Federal Court of Australia

Big Review TV Ltd (in liq) v FC Securities Pty Ltd (No 2) [2026] FCA 1392

ORDERS

THE COURT ORDERS THAT:

1.    The application be dismissed.

2.    The applicants pay the respondents’ costs, subject to any costs orders previously made in the proceeding.

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

REASONS FOR JUDGMENT

MOORE J

Introduction

1    Until 2018, the first applicant, Big Review TV Ltd (in liquidation) (BRTV), operated a video review platform containing promotional videos and TV shows. BRTV was the sole operating subsidiary of BIG UN Ltd (BIG), which was listed on the Australian Securities Exchange (ASX) following a reverse takeover of Republic Gold Limited. Although this proceeding concerns BRTV, the business conducted by BRTV was subject to formal reporting and disclosures to the ASX by BIG.

2    BRTV lost the support of its financiers in 2018, and on 7 November 2018 BRTV entered liquidation, having earlier been placed into administration on 21 May 2018. Likewise, BIG was placed into administration on 24 August 2018 and then liquidation on 23 October 2018. These proceedings are brought by BRTV and its liquidators (the Liquidators) against BRTV’s former financiers who traded under the name First Class Capital (FCC). The relevant entities are the first respondent FC Securities Pty Ltd (FCS), the second respondent Finstro Payments Pty Ltd (Finstro Payments) and the third respondent Finstro Holdings Pty Ltd (Finstro Holdings) (together, the FCC Entities). During the relevant period, Finstro Holdings owned the shares in FCS and Finstro Payments. The fourth respondent, Mr Bradley Prout, was a director of each of the FCC Entities. Mr Prout had separate representation in the proceedings. Where in the course of these reasons it is not necessary to be precise about the particular entity, then for simplicity I will refer to FCC or the FCC Entities.

3    BRTV had a business with a number of limbs, including the production of promotional videos for businesses, particularly small and medium-sized enterprises (SMEs) and not-for-profit entities, and later larger corporate entities. The FCC Entities were companies that provided credit and payment solutions to SMEs.

4    Since 2015, the FCC Entities had been providing finance to BRTV. From late 2016, BRTV and the FCC Entities discussed the provision of a new facility. On a date which is the subject of controversy in these proceedings (being either 10 November 2016 or 9 August 2017), BRTV entered into a financing agreement with FCS and Finstro Payments known as the Sponsorship Agreement pursuant to which FCS agreed to finance (or “sponsor”) the production of BRTV’s promotional videos. On a different date, BRTV and FCS also entered into a further agreement known as the Subscription Agreement whereby BRTV agreed to procure the issue of, and FCS agreed to subscribe for, 3,030,303 shares in BIG for an average price of 16.5 cents per share. These proceedings concern the entry into the Sponsorship Agreement and the Subscription Agreement.

5    The share price of BIG increased very significantly during 2017. On 19 February 2018, BIG was placed into a trading halt after revelations to the market (prompted by articles in the Australian Financial Review) that BIG had been reporting monies provided to BRTV by FCC in respect of new customers as revenue, in circumstances where the customers were not contractually obliged to make payments and where the “revenue” in question was potentially repayable. After a review conducted with the benefit of legal and accounting assistance, BIG determined that its publicly reported revenue was materially overstated, and when BIG corrected this overstatement, it led to a significant deterioration in the reported financial metrics for the company.

6    The applicants allege that certain officers of BRTV (the Officers) breached their fiduciary duties and duties to BRTV pursuant to ss 181 and 182 of the Corporations Act 2001 (Cth) (Corporations Act). The Officers are directors Mr Brandon Evertz (B Evertz) and Ms Sonia Thurston, the Chief Executive Officer Mr Richard Evertz (R Evertz), who is Mr B Evertz’s father, and the Chief Financial Officer Mr Andrew (Andy) Corner.

7    The applicants’ case is that the Officers caused BRTV to enter into the Sponsorship Agreement and the Subscription Agreement which were, in the words of the applicants, “extravagantly uncommercial” and contrary to the interests of BRTV. It is asserted that the Officers did this in order to permit BRTV to record the funds being advanced by FCS as customer revenue so as to artificially inflate the share price of BIG for their own personal benefit.

8    The applicants’ case thus involves very serious allegations against the Officers. It is, in effect, alleged that the Officers acted against the interests of BRTV so as to obtain a personal benefit from their ownership of shares in BIG.

9    The applicants assert that the FCC Entities and Mr Prout were knowingly concerned in this conduct by the Officers. This involves an allegation that the FCC Entities and Mr Prout were knowingly concerned in a scheme that was for the personal benefit of the Officers and was commercially harmful to the financial position of the entity to which the FCC Entities were lending large sums of money. At one level, that seems inherently unlikely. The applicants sought to explain their case on the basis that the commercial terms of the Sponsorship Agreement were very favourable to the FCC Entities.

10    The applicants seek statutory and equitable compensation totalling $27,232,482 (broken down into four categories), or alternatively an account of profits or knowing receipt of property of up to $72,728,000.

11    The applicants’ case, insofar as it involves allegations of misconduct against the Officers, is largely a documentary case. The applicants also adduced evidence from Ms Tarryn Luyben, who was working as an accountant/bookkeeper for BRTV in her first job out of university. Ms Luyben could provide useful evidence as to various accounting matters, but could not (and did not purport to) shed light on the purposes or plans of the Officers. The applicants also rely upon expert accounting evidence from Mr Andrew Ross concerning, inter alia, the commerciality of the Sponsorship Agreement, and evidence from Mr Wayne Basford, who was involved in the review by BRTV/BIG conducted in 2018 of the accounting treatment of monies payable under the Sponsorship Agreement.

12    The applicants also adduced an expert report from Mr Warren McGregor on the proper accounting treatment of monies payable under the Sponsorship Agreement, and evidence from the second applicant, Mr Anthony Elkerton, as to various transactions and the history of the external administration of BRTV.

13    The respondents adduced expert evidence from Ms Michelle Jennings-Jones, who responded to the evidence of Mr Ross. Ms Jennings-Jones and Mr Ross also produced a detailed Joint Report.

14    The trial took place over ten days. The Court Book was extremely large and consisted of more than 60,000 pages. The parties adduced a very large quantity of evidence. The tender bundle consisted of over 2,200 documents. The applicants’ closing submissions were 194 pages in length with 1,411 footnotes. The respondents also relied upon large written submissions, and the submissions of the FCC Entities were 99 pages. Having regard to the issues that are determinative, it is not necessary to make factual findings about a great deal of the evidence. Further, I have only had regard to evidence to which I was taken either in the course of the hearing or in written submissions.

15    There has been a delay in providing these reasons for judgment, for which I apologise.

16    For the reasons set out below, I have concluded that the applicants have failed to establish their case at multiple levels.

Background

17    BRTV was incorporated on 30 May 2013. It was the main operating entity and wholly owned subsidiary of BIG.

18    Mr R Evertz was the Chief Executive Officer of BIG and BRTV. He initially held options over shares in BIG, which were later held by Richbrandson Pty Ltd, the sole director and shareholder of which was his son, Mr B Evertz. Those options were later exercised in December 2017, such that Richbrandson Pty Ltd thereafter held shares in BIG. There is a question as to whether Mr R Evertz had any interest in BIG’s shares in the relevant period. The evidence does not resolve that question.

19    Mr B Evertz, the son of Mr R Evertz, was a director of BRTV and was the Chief Operating Officer of BIG and BRTV. He held shares in BIG through Richbrandson Pty Ltd.

20    Ms Thurston was a director of BRTV and was the Communications Director of BIG and BRTV. Ms Thurston held shares in BIG through companies of which she was the sole director and shareholder.

21    Mr Corner was the Chief Financial Officer of BRTV and BIG. He held shares in BIG through family companies.

22    BRTV was a technology-based “start-up”, and the creator of a new social media app called the “BIG TV Platform”, which was described as a “video version of Tripadvisor” enabling users to “search and find entertaining videos for places to eat, play, stay or shop anywhere in the world”. The platform was described by BRTV as the “world’s first video review platform that combines short video reviews with TV style review shows and peer generated video reviews”.

23    As set out in more detail below, BRTV’s video business had various aspects. One aspect of central relevance to the present proceeding was that BRTV sold video content creation packages and subscriptions, whereby BRTV agreed to film and then produce short videos for businesses in return for a licensing or subscription fee which granted that business the right to use the promotional video on its social media and website, but did not otherwise grant the business ownership of the video. Promotional videos that BRTV produced were also posted on its BIG TV Platform.

24    BRTV offered a variety of different video content creation packages and subscriptions that varied in price which determined the length of video produced (from as short as 15 seconds to several minutes), and the type of content and features included.

25    In its video production and subscription business, BRTV had two main types of customers. The first were customers who agreed to pay upfront for a video to be produced (Up Front Customers). The second were customers who consented to the production of a video about their business, but without a binding obligation to pay for that video unless they were satisfied with it upon receiving it (Pay Later Customers). If a Pay Later Customer chose to pay for the video (a Contracted Pay Later Customer), they would be licensed to use the video. However, if they chose not to pay for the video, the video would nevertheless be posted on the BIG TV Platform, but the business would have no rights to use it for its own promotional purposes. That business would thereafter be classified as a “Freemium” member, which was a reference to a free subscription to the BIG TV Platform.

26    From October 2015, BRTV received funding from the FCC Entities and/or a related entity called FC Funds Management Pty Ltd in relation to the production of videos for customers. For many months prior to the entry into the Sponsorship Agreement, FCC provided funding pursuant to a somewhat similar funding structure, but with some differences.

27    As mentioned earlier, Mr Prout was a director of the FCC Entities. Mr Tom Whitworth was the Chief Operating Officer of FCC, and is a party to a number of the relevant emails, including emails with Mr Corner.

28    From approximately November 2016, FCS commenced providing funding to BRTV under a new facility, which was ultimately the subject of the Sponsorship Agreement. The Sponsorship Agreement was finalised and dated 9 August 2017. The terms of the Sponsorship Agreement are considered below in the separate section concerning that agreement. Pursuant to the agreement, a “Sponsorship Pool” of $20 million was made available to BRTV to fund the production of videos in respect of “sponsored” customers. The terms of the agreement include provisions for the payment of a “Cancellation Fee” of 24% of the customer’s offer value in the event that a video is not delivered or the customer does not enter into a contract with BRTV within 120 days, and the customer is not exchanged for a replacement customer. That is in addition to the amount repayable to FCS by BRTV, being the amount advanced in respect of the customer. It is common ground between the parties that during the relevant period prior to external administration no amounts were ever sought by FCS, or paid by BRTV, in respect of Cancellation Fees or the repayments of customer amounts.

29    Prior to a date in mid-2018, BRTV recorded payments received from the FCC Entities as revenue, and payments made to the FCC Entities as operating expenses. That had the consequence that monies paid to BRTV by FCS in respect of customers who had not yet agreed to enter into a subscription contract for the licence to the video were treated as revenue. In 2016 and 2017, the share price of BIG increased very significantly.

30    It appears that the rationale adopted by BRTV for recognising payments from FCS as revenue was as follows. BRTV treated FCS as providing finance to customers, in order to finance the payments by those customers to BRTV of licence fees for their videos. BRTV treated the payments by FCS to BRTV as payments made on behalf of customers of licence fees, and therefore as revenue from customers. This treatment of the payments from FCS to BRTV did not give any role for the circumstance that the customers had not yet agreed to make any payments for their videos. However, there is some evidence that Pay Later Customers were sent a form of invoice that treated the licence fees as payable but subject to a right of cancellation and refund. The accounting advice received by BRTV and upon which BRTV was relying is not in evidence.

31    During the course of the trial, some practical challenges were created by the absence of any clear analysis of the terms on which BRTV contracted with its customers for video licensing products. The applicants have addressed this in their closing written submissions by providing detailed submissions on the process by which, and the terms on which, BRTV sold video packages to customers. Some of those matters are summarised below in the section dealing with BRTV’s business model.

The claims made against the respondents

32    The applicants, in their closing written submissions, say that the Officers owed the following duties to BRTV:

(a)    a duty under s 181(1)(a) of the Corporations Act, and a fiduciary duty under the general law, to exercise their powers and discharge their duties in good faith in the best interests of BRTV;

(b)    a duty under s 181(1)(b) of the Corporations Act, and a fiduciary duty under the general law, to exercise their powers and discharge their duties for a proper purpose;

(c)    a duty under s 182(1) of the Corporations Act, and a fiduciary duty under the general law, not to use their position improperly to gain an advantage (either for themselves or for someone else) or to cause detriment to BRTV;

(d)    a fiduciary duty under the general law not to have an interest that conflicts or might possibly conflict with their duty to BRTV in any matter falling within the scope of their office, except with BRTV’s fully informed consent; and

(e)    a fiduciary duty under the general law not to misuse their position for personal advantage or for the advantage of a third party, except with BRTV’s fully informed consent.

33    The applicants submit that, objectively determined, in causing or permitting BRTV to enter into the Sponsorship Agreement and the Subscription Agreement, the Officers’ purpose was to record the debt financing advanced under the Sponsorship Agreement as revenue and report the same to the market, without disclosing BRTV’s debt obligation to the FCC Entities, in order to inflate the share price of BIG. It is further alleged that the Officers’ purpose was to confer a benefit on each of the Officers who (directly or indirectly through their related parties) held shares or options in BIG, the benefit being the increase in the price of the BIG shares held by them or their related parties. It is also alleged that the purpose was, perhaps incidentally, to confer a benefit on the FCC Entities, being the issue of 3,030,303 shares in BIG at a relatively modest price in circumstances where the share price of BIG was increasing.

34    The applicants further submit that the Officers each breached their duty under s 181 of the Corporations Act because an intelligent and honest person in the position of each of the Officers could not reasonably have believed that the entry by BRTV into the Sponsorship Agreement and the Subscription Agreement was for the benefit of BRTV. I understand this further claim is not dependent upon the allegation as to purpose: i.e. it includes a claim on the basis that, even if the purpose of the Officers was not to increase the share price of BIG for their personal benefit, the Officers breached their duty by entering into an agreement that was commercially harmful to BRTV.

35    The applicants submit that the respondents were knowingly concerned in the conduct of the Officers within the meaning of s 79 of the Corporations Act and the general law.

The strategy and business plans of BRTV

36    Understanding the strategy and plan employed by BRTV is important in analysing the issue of whether the relevant agreements were “extravagantly uncommercial” as alleged.

37    BRTV was a technology start-up. It is of course not uncommon for a start-up to carry on a business that is not immediately profitable, often because it is focussed on growth and market share, so as to attract capital inflows from investors. There are many ultimately successful businesses that are not profitable during an early growth phase.

38    In the case of BRTV, its business model depended upon achieving considerable scale. BRTV’s plan was to create a promotional video platform business that had at least the following elements:

(a)    Businesses (and other enterprises including charities) would obtain promotional videos of their business from BRTV. BRTV would retain ownership of the videos, and the business customers would pay licence or subscription fees to use the videos, either on BRTV’s platform or on other platforms (such as their websites or social media).

(b)    Those videos would be hosted on a searchable platform so that end users could use the platform to find businesses that would meet their need for services: e.g. where to eat, stay, shop, or obtain entertainment. That use by consumers would be monetised, including through advertising.

(c)    End users could upload their own videos about the businesses.

(d)    In due course, the extensive video content available to BRTV on its platform could be used by BRTV to generate further videos at lower cost.

(e)    The extensive video content library could also be used to create TV shows.

39    In its first Annual Report as part of the BIG group, BRTV described its business in the following way:

Big Review TV Limited’s core business is the production of video reviews for businesses, of businesses. Its professionally produced and edited video reviews are targeted at small-medium sized business customers who do not otherwise have access to such services at a reasonable cost. Big Review TV Limited also provides the technology and capability for consumers to post self-generated video reviews of their experiences and provide feedback, making it an end-to-end review service.

The Company’s unique business model enables it to produce videos significantly below the cost of traditional media products. Each business then has the opportunity to apply for an annual membership to the platform, publishing their video on the platform and promoting their business to those searching the Big Review TV database.

40    This document referred to “small-medium sized business customers”. The common term for these customers, and one used in BRTV’s documents, is “small and medium-sized enterprises” or “SMEs”.

41    The Court was shown some examples of promotional videos produced by BRTV. They were high-quality, professional videos. Indeed, the quality was surprisingly high having regard to the evidence as to the cost of production per video.

42    In connection with its video production and licensing business, BRTV offered to businesses a variety of different video content creation packages and subscriptions that varied in price. For some packages, the price determined the length of the videos produced (from as short as 15 seconds to several minutes), and the type of content and features included.

43    Some of BRTV’s business/enterprise customers were Up Front Customers who agreed in advance to pay for a video to be produced by BRTV and entered into a binding licensing or subscription agreement.

44    However, importantly for the present proceedings, BRTV also entered into arrangements with many Pay Later Customers whereby:

(a)    the customer would consent to the production of the video (for example, filming on the customer’s premises) and that BRTV would own the video;

(b)    the customer would receive the video on a “no commitments” basis – i.e. the customer was told that they were under no obligation to pay for the video;

(c)    where the customer agreed to pay for the video, the customer would obtain a licence such that the customer could use the video for its own purposes (and such customers became Contracted Pay Later Customers);

(d)    where the customer did not agree to pay for the video, the video would still form part of BRTV’s collection of videos (and such customers became Freemium members of the BIG TV Platform).

45    An important practical consequence of these arrangements for present purposes was that BRTV was producing videos at its cost, where those costs might never be recovered from the customer for whom the video was produced, and where BRTV might not earn any other revenue from that customer, although it might potentially earn other revenue from having that video available on its platform.

46    Some general observations can be made about the development of BRTV’s business strategy.

47    In mid-2015, BRTV offered the following packages to its customers (all videos being licensed to the customer to use across any platform):

(a)    Bronze: 1 x 15-second video for $399 for 12 months.

(b)    Silver: 1 x 15-second video and 1 x 30 to 45-second video for $399 plus $7.50 per week for 12 months.

(c)    Gold: 1 x 15-second video, 1 x 30 to 45-second video and 1 x 60 to 90-second video for $399 plus $25 per week for 12 months.

(d)    Platinum: 1 x 15-second video, 1 x 30 to 45-second video, 1 x 60 to 90-second video and 1 x 150 to 190-second interview video with a professional presenter for $399 plus $50 per week for 12 months.

(e)    Platinum Plus: The same features as Platinum, with an additional feature on Big Review TV’s online TV show, for $399 plus $75 per week for 12 months.

48    BRTV would approach customers (including by cold calling them). It appears that some customers would be persuaded to pay a refundable $399 fee upfront and give BRTV permission to record a promotional video, but on the basis that, once the customer saw the video, BRTV would refund the $399 if the customer did not wish to pay for the video. If the customer was happy with the video, then the customer would take out one of the subscription levels detailed immediately above. For the Bronze level, that meant that BRTV kept the $399 but did not receive any other payment (at least in the first 12 months).

49    However, many other customers did not pay the $399 fee upfront. After receiving some accounting advice, BRTV developed a procedure whereby customers were sent an “invoice” for $399, but also received an email saying that the invoice was not payable until the customer approved the video. The invoice contained wording saying that if the customer did not like the video then the customer was entitled to a full credit or refund. In other words, the invoice was expressed as payable, but with a right to a refund if not satisfied with the product. By contrast, the accompanying email in many cases suggested that there was no need to pay the invoice until the video was produced and found acceptable.

50    A similar approach was adopted for customers taking higher value packages. For example, in April 2016, a customer was sent an invoice for a $399 “application fee” and a $701 “Gold Membership”, with the application fee being described as “fully refundable” on the invoice.

51    BRTV described this period as a “land grab”. It is apparent that BRTV’s strategy was to grow rapidly by enticing customers with a deal that involved no upfront commitment. It is tolerably clear that during this early phase BRTV was prioritising growth over profit. As one BRTV internal document put it:

The most important thing to keep in mind at all times is that we must grab as much SME base as possible, as all the other benefits will come to us when we have corralled thousands of SMEs to the platform!

52    It is apparent that BRTV was employing a familiar start-up strategy of funding rapid growth without making profits, with the expectation of monetising its market position later through changes to its business model including the offering of additional services and changes to pricing. In the case of BRTV, an additional relevant factor in this regard was that aspects of BRTV’s business model, such as the use of the platform by consumers to find appropriate goods and services and the automated production of videos, did not function well (or at all) until BRTV had amassed a considerable volume of videos.

53    As the number of BRTV customers grew, BRTV began to focus on higher value customers (including businesses larger than the businesses of the initial customers) and sought to sell them more expensive packages. Instead of trying to sell $399 packages, BRTV was seeking to sell annual packages worth thousands of dollars (up to $24,000).

54    The contemporaneous documents reveal that BRTV had a tolerably clear business strategy for growth. This “growth” strategy was summarised in an email from Mr Corner to Mr Whitworth of 22 September 2016. Although lengthy, it is worth setting out a substantial portion of this email as follows (with some abbreviations explained in square brackets, and typographical and other errors preserved):

Stage One

BIG PROOF OF CONCEPT AND LANDGRAB

Initially we built a buy now and pay later $399 model, this was to get a large footprint of SME’s and video content. The FCC sponsorship revenue was perfect as it assisted us in funding the SME content and LANDGRAB.

Stage Two

BIG SME UP-SALE

Once BIG had achieved critical mass on SME’s we focused getting our sales teams to upsell into higher packages, the top package being Platinum for $2,400.

Stage Three

Once BIG had proven that the platinum packages could sell we moved into Enterprise packages, initially focused on NFP’s [Not For Profits] with a cost of $15,000 per annum.

Stage Four

NFP has proven to be a great model, BIG focused its sales assets into Enterprise packages on a Ski-Slope sales process, ranging from $24,000 to $399. This has proven to be successful.

Stage Five

AUTOGEN and Large Activations via Partnerships

Currently BIG has entered into a partnership with TIG [The Intermedia Group] to produce online TV shows and also offer the Video SaaS [software as a service] model to TIG’s 300,000 SME relationships. BIG will no longer be filming “Freemium” and will give AUTOGEN videos to thousands of SME’s then offer the Ski-Slope product range from $24,000 to $1,200.

We will not shoot $399 videos anymore. This transition is well underway and the ARPU [average revenue per user] is dramatically increasing as a result.

Summary

Through each stage BIG has ensured customer activations and revenue and has focused its sales assets on the revenue growth and increased pricing plans…

BIG estimates an increase of revenue 16/17 to over $15m. This would be unlikely if BIG continued the $399 model. It has always been the company’s plan to build a stronger client base as we grew our footprint as medium size enterprises in general do not deal with start ups.

Finally, BIG has established itself as the dominant online video player in Australasia with over 21,000 videos on YouTube, viewership in excess of 1.5m per month and over 60 TB of SME content library. We have developed the AUTOGEN technology and we are at the forefront of the video boom. The FCC sponsorship model has been a great process (expensive) but still great for us to establish this Brilliant model and company.

… For the tally the attached shows 1900 customers from the 5000 sponsored by FCC to production (i.e. customers sponsored to May, with the June sponsored customers being converted in October) which is 38% which is pretty much bang on and now that we’re selling the shows onto our SME customers for a $12,000 subscription we expect the ARPU to lift significantly in this next year. As a reference point, we’re projecting selling 20 slots per week (and we’re already doing ~10 per week before the Intermedia deal even starts) at $12,000 per slot which will result in $12m over the next year.

55    The evidence suggests that some aspects of this email, such as “This has proven to be successful”, involve a degree of optimism and possibly exaggeration. Nevertheless, the plan is clear enough.

56    Similarly, in an email dated 28 September 2016, Mr Corner said the following to Mr Whitworth:

As I explained last week, the FCC sponsorship revenue has helped BIG to create a SME video content library with over 60 terabytes of SME video content. The library has enabled BIG to improve efficiencies to the model through developing automated production techniques which will massively accelerate growth, market penetration and reduce production costs. The content has also attracted the TIG partnership along with other partners.

57    The same email emphasised that BRTV also expected to gain significant additional revenue from its TV show business. By around September 2016, it appears that BRTV had shifted its focus to Stage 5 of the business strategy. Specifically, there was a plan to begin implementing the “Autogen” technology and shift its focus to higher value packages such as the Online TV Show package for larger corporates, and away from lower value subscription packages.

58    In October 2016, BIG announced to the market via an ASX announcement that it had developed a new “video workflow technology” known as Autogen that was capable of automatically generating large volumes of promotional videos utilising BRTV’s existing video content library for an average of $2 per video. BIG stated that the technology would enable BRTV to produce videos efficiently without requiring a crew to film videos on site, and allow BRTV to allocate greater resources and time to higher-revenue video products. It was also stated that the customers would be charged $399 to use the auto-generated videos for 12 months (consistent with Mr Corner’s statement that BRTV would no longer be shooting $399 videos, i.e. that they would be replaced with auto-generated videos). It was stated that BIG expected that the technology would be rolled out in November 2016 and would “lead the drive towards a profit in FY16/17”. It was otherwise said that this would be “Paving the pathway to profitability”. It is unclear from the evidence the extent to which BRTV commenced use of its Autogen product.

59    The analysis of the applicants’ expert, Mr Ross, was that at about this time the average cost to BRTV of producing a video was $891 per video. A change to a $2 cost was a significant change in that context.

60    Consistently with Mr Corner’s statement that BRTV would not be shooting $399 videos, in BIG’s quarterly update for April 2017, it was stated that BIG would deploy the auto-generation technology and that:

Customers waiting in line will receive an auto-generated video using BIG’s video database. BIG will then only deploy its production team for members that elect to subscribe.

61    That change is notable. It involved a move away from a model whereby BRTV would be spending significant money on the production of a video for which the customer might not pay, or might pay less than the cost of the video.

62    In BIG’s 2017 Annual Report, the business was described as follows:

[T]he core activity of the company is the development of a global video-driven ecosystem that targets B2B2C [business to business to customer] services by integrating video listings, social media and an innovative mobile video review application. The business operated across a three-pillar model with each pillar feeding and sharing video content across its own ecosystem.

The first pillar is the creation of high-quality, affordable video licensing packages for small to medium sized businesses. The videos are curated and hosted on the Big Review TV platform. Revenue is generated through licensed subscription fees (Video SaaS [software as a service]) paid by businesses wanting to use the video content for marketing purposes.

The second pillar is the repurposing of video content for the production of online TV shows that are suitable for syndication to third parties and sponsorship by large brands. The TV shows also provide the ability for the Company to sell content and advertising slots to advertisers who target small to medium sized businesses. Online shows also appeal to small businesses who are willing to pay a premium license for inclusion in shows.

The wholly owned video library created by pillar one currently contains over 150 terabytes of video content and video data that is suitable for re-purposing into other video technology products in addition to creating online shows.

The third pillar is the company’s video platform and mobile video review app which enables customers to search for and review businesses, creating and sharing their own review via social media channels.

The first and second pillars are generating revenue for the Company. Revenue from the third pillar is anticipated following technology enhancements that will provide customer insights, analytics and data to businesses.

63    Likewise, in its 13 October 2016 announcement about the Autogen technology, Mr B Evertz is quoted as saying:

We have been investing in building a substantial video content library and we have now achieved critical mass, having huge amounts of video content available in all verticals. This puts us in a strong position and gives us the ability to deliver a unique video product at very little cost, which will in turn enable us to scale globally, and rapidly.

64    The Chairman, Mr Hugh Massie, is also quoted as saying:

To date, the Australian market has been valuing this business as a video production company. Indeed, our success in generating significant early revenue growth has been largely achieved through disruptive video production and licensing of our video content to participating SMEs. This new technology allows us to move to the next phase of our business plan via leveraging and re-purposing our vast content library. This places BIG firmly in the video technology space…

65    It is clear that BRTV regarded the acquisition of a video content library as a prerequisite to its plans to transform the business. The BRTV business was not just a business for the direct licensing of promotional videos to the businesses they were promoting. Even if the business did not take up a subscription, the resulting video review was an input to the further limbs of the business.

66    As considered in more detail later in these reasons, the analysis performed by the applicants (including by their expert) of the commerciality of the impugned agreements relied on something of a static view of the arrangements between BRTV and its customers.

67    Once BRTV’s business model over time is understood, it presents significant challenges for the applicants’ case theory. It is evident that, in accordance with that business model, the funding from the FCC Entities was not primarily for the purpose of generating profits for BRTV in the short-term, but was for the purpose of rapid expansion so that BRTV would have a set of videos, and an existing and potential customer base, which it could utilise for its subsequent business in a modified, expanded and more profitable form.

68    The applicants have not sought to establish that BRTV’s business plans were misconceived or impossible. They called no evidence from any expert on those matters. Nor have the applicants sought to establish that there was other finance available to BRTV that would have been materially better than the terms of the Sponsorship Agreement. In light of the nature of BRTV’s business model, these matters create significant difficulties for the applicants’ case. Whether the Sponsorship Agreement is “uncommercial” for BRTV cannot be established by considering the short-term cashflow impact of the agreement, or whether the terms of the agreement permitted BRTV to make an immediate profit. It is clear from the evidence that part of the purpose of the Sponsorship Agreement, from BRTV’s perspective, was to fund the production of videos for BRTV’s video library which would be used down the track for various purposes.

69    To take just one example, the applicants have not sought to establish that the Autogen technology was unworkable or that BRTV could not use its video library to produce videos at the cost of $2 per video as suggested in BIG’s public communications. Yet the analysis by the applicants’ expert, Mr Ross, of the commerciality of the Sponsorship Agreement assumes that each video costs $891 to make.

70    I also note that, as discussed later in these reasons, BRTV ultimately sold various intellectual property rights, including its video content library, for $42 million, which benefit forms no part of the applicants’ analysis as to commerciality.

71    This also means that it is difficult to draw any inference that the purpose of the Officers in entering into the Sponsorship Agreement was not to act in the best interests of BRTV.

72    On the applicants’ case theory, the statements by Mr Corner to Mr Whitworth in the email quoted at length above that the FCC sponsorship model was a “great process” to establish “this Brilliant model” must have been false, and Mr Whitworth must have known they were false. On the applicants’ case, Mr Corner’s purpose was to enter into arrangements with the FCC Entities that were contrary to the interests of BRTV and did not support any viable model for BRTV, and was to inflate the share price, and the FCC Entities were aware of this. However, there is no evidence that would support such a conclusion. Having reviewed the evidence to which I was taken, I find that:

(a)    Mr Corner’s statements were genuine statements that reflected his state of mind at the time;

(b)    Mr Corner’s statement reflected the view of BRTV, through its officers, that the Sponsorship Agreement was beneficial for the growth of BRTV and the success of BRTV’s business in the long term;

(c)    Mr Whitworth and the respondents would have understood Mr Corner’s statements to reflect Mr Corner’s state of mind and the view of BRTV at that time;

(d)    more generally, BRTV’s business model involved the use of its video library for various purposes, including to produce auto-generated videos and to produce TV shows; and

(e)    the Sponsorship Agreement funded the production of numerous videos for the purposes of BRTV’s business model, whether or not customers agreed to take out a subscription for the video in question.

The applicants’ purpose case, including BRTV’s approach to the recording of revenue

73    The applicants placed some emphasis on the approach by BRTV to the recording of revenue. They adduced a large body of documentary and expert evidence on this topic. Their closing written submissions contain a detailed chronology that has a significant focus on revenue recognition. The applicants also adduced accounting evidence from Mr Basford, who gave evidence about his work for BRTV in reaching a view as to the correct treatment of revenue, and independent expert evidence from Mr McGregor about the proper treatment of the amounts in question.

74    Notwithstanding all of this evidence, the applicants made clear in closing submissions that their case did not depend on proving either that the accounting treatment by BRTV of the payments under the Sponsorship Agreement was wrong, or that the Officers (and likewise the respondents) knew this.

75    The applicants’ closing written submissions commence as follows:

1.    The directors and officers of BRTV, Richard, Andy, Sonia and Brandon (the BRTV Officers), conceived – rightly or wrongly [with a footnote stating “To the extent relevant, wrongly”, with a reference to Mr McGregor’s report] – and for that matter whether they knew the accounting was incorrect or not – that by entering into a financing agreement with FCS, BRTV could record what was objectively (and plainly so) debt as revenue. The BRTV Officers were concerned to cause BRTV’s holding company BIG Un Ltd (in liq) (BIG) (of which they were significant shareholders) to make announcements to the market that amounts which were debt was revenue, or “cash receipts” or “cash revenue”. The obvious, intended and inevitable consequence of this was to inflate the market price of BIG’s shares until the technique was disclosed.

2.    It matters not whether an artificial inflation of BIG’s share price (albeit with the BRTV Officers’ erroneous belief that the inflation could continue indefinitely) transpired as a consequence, although the increase in share price throughout 2017 and market response to disclosure in February 2018 shows that the technique succeeded in inflating or supporting the share price. It also does not matter whether the scheme was one the BRTV Officers thought could continue indefinitely or was a more medium term “pump and dump” scheme, albeit that they did not “dump” before the scheme was exposed. What matters is the BRTV Officers’ purpose and attempt at giving effect to the scheme.

76    Thus the applicants say that their case does not depend on:

(a)    whether the accounting treatment was correct or incorrect;

(b)    whether the Officers (or the respondents) knew it was correct or incorrect; or

(c)    whether the Officers thought that the revenue recognition could continue indefinitely.

77    The applicants might have sought to make out a case that the revenue treatment was wrong, that the Officers knew it was wrong, that they intended to obtain a benefit for themselves at the expense of BRTV (i.e. that they did intend to “dump” at some point), and that the respondents knew all of these matters. However, the applicants have eschewed such a case, no doubt for good reasons.

78    One challenge for the applicants in saying that it does not matter whether the Officers or the respondents knew that the accounting treatment was correct or incorrect, is that if the Officers were endeavouring to present an accurate and fair measure of revenue, it is somewhat difficult to characterise that as involving an improper purpose.

79    As noted earlier, the applicants submit that the Officers’ purpose was:

(a)    to confer a benefit on each of the Officers, who directly or indirectly held shares or options in BIG; and

(b)    perhaps incidentally, to confer a benefit on the FCC Entities, being the benefit from the issue of 3,030,303 shares in BIG in circumstances where the market price of BIG shares was increasing.

80    The applicants’ case is that the Officers’ purpose in entering into the Sponsorship Agreement was to permit favourable revenue recognition, rather than to enter into an agreement that was for the commercial benefit of BRTV, so as to increase the share price in BIG for their own personal benefit.

81    Underlying the applicants’ case theory appears to be an assumption that if the purpose of the Officers was to increase the amount of recorded revenue, then this involves the Officers improperly benefitting themselves (through an increased share price) at the expense of BRTV. However, there is a difficulty with a case framed in that way. It involves a false dichotomy between revenue recognition and the commercial interests of BRTV. It assumes that revenue recognition benefits the Officers but not the company. However, BRTV was a start-up in a growth phase. Start-ups need capital, and capital is easier to raise if revenue is growing in a healthy manner. This difficulty with the applicants’ case theory appears to be the product of the applicants’ focus on short-term cashflow and profitability as the only measure of corporate benefit and the only matter to which the Officers could properly have regard. That approach involves error.

82    In the remainder of this section, I consider evidence relevant to the purpose of the Officers. This analysis focusses on the conduct, knowledge and state of mind of Mr Corner, who as Chief Financial Officer was responsible for accounting issues. There is no evidence to suggest, and the applicants do not submit, that any of the other Officers had a knowledge or purpose that Mr Corner did not. Conversely, if Mr Corner had relevant knowledge or a relevant purpose, then it is necessary to give separate consideration to whether this was shared by the other Officers and by the respondents.

83    From an early stage, Mr Corner, as the Chief Financial Officer, sought accounting advice as to how to account for revenue in light of BRTV’s then business model, which involved many videos being produced for customers who had not entered into any contractual commitment to pay.

84    Mr Corner sought advice from BRTV’s accountants and auditors about this proposed revenue treatment including Ms Elissa Lippiatt and Mr Wilson Har who were accountants from Ecovis Clark Jacobs (Ecovis), Mr Barton Lynch and Mr Andrew Simpson from Gunderson Briggs Chartered Accountants (Gunderson Briggs), and Mr Steven Bradby of PKF Melbourne Audit & Assurance (PKF) who were BIG’s auditors.

85    On 14 October 2014, Mr Corner emailed Ms Lippiatt, copying Mr Har, asking if someone could consider BRTV’s “revenue treatment”. Mr Corner asked Ms Lippiatt whether BRTV, upon issuing a “pay later” invoice, could recognise the revenue at the point of issue:

We currently invoice our customers when we close the sale on the basis that they do not have to pay for the video until they have seen it around 12 weeks later.

Can I take that revenue on raising that invoice? What are the conditions that would allow me to do this so I make sure we’re fulfilling them.

This is classic – buy now, pay later scenario.

86    On 20 October 2014, Ms Lippiatt provided Mr Corner with advice that the full value of the invoice could not be recognised as revenue at the start of a project where no service had yet been provided upfront, stating (emphasis in original):

The accounting standards require the recognition of revenue from services be based on a percentage of completion method. As such, revenue cannot be recognised on the issuance of an invoice at the start of a project where no services have yet been provided.

87    On this “percentage of completion method”, Ms Lippiatt explained that if, for example, 50% of work had been completed, at that point, “you could recognise 50% of the income on issuing the invoice and the remaining 50% once the video is completed”.

88    On 25 November 2014, Mr Corner emailed Mr Lynch and Mr Simpson from Gunderson Briggs, copying in Ms Lippiatt and Mr Har, and sought their views on an “unimpeachable position on revenue recognition” (emphasis added):

I’ve set out a case study of a business operation and really need your thoughts on how revenue would be recognised.

One thought that occurred to me on the bus home was that I’m looking for an unimpeachable position on revenue recognition but also really want to be guarded against just taking the easy option e.g. not taking revenue until the customer pays. If there were a strong case for a particular revenue treatment, but another might be more prudent then please can you advise of both possibilities so that we can discuss.

Like I said I really just want to get this right and to never have to revise the treatment. Outside of accounting standards it would make sense to me that there was some revenue when the customer places the order rather than being 100% on payment but I want to be careful not to lead you.

89    Later that day, Mr Corner emailed Mr B Evertz, Ms Thurston and Mr R Evertz, and mentioned that he had discussed the revenue recognition issue with Gunderson Briggs, observing (emphasis added):

Revenue Recognition – met with Andrew [Simpson] and Barton [Lynch] to discuss a case study for a business like ours and asked them for a position paper on revenue recognition. I reiterated that we want an unimpeachable position that will never require revision. Am likewise meeting with Elissa on Thursday prior to the auditors to touch base briefly and make sure she’s on board. The answer will be the answer but with some wonderful positive thinking I’m sure we’ll get the absolute best outcome in the medium term, even if it does end up being a low entry point at 31 Dec.

90    On 1 December 2014, Ms Lippiatt forwarded the advice she gave to Mr Corner on 20 October 2014 (outlined at [86] above) to Mr Simpson and Mr Lynch. Her email suggests that the advice she provided to Mr Corner on 20 October 2014 regarding the “percentage of completion” method was in relation to invoices that were payable upfront, although subject to a refund “prior to finalisation of storyboarding”. However, in relation to invoices “where there is no obligation to pay the fee until agreement with the final product”, Ms Lippiatt’s advice was that revenue could only be recognised on delivery and acceptance of the video by the customer (emphasis added):

- In accordance to AASB paragraph 20, the outcome of the transaction cannot be estimated reliably as there is high uncertainty that economic benefits will flow to the entity. Market research suggests that up to 35% of sales where payment is conditional (similar to these circumstances) will not complete to payment. BRTV experience suggests this is a much lower number but there is currently not enough historical data (or volume of data) to support this.

- As such, revenue should be recognised on video delivery and agreement to proceed, or for practical purposes, on cash payment.

91    Ms Lippiatt attached two example invoices which made clear that BRTV had two types of customers – those who paid upfront (who could subsequently request a refund), and those who paid upon completion and acceptance of the video. Invoices for the latter category of customers (i.e. “pay later” customers) stated: “There is no obligation to pay this invoice until you have seen the content and choose to be involved. If you choose not to participate there is no obligation to pay this invoice”.

92    On 4 December 2014, Mr Corner emailed Ms Lippiatt and Gunderson Briggs and asked them to consider a solution so that BRTV could recognise the value of “pay later” invoices as revenue (prior to the customer agreeing to pay for the video):

I understand that we’re working in that age old conflict of companies that want revenue as soon as possible and accounting standards pushing caution but hopefully this makes sense.

What I’m really looking forward from you as a team is a position that helps reconcile the two issues above rather than simply states the recognition principles against our existing processes.

One consideration could be, for instance, if we changed the “no obligation to pay” wording to a “if you’re not happy with the product we’ll issue you a credit note” then magically the two processes (Upfront and Pay Later) align and end up treated the same under the standards.

It’s this sort of clever thinking I’m after – it makes the admin so much easier and it allows for prudent recognition of revenue within the standards.

93    Ms Lippiatt responded to Mr Corner’s email and advised (emphasis in original):

If the terms on the invoice were changed that [sic] they reflected:

- An obligation to pay

- An ability to claim a refund if the client is unhappy with the video

Then it is our opinion that Big Review could recognise this income over the time that it is earned (i.e. on the same terms as the ‘upfront’ invoices).

You could then include on the invoice a statement about Big Review refund policy – e.g. something along the line of “We are sure that you will love the review that we have created for you, however if there are any adjustments that you need made to the review please let us know. Should we be unable to resolve these for you, then you are entitled to apply for a full refund of the application show fee.” You will then need to create a provision for the refunds.

94    On 11 December 2014, Mr Lynch reached out to PKF and sought their views on the advice Ms Lippiatt had sent (namely the emails at [85]–[92] above) regarding the proposed revenue recognition process:

In terms of the process as suggested by Elissa [Lippiatt] in the attached, we essentially wanted to know whether you are comfortable that the proposed process will be sufficient and in accordance with the appropriate accounting standards.

With regards to the terms and conditions of the invoice (the contract) we wanted to gauge your thoughts from an auditing perspective, the impact of the wording on the invoice on the ultimate revenue recognition. Examples of both invoices are included in the attached for your reference.

95    On 16 December 2014, Mr Bradby responded to Mr Lynch’s email, and stated:

Further to our quick discussion Bart, my observations are:

1. The email trail covers what we were discussing last Thursday, consistent with AASB118.20(b) being the ‘sticking point’.

2. I agree with the principles being put for both the up-front payment and the 12 week terms styled invoices.

3. The contemplated wording will presumably be on an invoice whose date is the same as its due date? (that has to be the case). Then, the words could support the payment = work to proceed = credit if not satisfied outcome. But, isn’t that getting close to the pay upfront version that already exists? Which raises the question, is there need for differentiation? Maybe there is, it is just that I don’t know the answer.

96    On 18 December 2014, Mr Lynch provided Mr Corner with the views of PKF and Gunderson Briggs “with respect to the revenue recognition process and the proposed invoice wording”. PKF and Gunderson Briggs were of the view that a change in wording to the invoice as proposed by Mr Corner (see [92] above) did not change the substance of the “pay later” transaction. In other words, revenue could not be recognised at the time of issue of an invoice where there was no obligation for the customer to pay until the service had been performed. The recommendation was for BRTV to revisit the revenue recognition position once the business was “up and running” (emphasis added):

With respect to those invoices under the ‘Pay Later’ arrangement, we note that under the current invoice narration there is no obligation placed on the customer to pay the fee until the final service has been performed (i.e. the invoice is dated now, however the due date noted on the invoice is 12 weeks later).

In the discussions we have had with Steven Bradby, the concern raised is around the probability that the economic benefits associated with the transaction will flow to the entity (AASB118 Paragraph 20(b)). Irrespective of the wording on the invoice, the reality is that in the event the customer is not happy with the end product, they will not pay at the end of the 12 week period.

Our view in relation to the wording on the invoice is that it is a matter of substance over form. Given BRTV is still relatively young, there is not a substantial history that can be referred to in order to assess the level of customers that will ultimately choose not to take the end product under the ‘Pay later’ option. The wording included on the invoice can be finessed, however it doesn’t change the ultimate substance of how the transaction works.

Steven Bradby has advised that the revenue recognition process may be revisited in due course once BRTV has a documented history which shows the level of customers that ultimately pay under the ‘Pay later’ option.

In any event, we note that the ultimate revenue recognition position adopted will only be a timing difference that impacts the initial position. Once the business is up and running with a high volume of transactions, any timing differences will net out.

97    Mr Corner forwarded this advice to Ms Lippiatt, noting that his initial reaction was that “this isn’t in the slightest bit helpful”. He sought her views on the advice received.

98    On 2 January 2015, Mr Corner sought a second opinion from Mr Robert Crossman, BRTV’s corporate advisor, on the advice from PKF and Gunderson Briggs. For context, Mr Corner explained that he saw BRTV’s revenue priorities as:

1. Presenting a number which accurately represents the revenue of the business

2. Having a number which is tight with Accounting and Auditing standards so it is simply signed off by the Accountants and Auditors

3. Taking a prudent approach such that our revenue builds throughout the start of 2015 rather than an aggressive approach that leads to the numbers going backwards if we don’t produce the content quick enough.

99    In his email, Mr Corner stated that he was “unimpressed” with Gunderson Briggs, noting their tardiness in responding and that their advice “doesn’t really show a thought process or real consideration of options and alternatives – it’s just a conclusion, and a brief one at that”. Mr Corner further stated:

The biggest concern in that though is that Gundersson Briggs also ran this past the auditors (PKF in Melbourne) and appear to have just taken the safe, conservative view that we’ll respond with the position that the auditor came back with which equally seems to have not really contemplated the detail of the issue but replied with a safe option.

Would be really keen to hear your thoughts and perspectives.

My gut tells me that Elissa is on the money (as she always has been in the past) but am concerned that we have to make sure the auditors are on board. I’m certainly keen to review who we use as auditors as well since I think we should take the opportunity now to find someone who plays well in this space and have capacity to help (PKF don’t seem to be that responsive, are based in Melbourne and I suspect were appointed due to an existing RAU relationship).

100    On 24 February 2015, Ms Lippiatt emailed PKF and Gunderson Briggs, copying in Mr Corner, and attached “updated debtor and revenue recognition notes” which stated:

Where the application fee is not charged by Big Review TV Limited (and therefore not payable by the client) until the final video is reviewed and approved by the client, the application fee is only recognised when cash payment for the video is received.

101    From this point, there is a gap in the chronology. It is apparent that at some point BRTV received advice about how it could recognise revenue from its arrangements with the FCC Entities. The applicants were not able to identify that advice.

102    There is, however, reference to it when the Sponsorship Agreement was being negotiated with the FCC Entities. On 31 July 2017, Ms Lippiatt sent an email to Mr Corner saying that she and her colleague had reviewed the draft agreement and structure and said that it looked fine from an accounting perspective. Ms Lippiatt describes the arrangement as an “invoice funding” arrangement. She states that:

We can see that, same as last time (and the major focus of our review) is that the finance agreement rests primarily between the customer and FCC. There’s then an assignment of the obligation to pay (originally from the customer to BIG and now customer to FCC).

103    It is clear from this exchange that BRTV had previously received advice as to the accounting treatment of payments from the FCC Entities. The parties did not direct me to any evidence as to the contents of that advice. However, this email suggests that the advice was to the effect that amounts received from FCS could be recorded as revenue.

104    Mr Corner forwarded this email to Mr R Evertz, copied to Mr B Evertz and Ms Thurston, and said:

Just got the BIG green tick from Elissa on the FCC agreement :) :) :).

105    Further insight into what had occurred is provided in the evidence of Mr Wayne Basford. Mr Basford was a former partner at BDO. In 2018, he provided accounting advice pursuant to a retainer from DLA Piper, which was acting for BIG. The advice included advice as to the proper accounting treatment of the arrangements with the FCC Entities, as well as assistance with the preparation of BIG’s accounts.

106    Mr Basford received various documents from BIG/BRTV, through DLA Piper, and had discussions with Mr Corner. Mr Basford’s consideration involved two distinct issues. The first was whether BRTV could recognise the amounts paid by the FCC Entities as revenue because the FCC Entities were taking the risk on non-payment by a customer. Mr Basford determined that this was not the effect of the agreements, which placed that risk on BRTV. The second issue was whether the customer was obliged to pay. In paragraph [20] of his affidavit, Mr Basford explained the issue as follows:

20.1    … [I]t was explained to me by Mr Corner that:

(a)    BRTV recognised revenue based on the invoice to FCC (Finstro), i.e. over 12 months from the point it had received funds from FCC.

(b)    BRTV had in practice substituted replacement invoices where the customer to which the original factored invoice had declined to use BRTV’s services. That is, by way of example:

(1)    BRTV raised a provisional invoice for $12,000 to prospective SME X under the 2016 Sponsorship Arrangement with FCC.

(2)    FCC advanced $12,000 to BRTV (less 24% ‘commission’ and 41% security deposit);

(3)    the prospective SME X declined to subscribe for BRTV’s services, and BRTV accordingly substituted the invoice raised to SME X, with another prospective invoice raised to SME Y for $12,000; and

(4)    this meant that the amounts advanced by FCC were secured by invoices, but most of these invoices related to prospective customers, rather than an SME that had signed a contract to subscribe for the BRTV service.

20.2    As I had already determined that BRTV had a contractual obligation to repay FCC monies advanced, it was clear to me from the explanation referred to in paragraph 20.1 that BRTV had recognised revenue too early, and that the quantum of BRTV’s overstatement of revenue was dependent on [the] amount of funds advanced by FCC that related to prospective customers compared to those factored invoices that related to actual customers (i.e. those customers that had signed a contract to subscribe for BRTV’s services).

107    On 25 July 2018, there was a board meeting of BIG (not BRTV) which was attended by Mr Basford and at which the accounting issues were discussed. According to the minutes of that meeting, a director of BIG, Mr Nicholas Jordan, asked Mr Basford whether the previous errors were “outright errors” or were a result of the application of a different methodology which could be arguable under the accounting standards. Mr B Evertz also asked how the previous accountants and auditors “could get the accounting treatment so wrong.” Mr Basford responded that he could not come up with a justification for the previous accounting treatment or understand how the auditor could have “signed off” on the earlier versions of the accounts as the auditor could not have complied with the Australian Auditing Standards.

108    From these matters, it is apparent, and I find, that Mr Corner and the other Officers were acting on the basis of accounting advice that BRTV had received that endorsed the treatment of payments from FCS as revenue. That recognition of revenue was endorsed (in the sense of not queried or rejected) by BRTV’s auditors. To the extent that they did not provide the advice relied upon, the approach was also endorsed by BRTV’s accountants. I find that the Officers did not intend to present a false picture as to the revenue of BRTV.

109    If the FCS payments were revenue in the hands of BRTV, then any Officer of BRTV, acting in the interests of BRTV, would want to ensure that the financial statements of BRTV recognised that revenue. It would not be in the interests of BRTV to understate its revenue, or to present anything less than a fair and accurate picture of that revenue. It would also not be in the interests of BRTV to miss out on potential revenue in any financial period. The applicants point to evidence that Mr Corner was anxious to obtain payments from FCS by certain deadlines to ensure that the revenue was able to be recognised in the current financial period (e.g. in a particular quarter). In light of the accounting advice received, that is unsurprising and is not evidence of any improper purpose. The applicants place great emphasis on this evidence as if there is something untoward about Mr Corner wanting to ensure that revenue that might potentially be available in the current quarter is in fact booked in that quarter. On the contrary, it would be quite odd if Mr Corner, the Chief Financial Officer of a start-up business trying to establish its viability, was indifferent to whether revenue was earned in one quarter or the next.

110    I emphasise that it is no part of the applicants’ case that a competent Chief Financial Officer would have realised that the FCS payments could not properly be treated as revenue, or that Mr Corner should otherwise have gone behind the advice that BRTV received. As clarified in closing submissions, the applicants also do not seek to establish that the Officers knew or believed that the revenue recognition was incorrect.

111    I recognise that the possibility of obtaining recognition of upfront revenue from FCS before the customer has committed to enter into a contract to pay subscription fees may have constituted a motive for entering into the Sponsorship Agreement. However, that does not take the applicants anywhere because the early recognition of revenue is also in the interests of BRTV. As observed earlier, the applicants’ approach appears to be driven by a dichotomy between the interests of the Officers in revenue recognition and the interests of BRTV in positive cashflow. That dichotomy is false.

112    There is a further issue for consideration. The applicants allege that the Officers engaged in conduct by which they were seeking to prefer their own interests over the interests of BRTV. This is a serious allegation, seeking to impugn in a significant way the reputations and integrity of the Officers, in a proceeding to which they are not parties and in which they are unable to defend themselves. It is said that each of the Officers held shares or options in BIG, either directly or through their companies, and were seeking to drive up the price of BIG shares at the expense of the commercial wellbeing of BRTV. In closing written submissions, the applicants say that it does not matter:

whether the scheme was one the BRTV Officers thought could continue indefinitely or was a more medium term “pump and dump” scheme, albeit that they did not “dump” before the scheme was exposed.

113    The applicants did not ever explain how conduct contrary to the interests of BRTV could elevate the BIG share price indefinitely, or why an officer would ever think that it could.

114    This allegation against the Officers is unsupported by any direct evidence to which I was taken. The applicants do not suggest otherwise. There is nothing in the documents connecting the conduct with any concern by the Officers for their own personal position. There is no evidence whatsoever that the Officers were looking to spike the share price and sell out. As the applicants’ written submissions recognise, there was no attempt to “dump”. There is nothing at all in the evidence that suggests anything other than a concern for the commercial interests of BRTV – all of the relevant documents reflect that focus.

115    The applicants pursue an inferential case in this regard. That case appears to rely upon the significant focus by Mr Corner (in particular) on revenue recognition, and the alleged lack of any commercial rationale for the agreements reached with the FCC Entities. However, that inferential case falls down at various levels. In light of the business model of BRTV and the utility of the Sponsorship Agreement in supporting that business model, discussed above, no such inference would be drawn. In light of the benefits to BRTV in raising capital flowing from increased revenue, no such inference would be drawn. In light of the proper analysis as to the alleged uncommerciality of the Sponsorship Agreement and Subscription Agreement (discussed below), no such inference would be drawn.

116    I reject the applicants’ purpose case, and I find that the Officers did not have any purpose of preferring their own interests over the interests of BRTV.

The date of the Sponsorship Agreement

117    The Sponsorship Agreement as executed is dated 9 August 2017. Pursuant to clause 3.2 of the Sponsorship Agreement, the appointment of FCS as the exclusive sponsor and financier of BRTV for the marketing, sale, production and delivery by BRTV of videos commenced on 9 August 2017.

118    Notwithstanding this, the applicants submit that the agreement commenced many months earlier, by “no later than 10 November 2016”.

119    The applicants also make the following submission:

Remedially, it does not matter to the Applicants if it is found that the Sponsorship Agreement only commenced on 9 August 2017 because the Sponsorship Agreement covered the “Included Contracts” at Annexure A of the Sponsorship Agreement. Those are customers in respect of whom finance was advanced from November 2016.

120    However, as the FCC Entities submit, the date does matter because whether the agreement is “extravagantly uncommercial”, as the applicants submit, falls to be judged at the time of entry into the agreement.

121    The applicants submit that, although not documented until 9 August 2017, the Sponsorship Agreement was agreed between the parties and commenced no later than 10 November 2016, after Mr Prout had confirmed on 2 November 2016 that financing facilities had been approved by FCC’s credit committee and when funding in various amounts was advanced by FCS in late 2016. These funding activities included FCS advancing 35% of the value of the customer contracts as working capital on 10 November 2016 and also retaining 41% in a separate trust account in BRTV’s name (controlled by FCS) as security in December 2016. The applicants submit these funding activities evidence the performance of key commercial terms of the agreement prior to the execution of the Sponsorship Agreement on 9 August 2017.

122    One key commercial term which was not performed was payment of a 24% Cancellation Fee, because it was common ground between the parties that no Cancellation Fees were ever paid. The applicants sought to deal with this problem by saying that it had been agreed that there would be a “margin”, and that when the first draft of the Sponsorship Agreement was created in 2017 and sent across to BRTV, there was no resistance to that margin being specified at 24%. However, that is not equivalent to the Sponsorship Agreement being agreed in November 2016. The matters relied upon by the applicants are insufficient to establish that an agreement existed in November 2016 about the terms of a detailed and formal commercial agreement not executed until 9 August 2017.

123    On 28 May 2017, Mr Prout sent an email to FCC’s lawyers. It provides a high-level description of some commercial terms for the preparation of an agreement. The email attached the previous agreement between the parties, and included the following:

Attached is a document we prepared internally which has covered to date. We also have a registered GSA over the company.

We want to redo and update the document to reflect our currently [sic] financing arrangements.

It would be good if we could meet tomorrow to go through our requirements rather than send a lengthy email. That said, in short:

1.    BIG provide video content to SMEs

2.    They sign-up customers on a conditional basis (Sign up), produce the content, deliver to customer, get customer to accept video and contract terms and then commence charging (Delivery).

3.    New arrangement (not reflected in the attached document) is that we (FCC) advance X% on Sign-up and Y% on Delivery.

4.    BIG must swap out contracts or repay us + margin if no Delivery within 120 days.

5.    […]

6.    Financing contract is ‘dressed’ up as a sponsorship rather than sale of receivables. BIG auditors are o.k. with that but to my mind it is still debt or at least a financial obligation of BIG.

7.    […]

8.    Tricky part will be that the new document needs to deal with the legacy positions of FCC (described in attached and we can identify in a schedule) and new positions (as per point 3 above).

9.    […]

124    The applicants rely on this document as providing support for the existence of the Sponsorship Agreement earlier than 2017. However, this email makes tolerably plain that, whilst some basic commercial terms might have been agreed, there were matters that would need to be drafted and resolved between all parties before the agreement was finalised. Further, the reference to “+ margin” does not itself indicate that the precise figure was agreed, noting for example that the previous cancellation fee was not 24% and there is no evidence of when the 24% figure was resolved (other than that it was in the draft Sponsorship Agreement when it was sent across after this time and was not challenged).

125    There were substantive matters that were only negotiated and included in the Sponsorship Agreement well after November 2016. For example, in an email dated 24 July 2017 from Mr Corner to Ms Thurston and Mr B Evertz, Mr Corner raised issues with the drafting of numerous substantive terms, noting in some cases that what was proposed did not seem to be what was agreed, but also noting in other cases that the proposal was new. In the accompanying agreement, Mr Corner and others (such as Mr Massie, the Chairman of BIG) provided numerous comments on draft terms, which led to changes in the next version which came back from FCC. It is clear that the agreement was not finalised at this point, let alone back in November 2016.

126    I conclude that the Sponsorship Agreement was not finalised and agreed until 9 August 2017.

Construction and operation of the Sponsorship Agreement

127    The Sponsorship Agreement was dated 9 August 2017. The parties are BRTV, FCS and Finstro Payments, although most of the substantive rights and obligations apply to FCS rather than Finstro Payments. Finstro Payments is appointed as an agent of BRTV to collect amounts from customers.

128    At various points during the hearing, the parties suggested that the Sponsorship Agreement was not performed with precise fidelity to its written terms.

129    It is relevant to consider the practical operation of the Sponsorship Agreement before dealing with issues of construction. The broad operation of the agreement is as follows:

(a)    Initial Offer: First, BRTV would make an offer to a potential Pay Later Customer for the production and delivery of a video by BRTV (Initial Offer). For illustrative purposes, assume an Initial Offer under the Sponsorship Agreement is made for a package valued at $12,000 (i.e. $1,000 per month (plus GST) fee for a 12 month subscription). This is the figure I will adopt for the Initial Offer amount to demonstrate the money flows in the following sub-paragraphs and it was the nominal figure adopted by the parties and experts.

(b)    Acceptance of Initial Offer: That customer could accept the Initial Offer by signing an online agreement or indicating they accepted BRTV’s terms and conditions. If the customer chose the option of not paying upfront (i.e. they chose the “pay later” option), they did so on the understanding that if they were not satisfied with the video they were ultimately not obliged to pay anything to BRTV.

(c)    FCS Approval and Sponsorship: BRTV would make a request to FCS to approve the sponsorship of the customer. There is no evidence to suggest that FCS ever declined to approve any customer. If approved, BRTV received from FCS an amount equal to 35% of the value of the Initial Offer, which was $4,200 (Working Capital). Separately, a Security Deposit which was 41% of the value of the Initial Offer ($4,920) was held in an escrow account controlled by FCS pending the outcome of the “Final Acceptance” Stage (outlined below). 24% of the value of the Initial Offer was retained by FCS as a commission, known as the Discount Amount.

(d)    Production: BRTV would produce a video for the customer and provide it to them for their final review and consideration. The Sponsorship Agreement mandated that this step was required to be completed within 120 days of the customer accepting the Initial Offer, although there was a suggestion that this term was not complied with.

(e)    Review: Once the customer reviewed the video, they could either accept the video and enter into a paid subscription package, or decline the video in which case they would not be required to pay anything.

(f)    Final Acceptance: If the customer accepted the video and agreed to enter into a subscription package, the customer could enter into a package as originally contemplated (valued at $12,000 on this example), or could instead choose to accept another package at a higher or lower cost (Final Offer). The value of the Final Offer affected whether BRTV would receive any additional funds from FCS beyond the Working Capital amount. That is because, upon acceptance of a Final Offer, BRTV would receive the Security Deposit plus or minus an “Adjustment Amount” (which was calculated as 76% of the Final Offer value less 76% of the Initial Offer value).

(g)    Rejected Offer: On the other hand, if the customer did not accept the video within 120 days of accepting the Initial Offer or BRTV did not end up making a video for that customer, BRTV could either (a) “swap in” another customer who had an Initial Offer date prior to the “swapped out” customer, or (b) BRTV would repay FCS the Working Capital amount plus a “Cancellation Fee” calculated at 24% of the Initial Offer ($2,880). The applicants contended that BRTV was also required to repay the Discount Amount ($2,880). This is discussed further below.

(h)    Payments from customers to FCS: For customers who had accepted a Final Offer, BRTV had assigned to FCS the right to receive payments from customers – i.e. customers would make their payments (in accordance with the terms of their subscription) to FCS instead of BRTV.

130    By way of example, assuming “Customer A” accepted an Initial Offer for BRTV to produce an Online TV Show valued at $12,000, which meant that BRTV would have received a Working Capital amount of $4,200 from FCS, the cash flows would have been as follows upon BRTV producing a video:

(a)    If Customer A accepted the video and agreed to purchase the Online TV Show package valued at $12,000 as their Final Offer, BRTV would receive an additional amount of $4,920 comprising: $4,920 (release of the Security Deposit) plus $0 (76% × $12,000 less 76% × $12,000). BRTV would therefore be entitled to receive $9,120 in total from FCS in sponsorship for Customer A.

(b)    If Customer A accepted the video but agreed to purchase a cheaper package valued at $3,000 as their Final Offer, the full value of the Security Deposit ($4,920) would not be released to BRTV. Instead BRTV was entitled to receive an amount of $4,920 less $6,840 (76% × $3,000 less 76% × $12,000), or in other words, $1,920 had to be repaid to FCS. Therefore, BRTV would receive a net amount of $2,280 in relation to Customer A.

(c)    If Customer A accepted the video and agreed to purchase a more expensive package valued at $24,000 as their Final Offer, BRTV would receive an additional amount of $14,040 comprising: $4,920 (release of the Security Deposit) plus $9,120 (76% × $24,000 less 76% × $12,000). BRTV was therefore entitled to receive $18,240 in total from FCS in sponsorship for Customer A.

(d)    If Customer A rejected the video, i.e. declined to pay for a video, BRTV could “swap in” another customer, Customer B (who had accepted an Initial Offer prior to Customer A). However, it would not receive any additional sponsorship to produce a video beyond the $4,200 it had already received in relation to Customer A. In relation to Customer B, the Production Stage and Final Review Stage would repeat again. Similarly, if Customer B rejected the video BRTV produced for it, BRTV could, again, “swap in” another customer and repeat the process (noting, however, that each swapped-in customer had to have an Initial Offer date prior to that of Customer A).

131    If Customer A rejected the video, and BRTV was unable to “swap in” another customer, it had to repay to FCS from its pocket the amount it received as Working Capital, namely $4,200, plus a Cancellation Fee of $2,880.

132    The Sponsorship Agreement is oddly structured and some of the provisions are not drafted in a clear manner. Set out below is an analysis of some of the key terms.

133    The recitals provide, inter alia, that:

(a)    in order to finance the production of corporate promotional videos, BRTV has asked FCS to exclusively sponsor the customer for the production of such videos;

(b)    FCS has agreed to sponsor the production of corporate promotional videos on and subject to the terms of the Sponsorship Agreement; and

(c)    BRTV has agreed to make and procure payments to FCS and to appoint Finstro Payments as its exclusive agent to collect amounts payable by approved customers.

134    By clause 2.1, FCS agrees to make available to BRTV sponsorship monies drawn from the Sponsorship Pool up to the “Sponsorship Pool Limit”. The Sponsorship Pool is defined as the pool of monies which FCS has agreed to advance to BRTV for Video Offers not yet “Finally Accepted”, and the Sponsorship Pool Limit is $20 million. A “Video Offer” is defined as an offer made by BRTV to a customer for the production and delivery of a corporate or other promotional video. “Final Acceptance” means acceptance by the customer of the video and the customer’s agreement to pay the referable Application Fee, which is simply defined as the fee payable upon Acceptance. There is no definition of Acceptance, so presumably this is meant to refer to Final Acceptance.

135    Clause 2.2 provides that BRTV agrees to incorporate some defined advertising of FCS on each video, to permit FCS to market its financial products to BRTV’s customers, and to, on payment of the referable Sponsorship Payment (the definition of which is considered below), assign to FCS the right of BRTV to receive payment of the amount payable by customers for the production and delivery of a video.

136    Clause 3.1 provides that BRTV appoints FCS as its exclusive sponsor and financier of the marketing, sale, production and delivery of Videos.

137    Clause 3.2 provides that FCS’ appointment is from 9 August 2017 until the termination date.

138    Clause 3.4 specifies some requirements for the utilisation of the facility the subject of the Sponsorship Agreement. Clause 3.4(a) provides that if on the Review Date (which is 30 June 2019) the Video Offers sponsored under the Sponsorship Agreement are less than the lower band of the Customer Contracts Sponsored Percentage, then a payment obligation applies. However, this provision would appear to have no operation because no lower band is specified in the Reference Schedule. Clause 3.4(b) provides that if on the Review Date the aggregate amount of Contract Values the subject of Sponsorship Payments is less than the Sponsorship Pool Limit (i.e. less than $20 million), then BRTV must pay 24% of the difference between the aggregate and the facility limit. In other words, although BRTV does not have to use the Sponsorship Agreement in respect of any particular customer, if it fails to use $20 million worth of sponsorship funds by 30 June 2019 then it pays a price for this.

139    Clause 5 provides a process by which FCS approves “Approved Customers”, which provides discretion to FCS to approve or not approve a customer in accordance with criteria “specified in writing by [FCS] from time to time”.

140    Clause 6 specifies the process for making “Requests” for sponsorship under the agreement, which must be for a minimum of $500,000 and specify the relevant Approved Customers, and can only be in respect of customers who have provided approval to make a video.

141    Clause 7 is an important clause for present purposes which provides for the payments to be made under the Sponsorship Agreement. To understand the structure of the payments, it is sensible to commence with clause 7.2. Clause 7.2 deals with “Initial Payments”, being the payment upon the Request being made to FCS.

142    Clause 7.2.1 provides that within two business days after a Request to the Sponsor (i.e. FCS), the Sponsor will pay the Recipient (i.e. BRTV) an amount equal to the Offer Value. If the Offer Value is $12,000, then this clause on its face provides that FCS will pay $12,000 to BRTV. However, clause 7.2.1 has to be read with clause 7.2.2. Clause 7.2.2 provides as follows:

At the time of payment of the amount specified in clause 7.2.1 [i.e. the Offer Value] the Recipient will pay the Sponsor an amount equal to the Offer Value multiplied by the Discount Rate (Discount Amount). The Recipient irrevocably directs the Sponsor to deduct the Discount Amount from the amount payable under clause 7.2.1.

143    This clause is structured in an odd way. It provides for two simultaneous payments in opposite directions, but this is subject to the final sentence which provides an irrevocable direction to the Sponsor to set off the two amounts and only pay the balance. When read as a whole, the final sentence dictates that the two offsetting payments are notional only, and the amount in fact payable from the Sponsor to the Recipient is the net amount: i.e. the Offer Value less the Discount Amount, which is $9,120 on the applicants’ example. This is important for the subsequent operation of clause 7.4 and the definition of “Sponsorship Payment”.

144    BRTV does not get the full benefit of this net payment (e.g. of $9,120) for any length of time, because clause 7.1 provides that on the same day the Recipient will pay the referable Security Deposit, which is defined as the Offer Value multiplied by the Security Deposit Rate specified in the Schedule (which is 41%), into a bank account nominated and controlled by the Sponsor. Therefore, on the same day that BRTV gets $9,120, it must pay $4,920 to a bank account controlled by FCS and BRTV gets $4,200 in hand (or 35%).

145    Clause 7.3 makes provision for “Final payments”, being payments after Final Acceptance. It provides that within two business days after Final Acceptance, the Sponsor will release the Security Deposit to the Recipient. That is subject to an adjustment if the amount the customer ultimately contracts to pay is greater than or less than the Offer Amount. In the absence of such an adjustment, BRTV will receive the $4,920 Security Deposit.

146    The practical effect of these provisions is that BRTV assigns the customer liability to FCS. In return, FCS provides 76% of the customer liability to BRTV, and retains 24%. The 76% is payable in two tranches: 35% immediately (and before the customer has even entered into a contractual commitment) and 41% upon the customer agreeing to make payments.

147    The applicants submit that the 24% is, in effect, an interest rate for an advance of credit for 120 days. That is not quite correct, for a number of reasons. First, the customer may pay by instalments, in which case FCS will receive payments over a period of time (e.g. 12 months). Therefore, the term is not 120 days. Secondly, there is the unusual operation of the clause relating to substitution of customers, which is certainly not a conventional finance arrangement.

148    Clause 7.4 is an important clause. It provides that if:

(a)    “Delivery” (i.e. delivery to the customer of a Video in accordance with their Customer Contract) does not occur within 120 days from original Preliminary Acceptance;

(b)    a customer fails to become an Approved Customer on Final Acceptance; or

(c)    the customer disputes or changes their Preliminary Acceptance of a Video Offer,

which is defined as a “Declined Customer”, then (quoting directly):

(d)    the Recipient assign to the Sponsor another Customer (a Swapped-in Customer) with an earlier (older) original Preliminary Acceptance Date than that of the Declined Customer; or

(e)    pay to the Sponsor an amount equal to any Sponsorship Payment paid for that Declined Customer plus the referable Cancellation Fee.

149    As is apparent from the terms of the clause, the final part of clause 7.4 does not actually say that the Recipient must pay. This appears to be an error in grammar and drafting. It just says “pay”, without identifying who pays. However, it is clear enough that it must mean the Recipient (i.e. BRTV).

150    Thus in these circumstances, one of two things happens. Either BRTV can assign to FCS another customer (a “Swapped-in Customer”) with an earlier (older) original Preliminary Acceptance Date than that of the Declined Customer, or BRTV must pay to FCS the “Sponsorship Payment” plus the Cancellation Fee.

151    The definition of Sponsorship Payment is central to the operation of clause 7.4. It is somewhat poorly drafted and is as follows:

Sponsorship Payment, at any time, means each payment of sponsorship moneys to be paid under this agreement and, if paid, outstanding at that time.

152    The last part of this definition is difficult to understand. It is not clear how an amount that is paid could be “outstanding”. However, attempting to give the agreement a sensible construction, it is tolerably clear that the last part of clause 7.4 quoted above, when read with this definition of Sponsorship Payment, means that BRTV must repay to FCS the amount payable or paid by FCS to BRTV in respect of the Declined Customer, plus the Cancellation Fee.

153    In the case of a Declined Customer, the amount payable or paid under the agreement is the amount specified in clause 7.2: i.e. the Offer Value less the Discount Amount, being $9,120 on the example used by the applicants.

154    This is not the construction advanced by the applicants. The applicants submit, as a matter of construction of the Sponsorship Agreement, that the Sponsorship Payment, in respect of a Declined Customer, is the Offer Value. The applicants submit that the amount payable pursuant to clause 7.4 is:

(a)    the 76% which comprises the initial payment (being the 35% in hand and the 41% security amount); plus

(b)    the Discount Amount (24%); plus

(c)    the Cancellation Fee (24%).

155    I reject this contention. In their closing submissions, the applicants have not advanced any arguments as to the construction of the agreement in support of this contention. Rather, it is simply asserted that BRTV must pay the 24% Discount Amount plus the 24% Cancellation Fee. However, as analysed above, the combined operation of clauses 7.2.1 and 7.2.2 is that the Discount Amount is never payable or paid to BRTV, because BRTV irrevocably directs FCS to deduct it from the amount payable under clause 7.2.1, such that the amount in fact payable to BRTV is the Offer Value less the Discount Amount, i.e. FCS retains the Discount Amount. Clause 7.2 has to be read as a whole. Put another way, the Sponsorship Payment is the 76% of the Offer Value, not 100% of the Offer Value. The full Offer Value is not “to be paid” under the agreement or “paid” under the agreement within the meaning of the definition of Sponsorship Payment. It is neither paid nor payable.

156    Therefore, to take the example used above, the Sponsorship Payment for that customer is $9,120 and the Cancellation Fee is $2,880, such that in the case of a Declined Customer who is not substituted, BRTV must pay $12,000 to FCS, not $14,880. Of that $12,000, $4,920 is the Security Deposit being held in the bank account controlled by FCS. Therefore, BRTV is $2,880 out of pocket.

157    Not only is this construction the construction that is most consistent with the language of the provisions in question, but it is one that gives a commercially sensible operation to the provisions. On this construction, in the event that another customer is not substituted for a Declined Customer, then BRTV must repay the amount it received from FCS (noting that some of that is held separately for security) plus the “Cancellation Fee”. The Cancellation Fee operates as the name suggests: it is the amount that BRTV will be out of pocket in respect of the individual financing transaction not proceeding. By contrast, on the applicants’ approach, BRTV in effect pays two cancellation fees. It has to pay the Discount Amount, being money it never received, out of its own pocket, and then has to pay the Cancellation Fee out of its own pocket on top. From the perspective of FCS, on the applicants’ approach it gets to keep the Discount Amount, then it is paid a second Discount Amount and it is also paid a Cancellation Fee. None of this is commercially sensible.

158    In their closing written submissions, the applicants make the following submission (at para [152]):

But if (as was the bulk) the customer did not convert, the following occurred:

(a)    a fee of $24 for every $100 was paid by BRTV to FCS;

(b)    of every $100 advanced, $35 was paid to BRTV for up to 120 days against a non-existent invoice, as was the $24 discount fee which was in effect immediately repaid;

(c)    The balance of $41 was held in the escrow or security account;

(d)    on expiry of the 120 days (or earlier cancellation without a replacement) BRTV paid $124 to FCS: the Sponsorship Payment ($41 from the escrow account, the balance from BRTV’s own funds) plus $24 for the Cancellation Fee.

159    However, sub-paragraph (d) overstates the amount payable.

160    This issue is of some significance (although not determinative of the proceeding) because the case advanced by the applicants on the commerciality of the Sponsorship Agreement, and the calculations performed by the applicants’ expert in that regard, assume an incorrect construction of the Sponsorship Agreement and assumes that an additional 24% of the Offer Value was payable to FCS. I will return to this topic below. It is not determinative because the case would fail in any event.

161    Clause 11 of the Sponsorship Agreement contains certain financial covenants referable to the quantum of Video Offers the subject of Preliminary Acceptance as at the last business day of each month. It provides that within 120 days of that date:

(a)    the ratio of the number of Video Offers to the number of Customer Contracts must not be more than 2:1;

(b)    the ratio of Offer Values of the Video Offers to the aggregate Contract Values must not be greater than 2:1; and

(c)    the ratio of the aggregate Video Offers the subject of Sponsorships to all Video Offers must be below 67%.

162    I did not receive any meaningful submissions as to the proper construction of these financial covenants, even though they were referred to by Mr Ross. Their construction is not without difficulty. For example, the definition of Video Offer is an offer made by BRTV to a Customer for the production and delivery of a Video, “in form and substance satisfactory to the Sponsor”. A “Video” is defined as “a corporate or other promotional video offered to be produced for and delivered to a Customer as contemplated by this agreement.” The definition of Video Offers therefore appears to be confined to offers within the rubric of the Sponsorship Agreement, rather than outside that agreement. However, in those circumstances, it is not clear what is dealt with by the third ratio, which seems to contemplate a ratio of Video Offers the subject of Sponsorships to all Video Offers.

The applicants’ case on commerciality

163    As noted above, a critical aspect of the applicants’ case is their contention that the Sponsorship Agreement was so “extravagantly uncommercial” that no reasonable officer of BRTV could have approved the entry by BRTV into that agreement.

164    In support of that contention, the applicants relied upon a cashflow analysis performed by the applicants’ expert, Mr Andrew Ross. That evidence was responded to by the respondents’ expert, Ms Michelle Jennings-Jones. Mr Ross performed his analysis on the basis of his instructions and on the basis of assumptions he was asked to make. He faithfully undertook that process and made appropriate concessions and clarifications, including under cross-examination in the concurrent evidence session. Nevertheless, without any criticism of Mr Ross, I find the applicants’ analysis to be of no assistance and to provide no support for the conclusion the Court is asked to draw.

165    To conduct his cash flow assessment, Mr Ross relied on the following core assumptions:

(a)    the Sponsorship Agreement commenced on or about 1 November 2016 (rather than 9 August 2017);

(b)    BRTV did not pay any cancellation fees associated with failing to convert a customer into a paying customer, and there was no limit on the number of available customers to “swap in” for every customer that ultimately declined to pay for a video;

(c)    BRTV produced a video for every customer that accepted an Initial Offer; and

(d)    95% of all of BRTV’s customers would be funded by the FCC Entities under the Sponsorship Agreement. This appears to involve an assumption that 95% of BRTV’s customers were Pay Later Customers who were funded by FCS.

166    Mr Ross then relied on the following inputs to calculate the net cash flows under the agreement:

(a)    The Initial Offer value was assumed to be $12,000 for each customer, which resulted in an assumed Working Capital amount of $4,200 (i.e. 35% of the Initial Offer value) and a Security Deposit of $4,920 (41% of the Initial Offer value).

(b)    Conversion Rate: This is the rate at which BRTV converted a customer who consented to the production of a video (i.e. received an Initial Offer) into a contracted customer. This was calculated by Mr Ross to be between 11.67% and 15% – the former figure was calculated by the FCC Entities in an audit conducted in or around October 2016, and the latter figure was a calculation made by Mr Ross by comparing the number of people the FCC Entities sponsored to the number of customers that became paying customers in the 12 months immediately preceding the commencement of the Sponsorship Agreement (assuming it commenced in November 2016).

(c)    Average Package Price: The average value of a Final Offer that was accepted by a customer in the 12 months to September 2016 was calculated by Mr Ross to be $4,394. It should be noted that this figure was highly influenced by the period that was used for calculating a historical average. Further, the amount that would be received by BRTV under the Sponsorship Agreement was only a maximum of 76% of this figure.

(d)    Direct Production Costs: The direct cost of producing a video for each customer who accepted an Initial Offer was calculated by Mr Ross to be $891 per customer.

(e)    Operating Costs: BRTV’s average monthly operating costs were calculated by Mr Ross to be $433,191 per month.

(f)    Converted Customers: The number of customers BRTV actually converted in the 12 months to September 2016 was assessed by Mr Ross to be 114 per month.

167    The following formula was used to calculate the net cash flow per customer (assuming an Initial Offer value of $12,000): Working Capital + Security Deposit – Adjustment Amount – (Direct Production Costs ÷ Conversion Rate) (Customer Net Cash Flow). To calculate net cash flows per month, Mr Ross multiplied the Customer Net Cash Flow figure by 114 (being the number of customers BRTV converted in the 12 months to September 2016).

168    Based on a Conversion Rate of 11.67%, Mr Ross assessed that excluding Operating Costs, BRTV stood to lose $4,296 per customer who accepted a Final Offer. Including Operating Costs, this would result in a loss of $922,957 per month.

169    Based on a Conversion Rate of 15%, Mr Ross assessed that excluding Operating Costs, BRTV would lose $2,601 per customer who accepted a Final Offer. Including Operating Costs, Mr Ross assessed that BRTV would lose $729,715 per month.

170    Mr Ross’ calculations indicate that to break even under the Sponsorship Agreement:

(a)    excluding Operating Costs, BRTV would have to achieve a Conversion Rate of at least 27% (i.e. converting roughly 1 in 4 customers that accepted an Initial Offer);

(b)    including Operating Costs, and assuming a Conversion Rate of 27%, BRTV would need to convert at least 11,067 customers each month to cover its Operating Costs;

(c)    including Operating Costs, and assuming a Conversion Rate of 50%, BRTV would need to convert at least 279 customers each month to cover its Operating Costs; and

(d)    including Operating Costs, and assuming a Conversion Rate of 100%, BRTV would need to convert at least 177 customers each month to cover its Operating Costs.

171    By comparison, Mr Ross had assessed the average Conversion Rate to be 15% and calculated that in the 12 months to September 2016, BRTV had only managed to convert on average 114 customers per month.

172    There are a number of issues affecting the utility of Mr Ross’ analysis for the present proceedings.

173    First, Mr Ross undertook his analysis as at 1 November 2016. As considered above, this is not the relevant date for the purposes of assessing the commerciality of the Sponsorship Agreement. Mr Ross agreed that he had not undertaken any consideration of what his analysis would be like if undertaken in 2017. For one thing, that would alter the average revenue per customer, the average monthly operating costs, and probably the average cost per video. Mr Ross’ analysis therefore cannot inform the relevant assessment.

174    Secondly, Mr Ross’ approach to whether the Sponsorship Agreement was “commercially unreasonable” was simply to examine whether cash outflows exceeded cash inflows. Such an approach ignores the growth in the value of any asset (here the video library) and the potential future revenue from the business after its early growth stage. On this approach, framework agreements entered into by a start-up business during its early growth stage where it is cashflow negative and relying on investors to provide ongoing funding for the business would be “commercially unreasonable”. Such an approach is particularly unhelpful in the present context where the very business model adopted by BRTV required the building up of a video library at some expense. This alone is sufficient to put Mr Ross’ analysis to one side.

175    Thirdly, when properly understood, Mr Ross’ analysis is not really an analysis of the commerciality of the Sponsorship Agreement, but is largely an analysis of the commerciality of BRTV’s business. A central driver of the negative cash flow on Mr Ross’ analysis is the low conversion rate. On the figures used by Mr Ross, BRTV has to make 8 or 9 videos at an average cost of $891 per video to achieve one paying customer who yields $4,394 to FCS and $3,339 to BRTV (i.e. not enough to cover the video costs). Further, on Mr Ross’ figures, there are insufficient new customers each month to cover the average monthly operating costs, where those operating costs are not caused by the Sponsorship Agreement. One aspect of Mr Ross’ analysis which is affected by the terms of the Sponsorship Agreement is the figure of $3,339 per Contracted Pay Later Customer, which is 76% of the average customer contract value of $4,394. However, Mr Ross does not analyse the likely cost of any alternative finance that might have been available in the market. Further, on the conversion rates used by Mr Ross, even if the full $4,394 was available to BRTV (i.e. if the cost of finance under the Sponsorship Agreement for a Contracted Pay Later Customer was nil), the BRTV business would still be cashflow negative.

176    That transacting under the Sponsorship Agreement produces negative cash flow on Mr Ross’ analysis is not really a function of the Sponsorship Agreement, but rather is a function of various performance metrics of the BRTV business as at 1 November 2016. It is no part of the applicants’ case that BRTV’s business model was hopeless such that the carrying on of the BRTV business was something that no reasonable officer would have done.

177    The applicants apparently recognise this aspect of the criticism of Mr Ross’ analysis. The applicants say in their closing submissions (at [156]) that “the significance of Mr Ross’ assessment should not be overstated”, and observe that:

It is true that the analysis is by reference to BRTV’s business and the ultimate question is directed to the 2016 Sponsorship Agreement. The agreement viewed simpliciter is in effect more straightforward.

178    Further, as well as being in respect of the wrong date, Mr Ross’ analysis is static in the sense that it ignores the changes that BRTV planned to make to its business in order to make it profitable. Mr Ross discounts BRTV’s plans and forecasts on the basis that he had seen no evidence to suggest that they were plausible. For example, Mr Ross recognises that BRTV was forecasting revenue from TV shows, but observes that he “didn’t have any other information which would allow me to conclude that such a transition was possible” (T449.7). However, Mr Ross does not purport to be an expert in the conduct of such businesses and his views as to whether BRTV’s plans or forecasts are plausible are of no assistance to the Court for present purposes. Just to take an example, it is no part of the applicants’ case that the Autogen model of producing videos for $2, instead of the $891 average cost calculated by Mr Ross, was unable to be achieved, yet that would fundamentally alter Mr Ross’ cashflow analysis.

179    Standing back from the detail, that the conduct of BRTV’s business was cashflow negative in the period up until 1 November 2016 is hardly a surprising conclusion. The Officers themselves recognised that the business was in a “growth” phase and needed to change in order to be profitable. They were propounding changes to the business, including the cessation of $399 videos and the move to Autogen. They also recognised the potential for subsequent use and monetisation of the video library.

180    In the course of cross-examination (T468.30-38), Mr Ross accepted that, using the same figures (with the same conversion rate), if he was instead analysing the commerciality of a bank overdraft facility, he would reach the same conclusion. That is, if the business had to make 8 or 9 videos in order to achieve one sale then the bank overdraft would be uncommercial because the company could not make money. That concession was fairly made, and emphasises that Mr Ross’ analysis was not an analysis as to why the Sponsorship Agreement was uncommercial.

181    Mr Ross added three qualifications to this concession, as follows:

(a)    First, Mr Ross pointed out that his cashflow analysis did not include the further impact of the Cancellation Fee under the Sponsorship Agreement. That may be accepted, but there was no separate analysis of the impact of the Cancellation Fee, and this does not alter the nature of the problems with the analysis more generally.

(b)    Secondly, Mr Ross said that his analysis did not include the effect of certain financial covenants in the Sponsorship Agreement which he understood required certain ratios to be maintained (e.g. the ratio of Pay Later Customers to Contracted Pay Later Customers). As noted earlier, the construction of these provisions is problematic and I received no real assistance from the parties. There is certainly no analysis of how the provisions affect cashflow, or why they render the Sponsorship Agreement uncommercial.

(c)    Thirdly, Mr Ross said that the operation of the business of BRTV did not require BRTV to make nine videos per contracting customer, and a business might engage in some other activity, whereas under the Sponsorship Agreement a sponsored customer needed to become a contracted customer at some point (either directly or via substitution), or else a Cancellation Fee would be payable. However, whilst that might be so, it is not a realistic analysis to say that, in the absence of the Sponsorship Agreement, BRTV might have stopped offering videos to customers altogether. There is nothing to suggest that this would occur, and no relevant distinction in that regard between an overdraft and the Sponsorship Agreement. Mr Ross’ point does not detract from the observation that Mr Ross was really assessing the commerciality of the business, not of any particular agreement.

182    In relation to the Cancellation Fee, it was common ground that no Cancellation Fees were paid during the relevant period. However, I agree with the applicants that this alone does not mean that the fee should be entirely ignored for the purposes of analysing the commerciality of the Sponsorship Agreement. A fee that BRTV is contractually liable to pay and which accrues over time cannot simply be disregarded. The respondents did not point to any evidence that it had been waived. Ultimately, Cancellation Fees were payable by BRTV, although the amount that was paid is not determinative or illustrative of the extent of Cancellation Fees that would have been payable if the BRTV business had not come to an end when it did with BRTV ceasing to substitute customers. Nevertheless, notwithstanding the potential relevance of Cancellation Fees, there was no analysis of the impact of the Cancellation Fee on the commerciality of the agreement, and of course there was no evidence of the terms of any alternative finance.

183    In that regard, it is relevant to observe that in order to consider the likely effect of the Cancellation Fee from the perspective of the Officers at the date of entry into the Sponsorship Agreement, it would be necessary to assess how likely it was as at that date that significant Cancellation Fees would have to be paid. In its letter to the ASX dated 18 February 2018, BIG observed that only 35% of customers were funded by the Sponsorship Agreement, and because of the number of customers who could be substituted, no Cancellation Fees had been payable. What would have been understood or predicted as at 9 August 2017 was not explored, although there was evidence that Mr Corner understood that it was desirable to keep a good proportion of customers in reserve so that they could be substituted if necessary.

184    Fourthly, the figures used by Mr Ross for the conversion rate (11.67% and 15%) were not the correct figures for the purposes of his cashflow analysis. For that purpose, Mr Ross needed to consider the percentage of videos made under the Sponsorship Agreement that will be “sold” – i.e. will be taken up by a customer who commits to pay the relevant licensing fee. In cross-examination, Mr Ross accepted that this was the relevant metric. However, the figures used by Mr Ross represented the percentage of customers who commenced the process (whether or not a video was made) who subsequently contracted to pay licensing fees. The two measurements are different, and the reason for the difference is that BRTV fell behind in making videos so that numerous customers who consented to a video being made never received a video. Counting those customers in Mr Ross’ cashflow analysis would incorrectly include the cost of producing a video that was not in fact produced.

185    The internal management reports produced by BRTV (which were known as HOT Reports) contained a cumulative measure of the paying customers as a percentage of total memberships. Total membership included the Freemium memberships, and Ms Luyben confirmed in oral evidence that all persons who had a video made but did not take up a package were Freemium members. The relevant percentages exceeded 30%. As noted earlier, Mr Ross concluded that a 27% conversion rate was necessary to cover average video costs, such that this ratio would be exceeded. Covering operating costs was a separate matter, and required more customers per month than BRTV had been achieving. However, operating costs were not caused by the Sponsorship Agreement.

186    In cross-examination, Mr Ross observed that it was not sensible to simply ignore customers for whom a video had not been made because the Sponsorship Agreement effectively required a video to be made within 120 days, in the sense that the repayment obligation (and Cancellation Fee) in clause 7.4 is triggered if “Delivery” (i.e. delivery to an Approved Customer of a video) does not occur within 120 days. However, consideration of this issue merely highlights a broader problem with the utility of Mr Ross’ analysis. BRTV was not compelled to use the Sponsorship Agreement mechanism for any particular customer. For example, BRTV recognised that it needed to keep back customers who were not financed under the Sponsorship Agreement so that it would have a body of available customers to substitute if a particular Approved Customer under the Sponsorship Agreement did not become a contracted customer. BRTV could likewise:

(a)    choose customers to be subject to the Sponsorship Agreement who it thought were more likely to agree to pay; or

(b)    prioritise its video production so that it produced videos for Sponsorship Agreement customers first.

In these circumstances, it makes little sense to assess the cashflow consequences of the Sponsorship Agreement by using a general metric of the business, being the percentage of customers commencing the process who enter into a contractual obligation, as Mr Ross has done.

187    In light of these matters, Mr Ross’ analysis is unhelpful and can be put to one side.

188    As noted above, in their closing written submissions, the applicants recognise that Mr Ross’ analysis is largely an analysis of the BRTV business, and posit an alternative way of assessing the commerciality of the Sponsorship Agreement. The applicants seek to undertake something of a cashflow analysis of the Sponsorship Agreement itself, rather than the BRTV business. In paragraph [10] of their written submissions, the applicants submit that the Sponsorship Agreement “was uncommercial for several related reasons”. The first reason is stated as follows (at paragraph [11]):

First, the Discount Amount and the Security Deposit Amount in the context of a conversion rate, had the consequence that to receive finance for 120 days on the terms of the Sponsorship Agreement, BRTV paid $24 upfront for the $35 it received. If BRTV converted the potential customer into a paying customer within 120 days, BRTV received a further $41 with the consequence that the effective interest rate for 120 days was 24%. However, historically, BRTV had a conversion rate of 11.67% or 14% which meant that the arrangement documented in the Sponsorship Agreement was loss making to BRTV.

189    The applicants then submit that the problem of a customer not converting was addressed by substituting those non-converting customers with other customers, but this had the effect of exacerbating the problem because unless they were converted within the same 120-day period, all amounts advanced had to be repaid together with the Cancellation Fee. The applicants submit (at paragraph [12]):

The arithmetical consequence was that BRTV had to convert 39% of its potential customers within 120 days for the financing under the Sponsorship Agreement to breakeven for BRTV. This is because the cost of a non-converting customer was $48 of every $100 (non-converted) to receive $35 for 120 days.

190    The applicants then say that Mr Ross’ analysis of the Sponsorship Agreement adds further costs before that breakeven.

191    The FCC parties submit that this analysis and the resulting figure of 39% has not been pleaded, has not been addressed by Mr Ross (and is in fact inconsistent with his evidence), is not adequately explained, and finds no proper foundation in the evidence. Subject to the following qualifications, I agree with this submission:

(a)    The first qualification is that, although it is not explained, one can see how it was calculated, in that 39% of the $76 received for a successfully contracted customer is just slightly larger than 61% of the $48 that the applicants say that BRTV is out of pocket for an unsuccessful customer: i.e. the submission is that BRTV needs to convert 39% of customers so that there is positive cashflow from the Sponsorship Agreement itself (considered in isolation). Put another way, the applicants say that unless 39% of customers are converted, BRTV is paying out more to FCS than it is receiving from FCS. The applicants rely on the fact that, historically, BRTV did not convert 39% of customers, and therefore, absent an ahistorical change to the business, the operation of the Sponsorship Agreement will be cashflow negative.

(b)    The second qualification is that, although not expressly pleaded, and the figure of 39% is not identified, the concept is present in paragraph 126(e) Particular (B) of the Further Amended Statement of Claim.

192    The applicants also submit that the relevant historical percentage is not the percentage from the HOT Reports, because under the Sponsorship Agreement if BRTV does not make a video within 120 days, it either has to substitute a customer or repay the Sponsorship Payment and the Cancellation Fee.

193    There are a number of problems with the applicants’ submission.

194    The first is that the figure of $48 in paragraph [12] of the applicants’ submissions is wrong. It reflects the applicants’ incorrect approach to the construction of the Sponsorship Agreement, and the assumption that BRTV has to pay, out of its own pocket (i.e. not just returning money), $24 for the Discount Amount and $24 for the Cancellation Fee. The correct figure is $24 not $48, and therefore the correct percentage is 24% (or, more precisely, anything over 24%) not 39% (i.e. 24% × $76 = 76% × $24).

195    The second problem is that the analysis again assumes that the notional percentages for cashflow under the Sponsorship Agreement can be compared with metrics from the BRTV business. However, the conversion rate of 24% identified above (39% on the applicants’ calculation) cannot sensibly be compared to any overall conversion rate in BRTV’s business. If customers are kept in reserve and not funded pursuant to the Sponsorship Agreement, then the $24 Cancellation Fee can be minimised to at least some extent. As noted above, BRTV could select for sponsorship customers who are more likely to pay, and could prioritise the sponsored customers for video production. In relation to the latter point, I observe that the figure of 24% is less than the conversion rate of customers who have videos produced which is contained in the HOT Reports. Therefore, even if a cashflow analysis is adopted, the applicants have not established that the Sponsorship Agreement would be cashflow negative, or should have been understood by the Officers at the time inevitably to be cashflow negative.

196    The third problem, and a central one, is that a cashflow analysis is simply not appropriate in the circumstances of the present case. The utility of the Sponsorship Agreement to the BRTV business is not measured by whether it produces a short-term positive cashflow. Although the applicants go on to observe that there may be additional costs, their approach ignores any value that might be created by the funds being deployed, including but not limited to future revenue from a contracted customer or future revenue from the video funded by the Sponsorship Agreement.

197    In their closing written submissions, the applicants submit that the business plans of BRTV were not realistic. It is said that there are no documents from management which “explain how BRTV was going to transition to offering TV Shows as two-thirds of its future revenue”. It is also submitted that, while BRTV aspired to introduce and sell higher value packages, “in fact, BRTV was not successfully selling higher value packages although it was attempting to do so and in fact was trending down towards lower value packages.” The applicants pointed to a table in the expert report of Ms Jennings-Jones, being Table 59 on page 185. However, that table does not support the submission. It is a table recording subscriptions each month for the 12 months up to 30 September 2016. At the commencement of that period, all subscriptions are at a relatively low value ($0-$1,000 and $1,000-$2,000) with many subscriptions in those bands. In the month of June 2016, there were 5 subscriptions of $0-$1,000, 5 subscriptions of $1,000-$2,000, 2 subscriptions of $2,000-$3,000, 6 subscriptions of $7,000-$8,000, 2 subscriptions of $12,000-$13,000, 15 subscriptions of $15,000-$16,000, 1 subscription of $18,000-$19,000, 1 subscription of $20,000-$21,000, 1 subscription of $22,000-$23,000 and 23 subscriptions of $24,000-$25,000. There is certainly no trend towards lower value packages apparent from this table, and to understand what was happening in the business would require greater evidence and analysis.

198    The HOT Reports also reveal that from September 2016, BRTV began selling the Online TV Show packages. Between September 2016 and December 2017, BRTV was selling on average around 226 Online TV Show packages, and generated on average $2,995,698 per month. The HOT Reports reveal a shift from January 2017 onwards to filming for Online TV Show packages and higher value packages, and scaling back on the content for SMEs.

199    More generally, apart from the superficial observations in paragraph [159] of their closing written submissions, the applicants have not brought forward any proper evidence (including expert evidence) as to the viability or reasonableness of the business plans of BRTV or undertaken any detailed analysis. There is no proper basis for the Court to engage in a process of second-guessing the business decisions of the Officers.

200    Having regard to the matters considered above and the evidence before me, I find that:

(a)    BRTV used the monies provided under the Sponsorship Agreement for the purpose of funding the production of promotional videos for customers;

(b)    building up a video library of customer promotional videos was integral to the business plans of BRTV;

(c)    those business plans included:

(i)    receiving licensing fees from customers, including further licensing fees after the initial customer contract period;

(ii)    using the videos to generate further customer promotional videos at lower cost;

(iii)    using the videos for the purpose of a searchable database of videos for services provided to consumers;

(d)    entering into the Sponsorship Agreement assisted BRTV to put itself in a position to be able to carry out those business plans;

(e)    those business plans were not dependent upon producing a short-term positive cashflow, but rather depended upon the generation of value over the longer term; and

(f)    in entering into, and performing, the Sponsorship Agreement, the Officers acted honestly and believed that they were acting in the best interests of BRTV.

201    I conclude that the applicants have not demonstrated:

(a)    that entering into, or performing, the Sponsorship Agreement was contrary to the commercial interests of BRTV;

(b)    that the business plans of BRTV were unreasonable or doomed to fail; or

(c)    that in entering into the Sponsorship Agreement, the Officers were acting otherwise than in accordance with the standards of honest ordinary persons.

The Subscription Agreement

202    The applicants’ case in relation to the Subscription Agreement was never developed in any detail, and by closing submissions it had disappeared beneath the waves. No case in relation to the Subscription Agreement was developed in the applicants’ closing written submissions. Nothing was said about it in oral closing.

203    In case it is still a live issue, I make the following observations. The case based on the Subscription Agreement has no merit. Pursuant to the Subscription Agreement, BRTV received a financial benefit, being a reduction in its indebtedness to FCS of $500,000. BRTV did not suffer any detriment. Even the detriment alleged by the applicants (if it could truly be said to be a detriment) is a detriment suffered by BIG or the shareholders of BIG. However, BIG is not a party to this litigation and the only relevant role of the Officers relied upon is their role as officers of BRTV.

204    Further, the case relies on hindsight reasoning. The applicants say that the Subscription Agreement was agreed on 24 January 2017. The complaint appears to be that BIG issued shares at an issue price which was effectively 16.5 cents per share, when the market price per share on the five different dates on which the shares were issued was very much higher than 16.5 cents per share (ranging between $2.29 and $3.51) such that FCS obtained a significant benefit. The first issue date was 22 October 2017. It is unclear how the conferring of such a “benefit” could possibly amount to a contravention by the Officers when at the date of reaching the agreement (said to be 24 January 2017) such a benefit was unknown and unknowable. In any event, there was no evidence or analysis of the terms on which BIG could have raised capital in 2017 to support a conclusion that FCS received some form of unwarranted benefit.

205    I reject the case based on the Subscription Agreement.

Application to the claim against the respondents

206    In light of the conclusions set out above, it is unnecessary to engage in a detailed discussion of the requirements of the relevant provisions of the Corporations Act or under the general law. The applicants are a long way from establishing relevant matters that would amount to a contravention by the Officers such as to require consideration of any matters of nuance in the relevant provisions.

207    Sections 181(1)(a) and (b) of the Corporations Act represent the statutory expression of two separate duties owed at general law, being the duty to act in good faith in the best interests of the corporation, and the duty to act for a proper purpose.

208    The requirements imposed by law were identified by Malcolm CJ in Chew v The Queen (1991) 4 WAR 21 at 49 as follows:

First, the directors must exercise their powers in the interests of the company, they must not misuse or abuse their powers. Secondly, they must avoid conflict between their personal interests and those of the company. Thirdly, they should not take advantage of their position to make secret profits. Fourthly, they should not misappropriate the company’s assets for themselves.

209    See also Sunnya Pty Ltd v He (2025) 427 ALR 583; [2025] NSWCA 79 (Sunnya) at [24] and In the matter of IW4U Pty Ltd (in liq) (2021) 150 ACSR 146; [2021] NSWSC 40 at [30]. There is authority that an officer may act for an improper purpose (i.e. a purpose for which the power was not intended) even if the officer is not conscious of any impropriety and even if the officer considers he or she is acting in the best interests of the company: Sunnya at [31]–[34] per Basten JA, Bell CJ and Leeming JA agreeing. Further, an honest belief as to purpose under s 181 will only support an appropriate purpose when the belief is rational: Sunnya at [27].

210    In the present case, the applicants have not established that the Officers acted for an improper purpose, or otherwise than in good faith in the interests of BRTV, within the meaning of s 181.

211    Section 182 prohibits officers from improperly using their position to gain a benefit for themselves or someone else or to cause a detriment to the company. It is not improper for officers to desire their own shares to increase in value and to take steps to increase that value by making business decisions which lead to growth in the company’s business: Mills v Mills (1938) 60 CLR 150; [1938] HCA 4 at 163–164 per Latham CJ.

212    In the present case, the applicants have not established that the Officers have improperly used their position to gain an advantage for themselves or any other person or to cause detriment to BRTV within the meaning of s 182 of the Corporations Act.

213    There is similarly no basis for concluding that there was a breach of fiduciary duty by the Officers.

214    In light of the conclusion that the applicants have not established any breach of duty by the Officers, there is no occasion to consider whether the respondents were knowingly concerned in the alleged breaches. To do so on a hypothetical basis is difficult because the nature of that consideration is bound closely to the nature of the breach by the Officers.

215    Nevertheless, in deference to the detailed submissions on this topic, I make the following observations.

216    First, the respondents were further removed from the commercial purpose of the Sponsorship Agreement than the Officers. Mr Corner had informed Mr Whitworth on 22 September 2016 that:

(a)    the buy now pay later model adopted by BRTV was to obtain a large footprint of SMEs and video content;

(b)    the FCC sponsorship had been “perfect” for this purpose as it assisted in funding the SME content and the “landgrab”;

(c)    whilst “expensive”, the FCC model was a “great process” for BRTV as it permitted the funding of the original model;

(d)    BRTV was evolving its model to focus on higher value packages and was succeeding in doing this, and was also dramatically reducing the cost of producing videos (using the Autogen technology) and would no longer incur material production costs for uncontracted customers; and

(e)    the current model adopted by BRTV included revenue from other sources, including TV shows.

217    Having been told these matters, there was no reason for the respondents to consider the commerciality of the Sponsorship Agreement as merely a function of the cashflow under that agreement. The respondents were entitled to assume that their arrangements with BRTV were in the best interests of BRTV and that the Officers were acting in the interests of BRTV in entering into the Sponsorship Agreement.

218    Further, as a significant provider of finance to BRTV, FCC had an interest in ensuring that BRTV succeeded. In September 2016, questions had been raised within FCC about whether BRTV would be able to survive if it continued to burn through cash and was unable to raise sufficient capital. As a financier, FCC was interested in recoverability, and recognised that recoverability depended upon the ongoing success of the BRTV business. That concern is incompatible with the respondents being knowingly concerned in an improper strategy to benefit the Officers at the expense of BRTV.

219    The questions were raised in September 2016 by Mr Lewis, who was at that time a director of Finstro Holdings and a member of the FCC credit committee. Mr Lewis was concerned about the decline in the share price of BIG and the concern that FCC’s exposure to BRTV could be greater than the equity in BIG. That concern led to the audit conducted by FCC. It is inconceivable, in light of these concerns, that FCC would have proceeded with the Sponsorship Agreement on the understanding that it was contrary to the commercial interests of BRTV and was instead being used by the Officers to ramp the share price for their personal benefit.

220    There is certainly no direct evidence that the respondents understood that the Officers were acting in their own self-interest and contrary to the interests of BRTV. The applicants’ case is an inferential case, but the basis for the inference is even weaker than it is for the findings the applicants seek against the Officers, and the case against the respondents has even less merit.

221    The applicants also submit that the respondents were aware that the Sponsorship Agreement was commercially detrimental to BRTV because of the cashflow implications of the Sponsorship Agreement in light of the conversion rate, which was known by the respondents. I reject this submission. It is incorrect for several reasons:

(a)    first, in light of the matters that Mr Corner had told FCC about the purpose and usefulness of the financing from FCC, it would have been clear to representatives of FCC that the commerciality of the Sponsorship Agreement could not sensibly be assessed on a cashflow basis, and that the agreement was likely to be useful to BRTV even if the short term revenue from licensing fees did not cover the amounts payable to FCC;

(b)    secondly, it is not the case that the respondents had any perceived or actual understanding of the relevant conversion rate, or more accurately the likely conversion rate; and

(c)    thirdly, FCC had been told that BRTV was moving to a different stage in the business model, such that video production would no longer depend upon filming at the customer’s premises, and filming would be reserved for contracted customers, such that previous conversion rates were no longer particularly relevant and certainly not determinative of anything.

222    As to the second point, FCC was told by Mr Corner that the conversion rate was 40%, in that on 21 September 2016 Mr Corner told Mr Whitworth that 60% of customers were non-paying (i.e. 40% were paying). Mr Whitworth subsequently prepared notes observing that that the “Reported Conversion Rate” was that 40% of customers “upgrade to $399 or greater”. His notes also observed that on the audit sample, only 4% were paying to upgrade to $399. Mr Whitworth sought more details from Mr Corner. After some backwards and forwards, Mr Corner sent an email on 28 September 2016 observing that:

(a)    of the 5,025 customers sponsored by FCC as at the end of September 2016, 710 had taken a paid product (which did not include revenue from TV shows), which equated to approximately 14%, although Mr Corner noted that there were additional customers who had outstanding payments that would increase the ratio to 23%;

(b)    however, Mr Corner noted that the reason this was “low” was because BRTV had not yet produced videos for all of these customers, and had only produced 3,434 videos from that group approached, so that the sales conversion rate was 21%.

223    In terms of assessing what percentage of customers were likely to be converted to paying customers in due course pursuant to the funding from the Sponsorship Agreement, this information did not provide any reliable figure. That is so for various reasons, including that, as noted above, BRTV could choose which customers were financed and which videos were produced, and also because, with the change of business model, previous conversion rates and rates of video production were not directly applicable.

224    Further, in any event, on 10 November 2016, Mr R Evertz informed the FCC board that conversion rates were “as high as 30%”. Mr R Evertz also informed the board that the arrangements with FCC to date had been beneficial to BRTV, and that BRTV had recently experienced a good take up of annual subscription renewals, such that he was of the view that BRTV’s client base remained quite “sticky”.

225    In those circumstances, the applicants’ simple cashflow analysis is not useful or appropriate, and I do not accept that the respondents would have conducted any such assessment or would have drawn the conclusion that the Sponsorship Agreement was cashflow negative for BRTV, let alone the conclusion that the Sponsorship Agreement was not in the commercial interests of BRTV.

226    I find that:

(a)    the respondents neither knew nor considered that the Sponsorship Agreement (or the Subscription Agreement) was contrary to the interests of BRTV;

(b)    the respondents would not have entered, or approved or participated in the entry into, the Sponsorship Agreement (or the Subscription Agreement) if they had perceived that it was contrary to the commercial interests of BRTV; and

(c)    the respondents did not understand the Officers to be acting contrary to the interests of BRTV and for their own benefit through the mechanism of an inflated share price.

227    Thus even if, contrary to my conclusion, the Officers procured or endorsed the entry into an agreement that was contrary to the interests of BRTV, and/or entered into the Sponsorship Agreement or the Subscription Agreement for an improper purpose, the respondents were not knowingly concerned in that conduct, and did not receive property knowing that it was derived from breaches of fiduciary duty.

Calculation of loss / account of profits

228    In light of my conclusions on liability, there is no occasion for an assessment of loss or an account of profits. However, given that there were detailed submissions on these issues, I deal with this topic in this section. I will do so in a more abbreviated way than would have been the case if liability had been established.

229    The applicants claim compensation under s 1317H(1) of the Corporations Act or equitable compensation. In the alternative, the applicants seek an account of profits (including pursuant to s 1317H(2) of the Corporations Act). The applicants quantify their claim in the following significant amounts:

Claim for compensation

230    The first amount of $25,454,976 for liabilities under the Sponsorship Agreement less benefits received is said by the parties to be calculated as:

(a)    the amount of liability claimed in the liquidation of BRTV of $45,161,656, being the sum of the principal of $42,791,648, the 24% discount amount of $13,513,152 and the 24% cancellation fee of $11,941,824, less the security deposit of $23,084,968 held by FCS;

(b)    less $19,706,680 being the amount described as the “principal at risk” and representing the amount earlier advanced.

231    A much simpler way of describing that figure is that the amount of $25,454,976 claimed is the sum of the 24% discount amount ($13,513,152) and the 24% cancellation fee ($11,941,824). In other words, the claim is for what was in effect the cost of the provision of finance payable on each advance (somewhat analogous to an interest charge, but in a fixed percentage regardless of time) and the termination fee for each customer who did not accept the video and the contract terms within 120 days. The applicants say that but for the entry into the Sponsorship Agreement, those costs or liabilities would not have been incurred.

232    This is an ambitious claim. In practical terms, it involves a contention that the applicants should be entitled to a cost-free loan. The applicants say, in effect, that they should retain whatever benefits flowed from the provision of monies under the Sponsorship Agreement, but should not pay any of the costs associated with that funding. No proper justification has been advanced for a recovery calculated in that way.

233    The applicants submit that they should not have to account for the costs of any hypothetical alternative funding in calculating their loss, because there is no evidence that such funding was available, or the terms on which it might have been available, and the evidentiary burden of demonstrating these things fell on the respondents. The applicants cite Berry v CCL Secure Pty Ltd (2020) 271 CLR 151; [2020] HCA 27 (Berry) at [65]-[69] per Gageler and Edelman JJ and at [38]-[39] per Bell, Keane and Nettle JJ. I do not accept that the observations in Berry are applicable to the present circumstances. As observed in Berry at [65], plaintiffs are responsible for formulating how such loss or damage as they claim to have suffered is to be identified, and bear the legal onus of proving that the identified loss or damage has been suffered by the contravention and of establishing the amount of that loss or damage. Whilst an evidentiary onus might shift depending on the circumstances, that possibility does not absolve the plaintiff from formulating how the alleged loss is said to be caused by the conduct. In the present case, the entirety of the financing costs are not “loss and damage” because they are not a relevant detriment.

234    The applicants also claim against the respondents the amount of all liabilities to BRTV’s creditors, on the footing that if the Sponsorship Agreement had not been entered into, the resulting trading and financial collapse would not have transpired which rendered BRTV unable to satisfy the various debts and liabilities outstanding to its creditors. Although the applicants recognise that other factors contributed to the insolvency of BRTV (including the high cash burn and the fact that expenses were not met by sales), the applicants submit that this “does not detract from the fact that the liability under the Sponsorship Agreement at the very least materially contributed to BRTV’s external administration and resulting losses”.

235    I do not accept this submission. In the first place, a liability is not a loss simply because it is a liability. A liability is ordinarily incurred in exchange for some good or service. For example, the applicants claim liabilities owed to employees. Secondly, if the applicants wish to claim that liabilities were caused by the Sponsorship Agreement, then there would need to be some analysis and evidence as to why the agreement caused BRTV to be worse off than it would have been in the absence of the agreement, and the quantification of that difference (particularly given the recognition by the applicants of other factors contributing to the insolvency of BRTV). In that regard, the FCC Entities observe that the applicants plead that the FCC Entities and Mr Prout were aware that BRTV required the funds advanced under the Sponsorship Agreement to continue to operate its business: paragraph [139(f)] of the Further Amended Statement of Claim. It is certainly not self-evident that BRTV would have been in a better position in the absence of the Sponsorship Agreement, and not self-evident that BRTV would not have incurred any of the liabilities claimed in the absence of the Sponsorship Agreement. Further, the amount of the loss (i.e. the amount of the difference between the position with the agreement and the position without the agreement) almost certainly does not simply correspond to the quantum of liabilities in the winding up of BRTV.

236    The applicants also claim the costs of the external administration. The same problem arises: the applicants have not established that the external administration was caused by the Sponsorship Agreement in the sense that there would have been no external administration in the absence of that agreement, particularly having regard to the contributing factors to the insolvency of BRTV identified by the applicants.

237    There is a further substantial issue. It concerns the various transactions that were entered into once BRTV went into administration. On 15 May 2018, AS Capital Ventures Pty Ltd (ASCV), FCS and Finstro Payments entered into a Deed of Assignment whereby FCS assigned to ASCV all of its right, title and interest in and to all debts and money owed by BRTV to FCS, including under the Sponsorship Agreement and all rights held by FCS under that agreement, other than the rights and obligations of FCS in relation to the Security Deposit amounts under the Sponsorship Agreement. The consideration for this assignment was only payable by ASCV to FCS after ASCV received any payment from BRTV.

238    Subsequently to this, the Liquidators (then administrators) sought expressions of interest in relation to the sale of BRTV. There were negotiations by them with the principal of ASCV (Mr Alan Shepherd) and the directors of BRTV in May and June 2018 about the entry into a Deed of Company Arrangement (DOCA), an asset sale agreement to ASCV, and a rights agreement for BIG to be able to continue to license necessary IP to conduct its business. Ultimately, ASCV agreed to pay $42 million for certain IP assets of BRTV including the video content library (VCL), which reduced the outstanding debt from BRTV to ASCV by that amount. On 30 June 2018, various agreements were executed including:

(a)    an IP asset sale agreement (IP Asset Sale Agreement) between ASCV, BRTV and the administrators;

(b)    a DOCA; and

(c)    a licence agreement to BIG for certain IP rights.

239    Pursuant to the IP Asset Sale Agreement, ASCV purchased the VCL and various IP assets for $42 million plus GST. The agreement provided that the purchase price was to be set off against the indebtedness from BRTV to ASCV. Pursuant to this set-off, ASCV’s claim in the winding up of BRTV of $45,161,656 was reduced by $42,000,000.

240    As is apparent from the discussion earlier in these reasons, one of the benefits identified by BRTV of the financing arrangements between FCC and BRTV was the resulting ability of BRTV to fund the production of videos to create what BRTV regarded as a valuable video content library. No calculation of the “loss” flowing from the Sponsorship Agreement can be undertaken without analysing and bringing to account the contribution of the Sponsorship Agreement to the development of the VCL and the extent to which the $42 million paid by ASCV was the product of funding provided pursuant to the Sponsorship Agreement. The benefit attributable to the Sponsorship Agreement may well exceed the cost of finance pursuant to the agreement, which itself is not demonstrated to be a “loss” without further analysis, such as an analysis of the cost of alternative finance, and an analysis of the position that BRTV would have been in if it had not entered the Sponsorship Agreement. The applicants simply have not addressed these matters. In light of the $42 million consideration received by BRTV for, inter alia, the VCL, it has not been established by the applicants that BRTV has suffered any loss from the Sponsorship Agreement, let alone the specific amounts claimed by the applicants.

241    In these circumstances, it cannot be said that any of the amounts claimed by the applicants are “losses” caused by entry into the Sponsorship Agreement. The applicants have failed to establish any loss or damage, and I reject the applicants’ claim for compensation for this further reason.

Account of profits

242    Similar problems affect aspects of the applicants’ request for an account of profits.

243    The first, and largest, amount is an account of profits in respect of a “gain on sale of IP assets”. The amount claimed is $43.34 million to $48.309 million. The applicants’ written submissions on this amount are wholly unsatisfactory. The submissions merely refer to a calculation by Mr Ross, and to certain details of that calculation. The submissions do not address:

(a)    what, precisely, is claimed as a “profit”, and how it arose;

(b)    why this amount is a “profit”; or

(c)    why the alleged profit is causally related to the alleged contraventions.

244    Mr Ross’ report is a report from an expert accountant. Although he refers to certain agreements, those agreements have a complex operation, and his report does not consist of an appropriate legal analysis. That is plainly not Mr Ross’ task. Although not explained in the applicants’ written submissions, the claim appears primarily to relate to gains in the value of certain shares and notes in Franki Global Inc. (Franki), a US corporation, the beneficial interest in which was obtained by FCS in a complex series of agreements following BRTV going into administration. The applicants have not explained the operation of the agreements to me, or how they put their claim. That is not an appropriate way to pursue a multi-million dollar claim in this Court. It is not a task for the Court to seek to sift through expert reports, locate agreements, dissect transactions and formulate ways that the applicants might, but did not, put their claim. The applicants’ claim therefore fails for want of explanation. I reject it on that basis.

245    In any event, from the limited information available to me, it is apparent that the claim cannot succeed. That is so for a number of reasons. First, as detailed above, the IP rights were sold by BRTV to ASCV after the events the subject of these proceedings. They were sold in an arm’s-length transaction and sold for value: $42 million was set off against the indebtedness of BRTV. In circumstances where the IP rights were sold for value, the applicants have not explained why any subsequent profit earned in relation to those IP rights by any subsequent purchaser of those rights would be a profit from the alleged contraventions. The applicants have not identified any relevant causal connection.

246    To the extent to which BRTV had IP assets to sell, those assets were the product of the operation of its business. As discussed above, the acquisition of assets (including the VCL) may have been assisted by the funding available under the Sponsorship Agreement. In any event, the assets were then sold by BRTV to ASCV. They were not assets acquired by ASCV in breach of some duty owed to BRTV. No claim is pleaded against ASCV. If ASCV had subsequently made a profit in relation to those assets, it is not at all apparent why ASCV would have to account for that profit. It is similarly unclear why any person who purchased those assets from ASCV would have to account for any subsequent profit. It is not a profit that flows from any alleged contravention.

247    Secondly, the agreement by which FCS acquired rights is a complex agreement dated 30 June 2018 between ASCV as vendor and Huntley Custodians Ltd (Huntley) as purchaser, where Huntley is said to be acting as a “custodian” of FCS (the ASCV IP Asset Sale Agreement). The agreement also refers to a separate tripartite arrangement between ASCV, FCS and Finstro Holdings concerning the payment of a “success fee” of $7 million. Clause 4 of the ASCV IP Asset Sale Agreement provides that the purchase price of the IP assets is $42 million, and provides that $35 million of this price is to be set off against the existing debt between ASCV and FCS and $7 million is to be recharacterised as an amount owing to FC Capital Holdings Pty Ltd but is to be set off against the purchase price. The applicants have not addressed any of these matters.

248    Thirdly, Huntley subsequently sold certain assets to Franki and obtained in return some shares in Franki and some Franki notes. However, the description of the assets sold to Franki differs from the description of the assets sold to Huntley. It is plain that additional assets have been sold. For example, the assets sold to Huntley include:

(a)    the TIP Technology Assets, which includes but is not limited to the code for an app and a web portal;

(b)    business and domain names registered in connection with the FrankiApp Business Model, being a social video review app business proposed to be operated by Franki Global;

(c)    trade marks in respect of the FrankiApp Business Model;

(d)    trade secrets and other intellectual property relating to the FrankiApp Business Model; and

(e)    the TTA Enhancements, being a customised and enhanced version of the TIP Technology Assets including all revised code and additional applications developed for the FrankiApp Business Model.

249    The claim for profits primarily consists of claims for an additional $5 million paid by Franki for the assets ($47 million instead of $42 million) and gains in the value of the shares and the notes. Given that the assets do not appear to be the same, the first of these (the $5 million) has not been shown to be a profit at all, and it is not clear how any of these amounts are profits (or limited to profits) earned from the BRTV IP assets, let alone how those profits are causally connected to any alleged wrongdoing.

250    Fourthly, it is not clear how the alleged gains on shares or notes are properly calculated as profit. There is no suggestion that they are realised gains (rather than book values), and the gain on the shares of $27 million to September 2022 was based on a draft document addressed to Deloitte. None of this is addressed by the applicants.

251    I reject this claim for an account of profits for these further reasons.

252    The second category of profit is a claim for $8.432m to $12.499m (including interest) in respect of FCS’ use of amounts paid under the Sponsorship Agreement.

253    A key difficulty here is that Mr Ross’ analysis of these profits commences with a starting date of 1 November 2016. That is not the correct date. Nor is that problem addressed by saying that amounts paid prior to the contract date of 9 August 2017 were brought under the rubric of the Sponsorship Agreement. If the relevant impugned conduct is conduct consisting of the approval of and entry into the Sponsorship Agreement from 9 August 2017, monies provided prior to that date (including Discount Amounts withheld) are not monies which result from any contravention. No alternative calculation was put before me. The applicants have therefore failed to establish a relevant profit claim in this regard.

254    The third category of claim is for an amount of $0.331m to $2.52m in respect of the reinvestment by the FCC Entities of the Discount Amount and the Security Deposit Amount. It is common ground that no actual interest was paid on these amounts. However, as the amounts were mingled with other amounts, the experts appear to agree that some allowance should be made for the benefit of the use of the funds, but disagree as to the best approach. The respondents also contest the allowance on various grounds. Given my conclusions on liability, I will not give further consideration to the minutiae of this particular debate.

255    The final category of claim is a claim for $9.4 million being the alleged profit earned on the issue of the 3.03 million BIG shares under the Subscription Agreement.

256    This can be dealt with shortly. The amount calculated as “profit” is simply the notional market value of each parcel of shares on their issue date less the amount paid for the shares. Given that the shares were not sold on the issue date (or at all) and are now worthless, this is not a proper measure of profit. Rather, the correct position is that FCS made no profit on the shares.

257    It follows that, with the exception of the claim for $0.331m to $2.52m for the benefit of the reinvestment of funds (which I do not resolve), I reject the applicants’ claims of an entitlement to profits.

Conclusion

258    The application should be dismissed, with costs.

Associate:

Dated:    22 September 2026