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TUITE & ANOR v EXELBY & ORS

Judges:
Shepherdson J

Court:
Supreme Court of Queensland

Judgment date: Judgment handed down 30 November 1992

Shepherdson J

[His Honour set out the plaintiffs' claims and the evidence. He then continued...]

1. BY THE FIRST PLAINTIFFS AGAINST FIRST AND SECOND DEFENDANTS

There is no issue that Cradex is in the business of stock feed production carried on within the area and time period of the restraint referred to in Ex. 2. There is no issue as to

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reasonableness of the restraint whether as to area or time.

The first plaintiffs allege that the first and second defendants have been engaged in or concerned or interested in the business conducted by the third defendant. A number of particulars are pleaded.

In
Batts Combe Quarry Ltd. v. Ford (1943) 1 Ch. 51 the Court of Appeal dealt with a restraint of trade covenant. Lord Greene M.R. with whose reasons the other two members agreed said:-

``The word `concerned' is of quite general import. Clearly it cannot be limited to `concerned' in the sense of financial interest or of being an employee of the business.''

There the father in conducting negotiations on behalf of his sons was ``concerned in'' the business.

Exhibit 2 prohibited the first and second defendants being ``directly or indirectly concerned or interested in'' the relevant business. ``Concerned in'' means ``having something to do with'' a similar business. (
George Hill & Co. v. Hill (1886) 55 L.T. 769 at 771.)


William Cory & Son Ltd. v. Harrison (1906) A.C. 274 decided that although the words ``concerned or interested in'' are very wide nevertheless, when referring to the carrying on of a business, the mere fact of being a creditor is not being ``concerned or interested in'' the business.


Smith v. Hancock (1894) 2 Ch. 377 - another restraint of trade case - is authority for the proposition that ``interested in'' connotes a pecuniary or proprietary interest. Thus, if I concluded that Russell and Wendy Exelby or either of them had a pecuniary or proprietary interest in Cradex they or at least one is in breach of the restraint and the first and second plaintiffs are entitled to relief.

The first and second plaintiffs contend that on the evidence Cradex Pty. Ltd. was and is a sham and that in reality it was and is the business of the first and second defendants (whether with or without the involvement of Peter and Doris Exelby). Therefore, the first plaintiffs say the first and second defendants were and are interested in Cradex and are in breach of the restraint covenant.

Reliance is placed on Smith v. Hancock (supra) at p. 385.
Gilford Motor Co. v. Horne (1933) 1 Ch. 935 at 955-6 (Lord Hanworth M.R.), at 965 (Lawrence L.J.) and at 969 (Romer L.J.).

I have set out my findings and comments on the evidence in this case in some detail because, although on the face of Cradex Pty. Ltd. and its directors, Cradex at first appears an entity quite independent of Russell and Wendy Exelby, nevertheless, when all the evidence before me is looked at, as a circumstantial evidence case is considered, I have reached the irresistible conclusion that Cradex Pty. Ltd., from the time Peter Exelby bought it as a shelf company has operated as a facade for Russell Exelby and Wendy Exelby. Both Russell and Wendy knew they could not lawfully be involved in this company bought to operate the new mill. Throughout my earlier findings, Russell Exelby's involvement appears continually and at times when, if he was not in any way involved, one would not have expected him to appear. I have considered all the evidence as in a circumstantial evidence case, see
Chamberlain & Anor v. R. (No. 2) (1983-1984) 153 C.L.R. 521 at 535 where Gibbs C.J. and Mason J. said:-

``At the end of the trial the jury must consider all the evidence, and in doing so they may find that one piece of evidence resolves their doubts as to another. For example, the jury, considering the evidence of one witness by itself, may doubt whether it is truthful, but other evidence may provide corroboration, and when the jury considers the evidence as a whole they may decide that the witness should be believed. Again, the quality of evidence of identification may be poor, but other evidence may support its correctness; in such a case the jury should not be told to look at the evidence of each witness `separately in, so to speak, a hermetically sealed compartment'; they should consider the accumulation of the evidence: cf.
Weeder v. The Queen (1980) 71 Cr. App. R. 228, at p. 231.

Similarly, in a case depending on circumstantial evidence, the jury should not reject one circumstance because, considered alone, no inference of guilt can be drawn from it. It is well established that the jury must consider `the weight which is to be given to the united force of all the circumstances put together': per Lord Cairns, in
Belhaven and Stenton Peerage

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(1875) 1 App. Cas. 278, at p. 279, cited in
Reg. v. Van Beelen (1973) 4 S.A.S.R. 353, at p. 373.''

These comments, although appearing in a criminal case are, I believe equally relevant to a judge sitting as a tribunal of fact in a civil case. The explanation of Chamberlain in
Shepherd v. R. (1990) 65 A.L.J.R. 132 does not cast doubt on the above passage. The onus of proof in the civil case is less burdensome than in a criminal case.

One of the telling pieces of evidence pointing in the direction of Cradex being really under Russell's control was his statement to Perkins about ``breaking Pat'' and not caring whether Cradex trades at a loss (see para. 23 ante).

Other telling pieces of evidence I have mentioned in paras. 58, 59 and 60 [that Russell Exelby paid $10,000 to Peter and Doris Exelby to provide funds to ensure that bank finance was granted to Cradex; that Russell and Wendy Exelby were the beneficial owners of the Cradex shares held by Peter and Doris Exelby; and that Russell Exelby was at all relevant times on hand to advise and assist in the day to day running of the Cradex mill]. This is not to say that these are the only pieces of evidence I have relied on. My conclusion as to Cradex being a facade behind which stood Russell and Wendy as the real owners is based on my consideration of all the evidence.

Thus, on the basis of Cradex being a facade for Russell and Wendy as real owners I find that both Russell and Wendy Exelby have breached the restraint covenant and are liable in damages to the first plaintiffs. They were concerned and interested in Cradex Pty. Ltd.'s business from the moment it began to trade until 19th June 1991 and their carrying on Cradex's business was in clear breach of the restraint on trade covenant.

Further and alternatively I find that Russell breached the restraint covenant in that he was concerned in the sense that he had something to do with Cradex when he:-

  • (a)(i) canvassed custom for the new mill by interviewing Shelton, Bell, Hiron and McUtchen in company with Dalton and introducing Dalton to Bell as manager of the new mill.
    • (ii) canvassed custom for Cradex from Noel John Kirk (see para. 25 ante).
    • (iii) canvassed custom for the new mill from Perkins and Gleich (see paras. 23 and 24 ante).
  • (b) persuaded Dalton to leave Wenmar's employ and work for Cradex;
  • (c) assisted O'Brien's application for finance on behalf of Cradex by providing information re Wenmar's trading figures and providing lists of material and equipment required to commence and to operate a stock feed mill;
  • (d) assisted Cradex's Application for Finance by the telephone call referred to in para. 46 (ante) (Ex. 46) and by telling Peter Exelby of his canvassing of customers which canvassing Lalor inserted in his recommendation of the Line of Credit Application (part of Ex. 37);
  • (e) assisted in loading and unloading grain at Cradex Mill from September 1989 to February 1990;
  • (f) advised Peter Exelby as to the appropriate machinery and equipment for use in the stock feed mill;
  • (g) assisted Cradex's finance application with National Australia Bank Wondai by attending at the bank and introducing the Olivers as guarantors, the Olivers being well known by Peter Exelby who was then present and who could well have introduced the Olivers to Lalor;
  • (h) introduced Dalton to Bell at Cushnie on or about 20th May 1989 as manager of the new mill;
  • (i) between October 1990 and December 1990 entering into agreements to sell barley to Cradex at a price $20 per tonne over market price (see para. 56 ante);
  • (j) on 21st June 1989 providing Peter and Doris Exelby with $10,000 with the dominant purpose of enabling them to pay that sum to the credit of Cradex with the National Australia Bank knowing at the time that Cradex was seeking finance from that bank.

I find also that Wendy Exelby approved of Russell's foregoing conduct. Wendy Exelby has been a high school teacher since 1987. I find that she and Russell generally discussed decisions to be made in relation to Wenmar. In early 1989 she and Russell discussed his then intention of being involved in a new feed mill. I am satisfied that whatever decision Russell

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made in respect of a new feed mill and financing of it she left to Russell and was prepared to abide by and be part of that decision and its consequences.

As a witness I thought Mrs Exelby did her best to disclaim any knowledge of Cradex, the building of the Cradex mill and what Russell's intentions were in respect of the new feed mill. She admitted knowing of the restraint of trade in Ex. 2 and seeing the new Cradex Mill being built. I thought her evasive and unreliable. I have concluded that whatever arrangements Russell made in relation to the new feed mill were acquiesced in by her and done with her approval. I also find that it is most unlikely that Mr and Mrs Oliver would risk a guarantee liability up to $70,000 in a venture in a field in which the apparent owners Peter and Doris Exelby had had no prior experience unless the guarantee was in reality given because their daughter was involved in that venture.

I have concluded that the second defendant is liable for Russell Exelby's breaches of the restraint of trade covenant which I have earlier set out, she having approved of Russell's conduct which constituted those breaches.

I find further and alternatively that the first and second defendants by Cradex Pty. Ltd. breached the restraint on trade covenant by supplying during the period of the restraint persons and firms who were customers of Wenmar as at 19th June 1989. I refer now to Ex. 7 which I find is a list of persons and businesses who traded with Wenmar at 19th June 1989. The persons on this list were not trading with Wenmar by the end of September 1989 and all on that list traded with Cradex. Save for one load of feed to G. and C. Bell, Wenmar did not again trade with any person named in Ex. 7.

The finding in the foregoing paragraph results from my earlier finding that Cradex Pty. Ltd. was at all times a facade for the first and second defendants and my construing the restraint on trade clause in Ex. 2 to read:-

``The vendors shall not... either by themselves... or [by a] corporation in the trade or business of stock food production within [the area] during a period of two years from the date hereof... supply... any of the existing customers of [Wenmar]''

In my view this construction is plainly open and reflects the intention of the parties. This sort of clause should be construed without a narrow or pedantic approach (
The Council of the Upper Hunter County District v. Australian Chilling and Freezing Co. Ltd. (1967-1968) 118 C.L.R. 429 at 437). (See also
Allen v. Carbone (1975) 132 C.L.R. 528;
B.P. Refinery (Westernport) Pty. Ltd. v. Shire of Hastings (1978) 52 A.L.J.R. 20 at 27 and
Australian Broadcasting Commission v. Australasian Performing Right Association Ltd. (1973) 129 C.L.R. 99 at 109-110.)

I find the restraint of trade covenant was intended to prevent the first and second defendants from supplying stock feed or grain customers of Wenmar during the period of the restraint. Supplies to those customers via Cradex Pty. Ltd. as a facade were breaches of the covenant.

As to damages for breach of contract I find:-

  • (a) Before September 1989 all of the persons listed in Ex. 7 were customers of Wenmar who traded with Wenmar. They were all customers of some standing. Save for two exceptions none had threatened to take his business elsewhere.
  • (b) By the end of September 1989 all these customers had begun to trade with Cradex.
  • (c) Russell Exelby's approaches to Wenmar customers were a factor in having them transfer their allegiances to Cradex. A number of Wenmar customers went to Cradex to give the new mill in the district ``a go''.
  • (d) Russell Exelby knew this would happen.
  • (e) If it were not for Russell Exelby's actions, Cradex would not have been formed and would not have competed with Wenmar within the area and period of the restraint.
  • (f) It is no answer for the defendants to say Cradex was cheaper than Wenmar - it should not have been trading in competition with Wenmar during the restraint period.

As to the quantum of damages I heard expert evidence from two accountants - James Peter Pastellas for the plaintiff and Rodger William Flynn for the defendants. Each furnished a report. Pastellas' is Ex. 15 and Flynn's Ex. 65 and 66. Pastellas relied on analyses by Mr Tuite from Wenmar's records of dealings with the customers in Ex. 7. These analyses are in Ex. 8. They were later corrected by Mr Tuite in his evidence.

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Pastellas attempted an averaging approach in determining the loss to Wenmar and the first plaintiffs as its shareholders resulting from the loss of Wenmar's customers to Cradex.

His methodology is explained in his report and in his oral evidence. I find that it was reasonable for him to conclude that if Cradex had not started operating the customers in Ex. 7 or the vast bulk of them would have traded with Wenmar to much the same extent as they traded with Cradex.

He determined a gross profit percentage by looking at all available information and all the gross profits achieved. He ignored some results as not reliable. I thought his calculation of lost maintainable profit in Appendix 9 to Ex. 15 reasonably accurate. This calculation shows an estimated loss of $161,788 per annum (net after tax) commencing on the day those sales were lost i.e. about 10 September 1989.

As I understood Mr Flynn he did not challenge the capitalisation of profits method of Pastellas. What he did challenge was the true figure for lost maintainable profits and the capitalisation rate.

Mr Morton has submitted that I should ignore Mr Flynn's methodology disclosed in Ex. 66 because of the following alleged defects in it:-

  • (a) Ex. 66 is an attempt to assess at 30th June 1991 the difference in the value of Wenmar's business at that date as compared with 30th June 1989 instead of attempting to assess what loss was suffered by the plaintiffs as a result of the defendants' breaches of their obligations.
  • (b) It wrongly ignores the effect of any customer who did not continue with Cradex up to 30th June 1991 because:-
    • (i) it ignores any question of lost profits to the first and second plaintiffs which may have been derived from those customers whilst trading with them in the intervening period;
    • (ii) it assumes, quite unjustifiably, that if Cradex had not existed the customers would have left Wenmar in any event.
  • (c) Rather than attempting to assess what costs were actually saved by Wenmar as a result of not making the lost sales, Flynn applied an across the board overheads charge which may or may not represent what was Wenmar's actual loss e.g. bags and packing. This attitude, Mr Morton submits, lacks reality.
  • (d) Flynn fails to address at all the question of loss to the first and second plaintiffs because of loss of trading with customers. Mr Morton submits that Flynn was unable to address this matter because, as said earlier, he ignored the effect of any customer who left Cradex before 30th June 1991.

In my view these submissions are correct. I prefer the approach of Pastellas to that of Flynn.

I should here add that Flynn is an employee of Duesburys. Cradex was a client of Duesburys. He does not therefore present as entirely independent as a court expects an expert witness to be. Further, Lloyd Haywood, a manager in the audit division of Duesburys prepared certain schedules for Flynn under Flynn's instructions. These schedules were mechanical analytical work but Lloyd Haywood is Wendy Exelby's brother-in-law and sat in Court behind Mr Hack while Flynn gave evidence. This aspect of Haywood's involvement, albeit in the type of work described by Flynn and used by Flynn in his report, combined with Haywood's presence in Court detracted from the appearance of independence usually associated with expert witnesses. I have not rejected Flynn's evidence for this reason but it was a matter which caused my concern. I mention it to emphasise the need for independence in expert witnesses.

The second area of difference between Pastellas and Flynn was selection of the capitalisation rate. This is I find essentially a matter of judgment as to the return a purchaser would expect to receive on his investment and such return is essentially linked to the risk.

The evidence before me shows that Wenmar and Cradex were two quite successful businesses both making a reasonable profit. I find that a purchaser of the Wenmar business would not perceive a great risk associated with the purchase.

Flynn viewed the business as ``extremely risky'' (he later reduced this to ``risky'') and chose a rate of 34 per cent. I find this rate unacceptably high. Flynn had difficulty justifying this choice. Pastellas chose a rate of twenty per cent. Of the two I prefer Pastellas' choice because it seems to me to accord better with the actualities of Wenmar's trading.

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Thus I accept that the loss per annum commencing from about 10 September 1989 is $161,788 (net after tax). The two year restraint began on 19 June 1989. Therefore loss at this rate for one year and nine months is $283,129. Mr Morton has submitted that I should allow another six months because he submits, had the relevant period been properly observed, the probabilities are that Cradex would not have begun to trade until about December 1991 and until it did begin to trade, Wenmar would have continued with its customers free from competition from Cradex operations.

In my view six months is too long. The evidence shows that Cradex mill was built and began operating within 3-4 months. I propose to add $40,000 to the above figure of $283,129 to take account of this gap. The total is $323,129 which I round out to $323,130. The first plaintiffs are each entitled to one half of this sum viz. $161,565. This figure does not take into account income tax payable by them.

The first plaintiffs also claim to be entitled to damages for the reduction in the capital value of the shares in the Wenmar business calculated by Pastellas at $808,940. I accept Pastellas' opinion that the sales lost by Wenmar to Cradex have resulted in the reduction in the capital value of the issued shares of $808,940. In the assessment of damages in contract the plaintiff is to be put in the same situation as if the contract had been performed (
Wenham & Anor v. Ella (1972) 127 C.L.R. 454 at 460, 471). Had that been so in respect of the restraint of trade covenant, the first plaintiffs would not have suffered the reduction in the value of their shares as claimed.

Applying the rule in
Hadley v. Baxendale (1854) 9 Ex. 341 at 354 [156 E.R. 145 at 151] it can be said that such loss fell within the ambit of that rule and was foreseeable by the first and second defendants. I find that such a loss was not only foreseeable but was envisaged contemplated and hoped for by the first and second defendants.

However, Mr Hack submitted that no damages on this aspect should be assessed. He argued that the first plaintiffs have suffered a capital loss at an earlier time than would otherwise have occurred and the acceleration of that loss is not capable of being compensation for the first plaintiffs.

The breaches by the first and second defendants of the restraint on trade were continuous up to 19th June 1991. Damages are to be assessed at the date of the breach and in my view that means up to and including 19th June 1991. It is beside the point to say that the loss in value of the shares has been accelerated. If the contract had been performed Cradex would not have existed and been trading in competition with Wenmar at 19th June 1991. Thus, with lack of that competition there is no evidence to suggest that the capital value of the shares would not have been greater by some $808,940.

In my view, on accepted principle the first plaintiffs are entitled to damages for the reduction in the capital value of the shares in the Wenmar business.

In the result I find those damages to be $808,940.

The matter of income tax on loss of profits and capital loss must be considered.

On this aspect it is the opinion of Mr Pastellas that an award of $808,940 ``as compensation for a reduction in the value of the assets... would more than likely involve an assessable capital gain by virtue of s. 160M(7)'' of the Income Tax Assessment Act 1936. Section 160M(7) is one of the sections in ``Part IIIA - Capital Gains and Capital Losses'' and it applies to assets coming into existence after 19th September 1985. Wenmar was incorporated after 19th September 1985.

Mr Morton has referred to
Hepples v. FC of T 91 ATC 4808; (1991) 65 A.L.J.R. 650 in which the High Court considered s. 160M(7).

Section 160M is a complex section.

Sub-sections 160M(1) and (2) read:-

``160M(1) [Change in ownership of asset] Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.

160M(2) [Methods of change] A reference in subsection (1) to a change in the ownership of an asset is a reference to a change that has occurred in any way, including any of the following ways:

  • (a) by the execution of an instrument;
  • (b) by the entering into of a transaction;

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  • (c) by the transmission of the asset by operation of law;
  • (d) by the delivery of the asset;
  • (e) by the doing of any other act or thing;
  • (f) by the occurrence of any event.''

Sub-section 160M(2) is of wide import.

Sub-section 160M(7) provides:-

``160M(7) [Consideration in relation to act, transaction or event] Without limiting the generality of subsection (2) but subject to the other provisions of this Part, where-

  • (a) an act or transaction has taken place in relation to an asset or an event affecting an asset has occurred; and
  • (b) a person has received, or is entitled to receive, an amount of money or other consideration by reason of the act, transaction or event (whether or not any asset was or will be acquired by the person paying the money or giving the other consideration) including, but not limited to, an amount of money or other consideration-
    • (i) in the case of an asset being a right - in return for forfeiture or surrender of the right or for refraining from exercising the right; or
    • (ii) for use or exploitation of the asset,

the act, transaction or event constitutes a disposal by the person who received, or is entitled to receive, the money or other consideration of an asset created by the disposal and, for the purposes of the application of this Part in relation to that disposal-

  • (c) the money or other consideration constitutes the consideration in respect of the disposal; and
  • (d) the person shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (c) or (d), (2)(a), (b), (c) or (d) or (3)(a), (b), (c) or (d) in respect of the asset;...''

As I understand Mr Pastellas' argument, the asset referred to in s. 160M(7)(a) is the shares in Wenmar, that an event affecting that asset has occurred viz. damage or loss being suffered by Wenmar in respect of the breaches by the first and second defendants and Wenmar has become entitled to receive $808,940 by reason of that event.

On first impression it does seem that the asset referred to in s. 160M(7)(a) is the shares in Wenmar all of which are owned by the first plaintiffs. However the asset there referred to might equally be the benefit of the restraint of trade covenant enjoyed by the first plaintiffs and assignable as a proprietary right (
Commr of Inland Revenue v. Angus (1889) 23 Q.B.D. 579 at 596;
Townsend v. Jarman (1900) 2 Ch. 698 at 702-704 and
Jacoby v. Whitmore (1883) 49 L.T. 335 at 338. Further consideration, particularly after referring to s. 160M(1) in which there has to be a change in the ownership of the asset, confirms the correctness of the view that the asset in s. 160M(7) is the shares in Wenmar.

I have found breaches by the first and second defendants of that restraint of trade covenant. These breaches by the first and second defendants of the restraint on trade covenant are events affecting the shares in Wenmar. The first plaintiffs are entitled to receive $808,940 by reason of the breaches having affected the shares. So far, it may be said the requirements of s. 160M(7) are satisfied. That sub-section in referring to the amount of money or other consideration goes on ``including, but not limited to an amount of money or other consideration-

  • (i) in the case of an asset being a right - in return for forfeiture or surrender of the rights or for refraining from exercising that right, or
  • (ii) for the use or exploitation of the asset,''

I pause to say that the provisions of (i) and (ii) are not exclusive in light of the preamble thereto - ``including but not limited to''.

It may therefore be said that up to that stage s. 160M(7) still applies. If it does, then the events affecting the shares in Wenmar viz. the breaches of the restraint of trade covenant constitute a disposal by the first plaintiffs who are entitled to receive the $808,940. The methods of change in ownership detailed in s. 160M(2) are very wide, particularly so in para. (f) thereof.

As I understand s. 160M(7) if what I have set out is correct, the $808,940 being the amount of entitlement for the deemed disposal is taxable under Part IIIA.

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I cannot be certain that the Commissioner of Taxation will assess to tax under Part IIIA entitlement to receipt of $808,940. I am concerned with whether such a future event is more likely than not to occur. In my view, given the way in which I have analysed above s. 160M(7) and applied my findings to it, I find it more likely than not that the Commissioner will assess to tax under Part IIIA the first plaintiffs' entitlement to receipt of $808,940.

I find that Mr Pastellas' opinion is correct.

It seems to me therefore that given that the first plaintiffs are entitled to have the restraint on trade covenant properly performed it was in my view reasonably foreseeable by the first and second defendants that their breaches of the restraint on trade covenant would expose the first plaintiffs to tax under Part IIIA on an award of damages for any loss in value of the plaintiffs' shares in Wenmar caused by such breaches.

The $808,940 should be increased to $1,326,131 in accordance with Mr Pastellas' calculations. I have been concerned as to how best to deal with the possibility that tax under Part IIIA is not ultimately assessed and payable on the $808,940. I have concluded that I should seek and obtain from the first plaintiffs their undertaking to be given in open Court that, in the event that such tax is not assessed at all or that such tax is assessed at less than $517,191, they will refund to the first and second defendants the whole of the $517,191 or the amount by which $517,191 exceeds the tax assessed as the case may be. I propose to deal with this matter when handing down these reasons for judgment.

On the aspect of income tax payable on the damages of $323,130 when such damages are received, I leave that for assessment by the Commissioner of Taxation and payment by the first plaintiffs.
McLaurin v. FC of T (1961) 12 ATD 273; (1960-1961) 104 C.L.R. 381 does not apply to this case and these damages of $323,130 when received are obviously identified as assessable income in the hands of the first plaintiffs. See
Raja's Commercial College v. Gian Singh & Co. Ltd. (1977) A.C. 312 at 319 where the Privy Council approved the following statement of Diplock L.J. (as he then was) in
London & Thames Haven Oil Wharves Ltd. v. Attwooll (Inspector of Taxes) (1967) Ch. 722 at p. 815:-

``Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received, instead of the compensation. The rule is applicable whatever the source of the legal right of the trader to recover the compensation. It may arise from a primary obligation under a contract, such as a contract of insurance, from a secondary obligation arising out of non-performance of a contract, such as a right to damages, either liquidated, as under the demurrage clause in a charterparty, or unliquidated, from an obligation to pay damages for tort, as in the present case, from a statutory obligation, or in any other way in which legal obligations arise.''

2. CLAIM BY FIRST PLAINTIFFS AGAINST THE THIRD DEFENDANT FOR DAMAGES FOR WRONGFUL PROCURATION OF A BREACH OF CONTRACT BY THE FIRST AND SECOND DEFENDANTS

I find that Cradex knew of the relevant restraints on the first and second defendants and that it so knew through the first and second defendants who, as I have found, were Cradex's real controlling minds. Cradex also knew of the restraints through Peter Exelby's knowledge acquired from Russell Exelby. It was I find always contemplated by Russell and Peter Exelby that the new mill would be operated by a Corporation.

Cradex by its directors and by Dalton have operated its business as a facade for the first and second defendants and thus procured the first and second defendants to breach the restraints continuously up to and including 19th June 1991. Those breaches by the first and second defendants are in most cases directly attributable to Cradex's acts. Without the corporate entity to shield their carrying on the stock feed mill the first and second defendants could not have breached the restraints as substantially as they did. Damage has been caused to the first plaintiffs by Cradex's conduct. I find this claim made out and the

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damages suffered by the first plaintiffs are the same as those already assessed.

3. CLAIMS BY THE SECOND PLAINTIFF AGAINST THE FIRST AND SECOND DEFENDANTS FOR: -

  • (a) damages for breach of directors' duties;
  • (b) damages for breach of fiduciary duty.

(a) Breach of Directors' duties

The claim on this head has two bases - the obligations of Russell and Wendy Exelby as directors at common law and under the statute - s. 229 of the Companies (Queensland) Code 1981.

(1) Under the Common Law

The duties of directors are set out in the following well-known statement by Romer J. in
Re City Equitable Fire Insurance Co. (1925) Ch. 407 at 427-429:-

``In order, therefore, to ascertain the duties that a person appointed to the board of an established company undertakes to perform, it is necessary to consider not only the nature of the company's business, but also the manner in which the work of the company is in fact distributed between the directors and the other officials of the company, provided always that this distribution is a reasonable one in the circumstances, and is not inconsistent with any express provisions of the articles of association. In discharging the duties of his position thus ascertained a director must, of course, act honestly; but he must also exercise some degree of both skill and diligence. To the question of what is the particular degree of skill and diligence required of him, the authorities do not, I think, give any very clear answer. It has been laid down that so long as a director acts honestly he cannot be made responsible in damages unless guilty of gross or culpable negligence in a business sense. But as pointed out by Neville J. in
In re Brazilian Rubber Plantations and Estates, Ld. (1911) 1 Ch. 425, 437, one cannot say whether a man has been guilty of negligence, gross or otherwise, unless one can determine what is the extent of the duty which he is alleged to have neglected. For myself, I confess to feeling some difficulty in understanding the difference between negligence and gross negligence, except in so far as the expressions are used for the purpose of drawing a distinction between the duty that is owed in one case and the duty that is owed in another.

...

There are, in addition, one or two other general propositions that seem to be warranted by the reported cases: (1.) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. A director of a life insurance company for instance, does not guarantee that he has the skill of an actuary or of a physician. In the words of Lindley M.R.: `If directors act within their powers, if they act with such care as is reasonably to be expected from them, having regard to their knowledge and experience, and if they act honestly for the benefit of the company they represent, they discharge both their equitable as well as their legal duty to the company': see
Lagunas Nitrate Co. v. Lagunas Syndicate (1899) 2 Ch. 392, 435. It is perhaps only another way of stating the same proposition to say that directors are not liable for mere errors of judgment. (2.) A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so. (3.) In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.''

I am satisfied that under their duties as directors at common law, Russell and Wendy Exelby up to and including 19 June 1989 owed to the second plaintiff obligations or duties:-

  • (i) to act in its interests;
  • (ii) to act honestly and in good faith towards it;
  • (iii) not to directly or indirectly divulge to any person any information confidential to the second plaintiffs' business;

    ATC 4303

  • (iv) not to act in such a fashion as to damage or depreciate the value of the second plaintiffs' business;
  • (v) not to make improper use of information acquired by virtue of their position as directors so as to cause directly or indirectly detriment to the second plaintiff.

These duties or obligations were owed by Russell and Wendy Exelby severally.

(2) Under s. 229 of the Companies (Qld) Code

The duties set out here appear in s. 229(1) and (3) which relevantly read:-

``229(1) An officer of a corporation shall at all times act honestly in the exercise of his powers and the discharge of the duties of his office.

...

(3) An officer or employee of a corporation, or a former officer or employee of a corporation, shall not make improper use of information acquired by virtue of his position as such an officer or employee to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the corporation....''

``Officer'', in relation to Wenmar, means a director and it is accepted that both Russell and Wendy Exelby were at all material times up to and including 19th June 1989 directors of the second plaintiff.

The effect of s. 229 is to add to the common law duties of Russell and Wendy Exelby as directors, the duties set out in s. 229.

Effectively then I find that the duties and obligations owed by Russell and Wendy Exelby to Wenmar are the same as those I have set out under the common law.

I mention s. 229(7) which is relevant to the matter of damages. It reads:-

``229(7) Where a person contravenes or fails to comply with a provision of this section in relation to a corporation, the corporation may, whether or not the person has been convicted of an offence under this section in relation to that contravention or failure to comply, recover from the person as a debt due to the corporation by action in any court of competent jurisdiction-

  • (a) if that person or any other person made a profit as a result of the contravention or failure - an amount equal to that profit; and
  • (b) if the corporation has suffered loss or damage as a result of the contravention or failure - an amount equal to that loss or damage.''

I find that Russell Exelby breached his duties to Wenmar both at common law and statute in the following respects:-

1. While still a director he canvassed the following customers of Wenmar with a view to having them take their business elsewhere:-

  • (a) 30th May 1989 - John Gleich (see para. 24 ante)
  • (b) March/April and about May 1989 - Rex Shelton - twice (see para. 26 ante)
  • (c) May 1989 - W.G. Bell (see para. 27 ante)
  • (d) March/April 1989 - D. Hiron (see para. 28 ante)
  • (e) late March early April 1989 - W.J. McUtchen (see para. 29 ante)

I respectfully adopt the following words of Danckwerts J. in
Aubanel & Alabaster Ltd. v. Aubanel (1946) 66 R.P.C. 343 at pp. 346-347:-

``It seems to me that the dangers of a director using confidential information (acquired as director) to assist him in the competing business and the difficulties of avoiding such use of any confidential information, are considerable, but I must accept the proposition that such competition is permissible. But solicitation of the company's customers is another matter. The function of a director is to supervise the carrying on of the company's business for the benefit of the company and its shareholders and to advance these interests. How can it be compatible with this function that the director should depreciate the value and progress of the company's business by asking the company's customers to cease to deal with the company and to deal with him in his competing business instead? It seems to me that this cannot be proper behaviour by a director.''

The above extract was adopted (as part of a longer quotation from Aubanel) by the Court of Appeal in New South Wales in
Mordecai v. Mordecai & Ors (1988) 12 N.S.W.L.R. 58 at p. 64.

ATC 4304

2. On 14th April 1989 he consciously and deliberately divulged to Peter Exelby and to Kevin James O'Brien information confidential to Wenmar's business namely Wenmar's trading figures at a time when he knew that Peter Exelby with Russell Exelby's help was to apply to Esanda for finance to set up a stock feed mill to compete with Wenmar.

3. In May and June 1989 (before 19th June 1989) told Peter Exelby who he well knew intended to set up a stock feed mill to compete with Wenmar that he had canvassed customers of Wenmar such information being given in order to encourage and support Peter Exelby's participation in the new mill venture and told Mr Exelby that such customers would patronise the new mill. Confirmation of this is found in the line of credit application dated 15th June 1989 which is part of Ex. 37.

4. Procured John Dalton to leave the employ of Wenmar and work for Cradex as its manager, well knowing that Dalton was well regarded by customers of Wenmar as a mixer of grain and feed and well knowing that customers considered the ability of the feed mixer important when deciding from whom to buy stock feed.

5. On or before 14th June 1989 assisting and advising Peter Exelby as to the selection of appropriate machinery for the proposed new mill.

6. On or before 19th June 1989 causing Cradex Pty. Ltd. to be established as a competitor to Wenmar by encouraging and persuading his parents to acquire the shares in Cradex Pty. Ltd. and become directors of that company and thereafter to take steps necessary to obtain finance to enable the mill to be built and operate.

7. On or before 19th June 1989 arranging with Peter and Doris Exelby to pay to them $10,000 well knowing that while that money would appear to be a repayment under a mortgage from him and Wendy Exelby to Peter and Doris Exelby, his dominant purpose was that Peter and Doris Exelby would immediately pay Cradex Pty. Ltd. $10,000 with a view to assisting Cradex obtain from the National Australia Bank at Wondai finance to build the new mill.

8. In approximately March and April 1989 persuaded John Dalton an employee of Wenmar to breach his obligations to Wenmar by assisting him Russell Exelby to canvass customers of Wenmar with a view to having them cease trade with Wenmar and trade with another feed mill to be operated by Russell Exelby.

9. Encouraged and procured John Dalton to leave the employ of Wenmar for the purpose of employment with Cradex when the first defendant well knew that such action would harm the business of Wenmar and advance the business of Cradex.

I further find that the second defendant as director breached her duties to Wenmar both at common law and by statute in that she permitted her name and the financial records of Wenmar to be used by Russell Exelby on 14th April 1989 to assist the finance application to be made by O'Brien to Esanda.

I find that Wendy Exelby left to the first defendant matters concerning and affecting her obligations as director of Wenmar. She well knew, while she and her husband were still directors of Wenmar, of her husband's intention to set up a feed mill.

Generally speaking I am satisfied that both the first and second defendants did, while still directors of Wenmar, assist in the setting up of the competing business and use or permit to be used information confidential to Wenmar for this purpose. Both first and second defendants while directors of Wenmar have exhibited marked lack of good faith towards Wenmar from March 1989 to 19th June 1989.

Mr Hack submitted that if I found both Russell and Wendy Exelby or either of them in breach of their duties as directors I should give them relief from liability for the breach or breaches and act under s. 535(c) of the Companies (Qld) Code.

I can only act under that section if it appears to me that the defaulting director has acted honestly. This is the first requirement of s. 535(1). In my view it is quite impossible to say that either Russell or Wendy acted honestly. Russell was the principal actor and if one looks at degrees of culpability he was much more culpable than his wife. She, as a director, really acquiesced in what Russell did. Because of my findings that in effect Cradex was a facade for Russell and Wendy Exelby, it is quite impossible to find that these two persons acted honestly. Both these persons obtained benefits from the events which happened. I mention by

ATC 4305

way of example only the matters referred to earlier relating to the absence of payments under their mortgage to Peter and Doris Exelby. I decline to make any order under s. 535 of the Companies (Qld) Code.

In my view the damages for the breaches of the first and second defendants' duties as directors are the same as those for breach of contract limited to the loss of profits viz. $323,130. The second plaintiff has no claim under this head for loss in value of the shares owned by the first plaintiffs.

(b) Claim for damages for breach of fiduciary duty

This is based on the fiduciary relationship which each of the first and second defendants bore to Wenmar while directors. Mr Hack concedes, correctly, that Mr Russell Exelby as director answered the description of a fiduciary. I find also that Mrs Wendy Exelby as director of Wenmar also answered that description.

I should add that I do not accept Mr Hack's submission that from late March 1989 Mr and Mrs Russell Exelby were nominal directors only and that from that time the concept of their duties as directors ought to be narrowed significantly. On the contrary, once they had given the option to the first plaintiffs to buy their shares, with a restraint on trade involved, they were beholden to ensure that thereafter they did not breach their obligations as directors to Wenmar.

Mr Hack has urged that Russell Exelby did not breach his fiduciary duty in that the information given by Russell to his father being the names of customers canvassed who had said they would trade with the new mill were not ``confidential'' in nature and that the imparting of that information could not be described as participating in a dishonest and fraudulent design.

It is true that there is evidence to show that at cattle sales, pig sales and like events persons who are customers of the various feed mills do discuss with each other the product of the mill or mills with whom they are then dealing. Thus, Mr Hack says, each person knows the identities of other persons who are the customers of such and such a mill. Therefore he said, that information cannot be confidential. While that may well be true in one sense, the fact remains that each mill had, as Wenmar had, a number of persons who had been its customers for several years and Russell Exelby, as a director of Wenmar, knew the names of Wenmar's customers. It was not a case of his having to inquire elsewhere on the open market as it were to find out who were Wenmar's customers.

Here, as I have found, Russell Exelby did impart to Peter Exelby the names of the canvassed customers as part of what I find to be a plan to persuade and encourage his father to appear to be the person setting up Cradex and trading in opposition to Wenmar, despite the known restraint of trade covenant and to trade relying in part on the canvassed customers leaving Wenmar and transferring their custom to Cradex. I mention again the credit application of 15.6.1989 in Ex. 37 which gives some indication of the results of Russell Exelby's canvassing of Wenmar customers.

In the result I am well satisfied that Russell Exelby did breach his fiduciary duty to Wenmar. In my view the damages or compensation for that breach should be the same as those already assessed but not on this occasion limited to the loss of profits viz. $323,130. This head of claim enlivens this Court's inherent jurisdiction in equity. Russell Exelby by his breaches of fiduciary duty to Wenmar has caused the loss in value of Wenmar's shares as at 19th June 1991. Russell and Wendy were at all material times and still are the controlling minds of Cradex. Cradex is their alter ego. In the Court's equitable jurisdiction it would I believe be wrong to limit the damages under this head of claim to loss of profits. I assess damages at $1,649,261.00.

4. CLAIM BY WENMAR AGAINST CRADEX PTY. LTD. FOR DAMAGES FOR BREACH OF FIDUCIARY DUTY

In my view, having found that Cradex was a facade for Russell and Wendy Exelby any breach by Russell Exelby as a fiduciary for Wenmar passes on to Cradex. Cradex, as it were assumes Russell Exelby's fiduciary obligation, he being as I have found the major controlling mind of Cradex (see
John v. Dodwell & Co. Ltd. [1918] A.C. 563 at 569 where the phrase ``transmitted fiduciary obligation'' is used). I should add here that Russell Exelby being in fact the more important of the controlling minds of Cradex - Wendy having had a lesser role - and Cradex being really a facade for Russell and Wendy, there is no sound reason why Cradex should not be made liable to pay the second plaintiff's

ATC 4306

damages caused by Russell's breaches of fiduciary duty to it. The second plaintiff suffered diminution in the value of its shares as a result of such breaches. Cradex in its corporate entity has received the financial benefit flowing from those breaches and fairness dictates that it should be asked to disgorge from those benefits - it cannot be allowed to profit from the breaches of fiduciary duties by Russell Exelby its major controlling mind. Cradex is, in my view not to be treated as an entity separate from Russell and Wendy Exelby and without actual knowledge that its actions amounted to competition with Wenmar within the area and period of the restraint of trade. Cradex must in my view be treated as having the knowledge of Russell Exelby as its controlling mind (see
Consul Development Pty. Ltd. v. D.P.C. Estates Pty. Ltd. (1974-1975) 132 C.L.R. 373 at pp. 396 and 408) and as a fiduciary in relation to Wenmar.

If I am wrong on this aspect I am satisfied that when Peter Exelby on behalf of Cradex received from Russell Exelby knowledge that Russell had canvassed Wenmar customers and of their potential defection to Cradex, Peter Exelby must, I find have received that information well knowing that Russell was imparting it to him in clear breach of Russell Exelby's fiduciary and common law duties to Wenmar. I say this because Peter Exelby knew Russell was a director of Wenmar and I infer from Peter Exelby's evidence before me that he knew Russell could not be involved at that time in another feed mill at or near Wondai. I find also that at the meeting with O'Brien on 14th April 1989 Peter Exelby must have known that Russell was wrongly imparting to O'Brien Wenmar's trading figures and that those figures were being given to O'Brien to help advance what was then proposed and eventually became a mill competing with Wenmar. Peter Exelby on the alternate basis I am now discussing assumed the transmitted fiduciary obligation of Russell towards Wenmar and he assumed it for the benefit of Cradex.

Further, it is clear from Peter Exelby's own evidence that whilst John Dalton was still employed by Wenmar he, Peter Exelby, procured a breach by Dalton of his obligations to Wenmar by having Dalton assist in the commencement of Cradex operations.

Dalton as an employee of Wenmar owed Wenmar a duty not to inflict harm on Wenmar's business and not to further the interest of a possible competitor -
Timber Engineering Co. Pty. Ltd. & Ors v. Anderson & Ors (1980) 2 N.S.W.L.R. 488; ``Fiduciary Obligations'' para. 612 by P.D. Finn from whose scholarly work I have derived much assistance.

I find that Peter Exelby knowingly procured Dalton to breach those duties and to do so in order to have Cradex begin business. This finding however does not result in a fiduciary relationship transmitted to Peter Exelby.

Thus on this alternative basis, if the facade view is held to be wrong, I find on all the evidence that Cradex through Peter Exelby as its director knowingly participated in breaches of fiduciary duty owed to Wenmar by Russell Exelby and thereby assumed Russell's fiduciary obligation towards Wenmar. He breached these transmitted obligations while acting as a director of Cradex. These breaches were, I find a direct cause of Cradex being able to set up business to the detriment of Wenmar.

It is well settled that a person who knowing of the breach, participates in or takes the benefit of a breach of fiduciary duty is liable to account for the profits received (
Barnes v. Addy (1874) 9 Ch. App. 244 at 251; Consul Development Pty. Ltd. v. D.P.C. Estates Pty. Ltd. (1974-1975) 132 C.L.R. 373).

Although Wenmar here does not seek an account of profits this Court can order an inquiry as to damages (as was done in Timber Engineering Co. Pty. Ltd. v. Anderson (supra)) or it can in its inherent equitable jurisdiction grant damages in lieu of an amount of profits.

It seems to me that in respect of this claim Wenmar has made out its case against Cradex. I find that on this basis Wenmar is entitled to an award of damages of $323,130.00 against Cradex for lost profits and $1,326,131.00 for loss in value of its shares. I have included this latter amount for the same reasons as I did so when assessing damages on the second plaintiff's claim against the first and second defendants for breach of fiduciary duty. I would add that although the second plaintiff did not own the shares which I have found were diminished in value to the extent already stated, this diminution in value should, if it became necessary, be capable of compensation from Cradex assets. It may be that the first and second defendants will, by reason of arranging their personal affairs, escape liability for the judgment ordered against them. In that event, I

ATC 4307

consider Cradex assets should be available to meet any shortfall, Cradex being as I have found beneficially owned by the first and second defendants.

INTEREST

The first and second plaintiffs have claimed interest under s. 72 of the Common Law Practice Act 1867.

The plaintiffs are entitled to interest and that interest will be awarded because they have been deprived of the use of their money and not because they have forgone investment opportunities (
MBP (S.A.) Pty. Ltd v. Gogic (1991) 65 A.L.J.R. 203 at 206).

There are no proper reasons for withholding interest (
Hadzigeorgiou v. O'Sullivan [1983] 1 Qd.R. 55 at 57). The plaintiffs are entitled to interest on the damage for the loss of profits viz. $323,130 from 19.6.1991 to date. In
Serisier Investments Pty. Limited v. English [1989] 1 Qd.R. 678 the Full Court of the Supreme Court of Queensland accepted twelve per cent as a median figure representing a perception of commercial rates.

Since that case Gogic (supra) has been decided. Although it concerned interest on pre- trial pain and suffering, which is not the case here, nevertheless in Gogic the High Court has emphasised that interest is awarded because a plaintiff has been deprived of his or her money and not because he or she his forgone investment opportunities.

At the end of the day, while one may well feel justified in following Serisier and adopting twelve per cent as the appropriate interest rate, nevertheless I feel that commercial interest rates are sufficiently notorious for me to be able to take judicial notice of the fact that they have declined within the past eighteen months. I have decided that interest to date should not be less than that which a judgment debt bears under s. 73 of the Common Law Practice Act. The rate prescribed under that section is presently ten per cent.

I therefore propose to award interest at ten per cent per annum on $323,130.00 from 19th June 1991 for fifteen months. That interest is $40,391.25.

As to the damages assessed at $808,940.00 I propose to award interest at the same rate for fifteen months the same period of time. That interest is $101,117.50. I have chosen fifteen months to reflect some delay due to the adjournment of the trial after the plaintiffs were given leave to amend their statement of claim.

In summary then I order as follows:-

1. I give judgment for the first plaintiffs against the first and second defendants for $1,649,261.00 together with interest of $141,508.75.

2. I give judgment for the first plaintiffs against the third defendant for $1,649,261.00 together with interest of $141,508.75.

3. I give judgment for the second plaintiff against the first and second defendants for $1,649,261.00 together with interest of $141,508.75.

4. I give judgment for the second plaintiff against the third defendant for $1,649,261.00 together with interest of $141,508.75.

I shall hear from the parties on costs.


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