(2011) 280 ALR 503
R v Tannous (1987) 10 NSWLR 303
Re HIH Insurance Ltd [2016] NSWSC 482
Judgment (27 paragraphs)
[1]
Kayteal Pty Ltd v Dignan [2011] NSWSC 197; (2011) 15 BPR 29,515
McBride v Christies Australia Pty Ltd [2014] NSWSC 1729
MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 990
Potts v Miller (1940) 64 CLR 282
Qantas Airways Ltd v Transport Workers' Union of Australia [2011] FCA 470; (2011) 280 ALR 503
R v Tannous (1987) 10 NSWLR 303
Re HIH Insurance Ltd [2016] NSWSC 482; (2016) 335 ALR 320
Ronchi v Portland Smelter Services Ltd [2005] VSCA 83
Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502
Selig v Wealthsure Pty Ltd [2013] FCA 348
Selig v Wealthsure Pty Ltd (2018) 255 CLR 661; [2015] HCA 18
Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98
Smith New Court Securities Ltd v Citibank NA [1997] AC 254
TPT Patrol Pty Ltd (as trustee for Amies Superannuation Fund) v Myer Holdings: [2019] FCA 1747; (2019) 140 ACSR 38
Trade Practices Commission v Australia Meat Holdings Pty Ltd (1988) 83 ALR 299
Uack v Avante Developments [2007] NSWSC 367
Wealthsure Pty Ltd v Selig [2014] FCAFC 64
Yorke v Lucas (1983) (1985) 158 CLR 661; 49 ALR 672
Texts Cited: John Henry Wigmore, Wigmore on Evidence (3rd ed, 1940), vol. 2
Category: Principal judgment
Parties: Nicols Super Pty Ltd (trustee for the Nicols Family Super Fund) (Second Plaintiff)
Brian Nicols (trustee for Nicols Family Trust) (Third Plaintiff)
Susan Nicols (trustee for Nicols Family Trust) (Fourth Plaintiff)
Rawlo International Pty Ltd (trustee for McCartney Family Super Fund (Fifth Plaintiff)
Shayne Gaynor (Sixth Plaintiff)
Naomi Rechter (Seventh Plaintiff)
John Brandon (Eight Plaintiff)
Nathan Polito (Second Defendant)
Intergalactic Federation Pty Ltd (Third Defendant)
Representation: Counsel:
Ms L Hulmes (Second to Eighth Plaintiffs)
Mr N Polito (Second Defendant, in person)
Mr N Polito (Third Defendant)
[2]
Solicitors:
Henry William Lawyers (Second to Eighth Plaintiffs)
File Number(s): 2019/400760
[3]
Judgment
HER HONOUR: This is a claim for damages for misleading and deceptive conduct. The plaintiffs invested $950,000 in Mediation & Online Dispute Resolution Operating Network Pty Ltd (the Company), a "start-up" company founded by website designer, Nathan Polito. The Company was commercialising an online dispute resolution system, referred to as "Modron". The investors seek damages from Mr Polito by reason of his contravention of sections 1041H and 1041E, Corporations Act 2001 (Cth), and section 12DA, Australian Securities and Investments Commission Act 2001 (Cth). They also seek damages from his company, Intergalactic Federation Pty Ltd, as being involved in the contravention within the meaning of section 79 of the Corporations Act 2001 (Cth).
Mr Polito terminated his solicitor's retainer shortly before the hearing and was self-represented at trial. In addition, at the commencement of the trial, I granted leave to Mr Polito to represent Intergalactic Federation.
[4]
WITNESSES
For the plaintiffs, evidence was given by Richelle Nicols, her parents Brian and Susan Nicols, accountant Adam Murray of Crowe Horvath, and investors John Brandon, Shayne Gaynor, William (Bill) McCartney and Naomi Rechter. All were cross-examined by Mr Polito. Richelle Nicols appeared stressed; it was apparent that she and Mr Polito no longer got on. Ms Nicols gave clear answers and remained firm in her evidence. Brian Nicols and Bill McCartney both seemed like nice fellows. Cross-examination of the remaining witnesses was very brief; no issues of credit arose.
For the defendants, evidence was given by Mr Polito and his father, Victor Polito, who was not required for cross-examination. Mr Polito was a most unsatisfactory witness. Mr Polito insisted, "I've never lied, and I'm telling the truth and it's 100% of the truth… I've always been 100% truthful with everyone I've engaged with." The contrary proved to be the case. Mr Polito started lying earlier in his cross examination and seemed unable to stop. I got the impression that Mr Polito was not particularly interested in what had actually happened. He lacked insight into the implausibility of his evidence. Mr Polito recalled matters which suited him "really vividly" and had no recollection of things which did not suit him. Mr Polito proffered incredible explanations for obvious events; he 'missed' seeing key documents and said he had no involvement in matters likely to be of keen interest to him, being raising funds from investors and obtaining a government grant. Mr Polito denied signing term sheets but did not deny this in his affidavit. He blamed everything on others. He repeatedly verballed other people as endorsing his actions. Whilst Mr Polito appeared courteous and polite, he made nasty remarks whenever possible about other people involved in this case.
The version of events described by Ms Nicols and Mr Polito cannot stand together. One of them must be disbelieved. I comfortably prefer the evidence of Ms Nicols to that of Mr Polito, where there is conflict between them. That said, I have not accepted Ms Nicols' evidence unquestioningly; her version of events itself raises some questions.
[5]
DOCUMENTS
Given the paucity of surviving contemporaneous documents, it is not easy to work out precisely what happened. The documents exhibited to Mr Polito's affidavit were far from comprehensive. On the plaintiffs' side of the record, Mr Nicols was the repository of company records. However, when Mr Polito fell out with the investors, Mr Nicols' company emails were wiped. As Mr Nicols explained, when he found he could no longer access the emails, he contacted an IT consultant, who examined his computer and Google account, which hosted his emails. The IT consultant found that Mr Nicols' Google account had been accessed by an external third party on 28 February 2019 from an IP address located on the Central Coast. Emails prior to 28 February 2019 had been removed from the Google account. Specifically, all of the folders that Mr Nicols had maintained of material in relation to the Company had been deleted. Accordingly, Mr Nicols has been unable to access many of the emails and other documents that he had in his possession at the time of these events. Mr Polito did not respond to this portion of Mr Nicols' affidavit.
An adverse inference may be drawn in respect of the absence of documentary evidence to support a party's case, where the party might be expected to be in possession of documents to corroborate their account: Jones v Dunkel (1959) 101 CLR 298 at 320; [1959] HCA 8 (Windeyer J), citing with approval John Henry Wigmore, Wigmore on Evidence (3rd ed, 1940), vol. 2, page 162: "The failure to bring before the tribunal some circumstance, document or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party …"; Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 at [134] (Callinan J); Ronchi v Portland Smelter Services Ltd [2005] VSCA 83 at [44] (Eames JA, with whom Buchanan JA agreed); Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445; [2011] VSC 184 at [131]-[132] (Croft J); Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98 at [112] (Henry J). I readily draw such an inference in respect of the absence of documents which the defendants might be expected to have produced.
[6]
FACTS
After leaving high school, Mr Polito began developing websites. One of his clients was a barrister and mediator, who asked Mr Polito to develop a corporate website. Later, the barrister, with others, asked Mr Polito to assist in developing an online platform for mediations. Over time, this project developed into "Modron". A company was incorporated, Modron Pty Ltd (the parties referred to Modron Pty Ltd as "Modron Short" and the Company as "Modron Long"). Mr Polito fell out with the barristers and mediators with whom he was working to develop "Modron". Modron Pty Ltd no longer traded.
[7]
IP structure
Mr Polito wanted to protect the intellectual property in "Modron"; there appeared to be an issue as to the intellectual property rights where he had begun working on the "Modron" project for others. In February 2015, Intergalactic Federation was incorporated, with Nathan Polito as sole director and shareholder. It was intended that this company would hold the intellectual property rights. In April 2015, the Company was incorporated with, again, Nathan Polito as sole director and shareholder. It was intended that this would be the operating company. Mr Polito set up the Company by buying a 'shelf company' and was provided with a number of documents including a template constitution (the Original Constitution).
Further to this end, Mr Polito retained the barrister to prepare the necessary documents. (I will refer to the structure to be effected by these documents as the "IP structure".)
1. In May 2015, the barrister provided Mr Polito with a draft "IP Deed of Assignment" for review, which proposed that Mr Polito, as creator of the intellectual property relating to "Modron", would assign his intellectual property rights in the technology to Intergalactic Federation as trustee for the Modron Alpha Trust. The barrister advised Mr Polito that he would need to register the deed and pay duty.
2. In June 2015, the barrister provided Mr Polito with a draft "IP Licence Agreement" between Intergalactic Federation as trustee for Modron Alpha Trust (as licensor) and the Company (as licensee). The agreement noted that Intergalactic Federation owned the intellectual property in "Modron" and wished to grant an exclusive licence of the intellectual property to the Company, with the intent that it would commercialise the intellectual property. The agreement could be terminated by either party without cause by serving three months' notice of termination in writing: clause 16.
In addition to these two documents, the barrister advised that he would start to prepare his own consultancy agreement "with both the operating company and the Trustee of the Modron Alpha Trust." The barrister explained: (emphasis added)
This is because the Trust can pull the plug at any time on the operating company and the operating company will not hold any assets other than operating revenue. All real wealth will be in the Trust. To give me the level of protection I require to commit my time and effort to this I need to have a secure agreement.
It was plain from the barrister's explanation that the purpose of the IP structure was for the "real wealth", being the intellectual property rights, to be held in the trust, whilst the business of commercialising the product would be conducted by the Company. Should the business operations prove unsuccessful, then the intellectual property rights were safe.
[8]
Amended Constitution
The barrister was then contemplating taking an equity stake in the business. Mr Polito wanted to ensure that his control as sole director and shareholder would not be diluted. On 15 August 2015, Mr Polito amended the Original Constitution (the Amended Constitution) to ensure that he did not lose control of the intellectual property or the Company if a dispute occurred with its shareholders. Mr Polito said, "I made those amendments to protect against [the barrister] entering into the company on the terms that he wanted to. So I made the amendments myself to the constitution with [the barrister's] proposition in mind. That was the purpose of it." Although Mr Polito said in his affidavit that the amendments were prepared with the assistance of the barrister, in cross-examination (and in this respect I think his evidence in cross-examination reflects the correct position) the barrister "was being very forceful about wanting to be a director, wanting to have a role in the company and be a shareholder … Obviously I wasn't going to have [the barrister] draft amendments to a document that were designed to protect against - you know, protect against his involvement."
The amendments were (with underlining and strike through indicating where the Amended Constitution differed from the Original Constitution):
1. The company or the directors may appoint a director, remove a director, or do both, by passing a resolution at a general meeting of the company. A resolution by circular may also be passed if there is a director that holds at least 75% of the company's votes as a member solely signs the resolution, even if it was not presented for approval at a properly convened meeting. Notice of the resolution by circular is not required to be provided to the remaining directors or members: clause 7.1.
2. A director automatically ceases to be a director if any of the following applies (clause 9.1(a)-(e)):
1. the director is prohibited from being a director or ceases to be a director or is removed from being a director by the Corporations Act or by an order made under it;
2. the director becomes insolvent or makes a composition or arrangement with his or her creditors or a class of them;
3. the director was employed by the company in any role or office and ceases to remain employed by the company;
4. the director becomes of unsound mind or a person who is, or whose estate is, liable to be dealt with in any way under any law relating to mental health;
5. the director is absent from meetings of directors for 6 consecutive months without special leave from the directors, and the directors consequently declare his or her office vacant;
6. the director fails to pay a call on his or her shares in the company for at least a month after the call was made - or a long period allowed by the directors.
1. The clauses in the Original Constitution that apply in relation to the resignation, disqualification and removal of a director apply to the managing director with any necessary qualifications. The directors may remove the managing director from office but only in accordance with the company's contract of employment with that person (clause 7.1, second appearing in the Amended Constitution).
2. Resolutions passed at a meeting of directors for which notice was not given to all directors, and actions taken to implement those resolutions, are nonetheless valid if the required quorum was notified each director who was not given notice later agrees to waive receipt of that notice: clause 18.1.
3. No business may be transacted at any time during a meeting of directors unless a quorum is present. Until the directors decide otherwise, the quorum for a meeting of directors is any 2 directors. If there is only one director, the quorum is that director. If there is a director that holds at least 75% of the company's votes as a member, the quorum is that director. The quorum must be present throughout a meeting. An alternate director who is not also a director may be counted in the quorum if the appointing director is not present: clause 19.1.
4. At a meeting of directors (clause 24.1(a)-(c)):
1. each director who is present has one vote. Unless a director holds at least 75% of the company's votes as a member, then that director has five votes;
2. an alternate director who is also a director has one vote as a director and one vote for each appointing director who is absent from the meeting and by whom he or she has been appointed as an alternate; and
3. the chair has a casting as well as a deliberative vote.
1. A resolution is passed at a meeting of directors if a majority of the votes cast is in favour of it. If there is only one director, he or she may pass a resolution in the way provided for by section 248B of the Corporations Act. If there is a director that holds at least 75% of the company's votes as a member, he or she may pass a resolution signed by themselves: clause 24.2.
2. The directors may pass a resolution by circular without holding a meeting. Reasonable notice of the resolution must be given to all directors: (clause 25.1).
3. In addition to any other way in which the company may execute a document, it may do so by 2 directors signing it, or by one director and a secretary of the company signing it. If there is only one director who is also the sole company secretary, the company may execute the document by that director and company secretary signing it. If there is a director that holds at least 75% of the company's votes as a member, the company may execute a document by only that director signing it. Execution under a common seal is not required: clause 30.1.
4. On a show of hands, each member present (except by proxy) at a meeting of members or of a class of members who is entitled to vote has one vote. If there is a member that holds at least 75% of the votes, that member has 10 votes (clause 42.1).
5. On a poll, each member present at a meeting of members or of a class of members who is entitled to vote has one vote. If there is a member that holds at least 75% of the company's votes, that member has 10 votes. (clause 42.2).
6. A resolution at a general meeting is to be decided on a show of hands unless a poll is demanded by any of the following:
1. the chair of the meeting;
2. at least 5 members present who are entitled to vote on the resolution;
3. by a member or members who represent at least 1025% of the votes that may be cast on the resolution (clause 47.1(a)-(c)).
[9]
Ms Nicols joins the business
Ms Nicols and Mr Polito went to high school together. In July 2016, they met by chance and caught up over coffee. Ms Nicols was then working as a lawyer and governance executive at the Australian Institute of Company Directors. Over time, they began to discuss Ms Nicols joining the Company. In December 2016, Mr Polito offered Ms Nicols the role of Managing Director. Ms Nicols said she would need to do some due diligence before proceeding. On 12 December 2016, Ms Nicols sent an email to Mr Polito asking a series of questions about her salary, the current financial position of the company and its current shareholders. Further:
Have you protected your idea / creation from those that originally asked you to create this platform several years ago? i.e. what legal protections have been considered to prevent one of them coming back and saying it's their idea etc?
The evidence as to how the question was answered is the first point of difference between Ms Nicols and Mr Polito. Mr Polito said he told Ms Nicols that the Company did not own the intellectual property, but used it under licence from Intergalactic Federation, being IP protection measures instigated on the advice of the barrister. Ms Nicols was adamant that Mr Polito said no such thing. Rather, "I had asked you about how are you confident that no one was going to come back and make a claim on the IP. … Your answer was quite dismissive, and you said, 'No, don't worry about it. I have changed the original idea that was presented to me. No one can make any claims on the IP. It's MODRON's IP. Don't worry about it.'" Further:
I had asked you the question, what had you done to protect your IP, because it had been given to you by a group of other mediators. When that disbanded, you decided to pursue the platform yourself. That was a concern for me. I asked you, "How are you sure that these people aren't going to come back and claim it as their IP?" You were very quick to dismiss it and say, "Don't worry about it. It's fully MODRON's IP."
I will return to whether Mr Polito told Ms Nicols about the IP structure at this time at [39].
On 14 December 2016, Ms Nicols asked Mr Polito for a copy of the Company's constitution. According to Ms Nicols, Mr Polito provided her with a hard copy of the Original Constitution, which Ms Nicols took home and reviewed, considered to be "generic in nature" and returned to Mr Polito. According to Mr Polito, he provided her with a copy of the Amended Constitution. Ms Nicols denied this, saying the first time that she was aware of the Amended Constitution was on 3 December 2018: see [85]. Mr Polito did not accept that, had Ms Nicols known that the Company was governed by the Amended Constitution, there was no way she would have agreed to be a director. Nor did he agree that this is why he did not inform her of its existence. This is the second point of difference between these witnesses.
[10]
Applying for a government grant
Ms Nicols was tasked with preparing an application for a grant offered by the Commonwealth Department of Industry, Innovation and Science. As Mr Polito explained in an email to Ms Nicols on 22 December 2016, the grant was "a major key. Team it up with a capital raising and we double our money." (The Government grant "matched" private investment). The eligibility requirements for the grant included that:
… you have ownership, access to, or beneficial use of, any intellectual property that is the subject of, or necessary to carry out your commercialisation project; …
The grant also required evidence of outside investment in the company.
Ernst & Young was retained to assist in preparing the application. Ernst & Young requested information from Mr Polito, including a calculation of the aggregated turnover of "the MODRON group", together with details for all connected or affiliated entities in the group. Mr Polito replied,
In it's current form the entity exists on it's own without direct connection to other entities (outside of myself and venture capital fund as shareholders).
The "venture capital fund" was a reference to Chant Venture Fund LLC which, by a subscription agreement made on 27 October 2016, acquired 15% of the Company's "Seed Preference Shares" for $310,000.
Ernst & Young sought confirmation as to whether Mr Polito was connected or affiliated with any other entities at any time during the 2016 financial year. Mr Polito advised,
I had control as sole shareholder of some other company entities during this period, however they were not commercially active and had $0 turnover. They were also not directly connected in any way to Mediation & Online Dispute Resolution Operating Network P/L.
Mr Polito provided these emails to Ms Nicols on 19 April 2017. This email chain would have confirmed Ms Nicols' understanding that the Company stood alone. Mr Polito's instructions to Ernst & Young were also inconsistent with the IP structure being in place.
Ms Nicols said she had never written a grant application before and did not know the Company's business or technology very well at that stage. Consequently, she discussed the application with Mr Polito throughout the process, shared drafts with Ernst & Young and, on 3 April 2017, met with Maureen Murphy, a commercialisation officer with the Department, to get feedback on the proposed application. The expression of interest for the grant was an online form. It was safer for Ms Nicols to sit with Mr Polito and work through the application together rather than risk losing work done if the application was interrupted. Once Mr Polito was happy with the form and its content, Ms Nicols submitted the form online.
[11]
Raising capital
In June 2017, the Company engaged Crowe Horvath to assist with capital raising; Adam Murray began producing an Information Memorandum. Mr Polito said he left the capital raising to Ms Nicols and her father, "I felt like I had no option but to defer to Richelle and trust her ability to manage Brian". In contrast, Mr Nicols said that Mr Polito commented on drafts of the Information Memorandum, participated in a telephone conference on 19 July 2017 to discuss the Information Memorandum and attended a meeting on 5 August 2017 with Crowe Horvath to review the progress of the capital raising. I have no reason to doubt Mr Nicols' evidence.
[12]
Assignment of IP
On 19 July 2017, Ms Murphy told Ms Nicols that the Department would need to see documentation showing that the Company held the intellectual property. According to Ms Nicols, she spoke to Mr Polito, who instructed her to prepare assignments of the intellectual property using drafts he had previously had prepared, assigning his intellectual property rights in the "Modron" platform to Intergalactic Federation. I take this to be a reference to the documents drafted by the barrister in 2015, provided by email to Ms Nicols on 15 February 2017: see [25]. According to Ms Nicols, Mr Polito said, "Just clean up those drafts I have and I will sign them and you can send them". Ms Nicols told Mr Polito that this would not work, as the government needed evidence that the intellectual property was held directly by the Company and not by a third party. Mr Polito said, "Just try anyway. They just want any documents and they will not care what the documents say." Ms Nicols cleaned up the draft intellectual property deeds, keeping the dates as June 2015, which was what Mr Polito wanted. Ms Nicols printed the documents out for Mr Polito to sign. The documents were sent to Ms Murphy. Mr Polito denies this conversation and said that the IP Deed of Assignment and IP Licence Agreement were signed in 2015.
It is not easy to understand why Mr Polito or Ms Nicols would have done what Ms Nicols here described. Ms Nicols rightly appreciated that the effect of the IP structure was that the Company had a right to use, but did not own, the intellectual property. This was unlikely to satisfy the Department. From Mr Polito's perspective, he may have signed the 2015 documents - either for the first time, or again - because this was how he wanted the intellectual property rights to be held, that is, outside the operating company. Whether the documents, as signed, were effective to transfer the intellectual property to Intergalactic Federation "in its capacity as trustee for the Modron Alpha Trust" where the trust did not, in fact, exist is another matter. Perhaps for this reason, Ms Nicols regarded the documents "to be a nullity" and told Mr Polito so, to which Mr Polito said, "No big deal".
On 20 July 2017, Mr Polito emailed his comments on the Information Memorandum to Ms Nicols, amending the section concerning intellectual property. As edited, the Information Memorandum stated, "While [the Company] has no specific patents, the MODRON IP lies in coding, platforms, gateways and integrations it has and will continue to develop. [The Company] is a market leader in terms of functionality, ease of use and the ability to link mediators with revenue streams". As to corporate and organisational structure, the Information Memorandum simply noted that the Modron business was operated through the Company. No reference was made to Intergalactic Federation and, presumably, Crowe Horvath was not informed of its existence. Thus, Mr Polito continued to represent the position - as he had to Ernst & Young - that the Company stood alone in its ownership and development of the "Modron" platform. However, the description in the Information Memorandum, albeit vague, was no longer correct given the IP Deed of Assignment and IP Licence Agreement just dispatched to the Department.
[13]
Term sheets
On 11 August 2017, Ms Nicols emailed Mr Murray and Mr Polito, advising that the government needed a term sheet evidencing investment of $1 million. Ms Nicols provided the details of the friends and family who were then prepared to invest. Crowe Horvath prepared a term sheet, which provided that the parties would enter into a subscription agreement, to include the following key provision:
The subscription agreement will: …
…
(c) require the founder to enter into a deed of assignment under which it assigns all intellectual property related to the business to the Company
Mr Polito agreed that he was the "founder".
How the founder's obligation in the term sheets 'sat' with the IP structure submitted to the Department on 18 July 2017 is unclear. If Mr Polito had already assigned the intellectual property to Intergalactic Federation (and query whether he had, given that the Modron Alpha Trust did not then exist), how could he now assign the intellectual property to the Company? It may be that, as Ms Nicols said, she regarded those documents as a "nullity" such that he was not precluded from assigning the intellectual property to the Company.
Ms Nicols said that Mr Polito executed each of the term sheets, but he denied doing so in cross-examination (although made no reference to this in his affidavit). Mr Polito said that, by August 2017, he was not even aware that discussions were taking place with the investors about possible investing in the Company, "No idea at all." I do not accept his evidence; raising funds for the Company's activities would have been a matter of keen interest to him. If his signature had been forged on these term sheets, I expect it would have been stated in his affidavit.
[14]
Second assignment of IP
Also on 11 August 2017, another representative of the Department, Frank Lux, raised various queries with Ms Nicols about the Company's application, including that the application referred variously to Modron Pty Ltd and the Company, "I'm not sure how you will address this but it's important that it's made clear which company is carrying out the work and, if Modron is going to play a part, how the companies are linked and what authority they have to utilise the IP. (Thinking about all this as an aside, I wonder if it wouldn't be easier for you to arrange another IP agreement between Nathan and Modron and keep the application under Modron. … if in reality all the work is going to be carried out under the Modron name, this may be a better course of action??)" Ms Murphy also suggested to Ms Nicols, "Just do an IP assignment deed directly from Nathan to Modron Long. Remember the applicant needs to have clear ownership of the IP".
Ms Nicols spoke to Mr Polito, who told her to draft an IP assignment directly from him to the Company. Ms Nicols asked whether Mr Polito had a straightforward template which she could use, and he said there was some documents he had sent her previously and to try using those. On 14 August 2017 at 11.15am, Ms Nicols sent Mr Polito an email entitled, "IP assignment":
Nath is the attached the letter that Peter Knight suggested we use for IP assignment?
Would rather use a short one that the one [the barrister] did.
Government have suggested we just show that you assigned the IP directly to MODRON (Long).
Two minutes later, Ms Nicols sent Mr Polito another email attaching another document, entitled "Or was it this one?". According to Mr Polito, he does not recall seeing Ms Nicols' emails and said he was "likely busy with the technical aspects of the Modron platform". "I wouldn't always open every email I got from Richelle. I didn't respond to these. There's no record of me communicating in this conversation at all. I missed them." Mr Polito said he only became aware of these emails during the course of these proceedings.
According to Ms Nicols, Mr Polito told Ms Nicols to use either of the templates which she had sent him to create a version that assigned the intellectual property from Mr Polito to the Company, and to send it to the Government. Mr Polito said, "Just sign it for me", which it was not uncommon for Mr Polito to ask Ms Nicols to do. On 14 August 2017, an IP Deed of Assignment was signed, albeit dated 11 August 2017, between Mr Polito and the Company, by which Mr Polito assigned the intellectual property relating to "Modron" to the latter. Ms Nicols says she was authorised by Mr Polito to insert his electronic signature.
[15]
Original Constitution circulated
On 15 August 2017, Mr Polito forwarded to Ms Nicols the documents obtained when incorporating the Company, including the Original Constitution. I note that Ms Nicols was meeting with potential investors later that day to give a presentation, at which she gave copies of the Original Constitution to those attending. I infer that Ms Nicols asked Mr Polito for the founding documents for this purpose. Of course, if Ms Nicols had been aware that there was an Amended Constitution, it is most unlikely that she would have handed out an obsolete version of the constitution to potential investors, including her parents and family friends.
On 6 September 2017, Mr Polito also provided Mr Murray with the documents obtained when incorporating the Company, including the Original Constitution. Mr Murray said he requested the documents as part of understanding the group structure for advisory and capital raising purposes. Mr Murray said that the Original Constitution was the only version of the constitution of which he was aware.
Mr Polito said he forwarded the Original Constitution to Mr Murray at Ms Nicols' request for the documents generated when the company was created, as Mr Murray thought there was an issue at the very beginning of the Compnay being set up. The nature of this issue was never explained by Mr Polito. In cross-examination, Mr Polito said that, in fact, Ms Nicols had all of the other documents "and only need[ed] the constitution … so that's what I sent. I didn't put any further documents …" The fact that this clarification was not included in his affidavit was dismissed, "I don't know if I put the whole detail in my affidavit, but that's the way the conversation happened." In fact, I think Mr Polito focussed on the text in his cover email to Mr Murray, "Please find constitution attached", but overlooked the fact that Mr Murray exhibited the email and its attachments - which included all of the incorporation documents - to his affidavit. The point is that Mr Polito lied wherever he saw the opportunity, whether the lie was relevant to a matter in issue or not.
There is no reason to doubt Mr Murray's evidence that he requested the documents from Mr Polito, and as to why he requested the documents. It is also likely that it had something to with instructions to finally establish the Modron Alpha Trust.
[16]
The investors
Mr McCartney was provided with the Original Constitution by Mr Nicols, which he reviewed; the constitution appeared to be generic and unexceptional, providing no barrier to making an investment in the Company. Mr McCartney said the Amended Constitution would have been "an absolute deal breaker" for him as it gave almost complete control of the company to any individual investor controlling over 70% of the shares.
On 11 August 2017, Mr McCartney received the Information Memorandum from Mr Nicols, from which he assumed that the intellectual property was held by the Company. Mr McCartney also reviewed the term sheet, which reinforced his understanding that the intellectual property was, or at the very least would be, held by the Company. Mr McCartney invested $250,000 in the company via his superannuation fund. Had Mr McCartney been aware, prior to investing, that the Company did not have the intellectual property in the software and digital platform that it was to commercialise, he would not have invested in the Company on any basis.
Mr Brandon invested $100,000. He had earlier received the Investor Memorandum from Mr Nicols, which he considered. He specifically noted its contents about intellectual property and corporate and organisational Structure. Mr Brandon attended a presentation by Ms Nicols and Mr Nicols on 29 August 2017, when he was given a copy of the Original Constitution. He carefully examined the Original Constitution during the presentation, noting that it distributed power in the company between Mr Polito and Ms Nicols. It was important to Mr Brandon that the constitution did not allow for the unilateral removal of Ms Nicols, who was known to him whilst Mr Polito was not. Mr Brandon said that the Amended Constitution fundamentally increased the relative power of the majority shareholder of the company, which he understood to be Mr Polito. Had he been made aware of the terms of this constitution considering his investment in the Company, he would not have made any investment.
Mr Brandon asked Ms Nicols and Mr Nicols where the intellectual property was assigned (to clarify the Information Memorandum) and was told, "The IP is with Modron, and this is in line with the government requirements for the funding grant". Further, Mr Brandon considered that the Company's main and most important asset was its intellectual property. Had he known at the time when deciding to invest in the Company that it did not own its intellectual product that it was established to commercialise, he would not have invested in the Company as it would have been an empty shell with no value to an investor.
[17]
Subsequent events
In November 2017, the Company's application for a Commonwealth grant was successful. The Company received $465,000 from the Department.
On 12 December 2017, Mr Polito sent an email to Ernst & Young, copied to Ms Nicols:
We're currently just clarifying the company structure of MODRON and the IP ownership / assignment.
Can you please confirm if the MODRON Alpha Trust is a valid and active trust. The trustee should be Intergalactic Federation Pty Ltd. The Alpha Trust is also supposed to hold the IP and assign it to MODRON.
Ms Nicols forwarded "Deeds / Licence" to Mr Polito, which he forwarded to Ernst & Young, "Fyi, these are the IP assignment docs". The documents were the IP Deed of Assignment dated 1 June 2015 and IP Licence Agreement dated 3 June 2015.
Mr Polito said these emails were prompted by a discussion between himself and Ms Nicols during one of their regular walks around the Botanic Gardens, when Mr Polito expressed an interest in double checking everything was in order with the company's intellectual property protection measures. Mr Polito no longer felt comfortable relying on the barrister's advice in relation to intellectual property and wanted to be sure everything was as it should be. He requested Ms Nicols to send him a copy of the relevant documents, being the Deed of Assignment and Licence Agreement, which Ms Nicols later did and he forwarded to Ernst & Young.
Whilst I place no weight in Mr Polito's evidence of his walk in the garden, Ms Nicols did not respond to this portion of Mr Polito's affidavit in a later reply affidavit. Her contemporaneous emails shed no light on why she sent the 2015 documents to Mr Polito at that time. It may be that Ms Nicols was aware that there were two conflicting contractual regimes in place concerning the intellectual property rights and Ernst & Young's assistance was sought to clarify the position. I also think that, having obtained the government grant, Mr Polito wished to 'wind back' the second assignment of intellectual property and revert to the first assignment of intellectual property having now, conveniently, incorporated the Modron Alpha Trust to implement the IP structure.
[18]
The removal of Ms Nicols
In early 2018, there appears to have been a disagreement between Ms Nicols and Mr Polito, in particular, in respect of the number of shares which had been agreed would be issued to Mr Nicols for his assistance in the capital raise. Mr Polito said, "Richelle was aware I was trying to get her to leave as director and she wouldn't. She wanted a settlement and she wouldn't leave until she got the settlement." On 7 March 2018, Ms Nicols provided Ernst & Young with the Original Constitution, prompting an inquiry from Ernst & Young, "Have you resigned as Director of Modron? … I know we haven't done anything with ASIC with regard to changes." Ms Nicols confirmed that she, "definitely [had] not resigned as director/managing director of Modron."
On 23 March 2018, Mr Polito signed a resolution on behalf of the Company, amending the resolution passed on 15 August 2015 when the Amended Constitution was adopted, correcting an administrative error. On 23 March 2018, Ms Nicols was removed as director and secretary of Intergalactic Federation. On 28 March 2018, Mr Polito lodged a Form 484 Change to Company Details with ASIC, advising that Ms Nicols had ceased to be a director and secretary of the Company effective 27 February 2018.
Ms Nicols said that this form was lodged without her knowledge or consent. Mr Polito did not suggest otherwise, "I believe it was Ernst & Young that informed her. … I wasn't in communication with Richelle at that time." On 2 April 2018, an intellectual property licence agreement was entered into by which Intergalactic Federation licensed the intellectual property to the Company. The document is not in evidence but I infer that it was thought necessary to enter into such a document given the uncertainty surrounding whether the IP structure was actually effected in 2015, or 19 July 2017, or at all given the non-existence of the Modron Alpha Trust at all relevant times. That is, it was not only Ms Nicols who regarded the IP structure, as initially implemented, as a "nullity".
In about April 2018, Ms Nicols became aware that she had been removed as director and secretary of the Company. In May 2018, the existence of the Amended Constitution also came to light, when one of the investors wished to sell their shares in the Company and Mr Polito offered the shares to other investors. His letter of offer referred to provisions of the constitution which did not appear in the Original Constitution.
[19]
MISLEADING AND DECEPTIVE CONDUCT
Section 1041H of the Corporations Act provides that a person must not engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or likely to mislead or deceive. Section 12DA of the ASIC Act is in similar terms, although the relevant conduct must be in trade or commerce, in relation to financial services. The principles applicable to whether conduct is misleading and deceptive are well known and were summarised by Moshinsky J in Australian Securities and Investments Commission v Wealth and Risk Management Pty Ltd (No 2) (2018) 124 ACSR 351; [2018] FCA 59 at [82]: (citations omitted)
Conduct is misleading or deceptive if it has a tendency to lead a person into error… Conduct is likely to mislead or deceive if there is a real or not remote chance or possibility of it doing so…. Whether conduct is, or is likely to be, misleading or deceptive is determined objectively…. Further, in assessing the effect of conduct on a class of persons such as consumers, who may range from the gullible to the astute, the Court must consider whether the "ordinary" or "reasonable" members of that class would be misled or deceived ...
The plaintiffs allege that Mr Polito made engaged in misleading and deceptive conduct by making two misrepresentations:
1. that the Company was governed by a constitution that was generic and standard in form when, in fact, he had radically amended the constitution to give himself unilateral control over the Company, including removing other directors without notice (the Constitution representation);
2. that he had assigned the intellectual property rights in "Modron" to the Company when, in fact, Mr Polito had assigned the intellectual property rights to Intergalactic Federation (the IP representation).
The defendants accepted that the representations, if made, were made in trade and commerce and were misleading and deceptive. Both concessions were appropriately made. The first question is whether the representations were made. As to the Constitution representation, the defendants admitted that Mr Polito provided Ms Nicols with a copy of the Original Constitution before commencing employment in February 2017 but deny representing that it was the current constitution. Rather, Mr Polito represented that the Original Constitution had been superseded by the Amended Constitution; both Ms Nicols and Mr Murray were said to be alive to this fact. The defendants submitted that Ms Nicols made a mistake in respect of the correct constitution. On discovering her mistake, she declined to admit her error and blamed it on Mr Polito.
[20]
Personal or corporate responsibility
Mr Polito did not accept that any representations were made by him personally but only in his capacity as a representative of the Company. The second question is whether the representations were made by Mr Polito personally. In answering this question, it is necessary to consider whether "all of the elements of the contravention are made out against the individual or whether he or she merely acted as a corporate organ, binding the company but not the person individually": Australian Securities and Investments Commission v Narain (2008) 169 FCR 211; [2008] FCAFC 120 at [96] (Jacobson and Gordon JJ); Cleary v Australian Co-operative Foods Ltd (No 2) (1999) 32 ACSR 701; [1999] NSWSC 991 at [54], [56], [57]. For example, in Narain, a director (with the assistance of others) prepared an Australian Stock Exchange (ASX) release, in which it was claimed that the company's products were effective against HIV/AIDS and other diseases. He then instructed the company secretary to send the statement to the ASX for publication. The Full Court of the Federal Court found that the director, as a person with the authority to order the statement's release and knowledge of the representations contained in it, had personally engaged in misleading and deceptive conduct: at [19] and [98].
The position in this case was perhaps best explained by Mr Polito: "I was MODRON. I was the only person that was MODRON. I'd sold my house, I'd put all my savings in and I'd spent years working on this thing. It was me and me only. And I referred to MODRON as, you know, the structure, everything." Mr Polito also said, "MODRON as a term encompasses company group, a movement, a brand, a collection of things, including myself as inseparable from that." That is, Mr Polito held himself out as the creator of the "Modron" intellectual property and the company incarnate. Representations he made as to the ownership of the intellectual property were his own representations, he having direct knowledge as to whether he had assigned the intellectual property to the Company or to some other entity. To the extent he made representations about the Company's constitution, he was acting in his personal capacity as he had the authority to make those statements and knowledge of their contents. The representations were made by Mr Polito personally.
[21]
Section 1041E
Whilst accepting that the representations were misleading and deceptive (which does not require any deliberate act on their part), the defendants did not accept that their conduct was a contravention of section 1041E of the Corporations Act. Section 1041E(1) prohibits a person making a statement, or disseminating information, that is false in a material particular, or that is materially misleading, which is likely to:
1. induce persons in this jurisdiction to apply for financial products;
2. induce persons in this jurisdiction to dispose of or acquire financial products; or
3. have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in this jurisdiction,
and when the person makes the statement or disseminates the information, the person:
1. does not care whether the statement or information is true or false; or
2. the person knows or reasonably ought to have known that statement or information is false in a material particular or is materially misleading.
As the plaintiffs submitted, the term "statement" embraces a "representation": ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1; [2014] FCAFC 65 at [750], [752]-[753]. The representations constituted statements for the purpose of their claim pursuant to section 1041E(1); those statements were false in a material particular or materially misleading. Further, they were representations of fact, and matters that were known to be false by Mr Polito. The representations were of a kind that would instil a level of comfort in a potential investor. The plaintiffs did consider the provisions of the Original Constitution and found comfort in those provisions, given they were investing in a start-up company that had, to that point, been controlled by one individual. The plaintiffs did have regard to the intellectual property ownership issues, as they recognised that these were the Company's only asset. Mr Polito knew or ought reasonably have known that the statements were false.
Mr Polito's conduct easily satisfies the requirements of this section. Mr Polito's misrepresentation of the position with respect to the Company's constitution and intellectual property rights was serious and deliberate. Mr Polito was perfectly happy to take people's money but without giving them what they paid for, being an investment in a company with intellectual property rights and governed by a constitution untrammelled by the draconian provisions he had inserted.
[22]
'Knowingly involved'
With respect to the IP representation, the plaintiffs also allege that Intergalactic Federation was knowingly involved within the meaning of section 79 of the Corporations Act. A person will only be regarded as 'involved' in a contravention if the person intentionally participated in the contravention. This requires actual knowledge of the essential matters or facts that make up the contravention: Yorke v Lucas (1983) (1985) 158 CLR 661; 49 ALR 672 at 680. A person cannot become 'involved' in an act merely by reason of their knowledge of the conduct pursued; there has to be something that implicates the person such that they become associated with the conduct: R v Tannous (1987) 10 NSWLR 303 at 307-308 citing Ashbury v Reid [1961] WAR 49 at 51. The requisite actual knowledge must be present at the time of the contravention. A later acquisition of knowledge of the essential matters is not sufficient: Fair Work Ombudsman v South Jin Pty Ltd [2015] FCA 1456 at [234]. Being 'knowingly concerned' in a contravention requires association with, implication in, or a practical connection with the contravening conduct: Qantas Airways Ltd v Transport Workers' Union of Australia [2011] FCA 470; (2011) 280 ALR 503 at [324]-[325]; Trade Practices Commission v Australia Meat Holdings Pty Ltd (1988) 83 ALR 299 (Wilcox J) at 357 citing Ashbury v Reid.
Here, Intergalactic Federation was the majority shareholder in the Company. Intergalactic Federation entered into a deed of assignment with Mr Polito, pursuant to which it was assigned the intellectual property rights. Mr Polito was the CEO and controlled the operations of Intergalactic Federation at all times. Given Mr Polito effectively controlled Intergalactic Federation, his knowledge and actions can be treated as the knowledge and actions of Intergalactic Federation: Commonwealth of Australia v Davis Samuel Pty Ltd (No 7) (2013) 282 FLR 1; [2013] ACTSC 146 at [695]. As such, Intergalactic Federation had knowledge of the essential facts which made what was done by Mr Polito a contravention, and participated in that contravention: Yorke v Lucas (1985) 158 CLR 661 at 668; 61 ALR 307 at 311; Re HIH Insurance Ltd [2016] NSWSC 482; (2016) 335 ALR 320 at [21]-[22] (Brereton J). Intergalactic Federation was thus involved in the contravention of the Corporations Act provisions: MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 990 at [551] (Barker J).
[23]
Causation
Apart from Mr Nicols, the investors agreed that they had never spoken to Mr Polito before deciding to invest in the Company. That is, Mr Polito's conduct was not directly addressed towards the plaintiffs. It was directed towards Ms Nicols (and in some cases, also directed towards Mr Nicols and third parties). Ms Nicols relied on Mr Polito's representations and passed them onto the plaintiffs. The plaintiffs were provided with the Original Constitution on the basis that it was the Company's constitution, because that is what Mr Polito represented to Ms Nicols. They were provided with documents that referred to the Company's ownership of the intellectual property because that is what had been represented to Ms Nicols. Some of them were told by Ms Nicols that the Company owned the "Modron" platform, because that is what Ms Nicols understood the position to be, based on Mr Polito's conduct.
The plaintiff is not precluded from recovering loss in such a circumstance: Re HIH Insurance at [71]. Loss may be recovered where misleading representations were not made directly to the person who ultimately suffered loss, sometimes referred to as indirect causation: HIH Insurance at [71] citing Digi-Tech (Australia) Ltd v Brand (2004) 62 IPR 184; [2004] NSWCA 58 at [155] and Ingot Capital Investment Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653; [2008] NSWCA 206; ABN AMRO at [1374]-[1377]; McBride v Christies Australia Pty Ltd [2014] NSWSC 1729 at [265]-[266] (Bergin CJ in Eq). In TPT Patrol Pty Ltd (as trustee for Amies Superannuation Fund) v Myer Holdings: [2019] FCA 1747; (2019) 140 ACSR 38, Beach J considered that cases of indirect causation may fall into two categories, of which the following is apposite here, at [1659]:
The first subcategory is active indirect causation. This is the scenario where a respondent's misleading conduct induces some reaction in X, and the applicant would have acted differently but for that reaction by X. There is no additional requirement that the applicant was aware of or relied on the respondent's conduct. It is enough that X relied, and that the applicant would have acted differently but for that reliance by X Or in other words, it is enough that the applicant relied on X.
Beach J's observations were recently cited, with apparent approval, by the Court of Appeal in Braham v ACN 101 482 580 Pty Ltd [2020] VSCA 108 at [155]-[156].
[24]
Damages
The plaintiffs claim loss and damage pursuant to section 1041I, which provides relevantly:
A person who suffers loss or damage by conduct of another person that was engaged in in contravention of s 1041E … or 1041H may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention …
The plaintiffs submitted that they have suffered loss or damage by conduct of Mr Polito, where "by" signifies no more than that the loss or damage was brought about by reason of the contravening conduct; the statutory cause of action does not per se include reliance as a necessary material fact: Re HIH Insurance at [42].
The ultimate issue posed by section 1041I of the Corporations Act is one of causation, not one of reliance, and reliance is not a substitute for the fundamental question of causation: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 at [143] (Gummow, Hayne, Heydon and Kiefel JJ); Re HIH Insurance at [42]. Further, the contravening conduct need not be the sole cause of the plaintiffs' loss or the predominant cause; it is sufficient if it materially contributed to their loss: Henville v Walker (2001) 206 CLR 459; [2001] HCA 52 at [14] (Gleeson CJ), at [59]-[61] (Gaudron J), at [106]-[109] (McHugh J, Gummow J agreeing), at [163] (Hayne J, Gummow J agreeing); I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 [2002] HCA 41 at [27]-[33] (Gleeson CJ), at [57] and [62] (Gaudron, Gummow and Hayne JJ). The relevant question is whether the representations materially contributed to the plaintiffs incurring loss.
I am satisfied that the representations materially contributed to the plaintiffs' loss. They would not have invested substantial funds in the Company absent their understanding - engendered by the representations - that the Company owned the intellectual property in "Modron" and was governed by a constitution in unexceptional terms.
This is a "no transaction" case in which the plaintiffs say that, but for Mr Polito's conduct, they would not have acquired shares in the Company. The measure of damages in such a case can be the difference between the purchase price and the true value of the asset as at the date of purchase (Potts v Miller (1940) 64 CLR 282), although any suggestion that it is the default position, or a "rule" is "unhelpful and dangerous": ABN AMRO at [969]. It is not an inflexible rule: HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54 at [35], [38]-[39]. The question is what is the true measure of the plaintiffs' loss which represents the prejudice or disadvantage suffered by the plaintiffs as a result of altering its position in reliance on the misleading representations: ABN AMRO at [960], citing HTW Valuers at [35]-[40]).
[25]
CONCURRENT WRONGDOER
The defendants contended that the plaintiffs' claim for damages was an apportionable claim pursuant to section 1041L of the Corporations Act and section 12GP of the ASIC Act. Mr Polito's liability should be limited to an amount that reflects the proportion of the damage or loss that the Court considers just, having regard to his responsibility for the damage or loss.
Section 1041L and Division 2 of Part 7.10 of the Corporations Act establishes a framework for the apportionment of liability among concurrent wrongdoers. However, as the High Court held in Selig v Wealthsure Pty Ltd (2018) 255 CLR 661; [2015] HCA 18 (French CJ, Kiefel, Bell and Keane JJ), that framework applies only to apportionable claims (section 1041N(1)). While section 1041H, as a civil liability provision, is an apportionable claim, section 1041E, being a strict liability offence, is not: at [24]-[25] (see also ABN AMRO at [1589]).
As I have found that the representations made or caused to be made by Mr Polito breached both sections 1041H and 1041E of the Corporations Act, and given that damage and loss under section 1041E is not apportionable, it is not strictly necessary for me to consider the question of proportionate liability. I will, however, do so briefly. Mr Polito alleged that the Company was a concurrent wrongdoer in respect of the Constitution representation and that Ms Nicols and the Company were concurrent wrongdoers in respect of the IP representation, and that any liability of Mr Polito should be reduced to the extent those concurrent wrongdoers are also liable for the plaintiffs' loss.
The plaintiffs submitted that Mr Polito was the person actively engaged in making both representations and was the one most effectively able to stop the loss. Ms Nicols' culpability must be viewed as nil, where it is plain that Ms Nicols was misled by Mr Polito as to the true position with respect to the intellectual property.
The precise basis on which it is said that the Company or Ms Nicols were concurrent wrongdoers is unclear. In HSD Co Pty Ltd v Masu Financial Management Pty Ltd [2008] NSWSC 1279, Rothman J set out the requirements for pleading a proportionate liability defence, at [18]:
It is essential, if these provisions are to operate appropriately, that any defendant be required to plead the proportionate liability defence in a manner that discloses the cause of action and damage in at least as detailed a manner as would be required of any initiating process for such a cause of action. The information should include:
(a) the identity of the concurrent wrongdoer;
(b) the basis for the cause of action - if it be contract, identify the contract; if it be tort, identifying the duty, its scope and the breach; and
(c) the damage - the aspects of causation; the alleged extent and proportion of the damages, and the causal connection with the damage said to be suffered by the plaintiff in the substantive proceedings.
See also Uack v Avante Developments [2007] NSWSC 367.
[26]
ORDERS
The plaintiffs also sought declaratory relief, where declarations may be an appropriate vehicle to record the Court's disapproval of contravening conduct, to vindicate the plaintiffs' claim that the defendants contravened the Corporations Act and ASIC Act and to inform other consumers of the dangers arising from such conduct: Australian Competition and Consumer Commission v Construction, Forestry, Mining and Energy Union [2006] FCA 1730 at [6]. I consider the defendants' conduct to be sufficiently serious in this case to make the declarations sought.
For these reasons, I make the following orders:
1. DECLARE that Nathan Polito has engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, in contravention of section 1041H of the Corporations Act 2001 (Cth) and section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth).
2. DECLARE that Nathan Polito has made statements that were false in material particulars or materially misleading, in contravention of section 1041E of the Corporations Act 2001.
3. DECLARE that Intergalactic Federation Pty Ltd was involved in Nathan Polito's contraventions of section 1041H of the Corporations Act 2001 and section 12DA of the Australian Securities and Investments Commission Act 2001.
4. Pursuant to section 1041I of the Corporations Act 2001 and section 12GF of the Australian Securities and Investments Commission Act 2001, award damages to the plaintiffs against the defendants as follows:
1. Judgment in favour of the second plaintiff against the defendants in the sum of $200,000.
2. the third and fourth plaintiffs against the defendants in the sum of $200,000.
3. the fifth plaintiff against the defendants in the sum of $250,000.
4. the sixth and seventh plaintiffs against the defendants in the sum of $200,000.
5. the eighth plaintiff against the defendants in the sum of $100,000.
1. Order the defendants to pay the plaintiffs' costs of the proceedings.
2. Parties to notify any errors or omissions with 14 days.
[27]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 23 February 2022
The implications of the lack of documentary evidence on the onus of proof - which is on the plaintiffs - should not be overlooked. As Gleeson J explained in BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 117 ACSR 18 at [125]:
All evidence "is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted": Coshott v Prentice (2014) 221 FCR 450; [2014] FCAFC 88 at [80], quoting Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970. This maxim also bears upon the appropriateness of deciding whether a fact has been proved when only limited evidence is available. In Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 at [14], [15], Hodgson JA (with whom Beazley JA agreed) said:
[I]n deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision …
In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so …
Gleeson J's judgment was relevantly affirmed on appeal in BCI Finances Pty Ltd (In Liq) v Binetter [2018] FCAFC 189; (2018) 132 ACSR 1.
Whether Mr Polito signed these documents at the time or much later on 19 July 2017 (or both) is a contested factual issue, to which I will return at [42]. Mr Polito said that he signed the documents in 2015 and, on one view, there is no reason why he would not have signed the documents then. Pointing in the other direction are two matters:
1. In accordance with the barrister's advice that Mr Polito needed to register the IP Deed of Assignment and pay duty, Mr Polito said that he took the documents to a government office in Parramatta to have the deed "witnessed, approved and registered". However, Mr Polito's execution of the deed is not witnessed, nor was a stamped copy of the deed exhibited to his affidavit (nor, so far as the evidence reveals, was the Deed of Assignment stamped or registered).
2. More importantly, the IP Deed of Assignment referred to Modron Alpha Trust, which did not come into existence until 21 September 2017 (Mr Polito preferred to say it was "re-established"): see [64]. That is not to say that the documents to establish the trust were not drafted in 2015, but the trust was not established until sometime later.
In respect of both matters, I infer from the defendants' failure to produce either an IP Deed of Assignment stamped and registered in 2015, or an earlier executed trust deed, that there are no such documents.
Either way, it is clear that Mr Polito did not wish the IP structure to be known. In a rare moment of candour, Mr Polito said of Intergalactic Federation's role, "It was never really mentioned … it was not anything I ever intended to be known outside of the company."
The effect of the amendments was to permit a director who held at least 75% of the Company's votes as a member (as Mr Polito did) to take unilateral action, without notice to other directors or members, in relation to the removal of fellow directors, the removal of the Managing Director, the holding of meetings of directors, the passing of directors' resolutions and the execution of company documents, and to increase the voting power of any director who held at least 75% of the shares.
Mr Polito did not provide the Amended Constitution to the barrister, "No, it wasn't to be put forward at this point because we were still negotiating on what the terms would be for him entering the company." Nor does he recall whether he lodged the Amended Constitution with the Australian Securities and Investments Commission (ASIC); obviously, he did not. Rather, the hard copy document stayed with his father and, once it became evident that he was not going to proceed with the barrister, "It was just back of mind, it didn't have any … relevance anywhere for quite a long time. So I don't believe I emailed it to anyone."
That is, at a time when the barrister was considering investing in the Company, Mr Polito made wholesale amendments to the Company's constitution to ensure that, if any problems occurred with his fellow shareholder, he retained the ability to control the Company, including by passing resolutions in the absence of a meeting, or notice of a meeting, and giving himself extra votes for good measure. The fact that the Company's constitution was now in the form of an Amended Constitution would no doubt have been a matter of great interest to the barrister, when deciding whether to invest in the Company. Mr Polito did not share the document with the barrister but left it with his father for safekeeping. The plaintiffs contend that Mr Polito continued to secret the Amended Constitution when they came to invest in the Company two years later.
As to whether Mr Polito gave Ms Nicols the Original or Amended Constitution, I prefer Ms Nicols evidence. It would be surprising if Mr Polito - having secreted the Amended Constitution from the barrister who was considering investing in the Company - would now share it with a prospective employee. Further, as the Amended Constitution conferred unfettered power on Mr Polito to remove Ms Nicols as managing director, notwithstanding the terms of any contract of employment, it is unlikely that Ms Nicols would have chosen to leave her employment at the Australian Institute of Company Directors in order to join the Company if she had been aware of its terms.
On 31 January 2017, Ms Nicols entered into a consultancy agreement with the Company, becoming managing director. On 1 February 2017, Ms Nicols was appointed as a director and secretary of the Company for a one-year term commencing 1 March 2017.
On 15 February 2017, Mr Polito explained to Ms Nicols that there were actually two 'Modron' entities, being Modron Pty Ltd and the Company, as well as another company, Intergalactic Federation. Mr Polito emailed to Ms Nicols company documents in relation to these companies and a trust, together with draft IP documents. Ms Nicols asked what these other companies and documents were for, noting "They're in draft and not signed." It would thus appear that, Ms Nicols having now become managing director, Mr Polito shared the draft documents prepared by the barrister in 2015, but did not provide any signed copies (if there were any). According to Ms Nicols, Mr Polito said they were entities he had either previously used or might use in the future. He told Ms Nicols that he had originally operated out of Modron Pty Ltd, but there were legacy issues with other people that were involved early on, so he switched to the Company "to make it all clean".
On 15 February 2017, Ms Nicols was appointed as director and secretary of Intergalactic Federation. Ms Nicols understood that this was a holding company for Mr Polito's shares. Mr Polito told her that Intergalactic Federation was "a company that [he] wanted to hold [his] shares and work on other projects".
On 1 March 2017, Ms Nicols began work for the Company. She began collecting and organising documents relating to the company, including all of the documents that Mr Polito had in his drawers at the office. Ms Nicols again asked Mr Polito for the Company's constitution and other relevant company documents, so that she could collate the information and put it into folders, as there was no organisation of company documentation at all. Mr Polito gave her a copy of the Original Constitution, which she put into a folder with other company documents. Mr Polito said that he also gave Ms Nicols a copy of the Amended Constitution for safekeeping, which Ms Nicols emphatically denies. I accept Ms Nicols' evidence in this regard, essentially for the same reasons as previously: Mr Polito was secretive about the Amended Constitution; further, it is unlikely that Ms Nicols would have continued to work for a company with such a constitution or, more significantly, to solicit investment from friends and family.
Ms Nicols assisted Mr Polito to finalise a memorandum of understanding, later entered into by the Company with another company to jointly develop "Modron". A recital to the memorandum of understanding noted: (emphasis added)
[The Company] is the developer and owner of an online dispute management and dispute resolution platform called MODRON.
The recital corroborates Ms Nicols' then understanding of the ownership of the Company's intellectual property, that is, the Company owned the intellectual property rather than used the intellectual property under a licence from Intergalactic Federation. It is unlikely that a solicitor would have mis-stated the position in such a document if she had known of a licence arrangement.
Against this, Mr Polito said he left Ms Nicols to put together the application as he was devoted to developing "Modron". Although he was copied on emails with the Department, he rarely read or engaged with such emails. Mr Polito agreed that the application for a grant was very important to the company, but denied frequently discussing the application with Ms Nicols. Although Ms Nicols had only then been employed for about two months, Mr Polito insisted that he left her to prepare the application without providing her with any instructions about how it should be prepared or what should be included in it. "It was just a matter of hours in the day. I literally was doing nothing but working every waking hour … I was completely overworked at that time."
Mr Polito's evidence seems unlikely. On joining the Company, Mr Polito told Ms Nicols that there was one investor (Chant Venture Fund LLC) for $310,000, who was substantially funding the Company, as well as a $100,000 grant from the NSW Government. Mr Polito was keen to obtain the Commonwealth grant. As he described it at the time, obtaining a government grant was "a major key". The application for the grant was a matter in which I expect he took a keen interest. As Ms Nicols had only worked for the Company for a short time, I expect it is also likely that she would have needed Mr Polito's input to complete the long and detailed application form. The suggestion that he left the grant application to Ms Nicols alone is wholly unlikely.
On 30 May 2017, the Company submitted its application for the Commonwealth grant. In the portion of the application dealing with intellectual property, the Company advised that the project did not depend on access to protected intellectual property. Where the applicant was asked to describe their intellectual property and its protection strategy, the Company advised: (emphasis added)
We own and have exclusive rights and use of the intellectual property rights in the design, development and coding of the MODRON Mediator Accounts. MODRON has engaged a law firm to fully manage and protect our intellectual property rights.
Ms Nicols said that this was inserted at Mr Polito's direction. Mr Polito denies this, "I would almost never proof check Richelle's work or read over something that she'd put her approval on." Mr Polito said that Ms Nicols had "complete autonomy" for his project, "I very rarely, if ever, proof read or re-read or looked over what Richelle had put her stamp on. … There was a really clear separation of duties … I had no time. I had no time at all to be second guessing the work Richelle was doing." I do not accept his evidence, for reasons already given. The description of the Company's intellectual property rights, as set out in the application, corroborates Ms Nicols' understanding of the position, of which Mr Polito did not disabuse her.
Having regard to the evidence of Ms Nicols' understanding of the Company's intellectual property rights, referred to at [28]-[29], [31]-[33] and [37], I find that Mr Polito did not tell Ms Nicols about the IP structure when she joined the Company, either because he had not given effect to the structure or he did not want to her to know, or both.
Following submission of the grant application, the Company was invited by the Department to begin the full application process, which Ms Nicols worked on in June and July 2017. In about June 2017, the Company moved offices. Hardcopy files, folders and documents were given to Ms Nichol's father for safekeeping, as there was not enough space to store these items at the new office. This included the Original Constitution, but not the Amended Constitution. By now, Mr Nicols was working for the Company to help support Mr Polito and Ms Nicols with day-to-day activities, including filing, organising company documents and administration.
Mr Polito could not explain the inconsistency between the Information Memorandum and how he said the intellectual property rights were held, save to distance himself from the Information Memorandum. Mr Polito said that the Information Memorandum was not something that he was focussing on at all; he was "almost not involved". He never felt the need to check that the Information Memorandum was accurate; this was why he hired Ms Nicols, "… because we wouldn't have had a platform if I wasn't able to work 100 hour weeks, and it was just - there's no understating how much pressure I was under, how hard I was working on things that had nothing to do with this nature of running the business and commercialisation. … I wanted to rely on her completely for this type of thing, and it was a necessity that bred it." Further, "I had no hours in the day to spare. … I can't stress enough how much pressure I was personally under. You know, barely sleeping. Weekends were no different than week days. I had my whole life savings into this thing and I was … borderline obsessed with the work I was doing. There was no headspace for me to be second guessing Richelle. You know, re-reading things she'd done. I just accepted what she did. If she told me it was good, it was good."
However, given Mr Polito's email of 20 July 2017 (see [44]), there can be no doubt as to Mr Polito's input into the particular portion of the Information Memorandum concerning intellectual property and corporate and organisational structure. To be clear, Mr Polito endorsed a description of the Company's intellectual property and organisational arrangements which was misleading, as it did not disclose the IP structure and the role of Intergalactic Federation.
On 26 July 2017, Mr Murray advised that, as the Information Memorandum was now complete, he would approach potential investors. On 1 August 2017, Mr Polito and Ms Nicols travelled to Melbourne to present the proposal to investors. The presentation did not produce any interest from investors. After the meeting, it became apparent that Mr Murray may not be able to raise the capital needed in time for the government grant, which required evidence of outside investment into the Company. Mr Nicols suggested that he may be able to raise capital through friends and family, if Mr Polito was willing to do that. Mr Polito was happy for Mr Nicols to do so.
On 2 August 2017, Ms Murphy provided her comments on the Company's application to Ms Nicols, including in respect of intellectual property, "Licence and Assignment documents do not entitle the applicant to the IP. ABNs of the applicant and assigned company are different". Ms Nicols sought Crowe Horvath's assistance, who advised that this matter would need to be rectified. Ms Nicols expected this would be the start of problems with the grant application. On 4 August 2017, Ms Murphy provided further clarification:
Just so you know, if a company has patents protecting its IP we require a copy of the full patent documentation. Essentially, the [grant] program is there to help companies commercialise their novel intellectual property, so unless that novel intellectual property is open to scrutiny, it can't be assessed.
Mr Polito said that he did not agree that the intellectual property should be assigned, nor direct Ms Nicols to draft any document to assign the intellectual property to the Company. Mr Polito said that Ms Nicols prepared the IP Deed of Assignment on her own, "I never had anything to do with it." Mr Polito denies instructing Ms Nicols to insert his electronic signature, "it was never my practice in working with Richelle to have her sign a document on my behalf." According to Mr Polito, in August 2017 Ms Nicols told him that there was a problem with the grant application as the Department wanted to see that the Company owned the intellectual property. He told Ms Nicols, "I don't think that will be possible. You know how the IP protection is structured and how that structure protects it, we can't move the IP into MODRON, it can only have a licence that allows MODRON to make proper use of it". Mr Polito said he was unaware that there was a problem with establishing the Company's entitlement to use the intellectual property as part of the application process, "I was under the impression that Richelle had found a work around." When it was suggested that his evidence was false, Mr Polito said, "I'm not lying. I never lie. This is 100% the truth. I'm telling the truth."
At 4pm on 14 August 2017, Ms Nicols forwarded the term sheets to Ms Murphy and Mr Lux copied to Mr Polito. The amounts committed by the term sheets totalled $750,000. Mr Polito said the fact that he was copied on emails concerning the term sheets was "basically just a gesture" … I 100 per cent wouldn't have read this type of an email." Further, "no one's been under the amount of pressure I was under on this journey. I just didn't have the head space." I do not accept his evidence. I find that Mr Polito was aware of the term sheets and his obligation to ensure that the intellectual property was assigned to the Company. Whether he had any intention of complying with that obligation is another matter, but he was certainly prepared to represent that he was entitled to assign the intellectual property in order to secure investment into the Company and support the Company's application for a government grant.
At 6.37pm on 14 August 2017, Ms Nicols emailed the IP Deed of Assignment dated 11 August 2017 to the Department in support of the grant application. Ms Nicols explained in her email, copied to Mr Polito, that Modron Pty Ltd did not form part of the application "(I believe Nathan created the company in 2013 but has always used [the Company] in recent times and particularly for commercialisation purposes). [The Company] has no related companies or trusts. The IP assignment is directly from Nathan to [the Company]." As the Company had no related companies or trust, Ms Nicols asked whether the Department still wanted a company structure document. Presumably Ms Nicols considered that, by reason of the obligation imposed on Mr Polito in the term sheets and the IP Deed of Assignment dated 11 August 2017, this now correctly stated the position.
Although copied on this email, Mr Polito said, "The truth is I would almost never read an email like this. If it's from Richelle … there was a lot of trust, there was a lot of autonomy. I did not have the headspace or the resource to proofread or check anything that Richelle had done. It was just the way we were working."
I do not accept Mr Polito's evidence that he was not aware, and did not authorise, the second assignment of intellectual property. He was copied on all relevant emails. I do not accept that he did not notice these emails at the time. It is more likely that he tried, in the first instance, to put forward the IP structure as that is how he wanted the intellectual property to be held and he thought it was worth seeing whether the Government would object, but when it became necessary to change those arrangements in order to secure a government grant, he did so.
On 21 September 2017, Mr Polito, on behalf of Intergalactic Federation, executed a Discretionary Trust Deed establishing the Modron Alpha Trust. The trust deed was drafted by Crowe Horvath and signed by Mr Murray as settlor of the trust. Mr Polito was the primary beneficiary of the trust. The circumstances in which the trust was established are unclear. Mr Murray does not recall it. One may be forgiven for thinking, however, that Mr Polito had no intention of adhering to the assignment of intellectual property rights documented in the IP Deed of Assignment dated 11 August 2017 but intended to revert to the IP structure.
Mr Gaynor and wife Ms Rechter invested $200,000. On 15 August 2019, Mr Gaynor met with Mr Nicols and Ms Nicols and reviewed the Information Memorandum. Section 11 "Intellectual property" was of particular interest to them as they were both involved in television production and were familiar with such issues. The fact that the Information Memorandum stated that the Company owned its intellectual property was a key point for them in deciding to invest in the company. Ms Nicols confirmed that the Department would not provide the Company with a grant if it did not own the intellectual property. This was a matter of particular concern to Mr Gaynor. At the meeting, Mr Gaynor was also given a copy of the Original Constitution. Mr Gaynor examined the constitution and observed its clauses were routine in nature.
In contrast, Mr Gaynor considered the Amended Constitution effectively gave all power to any shareholder having more than 75% of the shares which, in his experience, was an unusual provision as it gave a single individual absolute control of the company. He considered this to be a significant and material difference to the Original Constitution and, had he been told at the time of making his decision to invest that the company's constitution was the Amended Constitution, he would either have not invested in the company or potentially invested a much smaller amount of no more than $10,000 to $20,000 due to his reservations concerning companies that were in the absolute control of a single individual. Ms Rechter shared her husband's view that she would not have invested in the Company, or would have invested a much smaller amount, had she been aware of the Amended Constitution.
On 20 August 2019, Mr Gaynor attended another presentation at Mr Nicols' house, when Ms Rechter asked Ms Nicols who owned the intellectual property. Ms Nicols advised that the Department would not otherwise provide a grant to the Company if it did not own the intellectual property. Mr Gaynor reviewed the term sheet, including that it was proposed to enter into a subscription agreement which required the founder to assign the intellectual property to the Company. Mr Gaynor understood that the "founder" was Mr Polito; the term sheet was consistent with his understanding that the Company was the holder of the intellectual property. Had Mr Gaynor known, at the time of investing, that the Company did not own the intellectual property in the Modron system, or would not be assigned the intellectual property following the execution of the subscription agreement with Mr Polito, he would not have invested in the Company. Ms Rechter also reviewed the term sheets and noted that the intellectual property in the Modron system was to be assigned to the Company, confirming her understanding that the intellectual property was or would be held by the Company. Ms Rechter considered that the Company's main and most important asset was its intellectual property. Had she known that the Company did not own the intellectual property in the Modron system she would not have invested in the company.
Mr Nicols and his wife invested $400,000 in the Company via their superannuation funds. Had Mr Nicols been aware of the Amended Constitution, he would not have invested in the Company, as the constitution provided that an individual shareholder controlling more than 75% of the shares, as Mr Polito did, could unilaterally terminate the managing director, Ms Nicols, which was Mr Nicols' only connection with the company. Further, had Mr Nicols understood at the time that the Company did not hold the intellectual property in the "Modron" system and software, he would not have invested in the company at all.
Mrs Nicols was aware of her husband's role with the Company and that he kept a lot of the company documents at home. When she and her husband began considering investing in the company, Mrs Nicols reviewed the Original Constitution and considered that it was a standard constitution. Had Mrs Nicols been aware that the constitution was in fact the Amended Constitution, she would not have invested in the company given the ability of a 75% shareholder to unilaterally terminate the managing director, Ms Nicols, which was her most confident connection with the company. "Everything about the altered constitution went against the rights of shareholders [giving] Nathan Polito the unilateral power to vary or cancel shareholder rights." Had Mrs Nicols known that the Company did not own the intellectual property rights to the Modron system, she would not have invested in the company at all.
On various dates from 7 September 2017 to 23 October 2017, the investors paid a total of $950,000 for shares in the Company. The plaintiffs, together with another investor, then held 12% of the issued shares in the Company, whilst Intergalactic Federation held 82.5%.
In response to the letter of offer, Mr McCartney emailed Mr Polito, "I haven't heard from Richelle for some time? … could you ask Richelle to give me [a]n update…". On being informed that Ms Nicols was no longer employed by Modron, Mr McCartney replied:
i'm a bit confused when I invested $250,000 in Modron it was because I knew Richelle through her father and thought she was part of the sales team??? i knew and trusted both of them.
I need an immediate update … then a face to face meeting with whoever is in charge … to see if i will take up my entitlement and how safe my $250,000 is, as the only person i ever met was Richelle.
On 22 May 2018, Mr Nicols requested a copy of the constitution of the Company referred to in the letter of offer. The constitution was not forthcoming. On 22 August 2018, Mr Nicols sent an email to Mr Polito asking that he hold an annual general meeting of the Company and provide the members with financial reports. No response is in evidence. On 26 November 2018, the investors signed a shareholder direction pursuant to section 293 of the Corporations Act, directing the company to prepare and circulate to all shareholders before close of business on 10 December 2018 an audited financial report and director's report for the 2018 financial year. The Company was further directed to provide a current copy of the constitution within seven days.
In response, on 3 December 2018, Mr Polito forwarded a copy of the Amended Constitution to shareholders. This was the first time that the investors had seen this form of the constitution. I have already set out their views on the document. In January 2019, the shareholders were provided with unaudited accounts from the Company for the 2018 financial year. On 28 February 2019, Mr Nicols lost access to his company emails, which were wiped. On 14 October 2019, the investors served a second shareholder direction on Mr Polito, requiring the Company to prepare a financial report and director's report for the 2019 financial year. In December 2019, an unaudited financial report for the 2019 year was provided.
On 20 December 2019, these proceedings were commenced; the Company was a defendant. On 25 February 2020, Mr Polito gave notice of a meeting of shareholders of the Company on 18 March 2020, proposing that a resolution be passed to wind up the Company. In advance of the meeting, the investors were provided with the accounts for the company up to 25 February 2020. On 27 February 2020, Mr Polito incorporated Space Command Pty Ltd, of which he is sole director and shareholder. The Modron website was altered to show that the product was now being provided by Space Command.
On 16 March 2020, the investors' solicitors wrote to Mr Polito's solicitors, noting that the accounts did not include the intellectual property as an asset of the Company, despite it having previously been assigned to the Company by the IP Deed of Assignment dated 11 August 2017. Clarification was sought. On 17 March 2020, Mr Polito's solicitors responded, advising that the Company did not own the intellectual property. Further, on 1 June 2015, Mr Polito assigned the intellectual property to Intergalactic Federation in its capacity as trustee for the Modron Alpha Trust. On 3 June 2015, Intergalactic Federation granted a licence in the IP to the Company, with the terms of the licence thereafter recorded in the intellectual property licence agreement of 2 April 2018. Further:
We are also instructed that:
(a) Mr Polito does not have any record of the IP Deed of Assignment dated 11 August 2017.
(b) Mr Polito does not recall ever signing the 2017 Deed of Assignment.
(c) The handwriting in the 2017 Deed of Assignment is not Mr Polito's
Intergalactic and not Mr Polito owned the IP from 1 June 2015. As such, the assignment purported to be documented in the 2017 Deed of Assignment would, in any event, be ineffective. For these reasons, the IP has never been an asset of the Company.
On 18 March 2020, a meeting of the shareholders of the Company was held. The motion to appoint a liquidator was defeated and a resolution was passed adjourning the meeting for 30 days for the Company to obtain and provide shareholders with audited accounts. On 26 March 2020, Mr Polito placed the company into voluntary administration. A Report on Company Activities and Property completed by Mr Polito did not list the intellectual property as an asset of the Company. On 6 May 2020, the Company was placed into liquidation. The liquidator reports that it has no realisable assets and no dividend is expected to be declared.
It follows from my earlier findings that I am comfortably satisfied that Mr Polito represented that the Company's constitution was the Original Constitution, and made no mention of the Amended Constitution. Had he provided Ms Nicols with the Amended Constitution at the outset, it is unlikely that Ms Nicols would have left her employment at the Australian Institute of Company Directors to join the Company at all. The Amended Constitution was not among the documents compiled by Ms Nicols and stored by Mr Nicols at his home: if Ms Nicols had been provided with the document, then it would surely have been stored in this material along with other important company documents. When Ms Nicols began making presentations to potential investors, Mr Polito forwarded the Original Constitution to her again, and she made copies which were given to potential investors, including her parents and family friends. It beggars belief that Ms Nicols would not have disclosed the Amended Constitution to her friends and family if she had been aware of its existence. I find that the Constitution representation was made by Mr Polito.
As to the IP representation, the defendants deny that Mr Polito represented that he had assigned the intellectual property rights to the Company or that the Company owned the intellectual property rights. Rather, Ms Nicols was aware of the IP structure as she was given the relevant documents in the first week of her employment, but did not disclose these documents to the investors. The defendants denied having represented otherwise to the Department, or authorising Ms Nicols to make such representations on Mr Polito's behalf or to insert his signature the IP Deed of Assignment of 11 August 2017. Any misleading or deceptive representations were said to have been made by Ms Nicols. The defendants submitted that Ms Nicols made a mistake in respect of the assignment of intellectual property rights. On discovering her mistake, she declined to admit her error and blamed it on Mr Polito.
As to the IP representation, I have already charted the twists and turns of the intellectual property arrangements, from which it is evident that, on joining the Company, Mr Polito did not disclose the IP structure but represented that the Company owned the intellectual property. Ms Nicols' understanding to this effect was reflected in the memorandum of understanding which she finalised in March 2017 (see [28]), reinforced by Mr Polito's emails to Ernst & Young and forwarded to Ms Nicols in April 2017 (see [31]-[33]), and repeated in the application for a Commonwealth grant submitted on 30 May 2017 (see [37]). This changed in July 2017, when Mr Polito purported to implement the IP structure such that the Company did not own the intellectual property but had a licence to use it. This was remedied in August 2017 - the second assignment of intellectual property - when Mr Polito, by signing the term sheets and authorising Ms Nicols to send the IP Deed of Assignment dated 11 August 2017 to the Department, resumed his earlier representation that the Company owned the intellectual property rights.
If one views events through the lens of ordinary commercial practices, it is not easy to understand some of the steps taken by Mr Polito. This is because Mr Polito did not operate in accordance with such practices. Rather, Mr Polito was fixated on ensuring that he remained the owner of the intellectual property by establishing a structure which he variously kept secret or, if he needed to, represented he had changed, in order to secure funds into the business.
The present case falls within this description. Further, the plaintiffs' evidence that they relied on the representations was not challenged. The Company was a start-up company that had, until recently, been controlled by one individual who had developed "Modron" and was seeking outside investment. The Company had not yet, but was seeking to, commercialise the "Modron" product. The plaintiffs were introduced to the Company by a family member or friend who was a recently appointed director. Had they known that the Original Constitution was not the true constitution (and that the true constitution gave Mr Polito unilateral control, including to remove directors) and had they known that the Company did not own the intellectual property, they would not have invested in the Company (or, in some cases, they might have considered subscribing only for a much smaller amount). Neither proposition is surprising, given the circumstances of their investment.
The defendants accepted that the plaintiffs relied on what Ms Nicols said but did not accept that it led to their investment. Rather, it was the quality of the "Modron" product and the concept behind it that induced the plaintiffs to invest, rather than questions as to the constitution and ownership of intellectual property. It was submitted that the investors would have been likely to invest notwithstanding the amendments to the constitution and Intergalactic Federation's ownership of the intellectual property rights, because of the attractiveness of the investment in that product.
But that is really the point. The investors were interested in investing in the Company because they understood that the Company owned the product, rather than had a licence to use the product which could be terminated without cause on three months' notice and where the company entitled to terminate the licence (Intergalactic Federation) was owned and controlled by Mr Polito. The investors were also comforted by Ms Nicols' role in the Company as director - as seen by Mr McCartney's contemporaneous comments at [83] - and would not have entrusted substantial money to the stewardship of Mr Polito, who they did not know. Such comfort would have been replaced by alarm if they knew of the existence of the Amended Constitution. I find that the plaintiffs relied on both the Constitution representation and IP representation and were thereby induced to invest in the Company.
When considering whether to assess damages otherwise than in accordance with Potts v Miller, Ipp JA said in Ingot Capital Investments at [177]:
In my opinion, particularly bearing in mind the scope and purpose of s 1005 [of the Corporations Act, the predecessor to s 1041I], the rule in Potts v Miller will not ordinarily apply in cases where a plaintiff becomes "locked in" to property acquired as a result of contravening conduct. In circumstances where it is not practically possible or it is unreasonable for plaintiffs to dispose of assets acquired on the strength of contravening conduct on the part of others, that conduct may be regarded as causing the entire loss even if, after the acquisition of the assets in question, other causes contribute to the loss.
Ipp JA referred at [178] (citing Smith New Court Securities Ltd v Citibank NA [1997] AC 254 at 266 (Lord Browne-Wilkinson) to the rationale for the departure from the rule as inter alia necessary to give adequate compensation for the wrong done to the plaintiff, in particular where the fraud continues to influence the conduct of the plaintiff after the transaction is complete or where the result of the transaction induced by fraud is to lock the plaintiff into continuing to hold the asset acquired. Further, in ABN AMRO at [971], [983], the Full Court observed that Potts v Miller has no application where the misrepresentations have and continue to have operative effect. The plaintiffs submitted that these principles were applicable here. Their damages should be assessed as the difference between what they paid for their investments and the value of the investments following the failure of the Company.
The High Court held in HTW Valuers that damages for a misleading statement are to be assessed at the date some or loss or damage has been suffered, but the Court may take into account "all matters known by the later date when the Court's assessment is being carried out": at [39]. Damages may be assessed at the time of the trial, provided it works no injustice: at [64]-[65]. I will assess damages at the date of the trial; it works no injustice here and, in any event, likely results in the same figure.
What is known at this time is that the investors thought they were investing in a company which owned the "Modron" intellectual property - which each of the investors clearly thought was an interesting, exciting and worthwhile product - but it did not. They thought their investment had the protections inherent in a company run by directors working in accord with the Original Constitution, but in fact Mr Polito had total control. Whether their investments were ever worth a penny is not known. On making their investments, the investors were 'locked in'. When one of the investors sought to exit, there is no evidence that she succeeded in selling her shares to others. What is known is that their investments were wholly lost. The true measure of the plaintiffs' loss is the monies outlaid to acquire shares in the Company.
While the defendants, in their Further Amended Defence - served when the defendants were legally represented - identified the proposed concurrent wrongdoers, the basis of the cause of action was not stated, nor causation nor the extent to which damages should be reduced and why. In oral submissions, Mr Polito submitted that the Company was a concurrent wrongdoer as it was responsible for the actions of its employees. Further, any representations made by Mr Polito were made acting on behalf of the Company, and not in a personal capacity. Mr Polito submitted the portion of responsibility pursuant to the concurrent wrongdoer defence ought to be apportioned "along the divisions of labour amongst the company and the roles and responsibilities that were defined". The defendants' position was thus not significantly advanced from that of its pleading.
When apportioning responsibility between concurrent wrongdoers, the Court compares both the culpability and the relative importance of the acts of each wrongdoer: Selig v Wealthsure Pty Ltd [2013] FCA 348 at [1103] and [1108] (overturned but not on this point); Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502 at [963]; Kayteal Pty Ltd v Dignan [2011] NSWSC 197; (2011) 15 BPR 29,515 at [71] (Brereton J). In Kayteal, Brereton J said the following regarding apportionment under the Civil Liability Act 2002 (NSW), at [71]:
In determining the relative responsibility of concurrent wrongdoers for a loss, it is necessary to compare the blameworthiness and causative potency of the conduct of each of them [Reinhold v New South Wales Lotteries Corporation (No 2) [2008] NSWSC 187, [50]-[53]]. Relevant factors include, but are not limited to, which of the wrongdoers was more actively engaged in the activity causing loss, and which was more able effectively to prevent the loss [Yates v Mobile Marine Repairs Pty Ltd [2007] NSWSC 1463, [93]-[97]]. …
The same approach applies in the context of proportionate liability under the Corporations Act (Wealthsure Pty Ltd v Selig [2014] FCAFC 64 at [88]-[89], [103] per Besanko J, with whom Mansfield J agreed at [1] and White J agreed at [372] (on apportionment)) and the ASIC Act (Selig v Wealthsure Pty Ltd [2013] FCA 348 at [1013], overturned but not on this point).
So far the Company is said to be a concurrent wrongdoer, it follows from my conclusion that the representations were made by Mr Polito personally that I do not consider it just to apportion part of his liability to the Company. To repeat, "I was MODRON. I was the only person that was MODRON. … It was me and me only." So far as Ms Nicols is said to be a concurrent wrongdoer - on the basis of an unstated cause of action - I do not have much to go on save to say that, when Mr Nicols conveyed the IP representation to the investors, she then understood from what Mr Polito had represented to her - by signing the term sheets and authorising her to affix his electronic signature to the IP Deed of Assignment dated 11 August 2017 - that it was true. Any falsity in this representation lay entirely at the feet of the defendants, and their obligation to pay damages should not be reduced on account of Ms Nicols' role in passing that representation onto prospective investors.