AHI Healthcare Systems v Clinical Associates of Australia

APPLICANT: Mr J N West, QC and Mr A Gotting of counsel Solicitor: Mr P Hayward Haywards Solicitors LEGAL REPRESENTATIVES: RESPONDENT: Mr G J Hatcher of counsel Solicitor: Ms K Raymond Henry Davis York

JUDGMENT: - 1 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION

Matter No IRC 908 of 2000 AHI HEALTHCARE SYSTEMS PTY LIMITED AND ANOR v CLINCIAL ASSOCIATES OF AUSTRALIA LIMITED AND ANOR Matter No IRC 2342 of 2000 CLINICAL ASSOCIATES OF AUSTRALIA LIMITED AND ANOR v AHI HEALTHCARE SYSTEMS PTY LIMITED AND ANOR Applications under section 106 of the Industrial Relations Act 1996 JUDGMENT INTRODUCTION

1 From about March 1998 Michael Joseph McGrath, through his company, AHI Healthcare Systems Pty Ltd ("AHI"), provided consultancy services to Clinical Associates of Australia Limited ("CAA") as its managing director and chief executive officer. In October 1999 this arrangement was translated into a formal, written consultancy agreement between AHI and CAA. A deed of covenant was also made at the same time between CAA and Mr McGrath and an option agreement relating to shares was entered into between AHI and CAA's major shareholder, Pacific Healthcare Limited ("PHL"), a company registered in the United Kingdom. In February 2000 CAA terminated the consultancy agreement purportedly for cause, on the basis that AHI had breached certain terms of the agreement. 2 AHI and Mr McGrath claimed that the consultancy agreement, deed of covenant and option agreement were unfair within the meaning of s 106 of the Industrial Relations Act 1996. In a summons for relief filed on 6 March 2000 and amended on 21 June 2000, AHI and Mr McGrath sought relief by way of certain orders, including compensation for alleged unfairness. Details of the relief sought are addressed later in this judgment but it included money orders for the balance of the unpaid fee payable to AHI under the consultancy agreement to 30 June 2004, of an amount of $1,780,972.00. 3 CAA and PHL cross-claimed against AHI and Mr McGrath. In a further amended summons for relief filed on 14 August 2000, CAA and PHL sought certain orders to remedy the alleged unfairness of the consultancy agreement and option agreement. Additionally, they sought compensation in respect of what CAA and PHL alleged were breaches of the consultancy agreement by AHI and Mr McGrath. 4 CAA and PHL asserted a number of grounds supporting the severing of the relationship with AHI and Mr McGrath. These are described in detail later in this judgment but, in summary, they were as follows: (a) The provision by Mr McGrath to Dr Hazan of a $300,000 per annum remote rural site allowance by way of an agreement dated 7 October 1999 without the prior approval of the CAA Board; (b) The provision by Mr McGrath to Dr Ruut of bonus payments by way of an agreement dated 6 October 1999 without the prior approval of the CAA Board; (c) The provision by Mr McGrath of increased bonus payments to Mr Siva Moodliar of approximately $50,000 by way of an agreement of 6 September 1999, without the prior approval of the CAA Board; (d) The commencement of legal proceedings by Mr McGrath on behalf of Sydney and South Coast X-Ray (an acquisition of CAA) against Dr Victor Mansberg without the prior approval of the CAA Board; (e) The provision by Mr McGrath of relocation expenses, cash bonus, tax equalisation payments and accommodation allowance for Mr Michael Schenk without the prior approval of the CAA Board; (f) The taking of leave by Mr McGrath in the period 24 December 1999 to 14 January 2000 without the prior approval of the CAA Board; (g) The entry by Mr McGrath into leasing commitments for a practice in Dubbo, New South Wales without the prior approval of the CAA Board; (h) A lack of consultation by Mr McGrath with the doctors employed by subsidiaries of CAA, causing loss and damage to CAA; (i) The direction that CAA pay on 5 August 1999 $US 40,000 to the benefit of Mr McGrath in breach of a fiduciary duty arising from Mr McGrath being a director of CAA. 5 Matters 908 of 2000 and 2342 of 2000 were heard together and it was agreed that the evidence in one matter would also be evidence in the other. 6 Mr J N West QC with Mr A B Gotting of counsel appeared for AHI and Mr McGrath. Mr G J Hatcher of counsel appeared for CAA and PHL. FACTUAL BACKGROUND 7 When he returned to Sydney in 1995, after spending 13 years in the United States of America, Mr McGrath established AHI as a health care and consultancy company. AHI provided consultancy services to the health care industry in 1996. Mr McGrath and his wife, Carla, were the directors of AHI. 8 Mr McGrath had a long term involvement in the health care industry having filled a number of senior posts, particularly related to financial roles, in medical centres and health care enterprises in the US. 9 Mr McGrath's ambition in Australia was to develop a physician multi-specialty company based on his experience and observations in the US. This was to be achieved in a number of stages. The first stage involved the acquisition of a number of physician practices/partnerships that provided radiology and nuclear medicine services. The second stage involved "drawing those acquired practices together into one cohesive operational company, administered from a central office and facilitated by common systems, support and a professional medical administration team." The third stage of Mr McGrath's plan "involved the acquisition of other related medical specialities, such as radiation oncology practices, so as to form a multi-speciality group". 10 Of course, large sums of capital were needed to acquire established medical practices. In late 1997 and early 1998 Mr McGrath discussed his plans with representatives of a publicly listed United Kingdom company, Pacific Investments Limited ("PIL"). PHL was a wholly owned subsidiary of PIL. Mr McGrath's main point of contact at this stage was Stuart Bruck, a director of PHL and a person Mr McGrath had come to know while he was working in the US. PIL expressed interest in Mr McGrath's proposals and in about February 1998 it was put to Mr McGrath that, in order to pursue the business opportunities identified by Mr McGrath, he take up employment with PHL. Subsequently, an arrangement was entered into between Mr McGrath and PHL where Mr McGrath was to be appointed as managing director of Pacific Healthcare (Australia) upon its formation. This proposal was set out in a facsimile message from Mr Bruck to Mr McGrath dated 10 March 1998. The facsimile was marked "subject to contract". Mr McGrath noted in his handwriting on the facsimile "contract period 5 years. (other employment related matters addressing vacation etc will be addressed in the contract)". Mr McGrath signed the facsimile and sent it back to Mr Bruck. Mr Bruck said in his evidence that the five year term was not accepted and that he wrote on the facsimile "6 months termination and strong covenants" to remind him that any formal contract would contain a termination period of six months' notice and strong covenants restricting Mr McGrath from working with competitors upon termination. Mr Bruck said that six months' notice was within the standard notice period for executives in the PIL group and that the standard restraint period was two years. Mr Bruck did not send the facsimile back to Mr McGrath. Mr McGrath said he never received a formal letter of appointment and his remuneration was paid by telegraphic transfer into the bank account of AHI. 11 In any event, in March 1998 Mr McGrath acquired a shelf company and changed its name to CAA. CAA was to be Mr McGrath's operational company envisaged in his plan. Through his consulting company, AHI, Mr McGrath became managing director and chief executive officer of CAA on 27 March 1998 and remained so until 29 February 2000. In June 1998 Mr McGrath transferred his shareholding in CAA to PHL. 12 Peter Timothy McGuinness, the corporate finance director of PHL and PIL, was appointed a director of CAA. Mr McGuinness, an accountant by profession, was described in the evidence as the "eyes and ears" of PIL and PHL insofar as their interests in CAA were concerned. Mr McGuinness described his role as "to assist the subsidiary operating companies of PHL in any corporate finance activities, secondly to represent PIL in monitoring the performance of the investments as a non-executive director and thirdly to advise PIL on growth or exit strategies for investments". Mr McGuinness was in Australia for a significant part of 1999. Mark Johnson was a non-executive director of CAA as well as being managing director of PIL. Stuart Bruck was also a director of CAA from October 1998 to October 1999. Other directors were later appointed to the CAA Board including Mr John Boulos, CAA's Finance Director. 13 In July 1998, Mr McGrath made a presentation on his plans for developing a physician multi-specialty company to senior executives of PIL, including the chairman of PIL, Mr John Beckwith. Mr Johnson was also present, together with Stuart Bruck. In the presentation, under the heading "Summary of the Business Plan (Base Case)" it was stated "Pacific Investments to finance first acquisition; CAA will look to new capital/debt partners for subsequent transactions using its own cash flow". Another important aspect of the plan was that the doctor/partners in the medical practices acquired by CAA would retain equity in the business to ensure they remained committed to the success of the business. 14 Following the presentation, Mr Beckwith advised Mr McGrath that PIL wished to proceed further with the idea and encouraged Mr McGrath to pursue acquisition of the medical practice he had identified. This practice was Rayscan Imaging ("Rayscan"), a partnership of medical practitioners who operated radiology clinics at Baulkham Hills Hospital, Mudgee, Liverpool, Fairfield and Burwood. 15 It is sufficient to say, without going into the associated corporate structuring, that CAA acquired a majority interest in Rayscan, with the purchase taking effect from 1 January 1999. In this connection, Mr McGrath deposed that: The advantages to CAA of the Rayscan acquisition was (sic) that: (i) it obtained 100% of the income stream of Rayscan; (ii) it had majority control of the Board of Rayscan; (iii) it held no obligations to pay dividends in relation to the 40% interest in the business held by Rayscan physicians; (iv) the Rayscan physicians could not sell their interest in the business, other than in the event of a trade sale or a public float of CAA. This was provided for in 'Drag Along' 'Tag Along' clauses of the contract. This arrangement applied up until the anniversary of the sale in 2010; and (v) the Rayscan physicians guaranteed EBIT for 5 years averaging $1.5 million per annum. Otherwise a claw back provision on the Rayscan physicians interest in the business would 'kick in'. 16 The former physician/partners were paid an average of $1.8 million each for their share of the business and offered five year employment contracts on annual salaries of about $350,000, plus other benefits. The doctors retained about 40 per cent equity in the business. The purchase of Rayscan was funded by PIL. 17 CAA made a further significant acquisition, namely Sydney and South Coast X-Ray ("Sydney and South Coast"), which operated radiology and nuclear medicine clinics in the eastern and western suburbs of Sydney and in the Illawarra area. This purchase took effect from 1 July 1999. Other minor acquisitions were also made during 1999. The advantages flowing to CAA from the Sydney and South Coast acquisition were similar to those described by Mr McGrath in respect of Rayscan. 18 The structure of Sydney and South Coast was described by Mr McGrath as follows: First, a debt company, Clinical Associates of Australia No 2 Pty Limited (CAA No 2), was formed. CAA owned 100% of the debt company. The debt arrangement for this transaction formed part of a re-financing arrangement on all of CAA debt arrangements, which involved a new bank, the ANZ bank, in place of the National Australia Bank, and a change in the proportion of borrowings that the ANZ would allow compared to the National Australia Bank. Secondly, a service company, Sydney X-Ray Management Pty Limited, was used. The service company was owned 100% by CAA and it was charged a management fee by CAA. Thirdly, CAA No 2 purchased 65% of the shares in Sydney X-Ray Pty Limited, the revenue producing company for Sydney and South Coast and the company that contracted with all the physicians. 19 There was no formal Board meeting of CAA to approve the acquisition of either Rayscan or Sydney and South Coast. In fact, during 1999 the only Board meeting of CAA to discuss operational and financial issues was on 3 November 1999. There was no complaint by CAA or PHL against Mr McGrath that in acquiring Rayscan and Sydney and South Coast he acted without Board approval. 20 Success fees of $100,000 each for the acquisition of Rayscan and Sydney and South Coast were payable by CAA to Mr McGrath's consultancy company, AHI. Mr McGrath chose to receive shares in CAA rather than the $200,000 in success fees. In July 1999 AHI was issued with 71,685 ordinary shares in CAA. In connection with the matter of shares, it is also necessary to mention that in December 1998, AHI was issued with a share certificate for 20 A class convertible redeemable preference shares in CAA. The controlling interest in CAA continued in the hands of PHL. 21 It was also the case that during 1999 preparations were underway for a public float of CAA and Mr McGrath, along with other directors of CAA - Mr McGuinness and Mr John Boulos in particular, were heavily involved in drawing up a prospectus. This required the directors and nominated advisers to the prospectus to conduct due diligence of the CAA business and to make necessary disclosures concerning the operation of the business. This is a matter I will return to later but it may be noted that ultimately the float did not proceed. 22 There was competing evidence about Mr McGrath's obligations to obtain approval to expend monies. In the early days of CAA's operations Mr Bruck's evidence was that Mr McGrath had to obtain his approval to expend, or commit to expenditure, on behalf of CAA. This was done by Mr McGrath forwarding budgets that outlined any expenditure and these were reviewed by Mr Bruck and Mr Johnson and either approved or amended. Prior to committing to a relatively large amount of expenditure, such as engaging solicitors, Mr Bruck said Mr McGrath was still required to obtain approval from himself or Mr Johnson. Mr Bruck said that there were a number of occasions where he had to remind Mr McGrath not to commit to expenditure on behalf of CAA without prior approval of PHL. Mr McGrath denied this. Mr McGuinness said that, as early as February 1999, he made it clear to Mr McGrath, after reviewing a management company budget that Mr McGrath had submitted to PIL, that PIL required prior written approval for all payments in excess of $5,000 and that all payments requiring approval be submitted to Mr McGuinness or Mr Johnson on a weekly basis for approval before payment. Mr McGuinness said that Mr McGrath complained about the unworkability of such an arrangement and that Mr McGuinness responded by suggesting Mr McGrath put forward a proposal to the CAA Board. Mr McGuinness said that Mr McGrath responded by saying that he did not have a problem with this. Mr McGrath never put forward any proposal. Mr McGrath denied that Mr McGuinness made any suggestion about a proposal to the Board or that he said he had no problem with it. 23 Mr McGrath maintained throughout his evidence that he had received no instructions from CAA or PHL as to limits on his authority to expend monies. The Dubbo Practice 24 In about March 1999, Mr McGrath initiated moves to develop a "greenfields" practice at Dubbo in New South Wales under the name of Western Plains Radiology and Nuclear Medicine ("the Dubbo practice"). During March 1999 Mr McGrath, together with Mr Boulos and two other employees of CAA - Mr Hopkins and Mr Wilson, visited Dubbo. Subsequently, lease arrangements were negotiated for premises in Dubbo and a lease was signed by Mr McGrath on 1 April 1999. Companies were invited by Mr McGrath to tender for the supply of medical equipment; budgets were prepared. Before all this Mr McGrath said that he spent considerable time investigating the demographics of the Dubbo area and made inquiries of the health service and referring doctors within the area to satisfy himself about the viability of setting up a practice in Dubbo. No formal feasibility study of the Dubbo practice proposal was produced until October 1999. This feasibility study was distributed to members of the CAA Board in October prior to the Board meeting on 3 November 1999. 25 Mr McGrath did not seek Board approval before taking the steps he did to set up the Dubbo practice. This was a major complaint by CAA and PHL against Mr McGrath; that he acted without authority in setting up the Dubbo practice and committed CAA to expenditure of the order of $8 million without Board approval. Mr McGrath maintained that he was never informed of any requirement to obtain approval of the CAA Board or PIL prior to entering into transactions. 26 Mr McGrath's Dubbo initiatives were discussed on 22 March 1999 at a meeting of a Rayscan management committee which he chaired. According to the minutes of the meeting it was attended by Mr McGuinness, Mr Boulos, Mr Hopkins - the general manager of Rayscan at the time, and two doctors, namely, Doctors Gale and Sachinwalla, who were representing the interests of the minority partners, that is the doctor/partners in the Rayscan practice. The minutes record that Mr McGrath advised in relation to Dubbo that: a lease of the premises is being prepared and requests for a turnkey quote to equip and fit out the site have been made of GE Medical Systems and Medical Applications Pty Ltd. The search for a Radiologist has commenced; one that was available has been found to be not MRI trained. Toos (Dr Sachinwalla) agreed to follow up on the availability of George McIvor. Michael McGrath noted that Nuclear Medicine physicians can be supplied from Sydney on rotation. The planned opening is 1st July 1999. Two PACS systems are being evaluated. The suppliers are Agfa and Philips; Agfa being a slight preference. It is proposed to link Mudgee and Dubbo. There also might be an opportunity to link the seventeen hospitals of the Area Health Service by tele-radiology. 27 Under the Rayscan acquisition CAA was to take delivery of a Magnetic Resonance Imaging ("MRI") machine which, according to Mr McGrath, was surplus to requirements. He proposed that the machine be located at Dubbo. 28 It was the evidence of Mr McGuinness that he did not recall (although he did not deny) being at the meeting of the Rayscan management committee on 22 March 1999 and, therefore, at this point of time, was not aware of the proposals to set up the Dubbo practice. Dubbo was again discussed at Rayscan management committee meetings on 19 April and 21 June 1999. Mr McGuinness was not present at these meetings but it was Mr McGrath's evidence that copies of the minutes of the meetings were sent to Mr McGuinness by mail. Mr McGuinness did not recall (but did not deny) receiving these minutes. 29 On 16 June 1999 Mr McGrath faxed a summary of a budget ("May Management Budget") for CAA for the year ending 30 June 2000 to Mr McGuinness. While that summary contained an entry under Expenditure for "Lease payments - Operating Leases" it did not identify the Dubbo practice proposal. Mr McGrath said he caused a full budget on a site-by-site basis to be couriered to Mr McGuinness in London and that "In the full budget, a separate spreadsheet was included for each site including the Dubbo practice". This evidence was corroborated by Mr Boulos. Mr McGuinness said that he did not receive this budget until he was handed a copy by Mr Boulos on his return from London to Sydney in July 1999. The budget for Dubbo showed income to 30 June 2000 of $2,350,000 and expenditure of $3,100,743 - a budgeted loss in the first year of $700,743. This budget gave no indication that the total leasing commitment of Dubbo was to be $8 million because it had been amortised over a period of eight years and, therefore, would not normally be shown in a single year's budget. CAA and PHL's complaint, however, was that they had no means of identifying such significant expenditure which had been committed without Board approval and without informing the major shareholder. 30 Whilst the expenditure of $8 million in respect of the Dubbo practice was not evident to Mr McGuinness or Mr Beckwith from the budget for the year ending 30 June 2000, it is clear that from July 1999, Mr McGuinness must be taken as being well aware of at least the prospect of significant expenditure in respect of the Dubbo practice. Mr McGuinness said that he was surprised to hear that McGrath had committed to the Dubbo practice without any discussion with the CAA Board and that he decided to discuss the matter with Mr Johnson, PIL's managing director, on his visit to Australia in September 1999. Moreover, Mr McGuinness said he assumed that Mr McGrath had undertaken a detailed feasibility study and financial analysis prior to committing to contracts to establish the Dubbo practice and that this would come out in the due diligence process being undertaken to prepare CAA for public float. Mr McGuinness said he did discuss the matter with Mr Johnson and in September 1999, Mr Johnson and he asked Mr McGrath for a copy of the financial forecast that justified the establishment of the Dubbo practice. Mr McGrath said he responded by saying that the information ".. was included in the budget pack we sent in June." This was a reference to the full budget, broken up on a site by site basis, sent to Mr McGuinness in June, according to Messrs McGrath and Boulos, but which Mr McGuinness said he did not receive until July 1999. 31 Mr McGuinness said in his evidence that he first became aware of the $8 million figure in respect of Dubbo during the finalisation of the Initial Public Offer (IPO) prospectus, in preparation for the public float. This was about late August 1999. Mr McGuinness said that he first formed the view in early September that, as Mr McGrath had not obtained CAA Board approval, the Dubbo acquisition constituted unauthorised conduct on his part. 32 About a week before the CAA Board meeting held on 3 November 1999, Mr McGuinness said he received a copy of a 39 page submission prepared by Michael Mitchell on the proposal to establish a practice in Dubbo. This was the "feasibility study" referred to earlier. He said he was shocked to see that the report did not specifically disclose the $8 million expenditure commitment. Mr McGuinness did not take up the issue of the $8 million with Mr McGrath and did not seek to air the matter at the Board meeting on 3 November. 33 The CAA Board meeting held on 3 November 1999 was attended by the following persons: · Mr Bill Cutbush - Chairman · Professor S Bruce Dowton · Mr Peter McGuinness · Mr Michael McGrath · Mr John Boulos · Ms Elizabeth Wyatt - Secretary 34 Mr Beckwith, PIL's chairman, was to be linked into the Board meeting by video-link but apparently the technology did not work. Mr Johnson tendered his apologies. 35 Mr Beckwith's evidence was that, arising out of the Board meeting: I discovered that McGrath had committed CAA to the establishment of a new clinic in Dubbo for a cost of approximately $8 million. I was furious that McGrath had proceeded to commit this amount of money on behalf of CAA without consulting or obtaining the approval of CAA's Board of Directors. 36 Mr Beckwith went on in his evidence to say: After the Board meeting of CAA on 3 November 1999, I had a telephone conversation with McGrath where words were spoken to the following effect I said " You are totally out of control and the business is out of control. You have been spending money without authority and you have acted without and well above your authority ." 37 As to Mr McGrath's response, Mr Beckwith said: I do not recall McGrath saying much at all during this telephone conversation. I received the impression that he was taken aback by my outburst. 38 Mr McGrath denied that Mr Beckwith used the words alleged but in respect of Mr Beckwith's "outburst" said he was not given an opportunity to respond because Mr Beckwith "left the room and ceased his involvement in the telephone link-up". 39 Attached to the Board minutes of the meeting on 3 November 1999 was a "Managing Director's Report - 30 September 1999" which indicated that "Dr George Hazan will be the permanent resident doctor at the (Dubbo) practice"; that there would be a grand opening ceremony on 16 October 1999 and that the practice would officially open for the first day of business on 25 October 1999. 40 Mr McGrath claimed in his evidence that at the Board meeting on 3 November, the CAA Board accepted and acknowledged the report on Dubbo prepared by Mr Mitchell. Mr McGuinness said in his evidence that the Board acknowledged the Dubbo submission but did not accept it, except to the extent that there was nothing that could realistically be done about the commitments Mr McGrath had made on behalf of CAA in respect of the expenditure for Dubbo. 41 Mr McGuinness said in his evidence that, had PIL been aware of the level of potential working capital and cashflow support required in relation to Dubbo, it would not have approved it. 42 It is to be noted that in the result, according to Mr McGuinness and Mr Boulos, CAA sold the Dubbo practice in June 2000 at a loss. Mr McGuinness stated that the loss was in excess of $1.2 million. The Hazan Issue 43 Associated with the Dubbo practice issue was the engagement of Dr Hazan as the resident doctor at Dubbo. It was contended by CAA and PHL that Mr McGrath was not authorised to employ Dr Hazan on the terms that he did, which included a $300,000 remote rural site allowance. Mr McGrath's evidence was that he was never informed that a remote rural site allowance paid to Dr Hazan would require CAA Board approval. 44 Between March and August 1999, despite considerable effort, CAA was unable to find a suitable radiologist for the Dubbo practice. Mr Boulos said in his evidence that by August 1999 "CAA became desperate because the Dubbo practice was scheduled to open on 16 October 1999 and this left CAA with six weeks to find a radiologist." In about August 1999 Dr Hazan, who was a Rayscan partner, approached Mr McGrath about the Dubbo practice position. In August 1999 Dr Hazan accepted the Dubbo position and eventually entered into a contract with CAA dated 7 October 1999. The contract provided for, amongst other things, an annual salary of $300,000 and a remote rural site allowance of $300,000 paid in four quarterly instalments of $75,000. According to Mr Boulos' evidence, the annual package of $600,000 payable to Dr Hazan was twice the salary that doctors at Rayscan and Sydney and South Coast were being paid. 45 Mr McGuinness said that he first learned of Dr Hazan's package shortly before the 3 November Board meeting of CAA and that he was "shocked". Mr McGuinness contended that Mr McGrath was aware, as a result of being in an executive position in a company within the PIL group, that expenditure on a remote rural site allowance required Board approval. He also contended that as a result of conversations in June and July 1999 McGrath was aware that CAA had a limited amount of cash to spend and, further that it had been reinforced to McGrath that expenditure such as this required Board approval because he was aware of the limits upon which he could spend money on behalf of CAA without prior Board approval from on or about 17 September 1999 when he received the first draft of the consultancy agreement. 46 The consultancy agreement is a central issue. It was made between AHI and CAA on 12 October 1999 and was the basis of the relationship between Mr McGrath and CAA. I will deal with the consultancy agreement in more detail later in this judgment. 47 In relation to the Hazan issue, Mr McGrath said in his evidence that during the autumn of 1999 he had a number of conversations with Mr McGuinness at the CAA offices at Liverpool and that he had said to Mr McGuinness "We will need to pay a premium for a physician to be based at Dubbo." Mr McGrath said that he "was never informed of any requirement to obtain the approval of the Board of CAA or PIL prior to entering into transactions." Moreover, Mr McGrath denied that there had been any conversations in June or July 1999 about limits on spending and denied that he was told on 17 September about any such limits. Indeed, Mr McGrath denied he was at a meeting with Mr McGuinness on 17 September 1999. 48 The provision of a benefit to the doctor at the Dubbo practice was foreshadowed in the May Management Budget under the description "Doctor's Bonus." According to Mr McGuinness, he received this budget in July 1999. The prospectus budget also provided for the payment of a bonus to the Dubbo doctor of $75,000 in each of October 1999, January 2000 and April 2000. The prospectus budget only dealt with the period September 1999 to June 2000 with the result that the bonus would have been $300,000 for the full twelve month period ($75,000 x 4 = $300,000). The prospectus budget was approved by the due diligence committee of which Mr McGuinness was a member. The provision of a benefit for the Dubbo doctor was also included in the Dubbo Feasibility Study which was distributed to CAA Board members in October. The Study provided for a payment for a radiologist of $50,000 per month over the period October 1999 to June 2000. This extrapolates to an annual payment of $600,000. The Canterbury Practice and Dr Ruut 49 The next significant complaint by CAA and PHL against Mr McGrath was that he entered into an employment contract with Dr Thomas Ruut without prior approval of the CAA Board. Dr Ruut owned and operated a practice at Canterbury which was acquired by CAA. In July 1999 Mr McGrath prepared a term sheet and cover letter for the purchase by CAA of the Canterbury practice. On 6 July 1999 both Mr McGrath and Dr Ruut signed the term sheet, which was expressed to be subject to contract and due diligence. In the course of negotiating the terms of the purchase, Dr Ruut demanded an additional $50,000 payment consisting of a one-off payment of $25,000 for goodwill and a one-off completion bonus (after 5 years) of $25,000. Mr McGrath signed off the term sheet, which included these additional terms in Dr Ruut's handwriting. The agreement also provided that Dr Ruut would take up full time employment with CAA on an annual salary of $300,000. The purchase agreement and employment contract between CAA and Dr Ruut were executed on 6 October 1999. 50 Mr McGuinness said in his evidence that the Canterbury practice was purchased by Mr McGrath without any consultation with the Board of CAA. Mr McGuinness said he was advised about the acquisition of the Canterbury practice after having seen a draft budget that had been prepared for the prospectus. This was in early August 1999. In September, Mr McGuinness said he had a conversation with Mr McGrath in which he asked Mr McGrath whether CAA could afford to do the deal and was assured by Mr McGrath that it could. In his oral evidence Mr McGuinness said that he formed the view in late November 1999 that Mr McGrath had exceeded his authority in acquiring the Canterbury practice without CAA Board approval. In December 1999, Mr McGuinness said he had conversation with Mr McGrath about the payment to Dr Ruut of a bonus and "some goodwill" and asked why this was the case when "the guy was virtually bankrupt". According to Mr McGuinness, Mr McGrath replied "I had to, to get the deal done. He demanded it." Mr McGrath denied this conversation occurred. Mr McGuinness said in his evidence that "CAA has closed the Canterbury practice at a total loss of approximately $500,000. CAA is committed to a lease for the next nine years for a lease payment of $100,000 per annum". 51 Mr McGrath's evidence in respect of Canterbury was that he did consult over the purchase. In this respect he referred to a management committee meeting of Rayscan on 21 June 1999 where the potential acquisition of the practice was discussed. Mr McGrath said a copy of the minutes of that meeting were forwarded to Mr McGuinness. The minutes state "Tom Ruut's Practice - Has a practice in Canterbury next to Canterbury Hospital not going very well at the moment. Should be able to pick up without major delay." There was no other evidence as to whether Mr McGuinness had received the minutes. Mr McGrath also claimed that he sent Mr McGuinness a copy of the cover letter and term sheet signed by himself and Dr Ruut. Mr McGuinness did not recall having received these documents. 52 The minutes of a meeting of the due diligence committee on 31 August 1999, at which Mr McGuinness is recorded as being present, stated under the heading "Smaller Acquisitions": Campsie/Canterbury The Canterbury site is located near a hospital and the Campsie site is located near the station. There are a couple of other competitors but there is a lot of potential at these sites. At Canterbury, the location is brand new. It has the capability of 18 to 20 medical offices and CAA has taken the head lease. It works well with the practice in Burwood and these are definitely growth areas." 53 Mr McGrath stated that in a meeting in September 1999, Mr Timothy Hunter Watkin, a partner in the legal firm Deacon, Graham & James (DGJ) and who was heavily involved in advising CAA in relation to the preparation of its prospectus as well as other matters, handed Mr McGrath execution copies of the purchase agreement for Canterbury and the contract of employment for Dr Ruut. Mr McGrath said that Mr McGuinness was present at this meeting and asked Mr McGrath "How long before you can get these executed?" 54 Mr Boulos gave evidence that at a meeting in September 1999 involving himself, Mr McGrath and Mr Watkin, the possibility of being able to get out of the Canterbury purchase was discussed. Apparently, Mr Boulos had had an earlier discussion with Mr McGuinness about the Canterbury acquisition. In the cross examination of Mr Boulos the following exchange took place: Q. Now during the course of the due diligent process did you ever have cause to speak, or did you ever speak with Mr McGuinness concerning any queries or concerns that he expressed to you about any of the information that was being reported to the due diligence committee? A. Yes, I did.

Q. What was that? A. We spoke about the Canterbury and Campsie acquisitions.

Q. And do you recall, when in relation to the completion of those transactions, that event took place, that discussion took place? A. Sir, the discussions were prior to the finalization of both contracts for Campsie and Canterbury.

Q. So far as you remember, before any contract had in fact been settled? A. It's a question of what the term "settled" means, but before any contract had been signed, yes.

Q. And what did Mr McGuinness say to you in those discussions that you just referred to? A. We talked about the possibility of getting out of the Canterbury, in particular, as it wasn't considered that it was a good investment, or the possibility of being a good investment going forward, and McGuinness had taken advice from doctors at Rayscan who believed that we should have gone ahead (sic - the doctors believed that the Canterbury acquisition should not have gone ahead) with that process. We discussed the matter with Mr Tim Watkins at Deacons as to whether he considered it would damage our prospectus, potentially damage our prospectus if we were to pull out at that stage, and the consensus was that it was more likely that this could cause harm to the prospectus if we were to pull out at that stage as Dr Ruut, we were concerned that Dr Ruut may have sued for breach of promise, so it was decided to leave Canterbury in at that stage.

Q. Even though you understood that at that stage there was an agreement? OBJECTION. QUESTION PRESSED. A. There was an agreement, I understand, between Mr McGrath and Dr Ruut, and while the final legal contract hadn't been signed, there was basically a contract in place, verbal contract.

Q. And did you have a discussion with Mr McGrath about that matter? OBJECTION. THE MATTER SHOULD BE CLARIFIED. Q. About Mr McGuinness's apparent discussions with the Rayscan doctors? A. No, I didn't.

Q. And you weren't present in any discussions between Mr McGuinness and Mr McGrath concerning such consultation that McGuinness might have had with Rayscan doctors? A. No, I wasn't.

Q. And when in 1999 did this discussion take place and can you tell us what happened? A. It would have been about the second last due diligent meeting before minutes had been signed off, so I imagine, time-wise, it would probably be about early to mid October.

Q. Now do you recall representatives doctors, representatives of Rayscan and Sydney and South Coast X-rays were involved in the due diligent process at any stage? A. Yes, they were.

Q. In fact the doctors made presentations to the due diligent committee, didn't they? A. There was about three that did, yes.

Q. Adrian Gale, in particular? A. Yes.

Q. And were you present when those presentations were made? A. Yes, I was.

Q. Those presentations were made towards the end of the due diligent committee work in September or thereabouts? A. September I would say, yes. 55 Dr Gale gave evidence in respect of the Canterbury acquisition that he advised Mr McGrath not to go ahead with it. Dr Gale said that Rayscan had assessed the prospect of opening a practice at Canterbury on two separate occasions and that in 1998 a Dr Dreverman had made a detailed analysis of the Canterbury site. On the basis of Dr Dreverman's research Rayscan had determined Canterbury was not a good location because: (a) the rent was too high; (b) the position was wrong; (c) there were insufficient referring doctors in the area; (d) the hospitals in the vicinity of the practice all had in-house radiography services. 56 Dr Gale stated that he said to Mr McGrath at one point words to the effect: Don't do it. Tom's going belly up and we've looked at the site before. It's not suitable. 57 Mr McGrath denied that Dr Gale said to him "we have looked at this site before. It is not suitable". 58 As at 15 February 2000 CAA had not paid Dr Ruut the one-off payment of $25,000. The Campsie Practice and Mr Moodliar 59 The next complaint by CAA and PHL against Mr McGrath was that upon the acquisition by CAA of the Campsie practice owned and operated by Mr Siva Moodliar, Mr McGrath entered into an employment agreement with Mr Moodliar, on behalf of CAA, which he was not authorised to make. According to Mr McGrath's evidence, in June 1999 he provided Mr Moodliar with a cover letter and term sheet regarding the purchase of the Campsie practice. On 6 September 1999, at a meeting between Mr McGrath and Mr Moodliar, Mr McGrath said that Mr Moodliar executed the purchase agreement and a consultancy agreement and inserted the date "1 July". Mr McGrath said that during the meeting Mr Moodliar provided him with a letter on CAA letterhead dated 6 September, which set out the terms of his engagement on a full time basis and proposed part time arrangements. Both the full time and part time proposals contained provision for the payment of a bonus of 1 per cent of gross receipts for the Campsie and Canterbury practices. The letter was signed by Mr McGrath and Mr Moodliar on 25 September 1999 and expressed to apply from 1 July 1999. 60 Mr McGuinness said in his evidence that he did not find out about the payments to Mr Moodliar specified in the 6 September letter until December 1999 or January 2000. Mr Boulos said that he was unaware that Mr Moodliar was entitled to a bonus until October 1999. Mr McGrath denied that he was not authorised to make the agreement with Mr Moodliar. 61 As at 15 February 2000 CAA had not paid Mr Moodliar any amount of bonus. Mr Moodliar no longer provides service to CAA pursuant to the consultancy agreement. Dr Mansberg 62 Dr Victor Mansberg was an associate doctor at Sydney and South Coast. When CAA acquired Sydney and South Coast Mr McGrath sought to negotiate a new contract of employment with Dr Mansberg. The negotiations were unsuccessful and in September 1999 Dr Mansberg resigned, giving about two weeks notice. Under his contract of employment Dr Mansberg was required to give three months notice. Dr Mansberg's resignation left the practice shorthanded and in some difficulty. Mr McGrath sought and gained the advice of DGJ that there were good grounds to sue Dr Mansberg for breach of contract. Mr McGrath said that in September 1999 he advised Mr McGuinness that he was thinking of taking legal action against Dr Mansberg pending DGJ advice. In October 1999 Mr McGrath said he informed Mr McGuinness that he had commenced proceedings against Dr Mansberg. Mr McGrath said in October 1999 he attended a meeting of all Sydney and South Coast doctors and informed them of the proceedings being taken against Dr Mansberg and that DGJ had given an opinion supporting the action. 63 Mr McGuinness said that he first became aware of the Mansberg issue in mid-September 1999 after a conversation with Mr McGrath. The next occasion Mr McGuinness said he heard about the issue was at a meeting of doctors on 14 October 1999 when Mr McGrath informed the doctors that he had instructed DGJ to commence proceedings against Dr Mansberg. Mr McGuinness said that Mr McGrath should have obtained the approval of the CAA Board before instituting the proceedings and putting CAA to an unbudgeted expense (CAA settled proceedings with Dr Mansberg in March 2000, incurring costs of $28,650.35). Mr McGuinness referred to cl 7.2 of the consultancy agreement between AHI and CAA which he said required Mr McGrath to obtain Board approval in the circumstances. The other concern expressed by Mr McGuinness was that Mr McGrath had not consulted with the doctors of Sydney and South Coast before instituting proceedings against Dr Mansberg. Mr McGrath insisted that he had consulted with various doctors and that they understood his position in respect of the matter, although at least one expressed opposition to the taking of proceedings. Mr McGrath also claimed that he had instructed DGJ to commence the proceedings against Dr Mansberg prior to the signing of the consultancy agreement and, further, that in early October, prior to the meeting with doctors on 14 October, he had in fact advised Mr McGuinness of his instructions to DGJ. Mr McGuinness denied this was the case. The Schenk Issue

64 On 12 August 1999 Mr McGrath forwarded a letter to Michael Schenk at an address in San Francisco, California offering him the position of Director of Information Technology with CAA in Australia. The letter set out various matters including offers to the following effect: · base compensation of $150,000 pa for the contract period of five years to be paid in a cost effective manner; · participation in a bonus program; · stock options; · annual leave; · a relocation allowance. 65 In a facsimile message to Mr Schenk on 14 August Mr McGrath advised him that CAA would pay for temporary housing costs for 60 days. 66 On 18 August Mr Schenk advised Mr McGrath in a telephone conversation of his concerns with the offer of employment. In late August, Mr McGrath said he had a conversation with Mr McGuinness regarding the terms of Mr Schenk's employment, including a six months temporary accommodation allowance and a relocation allowance of $20,000. According to Mr McGrath, Mr McGuinness indicated that he thought Mr Schenk's requests were reasonable. There was also a discussion regarding stock options for Mr Schenk and Mr McGrath said it was agreed with Mr McGuinness that Mr Schenk would get $150,000 of shares over five years or, if CAA did not list, the same amount in cash. Mr McGuinness said that he did not recall the specifics of Mr Schenk's remuneration being discussed but denied that he agreed to shares being converted to cash. 67 Subsequently, Mr McGuinness arranged for Mr Schenk to be interviewed by Mr Beckwith in the US and in late September/early October 1999 Mr McGrath was advised by Mr McGuinness that the interview "went fine." Mr McGrath then arranged for DGJ to obtain a work permit for Mr Schenk. 68 The issue of Mr Schenk's employment was on the agenda of the CAA Board meeting held on 3 November 1999. In cross examination of Mr McGrath the following exchange took place: Q. Also in that November Board meeting you presented an agreement that you had executed with Mr Schenk? A. Yes.

Q. And the Board considered that agreement, reviewed the agreement, and it was agreed that it was a critical role and there was to be a draft contract available in September for review prior to his appointment? A. Yes. For review by Mr Schenk.

Q. Well, that is not what the Board minute says, is it? A. I believe it does.

Q. It was for review by the Board, was it not? A. No, that is incorrect.

Q. The agreement that you put before the Board did not include a reference to housing costs for 60 days after arrival in Australia? A. I verbalised to the Board all of the issues that had changed from the original offer letter to the Board, which included not only the 60 days but the full provision of providing an allowance for Mr Schenk upon his arrival.

Q. That didn't occur, did it? A. Yes, it did. 69 In the cross examination of Mr McGuinness on the Schenk issue the following exchange took place: Q. I want to suggest to you that there was a Board meeting of course on 3 November 1999, and I trust for the last time I have to show you this document. It is annexure Z to your affidavit, the first affidavit? A. Yes.

Q. Do you see that on a page on which paragraphs 9 through to 13 appear there is a reference next to item 12, Mr Michael Schenk? A. Yes.

Q. Do you recall that at the Board meeting on that day Mr McGrath said words to this effect: "Here's the offer that we've sent to Schenk", and he had it with him. "He has got back to me with a number of amendments. His major concern is tax parity. He is coming out here in December. We will look at the tax parity point when he is out here. We will have to get tax advice for him." Remember him saying that? A. No. He did not say that in a Board meeting definitely, and I do not remember him saying that outside of the Board meeting.

Q. You don't remember him saying it at all? A. Correct. But I am more clear that he did not say that in the Board meeting.

Q. Is what is perhaps forming your recollection, Mr McGuinness, that the Board meeting was really more immediately concerned with topics such as the putting on ice of the float and the cash flow position which the company was faced with? A. No, my recollection is driven by the fact that it was a structured meeting and there was a specific agenda and I remember the presentation of the offer that was made and the discussion thereof. Q. So you remember that item, do you? A. I remember discussing the Schenk contract in that meeting, yes.

Q. And it was left on the basis that a formal contract was to be drawn up and put to Schenk for his approval. That's right, isn't it? A. No, my recollection is that the contract was to be prepared for the Board to approve before being sent to Mr Schenk for his comments or approval.

Q. Would you like to look at the Board minute against item 12: "All Board members reviewed Mr Schenk's agreement." Do you see that? A. Yes.

Q. That rather suggests, doesn't it, that some time was taken over this particular minute. Would that be right? A. I believe that the contract or the agreement referred to here was available before the Board meeting to the Board members.

Q. Whether it was available before or not, Mr McGrath told the Board meeting, didn't he, that Schenk had some problems with the agreement and he had a list of matters that Schenk wasn't happy about. That's right, isn't it? A. No. He presented a signed offer or term sheet that was actually signed by Mr Schenk. He did not discuss specific problems that Mr Schenk had with that contract.

Q. Are you quite sure about that, Mr McGuinness? A. In the Board meeting I am absolutely sure, yes.

Q. This is one matter about which you have a crystal clear recollection, is it? A. I have a good recollection of that meeting, yes.

Q. I want to suggest to you that no such thing happened. What the Board was told was that there was going to be a contract with Schenk, but that it wasn't yet in the form which Schenk was prepared to approve. That's the fact of it, isn't it? A. No. Mike presented to the Board a signed letter of response from Mr Schenk accepting the terms of the offer.

Q. And do you recall whether that document disclosed that Schenk had any outstanding questions such as tax parity? A. I do not recall whether that document disclosed that, no.

Q. If tax parity was still an issue then the likelihood is, isn't it, that Schenk hadn't made any agreement to the terms of any offer made to him. That would be true, wouldn't it? A. I can't speak for Mr Schenk.

Q. But what I put to you has about it a kind of inevitable logic, doesn't it? A. He had signed the offer letter that was put to him. I can only assume that he was happy with the contents of that offer.

Q. You know, don't you, that tax advice was obtained for Schenk? A. I know now that tax advice was obtained for Schenk, yes.

Q. Can you imagine any reason why it would matter to McGrath whether the tax advice obtained for Schenk was shown to individual members of the Board or not shown to individual members of the Board if he had gone ahead and done it? Can you imagine any reason why he wouldn't want to show anyone? A. I have no reason to believe why he would not specifically show it, no.

Q. The minute, I want to suggest to you, does not actually say as a matter of English that the draft contract had to come back to the Board for its review prior to being given to Schenk, does it? A. Not as a matter of English, no.

Q. That's because, I want to suggest to you, that the position which was emerging in this Board meeting was that Schenk was coming, the company wanted him and the company had wanted him for some time, and that the Board was told that Schenk was not happy with the terms of his contract as offered and he wanted some changes, including advice on tax minimisation, and that was all going to be done. That's the truth, isn't it? A. I disagree with you. 70 Mr McGuinness said that he became aware in February 2000 that on 23 December 1999 Mr McGrath had entered into a contract on behalf of CAA with Mr Schenk that was substantially different to the agreement of 12 August 1999. The differences appear to have been: · increased remuneration from $150,000 to $195,000 as a consequence of a tax equalisation adjustment; · a relocation allowance of $20,000; · $150,000 in cash if CAA did not list; and · an accommodation allowance of $3,000 per month. 71 Mr McGuinness said the December contract was made without the Board reviewing it and that it was made by Mr McGrath without the approval of the CAA Board. In his evidence Mr McGuinness said: The failure of McGrath to advise the Board about the revised terms of Schenk's agreement, significantly increasing his remuneration was completely beyond his authority. Further, as Schenk had travelled to Australia in December 1999, to decide if he would join CAA, it was still open to CAA to advise Schenk that he was no longer required. It was simply extraordinary that McGrath, knowing the dire financial position that CAA was in, knowing that as CAA had not listed it was not vital that CAA employ someone like Schenk, that he then decided to vary the terms of Schenk's employment to substantially increase his remuneration, without consulting anyone on the Board." 72 Mr Boulos gave evidence in relation to the Schenk issue. In his affidavit Mr Boulos said: The first I knew about Schenk's contract of employment with CAA dated 23 December 1999 was when Schenk brought me his file in February 2000 to ask me why he was not receiving his tax equalisation salary of $190,000. At this stage, I was only aware that he was being paid $150,000 in accordance with the agreement signed between McGrath, on behalf of CAA and Schenk dated 12 August 1999. I was not aware until I saw the contract dated 23 December 1999 that Schenk was receiving a $20,000 relocation cost, $150,000 in cash if CAA did not list by the end of his contract and an accommodation allowance of $3,000 per month. 73 In cross examination Mr Boulos' attention was drawn to the contract between Schenk and CAA made on 23 December 1999 and the fact that Mr Boulos' signature was on the contract. Mr Boulos agreed that to the extent his affidavit suggested he was not aware of the provisions of the 23 December contract until some time in February, the affidavit was in error. 74 Mr McGrath denied that it was beyond his authority to increase the remuneration of Mr Schenk. He also denied that he significantly increased the remuneration of Mr Schenk. Mr McGrath said he was never informed by CAA's Board not to proceed with a contract for Mr Schenk. The Doctors and Mr McGrath 75 A very significant issue in the proceedings was the alleged lack of consultation by Mr McGrath with the doctors of Rayscan and Sydney and South Coast. In this and other respects, a number of doctors gave evidence. They were: · Dr Adrian Gale, a partner of Rayscan and a representative of the Rayscan doctors who sat on the Rayscan management committee and general manager of Rayscan from June 1999; · Dr Colin Franklin, a partner of Sydney and South Coast and a representative of the Sydney and South Coast doctors on the Sydney and South Coast management committee; · Dr Graeme Shirtley, a partner of Rayscan and responsible for the Fairfield practice; · Dr Timothy Mander-Jones, a partner of Rayscan at the Burwood practice; · Dr Peter Kitchener, a partner of Sydney and South Coast, a representative of the Sydney and South Coast doctors on the Sydney and South Coast management committee and general manager of Sydney and South Coast. 76 There was a great deal of material before me regarding the dissatisfaction of the doctors with Mr McGrath. I do not find it necessary to canvass exhaustively the doctors' complaints against Mr McGrath but essentially they fell into three categories: firstly, that Mr McGrath did not meet the doctors' expectations arising out of the acquisition of their practices, relating to consultation with them about the business; secondly, the doctors objected to Mr McGrath's management style; and, thirdly the doctors became increasingly concerned that, under Mr McGrath's leadership, CAA was getting into such financial difficulties that the business was suffering and their reputations were being damaged. 77 Some of the more significant examples of the doctors' concerns relating to Mr McGrath may be summarised as follows: Consultation · Rayscan management committee meetings chaired by Mr McGrath were held in the style of briefing sessions and the minority partners (the doctors) were not provided with an opportunity to make real input into decisions; doctors were not given an opportunity to discuss any projects or strategy before a decision was made, despite the requirement in the partnership agreement between the doctors and CAA for consultation to occur. · The decision to establish a practice at Dubbo was made without consultation with the Rayscan doctors. The doctors told Mr McGrath that unless he could get a radiologist to work there (which they doubted) the practice would not work. Mr McGrath ignored this advice. · A request for feasibility studies in respect of Dubbo was made many times but there was no response from Mr McGrath. · There was a lack of consultation by Mr McGrath over the purchase of the RADOS system. · Mr McGrath did not consult with the Sydney and South Coast doctors prior to selecting staff for redundancy. · Mr McGrath did not consult at the local level, despite promises that the business would be physician-run. · Mr McGrath did not consult about key staff transfers. Management Style

The main complaint amongst the doctors regarding Mr McGrath's management style was that it was too "autocratic". It was said that Mr McGrath allowed very little input by doctors in the way the business was run and gave very little access to financial information. Doctors' opinions on matters relating to the management of Sydney and South Coast, it was claimed, were nearly always ignored by Mr McGrath. Mr McGrath was advised not to go ahead with the Canterbury acquisition but this advice was ignored. The doctors were, in their view, treated merely as rubber stamps.

By October 1999 it was evident that CAA was experiencing severe cash flow problems. This matter will be dealt with in more detail later in this judgment, however, it was clearly the view of a number of the key doctors that Mr McGrath was "financially irresponsible" and was leading the business into insolvency. It was claimed that Mr McGrath had outlaid "huge expenditure" on equipment such as the RADOS system, cat scans and ultra sound machines; that he had made bad decisions in respect of acquisitions such as Canterbury; that by November 1999 suppliers were not being paid and rent was in arrears because of a cash flow crisis; that Mr McGrath was, in effect, fudging the financial accounts by capitalising certain expenses that should not have been capitalised, thereby exaggerating profitability. The doctors expressed concern that the failure to pay suppliers and rent was damaging their reputation and the reputation of the business. 78 In his evidence Mr McGuinness referred to the importance of doctors being involved in the decision-making process at CAA and for them to be consulted. In his affidavit Mr McGuinness deposed: The doctors, as a result of their (sic) acquisition of their businesses, had retained some equity and therefore it was particularly important that they were consulted about decisions that would affect the profitability of the Rayscan and Sydney X-Ray practices. 79 In relation to the matter of consultation Mr McGuinness also said: It was also part of the management philosophy of the Pacific Group that the doctors were treated as our partners and involved in the important decisions made in relation to the practices in which they were working. This was viewed as an essential requirement to the success of managed healthcare companies and was the main reason we insisted that they retain an interest in the company. I have since become aware that directors' meetings of Rayscan and Sydney X-Ray were reduced to an absolute minimum whilst McGrath was Managing Director of CAA, with meetings often being cancelled at the last minute. I believe that the lack of involvement of the doctors lead (sic) to them feeling alienated and therefore they did not support CAA in relation to many decisions that were made. 80 I note that there was evidence from both Dr Gale and Dr Kitchener that they found considerable difficulty in having Mr McGuinness consult with them over their concerns relating to Mr McGrath. In the cross examination of Dr Kitchener the following exchange took place: Q. You did not see fit to take up with McGuinness any matters that you regarded as being unsatisfactory in the working out of the CAA structure in particular its management, did you? A. There were numerous times when these matters were raised with McGuinness. Q. Can you recall the earliest of them for me, looking back in 1999 and the time you came into the practice? A. It was probably sometime during October after I returned to work.

Q. So prior to October may his Honour take it you had not had cause to go to Mr McGuinness with any dissatisfaction, is that right? A. I had not had any contact with him, that's correct.

Q. And do you recall how it was you contacted McGuinness, was it by phone or was it in person? A. I don't recall exactly but I believe it was in person.

Q. May we take it he was in Australia at that point? A. Yes.

Q. And do you recall how many times you had a discussion with McGuinness in October 1999? A. I'm sorry I don't remember.

Q. It's not meant to be a memory test. Having approached McGuinness, did you find him receptive? A. No.

Q. Did you conclude after having spoken to McGuinness that he was tarred with the same brush as McGrath? A. They were different brushes.

Q. But they came from the same pot, would that be right? A. To some extent, yes.

Q. Now, I take it then that in November of 1999 you had no further contact with McGuinness about matters of management and style and so on before you left for the medical conference in Chicago? A. There were multiple occasions during November before I left when I had spoken with McGuinness. There were also multiple telephone conversations with him while I was in Chicago.

Q. What were the matters you were raising with McGuinness in November? A. At that stage the issues, the major issues were the dissatisfactions with the management style of Michael McGrath. I am sorry, there were concerns beyond that regarding the solvency of the company itself and the ability to pay debts. 81 Mr McGrath comprehensively denied the allegations by the doctors about his conduct. He sought to explain the rationale for his actions or decisions in respect of specific matters complained of by the doctors or why it was that the allegations against him were wrong. In relation to the general allegations regarding lack of consultation and management style, it was essentially Mr McGrath's case that the doctors resented the intrusion into their practices by CAA despite the fact they had sold their majority interests and, further, that they wanted a say in the management of CAA beyond which their minority interest in the business reasonably permitted. In other words, the doctors could not accept that they no longer had management control of their practices and sought to take out their frustration on Mr McGrath. In respect of what Mr McGuinness alleged about his lack of consultation with doctors, Mr McGrath: denied he did not consult; denied directors' meeting were kept to an absolute minimum; denied meetings were cancelled at the last minute; denied he was ever informed of the Pacific group's philosophy regarding doctors. 82 Apart from expressing their concerns to Mr McGrath from time to time and not receiving what they regarded as satisfactory responses, several of the doctors of Sydney and South Coast wrote to Mr McGrath on 20 November in relation to a number of matters. The letter referred to: · their distress about the financial exposure caused by Mr McGrath's actions and the lack of working capital; · the unworkability of the relationship where the doctors were not involved in the business; · Mr McGrath's decision to dismantle the management base and geographically remove them from Liverpool and how this was demoralising and disruptive to the administrative staff; · Mr McGrath's apparent accusation that the doctors had taken their eye off the ball and had let the core business fall; · CAA's preoccupation with the "proposed ASX float" which had caused a lack of management and direction; · the damage to the doctors' reputation by the large staff redundancies; · the need for a change in attitude on CAA's part away from "the current position where we continue to be patronised and ignored". 83 Mr McGrath responded to the doctors' letter on 25 November 1999. In his detailed response Mr McGrath: · said that the lack of working capital was due to a variety of issues and decisions that pre-dated CAA's ownership; · explained that the doctors had no financial exposure; · reminded the doctors that they did not have any responsibility for administrative issues of the group; · explained that the relocation of the administrative function had always been intended and this was communicated to Dr Kitchener as the general manager; · stated that "Transfer of payroll and creditor functions to Liverpool did happen quickly, however, this was out of necessity as you had people resigning and leaving almost immediately after completing our transaction on 23 July 1999. CAA is unaware of any demoralizing of staff that occurred. We agree it was disruptive, as CAA had to pick up the pieces."; · referred to the work practices of certain doctors including conduct of personal business during working hours, being absent from the practice for extended periods without explanation, doctors routinely arriving late and leaving early; · denied the work on developing the prospectus had any significant impact on the business; · explained that staff redundancies were necessary and did not believe this would impact unfavourably on the business; · stated that he did not believe CAA had patronised or ignored the physicians and suggested that "Some of you are experiencing an identity crisis and frustration in not being able to separate your role of making administrative decisions too (sic) clinical decisions. This goes to the heart of the problem". 84 On 23 December 1999 doctors from Sydney and South Coast again wrote to Mr McGrath. The letter canvassed a number of further concerns including lack of consultation, staffing and unpaid accounts. The final two paragraphs of the letter stated: We firmly believe that the present climate of turmoil and dissatisfaction is very damaging to Sydney X-Ray's business and, contrary to your claims when negotiating for CAA to acquire the business, it has become almost impossible to attract much-needed specialist medical staff to Sydney X-Ray. We stated in our last letter to you our commitment to support CAA must be reciprocated by a change in the attitude by CAA. So far, this has not occurred, and we continue to be patronised and ignored.

85 Mr McGrath responded on 8 February 2000 upon his return from annual leave. Once again, Mr McGrath's response was detailed, addressing each of the points raised in the doctors' letter. Mr McGrath did not agree with any of the complaints, expressed or implied, in the doctors' letter. 86 In between the various exchanges between the doctors and Mr McGrath which I have just described, Doctors Gale, Kitchener and Dr Ellison, a nuclear physician with the Sydney and South Coast practice, attended a conference in Chicago. In accordance with a prior arrangement, Dr Gale met with Mr Bruck in Chicago on 29 November 1999. Dr Gale relayed to Mr Bruck his concerns about the financial state of CAA's business and the problems being experienced with Mr McGrath's management of the business. Mr Bruck said he was shocked and expressed the opinion that what Dr Gale had said to him seemed to be "really out of character" for Mr McGrath. Dr Gale asked Mr Bruck to speak with Mr McGrath about the doctors' concerns. The following day a meeting occurred involving Mr Bruck and Doctors Gale, Kitchener and Ellison. Concerns relating to the financial position of CAA and Mr McGrath's management were reiterated by the doctors to Mr Bruck. 87 On 3 December 1999, Mr Bruck left a message with Dr Gale to the effect that he had spoken to Mr McGuinness about the issues raised by the doctors and that "Peter is on the right track to attend to our issues". 88 On 3 February Doctors Gale and Sachinwalla prepared a document entitled "Rayscan Imaging - Minority Partner Assessment for 1999" A copy of the document was sent to Messrs McGrath, McGuinness, Beckwith, Bruck and Johnson. The five page document addressed the doctors' concerns in relation to the following areas: · management decision-making process; · issues that appear to have impacted adversely on the Rayscan business (new sites, RADOS and computerised billing, lack of access to the real cost of administration, disruptions to electricity supply because bills not paid, telephone accounts cancelled because bills not paid, delays in the arrival of consumables, seriously inadequate cash flow); · human resources (poor staff morale, high turnover of staff); · radiologist manpower (understaffing, reduction in quality of service, erosion of goodwill, delays in salary reviews, difficulty in finding new radiologists). 89 Consistent with his manner of dealing with such matters, Mr McGrath responded to the Gale/Sachinwalla letter in a detailed, 13-page response dated 9 February 2000 and sought to answer each of the issues raised. Mr McGrath copied his letter to Messrs Beckwith, McGuinness, Bruck and Johnson. 90 In early February, the minority partners of Rayscan engaged a firm of chartered accountants to investigate the past and future profitability of Rayscan and the current financial position of the group. A report by the firm was provided on 10 February 2000. 91 On 10 February 2000 Dr Gale received a letter from Mr Beckwith informing Dr Gale of an intention on Mr Beckwith's part to come to Australia to carry out an urgent review into the "clearly serious management issues which need to be addressed in CAA". The cash flow crisis 92 In July 1999 Mr McGuinness said that he had a conversation with Mr McGrath in which he said words to the following effect: CAA is now highly geared as a result of acquiring Sydney X-Ray. Based on our current assumptions, there is very little tolerance for spending any cash flow generated from CAA as most of that cash flow is required to pay down bank principal and interest or tax. Any project requiring expenditure will need to be looked at very closely, modelled and if necessary, funds sought elsewhere. 93 Mr McGuinness said he demonstrated the cash flow issue on a white-board in Mr McGrath's office. Mr McGrath denied that the conversation with Mr McGuinness in relation to cash flow took place. 94 On 28 October 1999 Mr McGrath and Mr Boulos sent a facsimile message to Mr Johnson with copies to Mr Cutbush, Mr McGuinness and Professor Dowton asking PIL to give urgent consideration to providing an amount of $4 million in working capital to CAA because of a cash flow crisis. The message indicated that the crisis had arisen as a result of the following: · The company [CAA] has funded the majority of the Sydney Xray (sic) purchase costs ($1,562,462 of which $700,000 contributed by PIL at time of settlement). · Prospectus (IPO) Costs Already paid $53k plus to be paid if prospectus doesn't go ahead $465k. · Small Acquisition Costs $108k. · A worse than expected working capital position arising from the ramp up of new projects and collection of debtors in the core businesses, due to introduction of new pricing policies and billing systems being introduced. · All new projects and acquisitions begin with a negative effect on working capital as collection of procedure fees can take 4-8 weeks, whereas the liabilities are incurred immediately. 95 The message also said: The shortfalls predicted in the attached cash flow, don't take into account the potential effect on EBIT of the current review being conducted on our 3 MRI machines by the Department of Health and Aged Care. Once the full effect of this review is known, we may well need to revise our cash flow projections again. 96 From 1 November 1999 the Commonwealth Government placed an embargo on Medicare refund payments for the use of certain MRI machines. This had a very significant impact on CAA's cash flow and was one of the main reasons why CAA did not proceed with its public float at the time. Another reason for not proceeding with the float was said by Mr McGuinness in his evidence to be a lack of confidence by sub underwriters in CAA's management. 97 The other contributing factor to the cash flow crisis was an alleged misstatement by Sydney and South Coast at the time of the acquisition by CAA of the financial position of that practice. In this respect, Mr McGuinness wrote to Dr Franklin on 26 November 1999 expressing "great concern" at a material change in the financial performance of the business compared to the financial warranties given by Sydney and South Coast in the various acquisition agreements. Nevertheless, CAA did not exercise a claim under the warranties given in the various acquisition agreements. Instead, Mr McGuinness said that it was CAA's intention to use the mechanism in the agreements which allowed CAA to assess the profitability of the Sydney and South Coast business over five years and contractually to adjust, with the benefit of hindsight, the acquisition price that was originally paid. 98 It is difficult to assess from the evidence how much of the cash flow crisis can be attributed to the actions of Mr McGrath as managing director of CAA and to factors outside his control, such as the MRI situation and the unexpected shortfall in revenue flowing from Sydney and South Coast because of alleged misstatements at the time of acquisition. Clearly, however, CAA was already in a cash flow crisis before the MRI problem struck. Moreover, both Mr McGrath and Mr Boulos must have been aware of the developing crisis from at least September 1999. In his evidence Mr McGrath denied that Mr McGuinness had no idea that CAA was in a dire financial situation prior to receiving the facsimile message from he and Mr Boulos on 28 October 1999 because in late September and in October Messrs McGuinness, McGrath and Boulos had met on at least three occasions to discuss the financial situation of CAA. Mr McGrath's Expenses 99 In August 1999 Mr McGrath requested Mr Boulos to transfer $US40,000 into a personal account operated by Mr McGrath for expenses incurred prior to the Rayscan acquisition. Mr Boulos said that he asked for supporting documentation from Mr McGrath on a number of occasions but this was never provided. Mr Boulos treated the payment to Mr McGrath as an "employee receivable" in the accounts of CAA until Mr McGrath provided the paperwork supporting the expenditure. The "employee receivable" was to be cleared before the end of the fiscal year, that is, 30 June 2000. Mr McGrath regarded the task of working out the expenses as "too laborious" but that he was going to get around to it. CAA and PHL alleged that in failing to provide supporting documentation and failing to provide CAA with the opportunity to review and reject the claim prior to being reimbursed, there was a breach of fiduciary duty on the part of Mr McGrath. The taking of annual leave by Mr McGrath 100 Mr McGrath took annual leave from 24 December 1999 to 14 January 2000. CAA and PHL asserted that the leave was taken at a time when CAA was suffering a serious financial crisis and without Board approval. Mr Boulos said that he was extremely concerned that Mr McGrath had decided to take leave when he did "when he was aware of the severe financial crisis that CAA was facing." Under cross examination, however, Mr Boulos conceded that there was nothing more that could be done at the time by Mr McGrath about the cash crisis. Mr McGrath said in his evidence that he had advised Mr Cutbush, the chairman of CAA, that he would be taking leave over Christmas. Mr Cutbush was not called to give evidence. Mr McGrath also said that he had advised Mr McGuinness that he would take leave from Christmas eve for a few weeks. Mr McGuinness said what Mr McGrath said to him in respect of leave was "Nothing much will be going on between Christmas and New Year anyway. The practices will be shut between Christmas and New Year and the office will also be on holiday during that period." Mr McGuinness said that when he learned from Mr Boulos on 5 January 2000 that Mr McGrath was on leave when CAA was experiencing the cash flow crisis he was "amazed". The Consultancy Agreement 101 Before going to the events leading up to the severing of the relationship between Mr McGrath and CAA in February 2000, it is necessary to deal with the consultancy agreement between AHI and CAA, executed on 12 October 1999. 102 Mr McGuinness instructed Mr Watkin of DCJ in June 1999 to arrange for a contract of employment to be drafted for Mr McGrath. There was some urgency about this because it was necessary to have in place a formal agreement with Mr McGrath as the managing director of CAA as part of the preparation of the public float of CAA. In July 1999, Mr McGrath advised Mr Watkin that he was to enter a consultancy agreement with CAA. A draft consultancy agreement was subsequently prepared and this was forwarded to Mr McGuinness on 3 September 1999. On Mr McGuinness' instructions, the draft was amended on a number of occasions and on 13 September Mr Watkin provided Mr McGuinness with an amended copy of the agreement. 103 Mr McGrath stated that he did not receive a copy of any draft consultancy agreement until 1 October 1999. Mr McGuinness contended that Mr McGrath received a copy in September 1999 and indeed, that at a meeting on 17 September between Mr Watkin, Mr McGrath and Mr McGuinness to discuss the consultancy agreement, Mr McGuinness noted that Mr McGrath had a copy of a draft consultancy agreement with handwritten notes on it. Mr McGrath contends there was no such meeting on 17 September and upon referring to his diary said that on that day he was otherwise engaged. 104 The evidence as to whether Mr McGrath had a copy of a draft consultancy agreement prior to 1 October 1999 is not definitive. Some importance - although not critical to the final outcome of the case - attaches to the issue because CAA and PHL contended that because Mr McGrath had access to a copy of a draft consultancy agreement in September, that from that point on he was aware of the limitations on his authority to expend monies on behalf of CAA and of the requirement to seek Board approval in relation to certain expenditure. It was put by Mr Hatcher for CAA and PHL that "if Mr McGrath at the time he executes the documents (the consultancy agreement, options agreement and deed of covenant) knows that the contract requires him to disclose expenditure by this time and, nonetheless, doesn't disclose it, it is a clear and flagrant breach of his obligations". 105 In their negotiations over the terms of the consultancy agreement Mr McGrath and Mr McGuinness discussed the terms relating to termination of the agreement. The evidence again is somewhat confused on this issue. It was Mr McGrath's contention that he was unhappy with a six months notice period that allowed CAA to terminate the agreement and that he required 12 months notice. Mr McGrath also said that in his negotiations with Mr McGuinness he indicated that if CAA wanted a non-compete period of five years, Mr McGrath wanted to be paid out for that period. Mr McGrath said that his understanding of the outcome of negotiations in relation to termination was that if CAA terminated the agreement he would be paid out for a period of two years which was to be the equivalent of the non-compete period. Mr McGuinness conceded in his evidence that a five year non-compete period was too harsh and proposed to Mr McGrath a two year non-compete period and six months notice. Mr McGuinness was unclear as to how Mr McGrath responded to this offer to amend the draft agreement but he did say that Mr McGrath did not reject the offer. 106 Clause 14 of the executed consultancy agreement was in the following terms: 14. Termination

14.1 Subject to clauses 14.2-14.5 inclusive, either party may terminate this Agreement at any time by giving at least six month's written notice to the other party, or payment, or forfeiture instead.

14.2 CAA may terminate this Agreement immediately without prior notice of termination and without any payment instead of notice if: (1) the Consultant becomes an externally-administered body corporate under the Corporations Law; (2) steps are taken by any person towards making the Consultant an externally-administered body corporate; (3) a controller (as defined in section 9 of the Corporations Law) is Appointed to any of the property of the Consultant or any steps are taken for the appointment of such a person; (4) the Nominated Person: (a) is charged with any criminal offence which in the reasonable opinion of CAA brings the Consultant or CAA into serious disrepute; (b) becomes bankrupt or makes a composition or arrangement with his creditors generally or takes advantage of any statute for the relief of insolvent debtors; (c) is incapacitated by illness or injury from performing his duties under this Agreement for a period of 9 months; (d) dies; or (5) the Consultant breaches any term of this Agreement or the Option Agreement and fails to rectify that breach after being given at least 7 days notice of the nature of the breach.

14.3 If the Nominated Person is incapacitated by illness or injury from performing his duties under this Agreement for a period greater than 3 months but less than 9 months, the Consultant will not be entitled to any fees during that period.

14.4 The Consultant may terminate this Agreement immediately without prior notice of termination if: (1) CAA becomes an externally administered body corporate under the Corporations Law; (2) a controller (as defined in section 9 of the Corporations Law) is appointed over any of the property of CAA; or (3) if CAA is guilty of any material breach of any material term of this Agreement and fails to remedy that breach after being given 7 days notice of the nature of the breach. 14.5 CAA may terminate this Agreement without cause and without prior notice of termination if it pays to the Consultant the balance of the unpaid Fee as if the Consultancy had run for the full term of this Agreement. 107 Clause 18 of the consultancy agreement was the "Non Compete" provision. It referred to the periods during which, and areas in which, AHI could not compete once the agreement had been terminated. The relevant periods were specified in Item 5 of the Schedule to the consultancy agreement. 108 Item 5 of the Schedule to the agreement provided that: Item 5 Restraint Period (a) after termination by the Consultant under clause 14.1 - 2 years; (b) after termination by the Consultant under clause 14.4 - nil; (c) after termination by CAA under clause 14.5 - 2 years; (d) after termination by CAA under clause 14.2 - the balance of the term or 2 years which ever is longer; and (e) if the Consultant does not renew at the end of 5 years - 2 years. 109 The final form of the agreement as to its termination and restraint provisions is clearly not consistent with Mr McGrath's understanding of the outcome of negotiations on this issue. Item 5 of the Schedule to the consultancy agreement provides for a somewhat oppressive provision to the effect that, in circumstances where CAA terminated for cause and if CAA had sought to rely on the restraint provisions of the agreement, Mr McGrath would be subject to a restraint period of the balance of the term of the agreement or two years, which ever was the longer. This would have meant Mr McGrath would have been subject to a non-compete period of about four years and four months if cl. 18 had been relied upon by CAA following termination of the consultancy agreement. In this respect it is noted that prior to commencement of the hearing of these matters, CAA and PHL consented to treat the non-compete provisions of the consultancy agreement as non-effective. Events leading to termination of consultancy agreement 110 In his affidavit, Mr McGuinness deposed that "I decided as a result of the cashflow situation, the unauthorised expenditure that McGrath had committed to and the doctors concerns to write a memorandum to Beckwith and Johnson". Mr McGuinness did this on 3 December 1999. Mr McGuinness went on to state in his affidavit: I believed at this time that, in general, the strategies and expansion plans that McGrath had were good. However, the lack of financial analysis that was performed before any financial implementation, the lack of market research and due diligence and failure to consult the Board or doctors of Rayscan before committing CAA to agreements to acquire practices, undermined any credit that I gave to his ideas. I was rapidly forming the view that if McGrath did not leave the company, the company would be financially ruined. 111 In his memorandum to Messrs Beckwith and Johnson of 3 December 1999 Mr McGuinness referred to his concerns regarding Mr McGrath but said his "ideas though are very good." The memorandum also stated "We should consider moving him from this position of control into a business development/marketing role where his skill set lies, or terminate his contract if he cannot accept this (his contract has a 6 month notice period.)". 112 After learning in January 2000 that Mr McGrath "had decided to take leave when CAA was in such a dire financial position and had made no attempt to stay in contact with Boulos during this critical period", Mr McGuinness said "I decided that McGrath was out of control and that if he stayed in the company any longer it would be financially ruined". 113 In February 2000 Mr McGuinness requested from Mr Boulos the detailed cash flow position of CAA. This he reviewed with Mr Bruck during the same month and came to the view that CAA needed a further $3 million in funding. 114 Also during February, Mr Beckwith received the Minority Partner Assessment for 1999 letter from Drs Gale and Sachinwalla dated 3 February and referred to earlier in this judgment. Mr Beckwith responded to the doctors and said he would like to discuss with them, as well as Messrs McGrath and McGuinness, the issues they had raised in their letter of 3 February and that he would do this on his forthcoming visit to Australia. 115 Mr Beckwith met with Drs Kitchener and Gale in Sydney on 13 February. Immediately following this meeting Mr Beckwith resolved to remove Mr McGrath as a matter of urgency. In fact, Mr Beckwith conceded under cross examination that he had decided he would not hear Mr McGrath in his defence. This was despite the fact that Mr Beckwith knew that Mr McGrath disputed the allegations by the doctors in their letter of 3 February because he had received a copy of Mr McGrath's reply to the doctors. Mr Beckwith justification for not giving Mr McGrath an opportunity to defend his position was that Mr McGrath had "plenty of opportunity beforehand to tell us why he had taken the actions he had…". 116 On 15 February 2000, according to Mr McGuinness' evidence, Mr Beckwith said to Mr McGrath: You have been entering into a series of onerous contracts on behalf of CAA, without any prior approval of the Board or discussion with us. You have lost the confidence of the doctors and I'm afraid that we are going to have to part company. 117 Immediately following this statement, Mr McGuinness handed to Mr McGrath a letter dated 15 February 2000. The letter, under CAA letterhead and signed by Mr McGuinness, referred to the consultancy agreement between AHI and CAA and, in particular, to cl 7 of that agreement and the requirement that the "Consultant must not pledge the credit of, or enter into any contract or agreement on behalf of CAA, without the prior approval of the Board." This was not a complete quote from the relevant provision, which was as follows: 7.2 The Consultant must not pledge the credit of, or enter into any contract or arrangement on behalf of CAA, without the prior approval of the Board except (1) where the transaction is in accordance with the budget or business plan and up to $100,000; or (2) where the transaction is not in accordance with the budget or business plan and up to $25,000, but subject to a review by the Board at the end of the period of six months from the date of execution of this Agreement. 118 Mr McGuinness conceded in cross examination that, to the extent cl 7.2 was not quoted in full, the letter was wrong. The letter went on to refer to the following commitments that it was alleged Mr McGrath had made between 1 July 1999 and 31 December 1999: 1. Leasing liabilities for the Dubbo practice for amounts in excess of $5 million.

2. Engagement of Dr George Hazan to provide services to the Dubbo practice for a fee of $600,000 per annum.

3. The acquisition of a practice at Canterbury for a price of approximately $175,000, including a $25,000 sign on bonus and a $300,000 per annum service contract for a doctor.

4. A series of information technology platforms. 119 It was alleged in the letter that none of these contracts or agreements had Board approval prior to committing CAA and that In our view in entering into these contracts or agreements and in failing to present business plans or feasibility studies to the Board prior to committing CAA, you are in breach of the Consultancy Agreement. You are hereby put on notice that you have seven days in which to rectify the breaches. We draw your attention (sic) clause 14.2(5) of the Consultancy Agreement. If you fail to rectify the breaches we will consider terminating the Consultancy Agreement. 120 Under cross examination, Mr McGuinness conceded that it would have been impossible for AHI to rectify the alleged breaches and that the letter was sent by CAA knowing that whatever Mr McGrath's response, the consultancy agreement was to be terminated. Mr McGuinness agreed that it was "disingenuous" to say in the letter "If you fail to rectify the breaches we will consider terminating the Consultancy Agreement" because there was no intention on the part of CAA to maintain the agreement with AHI. 121 The letter to Mr McGrath of 15 February sought a response by 22 February 2000. On the morning of 22 February CAA circulated a memorandum to its staff stating that Mr McGrath "was no longer with the company". At the time Mr McGuinness wrote the memorandum to staff, no response had been received from Mr McGrath. 122 On 22 February 2000, at 5.00 pm Mr McGrath forwarded his six page response to CAA's nominated solicitors in respect of the issue, Henry Davis York. In his response Mr McGrath addressed each of the allegations against him, noting in particular that in respect of the four matters referred to in CAA's letter of 15 February, each of them pre-dated the consultancy agreement and that the nature and detail of the matters raised were known to CAA. 123 By letter dated 29 February 2000, AHI was advised of the termination of the consultancy agreement. The letter stated that CAA had "carefully considered" AHI's response of 22 February, although it is clear that a decision had been taken to terminate the agreement prior to receiving the response. The letter of 29 February stated: Having considered your response and the available material it is clear that you have undoubtedly breached clause 7.2 of the Consultancy Agreement in respect of the following matters: (a) Your agreement on 7 October 1999 to provide Dr Hazan with a $300,000 per annum remote and rural site allowance; and (b) Entering into agreements for the purchase of the Canterbury practice of Dr Ruut agreeing to bonus payments including $50,000 to Dr Ruut and an acquisition cost for the business. These agreements being entered into on 6 October 1999. It is CAA's view that in accordance with clause 14.2(5) of the Consultancy Agreement you have breached a term of the agreement and in particular a critical term. CAA has elected to terminate your consultancy and the Consultancy Agreement effective immediately. In accordance with clause 14.2 there is no obligation on CAA to make any further payment. 124 The letter went on to request that Mr McGrath execute resignations from the Boards of companies connected with CAA from 1 March 2000. This was subsequently done by Mr McGrath. 125 It is to be noted that the letter of 29 February relied on only two issues as the basis for terminating the consultancy agreement, compared to the four issues referred to in the letter of 15 February 2000. Option Agreement 126 Insofar as the option agreement was concerned, following termination of the consultancy agreement, PHL had purported to acquire all of the termination shares of AHI pursuant to cl 3.3 of that agreement. In the course of the proceedings it was acknowledged by counsel for CAA and PHL that they would not be contending that there had been any alteration in the shareholding of AHI in CAA. Whatever was the shareholding, including the holding of options, immediately before the termination of the consultancy agreement, was to remain unaffected by the termination and any purported "claw back" was to be of no legal effect. To this extent the option agreement was not put in issue, except that AHI and Mr McGrath sought an order declaring that, for the purposes of cl 3.3 of the options agreement, the consultancy agreement was not terminated by CAA with cause pursuant to cl 14.2 of the consultancy agreement. CAA's Constitution - "Bad Leaver" Provisions 127 The constitution of CAA enabled CAA by notice in writing to redeem all or any unconverted shares held by a "Bad Leaver" at the issue price. The issue price of the convertible shares held by AHI was "nil dollars". 128 It was contended by counsel for AHI and Mr McGrath that AHI, the shareholder, was not a "bad leaver" within the meaning of CAA's constitution. My understanding of the undertaking given by counsel for CAA and PHL that AHI's shareholding immediately prior to the termination of the consultancy agreement would remain unaffected, would preclude any application of the "bad leaver" provisions. Nevertheless, counsel for Mr McGrath and CAA sought an order declaring that CAA would not be entitled to redeem the class A convertible preference shares held by AHI in CAA pursuant to the "bad leaver" provisions in CAA's constitution. SUBMISSIONS OF THE PARTIES

AHI and Mr McGrath 129 Mr West QC, with Mr Gotting for AHI and Mr McGrath, submitted that the consultancy agreement was unfair on a number of bases: (a) the failure of CAA to pay, or for the consultancy agreement to require to be paid, AHI termination payments in accordance with cl 14.5 of the consultancy agreement;

(b) (in the alternative) the period of notice of termination specified in cl 14.1 of the consultancy agreement (six months) was inadequate;

(c) the non-compete restraint in cl 18 of the consultancy agreement was void ab initio as it was contrary to the public interest and did not protect a legitimate interest of CAA (alternatively, it provided greater than reasonable protection for the interest of CAA);

(d) the statement of entire understanding in cl 26 of the consultancy agreement was factually incorrect and, in any event, unfair;

(e) the consultancy agreement failed to contain clauses providing for procedural fairness prior to termination of the consultancy agreement. 130 As to the summary nature of the termination of the consultancy agreement, Mr West submitted that a contract between a principal and independent contractor may be an unfair contract on the basis of an inadequate period of notice of termination: ABC Radio Taxi Co-op Ltd v Matthews (unreported, Hungerford, Cullen and Schmidt JJ, CT 1287 of 1995, 8 March 1996); Port Macquarie Golf Club Limited v Stead (1996) 64 IR 53 at 67; Avis v AMP Society (unreported, Schmidt J, CT 1310 of 1995, 21 December 1995); Mitchell v International Pipelines Limited (1998) 87 IR 324. Mr West submitted that in determining a fair period of notice of termination the Court will have regard to common law notions of reasonable notice. Given the nature of the services provided by Mr McGrath to CAA, Mr West submitted it was appropriate to treat the factual situation akin to one of employment: Mitchell v International Pipelines Limited at 332. 131 Mr West submitted that the grounds relied upon by CAA and PHL to summarily terminate (or terminate for cause) the consultancy agreement did not justify the termination of the agreement. Mr West went to each of the grounds relied upon by CAA and PHL. 132 In relation to the provision to Dr Hazan of a $300,000 per annum remote rural site allowance by way of an agreement dated 7 October 1999 without prior Board approval, it was submitted that: (a) AHI did not breach the consultancy agreement concerning the provision of a bonus to Dr Hazan as the obligation to obtain prior Board approval was not in existence at the time the bonus was negotiated; and (b) AHI (through Mr McGrath) advised Mr McGuinness of the bonus through the May Management Budget; and (c) There was no doubt that even on Mr McGuinness' evidence, he had the site-by-site budget by July 1999; and (d) AHI (through Mr McGrath) advised the CAA Board of the Hazan bonus by the prospectus budget, a budget considered and approved by members of the Board in the due diligence committee. 133 In relation to the provision to Dr Ruut of bonus payments by way of an agreement dated 6 October 1999 without prior Board approval, it was submitted by Mr West that: (a) AHI did not breach the consultancy agreement concerning the provision of one-off payments to Dr Ruut as the obligation to obtain prior Board approval was not in existence at the time the payments were negotiated or formally recorded; and

(b) In any event, directors of CAA knew about the contractual terms with Dr Ruut and were sufficiently unconcerned about them not to take the matter further; and

(c) There was no evidence that CAA had paid Dr Ruut the first one-off payment which was an alleged "unauthorised" payment created by Mr McGrath; and

(d) (In the alternative) the provision of the first one-off payment was within the limit imposed by the consultancy agreement before Board approval was required; and

(e) CAA cannot become liable to pay Dr Ruut the second one-off payment as Dr Ruut will never complete a term of 5 years in accordance with the agreement. 134 In relation to the provision of increased bonus payments to Mr Siva Moodliar by approximately $50,000 by way of an agreement dated 6 September 1999 without prior Board approval, Mr West submitted: (a) AHI did not breach the consultancy agreement as the obligation to obtain prior Board approval was not in existence at the time the letter dated 6 September 1999 was signed; and

(b) The terms contained in the letter never took effect as the pre-conditions - that Mr Moodliar work on a part time basis and notify Mr McGrath of this fact - were not met;

(c) The letter of 6 September did not in fact increase the bonus payable to Mr Moodliar;

(d) (In the alternative) the letter only increased the bonus payable to Mr Moodliar by $10,000, within the limit imposed by the consultancy agreement before Board approval was required;

(e) There was no evidence that CAA had paid Mr Moodliar an increased bonus which was an "unauthorised" bonus created by Mr McGrath ( and therefore there was no relevant loss); (f) The potential of CAA to suffer loss from the letter in the future has been removed; and

(g) CAA was precluded from relying upon the alleged breach at this stage, given its decision not to rely upon it at the time of the termination of the consultancy agreement. 135 In relation to the proceedings against Dr Mansberg without the prior approval of the Board, Mr West submitted: (a) The proceedings were commenced against Dr Mansberg prior to AHI entering into the consultancy agreement and therefore cannot constitute a breach of the consultancy agreement;

(b) Mr McGuinness was informed of the intention to commence proceedings against Dr Mansberg and neither advised nor requested Mr McGrath to refrain from doing so; (c) Mr McGrath was not responsible for the payment of $5,000 by CAA towards the legal costs of Dr Mansberg; the basis for CAA having done so is nowhere apparent;

(d) The total cost of commencing the proceedings against Dr Mansberg (excluding the sum of $5,000) was in any event, less than the $25,000 limit imposed by the consultancy agreement; and

(e) CAA was precluded from relying upon the alleged breach at this stage, given its decision not to rely upon it at the time of termination of the consultancy agreement. 136 In relation to the provision of relocation expenses, cash bonus, tax equalisation payments and accommodation allowance for Mr Schenk without prior Board approval, Mr West submitted: (a) Mr McGrath advised Mr McGuinness of the negotiations concerning the consultancy agreement for Mr Schenk prior to the entry into the consultancy agreement;

(b) Mr McGrath advised the CAA Board that changes to the consultancy agreement for Mr Schenk would need to be made and that he was pursuing tax advice. It was plain according to Mr McGuinness that there was little discussion at the Board meeting on 3 November 1999 concerning this matter. Yet Mr McGrath says he went to the Board meeting fully armed with the details of the problems with Mr Schenk's contract. The minute of the Board meeting is poorly drafted - yet it is perfectly consistent with Mr McGrath's evidence as to how the matter was to be moved forward. 137 In relation to the taking of leave by Mr McGrath in December 1999 to January 2000, Mr West submitted: (a) Mr McGrath had informed Mr Cutbush (chairman of the CAA Board) and Mr McGuinness of his intention to take annual leave, neither of whom indicated that he should not take such leave; and

(b) (In the alternative) CAA was precluded from relying on a lack of authorisation for Mr McGrath to take leave when it knew of the position prior to terminating the consultancy agreement and chose not to rely upon it as a ground for summary termination. 138 In relation to the entry by Mr McGrath into the leasing commitments for the Dubbo practice without prior Board approval, Mr West submitted: (a) CAA cannot rely upon the alleged "unauthorised" commitments for the Dubbo practice as a ground for termination with cause when it knew of the position prior to terminating the consultancy agreement and chose not to rely upon it as a ground for summary termination;

(b) In any event, Dubbo and its creation was not a breach of the consultancy agreement;

(c) Nor was it conduct of which the Board of Directors of CAA disapproved. Indeed the float was to take place with all of the Dubbo features available for examination in the due diligence committee. 139 In relation to the lack of consultation with doctors causing loss and damage, Mr West submitted: (a) The doctors of both Rayscan and Sydney and South Coast were consulted by Mr McGrath;

(b) The complaints by doctors about lack of consultation were to a greater or lesser extent complaints that they did not agree with the actions of CAA;

(c) The quality of consultation may often be difficult to assess but it is not the task of the Court to assess the degree of quality of consultation. 140 In relation to the direction that CAA pay $US40,000 to the benefit of Mr McGrath in breach of a fiduciary duty arising from Mr McGrath being a director of CAA, Mr West submitted: (a) The payment was to offset funds which CAA owed Mr McGrath for the reimbursement of expenses which Mr McGrath incurred on behalf of CAA;

(b) The payment was treated as an "employee receivable" in the accounts of CAA until Mr McGrath provided the paperwork of the expenditure. The "employee receivable" was to be cleared before the end of the fiscal year (June 2000);

(c) A court of equity has not yet recognised as a fiduciary duty the obligation of a director to provide documentation in support of a claim for reimbursement. Equally a court of equity has not yet recognised as a fiduciary duty a claim for reimbursement prior to the director being reimbursed. Accordingly, the was no breach of fiduciary duty; (d) In any event, Mr Boulos, the alternate public officer of CAA and a person reporting to the Board of CAA, authorised the payment prior to the provision of documentation in support of the claim for reimbursement. Moreover, Mr Boulos reserved the right of CAA to review and reject the claim for reimbursement by treating the payment as an employee receivable. 141 Mr West submitted that in reality the reason for the termination of the consultancy agreement was the lack of confidence in Mr McGrath arising from his relationship with the doctors. He argued that it was only after this that CAA "reviewed the history of the relationship seeking to locate breaches". 142 Mr West submitted that AHI and Mr McGrath had not been accorded procedural fairness in the termination of the consultancy agreement. He referred to Abboud v State of New South Wales (1999) 92 IR 32 and Murphy v Australian Guarantee Corporation Limited [2000] NSWIRC 162 as authority for the proposition that a contract may be an unfair contract as it fails to require a party to investigate allegations fully prior to termination of the contract. He also referred to Pullen v R & C Products Pty Limited (1994) 60 IR 183 as authority for the proposition that a contract may be unfair as it fails to require a party to be appraised fully of facts prior to termination of the contract and to Walker v Hussman Australia Pty Limited (1991) 44 IR 404 (affirmed by the Court of Appeal as reported in (1994) 53 IR 121) as authority for the proposition that a contract may be unfair as it fails to require one party to afford the other party an opportunity to be heard prior to terminating the contract. 143 In examining the question of procedural fairness Mr West identified the following sequence of events: · On 3 December 1999 Mr McGuinness wrote to Messrs Beckwith and Johnson raising the possibility of terminating the consultancy agreement with AHI. However, the suggestion was in the context of Mr McGrath's value to the business and against the background of the doctors' discontent with Mr McGrath's management style. In his memorandum Mr McGuinness did not suggest termination of the consultancy agreement, save where McGrath would not agree to move to a marketing role. The memorandum also raised concerns over the failure by Mr McGrath to prepare proper feasibility studies and his failure to obtain Board approval. These concerns were not put to Mr McGrath; · Mr Beckwith received the letter referred to earlier in this judgment, from Drs Gale and Sachinwalla dated 3 February 2000. In his reply Mr Beckwith indicated he would discuss the issues raised in the letter with, among other people, Mr McGrath. He never did so. In fact, Mr Beckwith took the view that he would not hear Mr McGrath in his defence; · In February 2000 Drs Kitchener, Franklin and Ellison met with Mr Bruck in Sydney. The doctors raised with Mr Bruck their concerns with Mr McGrath as reflected in the letter written by Dr Franklin to Mr McGrath on 23 December 1999. The doctors did not however, discuss with Mr Bruck Mr McGrath's reply of 8 February 2000. Mr McGuinness was aware that Mr McGrath contested the doctors allegations in their letter of 23 December but he did not afford Mr McGrath an opportunity to respond to the allegations before the decision to terminate the consultancy agreement was made; · Mr Beckwith met with Drs Kitchener and Gale on 13 February 2000. Mr Beckwith decided, upon emerging from this meeting, that Mr McGrath had to be removed as a matter of urgency. Mr Beckwith resolved to do so without allowing Mr McGrath to raise matters in his defence; · Mr Beckwith indicated to Mr McGrath on 15 February 2000 that it was necessary to "part company". By this time Mr Beckwith had decided to terminate the consultancy agreement. He had only heard from the doctors and Mr McGuinness in deciding to terminate the agreement, yet he knew that Mr McGrath disputed the doctors' allegations; · CAA provided Mr McGrath with a "please explain" letter on 15 February 2000. The letter purported to quote cl 7 of the consultancy agreement but did so inaccurately, failing to cite the qualification to the clause. Mr McGuinness admitted the letter was "wrong" in this respect. The letter put Mr McGrath on notice that he had seven days in which to rectify the breaches referred to in the letter. Mr McGuinness regarded it as impossible for AHI to rectify the alleged breaches. CAA also sent the letter knowing the consultancy agreement was to be terminated. Mr McGuinness recognised that the letter did not convey the true intent of CAA and was "disingenuous"; · The "please explain" letter called for AHI to respond by 22 February 2000. Mr McGuinness understood that a response could be provided up until one minute to midnight on 22 February 2000. On the morning of 22 February CAA circulated a memorandum to its staff stating that Mr McGrath "was no longer with the company". Mr McGuinness believed that he had already terminated the consultancy agreement at this time. Mr McGuinness had not received the response of AHI at the time he wrote the memorandum to staff. By the time of the circulation of the memorandum Mr McGrath had not finalised his response to the "please explain" letter; · CAA advised AHI by letter on 29 February 2000 of the termination of the consultancy agreement. The letter stated that CAA had "carefully considered" the response of AHI, although such a statement was false as it had decided to terminate the consultancy agreement prior to receiving the response; · CAA did not provide Mr McGrath with an opportunity to comment upon: (a) the provision of an alleged increased bonus to Mr Moodliar without prior Board approval; (b) the commencement of proceedings against Dr Mansberg without prior Board approval; and (c) the taking of annual leave without prior Board approval, even though CAA was aware of all of these matters prior to 15 February 2000. CAA, through Mr McGuinness, had knowledge of: (a) the alleged increased bonus to Mr Moodliar at least from early December 1999; (b) the commencement of proceedings against Dr Mansberg at least from 14 October 1999; and (c) of the taking of annual leave at least from 5 January 2000. In truth the only director of CAA ( Mr McGuinness) did not have grounds to terminate the consultancy agreement "for cause". Mr Beckwith could not vote on such a question and neither could Mr Bruck. Mr Boulos, another director, was never consulted; the Board of CAA did not meet on the subject; · CAA advised AHI of the termination of the consultancy agreement by courier, as opposed to a face to face meeting. 144 Mr West analysed the provisions of cl 14 - Termination, of the consultancy agreement between AHI and CAA and the evidence associated with the operation of that clause. He submitted that when it was put to Mr McGrath in the course of discussing the draft agreements, he did not accept that if the consultancy agreement was terminated in accordance with cl 14.1 he would receive only six months notice, yet would be bound by the non-compete provisions of the agreement for a period of five years. Mr West submitted that Mr McGrath's evidence was that Mr McGuinness agreed to a pay out period of two years in return for a two year non-compete period. Mr West said that as far as Mr McGrath was concerned, the six months period in cl 14.1 was not operative and that the provisions of cl 14.5 were to be adjusted before execution of the agreement. Neither of these changes were made to the draft agreement, yet changes were made to the non-compete provisions of the agreement in that item 5 in the Schedule to the agreement was amended to two years. Mr West submitted that the non-compete provision where a termination is effected by CAA under cl 14.2 (the provision on which CAA did in fact seek to rely) was for two years or the balance of the term "whichever is the longer". The consequence of this for Mr McGrath was that he would receive no notice or payment in lieu because the consultancy agreement was terminated for cause under cl 14.2 and, but for CAA's subsequent waiving of the non-compete provisions of the agreement, he would not have been able to enter into competition with CAA for the balance of the term of the contract, ie., until 1 July 2004. 145 Mr West submitted that Mr McGrath should receive his fee for the balance of the contract period (ie., to 1 July 2004) because of the "thoroughly unprincipled manner in which the Applicants were treated by the Respondents, especially the shabby and misguided farce resorted to in an endeavour to set up a termination without cost to CAA". Alternatively, AHI should receive its fee for two years, as was represented to Mr McGrath in the negotiations over the terms of the consultancy agreement. 146 As to the further amended summons for relief filed by CAA and PHL, Mr West submitted that they failed to establish the alleged grounds of unfairness. CAA and PHL 147 Mr Hatcher for CAA and PHL canvassed the basis of the arrangements between Mr McGrath and PHL first negotiated in 1998 and culminating in the consultancy agreement executed between AHI and CAA on 12 October 1999. Mr Hatcher submitted that when one considered the various drafts of the agreement dated September 1999 and the nature of the changes to those drafts (particularly clauses 7.2 and 9), it was evident, he submitted, that Mr McGrath more than likely had an input into the drafts during September 1999. This meant, according to Mr Hatcher, that " if Mr McGrath at the time he executes the documents knows that the contract requires him to disclose expenditure by this time and, nonetheless, doesn't disclose it, it is a clear and flagrant breach of his obligations". 148 In relation to cl 14 - Termination, and the non-compete provisions of the consultancy agreement, it was Mr Hatcher's submission that Mr McGrath knew very well what he was committing to in executing the agreement on 12 October 1999. Clause 14.2 (5) enabled CAA to terminate the agreement without notice or payment in lieu in circumstances where Mr McGrath breached any term of the agreement and failed to rectify the breach after being given at least seven days' notice of the nature of the breach. In such circumstances the Schedule to the agreement restrained Mr McGrath from competing with CAA for the balance of the term of the agreement or two years whichever was the longer. Mr Hatcher conceded that cl 14.2 was an unusual provision but that it was not unfair in circumstances where Mr McGrath was "being paid a very generous sum of money …" and where his share options could be worth eight million dollars within three years. 149 Mr Hatcher submitted that the arrangement between CAA and PHL entitled CAA to terminate the arrangement for cause without payment under cl 14.2 of the agreement. 150 Mr Hatcher referred to the arrangement between Mr McGrath and PHL in relation to PHL's financial exposure. He submitted that the basis upon which Mr McGrath sought funding from PHL was that it would fund the first acquisition by CAA and thereafter CAA would be self-funding. Mr Hatcher further submitted that it was a term of the arrangement that Mr McGrath would only expend monies in accordance with business plans and budgets or specific approvals. Mr Hatcher submitted that because of the decisions and actions of Mr McGrath this arrangement in practice came to be that PHL was responsible for financing the ongoing operations of CAA. 151 In relation to the basis upon which the doctors were to be involved in the business, Mr Hatcher submitted that it was apparent from the evidence that PHL went forward with Mr McGrath on the basis of his representations that the doctors were to be involved in the running of the business. Further, that the doctors were led to believe that they had a real contribution to make to the management of the business. In practice Mr Hatcher submitted, the doctors were not involved in the running of the business; they were not consulted about decisions taken by CAA or Mr McGrath; where the doctors did proffer advice to Mr McGrath that advice was never followed, indeed it was positively resisted; the doctors were effectively treated as a rubber stamp in relation to all decisions. 152 Mr Hatcher addressed the question of unfairness in the arrangements between Mr McGrath and CAA/PHL. He submitted that there was nothing unfair in an arrangement whereby a managing director's engagement could be terminated for breaching his contract in a circumstance where the breach either is not, or cannot be, remedied. Mr Hatcher said this was particularly so "where the rewards are handsome and the parties go into an arrangement on an equal footing". Mr Hatcher said that there was also no unfairness in the way in which the arrangement operated. Mr McGrath, it was submitted, having obtained finance from PHL, proceeded to deal with CAA's business as if it were his own. He regarded himself as completely unconstrained. He sought approval from no-one; it was Mr McGrath's responsibility to ensure that the affairs of CAA were properly conducted and its dealings authorised, yet only one Board meeting was called in 1999 to consider financial and operational issues. Mr Hatcher submitted there was no duty on Mr McGuinness to monitor Mr McGrath's conduct or to regard himself as being on notice of Mr McGrath's failings. Mr McGrath "was paid handsomely to accept the responsibility for the proper conduct of the company's affairs. This he failed to do in a number of respects". 153 Mr Hatcher then proceeded to deal with Mr McGrath's alleged failings in respect of the Dubbo practice, the RADOS system, Mr Moodliar, Dr Ruut, Mr Schenk, the issue of Mr McGrath's fiscal irresponsibility and the relations between Mr McGrath and the doctors. Mr Hatcher contended that if the contract between AHI and CAA did not permit CAA to terminate the consultancy agreement without the payment of further monies, notwithstanding Mr McGrath's alleged misconduct, then the contract was unfair against CAA and ought be varied to permit such termination. 154 Mr Hatcher submitted that the arrangement between Mr McGrath and PHL relating to PHL's financial exposure, in practice, operated unfairly. PHL became liable for debts well in excess of the proposal Mr McGrath originally put forward and "did so in a quite chaotic fashion due to the fiscal irresponsibility of Mr McGrath". 155 To the extent that the doctors were not involved in the conduct of the business, in accordance with the representations that were designed to, and did, induce the doctors to enter into the arrangement with CAA, the arrangements were unfair, Mr Hatcher contended. This was an unfairness that was appropriately rectified by removing Mr McGrath from the management of CAA. CONSIDERATION 156 In these matters, AHI and Mr McGrath seek orders which I paraphrase as follows: (a) An order declaring that the consultancy agreement between AHI and CAA is unfair within the meaning of ss 105 and 106 of the Industrial Relations Act 1996; (b) An order declaring that for the purposes of cl 14.2 of the consultancy agreement (that is, the provision which enabled CAA to summarily terminate the agreement for cause), CAA may not summarily terminate the agreement based on the matters identified in the letter from CAA to AHI dated 29 February 2000; (c) An order declaring that, for the purposes of cl 3.3 of the option agreement between AHI and CAA, the consultancy agreement is not terminated by CAA with cause under cl 14.2 of the agreement; (d) An order declaring that the option agreement is unfair within the meaning of ss 105 and 106 of the Industrial Relations Act 1996; (e) An order declaring that the deed of covenant between Mr McGrath and CAA is unfair within the meaning of ss 105 and 106 of the Industrial Relations Act 1996; (f) An order declaring void ab initio cl 18 ( the non-compete provisions) of the consultancy agreement; (g) An order declaring void ab initio cl 8 (taking leave only with the consent of CAA's Board) of the consultancy agreement; (h) An order varying cl 14.1 of the consultancy agreement by providing for 24 months' notice of termination;

(i) An order deleting cl 26 (Entire Understanding) and inserting provisions that require CAA to properly investigate any allegations of breach and to afford AHI the opportunity to respond to any allegations; (j) Orders varying the consultancy agreement and the deed of covenant to provide that CAA must not during the period of the consultancy and at any time after termination engage in conduct that damages AHI or Mr McGrath; (k) An order deleting cl 4 of the option agreement and inserting in lieu thereof a provision to the effect that after termination of the consultancy agreement AHI is permitted to dispose of AHI equity at any time; (l) An order declaring that CAA is not entitled to redeem the class A convertible redeemable preference shares held by AHI in CAA; (m) An order that CAA and PHL pay to AHI monies relating to fees owing, unpaid expenses, compensation for damage and the balance of unpaid fee under the consultancy agreement to 30 June 2004; (n) An order for interest on an sum ordered to be paid by CAA and PHL to AHI; (o) An order for costs. 157 For their part, CAA and PHL sought the following orders: (a) an order declaring the consultancy agreement between AHI and CAA is unfair within the meaning of ss 105 and 106 of the Industrial Relations Act 1996;

(b) An order declaring that cl 14.2(5) of the consultancy agreement does not apply to breaches that are not able to be rectified;

(c) An order varying the consultancy agreement to provide that CAA may terminate the consultancy agreement immediately and without notice if it becomes aware that AHI has committed breaches of clauses 7 ( AHI's obligations) or 13 (duty of AHI to act in good faith and use best endeavours) of the agreement that cannot be rectified;

(d) An order varying the consultancy agreement to provide that AHI and Mr McGrath pay to CAA and PHL a sum to compensate for the loss suffered by them as a result of the breaches of the consultancy agreement by AHI. 158 Certain orders were sought by CAA and PHL in relation to the option agreement but in light of the undertaking by CAA and PHL that AHI's shareholdings would remain unaffected by the termination of the consultancy agreement, the application for these orders would now seem to be redundant. 159 The jurisdiction of the Commission in Court Session in these matters is not questioned by any of the parties; it was agreed that jurisdiction exists and clearly, on the facts and the law, that must be the case. 160 AHI and Mr McGrath contended that the agreements and deed of covenant (or arrangement within the meaning of s 106 of the Industrial Relations Act 1996) were unfair and, in a tightly argued case, set about attempting to show how this was so. The manner in which CAA and PHL terminated the consultancy agreement and the close analysis questioning the validity of each of the grounds used by CAA and PHL as supporting termination, were pivotal features of the case put on behalf of AHI and Mr McGrath. 161 The case pressed on behalf of CAA and PHL, in effect, invited me to take a global view of the facts in determining whether Mr McGrath and AHI had conducted themselves unfairly. Important features of Mr Hatcher's case were what he regarded as Mr McGrath's almost contemptuous treatment of the body of doctors, regarding them as little more than rubber stamps; Mr McGrath's attitude that CAA was his personal fiefdom and that he was accountable to no one; his reckless and irresponsible approach to expenditure; his failure to properly disclose information and his activities to the Board of CAA and its major shareholder. This conduct, Mr Hatcher submitted, was unfair against CAA and PHL and was more than sufficient justification for terminating the consultancy agreement between AHI and CAA. 162 A contract may be an unfair contract within the meaning of s 106 of the Industrial Relations Act 1996 either because of what it provides or fails to provide or because of surrounding circumstances and/or from the manner of performance or operation of the contract: Barry v Incitec Ltd (1991) 45 IR 143 at 146; Incitec Ltd v Industrial Court (NSW) (1992) 45 IR 155 at 157 (Gleeson CJ, Kirby P and Priestley JA); Walker v Industrial Court of New South Wales (1994) 53 IR 121 at 148; Port Macquarie Golf Club Ltd v Stead (1996) 64 IR 53 at 59; Beahan v Bush Boake Allen Australia Ltd (1999) 93 IR 1 at 32; Reich v Client Server Professionals of Australia Pty Ltd (Administrator Appointed) (2000) 99 IR 69 at 83 per Wright J, President, Walton J, Vice President, Hungerford J. 163 These authorities confirm that the approach I am to take in these matters, in determining whether there was unfairness, is to consider the operation of the contract - which necessarily means looking at the conduct of the parties, how the terms of the contract operated at the time of termination and the terms of the contract itself. In doing so, it is convenient to start by examining the evidence in relation to each of the matters which CAA and PHL alleged constituted unfairness on the part of Mr McGrath. In weighing up the evidence I am assisted by the longstanding observation of Sheldon J in Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 at 374 that unfairness of a contract or arrangement is to be determined according to "the common sense approach characteristic of the ordinary juryman … It is a plain matter of morals not law". The Doctors and Mr McGrath 164 In its further amended summons for relief, CAA claimed that Mr McGrath committed CAA to consult with the doctors in its subsidiary companies prior to embarking on substantial expenditure or important decisions but that, far from consulting, Mr McGrath refused to inform the doctors of decisions affecting them and their interest in CAA. As a consequence, it was claimed that CAA suffered loss and damage. It was claimed that the failure to consult breached cll 7.1, 7.2 and 13 of the consultancy agreement. 165 There was, as I have already noted, extensive material before me regarding the dissatisfaction of the doctors with Mr McGrath. Their dissatisfaction fell into three categories: 1) Mr McGrath's failure to consult with them about the business; 2) Mr McGrath's management style which the doctors regarded as too autocratic and his treatment of them as mere rubber stamps; 3) the doctors' increasing concern and anxiety that, under Mr McGrath's leadership, CAA was getting into serious financial difficulties, the business was suffering as a consequence and their reputations were being damaged. 166 Mr McGrath denied the doctors' complaints about his conduct towards them. As I noted earlier, it was part of his case that despite the fact that the doctors had sold their majority interests to CAA, they still wanted a say in the management of the business, a say which Mr McGrath was not prepared to give them beyond what the doctors' minority interests permitted; this was a source of frustration for the doctors who could not come to terms with the fact they no longer had ownership and control of their practices. 167 I have noted the manner in which Mr McGrath in his written correspondence with the doctors in his letters of 25 November 1999 and 8 February 2000, carefully and with precision, addresses each of their complaints and seeks to show why they are wrong and he is right. Mr McGrath is an articulate and highly intelligent man; he has considerable skills and experience in the business of healthcare and he is an accountant by profession. Nevertheless, I am unable to accept there were no grounds for the doctors' complaints against him. The weight and quality of the evidence from the doctors cannot be dismissed on the basis that they simply did not like Mr McGrath and were "out to get him", or that they could not come to terms with their minority role in the running of the business. To come to that conclusion I would have to accept there was a massive conspiracy by the doctors and other players against Mr McGrath and I simply do not consider that to have been the case. Moreover, there was far too much denial on Mr McGrath's part in relation to specific evidence by the various doctors and other witnesses, of words spoken or actions taken so as to lessen the credibility of parts of Mr McGrath's evidence. 168 I consider there was substance in Dr Gale's evidence that Rayscan management meetings chaired by Mr McGrath were held in the style of briefing sessions and the doctors were not provided with an opportunity to make real input into decisions. Further, if it did not suit his purposes Mr McGrath ignored sound advice given in good faith from doctors - the Canterbury acquisition is a good example of this. The decision to set up a practice at Dubbo was taken before any proper consultation with the Rayscan doctors; Mr McGrath had made up his mind before the management committee meeting on 22 March 1999 and he was deaf to any concerns expressed by the doctors about being able to employ a radiologist at Dubbo. 169 I consider that the doctors had good grounds to be concerned about the financial circumstances of CAA, especially from October onwards and that they were not being properly advised or consulted about expenditure. Clearly, the provision of budgets and monthly management accounts to the doctors were not sufficient to allay their concerns in the face of suppliers' complaints about not being paid and rent not being paid. The actions of the Rayscan doctors in February 2000 in seeking independent advice about the current financial position of the group underlined the genuine concern they held. 170 The role of the doctors, while in a minority in terms of the control of the business was, nevertheless, an important one. In fact, it was vital to the success of CAA. And although their interest in the business was in the minority it was still of the order of 40 per cent. Mr McGrath's attitude towards them, described on one occasion as patronising and as being treated as mere rubber stamps, left them feeling alienated and hostile. As the managing director and chief executive of CAA Mr McGrath should have recognised and acknowledged the importance of the role the doctors played in the business and treated them accordingly, especially in respect of the level and quality of his consultation with them. 171 I acknowledge that during 1999 Mr McGrath was extraordinarily busy, not only in developing and expanding the new business of CAA but also in his involvement in preparing for the public float of the business. This needs to be taken into account in assessing Mr McGrath's culpability in failing to properly consult with the doctors. The doctors themselves are not entirely free of blame either when it comes to assessing their relationship with Mr McGrath. It does seem that, from time to time, cooperation with Mr McGrath was less than ideal and that information from him was not always adequately disseminated to all the doctors by those responsible for doing so. Nevertheless, in weighing up the competing evidence, I find the weight of the blame falls on Mr McGrath. 172 Was the conduct by Mr McGrath towards the doctors grounds for summarily terminating the consultancy agreement pursuant to cl 14.2(5)? There are two important considerations here: The first is whether the punishment fitted the crime. The consequences for Mr McGrath of summary termination of the consultancy agreement, putting aside for the moment the concessions subsequently made by CAA and PHL in relation to shareholdings and restraint of trade, were quite devastating. Under the consultancy agreement he would have received no notice or payment in lieu, he would have been restrained from engaging in competition with CAA until 1 July 2004, all of AHI's termination shares would have been acquired by PHL under cl 3.3 of the option agreement and there was the prospect of CAA redeeming the convertible shares held by AHI in CAA. Secondly, it was never put to Mr McGrath, either by CAA's Board or the major shareholder until after a decision had been made to terminate the consultancy agreement, that his conduct towards the doctors was unacceptable. Furthermore, no opportunity was given to Mr McGrath to take steps to improve his relations with the doctors. 173 Mr McGuinness, a Board member of CAA and a representative of PHL, knew of the doctors' dissatisfaction with Mr McGrath by November 1999 at the latest, yet he chose to do nothing about it, including discussing it with Mr McGrath or calling a Board meeting to air the issue. Mr Bruck became aware of the doctors' concerns in late November but other than speak to Mr McGuinness about it, he also chose a course of non-action. Messrs Beckwith and Johnson were made aware by Mr McGuinness in his memorandum of 3 December 1999 that the doctors had lost confidence in Mr McGrath and this was subsequently reinforced to Mr Beckwith by the doctors in their correspondence and in face to face meetings with Mr Beckwith. But neither Mr Johnson nor Mr Beckwith took any action to have Mr McGrath modify his conduct towards the doctors, let alone provide him with an opportunity to explain himself and offer a defence to his conduct. 174 It may have been the case that had Mr McGrath been given the opportunity to mend his ways over a period of six to 12 months, that he did not take advantage of the opportunity. In those circumstances, there may have existed cause to terminate the agreement. But the state of relations between Mr McGrath and the doctors as at 29 February 2000 did not justify the application of cl 14.2(5) of the consultancy agreement and the consequences that flowed from it. The Dubbo Issue 175 In early 1999 Mr McGrath conceived and proceeded to implement, the setting up of the Dubbo practice without first consulting with the Board of CAA or the major shareholder in CAA and without input from the Rayscan doctors. There was some disagreement about the extent of the liability that Mr McGrath created for CAA in respect of Dubbo but it was either about $5.5 million or $8 million, depending upon whether one includes the cost of an MRI machine relocated from Campbelltown and the associated cost of cabling. 176 There was no conclusive evidence that, at the time he commenced to implement his plans to set up a practice at Dubbo, Mr McGrath was aware of a requirement to obtain Board approval or the consent of the major shareholder before committing CAA to such a level of expenditure. And, indeed, Mr McGrath denied there was any such requirement. I must say, however, I find it odd that, at the very least, a person in Mr McGrath's position would not inform the Board of his company of his intentions to commit the Company to a very significant liability and/or discuss it with the main financial backer of the business. Of course, Mr McGrath maintained that he did inform relevant persons through the Rayscan management committee and the May 1999 management budget, but it must be observed that at the Rayscan management committee meeting on 22 March, Dubbo was effectively presented by Mr McGrath as a fait accompli. This is consistent with Dr Gale's evidence that these management committee meetings were little more than briefing sessions. Further, the process for setting up Dubbo was well in train by the time the May 1999 management budget was distributed. 177 CAA submitted that expenditure of the kind associated with setting up the Dubbo practice had to be approved and the process for this was through the submission of budgets reflecting the proposed expenditure. Mr McGrath submitted that is precisely what he did in the May 1999 management budget and subsequent updates of that budget. He also pointed to the budget prepared in relation to the prospectus and evidence was adduced as to who had access to this information. One of the persons who did have access was Mr McGuinness. There was some disagreement about when Mr McGuinness had at his disposal information that may have alerted him to CAA's liability in respect of Dubbo, but it is my view it was about late August. However, it seems to me that it was not readily apparent from the May management budget, including the site by site material, that Mr McGrath had committed CAA to a liability in respect of Dubbo of $8 million. In this respect I am prepared to accept Mr Beckwith's evidence. It may have been the case that an accountant, on close examination and after making relevant inquiries, would have discovered the full extent of the liability. Mr McGuinness was an accountant but I am not convinced it was his role to pursue a line by line inquiry into the accounts in the nature of an audit. Why Mr McGrath or Mr Boulos did not simply make it clear in a note to the accounts that a significant liability in respect of Dubbo had been created of $5.5 million or $8 million - whichever is the appropriate figure - is something that has escaped satisfactory explanation. 178 Mr McGuinness said in his evidence that he first became aware of the $8 million figure in respect of Dubbo during the finalisation of the prospectus, in preparation for the public float in early October 1999 when he received a copy of the "penultimate final draft of the prospectus". The prospectus was lodged with ASIC on 11 October 1999 but an error was discovered and a revised version was lodged on 13 October 1999. I consider it is safe to assume that Mr McGuinness was aware of the $8 million figure in respect of Dubbo before 12 October, when the consultancy agreement between AHI and CAA was executed. 179 Even before this, however, Mr McGuinness said he formed the view (in early September 1999) that the Dubbo acquisition constituted unauthorised conduct on the part of Mr McGrath. This view seems to have been formed about the time Mr McGuinness realised that Dubbo was forecast to lose substantial money in its first year. After he realised this, Mr McGuinness spoke with Mr Johnson and as a consequence Mr McGrath was requested to produce a business plan in respect of Dubbo. This was done and Mr McGuinness received it, he said, about a week or ten days prior to the Board meeting on 3 November 1999. 180 Dubbo was the subject of discussion at the CAA Board meeting on 3 November 1999. While there was a difference of view about what the Board decided in respect of Dubbo, it is apparent that the Board felt there was little that could be done to retrieve the situation in light of the commitments made by Mr McGrath and in fact the official opening of Dubbo went ahead as planned. Despite the Board having every opportunity, it did not admonish Mr McGrath for not having obtained Board approval or warn him about the consequences of doing so again. Mr Beckwith was critical of Mr McGrath but he was not a member of CAA's Board and the criticism was not made in the context of the Board meeting. Mr Beckwith had no authority, per se, to dismiss Mr McGrath. 181 I have mentioned Mr McGuinness' role in relation to Dubbo. Mr Hatcher pressed the view that it was not Mr McGuinness' role to be constantly looking over the shoulder of Mr McGrath or monitoring McGrath's management of CAA and, therefore, he had no responsibility to intervene in Mr McGrath's management of CAA. I agree with this to a certain extent and, as I have said, I do not consider it was Mr McGuinness' role to analyse the monthly accounts line by line. I can understand, therefore, that he would not have picked up from the May management budget the full extent of CAA's liability in respect of Dubbo and, similarly, would not have done so from the prospectus budget which he had access to by late August 1999. On the other hand, however, it was not Mr McGuinness' role to sit mute in the face of what ultimately he alleged on behalf of CAA was serious misconduct on the part of Mr McGrath. Having formed the view in September 1999 that Mr McGrath had exceeded his authority in relation to Dubbo, Mr McGuinness had a duty to protect PHL's investments and a duty as a director of CAA to act to protect CAA's interests in the face of what he perceived to be misconduct by its managing director. 182 Mr McGuinness was alert to the prospect of a significant financial commitment in respect of Dubbo by late August to mid September and formed a view that Mr McGrath had exceeded his authority in making this commitment. He requested a business plan from Mr McGrath that appears to have been constituted by the Dubbo Feasibility Study that Mr McGuinness received a week or so prior to the Board meeting on 3 November 1999. Mr McGuinness knew about the $8 million figure in respect of Dubbo before the consultancy agreement was executed on 12 October 1999. Despite this, he took no action at or before the Board meeting against Mr McGrath and his conduct in relation to Dubbo. But in the 'please explain' letter from CAA to AHI signed by Mr McGuinness on 15 February 2000 he alleged that AHI had breached the consultancy agreement by committing CAA to leasing liabilities at Dubbo for amounts in excess of $5 million. 183 In his subsequent letter on 29 February 2000 terminating the consultancy agreement, and after having given "careful consideration" to Mr McGrath's letter of 22 February, Mr McGuinness did not refer to Dubbo as a reason for terminating the consultancy agreement. A reasonable inference to be drawn from this is that CAA accepted at the time it terminated the agreement that it could not sustain the position that AHI had breached the agreement in relation to Dubbo. I seems to me that Mr West was correct in submitting that having relied on Dubbo as a ground for terminating the agreement on 15 February 2000 and then having abandoned it on 29 February 2000, CAA cannot now rely on it as a ground for summary termination of the agreement. 184 In any event, I do not think it can be said that AHI (or Mr McGrath) did breach the consultancy agreement in relation to Dubbo. CAA claimed in its further amended summons that Mr McGrath's failure to obtain CAA Board approval in relation to the Dubbo practice was a breach of clauses 7.1, 7.2 and 13 of the consultancy agreement. Clause 7.1 of the agreement dealt with AHI's obligations in providing services to CAA. The obligations included the performance of duties vested in or assigned to AHI by the CAA Board and using best endeavours to promote the interests and welfare of CAA. Clause 7.2 was quoted earlier in this judgment and provided, subject to certain exceptions, that AHI was not to enter into any contract or agreement on behalf of CAA without the prior approval of the Board. Clause 13 referred to the requirement for AHI to act in good faith and, amongst other responsibilities, to furnish a full and correct explanation of all transactions to CAA and to disclose to CAA all information or knowledge which AHI possessed in relation to the affairs, business and activities of CAA. 185 The evidence shows that the consultancy agreement was executed by Mr McGrath on 12 October 1999 and backdated to 1 July 1999. The evidence about when Mr McGrath would have first seen the obligations referred to in clauses 7.1, 7.2 and 13 was not conclusive. Mr McGrath insisted he did not see a draft agreement until 1 October 1999. Messrs Watkin and McGuinness said that Mr McGrath was provided with a draft in September. In any event, the financial commitments made by Mr McGrath on behalf of CAA in respect of Dubbo were made well before September 1999 and I do not see how the consultancy agreement could create obligations concerning the authority of Mr McGrath in respect of events that had already passed. Moreover, Mr McGuinness knew about the Dubbo liabilities at the time the consultancy agreement was executed and, indeed, had by then formed a view that Mr McGrath had exceeded his authority in respect of Dubbo. Mr McGuinness took no action against Mr McGrath and neither did the CAA Board prior to or at its meeting on 3 November 1999. 186 In all the circumstances, despite my opinion that Mr McGrath acted in a manner that might be considered less than proper for a managing director in failing to provide, in a timely manner, full and frank disclosure of his activities in relation to Dubbo, I am unable to find that in the context of the consultancy agreement, he acted without the authority of the CAA Board. It follows, in my view, that the Dubbo issue did not constitute a ground for terminating the consultancy agreement under cl 14.2(5) of that agreement. The Hazan Issue 187 CAA claimed in its further amended summons that the contract to employ Dr Hazan, dated 7 October 1999, as a radiologist at the Dubbo clinic with a remote rural site allowance of $300,000 per annum, was a breach of the consultancy agreement because it was made without Board approval. Reliance was placed on clauses 7.1, 7.2 and 13 of the consultancy agreement. The Hazan issue was also one of the grounds expressed in CAA's letter to AHI on 29 February 2000 for terminating the agreement. 188 The allowance of $300,000 payable to Dr Hazan was well in excess of what was generally paid to other doctors within Rayscan. The reason it was paid to Dr Hazan was because of the difficulty of attracting a radiologist to a remote location such as Dubbo - a problem Mr McGrath was adequately warned about but failed to heed. By August 1999, CAA were becoming somewhat desperate to attract a radiologist to Dubbo because the practice was to open on 25 October 1999. 189 It would appear that the reason why CAA relied on the Hazan issue, as opposed to the Dubbo issue, to terminate the consultancy agreement in the letter of 29 February 2000, was that the contract between Dr Hazan and CAA, which provided for the allowance, was executed on 7 October 1999 - reasonably proximate to when McGrath executed his consultancy agreement on 12 October 1999. As I understand CAA's position, in executing the Hazan contract Mr McGrath would have been aware of his obligations under clauses 7.1, 7.2 and 13 of the consultancy agreement because he had a copy of the draft of that agreement at the latest, by 1 October 1999. Despite being aware of these obligations on him Mr McGrath did not fulfil them in respect of the contract he had entered into with Dr Hazan on behalf of CAA. 190 Given Mr McGrath's apparent view that it was unnecessary for him to first seek Board approval before embarking on an expenditure of some millions of dollars in respect of the Dubbo practice, it was unlikely that he regarded the expenditure of an extra $300,000, to be paid to the Dubbo doctor as a bonus, as warranting prior Board approval. And, indeed, he did not seek it at the time he negotiated the arrangement with Dr Hazan in August 1999. Of course, Mr McGrath's obligation under the consultancy agreement to obtain Board approval in respect of the allowance payable to Dr Hazan was not in existence when he negotiated the arrangement. The question is whether Mr McGrath should have sought Board approval prior to executing the contract with Dr Hazan on 7 October 1999 knowing his forthcoming obligation to do so under the consultancy agreement? 191 There are three things to be said about this: Firstly, at the time the agreement was executed with Dr Hazan the provisions of the consultancy agreement did not apply and given that the grand opening for Dubbo was scheduled for 16 October there would have been some urgency in finalising Dr Hazan's contract of employment. Secondly, the deal with Dr Hazan had been done; execution was a formality. It was unlikely that even if Mr McGrath had sought Board approval before execution that the Board would have disapproved, given the imminent opening of Dubbo and the prospect of being sued by Dr Hazan. Thirdly, unlike the leasing liabilities in respect of Dubbo, the doctor's bonus and doctor's drawings at Dubbo are readily apparent from the May 1999 management budget and the prospectus budget. A glance at the Dubbo sheet in these budget papers shows what was proposed. Mr McGuinness had access to the May management budget from about July and to the prospectus budget from late August. It was reasonable for Mr McGrath to assume that Mr McGuinness knew of the proposed allowance for Dr Hazan and given that Mr McGuinness had made no complaint about it up to the time the contract with Dr Hazan was executed, it was reasonable for him to assume the allowance was not an issue. Indeed, Mr McGuinness was a member of the due diligence committee that approved the prospectus budget. If Mr McGuinness did not know about the proposed allowance he should have, because it was evident from the relevant budget papers of which Mr McGuinness had copies. 192 Mr McGuinness said in his evidence he did not become aware of the allowance payable to Dr Hazan until after he saw the Dubbo feasibility study just prior to the 3 November Board meeting. It was open to Mr McGuinness to raise the issue of the allowance at the Board meeting in the context of the failure of Mr McGrath to obtain prior Board approval. He did not do so. 193 The Hazan issue did not constitute a ground for terminating the consultancy agreement under s 14.2(5) of that agreement. The Ruut Issue 194 CAA claimed in the further amended summons that the contract to employ Dr Ruut as the radiologist at the Canterbury practice dated 6 October 1999 was made without the prior approval of the CAA Board and was in breach of the consultancy agreement (clauses 7.1, 7.2 and 13). This claim was also one of the two grounds referred to in CAA's letter to AHI on 29 February 2000, terminating the consultancy agreement. In the letter of 29 February, however, the breach referred to included the agreement to purchase the Canterbury practice, whereas in the summons the claim was confined to the employment contract with Dr Ruut. 195 The agreement to assign the Canterbury lease to CAA and the terms of Dr Ruut's employment were negotiated by Mr McGrath on 6 July 1999. A term sheet relating to the purchase was signed by Mr McGrath and Dr Ruut on 23 July 1999. Once again, Mr McGrath embarked on the purchase of Canterbury and the employment of Dr Ruut without first seeking Board approval and in the absence of any discussion with a Board member or the major shareholder. Mr McGrath was advised by Dr Gale not to proceed with the purchase for reasons which I consider were quite sound. Nevertheless, Mr McGrath went ahead with the purchase. Mr McGrath maintained there was no specific requirement for him to first seek Board approval for a purchase such as Canterbury, or for entering into an employment agreement such as that with Dr Ruut. Be that as it may, as at July 1999, the purchase of Canterbury and the employment agreement with Dr Ruut were additional examples of Mr McGrath's lack of regard for paying his Board or the major shareholder the common courtesy of informing them, beforehand, of his intentions. His failure to do so underlined his generally poor attitude to consultation with stakeholders in the business and in that limited sense Mr McGrath contributed to the situation that ultimately befell him. 196 The question is, however, whether Mr McGrath's actions in relation to Canterbury and Dr Ruut were of such a nature as to justify terminating the consultancy agreement under cl 14.2(5). Mr McGrath stated in his evidence that he sent a copy of the term sheet, signed by him and Dr Ruut, to Mr McGuinness as well as to Mr Watkin. Mr McGrath's evidence was that at a meeting in September Mr Watkin handed to him execution copies of the Canterbury purchase agreement and Dr Ruut's employment contract. These were executed on 6 October 1999 and refer to CAA's obligation in respect of the two payments of $25,000. 197 Mr McGuinness said he did not recall receiving the term sheet and that it was unlikely he would have received it and not read it. Whether or not Mr McGuinness received a copy of the term sheet, it was clear from the evidence that he was aware of the Canterbury purchase from about August onwards, although the evidence suggested he was not aware at this time, of the detail of the two $25,000 payments to Dr Ruut negotiated by Mr McGrath as part of the employment agreement. It was clear from the evidence that there were reservations about the advisability of proceeding with the purchase of Canterbury, based on the concerns expressed by Dr Gale. Mr McGuinness shared these concerns but the advice from Mr Watkin was that any attempt to avoid the purchase might endanger the prospects of floating CAA if Dr Ruut sued for breach of promise and so nothing was done, arising out of that meeting, to stop the purchase going ahead. 198 Mr McGuinness said that after becoming aware of the terms of the employment contract with Dr Ruut, he had a conversation in early December 1999 with Mr McGrath and asked why he had agreed to the two payments of $25,000 when the business was virtually bankrupt and Dr Ruut was in no position to demand such payments. 199 Both the purchase agreement and the employment contract were negotiated in July 1999 and executed on 6 October 1999. Mr McGuinness was well aware of the purchase proposal prior to Mr McGrath executing the consultancy agreement on 12 October but, it seems, not the two payments of $25,000 in the employment agreement until late November or early December. This appears to be the reason why CAA's complaint in its summons was limited to the employment agreement and not both that agreement and the purchase agreement. This was despite the fact that, if it could be said prior Board approval had not been obtained in respect of the employment agreement, it had also not been obtained in respect of the purchase agreement. 200 In any event, the agreement to assign the Canterbury lease to CAA and the employment agreement with Dr Ruut were made in July. The execution of those agreements was a formality. Accordingly, the obligation on Mr McGrath to obtain prior Board approval was not in existence either at the time the agreements were negotiated or, for that matter, at the time of execution. However, Mr McGrath may be taken to have been aware, from drafts of the consultancy agreement received before 6 October, of his impending obligations under clauses 7.1, 7.2 and 13. As I understand it, CAA relied on this fact to submit that Mr McGrath should have sought Board approval and should have disclosed to CAA the details of the employment agreement before executing the agreements on 6 October. 201 In this respect, I think it was reasonable for Mr McGrath to assume that Mr McGuinness as a director of the CAA Board, was aware of the purchase agreement and the employment agreement in respect of Canterbury. Mr McGrath was of the belief that he had sent a copy of the term sheet to Mr McGuinness in July; Mr McGuinness acknowledged that Mr McGrath was of this belief as a consequence of the discussion he had with Mr McGrath about Canterbury in December. There was no attempt on Mr McGrath's part to hide the arrangement with Dr Ruut. If that was the case, Mr Watkin, presumably, would not have been given a copy of the term sheet to enable his firm to draft formal agreements. Further, Mr McGuinness participated in the due diligence committee meetings where Canterbury was discussed, including whether CAA should proceed with the purchase, although there is no direct evidence that the two $25,000 payments were the subject of specific consideration at those meetings. 202 Believing that Mr McGuinness was fully aware of the purchase agreement in respect of Canterbury and knowing that cancellation of the agreement had already been considered and rejected, Mr McGrath had no reason to think that prior to executing the purchase agreement on 6 October 1999 there was such a level of concern within CAA that he should obtain Board approval before executing the agreement. In my view the same goes for the employment agreement with Dr Ruut. In these circumstances, I consider that any summary termination of the consultancy agreement on the grounds that Mr McGrath did not seek prior approval of the CAA Board in accordance with cl 7.2 of the consultancy agreement, and did not disclose the details of Dr Ruut's employment agreement to CAA in accordance with cl 13 of the consultancy agreement, was harsh and unwarranted. The Moodliar Issue 203 CAA claimed in its further amended summons that in negotiating an agreement on 6 September 1999 with Mr Siva Moodliar, which increased potential bonus payments to Mr Moodliar by up to approximately $50,000 without the prior approval of the CAA Board, Mr McGrath breached the terms of clauses 7.1, 7.2 and 13 of the consultancy agreement. 204 The Moodliar issue was not one of the grounds referred to in the letter of 29 February terminating the consultancy agreement between AHI and CAA but it was referred to in the letter of 15 February. 205 The complaint by CAA was that while CAA, through Mr McGuinness, had accepted the fact that Mr Moodliar was to be paid a bonus according to the term sheet given to Mr Moodliar by Mr McGrath in June 1999, the letter signed by Mr Moodliar and Mr McGrath on 6 September materially changed the term sheet. The term sheet provided for an annual bonus calculated as one per cent of gross revenue of all new business identified to accrue from the Campsie practice and any approved new locations opened and initiated by Mr Moodliar subject to at least $1,000,000 gross receipts being generated. The letter of 6 September provided that Mr Moodliar would receive one per cent of gross receipts for Campsie and Canterbury and that this would apply whether Mr Moodliar worked full time or part time. The limitation that at least $1,000,000 of gross receipts had to be generated before a bonus was payable was not included in the 6 September letter. 206 Mr McGuinness claimed that he was not made aware of the terms of the 6 September letter until late December 1999 or early January 2000 and that Mr McGrath was not authorised to make such an agreement. 207 There was an argument by Mr West that the difference between the June 1999 term sheet and the 6 September amounted to no more than $10,000 and not $50,000. However, I think the point here is this: That Mr McGrath entered into an agreement with Mr Moodliar in June 1999 as expressed in the term sheet and he entered into a somewhat different arrangement in September. On both occasions he did it without Board approval. Thus, it appears that Mr McGuinness accepted the term sheet and took no objection to the fact that there was no prior Board approval, but did not accept the 6 September letter because he was not aware of it and objected on the grounds that there was no prior Board approval. 208 I think this selective approach to Mr McGrath's transgressions tends to reinforce Mr West's argument that "the relationship between the Applicants [AHI and Mr McGrath] and the First Respondent [CAA] broke down and then (and only then) the First Respondent reviewed the history of the relationship seeking to locate breaches". 209 In any event, the agreement between CAA and Mr Moodliar in the letter of 6 September 1999, which was executed on 25 September occurred before it could be said that any obligation existed for AHI to obtain prior Board approval under the consultancy agreement. Moreover, I agree with Mr West's submission that CAA is precluded from relying on the Moodliar issue at this stage to support a breach of the consultancy agreement, given its decision not to rely upon it at the time of termination of the consultancy agreement. The Mansberg Issue 210 CAA claimed in its further amended summons that AHI had breached the consultancy agreement by instructing solicitors to commence proceedings for breach of contract on behalf of a wholly owned subsidiary of CAA, namely, Sydney and South Coast, against Dr Mansberg, without the prior approval of the Board of CAA. Further, that AHI had exposed CAA to an inability to engage further doctors by causing Sydney and South Coast to bring proceedings against Dr Mansberg. 211 There was an issue in the proceedings about when Mr McGrath instructed DGJ to institute proceedings against Dr Mansberg for breach of contract - whether it was shortly before 12 October 1999 when Mr McGrath signed the consultancy agreement or shortly after it and before the meeting with doctors on 14 October. Mr McGrath maintained that it was prior to 12 October and that he had informed Mr McGuinness at the time. Mr McGuinness said that while he was aware of the Mansberg issue in mid-September he did not become aware that actual proceedings had been instituted by CAA until the meeting with doctors on 14 October. 212 Clearly, Mr McGuinness was aware of the proceedings against Dr Mansberg by mid-October at the latest. Mr McGuinness chose to take no action in this respect against Mr McGrath for breach of the consultancy agreement, despite the fact that he had every opportunity to raise the matter in the CAA Board meeting on 3 November. At no time was Mr McGrath asked to refrain from instituting the proceedings or to withdraw the proceedings. I consider that summary termination of the consultancy agreement on the basis of the Mansberg issue was unfair. The Schenk Issue 213 CAA claimed in its further amended summons that AHI had breached the consultancy agreement by entering into a contract with Michael Schenk where Mr McGrath had agreed to payments to Mr Schenk that were not first approved by CAA's Board. 214 The evidence in relation to this issue is in direct conflict. Mr McGrath maintained that the Schenk issue was a matter for discussion at the CAA Board meeting on 3 November and at that meeting he referred to the terms of the offer to Mr Schenk. In the course of doing so, Mr McGrath explained that Mr Schenk had proposed a number of amendments but that his main problem was tax parity. Mr McGrath said to the Board that it was necessary to obtain advice on the tax parity issue for Mr Schenk. It was Mr McGuinness' evidence that Mr McGrath merely informed the Board of the offer made to Mr Schenk in August and definitely did not mention the tax parity issue. Mr McGuinness also said in his evidence that the offer to Mr Schenk was approved subject to reviewing and approving the final contract. In this respect, the Board minutes state: "All Board members reviewed Mr Schenk's agreement. It was agreed that this was a critical role and to ensure his commitment a draft contract will be available in December 1999 for review prior to his appointment in February 2000". 215 Whether or not Mr McGrath did, in fact, raise the tax parity issue at the Board meeting is simply not clear to me. I note that he did subsequently seek advice from PriceWaterhouseCoopers regarding the issue and received a letter of advice on 11 February 2000. That letter of advice appears to suggest that the US equivalent of an Australian salary of $150,000 was $96,000. If superannuation payments were added and US tax was deducted the figure became $US 78,397 which was equivalent to $A122,495. How the salary of $195,000 came to be paid to Mr Schenk was not clear from the evidence. 216 While the minute of the 3 November Board meeting in relation to Mr Schenk could have been drafted with more precision, I am inclined to the view that the intention was that any final contract with Mr Schenk was to be reviewed and approved by the Board before it was executed. Mr McGrath did not do that and it could, therefore, be argued he was in breach of the consultancy agreement. However, the matter is not clear cut. It is one person's word against another and I note that CAA and PHL did not call any other member of the CAA Board who was present at the meeting to corroborate the evidence of Mr McGuinness, despite there being no apparent impediment to doing so. In those circumstances, I am not prepared to find that CAA was justified in summarily terminating the consultancy agreement between AHI and CAA on the ground of the Schenk issue. The Annual Leave Issue 217 In its further amended summons CAA claimed that AHI had breached the consultancy agreement by not providing services and not ensuring that Mr McGrath attended to the business of CAA during the period 24 December 1999 to 14 January 2000 without Board approval. It was claimed that this was a breach of clauses 7.1, 8 and 13 of the consultancy agreement. 218 Mr McGrath said in his evidence that he had advised the chairman of CAA, Mr Cutbush that he would take leave over Christmas. Mr Cutbush was not called by CAA in relation to this matter. Mr McGrath also said in his evidence that he informed Mr McGuinness of his intention to take leave over Christmas. Mr McGuinness acknowledged that Mr McGrath did mention he would be taking leave but had the impression it would only be over the period between Christmas and New Year. In his affidavit, Mr Boulos expressed some consternation at Mr McGrath being absent during a critical period when CAA was in the depths of a cash flow crisis and being uncontactable. However, under cross examination, Mr Boulos conceded that at the time Mr McGrath had taken leave there was little he could have done about the crisis. 219 I must say, it does surprise me that Mr McGrath would have been virtually incommunicado for a period of three weeks when CAA was experiencing a serious cash flow crisis which left CAA in the situation of "surviving day to day" according to Mr Boulos. Nevertheless, in the absence of any evidence contradicting that of Mr McGrath in relation to his conversation with CAA's chairman and Mr Boulos' evidence that even if Mr McGrath was present there was little he could have done about the cash flow crisis, I am left with Mr McGrath's version of events. In those circumstances I am unable to find that Mr McGrath's absence on leave was unauthorised. Consequently, it was not a ground supporting summary termination of the consultancy agreement. The Expenses Issue 220 In its further amended summons CAA claimed that the direction by Mr McGrath to CAA to pay into his account an amount of $US40,000 in August 1999 as reimbursement of expenses without providing supporting documentation and without providing CAA with the opportunity to review and reject the claim, breached Mr McGrath's fiduciary duty to CAA. 221 The action of McGrath in directing payment into his account of a very substantial amount for reimbursement of expenses, without any supporting documentation, and his subsequent dismissal of his failure for six months to provide support for his claim by saying the task was "too laborious", could hardly be described as a responsible and proper practice on the part of a senior executive. Nevertheless, the payment was treated as an 'employee receivable' and presumably Mr McGrath would have been required to account for the claimed expenditure by the end of the fiscal year, 30 June 2000. In other words, at year end CAA would have had the opportunity to review and, if necessary, reject the claim. Until that occurred, and depending on the outcome, I cannot see how it could be said there was a breach of fiduciary duty on Mr McGrath's part. The Cash Flow Crisis 222 It was not alleged by CAA and PHL that AHI and Mr McGrath had caused the cash flow crisis and it was not claimed in their further amended summons for relief that the consultancy agreement was unfair by reason of the cash flow crisis. However, there was a substantial amount of material presented about the cash flow crisis and Mr McGrath's contribution to its making. The crisis, it seems to me, came about for a number of reasons to which I referred to earlier in my judgment. A very significant cause was the MRI issue and, of course, this was well outside the control of CAA and its managing director. 223 Considering the whole of the evidence relating to the cash flow crisis, I have come to the view that Mr McGrath's role in managing it and protecting the interests of CAA and its shareholders, was less than satisfactory. Mr Boulos' evidence, which I accept, and which is corroborated by evidence of the doctors, indicates that despite the cash flow crisis Mr McGrath pressed ahead with all his plans, including the taking out of new leases of premises that CAA could not really afford "based on a premise that there was money going to come from somewhere". I have taken this into account in weighing up the competing contentions of unfairness in the agreement between the parties. Termination of the Consultancy Agreement 224 It is clear from the evidence relating to the termination of the consultancy agreement that it was terminated in what Mr West described as a "thoroughly unprincipled" manner. Messrs Beckwith, Johnson and McGuinness had made up their minds to terminate the agreement when the letter of 15 February was handed to Mr McGrath and whatever Mr McGrath's response was to be to the allegations in the letter it would have made no difference to the decision to terminate. To add insult to injury, before CAA had received Mr McGrath's response to the allegations in the letter of 15 February, CAA's staff were informed that Mr McGrath "was no longer with the company". 225 There was no proper inquiry into the allegations by the doctors against Mr McGrath, their complaints being taken virtually on face value; Mr McGrath was given no genuine opportunity to defend his position; there was no attempt to constitute a meeting of CAA's Board, which was the proper venue for the allegations against Mr McGrath to be aired and determined; there was no attempt by Messrs McGuinness, Beckwith and Johnson to engage in any dialogue with Mr McGrath about his perceived shortcomings and provide him with any opportunity, within a reasonable period of time, to rectify them. 226 In light of the manner in which the consultancy agreement was terminated it is difficult to resist the inference that Mr West would have me draw, namely, that the decision to terminate was made before any consideration was given to whether there were proper grounds and, further, that the termination was sought to be achieved without any cost to CAA. 227 The letter of 29 February 2000 from CAA to AHI terminating the consultancy agreement did so pursuant to cl 14.2(5), which provided for termination for cause without notice and without any payment instead of notice. Clause 14.5 provided that CAA may terminate the agreement without cause and without prior notice of termination if it paid to AHI the balance of the unpaid fee as if the consultancy had run for the full term of the agreement. Mr West argued that because CAA had no cause to terminate the agreement, it could only be terminated under cl 14.5 because although cl 14.1 allowed either party to terminate the agreement at any time by giving at least six month's written notice to the other party, or payment, or forfeiture instead, cl 14.1 was subject to cll 14.2-14.5 inclusive. 228 I have earlier referred to the evidence relating to the negotiation of the consultancy agreement and the proposals to amend it. As I noted earlier, no amendment was made to cl 14.1 as to the period of notice. Consequently, at the time of termination of the agreement, the agreement provided, by virtue of cl 14.1, that AHI could terminate the agreement by six months notice or forfeiture in lieu and AHI would be restrained from competing against CAA for a period of 24 months. Moreover, the agreement provided that in circumstances of termination by CAA for cause under 14.2, the non-compete period was the balance of the term of the agreement or two years which ever was the longer. CONCLUSIONS 229 I find that the consultancy agreement between AHI and CAA, made on 12 October 1999 was a contract whereby work was performed in an industry; the option agreement made between PHL and Mr McGrath on the same date was a contract whereby work was performed in an industry; the deed of covenant between CAA and AHI made on the same date was an arrangement, or alternatively, collateral arrangement to the consultancy agreement, whereby work was performed in an industry. These transactions were, therefore, contracts within the meaning of s 106 of the Industrial Relations Act 1996. 230 Having regard to the evidence in Matter No. IRC 908 of 2000 and the analysis in this judgment of the issues upon which CAA and PHL relied to summarily terminate the consultancy agreement, I have come to the conclusion that the consultancy agreement and the deed of covenant were unfair within the meaning of s 106 of the Industrial Relations Act 1996 for the following reasons: (1) The consultancy agreement and deed of covenant restrained AHI and Mr McGrath from engaging in competition with CAA for a period of the balance of the term of the consultancy agreement or two years, whichever was the longer, in circumstances where the consultancy agreement was terminated for cause by CAA without notice or payment instead of notice. (2) The consultancy agreement did not make any provision for CAA to investigate properly any allegation of breach of the agreement by AHI before CAA exercised its right under cl 14.2(5).

(3) The consultancy agreement did not afford AHI the opportunity to respond to any allegation of breach of the agreement before CAA exercised its right under cl 14.2(5).

(4) The consultancy agreement did not require CAA to consider any response by AHI before CAA exercised its right under cl 14.2(5) of the agreement. (5) CAA did not investigate properly the allegations of breach of the agreement by AHI before CAA summarily terminated the agreement. (6) CAA did not afford AHI the opportunity to respond to any allegation of breach of the agreement before CAA summarily terminated the agreement. (7) The decision by CAA to terminate the agreement was to be irrevocable and was to be implemented regardless of any response by AHI to the allegations against it.

(8) The consultancy agreement was terminated pursuant to cl 14.2(5) of the agreement without cause. 231 In a letter from Mr Johnson dated 25 May 2000 to AHI, PHL purported to exercise its call option pursuant to cl 3.3 of the option agreement to acquire all of the termination shares (shares held by AHI in CAA) at an exercise price of $1 in aggregate. I have found that CAA did not have grounds for summarily terminating the consultancy agreement and, accordingly, PHL had no right to purport to acquire all of the termination shares held by AHI. I note, however, that counsel for CAA and PHL indicated that whatever shareholding AHI held in CAA immediately before the termination of the consultancy agreement on 29 February 2000, that shareholding remained unaffected by the termination and any purported claw back was of no legal effect. Nevertheless, AHI and Mr McGrath sought an order declaring that, for the purposes of cl 3.3 of the option agreement, the consultancy agreement was not terminated by CAA with cause pursuant to cl 14.2 of the consultancy agreement. 232 AHI and Mr McGrath also sought an order declaring that CAA was not entitled to redeem pursuant to rule 98.2(1) of CAA's Constitution made on or about 10 February 2000 the class A convertible preference shares held by AHI in CAA. A "leaver" is defined in rule 98.2(9) of CAA's Constitution as "any holder of convertible shares who is employed by any member of the Group from time to time (a) who dies; or (b) who ceases to be an employee of any member of the Group and does not continue (or who is not immediately re-employed) as an employee of any other member of the Group." In order for a person to be a "bad leaver" the person must be (a) a shareholder (b) who is a "leaver" (c) as a result of the leaver (amongst other things) (i) resigning as an executive director, consultant or employee or (ii) being dismissed in circumstances of "material breach". Notwithstanding the reference to "consultant", it would appear that a "bad leaver" is an employee, that is, one who is subject to a contract of service and not a contract for services. Mr McGrath was engaged under a contract for services. In my opinion, the "bad leaver" provisions would have no application to either AHI or McGrath. In any event, Mr McGrath did not resign and, given my findings in this matter, was not dismissed for material breach. 233 I intend to make orders reflecting these findings. 234 CAA claimed in the further amended summons in Matter No. IRC 2342 of 2000 that the consultancy agreement was unfair, harsh, unconscionable and contrary to the public interest in that cl 14.2(5) should specify that it does not apply to breaches of the consultancy agreement that are not able to be rectified. Consequently, CAA sought orders varying the consultancy agreement to provide that CAA was entitled to terminate the consultancy agreement as soon as it became aware that AHI had committed a breach of clauses 7 or 13 of the agreement that could not be rectified. CAA also sought money orders to compensate for losses suffered as a result of the alleged breaches of the consultancy agreement by CAA. In the same summons PHL sought orders that the option agreement was unfair and sought orders varying the agreement. 235 In the light of my findings in relation to Matter No. IRC 908 of 2000, I have reached the conclusion that there was no unfairness as alleged in the further amended summons of CAA and PHL in Matter No. IRC 2342 of 2000 and that there are no grounds for making the orders sought in that further amended summons. This is not to suggest that CAA and PHL had no cause for complaint against Mr McGrath. For example, there was his failure to fully consult with stakeholders in the business, especially the doctors; his failure to fully reveal all details associated with transactions he initiated and to ensure the CAA Board and the shareholders were fully appraised of the commitments he had made on behalf of CAA; his failure to exercise a high degree of fiscal responsibility at the time of the cash flow crisis. 236 In Nordby v Barclays Investment Service (1993) 53 IR 319 at 338, Schmidt J said "A proper assessment of what relief should be granted by the Court cannot be one-sided, but must have regard to all the circumstances of the arrangements between the parties". Additionally, s 106(5) of the Industrial Relations Act 1996 provides that: (5) In making an order under this section, the Commission may make such order as to the payment of money in connection with any contract declared wholly or partly void, or varied, as the Commission considers just in the circumstances of the case. 237 In making orders as to the payment of money, it can only be just in the circumstances of this case if I take into account the conduct of Mr McGrath and in doing so I have reached the conclusion that it precludes an order requiring the payment by CAA of the balance of the unpaid fee to AHI under the consultancy agreement to 30 June 2004. To make such an order would be to accept that Mr McGrath was wholly free of any culpability in his relationship and dealings with CAA and the stakeholders in that business and in his actions on their behalf, which was simply not the case. 238 In attempting to strike a proper balance and one which is just in the circumstances of this case, I have considered what might be appropriate compensation. I have come to the view that CAA should pay AHI 24 months' fee at the rate prescribed by cl 9.1 of the consultancy agreement. The factors which I have taken into account in arriving at this view include the following: (1) The unfair conduct of CAA in terminating the consultancy agreement. (2) The need for a substantial discount of the balance of the unpaid fee under the consultancy agreement to 30 June 2004 as a consequence of Mr McGrath's conduct which, while falling short of serious misconduct striking at the heart of the contract, led to a loss of confidence in him and his ability to continue as managing director of CAA. (3) The need for any compensation to have regard to the very significant contribution Mr McGrath made to CAA, including his instrumental role in starting up the business. (4) Neither AHI nor Mr McGrath will be subject to any restraints of trade. (5) AHI will continue to have the benefit of its valuable shareholdings in CAA. (6) That the six months notice period or payment instead in cl 14.1 would not be appropriate because it does not provide adequate compensation having regard to all the circumstances associated with the termination of the consultancy agreement, including the particular unfairness visited upon AHI and Mr McGrath. (7) That in the course of negotiating the consultancy agreement, Mr McGrath sought a two year notice period under cl 14.1 and that it was his expectation that a two year period would be inserted into the agreement. Mr McGrath negotiated and signed the agreement without legal advice, whereas on the other hand, CAA had the advice and support of a large legal practice. (8) That, in the circumstances, two years is a reasonable period. Orders 239 I intend to make orders in Matter No. IRC 908 of 2000 to give effect to the following: (1) An order declaring the consultancy agreement between AHI and CAA dated 12 October 1999 is an unfair contract within the meaning of s 105 of the Industrial Relations Act 1996. (2) An order declaring that, for the purposes of cl 14.2 of the consultancy agreement, CAA may not terminate the consultancy agreement immediately and without payment instead of notice based upon the matters identified in the letter from CAA to AHI dated 29 February 2000. (3) An order declaring that, for the purposes of cl 3.3 of the option agreement between AHI and PHL dated 12 October 1999, the consultancy agreement is not terminated by CAA with cause under cl 14.2 of the consultancy agreement. (4) An order declaring that the arrangement known as the deed of covenant between Mr McGrath and CAA dated 12 October 1999 is an unfair contract within the meaning of s 105 of the Industrial Relations Act 1996. (5) An order declaring void ab initio cl 8 of the consultancy agreement. (6) An order declaring void ab initio cl 18 of the consultancy agreement. (7) An order varying the consultancy agreement: (a) by deleting cl 14.1 and inserting: "14.1 Subject to Clauses 14.1-14.5 inclusive, either party may terminate this Agreement at any time by giving 24 months' written notice to the other party or payment in lieu instead"; and (b) by deleting cl 26 and inserting the following new provisions: "14.6 CAA must investigate properly any allegations of breach of the Agreement by the Consultant before CAA exercises its rights under Clause 14.2(5). 14.7 CAA must afford the Consultant the opportunity to provide a response in writing to any allegation of breach of this Agreement before CAA exercises its rights under cl 14.2(5). 14.8 CAA must consider any response under Clause 14.7 by the Consultant before CAA exercises its rights under Clause 14.2(5)." (8) An order varying the option agreement by: a. deleting Clause 4; and b. inserting a new Clause 4 as follows: "After the termination of the Consultancy Agreement AHI is permitted to dispose of the AHI equity or part of the AHI equity at anytime." (9) An order declaring that CAA is not entitled to redeem pursuant to rule 98.21 of the Constitution of CAA made on or about 10 February 2000 the class A convertible redeemable preference shares held by AHI in CAA. (10) An order that CAA pay to AHI a sum equivalent to 24 months of the fee payable under clause 9.1 of the consultancy agreement. (11) An order that CAA pays interest in accordance with s 94 of the Supreme Court Act 1970 (NSW) on the sum to be paid in proposed order 10 hereof from 29 February 2000. (12) Costs are reserved.

240 The application in Matter No. IRC 2342 of 2000 is dismissed. 241 The applicants in Matter No. IRC 908 of 2000 and the respondents in Matter No. IRC 2342 of 2000 are to file and serve short minutes of order reflecting this judgment on or before 4.00pm Monday 26 March 2001. 242 Any application for costs shall be filed and served on or before 4.00pm Monday 26 March 2001. 243 The matters will be listed to make final orders, or make consent orders as to costs or to give directions in relation to any contest as to costs at 2.00pm Wednesday 28 March 2001.

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