Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan - [2018] NSWSC 1455 - NSWSC 2018 case summary — Zoe

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Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan

[2018] NSWSC 1455

Supreme Court of NSW|2018-03-15|Before: Robb J

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At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2018-03-15

Before

Robb J

Catchwords

CONTRACTS - Buyback agreement - a contract between the parties for the repurchase of a legal practice by the previous vendor

Source

Original judgment source is linked above.

Catchwords

CONTRACTS - Buyback agreement - a contract between the parties for the repurchase of a legal practice by the previous vendor

Judgment (46 paragraphs)

[1]

Background

In order to provide a framework for my consideration of the credibility of the evidence given by the witnesses and the resolution of the individual claims, I will first set out my findings concerning the primary facts that were either uncontroversial or can be supported by the objective evidence. As an exception to this approach, I propose to include aspects of the evidence given by Mr Steven D'Apice, who is an independent witness whose evidence I have accepted as being true.
Mr Vaughan was born on 11 January 1948.
Mr Dlakic was born on 6 March 1977.
Mr Vaughan was admitted as a legal practitioner on 9 July 1982. He purchased the practice Johnston Vaughan from Mr Gregory Johnston in May 1988 for the sum of $300,000.
Davlite was incorporated on 22 August 1988. Davlite has always had two ordinary issued shares. Initially one share was held by each of Mr Johnston and Mr Vaughan. Mr Johnston was a director of the company until 16 June 1999. Mr Vaughan has been a director of the company since 13 September 1988. He has been the sole director since 26 October 2001. Mr Vaughan has been the secretary of the company since 13 September 1988, save for the period between 26 October 2001 and 23 August 2012, when Mr Dlakic was the secretary.
Davlite purchased the Montgomery Street property from Mr Johnston on 30 May 1989 for the sum of $400,000.
Mr Dlakic graduated with a bachelor of laws degrees from Bond University in 1998, and was admitted as a legal practitioner in this State on 7 April 2000.
After having worked for a short time for another firm, on 20 September 2000 Mr Dlakic commenced employment as a solicitor at Johnston Vaughan under the supervision of Mr Vaughan. Mr Dlakic started on a salary of $35,000 per year. Mr Dlakic's salary rose slowly and by 2010 he was earning about $70,000 per year as a full-time solicitor with 10 years post admission experience. As Mr Vaughan said at par 15 of his general affidavit sworn on 20 June 2017, he "did not consider anything but modest pay rises for [Mr Dlakic] in respect of [Mr Dlakic's] services to the firm". (It is to be noted that Mr Vaughan swore an initial general affidavit on 20 June 2017 and on the same day swore specific affidavits in response to the affidavits of Steven D'Apice, Michael Karam, Mr Dlakic, Zhu Min Ma and Paulus Saleem Nahkle. He swore a further affidavit on 14 March 2018). The evidence concerning the relatively low salary received by Mr Dlakic is relevant to a claim by Mr Dlakic that he was given one share in Davlite in October 2001 in return for a salary sacrifice on his part.

On 25 November 2014, Mr Dlakic (as vendor) and Mr Vaughan (as purchaser) entered into a deed that was described as "contract sale of business" (the buyback agreement). The deed provided: RECITALS 1. The Vendor and Purchaser have agreed that the Business known as Johnston Vaughan Solicitors conducted from premises at 1/20 Montgomery Street Kogarah, will be sold to the Purchaser. 2. The Vendor agrees to Transfer all files, documents and Trust money held by various clients to the Purchaser and the Purchaser will be responsible for the files and money transferred from the date of this Deed. 3. The Vendor has been suspended from practicing and is no longer able to act as a Principal in the practice known as Johnston Vaughan Solicitors. 4. The Vendor will be liable for all liabilities arising out of the transferred files up until the date of this Deed. 5. The Vendor has the option to require the Purchaser to transfer the practice known as Johnston Vaughan to the Vendor in the event that an unrestricted Practicing Certificate is issued to the Vendor within 2 years of this deed. Now this Deed witnesses that: 1. The Vendor will transfer to the Purchaser the client files, goodwill, Trust Account money and trust account ledgers and journals to the purchaser for the payment of $1.00, payment of which is acknowledged. 2. The Vendor will sign all documents and do all things to transfer the entire files past and present to the Purchaser at the Purchaser's request. 3. The Purchaser will be responsible for the client files, Trust Account money from the date of this Deed excluding liability which arose prior to the date of this Deed. 4. The Vendor will be entitled to receive all money prior to the date of this Deed for all work done in the client's file as they are received by the practice. The purchaser will pay those monies received to the Vendor as they are received by the Purchaser, less any money owing in respect of the aforesaid client files including disbursements. 5. That the Vendor will be liable and indemnify the purchaser for the wages, annual holiday leave, superannuation and long service leave owing to the staff Karen Newell, Steven D'Apice and Salim Milinkic until the date of this deed.

[2]

Contentious issues of fact

At this point in the chronological consideration of the background facts, the Court's ability to set out the facts in a reasonably comprehensive way based upon the objective evidence, and without preferring the evidence of one party to that of the other, becomes limited. The first reason is that Mr Dlakic makes a number of assertions in his primary affidavit that are simply denied in their entirety by Mr Vaughan, without Mr Vaughan offering any alternative version of events. Mr Vaughan's affidavit that specifically responds to Mr Dlakic's primary affidavit largely either denies identified paragraphs, or ignores other paragraphs entirely. I have assumed that Mr Vaughan does not dispute the paragraphs that he has ignored, but it often appears in relation to paragraphs that have been denied that the denials should have related only to part of Mr Dlakic's assertions, and a more positive response was called for in response to other parts of his assertions.
The second reason for the difficulty is that Mr Vaughan's compliance with a notice served on him to produce the records of Johnston Vaughan concerning income and expenses, particularly for the period after the buyback agreement, appears to have been deficient. It would be expected that the records kept by a properly functioning law practice would have provided objective proof, either for or against, of a number of significant claims made by Mr Dlakic. Whether or not it is ultimately established that relevant records exist and have not been produced, it must be stated that the absence of the records has hampered the ability of the Court to make a number of necessary findings precisely and accurately.
In order to facilitate an understanding of the issues that are the subject of factual dispute, it will be convenient to set out the claims made by Mr Dlakic.
First, Mr Dlakic claims that, in the period leading up to the buyback agreement, Mr Vaughan regularly assured him orally that the purpose of the buyback agreement was to give Mr Vaughan control of the firm's files, but that "all the money that the firm earns will go to you" (par 193), and "I will give you every cent that comes through the general account" (par 194). Mr Vaughan denies that he made these statements.
Then, Mr Dlakic claims that, shortly after he signed the buyback agreement, Mr Vaughan took him to the bank to open new general and trust accounts in Mr Vaughan's name, but that when that was done, Mr Dlakic was given an authority to access the new general account so that he could "see all the money that comes through on the Internet when you login on your NetBank, and you can just take out all the money when you need it" (par 208). Mr Vaughan denied that these events occurred.
Mr Vaughan did not deny Mr Dlakic's evidence that, in six withdrawals between 13 and 23 February 2015, Mr Dlakic withdrew a total of $26,261 from the new general account and transferred it to his cash management account. Mr Vaughan did deny Mr Dlakic's claim in par 211 that the withdrawals were in respect of fees paid to the firm after the buyback agreement for work undertaken both before and after that agreement was made.
Mr Vaughan denied a claim made by Mr Dlakic in par 212 of his primary affidavit that, in late February or early March 2015, Mr Vaughan withdrew Mr Dlakic's authority to operate the Johnston Vaughan general account.
Mr D'Apice gave evidence that from late February or early March 2015, with the agreement of Mr Vaughan, Mr D'Apice commenced to pay Mr Dlakic $200 each Thursday. That arrangement continued until late May or early June 2015, when Mr Vaughan ordered Mr D'Apice to stop paying to Mr Dlakic the $200 per week.
Mr Vaughan did not respond to Mr D'Apice's evidence of his instruction to cease paying Mr Dlakic the $200 per week.
Mr Dlakic gave evidence that, following the buyback agreement, he received some very small amounts in respect of fees paid to Johnston Vaughan for work done before the date of the buyback agreement, and in par 224, Mr Dlakic refers to a spreadsheet exhibited to his affidavit that he originally prepared on 1 October 2014, and updated over the period to 22 May 2017, which takes the form of an aged debtors list in respect of amounts that Mr Dlakic claims represented fees owed by clients that should have been paid to the firm and remitted to Mr Dlakic. The total amount of the list is $1,922,981.44. Mr Dlakic qualified his evidence by explaining in relation to some entries that part of the fees payable by clients accrued before the date of the buyback agreement, and part accrued afterwards. Mr Vaughan simply denied the paragraph, without offering any positive explanation concerning what fees were owed to the firm and what amounts were received.
Mr Dlakic gave evidence of being aware, by reason of having reviewed some of the Johnston Vaughan trust account ledgers in about October 2015, that some of the fees itemised in the spreadsheet (with a total of about $339,430.35) had been received by Johnston Vaughan. Strangely, Mr Vaughan did not respond to these paragraphs.
There is one receipt that I am satisfied occurred, because evidence was given as to its receipt by Mr Steven D'Apice, who was a conveyancer employed by Johnston Vaughan at the time, and who also was responsible for all office records concerning receipts in reconciliation to the trust account cash books and journals, all trust account bookkeeping, and the records necessary to complete PAYG and GST declarations. Mr D'Apice gave evidence that in about September 2015, Mr Dlakic attended the office and negotiated the amount of fees to be paid by a client, Mr Paul Calleja, which enabled an amount of approximately $191,000 to be released from the firm's trust account. Mr D'Apice gave evidence that, of this sum, about $180,000 was paid to Mr Vaughan. Mr D'Apice annexed to his affidavit what he called an expense sheet that was given to him by Mr Vaughan. The document lists eight payments totalling $178,439.11.
It must be noted that two of those payments were described as "Michael Vaughan - rent" for $43,866.25, and "rent in advance" for $24,360. This payment to Mr Vaughan occurred long after the time when the lease of the Montgomery Street property to Mr Dlakic had been surrendered.
In his specific response to Mr D'Apice's affidavit, Mr Vaughan did not respond to the evidence concerning the release of Mr Calleja's fees from the trust fund or that about $180,000 was paid to him. Mr Vaughan denied Mr D'Apice's evidence that Mr Vaughan instructed him to pay the bills and expenses listed in the document and said (par 21): "I say that the Plaintiff was to pay his obligations to the staff and the rent from the Calleja money. The annexure marked "A" is not a document made by me and the writing on it is the handwriting of the Plaintiff". Irrespective of who was the author of the document annexed to Mr D'Apice's affidavit, Mr Vaughan's response is a clear admission that the money was paid to Mr Vaughan for alleged expenses of Johnston Vaughan at a time long after the date of the buyback agreement.
Mr Vaughan did not respond to evidence given by Mr Dlakic that, in about March or April 2015, he was told that the lender Jaara, to whom Mr Dlakic still owed a residual loan of $65,000, threatened to call in the loan if it was not refinanced.
On 27 April 2015, a firm of solicitors, on behalf of a lender called Mr Aysan Fetin, sent a letter of offer to Mr Vaughan on behalf of Johnston Vaughan Solicitors Pty Ltd. The letter offered a loan of $160,000 to Johnston Vaughan Solicitors Pty Ltd, supported by a guarantee by Mr Dlakic and a second unregistered mortgage secured by a caveat over Mr Dlakic's home at Towns Road, Vaucluse. The term of the loan was to be six months at an interest rate of 33% per annum, reducing to 30% per annum if payments were made on time. The necessary documents for execution were provided to Mr Vaughan under cover of a separate letter from the lender's solicitor dated 27 April 2015. The documents have been executed on behalf of Johnston Vaughan Solicitors Pty Ltd and Mr Dlakic.
An authority to pay addressed to the lender's solicitor signed by Mr Dlakic on 28 April 2015 includes a direction to pay $65,000 to Jaara and the balance of $55,241.95 (after various other payments) to the Johnston Vaughan general account that Mr Dlakic had used when he was the principal of Johnston Vaughan and that was still under his control.
Mr Vaughan denied the evidence given by Mr Dlakic at par 249 of his principal affidavit that Mr Vaughan asked Mr Dlakic to pay the balance of the loan funds to him because "I need most of it to pay office bills like tax and liabilities".
Mr Dlakic gave evidence that he paid the running expenses of Johnston Vaughan after the date of the buyback agreement. Mr Vaughan comprehensively denied the truth of this evidence without offering any positive explanation of his own.
Mr Vaughan did not deny that the statements of account exhibited to Mr Dlakic's affidavit, and referred to in par 230, for the bank account that had previously been Mr Dlakic's general account for Johnston Vaughan, for the period 16 October 2014 to 20 July 2015, were genuine. Mr Vaughan did deny Mr Dlakic's subsequent evidence concerning the significance of the transactions referred to in the statements of account. The statements of account do not directly prove payments to Mr Vaughan. Mr Dlakic gave somewhat complicated evidence in pars 231 to 234 of payments made by him for the benefit of Johnston Vaughan, including rent payments totalling $11,823, almost the whole of the balance of $55,095.95 from the loan made by Mr Fetin, the amounts deducted from the Calleja money, four direct debits of $6181.28 for professional indemnity insurance premiums, wages of $51,115.80 (including the Christmas wages for the staff in the sum of $20,299.50), and further operating expenses of $95,338.03.
Significantly, Mr Vaughan denied all of these assertions by Mr Dlakic except for the evidence in par 232 that Mr Dlakic paid the four professional indemnity insurance premiums in the period from 25 November 2014 until 2 March 2015 in the total sum of $24,725.12.
Mr D'Apice gave evidence that he observed in his capacity as paymaster, that Mr Dlakic paid all the bills of Johnston Vaughan from the time that Mr Vaughan became principal. These expenses included Mr Vaughan's wages, the Christmas 2014 staff wages of over $20,000, rent and other incidental expenses that were drawn from Mr Dlakic's general account.
Mr D'Apice said that Mr Dlakic continued to run and operate Johnston Vaughan from the general office account until about February or March 2015. In about late February or early March 2015, Mr Vaughan said to Mr D'Apice: "Amil's pulling too much money from my general account. I am not going under because of him", or words to that effect. Shortly after that, Mr D'Apice attended with Mr Vaughan to the bank to set up a new office general account that Mr Dlakic did not have authority to operate.
Mr Vaughan responded to Mr D'Apice's evidence concerning Mr Dlakic having paid the bills of the legal practice by saying that Mr Dlakic paid some accounts but not all of the accounts and he did not pay the rent.
Mr Vaughan did not respond to the evidence given by Mr Dlakic in pars 256 to 269 of his principal affidavit concerning the default of Johnston Vaughan Solicitors Pty Ltd under the loan from Mr Fetin.
Apparently for the reason that Johnson Vaughan Solicitors Pty Ltd had been ordered to be wound up, Mr Fetin commenced proceedings in this Court against Mr Dlakic, and on 18 July 2016 consent orders were made by Darke J. Those orders included an order 13 that judgment against Mr Dlakic be given in favour of Mr Fetin in the sum of $198,044.93. The Court also ordered Mr Dlakic to give Mr Fetin possession of his home at Vaucluse, and made orders for the conduct of the sale of that property.
By email to the Equity Registrar dated 26 August 2016, Mr Fetin's solicitor advised that Mr Dlakic had repaid the mortgage debt in full that day, and requested that the Court not issue the writ to the Sheriff.
Mr Dlakic gave evidence in par 267, to which Mr Vaughan has not responded, that he paid a total sum of $290,000, including principal and interest of $198,044.93 and costs of $92,314.88. He said that he was only able to settle the possession proceedings by borrowing further funds which have yet to be paid back.
On 19 May 2016, Mr Vaughan wrote a letter to Mr Byran Collis on behalf of the liquidator of Johnston Vaughan Solicitors Pty Ltd, in which Mr Vaughan gave reasons why the $1.00 payment was fair "consideration given with respect of the sale of the business Johnston Vaughan Solicitors Pty Ltd". Although that letter is consistent with the company rather than Mr Dlakic being the owner of the goodwill of Johnston Vaughan at the date of the buyback agreement, Mr Vaughan did not in the proceedings raise this as a ground for denying Mr Dlakic the relief that he claimed.

[3]

Defendant's response to notice to produce

It will be convenient to end this consideration of the background facts by dealing with the absence of detailed evidence of the work done by Johnston Vaughan for clients, the amounts of fees billed, and the amounts of fees paid by clients at relevant times. Evidence of those matters may have been significant or helpful in relation to many issues in these proceedings, as it would have assisted the Court to have an objectively based understanding of the real nature of the firm's practice. That evidence would have been necessary to enable the Court to determine whether, and if so to what extent, Mr Vaughan did not pay Mr Dlakic fees received by Johnston Vaughan in respect of work done for clients before the date of the buyback agreement. It would have been material to an assessment of whether the consideration of $1.00 payable under the buyback agreement was inadequate. It would have been material to an understanding of the likely outcome of an accounting that will be necessary if the Court makes an order setting aside buyback agreement.
It would also have been material for the Court to have evidence of the expenses of Johnston Vaughan at relevant times, and the extent to which those expenses were either paid by Mr Dlakic or were met from fees received by the firm to which Mr Dlakic was entitled under the buyback agreement.
The Court has not had the benefit of any of this evidence, and has not had comprehensive evidence covering these material financial issues.
On 7 August 2017, Mr Dlakic served a notice to produce on Mr Vaughan, which relevantly sought production of the following categories of documents: 4. A copy of the MYOB data files for the legal practice known as "Johnston Vaughan" and/or "Johnston Vaughan Solicitors" for the period September 2000 to date, including but not limited to the payroll, general ledger and profit and loss; 5. A copy of the timesheets, work in progress billed or unbilled, ledgers, taxation invoices, bills of costs and software files known as "Timeslips" for the legal practice known as "Johnston Vaughan" and/or "Johnston Vaughan Solicitors" for the period September 2000 to date. 6. In respect of all legal practice trust accounts operated by the law practice known as Johnston Vaughan and/or "Johnston Vaughan Solicitors", a copy of: a. Withdrawal authorities; b. Withdrawal receipts; c. Withdrawal ledgers, d. Trust account folders - being lever arch folders for clients alphabetically listed A - Z; e. Kalamazoo trust account records - which were located in the office of Johnston Vaughan Solicitors occupied by Stephen D'Apice (this includes all records of trust account transactions for closed trust account client files), and f. Audit reports - including reports by external examiners; for the period from September 2000 to date.
Mr Dlakic took the view that Mr Vaughan's response to the notice to produce was tardy and inadequate. Mr Dlakic raised the issue with the Court at a pre-trial conference held on 20 February 2018. At that time the Court was informed by counsel for Mr Dlakic that the parties were conferring about the issue and that it was hoped that full production could be made before the commencement of the hearing.
On the first day of the hearing, the Court was informed that shortly before the hearing Mr Vaughan had served on Mr Dlakic some 2200 further documents that were copies of tax invoices, but all dated on the date of printout, and many documents were not complete in relation to the information that should have been included in the original documents when forwarded to clients.
The first morning of the hearing was devoted to dealing with the consequences of Mr Vaughan's response to the notice to produce. An affidavit by Mr Vaughan sworn on 8 March 2018 and an affidavit of Mr Dlakic's solicitor, Mr Hugo Nicholas Antony Paul sworn 12 March 2018, were read in respect of the issue. I permitted counsel for Mr Dlakic to cross-examine Mr Vaughan on the adequacy of his response to the notice to produce.
I do not propose in these reasons for judgment to deal with this issue in any comprehensive way. The reason is that the result of the exercise was inconclusive. The available evidence does not permit the Court reliably to form a judgment about the extent to which documents falling within the categories sought in the notice to produce exist, what has been produced, or the comprehensiveness of what has been produced. All that the Court knows is that, as a matter of fact, the legal representatives for Mr Dlakic have sought to be in a position where they could tender on his behalf reasonably comprehensive business records of relevant transactions, but they have not been able to do so.
The subject matter of Mr Vaughan's 8 March 2018 affidavit was his attempt to obtain from the Law Society a list of clients prepared by Mr Dlakic in about November 2014 and handed by him to the manager appointed by the Law Society, certain aspects of the firm's billing and record keeping practices, and an explanation of the three tranches of production of documents in response to the notice to produce, together with additional documents produced in March 2018. As I understand it, on 6 March 2018, with the assistance of a law student who Mr Vaughan claims to be more computer literate than himself, Mr Vaughan produced from the firm's server a series of WIP reports as at 17 July 2010, then every six months and finally the date of the buyback agreement, 25 November 2014. Mr Vaughan also gave evidence that on 6 and 7 March 2018, with the assistance of the student and his secretary, he conducted a search on the firm's server for documents containing the word "tax invoice". The search revealed 2163 documents which all appeared to be tax invoices. Mr Vaughan said that he was not aware that these invoices were stored in the particular archive folder. The documents were provided to Mr Dlakic's solicitor in electronic form on 8 March 2018.
In his affidavit in response, Mr Paul explained that the invoices that had been produced could not be copies of genuine original invoices, as they were missing essential information and, for example, recorded payments being made both before and after the date of the invoice (par 5). Mr Paul expressed the opinion (par 7) that there had been little meaningful compliance with the notice to produce. Mr Paul's office has assembled the documents produced into 21 lever arch folders. Then, in pars 10 to 24 of his affidavit, Mr Paul expressed opinions as to difficulties and inadequacies with the production that had occurred.
At the end of her cross-examination of Mr Vaughan, Mr Dlakic's counsel put it to Mr Vaughan that he had not taken compliance with the notice to produce seriously, he had deliberately withheld documents until February, and that he knew that there were further documents that he was refusing to produce in answer to the notice to produce. Mr Vaughan denied each of these suggestions.
However, in the cross-examination Mr Vaughan accepted that the initial tranches of production of documents were inadequate because he had not caused the firm's server to be searched properly.
The ultimate result has been that the evidence that Mr Dlakic has been able to tender has in many cases not been the best evidence that ought to have been available, if the records of Johnston Vaughan had been properly kept in a conventional way at all relevant times, and if a proper response had been made to the notice to produce. The Court is at a loss to know whether in fact there are more documents that ought to have been produced but have not been produced. The Court does not know whether more complete and accurate versions of the documents that have been produced can still be produced.
The Court has no choice but to determine the issues that are before it on the basis of the evidence that has been tendered, but it should do that having regard to the appearance that Mr Dlakic's case has been impaired by the failure of Mr Vaughan to comply with the notice to produce in a complete and timely way. As it is clear that there has not been production of all of the documents that would have been prepared and retained in the ordinary course by a well-run firm of solicitors, the Court should be solicitous to an appropriate extent when considering the fact that in some respects Mr Dlakic has not been able to tender the best evidence that should have been available.
The deficiency in production will also have the effect that some issues that may otherwise have been capable of being determined finally on the evidence at the hearing will now need to be dealt with as part of an accounting process, if Mr Dlakic succeeds in one or other of his claims arising out of the buyback agreement.
I will return to this issue below, when I come to consider the orders that should be made at this stage of the proceedings and the appropriate regime for its future case management.

[4]

Mr Dlakic's credit

As I have recorded above, Mr Dlakic has prosecuted these proceedings by his wife as his tutor. Mr Dlakic candidly informed the Court at the beginning of both of his affidavits that his wife helped him to prepare the affidavit.
As I have also observed above, and will consider in more detail below, by November 2014 Mr Dlakic had been diagnosed as suffering from severe depression. A medico-legal report prepared by Dr Leonard Lee dated 27 July 2018, in respect of proceedings instituted by Mr Dlakic for total and permanent disability claims with AMP and MLC, described the following result of a mental state examination conducted by Dr Lee on 27 July 2015: 17. Mr Dlakic was a pale, obese man who spoke rapidly and was at times difficult to follow. At other times, he became emotionally flattened and spoke very slowly. He reported symptoms consistent with a major depression characterised by inability to function at work and socially, loss of self-confidence, impaired concentration, insomnia and anhedonia. He said his condition is not improving with medication and he doubts that he could ever return to any form of work.
Dr Lee included in the history that he obtained from Mr Dlakic at par 15 that: "He is extremely forgetful".
Dr Lee gave as his opinion in par 18: "… His mental functioning is described as impaired as is his short-term and long-term memory and concentration".
To my observation, the views expressed by Dr Lee are consistent with the way that Mr Dlakic gave his evidence in the witness box, at least to the extent that the matters observed by Dr Lee could expect to be exhibited in the course of giving evidence.
Relevantly, Mr Dlakic conceded in the history that he gave to Dr Lee that he was extremely forgetful, and Dr Lee accepted in expressing his medical opinion that Mr Dlakic's short-term and long-term memory was impaired.
It follows from this evidence, and Mr Dlakic's concession that he prepared his affidavits with the help of his wife, that there may have been some reconstruction in the preparation of the affidavits.
When I deal with the specific claims made by Mr Dlakic, I will set out some of the evidence of conversations between Mr Dlakic and Mr Vaughan that are included in Mr Dlakic's affidavits. Notwithstanding that the evidence is expressed to be as to the effect of the conversations, it will be seen that they are set out in relatively minute detail, even though the conversations span a period commencing in the year 2000, and cover the period during and after the development of the serious depression from which Mr Dlakic suffers.
The concerns expressed by McClelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315 at 318-319 must be especially acute in the present case. His Honour said: …Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience. Each element of the cause of action must be proved to the reasonable satisfaction of the court, which means that the court "must feel an actual persuasion of its occurrence or existence". Such satisfaction is "not … attained or established independently of the nature and consequence of the fact or facts to be proved" including the "seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding": Helton v Allen (1940) 63 CLR 691 at 712. Considerations of the above kinds can pose serious difficulties of proof for a party relying upon spoken words as the foundation of a causes of action based on s 52 of the Trade Practices Act 1974 (Cth) (or s 42 of the Fair Trading Act), in the absence of some reliable contemporaneous record or other satisfactory corroboration. That is the position in the present case…
The following observations made by Hammerschlag J in John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 are also apposite: [94] Where a party seeks to rely upon spoken words as a foundation for a cause of action, including a cause of action based on a contract, the conversation must be proved to the reasonable satisfaction of the court which means that the court must feel an actual persuasion of its occurrence or its existence. Moreover, in the case of contract, the court must be persuaded that any consensus reached was capable of forming a binding contract and was intended by the parties to be legally binding. In the absence of some reliable contemporaneous record or other satisfactory corroboration, a party may face serious difficulties of proof. Such reasonable satisfaction is not a state of mind that is obtained or established independently of the nature and consequences of the fact or facts to be proved. The seriousness of an allegation made, inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question of whether the issue has been proved to the reasonable satisfaction of the court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony, or indirect inferences: see Briginshaw v Briginshaw (1938) 60 CLR 336 at 362; Helton v Allen (1940) 63 CLR 691 at 712; Rejfek v McElroy (1965) 112 CLR 517 at 521; Watson v Foxman (1995) 49 NSWLR 315 at 319. [95] The sensation of feeling an actual persuasion, after a contest, that an event has happened or that something exists is one which is well known and recognised by experienced trial judges for what it is.
These considerations are of particular relevance to Mr Dlakic's evidence of conversations with Mr Vaughan concerning the terms upon which Mr Vaughan allegedly provided advice to Mr Dlakic in relation to the Vince and Fetin loans; to oral assurances made in connection with the buyback agreement; and the basis upon which the share in Davlite was transferred to Mr Dlakic.
Notwithstanding these concerns, I formed the opinion from listening to Mr Dlakic in cross-examination that he was attempting to give genuine and truthful evidence to the best of his ability.
I accept that in most instances the evidence given by Mr Dlakic reflected his genuine present recollection of the relevant events. However, Mr Dlakic's evidence must be treated with due scepticism given the consequences of his psychological disabilities and the consequential effect on the process whereby his affidavits were prepared and his recollection of events established. I have attempted to exercise particular care to measure the plausibility of Mr Dlakic's evidence against the background of the objective circumstances, and have looked carefully for corroboration in the evidence given by the other witnesses called in Mr Dlakic's case.
There are a number of additional concerns that have caused me to exercise caution in weighing the significance of the evidence given by Mr Dlakic.
A serious residual concern that I have is that I consider that Mr Dlakic has exaggerated Mr Vaughan's moral responsibility for Mr Dlakic's suffering, and he has failed to accept his personal responsibility in that regard.
There is some evidence that Mr Dlakic's psychological disabilities commenced in about 2010, although they were un-diagnosed until November 2014. Notwithstanding that, it would appear that Mr Dlakic's psychological disabilities grew gradually, and Mr Dlakic made a significant number of financial decisions that were, to my mind, plainly imprudent and could even reasonably be described as prodigal. There was no evidence that these actions by Mr Dlakic were caused by Mr Dlakic's deteriorating psychological condition, and he did not claim that they were.
The credibility of Mr Dlakic's evidence has been diminished by his failure to volunteer in his primary affidavit an objective history of his financial dealings unrelated to Johnston Vaughan. A significant focus of Mr Dlakic's primary affidavit was evidence of events allegedly involving Mr Vaughan by which Mr Dlakic sought to suggest that Mr Vaughan had encouraged Mr Dlakic to engage in financially improvident transactions, and then Mr Vaughan had exacerbated Mr Dlakic's difficulties by failing to assist him financially, or failing to pay him money to which he was entitled. Whether or not those claims are true, Mr Dlakic omitted to give a balanced picture of his financial dealings. I refer in particular to his margin lending investment in 2008, his purchase of the Town's Road Vaucluse property in 2010, and his leasing of the Aston Martin and Porsche vehicles at about that same period. These latter transactions occurred in broadly the same time span that Mr Dlakic borrowed the $300,000 from Dr and Ms Vince on onerous terms.
Consequently, I have concluded that there is a real risk that Mr Dlakic has, over time, come to a reconstructed memory of Mr Vaughan's conduct which paints Mr Vaughan as the sole villain in Mr Dlakic's affairs.
As will be seen, there are aspects of Mr Dlakic's evidence that I am not prepared to accept, primarily on the basis that the evidence that has been offered to the Court is not sufficiently complete or plausible to be persuasive. The clearest example of this problem is the evidence given by Mr Dlakic in support of his professional negligence claim against Mr Vaughan concerning the circumstances in which Mr Dlakic borrowed the $300,000 from Dr and Ms Vince. Mr Dlakic has chosen to commit himself to aspects of his case that are so thinly supported by the evidence that his choice has impaired his credibility.

[5]

Mr Vaughan's credit

I regret to have to say that I found Mr Vaughan to be an unsatisfactory witness.
The abiding sense that I gained listening to Mr Vaughan's cross-examination was that he was bemused as to how he could explain his conduct, both in respect of his unconscionable treatment of Mr Dlakic, and the fundamental inconsistencies between his own affidavit evidence and the objective facts.
Mr Vaughan's evidence was unsatisfactory in a structural sense, in the manner of its being given in cross-examination, and its fundamental inconsistency with the objective evidence.
I mean by the observation that Mr Vaughan's evidence was structurally unsatisfactory that his specific affidavits in response to Mr Dlakic's witnesses' affidavits consisted of bald denials, absences of any response, and perfunctory explanations. In many cases Mr Vaughan simply denied the entirety of a paragraph, when it appeared perhaps reasonable for him to have denied part of the paragraph (say, a conversation attributed to him), but where the denial of the whole of the paragraph appeared to be irrational, in that Mr Vaughan had denied conventional evidence of circumstances that plainly called for some positive response. There seemed in many cases to be a serious inconsistency between occasions when Mr Vaughan denied whole paragraphs and then did not respond to other paragraphs dealing with related circumstances.
Consequently, I am not prepared to give significant weight to most of the evidence given by Mr Vaughan in his affidavits.
I do not consider that Mr Vaughan conscientiously responded to the notice to produce served upon him by Mr Dlakic, which I have considered above. Mr Vaughan, as a very experienced solicitor, must have understood that the documents sought by Mr Dlakic were essential to the proper and efficient determination of these proceedings. Broadly, the documents should have been retained by a properly operated legal practice, and should have been able to be gathered for production in a relatively simple way. I did not find Mr Vaughan's attempt at explaining why he was unable to produce the documents at all convincing. This has caused me to entertain the suspicion that Mr Vaughan was not prepared to address his obligation to produce the documents conscientiously because he was aware of the likely damage that production would do to his defence of Mr Dlakic's claims.
The evidence justifies a conclusion that it is likely that Johnston Vaughan received substantial fees from clients for work done before the date of the buyback agreement, which on the clear terms of that agreement were required to be paid by Mr Vaughan to Mr Dlakic. Very little of those receipts were in fact paid to Mr Dlakic. It is hard to conceive that Johnston Vaughan does not have records that would prove the receipt of these funds.
It is also hard to conceive of why Mr Dlakic would have continued to pay very substantial amounts towards the expenses of Johnston Vaughan after the date of the buyback agreement, if there were not a side agreement between Mr Dlakic and Mr Vaughan that Mr Dlakic would continue to receive the net profits from the firm's practice after the date of the buyback agreement. Although, because of the dearth of records, the evidence is incomplete and inexact concerning the amount of the fees received for work done after the buyback agreement, and as to the expenses of Johnston Vaughan paid by Mr Dlakic, the evidence is sufficient to establish that there must have been significant fees received and significant expenses that were in fact paid by Mr Dlakic.
Yet Mr Vaughan point blank denied that there had been any failure by him to remit to Mr Dlakic fees payable for work done before the date of the buyback agreement, or that there was any side agreement concerning the operation of Johnston Vaughan after the buyback agreement.
Not only are these denials incredible in themselves, but they heighten the significance of the failure of Mr Vaughan to properly comply with his obligations in respect of the notice to produce.
Additionally, Mr Vaughan's credit is undermined by his apparent failure to cause Davlite to declare the income in rent that it received from Mr Dlakic. Mr Vaughan's instruction to Mr D'Apice that he be paid his salary in cash also gives rise to grounds for suspicion about Mr Vaughan's honesty.
Quite astonishingly, Mr Vaughan claimed that the payments made by Mr Dlakic, a man who was obviously in dire financial circumstances, of Johnston Vaughan's expenses were a gift (T 248.12-23, 250.22-28, and 252.8-19).
It is in my view clear that Mr Vaughan caused the surrender of the lease that Davlite granted to Mr Dlakic just before the buyback agreement to be backdated from July 2015 to the date that Mr Dlakic's practising certificate was suspended on 30 October 2014, to avoid the possible discomfort to Davlite of Johnston Vaughan Solicitors Pty Ltd being ordered to be wound up. Notwithstanding the surrender, Mr Vaughan still required Mr Dlakic to pay rent to Davlite (including out of the fees payable by Mr Calleja that I have considered above).
In my view Mr Vaughan sacrificed the credibility of his evidence by too frequently denying the obvious significance of events that were comprehensively proved by the objective evidence.
Consequently, I have not accepted Mr Vaughan's evidence except to the extent that it is corroborated by evidence that I am prepared to accept, or its acceptance is warranted on the basis that it is the most consistent conclusion to draw by reference to the objective evidence.

[6]

Credit of other witnesses

Mr Vaughan did not challenge the credibility of the witnesses called in Mr Dlakic's case in his final submissions, other than that of Mr Dlakic himself.
Mr D'Apice was the most significant of those witnesses to the conclusions that have been reached in this judgment. I have described Mr D'Apice's role in Johnston Vaughan above. The office was a small one and Mr D'Apice had the opportunity on a day-to-day basis to observe the relationship between Mr Dlakic and Mr Vaughan, and to converse with them on the subjects relevant to these proceedings. I found Mr D'Apice to be a straightforward and convincing witness. His evidence was germane to the issues and its substance dovetailed with significant aspects of the evidence given by Mr Dlakic in a manner that enhanced its plausibility. There was no suggestion that Mr Dlakic and Mr D'Apice concocted this evidence together. As I have observed above, I have had no hesitation in accepting Mr D'Apice's evidence.
Ms Zhu Min Ma (also known as Annie Ma) is the estranged wife of Mr Vaughan. She married Mr Vaughan on 5 August 2013 and separated from him on about 2 May 2016. The principal relevance of her evidence was her recounting of statements made to her by Mr Vaughan, some of which I have recorded in this judgment. It was suggested on behalf of Mr Vaughan that Ms Ma was antipathetic to Mr Vaughan as a result of the acrimonious breakdown of their relationship. Mr Dlakic responded by suggesting that Ms Ma had given evidence against her own interests in so far as success by Mr Dlakic in the proceedings was likely to reduce the pool of assets that were available between Ms Ma and Mr Vaughan on the dissolution of their marriage.
Ms Ma appeared to me to be a nervous witness but I have seen no reason to discount her evidence. While it would be appropriate for the Court to approach her evidence with caution because of her apparent animosity towards Mr Vaughan, her evidence as to statements made by Mr Vaughan appears to be credible given the substance of what she recalled that he said. There was no suggestion that Ms Ma concocted her evidence in collaboration with Mr Dlakic. I found the relatively few parts of Ms Ma's evidence that I have relied upon to be inherently credible.
The other witnesses called for Mr Dlakic included Mr Paulus Saleem Nahkle and Mr Michael Karam who each gave matter-of-fact evidence as independent witnesses in a credible way, and I am prepared to accept their evidence for the limited purposes for which I have found their evidence helpful.
Ms Karen Newell, who is Mr Vaughan's long-time secretary, gave limited evidence in Mr Vaughan's case. From her recollection she denied various statements attributed to her in the evidence of Mr Dlakic, and said that she could not recall a particular statement attributed by Mr D'Apice to Mr Vaughan. Ms Newell's evidence was not of great significance, and I am prepared to accept that she gave her evidence to the best of her recollection. It would not be appropriate to reject her evidence, as Mr Dlakic suggested, on the ground of her long-term relationship with Mr Vaughan.

[7]

Evidence of Mr Dlakic's mental state

Two questions arise in relation to Mr Dlakic's mental state. The first concerns his objective mental health at relevant times. The second concerns the outward manifestation of any psychological problems experienced by Mr Dlakic, which is relevant to the question of whether Mr Vaughan was aware in his dealings with Mr Dlakic that Mr Dlakic was under a serious psychological disadvantage.
Mr Dlakic tendered the expert medico-legal reports of four consultant psychiatrists prepared for the purposes of other legal proceedings in which Mr Dlakic is engaged. I have set out an extract from the report of Dr Leonard Lee in my consideration of the background above. Mr Vaughan did not cross-examine any of the expert psychiatrists, and did not attempt to contradict their evidence.
Only Dr Olav Nielssen saw Mr Dlakic in 2014, being on 10 and 17 November 2014 and 1 December 2014. According to Dr Nielsen's 29 May 2015 and 14 May 2016 reports, he also saw Mr Dlakic on 9 and 16 March 2015 and 21 March 2016.
As well as being seen by Dr Lee on 27 July 2015, Mr Dlakic was also seen by Prof Ian Coyle on 5 October 2016 and Prof Phillip Morris on 20 December 2016.
The expert psychiatrists all concur in the opinion that Mr Dlakic suffers from Major Depressive Disorder with Anxious Distress, although they formulate his psychiatric condition in slightly different terms.
Although reliant upon the history given by Mr Dlakic, all four experts accepted that Mr Dlakic's psychological symptoms started to emerge in about 2010, even though he did not realise that he had a severe psychological disability until 2014, and his symptoms were otherwise not diagnosed.
As Dr Lee recorded in par 9 of his 27 July 2015 report: In 2014, realising that he could not continue, he consulted Dr Lucille Been. She was so concerned as he was overwhelmed by tears that she wanted him to immediately be assessed by the Hornsby Mental Health Unit. He refused, but he promised to attend the Emergency Department at the Wahroonga Sanatorium, where he underwent cardiac investigations, chest x-ray and MRI scan and when these were normal, the doctor said that he had extreme symptoms of stress…
Dr Nielssen said in his 29 May 2015 report, concerning his treatment of Mr Dlakic commencing on 10 November 2014: It emerged that he has been suffering from symptoms of depression for a number of years. He reported that he first noticed insomnia in about 2010, and had experienced anxiety symptoms that he attributed to physical illness from late 2011. He reported having a range of blood tests and heart and other tests, which showed no abnormality. He reported increasing fatigue in the last two years, accompanied by impairment in concentration and problem solving. He described the loss of confidence in his own ability and the avoidance of difficult tasks. Factors contributing to being depressed include the estrangement from his brother, who it seems had become jealous of his success, his parents disapproval of his marriage, and his wife's health problems, which included difficulty conceiving and keeping a pregnancy, financial stress and his very high workload.
Given the unanimity of the expert psychiatric evidence, it will be sufficient to record the following extract from the report of Prof Phillip Morris dated 20 December 2016: Amil Dlakic was last psychologically well in 2010. Since then his mental health has deteriorated significantly. From 2010 he was exposed to a number of stressful experiences. He faced serious family conflict when he married his wife on 21/12/2010. His parents and brother were vehemently opposed to his marriage to a woman of a different religious faith (Christian), and a divorcee with children from a previous marriage. The family opposition did not subside and has persisted with intensity. At this time he bought out the owner of the legal practice he was working in and became the principal of this firm. He took on substantial financial debt to achieve this purchase and found it difficult to manage the finances of the practice. This placed him under severe work-related stress. When the Law Society investigated his practice and he subsequently lost his practising certificate he was unable to work to finance his practice and other financial liabilities. In addition he and his wife were unable to conceive a child normally and they sought IVF in Greece. This produced a pregnancy but his son was born premature and has experienced developmental delays and deafness as a consequence. This has placed more distress on Amil Dlakic and his family over the past 18 months. Since 2010 the accumulation of all the stressors has resulted in him developing a major depressive disorder accompanied by severe anxiety features. His depressive disorder has persisted from 2010 through to the present. There has been no improvement in the condition and it now has become chronic. The disorder is characterised by symptoms of depressed mood, loss of interest, anhedonia, tearfulness, significant weight gain, insomnia, fatigue, feelings of worthlessness, hopelessness and loss of confidence and motivation, poor concentration and indecisiveness, and frequent thoughts that life is not worth living. He has frequent panic attacks, he become anxious when thinking of his legal practice, he tries to avoid thinking of legal work to avoid anxiety, he avoids associating with people involved with his former workplace including staff and clients, he feels emotionally numbed or withdrawn, he is constantly 'on edge' and irritable, and is easily provoked to angry outbursts. He has become socially withdrawn and avoidant. He has lost libido and has poor sexual performance. The psychiatric condition has caused frequent discord with his wife and children.
In his primary affidavit, Mr Dlakic gave evidence, which I accept, concerning the events in his life which the expert psychiatrists accepted lead Mr Dlakic to be diagnosed with major depressive disorder in November 2014.
Mr Dlakic also gave the following evidence concerning the outward manifestation of his increasing psychological difficulties: 155. By mid-2013 to late 2014 the pressure had become so great upon me both mentally and financially that I did not know what I was going to do about my predicament… 156. It was during this time that I started yelling and crying in the toilet at work. I felt completely helpless. I was constantly sad and often inconsolable. The Defendant observed me crying at work. I recall in mid-2013 the Defendant knocked on the toilet door and said to me: "Mate, stop crying and yelling. Get back to work. We have got bills to pay and carrying on like a little girl is not going to fix anything," or words to that effect… … 158. During the period between mid-2013 and 2014 I would come to work and many days I would close my office door and cry. I was unable to properly focus on my work. I would leave the lights off in my windowless office. I wanted peace and quiet in an attempt to escape from my reality of financial dysfunction. 159. During 2014, when things became very difficult for me and I was struggling to cope, the Defendant would come into my office at least twice a week and chastise me about lots of issues such as not renewing the firm's practising certificate or my not having my own professional indemnity insurance in place… 160. He said: "Mate this mess in your own creation. You shouldn't have bought the office. You know I will not help you because this is character building stuff," or words to that effect. I broke down in tears in front of him. I was convulsing.
Later in his primary affidavit, Mr Dlakic said: 172. From July 2014 onwards, when I had returned from overseas, I started suffering and experiencing panic attacks, chest pains, and chronic insomnia. There were periods when I could not sleep for days in a row.
Mr Dlakic gave evidence of conversations with Mr Vaughan in which Mr Dlakic explained the difficulties that were occurring in his wife's pregnancy, and the stress that was causing him. Mr Dlakic then said: 190. In about the first week of November 2014 I said to the Defendant: "Michael, Dr Been at St Ives wanted to refer me to the Hornsby Mental Health Clinic for severe depression and mental illness and get me scheduled. I promised her that if I check into emergency and get myself checked out she wouldn't do this. So this Friday I won't be at the office. I'll check myself into The SANS Emergency and start getting help," or words to that effect. He said: "Do whatever you need to. I'll look after the office," or words to that effect. … 193. On or about 25 November 2014 being several weeks after the SANS Hospital emergency admission, I said to the Defendant at the office: "Michael I have extreme depression and mental disorders. I can't work or function anymore," or words to that effect. He said to me: "Well mate the Law Society has taken the firm from you anyway. So I will draw an agreement to transfer all the files to me for $1.00. That way the Law Society will be happy as the files go to me. They don't need to know that all the money that the firm earns will go to you. That way it's just business as usual and I'll look after you," or words to that effect. 194. On a daily basis the Defendant said to me: "Mate I will give you every cent that comes through the general account, you have my word, just sign the agreement, Mate I will not let you down, my livelihood depends on you," or words to that effect. 195. I replied: "Okay, I have been seeing a psychiatrist Dr Nielssen to get help," or words to that effect. He said: "Mate, you need a lot of help. It's a shame how all this turned out," or words to that effect. My speech was slurred. I could not focus or concentrate on anything.
In his affidavit specifically in response to Mr Dlakic's affidavit, Mr Vaughan simply denied that all of these conversations took place concerning Mr Dlakic's psychological condition.
In his general affidavit, Mr Vaughan made the following observation concerning Mr Dlakic's psychological illness: 54. The Plaintiff did say to me words to the effect: "I am insured for Total and Permanent Disability with AMP and MLC and I am going to make a claim, now that I cannot work, for mental health. If I get the MLC money I will take you to France for a holiday, it is a huge payout I am looking to get". I said "I will go Amil". The Plaintiff said to me and Karen Newell "I need to look as though I am mad in case there is surveillance on me". Both Karen Newell and myself then witnessed the Plaintiff walking up the street, having a conversation with himself and shouting and laughing. The staff and I did not believe the Plaintiff was mad.
Ms Newell, who remains Mr Vaughan's legal secretary and personal assistant, swore an affidavit in which she responded to Mr Dlakic's affidavit. She did not say anything about her observations of Mr Dlakic's apparent psychological condition.
Mr D'Apice gave the following evidence in his affidavit concerning the circumstances in which Mr Dlakic and Mr Vaughan entered into the buyback agreement: 24 In or about late June 2014 the Defendant said to me: "Mate, I've just spoken to the Law Society and asked the trust account department when will they be coming to do the trust account inspection. Amil hasn't reconciled the trust for a year now. Wait till he comes back, he is fucked. He will lose his practicing certificate, his home in Vaucluse, his wife and kids and go bankrupt," or words to that effect. I did not respond to this comment, as I did not know what to say but I recall I was quite horrified to hear this. … 26 Throughout 2013 and 2014 I observed the Plaintiff sit in his office with the lights off, and he appeared to me to be very sad and disconnected. I recall that on many occasions when I approached the Plaintiff in his office during the above period I observed the Plaintiff to stare blankly at me. He would often not respond to my questioning him in relation to work matters, or if he did respond it was usually with only a grunt. 27 In or about late October 2014 the Plaintiff said to me as I observed him crying and convulsing in his office: "Steve they have suspended me. A receiver has been appointed. I'm so sorry," or words to that effect. I observed that he cried for about 2 or 3 hours in his chair. 28 In or about November 2014 the Defendant said to me: "Mate I have drawn an agreement to transfer all the files from Amil to me for $1 to get the Law Society off our back. That way the Law Society will be happy as the files go to me. They don't need to know that this is still Amil's practice. That way its just business as usual and we can look after Amil," or words to that effect. On an almost daily basis the Defendant would say to me (often in the presence of the Plaintiff and occasionally a staff member such as Karen Newell): "Mate I will give every cent that comes through the general account to Amil. I have given my word to Amil," or words to that effect.
I accept Mr D'Apice's evidence as to his observations concerning Mr Dlakic's conduct and appearance in 2013 and 2014. Mr D'Apice's evidence assists me in preferring the evidence given by Mr Dlakic on the same subject over the evidence given by Mr Vaughan. Given the evidence of the expert psychiatrists concerning Mr Dlakic's psychological condition in November 2014, I accept that it must have been obvious to Mr Vaughan that Mr Dlakic was suffering from a severe psychological disadvantage. While I would hesitate to accept that the conversations on that topic that Mr Dlakic claimed he had with Mr Vaughan took place precisely as alleged, I am satisfied that Mr Dlakic did inform Mr Vaughan of his psychological condition and the reasons for it. I reject Mr Vaughan's denials.
In her 4 May 2017 affidavit, Ms Ma gave the following evidence of conversations with Mr Vaughan related to the buyback agreement: 13 From October 2014 onwards on a weekly basis the Defendant said to me "The Law Society will cancel Amil's licence." I replied: "Who reported Amil to the Law Society?" The Defendant replied "No client reported him". I said "Then how did they know about the problems? Did you report him?" or words to that effect. I observed him laughing. He replied: "Yes, look the business has been going down since 2010. If I run the business I can make a million dollars a year, but the way Amil runs it, everything goes down. But in the meantime I'll keeping letting Amil go down and I'll take it back for nothing. Amil will thank me for rescuing him and giving me back the office. I can get all the files from Amil by putting them over to me and transferring all the information onto my computer", or words to that effect. 14 Further, in late November 2014 I had a conversation with the Defendant at our home at 163 Stuart Street, Blakehurst. He appeared to me in my observations and experience of him to be quite excitable and he seemed very matter of fact in his composure. He said to me words to the following effect: "Amil has just had a visit from the Law Society Receiver. They have closed him down, they want to get all the client files off him and finish him. He has gone mentally ill and seeing Doctors and Hospitals, and in constant chest pain. He has told me about it all and about his mental health problems, but I already knew it. I'm drafting a deed that he is going to have to sign so that I get the law firm, the Law Society fucks off out of the office, and I'll look after Amil by letting him keep the money from the firm after I become the boss," or words to that effect. 15 In or about December 2014, I had a further conversation with the Defendant concerning the Plaintiff. I recall that the Defendant said to me words to the following effect: "I tricked Amil into signing a Deed that gives me back control of the law firm off Amil. The idiot took pills in front of me before he signed the deed." I replied: "If Amil's business is going down why would you report him? Why do it this way? So Amil gets nothing he gave you half a million to buy the business. You let Amil get nothing. You put Amil into a corner. Do you know you killed Amil's life," or words to that effect. The Defendant replied: "It's not my fault he is an idiot," or words to that effect.
Mr Paulus Saleem Nahkle said that he was a client of Johnston Vaughan for about four years from July 2010. In about June 2013, Mr Nahkle loaned Mr Dlakic $70,000 to assist him to pay a liability to the ATO.
Mr Nahkle gave evidence in his affidavit of observations he made of Mr Dlakic throughout 2013 and 2014 he said: 12 … He had gained considerable weight, and he appeared to me to be obese. He was constantly angry and upset and was prone to raging and arguments with family members. As a client of his firm Johnston Vaughan, I recall visiting him in early 2014. I opened the office door. I observed that the lights were off. He was sitting in his chair with his feet on the table with socks on and no shoes. He was crying. He said to me: "I'm not feeling well. Everything is complicated and too hard. I'm not doing enough work. It's all too hard. My memory is failing" or words to that effect. 13 In November 2014 the Plaintiff said to me: "Mate, Michael has drawn an agreement to transfer all the files to him for $1. That way the law society will be happy as the files go to Michael. He will give me every cent that comes through it will be not different to before," or words to that effect. I replied: "That's good, as long as the status quo stays on track and my legal matter gets done," or words to that effect. 14 In or about March 2015, the Plaintiff said to me: "Paul I'm very very scared. Michael has locked me out of the general accounts. How can I pay the kid's school fees … 15 In about late March 2015, the Defendant said to me: "Amil's pulling out too much money from my general account, over $20,000, I am putting an end to this. I am now in control, mate I am doing my best and giving him $200 per week," or words to that effect.
Mr Nahkle also gave evidence of a conversation that he had in about June or July 2015 with Mr Vaughan. Mr Nahkle raised the issue of Mr Dlakic's need for income with Mr Vaughan: 19 The Defendant replied: "Paul listen, everyone here especially me must stand by him now. All the money that comes through the office since I have become Principal here belongs to Amil. He is just paying my wage of $2,000 per week cash and the rent here. He has a lease until 2019. There's a lot of money coming through the end of 2015 here so we will be okay. But no one need worry about this. He is sick, but I swear to you mate I'll send him every dime that comes through this firm. Mate he is like a son to me," or words to that effect.
This evidence, given by independent witnesses, reinforces the basis of my conclusion that the symptoms of Mr Dlakic's psychological disabilities were obvious by November 2014, and Mr Vaughan was well aware at the date of the buyback agreement that Mr Dlakic suffered from a serious disadvantage in relation to his ability to make rational and prudent decisions in his own interest.
As will be obvious, the evidence that I have extracted is also relevant to the unwritten terms upon which Mr Dlakic agreed to transfer the goodwill of Johnston Vaughan to Mr Vaughan by means of the buyback agreement. I have set out that evidence out of context because of the difficulty in separating it from the evidence relevant to Mr Vaughan's knowledge of Mr Dlakic's psychological condition.

[9]

The pleaded claim

Mr Dlakic pleaded in par 46 of his further amended statement of claim that he retained Mr Vaughan to provide legal advice on the loan documentation concerning the loan from Dr Peter and Ms Eve Vince 3 in August 2010. He alleged in par 47 that the retainer was oral or alternatively a "de facto relationship of lawyer and client". Mr Dlakic alleged that Mr Vaughan said to him: "Mate I will read this now and give you legal advice on it". Mr Dlakic alleged in par 48 that it was an implied term of the retainer that Mr Vaughan would use all reasonable care, skill and diligence expected of a reasonably competent solicitor in the position of Mr Vaughan.
Then, in par 49, Mr Dlakic set out the advice given by Mr Vaughan in the following terms: On or about 3 August 2010, the Defendant advised the Plaintiff that: a. interest would be charged at 87% per annum or $17,500 per month; b. Johnston Vaughan could afford to pay the interest charged; and c. The Plaintiff should sign the mortgage and guarantee.
Mr Dlakic alleged in par 50 that on 3 August 2010 he signed the loan agreement in reliance upon Mr Vaughan's advice.
The alleged breach of duty by Mr Vaughan is formulated in par 51 in the following terms: The Defendant failed to advise the Plaintiff properly or at all that under the loan documentation pursuant to which Dr Vince would loan moneys to the Plaintiff: a. That the Plaintiff parents' home at 251 Avoca Street Randwick NSW 2031 would be secured by a registered second mortgage in favour of Dr Vince; b. That the Plaintiff's properties at 149 and 149A Rocky Point Road, Ramsgate NSW 2217 would be the subject of a registered second mortgage and securitisation by Caveat in favour of Dr Vince. c. That the property situated at 56/301 Castlereagh Street, Sydney NSW 2000 owned by the Plaintiff would be secured by Caveat in favour of Dr Vince. d. That the Plaintiff would be providing a Power of Attorney in registrable form in favour of Dr Vince. e. That Johnston Vaughan would not be in a position to generate the necessary gross income in order to meet the monthly Dr Vince Loan repayment obligations that the Plaintiff was personally liable for.
Mr Dlakic alleged in par 52 that the matters pleaded in par 51 involved a breach of duty of care owed to the plaintiff. Mr Dlakic listed his damage in par 53 as being in the total of $714,000, comprising the principal of $300,000, interest paid from 4 August 2010 to December 2011 of $146,000, further interest paid up to December 2012 of $165,000, $65,000 in principal repayments, an amount of $100,000 still owing on the loan, and costs paid of $3000.
The following aspects of Mr Dlakic's pleaded claim are of particular significance. First, Mr Dlakic's particulars of the service Mr Vaughan agreed to provide him specifically concerned "legal advice". Secondly, the advice that Mr Dlakic identified concerned the amount of interest payable and the proposition that Johnston Vaughan could earn enough that Mr Dlakic would be able to afford to pay the interest. The advice did not relate to the ability of the firm to generate enough income to pay the principal of the Vince loan within the three months term of the loan. Thirdly, sub-pars (a) to (d) of the allegations of breach concerned alleged failures by Mr Vaughan to advise Mr Dlakic of the basic effect of four of the documents that would be required to be signed. That is, Mr Dlakic pleaded that the legal advice given by Mr Vaughan was defective in the fundamental sense that he did not advise what the effect of the various documents required to be signed would be. Fourthly, the pleading confirmed that the claim against Mr Vaughan in relation to the financial consequences of the Vince loan was limited to the ability of Johnston Vaughan to generate income to pay the monthly interest. Finally, Mr Dlakic's particulars of damage include not only the principal of the Vince loan but also amounts of principal repaid and amounts of principal still owing.
Mr Vaughan's response to all of these allegations was simply to deny them.

[10]

Mr Dlakic's evidence

Mr Dlakic gave evidence that he felt pressure to buy the practice, as from the time that he had commenced employment with Mr Vaughan in 2001 he had frequently been told that the practice would ultimately be his, and he had worked on a low salary in the expectation that he would ultimately become the principal of Johnston Vaughan when Mr Vaughan retired. Mr Dlakic felt that he had to take his opportunity or lose it.
Mr Dlakic also gave evidence that Mr Vaughan put pressure on Mr Dlakic to pay the balance of the purchase price quickly: 85. … The Defendant pointed his finger at me and became red-faced. He shouted at me words to the effect of: "Mate, I'm not going to let you dick me around with taking forever. I'll sell it to Anthony Liberiou or someone else, and I'll keep the $250,000 that you paid for defaulting on me." The Defendant then said to me: "You'd better quick smart raise the money from some loan sharks if you have to but I'm warning you, I'm not going to let this turn out like a family law spec case" or words to that effect.
Although Mr Dlakic said that this conversation made him feel extremely pressured and vulnerable, Mr Dlakic has not pleaded a claim that alleges any unconscionable conduct on Mr Vaughan's part in forcing Mr Dlakic to seek the loan that he ultimately obtained from Dr and Ms Vince.
Mr Dlakic accepted in his evidence that he obtained the agreement of Dr and Ms Vince to lend him the $300,000 through his own mortgage broker, Mr Grant Hawkswell.
Mr Dlakic gave the following evidence, which is at the heart of his claim that Mr Vaughan is liable to him for professional negligence: 89. On 3 August 2010, I obtained the relevant mortgage contract from Dr Vince's lawyers: John Morrissey and Company. I took the loan documents to the Defendant. I said to Michael: "I've got loan documents from Dr Vince's lawyers but I'll need independent advice," or words to that effect. The Defendant said to me in his office: "Mate I will read this now and give you legal advice on it," or words to that effect. … 90. I observed the Defendant read the above loan documents in front of me for about 30 minutes. He then said to me: "Mate go ahead with it, you are going to get the firm and be rich like me. They are going to charge about 87 per cent interest and fees of about $17,500 per month, but that's fine. You can afford that. The office is good for it. I've read it all, don't worry about a thing. Just go and sign the mortgage, Power of Attorney in registrable form, and guarantees. You have to get it signed by another lawyer, but take it from me you've got nothing to worry about. I am going to help you. Mate, you and I were never going to the best lawyers, but we could always be the richest lawyers and this firm will make you get 6 houses and a Rolls Royce by the time you leave Kogarah. Sign the damned mortgage with Dr Vince and the firm is yours and for the rest of your life, you are set, like me mate. How did you think I made $8 million? Go and see Vasso Tsolakis who I use for Waverley Local Court agency work", or words to that effect. 91. In my recollection during the above advice that the Defendant provided me at no stage did the Defendant advise me that my parent's home at Randwick was secured against the loan and could be sold in order to meet the principal loan and any arrears of interest repayments if I defaulted in the loan repayments to Dr Vince.
If it be accepted for the moment that Mr Vaughan made the statements attributed to him by Mr Dlakic, it should be noted from par 89 of Mr Dlakic's affidavit that Mr Vaughan offered to give him "legal advice" on the documents. There was no suggestion that Mr Dlakic would pay a fee for the advice, or that a file would be opened in respect of Mr Dlakic having become Mr Vaughan's client.
Mr Dlakic then gave the following evidence concerning his visit to Mr Tsolakis: 92. I relied heavily on the Defendant's above advice including the referral to see Vasso Tsolakis, solicitor ("Vasso"). I then made an appointment to see Vasso. His office was located at 830 ANZAC Parade, Maroubra, which I visited with my parents at approximately 8.00pm on 3 August 2010.
It may be wondered why Mr Dlakic visited Mr Tsolakis with his parents, if Mr Dlakic did not understand that the parents were going to enter into some legal obligation in relation to the loan to Mr Dlakic.
Mr Dlakic then continued: 93. During my appointment with Vasso at his office I observed Vasso read the Dr Vince Loan documents, for a total time of about four or five minutes. He said to me: "Amil you have to sign this all up if you want the firm. I am not going to read all this out, as it's late at night and I want to go home", or words to that effect. I said: "Okay no problem", or words to that effect. Given the time of night and the above advice that I had already received from the Defendant whom I trusted, and the fact that Vasso did not indicate to me that there was any issue with the loan terms and conditions, I accepted that the proposed loan appeared to be in order and suitable to be signed by my parents and me. I recall that I did not press Vasso for more advice in respect of the loan terms and conditions before signing the Dr Vince Loan documents.
Mr Dlakic did not explain what he understood the purpose to be of his parents signing the documents, as they plainly did at that time.
In par 37 of his affidavit in reply, Mr Dlakic said: "… The Defendant had already specifically advised me concerning the Dr Vince loan prior to my seeing Vasso. I recall that I said to Vasso: "Michael Vaughan has already explained the loan conditions to me and I just need them witnessed," or words to that effect. Vasso simply witnessed my signature on the loan documents, which was late at night, as previously deposed in my earlier affidavit".
Mr Dlakic gave evidence that the agreement contained a term that required Mr Dlakic to pay to Mr Vaughan the gross amount of fees received by the firm for work done before 19 July 2010; Mr Dlakic became responsible for all employment obligations of the firm; and he was required to pay Mr Vaughan a salary of $150,000 per year. In this respect, Mr Dlakic gave evidence that the earnings of Johnston Vaughan were unexpectedly low in respect of his ability to repay the amounts that he borrowed to purchase the firm.
Factual issues not addressedUpon careful consideration, there was an absence of evidence in Mr Dlakic's case in respect of a number of significant matters relevant to his negligence claim against Mr Vaughan.
Mr Dlakic did not give any evidence of his discussions with Mr Hawkswell, or what Mr Hawkswell said to him about the terms of the loan that were on offer.
It is implicit in Mr Dlakic's evidence that he took the bundle of documents that he received from the solicitors for Dr and Ms Vince to Mr Vaughan without having attempted to peruse the documents at least to a sufficient extent to identify their general nature. If indeed Mr Dlakic suggests that that is what happened, it would have been an unusual and improbable course of action for a solicitor of some 10 years standing. Mr Dlakic did not give any evidence that he made Mr Vaughan aware that he had not even looked at the documents and was relying upon Mr Vaughan to advise him of their general legal effect.
The effect of Mr Dlakic's evidence was that he discovered after he had borrowed the money from Dr and Ms Vince that he could not service the interest payments from the income generated by Johnston Vaughan. However, Mr Dlakic did not lead any evidence at all about the income and expenses of the firm in the period up to 25 October 2010 when the Vince loan was repayable, and thus whether there were insufficient funds to pay the interest. As I have noted above, an income and expenditure statement for Johnston Vaughan Solicitors Pty Ltd for the year ended 30 June 2014 shows that director's fees were $500,000 and $278,000 for the previous year. Equivalent evidence was not provided for the year ended 30 June 2011. It is not clear whether such evidence was prepared either for Mr Dlakic or the company.
Further, the evidence was imprecise as to when Mr Dlakic acquired the Aston Martin and Porsche motor vehicles and how the need to pay the leasing fees for those vehicles affected Mr Dlakic's cash flow. Mr Dlakic also gave evidence of having to pay the whole of the mortgage over his parents' home and substantial school fees for his step-children, and there is no evidence that permits any assessment as to whether, and if so how, these extraneous expenses affected Mr Dlakic's ability to service the Vince loan.
There is no evidence that Mr Vaughan was aware in any specific way of Mr Dlakic's recurrent financial obligations, such that Mr Dlakic could reasonably have expected Mr Vaughan to be able to give a reliable assurance concerning the likelihood that Mr Dlakic would be able to service the Vince loan. Even if it be accepted that Mr Vaughan made statements concerning the earning capacity of Johnston Vaughan in relation to servicing the loan, without proof that Mr Vaughan was aware of all of Mr Dlakic's current financial obligations, it would be problematic to characterise any assertions made by Mr Vaughan as material representations concerning the actual ability of Mr Dlakic to service the Vince loan in conjunction with all of his other obligations.
There is no evidence that Mr Dlakic informed Mr Vaughan that, notwithstanding that Mr Vaughan advised Mr Dlakic to see another solicitor, Mr Tsolakis, when Mr Dlakic did so, he did not obtain full advice for himself and his parents before the various documents were signed. In the absence of such evidence, it would be problematic to conclude that Mr Vaughan ought to have appreciated, in the informal circumstances in which he is alleged to have advised Mr Dlakic, that Mr Dlakic expected Mr Vaughan to give comprehensive advice to Mr Dlakic that would be relied upon as if Mr Vaughan had formally been retained to act as Mr Dlakic's solicitor.
Mr Dlakic did not in my view give any evidence that is capable of supporting a finding that he entered into a retainer agreement with Mr Vaughan in which Mr Vaughan agreed in any formal sense to treat Mr Dlakic as his client and to provide legal services to him, whether or not for reward. The most that the evidence could support is a finding that Mr Vaughan casually and informally agreed to provide Mr Dlakic with "legal advice" on the documents that Mr Dlakic had presented to him and that he would do so gratuitously.

[12]

Relevant legal principles

I will set out what I consider to be the basic legal principles governing the degree of care required of solicitors in advising clients in respect of their intention to execute documents to take out loans, particularly in the context where the advice may be required to extend to the commercial consequences of the transaction, and where the advice is given gratuitously. I have not found it necessary to canvass the authorities in detail because, as will be seen, I have concluded that the proper approach is to reject this aspect of Mr Dlakic's case on the facts.
In Lauvan Pty Limited & Anor v Bega & Ors [2018] NSWSC 154 (Lauvan) Gleeson JA set out the legal principles relevant to a solicitor's duty to advise at [421]-[426]: Legal principles - solicitor's duty to advise [421] A solicitor's duty to his or her client arises in both contract and tort. The terms of the retainer will usually set out the scope of the duty with respect to the latter: Badenach v Calvert (2016) 257 CLR 440; [2016] HCA 18 at [16] (French CJ, Kiefel and Keane JJ), citing Hawkins v Clayton (1988) 164 CLR 539 at 544-545; [1988] HCA 15. [422] It is uncontroversial that a solicitor must ensure that the client understands the documents he or she is to execute and the consequences of executing them, especially in relation to unusual provisions: Fox v Everingham (1983) 50 ALR 337 at 341-2; Henderson v Amadio (No 1) (1995) 140 ALR 391 at 518-9. [423] That a matter might fall beyond the ambit of the retainer does not necessarily militate against the existence of a duty owed by a solicitor to act in respect of it, though whether any such responsibility is enlivened will always depend upon the circumstances of the case: Provident Capital Ltd v Papa at [2] (Allsop P); Dominic v Riz [2009] NSWCA 216 at [89] and [91] (Allsop P). It is therefore unwise to be in any way dogmatic in general terms about what needs to be done in fulfilment of the retainer: Provident Capital Ltd v Papa at [2]. [424] Solicitors are not ordinarily required to advise upon the wisdom of transactions in relation to which they act: Provident Capital at [75] (Macfarlan JA), citing Polkinghorne v Holland (1934) 51 CLR 143 at 158; [1934] HCA 28, and Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 at 418. However, depending on the circumstances known to the solicitor, the performance of the retainer may require more than an explanation of the legal effect of documents, but also the obvious practical implications of the client's entry into the transaction the subject of advice: Provident Capital Ltd v Papa at [75], [80] (Macfarlan JA). [425] Thus, it is necessary to consider what material facts were known to the solicitor when the impugned conduct occurred in order to determine precisely the extent of the obligations attracted by his or her discharge of the retainer: Provident Capital Ltd v Papa at [68] and [78] (Macfarlan JA). [426] With respect to a retainer in relation to a mortgage transaction (whether certified or not), the provision of independent legal advice is not a mere formality and should involve proper and adequate advice about the consequences of entering into the contract. If, during the execution of a retainer, the solicitor is put on notice that the client's interests are endangered unless further steps are carried out, a duty may arise to bring attention to that aspect of concern. The amount of emphasis that ought to be placed on any apparent risk will depend upon the circumstances (e.g. loyalty of blood or love), and may need to be expressed "with clarity and force" or "in strong terms": Provident Capital Ltd v Papa at [2] (Allsop P) and [80] (Macfarlan JA); David v David [2009] NSWCA 8; (2009) Aust Torts Rep 91-993 at [76] (Allsop P)
In Provident Capital v Papa [2013] NSWCA 36 (Provident Capital) Macfarlan JA, with Allsop P and Sackville AJA agreeing, made statements to the effect that, although solicitors are not ordinarily required to give advice about the financial or business value of a transaction, the "proper execution of a retainer to give independent legal advice concerning a loan and mortgage transaction may, depending upon the circumstances known to the solicitor, require more than an explanation of the legal effect of the documents to be executed" (at [75]). His Honour elaborated at [80] by stating that a solicitor's obligation is "not simply to explain the legal effect of documents but to advise his or her client of the obvious practical implications of the client's entry into a transaction the subject of advice". His Honour said the following at [75]-[77]: [75] It is well established that solicitors are not ordinarily required to advise upon the wisdom of transactions in relation to which they act (Polkinghorne v Holland [1934] HCA 28; 51 CLR 143 at 158; Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 at 418). Further, the correctness of the view expressed in Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 that a solicitor may have a duty of care extending beyond the ambit of the solicitor's retainer (a so-called penumbral duty) remains a matter of debate (Kowalczuk v Accom Finance [2008] NSWCA 343; 77 NSWLR 205 at [267] - [294]; Dominic v Riz [2009] NSWCA 216 at [89] - [90]; Keddie v Stacks/Goudkamp Pty Ltd [2012] NSWCA 254 at [86] - [104]). However proper execution of a retainer to give independent legal advice concerning a loan and mortgage transaction may, depending upon the circumstances known to the solicitor, require more than an explanation of the legal effect of the documents to be executed. As Allsop P (with whom Hodgson JA and Handley AJA agreed) said in David v David [2009] NSWCA 8 at [76], after referring to the existence of a "penumbral" duty being doubtful: "If, however, the solicitor during the execution of his or her retainer learns of facts which put him or her on notice that the client's interests are endangered or at risk unless further steps beyond the limits of the retainer are carried out, depending on the circumstances, the solicitor may be obliged to speak in order to bring to the attention of the client the aspect of concern and to advise of the need for further advice either from the solicitor or from a third party". [76] In Dominic v Riz at [90] - [91] his Honour (with the concurrence of Hodgson and McColl JJA) referred to that statement as follows: "[The statement] was intended to do no more than posit the possibility that the performance of the retainer, and what is learnt during it, may affect how the retainer is properly discharged". [77] Allsop P's statements were endorsed by Beazley JA (with the concurrence of Barrett JA and Sackville AJA) in Keddie v Stacks/Goudkamp at [104].
Kenny J in Carey v Freehills [2013] FCA 954, (2013) 303 ALR 445 (Carey) said the following about the circumstances in which a solicitor may owe a duty of care to a person even though the solicitor has not formally accepted a retainer from the client: [310] Generally speaking, solicitors do not owe a duty of care to persons who are not their clients: see, for example, Hill v van Erp (1997) 188 CLR 159 ('Hill v van Erp') at 167 (Brennan CJ). A solicitor owes a duty of care to a client who has retained that solicitor. Freehills owed a duty of care to WPC and WPM, who had retained Mr Shearwood; but neither company is a cross-claimant. In Hill v van Erp at 167, Brennan CJ said: Generally speaking … a solicitor's duty is owed solely to the client subject to the rules and standards of the profession. That is because the solicitor's duty is to exercise professional knowledge and skill in the lawful protection and advancement of the client's interests in the transaction in which the solicitor is retained and that duty cannot be tempered by the existence of a duty to any third person whose interests in the transactions are not coincident with the interests of the client. [311] Where a solicitor's conduct demonstrates an assumption of responsibility, with known reliance by the plaintiff, a duty of care may arise by reason of an implied professional retainer agreement: see, for example, IGA Distribution Pty Ltd v King and Taylor Pty Ltd [2002] VSC 440 at [231] (Nettle J); Pegrum v Fatharly (1996) 14 WAR 92 ('Pegrum v Fatharly') at 95 (Ipp J), 101-102 (Anderson J, Kennedy J agreeing); and Meerkin & Apel v Rossett Pty Ltd [1998] 4 VR 54 at 62 (Charles JA, Callaway and Batt JJA agreeing). [312] There are, however, circumstances in which a duty of care on the part of a solicitor may arise independently of a retainer. Thus, a duty of care has been said to arise in the context of negligent misstatement causing loss: see Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 and Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241, at 252 (Brennan CJ). A duty of care has also been recognised as being owed by a solicitor to a beneficiary of a client's will, in the absence of reliance by the third party beneficiaries: see Hill v van Erp at 166-168 (Brennan CJ), 172-173 (Dawson J), 234 (Gummow J). Significantly, however, there the High Court emphasised the coincidence of interest between the client and the beneficiaries. In Blackwell v Barroille Pty Ltd (1994) 51 FCR 347 ('Blackwell v Barroille') a Full Court of this Court held that a solicitor owed a duty of care to the client's trustee in bankruptcy as a result of the reliance by the trustee on the solicitor. See further, Beach Petroleum NL v Kennedy and Others (1999) 48 NSWLR 1 at 45-48 [188]-[205] and Hawkins v Clayton (1988) 164 CLR 539 at 578 (although Deane J's analysis there depended on treating proximity as a determinative factor, an approach that has since been rejected: see below). [313] Where a duty of care is claimed to have a risen in a new circumstance or with respect to a new category of relationships, Australian law now requires a multi-factorial approach in assessing whether a duty of care has indeed arisen. As the New South Wales Court of Appeal noted in Caltex Refineries (Qld) Pty Ltd v Stavar (2009) 75 NSWLR 649 ('Caltex v Stavar') 675 [101], the High Court has rejected the doctrine of proximity as a determinative factor in deciding whether a duty of care existed, as well as "the two stage approach in Anns v Merton London Borough Council [1978] AC 728 based on reasonabl[e] foreseeability, the expanded three stage approach in Caparo Industries Plc v Dickman [1990] 2 AC 605 [('Caparo v Dickman')] and any reformulation of the latter two". See, for example, Hill v van Erp at 210 (McHugh J), 237-239 (Gummow J), Perre v Apand Pty Ltd (1999) 198 CLR 180 at 193-194 [9]-[10] (Gleeson CJ), 197-198 [25]-[27] (Gaudron J), 208-213 [70]-[83], 216 [93] (McHugh J), 268 [245]-[247], 273 [255], 285 [280]-[287] (Kirby J), 303 [330]-[335] (Hayne J), 319 [389], 324 [398]-[400], 326 [406] (Callinan J); Sullivan v Moody (2001) 207 CLR 562 at 577-580 [43]-[53] (Gleeson CJ, Gaudron, McHugh, Hayne and Callinan JJ); Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 at 583 [99] (McHugh J), 625 [234]-[236] (Kirby J); and Stuart v Kirkland-Veenstra (2009) 237 CLR 215 at 260 [132] (Crennan and Kiefel JJ).
For the purposes of the present case, the significant lessons to be taken from these cases include that the duty on a solicitor does not usually extend to advising upon the wisdom of the transaction (Lauren at [424] and Provident Capital at [75]), but it may do so "depending on the circumstances known to the solicitor" (Lauren at [424]). Whether such a duty has arisen will require a consideration of what material facts were known to the solicitor when the conduct complained of occurred (Lauren at [425]), and whether the solicitor has learned of facts which put him or her on notice that the client's interests are endangered or at risk unless further steps beyond the limits of the retainer are carried out (Provident Capital at [75]). Even where there is not a formal retainer, by reason of an assumption of responsibility by the solicitor, with known reliance by the plaintiff, a duty of care may arise by reason of an implied professional retainer agreement (Carey at [311]). A duty of care may also arise independently of an express or implied retainer, but that will depend upon the application of the tort principles relevant to the facts of the particular case (Carey at [312]).

[13]

Consideration

The context in which this claim arose, as set out in the consideration of the background facts above, is that on 19 July 2010 Mr Dlakic entered into the purchase agreement under which he agreed to pay Mr Vaughan $550,000 for the practice of Johnston Vaughan.
On the same day, Mr Dlakic entered into a lease from Davlite that committed Mr Dlakic to pay rent of $1300 per week for a period of three years.
However, it must also be borne in mind that, at or around the same time, Mr Dlakic's appetite for entering into burdensome financial transactions included his purchase of the Vaucluse property, which was apparently completed in early 2011, and his lease of an Aston Martin vehicle.
Mr Dlakic entered into the purchase agreement on 19 July 2010 without any secure arrangement for funding the purchase price. By 22 July 2010, Mr Dlakic had paid Mr Vaughan $250,000, which was funded as to $191,000 by an increase in his parents' mortgage.
Mr Dlakic said in par 61 of his primary affidavit that Mr Vaughan said to him concerning the proposal that he purchase the practice: "This is an engine room for making money; the firm is easily worth $550,000. Future billings in Despot will be at least $250,000 and the Ann Collins matter will be at least $300,000. You get the rest of the practice for nothing," or words to that effect".
The point of these observations concerning the purchase agreement is that, whether or not it be the case that the purchase agreement was onerous in some respects, and whether or not Mr Vaughan made proper disclosure in relation to the financial circumstances of Johnston Vaughan, Mr Dlakic has not made any claim arising out of the circumstances in which he entered into the purchase agreement. His claim is limited to the circumstances in which he borrowed $300,000 from Dr and Ms Vince. By the time he borrowed that money he was already committed to the purchase of Johnston Vaughan and owed an outstanding debt of $300,000 to Mr Vaughan.
When the documents that were signed in connection with the making of the $300,000 loan are examined (Court Book pages 767 to 847) it becomes immediately clear that Mr Tsolakis witnessed the signatures of Mr Dlakic's parents on a number of documents, including the loan agreement, a mortgage of the Randwick property, a deed of guarantee, and the guarantors' acknowledgement.
In the absence of evidence from Mr Dlakic's parents, I could not accept, on the basis of the limited evidence proffered by Mr Dlakic, that Mr Tsolakis was so remiss in his professional duties that he allowed Mr Dlakic and his parents to sign all of the documents without at least making them aware of the essential nature and effect of the documents being signed.
By the time the documents related to the Vince loan were signed on 3 August 2010, Mr Dlakic had been a practising solicitor for 10 years. As I have noted above, Mr Dlakic did not give any evidence concerning whether or not he read the bundle of documents provided to him by the lenders' solicitors, or even whether he leafed through them sufficiently to learn their general nature.
I am unable in the circumstances to accept that Mr Dlakic simply received the bundle of documents, allowed Mr Vaughan to read them for 30 minutes and make the statements attributed to him, and then took his parents to the office of Mr Tsolakis so that the documents could all be signed and witnessed, without either Mr Dlakic or his parents having any clue about the effect of the documents that they were signing.
If it is true that Mr Vaughan did not mention to Mr Dlakic that the documents included a mortgage by Mr Dlakic's parents over their home, or indeed any other of the documents to be signed by the parents, that could reasonably be explained by Mr Vaughan having an implicit belief that Mr Dlakic, as an experienced solicitor, already knew what the nature and effect of all of the documents was.
Although Mr Dlakic gave evidence that he signed the various documents connected with the loan in reliance upon the advice that he alleges Mr Vaughan gave to him, Mr Dlakic did not say that, if he had received any different advice from Mr Vaughan, he would not have executed the documents himself, and would not have allowed his parents to do so.
Mr Dlakic was already under a legal obligation to pay Mr Vaughan the $300,000 balance of the purchase price, and Mr Dlakic has not given any evidence that there was any alternative means for him to borrow the $300,000 either at all, or on more favourable terms than the terms offered by Dr and Ms Vince.
The problem that Mr Dlakic experienced following his borrowing of the $300,000 was that he was unable to repay the capital and the interest payable by the due date, being 25 October 2010.
Ultimately, the fact that the documents listed in sub-pars (a) to (d) of par 51 of Mr Dlakic's further amended statement of claim were signed did not have any effect on any loss that Mr Dlakic may have suffered.
The operative complaint that Mr Dlakic makes in his further amended statement of claim is the complaint in par 51(e) that Mr Vaughan failed to warn him that Johnston Vaughan would not be in a position to generate the necessary gross income in order to meet the monthly Vince loan repayment obligations that Mr Dlakic was personally liable for.
This is only a complaint about the ability of the firm to generate income to service the loan made by Dr and Ms Vince, and is not a complaint that Mr Dlakic was not warned that the firm would be unable to earn sufficient income to repay the principal borrowed in the three month period for repayment.
Mr Dlakic gave no evidence that he had any belief that Johnston Vaughan would have earned him enough to repay a principal sum of $300,000 in three months (after allowing for all expenses). That would require that the firm have an earning capacity on an annual basis of a profit of $1,200,000.
I am not satisfied that the credibility of Mr Dlakic's evidence on this issue is sufficiently superior to that of Mr Vaughan's response to justify the Court in preferring Mr Dlakic's version to the extent and in the detail that would be required in order for the Court to accept Mr Dlakic's evidence and to reject entirely the evidence given by Mr Vaughan. Even if Mr Dlakic's version of events were accepted in detail, I am not satisfied that Mr Dlakic has established a retainer of Mr Vaughan, or that Mr Vaughan accepted a voluntary duty of care, that extended to Mr Vaughan taking professional responsibility for advising Mr Dlakic about the nature and effect of the documents that Mr Dlakic and his parents would be required to sign, or as to whether the fees earned by Johnston Vaughan would be sufficient to enable Mr Dlakic to service the loan. The evidence in my view does not establish with sufficient certainty that Mr Dlakic and his parents did not understand the nature of the documents that they signed. I am not satisfied that Mr Dlakic has proved that he was dependent upon Mr Vaughan's advice to be able to estimate whether he could service the loan from his earnings as principal of Johnston Vaughan.
As I have observed above, there is no evidence that Mr Vaughan knew that Mr Dlakic would enter into the documents related to the Vince loan, and would permit his parents to do the same, in reliance upon the informal advice given by Mr Vaughan, and not the independent advice of Mr Tsolakis, as Mr Dlakic's own evidence would show Mr Vaughan was entitled to expect Mr Dlakic and his parents to do. There is no evidence that Mr Vaughan was sufficiently aware of all of Mr Dlakic's recurrent financial obligations for Mr Vaughan to understand and be expected to take responsibility for any assertion that he did make that Mr Dlakic should be able to service the Vince loan from the income of Johnston Vaughan.
Viewed strictly, the evidence does not establish that the income of the firm was not sufficient to service the Vince loan, putting aside other obligations of Mr Dlakic which are not shown to have been known to Mr Vaughan.
For the multitude of reasons that I have considered above, in the absence of a formal retainer from Mr Dlakic to Mr Vaughan, the evidence falls short of establishing either an implied retainer or a level of knowledge on Mr Vaughan's part that caused him to be subject to any duty of care towards Mr Dlakic as has been alleged.
Accordingly, I find that Mr Dlakic's claim for damages against Mr Vaughan for breach of retainer or duty of care in relation to the $300,000 loan from Dr and Ms Vince must be dismissed.
It is therefore not necessary for the Court to assess the damages that would have been payable if Mr Dlakic had made out his negligence case against Mr Vaughan.
I would observe, however, that the amount of damages claimed by Mr Dlakic in par 53 of his further amended statement of claim has substantially been overstated.
Mr Dlakic would not be entitled to recover the $300,000 principal that he borrowed. At the time that Mr Dlakic borrowed the money, he was indebted to Mr Vaughan for that amount as part of the purchase price for Johnston Vaughan. Mr Dlakic used the money borrowed to pay that liability. Accordingly, Mr Dlakic did not make any loss from the borrowing of the principal. If he had not borrowed the money from Dr and Ms Vince, he would have had to find the $300,000 from some other source.
It goes without saying that Mr Dlakic could not be entitled to recover both the amount of the principal borrowed and the $65,000 in principal repayments that he claims, as that claim involves double counting, as does the claim for the $100,000 that Mr Dlakic claims remains outstanding.
As Mr Dlakic was clearly aware of what he claimed to be the effective rate of interest on the loan (as he pleads in par 49(a) of his further amended statement of claim) and as Mr Dlakic has not proved that he had an alternative and more favourable source of funds, he cannot complain about the interest payable up to the 25 October 2010 date of repayment of the loan.
If Mr Dlakic had made out his negligence case against Mr Vaughan, in theory he may have been able to prove a case for damages based upon the difference between the effective interest rate he paid and some alternative more favourable interest rate he could have achieved by borrowing the money from an alternative lender. Mr Dlakic did not, however, lead evidence of any more favourable course that he could have followed if he had been advised by Mr Vaughan that he could not service the loan from Dr and Ms Vince from the earnings of Johnston Vaughan.

[15]

The pleaded claims

As I have outlined in the summary of Mr Dlakic's claims at the beginning of this judgment, Mr Dlakic makes two primary claims concerning the buyback agreement. Those claims are pleaded in pars 6 to 33 of the further amended statement of claim.
The first of the claims is that the buyback agreement is either void or should be set aside. The second assumes the continued effectiveness of the buyback agreement, and claims damages for failure by Mr Vaughan to pay to Mr Dlakic fees received in respect of work done before the date of the buyback agreement, in breach of a term of that agreement.
As I understand Mr Dlakic's case, the second of these claims will not logically arise if he succeeds on the first. If the buyback agreement is void or is set aside, then Mr Dlakic will continue to be legally entitled to all fees earned by Johnston Vaughan before the date of the buyback agreement, and Mr Vaughan will be liable to account to Mr Dlakic for all such fees that were received afterwards.
Mr Dlakic has not yet elected which of these two alternative remedies he wishes to obtain. If he is entitled to an order setting aside the buyback agreement, and he elects for that remedy, then the benefit of that remedy to him in money terms will depend upon what is determined from a reconstruction of the accounts of Johnston Vaughan. That is an exercise that has not yet been done. It is not yet clear that it can be done, but the question of whether or not it can be done cannot be answered at present because of the late and incomplete production of documents by Mr Vaughan in response to Mr Dlakic's notice to produce. If the buyback agreement is set aside, then Mr Dlakic will be entitled to all of the fees received, but he will also be responsible for all of the expenses and other outgoings of the practice. Those expenses may include an allowance for remuneration for Mr Vaughan for the work that he did in carrying on the practice of Johnston Vaughan. The evidence before the Court at present does not demonstrate whether Johnston Vaughan made a profit, and if so what that profit was. It is conceivable that the more advantageous remedy to Mr Dlakic would be to leave the buyback agreement in effect, and obtain the benefit of an order that Mr Vaughan pay to him all fees received by the practice after the buyback agreement in respect of work done before. The position is unclear.
It will be appropriate in the first instance to consider whether Mr Dlakic has a right to have the buyback agreement set aside. Although Mr Dlakic sought an alternative declaration that the buyback agreement is void, he has relied upon the alternative principles of undue influence and unconscionable taking advantage by Mr Vaughan of a serious disadvantage on Mr Dlakic's part. It is clear that if either of those grounds are established, the buyback agreement will be voidable not void. The making of an order setting aside the buyback agreement will be in the discretion of the Court, where that discretion is to be exercised judicially according to a number of established principles: see Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114 at [32].

[16]

The misrepresentation alleged by Mr Dlakic

The starting point of Mr Dlakic's claim that the buyback agreement should be set aside is the allegation made in par 7 of the further amended statement of claim that, on or about 25 November 2014, Mr Vaughan warranted, or alternatively represented to Mr Dlakic that if the files of Johnston Vaughan were transferred back to Mr Vaughan, the net income earned by Johnston Vaughan would continue to be paid to Mr Dlakic. (In his final submissions, Mr Vaughan made an issue out of whether the representation alleged related to the whole of the income of the firm or only the net income, but it is clear from par 7 of the further amended statement of claim that Mr Dlakic only alleged that Mr Vaughan told him that he would continue to receive the net income).
Mr Dlakic made a series of allegations in pars 11 to 16 of the further amended statement of claim to the effect that Mr Vaughan made a material misrepresentation, or his conduct was misleading and deceptive for the purposes of s 18 of the Australian Consumer Law (having regard to the effect of s 4 of the Australian Consumer Law).
Mr Dlakic alleged in par 10 that since 25 November 2014, the date of the buyback agreement, Mr Vaughan has retained the income received by Johnston Vaughan. He alleges, in effect, that when Mr Vaughan made the representation he knew it was false, or he was recklessly indifferent as to its truth, or he did not have reasonable grounds for making the representation.
I do not understand Mr Dlakic to have pursued his alternative case based upon mistake pleaded in pars 17 and 18 of his further amended statement of claim.
Mr Vaughan's pleaded response to the allegation in par 7 that he made the representation was: 7. Denied. The active files which were transferred to the purchaser pursuant to Clause 4 of the Agreement, were files which had no value due to the conduct of the Plaintiff and the only files retained were the files of Paul Calleja and the Angelo De Jong file, a workers compensation case, which has not settled. The proceeds of the settlement of the Calleja matter paid the expenses of the Plaintiff to which Clause 3 of the Deed refers and paid the statutory liabilities of staff and rent and there were no funds then available for payment to the Plaintiff, in accordance with Clause 4.
The first question of fact is whether Mr Vaughan made the representation as alleged.
Had the evidence been sufficient to answer it, the second question would be whether the allegation by Mr Vaughan in par 7 of his defence was correct, and the fees received by Johnston Vaughan after the date of the buyback agreement in respect of work done before that date were insufficient, after payment of all of the obligations for which Mr Dlakic remained responsible under the buyback agreement, for a balance to be left over to be paid to Mr Dlakic. Because of the dearth of detailed financial evidence, this question cannot be answered with any confidence. There is some evidence that allows some conclusions to be drawn, but it is not possible for the Court to make comprehensive findings.
I have set out the evidence given by Mr Dlakic on this subject in pars 190 to 195 of his primary affidavit in par 166 above in dealing with Mr Vaughan's knowledge of Mr Dlakic's psychological disability in November 2014.
I have also set out Mr D'Apice's evidence on that subject in par 170 above when dealing with the same subject.
Mr Vaughan's evidentiary response was simply to deny that he made the statements attributed to him by both of these witnesses.

[17]

Mr Nakhle's evidence

Mr Paul Saleem Nakhle is related to Mr Dlakic and retained Mr Dlakic to act for him and related corporations in the years after Mr Dlakic acquired Johnston Vaughan from Mr Vaughan.
Mr Nakhle gave evidence that in November 2014, Mr Dlakic said to him: "Mate, Michael has drawn an agreement to transfer all the files to [me] for $1. That way the Law Society will be happy as the files go to Michael. He will give me every cent that comes through it will not be different to before" or words to that effect". He also gave evidence of Mr Dlakic telling him in March 2015 that Mr Vaughan had "locked me out of the general accounts", and of Mr Vaughan confirming that he had done so, and that Mr Vaughan would give Mr Dlakic $200 per week. Later, in June or July 2015, Mr Nakhle raised with Mr Vaughan his concern about Mr Dlakic's psychological condition and the inadequacy of his income, and related the conversation that I have set out above in par 178, in which Mr Vaughan said to Mr Nakhle that he would send to Mr Dlakic "every dime that comes through this firm".
Mr Nakhle gave evidence that in October 2015, when he was pressing Mr Vaughan to increase the amount of income that he gave to Mr Dlakic, he made an agreement with Mr Vaughan that Mr Vaughan would pay one third of the fees of $35,000 payable by Mr Nakhle to the firm to Mr Dlakic. Mr Nakhle annexed to his affidavit an email dated 14 October 2015 that was written to him by Mr Vaughan. The email set at a calculation as to how the one third was reduced to $9376.05 to cover an identified expense. The email concluded, relevantly: "I will have Steve send that across to you today".
Mr Nakhle explained the reason for Mr Vaughan sending part of the fees payable by Mr Nakhle back to him by giving the following evidence. Mr Nakhle said Mr Vaughan said to him: "I don't want a paper trail showing that I am sending money to Amil. So I am going to send you this $9376.05…" Mr Nakhle said that, at Mr Vaughan's suggestion, he ultimately paid the money to Mr Dlakic's wife.
Mr Nakhle also gave evidence of a conversation with Mr Vaughan shortly before Johnston Vaughan became entitled to its fees in the Calleja matter. He did so because he was advised by Mr Dlakic that he would be repaid $70,000 that he had advanced to Mr Dlakic out of the money that Mr Dlakic would receive. Mr Nakhle gave the following evidence in par 27 of his affidavit: 27 … I attended on the Defendant's office at Kogarah, I said to him: "I'm here to discuss Amil's finances," or words to that effect. He said to me in reply: "I have all of these expenses", or words to that effect. He presented to me an A4 page of how he was to disburse the funds upon the settlement, which predominantly included the rent alleged to be outstanding as well as Christmas pays and nothing for me. After looking at the sheet, I replied: "Wow, you have even charged for yourself rent in advance of $24,000. Surely you can pay Amil something before that, he is desperate. You have not even dealt with my $70,000 that Johnson Vaughan owes me", or words to that effect. The defendant replied: "I just don't have it, mate," or words to that effect. I was extremely annoyed. I simply turned around and left his office without further comment.
Finally, Mr Nakhle gave evidence of an agreement that he made with Mr Vaughan that Mr Vaughan would pay to Mr Dlakic $2000 out of total fees of $21,497.25 that Mr Nakhle owed to Johnston Vaughan. Mr Nakhle supported his evidence with a letter written by Mr Vaughan on 2 February 2016, which records a deduction of $2000 next to the reference "AMIL".

[18]

Consideration

I prefer the evidence given by Mr Dlakic to that given by Mr Vaughan, as it is closely corroborated by the evidence of Mr D'Apice and Mr Nakhle, who I regard to be credible witnesses.
This finding is supported by the consideration that it is improbable that Mr Dlakic would have transferred the practice of Johnston Vaughan to Mr Vaughan for no more than one dollar unless he thought that he was going to continue to receive the earnings of the practice.
More significantly, the only rational explanation for Mr Dlakic continuing to pay rent to Davlite (including even after the surrender of his lease), and to pay substantial additional expenses of the practice, is that Mr Dlakic believed that he continued to be entitled to the earnings of the practice. As I have observed above, I find Mr Vaughan's explanation of the payment of expenses as being effectively a gift to help him out to be entirely implausible.
As I have noted above at pars 90 to 92, Mr Dlakic's claims that he continued to pay the rent and the operating expenses of Johnston Vaughan was corroborated by the evidence of Mr D'Apice.
On balance, I am prepared to accept the descriptive evidence of Mr Dlakic that he became aware that fees were received by Johnston Vaughan after the date of the buyback in respect of work done beforehand.
I find Mr Vaughan's allegation that the files that were transferred had no value to be not proved.
I have considered the evidence relating to the matter involving Mr Paul Calleja as part of the background above at pars 80 to 83.
I do not accept that the evidence establishes that the fees paid in respect of the Calleja matter were used solely to pay expenses of Mr Dlakic payable under the buyback agreement because they were incurred before the date of that agreement. In his defence, Mr Vaughan refers to cl 3 of the buyback agreement, which effectively makes Mr Dlakic responsible for liabilities in relation to client files that arose before the date of the agreement. Mr Dlakic's liability could not have extended to the $24,360 for rent in advance, or the $20,000 that was taken to pay for the coming Christmas expenses. I do not accept that the $43,866.25 that was paid to Mr Vaughan for rent all related to a period before 25 November 2014. Mr Vaughan did not lead evidence to prove that it did.
In summary, I do not accept Mr Vaughan's claim that virtually no money was paid to Mr Dlakic under cl 4 of the buyback agreement on the basis that little money was received, and the money that was received was applied against the obligations of Mr Dlakic under the buyback agreement.
I conclude that, when Mr Vaughan made the representation to Mr Dlakic concerning the latter's entitlement to receive the earnings of the practice after the date of the buyback agreement, Mr Vaughan had no real intention to act in the manner represented. The representation was an actionable misrepresentation, and constituted misleading and deceptive conduct on Mr Vaughan's part.
Technically, the fact that Mr Vaughan made the representation to Mr Dlakic without having any real intention to implement it has the effect that the representation was made fraudulently. That would provide a separate ground for the making of an order setting aside the buyback agreement. (I will not consider the possibility that in a case involving fraudulent misrepresentation at common law the representee may be able to avoid the contract by the representee's own act, because of the need in the present case for the Court to make consequential orders to implement the status quo at the time the buyback agreement was made: see Nadinic v Drinkwater at [28] and [44]).
The circumstances in which Mr Vaughan made the representation to Mr Dlakic will also be material to Mr Dlakic's claim that Mr Vaughan exercised undue influence and acted unconscionably in causing Mr Dlakic to enter into the buyback agreement.
It will be appropriate to set out briefly the general principles that govern when a transaction is liable to be set aside for undue influence or for the unconscionable taking of advantage of a special disadvantage.

[19]

Undue influence

Certain established categories of relationships give rise to a presumption of a relationship of influence. The categories are not closed, and a special relationship of influence may be established by one party proving that he or she reposed confidence in another party who occupies or assumes a position of ascendancy or influence over them: Whereat v Duff [1972] 2 NSWLR 147; Whereat v Duff (1973) 1 ALR 363; 47 ALJR 540; Goldsworthy v Brickell [1987] Ch 378 at 401; [1987] 1 All ER 853 at 865; Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923 at 953; [1992] 4 All ER 955 at 964. Dixon J (as his Honour then was) in Johnson v Buttress (1936) 56 CLR 113; [1936] HCA 41; described the two categories of relationships at 134: This burden is imposed upon one of the parties to certain well-known relations as soon as it appears that the relation existed and that he has obtained a substantial benefit from the other. A solicitor must thus justify the receipt of such a benefit from his client, a physician from his patient, a parent from his child, a guardian from his ward, and a man from the woman he has engaged to marry … But while in these and perhaps one or two other relationships their very nature imports influence, the doctrine which throws upon the recipient the burden of justifying the transaction is confined to no fixed category. It rests upon a principle. It applies whenever one party occupies or assumes towards another a position naturally involving an ascendancy or influence over that other, or a dependence or trust on his part. One occupying such a position falls under a duty in which fiduciary characteristics may be seen. It is his duty to use his position of influence in the interest of no one but the man who is governed by his judgment.
In Jenyns v Public Curator (1953) 90 CLR 113; [1953] HCA 2; Dixon CJ said the following about the second category of relationships of influence at [28]: We are not here dealing with any of the traditional relations of influence or confidence - solicitor and client, physician and patient, priest and penitent, guardian and ward, trustee and cestui que trust. It is a special relationship set up by the actual reposing of confidence. It is therefore necessary to see the extent and nature of the confidence reposed and whether it involved any ascendancy over the will of the person supposedly dependent on the confidence.
Brereton J (as his Honour then was) in Brown v The NSW Trustee & Guardian [2011] NSWSC 1203 emphasised that the relationship must not be one of mere confidence, but one of ascendancy and dependence at [46]: [46] To establish such a relationship, more than mere confidence and reciprocal influence is required. For a relationship to be brought within the doctrine, it must go beyond one of mere confidence and influence to one involving dominion or ascendancy by one over the will of the other and, correlatively, dependence and subjection on the part of the other. It is not necessary to establish a relationship of actual dominion by one party over another, and it is enough to show that the party in whom trust and confidence is reposed is in a position to exert influence over the party who reposes it. But more is required than the influence that any person might have on another by making a recommendation or giving advice; as a minimum, it is necessary that one have some element of authority or superiority - which may be moral or practical, as distinct from legal - over the other.
In Thorne v Kennedy [2017] HCA 49; (2017) 350 ALR 1, Kiefel CJ, Bell, Gageler, Keane and Edelman JJ spoke of the "history of the particular relationship" at [34]: [34] … Outside recognised categories, the presumption can also be raised by proof that the history of the particular relationship involved one party occupying a similar position of ascendency or influence, and the other a corresponding position of dependency or trust [51]. In either case, the presumption is rebuttable by the other party proving that the particular transaction or transfer, in its particular circumstances, was nevertheless the result of the weaker party's free will [52].

[20]

Unconscionability

In Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 Mason J (as his Honour then was) stated the principle at 461: … relief on the ground of "unconscionable conduct" is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage, e.g., a catching bargain with an expectant heir or an unfair contract made by taking advantage of a person who is seriously affected by intoxicating drink. Although unconscionable conduct in this narrow sense bears some resemblance to the doctrine of undue influence, there is a difference between the two. In the latter the will of the innocent party is not independent and voluntary because it is overborne. In the former the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position.
Brereton J (as his Honour then was) set out the relevant principles comprehensively in Tillett v Varnell Holdings Pty Ltd [2009] NSWSC 1040 at [49]-[54]: Unconscientious bargains [49] Equity intervenes to avoid a transaction which has been brought about by one party knowingly taking advantage of a special disadvantage to which the other party was subject which affected that party's ability to safeguard his or her own interests. In Commercial Bank of Australia v Amadio (1983) 151 CLR 447, Mason J, as he then was, emphasised the distinction between the doctrines of unconscionable dealing and undue influence, and in particular that for the purpose of attracting the former - unlike the latter - it was not necessary that the plaintiff's will have been overborne (at 461): Although unconscionable conduct in this narrow sense bears some resemblance to the doctrine of undue influence, there is a difference between the two. In the latter the will of the innocent party is not independent and voluntary because it is overborne. In the former the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position. … though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interest. [50] The doctrine was summarised by Kitto J in Blomley v Ryan (1956) 99 CLR 362 at 415 in the following terms (emphasis added): It applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands. [51] In Amadio Deane J, with whom Mason and Wilson JJ agreed, described the elements that would attract relief (at 474), as follows (emphasis added): The jurisdiction is long established as extending generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that disability was sufficiently evident to the stronger party to make it prima facie unfair or "unconscientious" that he procure, or accept, the weaker party's assent to the impugned transaction in the circumstances in which he procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable: "the burthen of shewing the fairness of the transaction is thrown on the person who seeks to obtain the benefit of the contract" (see per Lord Hatherley, O'Rorke v Bolingbroke [46]; Fry v Lane [47] , at p. 322; Blomley v Ryan [48] , at pp. 428-429). [52] Thus, where a party impugns a transaction on the ground that it is a unconscionable dealing: (1) the plaintiff must establish that there was a relevant relationship of "special disadvantage"; (2) the plaintiff must establish that the defendant understood that the plaintiff was at a special disadvantage. In this respect, actual knowledge of any specific diagnosis or condition is not required, and it suffices that the defendant knew, or ought reasonably have known, that Mr Tillett was not in a position to look after his own interests; and (3) the defendant then bears the onus of establishing that the transaction was "fair, just and reasonable" [Amadio, 474 (Deane J)], which involves showing either that the plaintiff received full value or was independently advised [Cope, Duress Undue Influence and Unconscientious Bargains, 1985, [260]]. [53] In this context "special disadvantage" is usually associated with conditions that make people vulnerable to exploitation and less able to conserve their own interests. Mason J, in Amadio, explained the concept in the following terms: It goes almost without saying that it is impossible to describe definitively all the situations in which relief will be granted on the ground of unconscionable conduct. As Fullagar J said in Blomley v Ryan, at p. 405: The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-a-vis the other. Likewise Kitto J. spoke of it as "a well-known head of equity" which- ... applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands". It is not to be thought that relief will be granted only in the particular situations mentioned by their Honours. It is made plain enough, especially by Fullagar J., that the situations mentioned are no more than particular exemplifications of an underlying general principle which may be invoked whenever one party by reason of some condition of circumstance is placed at a special disadvantage vis-a-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. I qualify the word "disadvantage" by the adjective "special" in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party. [54] At the heart of the doctrine is the prevention of unfair exploitation of a disadvantage or vulnerability. A relationship of emotional dependence that renders a party susceptible to improvidence in favour of the stronger party may attract the doctrine [Louth v Diprose (1992) 175 CLR 621; Bridgewater v Leahy (1998) 194 CLR 457]. But not every case of illness, impairment or emotional dependence is a case of special disadvantage. The cases to which reference has so far been made show that it is insufficient to attract the doctrine merely that there be an inequality of bargaining power, or that the plaintiff be affected by one or more of the relevant conditions; it is critical that the condition be such as to impact on the plaintiff's ability to conserve his or her own interests and render him or her vulnerable to exploitation. One can be ill, or poor, or even affected by delusions, and still perfectly capable of robustly conserving one's own interests [cf, albeit in a different field, Banks v Goodfellow (1870) LR 5 QB 549, in which it was established that the circumstance that a testator, who managed his general affairs perfectly capably, entertained certain insane delusions which did not impact on the will-making process, was not inconsistent with his having testamentary capacity].

[21]

Consideration

Mr Dlakic led considerable evidence of the relationship that he developed with Mr Vaughan over the 10 years to 2010 when Mr Vaughan was Mr Dlakic's employer, and continuing into the period up to the date of the buyback agreement, when Mr Vaughan was formally an employee of Mr Dlakic. Mr Dlakic described Mr Vaughan as his mentor and a father figure. He gave evidence that he was personally close to Mr Vaughan, both professionally and socially, and that it was his inclination to defer to the wise advice of the older man.
I doubt, however, that the evidence would have established that Mr Vaughan's relationship with Mr Dlakic was such that he had achieved a state of dominion or ascendancy over the will of Mr Dlakic to the extent that Mr Dlakic reposed such trust and confidence in Mr Vaughan as to permit Mr Vaughan to exert influence over the decisions made by Mr Dlakic. In terms of the requirement for establishing undue influence considered by Brereton J, I would accept that there was a relationship of confidence and influence between Mr Dlakic and Mr Vaughan, but I do not accept that the evidence would have established a relationship of dominion or ascendancy.
The consideration of whether the relationship between Mr Dlakic and Mr Vaughan went further than mere confidence and reciprocal influence was in my view, however, superseded by the developing consequences of Mr Dlakic's serious psychological disabilities that I have addressed above in pars 154 to 177. Whatever the degree of influence Mr Vaughan may have had over the decision-making processes of Mr Dlakic, that became substantially immaterial because by the date of the buyback agreement, Mr Dlakic was in such a compromised psychological state that he was substantially unable to safeguard his own interests. Mr Dlakic's decision to enter into the buyback agreement, and to rely upon Mr Vaughan's representation concerning his entitlement to the income of Johnston Vaughan notwithstanding the terms of the buyback agreement, did not so much involve Mr Dlakic's will being overborn, but by that stage he was unable to make a worthwhile judgment as to what was in his best interests.
It is clear that Mr Dlakic was in a relationship of "special disadvantage" with Mr Vaughan. Mr Dlakic's practising certificate had been suspended by the Law Society, so to Mr Vaughan's knowledge Mr Dlakic had ceased to be capable of conducting the practice of Johnston Vaughan himself. Mr Vaughan was well aware, as it was obvious not only from what Mr Dlakic told him, but also from Mr Dlakic's visible reactions, that Mr Dlakic was deeply depressed and psychologically inadequate to determine how to respond to events in his own best interests.
Although there was no evidence of the market value of Johnston Vaughan as at 25 November 2014, I consider that the evidence justifies an inference that the goodwill of the firm was worth more than the one dollar consideration provided in the buyback agreement (given that Mr Dlakic had paid a price of $550,000 for the firm in 2010).
Although the buyback agreement entitled Mr Dlakic to require Mr Vaughan to transfer the practice back to him in the event that an unrestricted practising certificate was issued to Mr Dlakic within two years of the date of the agreement (albeit only provided for in a recital), I do not accept that Mr Vaughan adequately considered the likelihood that Mr Dlakic would be able to achieve the issue of an unrestricted practising certificate within the period (given that there is no evidence that Mr Vaughan objectively considered the issue, and it was plain for him to see that Mr Dlakic was in an abject psychological condition).
I consider that the evidence overwhelmingly justifies a finding that Mr Vaughan took advantage of a special disadvantage from which he knew Mr Dlakic suffered, so that Mr Dlakic will be entitled to an order setting aside the buyback agreement, if the grant of that relief is available having regard to relevant discretionary considerations.
In my view the granting of that relief would separately be justified on the basis of Mr Vaughan's misleading and deceptive conduct in representing to Mr Dlakic that he would continue to receive the income of Johnston Vaughan after the date of the buyback agreement. I am satisfied that when Mr Vaughan gave that assurance to Mr Dlakic he did not have any genuine intention to implement it. However, in the circumstances of this case, the preferable course is to treat Mr Vaughan's conduct in making the misrepresentation to Mr Dlakic as being an aspect of his taking advantage of the special disadvantage from which Mr Dlakic suffered.

[22]

Restitutio in integrum

The only discretionary consideration that Mr Vaughan raised in opposition to Mr Dlakic's claim for an order setting aside the buyback agreement was the consideration that "because after several years [of] retaining and developing the firm since Mr Dlakic surrendered it, there can be no restitution in integrum", on the basis that "it would be difficult [to] provide Mr Dlakic with the firm in the position that it was in in November 2014 (even without adjustments)" (par 53). Mr Vaughan also submitted that rescission would not "make sense, as Mr Dlakic cannot work as a solicitor".
The only authority relied upon by Mr Vaughan was the decision of the High Court in Alati v Kruger (1955) 94 CLR 216 per Dixon CJ, Webb, Kitto and Taylor JJ at 222-4, where their Honours said: [E]quity has always regarded as valid the disaffirmance of a contract induced by fraud even though precise restitutio in integrum is not possible, if the situation is such that, by the exercise of its powers, including the power to take accounts of profits and to direct inquiries as to allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so doing restore them substantially to the status quo: Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218; at 1278, 1279 ; Brown v Smitt (1924) 34 CLR 160; at 165,; 169 ; Spence v Crawford [1939] 3 All ER 271; at 279, 280, HL. … The difference between the legal and the equitable rules on the subject simply was that equity, having means which the common law lacked to ascertain and provide for the adjustments necessary to be made between the parties in cases where a simple handing back of property or repayment of money would not put them in as good a position as before they entered into their transaction, was able to see the possibility of restitutio in integrum, and therefore to concede the right of a defrauded party to rescind, in a much wider variety of cases than those which the common law could recognize as admitting of rescission. Of course, a rescission which the common law courts would not accept as valid cannot of its own force revest the legal title to property which had passed, but if a court of equity would treat it as effectual the equitable title to such property revests upon the rescission.
In the context of setting out this extract from Alati v Kruger, Leeming JA in Nadinic v Drinkwater (with whom Beazley P and Sackville AJA agreed) made the following observations concerning rescission in equity: [27] Essential to rescission both at law and in equity was the idea, expressed in the language of restitutio in integrum, of restoring the parties to the position they were in prior to the entry into the rescinded contract. Thus the validity of a purchaser's rescission for fraudulent misrepresentation in Alati v Kruger (1955) 94 CLR 216 "depended, therefore, only upon the question whether restitutio in integrum was possible": at 223 (Dixon CJ, Webb, Kitto and Taylor JJ). But the different natures of the two remedies led to significant differences in their availability. … [29] Rescission was more widely available in equity than at law, because in equity, rescission was effected by court order and equity had the means to make more extensive orders so as to achieve restitutio in integrum. That included the reconveyance of property, the taking of accounts and the granting of relief on terms. The classic statement of principle is that of Lord Blackburn in Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at 1278-9. After stating that a Court of Equity could give no damages, and, unless it could rescind the contract, could give no relief, his Lordship said: [O]n the other hand, it can take accounts of profits, and make allowance for deterioration. And I think the practice has always been for a Court of Equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract. [30] [his Honour then set out the extract from the judgment of Dixon CJ, Webb, Kitto and Taylor JJ in Alati v Kruger (1955) 94 CLR 216 at 223-224]. … [32] Fourthly, rescission in equity is discretionary, and may be declined if an equitable defence is established. Thus, immediately after the reference in Erlanger v New Sombrero Phosphate Company to a Court of Equity granting relief where, by the use of its powers, it can do what is practically just, Lord Blackburn added at 1279: And a Court of Equity requires that those who come to it to ask its active interposition to give them relief, should use due diligence, after there has been such notice or knowledge as to make it inequitable to lie by. [33] For example, in Civil Service Co-operative Society of Victoria Ltd v Blyth (1914) 17 CLR 601, delay was sufficient to deny rescission to plaintiffs who had taken up shares in the society in reliance upon a representation: see at 608-9 (Griffith CJ), 610 (Barton J) and 614-5 (Isaacs J). That was a case of innocent misrepresentation, but in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546, a case evidently regarded by the Full Court of the Federal Court as one of fraudulent misrepresentation or fraudulent nondisclosure, delay was also significant. It is clear that the purchaser's delay was the principal factor relied upon in the leading judgment of Lockhart J (at 562-6). Burchett J, who agreed with Lockhart J that rescission should be refused although liability had been made out, said (at 568): [T]his is simply not a matter in which the remedy for rescission is appropriate on any footing. Too long had elapsed and too much had happened, attributable to the actions and neglect of the respondent purchaser, for it to be right to attempt a disentanglement so dilatorily asked, and fraught with so many possibilities of injustice to other parties.
As stated by Leeming JA in Taheri v Vitek (2014) 87 NSWLR 403; [2014] NSWCA 209 at [103]: "…the ultimate issue is whether there may be achieved "what is practically just" to use the language of Lord Blackburn in Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218 at 1218 and quoted in Alati v Kruger".

[23]

Consideration

Although Mr Vaughan has asserted that in this case it is beyond the power of the Court to make orders supplementary to an order setting aside the buyback agreement that will achieve what is practically just between the parties to restore them to the position they were in before the buyback agreement was made, he has led no evidence to support that submission and has not explained why the achievement of practical justice is impossible.
On the basis of the evidence put before the Court in this case there is no discretionary reason for the Court to reject Mr Dlakic's application for an order setting aside the buyback agreement.
On the other hand, Mr Dlakic has not paid any attention to the consequences of the Court simply making an order setting aside the buyback agreement. His counsel has referred to the need for an accounting to take place, in part because the inadequacy of the response by Mr Vaughan to the notice to produce has disabled Mr Dlakic from investigating and proving the actual financial performance of Johnston Vaughan at relevant times. However, there is more to the consequences of the Court making an order setting aside the buyback agreement than that. Mr Dlakic remains prohibited from practising as a solicitor. Apparently, he is pursuing insurance claims on the basis that he is totally and permanently disabled, which is inconsistent with him practising as a lawyer again. The Court really has no idea of what the consequences of the making of an order setting aside the buyback agreement will be. The Court must at least take into account the possibility that the making of that order will destroy the value of Johnston Vaughan, leaving the parties to conduct an accounting process over the entrails of the practice.
The small matter of the entitlement of Johnston Vaughan to practice from the Montgomery Street property is another issue that has been given no attention. As noted in par 67 above, Davlite granted a lease to Mr Dlakic for a term of five years from 8 December 2014, with an option for renewal for five years. However, Mr Dlakic has surrendered that lease in the circumstances described in par 68. There is a real issue as to the viability and value of the practice of Johnston Vaughan if the proprietor is not able to conduct the practice from the Montgomery Street property.
I propose to defer further consideration of the orders that the Court should make, following Mr Dlakic having established that he has a right to an order setting aside the buyback agreement, until after I have considered the outcome of all of Mr Dlakic's claims for relief.

[25]

The pleaded claim

Mr Dlakic pleaded in par 34 of his further amended statement of claim that in late February or early March 2015, Mr Vaughan represented to him that Mr Dlakic needed to take out a loan to pay the expenses of Johnston Vaughan. He alleged in par 35 that he then retained Mr Vaughan to provide legal advice on loan documentation concerning a loan from Mr Aysan Fetin for the principal sum of $160,000. Mr Dlakic alleged in par 36 in the alternative that there was a de facto relationship of lawyer and client between himself and Mr Vaughan. An implied term is alleged in par 37 that Mr Vaughan would use all reasonable care, skill and diligence expected of a reasonably competent solicitor in the position of Mr Vaughan.
The advice given by Mr Vaughan is alleged in par 38 of the further amended statement of claim in the following terms: On or about 29 April 2015, the Defendant advised the Plaintiff that under the loan documentation pursuant to which Mr Fetin would loan moneys to Johnston Vaughan Solicitors Pty Ltd: a. Only the corporate entity Johnston Vaughan Solicitors Pty Ltd would have to repay the debt; b. the Plaintiff's personal property in Towns Road, Vaucluse was not exposed to any risk of loss; c. the loan was required for the continued running of Johnston Vaughan; d. the loan would be repaid in full once Johnston Vaughan received the proceeds of its work-in-progress from the Calleja matter; and e. the Plaintiff himself was not personally liable for the debt.
There are therefore three aspects of the advice that Mr Dlakic alleges he was given by Mr Vaughan. The first is that Johnston Vaughan Solicitors Pty Ltd would be liable to repay the debt, and not Mr Dlakic, and Mr Dlakic's home would not be at risk. That advice concerned the basic effect of the documentation that Mr Dlakic would be required to sign. The second is that the whole of the loan was required for the running of Johnston Vaughan. The third is a representation as to a future occurrence, being that the loan would be repaid in full from fees received in the Calleja matter.
Mr Dlakic then alleged in par 39 that on 29 April 2015, in reliance upon Mr Vaughan's advice, he signed the loan agreement with Mr Fetin for the principal sum of $160,000.
Then, in part 40, Mr Dlakic alleged: "At the Defendant's request the Plaintiff provided the monies borrowed from Mr Fetin to the Defendant".
It is alleged in par 41 that at no time did Mr Vaughan advise Mr Dlakic that he was personally giving Mr Fetin a mortgage over the property at Towns Road Vaucluse, and then in pars 42 to 44 Mr Dlakic alleged the circumstances in which Mr Fetin commenced proceedings for possession and judicial sale of the Vaucluse property, and the fact that that claim was settled, as discussed above at pars 95 to 97 in relation to the background facts.
The particulars alleged by Mr Dlakic of his damages for breach of duty by Mr Vaughan, as set out in par 45, are the sum of $290,314.88 paid in settlement of the proceedings, and the costs of $13,376.

[26]

Claim concerning effect of the documents

Mr Dlakic gave evidence in par 243 of his principal affidavit that, when he raised the need for the loan with Mr Vaughan, Mr Vaughan said: "We need to do this properly. When you receive the mortgage contracts I will review them carefully, read them and advise you on your terms. You need the money at the moment, even though you are broke, so I will look at it. I will get you independent advice for you," or words to that effect".
Mr Dlakic said that, when he received the bundle of mortgage documents from Mr Fetin's solicitor, he took the documents into Mr Vaughan's office and handed them to him. Mr Dlakic said in par 248: "I did not read the loan documents and at all times, I relied upon the advice given to me by the Defendant".
The primary evidence given by Mr Dlakic on this issue, in par 245, was: 245. An hour later the Defendant called me into his office. He said to me: "I have carefully read all the documents that Mr Carter has drafted. Take a seat," or words to that effect. I sat down. He said to me: "It's my duty as your lawyer here to advise you personally where you stand with all this loan documentation. A bloke called Mr Fetin is lending Johnston Vaughan Solicitors Pty Limited $160,000 and he is going to keep about $28,000 upfront on the settlement. There are huge fees payable to the brokers and the solicitors. But basically mate they are taking a loan against the company and the company will have to pay it back. Oh and they are charging you interest of 30 per cent," or words to that effect. I then said to the Defendant: "Is my house at Towns Road, Vaucluse exposed in this anyway to this loan? I cannot afford to pay any of this loan right now. It will probably take me until the office gets some big money before I can then repay Mr Fetin," or words to that effect.
Mr Vaughan's response to this evidence from Mr Dlakic was simply to deny the evidence.
Mr Dlakic did not give any evidence that he advised Mr Vaughan that he had not looked at the bundle of documents or the covering letter to satisfy himself as to who the parties to the documents would be and what type of interests they would create when executed.
The evidentiary difficulty that arises in this aspect of Mr Dlakic's case is that the communications addressed by Mr Fetin's solicitors to Mr Vaughan at Johnston Vaughan Solicitors Pty Ltd dated 27 April 2015 and their enclosures (Court Book pages 1034 to 1074) contain obvious references to a mortgage over the Vaucluse property owned by Mr Dlakic, as well as the mortgage itself, duly executed by Mr Dlakic. For example, the letter of offer refers in its subject heading to a collateral security by mortgage from Mr Dlakic over 107/46 Towns Road, Vaucluse. The Mortgage Security is described as: "second unregistered mortgage and secured by a caveat over property situated at and known as 107/46 Towns Road, Vaucluse, NSW 2030 being the whole of the land contained in Certificate of Title 7/SP5112 at Woollahra Council".
For Mr Dlakic to be unaware that he was being required to grant a second mortgage over the Vaucluse property would have required him to entirely shut his eyes to what was written on the documents that he took to Mr Vaughan for advice and later signed.
Although Mr Dlakic has given evidence that Mr Vaughan positively advised him that he was not personally exposed to the proposed loan, and "Your house is not on the line", it is difficult to accept on the probabilities that Mr Vaughan made these statements, because they were positively false, and readily exposed if Mr Dlakic had taken a moment's care to cast his eyes over the first page of the communications from Mr Fetin's solicitor.
I am not persuaded as a matter of fact that Mr Dlakic was unaware when he executed the various documents that he was granting a mortgage over the Town's Road property. I am not satisfied that Mr Vaughan was made sufficiently aware that Mr Dlakic was entirely ignorant of the nature and effect of the draft documents for Mr Vaughan to have appreciated that Mr Dlakic was relying entirely on Mr Vaughan to explain the nature and effect of those documents. Nor am I satisfied that the evidence justifies a conclusion that Mr Vaughan made positive statements as to the nature and effect of the documents that were plainly inconsistent with what the covering letter and the draft documents taken as a whole made clear.

[28]

Claim concerning repayment of the loan

Mr Dlakic supported the allegation in par 38(d) of the further amended statement of claim that Mr Vaughan advised him that the loan would be repaid in full once Johnston Vaughan received the proceeds of its work-in-progress from the Calleja Estate matter, by saying in par 246 of his primary affidavit: The Defendant replied: "Mate you are not personally exposed to this loan to the company," or words to that effect. I then said to him: "Okay". The Defendant then said to me: "Mate you don't need to worry because when you get the Calleja money you can pay it all back. Your house is not on the line. You will get the Calleja money probably towards the end of 2015. But look from what I have read you are not personally liable and your house is safe," or words to that effect….
Mr Dlakic's case is that he received the advice concerning the Fetin loan from Mr Vaughan on 29 April 2015. As I have discussed at par 80 above when considering the background, the fees in the Calleja matter were released from trust in about September 2015. The amount received was approximately $191,000. That amount was sufficient nominally to enable Mr Dlakic to repay the debt of $160,000 to Mr Fetin. In fact, after the fees were released, Mr Vaughan caused $178,439.11 to be paid to cover rent payments due to Davlite and various expenses of Johnston Vaughan.
I have not found it possible given the state of the evidence to make any finding with confidence as to what precisely, if anything, Mr Vaughan said to Mr Dlakic on 29 April 2015 concerning the likelihood that the amount of the Fetin loan could be repaid out of the expected fees in the Calleja matter. I do not rule out the possibility that Mr Vaughan made some comment to that effect, but I am not persuaded that the evidence establishes that Mr Vaughan gave formal advice to Mr Dlakic in the context of a de facto relationship of solicitor and client (there was clearly no formal retainer) that both men could reasonably have understood Mr Dlakic could rely upon for the purpose of entering into the Fetin loan documents that the principal of the loan would be repaid out of the Calleja fees.
In any event, the evidence does not establish that advice to that effect would have been negligent if given on 29 April 2015, as subsequent events have demonstrated that it was reasonable for Mr Vaughan to expect that the amount of the fees received in the Calleja matter would be sufficient to repay the Fetin loan. There is no evidence that, if Mr Vaughan made the representation as claimed by Mr Dlakic, at that point in time he intended to cause the fees to be paid in various ways for his own benefit. There is no evidence that it was reasonably apparent on 29 April 2015 that, whenever the Calleja fees were received, they would have to be diverted to cover the expenses of Johnston Vaughan rather than to be used to repay the Fetin loan. The evidence is consistent with Mr Vaughan having decided to divert the fees for the purposes to which they were in fact applied at the time when the fees were released from trust.

[30]

Observations on the damages claimed

As was the case for Mr Dlakic's negligence claim in relation to the Vince loan, it is not necessary to determine the amount of damages to which Mr Dlakic would have been entitled had he succeeded in his negligence claim against Mr Vaughan concerning the Fetin loan. However, it is appropriate to note that again Mr Dlakic has included in his particulars of loss the principal amount that he borrowed.
The obligation of Mr Dlakic to pay the $65,000 to Jaara was a leftover from the original borrowing of $300,000 from Dr and Ms Vince. The repayment of that loan did not represent a loss to Mr Dlakic.
As Jaara was, according to Mr Dlakic's evidence, pressing Mr Dlakic for payment of the outstanding $65,000; as Mr Dlakic himself raised the loan from Mr Fetin through the mortgage broker, Mr Grant Hawkswell; and as Mr Dlakic has not led evidence that he was able to borrow the money on more favourable terms than was offered by Mr Fetin, I cannot see how the costs that Mr Dlakic incurred in respect of the borrowing could constitute damages for which Mr Vaughan is responsible.
It is also appropriate to bear in mind the relationship between this claim and the claim that Mr Dlakic has made for an order setting aside the buyback agreement. As I have found above, Mr Dlakic has established that the buyback agreement is liable to be set aside, and the remaining question is whether it is appropriate that an order setting aside the buyback agreement be made. If the buyback agreement is set aside, Mr Dlakic will become entitled to the earnings of Johnston Vaughan, but he will also become responsible for its expenses. If it is the case that most of the balance from the loan of $55,241.95 was given to Mr Vaughan and applied by him to pay the expenses of Johnston Vaughan, then those payments will have been made against expenses for which Mr Dlakic will become responsible on the setting aside of the buyback agreement. Even if Mr Dlakic were able to establish his negligence claim against Mr Vaughan, the monies paid for Mr Dlakic's own expenses would cease to be damages claimable against Mr Vaughan.

[33]

Allegations made by the parties

It will be appropriate to set out in full the facts pleaded by Mr Dlakic to support this claim: 54. On or about 26 October 2001, the Plaintiff became a shareholder of Davlite Pty Ltd. 55. [Deleted] 56. On or about 27 August 2012, the Defendant represented to ASIC that the Plaintiff had ceased to be a shareholder in Davlite Pty Ltd and the Plaintiff's share in Davlite Pty Ltd was to be transferred to the Defendant ("Share Transfer"). Particulars ASIC form 484 filed 27 August 2013 attaching unsigned alleged "Minute of Annual meeting". Unconscionability and undue influence 57. From 2010 the Plaintiff was undiagnosed with severe mental health these illnesses and as a consequence did not have the mental capacity or understanding to enter into legal or other agreements. 58. The plaintiff did not: (a) receive notice of an annual meeting of Davlite Pty Ltd prior to August 2012; (b) attend an annual meeting on or about August 2012; or (c) consent to transfer his share in Davlite Pty Ltd to the Defendant. 59. No consideration was provided by the Defendant for the Plaintiff's share in Davlite Pty Ltd. 60. If the Plaintiff executed documents in respect of the share transfer, he did so at the request of the Defendant and under the influence of the Defendant. Particulars (a) the Defendant said words to the effect of "you have to sign these papers"; "in case you go broke I do not want it to affect me"; "you have huge expenses running the firm. I have done a spreadsheet to prove it's only a matter of time before you go broke"; and "I do not want to fall over with you"; and (b) the Defendant refused to leave until the Plaintiff had signed the papers. 61. In the premises, the Share Transfer is voidable and of no effect and the Plaintiff seeks orders for rectification of the information recorded in the Company's register and by ASIC in respect of Davlite Pty Ltd. 62. In the alternative, the Plaintiff, in the circumstances set out above, claims damages or equitable compensation in an amount equal to the value of his share in Davlite Pty Ltd as at 22 August 2012 if the register of members is not corrected.
In his further amended defence, Mr Vaughan did not admit that Mr Dlakic became a shareholder of Davlite on 26 October 2001. He admits that on 27 August 2012, Mr Vaughan represented to ASIC that Mr Dlakic had ceased to be a shareholder in Davlite. Mr Vaughan denied that from 2010, Mr Dlakic was undiagnosed with severe mental health illnesses and lacked the capacity to enter into legal agreements. Mr Vaughan did not admit the allegations made in par 58 of the further amended statement of claim concerning the notice or attendance at an annual meeting of Davlite in August 2012, or that Mr Dlakic did not consent to the transfer of his share in Davlite. Mr Vaughan admitted that he did not provide any consideration for the transfer of the share in Davlite to Mr Vaughan. Mr Vaughan denied the allegations in pars 60, 61 and 62 of the further amended statement of claim.
Finally, Mr Vaughan pleaded the following response to Mr Dlakic's claim for rectification of the share register of Davlite: 59. In further answer to paragraphs 54 to 62 of the FASoC, the defendant says: (a) If a share of Davlite Pty Ltd was transferred to the plaintiff, it was never intended that he have the share or the benefit of that share. (b) It was always intended that the share or the benefit of that share was to be transferred to the defendant. (c) At all relevant times, the plaintiff was aware of, or ought to have been aware of (a) and (b); or in the alternative, was aware, or ought to have been aware that he was not entitled to the share or the benefit of the share. (d) In the premises, it would be unconscionable for the plaintiff to retain the share and the plaintiff holds that share on trust for the defendant.
As I understand Mr Dlakic's final submissions, he did not pursue a case that, if he is found to have positively consented to the transfer of his share in Davlite to Mr Vaughan, that transfer is vitiated by reason of undue influence or unconscionability resulting from Mr Vaughan's knowledge of Mr Dlakic's mental infirmity in August 2012, or on the basis that Mr Dlakic entirely lacked legal capacity to transfer the share as alleged in par 57 of the further amended statement of claim as set out above.
Mr Dlakic's claim ultimately was that a share in Davlite had been transferred to him beneficially; and in August 2012 he did not consent to the transfer of that share to Mr Vaughan. This case was put on the basis of Mr Vaughan's own evidence that, when he discovered that Mr Dlakic appeared to be the holder of a share in Davlite, Mr Vaughan acted unilaterally to amend the register and to lodge a notification with ASIC that the share had been transferred to Mr Vaughan. Mr Dlakic's case was that even though he could remember engaging in a conversation with Mr Vaughan concerning the transfer of the shares, he did not in fact execute any document that had the effect of consenting to that transfer, and the only document produced by Mr Vaughan has not been signed by any party.
It may be noted that the case as pleaded by Mr Vaughan, in relation to the circumstances in which any share in Davlite was transferred into the name of Mr Dlakic, was that it would be unconscionable for Mr Dlakic to retain the share because of his knowledge that there was no intention that the share be transferred into his name, and in any event, if transferred, there was no intention that he hold the share beneficially.
Mr Vaughan's case did not accept that there was any intention that the share in Davlite be transferred into Mr Dlakic's name at all, and he did not plead that by reason of the circumstances in which the transfer took place, some form of resulting trust arose in favour of Mr Vaughan.
Mr Vaughan has not positively pleaded that in August 2012 Mr Dlakic voluntarily transferred the share in Davlite to Mr Vaughan. Apart from admitting that Mr Vaughan did not provide to Mr Dlakic any consideration for the transfer, all he has relevantly done is to not admit Mr Dlakic's allegation in par 58(c) that Mr Dlakic did not consent to the transfer of the shared to Mr Vaughan.

[35]

Objective evidence relevant to transfers of share in Davlite

At the outset it will be convenient to set out the objective evidence concerning the circumstances in which the one share in Davlite may have been transferred to Mr Dlakic and then transferred to Mr Vaughan.
An ASIC current & historical organisation extract for Davlite issued on 20 January 2017 records Mr Vaughan as having been a director of the company since 13 September 1988. Mr Johnston, Mr Vaughan's former business partner, is recorded as being a director between 13 September 1988 and 16 June 1999. Another person, Jenelle Aitken was a director of the company between 16 June 1999 and 26 October 2001.
Mr Vaughan is recorded as being the secretary of Davlite between 13 September 1988 and 26 October 2011, and from 23 August 2012.
Mr Dlakic is recorded as being the secretary of Davlite between 26 October 2001 and 23 August 2012.
Mr Vaughan is shown as being the holder of the two issued shares in Davlite (although the shares are not described as being beneficially owned by him).
Mr Johnston and Mr Dlakic are recorded as being former owners of one issued share in Davlite. Only Mr Dlakic is recorded as being a beneficial owner. The extract does not contain a statement of when each of these persons ceased to hold a share in Davlite.
An annual return of a company (Form 316) was completed by Mr Dlakic in the capacity of secretary of Davlite and dated 8 March 2002, and lodged by Johnston Vaughan on 14 March 2002. The document records in Mr Dlakic's handwriting that Ms Aitken ceased to be a director on 26 October 2008, Mr Vaughan ceased to be secretary on 26 October 2001, and Mr Dlakic became secretary on that date.
The return recorded that Mr Vaughan was the holder of one share in Davlite (although he was not recorded as being a beneficial owner), and then the following entry was made in handwriting: DELETE GREGORY M JOHNSTON --> DATE CEASED AS MEMBER 26/10/01 ADD AMIL DLAKIC ORD 1 Y Y 251 AVOCA STREET RANDWICK NSW 2031
By reference to the Form, the 1, Y and Y signified that one share, fully paid, and beneficially owned was held by Mr Dlakic.
On 20 January 2004, ASIC wrote a letter to Johnston Vaughan, in which it referred to a document received on 19 January 2004, which was stated to be enclosed with the letter. The enclosure was a Change to Company Details (Form 484) for Davlite. The enclosure had been completed by Mr Vaughan and signed by him on 10 November 2003 in his capacity as director of Davlite. The form referred to a change to the register of members, being the removal of Ms Aitken as the holder of one share in the company. ASIC's letter contained the following request: Clarify the decrease for Jenelle Aitken. ASIC records do not show her as holding shares. The current shareholders are Michael John Vaughan and Amil Dlakic holding one ORD share each.
Mr Vaughan must have read this request, because the entry concerning Ms Aitken's removal from the register of members has been crossed out, and the changes initialled by Mr Vaughan. The revised Form was evidently re-lodged with ASIC on 4 February 2004.
On 23 August 2012, Mr Vaughan in his capacity as a director of Davlite completed a Change to company details (Form 484) and caused it to be lodged with ASIC.
The form records Mr Dlakic as ceasing to be the secretary of Davlite on 23 August 2012 and Mr Vaughan becoming the secretary. It also records Mr Dlakic as ceasing to be the holder of a share in the company and becoming the holder of two shares in the company! (I will discuss the contents of the Change to company details form in more detail below)
In any event, it appears that a minute was attached to the form that was lodged with ASIC. The minute stated: DAVLITE PTY LTD … GENERAL MEETING OF DAVLITE PTY LTD Held 23 AUGUST 2012 Minutes of Annual Meeting In accordance with the Articles of Association of the company DAVLITE PTY LTD…it was resolved: 1 That Article 30 and 31 of the Memorandum of Association be amended by resolution of the Board of Directors passed at this General Meeting of reduce (sic) the number of Directors to one (1), namely Michael John Vaughan who would act as Director and Secretary. 2 That Article 81 of the Memorandum of Association be amended and the shareholders be reduced to one (1) shareholder being that of Michael John Vaughan only holding 2 fully paid shares in the company. 3 That Amil Dlakic resign as the Secretary of the Company forthwith. 4 That the share held by Amil Dlakic is transferred to Michael John Vaughan. BY ORDER OF THE BOARD Michael John Vaughan ……………………. Amil Dlakic …………………….. Dated 23 August 2012
This document was not signed in the place provided for either signatory to sign. As will be seen below, the admissibility of this document to prove the facts stated in it is not improved by the fact that it was attached to the Change of company details form and lodged with ASIC.
There was no objection to the document being admitted into evidence. Nonetheless, the evidentiary significance that the document could have, if any, must be limited by the fact that it has not been adopted by signature by either Mr Dlakic sure Mr Vaughan. It purports to be the minutes of a general meeting, or an annual meeting, held on 23 August 2012, which suggests that it purports to be a meeting of the members of Davlite. But it is then stated to be "by order of the board", which seems to be a contradiction in terms. The constitution of Davlite is not in evidence, so it is not possible to understand the significance of the attempt in resolutions 1 and 2 to amend the stated memorandum of Association of the company. Resolution 2 is at least strange in so far as it purports to amend article 81 of the memorandum of Association to reduce the shareholders to one, being Mr Vaughan holding two shares. It is also strange that the members of the company should resolve that Mr Dlakic's share be transferred to Mr Vaughan. At the very least, the document appears to have been produced by someone who had an imperfect understanding of the basics of company law.

[36]

Limitation on the available relief

The evidence that has been set out above is the only objective evidence relevant to the transfer of a share in Davlite to Mr Dlakic and then the transfer of that share to Mr Vaughan. The register of members of Davlite was not tendered. The articles of association of the company are also not in evidence. Share transfers to effect the transfer of the share to and from Mr Dlakic were not tendered, nor were any resolutions of the board of Davlite to accept the transfers.
As stated above, Mr Dlakic seeks a declaration in Prayer 5A that the share transfer dated 22 August 2012 is voidable and of no effect. Presumably, that is intended to refer to a transfer of one share in Davlite from Mr Dlakic to Mr Vaughan. There was no direct evidence that any such share transfer existed that could be declared void by the Court.
I do not understand the reference to the date 22 August 2012 in Prayer 5A. The only evidence of the alleged transfer of which I am aware is the Change to company details (Form 484) dated 23 August 2012 that has been referred to above. That document at Section C page 4 of 5 asserts that the change to the register of members of Davlite whereby Mr Dlakic ceased to be recorded as a shareholder occurred on 23 August 2012.
The absence of a share transfer concerning the alleged transfer of the share from Mr Dlakic to Mr Vaughan leaves open the possibility that there was no effective transfer of the share at all, as well is the possibility that there was a transfer that is capable of being declared void.
Then, in Prayer 5AA, Mr Dlakic seeks an order for the rectification of the register of members of Davlite.
However, as I have also noted, Davlite's share register, in whatever form that record may take, was not tendered into evidence. The evidence does not explain why that is so, whether there was any attempt on behalf of Mr Dlakic to obtain the register for the purpose of tender, or even whether a record in the nature of the register exists.
In a similar situation, Black J in Re Centura Global Holdings Pty Ltd [2016] NSWSC 62; (2016) 111 ACSR 185 said at [54]: [54] There seem to me to be several reasons why an order for rectification of the register should not now be made, although I consider that I should reserve liberty to apply if a register is later located. It is not clear whether a register of Centura exists, notwithstanding the statutory requirement that it be maintained; or, if it exists, who holds it so as to give effect to an order for rectification of it; or what it records, which may or may not be correct. Mr Kovacic's evidence was that he had not acquired the register of members when he arranged for Centura to be set up (T38). It is also entirely plausible that the register still records the correct position, despite the incorrect information that has been notified to the Australian Securities & Investments Commission ("ASIC"), and Mr Allen made clear that the Defendants' Cross-Claim seeking orders for specific performance of an agreement to transfer shares in Centura to Buildcon and Brokers Property is pursued on that basis.
The Court could not make an order for the rectification of the register of Davlite without first knowing that the register exists and that it requires rectification. Black J in the case before him granted liberty to apply if the register could be located. In this case I take the view that, if it is determined that Mr Dlakic is entitled to be registered as a member of Davlite, the Court should make case management orders to determine the true factual position so that orders finally disposing of the controversy between the parties can be made.
It need merely be noted that the Court does have power in a case such as the present to make an order of the type sought by Mr Dlakic in Prayer 5AA(b) under s 1322(4) of the Corporations Act 2001 (Cth), if it finds that the information recorded by ASIC incorrectly records Mr Dlakic as not being a member of Davlite: see for example Re Centura Global Holdings Pty Ltd at [56]-[57] and Re ABI Australia Holding Pty Ltd [2017] NSWSC 1822 at [7]-[8].
It seems to be becoming a modern habit to think that in cases concerning the formal corporate records of a company, it is not necessary to seek or to tender those records. Rather, parties seem to be content to rely upon whatever forms concerning what should be entered in the corporate records that have been lodged with ASIC to record relevant transactions. From time to time that practice will lead to disappointment!
Mr Dlakic claims that he became a shareholder of Davlite on 26 October 2001. The Corporations Act 2001 (Cth) commenced on 15 July 2001. Section 168(1)(a) required all companies to set up and maintain a register of members. Section 169(1)(a) required the register of members to contain each member's name and address, and the date on which the entry of the member's name in the register was made. In cases where the company had a share capital, s 169(3)(c) required that the register show the shares held by each member. Section 169(5A) required in respect of an unlisted company such as Davlite that the register must indicate any shares that a member does not hold beneficially.
From 11 March 2002 up until today and continuing, ss 1070A to 1071H and 1072F to 1072H in Part 7.11 Divisions 1 and 2 of the Corporations Act have contained particular provisions concerning the nature of company shares and the transfer of those shares. Between the commencement of the Corporations Act and 11 March 2002, provisions with comparable effects were contained in the Corporations Act in Part 7.13 Divisions 1 and 2, with different section numbers.
The effect of s 1085(1) of the Corporations Act, at the time Mr Dlakic claims that a share in Davlite was transferred to him, was that a share in a company was personal property and was transferable as provided by the company's constitution. As stated above, Davlite's constitution was not put into evidence. By ss (2) of that section, the laws applicable to ownership of and dealing with personal property applied to a share in a company as they applied to other property, and equitable interests in respect of a share in a company could be created, dealt with and enforced as in the case of other personal property.
Section 1087(1) provided that a certificate issued by a company specifying the shares held by a member of a company was prima facie evidence of the title of the member to the shares. (This provision differs from the s 1070C which replaced it, which specifically required companies to ensure that a certificate was issued specifying the shares held by a member). However, under ss (3), the failure to comply with ss (1), which specified what the certificate was required to state, did not affect the rights of a holder of shares.
Section 1091(1) relevantly provided that a company must only register a transfer of shares if a proper instrument of transfer had been delivered to the company. That was so despite anything in the company's constitution.
Under s 1091D(1), a person transferring shares remained the holder of the shares until the transfer was registered, and the name of the person to whom the shares were being transferred was entered in the register of members in respect of the shares.
Section 1091E enacted a replaceable rule for the purposes of s 135, that the directors of a proprietary company may refuse to register a transfer of shares in the company for any reason. Section 1094 gave to the Court a power to order the registration of a transfer of shares in certain circumstances.
Under s 1096(1), within one month after the date on which a transfer of any shares was lodged with the company, the company had to complete and have ready for delivery to the transferee an appropriate certificate, unless the company was entitled to refuse to register the transfer.
In cases where, upon registration of the transfer of shares, the transferee would not hold the shares beneficially, s 1096A(1) required the transferee to lodge with the company an instrument of transfer that included a notice that upon registration of the transfer, the transferee would hold the relevant shares non-beneficially.
I have made these somewhat complicated observations concerning the operation of the Corporations Act at relevant times, because they are material to the fact that Mr Dlakic has not tendered to the Court the formal, conventional evidence necessary to establish that a share in Davlite was transferred to him in the first place. It does not follow that his claim must fail, as in an appropriate case the fact that a share was transferred to Mr Dlakic might be proved by secondary evidence. However, this particular problem has not specifically been addressed in the present case.
Furthermore, the evidence that is before the Court would not support a claim that Mr Vaughan transferred to Mr Dlakic a share in Davlite held by Mr Vaughan. Mr Vaughan initially only held one share in Davlite, and he has continued to hold that share at all material times. The other share was held by Mr Johnston, Mr Vaughan's former legal partner. It may be that Mr Vaughan became entitled to have Mr Johnston's share in Davlite transferred to him as part of the terms of Mr Johnston's retirement from Johnston Vaughan. No evidence was tendered on that subject.
There is no evidence of Mr Johnston executing a transfer of his share in the company to Mr Dlakic. There is no evidence of any meetings of the directors of the company resolving to accept any relevant transfer, and making any appropriate recording in the register of members. No relevant share certificate has been tendered.

[37]

Evidentiary effect of ASIC extracts and records

In these circumstances it will be necessary to consider the evidentiary effect of the ASIC extract and the returns lodged with ASIC that have been considered above.
The first record that was produced in time was the Annual Return of a company (Form 316) prepared by Mr Dlakic as the company secretary of Davlite on 8 March 2002.
In Trade Practices Commission v TNT Management Pty Ltd (1984) 56 ALR 647 Franki J, at 665 to 669, considered the evidentiary significance of an annual return of a company lodged with ASIC, as a public document, so that hearsay statements contained in the document could be received to prove the truth of the statements. Relevantly, his Honour said: The most recent leading case in this area in Australia or the United Kingdom is R v Halpin [1975] 1 QB 907. Geoffrey Lane LJ, Wein and Stocker JJ sitting as the Court of Appeal in a criminal appeal delivered a joint judgment in a matter wherein Halpin appealed against his conviction on an indictment containing, inter alia, an account charging him, with others, of conspiracy to defraud. The critical question was whether the annual return of a company could be used to prove that the defendant and his wife were in effect the sole shareholders and directors of that company. It appears that the return was in fact signed by Halpin but that this does not seem to have been a factor to which the court gave any weight. The admissibility of the return was disputed on the ground that it was hearsay. The court considered the long standing leading case of Sturla v Freccia (1880) 5 App Cas 623. That case was described by the Court of Appeal as the locus classicus and a passage from the speech of Lord Blackburn (at p 643) was set out. The question was whether a document was a public document in the sense necessary to make it evidence of the facts stated therein. The court considered that one important question was whether the entry was made by a person having a duty to inquire and to satisfy himself as to the truth of the recorded facts. The passage cited from Lord Blackburn in Sturla v Freccia included the sentence: "And an entry probably in a corporation book concerning a corporate matter, or something in which all the corporation is concerned, would be 'public' within that sense. But it must be a public document, and it must be made by a public officer. I understand a public document there to mean a document that is made for the purpose of the public making use of it, and being able to refer to it. It is meant to be where there is a judicial, or quasi-judicial, duty to inquire, as might be said to be the case with the bishop acting under the writs issued by the Crown." After citing certain authorities the joint judgment continued, at p 915: "It seems to be inescapable from those authorities that it was a condition of admissibility that the official making the record should either have had personal knowledge of the matters which he was recording or should have inquired into the accuracy of the facts." A little later the judgment continued: - But the common law should move with the times and should recognize the fact that the official charged with recording matters of public import can no longer in this highly complicated world, as like as not, have personal knowledge of their accuracy. What has happened now is that the function originally performed by one man has had to be shared between two: the first having the knowledge and the statutory duty to record that knowledge and forward it to the Registrar of Companies, the second having the duty to preserve that document and to show it to members of the public under proper conditions as required. Where a duty is cast upon a limited company by statute to make accurate returns of company matters to the Registrar of Companies, so that those returns can be filed and inspected by members of the public, the necessary conditions, in the judgment of this court, have been fulfilled for that document to have been admissible. All statements on the return are admissible as prima facie proof of the truth of their contents. The first of the last three paragraphs cited points out that the common law should move with the times, and the second and third paragraphs point out the duty that is cast on the company. The ultimate view of the court was that statements made in a return filed by a company in pursuance of a statutory duty to make accurate returns which are filed and can be inspected by the public are "admissible as prima facie proof of the truth of their contents". It is clear that the court's judgment only extended to admissibility as prima facie proof. Halpin's case has been accepted by the recognized text writers: see Phipson on Evidence 13th ed, para 25-12, p 513; Archbold Criminal Pleading Evidence and Practice 41st ed, para 10-29, p 838; Halsbury Laws of England, 4th ed, vol 17, para 76, p 57; Cross on Evidence 2nd Aust ed, para 18.81, p 500. Halpin's case does not deal with material in a return other than that which is in compliance with the duty cast upon the company by statute and therefore, whatever might be the position with regard to other material, I will reject any part of the return which is not filed pursuant to a duty cast upon the company by the Companies Act. This leaves for consideration the question of the rest of the return. I have not been referred to, nor have I found, any judgment in which Halpin's case has been considered.
See also Residues Treatment and Trading Co Ltd v Southern Resources Ltd (1989) 52 SASR 54.
Section 1274(5) of the Corporations Act has the effect that a copy of the public record constituted by the Annual Return that is obtained from ASIC is "in any proceeding, admissible in evidence as equal validity with the original document".
So much of the Annual Return lodged by Mr Dlakic on behalf of Davlite in compliance with a statutory duty to make accurate returns in circumstances where the Annual Return can be inspected by the public will be admissible as prima facie proof of the statements that the statute actually requires be included.
At the time the Annual Return was lodged by Mr Dlakic, s 345(1) of the Corporations Act, as it was then enacted, required companies to lodge an annual return with ASIC by stipulated date. The required contents of the annual return were set out in a table included in s 348. Item 8 included the names and addresses of the members (if the company had 20 or fewer members). The item also required the annual return to state "whether or not the shares are beneficially owned" (in the case of a company that is not a listed company).
Consequently, the Annual Return dated 8 March 2002 is prima facie evidence that, on 21 October 2001, Mr Johnston ceased to be a member of Davlite and on the same date Mr Dlakic became the holder of one ordinary fully paid share in the company and that the share was beneficially owned by Mr Dlakic.
The next document in time lodged with ASIC was the Change to company details form (Form 484) prepared by Mr Vaughan on 23 August 2012 and lodged with ASIC. That document is subject to the same general law evidentiary principles that are considered above as being applicable to the Annual Return lodged by Mr Dlakic.
As at 23 August 2012, s 178A of the Corporations Act required a proprietary company such as Davlite to notify ASIC within a stipulated time if it was required to add to or alter a particular in its share register maintained under s 169, in respect of particulars including the date of entry of the member's name into the register, and the number of shares held by the member. Consequently, a notification to ASIC that Mr Dlakic had ceased to be the holder of the share and that Mr Vaughan had become the holder of that share would be prima facie evidence of the transfer.
It is necessary to analyse the Change to company details form in order to determine what notification ASIC received on the subject of the change of ownership of the share. When this is done, it becomes apparent that the person who filled out the form did not understand how to do so. Part C2 deals with Issue of shares, and only requires completion when new shares are issued by the company. This part of the form has been completed as if two ordinary shares in Davlite were issued on 23 August 2012. There is no suggestion in the evidence that two shares were issued on that date. Part C3 deals with Change to share structure, and has been filled out as if the share structure of Davlite changed on 23 August 2012 in relation to the issue of two ordinary shares. Part C4 deals with Changes to the register of members for proprietary companies. Mr Dlakic is identified as the member whose shareholding has changed. The date of the change is stated to be 23 August 2012.
There is a table in Part C4 that must be filled out to inform ASIC what the changes in membership have been. One cell that requires information as to the number of the decrease in the shares held by the identified member has been marked "N/A". That response means that the number of shares held by Mr Dlakic did not change. In the cell headed "Total number now held" the response was "2". That would signify that Mr Dlakic held two shares, rather than none, after the change to the register. It may be noted that the cell headed "Beneficially held (y/n)" has been completed "No". While that entry would inform ASIC that Mr Dlakic was not the beneficial holder of the two shares, it remains the case that ASIC has been informed that Mr Dlakic held two shares.
The form requires a date to be inserted as the "Date of entry of member's name in register". The date given is "23/08/12". That entry would mean that Mr Dlakic was entered into the register of members on 23 August 2012 as holding two shares in Davlite.
It appears that the alleged minute of the general meeting of Davlite that has been set out above has been obtained from ASIC, as the document is marked page 12 of 12, and follows the Change to company details form that comprises pages 1 to 11 of 12. However, the fact that this document has been supplied to ASIC with the Change to company details form required by s 178A of the Corporations Act does not mean that it is admissible into evidence, or that any hearsay statement included in the document should be received as evidence of the fact.
As s 178A did not impose upon Davlite a requirement to notify ASIC, so far as is presently relevant, of any change other than the change in the register of members, the only part of the alleged minute that could be admissible on that issue is the statement in par 4 of the alleged resolution of the members: "That the share held by Amil Dlakic is transferred to Michael John Vaughan".
It will be remembered that in Trade Practices Commission v TNT Management Pty Ltd, which has been considered above, Franki J refused to receive as evidence of the fact hearsay statements in the annual return that were not provided to ASIC as part of a statutory duty to provide the information.
The last in time of the ASIC documents is the ASIC Current & Historical Organisation Extract that was extracted on 20 January 2017, which is referred to above. As I have recorded, the extract states that the current member of Davlite is Mr Vaughan who holds the two ordinary shares (albeit not beneficially). Mr Dlakic is described as a former beneficial owner of one ordinary share in Davlite.
Section 1274B(2) of the Corporations Act provides: (2) In a proceeding in a court, a writing that purports to have been prepared by ASIC is admissible as prima facie evidence of the matters stated in so much of the writing as sets out what purports to be information obtained by ASIC, by using a data processor, from the national database. In other words, the writing is proof of such a matter in the absence of evidence to the contrary.
The ASIC extract purports to have been prepared by ASIC, as required by the subsection, so that it is prima facie evidence of the matters stated in it in the absence of evidence to the contrary: See Gosford Christian School Ltd v Totonjian [2006] NSWSC 725 per Barrett J (as his Honour then was) at [12]-[15]. See also Forrest v Cosmetic Co Pty Ltd [2008] SASC 152; (2008) 67 ACSR 1; and Robertson v Deputy Commissioner of Taxation [2010] NSWCA 58.
It is not clear how ASIC came to record that the share held by Mr Dlakic in Davlite had been transferred to Mr Vaughan, as the notification of that transfer in the Change to company details form is most unclear. It is possible that the change was notified to ASIC by means of the annual updating of ASIC's information about Davlite that is provided for in Chapter 2N of the Corporations Act. Whatever the truth may be, the entry in the Current & Historical Organisation Extract is prima facie evidence that currently Mr Vaughan is the holder of the share of which Mr Dlakic was previously the holder. There is no prima facie evidence of the date of the transfer.
It will need to be borne in mind that although the 20 January 2017 extract may be prima facie evidence that Mr Vaughan is now the holder of the two shares in Davlite, the Change to company details (Form 484) prepared by Mr Vaughan on 23 August 2012 recorded that Mr Dlakic was then the holder of two shares in the company. The 23 August 2012 document was prepared at the time of the alleged transfer of Mr Dlakic's share to Mr Vaughan. The fact that the entries in Part C4 are inconsistent with the unsigned minute must, by reason of the internal inconsistency, undermine the prima facie evidentiary effect of the documents. Although the contents of the 20 January 2017 extract may be prima facie proof that Mr Vaughan is the holder of two shares in Davlite, the complete absence of evidence as to how the information recorded by ASIC concerning the shareholding in Davlite changed must tend to undermine the evidentiary weight of the extract.
The Court may be more comfortable in accepting the prima facie effect of the Annual Return of a company (Form 316) completed by Mr Dlakic on 8 March 2002, which records the transfer of one share from Mr Johnston to Mr Dlakic on 26 October 2001, and that Mr Dlakic held the share beneficially, as there is no contest between the parties that Mr Vaughan did cause that transfer to take place. The only issue is as to the beneficial ownership of the share.
For what it may matter, the Current & Historical Organisation Extract provides prima facie evidence that Mr Dlakic was the beneficial holder of the share, which supports the same prima facie inference that arises from the Annual Return lodged by Mr Dlakic on 8 March 2002.

[38]

Parties' submissions

Mr Dlakic's case was that Mr Vaughan gave him the one share in Davlite in 2001 in consideration of his work at Johnston Vaughan, as an acknowledgement of the low salary Mr Dlakic had agreed to accept as an employed solicitor. In fact, according to Mr Dlakic, his salary rose from $56,826 in 2004 to only $69,535 in 2010. Thus, Mr Dlakic argued that he received the share as part of a salary sacrifice. Mr Dlakic also claimed that he was given the share because he had a mentor/client relationship with Mr Vaughan, who regularly said to Mr Dlakic "one day all this [i.e. the firm] will be yours", as Mr Vaughan saw Mr Dlakic as part of his succession policy. Mr Vaughan was a very senior solicitor who needed to concern himself with being able to get value out of his firm when the time came for him to retire.
Mr Vaughan submitted that, although his recollection of events so long ago was not entirely clear, he did agree to transfer one share in Davlite to Mr Dlakic in 2001. However, it was never his intention to transfer the beneficial interest in the share, but rather he was mistaken as to the requirements of the Corporations Act, and thought that a company like Davlite required two shareholders. Mr Dlakic gave no consideration for the transfer, and either knew or ought to have known that he was not to have a beneficial interest in the share and that he was the beneficiary of a mistake by Mr Vaughan. Consequently, Mr Dlakic held the share on trust for Mr Vaughan.
Mr Vaughan further submitted that in 2012, after he discovered that Mr Dlakic may have been seeking to use Davlite as security for his borrowings, Mr Vaughan requested that Mr Dlakic transfer his share back to Mr Vaughan, which Mr Dlakic did. In making this request, Mr Vaughan says that he was merely reclaiming property that Mr Dlakic held on trust for him.
Upon the apparent understanding that Mr Dlakic claims that any transfer of the share back to Mr Vaughan that he consented to is vitiated by unconscionable conduct, because Mr Vaughan took advantage of knowledge that Mr Dlakic was suffering from a severe psychological injury, or alternatively undue influence, Mr Vaughan submitted that he did not know of the illness at the time, and there was not a relationship of influence between himself and Mr Dlakic.
As I have observed above, it is my understanding of Mr Dlakic's final position that his case was that he did not consent to the transfer of the share back to Mr Vaughan, and if the Court found to the contrary, Mr Dlakic no longer pursued his case that the transfer is liable to be set aside on the ground that Mr Vaughan took unconscionable advantage of Mr Dlakic's psychological illness or exercised undue influence. Mr Dlakic's case is that Mr Vaughan acted unilaterally and without his consent in creating the appearance that Mr Dlakic had transferred the share back to him.
It will now be appropriate to consider material parts of the oral and affidavit evidence given by the parties.

[39]

Mr Dlakic's evidence

Mr Dlakic gave evidence that he started at the firm in 2000 on a small salary of $35,000 per year (Dlakic pars 19 to 22). He said that he managed most of the firm's litigation files, and that from 2002 to 2010 he appeared in various Courts on an "almost daily basis" (Dlakic par 24), but that he remained on a small salary from 2000 to 2010, when he earned fees of between $400,000 and $1,000,000 on an annual basis for the firm (Dlakic par 34): 34. Throughout the period between 2000 and 2010 I earned an annual turnover for the Defendant's firm of between $400,000 and $1,000,000 on average and I worked extremely hard for a period of 10 years from about September 2000 to 2010 in order to achieve this level of revenue for the Defendant. However, I remained on an income of approximately $35,000 to $55,000 until 2010. By 2010 I was earning about $70,000 per annum as a full-time solicitor with 10 years post admission experience before I became Principal of Johnston Vaughan.
Mr Dlakic said in his affidavit at par 38 that Mr Vaughan represented that he would receive all of the shares in Davlite if he earned $500,000 a year for the firm: 38. In mid-2001, I said to the Defendant words to the effect of: "Michael, I'm on a small salary and I can't progress," or words to that effect. The Defendant replied: "Mate earn me over $500,000 a year and I'll put the Davlite shares in your name. Davlite Pty Limited owns the office and has no loan. It can be in your name as shareholder, that way you know you are working for yourself. So I'll pay you a little salary but look at what you'll get," or words to that effect.
Mr Dlakic said he relied on these representations to form a belief that, by acquiring all of the shares in Davlite, he would become the legal owner of the Montgomery Street property (Dlakic par 40).
Mr Dlakic said he remained on a small salary because he understood from representations made by Mr Vaughan that he would one day acquire the legal practice of Johnston Vaughan and the real estate owned by Davlite (Dlakic par 41). Mr Dlakic said further that, based on those representations by Mr Vaughan, he did not seek employment from another firm for a greater salary in line with his experience (Dlakic par 43).
Mr Dlakic said that, in late 2001 or early 2002, Mr Vaughan transferred to him all of the shares in, and made him company secretary of, Davlite: 44. In about late 2001/early 2002 the Defendant approached me in my office at Johnston Vaughan holding some ASIC papers and he said to me: "Mate, I have watched you since you started here. You have been an inspiration. You have made a lot of money here and I need you to stay here until I am ready to go, which will be a few years from now. Keep your billings up. As a sign of good faith, I am putting the shares in Davlite in your name. Because you're not earning much, I will take care of the expenses. You know all the strata, council, water etc, shit you will have to take care of one day," or words to that effect. The Defendant handed some ASIC papers to me and said to me: "Let's fill in this paper work together. Basically I'm putting you on as a company secretary and giving you the shares in Davlite," or words to that effect. 45. I then completed the ASIC forms which the Defendant was holding. … 47. Shortly thereafter, I recall I personally attended the Market Street, Sydney Office of ASIC and lodged the relevant forms to effect the transfer of the one ordinary share to me, and to add myself as a new Company Officer being as the Company Secretary of Davlite.
Mr Dlakic said that, at all times from 2002 until he reviewed the ASIC extract for Davlite on 24 March 2017, he believed that he was the sole shareholder in Davlite (Dlakic par 50). Although Mr Dlakic was aware Mr Vaughan was the sole director of Davlite, he said he did not check to see how many shares were in the company (Dlakic par 51). Mr Dlakic said that, although he was a shareholder in Davlite since 2001, he never received a share of any income in Davlite or the rent Davlite earned (Dlakic par 52).
It must be noted that the Annual Return for Davlite that was signed by Mr Dlakic on 8 March 2002 states in Mr Dlakic's own handwriting that he held one share in Davlite beneficially.
Mr Dlakic says that in about August 2012 Mr Vaughan approached him with the ASIC papers he wanted Mr Dlakic to sign: 141. I observed that the Defendant was pacing in my office, was agitated and was speaking quickly, and he said to me: "Mate, you have to sign these papers, they are to take you off as shareholder and secretary of Davlite. In case you go broke I don't what it to effect me. You have huge expenses running the firm. I have done a spread sheet to prove it's only a matter of time before you go broke. You know the wages here are over $10,000 per week including super and tax. You're paying huge loans to buy the office, you're fucked and I don't want to fall over with you," or words to that effect. I replied: "Mate, it took ten years of a decreased salary and I made you a fortune, please don't ask for this, and remember you said you left it to me in your will. I don't want to sign this", or words to that effect. The Defendant said: "Mate nothing has changed. You were born on the same day as my only child, the 6th March. You have been me with me longer than anyone else. Whose place is this, if not yours?", or words to that effect. 142. I then immediately signed the documents having been comforted by the Defendant's above assurances, which I relied upon in signing the documents. 143. The Defendant would not leave my office until I signed certain documents that may have been ASIC papers to the best of my recollection.
Mr Dlakic says there was no proper corporate governance in relation to Davlite. Mr Dlakic provided evidence of the ASIC document number 028231120 dated 23 August 2012, being a Form 484, which I have referred to above in pars 48, 349 and 384. That form attaches an unsigned copy of a document titled: 'General Meeting of Davlite Pty Limited Held on 23 August 2012 - Minute of Meeting' (Dlakic [147]). Mr Dlakic denies such a meeting occurred: 148. There was never a General Meeting held by the Company on 23 August 2012. Indeed to my knowledge there was never any meeting held at any stage when I was Company Secretary and / or shareholder of Davlite. The document shows that the total number of shares held in the company are 2 shares held by Amil Dlakic but reduced to one share by way of the attached contradictory Minute of Meeting containing the above-mentioned unsigned company resolution. 149. No notice of any Annual General Meeting in respect of such Agenda was provided to me. 150. I cannot recall signing any Company Resolution in respect of the above Minute of Meeting. … 152. I refer to the aforementioned document at Tab 17 of Exhibit AD-1, being a copy of an ASIC Form 484 dated 23 August 2012 having the document number 028231120 showing that the total number of shares held in the company are 2 shares held by Amil Dlakic but reduced to one share by way of the attached contradictory Minute of Meeting containing the above-mentioned unsigned company resolution.

[40]

Mr Vaughan's evidence

Mr Vaughan denied ever suggesting that Mr Dlakic would own Davlite or the premises out of which the firm practiced in Kogarah (Vaughan 14 March 2018 par 5). Mr Vaughan said it was his intention, even in 2010 when he sold the firm to Mr Dlakic, to keep the property and rent it to Mr Dlakic (Vaughan 14 March 2018 par 5). At par 6 of his 14 March 2018 affidavit Mr Vaughan said: 6 In my estimate, in about 2001, the Office was worth about $650,000. It was not in my mind at all that I would give half the value of this property to a junior employee that had worked at the firm for about a year. I own a number of properties and it is my philosophy to own and collect property not to sell it or give it away. Of all the properties that I have owned, I have only ever sold three and two of those were sold out of necessity.
The position that Mr Vaughan initially adopted was in his first affidavit made on 20 June 2017, in which he said: 17 I made the Plaintiff a Director of Davlite Pty Ltd in about 2001 and also a shareholder. I believed there was a need for 2 Directors and 2 shareholders for a company until the law changed when there could be a single director and shareholder in the company. 18 The Plaintiff did not have an interest in Davlite Pty Ltd and received his share gratuitously. At no time did I promise the Plaintiff that I would leave him a share in Davlite Pty Ltd in my Will or a share in Davlite Pty Ltd for his work in recognition of his work for my firm.
This evidence is obviously wrong, because Mr Vaughan did not make Mr Dlakic a director of Davlite. Mr Vaughan was at all relevant times the only director of the company. There is no suggestion in the evidence that Davlite was ever managed as if Mr Dlakic was a director entitled to participate in the business of the board of directors of the company. The Court could hardly accept Mr Vaughan's evidence that he believed that there needed to be two directors in these circumstances.
Mr Vaughan's final position was that he intended for Mr Dlakic to be appointed as a director of Davlite because he mistakenly understood that a company needed to have two directors, but that he never intended for Mr Dlakic to be a shareholder of Davlite.
At par 10 of his 14 March 2018 affidavit, Mr Vaughan explained why Mr Dlakic was to become a director in the company: 10. Shortly afterwards, I had a conversation with Amil in the Office, which included words to the following effect: I said: 'Greg Johnston is coming off, and you're going on as a director, because I am the only director, and the law says that I have got to have two. Do you mind being a director? He's also still a shareholder and I'm to get his share.' He said: 'Okay.'
At par 15 of his 14 March 2018 affidavit, Mr Vaughan explained he never intended Mr Dlakic to become a shareholder of Davlite: 15 I believed that I had to replace Gregory director of Davlite. That is why approached Amil. I always intended for Amil to be director of Davlite. I did not realise at the time that he was not made a director in 2001, but rather became a shareholder. It was never my intention to make him a shareholder of Davlite, but to have the remaining share transferred to me. I do not recall whether we discussed Amil becoming secretary as well.
At par 17 of his 14 March 2018 affidavit, Mr Vaughan said he mistakenly stated in certain other affidavits filed in this matter that he intended Mr Dlakic to become a shareholder: 17 I have previously sworn affidavits in these proceedings, dated 4 May 2017 (in response to the affidavit of Zhu Min Ma) and 20 June 2017. In paragraph 13 of the former affidavit and paragraph 17 of the latter affidavit, I suggest that I intended Amil to become a shareholder of Davlite to comply with the law, but having reviewed the documents in Exhibit AD-1 of Amil's Affidavit, I say that what I said in those paragraphs is incorrect. My best recollection of what occurred in 2001 and (sic), is as set out above.
Thus, Mr Vaughan's initial position was that he intended to appoint Mr Dlakic as a director and transfer a share in Davlite to him because of the belief that the company needed two directors and two shareholders. In fact, Mr Vaughan did nothing to appoint Mr Dlakic as director, but steps were taken to make Mr Dlakic a shareholder. In his later affidavit, Mr Vaughan attempted to change his position to say that he intended to make Mr Dlakic a director, but not a shareholder.
Mr Vaughan was cross-examined about his mistakenly stating in his earlier affidavits that he intended Mr Dlakic to become a shareholder. He clarified that he did mistakenly make Mr Dlakic a shareholder of Davlite, it seems because he did not understand that making someone a shareholder would make them a part-owner of the company, but that if Mr Dlakic was a shareholder it was as trustee for Mr Vaughan (T 258-260): Q. I'll just get you to turn to paragraph 17 of that affidavit, and in the second sentence there you say - refer to two of your earlier affidavits and you say in those you suggested that you did intend Amil to become a shareholder to comply with the law - that's what you're talking about now? A. Yes, that's what I thought. Q. Having reviewed the documents - that was incorrect? A. Yes. Q. So it was incorrect that you thought he had to be a director to comply with the law? A. I've not - I'm not sure. Q. Well, what do you mean when you say that was incorrect? A. It was incorrect at that time. May I just have a moment to read it? Q. Certainly. A. Yes, I remember - I thought that there had to be two shareholders and two directors - that's the mistake I made in 2001. But I never intended that he should be a part owner of the - of Davlite and entitled to the property. Q. Well, Mr Vaughan‑‑ A. Ever. Q. By 2001 you'd been a solicitor for just shy of 20 - you'd been admitted as a solicitor for just shy of 20 years. A. Yes, but I don't do anything in company law. Q. And you deal regularly with corporate entities in the course of your practice as a solicitor, don't you? A. No, I don't - I do local court work - crime and family law. Q. And so you've never been involved in any family law cases where - for example - husbands and wives had a company that they held together to own assets? A. I may have been but I don't understand company law. Q. So you don't understand that a person who holds a share in a company is a, in a sense, part-owner of that company? A. I had made a mistake in putting him on as a shareholder. Q. But you did put him on as a shareholder? A. I did. Q. You certainly intended at that time for him to be recognised in the register as a shareholder? A. That was the effect of it. Q. Indeed, he was recognised in the register as a shareholder. He was never a director though, was he? A. Of that I'm not sure. Q. You've got the company extract in front of you. A. He was supposed to be a director, not a shareholder. That's now thinking back but it's 17 years ago. When Mr Johnston, he said, "I want" - I was told that I needed two shareholders and two directors by an accountant. I'm pretty sure it was an accountant and it was just a mistake that he ended up not a director but a shareholder, and all the documents are in his hand. Q. So as at 2001-- A. Yes. Q. --October 2001, you knew that Mr Dlakic was indeed a shareholder of Johnston Vaughan - of Davlite, sorry, my apologies, of Davlite Pty Ltd? A. Of Davlite, but only as a trustee for me. … Q. So as at 2001 you thought Mr Dlakic was both a shareholder and a director of Davlite Pty Ltd? A. Yes. Q. When is it that you realised he was not a director of Davlite Pty Ltd? A. I didn't realise that he was a shareholder and not a director until these papers came through and until I saw an application for finance in 2012 where he showed Davlite as an asset of his. Q. Just pausing there, do you say that it was at 2012 that you first realised that he was a shareholder and not a director? A. I didn't look as to who was - I don't - I can't speak for director but I realised that being a shareholder and adding that Davlite as an asset of his was wrong, and I went to him immediately and said, "You must - you've made a claim or an application for finance and you've included Davlite in that, and you've got nothing to do with it," and he said, "I'm sorry. I won't do it again."
This evidence of Mr Vaughan's understanding of how many directors and shareholders were required for Davlite, and what the nature of Mr Dlakic's involvement was, and his knowledge of that involvement, can best be described as confused. Although in his later affidavit, Mr Vaughan attempted to correct his earlier affidavit and say that he never intended to make Mr Dlakic a shareholder in Davlite, in cross-examination he clearly accepted that he did intend to make Mr Dlakic a shareholder, and that he did so, but he said that he did not intend thereby that Mr Dlakic would effectively gain an interest in the property from which the firm practised. But then, Mr Vaughan asserted that Mr Dlakic "was supposed to be a director, not a shareholder", before again accepting that Mr Dlakic was a shareholder (but only as trustee for Mr Vaughan).
Mr Vaughan at pars 20 and 21 of his 14 March 2018 affidavit (and similarly at par 41 of his 20 June 2017 affidavit) says that around 23 August 2012, Mr D'Apice informed him that he saw Davlite on a mortgage application by Mr Dlakic, to which Mr Vaughan said he was shocked because to his mind Mr Dlakic had "nothing to do with the ownership of Davlite". Mr Vaughan then states the following at pars 22 to 25 in his 14 March 2018 affidavit: 22 I immediately obtained the ASIC forms to remove Amil as a shareholder, and I filled them in. Those forms are behind Tab 15 of the Exhibit AD-1 to Amil's Affidavit. 23 I then went to Amil's office and we had a conversation which included words to the following effect: I said: 'I am very cranky about you trying to mortgage my company. And I am taking steps to take you off it immediately.' He said: 'I am sorry Michael, I won't do it again.' 24 I did not have the conversation set out in paragraph 141 of Amil's Affidavit. I did not promise Amil that the firm was his. 25 I asked Amil to sign a document and he did so. I do not now recall what that document was. I then lodged the ASIC forms.
Mr Vaughan's response to this evidence in his 20 June 2017 affidavit in reply to Mr Dlakic's affidavit was limited to denying pars 148 and 149 and not responding to pars 150 and 152.
In his 14 March 2018 affidavit, Mr Vaughan added: 21. In about 23 August 2012, Steven D'Apice said to me words to the following effect: "I saw Davlite on a mortgage application by Amil." 22. I was shocked by this. Because in my mind Amil had nothing to do with the ownership of Davlite. 23. I immediately obtained the ASIC forms to remove Amil as a shareholder, and I filled them in. Those forms are [the Change to company details (Form 484) signed by Mr Vaughan on 23 August 2012]. 24. I then went to Amil's office and we had a conversation which included words to the following effect: I said: "I am very cranky about you trying to mortgage my company. And I am taking steps to take you off it immediately." He said: "I am sorry Michael, I won't do it again." 25. I did not have the conversation set out in paragraph 141 of Amil's Affidavit. I did not promise Amil that the firm was his. 26. I asked Amil to sign a document and he did so. I do not now recall what that document was. I then lodged the ASIC forms.
Mr Vaughan did not give evidence that a general meeting of shareholders of Davlite was held, or that any notice of such a meeting was given to Mr Dlakic. He did say that he filled in the Form 484. He did not say that he gave Mr Dlakic an opportunity to read whatever documents were put before Mr Dlakic to sign. Mr Vaughan did not give evidence that Mr Dlakic in clear terms expressed his consent to the share in Davlite that he held being transferred to Mr Vaughan. Although Mr Vaughan said that Mr Dlakic signed a document that was put before him, Mr Vaughan has not identified the document, and now says that he cannot recall what the document was. The document that purports to be the minutes of the general meeting of the members of Davlite that was apparently attached by Mr Vaughan to the Form 484 is not signed. Mr Vaughan did not say that the unsigned document that he attached to the form was an unsigned version of the document that Mr Dlakic signed. He did not explain how it could have been that he attached an unsigned version of the document that Mr Dlakic signed, if that is what happened. In the result, the Court cannot make a finding as to the identity of any particular document as having been signed by Mr Dlakic. Consequently, as Mr Dlakic has not conceded that he signed any document, the Court cannot find that he did so. It does not matter whether or not Mr Dlakic did sign a document, because no such document has been identified and produced to the Court. There is not even secondary evidence of the contents of such a document. The Court should not draw an inference that Mr Dlakic in fact signed the purported minutes of the general meeting of the members, and for some unexplained reason Mr Vaughan wrongly attached a draft and not the signed copy. Mr Vaughan has not given evidence that would justify such an inference being drawn.

[42]

Matters relevant to beneficial ownership of share

A number of matters arose from the evidence that have an objective bearing on the likelihood that Mr Vaughan transferred the share in Davlite to Mr Dlakic beneficially, and whether Mr Dlakic understood that he was the beneficial owner of the share.
The significance of these matters is clouded by the fact that it was Mr Dlakic's evidence that from the time of the transfer to some unspecified time during the course of the proceedings Mr Dlakic believed that he was the beneficial owner of both shares in Davlite. He gave that evidence notwithstanding that the Annual return of a company (Form 316) completed by Mr Dlakic on 8 March 2002 recorded the transfer of only one share from Mr Johnston to Mr Dlakic. If Mr Dlakic believed that he was the sole shareholder in Davlite, then Mr Dlakic could have used the shares in Davlite or the Montgomery Street property as security for the loan to buy the firm, or to repay the Vince loan, without needing Mr Vaughan's consent; he should have been entitled to dividends related to the rent payable by Johnston Vaughan; after Mr Dlakic purchased Johnston Vaughan, Mr Dlakic should not have had to pay rent if he chose not to; and Mr Vaughan would not have retained any interest in Davlite that could be the subject of the gift in favour of Mr Dlakic in Mr Vaughan's will.
The significance that the ownership of the shares in Davlite had on these matters would be different if (as was the fact) both Mr Dlakic and Mr Vaughan were the apparent owners of one share in Davlite each.
At the end of the day, the evidence that emerged in relation to these issues was inconsistent, and I do not consider that the manner in which the parties dealt with these matters during the hearing resolved the inconsistencies.
On the issue of whether Mr Dlakic believed that he was the owner of the shares in Davlite and accordingly entitled to offer the shares in the company or the property that it owned as security, there was positive evidence that in 2008, 2009 and 2010 Mr Dlakic sought to borrow money on the security of Davlite. Mr Michael Karam was at the time a finance consultant who sought to assist Mr Dlakic to borrow money. He gave evidence that in the latter part of 2008, Mr Dlakic approached him to assist Mr Dlakic to borrow $1,100,000 to buy Johnston Vaughan from Mr Vaughan, under a proposal that was not finally implemented. Mr Karam arranged finance that involved a security over the Montgomery Street property, a property in Ramsgate owned by Mr Dlakic and his brother, and the property owned by Mr Dlakic in Castlereagh Street Sydney.
Mr Karam's evidence on this issue is corroborated by an email dated 12 January 2009 from an officer of Westpac to grant Hawkswell, Mr Dlakic's finance broker, which advised of Westpac's conditional approval to a number of loans, one of which was described as: "(3) DAVLITE PTY LTD… BBBL - VR $525.0k".
Mr Karam gave evidence that, after the loan approval had been obtained, Mr Dlakic said to him in January 2009: "Michael Vaughan does not agree to this arrangement. You know how I was going to give him $1.1 million for the business? He will not let me mortgage Davlite even though I can".
Mr Karam also gave evidence that Mr Dlakic spoke to him about arranging a loan against Davlite to pay out the $300,000 debt to Dr and Ms Vince, Mr Karam could not arrange finance without Mr Dlakic using Davlite as security. Mr Dlakic informed him that Mr Vaughan would not agree to Davlite being used as security.
These events are difficult to understand if Mr Dlakic believed that he was the sole owner of the shares in Davlite. They are intelligible if Mr Vaughan retained one of two shares (which he did).
Mr Dlakic was asked why he needed permission from Mr Vaughan to mortgage Davlite, and if that request indicates that he believed Mr Vaughan owned Davlite (T 156): Q. If I can take you to paragraph 96 page 114, there you sought to mortgage the Kogarah property owned by Davlite, the offices in effect, and in that paragraph you ask - well, you talk to Mr Vaughan about mortgaging the unit and he says no. Isn't that right? A. Yes, sir. Q. So you don't go ahead and mortgage the property. A. Yes, sir. Q. So in a sense when he said, no, you weren't permitted to do that, you understood that you couldn't do that. A. No, I respected him so much that no matter - I'd rather pay 87% interest than hurt him, than not respect him. Q. Mr Dlakic-- A. No. Q. That's not true, is it? A. That is. It's 100% true. Q. The reality is that you believed he was in charge of the company, he owned it, and therefore when you asked him and he said no that you weren't able to. A. Well, why would we be having this discussion if I didn't have a proprietary interest in it? Q. My question to you is that you didn't believe you had an interest in it, didn't you? A. Well, correct, sir. Q. But if you were that concerned about your borrowings at that time, particularly the Dr Vince loan which you previously talked about, and you were that desperate to refinance and use Davlite, surely you could have forced Mr Vaughan to let you use Davlite as security, couldn't you? A. Yes. Q. If you were the sole shareholder you could have upended him as director. A. Yes. Q. And you could have forced the company to be used as a security, couldn't you? A. Yes. Q. And you never did that? A. Yes, I - I'm not that kind of a person. Q. I put it to you that the reason you never did that is because you truly understood that Mr Vaughan was the owner of the company. A. No. Q. Because if you were the 100 per shareholder you could have essentially done what you would have wanted, couldn't you? A. Of course.
Mr Dlakic's case was that, after he acquired Johnston Vaughan from Mr Vaughan, he entered into leases of the Montgomery Street property, and continued to pay rent even after the buyback agreement. He never asked for any dividends from Davlite.
Mr Dlakic was asked in cross-examination and denied that the basis on which he paid rent to Mr Vaughan following the purchase of Johnston Vaughan was that he understood Davlite was Mr Vaughan's company (T 155): Q. If I can take you to page 84 - paragraph 84 page 111. A. Yes, sir. Q. There you say, don't you, that you paid as part of the 2010 deed a salary package for Mr Vaughan and, "The rent by me to him for the Kogarah premises." A. No, page 84 of my document seems to talk about something else. Q. Paragraph 84, Mr Dlakic, my apologies, page 111. A. Page 111. So your question, sir? Q. So you paid rent to Mr Vaughan as part of the arrangement you entered into, didn't you? A. Yes, sir, I did. Q. And that was because you understood that it was Mr Vaughan's company. A. No, sir. Q. Well, you don't say there that you asked Mr Vaughan for half of the rent or all of the rent, do you? A. Not in that paragraph, sir, no. Q. I put it to you that you didn't ask Mr Vaughan for all of the rent at any other time. A. Yes, sir, that's correct. Until these proceedings, that is correct. Q. And that is because you understood or believed the company to belong to Mr Vaughan. A. No, sir, that's incorrect.
The significance of Mr Dlakic's payment of rent to Davlite without claiming any entitlement to share in the benefit of the rent must be balanced against the fact that Mr Vaughan denied that Mr Dlakic continued to pay rent to Davlite after 2010 (T 227): Q. Mr Vaughan, I suggest to you that after 2010 Mr Dlakic did continue to pay rent to Davlite through the period that he was principal of Johnston Vaughan. A. Wrong. Q. Mr Vaughan, I suggest that if he hadn't to pay rent, that's something you would have included in your evidence in this Court. A. Yes. Q. And there's not one word in your six affidavits to that effect, is there? A. Wrong.
Mr Dlakic claimed that he relied on representations by Mr Vaughan that he would become the owner of Davlite after Mr Vaughan's death. He said that in 2016, he read Mr Vaughan's executed will which was given to him by Ms Ma, and at that time learned that Mr Vaughan had left the shares in Davlite to his daughter. This evidence is also inexplicable if Mr Dlakic believed that he already was the beneficial owner of both shares in Davlite. Mr Dlakic's position is more understandable if Mr Vaughan continued to be the owner of one of the two shares.
Mr Vaughan denied that he represented to Mr Dlakic at any time from 2000 onwards that he would become the owner of Davlite after his death.

[43]

Consideration

There is no evidence that the share in Davlite originally owned by Mr Johnston was effectively transferred to Mr Dlakic in accordance with the requirements of the Corporations Act at the time, by means of the execution of a share transfer that was approved by Mr Vaughan as the sole director of Davlite and entered into the company's register of members.
However, in the manner that I have discussed above, the effect of the Annual Return of Davlite lodged by Mr Dlakic and the ASIC Current & Historical Organisation Extract is that there is prima facie evidence that Mr Dlakic became the beneficial holder of one share in Davlite.
In his evidence, Mr Vaughan accepted that a share in Davlite was transferred to Mr Dlakic, although Mr Vaughan asserted that it was not his "intention" that Mr Dlakic would be the beneficial owner of the share, and he was to hold the share on trust for Mr Vaughan. Mr Vaughan's evidence was confused and inconsistent about whether he in fact had agreed that a share in Davlite would be transferred to Mr Dlakic, or whether he was to be appointed a director.
I do not regard the oral evidence of either party to be reliable in so far as the evidence is given as to precise conversations that occurred at the time of the transfer.
I regard the contents of the Annual Return lodged by Mr Dlakic as having significance going beyond the evidentiary effect that it is given as a public document. It was prepared relatively contemporaneously with the events relevant to the transfer of the share, and is likely to have been completed by Mr Dlakic in a way that conformed to his genuine understanding of the arrangement that had been reached between him and Mr Vaughan. Mr Dlakic completed the form in a way that described him as being the beneficial owner of the share. It was not suggested to Mr Dlakic that he dishonestly included the reference to beneficial ownership.
There are a number of aspects of the evidence that are capable of introducing doubt concerning the prima facie position, but I have come to the view that they are not sufficient to displace that result.
I am not persuaded by Mr Vaughan's confused explanation either that he really intended that Mr Dlakic would be made a director rather than become a shareholder, or that he thought that the applicable company law principles required that Davlite have at least two directors and two shareholders. First, I do not have sufficient confidence in the reliability of Mr Vaughan's evidence, and consider that it is most likely to be a reconstruction. I do not accept that Mr Dlakic would have produced the Annual Return consistently with him becoming a shareholder, if the real agreement between him and Mr Vaughan was that he would be made a director. There is no explanation for why Mr Vaughan only allowed Mr Dlakic to become a shareholder, if he in fact thought that he needed to appoint an additional director as well is an additional shareholder. More importantly, even if Mr Vaughan was mistaken about the legal requirements, I do not accept that he would have simply made Mr Dlakic a shareholder, if the real agreement was that Mr Dlakic would hold the share on trust for Mr Vaughan, without taking appropriate steps to ensure that the creation of the trust was effectively documented. Whatever the level of legal competence the Court may assume Mr Vaughan had, he clearly had the competence to establish a successful law practice. He must have understood that to simply cause a share in Davlite to be transferred to Mr Dlakic would create the appearance that Mr Dlakic held the share beneficially. Mr Vaughan did not ensure that there was any documentary proof at all that Mr Dlakic held the share on trust for him. I do not accept that Mr Vaughan was so legally naive that he did not understand the need to document the creation of the trust if that is what he intended to achieve.
On the other hand, I accept that it was an unusual course for Mr Vaughan to have taken to have transferred one of two shares in Davlite to Mr Dlakic relatively soon after Mr Dlakic commenced his employment with Johnston Vaughan.
That consideration is, however, balanced by the evidence that Mr Dlakic continued to work for Mr Vaughan for many years at a relatively low salary that is consistent with Mr Dlakic having accepted a salary sacrifice.
Mr Dlakic's evidence that he thought for many years that he was the sole shareholder in Davlite is also strange, particularly as he completed the Annual Return in his own handwriting and that document recorded that he and Mr Vaughan were the holders of single shares in Davlite.
Mr Dlakic's belief that he was the sole shareholder in Davlite also does not sit comfortably with the fact that Davlite was paid rent by the firm, including for periods when Mr Dlakic was the principal of the firm, and Mr Dlakic did not ever receive any share of the rent paid through dividends, and he did not pursue his entitlement to receive the profit from Davlite's ownership of the property from which the firm's practice was conducted.
Mr Dlakic's evidence concerning an understanding that the property would be left to him in Mr Vaughan's will is also not consistent with Mr Dlakic understanding that he was already the beneficial owner of both of the issued shares in Davlite, which was the owner of the property. A belief on Mr Dlakic's part that he would receive full ownership of the property through Mr Vaughan's will is to an extent consistent with Mr Dlakic understanding that he was the beneficial holder of one of two shares in Davlite, as that would leave room for Mr Dlakic to receive Mr Vaughan's share through his will.
Although the aspects of Mr Dlakic's evidence that I have just considered introduce significant doubt, I consider the effect of Mr Vaughan's inability to explain in a clear and persuasive way why it was that Mr Dlakic held the share in Davlite that was transferred to him on trust for Mr Vaughan is that the prima facie position that Mr Dlakic held that share beneficially has not been displaced.
The best reconciliation of all of the conflicting evidence that has been given to the Court that I can derive is that Mr Dlakic's evidence that he believed that all of the shares in Davlite had been transferred to him was an error of recollection, perhaps affected by his psychological condition. Mr Dlakic must have understood that only one share had been transferred to him when he prepared the Annual return that reflected the transfer of the single share to him. A belief that he only held one of two shares would be consistent with his understanding that he could not mortgage the shares in Davlite or the Montgomery Street property without Mr Vaughan's consent, and it would leave room for Mr Dlakic's belief that there remained scope for him to acquire full ownership of Davlite through Mr Vaughan's will. The terms of the Annual return and the evidence of Mr Dlakic's attempts to raise finance on the security of Davlite provide evidence that Mr Dlakic believed that he was the beneficial owner of one share in the company. While there is force in Mr Vaughan's claim that it would not have been sensible for him to transfer one of the two shares in Davlite to a junior employed solicitor, that is exactly what he did do. I do not place weight on Mr Vaughan's confused and inconsistent stated reasons for transferring the share to Mr Dlakic. Mr Vaughan may well have intended that Mr Dlakic would hold the share on trust for him, but I find that he did not convey that intention to Mr Dlakic, and in fact caused Mr Dlakic to believe that he held the share beneficially. The most likely reality is that Mr Vaughan induced Mr Dlakic to continue to work for a relatively low salary because of Mr Dlakic's belief that he would ultimately receive the practice of Johnston Vaughan, one aspect of which was his belief that he already beneficially owned one of the shares in Davlite. Accordingly, Mr Vaughan will not now be heard to say that the legal position was that Mr Dlakic held the share on trust for him.
It is therefore necessary to address the question whether the prima facie position that Mr Dlakic's interest in his share was validly transferred to Mr Vaughan has been displaced.
Unlike the position concerning the transfer of the share to Mr Dlakic, there is some positive evidence of the steps that were actually taken in relation to the purported transfer of the share to Mr Vaughan.
Mr Vaughan gave evidence that he filled out the Change to company details (Form 484) and lodged it with ASIC. The evidence justifies a finding, which I make, that the general meeting of members of Davlite that was the purported subject of the unsigned minutes did not take place. Mr Vaughan did not give evidence of Mr Dlakic orally agreeing to his share being transferred to Mr Vaughan. According to Mr Vaughan's evidence, the only agreement that Mr Dlakic made was that he would not attempt to grant a mortgage over the shares in Davlite again. Mr Vaughan did not give evidence that Mr Dlakic signed a share transfer, or even that he signed the purported minutes of the general meeting of members of Davlite, an unsigned version of which was attached to the Change to company details form.
Although Mr Dlakic gave evidence that he could not remember signing the draft minutes of the general meeting of members of Davlite, he did give the evidence that I have set out above that in response to Mr Vaughan's insistence he did sign a document that "may have been ASIC papers" that were intended to "take [Mr Dlakic] off as shareholder and secretary of Davlite".
This evidence gives rise to the question of whether the Court should find that the prima face position that Mr Dlakic's share in Davlite was effectively transferred to Mr Vaughan has not been displaced because Mr Dlakic gave evidence that he signed a document that was intended to have the effect, even though there is no evidence to establish the content of any document signed by Mr Dlakic; Mr Vaughan has not given such evidence when he had the opportunity to do so; and no explanation has been given as to why the unsigned document that purported to be the minutes of a general meeting of the members of Davlite that did not take place was in fact unsigned.
Although the necessary analysis of the public documents held by ASIC is complicated, I have explained above at pars 339 to 343 that it is only the ASIC historical extract for Davlite prepared on 20 January 2017 that records Mr Vaughan as being the holder of the two shares in Davlite. The circumstances in which ASIC recorded that information are not known. The Change to company details (Form 484) signed by Mr Vaughan on 23 August 2012 stated in Part C4 that it was Mr Dlakic that held the two shares in Davlite (as I have explained above at pars 386 and 387). It was only the misconceived and unexecuted minutes (set out at par 351 above) that in a manner which is not admissible as part of a public document contains an assertion: "That the share held by Amil Dlakic is transferred to Michael John Vaughan". That statement was not an effective transfer of the share from Mr Dlakic to Mr Vaughan as, putting form aside, it was not executed by Mr Dlakic. Mr Vaughan did not provide any consideration for the transfer, so equity would not specifically enforce any failed attempt to effect the transfer from Mr Dlakic to Mr Vaughan.
Notwithstanding the difficulty in making sense of all of the evidence, I have come to the view that the prima facie effect of the record represented by the ASIC historical extract dated 20 January 2007 is overcome by the positive evidence (as well as the absence of expected evidence), which causes me to conclude that beneficial ownership of the share in Davlite owned by Mr Dlakic was not effectively transferred to Mr Vaughan. The only evidence of what transpired on the occasion when Mr Vaughan claims that the share was transferred to him does not prove that there was a valid transfer. Rather, Mr Vaughan took various steps that were ineffective, and because of the absence of an enforceable promise by Mr Dlakic to transfer the share, supported by consideration, Mr Dlakic remains in equity the owner of the share.

[45]

Conclusion

The position that has been reached is that Mr Dlakic has succeeded in his claims that in principle he is entitled to an order setting aside the buyback agreement and that he is entitled to be reinstated as the holder of one of the two shares in Davlite. He has failed in his two negligence actions against Mr Vaughan, so that in due course orders will be made dismissing those aspects of his claim.
It will be necessary for the parties and the Court to address the issue of the orders that are appropriate to be made in respect of those claims for which Mr Dlakic has been successful.
In relation to the setting aside of the buyback agreement, the Court should not simply make an order to that effect and ignore the consequences. The parties will be given an opportunity to confer about the matter, and in the absence of agreement, to make further submissions to the Court as to the orders that are appropriate.
I have discussed on a number of occasions the apparent significance of the inadequate response by Mr Vaughan to the notice to produce that was served upon him by Mr Dlakic. I have taken the view that the absence of adequate documentation concerning the affairs of Johnston Vaughan has had serious consequences to the conduct of these proceedings. Primarily, it has impaired Mr Dlakic's ability to make considered choices about the relief that he should pursue. It has also impaired the capacity of the Court to make case management orders for the just, quick and cheap completion of these proceedings. As to this last matter, the Court would hesitate simply to make an order that an accounting take place, without the Court having an adequate understanding of the practical consequences and being able to facilitate an appropriate and cost-effective determination of the remaining issues.
I should make it clear that I do not contemplate that the parties will be permitted to lead further evidence where that evidence could have and should have been led at the hearing, to enable them to remedy any deficiencies in the cases that they have presented. On the other hand, I am satisfied that it will not be appropriate for the Court simply to make case management orders and then leave the parties to pursue the attempt on Mr Dlakic's part, that has failed thus far, to gather the documents that ought to exist concerning the financial affairs of Johnston Vaughan at relevant times. That is an exercise that should take place first, and should be facilitated by the full force of the Court to ensure that all available documents are produced in a timely and complete fashion. Only then will the Court and the parties have some chance to determine how these proceedings should be brought to a proper conclusion.
Mr Dlakic made an application for the Court to make an order at this stage of the proceedings that Mr Vaughan pay the costs of the accounting that will be necessary, on the basis that it was his failure to comply with the notice to produce that has prevented the accounting effectively being undertaken during the hearing that has now been completed. It is premature for the Court to consider the issue of costs. Mr Vaughan is clearly at risk of an adverse costs order on this issue, but the evidence does not yet establish positively the extent to which Mr Vaughan's response to the notice to produce was inadequate, or what the consequences have been. It is also likely that a separate accounting exercise would have been necessary in any event.
It will also be necessary for Mr Dlakic to address the observations that I have made above concerning practical matters connected with his application for an order that the register of members of Davlite be rectified, in particular the fact that the register has not been produced to the Court so the Court does not know whether an order for rectification is necessary, or what form it should take.
The parties also do not appear to have addressed the consequences of the Court making orders that will have the effect that Mr Dlakic and Mr Vaughan will hold one share in Davlite each. It seems to be inevitable that the consequence will be that there will be a deadlock between the shareholders, and the consequences to the management of the company will depend upon the terms of the Constitution that are not before the Court.
Though the view could be taken that the consequences of such a deadlock are not matters raised by the pleadings in the present case, it might be material to the entitlement of the proprietor of Johnston Vaughan to conduct the practice from the Montgomery Street property, which is a matter that is germane to the dispute.
The issue of the cost of the proceedings races complex questions, and a decision will be necessary as to whether those questions should be addressed now or at the conclusion of the proceedings.
When I deliver these reasons for judgment, I will discuss with the parties the appropriate short-term orders that should be made to enable the parties to consider these reasons, to confer, and to determine what orders should be made now for the future conduct of the proceedings.
It will be necessary for the parties to arrange with my associate an appropriate time for the making of the necessary orders.

Parties

Applicant/Plaintiff:

Amil Dlakic by his tutor Liliane Dlakic

Respondent/Defendant:

Michael John Vaughan

Legislation Cited (2)

Trade Practices Act 1974(Cth)

Corporations Act 2001(Cth)

Cases Cited (62)

Corporations Act 2001 (Cth) Cases Cited: Watson v Foxman (1995) 49 NSWLR 315 John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 Lauvan Pty Limited & Anor v Bega & Ors [2018] NSWSC 154 Provident Capital v Papa [2013] NSWCA 36 Carey v Freehills [2013] FCA 954, (2013) 303 ALR 445 Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114 Whereat v Duff [1972] 2 NSWLR 147 Whereat v Duff (1973) 1 ALR 363; 47 ALJR 540 Goldsworthy v Brickell [1987] Ch 378; [1987] 1 All ER 853 Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923 Bank of Credit and Commerce International SA v Aboody [1992] 4 All ER 955 Johnson v Buttress (1936) 56 CLR 113; [1936] HCA 41 Jenyns v Public Curator (1953) 90 CLR 113; [1953] HCA 2 Brown v The NSW Trustee & Guardian [2011] NSWSC 1203 Thorne v Kennedy [2017] HCA 49; (2017) 350 ALR 1 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 Tillett v Varnell Holdings Pty Ltd [2009] NSWSC 1040 Alati v Kruger (1955) 94 CLR 216 Taheri v Vitek (2014) 87 NSWLR 403; [2014] NSWCA 209 Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218 Re Centura Global Holdings Pty Ltd [2016] NSWSC 62; (2016) 111 ACSR 185Re ABI Australia Holding Pty Ltd [2017] NSWSC 1822Trade Practices Commission v TNT Management Pty Ltd (1984) 56 ALR 647Residues Treatment and Trading Co Ltd v Southern Resources Ltd (1989) 52 SASR 54 Gosford Christian School Ltd v Totonjian [2006] NSWSC 725 Forrest v Cosmetic Co Pty Ltd [2008] SASC 152; (2008) 67 ACSR 1 Robertson v Deputy Commissioner of Taxation [2010] NSWCA 58 Category: Principal judgment Parties: Amil Dlakic (Plaintiff/Cross-Defendant) Michael Vaughan (Defendant/Cross-Claimant) Representation: Counsel: A Avery-Williams (Plaintiff/Cross-Defendant) A Kuklik (Defendant/Cross-Claimant)

[1953] HCA 2

[2008] SASC 152

[1934] HCA 28

[2002] VSC 440

(1995) 49 NSWLR 315

(2013) 303 ALR 445

(2017) 94 NSWLR 518

(1973) 1 ALR 363

(1936) 56 CLR 113

(1953) 90 CLR 113

(2017) 350 ALR 1

(1983) 151 CLR 447