Australian Careers Institute Pty Ltd v Australian Institute of Fitness Pty Ltd

Shareholders Agreement

1. I have already reproduced the Recitals to the Shareholders Agreement, as well as cl 2, which set out the objectives of the shareholders. [17] I refer below to other relevant provisions of the Shareholders Agreement.
2. Under the Shareholders Agreement, each shareholder was entitled to appoint one director (cl 4(1)). The term "shareholders" was defined to mean "the entities holding shares in AIF National from time to time" (cl 1(1)). Mr Hornsey was expressly named as one of the original directors of AIF National (cl 4(2)).
3. All decisions of the board or of shareholders in general meeting were to be made by absolute majority vote (cl 5(1)).
4. Clause 8 of the Shareholders Agreement dealt with the funding of AIF National as follows: "(1) Each shareholder must contribute its respective proportion of the funding requirements of the company, as determined by the board from time to time. The shareholders must ensure that on the effective date they have advanced to the company, in accordance with their respective proportions, an aggregate amount in such sum as shall be agreed by them. … (4) Each shareholder acknowledges and agrees that any breach of the funding obligation by a shareholder ('defaulting shareholder') will cause loss or damage to the company and any other shareholder ('non-defaulting shareholder'), and accordingly, any breach of the funding obligation may be enforced (or damages sought) by the company or the non-defaulting shareholder by legal action against the defaulting shareholder. This right is in addition to any other right that the company or a shareholder may have under this agreement. … (11) Levies shall be raised in identical terms and conditions except for any difference in the amount of same in order to reflect the difference in the respective market share of the shareholders." "Levy" was defined to mean: "a non-refundable charge levied by the company on the shareholders (and payable by the shareholders) to enable the company to carry out the business."
5. Clause 1(1) of the Shareholders Agreement defined the term "Business" to mean "the business referred to in clause 2(1)". As has been seen, cl 2(1) did not use the word "business", but referred to "the interests of shareholders as leading businesses dedicated to education and training in the fitness industry". However, cl 2(2)(a), which requires its shareholders to use their best endeavours to "ensure that the company [AIF National] successfully carries on the business" appears to imply that AIF would carry on "the business".
6. Clause 9 of the Shareholders Agreement relevantly provided as follows: "Each shareholder acknowledges and agrees that: (1) the company shall promote and advance the interests of the shareholders as leading education and training businesses in the fitness industry in their respective territories and that the company will act as the national body to advance the interest of the shareholders. (2) Each shareholder warrants that it is a leading provider of education and training services for the fitness industry in its territory and that it will during the course of this agreement continue to provide such services in its said territory in accordance with the highest accepted standards in the industry. (3) Each shareholder shall, change its name to Australian Institute of Fitness Pty Ltd with a designation indicating its territory. (4) In the course of carrying out its business in its territory each shareholder shall promote its affiliation with the company and the name Australian Institute of Fitness and/or AIF and in particular (without limiting the generality of the foregoing) and shall promote any certificate issued by the company as a premier qualification in the industry and shall promote Australian Institute of Fitness certification as an ongoing measure of competency [sic] in the industry and shall support and utilise in-house training systems created by the company and shall not do anything or fail to do anything that brings the name of the company or the Australian Institute of Fitness into disrepute or [sic] any way damages the goodwill of the company or value or standing thereof."
7. Clause 10(1) of the Shareholders Agreement contained the following covenant: "Each shareholder and each principal of each shareholder covenants that it will not, during the term of this agreement, whether individually or as principal, agent, partner, joint venturer, shareholder directly or indirectly without the previous consent in writing of the company be concerned or interested or employed, manage or operate or participate in the management or operation or marketing of any products or services using or in any way associated with the name Australian Institute of Fitness anywhere except in its territory."
8. Clause 12(3) obliged each shareholder and principal to use any confidential information of another shareholder or of AIF National "only for the purposes of the business" and, subject to specified exceptions, to refrain from disclosing the information to third parties. The term "business" was defined to mean "the business referred to in clause 2(1)". As has been seen, cl 2(1) referred to the business of the shareholders rather than that of AIF National.
9. Clause 26(1) provided that the rights, duties obligations and liabilities of the shareholders were several and not joint or collective. Nothing in the Shareholders Agreement was to create a partnership between the shareholders (cl 26(2)).

The RLA

1. I have previously referred to some provisions of the RLA entered into between AIF National and AIF (Vic/Tas). [18] I refer below to other relevant provisions of the RLA.
2. AIF National appointed AIF (Vic/Tas) "to exclusively provide the services on behalf of [AIF National] in the territory for the term" (cl 2.1). The expression "services" was defined to mean "the delivery of courses, assessments and the issuing of qualifications for fitness, business and massage" (cl 1.1). The "territory" meant "the States of Victoria and Tasmania" (cl 1.1). The "term" of the RLA ended on 6 May 2015 (cll1.1 and 3.1).
3. Clause 5 of the RLA dealt with "Services" as follows "5.1 The licensee must provide the services as is reasonably required by the Institute and in accordance with the terms of this agreement. 5.2 The licensee must not provide the services in the territory other than in accordance with this agreement during the term. … 5.4 The licensee must ensure that each element of the services is delivered by personnel who are properly qualified, trained, experienced and accredited to perform the services. 5.5 The licensee must: 5.5.1 employ the senior management for the purpose of providing the services during the term; and 5.5.2 obtain the written approval of the Institute in respect of the employment of any of the senior management or the alteration of the functions of any of the senior management which approval cannot be unreasonably withheld; 5.6 If the Institute reasonably believes that any employee of the licensee should be removed from the provision of the services the Institute shall notify the licensee accordingly... … 5.9 The licensee must devote all of its time attention and abilities to providing the services during the term and will not engage in other business without the prior written consent of the Institute during the term which consent cannot be unreasonably withheld. 5.10 The licensee agrees that it will ensure that each of its senior management are full time permanent employees and do not engage in other business or undertake other employment during the normal business hours without the prior written consent of the Institute during the term which consent cannot be unreasonably withheld."
4. AIF (Vic/Tas) was required to pay AIF National the monthly "license [sic] fees", "marketing and promotion fees", and the "product development fee" set out in Schedule 2 (cl 6.1). AIF National could vary the fees provided that at least 75 per cent of the board approved the variation (cl 6.2.1). If AIF (Vic/Tas) objected to a variation in the fees payable, it could invoke a dispute resolution mechanism (cl 6.2).
5. In providing the services, AIF (Vic/Tas) was required, among other things:

• to deliver the services in a competent, ethical and professional manner (cl 9.1.1);
• to be diligent in the protection of AIF National's interests and the interests of other licensees (cl 9.1.2);
• inform AIF National of any information known to it that might prejudice its duties and obligations under the RLA (cl 9.1.7); and
• comply with any reasonable directions or instructions given by AIF National in connection with the RLA (cl 9.1.14).

1. AIF National was obliged to provide AIF (Vic/Tas) with all reasonable forms of assistance conducive to it performing its duties under the RLA and in complying with all requirements of the regulatory authority (cll 10.1.1, 10.1.2). AIF National was also obliged to do everything necessary to maintain its accreditation as a nationally registered RTO for the delivery of the services (cl.10.1.3).
2. AIF National granted AIF (Vic/Tas) an exclusive licence to use the intellectual property in the territory (cl 16.1). The intellectual property included the name and brand of "Australian Institute", its training products, computer programs, training materials, and sales and marketing materials (Schedule 1). AIF National was obliged to take all steps necessary to protect its intellectual property, while AIF (Vic/Tas) had to provide all reasonable assistance requested by AIF National to protect the intellectual property (cll 17.3, 17.4).
3. Nothing in the RLA constituted either party as an agent or partner of the other, nor created an agency or partnership for any purpose (cl 33.1). Except as otherwise specified, neither party had authority to act for or assume any obligations on behalf of the other (cl 33.2).

Primary Judgment

1. The primary Judge described AIF National as "a major provider of education and training services in the fitness industry", operating its business through its shareholders and licensees. Each shareholder/licensee had the right and duty to operate the business in a specified State or Territory and also had the right to use AIF National's intellectual property for this purpose. [19]
2. His Honour found that AIF National: "was established to promote the interests of each of its individual shareholders. [AIF National] does not, and has never, operated to return a profit and does not itself have any business activities related to fitness accreditation. It does not employ lecturers or trainers. As described above, each shareholder holds 20% of the shares in the Institute. [AIF National's] role is in sales and marketing, development of training products, control of [its] brand, provision of administrative systems, and maintenance of the status of [an RTO] for the benefit of each regional licensee." [20]
3. After addressing the legal principles relevant to the Sage Proceedings and the other matters before him, his Honour recorded his assessment of the witnesses who had given evidence. Of present relevance is that his Honour was extremely critical of the evidence given by Mr Hornsey. His Honour considered Mr Hornsey's evidence on occasions to be "palpably absurd" and that some of his claims were "dishonest". [21] His Honour said that insofar as any issue in the proceedings turned on Mr Hornsey's credit, he would not accept any of Mr Hornsey's evidence unless it was corroborated. [22]
4. An issue in the Licence Fee Proceedings was whether AIF (Vic/Tas) breached the RLA by obtaining RTO status itself and by using that status to conduct its business. The primary Judge upheld AIF National's claim that AIF (Vic/Tas) was in breach of the RLA. In doing so, his Honour made some observations about the RLA that are relevant to the Sage Proceedings.
5. His Honour considered that cl 9.1.5 (requiring AIF (Vic/Tas) to act loyally and faithfully towards AIF National) and cl 10.1.3 (requiring AIF National to maintain its RTO accreditation) made: "it plain that the parties objectively intended that AIF Vic/Tas would deliver the 'services' as defined within its territory on behalf of [AIF National] and under the umbrella of the RTO accreditation maintained by [AIF National]." [23] His Honour accepted that this situation had the "unsurprising" commercial objective of enabling AIF National to control its brand and provide services nationally in compliance with its RTO obligations. [24]
6. The primary Judge found that when Mr Hornsey established the Sage business in 2008, his interest was in providing massage training courses. [25] As early as March 2010, the Commander in Chief of AIF National (as he was titled) stressed to Mr Hornsey that Sage had to be separated from AIF (Vic/Tas) at all levels. Mr Hornsey did not disagree and in February 2014 he informed Mr Pettit of AIF National that he was keeping both companies separate. Mr Hornsey did this to allay any fears or suspicion that Sage would have an adverse impact on AIF National. [26]
7. Mr Hornsey acknowledged in his evidence that when he registered "fitness" in May 2012 as part of ACI's RTO accreditation, he intended to move the Sage business into fitness training. The primary Judge was satisfied that Mr Hornsey deliberately kept his intentions secret in the early stages. [27] His Honour also recorded that Mr Hornsey accepted in his evidence that in 2012 he wanted the Sage business to compete actively against AIF (Vic/Tas) and that both were operating in the same market. [28]
8. The primary Judge regarded it as "plainly correct" that Mr Hornsey: [29] "pursued the business opportunity for the benefit of ACI or Sage and indeed took active steps by which he placed himself and those around him in a position of conflict between his personal interest and the interests of the Sage fitness business on the one hand and the business and interests of [AIF National] on the other."
9. His Honour also accepted AIF National's submission that it conducted its fitness training business through its licensees and that it had a brand and goodwill to protect. In any event, in his Honour's view AIF National was entitled to protect the conduct of its business through its licensees. [30]
10. His Honour found that for all practical purposes, there was no internal separation between AIF (Vic/Tas) and the Sage fitness business. He accepted that there was a "confusion of roles" which created a "very serious risk of the re-direction (intentional or unintentional) of customers from [AIF National] to the Sage Business". [31]
11. The primary Judge noted that Mr Hornsey had agreed in his evidence that it was inappropriate to set up a competing business and keep it secret from all other directors. This concession was inconsistent with Mr Hornsey's claim that he was open and honest with the other directors in relation to his plans. [32]
12. The primary Judge then referred to what he described as the "so-called agreement" of 5 September 2006 [33] and to the Sage Defendants' submissions, based on the resolution of that date that the shareholders and directors were free to participate in competing businesses. [34] His Honour addressed the issue as follows. [35] "373. [AIF National] submits that the whole of the document needs to be considered and when that is done it is clear that there was no such agreement but rather a proposal to enter into a new memorandum of understanding to replace the Shareholders' Agreement. It is submitted by [AIF National] that the parties never entered into a new memorandum of understanding. Mr Hornsey agreed with that latter proposition in cross examination. 374. In any event, [AIF National] submits that on no view of the evidence could it be said that there was ever an agreement which involved permission to create a competing business which would act to the detriment of [AIF National] and hence damage its goodwill. Further it is submitted that none of [AIF National's] witnesses were cross examined about any alleged agreement that permitted freedom for any relevant parties to be involved in competing businesses without the [AIF National's] consent. 375. It is submitted that Mr Hornsey's evidence is such that it should be found that he planned the Sage Fitness Business as early as 2007 and that he never candidly informed his fellow directors of this intention nor ultimately what he had in mind. Further, it is submitted that it is simply not to the point that either Mr Hornsey, or for that matter Ms Tuchtan, believed that they were entitled to compete with [AIF National] or to have interests in competing businesses. Further, it is submitted that at least Mr Hornsey, if not Ms Tuchtan, must have appreciated that they simply did not have the fully informed consent of the Institute to do what they were doing and that their conduct lacked good faith and that they must have appreciated it could only harm [AIF National] and benefit Mr Hornsey and Ms Tuchtan's other interests. So far as Mr Hornsey goes I am satisfied that those submissions are correct..."
13. In his Honour's view, the evidence demonstrated Mr Hornsey had implemented a deliberate strategy to "establish, promote and attempt to secure the success of Sage," a competitor of AIF National, while being a director of both companies. [36]
14. The primary Judge rejected the submissions by the Sage Defendants [37] that ACI did not compete with AIF National because it did not itself conduct any courses (the licensees being responsible for providing the courses). [38] His Honour also rejected the Sage Defendants' submission that since AIF National operated on a not-for-profit basis, there was no real possibility of a conflict between the interests of AIF National and those of ACI and AIF (Vic/Tas). [39]
15. The primary Judge found that notwithstanding Mr Hornsey's attempts to differentiate Sage's business from the business of AIF National, he deliberately intended to make Sage's business more attractive at the expense of AIF National: "[Mr Hornsey] set out whilst a director of [AIF National] to devise a rival business which would directly compete with [AIF National] and which would directly compete with [AIF National] and which would inevitably damage its goodwill, or at least in the knowledge that would be the likely result of his conduct." [40]
16. His Honour considered that the Sage Defendants' reliance on the written consent of 10 December 2010 [41] was misplaced since AIF National's consent to Mr Hornsey engaging in other business during normal office hours could not be understood as extending to Mr Hornsey setting up a business in direct competition with AIF National. [42]
17. The primary Judge continued as follows: [43] "434. In my view, Mr Hornsey's conduct in setting up and promoting the Sage business was deliberate, for a time covert, and in a number of respects, in my view, quite dishonest. The suggestion that he and Ms Richardson [Mr Hornsey's wife] had the motivation or competence assiduously to keep separate at all times [AIF National's] and Sage's interests is, in my view, as a matter of fact and practical reality absurd. Whilst a director of [AIF National] and AIF Vic/Tas, Mr Hornsey deliberately pursued the Sage business opportunity for his own benefit and for the obvious benefit of ACI and AIF Vic/Tas [44] and placed himself quite deliberately in a position of conflict between personal interests and the interests of the Sage fitness business on the one hand and the interests of [AIF National] on the other. … 436 As far as the submission that [AIF National] has no relevant interest to protect is concerned, [AIF National] submits that such an allegation is artificial. I agree. In my view [AIF National] has a business because, under its RTO and under its umbrella of central management administration, and using its intellectual property brand and goodwill, a range of education and training services in the fitness industry are provided to students across Australia. 437 It seems to me that the Sage fitness business is in direct competition with [AIF National's] business and the business of its licensees, at least in Victoria, Tasmania, New South Wales and Queensland. Moreover, the potential cannibalisation of the business of AIF Vic/Tas by the Sage fitness business has a direct and palpable impact on [AIF National]. Among other things it would undoubtedly have an impact on [AIF National's] brand and goodwill including an impact on its national standing as an RTO accredited provider of premium quality services in the fitness industry. Even Mr Hornsey conceded that [AIF National], by reason of the operation of the Sage fitness business, would receive less revenue from AIF Vic/Tas. 438 In my view [AIF National] has amply demonstrated a legitimate commercial purpose in seeking the relief outlined. 439 It is submitted by [AIF National], quite correctly, therefore, that any reduction in the business and revenues of AIF Vic/Tas correspondingly reduces the amount of licence fees payable by AIF Vic/Tas to [AIF National] under the AIF Vic/Tas RLA, imposing an additional financial burden on other licensees to make up any funding shortfall, but overall constraining the Institute's business activities. 440 Further, [AIF National] makes the point that it is simply not an answer that it only conducts its fitness training business through its various licensees. Again, I agree. The brand and the goodwill belong to [AIF National]. These submissions are, in my view, as a matter of legal and commercial reality, correct. The mere fact that [AIF National] does not retain profits is also, I consider, not to the point. It has marketed and promoted itself and on the evidence has a commercial presence and hence reputation. 441. Of course [AIF National] owns the intellectual property and is responsible for maintaining the good will of the business nationally. The licensees provide the services in their respective regions 'on behalf of [AIF National]'. [AIF National], therefore, is entitled to insist for the benefit of the Institute as a whole that its directors not place themselves in a position of conflict and then derive private profits from the conflicted position. … 444. In my view, Mr Hornsey's conduct amounted to a misuse of his position for the purposes of s 182 and he was therefore in breach of his fiduciary obligations."
18. His Honour dealt briefly with AIF National's claim against ACI and Sage, as follows: [45] 449 "[AIF National] submits that as Mr Hornsey and Ms Tuchtan are and were the controlling minds relevantly of ACI and Sage, being two of the three directors of both companies, it can be inferred that ACI and Sage knew everything that was known to Mr Hornsey and Ms Tuchtan and had an obvious involvement in the contravening conduct (in the sense of participation or assistance), because they are the corporate entities that own and operate the Sage fitness business. I agree so far as Mr Hornsey is concerned. 450 Further, there is no need separately to demonstrate dishonest [conduct] on the part of ACI and/or Sage: Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6. As to knowing receipt, [AIF National] accepts that the authorities require a receipt of property and that information is not property. It is, however, submitted that [the] goodwill and assets of the Sage fitness business are property and there need be no greater identification than that. Again I agree."

Breach of Director's Duties

1. Mr Osborne QC, who appeared with Mr Tomlinson and Mr Stretton for the appellants, did not contend that the primary Judge misstated the principles governing the statutory and fiduciary duties of directors of corporations. However, Mr Osborne emphasised that it had never been part of ACI's case that Mr Hornsey acquired confidential information in his capacity as a director of AIF National, or that he had misused any such information for ACI's purposes. Nor had ACI claimed that Mr Hornsey took advantage of a commercial opportunity which he became aware of in his capacity as a director of AIF National.
2. According to Mr Osborne, the primary Judge wrongly conflated the activities of AIF National (to which Mr Hornsey owed statutory and fiduciary duties) and the activities of AIF National's shareholders and licensees (to which Mr Hornsey owed no such duties). In support of that submission, Mr Osborne challenged the primary Judge's findings that:

• the business of the Sage Institute of Fitness was in direct competition with AIF National's business [46] (as distinct from competing with the separate businesses of the regional licensees);
• the Sage Institute of Fitness had a direct impact on AIF National's goodwill; [47] and
• a reduction in licence fees payable by AIF (Vic/Tas) to AIF National would constrain the latter's business activities [48] (since AIF National could set its own budget and impose higher fees on other regional licensees).

1. Mr Osborne submitted that AIF National's role in accordance with cl 2(1) of the Shareholders Agreement was to promote and advance the interests of each of the shareholders or their licensees. AIF National's ability to carry on its business was not impaired by anything that ACI did regardless of whether ACI's activities might have affected the business of one or more of the licensees.
2. Even if (contrary to Mr Osborne's submission), AIF National and ACI engaged in the same sphere of business activity, Mr Osborne contended that Mr Hornsey's duties as a non-executive director of AIF National did not prevent his involvement in a business that competed with that of AIF National. Mr Osborne submitted that it is permissible for a non-executive director of a company to establish a competing business, provided that the director does not misuse confidential information and does not take advantage of commercial opportunities that come to the director in his or her capacity as such. While the potential conflict of interest might require the non-executive director to limit the extent of his or her participation in the company's decision-making, no breach of this kind had been alleged against Mr Hornsey.
3. Mr Osborne challenged the primary Judge's finding that Mr Hornsey's conduct was dishonest, [49] but did not dispute his Honour's finding that Mr Hornsey pursued the business opportunity for his own benefit and for the benefit of ACI. Mr Osborne contended that in any event, even if Mr Hornsey's pursuit of the business opportunity was "dishonest," it did not involve any breach of his duties as a director in the absence of misuse of information or diversion of a business opportunity available to AIF National. He pointed out that neither the Shareholders Agreement nor the RLA contained a provision prohibiting a principal from competing with AIF National and submitted that the omission was quite deliberate.
4. Mr Osborne accepted that Mr Hornsey may well have been in breach of his duties as a director of AIF National if he failed to disclose the potential conflict of interest and continued to participate in AIF National's affairs regardless of the conflict. But the finding that Mr Hornsey had acted covertly and dishonestly in not revealing his intentions was not material to the way AIF National pleaded or conducted its case. Mr Hornsey's lack of openness did not alter the fact that actively promoting a competing business, of itself, did not constitute a breach of his duties as a director of AIF National.

Accessorial Liability

1. The appellants submitted that assuming the finding that Mr Hornsey breached his fiduciary duties to AIF National stands, this Court should overturn the primary Judge's findings relating to the accessorial liability of ACI and Sage. [50]
2. The appellants accepted that if Mr Hornsey's actions in setting up and promoting the Sage business involved him carrying out a dishonest and fraudulent design, ACI and Sage had knowledge of that design and thus knowingly assisted Mr Hornsey's breach of fiduciary duties. Mr Osborne acknowledged that Mr Hornsey was a directing mind of ACI and Sage and that the two corporations must be taken to have known that Mr Hornsey's actions were dishonest and fraudulent (if indeed they were).
3. Mr Osborne submitted, however, that a finding that Sage knowingly assisted in Mr Hornsey's breach of fiduciary duties required a finding that Mr Hornsey's breach was dishonest or fraudulent, in conformity with the principles stated by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [51] and explained in Hasler v Singtel Optus Pty Ltd. [52] Mr Osborne accepted that in view of the Court's decision in Hasler, it was not necessary for AIF National to plead specifically that Mr Hornsey's breaches of his fiduciary duties were part of a dishonest or fraudulent design. He also acknowledged that the primary Judge characterised some unspecified aspects of Mr Hornsey's conduct as "quite dishonest". Nonetheless, Mr Osborne submitted that it was significant that his Honour made no express finding that Mr Hornsey acted with a fraudulent and dishonest design such as to attract accessorial liability in ACI or Sage. In any event, so he argued, the evidence did not justify any such finding.

Breach of Director's Duties

1. Mr Pritchard SC, who appeared with Mr Emmett for AIF National, accepted that there may be circumstances in which a director of a company can legitimately participate in the activities of a business competing with the company's business. He submitted, however, that the critical question is whether, having regard to the nature of the competing business, the role of its directors in that business, and other relevant circumstances, the director's conduct gives rise to the sensible possibility of conflict. [53] In this case, so Mr Pritchard argued, Mr Hornsey did far more than merely maintain an interest in a competing business or company while remaining a director of AIF National. Mr Hornsey's activities created a real and substantial possibility of conflict between his personal interests and the interests of AIF National which he was bound to protect.
2. Mr Pritchard submitted that the primary Judge correctly found that AIF National was a major provider of education and training services in the fitness industry and that it conducted its business through its licensees. His Honour also correctly found that AIF National had an interest in controlling its brand and in ensuring that services were provided nationally in accordance with its RTO obligations. These findings demonstrated that ACI operated in competition with AIF National in the same market place. By diverting customers from AIF (Vic/Tas), ACI was harming AIF National's brand and business. Mr Hornsey's activities therefore placed him in a position of conflict between his duties to AIF National and his interest as a shareholder and director of ACI.
3. In his oral argument on the appeal, Mr Pritchard agreed that the thrust of his submissions was that the business of AIF National was to advance the interests of its shareholders and licensees and that Mr Hornsey's conduct in diverting business from AIF (Vic/Tas) to ACI necessarily reduced the ability of AIF National to achieve its objectives. In support of this submission, Mr Pritchard referred to the objectives stated in the Shareholders Agreement and to the terms of the RLA which, so he argued, informed the scope of Mr Hornsey's duties as a director of AIF National. In particular, the terms of the RLA demonstrated that AIF National had an interest in controlling the use of its material and intellectual property and in protecting its RTO accreditation.

Accessorial Liability

1. Mr Pritchard accepted that this Court would follow the decision in Hasler, although Mr Pritchard formally reserved AIF National's position as to the correctness of that decision, should the matter proceed further. [54] The effect of the interpretation adopted in Hasler of the decision in Farah Constructions, as Mr Pritchard acknowledged, is that in order to render a third party liable for participating in a breach of fiduciary duty in accordance with the so-called "second limb" of Barnes v Addy, [55] the plaintiff must show that the fiduciary's breach was part of a dishonest or fraudulent design.
2. Mr Pritchard sought to uphold the primary Judge's decision in two ways. First, he submitted that despite Hasler, AIF National does not have to show that Mr Hornsey's breach was part of a dishonest or fraudulent design in order to succeed against ACI and Sage. Mr Pritchard relied on the principle that a third party corporation can be held liable for a non-fraudulent breach of duty by a fiduciary if the corporation is simply the alter ego of the fiduciary. If the fiduciary uses the corporation to secure the profit or inflict the harm that results from the breach, so he argued, the corporation is liable.
3. Secondly, Mr Pritchard submitted that the primary Judge in substance found that Mr Hornsey's conduct in developing the Sage fitness business was part of a dishonest or fraudulent design. The findings demonstrated, so Mr Pritchard contended, that Mr Hornsey had already departed from the ordinary standards of honest behaviour that a person in his position would be expected to observe.
4. AIF National's written submissions on the appeal accepted that neither ACI nor Sage received property that was subject to a pre-existing trust or fiduciary obligation. In view of its concessions, I did not understand Mr Pritchard to support the primary Judge's finding that ACI received AIF National's property in the form of the goodwill and assets of the Sage fitness business.

Corporations Act

1. Sections 181-184 of the Corporations Act set out the statutory duties owed by directors of corporations. Section 185 of the Corporations Act provides that these duties are in addition to, and do not derogate from, any rule of law imposing duties on directors. The statutory duties therefore co-exist with equitable principles imposing fiduciary duties on directors.
2. The argument in this Court did not distinguish to any significant extent between the duties imposed on Mr Hornsey by the Corporations Act and the fiduciary duties he owed as a director of AIF National. However, the primary Judge found that in addition to breaching his fiduciary duties, Mr Hornsey misused his position as a director "for the purposes of s 182 and he was therefore in breach of his fiduciary obligations". [56]
3. It is convenient to reproduce both ss 181 and 182 of the Corporations Act. They provide as follows: "181 Good faith--civil obligations (1) A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in the best interests of the corporation; and (b) for a proper purpose. 182 Use of position--civil obligations (1) A director…of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation."
4. Section 1317H of the Corporations Act empowers the Court to order a person to compensate a corporation for damages suffered by the corporation if the person has contravened a civil penalty provision and the damage resulted from the contravention. Both ss 181 and 182 of the Corporations Act are civil penalty provisions. [57]

Fiduciary Duties: Principles

1. The principles governing the fiduciary duties owed by a director to a company, as has been remarked, are easy enough to state in general terms, but often difficult to apply to concrete facts. [58] The basic principle was stated by Mason J in Hospital Products Ltd v United States Surgical Corporation: [59] "[a fiduciary] is under an obligation not to promote his personal interest by making or pursuing a gain in circumstances in which there is a conflict or a real or substantial possibility of a conflict between his personal interests and those of the persons whom he is bound to protect..."
2. The principle was restated by an unanimous High Court in Warman International Ltd v Dwyer [60] as follows: "A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position."
3. The authorities make it clear that there must be at least a real, or a substantial possibility of a conflict, before a director can be said to be in breach of his or her fiduciary duties. The test for whether there is a real and substantial possibility of a conflict between a director's personal interests and his or her duties as a director is objective. It is to be determined from the standpoint of an objective observer, with knowledge of all the material facts and circumstances. [61]
4. The authorities have also warned that the principle cannot be applied "inexorably … and without regard to the particular circumstances of the situation" [62] and that care must be exercised not to convert general principles of equity into instruments of hardship in particular cases. [63] It is therefore perhaps not surprising that the High Court has said more than once that different minds may reach different conclusions as to whether there is a real possibility of conflict between interest and duty in a particular case. [64]
5. The scope of a fiduciary's duties must be accommodated to the particulars of the underlying relationship that gives rise to the duties in the first place. [65] An example that is often given is that a company director who is also a shareholder is permitted to advance his or her own interests as a shareholder, as well as those of the company. [66] Another example, the correctness of which was not challenged by Mr Pritchard, is the statement in Bell v Lever Brothers Ltd [67] that a director is at liberty to become a director of a rival company, provided that he or she does not make use of confidential information.
6. In Links Gulf Tasmania Pty Ltd v Sattler, [68] after a comprehensive examination of the authorities considering Lord Blanesburgh's dictum, Jessup J concluded that the: "…question whether, in the light of the nature of the competitive business, the director's role in it and other relevant circumstances, the director's conduct would give rise to the sensible possibility of conflict, is not foreclosed by the dictum. At most, the dictum means that the mere fact of being the director of a company will not preclude the director from engaging in a competing business on his or her own account. But it leaves open any issues of actual conflict, or of conflict reasonably perceived to be within the range of sensible possibilities, arising on the facts of a particular case." [69] Having regard to Mr Pritchard's concession, it is not necessary to take the matter further beyond observing, with respect, that Jessup J's conclusion appears to me to be sound as a matter of principle. [70]
7. In determining whether there is a conflict between the personal interests of a director of a company, and the director's duties to the company, it is necessary to identify the functions or responsibilities the director has undertaken in that capacity. As was said by the Full Federal Court in Grimaldi v Chameleon Mining NL (No 2), [71] the actual functions or responsibilities assumed by the fiduciary determine the subject matter over which his or her obligations extend, at least for the purposes of deciding whether there is a conflict of interest and duty or a conflict between duties. While the functions or responsibilities of a director are generally framed in broad terms, the precise scope of the functions or responsibilities in a particular case is a question of fact. [72] Thus, the content of fiduciary duties are moulded to the character of the particular relationship between the director and the company. [73]
8. In assessing the circumstances of a case, it is important to bear in mind the protective rationale for the imposition of fiduciary duties. [74] In Chan v Zacharia, [75] Deane J discerned two distinct themes in the "fundamental rule" that a fiduciary is not permitted to put himself or herself in a position where duty and interest conflict: [76] "The first [theme] is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage."

The Present Case

1. It is now not in dispute that Mr Hornsey, in creating and developing ACI's business as a provider of fitness training courses did not divert a business opportunity that came to him in his capacity as a director of AIF National. Nor does AIF National now contend that Mr Hornsey misused confidential information that he received or was privy to by virtue of his position as a director.
2. The absence of any contention that Mr Hornsey diverted a business opportunity from AIF National or misused confidential information does not necessarily mean that the primary Judge erred in finding that Mr Hornsey breached his fiduciary duties. As the statement of principle in Warman International Ltd v Dwyer shows, Mr Hornsey's role in establishing and expanding the business of ACI could have breached the fiduciary duties he owed to AIF National, provided his conduct created a real or substantial possibility of a conflict between his personal interests and the duties owed to AIF National.

Criticisms of the primary Judge's approach

1. There is nonetheless force in some of the appellants' criticisms of the primary Judge's reasoning underlying his Honour's conclusion that Mr Hornsey's conduct involved him in a conflict between his fiduciary duties as a director of AIF National and his personal interest in expanding ACI's business.
2. The primary Judge found that Mr Hornsey set out while a director of AIF National to "devise a rival business which would directly compete with [AIF National"]. [77] His Honour also found that the Sage fitness business was "in direct competition with [AIF National's] business". [78] These findings played a part in his Honour's findings that Mr Hornsey's conduct necessarily had a "direct and palpable impact" on AIF National's business [79] and that Mr Hornsey was in a position of conflict between his duties as a director of AIF National and his personal interests. [80]
3. The finding that Mr Hornsey deliberately set out to create a rival business to that of AIF National also informed his Honour's view that Mr Hornsey's conduct was not only covert (a matter not in dispute), but "quite dishonest" [81] and "blatant". [82] This can be seen from the significance his Honour attributed to Mr Hornsey's admission in cross-examination that it would have been inappropriate for him to set up a "competing business and keep it a secret from [AIF National]. [83] Mr Hornsey's answer had no particular significance to the issues in dispute, unless Mr Hornsey was in fact setting up a business which competed with that of AIF National.
4. It is not easy to reconcile the finding that Mr Hornsey set up a business competing with AIF National with the finding made earlier in the judgment, that AIF National never operated so as to make a profit and did not "itself have any business activities related to fitness accreditation". [84] The latter finding reflected evidence, not in dispute on the appeal, that it was the licensees and not AIF National, who actually conducted fitness training courses and provided associated services to customers, even though they did so with the benefit of AIF National's promotional activities and the materials supplied by it.
5. The primary Judge considered that this difficulty was overcome because the licensees provided services "on behalf of" AIF National. [85] His Honour was referring to the RLA, which states that AIF (Vic/Tas) (and all other licensees) are to provide services in their territory "on behalf of" AIF National. [86] His Honour did not, however, address whether the terms of the RLA apparently creating an agency can be reconciled with cl 33.1, which provides that nothing in the RLA constituted a licensee as the agent of AIF National. I shall return to this issue.
6. A second difficulty is that the primary Judge thought that the fact that ACI competed in the same market as AIF (Vic/Tas) demonstrated that ACI's business must have involved Mr Hornsey in a position of conflict between interest and duty. For example, his Honour referred to Mr Hornsey "conced[ing] quite frankly" that the Sage business and AIF (Vic/Tas) were competing in the same market. [87] Elsewhere, his Honour referred to the Sage business being in direct competition with the business of the licensees, and to the "potential cannibalisation" of the business of AIF (Vic/Tas) by the Sage fitness business. [88] Insofar as the primary Judge may have intended to suggest that harm inflicted on the business of AIF (Vic/Tas), of itself, necessarily placed Mr Hornsey in a position of conflict that cannot be correct. For obvious reasons, AIF (Vic/Tas) made no complaint in the proceedings about its loss of business to ACI.
7. A third difficulty is that the primary Judge appears to have attached considerable significance to his finding that Mr Hornsey engaged in a deliberate strategy to establish and promote the Sage Institute of Fitness and that his conduct in some respects had been "quite dishonest". [89] A finding that a director of a company has been dishonest in dealings with the company or fellow directors may well be cogent evidence that the director has failed, for example, to discharge his or her duties in good faith in the interests of the company. [90] However, when the director is said to have been in a position of conflict between interest and duty, characterising the director's conduct as deliberate or even dishonest does not necessarily demonstrate that there was in fact such a conflict. Whether or not the director faced a conflict between interest and duty will depend on the considerations identified in the authorities, including the director's functions and responsibilities in the particular circumstances of the case.

Scope of Mr Hornsey's functions

1. Conformably with the authorities, it is convenient to begin consideration of whether Mr Hornsey placed himself in a position of conflict between interest and duty by addressing the nature and scope of his functions and responsibilities as a director of AIF National. Mr Osborne did not dispute that this task requires the provisions of the Shareholders Agreement to be taken into account. He accepted that the Shareholders Agreement, to which Mr Hornsey was a party, recorded the objectives of AIF National and provided for the relationship between the company, its shareholders and the principals.
2. Mr Osborne, as I understood him, did not concede that the terms of the RLA between AIF National and AIF (Vic/Tas) must also be considered when determining the scope of Mr Hornsey's functions and responsibilities as a director of AIF National. In my view, however, the RLAs are relevant to the question. Each licensee entered into an RLA with AIF National in almost identical terms. The RLAs provided the framework by which the objectives stated in the Shareholders Agreement were to be achieved by AIF National and the licensees. For example, AIF National's status as a "nationally accredited registered training organisation for the delivery of courses, assessments and the issuing of qualifications," as recorded in Recital A to the RLA, was clearly central to achieving the objectives stated in cl 2(1) of the Shareholders Agreement.
3. The Shareholders Agreement gave specific content to the duty of good faith owed by Mr Hornsey as a director of AIF National. The objectives to which the shareholders and principals were committed indicate that Mr Hornsey, in his capacity as director, was obliged to act in good faith to enable AIF national to: "promote and advance the interests of the shareholders as leading businesses dedicated in education and training in the fitness industry in their respective territories." [91] The acknowledgement by the shareholders that AIF would act "as the national body to advance the interests of the shareholders" [92] indicated that Mr Hornsey's responsibilities as a director included enabling AIF National to perform that role.
4. As I have noted, cl 2(1) of the Shareholders Agreement refers to the businesses of the shareholders, but does not state explicitly that AIF National is to carry on a business. However, cl 2(2)(a) required each shareholder "to co-operate and use [its] best endeavours to ensure that [AIF National] successfully carries on the business". This provision implies that AIF, so far as the shareholders and principals were concerned, was to carry on the business of promoting and advancing the interests of the shareholders' businesses, albeit not necessarily as a profit-making undertaking.
5. Regardless of whether AIF National can be said to have been conducting a "business" its role was unusual. The core of its activities lay in promoting and advancing the interests of each of its shareholders, not only in their capacity as shareholders, but as the operators of businesses (whether by themselves or by nominees).
6. The Shareholders Agreement made it plain that the shareholders were not to be regarded as partners or as agents of each other. [93] Nevertheless, the Shareholders Agreement contemplated that the shareholders would co-operate with each other and use their best endeavours to ensure that AIF National successfully carried on its business. [94] In this sense, AIF National was to be a key participant in a co-operative venture (however that venture might be legally characterised) involving the five shareholders and AIF National itself.
7. The nature of the co-operation required from shareholders was addressed (among other places) in cl 9(4) of the Shareholders Agreement. This provision required each shareholder:

• to promote its affiliation with AIF National and with the name "Australian Institute of Fitness";
• to promote Australian Institute of Fitness certification as an ongoing measure of competency in the industry; and
• not to do anything that damaged the goodwill of AIF National or its value or standing.

1. Clause 9(4) constituted an acknowledgment by the parties to the Shareholders Agreement including Mr Hornsey that AIF National had goodwill and a reputation to protect, even though AIF National was a non-profit organisation and existed primarily to advance the business interests of its shareholders. In particular, the standing of AIF National's certification of competency was acknowledged to be important, if not critical, to its capacity to perform its role as the national body undertaking activities designed to promote and advance the businesses conducted by shareholders. Clause 9(4) also expressly acknowledged that actions of the shareholders could adversely affect AIF National's goodwill, standing and value and thereby affect its capacity to carry on its "business".
2. The funding arrangements dealt with in the Shareholders Agreement recognised that disruption to the revenue stream from one or more shareholders would have consequences for the capacity of AIF National to perform its role as the national body promoting all businesses of shareholders. Each shareholder was required to contribute a proportion of AIF National's funding requirements, as determined by the board from time to time. [95] Each shareholder acknowledged and agreed that any breach of its funding obligation would cause loss or damage not only to other shareholders but to AIF National itself. [96] While it was contemplated by the parties to the Shareholders Agreement that AIF National would not necessarily be a profit-making entity, these provisions recognise that achieving AIF National's objective of promoting and advancing the business interests of shareholders depended in part upon each shareholder meeting its funding obligations.
3. It is true that the particular funding formula approved by the board in November 2012 provided for adjustments to be made at the end of a financial year if one licensee failed to achieve the budgeted revenue. [97] But the formula could be varied at any time, and it was open to the board, for example, to impose fees that although "proportionate", were fixed at the beginning of a year. If that was done, a shortfall in the payments made by one licensee would not be adjusted by automatically increasing the contributions from other licensees.
4. The RLA set out in detail the manner in which the licensee was to deliver services. The detailed perception of the licensee's responsibilities was clearly designed to ensure that AIF National could achieve its objectives as a nationally accredited RTO required to promote the business of each of its shareholders. As I have noted, there may be some difficulty in reconciling cl 2.1 of the RLA (appointing the licensee to deliver services "on behalf of" AIF National) and cl 33.1 (nothing in the RLA constitutes the licensee as agent of AIF National). [98] The primary Judge seemed to think that cl 2.1 meant that the licensee delivered services to trainees and others as an agent of AIF National. I doubt that the proposition is correct, at least without qualification. But cl 2.1 and other provisions in the RLA recognised that AIF National had a direct and continuing interest in regulating the quality of services provided by each of the licensees. It was central to AIF National's role as outlined in the Shareholders Agreement and the RLA that it should maintain and enhance its standing as an accredited RTO and a certifier of training qualifications. The RLA shows that although the licensees were separate corporate entities, their businesses were not autonomous. They were to be conducted in close association with AIF National and with each other.

A conflict between interest and duty

1. As a non-executive director of AIF National, Mr Hornsey was not required to devote all his energies to promoting its objectives and operations. But his functions and responsibilities included acting in good faith in the interests of AIF National, as a company required to advance and promote the business interests of its shareholders and their licensees. The mode of funding for AIF National in force at the time Mr Hornsey was developing the Sage Institute of Fitness meant that AIF National would not make a profit. However, the funding model does not alter the fact that the parties to the Shareholders Agreement, including Mr Hornsey, regarded AIF National as a company conducting activities of a very particular kind.
2. Mr Hornsey did not merely set up and promote a business that competed in the same market as the business conducted by one of the licensees (AIF (Vic/Tas)). On the primary Judge's findings, AIF (Vic/Tas) and ACI had overlapping staff with dual roles. [99] His Honour regarded it as "absurd" to suggest that Mr Hornsey assiduously kept separate the interests of AIF National and the Sage Institute of Fitness. [100] His Honour also found that the overlap led to a confusion of roles and created a very real risk of redirecting customers of AIF National to the Sage business. [101] Whether or not it can be said that AIF National had its own "customers" (it did maintain stands at trade shows), it must follow that there was a serious risk that customers who might otherwise use the services of AIF (Vic/Tas) would be redirected to ACI.
3. Redirecting business from AIF (Vic/Tas) to ACI would not only harm the former's business, it would potentially impair, if not destroy, AIF National's capacity to promote the business of its Victorian licensee. More generally, it would impair the capacity of AIF National to promote the name "Australian Institute of Fitness" as a national brand capable of advancing the business interests of each of its shareholders. This in substance, is what I understand his Honour to mean when he found that the activities of the Sage business had: "an impact on [AIF National's] brand and goodwill including an impact on its national standing as an RTO accredited provider of premium quality services in the fitness industry." [102]
4. AIF National's role, as delineated in the Shareholders Agreement and the RLAs, was to promote the business of each shareholder in the relevant territory. AIF National was to carry out co-ordinating, promotional and supervisory activities in a co-operative venture. While each shareholder was to conduct a business in its own territory, the co-operative venture operated in important respects on a national basis through AIF National. To achieve the objectives set out in the Shareholders Agreement, the co-operation of all shareholders was required. That meant cooperation with each other and with AIF National.
5. Mr Hornsey's actions necessarily impeded the ability of AIF National to achieve its objectives as "the national body to advance the interests of the shareholders". By promoting ACI at the expense of AIF (Vic/Tas), Mr Hornsey was effectively moving towards withdrawing the Victorian and Tasmanian licenses from the co-operative national venture. If Mr Hornsey succeeded in his endeavours, AIF National could no longer advance the interests of the shareholders "as leading businesses" in all relevant territories, including Victoria and Tasmania.
6. I did not understand Mr Osborne to take the point that AIF (Vic/Tas) was not a party to the Shareholders Agreement and was not a shareholder (AIVT being the shareholder representing Mr Hornsey's interests). In any event, the RLA constituted AIF (Vic/Tas) as the licensee of AIF National. AIF (Vic/Tas) became for practical purposes the entity conducting the "leading business dedicated to education and training in the fitness industry". Mr Osborne did not suggest that the RLA was entered into otherwise than with AIVT's knowledge and approval. Whether or not the RLA amounted to an assignment or a transfer of AIVT's rights under the Shareholders Agreement, [103] AIF (Vic/Tas) became the vehicle by which AIVT discharged its obligations under the Shareholders Agreement (for example, to promote its affiliation with AIF National). [104]
7. A further consequence of Mr Hornsey's actions was a reduction in the monetary contribution AIF (Vic/Tas) (or AIVT) was required to make to the funding of AIF National's activities. It is true that pursuant to the resolution of the board of 26 November 2012, [105] the other shareholders or licensees would have to make up the shortfall at the end of the financial year. But faced with a substantial loss of revenue from operations in Victoria and Tasmania (the largest source of funding for AIF National), other shareholders and licensees might or might not be willing to continue to make up the deficiency. The "cannibalisation" of the business conducted by AIF (Vic/Tas) created a risk that funding would not be available to enable AIF National to exploit its brand effectively, not only in Victoria and Tasmania, but in other territories.
8. As I have explained, the critical question is whether Mr Hornsey's conduct created a real or substantial possibility of a conflict between his duties as a director of AIF National and his personal interests in promoting ACI's business. In my view, an objective observer, having regard to the terms of the Shareholders Agreement, and the scope of Mr Hornsey's functions and responsibilities as a director of AIF National, the primary Judge was entitled to find that there was a real or substantial possibility of such a conflict.

Authorities

1. Mr Osborne referred to three authorities in particular that he said supported the appellants' contentions. In my view, none of the three is inconsistent with the conclusion that the primary Judge was entitled to find that Mr Hornsey breached his fiduciary duties as a director of AIF National.
2. In Streeter, a mining company (WAE) failed in its claim that a director breached his fiduciary duties by investing and becoming a director of another mining company (WANE) which ultimately became extremely successful. The claim failed because it was held to be barred by laches. McLure P, with whom Buss JA agreed, held that in any event the director had not breached what her Honour described as the "conflict rule".
3. After stating the principles governing the conflict rule, [106] McLure P examined the facts closely. Her Honour found that the director had been approached by a group of geologists seeking seed capital for a proposed mining project. The approval was made to the director, not in his capacity as such, but as a substantial investor able to contribute funds to the venture. At the time, WAE was solvent only because the director was providing substantial financial support.
4. The director suggested to the group that WAE should be the vehicle for the proposed project. Her Honour found that it would have been in the director's interest for WAE to be the vehicle, but that the group members rejected the suggestion for sound commercial reasons. Her Honour found that in these circumstances, there was no positive duty on the director to seek to acquire the proposed project for WAE and there was an opportunity for WAE to be the corporate vehicle. [107] Thus, there was no relevant conflict between the director's interests and the interests of WAE.
5. In the present case, for the reasons I have given, Mr Hornsey's duties as a director included assisting AIF National to perform its role as the national body advancing the interests of the shareholders' businesses. He was in a position of real conflict because his personal interest in expanding ACI's fitness training business necessarily impaired AIF National's capacity to achieve the objectives stated in the Shareholders Agreement.
6. The second case relied on by Mr Osborne was Links Golf. In that case, the plaintiff (LGT) operated a golf course on land owned by the defendant and leased to LGT. The defendant owned an adjoining piece of land (Lost Farm), on which he developed a second golf course. At the time the defendant commenced the development of the second golf course, he was a director of LGT. LGT claimed that the defendant had breached his fiduciary duties as a director.
7. Jessup J dismissed LGT's claim. His Honour found that the "reality of the relationship" between LGT and the defendant was that the future use of Lost Farm was a matter for him to determine. [108] His Honour also found that LGT never had in contemplation that it would participate in the development of Lost Farm, despite knowing of the development. [109] In these circumstances, taking up the opportunity to develop Lost Farm was not within the scope of the defendant's fiduciary duties. [110] For similar reasons, there was no reasonable possibility of a conflict between the defendant's responsibilities as a director of LGT, and his personal interest in developing his land as a golf course. [111]
8. The decision in Links Golf turned on the scope of the defendant's responsibilities as a director of LGT having regard to the nature of LGT's activities, the course of dealings between the director and LGT, and his ownership of Lost Farm. The present case is different because Mr Hornsey's responsibilities as a director of AIF National included advancing the company's objectives as outlined in the Shareholders Agreement.
9. The third case cited by Mr Osborne was Southern Real Estate Pty Ltd v Dellow. [112] The Full Court of the Supreme Court of South Australia held that a director of a real estate agency who resigned and set up a competing agency breached her fiduciary duties and her statutory duty to act in good faith in the interests of the company. The case does not assist the appellant's argument.

Conclusion

1. The preceding analysis differs somewhat from the approach of the primary Judge. However, the conclusion I have reached is within AIF National's pleaded case and consistent with the findings made by the primary Judge. It also reflects the protective rationale for the principle that a fiduciary is not entitled to obtain a benefit, in circumstances where there exists a significant possibility of a conflict between personal interest and fiduciary duty, namely that the fiduciary should not be swayed by considerations of personal interest. [113] I therefore reject the appellants' challenge to the finding that Mr Hornsey breached his fiduciary duties to AIF National.

The Grimaldi Principle

1. Mr Pritchard's first argument relies on the principle stated by the Full Federal Court in Grimaldi. The Full Court in that case observed that Lord Selborne's ex tempore judgment in Barnes v Addy [114] does not provide an exhaustive statement of the circumstances in which a third party's participation in another's breach of fiduciary duty can render the third party liable to equitable remedies. [115]
2. The Full Court in Grimaldi identified four "different manifestations" of participation in a breach of fiduciary duty sufficient to render the party participating in the breach liable to the person to whom the fiduciary duties are owed. [116] The first of these: "..is where the third party is the corporate creature, vehicle, or alter ego of wrongdoing fiduciaries who use it to secure the profits of, or to inflict the losses by, their breach of fiduciary duty… In these cases the corporate vehicle is fully liable for the profits made from, and the losses inflicted by, the fiduciary's wrong. The liability itself is explained commonly on the basis that "company had full knowledge of all the facts"… it is the alter ego of the fiduciary with a "transmitted fiduciary obligation"… or that it "jointly participated" in the breach…Liability does not turn on the need to show "dishonesty", although it often provides the reason for the interposition of the company. Proof of a breach of fiduciary duty will suffice…And…it is "rather artificial" to use Barnes v Addy to explain this liability". (Citations omitted).
3. In this passage the Full Court cited a number of authorities to support the statement of principle. In most, if not all of these cases, the fiduciary's conduct was regarded as fraudulent, [117] as "wrongdoing close to fraud" [118] or could well have been characterised as fraudulent. [119] However, I am prepared to accept for present purposes, that the principle stated in Grimaldi applies to the corporate "alter ego" of a fiduciary, even where the fiduciary's breach of duty does not involve dishonesty or fraud.
4. In the present case, AIF National pleaded that ACI and Sage knowingly assisted, or were directly concerned in, or party to, Mr Hornsey's breach of duties, by reason that Mr Hornsey's knowledge was also the knowledge of ACI and Sage. The ASC did not specifically plead that either ACI or Sage should be held liable to AIF National as the "alter ego" of Mr Hornsey.
5. AIF National's concluding submissions at the trial referred to the statement of principle in Grimaldi, although without elaboration. AIF National submitted to the primary Judge that ACI and Sage were controlled by Mr Hornsey and Ms Tuchtan (who was a defendant). On this basis, AIF National contended that each corporation should be regarded as having full knowledge of the fiduciary obligations owed by Mr Hornsey and Ms Tuchtan to AIF National. No submission was made to his Honour that if the case against Ms Tuchtan failed (as it did), each of ACI and Sage should be found to be the alter ego (or equivalent) of Mr Hornsey alone. The absence of any such submission was not surprising, given that Mr Hornsey and his wife had only a 42.5 per cent interest in Holdings, the parent company of both ACI and Sage (the balance of the shares being held by interests associated with Mr and Ms Wade and Ms Tuchtan).
6. In the primary Judge's brief reasons for finding ACI and Sage liable to AIF National, his Honour made no finding that either company were simply the alter ego of Mr Hornsey. His Honour cited Grimaldi for the proposition that there was no need for AIF National to demonstrate separate dishonesty on the part of ACI and Sage. His Honour appeared to accept that if ACI and Sage were to be found liable, AIF National had to show that Mr Hornsey's conduct was part of a dishonest or fraudulent design on his part.
7. In these circumstances, I do not think it is open to AIF National to argue on appeal that the principle stated in Grimaldi should be applied. The primary Judge made no finding that either ACI or Sage was the alter ego of Mr Hornsey. No Notice of Contention has been filed seeking such a finding, and the evidence does not appear to support a finding of the kind that is necessary to attract the principle stated in Grimaldi.

A fraudulent and dishonest design

1. In Farah Constructions, the High Court stated that the second limb of Barnes v Addy, as conventionally understood in Australia: "makes a defendant liable if that defendant assists a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary." [120] As this statement implies, a breach of fiduciary duty can involve a dishonest and fraudulent design. [121]
2. In Hasler, Leeming JA said that there was nothing in Farah Constructions to suggest that the High Court was substantially expanding the class of breaches of fiduciary duty which could attract the second limb of Barnes v Addy. [122] His Honour pointed out that the High Court was at pains in Farah Constructions to preclude Australian courts from relaxing the meaning of "dishonest and fraudulent design". Leeming JA later reiterated that the liability of a third party who participates in, but does not procure or induce a breach of fiduciary duty, is confined to breaches which are dishonest. [123] His Honour said that dishonesty "amounts to a transgression of ordinary standards of honest behaviour [and] it is not necessary to demonstrate that the person thought about what those standards were". [124]
3. It is true, as the appellants submitted, that the primary Judge did not make a finding in terms that Mr Hornsey acted with a dishonest and fraudulent design when breaching his fiduciary duties to AIF National. It is also true that I have not accepted all of his Honour's reasoning supporting the conclusion that Mr Hornsey was in a position of conflict between his duties to AIF National and his personal interests. Nonetheless, I think that his Honour, in substance, found that Mr Hornsey breached his fiduciary duties dishonestly. I also think that the finding applies to the breaches of fiduciary duties that I consider to have been made out.
4. The primary Judge's finding that Mr Hornsey's conduct in setting up and promoting the Sage business was deliberate, covert and "in a number of respects…quite dishonest" has to be understood in context. For example, his Honour found that on 27 February 2014, Mr Hornsey informed the Commander in Chief of AIF National that Sage's business and AIF National's business were being kept separate. His Honour had no doubt that Mr Hornsey "fully intended to confront and allay any fears or suspicion that Sage would impact on [AIF National]". [125] This finding clearly implies that Mr Hornsey appreciated that the covert course of conduct on which he was engaged at the time would have, or at the very least potentially would have, an adverse impact on AIF National's functions as outlined in the Shareholders Agreement.
5. The primary Judge also found that:

• as Mr Hornsey knew, Sage's marketing activities and its media strategy were targeted at AIF National; [126]
• Mr Hornsey planned Sage's move into the fitness industry as early as 2007, but did so covertly and never informed AIF National of his plans; [127]
• Mr Hornsey appreciated that his conduct lacked good faith and could only harm AIF National while advancing his own interests; [128] and
• Mr Hornsey pursued a deliberate strategy of establishing and promoting Sage's fitness business, thereby "quite deliberately" placing himself in a position of conflict between his interests and those of AIF National. [129] These findings and others bearing on Mr Hornsey's conduct rested on both his Honour's unfavourable assessment of Mr Hornsey's credibility and on the objective circumstances.

1. In my opinion, the findings made by the primary Judge demonstrated that Mr Hornsey well appreciated that his conduct in promoting ACI's business, at the expense of the business carried on by AIF (Vic/Tas), necessarily had a significant adverse impact on AIF National's capacity to discharge the functions conferred on it by the Shareholders Agreement, to which Mr Hornsey was a party. In particular, Mr Hornsey appreciated that diverting business from AIF (Vic/Tas) impaired AIF National's ability to act as the national body promoting and advancing the business interests of all shareholders.
2. Mr Hornsey's departure from ordinary standards of honest behaviour lay in his knowledge that his conduct advanced his personal interests, at the expense of AIF National's ability to perform its core functions that, as a director, he was obliged in good faith to advance. The clandestine nature of his activities supports the conclusion that he understood that there was a conflict between his personal interests and his duties as a director, but that he decided to proceed nonetheless. By expanding the business of the Sage Institute of Fitness without the knowledge of his co-directors, Mr Hornsey denied them the opportunity to curtail the harm being done to AIF National and exacerbated the seriousness of the conflict between his personal interests and his duties as a director.
3. For these reasons, I consider that the primary Judge's findings establish that Mr Hornsey's breaches of the fiduciary duties he owed to AIF national were carried out with a fraudulent and dishonest design.
4. As I have noted, the appellants do not dispute that, once this finding is confirmed, ACI had knowledge of Mr Hornsey's dishonest and fraudulent design. Accordingly, the primary Judge correctly found that ACI was liable to AIF National for its knowing participation in Mr Hornsey's breaches of fiduciary duties.

Sage's liability

1. The primary Judge seems to have assumed that Sage participated in Mr Hornsey's breaches of fiduciary duty, but his Honour made no specific finding to that effect. The appellants challenge the grant of relief against Sage on the ground that there was no evidentiary basis for his Honour's finding [130] that "at the beginning of 2014 it would appear that ACI and Sage launched the Sage fitness business".
2. Mr Osborne submitted that the primary Judge's description of the steps taken to set up and promote the Sage Fitness Business [131] demonstrated that ACI, but not Sage, was involved in the process. Mr Osborne pointed out that although Sage was incorporated on 25 October 2012, it was ACI that registered the trade mark "Sage Institute of Fitness" and used that name as its trading name. Mr Osborne also pointed to Mr Hornsey's un-contradicted evidence that ACI conducted the Sage business. Perhaps more importantly, Ms Tuchtan gave evidence that when Sage was incorporated, it potentially could have operated a fitness business, but that in fact, Sage "wasn't doing anything".
3. AIF National did not identify any other evidence that would justify a finding that Sage, as distinct from ACI, participated in Mr Hornsey's breaches of his Fiduciary duties. In my opinion, the mere incorporation of Sage, in the absence of any trading or other ongoing activities, does not justify a finding that Sage was knowingly involved in Mr Hornsey's dishonest breaches of his fiduciary duties. The orders granting relief against Sage should therefore be set aside.

Orders

1. The appeal has succeeded in two respects. First, the primary Judge was in error in granting relief against Sage. The declarations and orders made by the primary Judge should therefore be amended to remove references to Sage.
2. Secondly, the primary Judge was in error in finding that ACI received AIF National's property in the form of the goodwill and assets of the Sage Fitness Business. Thus, the declaration made against ACI should be amended to remove the reference to it having received property derived from Mr Hornsey's breaches of fiduciary duties.
3. The Notice of Appeal challenges the findings that Mr Hornsey, ACI and Sage, are liable to AIF National, but does not challenge the form of relief granted by the primary Judge assuming the findings as to liability (or some of them) stand. Accordingly, there is no occasion to consider whether an account of profits is an appropriate remedy in respect of Mr Hornsey's breaches of fiduciary duties and ACI's accessorial liability.
4. The following orders should be made: 1. Appeal allowed in part. 2. Amend the declarations in paras 8 and 9 of the orders made by the primary Judge on 16 December 2015 so that they read as follows: 8. Declares that the second defendant, by its involvement in the third defendant's breach of fiduciary duties referred to in Order 7 above knowingly assisted in the third defendant's breach of his fiduciary duties. 9. Declares that the plaintiff is entitled as against the second and third defendants to an account of profits of the Sage Fitness Business, to include the profits derived by the second and third defendants respectively from their breaches, in each case plus interest at the rate prescribed by the Uniform Civil Procedure Rules 2005 (NSW) for the purposes of s 101 of the Civil Procedure Act 2005 (NSW). 1. Amend Orders 11, 12 and 15 made by the primary Judge on 16 December 2015 so that they read as follows: 11. Orders that, for the purposes of quantifying profits derived by the second and third defendants: (a) there be an inquiry into the profits derived by the second and third defendants up until 17 November 2015, including the assessment of: (i) the revenue derived by each of the second and third defendants from the Sage Fitness Business; and (ii) a just allowance for the costs expended and expenses incurred by the second and third defendants, and the labour expended by the second defendant (otherwise than through the labour of the third defendant directly); and (iii) the interest payable in respect of profits derived by each of the second and third defendants less any just allowance; and (b) the inquiry include an assessment for the entirety of the net profits of the Sage Fitness Business conducted by the second defendant up until 17 November 2015, before tax, less an appropriate allowance for expenses, skill, expertise and resources contributed by the second and third defendants (other than through the labour of the third defendant directly); and (c) the inquiry be conducted by a referee to be agreed between the parties or, failing agreement, appointed by the Court, on the basis that, after the referee has prepared the assessments contemplated by orders 11(a) and (b) above, the matter come back before Sackar J, or some other judge of this Court, to order the quantum of the account of profits. 12. Subject to any further order of the Court, orders the second and third defendants to pay the costs of the account of profits, on the ordinary basis. 15. Orders the second and third defendants to pay the plaintiff's costs of the proceedings on the ordinary basis, as to 65% of the plaintiff's costs. 1. Appeal otherwise dismissed. The appellants have had only very limited success on the appeal. The issues on which they succeeded took up very little time and played a very minor role in the written submissions. Accordingly the following costs order should be made: 1. The appellants pay 85 per cent of the respondents' costs of the appeal.

Endnotes

1. Australian Institute of Fitness Pty Ltd v Australian Institute of Fitness (Vic/Tas) Pty Ltd (No 3) [2015] NSWSC 1639 (Primary Judgment).
2. Primary Judgment at [69].
3. Primary Judgment at [182].
4. The pleading referred in the alternative to Sage, but it is convenient to omit those references.
5. Ms Tuchtan was a defendant in the Sage Proceedings. She had been an employee of AIF National and was the "Academic Director" of the Sage Institute of Fitness.
6. Primary Judgment at [17].
7. Mr Tuchtan was Ms Tuchtan's husband.
8. See at [75]-[83] below.
9. Primary Judgment at [8].
10. Primary Judgment at [16].
11. Primary Judgment at [25].
12. Reproduced below at [64].
13. See at [84]-[91] below.
14. Primary Judgment at [306].
15. Primary Judgment at [322].
16. Primary Judgment at [49].
17. See at [50]-[51] above. See also at [59] above for the addition of cl 29 to the Shareholders Agreement.
18. See at [63]-[65] above.
19. Primary Judgment at [14].
20. Primary Judgment at [15].
21. Primary Judgment at [146], [149].
22. Primary Judgment at [160].
23. Primary Judgment at [278].
24. Primary Judgment at [279].
25. Primary Judgment at [304].
26. Primary Judgment at [305].
27. Primary Judgment at [306].
28. Primary Judgment at [306].
29. Primary Judgment at [367].
30. Primary Judgment at [368].
31. Primary Judgment at [335], [343].
32. Primary Judgment at [371].
33. See at [56] above.
34. Primary Judgment at [372].
35. Primary Judgment at [373]-[375].
36. Primary Judgment at [393].
37. His Honour's term for the defendants in the Sage Proceedings.
38. Primary Judgment at [395].
39. Primary Judgment at [396].
40. Primary Judgment at [432].
41. See at [62] above.
42. Primary Judgment at [433].
43. Primary Judgment at [434]-[444].
44. The reference to AIF (Vic/Tas) appears to be an error, as Mr Hornsey clearly intended ACI to compete with AIF (Vic/Tas) and to divert customers from AIF (Vic/Tas).
45. Primary Judgment at [449]-[450].
46. Primary Judgment at [437].
47. Primary Judgment at [368],[437].
48. Primary Judgment at [439].
49. Primary Judgment at [434].
50. Primary Judgment at [449]-[450].
51. (2007) 230 CLR 89; [2007] HCA 22 (Farah Constructions).
52. (2014) 87 NSWLR 609; [2014] NSWCA 266 (Hasler).
53. Relying on the formulation by Jessup J in Links Golf Tasmania Pty Ltd v Sattler (2012) 213 FCR 1; [2012] FCA 634 at [564].
54. In Hasler, two members of the Court declined to follow Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; [2012] WASCA 157 at [2104]-[2126]: see Hasler at [84]-[125] (Leeming JA, Gleeson JA agreeing).
55. (1874) LR 9 Ch App 244.
56. Primary Judgment at [444].
57. Corporations Act s 1317E.
58. R P Austin and I M Ramsey, LexisNexis, Ford, Austin & Ramsay's Principles of Corporations Law, vol 2 (at Service 114) at [9.010].
59. (1984) 156 CLR 41; [1984] HCA 64 (Hospital Products) at 103; see also Pilmer v Duke Group Ltd (In Liq) (2001) 207 CLR 165; [2001] HCA 31 (Pilmer) at [78] (McHugh, Gummow, Hayne and Callinan JJ).
60. (1995) 182 CLR 544; [1995] HCA 18 at 557 per curiam; see also Howard v Federal Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21 (Howard) at [33] (French CJ and Keane J).
61. Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37 at [109] (Payne JA, Gleeson and Leeming JJA agreeing), citing Boardman v Phipps [1967] 2 AC 46 at 124; [1966] 3 All ER 721 at 756 (Lord Upjohn, who dissented as to the result).
62. Phelan v Middle States Oil Corporation (1955) 220 F (2nd) 593 at 602 (Judge Learned Hand), quoted with approval by Mason J in Hospital Products at 104, and by the majority in Pilmer at [79].
63. Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36 at 205 (Deane J); Howard at [36] (French CJ and Keane J).
64. Pilmer at [79]; Howard at [60] (Hayne and Crennan JJ).
65. Howard at [34] (French CJ and Keane J); Hospital Products at 102 (Mason J).
66. Mills v Mills (1938) 60 CLR 150; [1938] HCA 4 at 164-165 (Latham CJ), 170 (Rich J, Evatt J agreeing at 188), 179 (Starke J); Howard at [34].
67. [1932] AC 161 at 195 (Lord Blanesburgh).
68. (2012) 213 FCR 1; [2012] FCA 634 (Links Golf).
69. Links Golf at [564].
70. Compare Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17; 278 ALR 291 (Streeter) at [69] (McLure P, Buss JA agreeing).
71. (2012) 200 FCR 296; [2012] FCAFC 6 (Grimaldi) at [179] per curiam, citing Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384; [1929] HCA 24 at 408 (Dixon J).
72. Grimaldi at [179], quoted with approval by Gageler J in Howard at [110]; see also Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37 at [108] (Payne JA, Gleeson and Leeming JJA agreeing).
73. Streeter at [70], citing United Dominion Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; [1985] HCA 49, at 11 (Mason, Brennan and Deane JJ).
74. Howard at [35].
75. (1984) 154 CLR 178; [1984] HCA 36.
76. (1984) 154 CLR 178; [1984] HCA 36 at 198-199.
77. Primary Judgment at [432]; see also at [393].
78. Primary Judgment at [437].
79. Primary Judgment at [437].
80. Primary Judgment at [443].
81. Primary Judgment at [434].
82. Primary Judgment at [443].
83. Primary Judgment at [306].
84. Primary Judgment at [15].
85. Primary Judgment at [441].
86. RLA, Recitals C and D, cl 2.1.
87. Primary Judgment at [330].
88. Primary Judgment at [437].
89. Primary Judgment at [393], [434].
90. Corporations Act s 181(1)(a).
91. Shareholders Agreement cl 2(1).
92. Shareholders Agreement cl 9(1).
93. Shareholders Agreement cl 26(2).
94. Shareholders Agreement cl 2(2)(a), (e).
95. Shareholders Agreement cl 8(1).
96. Shareholders Agreement cl 8(4).
97. See at [69] above.
98. Clause 33.2 appears to recognise that there are some circumstances in which one party to the RLA may have authority to act for or on behalf of the other.
99. Primary Judgment at [384].
100. Primary Judgment at [434].
101. Primary Judgment at [343].
102. Primary Judgment at [437].
103. Under cl 16 of the Shareholders Agreement, a shareholder could assign or transfer its rights under the Agreement with the written consent of each shareholder.
104. Shareholders Agreement cl 9(4).
105. See at [69] above.
106. Streeter at [66]-[70].
107. Streeter at [87].
108. Links Golf at [518].
109. Links Golf at [519].
110. Links Golf at [520].
111. Links Golf at [562]-[565].
112. (2003) 87 SASR; [2003] SASC 318.
113. See Chan v Zacharia at 198-199, quoted at [137] above.
114. (1874) LR 9 Ch App 244.
115. Grimaldi at [242].
116. Grimaldi at [243].
117. See, for example, Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488 at 495 (Kearney J).
118. CMS Dolphin Ltd v Simonet [2001] EWHC Ch 415; [2001] 2 BCLC 704 at [103] (Lawrence Collins J).
119. See, for example, Cook v Deeks [1916] 1 AC 554 at 562 per curiam (deliberate concealment and intention to exclude the company from the benefits of a contract); Green and Clara Pty Ltd v Bestobell Industries Pty Ltd (No 2) [1984] WAR 32 at 33-34 (Brinsden J) (deliberate conduct by a manager who had already given notice to the company).
120. Farah Constructions at [160].
121. Farah Constructions at [179].
122. Hasler at [105].
123. Hasler at [125].
124. Hasler at [124].
125. Primary Judgment at [305].
126. Primary Judgment at [355].
127. Primary Judgment at [375].
128. Primary Judgment at [375].
129. Primary Judgment at [434].
130. Primary Judgment at [322].
131. Primary Judgment at [304]-[322].

Amendments 09 December 2016 - Decision (3) change (ii) to (iii) 09 December 2016 - Decision (3) change (ii) to (iii) 12 December 2016 - para 142 - line 3 - inserted "only" before covert DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 12 December 2016