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[2025] NSWCA 162
respondent. Appeal dismissed. The appellants were ordered to pay the respondents’ costs: [104].
The Court of Appeal upheld the finding that Mr Paule owed fiduciary duties to Dr Kambouris and DJD in the particular circumstances of the restructure and capital raising. The case did not establish that directors always owe fiduciary duties directly to shareholders. The Court also found that the appellants had a fair opportunity to contest the claim concerning DJD, that their proposed alternative version of events was speculative, and that the evidence did not establish that BWT UK could claim the same loss. The appeal was dismissed and the appellants were ordered to pay costs.
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2,491 words · generated 06/10/2026
Botanical Water Technologies IP Ltd v Driver concerned a dispute about the ownership and commercialisation of technology designed to extract drinkable water from wastewater generated by processing fruit, vegetables and sugar cane. Dr Kambouris developed the technology and related intellectual property. Mr Driver invested through DJD Trading Pty Ltd, which held a 27 per cent interest in the intellectual property. Mr Paule and MyCo also invested and took a central role in arranging the corporate structure and later capital raising ([2], [4]-[12]).
6 cited instruments linked from this judgment.
The business was restructured in 2018. BWT held all the shares in BWT IP 4, which indirectly held the intellectual property. The intended international business vehicle was BWT. A second restructure began in late 2019. BWT UK and BWT IP UK were incorporated in February 2020, with Mr Paule as their sole director and shareholder at formation. The existing BWT shareholders transferred their shares to BWT UK in exchange for equivalent shares in the UK company ([13]-[14], [20]).
The primary judge found that Mr Driver, on behalf of DJD, and Dr Kambouris transferred their shares after receiving assurances that they would be appointed directors of BWT UK. They were not appointed. The primary judge also found that they depended on Mr Paule to create a structure capable of raising capital and that their BWT UK shareholding was unclear to them for a period ([14], [21]).
BWT UK raised capital on 31 December 2020. It issued 25,482 shares. The primary judge found that Mr Driver and Dr Kambouris were not given information about the allotments before they occurred and that their combined interest fell from 62.5 per cent to 49.8 per cent. A parcel of 6,912 shares went to the Paule Family Trust, in connection with the capitalisation of part of a loan owed by BWT to MyCo. The primary judge concluded that this arrangement benefited Mr Paule and his brother and harmed the other shareholders ([15]-[17], [26]).
The primary judge upheld the fiduciary-duty claim and awarded USD 15,837,000 in equitable compensation. The appeal challenged the duty, the procedure followed at trial, causation and loss, and the reflective-loss analysis. Payne JA gave the principal reasons, with Ward P and Adamson JA agreeing. The appeal was dismissed, with costs against the appellants ([22], [31], [104]-[105]).
The Court treated the duty question as fact-sensitive. It did not hold that every director owes a fiduciary duty directly to each shareholder whenever shares are issued. Rather, it applied the principle that a shareholder or director-shareholder may occupy a special position giving rise to duties to another shareholder. The examples identified in Crawley v Short include an undertaking to act for another shareholder and possession of special knowledge known to be relied on for that shareholder’s advantage ([46]-[47]).
The unchallenged factual findings placed Mr Paule within those categories. He assumed principal responsibility for the second restructure and capital raising, had special knowledge about the arrangements, and knew that Dr Kambouris and DJD relied on him. He had represented that he was acting in their interests. DJD was the shareholder, and Mr Driver’s representations as its business associate and controller were understood in that corporate context ([47]-[48]).
The Court rejected the argument that a director’s duty to the company necessarily prevented a concurrent duty to shareholders. Payne JA explained that the proposition drawn from Brunninghausen was qualified by its discussion of directors’ duties in issuing shares. The Court also relied on the special circumstances identified in Crawley. Its reasoning therefore concerns a particular relationship and conduct, rather than a universal shareholder-facing duty ([45]-[49]).
The appellants’ arguments about vulnerability and trust did not displace the duty. The Court said the test was not simply whether a vulnerable party expected, as a matter of fact, that the fiduciary would act in its interests, but whether that party was entitled to expect a particular standard of conduct. The fact that Mr Driver was educated, had commercial experience, or could engage lawyers did not answer that question. Nor did the possibility that shareholders might have used voting rights to remove directors make self-interested share issues permissible ([51]-[53]).
On procedural fairness, the Court reviewed the trial as a whole. It accepted that submissions sometimes used “Mr Driver” and “DJD” without distinguishing them, but found that the claim was advanced as one concerning shareholders of BWT UK. The opening address referred to the vulnerability of those who had transferred their shares and lacked control of the UK entity. The closing submissions repeatedly referred to duties to shareholders. Mr Paule’s counsel addressed the substance of that case and did not object to the issue being decided in that way ([62]-[73]). The material facts about DJD’s shareholding and transfer were also pleaded ([70]).
For causation, the appellants argued that the later capital raising could be treated as having occurred in the same way, except without the allotment to the Paules. On that assumption, they said, the respondents would still have lost the ability to remove the directors. The Court rejected this as an unsupported hypothetical. It agreed that the party in breach had to establish that, without the impugned conduct, the transactions would have proceeded identically and their consequences would have been the same. Mr Paule gave no evidence establishing that counterfactual ([80]-[83]).
The Court also noted that it made little difference whether the share allotment first gave the Paules control or entrenched control they already exercised as directors. Before the capital raising, DJD and Dr Kambouris together held 62.5 per cent of the shares and could remove the directors; afterwards their combined holding was 42.63 per cent. The Court concluded that the primary judge’s causation reasoning was not undermined by the appellants’ characterisation of control ([81]).
The valuation findings were unchallenged. The primary judge accepted expert evidence that the shares were worth USD 35.1 million as at 12 October 2023 and found that they became worthless after the sale of BWT UK’s undertaking to MyCo. Those findings supported the assessment of loss, and the Court rejected the relevant appeal grounds ([84]-[85]).
Before this decision, the NSW Court of Appeal authorities discussed in the judgment already recognised that directors may, in particular circumstances, owe duties to shareholders in relation to share issues. Brunninghausen v Glavanics was treated as authority that directors may owe a duty to shareholders when issuing shares. The judgment referred to the different interests potentially affected: a company may not generally be concerned about the identity of its shareholders or the location of voting control, while shareholders may have a direct interest in those matters ([45]).
Crawley v Short described circumstances in which a director or shareholder may hold a special position. These included an undertaking to act on another shareholder’s behalf and special knowledge that another shareholder relies on for their advantage. Payne JA applied those categories to the unchallenged findings about Mr Paule and the second restructure ([46]-[48]).
The judgment also considered the appellants’ argument that directors’ duties to the company generally prevent concurrent duties to shareholders over the same subject matter. It rejected that as a general proposition capable of resolving this case, referring to the qualification in Brunninghausen and the special-position reasoning in Crawley. The outcome is therefore not that all directors owe shareholders identical duties whenever corporate powers are exercised. It confirms that a direct duty can arise on specific facts, including where an individual has undertaken responsibility and knows the shareholders rely on that individual ([49]).
On causation, the judgment applied the approach in Maguire v Makaronis to the counterfactual in a fiduciary-breach case. The appellants could not answer the claim merely by suggesting that the capital raising would otherwise have occurred in the same way. The proposed alternative needed evidential support; on this record, the Court regarded it as speculation ([82]-[83]).
On reflective loss, the judgment applied Central Coast Council v Norcross Pictorial Calendars Pty Ltd. It described the principle as preventing a shareholder from recovering a diminution in share value or shareholder benefits where the company itself suffered the relevant loss and both the company and shareholder had a cause of action. It found no demonstrated company cause of action for the same loss on the evidence in this case ([91], [94]-[100]).
The judgment’s effect is thus a fact-specific application and clarification of existing authorities, rather than a wholesale reformulation of fiduciary law. The supplied judgment contains no account of decisions after 25 July 2025, so it does not establish how later courts have applied or developed its reasoning.
At [46], Payne JA quoted Crawley: “There will be a variety of situations where a shareholder or director/shareholder holds a special position where he or she may owe duties to another shareholder.” In plain English, the existence of a company does not automatically rule out duties between participants. The particular relationship and conduct matter.
At [47], Payne JA concluded that Mr Paule had undertaken to act for Dr Kambouris and DJD, had special knowledge of the restructure and capital raising, and knew they relied on him to use it for their advantage. This is the link between the general principle and the established facts. It shows why the Court regarded the duty as arising in this case.
At [51], the Court said the question was whether the shareholders were “entitled to expect” a particular standard of conduct, rather than whether they actually expected the fiduciary to act in their interests. The practical point in the Court’s reasoning was that distrust, access to lawyers, or potential voting powers did not by themselves answer whether a duty existed.
At [83], Payne JA said the claim that the capital raising would have proceeded identically, except for the conduct found to be a breach, “was not established”. In plain English, a hypothetical alternative cannot replace evidence. The Court treated the appellants’ proposed scenario as speculation, particularly because Mr Paule gave no evidence supporting it.
At [94], the Court stated that the evidence did not establish that the respondents’ loss was reflective of a loss BWT UK could have claimed. This did not mean that a company can never have a claim when shareholders suffer a fall in share value. It meant that the asserted company claim for the same loss had to be identified and supported in this case.
The duty analysis is most directly relevant where an individual director or shareholder takes responsibility for a transaction affecting other shareholders and those shareholders rely on that person’s special knowledge. The specific categories discussed are an undertaking to act on another shareholder’s behalf and knowledge, coupled with awareness of reliance, used for the advantage of the other shareholder ([46]-[48]).
Relevant features in this judgment included the director’s central role in establishing the corporate structure, control of the newly incorporated entity, assurances about the other investors’ future roles, and the investors’ dependence on him while their ownership position was unclear ([14], [21], [48]). The Court also considered whether the director’s conduct in issuing shares preferred his interests over those of the other shareholders ([25]-[26], [51]-[52]).
The procedural-fairness reasoning may be relevant where a party says a claim was not pleaded or was raised too late. The Court examined the pleadings, opening and closing submissions, the other party’s response, objections, cross-examination, and any demonstrated prejudice. It did not decide the issue by looking only at one isolated passage in a pleading or submission ([62]-[73]).
The causation analysis is relevant where a fiduciary argues that the same loss would have occurred without the breach. The judgment indicates that the counterfactual needs a proper evidential foundation. Here, the Court rejected a reconstruction that assumed all other features of the capital raising would remain unchanged ([82]-[84]).
For reflective loss, the key trigger is an asserted overlap between a shareholder’s loss and loss recoverable by the company. The judgment requires attention to whether the company has a cause of action for the same loss, not merely whether there are circumstances that could suggest some breach of duty to the company ([94]-[100]).
The judgment was delivered on 25 July 2025. The supplied materials do not include any later cases applying, following, distinguishing, or otherwise treating Botanical Water Technologies IP Ltd v Driver. No later-court treatment can therefore be stated from the available source.
The decision itself explains its relationship with prior authorities. It applied Brunninghausen and Crawley to the existence of a shareholder-facing duty in a special relationship, and applied Maguire to the unsupported counterfactual argument. It applied Central Coast Council to the reflective-loss issue. It also discussed other authorities, including Pilmer, Union Dominions, Rialto Sports, Prudential, Foss and Marex, for the specific propositions identified in the judgment ([45]-[49], [80]-[83], [91]-[94]).
A researcher using the decision for a current matter would need to check subsequent authorities independently. That observation is a limit of the supplied text, not a claim about whether later treatment exists.
The Court did not determine the respondents’ first notice-of-contention ground, which alleged another fiduciary breach arising from the sale of BWT UK’s undertaking to MyCo. Payne JA considered it undesirable to decide the difficult legal issues raised when it was unnecessary to do so ([102]).
The Court also left open the correct interpretation of ss 12CA and 12CB of the ASIC Act. It said those potentially difficult issues should await a case where their resolution was necessary ([103]). The judgment therefore cannot be treated as resolving those statutory questions.
The decision did not determine a universal boundary for when a director’s duties to the company may coexist with duties to shareholders. Its analysis rests on the special position described in Crawley and the particular unchallenged findings concerning Mr Paule’s undertaking, knowledge and the shareholders’ reliance ([46]-[49]). The scope of any duty in different corporate structures, with different relationships or different conduct, remains dependent on facts and authorities beyond those addressed here.
There are also limits to the reflective-loss conclusion. The Court concluded that the evidence did not establish that BWT UK could claim the same loss. It noted that BWT UK had been a party below, had denied the relevant allegations, and had advanced no claim against Mr Paule ([95]-[100]). The judgment does not decide what evidence or procedural posture would be sufficient in another case to establish a company cause of action for the same loss.
Finally, the Court’s causation analysis concerned the counterfactual argued on this record. The appellants did not establish that the capital raising and its consequences would have been identical without the breach. The reasons do not specify every kind of evidence that might suffice in another case; they explain why the evidence here did not establish that hypothetical ([82]-[84]).
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Source: NSW Caselaw (www.caselaw.nsw.gov.au). Converted to plain text by ZoeLaw. Not the official version.
Medium Neutral Citation: Botanical Water Technologies IP Ltd v Driver [2025] NSWCA 162
Hearing dates: 20 June 2025
Date of orders: 25 July 2025
Decision date: 25 July 2025
Before: Ward P at [1];
Payne JA at [2];
Adamson JA at [105]
Decision: (1) Appeal dismissed.
(2) Appellants to pay the respondents’ costs.
Catchwords: EQUITY — Fiduciary duties — Fiduciary relationships — whether primary judge erred in finding fiduciary duties are owed — whether directors owe a fiduciary duty to shareholders in issuing shares — where director holds special position
EQUITY — Fiduciary duties — Fiduciary relationships — whether appellants not given fair opportunity to address finding that fiduciary duty was owed — whether issue raised in pleadings — allegation of fiduciary duties raised at trial without objection
EQUITY — Equitable remedies — Equitable compensation — causation and loss — whether loss would not have been suffered “but for” the breach of duty — whether speculation that capital raising would have proceeded identically save for the conduct found in breach of fiduciary duty — uncontradicted expert evidence about valuation of shares
EQUITY — Equitable remedies — Equitable compensation — reflective loss — whether loss claimed was reflective of a loss that could have been claimed by company — application of Central Coast Council v Norcross Pictorial Calendars Pty Ltd (2021) 391 ALR 157; [2021] NSWCA 75
Legislation Cited: Australian Securities and Investment Commissions Act 2001 (Cth)
Corporations Act 2001 (Cth)
Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited: Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43
Best v Rosamond [2020] NSWCA 90
Brunninghausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199
Central Coast Council v Norcross Pictorial Calendars Pty Ltd (2021) 391 ALR 157; [2021] NSWCA 75
Crawley v Short (2009) 262 ALR 654; [2009] NSWCA 410
Foss v Harbottle (1843) 2 Hare 461
Johnson v Gore Wood & Co [2002] 2 AC 1
Magann v The Trustees of the Roman Catholic Church for the Diocese of Parramatta [2020] NSWCA 167
Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23
Marex Financial Ltd v Sevilleja [2021] AC 39; [2020] UKSC 31
Massoud v Nationwide News Pty Ltd (2022) 109 NSWLR 468; [2022] NSWCA 150
Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31
Prudential Assurance Co Ltd v Newman Industries Ltd [No 2] [1982] Ch 204
Rialto Sports Pty Limited v Cancer Care Associates Pty Limited; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited [2022] NSWCA 146
Union Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; [1985] HCA 49
Texts Cited: Paul Finn, Fiduciary Obligations: 40th Anniversary Republication with Additional Essays (2nd ed, 2016, The Federation Press)
Category: Principal judgment
Parties: Botanical Water Technologies IP Ltd (First Appellant)
MyCo Pty Ltd (Second Appellant)
Terry Paule (Third Appellant)
David Driver (First Respondent)
Ambrosios Kambouris (Second Respondent)
Kambouris Shares Pty Ltd (Third Respondent)
DJD Trading Pty Ltd (Fourth Respondent)
Representation: Counsel:
M Rush KC / J Hynes / M Davis (appellants)
D Thomas SC / H Atkin (respondents)
Solicitors:
Corrs Chambers Westgarth (appellants)
McCabes Lawyers (respondents)
File Number(s): 2024/476362
Publication restriction: Nil
[This headnote is not to be read as part of the judgment]
Botanical Water Technologies IP Ltd (BWT), MyCo Pty Ltd (MyCo) and Mr Terry Paule (the appellants) brought an appeal against Mr David Driver, Dr Ambrosios Kambouris, Kambouris Shares Pty Ltd and DJD Trading Pty Ltd (DJD) (the respondents).
At trial, the respondents advanced several claims against the appellants arising out of MyCo and Mr Paule’s investment in technology developed by Dr Kambouris for the extraction of drinkable water from wastewater sourced from the processing of fruit, vegetables and sugar cane (the botanical water technology). The dispute arose in the context of Mr Paule’s acquisition of interest in Aqua Botanical Beverages (Australia) Pty Ltd (ABBA) which originally owned the relevant patents in relation to the botanical water technology, and the parties’ subsequent efforts in commercialising the technology through the incorporation of BWT, BWT IP 4, as well as, later on, overseas entities BWT UK and BWT IP UK. Mr Driver (on behalf of DJD) and Dr Kambouris, originally as shareholders of BWT, executed their share transfer forms in favour of BWT UK in 2020. The primary judge, Ball J, found that Dr Kambouris and Mr Driver were completely dependent on Mr Paule in circumstances where their shareholding in BWT UK was unclear to them and they were not directors of that company.
The respondents’ claims included that Mr Paule owed and breached fiduciary duties to Dr Kambouris and DJD, that Mr Paule engaged in unconscionable conduct in contravention of ss 12CA or 12CB of the Australian Securities and Investment Commissions Act 2001 (Cth), claims for relief under ss 232 and 233 of the Corporations Act 2001 (Cth), and claims by Mr Driver seeking repayment from MyCo of amounts lent to ABBA based on breach of the ABBA Implementation Deed.
The primary judge, Ball J, upheld the claims in relation to the breach of fiduciary duties and dismissed the other claims. The primary judge found that Mr Paule breached his fiduciary duty because he preferred his own interests to those of Dr Kambouris and DJD by causing MyCo’s loan to BWT to be capitalised in exchange for shares in BWT UK. His Honour granted equitable compensation to Dr Kambouris and DJD in the amount of USD $15,837,000. On appeal, the questions were:
(i) Did Mr Paule owe fiduciary duties to Mr Driver, DJD and Dr Kambouris?
(ii) Was Mr Paule afforded procedural fairness with respect to whether Mr Paule owed DJD a fiduciary duty?
(iii) Was the loss which each of DJD and Dr Kambouris was found to have suffered caused by the breach of fiduciary duty found to be owed by Mr Paule?
(iv) Was the loss which each of DJD and Dr Kambouris were found to have suffered reflective of a loss of the company (BWT UK) in which DJD and Dr Kambouris were shareholders and therefore not recoverable by DJD and Dr Kambouris?
The Court (Payne JA, with Ward P and Adamson JA agreeing) held, dismissing the appeal:
(1) Directors may owe a fiduciary duty to shareholders in issuing shares in a company where a director/shareholder holds a special position such that they may owe duties to another shareholder: at [44]-[46].
Brunninghausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199, Crawley v Short (2009) 262 ALR 654; [2009] NSWCA 410, Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31, Union Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; [1985] HCA 49 applied.
(2) On the unchallenged findings of the primary judge, Mr Paule undertook to act on behalf of Dr Kambouris and DJD; he had special knowledge about all aspects of the second restructure and associated capital raising; and he knew that Dr Kambouris and DJD were relying on him to use that knowledge for the advantage of Dr Kambouris and DJD: at [44]-[55].
(3) It is clear that counsel for Mr Paule before the primary judge understood that the case relevantly being advanced was one in which Mr Paule owed duties to Dr Kambouris and DJD as shareholders of BWT UK. The allegation that Mr Paule breached a fiduciary duty to DJD was raised at trial, both in opening and closing address, without objection by the appellants. There was no denial of procedural fairness: at [62]-[74].
Brunninghausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199.
(4) The primary judge did not err in finding that the loss which each of DJD and Dr Kambouris suffered was caused by the breach of fiduciary duty found to be owed by Mr Paule. A party in breach of fiduciary duty is required to demonstrate that, in the absence of the conduct found to be in breach of fiduciary duty, the transactions would have proceeded identically in all respects and that the consequences would have been the same for the respondents. This the appellants failed to do: at [80]-[85].
Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43, Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23 applied.
(5) The evidence did not establish that the loss claimed by Dr Kambouris and DJD was reflective of a loss that could have been claimed by BWT UK. Despite being a party to the proceeding below, BWT UK did not assert any claim against Mr Paule. To the contrary, BWT UK denied the material facts now relied upon in this Court said to establish the reflective loss ground: at [91]-[101].
Central Coast Council v Norcross Pictorial Calendars Pty Ltd (2021) 391 ALR 157; [2021] NSWCA 75, Rialto Sports Pty Limited v Cancer Care Associates Pty Limited; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited [2022] NSWCA 146, Prudential Assurance Co Ltd v Newman Industries Ltd [No 2] [1982] Ch 204, Foss v Harbottle (1843) 2 Hare 461; Marex Financial Ltd v Sevilleja [2021] AC 39; [2020] UKSC 31 discussed.
WARD P: I agree with Payne JA.
PAYNE JA: This is an appeal brought by Botanical Water Technologies IP Ltd (the first appellant), MyCo Pty Ltd (renamed Biocheese Pty Ltd on 3 September 2021, the second appellant), and Mr Terry Paule (the third appellant). Mr Paule is a director of MyCo and controls the company together with his brother, Mr S Paule. I will refer in this judgment to Mr Terry Paule as “Mr Paule” and to his brother as “Mr S Paule”. MyCo and Mr Paule invested in technology developed by Dr Ambrosios Kambouris (the second respondent) for the extraction of drinkable water (referred to by the parties as “botanical water”) from wastewater sourced from the processing of fruit, vegetables and sugar cane. Mr David Driver (the first respondent) was a business associate of Dr Kambouris who also invested in the technology. Mr Driver acquired a 27% interest in the intellectual property in the technology through DJD Trading Pty Ltd (DJD) (the fourth respondent).
There was no challenge by the appellants to any of the facts found by the primary judge and no statement under r 51.36 of the Uniform Civil Procedure Rules 2005 (NSW) was filed. The importance of compliance with that requirement has been emphasised by this Court on numerous occasions: Massoud v Nationwide News Pty Ltd (2022) 109 NSWLR 468; [2022] NSWCA 150 at [139] per Leeming JA; Magann v The Trustees of the Roman Catholic Church for the Diocese of Parramatta [2020] NSWCA 167 at [52]-[56] per Bell P; Best v Rosamond [2020] NSWCA 90 at [21] per Payne JA. The reason the Court requires compliance with r 51.36(2) is obvious. In a case such as the present, whilst various conclusions reached by the primary judge are challenged, the appellants have not, or have not clearly, challenged any of the facts upon which those conclusions are based. The failure to identify the facts which are challenged creates a serious hurdle for an appellant to overcome.
In approximately 2010, Dr Kambouris developed technology for the extraction of drinkable water from wastewater sourced from the processing of fruit, vegetables and sugar cane, and subsequently obtained a patent for that technology (the Recovering Water Patent). On 17 May 2013, Dr Kambouris transferred the Recovering Water Patent to the third respondent, Kambouris Shares Pty Ltd (KSP), in which he owned 80% of the shares. Dr Kambouris also applied for various related patents in Australia and other jurisdictions between 2010 and 2018. The primary judge described the relevant suite of patents as “the Patents” and I will do the same. Similarly, I refer to the Patents, trademarks and other knowhow related to the botanical water technology collectively as the intellectual property.
On 11 October 2011, Dr Kambouris incorporated Aqua Botanical Beverages (Australia) Pty Ltd (ABBA). He was the sole director and shareholder. ABBA is now in liquidation. In late 2013 or early 2014, Mr Driver agreed to become the CEO (and later a director) of ABBA, acquiring a 27% interest in the Patents through DJD, and a 5%, later increased to 15.25%, shareholding in ABBA through L & L Wood Pty Ltd, a separate company associated with Mr Driver.
In early 2015, Dr Kambouris was introduced to Mr Paule, the latter expressing an interest in acquiring an interest in ABBA through MyCo. On 19 April 2017, ABBA and MyCo entered into a Heads of Agreement (HoA). The primary judge quoted the relevant parts of the HoA as follows:
[15] By cl 3(a) of the Heads of Agreement, it was agreed that “all Aqua Botanical patent(s) and trademarks(s) [sic] relating to Australia will be exclusively licenced [sic] to ABBA”. By cl 3(b), ABBA agreed immediately to “transfer 25% of its paid up share capital to MYCO and/or nominee”. By cl 3(c), it was agreed that ABBA would have three directors including one “from MYCO being Spiro or Terry Paule”. By cl 3(d), the parties agreed to establish a “Newco” as “JV partners to produce sell and brand develop a range of botanical water from fruit and vegetable or sugarcane sources and related products outside Australia and for global markets”. It was agreed that the patents and trademarks outside of Australia would be licensed exclusively to Newco and that Newco would issue 25 percent of its share capital “to MYCO and/or nominee”. It was also provided that “The remaining 75% shareholding shall be allocated to the originating founders”. Clause 3(e) states that NewCo “shall consist of three (3) directors including (1) from MYCO being Spiro or Terry Paule”.
On 27 November 2017, Botanical Water Technologies Pty Ltd (BWT), which was the Newco contemplated by the HoA, was incorporated. BWT was intended by ABBA and MyCo to be the vehicle through which international development of the botanical water business would occur. Originally, Mr Paule and Mr S Paule were the only directors of BWT. Mr Driver and Dr Kambouris were added as directors on 10 October 2018.
Prior to and following execution of the HoA, Mr Driver continued to fund ABBA through personal loans.
i. Located in the appropriate jurisdiction (i.e. Australia or overseas) from a business perspective;
ii. Facilitate global commercialisation of IP;
iii. Facilitate investment from both domestic and foreign investors;
iv. Limit the current legal liability risk faced by Dr Bruce [Dr Kambouris], Mr Driver and the PFO.
That advice ultimately led to a series of transactions in April 2018 and agreements entered into on or about 30 June 2018 by which each party transferred their interest in the intellectual property to special purpose companies in exchange for shares in those companies. Those shares were then transferred to a wholly owned subsidiary of BWT known as BWT IP 4 Pty Ltd (BWT IP 4) in exchange for shares in BWT. The result was that BWT owned 100% of the shares in BWT IP 4 which indirectly owned the intellectual property. Dr Kambouris held 27.1% of the shares in BWT, Ms Kambouris (Dr Kambouris’ now former wife) held 17.8% of the shares, KSP held 5.1% of the shares, DJD held 25% of the shares and Mr S Paule held 25% of the shares.
On 29 June 2018, BWT licensed the intellectual property to ABBA and appointed ABBA to conduct research and development on its behalf, with the intention that ABBA would develop the business in Australia, the international side of business would be developed through BWT, and that Mr Paule would have day-to-day responsibility for managing BWT.
The agreements executed in June 2018 included two referred to as the “BWT Implementation Deed” and the “ABBA Implementation Deed”. The parties to both those agreements included MyCo, KSP, Mr Paule, Mr S Paule, Dr Kambouris, Ms Kambouris, Mr Driver and DJD. By cl 1.1(d) of the BWT Implementation Deed, the parties agreed that the directors of BWT would be Dr Kambouris, Mr Driver and Mr Paule. Consistently with that agreement, Mr S Paule ceased to be a director of BWT on 10 October 2018.
From around December 2019, Mr Paule raised with Dr Kambouris and Mr Driver the idea of establishing an overseas entity and raising capital through that entity.
On 4 and 5 February 2020, Botanical Water Technologies Ltd (BWT UK) and Botanical Waters Technologies IP Ltd (BWT IP UK) were incorporated in the United Kingdom with Mr Paule as the sole director and sole shareholder of both companies. Each of the shareholders in BWT transferred their shares in BWT to BWT UK, and ultimately received an equivalent number of shares in BWT UK in return. The primary judge’s unchallenged finding was that Mr Driver (on behalf of DJD) and Dr Kambouris executed their share transfer forms in favour of BWT UK on 20 February 2020. The primary judge found that they only did so as a result of receiving assurances that they would be appointed as directors of BWT UK. They were never so appointed.
Following COVID delays, the capital raising occurred on 31 December 2020 when BWT UK issued 25,482 shares pursuant to a number of subscription agreements. On 30 April 2021, Mr Paule and Mr S Paule as the directors of BWT UK signed a resolution relevantly in the following terms:
… the allotment and issuance of New Shares in Annex 1, entry into the Subscription Agreements and any acts that have already been implemented or carried out by or on behalf of the Company in connection with the Capital Raise be ratified and approved in all respects; …
[72] The effect of these allotments was to reduce Mr Driver and Dr Kambouris's interests in BWT UK from 62.5 percent to 49.8 percent. Neither Mr Driver nor Dr Kambouris were given any information about the allotments before they occurred. Contrary to what Mr Paule had said to Dr Kambouris, none of the shares held by Dr Kambouris were sold into the capital raising.
[73] As is apparent from the resolution signed by Mr Paule and Mr S Paule, 6,912 shares were issued to them as trustees of S&T Paule Family Trust. As the plaintiffs point out, there was no loan agreement between the trust on the one hand and BWT UK on the other. There was a loan agreement between MyCo and BWT. The general ledger of MyCo shows that as at 31 December 2020, the amount BWT owed it was $1,459,832.86. That amount did not decrease on 1 January 2021. There is, however, an entry in the ledger on 1 July 2022 showing a debit of $501,610.00 which is described as “Loan to Equity Conversion – S&T Paule FT investment in BWT UK”. On the same date, there is a credit of $421,964.23 described as “Interest on BWT Loan – Jan’18-Jun’22”. Accepting that the loan could be capitalised in that way, that implies that the S&T Paule Trust paid AUD72.57 per share, which contrasts with a price paid by other investors which ranged between USD279.96 and USD295.31 per share.
Mr Driver gave unchallenged evidence that, upon receiving advice from Findex on or around 31 January 2020, he was concerned whether he would be able to participate in, as a director of BWT UK, any form of capital raising, including whether he “would have a say as to who would be brought in as investors”.
Dr Kambouris gave unchallenged evidence that he and Mr Driver would be appointed as directors and “have the power to control the business, have a say on the terms of any capital raising and who the investors might be, and so [they] could veto any decisions that [they] considered to not be in the interest of the shareholders”.
By virtue of the steps taken in February 2020, BWT UK now owned all of the shares in BWT. That shareholding, together with BWT UK’s ownership of BWT IP UK, gave BWT UK full ownership of all of the intellectual property. Share certificates in BWT UK were not issued to DJD and Dr Kambouris to reflect their shareholding for almost ten months after the restructuring occurred.
The primary judge found (at [119]) that Dr Kambouris and Mr Driver were dependent on Mr Paule to raise capital and to put in place a structure that would enable capital raising to happen, which was desirable if not necessary for the future viability of the business. It was important to Dr Kambouris that he be able to sell some of his shares to raise money for buying a house in Mildura. His Honour found that, having transferred their shares in BWT to BWT UK in good faith, Dr Kambouris and Mr Driver were completely dependent on Mr Paule in circumstances where their shareholding in BWT UK was unclear to them and they were not directors of that company.
The primary judge upheld the complaint by Dr Kambouris and DJD that Mr Paule breached his fiduciary duties. His Honour granted equitable compensation to Dr Kambouris and DJD in the amount of USD $15,837,000.
His Honour rejected claims that Mr Paule engaged in unconscionable conduct in contravention of ss 12CA or 12CB of the Australian Securities and Investment Commissions Act 2001 (Cth), claims for relief under ss 232 and 233 of the Corporations Act 2001 (Cth) and claims by Mr Driver seeking repayment from MyCo of amounts lent to ABBA based on breach of the ABBA Implementation Deed.
The primary judge found that Mr Paule owed fiduciary duties to DJD and Dr Kambouris in relation to specific conduct he undertook for the benefit of Mr Driver, Dr Kambouris and DJD as investors in BWT. The primary judge found that Mr Paule took principal responsibility for creating a legal and corporate structure which would permit the business to expand. When BWT UK was established, Mr Paule became its sole director and shareholder and had absolute control over the company. The primary judge explained:
[114] Throughout the period, Mr Paule indicated particularly to Dr Kambouris that he was acting in the interests of Mr Driver and Dr Kambouris. Mr Paule’s periodic reference to “teamwork” and that he, Mr Driver and Dr Kambouris were in partnership gave that impression. Mr Paule accepted that he was at least acting in the interests of Dr Kambouris. In response to a series of text messages from Dr Kambouris asking when he (Dr Kambouris) would be paid the amount he expected to receive for the shares he thought he was selling into the capital raising, Mr Paule said in a text message sent on 28 November 2020:
Your payment will be made as promised and agreed. Unfortunately, you like me will need to suffer the headache of cleaning up what can at best be described as the mess called ABBA so that we can move forward. You should be thankful that we are here and looking after your best interests.
[115] Mr Driver and Dr Kambouris were vulnerable to abuse by Mr Paule of his position. Although Dr Kambouris and Mr Driver were not unsophisticated, they did not have the necessary experience or connections to perform the work undertaken by Mr Paule, and as the Heads of Agreement recognised, MyCo was an attractive investor to them because Mr Paule did have that experience and those connections. Moreover, particularly after the shares in BWT were transferred to BWT UK and Mr Paule remained in control of BWT UK, Dr Kambouris and Mr Driver were completely dependent on Mr Paule.
[125] The plaintiffs characterise the scope of Mr Paule’s duties as having two elements. One was not to promote or pursue his personal interests (or those of a third party) in circumstances in which there was a conflict or a substantial possibility of a conflict between those interests and the joint interests of the shareholders. The other was not to use his position as a director of BWT UK to acquire an unauthorised benefit for himself or a third party. I accept that characterisation. In essence, in pursuing the restructure and capital raising Mr Paule had a duty not to put his own interests ahead of the interests of the shareholders of BWT as a whole.
[126] The plaintiffs submit that Mr Paule breached his duty in two main ways. First, he preferred his own interests to those of Mr Driver (or DJD) and Dr Kambouris by causing MyCo’s loan to BWT to be capitalised in exchange for shares in BWT UK. Second, he preferred his own interests or those of MyCo by causing the whole of BWT UK’s undertaking to be sold at an undervalue to MyCo.
[127] I accept the first of those submissions, but not the second.
[128] As to the first, as Mr Paule knew, Mr Driver and Dr Kambouris transferred their shares in BWT in exchange for shares in BWT UK in the expectation that an amount of USD7 million would be raised by BWT UK issuing shares representing 20 percent of its capital and Dr Kambouris selling 5 percent of his shares. That was the proposal presented to both Dr Kambouris and Mr Driver, and they must be taken to have agreed to it. However, the capital raising that actually occurred was quite different. It involved raising approximately USD4.1 million in cash from external investors, none of which was paid to Dr Kambouris. At the same time, it involved Mr Paule and Mr S Paule obtaining an additional 6,912 shares in exchange for MyCo agreeing, in effect, to forgive part of its loan to BWT. That transaction was clearly to the benefit of Mr Paule and his brother and to the detriment of Mr Driver and Dr Kambouris. It was to the benefit of Mr Paule and his brother because they increased their shareholding in BWT UK without having to provide any obvious benefit to BWT UK. It is true that, as a result of the transaction, the debt owed by a subsidiary of BWT UK (that is, BWT) was reduced. But it is doubtful that that was a benefit to BWT UK and, even if it was, the transaction occurred at an imputed price which undervalued the shares they received when compared with the price paid by other investors. In short, Mr Paule and his brother increased their interest in BWT UK and the degree to which they could exercise control over it. On the other hand, Mr Driver and Dr Kambouris lost control of BWT UK. None of that was disclosed to Mr Driver and Dr Kambouris, let alone approved by them. On the contrary, it appears that Mr Paule went out of his way to keep what was happening from Dr Kambouris and Mr Driver. In acting in that way, Mr Paule clearly preferred his own interests to those of Dr Kambouris and Mr Driver (and DJD).
[133] The plaintiffs are entitled to equitable compensation or an account of profits in respect of Mr Paule's breach of fiduciary duty, although not both. They indicated that they would make their election once they knew the outcome of their claim, as they are entitled to do.
[134] The remedy of an account of profits was explained in these terms by Gageler J in Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited (2018) 265 CLR 1; [2018] HCA 43 (Foresters) at 75:
The equitable remedy of account is a personal order. The order operates to require that a defendant pay to a plaintiff the monetary value of a benefit or gain to the defendant. Although commonly referred to as an “account of profits”, there is no reason why a benefit or gain to be made the subject of an account must answer the description of a "profit" in conventional accounting terms. Nor is there any reason why that benefit or gain must answer the description of "property" or must have sufficient certainty as to be capable of forming the subject matter of a trust. The benefit or gain can be expectant or contingent. Indeed, it is commonplace that a benefit or gain the subject of an account might encompass an ongoing business. And it is commonplace that the benefit or gain to be made the subject of an order to account might extend to the whole of the ongoing business or be limited to a part of the business identified by reference to both a specified scope of commercial activities and a specified period of commercial activities which need not be confined to a past period but may be a period which extends into the future.
See also Foresters at [7] per Kiefel CJ, Keane and Edelman JJ.
[138] Leaving the reflective loss principle aside for the moment, Dr Kambouris and DJD are entitled to recover the losses that they would not have sustained but for the breach of Mr Paule of his fiduciary duties: see Foresters at [88] per Gageler J. In the present case, Mr Paule’s breach of duty arose from the way in which the capital raising that formed part of the second restructure was conducted, and, in particular, the fact that Mr Paule and his brother gained control of BWT UK as a result of the capitalisation of the loan owed by BWT to MyCo. But for that breach, they would not have gained control of BWT UK and been able to engage in the subsequent transactions that resulted in the shares in BWT UK becoming worthless.
…
[143] In my opinion, it is appropriate to assess the plaintiffs’ loss as at the date of judgment. In assessing equitable compensation, it is appropriate to compensate the plaintiffs for all the losses that flow from the breach of duty: Target Holdings Ltd v Redferns [1996] 1 AC 421; O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262; Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1; [1999] NSWCA 408 at [431]-[432] per Spigelman CJ, Sheller and Stein JJA; J & E Vella Pty Ltd v Hobson [2020] NSWCA 188 at [40] per Bell P, Basten and White JJA. Those losses include the actions taken by Mr Paule after he obtained control of BWT UK, which includes the sale of its business. Consequently, Dr Kambouris and DJD’s losses should be assessed by comparing the value of the shares in BWT UK now with the value of the shares they would have had but for the breach of duty. It is plain that the current value of the shares in BWT UK is zero. Mr Potter does not provide a value of the shares now assuming the breach of duty had not occurred. He does provide a value of the shares as at 30 April 2021 and 12 October 2023. Both valuations are based on the imputed value of the shares that is to be derived from the amount third parties were willing to pay to invest in BWT UK at the time of the first capital raising. The principal difference is that the valuation as at 12 October 2023 includes the amount of additional capital raised.
The primary judge held that the principle relating to reflective loss had no application in this case, since the evidence did not establish that the loss claimed by Dr Kambouris and DJD could have been claimed by BWT UK.
The primary judge subsequently determined questions concerning interest and costs in Driver v Botanical Water Technologies Pty Ltd (No 2) [2024] NSWSC 1641. Those orders were stayed by Williams J in Driver v Botanical Water Technologies Pty Ltd [2025] NSWSC 566 until 5pm on the first day of the hearing of this appeal.
1 The Primary Judge erred in finding that the fifth defendant (Mr Paule) owed a fiduciary duty to:
a. the first plaintiff (Mr Driver) and the fourth plaintiff (DJD); and
b. the second plaintiff (Dr Kambouris),
(J[110]-[125], [137]).
2 The Primary Judge erred in finding that Mr Paule owed a fiduciary duty to DJD (J[123], [137]):
a. in circumstances involving a denial of procedural fairness to Mr Paule, because:
i. the plaintiffs did not plead that Mr Paule owed DJD a fiduciary duty;
ii. the plaintiffs did not allege in opening written submissions or in opening oral address that Mr Paule owed DJD a fiduciary duty;
iii. the trial was not conducted on the basis that Mr Paule owed DJD a fiduciary duty;
iv. the plaintiffs contended, briefly, and for the first time, in written closing submissions, and without notice to the defendants, that Mr Paule breached a fiduciary duty to DJD, in circumstances where:
1. such written closing submissions were 140 pages in length, and not provided to the plaintiffs until closing addresses had commenced;
2. the plaintiffs, in closing address, said nothing about the contention that Mr Paule owed DJD a fiduciary duty;
v. the primary judge did not inform the defendants that he intended to determine, and then decide the case based on, whether Mr Paule owed DJD a fiduciary duty;
b. by relying on the same facts relevant to Mr Paule’s liability to the first respondent, Mr Driver, to determine that Mr Paule owed a fiduciary duty to DJD (at J[123]), in circumstances where:
i. facts relevant to Mr Driver did not support a finding that, and were not determinative of the question whether, Mr Paule owed a fiduciary duty to DJD;
ii. the plaintiffs, neither in their written closing submissions nor elsewhere, did not contend that Mr Paule owed a fiduciary duty to DJD based on facts relevant to any liability to Mr Driver.
3 The Primary Judge erred in finding that the breach of fiduciary duty:
a. caused Mr Paule and Mr S Paule to obtain control of BWT UK (J[138], [143], [152], [153]); and
b. thereby resulted in Mr Paule and Mr S Paule engaging in subsequent transactions (including the sale of the business of BWT UK to the fourth defendant (My Co)) that caused the shares of DJD and Dr Kambouris in BWT UK to become worthless (J[138]).
4 The Primary Judge erred in finding that the loss to DJD and Dr Kambouris caused by the breach of fiduciary duty:
a. included loss resulting from subsequent actions taken by Mr Paule, including the sale of the business of BWT UK to My Co (J[138], [143]); and
b. was to be assessed by reference to the value of DJD’s and Dr Kambouris’ shares in BWT UK at the date of judgment (J[138], [143]).
5 The Primary Judge erred in:
a. finding that the loss said to be suffered by DJD and Dr Kambouris was separate and distinct from any loss claimable by BWT UK (J[149], [153]-[155]); and
b. failing to find that the loss said to be suffered by DJD and Dr Kambouris was:
i. reflective of the same loss claimable in an action by BWT UK against Mr Paule; and
ii. not recoverable in an action by DJD and Dr Kambouris as shareholders of BWT UK.
1 The third appellant breached a fiduciary duty owed to the second and fourth respondents by causing the whole undertaking of Botanical Water Technologies Ltd (BWT UK) to be sold to the second appellant: c.f. J [129]-[130]. The judgment below may be affirmed as an award of equitable compensation for that breach.
2 The third appellant engaged in unconscionable conduct in connection with the supply or acquisition of financial services in contravention of s 12CB(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), as found by the Court below at J [178]-[181], and by causing the whole undertaking of BWT UK to be sold to the second appellant: c.f. J [181]. That conduct also contravened s 12CA of the ASIC Act: c.f. J [178]-[179]. The judgment below may be affirmed as an award of damages under s 12GF(1) of the ASIC Act for the loss or damage suffered by those contraventions.
By the first ground of appeal, the appellants contended that Mr Paule did not owe DJD (or, to the extent relevant, Mr Driver) or Dr Kambouris a fiduciary duty in relation to the second restructure and related capital raising for BWT UK.
The appellants’ first complaint was that, on the facts, no fiduciary duty was owed by Mr Paule to DJD. The appellants submitted that the primary judge treated DJD as if it were the alter ego of Mr Driver, despite his Honour’s express finding that it was not. The appellants contended that the primary judge did not identify and examine the particular features of the relationship between Mr Paule and DJD.
The appellants took issue with the conclusion reached by the primary judge in the following paragraph:
[123] There is a question whether the fiduciary duties owed by Mr Paule were owed to Mr Driver or to DJD, since it was DJD that was the shareholder in BWT and BWT UK, and at least following its own capital raising DJD could not be regarded as a creature of Mr Driver, even if he continued to control it. The pleaded case is that the fiduciary duties were owed to Mr Driver, not DJD (consistently with the plaintiffs’ claim that there was a joint venture between Mr Paule, Mr Driver and Dr Kambouris). However, in various parts of the plaintiffs written submissions they submit that Mr Paule breached his duties to DJD or to Mr Driver and DJD. No point was taken that those allegations went beyond the pleaded case. DJD is a plaintiff in the proceedings, and the facts relevant to Mr Paule’s liability to it are the same as the facts relevant to his liability to Mr Driver. Consequently, nothing more needs to be said about the issue in this context. The issue may, however, be relevant to the question of relief, which is dealt with below.
The appellants accepted that Mr Paule and MyCo took principal responsibility for undertaking work in relation to the second restructure, and that Mr Paule had absolute control over BWT UK. However, they argued:
Mr Paule was not communicating to Mr Driver (or to Dr Kambouris) during the period of the capital raising that he was acting in the interests of DJD (or Mr Driver). The appellants submitted that evidence showed that, at the time Mr Paule was assisting in the capital raising for BWT UK, he was not speaking with Mr Driver, and that there was friction between them. In these circumstances, the appellants submitted that DJD did not have a relationship of trust and confidence with Mr Paule.
DJD was not relevantly vulnerable. Mr Driver was educated, had commercial experience and had engaged solicitors to represent his interests.
By no later than 6 November 2020, DJD and Dr Kambouris were the majority shareholders and were able to control BWT UK. The appellants said that Mr Driver knew this to be the case. The Paule Family Trust held only 37.5% of the shares in BWT UK.
The evidence did not support a conclusion that Mr Driver (or DJD) was completely dependent on Mr Paule to raise capital for BWT UK because Mr Driver (and DJD) had capacity to engage in the process of raising capital, which it had done successfully in 2020.
The appellants’ second complaint was that no fiduciary duty was owed to DJD or Dr Kambouris (or Mr Driver) as shareholders of BWT UK in circumstances where Mr Paule owed duties, as a director, to BWT UK, in raising capital for the company. The appellants emphasised that a director’s fiduciary duties are owed to the company and not to its shareholders. It was submitted that Mr Paule did not undertake to act in DJD’s best interests in relation to the capital raising for BWT UK.
The appellants submitted that it is commonly accepted that a director’s fiduciary duty to a company usually prevents the recognition of concurrent and identical duties to the company’s shareholders covering the same subject matter. The appellants relied on Brunninghausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199 at [58]; Crawley v Short (2009) 262 ALR 654; [2009] NSWCA 410 at [112].
The appellants accepted that there are exceptions to this suggested principle, as identified in Crawley at [122]. The appellant submitted that in each exception, the transaction in question did not relevantly concern the company, but only another shareholder. The company did not have an interest in the loyal and disinterested performance of the director’s duty, and it did not suffer any loss as a result of the director’s conduct.
Such an exception could not apply in this case on the appellants’ submission, because BWT UK had a clear and direct interest in the transaction. The appellants sought to make a virtue of the primary judge’s findings, as quoted above at [26], that Mr Paule obtained shares at below market value. This, they said, was contrary to BWT UK’s interest in shares being issued at a price consistent with their value, so as to maximise the amount of capital raised. More broadly, BWT UK had an interest in the loyal and disinterested performance by Mr Paule of his duties as a director.
I have set out above the primary judge’s detailed and unchallenged findings of fact about the relationship between these parties which underpinned his Honour’s conclusion in this case that fiduciary duties were owed by Mr Paule to DJD and Dr Kambouris. His Honour was correct so to conclude.
There is nothing novel about the fiduciary duty found by the primary judge to exist here. In Brunninghausen, Handley JA (with whom Priestley and Stein JJA agreed) explained (at [69]) that directors may owe a fiduciary duty to shareholders in issuing shares in a company. A company is generally “not concerned with the identity of its shareholders, or with the location of voting control”, whereas shareholders are keenly interested in such matters: Brunninghausen at [68]. The issuing of shares by a company does not generally cause the company to lose the market value of those shares. In Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31, the High Court rejected a claim that the company suffered damage when new shares were issued and distinguished that from the claim that the shareholders were disadvantaged: see [45]-[64]. Professor Finn in Fiduciary Obligations*: 40th Anniversary Republication with Additional Essays* (2nd ed, 2016, The Federation Press) rejected the notion that directors never owe a fiduciary duty to shareholders in issuing shares in a company:
[141] … If there is any reason in principle for imposing a fiduciary obligation on the directors in favour of the company when the powers of management are exercised, that reason, it is suggested, must surely necessitate the imposition of a similar obligation in favour of the shareholders as well when the board exercises such of their powers as operate directly upon the contractual rights and obligations of the shareholders – and in a Table A type company these will usually consist of those powers listed earlier in para. Accordingly, the directors should in principle be obliged to act fairly as between the company and the shareholder(s) directly affected by the exercise of these powers. If the power being exercised is one which affects all the shareholders, for example, the power to declare dividends or to issue new shares, the interests which should be weighed against those of the company are those of the shareholders collectively and not the individual interests of any one or more shareholders. The imposition of such a duty does not mean that equal treatment is to be meted out to the company and to the shareholders. Obviously the respective interests of each will differ, and differ in relative importance. All that the board must do is act fairly towards them all so that if, for example, the board has the power to declare dividends and their company is prospering, fairness might dictate that the shareholders be allowed to participate in the company’s [68] prosperity through substantial dividends. Furthermore, given that the directors would thus be obliged to consider the collective interests of all the shareholders affected by the exercise of a power, any decision taken with the dominant purpose in mind of advantaging/disadvantaging only some of them would automatically amount to a breach of duty to those disadvantaged and irrespective of any corresponding wrong done to the company. So where a board, for example, deliberately summons a company meeting at a time when they know a shareholder-critic of theirs will, for purely temporary reasons, be unable to attend, they would breach their duty to that shareholder in that they have not attempted to do what is fair towards the company and its shareholders. Rather they have attempted simply to disadvantage that shareholder.
(Footnotes omitted)
[119] The primary judge acknowledged that there were cases where a director who was also a shareholder could owe a duty to another shareholder, but considered that Brunninghausen told against it when the same acts constituted a breach of the fiduciary duty to the company.
[120] With respect, this is too narrow a reading of Brunninghausen and is out of line with other authorities.
[121] There will be a variety of situations where a shareholder or director/shareholder holds a special position where he or she may owe duties to another shareholder.
[122] Without being an exhaustive list, this will occur where: one shareholder undertakes to act on behalf of another shareholder; where one shareholder is in a position to have special knowledge and knows that another shareholder is relying on her to use that knowledge for the advantage of another shareholder as well as herself; and where the company is in reality a partnership in corporate guise, nowadays termed a quasi partnership.
[123] In a pure partnership, a partner has a clear fiduciary duty not to take a personal advantage when dealing with the share of another partner.
[124] An extreme example of this duty is provided by Perens v Johnston (1857) 65 ER 720; 3 Sm & Giff 419 where a partner had deliberately concealed the fact that the partnership’s mine was about to hit a rich seam of coal so that he could purchase an insolvent partner’s share at auction for an undervalue. The sale was set aside.
[125] Of course there may be closely held corporations where the interests of the shareholders are diverse so that no such duty can be implied. The prime illustration is a home unit company where each shareholder is only interested in his or her own home unit; see for example Woods v Cann (1963) 80 WN (NSW) 1583.
The present case falls within the first two of the situations identified at [122] of Crawley v Short where a director/shareholder holds a special position such that he or she may owe duties to another shareholder. On the unchallenged findings of the primary judge, Mr Paule undertook to act on behalf of Dr Kambouris and DJD; he had special knowledge about all aspects of the second restructure and associated capital raising; and he knew that Dr Kambouris and DJD were relying on him to use that knowledge for the advantage of Dr Kambouris and DJD.
As the primary judge found, Mr Paule assumed “principal responsibility” for attracting new investors and putting in place a legal and corporate structure to facilitate capital raising as part of the second restructure. Mr Paule made representations that he was doing so in the interests of Mr Driver and Dr Kambouris. The representations that he was acting in the interests of Mr Driver can only meaningfully be understood as acting in the interests of DJD, which was the company controlled by Mr Driver and was the shareholder of BWT. Dr Kambouris and DJD transferred their shares in BWT to BWT UK on the faith of promises by Mr Paule that they would be transferred equivalent shares in BWT UK and that they would be appointed as directors of BWT UK. Mr Paule was the only director of BWT UK at that time. As the primary judge correctly found, until that agreed-upon legal structure was put in place, Dr Kambouris and Mr Driver were “completely dependent on Mr Paule”. In those circumstances, the primary judge’s reference (at [106]) to Union Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; [1985] HCA 49 at 12, that a fiduciary relationship can arise “between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them”, was apposite.
The appellants’ submission that there is a “general principle” that where a director’s fiduciary duties are owed to the company they are not concurrently owed to its shareholders, should be rejected. The passage in Brunninghausen at [58] relied upon by the appellants is expressly qualified by the passage at [69] which provides:
[69] Although this may not have been explicitly recognised, the result is that directors in issuing shares have a fiduciary duty not only to the company, but also to shareholders. The point was made clearly by Dixon J in Richard Brady Franks Ltd v Price (1937) 58 CLR 112 at 143 which involved the directors' fiduciary power to issue debentures. He said:
“… Those impeaching the transaction must sustain the burden of proving that the directors acted in their own interests and were not in fact exercising their powers in supposed furtherance of any purpose or advantage of the company. In considering such a question, it is important to ascertain what are the purposes for which powers are given and to remember that the fiduciary duty of the directors is to the company and the shareholders.”
(Emphasis added)
I would also reject each of the appellants’ challenges to the findings of the primary judge relating to the existence of a fiduciary duty owed to Dr Kambouris and to DJD.
First, the fact that Dr Kambouris and Mr Driver were ultimately provided with a share register of BWT UK on 6 November 2020, on the same day as the capital raising was completed, is irrelevant to whether Mr Paule owed them fiduciary duties at the time of the issuing of the shares. As the primary judge correctly pointed out (and see Brunninghausen at [101]), the question is not whether “there is an expectation in fact” that the fiduciary will act in the vulnerable party’s interests, but rather “whether the vulnerable party is ‘entitled to expect’ a particular standard of conduct”. Dr Kambouris and DJD were plainly entitled to expect that Mr Paule would act in their interests, for reasons emphasised at [48] above. In those circumstances, the appellants’ suggestion that DJD was not relevantly vulnerable, because it could have exercised its rights as shareholder in BWT UK to seek the Paules’ replacement as directors, should be rejected. The fact that a majority of shareholders might have, but did not, seek to remove the existing directors, or to appoint further directors, did not permit those existing directors to issue shares in a self-interested fashion. Further, Mr Driver’s successful efforts to raise capital in DJD had no effect on the duty Mr Paule owed to the shareholders of BWT UK. Mr Paule took no steps to cause Dr Kambouris or Mr Driver to be appointed as directors, despite his promise to do so. To the extent that the appellants rely upon any indication by Dr Kambouris that he and Mr Driver would not insist upon being directors of BWT UK, the indication was made on the condition that Dr Kambouris be provided with USD1m from the sale of some of his shares**.** Mr Paule did not fulfil that condition.
Secondly, whilst it may be accepted that the relationship between Mr Paule and Mr Driver was distrustful, as noted above the question is not whether “there is an expectation in fact” that the fiduciary will act in the vulnerable party’s interests, but rather “whether the vulnerable party is ‘entitled to expect’ a particular standard of conduct”. Dr Kambouris and DJD were entitled to expect that Mr Paule would manage BWT UK’s affairs for their benefit. Dr Kambouris and DJD were entitled to expect that the power to issue shares would not be exercised by Mr Paule in a manner which preferred his interests over their own. This is so irrespective of whether Mr Driver may have a feeling of animus towards Mr Paule.
Thirdly, the fact that Mr Driver was educated and able to engage lawyers does not demonstrate error in the primary judge’s findings about the existence of a fiduciary duty. Mr Driver’s enquiries, and those of his lawyers, seeking confirmation as to his directorship and DJD’s shareholding in BWT UK were repeatedly met by silence, or evasive or largely non-responsive answers from Mr Paule and his representatives over a period of many months. As the primary judge found:
[62] There were further exchanges on the subject principally between Mr Smith and Dr Kambouris on the one hand and Mr Paule and Mr Richardson on the other in which Dr Kambouris and Mr Smith received largely non-responsive or evasive answers to their questions concerning shareholding and Dr Kambouris and Mr Driver’s directorships. Dr Kambouris and Mr Paule also exchanged messages on the capital raising and the proposal that Dr Kambouris would receive a sum of money from it. In one text message sent by Mr Paule to Dr Kambouris on 2 September 2020, Mr Paule said:
As I said taking money out is hard to negotiate at the best of times. COVID-19 had made it even harder. We have worked hard to cut a deal so suggest you take it as there will not be another opportunity for at least next 3 years. This only offered to you.
Finally on ground 1, I do not accept the appellants’ submission that the “issuing of shares to the Paules” was not raised by the respondents until closing submissions. The “Nature of Dispute” section of the Further Amended Commercial List Statement (FACLS) clearly alleged that Mr Paule had breached fiduciary duties by causing BWT UK to issue shares “without Dr Kambouris or Mr Driver’s knowledge or consent, thereby diluting Dr Kambouris’ and DJD’s shareholding in BWT UK, such that together they hold less than 50% of BWT UK’s issued shares”: FACLS, Section A par 4(e). The fact that 6,912 ordinary shares were allotted “in respect of the capitalisation of a loan” was included in the particulars subjoined to the FACLS para 106. FACLS par 106A recited the effect of the 31 December 2020 allotments. The allotment was alleged to give rise, inter alia, to a breach of fiduciary duty: FACLS pars 126, 147, 156 and 161A.
I would reject Ground 1.
By their second ground of appeal, the appellants contended that Mr Paule did not have fair notice of, and was not given a fair opportunity to address, the primary judge’s finding that Mr Paule owed DJD a fiduciary duty. The appellants contended that the primary judge erred in deciding the case on a ground that was not raised on the pleadings, and which went beyond the issues joined between the parties at trial. The appellants submitted that Mr Paule was denied the opportunity to obtain documents relevant to whether DJD was owed a fiduciary duty, and to cross examine Mr Driver or call other witnesses relevant to this question. It was submitted that information may have been adduced in evidence on matters relevant to whether there was a fiduciary duty, such as the vulnerability of DJD; what (if any) trust and confidence DJD held in Mr Paule (in conducting the capital raising); and its dependency on Mr Paule to conduct a capital raising (having regard to DJD’s own resources, expertise and contacts to conduct its own capital raising). Had they been given a fair opportunity, there was at least the possibility of a different outcome.
The primary judge recognised that the pleaded case was that a fiduciary duty was owed to Mr Driver and Dr Kambouris, and not DJD (at [123]). The primary judge, however, determined that the argument (that a fiduciary duty was also owed to DJD) was made at the trial and no point was taken by the appellants that those allegations went beyond the pleaded case. The appellants submitted that there were only two references to Mr Paule having allegedly breached a fiduciary duty to DJD in the 140 pages of the respondents’ written closing submissions. The parties exchanged written closing submissions on the same day and only after the plaintiffs’ closing addresses commenced. It was submitted that no such claim was made in oral submissions and counsel for the respondents was asked by the Court about the alleged fiduciary duties owed to Dr Kambouris and Mr Driver, but not DJD.
The appellants submitted that they did object to the respondents raising (allegedly for the first time) in their closing submissions an argument based on the capitalisation of MyCo’s loan to BWT and the issuing of 6,912 shares to the Paule Family Trust at an undervalue.
The respondents submitted that, during the trial, they alleged that Mr Paule owed and breached a fiduciary duty to DJD, albeit that the parties (on both sides) frequently did not differentiate between Mr Driver and DJD, or referred compendiously to duties alleged to be owed “to the plaintiffs”. It was submitted, however, that the claim that a fiduciary duty was owed by Mr Paule to a category of persons, being the shareholders of BWT UK, was clearly articulated.
In addition to the references mentioned by the appellants, the respondents drew the Court’s attention to the multiple references in their written closing submissions to the proposition that directors owe “shareholders” fiduciary duties in relation to the issuance of shares. Mr Paule’s duty was specifically said to be owed to “the shareholders of BWT UK”. The respondents submitted that material facts underlying the conclusion that Mr Paule owed DJD a fiduciary duty were squarely pleaded.
Whilst I accept that that the parties (on both sides) frequently did not differentiate between Mr Driver and DJD or referred compendiously to duties alleged to be owed “to the plaintiffs”, a close examination of the course of the trial makes clear that the respondents clearly alleged throughout the trial that Mr Paule owed and breached a fiduciary duty to DJD.
In opening, Senior Counsel for the respondents said:
We were in a uniquely vulnerable situation when we had … divested ourselves of our shares in the Australian entities … and where we were not given access to the control of the UK entity. And we were not told, as your Honour saw, for months and months, that we had a registered shareholding in that entity. Your Honour will need to reach a view as to whether … that gives rise to fiduciary duties, and if it does, whether they’ve been breached.
As Mr Rush KC for the appellants correctly and fairly accepted in oral address, the “we” in that passage must include DJD as it was the entity which owned shares and thus “divested ourselves of our shares in the Australian entities”.
The primary judge noted that he was proposing to address the plaintiffs’ claims by reference to the oral and written openings, rather than by reference to the pleading or the summons.
Written closing submissions for the plaintiffs were handed up to Court at the commencement of their oral closing address on 21 August 2024. Those submissions made multiple references to the proposition that directors owe shareholders fiduciary duties in relation to the issuance of shares (referring to Brunninghausen at [69]). Mr Paule’s duty was specifically said to be owed to “the shareholders of BWT UK”. The appellants’ submission that the issue was only raised twice and briefly is incorrect.
No complaint was made about these matters by counsel for Mr Paule, whose closing address commenced in the afternoon of 21 August 2024 and concluded on 22 August 2024. Counsel then appearing for Mr Paule took a different pleading point as to the date on which the shares in BWT had been transferred to BWT UK by “both plaintiffs”; that is by, inter alia, DJD. Counsel for the respondents returned to the issue in reply, again without any complaint or objection being raised by counsel for Mr Paule, taking the primary judge specifically to Brunninghausen at [69].
Counsel for Mr Paule sought to defend the case on the basis that the respondents’ pleading identified fiduciary duties “said to be owed to the plaintiffs”. He did not draw the distinction now sought to be drawn between Mr Driver and DJD.
It is tolerably clear that counsel for Mr Paule before the primary judge understood that the case relevantly being advanced was one in which Mr Paule owed duties to Dr Kambouris and DJD as shareholders of BWT UK. Mr Paule’s closing written submissions on the breach of fiduciary duty claim treated Mr Driver and DJD as interchangeable. Those submissions included the following references: “the basis on which the plaintiffs contend that a relevant vulnerability arises is that Dr Kambouris and Mr Driver caused their shares in BWT to be transferred to BWT UK entrusting Mr Paule to see to it that they be appointed directors of BWT UK as he had promised”; “Dr Kambouris and Mr Driver both voluntarily parted with their shares in BWT”; and “the basis for any complaint would appear to have fallen away by 6 November 2020 at which time the shareholdings of Dr Kambouris and Mr Driver in BWT UK had been registered”. The references to Mr Driver in each of these submissions could only sensibly be understood as references to DJD, the shareholder in both BWT and BWT UK.
By grounds 3 and 4, the appellants submitted that the loss which each of DJD and Dr Kambouris was found to have suffered was not caused by the breach of fiduciary duty found to be owed by Mr Paule.
The appellants submitted that Mr Paule and his brother exercised control over the affairs of BWT UK as directors of the company both before and after the share issue. The appellants’ submission was that the allotment of shares did not result in the Paules gaining control of the company, leading ultimately to the sale of its undertaking to MyCo, and that therefore the loss caused to Dr Kambouris and DJD upon the sale to MyCo did not flow from the primary judge’s finding of breach of fiduciary duty in the issuing of shares to the Paule Family Trust.
The appellants sought to emphasise that as a result of the share issue the Paule Family Trust’s shareholding in BWT UK actually decreased from 37.5% of the issued shares to 35.39%. The appellants emphasised that the Paules never obtained a majority interest in BWT UK and therefore did not, at least through their shareholding, control the company.
The core of the appellants’ submission about causation sought to compare what they asserted as the outcome of the capital raising as it occurred with what the outcome would have been, assuming that the share issue would otherwise have proceeded exactly as it did, save that the Paule Family Trust did not participate:
If this assumption were made, the appellants submitted that the allotment to the Paules did not have the effect of removing the possibility of DJD and Dr Kambouris joining together to remove Mr Paule as a director because that would have been the outcome of the capital raising in any event. But for the allotment of shares to the Paules, DJD would have held a 21.08% interest in BWT UK and Dr Kambouris would have held a 24.04% interest in BWT UK (giving a combined holding of 45.12%). In doing so the appellants put to one side the shareholding of Ms Kambouris who held 17.8% of the shares in BWT and even on these figures held over 7% of the shares in BWT UK. The appellants called in aid the primary judge’s finding, in rejecting the respondents’ claim to be entitled to a premium for control, that “DJD, Dr Kambouris and Ms Kambouris’s shares should not be regarded as a single block” (J [148]).
The primary judge found that Mr Paule’s allotment of shares to himself and his brother caused the Paules to gain control of BWT UK and to engage in the transactions which rendered Dr Kambouris’ and DJD’s shares worthless. This was a loss that would not have been suffered “but for” the breach of fiduciary duty: J [138] applying Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43 at [88] per Gageler J.
I reject the appellants’ submission that the primary judge made a “critical” error in finding that the Paules “gained control” of BWT UK as a result of the allotment of 6,912 shares to themselves. It may, perhaps, be more accurate to say that the Paules entrenched their control of BWT UK by allotting shares to themselves but nothing turns on the distinction. As the two directors of BWT UK, the Paules had control of the affairs of BWT UK, including its power to issue shares, to enter into a loan agreement, to charge its property, or to sell its assets. Prior to the capital raising, the uncontested finding of the primary judge was that DJD and Dr Kambouris controlled 62.5% of the issued shares in BWT UK and had the power to remove the Paules as directors of BWT UK. After the capital raising, DJD and Dr Kambouris controlled 42.63% of the issued shares in BWT UK and no longer had the power to remove the Paules as directors of BWT UK:
[138] Leaving the reflective loss principle aside for the moment, Dr Kambouris and DJD are entitled to recover the losses that they would not have sustained but for the breach of Mr Paule of his fiduciary duties: see Foresters at [88] per Gageler J. In the present case, Mr Paule’s breach of duty arose from the way in which the capital raising that formed part of the second restructure was conducted, and, in particular, the fact that Mr Paule and his brother gained control of BWT UK as a result of the capitalisation of the loan owed by BWT to MyCo. But for that breach, they would not have gained control of BWT UK and been able to engage in the subsequent transactions that resulted in the shares in BWT UK becoming worthless.
[139] It is no answer to the plaintiffs’ claim that they would have lost control of BWT UK in any event. Whether they would have lost control and the circumstances in which they would have done so and the consequences if they had are matters for speculation. In the absence of evidence to the contrary, that speculation should be resolved in the plaintiffs’ favour: see Maguire v Makaronis (1997) 188 CLR 449 at 470-2 per Brennan CJ, Gaudron, McHugh and Gummow JJ and the discussion of that passage in J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies, 5th (2015), LexisNexis Butterworths, [23-260]ff.
The assertion that the capital raising conducted by Mr Paule and his brother would have proceeded identically in all respects save for the conduct found in breach of fiduciary duty was not established. The appellants’ assumed outcome of that hypothetical capital raising, reflected in the Table at [78] above, rises no higher than mere speculation, particularly in the absence of any evidence being given at the trial by Mr Paule. The primary judge was correct to conclude that Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23 required the party in breach of fiduciary duty to demonstrate that, in the absence of the conduct found to be in breach of fiduciary duty, the capital raising would have proceeded identically in all respects and that the consequences would have been the same for the respondents. This the appellants failed to do. I agree with the primary judge that whether DJD and Dr Kambouris would have lost control, and the circumstances in which they would have done so and the consequences if they had, are all matters for speculation.
As to valuation, the primary judge accepted uncontradicted expert evidence that the issued shares in BWT UK were worth USD35.1m as at 12 October 2023. His Honour accepted that after the sale of BWT UK’s undertaking to MyCo the shares in BWT UK became worthless. Neither finding was challenged on appeal.
Grounds 3 and 4 should be rejected.
By ground 5, the appellants complained that the loss which each of DJD and Dr Kambouris were found to have suffered was reflective of loss of the company (BWT UK) in which DJD and Dr Kambouris were shareholders and therefore not recoverable by DJD and Dr Kambouris.
The appellants submitted that it is sufficient that the company “has a viable cause of action in respect of the same loss claimed by the shareholders”. The appellants stated that the losses suffered by DJD and Dr Kambouris resulting from the issuing of shares to the Paules had to “include the actions taken by Mr Paule … which includes the sale of its business”. It was the sale of BWT UK’s business which “resulted in the shares in BWT UK becoming worthless”. Thus, the appellants argued, the loss to DJD and Dr Kambouris was not limited to the dilution of their shares in BWT UK resulting from the allocation of shares to the Paules. Rather, the loss sought to be recovered, and which was awarded by the primary judge, was for the diminution in the value of the shares upon the sale of BWT UK’s business to MyCo. That loss was reflective of loss sustained by BWT UK upon the sale of its business.
The appellants submitted that the primary judge erred in focusing on the breach by Mr Paule (and whether an immediate loss in the dilution of DJD’s and Dr Kambouris’ shares was reflected in a loss sustained by company) rather than on the later conduct which was the ultimate cause of the loss for which DJD and Dr Kambouris were compensated.
The appellants submitted that a viable cause of action is available to BWT UK. The primary judge acknowledged that “there are matters that suggest that Mr Paule may have breached his duties to BWT UK”. It was submitted that the claim would be based on the sale of BWT UK at an undervalue when Mr Paule was in a position of conflict.
The respondents submitted that the reflective loss principle provides that where loss is suffered by a company as a result of wrongdoing, in respect of which each of the company and the shareholder has a cause of action, only the company may sue to recover that loss. The respondents submitted that it was not sufficient to merely point to a claim that is not untenable, groundless or unarguable. Because the principle is grounded in the prevention of double recovery, said the respondents, it is necessary for the Court to be positively satisfied that the company has a cause of action.
The reflective loss principle provides that where loss is suffered by a company as a result of wrongdoing in respect of which each of the company and the shareholder has a cause of action, a shareholder cannot sue to recover the diminution in the value of his or her shares (or loss of benefits associated with his or her shareholding) resulting from loss suffered by the company: Central Coast Council v Norcross Pictorial Calendars Pty Ltd (2021) 391 ALR 157; [2021] NSWCA 75 at [103] (Bathurst CJ, Macfarlan and Gleeson JJA agreeing); see also Rialto Sports Pty Limited v Cancer Care Associates Pty Limited; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited [2022] NSWCA 146.
The principle has its origins in the application in Prudential Assurance Co Ltd v Newman Industries Ltd [No 2] [1982] Ch 204 of the rule in Foss v Harbottle (1843) 2 Hare 461 that only the company itself can seek relief for an injury done to the company, where the company has a cause of action. As the Court of Appeal stated in Prudential at p 224, “[the shareholder] accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting”.
In Marex Financial Ltd v Sevilleja [2021] AC 39; [2020] UKSC 31, a majority of the UK Supreme Court held that the rule concerning reflective loss “is limited to claims by shareholders that, as a result of actionable loss suffered by their company, the value of their shares, or of the distributions they receive as shareholders, has been diminished. Other claims, whether by shareholders or anyone else, should be dealt with in the ordinary way”: at [89] citing Johnson v Gore Wood & Co [2002] 2 AC 1. In Marex, the minority held that the rule should be abandoned.
I have concluded that the primary judge was correct that the principle of reflective loss has no application in this case. The evidence did not establish that the loss claimed by Dr Kambouris and DJD was reflective of a loss that could have been claimed by BWT UK. This was an orthodox application of the ratio of this Court in Central Coast Council at [119]-[120] – i.e. the reflective loss principle has no application unless the company in question has a cause of action to recover the loss from which the shareholder’s loss derives.
BWT UK was a party to the proceeding below. BWT UK did not assert any claim against Mr Paule. To the contrary, BWT UK denied the material facts now relied upon in this Court said to establish the reflective loss ground. The allegation made by the plaintiffs, at a time when BWT UK was an active and represented party, was that Mr Paule owed duties to Mr Driver, Dr Kambouris, ABBA, BWT and BWT UK and BWT UK IP. The relevant paragraphs of the FACLS read:
117 Further and in the alternative to paragraphs 114 and 115 113 and 114 above, as a result of the matters referred to at paragraph 115 and 116, Terry Paule owed duties to Mr Driver and Dr Kambouris, ABBA, BWT, BWT UK and BWT UK IP to the effect that he would:
(a) act bona fide and in the interests of the partnership or venture as a whole;
(b) not place themselves in a position where their interests conflicted with, or possibly conflicted with, their duty to the partnership or venture as a whole;
(c) not obtain a benefit, gain or profit by virtue of their position as a partner or joint venture party; and
(d) account for any benefit, gain or profit received by virtue of their position as a partner or joint venture party…..
146A By reason of the matters referred to above at paragraphs 112E, 112FA, 112I, 112K, 112L, 112N and 112V, Mr Paule has breached the duties pleaded at paragraph 117(a)-(d) above by:
(a) not acting in the interests of the partnership or venture as a whole;
(b) placing himself in a position where his interests in Philo Holding Company Limited (and its related entities) and in MyCo conflicted with his duty to the partnership or joint venture as a whole;
(c) obtaining unauthorised benefits for Philo Holding Company Limited (and its related entities) and My Co and, indirectly, himself by virtue of his position as a partner or a joint venture party; and
(d) not accounting to his partners or joint venture parties for the benefits referred to in the previous paragraph.
A commercial list response was filed by BWT UK, amongst other entities. All of the defendants, including BWT UK, denied the allegations made in paragraphs 117 and 146A. This defence has never been withdrawn by BWT UK. On the face of the pleadings, BWT UK has expressly disclaimed any duty owed to it. The Corporations Act does not contain provisions which effect a stay of proceedings against foreign corporations once they enter external administration. The fact that BWT UK was a party to the proceeding below and denied the claim, poses a formidable hurdle to establishing any realistic prospect of the same claim now being made by BWT UK. Contrary to the appellants’ submissions, Mr Paule is not exposed to any real risk that BWT UK may now bring separate proceedings to advance claims for the same loss as that claimed by Dr Kambouris and DJD.
I accept that for the reflective loss principle to apply the appellants do not have to prove that they would be liable if sued by BWT UK. They do, however, need to identify a cause of action. This they failed to do. The primary judge correctly found as much:
[154] It is unclear that BWT UK itself has any claim against Mr Paule arising out of the Amended Loan Agreement or the sale of its business to MyCo. As I have explained, there are matters that suggest that Mr Paule may have breached his duties to BWT UK. However, no case was advanced that he had, and any such case would depend on the precise circumstances in which those transactions occurred. In this context, it is relevant to observe that an independent valuation of BWT UK’s business was obtained, and the defendants do not suggest that BWT UK and Mr Paule were not entitled to rely on that valuation. BWT UK is now in external administration, and it is a party to these proceedings. However, there has been no suggestion that those now in control of the company think that it has any claim against Mr Paule.
[155] In those circumstances, it seems to me that the principle relating to reflective loss has no application in this case, since the evidence does not establish that the loss, or indeed any profit, claimed by Dr Kambouris and DJD could have been claimed by BWT UK.
The independent valuation of BWT UK referred to at J [154] is a “Valuation Report” of BWT Group (including BWT UK) as at 30 November 2023 by Exit Value Advisers. Accepting, as the primary judge did, that “Mr Paule may have breached his duties to BWT UK” does not assist the appellants in asserting that BWT UK had a cause of action against Mr Paule for the same loss as that claimed by Dr Kambouris and DJD. The closest the appellant came to identifying a possible cause of action was simply to point to the sale of BWT UK’s business to MyCo. I do not accept that the appellant thereby identified a possible cause of action available to BWT UK against Mr Paule for the same loss as that claimed by Dr Kambouris and DJD. His Honour did not find, and was not asked to find, that the sale of BWT UK’s undertaking to MyCo the shares in BWT UK involved a breach of fiduciary duty. His Honour did find, applying Maguire v Makaronis that whether, absent the breach of fiduciary duty, Dr Kambouris and DJD would have lost control of BWT UK and the circumstances in which they would have done so and the consequences if they had were matters for speculation. This does not mean that a possible cause of action available to BWT UK against Mr Paule for the same loss as that claimed by Dr Kambouris and DJD was identified.
In any event, whether BWT UK had a cause of action arising from the sale of BWT UK’s undertaking to MyCo would depend on the precise circumstances in which that sale took place. Mr Paule, the person in the best position to know the details of those circumstances, led no evidence about them from which an inference might be drawn that BWT UK had a cause of action arising from the sale of BWT UK’s undertaking to MyCo. Finally, as the primary judge pointed out, there is no suggestion in the evidence that BWT UK and Mr Paule were not entitled to rely on Exit Value Advisers’ valuation.
I agree with the primary judge that the evidence does not establish that the loss, or indeed any profit, claimed by Dr Kambouris and DJD could have been claimed by BWT UK.
Ground 5 should be rejected.
As I have rejected each of the grounds of appeal, contention 1 does not arise. It is undesirable to deal with the difficult legal issues raised by contention 1 in circumstances where it is unnecessary to do so.
Contention 2 raises potentially difficult issues about the correct interpretation of ss 12CA and 12CB of the Australian Securities and Investments Commission Act 2001 (Cth). Resolution of the issues raised by contention 2 should await a case where it is necessary to do so.
For the foregoing reasons I propose the following orders:
Appeal dismissed.
Appellants to pay the respondents’ costs.
ADAMSON JA: I agree with Payne JA.
**********
Botanical Water Technologies IP Ltd
Driver [2025] NSWCA 162
(2021) 391 ALR 157
(2018) 265 CLR 1
(1999) 46 NSWLR 538
(2009) 262 ALR 654
(1997) 188 CLR 449
(2022) 109 NSWLR 468
(2001) 207 CLR 165
(1985) 157 CLR 1
(1998) 45 NSWLR 262
(1999) 48 NSWLR 1
(1937) 58 CLR 112
Appeal dismissed. The appellants were ordered to pay the respondents’ costs: [104].
The respondents supported the findings of the primary judge that a fiduciary duty was owed by Mr Paule to Dr Kambouris and DJD in relation to the issuance of shares, and that it was consistent with Brunninghausen. They emphasised the unchallenged finding (at [180]) that Mr Paule “made a deliberate decision to mislead” Dr Kambouris and Mr Driver and hid from them the fact that they were shareholders of BWT UK who could have procured their own appointment as directors of BWT UK.
In reply to the appellants’ submissions, the respondents said:
Irrespective of whether the director may have a feeling of animus towards the shareholder, shareholders are always entitled to expect that the power to issue shares will not be exercised by directors in a manner which prefers the interests of those directors over those of the balance of shareholders. Indeed, fiduciary obligations are more important, not less so, in such a situation.
The fact that Mr Driver was educated and able to engage lawyers is irrelevant. Further, the enquiries of Mr Driver, and his lawyers, seeking confirmation as to his directorship and DJD’s shareholding in BWT UK were repeatedly met by silence, or evasive or non-responsive answers from Mr Paule and his representatives.
The fact that a majority of shareholders might have, but did not, seek to remove the extant directors, or to appoint further directors is not to the point. The power to issue shares remained vested in the board, and Mr Paule took no steps to cause Dr Kambouris or Mr Driver to be appointed as directors. Dr Kambouris and Mr Driver were only provided with the register of shares after Dr Kambouris had indicated to Mr Paule that he and Mr Driver would not insist upon being directors of BWT UK on condition that Dr Kambouris be provided with USD1m from the sale of some of his shares, which never occurred. The respondents submitted that “the implicit suggestion that DJD was not relevantly vulnerable, because it could have exercised its rights as shareholder in BWT UK to seek the Paules’ replacement as directors is unreal”.
Mr Driver’s successful efforts to raise capital in DJD were of no relevance.
The respondents submitted that the suggestion that any different evidence might have been led to test an alleged fiduciary duty to DJD ought to be rejected in circumstances where there was a pleaded allegation that a fiduciary duty was owed to Mr Driver, the sole director of DJD, who was cross-examined as to vulnerability, trust and confidence and dependency.
I find that the allegation that Mr Paule breached a fiduciary duty to DJD was raised at trial, both in opening and closing address, without objection by the appellants. The material facts underlying the conclusion that Mr Paule owed DJD a fiduciary duty were squarely pleaded, including the fact that DJD had transferred its shares in BWT to BWT UK in exchange for shares in BWT UK; that Mr Paule was a director of BWT UK; and that Mr Driver was not appointed a director of BWT UK despite repeated enquiries.
The primary judge indicated that he proposed to determine the claims based on the submissions as put, rather than strictly by reference to the FACLS, unless prejudice could be demonstrated by Mr Paule. Mr Paule did not object to this course or seek to raise with the primary judge the prejudice which he now asserts he suffered. The course adopted by the appellants here is to be deprecated, especially as the trial was heard in the Commercial List, where speedy resolution of the real commercial issues in dispute is a key feature of the Court’s work.
The argument now advanced by Mr Paule highlights the absence of any relevant unfairness. The claim was that a fiduciary duty was owed by Mr Paule to DJD in its capacity as a shareholder of BWT UK. Mr Paule accepts that the identical allegation was open (and was defended) with respect to Dr Kambouris. The fiduciary duty found here did not distinguish between Dr Kambouris and DJD, but instead treated them each as shareholders entitled to expect a standard of conduct from Mr Paule in relation to the second restructure and associated capital raising.
I reject the appellants’ submission that other or different evidence might have been sought or led to test the fiduciary duty found to be owed to DJD. There was a pleaded allegation that a fiduciary duty was owed to DJD’s sole director. Counsel for Mr Paule did cross-examine Mr Driver as to the vulnerability, trust, confidence and dependency of DJD and made submissions going directly to those matters as negating the existence of any fiduciary duty. As I have earlier found, the appellants’ submissions to the primary judge were replete with references to why no fiduciary duty was owed to the shareholders of BWT UK, relevantly Dr Kambouris and DJD.
I would reject Ground 2.