Catalano v Managing Australia Destinations Pty Ltd

Catalano v Managing Australia Destinations Pty Ltd - [2014] FCAFC 55 - FCAFC 2014 case summary — Zoe

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Introduction 1 Fine Food Solutionz Pty Ltd ("Fine Food Solutionz") was originally owned and controlled by Messrs Hepner and Kurth, who set up the company's business of manufacturing and selling frozen finger food products. In 2010, the company needed an injection of funds and advertised for investors. Nathan Catalano responded and in November 2010, heads of agreement were entered into and a trust entity associated with Mr Catalano ("Equicap") took up a 50% shareholding. Thereafter the two directors were Mr Kurth and Mr Catalano. The shareholders were Mr Kurth (through a company associated with him) with 200 shares, Mr Hepner with 300 shares, and Equicap with 500 shares. Mr Catalano's father, Samuel Catalano, also became involved in the business affairs of the company. 2 Not long into this new business association, rifts appeared between the Catalano camp and the Kurth/Hepner camp with respect to the direction of Fine Food Solutionz. The rifts culminated in the Catalano camp bringing oppression proceedings against the Kurth/Hepner camp in circumstances where the two camps were plainly deadlocked regarding the management of Fine Food Solutionz, and it was clear that their business relationship had irretrievably broken down. 3 It was inevitable that the business relationship had to be dissolved. But rather than focusing on how that was to be achieved, the respective camps focussed their attention on who was at fault and engaged in lengthy and no doubt costly proceedings, where the Catalano camp made claims of oppression, breaches of directors' duties and claims of misleading or deceptive conduct against the Kurth/Hepner camp and the Kurth/Hepner camp made cross-claims of oppression, misleading and deceptive conduct and breaches of directors' duties, and additionally sought damages, compensation and restraints against both Nathan and Samuel Catalano. 4 The primary judge dismissed the claims made by the Catalano camp but found for the Kurth/Hepner camp on their cross-claims. Orders were made: (1) for Messrs Kurth and Hepner to buy out the shares of the Catalano camp for the total amount of $500 (based upon the unchallenged valuation evidence furnished by the Catalano camp); (2) restraining Nathan and Samuel Catalano for a period of one year from interfering in the business of Fine Food Solutionz by disparaging the business of Fine Food Solutionz, competing with Fine Food Solutionz and utilising any intellectual property or confidential information belonging to Fine Food Solutionz; and (3) for the entry of judgment for Fine Food Solutionz against Nathan Catalano personally and as trustee of Equicap, and Samuel Catalano for the sum of $130,000 and interest of $8,684.78. That judgment was entered on claims that the Catalano camp had wrongfully diverted business opportunities from Fine Food Solutionz to Innova Foods Pty Ltd ("Innova Foods"), a company set up by Samuel and Nathan Catalano ("the wrongful diversion of business opportunities to Innova Foods claim"), and had wrongfully refused to permit Fine Food Solutionz to contract the manufacturing of certain of its products to a company called Rethink Group Pty Ltd ("Rethink"), thereby causing loss and damage to Fine Food Solutionz ("the supplier wrongdoing claim"). 5 The Catalano camp has appealed against those orders. The Kurth/Hepner camp cross-appealed, claiming in effect that the terms of the restraining order should have been broader and that the quantum of loss and damage awarded should have been greater. For the reasons that follow, we have concluded that the primary judge was correct to find that the Catalano camp engaged in oppressive conduct by diverting business opportunities to Innova Foods, but that the primary judge wrongly concluded that the Kurth/Hepner camp had not also engaged in oppressive conduct. We consider, with respect, that the primary judge applied the wrong test in reaching the conclusion that Kurth/Hepner camp did not engage in oppressive conduct when it used a company associated with Mr Hepner (called the Gourmet Dim Sim Company Pty Ltd ("Gourmet Dim Sim")) in which the Catalano camp had no interest, to supply product directly to a customer of Fine Food Solutionz. In our opinion, that conduct should also have been characterised as oppressive conduct within s 232 of the Corporations Act 2001 (Cth) ("the Act"). 6 In view of our conclusion that both camps have engaged in oppressive conduct and because the business relationship has irretrievably broken down, there is, in our opinion, a compelling case for the making of an order for the winding up of the company under s 233(1)(a) of the Act: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 ("Campbell") at 360 [177] per Gummow, Hayne, Heydon and Kiefel JJ. We have also concluded that there was no foundation in law or in fact for the restraining order or for the award of damages. As argument during the hearing of the appeal put beyond doubt that there was no basis for the injunction, we discharged the restraining order at the conclusion of the hearing of the appeal and stated that we would provide our reasons in the judgment delivered on appeal. 7 We turn now to give our reasons.

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The Innova Foods oppression claim 10 The primary judge found that Innova Foods was set up by Nathan and Samuel Catalano as the vehicle by which business opportunities of Fine Food Solutionz could be, and were in fact, diverted, contrary to the interests of Fine Food Solutionz and the Kurth/Hepner camp. The Catalano camp challenged that finding, contending that the evidence relied on by the primary judge, taken at its highest, established that Samuel Catalano operated a business selling products to clients of Fine Food Solutionz that Fine Food Solutionz did not manufacture, in circumstances where the manufacture of those types of products was unprofitable to Fine Food Solutionz. It was argued that in the absence of a finding that the product lines were a Fine Food Solutionz "business opportunity" or that Fine Food Solutionz could have profitably exploited the products manufactured and sold by Innova Foods, the primary judge should have rejected the establishment of Innova Foods, and of the Catalano camp's involvement with it, as a basis for finding oppression. They argued further that in circumstances where there was no finding by the primary judge that Nathan Catalano was an officer of Innova Foods or that Samuel Catalano was an officer of either Innova Foods or Fine Food Solutionz and it was found that Samuel Catalano was a manager, but not a director, of Fine Food Solutionz, any conduct by Samuel Catalano was insufficient to found a ground of oppression. 11 We do not consider that error has been demonstrated in the primary judge's conclusion that the Catalanos engaged in oppressive conduct by diverting business opportunities of Fine Food Solutionz to Innova Foods. 12 First, there is no substance in the claim that any conduct by Samuel Catalano was insufficient to found a ground of oppression. Although it appears that Samuel Catalano had not been appointed as a director of Fine Food Solutionz, the primary judge was satisfied that Samuel Catalano was involved in the decision-making processes of Fine Food Solutionz. The primary judge found as a fact at [169] that Samuel Catalano's involvement in the company "intruded into the day-to-day management of Fine Food Solutionz … on an ongoing basis" and at [174] rejected the claim that his involvement in the business affairs was confined to the provision of accounting services and providing assistance to his son, stating that Samuel Catalano's "failure to more frankly acknowledge his involvement in the decision-making of Fine Food Solutionz provide[d] reason to more broadly question the reliability of some of his evidence". That conclusion was open on the evidence considered by the primary judge and, in our view, provided a sufficient basis for the application of s 232 of the Act based on Samuel Catalano's conduct of the affairs of Fine Food Solutionz. 13 Secondly, the primary judge did not have to find that Nathan and Samuel Catalano were directors of Innova Foods in order to find that they engaged in oppressive conduct in relation to the affairs of Fine Food Solutionz. As the primary judge found, the oppressive conduct was their involvement in setting up Innova Foods as a vehicle to which business opportunities of Fine Food Solutionz could be, and were in fact diverted, contrary to the interests of Fine Food Solutionz and the Kurth/Hepner camp. 14 Thirdly, the complaint about the sufficiency of the primary judge's reasons for his conclusion must fail in the circumstance that the primary judge did not find Nathan and Samuel Catalano to be witnesses of truth and made adverse credit findings against them. As the primary judge stated at [55], in large part the ultimate conclusions that he reached were "very much driven by the conclusion that the evidence of Messrs Hepner and Kurth should generally be accepted and the separate conclusion that the evidence of Messrs Samuel and Nathan Catalano is open to serious reservation". Again at [57] the primary judge expressed his view that the evidence of Nathan Catalano "has to be considered against the background of an adverse view as to the reliability of that evidence" and at [174] the observation is made about the unreliability of Samuel Catalano's evidence. These adverse credit findings were not the subject of challenge on appeal. 15 As those adverse credit findings have not been impugned, the attack on his Honour's reasons cannot be sustained. As is made clear, the primary judge's conclusion that Innova Foods was set up and operated by the Catalanos to exploit a business opportunity to the exclusion of Fine Food Solutionz was based substantially on issues of credit. The reasons of the primary judge in [176] to [191] bear out that his Honour was not persuaded by the evidence of Nathan and Samuel Catalano that Innova Foods was not set up by them to compete with Fine Food Solutionz. In light of the primary judge's view about the unreliability of the evidence of Nathan and Samuel Catalano, the reasons given by the primary judge did not have to depend on positive findings that the product lines were a Fine Food Solutionz "business opportunity" or that Fine Food Solutionz could have profitably exploited the products that Innova Foods supplied. Once the primary judge had rejected Nathan and Samuel Catalano as witnesses of truth, it was open to the primary judge to disbelieve Nathan Catalano's assertion that Innova Foods was not set up to exploit a business opportunity available to Fine Food Solutionz. It was also clearly open to the primary judge to conclude on the evidence that both Nathan and Samuel Catalano were behind the establishment of Innova Foods. 16 Accordingly, we find no error in the primary judge's conclusion that the Catalano camp engaged in oppressive conduct by their involvement in setting up Innova Foods.

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The Gourmet Dim Sim oppression claim 17 The food products sold by Fine Food Solutionz were manufactured by third parties using specialised equipment owned by Fine Food Solutionz. When one of those manufacturers closed down, the Kurth/Hepner camp set up Gourmet Dim Sim to continue the manufacturing, using Fine Food Solutionz' equipment. Gourmet Dim Sim then produced and supplied product directly to a customer of Fine Food Solutionz. 18 The primary judge accepted the explanation of Messrs Hepner and Kurth that they set up Gourmet Dim Sim to ensure supply of product to customers of Fine Food Solutionz, not to divert business to that company and that against the background of the strained business relationship of the parties, there had not been a diversion of money or assets such as to amount to oppressive conduct. 19 We consider that the primary judge in this regard fell into error in his reasoning process by focussing on the motives of Messrs Hepner and Kurth in assessing whether there was commercial unfairness. As the High Court made clear in Campbell 238 CLR at 360 [176], the test of unfairness is objective, and "it is [not] to be supposed that there cannot be oppression on the part of one who thinks that he or she is acting rightly" and it is therefore not to the point to examine the motives for what was done. There is no doubt in our opinion that the Kurth/Hepner camp engaged in oppressive conduct. Viewed objectively, the conduct of the Kurth/Hepner camp in taking steps to set up a company in which they held all the interests and in which the Catalano camp had no interest, for the purpose of manufacturing products, using Fine Food Solutionz' equipment, for direct supply to customers of Fine Food Solutionz, was conduct that was commercially unfair to Fine Food Solutionz and prejudicial to the interests of the Catalano camp's shareholding: Scottish Co-Operative Wholesale Society v Meyer [1959] AC 324 at 341-343 per Viscount Simonds, 361 per Lord Keith of Avonholm, 366-367 per Lord Denning; Re Bright Pine Mills Pty Ltd [1969] VR 1002; Fitzpatrick v Cheal (2012) 264 FLR 313 at 365 [175] per Ward J.

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The damages Awarded by the primary judge 21 The Kurth/Hepner camp filed a further amended cross-claim on the first day of the trial. This made two relevant claims for damages against Nathan and Samuel Catalano based on their conduct, comprising the claim of wrongful diversion of business opportunities to Innova Foods discussed above and the supplier wrongdoing claim. We will explain the pleaded basis of each of those claims separately below. 22 The primary judge arrived at awards of damages for each of those claims of $30,000 and $100,000 respectively. He rejected, correctly in our view, the exiguous material on which the Kurth/Hepner camp relied as speculative. However, his Honour then came to the assessment of those two amounts on the following basis: 277 The choice foist upon the court by the Cross-Claimants is either to award no amount for loss or damage (notwithstanding a conclusion that some loss or damage has been suffered) or to award an amount which falls safely below what could reasonably be regarded as a minimum amount representing loss or damage. 278 Albeit involving an element of considerable approximation, it is concluded that loss or damage has been suffered in respect to both of the claims made in the Amended Notice of Cross-Claim. It is concluded that loss or damage should be assessed in respect to: (a) the diversion of business to Innova Foods - in the sum of $30,000; and (b) "supplier wrongdoing" - in the sum of $100,000. It is considered that the loss and damage suffered is at least that amount. Any ability to award any greater sum which may better approximate the loss and damage in fact suffered nevertheless must be visited upon the Cross-Claimants and their inability to adduce reliable evidence. 23 Both sides challenged his Honour's findings on the common basis, which we consider correct, that his Honour gave no reasoning process in arriving at either of the sums assessed as Fine Food Solutionz' damages. 24 The Kurth/Hepner camp argued that his Honour erred in his assessments and should have awarded $69,773.40 and $296,694 for each claim respectively based on their supplementary written submissions to him. They made those submissions after they appreciated that their attempts to prove any loss suffered by Fine Food Solutionz were mere speculative assertions of no probative value, as his Honour correctly found. 25 The Kurth/Hepner camp did not challenge that finding. However, they repeated on the appeal their supplementary submissions made at trial for the sums set out above. We will refer to those submissions in dealing with the claim based on the diversion of business opportunities to Innova Foods shortly. However, for reasons given below it is not necessary to discuss the Kurth/Hepner camp's argument for a monetary award in respect of the supplier wrongdoing claim. That is because there was no evidence to justify any award being made for that claim. In light of our conclusions on the damages claims, it is not necessary to consider whether any order should have been made allowing the Kurth/Hepner camp to proceed in the name of Fine Food Solutionz pursuant to s 236 of the Act. His Honour made no such order. 26 His Honour found that the evidence and methodology of each of Mr Kurth and Mr Hepner as the basis for calculating damages was not reliable. He found that Mr Kurth's first calculation arrived at a total of $537,526.30 that was, as Mr Kurth admitted, speculative and a guess. That finding was correct. Next, the primary judge found that Mr Hepner's belief that Fine Food Solutionz had suffered a total loss of at least $250,000 was based on unestablished assumptions. His Honour also rejected Mr Hepner's beliefs that Innova Foods had sold $120,000 worth of products that Fine Food Solutionz could have sold at a margin of 40%. The primary judge also rejected Mr Hepner's belief that Fine Food Solutionz would have saved in the order of $200,000 costs if the dumpling and gyoza manufacturing had been contracted to Rethink from about September 2012. 27 The primary judge noted that the difficulties with that evidence that had emerged in earlier submissions resulted in his granting the parties leave to file further submissions. The Kurth/Hepner camp used that opportunity to assert that an Innova Food's profit and loss statement for the eight months ended 30 June 2012 showed a gross profit of $8,203.40. Their supplementary written submissions then extrapolated from that figure a gross profit of $61,570 for the ensuring ten months to 30 April 2013 to arrive at the total claim for the diversion of business opportunities of $69,773.40. 28 The primary judge found that this methodology ignored the lack of synergy between the businesses of Innova Foods, whose products were mainly not frozen, and Fine Food Solutionz, whose products were mainly frozen. He considered that at least the costs of distribution of Innova Foods' products had to be (but had not been) deducted from the gross profit before it could be used in a calculation of damages. That is because Fine Food Solutionz could not transport non-frozen food products in trucks carrying the frozen products that comprised its predominant trade and needed to arrange for separate means of distributing the "non-core" products sold by Innova Foods.

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The wrongful diversion of business opportunities to Innova Foods claim 29 The Kurth/Hepner camp pleaded in their cross-claim that the conduct of Nathan and Samuel Catalano in relation to Innova Foods referred to above was not only oppressive, but constituted contraventions of ss 180(1), 181(1), 182(1) and 183(1) of the Act and a breach of their fiduciary duties owed to Fine Food Solutionz. The cross-claim pleaded that that conduct caused loss and damage to Fine Food Solutionz. It particularised that loss and damage as the profits that that company would have earned had it, instead of Innova Foods, supplied the products to the latter's customers. 30 In their submissions in the appeal the Kurth/Hepner camp repeated the same methodology as in their supplementary written submissions at trial to support the claim for $69,773.40. In our opinion, that methodology was rightly rejected by the primary judge. Innova Food's gross profit of $8,203.40 for the eight months to 30 June 2012 was arrived at before its net profit for that period of $1,353.27. The net profit took account of accounting, bank charges, commissions, marketing costs, rent and other minor expenses. 31 It was for the Kurth/Hepner camp to prove the amount of loss or damage that they claimed Fine Food Solutzion suffered. In our opinion, the primary judge erred in awarding any damages on the cross-claim. That was because the Kurth/Hepner camp failed to adduce precise or reasonably precise evidence of loss when they were able to do so: Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 196 ALR 257; [2003] HCA 10 at [37]-[38] per Hayne J with whom Gleeson CJ, McHugh and Kirby JJ agreed. In Ted Brown Quarries Pty Ltd v General Quarries (Gilston Pty Ltd) (1977) 16 ALR 23 at 37 Gibbs J, with whom Aickin J agreed, said that where there was no evidence, or no evidence that the trial judge was bound to accept, as to the value of an asset, there would be no basis on which the judge was entitled to make a jury assessment as to the value. He said: The case was not one in which the matter had necessarily to be left to the opinion and judgment of the court, acting at large, as is the case, for example, in the assessment of damages for personal injuries. It was possible, in the circumstances, to prove, with some degree of certainty and precision, the value of the property purchased, and it was not unreasonable to expect General Quarries to call acceptable evidence as to the value of the "resource". General Quarries failed to discharge the burden of proof that rested upon it. (emphasis added) 32 It was wrong to postulate that the loss or damage that the Kurth/Hepner camp claimed that Fine Food Solutionz had suffered, equated to the gross profit of Innova Foods. The calculation of the profit that Fine Food Solutionz might have made, could have been established by expert accounting evidence or other means. However, the crude selection of Innova Foods' gross profit for a period as a multiplicand for use in calculating the loss suffered by Fine Food Solutionz was an unscientific and inappropriate means of proving the latter's loss or damage. 33 There was no evidence that his Honour, or the Full Court, was bound to accept on the question of damages. Indeed, the method of calculation in the Kurth/Hepner camp's supplementary written submissions only appeared for the first time after the close of evidence. The primary judge's reference to there being a choice foist on him was wrong. It was not a choice between awarding nothing or an amount falling safely below a notional minimum of loss or damage. There was no basis for the latter element to be considered. 34 The Kurth/Hepner camp simply failed to prove their case for damages in respect of the diversion of business opportunities to Innova Foods and hence, none were capable of being assessed in the circumstances.

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The supplier wrongdoing claim 35 Relevantly, the Kurth/Hepner camp pleaded, in their cross-claim, the supplier wrongdoing claim as follows. They alleged that since 12 September 2012 Nathan and Samuel Catalano had required Fine Food Solutionz to contract with Innova Foods for dumpling and gyoza manufacturing and had refused to permit the company to contract with Rethink for that work. The cross-claim contended that this conduct was, first, oppressive, secondly, had caused loss to Fine Food Solutionz, thirdly, constituted a contravention of each of ss 180(1), 181(1), 182(2) and 183(1) of the Corporations Act and, fourthly, was in breach of Nathan and Samuel Catalano's fiduciary duties. 36 The central argument of the Kurth/Hepner camp was that Rethink could have performed the dumpling and gyoza manufacturing at the cost of $0.15 per unit while the then current supplier, Barramundi Gardens, was performing that work at the cost of $0.22 per unit. However, there was a factual dispute at trial as to whether Rethink was in a position to manufacture the goods at all. That was because, as at September 2012, one of Fine Food Solutionz' largest customers for them, Woolworths, had not been satisfied that Rethink was an acceptable manufacturer for that purpose. There was no evidence that at any time before the trial that position changed. 37 The evidence showed that this work had been contracted to an independent supplier, Barramundi Gardens, located in Port Douglas, Queensland. His Honour found that Mr Hepner had located and used Barramundi Gardens as a consistently good and reliable manufacturer before any involvement of the Catalano camp with the business of Fine Food Solutionz. The primary judge did not accept that Innova Foods had undertaken any dumpling or gyoza manufacturing. Apart from that, his Honour did not discuss, let alone make any findings about, any facts necessary to decide the supplier wrongdoing claim. 38 In those circumstances, there was no evidentiary or factual basis to conclude that the dumpling or gyoza manufacturing could have been performed for Fine Food Solutionz by Rethink at all, let alone at $0.15 per unit. Such a finding would have been an essential, but not the only, finding necessary to support a conclusion that Nathan or Samuel Catalano had any liability for oppression, breaches of their duties under the Act or of their fiduciary duties. The primary judge erred because he gave no reasons for finding that they were liable for any damages on the supplier wrongdoing claim, or for quantifying those damages in the sum of $100,000. 39 In our opinion, there was no justification for the finding of liability against Nathan or Samuel Catalano on the supplier wrongdoing claim. The award of $100,000 must be set aside.

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The injunctions ordered by the primary judge 40 The primary judge upheld the Kurth/Hepner camp's claim for injunctive relief against the Catalano camp. He restrained them for one year from, among other things, competing with Fine Food Solutionz or using any of its intellectual property or confidential information. 41 The injunctions were in the nature of restraints of trade in circumstances where, first, there was no contractual foundation for any restraint, secondly, his Honour had made orders that had the effect of causing the Catalano camp to cease having any interest or role in Fine Food Solutionz and, thirdly, there was no legal or equitable basis for restraining the Catalano camp or any of them from pursuing any business in competition to the company in which they no longer had any interest or acting in the manner that the injunctions prohibited. 42 The primary judge considered that there was a sufficient threat that the Catalano camp would compete with or seek to divert business from Fine Food Solutionz and that "unless restrained … [one or both of Nathan or Samuel Catalano] will undermine the business sought to be developed by Fine Food Solutionz". However, his Honour gave no reasons or basis for finding that this threat could be the subject of any injunctive relief. The Catalano camp, once they no longer held any interest in Fine Food Solutionz, had every right to compete with and divert business from that company. They had not contracted with it or the Kurth/Hepner camp that they would give up their right to compete with Fine Food Solutionz once they no longer owed any legal or equitable obligations to that company. 43 Ordinarily, any contractual restraint on competition or of trade is contrary to public policy unless it can be justified as both being reasonable in the interests of the parties and not injurious to the public interest: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565 per Lord Macnaghten; Amoco Australia Pty Limited v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 307 per Walsh J whose reasoning on the issue of public policy was approved by Gleeson CJ, Gummow, Kirby and Hayne JJ in Peters (WA) Limited v Petersville Limited (2001) 205 CLR 126 at 139 [27]. 44 Here, the parties did not provide in their heads of agreement for any restraint on either competing with the others or Fine Food Solutionz once their association had ceased. The orders made by the primary judge for the Catalano camp to cease involvement with and transfer their interests in Fine Food Solutionz brought any effect of oppression by them to an end. There was no evidence that the Catalano camp had disparaged Fine Foods Solutionz, or was likely to use its intellectual property or production techniques in recipes, manufacturing techniques or confidential information. 45 His Honour made no finding about what recipes, or elements of manufacturing or production techniques of Fine Food Solutionz had any characteristic that could be used to found the injunctions that he granted in respect of those subjects. The Kurth/Hepner camp did not prove, and his Honour did not find, that any information was of such a nature that the Catalano camp could be restrained from using it once they had no interest or role in Fine Foods Solutionz or its business. There was no finding that the Catalano camp had threatened to disparage the business of Fine Food Solutions so as to found a right to restrain their freedom of speech. The injunctions did not identify, and his Honour made no findings about, what the intellectual property or confidential information was that the Catalano camp could not use. Those injunctions should not have been granted without, first, findings as to what was the relevant intellectual property or confidential information and why it was confidential and, secondly, identifying in the orders the precise subject matters of the restraints: O'Brien v Komesaroff (1982) 150 CLR 310 at 328 per Mason J with whom Murphy, Aickin, Wilson and Brennan JJ agreed. 46 When the Full Court enquired, during argument, of counsel for the Kurth/Hepner camp on what basis they contended that his Honour had power to grant the injunctions, they could not identify any and accepted that the injunctions were insupportable as, indeed, they were. For these reasons we decided at the conclusion of the hearing that the injunctions should be immediately discharged.

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