Coope v LCM Litigation Fund Pty Ltd

Background facts

1. There was little dispute in this case about matters of primary fact, although there was a residual controversy over the characterisation of some events and the correct inferences to be drawn from documentary material.
2. LCM, a litigation funder, was established in 1997 by Mr Coope and others. At all relevant times Mr Coope was both a director and employee of LCM.
3. The essential business of LCM was to source and obtain clients with causes of action likely to generate a significant return, to enter into funding arrangements with those clients, and to supervise the performance of tasks by legal practitioners who would be retained to conduct the cases on behalf of those clients in court. Upon success (by settlement or verdict) LCM would take a percentage of the return.
4. Following some months of negotiations (conducted by Mr Coope), LCM entered into a Deed of Agreement with Vannin Capital Limited dated 24 April 2013. The term "Vannin Joint Venture" was used by the parties and will be used in this judgment. The contractual terms of the arrangement between the parties involved some complexity.
5. Vannin Capital Limited, incorporated in Malta, was also referred to as "Vannin Malta" by the parties. Vannin Malta is a wholly owned subsidiary of Vannin Capital PCC PLC ("Vannin Capital"). Vannin Capital is a significant Jersey based litigation funder. The primary judge referred to Vannin Malta simply as "Vannin", unless it was necessary to distinguish between the two companies. It is convenient to continue with this approach to corporate identification in this judgment.
6. Under the Vannin Joint Venture, Vannin Capital and Vannin Malta each agreed not to compete with LCM for two years and LCM afforded Vannin Malta a first right of refusal to fund projects valued over $5 million for a two year period. The Vannin Joint Venture, if not renewed, would come to an end on 31 March 2015, although there would be a considerable run-off period involving completion of cases commenced under the Vannin Joint Venture.
7. LCM's business required a significant capital commitment. LCM funded litigation projects from its own cash reserves, capital raisings and the Vannin Joint Venture. In May-June 2014, LCM completed a capital raising from new investors, unrelated to the parties the subject of this litigation. By early 2015, LCM was in need of further capital as its internal cashflow forecasts predicted that LCM would run out of cash in the second quarter of 2015.
8. Mr Patrick Moloney was a non-executive director of LCM from mid-2003. Prior to December 2013, he also practised as a solicitor. On 1 December 2013, he and Mr Coope commenced as joint managing directors of LCM under identical employment contracts signed on about 11 February 2014 (the "Employment Contract").
9. Relevantly, cl 19.9(b) of the Employment Contract gave LCM the right to terminate Mr Coope's employment if he was "guilty of any serious misconduct". Clause 4.1(c) required Mr Coope to "bring to the Company's and the Board's attention any significant matters of which you become aware that would be of detriment to the Company".
10. Clause 17 provided a restraint of trade, which prohibited Mr Coope from "directly or indirectly" engaging in any of the activities identified in cl 17.2 (extracted below) during his employment or within 12 months from the Termination Date, in Australia, without the express written consent of LCM: 17.2 Activity: (a) approach, solicit, canvass, induce or encourage (or attempt to do any of the foregoing) any Restricted Person to leave the employment or agency of the Company or of an Affiliate, or otherwise engage or employ a Restricted Person; (b) solicit, canvass, approach or accept any approach, or perform any work for (or attempt to do any of the foregoing), any Client with whom you (or a Person reporting to you) have had direct dealings, or for whom you (or a Person reporting to you) performed work in connection with your employment during the 2 years immediately prior to the Termination Date; (c) interfere with or disrupt or attempt to disrupt the relationship (whether contractual or otherwise) between the Company (or an Affiliate) and any Client, Restricted Person or supplier of the Company or of an Affiliate, with whom you (or a Person reporting to you) had dealings or performed work in connection with your employment during the 2 years immediately prior to the Termination Date; or (d) be engaged in any capacity, including as a director, partner, owner, principal, agent, contractor, consultant, representative, shareholder, financier, trustee or employee by any Client or in any Competing Business or Entity.
11. Clause 19.1 provided for payment on termination, "other than where your employment is terminated for…serious misconduct". The clause provided that termination would be effected by LCM: (a) making a payment to you equivalent to your total remuneration and benefits for the unexpired Term where the unexpired Term exceeds twelve (12) months; or (b) if the unexpired period of the Term is less than twelve (12) months, by giving you twelve (12) months' written notice or making a payment in lieu of notice.
12. Upon their commencement as joint managing directors, Mr Coope and Mr Moloney each received a 20 per cent share of LCM's entitlements, via the LCM Trust, from the Vannin Joint Venture.
13. From 15 February 2014, and at all relevant times thereafter, Dr David King, as director and non-executive chairman, Mr Coope and Mr Moloney, as joint managing directors, comprised the Board of LCM.
14. The Vannin Joint Venture was due to expire on 31 March 2015. In about April 2014, Mr Coope, on behalf of LCM, entered into negotiations with Mr Daniel Craddock, the executive chairman and majority shareholder of Vannin Capital, about a number of commercial opportunities for Vannin to work with LCM in the future. However, by July 2014 it became clear that these negotiations had been unsuccessful.
15. In early 2015, Mr Coope, on behalf of LCM, recommenced negotiations with Mr Craddock about a possible merger, or other commercial arrangement between LCM and Vannin. These negotiations, and their immediate aftermath, comprise the principal events the subject of this appeal.

The primary judgment

1. LCM's allegations of serious misconduct against Mr Coope related to negotiations between Mr Coope and Mr Craddock described in the evidence as: 1. the "Vannin Proposal" or "Wind Down Proposal" which Mr Coope communicated to the LCM Board on 6 and 9 February 2015 (which I will describe in this judgment as the "Wind Down Proposal"); and 2. the "Separation Proposal" which Mr Coope made to the LCM Board on 12 February 2015 (and followed up by Mr Coope with the LCM Board on 17,19 and 24 February 2015) and which had not been determined as at the date of Mr Coope's suspension from LCM, 26 February 2015.
2. The primary judge found that there was no serious misconduct on the part of Mr Coope established in relation to the Wind Down Proposal, but that serious misconduct had been proven in relation to the Separation Proposal.

Relevant background-The LCM/Vannin negotiations in early to mid-2014

1. The primary judge made the following findings about the 2014 negotiations, which were not challenged on the appeal: 1. Mr Coope was appointed by LCM to negotiate on its behalf with Vannin. He and Mr Craddock met between May and July 2014; 2. The topics for negotiation between Vannin and LCM were: 1. a possible merger between Vannin and LCM; or 2. an LCM "wind down", where LCM would stop trading, Vannin would acquire all issued capital of LCM and, in return, LCM's shareholders would acquire shares in Vannin; 1. Mr Coope was not pursuing his personal interests independent of the interests of LCM in the 2014 negotiations. The primary judge found that during this period: the only discussions that Mr Coope had had with Mr Craddock to this point concerning his personal position were in the context of some negotiated ongoing commercial relationship between Vannin and LCM.

The Wind Down Proposal

1. The Vannin Joint Venture was to come to an end on 31 March 2015. In November 2014, Mr Coope and Mr Craddock exchanged a number of emails for the purpose of organising a meeting between themselves and Dr King in London in January 2015 to re-visit the topic of a possible commercial arrangement between Vannin and LCM after the expiry of the Vannin Joint Venture.
2. On 21 January 2015, Mr Coope, Dr King, Mr Craddock and a Vannin employee attended a lunch meeting in London. That evening Mr Coope and Mr Craddock met and had dinner alone.
3. In correspondence exchanged ahead of these meetings, Mr Craddock asked Mr Coope whether there was anything that should not be discussed at the lunch (i.e. while Dr King was in attendance). Mr Coope's response was that: "Anything related to LCM can be discussed at lunch. Anything personal is best left for dinner".
4. The primary judge found that Mr Coope and Mr Craddock did not discuss the possibility of Mr Coope becoming employed by Vannin, independent of a commercial arrangement being reached between LCM and Vannin, ahead of their meeting in London. As to the dinner meeting, the primary judge concluded that Mr Coope and Mr Craddock had discussed commercial arrangements between LCM and Vannin, and what possible benefits Mr Coope could negotiate for himself if a commercial agreement between LCM and Vannin eventuated.
5. On 23 January 2015, Dr King and Mr Coope travelled to Amsterdam together to meet a potential employee. While there they had a conversation about LCM and Vannin wherein Mr Coope told Dr King that he had discussed with Mr Craddock whether he could negotiate for himself an arrangement with Vannin if a commercial agreement between LCM and Vannin eventuated. Mr Coope told Dr King, relevantly: I had a good discussion with Craddock. It seems like he is going to be more sensible this time. I think he is going to struggle with the cornerstone investor option because of tax. In any event he will want more than fifty percent (50%). The merger isn't going to fly because he still thinks Vannin is worth far more than LCM. I think he will come back with some variation of last year's proposed transactions. We had a discussion about my personal arrangements if there is a deal. Both of us are now more flexible and pragmatic. He has told me that he will give me the same deal I have now with LCM and I have told him I can live with that. (emphasis added)

The Separation Proposal of 12 February 2015

1. It is clear on the evidence that by 9 February the relationship between Mr Coope and Mr Moloney was strained. At the 9 February meeting, Mr Coope voiced a concern that there would be problems in LCM conducting the proposed capital raising due to the conflict between himself and Mr Moloney.
2. At the conclusion of the Board meeting Dr King asked both Mr Coope and Mr Moloney to submit a proposal to the LCM Board on the terms on which each would be prepared to leave LCM.
3. The primary judge found that following this invitation to submit a separation proposal by Dr King, Mr Coope considered, for the first time, seeking employment with Vannin outside the context of a continuing commercial arrangement between Vannin and LCM.
4. Shortly after the 9 February meeting, Mr Coope spoke to Mr Craddock to discuss potential employment terms. Mr Coope needed to get LCM's approval before commencing employment with Vannin. In particular, he needed to be released from the restraint in cl 17 of the Employment Contract (see [23] above).
5. On 12 February 2015, Mr Coope sent Mr Craddock an employment proposal (the "Employment Proposal"), the relevant terms of which were that: 1. Vannin Malta would commence operations in Australia as a litigation funder in competition with LCM on 1 April 2015; 2. Mr Coope would become managing director of Vannin Malta in Australia and Asia commencing 1 April 2015 and bring his team from LCM or be entitled to recruit a new team; 3. Mr Coope would obtain a 20 per cent shareholding in Vannin Malta; and 4. Mr Coope would continue managing all existing Vannin Joint Venture projects, subject to LCM's agreement.
6. Mr Craddock subsequently (and no later than 17 February 2015) agreed, in principle, to the proposal.
7. On the same day as making the Employment Proposal, Mr Coope sent Dr King and Mr Moloney his Separation Proposal, the terms of which were, in essence that Mr Coope would: 1. be released from all obligations under the Employment Contract (and in particular the non-compete obligations) with effect from 31 March 2015 (the day before his proposed start-up date with Vannin); 2. resign as a director of LCM and related companies; 3. have an unrestricted right to use and retain possession of certain confidential information of LCM described as its "contacts register", "standard documents", "completed projects data", "all notebooks", "all Vannin JV transaction documents" and "all Fund 2 transaction documents and reports to investors"; 4. be entitled to retain "current and old laptops, all other office equipment, stationery and books"; 5. continue to manage all Vannin Joint Venture run-off projects after 31 March 2015 at no cost to LCM, with LCM retaining all "fee entitlements"; and 6. be free to employ two named prospective employees of LCM. LCM would: 1. advise all employees "that their probationary periods in their employment contracts are satisfied"; and 2. pay Mr Coope a termination payment of 12 months' salary, rather than what was "otherwise payable" under the Employment Contract.

The issues on this appeal

1. The first group of issues on this appeal relates to the finding of the primary judge that the appellant was engaged in serious misconduct in relation to the Separation Proposal: 1. Mr Coope contends that the trial judge erred in finding that a failure to disclose the Employment Proposal was a breach of cl 4.1(c) and, in the absence of informed consent, a breach of his fiduciary duties. Mr Coope also contends that even if his conduct breached cl 4.1(c) and/or his fiduciary duties, this did not constitute serious misconduct within the meaning of the Employment Contract. Accordingly, Mr Coope submits that his employment was wrongfully terminated and he is entitled to damages for breach of the Employment Contract by LCM; 2. LCM, by Notice of Contention, submits that the primary judge should also have found, in addition to a breach of cl 4.1(c) and breach of his fiduciary duties, that Mr Coope contravened ss 181 and 182 of the Corporations Act in making the Separation Proposal to LCM without also disclosing the Employment Proposal.
2. The second group of issues on this appeal relates to Mr Coope's failure to disclose the offer by Mr Craddock to him of a 20 per cent equity stake in Vannin Malta as part of the Wind Down Proposal which was otherwise conveyed to LCM in the Transaction Options document on 6 February 2015 or at the LCM Board meeting on 9 February 2015: 1. LCM, by Notice of Contention, submits that the primary judge erred in failing to find that Mr Coope engaged in serious misconduct by the failure to disclose the offer of a 20 per cent equity stake when passing on the Wind Down Proposal in the Transaction Options document on 6 February 2015 or at the LCM Board meeting on 9 February 2015. It is submitted, in the circumstances of the communication of the Wind Down Proposal which was otherwise made, that this constituted a breach of cl 4.1(c) and a breach of Mr Coope's fiduciary duties; 2. By its draft Notice of Cross-Appeal, LCM submits that if this aspect of its Notice of Contention is upheld, it should be granted leave to cross-appeal and that LCM should in those circumstances be entitled to an order for all of its costs, on a party-party basis, of the trial.
3. The third group of issues on this appeal concerns the remaining grounds in LCM's Notice of Contention, which arise on the hypothesis that Mr Coope's appeal succeeds and LCM's Notice of Contention otherwise fails and this Court is required to assess the damages payable to Mr Coope for breach of the Employment Contract by LCM. If this Court finds that Mr Coope's Employment Contract was wrongfully terminated LCM contends that: 1. any determination of damages should be limited by s 200F(2) of the Corporations Act; and 2. Mr Coope was obliged to mitigate his loss. By Notice of Motion, LCM seeks an order pursuant to s 75A of the Supreme Court Act 1970 (NSW) to lead fresh evidence relating to the mitigation issue.

The first group of issues -The Separation Proposal

1. Before turning to the arguments advanced on the appeal, it is necessary to set out in a little detail the Employment Proposal Mr Coope made to Vannin on 13 February 2015. That proposal was as follows: Coope proposal for employment by Vannin Malta ("VM") Key issues 20% shareholding in VM Salary of $450K per annum plus superannuation contributions of $30K per annum 12 month notice period from each party Free to compete in Australia if employment ceases Bring existing team with me or, if that isn't possible, a replacement team to be recruited Keep managing all existing JV projects (LCM to agree) What happens on a Vannin IPO? Issues to discuss Does VM have any other assets or liabilities What are the operating costs of VM What tax is payable by VM on its profits How will VM be funded by VC and at what costs What happens if VC doesn't provide VM with required funding Will there be any FX risks in VM and if so, how to be dealt with How will money be paid out of VM as it successfully resolves projects Internal management of VM Rights of access to company records Audit Drag along and tag along rights Restrictions on issues of shares or other securities that convert into shares Pre-emptive rights on transfers Restrictions on its activities to litigation funding in Australia and Asia Exit rights if Craddock sells out of VC or is no longer the majority shareholder What happens to shareholding if employment ends Will VM meet all legal costs of documenting arrangements My shareholding in ATE insurance broking business in Australia Detail Commencement date of 1 April 2015 (nothing to be read into this!) Managing Director of Australia and Asia VM undertakes all Australian and Asian projects of Vannin Capital ("VC") and VC agrees not to compete in those jurisdictions with VM 6 weeks paid holidays a year (current LCM arrangement) Same travel policy as for LCM Pay for mobile phone (LCM does) (emphasis added)

Breach of clause 4.1(c) of the Employment Contract

1. There was no dispute on the appeal about the correct legal principles which apply in addressing the question of construction of the Employment Contract. The obligation in cl 4.1(c) of the Employment Contract must be construed by reference to the objects of the Employment Contract and in a businesslike way. A construction must be given to the clause so as to avoid commercial nonsense.
2. Clause 4.1(c) of the Employment Contract provided: During your employment, you must: (c) bring to the Company's and the Board's attention any significant matters of which you become aware that would be of detriment to the Company
3. It was submitted by the appellant that the primary judge erred in concluding that the obligation of disclosure in cl 4.1(c) of the Employment Contract was enlivened in the present circumstances. It was submitted that, for five reasons, the Employment Proposal did not need to be disclosed when making the Separation Proposal to the Board of LCM: 1. First, the primary judge erred in finding that the Employment Proposal was a significant matter that "would be of detriment to the company" within the meaning of cl 4.1(c). Clause 4.1(c), it was submitted, did not apply because the terms "would be of detriment" required that a certain or definite detriment must be established, and there was no evidence of a certain or definite detriment before the primary judge. It was submitted that Mr Coope's intention to compete with LCM was or should have been obvious from the terms of the Separation Proposal and that no additional detriment, beyond the fact of that competition, had been established; 2. Second, the primary judge erred in finding that cl 4.1(c) was enlivened in circumstances where Dr King had asked Mr Coope to consider the terms on which he would leave; the necessary implication being, it was submitted, that Mr Coope was free to act solely in his own interests in putting forward the Separation Proposal; 3. Third, it was submitted that the primary judge erred in that there could be no detriment to LCM as the Separation Proposal was incomplete and non-binding; it could only go ahead if LCM agreed; 4. Fourth, it was submitted that there could be no detriment occasioned to LCM (and therefore no breach) because LCM had "implicitly rejected" the Separation Proposal; 5. Fifth, it was submitted that the clause was not enlivened "in circumstances where the Board is already aware of the matter".

Conclusion re breach of Employment Contract

1. For these reasons, I consider the primary judge was correct in finding that the obligation in cl 4.1(c) was breached by Mr Coope's failure to disclose the Employment Proposal to the Board of LCM at the time of making the Separation Proposal. Further, the obligation was ongoing and whilst employed, he remained obliged to disclose the Employment Proposal.
2. Ground 1 of the Notice of Appeal should be dismissed.

The primary judge's finding of a breach of fiduciary duty

1. There was only a limited dispute on the appeal about whether the primary judge had correctly identified the correct legal principles in addressing the question of a breach of fiduciary duty.
2. The primary judge found that: …there was also a conflict between Mr Coope's interest in negotiating a platform from which he could compete with LCM on the one hand, and his continuing duties, as joint managing director of LCM, to promote LCM's interests on the other. As a director of LCM, Mr Coope was in a fiduciary relationship with LCM and subject to a duty not to place himself in a position where his personal interest and duty to LCM conflicted. The obligations imposed on a fiduciary are proscriptive (for example Breen v Williams [1996] HCA 57; 186 CLR 71 per Gaudron and McHugh JJ at 113), and do not include a positive obligation of disclosure. However, disclosure may be the only way to avoid breach, by obtaining the informed consent of the party (here LCM) to whom the duty is owed (for example Black Magic Design Pty Ltd v Overlise [2011] FCAFC 24 at [105] - [108] per Besanko J)… Here, my opinion is that in order to eschew the conflict of interest in which Mr Coope found himself, it was necessary that he obtain LCM's consent not only to the terms of his separation proposal, but also to the undisclosed circumstances that, the very next day he proposed to leave LCM, he proposed to head up its current major funder and joint-venture as a competitor. He can only do that by disclosing to the LCM board that, simultaneously with making the separation proposal to LCM, he had made the employment proposal to Mr Craddock.
3. A fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is a conflict, or a real or substantial possibility of a conflict, between the personal interest of the fiduciary and those to whom the duty is owed: Pilmer v Duke Group (In Liquidation) [2001] HCA 31; 207 CLR 165 at [78] per McHugh, Gummow, Hayne and Callinan JJ. A conflict arises if there is a real and sensible possibility that the personal interests of the fiduciary divide the loyalty of the fiduciary with the result that he or she could not properly discharge their duties to the beneficiary: Maguire v Makaronis (1997) 188 CLR 449 at 465.

The primary judge's finding of serious misconduct within the meaning of clause 4.1(c) of the Employment Contract

1. There was no dispute on the appeal that the primary judge had correctly identified the correct legal principles in addressing the question of whether "serious misconduct" had been proved. It is clear that conduct which is repugnant to the employer/employee relationship and which destroys the mutual trust and confidence between employee and employer will, generally, be a ground for summary dismissal: Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66 at 81; Concut Pty Ltd v Worrell [2000] HCA 64 at [51]; 176 ALR 693 at 707.
2. It is equally clear that a breach of contract and a failure to give full and frank disclosure and thereby avoid a conflict of interest and duty may each justify summary dismissal for "serious misconduct": Buitendag v Ravensthorpe Nickel Operations Pty Ltd [2014] WASCA 29 at [143]; Buitendag v Ravensthorpe Nickel Operations Pty Ltd [2012] WASC 425 at [68].
3. The appellant submitted that Mr Coope's actions in submitting the Separation Proposal were not repugnant to the employer/employee relationship. His conduct, it was submitted, was compatible with a continuing employment relationship, for these reasons: 1. First, following the correction of the transcript, there was no evidence that the Employment Proposal would be detrimental to LCM; 2. Second, Mr Coope was complying with a request made by Dr King and he had no intention of leaving LCM prior to this; 3. Third, the proposal was "for discussion purposes", and Mr Coope did not intend to compete with LCM without seeking a release from his obligations; and 4. Fourth, Mr Coope submitted that any breach of cl 4.1(c) was a "technical breach only" and a "one-off mistake". He submitted that "isolated conduct usually would not suffice" as constituting serious misconduct: Rankin v Marine Power International Pty Ltd at [250] per Gillard J.
4. As to the first submission, the primary judge expressly held that the transcript correction did not alter his conclusions. In my view the primary judge was correct in considering whether the failure to disclose the Employment Proposal was a sufficiently serious breach of contract and fiduciary duty to warrant the description "serious misconduct". Both parties written submissions refer to the transcription error however, this was not emphasised in oral submissions.

Notice of Contention Ground 1 - the Separation Proposal and breach of ss 181 and 182 of the Corporations Act

1. The respondent submitted that in addition to the findings made by the primary judge concerning breach of contract and breach of fiduciary duty, it is also entitled to findings under ss 181 and 182 of the Corporations Act in respect of the Separation Proposal.
2. Those sections provide: 181 Good faith - civil obligations Good faith - directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in the best interests of the corporation; and (b) for a proper purpose. (2) A person who is involved in a contravention of subsection (1) contravenes this subsection. 182 Use of position - civil obligations Use of position - directors, other officers and employees (1) A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. (2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
3. Whilst it is clear that it was pleaded that LCM was entitled to relief under these sections of the Corporations Act, the trial judge noted that this aspect of the case was "barely developed" by Senior Counsel then appearing for LCM.
4. In essence, the primary judge found that in circumstances where he had concluded that there was a breach of the contractual provision and a breach of fiduciary duty, sufficient to find there was serious misconduct, there was no utility in making a further finding in relation to statutory claims which had barely been addressed.
5. The appellant submitted that there was no relevant difference in the way the respondent had put the argument about breach of the statutory prohibitions in the Corporations Act to that put in relation to the contractual claim and the fiduciary obligation claim. Accordingly, it was submitted that the Notice of Contention should be dismissed in this respect as there would be no utility in the Court making its own findings in relation to the statutory breaches.
6. In oral address in this Court, Senior Counsel for the respondent concentrated on the terms of s 181 of the Corporations Act. In particular, the submission was made that s 181 contained no relevant restriction so far as prescriptive obligations were concerned. Thus, it was submitted, that if the Court concluded that the primary judge had impermissibly identified a fiduciary duty prescriptive in nature, it was nevertheless open to the Court to find a breach of s 181 (and by implication s 182) of the Corporations Act.

The second group of issues - The Wind Down Proposal

1. By its Notice of Contention LCM submitted that the primary judge erred in failing to find that Mr Coope's failure to disclose his personal interest in the Wind Down Proposal was a breach of cl 4.1(c) and a breach of Mr Coope's fiduciary duties amounting to serious misconduct.
2. To understand those submissions it is necessary first to compare the relevant terms of the Wind Down Proposal and the Transaction Options document.
3. The Wind Down Proposal, as put by Mr Craddock to Mr Coope in an email dated 27 January 2015, provided as follows: Vannin Proposal There really is only one solution for Vannin, which although I accept may be unpalatable for you and your Investors, I hope you can see that I have tried hard to find a solution that works for all parties. As of March 31st Vannin ends the current JV agreement LCM agrees to "sell" to Vannin Malta (VM) LCM renames to ABC All LCM costs and staff transfer to VM ABC is left with: Its ongoing interest in all of the outstanding JV claims Its existing non-JV cases These cases run by VM effectively free of charge No ongoing costs or commitments No requirements for further capital raises or dilution Vannin Malta is owned 80% Vannin Capital PPC PLC 20% Patrick Coope Shares held under Nominee (if required) The name LCM is replaced with Vannin Capital Vannin Malta is operated as a standalone entity with its own P&L and Balance Sheet There are a lot of positives of this move: Coope Certainty of salary and equity No capital raises or dilution 1 shareholder as opposed to 30+ after the next rounds No Moloney Realistic IPO prospects No requirement to explain to existing/new LCM shareholders the current debt to VM own (~$6m and rising) LCM Shareholders No ongoing costs or commitments No requirements for further capital raises or dilution If your target Investor is in the Oil & Gas sector - according to King - I fear you will have an uphill battle King is not required to be active in the business Non-JV cases are run by Vannin Malta effectively free of charges Far better ROC than under current guise (no $2m p.a. costs) Removes uncertainty of an LCM IPO There are of course negatives: Moloney Obvious LCM Shareholders No big IPO in the future - see below (emphasis added)
4. The Wind Down Proposal was presented by Mr Coope in option 4 in the Transaction Options document circulated on 6 February 2015 in the following terms: Transaction options discussed with Vannin and present position Extend JV - on same or renegotiated terms Vannin says it isn't interested (because the returns to it are low compared to what it generates from its own projects) Vannin also says this isn't possible if LCM raises more equity capital but I don't understand why (I think the bigger problem will be for LCM raising new equity when Vannin gets first option on all qualifying cases) Notwithstanding, I suspect this may be an option with Vannin but I am not sure it can work for LCM Vannin / LCM merger Vannin not interested - Craddock still holds the view that Vannin is worth far more than LCM Vannin becoming a cornerstone investor in LCM by way of an LCM equity swap for Vannin's interest in the LCM/Vannin JV Vannin says it isn't interested - I think the 2 key problems are Vannin would want control and Australian tax would need to be paid on Australian profits I don't think this option is available LCM wind down A variation of what was discussed in June and July last year although the terms sounds like they would be more attractive for LCM than was discussed then LCM ceases trading at an agree [sic] date and Vannin takes over its business. Vannin funds completion of LCM's existing cases (plus, I would propose, new projects up to an agreed cut off date) This is analysed in more detail in the attached Wind Down Financial Model - note that I haven't discussed the underlying assumptions (particularly those that apply to what I have called the 2 new JVs) in any detail with Craddock so I don't know his views. I also note that this model still needs some work but it is indicative of how this proposal might work Sale of LCM to Vannin Malta ("VM") Option raised by Vannin - Craddock's initial thought was that LCM shareholders might end up with 25% of VM This is really just another way of doing option 3 Would need more work on an exit strategy - presumably an exchange of equity in Vannin Malta for equity in Vannin when it does its IPO (but what happens if it doesn't do an IPO?) Craddock says that, because I would end up with 5% of Australian business, he would want me locked in for 5 years

Breach of clause 4.1(c)

1. I have set out above at [76] - [77] what I regard as the correct construction of cl 4.1(c) of the Employment Contract.
2. The primary judge found that: Mr Coope accepted that his potential interest in Vannin Malta was a "material" matter for LCM and its board to consider "if this proposal were to go ahead" or "if there was a transaction" … He thus agreed that if the proposal were to have gone ahead, he would have had to reveal the 20 per cent interest which he omitted from his 6 February 2015 document. In those circumstances, my conclusion is that, as at 9 February 2015, the point had not been reached where, in order to discharge his obligations as a director of LCM under ss 181 or 182 of the Corporations Act 2001 (Cth) ("the Act") or to avoid any conflict between his personal interest in advancing his own position and his duty to act in the interest of LCM, he was obliged to disclose what he stood to gain (that is, a 20 per cent shareholding in Vannin Malta) if the matter went further. Nor had the occasion arisen for Mr Coope to make any disclosure to LCM by reason of cl 4.1(c) of the Employment Contract… Any potential detriment to LCM which might otherwise have arisen by reason of Mr Coope having a 20 per cent shareholding in Vannin Malta upon implementation of the Vannin or Wind Down Proposal ceased to be of any moment in light of the board's decisive, and unanimous rejection of that proposal.
3. Accordingly, the primary judge found that there was no obligation of disclosure and thus, no breach of contract by Mr Coope.
4. The primary judge correctly concluded that the Wind Down Proposal would have been material to the Board if the proposal had gone ahead. I do not agree, however, with his Honour's finding that the point had not yet been reached where an obligation to disclose under cl 4.1(c) of the Employment Contract was engaged.
5. In my view, the primary judge should have found that the material identified in bold in paragraph [165] above was information that Mr Coope was obliged to disclose as it was a "significant" matter about which Mr Coope was aware which would likely now or in the immediate future result in LCM suffering detriment.
6. The time for disclosure within the meaning of cl 4.1(c) of the Employment Contract had arisen at the time of making the 6 February document and the obligation was a continuing one, such that the complete offer made by Mr Craddock to Mr Coope should have been disclosed orally no later than the time immediately before the matter becoming the subject of discussion at the LCM Board meeting on 9 February.

Breach of fiduciary duty

1. I have dealt with at [105] to [111] above the conflict of interest and duty rule and the need for fully informed consent.
2. As I have summarised above, at [31], [47] and [175], the primary judge found about this topic that: 1. Mr Coope "had made no decision to negotiate with Mr Craddock a position at Vannin Malta in the absence of an ongoing relationship between LCM and Vannin"; 2. The LCM Board had in 2014 and 2015 consistently been dismissive of any future Vannin "deal", and the matter was dealt with "peremptorily" at the Board meeting; and 3. in those circumstances, at the 9 February meeting, "the point had not been reached" where Mr Coope was required to disclose his proposed 20 per cent stake in Vannin Malta.
3. The first issue is whether Mr Coope faced a conflict between his interest and duty at the time of preparing the 6 February document and attending the 9 February meeting.
4. As the primary judge found, Mr Coope gave no reasonable explanation for not including the 20 per cent equity interest in the Transaction Options document. This omission is even more significant given that he did disclose that he would receive a 5 per cent interest as part of the Hybrid Proposal (contained in option 5 of the Transaction Options document, see above at [166]) as a quid pro quo for him agreeing to stay with the company for five years.
5. LCM contended that at the time Mr Coope circulated the Transaction Options document on 6 February and at the meeting on 9 February he was in a position of conflict between his personal interests, being to advance the proposal containing an offer of 20 per cent of the equity in Vannin Malta, and his duty to LCM.
6. Mr Coope submitted that the correct view of the "conflict rule" is that a director has a duty to act in the best interests of the company and avoid conflict in performing those duties. Mr Coope argued that he had done this because: 1. the Transaction Options document was expressed to be a work in progress that was to be discussed at the meeting on 9 February; 2. Mr Coope gave evidence that he intended to disclose his personal interest if the Board was interested in the deal, but the need for this did not arise; and 3. in any case, Mr Coope had avoided any conflict by not advocating for the Wind Down Proposal and choosing to act in the interests of LCM by promoting the capital raising instead. It was submitted that Mr Coope did not "actively" pursue or promote his personal interest in relation to the Wind Down Proposal.

LCM's Cross-Appeal re costs

1. As noted at the outset, the primary judge awarded the respondent only two-thirds of its costs of the hearing before him. This was on a variety of bases, including the fact that the appellant failed in persuading him that the non-disclosure of the Wind Down Proposal was a breach of contract or (in failing to seek fully informed consent) a breach of fiduciary duty warranting summary dismissal.
2. I have found that the failure of Mr Coope to seek the informed consent of LCM to the conflict of interest and duty he found himself in at the time of describing the Wind Down Proposal on 6 and 9 February 2015 was a breach of the Employment Contract and of his fiduciary duty to LCM. It warranted his summary dismissal.
3. On the other hand, the primary judge plainly had regard to other matters in awarding LCM only two-thirds of its costs of the trial. While submissions were made by both parties (which I will not describe here), those submissions arose against a background of a different determination about the Wind Down Proposal issue by the primary judge than the conclusion I have reached.
4. Accordingly, I propose to invite the parties to exchange brief written submissions about the orders the Court should make in relation to the cross-appeal in light of these reasons, and also to make submissions about whether any further oral hearing is necessary.

Damages and s 200F of the Corporations Act

1. Given the conclusions that I have reached about the primary judge's findings and my conclusion on the Notice of Contention so far as it affects the Wind Down Proposal, it is not strictly necessary to address the third group of issues.
2. Nevertheless, given the matter was the subject of full argument and it may be relevant to the Court's determination of the issues on the cross-appeal, I propose to address the argument made about s 200F of the Corporations Act.
3. The relevant sections are contained in Part 2D.2 Division 2 of the Corporations Act which is headed "Termination Payments".
4. What the Division requires, in general terms, is that retirement "benefits" (as defined in s 200AB) given to certain managerial or executive officers of a corporation be submitted for member approval: s 200B.
5. Unless an exemption or limitation applies, it is a contravention of the Corporations Act for a corporation to give a benefit to a managerial or executive officer who has retired (or a spouse, relative or associate of that person) unless member approval (to the giving of the benefit) has been obtained: s 200B. It is also a contravention of the Corporations Act for a managerial or executive officer who has retired from a corporation to receive a benefit if the giving of the benefit contravenes s200B: s 200D.
6. The contraventions of ss 200B and 200D each create an offence of strict liability as defined in s 6.1 of the Criminal Code Act 1995 (Cth). A contravention of ss 200B or 200D is punishable by 180 penalty units or imprisonment for 6 months, or both: Corporations Act sch 3.
7. Section 6.1 of the Criminal Code provides that in cases where the offence provision does not provide a fault element for any physical element of the offence, the defence of mistake of fact is available under s 9.2 of the Criminal Code. The defence of mistake of fact operates so that a person is not criminally responsible for a strict liability offence, as defined in s 6.1 of the Criminal Code, if: 1. at or before the time of conduct constituting the physical element, the person considered whether or not facts existed, and is under a mistaken but reasonable belief about those facts; and 2. had those facts existed, the conduct would not have constituted an offence.
8. It is in this context that the terms of s 200F come to be construed. Section 200F at the relevant time created exemptions and limitations to the operation of s 200B: (1) Subsection 200B(1) does not apply to: (a) a benefit that is a payment made in respect of leave of absence to which the person is entitled under an industrial instrument; or (aa) a benefit given under an order of a court; or (b) a benefit given in prescribed circumstances. (2) Subsection 200B(1) does not apply to a benefit given in connection with a person's retirement from an office or position in relation to a company if: (a) the benefit is: (i) a genuine payment by way of damages for breach of contract; or (ii) given to the person under an agreement made between the company and the person before the person became the holder of the office or position as the consideration, or part of the consideration, for the person agreeing to hold the office or position; and (b) the value of the benefit, when added to the value of all other benefits (if any) already given in connection with the person's retirement from offices or positions in the company and related bodies corporate, does not exceed the amount worked out under whichever of subsections (3) and (4) is applicable. (subsections (3) and (4) omitted)(emphasis added)

Mitigation of damage and the application to lead new evidence

1. LCM submits in the final ground of its Notice of Contention that the primary judge was in error in failing to entertain submissions concerning mitigation of damage.
2. In closing address in reply before the primary judge, LCM made a submission regarding mitigation of damage. This was the first occasion upon which LCM had made such a submission. Failure to mitigate had not been pleaded in the defence or been the subject of submissions prior to that point. Mitigation of loss was not the subject of any specific evidence nor, critically, any cross-examination of Mr Coope.
3. The primary judge, after noting that mitigation was not pleaded, found that Mr Coope had no opportunity to deal with the submission and that Mr Coope may well have sought to adduce evidence to answer a plea of mitigation. His Honour concluded, in those circumstances, that he would not be prepared to entertain that submission: [J[197]].
4. There was, on that occasion, no application to amend the pleading, and no such application was made to this Court.
5. LCM's submissions in this Court focused upon the distinction in mitigation of loss between avoidable loss and avoided loss, referring to Tasman Capital Pty Limited v Sinclair [2008] NSWCA 248; 75 NSWLR 1. It submitted that in this Court LCM is now solely seeking to address avoided loss and that, at the time of the trial, avoided loss could not have properly been pleaded or proved.
6. The further evidence which was proposed to be tendered established that Mr Coope is now employed by a Vannin entity, however, that evidence is silent as to the terms of that employment. Senior Counsel now appearing for LCM invites this Court to infer on the basis of evidence which was tendered at the trial that the terms are likely to be the same or similar namely a salary of $450,000 and 20 per cent profit share of some part of the business conducted by Vannin (in an amount which, could not at this point be calculated).
7. Whilst I accept the distinction made by the respondent that avoidable loss and avoided loss are different aspects of the plea of failing to mitigate, the problem with the submission made on behalf of LCM is that it seeks to take advantage of what it submits was established at the trial, namely that it was probable Mr Coope would obtain alternative employment in the near future on certain terms, whilst at the same time accepting that this was not an issue before the primary judge. If mitigation had been raised as an issue no doubt Mr Coope could have addressed this subject by evidence. He was not given this opportunity by reason of the conduct of the case by LCM. If, contrary to the way the trial was conducted below, there had been a plea of failing to mitigate based on avoidable loss and cross-examination of Mr Coope directed to that subject (and an opportunity given to him to address that topic) I may have been more sympathetic to the submission that evidence on appeal of subsequent matters going to avoided loss should be permitted.

Conclusion

1. For the reasons above, I propose the following orders: 1. appeal dismissed; 2. the appellant is to pay the costs of the respondent of the appeal on a party-party basis as agreed or assessed, save for those costs referable to order 4; 3. the respondent's Notice of Motion dated 26 February 2016 is dismissed; 4. the respondent to pay the appellant's costs of the Notice of Motion on a party-party basis as agreed or assessed; 5. In relation to the cross-appeal: 1. the cross-appellant's written submissions of no more than five pages containing such orders (including costs) it submits should be made on the cross-appeal to be forwarded by email to Gleeson JA's associate by 5pm, 15 June 2016 and served on the cross-respondent at the same time. Those submissions should address whether the opportunity to make any further oral submissions is sought; 2. the cross-respondent's written submissions of no more than five pages containing such orders (including costs) it submits should be made on the cross-appeal to be forwarded by email to Gleeson JA's associate by 5pm, 22 June 2016 and served on the cross-appellant at the same time. Those submissions should address whether the opportunity to make any further oral submissions is sought; 3. the cross-appellant to provide any written submissions in reply of no more than two pages to be forwarded by email to Gleeson JA's associate by 5pm, 24 June 2016 and served on the cross-respondent at the same time; 4. liberty to apply to this Court on three days written notice.

Amendments 08 June 2016 - "prescriptive" changed in "proscriptive" in the quote at [104] "loyalty of the beneficiary" changed to "loyalty of the fiduciary" at [105] DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 June 2016