Cutler v Derwent Howard Media Pty Ltd, in the matter of Derwent Howard Media Pty Ltd

Associate: Dated: 7 October 2011 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 830 of 2010

IN THE MATTER OF DERWENT HOWARD MEDIA PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 129 920 458 BETWEEN: NICHOLAS CUTLER

AND: DERWENT HOWARD MEDIA PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 129 920 458

JUDGE: JAGOT J DATE OF ORDER: 19 AUGUST 2011 WHERE MADE: SYDNEY

1. The parties are to confer (including with respect to costs) and are to submit agreed or competing proposed orders reflecting the reasons for judgment published today within seven days.
2. If the parties wish to be heard on costs they are to notify the Associate to Jagot J to that effect within the same period of seven days. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 830 of 2010

IN THE MATTER OF DERWENT HOWARD MEDIA PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 129 920 458 BETWEEN: NICHOLAS CUTLER

AND: DERWENT HOWARD MEDIA PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 129 920 458

JUDGE: JAGOT J DATE: 19 AUGUST 2011 PLACE: SYDNEY

THE APPEAL 1 These reasons for judgment concern an appeal against a decision of an administrator under a deed of company arrangement to reject a proof of debt. The appeal is made under s 1321 of the Corporations Act 2001 (Cth) (the Corporations Act) which provides, insofar as relevant, that a person aggrieved by any act, omission or decision of an administrator of a deed of company arrangement executed by a company may appeal to the Court in respect of the act, omission or decision and the Court may: confirm, reverse or modify the act or decision, or remedy the omission, as the case may be, and make such orders and give such directions as it thinks fit. 2 The plaintiff, Nicholas Cutler, lodged a formal proof of debt on 5 November 2009. Mr Cutler's proof of debt claimed moneys said to be owing to Mr Cutler by reason of his employment by the first defendant, Derwent Howard Media Pty Ltd (DHM). DHM had been placed into administration on 27 October 2009 and executed a deed of company arrangement appointing the second and third defendants as administrators on 15 December 2009. On 24 June 2010 the second defendant, Nicholas Malanos, in his capacity as administrator, rejected Mr Cutler's poof of debt to the extent of $122,019.95 and admitted it in the sum of $709.62. 3 Mr Cutler contends that his proof of debt should be admitted in the following amounts, totalling $146,383.99: (1) On account of wages in lieu of the giving of 26 weeks' notice of the termination of his employment: $102,500.62. (2) On account of unpaid long service leave entitlements of 25 days: $19,711.54. (3) On account of 27.88 accrued days of annual leave: $21,982.36. (4) On account of unpaid expenses: $1,479.85. 4 While the administrators accept that Mr Cutler has correctly calculated the amounts in question, they dispute any liability to pay those amounts on the basis that certain conduct of Mr Cutler constituted serious breaches of his contract of employment which entitled (and, had some of the conduct been known to DHM at the time, would have entitled) DHM to summarily dismiss Mr Cutler as DHM did on 14 October 2009. 5 The principal issue in the appeal, accordingly, is whether DHM was entitled to summarily dismiss Mr Cutler on 14 October 2009 on the bases pleaded. DHM pleaded a right summarily to terminate Mr Cutler's employment on two grounds. First, DHM pleaded that Mr Cutler engaged in serious misconduct by failing to comply with a lawful and reasonable direction to return to work on 7 and/or 13 October 2009. Second, DHM pleaded the following: 15. Further, and in alternative answer to the Plaintiff's claims, the Defendants will rely on the following facts, coming to the attention of the First Defendant after the date of termination, as giving rise to further or alternative grounds upon which the First Defendant was entitled to terminate the Employment Contract without notice on 14 October 2009: (a) During the period commencing by about 14 August 2009 at the latest, and 14 October 2009, the Plaintiff commenced providing his services to a company called CMMA Holdings Pty Ltd ACN 138 869 879 and/or Custom Made Media Pty Limited ACN 138 871 271 without advising or informing the First [Defendant] of those matters or obtaining the written consent of the First Defendant. Particulars (i) The Plaintiff provided his services to or for the benefit of CMMA Holdings and/or Custom Made Media for the purposes of those companies providing services to clients or former clients of the First Defendant, including Australian Newsagents Federation, Blockbuster and/or VideoEzy; (b) In the premises [sic], the Plaintiff's actions and conduct was a breach of: (i) [c]lauses 16 and/or 25.4 of the Employment Contract; further and in the alternative; (ii) [t]he term pleaded at paragraph 6(c) above, with each matter individually, or cumulatively with the others and those matters pleaded in paragraph 7(h) above, constituting serious misconduct on the part of the Plaintiff entitling the First Defendant to terminate the Employment Contract without notice. 6 Paragraph 6(c) of DHM's defence pleaded that it was an implied term of the contract of employment that Mr Cutler act in good faith and with fidelity to DHM. 7 To determine whether DHM was entitled summarily to dismiss Mr Cutler on 14 October 2009 (and the various subsidiary issues to which this question gives rise), it is necessary for the relevant facts to be found.

Uncontentious facts 8 From 25 February 2004 until 1 July 2008 Mr Cutler was employed by Derwent Howard Pty Ltd (DH), now known as Pub Media Pty Ltd (Pub Media). 9 From 1 July 2008 until 14 October 2009 Mr Cutler was employed by DHM as its managing director. 10 DHM was incorporated on 27 February 2008. Its directors were James Flynn and Nathan Berkley. Mr Berkley had little involvement with DHM and went overseas before the events material to this appeal occurred. He resigned as a director of DHM on 11 December 2009. Mr Flynn was thus responsible for the day-to-day management of DHM and remains a director of DHM. 11 DHM's main business is the publication of print and online material, including the production and publication of industry-specific contract magazines for particular clients and the production in its own name of consumer newsstand magazines. Until placed into administration, DHM employed between 25 and 40 people depending on demand and also engaged freelance contractors as required. DHM acquired this business from Pub Media (Mr Cutler's former employer) in about March 2008 in consideration for DHM accepting Pub Media's liabilities. Mr Flynn is also a director of Pub Media. 12 On 1 May 2008 DHM entered into a licence agreement with Derwent Howard Media Holdings Pty Ltd (DHM Holdings) as trustee for Derwent Howard IP Unit Trust (the DHM licence agreement). The licence agreement records that DHM Holdings, as licensor owning intellectual property including but not limited to mastheads, websites and software code, grants non-exclusive rights to DHM as licensee to use the intellectual property. Under the agreement the non-exclusive licence is in respect of the "Publication Rights", defined as the right to publish and distribute the "Licensee Publications". The "Licensee Publications" are publications "whose titles shall be determined upon licensing from the Licensor". 13 Mr Cutler and DHM executed a contract of employment on 28 August 2008, which was deemed to take effect from 1 July 2008. The contract included the following provisions: […] 2 Position/Role The offered position is Managing Director and the duties are set out in Schedule A. In the performance of your duties, you are to comply with all lawful and reasonable directions and shall report to Messrs Nathan Berkley and Jim Flynn. 3 [Probation] As you were previously employed by Derwent Howard Pty Ltd, [of] which you have been an employee since 25th February 2004, there is no probation period under the terms of this contract. […] 10 Work from Home You will usually be required to attend at the Company's premises to perform your duties. However, from time to time, it may be appropriate for you to perform some of your duties at home or elsewhere. Your discretion to do so shall be subject to the requirements of your position and any express directions of the Company. Where you work from home, the Company may require you to account for all hours worked by providing details of the time spent working and the work done (in writing if requested). 11 Annual Leave Your annual leave entitlements from your employment with Derwent Howard Pty Ltd will be carried over. As at 30th June 2008, you had 27.2 days['] annual leave accrued. You will accrue annual leave at the rate of 1/13 of an hour for each hour worked, capped at 160 hours (the equivalent of 20 days) per year of service. Annual leave accumulates from year to year and unused entitlements will be paid out upon termination of your employment. Each day's annual leave shall be paid at the rate of your normal weekly salary. Long periods of leave in the first twelve months of your employment are discouraged. The Company requires that, apart from exceptional circumstances, you will apply for annual leave in writing at least one month before. Annual leave must be approved in writing by the Company prior to the leave being taken and such approval shall be subject to the operational necessities of the Company. Annual Leave shall not accrue during periods of unpaid or maternity leave. There is no entitlement to unpaid leave, however such leave will only be granted at the complete discretion of the Company. … […] 16 Conflicts of Interest You are required to avoid any conflict between your personal interests and those of the Company in your dealings with suppliers, clients or any other person seeking to do business with the Company. You are to disclose any potential conflicts to the Company as soon as practicable. The Company, in its complete discretion, may require you to cease the activity resulting in the conflict of interest, impose conditions upon the activity or provide written consent to the activity. This clause does not preclude the holding of shares in publicly listed companies. […] 18 Confidentiality By virtue of your position you will have access to confidential information belonging to the Company. "Confidential information" is defined in the attachment to this letter. Unless it is strictly necessary for the performance of your duties or required by law, without the Company's prior written consent, you are not to: (a) disclose any confidential information to any third party (including any other worker who is not authorised to access it); (b) remove confidential information from the workplace; or (c) use confidential information for any purpose other than purposes expressly authorised by the Company. This provision remains in force after your employment with the Company ends. […] 24 Termination During any period of probation, either party may terminate the agreement with one week[']s notice. Outside any probation period: (a) If you wish to terminate your employment, you are to provide the Company with 26 weeks['] written notice. (b) If the Company wishes to terminate your employment, it will provide you with 26 weeks['] written notice, or pay you in lieu thereof. Any payment in lieu of notice will be based upon your normal weekly salary. Where your employment is terminated, and there are any amounts relating to bonuses or commissions that are accrued but are not due and payable until after you are terminated, the company shall cease to be liable to pay you such amounts. Notwithstanding the above provisions regarding notice periods, the Company may terminate your employment at any time without notice (and without paying you in lieu thereof) where your employment remains subject to a probation period or where you are guilty of serious misconduct. […] 14 The contract also included a restraint provision as follows: 25.1 Restraint on competing with the Company (without restraint payment) (a) The Restraint will apply to you. (b) For the purposes of this clause, the following definitions will apply: (i) "Restraint" means: for the duration of the Restraint Period within Australia, you are not to: A. be engaged in Any Capacity (whether directly or indirectly) in a similar capacity, or as an advisor in any such areas, by any Competitor of the Company; or B. become, or be involved in Any Capacity in creating, a Competitor of the Company within the meaning of paragraph (c)(iv) below. (ii) "Restraint Period" means: Six months, commencing from the date of termination of employment, less any period of notice given by either party prior to that termination. (iii) "Competitor of the Company" means any person who or entity which: A. publishes magazines; or B. supplies online content for Internet or mobile phone hosted services, relating to computer games, sport or any other theme which is the consistent dominant subject of magazine or online content provided by the company at the point of termination. (iv) "Any Capacity" whether yourself as a sole trader or as a director, officer, controlling shareholder, partner, employee, consultant, contractor, agent, licensee, unpaid worker or advisor. (c) This clause remains in force after your employment with the Company ends and survives the termination of this agreement. 25.2 Restraint upon working for clients of the Company For 12 months after the termination of your employment, you are not to canvass, solicit or entice away or accept work from our clients or any imminently prospective client: (a) with whom you have had regular dealings in the 12 months preceding the termination of your employment for the purpose of carrying out (or liaising or advising a third party on the carrying out) for that client (or imminently prospective client) of duties similar to those you performed while employed by the Company; or (b) for the purpose of providing services to or carrying out work for that client (or imminently prospective client) which would require you to use or disclose confidential information belonging to the Company. 25.3 Restraint on soliciting employees of the Company For 12 months after the termination of your employment, you are not to canvass, solicit, interfere with or entice any employee or any subcontractor copywriter of the Company to leave their engagement with the Company, nor engage any such employee or any subcontractor copywriter (either directly or via a third party) to carry out duties similar to those he, she or it performed when employed by the Company. This provision remains in force after your employment with the Company ends and survives the termination of this agreement. 25.4 Restraint on working for other employers while employed by [t]he Company During the term of this agreement, you are not to provide (whether directly or indirectly) goods or services for money or other benefits to any person or entity or be engaged by any person or entity (other than the Company) to do so, without the written consent of the Company. […]

15 In his role as managing director of DHM, Mr Cutler was primarily responsible for liaising with existing clients and securing new clients. Mr Cutler was not a member of DHM's board. Mr Cutler reported directly to Mr Flynn. 16 On 17 June 2008 DHM entered into a publishing project agreement with BB Australia Pty Ltd (known as Blockbuster). Mr Cutler signed this agreement on behalf of DHM in his capacity as DHM's managing director. The publishing project agreement between DHM and Blockbuster (the Blockbuster publishing contract) provided for DHM's appointment as Blockbuster's consultant to perform publishing and printing services for the Blockbuster magazine, with a first issue date of July 2008, for a term of 18 months involving 18 issues of the Blockbuster magazine. It also contained an option for a subsequent term of 12 months (12 issues) to be renegotiated. Under the contract, Blockbuster "acknowledge[d] that [DHM] may appoint subcontractors to provide any aspect of the Service with [Blockbuster's] consent, which will not be unreasonably withheld." 17 On 12 May 2009, DHM Holdings entered into a custom publishing agreement with the Australian Newsagents' Federation Ltd (the ANF). Anthony Matis, the chief executive officer of the ANF, signed this agreement on behalf of the ANF. Mr Cutler signed the agreement on behalf of DHM Holdings, describing his title as "MD" (or managing director). Mr Cutler, of course, was in fact employed by DHM as its managing director and not by DHM Holdings. The custom publishing agreement between DHM Holdings and the ANF (the ANF publishing contract) provided for DHM Holdings' appointment as the ANF's agent to publish and print the ANF magazine, with a first issue date of May 2009, for an initial term of 10 issues (plus one annual). It also provided for a termination notice period of 180 days and included a special condition for renegotiation of an additional 12-month extension. Under the contract the ANF "acknowledge[d] that DHM Holdings may appoint agents or contractors to provide any aspect of the Publishing, Advertising and Distribution Services and the Additional Services." 18 By May 2009, it was apparent that DHM was in financial difficulty. Mr Flynn and Mr Cutler, with others, met with the accounting firm Worrells on 18 May 2009. Mr Cutler's file note of that meeting records debtors of $1.14 million. The file note also refers to the possibility of liquidation or administration of DHM. 19 On 20 May 2009, DHM Holdings resolved to give notice to DHM of the termination of the DHM licence agreement. On 18 June 2009, DHM Holdings resolved that the DHM licence agreement should be terminated immediately. 20 On 18 June 2009 another company, Media Factory Pty Ltd (Media Factory), was incorporated. Mr Flynn is the sole director of Media Factory. A company associated with Mr Flynn, Whitecliff Consultants Pty Ltd (Whitecliff), is the sole shareholder of Media Factory. On the same day, 18 June 2009, DHM Holdings as trustee for the Derwent Howard IP Unit Trust entered into a licence agreement with Media Factory (the MF licence agreement). The MF licence agreement is in the same terms as the DHM licence agreement terminated on 18 June 2009. 21 On 19 June 2009, Mr Flynn sent an email to the National Australia Bank about the "New Derwent Howard entity". This email said: … As discussed on the phone… the Derwent Howard Media shareholding is going to be changing in the next few weeks. … Nathan will be relinquishing his shareholding in the company… I will be looking at securing the long-term participation of our current MD, Nick Cutler, with an equity stake… I am also looking to rebrand Derwent Howard, partly because there is no Howard (ie Nathan) moving forward. This will include a new trading entity and name - The Media Factory. … It is important to note that while the name will change the underlying turnover and activity of the company will remain completely unaffected. We will retain all existing clients. We are just looking to secure some new custom publishing clients such as blockbuster and Chartered Accountants. […] 22 Mr Flynn and Mr Cutler both attended another meeting with Worrells in July 2009 at which the financial difficulties of DHM were again discussed and the various options available to DHM (liquidation, trade through, administration) were considered. 23 On 1 July 2009, Media Factory forwarded a pro-forma letter to customers of the Derwent Howard group of companies. Mr Flynn authorised the sending of this letter. The letter advised customers as follows: Dear Customer, Re-branding of the Derwent Howard Group We are pleased to inform you that from the 1st July 2009, we will be trading as: The Media Factory, ABN 28 137 759 043 (ACN 137 759 043) Our new bank account details are as follows: […] We ask that you take steps to change your records to the new entity's name and ABN and use these new details with immediate effect. Your contacts within Media Factory will continue and all telephone numbers and address details will remain unchanged. We are confident the restructure will have a minimal impact on our day to day management and operations. […] 24 On 11 August 2009, after it became apparent that DHM's then printer (Web Star Printing) would not provide DHM with printing services unless its substantial overdue accounts were paid, Mr Cutler contacted another printing company, Offset Alpine Printing, to obtain quotes for two jobs (the Dick Smith and Samsung magazines). Mr Cutler sent these emails in his capacity as managing director of DHM and on DHM's behalf. Although in his oral evidence Mr Cutler indicated that he understood the emails to have been sent on behalf of Media Factory, no mention was made in the emails of Media Factory and the email signature identified Mr Cutler as the managing director of DHM. 25 By 12 August 2009, Mr Cutler had advanced in discussions he had been having with his own advisers about setting up two companies, Custom Made Media Australia Pty Ltd (CMMA) and CMMA Holdings Pty Ltd (CMMA Holdings). On 12 August 2009, Mr Cutler instructed his advisers to incorporate the proposed entities. In the email Mr Cutler said: I am ready to go sooner the better on this as I have contracts ready to run[.] 26 On or about 13 August 2009, Mr Cutler registered a web page for CMMA. 27 On 14 August 2009 Mr Cutler, on behalf of CMMA, met with a representative of Offset Alpine Printing, the printing company with which he had recently communicated in his capacity as managing director of DHM. Email communications between Mr Cutler on behalf of CMMA and Offset Alpine Printing followed on the same day. Mr Cutler said he would send to Offset Alpine Printing "details of the potential jobs and costs" and requested that contact from Offset Alpine Printing be via his new email address, nick@cmma.com.au. Later that day Mr Cutler sent another email saying: see below - some more info for you Really keen to see what we can do here, all I would need is for you to match the prices Blockbuster 275mm x 205mm 32pp self cover Text 80gsm Saddle Stitched Packing in Cartons of 90 per box Delivery one point Melbourne Print Run 135,835 Cost = $[…] + gst 12 x per annum Charter Magazine 275 x 210 Cover 170gsm Gloss 70gsm cover gloss 4pp cover / 80pp text Delivery Syd Metro Print Run 51,827 Cost $[…] + gst 11 x per annum 28 The prices quoted in this email for the Blockbuster and Charter magazines (the latter being the magazine of the Institute of Chartered Accountants) were those which had previously been charged to DHM for the printing of the same magazines. Mr Cutler acquired his knowledge of these prices by reason of his employment as DHM's managing director. 29 On 17 August 2009 Offset Alpine Printing forwarded to Mr Cutler, at his CMMA email address, a credit application form for completion. 30 By 17 August 2009 Mr Cutler's companies, CMMA and CMMA Holdings, were incorporated. Mr Cutler is the sole director of each company, and another private company controlled by Mr Cutler owns the shares in each company. 31 On 17 August 2009, Mr Cutler submitted an application for a commercial credit account to Offset Alpine Printing. The application was submitted on behalf of CMMA. The application indicates that the business of CMMA commenced on 14 August 2009. It records CMMA's business as "custom media business", its operation being "custom magazine business". The application sets out other details in answer to questions including: - (i) number of years in operation: new, (ii) number of full-time staff: 6, and (iii) major customers/clients: Samsung, Charter, Blockbuster, Big W, ANF. In fact, as at 17 August 2009, CMMA had no staff and no clients because, as the application itself disclosed, it was a new business. 32 On 17 August 2009, DHM and Media Factory entered into a contract for sale of stock. By this agreement Media Factory purchased stock from DHM, consisting of magazines and related materials in respect of nominated titles, for the sum of $50,000. The nominated titles do not appear to include any client magazines referred to in this proceeding (such as the Blockbuster magazine). 33 On the same day, 17 August 2009, Mr Cutler and Mr Flynn met. Although their versions of the conversation differ, it is apparent from both versions that Mr Cutler communicated his concerns to Mr Flynn about DHM's financial position and indicated his intention to resign from DHM. It is also apparent that, at the instigation of one or the other, the prospect of possible alternative ways forward was raised. 34 Either at the meeting or on the next day (the date and circumstances of receipt are not material) Mr Flynn received a letter from Mr Cutler dated 17 August 2009. In this letter Mr Cutler advised Mr Flynn as follows: It's is [sic] with great regret that I tender my resignation today effective immediately. The last few months has [sic] taken its toll on me mentally and physically, as it has for all of us. Late last week the true nature of the situation was made clear to me. I was receiving calls from suppliers stating that they would be unwilling to continue to do business with us unless accounts are rendered up to date immediately. Unfortunately this has left me with little choice in my next step forward as I believe the business is truly not solvent. Unless I make this move now I have grave concerns for the future of any part of the business. As you are well aware I have grown the custom business over the last 3 years and failing to deliver to these clients that have entrusted their business to me is something I just cannot let happen. The last 5½ years has [sic] been a mixture of high and lows and one thing that I feel I have done is give you (and Nathan) nothing short of 100%. I have always tried to lead the company being either [sic] the hardest working person in the business. I believe there is a very amicable way forward and will help as much as I can to make the next step as easy and smooth as possible. 35 At about the same time as Mr Cutler was providing his letter of resignation to Mr Flynn, Mr Flynn (on 18 August 2011) was forwarding an email to Mr Cutler. Mr Flynn's email invited discussion about "ways forward". The options put forward in Mr Flynn's email included the following: 1 Keep the company together with 50:50 ownership split […] 2 Amicably split company […] 3 NC buys "all of DHM" and moves on alone […] 36 At around the same time, Mr Cutler provided to Mr Flynn some spreadsheets showing the various ways in which the business of DHM could be split. 37 By the time of his purported resignation on 17 or 18 August 2009, Mr Cutler had had dealings with the following companies in his capacity as managing director of DHM: Blockbuster, the ANF, the Institute of Chartered Accountants, Samsung, Petbarn, and Coco Republic. 38 On 18 August 2009, Mr Cutler also sent an email to his advisers asking about the need to show an ABN on invoices from CMMA Holdings. The email said: I have some invoices that will be able to be sent out this week for CMMA Holdings Pty Ltd. 39 On 18 August 2009, and without the knowledge of Mr Flynn, Mr Cutler sent an email from the email address nick@cmma.com.au to Blockbuster. The subject of this email was "Change at Derwent Howard Media". The email from Mr Cutler continued as follows: […] As discussed there has been an operational change in the business and the 'custom media division' is branching out as its own entity. The new entity will be called "Custom Made Media Australia Pty Ltd" - ABN 511 388 712 71. In terms of this move nothing will [a]ffec[t] Blockbuster in the slightest - the same team will be working on the magazine. There may be some press regarding Derwent Howard Media and the owner in the coming weeks but I wanted to assure you that the new company moving forward will be 100% focused on your magazine and business. Attached are 2 letters: 1/ An explanation of the new entity and details 2/ A letter stating that the new company moving forward will adhere to the old contract for the next 3 issues and then a new contract will need to be entered into. I know we are catching up Thursday for lunch - Rob and I will be able to take you through any questions you have then BUT if you have any questions or need anything further from me moving forward please don't hesitate to contact me on the numbers below. Please note my email has changed. […] 40 The first of the two letters attached was in these terms: This letter is to inform you that there has been an operational change at Derwent Howard Media Pty Ltd. The client publishing side is breaking off as its own separate business entity starting today 18th August 2009. The new company called "Custom Made Media Australia Pty Ltd" will be 100% focused on the client publishing aspect and will continue to set the standard in terms of bespoke media. I will be a director of the new business and be very much client facing with business moving forward. In terms of staff, editors and designers, who you are familiar with in the day to day operations, will be employed by the new entity. They will remain your contacts moving forward. The same design, production and editorial quality will very much be the focus of the new entity. Apart from setting up new email / phone details and changing banking details with your accounts department, there will be absolutely minimal change at your end. The business details are: Company Information Bank Details Custom Made Media Australia Pty Ltd … ACN 138 871 271 … ABN 511 388 712 71 … … If you could update your records accordingly that would be greatly appreciated. If you have any concerns please don't hesitate to contact me at anytime [sic] on the number or email below. I look forward to a continued business relationship with you now and into the future. […] Nick Cutler Director Custom Made Media Australia Pty Ltd 41 The second letter, also signed by Mr Cutler as director of CMMA, said: This letter is to confirm that the publishing process as set out in the contract dated July Issue between Derwent Howard Media Pty Ltd and BB Australia will be now carried out by: Custom Made Media Australia Pty Ltd ACN 138 871 271 ABN 511 388 712 … This will be from the October Cover dated Issue 2009 but will conclude for the [sic] December 2009 - a new contract after this date will need to be negotiated and entered into. All terms and conditions in the contract will remain the same as will the people working on the magazine namely: Editor Amy Flowers Design Rob Loughridge Management Nick Cutler Suppliers will also remain in the same in the coming months. Should we be able to save further costs by changing suppliers we will inform you accordingly. In terms of invoices the following bank details will be attributed to the new entity. Bank Details … By signing below both companies agree to adhere to the terms and conditions of the contract stated above: […] 42 In fact, while discussions were occurring about "ways forward", no such arrangement had been agreed with DHM, DHM Holdings or Mr Flynn. Neither of these entities nor Mr Flynn knew that Mr Cutler had sent these communications to Blockbuster. 43 Also on 18 August 2009, Offset Alpine Printing forwarded to Mr Cutler at CMMA a quote to produce the Blockbuster and Charter magazines. 44 DHM did not accept Mr Cutler's resignation. Instead, on 19 August 2009 Mr Flynn on behalf of DHM sent a letter to Mr Cutler pointing out that under c 24(a) of his contract of employment Mr Cutler had to provide 26 weeks' written notice of his intention to resign. DHM, accordingly, did not accept Mr Cutler's resignation as immediately effective but treated it as the giving of notice, with the consequence that Mr Cutler's employment would terminate on 15 February 2010. Mr Cutler thus remained employed by DHM as its managing director (and was paid as such) until 14 October 2009, when it is agreed his employment was terminated. 45 Mr Cutler and Mr Flynn met on 19 August 2009. Again, although the terms of their conversation are in dispute, it is apparent that at this meeting Mr Cutler indicated to Mr Flynn his view that there was no point in him coming into work until things had been sorted out and that Mr Flynn agreed that it would be appropriate if Mr Cutler did not come into the office. 46 Mr Cutler did not attend DHM's offices for the purpose of performing his employment after 19 August 2009. He received a few telephone calls and emails in respect of DHM activities - mainly to do with invoicing - with which he dealt, but did no other work for DHM or at DHM's direction. 47 An aged payables record of DHM as at 20 August 2009 shows substantial amounts overdue for payment by DHM to various entities. For example, the amount owed to Web Star Printing was recorded as $719,530.90. The record also shows as payable to Mr Cutler the amount of $1,479.85. 48 The August 2009 issue of Charter magazine (as noted, the magazine of the Institute of Chartered Accountants) contains a note on the cover stating that the magazine was published by Media Factory. 49 On 15 September 2009 CMMA Holdings, Mr Cutler, Whitecliff and Mr Flynn entered into a deed of agreement. Under this deed CMMA Holdings and Whitecliff (a company associated with Mr Flynn), as joint venturers, agreed to publish the first issue of a magazine for Dick Smith (Woolworths) Limited (the Dick Smith contract). On the same day, 15 September 2009, Mr Cutler and DHM entered into a deed of release and confidentiality. By this deed DHM waived any rights it might have against Mr Cutler in regard to CMMA Holdings, CMMA and Mr Cutler performing the Dick Smith contract. 50 Between 17 and 23 September 2009, Offset Alpine Printing provided to CMMA quotes which Mr Cutler had sought for printing in respect of Coco Republic, Petbarn and Samsung. As noted, these were all clients with whom Mr Cutler had dealings in his capacity as managing director of DHM. Mr Flynn did not know about Mr Cutler's dealings with these entities on behalf of CMMA. 51 On 29 September 2009, Blockbuster sent a letter to Mr Cutler at CMMA. The letter invited submission of an expression of interest for the publication of the Blockbuster magazine, with a response required by 9 October 2009. Mr Cutler did not inform Mr Flynn of this invitation. 52 On 30 September 2009, Offset Alpine Printing invoiced CMMA $26,439.60 for work in connection with Samsung's magazine. By that date Samsung had confirmed an order with CMMA. Samsung ultimately paid CMMA over $100,000 for this work. 53 The September 2009 issue of the Blockbuster magazine states that the magazine was published by Media Factory, although the ABN of the company listed is not that of Media Factory but that of Pub Media. The October 2009 issue of the Blockbuster magazine displays the same publication note. 54 In mid- to late September 2009 Anthony Matis, the chief executive officer of the ANF, contacted Mr Cutler by telephone as he was concerned about DHM's position. Mr Cutler told Mr Matis he had resigned from DHM and said Mr Matis should take up any concerns he had about DHM with Mr Flynn. 55 On 24 September 2009, Mr Matis wrote to Mr Flynn advising that the October edition of the ANF magazine would be the last edition DHM would publish and that the ANF would be sourcing another publisher urgently. 56 In early October 2009, Mr Matis called Mr Cutler and told him that the ANF had cancelled its contracts with Mr Flynn and related companies. Mr Matis told Mr Cutler that he would be happy if Mr Cutler pitched for the ANF magazine. Mr Cutler replied that he would be happy to "get something together". Mr Cutler and Mr Matis then met. On 6 October 2009, the ANF gave CMMA Holdings trading as CMMA the right to publish the ANF magazine. 57 On 6 October 2009, Mr Cutler prepared an expression of interest on behalf of CMMA for the publication of the Blockbuster magazine. This expression of interest included a letter of support from Mr Matis of the ANF dated 30 September 2009. Mr Matis's letter said: Nick Cutler and his Custom Media team were chosen to deliver the Australian Newsagent Federation monthly magazine back in May 2009. Over the last 3 months through extremely difficult circumstances I have found Nick to be nothing but upfront and honest with me regarding the ongoing situation at Derwent Howard Media. At every stage we have been kept up to date and as 'the client' we always have been the priority even beyond his resignation. As a result of the above conduct we have decided to engage Custom Made Media Australia Pty Ltd as the publisher of choice for our magazine for the next period. […] 58 The expression of interest submitted by CMMA to Blockbuster also attached a letter from Samsung dated 1 October 2009. This letter said that CMMA had put together Samsung's magazine to be distributed late in 2009. 59 Mr Flynn did not know of Mr Cutler's dealings on behalf of CMMA and CMMA Holdings with Blockbuster or Samsung. 60 On 7 October 2009, at the offices of DHM's solicitors, Mr Flynn, Mr Cutler and their legal representatives met. They conducted discussions on a "without prejudice" basis. At one point in the meeting the solicitors for each agreed that part of the conversation would be on the record. Although the terms of this part of the conversation are also in dispute between Mr Flynn and Mr Cutler, the substance of what was said is not. Mr Flynn told Mr Cutler that he wanted Mr Cutler to attend work on the next day. Mr Cutler responded to the effect that there was nothing for him to do. Mr Flynn then had to leave to catch a flight. No earlier demand had been made to Mr Cutler by Mr Flynn (or any other person at DHM) to return to work after Mr Cutler ceased coming into DHM's offices on 19 August 2009. 61 Mr Cutler forwarded CMMA's expression of interest to Blockbuster by letter dated 8 October 2009. This letter said: It is with great pleasure that Custom Made Media Australia Pty Ltd puts forward its expression of interest for the BLOCKBUSTER magazine tender. Our creative director Rob Loughridge and I have worked on the publication for almost 6 years and have great affection and affiliation with the BLOCKBUSTER brand. We also have acquired the services of Amy Flower (current editor) and Clint Morris (current features writer) which will mean the team that has brought you what you and I believe to be the best magazine in the industry can continue without change… 62 Mr Cutler had worked with Mr Loughridge and Ms Flower at DHM, Mr Loughridge having provided services to DHM over many years and Ms Cutler having contracted to DHM as a freelance journalist. 63 On 8 October 2009, a representative of the ANF emailed Mr Cutler about the October edition of the ANF magazine. The October edition states that it was published by DHM. The email complained about the quality of the publication. Mr Cutler asked that he be sent samples of the blurred pages and said he would check with the supplier to see what had happened. Mr Cutler's email continued: The quality is paramount to the title and if DH have tried to cut a few corners I will find out, Likewise if the problem is at the printers I will find out… 64 "DH" in this email is DHM. In the same email, Mr Cutler told the ANF to withhold payment from DHM until Mr Cutler had "[got] to the bottom" of the problem. Mr Flynn did not know about this communication between the ANF and Mr Cutler. 65 Also on 8 October 2009, Mr Cutler attended at the offices of DHM but only for the purpose of collecting some personal items he had left at the office. 66 On 9 October 2009, more email exchanges occurred between the ANF and Mr Cutler. The representative of the ANF said that the survey they had printed for inclusion in that month's magazine was "outrageously bad" and that they hoped Mr Cutler would not be using the same printer going forward. Mr Cutler replied as follows: I will source new printers straight away - to me it looks like Jim and DH have dropped the ball for the last issue. I would certainly refuse to pay for the quality of this. I am away… BUT lets [sic] chat Monday and work towards this never happening again. 67 On 13 October 2009, DHM's solicitor sent a letter to Mr Cutler's solicitor. This letter said: As you are aware, we act for Mr James Flynn (Jim), the principal of DHM. We note, Jim and Nick have been in negotiations for approximately the past fortnight in an endeavour to reach certain agreements between themselves to resolve all issues in dispute between them which now appear to have broken down and come to an end. Nick continues to be employed by DHM and without the approval of Jim, since 17 August, 2009 has failed to attend the offices of DHM at Bondi Junction to perform his duties pursuant to his Employment Agreement. The writer notes that Nick asserts that Jim had agreed to Nick's leave of absence and non attendance at the offices of DHM to perform his duties. We are instructed that Jim denies any such agreement and at no time endorsed Nick's leave of absence from the office. Under the circumstances, we are instructed to seek confirmation from you that Nick will resume performing his duties for DHM and attending its offices at Bondi Junction to do so from 9.00 am tomorrow, Wednesday, 14 October, 2009. We would point out the recent conduct of Nick is not consistent with his intention to resume performing and honouring his obligations under his Employment Agreement with DHM. The writer understands on Thursday last, 8 October, 2009, Nick attended the offices of DHM, removed personal effects from his office and surrendered his corporate American Express Card to an officer of DHM. In the light of the above, please let us have written confirmation by return email or fax by 5.00 pm today, that Nick will be returning to work at the offices of DHM tomorrow morning to perform his duties under his Employment Agreement. 68 On 13 October 2009 at 6.10 pm, Mr Cutler's solicitor responded by email to this letter to the effect that, having just returned to the office, it would be unlikely that she could obtain instructions before 9.00 am the following day. The email said that this "should not be construed as any attempt to delay nor by Nick to evade any of his employment obligations". It further stated that the solicitor would respond in substance when she obtained instructions, but anticipated this would not occur before "late tomorrow afternoon". 69 On 14 October 2009, DHM sent a letter to Mr Cutler. This letter terminated Mr Cutler's employment. The letter said: This letter serves as notice to you of immediate termination of your employment with Derwent Howard Media Pty Ltd, due to serious misconduct on your part. Under the terms of your Employment Agreement, dated 28 August, 2008, you are required to work an average of 37.5 hours a week performing the duties ascribed to you under your Employment Agreement. Furthermore, under the terms of that Employment Agreement you are usually required to attend the company's premises to perform these duties. Since 17 August 2009, you have continuously up to the present, failed to attend the offices of the company at level 7,35 Grafton Street, Bondi Junction to perform your duties as an employee of Derwent Howard Media Pty Ltd. No permission to do so has ever been given to you by the company. Such conduct can only be regarded as the most serious misconduct constituting a rejection by you of your employment obligations. As your employment has been terminated for misconduct, you are not entitled to any notice nor payment in lieu of notice and no such payment will be made. You are reminded that under your Employment Agreement you are subject to post employment restraints. If those restraints are breached, the company will take prompt and stern action to protect its rights and enforce the restraints. 70 Also on 14 October 2009, Mr Cutler's solicitor responded to the letter from DHM's solicitor of 13 October 2009 as follows: We confirm that we act for Nick Cutler in regard to his employment with DHM. We refer to your letter and email of 13 October 2009 whereby you instruct Mr Cutler on behalf of DHM to attend for work and perform his duties. In regard to the matters raised or relevant to your letter we respond as follows: 1. Mr Cutler and Mr Flynn have been in negotiations for several weeks in regard to various commercial arrangements. Indeed Mr Cutler and Mr Flynn have been in such discussions from around the time that Mr Cutler resigned from his employment, being 17 August 2009. 2. As a result of these ongoing discussions it was agreed between Mr Flynn and Mr Cutler that it would not be appropriate for Mr Cutler to attend and perform his duties as Managing Director. 3. Further to point 2. above Mr Cutler also expressed grave concerns prior to and at the time that he resigned as to the solvency of DHM and indeed it was for this expressed reason that he resigned as is reflected in his letter of resignation of 17 August 2009 as he was of the view that he may be exposing himself legally if he continued in such a senior managerial role to conduct the business of a company that was insolvent. […] 71 The letter continued setting out the bases for Mr Cutler's concerns about DHM's solvency. Given these matters, the letter required DHM to produce information, including accounting information, effectively certifying DHM's solvency. The letter concluded: In the event that your client refuses to provide the above requested information and appropriate evidence of same we put you on notice that Mr Cutler will consider that DHM have repudiated the employment contract between him and DHM. Otherwise, once these issues are resolved we confirm that Mr Cutler remains ready and willing to perform all reasonable and lawful commands to perform the duties of Managing Director of DHM. 72 On 23 October 2009, DHM and Media Factory entered into a deed of assignment of cause of action. In consideration of the payment of $20,000 by Media Factory to DHM, DHM assigned to Media Factory "full, absolute and entire legal and beneficial interest in the Cause of Action", the cause of action being defined as "any claim, rights or entitlements that the Assignor [DHM] has against the Cutler Parties…". The Cutler parties were defined as Mr Cutler and CMMA Holdings. 73 On 27 October 2009, the directors of DHM resolved that, in their opinion, DHM was insolvent or was likely to become insolvent at some future time and that administrators should be appointed under s 436A of the Corporations Act. 74 On 4 November 2009, Media Factory submitted a formal proof of debt in the amount of $401,000. Mr Flynn prepared and submitted this proof of debt on Media Factory's behalf. The debt is explained as "loans to DHM from MF less account for profit". Attached to the proof of debt is a Media Factory General Ledger printed 6 November 2009, which refers to a loan to DHM with an initial balance date of 19 August 2009 and a final balance date of 21 October 2009. The final balance said to be owing by DHM to Media Factory is $608,000. Account records also annexed show the transfer of the amounts recorded as loans from Media Factory to DHM. 75 On 5 November 2009, Mr Cutler submitted a formal proof of debt claiming a debt payable on account of wages, superannuation, leave and otherwise in the amount of $122,729.57. 76 The first meeting of the creditors of DHM was held on 6 November 2009. 77 On 23 November 2009 Worrells, DHM's accountants, completed their report to creditors. This report records the following: The business of the company was a publishing house… The business had ceased trading between July and August this year when licensing agreements, for publishing licences held by a related entity, for the vast majority of publications were terminated by the licensee. 78 The report to creditors also states that: Prior to the company's existence the company's business was traded by a related entity called Pub Media Pty Ltd. The director has advised that around March 2008 the business of Pub Media Pty Ltd was transferred to the company in consideration for assuming the existing liabilities of Pub Media Pty Ltd. On 27 February 2009 Pub Media Pty Ltd was placed into Member's [sic] Voluntary Liquidation… 79 The report to creditors records that: On or about July/August of this year Media Factory Pty Ltd, a related entity, began publishing the various magazines formerly produced by the company under a new licence agreement with Derwent Howard Media Holdings Pty Ltd. The amount claimed as owed by Media Factory Pty Ltd is for funds transferred from its account to the company's account. 80 In respect of DHM's insolvency, the report to creditors says: Our investigations have revealed that the company became insolvent some time prior to our appointment. These investigations have not been able to identify a preliminary date of insolvency however the following factors would likely be taken into consideration in determining a date of insolvency: • The license agreement with Derwent Howard Media Holdings Pty Ltd was terminated in May 2009, effectively reducing the company's ability to generate income with which to pay its creditors. • Media Factory Pty Ltd was incorporated in June 2009. • The company did cease to trade in July to August 2009. • The company entered into a payment arrangement with the Australian Taxation Office around July 2009 in regards to its unpaid taxation liabilities at the time. • An application for the winding up of the company was lodged on 28 August 2009. • Aged third party creditors at 27/04/09 were $2,738,703.21. Aged Creditors at 27/10/09 were $3,449,370.68. This represents an increase of $710,667.47 or 25.95%. As noted above, there are indicia of insolvency that the company may have been insolvent at some earlier date between May 2009 and August 2009… 81 The report to creditors lists the proofs of debt received as totalling $4,696,2189.69. 82 According to Blockbuster's records, DHM sent Blockbuster invoices between 31 March and 17 August 2009 and Media Factory sent Blockbuster invoices on 18 September 2009, 30 October 2009 and 17 November 2009. 83 On 1 December 2009, at the second meeting of creditors of DHM, the creditors resolved that DHM execute a deed of company arrangement. 84 On 16 December 2009 DHM, Media Factory, DHM Holdings, Pub Media, Mr Flynn, and the administrators of DHM (Mr Darin and Mr Malanos) entered into a deed of company arrangement in accordance with s 444A(3) of the Corporations Act. Under the deed Media Factory is obliged to pay nominated amounts on two occasions in 2010 and "the balance as determined by the Administrators in their absolute discretion". Under the deed the administrators are able to settle creditors' claims as provided for in the deed. 85 On 24 June 2010 the administrators of DHM notified Mr Cutler that they had partially rejected his formal proof of debt.

Matters in dispute 86 There were numerous factual disputes between the parties, including (for example): whether DHM was insolvent or at substantial risk of insolvency by the time of Mr Cutler's purported resignation on 17 or 18 August 2009; whether DHM ceased trading from about 18 June 2009 onwards when DHM Holdings terminated the DHM licence agreement and granted a licence in the same terms to Media Factory; whether Media Factory was a "phoenix company" which took over all publications from DHM from about 18 June 2009 onwards; and whether Mr Cutler was on annual leave from 19 August 2009 until the termination of his employment on 14 October 2009. 87 There were also legal issues in dispute, including: whether DHM bore the onus of proving the facts said to entitle it summarily to terminate Mr Cutler's employment; whether Mr Cutler being ready, willing and able to perform his employment duties with DHM was relevant to the resolution of the dispute surrounding his claimed debt; whether DHM was precluded from summarily terminating Mr Cutler's employment by reason of it being in breach of its own contractual obligations to Mr Cutler; and whether the restraint in cl 25.4 of Mr Cutler's contract of employment should be read down. 88 Without abandoning any part of its case, DHM submitted that many of the factual and legal issues between the parties were of marginal materiality because its entitlement to terminate Mr Cutler's employment summarily could be determined solely by reference to the facts relating to Mr Cutler's dealings with Blockbuster. According to DHM, Mr Cutler's conduct in relation to Blockbuster constituted a repudiation of his employment contract. Although DHM was not aware of Mr Cutler's conduct at the time, it submitted that it was nevertheless entitled to rely on this conduct to support its termination of his employment (Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359, Concut Pty Ltd v Worrell (2000) 176 ALR 693; [2000] HCA 64). I propose to deal with this submission immediately.

Blockbuster 89 As noted, DHM and Blockbuster entered into the Blockbuster publishing contract on 17 June 2008. This contract was for a term of 18 months (18 issues of the Blockbuster magazine) with an option for renewal of 12 months (a further 12 issues of the Blockbuster magazine). DHM had thus secured publishing rights in relation to the Blockbuster magazine until the end of December 2009, with an option for renewal until December 2010. The Blockbuster publishing contract permitted DHM to appoint subcontractors to perform the publishing service, with Blockbuster's consent to such appointments not to be unreasonably withheld. Mr Cutler knew or must be taken to have known of the Blockbuster publishing contract because he executed it on behalf of DHM as its managing director. 90 On 14 August 2009 - some three or four days before his purported resignation from DHM - Mr Cutler contacted DHM's printing company, Offset Alpine Printing, to obtain quotes for the publication of the Blockbuster magazine (as well as the Charter magazine) by CMMA and/or CMMA Holdings. In so doing, Mr Cutler asked Offset Alpine Printing to match the prices that DHM had been charged for the printing of the Blockbuster magazine. This price information was known to Mr Cutler by reason of his employment as DHM's managing director. 91 Despite being aware of the requirement that he give six months' notice of his resignation from DHM, Mr Cutler apparently believed that his purported resignation of 17 or 18 August 2009 was effective. I infer that he held this belief until he received Mr Flynn's letter of 19 August 2009 informing him that his resignation was not accepted but would be treated as the giving of notice, with the consequence that he remained an employee of DHM, and thus bound by his employment contract, until 15 February 2010. 92 Although Mr Cutler was therefore aware from 19 August 2009 that he remained an employee of DHM, he did not apprise Mr Flynn of the fact or effect of his communications on 18 August 2009 with Blockbuster. It will be recalled that, on that date, Mr Cutler wrote to Blockbuster on behalf of CMMA advising that there had been an operational change at DHM, with the "custom made media division" branching out as its own entity, CMMA. According to the communications from Mr Cutler, CMMA would be carrying out the Blockbuster publishing contract using the same team that had been employed at DHM. The communications provided Blockbuster with CMMA's bank account details, in the obvious expectation that CMMA would be paid from then on for the publication of the Blockbuster magazine. When he wrote to Blockbuster, Mr Cutler knew that there had been no such operational change at DHM. The best that can be said from Mr Cutler's point of view is that, at the time of writing, he anticipated a more favourable outcome from his discussions with Mr Flynn than transpired. Mr Cutler, who knew that he remained employed as DHM's managing director after receiving Mr Flynn's letter of 19 August 2009, also took no step to make DHM aware of these communications with Blockbuster. Nor is there any evidence that Mr Cutler himself sought to correct the false information he had provided to Blockbuster. Instead, when Blockbuster sent Mr Cutler, in his capacity as the principal of CMMA, an invitation to submit an expression of interest in relation to the publication of the Blockbuster magazine, Mr Cutler (who was still the managing director of DHM at this time) did not tell DHM about the invitation and submitted an expression of interest on behalf of CMMA. In this expression of interest Mr Cutler again said that CMMA would engage the same team that had been responsible for the Blockbuster publishing contract at DHM. 93 DHM characterised Mr Cutler's dealings with Blockbuster as conduct repudiating the employment contract and otherwise in breach of both cl 16 of that contract and Mr Cutler's implied duty of good faith and fidelity. On any of these three bases DHM said that had it known about the conduct at 14 October 2009 it would have been entitled to, and would have, terminated Mr Cutler's contract for serious misconduct. 94 Unlike cl 24.5, no challenge was made to the validity of cl 16 of Mr Cutler's contract of employment. By that clause Mr Cutler was required to avoid any conflict between his personal interests and those of DHM in his dealings with suppliers, clients or any other person seeking to do business with DHM. Further, Mr Cutler was required to disclose any potential conflicts to DHM as soon as practicable. DHM, in its discretion, was able to require Mr Cutler to cease the activity resulting in the conflict of interest, impose conditions upon the activity, or provide written consent to the activity. 95 Mr Cutler's answers to the case against him in respect of Blockbuster may be summarised as follows: (1) Clause 16 of the contract of employment covers the field. Hence, there is no implied duty of good faith and fidelity. (2) On and from July 2009, the Blockbuster magazine was being published by Media Factory and not DHM. (3) Mr Flynn's evidence that Media Factory was performing services on behalf of DHM and accounted to DHM for profits should not be accepted as DHM had ceased trading by mid-2009. (4) Accordingly, at all material times the Blockbuster business was the business of Media Factory and not DHM. (5) In any event, there is no evidence that Mr Cutler knew of any arrangement between DHM and Media Factory, and Mr Cutler believed Media Factory (not DHM) was producing the Blockbuster magazine. (6) Alternatively, DHM had ceased trading by 14 October 2009 and thus there was no subsisting breach as at that date. (7) The remedy for breach of cl 16 of the contract of employment is not necessarily termination. DHM would have to establish that it would not have consented to Mr Cutler's activities in respect of Blockbuster as provided for by cl 16 had it been aware of them at the relevant time. (8) By demanding that Mr Cutler return to work for an insolvent company on 7 or 13 October 2009, DHM was itself in serious breach of Mr Cutler's contract of employment and was thus disentitled from terminating for breach. 96 The submissions for Mr Cutler overlooked some fundamental propositions. 97 First, between 14 August 2009 and 14 October 2009 Mr Cutler continued to be employed by DHM as its managing director and was remunerated accordingly. 98 Second, irrespective of: - (i) DHM's parlous financial position or insolvency (if it was then insolvent), (ii) DHM's trading status, (iii) the arrangements between DHM and Media Factory, or (iv) Mr Cutler's knowledge (or lack thereof) of DHM's trading status or the arrangements between DHM and Media Factory, DHM had the benefit of the Blockbuster publishing contract until December 2009. Mr Cutler, moreover, knew that DHM had the benefit of this contract. Whatever the true position about any of the matters listed in (i) to (iv), the Blockbuster publishing contract remained an asset of DHM unless and until terminated by Blockbuster. Despite this, Mr Cutler not only took steps in relation to the Blockbuster publishing contract to advance his own interests and the interests of his companies CMMA and CMMA Holdings in preference to the interests of DHM, but also took steps to undermine DHM's position in respect of Blockbuster. 99 Despite the submissions for Mr Cutler to the contrary, there cannot be any real doubt that the interests of CMMA (and, via CMMA, Mr Cutler) in respect of the Blockbuster business were in conflict with the interests of DHM, which held the rights in the Blockbuster publishing contract. For so long as the Blockbuster publishing contract remained on foot, Blockbuster was a client of DHM within the meaning of cl 16 of Mr Cutler's employment contract. Instead of avoiding a conflict between his own interests (via CMMA) and the interests of DHM, Mr Cutler on 14 August 2009 used DHM's pricing information - which he had obtained by reason of his employment by DHM - to solicit quotes from Offset Alpine Printing to print the Blockbuster magazine on behalf of CMMA. Price information is inherently sensitive and, indeed, supplier prices were agreed in Mr Cutler's contract of employment to be confidential information. Mr Cutler thereby created a conflict between his own interests (via CMMA) and the interests of DHM. Moreover, he preferred his own interests to those of DHM. Finally, he failed to disclose the conflict of interest to DHM as soon as practicable. In so doing, he denied DHM the contractual right vested in it by cl 16 to require Mr Cutler to cease or impose conditions on his activities on behalf of CMMA in respect of Blockbuster. 100 Mr Cutler compounded the conflict of interest which he created as between his own interests (via CMMA) and those of DHM by sending to Blockbuster his communications of 18 August 2009. The submissions on Mr Cutler's behalf that the "operational changes" at DHM to which Mr Cutler was referring in these communications concerned the role of Media Factory are untenable. It is obvious from the context and content of the communications that Mr Cutler's approach to Blockbuster had nothing to do with Media Factory. The communications were directed towards Mr Cutler's company taking over the Blockbuster publishing contract and being paid for that work instead of DHM. As noted, the most generous explanation of Mr Cutler's conduct is to characterise it as carried out in anticipation of a successful negotiation with Mr Flynn and on the basis of an incorrect belief that Mr Cutler had effectively resigned from DHM. The problem for Mr Cutler is that he knew that he had not reached any agreement with DHM to the effect represented in his communications with Blockbuster. In light of this knowledge, Mr Cutler's communications cannot be described as merely suffering from inaccuracies grounded in premature hope. Mr Cutler sent the communications to Blockbuster knowing them to be false and, it must be inferred, intending them to result in the diversion of Blockbuster's business from DHM to CMMA. Moreover, when the content of those communications is considered, it is difficult to imagine anything more damaging to DHM's interest than for Blockbuster to be told that DHM would no longer be performing the Blockbuster publishing contract and that CMMA would be doing so instead. Even if the most generous explanation of Mr Cutler's conduct is the true cause of his correspondence to Blockbuster on 18 August 2009, there is no evidence suggesting that Mr Cutler took steps to correct his misrepresentations when he realised (on 19 August 2009) that he had not effectively resigned on 17 or 18 August 2009 and thus was not able to take over the publishing of the Blockbuster magazine through his company CMMA. Nor did Mr Cutler inform Mr Flynn or DHM of the content of his communications with Blockbuster so that they could, if they so wished, correct Mr Cutler's misrepresentations. Mr Cutler also failed to disclose these circumstances of conflict of interest to DHM, thereby again depriving DHM of the contractual right vested in it by cl 16 to require Mr Cutler to cease or impose conditions on his activities on behalf of CMMA in respect of Blockbuster. 101 On 8 October 2009, Mr Cutler yet again compounded the conflict of interest he had created by submitting an expression of interest to Blockbuster on behalf of CMMA and refraining from informing DHM that he had done so. It must be inferred that Blockbuster invited CMMA to submit its expression of interest at least in part because of Mr Cutler's correspondence of 18 August 2009. In other words, the invitation to CMMA (made on 29 September 2009) was not unconnected to Mr Cutler's active soliciting of that work. Mr Cutler's explanation of his conduct - that the invitation was marked confidential and he assumed DHM might also have received an invitation - exposes the obviousness of the conflict he had created between his own interests and those of DHM and his consistent preference of his own interests to those of DHM. If Mr Cutler believed that DHM might have received an invitation to submit an expression of interest then it must have occurred to Mr Cutler that CMMA's submission would be in direct competition with that of DHM - at a time when, as noted, Mr Cutler was still employed by DHM as its managing director and was being paid accordingly. 102 It is no answer to the creation of this conflict of interest and the preferring of his own interest to that of DHM for Mr Cutler to attempt to rely on DHM having ceased trading or having some arrangement with Media Factory to publish the Blockbuster magazine. Whatever the true position about those matters or Mr Cutler's perception thereof, the inescapable facts are that: - (i) Mr Cutler was still employed as DHM's managing director and being paid accordingly, (ii) he knew that DHM had the benefit of the Blockbuster publishing contract until December 2009 and a right to renegotiate for another 12 months, (iii) he had no basis for surmising that the Blockbuster publishing contract had been terminated by either party, and (iv) he decided to submit an expression of interest for CMMA to gain the same publishing work the subject of the Blockbuster publishing contract. For these reasons, Mr Cutler's submissions regarding DHM's admissions in the report to creditors about it having ceased trading, DHM being insolvent, and the role of Media Factory, are beside the point. The termination of the DHM licence agreement is also immaterial. The termination of that licence agreement had no effect on the Blockbuster publishing contract. Nothing in the DHM licence agreement, moreover, suggests any connection between the intellectual property covered by that agreement and the Blockbuster publishing contract. So too the sale of stock from DHM to Media Factory of 17 August 2009 makes no mention of anything connected to the Blockbuster publishing contract. Even if something connected to the Blockbuster publishing contract had been the subject of these agreements, nothing in the agreements could have affected the existence of the contract between DHM and Blockbuster. In essence, it was a matter for Blockbuster, not Mr Cutler, to decide the effect of DHM's conduct on the Blockbuster publishing contract. 103 It is also no answer to the creation of this conflict of interest and the preferring of his interest to that of DHM for Mr Cutler to submit that there was no subsisting breach of his employment contract as at 14 October 2009 because DHM was no longer trading at that date. This submission fails to acknowledge the basic fact that, as outlined above, DHM held the benefit of the Blockbuster publishing contract as at that date. By reason of that fact alone Blockbuster was a client of DHM for the purpose of cl 16. Mr Cutler remained in breach of his employment contract as at 14 October 2009, the date of his termination. As at that date he had submitted CMMA's expression of interest to Blockbuster and must be inferred to have been actively seeking the award of the Blockbuster publishing work to CMMA instead of DHM. Again, Mr Cutler's conduct involved the preferring of his own interests to those of DHM. 104 It should be apparent from this discussion that I accept that Mr Cutler's conduct in respect of Blockbuster from 14 August 2009 until 14 October 2009 involved ongoing breaches of cl 16 of his contract of employment. The problem with Mr Cutler's submission that the remedy for such breach was not necessarily termination is that Mr Cutler not only created conflicts between his own interests and those of DHM, but also failed to disclose those conflicts to DHM as required by cl 16. The potential responses of DHM contemplated by cl 16 (that is, that DHM, in its complete discretion, may require the employee to cease the activity, impose conditions upon the activity or provide written consent to the activity) depended upon the employee complying with the obligation to disclose any potential conflicts of interest to DHM as soon as practicable. Given that Mr Cutler did not disclose to DHM the conflict of interest he had created by reason of his conduct in respect of Blockbuster, it is not open to Mr Cutler to rely upon the alternative courses of action DHM might have taken under cl 16 had it been notified as required. Putting it another way, by his actions Mr Cutler denied DHM the opportunity consider its position under cl 16. He cannot now contend that DHM might have consented to his activities had he in fact complied with (at least some of) his obligations under that clause. Even if it were open to Mr Cutler to make that submission, it defies belief that DHM would have consented to Mr Cutler: - (i) using DHM's confidential information to obtain printing quotes for CMMA (a competitor in the same market as DHM), (ii) misrepresenting to Blockbuster that Mr Cutler's company, CMMA, would be taking over the Blockbuster publishing contract which DHM held, or (iii) submitting an expression of interest for the publishing work over which DHM held an option to renegotiate for a further 12 months after December 2009. 105 Mr Cutler's conduct with respect to Blockbuster was inconsistent with continued acceptance of his obligations as managing director of DHM and thus inconsistent with the continuation of his employment. By his conduct Mr Cutler misused information obtained by reason of his employment by DHM in order to undermine DHM's contractual relationship with Blockbuster and, thereby, to advantage himself (via CMMA) by obtaining the Blockbuster publishing work for CMMA and removing that work from DHM. Mr Cutler's conduct constituted an unequivocal repudiation of his employment obligations as DHM's managing director. The conduct was wilful and was carried out over a period of months. It was conduct "so seriously in breach of the contract that by standards of fairness and justice the employer should not be bound to continue the employment" (North v Television Corporation Ltd (1976) 11 ALR 599 at 608-609). The conduct involved repeated and serious breaches of cl 16 of the contract of employment sufficient to constitute "serious misconduct" within the meaning of cl 24 and therefore entitling DHM to terminate the contract without notice and without payment in lieu thereof. 106 As the above discussion discloses, it is not necessary for DHM to rely upon the implication of a term into the contract of employment that Mr Cutler would act in good faith and with fidelity to DHM (para 6(c) of DHM's defence). Nevertheless, it is appropriate that I record that I do not accept the submission that cl 16 of the contract of employment covers the field and thereby excludes any such implied term. Clause 16 is relatively confined. As Besanko J said in Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1; [2011] FCAFC 24 at [118]: It is well established that in the ordinary case there is an implied contractual duty of good faith owed by an employee to his or her employer. 107 While the content of this implied duty may not be capable of precise definition, it is at least capable of extending to the employee not establishing a competing business to that of the employer and soliciting the employer's clients to divert their custom from the employer's business to the employee's business (Manildra Laboratories Pty Ltd v Campbell [2009] NSWSC 987 at [77]-[83]). Despite the submissions for Mr Cutler to the contrary, it is apparent while employed by DHM as its managing director Mr Cutler took active steps to solicit Blockbuster's business (at least) from DHM to his own companies. Mr Cutler did not merely receive inquiries from Blockbuster. The case on which Mr Cutler relied, Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 at [12], accordingly, supports DHM on this issue rather than Mr Cutler. 108 For these reasons, Mr Cutler's dealings with Blockbuster also breached his implied duty of good faith and fidelity to DHM such as to justify his summary dismissal on 14 October 2009. 109 The remaining issue is whether, as Mr Cutler submitted, DHM was precluded from exercising its right to terminate his employment without notice because it was itself in serious breach of the contract of employment. As I understand, it this proposition involved the following steps: - (i) as at 14 October 2009, and since at least August 2009, DHM was insolvent or at grave risk of becoming insolvent, (ii) Mr Cutler could not lawfully and reasonably be required to work for DHM in circumstances where in doing so he ran the risk of unlawfully aiding and abetting insolvent trading, even though not a director of DHM (ss 588G(3) and 1308A of the Corporations Act), (iii) alternatively, and given that DHM had ceased trading by August 2009 in any event, Mr Cutler could not lawfully and reasonably be required to work for the phoenix company Media Factory, (iv) the letter from Mr Cutler's solicitors of 14 October 2009 put DHM on notice that a failure by DHM to provide the required information as to DHM's solvency would be treated by Mr Cutler as a repudiation of his employment contract, (v) DHM requiring Mr Cutler to return to work without having provided the required information and assurances was in breach of DHM's duty of trust and confidence or of good faith to Mr Cutler, potentially prejudicing Mr Cutler's career prospects, and (vi) as a party in breach DHM could not rely upon Mr Cutler's breach to terminate the contract of employment. 110 This submission confronts a number of difficulties. 111 First, Mr Cutler's position was not analogous to that of the employees in Malik v Bank of Credit and Commerce International SA (in liq) [1998] AC 20 (Malik) or Koehler v Cerebos (Australia) Ltd (2005) 222 CLR 44; [2005] HCA 15 (Koehler) (on which Mr Cutler relied to support the submission). In Malik it had become widely known after the employer's liquidation that the employer's business had been carried on fraudulently and corruptly. The employees had no knowledge of these facts when employed. After they were made redundant they sued for damages for breach of the employer's implied obligation of trust and confidence because they were stigmatised by their former employment and could not obtain new employment in consequence. Koehler concerned the question whether a duty of care existed requiring an employer to take steps to avoid psychiatric injury to an employee. There is no meaningful analogy with the present case. 112 Mr Cutler may well have been concerned that the company of which he had been managing director for some years was in financial trouble. But Mr Cutler was not a director of DHM. He knew that DHM had obtained and was obtaining professional financial advice about its circumstances and actions. Moreover, Mr Cutler's apparent concerns are difficult to reconcile with each other. On the one hand, Mr Cutler insisted that DHM had ceased trading so that if he returned to the office as required there would be no work for him to do. On the other hand, Mr Cutler also insisted that if he returned to work he would be at risk of aiding and abetting Mr Flynn, as DHM's director, in incurring debts on DHM's behalf when DHM was insolvent. It is not apparent how Mr Cutler could have held these two inconsistent beliefs simultaneously. As to the first belief, the mere fact that DHM was in financial difficulty and moving towards the acknowledged prospect of voluntary administration did not mean that there was no work to do at DHM. The basis for this belief, irrespective of any arrangement between DHM and Media Factory, is not apparent. As to the second belief, it is also not apparent that Mr Cutler had any reasonable grounds to assume that Mr Flynn would act to incur debts on DHM's behalf in breach of his obligations as a director under s 588G(3) of the Corporations Act, let alone that Mr Flynn would attempt to direct Mr Cutler to perform his obligations in such a way that Mr Cutler might be at risk of aiding and abetting such unlawful action. Once these matters are accepted it becomes apparent that the submission for Mr Cutler that DHM was in serious breach of the contract of employment merely by requiring Mr Cutler to do that which he was still being paid to do is unsustainable on the facts. 113 The decisions on which Mr Cutler relied also provide no support for the proposition that DHM was disentitled from terminating the contract of employment by reason of its own breach. In Foran v Wight (1989) 168 CLR 385 at 405-408 Mason CJ considered the requirement that a party claiming damages after acceptance of an anticipatory repudiation by the other party must have been ready and willing to perform the contract. His Honour concluded that this requirement extended beyond a claim for damages to the entitlement to terminate for breach. Brennan J at 427 limited the concept to contracts involving mutually dependent and concurrent obligations. Dawson J at 452 described readiness and willingness as part of the cause of action for anticipatory repudiation. In other words, a party entitled to rescind for anticipatory breach must be an "innocent party" (see DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; [1978] HCA 12 at 433). On the findings above, DHM was an "innocent party" in the sense that its requirement for Mr Cutler to return to the office and do what he still being paid to do could not be construed as a breach of any implied duty of trust and confidence. 114 In any event, this is not a case of termination for anticipatory breach. DHM's contention is that its termination of the contract of employment on 14 October 2009 was lawful because of Mr Cutler's serious misconduct in respect of Blockbuster, being misconduct which DHM only discovered after 14 October 2009. According to DHM, Mr Cutler's serious misconduct gave it the right to terminate under cl 24 of the contract irrespective of its lack of knowledge of Mr Cutler's wrongdoing at the time of termination. DHM's contentions are consistent with principle. Termination can be justified on the basis of subsequently discovered misconduct. Mr Cutler having actually repudiated the contract of employment by his conduct, it is not apparent how the principles in respect of termination for anticipatory breach are relevant. Be that as it may, those common law principles are subject to the contract of employment (Allphones Retail Pty Ltd v Hoy Mobile Pty Ltd (2009) 178 FCR 57; [2009] FCAFC 85 at [56]). Clause 24 vested in DHM the right to terminate Mr Cutler's employment summarily where Mr Cutler was guilty of serious misconduct. There is no basis to conclude that this express power of termination is subject to an implied limitation that the power may not be exercised if DHM itself is in breach of contract. The consequence of Mr Cutler's argument, if accepted, would be that DHM, merely by requiring Mr Cutler to return to the office and work for his pay at a time when DHM was in financial difficulty and considering being placed into administration, would be precluded from terminating Mr Cutler's employment irrespective of any misconduct by Mr Cutler until the expiration of Mr Cutler's period of notice of his resignation. No matter what Mr Cutler did during that period of notice, on Mr Cutler's argument, DHM was bound to continue paying him as its managing director and could not require him to attend the office to work. I do not accept that argument. 115 None of the other matters in issue between the parties (with which I deal below) affect the conclusions I have reached in respect of Mr Cutler's dealings with Blockbuster. As DHM submitted, this conduct alone justified DHM summarily terminating Mr Cutler's employment. Thus, Mr Cutler's entitlements must be determined on the basis that his summary dismissal on 14 October 2009 was lawful. 116 I turn now to the other subsidiary issues in dispute between the parties (albeit in an abbreviated form where possible) before resolving Mr Cutler's claimed entitlements.

Onus of proof 117 As noted, the parties disagreed as to the applicable onus of proof. Questions of onus may be determinative in a particular case. In the present case, however, the debate is sterile. On the whole of the evidence I am satisfied that Mr Cutler's conduct in respect of Blockbuster constituted serious misconduct justifying DHM's summary dismissal pursuant to cl 24 of the contract of employment. If DHM bore the legal onus of proof of the fact of serious misconduct then it discharged that onus. Otherwise there was no issue in the proceeding in relation to which the evidence was such as to make the location of the onus material. If it is necessary to say more, in a proceeding of this nature it is apparent that Mr Cutler, as the plaintiff, must ultimately bear an onus to establish the facts giving rise to his claimed entitlements. Insofar as DHM contested those entitlements on the grounds that its summary dismissal of Mr Cutler was justified on bases other than those on which it relied at the time, ordinary principles would suggest that DHM bore the onus of proving that case. In short, given the evidence, I do not accept that any issue turned on the location of the onus of proof.

Credit of Mr Flynn and Mr Cutler 118 The credit of both Mr Cutler and Mr Flynn was in issue. Contrary to the submissions of both parties, I do not see the issue of credit as material to the resolution of the issues in dispute. The reason for this is that I did not find either Mr Cutler or Mr Flynn to lack credit in the relevant sense of willingness to give truthful evidence in this proceeding. I did not find Mr Flynn evasive or unwilling to make concessions against his interests. Mr Flynn was undoubtedly a careful witness and was precise in his answers. Nothing in his evidence, however, undermined his credit. I also accept that Mr Cutler was attempting to give evidence reflecting the truth as he perceived it. It is not the case that Mr Cutler's evidence can be dismissed as lacking credibility merely because he admitted making knowingly false statements in his communications with Blockbuster and in the credit application to Offset Alpine Printing. Mr Cutler was truthful in his evidence about those false statements. Moreover, while Mr Cutler may have been willing to accept that he made knowing false statements, the entire context of his communications was not explored in this proceeding. For example, the credit application to Offset Alpine Printing, on its face, contains inconsistent statements - namely, that CMMA was a new business yet had existing clients. Mr Cutler also had a conversation with Offset Alpine Printing about the credit application, the contents of which are not known. It would be unfair to place much weight on Mr Cutler's readiness to accept the falsity of some of his communications as undermining his credit as a witness in this proceeding. If anything, his readiness to do so weighs in his favour as a witness of credit. 119 In any event, it is obvious from the nature of the proceeding that both Mr Cutler and Mr Flynn have a financial interest in the outcome. Both believed that their competing positions were justified. It would be unusual for the evidence of the main protagonists in such a dispute not to be affected by their competing interests. Nothing in the evidence of either Mr Flynn or Mr Cutler supported the conclusion that the evidence of one or the other should be preferred or discounted merely on the ground of their respective levels of credit.

Mr Cutler's readiness and willingness to perform 120 DHM pleaded that by on or about 12 October 2009 at the latest, Mr Cutler was not ready and willing to perform the employment contract "and therefore is not entitled to any payment in lieu of notice or long service leave" (para 8(d) of the defence). 121 Contrary to DHM's case, Mr Cutler's claim was not a claim for damages or akin thereto. Mr Cutler claimed certain payments as a debt due and owing by DHM to him. Accordingly, in the context of this proceeding, Mr Cutler's readiness and willingness to return to work is relevant to DHM's right to terminate for repudiation of the contract but not to his claimed accrued entitlements. DHM's pleading, in para 15 as set out above, raises Mr Cutler's readiness and willingness to perform his employment obligations in the specific context of its answer to the whole of Mr Cutler's claim. This is the purpose of the reference in para 8(d) of the defence to the "matters specifically referred to in paragraphs 15(a)…". I deal with the issue on this basis. 122 As submitted for Mr Cutler, his evidence "was firm that he remained ready, willing and able to perform his employment contract if his… demands had been met." Mr Cutler's demands were for information and assurances in respect of DHM's solvency as set out in his solicitor's letter of 14 October 2009. 123 Although I accept that Mr Cutler was able to fulfil his employment obligations (if he so wished), I am satisfied that he was not ready and willing to do so on 14 October 2009 or, indeed, at any time from his purported resignation on 17 or 18 August 2009 onwards. For this purpose it is not necessary to determine whether Mr Cutler's demands of DHM were reasonable or not. Nor is it necessary to resolve the question whether Mr Cutler was on annual leave or "gardening leave" when he did not attend the office throughout that period. For present purposes, it may be assumed that both issues are resolved in Mr Cutler's favour. Nevertheless, Mr Cutler's undisputed conduct from 17 or 18 August onwards is irreconcilable with his being ready and willing to continue to perform his obligations under his employment contract with DHM. This conduct must be considered as a whole rather than piecemeal. Once it is so considered, Mr Cutler's lack of readiness and willingness to perform his employment contract is plain. 124 At a time when he must have been considering resigning from DHM, Mr Cutler established CMMA and CMMA Holdings as vehicles to enable him to pursue his own business. The business Mr Cutler intended to pursue was, and was intended to be, in direct competition with that of DHM. Even before he had tendered his purported resignation, Mr Cutler was obtaining printing quotes for CMMA to carry out printing work for two companies with whom he had dealings in his capacity as managing director of DHM. Only days later he was submitting a credit application for sufficient credit with the printer to enable CMMA to provide publishing services to anticipated clients such as Samsung, the Institute of Chartered Accountants, Blockbuster, the ANF and Big W (with most or all of whom he had dealt in his capacity as managing director of DHM). Recognition of these matters, contrary to the submission for Mr Cutler, is not inconsistent with DHM's pleading. Mr Cutler's purported resignation on 17 or 18 August 2009 disclosed that he believed he had little choice other than to resign due to his perception that DHM was insolvent. More importantly, however, Mr Cutler's letter of resignation also disclosed his view that unless he moved on there would be nothing left of the "custom business" which he had "grown" over the past three years - a result which Mr Cutler said he "just cannot let happen". In the context of Mr Cutler's correspondence to Blockbuster the following day it is obvious that Mr Cutler believed that, somehow, he would be permitted to take the custom business from DHM and service that business through CMMA. That is precisely what Mr Cutler's correspondence to Blockbuster on 18 August 2009 said had already occurred, when in fact it had not. It cannot be doubted that, at this time, Mr Cutler was not ready and willing to perform his employment contract. 125 After Mr Flynn informed Mr Cutler that his resignation was not accepted and Mr Cutler had ceased to attend the offices of DHM, Mr Cutler continued to evince his lack of readiness and willingness to perform his employment contract. He actively sought alternative work for CMMA in the field of custom publishing, including the work for Samsung, the quotes for Coco Republic and Petbarn, and the expression of interest submitted to Blockbuster, as well as his dealings with the ANF and the publishing work thereby obtained. Again, recognition of these matters is not outside the scope of DHM's pleading. Take the expression of interest submitted by Mr Cutler to Blockbuster as an example. At 14 October 2009 Mr Cutler still hoped that CMMA would be awarded this work, as it had been awarded the ANF's publishing work. According to the expression of interest submitted on 8 October 2009 CMMA, if awarded the work, would do "what it takes" and work "however long" to deliver the service to the client. It is not apparent how Mr Cutler could have functioned as both director of CMMA and managing director of DHM given CMMA's commitments to the ANF and Samsung and its anticipated commitments to Blockbuster. To give any basis for his purported readiness and willingness to perform his employment obligations to DHM, it was incumbent upon Mr Cutler to give some rational explanation of how he might do so given the commitments he had accepted and was actively seeking on behalf of CMMA. This he did not do. 126 At the same time Mr Cutler was taking it upon himself to act contrary to DHM's interests in soliciting work from DHM's customers or former customers, he was also undermining DHM's reputation in his dealings with the ANF. Although the ANF had terminated the ANF publishing contract with DHM Holdings on 24 September 2009, the ANF required DHM Holdings to publish the October edition of the ANF magazine, after which the ANF advised it would find another publisher. Although the ANF gave its publishing work to Mr Cutler on 6 October 2009, its dealings with DHM had not yet finished. It is apparent that DHM continued to perform work on behalf of the ANF, presumably at DHM Holdings' direction. The ANF, in this way, was not only a client of DHM Holdings but also a client of DHM. Contrary to the assumption in Mr Cutler's case, the ANF could be a client of both DHM Holdings and DHM. On the evidence this conclusion should be drawn. This matter is dealt with in more detail below in the context of Mr Cutler's submissions regarding the role of Media Factory. 127 Although Mr Cutler described his conduct as fairly standard in the sense that, in his role as managing director of DHM, he would tell clients who received substandard work not to pay until he sorted the problem out, it is difficult to characterise his dealings with the ANF in October 2008 in this way. On 7 October 2008, Mr Flynn had asked Mr Cutler to return to work. He did not do so on the basis that he would have nothing to do. Yet the next day the ANF contacted Mr Cutler about substandard printing received from DHM. As noted, by this time the ANF had agreed to give its future publishing work to CMMA. The result was that the ANF was dealing with Mr Cutler, the principal of CMMA but also the managing director of DHM, about the ANF's complaints in respect of the work of DHM. Mr Cutler apparently did not recognise his conflict of interest. Instead he told the ANF that he would try to find out if DHM "had cut a few corners". He instructed the ANF to withhold payment from DHM until he had "[got] to the bottom" of the problem. He then told the ANF that it looked like Mr Flynn and DHM had "dropped the ball for the last issue" of the ANF magazine and that Mr Cutler "would certainly refuse to pay" for the work. Again, all this was said in the context of Mr Cutler being simultaneously DHM's managing director and the principal of CMMA, the company taking over the ANF's publishing work. So much is clear from Mr Cutler's assurance to the ANF on 9 October 2009 that he would source new printers - in context, a reference to Mr Cutler ensuring that CMMA did not use the same printers as DHM. This is confirmed by Mr Cutler saying they should work towards "this never happening again". Mr Cutler did not mean in respect of DHM carrying out work for the ANF. He meant in respect of the work that he and the ANF knew CMMA would be carrying out in the future. 128 Although Mr Cutler was purporting to deal with the ANF in his role as managing director of DHM (the only basis upon which he could possibly advise a customer not to pay DHM), it is apparent that Mr Cutler's conduct can only be described as in the interests of himself and CMMA and not in the interests of DHM. Any reasonable person in Mr Cutler's position as at 8 and 9 October 2009 should have recognised that they were hopelessly conflicted and unable to perform any function on behalf of DHM. Mr Cutler, however, chose to use his role as managing director of DHM to act contrary to and indeed to undermine DHM's interests. It must be inferred that he did so because he was in fact committed to developing the business of CMMA. That commitment, pursued by Mr Cutler even to the extent of undermining DHM to the ANF, was inconsistent with any genuine readiness and willingness on Mr Cutler's part to perform his employment contract with DHM. 129 Mr Cutler's apparent concern in this proceeding about the role of Media Factory is also undermined by these communications with the ANF. Mr Cutler makes no mention of Media Factory in these communications, referring instead to "DH", which is a reference to DHM. 130 For these reasons also, Mr Cutler's dealings with the ANF on 8 and 9 October 2009 involved repudiation of his contract of employment, serious breaches of cl 16 and his implied duty of good faith and fidelity, and thus "serious misconduct" within the meaning of cl 24 of that contract, and therefore entitled DHM to terminate his employment summarily.

Media Factory and DHM 131 For the reasons given above, Mr Cutler's focus on the role of Media Factory was misplaced. If Mr Cutler believed that DHM was not trading and all work was being done by Media Factory from about July 2009 onwards, then his apparent concern about incurring debts on behalf of DHM at Mr Flynn's direction is difficult to comprehend. Mr Cutler's conduct throughout August and up until 14 October 2009, moreover, is inconsistent with any real concern on his part about the role of Media Factory. Mr Cutler made no mention of Media Factory in his purported letter of resignation, his communications with Blockbuster or his communications with the ANF, apart from Mr Matis asking Mr Cutler who Media Factory was and Mr Cutler telling him to call Mr Flynn. 132 Moreover, insofar as Blockbuster was concerned, DHM and not Media Factory was party to the Blockbuster publishing contract. Whatever role Media Factory was playing in the business of DHM, it did not affect the Blockbuster publishing contract unless Blockbuster chose to take some action under the contract. The same is true in respect of any cessation of trading by DHM (if, in fact, it had ceased trading). Accordingly, it is no answer to DHM's claims for Mr Cutler to point to the activities of Media Factory in the publication of the Blockbuster magazine. As noted, the termination of the DHM licence agreement is equally immaterial as there is nothing in that agreement to suggest that it had any connection to the Blockbuster publishing contract. Unless and until Blockbuster took action under the Blockbuster publishing contract, the contract remained on foot. It was not a matter for Mr Cutler to assume that Blockbuster was no longer a client of DHM and, thereby, to feel free to deal with Blockbuster as he did. 133 Insofar as the ANF was concerned, Mr Cutler is on similarly weak ground. Mr Cutler's first point was that the ANF was not a client of DHM because the ANF publishing contract was with DHM Holdings. One problem with this argument for Mr Cutler is that, although this is true, Mr Cutler purported to sign the ANF publishing contract as managing director of DHM Holdings when, in fact, he was managing director of DHM. This fact indicates that, as is often the case in respect of small company groups, neither Mr Flynn nor Mr Cutler placed much emphasis on identifying the correct corporate entity for each role. But the real answer to this point is that, irrespective of the ANF publishing contract being between DHM Holdings and the ANF, the ANF was a client of DHM. It was a client of DHM because DHM carried out work for the ANF in connection with the publication of the ANF magazine. As with Blockbuster, the ANF did not cease to be DHM's client merely because DHM ceased trading (if it did so) or because of the activities of Media Factory. The termination of the DHM licence agreement is equally immaterial, as there is nothing in that agreement to suggest that it had any connection to the ANF publishing contract. 134 The ANF did terminate its agreement with DHM Holdings on 24 September 2009. Mr Cutler's second point is that the ANF then ceased to be a client of DHM's. I accept that, by reason of the termination of the contract with DHM Holdings, the ANF was no longer a client of DHM after the publication of the October edition of the ANF magazine. However, and as outlined above, the ANF remained a client of DHM at the time of Mr Cutler's dealings with the ANF's representative on 8 and 9 October 2009. At this time the ANF contacted Mr Cutler to complain about the quality of the October edition of the ANF magazine. Given the content of the communications it must be inferred that the ANF did so relying on Mr Cutler's capacity as both the managing director of DHM and the principal of CMMA. In short, the ANF wanted Mr Cutler to fix up their problems with DHM and for CMMA to avoid those problems in the future. In dealing with Mr Cutler in relation to the problems with the printing for the October edition of the ANF magazine, the ANF was acting in its capacity as a client of DHM. In other words, at the time Mr Cutler secured the ANF's work for CMMA on 6 October 2009, the ANF was still a client of DHM. 135 The other difficulty with Mr Cutler's case in respect of Media Factory is that no cogent reason has been presented which would have made it unlawful and unreasonable for DHM to direct Mr Cutler to perform certain services for Media Factory. Mr Cutler's point that he was not employed by Media Factory may be accepted. But Mr Cutler was employed by DHM and was subject to its control and direction. No matter has been put forward explaining why DHM would necessarily have been precluded from directing Mr Cutler to perform services for Media Factory. Mr Cutler's characterisation of Media Factory as a "phoenix company" is insufficient for this purpose. As set out above, Mr Cutler was not a director of DHM or Media Factory and was not bound by his contract of employment to incur any debts on either's behalf. 136 This conclusion also explains why Mr Cutler's focus on the arrangements between DHM and Media Factory is no answer to DHM's case that its summary dismissal of Mr Cutler was lawful. Whatever those arrangements - whether they involved an account of profits or otherwise - nothing provided Mr Cutler with a proper basis to refuse to perform his employment obligations when required to do so.

DHM's financial position 137 For the reasons given above, Mr Cutler's focus on the parlous financial position of DHM was also misplaced. If, as Mr Cutler feared, DHM was insolvent in August 2009, Mr Cutler was nevertheless bound by his contract of employment. As noted, Mr Cutler was not a director of DHM. There is no evidence from which it could be inferred that he was being, or was likely to be, directed by Mr Flynn to aid and abet Mr Flynn in procuring DHM to incur a debt while insolvent. Mr Cutler knew that DHM was obtaining professional advice on its options and must have known from his own attendance at meetings with DHM's accountants that Mr Flynn was aware of his obligations as a director of DHM. Further, if Mr Cutler genuinely held this fear then, as DHM submitted, he could nevertheless have returned to work as directed on 7 October 2009 and dealt with any such concern if an objective basis for it arose during the course of carrying out his employment obligations. If, on the other hand, Mr Cutler's concern was that there was nothing for him to do because DHM had ceased trading, it is equally apparent from Mr Cutler's dealings with the ANF on 7 and 8 October 2009 that DHM was still carrying out activities even if not trading (in the sense of itself publishing material) as such. Either way I am satisfied that, whatever his concerns about DHM, Mr Cutler was not ready and willing to continue working for DHM from mid-August 2009 onwards because he was committed to developing the business of CMMA and CMMA Holdings. His evidence about other potential options was not persuasive. 138 I thus accept the submissions of DHM about this issue as follows: [Mr Cutler] places significant stock in the financial position of DHM during August-October 2009. It is not disputed that DHM was suffering financial difficulties. Mr Flynn accepted that in his evidence. Mr Flynn also gave frank evidence that he was in discussions with creditors regarding the financial position of DHM. These discussion were had in the context of a "trade through" scenario being considered, a position which Mr Flynn says, in his evidence which was not contested, would have been more viable had [Mr Cutler] remained with DHM and had not engaged in what we now know he did. As a further demonstration of the confidence reposed in [Mr Cutler] by DHM, he was privy to some of the discussions with financial advisors regarding the financial position of DHM. [Mr Cutler's] response to all of this… was to start his own companies and immediately solicit the clients of DHM and generally undermine its efforts. 139 DHM characterised Mr Cutler's conduct as "breathtakingly opportunistic". Opportunism, however, is not the issue. It may equally be inferred that having built up DHM's custom media business for three years and developed close links to DHM's custom media clients, Mr Cutler was desperate for his efforts not to be wasted and the clients he had worked with not to be let down. The problem for Mr Cutler's claim to various entitlements is neither his opportunism (as DHM perceives it) nor his dedication to the interests of the clients he had cultivated for DHM (as Mr Cutler presumably perceives it). It is Mr Cutler's conduct as described above which involved him in the repudiation and breach of his employment contract.

Mr Cutler's absence from work 140 There was no dispute between the parties about the fact that Mr Cutler did not attend DHM's offices for the purpose of performing his duties as managing director of DHM after 19 August 2009. Nor was he performing his duties as managing director of DHM while out of the office. The dispute is whether or not, while absent from the office, Mr Cutler was on annual leave. 141 According to his contract of employment Mr Cutler had 27.2 days of annual leave accrued as at 30 June 2008, his annual leave having carried over from his previous employment by DH (cl 11). By 14 October 2009, the date of his termination, Mr Cutler would have accrued about 28 days of annual leave if not on annual leave for any period after 19 August 2009. Clause 11 of the contract of employment also provided as follows: There is no entitlement to unpaid leave, however, such leave will only [sic] be granted at the complete discretion of the Company. 142 Mr Flynn accepted that, during his conversation with Mr Cutler on 19 August 2009, he had agreed with Mr Cutler that it would be appropriate if Mr Cutler did not attend the office. In Mr Flynn's mind this was acceptable because Mr Cutler had accrued annual leave which could be used for this purpose. Mr Flynn, however, did not mention annual leave to Mr Cutler during this conversation or, on the evidence, at any other time. Mr Cutler believed he had been placed on "gardening leave" pending the resolution of his discussions with Mr Flynn about the custom media division of DHM. The contract of employment makes no provision for "gardening leave" (only unpaid leave at DHM's discretion). Nevertheless, despite knowing that Mr Cutler was not attending the office to perform his duties as managing director, DHM continued to pay Mr Cutler until 14 October 2009. According to Mr Flynn, DHM did so only because of the belief that Mr Cutler was using up his annual leave. 143 Mr Cutler submitted that, if he had been on annual leave, his leave would have expired on or about 16 September 2009. As DHM submitted, however, this incorrectly assumes that Mr Cutler was on leave on non-work days during the period from 19 August 2009. On the basis that annual leave applies to work days only, Mr Cutler's annual leave (if he were taking it from 19 August onwards) would have expired on or about 1 October 2009. DHM relied on the meeting of 7 October 2009 (at which Mr Flynn asked Mr Cutler to return to work) as evidence supporting the proposition that, after expiry of Mr Cutler's annual leave, DHM required him to return to work. According to DHM this position is consistent with the contract of employment, which provides only for unpaid leave at DHM's discretion, and the fact that Mr Cutler was not performing any services to DHM after 19 August 2009 so as to warrant payment of his salary unless on annual leave. 144 The difficulty with DHM's submissions is that not only did Mr Flynn not mention annual leave during the discussion with Mr Cutler on 19 August 2009, he accepted that he had communicated that, in the circumstances, it would be appropriate for Mr Cutler not to attend the office (I infer, until negotiations with Mr Cutler about the future of the custom media division, which Mr Cutler obviously wanted to remove from DHM, had been completed). Under the contract of employment, Mr Cutler was subject to Mr Flynn's direction (cl 2). If Mr Flynn had wished to require Mr Cutler to use his annual leave then he could have requested Mr Cutler to do so on 19 August 2009. However, no such request was made. Nor was it suggested to Mr Cutler at the meeting on 7 October 2009 that the reason he should return to work was that his annual leave had expired. Annual leave was not raised at all during the discussions between Mr Flynn and Mr Cutler. In these circumstances I do not accept that Mr Cutler was on annual leave from 19 August 2009 until the expiry of that leave on or about 1 October 2009. Mr Flynn had informed Mr Cutler that it was not appropriate for him to attend the office. Consistent with this position, Mr Cutler did not attend the office. On this basis the better view is that, by not attending the office or performing his duties as managing director of DHM from 19 August until 7 October 2009, Mr Cutler was acting in accordance with Mr Flynn's directions.

Demands to return to work 145 It was submitted for Mr Cutler that there was no unequivocal demand for Mr Cutler to return to work on 7 October 2009. The basis for this submission is unclear. During a without prejudice meeting in the presence of solicitors, Mr Flynn's solicitor asked that one part of the meeting be "on the record". Mr Flynn then told Mr Cutler that he wanted him to return to work the next day. Mr Cutler said there was nothing for him to do. I consider that the evidence supports the conclusion that Mr Cutler was unequivocally asked to return to work but, by his response, communicated his intention not to do so. Consistent with his communicated intention, Mr Cutler did not attend for work the following day. On this basis, and in accordance with the discussion above, Mr Cutler had no proper basis for refusing to attend for work. In failing to comply with Mr Flynn's request on 7 October 2009, Mr Cutler breached his contract of employment. This sets the context for the subsequent correspondence between the parties on 13 and 14 October 2009. 146 It is true that the letter from DHM's solicitor of 13 October 2009 requiring Mr Cutler to attend for work the following day, was not received until late in the day, with the consequence that less than 24 hours' notice was given to Mr Cutler of the requirement that he attend for work. This fact, however, does not make the direction unreasonable. Mr Cutler had been paid since 19 August 2009 whilst doing little or no work. He had been specifically asked to return to work on 7 October 2009 but had failed to do so. On 13 October 2009, a Tuesday (and a day on which he was being paid to work for DHM but was not doing so), Mr Cutler was required to turn up for work on the next day (also a day on which he was being paid to work for DHM but was not doing so). In these circumstances, there was nothing unreasonable about the content or timing of DHM's demand. In any event, the response from Mr Cutler's solicitors on 14 October 2009 was not to the effect that Mr Cutler could not attend on the next day (due to the short notice given by the demand) but would do so on some other day. The response made clear that Mr Cutler would not be attending for work unless DHM provided him with substantial information and assurances, in effect, guaranteeing to him DHM's solvency. The demands by Mr Cutler, for example, included: - (i) current profit and loss and balance sheets certified by DHM's external accountants demonstrating DHM's current solvency, (ii) cash flow projections confirming DHM's future solvency until at least the end of 2009, (iii) a full list of current creditors, (iv) the giving of a personal undertaking by Mr Flynn that DHM was currently solvent, had at all times been solvent and would remain solvent in his view until at least the end of 2009, (v) certification by Mr Flynn that DHM's financial statements were accurate (with Mr Cutler reserving the right to require certification by an independent external auditor), (vi) details of the duties Mr Cutler would be required to perform, being duties which would not place him at risk of performing unlawful acts, and (vii) payment of certain amounts, including pro-rata payment of the bonus due to Mr Cutler to February 2010. As noted, this letter said that if DHM did not comply with these requirements Mr Cutler would take non-compliance as repudiation of his contract of employment. It concluded that "[o]therwise, once these issues are resolved we confirm that Mr Cutler remains ready and willing to perform all reasonable and lawful commands to perform the duties of Managing Director of DHM." 147 The submissions for Mr Cutler described the requirements in this letter as "entirely reasonable" in the circumstances and contended that, on any view, the letter could not be regarded as a repudiation by Mr Cutler of the employment contract. Mr Flynn described the requirements as "absurd". According to Mr Flynn, he sent the letter terminating Mr Cutler's employment on 14 October 2009 in circumstances described in the following evidence: I took the decision that he wasn't complying with the lawful and reasonable directions and hadn't been for some time. This was yet another delaying tactic, after numerous attempts in good faith by myself to resolve the situation. And for an employee to ask for this level of detail and security, when his employment contract was quite clear about his obligations, was absurd to be honest. 148 I accept Mr Flynn's evidence in this respect. Mr Cutler was an employee of DHM, albeit a senior employee. He was being paid for services he had not provided since 19 August 2009. Even leaving aside the circumstances relating to Mr Cutler's dealings on behalf of CMMA and CMMA Holdings (discussed above), there was no possible justification for Mr Cutler's demands as a condition of his performance of his employment obligations. As outlined above, DHM's financial position and Mr Cutler's concerns in that regard (as well as in respect of his reputation) did not provide a proper foundation for Mr Cutler's imposition of these demands as a condition of his performance of his employment obligations. Mr Cutler was not entitled to impose those conditions on his return to work. DHM was entitled to treat the letter of 14 October 2011 as a repudiation of the contract of employment. Mr Cutler's purported readiness and willingness to return to work was conditional upon satisfaction of his unreasonable demands and he was thus not ready and willing to perform his employment contract at all. Once the circumstances of Mr Cutler's dealings on behalf of CMMA and CMMA Holdings (discussed above) are taken into account, the inference that should be drawn is that Mr Cutler had no intention of returning to work for DHM. As such, the submission for Mr Cutler that it was unreasonable not to give Mr Cutler a warning or opportunity to explain his position is untenable. 149 Consistent with these conclusions, I do not accept that Mr Flynn's demand for Mr Cutler to attend the office was disingenuous. Mr Cutler was being paid his full entitlements. Whether or not it was incurring debts and thus "trading" in that sense, DHM still existed and had functions to perform. Mr Flynn was entitled to expect Mr Cutler to work for his pay. There was also no inconsistency between this requirement and Mr Flynn's agreement to the Dick Smith contract. The Dick Smith contract was limited, relating to one issue only. Nor is there any sound evidentiary foundation for the submission that DHM may not have been able to pay Mr Cutler at all. After all, it was paying him for doing no work and had been doing so since 19 August 2009. Nor do I accept that DHM had to prove exactly what work Mr Cutler could have done to make its direction lawful and reasonable. Even the inquiries from the ANF fielded by Mr Cutler on 8 and 9 October 2009 indicate that, whether or not it was incurring debts or publishing material, DHM was still functioning. 150 For these reasons, Mr Cutler's refusal to return to work after the request made of him on 7 October 2009 and the demand made of him on 13 October 2009 breached his employment contract. The correspondence from Mr Cutler's solicitor of 14 October 2009 constituted a repudiation of that contract, entitling DHM to terminate Mr Cutler's employment summarily. As such, the suggestion that DHM was not justified in its termination because Mr Cutler's conduct on 14 October 2009, at worst, constituted a mere single act of disobedience should not be accepted. Mr Cutler had refused to return to work on two occasions. His conduct was wilful. On both occasions his response communicated his lack of readiness and willingness to work for DHM. The correspondence from his solicitor of 14 October 2009 imposed unreasonable conditions on his return to work which Mr Cutler, in my view, anticipated would not be met for that reason. This conduct demonstrated his repudiation of the employment contract.

The termination letter 151 It may be accepted that the letter of termination asserted that Mr Cutler did not have permission to be absent from the office when, in fact, on 19 August 2009 Mr Flynn had accepted that it would be appropriate that he not attend the office (a position which changed on 7 October 2009). Nevertheless, DHM's summary dismissal of Mr Cutler was justified on the various bases identified above. In these circumstances, the submission for Mr Cutler that his termination was an artifice to avoid paying him his entitlements given DHM's difficult financial position is unsustainable. As noted, DHM had been paying Mr Cutler for doing little to nothing since 19 August 2009. I infer that, when it became clear to Mr Flynn that none of the "ways forward" he had foreshadowed to Mr Cutler on 18 August 2009 could be realised, Mr Flynn considered that Mr Cutler should return to work and asked him to do so on 7 October 2009. Mr Cutler did not do so. In the circumstances (and particularly given that Mr Flynn did not know about Mr Cutler's activities on behalf of CMMA and CMMA Holdings other than with respect to the Dick Smith contract, an agreement to publish one issue of the Dick Smith magazine with Mr Flynn's company having a profit share), there is no foundation for the submission that DHM was involved in any artifice. DHM wanted Mr Cutler to work for his money and was entitled to direct him to do so.

Clause 25.4 152 Given the conclusions above, it is not necessary to resolve the dispute between the parties concerning cl 25.4 of the contract of employment. Nevertheless, I will deal with the competing submissions. As set out above, cl 25.4 of the contract of employment provided that: During the term of this agreement, you are not to provide (whether directly or indirectly) goods or services for money or other benefits to any person or entity or be engaged by any person or entity (other than the Company) to do so, without the written consent of the Company. 153 Mr Cutler said he could not be found to have breached this provision because he had not received any money or other benefit from his affiliation with CMMA or CMMA Holdings during the term of the contract of employment. I do not accept this construction of cl 25.4. The condition "during the term of this agreement" qualifies the provision of the goods or services for money or other benefits. It does not condition the receipt of the money or other benefits for the goods or services provided. The money or other benefits may be received at any time, including after the term of the contract of employment. As long as the goods or services have been provided during the term of the agreement, the provision is breached. Mr Cutler did provide services for money and was engaged to so in contravention of cl 25.4. He provided services to Samsung via CMMA and ultimately received over $100,000 for these services. He was engaged to provide services to the ANF on 6 October 2009 and must be inferred to have provided services to the ANF before 14 October 2009 (as he informed the ANF on 9 October 2009 that he would engage new printers "straight away" for the services his companies, CMMA and CMMA Holdings, had been engaged to provide to the ANF). 154 In the alternative, Mr Cutler said that cl 25.4 should be read down. Mr Cutler submitted that: In circumstances where the business of ANF or Blockbuster either never was or ceased to be the business of DHM, and in circumstances where the business was conduced by Media Factory which was not Mr Cutler's employer, no question of competition between Mr Cutler and his employer DHM arises. Accordingly, a reading down of the restraint to one that is reasonable should be seen as not involving any breach on the part of Mr Cutler. 155 As my reasons above disclose, I do not accept the factual premises on which this submission is based. 156 Mr Cutler also submitted that, on the approach in Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 at [16], cl 25.4 should not be enforced. Brereton J at [16] said: In New South Wales, one approaches this type of case by determining, first, whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed; secondly, whether the restraint in its application to that breach is against public policy; and thirdly, if it is not, then in its application to the alleged infringing conduct, the restraint is valid unless the court makes an order under the Restraints of Trade Act, s 4(3) [Orton v Melman [1981] 1 NSWLR 583; Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317; Woolworths Ltd v Olson [2004] NSWCA 372, [42]]. That is because the effect of the Restraints of Trade Act, s 4(1) is to require that, for the purpose of determining the validity of a restraint, attention be focussed on the actual or apprehended breach, rather than on imaginary or potential breaches. 157 Section 4 of the Restraints of Trade Act 1976 (NSW) is in these terms: (1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not. (2) Subsection (1) does not affect the invalidity of a restraint of trade by reason of any matter other than public policy. (3) Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding sub-section (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order. (4) Where, under the rules of an association, a person who is a member of the association is subject to a restraint of trade, the association shall, for the purposes of subsection (3), be deemed to have created or joined in creating the restraint. (5) An order under subsection (3) does not affect any right (including any right to damages) accrued before the date the order takes effect. 158 According to Mr Cutler, restraints as between employer and employee are treated less favourably than those in commercial sales of goodwill (citing IceTV v Ross [2007] NSWSC 635 at [56] in which Brereton J, citing the decision in Cactus Imaging Pty Limited v Peters [2006] NSWSC 717, said, "An employer is not entitled to be protected against mere competition, and the legitimate interests of an employer which may be the subject of protection by covenant are in the nature of proprietary interests… including the employer's trade secrets and confidential information, and the employer's goodwill including customer connection"). His Honour further identified the relevant questions as being whether the employer has a legitimate interest to protect and whether the restraint is a legitimate protection of that interest (citing John Fairfax Publications v Birt [2006] NSWSC 995 (John Fairfax) at [26]). On this basis Mr Cutler submitted that, as Mr Flynn was trading out of Media Factory and DHM insolvent or likely to become so, DHM had no legitimate or reasonable interest to protect in restraining Mr Cutler. 159 These submissions conflict with one of the other primary propositions made in the cases cited for Mr Cutler, namely, that the "validity of a restraint is judged as at the time at which the contract is made, by reference to what the restraint entitled or required the parties to do, rather than what they intend to do or have actually done" (also at [26] in John Fairfax). The circumstances relating to Media Factory and DHM's insolvency or likely insolvency are immaterial to the validity of cl 25.4. DHM, moreover, did have a legitimate interest in protecting "confidential information and customer connection", two of the three potentially relevant protectable interests also identified in John Fairfax. That Mr Cutler would be privy to confidential information was contemplated by cl 18 of the contract of employment (set out above). That his position would also be sensitive to customer connection is also apparent from the nature of his role as managing director. Mr Cutler's submissions also overlook the principles which DHM invoked as summarised in Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852 as follows: [37] In Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269, Lord Reid said that only in very unusual circumstances would a promise not to engage in other employment be void during the period of a contract of employment (at 294): Whenever a man agrees to do something over a period he thereby puts it wholly or partly out of his power to "exercise any trade or business he pleases" during that period. He may enter into a contract of service or may agree to give his exclusive services to another: then during the period of the contract he is not entitled to engage in other business activities. But no one has ever suggested that such contracts are in restraint of trade except in very unusual circumstances, such as those in Young v Timmins (1831) Cr&J 331, where the servant had agreed not to work for anyone else but might have been given no work and received no remuneration for considerable periods and thus have been deprived of a livelihood: … [38] To similar effect, Lord Morris said (at 307): Thus, if A made a contract under which he willingly agreed to serve B on reasonable terms for a few years and to give his whole working time to B, it would be surprising indeed if it were sought to describe the contract as being in restraint of trade. In fact such a contract would very likely be for the advancement of trade. [39] And in A Schroeder Music Publishing Co Ltd v Macaulay (formerly Instone) [1974] 1 WLR 1308, Lord Reid said that during the period of a contract a promise to give exclusive services to the employer, thus restricting his ability to serve anyone else, normally required no justification (at 1314): Any contract by which a person engages to give his exclusive services to another for a period necessarily involves extensive restriction during that period of the common law right to exercise any lawful activity he chooses in such manner as he thinks best. Normally the doctrine of restraint of trade has no application to such restrictions: they require no justification. [40] Thus it has been questioned whether the restraint of trade doctrine applies during the term of the contract of the employment as distinct from after its expiry [cf Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 at 341-342]. However, the qualifications expressed by Lord Reid in Esso v Harper's Garage and in A Schroeder Music Publishing Co - in particular, the reference to Young v Timmins (1831) Cr&J 331; 148 ER 1446 - support the analysis that the doctrine does apply to restrictions during the currency of an employment contract, but that the pendency of the contract will usually be sufficient justification of their reasonableness, though they may be unreasonable and void in exceptional circumstances. 160 Clause 25.4 operates during the term of the contract of employment. It is consistent with the fact that, under cl 9, Mr Cutler's working hours were described as "nominal working hours" of an average of 37.5 hours per week but that "[a]s a professional employee" he was "expected to work the hours that [were] reasonably necessary to complete [his] employment duties" without overtime being paid. 161 The other problem with Mr Cutler's case on cl 25.4 is that no application has been made to invalidate cl 24.5 in this proceeding. A submission that the clause is invalid has been made, but that is insufficient. The seeking of such orders is not a mere formality. It was too late for Mr Cutler to seek them in written submissions in reply. 162 For these reasons I do not accept that cl 24.5 of the contact of employment is invalid. Mr Cutler breached cl 24.5 during his employment by DHM through his dealings with Samsung and the ANF. For the reasons given above, these breaches were serious and also would have entitled DHM to terminate the contract of employment for serious misconduct.

The assignment point 163 Mr Cutler claimed that the deed of assignment of DHM's causes of action against Mr Cutler entered into by DHM and Media Factory on 23 October 2009 disentitled DHM from relying on the conduct of Mr Cutler said to justify termination of the contract of employment. I do not accept this submission. DHM assigned its causes of action to Media Factory. It did not, by the assignment, alter the facts in respect of its termination of the contract of employment. It did not disable itself from relying on those facts as justifying the termination. It is only the causes of action which have been assigned.

Long service leave 164 It was common ground between the parties that the Long Service Leave Act 1955 (NSW) (the Long Service Leave Act) applied to Mr Cutler's employment by DHM. Assuming in Mr Cutler's favour that his service with DH should be counted as part of his overall employment, Mr Cutler had been employed for less than 10 years. Accordingly, and as DHM submitted, s 4(2)(a)(iii) of the Long Service Leave Act applied to Mr Cutler. Under that provision Mr Cutler would be entitled to accrued long service leave if, but only if, his services had been terminated by DHM for "any reason other than the worker's serious and wilful misconduct". DHM, however, terminated Mr Cutler's employment for misconduct that is within the statutory description of "serious and wilful misconduct". For these reasons Mr Cutler had no entitlement to a payment for long service leave.

Unpaid expenses 165 Mr Cutler claimed unpaid expenses in the sum of $1,479.85. Although DHM submitted that there was no evidence supporting this claimed amount, DHM itself had accepted the claim at least to the extent of including it in a summary of its aged payables on 20 August 2009. The problem is one of evidence. Mr Cutler did not adduce any documentary or other records explaining how the expenses were incurred in connection with his employment by DHM. As DHM submitted, this is Mr Cutler's appeal against the rejection of his proof of debt. Mr Cutler, in asserting a right to unpaid expenses as a priority creditor claim within the meaning of the deed of company arrangement, carried the persuasive onus to establish the existence of this debt as properly due and owing. Mr Cutler did not discharge this onus.

Additional exhibits 166 DHM sought to tender certain additional documents in respect of which the parties made written submissions. The documents were produced by DHM in response to calls by Mr Cutler during the hearing. Mr Cutler objected to the admission of two of the documents. I am persuaded by those objections. The DHM stock inventory document bears a print-out date of 7 June 2011. It is too late for Mr Cutler to test the reliability of that document. The email of 18 August 2009 is accompanied by extensive annexures. Again, if DHM wished, the email could have been produced earlier. Those two documents (and the annexures thereto) are not admitted. The documents concerning payment arrangements are admitted into evidence.

CONCLUSIONS 167 For the reasons set out above I conclude that: (1) Mr Cutler has no entitlement to wages in lieu of notice. (2) Mr Cutler has no unpaid long service leave entitlements. (3) Mr Cutler is entitled to payment on account of 27.88 days of accrued annual leave in the amount of $21,982.36. (4) Mr Cutler is not entitled to payment of any unpaid expenses. 168 It follows that the appeal must be allowed in part, to the extent that Mr Cutler's proof of debt should also have been admitted in the additional sum of $21,982.36 on account of unpaid accrued annual leave. The parties should confer about the form of orders to be made (including as to costs) consistent with these reasons. Directions will be made accordingly. I certify that the preceding one hundred and sixty-eight (168) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.