Ferrari & Anor v Ferrari Invest

"By far and away the most important consideration seems to be whether the contract for the sale of the rent roll contains a restraint of trade clause, or at least whether the circumstances of the sale are such that it can confidently be assumed that the principal of the vendor will present no competition to the purchaser, as, for example, if the principal is retiring, leaving town and ceasing to carry on business.

Other factors which can be relevant are whether the vendor is providing assistance to the purchaser after the transaction, whether the vendor's staff are transferring to the purchaser, the degree of personal following which the principal of the vendor had attracted to the list which constituted the roll, and the question whether the contract contained any clause providing for reduction of price or rebate in respect of landlords who might withdraw their custom within a period of say, three or six months immediately after the transaction".

The judge assessed compensation on the basis that $150,000 was the figure attainable on a sale in relation to which the factors set out in the passage I have quoted were "favourable". That figure was discounted by 30% to take account of the fact that on the relevant date, 1 July 1997, "all these factors were not optimal".

3 The appellants argued that the discount of 30% was too low and should perhaps have been 100%. They invited this Court to accept the assumption, to assess the proper value, that the business would have been sold without the Ferraris undertaking any personal obligation; that is what the primary judge did. His Honour did not assess on the basis that the Ferraris would undertake not to compete; but he thought that competition, on the part of the Ferraris, with the sold business would to some extent have been restrained by injunction. His Honour proceeded on the footing that the Ferraris would not have accepted personal contractual restraint, although they were themselves the parties in breach of fiduciary obligations and also were the persons in control of Investments, which owned the letting business. That was the proper approach, since Investments' complaint was that it had lost the value of the business, not the value of any promises to be made by the Ferraris.

4 There is, in my respectful opinion, much force in the appellants' submission that the primary judge did not make sufficient discount from the gross figure of $150,000. As I have pointed out, his Honour postulated a sale in which the Ferraris made no promises. That would have been a sale in which a purchaser could have been confronted with competition from such an entity as Management, the company which the Ferraris in fact established to take over the letting business. That competition might have been able to be enjoined, to an extent which a purchaser's legal advisers would have found difficult to define, for example by taking proceedings against the Ferraris if they solicited business from the old customers. I cannot, with respect, agree that the hypothetical sale should be examined on the assumption that the Ferraris would have become directors of the purchaser for a considerable period after the sale, thereby leaving themselves vulnerable to a suit restraining them, as directors, from competing; it was on that basis that the primary judge proceeded in lessening the extent to which the hypothetical purchaser would need to be concerned about competition from the Ferraris. This, in my opinion, vitiates his Honour's assessment and makes it necessary for this Court to make up its own mind about the proper amount.

5 It appears to me that if compensation is fixed as the figure likely to be attained in a sale with no co-operation other than by the Ferraris executing the necessary assignments, a lower amount than the judge awarded must be the result. Having no promise from the Ferraris to act otherwise, a prudent purchaser would have good reason to fear an outcome resembling that which was in fact achieved by the Ferraris' establishment of Management: that the business would be successfully carried on by a new entity controlled by the Ferraris with the assistance of the property manager and perhaps other staff, and in the very same premises in which Investments had conducted the business. The evidence was that the Ferraris owned those premises and so a purchaser would probably have had to establish an office elsewhere.

6 The case is about the value attainable on a sale of goodwill, a concept recently analysed by the High Court in Commissioner of Taxation v. Murry [1998] HCA 42; (1998) 72 ALJR 1065. In the principal judgment it is explained that:

" . . . goodwill is really a quality or attribute derived from other assets of the business. Its existence depends upon proof that the business generates and is likely to continue to generate earnings from the use of the identifiable assets, locations, people, efficiencies, systems, processes and techniques of the business". (1068A)

"Goodwill is correctly identified as property . . . because it is the legal right or a privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it . . . The goodwill of a business is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it". (1070C)

7 Some of what might be treated as goodwill of an entity, such as relations with its staff, may be affected by a takeover or sale of the business conducted. The Court refers to goodwill as the product of combining and using the assets of the business so that custom is drawn to it. "Human assets" are included in this concept and that accords with commercial reality; a business might have substantial value, over and above its physical assets, in the quality of its staff. That idea has relevance here where, according to the evidence, the people who worked for Investments, and especially Mr Ferrari and the property manager Coleen Foster, were important advantages the business possessed. Those "human assets" would be at risk in a sale of the letting business to an outsider.

8 The business was worth more as it was being run by Investments than the figure which could have been achieved on sale on the open market, which would have produced the difficulties about protection from competition which constitute one of the main problems in assessing compensation in this case. A solution which is suggested by the reasons of Hope JA in Mordecai v. Mordecai (1988) 12 NSWLR 58 is to consider only the value on the sale to the directors guilty of the breach - i.e., in the present case, to Mr and Mrs Ferrari. The advantages of this concept are explained by Hope JA:

"The business was of unquestioned value to Morpak, and it was not to be expected to give it away. Moreover the appellants, being directors of Morpak, could not canvass Morpak's customers for themselves . . . [i]f, as the appellants assert, the goodwill would have been unsaleable to anyone else, it was certainly saleable, at its proper value to them and as the position stood when they took the business from Morpak, the business had the potentiality, valuable only to them when it was in their hands, to free them from the restraints which the law otherwise would impose on them". (69)

This is not a case in which the Ferraris would have been the only possible purchasers.

9 The second approach discussed by Hope JA in Mordecai was to fix compensation at the figure which a court would have approved, treating the purchasers, being the persons in the position of the Ferraris, as trustees. Hope JA remarked:

"That approval would have required evidence that the purchase price was a proper price, not diminished by the matters relied upon by the appellants to support the claim that the goodwill was valueless in Morpak's hands". (71)

The approach just mentioned was that which Hope JA in fact adopted, requiring the appellants in that case to pay an amount assessed -

". . . by reference to the value of the goodwill of the business, determined upon the basis of what they would have had to pay had they obtained it lawfully from Morpak". (71)

A rather similar situation would have arisen if, a liquidator or provisional liquidator having been appointed, the Court's direction was sought as to a proposed disposition of the letting business to Management, at what was asserted to be a proper price. That hypothesis is in the present case (where Investments was at material times insolvent and ultimately went into liquidation) closer to the facts than the sort of approval discussed in Mordecai.

10 It would have been advantageous, from the point of view of the creditors of Investments as well as that of the Ferraris, if such a sale could have been effected, at a proper price. A proper price would have been a greater sum than could be achieved by a sale in the open market, because of the special value of the property to a company, such as Management, in the control of the Ferraris. But a proper price would not in my respectful opinion have been one which ignored the advantages which the Ferraris personally had in their ownership of the premises, connection with the existing staff and particularly with the property manager, and personal following.

11 All of these were assets which Investments had been able to use, but were not assets of which it could dispose. I favour an approach based upon the one taken in Mordecai; but I reach a different result from that adopted in that case. I do so because of my opinion that a fair negotiated price would take into account, not only the advantages to the Ferraris of arranging to purchase a business already in their control, but also the advantages to Investments of making such a sale, rather than having to accept a substantially lower figure by sale to a purchaser controlled by people other than the Ferraris. I think the probability is that a compromise figure, reflecting the bargaining strength and interests of the parties, would have been reached - one between the open market value and the value which the business would have had in the hands of a company such as Management.

12 The appellants say there are significant differences between Mordecai and this case, which justify the Court declining to apply the method used there. I find it unnecessary to decide whether that is so, but am satisfied that to allow the "undiscounted" figure, as was done in Mordecai, would in the present case be to fix a price for the hypothetical sale well above that which would in reality have been achievable. And I can see no warrant in principle for making the appellants pay, by way of compensation, more than a realistic value, or for making them pay a value which treats their personal goodwill as an asset of Investments. True compensation restores to Investments the proper value of its business and has no punitive component.

13 There is no point in sending the case back for a reassessment; precision, in this situation, is an illusory goal. I would allow the appeal with costs, by reducing the assessment from $105,000 to $75,000 and would make a consequential adjustment in the interest allowed. I would dismiss the cross-appeal with costs.

1 I have read the reasons for judgment prepared by the two other members of this Court.

2 I agree with the orders proposed by Thomas JA and for the reasons which he has given. However, I wish to point to an additional reason for the result proposed by Thomas JA and at the same time emphasise the following matters:

1. That the above named first appellants ("the directors") as such directors acted in breach of the fiduciary duty owed by them to the above named respondent ("Investment") was admitted at the trial.

2. That breach was the making of the gift of the rent roll to the above named second appellant ("Management").

3. The rent roll represented goodwill of Investment. That it constituted such goodwill in the circumstances of this case is well illustrated by the words which I have underlined in the following extract from the speech of Lord Herschell in Trego v Hunt (1896) AC 7 at pp 17 and 18:

"the goodwill ... is the connection thus formed, together with the circumstances whether of habit or otherwise, which tend to make it permanent, that constitutes the goodwill of a business. It is this which constitutes the difference between a business just started, which has no goodwill attached to it and one which has acquired a goodwill. The former trader has to seek out his customers from among the community as best he can. The latter has a custom ready made ... ."

4. In the present case, Management, having acquired gratis a ready made property management business in the shape of the rent roll then, with the directors in charge, traded for almost two years before Investment was placed in liquidation. From the moment Management commenced business it had a current list of active clients - neither the directors nor Management had to seek out clients - thanks to the directors' gift to Management.

5. In addition and importantly Management from the time it commenced its business had the services of Ms Foster formerly an employee of Investment who was well known to the landlord clients on the rent roll and who was employed by Investment "to operate the roll" (R18); she began working for Management the day it opened its doors for business at the same premises from which Investment had operated on the preceding business day. The directors also caused Investment's plant and business to be transferred to Management.

Effectively then Investment's property management business ceased one day and next day the same property management business began in the name of Management and from the same premises.

6. In the present case the real issue has been the method of assessing Investment's equitable compensation to which it was entitled. It is my view that that compensation fell to be assessed on the basis of a hypothetical willing vendor and a hypothetical willing purchaser unaffected by the absence of restrictive covenants that would preclude the directors from competing with the purchaser (see para 18 of Thomas JA's reasons).

3 In my respectful view if the matter of restrictive covenants enters the assessment, it must be on the basis that if any hypothetical purchaser sought from Investment as hypothetical vendor an undertaking from the directors that they would not compete with the hypothetical purchaser for a reasonable period, such undertaking must have been forthcoming from the directors. That this is so flows from the obligation which the law casts on the directors of Investment to act honestly and in the best interests of that company and its shareholders. Consequently, if restrictive covenants enter the assessment, then as a hypothetical vendor, Investment as vendor must be taken to have obtained and given to the hypothetical purchaser the directors' undertaking not to compete.

4 When the learned trial judge came to determine the quantum of Investment's equitable damages and reduced the $150,000 by 30 per cent the learned trial judge, in my view, instead of acting on the valuation evidence before him, went beyond his judicial role and performed the role of a valuer.

5 In my respectful view when he did this he erred. He had before him evidence from two valuers, Mr Stack (for Investment) and Mr Matson (for Management and the directors) that if all the factors referred to in his Honour's reasons were optimal (including a restraint of trade clause for the rent roll) the roll in question could be valued at $1.50 for each dollar of commission payable by the landlords whose names appeared on the roll. His Honour accepted the evidence of Mr Charlton the agent of the liquidator of Investment and found that commission to be a little over $100,000 per annum. He found that with the optimal factors present the market value of the rent roll was $150,000.

6 In making that latter finding His Honour was acting on the evidence of the valuers and Mr Charlton. When Mr Stack gave evidence, it was never suggested to him in cross-examination that the $150,000 should be reduced by any particular amount or percentage by reason of factors mentioned by the learned trial judge in his reasons. It is true to say that Mr Stack was cross-examined about a number of these factors e.g. that ideally a rent roll is sold with a restraint on trade and retention clause, the retention clause containing a formula whereby the vendor had to refund money if the purchaser did not retain all or part of the landlords on the roll.

7 In my view, if Management and the directors were contending at trial that the $150,000 should have been reduced because any of the optimal factors were not present in the hypothetical sale of the rent roll, then there was an onus on them to lead evidence - valuation evidence - of the extent of that reduction, whether by percentage or amount. This evidence was not led although it is true to say that Mr Matson in his written valuation contended for an open market value of the rent roll of no more than $5,000 because on his instructions:

" · there was no agreement to sell - rather a closing of one business and an opening of another;

* the principal and staff will be in competition with the old company;

* no agreement for discount of purchase price for landlords lost."

8 It is my view that in this case Mr Matson as a competent valuer and the valuation expert called by Management and the directors, should have been asked in evidence to identify by estimate the percentage or amount of reduction when any one, two or three of the above four matters was absent. As a competent valuer, and there is nothing to suggest that neither Mr Stack nor Mr Matson was not a competent valuer, Mr Matson should have been able to give such estimate or opinion. This exercise was not done and as a result in Mr Stack's cross-examination there was never any suggestion put to him of an appropriate reduction. I add that I am not being critical of Mr Matson - rather of the failure to elicit such evidence from him. 9 In my view the responsibility in this case for performing that exercise was on the directors and Management but it appears Mr Matson was not asked to do it. I note that in "Principles and Practice of Valuation" (4th Ed) by J.F.N. Murray, the author in Chapter 20 discusses "Business Valuations and Goodwill" and at p 375 said:

"If a business is being purchased care should be taken to ascertain if the vendor has agreed not to compete within certain limits of time or place. If there is no such agreement, he may carry a great portion of the goodwill with him if he starts a new or similar business close by the old one."

10 It is true to say that in assessing pecuniary loss in a personal injury case where there are difficulties due to uncertainty (Naylor v Yorkshire Electricity Board ((1968) AC 529 at 548) the trial judge has to make an assessment doing the best he can with the evidence available. In my view that rule does not apply in the present case where valuers were called but during the trial their valuation skills touching on quantifying each of the optimal matters were not called on by the parties on whom lay the burden of introducing such evidence.

11 In my view, because of lack of the valuation evidence to which I have referred the present appellants cannot be permitted to retain the benefit of a 30 per cent reduction in Investments compensation simply because they say that no restraint on trade covenant would have been forthcoming in a hypothetical sale by Investment and that they would have traded in opposition to Investment. To permit that argument to succeed rewards the parties who breached the fiduciary duty.

12 That argument also mixes the hypothetical sale with the reality of the attitude displayed by the actions of the directors in mid 1987.

13 It is only by treating as hypothetical the sale and all that it entails e.g. the restraint on trade covenant that must accompany it, that one can, on the valuation evidence adduced, reach the proper quantum of Investment's compensation.

14 I add that in my view there was no onus on Investment to adduce the missing evidence to which I have referred. Of course, had amounts or percentages been put to Mr Stack during his cross-examination he would have been expected, as a valuer, to comment on his acceptance or otherwise of those amounts or percentages and, if he disagreed, to give his own opinion on each of those matters.

15 His Honour accepted the evidence of Mr Charlton the agent of the liquidator of Investment and found the commission to be a little over $100,000 per annum. He found that with the optimal factors present the market value of the rent roll was $150,000.

16 In summary then, the decision to reduce the $150,000 market value was not based on any evidence and particularly evidence from the persons qualified to estimate such reduction and for the reasons which I have given the decision to reduce cannot be justified.

1 Ferrari Investments (Townsville) Pty Ltd (In Liquidation) ("the original company") successfully sued its directors (Mr and Mrs Ferrari) and Ferrari Management Services Pty Ltd ("the new company") which Mr and Mrs Ferrari incorporated and operated from the time when the original company ceased to carry on business. A third company was also sued, but it plays no part in the present appeal. Judgment was given for $105,000.00 plus interest.

2 The appellants (the directors and the new company) have appealed against the judgment in favour of the respondent (the original company).

3 The original company was a licensed real estate agent whose business included the earning of commission from letting property for clients. The asset represented by the goodwill of such clients was referred to at the trial as that company's "rent roll". By June 1987 the original company had become insolvent. The new company was then incorporated by the directors. From 1 July 1987 the original company ceased business and the new company commenced business as a real estate agent, continuing to act as commission agent for clients who had previously rented their property through the original company, and using the original company's rent roll.

4 The directors were the sole directors and shareholders of the companies at all material times. They traded by means of the new company for a period of almost two years before the original company was placed in liquidation, remaining directors of both companies.

5 It was ultimately conceded by the directors at trial that the transfer or gift of the rent roll to the new company was in breach of their fiduciary duty to the original company. The new company was of course the knowing beneficiary of that breach of duty. The relief pursued by the original company was equitable damages or compensation, and it may be taken to have elected not to seek an account of profits in respect of subsequent dealings with the asset in question.

6 The learned trial judge assessed damages by analogy with common law principles, with the object of putting the original company into the position in which it would have been had the wrongful abstraction of the rent roll not occurred. The trial judge rejected the original company's submission that as the new company had acquired the asset as a constructive trustee, it was the value of the asset in the new company's hands that should govern the level of compensation.

7 At trial, the valuers for both parties agreed, on the assumption that co-operation would be forthcoming from the directors to the extent that they would give adequate assurance to a potential purchaser of the rent roll that they would not compete or cause others to compete with the purchaser, that the rent roll could be sold for a price based on $1.50 for each $1.00 of commission payable by landlords whose names appeared on it. On the above favourable assumption, $150,000.00 was calculated as the market value of the asset. The relevant market seems to have been regarded as letting properties for clients in the Townsville area. Most of the trial was taken up with questions concerning whether such an assumption ought to be made with respect to the hypothetical sale of the asset. In particular, Mr Ferrari gave evidence that he had received legal advice that he was not bound to give undertakings that would restrain his activities in these ways, and that he would not have given them; nor would he have offered assistance after sale to a prospective purchaser. On that basis, the valuer called on behalf of the defendants opined that the value of the rent roll would be purely speculative, and possibly nil.

8 The learned trial judge approached the hypothetical sale of the asset on the footing that the directors could not have been forced to sign a restraint of trade clause, but that a court of equity would have enjoined them from carrying on competitive business (i.e. business derived from use of the rent roll) for a reasonable period into the future. Further, his Honour stated that whilst such a protection would be regarded by a hypothetical purchaser as less favourable than an express restraint of trade clause signed by directors, it would have been regarded as a substantial protection. Accordingly his Honour applied a 30 per cent discount to the market value figure of $150,000.00 as at the date of abstraction of the asset, arriving at a figure of $105,000.00.

9 Apparently no interest was allowed between that date and the issue of the writ (March 1990), but interest at 10 per cent on the above sum was allowed between the date of issue of the writ and judgment (a further $85,622.94).

10 The appellants (the directors and the new company) challenge this assessment, contending that it should be set aside and replaced with a nil assessment or alternatively a small or nominal assessment not exceeding $5,000.00. The respondent (the original company) has filed a notice of contention disputing the discount allowed by his Honour and contending that the damages should be $150,000.00, and that interest should accordingly be adjusted upwards.

Appellants' challenge to his Honour's assessment

11 The trial judge's assessment proceeded on the footing of market value assessed by a hypothetical sale such as that envisaged in Spencer v The Commonwealth of Australia[1]. On that basis the value of the asset would be the amount which might be expected to be realised from a willing purchaser for such property sold in the open market by a willing though not over-desirous seller. The assumption is that each party is equipped with knowledge of existing relevant circumstances.

12 Counsel for the appellants, Mr Keane QC, challenged the assumption made by his Honour that a potential purchaser could have been told that there would be a reasonable period during which the directors were not entitled to compete with the purchaser, and during which they would be unable to use the information contained in the rent roll for their own benefit. He also challenged his Honour's view that had the rent roll not been wrongfully abstracted from the original company's assets, the directors would have been under a duty to refrain from carrying on competitive business against the interests of the original company whether or not it had continued to trade.

13 Counsel for the appellants submitted that the question whether the directors could have been precluded from competing with a purchaser of the rent roll was altogether different from the question whether the directors could compete against the original company. Even if the questions can be tidily separated in this way, I do not think that they should be given different answers. If the directors were not permitted to enter into competition with the original company, they would not personally be able to compete in the relevant market. It is true that the original company was insolvent and could not at that point continue trading. But it continued to exist and was capable of revival. Moreover the issue is the notional sale of an asset that was wrongfully taken from the original company. It is in my view unacceptable to look at the notional sale as if the original company no longer existed and as if no duty existed to use or deal with the rent roll for the advantage of the original company. The limited picture presented by counsel for the appellants, which shows no more than the directors personally dealing with third parties to whom they owed no fiduciary duty, overlooks the fact that they were dealing with company property which they had misappropriated and in respect of which they continued to owe fiduciary duties to the company. In an equitable assessment, that fact should surely be projected into the hypothetical sale.

14 It is also possible that in circumstances like the present, the hypothetical sale should be simplified into one which entirely eliminates the position of directors and their particular attitudes. As Hope JA observed in Mordecai v Mordecai[2]:

"It may also be that if the vendor is, for the purposes of the hypothetical sale, truly hypothetical, the position of directors of an owner-company is also to be ignored, for they would have had no position in and would thus have derived no advantage from an association with the hypothetical vendor with which they would have had nothing to do. The hypothetical purchaser could be adequately protected by the hypothetical vendor.[3]"

15 I therefore do not accept that the above submissions invalidate his Honour's assessment.

16 It was further submitted for the appellants that although they at material times retained their directorships in the original company, they could have at any time resigned. The submission proceeds that after resignation the directors would have been under no obligation to abstain from competing with the original company. To support this, the appellants referred to Attwood v Lamont[4] and Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd[5]. It was submitted that no court of equity would restrain the appellants as former directors from using knowledge of the client base of the original company if they elected to enter into competition with it, citing Rosetex Company Pty Ltd v Licata[6]. These submissions rather overstate the rights of directors in such a situation. Duty to the company does not cease at the point of resignation[7]. Further, there is reason to think that customer lists, particularly when a good deal of effort has gone into their compilation, enjoy such protection[8]. In the present matter it is difficult to sever the knowledge acquired by the directors of the contents of the roll and how it might be used from the roll itself which they admitted they had no right to appropriate. Directors are accountable to a company if they divert business opportunities away from it and into their own business[9]. Benefits thereby obtained are held on constructive trust in favour of the original company, and the law will intervene to protect confidential information and trade secrets before or after resignation.

17 The submission in any event fails as the directors at all material times retained their office.

18 In Mordecai v Mordecai[10] the same argument was raised as that in the present case, namely that the directors were not prepared to give restrictive covenants, and that therefore the goodwill of the company was valueless. It was rejected. Hope JA, after the preliminary observation that "this appears ... to be so unjust a result as to make it unlikely that it is a correct way to approach the question", continued:

"[T]his is not a case where the directors of a company set up a business in competition with that of the company. Making improper use of their powers as directors, they terminated the company's involvement in the business and carried on the same business and took over its goodwill for themselves. What they had, and what [the new company] now has, was and is a valuable asset. And yet they claim that [the original company's] goodwill was valueless in its hands and [the original company] is not entitled to damages for the loss of its goodwill because they, the appellants, could have frustrated the hypothetical sale which formed the basis of the valuation. I am happy to be able to conclude that Cohen J was right, and that the appellants' claim cannot be sustained[11]".

The Court of Appeal (Hope JA with whom Samuels and Priestley JJA agreed) held that one of the ways in which damages could properly be assessed for the breach of trust in that case was on the basis of a hypothetical willing vendor and a hypothetical willing purchaser, unaffected by the absence of restrictive covenants that would preclude the directors from competing with the purchaser[12].

19 Counsel for the appellants sought to distinguish Mordecai on the footing that the directors in that case deliberately closed down the company's business at a time when it was a going concern. Whilst that is a factual distinction, it does not make the recognised duty of directors inapplicable to companies which have become unable, temporarily or otherwise, to trade. Nor does it invalidate the tests for assessment of damages in such a case. The duties of directors to the company and its creditors are fundamental, especially in relation to preservation of assets, and are measured against high standards of loyalty and integrity [13].

20 There are many ways in which the quantification of the original company's entitlement might have proceeded[14]. So far I have discussed the method which his Honour adopted, and the alleged errors in that process that have been raised by counsel on behalf of the appellants. Suffice to say that in the context of the envisaged hypothetical sale his Honour did not err against the appellants in acting on the assumption that the directors could have been restrained from competing in the market which the purchaser entered by reason of its use of the rent roll.

Respondent's challenge to his Honour's assessment

21 More complex issues arise on the submissions on behalf of the respondent (the original company). Its contention is that damages should have been assessed on the basis of what the appellants would have had to pay if they had lawfully obtained the rent roll from the original company. This would seem to be consistent with their submission below that the new company acquired the rent roll as a constructive trustee, and that damages should be assessed as the value of the rent roll in its hands. The submission is that there should have been no discount; the full prima facie market value should have been paid. There is some support for the respondent's contention in Mordecai to which I shall return later.

22 The respondent's claim is based upon the fiduciary relationship that exists between directors and their company. Such duties have been articulated in many decisions[15], but for present purposes it is sufficient to note that this is an equitable cause of action rather than a specific claim based under relevant sections of the Corporations Law. Inter alia it was admitted on the pleadings that the directors were at all times under a duty to exercise their powers for the benefit of the company, and not to make improper use of their position to gain indirectly an advantage for themselves or for the new company or to cause detriment to the original company. When a company becomes insolvent or is nearing insolvency, directors are required to have regard to the interests of the company's creditors[16].

23 The duty that was breached in the present case may be very simply stated as the duty not to misappropriate company property, either for their own or a third party's benefit.

24 The directors are personally liable for the breach of such a duty. As their own new company received the benefit of such breaches with full knowledge of the relevant facts it inter alia became accountable as a constructive trustee[17]. The liability of such a company may be for an account of profits, or for an assessment of equitable damages[18].

25 In the present case claims were made both for damages and for an account of the profits arising from the use of the original company's assets but in the event the learned trial judge was asked only to make an assessment of damages. Some reliance was placed by counsel for the appellants upon my statement in Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd[19] that "equitable damages, when assessed at all, have always been assessed in the same way and on the same principles as common law damages". Johnson v Agnew[20] was cited in support of this statement, but that case was concerned only with assessments of damages under Lord Cairns Act. That is to say Johnson v Agnew justifies the statement only with reference to damages that are in addition to or in substitution for the grant of an injunction or of specific performance. Reference was then made in Markwell to Nocton v Lord Ashburton[21] which draws attention to the flexibility of courts of equity in measuring damages. With respect to the relief to be granted in respect of a breach of fiduciary duty by a solicitor, Viscount Haldane observed that "the measure of damages may not always be the same as in an action of deceit or for negligence", but found it unnecessary to pursue the other options, as the plaintiff in that case had sought and obtained an inquiry as to damages that had been sustained by reason of the release of a specified security.[22] The passage relied on in Markwell's case above concludes with the observation "in some cases the damages may be different but the present case is not one of them". Upon reflection the first passage quoted above from Markwell's case is erroneous. Equity follows the law and equitable damages may often be assessed on the same principles as common law damages[23]; but there is no rigid rule. The variety of situations in which equitable damages may be assessed may not always lend themselves to application of the common law remedy of damages.

26 The basic principle underlying the remedy against directors who breach their fiduciary duty is that a trustee must not benefit from the trust[24]. The remedy against the trustee is sometimes referred to as compensation against the trustee personally[25]. The present case concerns defaulting fiduciaries and more particularly, misappropriating fiduciaries. The obligation of such a party is essentially to effect restitution to the estate, and this may be achieved in a number of ways, one of which is to require the fiduciary to disgorge the equivalent of the advantage that has been taken. Such obligation is of a personal character. In Re Dawson[26], Street J (as he then was) observed that its extent is not limited by common law principles such as those governing remoteness of damage. His Honour continued:

"The cases to which I have referred demonstrate that the obligation to make restitution, which courts of equity have from very early times imposed on defaulting trustees and other fiduciaries, is of a more absolute nature than the common-law obligation to pay damages for tort or breach of contract... Moreover the distinction between common law damages and relief against a defaulting trustee is strikingly demonstrated by reference to the actual form of relief granted in equity in respect of breaches of trust. The form of relief is couched in terms appropriate to require the defaulting trustee to restore to the estate the assets of which he deprived it. Increases in market values between the date of breach and the date of recoupment are for the trustee's account: the effect of such increases would, at common law, be excluded from the computation of damages but in equity a defaulting trustee must make good the loss by restoring to the estate the assets of which he deprived it notwithstanding that market values may have increased in the meantime".

27 Meagher, Gummow and Lehane[27] suggest that equitable compensation is "normally" computed by reference to the profit made by the defendant rather than by reference to the detriment suffered by the plaintiff. In an article titled "Compensations for Breach of Fiduciary Duty" published in 1988[28] Gummow J emphasised that when a defaulting fiduciary makes an improper profit, "equity acts not to restore what the plaintiff has lost, for nothing has been lost, but to deprive the fiduciary of a gain made in breach of an obligation to eschew undisclosed conflicts between his duty to his principal and self interest"[29]. He continued: "the fundamental point remains that the obligation to make restitution which is imposed on defaulting trustees is of a more absolute nature than the common law obligations to pay damages for tort or breach of contract"[30].

28 A similar principle is applied in cases involving the abuse of confidential information:

"It is a principle applied in conformity with the more general principle that a person misusing confidential information must answer for his default according to his gain. A headstart may often be the gain in these cases. If it is the gain, damages will be assessed accordingly and any other relief, such as injunction, will be moulded. If it is not the gain the method of assessing damages or the appropriateness of some other remedy has to be considered in the light of what that gain is."[31]

29 In Mordecai, Hope JA recognised that the matter of assessing damages for breach of fiduciary duty by directors could be approached in a number of ways. In addition to the hypothetical sale method under which Cohen J's judgment was upheld, his Honour considered two other approaches, each of which in my view would support the respondent's submission of an assessment of value in the hands of the new company.

30 The first method is to assess the asset at its proper value to the misappropriating fiduciary.

"If, as the appellants assert, the goodwill would have been unsaleable to anyone else, it was certainly saleable, at its proper value to them, and as the position stood when they took the business from [the original company], the business had the potentiality, valuable only to them when it was in their hands, to free them from the restraints which the law otherwise would impose on them. It is well established that if property has some special potentiality which only one person would buy, it is to be valued on the basis of a notional sale to that person."[32]

31 The further alternative method, considered by Hope JA to be "the basis of the correct approach", is to assess damages by analogy with the assessment of damages in copyright cases. Upon this approach, damages are measured as the amount of royalty or other payment which the infringer would have to pay to obtain the intellectual property lawfully instead of unlawfully. His Honour considered this to be apt when someone unlawfully takes property which he might have obtained lawfully.

32 In the wide range of situations which have been canvassed over the last six paragraphs, the common factor is value of the acquisition to the wrong-doer. In my view the learned trial judge erred against the original company in taking what would seem to be the equivalent of a strict common law approach to the assessment of damages instead of acceding to the submission that damages should be assessed as the value of the rent roll in the new company's hands. His Honour did so in purported reliance upon Markwell Bros v CPN Diesels[33], but for the reasons above the statements at page 524 of that case need qualification. The preponderance of authority on the question of equitable compensation in a situation such as the present supports the view that damages should be assessed on the basis of value to the misappropriating fiduciary rather than value according to an artificial hypothetical exercise as if there had been a sale on the open market with directors behaving in a manner calculated to render the asset valueless.

33 On the evidence in this case the asset in the hands of the new company was plainly worth $150,000.00. The discounting exercise by which his Honour reduced this by 30 per cent was not necessary or appropriate. It may be observed that the same result is reached whichever of the three methods of assessment discussed by Hope JA in Mordecai is used. As I see the present case, the only realistic purchasers were the directors or some entity to which they were prepared to give the benefit of their knowledge of the original company's business and of how the rent roll could best be used. As the persons controlling both the vendor and the purchaser in such a situation, it must be assumed that they would purchase the asset at full value in the interests of the vendor company to which they owed fiduciary duties.

34 It is true that the directors' personal association with the business undoubtedly invested it with a special value in the hands of both the original company and the new company, and that the appellants then carried on virtually the same business that had formerly been conducted by the original company. In the light of the factors adverted to in the reasons of Pincus JA which I have read since preparing the above reasons I have given further consideration to the question whether application of the above principle would transform the liability of the fiduciary into a vehicle for the unjust enrichment of the plaintiff. Such a risk is adverted to in Warman International Ltd v Dwyer[34], and a method of avoiding it is suggested. In that case a distinction was drawn between cases of wrongful acquisition of an asset by a fiduciary and cases of wrongful acquisition of a business which is then operated by the fiduciary. In cases of the latter kind it is recognised that it may sometimes be appropriate to allow the fiduciary a portion of the profits[35]. However I do not think that the present case is one of the latter kind. The original company elected not to seek an account of the profits of the business and instead sought equitable compensation. The case was conducted on the footing that a specific asset, namely the rent roll, has been misappropriated and used by the appellants for their own purposes. In these circumstances the balance of authority favours assessment according to the value of the acquisition to the wrong-doer, and in my view the evidence showed this to be $150,000.00. I do not think that this is a case where it would be appropriate to discount that sum by reason of analogy with those cases where an account is taken of the profits of a business run by a fiduciary who invests special expertise and labour which, if completely left out of account, will unfairly enrich the beneficiary. The distinction between the two types of case drawn in Warman International Ltd v Dwyer is not always a tidy one, as the present case tends to illustrate, but in the circumstances here the correct solution seems to be that there should be a notional purchase by the appellants at full value to them without discount.

35 For the above reasons I would uphold the respondent's cross-contention that the damages should have been assessed as the value of the rent roll in the hands of the new company. On this basis the judgment to which the respondent is entitled is $150,000.00 and interest thereon comes to $123,750.00.

36 The appeal should be dismissed. The cross-appeal should be allowed and the judgment below increased to $150,000.00 damages with interest amounting to $123,750.00. The appellants should pay the respondent's costs of the appeal and the cross-appeal to be taxed.

[1] (1907) 5 CLR 418, 432, 436; cf Deputy Federal Commissioner of Taxation v Gold Estates of Australia (1903) Limited [1934] HCA 41; (1934) 51 CLR 509, 515.

[2] (1988) 12 ACLR 751, (1988) 6 ACLC 370, (1988) 12 NSWLR 58. References will be to the NSWLR report.

[4] [1920] 3 KB 571, [1920] 3 All ER 55.

[5] [1975] UKPCHCA 1; (1975) 133 CLR 331.

[6] (1994) 12 ACSR 779, 782, 784.

[7] SEA Food International Pty Ltd v Lam & Anor (1998) 16 ACLC 552, 556.

[8] Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317, 334; Schindler Lifts Australia Pty Ltd v Debelak [1989] FCA 311; (1989) 89 ALR 275, 313-317; Roger Bullivant Ltd v Ellis [1987] FSR 172; Slevin & Brown v Associated Insurance Brokers of Australia (Queensland) Pty Ltd trading as AIBA Group (CA No 250 of 1995, 16 February 1996); Faccenda Chicken Ltd v Fowler [1986] FSR 291, [1986] 3 WLR 288, [1987] Ch 117, (1985) 6 IPR 155.

[9] Cook v Deeks [1916] UKPC 10; [1916] 1 AC 554, (1916) 27 DLR 1.

[13] Jeffree v National Companies & Securities Commission (1989) 15 ACLR 217, [1990] WAR 183, (1989) 7 ACLC 556; Kinsela v Russell Kinsela Pty Ltd (In Liq.) (1986) 4 NSWLR 722, (1986) 10 ACLR 395, (1986) 4 ACLC 215; Mills v Mills [1938] HCA 4; (1938) 60 CLR 150; Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41.

[15] For example, Re City Equitable Fire Insurance Company Ltd [1925] Ch 407, [1924] 3 AllER 485; AWA Limited v Daniels trading as Deloitte Haskins & Sells (1992) 7 ACSR 759 at 864-868.

[16] Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1; Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946, (1991) 5 ACSR 115.

[17] Selangor United Rubber Estates Limited v Cradock (No 3) [1968] 1 WLR 1555, [1968] 2 AllER 1073; Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276, [1969] 2 WLR 427, [1969] 2 AllER 367; Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373; Cook v Deeks above n.9.

[18] Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd [1983] 2 Qd R 508, 525.

[20] [1980] AC 367, 379.

[21] [1914] AC 932.

[23] See for example the assessment of Dixon AJ (as he then was) in McKenzie v McDonald [1927] VicLawRp 19; [1927] VLR 134, 146.

[24] Cook v Deeks above n.9; Regal (Hastings) Ltd v Gulliver [1942] UKHL 1; [1942] 1 AllER 378; Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544, 560-562.

[25] Lewin, The Law of Trusts (16th Edn) pp193-194, 664; Meagher Gummow and Lehane, Equity Doctrines and Remedies (3rd Edn) para 2304.

[26] [1966] 2 NSWR 211. Re Dawson has been cited with approval in many jurisdictions. See Meagher, Gummow and Lehane (above) at para 2303.

[28] In Equity, Fiduciaries and Trusts edited by TG Youdan, pp57-92.

[31] United States Surgical Corporation v Hospital Products International Pty Ltd (1983) 2 NSWLR 157, 233 (reversed on other grounds in Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41); cf Fisher-Karpark Industries Ltd v Nichols [1982] 8 FSR 351.

[34] [1995] HCA 18; (1994-1995) 182 CLR 544, 561.