Foody v Horewood [2003] VSC 347

Foody v Horewood [2003] VSC 347 - VSC 2003 case summary — Zoe

[21]

(a) The annual return for the year ended 30 June 1990 records Horewood and Hore as the sole directors of Musashi, Hore having been appointed a director and secretary on 8 February 1990. The return also states that there were 18 issued shares the nominal value of which was $1, and that they were held as follows - by Horewood as to 11 fully paid and six partly paid shares, and Hore as to one fully paid share. The partly paid shares had been issued in connection with P.G.R.'s holding, it seems because of Probert's limited financial ability. It is to be noted that on 8 February 1990 the directors (Horewood and Hore) approved the transfer of four shares from Horewood to Hore. The four shares were to come from Horewood's holding. There is a question as to whether or when such a transfer occurred. In cross-examination Horewood agreed that the four shares were transferred to Hore and that Hore owned the shares. Then, in re-examination two days later Horewood said that he believed a transfer of the four shares had not taken place. (b) Minutes of a directors' meeting on 7 September 1990 record the appointment of Foody as a director. (c) Minutes of a directors' meeting on 8 October 1990 record the acceptance of the resignation of Goss as a director. The same minutes record a resolution that Bryan Thomas Woodford and Hore be appointed as directors, and the rescission of the resolution on 7 September 1990 to appoint Foody a director. (d) Woodford was employed by Musashi as general manager from early June 1990[6] to November 1992. It seems that he was a director until 23 December 1991. (e) Matthew Raymond Patrick Stewart was employed by Musashi in financial administration in, it seems, the years 1991 to 1998/1999. It is stated in the annual return for 1994 that Stewart was a director and company secretary from 29 May 1992 until 1 July 1992. He is also noted in minutes of directors' meetings in May and September 1992 as an alternate director. (f) Horewood and Hore have continued as directors and employees of Musashi. (g) Following completion of the purchase of the Goss shares and the splitting of the shares into shares of a par value of 10 cents in 1991, the shareholding in the company was, and remains, as follows: * Horewood - 92 fully paid and 60 partly paid shares. * Hore - 10 fully paid shares. * Foody - 18 fully paid shares.

[58]

Moving to that part of Foody's affidavit headed "Removal As Director", Foody referred to advice from his solicitor that "my formal appointment on 11 July 1990 as a director of Musashi" had not been registered at ASIC. Foody said that his solicitor advised him to convene a meeting of Musashi's directors to voice his objections about Horewood's conduct, Foody being concerned as to his possible criminal liability as a director of Musashi. The first point to note about this is that Foody was not appointed a director on 11 July 1990. That appointment occurred at a meeting on 7 September 1990. In attempting to establish an appointment at the earlier meeting, Foody relied on a set of minutes which contained the first page of the minutes of a meeting held on 11 July 1990, and the second (and third) pages of the meeting held on 7 September on which appeared the resolution to appoint Foody. In other words, Foody put forward, and relied on, a false document. These were not Musashi's minutes. In an affidavit Foody sought to explain this, and his repeated evidence that he had been appointed at the meeting on 11 July, on the basis that the minutes had been discovered by the defendants in this form. In cross-examination he explained that the discovery occurred in the Magistrates' Court case, saying that "these minutes" were provided to him "as discovery documents as the July 11, 1990 minutes." He had not had them until then. So, he said, he had not "patched" the minutes together, as Horewood asserted in an affidavit. Even accepting this evidence of Foody as to the manner of production of the minutes, appropriate regard to discovery and the evidence of the defendants which included the correct minutes, must have made it apparent that Foody was wrong in his assertion of an appointment on 11 July 1990. I find that Foody was aware that he had not been appointed a director on 11 July, but let his assertion run in an attempt to bolster his case of oppression and to better explain his concern as a director about Horewood's alleged misdoings.

[78]

It appears from an affidavit sworn by Horewood in Musashi's bankruptcy application against Foody (to which I refer below), that the "unresolved issues" related to Foody's conviction on 19 January 1990. Horewood stated that while Foody was overseas in July and August 1990 the Federal Police had visited him at Musashi and advised him that Musashi had been under surveillance "because of Foody's activities". Horewood said that he "was then advised by the Federal Police that Foody had been apprehended by them" at the airport on 19 January 1990 and that he had been convicted at the Broadmeadows Court. Horewood said that he took this up with Foody on his return to Australia and that Foody admitted the matter. Confusion and uncertainty was brought to this evidence by other evidence of Horewood that the visit by the Federal Police was later in October/early November 1990. In that respect there is a memorandum from Horewood to an officer in the Department of Immigration dated 19 October 1990 in which he refers to a visit "yesterday" by the Federal Police regarding Foody, who suggested that police records around January/February be checked as it "would appear that a drug conviction has been registered against Mr Foody". Horewood's evidence was not supported by independent evidence of the police. Regarding the evidence overall, however, the probability is that Horewood learned of the conviction in the period prior to termination of Foody's employment. That is consistent with the progressive deterioration in the relationship between Foody and Horewood from August, and Horewood's determination in October to be rid of Foody. There is also a consistency with the placing of a recording device in Foody's office in October 1990 prior to termination of his employment. It is not possible to make a precise finding as to when Horewood was first informed of the conviction, but I accept his evidence that he was visited by the police, that the police, not Foody, first informed him of the conviction, and that Foody admitted it to him later. I find that these events occurred prior to the termination of Foody's employment.

[97]

"That the plaintiffs are entitled to pursue the debt by lawful means, notwithstanding the dismissal of the bankruptcy petition, cannot be denied, although one can only really express some amazement at that in view of the findings of Jenkinson J, which were hardly flattering of the plaintiff's directors. However, my task is a judicial one, to be exercised in respect of the matters raised by this proceeding. I do not sit to pronounce generally on the past rights or wrongs of these parties, nor even on their other litigation. In my view, the magistrate was in error perceivable on his reasons and in addition on looking at the other material. He seems to have acted on the basis of Jenkinson J's comments, and possibly just the decision itself. Notwithstanding that I have a discretion with respect to orders in the nature of certiorari, it would be an improper exercise of my discretion to refuse to correct a perceived error of law on the ground that my overall impression is that Mr Foody has been something of a victim. One can sympathise with the defendant Mr Foody whose position is that he has always denied the debt, wanted to defend the case, had agreed to go along with an arrangement that led to a consent order to the contrary of his own case, because, according to him, his solicitor told him that he could get it overturned and start again. He successfully opposed the consequent petition for his bankruptcy, the Federal Court concluding on the oral evidence that it heard from the witnesses that there was no debt. The matter did not then die because the plaintiff did not accept those findings and started a fresh pursuit, but subpoenaed instead Foody's friends, all leading him to endeavour, doubtless to his own great inconvenience, to have the matter reactivated, to knock out the order of September 1992. He is perhaps a victim, although I emphasise that his former lawyers have not been heard. I say 'victim' perhaps of poor advice, subject to that caveat, and also perhaps some events beyond his control and of the existence of different jurisdiction - distinct courts in a federation. As I said to the defendant in the course of the hearing, courts strive to make the application of the law and the attainment of a fair and just result coincide. This is not always possible in the administration of the law."

[190]

Horewood and Foody are different types and in the end, in a relatively brief time, they fell out. Horewood was the principal and guiding hand at Musashi. In effect, he was the company. He is a quieter person and had his ways. It is evident that Foody involved himself in the company, and with others dealing with the company, in a way and to an extent that annoyed Horewood more and more, particularly as he was not achieving as well as he had hoped in developing the U.S. market. I accept as honest and correct the variety of reasons which Horewood gave for being concerned with Foody and that these led to his dismissal. I find too that the matter of the drug conviction was a relevant factor. I find that Horewood came to the view that he wanted to get Foody out of the company. That was not so easy because of his opportunistic obtaining of the $90,000 and the related representations he had made to Foody. In that, and some other respects, I do not accept Horewood's evidence. However, I accept his evidence on many matters. I should say that Horewood's evidence suffered from a lack of memory. This is not necessarily a criticism of Horewood. Other witnesses also suffered from a lack of memory. That was understandable by reason of the long time that had elapsed since the occurrence of the discussions and events being enquired into. The delay was attributable to Foody, who waited until 9 May 1997 to commence his case, and the fact that the trial did not commence until March 2002 in the 12th year after Foody was dismissed. I generally make allowance for the disadvantage the witnesses were thus under when they gave their evidence. I should say, and this is a significant finding adverse to Horewood and Hore, that I conclude that Foody did not owe Musashi the money claimed by it in the Magistrates' Court. I accept Foody's evidence on that matter. I find that Musashi's actions in that matter were driven by Horewood (with the support of Hore) with the object of forcing Foody to give up his shares with no or little recompense for his investment. The achievement of this object would be aided by financially disadvantaging, and harassing, Foody.

[195]

" Particulars (i) Refer to paragraph 8, 9, 10 and 11 above and their respective particulars. (ii) As part of the purchase of Mr Goss' shares agreed to write off a debt owed by Mr Goss to the Company in the sum of $100,000 without the consent of the company and/or its shareholders. (iii) Established businesses in competition with Musashi Pty Ltd's retailers knowing that action could damage Musashi Pty Ltd's relationship with its supplier and its customer base. (iv) Continued to remove excessive funds for personal use from Musashi Pty Ltd while the company was trading unprofitably and did so against the written advice of both internal and external accountants and in contravention of an agreement the directors made with the ANZ Bank not to remove further funds. (v) Made unnecessary, unjustified and unauthorised payments to trust companies and businesses related to the First and Second Respondents including ME MR Pty Ltd, Scoop Nominees (Australia) Pty Ltd, Harrison Clocks Pty Ltd, MNJ Concepts, Ozimer Trading and Athletes Advisory in USA and Prahran, International Cadence, Musashi North America, and other entities both in Australia and offshore for personal benefit to the detriment of Musashi Pty Ltd. (vi) Incorporated the companies known as 32Q Pty Ltd-Singapore, Musashi Asia Pty Ltd-Malaysia, Musashi North America-USA, Musashi New Zealand with themselves as directors and shareholders using Musashi Pty Ltd funds and leaving the debts of those companies with Musashi Pty Ltd when the companies failed to be profitable and were liquidated. (vii) Sold products for cash sales without proper invoicing or accounting for their sale. (ix) Did not declare the cash sales for taxation purposes of the company or thereunder. (x) Musashi did not record the profits from the cash sales and the profits were not distributed to shareholders as dividends; and (xi) Uncooperative and vague discovery on the part of the defendants has made it impossible to include in this list all of the gains made by the first and second defendants and the losses sustained by Musashi Pty Ltd due to the defendants actions and/or in-actions. Particulars of these losses that are currently available through discovery are as listed in the attached spreadsheets, calculated by the first plaintiff (refer to schedule 1) showing the loss is $7,080,531.00 as at 30/3/2002."

[206]

"Outline of Orders sought: The Plaintiff requests that the Honourable Court make the following declarations and orders based on the submissions above and the evidence in general: 1. A declaration that insufficient information is available to determine fair value for the purposes of the repurchase of Mr Foody's shareholding; 2. A declaration that Foody has been oppressed pursuant to section 232 of the Corporations Act 2001 (Cth) by Musashi Pty Ltd and the First and Second Defendants as Directors of Musashi Pty Ltd. 3(a) A declaration that the following matters constitute a breach of fiduciary duty owed by the first and Second Defendants to Musashi Pty Ltd as Directors of Musashi Pty Ltd; (b) A declaration that the conduct of the Defendants constitutes various breaches of the provisions of the Companies and Securities Code (Repealed), the Corporations Law (Repealed) and the Corporations Act 2001 (Cth); (c) An order that the First and Second Defendants account to Musashi Pty Ltd for any loss caused to Musashi Pty Ltd and for any personal benefits obtained as a consequence of the following matters; and (d) A declaration that all benefits derived from a breach of fiduciary duty from the following matters are held on constructive trust for Musashi Pty Ltd until such time as these benefits are accounted for to Musashi Pty Ltd; the following matters being: i. Uncommercial loans; ii. Loans to related parties on uncommercial terms; iii. Personal use of the property of Musashi Pty Ltd; iv. Dealing with the property of Musashi Pty Ltd for personal purposes; v. Excessive remuneration; vi. Writing off Musashi Pty Ltd debts for personal benefit; vii. Use of company monies to discharge personal and unrelated debts and liabilities; and viii. Failing to utilise business opportunities of Musashi Pty Ltd and subsequently diverting and using the same opportunities for personal advantage or the advantage of parties unrelated to Musashi Pty Ltd in which they held an interest; 4. In regard to the 'round robin' consultancy fee payments to Burnicle and the related loans from Burnicle to Mr Horewood and Mr Hore: (a) A declaration that the amounts were obtained for personal benefit in breach of fiduciary duty, and (b) An order that the monies be returned to Musashi Pty Ltd, or noted in the books of the company as loans due by Mr Horewood and Mr Hore on commercial terms; and (c) An order that interest be awarded on these amounts from the date of their receipt by the First and Second Defendants, pursuant to the Penalty Interest Rates Act 1986 (Vic). 5. In regard to monies paid to International Cadence from Musashi Pty Ltd: (a) A declaration that the amounts sent to International Cadence by First Defendant were obtained for personal benefit in breach of fiduciary duty; (b) An order that the monies be returned to Musashi Pty Ltd, or noted in the books of the company as loans due by Mr Horewood on commercial terms; and (c) An order that interest be awarded on these amounts from the date of their receipt by the First and Second Defendants, pursuant to the Penalty Interest Rates Act 1986 (Vic). 6. In regard to loans made by Musashi Pty Ltd to Bruce Hore (a related party) and Ozimer Trading Pty Ltd (a related party) in 1994 and 2000 respectively: (a) A declaration that the amounts lent to Bruce Hore and Ozimer Trading by Musashi Pty Ltd were granted on an uncommercial basis in breach of the First and Second Defendant's duties as Directors; (b) A declaration that the amounts lent to Bruce Hore and Ozimer Trading by Musashi Pty Ltd were granted for the personal benefit of the First and Second Defendant and Bruce Hore in breach of fiduciary duty; (c) An order that interest be awarded on these loans from the date of their receipt by Bruce Hore and Ozimer Trading Pty Ltd respectively, pursuant to the Penalty Interest Rates Act 1986 (Vic). 7. A declaration that the First Defendant failed to act in good faith and in the best interest of Musashi Pty Ltd and for proper purpose; 8. A declaration that the Second Defendant failed to act in good faith and in the best interests of Musashi Pty Ltd and for proper purpose; 9. A declaration that the First Defendant has acted in a manner unbefitting of a Director and specifically in breach of his duties as a Director of Musashi Pty Ltd; 10. A declaration that the Second Defendant has acted in a manner unbefitting of a Director and specifically in breach of his duties as a Director of Musashi Pty Ltd; 11. In reference to all outstanding uncommercial loans, an order that these loans be subject to interest at a commercial rate determined by the court from the date of the loan being granted, with interest compounded annually up to the present date; 12. A declaration that all shares of the First and Second Defendants which were purchased with monies lent from Musashi Pty Ltd and which were not repaid as at the date of this proceeding were acquired by the First and Second Defendants in breach of the fiduciary duty owed to Musashi Pty Ltd in their capacity as directors of Musashi Pty Ltd and therefore must be accounted for to Musashi Pty Ltd. 13. An order that a share restructure be performed which: i. excludes all shares paid for with Musashi Pty Ltd monies by the First and Second Defendants which were not repaid as at the date of the commencement of this proceeding; and ii. that the remaining shares paid for using monies independent of Musashi Pty Ltd by all parties be deemed to constitute the totality of the shares in Musashi Pty Ltd for the purposes of the said restructure; 14. An order that a new independent forensic audit be carried out to determine the value of the company (after the First and Second Defendant's account for benefits obtained in breach of their fiduciary duty and after the share restructure has been completed); 15. An order directing the repurchase of Foody's shareholding at fair value as at the date of the order, based on the independent forensic audit and accounting for the value of his restructured shareholding in Musashi Pty Ltd; 16. An order that Musashi Pty Ltd repay to Foody the sum of $29,676.37 being the amount garnisheed from Foody on 28 May 1999 together with interest from that date pursuant to the Penalty Interest Rates Act 1986 (Vic). 17. An order directing that Musashi Pty Ltd repay to Foody the sum of $9,164.48 being legal costs incurred by Foody to obtain his share transfer, together with interest pursuant to the Penalty Interest Rates Act 1986 (Vic). 18. An order that damages to be paid to Foody for miscellaneous acts of oppression as the court thinks fit or appropriate. 19. An order prohibiting the First and Second Defendant from using Musashi Pty Ltd funds for the purposes of costs for this oppression proceeding. 20. An order that Musashi Pty Ltd pay Foody's costs for this proceeding on an indemnity basis."

[370]

At one point in his evidence Horewood said that a dividend was not paid because it was desired to retain as much capital as possible in the company because, as he said, "we are an unprotected industry ... we are quite fragile". That evidence is to be understood in the context of the years in which the company was financially troubled. Also it is commonplace for owners of private companies to keep as much capital in the company as possible. It is also to be remembered that Foody was remunerated at a rate above Horewood and Hore during his employment. Nevertheless, while Foody received his fair share at the time of his employment, and perhaps more, such evidence is but part of the entire context and does not provide an answer to the present issue. In the same way, the mere fact that in more recent years Horewood's remuneration increased, and I do not overlook the benefit of loans, does not establish the plaintiffs' submission. Hore's remuneration was not large. In relation to Horewood, the benefits he receives must be considered in light of his role in and importance to the company. He is the person whose assets are at risk (and so are Hore's) and the person with overall responsibility for the company. It must be accepted that he is entitled to fair remuneration for undertaking those risks and the time and effort that he provides to the company. At the same time, there can be little doubt that irrespective of the extent to which the financial circumstances of the company improved, Horewood and Hore would not have declared a dividend. In the years of struggle and conflict since 1990 Horewood and Hore were not going to carry out an act of kindness that put money in Foody's pocket. I would and do find that Horewood and Hore were aware of their power to declare a dividend. There are, for instance, references to the matter of a dividend in minutes of annual meetings, and Horewood and Hore would not grant one for that simple, but discriminatory, reason, regardless of the company's financial circumstances. Yet, as I have said, they also wished to keep as much money in the business as possible, and that is an accepted reason for not declaring a dividend. However, when in more recent years the financial position of the company improved and Horewood's remuneration was increased, the failure (as I find it to be) to consider the payment of a dividend on proper grounds, having regard to Foody's position as a shareholder who had never received a return on his shares, amounted to unfairness and discriminatory treatment.

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