Lawrence Adams v Aspecta Financial Group Pty Ltd and ors

THIRD RESPONDENT Robert John Mann

FOURTH RESPONDENT Erwin Walter Filler FILE NUMBER: IRC7672 of 2001 CORAM: Curtis AJ CATCHWORDS : Unfair contract - Orders made against company directors LEGISLATION CITED : Industrial Relations Act 1996 s106 Ace Business Brokers Pty Ltd v Phillips-Treby (2000) 100 IR 420 CASES CITED : Armory v Delamirie (1722) 1 Stra 505, 93 ER 664 Brown v Rezitis (1970) 127 CLR 157 TNT Management Pty Ltd & Anor v White & Ors (1984) 7 IR 331 HEARING DATES: 02/09/2004; 02/11/2004 EXTEMPORE JUDGMENT DATE : 02/11/2004

APPLICANT Mr K G Bennett of counsel

Solicitors: Mr A Ronayne Yandell Wright Stell SYDNEY

FIRST AND FOURTH RESPONDENTS LEGAL REPRESENTATIVES: Mr M Foley Foleys NORTH SYDNEY

SECOND RESPONDENT no appearance

THIRD RESPONDENT In person

JUDGMENT: - 1 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION CORAM:CURTIS AJ DATE:11 FEBRUARY 2004

IRC7672 of 2001 LAWRENCE ADAMS v ASPECTA FINANCIAL GROUP PTY LTD AND ORS Application under s106 of the Industrial Relations Act 1996

1 On 5 January 2001 Phoenix Technology Corporation Pty Ltd (Phoenix) registered a wholly owned subsidiary corporation, Aspecta Financial Group Pty Ltd (Aspecta). The purpose of this incorporation was the purchase and consolidation of 60 to 70 accounting practices bringing them together under the trading name "Aspecta", cross selling financial products and services to clients of those practices, and floating the company on the stock exchange. The directors of the new company were Leslie Raymond Freeman, Erwin Walter Filler and Robert John Mann. From 4 May 2001 Mr Mann was also the company secretary.

2 In late January 2001 Aspecta placed a newspaper advertisement in these terms: Chief Financial Officer We are soon to be ASX listed financial services group acquiring over 70 accounting practices, financial planning and associated companies. This is an outstanding opportunity to create history. This is your opportunity to use your expertise to build a team and manage the financial requirements of a 200 million plus public company. You must be able to demonstrate a proven track record, be a team player, be able to motivate and lead by example. You will be required to establish systems and procedure and to assist with acquisitions. An attractive salary and share package is offered to secure the right person. Please send your resume to: Executive Director PO Box 483 Milsons Point, NSW 1565.

3 The applicant, Mr Lawrence Adams, responded to this advertisement and was interviewed by Mr Freeman and a Mr Paul Finch, who was introduced as "a consultant to Aspecta." A second interview followed on 26 March 2001 with the same persons. After this interview Mr Finch telephoned Mr Adams and said: We have decided to offer the job to you. We will confirm this in writing and send you a letter of employment. Your salary will be $150,000 together with a bonus and superannuation contribution.

4 On 3 April 2001 Mr Freeman, under the letterhead of Aspecta Financial Group, wrote to Mr Adams in these terms: Dear Lawrence, re: CFO position. I would like to confirm our offer and your acceptance of employment with Aspecta Financial Group Pty Ltd. I confirm your salary is $150,000 per annum with a bonus/performance payment in addition. Company contributions for superannuation are in addition to your salary. Naturally a formal employment agreement will be prepared in the near future. Could you please call me with an employment starting date. I welcome you on board and I look forward to working with you.

5 On 17 April 2001 Mr Adams received an email from Aspecta in the following terms: Dear Lawrence re: Chief Operating Officer Position We refer to your recent discussions with Mr Paul Finch concerning your employment as Chief Operating Officer. We confirm the terms of your employment as: fixed salary $150,000 per annum, plus a variable component of $75,000 of which 50% will be paid in cash and 50% in shares. The variable component will be paid pro rata on achieving targets as agreed. Company contributions for superannuation will be in addition to your salary. You will also be granted options for 500,000 shares exercisable as follows, 150,000 at $1.00 after 12 months of listing; 150,000 at $1.20 after 24 months of listing; and 200,000 at $1.40 after 36 months of listing. You will only be entitled to exercise the options during your employment. To confirm your starting date is 23 April 2001. Initially you will work from 52 Alfred Street, Milsons Point, shortly after Aspecta will move to 201 Miller Street, North Sydney. As discussed a car space will be provided. We look forward to your contribution. Yours faithfully Bob Mann - Director.

6 Obviously this document, being an email, did not bear a signature. Although some dispute was raised concerning the authenticity of the email, Mr Adams gave evidence that after receipt of the email he asked that Jane Beeson, the personal assistant to the directors, send a hard copy to him and the document produced in court was that hard copy. In cross-examination it was pointed out to Mr Adams that the document produced was not folded consistently with it having been confined within an envelope. However, I am informed from the Bar table that Ms Jane Beeson is available to give evidence and she is not called by the respondent. The appearance of the document is consistent with its having been sent within an envelope large enough to contain an A4 page without folding. Although in submissions Mr Mann said that he did not send the document he has elected to give no evidence. I accept that the document was sent and it stands as a business record in its terms.

7 It is important to here record that prior to 23 April 2001 when Mr Adams commenced work he dealt exclusively with Mr Freeman and Mr Finch. At no time prior to 23 April 2001 did he have any conversations with Mr Filler or Mr Mann.

8 In reliance upon the letter of 3 April 2001 Mr Adams resigned from his full-time employment with a company known as Johnson Barnett. It does appear that this employment was in the nature of commission work and was not wholly secure. On 23 April 2001 he reported for work at 52 Alfred Street, Milsons Point, which premises also housed employees of Phoenix Technology Corporation Pty Ltd. Mr Adams was then told by Mr Finch: Your appointment has not been approved by the Board of Directors of Aspecta. The Board will be meeting next week to discuss your appointment. You have the opportunity to work as a consultant at the rate of $5,000 per week inclusive of GST until the Board determines its position.

9 Mr Adams accepted these terms saying that he did so without prejudice to his existing full-time contract of employment with Aspecta. He had no option.

10 Pursuant to this new arrangement Mr Adams worked until 3 May 2001 preparing a report presented to the board of Aspecta on 4 May 2001. This report canvassed the viability of the proposed venture. It concluded with the expression of Mr Adams' opinion that Aspecta needed a further funding of $5,000,000 pre float. He offered three options by which funds may be raised, making observations as to the problem each option may create. He included as a fourth option the abandonment of the float. In this regard he observed that the "upside" to this option was to limit any further exposure of Phoenix to losses. The "downside" was that it exposed Phoenix to guarantees of $1.6 million given by Phoenix to investors and could have adverse collateral impact on Phoenix in the marketplace. The report is a model of objectivity and Mr Adams agreed in cross-examination that in the circumstances a decision by the directors to abandon the float may have been prudent although the other options were also viable. It appears that no further work was given to Mr Adams after he submitted this report. On 17 May 2001 he was advised by Mr Finch that further employment with Aspecta was no longer available.

11 On 4 June 2001 Mr Adams wrote to Aspecta in these terms: The Director, Aspecta Financial Group Pty Ltd, Level 17, 201 Miller Street, North Sydney. Attention: Robert Mann. Dear Robert, Chief Operating Officer position . I refer to Aspecta's offer and my acceptance of employment as chief operating officer of Aspecta with effect from 23 April 2001. As I have not been advised of the outcome of the Board's discussion (scheduled for 4 May 2001) I am writing to confirm that:

· I am ready, willing and able to continue to perform the duties of the position to which the Company has appointed me.

· On my calculations, the company is indebted to me in the sum of $7,307.69 (being fixed salary component at the rate of $150,000 per annum for the period from 23 April - 4 June 2001 less $10,000 paid by way of interim consulting fees).

· The company is also contractually obliged to pay statutory superannuation contributions in respect of my employment. Unless I am informed to the contrary in writing, I will assume that the Company does not dispute:

· The fact that my contract of employment remains on foot.

· The Company's liability to pay me the sum referred to above and also to meet its future obligations under my contract of employment. Yours sincerely, Lawrence F Adams.

12 Mr Adams received the following letter in reply under the letterhead of Aspecta Financial Group. Dear Lawrence,

We refer to your letter dated 4 June 2001. Aspecta disputes that you had an employment contract.

You will recall that you agreed to accept a 2 week consultancy contract of $5,000 per week pending consideration of your appointment.

It was explained to you that it was necessary for the board to consider the future of the consolidation project before giving you a fulltime position. Based on your report to the board it was decided that Aspecta should not continue with the consolidation project and consequently decided not to make any further appointments. Yours sincerely (signed) Bob Mann, Phoenix Technology Corporation Ltd. The Claim

13 Mr Adams, although actively seeking work, was unemployed until 17 September 2001 when he commenced work with the Australian Securities Investments Commission. He asserts that the contract of employment pursuant to which he was to perform work for Aspecta was harsh, unfair and unconscionable in that it failed to provide that the respondent make a fair and reasonable payment to him upon unilateral termination by the employer. Upon the evidence it also appears that the arrangement pursuant to which the contract was entered was also unfair because the directors of Aspecta did not carry out the feasibility study conducted by Mr Adams before offering employment to him. Had this been done Mr Adams would not have left his relatively secure employment.

14 Because Phoenix is now in liquidation and Aspecta may have no funds, Mr Adams claims relief against Messrs Freeman, Filler and Mann, the directors of Aspecta at the relevant times. He never met Mr Filler nor had any discussions with him. He did not meet or have any discussions with Mr Mann until he commenced work on 23 April 2001. Mr Mann, however, worked at the Milsons Point premises occupied by both Phoenix and Aspecta. Other persons directly employed by Aspecta also worked at those premises.

15 Mr Mann at the relevant times was a beneficial shareholder in Phoenix. Mr Filler held shares as trustee "for his family trust."

17 I find that the contract of employment between Mr Adams and Aspecta was unfair, harsh and unconscionable for two reasons. First, it made no provision for the payment to Mr Adams of compensation upon unilateral termination by the employer. Secondly, it was unfair that Aspecta offer that contract to Mr Adams in circumstances where the viability of the project and the continuation of his employment were problematical because of lack of funding. I declare the contract void. In this circumstance I have jurisdiction to make such order as to the payment of money in connection with the contract as may be just in the circumstance. The Law

18 A person not a party to a contract declared void or varied pursuant to s106 may be liable to an order for the payment of money in connection with the contract where the justice of the order has "a real connection" with the making, performance, variation or avoidance of the contract (Brown v Rezitis (1970) 127 CLR 157).

19 The managers and shareholders of a corporation may be liable to such orders as may persons who have received the proceeds of the contract or persons culpably associated with its making or operation (Brown v Rezitis at 168). These two circumstances are not exclusive but mere exemplars of the general principle (Ace Business Brokers Pty Ltd v Phillips-Treby (2000) IR 420 at 439).

20 It is unnecessary that the conduct impugned be characterised as fraud, misrepresentation, sharp business practice, lack of bona fides or conduct in the absence of equal bargaining positions (TNT Management Pty Ltd v White 1984 IR 331 at 336), nor that the conduct be "culpable" or "recklessly indifferent" (Ace Business Brokers Pty Ltd v Phillips-Treby at 439).

21 That conduct necessary to found an order for the payment of moneys by a non party to a contract voided pursuant to s106 is no more than conduct "in connection with" the making or performance of a contract which reasonably excites a sense of corrective justice discharged by a money order in favour of the aggrieved applicant.

22 An order for the payment of moneys appropriate to the justice of the case may be made in an amount less than that required to make good the whole of the applicant's loss (Ace Business Brokers, Brown v Rezitis).

23 The requirement that the conduct be "in connection with" connotes a causal connection between the creation of the contract or its performance and the grievance for which the applicant claims relief. Thus the acquisition or holding of shares as a bare trustee for another, or the mere introduction of the contracting parties by a salesman, were circumstances held in Brown v Rezitis unable to satisfy the test of having a "real connection" with the contract. The Relevant Conduct Mr Mann

24 Aspecta was created by Phoenix for a particular purpose, which is spelt out in the terms of the advertisement to which Mr Adams responded. It is inconceivable that Mr Mann as a director was ignorant of both the necessity to appoint a chief financial officer to manage the float vehicle and of the placement of the advertisement. Mr Mann worked at the premises occupied by Aspecta and staff who had been employed by Aspecta before Mr Adams was engaged. His name appears as author of the email confirming Mr Adams' appointment. He does not give evidence to deny that he wrote it. Mr Mann was signatory to the letter of 7 June 2001 in which Aspecta denies that Mr Adams had an employment contract. This denial, in light of the history of events as it must have been known to Mr Mann, was reprehensible. It may be assumed that before writing that letter Mr Mann, even in the most improbable circumstance that he was not aware of the previous correspondence, spoke to Mr Freeman, a co-director. At the very least it may be assumed that he looked at the correspondence or inquired of Mr Adams as to what documents he held, in which case he would have been shown the letter of 3 April.

25 I find that Mr Mann was the author of the email of 17 April and was privy to the offer of employment made to Mr Adams.

26 I find that this contract was unfair in the terms recited above.

27 I find that Mr Mann's complicity in the offer of the contract of employment to Mr Adams, and his further conduct in repudiating the contract and refusing to negotiate some fair and just separation payment to Mr Adams, to be conduct in connection with the making and performance of the contract such that justice requires that an order for the payment of moneys to Mr Adams should be made against him.

28 I am fortified in this finding by the additional but unnecessary finding that Mr Mann held shares in Phoenix, the beneficial owner of Aspecta and my conclusion that Mr Mann stood to either profit or reduce his losses by his stand. Where Mr Mann refuses to give evidence as to the extent of the shareholding I draw the inference that it was not insubstantial (Armory v Delamirie (1722) 1 Stra 505, 93 ER 664).

29 Between the date of incorporation and 30 April 2000 Aspecta disbursed $1,390,000 of investors' funds. $844,000 of this sum was paid to Phoenix as underwriting fees and $546,000 spent on operating expenses.

30 Mr Filler owned shares in Phoenix as trustee for his family trust. He was appointed a director of Aspecta upon its incorporation and could not have been unaware of its purpose. That purpose, a public float, could not have been achieved without the employment of a chief executive officer and a chief financial officer. If he was unaware of the placement of the particular advertisement to which Mr Adams responded Mr Filler must have been aware of the necessity to place an advertisement in similar terms offering "an attractive salary and share package to secure the right person."

31 After Mr Freeman confirmed the offer and acceptance of Mr Adams' employment contract by letter of 3 April 2001, and Mr Mann further confirmed the terms in the email of 17 April, Mr Adams was told by Mr Finch, Aspecta's agent: Your appointment has not been approved by the board of directors of Aspecta. The board will meet next week to discuss your appointment.

32 At that time there were only three directors, Mr Freeman, Mr Mann - both of whom had already confirmed the contract of employment - and Mr Filler. It is a reasonable inference that the board did meet to discuss the appointment, if not the next week, certainly before Mr Mann's letter of 7 June 2001 repudiating the contract. In the absence of any evidence from Mr Filler, who was in court throughout the proceedings, I comfortably draw the inference that he attended such meeting and that he knew of the offer and acceptance of the contract of employment, that it was he who decided that the contract agreed by Mr Mann and Mr Freeman should not be honoured and that after discussion with him Mr Freeman and Mr Mann changed their minds. Because it is probable, and Mr Filler does not deny it, I find that a board meeting was held, attended by Mr Filler, and that he was party to the repudiation of Mr Adams' contract. His conduct in this regard I find to be conduct "in connection with" the performance of the contract of employment and causative of Mr Adams' grievance and his loss.

33 I add a further but unnecessary conclusion, that because Mr Filler held shares in Phoenix through his family trust he stood to materially benefit from the decision to repudiate Mr Adams' employment.

34 Mr Adams was unemployed for 21 weeks between 23 April 2001 and 17 September 2001 other than in respect of the contract work he performed for Aspecta. Had Aspecta honoured his contract he would have received in that time by way of gross wages including superannuation the sum of $66,000.

35 From that sum should be deducted the $10,000 already paid. I order that Aspecta pay to Mr Adams the sum of $56,000.

36 In the circumstances of this case, where the directors were not parties to the contract, any order for the payment of moneys against those directors ought not reflect a windfall to Mr Adams. The justice of this circumstance requires no more than that he be restored to the position in which he stood before the contract was made. Had Mr Adams not accepted the offer of Aspecta he probably would have continued with Johnson Barnett until he found other employment, although this is not certain. He may have been unemployed for a time before finding employment such as his more highly paid job at ASIC. I propose that a money order be made against the directors pursuant to which he is to receive, for the period he was unemployed, the equivalent of his weekly pay at Johnson Barnett. In that employment between 1 July 2000 and 12 April 2001 Mr Adams was paid at the gross rate of $1,300 a week including superannuation. After the deduction of $10,000 paid to him it is just and equitable that he receive the sum of $17,300 in order to place him in the position in which he would have stood but for the conduct of the directors.

37 I enter judgment against the respondents Leslie Raymond Freeman, Robert John Mann and Irwin Walter Filler jointly and severally in the sum of $17,300.

38 I stay judgment for 14 days and give liberty to the respondents or any one of them to place arguments before me as to whether the appropriate award ought be the gross figure as has been awarded or the figure net of tax.

39 I order that the respondents jointly and severally bear the costs of the applicant.

40 In order that Mr Adams be restored to the position in which he would have stood but for the circumstances appearing in the judgment it is appropriate that he receive interest on the judgment moneys from 17 September 2001 to date at the Supreme Court rates. The parties may agree upon the sum and bring in short minutes. 41 It is of course implicit in these reasons and orders that Mr Adams may not satisfy the several judgments in an amount exceeeding $56,000. Satisfaction of any one judgment is pro tanto satisfaction of the others.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.