LCM Litigation Fund Pty Ltd v Coope; Coope v LCM Litigation Fund Pty Ltd

Background

1. LCM was established in 1997 by Mr Coope and others, and is engaged in the business of litigation funding. It was one of the first professional litigation funders in Australia. LCM meets all the costs of litigation funded by it and provides a secured indemnity to the parties that it funds in relation to adverse costs orders. In exchange for that funding and indemnity, LCM receives a percentage of any amount recovered from the litigation, together with repayment of all costs paid by it.
2. Mr Coope was LCM's principal employee until late 2013, at which time Mr Patrick Moloney commenced employment as co-managing director. Mr Moloney had been a non-executive director of LCM since 2003, during which time he was also practising as a solicitor.
3. On or about 11 February 2014, both Mr Coope and Mr Moloney entered into identical contracts of employment which took effect from 1 December 2013. Those contracts contained cascading restraints against competition which, at their widest, prevented Mr Coope and Mr Moloney from being engaged in any competing industry throughout Australia for 12 months from their last date of employment with LCM ("however occurring": cll 17 and 32).
4. At the same time, both Mr Coope and Mr Moloney acquired a 20 per cent share, via the "LCM Trust", in LCM's fee entitlements from a joint venture that LCM had with a third party, Vannin Capital Limited, a subsidiary of Vannin Capital PCC Limited.
5. The parties referred to Vannin Capital Limited as "Vannin Malta". I will use that description in these reasons when it is necessary to refer specifically to that company. Otherwise, I will simply refer to "Vannin".
6. Mr Coope said that he regarded LCM's fee entitlements under its joint venture with Vannin ("the Vannin Joint Venture") as LCM's most valuable asset.
7. From February 2014, there were three directors of LCM; Dr David King (non-executive chairman), Mr Coope and Mr Moloney (co-managing directors).
8. The shareholders of LCM at the time that Mr Coope's employment was terminated were: 1. Mr Coope and his associated entities (18 per cent); 2. Mr Moloney and his associated entities (17.8 per cent); 3. Dr King and his associated entities (6 per cent); and 4. approximately 31 private investors (the remaining 58 per cent).
9. Despite the termination of his employment as joint managing director, Mr Coope remains a director of LCM, as is his entitlement as a shareholder by reason of cl 41.5 of LCM's constitution.
10. In order to fund its litigation projects, LCM relies on its own cash reserves, and capital raisings.
11. Since about mid 2013, LCM has also relied on funding from the Vannin Joint Venture. That funding was for projects valued in excess of $5 million and governed by a suite of documents executed by LCM and Vannin on or about 24 April 2013. The arrangements between LCM and Vannin were complex and not necessary to understand for the purpose of these proceedings.
12. The Vannin Joint Venture expired on 31 March 2015 (the same day that LCM purported to terminate Mr Coope's employment as joint managing director) subject to the running off of uncompleted cases.
13. The serious misconduct that LCM relied upon to terminate Mr Coope's employment arises from the circumstances in which: 1. on 6 and 9 February 2015, Mr Coope communicated to his fellow directors the details of what the parties described as the "Vannin Proposal" or "Wind Down Proposal"; and 2. on 12 February 2015, Mr Coope made to his fellow directors what the parties described as the "Separation Proposal".
14. I set out the detail of those circumstances later in these reasons.

Decision

1. The conclusion to which I have come is that Mr Coope did not engage in serious misconduct in relation to the Vannin or Wind Down Proposal, but did engage in serious misconduct in relation to the Separation Proposal.
2. It follows that LCM was entitled to terminate Mr Coope's employment, and that Mr Coope is not entitled to damages.

Mr Coope's negotiations with Mr Craddock in 2014

1. Between May and July 2014, Mr Coope engaged in negotiations about a possible merger between Vannin and LCM with the executive chairman and majority shareholder of Vannin, Mr Daniel Craddock.
2. At the same time, LCM (principally through Mr Moloney) pursued a possible capital raising. The capital raising was successful; approximately $4 million was raised in June and July 2014. A further $1.3 million had been raised earlier in 2014. These capital raisings account for the private investors to whom I have referred.
3. The negotiations between Mr Coope and Mr Craddock were unsuccessful, principally because of their differing views as to LCM's value.
4. Mr Coope kept Dr King informed of the progress of those negotiations, including the possibility that, if those negotiations were successful, and if a merger or some like arrangement could be negotiated (so that LCM and Vannin had an ongoing relationship beyond the conclusion of the Vannin Joint Venture), he might be employed by Vannin or have equity in one of the Vannin entities.
5. These matters did not concern Dr King, as is revealed by this exchange in cross-examination: "Q. And you knew that Mr Coope was negotiating on his own behalf for not only [an] employment position and salary but also an equity position with Vannin. Correct? A. Correct. Of course it's not unusual for anybody negotiating employment positions to look at some incentive equity positions. It's absolutely standard, yes. Q. He was effectively a 20% shareholder in LCM. Correct? A. Not 20%. Q. It was almost 20%. A. If you include all the things like partly paid shares it was really less than that. Q. I accept it's not exactly 20%. The right figure works out at approximately 20%. Correct? A. Yes. Q. And he was trying to seek that he get the same equity position with the Vannin entity going forward in the business working in Australia under this proposal that was being put forward. Correct? A. I can't reach that conclusion, I'm sorry, no. Q. I'm asking if that was your understanding. A. No. He was looking to have an equity position in whatever vehicle he ended up working in, yes. Q. So at this stage you didn't know what that equity position was in terms of what percentage. A. I didn't know what else was in the vehicle, so it was irrelevant."
6. This material provides some background to what occurred in February 2015. However, as Mr Douglas pointed out in final submissions, it was clearly contemplated by Mr Coope, Mr Craddock and Dr King in the course of the 2014 negotiations that there would be some ongoing relationship between LCM and Vannin. Dr King's position was that, provided an arrangement could be negotiated between LCM and Vannin for an ongoing association, and provided Mr Coope disclosed to LCM what his role in Vannin might be in that event, it was of no concern to Dr King what those arrangements actually were.

The events of January and February 2015

1. In January 2015, Mr Coope engaged in further negotiations with Mr Craddock as to the future business relationship between Vannin and LCM.
2. In the course of those negotiations, Mr Craddock made two proposals I will discuss below, being the Vannin or Wind Down Proposal to which I have referred and what Mr Craddock described as the "Hybrid Proposal".
3. In the circumstances I discuss below, the LCM board considered each of those proposals in early February 2015. At that time, each of the directors of LCM considered that if LCM could not come to an arrangement with Vannin following the looming expiry of the Vannin Joint Venture on 31 March 2015, LCM would have to engage in a further capital raising.
4. In that context, it is important to note at this stage the following evidence that Mr Coope gave in one of his affidavits: "In the event that the Board decided to pursue negotiations with Vannin in relation to the Wind Down Proposal rather than proceed with the further capital raising it was my intention to disclose to the Board any deal I could negotiate with [Mr] Craddock in respect of my future employment arrangements with Vannin before LCM decided to enter into an agreement consistent with the Wind Down Proposal."
5. Mr Douglas did not challenge that evidence in cross-examination.
6. The evidence is consistent with emails that Mr Coope sent to Mr Craddock and Dr King in June and July 2014 in which he said, in effect, that he would disclose to LCM any arrangements he made with Mr Craddock concerning his personal situation before committing LCM to any deal.
7. In those circumstances, I accept Mr Coope's evidence at [35]. Mr Coope's avowed intention of disclosure was, however, as he said, limited to circumstances where LCM's board "decided to pursue negotiations with Vannin in relation to the Wind Down Proposal". The alleged serious misconduct of Mr Coope arising from what he communicated to his colleagues regarding the Vannin or Wind Down Proposal (referred to at [22(1)] above) arose in that circumstance. That arising from the Separation Proposal (referred to at [22(2)]) did not.

Revival of discussions with Vannin in early 2015

1. In November 2014, Mr Coope engaged in correspondence with Mr Craddock and Dr King to arrange a meeting between the three of them in London in January 2015.
2. On 18 January 2015, Mr Craddock sent Mr Coope an email saying he had made separate bookings for lunch in London on 21 January 2015 (for four people) and for dinner on the same evening (for two people).
3. Mr Craddock contemplated, as occurred, that he would attend the lunch with Mr Coope, Dr King and one of Vannin's employees, and that he would attend the dinner with Mr Coope alone.
4. Mr Craddock's email stated: "With regards to lunch, I need some idea from you on what can, and cannot be discussed…?"
5. In cross-examination, Mr Craddock said he did not know in advance of the meeting of any matter that could not be discussed, and asked this question as he had not met Dr King before and did not know him.
6. Mr Craddock gave this evidence: "Q. [W]hy did you think there may possibly be matters which you couldn't discuss? A. I don't recall. Q. Is it that at that stage you had had some discussions with Mr Coope about engaging him separately from LCM to carry on a business in Australia, if in fact you were unable to reach some agreement with LCM? A. Absolutely not."
7. Mr Coope also denied having had any such discussions with Mr Craddock. I see no basis upon which I should reject that evidence.
8. On the same day, 18 January 2015, Mr Coope prepared a handwritten document called "Tasks for next capital raising". The document listed some 24 such tasks including: "Sort out what happens with Vannin post 31/3/15".
9. The remaining points on Mr Coope's task list were mostly related either to a proposed capital raising and/or the ongoing management of LCM. Mr Coope was not asked any questions about this document in cross-examination. I accept Mr Clarke's submission that this document suggests that Mr Coope's state of mind as at 18 January 2015 was that a capital raising was likely to proceed. The document is inconsistent with Mr Coope having then made any decision to leave LCM or join Vannin separately to LCM; I accept that he had not.
10. The following day, 19 January 2015, Mr Coope sent Mr Craddock an email, in which he copied Dr King, attaching his "agenda" for the lunchtime meeting scheduled for 21 January 2015.
11. Relevantly, the agenda referred to: "11. Expiry of LCM's obligations re first right of refusal on new projects".
12. Mr Coope's email stated: "In advance of our meeting I thought that it might be helpful if I shared my current thoughts with you in regard to agenda item 11. LCM is presently planning another capital raising in March/April. We will probably be looking to raise at least $20M. We have had indications from the investors from whom we raised capital in July last year that they will fully support a raising of this amount. As you know, LCM's obligation to give Vannin the first right of refusal to fund any new LCM claims for greater than $5M expires on 31 March. Options for after that date if LCM and Vannin both wish to continue their relationship include: 1. Renegotiate and extend the JV/first right of refusal - not clear how this will fit in with LCM's current strategic plan/commitments made to new 2014 investors and makes it more difficult for LCM to raise further capital because investors are only investing in small claims or claims rejected by Vannin 2. Revisit the Vannin/LCM merger - there will be the valuation issues… 3. Vannin becomes a cornerstone shareholder in LCM (this could also involve LCM changing its name to Vannin Australia). This would probably best be done by Vannin exchanging its interest in the JV for equity in LCM and then participating pari-pasu [sic] in LCM's next capital raising in order to maintain the level of its shareholding. … We are interested in exploring all of these options and more than willing to consider any alternative ideas you have. I look forward to discussing on Wednesday".
13. A short time later on 19 January 2015, Mr Coope replied to Mr Craddock's 18 January 2015 enquiry as to what "can, and cannot be discussed" as follows: "Anything related to LCM can be discussed at lunch. Anything personal is best left for dinner. See you Wednesday."
14. In cross-examination Mr Coope said that there were two matters that he did not wish to discuss in Dr King's presence (being the "personal" matters "best left for dinner"): "The first was I wanted to say to Mr Craddock that if there was going to be any deal that one of the problems in the previous year had been that he and I couldn't agree on employment terms. I wanted to say to him that I thought I'd been too greedy and to see if we could resolve that issue. The second issue was I wanted to press him, perhaps even more forcefully than that, to be more reasonable if he was going to put up a transaction."
15. The cross-examination continued: "Q. So far as the second of those matters is concerned, there's no reason why you couldn't discuss that in front of Dr King, was there? A. I thought there was. Q. Why? A. Because I [didn't] think Mr Craddock was going to like being pressed, and he was less likely to like it in front of someone else."
16. Mr Craddock gave this evidence concerning Mr Coope's comment that "anything personal is best left for dinner": "Q. Could I suggest to you that you understood that reference to personal to be a reference to the terms under which Mr Coope would be engaged in the event that the proposed arrangements…discussed in a previous email went ahead. Is that one of the matters which was discussed, the terms of his own personal engagement? A. Yes. If an agreement was done, Mr Coope was to move with the agreement, then, yes. I don't know if that was what it refers to, but that is a personal answer, yes. Q. Could I suggest to you that you also discussed not only what would happen vis-a-vis Mr Coope should any of those proposals for LCM go ahead, you also discussed what would happen between Vannin and Mr Coope in the event that none of those proposals went ahead? A. No."
17. Mr Douglas put a similar proposition to Mr Coope as follows: "Q. What I want to suggest to you is that by the time these emails which I've been taking you to passed between you, it had become obvious to you there was not going to be a deal between Vannin and LCM which was capable of being agreed upon? A. I don't agree. Not - Q. I want to suggest to you that in these emails you were pursuing, to your own advantage, the possibility of being engaged by the Vannin group of companies on some basis separately from LCM? A. I never had that discussion with him."
18. Thus, both Mr Coope and Mr Craddock denied discussing, at this time, the prospect of Mr Coope's employment with Vannin in the event that negotiations for an ongoing commercial relationship between Vannin and LCM did not bear fruit.
19. Mr Douglas did not suggest to either Mr Coope or Mr Craddock that they had colluded to give the same evidence on this topic. That was quite proper of Mr Douglas as, no doubt, he had no basis to put any such proposition.
20. In the absence of any evidence pointing to the inherent improbability of the evidence given by both Mr Coope and Mr Craddock, I see no reason why I should not accept it.

The lunch meeting on 21 January 2015

1. The lunch meeting on 21 January 2015 was attended by Mr Coope, Dr King, Mr Craddock and the Vannin employee.
2. Amongst the matters discussed at the lunchtime meeting was the possibility of Vannin becoming a "cornerstone investor" in LCM. Mr Craddock rejected this possibility and said: "I cannot see how Vannin could become a cornerstone investor in LCM. Your valuation of LCM is way too high and we will never agree on the respective values of LCM and Vannin, least not [sic] because your valuation of LCM is based on the value created by our funding the Vannin JV, strip that out and what is left to value."
3. Mr Craddock also said he was not happy with LCM's proposed capital raising. He said: "It was my belief that a capital raising would remove Patrick Coope almost entirely from the business and I was concerned that the existing Vannin JV cases would suffer".
4. It is not clear from the evidence precisely what else was discussed at the lunchtime meeting. It did include discussion of the three options outlined by Mr Coope in his email of 19 January 2015 (extension of the Vannin Joint Venture, a possible merger, or Vannin becoming a cornerstone shareholder in LCM).
5. Whatever may have been the detail of those discussions, Dr King's conclusion at the end of the lunch was that there was "no real prospect of a deal being struck with Vannin".

The dinner meeting on 21 January 2015

1. My attention has not been directed to any evidence which suggests that either Mr Craddock or Mr Coope told Dr King that they proposed to meet for dinner on 21 January 2015.
2. Dr King said he did not recall whether he knew about the dinner.
3. As only Mr Coope and Mr Craddock were at the dinner, the only account of what happened is theirs.
4. Mr Coope's account of what was said at the dinner is as follows: "[Mr Coope]: We are interested in doing a transaction but you are going to need to make it attractive. We already have indications from the last round of investors that they will fully participate in our March capital raising. Whilst you never have money until it is in your hands, I am confident that capital raising will be successful. What are you thinking? [Mr Craddock]: Your cornerstone investor option isn't that appealing. We will never agree valuations so the merger is a non-starter. I am interested in revisiting last year's proposals or thinking about other alternatives. Give me a few days to think about it and I will come back to you. [Mr Coope]: Sure but the clock is ticking. We are going to get stated on the back-end work for the capital raising. You need to resist the urge to push too hard. We have a viable alternative just like we did last year. This will be the last chance for a deal. If you are going to put last year's proposals or something similar then that is just going to bring up the issue of my personal position. I have come to the view that I was too greedy last year and am willing to accept less than what I sought then, but I am still a long way from what you were proposing last year. [Mr Craddock]: I have probably mellowed my position as well. What's your current deal? [Mr Coope]: $XXXK salary and effectively twenty per cent (20%) of the profits. [Mr Craddock]: I can live with that."
5. In examination-in-chief Mr Craddock gave a similar account of the conversation: "[Mr Coope] alluded to the fact that there were discussions last year, perhaps he had been too greedy in the negotiations, too aggressive; we likewise agreed. Then it was kind of a case of, 'We don't have long now to do this deal. 31 March is rapidly approaching', and it was just basically throwing ideas around. … We discussed [Mr Coope's] personal situation, if he wanted to move across to the finished entity. … I mean I know it was around salary and equity participation. The original deal had him having some form of equity in [Vannin Malta]. … Other than that, it just kept returning to what could we do between the two respective entities".
6. In cross-examination, Mr Coope reiterated that he discussed with Mr Craddock at the dinner the possibility of acquiring a 20 per cent interest in Vannin Malta. As I discuss below, Mr Craddock mentioned such an interest in the context of the Vannin or Wind Down Proposal that he put to Mr Coope in an email of 27 January 2015. Mr Craddock's recollection was that a possible 20 per cent interest in Vannin Malta for Mr Coope was not mentioned at the dinner meeting on 21 January 2015, but was first mentioned by Mr Craddock in his 27 January 2015 email.
7. In cross-examination, Mr Coope said that what he did discuss with Mr Craddock at the dinner meeting on 21 January 2015 was: "…what arrangements would apply to me if there was a deal".
8. I see no basis to reject that evidence. It is consistent with Mr Craddock's evidence that they discussed what could be done "between the two respective entities". Again, Mr Craddock and Mr Coope, independently, gave a similar account of what happened. There was no suggestion in the evidence that they had put their heads together to ensure their evidence was congruent.
9. In those circumstances, I see nothing sinister in the fact that Mr Coope and Mr Craddock met separately from Dr King on this occasion. I see no basis to conclude that they were doing anything other than discussing what possible commercial arrangements could be negotiated between Vannin and LCM, and what salary and equity arrangements might be available to Mr Coope if some mutually satisfactory arrangement could be negotiated between Vannin and LCM.
10. I cannot see a basis to conclude, as Mr Douglas submitted, that Mr Coope "sought to isolate certain discussions with Mr Craddock, to the exclusion of Dr King".

The Amsterdam meeting

1. On 23 January 2015, Dr King and Mr Coope travelled to Amsterdam to meet with a potential future employee of LCM.
2. In one of his affidavits, Mr Coope gave this account of a conversation he had with Dr King while in Amsterdam: "[Mr Coope]: I had a good discussion with Craddock. It seems like he is going to be more sensible this time. I think he is going to struggle with the cornerstone investor option because of tax. In any event he will want more than fifty percent (50%). The merger isn't going to fly because he still thinks Vannin is worth far more than LCM. I think he will come back with some variation of last year's proposed transactions. We had a discussion about my personal arrangements if there is a deal. Both of us are now more flexible and pragmatic. He has told me that he will give me the same deal I have now with LCM and I have told him I can live with that. [Dr King]: You need to keep any deal simple. Resist your natural urge to complicate things. [Mr Coope]: I hear you but don't know whether a deal will be possible. I have told Craddock that we have a viable alternative with the capital raising but is that really true? How are we going to raise money given my issues with Moloney? They will have to be disclosed. [Dr King]: I agree it will be hard to raise money in those circumstances. Anyway, raising money will be hard. [Mr Coope]: What are you going to do about Moloney? I sense nothing. I don't understand why you won't do anything. He has clearly breached his contract. He achieves nothing. [Dr King]: I will address this when I am back in Australia. Have you sorted out the dispute with Piper Alderman? [Mr Coope]: No and it isn't an important issue for the company. [Dr King]: I want it sorted out straight away."
3. In cross-examination, Mr Coope said that he held approximately 20 per cent of the trust that held the Vannin Joint Venture profits, and that this is what he was referring to when he said that "if there is a deal", Mr Craddock "will give me the same deal I have now with LCM".
4. Dr King accepted that his conversation in Amsterdam with Mr Coope was in substance what Mr Coope set out in his affidavit. He added: "However, I understood any employment of Coope by Vannin would be in circumstances of a merger or significant investment by Vannin in LCM."
5. That appears to be consistent with Mr Coope's statement that his discussions with Mr Craddock concerning his "personal arrangements" were contingent on there being a deal ("if there is a deal").
6. Thus, in substance, Mr Coope told Dr King that if an ongoing business relationship could be negotiated between Vannin and LCM, Mr Craddock was prepared to offer Mr Coope equity in one of the Vannin entities.
7. That suggests, consistently with Mr Coope's recollection, that Mr Craddock had mentioned a possible 20 per cent equity for Mr Coope in Vannin Malta at the 21 January 2015 dinner.
8. It also suggests that, consistently with Mr Coope's evidence, the only discussions that Mr Coope had had with Mr Craddock to this point concerning his personal position were in the context of some negotiated ongoing commercial relationship between Vannin and LCM.
9. At this time, it was Dr King's understanding that the "cornerstone shareholder" option (referred to in Mr Coope's email of 19 January 2015) would not eventuate, as Vannin was not interested in it. Dr King also understood that the "merger" proposal (also mentioned by Mr Coope in the same email) was not viable because of Mr Craddock's views as to LCM's value.
10. Dr King understood that Mr Craddock was intending to come back with a revision of the merger proposal that had been discussed by Mr Craddock and Mr Coope between May and July 2014. However, Dr King's view was that such an option was unattractive to LCM because of LCM's "changed landscape"; namely, LCM's changed shareholding following the 2014 capital raising (which resulted in a number of arm's length investors, the private investors referred to at [17(d)] above, acquiring a shareholding in LCM).

Further communications between Mr Craddock and Mr Coope

1. On 25 January 2015 Mr Craddock sent an email to Mr Coope stating: "I was planning on spending today doing the numbers, always best to discuss with accurate (best guess) information available - I'll be using what you have supplied before, a little out of [date] but it cannot be far off. If I'm wasting my time let me know i.e. if the solution we discussed will never work, saves me spending hours on it".
2. In cross-examination, Mr Craddock said that the "solution we discussed" was a reference to the Vannin or Wind Down Proposal which, as I have mentioned, was included in Mr Craddock's email of 27 January 2015. I will return to this email below.
3. Mr Craddock denied that the "solution we discussed" was one whereby Vannin would become a competitor of LCM.
4. Mr Craddock said that the Vannin or Wind Down Proposal was: "…a scenario whereby we would effectively take over the running costs of LCM and put it into what we would class as a run off scenario with an insurance company".
5. The cross-examination continued: "Q. And you'd effectively take over LCM, could I suggest to you. A. Yes. In effect, yes. Q. Could I suggest to you that you were discussing a proposal whereby Vannin Malta would become a competitor of LCM in Australia. A. No, that couldn't happen. Q. Why not? A. Because we wanted to get hold of LCM by one means or another, be it an acquisition, a merger or a wind-down proposal. There wouldn't be an LCM after the fact."
6. On 26 January 2015, Mr Coope replied to Mr Craddock's enquiry (as to whether he would be "wasting [his] time") as follows: "I don't think you are wasting your time but I don't know whether it will be acceptable to the other shareholders of LCM."
7. That response makes clear, in my opinion, that the "solution we discussed" referred to by Mr Craddock was not some private arrangement between Mr Craddock and Mr Coope but, rather, a proposal that Mr Coope intended to put to the other shareholders of LCM.

Mr Craddock's 27 January 2015 email

1. On 27 January 2015, Mr Craddock sent an email to Mr Coope which was marked "Confidential - FYEO [for your eyes only]".
2. Mr Craddock said that he marked the email "FYEO" to ensure that Mr Coope did not use the proposal for the purpose of an LCM capital raising. Mr Craddock rejected as "nonsense" the suggestion put to him by Mr Douglas that he did not intend Mr Coope to reveal the email to his fellow directors. However that may be, Mr Coope did not show the email to Dr King or Mr Moloney.
3. The substance of Mr Craddock's email of 27 January 2015 was as follows: 1. if an agreement could not be reached, Vannin proposed not to renew the Vannin Joint Venture and proposed to put the existing cases into "run off"; 2. Vannin was not interested in the proposals which Mr Coope had raised in his 19 January 2015 email (referred to at [50] above) of a renegotiation or extension of the Vannin Joint Venture, reconsideration of a merger, or Vannin becoming a cornerstone investor; 3. there was only one solution satisfactory to Vannin, which Mr Craddock called "Vannin Proposal" (as discussed, also referred to as the Wind Down Proposal). The Vannin or Wind Down Proposal involved the following elements: 1. the Vannin Joint Venture would come to an end on 31 March 2015; 2. LCM would "sell" its business to Vannin Malta; 3. LCM would be renamed as "ABC"; 4. all LCM costs and staff would be transferred to Vannin Malta; 5. "ABC" would be left with its ongoing interest in all of the outstanding Vannin Joint Venture litigation projects, and with its existing non-Vannin Joint Venture cases, but these cases would be run by Vannin Malta "effectively free of charge". There would be no ongoing costs or commitments to Vannin and there would be no further requirements for further capital raises or dilution; 6. Vannin Malta would be owned 80 per cent by a Vannin Group company and 20 per cent by Mr Coope; and 7. Vannin Malta would be operated as a "standalone entity"; and 1. as an alternative to the "hardcore" proposal outline (namely, the Vannin or Wind Down Proposal), Vannin might consider a "Hybrid Proposal". This would involve LCM being sold or merged with Vannin Malta creating a combined business owned 25 per cent by LCM and 75 per cent by Vannin Malta.
4. In cross-examination, Mr Craddock said that he regarded the Vannin or Wind Down Proposal as one where, in effect, Vannin acquired the assets of LCM, and the Hybrid Proposal (which he agreed had not previously been discussed with Mr Coope) as one where, in effect, Vannin would "own LCM outright".
5. Following receipt of Mr Craddock's 27 January 2015 email, Mr Coope telephoned him.
6. Mr Coope's account of that conversation was as follows: "[Mr Coope]: Dan [Mr Craddock], you are going to have to be more generous to LCM in your proposal to wind down LCM and merge its business into Vannin. You need to give LCM a profit share not only on existing cases but also new cases for an agreed period. This would represent a goodwill payment to the LCM investors. Unless you improve the deal for LCM we won't agree to the proposal. [Mr Craddock]: I might be able to agree to that but I really need some updated numbers since the last time we looked at this in June last year. Can you prepare models for my two proposals and I will see what I can do. [Mr Coope]: Ok. I will work up some financial models."
7. Mr Craddock's recollection of the conversation was to the same effect: "[Mr Coope]: My initial thoughts on your two proposals are that LCM will need something more attractive. They won't fly as they are. Under your Vannin Proposal LCM will effectively be a "run off" scenario. [Mr Craddock]: I agree but LCM won't have to fund further running costs and it won't have to do further capital raises. Shareholders should make a good return on their investment without any further dilution. [Mr Coope]: I think you need to consider extending your proposal to future litigation funding cases for a period to allow LCM to get some upside from future cases after March 2015. … [Mr Coope]: I've just hired some great staff who I would not like to let go, would you also consider taking on these staff? [Mr Craddock]: I don't see why LCM should get any benefit from future cases, not under the Vannin Proposal where we are taking on the costs. I will consider taking over the LCM staff but let's see where we get to."
8. Once again, Mr Coope and Mr Craddock, independently, gave a similar account of this conversation. The terms of the conversation show that Mr Coope was endeavouring to negotiate the best possible outcome for LCM. There is no suggestion in the conversation that Mr Coope might leave LCM and enter a separate venture with Vannin.
9. On 3 February 2015, Mr Coope sent an email to Mr Craddock in which he stated that he was: 1. trying to arrange an LCM board meeting for 9 or 10 February 2015; 2. still working on a model for "your LCM wind down proposal" (that is the Vannin or Wind Down Proposal); 3. unsure whether this proposal would be acceptable to LCM shareholders "even if the terms are acceptable to you"; and 4. "also thinking about your other potential option of a sale of LCM to Vannin Malta [that is, the Hybrid Proposal] although I am not particularly excited by it".
10. Mr Craddock replied expressing disappointment in the lack of enthusiasm that he detected in Mr Coope's 3 February 2015 email. Mr Coope responded on 4 February 2015: "I am interested but (regrettably) it isn't just my decision".
11. Again, there is no suggestion here that Mr Coope was doing anything other than attending to LCM's interests.

The 9 February 2015 board meeting

1. On 6 February 2015, Mr Coope circulated to Dr King and Mr Moloney a proposed agenda for a board meeting to be held on 9 February 2015, which included an item "Vannin proposals".
2. A short time later, Mr Coope circulated to Dr King and Mr Moloney a document headed "[t]ransaction options discussed with Vannin and present position" ("the Transaction Options document").
3. It is necessary to set out this document in full as it is at the heart of one of the bases upon which LCM contends that Mr Coope engaged in serious misconduct. The Transaction Options document was in the following terms: "Transaction options discussed with Vannin and present position 1. Extend JV - on same or renegotiated terms a. Vannin says it isn't interested (because the returns to it are low compared to what it generates from its own projects) b. Vannin also says this isn't possible if LCM raises more equity capital but I don't understand why (I think the bigger problem will be for LCM raising new equity when Vannin gets first option on all qualifying cases) c. Notwithstanding, I suspect this may be an option with Vannin but I am not sure it can work for LCM 2. Vannin/LCM merger a. Vannin not interested - Craddock still holds the view that Vannin is worth far more than LCM 3. Vannin becoming a cornerstone investor in LCM by way of an LCM equity swap for Vannin's interest in the LCM/Vannin JV a. Vannin says it isn't interested - I think the 2 key problems are Vannin would want control and Australian tax would need to be paid on Australian profits b. I don't think this option is available 4. LCM wind down a. A variation of what was discussed in June and July last year although the terms sound like they would be more attractive for LCM than was discussed then b. LCM ceases trading at an agree[d] date and Vannin takes over its business. Vannin funds completion of LCM's existing cases (plus, I would propose, new projects up to an agreed cut off date) c. This is analysed in more detail in the attached Wind Down Financial Model - note that I haven't discussed the underlying assumptions (particularly those that apply to what I have called the 2 new JVs) in any detail with Craddock so I don't know his views. I also note that this model still needs some work but it is indicative of how this proposal might work 5. Sale of LCM to Vannin Malta ("VM") a. Option raised by Vannin - Craddock's initial thought was that LCM shareholders might end up with 25% of VM b. This is really just another way of doing option 3 c. Would need more work on an exit strategy - presumably an exchange of equity in Vannin Malta for equity in Vannin when it does its IPO [Initial Public Offering] (but what happens if it doesn't do an IPO?) d. Craddock says that, because I would end up with 5% of Australian business, he would want me locked in for 5 years".
4. In pars 1, 2 and 3 of the Transaction Options document, Mr Coope conveyed Vannin's rejection of the options set out in Mr Coope's email of 19 January 2015; that is, of an extension to the Vannin Joint Venture, a merger between Vannin and LCM, or Vannin becoming a cornerstone investor in LCM. Paragraphs 4 and 5 correspond with Mr Craddock's Vannin or Wind Down Proposal and his Hybrid Proposal.
5. In final submissions, Mr Clarke stated: "The [Transaction Options document] was an outline of the options contained in Mr Craddock's email of 27 January. … It is evident from the face of the [Transaction Options document] that it was not intended to comprehensively outline each of the options raised by Mr Craddock in his email of 27 January 2015 or how they could be implemented. Further, it is evident that the Paper not only contained a summary of the various options but also a summary of Mr Coope's comments on each option".
6. The Transaction Options document was an "outline" of sorts. But it did descend to detail. And what is conspicuously absent from Mr Coope's summary of the Vannin or Wind Down Proposal is any reference to Mr Craddock's proposal that Mr Coope acquire a 20 per cent equity in Vannin Malta.
7. Mr Coope also circulated financial models as to the Vannin or Wind Down Proposal which showed that LCM would cease to employ staff after 31 March 2015 and that such salary costs (including those of Mr Coope and Mr Moloney) would be borne by Vannin under that proposal.
8. Dr King said that, prior to the 9 February 2015 board meeting, he did not give any of the options set out in Mr Coope's document much consideration: "…because I felt they were all rather unattractive, particularly in February and we're in readiness for new capital raising".
9. Dr King gave this evidence: "Q. So your position when you went into the board meeting was that you'd already pretty much decided that none of these options really had any future, and that it was time that everyone faced up to the next capital raising? A. Yeah, we'd need a lot of persuading to pursue these others, yes."
10. Mr Moloney gave evidence that, at this time, his preference was to conduct a capital raising rather than try to extend the Vannin Joint Venture. He said that, prior to the 9 February 2015 board meeting, he did not ask Mr Coope for any further details about the Vannin or Wind Down Proposal. Mr Moloney gave this evidence: "Q. Your position when you reviewed these potential proposals was that you weren't interested in following up on any of them, because your view was that you should do the capital raising. Correct? A. Yeah, my view is that the options which had been discussed with Vannin were inconsistent with what had been put to investors, who had invested in LCM in July the year prior. Q. Yes. So you thought that doing one of these types of deals with Vannin, as far as you understood them, was going to be a matter which didn't add up very well with the basis upon which investors had come in in the capital raising in 2014? A. Correct. Q. So your view, having received this document, I suggest to you, was that you weren't particularly enamoured with any of these options and you wanted to proceed with the capital raising. Correct? A. I wanted to discuss the capital raising and give consideration to the capital raising and then, if there were problems associated with the capital raising, potentially come back and canvass some of these issues. Q. Yes. A. But part of the strategic plan was that we were to raise further capital. So I was just unsure as to why these appeared to be at the forefront of discussions as opposed to the strategic plan, which was to raise more capital. Q. Yes, your primary position was to go to the capital raising ahead of these options. Correct? A. Correct."
11. On 9 February 2015 Mr Coope, Dr King and Mr Moloney attended the board meeting of LCM.
12. Mr Coope gave the following evidence as to what was said at the meeting: "[Mr Coope]: There are only two (2) real options proposed by Vannin - what I call the 'LCM wind down' proposal which is similar to what we were discussing mid last year and the merger of Vannin Malta and LCM [evidently a reference to Mr Craddock's Hybrid Proposal]. I don't see the merger as a real option. I sent models on these two (2) options last Friday. Does anyone have any comments? [Dr King]: Neither of the options seem to be a great deal. … [Mr Coope]: I agree. The two (2) proposals by Vannin are not great. The only one Craddock is really interested in is the 'wind down' proposal. I think LCM shareholders would do better if they proceed with the proposed capital raising of a further $16 million and then do an IPO in a couple of years. I think there are reasonable prospects of pulling this off with potentially much better returns but, of course, greater risks. The third option is not very palatable - we don't do a deal with Vannin and Vannin starts competing, we are unsuccessful with the capital raising and we run out of money in June 2015 on the current forecast. This is not really an option. However, even though the capital raising has great potential I don't see it as a real option because of the current internal problems. With these problems it will be very hard to raise money. … [Dr King]: I agree it would be difficult. What's your solution? [Mr Coope]: Dave [Dr King], I don't have a solution. What's your solution? [Dr King]: Why don't you leave? Do you have a proposal? [Mr Coope]: Why would I leave? I don't have any proposal but I will think about it. [Dr King]: We need to deal with this quickly. We don't have much time. Can you give me a proposal by Wednesday? [Mr Coope]: I will think about it. [Dr King]: And Patrick [Mr Moloney] you had better give me a proposal for you to leave as well."
13. Dr King did not, in substance, disagree with Mr Coope's account of the meeting. He said in his affidavit: "I do not recall the exact conversation that Coope, Moloney and I had, but I do recall that at the conclusion of the board meeting I held the same view as I had expressed previously to both Coope and Moloney that there was no real prospect of any deal with Vannin given the valuation issues between the parties".
14. In cross-examination Dr King agreed that, at the meeting, there was no substantive discussion about the Vannin or Wind Down Proposal, and that because of the "new landscape at this time in February" (that is, the new shareholders following the 2014 capital raising) the "wind down model was really just not tenable".
15. Dr King gave this evidence in cross-examination: "Q. Your reaction before the meeting and at the meeting was that the LCM wind down model was not tenable, as you've just said. A. In the new landscape, correct. Q. … The particular details in respect of the wind down model were something that [were] of no particular interest to you for the reason you have just said. Correct? A. In the limited time available I wasn't going to spend that time looking at things which I thought were the least likely, yes. … Q. Do you recall that Mr Coope shared your view that neither of the two proposals by Vannin looked particularly great for LCM? A. That's my recollection, yes."
16. Mr Moloney gave similar evidence as to this aspect of the 9 February 2015 meeting in his cross-examination: "Q. The outcome of the board meeting on 9 February 2015 was that you didn't express any particular interest in any of the five proposals that were the subject of Mr Coope's summary paper. Correct? A. My recollection is that they were all proposals that Mr Coope didn't think were viable, so the answer is: I didn't express any interest. That's correct. Q. Dr King stated that neither of the two remaining options, option 4 or 5, seemed to be a great deal. Do you recall that? A. I do. Q. Mr Coope said that he agreed and that in his view the only option that Mr Craddock was interested in was the wind down proposal, but that LCM shareholders would actually do better if they proceeded with the capital raising. Do you recall that? A. I don't recall that, but it could have been said. Q. That was the extent of the discussions on the Vannin proposals. Correct? A. I think that's probably correct."
17. One of the bases upon which LCM contends that Mr Coope engaged in serious misconduct is that he failed to disclose to Dr King and Mr Moloney in the Transaction Options document or at the 9 February 2015 meeting that an element of the Vannin or Wind Down Proposal was that Mr Coope would become a 20 per cent shareholder in Vannin Malta.
18. Mr Douglas took the matter up with Mr Coope in cross-examination: "Q. Why didn't you disclose the fact that you would have a 20% interest in the ongoing business of the company? A. In the 6 February document? I was analysing it from the point of view of LCM. Q. You knew, as at 6 February [did] you not, that LCM was facing either the possibility of doing some deal with Vannin in relation to the ongoing businesses or alternatively, raising more capital from the public or actually from sophisticated investors. A. They were two of its options available, yes. Q. You knew if they were to go down the route of raising capital from sophisticated investors, it would be inconsistent to that approach for you to take an interest in a company which effectively took over the business of LCM and run that in competition with LCM. A. They were alternatives. LCM could raise more capital, continue on or it could do a transaction with Vannin. There was no contemplation of both being done. Q. Didn't you think it was incumbent upon you at the meeting on 9 February, to say to the board, and I just want you to note if this proposal goes ahead I will have 20% interest in Vannin Malta and I will be running what was the business of LCM in Australia? A. In the circumstances, no. Q. Why? A. There was no interest from any of us in the Vannin proposals. Q. How could the lack of interest give rise to any inhibition upon you disclosing that fact? A. What was the word you used, sorry? Q. Let me put another question to you. Didn't you think it was material for LCM and its board to know that you would have a 20% equity interest in Vannin Malta if this proposal were to go ahead? A. Yes. Q. Didn't you think it was material to know, for LCM and its board, that you would be running the business which had been the business of LCM in Australia? A. If there was a transaction? Q. Yes. A. Yes. Q. So why didn't you disclose it? A. Because we weren't doing the transaction. Q. I want to suggest to you that by this stage, you had formed the view that you wanted to separate yourself from the ongoing business of LCM and throw in your lot, if I could put it that way, with Vannin and Mr Craddock. A. That's not right."
19. Later in his cross-examination, Mr Coope said: "I didn't disclose it on [sic] 9 February board meeting because the transactions weren't going anywhere. It was literally a two minute discussion. I wasn't interested, Dr King wasn't interested. Mr Moloney didn't say anything, but I assumed he wasn't interested."
20. As I have set out above at [35] to [36] above, Mr Coope gave unchallenged evidence that if the LCM board "decided to pursue negotiations with Vannin in relation to the Wind Down Proposal" it was his intention to disclose to the board "any deal I could negotiate with [Mr] Craddock in respect of my future employment arrangements with Vannin".
21. Thus, in substance, Mr Coope's position was that because of the lack of interest expressed by his fellow directors at the 9 February 2015 board meeting as to any of the options proposed by Mr Craddock in his 27 January 2015 email, the occasion did not arise for him to disclose to his fellow directors that, were the Vannin or Wind Down Proposal to proceed, he would be offered a 20 per cent stake in Vannin Malta.

The Separation Proposal

1. As I have set out above, it was Mr Coope's and Dr King's recollection that at the 9 February 2015 board meeting, following the very brief discussion set out at [113] above, Dr King invited Mr Coope to submit the Separation Proposal.
2. It was Mr Moloney's recollection that it was Mr Coope who raised the question of him "separating from LCM".
3. It seems probable that Mr Coope's and Dr King's recollection is correct.
4. So far as the evidence reveals, it was only in the face of Dr King's suggestion "why don't you leave" and request for a "proposal by Wednesday" (11 February 2015) that Mr Coope turned his mind to the possibility of joining Vannin independently of any ongoing business relationship between Vannin and LCM.
5. The next day, 10 February 2015, Mr Coope sent an email to Mr Craddock saying that Dr King and Mr Moloney had not expressed "much interest" in Mr Craddock's proposals and added: "I want to discuss my position with you".
6. On 11 February 2015, Mr Coope and Mr Craddock had a conversation.
7. Mr Coope's account of the conversation was as follows: "[Mr Coope]: Dan [Mr Craddock], King isn't really interested in your proposals. King wants me to give him a proposal to leave LCM. I have come up with a proposal that I can live with. Are you willing to employ me on the same terms we discussed over dinner in January assuming, of course, I can reach an agreement with LCM to leave. [Mr Craddock]: Definitely, but what happens to the Vannin JV cases. I don't want LCM managing them [if] you aren't there. [Mr Coope]: My proposal I am going to put to LCM envisages that I will keep managing them. I will send you an outline of my proposed employment terms. [Mr Craddock]: Okay, but keep it simple. I don't want pages of detail. [Mr Coope]: I know. I will get it to you shortly. I will also put my proposal to King. I think my solution is neat and should be acceptable. I am not sure what I am going to do if King won't accept it. If I can't do a deal with LCM to separate I am not going to leave LCM and leave Moloney to run the company - my shares in LCM will become worthless and my profit share entitlement…from the Vannin JV cases will amount to nothing. [Mr Craddock]: I can understand that. Send me your proposal and I will get back to you on the detail. [Mr Coope]: One last thing. If LCM doesn't want to continue the employment of any current LCM employees will you employ them on the same terms? [Mr Craddock]: That isn't likely to happen is it? [Mr Coope]: They would have to be completely stupid not to want the team but anything is possible. [Mr Craddock]: Sure if you believe they are good. [Mr Coope]: I think they are going to be a great team."
8. Mr Craddock's account of the conversation was as follows: "[Mr Craddock]: So King and Moloney don't like either of my proposals? [Mr Coope]: No. They think it is better to proceed with the capital raising. [Mr Craddock]: I see. So where do we go from here? [Mr Coope]: Well King asked me to put to him a proposal to leave LCM. I was a bit shocked. If I do that and King agrees will you employ me at Vannin? [Mr Craddock]: That's interesting. That almost takes us right back to [the Vannin Proposal in the 27 January 2015 email]. … [Mr Coope]: Looks like that. I part company with LCM and come and work with you. I have to put a proposal to King and I need to get his agreement to it before I can do anything with you. I have too much invested in LCM and I am not going to leave LCM unless I can get my money out. I am not prepared to leave my 20% shareholding in Moloney's hands. [Mr Craddock]: Sure, makes sense. You had better put some terms to me. Leave out the outrageous ones though! When do you think you will do a deal with King and Moloney? [Mr Coope]: Ok. I will get you something in the next few days. I don't know how long King and Moloney will take."
9. Once again, Mr Coope and Mr Craddock's recollection of their conversation, given independently, was to very similar effect.
10. Mr Coope made clear to Mr Craddock that he could not commit to employment with Vannin unless and until he could "do a deal with LCM to separate". However, I do not accept Mr Clarke's submission that this shows that Mr Coope was telling Mr Craddock that he would not come to an arrangement with Mr Craddock unless LCM approved that arrangement. There is no suggestion in the evidence that Mr Coope proposed to tell Dr King or Mr Moloney anything about his planned proposal to Vannin. What Mr Coope was saying was that he needed Dr King's (that is, LCM's) agreement to the Separation Proposal he was planning to put to Dr King/LCM "before I can do anything with you".
11. On 12 February 2015, Mr Coope sent an employment proposal ("the Employment Proposal") to Mr Craddock and the Separation Proposal to Dr King and Mr Moloney.
12. The essence of the Employment Proposal was that Mr Coope would: 1. become managing director in Australia and Asia of Vannin Malta commencing 1 April 2015; 2. obtain a 20 per cent shareholding in Vannin Malta; 3. bring his "existing team with me or, if that isn't possible, a replacement team to be recruited"; and 4. keep managing all existing Vannin Joint Venture projects, subject to LCM's agreement; And that: 1. Vannin Capital PCC would not compete with Vannin Malta in Australia and Asia.
13. Mr Coope's Employment Proposal also included provisions for his salary, annual leave and other like matters.
14. In substance, Mr Coope proposed that he head up Vannin Malta's operations in Australia, free of competition from Vannin Capital PCC, and compete with LCM in the litigation funding market in Australia. Mr Craddock's response, received shortly after, was in substance to agree with Mr Coope's proposal.
15. The essence of the Separation Proposal that Mr Coope sent to Dr King and Mr Moloney was that he would: 1. be released from all obligations under the Employment Contract with effect from 31 March 2015 (the day before his proposed start-up date with Vannin); 2. resign as director of LCM and related companies; 3. have an unrestricted right to use and retain possession of certain confidential information of LCM described as its "contacts register", "standard documents", "completed projects data", "all notebooks", "all Vannin JV transaction documents" and "all Fund 2 transaction documents and reports to investors"; 4. be entitled to retain "current and old laptops, all other office equipment, stationery and books"; 5. continue to manage all Vannin Joint Venture run off projects after 31 March 2015 at no cost to LCM, with LCM retaining all "fee entitlements"; and 6. be free to employ two named prospective employees of LCM. And that LCM would: 1. advise all employees "that their probationary periods in their employment contracts are satisfied"; and 2. pay Mr Coope a termination payment of 12 months' salary ("as opposed to the approximately 4 years that would otherwise be payable" under the Employment Contract).
16. Mr Coope also proposed swapping his shares in LCM "for the corresponding commercial interest in the LCM Trust", acquisition by LCM of Mr Coope's shares in a related company (Litigation Insurance Pty Ltd), and that all Mr Coope's long service and annual leave entitlements be paid out.
17. Mr Douglas described the Separation Proposal as one where Mr Coope was "setting himself up to compete" with LCM.
18. Mr Coope, in cross-examination, said that he thought it was "obvious", indeed "blindingly obvious", from the Separation Proposal that he was proposing to compete with LCM.
19. In his affidavit, Dr King said: "I recall that when I read the Separation Proposal, I thought that Coope may have negotiated some type of arrangement with Vannin or Craddock to work for Vannin. However, there was no suggestion from Coope's Separation Proposal, and in no way did I infer from it, that he would be working as the head of Vannin in Australia, in direct competition with LCM."
20. In cross-examination, Dr King said that he understood from the Separation Proposal that Mr Coope proposed to stay in the litigation funding industry. Dr King also said he understood that Mr Coope did not himself have the funds to fund litigation (see Mr Coope's proposal at [137(e)] above) and that it was probable that Vannin would be the funder of any business conducted by Mr Coope. Dr King said it became clear to him, prior to 26 February 2015 (the date of Mr Coope's suspension), that for the Separation Proposal to work, it was likely that Vannin would have to agree.
21. Mr Moloney also said that he expected someone would have to "back" Mr Coope if Mr Coope was to implement the Separation Proposal (specifically the element set out at [137(e)]). Mr Moloney understood that Mr Coope did not have sufficient personal resources to fund new cases, but did not "recall coming to a view that [the backer] was Vannin". Mr Moloney said that it was obvious that Mr Coope would be staying in the litigation funding industry and competing with LCM.
22. Mr Coope agreed that if the Separation Proposal had been accepted he would have joined Vannin Malta, as the head of Vannin Malta in Australia, to compete directly with LCM.
23. The complaint that LCM makes about Mr Coope, and the basis upon which, so far as concerns the Separation Proposal, LCM contends that Mr Coope engaged in serious misconduct, is that Mr Coope failed to disclose to his fellow board members that, simultaneously with making the Separation Proposal, he was proposing to Vannin that he: 1. be employed by Vannin Malta as its managing director; 2. be given an interest in Vannin Malta; and 3. thereby head Vannin Malta to compete directly with LCM in the Australian and Asian litigation funding market.
24. On 16 February 2015, Mr Moloney prepared a document setting out his reaction to the Separation Proposal. In that document, Mr Moloney stated that he could see some benefit to LCM accepting the proposal, especially so far as concerned Mr Coope's offer to manage all Vannin Joint Venture projects after 31 March 2015 at no cost to LCM. In that regard, Mr Moloney noted: "…it may not be a bad strategic position for LCM to avoid the ongoing drain on its resources in managing and pursuing the Vannin projects. There is currently a cost to LCM in terms of management and personnel to maintain its obligations pursuant to the Joint Venture. Note: this may be one way that LCM can shift the burden of managing the Vannin projects to another entity and off its own balance sheet." [Emphasis in original]
25. Having received no response to the Separation Proposal, Mr Coope sent a number of follow up emails to Dr King. Ultimately, on 24 February 2015 Dr King replied stating: "Re the Separation Proposal, it raises issues which I'm working through. In particular it seems to take away a lot of LCM's upside while leaving it with the liabilities".
26. Dr King suggested that it would be "better" to await receipt of Mr Moloney's separation proposal (that, at the 9 February 2015 board meeting, Dr King had suggested Mr Moloney also submit) and then "deal with all the matters together".
27. On the same day, Mr Coope replied saying that he was surprised at Dr King's comments and argued that the Separation Proposal was "value accretive for LCM and its shareholders". Mr Coope stated: "LCM is better off under my proposal because it is relieved of a contractual obligation to pay me for 3 years of salary…My proposal otherwise doesn't impact on LCM's liabilities. Would it be helpful for me to call you and work you through the key elements of my proposal? As you know, we need to sort out what is happening in the near future because LCM needs to raise more capital in [the] next few months and I am starting to become very concerned that there won't be enough time irrespective of what happens".
28. In the meantime, on 23 February 2015 Mr Moloney accessed Mr Coope's email transmissions and viewed some of the email correspondence between Mr Coope and Mr Craddock set out above, together with Mr Coope's Employment Proposal to Mr Craddock.
29. Mr Moloney drew certain conclusions from these communications and requisitioned a board meeting for 26 February 2015. He did not give Mr Coope notice of that meeting.

Suspension and termination from employment

1. On 26 February 2015 Dr King and Mr Moloney attended the board meeting requisitioned by Mr Moloney.
2. Later that day, LCM commenced these proceedings and obtained ex parte orders restraining Mr Coope from, amongst other things, negotiating or entering into any agreement with Vannin, disclosing any confidential information of LCM or soliciting or approaching any employee of LCM.
3. As I have mentioned, on 26 February 2015 LCM also suspended Mr Coope from his employment, purportedly pursuant to cl 20.1 of the Employment Contract. On 31 March 2015, the board of LCM, comprising Dr King and Mr Moloney, resolved summarily to terminate Mr Coope's employment pursuant to cl 19.9 of the Employment Contract on the basis of serious misconduct (see [3] above).
4. On 2 April 2015, Mr Coope, through his solicitors, informed LCM that Mr Coope regarded LCM's actions of 31 March 2015 as a repudiation of its obligations under the Employment Contract and that Mr Coope elected to treat the Employment Contract as being at an end.

Did Mr Coope engage in serious misconduct?

1. "Serious misconduct" is not defined in the Employment Contract. However, the expression has received consideration in the authorities.
2. What must be established is conduct that is "so seriously in breach of the contract that by standards of fairness and justice the employer should not be bound to continue the employment" (North v Television Corporation Ltd (1976) 11 ALR 599 at 608 to 609 per Smithers and Evatt JJ).
3. Mr Douglas did not cavil with the following summary of the relevant principles in Mr Clarke's closing submissions: "To justify dismissal, an employee's breach of contract of employment must be of a serious nature, involving a repudiation of the essential obligations under the contract, or actual conduct which is repugnant to the relationship of employee and employer: Rankin v Marine Power International Pty Ltd [2001] VSC 150 at [250] per Gillard J. Serious misconduct may be established where it is established that the employee's conduct was, in respect of important matters, incompatible with the fulfilment of the employee's duty or involved an opposition, or conflict between his interest and his duty to his employer or impeded the faithful performance of his obligations, or is destructive of the necessary confidence between employer and employee, but the conduct of the employee must itself involve the incompatibility, conflict, or impediment or be destructive of confidence: Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66 at 81-2 per Dixon and McTiernan JJ). An actual repugnance between the employee's acts and the employment relationship must be found and it is not enough that grounds for uneasiness as to future conduct arises: Blyth Chemicals v Bushnell…at 81-82… Summary dismissal is not justified by a mere breach of the contract of employment, as what is required is a 'radical breach of the [relation]…inconsistent with its continuance': Adami v Maison de Luxe Ltd (1924) 35 CLR 143 at 151 per Isaacs ACJ. To amount to serious misconduct, the conduct must be such so as to indicate that the employee no longer intends to be bound by the contract: Adami at 155 per Gavan Duffy and Starke JJ."
4. In final submissions, Mr Douglas agreed that LCM's case that Mr Coope engaged in serious misconduct came down to these matters: 1. failing to disclose in the 6 February 2015 Transaction Options document or at the 9 February 2015 LCM board meeting that an element of the Vannin or Wind Down Proposal was that Mr Coope would become a 20 per cent shareholder in Vannin Malta; 2. failing to disclose, in the course of making the Separation Proposal, that he was simultaneously making the Employment Proposal to Vannin; and in particular failing to disclose that he was thereby proposing to Mr Craddock that he would become the managing director for Australia and Asia of, and a 20 per cent shareholder in, Vannin Malta, with a view to that company carrying on business in Australia in competition with LCM and free of competition from Vannin itself.
5. I will deal with each matter in turn.

Mr Coope's failure to disclose that an element of the Vannin or Wind Down Proposal was that he acquire a 20 per cent interest in Vannin Malta

1. Mr Coope did not, in my opinion, provide an adequate explanation for his failure to mention, in the Transaction Options document, that an element of Mr Craddock's Vannin or Wind Down Proposal was that Mr Coope would acquire a 20 per cent shareholding in Vannin Malta.
2. It would have been easy for Mr Coope to do so.
3. Mr Coope accepted that his potential interest in Vannin Malta was a "material" matter for LCM and its board to consider "if this proposal were to go ahead" or "if there was a transaction" (see [119] above). He thus agreed that if the proposal were to have gone ahead, he would have had to reveal the 20 per cent interest which he omitted from his 6 February 2015 document.
4. However, as I have said, Mr Coope's unchallenged evidence was that he would have done so. He said, and I accept, that if the LCM board decided to pursue negotiations with Vannin concerning the Vannin or Wind Down Proposal, rather than proceed with a further capital raising, it was his intention to disclose to the LCM board "any deal I could negotiate with [Mr] Craddock in respect of my future employment arrangements" (see [35] above). And Mr Coope had mentioned to Dr King, in the Amsterdam conversation, that Mr Craddock had told him that, in the context of a proposal concerning the ongoing business relationship between LCM and Vannin, he would "give me the same deal I have now with LCM" (see [75] above).
5. For the reasons I have set out above, I am satisfied that, at the time Mr Coope provided Dr King and Mr Moloney with his Transaction Options document, he had made no decision to negotiate with Mr Craddock a position at Vannin Malta in the absence of an ongoing relationship between LCM and Vannin. The circumstances I have set out at [47] and [81] above suggest to me that, as Mr Coope contended, he did not give consideration to employment with Vannin separately from any ongoing relationship between LCM and Vannin until he was invited by Dr King to submit the Separation Proposal.
6. At the board meeting of 9 February 2015, Mr Coope did not advocate that LCM accept the Vannin or Wind Down Proposal. Indeed, he argued against its acceptance and urged that LCM proceed with the capital raising favoured by Mr Moloney (see [113] above).
7. Prior to the 9 February 2015 board meeting, Dr King was not enamoured of any future business relationship with Vannin. The idea of any such business relationship was dealt with peremptorily at the board meeting and dismissed out of hand. To adopt Mr Clarke's language, the discussion was "shut down" without giving Mr Coope any opportunity, or cause, to elaborate on what he had written in his 6 February 2015 Transaction Options document.
8. In those circumstances, my conclusion is that, as at 9 February 2015, the point had not been reached where, in order to discharge his obligations as a director of LCM under ss 181 or 182 of the Corporations Act 2001 (Cth) ("the Act") or to avoid any conflict between his personal interest in advancing his own position and his duty to act in the interest of LCM, he was obliged to disclose what he stood to gain (that is, a 20 per cent shareholding in Vannin Malta) if the matter went further.
9. Nor had the occasion arisen for Mr Coope to make any disclosure to LCM by reason of cl 4.1(c) of the Employment Contract, which obliged Mr Coope to: "[B]ring to the Company's and the Board's attention any significant matters of which you become aware that would be of detriment to the Company."
10. Any potential detriment to LCM which might otherwise have arisen by reason of Mr Coope having a 20 per cent shareholding in Vannin Malta upon implementation of the Vannin or Wind Down Proposal ceased to be of any moment in light of the board's decisive, and unanimous rejection of that proposal.
11. For those reasons, my conclusion is that Mr Coope did not thereby engage in serious misconduct.

Mr Coope's failure to disclose, in the course of making the Separation Proposal, the terms of the Employment Proposal

1. When putting the Separation Proposal to LCM, Mr Coope did not inform his fellow directors that, simultaneously, he was putting the Employment Proposal to Mr Craddock. As I have said, the central elements of the Employment Proposal were that, forthwith upon the cessation of his employment as managing director of LCM, Mr Coope would become the managing director and a 20 per cent shareholder of Vannin Malta, and Vannin Malta would compete against LCM in the Australian (and Asian) litigation funding industry free of competition from Vannin itself.
2. Mr Coope's Separation Proposal was not put to Dr King and Mr Moloney on a "take it or leave it" basis. His proposal was headed "for discussion purposes only - not an offer capable of acceptance".
3. Mr Coope's position was that, having been invited to put the Separation Proposal to Dr King, he was justified in acting exclusively in his own interests in so doing.
4. However, as Mr Douglas put to Mr Coope in cross-examination, Mr Coope remained at this stage one of the two joint managing directors of LCM, and the director at the "interface" of LCM's dealings with Vannin. Mr Coope therefore remained bound to comply with his obligations under the Employment Contract (including under cl 4.1(c); see [169] above) and with his statutory obligations under ss 181 and 182 of the Act.
5. Mr Coope agreed that what he was asking for was "an unrestricted right to compete with LCM".
6. Mr Coope said that he believed it was "blindingly obvious" from the terms of the Separation Proposal that he intended to compete with LCM.
7. As I set out above, Dr King did understand that Mr Coope would stay in the litigation funding industry, very likely with Vannin's agreement and financial backing so far as concerned managing Vannin Joint Venture projects after 31 March 2015, and that Mr Coope "may have negotiated some type of arrangement" to "work for Vannin" (see [141] and [142] above). Dr King later came to think that Mr Coope "actually [had] some arrangement with Vannin".
8. Mr Coope had also told Dr King at the 23 January 2012 meeting in Amsterdam that Mr Craddock would give him "the same deal I have now with LCM" (see [75] above). However, as Mr Coope then said to Dr King, this was only "if there [was] a deal" between LCM and Vannin. Mr Coope's Separation Proposal was put, and considered, in the context of there not being any such deal.
9. What was not obvious to Dr King was that not only did Mr Coope propose to compete with LCM, work in some capacity for Vannin and have financial assistance from Vannin for the Vannin Joint Venture run off, he was also proposing to become Vannin Malta's managing director in Australia and Asia so that Vannin Malta (without competition from its parent company) could compete with LCM in Australia and Asia.
10. Dr King said that he did not "infer" from the Separation Proposal that Mr Coope "would be working as the head of Vannin in Australia, in direct competition with LCM". Dr King said: "I, in no way, understood from discussions with Coope, in Amsterdam or otherwise, that he was negotiating to be employed by Vannin in direct competition with LCM in Australia".
11. During cross-examination, Mr Coope agreed that, at the time he put his Separation Proposal, it would have been "disastrous" for the prospects of LCM's proposed 2015 capital raising for him to leave LCM, join Vannin and set up a business in competition with LCM. But this is just what Mr Coope was proposing to do. And he did not tell his fellow LCM directors.
12. As I have mentioned, cl 4.1(c) of Mr Coope's Employment Contract obliged him to bring to the LCM board's attention "any significant matters of which you become aware that would be of detriment" to LCM.
13. Mr Coope's potential appointment as managing director of Vannin Malta in the circumstances proposed by Mr Coope to Mr Craddock was, in my opinion, a "significant" matter which was very likely, as Mr Coope must have been aware, to be of detriment to LCM; indeed, "disastrous", to use the word with which Mr Coope agreed.
14. Clause 4.1(c) of the Employment Contract was therefore enlivened and obliged Mr Coope to bring to the attention of the LCM board what he was proposing to Mr Craddock. His failure to do so was a breach of cl 4.1(c).
15. There was also a conflict between Mr Coope's interest in negotiating a platform from which he could compete with LCM on the one hand, and his continuing duties, as joint managing director of LCM, to promote LCM's interests on the other.
16. As a director of LCM, Mr Coope was in a fiduciary relationship with LCM and subject to a duty not to place himself in a position where his personal interest and duty to LCM conflicted. The obligations imposed on a fiduciary are proscriptive (for example Breen v Williams [1996] HCA 57; 186 CLR 71 per Gaudron and McHugh JJ at 113), and do not include a positive obligation of disclosure. However, disclosure may be the only way to avoid breach, by obtaining the informed consent of the party (here LCM) to whom the duty is owed (for example Blackmagic Design Pty Ltd v Overliese [2011] FCAFC 24 at [105] to [108] per Besanko J).
17. Here, my opinion is that in order to eschew the conflict of interest in which Mr Coope found himself, it was necessary that he obtain LCM's consent not only to the terms of his Separation Proposal, but also to the undisclosed circumstance that, the very next day after he proposed to leave LCM, he proposed to head up its current major funder and joint venturer as a competitor. He could only do that by disclosing to the LCM board that, simultaneously with making the Separation Proposal to LCM, he had made the Employment Proposal to Mr Craddock.
18. Mr Coope's failure to do so, and his breach of cl 4.1(c) of the Employment Contract, in all probability also amounted to a breach by him of his statutory duties to act in good faith in the best interests of LCM (s 181 of the Act) and not improperly use his position as joint managing director to gain an advantage for himself (s 182 of the Act). However, this aspect of the matter was barely developed by Mr Douglas. In view of the conclusions to which I have come concerning cl 4.1(c), it is not necessary for me to express any final view on this aspect.
19. In my opinion, what might have been "obvious" from Mr Coope's Separation Proposal is beside the point. It was not for Mr Coope's fellow directors to deduce from Mr Coope's Separation Proposal its full implications, absent simultaneous disclosure by Mr Coope of the Employment Proposal.
20. It follows from these conclusions that Mr Coope engaged in serious misconduct, such as to warrant LCM terminating the Employment Contract. His conduct was "repugnant to the relationship of employee and employer", "incompatible with the fulfilment of" his duty to LCM and "involved an opposition, or conflict between his interest and his duty" to LCM (see authorities at [158] above).
21. It follows that LCM did not itself repudiate the Employment Contract and that it has no liability to pay damages to Mr Coope. It is therefore not necessary to examine the arguments which arose in relation to the question of damages. However, in deference to the submissions put by counsel, I will do so, albeit briefly.

Damages

1. By his cross-claim, Mr Coope contended that LCM was obliged to pay him the salary that, but for LCM's termination of his employment, he would have been paid for the unexpired term of his Employment Contract: that is, from April 2015 to November 2018.
2. The Employment Contract made no provision for any payment in lieu of salary in the event that Mr Coope's employment was terminated during the course of the contract term.
3. In effect, Mr Coope's claim was for damages in the amount that he would otherwise have earned under the Employment Contract.
4. LCM contended that, assuming it was not entitled to terminate Mr Coope's Employment Contract, Mr Coope was not entitled to recover such damages for two reasons.

Mitigation

1. First, Mr Coope was, Mr Douglas submitted, obliged to mitigate his damages, presumably by seeking employment elsewhere. However, that matter was not pleaded by LCM and was only raised by Mr Douglas in oral submission in reply (at p 301 of a 305 page transcript). Mr Coope had no opportunity to deal with such a contention. He may well have sought to adduce evidence to answer it. In those circumstances, I would not have been prepared to entertain that submission.

The s 200B issue

1. Second, LCM contended that such a payment would be a benefit regulated by Pt 2D.2 of the Act and that: 1. there was no member approval for the giving of such a benefit under s 200E of the Act; 2. the benefit would not be an exempt benefit under s 200F of the Act; 3. LCM is barred from giving such benefit to Mr Coope by reason of s 200B of the Act, or alternatively, the giving of such a benefit would be illegal and void by virtue of that section; and 4. further or in the alternative, the giving of such a benefit would be limited by the provisions of s 200F(2)(b) of the Act.
2. Section 200B of the Act provides that, relevantly, a company must not give a person holding a managerial or executive office a "benefit in connection with [that] person's…retirement" unless there is "member approval" for the purpose of s 200E for the giving of the benefit.
3. It is common ground that there was no such "member approval" for a payment to Mr Coope of the kind he seeks in these proceedings.
4. However, s 200F(1)(aa) provides that s 200B "does not apply to…a benefit given under an order of a court". An award of damages for breach of contract is, in my opinion, a "benefit given under an order of a court". Thus, on the face of it, s 200F(1)(aa) would have been engaged, and would have had the effect that s 200B did not apply.
5. That is not a surprising result. There is no reason why the legislature would provide that the shareholders of a company should in advance agree that, if the company repudiates its obligations to an employee in a managerial or executive position, that employee should thereby be entitled to recover damages. No doubt that is why s 200F(1)(aa) states (perhaps unnecessarily, bearing in mind that s 200B is directed to benefits given to the relevant person by the company itself) that s 200B(1) does not apply to a "benefit given under an order of a court".
6. Mr Douglas drew attention to s 200F(2), which provides that s 200B(1) does not apply: "…to a benefit given in connection with a person's retirement from an office or position in relation to a company if…the benefit is…a genuine payment by way of damages for breach of contract" and: "[T]he value of the benefit, when added to the value of all other benefits (if any) already given in connection with the person's retirement from offices or positions in the company and related bodies corporate, does not exceed the amount worked out under whichever of subsections (3) and (4) is applicable."
7. Mr Douglas submitted that if s 200F(1)(aa) was engaged, s 200F(2) was also engaged, so as to limit the amount of Mr Coope's recovery. Mr Douglas submitted that the relevant limitation under s 220F(2) was to an amount equal to Mr Coope's average annual base salary.
8. The structure of s 200F makes clear that ss 200F(1) and (2) are directed to different circumstances. Section 200F(1) is directed to a circumstance where the relevant person receives a benefit by reason of an act external to the company (for example, an industrial instrument (ss 200F(1)(a)) or an order of a court (ss 200F(1)(aa)).
9. In my opinion, s 200F(2) deals with an entirely different circumstance; namely, a benefit that is given to the relevant person by the company which benefit could be described as a "genuine payment by way of damages for breach of contract".
10. For example, if the Employment Contract had stated that, were LCM to terminate Mr Coope's employment without cause, Mr Coope would be entitled to payment of such amount as would compensate him for the loss he thereby suffered, s 200F(2) would be engaged and would operate to provide a cap on the amount payable, such cap to be determined in accordance with ss 200F(3) and (4).
11. There would be no reason for s 200F(2) separately to create a circumstance to which s 200B does not apply, if s 200F(2) was directed to the same kind of "benefit" the subject of s 200F(1).
12. For those reasons, had I concluded that Mr Coope was entitled to damages, I would not have accepted either of Mr Douglas's submissions.

Conclusion

1. I invite the parties to confer and agree on the orders, including as to costs, necessary to give effect to these reasons.

Addendum

1. For the reasons set out in my judgment of 7 August 2015 in these proceedings (LCM Litigation Fund Pty Ltd v Coope; Coope v LCM Litigation Fund Pty Ltd (No 3) [2015] NSWSC 1156) I have determined that the answer given by Mr Coope to the question set out at [182] was "I don't agree with that" and not "I agree with that" (as was recorded in the transcript, without objection from either party, at the time I delivered this judgment of 24 July 2015).
2. Accordingly, this judgment should be read as if [182] was omitted and the words "indeed, 'disastrous', to use the word with which Mr Coope agreed" in [184] were omitted.
3. As I explained in my judgment of 7 August 2015, those omissions do not cause me to change my decision concerning Mr Coope's serious misconduct concerning the Separation Proposal.

Amendments 14 August 2015 - Addendum paragraphs [211] to [213] added to judgment to explain transcription error; this judgment should be read as if [182] was omitted and the words "indeed, 'disastrous', to use the word with which Mr Coope agreed" in [184] were omitted.

LCM Litigation Fund Pty Ltd v Coope; Coope v LCM Litigation Fund Pty Ltd (No 3) [2015] NSWSC 1156 added to Coversheet. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 14 August 2015