O’Farrell v McCarthy (No 3)

Medium Neutral Citation: O’Farrell v McCarthy (No 3) [2025] NSWSC 249

Hearing dates: 3 – 5 March 2025

Date of orders: 26 March 2025

Decision date: 26 March 2025

Jurisdiction: Equity

Before: Elkaim AJ

Decision: See paragraph 150

Catchwords: CORPORATIONS — Statutory derivative action — Application to bring proceedings on behalf of company — Where leave sought by member/director — Leave granted
CORPORATIONS — Members’ rights and remedies — Oppression — ss 232-233 Corporations Act 2001 (Cth) — Where conduct is oppressive to, unfairly prejudicial to, or unfairly discriminatory — Where sole member is a holding company
CORPORATIONS — Directors and officers — Directors’ duties — ss 180-181 Corporations Act 2001 (Cth) — Duty of care and diligence — Duty to act in good faith in the best interests of company and for proper purpose — Where first defendant entered contracts without consent — Where first defendant charged company for personal expenses

Legislation Cited: Corporations Act 2001 (Cth), ss 180, 181, 232, 233, 236, 237, 1317E, 1317H, 1318

Cases Cited: Alora Davies Developments 104 Pty Ltd (in liq) v Raphael [2024] NSWSC 547
Henderson v Queensland (2014) 255 CLR 1; [2014] HCA 52
Hoh v Ying Mui Pty Ltd [2019] VSCA 203
Li v Perpetual Holdings Pty Ltd [2025] NSWSC 175
O’Farrell v McCarthy (No 2) [2024] NSWSC 171

Category: Principal judgment

Parties: Brian Richard O’Farrell (First Plaintiff)
Talentpool Recruitment Pty Ltd (Second Plaintiff)
Talentpool Consulting Pty Ltd (Third Plaintiff)
Trevor Gerrard McCarthy (First Defendant)
Talentpool Recruitment Pty Ltd (Second Defendant)
Talentpool Consulting Pty Ltd (Third Defendant)

Representation: Counsel:
Mr S Fitzpatrick SC (Plaintiffs)
Ms S Steinhoff (Plaintiffs)
Mr G Stapleton (Defendants)
Solicitors:
McGirr Lawyers (Plaintiffs)
Operational Legal Australia (Defendants)

File Number(s): 2023/93781

Publication restriction: No

JUDGMENT

Introduction

1. The proceedings were commenced with the filing of a summons on 22 March 2023. It was mostly concerned with restraining the first defendant from expending monies which the first plaintiff believed had been improperly received or incurred by the first defendant.

2. An amended summons was filed on 5 April 2023. A points of claim document was filed by the plaintiffs on 5 August 2023.

3. The defendants filed a cross-summons on 8 September 2023 together with points of defence and a cross-claim.

4. The plaintiffs’ claim is supported by affidavits of Mr Brian O’Farrell dated 22 March 2023, 28 March 2023, and 22 May 2024. There is also an affidavit from Ms Laura Huggins dated 20 February 2025. The defendants rely on an affidavit of Mr Trevor McCarthy dated 12 January 2024. An earlier affidavit of Mr McCarthy, dated 27 April 2023, came into evidence through a tender of a bundle of documents by the plaintiffs (Exhibit 2).

5. Mr O’Farrell is the first plaintiff. Mr McCarthy is the first defendant. For convenience I will refer to them by their names.

6. Mr O’Farrell and Mr McCarthy are the two directors and shareholders of Talentpool Consulting Pty Ltd (TPC). They each own 50% of TPC.

7. TPC is the sole owner of Talentpool Recruitment Pty Ltd (Talentpool).

8. Subject to leave, Talentpool is both the second plaintiff and the second defendant (and cross-claimant). Similarly, TPC is both the third plaintiff and the third defendant (and cross-claimant).

9. The claims against Mr McCarthy can be separated into two parts: firstly, a personal claim by Mr O’Farrell for breach of an agreement, and secondly, derivative actions on behalf of Talentpool and TPC. Under the cross-claim, Mr McCarthy also wishes to obtain relief on behalf of these two companies.

10. The leave required for the derivative actions was deferred to the principal hearing by Kunc J on 5 April 2023. This applies to Talentpool and TPC as both potential plaintiffs and cross-claimants. In respect of the latter status however, I struck out the cross-claim on the first day of the hearing for reasons that I gave on 4 March 2025 (O’Farrell v McCarthy (No 2) [2025] NSWSC 171).

11. Mr McCarthy watched the proceedings, and gave his evidence, by audio-visual link (AVL) from Morocco. I gave leave for this course on 12 February 2025. Mr McCarthy now lives in the United Arab Emirates, or possibly Egypt. He is in Morocco to have some medical treatment. He suffers from a brace of hernias and a “spasmic” (presumably ‘spastic’) colon. He was due to have surgery on 10 March 2025.

Background

12. Mr O’Farrell and Mr McCarthy are both from Ireland. I am not sure if they knew each other in Ireland but they became friends, or at least acquaintances, in Australia.

13. Mr O’Farrell came to Australia in 2011 to work for a recruitment company called Talent International. He was subject to a “457 visa”. I understand a 457 visa allows its holder, being a skilled worker, to work in an approved business in Australia for four years. In 2013, Mr O’Farrell wished to establish his own company in Australia but needed to transfer his visa to a new employer in order to remain in Australia.

14. In February 2008, Mr McCarthy registered Talentpool. He was the sole holder of the company’s 100 shares.

15. In late 2013, Talentpool employed Mr O’Farrell, possibly as a device to extend his 457 visa. Whatever the case, it seems Mr O’Farrell’s intention was to join Talentpool as a means of pursuing his business aspirations.

16. In June or July 2014, Mr McCarthy and Mr O’Farrell entered into an agreement generally referred to as a Shareholders Agreement (the Agreement). The precise date of the Agreement is unknown but there is no dispute that the Agreement was made and that it has continued, despite certain subsequent events, to govern the relationship between Mr McCarthy and Mr O’Farrell. I will return below to these events, and also to a ‘mid-hearing’ change in Mr McCarthy’s position concerning the Agreement.

17. The recitals to the Agreement state that 100% of the shares in Talentpool were owned by Mr McCarthy but that the purpose of the Agreement was to rearrange the shareholding in the company so that each party owned 50% of the shares. In other words, the company was to become jointly, and equally, owned by Mr McCarthy and Mr O’Farrell. These two persons became the directors of the company and formed its board.

18. Without diminishing the possible importance of other terms, I think it important to note the following:

19. In the definition clause 1.1, Associate means:

“(a) in the case of a Shareholder which is a body corporate, a director, secretary or Related Corporation of the Shareholder or any person who has a relevant interest in 20% or more of the voting shares of the Shareholder;

…

(d) a body corporate which is controlled by a Director or Associate of a Director.”

2. Clause 4.5 states:

“Quorum for Board meetings

Where there is more than one Director a quorum for Board meetings is a majority of the Directors. A director who is not entitled to vote for any reason is not counted in the quorum.”

3. Clause 4.7, as relevant to the proceedings, states:

“Board Decisions and Restricted Matters

Other than decisions on the matters listed below, all decisions of the Board shall be by simple majority of Directors present and entitled to vote at the meeting, with each Director having one vote only. Decisions on the matters listed below require the unanimous vote of all Directors entitled to attend and vote at the relevant meeting of the Board:

…

(e) the Company entering into of any guarantee, indemnity or long term or onerous contract or arrangement which is outside the ordinary course of business or the aggregate value of such contract or arrangement is in excess of $5,000.00 or such other amount as the Board may from time to time determine;

…

(i) any arrangement or undertaking or commitment by the Company not in the ordinary course of business and not included in the six-monthly or yearly program and budget of the Company as approved by the Board;

…

(k) the entering into any agreement by the Company with any Director, Shareholder, Employee (other than employment contracts in the ordinary course of business) or Associate;”

4. Clause 13 states:

“DUTIES OF BRIAN

13.1 Brian shall unless otherwise permitted by consent of Trevor:

(a) devote the whole of his time and attention to the Business and Brian shall not without the consent of Trevor engage in or be concerned or interested in any way whatsoever in any other business, enter into any employment or hold any office or appointment;

(b) punctually pay his separate debts and liabilities and indemnify the Trevor and the assets of the Company against the same and all expenses on account thereof;

(c) be just and faithful to the other Shareholder, Director and to the Company in all transactions relating to the Company and shall when reasonably required to do so furnish to the Director full and satisfactory explanations of all matters transactions and things relating to the Company.

(d) be required to actively carry out the work in the Business as Principal Recruiter and Digital Director in accordance with Brian’s employment agreement.

DUTIES OF TREVOR

13.2 Trevor shall be responsible for the overall management and growing of the Business including but not limited to dealing with accountants, lawyers, government departments.

13.3 Trevor may engage in or be concerned with or interested in any other business, enter into any employment or hold any office or appointment provided that he fulfils his duties set out in clause 13.2 and in this regard Trevor may employ/engage a manager for that purpose.”

19. Following the making of the Agreement, the company did well with both directors seemingly performing their duties as intended. Mr O’Farrell described his role as “to attract recruiters and clients, place candidates, and build overall revenue”. He described himself as the Executive Digital Recruiter. Mr O’Farrell said that Mr McCarthy “focused on the accountancy aspects of the business, such as managing payroll, working with our management accountants for tax compliance and preparation of yearly financial statements, and staff IT support when needed”.

20. Mr McCarthy, not inconsistently, described the respective roles of the directors in this way:

“Brian was responsible for the recruitment and sales aspect of the Company, and I took on the responsibility for the operations of the Company, including liaising with professionals such as the Company’s lawyers and accountants. I also mentored Brian with respect of the necessary IT knowledge and managerial aspects of the Company.”

21. Mr McCarthy added:

“Also, I acted as the main Information Technology Support consultant throughout the life of the Company and the operations manager from the inception of the Company until Laura Huggins was hired. This was despite clause 13.3 of the Agreement which allowed me to hire staff to fulfill these duties.”

22. In September 2015, Grant Thornton Australia Pty Ltd (Grant Thornton) was engaged to “act as the Company’s accountants, bookkeepers, and financial advisors”.

23. In November 2015, Mr McCarthy and Mr O’Farrell changed the structure of Talentpool so that it became totally owned by TPC. The shares in TPC were equally owned by Mr McCarthy and Mr O’Farrell. The structural change had no effect on the running of the business. As stated by Mr McCarthy:

“Despite the change in business structure, Brian and I agreed and I understood that the Agreement was still the governing document of our relationship as directors and ultimate shareholders of the Company [referring to Talentpool].”

24. In October 2016, Ms Huggins was employed by Talentpool as the Operations Manager. At the beginning of 2019 she became the Head of Operations and Finance. In her affidavit, Ms Huggins says that the change of title was “more to carry weight with clients as I had essentially always done this role”.

25. Ms Huggins’ employment with Talentpool was terminated by Mr McCarthy in December 2024. She had also started working on a part-time basis, in April 2023, in a company called Furthr, which is owned by Mr O’Farrell. She remains, now full-time, working for Furthr. She is the Head of Commercial Operations and Finance.

26. Although she was working effectively for both protagonists at the same time (from April 2023 to December 2024), and is currently working for Mr O’Farrell, no suggestion was made that her evidence, although supporting Mr O’Farrell, was improperly biased in his favour.

27. Besides receiving dividends from Talentpool, Mr McCarthy and Mr O’Farrell each received a salary. As at May 2020, the salary was $90,000 per annum.

28. In May 2020, Mr O’Farrell altered his involvement in the business. He effectively gave up his participation in the running of the business in order to concentrate on other business activities. He also stopped receiving his salary. He did, however, maintain his shareholding in TPC and continued to receive dividends.

29. According to the defence filed by Mr McCarthy, the events of May 2020 fundamentally influenced the applicability of the Agreement. Mr McCarthy asserted that on or about 22 May 2020:

30. the Agreement was terminated;

31. alternatively, the Agreement was varied; and

32. alternatively, that Mr O’Farrell was estopped from relying upon the Agreement.

33. In the course of his cross-examination, this exchange occurred:

“Q. So on 23 June 2021, you weren’t telling Hayes Knight that the shareholder agreement had been terminated in May 2020, were you? You were saying the opposite.

A. Yeah - the - what you’re - you’re - I never said the Agreement was terminated. It was one of different - three different strategies done by Bridges Lawyers. I fired those lawyers.

Q. Okay, you gave instructions for the filing of that document though, correct?

A. Yeah, that’s a weird one. I--

Q. Okay--

A. --guess I have to answer, yes - but - yes.

Q. Well, okay, Mr McCarthy, are you saying that it’s wrong that--

A. I’m saying there’s a ball of contention in relation to the legal representation at the time that I didn’t agree with.

Q. Well, this is your case, Mr McCarthy. What’s your position? Was the shareholder agreement terminated or not?

A. You’re asking me?

Q. Yes.

A. I’m not - I’m not - I’m not the lawyer that’s actually constructed it. So, therefore, I don’t think my opinion - does my opinion matter?

Q. Yes, yes it does. It’s your case--

A. Sure.

Q. --and you’ve given instructions for a document to be filed, or a document has been filed on your behalf, taking three different positions on the status of the agreement. Now, are you saying that those positions that have been taken on your behalf are not right?

A. I’m saying that I questioned his view in relation to the fact that the Agreement wasn’t valid.

Q. When you say you question it, you mean you disagree with that?

A. I was scratching my head on it, let’s say.

HIS HONOUR: Well, why don’t we just ask this question.

Q. As far as you’re concerned, Mr McCarthy, that Agreement from 2014, does that still apply?

A. From - from my perspective, your Honour, yes. But I’m just simply saying that there was a different legal strategy that was put forward.”

31. The effect of the just quoted evidence was to switch the focus of Mr McCarthy’s case from the Agreement not being applicable, in whole or in part, to one of the interpretation of the Agreement. Mr McCarthy’s ‘new’ case was that the actions he took, as will be described below and which led to the litigation, were sanctioned by the Agreement. The estoppel point was not pursued. Mr Stapleton fairly conceded:

“I’ve thought about it, and I’m not sure how, in my submission, I could suggest that even if estoppel were made out, it would actually affect the analysis.”

32. Returning to the history, Mr O’Farrell still continued to be involved in the business but at a much lesser level. There was considerable dispute about this level, Mr McCarthy asserting that Mr O’Farrell made very little contribution, and that he himself effectively took on the role as managing director and operator of the business.

33. In August 2020, Mr McCarthy left Australia, apparently for Ireland. It seems he did not return and has taken up residence in the Middle East. In 2022, Mr O’Farrell says he became concerned about the financial dealings of Talentpool. He says that he reviewed the draft 2022 financial statements together with the material contained in the Xero accounting software. He discovered that commencing on 22 February 2022 and ending on 24 March 2023, Mr McCarthy caused Talentpool to make 10 separate payments to a company called Dolphin Dream Consulting Pty Ltd (Dolphin). The total of the payments was $501,355.01.

34. Dolphin is wholly owned by Mr McCarthy. According to Mr McCarthy the payments were made “in part payment of management consulting services rendered to Talentpool” by him.

35. In addition to the consultancy payments, Mr O’Farrell also says that he identified a number of “wrongful payments” made to Mr McCarthy. These payments were generally referred to as unauthorised travel expenses and totalled $90,364.49.

36. The discovery of the consultancy payments and the travel expenses prompted Mr O’Farrell to file the summons on 22 March 2023. Orders made after the filing of the summons have taken on some importance in the case.

37. On 22 March 2023, Lindsay J made a number of orders including:

“6. UPON the plaintiff by his counsel (Mr Fitzpatrick) giving to the Court the usual undertaking as to damages:

(a) ORDER that the first defendant by himself, his servants and agents be restrained, up to and including 24 March 2023 or further order, from selling, disposing, charging, dissipating, diminishing or reducing the equity in, the assets of the Second Defendant other than in the ordinary course of making payments to staff members and contractors of the Second Defendant as approved by the Plaintiff in his role as a director of the Second Defendant.

(b) ORDER that the first defendant, by himself, his servants and agents be restrained up to and including 24 March 2023 from operating the following bank accounts of the second defendant with the Australian and New Zealand Banking Group Limited without the prior written consent of the plaintiff or the leave of the Court:

i. BSB: xxxxxx and Account No. xxxxxxxx; and

ii. BSB: xxxxxx and Account No. xxxxxxxx.”

38. The email chain relating to the notification to Mr McCarthy of the orders made by Lindsay J indicates that Mr McCarthy was made aware of the orders before he made the final payment to Dolphin, from one of the accounts restrained by Lindsay J, in the sum of $124,998 (on 24 March 2023). Six emails referring to the orders were sent to Mr McCarthy before the payment was made. He said he was not aware of the orders, but it is clear that his email service was operating and being used by him at the time. I do not accept his denial about knowledge of the orders.

39. On 24 March 2023, Lindsay J continued Order 6, as set out above, until further order. The matter next came before the court, this time before Kunc J, on 28 March 2023.

40. Kunc J made freezing orders, including:

“6. (a) You must not remove from Australia or in any way dispose of, deal with or diminish the value of any of your assets in Australia (‘Australian assets’) up to the unencumbered value of AUD$652,123 (‘the Relevant Amount’).

…

10. This order does not prohibit you from:

…

(b) paying AUD$10,000 on your reasonable legal expenses;

…

12. (a) This order will cease to have effect if you:

(i) pay the sum of AUD$652,123 into Court; or

(ii) pay that sum into a joint bank account in the name of your solicitor and the solicitor for the applicant as agreed in writing between them; or

(iii) provide security in that sum by a method agreed in writing with the applicant to be held subject to the order of the Court.”

41. On 5 April 2023, Kunc J continued the freezing orders until further order.

42. On 27 February 2025, I varied the order concerning legal expenses so as to permit the expenditure of $90,000 in respect of the preparation for, and conducting of, the final hearing which commenced on 3 March 2025.

43. I observed in my decision on the variation application that Mr McCarthy was “almost certainly in breach of the freezing order”. The “almost” in my just quoted words was removed on the first day of the hearing when documents produced by Mr McCarthy revealed that since 18 May 2023, he had paid legal expenses totalling $130,993.45. In addition, the documents established that Mr McCarthy had allowed his cash assets to reduce to a figure about $100,000 less than that stipulated by Kunc J.

44. Mr McCarthy, other than denying his knowledge of the initial orders, which denial I have not accepted, has never otherwise sought to justify his final payment to Dolphin, his reduction of his assets to a value below that stipulated by Kunc J, and his more than tenfold exceeding of the limit placed on his legal expenses.

45. Mr McCarthy’s disregard, if not blatant ignoring, of court orders must have a significant effect on his credit. It was not suggested otherwise by his learned counsel, who more sought to reinstate Mr McCarthy’s credit by a comparison with Mr O’Farrell’s credit. Mr O’Farrell, in the witness box, often tried to put his own spin on questions he was asked. He did not succeed. Cross-examining counsel properly persisted in bringing Mr O’Farrell back to the topic at hand. Nevertheless, I did not think Mr O’Farrell was a dishonest witness. Much of what he said is consistent with the documentary evidence and with the evidence of Ms Huggins, the latter being unquestionably an honest witness.

46. As the case transpired, however, I think any credit issues were confined to the travel expenses claim. The consultancy payments dispute was I think determined by the terms of the Agreement.

47. As a result of the effective abandonment of the May 2020 memorandum of understanding (as influencing the legal relationship between Mr McCarthy and Mr O’Farrell), a good deal of evidence, in particular made up of WhatsApp messages, text messages and emails, became irrelevant.

48. However, the May 2020 memorandum of understanding was still important, said Mr McCarthy, to monies he was paid by Talentpool, in particular the payments to Dolphin.

49. The primary issues left to be determined were:

50. Were the monies paid to Dolphin in breach of the Agreement, including whether they were sanctioned by the May 2020 memorandum of understanding?

51. Were the travel expenses unauthorised and therefore in breach of the Agreement?

(a) The allegation that Mr McCarthy was in breach of his obligations under ss 180 and 181 of the Corporations Act 2001 (Cth)? (b) The derivative actions on behalf of Talentpool and TPC against Mr McCarthy, including the oppression claim by TPC, and the breach of directors’ duties by Talentpool? (c) The claim for damages made personally by Mr O’Farrell against Mr McCarthy?

50. I will deal with each of these issues in turn.

The money paid to Dolphin Dream Consulting Pty Ltd

51. There was no dispute that the monies were paid to Dolphin.

52. Mr McCarthy put his case in three ways:

53. After May 2020, when he took on increased duties, he was entitled to a greater remuneration than the $90,000 that he was then receiving. When he started making the payments to Dolphin in 2022, he was effectively backdating his remuneration, at an estimated figure of $150,000 per annum, back to July 2021.

54. The memorandum of understanding he concluded with Mr O’Farrell on 22 May 2020, sanctioned the payments to Mr McCarthy. The memorandum is contained in an email from Mr McCarthy to Mr O’Farrell.

55. The payments to Dolphin were not a breach of the Agreement. The terms of the Agreement permitted the payments, and, in any event, he was doing no more than nominating a recipient for his remuneration, perhaps akin to notifying a change of address.

56. Mr McCarthy, at para 73 of his affidavit, sets out the “additional tasks I was required to undertake”, perhaps amongst others, from May 2020. Mr O’Farrell conducted an analysis of these tasks, in particular compared to the work Ms Huggins was undertaking.

57. I accept that Mr McCarthy did have more to do after May 2020. But it is clear that from this time Ms Huggins also took on extra responsibilities. This can be seen from the responses she gave to the list of questions provided to her by Mr O’Farrell on 16 May 2024.

58. By May 2020, Ms Huggins was already playing a large part in management. There is an extensive list of her duties in the response to Question 7. In Question 8, Ms Huggins was asked if her duties decreased from May 2020. She responded:

“None of my tasks decreased due to Brian transitioning. If anything my role got larger once other managers left and I was asked to then also manage the sales team.”

56. After May 2020, Ms Huggins said that she looked “after the Company’s books and records including liaising with Grant Thornton, the ATO and various state governments including VIC and NSW”. Ms Huggins stated that she managed vendors, participated in the creation and maintenance of major contracts, participated in weekly sales meetings, assisted with IT issues and “on boarded” new contractors.

57. Ms Huggins said she did not receive much assistance from Mr McCarthy. Overall, I am satisfied that although Mr McCarthy did take on extra tasks after May 2020, he was nevertheless dependent on Ms Huggins for much of the day-to-day operations of Talentpool. If his intention was to suggest that he ran the company single-handedly after May 2020, then I reject that suggestion.

58. The email of 22 May 2020 is entitled “Memorandum of understanding” and is from Mr McCarthy to Mr O’Farrell. It states:

“Hi Brian,

As discussed, we are looking at this to achieve the best outcome for everybody. You, me and the staff. Your recent outbursts today are misunderstandings on your part to be honest and your passion is getting to overheated.

We spend a while discussing it and your desire is to move into,

‘non executive director role, no longer working within the Talentpool business day to day but my shareholding will remain the same and continue to get dividends on parity to yourself’ and forfeiting your salary of $90k. Having a monthly catch up with staff to career mentor them and not interfering in the running of the business. I agree to this.

I want the best for you and I asked that we communicate it in the best way possible to the staff to soften the blow and so we dont torpedo this healthy business for the best outcome for you, the staff and myself.

Our memorandum of understanding was this and nothing else. I never want to gain advantage, I don't want any conflict or further stress as I have enough thinking about my father's health and other matters. I will as always stick to my agreements but not last minute changes based on emotion and misunderstandings. Please be mature and you can't expect me to now, last minute to agree to anything else. I have stated to you and I mean it, I'm going to be honest, fair and please please no more fighting, it's not worth it. Thanks.”

59. At its highest, the memorandum supports the following:

60. Mr O’Farrell would become a non-executive director, not working on a daily basis within the company.

61. His shareholding would remain the same, namely 50%.

62. Mr O’Farrell and Mr McCarthy would continue to receive an equal amount by way of dividends.

63. Mr O’Farrell would no longer receive his salary of $90,000.

64. Mr O’Farrell would have “a monthly catch up with staff to career mentor them”.

65. Mr O’Farrell would not interfere in the running of the business.

66. Mr McCarthy specifically states in the email: “Our memorandum of understanding was this and nothing else.” There is nothing else in the email besides those matters set out in the previous paragraph. There is no permission to Mr McCarthy to set his own remuneration or to pay consulting fees, to himself or anyone else.

67. The memorandum of understanding therefore does not assist Mr McCarthy’s justification for the payments to Dolphin.

68. Turning to the Agreement, Mr McCarthy interpreted the Agreement in this way:

69. Clause 4.4 says Mr McCarthy is the chairman of the board and he has a casting vote.

70. While Mr McCarthy accepted that he did not have a casting vote in respect of the matters listed in cl 4.7 as requiring a unanimous vote of all directors, the payments to Dolphin did not fall within cl 4.7.

71. This was because Dolphin was no more than a nominated recipient of Mr McCarthy’s remuneration. Accordingly, there was no new agreement made by Mr McCarthy falling within cl 4.7(e), (i) or (k). Counsel put it this way:

“Whilst it doesn’t expressly say in 13.2 and 3 that my client had an existing employment agreement, Mr O’Farrell conceded readily and appropriately, in my submission, that he didn’t expect Trevor to not earn a salary, and the evidence is that Trevor did earn a salary.

So the two of them were existing employees as at the relevant dates of the payments that began in March 2022, in my submission. Paragraph 4.7(e), what I’d like to ask your Honour to consider is that the concept of (e) being such a blanket, strict opposition to what my client did is not as simple as it sounds. The company entering into any guarantee, indemnity or long-term or onerous contract or arrangement. In my submission, there was no entering into a new agreement. This is where I’d like to characterise it.

Truthfully, according to the circumstances, Mr McCarthy was an existing employee. Existing employee. There can be no doubt about that. In my submission, Mr McCarthy, who agreed that he started his Dolphin Dream Company, was in effect - in effect - not pleaded, I accept, but the alter ego of that, or it was the alter ego of him, because he was the sole director and shareholder. So the proper reading, in my respectful submission, in the circumstances of this case are that Mr McCarthy, when he made payments to himself, he didn’t enter into a new agreement.

He effectively nominated the recipient on his behalf of his entitlement to income. He was existing. There was no contract to enter into. The company was a nominee. We all know how often one can have described in a contract a nominee. That, in my respectful submission, is what occurred. That’s why, in my submission, (e) would not apply. Really, the only other operating element of 4.7 is (k), I understand it to be, because when one looks at the others, I would say they, respectfully, don’t apply.”

63. I disagree with Mr McCarthy’s interpretation of the Agreement. Dolphin may well have been the alter ego of Mr McCarthy, but it was still a separate entity. That is the very essence of a proprietary limited company. Being such an entity carries with it benefits, for example taxation rates, which separate it from its owner. In order to receive the payments, Dolphin, albeit through Mr McCarthy, had to contract to do so.

64. In addition, Dolphin was not simply a nominated recipient. It was the provider of a service in the form of work done by Mr McCarthy. Mr McCarthy himself states in his affidavit, at [91]:

“it was arranged that My Salary Package would be paid as follows:

(a) $90,000 per annum directly to me as an employee of the Company; and

(b) The remainder to an entity related to me by way of contract payments to a company related to me, being Dolphin Dream Consulting License No. 996087.”

65. Mr McCarthy is essentially saying that the payments made to him, via Dolphin, amounted to appropriate remuneration. Whether assessed at $150,000 per annum or $250,000 per annum, it cannot be said that such figures would not necessarily be seen as a reasonable remuneration. It might also be said that Mr McCarthy, with Mr O’Farrell having left the running of the business to him, was entitled to a raise in salary from the $90,000 he was receiving in 2020. But this is not the point. The point is that the payments to Dolphin were made specifically for consulting services and not as remuneration of an employee or a director.

66. Contractor payments are not salary payments. Dolphin was contracting with Talentpool for the provision of Mr McCarthy’s services to Talentpool. If there is any doubt about this issue it is disposed of by the invoices sent to Talentpool by Dolphin, all of which claim monies for “Management Consulting Services” and are stated to be “FOR Management Consulting”.

67. Even further, the response describing the payments in the points of defence refers to each payment as being “in part payment of management consulting services rendered to Talentpool by the First Defendant’s consultancy firm, Dolphin Dream Consulting.”

68. The contract is for more than $5,000 so falls under cl 4.7(e). The agreement to pay Dolphin also falls under (k), noting the definition of Associate which is quoted above.

69. It is perhaps arguable cl 4.7(i) is not contravened because consultancy services may fall within the course of business. What is clear is that the board never approved the payment of consulting fees.

70. There is no dispute that there was not a unanimous decision of the directors approving the agreement with Dolphin.

71. The next point to consider is whether the payments might be seen as just allowances paid to Mr McCarthy. Mr McCarthy put his receipt of the consultancy payments as qualifying him for relief under s 1318 of the Corporations Act. It was submitted that there was no loss to Talentpool because the monies paid to Dolphin were reasonable in quantity and would in any event have been paid to ‘somebody’ to do the work that was done by Mr McCarthy. Accordingly, there was no loss to the company. Counsel submitted:

“Sure, establish liability, but there’s no loss because the company would not have lost it. It would have done two things. The company would have either paid it to somebody else or paid it to them both by way of dividends. So you say 500,000. 250 on my client. He was overpaid, on one construction, by 320, so the business is out of pocket by $70,000. And that’s what all this is about. It’s unbelievable. Anyway, in our submission, damages claim fails. In our submission, there’s no resulting loss under s 1317.” (Emphasis added)

72. In my view the claim is quite believable. Mr McCarthy, as he ultimately accepted, was bound by the Agreement. He chose to act in contravention of the Agreement by making substantial payments to Dolphin, but ultimately entirely for his own benefit. Section 1318 of the Corporations Act requires that the person has acted honestly. I do not think Mr McCarthy acted honestly. This is exemplified by him totally ignoring the Agreement, manipulating his adherence to the Agreement by initially claiming it had ceased to have any effect or was varied, and his effective contempt for court orders. The last payment to Dolphin was made after the court ordered that such a payment should not be made. As I have said, I do not accept that Mr McCarthy was unaware of the orders. That payment was certainly dishonest.

73. The question of just allowances was dealt with by the Victorian Court of Appeal in Hoh v Ying Mui Pty Ltd [2019] VSCA 203, from [295]-[297]:

“295. Equity’s rationale for ordering just allowances was set out by the High Court in Warman International Limited v Dwyer, a case concerning an account of profits by an errant fiduciary but nevertheless applicable to the issue here:

‘In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal's goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal's property has been exposed. Then it may be said that the relevant proportion of the increased profits is not the product or consequence of the plaintiff's property but the product of the fiduciary's skill, efforts, property and resources. … the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff.’

296. Earlier, in Warman, the High Court had emphasised ‘the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts’.

297. The onus is on the defaulting fiduciary to demonstrate that it would be inequitable to refuse a just allowance, and the defendant’s burden of proof will be higher where there is dishonest or underhand conduct. However, dishonesty is not an automatic bar to an order of a just allowance. In Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd, Young J rejected that concept and stated:

‘The court must examine all the circumstances of the case and see what is fair and equitable. If there has been a degree of dishonesty by the fiduciary, but the fiduciary’s efforts have been the prime source of the profit, it is open to the court to make an allowance.’” (footnotes omotted)

74. Peden J, in Li v Perpetual Holdings Pty Ltd [2025] NSWSC 175 recently stated, at [107]:

“A ‘dishonest and fraudulent’ breach of fiduciary duty or trust is one that amounts to ‘a transgression of ordinary standards of honest behaviour’: Hasler v Singtel Optus Ltd (2014) 87 NSWLR 608 at [122]-[124] (Leeming JA; Gleeson JA agreeing).”

75. If Mr McCarthy was otherwise entitled to receive the monies paid to Dolphin as a just allowance, that option is precluded by his dishonest conduct.

76. My above conclusions inevitably lead to a finding that the payments to Dolphin were in breach of the Agreement. It is also clear that Mr McCarthy, in making the payments, was diminishing the assets of Talentpool and, by acting unilaterally and in breach of the Agreement, was misappropriating company funds. This finding will have an ongoing effect on Mr O’Farrell’s application to bring a derivative action.

The travel expenses claim

77. This claim is less straightforward. This was highlighted by the passion expressed by Mr McCarthy in his evidence in rejecting the validity of the allegations. I accept that this passion demonstrated a belief that he had not improperly incurred the travel expenses, and certainly not to the extent alleged.

78. The claim is derived from the evidence of Ms Huggins. On 1 June 2023, Ms Huggins sent Mr O’Farrell and Mr McCarthy an email which stated:

“Hi Both,

Please find attached the Xero reported expenses that are not associated with internal employees or contractor expenses.”

79. The attached document is in three parts. The first is headed “Travel & accommodation - Domestic Transactions” and refers to the period from 1 July 2019 to 31 July 2023. It lists a series of payments, mostly made by a Westpac credit card, totalling $32,806.70.

80. The second part is headed “Travel & accommodation - International Transactions” and is stated to refer to the period from 1 July 2019 to 28 June 2023. It comprises a list of payments made by Talentpool, totalling $33,072.16.

81. The third part is entitled “Entertainment Non Deductible Transactions” and covers the period from 1 July 2019 to 30 June 2022. The list of payments totals $24,485.63.

82. The three parts add up to $90,364.49.

83. Relying on the overall description of “reported expenses that are not associated with internal employees or contractor expenses”, Mr O’Farrell claims that these are expenses wrongly incurred by Mr McCarthy and charged to Talentpool.

84. Mr McCarthy said some of the expenses had nothing to do with him. For example, one of the payments to Avianca Lifemiles in 2019 related to Mr O’Farrell.

85. More significantly, counsel for Mr McCarthy outlined the path by which the claim came into being, stating that the claim had simply not been proved. It was “too uncertain and too vague”.

86. Mr McCarthy had a Westpac credit card (WCC). In his affidavit he described how he dealt with the use of the card and the expenses incurred at [110]-[114]:

“110. During the period which Grant Thornton were the Company's accountants, each quarter I, or Laura, would provide Grant Thornton with a copy of the Company's bank and credit card statements. I would go through the credit card statement and mark off anything which related to a personal expense. Grant Thornton would then 'code' the remaining transactions into various categories of expenses in the Company's books and records. Occasionally, Grant Thornton would ask for further clarification of certain expenses to either Laura or myself. Grant Thornton would then prepare draft Business Activity Statements (BAS), Payroll Tax, Income Tax Returns (ITRs) and other tax related documents for the Company based on this 'coding'.

111. Ordinarily, Grant Thornton would then provide me with copies of the draft BAS and ITRs. I would review these documents and then email Grant Thornton my approval of these documents.

112. I relied on Grant Thornton's advice in relation to the BAS, ITRs, the other tax documents of the Company and their expertise in respect of the appropriate 'coding' of all business related expenses.

113. The Westpac Credit Card (WCC) was my personal credit card and was used in relation to numerous expenses of the Company. Form [sic] time to time, I would use the WCC to make some minor personal expenses. Any personal expenses which I made using the WCC would be marked as personal expenses on the WCC bank statement, when it was provided to Grant Thornton.

114. Laura also had access to use the WCC and would pay business related expenses for the staff of the Company using the WCC. These expenses included, SEEK subscriptions, Linkedln Subscriptions, employee related travel, accommodation and/or entertainment expenses.”

87. In final submissions counsel for Mr McCarthy took me through this chain of events:

88. Mr O’Farrell, by email sent 20 February 2023, alleged: “Unsubstantiated travel expenses incurred by you totalling $150,992.09 during the financial years FY20 – FY22.”

89. On 31 May 2023, Mr O’Farrell emailed Ms Huggins asking questions about the expenses process. This led to Ms Huggins providing the Xero document I have referred to above, and in turn a claim made by Mr O’Farrell for the return of $90,364.49 “immediately” to Talentpool.

90. The next step was to look at the table of “Travel & accommodation – International Transactions” for the period 1 July 2021 to 30 June 2022. This is a different date range to the Xero document relied upon by Mr O’Farrell (1 July 2019 to 28 June 2023).

91. Next was an email from Mr Lau (from Grant Thornton), who emailed Mr McCarthy in these terms on 12 April 2023:

“We understand that domestic travel predominantly relates to expense reimbursements to employees/contractors per payroll in astute, and the remainder relates to expenses gone through the bank and credit cards. Laura should be able to clarify the details of what’s gone through the payroll reports if you require further details.

International travel relates to overseas expenditure.

In terms of reconciling the 150k of travel which EY and Brian are referring to, we are unsure of what this is made up of and would require additional information from them for confirmation.”

92. On 24 June 2023, Mr McCarthy emailed Ms Huggins, stating:

“Okay laura, I need you to go through these and start subtracting from that file…. The last File overseas (about $9k) was lot of mine but lots were marked as personal which was allocated in the loan account and balanced off.

there are so many mistakes, it’s nuts. This needs to be done asap please. Cant use new accountant yet as you would be aware of many transactions.

Most any of domestic are not mine…. but lazy the way they stuck into credit card month and amount ( this is where I’m deep diving ).”

93. This email was said to raise two points:

94. The allocation of personal expenses to Mr McCarthy’s loan account and the balancing with non-personal expenses. This was an unresolved issue, and one which fell to Mr O’Farrell to resolve.

95. The “so many mistakes, it’s nuts” was never investigated.

96. Noting this uncertain background, I was then taken to the document produced by Grant Thornton setting out domestic and international travel expenses for the financial years 2020, 2021 and 2022. The total is $49,371.94.

97. Mr McCarthy, under cross-examination, was anxious to explain the Grant Thornton document, which appears at p 340 of the Court Book. He gave this evidence:

“Q. What is it you wanted to say about 340?

A. 340 basically shows that when Grant Thornton went through all the travel expenses, international travel - remember, your Honour, they accused me of $158,000 worth of overseas travel expenses. This is what they got a Court order on. If you look, the international travels for that whole period was 17,702 and 94 cents. And then when you look, they make a mistake. Within that international travel, it coded a visa for four - I - I believe around 4,000. I - I - I don’t know if I can see that straight away. Right? So when you actually ... (not transcribable) ... for the whole period, it was $13,000, approximately, of international travel for that period.

And of the $13,000, there was one flight bought for $7,000, roughly, when I went back to take care of my father during COVID, where - where he was dying of cancer. And during that period, I was ...(not transcribable)... Ireland the whole time with zero accommodation costs. So if you were - I - I’m not arguing that the - that the flight - that 7 grand for the flight, if you take it off, you’re - you’re left with $6,000 of international travel expenses for the period, not 156. So that’s why I’m so passionately - how - how do I say - angry about being accused of - because it was completely wrong.”

96. Mr McCarthy’s explanation about the document is almost impossible to understand. Despite him expecting a “re-direct”, no questions were asked of him in re-examination and, perhaps more importantly, no affidavit evidence was sought from any person at Grant Thornton.

97. Finally, this submission was made:

“And in truth, the result is your Honour does not have a clear picture of whether the expenses incurred on Mr McCarthy’s credit card were appropriately, or even actually, allocated to his personal loan account and/or the business.”

98. The effect of me not having “a clear picture”, submitted Mr McCarthy, was that Mr O’Farrell had not proved that the travel expenses were unauthorised. At first sight, there is some attraction in this argument, in particular given that there do seem to be some payments that are not referable to Mr McCarthy and there is a fluctuating amount, as shown by the Grant Thornton document.

99. The difficulty for Mr McCarthy, however, is that the document primarily relied upon by Mr O’Farrell, namely the Xero print-out, carries with it the statement by Ms Huggins:

“Please find attached the Xero reported expenses that are not associated with internal employees or contractor expenses.”

100. Once this document came into evidence, the evidentiary burden switched to Mr McCarthy to show that the document was not reliable.

101. The switching of an onus was explained by Gagelar J (as his Honour then was) in Henderson v Queensland (2014) 255 CLR 1; [2014] HCA 52 at [89]-[90]:

“89. Generally speaking, and subject always to statutory modification, a party who bears the legal burden of proving the happening of an event or the existence of a state of affairs on the balance of probabilities can discharge that burden by adducing evidence of some fact the existence of which, in the absence of further evidence, is sufficient to justify the drawing of an inference that it is more likely than not that the event occurred or that the state of affairs exists. The threshold requirement for the party bearing the burden of proof to adduce evidence at least to establish some fact which provides the basis for such a further inference was explained by Kitto J in Jones v Dunkel:

‘One does not pass from the realm of conjecture into the realm of inference until some fact is found which positively suggests, that is to say provides a reason, special to the particular case under consideration, for thinking it likely that in that actual case a specific event happened or a specific state of affairs existed.’

90. That description of the ordinary operation of the civil standard of proof applies equally to a case in which the legal burden of a party is to prove the non-happening of an event or the non-existence of a particular state of affairs as to a case in which a party's legal burden is to prove the happening of an event or the existence of a particular state of affairs. As Davidson J earlier explained in the Supreme Court of New South Wales in Ex parte Ferguson; Re Alexander:

‘In all legal proceedings the basic principle at common law is that in civil cases a plaintiff must prove the essential elements of his case even if that course involves establishing the assertion of a negative ... He must establish what is really the affirmative in substance, not what is merely affirmative in form ... But if the party bearing the onus furnishes some evidence which gives rise to a presumption or inference of fact in his favor or that presumption already exists, the onus shifts to the other party’.

His Honour's reference to evidence adduced by the party bearing the legal burden of proof giving rise to a ‘presumption or inference of fact’ was to nothing more than an inference of fact drawn, in accordance with ordinary processes of inferential reasoning, in the absence of further evidence. His Honour's reference to an ‘onus’ then shifting to the other party was to nothing more than he practical need (sometimes referred to as a ‘tactical burden’) for an opposing party to adduce further evidence if that party wants to prevent such an inference of fact actually being drawn in the circumstances of the case.” (footnotes omitted)

102. The Xero printout, together with Ms Huggins comment on it, is sufficient to raise the inference that Mr McCarthy charged personal expenses to Talentpool. Mr McCarthy was unable, either through Ms Huggins or otherwise, to impugn the document so as to render it unreliable. An exception relates to the Avianca Lifemiles entries in 2019 which may be referable to Mr O’Farrell, as well as Mr McCarthy.

103. Mr McCarthy’s reliance on the document from Grant Thornton has the deficiency that while it might come up with a different total, it is effectively unexplained. No evidence was forthcoming from any person at Grant Thornton which might explain the document. At best, the email from Mr Lau leaves matters in a ‘yet to be determined’ state.

104. The total of entries attributed to Avianca Lifemiles in 2019 is $4,165.28. It is not clear which of the two payments is attributable to Mr O’Farrell. Accordingly, I will halve the total to a figure of $2,082.64. I will deduct $2,082.64 from the total of $90,364.49, leaving $88,281.85, which I conclude are unauthorised travel expenses wrongly paid for by Talentpool.

Sections 180 and 181 of the Corporations Act 2001 (Cth)

105. Section 180 relates to the civil obligation of a director in respect of care and diligence in carrying out his duties. Section 181 concerns a director’s civil obligation to act in good faith “in the best interests of the corporation”.

106. The claim is straightforward. Mr McCarthy did not act in good faith or in the best interests of the company by contracting with Dolphin and incurring expenses without the approval of Mr O’Farrell. Under the Agreement, Mr O’Farrell was required to give consent to the formation of contracts such as that with Dolphin. By entering into the contract with Dolphin, Mr McCarthy was obtaining a profit without shareholder approval.

107. The parties seem to agree that an objective test is to be applied. Mr O’Farrell’s approach was that finding against Mr McCarthy in respect of the consultancy payments and the travel expenses would automatically result in a finding of breaches of these sections. Senior counsel for Mr O’Farrell stated:

“So, we have s 180, which is the duty to exercise powers with care and skill, so there’s a default of that in this expense reimbursement process that allows for such easy misapplication of corporate money by even inadvertent failures to identify personal expenses.

Section 181 is the exercise of powers and duties in good faith, and in the best interests of the corporation for a proper purpose. That’s where we would say that that would capture the claim in respect of the contractor payments. Mr McCarthy didn’t enter them for a corporate purpose. It was, in our submission, a misappropriation of corporate funds in breach of his shareholder agreement.”

108. Counsel for Mr McCarthy referred me to Alora Davies Developments 104 Pty Ltd v Raphael [2024] NSWSC 547, where Black J summarised the principles relating to ss 180 and 181 at [139]-[141]:

“139. Section 180 of the Act requires a director or other officer of a corporation to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director or officer of a corporation in the corporation’s circumstances and occupied the office held by, and had the same responsibilities within the corporation as, the director or officer. The statutory duty of care and diligence under that section overlaps with directors’ duty of care arising at general law. I summarised the applicable principles in Colorado (at [408]) as follows:

‘In Australian Securities Commission v Gallagher above at 52–3, Pidgeon J observed that the test whether the statutory duty of care and diligence had been contravened was an objective one, that a director need not exhibit a greater degree of skill in the performance of his or her duties than may reasonably be expected for a person of his or her knowledge and experience, in the relevant circumstances, and that it was relevant to consider the way in which the work of the company was distributed between its directors and other officers, provided that distribution was reasonable. In Australian Securities and Investments Commission v Adler above at [372] (upheld by the Court of Appeal in Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504; 179 FLR 1; [2003] NSWCA 131), Santow J noted that the duties imposed by the section are essentially the same as directors’ duties at general law; that, in determining whether a director had exercised reasonable care and diligence, the test was what an ordinary person, with the director’s knowledge and experience, might be expected to have done in the circumstances if he or she was acting on his or her own behalf; and that the duty of care and diligence would require special vigilance in a situation of potential conflict, requiring scrupulous concern on the part of those officers who become aware of that transaction to ensure that any necessary corporate approvals are obtained and safeguards put in place. That decision has been cited with approval in recent case law, including Parker v Tucker (2010) 77 ACSR 525; [2010] FCA 263 at [70] per Gordon J and Diamond Hill Mining Pty Ltd v Huang Jim Mining Pty Ltd (2011) 84 ACSR 616; [2011] VSC 288 at [90] per Croft J.’

140. A question whether this duty is breached can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question: Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 450; 11 ACSR 162 at 209; Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023 at [479], aff’d Cassimatis v Australian Securities and Investments Commission (2020) 376 ALR 261; (2020) 144 ACSR 107; [2020] FCAFC 52; Re FAL Healthy Beverages Pty Ltd [2017] NSWSC 476 at [55]; Mudgee Dolomite & Lime Pty Ltd v Murdoch [2020] NSWSC 1510 at [99]-[100] (from which I have drawn the summary that appears above).

141. Section 181 of the Act requires a director or officer of a corporation to exercise his or her powers and discharge his or her duties in good faith in the best interests of the corporation and for a proper purpose. I summarised the relevant principles in respect of that section and the broadly corresponding general law duty in Colorado (at [419]-[421]) as follows:

‘In Chew v R (1991) 4 WAR 21; 5 ACSR 473 at 499, Malcolm CJ summarised the requirements of that duty as being that directors (1) must exercise their powers in the interests of the company, and must not misuse or abuse their power; (2) must avoid conflict between their personal interests and those of the company; (3) must not take advantage of their position to make secret profits; and (4) must not misappropriate the company’s assets for themselves.

The case law is divided as to whether a contravention of s 181(1)(a) of the Corporations Act requires that it be established that a director engaged deliberately in conduct which he or she knew was not in the company’s best interests: for example, Forge v Australian Securities and Investments Commission (2004) 213 ALR 574; [2004] NSWCA 448 at [245] per McColl JA (with whom Handley and Santow JJA agreed); Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd above at [150], varied on appeal on another point in V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd above. In Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; 89 ACSR 1; [2012] WASCA 157, the Court of Appeal of the Supreme Court of Western Australia unanimously held that the corresponding general law duty to act in good faith in the company’s best interests was subjective and would be complied with if directors honestly believed they acted in the company’s best interests (at [923] per Lee AJA, at [1988] per Drummond AJA, at [2027], [2772], [2795] per Carr AJA). The alternative view is that a contravention of that limb of s 181 can be established if the law objectively considers that what the director did was improper, even if the director subjectively believed that he or she was acting in the company’s best interests: see, for example, Australian Growth Resources Corporation Pty Ltd (recs and mgrs apptd) v Van Reesema (1988) 13 ACLR 261at 270–1; 6 ACLC 529 per King CJ; Mernda Developments Pty Ltd (in liq) v Alamanda Property Investments No 2 Pty Ltd (formerly known as Dollarforce Financial Services Pty Ltd) (2011) 86 ACSR 277; [2011] VSCA 392 at [32]–[33]. The difference in those approaches does not seem to me to be material for the purposes of this case. The section may be contravened if a director promotes his or her personal interest in a situation where there is a conflict or real or substantial possibility of a conflict between those interests and the company’s interests: Australian Securities and Investments Commission v Adler above at [735]; Parker above at [72].

A contravention of s 181(1)(b) may also be established if a director does not exercise his or her powers for the purpose for which they were conferred or exercised them for an improper purpose, and the bulk of authority indicates that question is to be determined objectively: Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187; 14 ACSR 109at 137 per Ipp J (with whom Malcolm CJ and Seaman J agreed); Australian Securities and Investments Commission v Adler above at [738]–[739]; Parker above at [73]. In Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) above, the majority held that whether a director acts for an improper purpose, for the purposes of the corresponding general law duty, is determined objectively involving an assessment by the Court of what was reasonable in the circumstances (at [933] per Lee AJA, at [1988], [2027], [2073] per Drummond AJA). By contrast, Carr AJA held that the test whether directors had acted for an improper purpose was primarily subjective, although a decision would be voidable if directors acted in good faith for a purpose that was beyond their powers or for a collateral purpose (at [2923]).’”

109. Mr Stapleton, on behalf of Mr McCarthy, submitted:

“So, the way in which this entity was operating was, putting it pleasantly, highly entrepreneurial. The two of them were obviously extraordinarily able, working together, but they did so, in my submission, with limited regard for what one might say - or some standard of governance, both in the business management side.”

110. Mr Stapleton was submitting that his client was honest and acting in accordance with the way Mr McCarthy and Mr O’Farrell carried on the business. They both worked hard, were successful, but did so with little regard to the specific rules of the Agreement. There may be an element of pragmatic analysis in this approach, but it cannot go so far as to sanction blatant breaches of the Agreement, in particular where that agreement states, in the introduction to cl 4.7:

“… Decisions on the matters listed below require the unanimous vote of all Directors entitled to attend and vote at the relevant meeting of the Board.”

111. This instruction to the directors cannot be seen as a licence to act as they wished provided they were doing so in their perceived interests of the company. The part of the clause just quoted is a specific direction that each of the matters to which it pertains requires a unanimous vote. The Agreement does not in any way sanction the ‘casual’ means of operating suggested by Mr McCarthy.

112. My conclusions about Mr McCarthy’s credit and the breaches, in respect of the consultancy payments and the travel expenses, lead me to agree with Mr O’Farrell’s submission that breaches of ss 180 and 181 flow, effectively automatically.

113. Accordingly, I am satisfied that in respect of the consultancy payments and the travel expenses, Mr McCarthy acted in breach of his civil obligations under ss 180 and 181.

The derivative actions on behalf of Talentpool and TPC

114. Mr O’Farrell is a person falling within the scope of s 236 of the Corporations Act. The finding that the payments to Dolphin were made contrary to the Agreement, and therefore that funds of Talentpool and TPC were accordingly reduced, is a powerful factor in favour of the granting of leave under s 237 of the Corporations Act. So much I think was conceded on behalf of Mr McCarthy. My findings in respect of ss 180 and 181 also significantly strengthen the appropriateness of giving leave for the derivative actions.

115. It is still necessary to examine the conditions for leave set out in s 237(2) of the Corporations Act. The two directors of TPC are opposed to each other in this litigation, and in particular, in respect of the payments to Dolphin. Having regard to their opposing positions it is unlikely that the company would be able to bring proceedings to recover the Dolphin payments or the travel expenses. I am therefore satisfied that it is probable that the company will not itself bring any proceedings.

116. I am also satisfied that Mr O’Farrell is acting in good faith. As a director of TPC he is naturally concerned that its assets are not improperly disbursed. This concern flows through to Talentpool which is owned by TPC.

117. It must be in the best interests of Talentpool and TPC that monies improperly taken from them are returned. The recovery of a large sum of money, the entitlement to which has been denied, of itself describes the serious question to be tried.

118. I am satisfied that the above factors make it appropriate to grant leave, notwithstanding that there was no compliance with s 237(2)(e)(i).

119. Accordingly, I give leave to Mr O’Farrell to bring derivative actions on behalf of TPC and Talentpool.

120. The purpose of the derivative actions is to return the consultancy fees and travel expenses to the companies. The findings in respect of these expenses leaves little doubt that they should be returned. As to which company should have the order, it probably is of little consequence, but ultimately I think the order should be made in favour of Talentpool. This is because Talentpool made the unauthorised payments. Talentpool will obviously be responsible to TPC for an accounting of the returned payments.

121. I will make orders in favour of Talentpool for the recovery of the two sums ($501,355.01 and $88,281.85). The orders, consistent with Order 5 sought in the amended summons, will be made pursuant to s 1317H of the Corporations Act.

TPC’s oppression case

122. This case is brought pursuant to ss 232 and 233 of the Corporations Act. The allegation is that Mr McCarthy’s improper receipt of the consultancy fees and the travel expenses lessened the assets of Talentpool thus reducing the monies available for distribution and for use by TPC in its operation of Talentpool.

123. The order sought under s 233(1)(e) is that Mr McCarthy’s shares in TPC be purchased by Mr O’Farrell “at a price reflecting the damage that has been done to the company by McCarthy”. Mr O’Farrell’s written submissions also refer to the submissions made in his contract case where he seeks personal damages.

124. The overlapping of breaches and damages, I think, gives rise to a need for caution to avoid any duplication of damages ordered against Mr McCarthy.

125. Returning to s 232, that Mr McCarthy’s conduct of the affairs of Talentpool was “contrary to the interests of the members as a whole”. The conduct is, of course, the dealings with the consultancy payments and the travel expenses.

126. Based on my above findings I have little difficulty in placing Mr McCarthy’s conduct within s 232. One of the problems with the orders sought under s 233 is assessing the value of the company. Mr O’Farrell’s closing submissions suggested that further orders would need to be made in respect of a valuation. Mr Stapleton, on behalf of Mr McCarthy, flagged this issue in opening submissions when he said:

“And we both, I think, feel as though there is a real possibility that the question of the value, if your Honour were to find that my learned friend’s client’s claim was successful, there would be a question as to the valuation of the shares, if he was successful in your Honour making that order, to be transferred at, and none of us are in a position to deal with that issue.”

127. Under the cross-claim, Mr McCarthy had also sought the purchase of the shares, obviously by him from Mr O’Farrell. It is sensible that one or other of Mr McCarthy and Mr O’Farrell are separated from TPC. Clearly, they cannot work together in the interests of the company.

128. I stopped Mr McCarthy from running his cross-claim. Accordingly, there is no order currently being sought whereby Mr McCarthy purchases Mr O’Farrell’s shares. For this reason, and more importantly because of my view about Mr McCarthy’s damaging conduct, the appropriate order will be in favour of Mr O’Farrell.

129. Because of the valuation difficulty signalled by both parties, I will hear further submissions on the appropriate way forward.

The personal action for breach of contract

130. Mr O’Farrell's claim is for just under $1.5 million, being half of the value of Talentpool in 2021.

131. In written submissions the claim was stated simply:

“O’Farrell’s contract claim seeks the lost value of his shares in TPC as the ultimate owner of Talentpool. The claimed amount is $1.499 million; that is, half the conservative valuation of the business that had been obtained by McCarthy in 2021.”

132. The breach of contract relied upon for the damages case seems to have these bases:

133. The unauthorised expenditure (consultancy payments and travel expenses) depleted the companies’ assets, so as to ultimately lead to their effective failure.

134. Contrary to the obligation in cll 2.1, 2.2 and 13.2 of the Agreement, Mr McCarthy has essentially let the business deteriorate because of his inefficient, or absent, management and his specific failure to replace key staff.

135. The primary submission made by Mr McCarthy was I think properly characterised as a causation problem faced by Mr O’Farrell. It was submitted:

“But your Honour, it’s seriously contended - and it’s a very private claim by Mr O’Farrell - that my client is the cause of this business being wroth nothing. Now, in my submission, that is fanciful. Can we just look at p 617? Between 2021 and 2022, there was a 40% reduction in the total revenue. That’s got nothing to do with my client paying himself a little bit of extra money. Then, we have gross profit going down by, I estimated, 55%. So, cost of sales have gone down, but relatively, the proportion of them going down is affecting the result. The gross profit is down by 55%. The total income is down by more than 50%. This cannot, on any rational basis, have anything to do with my client paying himself director’s fees.

Just to really finesse that, if we go over to p 618, we have under the expenses total travel expenses for domestic and total travel expenses for international going down in the year. We also have the increase in the salaries going up by $29,856. My client’s salary, if it were accepted, went up from 90,000 to 250,000. So, it went up by 160, and the total gross salaries went up by 29. I’m going to make this point. Of course, people left. So, arguably people left, and the salaries went down, and my client’s salary went up by 160. But the overall effect of increases of payments in salary was 29,000.

The result, in my respectful submission, is a very disappointing outcome for the partners in this business, but nothing in a legal causation sense to do with my client’s payment of his salary, which is the underlying breach, if it occurred. So, your Honour would just dismiss any contention that there is a damages claim available, other than the payments that my client made to himself.”

134. In Mr McCarthy’s written submissions, the current state of the companies was described as a “failed joint enterprise”. Taken with the above submission that the unauthorised payments could not be seen as the cause of the failure then, in turn, they could not give rise to the personal breach of contract damages sought by Mr O’Farrell.

135. I think it necessary to look a little closer at the current state of the companies and how they arrived in this state.

136. Talentpool started operating with both Mr McCarthy and Mr O’Farrell as directors and joint shareholders in the second half of 2014. TPC became the owner of Talentpool in October 2015. Ms Huggins was employed in October 2016. The enterprise was apparently successful. Mr McCarthy, in his affidavit, set out the following payments of dividends: $106,000 in 2017, $190,199 in 2018 and $160,000 in 2019.

137. From late 2019, Mr O’Farrell began to indicate a desire to pursue other interests. The discussions between the two directors led to the memorandum of understanding made on 22 May 2020. Although there is a dispute as to the extent, Mr O’Farrell’s involvement in the day-to-day running of the companies significantly decreased.

138. Again, based on Mr McCarthy’s affidavit, the revenue of Talentpool was $9,807,620 in 2020 and $15,233,895 in 2021. The corresponding net profit was $802,740 in 2020 and $2,083,099 in 2021. In respect of dividends for these two years, Mr McCarthy says that Mr O’Farrell received $160,000 in 2020 and $462,000 in 2021. The import of Mr McCarthy’s figures is that the company flourished under his stewardship and in the virtual absence of Mr O’Farrell.

139. Mr O’Farrell does not dispute the figures in the previous paragraphs but denies that any continuing success was due to Mr McCarthy’s efforts and that he, Mr O’Farrell, played no real part.

140. Mr McCarthy left Australia for Ireland in August 2020, apparently to care for his ailing father. He does not seem to have returned to Australia, but rather moved to the Middle East.

141. The companies do not seem to be currently operating with there being outstanding reporting and taxation obligations still to be complied with.

142. Mr McCarthy seems to blame the freezing orders for the company’s woes. He states in his affidavit, at [164]:

“Due to the Freezing Order and these proceedings the Company has suffered significant damage, colluding reputational damage, which has resulted in a decrease in the Company’s revenue and profits.”

143. According to the questionnaire completed by Ms Huggins, whose evidence I have already stated I accept entirely, Ms Huggins performed a significant part of the administrative functions of the company and Mr McCarthy did not do very much at all, in particular as time went by. At Question 10 Ms Huggins gave this description of the participation of the directors after May 2020:

“(10) Since Mr O'Farrell transitioned roles in or around May 2020, who was responsible for the following tasks and if one more was involved if you could please comment in what capacity each carried out the tasks and if each had carried out those tasks prior to Mr O'Farrell transitioning roles also?

(i) The recovery and maintenance of accounts receivables of the Company? Laura

(ii) Did many legal cases occur in this time and if so who was responsible for the debt recovery? Laura & Trevor with the assistance of Damien from Murdoch an [sic] Cheng lawyers. I would notify Trevor of debt recovery issues with the details. Trevor would then try to recover the debt and if unsuccessful engage Damien.

(iii) Managing and looking after the Company's books and records including liaising with Grant Thornton, the ATO and various state governments including VIC & NSW? Laura.

(iv) Manage vendors including but not limited to Seek and LinkedIn? Laura & Trevor. I managed the day to day. Trevor would occasionally speak with LinkedIn and Seek at the time of renewal to renegotiate

(v) Negotiating or involvement with overseeing the vast majority of major contracts the Company had? Laura

(vi) If times ever became tough without any sales managers, did you or Mr McCarthy work directly with clients to help drive revenue growth? Yes, I did. I won the eBay Consultancy. Priced and managed the entire project.

(vii) For how long did you and Mr McCarthy run or participate in sales team meetings and did either of you ever carry out one on one strategy and coaching sessions in relation to sales and if so up until when? As we were all working from home, the sales meetings were online. I participated in all the sales meetings weekly. I believe Trevor attended the meetings for around 6-8 months and therefter [sic] joined sporadically. For the last few years, when we had a sales team, Trevor did not attend but would follow up with myself or the sales manager. To my knowledge, Trevor did not carry out any coaching. I was only able to advise the team from my experience but as I m not in Sales I did not do any coaching.

(ix) Did you receive ongoing operations and finance training from Mr McCarthy or at all? No

(viii) Who helped fix IT issues and how often would issues arise that needed fixing? From March 2020 we were all working from home. I do not recall there being many issues, if any. I replaced a few laptops with new ones but that was all.”

144. Ms Huggins later gave this explanation for the company’s apparent decline:

“(21) As recruiters and sales managers left the Company do you believe if their salaries were used to replace them, the Company's signed clients would of been able to support a similar level of sales performance as previous recruiters and if so did Mr O'Farrell or Mr McCarthy ever attempt to hire a new suitable sales manager to delegate the commercial growth responsibilities to and when? Yes, I believe we should have allocated substantial funds to a new General Manager. I wrote the JD for this role with Brian's help and we created a potential earnings strategy so that we could attract the right talent and sent for Trevors review in April 2022. Brian sent me links to potential candidates which I forwarded to Trevor. Brian made calls and met a few of the potential candidates. Brian was targeting candidates that would attract staff. In my opinion we were not going to successfully hire anyone without a General Manager who is well known in the industry and could mentor and potentilly [sic] bring staff with them. Trevor also agreed we needed a new manager but did not sign off on the JD or the earnings strategy.”

145. The question that now arises is whether or not the failure of the company was caused by the breach of contract, in particular relating to the consultancy payments and the travel expenses. Mr O’Farrell put causation in this way:

“Your Honour will recall the messages that I took Mr McCarthy to this morning, where in March 2022, Mr O’Farrell was recommending investment in the company in the order of $500,000, which would have produced a growth scenario. So, the suggestion from my learned friend that it was inevitable that if the $500,000 had been in the company it would have been distributed as dividends, is directly at odds with the contemporaneous record of a suggestion of a reinvestment of profits to that point.

So, your Honour, our causation theory is that with Mr McCarthy as the managing director, with an obligation to grow the business under the shareholder agreement, Mr O’Farrell’s encouragement was to spend money to make money, not to cash out. It was at precisely that time that Mr McCarthy was taking the first of the payments, which add up to the $500,000. So, your Honour, that’s our causal chain.”

146. The case therefore seems to be that if the consultancy payments had not left Talentpool for the ‘pocket’ of Mr McCarthy then those funds (about $500,000) would have been used to strengthen and grow the enterprise. Mr McCarthy suggested that the $500,000 would not have been spent in this way but would rather have been distributed as a dividend to each of the directors.

147. Despite my general rejection of Mr McCarthy’s evidence, and case, I do think there is merit in his suggestion. This is because:

(a) After May 2020, the business was no longer being run through the joint efforts of the two directors. In other words, the enterprise no longer had the benefit of their efforts. A good deal of the workings of the company seem to have been left to Ms Huggins, who from April 2023 was splitting her time between Talentpool and also working for Mr O’Farrell’s company, Furthr. (b) Once Mr McCarthy left Australia, in August 2020, his devotion and contribution to Talentpool, as described by Ms Huggins, lessened, exacerbating the already declining prospects of Talentpool and TPC.

148. I intend to reject Mr O’Farrell’s personal claim for breach of contract. This is not only because I think there is a causation problem but because the remedy sought by Mr O’Farrell, as I read the amended summons, is limited to an order that Mr O’Farrell purchase Mr McCarthy’s shares in TPC. This is essentially the same order that arises from the oppression case, highlighting the duplication point that I made above.

149. The amended summons also seeks “damages”, but I am not sure precisely what is sought. I have also made the duplication and causation points above which I think extinguish any claim for damages, in particular if claimed by Mr O’Farrell personally.

150. I make the following declarations and orders:

151. A declaration that each of the following payments (collectively the consultancy payments) made to the first defendant from the bank accounts of the second plaintiff was made in breach of the first defendant’s obligations to the plaintiff and the second plaintiff:

(a) On 22 February 2022, a payment described as "Rev DD" totalling $161,776.00; (b) On 23 March 2022, a payment described as "Rev DD" totalling $68,750.01; (c) On 12 April 2022, a payment described as "Rev DD" totalling $20,833.00; (d) On 26 May 2022, a payment described as "Rev DD" totalling $20,833.00; (e) On 8 June 2022, a payment described as "Trev Revolut" totalling $20,833.00; (f) On 2 August 2022, a payment described as "Trev Revolut" totalling $20,833.00; (g) On 30 August 2022, a payment described as "Trev Revolut" totalling $20,833.00; (h) On 21 September 2022, a payment described as "Trev Revolut" totalling $20,833.00; (i) On 23 November 2022, a payment described as "Trev Revolut" totalling $20,833.00; and (j) On 24 March 2023, a payment described as "Trevbiz Rev" totalling $124,998.00.

2. A declaration that the payments made by or on behalf of the first defendant from the bank accounts or charged to the credit cards of the second plaintiff in the sum of $88,281.85 (collectively the travel payments) were made in breach of the first defendant’s obligations to the plaintiff and the second plaintiff.
3. A declaration pursuant to s 1317E of the Corporations Act 2001 (Cth) that in making, or causing to be made, the consultancy payments and the travel payments, the first defendant breached his duties to the second plaintiff pursuant to ss 180 and 181 of the Corporations Act 2001 (Cth).
4. An order that the first plaintiff has leave to bring derivative actions against the first defendant on behalf of the second and third plaintiffs.
5. An order pursuant to s 1317H of the Corporations Act 2001 (Cth) that the first defendant compensate the second plaintiff for damage resulting from his breaches of ss 180 and 181 of the Corporations Act 2001 (Cth) by payment to the second plaintiff of the amounts of the consultancy payments and the travel payments, namely the sums of $501,355.01 and $88,281.85 respectively.
6. A declaration that the affairs of the second plaintiff had been conducted in a manner which is contrary to the interests of the members as a whole within the meaning of s 232 of the Corporations Act 2001 (Cth) by the making of the payments stipulated in the first two declarations above.
7. An order pursuant to s 233(1)(e) of the Corporations Act 2001 (Cth) that the plaintiff purchase the first defendant’s shares in the third plaintiff.
8. An order that the parties confer on the appropriate method of assessing the value of the shares referred to in the previous order.
9. An order pursuant to s 233(1)(c) and/or (i) of the Corporations Act 2001 (Cth) that the first defendant be restrained from making payments to his own account or for his benefit from the bank accounts or with the credit cards of the second defendant/second plaintiff and the third defendant/third plaintiff other than with the approval of the plaintiff.
10. The first defendant is to pay the first, second and third plaintiffs’ costs of the proceedings.
11. The parties have liberty to make submissions on interest and on any alternative costs order.

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