(a) The financial information issue
95 The only consistent return for Kanki from the joint venture was that, until July 2017, Mr Ozmen was paid, or credited in Neptune's accounts with, a full-time fortnightly wage of $10,528.84. From about December 2016, Mr Ozmen began making demands for payment of money as his (in the guise of Kanki's) share of the net profits from what, on its face, appeared to have been Seadeck's success in trading.
96 The JVA required each party to nominate a firm of accountants (cl 2(b)), and cl 10 imposed an obligation on Neptune to calculate the net profit or net loss of the joint venture on both a fortnightly and annual basis. Neptune was responsible for paying Kanki its share of the joint venture net profits within one day of settlement of the fortnightly profit and loss statement, and within five days of settlement of the annual profit and loss statement.
97 Initially, Neptune nominated Peter Konnaris to carry out accounting for itself under the joint venture. In the period from the grant of the liquor licence on 25 October 2016 until mid-February 2016, Neptune and Mr Konnaris did not produce any fortnightly profit and loss statements or provide Kanki with any meaningful accounting reports of the joint venture's trading results other than, possibly, two confusing documents for the trading over New Year's Eve and New Year's Day.
98 Accordingly, over the period until mid-February 2017, Neptune never calculated whether the joint venture had made a fortnightly net profit or loss and Kanki did not receive any payment of net profit as such. But, over that period, Mr Ozmen and his associates had observed that Seadeck was trading, and, from time to time, they appear to have attended on her during cruises, including on New Years' Eve, when they noticed or learnt of the numerous problems with the quality of service and security on the vessel, including a major issue that the bar ran out of ice by 10.30pm.
99 Since Neptune had not produced any fortnightly or other accounts to explain the financial position of the joint venture, it was not in a sound position to calculate what, if anything, was due to Kanki as net profit during this period. In response to Mr Ozmen's requests, Mr Douchkov caused or made several payments to Mr Ozmen and his associates, some consisting of cash withdrawals from Neptune's bank accounts of $20,000 a time up to late January 2017.
100 Obviously, such an ad hoc process of Neptune providing some financial return to Kanki without proper accounting information was bound to lead to trouble…and it did.
101 Mr Douchkov considered, in January 2017, that Mr Ozmen was being unreasonable. By then, Mr Douchkov thought that Mr Ozmen was a very difficult person who had made a good job of making his (Mr Douchkov's) life pretty well impossible and "very stressful". He claimed in evidence that "I actually felt sorry for [Mr Ozmen] because I thought he had had mental issues and I wanted to reach out" and that Mr Ozmen was "unhinged".
102 On 13 January 2017, Mr Koyunoglu, who was then a director of both Kanki and Entertainment, wrote to Messrs Douchkov, Como, Robertson and Auld, summarising a large number of concerns that Kanki and Entertainment had raised earlier about the operation of Seadeck. The concerns included the cleanliness of the vessel, quality of the customer service and the music, as well as concerns about security and marketing. He noted that the ship was only working about 10 hours a week, in contrast to what he said were discussions before she left Turkey that she be operated full time for 11 months per annum, and wanted to know when the operating hours would be increased. He also wrote:
Expenditure on a number of items has been outrageous. There has been no consultation about these and no explanation as to why this is occurring have been provided despite these concerns being raised with you.
103 Mr Koyunoglu wrote that the concerns were critical to the ongoing success of Seadeck and that he did not understand why they were not being addressed. He said he was happy to discuss matters with the letter's addressees.
104 Mr Douchkov responded late that evening, acknowledging that Mr Koyunoglu had raised some very valid points "that I have always agreed upon and will need to be addressed". Mr Douchkov wrote that he had a great deal of respect for Mr Koyunoglu and apologised if he had not been polite in their last conversation, explaining that "I have been pushed in every direction from all parties as being one of the controllers of the accounts and accused of everything. I have lost everything to make this survive. Why would I put that at risk by being dishonest?" He said that he would "like to discuss with you the genuine situation of the company", concluding:
As you know, this whole venture evolved from a simple, lets get the boat here and make some money, to a truly drawn out and traumatic episode for all concerned.
105 Mr Douchkov gave evasive answers in cross examination when asked about his understanding of why Mr Ozmen was asking for money at this time. Implausibly, he did not agree that this might be because the ship had not earned any money for the years 2014 to early 2016 and people in Turkey might be dependent on Mr Ozmen to earn money from the ship. He denied there was any legitimacy in Mr Ozmen's requests or demands for money. Kanki's counsel and I sought to clarify Mr Douchkov's evasive answers in the following evidence (that I do not believe):
HIS HONOUR: But what was your understanding of Mr Ozmen's position? Did you understand him to be disappointed that the 800 passengers weren't in the survey or the license, and therefore he wouldn't be getting a guaranteed $5 million, or not?---To be honest, it was a very confusing situation, to understand what he wanted, or what he was upset with. He was not rational about most of the things he was saying, so I didn't perceive directly what he was actually upset about, in any particular thing, because it was everything.
MR CASTLE: You see, he was unhinged, to use your terminology, as you perceived it, because he hadn't got his expected return from the vessel when it finally started trading; that's so, isn't it? --- I disagree.
He was beside himself with stress and concern because his vessel had been contributed to a joint venture in the hope or expectation of earning $5 million a year, and no money of that order was being paid to him; what do you say about that?---I disagree again. (emphasis added)
106 On 16 January 2017, Mr Douchkov paid $5,000 to Mr Ozmen and $7,500 to Mr Altikulacoglu, who was then Kanki's representative under cl 3(a) of the JVA.
107 On 18 January 2017, Mr Ozmen and Mr Douchkov met at a café in Double Bay. When Mr Ozmen asked for $60,000 to save his mother's house, Mr Douchkov replied there was no way he could raise such a sum. He said that $20,000 was the maximum he could give Mr Ozmen. On 18 January 2017, Mr Douchkov withdrew $20,000 in cash and gave it to Mr Ozmen or Mr Altikulacoglu. The next day, Mr Douchkov withdrew two separate amounts of $20,000 in cash and gave them to Mr Altikulacoglu.
108 On 25 January 2017, Mr Como wrote a detailed reply to Mr Koyunoglu's 13 January 2017 letter, accepting that Neptune had to take action to address many of the concerns, and explaining what it had done. Mr Como said that the vessel had traded for about 35 of the 75 days since it began operating under the liquor licence. He said it was not easy to trade for 11 months of the year because of the climate issues and the lack of weather protection for the ship. He wrote that, "We are investigating QLD licence and logistic issues to see if we have opportunities for the vessel there" and sought Kanki's assistance. Mr Como also wrote that "almost all expenditure to date had been from loan funds advanced by [Mr Douchkov] and [himself]…[and] that, despite the insistence on dividends being paid from the outset," which he asserted was contrary to the terms of the JVA, "no repayments have yet been made or even scheduled in respect of those funds". He assumed that Mr Koyunoglu's reference to outrageous expenditure was to an invoice of "A2B" that Neptune did not accept, and was negotiating, adding, "[w]e have been at pains to consult with you on all items of expenditure, in accordance with [Neptune's] obligations under the [JVA]".
109 On 27 January 2017, Mr Douchkov emailed to Messrs Ozmen, Koyunoglu and Kyle Clarke (an accountant acting for Kanki) an unreconciled spreadsheet of trading figures for the week ending 22 January 2017.
110 Mr Douchkov said that in about late January 2017 or on 1 or 2 February 2017 he had his last meeting with Mr Ozmen. The meeting was at Mr Douchkov's office in Double Bay. Tempers became frayed as Mr Ozmen aggressively demanded money so that he and others could go to Turkey. Mr Douchkov said that Neptune was not in a position to pay, and offered to show Mr Ozmen the accounts (which I infer meant Neptune's bank statements). Mr Douchkov said, "We don't have that money in the accounts. You've taken it all". He said that Mr Ozmen became very agitated and demanded that, "You have to give me this money somehow." Mr Douchkov then asked Mr Auld to come into the office, and told Mr Auld that he felt a bit threatened, and that Mr Auld should explain to Mr Ozmen that Neptune really did not have the money to pay. Mr Ozmen demanded of Mr Douchkov:
You show me your account - personal account…You show me Mel's account. You show me Short Street account. You've got money. You've been stealing money….Well, f… you, Gavin. F… your businesses. I will f… your businesses for you and I will f… everything.
111 At this point Mr Ozmen had moved so close to Mr Douchkov that the men's faces were about 15 centimetres (or 6 inches) apart. Mr Douchkov told Mr Ozmen that he should not behave like that, and Mr Ozmen retorted that he did not like the way Mr Douchkov was running the business.
112 It is apparent from what I have set out that Neptune was in breach of its obligation to provide fortnightly profit and loss statements under cl 10(c) of the JVA. That breach (which by then had persisted for 3 months) caused disputes about what, if anything, Kanki was entitled to receive in light of the significant amounts in gross income that Neptune had earned through the trading under the liquor licence for Seadeck over the 13 weeks between 1 November 2016 and 31 January 2017. No doubt Mr Douchkov was reluctant to pay Mr Ozmen more and more on demand, as it were. But Kanki had a genuine reason to dispute what Neptune was doing, namely, obtaining, and controlling the disposition of, the income while breaching its obligation to provide basic financial information so that its joint venture partner could have any understanding of the operation and profitability of the business.
113 Accordingly, I find that by late January 2017 there was a significant, serious and ongoing breach by Neptune of its obligations under cl 10(c) of the JVA.
114 Neptune's argument that Kanki contrived disputes about the joint venture's accounting position is specious. Neptune no doubt felt that it had to pay something to Kanki, or Mr Ozmen as its principal, when it could not, and did not, do what the JVA required, namely, prepare in a timely way fortnightly profit and loss statements. Neptune's persistent series of breaches of cl 10(c) explained why, at this stage, Neptune made ad hoc payments to Mr Ozmen and his associates.
115 On 2 February 2017, Neptune paid $15,700 to Mr Ozmen. That occurred after Mr Douchkov emailed Mr Ozmen and Mr Ozer setting out a "pure estimate, not a P&L" for 26, 28 and 29 January 2019. The email noted that, after deducting a $40,000 "advance" to Mr Ozmen, Kanki's share of that estimate was $15,726, being reflected in the contemporaneous payment of $15,700. Mr Douchkov wrote that, previously, Mr Ozmen had promised that he would not take any money from the business for the fortnight ended 27 January 2017, but had broken his word, and was demanding more and more money. Mr Douchkov remonstrated against this conduct, writing "the business can't support this". He recounted threats to the business from Neptune's suppliers of champagne and generators over unpaid accounts.
116 Also on 2 February 2017, Mr Douchkov emailed a letter to Mr Altikulacoglu, Mr Koyunoglu and Kaan Ozer, another of Mr Ozmen's associates (the 2 February letter). The letter reflected legal and accounting advice that Mr Douchkov had received about Neptune's position. It referred to the requirement in cl 7 of the JVA that the parties ensure the joint venture have enough working capital to conduct the business at all times. The letter noted that the JVA did not require the parties to provide working capital. It asserted that while the exact amounts were still being calculated, Mr Douchkov had contributed $3,161,559 and Mr Como, $1,904,989, and they had borrowed short-term loans for three years with interest at 12%. The letter said there were no existing arrangements under the JVA for repayment of those sums, and then set out cll 9(c), (d) and (e) of the JVA (that dealt with the shared costs).
117 The 2 February letter also asserted that the lack of arrangements for repayment of those asserted costs had "become an unreasonable financial burden" on Neptune, Mr Douchkov and Mr Como. It continued:
As a result of the considerable pressure brought to bear by Mert Ozmen directly, the calculation of Net Profits pursuant to Clause 10 of the JVA has not accounted for repayments in accordance with Clause 9. While Neptune has accepted this to date, it can no longer do so. Accordingly, the calculation of net profits will henceforth be made strictly in accordance with clauses 9 & 10 of the JVA.
118 The 2 February letter also explained that this meant that the fortnightly profit calculation under cl 10(c) would take into account repayments under cl 9. It said that any future payment of net profit share would only be made to Kanki against a valid tax invoice, and not to Mr Ozmen, and that Kanki needed to obtain an ABN (Australian Business Number) and register for GST. Of course, to this point, Neptune had not provided any fortnightly calculation of net profit under cl 10(c).
119 Next, on 14 February 2017, Mr Konnaris wrote a "report to affairs" for Neptune, trading as Seadeck (the Konnaris report).
120 On 16 February 2017, Mr Douchkov emailed the Konnaris report to Messrs Ozer, Koyunoglu, Clarke and Altikulacoglu, together with Neptune's balance sheet, a monthly report for January 2017, and a report for New Year's Eve and New Year's Day. The Konnaris report contained asserted profit and loss statements for two periods: viz: the 7 months 1 July 2016 to 31 January 2017, and corresponding figures for the 3 months 1 November 2016 to 31 January 2017.
121 The January 2017 monthly profit and loss statement attached to Mr Douchkov's 16 February 2017 email recorded that sales of food generated $69,706.31, while the catering costs were $118,065.61. The Konnaris report recorded statements that:
the figures in it were not true reflections of normal trading conditions;
Mr Ozmen had been paid more than $280,000;
Messrs Douchkov and Como had borrowed over $5 million at 12% repayable over three years that the business had to repay monthly in the amounts of $105,009 and $63,273 respectively (totalling $168,282); and
no more payments would be made to Kanki until Messrs Douchkov's and Como's loans had been repaid within those loans' three year terms.
122 The Konnaris report also showed, in the seven months and three months columns, entries that appeared below the operating profit line under the heading "Paying Off Old Debts". Those entries suggested payments, including interest, to Messrs Douchkov and Como of $606,699, and $295,356 for the seven and three month periods, respectively. The bottom lines for those columns after the "Paying Off Old Debts" entries recorded, respectively, a resulting net loss for the seven months of $115,962, and a net profit for the last three months of $457,180. The operating profit entries above those calculations recorded net profits of $190,737 for the seven months and $452,536 for the three months.
123 The three month figures showed total catering expenses of about $344,850 while sales of food generated $192,235, from total revenue of about $2.2 million. The total catering expenses represented about 15.76% of total revenue, in stark contrast with the 3.38% for expenses for cost of goods sold for food in the projections annexed to the JVA.
124 In my opinion, the 2 February letter and the Konnaris report reflected that, by then, Mr Douchkov and Mr Como had come to realise that the limit of 450, rather than the planned 800, passengers, had had a profound effect on their (and Neptune's) financial positions and the ability to recoup their investment. Mr Douchkov accepted in evidence that there were "no guarantees in business. It's always a risk involved" and that where very considerable returns are held out, they come with, what he said were, "potentially" very significant risks. In his experience as a property developer, if one went into a project with a plan to develop a particular number of home units and received development approval for only half, that "changes the bottom line of the project" very considerably. He gave the following evidence:
Once the vessel was rated for 450 people - not 800 people - the financial returns that were available from this vessel evaporated as far as you were concerned?---No, not at all. I thought we could still make a successful business out of it. And we have.
…when you say a successful business, do you mean a successful business in terms of its appeal to the public and its patronage?---No, I would say that its ability to make a profit is pretty obvious.
But not a profit anywhere near the sort of numbers that were being projected back in December 2015 by Mr Robertson?---Of course. (emphasis added)
125 The 2 February letter and the Konnaris report sought to characterise the pre-JVA investments by Messrs Douchkov and Como, that they claimed had exceeded $5 million, as loans or costs that both Neptune and Kanki had to share under the rubric of shared costs under cl 9 of the JVA or in some other way. That characterisation was new so far, at least, as Kanki was concerned.
126 When the parties entered into the JVA, they expected that Seadeck would trade at the capacity of 800 passengers and would generate net profits exceeding $10 million per annum as the projections annexed to the JVA and the $5 million guaranteed reflected. Such a level of profit over the six year initial term and option periods would have enabled Mr Douchkov and Mr Como to recoup the moneys that they had invested, to the extent they were not a part of the shared costs, from Neptune's anticipated yearly share of net profit of at least $5 million. As Mr Douchkov said in his statutory declaration made on 28 September 2016 for the ILGA, with a capacity of 800, those projections showed that "it was commercially highly feasible and realistic to expect an annual profit of $10 million".
127 But the reality must have dawned on Mr Douchkov and Mr Como by early February 2017 that Seadeck was not producing, and could not be expected to produce in the future, sufficient net profit to service or repay what borrowings or investments they had failed to agree with Kanki would be included as part of the shared costs when negotiating the JVA. Before signing the JVA they knew the size of their investments to date. And, if what they each told the ILGA in their statutory declarations of 24 July 2016 was correct, as at July 2015, Mr Douchkov had invested or borrowed over $2.8 million, and Mr Como $1.35 million.
128 Mr Douchkov said in his statutory declaration of 28 September 2016 that, on a plain reading of the JVA, "it is clear that the promise to pay the owners a minimum $5 million profit does not now apply, because the underlying precondition (namely a legal capacity of 800) will not be met" (emphasis added) and that "Kanki's entitlement will be to receive 50% of the profits of the enterprise (whatever they might be)". He also said the vessel's owners "took advantage" of their negotiating position in October 2015 "to bring about a situation where they would only be liable for half of the additional costs of bringing the Seadeck to Australia, rather than reimbursing us for all of those costs" (emphasis added).
129 Mr Douchkov said in cross-examination that about 10% of the $5 million (or about $500,000), for which Neptune, he and Mr Como claimed reimbursement from the joint venture's revenues, had been incurred in the period after July 2015. However, under the JVA, Neptune was only entitled to reimbursement of half of the shared costs in schedule 1 being, as at 22 October 2015, about $470,000, together with expenses such as half of the subsequently incurred mooring fees. Yet the 2 February letter and the Konnaris report sought to inflate the shared costs to over $5 million and require that these much greater sums be reimbursed to Neptune (or Messrs Douchkov and Como) out of the joint venture's revenue.
130 I am of opinion that this asserted claim had and has no justification. Further, Neptune's subsequent accounting manipulations to enforce it, that appear to have occurred after the date of the Kanki notice, by Neptune deducting substantial sums in the fortnightly profit and loss statements for depreciation and amortisation, amounted to a breach of its obligation to prepare accounting documents in accordance with cl 10(c) and (l) of the JVA. Thus, while Neptune was asserting such a claim before the Kanki notice, it did not act in breach of the JVA by enforcing it until after the Kanki notice.
131 The parties had negotiated over what expenditures made before 22 October 2015, by Neptune, or on its behalf by Messrs Douchkov and Como were to be paid out of the joint venture as the shared costs. In his statutory declaration, 4 July 2016, Mr Robertson said that he was "particularly concerned to hold the meeting [of 23 October 2015] because Neptune had spent a very large sum of money in getting the Seadeck to Sydney but we still had no binding agreement to lease her". He said that at the meeting "we outlined generally the amount of those costs to the Seadeck's owners". In the statutory declaration he then set out and quantified each of the items comprising the shared costs and the hire premium in the amounts at which they were quantified in schedule 1 of the JVA, adding, "in addition, there were other costs" consistently with what he had written in his 27 October 2015 email to the solicitors for Entertainment and Kanki.
132 There is no suggestion in the evidence about the pre-contractual context that the shared costs were agreed at about only 20% of the amount that Neptune was then asserting that it could claim. Instead, cl 16 of the JVA recorded that the JVA was the entire agreement and understanding of the parties and excluded any prior arrangement from having any force or effect. Of course, cl 10(k) and the express terms of schedule 1 to the JVA contemplated that the values (but not the subject matters) of the shared costs were capable of being increased, but only with Kanki's approval under cl 10(k). Kanki did not give any such approval, and Neptune did not specify to Kanki what it claimed as further shared costs at any time prior to its solicitors' letter, dated 22 November 2017.
133 By two letters, dated 16 February 2017, Kanki appointed Mr Clarke as its accountant under cl 2(b), and Mr Ozer as its representative under cl 3(a) of the JVA, and gave Neptune notice under cl 10(d) that Kanki did not accept the net profit calculations in the Konnaris report or the document that Mr Douchkov had sent with his email earlier on 16 February 2017.
134 On 21 February 2017, Messrs Como, Douchkov, Ozer, Konnaris and Clarke attended a meeting at Double Bay. The minutes of the meeting recorded that Mr Clarke made numerous requests and comments about Neptune's presentation of accounting information. Importantly, Mr Clarke reiterated that Neptune had an obligation to provide fortnightly profit and loss reports under the JVA, and this would enable each of the parties to access its share of net profits. He said that he had applied for an ABN for Kanki, and for it to be registered for GST. I infer that this occurred and there is no evidence that it did not.
135 The minutes also recorded that Mr Konnaris said that fortnightly and annual profit sharing "will create many problems and disputes". Mr Clarke said there was no agreement that entitled Neptune's directors to receive the interest charged and it should not be claimed. He reiterated that fortnightly reports were required. He also asked that a joint venture bank account be opened, to which both parties were signatories. The minutes recorded that Mr Douchkov said that he and his partners had had to provide capital at considerable cost to ensure Seadeck was put in a serviceable condition because it had not been delivered in the agreed condition. Mr Clarke said (correctly, in my opinion) that those costs were not covered by the JVA, and were the sole responsibility of Neptune. Mr Douchkov signed the minutes as chairman.
136 On 22 February 2017, Mr Clarke emailed Messrs Como, Douchkov, Konnaris and Robertson, thanking them for their time at the meeting. He said that, as discussed, his accounting firm would be conducting a review and audit of the joint venture accounts, and requested numerous documents, including, relevantly, copies of any agreements entered into on behalf of the joint venture, and copies of all BAS and tax returns lodged to date, as well as access to Neptune's Xero accounting system. Soon after that email Mr Clarke was given read only access to the Xero information.
137 On 23 February 2017, Mr Clarke emailed Neptune's directors and reiterated that JVA required fortnightly accounts, and that Kanki would be requesting its 50% share of net profits for each fortnight. Moreover, he stated that Kanki did not accept the figures so far provided.
138 On 1 March 2017, Mr Clarke emailed Mr Douchkov and asked, "what the deal is with the food on the boat?"
139 On 6 March 2017, Mr Clarke emailed Mr Douchkov, Como and Robertson, reminding them of Kanki's requests for financial information made on 22 February 2017. He stated that Neptune had not complied fully with those requests, and, in particular, in respect of providing bank statements, supplier invoices and other source documents. He emphasised that in order to prevent Kanki referring the dispute to mediation (under cl 12 of the JVA) Neptune had to provide the outstanding documents within 48 hours.
140 Mr Douchkov replied about an hour later, advising Mr Clarke that Neptune had more information, which would be available later that day. He asked Mr Clarke to understand that Neptune was extremely time pressed, and that, while they were collecting documents for Kanki, it would take a little more time to put them together.
141 Mr Douchkov said in evidence that, as he understood it from about this time, issues about accounting documentation became an ongoing dialogue between Mr Clarke and Terry Borella, who, I find, had taken Mr Konnaris' place as Neptune's accountant.
142 On 14 March 2017, Mr Clarke wrote to both Kanki and Neptune, offering that his firm provide bookkeeping and accounting services for the joint venture. The letter referred to a discussion at the previous week's joint venture meeting, at which there was criticism of the shortcomings of Neptune's accounting and its (asserted) failure to provide the joint venture "with any meaningful information", in breach of the JVA. The offer was not accepted.
143 On about 14 March 2017, Mr Borella met with and, I find, was retained by Neptune. Mr Borella had claimed that he understood that both parties retained him and that after meeting with Mr Clarke on 16 March 2017 Mr Borella said that, "so far as I was concerned, I was involved as the joint venture accountant". He gave evidence that he had continued to hold that role thenceforth, even when he was giving evidence. However, Mr Borella gave no evidence that at the meeting with Mr Clarke on 16 March 2017, or on any other occasion, Mr Clarke or anyone on behalf of Kanki said or did anything to indicate that Kanki was retaining him or agreeing to his retainer to act for the joint venture. I will explain below why I have rejected Mr Borella's assertions that he was somehow the "independent" accountant for the joint venture. I should add that senior counsel for Neptune accepted in final address that Mr Borella had acted only as Neptune's accountant at all times.
144 By 16 March 2017, Mr Borella had engaged Dave Gorter to do the bookkeeping for Neptune. Mr Borella instructed Mr Gorter to create three separate ledgers, one for the joint venture itself, and one for each of Neptune and Kanki. He told Mr Gorter the principal reason for this was that, in accordance with the JVA, Neptune had "incurred/funded a significant layer of costs in relation to the JV operation (primarily in the nature of quasi-establishment costs)", with Kanki liable to pay Neptune a half share, with interest, of those costs over 36 months. Mr Borella wrote that he had spoken to Mr Douchkov about the need for the joint venture to provide in its books for depreciation and amortisation of those costs.
145 In his email of 23 March 2017 to Mr Clarke, which attached his email to Mr Gorter of 16 March 2017, Mr Borella referred to the past experience of "under scoping" of the accounting framework of the business and the joint venture (being, I find, a reference to Mr Konnaris and his earlier work). He wrote that "[t]he Neptune Hospitality people are well aware that this issue has been the source of justifiable concern on the part of your client" (emphasis added). He then described Kanki as being involved in a role that was more of being passive, rather than active, in the joint venture. He then wrote:
The Neptune Hospitality people have clearly sought to demonstrably address the concerns of your client in this regard by the appointment of my firm as the accountants to the Joint Venture. (emphasis added)
146 He also wrote that when his role in making accounting decisions as to the treatment of any items, "I act for the interests of both Joint Venture participants".
147 However, Mr Borella agreed in cross examination that (quite apart from what he asserted that he did as "joint venture accountant") at all times he had acted for, and knew that, he was retained by Neptune, yet he denied that he had any conflict of interest. He said that he never told Mr Clarke that he acted for Neptune, and Kanki never appointed him to act for the joint venture, or was involved in a decision to do so.
148 On 27 March 2017, Mr Borella emailed Mr Clarke and others. He wrote that he anticipated getting "on top of the profits reporting" within the immediate future.
149 On 3 April 2017, Mr Clarke sent an email to Neptune's directors and Mr Borella complaining of the lack of any payments to Kanki or information and inquiring whether there were monthly BAS (or instalment activity statements) in respect of significant statutory liabilities namely, superannuation, PAYG and GST.
150 Late on 4 April 2017, Mr Clarke sent a follow-up email that stated that Kanki was "deadly [sic] concerned over the management of the Joint Venture. We have sent numerous emails regarding the business, its accounts, allocation of expenses and the state of affairs. To date we have not had any response from you". He wrote that fortnightly profit and loss statements should be provided within five days of the end of the fortnight, but that the one then due had not been received.
151 On 4 April 2017, at night, Mr Borella replied advising that it was common ground that the previous accountants did not appropriately "grasp" the requirements of the JVA. He pointed out, among other matters, that Kanki was "required, in accordance with the [JVA], to progressively make good to [Neptune] over specified period of time, a designated share of such expenditures", being, "matters [sic] for the [JVA] that have been wholly funded by [Neptune]". His email asserted that while Kanki could ask questions, the mere fact that there was "an as yet unexplained debit entry on what is effectively the proprietor account of your client with the Joint Venture does not, of itself, manifest itself in an immediate contention that your client has been short-changed funds to which they would have otherwise been due…". The email also evaded providing any substantive answers to Mr Clarke's questions, including when the fortnightly profit and loss statements, then overdue, would be provided or how Neptune had dealt with the statutory obligations in respect of GST and PAYG.
152 I observed Mr Borella giving evidence over more than two days. He was loquacious by nature and he was evasive in cross-examination, just as, I find, he was in his dealings with Kanki and Mr Clarke. I had to direct him on a number of occasions to answer questions that he was evading answering directly. I found it difficult to assess whether Mr Borella was wilfully or otherwise blind in his denials of being in a position of conflict. Three instances of this stood out: first, his recognition, around the time of the inception of his retainer, that he could not give Neptune's BAS documents to Mr Clarke in response to the latter's request on 3 April 2017; secondly, his failure to provide any information about the GST position to Kanki until October 2017, despite Mr Clarke's numerous requests; and, thirdly, his decision not ever to render an account to Neptune for the considerable work he had done over two years on its behalf, while he rendered significant accounts, for which he received payment, to Neptune to pay as joint venture expenses, which Mr Douchkov authorised and paid.
153 When cross-examined about his failure to respond to Mr Clarke's request for, among other matters, information concerning taxation liabilities in his 3 April 2017 email, by providing the BAS documents, Mr Borella said that although Mr Clarke could look at the entries in the Xero accounting system:
Well, I think the limitation on his position is that he - he didn't have access to the Business Activity Statements that were lodged on behalf of Neptune.
Well, why didn't you provide them to him?---Because I reasoned that is discrete to Neptune. You see if, for example, it had been possible, which I believe it is not, for the joint venture to have its own ABN and its ability to file its own Business Activity Statement, of course that would have been provided to him immediately. But the issue here is that the obligations really arose on the - on the part of Neptune and I didn't think it was appropriate because I did act for Neptune and I also acted for the joint venture. I didn't think it was appropriate that I gave details of a client's integrated client account from the Tax Office and the - and the relevant filings, which would incorporate some of their own activity to another party. I believe that's a breach of my professional obligations. (emphasis added)
154 Mr Borella had no conception (as his evidence above demonstrated) that if, as he incorrectly thought, he was acting on behalf of the joint venture for both Neptune and Kanki, he would have been in a position of having conflicting duties to each of them. However, in his evidence, Mr Borella was unshakable in his belief that he was acting for both Neptune and Kanki while also separately retained by Neptune, and was not in a position in which his duties to Neptune and to the joint venturers conflicted, or might possibly conflict, or that if he were to act on behalf of both joint venturers, he needed to make any, let alone a full and frank, disclosure of the conflict to Kanki and receive its fully informed consent to his doing so.
155 After the receivers' appointment on 26 September 2018, Mr Borella caused Mr Douchkov to authorise, as joint venture expenses, invoices that he had rendered for his services. Mr Borella then submitted those invoices to the receivers and he received payments from them in December 2018 of $36,600; January 2019, $54,900; and February 2019, $24,152. Mr Borella said that the payments related to work done prior to the appointment of the receivers. Mr Borella never sought Kanki's authority to incur the liabilities involved in those invoices or to cause the joint venture's money to be used to pay his invoices. The receivers' February 2019 report described Mr Borella as "the accountant appointed under the Joint Venture Agreement terms", a description consistent with what Mr Borella used in evidence to describe himself (and, I infer, that he gave to the receivers). That description was misleading, since I have found that he was Neptune's accountant and was never acting or authorised to act for Kanki and Neptune together.
156 Mr Borella said that he sent his invoices to Mr Douchkov who approved them for payment. Normally, Mr Borella charged $1,500 per fortnight to oversee the preparation of fortnightly profit and loss statements and billed separately for other work. He said that he tried to issue invoices for his accounting services once a month and had "only ever issued invoices to the joint venture because I have not endeavoured to do any invoices for work that we've carried out for Neptune". He denied that he had included in the joint venture invoices fees for work he had done for Neptune. He said:
I've done work for Neptune and it's all on a separate billing system, and at this point in time, I have elected not to charge for it. (emphasis added)
157 This conduct, again, suggested that Mr Borella was treating Neptune differently to Kanki as the other party to the joint venture, in circumstances where he knew that Neptune controlled the joint venture accounts and was the source of a regular cash flow for his remuneration.
158 On Saturday, 8 April 2017, Mr Clarke sent an email to Messrs Douchkov, Como, Robertson and Borella, headed, "Material Breach of the Joint Venture Agreement". The email referred to Neptune's obligation under cl 10(c) of the JVA and its failure to provide a net profit calculation for the previous fortnight. The email stated this was not the first time that Neptune had not complied with cl 10(c). Mr Clarke said that Kanki had no option but to engage lawyers and prepare a formal notice of breach. Indeed, at that time, Neptune had never provided a fortnightly profit and loss statement under cl 10(c), and the last financial information as to the trading performance of the joint venture that it had provided to Kanki had occurred on 16 February 2017, when Mr Douchkov provided Kanki with the Konnaris report and associated documents. Neptune had not (and has never subsequently) provided any profit and loss statements to Kanki for any of the trading during February and before 15 March 2017.
159 Late on 9 April 2017, Mr Borella replied to Mr Clarke's email of 8 April 2017, saying he had been discussing aspects of the joint venture at length over the weekend with Mr Auld, "with a view to generating the first fortnightly net profit calculation" and anticipated having a first draft ready the following morning, so that Kanki would receive the statement on the Tuesday (11 April 2017). He foreshadowed that the statement would include "an applicable amount of depreciation and interest if applicable [sic]". He also asserted again that he acted for both joint venturers.
160 On 11 April 2017, Mr Gorter emailed to, among others, Mr Clarke, a profit and loss statement for the fortnight ended 28 March 2017. The document also incorporated in a parallel column incomplete figures (that Mr Gorter said were not yet accurate) for the fortnight ended 14 March 2017. As I will explain in more detail in dealing with the catering issue below, soon after this Mr Borella and Mr Clarke engaged in an exchange of emails about why the joint venture was losing money on catering.
161 On 13 April 2017, Mr Borella replied to an email from Mr Clarke, querying matters in the profit and loss statement for the fortnight ended 28 March 2017, saying that he had dealt partly with catering costs in an email the previous day. However, Mr Borella asserted that while he was "welcoming of your questions", he thought "it incumbent upon you to indicate the basis upon which those concerns are founded".
162 On 13 April 2017, Mr Clarke did so when he emailed a response to Mr Borella, saying:
We are struggling to understand how food can be running at break even and/or a loss. Our understanding is the catering contract (to [sic] which we have never seen) is the JV is entitled to 50% of the profit. (emphasis added)
163 Mr Clarke inquired whether Mr Borella had seen the catering agreement. He noted that Mr Douchkov was a director and shareholder of the catering company, Short St Kitchen Catering and Events Pty Ltd and asserted this was a conflict of interest that breached the JVA. The email led to Mr Borella's response on 13 April 2017 that he agreed that the joint venture should be making a 50% gross profit for catering and that he would do "a bit more digging for you" (see [198] below).
164 On 1 May 2017, Mr Clarke emailed, among others, Messrs Douchkov, Como, Robertson, Gorter and Borella, suggesting they hold a regular meeting "to go through the numbers, start planning for the future etc". He also noted that the profit and loss statements were issued on Tuesdays and, in order to allow some time for questions, he wrote that he was open to when such meetings ought to occur. Mr Borella gave evidence that a meeting occurred around the time of this email involving Mr Clarke, but that Neptune, whilst acknowledging that Mr Clarke was Kanki's accountant, considered that Mr Clarke was not Kanki's authorised representative under the JVA.
165 On 15 May 2017, Mr Ozmen wrote to Mr Auld in connection with Neptune's decision to relocate Seadeck to Brisbane (that I discuss further below when dealing with the relocation issue: see [214] below) noting that Mr Clarke had been asking Neptune to meet with Kanki "but your group has not answered". And, on 16 May 2017, Mr Clarke emailed Messrs Como, Douchkov, Robertson, Gorter and Borella (and copying in Messrs Ozmen and Koyunoglu) saying "[t]his is now our third request for a meeting with you to discuss the business". Mr Borella said (and I accept) that no regular meetings occurred after 1 May 2017 that he had attended. I infer that there were no regular meetings of the joint venturers after 1 May 2017.
166 On 1 June 2017, Kanki gave notice to Neptune that it had appointed Mr Clarke and his firm as its authorised representative under cl 3(a) of the JVA. Also on 1 June 2017, Mr Clarke asked Mr Borella to provide him with copies of the BAS statements for the 2016/17 year. Mr Clarke had first asked for BAS statements on 3 April 2017 (see [149] above).
167 Mr Clarke followed this request up with Mr Gorter and Mr Borella on 14 June 2017, asking whether (the lack of response was because) the BAS for prior periods were not correct or had not been completed. Soon after, on 14 June 2017, Mr Borella replied to Mr Clarke, saying that he had been "reluctant to submit BAS returns until such time as we were confident that there was an appropriate balancing of them with the system". In cross-examination, Mr Borella acknowledged that he had not given Mr Clarke any BAS statements to this point. Mr Borella also wrote that he was then concentrating on completing comprehensive financial statements for the joint venture up to 30 April 2017 for the primary purpose of securing funding for the joint venture going forward (which he had noted at the last meeting). Mr Borella wrote that the statements he was compiling were "an amalgam of the respective financial positions of the two parties to the Joint Venture" and would show that Kanki had "overdrawn" its account and was "indebted to [Neptune] for contributions to working capital".
168 Mr Borella gave evidence that he prepared 10 month financial statements to 30 April 2017 for Neptune as it was seeking some finance. Those statements, which were unsigned, recorded the joint venture had a total comprehensive net income of $323,721 for the 10 months, and a corresponding net loss of $236,006 for the financial year ended 30 June 2016. The statement of financial position recorded intangible assets of $1.88 million in both periods comprising (as note 1(k) explained) "Seadeck commissioning and procurement costs" and property, plant and equipment as $1,844,815 for 2016 and $1,733,344 for the ten months to 30 April 2017, the difference being the reductions caused by accumulated depreciation. The vessel's fitout ("at cost") was recorded as $1,225,844 for the 10 month period. In the 10 month trading profit and loss account, food sales were recorded as $446,330 with the cost of catering as $486,463, or a loss of $40,133.
169 Mr Borella gave evidence that he and Mr Gorter had done some "digging" about the catering costs, as he had written they would in his email of 13 April 2017, "but we didn't report it to Mr Clarke" (see [163] above). Mr Borella denied this was because he had a conflict between his duties owed to Neptune and those owed to Kanki. I find that Mr Borella did not report whatever he found out about the catering costs because he was acting as Neptune's accountant and could not make any such report without its authority, which I find was never given. Nor did he give any evidence about what the "digging" may have revealed.
170 Although this post-dated the events leading to late July 2017, I am fortified in my assessment that Neptune and Mr Borella did not give Kanki adequate or full information about the operation of the joint venture and its financial performance in accordance with Neptune's obligations under cll 6 and 10 of the JVA by the conclusion of the referee, Christian Sprowles, whom Burley J appointed on 19 December 2017. Mr Sprowles had to inquire into and report to the Court by 30 January 2018 on all disputes between Kanki and Neptune about the operating profit of the business for each fortnightly period from 26 September 2017 to 19 December 2017. Mr Sprowles found in his report that "many of the disputed line items could have been resolved by [Neptune] providing documents to substantiate the P&L Statements prior to the Court Order on 19 December 2017". He apportioned 80% of the liability to pay his costs to Neptune. He found (and I agree) that:
should [Kanki] have received supporting documentation for many of the disputed line items, [Kanki] may have been in a better position to be more amenable to accepting the methodology of accounting treatment used, and the profit reported on a fortnightly basis. The lack of transparency regarding operating expenses is evident in the email correspondence attached to the Dispute Notification" (emphasis added).
171 On 11 July 2017, Mark Sheller of Kanki's solicitors, Holman Webb, sent the Kanki notice, as a letter, to Neptune. That gave Neptune notice under cl 13(a)(iii) to remedy breaches of the JVA (see [90]-[93] above). The Kanki notice asserted that Neptune had conducted the business at a loss. It required Neptune to provide Kanki with copies of all financial documents, including BAS submitted to the Australian Taxation Office, and documents as to the quality and pricing of the beverages and food served on Seadeck (cf. cl 6(e) of the JVA). I will discuss the Kanki notice in more detail in dealing with the termination issue below.
172 On 14 July 2017, Mr Leather, then a partner at Omniwealth Legal, replied on behalf of Neptune. Neptune denied, in that letter, all of the breaches alleged in the Kanki notice and, in particular, Omniwealth wrote that:
It is completely false that the business had been operated at a loss…All financial information pertaining to the Business has been and remains available to your client [and] [a]ll quality and pricing information related to food and beverage service has also always been available to your client. The relevant obligation is to keep your client reasonably informed. Our client has done so. (emphasis added)
173 I find that, as at 14 July 2017, Neptune knew that the assertions just quoted from Omniwealth's letter of 14 July 2017 in relation to the provision to Kanki of "all financial information", such as BAS lodged with the Australian Taxation Office and the position with the quality and pricing of food served on Seadeck, were false (I do not suggest, and there is no evidence, that Mr Leather or Omniwealth had any such knowledge, or were doing anything other than honestly conveying the instructions that Neptune had given). The falsity of Omniwealth's instructions appeared from the following.
174 First, the fortnightly Xero based summary of profit and loss statements for the 100 week period 1 March 2017 to 29 January 2019 that are in evidence show that, other than a net profit of $9,042.25 for the fortnight 15 to 28 March 2017, the joint venture recorded, in the Xero system, a net loss in every fortnight between 1 to 14 March 2017 and 5 to 18 July 2017. The quanta of the net losses varied between about $10,000 and $60,000 and totalled $372,042.82. If the fortnightly wages paid or payable to Mr Ozmen, of $10,528.84, are excluded for the whole of this period and the one fortnightly profit is included, the overall net loss between 1 March 2017 and 18 July 2017 was $228,412.18. As I have mentioned, Neptune has never produced separate accounts for February 2017. The upshot is that the business was trading consistently at a loss since at least March 2017, albeit it had been profitable for a period beforehand. Secondly, Neptune's integrated client account with the Australian Taxation Office, as at 14 September 2017, showed that on 16 December 2016, 31 January 2017 and 27 February 2017, Neptune lodged self-assessments which, I infer, were monthly BAS, respectively, for the months November 2016, December 2016 and January 2017, that had generated debit entries in that account. The integrated client account subsequently had no record of BAS or similar lodgments for GST. A notice which the Australian Taxation Office gave to Neptune on 17 August 2017 at Mr Borella's address, stated that Neptune's BAS returns remained overdue "…despite our attempts to assist you to lodge".
175 Therefore, as Mr Borella's evidence also confirmed, Neptune only had lodged three BAS relating to the affairs of the joint venture prior to the Kanki notice, even if they also included other matters that solely concerned Neptune. But Neptune never provided or made available to Kanki any BAS that it had lodged in respect of the joint venture and did not inform Kanki of its failure to lodge any BAS for the months after January 2017. The 17 August 2017 Australian Taxation Office notice warned Neptune that it had to lodge the outstanding BAS immediately to avoid penalties and audit. Mr Borella knew that Neptune had not lodged BAS for some time. He also knew that Neptune had access to the funds that ought to have been used to pay GST while it remained in default of lodging BAS and paying the GST due, whether directly to the Australian Taxation Office or to Kanki (or account to it) for any share of GST due by Kanki that Neptune asserted was owing by it so that Kanki could pay that GST. He said that he had refrained from preparing and lodging BAS for Neptune "until such time as we did the relevant calculations".
176 And, of course, as Neptune's agent or even, in his misguided view, the joint venture accountant, he gave none of this information to Kanki despite Kanki's and Mr Clarke's continuing requests. He gave this evidence:
Did you do this because you felt it was in Neptune's interest to keep the cash that should have been remitted to the ATO in its bank account? --- No. My primary motivation, even in cases with clients who lodged late returns, is primarily to make sure that you don't put in an inaccurate return. So I took sufficient steps and considerable work to make sure that the BAS returns that were duly lodged with the ATO were in fact correct. (emphasis added)
177 Given what Mr Borella described as the "complexity" of the task, Neptune had an obligation to provide, timeously and at all events before the expiry of the Kanki notice on 25 July 2017, proper information about the GST position to Kanki to enable it to comply with whatever taxation obligations it had or may have had. Neptune's long delay in lodging BAS was a breach of its obligations under cl 6(b)(vi) of the JVA to comply with all applicable laws, namely, A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act), that, clearly enough, was applicable to the business. That breach existed at the time of the issue of the Kanki notice.
178 Thirdly, prior to 25 July 2017, Neptune had not provided Kanki with a copy of the catering agreement and did not do so until after this proceeding commenced (as explained below), and it had not given any pricing information to Kanki to explain why the provision of catering to Seadeck was operating at a loss.