Phipps v Boardman

CORPORATE AND COMMERCIAL CUSTODIAN PTY LTD Fourteenth Respondent MAIN CAMP TEA TREE OIL (NO 2) LTD Fifteenth Respondent MAIN CAMP TEA TREE OIL (NO 3) LTD Sixteenth Respondent PROJECT & GENERAL FINANCE PTY LTD Seventeenth Respondent MAIN CAMP ENTERPRISES LIMITED Eighteenth Respondent WAN DAN HOLDINGS LTD Nineteenth Respondent AND: GLENDON MICHAEL STOTTER First Cross-Claimant GG JAY INVESTMENTS PTY LTD Second Cross-Claimant AND: DOVEKA PTY LTD First Cross-Respondent THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD Second Cross-Respondent JOHN STEPHEN BAX Third Cross-Respondent THE FOOD IMPROVERS PTY LTD Fourth Cross-Respondent FREDERICK THEODORE GULSON Fifth Cross-Respondent NG 3238 OF 1992 BETWEEN: G G JAY INVESTMENTS PTY LTD First Applicant STUART INVESTMENTS (NSW) PTY LTD Second Applicant AND: DOVEKA PTY LIMITED First Respondent

THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD Second Respondent JOHN STEPHEN BAX Third Respondent THE FOOD IMPROVERS PTY LTD Fourth Respondent KARCOR HOLDINGS PTY LTD Fifth Respondent PETER J ONLEY Sixth Respondent CORAM: HILL J PLACE: SYDNEY DATED: 16 MAY 1997 MINUTES OF ORDER THE COURT ORDERS THAT: In the proceedings NG 3192 of 1992: 1. The applicant bring in short minutes of order to reflect the matters dealt with in these reasons. 2. A date is to be fixed with counsel when short argument will be heard on the question of the power of the Registrar to determine just allowance to the first and sixth respondents. In the proceedings NG 3238 of 1992: 3. Applicant to bring in short minutes of order to reflect the concessions made on behalf of the respondents in the course of the proceedings. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) ) GENERAL DIVISION ) NG 3192 OF 1992 BETWEEN: NATURAL EXTRACTS PTY LTD First Applicant DOVEKA PTY LTD Second Applicant AND: GLENDON MICHAEL STOTTER First Respondent ALAN JAMES GALLAGHER Second Respondent POOLMANS PTY LTD Third Respondent MAIN CAMP TEA TREE OIL LTD Fourth Respondent LAND & ASSETS FINANCE PTY LTD Fifth Respondent GAIL DAWN STOTTER Sixth Respondent GG JAY INVESTMENTS PTY LTD Seventh Respondent LAND & ASSETS DEVELOPMENTS PTY LTD Eighth Respondent STOTTER MANAGEMENT SERVICES PTY LTD Ninth Respondent AMALGAMATED LAND AND ASSETS FINANCE PTY LTD (FORMERLY LAND AND ASSETS FINANCE (NO.2) PTY LTD) Tenth Respondent MAIN CAMP MARKETING PTY LTD Eleventh Respondent NATURAL OIL GAS & MINING PTY LTD Twelfth Respondent SUMMERLAND LANDS PTY LTD Thirteenth Respondent

CORPORATE AND COMMERCIAL CUSTODIAN PTY LTD Fourteenth Respondent MAIN CAMP TEA TREE OIL (NO 2) LTD Fifteenth Respondent MAIN CAMP TEA TREE OIL (NO 3) LTD Sixteenth Respondent PROJECT & GENERAL FINANCE PTY LTD Seventeenth Respondent MAIN CAMP ENTERPRISES LIMITED Eighteenth Respondent WAN DAN HOLDINGS LTD Nineteenth Respondent AND: GLENDON MICHAEL STOTTER First Cross-Claimant GG JAY INVESTMENTS PTY LTD Second Cross-Claimant AND: DOVEKA PTY LTD First Cross-Respondent THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD Second Cross-Respondent JOHN STEPHEN BAX Third Cross-Respondent THE FOOD IMPROVERS PTY LTD Fourth Cross-Respondent FREDERICK THEODORE GULSON Fifth Cross-Respondent NG 3238 OF 1992 BETWEEN: G G JAY INVESTMENTS PTY LTD First Applicant STUART INVESTMENTS (NSW) PTY LTD Second Applicant AND: DOVEKA PTY LIMITED First Respondent

THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD Second Respondent JOHN STEPHEN BAX Third Respondent THE FOOD IMPROVERS PTY LTD Fourth Respondent KARCOR HOLDINGS PTY LTD Fifth Respondent PETER J ONLEY Sixth Respondent CORAM: HILL J PLACE: SYDNEY DATED: 16 MAY 1997 REASONS FOR JUDGMENT Before the Court are two applications. The first alleges a breach of fiduciary duty on the part of Mr Glendon Michael Stotter, the first respondent. It seeks orders that certain property held by some or all of the various corporate respondents to those proceedings, be held upon constructive trust for Natural Extracts Pty Ltd ("Natural Extracts"). Although Doveka Pty Ltd ("Doveka") is an applicant in those proceedings, it is not seriously suggested that any orders should be made that property is held upon trust for it. The proceedings seek also an accounting for profits made by Mr Stotter or others associated with him in the period to the date of the proceedings. For convenience, these proceedings may be referred to as "the fiduciary proceedings" (NG 3192 of 1992).

The second proceedings have been commenced by GG Jay Investments Pty Ltd ("GG Jay"), a trustee company holding assets upon trust for Mr Stotter's family and Stuart Investments (NSW) Pty Ltd ("Stuart Investments"), a company related to a Mr Stuart, seeking rectification of the register of shareholders of Doveka so that shares previously in their name but subsequently transferred out of their name be restored to them and the register of Doveka accordingly rectified. These proceedings for convenience may be referred to as "the rectification proceedings" (NG 3238 of 1992). In the rectification proceedings a cross-claim has been filed in substantially similar terms to the statement of claim in the fiduciary proceedings. Likewise, in the fiduciary proceedings a cross-claim has been filed in substantially similar terms to the statement of claim in the rectification proceedings. It is thus unnecessary to detail the complexity of the proceedings. Of the parties to the proceedings, it suffices to say that the major dispute is one between Mr Stotter, the first respondent to the fiduciary proceedings, and Mr Gulson the third applicant to those proceedings. The roles played by the other individual participants, particularly Messrs Gallagher, Bax and Jay, will emerge from the analysis of the facts to which I now turn.

THE EARLY DAYS - PRE-DECEMBER 1990 While indigenous Australians have recognised the medicinal qualities of tea tree oil perhaps for tens of thousands of years, commercial exploitation of tea tree oil in modern Australia is a rather more recent phenomenon. There was a cottage industry for tea tree oil in the early 1920s when cutters distilled the oil by crude methods and sold it for use for skin irritations, insect bites, burns etc. There was little or no scientific data to support therapeutic claims for the oil and sales depended largely upon folk lore. Interest in tea tree oil lay dormant up until the late 1980s. It was probably fed by the general interest at that time in natural alternative medicines. The recognition that tea tree oil was a safe and effective germicide, bactericide and fungicide and the recognition that there was a potential market for the oil, not only in Australia but for export, particularly for use in cosmetics with a pharmaceutical application, meant that there existed the potential for the establishment of a profitable new Australian venture if capital could be found to develop it. It is fair to say that the potentiality of a tea tree industry in Australia touched the imagination of the individuals with which the present litigation is concerned. But it must be emphasised there was a long time when the establishment of a viable tea tree plantation and industry by the individual parties to the present proceedings was as elusive as the finding of a new El Dorado.

Mr Stotter, with a certificate in marketing from the University of New South Wales, was, until 1984, involved in marketing in the insurance industry. In that year he resigned a position with MLC Limited. He thereafter became associated with a Hong Kong listed company, FP Special Assets Limited, in a project to acquire a lavender farm in Tasmania and a tea tree farm in Nambucca in New South Wales. To further that project, a company called Natural Extracts International Pty Ltd ("Natural Extracts International") was incorporated in or around April 1989. The shares in that company were held as to 90% by the Hong Kong company and 10% by GG Jay, a company which, as previously noted, was the trustee of the Stotter Family Trust. The directors of GG Jay (the seventh respondent) were Mr and Mrs Stotter. I have no doubt, having seen Mrs Stotter in the witness box, that Mr Stotter was at all times the governing mind of GG Jay or other companies of which he and Mrs Stotter were directors. GG Jay was granted an option to acquire a further 10% of the share capital of Natural Extracts International. Mr Stotter was the managing director of that company. At some stage the interest of the Hong Kong company in the project started to wane as did, it would seem, the relationship that existed between Mr Stotter and it. Thus, in or around 1989 negotiations took place between Mr Stotter and those representing the Hong Kong company for a "management buy-out". Precisely what this was to entail was not a matter explored in evidence. The management to participate in the management buy-out included Mr Stotter, Mr Reece, Mr Bax and Mr Stuart. Mr Reece was at all relevant times a consultant to the natural oils and extracts industry. He had spent some 17 years as marketing manager for the fragrance and chemical division of Keith Harris & Co and joined Australian Plantations Pty Ltd in February 1986 as a technical consultant. Mr Stotter was at that time managing director of Australian Plantations Pty Ltd. Mr Stotter left that company to become managing director of Natural Extracts International and retained Mr Reece as a technical/marketing consultant. According to Mr Reece he was not part of the management buy-out group. There is a marginal conflict in the evidence as to this but nothing turns in any event upon it. Mr Bax, a certified practising accountant, commenced to work for Natural Extracts International in early 1989. During 1989 Mr Bax worked with Mr Stotter to assess the financial viability of the establishment of a trust to be floated to the public in respect of the tea tree plantation project and the lavender plantation. When, in January 1990, the interest in the Hong Kong owners commenced to wane, so that no further funds were to be invested in the project, Mr Bax associated himself with Mr Stotter, Mr Stuart and Mr Reece in themselves setting up a tea tree project. Mr Stuart's role with Natural Extracts International was not explored in evidence.

Doveka, the second applicant, was acquired by Mr Stotter and his colleagues as a shelf company in 1989 in connection with the proposed management buy-out. There were initially two issued shares, one of which was held by Mr Stotter and the other by GG Jay as trustee of Mr Stotter's family trust. The share in Mr Stotter's name was held by him as nominee for GG Jay. The share capital of Doveka was expanded in 1990 as a result of a share issue made on 29 June of that year. Forty-eight shares were then issued to GG Jay in its trustee capacity, thirty shares to Stuart Investments, a company controlled by Mr Stuart, ten shares to The Food Improvers Pty Ltd ("Food Improvers", a company controlled by Mr Bax and ten shares to Karcor Holdings Pty Ltd ("Karcor"), a company controlled by Mr Reece. As and from 24 October 1989 the directors of Doveka were Messrs Stotter, Bax and Stuart. Natural Extracts was incorporated on 22 September 1988. It had an initial share capital of 2 shares, one of which was held by Mr Stotter and the other by Mr Gallagher, a solicitor then in private practice (and a close personal friend of Mr Stotter), in trust for Mr Stotter. The precise role which it was intended Natural Extracts would perform and its intended relationship with Natural Extracts International was a matter not explored in evidence. As has already been foreshadowed, the project with which Natural Extracts International was concerned involved raising money from the public. The proposed management buy-out involved the purchase of the Hong Kong interest in Natural Extracts International. It was in this connection that Poolmans Pty Ltd ("Poolmans"), headed by Mr Peter Poolman, an agricultural adviser, was retained by Natural Extracts International to evaluate and put together a funding proposal for the management buy-out. Mr Poolman was later to advise Natural Extracts in respect of a quite different proposal. The management buy-out did not proceed and in the result Mr Stotter ceased to be a director of Natural Extracts International. It may be inferred that the parting of Mr Stotter from Natural Extracts International was not wholly amicable. The relationship was terminated by a deed to which, inter alia, Mr Stotter and Doveka were parties. The copy in evidence was not dated but appears to have been executed some time around February or March 1990. In addition to mutual releases it is interesting to note that Natural Extracts International agreed to pay to Mr Stotter $103,000 to purchase a library identified in an annexure. The articles and books so identified generally related to tea tree oil and included a business plan for the development of a tea tree oil business which Mr Stotter had prepared in December 1984 as well as a complete set of notes on marketing from the University of New South Wales. In or around March 1990, Mr Stotter was approached by a Mr Burke, a Sydney based property developer who was apparently the contact point for a syndicate of investors, referred to in evidence as the "Main Camp Investing Partners", who were interested in investing in the setting up of a tea tree plantation on a property at Main Camp near Casino in New South Wales owned by O'Leary Investments Pty Ltd ("O'Leary Investments"), a company then controlled by a Mr Terence O'Leary. Mr Stotter, properly, discussed the opportunity which had come to him with his fellow shareholders or directors in Doveka. The discussions seemed to be less concerned with Mr Burke's proposal than with the possibility that Mr Stotter and his associates themselves seek to put together a proposal for public investment in a tea tree plantation on Main Camp. It was in connection with this proposal that Mr Stotter approached Mr Poolman. He also approached Security Pacific Australia Ltd ("Security Pacific"), where he dealt with a Mr Ross Purkiss. The proposal which was explored was the setting up of an investment trust under the name "Natural Extracts Trust" as a vehicle to obtain public participation. A public trustee company was to act as trustee; Security Pacific was to be responsible for locating investors who were to subscribe for income units in the trust and capital units were to be issued to Doveka. The idea of an agricultural trust and public participation in such a trust appears to have originated in the initial proposal under consideration by Natural Extracts International.

This proposal brought Mr Stotter together with Mr O'Leary. They had first met at a tea tree oil conference held in Byron Bay in about October 1989. Their next meeting was in or around March of 1990 when Mr Stotter first approached Mr O'Leary to see if Mr O'Leary would be interested in selling the property known as Main Camp. Main Camp had been purchased by O'Leary Investments in July 1986. From that time Mr O'Leary had harvested tea tree oil from natural stands on the property. Subsequent trips overseas by Mr O'Leary, in the period from 1987 to 1990, alerted him to the potential of tea tree oil. He had made some early contacts with investors in 1988 for the growing of seedlings but the investors did not have sufficient funds. He had also, before meeting Mr Stotter, had discussions with a Western Australian company specialising in raising funds for agricultural projects by offering, what Mr O'Leary euphemistically called, "tax effective schemes" to potential investors. Mr O'Leary was interested in Mr Stotter's proposition that he sell Main Camp. Later discussions which took place in around May 1990, at which Mr Stotter and Mr Stuart represented what may be referred to as "the Stotter interests", reached an agreement that Mr Stotter would be prepared to sell Main Camp for $3.5 million. In May 1990 Mr O'Leary orally agreed to give to the Stotter interests an option to purchase Main Camp. Mr O'Leary's recollection was that this option was for a period of six months. Mr Stotter's recollection was that it was for a period of three months. Whatever the case may be, there would seem to have been no written option until 5 March 1991. In this context it is interesting to note that on 24 October 1990 Mr Stotter appears to have written a letter to a Mr Graham Merry of Essential Consulting and Research saying that in the week preceding the letter he had secured an option over a large, suitable property in the Casino/Grafton area, presumably Main Camp. It is clear that no option was granted by Mr O'Leary at that time. Mr Stotter did not deny writing the letter although he did not recall it. The contents of it were clearly incorrect and aid in the view I have formed of Mr Stotter, for reasons which will emerge during the course of this judgment, that he was a far from truthful witness prepared to say anything which would contribute to his ultimate success in the tea tree project and retention of it for the benefit of his family. As I have already indicated, Doveka was capitalised by an issue of shares on 29 June 1990. At the meeting at which that capitalisation took place the directors of Doveka, including Mr Stotter, resolved that Doveka acquire "a copy of the tea tree library" from Mr Stotter for a purchase price of $50,000 to be paid in full upon the successful subscription of all income units relating to the proposed "Natural Extracts Trust". The minute does not detail the "library", although it would seem to be the same library as Mr Stotter had but a month or so earlier sold to Natural Extracts International as part of the settlement with that company. Nothing turns really upon this as Mr Stotter was never paid the $50,000 to which reference is made in the minutes. In his evidence Mr Stotter sought to down play the significance of the library. He suggested it contained but matters of public record which no doubt is true. Each transaction appears to have been no more than an attempt to create a liability to Mr Stotter in a way which would not attract tax to him. At the very least each would seem to have been a sham. The multiple sales of the "library" reflect adversely upon Mr Stotter's credit. It is not easy on the evidence to separate out arrangements between Doveka and Security Pacific in respect of the initial management buy-out proposal and the subsequent transactions relating to Main Camp. Doveka appears to have entered into an arrangement with Security Pacific in November 1989 involving a maximum fee of $80,000, part of which was capable of being refunded if Security Pacific had not obtained investors by February 1990. While this proposal must have related to the management buy-out agreement, as, according to Mr Stotter the Main Camp proposal had not arisen until March 1990, the agreement appears to have been the agreement under which Doveka and Security Pacific operated in respect of Main Camp as well.

On 23 May 1990, Mr Poolman advised Mr Stotter of the enthusiasm which he and Mr Purkiss had for the trust proposal. That conversation related to the Main Camp proposition. There were, however, some problems which needed to be solved. Firstly, Poolmans required money. Further, Mr Poolman was of the view that it was necessary to have Mr O'Leary accept units as part payment for Main Camp. It was also pointed out that there was a need for an option to be granted By O'Leary Investments. Security Pacific and Poolmans appear to have been somewhat bigger on style than they were on substance. They produced a selling document entitled "Proposed Natural Extracts Trust" comprising some 100 pages, but did not come up with one dollar of public money. The Information Memorandum which was generated described the key features of the trust in the following terms: "1. It will establish 750 hectares of Tea Trees over a three year period. This will require the propagation of about 18 million trees which will be planted in a configuration conducive to mechanical harvesting and low cost maintenance. 2. It will design and build appropriate steam distillation processing plants that will meet Good Manufacturing Practices (GMP) standards. It will be suitable for high grade pharmaceutical production as required by the various importing countries. 3. It will acquire (and maintain to the highest standards) suitable machinery, plant and equipment for the efficient production of Tea Tree leaf and oil from the leaf. 4. Production of oil from the property is expected to increase from the current 6 tonnes per annum to nearly 300 tonnes per annum which would be valued at over $ 20,000,000 at today's prices. 5. Land not immediately required for the production of Tea Tree oil will be used to run cattle or in other pursuits aimed at maximising returns. 6. The property to be acquired by the Trust can expect a net profit on gross assets employed in the project of 80% per annum over the first 10 years. 7. The property will be developed in a manner that will maximise both the cash flow back to the Trust and the asset value of the property. It is estimated that the property could be worth over thirty million dollars in ten years time. 8. The portion of the Trust raising not utilised on the Trust's property will be allocated to major financial institutions capable of providing a capital guarantee and a safe return over the term of the investment. 9. Eighty per cent (80%) of Surplus earnings after operating expenses and interest payments will be applied to reduce the loans made to Investors. 10. If the Trust performs to budget, the Investment Portfolio will be applied to eliminate all loans to Investors at the end of Year 5."

It is interesting to note that the initial document prepared provided for units to be issued to O'Leary Investments as part payment for Main Camp, such units to be redeemed, at the latest, after 10 years. Each vendor income unit was to have a face value of $100,000. The operating company for the trust was to be Natural Extracts which was also to promote the trust. Security Pacific dropped out of the arrangement in or around July or August 1990, when it advised Mr Stotter that it was "downsizing in Australia" and could no longer act as the arranger and manager of the proposed trust. Around that time, Mr Purkiss appears to have moved from Security Pacific to work with Mr Poolman at Poolmans Corporate Service Pty Ltd. In the result, by letter dated 10 October 1990, Natural Extracts requested Mr Poolman to act as "arranger" of the proposed trust, that is to say, in essence, to prepare and complete documentation and presumably to arrange for investors. At that time and in accordance with the ultimate final form that the Information Memorandum for the Natural Extracts trust took, the proposal was for the purchase of the Main Camp property for approximately $2 million cash and the issue of 15 vendor income units and the development of 750 hectares of tea tree plantation over the first three years of the trust's life supplementing income by cattle breeding and/or agistment. It was proposed that $18.5 million be raised from investors. The proposal left National Extracts with a capital interest in the project as its reward for promoting the trust. Mr Stotter recognised that a document to be put to the public for investment would require a number of reports. He envisaged that there would be a horticulturalist's report to be prepared by Mr Merry, a solicitor's report to be prepared by Mr Gallagher, a financial and taxation report to be prepared by Court & Co, a marketing report to be prepared by Poolmans and an agricultural industry report also to be prepared by Poolmans. The correspondence around that time makes it clear that money was a problem for the prospective promoters who were running within a very tight budget. So tight was it that by the end of 1990 Mr Poolman had advised Mr Stotter that he was no longer prepared to progress the establishment of the trust unless bills which had been rendered were paid, unless a hydrology report was obtained from the Department of Agriculture and unless Natural Extracts could demonstrate its ability to meet the additional costs involved in establishing the proposed trust. It may fairly be said that, unless further capital were injected into the proposal, it had come to a full stop. MR GULSON BECOMES A PARTICIPANT IN THE PROJECT Mr Stotter and Mr Gulson first met on or about 15 December 1990. Prior to that meeting Mr Stotter wrote to Mr Gulson on 5 December 1990 in the following terms: "RE: NATURAL EXTRACTS PTY LIMITED Dear Fred In response to your verbal enquiry regarding your interest in an equity investment in the above named Company, I enclose the details requested, together with other information regarding the operations and future outlook of the Company.

Shareholders of the Company have contributed $ 250,000 for the 250,000 ordinary shares currently committed. It is proposed to issue a further 62,500 shares to raise an additional $ 50,000 to complete the Company's role as Promoter of the Natural Extracts Trust. This means these additional shares are being offered at a 20% discount to par so as to attract the additional funding as quickly as possible. On settlement of the Natural Extracts Trust, this Company will receive a cash payment of $ 200,000 from the Arranger. Of this amount, $ 5,000 will be retained by the Company to cover on-going expenses with the remaining $ 195,000 distributed as a return of capital to shareholders. Preference will be given to the most recent shareholders when returning capital. Existing shareholders have agreed to this. Protection against dilution is granted to all shareholders with no special placements being made without the approval of all shareholders including yourself. It is not expected that such approval will ever be sought. The stated dividend policy of the Company is to pay full franked dividends equal to the total (i.e. 100%) operating profit of the Company. Existing shareholders are committed to subscribe an additional $ 20,000 as a part of the above issue and the Company will entertain applications for three subscriptions of $ 10,000 from one or more qualified investors. This is not an offer to the public and only investors known to the Company and who have approached the Company are eligible to apply for this very limited special issue. As such, please do not copy or pass on this letter to any other potential investor. The Business of Natural Extracts Pty Limited This Company's sole activity relates to the establishment and operation of the proposed natural Extracts Trust. Considerable benefits accrue to the Company from its role with the Trust. These include ownership of 50% of the Tea Tree Oil business (after repayment of Investors' loans, projected to be just 5 years away). This 50% ownership is estimated to be worth between fifteen and twenty million dollars in 5 years time with annual income to Natural Extracts Pty Limited estimated to be running at over four million dollars per annum. Considerable research and care has gone into the design of the Natural Extracts Trust. It is investor friendly and given the appropriate exposure we believe the required interest payment guarantees will be obtained from a small number of investors. With quality investor backing in place we expect to be able to secure a lender with a minimum of delay. We are aiming to commence this project in the first part of the New Year. Issue of Shares You will be issued with fully paid Ordinary Shares in the Company. In addition, you will receive a return of the capital you have invested at the first opportunity following settlement of the Trust. It is not proposed to list Natural Extracts Pty Limited on the Australian Stock Exchange. If you wish to dispose of your shares at any time in the future, other shareholders would wish to have first right of refusal. In the event the law changes (as is muted), the Company itself may become a purchaser of your shares should you ever wish to sell. With franked dividends projected at about $ 100,000 per annum in the sixth year for a $ 10,000 investment, it is probable that you would not wish to sell and you should purchase your shares with a view to a long term hold. Conclusion This is an opportunity to get in on the ground floor of an exciting new venture in one of Australia's brightest sunrise industries. For a relatively small amount of venture capital you can secure a long term equity position in Australia's foremost Tea Tree Oil producer. The Tea Tree Oil project itself is a very exciting export oriented business with tremendous potential for the future. You will share in the building of this business and at the same time reap the financial rewards of your investment. A copy of the Information Memorandum for the Natural Extracts Trust is attached. This explains the role and income expectations of Natural Extracts Pty Limited, the Company in which you will hold shares. We look forward to you joining us as a partner in this exciting project."

Any resemblance between the actual situation in which Natural Extracts found itself in December 1990 and the letter which Mr Stotter wrote, was purely coincidental. After Mr Gulson and Mr Stotter had met, Mr Stotter wrote again to Mr Gulson on 31 December 1990. Again, the position which the letter attempts to convey to the reader bears little resemblance to the reality. There is little doubt that in his approaches to Mr Gulson, Mr Stotter acted in a way which was misleading and deceptive. But that is not the substance of any complaint which Mr Gulson now makes, albeit that it does reflect upon Mr Stotter's credit and his propensity to say and do whatever was necessary to get a tea tree plantation established on the Main Camp property. It will be noted that there is reference to expenditure having been incurred of $250,000 either by Doveka, Natural Extracts or persons on behalf of those companies. The amount of $250,000 is said to be made up as follows: "Paid To Amount Security Pacific Australia Ltd - Mandate Fee 80,000 Towers Perrin - Actuaries & Management Consultants5,502 Poolmans - Agricultural evaluation 43,875 Deloitte Haskins & Sells - Taxation & Trust structure 28,000 N. Richardson & Associates - Negotiation Fees 22,000 F.P. Special Assets Ltd. Expenses in Trust Concept 40,000 Travel 3,000 G. Merry - Horticultural evaluation 2,000 Preparation of Memorandum 25,000 Soil Testing 623 $250,000" No attempt was made in the evidence to explore whether all the amounts in question were in fact paid. Certainly it is known that at some stage part of the Security Pacific mandate fee was refunded. Poolmans only ever received $23,500. Other items must also be the subject of doubt. Two formal documents were executed between Natural Extracts and Mr Gulson bearing date 15 March 1991. For its part, Natural Extracts agreed to issue to Mr Gulson 156,000 fully paid B' class $1 shares for which he was to pay $62,500 on execution. He also agreed to enter into a covenant not to compete. Prior to the issue of the shares, Natural Extracts was to procure the transfer to it by Doveka of "all plans, consultant's reports, notes, technical data, owned by it in relation to the production of Tea Tree Oil." Mr Gulson was to be retained as an executive providing administrative and marketing support to the company and to be paid such remuneration as was to be mutually agreed upon between Natural Extracts and him. The document was conditional upon evidence being provided to Mr Gulson of an option over Main Camp. In connection with the allotment to Mr Gulson, the Articles of Association of Natural Extracts were amended so as to provide that the holders of the B' class shares could appoint one director and that there was to be no share qualification for directors. Mr Gulson, for reasons of his own, did not wish to be a director and did not then avail himself of the opportunity. He seems not to have appreciated that as a result of the amendments the `A' class shareholders could appoint any number of directors and thus out-vote him. It is possible that the situation was deliberately so structured in Mr Stotter's interest. Also on 15 March 1991 Mr Stotter and Doveka executed a restrictive covenant with Natural Extracts. The operative part of the agreement, for which there was no consideration, was in the following terms:

"1. Stotter shall not whilst Doveka Pty. Limited is a shareholder of the Company [ie Natural Extracts] or whilst Stotter retains a legal or beneficial interest in the Company through Doveka or otherwise, carry on either alone or in partnership or be employed or interested in any capacity whatever in the Tea Tree extractive industry either in respect of the growing and harvesting of Tea Tree or the distillation and extraction of the oil therefrom. 2. Stotter will not utilise any technical or other information which may come into his knowledge or possession whilst a consultant to the Company nor promulgate or publish such information or communicate such information to any other person partnership or corporation excluding such information which is currently in the public domain or entered the public domain during the period of the consultancy."

It would seem that Mr Gulson was particularly concerned that there was no legally enforceable option in place to acquire Main Camp. To that end Mr Stotter, in company with Mr Gulson, visited Mr O'Leary at some time around the end of January 1991, raising with Mr O'Leary the question of a formal option. Mr O'Leary was represented by a solicitor and it is likely that some of the negotiations with respect to the option took place not directly with Mr O'Leary but with the solicitor.Be that as it may, a formal agreement was entered into between O'Leary Investments and Natural Extracts on 5 March 1991 whereby O'Leary Investments granted to Natural Extracts an option to purchase the Main Camp property, such option to be exercisable in writing at any time prior to 15 August 1991. The option agreement showed the purchase price as being $3.5 million. On exercise, a deposit of $250,000 was payable and completion was to take place on 18 September 1991. The option agreement annexed a form of contract to be entered into in the event the option was exercised. It was not annexed to the copy which Mr Stotter put in evidence through his own affidavit. The contract of sale annexed to the option contained the following special conditions: "32.The Vendor has read a document headed Proposed Main Camp Tea Tree Trust' and Information Memorandum for the Proposed Main Camp Tea Tree Trust' comprising various introductory pages and then a further 39 pages a copy of which is annexed to this contract. The Vendor relies on the representations made in the said documents and the Purchaser warrants that the details enclosed therein shall form the basis of the Main Camp Tea Tree Trust. This clause shall not merge on completion of this agreement for sale. 33. Upon completion of this agreement the Purchaser shall pay the consideration of $3,500,000.00 in the following manner: (i) In cash or by bank cheque the sum of $2,500,000.00; and (ii)The transfer of 10 capital units in the Main Camp Tea Tree Trust (having a total of 80 capital units) each unit valued in the Main Camp Tea Tree Trust at $100,000.00. This clause shall not merge on completion of this agreement for sale. 34. The Purchaser agrees to ensure:- (i) That whilst the Vendor holds any capital units in the said Trust no further capital units shall be issued; and (ii)Further that the interest payable to the Vendor on the capital units referred to in the Memorandum specifically in clauses 2.3, 2.4 and 3.2 shall be calculated from the date of settlement of this agreement, paid at the same intervals as the interest paid to the Lender and at the same rate as paid to the Lender. In the event that no interest is payable to the Lender the Purchaser shall ensure that the Vendor shall be paid interest at the rate of ten per centum (10%) per annum on the principal outstanding by equal monthly payments. This clause shall not merge on completion of this agreement for sale."

Counsel for the applicants submitted that the option was never intended by the parties to it to take effect in accordance with its terms and that it was a sham. He pointed out that the trust proposal contemplated that the land would be acquired by a trustee company and not Natural Extracts, that the deposit would have to have been paid by the trustee company not Natural Extracts, and that the transaction as entered into was inconsistent with Mr O'Leary's oral evidence that the option was agreed to be for an outright sale of the property rather than a transaction in which he was to partly finance the purchase through the issue to O'Leary Investments of capital units. The legal effectiveness of the option and its suitability in the context of the proposed Natural Extracts trust may, no doubt, be a matter of debate. It is certainly easy to criticise the document. However, I do not accept the submission that the parties intended the arrangement they had reached to be a disguise for some other and real transaction or no transaction at all in accordance with the traditional formulation of the doctrine of sham: Snook v London & West Riding Investments Ltd [1967] 2 QB 786 at 802; Sharrment Pty Ltd & Ors v Official Trustee in Bankruptcy (1988) 18 FCR 449. It is clear that Mr Gulson recognised the legal significance of a binding option existing to purchase Main Camp. In March 1991 no trust had yet been established; no public trustee had been engaged nor had any units yet been created. Whatever the legal effectiveness of the option as granted, it is clear that the parties intended that on exercise of the option a contract was to be entered into between O'Leary Investments and either Natural Extracts operating as nominee for the public trustee company or that company itself which was to result in O'Leary Investments in effect financing $1 million of the purchase price. That is inconsistent with the trust proposals as then documented which contemplated O'Leary Investments retaining $1.5 million of vendor finance, but in the event of any conflict clearly the contract for sale document itself would prevail.

Mr O'Leary's evidence on this matter was, to say the least, curious. He was, until ultimately shown the contract annexed to the option agreement, emphatic that at all times the option involved a straight out sale to Natural Extracts for a cash consideration of $3.5 million. He said he vaguely recollected some mention of shares but that neither he nor his wife had been interested in that. He could not recollect giving approval to an arrangement where he was to retain some interest. There are two possibilities with respect to Mr O'Leary's evidence. The first is that time had so diminished his recollection of the facts that he could not be regarded as a reliable witness for that reason. The alternative possibility is that Mr O'Leary was deliberately prevaricating. I am loathe to find the latter. The matter is of little significance so far as the option is concerned because it is clear that the agreement was executed by Mr O'Leary whose initials appear on various parts of the contract. The agreement clearly prevails over Mr O'Leary's inconsistent recollection. It is, however, of much greater significance when his evidence falls to be assessed in the context of arrangements entered into between Mr Stotter and him, a matter to be considered later. On Mr Gulson joining the project the Information Memorandum was reworked. In its amended form it proposed the raising of $24 million, of which $12.3 million was earmarked for the acquisition and development of the Main Camp property. It narrated that O'Leary Investments was prepared to leave $1 million out of the total price of $3.5 million outstanding and that trust distributions were to be applied to buy-back these ten units from Mr O'Leary over a period of five years with interest. The reworked version of the Memorandum cannot, of course, be the version of the Memorandum referred to in the contract attached to the option because it had not, at that stage, been prepared. However, the reworked version accords with the option as executed by O'Leary Investments. By June 1991 it was clear that Mr Purkiss could not raise funds from the public and the relationship between Poolmans and Natural Extracts was thus terminated. In consequence, Natural Extracts expanded its role as the promoter of the trust to include arranging the outside finance. In a letter dated 5 June 1991, which Mr Stotter wrote to Mr Merry, he said that Natural Extracts had already secured finance from a reputable source subject only to the provision of "an acceptable guarantor as to the interest payments." However, in the same letter Mr Stotter referred to the fact that Natural Extracts did not have sufficient funds to continue the current arrangements with Mr Merry and offered an alternative arrangement at a daily rate. Details of the steps thereafter taken by Mr Stotter and Mr Gulson to obtain the necessary finance are somewhatsketchy. Instead of seeking a number of private investors tosecure a private placement, Mr Stotter and Mr Gulson targeted single investors to put up a guarantee to enable the proposed trust to purchase the Main Camp property and develop the plantation. Persons sought out were those perceived to be users, potential users or traders of tea tree oil products. Both Mr Stotter and Mr Gulson made presentations to those targeted. By this time the option which had been granted by O'Leary Investments was due to expire. On 13 August 1991 Mr Stotter wrote on the letterhead of Natural Extracts to Mr O'Leary seeking to have the option extended by three months to 15 November 1991. The letter referred to the progress being made by Natural Extracts towards raising the necessary finance. As far as the evidence discloses, no progress at all had in fact been made. O'Leary Investments wrote back to Mr Stotter by letter of 14 August 1991 in the following terms: "After the 15th August, 1991, it is our intention to raise the finance necessary to proceed with the Tea Tree plantation on Main Camp and therefore cannot renew your option in its present form. Because of your efforts we will only be too willing to allow you to continue towards raising the finance to settle the purchase of Mani [sic]Camp in the near future and will discuss terms and conditions at your convenience.

Although this was not explored, it is possible that the two letters were written on the same typewriter. I make no finding one way or another. THE EVENTS OF 23 AND 24 SEPTEMBER 1991 On 23 and 24 September 1991 Mr Stotter wrote letters to each of Messrs Bax, Stuart, Reece and Gulson. The letters were in similar terms. That addressed to Mr Stotter stated: "It is now over 18 months since Doveka Pty. Limited, on its own account, or through Natural Extracts Pty. Limited, sought to commence a Tea Tree Oil project. During this 18 month period we have encountered a number of unforseen difficulties. These initially centred on our quest for seed capital where we were let down on promises from two separate parties before finally being successful. Close to 12 months work was necessary to complete this step which was a pre-requisite to the raising of funds through the Trust proposed by Poolmans/Security Pacific. We were also let down by SECPAC and Ross Purkiss who failed to deliver the required investors. To keep this project alive, against all odds, has required several changes in direction and a level of responsibility and commitment not expected. Most of this fell on my shoulders, although this in no way demeans the support given by other shareholders of Doveka who have each contributed in their capacity. Of necessity, my personal commitment to Doveka Pty. Limited and Natural Extracts Pty. Limited must cease on November 1st. next - if we have not been successful with the Main Camp Tea Tree Trust by that date. This confirms my earlier advice to you by telephone. I hope you understand that there has to be a cut-off date from my point of view. I also trust that you appreciate that I have personally made every effort to complete funding for the project including taking on the responsibility for trying to find an investor when we were let down by other parties. We are not without hope that an investor will be secured by November 1st, however if we do not have at least a Heads of Agreement by that date, then I will move to discontinue my association with both Doveka and Natural Extracts and pursue my own interests to the complete exclusion of the interests of either of these companies or their shareholders. To ensure a clean break on November 1st, should this become necessary, I wish to advise of my resignation as a Director of Doveka Pty. Limited effective from November 1st. and I offer shares held by myself and G.G. Jay Investments Pty. Limited for sale to the other shareholders of Doveka. With the approval (in writing please) of all the other shareholders of Doveka, I will continue to pursue existing interested parties, who may invest in the Main Camp Tea Tree Trust, right up until November 1st. However, I must from today's date also pursue my own interests on alternative deals whether or not they involve the future production of Tea Tree Oil. In the event that you, or any other Director of Shareholder of Doveka, feel that there is a conflict of interest in me pursuing the Main Camp Tea Tree Trust (as defined by the Information Memorandum) whilst discussing alternative arrangements for myself and my family in case the Trust does not come to fruition by November 1st, then I will make my resignation effective from today's date. I hope you appreciate my position and I look forward to your continuing support and understanding."

According to Mr Stotter, shortly after the letters were sent Mr Bax telephoned Mr Stotter to ask the current situation with the enterprise. Mr Stotter says that he replied that there were still a number of irons in the fire, although the only one with real promise was Fauldings. The reference to Fauldings was a reference to a drug company, a potential user of tea tree oil which company had been approached by Mr Stotter, asked to act as potential guarantor and which, at that time, was considering its response. Mr Stotter had similar conversations with Messrs Stuart and Reece. The letter to Mr Gulson, Mr Stotter personally hand-delivered. After Mr Gulson had read it, the two had some discussion about Fauldings and about the attitude that Mrs Stotter had to Mr Stotter continuing working with little prospects. According to Mr Stotter, Mr Gulson said that he was happy with the arrangement which Mr Stotter proposed in the letter. Mr Stotter then, according to his affidavit evidence, said, speaking of Fauldings: "Let's hope they do come good. But you must understand that I have been trying for over 18 months to get this deal up and there comes a time when you've got to call it quits. I have agreed with Gail that that time has come."

On 27 September 1991 Mr O'Leary wrote to Mr Stotter confirming verbal advice that Mr O'Leary had given to Mr Stotter, presumably around that time, that the option had been extended to 1 November 1991. The letter continued: "Beyond the 1st of November, 1991, work will commence on the plantation funded by ourselves. The introduction of equity after the First of November may be still possible, however the terms will need to be re-negotiated."

It is not at all clear what Mr O'Leary meant by "the introduction of equity". He most likely meant that if after 1 November 1991 he was required to provide vendor finance that would need to be the subject of further negotiation. If that is not what was meant then it is somewhat difficult to understand at all the reference in the letter. According to Mr Stotter's evidence in chief, the next contact he had with Mr O'Leary was shortly prior to 1 November 1991 when Mr Stotter telephoned Mr O'Leary and advised him that the Fauldings' proposal was to go before that company's board around that time and that an answer would not be forthcoming for a few more days. According to Mr Stotter, Mr O'Leary agreed that the exercise of the option could be extended for a few more days but repeated that he was going ahead with his own plantation and that he would start spending money. He said that if the option were to be exercised he would require to be reimbursed any money he may have spent in the meantime. Fauldings ultimately did not agree to participate in the project and notified Mr Stotter of this around 7 November 1991. Mr Stotter immediately faxed a copy of Fauldings' response to Mr O'Leary and also telephoned Mr O'Leary saying words to the effect, "Well, as you can see it's over." EVENTS FROM 7 NOVEMBER 1991 UP TO AND INCLUDING 2 DECEMBER 1991 According to Mr Stotter, he had a conversation with Mr Gulson on or around 7 November 1991 in which he advised Mr Gulson that he intended to withdraw from any connection with Doveka and Natural Extracts, and to pursue his own interests. According to Mr Stotter, he mentioned "the chance of a consultancy arrangement" which he intended to pursue. That reference to a consultancy was apparently a reference to a proposed arrangement with Prime Lynx Consulting Group ("Prime Lynx"), a company which was referred to in a further conversation in which Mr Stotter and Mr Gulson had in or around 22 November 1991. Mr Gulson was, however, still interested in pursuing the tea tree proposal and discussed with Mr Stotter the possibility of sending letters to further possible investors, including The Body Shop in London. On 22 November 1991 Mr Gulson wrote a letter to Mr Stotter referring to various "housekeeping matters" which needed to be attended to. Mr Gulson continued to display optimism and suggested a meeting with the other participants in the project. That led to the meetings which were held on 2 December 1991. Prior to those meetings being held, Mr Stotter had prepared a form of agenda for his own purposes. The agenda for the meeting of Natural Extracts contained the following, under the heading "Special Business": "(a)The company has been unsuccessful in raising funds as proposed for the acquisition of Main Camp and the development of a Tea Tree Oil business. (b) The Option the company held over Main Camp has lapsed after two extensions and a further extension has been denied the company. (c) There is no real prospect of the Company raising funds in the foreseeable future to fund an alternative project. (d) Mr. Stotter formally confirms his previous advice that he is no longer available to pursue the activities of the Company without a reasonable salary. (e) The company acknowledges that with the lapse of the Option, the failure of the Information Memorandum and the lack of funds to retain Mr. Stotter as a full time employee, that its objective in commencing a Tea Tree Oil project is dead. (f) As the Company cannot retain Mr. Stotters services, Mr. Stotter seeks a release from any obligations whatsoever to the company in respect of any Tea Tree Oil or other project so that he may pursue his own interests in the field. (g) The Company acknowledges that Mr. Gulson, a shareholder has voluntarily sent off some letters to certain parties he considers are target investors. (h) Mr. Stotter advises the Board that he would be available to be approached in the event of a firm enquiry to Natural Extracts from a party who has previously received an Information Memorandum, but not otherwise. This offer is limited to 6 months from the 30th. of November, 1991. (i) The Company acknowledges that he has used his own network of contacts in an attempt to secure funding for Natural Extracts and that he is free to use those contacts, whether or not he has discussed funding for the company, in his own endeavours. The company further acknowledges that it has no claim over any funds raised by Mr. Stotter, or with his assistance, whether or not the party providing the funds was contacted by Mr. Stotter prior to this date. (j) The Company requests that Mr. Stotter advises the Company if he receives a firm enquiry directly connected to the issuance by him of an Information Memorandum for the proposed Main Camp Tea Tree Trust by the Company."

According to Mr Stotter's account, the Natural Extracts meeting was held at 10.30am on 2 December 1991 between Mr Gallagher and himself. According to Mr Stotter, Mr Gallagher raised the question of whether Mr Stotter was eligible to vote on the resolution to release himself. Mr Stotter's affidavit evidence states: "I specifically stated to Mr Gallagher at the meeting that I understood that I could not vote on the resolution agreeing to release me and GG Jay Investments Pty Limited in terms of the Deed of Release, tendered at the meeting as altered by Mr Gallagher."

The Deed of Release is a document which had been prepared by Mr Stotter and typed up by his wife. It purported to release Mr Stotter from all claims whatever, including claims arising subsequently "in relation to the Tea Tree industry or in any industry related thereto." The document was executed by Mr Stotter personally and the common seals of GG Jay and Natural Extracts were affixed. Mr Gallagher's signature also appears on the document. Mr Gallagher's version of the events is different. First, it is clear from Mr Gallagher's evidence, both oral and on affidavit, that at no time was the question of conflict of interest referred to at all and that Mr Gallagher and Mr Stotter, in contravention of the Articles of Association of Natural Extracts, voted on releasing Mr Stotter, notwithstanding the obvious conflict of interest, which Mr Stotter had. Secondly, Mr Gallagher says that he asked whether the others, presumably meaning inter alia Mr Gulson, were in agreement with the release and was told by Mr Stotter that when Mr Stotter had last spoken to them they were in agreement. Mr Gallagher says that he voted in favour of the resolution releasing Mr Stotter and thereby executing the Deed of Release on the basis that the company could review its position. Mr Gallagher said that Mr Stotter, in conversations throughout that time, had told Mr Gallagher that he was to start his own organisation, Prime Lynx, which had nothing to do with the tea tree industry but was going to do some minor consulting for Mr O'Leary. Certainly Mr Gallagher was not led to believe that Mr Stotter was intending to have any continuing involvement in the tea tree industry. I think it is quite clear that Mr Stotter was not telling the truth in his account of what happened at the meeting. I accept Mr Gallagher's version which carries with it the consequence that the Deed of Release was not valid. I should say that senior counsel for the Stotter interests did not seek to rely upon the Deed of Release as a defence to the fiduciary proceedings. Subsequently, a meeting of directors of Doveka was held at 5.30pm on the same day at which were present Messrs Bax, Stuart, Reece and Stotter. Again Mr Stotter had prepared, and his wife typed, an agenda. Mr Stotter tendered in evidence minutes of meeting which he had prepared after the present proceedings had commenced. I place no weight upon them. Counsel for the Gulson interests cross-examined the various participants at that meeting to the effect that the release the subject of discussion at the meeting was a different document to a Deed of Release which had been executed under the common seals of Doveka and GG Jay personally by Messrs Stotter, Stuart, Bax and Reece, and on behalf of Stuart Investments, Food Improvers and Karcor, although not under the seal of those companies. However, I accept that the document referred to was the document so executed. At the meeting Mr Stotter announced his intention to resign as a director of both Doveka and Natural Extracts, and his intention to sell or otherwise to dispose of his shares in Doveka. He announced that he was working for Prime Lynx and that he would probably do some consulting to the tea tree industry through Prime Lynx, but that this would be a sideline. Although Mr Bax did not recall having signed the release, I think it is clear that he did. However, I also accept that the so-called meeting was probably conducted more as a "get-together", to use Mr Bax's expression, rather than specifically as a formal meeting, notwithstanding that Mr Stotter may have ensured that he got through in one way or another the various matters which were on his agenda. About 90 minutes after the Doveka meeting started, Mr Gulson joined the meeting. I accept Mr Gulson's evidence that he had no knowledge at that time of the releases which Mr Stotter was arranging to have signed, nor of the other matters which had taken place at the meeting of Natural Extracts earlier that day. Mr Bax made a note of what happened at the Doveka meeting on 2 December 1991, the next day. That note is perhaps the most reliable summary of the meeting. Mr Bax observed that Mr Stotter "updated the meeting on the status of the TTO project" and concluded that there appeared no likely prospects for successful financing of the project. The summary continued: "GS said that as he had not received regular income for a considerable time that he wished to pursue other interests and sought a release. GS tabled this document. GS said that F Gulson wished to continue with the project for another few months in order to seek a funding partner. JB asked GS what he is going to do? GS said that he has joined Prime Lynx as Chairman to carry out management consulting work. GS said that his association with TT [tea trees] now appeared to be over. FG joined the meeting at 6.15pm (approx). JB offered the 76% shareholding in NEXT to FG as agreed with GS. GS restated his desire to quite the project and to place his shareholding in Doveka up for sale. FG asked whether he would continue to be involved in the TTO industry. GS said only as a consultant to Terry O'Leary. FG said that GS has certain covenants with NEXT [relating] to working within the industry. GS said that he would get a release and offered FG the Doveka holding in NEXT for 76% of the cash in the bank (about $10,000)."

WHAT MR STOTTER WAS DOING UNBEKNOWN TO HIS ASSOCIATES BETWEEN AUGUST 1991 AND JANUARY 1992.

The case which Mr Stotter presented to the Court was that at no time, until at least January 1992, did he have any connections at all with Mr O'Leary except in respect of the option extensions to which reference has been made above. Effectively Mr Stotter sought to present to the Court a case that until after Fauldings' rejection on 7 November 1991 with the subsequent termination of the option, there was no arrangement at all between Mr Stotter and Mr O'Leary. When such arrangement arose it was, so Mr Stotter sought to say, in the nature of some minor consulting work which Mr Stotter went to perform for Mr O'Leary and which arose after mid-November 1991. The reality that emerged in cross-examination and from other documentary material was rather different. At some time between 26 and 28 August 1991, Mr Stotter accompanied Mr O'Leary to Brisbane to meet with Mr Allan of the National Australia Bank ("the NAB"), the banker for O'Leary Investments. One may wonder how it came about that Mr Stotter came to do this. At the time it seems O'Leary Investments owed the bank some $700,000. It seems, also, that Mr O'Leary needed Mr Stotter to negotiate with Mr Allan and to give Mr O'Leary support for Mr O'Leary's own tea tree oil project. Mr O'Leary wished to use Mr Stotter's involvement in the tea tree oil industry to bolster O'Leary Investments' case for continued bank assistance. The detail of Mr Stotter's involvement with Mr O'Leary at this time is far from clear. What is clear, however, is that Mr Stotter, as early as August 1991, was assisting Mr O'Leary in respect of Mr O'Leary's proposal for a tea tree plantation on Main Camp, which proposal could only proceed if the Natural Extracts proposal did not. This assistance was given, it would seem, at a time when Mr Stotter was supposed to be seeking, on behalf of Natural Extracts, to have Mr O'Leary extend the option. Mr Stotter suggested that the assistance he gave to Mr O'Leary at this time was given in an attempt to persuade Mr O'Leary to extend the Natural Extracts option. I do not accept Mr Stotter's evidence. Mr Stotter said that he had spoken to his colleagues in Natural Extracts and mentioned the assistance he had given to Mr O'Leary. With respect to Mr Stotter, had he done so one would have expected not only that Mr Stotter would have mentioned it in his affidavit evidence but also that other persons would have recalled it. It is clear enough to me, and I would so find, that Mr Stotter assisted Mr O'Leary without ever mentioning that assistance to his colleagues in Natural Extracts. Particularly, Mr Stotter's suggestion that he had told Mr Gulson that Mr Stotter had put a proposal to the NAB that the bank lend to Mr O'Leary $2.5 million to develop a tea tree oil plantation, is a fabrication, as is Mr Stotter's suggestion that in assisting Mr O'Leary he was merely assisting Natural Extracts. In my view, Mr Stotter was concerned to act in his own interests at all times and was laying the foundation for the closer involvement with Mr O'Leary which was to come. The August 1991 meeting with the NAB was not an isolated event. Although the bank records do not suggest that Mr Stotter visited Mr Allan again, at least before November 1991, it is clear that Mr O'Leary continued to explore with the NAB the possibility of finance to pursue his own tea tree oil plantation. The degree of association between Mr Stotter and Mr O'Leary is recorded in a letter dated 18 November 1991 addressed to Mr Allan on the letterhead of O'Leary Investments and signed by Mr Stotter on behalf of Mr O'Leary. It is important to set out that letter in full.

"Enclosed please find our presentation for a loan to increase the production of Tea Tree Oil on our Main Camp Property. We are looking to increase our debt facility from its current level to a total of $1.6m. The additional funds will be applied to meet some obligations of O'Leary Investments Pty. Limited with the remainder applied to increasing our production of Tea Tree Oil from its current level as set out in the enclosed Business Plan. Main Camp has been a traditional supplier of high quality Tea Tree Oil to domestic and international markets for over 60 years. We can no longer rely on outmoded bush methods to produce our oil if we are to compete in existing markets and to expand our production to meet demand from existing and new customers. O'Leary Investments has therefore completed an arrangement with Mr. Glen Stotter, who has pioneered the development of modern production methods, to establish and operate a modern plantation and processing facility on Main Camp. Our Business Plan provides for the establishment of 50 hectares of plantation over the next 12 months at a total cost of $600,000. In support of our application for additional funds I wish to point out:- (i) Our long association with the National Bank and our record of servicing loans. (ii) That we are offering first mortgage security on Main Camp with a valuation (in a depressed market) of about $3.2m. This means our borrowings will not exceed 50% of current valuation. (iii) $600,000 will be spent on enhancing the security over the next 12 months as set out in the attached financials. (iv) Cash flow projections, based on conservative assumption, indicate a current capacity to service the loan. This capacity will continue to expand as new production comes on stream as a result of these additional borrowings. (v) A debt reduction programme is to be put in place which will aim to retire the total debt at the end of year 3. Given that our plan to sell off single - title plantations' to investors is successful, we will be in a position to hold total debt at $1.6m and to retire this debt in full at the end of year 3, with the sale of only 3 single - title plantations'. Our market research indicates a strong interest in these `single - title plantations' and we expect to commence the first of these on July 1st. 1992 with two more in 1993. There is a considerable amount of data available to support the key elements of our application for an additional loan facility. I have selected some material to establish in your mind the current scientific credibility of Tea Tree Oil. This credibility is further supported by the research currently funded by the Australian Government and the increasing numbers of international users of this exciting Australian raw material. In the last 5 years since Mr. Stotter commenced the first major plantation of Tea Trees, Australia has witnessed five fold increase in supply and a doubling of prices. Our own research, supported by independent reports - including an New South Wales Government study, indicates a demand for Tea Tree Oil which will exceed this country's capacity to supply in the foreseeable future. Main Camp is an established, proven supplier of the highest quality oil and has recruited the best available agricultural, horticultural, processing and marketing talent in the business on which to base its expansion plans.

I invite you to consider the outline of my proposal, the supporting financial data and the scientific basis for the broad acceptance of increasing demand for our material. Once you have had an opportunity to peruse this information we would welcome the opportunity to make a presentation of our Business Plan to you. This will take approximately 2 hours and will cover the key elements of our plan, the industry in general and the financial aspects of our loan application. I will telephone you following your return from Melbourne to arrange a suitable time."

It is, of course, possible that the arrangement to which the letter referred was completed but a few days before the date the letter bore. In my mind, for reasons which will shortly appear, this is highly unlikely. In September 1991 Mr O'Leary met with a Mr Peter Chudleigh, an agricultural economics consultant. They had earlier met at meetings or seminars conducted by the Rural Industries Research and Development Corporation's sub-committee on tea tree oil research. Mr O'Leary told Mr Chudleigh that he was looking for investment funds for "a big tea tree project on Main Camp". He asked Mr Chudleigh if Mr Chudleigh had any ideas. Mr Chudleigh directed Mr O'Leary to Mr Warwick Young ofProject and Prospectus Management Pty Ltd ("PPM"), telling Mr O'Leary that Mr Young was in the business of raising investment funds for large agricultural development projects. Mr Chudleigh promised to mention the matter to Mr Young. He did this probably on Wednesday, 16 October 1991. Mr Chudleigh had no recollection of reporting back to Mr O'Leary, although he assumes that he did so. Some time later Mr Chudleigh telephoned Mr O'Leary who said to him, "I'll get Glen Stotter to go and see Warwick Young as he [Stotter] is in Sydney." Mr Chudleigh was unable to put a date on this last conversation. The expertise of PPM lay in putting together prospectuses for agricultural projects. Mr Young recalled the meeting with Mr Chudleigh. A Ms Christie, an associate of Mr Young's, was also present. Subsequently "not long afterwards" Mr O'Leary called Mr Young saying that he would like to get the tea tree oil project off the ground. There was some general discussion about the nature of Main Camp and tea tree oil potential, whereupon Mr O'Leary said to Mr Young: "I will give the phone number of Glen Stotter who is in Sydney and I would like him to come and discuss the project with you prior to me coming to Sydney."

Mr Young promised to phone Mr Stotter. He made some initial attempts to contact Mr Stotter without success. He recalls that on at least one occasion he left a message on an answering machine. The recorded message on that machine indicated that Mr Stotter was from "Natural Extracts". Mr Young made contact with Mr Stotter ultimately around the first week of November 1991. He said that contact was approximately a week before Mr Young actually met Mr Stotter in person on Monday, 11 November 1991. An appointment was arranged between the two men and Ms Christie attended with Mr Young at the meeting. According to Mr Young, whose evidence I accept in the event of any inconsistency with that of Mr Stotter, is that Mr Stotter at this meeting said: "Over the past few months we've approached a number of suitable investors, mainly large corporations who have something to do with products in which tea tree oil can be used. Several were interested but would not commit themselves. O'Leary extended his option pending the resolution of discussions with one of the investors, Fauldings, until a week ago. Given that those discussions have not resulted in any interest by Fauldings in the project, the option has expired but O'Leary is still keen on the prospects of tea tree oil as an industry."

Mr Young advised immediately that a trust structure was not the way to go but that investors would only be attracted if some taxation advantage was available. He proposed a structure similar to one that he had apparently employed in the strawberry growing industry. That involved investors each setting up a minimum sized farm with a set number of tea trees. The discussion ranged over a number of commercial matters not relevant to the present proceedings. Mr Stotter subsequently telephoned Mr Young and promised to send to him information prior to a visit by Mr O'Leary to Sydney which was ultimately scheduled for 25 November 1991. Mr Stotter thereafter worked closely with Mr Young on various aspects of the project. At a meeting which Mr Young believed was around 6 December 1991, Mr Stotter advised that he was no longer with Prime Lynx and that O'Leary Investments would be Mr Young's client if the project were to proceed. There were discussions with a firm of accountants concerning tax matters and on 10 January 1992 Mr Young committed his company to the project. It is not insignificant that at the meeting of 11 November 1991, the very first meeting which Mr Young held with Mr Stotter, Mr Stotter handed to Mr Young a copy of the Information Memorandum for the Main Camp Tea Tree Trust, clearly marked "Confidential", a document which on any view of the matter contained material prepared by and for Natural Extracts. Mr Stotter's explanation was that he did not regard the information contained in the schedules, which were ultimately used to prepare the information memorandum and subsequent trust proposals, as the property of Natural Extracts as, according to Mr Stotter: "All the knowledge that went into them was [his]".

Mr Stotter denied handing the document to Mr Young at that meeting but I think it is clear that Mr Stotter did hand the document to Mr Young, took it back and returned it later to Mr Young for the purposes of preparing a prospectus in either February or March 1992. Mr Stotter's evidence in cross-examination was that Mr O'Leary had telephoned him around mid-October 1991 telling Mr Stotter that he (Mr O'Leary) was attempting to put some syndicates together and that he had been referred to Mr Young of PPM. He agreed that Mr O'Leary had asked him to attend a meeting with Mr Young. On a number of occasions thereafter Mr O'Leary telephoned Mr Stotter to see if Mr Young had been in contact. Thus while Mr Stotter, on 2 December 1991, was telling his associates that the tea tree opportunities were all over, implying that he was getting out of the tea tree business altogether save for some small matter of consulting with Mr O'Leary, the inference is inescapable that Mr Stotter was working closely with Mr O'Leary on what was to be a joint project between them and which Mr Stotter, in the letter of 18 November 1991 to the NAB made clear, was by the date of that letter at least the subject of arrangements between Mr O'Leary and Mr Stotter. This brings me to consider what Mr Stotter and Mr O'Leary say the arrangements between them were at this time. In discussing this evidence it must be emphasised that neither Mr Stotter nor Mr O'Leary at any time mentioned any of the matters referred to above in chief and that the entirety of the evidence arose in the course of cross-examination. According to Mr Stotter, the first discussions between Mr O'Leary and himself took place in November 1991 when Mr O'Leary asked Mr Stotter whether Mr Stotter would provide "some consulting services". This, according to Mr Stotter, only occurred in "late November 1991". Given the letter to the NAB of 18 November 1991, the discussions must have taken place before that date. The totality of the discussion, so far as Mr Stotter could recall it in the witness box, seems to have been that Mr O'Leary had approached him to provide some consulting work and offered to pay some money in that regard. Subsequently Mr O'Leary did, so Mr Stotter said, pay some money a month or two later. That amount was, it seems, $1,200 which was apparently the agreed fixed sum. According to Mr Stotter, the next time money was discussed between Mr O'Leary and him was on 10 January 1992 when Mr Stotter received "an employment offer" from Mr O'Leary which Mr Stotter rejected. Between 10 January and 15 January 1992 Mr O'Leary, according to Mr Stotter, increased the offer so that on 15 January Mr O'Leary offered Mr Stotter, for the first time, equity in "the project" which Mr Stotter defined as "the proposed Main Camp Tea Tree Project No 1 Management Company". On 17 January 1992 Main Camp Tea Tree Oil Ltd, a company theretofore wholly owned by Mr O'Leary, Mrs O'Leary and O'Leary Investments, allotted to Mrs Stotter and GG Jay, as trustee of the Stotter Family Trust, each one ordinary share giving them 50% of the shareholding in that company. Mr O'Leary made it clear in his evidence that it was immaterial to him whether the shares were held by GG Jay or by Natural Extracts. One of the difficulties for Mr Stotter in persuading me to accept his version of events is the letter that he wrote to the NAB on 18 November 1991, when on his evidence he was but a consultant to do work for $1,200. The letter clearly implies that, as at 18 November 1991, there was an equity arrangement of sorts on foot between Mr O'Leary and Mr Stotter. The only explanation Mr Stotter was able to give of that letter was that he was "probably just gilding the lily a bit". The alternative is that his evidence is not to be believed. On balance, I think the alternative view should be adopted. Mr O'Leary's evidence was that the first time that he had asked Mr Stotter to assist him was after Mr Stotter advised him that Fauldings was not interested in proceeding with the Natural Extracts proposal. This is somewhat hard to accept given the evidence of Mr Stotter's involvement with Mr O'Leary's bank and the fact that Mr O'Leary had given Mr Young Mr Stotter's name at a time before this. Mr O'Leary sought to rationalise his evidence on the basis that the first time Mr Stotter had approached the NAB was in November 1991. This is contrary to Mr Stotter's evidence that it was in August 1991. According to Mr O'Leary, sometime in November 1991 he made an arrangement with Mr Stotter that Mr Stotter would assist Mr O'Leary to market Lots 7, 8 and 9 on Main Camp to investors in tea tree plantations. The area in question was approximately 650 hectares. The arrangement he reached with Mr Stotter was, he said, close to the time that Fauldings' decision was announced, or perhaps on the same day. Mr O'Leary could not recall any exact fee being struck between him and Mr Stotter, although according to his evidence he merely paid the $1,200 because it was "a fair fee". He said that Mr Stotter never asked for any money. Mr O'Leary said that it was not until January 1992, after a meeting with Mr Young, that he made to Mr Stotter "a formal offer" to be involved in the tax effective arrangements. At that time, Mr Stotter agreed to assist Mr O'Leary provided the prospectus being discussed with Mr Young was successful. Mr O'Leary rejected Mr Stotter's evidence to the effect that there had been a number of offers which Mr Stotter had turned down. I am not satisfied that Mr O'Leary's evidence can be accepted. It does not sit well against such objective evidence as is known. And, as I have already said, at the very least Mr O'Leary's recollection of events was very hazy. Ultimately, when Mr Stotter's and Mr O'Leary's oral evidence is put to one side, the inference is inescapable that by early November 1991 an arrangement had been reached between Mr Stotter and Mr O'Leary for a joint venture to develop Main Camp. It is true that at that time the proposal was one where bank finance was used and that later the proposal altered to encompass investors from the public being invited to subscribe with attendant tax advantages. But it seems fairly clear that from early November 1991 on, Mr Stotter and Mr O'Leary were, in a non-technical sense at least, partners in a venture to secure public subscription to establish a tea tree plantation in Main Camp. By January 1992 it was clear that Mr Stotter was to have a 50% interest. THE MAIN CAMP NO. 1 PROJECT On 12 May 1992 a prospectus was lodged with the Australian Securities Commission offering investors the opportunity to acquire a prescribed interest in what is referred to as the "Main Camp Tea Tree Oil Project No. 1". The scheme involved an investor borrowing from a finance company (Land & Assets Finance Pty Ltd ("Land & Assets")) $21,000. The amount borrowed was to be used as to $15,585 to pre-pay management fees payable under an agreement which the investor was to enter into with Main Camp Tea Tree Oil Ltd, the manager of the project. In addition $5,415 was payable under an agreement which the investor entered into with O'Leary Investments for "prepaid farm fees". Each loan was to be for a term of eight years. The first year's interest, calculated at the rate of 15%, was required to be pre-paid on the initial loan balance of $21,000 and totalled $3,150. This amount represents initially the only cash introduced into the project from outside the Main Camp group. It does not seem that Land & Assets had cash available to it to make the advances contemplated. Under the farm agreement with O'Leary Investments, the latter company sold germinated seeds to the investor for $147 per farm. Under the loan agreements investors had a choice between two methods of repayments. The first, which in practice was substantially the more popular, obliged the investor to make the first principal repayment of $7,350 on 10 October 1992. Thereafter investor's liability for repayment of the balance of the principal outstanding was limited to 50% of the proceeds of the sale of oil from the investor's farms after payment of all management fees and charges, farm fees and interest outstanding. If these proceeds were insufficient within the eight year term to pay the principal the term was to be extended for a further four years. In this additional period the manager had the right to vary the percentage of the remaining proceeds which were used to repay the loan from the 50% applying in the initial period. At the end of twelve years the investor had no liability. Under the second option, three payments of $2,450 (ie $7,350) were required to be made by 30 June 1993. Thereafter the remaining principal was repayable in the same manner as under the first option. Under the agreements, interest for the second year was calculated at 15% and was payable on or before 30 June 1993. Thereafter the interest rate on the loan was reduced to 10% and the investors liability to meet interest repayments was limited to such of the proceeds of the sales of oil from the farm as remained after the payment of all management fees and charges and farm fees. The management agreements required payment of $1,230 to be made in year 2, $2,192 in year 3 and $2,192 in years 4 to 12, subject to an indexation factor. In addition there was a variable interest component depending upon the quantity of oil produced. The farm agreement provided for a $770 fee in the second year and subsequent in years 3 to 12 of the same amount, subject to an indexation factor. However, as was the case in a management agreement, so too with the farm fees, they were payable only from the proceeds of the sale of oil with there being no recourse to the investors personally. In the events that happened, 479.5 farms were sold to investors. Of these, only 405 had been sold by 30 June 1992. The remaining 74 farms were sold after 30 June 1992 but before 30 June 1993. Under the proposal therefore, the finance company received $1,277,325, being the pre-payment of interest. Because the transactions initially involved a comparatively small amount of cash in relation to the amounts of fees involved, the accounts of the relevant companies show large inter-company balances so that the recipient of fees, largely Main Camp, was required to lend those fees to Land & Assets to enable that company, in what was a round robin transaction, to make loans to the investors.

The documentary material tendered in evidence makes it abundantly clear that Mr Stotter worked closely with Mr Young, and those associated with Mr Young, in the preparation of the prospectus and the subsequent invitation to the public. Given Mr Stotter's attitude in the witness box that he was entitled to use whatever he liked of the Natural Extracts Trust documentation since he largely was the author of it, there is a considerable similarity between the prospectus issued in June 1992 and the final version of the Main Camp Natural Extracts document of approximately June 1991. The two documents are not, of course, identical. To start with, one was concerned with selling an interest in a trust and the other a prescribed interest in the form of a "farm". But there are remarkable similarities which lead to no other conclusion but that much of the material was copied. The similarities can be summarised as follows: 1. There is a similarity in the location map with which each document commences. 2. Each document includes a report from Poolmans as agricultural consultant. Essentially, the Poolmans report differs only in that it replaces the name "Natural Extracts Trust" with the name "Main Camp Tea Tree Oil Limited" and deletes reference to cattle breeding. There is a marginal difference in yield projections. Typographical errors in the original Natural Extracts report are carried over into the prospectus. 3. The prospectus contained a marketing report by Essential Oils Research Laboratories, prepared by Mr Reece. There are some similarities between the material in that report and a report of Market Australia included in the Natural Extracts document. 4. Another matter of similarity is that the Main Camp prospectus includes a report by Mr Merry as hydrologist being the same report as is mentioned in the Poolman report included in the Natural Extracts documents (and for which Natural Extracts may have paid). In summary, although the documents are not the same, it is clear that the prospectus, as prepared by Mr Young in consultation with Mr Stotter, relied heavily upon the Natural Extracts Trust documentation. Mr Gulson did not learn of the prospectus until May 1992 when he was telephoned by Mr Reece about a marketing report which Mr Reece had been requested to prepare for the Main Camp prospectus. In June 1992 Mr Gulson saw an advertisement in the Sydney Morning Herald concerning the prospectus and applied for a copy using the name of his brother. MR GULSON TAKES CONTROL OF DOVEKA Having regard to a concession made by counsel for Mr Gulson and other respondents to the rectification proceedings, it is not necessary to spend much time on the steps that Mr Gulson took once he knew of the prospectus to secure for himself control of Doveka. It is conceded that, subject to discretionary matters, Mr Stotter, GG Jay and Stuart Investments are entitled to be returned to the register. There is no doubt that this concession was correctly made. The following outline of facts is taken from the written submissions of the Stotter interests and are conceded by the Gulson interests. The proposal to wind up Doveka was the subject of discussion initially at the meeting on 2 December 1991. It was again raised by Mr Stotter in a letter to each of the shareholders dated 15 May 1992. On 1 June 1992 the shareholders in Doveka discussed the winding up of the company and agreed to that course and for that purpose each of Mr Stotter, GG Jay and Stuart Investments agreed to execute and subsequently did execute share transfers in blank, signing letters that there was no indebtedness to them by Doveka and forwarded the documents to Mr Bax to facilitate the winding up of the company. However, the winding up did not proceed. Rather, Mr Bax, after discussing matters with Mr Stotter, decided to take another course. On 7 July 1992 Mr Gulson and Mr Bax purported to appoint by telephone Mr Gulson as a director and approved the transfer of 50 shares from Mr Stotter or GG Jay to the Triad Health Products Group of Companies Pty Limited. No notice of that meeting was given to Mr Stotter or Mr Stuart. It seems that Mr Bax and Mr Gulson deliberately withheld from Mr Stuart, or for that matter Mr Stotter, their change of mind about the winding up. There is little doubt that in the steps they took, Messrs Bax and Gulson were motivated by the desire to have the present proceedings commenced in a way in which both Doveka and Natural Extracts would be parties. It hardly needs to be said that no consideration was ever paid by the transferees of the shares that had previously been owned by the Stotter or Stuart interests. On 29 July 1992 Mr Bax and Mr Gulson resolved that Doveka should not be would up. Thereafter Mr Gulson and Mr Bax participated in meetings resolving to pay themselves management fees and executing charges securing those fees. It is accepted that the charges and purported liabilities were shams and that I should declare on the application of the Stotter interests to that effect. No discretionary matter suggests any contrary course. The applicants in the rectification proceedings must succeed in the relief sought in their application and in the course of the proceedings. THE MAIN CAMP TEA TREE OIL NO. 2 PROJECT A prospectus for the Main Camp Tea Tree Oil No. 2 Project was registered and dated 12 March 1993. It invited the public to subscribe for interests in a tea tree farming enterprise, comprising approximately 1,000 farms on 350 hectares of land at Main Camp. Apart from the size of the project, it was generally similar in structure to Project No. 1, save that the term of the loan was a period of 13 years consisting of an establishment year and 12 production years. The relevant parties to the proposal were Land & Assets Finance (No. 2) Pty Ltd, which acted as lender, Main Camp Tea Tree Oil (No. 2) Limited, the manager and O'Leary Investments as land owner. Main Camp Tea Tree Oil (No. 2) Limited was formed specifically for the No. 2 project. Although Mr Stotter was not initially a director (the initial directors being Mr and Mrs O'Leary and a Mr Hooker), Mr Stotter was general manager. Likewise Mr Stotter was not initially a director of Land & Assets No. 2 Pty Ltd which was incorporated on 4 December 1992. He became a director on 27 September 1993 at which time Mr O'Leary resigned. As is to be expected, the second prospectus bears great similarity to the first. Much of the material is word for word the same. Again there is an agricultural consultant's report from Poolmans. The Poolman report does, however, differ substantially from that in the first prospectus. In place of Mr Reece's report there is a report from Southpac Laboratories Pty Ltd dealing with marketing. There is some similarity between the two reports as, for example, in a table dealing with tea tree oil supply growth. The description of the documentation is virtually word for word subject to changes of the necessary detail, as is the material under the heading "How to invest in the project". There is in both prospectuses a report from Court & Co as to the taxation implications of a farm investment. The level of participation by Mr Stotter in the preparation of the second prospectus was not explored. However, it is clear that Mr Stotter was able to exercise a great deal of influence. For example, he was able to ensure that his friend, Mr Gallagher, was employed to give some tax and other legal advice on various aspects of the second prospectus. Indeed Mr Gallagher moved on to the Main Camp property to live in about August 1993. He was appointed a director of Natural Gas and Mining Pty Ltd, Main Camp Marketing Pty Ltd and Main Camp Management Pty Ltd on 13 August of that year and various other companies progressively thereafter. MAIN CAMP TEA TREE OIL PROJECT NOS 3 & 4 A third prospectus dated 20 April 1994 was registered in respect of the Main Camp Tea Tree Oil No. 3 Project. It concerns an invitation to the public to subscribe for interests in approximately 1,500 farms on 535 hectares of land at Main Camp. Basically the third project was similar in structure to the first two projects, save that the term was to be for 15 years, investors were required to enter into a management agreement with Main Camp Tree Oil (No.3) Ltd under which in the first year management fees of $27,000 were payable, reducing to $23,450 if prepaid. There were subsequent management fees the details of which need not be set out. By the time the third project was up and running, O'Leary Investments had sold the Main Camp property, encumbered as it then was, by the interests of outside investors in the first two projects, to Summerland Lands Pty Ltd ("Summerland Lands"), a company incorporated on 2 September 1993, of which Messrs Stotter and Gallagher were the initial directors. That company purchased the Main Camp property for $3.5 million, subject to a mortgage in favour of O'Leary Investments for $4 million. The fourth project is dealt with in a prospectus dated 10 April 1995. It offered investors the remaining land of Main Camp suitable for tea tree oil production and in part other land. The relevant parties to the fourth project were Project and General Finance Pty Ltd, the lender, Main Camp Enterprises Ltd, the trustee of the Main Camp Enterprises Unit Trust, which was to be the manager, Main Camp Management Pty Ltd, a company controlled by Mr Stotter which contracted for management services with Main Camp Enterprises Ltd, and Summerland Lands as the land owner. Again the whole detail of the prospectus need not be set out. It suffices to say that an investor, for a total outlay of $14,475, was said to be able to derive tax deductions of $32,050 over two years, which at the maximum tax rate more than covered the cash investment sought. It seems that each of the four projects was successful. But the enterprise did not stop there. There were other projects. Thus on 8 May 1996 a prospectus was lodged for a company Bud Plan No.1, on 3 June 1996 a prospectus was lodged for Personal Bud Plan No.2, on 6 November 1996 a prospectus was lodged for Personal Bud Plan No.3, on 5 December 1996 there was a personal syndicate prospectus for a bud plan. There appear, additionally, to have been a myriad of other activities which have spawned a Main Camp group structure of thirty companies at the top of which is Mainstar No. 1 Investments Pty Ltd as trustee of the New Stotter Family Trust owning the whole of the issued share capital of Mainstar One Holdings Pty Ltd. This in turn is the holding company for a variety of companies with activities as diverse as land ownership, marketing, agricultural consultancy, cattle grazing in the Northern Territory, wine grape projects, marketing of agricultural equipment and the provision of finance. One of the companies was incorporated in the British Virgin Islands. The applicants in the fiduciary proceedings have had considerable difficulty locating accurate and full accounting material of entities relevant to the structure. Particularly, accounts were not provided for the Stotter Family Trust which is at the top of the tree of companies, yet clearly such accounts would be essential to an unravelling of the affairs of the companies and entities of the group. Part of the difficulty in unravelling the relationships between the various companies is the fact that investors prepaid fees. This created significant potential income tax liabilities. It seems from the report of Messrs Arthur Andersen in evidence that the income tax problems were sought to be dealt with by large investments in research and development syndicates. For example, there was an investment in the "IMT-Wild Thing (No.1) Syndicate" in 1994, said to produce an income tax deduction of $9.3 million in that year and later years. The syndicate in question was concerned with research and development into a recreational watercraft. There have also been investments in syndicates directed at the research and development in the tea tree industry involving claimed tax deductions of $3.3 million and payments of a similar amount. Whether these tax arrangements are ultimately effective is not to the point. The relationship between the various companies in the groups is so complicated that it is virtually impossible to separate one company from the other. There is a chain of inter-company indebtedness which even an investigator skilled in pursuing the money trail left behind by the 1980s entrepreneurs would have difficulty in understanding. THE CASE FOR NATURAL EXTRACTS The case for Natural Extracts can be simply stated. Mr Stotter was, as a director of Natural Extracts, under a fiduciary duty not to put himself in to a position where his duty and self-interest conflicted. This obligation did not cease merely because Mr Stotter ceased to be a director of Natural Extracts. The business of Natural Extracts was the development of a tea tree oil plantation on the Main Camp property through the obtaining of investment funds from members of the public so as to secure for Natural Extracts what mining lawyers might refer to as "a carried interest" in Main Camp and the plantations. Not only did Natural Extracts plan for the establishment of tea tree plantations and tea tree oil extraction, but also the establishment of retail products divisions to add value to the tea tree oil extraction activity, so as to bring about the result that Natural Extracts would become the dominant tea tree oil production company in Australia. It is submitted that that is exactly what Mr Stotter did through his arrangements personally with Mr O'Leary, but for his own benefit or for the benefit of his family through the family trust, rather than for the benefit of Natural Extracts. To achieve his purposes Mr Stotter, it is submitted, worked with Mr O'Leary on what was, if not in August 1991 certainly by November 1991, had become, a joint venture formalised in January 1992 by the participation of GG Jay as a 50% joint venture shareholder with the O'Leary interests. What Mr Stotter did he did without the knowledge or consent of his fellow directors and shareholders in Natural Extracts, and indeed behind their backs. Not only did Mr Stotter disguise his participation initially, but ultimately he used, for the purpose of the joint venture with Mr O'Leary, promotional material which had been assembled for the "Natural Extracts Trust", material which Natural Extracts had assembled and, perhaps, in part, paid for, and for which it claimed confidentiality. In the result it is submitted that Mr Stotter or his family must now disgorge the profits made by Mr Stotter's breaching his fiduciary obligations. The preferred orders sought were initially said to be a declaration that the assets business and undertaking of all the companies and trusts shown on the diagram reproduced earlier be held upon constructive trust for Natural Extracts. A claim was also made that there should be an accounting taken of profits which Mr Stotter or others of the respondents made in the period from 1 January 1992 to date. It is submitted that such account should be taken by a registrar who should also investigate what, if any, remuneration or just allowances should be made for Mr Stotter's contribution to the present state of affairs. An election was made not to pursue a claim for equitable compensation or damages. In the course of argument counsel for the applicants in the fiduciary proceedings refined the orders sought so as to involve the declaration of a constructive trust of the assets of Natural Oil, Gas and Mining Pty Ltd since that company was the holding company for the Stotter family participation, and in consequence the Court's orders would not affect entities not parties to the litigation nor the rights of clear outsiders such as Mr Poolman. For Mr Stotter and his interests it is submitted first that Mr Stotter pursued his involvement with Mr O'Leary with the consent of Natural Extracts and its directors. Alternatively, it is submitted that Natural Extracts (and Mr Gulson in particular) stood by and allowed Mr Stotter to pursue the Main Camp projects at Mr Stotter's own risk and now that the projects appear to have been successful wish to participate in the profit. In any event, it was submitted that the Main Camp projects with which Mr Stotter became involved were not corporate opportunities available to Natural Extracts, but rather arose after Mr Stotter ceased to be a director of that company. It was submitted also that there was no gain demonstrated to Mr Stotter. If there were such a gain it was submitted it accrued to Corporate and Commercial Custodian Pty Ltd ("Corporate & Commercial") as trustee of the Stotter Family Trust No. 2, a company with which Mr Stotter was not involved, the directors of which were Mrs Stotter and Mr Stotter's son, who should be seen as third parties separate from Mr Stotter. Emphasis was also placed heavily on a submission that to require Natural Oil Gas and Mining Pty Ltd to hold the entirety of the assets in the various Main Camp enterprises for Natural Extracts would be unconscientious since it would not take into account the time and effort of Mr Stotter in bringing the various projects to where they now are, particularly as much of the enterprise in 1997 is different from that originally envisaged. So it is said that to accede to the orders sought by the applicants would bring about the consequence that the applicants would be unjustly enriched to the detriment of the Stotter interests. If relief was to be given at all, it was said that it should be limited at the most to the first project offered to the public and a period of no more than one year. THE LAW The starting point for the received law in Australia as to the imposition of constructive trusts for breach of fiduciary obligations are the decisions of the House of Lords in Phipps v Boardman [1967] 2 AC 46 and Regal (Hastings) Ltd v Gulliver reported as a footnote to Phipps v Boardman (at 134n). It emerges from these cases, applied thereafter by the Privy Council in Queensland Mines Ltd v Hudson (1978) 51 ALJR 399 and by the High Court of Australia in a number of cases including Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; Chan v Zacharia (1983-4) 154 CLR 178 and Warman International Ltd v Dwyer (1994-5) 182 CLR 544, that a fiduciary must account for a profit or benefit if that profit or benefit was obtained either where there was a conflict or possible conflict between his fiduciary duty and his personal interest, or, where that profit or benefit was obtained, by reason of his fiduciary position or by reason of his taking advantage of an opportunity or knowledge derived from that fiduciary position. The underlying purpose of the rule, as enunciated by the Full High Court of Australia, comprising Mason CJ, Brennan, Deane, Dawson and Gaudron JJ, in Warman at 557-8 is: "... (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves `at a level higher than that trodden by the crowd' [Meinhard v. Salmon (1928), 164 N.E. 545, at p. 546, per Chief Justice Cardozo]. The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage. [Chan v. Zacharia (1984), 154 C.L.R., at pp. 198-199.]" The obligation of a fiduciary to account is not diminished by the fact that the fiduciary made use of some special talent that he had: Phipps v Boardman (supra). However, a "liberal allowance" for skill and work undertaken by the fiduciary can be ordered. It is not necessary that the fiduciary have acted in bad faith. He will be liable even if he acted bona fide: Phipps v Boardman (supra). It is not necessary to demonstrate that the corporate opportunity be one which the beneficiary of the fiduciary obligation could itself have availed of: Regal (Hastings) Ltd v Gulliver (supra). Although in the present case it was initially suggested that the arrangements with Mr O'Leary were personal to Mr Stotter and could not have been availed of by Natural Extracts, Mr O'Leary gave the lie to that when he said that as far as he was concerned it was of no concern to him who was the beneficial owner. His concern was to ensure that he had the talents of Mr Stotter. To this extent the case is similar to Phipps v Boardman where the opportunity in question could not have been availed of but for the skill and knowledge of the solicitor in that case. It is clear enough that the obligation to account may extend beyond the fiduciary directly to others who actually participated in any fraudulent conduct of the trustee: Barnes v Addy (1874) 9 Ch App 244, 251-2. Such persons are fixed with what was described at first instance by Wootten J of the Supreme Court of New South Wales in Queensland Mines Ltd v Hudson (1975-76) ACLC 40-266 at 28, 709 as "transmitted fiduciary obligations". In the present case there have been over time various share rearrangements among companies within what is now the Stotter group. Subject to the question of the involvement of the Stotter Family Trust No. 2, it is I think quite clear that all of the companies in the group controlled by Mr Stotter are within the Barnes v Addy rule and fixed with the same fiduciary obligation as Mr Stotter.

As has already been noted, at the top of the pyramid stands Corporate and Commercial as trustee of the Stotter Family Trust No. 2. Mr Stotter is not a beneficiary of the trust nor a director or shareholder of its trustee, Corporate and Commercial. The directors of that company are Mrs Stotter and Mr Stotter's son. Mr Stotter junior was not called to give evidence. I infer that his evidence would not have assisted the respondents. Mrs Stotter was called to give evidence. It was abundantly clear that everything she did, she did on instructions from or under the influence of her husband. In these circumstances I would infer that Corporate and Commercial was a participant in Mr Stotter's fraudulent conduct and thus likewise fixed with a fiduciary obligation. Although it is true that the proposal advanced by Mr O'Leary to Mr Stotter and in which Mr Stotter participated as a joint venturer was not identical to the Natural Extracts proposal in a number of respects, including most significantly the fact that Mr O'Leary's proposal offered tax benefits and did not involve a trust structure, there is little doubt that there is a substantial similarity between the proposal which was ultimately adopted and in which Mr Stotter participated on the one hand, and the Natural Extracts proposal on the other. While not identical it is, in my view, sufficiently in the same ball park as to come within the doctrine of fiduciary obligations, to which reference has been made.

Initially, the corporate opportunity which Mr Stotter availed himself of was his acquisition of shares in Main Camp Tea Tree Oil Limited. That was a company used only in respect of the first invitation to the public. I do not think, however, that it is correct to accept the submissions of the respondents that the constructive trust should start and end with the first offer to the public. There will always be a difficulty where, as here, a constructive trust is sought in respect of an expanding business activity. In Hospital Products Ltd v United States Surgical Corporation (supra at 110) Mason J referred to two approaches to the determination of the fiduciary's liability. His Honour said: "One approach, more favourable to the fiduciary, is that he should be held liable to account as constructive trustee not of the entire business but of the particular benefits which flowed to him in breach of his duty. Another approach, less favourable to the fiduciary, is that he should be held accountable for the entire business and its profits, due allowance being made for the time, energy, skill and financial contribution that he has expended or made. ... In each case the form of inquiry to be directed is that which will reflect as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty."

In Warman the High Court emphasised that a distinction should be drawn between cases in which the fiduciary acquires a specific asset and cases in which the fiduciary acquires a business. Their Honours refer to and quote Upjohn J in In re Jarvis (deceased) [1958] 1 WLR 815 at 821 where that distinction was made. Their Honours also refer to Clegg v Edmondson (1857) 8 DEGM and G 787 at 814, 44 ER 593 at 604, cited by Upjohn J in In re Jarvis in the following terms (at 821): "A mine which a man works is in the nature of a trade carried on by him. It requires his time, care, attention and skill to be bestowed on it, besides the possible expenditure and risk of capital, nor can any degree of science, foresight and examination afford a sure guarantee against sudden losses, disappointments and reverses. In such cases a man having an adverse claim in equity on the ground of constructive trust should pursue it promptly, and not by empty words merely. He should show himself in good time willing to participate in possible loss as well as profit, not play a game in which he alone risks nothing."

The very fact that a business acquired in breach of fiduciary duty expands, perhaps even as a result of the skill and endeavours of the fiduciary, provides no defence to the imposition of a constructive trust. It is perhaps a truism that businesses have an inherent capacity to expand or contract: cf Timber Engineering Co Pty Ltd v Anderson [1908] 2 NSWLR 488 at 498. But each case must depend upon its own facts and the order of the Court moulded to deal with those facts. Particularly, just allowances will be made for the time, energy and skill contributed by the fiduciary as well as for assets contributed to the business. Such due allowance may take the form of a charge upon the trust property, perhaps a generous allowance for the time and effort contributed by the fiduciary or even in a relevant case an order that a proportionate interest in the business exists in favour of the fiduciary: Timber Engineering at 499. It is a defence to a claim against the fiduciary that the course taken by him was taken with the consent of the person to whom the fiduciary obligation was owed. But such a consent must be an informed consent: Chan v Zacharia (supra at 204). This is but an illustration of the general principle discussed by Deane J in Chan v Zacharia (supra at 204-5), that a constructive trust will not be imposed where the circumstances are such that it would be unconscientious to assert it. His Honour said: "The liability to account as a constructive trustee will not arise where the person under the fiduciary duty has been duly authorized, either by the instrument or agreement creating the fiduciary duty or by the circumstances of his appointment or by the informed and effective assent of the person to whom the obligation is owed, to act in the manner in which he has acted. The right to require an account from the fiduciary may be lost by reason of the operation of other doctrines of equity such as laches and equitable estoppel: see, e.g., Clegg v. Edmondson. It may still be arguable in this Court that, notwithstanding general statements and perhaps even decision to the contrary in cases such as Regal (Hastings) Ltd v. Gulliver and Phipps v. Boardman, the liability to account for a personal benefit or gain obtained or received by use or by reason of fiduciary position, opportunity or knowledge will not arise in circumstances where it would be unconscientious to assert it or in which, for example, there is no possible conflict between personal interest and fiduciary duty and it is plainly in the interests of the person to whom the fiduciary duty is owed that the fiduciary obtain for himself rights or benefits which he is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed ... In that regard, one cannot but be conscious of the danger that the over-enthusiastic and unnecessary statement of broad general principles of equity in terms of inflexibility may destroy the vigour which it is intended to promote in that it will exclude the ordinary interplay of the doctrines of equity and the adjustment of general principles to particular facts and changing circumstances and convert equity into an instrument of hardship and injustice in individual cases."

On the facts of the present case Mr Stotter hid from his co-directors and shareholders his involvement with Mr O'Leary and the promotion of the Main Camp Tea Tree Oil No. 1 Project. When asked his intentions on retirement Mr Stotter dissembled, referring to minor consulting, a term which on no view of the matter would embrace the close involvement which Mr Stotter had with the initial as well as later projects. The submission that Mr Gulson and those in the applicants' camp stood by idly and allowed Mr Stotter to proceed, letting Mr Stotter take the risks and subsequently seeking the profit, has likewise little substance. It is clear that the detail of Mr Stotter's involvement was not in any way revealed to the applicants until the prospectus for the first Main Camp project came into Mr Gulson's hands in or about 29 June 1992. Mr Gulson having first learnt of the prospectus in or around mid-May in a discussion with Mr Reece. Between 7 July and 15 July 1992 Mr Gulson prepared a brief for advice and sought such advice. His solicitors contacted Mr Stotter and demanded that Mr Stotter hand over the "library" and other documents. A letter of 18 August 1992 from the solicitors to Mr Stotter alleged breach of fiduciary duty. There was much correspondence thereafter, in part dealing with allegations of breach of fiduciary duty and in part the question of the shareholding and directorate of Doveka. Legal proceedings were threatened and indeed commenced on 3 September 1992. In the circumstances it can not be said in my view that Mr Gulson merely sat by and took no action. The submission that there was no corporate opportunity available to Natural Extracts which Mr Stotter appropriated, depends on two matters. First, it was originally suggested that Mr O'Leary would have nothing to do with Mr Gulson because he was "litigious". Any such suggestion was, as has already been noted, dispersed by Mr O'Leary's own evidence. Secondly, Mr Stotter relies upon the fact that the business of Natural Extracts had come to an end, that Natural Extracts had no option over the Main Camp property and that Mr Stotter had resigned from the company at the latest by 2 December 1991.

Of these matters, only the last of them requires comment. It is clear that the mere fact that Mr Stotter had ceased to be a director of Natural Extracts would not necessarily put an end to any fiduciary obligation he had. First, factually, it is clear that Mr Stotter was acting in concert with Mr O'Leary while he still was a director of Natural Extracts. However, at the very least it must be said that it is clear law that a fiduciary duty may continue after a director's resignation, particularly in circumstances where that resignation may fairly be said to have been prompted or influenced by the desire to obtain the corporate opportunity: Canadian Aeroservice Ltd v O'Malley (1973) 40 DLR (3D) 371. It is evident here that Mr Stotter's desire to resign and obtain a release has to be seen in the context of his associating himself with Mr O'Leary. Mr Stotter was, in my view, perfectly aware of the fact that in associating with Mr O'Leary he had put his own interests and his duty of Natural Extracts in conflict. Hence his desire to obtain a release, a desire that he sought to push through without Mr Gulson's knowledge and with the aid of Mr Gallagher. The submission of no gain can likewise not be supported. It is not, in my view, a requirement of equity imposing a constructive trust that an applicant give evidence positively of the value of the asset acquired in breach of fiduciary duty, so as affirmatively to prove a gain. There is a dispute in the evidence read between experts as to the value of the underlying interests. Ultimately, counsel for the applicants did not seek to rely upon the valuation evidence which had been read in the proceedings and accordingly I say nothing further about it. It suffices for present purposes to note that entities associated with Mr Stotter have acquired assets in circumstances where in acquiring them Mr Stotter was acting in breach of his fiduciary duty to Natural Extracts. Should it ultimately turn out that the assets acquired are worth very little, that will not affect the obligation that the assets be held upon trust for Natural Extracts. It can not be a requirement that an applicant prove a positive valuation. That must be particularly so here where there are a large number of companies with interconnected indebtednesses and where the ultimate future profit will depend upon the success of the tea tree oil plantations. The issue which has given me the greatest concern is the question whether the constructive trust to be imposed should be limited as the respondents suggest to the first project only, or whether it should range beyond that and, if so, how far. It is submitted for the respondents that for relief to be granted in respect of projects 2, 3 and 4 would be inappropriate and inequitable. It is submitted also that regard must be had to outgoings for costs of shareholdings and the like. The answer to these submissions lies in the proposition that each of the projects flowed inexorably from the project which preceded it and this, notwithstanding the fact that on the record at least, Mr Stotter or his companies were not directly shareholders until 1993. It is possible to criticise the doctrine of constructive trust as a somewhat blunt weapon. But such criticism fails to take into account the ability of equity to give a just allowance for contributions made by the fiduciary. The onus lies not on the applicant to establish that the fiduciary has not contributed, but on the fiduciary to demonstrate the extent of any contribution. If there is difficulty in a precise identification of the assets over which the trust extends, then that difficulty ultimately works against the fiduciary rather than in favour of the fiduciary: cf Brady v Stapleton (1952) 88 CLR 322 at 336. The Court will ensure that the fiduciary not benefit from difficulties which his or her own conduct has precipitated. As I have already indicated, it is necessary that the Court seek to mould the remedy which it grants to the circumstances of the case. In the circumstances I am of the view that I should order that one half of the shares in Main Star Holdings Pty Ltd, presently held by Main Star 1 Investments Pty Ltd, be held upon constructive trust for Natural Extracts, but that there be a lien over those shares to secure the cost to that company of acquiring the shares as agreed between the parties or failing agreement as determined in later proceedings.

The reason that I have determined that one half only of the shares be held upon the constructive trust is to take into account the fact the corporate opportunity taken by Mr Stotter through his corporate vehicles was a 50% interest only in the joint venture with Mr O'Leary. While it is true that subsequently Mr O'Leary transferred his interest in the joint venture to Mr Stotter, I think that it is too remote to regard the entirety of the interests as held upon constructive trust. I would order also that an account be taken by a registrar of the Court of any profit which has accrued to Mr Stotter or companies not being those in the Main Camp group. To the extent that profit has accrued to companies within that group it will be reflected in the trust over the shares in Main Star Holdings Pty Ltd. It will be necessary if Mr Stotter is of the view that he wishes to claim an appropriate allowance for the time he has spent for the amount of that allowance to be determined. As presently advised I do not think that that is a matter in respect of which a registrar of the Court has jurisdiction. I shall hear argument about that. Order 39 r7 of the Federal Court Rules contemplates that a Registrar in taking accounts may make just allowances. But this power seems ancillary to the accounting and not necessarily such as to permit an allowance to be made in respect of the constructive trust. If there be no jurisdiction then it will be necessary to have the matter listed before me after evidence has been filed so that an appropriate allowance for Mr Stotter's contribution, or for his wife's contribution, to be taken into account. The lien over the shares in Main Star Holdings Pty Ltd will secure any allowance to the Stotter interests which is ultimately quantified. I certify that this and the preceding eighty (80) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Hill. Associate: Date: 16 May 1997 Proceedings NG 3192 of 1992 Counsel and Solicitors R K Eassie instructed by for Applicants and Cordato Partners Cross-Respondents: Counsel and Solicitors G C Lindsay and F Gleeson for Respondents and instructed by Freehill Cross-Claimants: Hollingdale & Page Proceedings NG 3238 of 1992 Counsel and Solicitors G C Lindsay and F Gleeson for Applicants: instructed by Freehill Hollingdale & Page Counsel and Solicitors R K Eassie instructed by for Respondents: Cordato Partners Dates of Hearing: 19 February; 3-7 and 11-13 March; 2-3 and 7-8 April 1997. Date Judgment Delivered: 16 May 1997