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.