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[2005] VSC 223
Supreme Court of Victoria
2005-07-01
WHELAN, J
Original judgment source is linked above.
CONTRACTS - Contract formation -Agreement to transfer shares - Agreement made but legal transfer deferred pending tax advice - Agreement binding notwithstanding deferral.
EQUITY - Constructive trust - Nature of constructive trust remedy - Ambit of declarations made - Priority - Later equitable interest has priority as "better equity".
1 Between July 1999 and June 2003 Professor Kenneth Wilson and Dr Donald Feaver, two academics employed by the Victoria University of Technology ("the University"), together with a former student of Professor Wilson's named Craig Astill, and others, developed a suite of software programs for use in international commerce ("the software"). Professor Wilson, Dr Feaver, and Mr Astill, together sometimes referred to as "the co-founders", arranged for the intellectual property so developed to be vested in a company named IP3 Systems Ltd ("IP3 Systems"), which was incorporated on 6 December, 1999. Companies that the co-founders each respectively controlled together held the majority of the shares in IP3 Systems at all relevant times until March 2004.
2 The chief executive officer of IP3 Systems is the plaintiff, Mr Youssef. Mr Youssef claims that in 2002, when he was acting chief executive officer, Professor Wilson, Dr Feaver and Mr Astill (on behalf of their respective companies) each promised to transfer 700,000 shares to him in consideration of a promise by him to continue with the company and to accept the position of chief executive officer. He says that for reasons primarily to do with taxation the shares were not transferred when the agreement was made.
3 In June 2003, the University issued proceedings against Professor Wilson, Dr Feaver, and their companies, and against IP3 Systems, claiming proprietorship of the software. In October 2003, the University added Mr Astill and his company as defendants, and amended its statement of claim so as to claim, amongst other things, proprietorship of the shares in IP3 Systems held by the companies controlled by Professor Wilson, Dr Feaver and Mr Astill.
4 The matter proceeded to trial in late 2003. Nettle J delivered his reasons for judgment on 18 February 2004 and made orders on 3 March 2004. Amongst the orders so made were orders declaring the existence of a constructive trust in favour of the University over all of the shares in IP3 Systems then registered in the names of the companies controlled by Professor Wilson and Dr Feaver, and orders requiring the transfer of those shares to the University. These orders were expressed to be "without prejudice" to Mr Youssef's claim to the shares that he says were promised to him. Pursuant to those orders, Professor Wilson's company, Jahupa Pty Ltd ("Jahupa"), and Dr Feaver's company, Coap Pty Ltd ("Coap"), transferred all of their shares, including the 700,000 shares claimed against each of them by Mr Youssef (1.4 million in total), to the University. The claim against Mr Astill and his company, Caason Investments Pty Ltd ("Caason"), failed.
5 In this proceeding, Mr Youssef seeks to recover those 1,400,000 shares. That claim is resisted by the University, which seeks to retain all of the shares transferred to it pursuant to Nettle J's orders.
6 Mr Youssef was introduced to Professor Wilson, Dr Feaver and Mr Astill in the course of his employment with PricewaterhouseCoopers as a management consultant. His involvement with IP3 Systems began in about May 2000. He became progressively more involved throughout 2001, and in August 2001 he accepted employment with IP3 Systems as a full-time executive director.
7 Upon investigating IP3 Systems' financial position after his appointment as a director, Mr Youssef discovered that its cash flows were quite strained and that it had substantial accrued creditors.
8 In mid-2002, attempts were made to raise substantial capital utilising Deloitte Touche Tohmatsu. By September or October 2002 it had become clear that these attempts had been wholly unsuccessful.
9 Mr Youssef's evidence was that towards the end of September 2002 he had a discussion with Professor Wilson in which he told Professor Wilson that each of the co-founders would need to "carve off" approximately 2.7 million of the 4.7 million shares their companies each then held in IP3 Systems for the purpose of attracting new investors and retaining his involvement with the company. At that time, Professor Wilson was seeking to persuade Mr Youssef to accept the position of chief executive officer, a position in which he had been acting for some time. According to Mr Youssef, Professor Wilson agreed that 2,000,000 shares from each co-founder would be available for an incoming investor, and that 700,000 shares from each would be transferred to Mr Youssef in order to induce him to stay with IP3 Systems and to accept the position of chief executive officer. Mr Youssef's evidence was that in this initial discussion Professor Wilson said that his only concern was about possible capital gains tax, in response to which Mr Youssef said that he wanted the shares "clean" and would not accept any liability in relation to them, but that he would pay the co-founders one cent per share, which was the original subscription amount, if that assisted.
10 Mr Youssef's evidence was that over the next week he spoke to Dr Feaver and Mr Astill, who each told him that they agreed with the share transfers he had discussed with Professor Wilson.
11 According to Mr Youssef's evidence, Professor Wilson, Dr Feaver, Mr Astill and he then met together in either the board room or in Mr Youssef's office at IP3 Systems' offices. Mr Youssef says that at this meeting Professor Wilson said to him that he would work out "the logistics" required to transfer the three parcels of 700,000 shares to him. His evidence was that Professor Wilson told him "the shares were mine" but there were regulations which related to the transfer of shares and he specifically mentioned tax concerns. He said that Professor Wilson said he would get advice and they would then discuss the matter further. His evidence was that Dr Feaver and Mr Astill indicated their agreement with what Professor Wilson had said.
12 Mr Youssef's evidence was that in October 2002 the four men met again. He gave the following account of what occurred. Professor Wilson put figures on a whiteboard. He calculated a potential capital gains tax liability of something in the order of $1,575,000 based upon a share value of $2.50 per share. Professor Wilson, Dr Feaver and Mr Astill said they could not afford to pay such a liability. Professor Wilson suggested that if Mr Youssef wanted a formal transfer then he would have to pay the capital gains tax. Mr Youssef became upset at this suggestion. Professor Wilson then said that he would sort out how to transfer the shares without Mr Youssef incurring expense.
13 Professor Wilson gave evidence in the trial before me and his account of these events, whilst less full than the account of events given by Mr Youssef, was essentially consistent with that account. He agreed that Mr Youssef had suggested the creation of a pool of approximately 6 million shares which could be offered to an incoming investor. He also agreed that Mr Youssef had said that he wanted a parcel of 700,000 shares from each co-founder in return for continuing with IP3 Systems and accepting appointment as chief executive officer. He said that he, Dr Feaver, and Mr Astill all agreed to these proposals. According to Professor Wilson, it was Mr Astill who raised the issue of capital gains tax. Professor Wilson's evidence was that the co-founders said to Mr Youssef that although "the shares were his" they were concerned about transferring the shares before they had obtained advice regarding capital gains tax implications. His evidence was that Mr Youssef had wanted the shares clear of any liability and that at some point Mr Youssef offered to pay an amount of $700 in respect of each parcel of 700,000 shares.
14 Dr Feaver also gave evidence and his account differed somewhat from that of Professor Wilson and Mr Youssef. According to Dr Feaver, the co-founders agreed to each alienate a parcel of 1,500,000 shares into a pool, 700,000 of which would be for Mr Youssef to keep for himself unless he required those shares of the purpose of attracting an incoming investor.
16 Whilst there are some differences between Mr Youssef and Professor Wilson on the one hand and Dr Feaver on the other, they all say that Mr Youssef was promised 700,000 shares by each of the co-founders (on behalf of their companies), in consideration of his remaining with the company and becoming the chief executive. They were concerned about possible capital gains tax, so they did not proceed to transfer the shares. In so far as it is necessary to do so, I prefer the evidence of Professor Wilson and Mr Youssef on this issue to that of Dr Feaver for two reasons. First, Mr Youssef and Professor Wilson gave a fuller account of the discussions than Dr Feaver and in their cross-examination they appeared to me to have a superior recollection of events. Secondly, and more importantly, their account of a 6 million share pool (excluding the Youssef 2.1 million shares = 700,000 x 3) is consistent with what subsequently occurred when a new investor was attracted; Dr Feaver's account of a 4.5 million share pool (including the Youssef 2.1 million shares) is not.[1]
17 The annual general meeting of IP3 Systems was held on 28 November 2002. Mr Youssef was appointed chief executive officer. Mr Youssef's evidence was that he agreed to become chief executive officer believing that the 700,000 shares would be transferred to him by each of the co-founders as a "mere formality".
18 The company's financial position at the time of Mr Youssef's appointment as chief executive was anything but sound. Mr Youssef and the co-founders believed in the company's potential, but it had by then incurred accumulated losses of over $1.7 million, its assets were very substantially comprised of capitalised software development costs, its financial accounts for the period to 30 June 2002 expressed significant uncertainty as to whether the company would continue as a going concern, and its auditors had qualified their audit report on that basis. One can well understand why Mr Youssef was concerned to insist upon additional equity given the precarious financial position of the company and the consequent precarious nature of his task, as chief executive officer, to realise the company's potential and reverse its financial fortunes.
19 The University contends that no final agreement was made prior to the annual general meeting in November 2002, as the parties had expressly decided not to finalise any agreement because they were concerned that to do so would result in taxation liabilities. Mr Youssef, Professor Wilson, and Dr Feaver were cross-examined to this effect.
20 The evidence which they gave in their witness statements and in cross-examination on this issue needs to be assessed in the context of their attitude towards taxation. They all made it clear that as a commercial matter the deal had been done. The 2.1 million shares were, as a matter of commerce between themselves, Mr Youssef's. They all also made it clear, however, that significant taxation liabilities were unacceptable and that their commercial deal, if it might expose them to such liabilities, would need to be "structured" in such a way as to avoid that. I say "expose" them because my conclusion on their evidence is that they never had any intention to alter the commercial substance of their agreement; what they did intend was to avoid tax, and if it was necessary to pretend their arrangement was something it was not then they would consider doing so. If liabilities could not be avoided then they would have had to negotiate amongst themselves as to how they would be met.
21 Whilst the concern initially raised, and the concern of the co-founders throughout, was the possibility of capital gains tax, Mr Youssef acknowledged in his evidence that he was concerned as to his possible liability for income tax. The contemporaneous documents, to which I refer below, confirm the existence of this concern on Mr Youssef's part.
22 Mr Youssef and the co-founders did not see these tax considerations as an impediment to an agreement; potential taxation liabilities to them were matters to be addressed by "structuring", involving legal formalities rather than commercial substance. At one point Dr Feaver observed, when it was put to him that there was no way he would have entered into an agreement involving a potential tax liability of in excess of $500,000:
"Well, it's like everything else with the law, there's probably several different ways of doing it and I thought at that time we were just being prudent in trying to find the best and most efficient way, given the nature of this transaction."[2]
23 A short time later the following interchange occurred between Dr Feaver and senior counsel for the University:
"So you left it at that, that you would look at alternate ways of entering into an arrangement with Mr Youssef to give effect to a transfer of shares, is that right? - - - The agreement was made and then we entered into the process of taking on advice to find the best way to transfer those shares.
But I suggest to you that no agreement was made because until you had the tax advice you couldn't work out the structure of the agreement? - - - No, no. The agreement was one that was made as a commitment by the three of us and there then was the next step of how to honour that agreement which followed after that."[3]
24 The first attempt to document the agreement was a "Share Transfer Agreement," a version of which was discussed between the four participants in early December 2002. That draft agreement provided for "options" to buy and sell based upon "triggering events." No one suggested that this document actually reflected what had been agreed. It is perfectly clear that it did not. It was put forward as a possible means of producing the agreed outcome without incurring capital gains tax.
25 Between late December 2002 and mid-February 2003, successful negotiations were conducted with a company named USA Health Investors LLC ("USA Health") for a substantial investment by that company in IP3 Systems. USA Health was represented in those negotiations by a Dr Roger Bohle. Mr Youssef's evidence was that he told Dr Bohle of his entitlement to 2,100,000 of the shares still in the names of the co-founders' companies.
26 On Monday 10 February 2003, Professor Wilson e-mailed to Mr Youssef an analysis he had prepared of both the proposed transaction with USA Health and the arrangement with Mr Youssef concerning the 2,100,000 shares. The University placed reliance upon this analysis, submitting that it was inconsistent with any existing obligation to Mr Youssef at that time. On my reading of the analysis it supports the opposite conclusion. Whilst it does at one point refer to the transfer of the 2,100,000 shares as having been agreed "in principle," it otherwise proceeds on the basis that those shares are already Mr Youssef's. Significantly, the analysis concludes:
"(Note: the fact that the transfer has not taken place does not prejudice the rights of ownership of AY in any way... that is to say, registration is a mere formality)."
27 The arrangement with USA Health was eventually embodied in an agreement to subscribe for and/or transfer shares dated 13 February 2003 pursuant to which USA Health agreed to invest $US12,500,000 over a three year period either by subscription at a price of $US1.25 per share or by transfer from Coap, Jahupa and Caason at a price of $US1.00 per share.
28 The transaction with USA Health led to the introduction to IP3 Systems, and those associated with it, of a solicitor named Oliver Carton. Mr Carton acted for IP3 Systems on the USA Health transaction and was then requested by Mr Youssef to assist in relation to the arrangement concerning the 2,100,000 shares.
29 Another version of the "Share Transfer Agreement" was circulated by Professor Wilson in an e-mail of 12 February 2003. This version again provided for "options", and, although the version in evidence is incomplete, apparently also provided for "triggering events". Professor Wilson's covering e-mail said that Mr Youssef ought not to be "confused" by the use of the word option as "it is crystal clear that this is a transfer of shares... use of the word 'option'... is explicitly to avoid a capital gains tax event being triggered at the time of signing the share transfer agreement."
30 Mr Carton gave evidence that he met the three co-founders and Mr Youssef about this matter on about 20 February 2003. He said that they told him an agreement had been made in November 2002 whereby each of the co-founders' companies would transfer 700,000 shares to Mr Youssef. He said they gave him a copy of the "Share Transfer Agreement" which had been drafted. He said there was a discussion about capital gains tax. Mr Carton's evidence was that he told them there was a need to be cautious about transferring the shares to Mr Youssef because of tax implications in terms of any capital gain the co-founders made and in terms of the transfer being viewed as income for Mr Youssef.
31 At this time, February 2003, Mr Youssef sought advice about his own tax position from a friend of his in the Australian Taxation Office named Mostafa Boray. Mr Boray advised Mr Youssef that if the receipt of the shares was in respect of employment or services rendered it would be assessable income. Mr Boray expressed some confusion as to why there should be any suggestion that Mr Youssef would pay capital gains tax.
32 Shortly after the first meeting with Mr Carton concerning the shares, the three co- founders and Mr Youssef met with Mr Carton again. According to Mr Carton's evidence, on this occasion Mr Carton told them he had reviewed the "Share Transfer Agreement" and he advised that it did not "meet their needs" and did not "reflect the agreement that had been reached". He advised that the co-founders should enter into declarations of trust "to record between them the current status of their shareholdings, which would then show Mr Youssef as the beneficial owner of the shares and would allow for the transfer of the legal interest in the shares at Mr Youssef's discretion, to allow for their tax issues to be resolved." Mr Carton's evidence was that he advised that expert advice on the tax issues should be obtained. He told them that he could hold executed share transfer forms pending receipt of that advice. His evidence was that Mr Youssef and the co-founders agreed with what he had proposed. The evidence of Mr Youssef, Professor Wilson, and Dr Feaver was to a similar effect.
33 On 28 February 2003 the three co-founders met Mr Carton and executed declarations of trust and transfers of shares on behalf of each of the co-founder's companies.
34 Remarkably, the declarations of trust executed on 28 February 2003 do not bear any date and indeed have no provision for the insertion of a date. The transfers, although they have provision for a date, are also undated. When asked why the declarations were undated, Mr Carton said in evidence that he could not specifically recall but that he thought he may have advised them to avoid doing anything that the tax office might seize upon as dating the taxable event at anything other than November 2002. November 2002 was significant as that was when the AGM was held at which Mr Youssef was appointed as chief executive officer and when the accounts showing the company's then parlous financial state were presented. The underlying premise adverted to by Mr Carton in evidence was that if the time at which any capital gains tax or income tax liability was incurred was a time when the value of the shares was very low, then the tax liability would be minimal.
35 The declarations of trust are expressed to create a trust subject to, amongst other things, "the Conditions." Clause 6 of each declaration provides:
"Provided that the Conditions and the terms and conditions of this Declaration are met, the Beneficiary is hereby authorised to complete any transfer of the Security executed by the Trustee in blank by inserting the name of any transferee or otherwise completing such transfer to be duly registered."
36 Upon execution Mr Carton gave to each of the co-founders a letter addressed to them from him dated 28 February 2003, which read as follows:
"I refer to the Declarations of Trust concerning shares in iP3 Systems Ltd in favour of Ahmed Yassouf [sic] delivered by you to me today. I confirm that I hold the Declarations of Trust in escrow pending resolution of both the following issues:
I confirm that I will not release the Declarations of Trust to any entity without your approval, unless required to do so by law."
37 I referred earlier to the approach to taxation issues by the parties involved. Professor Wilson, referring to the "Share Transfer Agreement" circulated on 12 February and the documents drawn by Mr Carton on 28 February 2003, said in his evidence the following:
"My recollection is that this version of February 12 was a revised version of what Craig [Astill] had previously circulated and we thought that it might serve the purposes of the Roger Bhole deal. However, Oliver Carton came up with an alternative that was superior and so that was the one that we executed in late February."[4]
"So our discussion and our tax advice progressed along at this point and we were then looking at the option of having the transfer effected as of the date being on or around the annual general meeting, going back to the original agreement date because that would have meant that the value of the company would have been significantly less, and the CGT if we had to pay it would have been minimal."[5]
39 As can be seen, it appears to have been somewhat fortuitous that the truth was adopted as the "structure," as it then appeared that was likely to be best from a tax point of view.
40 There was an issue in the trial as to what, if anything, were the "Conditions" referred to in the declarations of trust. My conclusion is that the "Conditions" referred to in the declarations of trust are the conditions set out in Mr Carton's letter of 28 February 2003. Mr Carton himself said that that was not so. Dr Feaver thought that they were the Conditions and Professor Wilson's evidence also suggested a similar conclusion. Mr Carton suggested that the reference to "Conditions" was a drafting error of some kind. Given the terms of the letter of 28 February 2003 and the evidence of Dr Feaver and Professor Wilson, I conclude that he is mistaken about that matter. I also conclude that the Conditions were imposed and the declarations were left undated so as to preserve to the four participants the capacity to maintain some other position or "structure" should they consider it desirable to do so after receiving expert taxation advice.
41 Mr Youssef was not present when the declarations of trust were signed and his e-mails to Mr Boray at that time suggest that he was initially unsure what had been executed. Those e-mails also indicate that as at March 2003 he and Mr Boray were considering the tax implications for Mr Youssef of him executing an agreement concerning the shares. From the terms of the e-mails, this agreement seems to have involved an option. An e-mail of 12 March 2003 refers to Mr Youssef being given "the right to buy."[6] It therefore appears likely that the agreement they were considering was a version of the "Share Transfer Agreement."
42 At some point Mr Youssef must have been informed of what had been done on 28 February 2003. He had been present when Mr Carton had proposed that course, and he had agreed to it. In his evidence he accepted that the arrangement was, as set out in the letter of 28 February 2003, that the declarations of trust would be held in escrow and that if a capital gains tax liability arose, he and the co-founders would then have to negotiate to determine who would pay it. His evidence was that his understanding at the time was that any capital gains tax would be negligible due to the low value of the shares as at October/November 2002.
43 Prompted by Mr Youssef, in about May 2003 Mr Carton began seeking the specialist taxation advice which was required. The advisers approached were at KPMG. Mr Carton's contemporaneous e-mails refer to the possibility of setting up a structure involving an "offshore entity."[7] In his oral evidence, he said he had a vague recollection of having spoken to someone at KPMG about minimising tax using a nominee for Mr Youssef as recipient of the shares.[8]
44 On 4 June 2003 the University issued proceedings against Professor Wilson, Dr Feaver, IP3 Systems, Jahupa, and Coap. It obtained an Anton Piller order and injunctions ex parte on that day. Amongst the orders made was an order restraining Jahupa and Coap from assigning, transferring, disposing of, encumbering or dealing in any manner with the shares respectively held by them in IP3 Systems. This order was originally of limited duration, but it was extended on a number of occasions and on 4 July 2003 was extended until the determination of the proceeding. In the hearing before me it was sometimes referred to as the Mareva order.
45 In August 2003 Professor Wilson gave discovery. Amongst the documents he discovered were the letter of 28 February 2003 and a "Share Transfer Agreement." The University also gave discovery. It also discovered the letter dated 28 February 2003, describing it as being in a folder obtained from Professor Wilson's residence pursuant to the Anton Piller order. The letter is one item amongst a large quantity of material.
46 Mr Carton's evidence was that in early September 2003 he and Mr Youssef met Ms Lui and Mr Di Sebastiano from KPMG. Mr Youssef told them of the agreement in 2002 and of the declarations of trust. KPMG's advice was that the taxable event occurred in November 2002. Mr Youssef told them that at that time the shares were not worth anything. They advised that it was not necessary to obtain a formal valuation so long as the position adopted was justifiable to the Australian Taxation Office. They suggested that Mr Carton obtain confirmation of Mr Youssef's view as to the value of the shares in writing from the co-founders.
47 On 10 September 2003 Mr Carton e-mailed to KPMG a draft letter intended for the co-founders to sign. Ms Lui replied on 11 September 2003 suggesting an alteration, which Mr Carton promptly advised that he would incorporate. The draft letter with KPMG's suggested alteration is in evidence.[9] The draft does not have a date but contains provision for a date to be inserted. Mr Carton's evidence in his witness statement was as follows:
"Once the amendments had been incorporated into the draft letter to be signed by the co-founders, I gave a copy of that letter to Mr Youssef in electronic form and asked him to get the co-founders to sign it."
48 In his own witness statement, Mr Youssef did not deal with his receipt of this draft letter in electronic form.
49 Amongst the documents in evidence are the following:
50 As previously indicated, Mr Carton's evidence was that he had given the undated letter settled between him and KPMG in electronic form to Mr Youssef. Mr Carton was shown the transfers in which the consideration is expressed to be $2,100. His evidence was that he did not believe that he had prepared those transfers. He accepted that the documents referred to above bearing the date 3 March 2003 had been backdated.[14]
51 Dr Feaver, in his witness statement, said that in about September 2003 Mr Youssef told him that he had obtained advice about the tax implications, and that there ought not to be any capital gains tax attaching to the transfer. In his witness statement, he said that Mr Carton provided him with a draft letter, which he identified as the letter dated 3 March 2003 to which I have referred. His evidence as to who had provided him with this letter was not consistent with Mr Carton's evidence. In cross- examination Dr Feaver was uncertain of when he executed the transfer, but he agreed it may have been backdated. When it was put to him that the transfer was backdated to avoid the prohibition of the injunction he said: "I don't recall but yes, that may have been a consideration."[15]
52 Professor Wilson gave oral evidence-in-chief about the 11 September, 2003 letter. His witness statement dealt with the letter but he did not adopt that paragraph as he said it was not correct. He said he recalled receiving the letter from Mr Carton but that he did not sign it. He said he did not sign it as a result of legal advice. In cross- examination he agreed that he did not sign it because he was advised it could be an infringement of the injunctions.[16]
54 Mr Youssef's witness statement says that he told Mr Astill on 7 October 2003 that he had been advised that there would be no capital gains tax and that he would fax him a letter which he should send back together with "another copy of the share transfer form." The witness statement states that Mr Youssef forwarded the letter to Mr Astill by facsimile transmission and that it was returned signed and with amendments.
55 There is an unexplained timing inconsistency in the documentary evidence concerning Mr Astill. The fax to Mr Astill from Mr Youssef bears the date Monday, 6 October 2003 and the fax notations suggest the documents were faxed back on 7 October 2003. According to a record of shareholdings tendered before me, 700,000 shares were transferred from Caason to Mr Youssef on 2 October 2003.[17] This issue was not explored in the oral evidence.
56 During Mr Youssef's cross examination, he was questioned extensively on the issue of whether he had backdated the documents referred to which were signed by Dr Feaver and Mr Astill. In his evidence, whilst he asserted that he could not remember when the documents were signed, he denied that the letters and the transfer were backdated. At times he positively maintained that the documents were executed in March 2003.[18] In re-examination, he was taken to the transfer signed by him and Dr Feaver, which has the handwritten date 3 March 2003 next to each signature, and was asked whether at the time he signed and dated the document he had a practice as to the date he would insert when signing documents. He said that he did and that his practice was to write the date of the day when he signed. He said he knew of no reason why he wouldn't have followed his usual practice in relation to this document.[19]
57 Both the documentary record and Mr Carton's evidence on these matters, which I accept, make it clear that the letters signed by Dr Feaver and Mr Astill which bear the date 3 March 2003 were not in existence before September 2003. I accept Mr Carton's evidence that he provided the letter in electronic form, undated, to Mr Youssef. The conclusion that the letters and the transfer bearing the date 3 March 2003 were backdated is irresistible. On the balance of probabilities, I conclude that Mr Youssef backdated the letters which were sent to, and signed by, Dr Feaver and Mr Astill; and that both he and Dr Feaver wrote a false date next to the signatures on the transfer executed by Dr Feaver on behalf of Coap. I do not accept Mr Youssef's evidence to the contrary.
58 The University contended that the parties never made any binding agreement because they did not wish to make such an agreement until they had satisfactory tax advice. I do not accept that. The agreement was made. The tax concerns delayed the documentation and implementation of that agreement.
59 There remains an issue of what would have happened if the tax advice had been unfavourable. Dr Feaver suggested that the co-founders may have accepted liability and paid the tax. I think it more likely the four participants would have either "structured" their arrangement as something other than what it was, as they had already considered doing with the "Share Transfer Agreements", or they would have varied the agreement they had already made. It is unnecessary to determine what they would have done in a circumstance which never arose. The possibility that they may have attempted to vary their agreement or to "restructure" it does not mean they never agreed at all.
Disclosure of Mr Youssef's claim in the University's proceeding
60 Mr Youssef maintained, in his evidence before me, that he told both the solicitors and the counsel representing IP3 Systems of his claim to the 2,100,000 shares during the course of the University's proceeding. The particular people he identified were Cameron Harvey, the partner responsible for the matter at Deacons, the firm acting on behalf of IP3 Systems, and Mr Peter Collinson of counsel who appeared during the interlocutory stages of the proceeding for IP3 Systems and who appeared with Ms Rofe for all of the defendants at the trial. In his evidence-in-chief, Mr Youssef said he was raising the matter every second week, if not every week. He said he was told that the University was claiming the intellectual property of the company and that the shares were irrelevant. Some of this evidence was given by reference to a spreadsheet, in relation to which Mr Youssef maintained that the solicitors deleted a reference to his claim prior to submitting the document to the Court. As it emerged that this spreadsheet was first produced within a few days of the occasion upon which Mr Youssef's claim was discussed in open court on 27 February 2004, this aspect of his evidence is of no significance. Generally, Mr Youssef maintained that he repeatedly alerted IP3 Systems' lawyers to the existence of his claim and that they repeatedly advised him that it was unnecessary for any step to be taken in the proceeding to notify the University of that claim.
61 In cross-examination, Mr Youssef agreed that he was told of an amendment to the University's claim in October 2003 as a result of which, amongst other things, the University claimed a constructive trust over all of the shares then held by Jahupa, Coap, and Caason.
62 The amendment in question was made pursuant to an order of Harper J on 10 October 2003. The University was granted leave to add Mr Astill and Caason as defendants and to amend its statement of claim. The amended statement of claim is dated 14 October 2003 and claims a constructive trust over 4,391,786 shares alleged to be then held by each of Jahupa, Coap and Caason. According to the shareholding record tendered in the proceeding before me, Mr Astill had already transferred 700,000 shares to Mr Youssef on 2 October 2003.
63 As earlier indicated, as a result of execution of the Anton Piller order, and as a result of discovery, the University had in its possession copies of Mr Carton's letter of 28 February 2003. The only witness called on behalf of the University in the trial before me was the deputy vice-chancellor, Professor Michael Hamerston. Professor Hamerston said that he had been involved in the investigation of the matter concerning Professor Wilson and Dr Feaver from around November 2002, and from around October 2003 had had management control of the proceeding on behalf of University. In a witness statement adopted by him as part of his evidence in chief he said that the first time that the University became aware of Mr Youssef's claim was when the issue was referred to in Court by counsel for the defendants on 27 February 2004, after Nettle J had delivered his reasons for judgment but before any orders had been made. In his oral evidence, Professor Hamerston said that if the claim had been revealed earlier, the University would have taken advice from legal counsel to ascertain what effect that would have had on the remedies the University was seeking.
64 The cross-examination of Professor Hamerston focused upon the fact that the University did have documents, particularly Mr Carton's letter of 28 February 2003, which might have alerted it to the existence of the claim. Notwithstanding the correctness of that proposition, I accept that Professor Hamerston was not aware of the claim until 27 February 2004. He was the University officer responsible for the matter from October 2003. There is no evidence that any other officer of the University was aware of the claim before 27 February 2004, but it cannot be said that no information concerning the claim was available to it. Whilst it is impossible to be certain of what the University might have done had Professor Hamerston been aware of the claim earlier, it seems to me that, on the balance of probabilities, the University would have resisted the claim, as they have done in this proceeding, and that it would have joined Mr Youssef as a party and amended the pleadings so as to have his claim determined in that proceeding. The two circumstances which lead me to this conclusion are, first, the joinder of Mr Astill and his company and the amendments made in October 2003, and, secondly, the University's conduct of this proceeding.
Nettle J delivers reasons in the University's proceeding
65 On 18 February 2004 Nettle J delivered reasons for judgment in the University's proceeding.[20]
66 Nettle J summarised the University's proceeding as having three essential contentions. The first was a claim based upon the existence of an alleged University policy concerning intellectual property. The second was a claim based upon alleged implied terms in Professor Wilson and Dr Feaver's employment contracts. The third was a claim based upon alleged fiduciary duties of loyalty and good faith. (See para 72.)
67 Nettle J rejected the claim based upon University policy on the ground that the evidence did not establish that any such policy was ever adopted. He also rejected the suggestion that there was so much use of University time and resources that one had to conclude that the software belonged to the University. (See paras 103 and 104.)
68 He found that the work initially done by Professor Wilson and Dr Feaver on the software was work which they were retained by the University to perform. (See para 119.) But he also found that a decision made on 23 September 1999 by the three co-founders that henceforth they would own the intellectual property themselves meant that thereafter it ceased to be a project being performed on behalf of University. (See para 139.)
69 The claim which succeeded was a claim that Professor Wilson and Dr Feaver breached fiduciary duties they owed to the University by diverting from the University the opportunity to design the software, and that in breach of those duties they took advantage of that opportunity themselves. (See para 150.)
70 Nettle J said that the consequence which would have followed from these breaches, but for Mr Astill's involvement and other subsequent developments, was that Professor Wilson and Dr Feaver would hold the software on constructive trust for the University. Nettle J observed that while that was not the only possible outcome "it would be the most appropriate manner of giving effect to the rule that a fiduciary must account for benefits which have flowed to him in breach of his duty". As matters then stood, however, it was, in Nettle J's view, necessary to allow for significant differences made by Mr Astill's involvement and by subsequent developments. Nettle J regarded the effect of the subsequent developments as making it inappropriate that a constructive trust be imposed upon the software. (See para 176.)
71 A claim against Mr Astill on the basis of knowing participation in the breaches of fiduciary duty failed. (See paras 180-189.) An attempt made late in the trial to introduce a claim based on knowing receipt of trust property was not permitted, but would have failed in any event. (See paras 190-194.)
72 The transfer of rights in the software to IP3 Systems was a significant subsequent development because of the later involvement of a number of third-party investors. (See paras 214-216.)
73 After referring to the High Court decision in Warman International Ltd v Dwyer,[21] Nettle J reached the following conclusions on the appropriate relief. Because of the importance of his conclusions it is necessary to quote them at some length (paras 221-222):
"By parity of reasoning I conclude that the relief to be accorded to the university in this case should be focussed upon the shares in IP3 Systems which are or have been held by Professor Wilson and Dr Feaver, and by Jahupa Pty Ltd and Coap Pty Ltd. IP3 Systems' only assets are the patent applications and the software. Accordingly, the value of the shares and the proceeds of sale of any of the shares (less appropriate expenses and allowances) represent the gain derived by Professor Wilson and Dr Feaver by reason of their breaches of duty. A remedy focussed on the shares held by Professor Wilson and Dr Feaver and their companies therefore fits the facts of the case and it avoids the imposition of adverse effects on innocent third parties and other interests associated with the development of the software.
In my judgment, Professor Wilson and Dr Feaver, and Jahupa Pty Ltd and Coap Pty Ltd, should be called to account either by the imposition of a constructive trust over their shares in IP3 Systems, or by the payment to the university of an amount of money equal to the value of the shares, and by payment to the university of the proceeds of sale of any shares which they may have already sold, subject in each case to the payment of subscription moneys and just provision for other appropriate expenses and allowances."
74 On 20 February 2004 Mr Collinson of counsel told Nettle J that if he were to order that the shares owned by Professor Wilson and Dr Feaver's companies be held on a constructive trust "we really have nothing to say about that."[22] According to Mr Youssef's witness statement, he was present in Court on this day and became very concerned. On 27 February 2004, Mr Collinson, based upon what appeared to be limited instructions, advised the Court of Mr Youssef's claim to 700,000 of the 4,381,786 shares recorded in the register as being owned by each of Jahupa and Coap.[23]
75 Nettle J gave judgment on 3 March 2004.[24] The relevant parts of that judgment read as follows:
"1. The Court declares that the 4,381,786 shares in the capital of the Thirdnamed Defendant [IP3 Systems] which are at present held by the Fourthnamed Defendant [Jahupa] are and at all relevant times have been so held on constructive trust for the Plaintiff.
76 Annexed to the judgment are copies of the unexecuted draft "Share Transfer Agreement," and the declarations of trust and the transfer forms drawn by Mr Carton and executed by Professor Wilson and Dr Feaver in February 2003.
77 By transfers dated 5 March 2004 and 7 March 2004, Jahupa and Coap transferred the 4,381,786 shares registered in their names to the University.
78 Mr Carton held the declarations of trust and transfers signed in February 2003 until approximately April 2005 when he gave them to the solicitors for Mr Youssef. His evidence was that he considered that the escrow conditions were satisfied upon the co-founders signing the letters he drafted with KPMG in September 2003. He said he did not release the documents at that time (September 2003) because there was "no point, the transfers couldn't be registered".[25] Mr Carton did not seem to be aware that Professor Wilson didn't sign the letter. He denied the suggestion that he was still holding the transfers up until April 2005 under the terms of the letter of 28 February 2003. He observed that "events overtook that letter".[26]
79 The claim pleaded in the plaintiff's statement of claim is simple. The plaintiff alleges an agreement made on or about 25 September 2002, pursuant to which Coap, Jahupa and Caason undertook to hold 700,000 shares each in the capital of the company upon trust for the plaintiff. Terms are alleged, including a term that the plaintiff would consent to being appointed as "substantive" chief executive officer and a term that the plaintiff would agree to make payment of $700 upon each transfer. The plaintiff alleges that, in furtherance of the agreement, the plaintiff consented to be, and was appointed as, chief executive officer at the company's annual general meeting on 28 November 2002, and that on about 28 February 2003 each of Coap, Jahupa and Caason executed declarations of trust and share transfer forms. The plaintiff alleges a wrongful refusal by the defendant to transfer the shares to him. The plaintiff seeks a declaration that 1.4 million shares in the capital of the company are held by the defendant on trust for the plaintiff, seeks an order that the defendant transfer the shares to the plaintiff, and seeks damages including exemplary damages.
80 The University's amended defence and counterclaim denies the agreement, pleads Nettle J's orders and the transfers made pursuant to them, and alleges that the University's interest has priority as it "came into existence on or about 6 December 1999" and is accordingly earlier in time.
81 The defence also alleges that the University has the "better equity". In that respect reliance is placed upon Nettle J's orders, the alleged existence of the constructive trust since 6 December 1999 (when the company was incorporated), an allegation that no agreement was ever concluded and/or that any such agreement was not one of which a Court would order specific performance, the escrow arrangements and an alleged absence of evidence that Mr Carton ever received approval to release the trust declarations from escrow, an allegation that any release from escrow would have breached the terms of the injunctions, an alleged failure on the plaintiff's part to take steps to assert his rights over the shares and to notify the University of his claim, alleged delay on the plaintiff's part in asserting his rights as a consequence of which it is alleged that the University has suffered delay and expense, and an allegation that the respective conduct of the plaintiff and the defendant is such as to weigh "in favour of the Defendant's equitable interest taking priority".
82 The defence also alleges that the plaintiff is not a bona fide purchaser for value without notice, that he has been guilty of laches, and that by his conduct he has waived his rights. The defendant counterclaims, seeking a declaration that the plaintiff has no interest in the shares.
83 In his amended reply, the plaintiff also relies on the terms of the orders made by Nettle J and, in the alternative, alleges that he acquired his interest in good faith for valuable consideration and without notice of any prior claim. He says that the declarations of trust did not affect his immediate right to an equitable interest, and that any escrow conditions were satisfied in August or September 2003 upon receipt of advice by Mr Carton from KPMG. The reply alleges that the University has been guilty of delay which has prejudiced the plaintiff, and asserts that he has taken all reasonable and available steps to protect and enforce his entitlement to the shares. A large number of steps are particularised in relation to this last allegation but they are all steps taken on or after 27 February 2004 (some dates are incorrect), and, in the course of the trial, counsel for the defendant made it clear that the defendant did not rely on any delay after that date.
84 My conclusions on the alleged agreement and other relevant factual matters are as follows:
85 Nettle J's reasons for judgment make it clear that he gave relief by declaring the existence of a constructive trust so as to enforce the defaulting fiduciaries' obligation to account for their profit. The constructive trust he ordered was, to borrow the words of Judge Cardozo, quoted in Scott on Trusts,[27] "... the remedial device through which preference of self is made subordinate to loyalty to others." It is the remedy dealt with in Chan v Zacharia.[28]
86 Whenever it is necessary to consider the effect of a judgment declaring the existence of a constructive trust, attention must be directed in the first instance to the discussion of the nature and function of the constructive trust by Deane J in Muschinski v Dodds.[29] It is necessary to quote three passages from that well-known treatment of the subject which are particularly relevant here. Deane J said:
"Viewed in its modern context, the constructive trust can properly be regarded as a remedial institution which equity imposes regardless of actual or presumed agreement or intention (and subsequently protects) to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle."[30]
"Where an equity court would retrospectively impose a constructive trust by way of equitable remedy, its availability as such a remedy provides the basis for, and governs the content of, its existence inter partes independently of any formal order declaring or enforcing it. In this more limited sense, the constructive trust is also properly seen as both 'remedy' and 'institution'. Indeed, for the student of equity, there can be no true dichotomy between the two notions."[31]
"This is a fortiori in the case of constructive trust where, as has been mentioned, the remedial character remains predominant in that the trust itself either represents, or reflects the availability of, equitable relief in the particular circumstances. Indeed, in this country at least, the constructive trust has not outgrown its formative stages as an equitable remedy and should still be seen as constituting an in personam remedy attaching to property which may be moulded and adjusted to give effect to the application and interplay of equitable principles in the circumstances of the particular case."[32]
87 There is no doubt that the constructive trust remedy can and should be adjusted and moulded so as to take account of competing claims and particular circumstances.[33] That is indeed precisely what Nettle J did in addressing Mr Astill's involvement and the other subsequent developments to which he referred.
88 Turning to the specific orders made here, Orders 1 and 2 declare the existence of a constructive trust both at the time of the making of the orders and "at all relevant times." In this proceeding, the University submits that this must mean that the trust exists from IP3 Systems' incorporation in December 1999. I agree that this must be so, as that entire period since incorporation is relevant. The declarations only concern the 4,381,786 shares registered in the names of the fiduciaries' companies at the time the orders were made. These are not the only shares those companies or the fiduciaries have ever held in IP3 Systems. The remedy in relation to other shares, which had been disposed of by the defaulting fiduciaries or their companies, was provided for in Order 8, where, amongst other things, they were ordered to pay the proceeds of sale of those shares to the University, after appropriate allowances were made as determined by a special referee pursuant to Order 9.
89 Order 4 then provides that the constructive trusts are "without prejudice to any claim ... that [Mr Youssef] is entitled to rank in point of priority ahead of the [University's] interest as equitable owner of the said shares."
90 One submission made on Mr Youssef's behalf was that my task was to consider "re-determining as between the Plaintiff and the Defendant, appropriate Orders to recognise the university's claim against the co-founders whilst also recognising the Plaintiff's equitable interest."[34] I cannot take that course. Nettle J's orders are made. They cannot be re-made by me.
91 It must be borne in mind that Nettle J was addressing this issue on very limited material and without the benefit of submissions made on Mr Youssef's specific behalf. The material concerning and explaining Mr Youssef's claim which was led before me in a trial occupying several days was not available to Nettle J.
92 Notwithstanding the terms of Order 4 which I have quoted, it is, in my view, so clear from Nettle J's reasons that he was declaring a constructive trust so as to enforce an account of profits, that Order 4 must be interpreted as excepting from Orders 1 and 2 any shares which Mr Youssef could prove to be the subject of a binding agreement between the defaulting fiduciaries and him. Such shares could not form part of their profit.
93 If I am right about that, then, as was submitted by counsel on behalf of Mr Youssef, there is no priority dispute. Mr Youssef has established that Professor Wilson and Dr Feaver on behalf of their companies did agree to transfer 700,000 shares each to him in consideration of his agreement to remain with the company and to accept appointment as chief executive officer. The remedy granted to the University by Nettle J does not extend to these 1,400,000 shares because they do not form part of the defaulting fiduciaries' profit; the fiduciaries had bargained them away just as they had bargained away such shares as fell within Order 8, although here there are no proceeds to be accounted for.
94 I reach this conclusion with considerable hesitation, not because I have any doubt as to Nettle J's intention, but because the words of the judgment do not sit easily with this approach. If I am wrong in interpreting the orders in this way, then the matter does need to be addressed as a priority dispute.
95 Mr Youssef has an equitable interest. He is a party to an agreement to transfer shares to him for which he has given valuable consideration, but he has not obtained the legal title.[35] The parties were not setting out to create a trust, they were setting out to transfer shares to Mr Youssef. The co-founders and their companies agreed to transfer the shares but they delayed doing so because of their taxation concerns. In the process, a trust was created, which was eventually documented in the undated declarations.
96 The University now has legal title, but it cannot rely on that legal title in the circumstances here.[36] At all relevant times, it has had an equitable interest as the beneficiary of the constructive trusts declared by Nettle J.
97 There has been controversy in relation to whether a constructive trust is an equitable interest arising upon the making of the remedial order, or an equitable interest arising upon the occurrence of the circumstances giving rise to the entitlement to the remedy. It seems to me that Deane J's analysis in Muschinski v Dodds supports an approach under which the interest arises upon the occurrence of the entitling circumstances whilst recognising the court's ability when moulding or adapting the remedy to allow for subsequent claims and events. This approach appears to me to be now established.[37] That being the position, the University's equitable interest is first in time.
98 The relevant priority rule is that set out in Rice v Rice.[38] The Vice-Chancellor, Sir R. T. Kindersley, expressed the rule in these terms:
"As between persons having only equitable interests, if the equities are in all other respects equal, priority of time gives the better equity..."[39]
"When we say that A. has a better equity than B., what is meant by that? It means only that, according to those principles of right and justice which a Court of Equity recognizes and acts upon, it will prefer A. to B., and will interfere to enforce the rights of A. as against B."[40]
"Indeed it appears to me that in all cases of contest between persons having equitable interests the conduct of the parties and all the circumstances must be taken into consideration, in order to determine which has the better equity."[41]
101 In Heid v Reliance Finance Corporation Pty Ltd,[42] Mason and Deane JJ expressed the principle as follows:
"Where the merits are equal, the general principle applicable to competing equitable interests is summed up in the maxim qui prior est tempore potior est jure - priority in time of creation gives the better equity. But where the merits are unequal and favour the later interest, as for instance where the owner of the later equitable interest is led by conduct on the part of the owner of the earlier interest to acquire the later interest in the belief or on the supposition that the earlier interest did not then exist, priority will be accorded to the later interest..."[43]
102 A little later, when considering the theoretical basis for granting priority in some circumstances to the later interest, they said:
"For our part we consider it preferable to avoid the contortions and convolutions associated with basing the postponement of the first to the second equity exclusively on the doctrine of estoppel and to accept a more general and flexible principle that preference should be given to what is the better equity in an examination of the relevant circumstances. It will always be necessary to characterize the conduct of the holder of the earlier interest in order to determine whether, in all the circumstances, that conduct is such that, in fairness and in justice, the earlier interest should be postponed to the later interest."[44]
103 The authorities in this area tend to focus on what might be termed disentitling conduct on the part of the holder of the earlier interest. As the above passages indicate, the analysis required is not confined to that consideration. Disentitling conduct is one "instance" in which the later interest may have a better equity.
104 Here, the University submits that there has been no disentitling conduct by it. In the sense in which that issue commonly arises in this context, that is correct. The University has not been guilty of any act, or representation, or negligence which has led to the creation of the later interest, or which prevented the subsequent interest holder from being aware of the existence of the earlier interest.
105 The University also contends that there has been disentitling conduct on the part of Mr Youssef. In this respect they rely on the backdating of the documents in September/October 2003 and submit that I should infer that Mr Youssef backdated those documents "so as to attempt to avoid the operation of the Mareva orders". The University also relies on the fact that Mr Youssef did not "cause his interest to be brought to the attention of Nettle J" and submits that his explanation in this respect is implausible.
106 I have found on the balance of probabilities that Mr Youssef did backdate documents in September/October 2003. That must have been done to deceive someone. It is a matter that must be taken into account. The position here, however, is not the same as the position which arose in relation to Occidental Life Nominees Pty Ltd in Linter Group Ltd v Goldberg,[45] where the backdating "involved the very documents which Occidental put forward as the foundation of its claim to an equitable interest."[46] The backdated documents here are not the basis of Mr Youssef's claim, and there is no evidence that the backdated documents, in so far as they concern the shares now in issue, were ever used for any purpose.
107 As to the failure to alert the earlier Court to the existence of his claim, two matters seem to me to be important. First, in that proceeding, whilst he was deeply involved as IP3 Systems' chief executive, Mr Youssef was not a party and had no legal representation for himself. Secondly, whilst I neither accept nor reject Mr Youssef's assertions that he was repeatedly raising his interest with the legal advisers to IP3 Systems at this stage, it seems to me that the only consequence of any failure to raise the matter in that proceeding is that the University lost the opportunity to have his claim determined in that proceeding and has instead been put to the additional trouble and expense of litigating the claim in this separate proceeding. That is a matter which can be addressed, and, if appropriate, substantially remedied, when considering the costs orders to be made in this proceeding.
108 Counsel for Mr Youssef submitted that he has the better equity because, if he is not now given the shares he was promised, the University, as the owner in equity of the balance of the shares owned by Professor Wilson, Dr Feaver, and their companies, will have had the benefit of the enhanced value of those shares as a result of Mr Youssef's commitment to the company and of his work in the company in the absence of payment to Mr Youssef of his "agreed compensation" for that commitment and that work. Counsel for Mr Youssef submitted that the University would then "have had its cake and eaten it as well". Professor Wilson and Dr Feaver agreed to transfer the 1,400,000 shares to Mr Youssef in order to persuade him to continue to work to enhance the value of the business and thereby the value of their remaining shares. If the University has priority, it was submitted that it would take those remaining shares, with their enhanced value, but be relieved of the obligation undertaken in relation to that enhancement by Professor Wilson and Dr Feaver.
109 The submission made by counsel for Mr Youssef in this respect is a compelling one and, in my view, is determinative of the issue of who has the better equity in this case. Counsels' submissions, as outlined above, are further fortified by this consideration. If the University has priority it will recover more than the defaulting fiduciaries' profits. If the University's claim had failed, Jahupa and Coap would have been under an obligation to each transfer 700,000 shares to Mr Youssef, just as Caason had done. Mr Youssef must have the better equity here because if he does not the effect will be to require him, who is guilty of no breach of fiduciary duty, to account for shares he has earned to the University, which would without those shares have recovered in full all of the profits of the defaulting fiduciaries, both in shares and in the proceeds of sale of shares. As Deane J observed in Chan v Zacharia,[47] when considering a similar remedy to that granted by Nettle J for a similar breach of duty, it is necessary to be conscious of the danger of converting equity into "an instrument of hardship and injustice in individual cases."
111 I reject the claim made for exemplary damages and the pleas of waiver and laches.
112 I will hear the parties on the orders to be made to give effect to these reasons. On the question of costs, I will permit both parties, if so advised, to call further evidence on the issue of the communications between Mr Youssef, Mr Harvey and Mr Collinson during the course of the earlier proceeding concerning Mr Youssef's claim.
Youssef
Victoria University of Technology [2005] VSC 223
(2004) 60 IPR 392
(1995) 182 CLR 544
(1984) 154 CLR 178
(1985) 160 CLR 583
(1995) 64 FCR 86
(1996) 21 Fam LR 213
(2000) 96 FCR 357
(2001) 109 FCR 120
(1988) 164 CLR 604
(1983) 154 CLR 326