Is there a serious question to be tried?
57 QMI and Dr Gaul submit that, in relation to the claims based upon Mr Keogh's breaches of his duties as a director of QMI and upon the representations by Mr Keogh and Majac in respect of, and misappropriation of, QMI's products, there is a considerable weight of evidence that Mr Keogh and Majac have not sought to challenge on this application. They submit that Mr Keogh has represented to the market in which QMI trades, to QMI's manufacturer, Symbio Australia, and to ACS, its quality assurance provider, that QMI's products are not compliant with TGA requirements, assertions for which there is no support. They say that even if those assertions had substance, as a director of QMI it would be incumbent upon Mr Keogh to act in QMI's interest and seek to resolve any such issues internally.
58 QMI and Dr Gaul observe that the defendants attempt to excuse Mr Keogh competing directly with QMI as a reaction to QMI denying supply to Majac in August 2020 but contend that the difficulties with that assertion include that Mr Keogh was attempting to obtain QMI formulations and price lists from Symbio Australia from as early as August 2020; Mr Keogh began making unsupported allegations about QMI being non-compliant with TGA requirements no later than May 2020; Majac's return of stock to Symbio Australia without prior warning appears to be based upon the unsupported TGA claims and the escalation of Mr Keogh's and Majac's moves against QMI appears to coincide with Dr Gaul raising historical debts owned by Majac to QMI in response to the return of stock by Majac to Symbio Australia.
59 QMI and Dr Gaul submit that, in any event, so long as Mr Keogh remains a fiduciary of QMI he is and at all times has been bound to act in the interests of QMI and he was thus prohibited from competing with QMI through Majac. QMI and Dr Gaul say that the fact that Mr Keogh placed himself and Majac in a position of conflict with QMI is no answer to that charge but is rather an independent and overlapping example of Mr Keogh's breaches of duty to QMI. They contend that there is a serious question to be tried on QMI's claim in respect of breaches of fiduciary duty by Mr Koegh, through Majac.
60 These submissions were supplemented by detailed oral submissions.
61 Mr Keogh and Majac submit that the plaintiffs' case reduces to the say-so of Dr Gaul about alleged oral agreements and understandings, which are denied, and brought in the face of Dr Gaul's own conduct of excluding a co-director and 50% owner of QMI and the QMI Trade Marks from information and participation in management to which Mr Keogh is entitled; termination of a distribution arrangement with Majac without board or shareholder approval; entering into a new distribution partnership with Symbio Australia without notifying, and in the face of express disapproval by, Mr Keogh; and holding himself out as "managing director" when he knows no such authorisation or delegation has been made.
62 Mr Keogh and Majac contend that, on the materials before it, the Court cannot be satisfied that there is a serious question or prima facie case which warrants injunctive relief. If the evidence remains as it is the Court cannot be satisfied that there is a probability that at the trial of the action QMI and Dr Gaul will be held entitled to relief.
63 The question of whether there is a serious question to be tried, or perhaps put more precisely in the context of s 1324(4) of the Corporations Act whether there is a sufficiently seriously arguable case of an actual or threatened contravention of the Corporations Act, must be considered through the lens of the claims made by QMI and Dr Gaul against Mr Keogh for breach of the Corporations Act and the nature of the interim relief sought.
64 In terms of the pleaded claim, first Mr Keogh is alleged to have breached his duties owed under ss 181, 182 and/or 183 of the Corporations Act by making the Copyright Representations, the Previously Clinivac Representations, the Previously Clinijet Representations, the TGA Representations, the Availability Representations and the FFP Representations. Much of the oral argument before me and evidence relied on by QMI and Dr Gaul focussed on Mr Keogh's conduct in making these representations. The interim relief sought in para 2(a) of the IP seeks to restrain conduct of this nature.
65 The Undertaking which has been given by Mr Keogh to the Court and which is in terms of para 2(a) of the IP, in effect, provides the relief sought. Subject to the impact on the question of costs, which I address below, no more need be said about the alleged breaches by Mr Keogh arising out of this conduct.
66 Secondly, Mr Keogh is alleged to have breached his duties owed under ss 181, 182 and/or 183 of the Corporations Act by using information that was confidential to QMI to produce the Majac Products. By the relief sought in paras 2(b) and (c) of the IP, QMI and Dr Gaul seek to restrain the sale of any of the Majac Products that were created or derived from chemical formulae which are the property of QMI or from formulae for the products offered for sale under the QMI Trade Marks or the 2017 Trade Marks.
67 I accept that if there is evidence to establish or ultimately prove, on the balance of probabilities, that Mr Keogh used information that was confidential to, or the property of, QMI to produce the Majac Products, that would amount to a sufficiently arguable case that Mr Keogh breached his duties owed to QMI under ss 181, 182 and/or 183 of the Corporations Act. The issue that arises is whether there is sufficient evidence before me for the plaintiffs to establish that is so.
68 The evidence relied on by QMI and Dr Gaul establishes that, in April 2020, Mr Keogh asked Mr Warner of Symbio Australia for "formulations and technical information" for QMI products and that, on 25 June 2020, he requested ACS to provide "copies of all Chemical formulae that are the property of QMI". It is apparent that Mr Keogh sought to obtain this information in a somewhat clandestine manner to the exclusion of Dr Gaul. However, based on the evidence before me, it is also apparent that the information sought was not provided to Mr Keogh.
69 The plaintiffs submit that I should infer, in light of the enquiries made by Mr Keogh and the subsequent production of the Majac Products in competition with the QMI products, that the Majac products were produced based on or using the formulae for QMI products. However, there is nothing in the evidence relied on by QMI and Dr Gaul that would permit me to draw that inference.
70 QMI and Dr Gaul also rely on "safety data sheets" which are published in relation to each QMI product, and submit that it is possible, based on those documents, to discern the composition of products. Those documents include, at part 3, "composition/information on ingredients". However, there was no evidence before me about how the material included there, which did not on my review seem to include a complete list of the ingredients in any of the products, might be used, in effect, to reverse engineer the formula for a particular product.
71 In my view, QMI and Dr Gaul have not established a sufficiently arguable case that Mr Keogh breached his duties owed to QMI under ss 181, 182 and/or 183 of the Corporations Act by using QMI's confidential information to produce the Majac Products.
72 Thirdly, Mr Keogh is alleged to have breached his duties owed under ss 181, 182 and/or 183 of the Corporations Act by producing and offering for sale the Majac Products. By the relief sought in para 2(d) of the IP, QMI and Dr Gaul seek to restrain Mr Keogh and Majac from offering for sale any product under the trade marks or brand names ProDet, DentiVac, DenJet and PlasClean.
73 As I understand it, QMI and Dr Gaul submit that as a director of Majac, which competes with QMI, Mr Keogh has placed himself in a position of conflict in breach of his duties owed to QMI or, alternatively, by producing and selling the Majac Products Mr Keogh is diverting business opportunities from QMI to Majac.
74 In support of those propositions, QMI and Dr Gaul rely on Fitzpatrick v Cheal (2012) 264 FLR 313; [2012] NSWSC 261. The facts of that case are complicated but, relevantly, there was an allegation of breach of ss 180, 181 and 182 of the Corporations Act and an allegation of breach of fiduciary duty owed by the defendant, Mr Cheal. In the context of considering whether that was so, Ward J (as her Honour then was) considered the authorities relating to the obligations of a fiduciary. QMI and Dr Gaul rely on [117] and [122] where her Honour said:
117 As to the equitable duties alleged to have been breached, Mr Evans notes that the essential obligation imposed on a fiduciary is that stated by Lord Hershell in Bray v Ford [1896] AC 44 at 51-2:
It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the respondent's, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect. It has, therefore, been deemed expedient to lay down this positive rule.
…
122 In Canadian Aero Service v O'Malley [1974] SCR 592; 40 DLR (3d) 371, Laskin J said:
An examination of the case law in this Court and in the Courts of other like jurisdictions on the fiduciary duties of directors and senior officers shows the pervasiveness of a strict ethic in this area of the law. In my opinion, this ethic disqualifies a director or senior officer from usurping for himself or diverting to another person or company with whom or with which he is associated a maturing business opportunity which his company is actively pursuing; he is also precluded from so acting even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company, or where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired.
(Emphasis added.)
(Original Emphasis.)
75 Ultimately, Ward J found, in the circumstances of the case before her Honour, that Mr Cheal had breached his statutory and fiduciary duties as a director in a number of ways.
76 There are a number of other cases in which the issue of conflict in the context of the personal interests of a director and those owed by the director to the company have been considered. One such case is Links Golf Tasmania Pty Ltd v Sattler (2012) 213 FCR 1 (Links Golf). In that case the plaintiff, who I will refer to as LGT, operated a golf course on land which it leased from the defendant, Mr Sattler. Mr Sattler also owned an adjoining piece of land on which he developed a second golf course. At the time of establishment of the second golf course, Mr Sattler was a director of LGT but, by the time the second golf course was operating as a business, he had resigned from that position. One argument advanced by LGT was that Mr Sattler's decision to carry on a competing business necessarily involved a conflict of interest and duty. This argument was distinct from any argument that Mr Sattler had breached his duties owed as a director to LGT by taking for himself an opportunity to develop the second golf course that should have been offered to LGT: Links Golf at [539].
77 Following a comprehensive review of the authorities Jessup J observed at [562] that "[i]t is … a striking feature of the authorities referred to above how rare have been the circumstances in which a court has been called on to deal with the pure case of a director's involvement in a competing business, without any additional or complicating factor". His Honour continued at [562]-[564]:
562 … I must accept that, in Australia, Bell v Lever Bros is good law to the extent that it stands for the proposition that merely by acting as a director of a competing company, or carrying on a competitive business on his or her own behalf, a company director will not be regarded as being in breach of his or her fiduciary obligations. …
563 Although nowhere so stated in terms, the principle with which the authorities are consistent is that carrying on business - including doing so by working as an executive director of a company - in competition with the company of which he or she is a non-executive director will not necessarily be regarded as involving a conflict of interest or duty. It cannot be assumed, as a matter of fact, that a situation of this kind will inescapably involve "a real or substantial possibility of a conflict between [the director's] personal interests and those of the persons whom he [or she] is bound to protect" (Hospital Products at 103 per Mason J). So understood, the principle is a very high-level one that could be used only as the broadest of starting points for the resolution of issues arising in a particular case.
564 Notwithstanding the heavily qualified nature of the legal principle on which LGT relies, to the extent that the defendants' case is to be understood as involving the proposition that Lord Blanesburgh's dictum in Bell v Lever Bros opens up as legitimate any and all kinds of competitive business to the director of a company, that proposition must be rejected. The question whether, in the light of the nature of the competitive business, the director's role in it and other relevant circumstances, the director's conduct would give rise to the sensible possibility of conflict, is not foreclosed by the dictum. At most, the dictum means that the mere fact of being the director of a company will not preclude the director from engaging in a competing business on his or her own account. But it leaves open any issues of actual conflict, or of conflict reasonably perceived to be within the range of sensible possibilities, arising on the facts of a particular case.
(Emphasis added.)
78 At [574] Jessup J observed that "[t]he question which equity requires the fiduciary to ask of himself or herself is not 'will my establishment of a second business deliver a benefit to the first?', but 'in the conduct of a second business, is it a substantial possibility that I will be required to make decisions, and to conduct myself generally, in circumstances where I will be confronted with a conflict?'". At [575] his Honour said:
In the nature of things, the prospect that Sattler, operating his own business at Lost Farm, would, from time to time if not regularly, be obliged to make decisions that might work to the relative advantage of Lost Farm over Barnbougle Dunes, or vice versa, could not be dismissed as insubstantial. Nothing in the evidence suggests otherwise. The situations in which Sattler might find himself facing a conflict may be of such subtlety that he himself would not recognise the fact of conflict. Even an attempt at even-handedness may not achieve the result which equity would require, which is that of undivided loyalty to the company of which the fiduciary is a director. …
79 In Australian Careers Institute Pty Ltd v Australian Institute of Fitness Pty Ltd (2016) 340 ALR 580; [2016] NSWCA 347 the New South Wales Court of Appeal upheld a finding that Mr Hornsey, a director of the respondent, had breached his duties as director by setting up and promoting a fitness education business known as the Sage Institute of Fitness which competed with the business conducted by the respondent. In the course of doing so, Sackville AJA (with whom Meagher JA agreed) referred to Links Golf at [563] and, at [135], observed that the conclusion reached there "appeared to be sound as a matter of principle". At [136]-[137] his Honour described the nature of the enquiry to be undertaken when determining whether a conflict arose:
136 In determining whether there is a conflict between the personal interests of a director of a company, and the director's duties to the company, it is necessary to identify the functions or responsibilities the director has undertaken in that capacity. As was said by the Full Federal Court in Grimaldi v Chameleon Mining NL (No 2), the actual functions or responsibilities assumed by the fiduciary determine the subject matter over which his or her obligations extend, at least for the purposes of deciding whether there is a conflict of interest and duty or a conflict between duties. While the functions or responsibilities of a director are generally framed in broad terms, the precise scope of the functions or responsibilities in a particular case is a question of fact. Thus, the content of fiduciary duties are moulded to the character of the particular relationship between the director and the company.
137 In assessing the circumstances of a case, it is important to bear in mind the protective rationale for the imposition of fiduciary duties. In Chan v Zacharia, Deane J discerned two distinct themes in the "fundamental rule" that a fiduciary is not permitted to put himself or herself in a position where duty and interest conflict:
"The first [theme] is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage."
(Footnotes omitted.)
80 These cases all included an alleged breach by a director of their fiduciary duties. No such allegation is made in this case. QMI and Dr Gaul only contend a breach by Mr Keogh of his statutory duties. However, it is well settled that a director who promotes his or her own personal interest by making or pursuing a gain in circumstances where there is a conflict, or real or substantial possibility of conflict, between their personal interests and those of the company will breach his or her statutory duty under s 181 of the Corporations Act (and, if that conduct involves misuse of information or their position, s 182 and s 183 of the Corporations Act): Australian Securities and Investments Commission v Adler (2002) 168 FLR 253 at [735]; Parker v Tucker (2010) 77 ACSR 525; [2010] FCA 263 at [72].
81 The question of whether Mr Keogh has breached those duties by placing himself in a position of conflict as between his personal interests and those owed by him as a director to QMI, by enabling Majac to offer the Majac Products for sale, is to be determined by reference to the facts. The apparent competition between QMI and Majac, who it seems operate in the same or similar markets selling similar products, is not of itself sufficient to make the claim good. There must be something more. In particular, it is necessary to identify Mr Keogh's functions or responsibilities as a director of QMI as they determine the subject matter over which his obligations extend, at least for the purposes of deciding whether there is a conflict of interest and duty or a conflict between duties.
82 The only evidence of Mr Keogh's responsibilities as a director of QMI is given by Dr Gaul who says that his role was limited to sales and marketing and that he had no input into QMI's management. How that role was undertaken vis a vis QMI is not the subject of evidence before me. However, Dr Gaul also says that the sales role was undertaken by Majac. According to Ms Carroll, Mr Keogh never received a salary or any dividends from QMI. It thus seems, on the evidence before me, that Mr Keogh's responsibilities were limited to sales and marketing which, with Dr Gaul's consent, he apparently undertook in a dual capacity: as a director of QMI; and as a director of Majac. Mr Keogh has now caused Majac to develop and sell the Majac Products. Arguably in doing so he has put himself in a position of conflict of duty to QMI in the sales and marketing of QMI products, albeit through Majac, and his own interests in promoting the sale of the Majac Products.
83 However, I am not satisfied that the evidence supports a seriously arguable case that Mr Keogh has breached his duties owed to QMI by diverting business opportunities from QMI to Majac. Dr Gaul says that Mr Keogh returned a large quantity of stock to Symbio Australia on 13 May 2020 without warning or explanation and points to correspondence, sent from Dr Gaul to Mr Keogh, which inquires about "a number of Pallets of Clinicol and Vibactum" received by Symbio Australia. In an earlier email, however, Dr Gaul approves the return of those products by Majac and says "[u]nsold Clinicol and Vibactum currently at MAJAC can be returned to Symbio for disposal and a credit will be issued for the returns". Dr Gaul's evidence deals only with the return of Clinicol and Vibactum products and makes no mention of any other QMI products. In contrast, as noted at [36] above, Ms Carroll's evidence is that QMI ceased supply of its products to Majac contrary to a distribution arrangement as a result of an alleged debt owed by Majac to QMI.
84 QMI and Dr Gaul submitted that I should put no weight on Ms Carroll's evidence, relying on Blatch v Archer (1774) 1 Cowp 63; 98 ER 969 and Jones v Dunkel (1959) 101 CLR 298. However, given that this is an interlocutory application I decline to adopt that approach: see s 75 Evidence Act 1995 (Cth). Ms Carroll's evidence can be given some weight. Considered in its totality, the evidence is equivocal. On the one hand, Dr Gaul's evidence is not sufficient to permit me to make the finding that QMI and Dr Gaul urge and, on the other, based on Ms Carroll's evidence an available inference is that Mr Keogh developed the Majac Products because QMI stopped supply of its products to Majac. Based on the evidence it is not sufficiently clear that, at the time Majac began producing and selling the Majac Products, there still existed a relevant business opportunity of QMI to be diverted.
85 On balance, I am satisfied that there is a prima facie or sufficiently arguable case of contravention by Mr Keogh of s 181 of the Corporations Act insofar as he has enabled or caused Majac to offer the Majac Products for sale and, in doing so, placed himself in a position of conflict. I am accordingly satisfied that there is a serious question to be tried.