SBA Music Pty Ltd v Hall

SBA Music Pty Ltd v Hall - [2015] FCA 1079 - FCA 2015 case summary — Zoe

[7]

The Undisclosed Shooting Star Agreement

That between about April 2008 and March 2012 the Defendant contravened s 182(1) of the Corporations Act 2001 (Cth) by improperly using his position as an officer of SBA Music Pty Ltd and SBA Music Solutions Pty Ltd (collectively the Plaintiffs) to gain an advantage and/or cause detriment to the Plaintiffs by: (a) placing himself in a position where he became aware of an actual or maturing business opportunity relating to the supply of music licensing and other related services ultimately to Torch Media Pty Ltd (Torch Media), which he did not disclose to the Plaintiffs and instead took up for his own benefit or the benefit of The Shooting Star Picture Company Pty Ltd (Shooting Star); and (b) causing or facilitating the Plaintiffs to enter into an agreement with Shooting Star (the Shooting Star Agreement) in circumstances where he intended to or had entered into an undisclosed agreement with Shooting Star (the Undisclosed Shooting Star Agreement), pursuant to which he stood to, and did gain an advantage for himself and Shooting Star.
That between about April 2008 and March 2012 the Defendant contravened s 183(1) of the Corporations Act 2001 by obtaining information relating to the supply of music services ultimately to Torch Media by reason of his position as Director of the First Plaintiff, or an officer of both of the Plaintiffs, and improperly using such information to gain an advantage and/or cause detriment to the Plaintiffs by: (a) placing himself in a position where he obtained information concerning an actual or maturing business opportunity relating to the supply of music licensing and other related services ultimately to Torch Media, which he did not disclose to the Plaintiffs and instead took up for his own benefit or the benefit of Shooting Star; and (b) causing or facilitating the Plaintiffs to enter into the Shooting Star Agreement in circumstances where he intended to or had entered into the Undisclosed Shooting Star Agreement, pursuant to which he stood to, and did gain an advantage for himself and Shooting Star.
That between about April 2008 and March 2012 the Defendant breached his fiduciary duties owed to the Plaintiffs by not avoiding an actual or potential conflict of interest, not avoiding the making of a benefit by reason of or by use of his position as a fiduciary and not accounting to the Plaintiffs for such a gain by: (a) placing himself in a position where he became aware of an actual or maturing business opportunity relating to the supply of music licensing and other related services ultimately to Torch Media during or at the time that he was working for and on behalf of the Plaintiffs, which he did not disclose to them and instead took up for his own benefit; (b) causing or facilitating the Plaintiffs to enter into the Shooting Star Agreement in circumstances where he intended to or had entered into the Undisclosed Shooting Star Agreement pursuant to which he stood to and did receive a financial benefit for performing work in his personal capacity; (c) intending to perform, and then performing and continuing to perform, work on behalf of Shooting Star that was the same or of a similar nature that the Plaintiffs provide to its clients or which they were capable or able to provide to its clients; and (d) intending to receive, and then receiving, monetary benefits from Shooting Star.

[8]

The Undisclosed Torch Agreement 4. That between about April 2010 and 31 December 2012 the Defendant contravened s 182(1) of the Corporations Act 2001 by improperly using his position as an officer of the Plaintiffs to gain an advantage and/or cause detriment to the Plaintiffs by: (a) placing himself in a position where he became aware of an actual or maturing business opportunity relating to the supply of music licensing and other related services to Torch Media, which he did not disclose to the Plaintiffs and instead took up for his own benefit; (b) causing or facilitating the Plaintiffs to enter into an agreement with Torch Media (the Torch Agreement) in circumstances where he intended to or had entered into an undisclosed agreement with Torch Media (the Undisclosed Torch Agreement), pursuant to which he stood to, and did gain an advantage for himself; and (c) using his position to make use of the Plaintiffs' resources and staff in pursuance of the Undisclosed Torch Agreement. 5. That between about April 2010 and 31 December 2012 the Defendant contravened s 183(1) of the Corporations Act 2001 by obtaining information relating to the supply of music services to Torch Media by reason of his position as Director of the First Plaintiff, or an officer of both of the Plaintiffs, and improperly using such information to gain an advantage and/or cause detriment to the Plaintiffs by: (a) placing himself in a position where he obtained information concerning an actual or maturing business opportunity relating to the supply of music licensing and other related services to Torch Media, which he did not disclose to the Plaintiffs and instead took up for his own benefit; (b) causing or facilitating the Plaintiffs to enter into the Torch Agreement in circumstances where he intended to or had entered into the Undisclosed Torch Agreement, pursuant to which he stood to, and did gain an advantage for himself; and (c) using the Plaintiffs' resources and information in pursuance of the Undisclosed Torch Agreement. 6. That between about April 2010 and 31 December 2012 the Defendant breached his fiduciary duties owed to the Plaintiffs by not avoiding an actual or potential conflict of interest, not avoiding the making of a benefit by reason of or by use of his position as a fiduciary and not accounting to the Plaintiffs for such a gain by: (a) placing himself in a position where he became aware of an actual or maturing business opportunity relating to the supply of music licensing and other related services to Torch Media during or at the time that he was working for and on behalf of the Plaintiffs, which he did not disclose to them and instead took up for his own benefit; (b) causing or facilitating the Plaintiffs to enter into the Torch Agreement in circumstances where he intended to or had entered into the Undisclosed Torch Agreement pursuant to which he stood to and did receive a financial benefit for performing work in his personal capacity; (c) intending to perform, and then performing and continuing to perform, work on behalf of Torch Media that was the same or of a similar nature that the Plaintiffs provide to its clients or which they were capable or able to provide to its clients; (d) intending to receive, and then receiving, monetary benefits from Torch Media; and (e) using the Plaintiffs' resources and staff in pursuance of the Undisclosed Torch Agreement.

[9]

Diversion of the MyStore Opportunity 7. That between about May 2010 and December 2012 the Defendant contravened s 182(1) of the Corporations Act 2001 by improperly using his position as an officer of the Plaintiffs to gain an advantage and/or cause detriment to the Plaintiffs by: (a) obtaining information relating to the acquisition of the MyStore business (the MyStore Acquisition Opportunity) by reason of his position with the Plaintiffs and then diverting the benefits of the MyStore Acquisition Opportunity for his own benefit or the benefit of a third party; and (b) using his position to make use of the Plaintiffs' resources, including staff, email facilities, and computer networks, for his own benefit in pursuance of the MyStore Acquisition Opportunity. 8. That between about May 2010 and December 2012 the Defendant contravened s 183(1) of the Corporations Act 2001 by obtaining information relating to the acquisition of the MyStore assets by reason of his position as Director of the First Plaintiff, or an officer of both the Plaintiffs, and improperly using such information to gain an advantage and/or cause detriment to the Plaintiffs by: (a) obtaining and using information relating to the MyStore Acquisition Opportunity by reason of his position with the Plaintiffs and then diverting the benefits of the MyStore Acquisition Opportunity for his own benefit or the benefit of a third party; and (b) using the Plaintiffs' resources and information, including staff, email facilities, and computer networks, for his own benefit in pursuance of the MyStore Acquisition Opportunity. 9. That between about May 2010 and December 2012 the Defendant breached his fiduciary duties owed to the Plaintiffs by not avoiding an actual or potential conflict of interest, not avoiding the making of a benefit by reason of or by use of his position as a fiduciary and not accounting to the Plaintiffs for such a gain by: (a) obtaining information relating to the MyStore Acquisition Opportunity by reason of his position with the Plaintiffs; (b) exercising his powers and discharging his duties with the Plaintiffs, and placing himself in a position where he used his positions with the Plaintiffs, and the information he had obtained from those positions, to divert to himself the benefit of the MyStore Acquisition Opportunity; and (c) Using the Plaintiffs' resources, or causing the Plaintiffs' resources to be used, including staff, email facilities, and computer networks, for his own benefit in pursuance of the MyStore Acquisition Opportunity.

[10]

Misuse of Confidential Information 10. That between about February 2011 and July 2011 the Defendant contravened s 182(1) of the Corporations Act 2001 by improperly using his position as an officer of the Plaintiffs to gain an advantage and/or cause detriment to the Plaintiffs by: (a) obtaining information relating to the Plaintiffs' "Audio S Software encryption tool" by reason of his position with the Plaintiffs and then disclosing and using that information for his own benefit; and (b) using his position to obtain confidential emails from the Plaintiffs' computer networks and instructing, directing, causing, or being recklessly indifferent in allowing Mr Silla to archive and transfer such emails to the MyStore computer networks for future use for his own benefit or the benefit of Mr Silla. 11. That between about February 2011 and July 2011 the Defendant contravened s 183(1) of the Corporations Act 2001 by obtaining confidential information relating to the Plaintiffs' "Audio S Software encryption tool", and emails from the Plaintiffs' computer networks, by reason of his position as Director of the First Plaintiff, or an officer of both Plaintiffs, and improperly using such information to gain an advantage and/or cause detriment to the Plaintiffs by: (a) obtaining information relating to the Plaintiffs' "Audio S Software encryption tool" by reason of his position with the Plaintiffs and then disclosing and using that information for his own benefit; and (b) obtaining confidential emails from the Plaintiffs' computer networks and instructing, directing, causing, or being recklessly indifferent in allowing Mr Silla to archive and transfer such emails to the MyStore computer networks for future use for his own benefit or the benefit of Mr Silla. 12. That between about February 2011 and July 2011 the Defendant breached his fiduciary duties owed to the Plaintiffs, and his equitable obligations of confidence, by: (a) obtaining information relating to the Plaintiffs' "Audio S Software encryption tool" by reason of his position with the Plaintiffs and then disclosing and using that information for his own benefit; and (b) obtaining confidential emails from the Plaintiffs' computer networks and instructing, directing, causing, or being recklessly indifferent in allowing Mr Silla to archive and transfer such emails to the MyStore computer networks for future use for his own benefit or the benefit of Mr Silla.

[12]

THE COURT ORDERS THAT: 15. The Defendant pay to the Plaintiffs equitable compensation and/or compensation pursuant to s 1317H of the Corporations Act 2011 in respect of the declared contraventions and breaches (paragraphs 1 to 14 of these Orders) assessed in the sum of $2,273,374. 16. Within 7 days' of these orders, the Defendant deliver up to the Plaintiffs' lawyers, all of the documents in his possession, custody or control which are not in the public domain and were obtained directly or indirectly as a result of, or in the course of, the Defendant's engagement with the First or Second Plaintiff, including: (a) Any confidential information belonging to the First or Second Plaintiff or commercially sensitive information reasonably to be regarded as confidential from its nature and content; (b) Any intellectual property belonging to the First or Second Plaintiff; (c) Any documents relating to the business opportunities, future developments, or business practices of the First or Second Plaintiff or its suppliers or customers; (d) Customer or supplier lists; (e) Information relating to the business affairs of customer or suppliers to the First or Second Plaintiff, including their confidential or commercially sensitive information; and (f) The confidential information comprised of the Audio S Encryption Tool and the emails of Ms Grant (including using the email address christinagrant@sbamusic.com.au). 17. The Defendant be restrained from retaining or using any of the information or documents referred to in paragraph 16 above. 18. The Cross-Claim be dismissed. 19. The Defendant pay the Plaintiffs' costs of and incidental to the proceedings (including, but not limited to, the Plaintiffs' Application, the Cross-Claim, and the Interlocutory Applications), subject to the Plaintiffs having a period of 14 days from Judgment to make an application for any other order as to costs. 20. Orders 1 and 2 made on 11 September 2013 in relation to security for costs paid by the First or Second Plaintiff be vacated.

[16]

REASONS FOR JUDGMENT 1 SBA Music Pty Ltd (SBA Music) and SBA Music Solutions Pty Ltd (SBA Solutions) conduct a business (SBA) that provides music "solutions" to retail stores and other businesses, including developing themed music and videos, supplying software and hardware solutions to deliver themed music and videos, and dealing with associated licencing and royalty issues. In March 2000, SBA Music engaged Mr Wayne Hall as a consultant. Over the following years, Mr Hall occupied various different positions as a senior manager of SBA Music and SBA Solutions. For a period of over eight years from July 2004, he was a director of SBA Music. 2 In August 2013, SBA Music and SBA Solutions commenced proceedings against Mr Hall alleging that, whilst he was engaged as a senior manager with them, Mr Hall directed business opportunities away from SBA and towards himself and other businesses operated or controlled by him. They sought compensation for breach by Mr Hall of fiduciary duties owed to them, damages for breach by Mr Hall of his contractual engagement with them, and compensation pursuant to s 1317H of the Corporations Act 2001 (Cth) (Corporations Act) arising from Mr Hall's breach of his statutory duties as a director or officer under ss 181, 182 and 183 of the Corporations Act. 3 Mr Hall filed a defence to the proceedings. He also filed a cross-claim in which he claimed damages or equitable compensation from SBA Music for alleged breach of his consultancy agreement. In September 2014, however, Mr Hall filed a debtor's petition and was declared bankrupt. Orders were subsequently made granting SBA Music and SBA Solutions leave pursuant to s 58(3) of the Bankruptcy Act 1966 (Cth) to take fresh steps in and to continue with these proceedings. The matter was then set down for hearing. 4 At the hearing of the matter on 25 November 2014, Mr Hall was represented by counsel. Counsel advised that Mr Hall did not oppose the orders sought by SBA Music and SBA Solutions and did not oppose judgment being entered. Nevertheless, the hearing proceeded, and SBA Music and SBA Solutions read a number of affidavits and tendered a number of exhibits in support of their case for relief. Having read and considered that material, I granted the relief sought. That relief included the making of a number of declarations that Mr Hall had breached his fiduciary and statutory duties as an officer of SBA Music and SBA Solutions, an order that Mr Hall pay compensation to SBA Music and SBA Solutions assessed in the sum of $2,273,374, and some ancillary orders. Mr Hall's cross-claim was dismissed. 5 These are my reasons for granting that relief. The facts referred to throughout these reasons are the facts established by the affidavits and other evidence tendered and relied upon by SBA Music and SBA Solutions at the hearing. None of that evidence was challenged.

[17]

Factual background 6 Mr Hall was first engaged by SBA Music in March 2000. The terms of Mr Hall's engagement included that he would provide management services to SBA Music as an independent contractor trading under the business name Soundmark Solutions (Soundmark). Mr Hall also conducted a business providing telephone-on-hold services using the Soundmark business name. The terms of his engagement with SBA Music permitted him to continue to operate the Soundmark business so long as it did not conflict with his duties to SBA Music and SBA Solutions, or otherwise impact on his ability to perform those duties. 7 Between about 20 March 2000 and October 2002, Mr Hall was designated General Manager of SBA Music. From October 2002 to March 2006, he was designated Strategic and Business Development Manager of SBA Music. Mr Hall was then reappointed General Manger of SBA Music and remained in that position until his engagement was terminated on 13 December 2012. Between 8 July 2004 and 13 December 2012, Mr Hall was a director of SBA Music. 8 Mr Hall was the most senior manager of SBA Music and SBA Solutions. His duties included: (a) managing the daily running of SBA's business; (b) responsibility for strategic direction and planning of SBA Music; (c) managing SBA's client relationships, including marketing and relationship building; (d) securing new business opportunities for SBA Music and SBA Solutions; (e) liaising with and building relationships with suppliers and licencing organisations on behalf of SBA Music; (f) recruiting, supervising and managing the staff of SBA Music; and (g) overseeing SBA Music's finances and expenditure and SBA Solutions' revenue. 9 As part of his engagement with SBA Music and SBA Solutions, Mr Hall worked without direct supervision and acted independently of the directors of SBA Music and SBA Solutions. He had authority to enter into and negotiate contracts on behalf of both SBA Music and SBA Solutions. He also had significant autonomy in relation to his dealings with the clients of SBA Music and SBA Solutions, as well as SBA Music's license providers. He participated in making decisions that affected the whole or substantial part of the business conducted by both SBA Music and SBA Solutions, and had the capacity to significantly affect SBA's financial standing. 10 The other directors of SBA Music and SBA Solutions were accustomed to act in accordance with the wishes, advice and recommendations of Mr Hall.

[18]

Relevant principles and statutory provisions 11 During the period he was a director of SBA Music, Mr Hall was subject to the statutory duties in ss 181-183 of the Corporations Act. As a director, he also owed fiduciary duties to SBA Music: Breen v Williams (1996) 186 CLR 71 (Breen v Williams) at 107. 12 Mr Hall's fiduciary and statutory duties applied despite his status as an independent contractor. Notwithstanding that Mr Hall was engaged as an independent contractor, he was nevertheless capable of being a director, or an officer of a corporation pursuant to s 9 of the Corporations Act, and a fiduciary of both SBA Music and SBA Solutions: Redwood Anti-Ageing Pty Ltd v Knowles (2013) 101 IPR 358; [2013] NSWSC 508 at [58]; Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 at [68]; and Equity 8 Pty Limited v Shaw Stockbroking Limited [2007] NSWSC 413 (Equity 8 Pty Limited) at [43]-[58]; Commonwealth v Davis Samuel Pty Ltd (No 7) (2013) 282 FLR 1; 35 ACSR 258 (Commonwealth v Davis Samuel) at [297]-[312]. 13 Further, by reason of the position held, and the duties performed by Mr Hall, Mr Hall owed fiduciary duties to both SBA Music and SBA Solutions. The categories of fiduciary relationships are not closed: Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 (Hospital Products Ltd) at 68 per Gibbs CJ; Breen v Williams at 107. The critical feature of fiduciary relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position: Hospital Products Ltd at 96-97 per Mason J. 14 Where reliance is placed on an independent contractor in relation to tasks of special responsibility critical to the financial and reputational well-being of the enterprise, such reliance and the trust that it involves may cause the contractor to owe fiduciary duties: Equity 8 Pty Limited at [57] citing Hospital Products Ltd; Canadian Aero Service Ltd v O'Malley (1973) 40 DLR (3d) 371 (Canadian Aero Service); Re Morvah Consols Tin Mining Company (1875) 2 Ch D 1; Smith v French [2000] VSC 381; and Minlabs Pty Ltd v Assaycorp Pty Ltd (2001) 37 ACSR 509. 15 In Commonwealth v Davis Samuel, the following factors (at [306]) were found to be relevant in finding that an independent contractor owed fiduciary duties to the Commonwealth: (a) there was a clear relationship of confidence; (b) there was an undertaking by the contractor to provide specified services to the Commonwealth in the interests of the Commonwealth, which were to be carried out in a way that was in large measure indistinguishable from those carried out by an employee; (c) the contractor had scope unilaterally to exercise a power or discretion which may affect the rights of the Commonwealth which was, therefore, put in a position of vulnerability because of access given to the Commonwealth's facilities; (d) the Commonwealth was dependent on and vulnerable to the contractor; and (e) the contractor was provided with access to confidential information and obliged to respect the confidence of the Commonwealth in that information. 16 Mr Hall's position had each of these qualities. 17 Further, such duties may be more readily implied where a person is engaged as a contractor or consultant, but occupies a position akin to that occupied by an employee: Equity 8 Pty Limited at [32]. In the present case, Mr Hall held a position that was akin to that occupied by an employee. 18 Pursuant to s 9 of the Corporations Act, an "officer" of a corporation is defined to include a person: (a) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or (b) who has the capacity to affect significantly the corporation's financial standing; or (c) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation). 19 Mr Hall's position and duties were such that he was clearly an officer of both SBA Music and SBA Solutions. 20 As a director of SBA Music and an officer of both SBA Music and SBA Solutions, Mr Hall was subject to the statutory duties contained in ss 181-183 of the Corporations Act and owed fiduciary duties to those companies. 21 The content of fiduciary duties is often expressed in terms of the "conflicts" rule and the "profits" rule: Chan v Zacharia (1984) 154 CLR 178 (Chan v Zacharia) at 198-199 per Deane J. The two rules, whilst overlapping, are distinct: Chan v Zacharia at 199 per Deane J. The duties involve the following (see Manildra Laboratories v Campbell [2009] NSWSC 987 (Manildra) at [57] per McDougall J): (a) a fiduciary obligation not to obtain a personal benefit by use of the fiduciary's position or from an opportunity or knowledge gained by the fiduciary by reason of that position; (b) a fiduciary obligation to avoid conflict, or a real or substantial possibility of conflict, between the interests of the company and the fiduciary's own interests (and interests of or duties owed by him or her to others); and (c) a fiduciary obligation to account to the company for any benefit or gain obtained by him or her in breach of either of those duties. 22 The "conflicts" rule is that a fiduciary must avoid actual or significant possibility of conflict between fiduciary duty and personal interest in the pursuit or possible receipt of a benefit or gain: see Chan v Zacharia at 198 per Deane J. The fiduciary duty with respect to a "conflict of interest" is shorthand for a conflict between the duty owed by the fiduciary to the principal and the interests of the fiduciary. It is to avoid particular circumstances, involving use of position or of information gained by virtue of their position or role, to gain an advantage for themselves or another, or to the detriment of the principal. It relates to the fiduciary not placing him or herself in a position in which his or her own interest in a transaction within the sphere of the principal's business operations conflicts with the fiduciary's duty to act solely in the principal's interest in relation to that transaction: Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421; 40 ACSR 487 at [22]. 23 The "profits" rule is that a fiduciary must avoid making a benefit or gain obtained or received by reason of or by use of the fiduciary position or of opportunity or knowledge resulting from it: Chan v Zacharia at 198-199 per Deane J. A fiduciary cannot divert to him or herself, or another person or company with whom or with which he or she is associated, a maturing business opportunity which the company is actively pursuing: Canadian Aero Service at [25] per Laskin J. A maturing business opportunity often takes the form of an opportunity to supply some services or goods which is approaching the stage where a contract can be formed but has not yet reached it; an unconscionable diversion of such an opportunity amounts to a breach of the "profits" rule: Weldon & Co v Harbinson [2000] NSWSC 272 (Weldon v Harbinson) at [73]. 24 Diverting business or profits, including maturing business opportunities which came to the fiduciary through or in the course of the relevant engagement with the principal would amount to a breach of the fiduciary duty: Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488; Weldon v Harbinson at [10] per Bryson J; Canadian Aero Service. 25 A fiduciary's position inhibits him or her not only in respect of business opportunities that the company is actively pursuing, but also opportunities in which the company might reasonably be expected to be interested, given its current line of business. A fiduciary may also be liable for misuse of knowledge or position where the fiduciary misuses his fiduciary office in order to ascertain information, for example, obtaining the relevant information by purporting to be acting in a representative capacity or having sought the information expressly in that capacity, when in actuality intending to act in a private capacity. 26 It is not necessary to show that the opportunity taken by the fiduciary is one that could have been exploited by the company: Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162; Showtime Management Australia Pty Ltd v Showtime Presents Pty Ltd [2008] NSWSC 618 at [109] per Austin J. The reason for that is that, because of the ongoing fiduciary duty owed, the pursuit of the opportunity by the fiduciary gives rise to a possible conflict between the director's personal interest and ongoing duty, which is unacceptable. 27 The fiduciary obligation to account exists where there is a profit or benefit obtained in circumstances where there was a conflict, or possible conflict, between interest and duty, or by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge derived in consequence of occupation of the fiduciary position: Hospital Products Ltd at 107 per Mason J. 28 Each of ss 182 and 183 of the Corporations Act effectively reflects a fiduciary obligation under the general law: Manildra at [131]; Landmark Underwriting Agency Pty Ltd v Kilborn [2006] NSWSC 1108 at [71], referring to Rosetex Company Pty Ltd v Licata (1994) 12 ACSR 779 and Forkserve Pty Ltd v Pacchiarotta (2000) 50 IPR 74; [2000] NSWSC 979 at [28]. It follows that if a breach of a general law fiduciary duty is made out, it is likely that there will also be a contravention of ss 182 and/or 183 of the Corporations Act: Manildra at [133]. 29 Section 182(1) of the Corporations Act provides that: A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. 30 Section 183(1) of the Corporations Act provides that: A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. 31 The requirement of acting "improperly" does not necessarily equate to dishonest conduct: Kwok v R (2007) 64 ACSR 307 at [80] per Santow JA. A director of a company may act improperly with no intention of acting dishonestly or otherwise than in the best interests of the company as a whole: Chew v The Queen (1992) 173 CLR 626 (Chew v The Queen) at 640 per Dawson J. 32 The relevant "improper" conduct, also referred to as "impropriety", in the use of a position (or information), may consist in an abuse of the power or authority which the position of director confers: R v Byrnes (1995) 183 CLR 501 (Byrnes) at 512 per Brennan, Deane, Toohey and Gaudron JJ. Where there is such an abuse for the purpose of gaining an advantage for himself, herself or another person, or of causing detriment to the corporation, both elements of the provision are established: Byrnes at 512. 33 The test of impropriety, in the sense of "improper use", is objective: Byrnes at 514-515. In Byrnes, the High Court held that impropriety does not depend on consciousness of impropriety, but consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case. 34 Accordingly, the majority in Byrnes held (at 517) that a fiduciary who exercises an authority or power for the personal benefit or gain of the fiduciary (or a third party) without the beneficiary's consent, acts improperly. 35 The decision in Byrnes was followed in Doyle v Australian Securities and Investments Commission (2005) 227 CLR 18, where it was held at [35], that conduct would be relevantly improper if it involved a breach of the standards of conduct that would be expected of a person in the director's position by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case, including the commercial context. Such standards are expressed according to objective criteria. See also Forkserve Pty Limited v Jack (2000) 19 ACLC 299 (Forkserve v Jack) at [120] per Santow J, referring to Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1989) 52 SASR 54, Southern Resources Ltd v Residues Treatment and Trading Co Ltd (1990) 56 SASR 455. 36 In Grove v Flavel (1986) 43 SASR 410, it was held that a director who used knowledge that a company had liquidity difficulties breached the statutory duty. The court also held (at 420) that "improper" is not a term of art. It is to be understood in its commercial context to refer to conduct which is inconsistent with the "proper" discharge of the duties, obligations and responsibilities of the officer concerned (cited with approval in Byrnes at 514). 37 A director may breach the section even if the purpose of gaining an advantage by the director is not achieved: Forkserve v Jack at [119] per Santow J, referring to Chew v The Queen. 38 It follows that what is improper depends in certain respects on the position at general law, and, in particular, in relation to the precise scope of the fiduciary duty owed by directors to the company. Where there is no breach of fiduciary duty and no breach of obligation in respect of confidential information, then there will be no contravention of ss 182 or 183 of the Corporations Act: Manildra at [133] per McDougall J.

[20]

The Undisclosed Shooting Star Agreement 41 In mid to late 2007 and early 2008, Mr Hall was involved in dealings, on behalf of SBA Music and SBA Solutions, with Torch Media in relation to the supply of music-related services to Torch Media. The proposal involved the ultimate supply of music solutions to Woolworths and its subsidiaries. 42 Ultimately, in or about April 2008, Mr Hall caused SBA Solutions to enter into arrangements whereby it provided services to Woolworths' stores, but it did so on behalf of Torch Media and via an arrangement with Shooting Star. It is unclear exactly why Shooting Star was interposed in the arrangements. 43 The difficulty for Mr Hall is that in March 2008, shortly before these arrangements were put in place, and unbeknownst to the directors of SBA Music or SBA Solutions, Mr Hall entered into an agreement whereby he provided (through Soundmark) personal consulting services to Shooting Star. The services related to the very services to be provided to Woolworths via Torch Media and Shooting Star. Under the agreement, Mr Hall invoiced Shooting Star approximately $33,750 per quarter. 44 Mr Hall was in a position of conflict arising from his undisclosed consultancy agreement with Shooting Star. He caused SBA Music and SBA Solutions to enter into the arrangements involving Torch Media, Shooting Star and Woolworths in circumstances where he stood to personally benefit from Shooting Star's interposition in the arrangements. He did not disclose his personal connection or benefit from the arrangements to the directors of SBA Music and SBA Solutions. 45 Perhaps more significantly, SBA Music and SBA Solutions could have provided the relevant music services directly to Torch Media. They could also have provided the services that Mr Hall supplied pursuant to his undisclosed agreement with Shooting Star. Had this business not been diverted to Shooting Star and Mr Hall, SBA Music and SBA Solutions would have earned a profit of $1,106,286 (in respect of the services Shooting Star provided to Torch Media) and $378,222 (in respect of the services provided under the Undisclosed Shooting Star Agreement). 46 Mr Hall breached his fiduciary and statutory duties in diverting his business away from SBA Music and SBA Solutions, and in not disclosing the personal benefit he derived from the arrangements.

[22]

Diversion of the MyStore business opportunity 52 In June 2007, SBA Music entered into an agreement with MyStore, pursuant to which SBA Music supplied its Audio Play S system hardware and music programming services to MyStore clients at a fixed rate. In 2009, as a result of financial and economic difficulties being encountered by MyStore, that fixed rate was reduced. In the course of discussions concerning the reduction of the rate, it was proposed that if the MyStore business was to be sold, SBA Music would be given the first option to buy the MyStore business. Mr Hall was aware of this proposal. 53 In August 2009, administrators were appointed to MyStore. In September 2009, MyStore entered into a Deed of Company Arrangement. At this time, the directors of SBA asked Mr Hall to negotiate with the MyStore administrators in relation to, amongst other things, obtaining MyStore's clients for the benefit of SBA. 54 In May 2010, the administrators offered to sell the assets of MyStore's business to SBA. This offer was put to Mr Hall in his capacity as an officer of SBA. Mr Hall did not, however, disclose this offer to the directors of SBA Music or SBA Solutions. Rather, he acquired that business opportunity himself. 55 Following his acquisition of the MyStore assets, Mr Hall was actively involved in the conduct of the MyStore business. At the same time, in his capacity as an officer of SBA Music and SBA Solutions, he managed SBA's contractual and commercial relationship with MyStore. He did not reveal his ownership of or involvement with MyStore to the directors of SBA Music or SBA Solutions. 56 Mr Hall was in a clear position of conflict in relation to the acquisition and subsequent conduct of the MyStore business. He used his position as an officer of SBA Music and SBA Solutions to gain an advantage for himself. He accordingly breached his fiduciary and statutory duties. 57 The present value of the MyStore business that, but for Mr Hall's breaches of duty, would have been acquired by SBA Music or SBA Solution, is $429,447. Had SBA Music and/or SBA Solutions operated the business post-liquidation, they would have earned a profit of $100,373 up to December 2012.

[25]

Relief 62 The Court has a broad discretionary power to make declarations under s 21 of the Federal Court of Australia Act 1976 (Cth). That power, however, is confined by the considerations which mark out the boundaries of judicial power. It follows that declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions, and the person seeking the relief must have "a real interest" in the claim of the controversy: Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 582; Forster v Jododex Australia Pty Limited (1972) 127 CLR 421 at 437 per Gibbs J; University of New South Wales v Moorehouse (1975) 133 CLR 1 at 10 per Gibbs J. 63 In this matter, the declaratory relief sought by SBA Music and SBA Solutions is directed to the determination of a legal controversy. That controversy is whether a former officer, Mr Hall, breached the fiduciary and statutory duties he owed them and ultimately whether he is liable to compensate them for the losses incurred as a result of those breaches. 64 These are not abstract or hypothetical questions. SBA Music and SBA Solutions have a real interest in quelling this controversy. 65 In these circumstances, it is appropriate to grant the declaratory relief sought by SBA Music and SBA Solutions concerning the breaches of duties by Mr Hall. 66 SBA Music and SBA Solutions led evidence from an expert forensic accountant, Mr Andrew Firth, to quantify the total loss or damage suffered by SBA Music and SBA Solutions as a result of Mr Hall's breaches of duty. Mr Firth assessed the total loss or damage at $2,273,374. The basis of that assessment was clearly and cogently explained in Mr Firth's report. In all the circumstances, it is appropriate to order Mr Hall to pay equitable compensation, or compensation pursuant to s 1317H of the Corporations Act, in respect of the declared contraventions and breaches assessed in the sum of $2,273,374. 67 It is also appropriate to grant SBA Music and SBA Solutions the ancillary relief sought in respect of the misuse of confidential information by Mr Hall, including that Mr Hall deliver up and be restrained from using any of that information.

[28]

The Undisclosed Shooting Star Agreement (1) That between about April 2008 and March 2012 the Defendant contravened s 182(1) of the Corporations Act 2001 (Cth) by improperly using his position as an officer of SBA Music Pty Ltd and SBA Music Solutions Pty Ltd (collectively the Plaintiffs) to gain an advantage and/or cause detriment to the Plaintiffs by: (a) placing himself in a position where he became aware of an actual or maturing business opportunity relating to the supply of music licensing and other related services ultimately to Torch Media Pty Ltd (Torch Media), which he did not disclose to the Plaintiffs and instead took up for his own benefit or the benefit of The Shooting Star Picture Company Pty Ltd (Shooting Star); and (b) causing or facilitating the Plaintiffs to enter into an agreement with Shooting Star (the Shooting Star Agreement) in circumstances where he intended to or had entered into an undisclosed agreement with Shooting Star (the Undisclosed Shooting Star Agreement), pursuant to which he stood to, and did gain an advantage for himself and Shooting Star. (2) That between about April 2008 and March 2012 the Defendant contravened s 183(1) of the Corporations Act 2001 by obtaining information relating to the supply of music services ultimately to Torch Media by reason of his position as Director of the First Plaintiff, or an officer of both of the Plaintiffs, and improperly using such information to gain an advantage and/or cause detriment to the Plaintiffs by: (a) placing himself in a position where he obtained information concerning an actual or maturing business opportunity relating to the supply of music licensing and other related services ultimately to Torch Media, which he did not disclose to the Plaintiffs and instead took up for his own benefit or the benefit of Shooting Star; and (b) causing or facilitating the Plaintiffs to enter into the Shooting Star Agreement in circumstances where he intended to or had entered into the Undisclosed Shooting Star Agreement, pursuant to which he stood to, and did gain an advantage for himself and Shooting Star. (3) That between about April 2008 and March 2012 the Defendant breached his fiduciary duties owed to the Plaintiffs by not avoiding an actual or potential conflict of interest, not avoiding the making of a benefit by reason of or by use of his position as a fiduciary and not accounting to the Plaintiffs for such a gain by: (a) placing himself in a position where he became aware of an actual or maturing business opportunity relating to the supply of music licensing and other related services ultimately to Torch Media during or at the time that he was working for and on behalf of the Plaintiffs, which he did not disclose to them and instead took up for his own benefit; (b) causing or facilitating the Plaintiffs to enter into the Shooting Star Agreement in circumstances where he intended to or had entered into the Undisclosed Shooting Star Agreement pursuant to which he stood to and did receive a financial benefit for performing work in his personal capacity; (c) intending to perform, and then performing and continuing to perform, work on behalf of Shooting Star that was the same or of a similar nature that the Plaintiffs provide to its clients or which they were capable or able to provide to its clients; and (d) intending to receive, and then receiving, monetary benefits from Shooting Star.

[29]

The Undisclosed Torch Agreement (4) That between about April 2010 and 31 December 2012 the Defendant contravened s 182(1) of the Corporations Act 2001 by improperly using his position as an officer of the Plaintiffs to gain an advantage and/or cause detriment to the Plaintiffs by: (a) placing himself in a position where he became aware of an actual or maturing business opportunity relating to the supply of music licensing and other related services to Torch Media, which he did not disclose to the Plaintiffs and instead took up for his own benefit; (b) causing or facilitating the Plaintiffs to enter into an agreement with Torch Media (the Torch Agreement) in circumstances where he intended to or had entered into an undisclosed agreement with Torch Media (the Undisclosed Torch Agreement), pursuant to which he stood to, and did gain an advantage for himself; and (c) using his position to make use of the Plaintiffs' resources and staff in pursuance of the Undisclosed Torch Agreement. (5) That between about April 2010 and 31 December 2012 the Defendant contravened s 183(1) of the Corporations Act 2001 by obtaining information relating to the supply of music services to Torch Media by reason of his position as Director of the First Plaintiff, or an officer of both of the Plaintiffs, and improperly using such information to gain an advantage and/or cause detriment to the Plaintiffs by: (a) placing himself in a position where he obtained information concerning an actual or maturing business opportunity relating to the supply of music licensing and other related services to Torch Media, which he did not disclose to the Plaintiffs and instead took up for his own benefit; (b) causing or facilitating the Plaintiffs to enter into the Torch Agreement in circumstances where he intended to or had entered into the Undisclosed Torch Agreement, pursuant to which he stood to, and did gain an advantage for himself; and (c) using the Plaintiffs' resources and information in pursuance of the Undisclosed Torch Agreement. (6) That between about April 2010 and 31 December 2012 the Defendant breached his fiduciary duties owed to the Plaintiffs by not avoiding an actual or potential conflict of interest, not avoiding the making of a benefit by reason of or by use of his position as a fiduciary and not accounting to the Plaintiffs for such a gain by: (a) placing himself in a position where he became aware of an actual or maturing business opportunity relating to the supply of music licensing and other related services to Torch Media during or at the time that he was working for and on behalf of the Plaintiffs, which he did not disclose to them and instead took up for his own benefit; (b) causing or facilitating the Plaintiffs to enter into the Torch Agreement in circumstances where he intended to or had entered into the Undisclosed Torch Agreement pursuant to which he stood to and did receive a financial benefit for performing work in his personal capacity; (c) intending to perform, and then performing and continuing to perform, work on behalf of Torch Media that was the same or of a similar nature that the Plaintiffs provide to its clients or which they were capable or able to provide to its clients; (d) intending to receive, and then receiving, monetary benefits from Torch Media; and (e) using the Plaintiffs' resources and staff in pursuance of the Undisclosed Torch Agreement.

[30]

Diversion of the MyStore Opportunity (7) That between about May 2010 and December 2012 the Defendant contravened s 182(1) of the Corporations Act 2001 by improperly using his position as an officer of the Plaintiffs to gain an advantage and/or cause detriment to the Plaintiffs by: (a) obtaining information relating to the acquisition of the MyStore business (the MyStore Acquisition Opportunity) by reason of his position with the Plaintiffs and then diverting the benefits of the MyStore Acquisition Opportunity for his own benefit or the benefit of a third party; and (b) using his position to make use of the Plaintiffs' resources, including staff, email facilities, and computer networks, for his own benefit in pursuance of the MyStore Acquisition Opportunity. (8) That between about May 2010 and December 2012 the Defendant contravened s 183(1) of the Corporations Act 2001 by obtaining information relating to the acquisition of the MyStore assets by reason of his position as Director of the First Plaintiff, or an officer of both the Plaintiffs, and improperly using such information to gain an advantage and/or cause detriment to the Plaintiffs by: (a) obtaining and using information relating to the MyStore Acquisition Opportunity by reason of his position with the Plaintiffs and then diverting the benefits of the MyStore Acquisition Opportunity for his own benefit or the benefit of a third party; and (b) using the Plaintiffs' resources and information, including staff, email facilities, and computer networks, for his own benefit in pursuance of the MyStore Acquisition Opportunity. (9) That between about May 2010 and December 2012 the Defendant breached his fiduciary duties owed to the Plaintiffs by not avoiding an actual or potential conflict of interest, not avoiding the making of a benefit by reason of or by use of his position as a fiduciary and not accounting to the Plaintiffs for such a gain by: (a) obtaining information relating to the MyStore Acquisition Opportunity by reason of his position with the Plaintiffs; (b) exercising his powers and discharging his duties with the Plaintiffs, and placing himself in a position where he used his positions with the Plaintiffs, and the information he had obtained from those positions, to divert to himself the benefit of the MyStore Acquisition Opportunity; and (c) Using the Plaintiffs' resources, or causing the Plaintiffs' resources to be used, including staff, email facilities, and computer networks, for his own benefit in pursuance of the MyStore Acquisition Opportunity.

[31]

Misuse of Confidential Information (10) That between about February 2011 and July 2011 the Defendant contravened s 182(1) of the Corporations Act 2001 by improperly using his position as an officer of the Plaintiffs to gain an advantage and/or cause detriment to the Plaintiffs by: (a) obtaining information relating to the Plaintiffs' "Audio S Software encryption tool" by reason of his position with the Plaintiffs and then disclosing and using that information for his own benefit; and (b) using his position to obtain confidential emails from the Plaintiffs' computer networks and instructing, directing, causing, or being recklessly indifferent in allowing Mr Silla to archive and transfer such emails to the MyStore computer networks for future use for his own benefit or the benefit of Mr Silla. (11) That between about February 2011 and July 2011 the Defendant contravened s 183(1) of the Corporations Act 2001 by obtaining confidential information relating to the Plaintiffs' "Audio S Software encryption tool", and emails from the Plaintiffs' computer networks, by reason of his position as Director of the First Plaintiff, or an officer of both Plaintiffs, and improperly using such information to gain an advantage and/or cause detriment to the Plaintiffs by: (a) obtaining information relating to the Plaintiffs' "Audio S Software encryption tool" by reason of his position with the Plaintiffs and then disclosing and using that information for his own benefit; and (b) obtaining confidential emails from the Plaintiffs' computer networks and instructing, directing, causing, or being recklessly indifferent in allowing Mr Silla to archive and transfer such emails to the MyStore computer networks for future use for his own benefit or the benefit of Mr Silla. (12) That between about February 2011 and July 2011 the Defendant breached his fiduciary duties owed to the Plaintiffs, and his equitable obligations of confidence, by: (a) obtaining information relating to the Plaintiffs' "Audio S Software encryption tool" by reason of his position with the Plaintiffs and then disclosing and using that information for his own benefit; and (b) obtaining confidential emails from the Plaintiffs' computer networks and instructing, directing, causing, or being recklessly indifferent in allowing Mr Silla to archive and transfer such emails to the MyStore computer networks for future use for his own benefit or the benefit of Mr Silla.

[33]

THE COURT ORDERS THAT: (15) The Defendant pay to the Plaintiffs equitable compensation and/or compensation pursuant to s 1317H of the Corporations Act 2011 in respect of the declared contraventions and breaches (paragraphs 1 to 14 of these Orders) assessed in the sum of $2,273,374. (16) Within 7 days' of these orders, the Defendant deliver up to the Plaintiffs' lawyers, all of the documents in his possession, custody or control which are not in the public domain and were obtained directly or indirectly as a result of, or in the course of, the Defendant's engagement with the First or Second Plaintiff, including: (a) Any confidential information belonging to the First or Second Plaintiff or commercially sensitive information reasonably to be regarded as confidential from its nature and content; (b) Any intellectual property belonging to the First or Second Plaintiff; (c) Any documents relating to the business opportunities, future developments, or business practices of the First or Second Plaintiff or its suppliers or customers; (d) Customer or supplier lists; (e) Information relating to the business affairs of customer or suppliers to the First or Second Plaintiff, including their confidential or commercially sensitive information; and (f) The confidential information comprised of the Audio S Encryption Tool and the emails of Ms Grant (including using the email address christinagrant@sbamusic.com.au). (17) The Defendant be restrained from retaining or using any of the information or documents referred to in paragraph 16 above. (18) The Cross-Claim be dismissed. (19) The Defendant pay the Plaintiffs' costs of and incidental to the proceedings (including, but not limited to, the Plaintiffs' Application, the Cross-Claim, and the Interlocutory Applications), subject to the Plaintiffs having a period of 14 days from Judgment to make an application for any other order as to costs. (20) Orders 1 and 2 made on 11 September 2013 in relation to security for costs paid by the First or Second Plaintiff be vacated.

At a glance

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