Thomas v SMP International [2010] NSWSC 984 | Case summary

Thomas v SMP International [2010] NSWSC 984 | Case summary | Zoe

[16]

Complex Facts 3 Before setting out my findings of fact, I should make the following preliminary observations. The hearing was lengthy and fact-intensive. There were four weeks of evidence and one week of addresses. It has been frequently said of cases involving an alleged fiduciary relationship that there is "no class of case in which one ought more carefully to bear in mind the facts of the case": Re Coomber; Coomber v Coomber [1911] 1 Ch 723 at 729 (Fletcher Moulton LJ). I have borne in mind that observation. 4 The three protagonists were Mr Thomas, Mr Sullivan and Mr Willett. Other witnesses also played roles, but they were less important. Two of these were Mrs Willett and Mrs Liddlelow, Mr Willett's former secretary. I have had the considerable advantage of seeing and hearing the evidence unfold over almost a month. During that period I have been able to observe, at close range, each of the protagonists, as well as all of the other witnesses. Mr Thomas was cross-examined over seven days, Mr Sullivan over four days and Mr Willett over four days. 5 Numerous questions of competing credibility arose. It is tempting to base my factual findings on those questions by reference to "the subtle influence of demeanour": Abalos v Postal Commission (1990) 171 CLR 167 at 179 (McHugh J). But there were insufficient indicators of demeanour one way or another, and except in an obvious case, I doubt the ability of a judge to discern the truth from a witness' demeanour: Patrick Devlin, The Judge, Oxford, Oxford University Press, 1979 at 63 (cited in State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (1999) 160 ALR 588 at 617-8). I prefer the approach of Atkin LJ in Société d'Avances Commerciales v Merchants' Marine Insurance Co (1924) 20 Ll.L Rep 140 at 152 (also cited in SRA v Earthline (supra) at 617): An ounce of intrinsic merit or demerit in the evidence, that is to say, the value of the comparison of the evidence with known facts, is worth a pound of demeanour.

[17]

6 In any event, the resolution of the competing questions of credibility did not, by itself, enable me to determine the true facts on all of the many issues that have arisen. Credibility was important, but it was not always the only relevant factor. In general, I have endeavoured to reach my conclusions on the issues of fact by reference to the probabilities, after comparing the evidence of the witnesses with the proved facts and the competing accounts. The assessment of the credibility of the witnesses was a part of that process and I deal with it separately later in this judgment at paragraphs [82] - [87]. 7 However, because the trial was lengthy, the exhibits numerous, the factual issues multiple and the submissions detailed, there are practical limits to the extent to which it is possible to explain all of the considerations and impressions that have led me to the conclusions of fact that I have reached. This feature of complex factual cases was explained in SRA v Earthline (supra) at 619 (per Kirby J). Lord Hoffmann had used similar language a few years earlier in Biogen Inc v Medeva PLC [1997] RPC 1 at 45: … specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance … of which time and language do not permit exact expression, but which may play an important part in the judge's overall evaluation. 8 In this case, the primary events took place 10 to 12 years ago. The evidence of all witnesses was fallible. Sometimes it was even fanciful. This was partly because of the passage of time and the absence of corroborative documents, and partly because the witnesses' processes of memory and reconstruction were overlaid by perceptions of self interest: Watson v Foxman (1995) 49 NSWLR 315 at 319 (McLelland CJ in Eq). The degree to which perceptions of self interest affected the evidence, and whether that effect was subconscious or deliberate, varied between the witnesses. 9 At a general level only, I thought that Mr Thomas and Mr Sullivan overstated and exaggerated their case. On the other hand, the evidence of Mr & Mrs Willett was somewhat unpersuasive. Each was present in court and followed intently the evidence of Mr Thomas and Mr Sullivan. When their time to give evidence eventually arrived, each was defensive, and sought to deflect any possible criticism by a considered process of denial and non-recollection. Only when they perceived that a question was not threatening, did they occasionally open up. Sometimes these answers were revealing. I have explained in detail, later in this judgment, why I have taken an adverse view of Mr Willett's evidence. 10 Ultimately, after putting aside evidence that was irrelevant, inconsistent, exaggerated or plainly false, I thought there was an irreducible core on which I was able to act, because it was consistent with the probabilities, the contemporaneous documents, the undisputed facts and the evidence of other witnesses on relevant issues. This has led me to conclude that Mr Thomas and Mr Sullivan should succeed, but not on all issues, and not against all defendants. It is necessary at the outset to explain the relationship between Mr Thomas, Mr Sullivan and Mr Willett.

[18]

11 Mr Sullivan is a man of limited education. Apart from his experience as a commercial diver, he has had little in the way of a regular job or a regular income. During the period with which this case is primarily concerned, he was frequently occupied providing assistance to Mr Willett - delivering documents, assisting in Mr Willett's office, signing papers, conducting the banking, liaising with Mr Willett's clients including sportsmen, and helping with the computers in Mr Willett's office. His only direct recompense for these services was the provision of a petrol card. No doubt Mr Sullivan saw benefits and opportunities in being able to associate and socialise with Mr Willett and the rugby league footballers that he managed. No doubt Mr Willett saw advantages in having at his disposal someone who was so willing to assist. Mr Sullivan agreed with the description of himself as a "gofer" for Mr Willett, no doubt because it was in his interest to do so. But I do not think that it was too far from the truth. He added, quite fairly, that he was always willing to learn. And he showed a keen interest in doing so. 12 Mr Sullivan and Mr Willett had first met at Cronulla High School. Mr Sullivan left the school in 1967, aged 15, and undertook a plumbing apprenticeship. Throughout the 1970s he had some social and business association with Mr Willett, who was training to be an accountant and was also known as a rugby league player in the Cronulla district. Mr Willett or his office prepared Mr Sullivan's tax returns for many years through the 1970s to the 1990s. I am satisfied that he gave some advice and assistance to Mr Sullivan in connection with the purchase of a small business known as the "Juice & Jaffle Bar" in Cronulla in 1977. This business was short lived. In 1978 Mr Sullivan commenced a commercial diving course with Mr Thomas. Later, in 1984, Mr Sullivan was a guest at Mr Willett's wedding. 13 The relevant events in this case commence in 1998, but during the preceding years, a series of transactions took place which help explain the nature of the relationship that developed between Mr Sullivan and Mr Willett. They also reveal a pattern of behaviour on Mr Willett's part which, I have concluded, continued during the period 1998 to 2002. The essence of that behaviour was an ability to persuade other persons to part with their money for investment in transactions in which Mr Willett was interested - directly or indirectly. 14 These earlier transactions involving Mr Sullivan and Mr Willett were as follows: (a) In March 1984, Mr Sullivan received approximately $28,000 from his brother in connection with the sale of a unit. The monies were invested with the firm of T H Waters Halpin & Co. By January 1985, the proceeds of the investment had become $30,427. Mr Willett recommended to Mr Sullivan that he lend those monies to Mr Willett's father-in-law. Mr Willett said that he would guarantee the loan and it would be as if it were a loan to him. Mr Sullivan lent the monies;

[27]

15 Mr Sullivan's credit was attacked and I will return to it. I formed the view that he was not only foolish and commercially naïve, but also simple, and easily led. In connection with the business of SMP, he did not always behave with complete honesty. But nor did Mr Willett. I concluded that Mr Sullivan placed considerable trust and confidence in Mr Willett and was prepared to do what Mr Willett requested him to do. Mr Willett, on the other hand, privately regarded Mr Sullivan with disdain. Mrs Liddlelow, who was Mr Willett's personal secretary from 1996 to 2002, recalls Mr Willett describing Mr Sullivan in words to the following effect: "Sul is nothing but a dumb-arse diver. He's got brain damage from diving." Mrs Liddlelow's credit was also attacked and I will return to it. Mr Thomas 16 Mr Thomas' history before 1998 was as follows. When he left school at the age of 15 years, he obtained an apprenticeship as a fitter, machinist and welder. After completing a commercial diving course, he worked as a hyperbaric welder and diver in the oil industry until 1988. He then became a commercial fisherman. He leased an abalone fishing licence and carried on business from Eden on the far south coast of New South Wales. In 1989 he was involved in a serious motor vehicle accident and spent the next 11 months in the Spinal Ward at Prince Henry Hospital. He became a quadriplegic. He eventually received compensation in excess of $5 million. While he was in hospital, he exercised an option to purchase the abalone licence. He was only able to do so because of the generous assistance of Mr Sullivan who provided security over his own home to Mr Thomas' lender. Although physically incapacitated, Mr Thomas was able to conduct the business by leasing a fishing boat and employing a diver and deckhand. Like other abalone fishermen on the far south coast, Mr Thomas belonged to the Mallacoota Abalone Fishermen's Co-operative. 17 From approximately 1980, Mr Thomas and his wife utilised the services of a local Bega accountant, Mr Kellow. He prepared their tax returns and incorporated a number of private companies for them as Mr Thomas endeavoured to make a living from various aquatic and agricultural ventures. Mr Kellow's main area of work was taxation and the companies appear to have been established to minimise the incidence of taxation. The businesses themselves were simple and uncomplicated with few overheads and only an occasional contractor. Mrs Thomas was trained as bookkeeper but had limited ability to understand complex financial statements. Mr Thomas had even less ability to do so. He was an outdoors man who had neither the temperament, the talent, nor the interest, to master financial statements or the complexities of the retail clothing trade. He was no fool however and has demonstrated an aptitude for the successful conduct of his abalone fishing business. 18 The companies incorporated by Mr Kellow included Extraband Pty Ltd which was the trustee of a trust known as the Abalone Fishing Trust. E C & J M Thomas Pty Ltd which was the trustee of the Thomas Family Superannuation Fund of which Mr Thomas became a director in 1998; Aquaden Pty Ltd which was established to pursue, somewhat optimistically, the business of farming eels; and Tupelo Hill Pty Ltd which was a corporate beneficiary of the Abalone Fishing Trust. Cattle, sheep and deer, in insignificant numbers, generating only modest income, if at all, were farmed in partnership between Mr & Mrs Thomas. Mr & Mrs Thomas did not have a clear or complete understanding of the corporate structure. Nor does the corporate picture indicate any real commercial sophistication on their part. Given the valuable abalone fishing licence, and the size of his personal injury verdict, any prudent accountant could have been expected to advise and recommend similar structures. 19 By 1998, it is clear that Mr Thomas had several things in common with Mr Sullivan. They both had an acquaintance with Mr Willett during schooldays in Cronulla. Both left school at the age of 15 years and undertook trade apprenticeships. Both subsequently became commercial divers. Both suffered an injury which resulted in the payment to each of them of a substantial lump sum. Mr Sullivan's total payments, as I have mentioned, were almost $800,000. Mr Thomas' payment was in excess of $5 million. In summary, both were men of limited education with substantial monies at their disposal, who regarded Mr Willett as financially astute, materially successful and well positioned to assist them by advancing their financial interests. Mr Willett 20 Mr Willett was at all material times a licensed tax agent. In 1978, he obtained a Certificate of Commerce (Accounting Practices) from TAFE. In 1986, he obtained a Bachelor of Business degree from UTS. Throughout the 1980s and 1990s and until 2007, Mr Willett carried on a tax and accounting business in Cronulla in partnership under the firm name of Willett & Associates. He was a long time Cronulla resident and was well known in the district. He grew up in Cronulla; went to school there; played rugby league football there; carried on business there; and married and resided there. His practice as an accountant and tax agent had many clients and appeared to be prosperous. In addition to his taxation and accountancy practice, he operated a seemingly successful sports management business, managing some of the most well known rugby league players in the NRL, as well as surfers and other sportsmen. 21 To persons like Mr Thomas and Mr Sullivan, Mr Willett would have exhibited all of the superficial trappings of material success. His counsel sought to downplay his commercial prowess, describing him as "just a suburban accountant who was no financial genius". But these things are relative and a matter of perception. In any event, he was not just an accountant. I am quite satisfied that Mr Thomas and Mr Sullivan regarded Mr Willett as having skills, expertise, financial training and contacts that were beyond their own capacity or experience. I am also satisfied that Mr Willett knew that, in relation to the events and transactions that I will recount, Mr Thomas and Mr Sullivan trusted and depended on him. The starting point is the establishment of a company known as Softsand Design Investments Pty Ltd (SSDI) in 1998. The end point is the investment by Mr Thomas and Mr Sullivan in SMP in 2000.

[28]

SSDI - Establishment 22 Mr Willett caused SSDI to be incorporated on 24 September 1998. From that date, its registered office became "c/- Willett & Associates". Mr Sullivan's address, around the corner from the office, was given as the principal place of business. The company register contains a resolution made on 24 September 1998 by the shelf company director and shareholder. That resolution records the issue of one ordinary share to each of Mr Willett, Mr Thomas, Mr Sullivan and Mr Hankinson and the appointment of each of them as directors. Mr Hankinson was a builder. The formal notifications to ASIC relating to the issue of shares and the appointment of directors and office holders were signed as to some by Mr Willett, and as to others by Mr Sullivan. As at 24 September 1998, ASIC was notified of the issue of four ordinary $1 shares and of the appointment of the four directors. Mr Willett was the secretary as well as the firstnamed director. Mr Thomas and Mr Sullivan each signed an application for one share and a consent to act as a director. After 24 September 1998, with one possible exception, Mr Willett did not cause any meetings of the company, or its directors, to take place. The exception relates to a meeting of directors recorded in minutes dated 24 July 2000 and signed by Mr Willett as "Chairman". I will return to it. 23 On 1 October 1998, Mr Willett lodged further documents with ASIC which included notice that Mr Hankinson ceased to hold office as a director and that the issued shares were then allocated as to Mr Willett (2 shares), Mr Thomas (1 share) and Mr Sullivan (1 share). The reason for the establishment of the company, at least initially, was the investment of Mr Thomas' personal injury monies. That was the only money realistically available to SSDI from the shareholders at that stage. Somewhat surprisingly, shortly after its incorporation, Mr Willett owned 50% of SSDI's issued capital. 24 Mr Willett says that this situation came about because, within a few days of the company's incorporation on 24 September, it was decided that Mr Hankinson should not be a director or shareholder. He says that he discussed with Mr Thomas and Mr Sullivan what was to happen to Mr Hankinson's share and that either Mr Thomas or Mr Sullivan said words to the effect: "Leave the two shares with you. We can sort it out later." I reject this evidence. It is inconsistent with the explanation given by Mr Willett in proceedings in the District Court in 2008. I have grave doubts about the honesty of Mr Willett's evidence on this issue. In the District Court proceedings, his explanation was that SSDI was initially established as a joint venture between him and Mr Sullivan. In these proceedings, he has said that from the outset, it was established as a joint venture of which Mr Thomas was a part. 25 Mr Willett's evidence in the District Court was as follows: Q. You made yourself a shareholder in this company without telling either Mr Sullivan or Mr Thomas didn't you? A. No Mr Thomas wasn't coming into it at that time. The person who found the land was a man called Kas James and he told us after we'd done the development of Kirkwood Road, there was three blocks of land up in Bando Road that we should buy for a development. So I formed a company and there was going to be two shares Sullivan and two shares me. Then what happened was Sullivan said, "Mr Thomas wants to come in", and so we went up there and we bought the land in the - but we'd already - because there was going to be four shares issued and that's how come the four share part came about, and I had two and they had one each. Because he told me all Mr Thomas was going to be was we were going to do the deal with the St George Bank and he told me that Mr Thomas would come in and he'd finance the development. So they got a share each for their half and I got my two shares. 26 It is not possible to reconcile the explanation given by Mr Willett in the District Court proceedings with the evidence which he has given in these proceedings. Mr Willett also confirmed in his District Court evidence that at the time, he had no money to contribute to SSDI; that Mr Thomas was primarily putting the money in; and that he (Mr Willett) knew what a fiduciary was. For reasons which will become clear, I regard Mr Willett's conduct in connection with his acquisition of a second share in SSDI as amounting to double-dealing.

[29]

SSDI's Property Acquisitions 27 On 26 September 1998, two days after its incorporation, SSDI purchased three properties at auction. The properties had been identified by Mr Willett, with the assistance of a real estate agent, and were known as 5, 7 and 9 Bando Road, Cronulla. Mr Thomas was kept informed by telephone during the bidding. He supplied the total purchase price of $1.96 million and took three mortgages from the company to secure repayment, without interest, of the monies outlaid by him. On 23 April 1999, SSDI purchased another property known as 11 Marlo Road, Cronulla. The purchase price was $580,000. Mr Thomas also supplied the purchase price for this property. 28 The submission, on Mr Willett's behalf, that the Marlo Road property was purchased "with a lot of Greg Willett's money" did not have a proper foundation. Despite some tired and confusing oral evidence by Mr Thomas, the submission never accorded with Mr Willett's own contentions, the competing affidavit evidence or the contemporaneous documents. In his affidavit, Mr Willett said no more than that he "may have supplied the deposit for Marlo Road" using funds borrowed from his mother-in-law, Gloria Campbell. He added that Mr Thomas supplied the balance of the purchase price of approximately $550,000. Mr Thomas' affidavit evidence was to the same effect. He said that Mr Willett asked him to deposit $547,000 into the SSDI account for the purchase of the Marlo Road property. This tallies with the amount of $546,829 stipulated in the letter from Cassidy Gibson & Howlin dated 2 June 1999. That firm acted for SSDI on the purchase and was also Mr Willett's solicitors. 29 On 20 August 1999, SSDI agreed to purchase another property. This property was known as 3 Bando Road, Cronulla. The evidence as to the payment of the purchase price for this property is less clear. Mr Willett stated in his affidavit that he recalled paying stamp duty of $40,494. Mr Thomas says in his affidavit that on 30 September, he transferred $370,000 to SSDI towards the purchase of this property. 30 Whatever the precise funding arrangements in relation to 3 Bando Road, Mr Willett was able to state in his affidavit that by mid-2000, SSDI was in a strong financial position. He said that it owned assets consisting of the properties known as 3, 5, 7 and 9 Bando Road and 11 Marlo Road, Cronulla having a total purchase price of $3.54 million. Mr Thomas contributed the vast majority of these purchase monies. In describing SSDI's financial position, Mr Willett did not mention that he had become the holder of 50% of its issued share capital, or that, for a minimal outlay, he had secured a very advantageous position for himself, particularly at the expense of Mr Thomas. Neither Mr Thomas nor Mr Sullivan knew, or had any reason to suspect, that Mr Willett had acquired two shares in SSDI.

[34]

(c) But third, I do not think that Mr Thomas and Mr Sullivan understood the implications. They assumed, I am satisfied, that their respective interests in the company were equivalent, at least initially, to the investment (if any) which each of them made. Hence in 1998, Mr Thomas rationalised that the company was for his benefit. And Mr Sullivan believed that he was assisting his friend, Mr Thomas, in a vehicle primarily designed for his benefit, but with some expectation of profit for himself. In my view, neither Mr Thomas nor Mr Sullivan, or for that matter Mrs Thomas, had an adequate understanding of the significance of ownership through a corporate vehicle. They started off thinking that the Bando Road properties might be redeveloped but did not know, or understand, how any redevelopment would be funded or how any profits on resale would be shared through SSDI. 35 But whatever view is taken of the matter, Mr Willett's conduct in bringing about a situation, within a short time after incorporation, where he held 50% of the issued shares of SSDI, was not honest. It was contrary to the natural expectations of Mr Thomas and Mr Sullivan and occurred without any meetings of the company or its directors being held. Mr Willett did not inform Mr Thomas and Mr Sullivan or obtain their consent. Nor did he contribute any significant monies to the purchase of the properties which SSDI acquired. He was, in my view, engineering an opportunity for himself. He perceived that it was not in his interest to be full and frank or to deal openly and directly with Mr Thomas and Mr Sullivan. He saw advantage to himself in opacity, obscurity and non-disclosure. 36 Over time, Mr Willett began to treat SSDI as if it were his own company, available for his private purposes. He already had another company, with a similar name, which fulfilled that purpose - Softsand Design Pty Ltd (SSD). Mr Thomas had no interest in SSD. For many years SSD had been the corporate vehicle through which Mr Willett had conducted the business of managing footballers and surfers, making investments and conducting transactions outside his tax and accountancy practice. He had been a director, and its major shareholder, since 1985. His mother-in-law, Gloria Campbell, had held the offices of director and secretary since 1989. In 1997, in connection with the joint purchase and development of 40 Kirkwood Road, Cronulla with Mr Sullivan, the latter was made a director of SSD and issued with 15 out of 198 A class ordinary shares. This represented 7.5% of its issued capital. 37 With increasing frequency, Mr Willett began to make deposits and payments into and from SSDI's bank account relating to his personal affairs. These deposits and payments included amounts related to footballers (Phil Blake and Craig Gower), his mother-in-law, Gloria Campbell, clients of his taxation and accountancy practice (Chris Rylands and Michael Atkins) and other individuals with whom he was associated in some way (John Murray and Bob Norris). Even part of the proceeds of sale of a Willett family ski lodge was at one stage paid into the SSDI account. The evidence did not permit a thorough or reliable investigation of the source and origin of each deposit and payment. Among other things, Mr Willett contended that a great deal of his paperwork relating to SSDI was stolen. When I asked him whether he could think of any reason why someone might want to take his financial records relating to SSDI, or who any such person might be, he could provide no reason or identify any person. 38 On the other hand, the plaintiffs sought to put much evidence before me, of varying quality and admissibility, designed to show how, over time, many personal expenses of Mr & Mrs Willett were paid out of SSDI's bank accounts. I accept that there were such payments, but it does not matter what the precise amounts were. Mr Willett freely admitted that historically, SSD was his family company into which he had put money from sports management and football earnings, as well as other activities outside his tax and accountancy practice. He explained that he changed his practice and started using SSDI for his private purposes because "Softsand Design did not have money, but SSDI did - because of the contributions initially made by Mr Thomas." I have no doubt that, by July 2000, Mr Willett regarded SSDI as if it were his own. He believed that SSDI was a vehicle available for use in any further investments that he thought appropriate and that he could probably obtain further substantial financial contributions to any such investment from Mr Thomas and possibly from Mr Sullivan. This is what happened in connection with the SMP group commencing in July 2000.

[39]

45 The contemporaneous evidence supports the inference that Mr Willett took charge of SMP, at least from 24 July 2000. On that day, Mr Willett signed the minutes of a meeting of directors of SMP. That company owned the shares in SSS which was the company that generated the sales turnover. Mr Willett described himself in the minutes as "Chairman" of SMP International. Eugene King is also recorded as being present at the meeting. He had previously been in effective practical control of the SMP group's day to day affairs. It is obvious that Eugene King relinquished control in favour of Mr Willett. The subject of the meeting was the cancellation of the payment of royalties by SSS to SMP International in order to improve the cash flow of the former. 46 Also on 24 July 2000, Mr Willett signed minutes of a meeting of directors of SSDI, describing himself as "Chairman" of that company as well. The minutes record that SSDI will receive "50% of all the companies and the international companies" in the SMP group. They also record that SSDI's aim was to reduce SMP's loans to HSBC by $500,000, by injecting approximately $600,000 cash flow and that Eugene King was to get a share of the profits (in an amount that was not yet decided), if the Bando Road properties were redeveloped. This agreement was further recorded in a letter dated 25 July 2000, on the letterhead of Willett & Associates, from Mr Willett to the directors of SSDI, being Mr Thomas, Mr Sullivan and himself. 47 Thus, in less than two years since the establishment of SSDI on 24 September 1998, Mr Willett had brought about the following series of events. Having started with the $1.96 million which he had recommended that Mr Thomas outlay for the acquisition of the Bando Road properties by SSDI, he was now SSDI's self appointed "Chairman" and the holder of 50% of its issued capital. He had ceased to use his family company (SSD) and had commenced to use SSDI as if it were his own company, available for his private affairs and transactions. He had an agreement in principle for SSDI to acquire 50% of the issued share capital in the SMP group, namely SMP International, SSS and a third company known as SMP Clothing Pty Ltd. He was also now the "Chairman" of SMP International and, for the time being, appeared to be in day to day control of the group's affairs. He managed to achieve all of this without contributing in any significant way to the purchase of the Bando Road and Marlo Road properties in 1998 and 1999. And he had made clear in July 2000, that he personally had no available funds to invest in SMP.

[66]

55 During this period, Mr Thomas in particular, and Mr Sullivan more slowly, gradually became suspicious and distrustful of Mr Willett. They received reports direct from the accounting staff at SMP and learned that things were not going as well as had been hoped. By 12 November 2001, Mr Willett became concerned himself. He wrote to Eugene King informing him that he wanted to resign as a director of SMP International. 56 In January 2002, Mr Thomas and Mr Sullivan became aware from Mr Cronin, who was Mr Frykberg's accountant, that Mr Willett held two shares in SSDI. Then, in early February, Mr Cronin recorded in his notes that, in order to keep trading, SSS required an immediate injection of $3 million. On 12 February 2002, an agreement was entered into for the transfer to Mr Frykberg, Mr. Willett, Mr Thomas and Mr Sullivan of 85% of the remaining 50% of the SMP group still held by the King Family Trust. The agreement was predicated on SSDI having already acquired the other 50% of the SMP group in September 2001- although no documentation relating to the transfer of shares to SSDI had ever been lodged with ASIC. The February 2002 agreement was never implemented and nothing eventuated. 57 By April 2002, Mr Thomas had ceased to speak to Mr Willett. Mr Thomas' solicitor, Mr Macken, attended meetings on his behalf and became engaged in discussions for the sale of the SMP group. One proposal was for the sale of SMP to the Bart group. Nothing came of it. On 17 May 2002, Eugene King caused SMP International to terminate the licence of SSS to use the SMP brand and trademark. On 27 May, voluntary administrators were appointed to SSS. On 29 May, the NAB appointed receivers of its assets. 58 The final blow occurred when on 27 May 2002, unknown to either Mr Thomas, Mr Sullivan, Mr Frykberg or Mr Willett, Eugene King caused SMP International and the King Family Trust to enter into an agreement with Garment Corporation Pty Ltd. The agreement provided for Garment Corporation Pty Ltd to subscribe for shares in SMP International to a maximum amount of $2 million. The intended result was that Garment Corporation and the King Family Trust would each hold 50% of the issued capital in SMP International. SSDI's supposed 50% interest in the SMP group arising from the 4 September 2000 agreement, in relation to which no share transfer documents had ever been lodged, was ignored.

[71]

Fiduciary Analysis - Factual 60 Having regard to those findings of fact, I have concluded that Mr Willett was in a fiduciary relationship with Mr Thomas and Mr Sullivan. Mr Willett contended that there was no fiduciary relationship and that he was not their advisor. He said that in their dealings with him in connection with SMP, Mr Thomas and Mr Sullivan were arms length commercial investors who were prepared to undertake a highly risky investment in return for the prospect of higher correlative rewards. He said that he warned them that the investment was a "punt". But except perhaps in the case of treasury bonds, all investments are a "punt" to varying degrees. The issue is always the assessment of risk. I accept that it would have been obvious to Mr Thomas and Mr Sullivan that there were risks involved. They knew, among other things, that the SMP group had not maintained its payments pursuant to its debt and overdraft facilities with HSBC. And Mr Willett did not literally say, at least generally, as Mr Thomas and Mr Sullivan contend, that he personally guaranteed their investments in SMP. Nor did he say that he had a 10% interest in the SMP group or that he had a charge over its assets. 61 What Mr Willett did do was enthuse Mr Thomas and Mr Sullivan in order to advance his own financial interests. He encouraged them with the acclamations about SMP's prospects which I described in paragraphs [43] and [44] above. He made clear that he was now in control. He sought and obtained their trust and confidence. He relied on his superior financial expertise, his long experience of accounting practice, his supposed business management credentials and his past connection with, and knowledge of, Eugene King and SMP. He built on his established relationship with Mr Thomas and Mr Sullivan - since 1998 in the case of the former and over many more years in the case of the latter. He made clear that he was in a position, as the new Chairman of the SMP group, to exercise control over its future direction. 62 The impression that Mr Willett made on Mr Thomas and Mr Sullivan was that, in a sense, he now represented and stood behind the SMP group. This was, of course, more metaphorical than real. In late July 2000, Mr Willett had not put, or promised to put, any of his own monies or assets on the line. But these circumstances and impressions explain why Mr Thomas and Mr Sullivan believed that Mr Willett was "guaranteeing" their investment. They were following him, accepting his recommendations and taking him on trust. Mr Willett knew this. He knew also that they had monies to invest and that he did not - or at least not much. He knew they were open to suggestions from him. His interest was in advancing his financial position and he was prepared to do so at their expense. 63 In July 2000, it was in Mr Willett's financial interests for Mr Thomas and Mr Sullivan to provide almost $2 million to the SMP group. Mr Willett believed that SMP's difficulties were short term and that control of cash flow and sound management would alleviate its problems. He thought, as I have mentioned, that the turnover was "huge". By 24 July, he had procured an agreement in principle for SSDI to acquire 50% of the SMP group. Unknown however to Mr Thomas and Mr Sullivan, Mr Willett owned 50% of SSDI. In April 2002, when Mr Thomas confronted Mr Willett and asked him why he had issued to himself two shares in SSDI, Mr Willett responded by saying: "Deb and I have done all the work and we have put in $1.6 million between us, which entitles us to half the company". I do not think that Mr & Mrs Willett put $1.6 million into SSDI, or anything like it. The evidence was conjectural and unsatisfactory. 64 However, it is not necessary to resolve the issue. What matters is that the position in July 2000, when Mr Willett requested $1.5 million for SMP from Mr Thomas, was that Mr Willett had not paid any monies for the two shares in SSDI held by him; nor had he paid any substantial monies towards the purchase by SSDI of the Bando Road and Marlo Road properties; nor had he paid, or promised to pay, any monies towards the rescue of the SMP group; nor had he informed Mr Thomas and Mr Sullivan that he held 50% of the issued capital in SSDI. In July 2000, Mr Willett had no personal financial exposure to SMP. From his perspective, if monies from Mr Thomas and Mr Sullivan could produce the turnaround in SMP that he hoped and expected, he would have procured for himself an advantageous financial position - by virtue of his 50% ownership of SSDI and SSDI's agreement to acquire 50% of SMP. 65 In bringing about this potentially advantageous situation, Mr Willett did not deal fully, fairly or frankly with Mr Thomas and Mr Sullivan. He took advantage of them and abused their trust and confidence. His conduct was duplicitous. They should never have been in the position in which they found themselves. They did not know, because Mr Willett concealed from them, the fact of his ownership of two shares in SSDI. They advanced monies, for the benefit of the SMP group, on a false premise - in circumstances where Mr Willett knew they depended on him and relied on his good faith and honesty. 66 Mr Thomas and Mr Sullivan were clearly enthusiastic about SMP's prospects, perhaps naively so. But if they had known in July 2000 that Mr Willett had procured for himself two shares in SSDI and, was engineering a situation of potential financial advantage for himself, at their expense, in relation to SSDI and SMP, they would not have outlaid the sums totalling almost $2 million that they paid between 28 July and 12 October 2000 or the other sums which I have described in paragraph [59]. Their trust and confidence in Mr Willett would have evaporated, just as it did when they learned the true facts in January 2002.

[80]

Loss & Compensation 77 The remaining matter goes to the calculation of loss. It was submitted on Mr Willett's behalf that the plaintiffs should give credit for the proceeds of sale of the Bando Road properties. It was also submitted that the monies paid by Mr Thomas and Mr Sullivan were not loans to SMP, and if they were loans to SSDI, the plaintiffs have failed to prove that SSDI is unable to repay those loans. 78 As I have already mentioned, Mr Thomas and Mr Sullivan should never have been in the position in which they found themselves. The monies which they outlaid at Mr Willett's request during 2000 and 2001 for the benefit of SMP, were used and dissipated in the business of the SMP group. The legal status of those payments was opaque at the time and remained so. It is clear however that these monies will never be recovered. It is neither appropriate nor necessary to take into account the profits, if any, that SSDI made on the re-sale of the Bando Road properties. The evidence did not reveal the prices at which the properties were sold or the net profit to SSDI, if any. This would require an accounting of all holding costs, charges and expenses during the period of ownership by SSDI. In any event, the SMP losses were suffered by Mr Thomas and Mr Sullivan, not by SSDI. They paid the monies from their own resources or borrowings. Any net profit that may have been earned by SSDI from the Bando Road properties is a separate matter. It is extraneous to my consideration of the position of Mr Thomas and Mr Sullivan. 79 I mentioned earlier that Mr Thomas is now in control of SSDI; that Mr Willett resigned as a director in July 2002; and that he made no claim for any share of the proceeds of sale from the Bando Road properties. Mr Willett is however still a shareholder of SSDI. He is recorded as being the holder of two of its four issued shares. While Mr Willett was a director of SSDI, and in effective practical day to day control of it, he did not maintain its books and records, including its books of account, in accordance with his obligations under the Corporations Law. He treated the company as if it were his own and intermingled his personal monies with those of the company. He persuaded Mr Thomas and Mr Sullivan to part with their own monies for investment in SMP but did not explain, or record, the nature of the transactions or the basis of the payments. He did not know himself. He was operating hand to mouth, requesting Mr Thomas or Mr Sullivan to make payments direct to SMP's creditors or drawing cheques on SSDI's bank accounts and requesting Mr Thomas or Mr Sullivan to replenish the amounts by which those accounts were overdrawn. 80 SSDI was not a regular company, properly managed. Its records were not properly maintained. That was entirely Mr Willett's fault. Shortly after it was established, it became a cloak for Mr Willett's subterfuge, as a vehicle for advancing his own financial interests. There is no reasonable or equitable basis for requiring, as a condition of equitable compensation, that Mr Thomas and Mr Sullivan engage in the speculative exercise of seeking to recover from SSDI monies that may or may not be standing to their credit in loan accounts with SSDI. Further, and in any event, there was no adequate evidence of the maintenance or the amount of any loan accounts held by Mr Thomas or Mr Sullivan with SSDI. No person on behalf of SSDI was in a position to give reliable evidence of its current financial position or the reality of any loan accounts supposedly existing for the benefit of Mr Thomas and Mr Sullivan. 81 A set of unsigned financial statements was prepared by Mr Willett for SSDI for the period ended 31 December 2001. This was done under pressure from, and at the insistence of, Mr Frykberg or his accountant. I can have no confidence in those pieces of paper prepared by Mr Willett. I would not be prepared to act on the basis of the information recorded in them. No attempt was made during the hearing to verify, sustain or uphold them. Nor is it appropriate to act on the basis of the investigative report of Knights Insolvency dated 7 February 2002. Knights' instructions were to investigate the financial affairs of the SMP group. It was not instructed to investigate SSDI. Further, the investigations were not undertaken as an audit and they were not exhaustive.

[88]

Misrepresentation & Misleading Conduct 89 In addition to their fiduciary duty case, Mr Thomas and Mr Sullivan allege many false, negligent or misleading representations against both Mr Willett and Mrs Willett. As against Mrs Willett, it is said that she not only engaged in trade and commerce in her own right - and made misrepresentations in that capacity - but that she was also knowingly concerned in her husband's misleading or deceptive conduct. 90 This was the area of the case where the evidence of Mr Thomas and Mr Sullivan was least reliable. It is the area where the well known warning by McLelland CJ in Eq is most apposite: "Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions of self interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience. Each element of the cause of action must be proved to be reasonable satisfaction of the court, which means that the court 'must feel an actual persuasion of its occurrence or existence.' Such satisfaction is 'not … attained or established independently of the nature and consequence of the fact or facts to be proved' including the 'seriousness of an allegation made, the inherent likelihood of an occurrence of a given description, or the gravity of the consequences flowing from the particular finding' … Considerations of the above kinds can pose serious difficulties of proof for a party relying upon spoken words as the foundation of a cause of action based on s 52 of the Trade Practices Act 1974 (Cth) …, in the absence of some reliable contemporaneous record or other satisfactory corroboration".

[91]

Mr Willett 92 On the other hand, there is no doubt that Mr Willett made many encouraging statements about SMP. For that matter, so did Eugene King who may well have been just as culpable. Mr Willett believed that SMP's problems could be rectified and that it had a reasonable prospect of turning the corner with sound financial management and cash flow control. He was genuinely impressed and excited by the cash flow. He conveyed to Mr Thomas and Mr Sullivan that SMP represented a good opportunity, that the brand was exciting and that the cash flow was very encouraging. Mr Sullivan was easily enthused. And he conveyed that enthusiasm to Mr Thomas. However, I do not think that Mr Willett told them that the investment was risk-free, that they would receive interest at 10% and that he would personally guarantee the monies which they outlaid. Nor do I think that Mr Willett said that he had an existing 10% interest in SMP or that he held a charge over its assets. 93 Mr Willett certainly conveyed the impression to Mr Thomas and Mr Sullivan that he was prepared to invest in SMP and that his existing knowledge and understanding of SMP and Eugene King put him in an advantageous position in making his assessment of its prospects. These statements were not false or misleading. Nor were the various acclamations and enthusiasms that I set out in paragraph [43]. They may not have carried much weight with a prudent investor but they were essentially a true statement of his beliefs at the time they were made. 94 When so understood, I am not prepared to find that the pleaded misrepresentations alleged against Mr Willett have been established. What was said by Mr & Mrs Willett was heavily interwoven with puffery, eagerness and undue optimism. But this would have been transparent to Mr Thomas and Mr Sullivan. They knew that Mr Willett was not warranting the unqualified success of the SMP group. They knew that the three of them were in it together and had the same ambitions for SMP's success. They also knew there were risks involved. Having regard to my assessment of the reliability of the evidence of Mr Thomas and Mr Sullivan, insofar as it attributes misrepresentations to both Mr and Mrs Willett, and taking into account the probabilities and the contemporaneous documents, I do not feel an actual persuasion about the pleaded misrepresentation case.

[93]

Mrs Willett 96 That leads me to the position of Mrs Willett. I do not think that there is any proper basis on which I can find that she has contravened the Fair Trading Act, either as an accessory, or by engaging in her own right in misleading conduct in trade or commerce. The accessory case against her must fail because I am not satisfied that any false or misleading misrepresentation concerning SMP has been established against Mr Willett. And there is no claim that she was knowingly concerned in his misleading conduct in connection with the concealment of his full shareholding in SSDI. 97 The separate claim against her based on her own alleged misleading conduct fails at several levels. I do not think that Mrs Willett's roles and activities, in the course of which she is said to have engaged in misleading conduct, constituted trade or commerce. Nor do I think, in any event, that any misleading or deceptive conduct has been established. Mrs Willett was interested, excited and enthusiastic about the potential for the SMP group. Her enthusiasm reflected what one might expect from a spouse in her circumstances. The SMP adventure represented an opportunity for her and Mr Willett to increase their wealth and to become involved, as controllers and part owners, in what they perceived to be a glamorous business. She was a denizen of Cronulla, a skier and a Qantas employee. She had a natural affinity with fashion, surf and ski wear. The prospect of further travel attracted her. I have no doubt that she believed that the SMP brand would become as big as Billabong. But she was not an employee of the SMP business. She was not a shareholder. She was not her husband's business partner. She had her own job and young sons to bring up. It would have been obvious to Mr Thomas and Mr Sullivan that she had no knowledge or information about SMP beyond that which she gleaned from Mr Willett. 98 In this context, the attention given in the evidence to the detailed terms of a conversation which is said to have taken place between Mrs Willett and Mr Sullivan, while travelling from Scots College, Bellevue Hill to Cronulla, with her son in the back of the car, was surprising. The occasion and the context could not reasonably support the case against her for misleading conduct made in trade or commerce. In any event, for reasons which I have already explained concerning the inherent weaknesses in the uncorroborated evidence of the statements attributed to Mr & Mrs Willett, I am not persuaded that the conversation occurred in the terms alleged. 99 It is not necessary to deal separately with the other statements attributed to Mrs Willett. They were few. I will however mention one other which illustrates my lack of persuasion. Mr Thomas asserted that during a telephone conversation with Mr Willett in July 2000, Mrs Willett was hovering in the background at Mr Willett's end of the telephone. Mr Thomas says that he heard her call out certain things such as: "Greg, tell him we have got our money in there. Tell him we are in there - looking after him." Mrs Willett, of course, denies that she was present or that she said those words. I am not persuaded that the statement was made. But even if it was, the prosaic context hardly supports a finding of misleading conduct in trade or commerce - at least conduct, that any reasonable person could have been expected to rely on.

Thomas v SMP International

At a glance

Court

Decision date

Before

Source

Judgment (104 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (14)

Cited By (10)