V-Flow Pty Limited v Holyoake Industries

Solicitor for the respondent: Nicholas O'Donoghue & Co

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 460 of 2012

JUDGES: EMMETT, EDMONDS and RARES JJ DATE OF ORDER: 20 February 2013 WHERE MADE: MELBOURNE

1. The appellant file and serve draft short minutes of order to give effect to these reasons no later than Monday, 25 February 2013.
2. The parties make any submissions that they wish to in relation to costs no later than Monday, 25 February 2013.
3. The matter be listed for directions on Friday, 1 March 2013. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 460 of 2012

JUDGES: EMMETT, EDMONDS and RARES JJ DATE: 20 february 2013 PLACE: MELBOURNE

INTRODUCTION 1 This appeal concerns the relief to be granted as a consequence of breaches of fiduciary and contractual duty, and contraventions of the Corporations Act 2001 (Cth) (the Corporations Act), in relation to the respondent, Holyoake Industries (Vic) Pty Limited (Holyoake). The breaches and contraventions were committed by a former director and two former employees of Holyoake (the individual appellants) in connection with the acquisition by the first appellant, V-Flow Pty Limited (V-Flow), of the business of Variflow Melbourne Pty Limited (Variflow). 2 Having found that such breaches and contraventions on the part of the individual appellants had occurred, and that V-Flow had knowingly benefitted from them, a judge of the Court made assessments in relation to the possible alternative remedies: equitable compensation, account of profits and statutory compensation under s 1317H of the Corporations Act. Following the assessments, Holyoake elected for statutory compensation and his Honour made orders accordingly. 3 Section 1317H(1) of the Corporations Act relevantly provides that a court may order a person to compensate a corporation for damage suffered by the corporation if the person has contravened a civil penalty provision in relation to the corporation and the damage resulted from the contravention. Section 1317H(2) relevantly provides that, in determining the damage suffered by the corporation, profits made by any person resulting from the contravention are to be included. The appellants claim that the primary judge erred in his assessment of statutory compensation under s 1317H.

THE PARTIES AND THE PROCEEDING 4 Holyoake Industries Limited is a New Zealand company. Holyoake is a member of the Holyoake Industries Limited group of companies. Holyoake conducts an air distribution business, involving the supply of equipment to mechanical contracting service companies and others engaged in the installation of air conditioning systems in office and other buildings. Variflow was a long-standing competitor of Holyoake. At relevant times, Variflow was controlled by Mr and Mrs Kelvin Payne. 5 The second appellant, Mr Jamie Brown, was the general managing director of Holyoake and its predecessor from 1998 to 26 March 2009. The third appellant, Mr Bozidar Matkovic, was employed by Holyoake as a production manager and factory manager from 9 August 1999 to 27 March 2009. The fourth appellant, Mr Anthony Aloe, was employed from 2000 by various members of the Holyoake Industries Limited group. Between 1 December 2008 and 13 March 2009, he was employed by Holyoake as its business development and engineering manager. 6 V-Flow was incorporated on 25 February 2009. The two inaugural directors of V-Flow were Messrs Aloe and Matkovic. V-Flow purchased Variflow's business with effect from April 2009, and thereafter entered into competition with Holyoake. The commercial negotiations and dealings that led to the incorporation of V-Flow and its purchase of Variflow's business commenced in the latter part of 2008 and were conducted by Messrs Brown, Matkovic and Aloe. 7 In the proceeding, Holyoake alleged that, in the course of pursuing the purchase of Variflow's business, Messrs Brown, Matkovic and Aloe breached fiduciary and contractual duties that they owed to Holyoake. It also alleged that the three of them contravened s 182 and s 183 of the Corporations Act, and that Mr Brown contravened s 181 of the Corporations Act. 8 Section 181 relevantly provides that a director or other officer of a corporation must exercise his powers and discharge his duties in good faith in the best interests of the corporation and for a proper purpose. Section 182 relevantly provides that a director or employee of a corporation must not improperly use his position to gain an advantage for himself or someone else or cause detriment to the corporation. Section 183 relevantly provides that a person who obtains information because he is or has been a director or employee of a corporation must not improperly use the information to gain an advantage for himself or someone else or cause detriment to the corporation. 9 The parties agreed that issues relating to liability should be dealt with first and that issues relating to damages and other remedies should be resolved having regard to the findings made at the first stage of the trial and after further evidence and submissions had been considered. In his reasons of 12 October 2011, the primary judge found that Holyoake's complaints about breach of fiduciary and contractual duties and contraventions of the Corporations Act had been made out. Accordingly, his Honour gave directions for further evidence to be filed in relation to the remedies that should be granted in the light of the findings made at the first stage. 10 On 25 May 2012, the primary judge made further findings. In his reasons of that date, his Honour recorded that Holyoake had sought remedies as follows: An account of the net profits made by V-Flow for the period from 9 April 2007 to 30 June 2011, subject to certain adjustments. In the alternative to that remedy, equitable compensation on the basis that Holyoake lost the opportunity to acquire Variflow's business. Statutory compensation under s 1317H of the Corporations Act in respect of the profit made by V-Flow. Damages or equitable compensation from Messrs Brown, Matkovic and Aloe in respect of specific benefits received by them from Holyoake on their ceasing to be employed by Holyoake. His Honour made findings under each of those heads. The amounts assessed under the respective heads were as follows: Account of profits: $1,469,178 Equitable compensation for lost opportunity: $1,046,923 Statutory compensation: $1,469,178 Damages or equitable compensation from the individual appellants: various amounts. His Honour concluded that Holyoake would need to make an election as to whether it wished to receive equitable compensation or an account of profits. 11 On 5 June 2012, Holyoake made an election to claim statutory damages in the sum of $1,469,178. On 14 June 2012, after noting that Holyoake, having been required to elect between an account of profits and damages, had elected the remedy of damages, his Honour made orders that: 1. Each of V-Flow and Messrs Brown, Matkovic and Aloe pay to Holyoake the sum of $1,469,178, together with interest in the sum of $167,208. 2. Mr Brown pay to Holyoake the sum of $122,429, together with interest in the sum of $26,265. 3. Mr Matkovic pay to Holyoake the sum of $5,901, together with interest in the sum of $1,265. 4. Mr Aloe pay to Holyoake the sum of $17,054, together with interest in the sum of $3,658. His Honour also ordered V-Flow and Messrs Brown, Matkovic and Aloe to pay Holyoake's costs of the proceeding up to the determination of the liability stage on an indemnity basis and the costs thereafter on the party-party basis. There has been a certain degree of imprecision in the proceedings in the use of the terms account of profits, statutory compensation, equitable compensation, damages and statutory damages. It is probably tolerably clear what has been intended by the various usages. 12 By notice of appeal filed on 5 July 2012, V-Flow and Messrs Brown, Aloe and Matkovic appealed from all of the orders made by the primary judge, apart from an order for a stay of the other orders. The appellants accept, for the purposes of the appeal, that the primary judge made no error in the conclusions reached in his Honour's reasons of 12 October 2011. However, in order to place in context the orders for compensation made by the primary judge, it is necessary to have regard to the findings of breach and contravention made by his Honour.

FINDINGS OF BREACH AND CONTRAVENTION 13 In 2001, Mr Payne considered selling Variflow's business and he engaged a broker for that purpose. The broker informed Mr Brown that the business was on the market and asked whether Holyoake might be interested in buying it. Mr Brown's response was sufficiently positive for him to be invited to sign a non-disclosure agreement in order to obtain a memorandum containing confidential business information relating to Variflow. Mr Brown received the memorandum and retained it in Holyoake's records. Holyoake made no offer for the business, which remained in the hands of Mr and Mrs Payne. 14 Towards the end of 2007, Mr Payne renewed his interest in selling Variflow's business. He engaged business brokers, Messrs Blount Marlow Walsh (BMW), to appraise the market value of the business and to advise on a marketing strategy. 15 In about August or September 2008, Messrs Brown, Matkovic and Aloe discussed the possibility of jointly pursuing the purchase of a business trading as High Fire Heating. They consulted Lanteri Partners, who are management advisers. 16 In October 2008, Mr Brown visited Variflow to discuss a number of business matters with Mr Payne. In the course of their discussions, Mr Brown asked Mr Payne whether Variflow was for sale. Mr Payne indicated that the sale was in the hands of his business brokers, BMW. 17 On 1 December 2008, the day when he joined Holyoake from another company in the Holyoake Industries Limited group, Mr Aloe signed a confidentiality agreement with BMW. The agreement covered information that was to be provided by BMW to assist Mr Aloe in assessing the activities and market worth of Variflow's business, with a view to acquisition. By this time, the interest of Messrs Brown, Aloe and Matkoic in High Fire Heating had cooled and they had determined to pursue the purchase of Variflow's business. 18 On 19 December 2008, Mr Aloe signed heads of agreement containing an offer to purchase Variflow's business. The offer was forwarded to BMW and it was accepted by Mr Payne on behalf of Variflow on 22 December 2008. On 30 December 2008, Mr Aloe, acting on behalf of himself, Mr Brown and Mr Matkovic, paid a deposit of $50,000 towards the purchase of Variflow's business. On 6 January 2009, Mr Brown told Lanteri Partners that 1 April 2009 had been proposed as the date for completion of the purchase of Variflow's business and that he proposed to resign from Holyoake during that month. 19 Messrs Brown, Aloe and Matkovic met with Lanteri Partners on 9 January 2009. They discussed the legal structure under which Variflow's business would be operated following completion of the purchase. They also discussed undertaking a due diligence audit, accounting and taxation matters and the provision of finance for the purchase. On 20 January 2009, Mr Aloe conducted a due diligence inspection of the Variflow premises. He was accompanied by Mr Matkovic. They attended the Variflow premises for several hours. 20 On 28 January 2009, Lanteri Partners provided Messrs Brown, Aloe and Matkovic with the result of their review of the financial data of Variflow's business, indicating that Variflow had made healthy profits in each of the previous 3 financial years. On 30 January 2009, Lanteri Partners provided a finance proposal to assist Messrs Brown, Aloe and Matkovic in obtaining funds to purchase Variflow's business. The effective purchasers were to be family trusts established by each of Messrs Brown, Aloe and Matkovic. The three were also identified as guarantors of any borrowings and the personal financial details of Messrs Brown, Aloe and Matkovic and their wives were attached to the proposal. 21 While the financial arrangements were being put in place, Messrs Brown, Aloe and Matkovic set about terminating their employment with Holyoake. Mr Brown gave notice of his resignation as managing director on 2 February 2009. He remained a director until 31 March 2009. Mr Aloe was offered the position of managing director of Holyoake to replace Mr Brown. He declined the offer and, on 16 February 2009, tendered his resignation, which took effect on 13 March 2009. Mr Matkovic tendered his resignation on 24 February 2009. His resignation took effect on 27 March 2009. 22 At no time prior to tendering their resignations and leaving the service of Holyoake did any of Messrs Brown, Aloe or Matkovic inform anyone at managerial level in the Holyoake Industries Limited group that they were proposing to purchase Variflow's business and to enter into competition with Holyoake. They said nothing about their dealings with BMW and others who were assisting them to make the arrangements. Indeed, they went to great lengths to conceal their activities from the management of Holyoake. 23 Completion of the purchase of Variflow's business by V-Flow was effected on 9 April 2009. Messrs Aloe and Matkovic commenced full-time employment with Variflow within days of ending their employment with Holyoake. Mr Brown was actively involved in Variflow's business, at least on a part-time basis, from the outset. 24 After Messrs Brown, Aloe and Matkovic had left the employment of Holyoake, the directors of Holyoake became aware of the association of its former employees with Variflow. Holyoake wrote to them drawing attention to their obligations to Holyoake. 25 Each of Messrs Brown, Aloe and Matkovic had been employed by Holyoake and it was common ground that, as employees, they each had contractual obligations to serve Holyoake with loyalty and fidelity. The primary judge found that it could not credibly be claimed that the opportunity for Messrs Brown, Aloe and Matkovic to purchase Variflow's business came to them independently of their employment by Holyoake. 26 While the directors of Holyoake knew that Variflow's business was on the market in 2001, Holyoake had no interest in purchasing it at that time. However, the primary judge rejected a contention that the Holyoake Industries Limited group would have had no interest in purchasing Variflow's business in 2008 if they had been aware, which they were not, that it was on the market. 27 The primary judge made several observations concerning aspects of the conduct of Messrs Brown, Aloe and Matkovic that support the conclusion that they breached their contractual and fiduciary obligations to Holyoake. The first aspect was the use they made of the memorandum about Variflow's business obtained by Mr Brown in 2001. Secondly, Messrs Brown, Aloe and Matkovic embarked on the due diligence process and the task of obtaining finance for the purchase of Variflow's business without informing the management of Holyoake that they were engaging in those activities. Rather, they deliberately sought to ensure that Holyoake's management did not come to know of their pursuit of the purchase of Variflow's business. Further, Messrs Brown, Aloe and Matkovic, while still employed by Holyoake, and without the knowledge of the management of Holyoake, set about obtaining customers for their proposed new business, which was to compete with Holyoake. Finally, Messrs Brown, Aloe and Matkovic set up the trust structures that they proposed to use to conduct Variflow's business at a time while they were still employed by Holyoake. His Honour concluded that, by acting in those ways, Messrs Brown, Aloe and Matkovic placed themselves in a position in which their interests conflicted materially with those of Holyoake. 28 The primary judge found that, from at least mid-November 2008, until the termination of their respective contracts of employment, each of Messrs Brown, Aloe and Matkovic breached his duty to serve Holyoake with loyalty and fidelity on multiple occasions, as described above. Each was also in breach of his fiduciary obligations to Holyoake and was, therefore, liable to account to Holyoake for any benefit or gain that was obtained by reason of that breach. Each of them had a clear conflict of interest with that of Holyoake, their employer, and each placed his personal interest ahead of that of Holyoake. His Honour also found that V-Flow was liable for the breaches committed by each of Messrs Brown, Aloe and Matkovic. They were the directing minds of V-Flow and, therefore, V-Flow participated in their dishonest breach of fiduciary duty. His Honour found that V-Flow received the benefit of the opportunity that the conduct of Messrs Brown, Aloe and Matkovic denied to Holyoake. 29 The primary judge found that, as managing director of Holyoake, Mr Brown occupied a singular position of trust. The various steps that he took, in conjunction with Messrs Aloe and Matkovic, to purchase Variflow's business while he was the managing director of Holyoake, and which gave rise to the conflicts described above, were not taken in the best interests of Holyoake or for proper purposes. They were steps that he took deliberately, well knowing that he was advancing his own interests at the expense of Holyoake. As a consequence, Mr Brown contravened s 181 of the Corporations Act. 30 His Honour also found that, in jointly pursuing their interest in procuring Variflow's business, Messrs Brown, Aloe and Matkovic each acted improperly in order to gain advantage for themselves and their families. His Honour considered that the conduct briefly described above constituted an impermissible departure from the standards of conduct that would reasonably be expected of persons holding the positions that Messrs Brown, Aloe and Matkovic had held in Holyoake. Their use of confidential information held by Holyoake and the making of presentations to their bankers in order to obtain finance to purchase a competitor of Holyoake, while they were senior officers of Holyoake, was improper and was undertaken in pursuit of a proscribed purpose. In failing to alert Holyoake to the business opportunity posed by the placing of Variflow's business on the market, and acting to ensure that that knowledge did not come to the attention of the management of Holyoake, Messrs Brown, Aloe and Matkovic acted improperly in pursuit of their own interests and to the detriment of Holyoake. Accordingly, Messrs Brown, Aloe and Matkovic contravened s 182 of the Corporations Act. 31 Mr Brown, acting on his own behalf and that of Messrs Aloe and Matkovic, improperly used his position for the purpose of advancing his interests and the interests of Messrs Aloe and Matkovic by disclosing confidential business information relating to Variflow to Lanteri Partners. That was done in order to advance their own interests by adding to the pool of information that would enable Lanteri Partners to advise them about commercial aspects of the proposed purchase of Variflow's business. Each of them relied on Holyoake's confidential information to assist them in obtaining Variflow's business. In that way, each of Messrs Brown, Aloe and Matkovic contravened s 183 of the Corporations Act.

ASSESSMENT OF COMPENSATION 32 The primary judge dealt with the question of relief under the four separate heads indicated above. It is convenient to describe his Honour's findings in relation to each separately.

Account of Profits 33 The primary judge observed that, by the time of the second stage of the hearing, Holyoake was not claiming a constructive trust over the business acquired by V-Flow or the benefits of its capital growth and profits on an indefinite basis. Nor was it seeking an account of capital profits. As a result, his Honour held that if, as sought by Holyoake, an account of V-Flow's net profit over the period of 27 months from its acquisition in April 2009 to 30 June 2011 were granted, V-Flow would retain the benefit of any capital growth since the acquisition and of any profits derived from the business from 1 July 2011 onwards. In that regard, his Honour referred to evidence that the business of V-Flow, which had been acquired for $615,000 in April 2009, had a value of at least $1.5 million as at 30 June 2011. 34 The primary judge referred to evidence adduced on behalf of Holyoake to the effect that net profits for a 12 to 15 month period would not represent the maintainable profit of the business, because it needed time to develop under the new ownership. For that reason, the 27-month period was fixed upon. His Honour held that V-Flow and Messrs Brown, Aloe and Matkovic bore the onus of establishing that the account should not be taken over an indefinite period and that, since Holyoake did not press for such an order, his Honour considered that the period of 27 months to 30 June 2011 sought by Holyoake was reasonable. 35 The accounting evidence adduced by the parties disclosed that V-Flow's accumulated net profit before tax for the period 9 April 2009 to 30 June 2011 was $1,019,033. The primary judge took that figure as the starting point and then added back three items to arrive at the sum of $1,469,178 as the amount of profit for which the appellants should account to Holyoake. The three items added back were as follows: Legal fees $243,766 Consultants' fees $61,533 Interest $144,846 There is no dispute about the items for legal fees and consultants' fees. There is a dispute about the item for interest. 36 The primary judge considered that interest paid by V-Flow in respect of borrowings to enable it to pay the price for the acquisition of Variflow's business should not be regarded as an expense in calculating net profit. His Honour observed that V-Flow borrowed money from Westpac Banking Corporation (Westpac) in order to finance the acquisition of Variflow's business and granted a charge over its assets to secure that borrowing. The interest in question was paid in respect of that borrowing. His Honour found that, since Variflow's business was acquired as a result of breaches of fiduciary and other obligations owed to Holyoake, and since the interest was paid in respect of borrowings for the purchase of the business and the assets of the business were deployed as security, the interest should not be allowed as an expense in calculating profit. 37 Further, the primary judge did not consider that any allowance should be made for any proportion of the net profits that might have been achieved as a result of the application of the skills and energy of Messrs Aloe and Matkovic in working in the business of V-Flow. His Honour considered that no allowance was warranted because of the deliberate dishonesty with which the acquisition of Variflow's business was pursued by Messrs Aloe and Matkovic. His Honour held that such dishonesty was such as to justify the refusal of any allowance for the contribution made to the success of a business obtained in those circumstances.

Statutory Compensation 38 The primary judge then dealt with the entitlement of Holyoake to statutory compensation under s 1317H of the Corporations Act. His Honour referred to his earlier findings that Mr Brown had contravened s 181 and that each of the individual appellants had contravened s 182 and s 183. His Honour also referred to his earlier finding that V-Flow was knowingly concerned in those contraventions and was, as a result, liable to Holyoake for the contraventions on the part of the individual appellants. His Honour then found that, in the 27-month period to 30 June 2011, V-Flow had made a net profit of $1,469,178 as a result of the contraventions of the Corporations Act by Messrs Brown, Aloe and Matkovic. The profit of $1,469,178 was calculated as indicated above. 39 The primary judge held that such profits constituted damage for the purpose of s 1317H of the Corporations Act, and that the Court was empowered to award compensation for profits made as a result of the contravention and may do so without proof of any corresponding loss on the part of Holyoake. His Honour concluded that, for the reasons already given in relation to the assessment made for the purpose of an account of profits, no allowances, for interest or the skills and energy of the individual appellants, were appropriate when calculating statutory damages under s 1317H. His Honour concluded, therefore, that Holyoake was entitled to an order for statutory damages under s 1317H in the sum of $1,469,178, subject to the requirement that no double recovery occur.

Individual Benefits 40 The primary judge then dealt with claims in respect of individual benefits derived by the individual appellants from Holyoake. His Honour found that Messrs Brown, Aloe and Matkovic went to great lengths to conceal from Holyoake's management that they were engaged in establishing a competing business. Holyoake asserted that, had its management been aware of the activities in question, the services of the individual appellants would have been terminated and they would not have been paid certain departing gratuities that recognised good and faithful service. 41 Mr Brown's resignation took effect on 31 March 2009 and he was paid $10,000 by way of discretionary director's fees for the period 1 October 2008 to 31 March 2009. In addition, when he left Holyoake Mr Brown was given ownership of the company car to which he had access as managing director. The car had a value of $89,052. Mr Grant Holyoake, a director of Holyoake, gave undisputed evidence that the discretionary payment and the gift of the car would not have been made had the directors of Holyoake been made aware of Mr Brown's conduct prior to his leaving. In October 2008, Mr Brown attended a conference in Vietnam at Holyoake's expense. The cost of Mr Brown's trip was $4,508. Mr Grant Holyoake gave uncontested evidence that the trip would not have been authorised or paid for had the directors been aware of Mr Brown's conduct. His Honour concluded that Holyoake was entitled to recover the discretionary payment, the value of the car and the amount for the trip. 42 When Mr Aloe left the service of Holyoake he was given a discretionary gratuity of $10,000. Mr Grant Holyoake said that that payment would not have been made had the directors been aware of Mr Aloe's conduct. Mr Aloe also attended the conference in Vietnam. The cost of his trip was $7,054. Mr Holyoake said that the trip would not have been authorised or paid for had the directors been aware of Mr Aloe's conduct. His Honour concluded that Holyoake was entitled to recover the amount of the discretionary payment and the value of the trip. 43 When Mr Matkovic left the service of Holyoake, he was paid a discretionary bonus of $4,952 and allowed to take with him a video camera valued at $949. Mr Grant Holyoake gave uncontested evidence that neither the payment nor the gift would have been made had the directors been aware of Mr Matkovic's conduct. His Honour held that Holyoake was entitled to recover those amounts.

Loss of Opportunity 44 In dealing with Holyoake's claim for damages and equitable compensation for the loss of the opportunity in relation to Variflow's business, the primary judge referred to evidence adduced on behalf of Holyoake. His Honour concluded that, subject to the need to elect before final orders were made, Holyoake was entitled to the sum of $1,046,923 as equitable compensation for its lost opportunity. 45 In order to calculate the estimated net profit that Holyoake would have earned from Variflow's business for the period 9 April 2009 to 30 June 2011, the cumulative net profit before tax before any adjustments for the period was determined at $1,019,033. There is no dispute about that determination. Several adjustments were then made to that cumulative figure of $1,019,033. 46 First, an item of expense for legal fees of $245,209 was excluded, on the basis that they related to legal costs associated with the proceeding. There is no dispute about that adjustment. Rental expense of $180,547 was also excluded, on the assumption that the newly purchased business could have been housed within the existing space owned by Holyoake. There is no complaint about that adjustment. One half of the expense of $25,370 for accounting and book keeping expenses was excluded, on the basis that Holyoake already had an administration infrastructure in place and the additional business could have been partially absorbed into the existing administration. There is no dispute about that adjustment. An expense of $82,084 for consultants' fees was also excluded, on the basis that they related to the development of projects that had already been fully developed by Holyoake. There is no dispute about that adjustment. 47 Two further adjustments were made that correspond with disputed adjustments made in relation to the assessment for the purposes of the account of profits. The first was the exclusion of the interest expense of $144,846 incurred by V-Flow and the replacement with an estimate of the interest expense of $114,544 that Holyoake would have incurred if the hypothetical purchase of Variflow's business by it had been totally funded by debt. Secondly, an adjustment was made to allow for the salaries of Messrs Aloe and Matkovic of $277,562 and $258,060 respectively, on the basis that they would have remained employed by Holyoake after the hypothetical purchase of Variflow's business. There is no dispute about those adjustments in relation to the calculation of the value of the lost opportunity. Mr Brown did not participate in the management of V-Flow. 48 Based on those adjustments, his Honour found that the net profit before tax that Holyoake would have earned from 9 April 2009 to 30 June 2011 from the hypothetical acquisition of Variflow's business was $1,046,923, calculated as follows: Cumulative net profit $1,019,033 Add back professional fees $245,209 Add back V-Flow interest $144,846 Less Holyoake interest $114,544 Add back rental expense $180,547 Add back consultant's fees $82,084 Add back accounting and bookkeeping $25,370 Less Mr Matkovic's salary $258,060 Less Mr Aloe's salary $277,562 Balance $1,046,923

THE APPEAL 49 There were seven grounds of appeal in the notice of appeal filed on 5 July 2012. However, only five grounds were pressed. The issues raised by the grounds of appeal can conveniently be summarised as follows: Whether the period for the calculation of profit, being 27 months from 9 April 2009 to 30 June 2011, was beyond what was reasonable to place Holyoake in the position it would have been in if the breaches and contraventions had not occurred. Whether any profit earned by V-Flow during that period resulted from any contravention of the Corporations Act, within the meaning of s 1317H. Whether interest incurred by V-Flow on borrowings made in order to pay the purchase price for Variflow's business should have been allowed as an expense in calculating that profit. Whether reasonable remuneration for Messrs Aloe and Matkovic ought to have been treated as an expense in calculating that profit. Whether any of the specific benefits received by Messrs Brown, Aloe and Matkovic resulted from any contravention of the Corporations Act, within the meaning of s 1317H. 50 The first two grounds are connected, in that they are complaints about the approach adopted by the primary judge in determining compensation under s 1317H of the Corporations Act. His Honour adopted, as the measure of compensation, the amount of the profit determined on the taking of the account. That approach was based on the direction contained in s 1317H that the profits made by any person resulting from a relevant contravention be included as part of the damage suffered as a result of the contravention. The grounds raise questions about the nature of the profits for which account must be given and about the causal connection between the breaches of fiduciary duty or contravention of the Corporations Act, on the one hand, and the profits that are to be made the subject of the account or statutory compensation, on the other hand. 51 The third and fourth grounds arise on the assumption that it is appropriate to calculate the compensation by reference to the profits made by V-Flow over the relevant period. There are two disputed items, namely, the exclusion of an expense for interest and the omission of an expense for salaries for Messrs Aloe and Matkovic. Significantly, although the primary judge allowed each of those items in calculating equitable compensation for the opportunity lost by Holyoake, his Honour disallowed those expenses in calculating profits for the purposes of the account. His Honour simply adopted the figure arrived at for the purposes of the account as the figure for statutory compensation under s 1317H. 52 In its written submissions, Holyoake contended that, if order 1 made on 14 June 2012 were to be set aside, it ought to be entitled to make a fresh election on the basis of an account of profits in equity, statutory compensation under s 1317H, and equitable compensation for the lost opportunity, calculated in accordance with the reasons of the Full Court. While the appellants contended that Holyoake could not make a fresh election, they sought leave, in the course of argument of the appeal, to amend the grounds of appeal in order to impugn the findings made by the primary judge in relation to account of profits and equitable compensation for the lost opportunity. Leave was refused on the basis that if the appeal based on the current grounds failed, that would be an end of the matter. On the other hand, if the appeal succeeded on the current grounds, the appropriate course would be to set aside the orders made by the primary judge and then remit the matter to his Honour for further consideration and finding as to statutory compensation under s 1317H. Holyoake would be entitled to make a fresh election on the basis of any new findings. It would then be open to the appellants to appeal from any orders made by the primary judge on the basis of that fresh election.

Statutory Compensation 53 Normally, the victim of a breach of fiduciary duty must elect between the remedy of equitable compensation or damages, on the one hand, and the remedy of account of profits, on the other. The Corporations Act has now introduced an additional remedy, being compensation under s 1317H. As indicated above, the primary judge in effect assimilated the statutory remedy of compensation under s 1317H with the equitable remedy of account of profits. That approach was doubtless prompted by the strange language of s 1317H. 54 The language of s 1317H is singularly inelegant. Section 1317H(1) provides that the Court may order a person to compensate a corporation for damage suffered by the corporation, if the damage resulted from a contravention of relevant provisions of the Corporations Act by that person. Section 1317H(2) then appears to direct the Court determining the damage suffered by the corporation to include, as damage, profits made by any person resulting from the contravention. That appears to refer to profits made, irrespective of whether there was countervailing damage suffered by the corporation. That is to say, the effect of s 1317H(2) is definitional, in the sense that it brings into the compensatory scheme of s 1317H the capacity for the Court to order that the compensation include profits, even though there was no corresponding loss on the part of the corporation (Grimaldi v Chameleon Mining (No 2) 200 FCR 296 at [630]-[631]). That scheme involves a conflation of the concepts of equitable compensation or damages, on the one hand, and account of profits, on the other. 55 The object of the equitable remedy of compensation or damages is restitution of what the victim has lost. The question is whether the loss would have occurred but for the breach. While the monetary sum awarded to the victim is normally computed by reference to the detriment actually suffered by the victim, it may occasionally be computed by reference to the profit that has been made by the errant fiduciary. Nevertheless, the primary purpose of equitable compensation or damages is compensatory (Nocton v Lord Ashburton [1914] AC 932, Re Dawson (1966) 84 WN (Pt 1) (NSW) 399). No element of penalty is involved. (Meagher, Gummow and Lehane, Equity: Doctrines & Remedies (4th ed) at [23-02]). 56 The obligation imposed by equity to pay damages or compensation is not fettered by the usual notions that serve to diminish the quantum of an award of damages at common law. The obligation imposed by equity upon an errant fiduciary is of a more absolute nature than the common law obligation to pay damages for tort or breach of contract. Thus, the obligation is not limited or influenced by common law principles governing remoteness of damage, foreseeability or causation (Hill v Rose [1990] VR 129 at 144). However, while foreseeability is not a concern in assessing equitable compensation or damages, the only losses that are made good are those that, on a common sense view of causation, are caused by the breach of duty (Canson Enterprises Limited v Boughton and Co [1991] 3 SCR 534 at 556). 57 On the other hand, the purpose of an account of profit is to prevent the unjust enrichment of the fiduciary by compelling the fiduciary to surrender any profits actually made by the fiduciary that were made improperly, and nothing beyond that. It is not to punish the errant fiduciary (Dart Industries Inc v Decor Corporation Pty Limited (1993) 179 CLR 101 at 111) (Dart). The errant fiduciary is made to account for, and is then stripped of, profits made that it would be unconscientious for that person to retain, because they are profits made by the fiduciary dishonestly. For example, in the case of infringement of intellectual property rights, the account is limited to the profits of the wrongdoer during the period when the victim's rights were being infringed (Colbeam Palmer Limited v Stock Affiliates Pty Limited (1968) 122 CLR 25 at 34). 58 There is no reason why an errant fiduciary should not be required to disgorge a capital profit, as well as a trading profit (Apand Pty Limited v Kettle Chip Co Pty Limited (1999) 88 FCR 568 at 584) (Apand). However, the profit must be shown to be one resulting from the breach of fiduciary duty. It is only profits properly attributable to the breach of fiduciary duty that should be the subject of the account (Dal Pont, Equity and Trusts in Australia (5th ed, 2011) at [34.155]). In calculating the quantum of the relevant profit, the Court adopts the nearest approximation to justice that it can make (Dart at 119). In principle, there is nothing wrong with the Court estimating the profit by drawing inferences, provided that there is some evidence of actual profit (Apand at 571). 59 In the application that initiated this proceeding, Holyoake claimed a declaration that V-Flow holds that part of its business that has been derived from the breaches and contraventions alleged in the statement of claim on constructive trust for the benefit of Holyoake. However, that prayer for relief was apparently not pressed and there has been no declaration of a constructive trust. 60 A declaration of a constructive trust would have required that the business acquired by V-Flow be transferred to Holyoake. Had there been a declaration that the business was held on a constructive trust for Holyoake, Holyoake would have been required to give an allowance for the consideration paid to acquire that business, including interest on any borrowings. Any profits derived in the meantime would also have been for the account of Holyoake. 61 However, if such a declaration of constructive trust had been granted, it may have been appropriate for an allowance to have been made for the extent to which the skill, efforts, property and resources of V-Flow and Messrs Brown, Aloe and Matkovic generated those profits. Thus, where a fiduciary appropriates the business of his principal, it may be inappropriate and inequitable to compel the fiduciary to account for the whole of the profit of his conduct of the business, or his exploitation of the principal's goodwill, over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. In particular, where it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the errant fiduciary, the capital that has been introduced and the risks that the fiduciary has taken, the circumstances might be such that it would be appropriate to allow the fiduciary a proportion of the profits. In such a case, the relevant proportion of the increased profits will not be the product or consequence of the principal's property, but the product of the fiduciary's skill, efforts, property and resources. The stringent rule requiring a fiduciary to account for profits should not be carried to extremes, and the liability of the fiduciary to account should not be transformed into a vehicle for the unjust enrichment of the principal. However, it is for the errant fiduciary to establish that it would be inequitable to order an account of the entire profits (Warman International Limited v Dwyer (1995) 182 CLR 544 at 561). 62 An account of profits for an indefinite period, on the other hand, is akin to a declaration of a constructive trust. That is to say, if such relief were ordered, the profits and losses, indefinitely, would be for the benefit or detriment of the principal. That is why such an order would not be made. Either the victim would be given the property, together with profits derived during the period that the business was operated by the errant fiduciary, or the errant fiduciary would be required to account for the profit derived as a result of the breach or contravention, being the difference between the price paid and the value of the property at the time of the grant of relief, less any appropriate allowances. 63 The remedy of account of profits still leaves the errant fiduciary with ownership of the property. Thus, under the relief granted by the primary judge, V-Flow will still remain as the owner of Variflow's business, which it acquired as a consequence of its knowing participation in the breach of fiduciary duty by the individual appellants. 64 The primary judge referred to accounting evidence adduced on behalf of Holyoake to the effect that an account of net profits for a 12 to 15 month period would not represent the maintainable profit of the business, because it needed time to develop under the new ownership. His Honour accepted Holyoake's submission that it was for that reason that the 27-month period was fixed upon. However, that suggests a misconception of the accounting evidence. The accountant was asked to calculate the profits of V-Flow for the 27-month period. He did not express any opinion as to the appropriateness of that period, except as a relevant period for determining maintainable profits of the business. If an assessment were to be made of the value of Variflow's business in the hands of V-Flow, one basis would be to determine the value by reference to the capitalisation of maintainable profits. That would involve determining value by multiplying maintainable annualised profit by an appropriate multiplier. It would have been necessary to arrive at an estimate of what the maintainable annualised profit of the business would be under the new management. 65 The accounting evidence was to the effect that the 27-month period was appropriate for determining the annualised profit of Variflow's business in the hands of V-Flow. It would have been appropriate to determine what the maintainable profits of the business were likely to be in order to calculate the value of the business. That course would have been appropriate had Holyoake pressed for an account on the basis of determining the difference between the consideration paid by V-Flow, on the one hand, and the value of the asset that it had acquired, on the other hand. That relief was not pursued. Accordingly, that course was irrelevant in determining the term of an arbitrary period for which an account of trading profits should be taken. 66 The question of whether the profit found by the primary judge resulted from the contraventions of the Corporations Act that his Honour found is obfuscated by the method that was adopted in calculating the profits. There is no causal connection between the profits of V-Flow over the 27-month period from 9 April 2009 to 30 June 2011, on the one hand, and the contraventions of the Corporations Act by Messrs Brown, Aloe and Matkovic, on the other hand. Those profits resulted from the work performed by the employees of V-Flow during that period. The net profit before tax of V-Flow was calculated by deducting from the amount of the total value of sales made by V-Flow during the period the cost of goods sold by V-Flow, together with V-Flow's manufacturing and other expenses, including interest and wages, during the same period. That gave rise to a net profit before tax for the period, of $1,019,033. That profit did not result from the contraventions of the Corporations Act by Messrs Brown, Aloe and Matkovic. 67 In any event, none of the individual appellants made any such profit. On the other hand, a profit was made as a result of the contraventions, in that V-Flow apparently has an asset with a value in excess of $1.5 million, for which it paid $615,000. That profit can fairly be said to have resulted from the contraventions, in the sense that, had the contraventions not occurred, V-Flow would not have made that profit. To the extent that, through trusts or otherwise, the individual appellants have some proprietary interest in V-Flow or its business, they have also made that profit as a result of the contraventions. 68 However, none of that profit has been taken into account in determining the profits that resulted from the contraventions found by the primary judge. On the other hand, his Honour appears to have had some regard to the fact of that profit, in so far as he observed that V-Flow and the individual appellants would retain any capital profit. Nevertheless, there is no finding as to what that capital profit was, other than that it exceeded the difference between $615,000 and $1,5000,000.

Allowance for Remuneration 69 A fiduciary who is ordered to account for his profit, or on whom a constructive trust is imposed, will be entitled to an allowance for his work and skill, so long as he has acted honestly (Boardman v Phipps [1967] 2 AC 46). Where a fiduciary has been particularly fraudulent, compensation may be denied altogether (United States Surgical Corp v Hospital Products International Pty Limited [1983] 2 NSWLR 157 at 242-3). However, an allowance for work and skill is a different matter from the calculation of profit actually made or derived. 70 To the extent that it was established that the profits of V-Flow and the increase in value of its business were generated by skills and efforts of the individual appellants, some allowance might be appropriate. However, such an allowance is quite different from reasonable remuneration for the work actually performed by the individuals in the business, being work that was necessary such that, whoever performed the work, it would have been a reasonable expense of the business. 71 There is no suggestion that Messrs Aloe and Matkovic did not in fact work in the business acquired by V-Flow. In calculating the opportunity lost by Holyoake, his Honour quite properly allowed as an expense the notional salaries that would have been paid by Holyoake to Messrs Aloe and Matkovic. By the same token, in calculating the profit made by V-Flow, there is no reason why an appropriate amount for reasonable remuneration should not be treated as an expense. It appears that, in fact, no salary was paid to either Mr Aloe or Mr Matkovic. However, if they had not worked in the business, it would have been necessary to pay someone else to do the work that they did. There is no suggestion that the amount allowed for the purpose of calculating the lost opportunity of Holyoake was inappropriate. It was based upon the salaries that were being paid by Holyoake to Mr Aloe and Mr Matkovic prior to their resignation. In the circumstances, those amounts should be treated as an expense incurred by V-Flow for the purpose of calculating the profits made by V-Flow during the relevant period.

Interest 72 The primary judge considered that the interest paid by V-Flow should not be allowed as an expense. His Honour found that V-Flow borrowed money from Westpac in order to finance the purchase price of $615,000. V-Flow granted a charge over its assets to secure the borrowings, which were also guaranteed by Messrs Brown, Aloe and Matkovic. V-Flow incurred interest on the monies borrowed, which was paid to service the loan from Westpac. His Honour observed that Variflow's business had been acquired as a result of breaches of fiduciary duty and other statutory obligations to Holyoake and that the interest had been paid in respect of the purchase of the business. His Honour considered that, in circumstances where the assets of the business were deployed as security, the interest payments should not be allowed as an expense on the taking of an account of profits. 73 Where property is acquired in breach of fiduciary duty, with trust money mixed with personal money, it may be appropriate, in some cases, to restrict the profit or gain for which an account is to be given to a proportionate part of the total profit or gain, based on the quantum of the trust money used compared with the quantum of personal money used. However, it will not be an appropriate case for the application of that principle where the fiduciary does not use his own money but, having used trust money to provide the deposit or part of the purchase price, so as to acquire an equitable interest in the property, provides the balance of the purchase price by way of a loan secured by mortgage on the property (Paul A Davies Australia Pty Limited v Davies [1983] 1 NSWLR 440). 74 Nonetheless, that is not this case. Here, Holyoake seeks an account by reference to the profits made by V-Flow during the relevant period. There is no doubt that interest on the loan from Westpac was an expense properly incurred in making those profits. There is no reason why that expense should not be regarded as an expense for the purpose of calculating the profits made by V-Flow.

Quantum of Compensation under s 1317H 75 Holyoake did not press for a constructive trust over the business acquired by V-Flow or over the benefits of its capital growth and profits on an indefinite basis. Nor did it seek an account of capital profits. His Honour considered that, as a result, if an account of V-Flow's net profit over the 27-month period sought by Holyoake were granted, Messrs Aloe and Matkovic would retain the benefits of capital growth from the time that V-Flow acquired Variflow's business and would retain the profits derived from the business from 1 July 2011. 76 One basis for gauging the measure of profit for the purposes of taking an account would be the difference between the price paid for Variflow's business and the value of that business at the time of taking the account. In order to determine the value of the business at that time, it would normally be necessary to arrive at a figure for the maintainable annual profits of the business for the purposes of applying an appropriate multiplier to arrive at the capital value of those maintainable profits. While the primary judge referred to evidence that the business had a value exceeding $1.5 million, the Full Court was not taken to that evidence. On that basis, the profit for which account should have been given would be in the vicinity of $900,000, being a value in excess of $1.5 million less the consideration paid of $615,000. 77 In assessing the value, an allowance might have been made for the contribution to that value of the skills and efforts of the appellants. For the reasons given by the primary judge, however, it may not have been appropriate to make such an allowance in the present case, having regard to the conduct of the individual appellants, which his Honour found was deliberately dishonest. That finding is disputed but, assuming the finding was open, that may be an appropriate exercise of discretion. 78 The Full Court was not taken to the evidence concerning the value of V-Flow's business. It is not clear whether that value was based on a capitalisation of maintainable profits or some other basis. A fortiori, if the valuation was made on the basis of maintainable profits, the Full Court has no material before it concerning the manner in which maintainable profits were calculated. Specifically, the Full Court was not told whether allowance was made for interest and whether an allowance was made for salaries for any of the individual appellants. Having regard to the calculation of equitable compensation for lost opportunity accepted by the primary judge, it would be expected that those items were allowed as expenses. However, that is a matter for speculation so far as the Full Court is concerned. 79 Assuming that calculation of profits over the 27-month period adopted by the primary judge is the correct approach, the figure arrived at by his Honour as the profit that would have been made by Holyoake had it acquired V-Flow's business, of $1,046,923, is much closer to the profit of approximately $900,000 calculated on the basis indicated above. However, Holyoake does not appear to have propounded a case for assessment of profit on that basis. Rather, it put forward the 27-month period as the period for which profit should be calculated, without any claim for an account in respect of the capital profit. 80 One course would be to remit the matter to the primary judge for assessment of damages on the basis that the capital profit is the relevant measure. The difficulty with that course is that the appellants have not contended for it. Rather, they have contended that the period adopted for calculating the profit is too long. 81 Part of the damage that Holyoake suffered as a result of the contravention was the lost opportunity. In those circumstances, it may have been appropriate to treat that value, namely, $1,046,923, as the quantum of damages under s 1317H(1), not merely the amount arrived at on the account of profits calculated on the basis above, namely $788,710, being: Adjusted Profit $1,468,178 Less interest $144,846 Less salaries Mr Aloe $277,562 Mr Matkovic $258,060 Balance $788,710 82 The damages for the lost opportunity included the anticipated profits that Holyoake would have earned had the respondents not acted as they did and instead allowed Holyoake to exploit the opportunity of acquiring Variflow's business. If profits made by V-Flow and Messrs Aloe and Matkovic were added, under s 1317H(2), to Holyoake's damages for loss of opportunity, in arriving at the damages payable under s 1317H(1), the overall award would be inflated unjustifiably by double counting of the profit element. There may be cases where the wrongdoer's conduct results in damage from loss of opportunity that both the wrongdoer and the injured party could not exploit, where it would be appropriate to make a cumulative award under s 1317H(1) and s 1317H(2) that includes the wrongdoer's profits. That would be because those profits would not have taken account of the value of the opportunity that the injured party could not exploit as a result of the wrongdoer's conduct. But that is not this case. In the present case, the value of Holyoake's loss of opportunity will compensate it for the profits the wrongdoers in fact earned as well as further loss it incurred that resulted from their contraventions. 83 However, to conclude that the damages for which Holyoake may elect under s 1317H were $1,046,923 does not appear to be the way in which the case was propounded before the primary judge. In its closing submissions to the primary judge, Holyoake dealt separately with its claims for an account of profits, statutory compensation and equitable compensation. In relation to account of profits, Holyoake quantified its claim at $1,469,178. As indicated above, his Honour accepted that calculation. 84 In dealing with statutory compensation, Holyoake submitted that it was entitled to a compensation order under s 1317H(1) against each of the appellants for damage suffered by it. Holyoake then submitted that, since V-Flow had made profits of $1,469,178 resulting from the contraventions of the Act by the individual appellants, Holyoake was entitled to a compensation order under s 1317H against all of the appellants in the sum of $1,469,178. Holyoake said in its submission that the Court should award as a debt due from all of the appellants the sum of $1,469,178, being the profit made by V-Flow because of the contraventions by the appellants. 85 The primary judge accepted Holyoake's contention that the statutory damages under s 1317H, including the damages deemed to be included by s 1317H(2), should be the amount assessed in relation to the claim for an account of profits. There is no doubt that the statutory damages under s 1317H may include profits made by any person resulting from the relevant contravention. Holyoake does not appear to have contended, however, that the statutory compensation or damages under s 1317H should be fixed by reference to the lost opportunity. In its closing submissions, Holyoake dealt with that claim separately and submitted that the value of its lost opportunity should be assessed at $1,046,923. The primary judge accepted that contention and adopted that figure as the value of Holyoake's lost opportunity to acquire V-Flow's business. Holyoake submitted on the appeal that his Honour had been correct to award, as damages under s 1317H, the profits made by V-Flow and did not contend for a different measure. 86 In order to save the costs of a further hearing, the appropriate course would be to conclude that the correct finding in relation to an account of profits would involve an allowance of the two items for interest and salaries from the profits for the 27-month period namely $788,710, being $1,469,178, less allowance for remuneration ($258,060 + $277,562) less interest ($144,846). In all of the circumstances, that figure of $788,710 would be the appropriate compensation under s 1317H. Holyoake could then be permitted to make an election between the resulting figures, which would be as follows: Account of Profits $788,710 Compensation under s 1317H $788,710 Equitable compensation for loss of opportunity $1,046,923

Individual Benefits 87 Apart from the questions of the period for which profits are calculated and the causal connection between those profits and the contravention, the primary judge also dealt with claims in respect of individual benefits derived by Messrs Brown, Aloe and Matkovic from Holyoake. The individuals complain that there was no finding made by the primary judge that any of the payments in question resulted from contraventions of the Corporations Act found by his Honour. They say that the contraventions found could not logically have had any causal connection between the payments. Accordingly, it could not be said that they were damage suffered by the corporation that resulted from any contravention or that they were profits made by the individuals resulting from any contravention. 88 It can be said that, had Holyoake's management been aware of the breaches and contraventions on the part of the individual appellants, the individual benefits would not have been conferred. However, the question is whether it can be said that the benefits resulted from the relevant contraventions. To the extent that the benefits resulted from the exercise of a discretion on the part of Holyoake's management, it can fairly be said that they resulted from the contraventions. Had there been full disclosure of the conduct now complained of, the benefits would not have been conferred. In that sense, it can be said that the benefits from the contravention, being the failure to disclose their conduct. 89 However, that raises the question as to whether or not the contravention was a failure to disclose the conduct. That is not the complaint made of contravention of s 181, s 182 or s 183. It may be concluded that Mr Brown's failure to disclose the conduct was a failure to exercise his powers and discharge his duties in good faith and in the best interest of Holyoake and for a proper purpose. That was a contravention of s 181. That is sufficient for the conclusion that the benefit conferred on Mr Brown resulted from the contravention. However, that raises a question as to whether or not the value of the trip to Vietnam was in fact a benefit conferred on Mr Brown and Mr Aloe. While they might not have been asked to visit Vietnam, there is no suggestion that the trip was paid for by Holyoake for any reason other than because it was a benefit to Holyoake. That question, however, was not raised in the appeal.

CONCLUSION 90 The appeal should be upheld. The parties should be directed to bring in short minutes reflecting the conclusions set out above. The parties should be invited to make submissions as to the costs of the appeal. I certify that the preceding ninety (90) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Emmett, Edmonds and Rares.