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[2024] NSWSC 1409
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Driver v Botanical water Technologies Pty Ltd [2024] NSWSC 1409 (8 November 2024)
Last Updated: 8 November 2024
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Supreme Court
New South Wales
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Case Name:
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Driver v Botanical water Technologies Pty Ltd
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Medium Neutral Citation:
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Hearing Date(s):
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12 to 15; 19, 21 and 22 August 2024
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Decision Date:
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8 November 2024
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Jurisdiction:
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Equity - Commercial List
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Before:
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Ball J
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Decision:
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See paras [193] to [195]
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Catchwords:
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CONTRACTS — Breach of contract — Remedies — Damages
— Remoteness of damage — Rule in Hadley v Baxendale
(1854) 156 ER
145 — Koufos v Czarnikow Ltd [1969] 1 AC 350 — Where loss or damage
claimed is too remote from breach of
contract CONTRACTS —
Unconscionable conduct — Australian Securities and Investments Commission
Act 2001 (Cth) s 12CB — In connection with financial services —
Meaning of “in connection with” — Where meaning given a wide
operation to include acquisition of shares — Where conduct complained of
not sufficiently connected to antecedent unconscionable
dealings CONTRACTS — Unconscionable conduct —
Australian Securities and Investments Commission Act 2001 (Cth) s 12CA —
Unconscionable conduct within the meaning of the unwritten law — Whether
circumstances of vulnerable parties amounted
to special disadvantage —
Where Plaintiffs found not to have suffered from some special disadvantage
CORPORATIONS — Members’ rights and remedies —
Oppression — Relief sought under Corporations Act 2001 (Cth) ss 232, 233
for conduct they believe is contrary to the interests of the members as a whole
— Where Plaintiffs have not identified in final
submissions what relief
they seek, nor established that the conduct was contrary to the interests of the
members as a whole EQUITY — Fiduciary duties —
Fiduciary relationships — Construction — Hospital Products Ltd v
United States
Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 — Where fiduciary
duties are owed EQUITY — Fiduciary duties — Fiduciary
relationships — Partners and joint venturers — Where relationship
between
parties is as a joint venture or some similar commercial arrangement
— Fiduciary relationship found pursuant to broader characterisation
of
parties’ relationship |
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Legislation Cited:
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Cases Cited:
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Texts Cited:
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J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s
Equity Doctrines and Remedies, 5th (2015), LexisNexis Butterworths
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Category:
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Principal judgment
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Parties:
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David Driver (First Plaintiff)
Ambrosios Kambouris (Second
Plaintiff)
Kambouris Shares Pty Ltd (Third Plaintiff)
DJD Trading Pty Ltd
(Fourth Plaintiff)
Botanical Water Technologies Pty Ltd (First
Defendant)
Botanical Water Technologies Ltd (Second Defendant)
Botanical
Water Technologies IP Ltd (Third Defendant)
MyCo Pty Ltd (Fourth
Defendant)
Terry Paule (Fifth Defendant)
Aqua Botanical Beverages
(Australia) Pty Ltd (In Liquidation) (Sixth Defendant)
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Representation:
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Counsel:
DFC Thomas SC with H Atkin (Plaintiffs)
J Hynes with MR
Davis (Third to Fifth Defendants)
Solicitors:
McCabes Lawyers
(Plaintiffs)
Corrs Chambers Westgarth (Third to Fifth Defendants)
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File Number(s):
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2021/181606
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Publication Restriction:
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None
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JUDGMENT
Introduction
- In
these proceedings, the plaintiffs advance a number of claims against the fourth
defendant, MyCo Pty Ltd (renamed Biocheese Pty
Ltd on 3 September 2021)
(MyCo), and the fifth defendant, Mr Terry Paule (Mr
Paule) (together, the Paule Defendants), arising out of
MyCo and Mr Paule’s investment in technology developed by the second
plaintiff, Dr Ambrosios Kambouris (Dr Kambouris), for the
extraction of drinkable water (referred to by the parties as “botanical
water”) from wastewater sourced from
the processing of fruit, vegetables
and sugar cane. Mr Paule is a director of MyCo and together with his brother, Mr
Spiro Paule
(Mr S Paule), controls that company. The first
plaintiff, Mr David Driver (Mr Driver), was a close business
associate of Dr Kambouris who also invested in the technology.
- In
order to explain the nature of the plaintiffs’ claims, it is necessary
first to set out the factual background from which
they are said to arise. But
before doing that, something should be said about the evidence in the
case.
The evidence
- Both
Dr Kambouris and Mr Driver gave evidence. I accept that both endeavoured to give
their best recollection of the events relevant
to these proceedings. The
defendants served affidavits from Mr Paule and from Ms Vicky Pappas, who is
variously described as the
general manager and chief executive of MyCo. Neither
of those persons was called to give evidence, although some paragraphs of their
affidavits were tendered by the plaintiffs. It is reasonable to infer from the
failure to call them that they could not have given
evidence that would have
assisted the defendants’ case: Jones v Dunkel (1959) 101 CLR 298;
[1959] HCA 8; Kuhl v Zurich Financial Services Australia Ltd (2011)
243 CLR 361; [2011] HCA 11 at 63. However, it does not follow from
that that the evidence of Dr Kambouris and Mr Driver should be accepted in its
entirety.
The passage of time and the intervention of these proceedings are
likely to have affected their memories. Moreover, many of the communications
between the parties were by email, SMS or WhatsApp. Some of those communications
have been lost but many were in evidence. In general,
they are likely to provide
more reliable evidence of what occurred than oral testimony given some years
later. In any event, as will
become apparent, resolution of a number of the
factual issues between the parties is unnecessary for the resolution of the
issues
in this case. The following findings are taken largely from the
documentary evidence which is supplemented where necessary by the
evidence given
by Dr Kambouris and Mr Driver.
Factual background
The plaintiffs and the Patents
- Dr
Kambouris has several science-related qualifications including Bachelor of
Science degrees majoring in microbiology and in immunology
and pathology and a
PhD focussing on the effect of diet upon lipoproteins and their consequent
effect on the risk of heart disease.
He also has a graduate certificate in
metallurgy. He developed the process for extracting drinkable water from the
wastewater in
or about 2010. At that time, Dr Kambouris applied for and
subsequently obtained, originally in his own name, a patent for the invention
(the Recovering Water Patent). On 17 May 2013, Dr Kambouris
transferred the patent to the third plaintiff, Kambouris Shares Pty Ltd
(KSP), a company in which Dr Kambouris owns 80 percent of the
shares and his now former wife, Ms Gillian Kambouris, 20 percent of the
shares.
The patent has since been granted in a number of jurisdictions.
- Between
2010 and 2018, Dr Kambouris also applied for several related patents in
Australia and a number of other jurisdictions (together
with the Recovering
Water Patent, the Patents).
- On
11 October 2011, Dr Kambouris incorporated the sixth defendant, Aqua Botanical
Beverages (Australia) Pty Ltd (ABBA), which is now in liquidation,
with the intention of commercialising his invention through that company.
Dr Kambouris was at the
time the sole director and shareholder of
ABBA.
- In
late 2013 or early 2014, Dr Kambouris met Mr Driver, who agreed to become the
chief executive officer of ABBA. Mr Driver had previously
been the chief
executive officer of San Miguel Yamamura Know Pty Ltd, which operated a
packaging business. He has a degree in accounting.
According to both
Mr Driver and Dr Kambouris, at about the time Mr Driver became the CEO of
ABBA, he acquired a 27 percent interest
in the Patents through the fourth
plaintiff, DJD Trading Pty Ltd, although the assignment of that interest was not
formalised until
2018. A company associated with Mr Driver, L & L Wood Pty
Ltd, also acquired 5 percent of the shares in ABBA. Its shareholding
was later
increased to 15.25 percent. Mr Driver became a director of ABBA on 5 November
2015.
- On
28 February 2014, Dr Kambouris registered the trademark
“AQUABOTANICAL”. Dr Kambouris has registered various versions
of
that trademark in Australia and a number of other jurisdictions (together,
the Trademarks). It will be convenient in this judgment to refer
to the Patents, associated knowhow and the Trademarks as the Intellectual
Property or IP.
- On
1 July 2014, KSP licensed the Recovering Water Patent to ABBA. On 13 September
2014, Mr Driver entered into a loan agreement with
ABBA under which he agreed to
lend ABBA an amount of $680,000 before 28 February 2016. There are two versions
of the loan agreement
in evidence. One provides that the loan is repayable after
15 years. The other leaves the repayment date blank. Mr Driver says that
in
all he advanced ABBA in excess of $2 million.
- Over
time, ABBA issued shares to several other entities in exchange for services
those entities provided to it.
MyCo invests in the technology
- In
early 2015, Dr Kambouris was introduced to Mr Paule during a tour that
Dr Kambouris gave of the factory in Mildura where ABBA had
started
manufacturing bottled water using Dr Kambouris’s invention. That water was
sold under the name “Aqua Botanical”.
- Coincidentally,
Mr Paule was (and is) the chairman of Findex (Aust) Pty Ltd, a professional
services firm, which trades under the
name Crowe Australasia or Crowe Horwath
(Findex). Mr S Paule was (and is) the managing director of Findex.
Findex had provided professional services to ABBA since 2014.
- Approximately
a year after Dr Kambouris was introduced to Mr Paule, Dr Kambouris and Mr
Driver met with Mr Paule and his brother in
Melbourne. During the meeting,
Mr Paule and his brother expressed an interest in investing in ABBA through
MyCo (which in the material
before the Court is sometimes referred to as
“the PFO” or “the Paule Family Office”). Mr Paule and
his brother’s
initial position was that they wanted a 50 percent interest
in ABBA, which was said to be consistent with the investment policy of
MyCo.
That proposal was unacceptable to Mr Driver and Dr Kambouris.
The
parties sign a Heads of Agreement
- Eventually,
on 19 April 2017, ABBA and MyCo entered into a Heads of Agreement. The Heads of
Agreement was expressed to be immediately
binding.
- By
cl 3(a) of the Heads of Agreement, it was agreed that “all Aqua
Botanical patent(s) and trademarks(s) [sic] relating to Australia
will be
exclusively licenced [sic] to ABBA”. By cl 3(b), ABBA agreed
immediately to “transfer 25% of its paid up share
capital to MYCO and/or
nominee”. By cl 3(c), it was agreed that ABBA would have three
directors including one “from MYCO
being Spiro or Terry Paule”. By
cl 3(d), the parties agreed to establish a “Newco” as “JV
partners to produce
sell and brand develop a range of botanical water from fruit
and vegetable or sugarcane sources and related products outside Australia
and
for global markets”. It was agreed that the patents and trademarks outside
of Australia would be licensed exclusively to
Newco and that Newco would issue
25 percent of its share capital “to MYCO and/or nominee”. It was
also provided that
“The remaining 75% shareholding shall be allocated to
the originating founders”. Clause 3(e) states that NewCo “shall
consist of three (3) directors including (1) from MYCO being Spiro or Terry
Paule”.
- On
27 November 2017, the first defendant, Botanical Water Technologies Pty Ltd
(BWT), which was the Newco contemplated by the Heads of Agreement,
was incorporated. Originally, Mr Paule and his brother were the directors
of
BWT. Mr Driver and Dr Kambouris were added as directors on 10 October 2018.
- Following
execution of the Heads of Agreement, the day-to-day management of ABBA’s
business remained with Mr Driver and Dr Kambouris
with some administrative
assistance from MyCo. Mr Driver continued to fund that company through loans
that he made to it. ABBA held
weekly management meetings that were often chaired
by Mr Paule or, in his absence, Ms Pappas. Mr Paule’s principal focus,
however,
was on developing the international side of the business. He instructed
solicitors to prepare a shareholders agreement, although
it appears that the
drafting of that agreement was overtaken by events.
Dr
Kambouris’s living arrangements
- In
early 2018, Mr Paule learned that Dr Kambouris was living in a room at Lamattina
Beverage’s factory in Mildura, where ABBA
conducted its operations,
because he could not afford to rent his own accommodation. Mr Paule offered to
pay Dr Kambouris’s
rent for a house in Mildura as a “gift” or
“personal contribution”. Dr Kambouris took up that offer. Mr Paule
ceased to pay Dr Kambouris’s rent in March 2021.
The
first restructure
- At
about the time BWT was incorporated, Mr Driver, Dr Kambouris and Mr Paule
agreed to instruct Findex to prepare advice on transferring
the IP (to quote
from a document prepared by Findex):
... into a new vehicle / structure which would be:
i. Located in the appropriate jurisdiction (i.e. Australia or
overseas) from a business perspective;
ii. Facilitate global commercialisation of IP;
iii. Facilitate investment from both domestic and foreign
investors;
iv. Limit the current legal liability risk faced by Dr Bruce
[Dr Kambouris], Mr Driver and the PFO.
- That
advice ultimately led to a series of transactions in April 2018 and agreements
entered into on or about 30 June 2018 by which
each party transferred their
interest in the IP to special purpose companies in exchange for shares in those
companies. Those shares
were then transferred to a wholly owned subsidiary of
BWT known as BWT IP 4 Pty Ltd (BWT IP 4) in exchange for shares in
BWT. The result was that BWT owned 100 percent of the shares in BWT IP 4 which
indirectly owned the IP.
Dr Kambouris held 27.1 percent of the shares in BWT, Ms
Kambouris held 17.8 percent of the shares, KSP held 5.1 percent of the shares,
DJD held 25 percent of the shares and Mr S Paule held 25 percent of the
shares.
- By
an agreement dated 29 June 2018, BWT licensed the IP to ABBA and appointed ABBA
to conduct research and development on its behalf.
It was intended that ABBA
would continue to be responsible for developing the business in Australia and
that Mr Driver would continue
to have day-to-day responsibility for managing
that company. The international side of the business would be developed through
BWT
and Mr Paule and other employees of MyCo would have day-to-day
responsibility for managing that company.
- The
agreements executed in June 2018 included two referred to as the “BWT
Implementation Deed” and the “ABBA Implementation
Deed”. The
parties to both those agreements included MyCo, KSP, Mr Paule, Mr S Paule,
Dr Kambouris, Ms Kambouris, Mr Driver
and DJD.
- Recital
A to the BWT Implementation Deed relevantly provided:
Commencing from early 2016, the Parties conducted negotiations relating to
international opportunities for the Patents. Those negotiations
resulted in a
commercial agreement (reached orally) in around early February 2017 that MYCO
and/or its nominee would obtain a 25%
ownership in the Patents and the owners of
the Patents to form a new company to focus on international opportunities ... It
was agreed
that MYCO or its nominees would acquire an ownership in the Patents
in return for MYCO providing or procuring assistance and services
for
BWT’s benefit.
- By
cl 1.1(d) of the BWT Implementation Deed, the parties agreed that the
directors of BWT would be Dr Kambouris, Mr Driver and Mr
Paule.
Consistently with that agreement, Mr S Paule ceased to be a director of BWT on
10 October 2018.
- The
issue of shares in ABBA to MyCo and the appointment of Mr Paule to the board of
ABBA had not occurred in accordance with the Heads
of Agreement. By cls 1.1
and 1.2 of the ABBA Implementation Deed, the parties agreed to take steps to
issue or to transfer shares
in ABBA to MyCo or its nominee to give it a 25
percent interest in ABBA and to procure the appointment of Mr Paule as a
director.
- Clause
1.3 of the ABBA Implementation Deed was in the following terms:
(a) Within 30 days from completion of MYCO and/or its nominee
being registered as the shareholder of the Shareholding, the parties
agree to
negotiate in good faith to adopt a shareholders' agreement for ABBA.
(b) Pending the adoption of the ABBA Shareholders' Agreement,
the parties shall ensure that none of the matters listed in Schedule
1 of this
Deed are entered into or pursued by or on behalf of ABBA unless such matters
have the unanimous consent of directors including
the representative director of
MYCO.
- Schedule
1 relevantly provided:
The following matters will require the approval of all Directors, including for
the avoidance of doubt the Director appointed by
MyCo Pty Limited if so
appointed:
(a) Issue, allot or grant any right to the issue of Shares in
the Company.
...
(e) Effect a sale of all or a substantial part of the Company
or the assets (including the Business) of the Company or a subsidiary
...
(g) Appoint or remove an executive or auditor of the
Company.
(h) Make a material change in the Business of the Company.
...
(k) Grant security over the assets of the company or factor or
assign a book debt.
...
(t) Appoint or remove a Director.
The meeting in Ballina and subsequent events
- On
or about 28 May 2019, Mr Paule and Mr Driver were in Ballina to attend a meeting
with a potential supplier of water. Following
the conclusion of the meeting,
they had lunch at a local cafe. Mr Driver gave a detailed account of a
conversation they had during
the lunch. According to him, he told Mr Paule that
he was under enormous emotional and financial stress and that he did not have
the funds to continue to fund ABBA and that he did not think Dr Kambouris would
be able to do so either. By that stage, ABBA owed
trade creditors in excess of
$100,000, with debts ageing by several months.
- Mr
Driver says that Mr Paule agreed that MyCo would fund ABBA, including the
payment of outstanding ABBA creditors, and that it would
also take over the
day-to-day management of ABBA, which could be done from MyCo’s office in
Melbourne. Mr Paule suggested that
in return, his and his brother’s
shareholding in ABBA and BWT should be increased to 50 percent. Mr Driver
replied that he
thought that that would be unacceptable to Dr Kambouris and that
it would be appropriate if Mr Paule and Dr Kambouris each had a
37.5 percent
interest in both ABBA and BWT and that he (Mr Driver) retain his 25 percent
interest in BWT and 17.25 percent interest
in ABBA.
- Following
that lunch, Mr Paule asserted in emails that Mr Driver had agreed to continue to
fund ABBA up until 30 June 2019 after which
time MyCo would take over those
responsibilities. That remained an issue between the parties and caused a
substantial deterioration
in the relationship between Mr Driver and
Mr Paule.
- MyCo
took over the management of ABBA from about 1 July 2019. Following a somewhat
acrimonious exchange of text messages between Mr
Driver and Mr Paule, Mr Driver
agreed to take responsibility for debts incurred by ABBA before that date,
although there was a dispute
between him and Mr Paule concerning the amount he
was required to pay, which was never completely resolved.
- On
5 April 2019, BWT (which was incorrectly named as “Aqua Botanical
Beverages Australia Pty Ltd (ACN 623 093 103)” entered
into an
agreement with ABBA by which it granted an exclusive licence to use, among other
rights, the IP in Australia.
- On
19 October 2019, after Dr Kambouris had transferred 12.5 percent of the shares
in ABBA and BWT to Mr Paule and his brother as trustees
of the Paul Family
Trust, Mr Driver sent Mr Paule an email in which he said:
After reflection and reconsideration, I will not be making further payments
towards the expenses of ABBA. To date, I have made substantial
continuing loans
to the company. In our meeting at Ballina it was proposed that you were to take
over the payment of ABBA expenses
effective straight away and continue with the
payment of BWT expenses, in return, you would receive the benefit of 12.5% of
further
shares in ABBA and BWT from Dr. Bruce [that is, Dr Kambouris]. This was
later discussed and accepted by Dr. Bruce and confirmed to
you.
- Mr
Paule responded to that email in the following terms:
I dont [sic] think so. I dont [sic] think you would want to embarrass yourself.
Let’s do what needs to be done.
Payment is now overdue.
- There
were further exchanges of emails and text messages between Mr Driver and Mr
Paule on the subject. Mr Driver paid some of the
outstanding pre-July 2019
accounts, but not all of them, which continued to be a source of friction. Mr
Driver accepted in cross-examination
that by 18 November 2019, he and
Mr Paule were no longer on speaking terms. By this stage, they had stopped
communicating through
SMS and WhatsApp. Dr Kambouris gave evidence that by early
2020, he “highly distrusted” Mr Paule.
- MyCo
also maintained that ABBA had been poorly managed by Mr Driver. On 17 December
2019, it appointed Mr Michael Landy of Eagle Financial
Solutions Pty Ltd to
undertake a review of the loan account between Mr Driver and ABBA and the past
management of the company. Mr
Landy ultimately produced what he described as a
“Preliminary Review and Observations” on 16 November 2020.
Proposed second restructure
- Despite
the deteriorating relationship, in or about December 2019, Mr Paule raised with
Dr Kambouris and Mr Driver the idea of establishing
an overseas entity and
raising capital through that entity. Mr Paule asked Findex to provide advice on
that proposal. In an advice
dated 19 December 2019, Findex discussed two
alternative structures, one with an Australian based parent company and the
other with
one based in the United Kingdom. Its preferred structure involved
establishing a new holding company in the UK in which the existing
shareholders
in BWT would receive shares in the UK company in exchange for their shares in
BWT and a new UK subsidiary of the holding
company would be incorporated to hold
the IP. In advice dated 31 January 2020, Findex advised that capital gains tax
rollover relief
would be available if the shareholders of BWT exchanged their
shares in BWT for an equal shareholding in the UK holding
company.
Proposed capital raising
- At
the same time, Mr Paule with the assistance of advisors including Findex, was
working on raising capital. The proposed capital
raising involved issuing 20
percent of the capital of the company to new investors in order to raise USD7
million. In that context,
Dr Kambouris had raised the possibility of selling
into the capital raising a 5 percent stake held by him, with the result that if
the capital raising went ahead in those terms, DJD would hold 21.56 percent of
the shares, Dr Kambouris and Ms Kambouris would hold
26.09 percent, the S &
T Paule Family Trust would hold 32.34 percent and the new investors would hold
20 percent.
- In
connection with the capital raising, Findex prepared a PowerPoint presentation
for potential investors. The original version of
the presentation appears to
have been prepared in about November 2019. The presentation appears to have
assumed that a holding company,
referred to as “Botanical Waters
Technologies Inc”, would be incorporated in the United States. One slide
stated that
the “Executive Team” of that entity would consist of
Dr Kambouris (described as the “Founding Director”),
Mr Paule,
Mr Driver and Mr Adam Priester, who was described as “CEO & Managing
Director”. Mr Priester was a friend
of Mr Paule who had provided
advice in relation to the proposal to raise capital and to expand the business
internationally. One
version of the presentation contains additional slides that
provided background information in relation to each member of the Executive
Team. On 29 January 2020, Dr Kambouris flew from Mildura to Melbourne and met Mr
Priester for the first time. Mr Paule and Ms Pappas
were also present. During
the meeting, Mr Priester spoke to a version of the PowerPoint presentation.
On 14 February 2020, Mr Priester
gave Mr Driver a copy of the presentation at a
meeting they had at Findex’s Sydney offices.
MyCo obtains
security for its loans
- In
around January 2020, Mr Paule or Ms Pappas raised with Dr Kambouris the question
of MyCo obtaining security for its loans to BWT
and ABBA. Drafts of the proposed
agreements were provided to Dr Kambouris and Mr Driver.
- On
7 February 2020, Ms Pappas circulated amended agreements, which
Dr Kambouris signed on 12 February 2020 after receiving legal advice
from
his lawyer, Mr Ashley Smith of Ashley Smith & Partners. There were two
agreements. One was between MyCo and BWT. The other
was between BWT and
ABBA.
- Under
the first agreement, MyCo agreed to lend BWT an amount up to $3,750,000.00. The
loan was expressed to be repayable three years
from the initial drawdown date
“or such later date as agreed by the Lender at its discretion”. The
loan was secured by
a General Security Deed that gave MyCo a first ranking
charge over BWT’s present and future assets.
- Under
the second agreement, the loan amount was $2,000,000.00. Again, it was repayable
three years after the initial drawdown date
or such later date as agreed by BWT
at its discretion. That loan was secured by a first ranking charge over all
ABBA’s present
and future assets under what was also described as a
“General Security Deed”.
Implementation of second
restructure
- On
4 and 5 February 2020, the second defendant, Botanical Water Technologies Ltd
(BWT UK), and third defendant, Botanical Waters Technologies IP
Ltd (BWT IP UK), respectively were incorporated in the United
Kingdom with Mr Paule as their sole director and shareholder.
- As
part of the restructure, each of the shareholders in BWT including Dr Kambouris
and DJD transferred their shares in BWT to BWT
UK and received an equivalent
number of shares in BWT UK in return, with the result that DJD owned 25 percent
of the shares, Dr Kambouris
owned 28.5 percent of the shares, Ms Kambouris owned
9 percent of the shares and Mr Paule and his brother owned 37.5 percent of the
shares.
- There
is an issue concerning precisely when the relevant transactions occurred. The
plaintiffs plead in para 77 of their Further Amended
Commercial List Statement
(FACLS) that “[o]n 19 February 2020, the shareholders of BWT
transferred their shares to BWT UK in exchange for an equivalent number
of
shares in BWT UK”. That paragraph of the FACLS is admitted by the
defendants in their list response. However, according
to evidence given by Dr
Kambouris and Mr Driver, they did not sign the relevant documents until 21
February 2020, after they had
received assurances that they would both be
appointed as directors of BWT UK. That evidence is consistent with the
contemporaneous
documents and the uncontradicted evidence given by Dr Kambouris
and Mr Driver, and I accept it.
- In
an email sent at 9.43 am on 20 February 2020 to Mr Priester, and copied to Dr
Kambouris, Mr Driver said:
We have received the below advise [sic] from our legal counsel, the main issue
is that the Board of BWT(Eng) should reflect that
of BWT(Aus).
- In
an email sent at 10.08 am, Mr Priester raised the issue with Mr Chris
Richardson, an associate partner of Findex who was working
on the transaction.
According to Mr Driver, he spoke to Mr Richardson by telephone at approximately
1.30 pm. He told Mr Richardson
that he and Dr Kambouris were on their way to
meet with Mr Priester, who had the documents for them to sign but before they
signed
them the main issue was their directorships of BWT UK. Mr Richardson
replied that he had spoken to Mr Paule and that he had confirmed
that the boards
and shareholdings of the UK companies would reflect the board and shareholdings
of BWT. At 3.19 pm, Mr Richardson
sent an email to Mr Simon Saitowitz, a
solicitor with Fried Frank who had been engaged by MyCo or Mr Paule in relation
to the setting
up of BWT UK, instructing them to update the director and company
secretary details for BWT UK to show the directors as Mr Kambouris,
Mr Driver
and Mr Paule, with Mr S Paule as the Secretary. That email was copied to Mr
Paule, Mr Driver, Dr Kambouris, Mr Priester
and Ms Pappas, among others. Mr
Paule said nothing to suggest that the instructions to Fried Frank did not
represent his position.
- Mr
Driver says in his affidavit evidence that he did not sign the documents until
the following morning and that he then sent them
to Ms Pappas. That evidence,
however, seems to be mistaken. At 10.14 pm on 20 February 2020, Mr Priester sent
Mr Saitowitz an email,
which was copied to Mr Paule and Ms Pappas among others,
saying “I’m pleased to advise that we have had all shareholders
sign
the documents and you will be receiving the electronic copy in the morning
(Australia time).” The likelihood is that Mr
Driver and Dr Kambouris
signed the documents when they met with Mr Priester. However, that does not
alter the fact that they only
did so after receiving assurances that they would
be appointed directors of BWT UK. At the same time, Dr Kambouris executed
documents
by which KSP transferred to BWT IP UK a number of international Aqua
Botanical trademarks.
- BWT
UK issued share certificates in respect of the shares that had been issued to
DJD and Dr Kambouris and Ms Kambouris. However,
it appears that the share
certificates were not provided to Mr Driver or Dr Kambouris and the issue of the
shares was not recorded
in the records held by Companies House in the United
Kingdom.
- On
or about 26 February 2020, Dr Kambouris was provided with several documents to
sign by which the international Aqua Botanical trademarks
and the Patents and
associated knowhow were to be transferred from Dr Kambouris and entities
associated with him to BWT IP UK. Why
it was thought to be necessary for Dr
Kambouris to sign those documents is not properly explained by the evidence. The
IP had already
been assigned to various subsidiaries of BWT IP 4, the shares in
which were owned by BWT. BWT became a subsidiary of BWT UK as a
result of the
transactions that occurred on 20 February 2020. It appears, however, that the
earlier transactions had not picked up
all the Patents or that some were still
treated as belonging to Dr Kambouris, necessitating the additional assignments.
In fact,
Dr Kambouris was asked to sign additional documents as late as October
2020 which assigned some of the Patents to BWT IP UK, which
he did.
- Dr
Kambouris was reluctant to sign any documents relating to the transfer of the
Patents to BWT IP UK until he had confirmation that
both he and Mr Driver would
be appointed directors of BWT UK. On 27 February 2020, he sent an email to Mr
Chris Richardson, who had
asked Dr Kambouris to sign the documents, in which he
said “I will sign these documents tomorrow but before I do, is it
confirmed
that both myself and Mr Driver are also directors jointly with Terry
and Spiro?”
- Mr
Richardson replied the following day saying:
On Terry’s advice, you and David will be added in due course. The plan is
to also expand the Board of Directors by the addition
of new externals who can
add value and a broader expertise and experience to help with the next stage of
the businesses [sic] development
and needs.
- There
was then a further exchange of emails between Dr Kambouris and Mr Richardson in
which Mr Richardson said the following:
It was practical to have one director (Terry) to sign the various set-up
documentation for each jurisdiction (e.g. USA) and we confirm
your directorship
is being processed and will be completed in due course, with the addition of new
investors to the Board to improve
BWT’s governance and capabilities.
- At
about the same time, Mr Paule sent the following email to
Dr Kambouris:
We this morning arrived in the USA to attend Expo West show and most importantly
conduct meetings over the next 2 weeks to finalise
the capital raise. Its [sic]
important that we have all paperwork safely signed and transferred into our new
structures before we
can accept new monies from the outside. It's a long,
expensive and complicated process which has to be 100% right so that there are
no issues in the future. Let me confirm that the shareholding for you, David and
PFO are transposed exactly the same to the new entities.
The other area of
apparent concern is directorship. This is also being attended to so that we are
all directors. Please keep in mind
we will most likely add new directors in the
future to beef up our board.
Finally, we cannot legally issue new investor subscription documents until all
of the above is in place first. If we delay further
we may lose our investors as
we have kept them waiting a long time whilst we have restructured our business.
Please help by doing what has been requested.
- Dr
Kambouris responded:
Dear Chris and Terry, I accept this email and other texts today as a promise to
be given my shareholdings (similar to BWT Australia)
including those of Mr David
Driver and Gillian Kambouris.
Furthermore, I also accept this email as a promise to be offered directorship
for myself and Mr David Driver in BWT Eng. and BWT
IP and other relevant
companies in this general business.
With this understanding, I will now sign the transfer of my patents to BWT IP
Pty Ltd.
- Following
that email, Dr Kambouris and Ms Kambouris executed the documents which had been
sent to him on 26 February 2020 and sent
them to MyCo.
Mr Driver
raises capital
- Starting
in January 2020, Mr Driver sought to raise capital by issuing shares in DJD, as
a means of providing investors with an indirect
investment in BWT and
subsequently BWT UK. For that purpose, Mr Driver used an edited version of the
PowerPoint presentation that
had been prepared by Findex for the capital raising
that it was intended BWT UK would undertake. In all, it appears that DJD raised
$3,085,000 between January and December 2020.
Mr Paule directs
that future sales of bottled water occur through BWT
- In
about the middle of 2020, Mr Paule directed that all further production and sale
of botanical water in Australia be conducted by
BWT and not by ABBA. By that
stage, minimal quantities of bottled water were being sold by ABBA. It appears
that the real value of
the business was not in the sale of bottled water but in
the operation of a trading exchange which is described by Mr Paule as a
business
“whereby people who have the capacity to make water (such as vegetable
producers) are connected to those who are looking
to offset or replenish water
used in their business (such as beverage manufacturers)”. Mr Paule says in
a paragraph of his
affidavit affirmed on 2 December 2022 that was tendered by
the plaintiffs that the exchange operates in much the same way as trading
in
carbon credits and that “[i]t has the potential to generate significant
revenue for BWT UK”.
Further attempts to obtain
information about BWT UK and BWT IP UK
- Steps
were taken to appoint Mr S Paule as the chairman of BWT UK. However, Dr
Kambouris and Mr Driver were not appointed to the boards
of the UK companies and
they were not given confirmation of their shareholding in BWT UK, which became a
sore point and the subject
of a number of emails between Dr Kambouris and Mr
Paule during 2020. Following several unsuccessful enquiries from Dr Kambouris
relating
to his and Mr Driver’s directorships and shareholding, on 26 June
2020, Mr Smith (Dr Kambouris and Mr Driver’s legal
advisor) sent an email
to Mr Paule in which he said:
Despite requests by Dr Bruce Kambouris and David Driver there has been no
documentation confirming:
1 The company [that is, BWT IP UK] exists.
2 The shareholders and directors of the company are identical
with BWT Australia.
3 The company is a subsidiary of BWT Eng.
4 There is any documentation between BWT Australia and BWT Eng
to confirm the transfer of the patents from BWT Aust.
5 Both Ambrosios Kambouris and David Driver have been added as
directors of BWT Eng.
- Mr
Paule responded on the same day saying:
All parties have signed paperwork at the time of the restructure and setup and
to effect shareholding as described by you etc. Our
accountants at Findex and
the UK lawyers are handling and will confirm same once completed.
- There
were further exchanges on the subject principally between Mr Smith and Dr
Kambouris on the one hand and Mr Paule and Mr Richardson
on the other in which
Dr Kambouris and Mr Smith received largely non-responsive or evasive answers to
their questions concerning
shareholding and Dr Kambouris and Mr Driver’s
directorships. Dr Kambouris and Mr Paule also exchanged messages on the capital
raising and the proposal that Dr Kambouris would receive a sum of money from it.
In one text message sent by Mr Paule to Dr Kambouris
on 2 September 2020, Mr
Paule said:
As I said taking money out is hard to negotiate at the best of times. COVID-19
had made it even harder. We have worked hard to cut
a deal so suggest you take
it as there will not be another opportunity for at least next 3 years. This only
offered to you.
- It
was not until 12 October 2020 that Mr Paule asserted in a text message he sent
to Dr Kambouris that “Directorship has not
been agreed as covered in the
contribution and exchange agreement that was signed by all parties including you
and your family. This
doesn’t mean that you cannot be added at a later
time if the board of directors decides it appropriate ...”.
- Following
that text message, the following exchange occurred between Dr Kambouris and Mr
Paule:
Kambouris: Leftheri [the diminutive Greek name for Terry], this
is why I cant [sic] have you as sole director as you always threaten
weak
people.
If no money, no money. I will try and pay my own rent so you don’t keep
threatening me.
Paule: B, Yes please pay your own rent. We will still make you
the richest guy in Mildura but it will be in a few years when it
all comes
together. In the meantime we will use the funds originally allocated to you to
pay lawyers to preserve our IP etc. David
Driver is the source of all your
problems and continues to give you bad advice. I guess you are in his camp. He
needs to do the things
he had promised me. We have contributed millions of
dollars to get the business to this point. He is a liar and needs to be held
to
account. That day is coming.
You may end up being collateral damage based on your actions. You can decide
differently. Time is running out. Its [sic] up to you.
Kambouris: We both like you as a person Leftheri...We will
support your plans. Make us directors as we are entitled to.
As for capital raise and money for me, if you have sold or about to sell my
shares, I am entitled to know how much for and is should
be mine...
Paule: You should be grateful that your shares are in a safe
place and lots of upside in the future. I have tried to carve out
some money for
you but you frustrate things for a misguided loyalty...
- After
a further exchange of messages, Dr Kambouris sent Mr Paule the following message
on 13 October 2020 in a context where he was
still being asked to sign further
documents relating to the transfer of the IP:
Leftheri, I have thought about things and will assist complete [sic] going
forward.
I want absolute evidence of our shareholding and not just files.
Promise me that when I text you for an update on the company, you will be
obliging and provide me an update ...
We will not further insist in being directors but we can if the board wants us
to.
You will provide me with $1 million usd to buy house ASAP?
Do we have a deal?
Do we have a deal?
Do we have a deal?
Mr Paule replied saying “Confirmed and a deal as you say”.
- Ms
Pappas ultimately sent Dr Kambouris on 6 November 2020 a copy of a letter from
Fried Frank issued the previous day which attached
a copy of the share register
of BWT UK and which confirmed that the copy represented a true copy of the
original.
MyCo starts charging fees
- On
24 September 2020, MyCo started withdrawing amounts of $44,000 from BWT’s
AUD account with NAB regularly. In all, over the
next 12 months it was paid what
appear to be service fees totalling $924,000.
Mr Landy’s
review and proceedings against ABBA
- On
2 September 2020, Mr Rakesh Rishyakaran, an employee of Mr Landy, sent an email
to Mr Driver seeking access to records in relation
to Mr Driver’s loan
account with ABBA. Mr Driver responded on 10 September 2020 providing a
spreadsheet “detailing all
incoming/outgoing loan related transactions
since AquaBotanicals inception until the present day”. Mr Driver also
provided
access to relevant bank accounts.
- On
12 November 2020, MyCo commenced proceedings against ABBA in the County Court of
Victoria claiming the amount of $144,855.30 said
to have been advanced to ABBA
between 1 July 2017 and 22 October 2020. Those proceedings were subsequently
stayed when ABBA was placed
in administration.
- On
16 November 2020, Mr Landy provided his preliminary report to MyCo. The report
was critical of the way in which ABBA’s finances
had been managed. In
particular, Mr Landy expressed the opinion that Mr Driver had not kept separate
ABBA’s finances from those
relating to other ventures that had been
pursued by Mr Driver and Dr Kambouris.
Completion of the capital
raising
- The
capital raising had been delayed by the Covid pandemic. It finally occurred on
31 December 2020 when BWT UK issued 25,482 shares
pursuant to a number of
subscription agreements. On 30 April 2021, Mr Paule and Mr S Paule as the
directors of BWT UK signed a resolution
relevantly in the following
terms:
... the allotment and issuance of New Shares in Annex 1, entry into the
Subscription Agreements and any acts that have already been
implemented or
carried out by or on behalf of the Company in connection with the Capital Raise
be ratified and approved in all respects;
...
Annex 1 was in the following terms:
|
(1)
New Investor
|
(2)
Number of Shares
|
(3)
Funding Price / Subscription ($)
|
|
Lapana Global Partners Limited OÜ
|
12,500
|
$3,500,000 (of which $500,000 has been satisfied in kind by the performance
of services)
|
|
Simon Fischer
|
1,250
|
$350,000
|
|
Steven Swarzman
|
1,786
|
$500,000
|
|
Ryan Gold
|
179
|
$50,000
|
|
Oxford Mill Pty Ltd as trustee for The Halamandaris Family Trust
|
650
|
$191,950
|
|
Ersatz Water, LLC
For and on behalf of Jonathan Mechanic
|
893
|
$250,000
|
|
Spiros Paule and Terry Paule as trustees for the S&T Paule Family
Trust
|
6,912
|
Capitalization of a loan
|
|
AJP Investments (VIC) Pty Ltd
|
830
|
Non cash consideration in the form of advisory services
|
|
For and on behalf of Peter Abraam
|
482
|
Non cash consideration in the form of advisory services
|
- The
effect of these allotments was to reduce Mr Driver and Dr Kambouris’s
interests in BWT UK from 62.5 percent to 49.8 percent.
Neither Mr Driver nor Dr
Kambouris were given any information about the allotments before they occurred.
Contrary to what Mr Paule
had said to Dr Kambouris, none of the shares held by
Dr Kambouris were sold into the capital raising.
- As
is apparent from the resolution signed by Mr Paule and Mr S Paule, 6,912 shares
were issued to them as trustees of S&T Paule
Family Trust. As the plaintiffs
point out, there was no loan agreement between the trust on the one hand and BWT
UK on the other.
There was a loan agreement between MyCo and BWT. The general
ledger of MyCo shows that as at 31 December 2020, the amount BWT owed
it was
$1,459,832.86. That amount did not decrease on 1 January 2021. There is,
however, an entry in the ledger on 1 July 2022 showing
a debit of $501,610.00
which is described as “Loan to Equity Conversion – S&T Paule FT
investment in BWT UK”.
On the same date, there is a credit of $421,964.23
described as “Interest on BWT Loan –
Jan’18-Jun’22”.
Accepting that the loan could be capitalised
in that way, that implies that the S&T Paule Trust paid AUD72.57 per share,
which
contrasts with a price paid by other investors which ranged between
USD279.96 and USD295.31 per share.
Mr Driver and Dr Kambouris
removed as directors of ABBA and BWT
- On
26 May 2021, Mr Driver sought to convene board meetings of ABBA and BWT at which
he proposed various resolutions relating to the
management of those two
companies be considered including a resolution that William Buck (NSW) Pty Ltd
be appointed to investigate
the affairs of ABBA.
- On
28 May 2021, Mr Paule resigned as a director of ABBA and caused BWT UK to call
Extraordinary General Meetings of ABBA and BWT to
pass resolutions removing Mr
Driver and Dr Kambouris as directors of those companies.
Commencement of these proceedings and appointment of receivers
to ABBA
- On
24 June 2021, these proceedings were commenced with ABBA as the first
plaintiff.
- On
24 June 2021, BWT (which was then under the control of Mr Paule) issued a
default notice pursuant to the Loan Agreement and General
Security Deed between
BWT and ABBA. On 2 August 2021, it appointed receivers to ABBA’s property,
relying on a number of alleged
breaches of the General Security Deed. In In
the matter of Aqua Botanical Beverages (Australia) Pty Ltd (receivers and
managers appointed) [2021] NSWSC 1214, Rees J found that several of those
breaches had been established and made a declaration that the appointment of the
receivers was
valid. Liquidators were appointed to ABBA on 3 February 2022.
Subsequent events
- BWT
UK and BWT continued to carry on business. As I have indicated, their business
was focussed on developing a water trading platform.
In around June 2022, BWT UK
sought to raise additional capital. For that purpose, it prepared a further
PowerPoint presentation seeking
to raise USD15 million. That presentation made
no reference to Dr Kambouris or Mr Driver. It described Mr Paule as “the
Co-Founder”.
It appears that Mr Paule spent the rest of 2022 attempting to
raise capital, but without success.
- BWT’s
loan from MyCo fell due on or about 13 February 2023. MyCo agreed to extend the
date for the repayment of the loan on
the condition that each of BWT UK and BWT
IP UK became co-obligors with BWT. On 8 August 2023, an Amended Loan Agreement
together
with a General Security Deed were entered into between MyCo and each of
BWT, BWT UK and BWT IP UK. By cl 5(a) of the Amended Loan
Agreement, each
borrower “must repay and finally discharge that portion of the Loan
advanced to it on the Repayment Date”,
which was defined to be six months
from “the Original Repayment Date”. The “Original Repayment
Date” was
defined as three years from the “Initial Drawdown
Date”, which in turn was defined as “[a]t a date as requested
by the
Borrower and accepted by the Lender at its discretion”. Under cl 6A(a)(i),
each “Guarantor” irrevocably
and unconditionally jointly and
severally “guarantees to the Lender punctual performance by each Obligor
of all the Obligor’s
obligations under this Agreement and the
Security”. “Guarantor” included each Borrower, as did the
expression “Obligor”.
The effect of these provisions was to give BWT
an additional six months from 13 February 2023 in which to repay the debt it
owed
to MyCo and to make BWT UK and BWT IP UK liable for that debt. The total
amount owing to MyCo as at 15 September 2023 was $4,438,770.15.
It may be
inferred that the amount owing to MyCo by BWT was close to that amount at the
time the Amended Loan Agreement was executed.
- On
15 September 2023, MyCo issued a notice of default and demand to each of BWT,
BWT UK and BWT IP UK.
- It
appears from a document dated 2 November 2023 that at about that time Mr Paule
and MyCo were contemplating a further restructure
and capital raising in which a
company known as Philo Holding Company Limited, which had been incorporated on 5
April 2023 with Mr
Paule as its sole director and shareholder, would become the
holding company of a group of companies which would include BWT IP UK
and that
Jissika Holdings Limited, a Cyprus based entity controlled by Mr Paule and Mr S
Paule, would have a 52.8 percent interest
in Philo Holding.
- On
13 December 2023, MyCo entered into a subscription agreement with Sirius
International Holding and Philo Holding (the Subscription
Agreement) under which Sirius would subscribe for 31 percent of the
shares in Philo Holding for a price of USD25 million. The subscription
was
conditional on a reorganisation by which all BWT UK’s business and assets
would be transferred to Philo Holding.
- That
capital raising did not proceed. Instead, on 17 January 2024, MyCo as buyer and
BWT, BWT UK, BWT IP UK and Botanical Water Exchange
Ltd (another UK subsidiary
of BWT UK) as sellers entered into an Asset Sale Deed. By cl 3.1 of the Deed,
the sellers agreed to sell,
and the buyer agreed to buy “[t]he Business
and the Assets free from all Encumbrances and otherwise on the terms set out in
this document”. The “Business” is defined to mean “the
business carried out by the Sellers as at the Completion
Date”. The
“Assets” are defined to include “all issued share capital in
[BWT IP UK] ...” and “all
other rights, title, interests and assets
of the Sellers used exclusively in the Business”. The purchase price was
stated to
be cash consideration of AU$120,000 and a set-off amount of
AU$2,900,000. The sale and purchase completed on 7 March 2024.
- On
21 March 2024, MyCo served a notice of default and demand on BWT and BWT UK
claiming an amount $2,516,622.61, which was the balance
owing under the Amended
Loan Agreement.
- On
28 March 2024, Mr Paule resigned as a director of BWT and BWT UK and on the same
day BWT UK resolved that BWT be wound up in voluntary
liquidation.
- On
4 April 2024, administrators were appointed to BWT UK.
The
claims
- A
substantial number of claims are pleaded against the Paule Defendants. As
finally put, the plaintiffs advance five claims or types
of claim.
- First,
Mr Driver claims that he is entitled to recover from MyCo the amount he lent
ABBA on the basis that MyCo breached the terms
of the ABBA Implementation Deed
by agreeing to a change in the business of ABBA without the unanimous agreement
of the directors
of ABBA (that is, without the unanimous agreement of Mr Driver,
Dr Kambouris and Mr Paule). The relevant change in the business was
the transfer
of ABBA’s business of selling bottled water to BWT that occurred as a
result of Mr Paule’s direction in
the middle of 2020. It is Mr
Driver’s case that, had that instruction not been given, ABBA would have
earned sufficient revenue
to repay his debt.
- Mr
Driver also advances an alternative case that an agreement arose out of the
discussion he had with Mr Paule over lunch in Ballina
by which MyCo agreed to
take over the day-to-day responsibility for ABBA’s business and that it
was a breach of that agreement
for MyCo to transfer that business to BWT.
- Second,
Mr Driver and Dr Kambouris claim that between around December 2019 and February
2020 they reached an agreement with Mr Paule
(the BWT UK
Agreement) to proceed with the second restructure on the basis that (to
quote from para 73 of the FACLS):
(a) Mr Driver, Dr Kambouris, and Terry Paule would be the
directors of the new entities [that is, BWT UK and BWT IP UK];
(b) the shareholdings in the new UK holding company would
mirror that of BWT; and
(c) no shares would be issued by the new entities without the
consent of Mr Driver, Dr Kambouris and Terry Paule.
- It
is alleged that Mr Paule breached that agreement primarily by refusing to
appoint Mr Driver and Dr Kambouris as directors of BWT
UK and BWT IP UK. Mr
Driver and Dr Kambouris claim that had they been appointed directors of those
companies, the transactions by
which BWT UK was deprived of its entire
undertaking would not have occurred. They claim that their loss is the
difference in the
value of their shares in BWT UK now (which is zero) and the
value they would have had if those transactions had not occurred. Relying
on an
expert report prepared by Mr Michael Potter, of Ernst & Young, they say that
amount is approximately USD17.5 million. The
figure of USD17.5 million
represents 49.8 percent of Mr Potter’s assessment of the value of BWT UK
as at 12 October 2023 (the
date of Mr Potter’s report). More will be said
about that valuation later in this Judgment.
- Mr
Driver and Dr Kambouris advance an alternative case based on estoppel.
- Third,
Mr Driver and Dr Kambouris submit that they and Mr Paule and Mr S Paule were
parties to a joint venture and that Mr Paule and
Mr S Paule owed fiduciary
duties to Mr Driver and Dr Kambouris by reason of that relationship. Mr Paule is
said to have breached
his fiduciary duties by preferring his own interests or
the interests of MyCo over those of the parties to the joint venture, which
ultimately led to MyCo obtaining control of the business of BWT UK for a
fraction of the value attributed to it by Mr Potter. Mr
Driver and Dr Kambouris
claim equitable compensation calculated by reference to the value of BWT UK
prior to what was said to be
the improper capitalisation of part of the loan
owed by BWT to MyCo. Prior to that time, it is said that Mr Driver and Dr
Kambouris
had a controlling interest in BWT UK. According to Mr Potter, the
value of that controlling interest was at least USD22.5 million,
which means
that the value of Dr Kambouris’s interest was USD12 million and the value
of DJD’s interest was USD10.5 million.
Alternatively, Mr Driver and Dr
Kambouris claim an account of profits.
- Fourth,
Mr Driver and Dr Kambouris each claim that Mr Paule in connection with the
supply or acquisition of financial services engaged
in conduct that was in all
the circumstances unconscionable in contravention of s 12CB of the Australian
Securities and Investments Commission Act 2001 (Cth) (the ASIC
Act) and that they are persons who suffered loss or damage by that
conduct and are therefore entitled to recover the amount of that loss
or damage
under s 12GF(1). The financial services were the supply of shares in BWT by Mr
Driver and Dr Kambouris and the acquisition
by them of shares in BWT UK. The
conduct that is said to be unconscionable was the failure to appoint Mr Driver
and Dr Kambouris
as directors of BWT UK, the structure of the capital raising,
which resulted in Mr Driver and Dr Kambouris having a minority interest
in BWT
(UK), and the ultimate sale of BWT UK’s undertaking to MyCo. The loss
claimed is the same as the loss claimed for breach
of the BWT UK Agreement.
- An
alternative case is advanced under s 12CA of the ASIC Act, which prohibits a
person in trade or commerce from engaging in conduct
“in relation to
financial services if the conduct is unconscionable within the meaning of the
unwritten law, from time to time,
of the States and Territories”. The same
conduct is relied on and the same loss is claimed.
- Fifth,
Mr Driver and Dr Kambouris seek relief under ss 232 and 233 of the
Corporations Act 2001 (Cth) (Corporations Act) against Mr
Paule and MyCo on the basis that the affairs of BWT were conducted in a way that
was either “contrary to the interests
of the members as a whole” (s
232(d)) or “oppressive to, unfairly prejudicial to, or unfairly
discriminatory against, a member or members whether in that capacity
or in any
other capacity” (s 232(e)). It is said that the conduct of the affairs of
BWT satisfied those requirements largely for the reasons that are said to give
rise
to a breach by Mr Paule of his fiduciary duties. It is also said that the
affairs of ABBA were conducted in a way that was contrary
to the interest of the
members as a whole or in a way that was oppressive to KSP (and each other member
of ABBA other than Mr Paule
and Mr S Paule). As finally put, they relied
principally on the transfer of ABBA’s business of selling bottled water to
BWT.
The plaintiffs submit that the Court should make findings as to the
existence of the alleged oppression and entertain further submissions
concerning
relief.
Breach of the ABBA Implementation Deed
- This
claim, and the claim based on the agreement allegedly reached by Mr Driver and
Mr Paule in Ballina, can be dealt with briefly.
- The
claims must fail, since, even, if the breaches could be established and even if
evidence concerning the amount owing to Mr Driver
is accepted, there is no
evidence before the Court that ABBA would have made a profit if the business it
carried on of selling bottled
water had not been transferred to BWT. The
evidence is that ABBA made a loss throughout the period it sold bottled
botanical water.
It was because of that Mr Driver asked Mr Paule during the
lunch in Ballina if MyCo would take over the funding of ABBA. There is
no
evidence that the business improved from that time or after it was taken over by
BWT. Absent evidence of the type, the claim must
fail.
Breach of
fiduciary duties
- It
is convenient to deal with the breach of fiduciary duties claim
next.
Relevant legal principles
- Although
there are recognised categories of fiduciary relationship, such as trustee and
beneficiary, solicitor and client, principal
and agent and partners, the
circumstances in which fiduciary obligations exist are not closed: see
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR
41 (Hospital Products) at 68 (per Gibbs CJ) and at 96 (per Mason J
in the minority, but not in relation to the statement of relevant principles);
Jaken Properties Australia Pty Ltd v Naaman [2023] NSWCA 214; (2023) 112 NSWLR 318
(Jaken) at [8] (per Bell CJ (dissenting)) and at [140] (per
Leeming JA (Kirk JA agreeing)).
- In
Hospital Products, Mason J explained, in a passage referred to with
approval by the High Court in John Alexander's Clubs Pty Ltd v White City
Tennis Club Ltd [2010] HCA 19; (2010) 241 CLR 1 at 86-7 and recently by the NSW Court of
Appeal in Anderson v Canaccord Genuity Financial Ltd [2023] NSWCA 294
(Anderson) at [130]-[131] (per Gleeson, Leeming and White JJA),
that:
The critical feature of these relationships is that the fiduciary undertakes or
agrees to act for or on behalf of or in the interests
of another person in
the exercise of a power or discretion which will affect the interests of that
other person in a legal or practical
sense. The relationship between the parties
is therefore one which gives the fiduciary a special opportunity to exercise the
power
or discretion to the detriment of that other person who is accordingly
vulnerable to abuse by the fiduciary of his position.
- The
relationship may be a reciprocal one, such as that between partners, but it
often will not be. Where the relationship does not
fall into any of the
recognised categories, it is necessary to pay close attention to the precise
relationship between the parties
and the subject matter over which it is
contended the fiduciary obligations extend to determine whether obligations of a
fiduciary
nature arise and, if so, their extent: see Birtchnell v Equity
Trustees, Executors & Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384 at 407-9 per Dixon
J (Rich J agreeing): cited with approval in Anderson at
[152]-[154].
- The
matters that are relevant to the question whether a fiduciary duty exists
include (to quote Gaudron and McHugh JJ in Breen v Williams [1995] HCA 63; (1996) 186
CLR 71 at 107):
... the existence of a relation of confidence; inequality of bargaining power;
an undertaking by one party to perform a task or fulfil
a duty in the interests
of another party; the scope for one party to unilaterally exercise a discretion
or power which may affect
the rights or interests of another; and a dependency
or vulnerability on the part of one party that causes that party to rely on
another (citations omitted).
See also Jaken at [8].
- The
question is not whether the beneficiary of the fiduciary obligations actually
placed trust and confidence in the fiduciary to
act in the beneficiary’s
interest, but whether the beneficiary was entitled in the circumstances to
expect the putative fiduciary
to do so: Brunninghausen v Glavanics (1999)
46 NSWLR 538; [1999] NSWCA 199 (Brunninghausen) at [100]f (per
Handley JA with whom Priestley and Stein JJA agreed); see also Hospital
Products at 69 (per Gibbs CJ).
- In
the context of commercial relationships, the parties will often choose a legal
framework to govern their relationship, such as
a contract or incorporation of a
company, that is largely incompatible with the existence of a fiduciary one. As
Mason J explained
in Hospital Products at 97-8 in the context of a
commercial contract:
The fiduciary relationship, if it is to exist at all, must accommodate itself to
the terms of the contract so that it is consistent
with, and conforms to, them.
The fiduciary relationship cannot be superimposed upon the contract in such a
way as to alter the operation
which the contract was intended to have according
to its true construction.
...
My conclusion that [the appellant] was at liberty to make some business
decisions by reference to its own interests, subject to the
obligations arising
under the best efforts promise and the other terms of the contract express and
implied, presents an overwhelming
obstacle to the existence of the comprehensive
fiduciary relationship found by the Court of Appeal. This is because [the
appellant]'s
capacity to make decisions and take action in some matters by
reference to its own interests is inconsistent with the existence of
a general
fiduciary relationship. However, it does not exclude the existence of a more
limited fiduciary relationship for it is well
settled that a person may be a
fiduciary in some activities but not in others (citations omitted).
- As
is apparent from what Mason J said, classification of a relationship as a
commercial one does not necessarily preclude the possibility
that the
relationship, or aspects of it, has a fiduciary character. So, for example, when
parties decide that the business they will
undertake together shall be conducted
through a company, their relationship may well be a fiduciary one until the
structure through
which this business is to operate has been established. As
Mason, Brennan and Deane JJ (with whom Gibbs CJ and Dawson J agreed) explained
in Union Dominions Corporation Ltd v Brian Pty Ltd [1985] HCA 49; (1985) 157 CLR 1
(Union Dominions) at 12:
A fiduciary relationship can arise and fiduciary duties can exist between
parties who have not reached, and who may never reach,
agreement upon the
consensual terms which are to govern the arrangement between them. In
particular, a fiduciary relationship with
attendant fiduciary obligations may,
and ordinarily will, exist between prospective partners who have embarked upon
the conduct of
the partnership business or venture before the precise terms of
any partnership agreement have been settled. Indeed, in such circumstances,
the
mutual confidence and trust which underlie most consensual fiduciary
relationships are likely to be more readily apparent than
in the case where
mutual rights and obligations have been expressly defined in some formal
agreement. Likewise, the relationship
between prospective partners or
participants in a proposed partnership to carry out a single joint undertaking
or endeavour will
ordinarily be fiduciary if the prospective partners have
reached an informal arrangement to assume such a relationship and have proceeded
to take steps involved in its establishment or implementation.
- Similarly,
one or more parties within a particular legal structure may take on specific
responsibilities which give rise to fiduciary
obligations owed by that party in
relation to those responsibilities. As Young JA (with whom Allsop P and
Macfarlan JA agreed regarding
these principles) said in Crawley v Short
[2009] NSWCA 410 at [119]- [122]:
The primary judge acknowledged that there were cases where a director who was
also a shareholder could owe a duty to another shareholder,
but considered
that Brunninghausen told against it when the same acts constituted a
breach of the fiduciary duty to the company.
With respect, this is too narrow a reading of Brunninghausen and is
out of line with other authorities.
There will be a variety of situations where a shareholder or
director/shareholder holds a special position where he or she may owe
duties to
another shareholder.
Without being an exhaustive list, this will occur where: one shareholder
undertakes to act on behalf of another shareholder; where
one shareholder is in
a position to have special knowledge and knows that another shareholder is
relying on her to use that knowledge
for the advantage of another shareholder as
well as herself; and where the company is in reality a partnership in corporate
guise,
nowadays termed a quasi partnership.
See also Brunninghausen; Warner Capital Pty Ltd v Shazbot Pty
Ltd [2020] NSWCA 121 at [94]- [99].
- In
Brunninghausen, the Court held that the sole effective director and
majority shareholder in a company owed the minority shareholder, who was his
brother-in-law, a fiduciary duty which was breached when he acquired his
brother-in-law’s shares for a low price following
the breakdown of the
relationship between them and at a time when he was negotiating for the sale of
the company to third parties
for a much greater price. In holding that the
majority shareholder owed his brother-in-law a fiduciary duty, Handley JA (with
whom
Priestley and Stein JJA agreed) said (at [99]):
The defendant, as the sole effective director, occupied a position of advantage
in relation to the plaintiff. He could, if he saw
fit, disclose information
about the pending negotiations for the sale of the business but could not be
compelled to do so. This gave
him the capacity to affect the interests of the
plaintiff “in a practical sense”, and in the context of the
negotiations
with him “a special opportunity” to exercise that
capacity to the detriment of the plaintiff who was “at the mercy”
of
the defendant and “vulnerable to abuse” by the defendant “of
his position”: Hospital Products ibid per Mason J at 96-7.
And later at [105]:
The sale of the plaintiff’s shares to the defendant required a
reconciliation of their competing interests in the transaction.
A sale to
outsiders in which both participated involved no such conflict. It would have
enabled both plaintiff and defendant to receive
full value for their shares
without any conflict of interest necessarily arising between them.
- In
Australia, it is accepted that fiduciary obligations are proscriptive, not
prescriptive. As Gaudron and McHugh JJ explained in
Breen v Williams
(1996) 186 CLR 71; [1996] HCA 57 at 113:
In this country, fiduciary obligations arise because a person has come under an
obligation to act in another's interests. As a result,
equity imposes on the
fiduciary proscriptive obligations — not to obtain any unauthorised
benefit from the relationship and
not to be in a position of conflict. If these
obligations are breached, the fiduciary must account for any profits and make
good
any losses arising from the breach. But the law of this country does not
otherwise impose positive legal duties on the fiduciary
to act in the interests
of the person to whom the duty is owed. [footnote omitted]
See also Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165;
[2001] HCA 31 (Duke Group) at 197- 8 per McHugh, Gummow, Hayne and
Callinan JJ, Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 at [84]
per French CJ, Gummow, Hayne and Bell JJ, and Howard v Federal Commissioner
of Taxation (2014) 253 CLR 83; [2014] HCA 21 at 31 and 32 per French CJ and
Keane J.
Did Mr Paule owe fiduciary duties to Mr Driver and Dr Kambouris
- I
am satisfied that Mr Paule owed fiduciary duties to Mr Driver and Dr
Kambouris.
- The
plaintiffs seek to characterise the relationship between Mr Paule, Mr Driver and
Dr Kambouris as joint venturers. In support of
that submission, they point to
the fact that the Heads of Agreement in Recital C expressly referred to MyCo as
a “commercial
partner who can bring extensive experience and track record
with regards global [sic] business dealings in order to successfully
help grow
and further commercialise ABBA and its related entities”. They also point
to correspondence in which Mr Paule spoke
of them as engaging in
“teamwork” or as their relationship being a
“partnership”.
- Whether
that is a correct characterisation of their relationship is open to some doubt
and ultimately does not matter. It is plain
that in early 2017, Mr Paule and his
brother agreed to invest in the botanical water business then carried on by Mr
Driver and Dr
Kambouris through corporate vehicles associated with them (in
particular, ABBA, KSP and DJD). The initial agreement (the Heads of
Agreement)
was between ABBA and MyCo, a Paule family company. But as the terms of the Heads
of Agreement made clear that was not
the final structure chosen by the parties
to carry on the business and much of the following three years or more was spent
putting
into place a legal and corporate structure which would permit the
business to expand overseas and to attract new investors.
- Mr
Paule (and MyCo) took the principal responsibility for undertaking the work to
achieve that result. Mr Paule was the principal
point of contact with Findex, a
company in which he had an interest and the company that was providing advice on
the final structure
that should be adopted. It is to be inferred that he was the
person who was responsible for engaging other advisors, including Fried
Frank, a
firm of English solicitors who were involved in establishing BWT UK, and it
appears that he or employees of MyCo were the
persons who gave that firm
instructions. Mr Paule was also the person responsible for meeting with
potential investors and it is
to be inferred that he selected Mr Priester to be
the managing director and CEO of the new entity that was proposed to be
established
as the holding company for the business. When that entity (BWT UK)
was established, Mr Paule initially became its sole director and
shareholder
and, in that position, had absolute control over the company.
- Throughout
the period, Mr Paule indicated particularly to Dr Kambouris that he was acting
in the interests of Mr Driver and Dr Kambouris.
Mr Paule’s periodic
reference to “teamwork” and that he, Mr Driver and Dr Kambouris were
in partnership gave that
impression. Mr Paule accepted that he was at least
acting in the interests of Dr Kambouris. In response to a series of text
messages
from Dr Kambouris asking when he (Dr Kambouris) would be paid the
amount he expected to receive for the shares he thought he was
selling into the
capital raising, Mr Paule said in a text message sent on 28 November
2020:
Your payment will be made as promised and agreed. Unfortunately, you like me
will need to suffer the headache of cleaning up what
can at best be described as
the mess called ABBA so that we can move forward. You should be thankful that we
are here and looking
after your best interests.
- Mr
Driver and Dr Kambouris were vulnerable to abuse by Mr Paule of his position.
Although Dr Kambouris and Mr Driver were not unsophisticated,
they did not have
the necessary experience or connections to perform the work undertaken by Mr
Paule, and as the Heads of Agreement
recognised, MyCo was an attractive investor
to them because Mr Paule did have that experience and those connections.
Moreover, particularly
after the shares in BWT were transferred to BWT UK and Mr
Paule remained in control of BWT UK, Dr Kambouris and Mr Driver were completely
dependent on Mr Paule.
- The
Paule Defendants point to three matters which they say count against the
existence of a fiduciary relationship.
- First,
at least by the time the parties had executed the ABBA Implementation Deed and
BWT Implementation Deed, they had formalised
their relationship and had
established in the ABBA Implementation Deed the matters that would require
unanimous agreement between
Dr Kambouris, Mr Driver and Mr Paule. Second, they
submit that Dr Kambouris and Mr Driver were not vulnerable. They were
sophisticated
persons who voluntarily transferred their shares in BWT to BWT UK.
They understood that that transaction occurred in conjunction
with a proposal to
raise capital which would dilute their shareholding to less than 50 percent. Dr
Kambouris intended to sell a five
percent stake into the capital raising and at
one stage both Dr Kambouris and Mr Driver raised the possibility of selling
their shares.
Third, the relationship between Mr Paule on the one hand, and Dr
Kambouris and Mr Driver on the other had broken down by late 2019,
following the
dispute between Mr Paule and Mr Driver concerning the funding of ABBA.
- In
my opinion, none of these matters negates the existence of a fiduciary
relationship. The relationship between Dr Kambouris, Mr
Driver and Mr Paule
changed over time and that in turn may have affected the scope and content of
any fiduciary duty. However, the
formalisation of the relationship that was
brought about by the transactions and agreements that formed the first
restructure proved
to be a temporary measure only. The second restructure
involved a decision by the individuals effectively to abandon the first formal
structure they had put in place and to replace it with a new one. Mr Paule
personally played a critical role in implementing that
decision and for the
reasons I have identified he owed fiduciary duties in undertaking that
role.
- As
to the Paule Defendants’ second point, it is true that Dr Kambouris and Mr
Driver may have been able to refuse to transfer
their shares in BWT to BWT UK
and Dr Kambouris may have been able to refuse to sign the various assignments
that he was asked to
sign. But that does not mean that they were not dependent
on and vulnerable to Mr Paule. They were dependent on him to raise capital
and
to put in place a structure that would enable that to happen, which was
desirable if not necessary for the future viability of
the business. It was
important to Dr Kambouris that he be able to sell some of his shares to raise
money so that he could buy a house
in Mildura. Mr Paule understood that to be
the case and on 13 October 2020 appears to have undertaken to obtain USD1
million from
the sale of a portion of Dr Kambouris’s shares. Moreover,
having in good faith transferred their shares, Dr Kambouris and Mr
Driver were
completely dependent on Mr Paule in circumstances where their shareholding in
BWT UK was unclear to them and they were
not directors of that company.
- As
to the Paule Defendants’ third point, the question is not whether Dr
Kambouris and Mr Driver actually trusted Mr Paule, but
whether in the
circumstances of the case, they were entitled to expect that he would act in
their interests or in the joint interests
of all of them. For the reasons I have
given, in my opinion, they were.
- The
Paule Defendants submitted that even if there was a period during which Mr Paule
owed Dr Kambouris and Mr Driver fiduciary duties,
those duties came to an end at
the latest on or about 6 November 2020, when Fried Frank sent Dr Kambouris and
Mr Driver a copy of
BWT UK’s share register, which confirmed their
shareholding. From then on, they were not dependent on Mr Paule because, until
the capital raising, they held a majority of the shares and were in a position
to control the company.
- I
do not accept that submission. An important part of the restructure was the
raising of additional capital. As I have explained,
that was particularly
important to Dr Kambouris. Dr Kambouris and Mr Driver remained dependent on Mr
Paule to put the capital raising
in place. Although the expectation was that, as
a result of the capital raising, Dr Kambouris and Mr Driver would no longer have
majority control of BWT UK, Dr Kambouris and Mr Driver were not in a position to
take over the capital raising themselves and were
still entitled to expect that
it would be conducted in a way that benefited both of them and Mr Paule. It may
well be the case that
any fiduciary relationship came to an end once the capital
raising was completed. I return to that point below.
- There
is a question whether the fiduciary duties owed by Mr Paule were owed to Mr
Driver or to DJD, since it was DJD that was the
shareholder in BWT and BWT UK,
and at least following its own capital raising DJD could not be regarded as a
creature of Mr Driver,
even if he continued to control it. The pleaded case is
that the fiduciary duties were owed to Mr Driver, not DJD (consistently with
the
plaintiffs’ claim that there was a joint venture between Mr Paule, Mr
Driver and Dr Kambouris). However, in various parts
of the plaintiffs written
submissions they submit that Mr Paule breached his duties to DJD or to Mr Driver
and DJD. No point was
taken that those allegations went beyond the pleaded case.
DJD is a plaintiff in the proceedings, and the facts relevant to Mr
Paule’s
liability to it are the same as the facts relevant to his
liability to Mr Driver. Consequently, nothing more needs to be said about
the
issue in this context. The issue may, however, be relevant to the question of
relief, which is dealt with below.
- Connected
to the previous point is the fact that the plaintiffs put their case in terms of
a joint venture between Mr Paule, Dr Kambouris
and Mr Driver. As I have said, it
is not clear that that is a proper characterisation of their relationship
throughout the whole
period. As a result of the first restructure, the parties
did put in place a legal structure that does not sit easily with the continued
existence of an unincorporated joint venture. However, it does not follow from
that that the plaintiffs’ case must fail. As
I have sought to explain, the
existence of fiduciary duties owed by Mr Paule does not depend on the existence
of a joint venture.
The case proceeded on a broader basis. The case was that,
having regard to the particular relationship between the parties, Mr Paule
owed
fiduciary duties to Dr Kambouris and Mr Driver because, in essence, he undertook
to act on behalf of all of them in relation
to the restructure and capital
raising. A case in those terms was raised during the hearing, and it was not
suggested that such a
case went beyond the pleadings.
- The
plaintiffs characterise the scope of Mr Paule’s duties as having two
elements. One was not to promote or pursue his personal
interests (or those of a
third party) in circumstances in which there was a conflict or a substantial
possibility of a conflict between
those interests and the joint interests of the
shareholders. The other was not to use his position as a director of BWT UK to
acquire
an unauthorised benefit for himself or a third party. I accept that
characterisation. In essence, in pursuing the restructure and
capital raising Mr
Paule had a duty not to put his own interests ahead of the interests of the
shareholders of BWT as a whole.
Did Mr Paule breach his fiduciary
duties?
- The
plaintiffs submit that Mr Paule breached his duty in two main ways. First, he
preferred his own interests to those of Mr Driver
(or DJD) and Dr Kambouris by
causing MyCo’s loan to BWT to be capitalised in exchange for shares in BWT
UK. Second, he preferred
his own interests or those of MyCo by causing the whole
of BWT UK’s undertaking to be sold at an undervalue to MyCo.
- I
accept the first of those submissions, but not the second.
- As
to the first, as Mr Paule knew, Mr Driver and Dr Kambouris transferred their
shares in BWT in exchange for shares in BWT UK in
the expectation that an amount
of USD7 million would be raised by BWT UK issuing shares representing 20 percent
of its capital and
Dr Kambouris selling 5 percent of his shares. That was the
proposal presented to both Dr Kambouris and Mr Driver, and they must be
taken to
have agreed to it. However, the capital raising that actually occurred was quite
different. It involved raising approximately
USD4.1 million in cash from
external investors, none of which was paid to Dr Kambouris. At the same time, it
involved Mr Paule and
Mr S Paule obtaining an additional 6,912 shares in
exchange for MyCo agreeing, in effect, to forgive part of its loan to BWT. That
transaction was clearly to the benefit of Mr Paule and his brother and to the
detriment of Mr Driver and Dr Kambouris. It was to
the benefit of Mr Paule and
his brother because they increased their shareholding in BWT UK without having
to provide any obvious
benefit to BWT UK. It is true that, as a result of the
transaction, the debt owed by a subsidiary of BWT UK (that is, BWT) was reduced.
But it is doubtful that that was a benefit to BWT UK and, even if it was, the
transaction occurred at an imputed price which undervalued
the shares they
received when compared with the price paid by other investors. In short, Mr
Paule and his brother increased their
interest in BWT UK and the degree to which
they could exercise control over it. On the other hand, Mr Driver and Dr
Kambouris lost
control of BWT UK. None of that was disclosed to Mr Driver and Dr
Kambouris, let alone approved by them. On the contrary, it appears
that Mr Paule
went out of his way to keep what was happening from Dr Kambouris and Mr Driver.
In acting in that way, Mr Paule clearly
preferred his own interests to those of
Dr Kambouris and Mr Driver (and DJD).
- As
to the sale of BWT UK’s business to MyCo, that sale may have involved a
breach by Mr Paule of his duties as a director. That
is so for two reasons. The
first is that it only became necessary for BWT UK to sell its business because
it had become liable for
the loan owed by BWT to MyCo in exchange for what was a
very short extension of the loan. It is unclear what benefit that short
extension
gave to BWT UK. The second is that it is arguable that the sale
occurred at an undervalue. A valuation report dated 22 December 2023
was
obtained from Exit Value Advisors in connection with the sale that concluded
that the value of BWT UK was AUD531,000 and that
the value of the BWT group was
AUD405,000, which included a value of AUD2,519,000 for BWT IP UK and a negative
value of BWT of AUD2,605,000
(as a consequence of the loan it owed to MyCo). But
two points should be made about that valuation. First, the valuation is not
admissible
in this case as evidence of the value of the company and it is
difficult to reconcile with Mr Potter’s valuation. Second, the
only
information that appears to have been given to the valuer concerned the capital
raising at the end of December 2020. The valuer
appears to have regarded what
occurred then as irrelevant to the position as at 22 December 2023 and chose to
value the company by
reference to its net assets. The valuer was not given
information relating to the more recent attempt to raise capital from Sirius.
- But
those points do not establish that Mr Paule breached his duties as a director of
BWT UK. At most, they raise a suspicion that
he did. Moreover, even accepting
that Mr Paule breached his duties to BWT UK, I do not think that he breached any
duties to Dr Kambouris
and Mr Driver. By that stage, the reorganisation and
capital raising that gave rise to Mr Paule’s fiduciary duties to Mr Driver
and Dr Kambouris were complete. There were other shareholders in BWT UK and it
is difficult to see why Mr Driver and Dr Kambouris’s
position was any
different from those shareholders. Whatever relationship had existed between Mr
Driver, Dr Kambouris and Mr Paule
had been replaced by one in which each was an
investor in BWT UK along with other shareholders and Mr Paule as a director of
BWT
UK owed that company fiduciary obligations. The cases relied on by the
plaintiffs to support this aspect of their case, such as Cook v Deeks
[1916] UKPC 10; [1916] 1 AC 554 and Australian Careers Institute Pty Ltd v Australian
Institute of Fitness Pty Ltd [2016] NSWCA 347; (2016) 116 ACSR 566, were
cases where the duty was held to be owed to the company, not specific
shareholders. Nor is the decision in Brunninghausen relevantly analogous.
In that case, the breach of duty arose in circumstances where the fiduciary
sought to keep the benefit of the
sale of the company by acquiring his
brother-in-law’s shares at an undervalue.
- The
plaintiffs rely on what are said to be several other breaches of duty. They
are:
(a) Causing MyCo to be paid regular service fees of $44,000;
(b) Causing BWT to arrogate the Australian botanical water business of ABBA;
(c) Causing BWT to cease funding to ABBA, notwithstanding the terms of the loan
agreement;
(d) Causing Mr Driver and Dr Kambouris to be removed as directors of BWT; and
(e) Causing BWT to enforce the loan agreement and security as against ABBA.
- The
plaintiffs do not explain how any of this conduct amounted to a breach of
fiduciary duty by Mr Paule or MyCo. As I have sought
to explain, Mr Paule did
not owe fiduciary duties at large. Rather, he owed fiduciary duties in relation
to specific conduct he undertook
for the benefit of Dr Kambouris and Mr Driver
as well as himself and his brother as investors in BWT. It is possible that the
identified
conduct involved a breach by Mr Paule of his duties as a director of
BWT or amounted to oppressive conduct giving rise to relief
under s 233 of the
Corporations Act. However, it is not conduct involving a breach of the
fiduciary duties owed to Dr Kambouris and Mr
Driver.
Relief
- The
plaintiffs are entitled to equitable compensation or an account of profits in
respect of Mr Paule’s breach of fiduciary
duty, although not both. They
indicated that they would make their election once they knew the outcome of
their claim, as they are
entitled to do.
- The
remedy of an account of profits was explained in these terms by Gageler J in
Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan
Australia Friendly Society Limited (2018) 265 CLR 1; [2018] HCA 43
(Foresters) at 75:
The equitable remedy of account is a personal order. The order operates to
require that a defendant pay to a plaintiff the monetary
value of a benefit or
gain to the defendant. Although commonly referred to as an “account of
profits”, there is no reason
why a benefit or gain to be made the subject
of an account must answer the description of a “profit” in
conventional
accounting terms. Nor is there any reason why that benefit or gain
must answer the description of “property” or must
have sufficient
certainty as to be capable of forming the subject matter of a trust. The benefit
or gain can be expectant or contingent.
Indeed, it is commonplace that a benefit
or gain the subject of an account might encompass an ongoing business. And it is
commonplace
that the benefit or gain to be made the subject of an order to
account might extend to the whole of the ongoing business or be limited
to a
part of the business identified by reference to both a specified scope of
commercial activities and a specified period of commercial
activities which need
not be confined to a past period but may be a period which extends into the
future.
See also Foresters at [7] per Kiefel CJ, Keane and Edelman JJ.
- The
plaintiffs accept that there is inadequate material before the Court to
determine the amount for which Mr Paule must account if
the plaintiffs elect to
pursue that remedy. Instead, the plaintiffs seek an order for an enquiry. For
that reason, the focus of the
submissions was on the claim for equitable
compensation.
- The
Paule Defendants raised two defences to both claims for relief. One is that the
claims for relief infringed the principle that
a shareholder is not entitled to
recover a reflective loss – that is, a loss arising from the diminution in
the value of the
shareholder’s shares in a company because of a loss
suffered by the company. The other defence was to the claim by Mr Driver.
It is
said that he is disentitled to equitable relief because he did not have clean
hands as a result of his own capital raising
through DJD.
- As
I have already indicated, in my opinion, the fiduciary duties owed by Mr Paule
were to the other shareholders of BWT and BWT UK
– that is, to Dr
Kambouris, Ms Kambouris and DJD. They were the persons or entity on behalf of
whom Mr Paule was acting in
the restructure and capital raising, and it was the
shares they held that became worthless.
- Leaving
the reflective loss principle aside for the moment, Dr Kambouris and DJD are
entitled to recover the losses that they would
not have sustained but for the
breach of Mr Paule of his fiduciary duties: see Foresters at [88] per
Gageler J. In the present case, Mr Paule’s breach of duty arose from the
way in which the capital raising that formed
part of the second restructure was
conducted, and, in particular, the fact that Mr Paule and his brother gained
control of BWT UK
as a result of the capitalisation of the loan owed by BWT to
MyCo. But for that breach, they would not have gained control of BWT
UK and been
able to engage in the subsequent transactions that resulted in the shares in BWT
UK becoming worthless.
- It
is no answer to the plaintiffs’ claim that they would have lost control of
BWT UK in any event. Whether they would have lost
control and the circumstances
in which they would have done so and the consequences if they had are matters
for speculation. In the
absence of evidence to the contrary, that speculation
should be resolved in the plaintiffs’ favour: see Maguire v
Makaronis [1997] HCA 23; (1997) 188 CLR 449 at 470-2 per Brennan CJ, Gaudron, McHugh and
Gummow JJ and the discussion of that passage in J D Heydon, M J Leeming and P G
Turner,
Meagher, Gummow and Lehane’s Equity Doctrines and Remedies,
5th (2015), LexisNexis Butterworths, [23-260]ff.
- But
for the breach, MyCo’s loan would not have been “capitalised”
by the issue of 6,912 shares to Mr Paule and his
brother as trustees of the
S&T Paule Family Trust. There is no reason to think that the other shares
would not have been issued.
It is not suggested that the issue of those shares
involved a breach of fiduciary duties on the part of Mr Paule, and there is no
suggestion that the issue of those shares was dependent on the issue of shares
to Mr Paule and his brother. On that basis, but for
the breach 6,912 shares
would not have been issued to Mr Paule and his brother and the shareholding in
BWT UK would have been as
follows:
|
Dr Kambouris
|
28,500
|
|
Ms Kambouris
|
9,000
|
|
DJD
|
25,000
|
|
Mr Paule and Mr S Paule
|
37,500
|
|
Other parties
|
18,570
|
|
TOTAL
|
118,570
|
- On
that basis, but for the breach, Dr Kambouris would have had approximately 24.04
percent of the shares and DJD would have had 21.08
percent of the shares.
Together with Ms Kambouris, they would have retained a majority of the
shares.
- Mr
Potter gives evidence of the value of the shares in BWT UK as at about 30 April
2021 (immediately after BWT UK had raised capital)
and the current value of the
shares as at the date of his report (12 October 2023). He was not asked to
update his valuation. However,
he did give oral evidence in chief (which was
objected to by the Paule Defendants) that the proposed capital raising involving
Sirius
suggested an implied value of Philo before the injection of additional
capital (and inferentially of BWT UK) of USD55.6 million and
that the current
value of the shares in BWT UK following the sale of its business to MyCo is
zero. No weight can be placed on the
first of these opinions, since the capital
raising did not proceed. The second opinion is uncontroversial.
- In
my opinion, it is appropriate to assess the plaintiffs’ loss as at the
date of judgment. In assessing equitable compensation,
it is appropriate to
compensate the plaintiffs for all the losses that flow from the breach of duty:
Target Holdings Ltd v Redferns [1995] UKHL 10; [1996] 1 AC 421; O'Halloran v R T
Thomas & Family Pty Ltd (1998) 45 NSWLR 262; Beach Petroleum NL v
Abbott Tout Russell Kennedy (1999) 48 NSWLR 1; [1999] NSWCA 408 at
[431]- [432] per Spigelman CJ, Sheller and Stein JJA; J & E Vella Pty Ltd
v Hobson [2020] NSWCA 188 at [40] per Bell P, Basten and White JJA. Those
losses include the actions taken by Mr Paule after he obtained control of BWT
UK, which includes
the sale of its business. Consequently, Dr Kambouris and
DJD’s losses should be assessed by comparing the value of the shares
in
BWT UK now with the value of the shares they would have had but for the breach
of duty. It is plain that the current value of
the shares in BWT UK is zero. Mr
Potter does not provide a value of the shares now assuming the breach of duty
had not occurred.
He does provide a value of the shares as at 30 April 2021 and
12 October 2023. Both valuations are based on the imputed value of
the shares
that is to be derived from the amount third parties were willing to pay to
invest in BWT UK at the time of the first capital
raising. The principal
difference is that the valuation as at 12 October 2023 includes the amount of
additional capital raised.
- In
my opinion, it is appropriate to use the valuation as at 12 October 2023. Mr
Potter expresses the opinion that as at that date
the value of the business as a
whole (before any adjustment for funding risk, control and marketability) was
USD35.1 million.
- I
accept the general approach adopted by Mr Potter. The defendants led no evidence
to contradict it. I accept that the best evidence
of value was the price that
independent third parties were prepared to pay for the shares. Mr Potter was
cross-examined on why he
did not use a discounted cash-flow analysis in
determining the value of the business. However, as he pointed out, there was
inadequate
information available about BWT UK’s expected cashflows, and
inevitably those cashflows would have depended on a range of assumptions
that
were never identified.
- It
is true that Mr Potter’s valuation depended on information that is now
several years old. However, the information before
the Court suggests that the
essential nature of the business has not changed and there is nothing before the
Court to suggest that
the value of the business has deteriorated substantially
since April 2021. One subsequent attempt to raise capital failed and it
appears
that further attempts by BWT UK to raise capital were abandoned. But without
knowing the circumstances, it cannot be inferred
that that was because the value
of the business had deteriorated.
- Mr
Potter refers to two possible adjustments. One is for funding risk. The other is
an adjustment for control. He makes no adjustment
for funding risk on the basis
that BWT UK was successful in raising capital and any further funding risk would
be reflected in the
price that the new investors were willing to pay for the
shares. I accept that conclusion. The relevant counterfactual is not one
where
the capital raising would not have proceeded at all. Rather, it is one where Mr
Paule and his brother would not have obtained
additional shares in BWT UK in the
way that they did.
- The
plaintiffs submit that they are entitled to a premium for control, since they
would have obtained control but for Mr Paule’s
breaches of duty. I do not
accept that submission. In my opinion, DJD, Dr Kambouris and Ms
Kambouris’s shares should not be
regarded as a single block. Ms Kambouris
was not a party to the proceedings and consequently no claim can be made in
respect of her
shares. Although DJD may be controlled by Mr Driver, he is not
the only shareholder in that company. In any event, it cannot be assumed
that Dr
Kambouris and Mr Driver’s interests would also be the same. For example,
Dr Kambouris wanted to sell part of his shareholding
as part of any capital
raising. Consequently, in my opinion, no premium for control should be added to
the value of the shares. But
for the breach, DJD would have held a 21.08 percent
interest in BWT UK. Dr Kambouris would have held a 24.04 percent interest. On
that basis, DJD would be entitled to equitable compensation in the amount 21.08
percent of USD35.1 million – that is, USD7,399,000.
Dr Kambouris is
entitled to 24.04 percent of USD35.1 million – that is, USD8,438,000.
Is the claim barred by the principles of reflective
loss?
- The
law relating to the reflective loss principle is usefully set out by Bathurst CJ
(with whom Macfarlan and Gleeson JJA agreed)
in Central Coast Council v
Norcross Pictorial Calendars Pty Ltd [2021] NSWCA 75; (2021) 391 ALR 157 at
103ff. There, the Chief Justice explained the principle in these
terms:
What has been described as the reflective loss principle articulated by the
English Court of Appeal in Prudential Assurance Co Ltd v Newman Industries
Ltd (No 2) [1982] Ch 204 (“Prudential Assurance”) at
223-224 (the principle) is that where loss is suffered by a company as a result
of wrongdoing in respect of which each
of the company and the shareholder has a
cause of action, a shareholder cannot sue to recover the diminution in the value
of his
or her shares (or loss of benefits associated with his or her
shareholding) resulting from the loss suffered by the company. The
rationale for
the principle has been described as the prevention of double recovery
(Prudential Assurance at 222; Johnson v Gore Wood & Co [2002]
2 AC 1 (“Johnson”) at 62-63, 66-67 per Lord Millett, Lord
Goff agreeing), or on the basis that the shareholder does not suffer a loss
distinct
from the company and the shareholder is barred from pursuing the claim
by the principle in Foss v Harbottle [1843] EngR 478; (1843) 2 Hare 461
(“Foss v Harbottle”) (Marex at [10] per Lord
Reed PSC, Lady Black and Lord Lloyd-Jones JJSC agreeing), or perhaps because the
shareholder has no legal or equitable
interest in the company’s assets
(Marex at [80] per Lord Reed PSC).
See also Garner v Central Innovation Pty Ltd [2022] FCAFC 64 at
[123].
- As
Bathurst CJ pointed out, although the principle has been adopted in a number of
cases, it is not uncontroversial, and its precise
scope remains unclear: id at
[106]. It appears, however, that the principle does apply to equitable remedies.
In Oates v Consolidated Capital Services Ltd [2009] NSWCA 183 at [222]
(in a passage not reported in the authorised reports: see [2009] NSWCA 183; (2009) 76 NSWLR 69)
Campbell JA (with whom Spigelman CJ and Allsop P agreed) said:
Mr Leeming submitted that, even if the reflective loss principle applied to any
claim for common law damages, it would not be applicable
to equitable remedies.
I do not agree. The reflective loss principle applies to remedies in all areas
of the law. When the law takes
the step of conferring legal personality on a
corporation, the artificiality of so doing brings with it a need to alter the
way in
which all remedies operate as between natural persons to take account of
that artificiality. When the item of property concerning
which a legal wrong has
been done is a share in a corporation, the remedies available for that wrong
must recognise the reality that
the value of that share is derived from the
assets of the corporation. The considerations of principle to which Lord Millet
referred
in Johnson v Gore Wood, in the passage quoted at para [214]
above, are general ones that apply to all types of remedy.
- The
reference to Johnson v Gore Wood was a reference to the following passage
from the decision of Lord Millett in Johnson v Gore Wood & Co
[2002] 2 AC 1 at [62]:
If the shareholder is allowed to recover in respect of such loss, then either
there will be double recovery at the expense of the
defendant or the shareholder
will recover at the expense of the company and its creditors and other
shareholders. Neither course
can be permitted. This is a matter of principle;
there is no discretion involved. Justice to the defendant requires the exclusion
of one claim or the other; protection of the interests of the company’s
creditors requires that it is the company which is
allowed to recover to the
exclusion of the shareholder.
- There
are difficulties in applying the reflective loss principle in the present case.
On the conclusions I have reached, the relevant
breach was the
“capitalisation” of part of the loan owed by BWT to MyCo in exchange
for the issue of shares in BWT UK
to Mr Paule and his brother. Dr Kambouris and
DJD are entitled to the losses that flowed from that breach or the profit that
Mr Paule
(and entities controlled by him) earned from it. The immediate loss
suffered by Dr Kambouris and DJD was that their interests in
BWT UK were
diluted, and they lost control of BWT UK. The immediate benefit that Mr Paule
obtained was that he obtained additional
shares for what might be regarded as
less than their market value and obtained control of BWT UK (despite not having
more than 50
percent of the shares). Neither that loss nor that profit is
something that BWT UK could have sued for. Although a company may suffer
a loss
by issuing shares, that loss is not the market value of the shares: Duke
Group at 56ff per McHugh, Gummow, Hayne and Callinan JJ. Indeed, from the
point of view of the company, it is unclear that Mr Paule committed
any breach
of duty by causing it to issue shares in the circumstances that it did. As
Handley JA (with whom Priestley and Stein JJA
agreed) explained in
Brunninghausen at [68]:
The reality in most but perhaps not all of the cases dealing with the validity
of an issue of shares is that the company as such
was not concerned with the
identity of its shareholders, or with the location of voting control, and had no
interest in challenging
the issue. The only persons with an interest in doing
this were shareholders who have standing to sue “in their own
names”,
as the High Court held in Ngurli Ltd v McCann
[(1953) [1953] HCA 39; 90 CLR 425], to set aside the issue.
Compare Winthrop Ltd v Winns Ltd [1975] 2 NSWLR 666 CA.
- The
difficulty that arises in this case is that Mr Paule, having obtained control of
BWT UK, caused it to sell its whole business
to MyCo at what, on the evidence
before the Court, was an undervalue. The immediate losses they suffered as a
consequence of the
issue of the shares are subsumed in the losses arising from
the sale of BWT UK’s business. However, the claim for those losses
does
not depend on some further breach by Mr Paule. Dr Kambouris and DJD are entitled
to recover those losses because they are losses
that would not have occurred but
for the original breach. Similarly, Mr Paule would be liable to account for any
benefits he received
because they are benefits flowing from the original breach
of duty, not because Mr Paule engaged in some further breach of duty that
he
owed both to Dr Kambouris and DJD and to BWT UK.
- It
is unclear that BWT UK itself has any claim against Mr Paule arising out of the
Amended Loan Agreement or the sale of its business
to MyCo. As I have explained,
there are matters that suggest that Mr Paule may have breached his duties to BWT
UK. However, no case
was advanced that he had, and any such case would depend on
the precise circumstances in which those transactions occurred. In this
context,
it is relevant to observe that an independent valuation of BWT UK’s
business was obtained, and the defendants do not
suggest that BWT UK and Mr
Paule were not entitled to rely on that valuation. BWT UK is now in external
administration, and it is
a party to these proceedings. However, there has been
no suggestion that those now in control of the company think that it has any
claim against Mr Paule.
- In
those circumstances, it seems to me that the principle relating to reflective
loss has no application in this case, since the evidence
does not establish that
the loss, or indeed any profit, claimed by Dr Kambouris and DJD could have been
claimed by BWT UK.
The defence of unclean hands
- For
the defence of unclean hands to operate, the impropriety must have “an
immediate and necessary relation to the equity sued
upon”: Dewhirst v
Edwards [1983] 1 NSWLR 34 at [51]; REW08 Projects Pty Ltd v PNC Lifestyle
Investments Pty Ltd [2017] NSWCA 269; (2017) 95 NSWLR 458 at [37] per Macfarlan JA (with whom
Beazley P and Gleeson JA agreed).
- In
my opinion, there was nothing improper in Mr Driver or DJD seeking to raise
capital. DJD was a separate company that was entitled
to conduct whatever
business it wished and to raise capital in the way that it saw fit. The fact
that at the time it raised capital
its only or principal investment was the
shares in BWT or BWT UK does not change the position.
- It
is alleged that Mr Driver breached his fiduciary duties as a director of BWT by
diverting potential investors in BWT to DJD. But
there is no evidence that those
who invested in DJD would have been prepared to invest in BWT. Moreover, there
is no evidence that
BWT was seeking investors. The company that was raising
capital was BWT UK. Mr Driver was not a director of that company. Finally,
any
breach by Mr Driver of his duties as a director of BWT did not have an immediate
or necessary relation to the equity sued upon.
The equity sued upon is a breach
by Mr Paule of his fiduciary duties by obtaining additional shares in BWT UK for
an imputed price
that is less than other investors paid. Mr Driver’s
capital raising was unconnected to that conduct.
The claim based
on the BWT UK Agreement
- Having
regard to the conclusions I have reached, it is strictly not necessary to
address this claim, since the relief sought adds
nothing to the relief sought
for breach by Mr Paule of his fiduciary duties. I should, however, say something
about the claim in
the event that I am wrong about the claim based on breach of
fiduciary duties.
- The
claim based on breach of the BWT UK Agreement is essentially that Mr Paule
breached the agreement by failing to appoint Dr Kambouris
and Mr Driver as
directors of BWT UK. It is alleged that had they been appointed as directors of
BWT UK, Mr Paule would not have
been able to obtain control of BWT UK and sell
its assets at an undervalue.
- It
is also pleaded that it was a term of the BWT UK Agreement that no shares would
be issued by BWT UK or BWT IP UK without the consent
of Mr Driver, Dr Kambouris
and Mr Paule. However, there is no evidence that such a term was discussed
between the parties; and it
is difficult to see how such a term could be
implied. It is not so obvious that it goes without saying, and it is not
necessary to
give business efficacy to the contract, to take two of the
requirements for the implication of terms set out by the Privy Council
in BP
Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at
282-3.
- I
am satisfied that there was an agreement between Mr Paule on the one hand and Dr
Kambouris and Mr Driver on the other that both
Dr Kambouris and Mr Driver would
be appointed directors of BWT UK as a result of the exchange of emails between
Dr Kambouris and
Mr Richardson and Mr Paule on 27 February 2020. Dr Kambouris
made it clear that he was not prepared to sign the documents relating
to the
transfer of the IP until he had confirmation that he and Mr Driver would be
appointed directors of BWT UK. Mr Paule gave that
confirmation when he said in
the email he sent on the following day: “The other area of apparent
concern is directorship. This
is also being attended to so that we are all
directors. Please keep in mind we will most likely add new directors in the
future to
beef up our board.” Dr Kambouris reasonably took that as a
promise that he and Mr Driver would be appointed directors. The
Paule Defendants
do not explain why that exchange of emails did not amount to an enforceable
agreement that Mr Paule would cause
Dr Kambouris and Mr Driver to be
appointed as directors of BWT UK in exchange for Dr Kambouris agreeing to sign
the documents that
he was asked to sign. It is plain that Dr Kambouris was
acting as Mr Driver’s agent in reaching that agreement.
- The
Paule Defendants submit that by 13 October 2020, Dr Kambouris and Mr Driver had
waived the requirement that they become directors.
That waiver is said to arise
principally from Dr Kambouris’s text message to Mr Paule sent on 13
October 2020 in which Dr Kambouris
said:
We will not further insist in being directors but we can if the board wants us
to.
You will provide me with $1 million usd to buy a house ASAP?
Do we have a deal? ...
Mr Paule responded “Confirmed and a deal as you say”.
- In
my opinion, this exchange does not have the character of a waiver. Rather, it
was an offer to terminate the existing agreement
in exchange for the payment of
$1 million. Understood in context, Dr Kambouris must be taken as saying that if
he received USD1 million
out of the capital raising for a proportion of his
shares, he would not insist on becoming a director. There is a question whether
the “we” in Dr Kambouris’s text message referred to both him
and Mr Driver or whether it referred to him alone.
In my opinion, it should be
understood as referring to both of them. Dr Kambouris did not normally refer to
himself in the first-person
plural. By this stage, Dr Kambouris dealt with Mr
Paule on behalf of both himself and Mr Driver, since Mr Driver and Mr Paule were
no longer on speaking terms. However, little turns on this issue. The payment
was not made and therefore the agreement never came
into effect.
- There
are, however, two further problems with the claim based on a breach of the BWT
UK Agreement. The agreement was that Dr Kambouris
and Mr Driver be appointed to
the board of BWT UK (and possibly BWT IP UK). There was no agreement that they
and Mr Paule would be
the only appointees. Mr S Paule was also on the board (and
Chairman) of BWT UK and it was contemplated that there would be other
directors
as well. It is far from clear that had Dr Kambouris and Mr Driver been appointed
to the board of BWT UK, their appointments
would have had any effect on the
capital raising. Their appointments would not have given them control of the
board. The likelihood
is that Dr Kambouris and Mr Driver would still have been
prepared to leave the capital raising to Mr Paule. Dr Kambouris and Mr Driver
became aware that they were the majority shareholders in BWT UK by 12 October
2020, but they took no steps to assert the control
that that gave them. It is
unclear why they would have acted differently if they had been directors.
- Second,
it is far from clear that Dr Kambouris and DJD would be entitled to recover all
the losses they claim. In contrast to a claim
for breach of fiduciary duties, in
a claim for breach of contract they are only entitled to recover damages in
accordance with the
“rule” stated in Hadley v Baxendale
(1854) 9 EXCH 341; (1854) 156 ER 145. Relevantly, that rule limits a claim
for damages for breach of contract to those damages that were within the
reasonable contemplation of the parties at the time the contract was entered
into. Lord Reid, in a passage frequently cited with
approval in Australia put
the test in these terms in Koufos v Czarnikow Ltd [1969] 1 AC 350
(Koufos) at 385:
... on the information available to the defendant when the contract was made, he
should, or the reasonable man in his position would,
have realised that such
loss was sufficiently likely to result from the breach of contract to make it
proper to hold that the loss
flowed naturally from the breach or that loss of
that kind should have been within his contemplation.
See also Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454 at 471–2 per Gibbs J;
Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at 667 per
Wilson, Deane and Dawson JJ; with Gibbs CJ citing Koufos as an authority
more generally at 658; Commonwealth v Amann Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at
92 per Mason CJ and Dawson J; at 99 per Brennan J; European Bank Ltd v
Robb Evans of Robb Evans and Associates (2010) 240 CLR 432; [2010] HCA 6
at 13; Stuart Pty Ltd v Condor Commercial Insulation Pty Ltd at [2006]
NSWCA 334 at [42]- [45] and [88] per Beazley JA (Tobias JA agreeing) and
at [115] per Ipp JA; Edwin Davey Pty Ltd v Boulos Holdings Pty Ltd [2022]
NSWCA 65 at [102]- [104] per Gleeson JA (Macfarlan JA and Simpson AJA agreeing).
See also Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17 at 2-3
per Gageler CJ and at 113-114 per Edelman, Steward, Gleeson and Beech-Jones
JJ.
- In
my opinion, it could not have been in the reasonable contemplation of the
parties that the failure to appoint Dr Kambouris and
Dr Driver as directors of
BWT UK would lead to the series of events that ended with the sale of BWT
UK’s business and it being
placed into liquidation. Those events arose as
a result of decisions taken subsequently and resulted largely from the capital
raising
rather than the failure to appoint Dr Kambouris and Mr Driver as
directors of BWT UK. For similar reasons, it could not be said that
the kind or
type of loss was within the reasonable contemplation of Mr Paule at the time
parties entered the BWT UK Agreement.
The claims based on
unconscionable conduct
Relevant legal principles
- The
plaintiffs claim that Mr Paule engaged in unconscionable conduct in
contravention of ss 12CA and 12CB of the ASIC Act. A pleaded
claim that Mr Paule
also engaged in unconscionable conduct in contravention of the equivalent
provisions of the Australian Consumer Law (ACL) (sections
20 and 21) was not pressed in final submissions.
- Under
s 12GF(1) of the ASIC Act:
A person who suffers loss or damage by conduct of another person that
contravenes [s 12CA or 12CB] may recover the amount of the
loss or damage by
action against that other person or against any person involved in the
contravention.
The plaintiffs claim the same loss as they claim for breach of fiduciary
duties – that is, the loss of the value of their shares
in BWT UK.
- Having
regard to the conclusions I have reached in relation to the claim based on
breach of fiduciary duties, it is strictly speaking
unnecessary to consider
these claims, since it is not suggested that they add anything to the claim
based on breach of fiduciary
duties. Nonetheless, it is desirable that I say
something about them in case I am wrong in the principal conclusions I have
reached.
- What
distinguishes s 12CB of the ASIC Act from s 12CA is that s 12CB requires the
conduct to be “in connection with” the
supply or acquisition, or
possible supply or acquisition, of “financial services” (in this
case, the acquisition of shares
relevantly by Dr Kambouris and DJD in BWT UK),
whereas s 12CA requires that the conduct be “in relation to financial
services”.
On the other hand, s 12CA is limited to conduct that is
“unconscionable within the meaning of the unwritten law, from time
to
time, of the States and Territories”, whereas s 12CB contains an
express provision (s 12CB(4)(a)) that makes it clear that
that section is not
limited in that way. Section 12CA does not apply if s 12CB does: see s
12CA(2).
- The
phrase “in connection with” is generally given a broad
interpretation, which is as true in this context as it is in
others. It does not
require a causal connection between the conduct and the supply or acquisition.
Nor does it require that the conduct
precede the supply or acquisition. All that
is required is that there be some discernible relationship between the two: see
Australian Securities and Investments Commission (ASIC) v Westpac Banking
Corporation (No 2) (2018) FCR 147; [2018] FCA 751 at [2172] per Beach J;
Australian Competition and Consumer Commission (ACCC) v Google LLC (No 2)
[2021] FCA 367 at [340] per Thawley J.
- In
order for relief to be granted in equity (in accordance with the unwritten law,
to use the language of s 12CA) in respect of unconscionable
conduct, the
innocent party must establish that the party against whom the relief is sought
unconscientiously took advantage of some
special disability or vulnerability of
the innocent party, although there remains a question of what counts as a
special disability
or vulnerability for this purpose. Mason J, for example,
explained the principle in these terms in Commercial Bank of Australia Ltd v
Amadio [1983] HCA 14; (1983) 151 CLR 447 at 467:
...if A, having actual knowledge that B occupies a situation of special
disadvantage in relation to an intended transaction, so that
B cannot make a
judgment as to what is in his own interests, takes unfair advantage of his (A's)
superior bargaining power or position
by entering into that transaction, his
conduct in so doing is unconscionable. And if, instead of having actual
knowledge of that
situation, A is aware of the possibility that that situation
may exist or is aware of facts that would raise that possibility in
the mind of
any reasonable person, the result will be the same.
- Similarly,
in Australian Securities and Investments Commission (ACCC) v Kobelt
(2019) 267 CLR 1;
[2018] HCA 18 
at 81, Gageler J described the principle in
these terms:
In Australia, the central concern of a court administering equity in identifying
conduct as unconscionable has long been understood
to be to relieve against a
stronger party to a transaction exploiting some special disadvantage which has
operated to impair the
ability of a weaker party to form a judgment as to his or
her interests. [footnote omitted]
See also McMillan v Coolah Home Base Pty Ltd [2024] NSWCA 138 at
[400] ff per Ward P (with whom Leeming and Stern JJA agreed).
- Conduct
is “unconscionable” within the meaning of s 12CB if, in all the
circumstances of the case, the conduct falls sufficiently
short of acceptable
norms, standards or values that it warrants condemnation as conduct that is
offensive to the conscience: see
Ipstar Australia Pty Ltd v APS Satellite Pty
Ltd [2018] NSWCA 15; (2018) 356 ALR 440 at 196 per Bathurst CJ (Beazley P
and Leeming JA agreeing). As Gageler CJ and Jagot J explained in Productivity
Partners Pty Ltd (t/as Captain Cook College) v Australian Competition and
Consumer Commission (ACCC) [2024] HCA 27 at 60 in relation to the
equivalent provision of the ACL (s 21):
The normative standard set by s 21(1) is tethered to the statutory language of
“unconscionability”. While that term is
not defined in the
legislation and, in its statutory conception, is “more broad-ranging than
the equitable principles”,
it expresses “a normative standard
of conscience which is permeated with accepted and acceptable community
standards”,
and conduct is not to be denounced by a court as
unconscionable unless it is “outside societal norms of acceptable
commercial
behaviour [so] as to warrant condemnation as conduct that is
offensive to conscience”. The items listed in s 22(1)(a)–(l)
are matters that the legislation requires to be considered, in the overall
evaluation of the totality of the circumstances to be
undertaken for the purpose
of s 21(1), if and to the extent those matters are applicable. This is why both
“close attention
to the statute and the values derived from it, as well as
from the unwritten law” and “close consideration of the
facts”
are necessary. [footnotes omitted]
See also per Gordon J at 96- 105 and per Beech-Jones J at 340.
- It
is not an essential element of the claim under s 12CB that the innocent party
have been under some special disadvantage, although
the existence of such a
disadvantage is highly relevant: see Australian Competition and Consumer
Commission (ACCC) v Quantum Housing Group Pty Ltd (2021) 285 FCR 133; [2021]
FCAFC 40 at [33]- [34] per Allsop CJ, Besanko and McKerracher JJ.
- Section
12CC of the ASIC Act sets out a number of matters the Court may have regard to
in determining whether conduct is unconscionable.
They include the relative
strength of the bargaining position of the parties, whether the “service
recipient” was able
to understand any document relating to the supply of
the financial services, any undue influence exerted by or unfair tactics used
by
the supplier of the services, and the conduct of the supplier in complying with
the terms and conditions of any relevant
contract.
Application
- I
am satisfied that Mr Paule’s conduct in connection with the second
restructure was unconscionable within the meaning of s
12CB, but not s
12CA.
- I
do not think that it could be said that Mr Paule took advantage of some special
disadvantage under which Mr Driver and Dr Kambouris
were labouring which meant
that they were incapable of looking after their own interests. Mr Driver and Dr
Kambouris insisted that
Mr Paule agree that they both be appointed directors of
BWT UK before signing the documents which gave effect to the second restructure.
On their case, it is the fact that they were not appointed directors that
ultimately caused the loss about which they complain. It
may have been imprudent
for them to accept what Mr Richardson told them about his conversation with Mr
Paule rather than to insist
on the appointments occurring before signing the
relevant documents. But I do not think that it could be said that that
imprudence
arose from any disability or weakness on their part. Rather, it
simply reflected the fact that they were willing to accept Mr Paule’s
word on the matter, even if by that stage they had lost trust generally in
him.
- On
the other hand, I think Mr Paule’s conduct could be described as
unconscionable in the broader sense. Mr Paule had taken
no steps to appoint Mr
Driver and Dr Kambouris as directors of BWT UK, even though he must have
understood that that was their expectation
based on the presentation that had
been prepared for potential new shareholders, which had been shown to both Dr
Kambouris and Mr
Driver. It seems clear that Mr Paule told Mr Richardson to
tell Dr Kambouris and Mr Driver that they would be appointed directors
and he
was on notice that they had in fact been told that from the email that Mr
Richardson sent to Fried Frank that was copied to
him. It is reasonable to
infer, particularly in the absence of evidence from Mr Paule, that he had no
intention of appointing Dr
Kambouris and Mr Driver as directors despite the fact
that he knew that is what they had been told. They were not appointed directors.
There is no suggestion that circumstances subsequently changed which made their
appointment inappropriate. The only reasonable inference
is that Mr Paule made a
deliberate decision to mislead them so that they would sign the relevant
documents and then kept from them
the fact that, until the capital raising, they
were majority shareholders of BWT UK who could have brought about their own
appointments.
This is not a case where Mr Paule merely breached an agreement
that had been reached in relation to directorships. The sharp practice
that Mr
Paule engaged in, in order that he could retain control of BWT UK was in my
opinion unconscionable within the meaning of
s 12CB.
- It
also seems to me that that conduct was in connection with the acquisition of
shares in BWT UK. It was part of the arrangement by
which DJD and
Dr Kambouris would acquire those shares. However, I do not think that Mr
Paule’s subsequent conduct could be
said to be in connection with the
acquisition of those shares. DJD and Dr Kambouris acquired their shares in BWT
UK. It was not suggested
that the subsequent sale of BWT’s undertaking to
Mr Paule and his brother were part of an overall plan that existed at the
time
the shares in BWT UK were issued to Mr Driver and Dr Kambouris. Rather, it
appears to be an independent transaction unrelated
to the issue of the shares
and unconnected to any unconscionable conduct that occurred at that time. Before
BWT UK’s business
was sold, the shares had been issued to DJD and
Dr Kambouris, and Mr Driver (through DJD) and Dr Kambouris knew that
through their
shareholding they were able to control BWT UK. Consequently, to
their knowledge, they were able to remedy the consequences of any
unconscionable
conduct that had occurred. Accordingly, I do not think that it could be said
that any subsequent conduct of Mr Paule
that could be characterised as
unconscionable was connected with the acquisition by DJD and Dr Kambouris of
shares in BWT UK. It
was conduct that was completely independent of that
acquisition.
- Nor
do I think it could be said that the subsequent conduct was caused by
Mr Paule’s unconscionable conduct in connection with
the acquisition
of the shares. That conduct resulted from independent decisions taken by Mr
Paule and the failure of DJD and Dr Kambouris
to exercise their rights as
shareholders of BWT UK.
- It
follows that the claims under ss 12CA and 12CB of the ASIC Act must
fail.
Relief under ss 232 and 233 of the Corporations Act
- The
case for relief under ss 232 and 233 in relation to the affairs of ABBA relies
principally on the transfer of its business of selling bottled water to BWT. It
also appears
that the plaintiffs rely on the loan agreement between ABBA and
BWT. The case in relation to BWT relies principally on the series
of
transactions by which Dr Kambouris and Mr Driver were removed as directors of
BWT and BWT was placed into administration. In their
closing written
submissions, the plaintiffs also assert that it was contrary to the interests of
members of BWT as a whole for MyCo
to charge the fees that it did. In addition,
they assert that it appears from an analysis of BWT’s loan ledger and bank
accounts
that $1 million of BWT’s funds were expended on these
proceedings, which was oppressive. As I have said, the plaintiffs did
not
identify in final submissions what relief they sought under s 233 of the
Corporations Act. Instead, they submitted that the Court should make findings in
relation to oppression and hear submissions on the question of relief
subsequently.
- In
my opinion, the claim for relief under ss 232 and 233 of the Corporations
Act must fail at least for the following reasons.
- First,
the plaintiffs have failed to establish that it was contrary to the interests of
the members of ABBA as a whole for the loss-making
business of ABBA to be
transferred to BWT. The plaintiffs’ case depends on their contention that
the business was profitable.
However, I have already rejected that contention.
For the same reason, the conduct could not be described as unfairly prejudicial
to, or unfairly discriminatory against, Dr Kambouris or Mr Driver.
- Second,
there is insufficient material before the Court from which it is possible to
conclude that it was contrary to the interests
of members as a whole for MyCo to
charge the fees that it did, or that establishes that BWT unfairly paid the
defendants’ legal
fees. It is not disputed that MyCo provided services to
BWT. There is no material before the Court that establishes that the amount
BWT
paid for those services was excessive. Nor did the defendants provide the Court
with the analysis that established that $1 million
of BWT’s funds were
used to pay defence costs, and if it was the source of those funds and precisely
how they were used.
- Third,
the plaintiffs’ principal complaint in relation to BWT relates to the
removal of Dr Kambouris and Mr Driver as directors
and the appointment of
receivers. So far as the appointment of receivers is concerned, the receivers
were appointed by MyCo exercising
its rights under the General Security Deed. Dr
Kambouris and Mr Driver were provided with a draft of that deed and obtained
legal
advice in relation to it. Dr Kambouris executed the deed and relevant loan
agreement after obtaining that advice. It does not appear
to be disputed that
MyCo advanced money to BWT under the loan agreement. The appointment of
receivers was held to be valid by Rees
J. The appointment of receivers could not
amount to oppressive conduct in those circumstances.
- So
far as the removal of Dr Kambouris and Mr Driver as directors is concerned, at
the time that they removed the sole shareholder
of BWT was BWT UK. That had
occurred as a consequence of transactions entered into with Dr Kambouris and Mr
Driver’s agreement.
As a result of those transactions, they each obtained
an equivalent number of shares in BWT UK. Consequently, they were not
shareholders
of BWT at the relevant time. It is difficult to see how the conduct
complained of could be said to be contrary to the interests of
the member of BWT
as a whole when the only member of BWT at the time was BWT UK, which is the
entity that took the relevant action.
Although s 232(e) of the
Corporations Act does not require the relevant conduct to be
oppressive etc to members in their capacity as members, it does require the
conduct to
be oppressive etc against a member or members, which at the time Dr
Kambouris and Mr Driver were not. Nor could it be said that
the circumstances
in which Dr Kambouris and Mr Driver ceased to be shareholders of BWT were part
of the oppressive conduct. The circumstances
in which they ceased to be
shareholders were quite separate from the circumstances in which they were
removed as directors.
- Fourth,
it is not appropriate to adopt the course proposed by the plaintiffs. The gist
of a claim under ss 232 and 233 is the relief available under s 233. If the
plaintiffs wanted relief under that section, they should have identified that
relief and then sought to persuade the Court
that the facts justify the granting
of that relief. It is not appropriate in this case for the Court to decide the
question whether
the conditions set out in s 232 for the granting of relief
under s 233 have been satisfied in the abstract and to have a separate hearing
on the question of what relief should be granted. The position
might have been
different if the plaintiffs had identified the possible relief they sought and
contended that the ultimate form of
relief should be determined once the Court
had made the necessary factual findings. But in this case, the plaintiffs have
not attempted
to identify any form of appropriate relief.
- Moreover,
both ABBA and BWT are in liquidation. There is a question whether relief is
available under s 233 where the company in respect of which relief is sought is
in liquidation: see Aqua Botanical Beverages (Australia) Pty Ltd v Botanical
Water Technologies [2022] NSWSC 435. In principle, it is difficult to see
why in an appropriate case relief should not be available. However, in practice,
any relief
would have to conform with the provisions of the Corporations
Act relating to the winding-up of companies. So, for example, it may be
possible to make an order requiring one shareholder or group
of shareholders to
buy the shares of those who had been oppressed at a price determined at a
particular date (presumably a date immediately
before the oppressive conduct
occurred). An order of that type may be particularly appropriate where the
liquidation of the company
was brought about by the oppressive conduct. On the
other hand, it would not be appropriate, and it may be that the Court does not
have power, to make orders affecting the management of the company or the
distribution of its assets, when those matters are governed
by the provisions of
the Corporations Act that apply in insolvency.
- In
this case, it would not be appropriate to order Mr Paule to buy the
plaintiffs’ shares in ABBA at a particular date when
the evidence suggests
that those shares had no value at the time the bottled water business it owned
was transferred to BWT. It would
not be appropriate to order Mr Paule to buy Dr
Kambouris and Mr Driver’s shares in BWT, when they no longer own those
shares
and received shares in BWT UK in exchange for them. It is difficult to
see what other order could be made that would address the
oppression relied on
by the plaintiffs, assuming that they had otherwise made out their
case.
Conclusion and orders
- On
the conclusions I have reached, Mr Paule breached fiduciary duties he owed Dr
Kambouris and DJD. Both Dr Kambouris and DJD are
entitled either to equitable
compensation or an account of profits in respect of those breaches. I have
concluded that the equitable
compensation to which Dr Kambouris is entitled is
USD8,438,000 and the equitable compensation to which DJD is entitled is
USD7,399,000.
There is a question whether judgment should be given for those
amounts in United States or Australian dollars.
- It
will be necessary for Dr Kambouris and DJD to make an election between the two
remedies they seek. In addition, once an election
is made, I should give the
parties an opportunity to make submissions on precisely what orders should be
made in the light of that
election. I should also give the parties an
opportunity to make submissions on costs.
- Accordingly,
I will stand the matter over to 9.30 am on 21 November 2024 for directions to
deal with those outstanding matters.
**********
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