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Supreme Court of Victoria |
Last Updated: 12 August 2005
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
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JUDGE:
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WHERE HELD:
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MELBOURNE
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DATE OF HEARING:
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CASE MAY BE CITED AS:
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CONTRACTS – Employee – Restraint of trade provision – Whether restraint exceeds what is necessary to protect the legitimate interests of the employer – Restraint of trade too wide and therefore invalid – Breach of non-solicitation provision – Misuse of confidential information.
EQUITY – Fiduciary duties of directors – Involvement in establishment of competing business before and after resignation – Fiduciary duties subsequent to resignation from company – Failure to act in the best interests of the company – Use of information to detriment of company and benefit of others.
CORPORATIONS – Corporations Act 2001 (Cth) – Directors’ duties – Breach of ss 181 and 183 by first defendant – Third defendant involved pursuant to s 79 in breach of first defendant’s statutory duties – Dishonestly assisted first defendant in breaches of fiduciary duties – Liability under the second limb of Barnes v Addy.
Southern Real Estate Pty Ltd v Dellow [2003] SASC 318, followed.
IF Asia Pacific v Galbally [2003] VSC 192; (2003) 59 IPR 43, followed.
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APPEARANCES:
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Counsel
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Solicitors
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For the Plaintiff
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Baker & McKenzie
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For the Firstnamed Defendant
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For the Second and Thirdnamed Defendants
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Mr P M N Bornstein
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Hendersons Legal
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Introduction1 The plaintiff, Courtenay Polymers Pty Ltd ("Courtenay Polymers"), is a manufacturer of polyethylene rotational powder used in the plastics industry and also provides grinding and compounding services for the plastics industry. The first defendant, Mr Deang, was a longstanding employee who had been Courtenay Polymers’ sole director in Australia from December 2001. On 7 February 2003, he left Courtenay Polymers’ employment and resigned as a director. From Courtenay Polymers’ point of view, Mr Deang’s departure was caused, or precipitated, by an investigation conducted by Courtenay Polymers’ staff into improper credit card usage, withdrawals of petty cash without authority, unauthorised incurring of casual factory labour expenses, and unauthorised acquisitions.
2 One of Courtenay Polymers’ customers was a company named Australian Rotomoulding Industries Plastank Pty Ltd ("ARI"). Mr Deang had a close association with personnel at ARI, particularly with a Mr Ian Hansen, and was Courtenay Polymers’ principal point of contact with ARI (now named Nylex Water Solutions Pty Ltd).
3 At approximately the same time that Mr Deang left Courtenay Polymers’ employ, the third defendant, Asia Pacific Consolidated Holdings Pty Ltd ("APC"), was incorporated and began conducting a business of providing grinding and compounding services to the plastics industry. It rented premises, obtained equipment and set up production lines. Its only customer is, and with insignificant exceptions has been, ARI.
4 APC’s sole director and shareholder is the second defendant, Mrs Woon. Her financial investment in APC, and her practical involvement in APC, are, however, very minor. Courtenay Polymers maintains that Mr Deang has a significant role in the business of APC, and that he is one of the "principals" behind the company. Mrs Woon and APC say the company is under the sole control of a chartered accountant named Chan Joon San, sometimes referred to as John Chan.
5 In this proceeding, Courtenay Polymers seeks relief against Mr Deang for what it alleges are breaches of obligations he owed under agreements entered into with Courtenay Polymers, and for alleged breaches of fiduciary and statutory duties, in relation to the establishment of the competing business conducted by APC, in relation to an alleged disclosure and misuse of confidential information, and in relation to various allegedly unauthorised expenses and acquisitions. Relief is also claimed against APC and Mrs Woon on the basis that they are liable for breaches by Mr Deang of his fiduciary and statutory duties. By amendments made late in the trial, Courtenay Polymers added a claim against APC for intentionally procuring a breach of contract by Mr Deang.
6 The trial of the matter commenced on Monday 11 April 2005. Mr Deang did not appear. The trial proceeded in his absence. APC and Mrs Woon were represented by counsel. The claims against Mr Deang concerning improper credit card usage, unauthorised casual factory labour expenses, and the unauthorised acquisitions did not concern them. (I hereafter refer to those claims as the "misappropriation claims".)
7 The trial proceeded on questions of liability only.
8 A range of legal issues were raised in the proceeding but the factual issues were confined. The misappropriation claims were undefended. In relation to the other claims made against Mr Deang, and the claims against Mrs Woon and APC, the critical factual issue was the extent of Mr Deang’s involvement in APC and its business. This was the issue which occupied most of the evidence and most of the trial. All of the defended claims turn in one way or another on the view one takes as to Mr Deang’s involvement with APC.
Mr Deang’s involvement with APC
Competing contentions as to Mr Deang’s involvement with APC
9 Courtenay Polymers’ case is that Mr Deang has a significant role in the business being conducted by APC.
10 APC and Mrs Woon deny this. They say he has some peripheral involvement as a helpful friend but that he has no financial interest, or management role, in the APC business.
11 It emerged during the hearing that there is a second company associated with APC’s business of providing contract grinding and compounding services. It is named South East Recyclers Pty Ltd ("South East Recyclers"). According to the evidence of Mr Chan there was uncertainty as to whether South East Recyclers or APC would conduct the business until approximately the middle of 2003. Eventually it was decided that APC would conduct the business and that South East Recyclers would lease one of the extruder machines from Esanda and rent it on to APC.
ASIC records
12 Company searches of APC and of South East Recyclers do not reveal any involvement by Mr Deang with either company. The company search of APC reveals the following relevant information:
(a) The registration date is 20 February 2003.(b) Its current registered office is 56 De Havilland Road, Mordialloc. This is also its principal place of business.
(c) Its sole director is Mrs Woon. She is also the secretary.
(d) Mrs Woon holds the only share issued in the company. She does not hold it beneficially.
13 The company search of South East Recyclers reveals the following information:
(a) Its current registered office is c/o Z Maric & Associates Pty Ltd, Suite 10, 22 Princes Way, Drouin.(b) Its current principal place of business is 56 De Havilland Road, Mordialloc.
(c) The directors are Mr Chan, and one Narcito Paguio.
(d) One hundred ordinary shares have been issued, all of which are owned by Saw Bee Rowena Yap, who is Mr Chan’s wife and is sometimes referred to as Rowena Yap or Mrs Chan. To avoid confusion I will refer to her as Mrs Chan. These shares are not held beneficially.
14 According to the evidence of Mr Chan, he has an option to take up 90% of the shares in APC whenever he wishes and, if he were to exercise that option, he would immediately be made a director. His evidence was that APC is a company entirely controlled by him. The sole director, Mrs Woon, gave evidence to the same general effect. She displayed almost total ignorance of the company’s business. In her oral evidence she was unable to give any coherent account of the arrangement between her and Mr Chan. Such account as she could give was not consistent with her witness statement. It was obvious in the course of her evidence that whilst she may have made a modest investment in the company, and whilst she is formally the sole director and the only shareholder, she has no influence over its affairs and has little or no involvement in its activities.15 It was, in effect, common ground between the parties that the true nature and extent of the various interests in APC and South East Recyclers, and their management, are not revealed by the company searches. The company search of APC suggests that Mrs Woon is in control of that company. Mrs Woon and APC say it is Mr Chan who is in control. Courtenay Polymers says Mr Deang also has a significant role. The company search of South East Recyclers shows Mrs Chan to be the sole shareholder but not to hold the shares beneficially. Courtenay Polymers maintains that South East Recyclers is just another arm of the APC business. Mr Chan in his evidence said that the shares in South East Recyclers are held by his wife on her own behalf.
16 In their oral evidence both Mr and Mrs Chan agreed that APC had been formally structured so as to conceal the identity of those involved in the business. They each suggested that the reason for this concealment was because Mrs Chan had been an employee of Courtenay Polymers until October 2002 and they were worried that Courtenay Polymers would take some action against them if their involvement were revealed. In cross-examination Mrs Chan agreed that she had not left Courtenay Polymers on bad terms and that she had not signed any agreements imposing upon her any restraint in her ability to conduct, or be employed in, a competing business.
Funding the APC business
17 The position in relation to the provision of funds for the business conducted by APC/South East Recyclers is characterised by a similar lack of transparency.
18 There is no share capital to speak of in either company. According to APC’s financial records, loans have been made to it by Mrs Woon and by Mr and Mrs Chan which as at 30 June 2004 total $292,663.52. Of this amount Mrs Woon is recorded as having lent $9,949. According to Mr Chan’s evidence, he and his wife lent the balance, being $282,714.52. Mr Chan was adamant that no part of these loans had been advanced by Mr Deang.
19 In his witness statement Mr Chan purported to set out the sources of these loans. Cross-examination revealed that it is impossible to trace the movement of the funds. A significant reason why this is impossible is because of a practice, which Mr Chan maintained in his sworn evidence was followed, whereby large amounts of cash were withdrawn from accounts of himself or his wife, kept at their home, and paid from time to time into the company’s account in smaller amounts. He was unable to give an explanation which I could follow as to why this practice was followed. He agreed that one effect of the practice was that it was impossible to trace all of the loans recorded as being made to the company back to funds sourced from himself and his wife.
20 Courtenay Polymers subpoenaed documents from the National Australia Bank ("NAB") and from the ANZ Bank in relation to the bank accounts of APC, Mr Deang, and Mr and Mrs Chan. Mr and Mrs Chan were cross-examined on those documents. The documents and that cross-examination revealed that some of the advances entered in the APC general ledger as being loans from Mr and Mrs Chan and Mrs Woon have come from the bank account of Mr Deang.
21 An advance of $10,000 on 2 April 2003 came from Mr Deang’s account. Mr Chan’s explanation was that this was repayment of a debt owed by Mr Deang to his wife. This was not an explanation which his wife gave (or was asked about by either party) when she was called to give evidence.
22 An advance of $5,000 on 4 April 2003 also came from Mr Deang’s account. APC’s general ledger recorded this as being an advance from Mr and Mrs Chan. An advance of $2,000 on 23 June 2003, recorded in APC’s general ledger as an advance from Mrs Woon, also came from Mr Deang’s account.
23 In addition to these specific advances, there were other instances, on 22 September 2003, 17 October 2003, 11 November 2003 and 19 November 2003, where withdrawals by Mr Deang closely reflected advances made purportedly by Mr and Mrs Chan to APC.
24 I cannot accept Mr Chan’s evidence that none of the advances that have funded the business have come from Mr Deang. I find that the payments of $10,000, $5,000 and $2,000 referred to, which came from Mr Deang’s account, were payments by Mr Deang to APC. On the balance of probabilities, I find that further payments were also made by Mr Deang to APC. I also find that the payments from Mr Deang have been incorrectly recorded by APC as loans from either Mr and Mrs Chan or Mrs Woon.
Other matters revealed by the subpoenaed bank documents
25 Mr Deang and Mrs Chan have conducted two joint bank accounts together at the ANZ Bank. One account commenced on 7 November 2003. A second account commenced on 3 December 2004. Mrs Chan gave an explanation for the account which commenced on 3 December 2004, saying it was related to a prospective business opportunity concerning a Malaysian natural therapy named "Lamp Berger". She was most reluctant to give any explanation for the joint account commencing 7 November 2003. Her evidence in relation to this account was characterised by long silences during which Mrs Chan was clearly most disconcerted. She eventually said that the account was used by her and Mr Deang to lend money to friends. It was obvious from her evidence that there are matters concerning this account which she is not prepared to reveal and which cause her concern.
26 Mr Deang’s accountant is Mr Zvonko Maric. Mr Maric conducts business under the name Z Maric & Associates at Suite 10, 22 Princes Way, Drouin. Mr Maric’s firm’s premises are the registered office of South East Recyclers. By a facsimile of 12 August 2003 to the NAB, expressed to be "Re: Income Tax Returns and Financials for Deang", Mr Maric forwarded, amongst other documents, a projected profit and loss for the year ending 30 June 2004, said to be referable to South East Recyclers. In cross-examination Mr Chan accepted that the projections set out in that document were projections for the APC business. He said that Mr Maric was the accountant for South East Recyclers. Mr Chan is himself a trained accountant. He does all the accounting work for himself, his wife, and for APC. His explanation that he does not have time to do South East Recyclers’ accounts was unconvincing, given that all the company does is lease an extruder which it then rents to APC. Mr Maric was not called as a witness. There was no explanation proffered as to why Mr Deang’s accountant would be submitting to the NAB financial projections for the APC business (described as being for South East Recyclers) as material relevant in some way to the financial position of Mr Deang.
27 Amongst the documents produced by ANZ Bank on subpoena were a number of payslips which purported to have been issued by APC to Mr Deang. Mr Chan in his witness statement said that Mr Deang had asked him for a "sample" payslip. In his oral evidence he said the documents produced from ANZ’s custody were not the sample which he provided. He said they were not APC documents at all. If Mr Chan’s evidence were accepted, these documents are forgeries. Mr Chan said that he had not reported that matter to the police and indeed that he had not raised it with Mr Deang.
Further circumstances relied upon by Courtenay Polymers
28 Courtenay Polymers relies on the following further circumstances in support of its contention that Mr Deang has a significant role in APC:
1. The timing of Mr Deang’s departure, APC’s incorporation, and the establishment of the business.2. The fact that the sole customer of the business is ARI, the customer with whom Mr Deang had a close association.
3. The close, interconnecting, and opaque relationships between Mr Hansen from ARI, Mr Deang, Mr Chan and Mrs Chan. Courtenay Polymers suggested Mr Hansen, Mr Chan and Mrs Chan had all given false evidence and thereby portrayed a "consciousness of guilt."
4. Evidence led on behalf of Courtenay Polymers from independent persons who had dealt with APC and, in that context, with Mr Deang.
The evidence from persons who had dealt with APC, was, in my view, the most significant of these factors.Evidence of persons who have dealt with Mr Deang concerning APC
29 The evidence given by the persons who had dealt with APC and, in that context, with Mr Deang, had two aspects. First, there was evidence of the dealings themselves. Second, there was evidence of statements made by Mr Deang which, Courtenay Polymers maintained, amount to admissions by him as to his significant role in the business.
30 Counsel for APC and Mrs Woon maintained that the evidence of the events, including statements made by Mr Deang which were not in the nature of admissions, was admissible against all defendants, but that the admissions were admissible against Mr Deang only, unless it could be established that all the defendants were acting in the course of a common design. I accepted the evidence of Mr Deang’s statements subject to objection and deferred argument until the evidence had been completed. Upon completion of the evidence, counsel for Mrs Woon and APC indicated that the question of the admissions could, and should, be dealt with in the course of final submissions. I observed that it seemed to me that counsel for APC and Mrs Woon was entitled to know what the evidence was against his clients before he made his final address. He said as a practical matter that was not necessary. In the circumstances I adopted the course he suggested. Counsel for Courtenay Polymers agreed with that course.
31 I will deal firstly with the evidence given as to Mr Deang’s conduct.
32 William John Dietrich is a director of Zodiac Tooling Australia Limited ("Zodiac Tooling"). Zodiac Tooling was engaged to design and build a mill housing for a grinding mill which was being built by a company named GT and JA Jones Engineering Pty Ltd for APC. Mr Dietrich gave evidence that in February or March 2003 Mr Deang phoned him at the Zodiac Tooling office and engaged him on behalf of APC to build the mill housing. Mr Dietrich said that on 14 March 2003 he received a purchase order from APC and that Zodiac Tooling built the mill housing in or around March and April 2003. Mr Dietrich said that during this period he had discussions over the telephone with Mr Deang on three or four occasions in relation to progress but he could not now recall the substance of those discussions. An invoice for the work was issued on 10 April 2003. In July 2003 Zodiac Tooling did some further work for APC but this time Mr Dietrich was contacted by Mr Chan. There were some difficulties in installing the mill housing and he was again contacted by Mr Chan. He visited APC’s factory at 56 De Havilland Road, Mordialloc in or around August 2003. On the occasion of that visit he discussed matters with Mr Chan. Mr Dietrich had further dealings with Mr Deang and APC in late 2003 and in 2004 and 2005, to which I will refer below.
33 Evidence was also called from Antonios Georgios Antoniou. Mr Antoniou is an employee of a manufacturer of "masterbatch" (a colourant used in the manufacture of polymer-based products) now named Rockwood Pigments Pty Limited but formerly named Johnson Matthey Pigments & Ceramics Pty Ltd ("Johnson Matthey"). Johnson Matthey is both a customer of, and a supplier to, Courtenay Polymers. Mr Antoniou said that at some time between February 2003 and October 2003 Mr Deang visited the Johnson Matthey office. He was unable to be specific as to dates, but in October 2003 Johnson Matthey issued a purchase order in response to this visit and Mr Antoniou’s evidence was that Mr Deang’s visit occurred three to six months before that order, suggesting the period April to July 2003. On the occasion of the visit the managing director, Mr Colin James, told Mr Antoniou in Mr Deang’s presence that Mr Deang had come to discuss the possibility of getting grinding work from Johnson Matthey. Mr Deang gave Mr Antoniou a business card. The business card is headed "Theorem & Postulates Group" and bears the name "Leonilo Deang". The address on the card is 56 De Havilland Road, Mordialloc; that is, the address of the premises leased and occupied by APC. The card has a telephone number and a facsimile number. Those numbers are also the telephone number and facsimile number of APC.
34 Mr Antoniou said that in early October 2003 he rang Mr Deang on the number on the card (in other words, on the number that is also APC’s number). After this conversation he sent Theorem & Postulates Group a purchase order for grinding 5,000 kilograms of material. The purchase order was addressed to "Theorem & Postulates Group" and the specified contact was "Leonilo Deang". The ground powder was delivered in October 2003. The applicable delivery orders and the invoices were issued by and in the name of APC. A further purchase order was directed to the "Theorem & Postulates Group" on 25 November 2003 with Leonilo Deang again named as the contact. Again, the delivery orders and invoices were issued by and in the name of APC.
35 At some point late in 2003 Mr Antoniou visited the factory at 56 De Havilland Road, Mordialloc. He was unsure whether this was after deliveries made in October or in December. The visit was prompted by a customer complaint. At the factory he met Mr Deang. There was no other person present, except for a person who appeared to Mr Antoniou to be a machine operator. He discussed the customer complaint, which concerned steel shavings, with Mr Deang, and Mr Deang advised him what he believed the problem to be and what he considered the solution to be. Mr Deang indicated that he would take steps to eradicate the problem.
36 In late 2003 and into 2004, Mr Dietrich from Zodiac Tooling was concerned about outstanding invoices. Notwithstanding his dealings with Mr Chan, the person he contacted to address this problem was Mr Deang. He said he did this because it was Mr Deang who had initially provided the instruction to build the mill housing. According to Mr Dietrich’s evidence, Mr Deang made excuses and asked for forbearance. On 6 April 2004, Mr Deang visited the Zodiac Tooling offices and paid $660.00 in cash. Mr Dietrich said he also had contact from Mr Chan in relation to outstanding accounts and further work in 2004.
37 David Bailey is the Victorian manager of The Parrington Group Pty Limited (trading as Comtec IPE) ("Comtec"). Comtec is the Australian distributor for a number of overseas manufacturers of processing machinery used in the moulding, extrusion and compounding of plastics and rubber materials. He gave evidence that in 2003 Mr Deang telephoned him seeking prices on spare parts for a pelletising system. On a date Mr Bailey could not recall, Mr Deang telephoned him and invited him to visit the factory at 56 De Havilland Road, Mordialloc. Mr Bailey said that in either late September or early October 2003 he visited the factory and was shown around by Mr Deang. He said there was no other person there except for one or two machine operators. He said he saw one complete, operational grinding line and a partially constructed second line. He said that Mr Deang indicated the spare parts were needed for the pelletiser in order to complete the second grinding line. Mr Bailey said that towards the end of October, or possibly early November 2003, Mr Deang told him the proposed acquisition would not be going ahead.
38 In January and February 2005, Mr Dietrich was still pursuing amounts outstanding in relation to the work undertaken by Zodiac Tooling. He contacted Mr Deang in relation to the matter at the end of January 2005 and again was given apologies and reassurances by him. His evidence was that on a number of occasions in early 2005 Mr Deang visited the Zodiac Tooling office and made payments by cheque and in cash.
39 Courtenay Polymers also tendered in evidence a credit application to an entity named "Metal Mesh" completed on behalf of APC and dated 11 December 2003. The application is signed by Mr Deang. Under his signature is the printed word "Position", next to which is written in handwriting "Manager". The form names the accounts contact as "John Chang" and sets out the anticipated monthly purchases, APC’s ABN number, and the name and branch of APC’s bank. All of this information is accurate.
40 Mr Chan gave explanations for these events. The explanations were to the broad general effect that Mr Deang was undertaking various "odd jobs" on behalf of APC without having any interest, or role, in the business, other than that of a helpful friend. Mr Chan also said he allowed Mr Deang to store goods for an entirely unrelated business at the APC factory.
41 The specific explanation given in relation to the dealings with Zodiac Tooling was that Mr Deang introduced Mr Chan to Mr Dietrich, but that the discussion of requirements and the placing of the order was undertaken by Mr Chan. This is not consistent with the account given by Mr Dietrich. I accept Mr Dietrich’s account.
42 In relation to the dealings with Johnson Matthey, Mr Chan’s explanation was that Mr Deang approached him and told him that Johnson Matthey staff had asked him whether he could arrange for grinding services to be performed. I find that the circumstances in which APC came to perform these services were those sworn to by Mr Antoniou. Johnson Matthey placed orders with Mr Deang and received product and invoices from APC.
43 In relation to the credit application to Metal Mesh, Mr Chan’s explanation was that he initially went to the premises of Metal Mesh with Mr Deang in order to discuss APC’s requirements, and that when the credit application form came some time later he was about to leave the premises of APC to make a delivery. His witness statement says: "As I had to go out, I asked Nilo to fill out and forward the form." Mr Chan says that he did not see the completed form, and indeed his evidence was he had not seen any copy of it until shown it by his solicitor in the course of this proceeding. I reject Mr Chan’s explanation. It is not credible.
44 In relation to the dealings with Comtec concerning the spare parts, in his witness statement Mr Chan said that obtaining the quote from Comtec was an "odd job" that he asked Mr Deang to do for him and that the quotation "came about in a similar way to the application for credit from Metal Mesh". In cross-examination he agreed that the latter part of that explanation could not be true. He agreed that it was wrong. Thus, the only explanation proffered by Mr Chan in relation to Mr Deang’s dealings with Comtec is that it was an "odd job". I do not accept that.
45 The evidence led from persons who dealt with APC through Mr Deang admits of only one conclusion. Mr Deang was playing a significant role in APC’s business when he dealt with these persons. I reject Mr Chan’s explanations. Mr Deang was not performing "odd jobs".
Further factors supporting conclusion of Mr Deang’s significant role
46 The conclusion that Mr Deang has played a significant role in APC’s business is further fortified by the acknowledged failure of the ASIC records to portray the true character of the equity holdings in APC and its management, by the matters revealed by the subpoenaed bank records, to which I have referred above, and by the following further factors:
1. The establishment of the APC business coincides almost precisely in point of time with Mr Deang’s departure from Courtenay Polymers. APC was incorporated on 20 February 2003. The lease of the factory at 56 De Havilland Road has a commencement date of 1 February 2003. Mr Deang left Courtenay Polymers’ employ on 7 February 2003. The evidence establishes that his continued employment with Courtenay Polymers was a matter of concern to him from at least October 2002. This coincidence of events arises in circumstances where Mr Deang had extensive knowledge of the business which APC was to conduct and where Mr Chan and Mrs Woon had no knowledge at all of that business. The business may not be complex, as was submitted by counsel on behalf of APC and Mrs Woon, but their ignorance and complete lack of experience in the field is significant given the other evidence of Mr Deang’s activities.2. The evidence reveals the existence of close, interconnecting, and, in certain respects, opaque relationships between Mr Hansen at ARI, Mr Deang, Mr Chan, and Mrs Chan. In this respect I am relying on the following circumstances:
(a) Mr Hansen and Mrs Chan were each directors of a company named United Plastics (Australia) Pty Ltd. The company search of that company reveals the following information:
(i) The company’s registration date is 1 May 2002.
(ii) The company’s registered office is "SE 10 22-26 Princes Way, Drouin" (which, it will be recalled, is the address of Mr Deang’s accountants, Z Maric & Associates).(iii) Between 1 May 2002 and 17 December 2003 the sole directors of the company were Mr Hansen and Mrs Chan.
(iv) The company has 100 issued shares, all of which are recorded as now being beneficially held by a person named Virginio Rivera Santos. It is recorded that previously the 100 shares were owned by Mrs Chan, but were not owned by her beneficially.
Each of Mrs Chan and Mr Hansen gave evidence in this proceeding that they agreed to become a director of this company at Mr Deang’s request. Neither of them could give any account of the company’s activities. Each of them said they were asked to become a director by Mr Deang without further explanation and that they agreed to become a director without knowing what the company’s activities were or why Mr Deang was requesting them to be the directors. Mrs Chan has an honours commerce degree from a university in Canada. Mr Hansen is an experienced manager. I cannot accept that they gave a full and truthful account of their association with Mr Deang in relation to this company.(b) I have already referred to the fact that Mrs Chan and Mr Deang have operated joint bank accounts together and that in relation to one of those accounts Mrs Chan is very loathe to provide an explanation for it.
(c) On both Mr Chan and Mr Hansen’s account of events, Mr Hansen played a very helpful role in relation to the setting up of the new grinding and compounding business. He gave Mr Chan advice, including advice as to prospective price, and, whilst professing uncertainty, he also said in his evidence that he may have referred Mr Chan to the company which supplied APC’s extruder. He established supply arrangements with Hyundai and arranged to import quantities of material specifically for the new business to grind before that business had rented premises or obtained the necessary equipment. ARI provides the new business with enough work to occupy its full capacity. It is now, and with insignificant exceptions (such as the Johnson Matthey work) has been, its only customer.
(d) Mr Deang was having problems at Courtenay Polymers from at least October 2002. Mr Hansen was advising Mr Deang in relation to these problems.
47 For the purposes of this proceeding it is not necessary for me to make findings about the role of anyone other than Mr Deang. It suffices to say that the evidence given as to the interrelationship between the various parties fortifies me in my conclusion that Mr Deang has had an important role in the APC business.Issues of credibility
48 It is also of significance that much of the evidence given by Mr Chan, and some of the evidence given by Mrs Chan and Mr Hansen, was not credible.
49 In relation to Mr Chan I refer in this respect to his evidence concerning the loans made to APC; the involvement of Mr Deang’s accountant in the figures produced to NAB purportedly concerning South East Recyclers; the "sample" payslip; and the explanations for Mr Deang’s dealings with Zodiac Tooling, Johnson Matthey, Comtec, and Metal Mesh. I cannot accept the veracity of his evidence on these matters. Mr Deang’s involvement in APC has been deliberately concealed by Mr Chan, albeit inadequately.
50 In relation to Mrs Chan I refer to her evidence concerning the joint bank account with Mr Deang and her involvement in United Plastics (Australia) Pty Ltd.
51 In relation to Mr Hansen I refer to his evidence concerning his involvement in United Plastics (Australia) Pty Ltd.
52 These aspects of Mr Chan’s evidence lead me to conclude that Mr Chan is concealing the truth about APC’s dealings with Mr Deang because the truth would be detrimental to APC’s case. The unsatisfactory aspects of Mrs Chan and Mr Hansen’s evidence lead me to conclude that they are prepared to be a party to arrangements involving Mr Deang which they are not prepared to explain.
The admissions by Deang
53 Turning then to the admissions made by Mr Deang, the evidence is set out in witness statements adopted by witnesses called on behalf of Courtenay Polymers. The relevant evidence is as follows.
54 Eddie Song Koh, an employee of a company related to Courtenay Polymers in Malaysia, swore that in December 2003 he had discussions with Mr Deang, in the course of which he said to Mr Deang words to the effect that he should not do "anything silly". In this context he says he specifically referred Mr Deang to a restraint clause to which he had agreed. In response to this Mr Koh says the following exchange took place:
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Deang:
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"Are you asking me indirectly if I am grinding powder?"
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Koh:
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"I don’t want to know, but just don’t do anything
stupid."
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Deang:
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"My name will not be on any company documents or information and you
won’t be able to trace me back to my company."
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55 Mr Bailey from Comtec gave evidence that in the course of his dealings with Mr Deang over the spare parts, Mr Deang made the following statements:
"I would like you to see the factory and what we are doing here so you can understand why we need the spare parts we’ve been discussing.""Don’t say anything about this to anyone, either that I have this factory or that I am interested in buying spare parts from Comtec."
"The spare parts I need the quote from you on are needed for the pelletiser to complete this second grinding line."
"We cannot go ahead as I don’t have the money to complete the second line."
56 Mr Dietrich gave evidence that in addition to the excuses and reassurance which Mr Deang gave on APC’s behalf, as to which there was no objection, Mr Deang, when placing the initial order, expressed himself in these terms:
"This is Nilo Deang. I want Zodiac Tooling to build a mill housing for APC. We have contracted GT Jones to build a mill that we will be using to grind resin into powder. You will be contacted by someone at GT Jones. APC will be your customer and will be paying your bills, but you are to take your instructions directly from GT Jones."
57 Mr Antoniou gave evidence that the words used by Mr Deang when discussing with him the problem of steel shavings at the Mordialloc factory were to this effect:
"I believe that this is happening because of the settings we are using on the grinding mill. If the blades are set too close together, occasionally contact will produce steel shavings. I think the problem can be overcome by simply resetting the grinding mill. I will also attach magnets to the mill to assist in our quality control processes. I will ensure that this never happens again."
58 The above statements constitute admissions by Mr Deang that he was playing a significant role in the APC business. He repeatedly refers to the business as if it were his own, or as if he were a principal in the business.59 As to whether these admissions can be relied on against Mrs Woon and APC, the first point to be made is that there is sufficient other evidence to reach the conclusion that Mr Deang has had a significant role in the APC business without relying on these admissions.
60 In relation to the admissibility of Mr Deang’s admissions as against Mrs Woon and APC, counsel on both sides relied upon ACCC v Leahy Petroleum Pty Ltd.[1] In that case Merkel J summarised the principle applicable where a criminal conspiracy is alleged as being that words uttered outside the presence of the accused are admissible only if it is shown that: (1) there is a combination of the type alleged; (2) there is reasonable evidence, apart from the words used, that the accused was a participant in the combination; and (3) the words sought to be used were uttered in furtherance of the common purpose. In this respect Merkel J relied upon Ahern v R.[2] Merkel J went on to observe that s 87(1)(c) of the Evidence Act 1995 (Cth) "substantially reflects" the Ahern principle, that there is a long line of cases establishing that the Ahern principle applies in the context of civil conspiracies and unlawful arrangements in contravention of Part IV of the Trade Practices Act 1974 (Cth), and that the principle also extended to the case with which he was concerned where it was alleged that the individual respondents had been knowingly concerned in and parties to contraventions of Part IV by the corporate respondents. He observed that the case before him was "directly analogous to a case that they were co-conspirators".
61 I accept the correctness of Merkel J’s analysis, subject to the non-application of the Evidence Act 1995 (Cth) provision to which he referred, of course. The case sought to be made against APC and Mrs Woon includes an allegation of accessory liability to breaches of statutory duties. This case is directly analogous to a case that they are co-conspirators.
62 For reasons I have already given concerning Mr Deang’s role in the APC business, I find that there is a relevant combination involving Mr Deang, that there is reasonable evidence apart from the words used that APC is a participant in the combination, and that the words used were uttered by Mr Deang in furtherance of the common purpose. The admissions are admissible against APC, as well as against Mr Deang.
63 I do not think the evidence establishes these requirements against Mrs Woon. I am not satisfied she is a participant in the combination. She has been used as a means of concealing it. Her professed ignorance of APC’s affairs appeared to me to be genuine, and there is no evidence of any active participation by her in any relevant activity.
Courtenay Polymers’ claims
Courtenay Polymers’ pleaded case
64 Courtenay Polymers’ fourth further amended statement of claim is convoluted and confusing. This may be partly explicable as a consequence of the concealment which permeates APC’s affairs. Nevertheless, the separate claims made are not easy to discern with clarity, and in certain respects the pleaded claims do not reflect the way the case was conducted.
65 Courtenay Polymers’ pleading alleges three agreements with Mr Deang: a confidentiality agreement dated 27 July 1993 ("the confidentiality agreement"), an employment agreement dated 1 April 1998 ("the employment agreement"), and a deed of separation made on 7 February 2003 ("the deed of separation"). The fourth further amended statement of claim alleges breaches of each of these agreements by Mr Deang and alleges breaches of his statutory and fiduciary duties. The claims made may be summarised as follows.
66 Mr Deang’s involvement with APC from in or about February 2003 is alleged to constitute a breach of a provision of the employment agreement prohibiting him from being directly or indirectly engaged in any business or activity within New Zealand or Australia likely to be in competition with any business or activity carried on by any "Group Company" (as defined) for a period of two years after termination, and is also alleged to constitute a breach of a provision of the deed of separation which also restrains his involvement in a competing business. I set out the terms of this deed of separation restraint in full below. (See fourth further amended statement of claim, paragraphs 11, 12 and 17).
67 Mr Deang’s conduct from in or about March 2003 promoting APC to ARI and to Johnson Matthey, and the supply by APC from about April or May 2003 of services to ARI and from about October 2003 to Johnson Matthey, is alleged to constitute a breach by Mr Deang of a provision of the employment agreement prohibiting the solicitation of former customers and suppliers for a period of two years after cessation of employment, is alleged to constitute breach of the restraint on competitive involvement after his employment ceased in the deed of separation, and is alleged to constitute breach of Mr Deang’s duties as an employee and a director of Courtenay Polymers, which duties are alleged to arise under the general law and under Chapter 2D of the Corporations Act 2001 (Cth). An allegation is also made in this context concerning solicitation of employees, but no evidence was led to support that allegation and no submissions were made in relation to it. (See fourth further amended statement of claim, paragraphs 18, 21, 22 , 25, and 30).
68 There is a provision of the deed of separation which also prohibits solicitation of customers (clause 8). Whilst no allegation is made in the pleading itself of breach of this clause, perhaps because of a drafting error in paragraph 25, the relief claimed includes a claim for a declaration that Mr Deang breached this provision and also a declaration that APC and Mrs Woon procured that breach. The submissions made by both counsel for Courtenay Polymers and counsel for APC and Mrs Woon addressed the alleged breach by Mr Deang of the non-solicitation provision in the deed of separation. (See outline of plaintiff’s submissions, paragraphs 1(a) and 4; outline of submissions on behalf of the second and third defendants, paragraphs 2 and 6; and plaintiff’s outline of submissions in reply, paragraphs 36-46). In the circumstances, notwithstanding the pleading deficiency, the matter was sufficiently raised by the fourth further amended statement of claim to enable reliance to be placed on it, given that the parties who participated in the trial conducted themselves on the basis that breach of the non-solicitation provision of the deed of separation (clause 8) was alleged.
69 It is alleged against Mr Deang that in or about January or February 2003 he revealed product information to Mr Hansen of ARI concerning a product coded UR654 manufactured by Hyundai, and a product coded 9050 manufactured by Courtenay Polymers using UR654 as a critical ingredient. It is also alleged that in or about January or February 2003 Mr Deang revealed to APC customer information concerning ARI’s requirements, plans, and problems, and concerning offers made by Courtenay Polymers to ARI. It is alleged that this conduct led to ARI purchasing UR654 from Hyundai in February 2003, after discussions between Mr Hansen and Seung-Do You of Hyundai in January 2003, and led to APC providing contract grinding services to ARI from May 2003 having been procured to do so by Mr Deang. It is alleged that this conduct was in breach of the confidentiality agreement, in breach of the employment agreement, in breach of the restraint on competitive involvement after his employment ceased in the deed of separation, and in breach of Mr Deang’s statutory and fiduciary duties. (See fourth further amended statement of claim, paragraphs 30-32, 36-38, 40-44, 48-49). The deed of separation contains an express provision (clause 6) governing use of information after cessation of employment, but Courtenay Polymers’ pleading does not rely on that provision.
70 Against APC it is alleged that it was knowingly concerned in the wrongful disclosure and use of the information allegedly misused by Mr Deang; that it aided and abetted, induced, was knowingly concerned in, and conspired with Mr Deang in the contravention of his statutory duties, for which it must compensate Courtenay Polymers pursuant to section 1317H of the Corporations Act 2001 (Cth); and that it received the benefit of Mr Deang’s breaches of fiduciary duty with knowledge of the breaches, or it knowingly assisted in those breaches, as a consequence of which it is liable to account for such benefit. (See fourth further amended statement of claim, paragraphs 58, 60, 61 and 63). It is also alleged that APC intended to procure a breach by Mr Deang of the restraint upon involvement in a competitive business in the deed of separation (paragraph 68A).
71 Mrs Woon is alleged to have aided and abetted, induced, been knowingly concerned in, and to have conspired with Mr Deang in, the contravention of his statutory duties, for which it is alleged she must compensate Courtenay Polymers pursuant to s 1317H of the Corporations Act 2001 (Cth). (See fourth further amended statement of claim, paragraphs 65-68).
72 Broad relief is sought in Courtenay Polymers’ prayer for relief against Mrs Woon and APC for inducing breach of contract. The only substantive pleaded allegation in this respect is in paragraph 68A. Paragraph 68A concerns only APC and when it was introduced, it was explained in terms which confined it to APC.[3] In submissions counsel for APC and Mrs Woon dealt with it on that basis, emphasising that no allegation of inducing breach of contract was made against Mrs Woon.[4] In the circumstances, Courtenay Polymers should be confined to its plea in paragraph 68A, notwithstanding the much broader relief sought in the prayer for relief. This means it is confined to an allegation of inducing breach of contract against APC. It also means that it is confined to an allegation that the provision breached is the restraint on involvement in a competitive business in the deed of separation (paragraphs 68A and 58).
73 An important aspect of Courtenay Polymers’ case as it was put in submissions did not closely reflect the pleading. This aspect of the case was, in substance, that Mr Deang had breached his fiduciary and statutory duties by establishing a competing business prior to 7 February 2003 which was continued after 7 February. The submission was that, in substance, Mr Chan, Mrs Woon, Mr Hansen, and Mr Deang were "all in this together", in setting up the APC business both before and after 7 February.[5]
74 There are allegations pleaded of breaches of statutory and fiduciary duties by conduct which straddles the period before and after 7 February 2003.[6] These allegations are, however, all pleaded as being related to the alleged misuse of "Product Information" and "Customer Information." The allegation that what was done was to establish a competing business whilst still a director of Courtenay Polymers is not squarely put in those terms in the pleading, although that case was squarely put in submissions. The case was conducted consistently with the submissions made, and APC and Mrs Woon’s counsel addressed the claim on this basis both in his final submissions,[7] and in his submission in reply.[8] I will also deal with the matter on that basis. On any view, breach of statutory and fiduciary duties by misuse of information before and after 7 February is pleaded.
Summary of Courtenay Polymers’ claims
75 In summary, the Courtenay Polymers claims which are to be determined are:
1. The alleged breach by Mr Deang of his statutory and fiduciary duties by conduct both before and after 7 February 2003.2. The alleged breach by Mr Deang of provisions restraining his involvement in a competitive business and prohibiting solicitation of customers in the employment agreement and in the deed of separation by his conduct after 7 February 2003.
3. The alleged breach by Mr Deang of provisions concerning misuse of information in the confidentiality agreement and the employment agreement.
4. The allegation that APC is liable for procuring breach of the restraint on involvement in a competitive business in the deed of separation.
5. Allegations that APC and Mrs Woon are liable for Mr Deang’s alleged breaches of fiduciary and statutory duties.
When did Mr Deang’s involvement in APC begin?76 I have determined that Mr Deang has played a significant role in the APC business. The APC business operates in direct competition with a part of Courtenay Polymers’ business with which Mr Deang was personally involved while an employee and director of Courtenay Polymers, namely its contract grinding business. The APC business’ sole significant customer, ARI, is a customer, or former customer, of Courtenay Polymers with whom Mr Deang was the primary point of contact when he was an employee and director of Courtenay Polymers. The case put by Courtenay Polymers is, in substance, that Mr Deang breached his statutory and fiduciary duties by using the information he had and combining with others to establish a competing business whilst still an employee and director of Courtenay Polymers and by continuing that activity after his termination as an employee and resignation as a director on 7 February 2003. It is also alleged that whilst an employee, he breached contractual obligations of confidentiality. It is accordingly necessary to address the issue of whether Courtenay Polymers has established that Mr Deang’s involvement in the competing business, or the proposed competing business, began prior to 7 February 2003.
77 According to Mr Chan he began considering the possibility of establishing a business to grind resin into powder in the middle of 2002. His evidence was that Mr Hansen was a friend of his wife and that he discussed the idea with him at his wife’s suggestion. In his witness statement he said that Mr Hansen told him "if I started a business of grinding resin into powder he would see to it that ARI would support the business by providing resin to grind for ARI". Mr Chan said that he discussed the idea with Mrs Woon and her husband and that in late December 2002 or early January 2003 he told her of his decision to set up a business grinding resin into powder. He said he then proceeded to locate premises, and left his previous employment with Air Nauru in February 2003, having first given notice in October 2002.
78 Mr Hansen’s evidence was that he discussed with Mr Chan the idea of Mr Chan establishing a grinding business in late 2002 and early 2003. He said that he told Mr Chan that ARI would be "receptive" to the idea of using Mr Chan’s proposed company. These discussions coincided with dealings Mr Hansen had with Mr You at Hyundai directed towards obtaining material to be ground into powder by a contractor for supply to ARI. Mr Hansen’s evidence was that ARI’s first order with Hyundai was placed on 5 February 2003 and was delivered to APC. Mr Hansen said his activities were prompted by a concern on his part to diversify ARI’s sources of supply.
79 In the course of final submissions both counsel submitted that there was no direct evidence of involvement by Mr Deang in the establishment of the competing business prior to 7 February 2003. Both submitted that a conclusion that Mr Deang had been involved before 7 February 2003 could be reached only by reliance on the nature and extent of his involvement thereafter. Counsel for Courtenay Polymers also made general submissions, to which I have referred above, as to the veracity of the evidence given on behalf of APC and Mrs Woon, and as to the conclusions which he submitted should be drawn as a consequence of what he submitted was the untruthful nature of that evidence.
80 My conclusion that Mr Deang has had a significant role in the APC business was based upon the acknowledged failure of the company’s records to reveal the true position in relation to equity holdings in the company and the company’s management; the payments to APC from Mr Deang’s bank account which were recorded as loans by others; Mr Deang’s dealings with APC’s customers and suppliers; the coincidence in timing between the establishment of the APC business and Mr Deang’s departure from Courtenay Polymers; the nature of the relationships between Mr Hansen, Mr Deang, and Mr and Mrs Chan; and the unsatisfactory nature of much of the evidence given by Mr Chan and some of the evidence given by Mrs Chan and Mr Hansen.
81 Two of the payments which were made to APC from Mr Deang’s account were made on 2 and 4 April 2003. Amongst the dealings with customers and suppliers upon which I have relied are the dealings which Mr Deang had with Zodiac Tooling. These dealings began in February-March 2003. There is direct evidence of Mr Deang’s involvement in APC’s business at a time not long after 7 February 2003.
82 Whilst there is no direct evidence of Mr Deang’s involvement in the setting up of the APC business prior to 7 February 2003, I accept the submission made by counsel for Courtenay Polymers that Mr Deang was involved in setting up the competing business from the outset. My reasons for reaching this conclusion are the nature and extent of Mr Deang’s role in the business in 2003 after 7 February, the attempts to conceal that role, and the admissions made by Mr Deang, also admissible against APC, indicating that the company and the business are in some sense his company and his business.
83 The fact that Mr Deang’s continued employment with Courtenay Polymers was a matter of concern to him from October 2002 (when Mr Chan gave notice to his employer) and that Mr Deang was communicating with Mr Hansen at that time about his employment position at Courtenay Polymers is a further factor which leads me to this conclusion. I cannot accept, as was maintained by Mr Hansen and Mr Chan, that they discussed setting up the new business, of which Mr Chan was entirely ignorant, without ever involving in any way Mr Deang, whose position at Courtenay Polymers was known to be uncertain, and who was an expert in the proposed business.
84 The conclusion to be drawn from the evidence of Mr Deang’s involvement after 7 February 2003 is that the APC business was then in some relevant sense his business. In the absence of any credible evidence explaining his involvement, it seems to me that I should conclude, from all the circumstances to which I have referred, that whatever interest he had then in the APC business is one which he had had from its inception.
85 Courtenay Polymers submits that the business was set up by Mr and Mrs Chan, Mr Hansen, and Mr Deang, who are all "in it together". It is unnecessary to reach any conclusion as to Mr Hansen’s involvement and I do not do so.
86 Mr Chan maintains APC conducts a business which he alone has always controlled and in which he has always had the only substantial equity interest. I reject that. I find that APC’s business is one in which Mr Deang also has, and has always had, a substantial involvement and a substantial interest.
87 As I have found that Mr Deang was involved in this business from the outset, it follows that he was involved in plans to set up the competing business whilst he was still an employee and a director of Courtenay Polymers.
Alleged breaches of statutory and fiduciary duties
88 Courtenay Polymers’ counsel submitted that the contractual obligations imposed on Mr Deang concerning his conduct after termination of his employment were fiduciary in nature. No authority was cited in support of this proposition and I reject it. Courtenay Polymers also submitted that Mr Deang’s fiduciary duties as a director continued beyond his resignation. In this respect, it relied upon the Court of Appeal decision in Edmonds v Donovan; Disctronics Ltd v Kingston Links Country Club Pty Ltd.[9]
89 The position here seems to me to be relevantly the same as that recently dealt with by the Full Court of the Supreme Court of South Australia in Southern Real Estate Pty Ltd v Dellow.[10] There the Court was considering the position of a former employee and director of a company which conducted a real estate business including management of a rent roll. The defendant in that case made plans and took steps to set up a competing rent management business before her resignation as a director and employee, and she then commenced the competing business immediately upon resignation.
90 The principles which emerge from that decision, and which I adopt, are the following:
1. Obligations of loyalty owed by an employee are subsumed in the more onerous fiduciary duties owed as a director.2. The statutory and fiduciary duties of directors exist side by side. There is both a statutory and a fiduciary duty on directors to act in the best interests of the company and not to promote their own interests or the private interests of others.[11]
3. Taking steps which are against the company’s interests with a view to resignation and subsequent involvement in a competing business will be, in the absence of full disclosure or other extraordinary circumstances, a breach of both statutory and fiduciary duty, even if those steps involve no misuse of confidential information.
4. The statutory and fiduciary duties of directors do not simply end at the point of resignation, but there is uncertainty as to when a former director might properly begin to compete with the company. Where a former director covertly puts everything in place so as to be in a position to compete with the company immediately upon resignation, and does in fact enter into competition immediately following resignation, there is no need to determine at what point the director might properly have commenced a competing business.
91 Applying those principles to Mr Deang’s position, his breach of both his statutory and fiduciary duties is clear. In breach of his fiduciary duties and in breach of s 181 of the Corporations Act 2001 (Cth), he has not acted in the best interests of Courtenay Polymers, the company of which he was a director, but has instead sought to advance his own interests and the interests of APC. I also conclude Mr Deang has breached s 183 in that he has improperly used information, being all the information he had concerning ARI, to gain advantage for himself and APC and cause detriment to Courtenay Polymers.The contract claims – post 7 February 2003 conduct
Deed of separation applies
92 The deed of separation provides that it constitutes "the whole agreement between the parties concerning the subject matter" and that it replaces "any prior agreement, arrangement or understanding concerning the subject matter." The subject matter of the deed of separation includes obligations of confidentiality, restraint on future competitive business involvement, and restraint on solicitation of customers and employees. Insofar as conduct after 7 February 2003 is concerned, the provisions of the deed of separation replace and supplant the provisions of the employment agreement and the confidentiality agreement dealing with the same subject matter. The subject matter of the deed of separation encompasses all such claims now made, so it is only that deed which is applicable after 7 February 2003.
Misuse of confidential information
93 The provision of the deed of separation concerning use of information (clause 6) was not pleaded.
The deed of separation restraint of trade clause
94 The most significant of the post 7 February contract claims was the claim that Mr Deang had breached the restraint on involvement in a competitive business after termination of his employment, which is contained in the deed of separation. A significant part of the proceeding was concerned with this issue.
95 The relevant clause is clause 7. It reads as follows:
"In consideration of the arrangements set out in clause 2 of this Deed and to reasonably protect the business of the Employer, the Employee will not from the separation date, without the prior consent of the Employer, whether directly or indirectly:
(a) carry on or be engaged in or concerned with any business which is or is likely to be in competition in any material way with the business or activities carried out by the Employer or any related company;(b) whether as:
(1) principal;
(2) agent;
(3) director;
(4) controlling shareholder;
(5) employee or consultant;
(c) for a period of:
(1) one year; or if unreasonable;
(2) 6 months; or if unreasonable;
(3) 3 months,
(d) within the State of Victoria."
96 It was submitted on behalf of APC and Mrs Woon that this clause is invalid on the grounds that it is unreasonable, an unnecessary restraint of trade, and is wider than was reasonably necessary for the protection of Courtenay Polymers’ interests or the interests of the public.Validity of the deed of separation restraint of trade – legal principles
97 It is well-established that a restraint of trade is prima facie unlawful and invalid. A restraint of trade may be valid, however, if it is reasonable in the interests of the parties. In the employment context, for a restraint to be reasonable it must not exceed what is necessary to protect adequately the legitimate business interests of the employer. The onus rests upon the employer to establish that the restraint is necessary for this purpose.[12]
98 Employers may legitimately protect "their business connection against the possibility of its being affected by the personal knowledge of and influence over the customers which the [employee] might acquire in their employment".[13] A restraint of trade clause preventing competition per se is not enforceable as it does not protect a legitimate interest of an employer.[14] The unenforceability of restraints preventing mere competition has been explained as follows:
"Wherever such covenants [against competition] have been upheld it has been on the ground, not that the [employee] would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer’s trade secrets would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilize information confidentially obtained."[15]
99 In determining the reasonableness of a restraint clause, the court must look to the protectable interests of the employer at the time of the making of the agreement.[16] Facts arising after the agreement may be relevant in that they may throw light on the circumstances existing when the agreement was made.[17]100 The factual matrix in which the parties contracted should be considered when determining whether a restraint of trade is necessary to protect the legitimate interests of the employer. The meaning of a restraint clause should be construed by reference to the documentary context and the surrounding circumstances. Evidence of the protectable interests of the employer should also be examined in order to determine whether the clause exceeds what is necessary to protect these interests.[18]
101 Where a restraint clause is wider than is necessary to protect the legitimate interests of the employer, the clause cannot be restrictively interpreted with the object of saving the clause from invalidity. On the other hand, if there is evident ambiguity in the terms of the clause, a reading down of the literal terms may be justified, and as a consequence the clause may be valid. In this respect, mere generality does not constitute ambiguity.[19]
Validity of the deed of separation – application
102 There is no issue in this proceeding as to the identification of the employer; "the Employer", under the deed of separation, is Courtenay Polymers. The nature and scope of Courtenay Polymers’ business is not in doubt. It is a company engaged in the manufacture of polyethylene rotational powder that is supplied to manufacturers known as ‘rotomoulders’, and in the provision of contract grinding services for the same manufacturers. It is the legitimate interests of Courtenay Polymers, in conducting such a business, that must be determined.
103 Courtenay Polymers submitted that the legitimate interests of an employer within this context include customer and trade connections, and confidential information and trade secrets. The protectable interests of Courtenay Polymers, as at the time of the making of the deed of separation on 7 February 2003, are said to consist of the following:
• trade connections with ARI and Johnson Matthey;• trade connections generally;
• confidential information and trade secrets to which Mr Deang was privy as operations director of Courtenay Polymers.
104 The classification of these interests (if established) as legitimate business interests, protectable by a restraint of trade clause, is supported by the authorities. Trade connections and confidential information and secrets are legitimate business interests within this context.[20]105 As to the existence of these interests as at 7 February 2003, the position is as follows.
106 In relation to the specific trade connections with ARI and Johnson Matthey, Courtenay Polymers submitted that Mr Deang materially contributed to the trade connections between Courtenay Polymers and ARI and Johnson Matthey. Both Mr Masutti and Mr Hansen gave evidence as to the involvement of Mr Deang in instigating, developing and sustaining trade connections between Courtenay Polymers and ARI. In March 2002, Mr Deang was assigned responsibility for managing the ARI account based upon his good working relationships with the then operations manager of ARI, Mr Hansen, and other members of senior management. Mr Deang and Mr Masutti, the group managing director of JR Courtenay, regularly spoke about how to manage the ARI business. The evidence establishes that Mr Deang was also an important contact in terms of Courtenay Polymers’ relationship with Johnson Matthey.
107 As to trade connections more generally, Mr Deang was operations director of Courtenay Polymers from 2001 to 2003. He was a member of the management team and regularly participated in management meetings throughout this period. At these meetings he was privy to discussions regarding market share, customers and suppliers. Mr Deang’s knowledge of the trade and his experience in the industry was noted by customers.
108 Courtenay Polymers called evidence establishing that Mr Deang was privy to confidential information and secrets held by Courtenay Polymers. In this respect I refer in particular to the evidence of Mr Masutti and Mr Tanner.
109 I conclude that as at 7 February 2003, Mr Deang had acquired personal knowledge of, and influence over, the customers of Courtenay Polymers, and he was privy to confidential information. Courtenay Polymers has established that the interests so identified – trade connections with ARI and Johnson Matthey, trade connections generally, and confidential information and secrets – are legitimate business interests of Courtenay Polymers which it might properly seek to protect by a restraint clause.
110 The problems for Courtenay Polymers arise not because it did not have legitimate interests to protect, but because of the terms in which it sought that protection.
111 The clause in issue restricts involvement with any business in competition in any material way with the business or activities carried out by Courtenay Polymers "or any related company." The expression "business or activities" is not defined. By reference to the evidence adduced at trial, the business and activities of Courtenay Polymers are sufficiently clear. Courtenay Polymers manufactures polyethylene rotational powder that is supplied to rotomoulders. Courtenay Polymers also performs contract grinding services as an alternative to selling powder. This involves the rotomoulder sourcing resin directly from a supplier and engaging a company such as Courtenay Polymers to perform the compounding and grinding services. These are the business and activities of Courtenay Polymers.
112 The restraint clause goes further. It also seeks to restrict competition with the business or activities carried out by "any related company." A number of related companies were referred to in evidence. ICO Technology Inc was described in evidence as the ultimate parent of all entities within the corporate group of which Courtenay Polymers is a part. No evidence was adduced as to the nature of ICO Technology Inc’s business or activities. ICO Holdings Australia Pty Ltd was described in evidence as the holding company of Courtenay Polymers. No evidence was led of its business or activities. A Malaysian entity, JR Courtenay SDN. BHD was referred to in evidence. Mr Koh, its managing director from 2001 to 2003, gave limited evidence regarding the business and activities of this company. He stated that JR Courtenay SDN. BHD and Courtenay Polymers are 100 per cent owned by JR Courtenay (NZ) Ltd. There was no evidence of JR Courtenay (NZ) Ltd’s business or activities.
113 The business and activities of Courtenay Polymers’ related companies are unclear. First, there is uncertainty regarding the identity of the related companies of Courtenay Polymers. Secondly, the nature of the business and activities of those related companies which were identified in the evidence is not revealed by the evidence.
114 Courtenay Polymers submitted that any ambiguity arising from the reference to related companies is resolved by the matrix of evidence before the Court. I do not accept that. The identity of the related companies, and the nature of their businesses, is almost entirely unknown. In any event, the problem is generality, not ambiguity.
115 Courtenay Polymers also submitted that :
1. "related company" should be construed as referring to related companies of Courtenay Polymers operating within the same industry; and2. because the restraint is geographically limited to Victoria and none of the related companies operate in Victoria, the restraint is in fact limited to Mr Deang’s involvement with a business that competes with Courtenay Polymers itself.
116 Counsel for Courtenay Polymers relied upon Rentokil Pty Ltd v Lee[21] in support of his contention that a ‘related company’ is to be construed as one operating within the same industry as Courtenay Polymers.117 In Rentokil the appellant employer had a number of "streams" of business. The respondent, a former employee, was employed in one of those streams. The restraint clause in question relevantly sought to restrain the respondent from carrying on, being associated with or engaged or interested in the stream of business of the employer. It was held at first instance that the clause sought to restrain the employee from engaging in any of the various streams of business. On appeal it was held that the correct construction was that the restraint was limited to the particular stream in which the respondent had been employed and did not extend to the other streams of business.
118 The decision in Rentokil is not relevantly applicable to the position here. In Rentokil there was a basis in the terms of the agreement itself for construing the restraint as applying only to the "stream" of business in which the particular employee had been employed. Here there is no such basis. There is nothing in the deed to suggest that "related company" refers only to a company operating within the same industry as Courtenay Polymers.
119 In my view this term, in its reference to "any related company", is relevantly similar to the clause in issue in IF Asia Pacific v Galbally,[22] as was the submission of APC and Mrs Woon. In that case, the plaintiff ("IF"), one of a group of companies known as the IF group, carried on a consultancy business. IF alleged that the defendants, former employees of IF, breached restraint of trade covenants. One of these covenants relevantly provided that the defendants could not "offer to perform services and otherwise solicit the custom of any person or corporation which at any time during your company’s contract with it was a client of IF or its related companies."[23] There was no definition of "related companies" and there was confusion in the evidence as to the entities in the corporate group.[24]
120 Dodds-Streeton J held that the clause could not be restricted to services, custom or business "the same as or similar to" those of IF. The text of the clause and the contractual documents displayed generality rather than ambiguity, and to incorporate the restriction would have been to remake the clause rather than give expression to its real meaning.
121 In the present case there is also generality, not ambiguity. To restrict the term in the manner suggested by Courtenay Polymers’ submissions would be to remake the clause.
122 As to the submission regarding the geographical limitation, this does not assist in reading down the expression "any related company". The evidence does not establish that it is the only company in the group with activities in Victoria. In submissions, Courtenay Polymers contended that the non-existence of related companies in Victoria was apparent from the evidence. In response to questioning counsel conceded that the evidence of this was silence.[25] Further, the reference to "any related company" must have been intended to have some operation. If the clause were limited to Courtenay Polymers, the reference to "any related company" would be superfluous.
Conclusion on validity of deed of separation restraint of trade
123 The deed of separation restraint of trade term (clause 7) is too wide. The term cannot be restricted to the business of a related company operating within the same industry as Courtenay Polymers. It cannot be restricted to companies operating in Victoria. There is no satisfactory evidence of who the related companies are or what their businesses are. The term is invalid on this ground.
The non-solicitation provision
124 The deed of separation provides, in clause 8, that Mr Deang will not "for a period of 12 months ... directly or indirectly ... solicit ... or have any business dealing away [sic] any person ... who has at any time during [his] employment with the Employer been a customer of the Employer". This term does not have the impermissible width of the restraint of trade provision already considered. In my view its terms are reasonable to protect Courtenay Polymers’ legitimate business interests. Mr Deang has breached this provision as a result of his significant role in the APC business and the dealings that business had in the 12 months after 7 February 2003 with Johnson Matthey and with ARI.
Contract claims – pre 7 February 2003 conduct
125 Under clause 7.2 of the employment agreement Mr Deang undertook and warranted not to disclose confidential information or use it for his own purposes. Under clauses 1 and 2 of the confidentiality agreement Mr Deang agreed not to reveal any of the trade secrets, confidential operations, processes or dealings or any information concerning the organisation, business finances or affairs of Courtenay Polymers, and not to use any such information in any manner which might cause loss to Courtenay Polymers.
126 Evidence was given by both Mr Hansen and Mr You (Hyundai) as to the dealings they had with each other in January and early February 2003 resulting in the first order, for 33 metric tonnes, of the material known as UR654 from ARI to Hyundai. Mr Hansen’s evidence was that he became aware of the product as a result of his general knowledge of world suppliers, research on the internet, and telephone contact with Mr You. Mr You gave evidence, which I accept in its entirety, which indicated that information about UR654 was published on the internet and was available from Hyundai on request.
127 Courtenay Polymers alleges misuse of confidential information concerning its products. In final oral submissions counsel for Courtenay Polymers would not identify what specific confidential product information was alleged to have been disclosed. My perception is that this aspect of the claim was all but abandoned because the relevant information was not confidential. To the extent that this aspect of the claim was pursued, I reject it on the ground that Courtenay Polymers has failed to establish that Mr Hansen was at any relevant time in possession of confidential information concerning Hyundai’s product UR654 or Courtenay Polymers’ product 9050.
128 The position in relation to the customer information concerning ARI was, in effect, subsumed in the submission that Mr Hansen was a part of the combination, which included Mr Deang, who together established APC. It seems to me that it must follow from the conclusions I have reached concerning Mr Deang’s involvement in the APC business that he disclosed all the information he had concerning ARI to those establishing APC. This disclosure may never have involved any specific communication. In the circumstances here, Mr Deang, in effect, transposed everything he knew concerning ARI from Courtenay Polymers to those setting up the APC business. At least some of this information was confidential.
129 In the circumstances I find that Mr Deang breached clause 7.2 of the employment agreement and clauses 1 and 2 of the confidentiality agreement.
The claim against Mrs Woon - accessory liability
130 For the reasons given, I proceed on the basis that there is no claim made against Mrs Woon in relation to any alleged contractual breach by Mr Deang. The only claim pleaded is that Mrs Woon is liable to compensate Courtenay Polymers pursuant to s 1317H of the Corporations Act 2001 (Cth) as a person involved in a contravention of the Act within the meaning of s 79.
131 Mrs Woon has allowed herself to be used as a means of concealing the true position in relation to both the management of, and the equity holdings in, APC. She has done this at the request of Mr Chan. There is no evidence that she has had any involvement with Mr Deang. Whilst her role in this matter is not one which reflects well on her, I accept her evidence as to her ignorance of APC’s business.
132 Courtenay Polymers’ submissions concerning Mrs Woon were based upon her position as the sole director of APC and what was submitted to be "constructive" accessory liability as a consequence.
133 The necessary basis for liability under s 79 and ss 181(2), 182(2) and 183(2) is knowledge of the essential facts which constitute the contraventions.[26] The knowledge required is actual, not constructive.[27]
134 The evidence does not establish actual knowledge by Mrs Woon of the essential facts of Mr Deang’s contraventions.
The claims against APC
135 The position in relation to APC is different. Mr Chan had actual knowledge of the essential facts. On the basis of the evidence to which I have referred establishing Mr Deang’s involvement in the APC business, and the evidence which has led me to conclude there was concealment of Mr Deang’s involvement in the APC business, I conclude that Mr Chan had actual knowledge of the fact that Mr Deang was assisting in the establishment of a competing business whilst still an employee and a director of Courtenay Polymers, and that Mr Deang was conducting, or assisting in the conduct of, that business before and after his resignation as a director and employee.
136 The claims against APC are made on the basis of s 79 and ss 181(2), 182(2) and 183(2) of the Corporations Act 2001 (Cth) and under that were described as both limbs of Barnes v Addy.[28]
137 Amongst other things, counsel for APC submitted it cannot be liable under s 79 for contraventions which occurred prior to 20 February 2003 when it was incorporated.
138 In Barnes v Addy, it was held that strangers are not to become liable as if they were trustees unless they receive and become chargeable with some part of the trust property, or they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. In the modern context, accessory liability for breaches of fiduciary duty by directors arises where a person dishonestly assists the defaulting fiduciary[29] or where a person receives property, with requisite knowledge, not necessarily amounting to dishonesty, which has been dealt with by the defaulting fiduciary.[30]
139 Here, APC, upon its incorporation, had actual knowledge of all the essential facts. Its only officer is Mrs Woon. She is merely a front. The person or persons who constitute the true "mind" of APC cannot be identified with certainty but they certainly include Mr Chan, and, my conclusion is that they also include Mr Deang. Each of them had actual knowledge of all the essential facts.
140 The activity which I have found constituted a breach of statutory and fiduciary duties by Mr Deang commenced prior to 7 February 2003 and continued thereafter. Whilst still an employee and director of Courtenay Polymers before 7 February 2003, he established with Mr Chan, and perhaps others, a competing business, and he conducted that business in a manner intended to conceal his involvement thereafter. APC was an important part of this course of activity, particularly the concealment. As the Dellow decision makes clear, the breach of duty does not stop at the point of resignation.
141 APC is liable as a person involved in Mr Deang’s contravention of his statutory duties. It aided and abetted the contravention and was knowingly concerned in it. Its involvement began immediately upon its incorporation and it had knowledge of the essential facts immediately upon its incorporation.
142 It is also liable under the second limb of Barnes v Addy for dishonestly assisting Mr Deang in his breaches of fiduciary duty. Whilst the submissions asserted liability under the first limb of Barnes v Addy, no proprietary remedy is sought. Given my other findings, it is unnecessary to determine whether APC is liable on this basis.
Other issues
143 The claim for intentionally inducing breach of the deed of separation fails because I have found the only term which is the subject of this claim to be invalid.
144 APC and Mrs Woon made substantial submissions on an alleged absence of proof of any damage. I find that there was damage suffered by Courtenay Polymers. A new competitor, APC, has captured part of the business of one of its customers, ARI. The quantum of the loss is a separate issue. The issue of relief in this proceeding is not confined to compensatory damages and it is preferable that all issues of relief are dealt with together after the parties have had the opportunity to consider these reasons.
Conclusions on claims other than the misappropriation claims
145 My conclusions on the claims made, other than the misappropriation claims, are accordingly as follows:
1. Mr Deang breached his statutory and fiduciary duties by conduct both before and after 7 February 2003.2. Mr Deang breached the provision of the deed of separation (clause 8) regulating the solicitation of, and dealings with, customers. The provision restraining his involvement in a competitive business (clause 7) is too wide and therefore invalid.
3. Mr Deang breached the provisions of the employment agreement (clause 7.2) and the confidentiality agreement (clause 1 and clause 2) concerning misuse of information.
4. APC is not liable for procuring breach of the restraint which I have held to be invalid.
5. APC is liable as an accessory to Mr Deang’s breaches of statutory and fiduciary duties. Mrs Woon is not.
The misappropriation claims146 Courtenay Polymers has established the factual basis for liability on the misappropriation claims.[31] The evidence on these issues was admitted only against Mr Deang. The trial before me was fixed for hearing on issues of liability only.
147 Although Mr Deang did not appear at the trial, one matter raised in his defence filed 12 March 2004 needs to be dealt with. In paragraph 38, it is said that each cause of action against him was discharged by operation of clauses 2.1 and 2.2 of the deed of separation. Clause 2.1 provides for certain entitlements of Mr Deang, including leave entitlements and payment in lieu of notice. Clause 2.2 then provides:
"The parties agrees [sic] that the payments referred to in clause 2.1 off-set in full the amounts owed by the Employee to the Employer and that, as such, the Employee will receive no payments from the Employer upon the termination of his employment."
Clause 3.1 provides:
"The Employer is not obliged to make the notional payment referred to in clause 2.1 of this Deed where it is of the reasonable opinion that the Employee has not complied with any or all of the terms and conditions of this Deed."
These provisions are not easy to follow. To the extent that they operate to "discharge" any claims they could only discharge those claims then in contemplation.[32] Any such discharge might be said to apply to the misappropriation claims, but it could not extend further.148 More fundamentally, if clause 2.2 operates as a discharge of any claims it must be subject to clause 3.1 concerning Mr Deang’s compliance. Here, Mr Deang has not complied with the deed of separation. He has breached clause 8 concerning solicitation of customers. In the circumstances, the provisions do not discharge his liability for the misappropriation claims.
Further disposition
149 I will hear the parties as to the further disposition of the matter once they have had the opportunity to consider these reasons.
[1] [2004] FCA 1678.[2] [1988] HCA 39; (1988) 165 CLR 87.
[3] Transcript 522.
[4] Transcript 644.
[5] Transcript 581, 590-592, 601-603, 627-631, 633–636.
[6] See fourth further amended statement of claim, paragraphs 36-38, 41-42, 48-49.
[7] Transcript 543, 548 and 577.
[8] Transcript 644.
[11] In this context the court cited Kinsela v Russell Kinsela Pty Ltd (In Liq) (1986) 4 NSWLR 722, 729; Mills v Mills [1938] HCA 4; (1938) 60 CLR 150, 185; and ss 181, 182 and 183 of the Corporations Act 2001 (Cth).
[12] Amoco Australia Pty Ltd v Rocca Bros Engineering Co Pty Ltd [1973] HCA 40; (1972) 133 CLR 288, 315-316 (Gibbs J); Lindner v Murdock’s Garage [1950] HCA 48; (1950) 83 CLR 628, 653 (Kitto J).
[13] Lindner v Murdock’s Garage [1950] HCA 48; (1950) 83 CLR 628, 654 (Kitto J).
[14] Monash Real Estate Pty Ltd v Ross [2005] VSC 116, [17]; IF Asia Pacific v Galbally [2003] VSC 192; (2003) 59 IPR 43, [102].
[15] Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 709 (Parker L).
[16] Lindner v Murdock’s Garage [1950] HCA 48; (1950) 83 CLR 628, 653 (Kitto J).
[17] Amoco Australia Pty Ltd v Rocca Bros Engineering Co Pty Ltd [1973] HCA 40; (1972) 133 CLR 288, 318 (Gibbs J).
[18] IF Asia Pacific v Galbally [2003] VSC 192; (2003) 59 IPR 43, [103].
[19] IF Asia Pacific v Galbally [2003] VSC 192; (2003) 59 IPR 43, [103], [105], [107]–[108].
[20] Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 709 (Parker L).
[21] [1995] SASC 5318; (1995) 66 SASR 301.
[22] [2003] VSC 192; (2003) 59 IPR 43.
[23] IF Asia Pacific v Galbally [2003] VSC 192; (2003) 59 IPR 43, [611].
[24] IF Asia Pacific v Galbally [2003] VSC 192; (2003) 59 IPR 43, [125]-[127].
[25] Transcript 624-625.
[26] Butterworths, Australian Corporation Law: Principles and Practice, para 1.2.1140; Re HIH Insurance Ltd and HIH Casualty and General Insurance Ltd; Re Australian Securities and Investments Commission (ASIC) v Adler [2002] NSWSC 171; (2002) 41 ACSR 72, [209] and on appeal [2003] NSWCA 131; (2003) 46 ACSR 504.
[27] Re HIH Insurance Ltd and HIH Casualty and General Insurance Ltd; Re Australian Securities and Investments Commission (ASIC) v Adler [2002] NSWSC 171; (2002) 41 ACSR 72, [358] and on appeal [2003] NSWCA 131; (2003) 46 ACSR 504, [399]–[418].
[29] Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] UKPC 4; [1995] 3 WLR 64.
[30] Robins v Incentive Dynamics Pty Ltd (In Liq) [2003] NSWCA 71; (2003) 45 ACSR 244.
[31] Witness statement of Mr Masutti (exhibit P3), paragraphs 96-101, 105-174; witness statement of Mr Davies (exhibit P4); witness statement of Mr Regis (exhibit P5); witness statement of Mr Johnstone (exhibit P6); witness statement of Mr Kavapalu (exhibit P7), paragraphs 1-18; witness statement of Mr Heffernan (exhibit P8), paragraphs 1-17; witness statement of Mr Bailey (exhibit P9), paragraphs 4-10.
[32] Grant v John Grant & Sons Pty Ltd [1954] HCA 23; (1954) 91 CLR 112.
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