IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY ng 839 of 1994 Allan charles raphael Applicant edwin henry whatson Respondent EDWIN HENRY WHATSON Cross-claimant ALLAN CHARLES RAPHAEL Cross-respondent JUDGE: WHITLAM j DATE OF ORDER: 29 may 1998 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The action is dismissed. 2. The applicant pay the respondent's costs of the action. 3. The cross-claim is dismissed. 4. The cross-claimant pay the cross-respondent's costs of the cross-claim. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY ng 3043 of 1994 IN THE MATTER OF REMA INDUSTRIES & SERVICES PTY LIMITED ACN 001 446 314 edwin henry whatson robyn carole whatson rema industries and services pty limited storgate rae endeavour co pty limited rema holdings pty limited Applicants allan charles raphael Respondent JUDGE: WHITLAM j DATE OF ORDER: 29 may 1998 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application is dismissed. 2. The applicants pay the respondent's costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY ng 3622 of 1995 IN THE MATTER OF REMA INDUSTRIES & SERVICES PTY LIMITED ACN 001 446 313 edwin henry whatson robyn carole whatson rema industries and services pty limited storgate rae endeavour co pty limited rema holdings pty limited Applicants IAN ABELITIS Respondent IAN ABELITIS Cross-claimant EDWIN HENRY WHATSON allan charles raphael Cross-respondents JUDGE: WHITLAM j DATE OF ORDER: 29 may 1998 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application is dismissed. 2. The applicants pay the respondent's costs. 3. The cross-claim is dismissed. 4. The first cross-respondent pay the cross-claimant's costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY Allan charles raphael ng 839 of 1994 Applicant edwin henry whatson Respondent and cross-claimants IN THE MATTER OF REMA INDUSTRIES & ng 3043 of 1994 SERVICES PTY LIMITED ACN 001 446 313 EDWIN HENRY WHATSON and Others Applicants ALLAN CHARLES RAPHAEL Respondent IN THE MATTER OF REMA INDUSTRIES & ng 3622 of 1995 SERVICES PTY LIMITED ACN 001 446 313 edwin henry whatson and OTHERS Applicants Ian abelitis Respondent and cross-claim JUDGE: WHITLAM j DATE: 29 may 1998 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction On 13 November 1992 Allan Raphael transferred his shares in Rema Industries & Services Pty Limited ("RIS") to Rema Holdings Pty Limited ("Rema Holdings"). The consideration stated in the instrument of transfer was $1,065,231. However, by an agreement in writing, also dated 13 November 1992, Edwin Whatson agreed to pay Mr Raphael $1,000,000 at the rate of $10,000 per month "from the date Mr Whatson acquires Mr Raphael's shareholding in [RIS]". Mr Whatson was the managing director of RIS. Mr Raphael subsequently received three monthly payments. In March 1993 Mr Whatson learned that Mr Raphael was setting up a business to compete with RIS. Thereafter he refused to make or arrange further payments to Mr Raphael. On 22 July 1993 Mr Raphael commenced an action against Mr Whatson in the Supreme Court of New South Wales claiming the sum of $970,000 plus interest from 15 March 1993. On 11 February 1994 Mr Whatson and four other applicants commenced proceeding NG 3043 of 1994 against Mr Raphael claiming for loss or damage suffered as a result of alleged contraventions of s 232(2) and (4) of the Corporations Law and of s 68 of the Fair Trading Act 1987 (NSW), for breach of fiduciary duty and for breach of contract. The other applicants in this proceeding are Mr Whatson's former wife Robyn Watson, RIS, Storgate Rae Endeavour Co Pty Limited ("SRE") and Rema Holdings. Mr Raphael had been a director of RIS and SRE prior to 13 November 1992. On 21 November 1994 Mr Raphael's Supreme Court action was transferred on his motion to this Court, where it was assigned serial number NG 839 of 1994. Mr Raphael has amended his claim to one for damages for breach of contract. Mr Whatson has cross-claimed against Mr Raphael in this proceeding repeating his allegations of breach of fiduciary duty and misleading and deceptive conduct made in matter NG 3043 of 1994. Finally, on 10 November 1995 the same applicants as in matter NG 3043 of 1994 commenced proceeding NG 3622 of 1995 against one Ian Abelitis claiming for loss or damage suffered as a result of alleged contraventions of s 232(2) and (4) of the Corporations Law and of s 68 of the Fair Trading Act 1987 (NSW) and for breach of fiduciary duty. Mr Abelitis is a solicitor who has acted for RIS. This proceeding purports to have been brought under the Corporations Law, although there has never been any suggestion that Mr Abelitis is an "officer" of any of the corporate applicants for the purposes of s 232. Mr Abelitis has, in turn, cross-claimed against both Mr Whatson and Mr Raphael in this proceeding. All three proceedings have been heard together. The Sale of Mr Raphael's Shares The name Rema is an acronym formed from the initial letters of the given names of Robyn Whatson, Edwin Whatson, Mareta Raphael and Allan Raphael. Mareta Raphael is the former wife of Mr Raphael. In happier times the two families were great friends. In 1974 Mr Raphael and Mr Whatson went into partnership as paper converters. In 1977 the Raphael Whatson Family Trust ("the Trust") was established to conduct their business. In 1979 the business was expanded to include the manufacture of disposable cups and containers. The new line of business was very successful. The operating structure was reorganized on 1 July 1981. SRE was appointed trustee of the Trust. Mr Raphael and Mr Whatson were the directors of SRE and each held half its issued shares. The Trust then sold the business to RIS. Mr and Mrs Raphael and Mr and Mrs Whatson were the directors of RIS, and Mr Raphael and Mr Whatson each held half its issued shares. In about 1986 the Trust purchased a property at Northmead using funds lent by RIS. This property was rented to RIS and used as a warehouse. By this stage the management of RIS had changed. A general manager had been appointed the year before. Mr Raphael had ceased to be involved in day-to-day affairs, although Mr Whatson continued to attend the office full-time. The paper converting business was also sold in 1986 to a Peter Dunn. The disposable cup and container business continued very successfully. Throughout the period from the late 1980s to 1992 RIS advanced moneys to the Trust which, in turn, made loans to Mr Raphael and Mr Whatson. In 1987 Mr Raphael became embroiled in Family Court proceedings with his wife. On 5 June 1990 the Family Court ordered Mr Raphael to pay Mrs Raphael $500,000 within 90 days. It further ordered that Mr Raphael execute by no later than 26 June 1990 all documents required to provide his shares in RIS as security for the payment of that sum of $500,000. Mr Raphael evidently failed to do so, and on 6 July 1990 a Deputy Registrar of the Family Court executed in the name of Mr Raphael a deed of mortgage prepared by Mrs Raphael's solicitors. This deed purported to transfer Mr Raphael's 380,000 shares in RIS to Mrs Raphael for the purpose of securing the payment to her of the sum of $500,000 and of the interest payable after 5 September 1990 on any unpaid part of that sum. Mr Raphael did not make any payment to Mrs Raphael, and she applied to the Family Court to enforce the order for payment by sale of the mortgaged shares. On 9 July 1991 orders were made by consent requiring Mr Raphael, on or before 5 September 1991, to sell the shares and to pay Mrs Raphael the sum of $500,000 together with interest. Meanwhile, Mrs Raphael had resigned as a director of RIS by notice dated 1 May 1991. Against the background of those orders Mr Whatson and Mr Raphael discussed the possibility of the shares being sold to Mr Whatson. Mr Whatson arranged a valuation of those shares by an accountant, Warren Duncan, and Mr Raphael arranged a valuation by the firm Ernst & Young. The deadline of 5 September 1991 passed without the consent orders being obeyed. Mrs Raphael applied to enforce those orders. On 12 December 1991 the Family Court ordered that, unless Mr Raphael had concluded an agreement for the sale of his 380,000 shares in RIS by 3 January 1992, David Blackwell, an official liquidator, was to be appointed as trustee for the sale of those shares. No agreement for sale eventuated and Mr Blackwell took up his appointment. On 4 April 1992 he placed newspaper advertisements, inviting tenders for the purchase of the shares. The advertisements indicated that no tender offering a price of less than $700,000 would be accepted and that no tender could be accepted after 8 May 1992. On the one hand, Mr Raphael was dismayed at the indicative price, and on the other hand, Mr Whatson was alarmed by the prospect of having a stranger on RIS's share register. During May 1992 Mr Duncan contacted Mr Blackwell on behalf of Mr Whatson to confirm that his client was prepared to offer a total price of $2,000,000 for the shares less Mr Raphael's "drawings to date". However, he emphasized that the Whatson family could not commit to a formal offer until finance had been approved.. By June 1992 Mr Whatson had separated from his wife. Mr Raphael continued to be involved in ongoing Family Court proceedings with his former wife relating to the weekly maintenance payments for one of his daughters and with the Deputy Child Support Registrar relating to arrears of child maintenance payments. Mr Raphael's counsel had advised him that he would be vulnerable in any contempt proceedings and that he should bring matters to a head with Mr Whatson by commencing proceedings to wind up RIS. On 19 August 1992 Mr Whatson faxed Mr Blackwell a letter setting out the terms upon which a discretionary trust associated with his family would be prepared to purchase Mr Raphael's shares in RIS by paying the sum of $658,203.36 to Mr Blackwell, by forgiving the sum of approximately $312,000 owed by Mr Raphael to the Trust, and by giving Mr Raphael a motor vehicle with a value of $35,000. The offer was conditional upon finance being obtained. The proposed terms included Mr and Mrs Raphael being parties to a deed of sale and Mr Raphael agreeing not to compete with RIS for a period of five years "in respect of those lines of business carried on by [RIS] at the acquisition date". Mr Blackwell acknowledged the letter by pointing out that the question of Mr and Mrs Raphael being parties to a deed of sale would need to be referred to them, but that the "cash element" of the offer would need to be raised to $700,000. Challenge Bank wrote to RIS on 25 August 1992 offering a facility for the purpose of re-financing its existing Westpac loan and lines of credit and providing $650,000 to fund the purchase of Mr Raphael's shares. Mr Blackwell was apparently informed that RIS's loan application had been approved, but he faxed Mr Whatson on 26 August 1992 insisting on a cash element of $700,000. Mr Blackwell asked for a reply by 1 September 1992 and said that, if the matter could not be resolved "next week", he would consider an application to wind up RIS. On 27 August 1992 Mr Raphael filed an application in the Family Court proceedings between him and Mrs Raphael dealing with proposed sale of his shares by Mr Blackwell. That application was dismissed by consent on 2 September 1992. However, on that day Mr Raphael gave an undertaking in person to the Family Court that, in the event that Mr Whatson had not paid to Mr Blackwell by 4 pm on 15 September 1992 all the moneys required by Mr Blackwell for the sale of the shares in RIS, he would forthwith instruct solicitors to commence proceedings to wind up RIS. On 16 September 1992 Mr Whatson wrote to Mr Blackwell revising his earlier offer so that it now included a cash element of $700,000. Mr Raphael had, however, the day before commenced proceedings in the Supreme Court of New South Wales to wind up RIS. The summons was returnable on 29 October 1992 and appears to have been served on RIS on 18 September 1992. The winding up order was sought on the ground of the directors' unfair conduct or, alternatively, on the just and equitable ground. Specifically, Mr Raphael's supporting affidavit referred to a loan of $400,000 made by RIS to a company called Tuncene Pty Ltd. (It transpires that Tuncene Pty Ltd is a company connected with the Mr Dunn to whom the paper converting business had been sold, and that the loan had been utilized by the borrower to invest in one of the notorious get-rich-quick schemes promoted by Nigerian mail fraudsters. Mr Whatson had apparently hoped in some way to participate personally in a bonanza which would provide the wherewithal to buy Mr Raphael's shares.) On 23 September 1992 RIS passed the following special resolution: "That the Company give financial assistance for the purpose of or in connection with the acquisition by Rema Nominees Pty Ltd A.C.N. 008 606 850 (as trustee of the Whatson Family Trust) of 380,000 ordinary shares in the capital of the Company and that such financial assistance be provided by the Company: (i) borrowing an amount of up to $700,000 from a commercial bank on commercial terms including the provision of all necessary security by the Company; (ii) on-lending the amount of up to $700,000 obtained from a commercial bank to Rema Nominees Pty Ltd A.C.N. 008 606 880 (as trustee of the Whatson Family Trust); and (iii) transferring a motor vehicle with an approximate value of $35,000 to Mr Allan Raphael." The notice specifying the intention to propose that resolution was accompanied by an annexure in the following terms: "A. Particulars of the Financial Assistance proposed to be Given The Company will borrow an amount of up to $700,000 from a commercial bank on commercial terms including the provision of all necessary security by the Company. The Company will on-lend the amount of up to $700,000 obtained from a commercial bank to Rema Nominees Pty Ltd A.C.N. 008 606 880 (as Trustee of the Whatson Family Trust) on an unsecured basis but otherwise on the same terms and conditions as a commercial bank loan. Also, the Company will transfer to Mr Allan Raphael a motor vehicle which has an approximately value of $35,000. B. Reasons for the Proposal to give Financial Assistance To enable the Whatson family and interests associated with the family to purchase the 380,000 shares of the capital of the Company owned by Mr Allan Raphael so as to allow the Company to continue to trade as a going concern. C. Effect of giving the Financial Assistance on the financial position of the Company and the Group of companies of which the Company is part 1. The Directors believe that the giving of the financial assistance referred to in paragraph A will have the following effect on the financial position of the Company: (i) The Company will incur a liability of up to $700,000 plus interest to a commercial bank and will obtain a corresponding asset in the form of a receivable due from Rema Nominees Pty Ltd as Trustee of the Whatson Family Trust. The directors consider that this receivable will be fully recoverable and that there will be no net impact on the financial position of the Company. (ii) The Company will dispose of an asset to the value of approximately $35,000, namely the motor vehicle to be transferred to Mr Allan Raphael. 2. The Directors believe that the effect on the financial position of the Group of companies of which the Company forms part will be that: Not applicable." On 24 September 1992 RIS published in the newspaper a notice under s 205(10)(h) of the Corporations Law. Mr Blackwell informed Mr Duncan on 1 October 1992 that Mr Raphael was not prepared to sign a sale agreement containing the warranties and other terms sought by Mr Whatson. On 2 October 1992 Mr Duncan's firm wrote to Mr Blackwell informing him that Mr Whatson was prepared to effect the sale by completion of a share transfer form, and that the only condition precedents now required by Mr Whatson were the transfer of Mr Raphael's shares in SRE and Mr Raphael's resignation as a director of RIS and SRE. Mr Blackwell was concerned that the balance remaining from $700,000 after payment of the amount owing to Mrs Raphael would be insufficient to cover his remuneration, expenses and solicitor's costs and an amount owing to the Child Support Agency. He estimated that he might require a cash payment of $780,000. Mr Raphael was unwilling to make up this deficiency. Accordingly, Mr Whatson and Mr Blackwell agreed that Mr Raphael should enter into a "consultancy agreement" with RIS, under which he would be paid over the period of the next twelve months a fee of $70,000 by monthly instalments of $5,833.33, and that Mr Raphael should give RIS a direction to pay those instalments to Mr Blackwell. On 28 October 1992, the eve of the return date for Mr Raphael's application to wind up RIS, the consultancy agreement was executed by Mr Raphael and by Mr and Mrs Whatson on behalf of RIS. At the same time Mr Raphael also executed transfers of his shares in RIS and SRE, notices of his resignation as a director of those companies and an irrevocable direction for RIS to pay Mr Blackwell the moneys due under the consultancy agreement. These documents, together with the scrip for the RIS shares, were delivered to Mr Blackwell's solicitors to be held in escrow for RIS provided that a bank cheque for not less than $700,000 was received by Mr Blackwell on or before 13 November 1992. However, the next day Mrs Whatson retained her own solicitors to protect her interests. This led to Mr and Mrs Whatson agreeing between themselves that Mr Raphael's shares should now be purchased by a trust to be called the Robyn Whatson Discretionary Trust, which was in due course created on 12 November 1992. The trustee was Rema Holdings, an untraded shelf company which had only been incorporated on 22 October 1992. The primary beneficiaries of the Robyn Whatson Discretionary Trust were Mrs Whatson and her lineal descendants. Meanwhile Mr and Mrs Whatson had also negotiated the terms of agreements to be concluded between each of them and RIS and SRE relating to the conduct of the affairs of each of those companies and of their service agreements with RIS. The position of the Trust remained to be addressed. Rema Nominees Pty Ltd was the appointor, and the beneficiaries entitled in equal portions were the First Family (defined as Mr Raphael, his wife and children) and the Second Family (defined as Mr Whatson, his wife and children). Mr and Mrs Raphael each held one share in Rema Nominees Pty Ltd, which needed to be transferred to Mr and Mrs Whatson respectively. In addition, Mr Raphael would have to resign as a director of Rema Nominees Pty Ltd. Mr and Mrs Whatson agreed between themselves that the Trust could then be varied to include Mr Whatson's "former wife" as one of the Second Family. They also proposed that Mr and Mrs Raphael should assign to Mr Whatson and Rema Holdings their interest in the Trust and that this could be effected by a deed of release which forgave the outstanding loans made to Mr Raphael by the Trust. On 13 November 1992, upon execution of a loan agreement and securities, Challenge Bank provided new facilities to RIS and to Mr and Mrs Whatson. This permitted the payout of their existing Westpac loans and the discharge of a supporting mortgage over land at Eraring which had been provided to Westpac by Mr Raphael. It also permitted the settlement of the sale of Mr Raphael's shares in RIS. Mrs Raphael delivered a discharge of her mortgage over those shares. Mr Raphael executed fresh transfers of his shares in RIS and SRE to respectively Rema Holdings and Mrs Whatson. He also signed the deed of release in the form submitted by Mr and Mrs Whatson. The chronicle of events described to this point is not essentially controversial. However, I now turn to the agreement mentioned at the start of these reasons, upon which Mr Raphael relies. Its terms should be set out in full: "1. Mr Whatson agrees to pay Mr Raphael the sum of $120,000.00 (one hundred and twenty thousand dollars) per annum for a period of 8.3 years amounting to $1,000,000.00 (one million dollars), effective from the date Mr Whatson acquires Mr Raphael's shareholding in Rema Industries and Services Pty Ltd (Rema). This sum to be paid at the rate of $10,000.00 (ten thousand dollars) per month. 2. Mr Raphael agrees to open the overseas bank account urgently and to notify the details to Mr Whatson at, or before, the time of acquisition of Mr Raphael's shareholding in Rema. The money mentioned at 1. above will be paid into the nominated overseas bank account. 3. It is hereby agreed by both parties that if the proposed purchase of Mr Raphael's shares in Rema does not proceed, that this Agreement between the parties is NULL AND VOID. 4. This agreement supercedes [sic] the Deed of Release dated 13 November, 1992, between Rema Industries and Services Pty Ltd, Storgate Rae Endeavour Company Pty Ltd, Rema Nominees Pty Ltd, Rema Holdings Pty Ltd, Allan Charles Raphael, Mareta Raphael, Edwin Henry Whatson and Robyn Whatson. The conditions set down in that Deed of Release have no bearing on this agreement." The agreement was signed by Mr Raphael and by Mr Whatson. Their signatures were witnessed by Paul Bennett, who was the general manager of RIS. During the second half of 1992, when Mr Raphael and Mr Whatson were for much of the time not speaking to each other, he acted as a go-between. RIS was not named as a party to the agreement. But the testimonium provided for its common seal to be affixed to the agreement, and it was affixed. It is common ground between Mr Raphael and Mr Whatson that the agreement was to be kept secret and that the original document should be held by Mr Bennett. Mr Raphael says that he always made it clear to Mr Whatson through Mr Bennett that he wanted $2,000,000 for his shares. This would provide $700,000 for Mr Blackwell and $1,300,00 for himself. After he commenced the winding up proceedings, he had a brief meeting with Mr Whatson and Mr Bennett. Mr Raphael says that Mr Whatson offered to pay him $1,000,000 by monthly instalments of $10,000 if he would stop the winding up proceedings. He says that Mr Whatson proposed that knowledge of their side-deal should be confined to the three of them, that no documentation be prepared by lawyers, that Mr Bennett hold any signed document, that no copies of such a document be kept, and that Mr Raphael should open a bank account overseas to which the monthly payments could be made. Mr Raphael says that Mr Whatson explained that the overseas account was required so that the payments were "untraceable" and did not come to the attention of Mrs Whatson. Mr Raphael acknowledges that at the time Mr Blackwell was appointed Mr Whatson had said that he did not have sufficient funds to purchase the shares, but says that he (Mr Raphael) did not know "where the money was coming from" to pay Mr Blackwell and the monthly instalments to him. Mr Raphael denies that he wished to conceal from Mrs Raphael the agreement for further payments totalling $1,000,000. For a long time after these proceedings were on foot Mr Whatson was very coy about this curious agreement. He first gave a version of its genesis in an affidavit sworn only a few days before the trial began and more than four and a half years after the events in question. Mr Whatson says that Mr Bennett raised with him Mr Raphael's request for an extra $1,000,000 about the time Mr Blackwell estimated that he might require $780,000 to sell the shares. Mr Whatson says that he proposed the monthly payments should be made to Mr Raphael by RIS's overseas suppliers by way of commission, but that Mr Raphael proposed such payments should be made to him offshore. Mr Whatson says that Mr Bennett prepared an earlier version of the agreement containing no reference to the deed of release, which was signed and given to Mr Bennett prior to the escrow arrangements. In any event, both Mr Whatson and Mr Raphael agree that the document now relied upon was prepared by Mr Bennett and was signed by both of them at RIS's offices on the morning of 13 November 1992 prior to the settlement with the bank and Mr Blackwell. As I have mentioned, three payments were made to Mr Raphael. On 26 November 1992 Mr Whatson paid $10,000 by his personal cheque. On 17 December 1992 RIS drew a cheque for $9,994.85 in payment of an invoice raised by Colin Ward and paid it into Mr Raphael's account. Mr Whatson says that Mr Raphael arranged for Mr Ward to render that invoice for fictitious services so that payment could be made by RIS. Mr Raphael claims not to recall whether he arranged to have Mr Ward issue that invoice. Mr Ward was and remains his accountant. I find that Mr Raphael did arrange for the account to be issued to RIS, knowing full well that payment of the invoiced amount would be made to him. In the next month, on 22 January 1993, RIS drew a cheque for $9,980 in favour of a local supplier which was also paid to Mr Raphael. In December 1992 Mr Raphael opened a bank account in New Zealand. In February 1993 Mr Whatson arranged for RIS to be billed by an overseas company for a bogus environmental study on the understanding that that company would arrange payment to Mr Raphael. By March 1993 Mr Whatson had learned of Mr Raphael's plans to compete with RIS and no further payments were made. (However, RIS continued to pay Mr Blackwell the payments due under the consultancy agreement so that a total of $70,000 was received by him, and on 18 January 1994 Mr Blackwell accounted to Mr Raphael for a surplus of $6,112.00.) In cross-examination, Mr Whatson admitted that, in entering into the side-agreement on 13 November 1992, he set out to deceive Challenge Bank and Mrs Whatson. Mr Raphael made no such admission. He insisted that, since his property dispute with Mrs Raphael had been finally adjudicated long before, he had no desire or need for secrecy. I do not accept that evidence. Mr Raphael was involved in ongoing litigation with the Deputy Child Support Registrar in the Family Court at Parramatta and, in affidavits as to his resources made after 13 November 1992, he omitted any reference to the agreed monthly payments totalling $1,000,000. Mr Raphael appears to have displayed a cavalier and heartless attitude towards his daughters, and I have no doubt that he wished to keep the arrangements secret from his former wife. Most importantly, however, I do not accept that Mr Raphael had no idea how the monthly payments of $10,000 were to be made. It was plainly always intended that the ultimate source of those payments would be RIS. It was, no doubt, perceived to be fortuitous for the purposes of both men that RIS had overseas suppliers who, they thought, could increase charges to absorb a "commission" paid to Mr Raphael. Nothing turns on who suggested the payments to Mr Raphael be paid into an overseas bank account. Mr Raphael says that he did not know whether Mr Whatson had other resources from which he could personally make the payments. I do not believe him. Mr Raphael knew about the Tuncene fiasco. Mr Whatson would hardly be employing RIS's funds in such a venture unless he was desperate to obtain funds. In addition, Mr Bennett, who was liaising with Mr Duncan about the steps required to implement the Challenge Bank's facilities for RIS and Mr and Mrs Whatson, would have kept Mr Raphael informed of Mr Whatson's asset position. When new solicitors were retained after the escrow arrangements to represent Mrs Whatson, Mr Raphael would have been further alerted to Mr Whatson's vulnerable position. At that point he cannot possibly have thought that Mr Whatson, rather than RIS, would be the source of the monthly payments due over a period exceeding eight years. I am quite satisfied that Mr Raphael expressly accepted Mr Whatson's proposal as to how the payments should be funded by RIS and that the arrangement should not be disclosed to Mrs Whatson. He did not merely acquiesce in the arrangement. He showed his early enthusiasm for facilitating the pillaging of RIS by arranging Mr Ward's invoice. In the light of my findings this very curious document can only be construed as an agreement between two dishonest men that Mr Whatson should procure RIS to "top up" the price already paid by Rema Holdings by funnelling its funds via intermediaries to Mr Raphael. This would be a flagrantly improper use of corporate funds which would be contrary to the interests of RIS's creditors and of the Robyn Whatson Discretionary Trust. Section 205 of the Corporations Law had already been blatantly breached in this case. The special resolution of 23 September 1992 made no reference to the proposed forgiving of Mr Raphael's debt exceeding $300,000 to SRE as trustee of the Trust. This was only made possible by RIS advancing well over $1,000,000 to Rema Holdings. In particular, the effect on the financial position of RIS was seriously misrepresented in the annexure earlier set out. (The facts that Rema Nominees Pty Ltd did not acquire the shares, that its Australian Company Number is wrongly stated and that Rema Holdings did not yet exist may be regarded as relatively inconsequential.) Mr Whatson pleads a defence of illegality to Mr Raphael's action for damages. The further performance of their agreement would plainly involve the giving of financial assistance by RIS for the past acquisition of its shares contrary to s 205(1) of the Corporations Law. Such acts would be unlawful. The agreement was made in breach of the statutory prohibition upon the doing of essential acts to the performance of the agreement. Mr Raphael is no innocent party. In my opinion, it is not to the point whether the acquisition by Rema Holdings is void by reason of s 205 or has become void under s 206 of the Corporations Law. The imposition of a sanction refusing Mr Raphael the right to recover damages from Mr Whatson is an entirely appropriate adjunct to the scheme for which ss 205 and 206 provide. This case falls squarely within the disqualifying circumstances outlined by McHugh J in Nelson v Nelson (1995) 184 CLR 538 at 613. Those principles were endorsed as being applicable in contract cases by McHugh and Gummow JJ in Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215 at 215-220. It follows that Mr Whatson's defence succeeds, and there will be judgment for him on Mr Raphael's claim. Mr Raphael's New Business On 21 July 1992 Phoenix Manufacturing Services Pty Ltd ("Phoenix") was incorporated and Mr Raphael was appointed a director. This was Mr Raphael's company and he set it up to run a business competing with RIS after his shares were sold. Phoenix started business in September 1993. The parties defined as the Whatson Group in the deed of release executed on 13 November 1992 claim against Mr Raphael for loss of sales and profits by RIS during the period October 1993 to June 1995. In particular, they identify three customers said to have been lost to Phoenix. Such loss or damage is said to result from a breach of statutory and fiduciary duties that Mr Raphael owed to RIS. In cross-examination, Mr Raphael admitted that he kept his plans to start up Phoenix concealed from Mr Whatson. He had visited the United States in the first half of 1992 in order to locate machinery that could be utilized in the manufacture of disposable cups and containers. Mr Ward, who had been RIS's accountant prior to the appointment of Mr Duncan in 1991, continued to act for Mr Raphael. They were engaged throughout 1992 in discussions with potential financiers, particularly Bridge Wholesale Acceptance Corporation (Australia) Limited. Mr Ward procured interim finance from a mysterious Irish company called Security Life Nominees Limited. This necessitated the preparation of security documents for registration. Mr Raphael located premises suitable for a factory at Smithfield and used RIS's product material in Phoenix's development application to the local council. Towards the end of 1992 he spoke to Mr Bennett, who was leaving RIS in December 1992 and returning to his native New Zealand, about the prospect of his joining Phoenix. Mr Raphael did engage Mr Bennett in January 1993. The lease of the Smithfield premises was also finalized in January 1993. The attempts in 1992 to purchase suitable manufacturing equipment had not succeeded. Efforts continued into 1993 and inquiries of potential sources in the United States were made by proxies in New Zealand so as not to alert any equipment supplier that the machinery was destined for Australia. In short, Mr Raphael acknowledges it was a covert operation. The Whatson Group cannot point to any real loss or damage occasioned to RIS by Mr Raphael during the period prior to 13 November 1992 whilst he remained a director of RIS. The first approaches to RIS's customers were not made until August or September 1993. Mr J.R. Morton, the managing director of one of those customers, has given evidence. He confirmed that there had been no earlier approaches. Mr Morton, however, made it very clear that he welcomed the prospect of competition for Mr Whatson, for whom he had no obvious affection. Mr Raphael admits that he intended to aim Phoenix at RIS's customers. The slight evidence of the structure of the market for sale of the disposable products manufactured by RIS suggests that the distribution chain to end-users is controlled in various parts of Australia by comparatively few persons. The identity of these customers is not information that Mr Raphael has used in breach of his fiduciary duty: Rosetex Company Pty Ltd v Licata (1994) 12 ACSR 779. Phoenix's marketing effort was assisted too by Mr Keith Stirton, another former employee of RIS, who left that company in August 1993 and joined Phoenix in October 1993. Phoenix is, of course, not a party to these proceedings. Mr Raphael's position must be seen in context. He had not been working at RIS in any kind of executive role since at least 1986. In fact, it may have been considerably earlier that he ceased to have any day-to-day involvement in marketing at RIS. His attention in the early 1980s had been distracted by a business known as Supafit. (RIS's optimistic efforts to make use for taxation purposes of the losses suffered by Supafit were the subject of a caveat by Mr Duncan at the time of his retainer in 1991 in connexion with the valuation of Mr Raphael's shares in RIS.) Mr Raphael had apparently lived a very comfortable existence on his earnings and drawings from RIS. It had been a grand milch cow, and he did not have to work. When the Family Court ordered that Mr Raphael's shares in RIS be furnished as security for Mrs Raphael's maintenance award and that he restrict his future drawings, those good days were going to come to an end relatively soon. Mr and Mrs Whatson knew that Mr Raphael was still in his forties, and he would have to sell his shares. The Whatsons obviously had the whip hand. Notwithstanding the absence of any pre-emptive rights, the shares were not likely to be nearly as attractive to anyone else. The position changed dramatically from the Whatsons' point of view when Mr Blackwell was appointed trustee to sell the shares. Now there was the prospect of an unwelcome stranger on RIS's share register so long as Mrs Raphael's award and Mr Blackwell's costs and expenses were covered by the purchase price. Throughout this period Mr Raphael steadfastly refused to give the undertaking not to compete sought by the Whatsons. In this situation it is fantastic to suggest that the Whatson Group can have been under any illusion that, following the sale of his shares, Mr Raphael would not compete with RIS. It was the only business in which he had ever made any money. Accordingly, I reject the submission that in this respect Mr Raphael's conduct was misleading or deceptive. It must always have been apparent that there was nothing to stop Mr Raphael starting up a competitive business. That is, no doubt, why the restraint on trade was sought by Mr Whatson. When Mr Raphael refused to give it, the consequences must have been obvious. I have already indicated that Mr Raphael caused no loss or damage to RIS whilst he was a director of that company. So far as the purchase price paid by Rema Holdings and the financing of that price by RIS and the Whatsons is concerned, the fact is that the only alternative facing those parties was, in the absence of another buyer, the liquidation of RIS. That course was obviously not attractive to them and that is why they arranged for Rema Holdings to pay the price it did and for SRE to forgive Mr Raphael's debt. It is entirely far-fetched to suggest that Mr Raphael's plans during 1992 constituted any kind of breach of fiduciary duty. No customers of RIS were solicited during that period. The approaches to employees were also not made until afterwards, although Mr Raphael obviously entertained hopes and expectations which he revealed to potential financiers. Any contract underlying the sale of Mr Raphael's shares requires for its business efficacy no term to be implied in accordance with the so-called principle in Trego v Hunt [1896] AC 7. Of course, the consultancy agreement affords no basis for a breach of contract. It was devised by Mr Whatson's solicitors and accountant merely as a means of paying Mr Blackwell's fees and expenses and thus having the sale of the shares proceed. This claim by the Whatson Group reeks of tit-for-tat. It is completely unmeritorious and will be dismissed together with Mr Whatson's cross-claim. Mr Abelitis Both Mr Raphael and Mr Whatson are dishonest and dishonourable men. Each sought to deceive his former wife. They used RIS as their plaything and were oblivious to the interests of its creditors. Mr Abelitis stands in a different position. He is a solicitor. The allegation that he knowingly assisted Mr Raphael's allegedly dishonest and fraudulent design is an extremely grave charge for a professional man. In view of my findings on the claim against Mr Raphael, no question of accessory liability will now arise. But there remains the issue of a suggested independent breach of fiduciary duty. There is no doubt that Mr Abelitis acted for RIS in the Raphaels' Family Court proceedings in 1990. At that time Mr Raphael retained Clayton Utz as his solicitors. Although he later retained Mr Abelitis in the Family Court proceedings, Mr Abelitis was a mere cypher and the conduct of that litigation was thereafter very much in the obviously capable hands of his new counsel, Mr Ian Serisier. For some reason that I cannot fathom, Mr Abelitis was at pains to deny that, in any sense, he acted for Mr Raphael on the sale of his shares in RIS. I find this puzzling since he seems to accept that he was liaising with Mr Bennett, the go-between, who was keeping him informed of developments. In any event, whether he had been formally retained or not in respect of that transaction, I accept his evidence that he knew nothing of the extra $1,000,000 until 23 November 1992 or perhaps the day before, and that he did not see the secret agreement or any earlier draft of it until he received a copy from Mr Bennett on 24 November 1992. So far as Phoenix is concerned, Mr Abelitis was involved throughout the second half of 1992 in matters on its behalf. He seems to have acted on the instructions of Mr Raphael and Mr Ward. A certain looseness of language slipped into some of his documentation at this time which suggested that he was also acting for one of the lenders to Phoenix. Mr Abelitis says that he did not learn of the intended business of Phoenix until he saw the permitted use clause in the lease submitted by the landlord of the Smithfield premises. Up to that time he says that he thought Phoenix was going to manufacture cake and biscuits trays. I consider it more likely that he knew it was Mr Raphael's intention to set up a business competing with RIS as far back as June 1992 when he received Mr Serisier's advice confirming instructions to that effect. However that may be, I see no possible basis upon which Mr Abelitis was under any duty during 1992 to disclose any part of his instructions to any of the Whatson Group. Baker & McKenzie were advising RIS and the Whatsons on the sale of the shares. They had been originally retained for that purpose back in 1991. Indeed, Ms Nicola Seaton, the solicitor retained by Mrs Whatson after the escrow arrangements, never had disclosed to her by her client or anyone else in the Whatson camp, including their legal advisers, the true purpose of the consultancy agreement. The evidence is replete with examples of Mr Whatson using different solicitors to handle discrete matters. The Tuncene transaction is a good example of what was no doubt a very delicate matter dealt with in 1991 on a one-off basis by another solicitor. Mr Abelitis obviously knew of the undertaking given by Mr Whatson to the Family Court in connexion with the winding up of RIS. However, he did not act in those proceedings and was not in breach of any retainer or duty owed by RIS. The claim against him will be dismissed with costs and Mr Whatson must pay the costs of his cross-claim. Conclusion It is trite to observe that courts of law are not courts of morals. However, I have rarely seen such effrontery as that displayed by the two thoroughly disreputable protagonists in this case. Their respective counsel must have almost gagged when making wholly predictable submissions by reference to in pari delicto doctrine. Mr Whatson may have repented his deception of his former wife, and she may have forgiven him for the purpose of joining him in the prosecution of their claims. But the blatant disregard Mr Whatson and Mr Raphael showed for the interests of RIS's creditors contrary to the provisions of the Corporations Law is irredeemable, and the Whatsons have been unable to erect any good claim in law, equity or statute against Mr Raphael arising out of his wholly predictable efforts to establish a competitive business. The fact that he was able to keep his plans secret until after the sale of his shares was completed should not have surprised anyone familiar with his character. It may betoken craftiness and canniness, but it does not, in the circumstances of this case, found any cause of action. All the claims fail, and costs will follow the event save, as I have indicated, in the case of Mr Abelitis's essentially defensive cross-claim where Mr Whatson should pay the costs. I certify that this and the preceding seventeen (17) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Whitlam Associate: Dated: 29 May 1998 NG 839 of 1994 Counsel for the applicant B W Walker SC and I M Jackman and cross-respondent: Solicitors for the applicant Walls & Rodriguez and cross-respondent: Counsel for the respondent J McC Ireland QC and J T Svehla and cross-claimant: Solicitors for the respondent Robert A Hannam & Co and cross-claimant: NG 3043 of 1994 Counsel for the applicants: J McC Ireland QC and J T Svehla Solicitors for the applicants: Robert A Hannam & Co Counsel for the respondent: B W Walker SC and I M Jackman Solicitors for the respondent: Walls & Rodriguez NG 3622 of 1995 Counsel for the applicants J McC Ireland QC and J T Svehla and first cross-respondent: Solicitors for the applicants Robert A Hannam & Co and first cross-respondent: Counsel for the respondent P L G Brereton and P J Brereton and cross-claimant: Solicitors for the respondent Mallesons Stephen Jaques and cross-claimant: Counsel for the second B W Walker SC and I M Jackman cross-respondent Solicitors for the second Walls & Rodriguez cross-respondent Dates of hearing: 23-27 and 30 June, 1-4 and 7-9 July 1997 Date of judgment: 29 May 1998