FEDERAL COURT OF AUSTRALIA The Food Improvers Pty Limited v BGR Corporation Pty Ltd (No 3) [2007] FCA 97 CORPORATIONS – membership, rights and remedies – members' remedies and internal disputes – oppressive or unfair conduct – what constitutes – conduct of, or relating to directions – where closely held corporation – whether majority shareholder engaged in oppressive conduct within the meaning of s 232 of the Corporations Act 2001 (Cth) – whether winding up just and equitable under s 461(1)(k) of the Corporations Act 2001 (Cth) – removal of minority shareholder from position of director – exclusion from decision-making and cessation of payment for work performed in executive capacity – destruction of quasi-partnership relationship – company paying for legal fees for majority in defence of minority claim PRACTICE – jurisdiction – inherent jurisdiction – officers and processes of court – restraining solicitors from acting – right of audience – solicitor a material witness – beneficial pecuniary interest in outcome of litigation – where motion to enjoin solicitor from acting filed and solicitor continued to act LEGAL PRACTITIONERS – solicitors – proceedings on behalf of client – solicitor a material witness – evidence and conduct likely to be scrutinised – beneficial pecuniary interest in outcome of litigation – where motion to enjoin solicitor from acting filed and solicitor continued to act Held – corporation's affairs found to be conducted in a manner oppressive to minority shareholder; just and equitable to wind up corporation Corporations Act 2001 (Cth) ss 232, 233, 461(1)(k) Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 applied Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 applied Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 applied In re A Company [1999] 1 WLR 1092 considered Kallinicos v Hunt (2005) 64 NSWLR 561 considered Re DG Brims & Sons Pty Ltd (1995) 16 ACSR 559 cited Scottish Meyer Cooperative Wholesale Society Ltd v Meyer [1959] AC 324 cited Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 WLR 413 applied Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 cited THE FOOD IMPROVERS PTY LTD (ACN 003 474 280) AND ANOR v BGR CORPORATION PTY LTD (ACN 059 820 807) AND ORS NSD 1140 OF 2005 RARES J 12 February 2007 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1140 OF 2005 BETWEEN: THE FOOD IMPROVERS PTY LTD (ACN 003 474 280) First Plaintiff JOHN STEPHEN BAX Second Plaintiff AND: BGR CORPORATION PTY LTD (ACN 059 820 807) First Defendant THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD (ACN 002 688 897) Second Defendant CORDATO PARTNERS (SERVICES) PTY LTD (ACN 075 518 964) Third Defendant MAIN CAMP HOLDINGS PTY LIMITED (ACN 061 573 804) Fourth Defendant MAIN CAMP CORPORATION PTY LTD (ACN 054 989 516) Fifth Defendant SNP NATURAL PRODUCTS PTY LTD (ACN 094 464 490) Sixth Defendant ADVANCED TECHNOLOGY RESEARCH PTY LTD (ACN 088 655 163) Seventh Defendant BUSINESS & RESEARCH MANAGEMENT LIMITED (ACN 070 946 664) Eighth Defendant JUDGE: RARES J DATE OF ORDER: 12 february 2007 WHERE MADE: SYDNEY THE COURT: 1. Declares that the affairs of the first defendant have, since 29 May 2005, been conducted by the second and third defendants contrary to the interests of its members as a whole and in a way which is oppressive to the first plaintiff. 2. Declares that each of the three resolutions of the first defendant made in its general meeting on 1 July 2005, namely to remove the second plaintiff as a director, to ratify the termination of the first plaintiff's consultancy agreement and to ratify the termination of the employment of Mr Gobert, was oppressive to, unfairly prejudicial to and unfairly discriminatory against the first plaintiff. 3. Declares that, by causing the first defendant to pay: (a) their legal and other costs associated with these proceedings; (b) the second defendant a consultancy fee of $20,000 in lieu of $16,000 per month between July 2005 and 28 February 2006; (c) the second defendant a consultancy fee of $20,000 per month since 1 March 2006; (d) an interim dividend on 22 February 2006 without first paying, or providing to pay, the first plaintiff $500,000 plus GST in respect of its entitlement to consultancy fees and interest; the second and third defendants have conducted the affairs of the first defendant in a way which is contrary to the interests of its members as a whole and in a way which is oppressive to, unfairly prejudicial to, and unfairly discriminatory against the first plaintiff. 4. Orders that the second defendant repay to the first defendant with interest from the date of the second defendant's receipt: (a) all amounts paid to the second defendant as consultancy fees after 28 February 2006; and (b) any amount received by the second defendant as consultancy fees, during the period 20 July 2005 to 28 February 2006, in excess of a rate of $16,000 per month plus GST. 5. Orders that up to and including 6pm on 14 February 2007 each of first, fourth, fifth, sixth, seventh and eighth defendants by itself, its servants and agents be restrained from: (a) entering into any transactions making any payments, creating any liabilities or making any decisions, including in relation to the eighth defendant's litigation with the Australian Taxation Office (known as the 'BARM litigation') otherwise than in the ordinary course of business; (b) paying any legal fees to the third defendant, Cordato Partners or Mr Anthony Cordato; (c) paying any further consultancy fees to the second defendant or any other entity connected to Mr Frederick Gulson. 6. Grants liberty to any party to apply on 1 hour's notice in respect of the operation of order 5. 7. Orders the second and third defendants to pay the plaintiffs' costs of the proceedings. 8. Orders that the first, fourth, fifth, sixth, seventh and eighth defendants pay the difference between the amount of costs recovered by the plaintiffs from the second and third defendants, if any, and the amount at which those costs are taxed. 9. Orders that the parties file and serve any written submissions, on or before 4pm on 13 February 2007, addressing the questions of: (a) whether it is preferable to have a liquidator rather than a receiver appointed to the first defendant or any other defendant; (b) the appropriate proportion of the legal fees paid for the defendants' conduct of the proceedings which ought be borne by the second and third defendants; (c) orders to set aside and rearrange the interim distribution or dividend paid by the first defendant on 22 February 2006 so as to give effect to these reasons including orders to the effect that the first defendant pay to the first plaintiff $500,000 in satisfaction of its entitlement to both consultancy fees and interest prior to the distribution by way of dividend of the balance of the proceeds from the sale of Main Camp Station and the first defendent's other assets to its shareholders in accordance with option B. 10. Stand the proceedings over to 9.30am on 14 February 2007 for hearing on the making of further orders. 11. Directs that these orders not be taken out until final orders are made disposing of the questions the subject of the submissions to be made on 14 February 2007. 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 NSD 1140 OF 2005 BETWEEN: THE FOOD IMPROVERS PTY LTD (ACN 003 474 280) First Plaintiff JOHN STEPHEN BAX Second Plaintiff AND: BGR CORPORATION PTY LTD (ACN 059 820 807) First Defendant THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD (ACN 002 688 897) Second Defendant CORDATO PARTNERS (SERVICES) PTY LTD (ACN 075 518 964) Third Defendant MAIN CAMP HOLDINGS PTY LIMITED (ACN 061 573 804) Fourth Defendant MAIN CAMP CORPORATION PTY LTD (ACN 054 989 516) Fifth Defendant SNP NATURAL PRODUCTS PTY LTD (ACN 094 464 490) Sixth Defendant ADVANCED TECHNOLOGY RESEARCH PTY LTD (ACN 088 655 163) Seventh Defendant BUSINESS & RESEARCH MANAGEMENT LIMITED (ACN 070 946 664) Eighth Defendant JUDGE: RARES J DATE: 12 February 2007 PLACE: SYDNEY REASONS FOR JUDGMENT OUTLINE OF ISSUES 1 In mid 1999 three businessmen, John Bax, Fred Gulson and John Reece, through their shareholdings in and directorships of BGR Corporation Pty Ltd, gained control of the Main Star One group of companies. That group was involved in the production, distribution and sale of tea tree oil and its products. Initially Mr Gulson's company, The Triad Health Products Group of Companies Pty Ltd, held 70.4% of the shares in BGR, Mr Bax's company, The Food Improvers Pty Ltd held 22.2% and Mr Reece's company, Karcor Holdings Pty Ltd, held 7.4%. Sometime shortly after the beginning of July 1999, Mr Gulson caused Triad to transfer 7.4% of the shares in BGR to Cordato Partners (Services) Pty Limited, a company controlled by his law school friend and a solicitor, Mr Tony Cordato. 2 Mr Bax, Mr Gulson and Mr Reece carried out the functions of the senior management of the businesses, which were known as Main Camp, after the takeover. They did so in accordance with a business plan which Mr Bax prepared. Mr Cordato provided the business with legal services, but did not play a role as a director or executive. In July 1999 each of Triad, Food Improvers and Karcor entered into consultancy agreements, which Mr Cordato had drafted, with a Main Camp company. In July 2000 replacement consultancy agreements were made with BGR. All the consultancy agreements provided for the payment to each consultant company of $20,833.33 per month for, inter alia, the provision of services by its respective principal. 3 In March 2001 the consultancy fees ceased to be paid. There is a substantial issue as to the terms on which that occurred. Mr Bax and Mr Reece say that invoicing of the fees was suspended but that in the future invoices could be rendered and payments would be made for services provided if and when the Main Camp group could afford to pay. Mr Gulson and Mr Cordato say that there was no arrangement deferring rendering, or for the payment of, consultancy fees if they had not been invoiced contemporaneously with the provision of the services. Later, after a dispute in 2002, Mr Reece relinquished his shareholding. The holdings of the remaining three shareholders from then on were Triad 68%, Food Improvers 24% and Cordato 8% of the shares in BGR. 4 After Mr Reece's departure, Jim Gobert, an expert in the use of and applications of tea tree oil products, took up the role of marketing manager of the group as an employee, but not as a shareholder or partner. 5 Eventually in about mid 2003, the payment of consultancy fees recommenced, but at much reduced rates, though there were increases later. Mr Bax's and Mr Gulson's companies received consultancy fees thereafter. 6 In early 2005 Mr Bax, Mr Gulson and Mr Gobert were planning an overseas trip to market tea tree oil. Mr Gobert was also to have discussions with European regulators about standards that were then being contemplated that would affect the sale of tea tree products within the European Commission. They arrived in Europe in the latter part of May 2005. Mr Gulson began to exhibit quite erratic behaviour as a result of a psychiatric condition which he had and which worsened during this time. 7 On 29 May 2005, in circumstances which I will describe in more detail below, Mr Gulson, without any prior discussion with Mr Bax, summarily dismissed Mr Gobert in London for no good reason on the eve of important meetings with an Israeli customer. Mr Bax then said that he could no longer work with Mr Gulson and refused to do so. Mr Gulson attended the meetings with the Israeli customer that had been scheduled the next day. All three men made their way home, Messrs Bax and Gobert travelling together and Mr Gulson separately. Mr Gulson returned and immediately went to the Main Camp plantation in Northern New South Wales. His erratic behaviour became more and more pronounced and caused alarm to the plantation manager, Mr Williams, and staff. 8 On 8 June 2005 Mr Gulson met in Sydney with Mr Cordato and Mr Bax. Mr Gulson was adamant that Mr Gobert would not be reinstated, although Mr Bax had already re-employed him. Mr Bax said that he would not work with Mr Gulson. Mr Cordato was at that time trying to hold what was obviously a highly fractious position together as best he could so that the parties could co-operate to effect the sale of the Main Camp undertaking and an orderly dissolution of the business relationship. However, on 10 June 2005 Mr Gulson caused an extraordinary general meeting of BGR to be called for 1 July 2005. The business of that meeting was to remove Mr Bax as a director, ratify Mr Gulson's summary dismissal of Mr Gobert, and his termination of Food Improvers' consultancy agreement. Because Mr Gulson's shareholding was sufficient, the July meeting proceeded to do so with Mr Cordato's support. In the meantime, Mr Gulson had been admitted to the Northside Clinic psychiatric hospital for treatment for his condition which had by then become quite unstable. Thereafter, Mr Gulson and Mr Cordato substantively exercised control over the direction of BGR to the exclusion of Mr Bax. In mid July 2005 Food Improvers and Mr Bax commenced these proceedings. 9 In mid September the 2005 the parties met and agreed to appoint an agent for sale of the Main Camp business. After the meeting Mr Bax prepared two suggested methods of distribution one of which involved a recognition that Food Improvers was owed $500,000 for consultancy fees and that after payment of this amount, the balance of the net proceeds of sale of the Main Camp plantation and business would be distributed to the shareholders by BGR as a fully franked dividend. After that distribution the shareholders would repay their loan accounts, which were substantial, and BGR would then make a further fully franked dividend. This became known as 'option B'. Correspondence ensued in which Mr Cordato, acting as the solicitor for all of the defendants, confirmed that the distribution would be made in accordance with option B. 10 But once the sale had been completed, without notice to Mr Bax, the distribution was ultimately made simply on the basis of shareholding entitlements without any payment recognizing Mr Bax's claim for consultancy fees. Earlier, when the Main Camp sale was about to be settled, Mr Cordato's solicitors' firm, Cordato Partners, issued 16 accounts totalling about $135,000 in respect of matters in which his firm had acted since 1999. Those accounts were paid very promptly from the sale proceeds. 11 The proceedings have been conducted with considerable feeling on all sides. At issue are the claims that Mr Bax and Food Improvers make, namely that: · BGR was in effect a quasi partnership consisting of initially himself, Mr Gulson and Mr Reece, and later himself and Mr Gulson. Mr Cordato was more of a silent investor. In this quasi partnership, Mr Bax was the managing director or chief executive, Mr Gulson was the corporate counsel and company secretary and Mr Reece, originally, was to be involved in running the Main Camp farm and marketing its products. Mr Gobert succeeded to Mr Reece's functions but not his equity. · Mr Gulson used his controlling shareholding in BGR and the ultimate alliance of Mr Cordato, to engage in oppressive conduct within the meaning of s 232 of the Corporations Act 2001 (Cth). That conduct began with the summary dismissal in London of Mr Gobert in the middle of the overseas trip and then Mr Gulson's use of his majority shareholding to exclude Mr Bax from any role in BGR contrary to the quasi-partnership. Mr Gulson used his voting power to impose his will at the meeting of 1 July 2005, with Mr Cordato's support. · Mr Gulson and Mr Cordato used and are using the resources of BGR to pay Cordato Partners for all of their companies' litigation costs against Mr Bax. They have excluded him from important decisions as to the terms of sale and the making of the distribution following the sale of Main Camp business, having previously represented to him that option B would be the method of distribution of the sale. · Mr Gulson continues to cause BGR to pay Triad a consultancy fee of $20,833 each month. · Mr Cordato and his firm ought not to act as solicitor for all of the defendants because it is oppressive or he has a conflict of interest and lack of independence. · The parties actually entered into a contract to cause the distribution of the proceeds of Main Camp sale to be made in accordance with the methodology in option B. 12 Although there is a large number of evidentiary conflicts, the real substance of the dispute falls within a much narrower compass. At the heart of the case are the questions of: · how the parties agreed that they would conduct the Main Camp business in 1999; · what arrangement was made for cessation of payments of consultancy fees in March 2001; · the circumstances and consequences of the resumption of payment of the consultancy fees; · the justification for the respective parties' positions in May and June 2005; · the question as to whether the conduct of BGR by Mr Gulson alone or with Mr Cordato gave rise to a right to relief on the just and equitable ground or amounted to oppression of Food Improvers; · whether there was a contract for the distribution of the proceeds of sale of the Main Camp business in accordance with option B. MID 1999 – BASIS OF RELATIONSHIP OF THE PARTIES 13 When negotiations for the acquisition of the Main Star One group were reaching their conclusion, Mr Bax was chief executive officer of the Ink Group. He had been a fellow of CPA Australia (an association of chartered accountants) since the early 1980s. Prior that he held senior managerial roles, including chief financial officer of a publicly listed trust. 14 The principal companies in the group were: · Main Camp Holdings Pty Limited, which owned land known as Main Camp on which a tea tree oil farming business was operated. That involved the growing of tea trees, distillation of tea tree oil, selling the tea tree oil and the supply of tea tree mulch. Some other agricultural activities were also conducted on the property including the running of cattle, growing of soy beans, barley and timber. · Main Camp Corporation Pty Limited purchased tea-tree oil from Main Camp Holdings. It sold Main Camp branded tea tree oil to domestic and international customers. · SNP Natural Products Pty Limited purchased non-branded tea tree oil from Main Camp Holdings and third parties together with Australian native herbs and spices. It on sold its own branded tea tree oil products and Australian native herbs and spices. SNP also conducted all head office operations with the BGR Group and its sales and marketing. · Advanced Technology Research Pty Limited, was a non operating entity which held claims against the failed Australian Rural Group Limited (in liq). · Business and Research Management Limited, known as BARM, was an also non operating entity which an outstanding objection against the Australian Taxation Office for a tax refund of about $9.2 million. 15 In late June 1999 Mr Bax, Mr Gulson and Mr Reece met at Mr Reece's Gladesville offices on a Saturday morning. Mr Bax presented a paper entitled 'Strategic and Short Term Business Plan for the Control and Operation of the Main Star One Group' in anticipation of BGR's imminent completion of the take over. The plan referred to the Main Star One Group's complex corporate structure and unique processes of operations. One objective was to seek the co-operation of Mr Glen Stotter, who was a principal in the management of the Main Star One Group. Mr Bax emphasized that the staff of the Main Star One Group had quickly to form the view that BGR was professional in its manner and was acting in the staff's and the investors' best interests. There had been extensive litigation concerning the Main Star One Group in the 1990s (see the judgments of Hill J in Natural Extracts Pty Limited v Stotter (1997) 24 ACSR 110; [1997] FCA 471 and Hely J in Natural Extracts Pty Limited (now called Benchmark Essential Oils Pty Limited (in liq)) v Stotter [1998] FCA 1636). 16 The plan recorded that the appointment of an appropriate managing director was critical in order to provide a clear and unequivocal statement to staff and external parties. The managing director had to liaise directly with Mr Stotter and be seen by investors in the tax schemes for tea tree oil products as a suitable person to take over his role. Mr Bax proposed that he be the managing director of the Group. He, Mr Gulson and Mr Reece were each to hold the position of director of BGR and each would have specific areas of responsibility. The plan proposed that all executive directors would report to the managing director, but they would all have equal say on a business direction and planning issues. The latter class of decisions would be made at board meetings. A number of strategies for the running of the business was proposed and a short term business plan was outlined. 17 The plan proposed that each of the three would have particular responsibilities which reflected the skills that he brought separately to the business. Mr Bax was have responsibility for all financial and administrative functions, liaising with Mr Stotter, licensed dealers and investors and dealing with future acquisition proposals. Mr Gulson was to be general counsel, having responsibility for all commercial legal matters pertaining to the operations of the group, settlement of outstanding litigation, company secretarial functions, government relations and managing special assets. He was also designated to have responsibility for insurance (although in the event he did not, but nothing turns on this). Mr Reece was to have responsibility for agricultural, operational and technical matters, relations with consultants acting on the various projects of the group, commercialization of research investments known as 'Budplan' products, supervision of the Main Camp plantation and the sales of tea tree oil and related products. 18 Mr Bax spoke to his plan after the others had read it in Mr Reece's office. He said that he had met with all the senior executives and directors of the Main Star One Group and they were concerned about its future. He noted his previous experiences as chief executive officer and in senior management of other businesses and proposed that he be appointed as managing director of BGR and all of its subsidiaries. He then explained Mr Gulson's role based on his legal background as a solicitor, should be as company secretary. Mr Bax envisaged that Mr Gulson would be able to use his connections with various government departments which he had developed when he was with New South Wales Farmers and he could concentrate on running of the BARM litigation with the Australian Tax Office and potential investor groups. That litigation involved a claim by BARM, a subsidiary of the group, for a refund of many millions of dollars. It is yet to be heard by a judge of the Court. 19 Mr Bax proposed that Mr Reece's role be to develop the markets for the sale of the products, look after the Main Camp farm, and pursue the commercialization of the research from the Budplan projects. 20 Both Mr Gulson and Mr Reece agreed with Mr Bax's proposals. They decided to hold regular weekly management meetings. They all agreed to hold regular board meetings because there were two non listed public companies in the group as well as other finance companies. They agreed that they would appoint a chairman at each meeting to handle the role and that there was no need for a permanent position of chairman to be filled. Mr Gulson observed that was a good idea that a chairman could be appointed at meetings from whomever was present because of the travel commitments each of them would have. MR BAX WAS MANAGING DIRECTOR 21 Mr Gulson and Mr Cordato sought to assert during the hearing that Mr Bax's use of the title of managing director did not properly reflect his role in the running of the business. I reject their evidence. Each was an unsatisfactory witness on this matter. Although there was no formal appointment of Mr Bax as managing director by any board resolution, once BGR assumed control of the group on 2 July 1999, Mr Bax began to act as managing director with the knowledge of Mr Cordato, Mr Gulson and Mr Reece. The group required a managing director or chief executive to run it. He continued in that role until June 2005. Throughout this time, he was recognised by the staff and external parties who dealt with the BGR group as managing director or chief executive. His name appeared in correspondence with third parties, including the group's financiers and customers, in the capacity of managing director. His business cards were printed with his capacity so described. 22 Mr Reece, who had no reason to be favourable to any party in the litigation, confirmed that Mr Bax was recognised as and acted as managing director throughout Mr Reece's time with BGR. Mr Williams also confirmed this was so up to June 2005. 23 In evidence, Mr Gulson agreed that when the three partners took over the Main Camp business in July 1999 the 45 to 50 staff needed to know who was the 'boss', managing director or chief executive officer, and that all three directors had agreed at that time Mr Bax was to be managing director. In early June 2005 Mr Gulson began calling himself 'interim managing director' in correspondence. On 7 June 2005 Mr Gulson drafted a letter for Mr Cordato to review before Mr Gulson sent it to Mr Bax's solicitors. Mr Gulson referred to having letters on file from 'the former managing director'. I find that this description not only reflected how Mr Gulson saw Mr Bax but also the reality that Mr Bax was the managing director of BGR and its group. 24 Mr Cordato gave evidence about a meeting with Mr Bax and Mr Gulson on 8 June 2005 when they discussed Mr Williams' fax of that day addressed to Mr Bax as CEO. There, Mr Williams had complained of Mr Gulson's irrational behaviour the previous day and its impact on the staff and business of Main Camp. Mr Cordato said that whole fax concerned him. He told both Mr Bax and Mr Gulson that this could not continue and '… somebody's got to sort him [Mr Williams] out and calm him down'. Mr Cordato said that Mr Bax had responsibility for sorting out the way in which Mr Gulson was behaving towards Mr Williams because Mr Bax brought Mr Williams' fax into the meeting and '.... he was the CEO'. The evidence continued: '(MR LEVER:) 'But did you not speak to Fred Gulson to try and sort Fred Gulson out to stop him behaving in the way that Dennis Williams was complaining about?---That was one reason I asked for the meeting of 8 June 2005, to sort out the inter alia for this issue. HIS HONOUR: Mr Cordato, why would a chief financial officer have responsibility for sorting things out with the staff who were running the plantation business - - -?---He sent - - - - - - and not the chief executive officer?---Well, Mr Williams thought of him as a chief executive officer, which is what CEO would imply to me.' (emphasis added) 25 I find Mr Cordato's evidence on this issue to be implausible. Mr Cordato sought to downplay Mr Bax's role by describing it as that of chief financial officer when he knew that was a false description. As his evidence showed, he had no basis for that description which he volunteered despite his knowledge that Mr Bax was regarded by the plantation manager, represented on business cards and to the staff as managing director or chief executive officer. Indeed Mr Cordato said Mr Bax had been acting as such for two or three years. I do not believe the limitation he put in that evidence. I find that Mr Cordato knew that Mr Bax was the managing director and chief executive officer from about the time BGR took over the Main Camp business. 26 The reason for Mr Cordato's expectation that Mr Bax should 'sort out' Mr Williams was that the former was the managing director in Mr Cordato's mind, and had always been so. And, as he said, he did nothing himself to 'sort out' Mr Gulson although he recognised that Mr Gulson then appeared agitated and to have periods of irrationality. I find that Mr Cordato was conscious Mr Gulson was behaving in the way which Mr Williams described and Mr Cordato endeavoured, at the meeting on 8 June 2005, to have Mr Bax's authority with the staff restored so that Mr Gulson's disruptive behaviour would not threaten their investment in the business. 27 In closing address the defendants conceded that the parties conducted their affairs in the way that had been contemplated in the meeting in Mr Reece's office in June 1999 and that a quasi partnership existed between Mr Bax, Mr Gulson and Mr Reece from that point forward. The defendants also then conceded that Mr Bax, as a matter of fact, acted as managing director or chief executive officer of the group, notwithstanding that there was no formal appointment to that office. Each of the three had his agreed role. The respective corporate vehicle of each was paid an equal consultancy fee equally through and each regarded his performance of a significant management role as important to his place in the overall business. 28 I am satisfied that Mr Bax acted as managing director of BGR and the group with the knowing consent of Mr Gulson and Mr Reece and the knowledge of Mr Cordato until the events of June 2005. Each of Mr Bax, Mr Gulson and Mr Reece performed in substance the roles assigned to them in Mr Bax's plan. 29 Having seen and heard each of them, I am confident that they each sought to co-operate with one another in the running of the business and, until the circumstances involving Mr Reece's ceasing to be a part of the partnership, treated each other as partners. Subsequently until 29 May 2005 Mr Bax and Mr Gulson treated each other as partners. And they made all significant decisions jointly and worked co-operatively in the operation of the business notwithstanding the disparity between the respective sizes of their companies' shareholdings in BGR, or the presence of Mr Cordato's company as another minor shareholder. CONSULTANCY AGREEMENTS 30 Food Improvers and Mr Bax entered into a consultancy agreement with Main Star One Holdings Pty Limited on 2 July 1999. That agreement provided that the consultant (Food Improvers) was entitled to a consultancy fee of $20,833.33 payable monthly in advance from 5 July 1999 unless otherwise agreed (cl 4.1). A similar consultancy agreement was entered into by Main Star One Holdings with Karcor and Mr Reece. I infer that a similar position applied to Triad and Mr Gulson even though the actual consultancy agreement was not in evidence. 31 New consultancy agreements replaced these from 1 July 2000. They were between BGR and each of the principals and their respective service companies. The BGR consultancy agreements contained a provision for the payment of consultancy fees which was relevantly identical to that in cl 4.1 in the earlier agreements. The consultancy fee payable under cl 4.1 was exclusive of GST (which commenced to be payable from 1 July 2000). The consultant was required to charge GST and show it separately on an invoice issued to BGR at the end of each month so that the amount payable would include GST (cl 10.11). There was an initial term of one year, but the agreements were to continue afterwards unless terminated by three months' notice in writing or in accordance with a right of BGR to terminate the consultancy immediately provided in cl 9. BGR's CASH FLOW DIFFICULTIES 32 From July 1999 until approximately late 2003 the BGR group incurred significant legal costs in a number of pieces of litigation. It also required a high level of working capital to operate the 4,500 hectare Main Camp plantation which had 55 million tea-trees planted and a staff of approximately 25. The market for tea-tree oil was at that time over supplied and the price for tea-tree oil decreased from $45 per kilo in 1999 to about $24 per kilo in 2003. 33 In about October 2000 four new tractors were required to be leased each which would cost approximately $440,000. Leasing finance initially, was not approved. The group's cash position tightened and in about December 2000 Mr Bax called a meeting with Mr Gulson and Mr Reece at his office in Phillip Street, Sydney in which Mr Bax told the others that his examination of the current and future levels of expenditure against projected incomes revealed cash flow problems. He told them of the need to fund the test cases, and the difficulties that running a table grape farm at Jabiru, in the Northern Territory, meant that business could not be operated at a profit because of obligations under a prospectus and the disputes with Australian Rural Group. Moreover, he pointed out the deteriorating market price of tea-tree oil and suggested that in the next few months BGR would need a cash injection of several hundred thousand dollars. He suggested that it would be up to the three of them to provide financial support because the business was basically managing projects which was not something a financier would find attractive. MARCH 2001 MEETING: SUSPENSION OF CONSULTANCY FEES – LOANS TO BGR 34 Over the next three months to March 2001 a number of other meetings concerning cash flow issues took place. Then, critically, in March 2001 Mr Bax called Messrs Gulson and Reece to another meeting in their offices in Phillip Street Sydney. 35 Mr Bax said that the time had come and that the business needed another $500,000 according to his calculations. It was not turning around and the price of tea-tree oil was still going down. He said it was a shareholder issue. Mr Gulson asked what that meant. Mr Bax said that BGR could not sustain consultancy fees for the three of them. He suggested that they repay some fees and that should be done in effect in proportion to their shareholdings. Thus, he suggested that Mr Gulson should repay $315,000, Mr Reece $37,000 and Mr Bax $111,000 inclusive of GST. Mr Reece said that seemed fair to him. Mr Gulson noted it obliged him to contribute a lot. Mr Bax pointed out that he was the largest shareholder. 36 Mr Gulson observed that he would have to borrow funds and pay interest and that they should be able to charge interest back to the company. Mr Bax said in evidence that Mr Gulson also asserted that the consultancy fees should be brought up to date as soon as possible. Mr Gulson said because they all would be borrowing and have no income from consultancy fees, the company should pay interest. Mr Bax agreed with that. Mr Reece said that he could not borrow money and that he would want his consultancy fees brought up to date as soon as possible. Mr Bax said that there was no need for them to continue to put in more invoices for their consultancy fees because BGR had no money to pay it. Any invoices would involve their companies becoming liable to tax although they would not have been paid. So, he suggested they stop issuing invoices. The others agreed. 37 Mr Reece had no reason to give evidence favouring one party against the other in these proceedings. His account was that Mr Bax said that they would have to suspend the consultancy fees rather than cancelling them. Mr Bax pointed out that if the fees were cancelled Mr Reece, for one, would only obtain remuneration or reward by way of distribution on the basis of shareholding. That would mean that Mr Gulson would earn nine times more than Mr Reece although Mr Reece was working for the group full time. And Mr Reece said there was mention of the fact that when the group got on top of things they would be reimbursed. 38 Mr Gulson contradicted Mr Bax's and Mr Reece's account of this meeting. He said that Mr Bax had told them that consultancy fees would cease to be paid from then and that they had to lend BGR $500,000 in proportion to their shareholdings. Mr Gulson denied that Mr Bax referred to returning consultancy fees. 39 In the event, a number of steps was taken in March 2001 and following by BGR's directors and members to offer the group financial support. First, the BGR creditors ledger shows that each of the three consultants paid back consultancy fees. This was done by credit notes which were dated 1 March 2001 and the payments to BGR on 23 March 2001 of $183,333.30 by Triad, $111,000.00 by Food Improvers and $37,000 by Karcor as recorded in BGR's creditors ledger. No corresponding entries occurred for Cordato Partners Services. Secondly, Mr Gulson approached Mr Cordato and arranged for him to contribute $37,000. BGR's general ledger recorded loans being made on 23 March 2001 by Triad of $116,666.70 and on 26 March 2001 by Cordato Partners Services of $37,000. 40 Thus in late March 2001 Triad paid a total of $300,000 to BGR, Food Improvers paid a total of $111,000 and Karcor and Cordato Partners Services had paid $37,000. These payments in late March 2001 provided a cash injection of $485,000.00 Thus Triad contributed 61.9% of that sum, Food Improvers, 22.9% while Karcor and Cordato Partners Services each contributed 7.6%. 41 Next, on 7 May 2001, BGR's general ledger records that Triad made a further loan of $157,500 (70.89%) and Food Improvers lent $55,500 (Ex 2; 4/120.1.3) of a total of $222,250. 42 Last, on 8 June 2001, BGR's general ledger shows that Triad lent $40,000 (46.5%) Food Improvers lent $20,000, (23.3%) Karcor lent $8,000 (9.3%) and on 13 June 2001 Cordato Partners Services lent $18,000 (20.9%) totalling a further $86,000. 43 Of the total of the loans made in May and June 2001 ($308,250), Triad contributed 64.1%, Food Improvers 24.5%, Karcor 5.6% and Cordato Partners Services 5.8%. I am not satisfied that anyone remembered the precise conversations or reasons why the amounts paid in the period between March and June 2001 were paid in the proportions or way in which they are recorded in BGR's books but nothing turns on this. Thus, in the three months to June 2001, the shareholders had paid $793,250 to BGR. Triad's share of the total payments by each shareholder represented 62.7% in respect of its 63% of the shares. Food Improvers had paid 23.5% compared to its shareholding of 22.2% and Karcor and Cordato Partners Services had paid 6.8% and 6.9% respectively as against their 7.4% shareholdings. Of that, $331,333.30 was recorded in BGR's creditor's ledger as a repayment of consulting fees. Moreover, the three executives had ceased to render, through their companies, any invoices for consultancy fees, representing an ongoing notional contribution of $20,833.33 each per month on top of the amounts of fees repaid. 44 I infer that each of the shareholders made total payments in the three months to June 2001 in approximate proportion to their shareholdings in order to provide needed cash to BGR. So, Mr Bax said in cross-examination, it was tax effective for the three consultants to return as much as they could by crediting consultancy fees previously earned. This meant that they would not have to pay company tax on the fees returned. On the other hand, it is improbable that Mr Bax, Mr Gulson and Mr Reece were repaying those fees, once for all rather than lending notionally the equivalent sum. The basis asserted by Mr Gulson would have meant that they could never reverse the repayment were BGR's fortunes to recover. That would have resulted in each of the executives making a gift to BGR not only of the work which they had done up to then but also of what they had been paid for it. I am satisfied that Mr Bax, Mr Gulson and Mr Reece intended and understood that the consultancy fees which were repaid in March 2001 were always intended to be returned to the consultants if the BGR group could afford to do so in future. 45 Subsequently, on 22 September 2005, Mr Bax, Mr Cordato and Mr Gulson met with BGR's taxation accountant, Joe Lombardo of KPMG, Accountants at KPMG's offices to discuss possible distributions of the proceeds of sale of Main Camp. I will return to this meeting below, but Mr Lombardo gave evidence that early in the meeting the following exchange occurred. 'Mr Bax: 'I am owed consultancy fees as marked on the first schedule. There are consultancy fees owed to each of us'. He indicated Mr Gulson; Mr Gulson: 'Yes that's right'. Mr Bax: 'Because I have a lesser share in the company, I need to have my consultancy fees paid.'' 46 The 'first schedule' was Mr Lombardo's description of option A prepared by Mr Bax; it claimed all amounts which could have been, but had not been, invoiced. The admission by Mr Gulson that substantial consultancy fees were owing is consistent with Mr Bax's and Mr Reece's evidence as to what occurred in March 2001 when the payment of the fees was discussed. Option A recorded that over $1,000,000 before interest was owed to each of Triad and Food Improvers as consultancy fees. And Mr Lombardo noted that when the discussion turned to option B, which recorded $500,000 as consultancy fees and interest payable to Food Improvers alone, he said that it seemed as if that sum had been agreed upon. Mr Gulson was nodding in apparent agreement when the $500,000 sum was raised by Mr Bax as due and he, Mr Lombardo, proceeded on that basis. 47 I have no hesitation in accepting Mr Lombardo's evidence as accurate and reliable and prefer it wherever it conflicts with Mr Cordato's or Mr Gulson's. Mr Lombardo had no reason to favour any party in his recollection. He had cause to remember the discussion. He was trying to dissuade Mr Bax from structuring Food Improvers receipt of the sale proceeds to include any sum for consultancy fees because it would be taxable, unlike a payment of the same sum as dividend (in light of the BGR group's franking credit position). 48 I am satisfied that at the meetings which occurred in March 2001, Mr Bax, Mr Gulson and Mr Reece decided that it would be pointless for any of them to cause their service companies to continue to issue monthly tax invoices since the BGR Group did not have sufficient cash with which to pay their consultancy fees. Accordingly, each of them continued to work full time in the management of the group in the expectation that if and when its fortunes turned around through their efforts, they would be entitled to render invoices for the work they had performed in the preceding period, including the period for which they had repaid the fees previously earned. 49 In the meantime they (through their service companies) drew down on their loan accounts with BGR as and when they needed funds to meet their living expenses. This had the consequence that they did not receive income and, thus were not liable to pay tax on the loan receipts. Had their service companies rendered tax invoices each month and accrued the consultancy fees as a debt payable by BGR, the consequences would have been that those companies would have incurred tax liabilities due to the receipt of 'income' on an accrual basis and for GST. BGR would have incurred a corresponding liability, also on an accrual basis. That would have reduced its profitability in its financial statements which could be shown to third parties, such as the group's financiers, and, neither the partners nor BGR would have benefited at all. By suspending the issuing of tax invoices until BGR's fortunes improved, the partners were supporting the fortunes of their enterprise without incurring pointless tax liabilities in respect of money that they knew would not be received at that time. 50 Likewise, in the first half of 2001 each partner saw it as important to support the group in the meantime by return of some of their consultancy fees and by providing loans to BGR in proportion to their shareholding. The commercial rationale for coming to this conclusion is, in my view, compelling. There was no sense in Mr Bax or Mr Reece in particular, working full time for the group during the period of cash flow difficulties after forsaking once for all any entitlement to be paid for that work given that they obviously thought that they could turn the group's fortunes around. They were prepared to take the risk of working without secure remuneration during that period for the potential benefits that they would be paid for their past work when BGR was in a position to do so. Only if, despite this work, BGR failed, had they accepted the risk of not being paid at all for their work. 51 Mr Gulson's evidence was that, in effect, his co-partners had agreed to forego all right to receive any further remuneration until the group's fortunes improved. He asserted that the right to fees had been cancelled not suspended. It has suited his financial position since the events of mid 2005 to contend, but I do not accept that he believed that this occurred. Nor do I believe that Mr Gulson understood what was happening in the meetings in March 2001 in that way. It makes no commercial sense. There would be no rational reason why, if the group recovered its fortunes, the partners would not have wanted to reward themselves for the period in which they worked to bring about that result. Quite the contrary, it would have been unfair as between the partners that Mr Gulson's equity of almost two-thirds of the shares would have benefited from the large amount of free work provided by his co-partners in a disproportionate amount to their rewards. 52 Indeed, Mr Reece's equity of 7.4% would have been improved by exactly the same amount as Mr Cordato's company's in circumstances where Mr Reece was working full time for nothing in the interests of BGR and Mr Cordato was not working in that way at all. Moreover, Mr Cordato retained the right to render professional fees. The behaviour of Mr Gulson in approving payment of Cordato Partners' legal fees in January 2006 reflected a recognition that those who supported the group through its cash flow difficulties would be paid for their work. Mr Cordato rendered professional fees in respect of work in progress and other matters which he had conducted over the whole of the period between July 1999 and January 2006 in sixteen separate accounts issued on 24 and 25 January 2006. He did that when the proceeds from the Main Camp sale were about to be distributed. 53 Mr Gulson gave evidence that he had agreed much earlier with Mr Cordato that the latter should defer rendering his fees until such time as BGR could afford it. Before a short adjournment in the hearing, Mr Cordato denied that he had made such an agreement. Following that adjournment Mr Cordato revealed, grudgingly, under cross-examination, that Mr Gulson had spoken to him in the toilet and sought to remind him that he had agreed with Mr Bax to a deferral of the rendering of his fees. Mr Gulson gave no evidence to deny that he behaved in this way. It was in Mr Gulson's interest to establish an agreement by Mr Cordato so as to justify the later payment of Mr Cordato's fees, the rendering of which had been deferred until the BGR group was in a position to pay them as to distinguish his position from that of the executive directors in respect of their entitlement to uninvoiced consultancy fees. Mr Cordato told Mr Gulson in the toilet that he had never made such an agreement. 54 Mr Cordato, as an experienced litigation solicitor, was aware of the inappropriateness of this discussion while he was under cross-examination. When first asked about the discussion he said he did not believe it was about the evidence he was giving, then that he could not remember. That was disingenuous of him. Asked 'what were his [Mr Gulson's] words' he responded 'You were there', before finally divulging what Mr Gulson suggested to him. I can understand that the incident was embarrassing to him, but Mr Cordato was evasive and far from candid in respect of this incident. Mr Cordato sought to glean from counsel what had been overheard before he was prepared to give his own version of the toilet discussion. To his credit, Mr Cordato told Mr Gulson that his suggested evidence was wrong. But this incident and Mr Cordato's response to its revelation in the witness box caused me to have considerable reservations about his reliability. The incident also showed that Mr Gulson was prepared to seek to influence Mr Cordato's evidence to bolster his case. 55 The defendants argued that at the time of his dismissal Mr Reece never claimed the right to any deferred consultancy fees. Mr Reece explained that he was distressed and did not raise any issue in relation to unpaid consultancy fees at the meeting with Mr Bax and Mr Gulson on 17 May 2002 where his services were terminated. He said that he did not discuss anything at the meeting because he was so shocked. He never raised any claim for unpaid consultancy fees later. He had no funds and knew he would have had to pursue the matter, in effect, through lawyers whom he could not afford. Moreover, while he was still a shareholder he knew that the group did not have funds. He said he assumed that the group would eventually, when it became more affluent, make payments that had been due earlier. He then gave the following evidence: 'You see, I suggest to you that you didn't raise it because you never believed those funds to be owing to you? ---- You mean you are saying that I worked all that time for nothing. I'm not saying that, Mr Reece, I'm suggesting to you that when the parties agreed not to charge consultancy fees, they agreed that they would cease to be paid? --- They were suspended. That was what happened. Otherwise, I … would never get any funds.' (T 403.32-.45) 56 Mr Bax said that in the meeting of 17 May 2002 he said to Mr Reece that if he signed over his shares in BGR his loan due to BGR would be forgiven and that the parties would all walk away. Mr Bax asserted that he said to Mr Reece that his also meant that there would be no claims for consultancy fees unpaid to Karcor and that Mr Reece agreed. Mr Gulson denies any mention was made of consultancy fees and he also relied on notes of the meeting taken by Ms Wee. Mr Bax had reservations about the completeness and accuracy of those notes. Suffice to say that the notes conclude enigmatically with Mr Reece being recorded as having 'enquired about his value of shares' without any further notation. It is likely that there was discussion about this topic which Ms Wee's notes do not record. Given that Mr Reece was being removed and that he asked about the value of his shares, I am satisfied that Mr Bax referred to the assignment of the shares, the forgiveness of the loan to Karcor and to the parties all walking away. 57 However, I am not persuaded that any one specifically referred to consultancy fees which had not been invoiced since March 2001. It is likely, and I find, that Mr Reece thought he could still claim these but that, because of the 'walk away' proposal both Mr Bax and Mr Gulson understood that those consultancy fees were not to be claimed by Karcor or Mr Reece. A reasonable person in the position of the parties would have understood that Mr Reece agreed to the 'walk away' proposal and thus lost any legal right for Karcor to claim consultancy fees: (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179 [40]). 58 Ultimately, Karcor's 74 shares were bought back by BGR. Its loan account was then about $290,000 in debit. Mr Reece signed the share transfer to BGR in November 2003. Mr Reece said he believed the extinguishment of his loan account was a settlement for transfer of his shares and that consultancy fees were never mentioned, but his belief is irrelevant because of the agreement I have found was made in May 2002. The buy back was effected formally in February 2004 and 74 replacement shares were allocated to the remaining BGR shareholders. Karcor's loan account balance owed to BGR was extinguished by the remaining shareholders assuming responsibility for it in proportion to their shareholding. After this, Mr Bax, through Food Improvers, held a 24% interest BGR, Mr Gulson, through Triad a 68% interest and Mr Cordato through Cordato Partners Services, an 8% interest. 59 The defendants argued that after the sale of one investment (Jabiru Table Grapes) in 2004, the group received cash funds and $695,000 was paid to the shareholders. That payment was made in approximately, but not exactly, the proportions of the shareholdings. They argued that this indicated that when BGR had the capacity it did not use surplus cash to pay consultancy fees. However, no distribution was made as a dividend or as a payment of consultancy fees. Instead, interest free loans were made through the BGR shareholders' loan accounts to the three shareholders in proportions not exactly matching their shareholding (Mr Bax's company receiving about 33% of the distribution). 60 None of the parties was able to give any explanation why the proportions used for those loans were out of alignment with the relevant shareholdings. These loans following the sale of a capital asset do not support the defendants' contention. At best they are neutral facts. It would be likely that when capital assets were sold, the shareholders would receive a return of the capital in proportion to their shareholding. The need to suspend the payment of monthly consultancy fees was caused because the group's income generating activities and cash flows did not support those payments. 61 When the cash flows returned to a sufficient level reduced consultancy fees commenced to be paid. The size of those payments increased as the cash flow situation improved. From July 2003 consultancy fees (exclusive of GST) of $8,000 per month were paid to Mr Bax's and Mr Gulson's companies out of cash flows. That was maintained until August 2004 when the amount increased to $10,000 a month and from December 2004 to $15,000 per month. The parties appear to have distinguished between rewarding the two active partners, Mr Bax and Mr Gulson, for their work by using cash out of revenues and rewarding the shareholders by advancing interest free loans of surplus capital. 62 The defendants argued that if Food Improvers and Karcor were able to invoice later for consultancy fees they would have engaged in a fraud on the minority by failing to record the liability in BGR's accounts and the accrued entitlement in their own accounts. They made, but withdrew an assertion that it was also a fraud on the revenue. Mr Bax said Food Improvers accounted on a cash basis. That meant that it did not have to bring to account any fees not actually paid to it. And cl 4.1 of the consultancy agreement contemplated that the time for payment of the fee could be 'otherwise agreed between the parties', while cl 10.11 envisaged that a tax invoice would be issued to BGR monthly. Cordato Partners Services was not the victim of a fraud on the minority by any failure to accrue unpaid consultancy fees. 63 I am of opinion that the parties agreed in March 2001 that BGR's liability for payment of the consultancy fees which would otherwise become due under cl 4.1 would be made subject to a condition that BGR be able to pay before the consultant were entitled to issue tax invoices. Thus, if BGR were never in a position to pay, it had no liability to do so. Similar arrangements are familiar to lawyers who agrees to a 'no win, no pay' contingency fee with clients. Here, Mr Bax, Mr Gulson and Mr Reece agreed to risk their fees, and to make substantial loans, with Mr Cordato, in the hope that BGR would recover. There was no fraud on the minority in not accruing any liability in BGR's accounts for consultancy fees which had not been invoiced. Indeed, Mr Cordato never sought to correct the same accounts over the years before January 2006 to reflect his firm's unbilled work in progress. 64 There was no consideration given by BGR for a release from its liability under the consultancy agreements to pay the monthly fees. For Food Improvers to give up the right to receive over $20,000 per month required, as a matter of contractual analysis, some form of consideration. The defendants never identified what the consideration was for each of the partners still to provide services at the level and rate that he had been given before this supposed agreement yet to abandon any right to be paid. Their argument leads to a commercially absurd result and reflects convenient self interest. It is inconsistent with their conduct in and after the meeting with Mr Lombardo and the rendering by Mr Cordato, with Mr Gulson's agreement, in January 2006 of unbilled fees for over six years work when the proceeds of Main Camp were about to be received. 65 I am satisfied that in March 2001 Mr Bax, Mr Gulson and Mr Reece did agree to defer the rendering of invoices for consultancy fees until the group could pay and they did not intend to or effectively give up their rights to invoice BGR at a later time for the work that had already been or was to be performed during the period when the group could not pay them at all or in full. I find that the partners agreed to pay interest on the funds borrowed by them which they on lent to BGR. I am satisfied that Mr Gulson's account was not reliable because it is inconsistent with the contemporaneous accounting records of BGR and the evidence of Mr Bax. (Ex 1). The payments made by Triad, Food Improvers and Karcor in March 2001 included substantial sums refunding consultancy fees which I also accept Mr Bax's and Mr Reece's evidence as to the meeting of March 2001. It follows that Food Improvers is entitled to invoice and claim those fees at the rate of $20,833.33 plus GST for the period in which they were not paid in full. THE MAY 2005 BUSINESS TRIP 66 From early 2000, Mr Bax had increased his involvement in the sales and marketing efforts. After Mr Reece left, Mr Gobert took over his position as the group sales manager. Mr Gobert was an acknowledged world expert in tea-tree oil and its products. Mr Bax accompanied, and provided support for, Mr Gobert on his overseas visits to customers in the European Union and the United States of America. In contrast, Mr Bax had not travelled overseas with Mr Gulson since 2000. 67 In April 2005 Mr Gulson advised Mr Gobert that he was proposing to draw up a draft long term supply contract between the Main Camp group and an Israeli customer Biomor, for discussion at the proposed meetings with Biomor representatives and Main Camp's Israeli distributor, Schlomo Steinberg of Petrus Chemicals in London. 68 On 17 May 2005 Mr Gobert met with Mr Bax and Mr Gulson at BGR's offices in Sydney to discuss the draft Biomor contract. During the meeting Mr Gulson broke the news that he was leaving for overseas the next day to go to Singapore and that he would arrive in Newcastle, England, on 23 May. Mr Gulson referred to a two page document which he had prepared saying that it was the 'contract' for the Biomor meeting in London. Mr Gobert queried whether, after four weeks, the two pages were all that Mr Gulson had prepared. Mr Gulson said that Mr Cordato had let them down on the matter and that he had to prepare the document himself. Mr Bax and Mr Gobert proposed several amendments to the draft and they prepared the next version of the heads of agreement and covering email to Biomor which was attached to Mr Bax's email to Mr Gulson of 17 May 2005. Mr Gulson asked for the email addresses of the Biomor executives and of Mr Steinberg so that he could have his wife send them the revised draft in advance of the London meeting. 69 Mr Gulson did not use computers, but his wife, who was a successful businesswoman, helped him with his email and other correspondence. She sent and received email and correspondence for Mr Gulson, even when he was overseas and she remained in Sydney. When one of BGR's staff, Ms Bevan, provided to Mr Gulson her handwritten transcription of the email addresses for the Israeli recipients she made a number of errors. The consequence was that when Mrs Gulson sent the emails, none of the intended Israeli recipients received them and, as events happened, they arrived in London without any knowledge of what was in the draft heads of agreements. 70 When they met in Newcastle, England, on 22 May 2005 Mr Gobert mentioned to Mr Bax that he had received an email about the Biomor draft from Mrs Gulson before he left Australia. He told Mr Bax that it was almost the same as what they had advised Mr Gulson except for a few changes. Mr Bax was happy that they had something. Mr Gobert had a new laptop computer with him but he was unable, because of some technical problem, to receive any email while in Europe. Mr Gobert had printed in Sydney a copy of Mr Gulson's email and he had put it in his luggage, but the luggage had been lost in transit and was only delivered two days later. By that time, Mr Gobert and Mr Bax appear to have forgotten about that email. Mr Bax did not see it until 31 May 2005. 71 In late May 2005, Mr Gobert had a meeting in Brussels with a regulatory body (the Scientific Committee for Cosmetic Products) comprised of a group of experts who reviewed the toxicology of raw materials. They met to discuss a proposed European Commission regulation of tea tree oil products. Representatives of two of Main Camp's largest customers, Christopher Dean, of TP Health, and Ken Shephard, the senior counsel of the American company, Melaleuca Inc, also participated in the SCCP meeting. Next, Mr Gobert was to address a major industry meeting in London about tea tree oil's status under the proposed regulations. There were also planned discussions with major customers in the United Kingdom and then in the United States. MR LAWSON'S EXPERIENCE OF MR GULSON 72 Mr Lawson, was the Managing Director of Unifect Limited, Main Camp group's distributor in the United Kingdom. He gave evidence about a number of instances of inappropriate and odd behaviour which Mr Gulson exhibited during the time which they spent together in the days leading up to 29 May 2005. During a meeting on 26 May with Mr Bax, Mr Gulson, Mr Lawson, together with Unifect's sales manager, Ms Marsh, at the headquarters of a large potential customer for tea-tree oil, Mr Gulson appeared to be anxious to get away. Whilst Ms Marsh was in the middle of her presentation, Mr Gulson stood up and, without any prior warning, brought the meeting to an end, to Mr Lawson's and Ms Marsh's puzzlement. 73 Mr Lawson described obsessional behaviour of Mr Gulson's after he saw some non-safety matches in a pub. This led to Mr Gulson trying to get out of a moving car in heavy Friday afternoon traffic and crossing a divided road looking for a supermarket. Mr Lawson gave a number of other instances of Mr Gulson's inappropriate comments and behaviour around his family, including making loud, insulting and racially biased comments at a restaurant in respect of a woman dressed in traditional Muslim dress and others of non-Caucasian appearance who passed by saying 'They look like terrorists to me .. they're definitely terrorists'. He began smoking a large Havana cigar in the non-smoking restaurant and refused to put it out. He told stories relating to his use of illegal drugs and his being supposedly 'banged up for a while in South America with Ronnie Biggs' (the notorious Great Train Robber). 74 On a later occasion, in the Lawson's kitchen, Mr Gulson asked their 16 year old daughter 'do you know what 'wank' means?' Mr Gulson was oblivious to the embarrassment his comments and behaviour were causing to Mr Lawson's family. Taken in isolation, each incident Mr Lawson described could perhaps be viewed by some persons as a momentary lapse, social clumsiness or the effects of too many drinks. But, Mr Gulson seemed to Mr Lawson, as he wrote to Mr Bax on 3 June 2005 '… to be unbalanced and totally out of control'. 75 In cross-examination there was little challenge to Mr Lawson's factual description of Mr Gulson's behaviour, although it was sought to suggest that he was biased because of his conduct in sending an email 'wanted' poster of Mr Gulson in insulting language and subsequently going into business with Mr Bax and Mr Gobert. The email showed that Mr Lawson was himself capable of inappropriate behaviour in response to Mr Gulson's. I am satisfied however, that Mr Lawson gave a reliable account of Mr Gulson's conduct. No doubt he found Mr Gulson on the occasion of his English visit to be socially very difficult. This behaviour was symptomatic of his then unknown psychiatric disorder. Mr Lawson appears to have been provoked to later react but not to give inaccurate evidence. Nor did his the subsequent business relationship with Mr Bax and Mr Gobert affect the reliability of Mr Lawson's evidence. I formed the view that Mr Lawson was an honest witness and I have no reason to doubt his account. EVENTS OF 29 MAY 2005 76 On the morning of 29 May Messrs Bax, Gulson and Gobert visited a National Trust House. They then went at Mr Gulson's request to Cowdray Park, so that he could look at polo. Mr Gulson watched a polo match alone. While waiting outside the polo game, Mr Gobert updated his presentation slides based on what had happened at the meetings he had attended on the trip. He did not work specifically on the Biomor presentation. Mr Bax made a number of attempts to persuade Mr Gulson to return to the car so they could get to the Renaissance Hotel at Heathrow near London where they were to stay and hold the Biomor meetings but Mr Gulson insisted on watching the whole game, which concluded at about 5pm. 77 In the car on the way to the Renaissance Hotel there was a discussion in which Mr Gobert said that he was concerned about some of the points that Mr Gulson had left in the email to Biomor with the draft heads of agreement. There was a discussion about Mr Gulson's proposal which concluded with Mr Gulson stating that he had taken an executive decision and was not going to change the draft. They arrived at the hotel at about 6-6.15pm Mr Gulson came to Mr Gobert's room at about 6.30pm just after the latter had finished returning the hire car and suggested they have a drink before dinner but Mr Gobert was unavailable. 78 Shortly after, Mr Bax and Mr Gulson met in the foyer of the hotel with Biomor's Peter Tirosh, his son Ziv Tirosh, Danny Neifeld and Zvi Paster. Mr Gobert joined them a little later. All were chatting. Mr Gulson enquired whether the Biomor representatives had received the documents he had sent. They said that they had not received anything from him. Mr Gulson stood up and said that they had been sent several days before but they reiterated that nothing had been received. Mr Gulson, who was by then a little agitated, said he would go to his room and ring his wife, and left. Mr Gobert, at the time, did not think about the fact that he had a copy in his luggage. 79 The others left to go to a nearby restaurant. About 10 or 15 minutes later Mr Steinberg arrived at the restaurant. Mr Gulson joined the table soon after saying that his wife was faxing the documents to the hotel. During dinner Mr Gulson drank some wine and several glasses of grappa. After dinner, the whole party returned to the hotel foyer except for Mr Gulson who began speaking to a table of young women in the restaurant. He rejoined the others in the foyer a short while later with photocopies, made by the hotel, of the two page draft heads of agreement. The Israelis each said that they had never seen the document. Mr Gulson said that the covering email or header was missing and that he would ring his wife to fax it. He made a telephone call and a little while later distributed copies of the covering email which his wife had sent on 20 May 2005. Mr Neifeld said that the reason he had not received the email was because his email address was not there. Mr Steinberg said that his company's name in the email address was spelt incorrectly. Peter Tirosh said that his email address was also incorrect. 80 Mr Gulson became very angry and shouted: 'Are you calling me incompetent?' at all present. At the time there were quite a lot of people present in the lobby unconnected with the BGR and Biomor representatives. Mr Neifeld said: 'No: it is just a little mistake. Don't worry'. Mr Gulson then turned on Mr Gobert saying: 'It's all your fault. Your staff have given me the wrong addresses – they are incompetent and you are managing them poorly'. Mr Gobert, understandably, was quite embarrassed by this abuse in front of the customers and other people in the lobby. MR GOBERT AND MR GULSON MOVE AWAY 81 Mr Gulson claimed that he then took Mr Gobert aside and told him that his wife had been trying to email Mr Gobert and the office for days about the emails to the Israelis which had not been able to be delivered. Mr Gulson blamed Mr Gobert for not getting the correct email addresses for the Israelis. In cross-examination, Mr Gobert denied both that he had any knowledge that Mrs Gulson had made such attempts and that Mr Gulson had raised this topic with him on the evening of 29 May. I accept Mr Gobert's evidence. As Mr Gobert said when confronted with Mr Gulson's account, if Mrs Gulson had a problem she could have easily told her husband rather than continuing to get no response. Notably, Mrs Gulson, though available, was not called. I infer that her evidence would not have assisted the defendants' case (Jones v Dunkel (1959) 101 CLR 298). 82 In evidence, Mr Gulson asserted that he had been unable to communicate with his wife by telephone while he was in Southdown, England before arriving at Heathrow, 'because there wasn't that facility'. I do not accept that evidence. His itinerary had telephone and fax numbers for the Southdown hotel. Even if a landline phone was not available (which I am not satisfied was the case), he had his mobile phone with him. Mr Gulson asserted that he did not use his mobile phone except in emergencies, and it was off most of the time (coincidentally, his mobile phone rang while he was in the witness box). He could have contacted his wife by telephone, or she him, at any time during the trip. He also acknowledged that he probably spoke to his wife when he first arrived in Newcastle, England. Of course, by then the email problem had emerged so Ms Gulson could have raised it. Moreover, Mr Gulson had no difficulty telephoning his wife twice earlier on the night of 29 May 2005. 83 Although in Mr Gulson's account he said that Mr Gobert had told him in the conversation that Christopher Dean had offered Mr Gobert a job, Mr Gobert denied this. Mr Gulson said that he told Mr Gobert that he had not been really performing in terms of sale prices and suggested that he take the job with Mr Dean. He accused Mr Gobert of raising for the third time in the past year that he had been offered the job and asked what was going on. He said that Mr Gobert had responded that he was merely letting him know. Mr Gulson continued his account: 'Mr Gulson: The timing is appalling, how can you continue with this trip if your heart is not in it? I think that in all conscience, you should leave the rest of the trip to John and myself. Mr Gobert: If that is your attitude, I am resigning.' 84 I do not believe Mr Gulson's account of this conversation, which he first offered in his affidavit of 16 March 2006. It is designed to improve his own case. Soon after these events on the evening of 29 May he phoned each of Mr Cordato and Mr Williams and said he had sacked Mr Gobert. Mr Gulson also told Mr McGilvray on the next day that he had sacked Mr Gobert. When he was in the Caritas Centre on 4 July 2005 he told the doctors that he recently had to sack employees who were undermining him in front of others and this was a spontaneous decision. None of these conversations referred to Mr Gobert resigning or suggested anything other than his sacking. 85 During cross-examination Mr Gulson gave this evidence: 'Why would he resign after you sacked him? --- Well, I mean there's [an] issue there of constructive dismissal isn't there[?] So maybe he didn't take it as that and it only occurred to me after I had – did the affidavits, I thought this could be constructive dismissal, but anyway, be that as it may, it's there. And, you know, that's what happened. I'm sorry, I can't change my words, the words were what I recalled when I did the affidavit, but I pondered about it later.' 86 His evidence continued by suggesting that Mr Gulson had drawn a line as a result of Mr Gobert's alleged reference to the job offer. Although Mr Gulson denied that he was out of control during the conversation, his denial was in these terms: 'No, I wasn't, totally --- .' I find that Mr Gulson was irrational and out of control and that he is not able accurately to recall what in fact had happened. Yet, when he gave his evidence he sought to attribute fault to Mr Gobert, in the sense of the latter resigning during the trip, so as to justify his own position in the proceedings. He asserted that his grounds for acting as he did on the evening of 29 May 2005 with Mr Gobert were: 'But … I didn't want somebody on board who you have to constantly got to wonder, "What's he going to do in three months time? What's he going to do in four months time or nine months time?" Despite the fact the he had given you no indication that he was even contemplating? --- Look, you can draw the lines, you know. I'm not silly. You don't keep on raising that issue if it's not live …I mean, you know, there comes a time when you say "Well go.".' 87 At another point in his cross-examination Mr Gulson had agreed that when he claimed to have used the words 'I think that in all conscience you should leave the rest of the trip to John and myself' during the meeting with Mr Gobert, he was in fact telling him to go home. He was asked: 'You were telling him he was sacked? --- Yes. There was no doubt in your mind after you had this conversation with Jim Gobert at the Renaissance Hotel on the evening of 29 May 2005 that you had sacked him? --- No. And I think elsewhere in my affidavit I said so – said so. Well I'm asking you, Mr Gulson, not what's in the rest of your affidavit. I am asking you in the witness box, you had no doubt after that conversation with Jim Gobert that you had sacked him? --- Correct. That you had sacked him without any consultation with your fellow director John Bax? --- At that time correct.' 88 I do not accept Mr Gulson's accounts of Mr Gobert's sacking or of what occurred between them when they were alone. Rather I accept Mr Gobert's evidence that when Mr Gulson sought to take Mr Gobert away to the side to a bar, along the way, in front of a large number of people in the foyer, Mr Gulson, who was red faced and making threatening gestures with his hands, started shouting at Mr Gobert. Mr Gulson addressed a number of insulting profanities to Mr Gobert in the course of the conversation accusing him of having a bad attitude and undermining Mr Gulson's authority. Mr Gobert responded that Mr Gulson was behaving on the trip like a spoilt child and should grow up. He reminded Mr Gulson that if it were not for him, they would not be having the opportunity with Biomor (it being a customer which Mr Gobert had cultivated). Mr Gulson continued his profane diatribe saying that, in effect, it was his company and he would do whatever he wanted to do with it. Mr Gobert broke away saying that he was not wasting his time talking to Mr Gulson when he was behaving in that way and that he would join the others. It was only later, as I set out below, that Mr Gobert was sacked by Mr Gulson. MR BAX FALLS OUT WITH MR GULSON WHEN HE SACKS MR GOBERT 89 After Mr Gobert walked away from Mr Gulson, he went back and sat down with Mr Bax and Mr Steinberg in a different section of the lobby. Mr Gulson joined them shortly afterwards. In Mr Gulson's account he 'stormed off back to the part of the foyer' where the others were sitting. 90 In the foyer Mr Gulson said to Mr Gobert that he was incompetent and irresponsible and was undermining the integrity of the company. Mr Gobert asked why. Mr Gulson said that he and Mr Bax were a couple of clowns and they had contributed nothing to the Biomor meeting. Mr Bax retorted that the Biomor documents (which Mr Gulson had distributed that evening) were basically what he and Mr Gobert had drafted before leaving Australia. Mr Gulson said Mr Bax should not speak to him like that and that it was his (expletive) company and that he would do whatever he liked. Mr Gobert said that Mr Gulson should stop being so immature and grow up. He said that Mr Dean said he was very impressed with the work that Mr Gobert had done (in response to the accusation of incompetence) and would like to work closer with him. He asked whether Mr Gulson would like him (Mr Gobert) to pursue that further. Mr Gulson said that he would warn Mr Dean to stop being so unprofessional to be poaching his staff and that Mr Gobert was totally unprofessional. He then told Mr Gobert that he was dismissed and he should get out now and have nothing further to do with the company. Mr Bax and Mr Steinberg were speechless. 91 During this encounter Mr Gulson was red faced, shouting, using obscenities and making threatening gestures. Mr Gobert and Mr Bax were concerned Mr Gulson might assault Mr Gobert. Mr Gobert then got up, walked out, sat on a garden wall outside and then called his wife in Australia. 92 Mr Bax then said to Mr Gulson: 'I just can't believe what you've done. You've destroyed six years of hard work with your foul mouth. I just can't work with you any more Fred. Our partnership is over.' Mr Bax then went out and joined Mr Gobert. After a while, they went back inside and Mr Bax noticed Mr Gulson and Mr Steinberg were in the bar area. Mr Gulson was sitting back having a scotch and smoking a cigar with his feet up on the table. Mr Steinberg was also having a scotch. Mr Steinberg approached them and Mr Gulson got up and started to walk towards them as well. Mr Gobert, noticing this, said that he was going to his room and left. Mr Steinberg suggested that they all have a drink but Mr Bax declined a drink. Mr Bax repeated that he could not believe what Mr Gulson had just done, that Mr Gobert was the technical expert of the company and Mr Gulson had just dismissed him. Mr Bax enquired as to the point of going on with the trip when everything they were going to talk about was technical, requiring Mr Gobert's services and there was no-one who could fill in for Mr Gobert. Mr Steinberg indicated that he was going to catch a train to central London and hoped that the two could sort things out. He left. 93 Mr Gulson then said: 'Well that went well' and smirked. Mr Bax retorted: 'You've just dismissed Jim Gobert. How do you think we're going to keep our customers without Jim? Jim is the lynchpin between Main Camp and all our customers. He's the one who expanded our customer base. People rely on [him] for technical expertise. He's always talking to them, meeting them and is considered, I think probably, a world expert in tea tree oil because … of what he was doing with the SCCP. Look, we're no better than any other tea tree producer now. We haven't got any technical expertise. All we're doing is selling oils. Biomor can get oil from anywhere. They don't have to get it from us. But what they wanted us for is to assist them with their regulatory processes they had to go through in the EU and Jim Gobert's technical knowledge because he is helping them with their local consultant in Australia as well, for getting registration in Australia for their products. All we're going to do now is compete on price. We've got nothing else to differentiate ourselves from other players. We had all the expertise and now its gone.' Mr Bax also remonstrated with Mr Gulson for using the abusive language and said that he was appalled. He got up and returned to his room. 94 I am satisfied from the contemporaneous material, including Mr Gobert's subsequent handwritten letters which he sent from overseas to Australia, and his and Mr Bax's accounts of the same events on the night of 29 May 2005 that Mr Gulson was in an irrational and uncontrolled rage, which was due to his rapidly deteriorating mental condition. I am also satisfied that Mr Gulson, despite the rage, was conscious that he had sacked Mr Gobert on the spot. His ultimate concession, during cross-examination, that there had to come a time when one could say 'Well, go' demonstrated this. It suited Mr Gulson's case to assert that Mr Gobert withdrew from the trip at that time by resigning. I do not believe Mr Gulson was telling me the truth in his asserted account. After all, it was his evidence that Mr Gobert '… was the lynchpin for the Israeli meetings'. Having had the benefit of seeing and hearing him in the witness box and assessing his evidence against independent material, as well as that of Mr Bax and Mr Gobert, I prefer the evidence of the latter two wherever there is a conflict with Mr Gulson. 95 Mr Gobert had nothing to do with his own cessation of employment. There was no legal basis for the dismissal. And, it is notable that this critical decision was taken unilaterally, by Mr Gulson, without any consultation with his partner, Mr Bax. EVENTS LATER ON 29 AND 30 MAY 2005 96 Mr Gobert spoke to Mr Cordato later that night from London (Sydney next morning) saying the trip had gone very badly, Mr Gulson had sacked him a few hours before and he was told not to have anything further to do with the company. He said he could not attend the Biomor or other meetings and that Mr Gulson was shouting at him in the lobby and calling him by profanities. He said that he had never been publicly abused like that and that there were no grounds for sacking him. Mr Cordato said that Mr Gulson had already called him and that he had not said anything about the incident but was very odd and sounded guilty about something. Mr Gobert said that he had sent a fax to his assistant, Ms Bevan, and asked her to send a copy to Mr Cordato. He was going to arrange to return as soon as possible. 97 Mr Bax sent an email to Mr Cordato stating that there was no further relationship between himself and Mr Gulson. He said that in his opinion Mr Gulson had become extremely irresponsible and uncontrollable. He set out an account of the previous evening's events, noted that Mr Gulson had told them that he could run the business by himself, which was exactly what would occur as no-one would work for him. He said that he could not see how the situation was recoverable and that Mr Gobert and he were returning home on the next available flight. Mr Cordato responded by email saying that unfortunately if the directors were divided, the enterprise had to be sold while it had enterprise value. He noted that it would obviously be beneficial, and probably vital, if both Mr Bax and Mr Gobert remained pending the sale. That sale had to be the whole of the undertaking. 98 The next morning, Mr Bax also telephoned Mr Cordato and told him that he and Mr Gulson had had a major confrontation the previous evening. He said that Mr Gulson had been abusive to Mr Gobert and that he (Mr Bax) had said that their relationship or partnership was now over. Mr Cordato said that he had already received telephone calls from both Mr Gobert and Mr Gulson and knew what he was talking about. He said that he had sent an email to Mr Bax. 99 The next morning in London, Mr Steinberg joined Mr Bax and Mr Gobert in the latter's room. Mr Gobert told them not to discuss anything commercially sensitive in front of him because his employment had been terminated. 100 Mr Williams, the Main Camp plantation manager, received two telephone calls from Mr Gulson on 30 May 2005. He said that Mr Gulson was mumbling and very incoherent. In the first call Mr Gulson told him that he had sacked Mr Bax and Mr Gobert. He asked Mr Gulson what he was talking about but could not get any sensible or comprehensible response. About 4 hours later Mr Gulson rang him back again mumbling and speaking incoherently. He told Mr Williams he was in a taxi cab in the early hours of the morning in London. Mr Gulson sounded to him to be either drunk or mentally unwell. At various parts of this conversation Mr Gulson told him that Mr Bax and Mr Gobert had misled him and that he had just sacked them both. He said that he would be the new managing director and would send a fax to Mr Williams. He said that he would be closing the Sydney office and moving everyone up to the farm which would save him a lot of money and the money would all come to him. 101 From Mr Williams's oral evidence it became clear that he was confused as to dates and had a tendency to telescope different occasions or conversations into one another. Mr Williams struck me as an honest witness. He obviously did not like Mr Gulson and felt very strongly about his behaviour. However, I am satisfied that the substance of his evidence as to his experience and observation of Mr Gulson's behaviour and conversations in late May and June 2005 is reliable. 102 Later, on 30 or 31 May 2005, Mr Gulson telephoned Bill McGilvray who was fast asleep in Australia at about 2 or 3 am Australian time. The two had known each other for a number of years and Mr McGilvray had his own business of buying and selling, among other oils, tea tree oil and which he operated from near the Main Camp plantation. Mr Gulson was difficult to follow and gave no explanation for calling Mr McGilvray at that hour. Mr Gulson said he had just done a big deal for a lot of tea tree oil and that he had some issues with Mr Gobert about not, somehow, following the deal. He told Mr McGilvray that he had sacked Mr Gobert. He had never rung Mr McGilvray before this to tell him of deals he had done. 103 On 30 May Mr Gobert sent a number of faxes to Mr Cordato. He noted that he wanted to have some written reasons as to why he had been dismissed. He wanted Mr Gulson to cease defaming him. He also wrote on 30 May to Ms Bevan asking her to contact all customers telling them that unfortunately he would not be able to meet them. He asked her to liaise with Mr Gulson and customers as to which customers Mr Gulson would meet for the rest of the trip and to do so urgently so that the business was not disadvantaged. He referred to the fact that he could not get emails on the trip and asked that he not be sent any company related information directly. 104 On the next day, Mr Gobert faxed Mr Cordato saying that despite the nature of his employment termination, he would have been willing to show Mr Gulson the presentations for the major customers that he had not previously seen, but that Mr Gulson had made no attempt to contact him prior to his departure for Australia even though they were in adjoining rooms. He noted that there were some key issues that needed to be addressed, which had been previously been discussed with Mr Gulson. He went through each of the major customers and issues that appeared to be important to advance the BGR group's interests in discussions with them so that Mr Gulson, if he used the material, would have the assistance of Mr Gobert's insights into what should happen. In that fax he disclosed that he had received an employment offer from a Main Camp customer. In cross-examination he acknowledged that this was Mr Neifeld of Biomor. He again complained about Mr Gulson's behaviour and defamatory comments about him. He reminded Mr Cordato that Mr Gulson would need to be aware of a deadline for a submission to TP Health. 105 Also on 31 May Mr Gobert sent another fax to Mr Cordato indicating that his place on the technical and safety committee was vacant and asked whether Mr Gulson wanted to fill the vacancy himself or let the decision be made by the Australian Tea Tree Industry Association. He said that he took this view because the BGR group had paid for his attendance at Brussels and did not think that he would be paid for attending the further meeting. He again pointed to the urgent commercial issues that faced the group. 106 Mr Gobert's actions were those of a professional and concerned employee and appeared to me to be genuinely felt. He seems to have been torn between his loyalty for the Main Camp business and his reaction to the abusive behaviour to which he had been subjected by Mr Gulson. In his letter of 15 June 2005 Mr Gulson said that Mr Gobert had been 'bagging' the company, its staff and certain senior executives. No particulars were given of this allegation. Mr Gobert said that Mr Gulson made up these allegations. I prefer his evidence to Mr Gulson's. 107 In final address the defendants accepted that Mr Gulson had constructively dismissed Mr Gobert in the Renaissance Hotel foyer on 29 May 2005. It was more than a constructive dismissal. Mr Gobert was sacked summarily and without justification by Mr Gulson. I am of opinion that Mr Gulson was mentally unwell at the time and that his condition subsequently deteriorated. However by 29 May 2005 he was having periods of considerable irrationality in which he was very forceful and aggressive. Earlier he had exhibited peculiar behaviour when with Mr Lawson and his family and on the afternoon of 29 May 2005, his insistence on going to and remaining at a polo game without attempting to assist Mr Bax or Mr Gobert to prepare for the dinner meeting with the Biomor representatives was odd. Mr Gulson's reactions to the failure of his wife's emails to reach the Israeli gentlemen was also quite odd. 108 I am of opinion that the reason Mr Gobert went on the overseas trip with Mr Gulson and Mr Bax was because Mr Gobert was viewed by both of them as being an essential participant in the trip. Had Mr Gulson had any substantive reservation about Mr Gobert's performance such as would warrant him being terminated, for example, his proffered excuse that Mr Gobert was not negotiating sales of bulk tea tree oil at high enough prices, he would not have been taken on the trip. The effort, time and expenditure for the trip was substantial. Mr Gulson would have considered that he had placed at risk the commercial reputation of the Main Camp business internationally, had he had reservations about Mr Gobert before the trip, at a time when the group was still experiencing cash flow difficulties. Mr Gulson's behaviour was extraordinary. It involved abusing Mr Gobert publicly in the hotel foyer and summarily dismissing him, allegedly because Mr Gobert said that he had been offered another job. I do not believe Mr Gulson's evidence on this matter. 109 In final submissions the defendants argued that Mr Gulson's summary dismissal of Mr Gobert was justified because he did not accept responsibility for Ms Bevan's mistranscription of the Israeli email addresses, his lack of commitment and because he had not achieved higher prices for Main Camp's tea tree oil. No attempt was made to address the termination provisions of Mr Gobert's employment agreement (2/481) to demonstrate how any of this alleged conduct could warrant summary dismissal in London on 29 May 2005. There, cl 8.1 entitled his employer, SNP Natural Products Pty Ltd, to terminate the agreement immediately if he: · committed any material breach of the agreement or any act of serious and wilful misconduct (cl 8.1(a) and (b)); · he had conducted himself in a manner which in SNP's reasonable opinion, would detrimentally effect its business (cl 8.1(i)). 110 The email address mix up was not the fault of Mr Gobert. He was highly committed to the group's business. If a failure to achieve higher prices were a genuine concern of Mr Gulson's, Mr Gobert would not have been taken on the trip. He did nothing on the trip to affect adversely prices and thus could not have been summarily dismissed when and as he was. Indeed, if this ground had any basis, the decision to take Mr Gobert on the trip and have him participate in all the planned meetings waived the 'right' to rely on it. The defendants' argument for his dismissal is specious and without any substance. 111 The defendants also argued that Mr Bax had lost any legitimate expectation to be involved in BGR's management after Mr Gobert's dismissal because he said he could no longer work with Mr Gulson, and he refused Mr Gulson's offer to discuss things after the dismissal. They said an objective bystander would realise 'blow ups' were common and he could not refuse to discuss matters or continue with the trip or allege 'unfair prejudice' to his minority position. And, they argued '[o]verhearing a few profanities does not alter this position.' Moreover they argued that Mr Bax should have discussed matters with Mr Gulson and was wrong not to have done so. 112 This overlooks the fact that Mr Gulson persisted in his resolve to dismiss Mr Gobert and continue on the trip without him even though his expertise was needed and the customers were expecting him. Mr Gulson never resiled from that position. He never apologised for his objectively inappropriate behaviour towards Mr Gobert and Mr Bax and his exclusion of Mr Bax from the 'decision' to dismiss Mr Gobert. Nor would a reasonable person consider that Mr Gulson was offering to consult with Mr Bax or seek or respect his views as to the further conduct of the overseas trip, meetings with customers or the management of BGR or the group. Mr Bax had been presented with a fait accompli. Mr Gulson appeared to require him to accept the radical change he had wrought and to proceed with the trip accordingly. This betrayed a detachment from reality symptomatic of Mr Gulson's mental condition in mid 2005. The submission is equally unreal. 113 After sacking Mr Gobert in front of Mr Steinberg and Mr Bax, Mr Gulson smirkingly said to Mr Bax 'well, that went well'. Mr Bax's reaction to such inappropriate conduct by Mr Gulson was quite understandable. Mr Gulson's behaviour over the previous few days obviously had had some impact on Mr Bax. In the middle of an overseas trip Mr Gulson had sacked an executive whom he knew was a key person not only in the business but also on the trip, without even consulting Mr Bax in advance. This action demonstrated that the partnership at that time was not workable. Mr Gulson had arrogated to himself the running of the group. He had taken a significant decision without involving his fellow director with whom he was travelling. The decision whether to dismiss Mr Gobert in any event, let alone in the middle of the trip when both Mr Bax and Mr Gulson were there, could not have been, in light of the history of their relationship, the prerogative of one of them alone. 114 It is unsurprising that Mr Bax regarded the partnership as over at that time. By his conduct, Mr Gulson had shown this to Mr Bax. While Mr Gulson in his evidence asserted that he had complained that Mr Bax had not given him the opportunity of hearing his reasons for dismissing Mr Gobert, I think that Mr Bax was honest and reasonable in saying that he could not work with him. Mr Bax's reaction was one a reasonable businessman in the position of quasi partnership the two men then had is likely to have had. Mr Gulson had taken a decision vital to the future of the group in an irrational rage. The conduct was very public. It followed earlier, erratic and inappropriate behaviour by Mr Gulson in Mr Bax's presence, including the incidents described by Mr Lawson. It was also undermining of Mr Bax's authority in front of Mr Gobert and Mr Steinberg. It was followed by Mr Gulson asserting that what he had done 'went well' when he had created a commercial crisis. 115 The defendants criticised Mr Bax for failing to attend the meetings with Biomor on the next day during which Mr Gulson negotiated a new contract. They said he ignored his obligations as a senior executive and partner in the business. However, Mr Bax could not be expected to continue as if nothing had happened. Mr Gobert's technical expertise was not going to be available. Mr Gulson was liable to behave in the increasingly irrational way which he had exhibited over the preceding days. By accompanying Mr Gulson, Mr Bax could be perceived as associating himself with the former's conduct. Moreover, Mr Bax could justifiably feel a sense of betrayal of trust by Mr Gulson in the way in which he had treated not just Mr Gobert but himself. RETURN TO AUSTRALIA 116 When Mr Bax, Mr Gobert and Mr Gulson returned to Australia, Mr Gulson's behaviour became worse as his mental condition deteriorated. 117 Mr Bax, Mr Cordato and Mr Gobert met on the morning of 6 June 2005. Mr Cordato said that Mr Gobert was a vital part of the BGR group and should remain a part of it in order to preserve value for the enterprise. Following this meeting Mr Bax signed a variation of Mr Gobert's employment contract increasing his notice period from 3 to 24 months' to ensure he had an incentive to stay and to establish the business after the events of 29 May 2005. Mr Bax saw this as giving Mr Gobert security in his position. Mr Bax did not discuss the new notice period with Mr Cordato or Mr Gulson because he thought it was within his powers as managing director to write it. Mr Gobert agreed to the new provisions. 118 In early June Mrs Gulson rang Mr Williams and told him that her husband was on his way home from England and was coming straight up to the plantation. She said he would explain what had happened. On his return Mr Gulson went straight to the plantation on 7 June 2005. Mr Williams showed Mr Gulson his fax to Mr Bax of 7 June 2005. Mr Gulson reacted by going into a rage and began ranting incoherently, evincing his unhappiness about the sending of the fax. 119 On 7 or 8 June 2005 Mr Bax and Mr Cordato had a discussion in which Mr Bax informed Mr Cordato that two substantial payments had been received from customers totalling about $700,000. Mr Bax said that he wanted to pay all creditors that were due for payment at that time. He said that given Mr Gulson's current state of mind he did not want large amounts of cash in the bank accounts when Mr Gulson returned as he, Mr Bax, was concerned that the cash might be diverted to Mr Gulson. Mr Cordato responded that that was a good idea and that the leases should be paid three months in advance. Mr Bax replied that that was not possible as the leases were paid on a monthly cycle. 120 There then was a minor controversy between Mr Cordato and Mr Bax as to what Mr Cordato said about having his own accounts paid. Mr Bax's account was that Mr Cordato said that he would bring all his accounts up to date with BGR. He then invited Mr Bax to come with him to see Ms Fleming, the book keeper of Cordato Partners, who could print off all unbilled accounts. Mr Cordato said that the conversation related to printing out copies of his firm's outstanding accounts or tax invoices, as opposed to any unbilled accounts. According to Mr Bax he and Mr Cordato went to Ms Fleming's office and Mr Cordato asked her to print off all unbilled amounts due from the BGR Group and give them to Mr Bax who would arrange for them to be paid. Mr Cordato and Ms Fleming said that Mr Cordato asked for the outstanding bills to be printed off and provided to Mr Bax. In any event Cordato Partners' outstanding bills, as opposed to their unbilled work in progress, were provided to Mr Bax and he arranged for their payment. 121 I am satisfied that Mr Cordato and Ms Fleming understood that in the discussion Mr Bax requested the invoices which had already been rendered by Cordato Partners to the BGR companies, but had not then been paid. However, Mr Bax thought he was asking for all of Cordato Partners' unbilled work in progress. I think that the differences in recollection are due to the participants in these conversations being at cross purposes. Mr Bax may have been seeking to have all the unrendered accounts provided, whereas Mr Cordato and Ms Fleming understood him to be asking for the accounts that had already been rendered but had not been paid to be printed off again so that payment could be arranged immediately. I do not think that anything in substance turns on this. No doubt Mr Bax was later concerned in light of his understanding of what had transpired in January 2006 that Cordato Partners had rendered 16 invoices and received payment of nearly $135,000 more than what he had arranged to be paid in June 2005. 122 Early in the morning on 8 June 2005 Mr Williams sent Mr Bax a further fax which said that Mr Gulson had totally lost his senses and was not rational in what he was saying. Mr Williams wrote that he felt Mr Gulson was on a path to destroy the Main Camp business, and 'was destroying the credibility of (sic) all staff within the business'. Mr Williams expressed concern that Mr Gulson's behaviour was affecting how the Main Cap business was perceived in the local community and throughout the world through its business partners. He continued: 'If Fred continues on this uncontrolled ego trip he is going to bring down Main Camp through banking credibility and possible foreclosure of the overdraft.' 123 Mr Bax, Mr Cordato and Mr Gulson met on 8 June 2005. Mr Bax emphasised that he could not work with Mr Gulson. That is hardly surprising. Mr Bax had then received Mr Williams' two faxes. Mr Cordato summarized the result of the meeting on 8 June 2005 in an email to both Mr Gulson and Mr Bax. First, he noted that Mr Gulson would be reviewing Mr Gobert's contract, taking legal advice on it and referring back if he wished to take action on the advice. Secondly, Mr Cordato noted that there would be no organizational changes in terms of personnel, duties or work places, other than in respect of Mr Gobert for the time being. And, Mr Cordato said in evidence that at the end of the meeting they all agreed that Food Improvers' consultancy agreement for the provision of Mr Bax's services would continue in place and Mr Bax's functions and responsibilities would be the same as in the past. I am satisfied that this was all agreed at that meeting. 124 However, at 23:57 on the evening of 9 June 2005 Mr Gulson sent a fax to Mr Cordato, Mr Bax, Mr Williams, BGR's accountant (Ms Mirjana Bojanovic) and Ms Wee, a former employee of the group, who was then in Singapore. The fax was dated the next day. It referred to the fruitful discussion that had been held on Wednesday (8 June) concerning the transition of management control within the BGR group. It recorded that Mr Bax would continue to hold the appellation of managing director subject to the terms of his consultancy agreement and Mr Gulson would take the appellation of chairman and executive director in preparation for the earliest succession. It noted that Mr Bax had agreed, as had he, that they would put the group's best interests first and that it was unlikely in his view that the problems which arose on the day of the negotiations of the Biomor contract would occur again. The fax then referred to Mr Bax being asked to provide and, required Mr Gobert to provide, identification of all contacts they had had with persons in a business relationship with the group in the previous week. Mr Gulson referred to an email which had been circulated by Mr Lawson and others showing Mr Gulson as the subject of a 'wanted' poster. (Mr Gulson was understandably quite upset by this unflattering portrayal albeit he did not have any insight into his own role in causing Mr Lawson to indulge in this insulting and undignified behaviour.) Mr Gulson's fax continued by stating that the recipients should reassure customers and others '… that it is business as usual at Main Camp and that the only thing that has happened is that [Mr Bax's] ceasing of involvement is occurring on a faster timetable than he had indicated to us all over the last twelve months'. 125 In the context of the events in which it was written, the fax has an air of unreality, being in places emollient and in others provocative. It was composed and sent without any involvement of Mr Bax or Mr Cordato. The fax conveys the impression that Mr Gulson, who signed it as chairman and executive director, was entitled to make Mr Bax answer to his directions. Mr Gulson had no such authority over Mr Bax. MR GULSON USES HIS CONTROLLING INTEREST TO REMOVE MR BAX 126 Later on 10 June 2005 Mr Gulson had Allens Arthur Robinson, solicitors, personally deliver to Mr Bax a letter terminating Food Improvers' and his consultancy agreement with immediate effect. The letter alleged that there had been intentional disobedience, serious breach of duty and wilful neglect in the discharge of Food Improvers' and Mr Bax's obligations under the consultancy agreement by refusing to participate with Mr Gulson in important negotiations with Petrus and Biomor London the previous week. Also, on that day Allens Arthur Robinson, served Food Improvers with a notice of general meeting of BGR to be held on 1 July 2005. The business of the meeting was to remove Mr Bax as director of BGR and ratify the actions of Mr Gulson as chairman in terminating the employment of Mr Gobert and BGR's consultancy agreement with Food Improvers. 127 Allens Arthur Robinson wrote to Mr Gobert, on Mr Gulson's instructions, that he was to be dismissed under his employment agreement dated 1 July 2004 because of his serious and wilful misconduct, and conduct which, in BGR's reasonable opinion, would detrimentally affect his business 'by you refusing to participate with Mr Gulson in important negotiations with Petrus and Biomor, Israeli incorporated companies, in London last week'. The stated reason was untrue to Mr Gulson's knowledge because he had summarily dismissed Mr Gobert and told him to go home. 128 The instructions to the solicitors do not appear to have been rational, however Mr Gulson may have appeared to those to whom he spoke. And he caused those letters to be sent within hours of his earlier fax referring to 'business as usual'. Nothing had happened in between to warrant such a radical change of mind. In his mentally distressed state Mr Gulson was using, and evincing an intention to continue to use, his powers as the controlling shareholder to exclude Mr Bax from their partnership and management of their joint enterprise. And, Mr Gulson, was using this power to advance his own interests to the detriment of Mr Bax's. 129 Over the ensuing weeks Mr Gulson's behaviour became even more irrational. He had Allens Arthur Robinson write to Mr Bax's solicitors on 22 June 2005 asserting that they had been validly retained by BGR via Mr Gulson and that the instructions given by Mr Gulson, including as to the termination of the consultancy agreement between BGR, Mr Bax and Food Improvers 'were made in consultation with and with the agreement of Mr Cordato'. Two matters flow from that assertion. First, Mr Cordato was not then a director of BGR, although he was a shareholder, so his involvement in the management of the partnership would have been a change made without Mr Bax's involvement. Secondly, Mr Cordato in evidence denied that he had agreed with those steps being taken as at 10 June 2005. I accept Mr Cordato's evidence that he had had no involvement with Mr Gulson's decision or instructions reflected in the three letters dated 10 June 2005 sent by Allens Arthur Robinson. Only later in June 2005, did he decide to side with Mr Gulson. 130 In late June 2005 Mr Bax, Mr Gobert and Mr Lawson decided to set up a new company. They caused Unifect International Pty Limited to be incorporated as an Australian company. Mr Bax's wife, Mr Gobert and Mr Lawson were its directors. MR GULSON HIRES MR McGILVRAY 131 Mr Gulson rang Mr McGilvray on 12 June 2005 and told him that after he had sacked Mr Gobert, Mr Bax had defended Mr Gobert's performance and he asked for Mr Bax's resignation. Mr Gulson enquired about possible replacements for Mr Gobert and Mr McGilvray put himself forward as a consultant. A few days later Mr Gulson offered him a position as Main Camp's sales and marketing executive. They agreed to meet during the Primex show. They agreed Mr McGilvray would continue to run his own business and act as a consultant in an executive capacity for Main Camp. 132 Mr McGilvray was known to Mr Gulson and Mr Cordato to be in competition with Main Camp for the sale of tea tree oil, although on a much smaller scale. He disclosed his customer list and then later, on 8 July 2005 would sign a confidentiality clause in respect of Main Camp's commercially sensitive information as part of his and his company's (A-Oil Pty Ltd) consultancy agreement. Mr McGilvray was allowed by Mr Gulson, with Mr Cordato's knowledge, to retain the right to carry on his own business while he acted as Mr Gobert's replacement. Mr McGilvray did not have Mr Gobert's technical expertise but he had marketing experience. Mr Cordato recognised that Mr McGilvray would be selling tea tree oil to customers in Australia and overseas for two competing vendors: Main Camp and his own company.. 133 Mr McGilvray began work with Main Camp on 4 July 2005. He said that he had offered to transfer his existing business customers to Main Camp if 'we can get Main Camp up and running properly' although the evidence did not reveal the criteria by which this would be addressed. The contract dated 8 July 2005 for his consultancy, through A-Oil, has no such provision. But Mr McGilvray saw this and his own sense of ethics as meeting any potential difficulties with what would otherwise be a conflict of interest and duty. MR GULSON'S MENTAL STATE 134 Mr Williams had found Mr Gulson's behaviour on his visit on 7 June 2005 so intolerable that he wrote a letter of resignation on 10 June 2005. In that letter he referred to the fact that Mr Bax had been able to keep Mr Gulson away from valued staff and the company over the previous 5 years in which Mr Bax had been the CEO. He referred to Mr Gulson's ego as destroying the professional credibility of all the staff and employees. He sent a copy of that letter to Mr Anderson of Elders, the group's financier, as well as to Messrs Bax, Cordato and Gulson. 135 On 15 June 2005 Mrs Gulson went with her husband to see Dr Newman Harris, his treating psychiatrist. Dr Harris described Mr Gulson's mental condition from the time of that consultation in his report of 30 June 2005. He had seen Mr Gulson first in June 2000 and had last seen him in March 2004. On 15 June 2005 Mr Gulson was plainly more elevated than Dr Harris had seen him in the past. Dr Harris wrote: 'He provided an over inclusive, circumstantial account of some chaotic and substantial disruptions which had developed in his business affairs with the breakdown of his relationship of his long time partner, friend and confidant, and it was plain that his behaviour was having an adverse impact upon his relationships and his business.' 136 Mrs Gulson gave Dr Harris a note at that consultation in which she described her husband as aggressive, irrational, manic, inconsiderate, inappropriate, unable to be reasoned with, impulsive and abusive. She said that some day he '… will go over the top and hurt someone'. And she also said he was bullying, overtalking and would 'only [have things] his way'. She recorded that he had been emotionally and verbally abusive and that he could not be reasoned with. She recorded that the family were all walking on eggshells and that Mr Gulson had 'nil communication skills'. There were rules for him and then rules for everyone else. She said he was speeding in the car and threatening people. 137 In the next weeks Mr Gulson continued to manifest symptoms of his illness. Mr Williams, whose evidence I accept, described Mr Gulson's odd appearance and behaviour at the time of the Primex Show in Casino around 16 to 18 June 2005 and his drinking and threatening behaviour towards staff at Main Camp. When Mr Gulson returned to Main Camp on about 22 June 2005 Mr Williams described how he continued to act in a bizarre and threatening manner. 138 In the meantime Dr Harris saw Mr and Mrs Gulson on 20 June 2005. The doctor recorded in his notes incidents involving Mr Gulson's driving in a manner which was irresponsible and highly dangerous. Mrs Gulson referred to her fear he might become violent and the overbearing behaviour he was exhibiting. Mr Gulson refused to be hospitalised even though Dr Harris had raised the possibility of compulsorily detaining him. Dr Harris noted he agreed to go to Main Camp, where, as I have found, his behaviour deteriorated. 139 Throughout Mr Gulson's visits in June 2005 the staff at Main Camp plantation continued to express concern to Mr Williams about being able to cope with him and his behaviour. They also expressed concerns to him about what would happen in the absence of Mr Bax and Mr Gobert. Mr Williams felt concerned about the business. 140 On 23 June 2005 Mr Williams sent a fax to Mr Bax and Mr Cordato noting that Mr Gulson had been acting in a totally irrational and uncontrollable rage and had displayed aggression towards the employees of the company. Mr Williams said he had grave fears for the staff and employees and that Mr Gulson had admitted to him that he had a serious mental problem and was seeking medical help to control the illness. He said that Mr Gulson had guns on the property and feared for the safety of employees at work and the safety of employees and their families who lived on the property and was seriously concerned for the safety of the staff. 141 On 27 June 2005 Mrs Gulson wanted to have Mr Gulson 'scheduled' by Dr Harris (under s 21(1) of the Mental Health Act 1990 (NSW)). That would have had the effect of making him an involuntary patient of a mental hospital. Instead, Mr Gulson agreed to attend the Northside Clinic, a psychiatric hospital, voluntarily. By 28 June, when he was admitted to the Northside Clinic, Dr Harris had written a schedule and alerted the local mental health team. He was moments from faxing the schedule to them for action. He said, with his own emphasis in his letter to the clinic of 30 June: 'It remains my opinion that, other than his preparedness to accept treatment, Fred is plainly detainable under the Mental Health Act in view of his obvious signs of mania and the adverse impact this disorder is having on his affairs and his relationships, both business and personal.' 142 I am of opinion that Mr Cordato also perceived that this was the mental state which Mr Gulson had been exhibiting over the previous few weeks. Mr Cordato knew that Mr Gulson has been admitted to the Northside Clinic when he voted on 1 July 2005. MR CORDATO SUPPORTS MR GULSON 143 Although during June 2005 Mr Cordato was receiving clear warnings about Mr Gulson's mental state and abusive behaviour, he decided to support Mr Gulson in the dispute with Mr Bax. He asserted that this was because he perceived in the days after 10 June 2005, that Mr Bax and Mr Gobert had mismanaged the business. He claimed that when he voted at the BGR meeting on 1 July 2005 in favour of ratifying Mr Gulson's termination of Mr Gobert's services that that was in the group's best interests. This, he said, was because of conversations he had had with Mr McGilvray and he had 'seen a few financial records of the company and I considered that the sales and marketing program wasn't working effectively'. He knew that Mr Gulson had selected that financial information which included mostly sales reports. 144 Mr Cordato said he formed the view that he should vote to ratify Mr Gobert's termination after discussion with Mr McGilvray and his review of the financial material Mr Gulson had selected. Mr Cordato said he considered the sale prices Mr Bax and Mr Gobert were selling the tea tree oil for were the result of a flawed strategy and this justified his vote in relation to Mr Gobert. However, he asserted that he did not know enough about the industry to be able to answer the question of whether people bargained for the price at which a sale of oil occurred. This showed that Mr Cordato allowed himself to be easily persuaded into backing Mr Gulson without any serious ability on his part to analyse what he was being told about commercial issues by Mr McGilvray or Mr Gulson. Mr McGilvray had, and had disclosed, his own conflict of interest and duty. 145 On his evidence Mr Cordato did not even know how prices in the industry were set. Yet he concluded that Mr Bax and Mr Gobert had a flawed strategy while Mr Gulson, whose mental state was evidently very disturbed, had a better one. Mr Cordato knew that Mr Gulson had no rational basis for summarily dismissing Mr Gobert and had given instructions to Allens Arthur Robinson to write to Mr Gobert on 10 June 2005 asserting falsely, that Mr Gobert's sacking by Mr Gulson was justified because Mr Gobert had 'refused to participate with Mr Gulson' in the Biomor negotiations. Indeed, before the letter was sent, Mr Chilton of Allens Arthur Robinson had spoken with Mr Cordato and told him the reasons for the resolutions which were in the letters of 10 June 2005. Mr Cordato said he was 'a bit taken aback' and, in relation to Mr Bax's position '… a little bit lost for words when I was given the reasons by Mr Chilton'. Even though he knew Mr Gulson had told him of his sacking Mr Gobert in London, he did not draw this to Mr Chilton's attention whom he knew was acting on instructions that Mr Gobert should have continued the trip. Mr Cordato gave this evidence. 'Did you discuss whether in light of Mr Gulson's then psychiatric condition it was advisable to continue with the meeting or suggest adjourning it? --- I didn't raise it. Why not? --- The Triad Health Products group of companies is a - is a family company in which Mr Gulson and his wife are joint directors and I believe they're joint shareholders. His wife had given the proxy and it's -well, as far as I was concerned, her instructions were as - I could see it was - the whole meeting was regularised because she was representing and instructing on behalf of the Triad Health Products group of companies. ... So and you had seen it as being in the best interests of the company, at least on 8 June, for Mr Bax and Mr Gulson to continue working together, albeit that that had not succeeded at that meeting. Is that right? --- Yes, I saw that is in the best interests. And that the events of 10 June which had been a little unexpected, from your point of view, of the Allens' letters coming to advise of this meeting being called. Is that right? --- Yes, that's correct. Did you think that there was something about the way Mr Gulson was behaving which required his admission to treatment that might have suggested that the time was not ripe then to take decisive action as that meeting of 1 July was taking place? --- Now, I guess your Honour's assuming that, you know, his condition was "disturbed", in your words, throughout but he wasn't, he was - there - he was rational a lot of the time but disturbed at other times. I - I saw it but there was a parting of the ways, that Fred's wife was well capable of making decisions and she had decided to go ahead with the meeting and that was that and being the majority shareholder, one has to take a little bit of heed of what the majority shareholder thinks and that's what I did. So you took heed of what you thought the majority shareholder thought? --- What I knew the majority shareholder thought. Yes? --- I didn't see it as my place to - to stamp any authority, I mean 8 per cent is just a trivial amount, a trivial share-holding and it doesn't even have a blocking interest let alone a decisive interest.' (emphasis added) 146 Mr Cordato was then not aware of what, if any role Mrs Gulson had played in the management of the BGR group. He assumed, wrongly, that she was a director and shareholder of Triad on 1 July 2005, when only Mr Gulson was. As Mr Cordato said, he took heed of what the majority shareholder thought. I am of opinion that Mr Cordato sided with Mr Gulson and voted in favour of the resolutions be proposed because he saw it as in his own financial interests to do so. THE BGR MEETING OF 1 JULY 2005 147 Mr Bax, as Food Improvers' proxy, attended the general meeting of BGR on 1 July 2005. Mr Chilton had Triad's proxy. Mr Cordato was elected as chair. The resolutions were carried over Food Improvers' dissent. Mr Bax then resigned as a director of all the BGR group companies. 148 The defendants argued that Mr Bax could not complain of being excluded from the management of BGR because he voluntarily resigned from all the other directorships of BGR's subsidiaries. This argument does not recognise that, first, Mr Bax had been removed as a director of BGR in which Food Improvers had a shareholding. Secondly, the meeting had just confirmed the termination of Food Improvers' consultancy agreement, this denying Mr Bax remuneration for any work he may do. The express reasons for the resolutions were false. Thirdly, he was susceptible of being removed immediately from any of those directorships at Mr Gulson's behest. Fourthly, once he was not on the board of the parent company, BGR, Mr Bax's ability to exercise the powers of a partner or executive in the business of BGR as parent of the group had been removed. His powers as a director of these companies were limited. He had, in that position, no authority over staff or to deal with the group's creditors, customers or financiers as he previously had done when managing director or chief executive. Fifthly, Mr Gobert was not to be employed, contrary to Mr Bax's wishes, and had no consultancy agreement in place. Lastly, Mr Gulson had made plain that he would use his voting power to impose his will. 149 Moreover, Mr Cordato had sided with Mr Gulson and Mr Gulson's previous irrational and mentally disturbed conduct was likely to continue. Having lost his position as a director of BGR and Mr Gulson's recognition of him as an equal partner in the business, together with his contractual right (through Food Improvers' consultancy) to income, Mr Bax had no reason to remain as director of the subsidiaries. There he would have had all the responsibilities and potential liabilities, including for insolvent trading, and only formal powers under the Corporations Act 2001 (Cth), to conduct the business of subsidiaries. Mr Gulson and Mr Cordato had demonstrated by no later than the meeting of 1 July 2005 that Mr Bax had lost his position as an equal partner. 150 In those circumstances, the basis on which Mr Bax and Mr Gulson conducted BGR's affairs after Mr Reece's departure had been radically changed. Mr Bax had been stripped of his position as a partner in BGR itself and chief executive of the BGR group. His continued participation in the group's, but not BGR's affairs, in an unremunerated position held at Mr Gulson's pleasure would have been a very diminished role. In those circumstances I do not consider it appropriate to draw any adverse inference against Mr Bax for resigning the other directorships after the meeting had carried the resolutions proposed by Mr Gulson. As Mr Gulson said: 'MR LEVER: You made the decision or you acted on the decision to instruct Allens to write the three letters after your meeting with Cordato and Bax on 8 June 2005; you agree with that? --- That's correct. That was a meeting at which the three of you agreed, and in particular you and John Bax agreed, that there would be no organisational changes within BGR? --- And that was before certain correspondence was drawn to my attention. What correspondence would that be? --- First of all a letter from Haywards to me, copies the staff up at the plantation had sent down the reward whatever, and I got through various other members of staff plaintive letters of what a bugger Fred Gulson is. I thought this is a planned smear campaign. I thought a number of the letters were puerile, I thought the reward poster was - and to be sent to all staff, was most inappropriate. It had been sent to me, that's fine. So it was fairly destructive and I thought to myself, this is going to go on and on and on and I'm not going to be a party to engaging in such school boy type activities. And I was also concerned that we had our plantation manager writing letters which were singularly unhelpful and overstepping the line and I could just see this going on and on and on so I thought the best way to do this is to take John out of the operational arm by BGR and leave him as a director for all the other companies, including the companies that had the assets, but that's how I left it. (emphasis added) He explained what he meant: HIS HONOUR: Mr Gulson, I don't understand how you could have done that if you were going to leave Mr Bax as a director, as you as you intended, of all the companies with assets, how that would give effect to what you were saying to me you wanted to do? --- Well, it would leave him - you know, those land holding company and whatever, there wouldn't be that day to day involvement that he would have as a consultant but he would still have equal, you know, as a director, one of two directors, control over the assets, the trading assets and the land, you know, $9 million plus, so it was only removing him from his consultancy agreement, formalising that and removing him as a director of one of 12 companies, being the holding company, with all the other companies involved. Now, he chose not to be involved. I just don't understand why removing him as a director of the holding company was necessary if you were leaving him as director of the other companies? --- Simply because I wanted to deal with the consultancy agreement and formalise that properly and then make sure, you know, that he's got no further - whatever activities he wanted to engage in to destabilise the company, that he was doing that not on BGRs premises, but I didn't have a problem with him being a director of all of the remaining companies, including the ones with the assets, because he could deal with that arm's length with somebody like Tony Cordato or somebody else present, but not on a day to day. Not with this correspondence and things coming through.' (emphasis added) 151 That evidence made clear that Mr Gulson intended to remove Mr Bax as a partner but to keep the benefit and control of their joint enterprise in his effective power. MR GULSON'S MEDICAL HISTORY 152 In his original affidavit, Mr Gulson gave a very truncated version of his medical condition and admission to the Caritas Centre. That affidavit was sworn in the proceedings to resist applications made by the plaintiffs to Hely J for interlocutory relief. Mr Gulson said that on 3 July 2005 he '… checked into the Caritas Centre. At that time I was under extreme stress and on recommendation it was decided that it was in my best interests to rest and receive dedicated medical attention. My condition was, and I wish it remained [sic], a private matter'. 153 He also said that his stay at the Caritas Centre 'was welcome and beneficial' and that on 12 July 2005 when his family returned from an overseas trip he left the Centre and had resumed his ordinary activities. 154 On 2 July 2005 Mr Gulson was scheduled under s 21 of the Mental Health Act 1990 (NSW) i.e. made an involuntary patient. That was because he had disappeared from the Northside Clinic and went to stay at a hotel in the city. The police came to the hotel early in the morning and he was taken away to the Caritas Centre. It was false to say he 'checked into' the Caritas Centre, which conveyed volition on his part. 155 On 4 July 2005, doctors at the Caritas Centre recorded a history in which Mr Gulson told them that recently he 'has had to sack employees that were undermining him in front of others. This was a spontaneous decision'. (This was obviously reference to Mr Bax and Mr Gobert) It was also recorded that he thought his medication was working. 156 At a discharge interview on 12 July 2005 with his family and his treating doctors, Mr Gulson said he believed that he was at a turning point and felt optimistic about things. Dr Richardson advised him and the family to take a break from business for a couple of months and that he should not travel or be involved in anything complex, including business dealings for a few months. Despite that advice, Mr Gulson went straight back to the affairs of BGR. Moreover that advice was not revealed in his affidavit of 20 July 2005 which portrayed Mr Gulson as fit for the work he had resumed. 157 After I ruled on 10 July 2006 (see The Food Improvers Pty Ltd v BGR Corporation Pty Ltd [2006] FCA 1238), that the plaintiffs should be able to have access to documents produced on subpoenas they had issued seeking information about Mr Gulson's treatment by Dr Harris and the Caritas Centre, Mr Gulson swore an affidavit on 30 July 2006. He said: 'I recall feeling under extreme stress in about June 2005 as a result of Mr Bax abdicating his responsibilities to the BGR group. I seek to refer to paragraph 18 of my affidavit sworn 20 July 2005 to correct and amplify some of the matters referred to therein. I consulted Dr Newman Harris, psychiatrist on or about 15 June 2005. I voluntarily admitted myself into the Northside Clinic at Greenwich where I was seen by Dr Newman Harris on 28 June 2005. I was subsequently admitted to Caritas on 2 July 2005 and discharged from there on 12 July 2005'. (30/7/06 par 23) 158 Dr Harris had told Mr Gulson on 28 June 2005 that he had to go to a hospital such as the Northside Clinic. Mr Gulson said that he did not recall whether Dr Harris told him that if he did not check himself in voluntarily, he would schedule him. Mr Gulson also recalled that his wife had told him that if he did not check himself into an institution for his mental care she would leave him taking their children with her. He regarded that as a strong inducement to admit himself on 28 June 2005. He also agreed Dr Harris may have suggested to Mr Gulson that he be admitted to hospital on 15 or 20 June 2005. Given his disturbed mental state at the time, including his lack of sleep, Mr Gulson's memory of that time is likely to have been affected, as he accepted. 159 While the matter may have been of some considerable personal embarrassment and distressing to raise both in affidavits and in open court, Mr Gulson was fully aware of the importance of being honest in his evidence. At one stage earlier in his career he had been admitted to practice as a lawyer. He also knew that it was important to tell the truth in his affidavit of 20 July 2005 because it would be used before Hely J to resist interlocutory relief. Notwithstanding this, Mr Gulson provided an account of his medical treatment which was incomplete. While he may have been suffering from effects of his condition on 20 July 2005 so that one could understand his lack of candour in the affidavit he swore that day, on 30 July 2006, Mr Gulson was fully aware of the issue in the proceedings that was raised concerning his mental health and his consequent behaviour in May 2005 and following. He said that he was seeking to 'correct and amplify some of the matters referred to in his affidavit of 20 July 2005 on this issue' but the economy of his revelation in both affidavits hid the nature and extent of his real condition. In July 2005, Mr Gulson may not have had sufficient insight into his own condition to appreciate that, or the extent to which, manifestations of his condition had affected him and his relations with others including Mr Bax over the preceding two moths. But by 30 July 2006 he gave a carefully crafted 'correction' and 'amplification' which was revealing for its lack of candour. 160 The account of 30 July 2006 on close reading reveals that he used the word 'voluntary' in relation to the admission to the Northside Clinic, but simply said that he was 'admitted' to Caritas. Absent background knowledge of the circumstances of his admission to the Caritas Centre, the omission of the word 'voluntary' in the account is not particularly amplificatory or corrective especially since the word 'admitted' was used. The significance of the fact that Mr Gulson was 'scheduled' under s 21 of the Mental Health Act 1990 (NSW) is that it reflected the seriousness of his mental condition and his own inability to be relied on to remain an ordinary member of the community and participate in business matters while suffering from his mental disturbance. Indeed, Mr Gulson had consulted, while in the Caritas centre with Mr Cordato with a view to taking proceedings to secure his release. In cross-examination Mr Gulson was evasive about his involuntary admission to the Caritas Centre. He said he had discussed the phrasing of his earlier (20 July 2005) affidavit on this topic with his then solicitors, at Allens Arthur Robinson, and believed what it said was truthful and accurate but then made a claim for privilege which was not challenged. I have difficulty accepting this evidence. However, Mr Gulson was clearly mentally sick at the time and I find that his evidence was unreliable on this point, rather than deliberately dishonest. 161 Mr Gulson's conduct in relation to the use of his evidence in his affidavits as to his own mental condition and his subsequent attempt to correct and amplify his earlier evidence, reveal that he was conscious of the impact that this may have on the assessment of his contemporaneous conduct and credibility. Mr Gulson's lack of candour about this, although perfectly understandable in human terms because of its embarrassment to him, detracts from the reliability of his evidence. It suited him to give the account he did in his affidavit when resisting claims for interlocutory relief based on his behaviour in mid 2005. I was not impressed by his veracity in this regard. SALE OF MAIN CAMP 162 Mr Bax, Mr Cordato and Mr Gulson met on 12 September 2005 with Mr McGrath of Elders Real Estate. They decided to appoint Mr McGrath as the agent for sale of Main Camp. There had been some discussions shortly before this between the parties. Mr Bax had been providing assistance to the Main Camp group by restructuring some of its financial accounts for the purposes of providing a financial information package to potential tenderers following assurances by Mr Gulson at a meeting at Main Camp plantation on 31 August 2005 that he would be consulted in the sale process. Those assurances were repeated at the meeting on 12 September 2005. 163 After Mr McGrath left, Mr Gulson said that he wanted Mr Bax to come back as the director. Mr Bax declined the request and Mr Cordato said that he could understand Mr Bax's position and did not see the need to press ahead with Mr Gulson's proposal. Mr Gulson did not mention anything about the reinstatement of Food Improver's consultancy agreement if Mr Bax did come back as a director of BGR. Nor did he suggest that Mr Bax would resume his previous position as managing director. 164 Mr Gulson acknowledged in evidence that Mr Bax had provided most helpful financial projections and figures in the process of arranging the sale of Main Camp plantation. No remuneration was given to Mr Bax for that work. Mr Gulson said that that was because Mr Bax did not ask to be paid. He did not offer to reinstate Food Improvers' consultancy agreement or to pay fees to Mr Bax should he return as a director. Mr Gulson's explanation was that if Mr Bax came back as a director it would be 'obvious' that the consultancy agreement would be reinstated. Mr Gulson asserted that it was common sense that that was what he meant. He asserted that he would not have said to Mr Bax 'Come back as a director, work on the sale and get nothing.' 165 I do not accept Mr Gulson's evidence that the position was as he asserted it. First, as he said, he did not pay or offer to pay Mr Bax for the work he did on the sale. Rather he expected Mr Bax to ask for payment. Secondly, the offer of a directorship of BGR which Mr Gulson made to Mr Bax was not a return to the position before June 2005 in which Mr Bax would hold office as managing director and have a consultancy agreement. I am of opinion that Mr Bax acted reasonably in rejecting the offer because it would have left him in a much reduced position compared to that which he had enjoyed as an equal partner prior to June 2005. 166 During the meeting of 12 September Mr Cordato opposed paying Triad and Food Improvers any consultancy fees. He became quite agitated and said that he would not agree to any consultancy fees being paid to them. Mr Bax noted the then draft deed of agreement for settlement of the dispute provided that both Mr Gulson and he, through their respective companies, were to be paid the same amount for consultancy fees plus interest and that Triad would receive more interest than Food Improvers. He noted that after payment of those fees, the balance was to be distributed by way of fully franked dividends. Mr Cordato threw his pen down on the table and turned aggressively to Mr Bax saying that he did not care, he was not approving BGR paying any consulting fees or interest to Mr Bax. He said that those amounts were not in the management accounts of BGR or the accounts prepared by KPMG. Mr Bax replied that the amounts were not in the accounts because accruing the fees would have made the accounts far worse than they were and it would mean that both Mr Gulson's and his companies would have had to take up the accrued income which would be treated as assessable even though they had not received any funds. He said that the accounts prepared by KPMG were special purpose accounts. They were prepared to support the BGR group's tax return based on the management accounts and had not been altered. Accordingly the special purpose accounts did not contain all the disclosures that would be made in statutory accounts which was why they were called 'special purpose' accounts. 167 Mr Cordato again threw his pen down on the table and said that if the consulting fees were not in the accounts then he had been misled as a shareholder. Mr Bax replied that Mr Cordato knew very well the difficult trading conditions that the group had faced. He said that Mr Cordato had drafted the consultancy agreements and that BGR could not meet his obligations to pay the fees. Mr Cordato reiterated that he was not agreeing to any payments being made to Mr Bax and that was it. He said that any distributions were to be made according to the shareholdings. Mr Gulson remained silent throughout this exchange and the meeting ended. 168 Mr Gulson, in his account of this conversation, asserted that Mr Cordato had said with respect to the consultancy fees: 'John all this is news to me, the first time this issue pops up is in your solicitor's draft. There is no mention of these fees anywhere in the group's books of account.' 169 When confronted with the fact that Mr Bax had claimed over $1 million in consultancy fees in his affidavit of 11 July 2005, some two months before this meeting, Mr Gulson asserted that he was not aware of that fact. I do not accept Mr Gulson's evidence about this. He must have been fully aware that Mr Bax was claiming over a million dollars in consultancy fees once any information about the proceedings had been given to him following his discharge from hospital on 12 July 2005. Besides having Mr Cordato as a source of information he had had Allens Arthur Robinson act for Triad and BGR in the proceedings and then Kemp Strang. Moreover, negotiations for settlement of the proceedings were taking place. It is inconceivable that Mr Gulson had no knowledge of Mr Bax's claim for consultancy fees or their quantum. Moreover, Mr Cordato, in his evidence denied saying at the 12 September meeting that the claim was all news to him and that the first time the issue popped up was in the solicitor's drafts. As he said 'I am certain I didn't say that. I knew all about the other fees.' THE DEVELOPMENT OF OPTION B 170 After the meeting of 12 September 2005, Mr Bax contacted Mr Lombardo at KPMG. Mr Bax had prepared two scenarios, which came to be called options A and B, for the distribution of the proceeds of sale among the shareholders of BGR and faxed these to Mr Lombardo on 20 September 2005. Option A contemplated that each of Triad and Food Improvers would be paid consultancy fees totalling $1,040,849 together with interest on those fees of $276,001. Option B provided for the payment to Food Improvers of $500,000 for consultancy fees including interest and then for the distribution of the balance of the proceeds of sale of Main Camp without any accounting for consultancy fees for Triad or the balance due to Food Improvers. After he had spoken to Mr Gulson about the two options, Mr Bax also sent a copy of this fax to him. A meeting was arranged at KPMG for 22 September 2005. Mr Bax told Mr Gulson that the preferred scenario, following discussions with Mr Lombardo, was option B. THE 22 SEPTEMBER 2005 MEETING 171 Mr Bax, Mr Cordato, Mr Gulson, Mr Lombardo and one of Mr Lombardo's assistants met at KPMG's offices at about 10:00 am on 22 September 2005. I have already described part of this meeting. During the course of the meeting, Mr Bax explained that option B provided that his consultancy fees would be fixed at $500,000. Mr Gulson nodded his head in agreement. Mr Bax explained that the way option B worked was that the amount of consultancy fees and interest ($500,000) would be paid to Food Improvers. The balance of the sale proceeds would then be distributed by way of fully franked dividends to each of the shareholders in accordance with its shareholding proportion. On receipt of those fully franked dividends, each shareholder would repay its shareholder's loan account (this would restore a very substantial amount of cash to BGR, which would then be available for distribution). Mr Bax explained that BGR would then pay a further dividend from the cash it then had. Each of options A and B showed the steps involved in this methodology based on an assumption that the net proceeds of the sale of Main Camp would be about $6.345 million. 172 In both options, all the dividends were fully franked because BGR had sufficient franking credits to enable that to occur. However, in option A, each of Triad and Food Improvers had to pay 30% company tax on the amounts of consultancy fees and interest which they were to receive, so that the net sum ultimately distributed to each, after tax, would be about $3.6 million (or 65% of the assumed amount available for distribution of $6.345 million) for Triad, $1.4 million (or 25%) for Food Improvers and $515,000 (or 9%) for Cordato Partners Services. 173 In option B the figures were different. This was because Triad would receive the whole of its proceeds as dividends, and only Food Improvers would receive $500,000 in respective of consultancy fees, Triad, in option B, would receive about $4.1 million (or 67%), Food Improvers would receive $1.35 million (or 22%) and Cordato would receive about $700,000 (or 11%). 174 Mr Bax pointed out that option B provided for total cash paid to each of the three shareholders in BGR being more in than option A. Mr Gulson asked how Mr Bax arrived at the $6.345 million dollars as the net proceeds of sale. Mr Bax said that he had estimated the figures based on the sale price of $9 million plus debtors, in the value of cattle and the sale of stock, less the liabilities. He said that the figures were only estimates and that the actual figures would be used when they were available. He then said that the $500,000 (for Food Improver's consultancy fee) was fixed and that he would be happy with that amount. Mr Cordato expressed agreement with option B as did Mr Gulson. Mr Gulson's contemporaneous note of that meeting contained the notation 'option B works'. 175 Thereafter, the discussion turned to the mechanics of how the sale proceeds could be dealt with in the most tax effective way. As noted above, Mr Lombardo urged Mr Bax against receiving any monies by way of consultancy fees, since they would be taxable but Mr Bax resisted that suggestion. 176 In giving their evidence of Mr Bax's explanation during the meeting of 22 September 2005 of how option B worked, each of Mr Cordato and Mr Gulson, in the witness box, did not appear to understand the commercially simple rationale of the document. Each attempted to reconstruct what Mr Bax had said but in a way which showed that he had no real memory of his explanation and each had no accounting understanding of how option B worked. Nonetheless, I am satisfied, from Mr Lombardo's and Mr Bax's evidence that both Mr Cordato and Mr Gulson fully understood, at the meeting of 22 September 2005, that option B provided that Food Improvers be paid $500,000 in respect of consulting fees as a compromise before any distribution of profits, repayment of shareholders loans and further distributions would be made, and that each agreed that the method would be used. 177 In final submissions the defendants asserted that the method of distribution made on 23 February 2006 had been agreed prior to the meeting with Mr Lombardo. They asserted that Mr Bax, Mr Cordato and Mr Gulson met shortly in KPMG's foyer before going up to see Mr Lombardo. Mr Gulson made no mention of this earlier meeting in his first affidavit account of meeting with Mr Lombardo sworn on 16 March 2006. In his second account sworn on 4 May 2006 he said nothing to indicate that the $500,000 used in option B would not be paid; to the contrary his account was that Mr Bax said he wanted to receive his part of the distribution using that methodology. 178 Mr Gulson denied Mr Lombardo's account of the meeting in his affidavit sworn on 11 September 2006. In oral evidence he referred to a meeting in KPMG's foyer in which Mr Bax said he wanted to take the $500,000 in option B 'out of my share of the proceeds'. In cross-examination he asserted that Mr Bax said the $500,000 was to come out of his pro rata share. Mr Cordato's affidavit of 8 May 2006 makes no mention of a meeting in KPMG's foyer before seeing Mr Lombardo but reaffirms that he $500,000 in option B was part of the methodology proposed by Mr Bax for distribution. Mr Bax denied any discussion occurred in the foyer. 179 I accept the evidence of Mr Bax and Mr Lombardo that Mr Bax explained in the meeting with Mr Lombardo that he wanted $500,000 paid in respect of consultancy fees under option B before the balance of the sale proceeds was distributed and Mr Cordato and Mr Gulson did not object to that. This account is supported by the negotiations on the draft agreement and the repeated assertions by Cordato Partners in later correspondence up to January 2006 that the distribution would be in accordance with Option B. 180 I do not accept the evidence of Mr Cordato and Mr Gulson that any qualification was made before, at or after the meeting with Mr Lombardo as to how option B would operate. I find that at the time Mr Cordato and Mr Gulson knew that option B necessarily operated by paying the $500,000 to Food Improvers before the balance of the net proceeds of the sale of Main Camp was distributed according to shareholding proportions. WAS THERE A LEGALLY BINDING AGREEMENT TO DISTRIBUTE IN ACCORDANCE WITH OPTION B 181 Oddly, each party pleaded that there was a binding agreement to distribute in accordance with option B, though with different results. 182 On 7 October 2005 the plaintiffs' solicitors, sent Kemp Strang and Cordato Partners a further draft deed of agreement which incorporated the distribution of the proceeds of sale, when received, in accordance with option B. In the draft deed, there was an express term that consultancy fees and interest due to Food Improvers and Mr Bax of $500,000 plus GST from July 2000 to the date of the receipt of the proceeds would be paid out of the proceeds of sale (cl 4(a)(viii)). There was also a clause providing for a release from any further claim for consultancy fees by Food Improvers and Mr Bax upon payment of that $500,000 plus GST (cl 4(c)). Option B was included as a Schedule as the contractual example of how payments contemplated by the deed were to be made (cl 4(f); Schedule 3). Neither Mr Cordato nor Mr Gulson attended to responding to Haywards draft deed for some time. 183 On 17 November 2005 Cordato Partners replied on their own behalf and on behalf of Mr Cordato personally with suggested amendments. However Cordato Partners charged BGR for writing the letter and I am satisfied that the letter was written on behalf of all of the defendants. In any event, the letter extensively reviewed the provisions of the draft deed, but did not comment on any of the provisions relating to the $500,000 consultancy fee payment, other than to renumber the schedule in which option B appeared. On 23 November 2005 Haywards responded and attached a marked up draft deed which incorporated many of the changes, leaving unchanged the consultancy fee provisions to which I have referred. MAIN CAMP SALE - DECEMBER 2005 184 On 12 December 2005 a contract of sale was entered into for Main Camp. The price was $9 million. Mr Bax's solicitors sought details from Cordato Partners (who by then acted for all the defendants) of the sale the next day, and again on 5 January 2006. None were provided. He had not been consulted on the terms of the sale. 185 Haywards on 5 January 2006 sought details of what the distribution of the proceeds would be from Cordato Partners. Cordato Partners responded the next day saying that BGR proposed to make a distribution 'along the lines set out in schedule 3 of the draft deed of agreement. Although not all terms of the deed agreement have been agreed, there is no dispute regarding schedule 3, which we note was prepared by your client.' They referred to the fact that KPMG would be consulted in the next week as to the methodology for the distribution. Schedule 3 was, of course, option B. However, Haywards, on 9 January 2006 attached a copy of option B to their letter and asked for an express confirmation that it was that method of distribution to which Cordato Partners were referring. On 11 January 2006, Cordato Partners responded saying that there were no longer any settlement discussions on foot and that BGR was proceeding with the sale of Main Camp in accordance with the contract. They continued: 'We reiterate the advices in our letter of 6 January 2006 as to the distribution of the proceeds of sale. In this respect we confirm that the schedule to which we refer in our letter of 6 January 2006 is the schedule you attach to your letter of 9 January 2006.' 186 On 31 January 2006 Cordato Partners advised Haywards that completion of the sale had taken place on 23 January 2006, except for an assignment of plant and equipment which was expected to occur in the next week. They said that BGR was awaiting advice from KPMG in relation to the level of franking credits available before a distribution was made of the sale proceeds. It was intended, Cordato Partners said, that the distribution would be made as a dividend on a fully franked basis subject to advice that there were sufficient franking credits available. The letter continued: 'Furthermore, as a distribution by way of dividend will constitute income, will your client continue to require that part of your client's distribution be made as an interest payment?' 187 Option B referred to an interest payment in respect of part of the consultancy fee amount of $500,000. The reference to an interest payment in the letter could only be construed as a reference to option B. Haywards responded on 1 February 2006 confirming that they understood the proposal was to distribute funds in accordance with option B and invited the payment of the consultancy fees and interest of $500,000 forthwith. 188 Next, on 23 February 2006 without any consultation, BGR, under Mr Gulson's hand, wrote to Food Improvers advising that an interim dividend of $3,500,000 had been declared and was payable as at 22 February 2006. Food Improver's share was $423,841.20 cash after repayment of its shareholder's loan account of $1,483,541. A distribution schedule was attached. Food Improvers was credited with franking credits of $817,449.51. The distribution schedule provided that Triad would be credited with a cash payment of about $2.56 million, after repayment of its loan account of $2.8 million, and Cordato Partners Services would be credited with a dividend of $510,747 after repayment of its loan account of $125,067. This was, clearly, radically different to what had been proposed in option B. 189 Mr Gulson asserted that he had not taken any interest in the details of the draft settlement deeds and had never read the provisions relating to the payment of a consultancy fee to Food Improvers, and despite the fact that in early October 2005, when Haywards circulated the draft deed incorporating option B, Kemp Strang were acting as BGR's solicitors, he made no enquiries about it. I do not believe Mr Gulson. He attended the meeting with Mr Lombardo, and had discussions with Mr Bax. I am of opinion that it is highly unlikely that Mr Gulson was as disinterested as he sought to portray in his evidence. Rather, he was conscious in giving evidence that the distribution actually made on 22 February 2006 was very different from what he had represented would occur. He agreed that he would have read at least one of the draft deeds that passed between the solicitors during the period following 7 October, including the provisions of cl 4. He said that he would not have paid much attention to what happened in the deed. Given that on 3 November 2005 Mr Gulson had written personally on BGR's behalf to Haywards saying that he was considering the draft deed which the shareholders had discussed on several occasions, I am not prepared to believe his assertions that he was not aware of the contents of the draft deeds relating to the payment of consultancy fees. 190 Mr Gulson asserted that his letter on 3 November 2005 was 'what one does in these sort of situations is you need to buy time.' He then said that he had had discussions with Mr Bax about settlement and knew that the draft deed needed further work, but asserted that 'that was far as it went'. When asked how he knew that the draft deed needed further work, he said that Mr Cordato had advised him. But he then said of the assertion in the letter of 3 November 2005 that the deed had been discussed on several occasions: 'I have got to say I was stretching it a bit.' By which he meant, so he said, 'It doesn't mean telling an untruth. It means being a little bit more generous … with the facts'. 191 I formed the view that he was being untruthful as to his knowledge of the draft deed and its contents and was seeking to avoid a finding that he had indicated agreement with option B. If what he wrote to Haywards on 3 November was 'stretching it a bit' then that in itself reflects badly on Mr Gulson's credibility and honesty in any event. However, I am not satisfied that he was being untruthful in the letter, as opposed to in the witness box. The course of the correspondence between the solicitors in the period between October 2005 and January 2006 satisfies me that Mr Gulson was fully aware of and, at that stage, had expressed his agreement to a distribution in which $500,000 in respect of consultancy fees and interest would be paid first to Food Improvers before the balance of the proceeds, after payment of external creditors, would be distributed to the shareholders. PLEADED AGREEMENTS CONCERNING OPTION B 192 Food Improvers' and Mr Bax pleaded that in consideration of the plaintiffs not making an application to the Court to have the sale proceeds paid into Court or similar interlocutory relief, the defendants agreed they would distribute the sale proceeds in accordance with option B. 193 In their defence of 6 March 2006, prepared by Mr Cordato, all the defendants, except Cordato Partners Services, asserted that they had entered into an agreement as to the distribution of the proceeds of sale of Main Camp, after payment of creditors and satisfaction of all financial agreements secured by guarantee and that that agreement had been carried out by the distribution that had been made on 22 February 2006. On 8 March 2006 Haywards sought particulars of that agreement. On 16 March 2006 Cordato Partners referred to the correspondence of 6, 9 and 11 January 2006 and option B as constituting the written part of the agreement. It was then asserted that no amount had been agreed to be paid by way of consultancy fees. 194 The further amended defences filed later assert that an agreement had been reached for distribution to be made to the shareholders of BGR from the proceeds of Main Camp station 'along these lines'. It was then asserted that the 'lines' were that the external creditors would be satisfied, an amount would be available for distribution to be paid in accordance with shareholding entitlement after repayment of loan accounts and using tax advice to find the most tax effective means. 195 For the reasons that I have given, I am of opinion that the negotiations culminating in the letter of 11 January 2006 all proceeded upon the basis that the method of distribution would be in accordance with option B, and that that included a payment, before any dividend, of $500,000 to Food Improvers by way of consultancy fees and interest thereon. The defendants' alleged contract is untenable because it, first, ignores the correspondence adopting option B and, secondly, asserts that option B was 'agreed' but then spells out an 'agreement' which does not reflect option B. No consideration for Food Improvers giving up the $500,000 or its other rights to consultancy fees is pleaded to support that contract. There is no evidence that the plaintiffs knew of, let alone, agreed to the terms which the defendants plead as a contract. 196 I am also of opinion that the correspondence on which the plaintiffs rely does not give rise to a legally binding agreement. Rather, Haywards sought in their letter of 5 January 2006 an identification of BGR's intentions as to the method of distribution failing which they would take steps to protect Food Improvers' interests. Cordato Partners' response of 6 January set out those intentions, which were to proceed with the distribution in accordance with option B. On 9 January 2006 Haywards responded asking what the defendants' position was with respect to execution of the draft Deed and seeking confirmation that the distribution that was proposed would be in accordance with option B. The response of 11 January 2006 from Cordato Partners indicated, clearly, that settlement negotiations were no longer on foot but that option B was the intended method of distribution. 197 I am not satisfied that this correspondence can be read as giving rise to a legally enforceable contract to distribute in accordance with option B. Rather, Haywards sought and received an indication of the intention which the defendants had for distribution. At the time the January letters were written, the intention of the defendants was to distribute in accordance with option B. But I do not consider that these letters were anything more than representations of an intention, as opposed to a promise, to distribute in accordance with the intention. And, I am of opinion that Haywards' letter of 1 February 2006 confirms that the preceding correspondence was not understood as giving rise to a contract. In that letter they say: 'We understand that you propose to distribute fund in accordance with the example distribution suggested by our clients. Whilst reserving their rights with respect to those matters pleaded in the present Federal Court proceedings, and notwithstanding the absence of a concluded agreement between the parties, our clients are content for the distribution to be made in accordance with the example distribution at this stage.' 198 This shows that reading of the correspondence which I have concluded to be appropriate was that understood by the plaintiffs' solicitors at the time. The fact that in their letter of 11 January 2006, Cordato Partners stated that settlement negotiations were no longer on foot, indicated that there had been no concluded agreement beforehand and whatever consensus had been reached on option B, it was not a legally binding consensus. DEFENDANTS' CONDUCT AFTER JUNE 2005 TRIAD'S CONSULTANCY FEES 199 After the meeting on 1 July 2005 Mr Bax was effectively excluded from any management functions in BGR. Mr Bax remained personally liable on some guarantees he had given to creditors of the group. Mr Gulson assumed sole executive control. He increased the amount which Triad was paid under the consultancy agreements to the sum of $20,000 per month commencing in September 2005, following a conversation between Mr Gulson and Mr Cordato in which Mr Gulson asked for the increase and Mr Cordato agreed. Triad continued to draw its monthly fee following completion of the sale of Main Camp plantation. 200 Mr Gulson asserted that the work he undertook justified the increase. He said he was working full time, at times it was very stressful and that he was doing at least the work of two people. He created a document which purported to set out an itemised description, month by month of the work which he claimed to have done. 201 The document he prepared covered what he said was the work undertaken between June 2005 and 5 April 2006. For June 2005 a page of activities was listed. These included attending Allens Arthur Robinsons, a two day attendance at Main Camp with Mr McGilvray and Mr Williams on a proposed marketing plan designed specifically to lift the per kilo selling price of tea-tree oil (about which neither Mr McGilvray or Mr Williams gave evidence). He also included an item 'attending to daily statutory filings'. When his attention was drawn to that in cross-examination, simply responded 'Yeah yeah, that's a nonsense; that's wrong, it is and shouldn't have been there.' He then suggested that the entry was to be read as attending to statutory filings. When asked what that involved he said that this was material 'inputted by a computer, check it off, check that it's accurate and press the button'. He was challenged that he did not do that and responded 'Yes I did, and before I could use a computer I had our accountant check it off.' The statutory filings which were made by members of the group during the period were the subject of a Notice to Produce. This became an exhibit in the proceedings (Exhibit N) and consisted of over fifty business activity statements and instalment activity statements prepared for various companies within the group by the group's accountant, Ms Bojanovic. All but one were signed by Ms Bojanovic, the exception being a business activity statement of BGR signed by Mr Gulson on 13 December 2005. The statements covered the period between July 2005 and October 2006. I am not satisfied that Mr Gulson did any work on these statements. He was not an accountant. Nor is he proficient in fiscal matters to do with the business (which was why Mr Bax handled such matters). 202 Next Mr Gulson was asked about his assertion of spending considerable time with Minter Ellison in discussing issues relating to the BARM litigation. When cross-examined about that claim, he said that he would probably have dealt with Minter Ellison at least once or twice a fortnight in a detailed way and would otherwise deal with one of its taxation partners, Mr Aitken, in a more relaxed way over coffee because he was trying to keep the bills down. However in Minter Ellison's timesheets for the period between July 2005 and August 2006 Mr Gulson's name is referred to on less than ten occasions, five of which related to discussions in June 2006 and one in relation to attendances in August 2006. Mr Gulson asserted that times he spent with Mr Aitken were not recorded because Mr Aitken did not charge for that time, although he was the partner in charge and his name appeared on the top of the timesheets. However, a number of the entries in which Mr Gulson's name appeared in the timesheets involved Mr Aitken. I do not accept Mr Gulson's evidence that he had one to two meetings or dealings per fortnight with Minter Ellison during this period. 203 Among other entries which Mr Gulson propounded in his exhibit so as to justify his increase in consultancy fees, were attendances with Kemp Strang, solicitors, (who were acting for BGR and Triad in the litigation,) meeting with Mr Bax concerning a proposal for sale of the property 'and other matters'. I accept that Mr Gulson's executive responsibilities increased with Mr Bax's departure. But during June and July 2005 I infer that Mr Gulson was unable to spend anything like the amount of time he had previously or would in the future spend on the business because of his mental illness and hospitalisation. 204 By the time that the sale of Main Camp plantation had been completed, there was very little substantial work for Mr Gulson to do. This is borne out by Mr Gulson's letter of 22 March 2006 from BGR to the Australian Competition and Consumer Commission (Exhibit F). In that, Mr Gulson said: 'BGR has no business activities, apart from being a holding company. Until 23 January 2006 (when it was sold) Main Camp Holdings owned the land known as Main Camp station and now has no business activities. Main Camp Corporation sold essential oils sourced from the Main Camp station in consequent upon the sale of the property, is winding down its business activities. 205 I am satisfied that by the time this letter was written, the activities of the defendant companies in the BGR group was of a very minor nature which did not justify the payment of consultancy fees at the level of $20,000 per month to Triad in the absence of agreement by Food Improvers and Mr Bax. Mr Gulson caused the consultancy fees to be paid to Triad in advance on at least two occasions. Thus on 7 February 2006, following the sale of Main Camp plantation, consultancy fees for the three months February, March and April 2006 were paid to Triad. On 21 March 2006 the consultancy fees for May 2006 were paid to Triad. Thus $80,000 (exclusive of GST) had been paid to Triad for the four months ended May 2006 in respect of BGR's virtually non-existent business at that time. I am not satisfied that there was any bona fide business reason why such payments should have been made in advance or why they should have been made and continued at the rate of $20,000 per month at a time when BGR group's business was, effectively, merely that of a holding company. These payments, of course, were made without Mr Bax's or Food Improvers' consent and had the effect of running down the cash available for payment to shareholders. PAYMENT OF ALL DEFENDANTS' LEGAL COSTS BY BGR 206 It is common ground that throughout the whole of the litigation, all the legal costs and disbursements of the defendants have been paid by BGR. These now amount to several hundred thousand dollars. 207 Mr Cordato caused his solicitor's firm, Cordato Partners, to invoice BGR in respect of work performed on behalf of BGR shareholders, Triad and Cordato Partners Services, in defending the litigation. Mr Cordato asserted that he had made an error in charging BGR for work done on behalf of his own company, Cordato Partners Services, because he kept no separate timesheets for that work. I do not accept his evidence. It is clear from reviewing Mr Cordato's accounts, that he regarded BGR as the only source of payment of his company's (Cordato Partners Services) legal fees. Mr Gulson caused those accounts to be paid. Mr Gulson also asserted this was an error but I do not accept that evidence. Likewise BGR was billed for work performed in defending Triad's interests in the litigation. Mr Cordato again asserted this was a mistake and could be corrected. I do not accept that he made a mistake. 208 Mr Cordato also charged BGR for drafting his own affidavit of 21 July 2005. He had no record at all of any work which he performed for Cordato Partners Services which has not been charged to BGR. His firm also charged BGR for attendances at Court on his company's behalf and for drafting his company's defences and affidavits sworn by him. 209 An issue in the litigation involved the participation of Mr Cordato's firm as solicitors on the record for the defendants. Had Mr Cordato seen any distinction between his own personal interests and the personal interests of Mr Gulson, through their respective companies, from those of BGR, Mr Cordato would have kept proper timesheets and billed those matters separately. The fact that no separation was made and bills were rendered to and paid by BGR for work done, including, for example, Mr Cordato drafting Cordato Partners Services' defences, demonstrates that both Mr Cordato and Mr Gulson were misusing their position as persons in control of BGR to have it fund their own defences of the litigation. In contrast, both Mr Cordato and Mr Gulson were aware that when Kemp Strang acted in late 2005, their fee notes, were addressed to Triad and not BGR. Nonetheless, after Kemp Strang ceased to act, BGR paid Kemp Strang's fees. Mr Gulson's rationalisation for this was that it was appropriate that BGR pay the fees. When Mr Gulson requested him to act Mr Cordato said that there was a potential conflict of interest were he to do so. Mr Gulson said that Allens Arthur Robinson had considered the issue of conflict as between the BGR group companies when they took instructions. Subsequently, he gave Mr Cordato a copy of that firm's letter of 20 July 2005 in which they said that they acted for BGR and its subsidiaries. Allens Arthur Robinson did not claim to act for Triad. Mr Cordato made a note on the copy letter that the interests of the majority shareholders: '… may go beyond the discrete interests of BGR; eg i/ 1/7 ratification – a S/H [shareholder] matter could be oppressive ii/ expenditure of funds on issues other than to resist payment of consultancy fees' (Ex S). 210 Despite adverting to these matters, Mr Cordato began to act for all the defendants and continued to do so, charging only BGR for work which no reasonable solicitor in his position could have considered to be for BGR's benefit, such as the examples I have given above. CREDIBILITY ISSUES 211 Mr Gulson is not a witness whose evidence I would accept unless it were corroborated independently on any matter on which there is an issue between him and other witnesses. I have given a number of instances above of circumstances in which Mr Gulson appeared to me to be deliberately misleading or unreliable. Whether this is a symptom of some unresolved psychiatric condition or whether it is a symptom of Mr Gulson's attempt to look after his own financial interests, it leads me to the conclusion that his evidence was generally unreliable. Mr Gulson sought to say what he believed would suit his own interests in the proceedings and to justify his own position, in the manner of an advocate, rather than a rencounter of facts. His demeanour and manner changed from time to time in the witness box in the sense that at times he appeared to be extremely alert and focused while at others he was quite detached. At times he was not prepared to make ready concessions of obvious matters, some of which I have set out above. An example of the detached air which he had in answering questions, although difficult to identify in transcript as opposed to observation (which I accept is a less than satisfactory general guide to a witness's truthfulness) is the following evidence he gave concerning Mr Gobert: 'And of course, you don't deny that you were having the opportunity of meeting the Biomor people that weekend, because of the efforts of Jim Gobert, do you? --- Oh, look, this is - we're a corporation, you know? This is not about what one person does, and one person doesn't do. It's a corporation. The corporation lives on, regardless of whether Jim's there in control of sales and marketing, or whether I'm there. I'm really sorry, but, you know, there's no specialties here.' (emphasis added) 212 Given the partnership relationship which Mr Gulson had with Mr Bax at this time the way in which he expressed himself in relation to the 'corporation' living on struck me at the time he said it as having an unusually detached quality about it. While in a manner of strict legal theory, and I appreciate Mr Gulson has legal training, what he said was correct, the comment was made during the course of cross-examination dealing with his very personal interaction with Mr Gobert on 29 May 2005. 213 Mr Cordato was also a witness who, unfortunately, I found unreliable. He had a material financial interest in the litigation through his beneficial holding in Cordato Partners Services. He was also, from the outset of the dispute, likely to be a material witness as to disputed issues of fact in relation to conversation he had had with Mr Bax, Mr Gulson and later Mr Lombardo. He agreed that when he swore his affidavit of 8 May 2006 he realised both he and Mr Bax were directly in conflict in respective of various conversations in which they were both participants. Nonetheless, having accepted that he was an experienced solicitor in commercial litigation, he proceeded to draft not only his own affidavit in relation to those conversations but also Mr Gulson's affidavit in relation to the same conversations in which all three were present. Mr Cordato certified compliance of those affidavits under O 14 r 2 of the Federal Court Rules. And, he acted as the defendants' solicitor on the record. 214 When his attention was drawn to r 19 of the Solicitors Rules made under the Legal Profession Act 2004 (NSW) he sought to ascribe to that rule a construction which I am unable to understand. The rule provides: 'A practitioner must not appear as an advocate and, unless there are exceptional circumstances justifying the practitioner's continuing retainer by the practitioner's client, the practitioner must not act, or continue to act, in a case in which it is known, or becomes apparent, that the practitioner will be required to give evidence material to the determination of contested issues before the court.' Mr Cordato gave this evidence: The fourth proposition, Mr Cordato, that a solicitor cannot provide objectively independent assistance to the court where he or she is required to justify or defend his or her conduct in representing the client, even if he or she doesn't have a pecuniary interest in the outcome of the hearing? --- I wouldn't put it in such strong language. How would you put it - sorry? --- There is a solicitors practice rule which I've - which I read a while ago so I can't be quoted on it, but to the effect that when a solicitor is to be - to give evidence in litigation they should not be conducting the matter, and I think - they shouldn't be personally conducting the matter, they are entitled to have someone in their office to do so, so I believe that what you're getting at here is, "justify defend his conduct." The way I read it is that I'm required to give evidence in these proceedings, so reading it that way I should not be objectively - purporting to give assistance to the client or to the court by – I should not be the solicitor actually conducting the proceedings if I'm to be independent in that respect. But you don't - you don't say, do you, Mr Cordato, that you aren't intimately involved in the conduct of these proceedings, do you? --- I supervise the conduct of the proceedings. I wouldn't say I'm intimately involved. You draft - you draft or settle the pleadings in the proceedings, don't you? --- I have settled the defences, yes, but I haven't drafted them of - entirely of my own accord and I've had instructions on them. You've drafted, for example, your own affidavit in the - your own affidavits in the proceedings, haven't you? --- I have drafted my affidavits and another - probably two others. Yes. You've in fact helped draft Mr Gulson's affidavits in the proceedings, haven't you? --- Yes, I have. You're a witness of fact in the proceedings and you've drafted your own affidavits. You will agree with that? --- Yes, I have. You're a witness of fact in the proceedings and you've drafted Mr Gulson's affidavits who's also a witness in the proceedings? --- Yes, I have. You are witnesses on material matters in these proceedings, aren't you - sorry, I withdraw that. You are a witness about material matters in these proceedings, aren't you? --- Yes. 215 Later in his evidence he sought to explain that he was able to comply with r 19 by having a solicitor employed by his firm, Ms Cook, conduct the file. However, he had drafted pleadings and a number of affidavits in the proceedings. He said: 'So, I say that one reading, and the reading that is suggested to me, is that I am not appearing as an advocate and I would have to be appearing as an advocate were I to be in breach of r 19. It seems to suggest both. But the way I have read the Rules is that provided one does not – one has an instructing solicitor, which I have, and doesn't take any part in instructions in the Court proceedings, then it is permissible to do so.' 216 He asserted that provided that Ms Cook had the day to day conduct of the file, then his firm could continue to act and he could continue to act as solicitor on the record. I am unable to understand how Mr Cordato rationalised his conduct in accordance with r 19. I am prepared to accept that he considered the rule and gave it a construction under which he could continue to act. I do not think that Mr Cordato was setting out deliberately to breach r 19 but I cannot see any reasonable basis for his interpretation. The rule in terms prohibits not just appearance as an advocate, but also acting as solicitor, in the same situation. 217 By the time he had drafted his affidavit of 8 May 2006, it was obvious to him, as he said, that he would have to give evidence material to the determination of contested issues of fact before the Court. These were in relation to disputed conversations with Mr Bax. And he agreed that this material issue affected him, through his beneficial interest in Cordato Partners Services, in a significant financial way. He also knew that his integrity was in issue in the sense that he and Mr Bax gave different versions of conversations, including that of 22 September 2005 in the meeting with Mr Lombardo and Mr Gulson. When he was asked why on 8 May 2006, when he swore his substantive affidavit which responded to Mr Bax's and made clear this conflict of evidence, he made the decision to continue acting not just for his own company but for all the defendants in the proceedings he responded: 'I didn't make the decision to do anything. I just continued to act. Why didn't you make the decision then knowing that your integrity was an issue, why didn't you then make the decision to stop acting for any of the [defendants] in the proceedings?.... I didn't think about it at the time.' 218 I am inclined to accept Mr Cordato's statement that he did not think about his position at the time, unsatisfactory as this was. Mr Cordato ignored the obvious problem unthinkingly. His continued participation in the proceedings as solicitor on the record and actively drafting affidavits and defences for himself and Mr Gulson was the result of his misconstruction of r 19, his determination to continue to act and obtuseness. I do not think that Mr Cordato made a dishonest misconstruction of r 19. Rather, he was wilfully blind in the view that he took of the rule. The requirement of rule 19 was that Mr Cordato could not continue to act when he knew, as he did on 8 May 2006, that he would be required to give evidence material to the determination of contested issues between himself, Mr Gulson and Mr Bax. Rule 19 is pellucidly clear. 219 I have been quite concerned about Mr Cordato's evidence because it must be assessed in light of the fact that the plaintiffs had sought orders enjoining him from acting and had put on a motion at the time his affidavit of 8 May 2006 was being prepared seeking to have that issue resolved immediately. Written submissions were prepared by the plaintiffs and served on Mr Cordato's firm. He said that he did not read them. Again, that is an answer which has caused me difficulty, but I think it is consistent with the above attitude Mr Cordato adopted to his own position. WAS MR BAX'S REACTION TO THE EVENTS OF 29 MAY 2005 A RUSE? 220 The defendants sought to suggest that Mr Bax wanted a basis to leave BGR because it was in dire financial straits and that he seized on the behaviour of Mr Gulson in dismissing Mr Gobert for this purpose. The argument seems to have been based on a suggestion that the business had a facility limit with Elders of $1,080,000 which had been temporarily extended to $1,380,000 until 31 August 2005 and which Mr Bax must have appreciated could not be repaid. 221 Mr Bax pointed out the group also had a Commonwealth Bank account. No financial analysis or expert evidence was tendered to support the defendants' suggestion. Mr Bax could simply have asked Mr Gulson to dissolve their partnership. No advantage was suggested to Mr Bax in cross-examination or submissions, for Mr Bax to have staged his departure in the way it occurred. No reason was suggested by the defendants why Mr Bax would want to provoke litigation in which Mr Gulson had, and he did not have, access to the group's funds in circumstances where Mr Gulson had the majority shareholding. 222 The group had substantial net assets, as was shown by the fact that over $6,000,000 was available for distribution after payment of creditors from the sale of Main Camp about six months later. Mr Bax had given personal guarantees to finance companies for some of the group's liabilities. Abandoning his position would mean that he could be exposed to those creditors, if there were default under their facilities. 223 The defendants (other than Cordato Partners Services) also denied in their pleaded defence that Mr Gulson acted abusively on 29 May 2005 in the Renaissance Hotel and that he had terminated Mr Gobert's employment. Moreover, they pleaded that the plaintiff's allegations 'were made as a ruse to deflect responsibility for the refusal by Jim Gobert and John Bax to continue with the travel arrangements made to visit customers and potential customers …' (Defence [43]). Mr Gulson verified that defence. For the reasons I have given this defence had no substance. In their final submissions the defendants abandoned the pleaded allegation of a ruse, no doubt because it was unsustainable. Yet they persisted with a contention that Mr Gulson had no option but to terminate Mr Bax's consultancy. That ignored what Mr Cordato had suggested to both Mr Bax and Mr Gulson in his email of 30 May 2005 that it '… would be obviously beneficial (probably vital) if [Mr Bax and Mr Gobert] remained pending the sale' of the business, in light of the breakdown in relations. 224 I find that Mr Bax did not engineer his own departure from the group and that he was genuine in his spontaneous reaction to what Mr Gulson did in sacking Mr Gobert on 29 May 2005. I am of opinion that the defendants' contention is baseless. 225 Mr Gulson asserted that Mr Bax had a discussion with him in early 2005 as they were discussing the fit out of BGR's new offices, which were to be located next to Cordato Partners. Mr Gulson said that Mr Bax said he was thinking of winding down his involvement in the business later in 2005. I accept Mr Bax's denial of that assertion. 226 The defendants also asserted that after Mr Gobert's sacking became known to Main Group's customers, he and Mr Bax orchestrated a campaign against to undermine Mr Gulson and to set up their own commercial opportunities with those customers. Mr Lawson, the Biomor representatives and Murray Hunter, managing director of Perlis Essential Oils of Malaysia all wrote to Mr Bax expressing appreciation of him and Mr Gobert and either distancing themselves from, or complaining of, Mr Gulson's inappropriate behaviour in his dealings with them. I do not consider that this evidences any disentitling or wrongful conduct by Mr Bax. He had seen Mr Gulson's behaviour and actions on the night of 29 May 2005 as destroying their partnership. Friends and contacts which he and Mr Gobert had made over the years were entitled to get their side of the story and to express their own views. The defendants sought to place this in the context of an argument that Mr Bax 'abdicated his responsibilities in London' and for the rest of the planned trip by refusing to participate after 29 May 2005. This argument has no substance. Mr Gulson had shown he was impossible to work with at this time. The medical and factual evidence to which I have referred above makes plain how ill he was and how that affected his ability to relate to others. 227 Mr Gulson's behaviour on the night of the 29 May 2005 was seen by Mr Bax as destructive of their partnership. That view was honest and reasonable. The defendants' submission in effect, required Mr Bax to ignore Mr Gulson's unilateral sacking of Mr Gobert and to acquiesce in a 'business as usual' stance when what Mr Gulson was doing was very unusual. STATUTORY BASES FOR THE PLAINTIFFS' CLAIMS 228 The Plaintiffs argue that they are entitled to relief on the bases provided under ss 232 or 461(1)(k) of the Corporations Act 2001 (Cth). The basis of the claim under s 232 is that the conduct of BGR's affairs was either contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or, unfairly discriminatory against, Food Improvers whether in its capacity as a member or any other capacity. In considering what a company's affairs are, s 53 of the Act provides a very wide, but not exhaustive, definition. Thus, the promotion, formation, membership and control of BGR are relevant, as is its internal management its share ownership and the power of persons to exercise or to control the exercise of rights to vote attached its shares (s 53(a), (c), (e) and (f)). 229 The Court has considerable powers to make orders designed to remedy a situation in which a plaintiff is able to establish the grounds provided under s 232. Thus s 233 enables the Court to make an order that the company be wound up, or if that is not appropriate to appoint a receiver or a receiver or manager of any or all of its property, regulate the conduct of its affairs in the future, order the purchase of shares or order a person to do a specified act. 230 The second statutory basis upon which the plaintiffs claim relief is an order under s 461(1)(k). That provides that the Court may order the winding up of BGR if it is of opinion that it is just and equitable to do so. Where an application is made by a member in the position of Food Improvers as a contributory (because of its position as a shareholder) on the just and equitable ground, the Court is obliged to make the order for winding up if it is of the opinion that the plaintiffs are entitled to that relief and in the absence of any other remedy it would be just and equitable to do so, unless there is some other remedy available to the plaintiffs and that they are acting unreasonably in seeking to have the winding up order made instead of pursuing that other remedy (s 467(4)). The defendants have not suggested that, in the event that the plaintiffs are able to prove their case, they are acting unreasonably in seeking have BGR wound up. However the plaintiffs have applied, under s 233(h) for a receiver to be appointed to BGR as a preferred alternative. PRINCIPLES OF LAW 231 In the decision to establish the business of the BGR group in mid-1999, each of Mr Bax, Mr Gulson and Mr Reece envisaged that they would operate together, through the corporate vehicle of BGR, as a quasi or actual partnership. As I have found, that is how the three men proceeded until Mr Reece's departure. Thereafter, Mr Bax and Mr Gulson operated as partners. Mr Cordato's role was confined to that of an external lawyer and a silent investor. 232 The remedies provided for oppression and the winding up on the just and equitable ground which the Corporations Act 2001 (Cth) and its predecessors have for many years provided are distinct. But, considerations relevant to each remedy can overlap because s 232(a) identifies the conduct of the company's affairs as being a relevant criterion for the ascertainment of whether what is complained of is either contrary to the interests of the members as a whole or oppressive within the meaning of s 232(e). The Court is invited to enquire into what the relationship between the members was in much the same way as it is required to assess their relationship for the purposes of determining whether it is just and equitable to wind the company up. 233 In his seminal speech in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 380B Lord Wilberforce pointed out that a company however small and however domestic is a company and not a partnership or even a quasi partnership. He said, however, that it was through the just and equitable clause (now s 461(1)(k)) that obligations, common to partnership relations, may come in. He continued by pointing out that the just and equitable ground is available if the member can point to and prove some special underlying obligation of his fellow member or members in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic that, if broken, the conclusion must be that the association must be dissolved (Ebrahimi [1973] AC at 380E). 234 Lord Wilberforce said that the principles on which the member may do this had been worked out by the Courts in partnership situations. Earlier in his speech, he pointed out that the just and equitable ground enables the Court to subject the exercise of legal rights to equitable considerations. He said that these considerations were of a personal character between one individual and another which may make it unjust or inequitable, to insist on legal rights or to exercise them in a particular way. Lord Wilberforce said that it would be impossible and wholly undesirable to define the circumstances in which those considerations may arise and pointed to the fact that merely because a company was a small one or a private company was not enough to bring those into play. 235 If the association were purely a commercial one in which it could safely be said that the basis of the association was adequately and exhaustively laid down in the company's constitution, equitable considerations need have no part (Ebrahimi [1973] AC at 379 C-E). But, his Lordship pointed out that: (Ebrahimi [1973] AC at 379 E-H) 'The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves.' 236 Conduct which is burdensome, harsh and wrongful is oppressive: Scottish Meyer Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 at 342. Such conduct is capable of being unfairly prejudicial to a member within the meaning of s 232(e): Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 at 135D per Spender, O'Loughlin and Branson JJ. Their Honours went on to apply what Lord Wilberforce said in Ebrahami [1973] AC at 379 which I have set out above on the question of the existence of quasi partnership (Dynasty 59 FCR at 138 B-D). They took the view the act of removing a quasi partner as a director could be significant evidence of oppression (Dynasty 59 FCR at 138 E-F; see also Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd (2004) 207 ALR 136 at 149-150 [105]-[107] per Wilcox, Marshall and Jacobson JJ). 237 In In re A Company [1999] 1 WLR 1092 at 1098D-1102B Lord Hoffmann discussed the interplay of the just and equitable concept in the analogue of s 461(1)(k) and 'unfair' in the analogue of s 232(e). He pointed out that although fairness was a notion that could be applied to all kinds of activities, its content would depend upon the context in which it was being used (In re A Company [1999] 1 WLR at 1098F). Of course, there will be decisions in any association, such as a partnership or company, which one or more members find to be prejudicial or discriminatory against them. But the emphasis in establishing a ground for an order under s 232(e) is that the conduct be unfairly prejudicial or discriminatory or be oppressive (Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 at 467-468 per Mason ACJ, Wilson, Deane and Dawson JJ). Thus, the bona fide and proper exercise of a power under a company's constitution for the purpose for which it was conferred is unlikely to be found to establish unfair prejudice or unfair discrimination against a member under s 232(e) (Wayde 180 CLR at 467). 238 In Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 WLR 413 at 417H-418A the Privy Council held that where a person has been led to believe, even in the absence of any express assurance, that he or she would participate in the management of a company, he or she would in any event be entitled to a seat on the board so long as he or she continued to hold his shares. Their Lordships said that although no specific undertakings may have been given, an obligation could be implied or inferred from the conduct of the parties to allow the person to participate in the management and to be a director '…unless by withdrawal of his support or for some other good reason a change in management and control became necessary.' 239 The defendants argued that Mr Bax withdrew his support and that it therefore became necessary to change management and control of BGR as occurred on 1 July 2005. The context of which their Lordships were speaking, in my opinion, was one in which the withdrawal of support by the director claiming a remedy under the just and equitable ground or for oppression occurred as a free and voluntary act. Where the relationship between the parties breaks down, and the plaintiff is not at fault, the substratum of their mutual endeavour may be removed so as to make it appropriate to grant relief under ss 233 or 461(1)(k). I do not understand their Lordships to suggest otherwise. A broad discretion is conferred by these provisions on the court to remedy instances in which relations break down among those who have combined to run a business through a corporate structure. This is necessary because of the wide variety of circumstances in which such disputes can arise. Courts have cautioned against the creation of hard and fast rules to govern the application of the broad discretionary remedies in the legislation (see Ebrahami [1973] AC at 374-375, applied by Gummow and Hayne JJ and Vigolo v Boston (2005) 221 CLR 191 at 217-218 [71]). CONSIDERATION 240 In May 2005 Mr Bax and Mr Gulson had been in a longstanding relationship of mutual trust and confidence in the management of BGR's affairs. They both recognised that Mr Gulson's company, Triad, held a substantial majority of voting power, but the substratum on which the two had acted over the preceding years was that each treated the other as a partner with an equal say in the management of BGR on business direction and, planning issues and Mr Bax was managing director, even though not formally appointed as such. They were both prepared to and did work for a substantial period for no guaranteed remuneration from March 2001, when large sums, representing consultancy fees, had been repaid and further payments suspended. These factors demonstrated that neither man (or his corporate vehicle) was looking to strict legal rights under BGR's constitution as the sole source of the regulation of their relationship in the conduct of BGR's affairs. 241 Mr Bax's plan, which had been agreed in 1999, was that each of the then three executives, and later two, would have equal say in the management of BGR. That was essential to the efforts being made by each of them. And, the recognition in the consultancy agreements that each would be equally rewarded for their work was also a key feature in their relationship. The equal reward for their work was, of course, distinct from the ultimately unequal distribution or burden which would occur when there was a need to resort to the use of shareholding to measure either benefit or obligation. Thus, in early 2001, when each of the investors was called upon to make loans to BGR, they did so in accordance with their approximate proportionate shareholding. Likewise, when BGR came to pay dividends they would have anticipated that it would do so in accordance with shareholding. However, each investor in BGR was aware that the three executives had consultancy agreements. Once payment of fess under those agreements ceased, or was made at a reduced rate, each investor could not have considered that the unpaid fees were foregone so as potentially to increase the ultimate amount available to be distributed as dividends at the unpaid executives' expense. The dividends were to come after the remuneration of each of the partners who had worked to generate such profits or assets as might be distributed by way of dividend. It would be unfair having regard to the way in which BGR's affairs had been conducted since mid 1999 to distribute, in the absence of agreement to do so, a dividend among the members in proportion to shareholding where the three executives' companies had been left unremunerated or inadequately remunerated, according to the consultancy agreements they had made for remuneration, in the period in which what was being distributed as a dividend had been earned or gained. 242 On 29 May 2005 the personal relationship between Mr Bax and Mr Gulson deteriorated so that Mr Bax said he could no longer work with Mr Gulson. Were they in partnership, it would be clear that the loss of mutual trust and confidence at that point would have meant that the partnership had been brought to an end. I am satisfied that is just and equitable to order the winding up of BGR because of the destruction on 29 May 2005 of the mutual trust and confidence that occurred between Mr Bax and Mr Gulson, the latter being joined shortly afterwards by Mr Cordato when sides were taken. Mr Bax had given up his position as chief executive officer of the Ink Group in order to take on his position as managing director of BGR. For the next six years he managed BGR and its subsidiaries. But he was confronted on 29 May with Mr Gulson, regrettably mentally unwell, but also belligerently insisting on sacking Mr Gobert in the middle of their overseas trip. Mr Gulson's behaviour was such as would have undermined anyone's trust and confidence in his ability to cooperate in the running of the enterprise. 243 I am satisfied that Mr Bax bona fide believed he could no longer work with Mr Gulson as a result of Mr Gulson's conduct and that Mr Bax acted honestly and reasonably in forming that view. Indeed, within two weeks Mr Gulson's wife was in a similar position, ultimately threatening to leave him with their children unless he admitted himself to hospital for treatment of his mental condition. His behaviour in this period was, regrettably, affected by his illness. That behaviour was destructive of the mutual trust and confidence he and Mr Bax had hitherto enjoyed. It involved the assertion of Mr Gulson's will and his attempt to dominate. In addition, he assigned false reasons for calling the meeting of BGR on 1 July 2005. While Mr Cordato says he was not consulted, he made no attempt to deal with Mr Gulson about the falsity of those reasons of which he knew (such as the fact that Mr Gobert had not refused to participate further in the overseas trip but had been summarily dismissed by Mr Gulson on the night of 29 May 2005). Moreover, Mr Cordato was well aware of Mr Gulson's deteriorating mental condition, but chose to do nothing about it. By saying that he took heed of what the majority shareholder thought he abdicated control to Mr Gulson. 244 Thereafter, both Mr Cordato and Mr Gulson used their powers to direct BGR in such a way that Mr Bax was entirely excluded from his previous position as an equal partner in the business' direction and planning and managing director. The circumstances in which BGR had been formed and run up to 29 May 2005 radically changed from that night. Mr Gulson's decision to dismiss a critical employee in the middle of the overseas trip without any consultation and to persist in what was an untenable basis for his dismissal showed that he was no longer able to be dealt with by Mr Bax in the way that they had related to each other before this happened. Then, Mr Gulson chose to break the deadlock he had created on the board by the exercise of Triad's majority shareholder's powers to remove Mr Bax and to cancel Food Improvers' consultancy agreement. 245 I am of the opinion that conduct warrants the making of an order under s 461(1)(k) because it is just and equitable that BGR be wound up. 246 However, it is necessary to consider whether some other remedy might be available of a less drastic kind under s 233 (see s 467(4)). In Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 at 687 [89]-[90] per Spigelman CJ, 772 [570]-[571] per Priestley JA and 792 [691] per Fitzgerald JA, the Court of Appeal of the Supreme Court of New South Wales held that the existence of irreconcilable differences among persons involved in what is, in effect, a partnership, conducted through a company, applies both to applications for winding up on the just and equitable ground and also to oppression suits. Spigelman CJ pointed out (Fexuto 37 ACSR at 687 [89] – [90]), if the court decided the person excluded was the one responsible for the breakdown in the relationship, he or she would not be entitled to claim to have suffered oppression under s 232. That is not this case. Mr Bax's conduct was understandable and reactive to Mr Gulson's. If fault is to be attributed in the breakdown of the relationship, it is to Mr Gulson for the way he behaved in the Heathrow Hotel and afterwards. That conduct was destructive of and confirmatory of the destruction of the previous relationship of mutual trust and confidence. Mr Cordato later came to participate in association with Mr Gulson in that destructiveness. 247 As Priestley JA said in Fexuto 37 ACSR at 772 [571], putting in quasi partnership terms what happened from 29 May 2005, the majority shareholder and director changed the previous management regime against the opposition of the minority director and shareholder. He held that this entitled the minority to a remedy and that in ordinary partnership situations the remedy was dissolution of the partnership. Priestley JA pointed out that the remedy available under the analogue of ss 232 and 233 was broader than simply a winding up. He had found that oppression in that case had occurred by a change in the previous way in which the business had been conducted, where all the partners or directors jointly engaged in direct management of the company (Fexuto 37 ACSR at 772 [569]). 248 Even if oppression of, or unfair prejudice or unfair discrimination against Food Improvers (either as a member of BGR or the partnership or as the provider of Mr Bax's services under the consultancy agreement) were not established solely by what occurred on the evening of 29 May 2005, Mr Gulson's later determination to use his voting power to exclude, first, Mr Bax as a director of BGR and, secondly, Food Improvers from the benefits of both his directorship and the consultancy agreement on the knowingly false basis upon which it was asserted that Mr Gobert's contact should be terminated or its termination affirmed, was oppressive of, unfairly prejudicial and unfairly discriminatory against Mr Bax and Food Improvers. When Mr Cordato sided with Mr Gulson and they both voted in favour of the resolutions on 1 July 2005, the oppression of Food Improvers was manifest. 249 Mr Bax was excluded from any management role in BGR. Mr Gulson commenced to pay Triad an increased consultancy fee. He and Mr Cordato initially consulted with Mr Bax about the sale of Main Camp plantation, but later negotiated the sale without Mr Bax's involvement and refused to inform him of the details of its terms apart from the price. 250 Mr Gulson and Mr Cordato used their majority powers to have BGR pay for all of the legal fees involved in Triad's and Cordato Partners Services' defence of these proceedings. They caused Cordato Partners to receive not only its fees for this work but also substantial fees for previously unbilled work once the proceeds of sale of Main Camp were received. There was no basis on which the expenditure of BGR's funds for the defence by Triad and Cordato Partners Services of these proceedings could be seen as being in the best interests of the members as a whole. It was plain to Mr Cordato and Mr Gulson that the relationship with Mr Bax had broken down. The resistance to the making of an order under s 461(1)(k) or s 233 for winding up BGR appears to have been initially based on an assertion that Mr Gobert had resigned and that he and Mr Bax had refused to participate further in the planned activities on the trip. That assertion was unsustainable because it was false to Mr Gulson's and Mr Cordato's knowledge. They also sought to argue, without justification, that Mr Bax was not entitled to be the managing director of BGR, he could be removed as a director and Food Improvers' consultancy could be terminated for the false reasons put forward in the notice of the 1 July 2005 meeting. 251 Next it was asserted that Mr Bax had voluntarily sought to bring the relationship to an end so that Mr Gulson was merely formalising matters on 1 July 2005 by forcing through his resolutions at the meeting of BGR. Given that both he and Mr Cordato were well aware of his mental illness and the impact that that illness was having on Mr Gulson's relationships, the failure, at least, to pause and reflect that Mr Bax had a legitimate reason for not being able to continue to work with Mr Gulson resulted in a persistence by Mr Cordato and Mr Gulson in pursuing this litigation. 252 Although he had been promised, as had been his right as a quasi partner, the right to be informed and consulted in the sale process, Mr Bax was excluded from discussions about or negotiations for the ultimate purchase of Main Camp plantation. For months the plaintiffs were told that a distribution would be made in accordance with option B. Instead, they were confronted with a fait accompli when a different form of distribution was made without any further consultation in February 2006. 253 Moreover, hundreds of thousands of dollars of BGR's funds have been spent in the defence of these proceedings so that Mr Gulson's and Mr Cordato's companies, Triad and Cordato Partners Services can resist orders being made that affect them in their personal capacity as shareholders. The expenditure of BGR's money in their defence of these proceedings was unjustifiable. There will be cases where a trustee or fiduciary is entitled to spend trust money in the defence of an attack of upon his or her own conduct. But the present case does not warrant since a conclusion. I have found a number of instances in which each of Mr Cordato and Mr Gulson has acted in the management or conduct of BGR's affairs in his or their own interests rather than those of BGR. And in some of those instances I did not accept their evidence or have positively disbelieved it. 254 Moreover, Mr Cordato acted in these proceedings as solicitor for all the defendants in circumstances where no reasonable solicitor in his position could possibly have acted. He was precluded by the application of r 19 of the Solicitors Rules from acting, certainly by no later than 8 May 2006, but probably considerably earlier. But in any event, Mr Cordato's financial interest in the success of the defendants' case meant that he was unable to act with the independence which a solicitor on the record must have as part of the relationship between an officer of the court and the court in the presentation and conduct of litigation: Kallinicos v Hunt (2005) 64 NSWLR 561 at 512 [76], 584-585 [86], 586 [91] per Brereton J. As Brereton J said, a solicitor should not act where a fair minded and reasonable observer would think that his or her independence and objectivity as a solicitor would be compromised. The scrutiny which the solicitor's conduct would attract in litigation, his or her knowledge of the instructions in relation to the subject matter in which he or she might be a material witness are relevant factors in this regard. (Kallinicos 64 NSWLR at 586 [91]). Mr Cordato was a material witness on important conversations; he charged BGR for the personal costs for which Triad and Cordato Partners Services were liable and he continued to act oblivious of the motion to enjoin him from doing so. He prepared Mr Gulson's affidavits including those parts dealing with disputed conversations, such as with Mr Lombardo, to which both Mr Cordato and Mr Gulson were party. That conduct put him in an impossible position. However much, by his own lights, he may have tried to put Mr Gulson's account objectively and uninfluenced by Mr Cordato's own recollection he could not do so in the way a person who was independent could have. And, of course, Mr Cordato's account is likely, even if only subconsciously, to have been influenced by what he had learned in taking Mr Gulson's affidavits. 255 The distribution in February 2006 did not recognise the need to make any payment to Mr Bax and Food Improvers for the work that he had been done during the periods in which consultancy fees had been refunded and later when they were either left unpaid or paid at a reduced rate. This was unfair prejudice to Food Improvers. Mr Cordato's legal firm was permitted by Mr Gulson to bill and be paid in January 2006 for all its unbilled work in progress throughout BGR's existence. Yet, Mr Cordato was not even working in the business of BGR to generate the asset that was ultimately realised on the sale of the Main Camp plantation business. 256 The affairs of BGR have been taken over by Mr Cordato and Mr Gulson and run in a way which favours their companies' interests and disadvantages Mr Bax's. Mr Cordato made no attempt to dissect from the fees he rendered to BGR those which were referable wholly to his own personal and his company's interests. Nor did he attempt to do so in respect of the personal interests of Mr Gulson and Triad. Instead, both Mr Cordato and Mr Gulson, deliberately, decided to use BGR's money to pay for the whole of the defence costs. I do not believe their evidence to the effect that the expenditure for the personal purposes of Mr Cordato or Cordato Partners Services was unintended. Mr Cordato kept no records to enable separate fees to be rendered because he did not need to do so. He considered he was entitled to use BGR's money to defend his own personal and his company's interests including his reputation, so far as it was attacked in the case. Mr Gulson had no reason to disapprove of Mr Cordato's fees being paid by BGR because Triad's fees were too. Likewise, Mr Gulson saw his interests as being those of BGR, which is why he caused the fees that Kemp Strang had rendered to Triad to be paid by BGR. Mr Cordato's lack of independence was one contributing factor which permitted that to occur. 257 These have been hard fought and expensive proceedings. Mr Cordato and Mr Gulson continued to pay not only all of the defendants' legal costs using BGR's resources. They knew Mr Bax had to fund his own case. Triad continued to be paid $20,000 per month after February 2006, sometimes in advance, even though the work Mr Gulson has done in that period does not merit any payment of this order, as his letter of 22 March 2006 to the Australian Competition and Consumer Commission makes clear. 258 In Re DG Brims & Sons Pty Limited (1995) 16 ACSR 559 at 591-592, Byrne J in the Supreme Court of Queensland said the use of company funds in defending the proceedings on behalf of the majority shareholders was unfair and infringed the basal principle that the powers and the funds of a company may be used only for the purposes of the company. He said that where the essential dispute was between the shareholders, company funds should not have been used to defend the majority. Here, the essential dispute was between the shareholders and the funds of BGR should not have been employed to pay for a defence of the majority. 259 For all these reasons, I am of opinion that the conduct of BGR's affairs is contrary to the interests of its members as a whole and is oppressive to, unfairly prejudicial to or unfairly discriminatory against Food Improvers. RELIEF AGAINST MR CORDATO AND CORDATO PARTNERS PERSONALLY 260 The plaintiffs filed a motion on 31 March 2006 which sought, among other things, an order restraining Cordato Partners from acting for any of BGR and its subsidiaries. It was not sought to restrain Cordato Partners from acting on behalf of Triad or Cordato Partners Services. The hearing of that motion was concurrent with the trial. Cordato Partners is not a party to the proceedings, and was not made a party to the motion. No relief is sought in the third further amended application or the further amended statement of claim against Cordato Partners. 261 As I have found, it was inappropriate for Mr Cordato to act in the proceedings or to continue acting, particularly after he swore his affidavit of 8 May 2006. The motion and the submissions made in support of it were served on him prior to his swearing that affidavit. He said that he chose not to read the submissions. I find that behaviour on his part, if it is true, to be extraordinary. A solicitor who is aware another party to proceedings seeks personally to enjoin him or her from acting in the proceedings cannot reasonably refuse to turn his or her mind to why that argument was being made, even if the person making it were perceived to be vexatious. Where the solicitor's integrity could be called into question as an officer of the court, were the relief granted, it would ordinarily be incumbent on his or her to familiarise himself or herself with the reasons why the person sought to have him or her cease to act or attack his or her integrity in the proceedings. And, once that familiarisation had occurred, it would be necessary for the solicitor to turn his or her mind to the question of whether there was substance in the application. If so, he or she ought to obtain independent advice on it, if he or she thought the application could be resisted. 262 Mr Cordato's insouciance to the application made against him was professionally unsatisfactory. It was an abnegation of his obligation to the Court to act independently as the solicitor on the record. Difficult as it is to believe that he did not read the submissions, I have concluded that I should not reject his explanation because it is consistent with his wrongheaded behaviour. He chose, wrongly, to ignore the obvious problem, no doubt taking comfort in his misconstruction of r 19. 263 After the hearing had concluded both sides and Mr Cordato made written submissions on the question of Mr Cordato's continuing to act. The plaintiffs apparently had insisted that counsel who appeared at the trial for the defendants be not permitted to make those submissions. Senior counsel was retained to make submissions on behalf of Mr Cordato and his firm. Senior counsel submitted that the attempt to remove Mr Cordato as solicitor for the defendants was made too late, was without substance and was inconsistent with the position taken by Haywards in their letter of 15 May 2006 that Mr Cordato's continuing to act was further evidence of oppression. Senior counsel pointed to Brereton J's statement in Kallinicos 64 NSWLR at 582 [76] that the jurisdiction is to be regarded as exceptional and is to be exercised with caution. 264 The fact that the plaintiffs only then insisted on someone other than those who had appeared hitherto in making these submissions, although the basis of such insistence is not clear to me, demonstrated a belated realisation on the plaintiffs' part of the inappropriateness of their motion. It was directed to restraining Cordato Partners, as opposed to restraining the defendants. Cordato Partners was not a party to the proceedings or to the motion. That firm had not been served formally and it was not separately represented at the hearing or on any other occasion save for the submissions made by senior counsel. Mr Cordato gave evidence as a witness, and as the controlling mind of Cordato Partners Services, the third defendant, but not as a party to the proceedings personally; nor did he appear for Cordato Partners. Had the motion sought to restrain the relevant defendants from engaging Cordato Partners, it may have been possible to hear and determine it, although, as a person affected by the order, Cordato Partners should have been joined and they could have applied to be joined. 265 I am not satisfied that the proceedings have been conducted appropriately as a vehicle for determining in the inherent jurisdiction of the court the disqualification of Cordato Partners from acting. I have expressed views about the inappropriateness of Mr Cordato's conduct, but having regard to the way in which the matter developed and the very late realisation by both sides as to the need for independent representation of Cordato Partners, I do not think it appropriate at this stage to make any orders against the firm or its principal Mr Cordato. For the reasons I have given it is inappropriate for Mr Cordato and his firm to continue to act for the defendants. That being so, I do not think it necessary for me to do anything further. RELIEF CLAIMED 266 In the third further amended application the plaintiffs sought: (a) declarations pursuant to s 232 that the following conduct is or was contrary to the interests of the members as of BGR as a whole or is oppressive to or unfairly prejudicial to or unfairly discriminatory against Food Improvers: · the conduct of the affairs of BGR; · the resolutions passed at the meeting of 1 July 2005; · the use of BGR's funds to pay the costs referable to the defence of the interests of Triad and Cordato Partners Services; and · the use of BGR's funds to pay Triad's $20,000 monthly consultancy fees from when BGR had no national business activity. (b) an order under s 233 that Triad and/or Cordato Partners Services purchase the shares of Food Improvers in BGR or that BGR purchase those shares; (c) orders under s 233 or s 461(1)(k) that BGR and its defendant subsidiaries be wound up and a liquidator appointed; (d) alternatively, orders appointing a receiver or independent accountant to sell the assets of BGR and its defendant subsidiaries and distribute the proceeds to creditors and shareholders; (e) alternatively, an order appointing an expert to value the shares in BGR; (f) orders for payment to Food Improvers of $1,165,777.73 plus GST for consultancy fees to 1 July 2005, together with interest on its loan of $111,000 and three months consultancy fees in lieu of notice following on termination of the consultancy agreement; (g) damages and interests. 267 In the plaintiffs' written submissions handed up on the last afternoon of the trial they sought some additional, unpleaded, relief, namely: · an order for specific performance of an agreement to distribute in accordance with option B; · orders that the distribution which was actually made in February 2006 either be repaid by Triad and Cordato Partners Services or be treated in such a way as to ensure that a distribution of the money then paid be made in accordance with option B; · an order that Triad and Cordato Partners Services repay to the other defendants 95% of all legal costs and disbursements paid by BGR or its subsidiaries in respect of these proceedings and that Triad repay 90% of all consultancy fees received by it since 1 July 2005; · the appointment of a receiver under s 233(1)(h) having all the powers of a court appointed receiver under s 420 of the Act for the purpose of selling the remaining assets of BGR and its defendant subsidiaries ascertaining and paying their creditors, determining whether the BARM litigation should be continued and to make distributions. WHAT ORDERS SHOULD BE MADE? 268 For the reasons I have given, I am of opinion that I should make declarations to the effect sought. 269 An order for specific performance of an agreement to distribute in accordance with option B is not appropriate because no contact so to distribute was made. But it is not the end of the matter. Both Triad and Food Improvers are entitled to render invoices so as to be paid over $1 million each in consultancy fees which had not been invoiced. Food Improvers has established that it is entitled to receive interest from BGR on its loan of $111,000. The plaintiffs' position is that they wish Food Improvers to receive only $500,000 by way of a payment for the consultancy fees forgone. Likewise, Mr Gulson has indicated that he and Triad do not wish to receive any consultancy fees. As the difference between options A and B showed, Triad was fiscally better off by receiving only dividends which would be fully franked together with the corresponding imputation credits. And, Mr Lombardo gave advice that that was best for both Triad's and Food Improvers' positions. 270 The negotiations in September 2005 and all the correspondence up to the time of the distribution on 22 February 2006 demonstrated that all the shareholders were content to have a payment of $500,000 made in respect of Food Improvers' entitlement to consultancy fees and thereafter a distribution made in accordance with the balance of option B. Having regard to the oppression which I have found in respect of the way Food Improvers has been treated, I am of opinion that it would be appropriate to make an order requiring BGR, Triad and Cordato Partners Services to cause the payment of a tax invoice for $500,000 plus GST, when issued by Food Improvers, in respect of the compromise of its entitlement to consultancy fees payable by BGR. Although the plaintiffs have also claimed that Food Improvers, should receive three months consultancy fees in lieu of notice for the wrongful termination of the consultancy agreement, I am of opinion that Mr Bax's and Food Improvers' conduct in September 2005 and thereafter in offering to accept payment of $500,000 plus GST for those fees under option B makes it appropriate that only that sum be ordered to be paid. The $500,000 was a compromise figure. Had it been paid, each party would have considered that to have finalised all of Food Improvers' entitlements to fees under the consultancy agreement. 271 The dividend paid on 22 February 2006 should be set aside and BGR should be required to give effect to a distribution in accordance with the mechanism in option B. That is, the $500,000 consultancy fee plus GST should be paid to Food Improvers by BGR and then a dividend paid to its shareholders which would be used to repay their loan accounts. The amounts so received by BGR would then fund a second dividend to its shareholders. It may be possible for the parties to agree some payments between them of net amounts instead of this, in light of the fact that the earlier payments have been made. Food Improvers will also be entitled to have the dividends paid to it by BGR treated as fully franked. 272 I am of opinion that an order should be made that a substantial proportion of the legal fees paid for the defendants' conduct of the proceedings should be borne by the second and third defendants. I propose to hear the parties as to the appropriate form of that relief. I will give the defendants an opportunity to make submissions as to whether the proportions should be 95% or a lesser sum. I should indicate that my preliminary view is that in the order of 90% of the fees payable up to the 31 July 2005 might properly be borne by BGR and that thereafter the substantial part of the proceedings appears to have been conducted for the benefit and defence of the positions of Triad and Cordato Partners Services. Although they contend that the defence of the claim to consultancy fees was for the benefit of BGR, I am of opinion that the dominant purpose of that defence was to benefit Triad and Cordato Partners Services at the expense of Food Improvers. In addition I have found that Mr Gulson did not believe that the entitlement to claim consultancy fees had ever been cancelled. In those circumstances the persistence in the defence was oppressive of Food Improvers. 273 In relation to the consultancy fees paid to Triad after July 2005, I find that Mr Gulson did perform some substantial work in the management of BGR. Mr Gulson's decision to sell on the terms on which Main Camp plantation was sold has not been challenged, so that it is accepted that his work achieved a considerable benefit for all the shareholders, albeit, by excluding Mr Bax from the decision making process. I can see no justification for Triad's consultancy fees at the rate of $20,000 per month having been established on the evidence after 28 February 2006. In my opinion it is oppressive of Food Improvers for Triad to continue to be paid at that rate. Given that Mr Gulson was performing work up to then I am inclined to the view that Triad should be remunerated at the rate agreed between him and Mr Bax before Mr Bax's exclusion, that is $16,000 per month plus GST. Accordingly, an order should be made that Triad should repay the amounts exceeding what I have set out above as an appropriate sum. PURCHASE OR BUYBACK OF FOOD IMPROVERS' SHARES IN BGR 274 Although an order under s 233 of the Act was sought that Triad and/or Cordato Parter Services purchase Food Improver's shares in BGR, or that BGR purchase Food Improver's shares, this claim was not pressed in final submissions and I have not addressed it. The plaintiffs indicated, through unchallenged expert evidence, that valuers could value those shares. Since the evidence is that there is no substantive business being carried on by BGR or its subsidiaries, I am of opinion that no purpose would be served in making such an order and that the interests of the parties will be better served by an order winding up BGR. The process of valuation would be expensive and at the end of the process there would be no guarantee that, after a further hearing, the orders would be given a practical operation. Any order for purchase, or buying back, of shares would require the purchaser to pay Food Improvers some time in the future. The final resolution of this dispute should not be postponed. SHOULD A RECEIVER BE APPOINTED? 275 Mr Max Prentice and Mr Murray Smith, both experienced insolvency practitioners and liquidators, gave evidence concurrently as to the likely work and associated costs involved in a court ordered liquidation of the BGR group of six companies which are defendants in the proceedings. They noted that none of those companies is now particularly active. Mr Prentice pointed out that a number of the debtors outstanding at the time he had prepared his report of September 2006 had subsequently been collected and so the work involved in a liquidation was somewhat reduced. Each gave varying estimates of the costs which a court ordered liquidation would involve. It is not necessary for me to resolve that factor. At the end of the day there was broad agreement on those costs other than those associated with the liquidation of BARM. That was because of the complication of the ongoing and unresolved litigation with the Australian Tax Office in which a refund of over $9 million is sought. Both experts agreed that a liquidator would need to become quite involved in that litigation because of the potential for personal liability were it unsuccessful. To the extent that they differ, I prefer Mr Smith's methodology because it addressed the detailed tasks which a liquidator would need to undertake. Mr Prentice, on the other hand, formed a broad brush estimate based on his experience. I do not mean to criticise Mr Prentice for that approach but simply to prefer Mr Smith's clearer and more closely justified method of arriving at his result. Both experts gave their evidence with complete professional detachment and undertook the task of assisting the court as one would expect from two such experienced professionals. 276 The plaintiffs have not given any detailed explanation as to why a receiver of BGR would be appropriate or preferable to a court appointed liquidator. On the evidence BGR has no ongoing business apart from realising its assets. The impact of appointment of a receiver or a liquidator would not appear to make any substantial difference to that exercise. A court appointed liquidator would enable BGR's affairs to be wound up, including the use of the liquidator's controlling shareholding in each of the other subsidiaries which are parties to appoint the liquidator or a nominee as a director and remove Mr Gulson and Mr Cordato or any other persons as directors. Again, a liquidator would be in a position to make an assessment, once he or she were appointed to the board of BARM, as to how that company's litigation with the Australian Tax Office should be conducted. It will be necessary to have cooperation from Mr Gulson and Mr Bax in the running of that litigation, but given the potential benefit each stands to gain from a successful outcome, I am confident that each will be willing to cooperate with an independent third party in its pursuit. There was no evidence as to the cost of the receiver being any less than that of a court appointed liquidator or of any other benefit of a receiver. Indeed, Mr Prentice said that a court appointed receiver of a solvent company sometimes increases costs and does not necessarily resolve the issue. 277 I will hear the parties on whether it is preferable to have a liquidator rather than a receiver appointed. I cannot see on the material now before me any benefit in having a receiver as opposed to a liquidator. A liquidator will bring finality to the affairs of the parties, which in my opinion, is necessary. A receiver may leave other matters unresolved in circumstances where I do not see the parties as being able themselves to resolve them. While each of a receiver or a liquidator can make an application to the court for directions, my preliminary opinion is that an order for the winding up of BGR should be made and the liquidator will then have a discretion as to the appropriate method of bringing to an end the affairs of the other companies in the group by virtue of the liquidator's control of them BGR's shareholdings. In the meantime, it is necessary to order that each of BGR and the fourth, fifth, sixth, seventh and eighth defendants be restrained from entering into any transactions or making any decisions, including in relation to the BARM litigation otherwise than in the ordinary course of business, so that a liquidator can consider what ought to be done about the composition of the boards and the continuing affairs of each of those companies. COSTS 278 In my opinion the Triad and Cordato Partners Services should pay the plaintiffs' costs of the proceedings. If they are unable to do so, then the other defendants, should pay any difference in the amount the plaintiffs are able to recover from Triad and Cordato Partners Services and the amount at which the costs are taxed. 279 The plaintiffs have sought a special order in respect of the costs of Mr Lawson who came to Sydney to be cross-examined. The costs associated with Mr Lawson's evidence will be the plaintiffs' costs in the proceedings and be recoverable on a taxation. I see no need for any special order. 280 In their final submissions the plaintiffs asked for an order vacating an order made by Hely J on 22 July 2005 when refusing interlocutory relief. He ordered that they pay the then defendants' costs of the amended interlocutory application up to but not including 22 July 2005. The defendants have not addressed that claim but, having regard to the false impression which Mr Gulson's affidavit of 20 July 2005 created as to his mental condition, I would be inclined, subject to hearing submissions from the defendants, to vacate Hely J's order as to costs. 281 The plaintiffs will have to bring in short minutes of order to give effect to matters in these reasons on which I have indicated I will hear them further. To the extent that either party wishes to make submissions about matters which I have said I will hear the parties on, those submissions should be filed and served on or before 4.00 pm on 13 February 2007. I will order the proceedings to stand over for making of further orders on 14 February 2007. I certify that the preceding two hundred and eighty one (281) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares. Associate: Dated: 12 February 2007 Counsel for the Plaintiffs: Mr F Lever SC with Mr R Alkadamani Solicitor for the Plaintiffs: Haywards Solicitors Counsel for the Defendants: Mr S Reuben with Mr D Jarrett Solicitor for the Defendants: Cordato Partners Counsel for Mr Cordato: Mr I Harrison SC (written submissions only) Solicitor for Cordato Partners Services Pty Ltd: Cordato Partners Lawyers (written submissions only) Date of Hearing: 9 October 2006–20 October 2006 and 27 November 2006 -1 December 2006 19 December 2006 Date of Final Submissions: Date of Judgment: 12 February 2007