New South Wales Supreme Court CITATION : Strata Consolidated v Bradshaw [1999] NSWSC 22 CURRENT JURISDICTION : Equity Division Commercial List FILE NUMBER(S) : 50304/94 HEARING DATE(S) : 26 October 1998; 27 October 1998; 28 October 1998 and 30 October 1998 JUDGMENT DATE : 8 February 1999 PARTIES : Strata Consolidated (Australia) Pty Ltd; ATA Wholesalers Pty Ltd; Adtech Corporation Pty Ltd v Edward John Bradshaw; Tarkello Pty Ltd; Ian Ronald Ney; Tartandi Pty Ltd; Procus Australia Pty Ltd; Procus West Pty Ltd; Selmet Pty Ltd; Sipro Pty Ltd; Siska Pty Ltd; Patrick Maguire; Warren Binney; Ross Patterson; John Shanahan; Do Yourself A Favour Co Pty Ltd. JUDGMENT OF : Hunter J 1-3P - P Biscoe QC with SJ Motbey COUNSEL : 1-2D - P McEwen SC 3-14D - P Gray with A Pearman 1-3P - J Biady & Associates SOLICITORS : 1-2D - Worthington Story 3-14D - Stephen Blanks & Associates CATCHWORDS : Account of profits - errant fiduciaries - just allowances - general principles - incremental or absorption methods of accounting DECISION : After making all just allowances no amount should be certified as due by the defendants to the plaintiffs. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST HUNTER J MONDAY 8 February 1999 50304/94 STRATA CONSOLIDATED (AUSTRALIA) PTY LTD & 2 ORS v EDWARD JOHN BRADSHAW & 13 ORS REASONS FOR JUDGMENT 1. In the course of these reasons, reference is made to the reasons for judgment of 27 November 1997 as the principal judgment and to the reasons for judgment of 24 April 1998, as the supplementary judgment. I have continued to use the references adopted in those two reasons for judgment. 2. The orders made in the course of delivering the supplementary judgment were the following: "2A. The Court enquire into and take an account of profits by the first, second, third, seventh and ninth defendants derived through the exploitation of the Selectrons process. B. The Court enquire into and take an account of profits by the first, second, third, fifth, seventh, eighth, ninth, tenth and eleventh defendants derived through the exploitation of the Lansec-Xelux distributorship rights. C. The fifth defendant pay the plaintiffs damages for passing off in the sum of $230,000 together with interest thereon at Court schedule rates from 1 January 1994. D. The third, fifth, tenth and eleventh defendants pay the plaintiffs damages for the breaches referred to in paragraphs 1F of these orders, in the said sum of $230,000 together with interest thereon at Court schedule rates from 1 January 1994. E. The Summons be dismissed against the fourth, sixth, twelfth, thirteenth and fourteenth defendants and judgment be entered in favour of each of those defendants. F. Except as otherwise ordered, the summons be dismissed. G. The third, fifth, tenth and eleventh defendants pay the plaintiffs' costs of the proceedings against those defendants for passing off and for proscribed conduct within the meaning of the Trade Practices Act 1974 (Cth). H. The plaintiffs pay the fourth, sixth, thirteenth and fourteenth defendants' costs of the proceedings. I. The plaintiffs and the twelfth defendant pay their own respective costs of the proceedings between them. J. The plaintiffs pay the defendants' costs of issues in respect of which the summons stands dismissed. K. The general costs of the proceedings, including the costs of the plaintiffs and of the first, second, third, fifth, seventh, eighth, ninth, tenth and eleventh defendants of the proceedings for breach of fiduciary duties of the first and third defendants and for the participation by the other named defendants in those breaches, be reserved pending the completion of the enquiry into and taking an account of profits." 3. In relation to orders 2 A and B, the basis upon which accounts should be taken were summarised at page 309 of the principal judgment and page 9 of the supplementary judgment. 4. I have taken as the starting point in the taking of accounts in this case that stated in the principal judgment (at 288-290), citing Warman, significantly a case of an account of profits derived by an errant fiduciary. It offers some consolation to a tribunal afflicted with the task of taking an account of profits to note the observation in the joint judgment of Mason CJ, Brennan, Deane, Dawson, and Gaudron JJ (the joint judgment) that the "remedy is ancient and notoriously difficult in practice" (at 556), citing Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101 as a case illustrating some of those difficulties. However, in referring to Dart, an account of profits case arising out of an infringement of patent, the joint judgment noted that "the liability of a fiduciary to account differs from that of an infringer in an intellectual property case" the purpose of which in the latter case was "to prevent the defendant's unjust enrichment" (at 557), whereas, in the case of a fiduciary, the liability does not depend upon the detriment to the person to whom the duty is owed. Consequently, it was observed in the joint judgment as follows: "A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position." (at 557.5) 5. The distinction is of importance, in my view, in understanding the appropriate approach to the taking an account of profits in this case. 6. It was acknowledged in the joint judgment that because "the assessment of the profit will often be extremely difficult in practice … (w)hat will be required on the inquiry … will not be mathematical exactness but only a reasonable approximation" (at 558) and that it was necessary "to keep steadily in mind the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts" (at 559), drawing from the judgment of Fletcher Moulton LJ in In re Coomber; Coomber v Coomber (1911) 1 Ch 723 at 728-729 and of Deane J in Chan v Zacharia (1983-1984) 154 CLR 178 at 195. In Coomber, Fletcher Moulton LJ expressed the view that: "There is no class of case in which one ought more carefully to bear in mind the facts of the case … than cases which relate to fiduciary and confidential relations and the action of the Court with regard to them". (at 728-729) 7. The importance of this approach was recognised by McLelland J in United States Surgical Corporation v Hospital Products International Pty Ltd (1982) 2 NSWLR 766 at 817 where the following statement of principle is made: "The liability of a person who knowingly participates in another's breach of fiduciary duty was discussed by Gibbs J in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, at pp 395-398 where the earlier authorities from Barnes v Addy (1874) LR 9 Ch App 244 onwards are examined. In my opinion the principal to be derived from those authorities is that a person who knowingly participates in a breach of fiduciary duty by another may be both (i) liable to account to the beneficiary for any benefit he has received as a result of such participation and (ii) jointly liable with the fiduciary in respect of any pecuniary liability of the fiduciary to the beneficiary as a result of the breach. In the application of this principal the court will have regard to the particular circumstances of the case to ensure that the relief granted accords with the requirements of justice and good conscience, with particular attention to the nature and degree of participation by, and the degree of knowledge of, the person sought to be made liability, the nature of the fiduciary duty involved and the nature and circumstances of the breach thereof." 8. Pertinent to the facts of this case, which have been recounted at considerable length in the principal judgment, the joint judgment contained the following observation: "In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal's goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal's property has been exposed. Then it may be said that the relevant proportion of the increased profits is not the product or consequence of the plaintiff's property but the product of the fiduciary's skill, efforts, property and resources. This is not to say that the liability of a fiduciary to account should be governed by the doctrine of unjust enrichment, though that doctrine may well have a useful part to play; it is simply to say that the stringent rule requiring a fiduciary to account for profits can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff … Whether it is appropriate to allow an errant fiduciary a proportion of profits or to make an allowance in respect of skill, expertise and other expenses is a matter of judgment which will depend on the facts of the given case. However, as a general rule, in conformity with the principle that a fiduciary must not profit from a breach of fiduciary duty, a court will not apportion profits in the absence of an antecedent arrangement for profit-sharing but will make allowance for skill, expertise and other expenses." (at 561-562) 9. After reviewing the facts, which bear some superficial similarity to the facts of this case, the joint judgment concluded that the errant fiduciaries "should be ordered to account on the basis of the approach less favourable to them … for the entirety of the net profits of the businesses before tax less an appropriate allowance for expenses, skill, expertise, effort and resources contributed by them" (at 568). 10. The facts of this case, in my view, require that in making "all just allowances" (Pt 48 r 7 of the Supreme Court Rules), as stated in the principal judgment (at 290), those "just allowances" should include allowances for any "expenses, skill, expertise, effort and resources contributed" by the defendants and applied towards the generating of any profits derived from exploiting the Selectrons agency and the Translight-Xelux agency (the agencies). 11. The relevant findings in the principal judgment relating to the Selectrons agency are to be found at pages 9 to 29 of that judgment. For convenience of reference, the concluding finding in respect of the Selectrons agency, is repeated below: "I think the principles to be applied in such a case are to be found in Queensland Mines Ltd v Hudson 18 ALR 1 at 3 and 4 and that the resolution of this issue comes down to a question of onus. I am not satisfied that Bradshaw and Ney obtained the full and informed consent of Strata to acquire the agency rights of the Selectrons process. Without that consent, I consider myself bound to find that they acted in breach of their fiduciary and director duties to Strata. I express the finding in those terms as it seems to me unduly harsh to reach such a conclusion in the face of the reasonable satisfaction that I have that Strata (Biady) was not interested in the process: was not prepared to distract itself from its "established business" and was not prepared to commit itself to the significant "technical requirements" involved in making a success of the Selectrons Agency in which the anticipated rewards were likely to be modest." (at 28-29) 12. The findings in the principal judgment in relation to the Translight-Xelux agency are to be found at pages 29 to 52. Again, for ease of reference, there is set out below the concluding findings in the principal judgment in relation to that issue. "I am satisfied that the failure of the Strata corporations to acquire the agency rights for the Translight helmet was unrelated to the activities of Bradshaw or of Ney and Binney with Sipro. I think the evidence established that it was a conscious decision on the part of McCarthy to go in other directions in looking at alternatives to the Optrel-Uvex helmet: that he had Strata's information at his disposal concerning the Translight-Xelux helmet had he chosen to explore that avenue. As for Biady, I have little doubt that had he wished to acquire the Translight-Xelux agency rights for Strata. It was open to him to do so either personally or through McCarthy, whose responsibility it was to report to Biady on such matters. The explanation for Biady's failure to do so, I think, is likely to be found in the restrictions imposed upon the Strata corporations under the Strata Uvex share sale agreement and in the strained financial position of Strata at that time, as examined in some detail later in these reasons. As to Strata's entitlement to equitable relief, should Strata elect to follow that course, it is not an appropriate case of treating Sipro as a constructive trustee of the Translight-Xelux agency for Strata nor one entitling Strata to equitable damages. In my view, Strata was not harmed by Bradshaw's breaches in any measurable way. While it may be said that Bradshaw's provision of confidential information to Ney in October 1992 facilitated Sipro's dealings with Xelux, it did not have the effect of depriving Strata of any opportunity to acquire the Translight-Xelux agency rights. However, that conclusion is not determinative of any entitlement of Strata to have an account of profits should it elect to make such a claim. I also have some difficulty in applying standards of fiduciary duty upon the defendants in respect of this issue so as to confer equitable relief to Strata where I am of the opinion that: (a) Biady had accepted, through the terms of the Strata Uvex share sale agreement, that Strata Australia would join with Uvex in a commercial relationship of mutual support and co-operation and act as the distributor of the products of Strata Uvex and of Uvex and that, at least in spirit, the Strata corporations would only compete with Strata Uvex in retailing those products; (b) the failure of Strata to pursue and/or acquire the Translight-Xelux agency rights was unrelated to the activities of the defendants; (c) there was full knowledge within the Strata corporations to enable them to pursue and/or acquire those rights had they chosen to do so; and (d) Biady had acknowledged that any decision by the Strata corporations to acquire those rights would have been "ethically" reprehensible, having regard to the terms of the Strata Uvex share sale agreement. As found later in these reasons, Strata has cause for complaint about the manner in which the Procus group went about setting up in competition with Strata. However, I have been left in little doubt that Strata's grievance in relation to that conduct has caused the Strata corporations to hit out indiscriminately at the collection of defendants in these proceedings and in a manner which has caused me to resist accepting at face value vast portions of the evidence. That is not to suggest that I have not experienced comparable difficulties in accepting the evidence adduced on behalf of the defendants. Ideally, the findings that I have made in these reasons call for a plague on both their houses, referring to the principal protagonists. Applying concepts of equitable compensation and of exemplary damages in those circumstances does not come easily." (at 51-52) 13. It has been submitted on behalf of Strata that "so-called 'just allowances' should not, in the exercise of discretion, be made in favour of a fiduciary guilty of conscious wrongdoing". I think such an approach is at odds with Warman, particularly so if one considers the orders made in Warman in the context of the subject conduct of the errant fiduciary. 14. However, it was submitted on behalf of Strata that, in any event, in making any just allowance there was to be excluded any allowance for fixed costs which were not increased by the exploitation of the agencies. This method of accounting, characterised as incremental costing, was to be distinguished from the "absorption" method of accounting which applies to the cost of a product, for the purpose of identifying its profitability, all costs which contribute to the ultimate sale of the product. Rental of leased premises from which the subject business is conducted is a good example of an overhead which could be treated differently by the incremental and absorption methods. The absorption method was favoured by McHugh J in Dart Industries. However, the majority in that case adopted the incremental method. Dr Rodney Ferrier (Ferrier), the accounting expert retained by Ney, favoured the absorption method. In doing so, in the circumstances of this case, I think he was correct so as to ensure that "just allowances" are made. 15. Strata has placed great emphasis on the passage in the joint judgment in Dart Industries which espoused the incremental method of accounting in the following terms: "Where the defendant has forgone the opportunity to manufacture and sell alternative products it will ordinarily be appropriate to attribute to the infringing product a proportion of those general overheads which would have sustained the opportunity. On the other hand, if no opportunity was forgone, and the overheads involved were costs which would have been incurred in any event, then it would not be appropriate to attribute the overheads to the infringing product. Otherwise the defendant would be in a better position than it would have been in if it had not infringed. It is not relevant that the product could not have been manufactured and sold without these overheads. Nor is it relevant that absorption method accounting would attribute a proportion of the overheads to the infringing product. The equitable principle of an account of profits is not to compensate the plaintiff, nor to fix a fair price for the infringing product, but to prevent the unjust enrichment of the defendant." (at 114-115) 16. However, Dart Industries was an infringement of patent case and, in my view, is to be distinguished from breach of fiduciary duty cases (Warman at 557). As earlier noted, Dart Industries was referred to in the joint judgment of Warman without reference to this dichotomy of accountancy costing methods. I think it is clear from Warman that the relief ordered had in contemplation the allocation of costs of resources used in generating the subject profits without restricting that allowance to incremental costs. 17. Another fundamental difference in the method of calculating profits as adopted by the parties was described in the submissions on behalf of Strata as posing the question "whether profits derived from the Selectrons (agency) and the (Translight-Xelux agency) should be calculated on a group basis or separately for each trading entity". Robert Bell (Bell), the accountant retained on behalf of Strata, carried out his principal calculation on the group basis, rather than calculating the profit earned individually by the defendants in relation to the Selectrons agency and the Translight-Xelux agency separately. In doing so, I think he was in error, both as a matter of accounting principle and as a matter of implementing the orders made in the supplementary judgment for the taking of separate accounts. 18. As to the practicality of implementing those orders, I am comforted by the evidence of Ferrier that "the only way to comply with the requirements of (those orders) is to prepare separate accounts of profit for each defendant (the subject of those orders) from each source". That is what Ney did. 19. I considered the qualifications of Ferrier as outstanding and his opinion evidence to be of particular assistance. He illustrated the underlying distortions in the approach of Bell in two ways. The first was a simple illustration of the possible consequence of grouping financial information when company "A" was trading unprofitably in the subject product and company "B" was trading profitably. Under the grouping method both companies, A and B, were shown, in this illustration, to be trading profitably. The table is reproduced below: Sales Company Product A X 100 80 Company Product B Y 100 20 Grouped Products A&B X&Y 200 100 Gross Profit (assumed figures) Overheads Net profit by product 56 80 64 ----------- ------------ -8 16 50 10 ------------ ------------ 6 72 130 65 ------------- ----------- 7 (Ex 145.) 20. The illustration is not without practical relevance, as may be seen from an analysis of the Selmet and Procus financial statements. Selmet and Procus were each engaged in various ways in the exploitation of the agencies. However, it is apparent that the agency activities of Selmet represented the majority of that company's sales whereas the Translight-Xelux agency activities represented a small proportion of Procus' sales. The group accounting approach, clearly, in my view, carries the likelihood of distortion of the calculation of any profits derived by the constituent entities. 21. From a practical viewpoint, it is not difficult to understand Strata's preference for a group accounting approach to the taking of accounts. There is little doubt that Ney has masterminded the establishment and operation of the Procus group and I am satisfied that, faced with a choice, Ney would have selected a commercial course in the structuring of the entities within the Procus group to defeat the claims of Strata, much along the lines that I think Biady has acted to dilute the interests of Ney and Bradshaw in the commercial undertakings once exploited by Strata. 22. The way in which Ney has used Lansarc is a very good example of his manipulative approach to his commercial interests: although, in the case of Lansarc, it appears that considerations other than those related to Strata, motivated him. It was Ney's evidence that the sales of Selectrons products recorded in Lansarc were "trust sales" which should have been "accounted at the end of year back into Selmet". However, he said that "for the year ended 30 June 1996 (he) omitted to do it." As for the year ended 30 June 1997, he said that Lansarc sales were recorded as "nil", the reason for that being that he "did account for them back into Selmet in the year ended (30 June) 1997" (T37.40). He explained the absence of trust documents and trust income tax returns because it was "not a trust in (a) legal sense, it (was) a trust … in the form of accounting" (T38.22). Ney elaborated upon this evidence in the following way: "HIS HONOUR: Just one or two other questions I thought I would ask, and it may be helpful if I do it now. HIS HONOUR: Q. What was the purpose of introducing Lansarc? A. What happened in 1995, Mr Sheehan got hold of a big job for us from a company called Austrack in Junee. And that was a planing a crankshaft out of a railway engine which belonged to BHP. Unfortunately the job went wrong and Selmet lost about 15,000 on it. And we were under threat of being sued by Austrack because they were under threat from BHP. I realised that that exposed the whole of what Selmet was doing to going under, because we were so small, and when companies as big as BHP and Austrack say jump, it's a matter of how high. So I decided to move the wholesale and the sale of the Selmet consumables into another company, which was known as mainly as Lansarc. And because of the litigation was on foot, I recognised and made provision to transfer the sales of the products from Selectrons back into Selmet. I used Lansarc because I had already incorporated it for the purposes of the carbon clean agency that had been obtained. Q. That is really what I was seeking to ascertain from you. That was the purpose of its introduction in the first place? A. That's right, because I was advised because of the litigation to start a new company. The problem I was confronted with was we had to move those items or those activities out of Selmet and I didn't want to have to incorporate another company because there were enough of them, so I put it into Lansarc." (T73.49-75.12) 23. That evidence was expanded further in Ney's cross-examination as follows: "Q. What would happen then if Selmet was under the attack of this litigation? What would you have done with the trading and the profits in Lansarc? A. Looking at it in a practical sense,. If Selmet had gone under because it has been sued by Austrack and any profits had been held in Lansarc, they would still be there available and if there was any judgment that we had to pay accounts of profits in relation to those. But if they were lost in Selmet, they would be lost forever and there would be none available to Strata. Q. Tell me this, if Austrack had obtained a judgment against Selmet, you would have concealed from Austrack, wouldn't you, that, in fact, the business being carried on by Lansarc to your mind was still beneficially owned by Selmet? A. I couldn't, because I had done that minute and like all things once you produce the documents the story comes out. Q. Yes. You mean as it came out when you produced the minute this morning? My question was a little bit different. If Austrack had obtained a judgment against Selmet, would you have disclosed to Austrack that the business being carried on by Lansarc, formally carried on by Selmet was still beneficially owned by Selmet and available to satisfy the judgment? A. I wouldn't have volunteered it, but the knowledge would come out when the minute book had to be produced. HIS HONOUR: Q. I don't quite follow that, because the minutes don't reveal that the activities of Lansarc were being carried on for the benefit of Selmet, I think quite to the contrary, and the only recognition that the minutes give in relation to Lansarc's activities was that if there was a court order, it would account appropriately in respect of those activities? A. That's right. If there had been a-- Q. If that's right, then there is no room in these minutes for saying that Lansarc was carrying on the activities for the benefit of Selmet? A. No, but from the timing point of view if it happened-- Q. From a? A. Timing point of view if it happened in 1996, you are quite correct. If it happened in 1997, the accounts show that sales had been transferred back to Selmet from Lansarc. Q. No, the accounts for 1997, not 1996? A. No. It happened in 1996. It wouldn't have showed, but in 1997 it would have. Q. Yes, but that is not a matter emerging from the minutes? A. No, that's correct. BISCOE: Q. These minutes have never been discovered in these proceedings at any stage before, have they? A. No, that's correct. HIS HONOUR: It might save time noting in this case that nothing surprises me, Mr Biscoe. From either side I suspect, and in this instance I treat the evidence as amounting to a movable feast with these takings. In accepting what the witness said, if Selmet had been the subject of litigation, then these activities would have stayed where they ostensibly were being accounted for, namely in Lansarc, and the concept of those activities being conducted for Selmet if it was not under the threat of litigation is an unacceptable commercial activity, I would have thought." (T84.24-85.35) 24. The manner in which Ney allocated accountancy fees in the financial statements of the defendants is another example of the manipulation of accounts by Ney, in this instance, with his eye on the effect of taxation upon entities within the Procus group. So much is clear from the following evidence of Ney in cross-examination: "Q. For example, you moved all accountancy fees out of Procus in '95 and '96; I mean by "out" that it paid no accountancy fees in 1995 and 1996, or I should say it did not accrue accountancy fees in those years? A. Yes, there was no cost in those years. Q. This was done at will in order to achieve the best possible result for each of the companies in terms of its tax liability, is that right? A. Yes, I'd agree with that." (T129.4-13) 25. I think the same may be said of the way Ney allocated the cost of interest and, probably, of wages and fees. Consequently, Ney's evidence-in-chief that he did not regard expenses incurred by those entities as "allocable at will to any specific entity within the group" requires some qualification. So any distrust by Strata of the Procus group's accounts was not without foundation. 26. Nevertheless, I think it was incumbent on Strata to scrutinise the accounts of the defendants, make any adjustments for distortions that may have resulted from Ney's creative accounting and calculate separately for each of the defendants any profits derived by them through the exploitation of the Selectrons agency or the Translight-Xelux agency. 27. Ney presented adjusted accounts which purported to disclose any such profits so derived by any of the defendants. Mathematically there is no significant challenge by Strata to the correctness of those calculations. Ferrier "checked the accuracy of … Ney's figures by reconstructing his model in the same way as (he) did for … Bell, and … reviewed, in general terms, (Ney's) methodology and confirmed that (he agreed) with, in principle, the methodology … Ney adopted" (T159.29-34). 28. I do not underestimate the difficulty confronting Strata in challenging Ney's allocations, particularly those involving subjective accounting decisions by Ney. Strata has sought to test those decisions in extensive cross-examination of Ney and through the evidence of Carruthers and Sheehan. Sheehan had been among those Strata salesmen who had defected to Procus in 1993. His evidence in the main proceedings was reviewed in the principal judgment (at 209-211). In the proceedings to take account of profits, he was recalled by Strata to evidence the manner in which the Procus group operated, in particular, the personnel engaged, the premises occupied by entities within the Procus group, the facilities used and the activities conducted by those entities. Carruthers' evidence was to like effect. 29. In my view, with that evidence available to Strata, there was no significant obstacle to undertaking a calculation of any profits derived by each of the entities within the Procus group on an individual accounting basis arising out of the exploitation of either of the agencies. 30. The second way in which Ferrier exposed the effect of the underlying assumptions and methodology in Bell's report was in Annexure B to the report of Ferrier of 25 August 1998 (Ex 144) (Ferrier's annexure B). 31. In Bell's report of 6 August 1998, he calculated the "total profits accruing to Sipro, Procus, Selmet and Lansarc from the sale of the products" the subject of the agencies as follows: $ 1993 10,873 1994 39,157 1995 56,613 1996 42,763 1997 62,726 Total 212,132 (Ex HJ) 32. In order to arrive at those "profit figures", Bell purported to adopt the Dart Industries' costing approach by excluding, what he perceived to be, fixed costs that would have been incurred whether or not any of the constituent entities were engaged in the sale of the subject products. In this way, Bell excluded rent, cost of computer equipment, depreciation and an item described as "Treatment of Related Party Expenses". "Related Party" referred to those defendants, other than the corporate entities, the subject of the orders for the taking of accounts. He also excluded legal expenses as not directly related to the sale of product. Bell made an allowance for the "opportunity" costs of interest on funds contributed by one or other of those related parties. In the end, Strata disowned this allowance for opportunity interest and adopted an allowance for "actual" interest. However, at the time of Ferrier's annexure B that change had not taken place. 33. Ferrier described that annexure as one which contained "schedules … which express … Bell's calculations in a format which makes apparent the assumptions and methodology adopted by (Bell)". I doubt if it would prove to be a rewarding exercise to repeat the details of Ferrier's annexure B in these reasons. It will suffice for my purposes to observe that among other things, it reveals that Bell's estimate of "profit" in relation to the sale of the subject products for the year ended 30 June 1994 converted a net loss for the year ended 30 June 1994 on the sale of the subject products, as derived from the financial statements, into a "profit" of $39,157. In simple terms, Bell's "profit" figure was achieved only by excluding any allocation of the wages paid to the personal defendants engaged in relation to the sale of the subject products. A similar analysis for the year ended 30 June 1993 was included in Ferrier's annexure B. As Bell had not taken issue in his evidence-in-chief with Ferrier's annexure B, I sought his comment on the validity of that analysis as follows: "HIS HONOUR: Q. Have you got Dr Ferrier's report of 25 August? A. Yes, I do. Q. Would you go to annexure B, page 1? A. (Witness complied). Yes. Q. Now, that's an annexure which Dr Ferrier has prepared which he says expresses your calculations in a format which reveals the assumptions and methodology. Are you aware of that? A. Yes. Q. Do you agree that it does just taking, for example, the 1993 analysis that appears at annexure B, page 1? A. Yes; it shows where we have allocated certain overheads on a ratio of sales and allocated certain items on a depreciable basis. Q. Perhaps more specifically, it reveals the assumptions and methodology adopted by you? A. Yes, it does. Q. I think to be fair, do you see in particular that in relation to your profit figure of $10,873, how that is comprised in relation to what I refer to as related parties? A. Yes, I do. Q. Do you accept that it involves the trading organisations as well as the individuals? A. No, I don't. Q. Why not? A. What I've done is to calculate. Q. Why not in the light of the analysis that appears at the foot of that annexure? A. Because there are add-backs in that for wages which shouldn't be added back, and I've done trading profits of the companies. Q. Do you say the $10,873 is not made up in the way shown at the bottom of annexure B, page 1? A. It is a way of going about it. Q. Isn't it the way? A. I don't know that it's the way. In the schedules in my report for each year-- Q. If you go to the last page of your report, you can see what you've done there is the $10,873. Have you got that? A. Yes. Q. And that justifies, does it not, the manner in which Dr Ferrier has analysed your $10,873? A. Yes, it does." (T191.41-192.37) 34. However, as earlier stated, having regard to the circumstances surrounding the acquisition and operation of the agencies, I am satisfied that some allowance must be made by way of an apportionment of the costs of resources utilised in the sale of the subject products, even if I was required to find, on the evidence, that some of the costs of those resources would have been incurred by the Procus group in the absence of the acquisition of the Selectrons agency or of the Translight-Xelux agency. 35. In accordance with my directions, Ferrier and Bell met and prepared a joint report which identified "Areas of Difference" (the joint report). In addressing those differences, it is also necessary to determine the period in respect of which accounts should be taken. Bell's analysis was taken up to the year ended 30 June 1997. In the supplementary judgment I deferred a decision on that question until I had the opportunity, among other things, of seeing how Lansarc fitted into the defendants' activities. 36. The view I have formed is that some time should be determined, lying between two and four years from the respective times of acquisition of the agencies. That would place an outside limit of mid 1996 in respect of the Selctrons agency and mid 1997 for the Translight-Xelux agency. 37. The term of the Selectrons agency was two years with provision for "automatic" renewal. The evidence of Ney was that the agency agreement had "died" with corporate changes affecting Sifco and for some years, probably from 1993, Selmet had been operating on an "order by order" basis. It was also his evidence that Selmet had not achieved the "yearly … sales quota (under the agreement) … for the first year of operation" and there had been no agreement reached thereafter on any minimum sales quota. I think that description was probably a reliable one of the practical relationship between Selmet and Sifco as distinct from the legal relationship under the Selectrons agency agreement. 38. Having regard to the circumstances of acquisition and the nature of the subject matter of the Selectrons agency which were the subject of findings in the principal judgment, I take the view that three years of any profits should be accounted for in respect of the exploitation of the Selectrons agency - that is to mid 1995. I think that borders on the generous side of the discretionary band. 39. I think a little in excess of three years is appropriate in respect of the Translight-Xelux agency, having regard to similar considerations relating to the circumstances of acquisition and nature of operation of the agency which were the subject of findings in the principal judgment. That would bring the accounting period up to mid 1996. In reaching that conclusion, I have had no regard to Ney's evidence that the agency relationship had come to an end by the beginning of 1998. 40. For reasons that follow, the effect of those findings is, in my view, that on a separate accounting method as presented in Ney's financial analyses and as adjusted by Ferrier, the defendants should not be ordered to make any payment to Strata by way of an accounting of profits. 41. I think the liability of the defendants to account should be treated as follows: (a) As to the Selectrons agency (July 1992 - June 1995) Selmet incurred a loss of $14,074 for the financial year ended 30 June 1993, gained a profit of $1,167 for the year ended 30 June 1994 and suffered a loss of $4,226 for the year ended 30 June 1995: resulting in the incurring of a net loss for the period of $17,133. Ney, in respect of services rendered, incurred a loss of $5,829, representing lost salary opportunity in the year ended 30 June 1993, $4,125 for the year ended 30 June 1994 and profited by $5,604 for the year ended 30 June 1995: resulting in a net loss for the period of $4,350. Unadjusted, Ney received $10,165 in that period for his services. Siska, on the basis of lost interest opportunity, lost $4,950 in 1993 and $2,692 in 1995, suffering no significant loss in 1994. Total loss incurred for the period was $7,642 (there is a small discrepancy in Ney's summary). Unadjusted, Siska received $2,940, recorded as an interest payment. Bradshaw received nothing and incurred no losses during this period other than through his interest in Selmet. Tarkello, on the basis of interest received adjusted for opportunity costs, benefited by $2,893. Unadjusted, Tarkello received $8,554 ($8,553 in Ney's analysis). However, in my findings in the principal judgment, I did not accept that the funds made available by Bradshaw, through Tarkello, for the acquisition and exploitation of the Selectrons agency were loan funds, rather capital contribution entitling Tarkello to a fifty per cent share in Selmet. Similarly, I regarded Ney and Siska as each entitled to a twenty five per cent share. On those bases, I think it is appropriate to: (i) take Selmet's losses into account in considering the position of Ney, Bradshaw, Tarkello and Siska; (ii) treat the payment recorded as interest as payments to shareholders in respect of their separate equities, unadjusted for opportunity costs; (iii) treat the payments to Ney as payments for services rendered, which payments, on balance, were less than the market value of those services. The consequence of those approaches is that none of the defendants, in my view, should be ordered to pay any moneys by way of an accounting of profits. (b) As to the Translight-Xelux agency (February 1993 to June 1996): Sipro: Although the order to inquire into and take account of profits was made against Sipro in respect of this agency, the evidence in the principal proceedings and in the taking account of profits established that Sipro acted as wholesaler to the Procus group and operated in a fashion which ensured that, for practical purposes, it derived no profits. Procus Australia, in respect of the exploitation of this agency, incurred a loss of $3,300 for the period to 30 June 1993 and of $21,904 for the year ended 30 June 1994. For the years ended 30 June 1995 and 1996, it derived profits of $2,312 and $1,299 respectively. For the period it incurred a net loss of $21,593. Selmet derived a profit of $203 for the year ended 30 June 1994 and incurred losses of $11,834 and $2,548 respectively for the years ended 30 June 1995 and 1996. The net losses incurred for the period were $14,179. Bradshaw was paid a total of wages or fees for services rendered of $10,916 in the period 1 July 1993 to 30 June 1996. This was approximately equivalent to the opportunity cost of those services. Tarkello received $5,331, recorded as interest from Selmet which, if adjusted for opportunity costs of interest, reduced that sum to $1,893. This should be treated in the same way as interest received from Selmet in relation to the Selectrons agency. Ney received a total of $30,006 for services rendered over the relevant period, which, if adjusted for opportunity costs, reduced the sum to $3,610. The amount of $30,006 included $2,799 paid by Lansarc. Siska received $1,164 recorded as interest from Selmet and $5,855, also recorded as interest from Procus - a total of $7,019, which, if adjusted for opportunity costs, converted the figure to a net loss of $7,037. Having regard to the findings in the principal judgment, the payments should be treated as though they were payments to a shareholder without regard to the opportunity cost of interest. Binney received $7,788 for services rendered (ignoring $243 recorded as an interest payment). That payment for services represented an undervalue. Maguire received $2,961 for services rendered (also ignoring a payment of $612 recorded as an interest payment). As in the case of Binney, that payment represented an undervalue based on opportunity costs of those services. 42. Having regard to the findings in the principal judgment as to the nature of the interests of Ney/Siska, Bradshaw/Tarkello in either Selmet or Procus Australia, I think it is appropriate to take into consideration the losses incurred by those entities which amounted to $35,772 during the relevant period. That figure does not include the Lansarc profit of $3,616 for the year ended 30 June 1996. In my view, that sum should be treated as part of Selmet's trading results in light of the evidence of Ney which, I think, revealed the movement of trading into Lansarc as a sham or as an attempt to defeat contingent directors of Selmet. 43. There is an outstanding application by Strata to join Lansarc as a defendant in these proceedings. I deferred ruling on that application. Clearly, it is highly undesirable to accede to that application having regard, alone, to the history of this litigation. As it happens, I am satisfied on the evidence and upon the findings made in these reasons that it is neither necessary nor desirable to accede to that application which, accordingly, is dismissed. In my view, having regard to those findings, nothing of significance would be achieved by joining Lansarc. By contrast, granting the application would be likely to occasion significant disruption to the finalising of those proceeds with little or no benefit from such joinder. 44. The effect of treating the Lansarc trading as that of Selmet is to reduce Selmet's loss for the relevant period to $10,563 and the total losses of Procus Australia and Selmet to $32,156. 45. The conclusion I have reached is that, given the close approximation of the payments for services rendered to the opportunity costs of those services, treating interest payments as being payments to shareholders in respect of their equities without regard to opportunity costs, and taking into account the losses suffered by Selmet and Procus Australia over the relevant period, it is not appropriate to order any of the defendants to make any payments to Strata by way of an accounting of profits. 46. In reaching that conclusion in respect of the defendants' exploitation of either agency, I accept that the defendants may have derived some capital profits. It is accepted by Strata that there is no basis upon which I could quantify capital profits in this case (T204.28). The way it was put on behalf of Strata is that, in the taking of accounts, regard may be had to capital profits as in Kettle Chip Co Pty Ltd v Apand Pty Ltd (1998) 155 ALR 134: that while capital profits have not been quantified in this case, the likelihood that some of the defendants had derived such profits was a relevant consideration in determining the appropriate period for the taking of accounts: that it would not be just to cut off the accounting period in the early years of building up the agencies when losses might be expected and "before the profit stream started to come in". 47. While it is common ground that the evidence does not permit me to quantify any such profits, I would add, the evidence does not permit me to make a positive finding that capital profits were, in fact, derived by any of the defendants in respect of either agency. On one view of Ney's evidence, there was no capital profit made. However, I did not regard Ney's evidence on that aspect as satisfactory, lacking support, for the most part, from relevant contemporaneous records. It is sufficient to say that I would not be prepared to make a positive finding that capital profits had been earned in respect of either agency. 48. In other circumstances than those the subject of findings in the principal judgment, I would not regard, the ultimate findings on this inquiry, as a just or satisfactory result. However, in a case in which I expressed the view in the principal judgment that "ideally, the findings … call for a plague on both their houses, referring to the principal protagonists", in my view, the result satisfies the demands of equity as formulated in Warman, Coomber and Hospital Products. 49. It is clear, however, that the parties will not allow this judgment to collect dust and for that reason I think there is some utility in making particular findings on some of the issues raised in this hearing. 50. In relation to costs which Bell regarded as not incrementally increased by the exploitation of the agencies the following findings are made: 51. Salary and fees payable to Ney, Binney, Maguire and Bradshaw: The real issue between the parties is in the divergence of accounting approaches adopted by Bell and Ferrier. Bell would make no allocation for such costs in the calculation of profits on the basis that their respective contributions to the exploitation of the agencies "related to surplus capacity in the four men" so that "the same wages would have been paid (to them) in any event". 52. It was further submitted by Strata that the allocation of any part of those costs could not be justified on the basis of lost opportunity of engagement by those individuals in alternative activities to those related to the agencies. 53. There is no challenge to quantification of the actual salaries and fees payable to those defendants, as extracted from the financial statements. For the reasons earlier stated, I agree with Ferrier's "absorption" method of accounting which requires a "just allowance" for the cost of the contributions of those defendants in the exploitation of the agencies. 54. Ney has contributed to the dispute with evidence of "opportunity costs" represented by "the amounts which could have been earned had the employment or other services (provided by the defendants) been provided to third parties". In Ney's opinion, the value of the personal defendants' services was greater than the amount actually paid to them. I have no difficulty in accepting that evidence. Ferrier and Bell are agreed that the "actual" was $114,025, while Ney has calculated a cost of those services at $122,022. I think the difference is of little significance. However, I think it is inevitable, in the circumstances in which the agencies were acquired and operated, that the defendants were prepared to provide services below "market" rates in an endeavour to get the agencies established and I regard Ney's evidence on the value of those services as reliable. 55. Had it called for decision, I would have regarded it necessary in making a "just allowance" to take into consideration the market value of the services provided by the personal defendants. Otherwise, I think it is clear that the actual amount paid for the services of the personal defendants has to be taken into consideration in determining what profits, if any, were derived by the defendants in the exploitation of the agencies. 56. Rent: For the reasons earlier stated, I think an allocation should be made of the rent paid for so much of Procus' premises occupied by the operations of the agencies. There is a conflict between the evidence of Ney and that of Sheehan and Carruthers over the use of the premises by the agencies. Strata allocates nothing by way of rental to the costs of exploiting either of the agencies. Strata contends that the area occupied by the Translight-Xelux agency took advantage of "surplus capacity" of Procus' premises. In the case of the use of the premises for the Selectrons agency it is acknowledged by Strata that the area occupied was no more than 15 to 20% of the premises. However, it is submitted by Strata that no allocation of rent is justified as it has not been shown that premises representing 80 to 85 % of the area of Procus' premises was available to Procus, or, if smaller premises could have been obtained, that a lesser rent would have been payable. As a matter of principle, I am of the view, for the reasons earlier stated, that some allocation of the cost of rental for the agencies' activities is required. 57. In relation to the Translight-Xelux agency, Ney's evidence is that, had that agency not been acquired, another like agency would have been obtained in its stead. On the principle of accounting espoused by Dart (at 114) that would be a relevant consideration in bringing to account an allocation of a fixed overhead such as rent. I would not be prepared to find that such an alternative agency would have been acquired. 58. As to the area actually occupied for the agencies' activities, the evidence established that Procus moved premises from a location known as 35 Prime Drive to one known as 4 St James Place, Seven Hills. Ney evidenced the areas within the premises occupied by the various entities in the Procus group by sketches of the floor plans for the respective locations which delineated areas by reference to usage. Ultimately, I think there was little divergence in the evidence of Sheehan and that of Ney, with Sheehan's substantial acceptance of the correctness of the sketches produced by Ney. There remained in dispute an area used for the Selectrons agency which was, in part, also used for storage by a third party and in part used as a communal area. I do not regard those matters as having any measurable significance in determining the reasonableness of Ney's designation of area usage. That being so, I regard the allocation of rental costs effected by Ney as reasonable. It is not necessary, in accepting that allocation, to determine whether the change from Prime Drive to an area the size of the St James Place premises was dictated by the need for space for use in connection with the Selctrons agency, as Ney maintained. However, I accept that in the choice of the St James Place premises, the needs of Selmet would have played a role. Strata submitted that, in any event, the allocation was unreasonable as it failed to give any weight to the use of the premises by Sipro. However, in my view, that omission does not result in distortion of allocation of costs. Sipro's role was that of wholesale supplier to the Procus group and it was largely, if not entirely, the creature of the incidence of sales tax. Its trading figures were arrived at by a philosophy aimed at generating no trading profit. I think it would be an artificial exercise to allocate a portion of rent to the costs of operation of Sipro. 59. Depreciation: The only question in issue is whether, as a fixed cost, with no measurable incremental costs attributable to the agencies' activities, any allocation of depreciation, as adjusted by Ferrier, is justified. For the reasons earlier stated, I think the allocation accepted by Ferrier is appropriate. 60. Software: This item of expense is in the same category as the cost of rent: the only issue being whether, there being no measurable incremental costs of computer usage in connection with the agencies' activities, any allowance should be made for computer software costs. For the reasons earlier stated, I am of the view that a just allowance requires an allocation of computer software costs as assessed by Ney. 61. Interest: There was debate about the validity of Ney's allocation of interest costs on moneys advanced by the defendants for working capital used in connection with the agencies. It was debated under the heading of "opportunity" costs. However, it was the evidence of Ney that there was an express understanding amongst the defendants that the moneys advanced by them would carry interest "to recognise the cost attached to that money" and that a rate was agreed upon from year to year. However, he added that the "interest reflected in the accounts (did) not take into account the total interest calculation because (he) tried to maintain a profit level without running into loss. So, therefore, quite often interest accrued into the Procus account, not the total" (T110). Bell and Ferrier are in substantial agreement that interest costs as agreed to be paid upon moneys advanced for the exploitation of the agencies should be allocated as a cost of deriving any profits through such exploitation. They have treated these costs as an opportunity cost on the basis that they are at variance with the recorded costs of interest in the financial statements of the entities in the Procus group. Strata has disavowed the validity of such an approach. 62. Having regard to my findings in the principal judgment, I have preferred to treat those payments not as interest payments, but as though they were payments to shareholders in respect of their particular equities. Had the position been otherwise, I would have taken the view that, in the absence of an agreement as to interest rates, the defendants are entitled to an allocation of interest costs on the basis of the reasonable cost of any loans by the defendants as working capital used in connection with the subject agencies. I have some difficulty in accepting that the rates applied by Ney in his allocation of interest costs were in fact agreed as amongst the defendants from year to year. Nevertheless, in my view, the rates as applied may be treated as reasonable for the purpose of allocation of costs in the manner accepted by Ferrier and Bell. 63. In disposing of the principal issues raised during this inquiry, I have not found it necessary to make further findings as to credit than those expressed in the principal judgment. Criticism has been made in these reasons of the manner in which Ney directed trading results of Selmet into Lansarc. There were other areas in which his evidence was attacked by Strata, principally in relation to his explanation of the partial reimbursement by Procus of Bradshaw's telephone costs for the quarter preceding 2 February 1994 and the inconsistency of his evidence in this inquiry with his evidence in proceedings in the Chief Industrial Magistrate's Court in September 1994. There was such an inconsistency and his explanation of Procus' reimbursement was not satisfactory. It may also be noted that Lansarc was incorporated in February 1996, that is, prior to the commencement of the hearing of the main proceedings. While there may have been no occasion for Ney to disclose its existence during those proceedings, I have little doubt that, unless required to do so, Ney would have been careful not to draw attention to its existence or activities. None of these matters has advanced, in any measurable way, the views expressed as to credit in the principal judgment. 64. Strata has referred me to the orders made by McLelland J in Hospital Products. Those orders included the following: "2. Declare that the second defendant knowingly participated in the aforesaid breaches by the first defendant of equitable obligations. 3. Declare that by reason of the aforesaid breaches by the first defendant and knowing participation by the second defendant, the plaintiff was entitled at its election (a) as against the first and second defendants, to payment of an amount equal to the profits made by the first defendant by selling surgical stapling products other than clinical product manufactured by the plaintiff and sold in the plaintiff's packages, on the Australian market between 1st December, 1979, and 30th November, 1980, such profits to be calculated on the basis that the cost of the demonstration product transferred from the Hospital Products Corporation to the first defendant via the Bellevue Trust and Morust Ltd is brought in at the price charged by the Hospital Products Corporation to the Bellevue Trust, and such payment to be secured by an equitable lien over the assets held by the first defendant representing the proceeds of the sale by the first defendant of its manufacturing business to the third defendant, or so much of those assets as the court may think sufficient to secure the said payment; … 4. The plaintiff having elected the remedy referred to in (a) of order 3 above, declare that the plaintiff is entitled as against the first and second defendants to payment of an amount equal to the profits made by the first defendant by selling surgical stapling products other than clinical product manufactured by the plaintiff and sold in the plaintiff's packages, on the Australian market between 1st December, 1979, and 30th November, 1980." (at 821) 65. It was submitted by Strata that similar orders, imposing joint liability on the defendants, should be made in this case. Had it been necessary to determine that question I would not have been prepared to make such orders. It is important, in my view, to understand the principles applied by McLelland J and the particular circumstances which attracted those orders. Those matters were addressed by his Honour in the following terms: "There is no doubt that Mr Blackman, under whose complete control and domination HPI acted at all material times, planned and executed HPI's breaches of fiduciary duty and thereby with full knowledge made himself the chief instrument by which those breaches were carried out. The liability of a person who knowingly participates in another's breach of fiduciary duty was discussed by Gibbs J in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, at pp 395-398 where the earlier authorities from Barnes v Addy (1874) LR 9 Ch App 244 onwards are examined. In my opinion the principle to be derived from those authorities is that a person who knowingly participates in a breach of fiduciary duty by another may be both (i) liable to account to the beneficiary for any benefit he has received as a result of such participation and (ii) jointly liable with the fiduciary in respect of any pecuniary liability of the fiduciary to the beneficiary as a result of the breach. In the application of this principle the court will have regard to the particular circumstances of the case to ensure that the relief granted accords with the requirements of justice and good conscience, with particular attention to the nature and degree of participation by, and the degree of knowledge of, the person sought to be made liable, the nature of the fiduciary duty involved and the nature and circumstances of the breach thereof. In the present case the relevant benefits were with one possible qualification received not by Mr Blackman personally but by HPI. … On the other aspect of the principal, I am unable to discern any circumstances in the case which would justify any view other than that Mr Blackman should be jointly liable with HPI in respect of the latter's liability as fiduciary either in respect of HPI's profits or in respect of USSC's loss, should USSC elect to pursue either of these remedies, subject to the defence based on the release of Mr Blackman, to which I will now turn." (at 817) 66. I think it is clear from those reasons that McLelland J had "regard to the particular circumstances of the case to ensure the relief granted (accorded) with the requirements of justice …" High in the priority of "particular circumstances" was the "complete control and domination" over the fiduciary exercised by the participating party and the fact that he was the "chief instrument by which (the fiduciary) breaches were carried out". These considerations were at the forefront of the passages earlier quoted from Warman and Coomber. 67. Having regard to the views I have formed as to the conduct of the principal protagonists in these proceedings, I do not regard McLelland J's reasoning or conclusions as at odds with a refusal to impose joint liability on the defendants had they been ordered to make payments to Strata by way of an accounting of profits. 68. Although extensive arguments on the appropriate order for costs have been addressed to me in the past, I have been requested to defer final orders as to costs until the parties have been afforded the opportunity of presenting submissions as to costs in the light of my determination on this inquiry into profits. Accordingly, the matter will be placed in the list at 9.30am on 11 February 1999 with the view to giving final judgment in these proceedings. oOo Last Modified: DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.