New South Wales Supreme Court CITATION : Calvo v Sweeney [2009] NSWSC 719 HEARING DATE(S) : 09-13 February 2009; 16-18 February 2009 JUDGMENT DATE : 29 July 2009 JURISDICTION : Equity JUDGMENT OF : White J DECISION : Refer to para 275 of judgment. CATCHWORDS : EQUITY - general principles - fiduciary obligations – defendant retained as plaintiffs' adviser to find purchasers for plaintiffs' shares or to raise capital for company to repay plaintiffs' loan – defendant obtained control of company and procured the issue of a substantial shareholding to himself for no consideration - dependence and vulnerability to exercise of influence – relationship of confidence - conflict between interest and duty – appropriateness of enquiry into fairness of transaction – undue influence - no presumption of undue influence – actual influence - EQUITY – equitable remedies – constructive trusts - EQUITY – equitable defences – acquiescence and laches - EQUITY – equitable relief – whether equitable relief should be conditional on making of just allowance for time spent on company's affairs or donations to company Fair Trading Act 1987 (NSW) LEGISLATION CITED : Income Tax Assessment Act 1936 (Cth) Higher Education Act 2001 (NSW) Higher Education Support Act 2003 (Cth) CATEGORY : Principal judgment Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215 Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447 Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 Bristol & West Building Society v Mothew [1998] Ch 1 Chan v Zacharia (1984) 154 CLR 178 Brunninghausen v Glavanics [1999] NSWCA 199; (1999) 46 NSWLR 538 Coleman v Myers [1977] 2 NZLR 225 Tate v Williamson (1866) LR2ChApp 55 Hadid v Lenfest Communications Inc [1999] FCA 1798 Australian Securities & Investments Commission v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963; (2007) 160 FCR 35 Daly v Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371 McEvilly v Manenti Quinlan & Associates Pty Ltd (Supreme Court of New South Wales, Einstein J, 10 August 1998, unreported) Holder v Holder [1968] Ch 353 CASES CITED : Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; 40 ACSR 83 Aberdeen Railway Co v Blaikie Bros [1843-60] All ER Rep 249 McPherson v Watt (1877) 3 App Cas 254 Daly v Sydney Stock Exchange (1986) 160 CLR 371 Clay v Clay [2001] HCA 9; (2001) 202 CLR 410 In re Thompson's Settlement [1986] Ch 99 People's Prudential Assurance Co Ltd v Australian Federal Life and General Assurance Co Ltd (1935) 35 SR (NSW) 253 Chellew v Excell [2009] 1 NZLR 711 Johnson v Buttress (1936) 56 CLR 113 Orr v Ford [1989] HCA 4; (1989) 167 CLR 316 Lindsay Petroleum Company v Hurd (1873-74) LR 5 PC 221 Clegg v Edmondson (1857) 8 De GM & G 787 Re Jarvis (decd); Edge v Jarvis [1958] 2 All ER 336 Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544 Phipps v Boardman [1965] Ch 992 Green & Clara Pty Ltd v Bestobell Industries Pty Ltd (No. 2) [1984] WAR 32 Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298 TEXTS CITED : Abel-Smith & Stevens, Lawyers and The Courts – A Sociological Study of the English Legal System 1750-1965, (1967) Dr Peter Calvo & Anor PARTIES : v William Sweeney & Anor FILE NUMBER(S) : SC 3670/07 COUNSEL : Plaintiffs: D R Conti SC with D H Mitchell Defendant: K P Smark SC with B J Burke SOLICITORS : Plaintiffs: Leigh Johnson Lawyers Defendant: Hicksons Lawyers IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WHITE J Wednesday, 29 July 2009 3670/07 Dr Peter Calvo & Anor v William Sweeney & Anor JUDGMENT INTRODUCTION 1 HIS HONOUR: The defendant, Mr William Sweeney holds 37.5 percent of the issued shares in the Australian Institute of Music Ltd ("AIM" or "the Institute"). The plaintiffs, Dr Peter Calvo and Mrs Athalie Calvo allege that he holds those shares on trust for them. They allege that the shares were acquired by Mr Sweeney in breach of fiduciary obligations he owed to them, or as a result of the exercise of undue influence or of unconscionable conduct, or misleading and deceptive conduct. 2 Prior to 6 September 2004, Dr Calvo and Mrs Calvo owned all of the issued shares in AIM. On 6 September 2004, shares were issued in AIM to Dr and Mrs Calvo and to Mr Sweeney as a result of which Mr Sweeney held 51 percent of the issued shares in AIM and Dr and Mrs Calvo each held 24.5 percent of the issued shares in AIM. This was intended to be a temporary arrangement. Negotiations were on foot with AIM's landlord for the compromise of a debt owed by AIM for outstanding rent and for the renegotiation of the terms of AIM's lease. On or about 27 September 2004, Mrs Calvo transferred her shares to Dr Calvo and further shares were issued as a result of which AIM's landlord, Ellimark Pty Ltd ("Ellimark") became the holder of 37.5 percent of the issued shares in AIM, and Mr Sweeney and Dr Calvo held 37.5 percent and 25 percent of the issued shares respectively. Mr Sweeney did not pay for the shares he acquired. 3 Mr Sweeney is a chartered accountant. He is a partner of a firm known as PKF. The plaintiffs allege that Mr Sweeney and PKF were retained to seek out investors who would be prepared to acquire the business or a share of the business of AIM, or acquire shares in AIM, in order that the capital so raised, or a substantial part of it, would be paid to Dr and Mrs Calvo. In return they would relinquish some of their shares. On 23 December 2003, Dr Calvo and Mrs Calvo paid $1,456,409.20 to discharge AIM's debt to Westpac Banking Corporation and to provide AIM with working capital. It was proposed that moneys raised from new investors would be applied to reimburse Dr and Mrs Calvo for these payments. 4 The plaintiffs say that the relationship between Mr Sweeney and them was a fiduciary one. They say that Mr Sweeney's task was to seek out potential investors and to negotiate the best terms that he could for Dr and Mrs Calvo. They say that in entering into transactions with them, or with Dr Calvo alone, Mr Sweeney had a conflict between his personal interest and his duty to them. 5 Mr Sweeney did not acquire his shares by transfer from Dr Calvo and Mrs Calvo. Rather they were issued to him by AIM. Accordingly, instead of seeking rescission of a transfer of the shares (there being no transfer to rescind), the plaintiffs claim a declaration that he holds the shares on trust for them. 6 Mr Sweeney denies that he owed fiduciary duties to the plaintiffs and denies that he breached any such duties. He does not plead that the plaintiffs gave their informed consent to the alleged breach of duty. The decision not to plead informed consent was deliberate. The question was raised at a directions hearing well before the trial. At the trial, senior counsel for Mr Sweeney confirmed that the decision was carefully considered. 7 Dr Calvo suffered a stroke on 12 July 2004. He returned to work in August 2004. The plaintiffs allege that the stroke put Dr Calvo in a position of special disadvantage. They allege that Mr Sweeney took unconscientious advantage of Dr Calvo's position of special disadvantage. They also say that Mr Sweeney had obtained a position of influence over Dr Calvo and came to occupy a position of ascendency or domination over him. They say that the transactions under which Mr Sweeney acquired a 37.5 percent shareholding in AIM and an irrevocable proxy over Dr Calvo's remaining shares should be undone on grounds of undue influence and the unconscientious taking advantage of Dr Calvo's position of special disadvantage. They also allege that the transactions were entered into as a result of misrepresentations. They allege that Mr Sweeney engaged in trade or commerce in conduct which was misleading or deceptive, or likely to mislead or deceive, contrary to s 42 of the Fair Trading Act 1987 (NSW). 8 As well as denying the allegations of breach of fiduciary duty, undue influence, unconscionable conduct and misleading and deceptive conduct, Mr Sweeney contends that the plaintiffs are not entitled to equitable relief on grounds of laches, acquiescence and estoppel. He also contends that it should be a condition of any equitable relief that an order for just allowances be made in his favour. He seeks such an order to compensate him for services he has provided to AIM as its managing director for which he has not been paid a salary and to compensate him for donations he, and a company controlled by him, have made to AIM. 9 I have concluded that the plaintiffs are entitled to the equitable relief sought on the grounds that Mr Sweeney acquired his shareholding through a breach of fiduciary duty he owed the plaintiffs and the exercise of undue influence. I have rejected the defences and the claim for just allowances. Background 10 In 1969 Dr Calvo started a business called the Sydney Spanish Guitar Centre. After various changes of name that business was renamed the Australian Institute of Music. AIM was incorporated in 1987 as a proprietary company limited by shares. On 14 June 1989 it changed its name to the Australian Institute of Guitar Limited. Its constitution was amended so that it became a public company limited by shares and by guarantee. On 27 November 1991, it changed its name to its present name and was registered as a public company limited by shares. On 21 January 1993 its memorandum was amended to provide that all of the income, profits and property of the company should be applied solely towards the promotion and education of music and no portion should be paid or transferred directly or indirectly by way of dividend, bonus or otherwise howsoever by way of profits to the persons who at any time are or have been members of the company. Its objects were also amended to provide that on a winding-up, after satisfaction of all its debts and liabilities, its property should be given to the Sydney Conservatorium of Music, or failing acceptance by that organisation, to the University of New South Wales, or in default thereof, to some charitable object. In 1996, its objects were further amended so that upon a winding-up after satisfaction of its debts and liabilities, any of its property could be given or transferred to some other educational organisation or organisations whose principal purpose involved the provision of instruction in the performing arts or a related field, and whose rules prohibited the distribution of its income among its members, being an organisation eligible for tax deductibility of donations and listed on the Register of Cultural Organisations maintained under the Income Tax Assessment Act 1936 (Cth). 11 From the time AIM was incorporated up to 26 September 2004, Dr Calvo and Mrs Calvo were its only shareholders. They and their son, Mr Benjamin Calvo, were its directors. In 1989 AIM was accredited by the New South Wales Department of Education as a provider of tertiary courses providing a three-year Diploma in Music. In 1995 it became accredited by the Department of Education for a four-year Degree of Bachelor of Music. It has been accredited by the Department for various graduate diplomas in music. It also provides non-tertiary education in music, particularly in performance. Dr Calvo deposes that AIM is the largest private music institute in Australia. 12 Mrs Calvo deposed that she and Dr Calvo made substantial capital contributions to AIM prior to 2003 but did not keep records of those contributions. She deposed that in 1982 and 1993 they invested substantial amounts from the proceeds of sale of their homes. 13 In about 2002 AIM extended its premises. It received a capital grant from the New South Wales Government of $2.4 million to help meet the costs of establishing itself in new premises. In advising the approval of the grant the Treasurer stated that it was his understanding that the move to new premises would enable AIM to expand its operations and increase full-time student numbers from 530 students in 2002 to 1,260 in 2010. It was a term of the grant that the Institute maintain its status as a not-for-profit organisation. In expanding its premises AIM became liable to pay a substantially increased rent to its landlord. 14 In May 2003, the Commonwealth Government released a report on higher education. That paper described the proposed new Higher Education Loan Program which included a new Fee-Help scheme to "offer eligible students an income contingent loan facility to pay their undergraduate or postgraduate fees in courses in public or eligible private institutions." It was announced that for students at a private higher education institute to have access to Fee-Help, the institution had to be listed as a Higher Education Institution on the Australian Qualifications Framework Register, and to meet certain other requirements. 15 In 2003 Dr Calvo was considering selling AIM to a university or other institution providing tertiary education. Introduction of Mr Sweeney 16 Mr William Bowtell was retained as a marketing consultant to AIM. Dr Calvo discussed with him his plans to retire and his desire to sell AIM to a similar institute at the best possible price. In June 2003 Mr Bowtell recommended that Dr Calvo speak to an accountant of Mr Bowtell's acquaintance, namely Mr Sweeney, to assist him to find a buyer for the Institute. On 24 July 2003 Mr Bowtell sent a memorandum to Mr Sweeney in anticipation of a meeting to be held with Dr Calvo. He wrote: " We have arranged to see Dr Peter Calvo of the Australian Institute of Music to discuss the possible restructuring of the AIM; and particularly in the context of the possible changes to funding of private sector higher education being proposed by the Commonwealth government; and the impact that these changes will have on the profitability of AIM. AIM The AIM is a fully fee-based private institution that has for some 30 years provided music and related degree courses. It is a non-profit organisation owned by Dr Peter Calvo and his family. It presently operates from rented premises in Foveaux Street Surry Hills and Crown Street Surry Hills. The AIM has a current enrolment of about 800 full and part time students and a staff of about 100 full and part time teachers and administrators. Apart from some very minor secondary studies grants, AIM receives no government recurrent subsidy of any kind and is totally dependent on student fees for its income. AIM has an outstanding academic record and is widely recognised as producing exceptionally high quality students in all forms of music, music industry and sound technology. Last year, AIM received a one-off grant from the NSW government to build a very good music auditorium at its Foveaux Street premises. It also secured a 10-year lease over its expanded and renovated Foveaux Street premises that will enable it to accommodate a much greater number of students in response to increasing demand. Student enrolments this year are running at some 30% over the previous year; and AIM is consistently attracting a large percentage of its students from overseas. In summary, therefore, AIM is a long-established, reputable institution whose income matches its recurrent expenditure and with an increasing demand from students in Australia and overseas. It has a secure long-term lease over its premises; and the landlord is a possible seller to the AIM. However, there is a need to restructure the AIM to separate its institutional interests from those of the Calvo family; and to place the AIM on a long-term sound and secure basis. The need to do this is recognized by Dr Calvo and several options, including merging the AIM into another public sector tertiary institution, have been tentatively explored without success. However, the recent decision by the Commonwealth government to allow students of approved private sector education institutions (of which AIM is one) to have access to low-interest government loans to fund their fees (the HELP scheme) will have a dramatic impact on AIM. If the legislation is approved, and the HELP scheme commences operation as planned in early 2005, AIM will experience a surge in enrolments in that year and consequent increase in operating surpluses; as well as in effect having its total fee income underwritten by the Commonwealth. AIM presently turns away many hundreds of students annually who wish to enroll [sic] but who cannot afford the present fees of about $10-13000 per annum. With access to the HELP scheme, many of these students will enroll in the 2005 year and beyond. AIM will also experience a transfer of enrolments from traditional public sector providers of musical and related education (the Conservatorium and others) whose students have had access to HECS and therefore had a competitive advantage over AIM. While the restructuring should happen in any event, the possible introduction of HELP therefore is an opportunity to restructure AIM from a non-profit institution, housed in leased premises and run by the Calvo family into an independent profit making institution purchasing its own premises and free to offer innovative and market based education services without being incorporated into a public sector tertiary institution. If all the reforms go through, then it seems to me that there is a good opportunity if the AIM can be established with a clear, transparent and investment-grade structure for its income stream over 10 years to be securitised. Such a securitisation of funds would assist the capitalisation of the AIM; and allow the Calvo family interests to be paid out in whole or part after the restructuring. A properly restructured AIM would also be able to purchase its premises that over time would become a very valuable asset of the new AIM. The discussions with Dr Calvo might therefore result in some progress on the AIM. But moreover they might also serve as the basis for considering the opportunities that will be present across the entire private sector tertiary education sector as and when the HELP reforms are introduced. " 17 Dr Calvo and Mr Sweeney met for the first time with Mr Bowtell on 29 July 2003. Following the meeting Mr Sweeney sent an email to Dr Calvo in which he identified the main issue as being the identification of an appropriate exit strategy for Dr Calvo. He asked to be provided with management results for the business for the year ended 30 June 2003, profit and loss statements and balance sheets for the previous two years, any business plans, strategy and philosophy documentation, and any background or history to the business. On 8 August 2003 Dr Calvo forwarded to Mr Sweeney documents describing the history of the Institute, the courses it offered, its governance structure, a business plan, and brief biographical details of some of its principal teachers. Also enclosed were draft profit and loss accounts and draft balance sheets for the half-year ended 31 December 2002 and forecast results to 30 June 2003. The documents also included what were said to be actual profit and loss results for the 12 months to 30 June 2002. The figures showed a profit of $1,726,000 to 30 June 2002 after treating as income the government grant of $2,182,000 for the construction of a concert hall. The figures showed an estimated loss for the 12 months to 30 June 2003 of $1,381,000 and an estimated deficiency as at 30 June 2003 of net assets of in excess of $650,000. This was after bringing into account the assets and liabilities of a business called the Sydney School of Guitar which was a business conducted by Mrs Calvo. The draft accounts showed that course fees and the bulk of other income was received by the Institute, that the Institute paid a service fee to the Sydney School of Guitar ("SSG"), and that most of the expenses other than rent, including expenses for salaries and wages, were incurred by SSG. 18 On 13 August 2003, Mr Sweeney wrote to his partner at PKF, Mr Andrew Kesik in relation to AIM. He said: " It is my proposal that PKF work out how to provide services for this second tier of education and in particular the Australian Institute of Music. Under this new funding scheme, these new businesses will become financially strong and viable but they do not have the runs on the board in terms of management and finance etc. " 19 Mr Sweeney prepared notes of his meeting with Dr Calvo of 29 July 2003. These notes included information as to the number of students, the area under lease, the prospective increase in the numbers of students, Dr Calvo's estimate of prospective increased turnover, numbers of staff, and wages cost as a percentage of turnover. Dr Calvo told Mr Sweeney that a United States group called the Kaplan Institute had shown interest in buying the business and Dr Calvo believed it would pay somewhere between $8 million and $12 million. After reviewing the documents forwarded by Dr Calvo on 8 August 2003, Mr Sweeney formed the view that AIM and its related businesses probably did not have a value of anything like the figure of $12 million mentioned by Dr Calvo at the meeting on 29 July. At the meeting on 29 July Dr Calvo said that he was not in a hurry to leave the Institute but at present was willing to sell 20 percent of the Institute for $2 million. In his note to Mr Kesik, Mr Sweeney said: " Our Objectives To work out how to refund the business [sic] and free the Calvo family and bring in someone who is interested in being an educator. ... " 20 On 14 August 2003, Dr Calvo wrote to Mr Sweeney and told him that: " At this time in August to early September, the institute is willing to sell between 25% to 100% of the four entities, AIM, AIMS, TCI and SSG between $2 million for 25% and $8 million for 100%. " 21 On 26 August 2003, Mr Sweeney prepared a draft position paper and sent the paper to Mr Bowtell and to Dr David Lance, a former deputy chancellor of the University of Technology of Sydney who had retired from that position and started his own venture raising capital for what Mr Sweeney called the commercialisation of scientific inventions and research projects. Mr Sweeney proposed to provide the paper to Dr Calvo. It set out points for proposed discussions with the University of New South Wales for the possibility of the latter acquiring the business of the Institute or entering into a joint venture with it. Points for discussion identified by Mr Sweeney included identifying the objectives of Dr Calvo, and what would constitute success for him. He noted that Dr Calvo: " needs to be repaid say $8 million on a walk in/walk out basis. * Dr Calvo is happy to maintain an involvement in the management of the AIM * Dr Calvo's involvement would require a continuation of the existing culture. " 22 Nothing came of the proposed discussions with the University of New South Wales. 23 On 2 and 3 October 2003 Mr Sweeney forwarded information about AIM to two individuals whom he thought were potential investors. He provided a number of documents describing the Institute and its business, including its business plan which he said required updating. He also enclosed draft financial figures for the year ended 30 June 2003 and a projected cashflow forecast. He advised both potential investors that: " Peter Calvo is a keen educator and, on a personal note, he is looking for an exit strategy. What I am hoping to do is to find a person who is interested in education and/or music who will be happy to have an investment, and if need be an active management interest, in the AIM. " 24 Neither person expressed an interest in investing. 25 On 29 October 2003 a meeting was held between Mr Sweeney and Mr Kesik of PKF, Dr Calvo, Mr Bowtell and Mr Paul Keating. Mr Keating was the chairman of a body called the Council of External Advisors which was actively involved in the development of the Institute's programs. During the meeting Dr Calvo said that in his view the Institute was worth at least $8 million. He said that he personally had put millions of dollars of his and his family's money into the Institute and was entitled to have this repaid. Mr Sweeney said that his review of the financial statements showed that the Institute was not worth $8 million and it was not making a profit. Mr Sweeney said that a demonstration that the Institute had value could not be based on its past performance but on its potential for future growth and that to demonstrate why it had value based on future growth it would be necessary to prepare forecasts. He said that the ledgers and accounts of the Institute did not reflect that Dr Calvo and his wife were owed any money. Mr Sweeney proposed that to attract potential investors an information memorandum be prepared by a reputable properly accredited and independent source. He advised that PKF could prepare such an information memorandum and estimated it would cost about $15,000 if AIM staff did the bulk of the work of collecting together the necessary financial and other information. This course was agreed to. PKF's Letter of 31 October 2003 26 On 31 October 2003 Mr Kesik of PKF wrote to Dr Calvo. As counsel for Mr Sweeney says that the letter sets out the terms of the retainer and defines the party to whom PKF or Mr Sweeney owed duties, it is appropriate to set out the term of the letter in full. Mr Kesik wrote as follows: " Dr Peter Calvo Director The Australian Institute of Music 1-51 Foveaux Street SURRY HILLS NSW 2010 Information Memorandum Dear Dr Calvo, I refer to our recent meeting where we concluded that the way forward was to prepare an Information Memorandum (IM) in the first instance. Following further discussion with Bill Sweeney and having regard to you [r] current circumstances our fees for the preparation of an IM will be fixed at $1500 with payment deferred to 27 February 2004. An additional success fee of 5% will apply to any monies raised either as equity or borrowing for the Institute or gross sale proceeds in the event that a purchaser is introduced and a sale is concluded. Should these terms be satisfactory to you will you please return a signed copy of this letter to me. In order to prepare the IM we will require the following information from AIM:- 1. A formal group structure for AIM and any subsidiaries including details of shareholders and office holders. 2. A copy of the constitution (memorandum and articles of association) of each company. 3. Copy of any correspondence with the Australian Tax Office granting exemption from income tax and providing for tax deductibility of any donations made to AIM. 4. Copy of the lease over the premises or an extract of the lease detailing the terms and conditions of the lease. 5. Details of any other leases over property or equipment. 6. Management accounts for the period 1 July 2003 to 30 September 2003 together with details of accounts supporting balance sheet items. 7. A list of current liabilities at 31 October 2003. 8. Copy of the budget and cash flow forecasts for the year ended 30 June 2004 including any ancillary workings to support assumptions made in the forecasts. 9. Copy of any longer term forecasts prepared by AIM or its advisors. 10. Details of remuneration paid to you and any related entities. 11. An updated business plan if this has been done (we have a copy of a plan prepared in 2000. 12. A schedule detailing each of the courses offered by AIM together with a timeline of when the courses commence and course semesters. 13. A schedule which details the current course fees (by course) and when fees are paid (also see 10 above). 14. A schedule detailing the current student population by course. 15. A schedule detailing student population (by course) over the past 3 years. 16. Details of course completion history (student retention over duration of course) and AIM policy regarding any refunds of fees. 17. A schedule detailing projections of growth in student population by course over the next 3 years. 18. A schedule showing the student teacher ratios by course. 19. Details of all the teaching staff including current annual remuneration and a schedule of accrued benefits for annual and long service leave. 20. Details of any cost analysis either by course or student indicating how course fees are determined, gross profit and costs. 21. Details of all non-teaching staff including current annual remuneration and accrued benefits. A statement indicating factors that may have driven growth of the institute in the past and what is likely to drive growth over the next 3. I appreciate that this is a lot of detail however it will be necessary in order for any IM to be meaningful. We may have further information requests as we proceed. You will most likely have to pass on some of this to your external auditor and as discussed we will need to meet with you [r] auditor as well as AIM's accountant and head of student administration. " 27 On 16 December 2003 Dr Calvo, signing as director of AIM, replied to this letter. He said: " Dear Andrew Thank you for your letter in which you have enumerated the elements necessary for the preparation of the Information Memorandum , at a cost of $15,000. The items that have been requested will be presented shortly. In relation to the percentage for payment to PKF for monies raised either as equity or sale of the entire operation we confirm 5% will be payable. As to borrowing I feel it is superfluous in the circumstances. ... " 28 The reason Dr Calvo said that he felt that borrowing was superfluous in the circumstances was that by December 2003 Dr and Mrs Calvo had arranged to sell their family home and apply the bulk of the proceeds of sale to discharging the debts owed by AIM to its bank and to provide it with working capital. It appears from a draft report of Ferrier Hodgson that on 28 October 2003 the former financial controller of AIM had sent a confidential letter to Westpac Banking Corporation containing allegations regarding AIM's solvency. In a draft report Ferrier Hodgson expressed the view that the bank should not further extend its facilities to AIM. Ferrier Hodgson expressed adverse views in relation to AIM's solvency. On or about 28 November 2003 Dr and Mrs Calvo exchanged contracts for the sale of their house for $1,635,000. On 23 December 2003 they paid $959,689.75 to the Westpac Bank to discharge AIM's overdraft account and other facilities. $496,719.45 was paid as an advance to AIM. Further Discussions Between Dr Calvo and Mr Sweeney 29 On 16 December 2003 Dr Calvo and Mr Sweeney had a further discussion in relation to the raising of capital. Mr Sweeney asked Dr Calvo what he wanted and Dr Calvo replied with words to the effect: " I want to serve the Institute. I want it to be my legacy. But I also want to solve the problem of getting funding and be properly paid for what I have created when I retire. The Institute is worth at least $8 million and I should be entitled to sell it for that when I retire. " 30 Mr Sweeney told Dr Calvo that an investor would do due diligence and look at the Institute's financial performance and on that basis would not want to pay $8 million. He told Dr Calvo that "for AIM's immediate funding problems we need to find donations of about $2.5 million to allow AIM to pay you back the $1.6 million you have invested in it from the sale of your home and still give AIM sufficient working capital for its operations in the coming academic year." They discussed the need for an information memorandum to attract potential investors. 31 After this meeting Mr Sweeney sent an email to Mr Kesik. After referring to Dr Calvo's sale of his home to pay off the overdraft for the business and to provide funding for 2004, Mr Sweeney wrote: " Peter is very keen for me to do something and I think we are his last hope. His wish is for me to get somebody to pay him to retire from the business or leave him there as a figurehead. He has answered all your questions and has accepted that PKF can do the work for the fee quoted plus the 5% success fee. I am very keen that we get an information memorandum completed ... ... I am not sure what the solution for Peter Calvo is right now. I don't believe we can sell the business in its current state as it does have the tax status of being able to accept donations and not be taxed for them. They have changed the Memorandum of Articles [sic] so that it would not distribute profits and all profits will be ploughed back into the business ... I think I will try and sit down with one of our tax guys to see whether we should try and restructure this business to make it a profitable entity or transfer the business to a new entity. What I would like to do is to raise $2.5m in a tax deductible format payable into this new business. With this money I would like to repay Peter Calvo the $1.6 million that he has currently put in and leave it at that. This will give us $900,000 in working capital. To do that doesn't require any restructuring at all. ... ... Can we move this to a profitable entity and bring in investors? Could this be a reality or should we always remain a not-for-profit organisation? ... " 32 Between December 2003 and April 2004, Mr Sweeney spoke with Dr Lance and with another potential investor to sound them out as to their willingness to invest in AIM or make a significant donation to it. Qualified Audit Report for 2003 Financial Statements 33 The financial statements for AIM for the year ended 30 June 2003 were signed on 7 May 2004. They disclosed a loss for the 2003 financial year of $836,116. The auditor, Mr Docherty, gave a qualified audit opinion. He stated that the sudden departure of the company's financial controller at the commencement of the audit, the non-existence of an audit trail substantiating numerous figures disclosed in the financial report, and the lack of many accounting records, had resulted in a limitation of the scope of the audit. He had been unable to obtain all information and explanations required to form an opinion on the financial report. He said that AIM's financial survival was dependent on the directors providing ongoing financial support from their personal assets and without that support there was significant uncertainty as to whether the company would be able to continue as a going concern. He said that if the company were unable to continue as a going concern it might be required to realise its assets and extinguish its liabilities other than in the normal course of business and at amounts different from those stated in the financial reports. The auditor was unable to express an opinion as to whether the financial report was presented fairly in accordance with the applicable accounting standards. Information Memorandum 34 The information memorandum was completed on 20 May 2004. It contained forecasts of future profitability based on different assumptions for increases in student numbers and tuition fees. A major theme of the information memorandum was that the commencement of Fee-Help would transform the funding base of private higher educational institutions whose students qualified to receive Fee-Help loans. Fee-Help was due to commence on 1 January 2005. The introduction of Fee-Help was expected to be of considerable benefit to AIM by attracting students who would otherwise not be able to afford to pay the fees. The information memorandum noted that AIM had spare capacity and could easily absorb additional student numbers at a marginal cost without expanding its floor space. The financial projections were based on assumptions of either an additional 50 full-time equivalent students in 2005 and 2006, or projected full year increases of 100 students. There were also projections based on assumptions of savings in teaching costs of five percent, and assumptions based upon increases in tuition fees of up to ten percent, or reductions in scholarships and early payment discounts. Advice from Mr Sweeney 35 At meetings with Dr Calvo in April and May 2004 Mr Sweeney advised Dr Calvo that the only way to interest an investor or to raise capital for AIM was first to ensure that it was profitable and this meant that it needed to be restructured and its management needed to be reorganised. He advised that AIM's status had to be changed from "not-for-profit" to "for-profit". He advised that investors would only be interested if they could expect some return for their investment which they could not expect from a not-for-profit institute. 36 Dr Calvo gave evidence that on 27 April 2004 Mr Sweeney handed him a first draft of the information memorandum and told him that he would be interested in making a personal investment as a project for his retirement. Mr Sweeney denied saying that at that time. Mr Sweeney said that the first time he suggested to Dr Calvo that he might personally invest in AIM was on 6 July 2004. I accept this part of Mr Sweeney's evidence. 37 PKF rendered two invoices each for $7,500 for its work in preparing the information memorandum. The invoices were addressed to: " Dr Peter Calvo Australian Institute of Music " The invoices were paid by AIM. Negotiation Between Mr Sweeney and the Plaintiffs in May and June 2004 38 According to Mrs Calvo, in May 2004 a meeting took place between her, Dr Calvo and Mr Sweeney. She deposed that Mr Sweeney offered $1 million for 49 percent of the shares in the company. She said that Mr Sweeney offered to pay $2 million with the balance of $1 million to be paid from a second capital-raising within 12 months. She said that Mr Sweeney proposed to keep Dr and Mrs Calvo on a retainer at $150,000 per annum for the next three years. 39 There were discussions along these lines in about May and June 2004, although I do not accept that Mr Sweeney put himself forward as a potential investor prior to 6 July 2004. Rather, he negotiated with Dr and Mrs Calvo the terms they would be prepared to accept. On 31 May 2004 Dr Calvo raised the following points with Mr Sweeney as appears from a letter Dr Calvo wrote on 4 June 2004 to Mr Keating. Dr Calvo wrote: " Dear Paul, ... Investor provides 1m as initial owner takeaway. Investor acquires 49% of the Institute. Owner is on salary of 150K Provision of second takeaway of 1m at end of 1 st year. Investor's acquisition expands to 75%. Investor undertakes to invest 1m each year for 5 years. Without second takeaway, Investor's share shrinks to 25%. I believe these are the main points you mentioned. I discussed them with Bill Sweeney. He seems to be interested and gone away to think about it. " 40 On 7 June 2004 Mr Sweeney made a record of his negotiations with Dr Calvo of the terms of a deal to be put to potential investors. He wrote: " Exit of Dr Peter Calvo Peter Calvo's immediate requirement is assistance to buy back his home which would cost approximately $1.8 million. I explained to him it is not possible during the capital raising to get enough money to give provide him $2 million upfront and nor do we consider that it is worth it. As such, a deal has been negotiated as follows: To get $1 million upfront for 49% of the company. Peter Calvo will retain the remaining 51% however there will be a Shareholders Agreement with the Board representatives having equal voting rights ie. 50:50. The balance of the $1 million is payable on the second capital raising and within twelve months. On payment of this $1 million, Peter Calvo's equity will reduce to 25%. It is accepted that his equity can reduce further as additional capital raising is made or the company goes to float. Peter Calvo will receive a retainer of $150,000 per annum for a period of three (3) years. It is considered that his ongoing support for the AIM, his culture and his abilities remain a key factor in going forward. " 41 In the same document Mr Sweeney wrote that: " Music is the backbone of the AIM. It has allowed for the proper development of infrastructure to create in a new business without needing substantially more capital than we are talking about. There is already a Principal, a General Manager, Accountants and a staff of 165 – the basis of a university and a higher education premises. Peter Calvo's expansionary nature has also developed courses other than music and these are growing and are the platform for future growth. He has employed Professor Greg Whateley, from the Central Queensland University, an Australian leader in on-line education. ... With this infrastructure already in place and the move to profitability in 2005, we have worked on a valuation figure for the business of $8 million. The raising of $4 million equates to 50% of the equity. The remaining equity will go to 25% to Peter Calvo to provide him with an ongoing interest in the business (see settlement details attached as Annexure 3) and the remaining 25% to go to management who will contribute to the overall growth of the business, the raising of $4 million in capital and the management of the business. " Provision of Detailed Financial and Other Information 42 On 3 June 2004 Mr Sweeney sent a long list of "due diligence questions" to Mr Ian Brooks who held the position of registrar at AIM. 43 Mr Brooks responded to the questions on 9 June 2004. He provided a breakdown of student and staff numbers, and information about leases, marketing, associations with other academic institutions, courses, and accounts. On 21 June 2004 Mr Sweeney wrote to the financial controller, Ms Vivien Power, seeking copies of the tax returns. On 25 June 2004 he asked Ms Power whether she had prepared a "trend analysis" and a comparison of expenses to budget. He made inquiries concerning the company's rental obligations and the arrangements under which it was then not paying full rent. He concluded by saying that rather than his trying to extract information she should be volunteering information to him so that there were to be no secrets kept from him. 44 Because of his role as an adviser, Mr Sweeney was provided with detailed information about the Institute's business which was otherwise confidential. That is not to say that an investor would not have required the same or similar detailed information before deciding to invest. Mr Sweeney initially sought the information so that he could provide it to serious potential investors and be in a position to respond to queries. He also saw himself as having an ongoing role in management. Further Approaches to Potential Investors 45 Mr Sweeney made more approaches to persons whom he thought might be potential investors in AIM. On 21 June 2004 he wrote to a Mr John Leece advising that he, Mr Sweeney, had taken a keen interest in AIM and would like to take a lead position in its future. After referring to the fact that AIM was currently a non-profit organisation and could receive donations which were not taxable income, which donations would be deductible to the donor, he described his view of the future of AIM. He said that the future of AIM should be as a new organisation that was a "for-profit" organisation; that it deliver a wider range of education than music, and that it be self-sufficient in money and resources. He advised that Dr Calvo had engaged him and many others to lead such a change for the future. He attached the information memorandum and said that AIM could be a profitable business and with the new Fee-Help scheme, new courses and new teachers, it could become highly profitable. He wrote: " Capital Requirements At the conclusion of our investigations, I believe that the AIM needs a capital investment of $4 million and I propose $2 million be raised before December 2004 and the balance before December 2005. The use of this money is two-fold: 1. It is to be used to pay out Dr Peter Calvo, the philanthropist and founder of the AIM. Peter is active in the AIM and life but he does require an exit strategy. Peter has put all his energies and wealth into the AIM and in the last two years, has sold his family home and invested this money into the AIM to put it on the sound financial footing it currently holds. From the sale of his home, Peter lent the AIM an amount of $1.6 million and it is proposed that this is loan is repaid to him through the capital raised over a period of two years. The exit strategy, which [h]as been approved by Peter Calvo, is provided at Annexure 2. 2. It is my purpose to make this business profitable and healthy. The second $2 million in capital will be raised at a time when the business is profitable and therefore will be raised as investment capital – shareholders funds. Return on Capital ... As you may know, my friend David Lance, played a key role in the development of Insearch Education ... David believes that a number of highly profitable large market courses could be added to the present portfolio enabling profits of $5 million or more to be achieved in perhaps 3-4 years. ... Based on the above, I value the business at $8 million. I would be keen for you to be a donor and/or investor in the AIM and would appreciate an opportunity to sit down with you to discuss this proposal further. " 46 A letter in similar terms was sent to a number of persons whom Mr Sweeney thought were potential investors on about 25 June 2004. The "exit strategy" contained in annexure 2 was in the same terms as the document quoted at para [40] with an additional provision that: " 4. Of the 25% equity remaining with Peter Calvo, he will grant an option over it to: a. To transfer 10% of the company within the first two (2) years for $2 million b. To transfer 10% of the company within the next five (5) years for $3 million " 47 On 23 June 2004, Mr Sweeney had dinner with Dr Lance and Professor Bob Robertson. Professor Robertson had recently retired as vice-president of the University of Technology Sydney. Dr Lance had suggested to Mr Sweeney that he talk to Professor Robertson. Mr Sweeney proposed that all three of himself, Dr Lance and Professor Robertson invest in AIM and that they work together to provide it with new management. Professor Robertson said that he might be prepared to put in $500,000. Mr Sweeney asked for Professor Robertson's assistance in obtaining reaccreditation by the New South Wales Department of Education and Training under the Higher Education Act 2001 (NSW) without which it could not qualify for Fee-Help. Application for Approval as a Higher Education Provider 48 On or about 24 June 2004 the Institute applied to the Commonwealth Department of Education, Science and Training for approval as a higher education provider under s 16(25) of the Higher Education Support Act 2003 (Cth). Grant of Charge to Ellimark 49 On 1 July 2004 AIM granted a fixed and floating charge over all of its assets and undertaking to its landlord to secure all of its current and future obligations under its lease. The charge was signed for AIM by Dr and Mrs Calvo. The charge was given without the prior knowledge of Mr Sweeney. First Offer by Mr Sweeney to the Calvos on 6 July 2004 50 Mr Sweeney deposed that on 6 July 2004 he had a meeting with Dr Calvo in which he said to him words to the following effect: " I am prepared to invest $500,000 this month, July 2004, into AIM. This will allow AIM to repay $500,000 to you of your investment of the proceeds of sale of your home in December 2003, but only on condition that you use this money towards the purchase of a new home up to a value of $2 million. In addition, I am prepared to borrow in my own name on your behalf $1.5 million, using your home as security, and pay all the costs and the interest on the loan as they fall due and repay the principal sum within 12 months. In consideration for doing this, I am proposing that you transfer to me now 49% of the equity in AIM and all its associated entities and give me equal voting power with you in the company and full participation in the management of AIM. When I repay the $1.5 million loan in 12 months' time, you will transfer a further 25% of the equity in AIM to me. We would both need to enter into a shareholders' agreement to ensure that we have equal voting rights on the Board. If I am going to manage AIM's re-organisation as a successful Higher Education Provider, I need to be sure that I can direct the management staff. You will also be employed for three years on a salary of $150,000 per annum as Chancellor. Finally, I would like to have an option to purchase 10% more equity in AIM from your remaining 25% shareholding for $2 million within the first two years and another 10% of the equity in AIM from you for $4 million within five years, leaving you with 5% of AIM's equity. " 51 Mr Sweeney deposed that Dr Calvo said that he would consider the proposal, but that he was not prepared to give an option to purchase his remaining shareholding in AIM. Mr Sweeney deposed that he told Dr Calvo that he would need to conduct a satisfactory due diligence on AIM and would need access to all of AIM's records and information. Dr Calvo agreed that he could carry out the due diligence. 52 I accept Mr Sweeney's evidence that a conversation to this effect took place. 53 Mr Sweeney was still looking for investors for AIM. He sent an email on 7 July 2004 to be provided to Mr Keating in which he stated that "I don't believe it will be easy to raise capital for the aim unless there is a clear demonstration that the business will be appropriately managed and that sensible people are investing money ... I am prepared to invest $500,000 of my money to start the ball rolling. This will give me an opportunity over the next 12 months to talk to various people and get the appropriate level of investment which I believe should be an amount of between $3,000,000-$4,000,000. ...". Mr Sweeney had meetings with several people who he thought would be interested in investing in or donating to AIM up to 27 September 2004. Dr Calvo's Stroke 54 On 2 July 2004 Dr Calvo suffered a stroke resulting in temporary paralysis of his right side and loss of speech. He was discharged from hospital on 20 July 2004. It is unclear when he returned to work. According to Mrs Calvo he attended an executive meeting at the Institute on 3 August 2004. According to Dr Calvo he returned to work on 5 August 2004. According to Mr Sweeney he was back at work by 20 July 2004. This last date cannot be right because the hospital records show that he was not discharged until 3.55pm on 20 July 2004. Further Draft of Information Memorandum: Institute's Prospects 55 A further draft of an information memorandum for prospective investments prepared by PKF is dated 15 July 2004. It stated amongst other things that: " At present the equivalent of 500 full-time students attend AIM. It is now proposed to build on the sound structure established by the Institute while preserving its outstanding reputation. The building blocks that will be put in place include: gradual and careful addition of high volume, high profit courses establishment of a close working association with at least one major Australian university establishment of a relationship with a major US university an active domestic and international marketing program adequate funding to enable the Institute to develop effective and proven marketing strategies. The new enterprise will aim at profits before tax for the years 2007 and 2008 before tax of $4.8 million and $7.4 million. It is the intention of AIM to seek Australian Stock Exchange listing in its third or fourth year of operation under the proposed new format. Assuming that the ASX valuation is ten times pre-text profit then the implied value based on the profits above for the years 2007 and 2008 is $8 million and in the following year $74 million. Investors are now being invited to acquire a 30% interest in the Institute for $3 million implying a valuation of $10 million for the company at this time. ... " Correspondence from NSW Department of Education and Training 56 On 20 July 2004 the NSW Department of Education and Training wrote to Dr Calvo in relation to the Institute's application for registration and accreditation for the Diploma of Music, the Advanced Diploma of Music and the Doctorate of Professional Studies. The Department advised that further information was required if the Institute were to be considered for registration as a higher education institute. The information required would need to give assurance that the company would be financially viable and that its students' financial investment in their education was protected. The Department said that it required a legally enforceable guarantee by the company's directors and a satisfactory audit report. Of particular concern to the Department was the qualification to the 30 June 2003 financial statements by the auditors that there was significant uncertainty as to whether the company would continue as a going concern. The Department noted that the financial statement for the 30 June 2003 financial year reported a loss of $836,116 and that there was no disclosure of how the government capital grant totalling $2.4 million received after 13 June 2002 had been spent in accordance with the conditions of the grant. 57 On 21 July 2004 Dr Calvo spoke to Mr Bowtell. Mr Bowtell told him that he (Mr Bowtell) had organised an informal meeting at senior level with the NSW Government to brief them on the PKF report. Dr Calvo authorised him to hand over a copy of the PKF report. 58 Dr Calvo responded to the Department's correspondence on 30 July 2004. He said that the reasons for qualification of the auditor's report for the 2003 financial year had been explained (that is, by reference to the alleged fact that the company's previous financial controller had left the company with its books in disarray). He said that the company's auditors, Rhodes Docherty, would be able to provide an unqualified audit statement that financial year. He also said that the audit of accounts for expenditure of the government grant had been provided to various named government ministers and senior public servants. It would seem from this correspondence that even if Dr Calvo had not returned to the office, he had resumed work by 30 July 2004. He was also able to compose the letter of 30 July 2004. 59 Dr Calvo did not show the letter from the New South Wales Department of Education and Training to Mr Sweeney at this time. Mr Sweeney did not become aware of the letter until about 1 September 2004. 60 On 5 August 2004 Dr Calvo wrote to the Chief of Staff to the Deputy Premier and Minister for Education concerning the Institute's application for registration under the Higher Education Act. He advised that the Institute had been recapitalised in 2003 and was now operating on a debt-free basis and was cashflow positive. He said that the financial results for the 2003-2004 financial year would be available by October 2004 and would reflect strong growth in student numbers and income. This correspondence was written without any reference to Mr Sweeney. Mr Sweeney's Discussions with Dr Lance and Professor Robertson 61 In the meantime Mr Sweeney had been discussing the position of the Institute with Dr Lance and Professor Robertson. They discussed matters such as the need for injection of capital, and obtaining additional students from Asia. At this time Professor Robertson told Mr Sweeney that "if I become involved in your endeavour to save AIM, I ultimately want to have an equity position in the company. ... I would also want to be on the Board as an independent director participating in the management of AIM and also directing its marketing." On 6 August 2004 Dr Lance reported to Mr Sweeney of meetings he had had with various academics and administrators in tertiary education in relation to the possible future of the Institute including provision of subjects which could be given credit by other university degree courses, and otherwise expanding the degree courses which the Institute might provide to attract a large number of additional students. Dr Calvo had no involvement in the discussions that Mr Sweeney was having with Dr Lance and Professor Robertson at this time. 62 Dr Calvo had attended a meeting with Professor Robertson prior to 12 July 2004 with Mr Sweeney and Mr Bowtell at which they discussed the courses and academic credentials the Institute was then offering. Dr Calvo responded to Professor Robertson's enquiries concerning the Institute's academic and administrative systems. However, Dr Calvo was not a party to the correspondence between Dr Lance, Professor Robertson and Mr Sweeney in which Dr Lance reported on the discussions he had had with Professor Robertson and others on plans to expand the range of courses to be offered by the Institute and plans to tap into new student markets. Further Communications with Dr Calvo and Ms Power 63 On 11 August 2004 Mr Sweeney attended a meeting with Dr Calvo at AIM. He told Dr Calvo he believed that the Institute needed to increase student fees to improve its profit and loss account. He told Dr Calvo that he had not had any success in finding any investors for AIM and said that this was mainly owing to AIM's poor financial state and its status as a not-for-profit organisation. Dr Calvo did not agree that student fees should be increased as proposed by Mr Sweeney. Although Dr Calvo denied that Mr Sweeney told him that he, Mr Sweeney, had not had any success in finding investors owing to the poor financial state of the Institute and its status as a not-for-profit institute, I think it probable that that was said at this time. Mr Sweeney had not been successful in obtaining financial investors and he was concerned about the Institute's financial position. It is likely that he would have explained the reasons he had been unable to obtain investors. 64 Dr Calvo did not discuss with Mr Sweeney at the meeting of 11 August 2004 the issues which the Institute then had with the New South Wales Department of Education and Training to be reaccredited as a higher education provider for New South Wales. Dr Calvo's view was that there was no real risk that the Institute would not be re-accredited. He had faith that personal contacts with persons he perceived to be influential would ensure that all necessary accreditations were received. At about this time he told Mr Sweeney that the then Commonwealth Minister for Education, Mr Nelson, would support the Institute's application for Fee-Help to ensure that the Institute obtained registration by the Commonwealth. 65 On 13 August 2004 Mr Sweeney wrote to Dr Calvo and to Ms Vivien Power. She had been engaged as the in-house accountant for the Institute in November 2003. As well as asking for information about the Institute's courses, he asked for copies of the last three years' income tax returns and the most recent management accounts. He asked to see a copy of the plant schedule to explain an allowance for depreciation in the accounts which had been prepared for the year ended 30 June 2004. 66 Mr Sweeney had a meeting with Ms Power on 13 August 2004 in which she told Mr Sweeney of the auditor's qualification to the 2003 financial statements. She also told him that the Department of Education and Training had advised they needed an unqualified audit certificate before they would let the accreditation process proceed. 67 On 17 August 2004 Mr Sweeney telephoned Mr Docherty of Rhodes Docherty, the auditors of the Institute. Mr Docherty advised him that the Institute had recently given a fixed and floating charge in favour of the lessor. Mr Docherty said that he would need to have a copy of the charge and see whether the Institute could meet its obligations under the leases and without this he could not issue an unqualified audit certificate. This was the first Mr Sweeney had heard of the charge. 68 On 18 August 2004 Mr Sweeney wrote to Dr Calvo expressing his concern about this information and the fact that he had only learned of the charge second-hand. He expressed concern that the auditor would not be able to give an unqualified certificate unless he was satisfied that the Institute could meet its terms. He said that he also needed to be satisfied that the Institute could meet the terms of the charge. On the same day Mr Sweeney wrote to Ms Power expressing concern that students would be holding off paying their fees in advance in anticipation of receiving Fee-Help. He asked for a weekly rolling cash forecast and to be advised whether a marketing budget had been prepared. He asked whether fee rises were being implemented. In reply, Ms Power said that she would provide weekly rolling cash forecasts, that the marketing budget would be forwarded to Mr Sweeney that day, and that she was preparing a detailed analysis of cost for the various courses and hoped to finalise new course fees by the next day. Mr Sweeney Insists on Control of Management 69 Mr Sweeney had gradually worked his way into a senior management position. On 19 August 2004 a meeting was held between Dr Calvo, Mr Bowtell and Mr Sweeney in anticipation of a meeting to be held later with a representative of the landlord. At the meeting of 19 August Mr Sweeney told Dr Calvo that unless the Institute's profit and loss, cashflow projections and its balance sheet were improved, it would not obtain an audit certificate confirming that the Institute was a going concern. They discussed the proposed negotiations with the landlord for it to exchange its debt for equity in the Institute. Mr Sweeney also said that: " We also need to persuade the landlord to defer the current year's rent for one year and then accept payment of it in instalments over the next 3-5 yrs when AIM's cashflow will be much healthier. The immediate effect will be to improve AIM's profit and loss and cashflow projections for the coming year. This will also free up AIM's cashflow in the coming year including the increase from fee-help coming in, to devote to reorganising and growing the business. To keep AIM afloat until then and also to improve the financial picture, I am willing and able to inject $500,000 capital in AIM. But I will do this only on two conditions: I must be in control of AIM's management and AIM must get registration as an HEP and qualify for fee-help for 2005 ." 70 According to Mr Sweeney, Dr Calvo did not give immediate assent to that proposal. Dr Calvo said that doing a deal with the landlord was the right thing for himself and for the Institute and that Mr Sweeney was the best person to obtain it. He said: " You have the support of both Athalie and me to get the best deal for AIM and for us ." I accept this evidence. 71 Negotiations between Mr Sweeney and the landlord for it to capitalise its debt and defer current rent started later that day. 72 Mr Sweeney continued to receive detailed financial information about AIM. On 30 August 2004 he proposed detailed amendments to draft budgets for the 2005 and 2006 financial years. Letter of 30 August 2004 from Commonwealth Department of Education, Science and Training 73 On 30 August 2004 the Commonwealth Department of Education, Science and Training wrote to Dr Calvo in relation to the Institute's application under the Higher Education Support Act 2003 (Cth) for approval as a higher education provider. The letter was written by a Mr Bill Burmester, Group Manager, Higher Education Group. He advised that based on the information provided with the Institute's application he was not able to form an opinion that it was financially viable, and was likely to remain financially viable, as required for approval to be granted. The matters he identified for that view were: " ... The financial statements have been qualified by the auditor on the basis that: - the audit trail for numerous figures were non-existent; - many accounting records were not available; - the auditor was not able to apply the necessary auditing procedures to the accounting records; and - the auditor was not able to obtain all the information and explanations required in order to form an opinion about the financial report. A number of key financial measures and indicators for AIM as derived from the latest available audited financial statements are unfavourable. These include the operating deficit, low short term liquidity, low year end cash position, and a high level of leverage (debt to equity). Despite an opening cash balance of $2.4 million (due in most part to a Government grant of $2.2 million for previous year), and a turnover of $4.6 million for the financial year ended 30 June 2003, the year end cash balance was just $2,20 with a decrease in net asset position. Despite a reported cash outlay of $1.6 million in investing activities, there is no noticeable change in the value of property, plant and equipment or investments. The AIM had transferred $1.0 million to Sydney School of Guitar (SSG) during the financial year, while the AIM itself had considerable borrowings of around $1.7 million. Also, I note the significant 'negative' net asset (-$1.7 million) position of SSG casting doubts over its ability to repay the loans owed to the AIM. I am concerned that if this amount is not recovered then AIM's net asset position will be negative; and The inter-entity transactions and the potential for signficant adverse impact on AIM. As noted above, I am currently of the opinion that I should reject the AIM's application for approval as a higher education provider on the grounds that it is not financially viable and is not likely to remain financially viable. " 74 The Institute was invited to make submissions as to why its application should not be rejected on those grounds. The deadline for such submissions was 10 September 2004. Obtaining Fee-Help approval was critical to the Institute's ability to retain, let alone substantially increase, student numbers. Meeting of 2 September 2004 75 On 2 September 2004 Mr Sweeney attended a meeting with Dr and Mrs Calvo. Mr Bowtell was also present. Mr Sweeney gave evidence that at this meeting he said words to the effect: " The letter from the DEST is a very serious concern. Unless AIM's application for registration as an HEP is approved, AIM cannot qualify for FEE-HELP and without FEE-HELP AIM cannot survive. AIM's qualification for FEE-HELP will not happen unless AIM's financial position can be turned around enough for John Docherty to be able to certify that AIM is a going concern. Unless we get an unqualified auditor's certificate from him, AIM will not be approved for FEE-HELP. " 76 Mr Sweeney said that he told the Calvos that, depending on what the landlord agreed to, he believed that he could save the Institute, but to do so he needed to be confident that he had sufficient control. He referred to Dr Calvo's having agreed to give a charge to the landlord without Mr Sweeney's knowledge and said that this undermined his ability to negotiate effectively with the landlord. He said that he had not managed to find any investors and the charge held by the landlord made it unlikely that any investors would be found. Mr Sweeney deposed that he said words to the effect: " 'The landlord does not have confidence in your ability to manage AIM properly. The Landlord will not agree to release AIM from its obligation to pay the unpaid rent in exchange for equity in AIM unless the Landlord can be satisfied that AIM is under new management. The solution I can offer is that you transfer to me 51% of the equity in AIM immediately. We can then tell the Government that AIM has faced up to its problems and is taking serious steps to manage itself out of its current impasse. I will then manage the team, including Bob Robertson, both of you and AIM's administrative staff, to turn AIM around. I will also provide AIM with the capital injection of $500,000 that it needs and which we have discussed before, but only on condition that I am fully participating in AIM's management and governance and only if AIM qualifies for FEE-HELP. I do not want to invest any money if there is no reason for it. What this means is that you will own 49% of AIM, but this will be better than owning 100% of something that is worth nothing.' During the meeting, I also said words to the effect, 'The transfer of 51% will be a temporary measure to allow me to have some traction in my discussions with the Government and the Landlord. When we work out the deal with the Landlord, we will also work out what to do about your position. A portion of the equity we will both hold will have to be shared with the Landlord.' " 77 Mr Sweeney also deposed that he said words to the effect: " The other major concern is the comments made in the DEST letter about the legal and business structures, ownership, management and governance issues surrounding AIM and SSG. " 78 Mr Sweeney said that he told Dr Calvo that any capital he provided to the Institute must be used to help it overcome its problems, and not be paid to Dr or Mrs Calvo. Mr Sweeney also deposed to saying words to the effect: " We have to demonstrate to the Government, the Landlord and the education industry generally that there has been a change in management. Turning AIM around financially is also not the whole issue. The DEST letter indicates concerns about AIM's management and governance. " 79 He deposed that Dr Calvo told Mrs Calvo that he, Mr Sweeney, was the best man who could help to save the Institute and they should listen to him. 80 I accept Mr Sweeney's evidence of what he said at the meeting. 81 Four days later on 6 September 2004 the directors of the Institute, namely Dr Calvo, Mrs Calvo and their son, Benjamin Calvo, approved the allotment of 510 shares to Mr Sweeney, 244 to Dr Calvo, and 244 to Mrs Calvo. This gave Mr Sweeney 51 percent of the issued shares and Dr and Mrs Calvo 24.5 percent each of the issued shares. Misrepresentation Case 82 The plaintiffs plead that they were induced to issue the new shares by three representations made by Mr Sweeney, two of which were made at the meeting of 2 September 2004, which the plaintiffs say were false. The plaintiffs pleaded that the alleged misrepresentations made at the meeting of 2 September 2004 were as follows: " 11A. On our about 2 September 2004, acting in his capacity as financial adviser to the Plaintiffs, the Defendant represented to the Plaintiffs that: (a) unless the Plaintiffs agreed to a change in management and control in AIM to the Defendant then the landlord would not agree to release AIM from its obligation to pay the arrears of rent and construction costs, in exchange for equity in AIM and/or, (b) the Federal Department of Education Science & Training ('DEST') had indicated in writing that it had a major concern about the Plaintiffs retaining the management and ownership of AIM and that AIM's application for registration as a Higher Education Provider ('HEP') and obtaining qualification for FEE HELP would receive a more favourable consideration if the management and control of AIM was transferred from the Plaintiffs to the Defendant. " 83 A director of Ellimark, Mr Ronen, swore an affidavit in which he deposed that he had never suggested or pushed for there to be a change of management of the Institute. He deposed that he had never suggested or pushed for Mr Sweeney to take control of the Institute. He was not cross-examined on that affidavit and I accept that evidence. 84 Mr Ronen's evidence was corroborated by that of Mr Muller who acted for Ellimark in the negotiations with Mr Sweeney. Mr Muller did not recall Mr Ronen saying that Ellimark would not agree to release the Institute from its obligation to pay the unpaid rent in exchange for equity unless he were satisfied that AIM was under new management. To the best of Mr Muller's recollection, Mr Ronen was content for Dr Calvo to remain involved with the Institute. Mr Muller did not recall telling Mr Sweeney that there must be a management change or saying that Mr Sweeney should have control of AIM. Mr Ronen's position was that he was not prepared to allow Mr Sweeney to gain more shares in AIM than the landlord. I accept that evidence. 85 There was not a reasonable basis for Mr Sweeney's representation to the Calvos that the landlord would not agree to release its debt for unpaid rent in return for shares unless satisfied that the Institute was under new management. 86 However, Dr and Mrs Calvo did not rely on that statement in agreeing to the issue of shares to Mr Sweeney. The plaintiffs amended their statement of claim after service of Mr Sweeney's affidavit of 23 July 2008 to include this count of misrepresentation, but the evidence of both plaintiffs was that Mr Sweeney did not say those words. 87 Counsel for the plaintiff did not read those parts of Dr and Mrs Calvo's affidavits in reply to Mr Sweeney's affidavit of 23 July 2008 which dealt with the meeting of 2 September 2004. But in cross-examination Dr Calvo denied that Mr Sweeney had said that the landlord would not agree to release the Institute from its obligation to pay unpaid rent in exchange for equity unless it was satisfied that the Institute was under new management. Dr Calvo said that if Mr Sweeney had said words to that effect he would have been sent away. Dr Calvo denied saying that he could see that it was imperative to present to the government and the landlord that there had been a change in management. In her affidavit in reply, Mrs Calvo had denied the material parts of Mr Sweeney's affidavit dealing with the meeting of 2 September 2004. The paragraphs that were not read in chief were introduced in cross-examination and Mrs Calvo adhered to that evidence. 88 The representation made by Mr Sweeney about the landlord's attitude to Dr Calvo's management and that there needed to be a change of management if the landlord were to be persuaded to surrender debt for equity, was a material representation calculated to induce the issue of shares to Mr Sweeney. If matters rested there, it would be a fair inference of fact that they were induced to agree to the issue of shares to Mr Sweeney by the representation (Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215 at 236). However, I cannot draw that inference where both Dr Calvo and Mrs Calvo deny that any such statement was made to them. Even though I conclude on the balance of probabilities that the statement was made, their denial shows that they placed no reliance on it. 89 I do not consider that the second representation alleged in para 11A(b) was made in the terms pleaded. Even if it had been made in the terms pleaded, it would not have been false or misleading. The only evidence of the representation is the evidence of Mr Sweeney himself, corroborated in essentials by the evidence of Mr Bowtell. Mr Bowtell said that Mr Sweeney said words to the effect "you have to show the government and the landlords that there has been a change of ownership of AIM". It is clear from Mr Sweeney's evidence that he was seeking to persuade Dr and Mrs Calvo as to what the position of the Federal Government was likely to be by reference to the concerns expressed by the Department of Education Science and Training ("DEST") in its letter of 30 August 2004. Mr Sweeney was not professing to pass on any statements which had been made to him by an officer of the Department. He was expressing his opinion about the Department's position as could be gleaned from the terms of the letter. 90 Mr Sweeney did not say (as alleged in para 11A(b)) that the DEST had a major concern about the plaintiffs' retaining the management and ownership of the Institute and that the application would receive more favourable consideration if management and control of the Institute was transferred from the Calvos to Mr Sweeney. He proffered his opinion that it was necessary in order to address the Department's concerns to show to the government that there had been a change in management. That was his opinion, and there was nothing misleading in his saying that the Department's letter showed that it had a major concern about the legal and business structures, ownership, management and governance issues surrounding the Institute and the Sydney School of Guitar. The Department noted that in the financial year ended 30 June 2003 the Institute's cash balance had diminished by almost $2.4 million without any noticeable change in the value of property, plant, equipment or investments, but during the year the Institute had transferred $1 million to Sydney School of Guitar when, according to the Department, there was doubt about Sydney School of Guitar's ability to repay the loan owed to AIM. Those comments justified Mr Sweeney's characterisation of the Department's position. 91 Accordingly, I find that the representation alleged in para 11A(b) was not made and that what was said at the meeting of 2 September 2004 about the position of the Commonwealth DEST was not misleading. I have found that the representation alleged in para 11A(a) was made, and was misleading, but was not relied on by the plaintiffs. Alleged Representation on 6 September 2004 92 Dr Calvo deposed that on 6 September 2004 Mr Sweeney said to him words to the effect: " It's too difficult to give you $2 million upfront during the capital raising so I suggest I keep 51% for $1 million and pay the additional $1 million within 12 months at which time you would have 25% ... I will pay you $150,000 per year for a 5-year period because of your ongoing support for AIM, culture and your abilities remaining a key factor in going forward. " 93 The plaintiffs pleaded that on or about 6 September 2004 Mr Sweeney represented that in consideration of the issue of sufficient shares in AIM to Mr Sweeney to give him a 51 percent shareholding, he would pay AIM $1 million upfront and a further $1 million in twelve months time following a second capital raising, to the intent that such funds be used by AIM to repay the loan made by the plaintiffs to AIM on 23 December 2003. They allege that this was a misrepresentation which induced them to issue the shares to Mr Sweeney. 94 Mr Sweeney denied making these statements as at 6 September 2004. As noted in paras [38]-[40] above there had been discussions along those lines in May and June 2004 where Mr Sweeney negotiated with Dr Calvo those terms to be put to potential investors. At one point in his cross-examination, Mr Sweeney accepted that at the meeting of 2 September he said to Dr Calvo words to the effect that he could pay Dr Calvo $1 million now and $1 million in 12 months for a transfer of 51 percent of his shares. He later said he would have to check and that he did not recall whether he said that on 2 September (T328). I do not accept that such a statement was made on 2 September. That would be a reversion to the position as it was in June, but Mr Sweeney had already modified his proposal on 6 July 2004. Having put his position on 2 September 2004 that he required 51 percent of the shares as a temporary measure to assist him in the negotiations, it is most unlikely that he would offer on 6 September 2004 to keep the 51 percent shareholding by paying $1 million upfront and an additional $1 million within 12 months. Mr Sweeney's position expressed four days earlier was that any capital which he provided would have to be used to help AIM overcome its problems and not be paid to Dr or Mrs Calvo. The proposal described by Dr Calvo as having been made on 6 September would not be consistent with what Mr Sweeney had said a few days earlier. 95 In any event, even if a statement were made on 6 September as described by Dr Calvo, I do not consider that the resolution of the directors on the same day for the issue of the shares was induced by any such statement. Dr Calvo did not say that he agreed to the share issue of 6 September 2004 because of the statement made to him on that day by Mr Sweeney. Mrs Calvo gave evidence that in May 2004, Mr Sweeney offered to pay $2 million for 49 percent of the shares in the company with half of the price to be paid from a second capital-raising within 12 months. She did not give evidence of having approved the share issues on 6 September 2004 by reason of anything she was told Mr Sweeney had said to her husband on that day about what payment he would make to retain the 51 percent shareholding. The evidence was that the plaintiffs agreed to the issue of the shares to Mr Sweeney because of some of the matters raised at the meeting on 2 September, not because of anything said by Mr Sweeney to Dr Calvo on 6 September. 96 For these reasons, the claim of misleading and deceptive conduct inducing the issue of a 51 percent shareholding to Mr Sweeney is not made out. It is unnecessary to consider whether the representations were made in trade or commerce. Obtaining Legal Advice 97 Mr Sweeney deposed that he told Dr and Mrs Calvo that they would need to hold a board meeting to decide to issue the shares. He told them he would prepare the necessary documents if they decided to go ahead. He told them that they ought to receive independent legal advice about it before going further. He said that Dr Calvo told them that they would do so. Mr Bowtell corroborated that evidence. He also corroborated Mr Sweeney's evidence that the Calvos were told that they had to move quickly because time was running out. Mr Sweeney said that the government had to be satisfied in the next few days. I accept this evidence. 98 Mr Sweeney deposed that on 6 September 2004 Mrs Calvo gave him signed copies of the resolutions for the allotment of additional shares in AIM as a result of which he acquired 51 percent of the issued capital. He deposed that when she handed him the documents he asked "Did you see your solicitor?" and Mrs Calvo said "We did". In her affidavit in reply Mrs Calvo denied the terms of this conversation. In oral evidence she said that in relation to this temporary arrangement for what she called the transfer of shares, she discussed the matter with an arts student who was doing some law subjects. She did not recall the effect of that discussion. I understood her ultimately to have accepted that Mr Sweeney did ask whether she and Dr Calvo had seen a solicitor and she told him that they had because they had discussed the matter with a student and she did not want to appear to be an idiot. (T194-196). That was the only legal advice obtained by Dr and Mrs Calvo either in relation to the issue of shares to Mr Sweeney on 6 September or in relation to the later transactions of 24 and 27 September 2004. Why did the plaintiffs agree to give Mr Sweeney 51 percent of the shares? 99 The plaintiffs did not dispute that 51 percent of the shares were to be given to Mr Sweeney on a temporary basis in order to help him in negotiations. Dr Calvo said that "it would have given him an understanding that the structure of the institute has already changed from the inside" and that "it would have cleared the road for us to get along and finish off". Mrs Calvo said that Mr Sweeney had told them that the transfer of 51 percent of the shares would be a temporary measure to allow him to have some traction in discussions with the landlord. She thought that having 51 percent of the shares would enable him to carry more credibility. Meeting with Department of Education and Training on 3 September 2004 100 On 3 September 2004 the New South Wales Department of Education and Training sent a letter to Dr Calvo at the Institute containing detailed comments upon the Institute's application for registration as a higher education provider in New South Wales and for accreditation of the Diploma of Music, Advanced Diploma of Music and Doctorate of Professional Studies. The Department specified over 25 pages matters which required attention. On the same day Mr Sweeney, Ms Power and Professor Robertson attended a meeting with representatives of the Department. Mr Sweeney advised that he was taking over AIM's management and bringing in a new management team. He asked whether, if AIM could restructure its finances and obtain an unqualified audit certificate confirming that it was a going concern, this would be acceptable to the Department. Mr Sweeney deposed that the representatives of the Department stated that they were not happy with the way the Institute was being managed and were concerned about governance issues, and that they were also concerned that the grant money from 2002 had been mismanaged and needed to know the whereabouts of all of the grant funds. He deposed that the representatives of the Department also said words to the effect: " If AIM is re-structured so that control over the Institute is taken away from the Calvos and given to you and if you can deliver an unqualified audit certificate and a statement from the auditor that AIM's business is a going concern, then it is likely that will be satisfied that AIM's registration as a Higher Education Provider can proceed. " 101 The representatives of the Department were Ms Stokes and Mr Richard Audley. Ms Stokes swore an affidavit in which she denied that she or Mr Audley said that AIM should be restructured and control taken from the Calvos and given to Mr Sweeney. She disagreed that AIM's registration was dependent upon a transfer of control from Dr Calvo to Mr Sweeney. She said that neither she nor Mr Audley said that they were not happy with the way the Institute had been managed and were concerned about governance issues. Nor did they say that their review of the accounts indicated that the Calvos had been taking money out of the Institute even though it was incurring losses. 102 The meeting occurred after the representations were made on 2 September 2004 dealt with at paras [75]-[91] above. The plaintiffs do not allege that Mr Sweeney misrepresented the New South Wales Department of Education and Training's position, nor that they relied upon any such subsequent misrepresentation. 103 However, counsel for Mr Sweeney submitted that even if Mr Sweeney owed a fiduciary duty to Dr and Mrs Calvo (which was denied), and even in the absence of their informed consent to his acting for his personal advantage, there would be no breach of fiduciary duty if the transaction was for the plaintiffs' benefit and no other course was open. It is relevant to this submission to decide whether the NSW Department would only have been prepared to register AIM if AIM were restructured so as to take control away from the plaintiffs. 104 I accept Ms Stokes' denial summarised above. She was not cross-examined. I accept her evidence that AIM's registration was not dependent upon a transfer of control from Dr Calvo to Mr Sweeney and that neither she nor Mr Audley said that it was. The Department's assessment of the Institute's application depended upon its internal audit assessment of the Institute's accounts. Discussions Between Mr Sweeney and the Auditor 105 Mr John Docherty of Rhodes Docherty & Co was appointed the Institute's auditor in mid to late 2003. As noted earlier in these reasons he issued a qualified audit opinion in respect of the financial statements for the financial year ended 30 June 2003. He confirmed that the previous financial controller had been replaced in very acrimonious circumstances. Many accounting records were missing. Between August and September 2004 he had a number of discussions with Mr Sweeney. Mr Sweeney told him that unless the company could obtain an unqualified audit certificate for the financial year ended 30 June 2004 it would be unable to obtain Federal and State Government accreditation and would not qualify for Fee-Help. Mr Docherty said that he was concerned about the very large rental debt and the charge that the landlord had over AIM. Mr Sweeney told Mr Docherty that he thought the company needed an urgent capital injection of at least $500,000. He also told him that it might be possible to persuade the landlord to reduce the rent payable and to take an allotment of shares in lieu of outstanding rent. 106 The accounts were signed by the directors and the audit opinion issued on 24 September 2004. The audit opinion was unqualified. Mr Docherty told Mr Sweeney on more than one occasion that AIM was in urgent need of capital and that he needed to be certain before he signed off on the audit that Mr Sweeney would guarantee to provide AIM with a capital injection of at least $500,000. Mr Sweeney said that he would provide that guarantee. By letter dated 22 September 2004 Mr Sweeney wrote to Mr Docherty in the following terms: " Dear Mr Docherty AUSTRALIAN INSTITUTE OF MUSIC LTD This letter is to confirm the promise made by myself to donate $500,000 to the above named company. I hereby undertake to pay a donation of $500,000 to the Australian Institute of Music Ltd on or before the 31 st of October 2004, subject to the following conditions: 1. That the Australian Institute of Music is registered as a tertiary institution by the New South Wales Government under the Higher Education Act 2001, and that any relevant courses are accredited under that act. 2. That the Australian Institute of Music is granted approval as a higher education provider by the Commonwealth Government so that it is eligible to receive FEE-HELP payments on account of student fees. Provided these conditions are met, I have undertaken to make my promised donation of $500,000. Should either of these events not take place I cannot guarantee the payment of a donation, as the continued viability of the Australian Institute of Music would in my opinion be jeopardised, and any donation could thus be rendered futile. " Events Between 6 and 10 September 2004 107 On 6 September 2004 Mr Sweeney prepared a new version of a discussion paper, evidently designed to be provided to potential investors. It included a section headed "Why is Bill Sweeney here?" Mr Sweeney answered that question by saying that the Institute was in financial difficulties due to poor decisions made in the past. He said that the Information Memorandum prepared by a partner of PKF, independent of Bill Sweeney, showed that the Institute could trade profitably. Mr Sweeney recorded that the landlord had a secured debt of $1.5 million, but said that what was required was for the landlord to agree to forgive the debt or treat it as a tax-deductible loan or as a capital investment. He noted that "I need him to go further and forgive the debt to June 2004 so that the business can reflect a strong balance sheet and a profitable year." He also said that an unqualified audit report for the 2004 financial year was required. He wrote: " The Budgets for 2005 to 2008 along with the Cashflows say that we can get by with some stretch in the cashflow in December 2004 and this after receiving contribution of $500,000. I don't think the $500,000 contribution is anywhere near enough and the amount really needed is $2 million - $3 million. The Budget and Cashflow are aggressive with the FTE student number growth from June 2004 of 450 students to 600 students by June 2005 (resulting form the introduction of HEP) to 784 students by June 2006 and 1,000 students by June 2007. The profitability at that stage is quite good however achieve that amount of growth in that short a period of time seems a little ambitious. If it was slower then we would need funding. Also to achieve this growth we do need to invest in good management and good marketing. I have allowed only a $400,000 marketing budget for 2005 and $600,000 in 2006. The Australian Institute of Music is unknown in the national and international arenas, it needs to change that position through some good marketing. " 108 On 7 September 2004 Mr Sweeney wrote to Mr Preston of Perpetual Trustee, soliciting investment from that company. Mr Sweeney wrote: " The Australian Institute of Music is set out in detail in the attached information portfolio which shows that the business has bee mismanaged over the last few years. Prior to that it was a sound business but it has over expanded its base and expenditure. To solve the management problems, I have been given 51% of the voting power of this not-for-profit organisation and have taken control of the business. I will be introducing new management through Bob Robertson, formerly of the University of Technology. I currently believe that the existing Executive are very good but they have not been allowed to operate and function in a proper manner. The attached portfolio is a warts-and-all outline and it shows that we can be very profitable with a reasonable cashflow however to achieve this we need the support of the Landlord. I spoke to him yesterday evening (Monday, 6 September 2004) and he was amenable to my requests. He has not said yes but will let me know his answer later this week. So what is required? We need at least $1 million over four years in addition to the $500,000 that I will put into the business. This money coming in could be by way of loan and/or sponsorship. It is a great opportunity for a corporate sponsor to get behind the Australian Institute of Music. When you review the attached portfolio, you can see the marketing opportunities that arise through our involvement with two students who are finalists in Australian Idol, The Tankstream Quartet and with 800 students growing to close to 2,000 (FTE 1,000). This is an opportunity to put something back. Alternatively, to lend $1 million at 10% for four years secured by first registered charge over the business. The concern for Perpetual would include whether I can make this business succeed. I am sure you do not wish to be associated with a failing business and nor do I. I do not expect you or myself to put money into this business unless we have resolved the landlord and rental situation, we [obtain] a clear audit certificate and that both the Federal and State Governments have granted approvals and registrations etc. In the meantime though, I need to know that there is interest in lending either the Institute or myself money and/or sponsoring the Institute in some way. " 109 Mr Sweeney attached what he described as a "portfolio being a 'warts and all' outline" which showed that the Institute could be very profitable with a reasonable cashflow if it had the support of the landlord. He asked whether Perpetual was interested in lending either the Institute or himself money or providing sponsorship. The approach was not successful. But it indicated that Mr Sweeney was continuing to pursue potential investors. 110 Mr Sweeney held a meeting with Mr Muller from Ellimark on 8 September 2004 to negotiate a compromise in respect of the outstanding and current rent. Ellimark was prepared to release the Institute from its current liability of $1.65 million and to reduce the current rent by 50 percent. The most important issue to be negotiated was the percentage of shares to be issued to Ellimark in return for these concessions. Ellimark proposed that it have 40 percent; Mr Sweeney have 40 percent; and Dr Calvo have 20 percent. 111 On 10 September 2004 Mr Sweeney wrote to Mr Muller stating that the 40 percent equity sought by the landlord was too high. He said "I note that in previous discussions with Peter Calvo on a deal similar to this that you were prepared to accept 20% equity. I suggest that we meet somewhere in between. Peter is very concerned that he is being swamped and on my presentation of your deal to him demanded that he have 30%." 112 Mr Muller asked that Mr Sweeney not be able to charge fees to the Institute. Mr Sweeney responded by agreeing to limit his fees between October 2003 and March 2005 to no more than $50,000. 113 On 10 September 2004 Mr Sweeney wrote to Mr Keating, whom he regarded as an advisor to Dr Calvo. Mr Sweeney wrote: " Dear Paul An Update on the Australian Institute of Music I respect and appreciate you making sure the interests of Peter Calvo are looked after. It is a bit difficult from my position to be interested in saving AIM whilst trying to look after Peter Calvo and also myself. In summary, the original deal (copy attached as Annexure 1) was not possible as no one would invest capital into AIM. I have had meetings with Tony Berg of Gresham Partners and have put feelers out to Peter Weiss, Andrew Banks and Geoffrey Morgan and some ten other potential investors. Nobody is quite interested in supporting this business as there are no success runs on the board in the last three years. I then tried to amend the deal to: 1. I would pay Peter Calvo $500,000 now for 50% of the business. This money would go into AIM and be used to repay his loan account ie. Peter gets the money 2. Twelve months after this payment, $1.5 million would be paid to him as repayment of his loan account and this would equate to a further 25% of the equity, leaving him with 25%. But this was not possible as the business was declining rapidly. I could not move forward any further with this business without knowing that whatever decisions I made would be supported by Peter Calvo. To this end, Peter Calvo has transferred 51% control of the business to me (see minute on issue of capital attached as Annexure 2). Due Diligence The above was subject to due diligence and on undertaking the due diligence I found the following: 1. The State Government is not willing to re-register AIM for some of its courses (see copy of letter attached as Annexure 3). They are enquiring about the financial position and, at a meeting which Bill Bowtell also attended, they made it quite clear that they wanted AIM to succeed but they had questions about corporate governance and that it must have an Unqualified Audit Report for 2004. 2. A similar problem has arisen with the Federal Government (see letter attached as Annexure 4) and they are not prepared to have AIM qualify for HEP unless they get an Unqualified Audit Certificate and a demonstration that corporate governance is in place. They seem to be following the lead of the NSW Department of Education. 3. In July 2004, the Landlord was given a Fixed and Floating Charge over the business which, in effect, has given him total control. 4. A severe cashflow problem has arisen as a result of students who have stopped paying fees in advance expecting HEP to pay their next year's fees. 5. Peter Calvo does not appear to have any large loan account due to him from AIM. He has been taking drawings in excess of $200,000 per year from the business (see general ledger attached as Annexure 5). Peter's capital contribution has been used to fund the loss for 2003 and 2004. SSG is owned by Athalie Calvo, and because of the way the group is structured, it incurs the loss and so owes money to AIM. This is a doubtful debtor in AIM so the auditor offset this against the $1.5 million owed to Peter Calvo. The net position is that they owe AIM $354,000. There are numerous other areas of poor administration (please see the detailed information portfolio). The situation is that AIM is insolvent. The Landlord On getting control, I have negotiated heavily with the Landlord and he has offered the following (see copy of the deal at Annexure 6): 1. The debt owing to him of $1.6 million will be capitalised and no longer to be repaid. 2. The rent for the year ended June 2005 will reduce by 75%. 3. He will take back two empty floors that have not ever been used. 4. The Landlord wants 40% equity in the business. He also wants me to have 40% of the business and Peter Calvo to have 20% of the business. It is point 4 above that I have not agreed to. It is not a good deal but it is a deal and we are still negotiating (see copy of counter deal at Annexure 7). (For your information, I have attached a newspaper article on the Landlord at Annexure 8). So what is fair? What Peter Calvo wants now is: 1. To receive $200,000 immediately 2. To receive a salary of $125,000 per annum 3. To receive $1.5 million in twelve months time I don't see myself or anybody paying that but he does have to be looked after. What I have said at the moment is that he can continue to draw at a rate of $200,000 per year as he has been in the past for the next three months until we get to the bottom of this and see if we can save the business. But what happens after this? The cashflows for AIM show that it will run out of money even with this new situation, in November 2004. This shortfall will be in excess of $1 million and will have to be covered by myself (please see Profit & Loss and Cashflow statements at Annexure 9). I can't see myself putting money into the business to save it and to pay Peter Calvo as well. Conclusion What can we do for Peter Calvo? If the business is sound then: 1. Peter will be left with 20%-30% of the business. His voting rights on this will be proxied to myself. 2. Peter and Athalie Calvo, combined, can earn a salary of $125,00 per annum. 3. Peter will not be in a position of authority but will have the title 'Chancellor'. 4. I will not invest until both the State and Federal Governments give their approval on the status of AIM and the registration of HEP. 5. Peter has lost between 70% and 80% of AIM and will not be compensated. The assignment of control has happened far too late. The investment into more space and the construction of the Concert Hall were too much too soon. Peter and Athalie have to come to accept this position. I am happy to walk away now if they have a better alternative. " 114 A copy of this letter and its annexures was provided to Dr Calvo. Annexure 1 setting out the "original deal" was the record made by Mr Sweeney in June 2004 of his negotiations with Dr Calvo set out at para [40] above. 115 The projected profit and loss statement at annexure 9 contained projections for the financial years from 30 June 2004 to 30 June 2008. It was based on favourable assumptions concerning rent, containing teaching costs, sub-letting part of the premises from January 2005, and most significantly, increasing student numbers such that by the 2008 financial year, tuition fees net of scholarships and discounts would increase almost threefold. On these assumptions there was a projected turnaround of the Institute's financial position from a net loss of $1.49 million, to a loss of $220,000 in 2005, and profits of $165,000 in 2006, $1.67 million in 2007 and $2.4 million in 2008. 116 The position expressed by Mr Sweeney in this letter was that Dr Calvo would be left with 20-30 percent of the shares in AIM and would be required to give a proxy to Mr Sweeney in respect of the shares he retained. Dr Calvo would not be compensated for the fact that 70-80 percent of the share capital would be issued to Mr Sweeney and to the landlord. Dr and Mrs Calvo would be continued to be employed by the Institute at a combined salary of $125,000. 117 Counsel for the plaintiffs submitted that Mr Sweeney wrote the letter of 10 September 2004 to Mr Keating in order to influence Mr Keating, whom Mr Sweeney perceived as Dr Calvo's advisor, to persuade Dr Calvo not to press any claim for compensation in respect of the 70-80 percent shareholding in the Institute which the Calvos were giving up. They say that it shows Mr Sweeney was conscious of a conflict of interest and was indicative of the pressure being applied to the Calvos at the time. The plaintiffs were told that if they did not agree to what Mr Sweeney proposed he would walk away. 118 I accept that Mr Sweeney's threat to walk away should not be understood as conveying that he would walk away from his negotiations with the landlord and his promise to pay $500,000 to the Institute, but nonetheless retain his 51 percent share holding. I think it was implicit in the threat to walk away that he would transfer his 51 percent shareholding back to the Calvos. That was the position he expressed to Mr Ronen and Mr Muller a few days later when he said: " As you are aware, I am willing to donate $500,000 to AIM. The conditions of this donation, which have previously been discussed, are that the institute obtains registration from both the State and Federal governments. Should this not be the case then I will not be in a position to make the investment and it could cause great embarrassment to the institute. I currently hold 51% equity in the institute and would be very happy to transfer this to Peter Calvo should you both wish to continue without me. " 119 The threat to walk away was a serious one. Without Mr Sweeney's promise to pay $500,000 to the Institute, an unqualified auditor's certificate would not be given and without that certificate the Institute could not expect Federal and State government accreditation. 120 Mr Sweeney said that the reason he wrote his letter of 10 September was, in effect, to provide a record at Mr Keating's request of the progress of the negotiations including a negotiation which took place that day with Mr Keating, Dr Calvo, Mr Bowtell and Mr Sweeney. According to Mr Sweeney, he said to Mr Keating, Dr Calvo and Mr Bowtell at a meeting on 10 September the substance of each of the matters set out in the third paragraph down to the paragraph above the heading "The Landlord". He deposed that Mr Keating said words to the effect "The way I see it, the institute is in serious financial difficulty and if you can raise the necessary capital the Calvos should keep somewhere between 20% and 25% equity and stay on for the next few years on a salary until the institute is financially healthy." Mr Sweeney deposed that towards the end of the meeting Dr Calvo said to Mr Keating that "I will agree to support Bill. He is the best person to save the institute and he has my support and I want to agree to the deal. I want to be guaranteed that I will have income of $125,000 per annum for the next three years and be the chancellor of the institute." Mr Sweeney deposed that he said words to the effect "I will agree to all of that." 121 That there was a discussion to this effect is consistent with the events which happened. 122 Dr Calvo denied saying "I will agree to support Bill. He is the best person to save the institute and he has my support and I want to agree to the deal." Mr Keating swore an affidavit which was read for the plaintiffs which did not touch on those words. He deposed not to recalling much of the conversation as deposed to by Mr Sweeney. He deposed that according to his records he had two separate meetings in relation to the Institute: one with Mr Sweeney and Mr Bowtell, and a second with Dr Calvo. He deposed that there were "certain discussions" in which Mr Sweeney said that Dr Calvo would be paid a salary or consultancy of some reasonable sum plus an amount of $1.5 million for the 32 percent he was acquiring from Dr Calvo to be paid within 12 months. I doubt that those discussions took place on 10 September. If they did they were immediately contradicted by Mr Sweeney's letter of that date. 123 Although Mr Keating was required to attend for cross-examination, the plaintiffs ultimately did not make him available. No application was made by the defendant in relation to what use should be made of his affidavit. In those circumstances I accept Mr Sweeney's evidence of what took place on 10 September. It is consistent with his letter of that date and with the objective facts. Whilst Dr Calvo denied saying that he would support Mr Sweeney and that he considered him the best person to save the Institute and he had his support, Dr Calvo's actions showed that that was his view and position at the time. I attribute much of Dr Calvo's subsequent denial of making such statements to his later perception that Mr Sweeney had not acted honourably towards him. Negotiation of Different Deals for the Calvos' Shares 124 Over the next few days Mr Sweeney had further negotiations with Mr Ronen and Mr Muller as to the terms on which Ellimark would take equity in return for varying the lease and forgiving the debt for outstanding rent. On 16 September 2004 Mr Sweeney set out the terms that he proposed which included that Ellimark take up 35 percent equity in AIM leaving Dr Calvo with 25 percent equity and Mr Sweeney with 40 percent. On the same day Mr Sweeney wrote to Dr Calvo enclosing a copy of the conditions he had proposed to Ellimark and setting out the conditions he proposed with the Calvos. He wrote: " Irrespective of Nitzan signing the deal, I currently have 51% of the Institute as signed over by Athalie and yourself. I am prepared to give that up and reduce my equity to 40% on the following conditions: 1. I have an option for you to purchase 11% of the equity from you at anytime I choose for an amount of $1,500,000. 2. I have an irrevocable proxy from you for the voting of your shares for the remainder of our association. In other words, if a shareholders vote takes place then you vote in favour of the direction that I choose to take. If you agree to these conditions, then I am prepared to become a Director and Chief Executive Officer of the Australian Institute of Music. The fee for the provision of these services will be $50,000 to 31 March 2005 and then the fee will be at $250,000 per annum. The fee for yourself and Athalie Calvo will be at a rate of $125,000 per annum (in total) to be shared between you in any matter that you choose. As previously agreed, the current drawings that you are taking from AIM will continue for the months of September 2004, October 2004 and November 2004 after which time you will both go on tot the $125,000 per annum fee. Your title will be that of Chancellor of the Australian Institute of Music and Athalie Calvo's title will be resolved by the Executive in the next month. I am prepared to invest $5000,000 by way of deductible donation to AIM, however, this donation will only be made when the Institute has received registration from the State Government, and more importantly, the Federal Government as a HEP registered body. " 125 Dr Calvo was unhappy about the terms of Mr Sweeney's letter of 16 September. He told Mrs Calvo that Mr Sweeney had reneged on the deal and was not prepared to pay $1 million now and $1 million in 12 months (T220). 126 On 17 September Mr Muller responded to Mr Sweeney's proposed terms. Relevantly he agreed that the equity should be either 40 percent Mr Sweeney; 40 percent Ellimark; and 20 percent Dr Calvo; or 37.5 percent: 37.5 percent and 25 percent. 127 On 20 September 2004 Mr Sweeney wrote to Dr Calvo as follows: " I was very disappointed with the letter from Nitzan, but in the interest of trying to save the institute, I am going to go ahead on the deal of 37.5% for him, 37.5% for me and 25% for yourself. If you please list out what you require to participate in this deal. I need your list and I need it in writing. Please be aware that for me to enter this deal, I require from you an irrevocable proxy over your shares so that I can vote them on all and any occasions. I also require an option over 15% of your shareholding so that any time I can purchase it for an amount of $1,500,000. Peter, I need you to sign an agreement on these which I'll have drafted today so that we may move ahead. " 128 Mr Sweeney initially proposed obtaining an option to acquire an 11 percent, and subsequently a 15 percent, shareholding from the Calvos. He was not proposing an agreement whereby he was committed to purchasing the shares. Given that the company was a not-for-profit company, so that there could be no distribution of dividends to the shareholders, and given that Mr Sweeney was also insisting on an irrevocable proxy entitling him to control the votes of all of the Calvos' shares, there would be no incentive for him to exercise the option, so long as the Institute remained a not-for-profit company. 129 The reason Mr Sweeney initially wanted an option over 11 percent of the shares and subsequently over 15 percent of the shares was to ensure that he could acquire a majority of the shares. He did not tell Ellimark that he was negotiating with Dr Calvo to take an option so that he could keep majority control. I infer that he did not tell the landlord that he was negotiating with Dr Calvo to be given a proxy over Dr Calvo's shares. Had he done so Mr Ronen would have objected. 130 Dr Calvo responded to Mr Sweeney on 20 September 2004. He said: " ... I agree with your assessment of the situation. Given the paucity of time it is vital to move fast in order to save the Institute. As to my requirements to participate in this deal, three things are important. 1. For the extra 4% of the shares (from 11% to 15%) a payment of $40,000 be made to me at the commencement of the agreement, or alternatively $1.56 million at the time of the share transfer. 2. The 15% share transfer should take place within the first year of operations under the new scheme. 3. An annual salary of $125,000 for Athalie [and] I primarily for the first three years of work to guide and sustain balance of development at the Institute. " 131 Whilst Mr Sweeney proposed acquiring an option over Dr Calvo's shares, on the face of it, Dr Calvo was requiring that the transfer of shares take place within the first year for which he would be paid either $1.56 million or (if a payment of $40,000 were made "at the commencement of the agreement") $1.5 million. He did not specifically reject the proposition that Mr Sweeney be given an option to acquire the shares, rather than agreeing to buy them. 132 Dr Calvo agreed that he composed the terms of the email of 20 September 2004 (T223). 133 By 20 September 2004 Mr Sweeney instructed a firm of solicitors, Hicksons, to act for him in relation to agreements to be entered into with Dr Calvo. He said that he instructed Hicksons at about 16 or 20 September 2004. At that time, negotiations with Dr Calvo were continuing. 134 In cross-examination it was put to Dr Calvo that in paragraph 1 of his email quoted at para [130] above, he was writing about an option for Mr Sweeney to acquire 15 percent of the shares. He did not disagree with that. (T227-228). He agreed that his proposal to Mr Sweeney involved either a payment of $40,000 upfront or, alternatively, that the price proposed by Mr Sweeney on the exercise of the option be increased by $60,000 to $1.56 million (T228). That is not how I read the correspondence. Nor is it how Mr Sweeney read it. For reasons which follow I have concluded that Dr Calvo assumed that an option would be exercised and was not different from an agreement to purchase shares in the future. 135 Mr Sweeney responded to Dr Calvo on 22 September. He said: " In regard to you [sic] requests for the extra 4%, I would agree to pay $1,560,000 at the time of share transfer and any spare money I have I am earmarking to put it into the Institute. The 15% transfer cannot take place in the first year, however, if we can make a conditional [sic] the business making $1,500,000 in the year ended 30 June 2006 I would be happy to purchase the shares from you two months after that date, that is the end of August. " 136 By this email, Mr Sweeney was indicating that he would agree to a term that he purchase the shares by August 2006 for $1.56 million if the business made $1,500,000 in the 2006 financial year. Mr Sweeney agreed that what he was conveying to Dr Calvo was not that he have an option to acquire the shares, but that he would acquire the shares if the stipulated profit were made. However, Mr Sweeney did not instruct his solicitors to draft a share sale and purchase agreement which incorporated such terms. He asked them to draft an option agreement for $1.5 million. 137 It was put by Mr Sweeney's counsel to Dr Calvo in cross-examination that Dr Calvo understood that Mr Sweeney was, in effect, saying that rather than pay $40,000 upfront for the option, he agreed to paying $1.56 million if he chose to exercise the option (T234). Dr Calvo denied that that was his understanding (T234). I consider that Dr Calvo expected to be paid $1.5 million or $1.56 million in twelve months' time. 138 Mr Sweeney deposed that on the afternoon of 21 September he had a meeting with Dr Calvo in Dr Calvo's office where he took Dr Calvo through the deal negotiated with the landlord saying that he would reduce his equity from 51 percent to a minority interest of 37.5 percent being the same amount the landlord would have, and that Dr Calvo's interest would be reduced to 25 percent. 139 It was not right for Mr Sweeney to describe his new 37.5 percent shareholding as a minority interest, given that he also stipulated for an irrevocable proxy over Dr Calvo's shares. Dr Calvo said to Mr Sweeney "What choice do we have? We need his support and yours." Dr Calvo told Mr Sweeney that he would be happy to give him his proxy. According to Mr Sweeney, Dr Calvo also said "Will you buy the balance of my shares but leave me with 10%? Paul Keating says that I should obtain value for the 25% remaining or at least always hang on to at least 10%". Mr Sweeney replied saying "I will take up an option over 15% for $1.5 million giving overall valuation of the business at $10m." I accept Mr Sweeney's evidence of this discussion. It is consistent with the objective facts. Mr Sweeney deflected the Calvos' request that he acquire the Calvos' shares by agreeing to take an option. He then attributed a value to the company, and by inference to the shares, by reference to the exercise price of the option. That is only valid if it is assumed that the option will be exercised. It was a negotiating strategy that was likely, and in my view, calculated, to induce Dr Calvo to believe that the option would be exercised. 140 Dr Calvo said that he was not happy to give Mr Sweeney his proxy but felt pressured into agreeing to do so because Mr Sweeney said that he had to have control of the management of AIM and was not interested in proceeding unless he got control. That was the position. 141 Dr Calvo also said that he believed that he was to receive $1.56 million for the 37.5 percent shares that Mr Sweeney was to receive. There was no rational basis for such a belief. Although Mr Sweeney had offered in June and July 2004 to pay $2 million in stages for a 49 percent stake, from 2 September, (when he insisted on acquiring a 51 percent stake in the company as a temporary measure), Mr Sweeney made no proposition to pay any consideration for the shares he was to retain. His only proposals were as to the consideration he would pay on taking a transfer of part of the remaining shares of Dr Calvo. 142 Nonetheless, although it lacked a rational basis, I accept that Dr Calvo believed that he would be paid $1.56 million for the 37.5 percent of the shares that Mr Sweeney acquired. He also believed that he would be paid $1.56 million by Mr Sweeney for the further shares that he believed Mr Sweeney would acquire. Dr Calvo did not deny that Mr Sweeney told him that he would take an option over 15 percent of the shares for $1.5 million, but I do not think that Dr Calvo appreciated that giving an option over his shares to Mr Sweeney was of no benefit to him because Mr Sweeney would not be required to exercise the option, and in the meantime he would be precluded from disposing of the shares to anybody else. 143 Dr Calvo did not respond to Mr Sweeney's email of 22 September. The call option entered into on 27 September did not include any of the terms proposed by Dr Calvo in his email of 20 September, nor the terms proposed by Mr Sweeney in his email of 22 September. No consideration (apart from the sealing of the deed) was provided for the grant of the option. The price payable for 15 percent of the shares, if the option were exercised, was stated to be $1.5 million, not $1.56 million. The deed imposed no obligation on Mr Sweeney to exercise the option irrespective of the performance of the business. I asked Mr Sweeney whether he told Dr Calvo that the agreement Dr Calvo was asked to sign did not reflect Mr Sweeney's most recent correspondence with Dr Calvo. Mr Sweeney did not directly answer that question. He said that he thought the agreement improved Dr Calvo's position. The reason, he said, was that: " There was no requirement to make a profit on my option agreement, it was just I have the right to buy his shares, so that's how I remember it. I will have to check the documents but I don't believe I asked for a profitability figure, just an option, because 1.56 was a pretty high profit figure. " 144 I do not accept that Mr Sweeney believed that the option agreement Dr Calvo was asked to sign was an improvement on Dr Calvo's position from that which had been under negotiation in the email correspondence. Whilst I accept that the profit of $1.5 million proposed by Mr Sweeney in his email of 22 September would be a hard figure to obtain, there was no benefit to Dr Calvo in giving a call option over his shares. Alleged Oral Offer of 22 September 2004 145 Mrs Calvo said that on or about 22 September Mr Sweeney asked for a private conversation in the course of which he said he was prepared to pay $1.56 million now on receiving his shares and a further $1.5 million for an option to take 15 percent of Dr Calvo's remaining 25 percent shares in the company. Mrs Calvo deposed that she said "Yes if that's the case then I can come to an agreement with you." 146 Mrs Calvo referred to Mr Sweeney's email of 22 September 2004 as corroboration of this evidence. But it is not corroborative. To the contrary, when read in the context of the emails which preceded it, it refers to paying $1.56 million at the time of transfer of the further 15 percent of Dr Calvo's shares and only then if the business made $1.5 million in the year ended 30 June 2006. 147 Mrs Calvo adhered to her evidence in cross-examination (T245) but it seems to me objectively improbable that Mr Sweeney would tell Mrs Calvo that he was prepared to pay $1.56 million for the 37.5 percent interest and a further $1.5 million on the exercise of the option for a further 15 percent of the shares when that was not his intention and was contrary to what he was negotiating with Dr Calvo in his correspondence. I am satisfied that Mrs Calvo was mistaken in her recollection. I consider she reconstructed a conversation with Mr Sweeney to accord with her belief about the contractual arrangements. Final Documentation 148 On 22 September Mr Sweeney gave Mr Docherty the letter referred to in para [106] above. On the same day Ellimark provided Mr Docherty with a letter confirming that it and the other owner of the properties leased by the Institute had agreed to release the Institute from the amount owing to them as at 30 June 2004, namely $1,576,426.45. They also acknowledged that they had agreed to vary the leases so that during the financial year ended 30 June 2005 the total rent payable would be reduced to 25 percent of the amount originally specified in the leases. From 1 July 2005 the full rent would become due and payable in accordance with the original lease terms and in addition the rent not charged over the financial year ended 30 June 2005 (75 percent of the original lease rental) would be charged in equal monthly instalments over the two years ended 30 June 2007. 149 On 23 September Dr and Mrs Calvo signed for the Institute surrenders of the existing leases and new leases and a new car park licence. 150 On 24 September Dr and Mrs Calvo signed a letter stating that a credit balance of $100,072.91 appearing in the balance sheet of the Institute as at 30 June 2004 was the net result of all recapitalisation funds injected by them, drawings made against that sum, and inter-company movements. They acknowledged that that balance would not be recoverable then or in the future. The document stated that the Institute might, at its discretion, make the payment to them at some future time. The statement of the credit balance of $100,072.19 took into account the capital injection of $1,466,209.20 in December 2003. I accept Dr Calvo's evidence (which was not challenged) that there had been no prior discussion about the document and it was simply presented for the Calvos' signature when the leases and surrenders of lease were being signed. They signed the document because they were asked to and they "did not wish to hold up the whole operation". 151 On 24 September Mrs Calvo and Benjamin Calvo resigned as directors and Professor Robertson and Mr Sweeney signed consents to act as directors. Dr Calvo signed minutes of a meeting of directors (himself and Mrs Calvo) appointing Mr Sweeney and Professor Robertson as directors. On the same day Dr Calvo and Mr Sweeney signed the financial statements for the Institute for the year ended 30 June 2004. 152 On the same day Mrs Calvo transferred her 245 shares to Dr Calvo. Mr Sweeney, as chairman of the board, signed a minute of a meeting of directors, said to be held by telephone between himself and Dr Calvo, by which it was resolved to allot further shares for $1 each to Dr Calvo, Mr Sweeney and Ellimark. 210 shares were allotted to Dr Calvo, 3,240 to Mr Sweeney and 3,750 to Ellimark. This brought Dr Calvo's shareholding up to 2,500 shares and Mr Sweeney's shareholding up to 3,750 shares. Share certificates were issued accordingly. 153 There remained three agreements to be signed. The first was a shareholders' agreement prepared by Hallgath Phillips, the solicitors for Ellimark. The parties to it were Ellimark, Mr Sweeney and Dr Calvo. The agreement included a provision that the shareholders take steps necessary to ensure that a new constitution was adopted incorporating provisions appropriate to the company's maintenance of its not-for-profit tax status. However, this was not Mr Sweeney's intention. In his communications with potential investors and in later communications, he made his view clear that the company should endeavour to change its status. 154 The shareholders' agreement also included restrictions on transfers of shares. A shareholder who wished to transfer his or its shares was required first to offer to sell the shares to the other shareholders. The agreement also included a term dealing with the services of Dr and Mrs Calvo and Mr Sweeney. Dr and Mrs Calvo were to be employed or retained as consultants until 30 June 2007 at a remuneration equivalent to $200,000 on an annualised basis for the period up to 31 December 2004 and thereafter on an aggregated employment package equal to $125,000 on an annualised basis for them both. Dr Calvo was to have the title of chancellor. The agreement provided that Mr Sweeney would fill the role of chief executive officer and that his services would be provided on a consultancy basis. His fees up to 31 March 2005 were not to exceed $50,000 plus GST and his fees or salary package for the period from 1 April 2005 was to be approved by the directors and not exceed $200,000 plus GST per year, unless the approval of shareholders holding not less than 75% of the issued shares was obtained. Mr Sweeney undertook to the other shareholders to make a donation to the company of $500,000 on or before 31 October 2004 if, on or before that date, the company was registered as a tertiary institute by the New South Wales Government under the Higher Education Act and the company was approved by the Commonwealth Government as a higher education provider so that it was eligible to receive Fee-Help payments on account of student fees. 155 The term that Dr and Mrs Calvo would be employed up to 30 June 2007 did not reflect the negotiations between Mr Sweeney and Dr Calvo where Mr Sweeney proposed that they be employed for three years. 156 Dr and Mrs Calvo received the draft shareholders' agreement on 23 September. They signed it without amendment on either 24 or 27 September. (25 and 26 September was a weekend.) 157 Hicksons drafted a call option agreement and a co-operation deed acting on the instructions of Mr Sweeney. The call option agreement provided that Mr Sweeney was entitled to exercise an option to acquire the "Option Shares" at any time up to 31 August 2008. "Option Shares" was defined to mean either 15 percent of the total number of shares in the issued capital of the Institute at the date of exercise of the option or, if Dr Calvo owned less than 15 percent of the total number of issued shares at that time, such shares as he then owned. 158 It is hard to see how Dr Calvo could comply with his obligation to transfer the option shares to Mr Sweeney if the option were exercised without being in breach of the restrictions on transfer in the shareholders' agreement (unless Ellimark consented to the transfer). No submissions were made about this and I merely note it. 159 The call option agreement also included a term requiring Dr Calvo to exercise voting rights attached to the Option Shares as, and only as, instructed by Mr Sweeney. Confidentiality of the agreement was maintained by a clause by which neither party was at any time to make any announcement relating to the agreement or its subject matter without the prior written approval of the other. 160 Dr Calvo and Mr Sweeney also signed a further agreement called a co-operation deed. Clause 2 provided that "for valuable consideration, [Dr Calvo] agrees that he (or any nominee of his) shall exercise all and any voting rights and other powers or rights in respect of the Shares in such manner as [Mr Sweeney] in his absolute discretion shall direct." "Shares" was defined to mean all shares held by Dr Calvo in the capital of the Institute. Clause 5 provided that the deed should terminate when Mr Sweeney ceased to be a shareholder of the company. Clause 8 provided that Mr Sweeney could execute any document or do anything pursuant to the deed even if he were in any way interested in the document or thing. There was a term that the parties maintain strict confidentiality of the agreement. 161 Although the agreements were dated 27 September 2004, it was Mrs Calvo's evidence that the documents were received on 23 September and signed by her and Dr Calvo on 24 September. The counter-party signatures were not provided until 27 September. It is possible that Dr and Mrs Calvo did not see the shareholders' agreement until 27 September, although that was not her recollection. The reason for that possibility is that the copy of the agreement in evidence signed by Dr Calvo, as well as the other parties, has on one page of it a word processing date of 27 September 2004. The individual pages are not initialled. It is possible that the reference schedule bearing that date was inserted on 27 September after the document had been signed. It does not matter whether Dr and Mrs Calvo signed the documents on 24 or 27 September 2004. They were not handed over until 27 September. But they had little time to consider the documents or obtain advice about them. In any event, the share transfer and share issues had been implemented on 24 September. Obtaining Legal Advice on Final Transactions 162 The plaintiffs did not obtain legal advice in relation to the transactions of 24 and 27 September. 163 Professor Robertson said that in a meeting in September leading up to "the establishment of an agreement" Mr Sweeney asked Dr Calvo whether he had taken legal advice and Dr Calvo replied that he had. Professor Robertson's recollection was that that conversation would have occurred in about the second week of September. Mr Sweeney said that several times during his involvement with AIM in 2004 he said to Dr and Mrs Calvo that they should get their own legal advice. He did not identify the times at which he said this. Mr Sweeney did not say in his affidavit that he advised Dr and Mrs Calvo to receive legal advice in connection with the agreements signed on 24 or 27 September. He did not say that Dr Calvo had told him that he had received advice in relation to those documents. In cross-examination Mr Sweeney said that he asked the Calvos to confer with Mr Keating and at the time of the shareholders' agreement he asked them to get legal advice on numerous occasions. 164 Dr Calvo denied that at any meetings in August or September 2004 Mr Sweeney advised him to get his own legal advice. However, he deposed to having told Mr Sweeney that he wanted to run "the agreement" past his lawyer. Mrs Calvo also said that they told Mr Sweeney that "We would like to have this looked at by a lawyer tonight". That would have been on the evening of 23 September. Mrs Calvo said that the documents were signed the next day. The Calvos did not obtain legal advice on the documents and I find that Mr Sweeney did not ask whether they had obtained advice. Nor was he told that they had obtained advice. 165 I conclude that Mr Sweeney did not believe that Dr and Mrs Calvo had taken independent legal advice in relation to the agreements. Whilst I accept that Mr Sweeney believed that the plaintiffs were discussing their position with Mr Keating, I do not find that he believed that Mr Keating had given them advice in relation to the final terms reflected in the shareholders' agreement, the call option deed and the co-operation deed. The Plaintiffs' Understanding of the Agreements 166 Dr and Mrs Calvo did not understand the agreements. They did not attempt to read them carefully. They relied on their own understanding of what Mr Sweeney had agreed to do. That understanding was imperfect and confused. Mrs Calvo believed that Mr Sweeney would pay $1.56 million for the 37.5 percent of the shares he was to retain and a further $1.5 million or $1.56 million on taking a transfer of a further 15 percent of the shares. She acknowledged that she understood that the latter was an option, but also maintained that she thought that Mr Sweeney had agreed to pay $1.56 million for the shares. I accept that that was her belief. It may well have arisen from her reading Mr Sweeney's email of 22 September without knowing the sequence of emails of which it was the last. 167 It is very difficult to assess what was Dr Calvo's understanding of the transaction because he could not be usefully cross-examined on that matter. Dr Calvo underwent heart surgery on 30 June 2007. One of the effects of his medical condition from July 2007 was that he would lose his train of thought. Not infrequently in giving evidence, Dr Calvo was unable to complete an answer because he lost his train of thought. It would be wrong to draw conclusions from his present condition about his capacity to understand the agreements in September 2004. He is undoubtedly an intelligent man. Nonetheless, Mr Sweeney gave evidence that during executive meetings held during August 2004, Dr Calvo appeared not to be holding his concentration throughout the meetings and on occasions appeared to be confused. He said that Dr Calvo had exhibited those symptoms in the past. 168 I conclude that Dr Calvo also believed that he would be paid $1.56 million for the 37.5 percent of the shares retained by Mr Sweeney. He raised with Mr Sweeney in October 2004 the fact that he had not been paid for those shares. He deposed that he believed that he was to receive $1.56 million for the 37.5 percent of the shares retained by Mr Sweeney. I accept that that was his belief. He wrote to Mr Sweeney on 29 June 2005 referring to Mr Sweeney's email of 22 September 2004 saying that the email of 22 September was a clear commitment to pay $1.56 million at the time of the share transfer which, he said, took place on 24 September 2004. He asserted that the undertaking was not fulfilled. He also believed that Mr Sweeney was to purchase the further 15 percent of the shares for $1.5 million by the end of August 2006. I conclude that Dr Calvo did not understand the succession of proposals that came from Mr Sweeney and did not read, or if he did read, did not understand, the agreements he signed on 24 and 27 September. The Effect of Dr Calvo's Stroke 169 There was conflicting evidence as to the effect of the stroke suffered by Dr Calvo on 12 July 2004 on his mental capacity. There was also a conflict on the extent to which, if at all, any such effect was apparent to those who dealt with him. 170 On 6 September 2004, Dr Romesh Markus, a staff specialist in neurology and director of the Stroke Care Unit of St. Vincent's Hospital reported to Dr Calvo's general practitioner on his consultation with Dr Calvo on 6 September 2004. He reported that Dr Calvo had made an excellent recovery and was back to normal function without any residual neurological deficit. 171 Mrs Calvo's observations of her husband were recorded in contemporaneous diary notes. On 30 July 2004 she recorded that Dr Calvo's voice was "so quiet and reactions are pathetically slow". On 5 August 2004 she noted a marked difference in his mental capacity, loss of memory and word blockages which made him frustrated. She wrote that "sometimes he can't understand the most simple message." On 6 August she noted "exec meeting with the guys slightly embarrassing (is a bit out of it)". On 11 August she noted "PC has sometimes a childlike response and dangerously open to suggestion?" 172 On 13 August she noted a loss of memory. On 17 August she noted: " PC's facial expressions have changed. He used to be animated, smiling always courteous. He used to be a great contributor to conversation mingling easy with all strata of society. Now he sits silent and says nothing. Does not join in and has a stare ... Also is so silent. " 173 At this time, others noticed that Dr Calvo was quieter than he had been before his stroke. 174 On 6 September 2004, Mrs Calvo noted Dr Calvo's appointment with Dr Markus and recorded that Dr Markus was very happy with his progress. She recorded "but I asked when will he (you know) be back to normal re memory etc. He says maybe one year maybe longer." 175 On 7 September 2004 Mrs Calvo noted that Dr Calvo had a habit of repeating everything she said. She recorded on 16 September 2004 that there had been a telephone call between Dr Calvo and Mr Sweeney. She wrote "renegs on deal. PC tells him to start walking (a bit of the 'old' Calvo talking!)." 176 Dr Calvo gave the graduation speech for the Institute on 22 September 2004. Mrs Calvo noted that after the speech he was very tired and depleted. 177 Ms Power gave evidence that, whereas, before his stroke Dr Calvo was very active in the running of the Institute, after his stroke he seemed very frail and distracted during conversations. She said that his voice was not always "coherent" and he appeared not to follow the gist of some of the conversations and appeared confused during some of the discussions held during August and September. Mr Sweeney told her during August that he observed that Dr Calvo was not well and seemed to be confused and not following things. Dr Whateley, who held the position of General Manager and Head of Arts of the Institute, also observed that Dr Calvo became confused on occasions after his stroke and appeared to find it hard to focus on topics that were being discussed at executive meetings. He appeared tired. Mr Brooks, the then Registrar at the Institute, also observed that after his stroke Dr Calvo looked very frail, his voice was faint and he appeared not to hold his concentration throughout meetings. From time to time, he also made comments which were inappropriate to the subject matter being discussed. 178 Mr Marcellino was employed from February 2003 as the Principal of the Institute. He observed that Dr Calvo worked only half days for several weeks after coming out of hospital. He thought that Dr Calvo was weaker and looked more tired and drawn than he had before his stroke. He was a little slower in his movements. Nonetheless, to his observation, Dr Calvo remained alert. He did not notice that Dr Calvo's concentration or comprehension were visibly affected by the stroke. Dr Calvo did not seem to Mr Marcellino to be confused or forgetful. He did observe that Dr Calvo was quieter during executive meetings, but nonetheless continued to participate in discussions and listened as he had before his stroke. 179 Mr Marcellino also found that before Dr Calvo's stroke, he was a person who was quite vague and difficult to understand, that he had a verbose way of speaking, and during conversations and meetings, had a tendency to get sidetracked onto topics that had nothing to do with the subject of the discussion. He made lengthy and meandering speeches about matters irrelevant to the points under discussion. 180 None of Ms Power, Dr Whateley, Mr Brooks or Mr Marcellino was cross-examined. 181 In para [167] I have referred to Mr Sweeney's evidence that during executive meetings held during August 2004, Dr Calvo appeared not to be holding his concentration and on occasions appeared to be confused. 182 On 13 December 2005 Mr Sweeney, on behalf of the Institute, applied to the National Australia Bank for finance for the Institute. He described his involvement with the management of AIM as follows: " Through advisors to Paul Keating, I was asked to become involved with the management of AIM to see if there was a way to improve the business and make it profitable. I began this work in late 2003, preparing documentation such as an Information Memorandum etc to clearly set out a platform that could make the business successful. At that time, Peter Calvo invested $1.6 million into the business to take it totally out of debt, the platform was there for change. After viewing the business for another 12 months, I decided that I would like to take control of the business as Peter was not well, he had suffered a minor stroke and there was a desperate need for strong leadership in the school. " 183 Dr Paul Darveniza provided a medical report on Dr Calvo based on medical records and other materials with which he was provided. He did not examine Dr Calvo at the time. Dr Darveniza expressed the opinion that the symptoms, which others observed of Dr Calvo suffering from forgetfulness, memory loss, poor concentration and loss of attention, were entirely consistent with the result of the stroke. The stroke affected his language function. Dr Darveniza said that, in his view, there was little doubt that Dr Calvo suffered permanent damage to his language centres. The evidence for this was a small infarct shown on a CT scan of the head in July 2004 and speech pathology assessments done up to 19 July 2004. It was Dr Darveniza's opinion that when it came to complex deliberations and judgments, Dr Calvo's abilities would have been compromised and impaired by the stroke to a significant extent. 184 However, Dr Darveniza had not examined Dr Calvo. He supported that opinion by the very fact that Dr Calvo entered into such negotiations soon after the stroke. He said that that indicated compromised insight and judgment. However, as Mr Smark SC for Mr Sweeney submitted, this reasoning assumes what it sets out to prove. Whilst it may be undesirable for anyone who has suffered a stroke to engage in complex or protracted negotiations within months of suffering the stroke, where there is good reason to do so, that fact alone could not be evidence of compromised cognitive ability. If, as Dr Markus opined on 6 September 2004, Dr Calvo then had no residual neurological deficit, there would be no reason for his not to engage in such negotiations when there was urgent pressure arising from the need to obtain an unqualified auditor's certificate as a necessary step for the Institute to qualify for Fee-Help. 185 Mr Docherty's note of his meeting with Mr Sweeney on 24 August 2004 included a note "poor management and ill". However I place no weight on that note. Mr Docherty was not asked about it. Nor was it put to Mr Sweeney that he had told Mr Docherty that Dr Calvo was ill. However, as noted above, Mr Sweeney did tell Ms Power that Dr Calvo seemed to be confused and not following things. 186 Professor Robertson did not observe any sign of physical disability, nor difficulties with movement, nor slurred speech, nor fatigue. However there was other consistent evidence that Dr Calvo did suffer from fatigue and that he spoke slower and softer after his stroke. That was so even though Professor Robertson did not notice it. Professor Robertson had only met Dr Calvo once before the stroke. Professor Robertson also did not consider that Dr Calvo had suffered an illness that impaired his capacity for judgment and did not notice his being confused or absent-minded or distracted in meetings. This is consistent with Dr Calvo's endeavour to keep up appearances to students and staff. Dr Calvo said in cross-examination that he strained to appear normal to students, staff, and everyone else with whom he dealt at the Institute. Professor Robertson also said that Dr Calvo had a tendency to digress. 187 Mr Bowtell also gave evidence that Dr Calvo's comprehension and understanding appeared to be more or less the same after the stroke as before. However, he only attended a couple of meetings with Dr Calvo in August and September 2004, as by that time he was stepping away from his involvement with the Institute. 188 A number of the witnesses who did not observe a significant deterioration in Dr Calvo after the stroke (other than being quieter and more easily tired), described him before the stroke as being confused and not speaking to the point. Even taking into account the deterioration in Dr Calvo's capacity before he gave evidence, I can readily accept the picture of Dr Calvo before his stroke as described by Mr Marcellino. I have already found that Dr Calvo's understanding of the documents he signed was imperfect and confused. One of the effects of the stroke was to leave him tired and less able to negotiate a position with Mr Sweeney. The stroke is likely to have had some effect on his ability to reason, but as this was not noticed by Dr Markus, I do not think the effect was severe. 189 Dr Calvo's stroke left him weaker and more susceptible to the exercise of influence by Dr Sweeney. It compromised his ability to negotiate in his and his wife's interests. If the parties were dealing at arm's length – for example, if Dr Calvo were dealing with a third party who was proposing to provide capital, who had notice that Dr Calvo had suffered a stroke - I do not consider that Dr Calvo suffered from a "special disability" or was under a "special disadvantage" which would attract the principles against unconscionable dealing in Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447 at 461. Dr Calvo's Diary Entries 190 Dr Calvo exhibited to his first affidavit what he said were copies of entries in his desk diary for the period from 16-27 September. The desk diary has a notation for 14 September 2004 that "B Sweeney agrees to $3.56m paid in share transfer." A copy of the diary for 22 September includes a notation "Sweeney's email arrives agreeing to pay $3.56m and others". An entry written across the dates of 27 and 28 September 2004 says "sign share transfer dishonoured". 191 On 29 September there is a note "the two Bs come. BS tries to justify non-payment as a result of poverty, but (will do it) asap." 192 For the reasons I have explained, Mr Sweeney's email of 22 September 2004 did not contain an agreement to pay $3.56 million. Dr Calvo gave no evidence of the circumstances in which he came to make these entries in the diary. The original diary was called for but not produced. There was no explanation as to why the original diary was not produced. The inference is plain that in the course of preparing his case, Dr Calvo made those entries in the diary and that they were not contemporaneous entries. This reflects adversely on Dr Calvo's credit. Dr Calvo did not give evidence that he believed he would receive $3.56 million for his shares. Nor did he give any evidence of any conversation to that effect with Mr Sweeney. 193 I can only surmise that at some point in preparing his case Dr Calvo in his own mind added up earlier offers of $2 million with the offer to pay $1.56 million on exercise of the option. This shows that Dr Calvo's reconstruction of conversations he had with Mr Sweeney is unreliable. Events after 27 September 2004 194 The Institute did not obtain registration as a higher education provider prior to 31 October 2004. It was approved as a higher education provider on 9 November 2004. Mr Sweeney did not make a donation of $500,000 to the Institute. It will be recalled that his promise to do so was conditional on the Commonwealth Government granting that approval by 31 October 2004. However, on 11 November 2004, that is, two days after the approval was received, Mr Sweeney caused a company he controls, Rowlands Pty Ltd, to make a donation of $150,000 to the Institute. On 31 December 2004 he caused that company to make a further payment of $100,0000. On 31 December 2004 Mr Sweeney made a donation of $50,000. He made a further donation of $100,000 on 14 December 2005. Rowlands Pty Ltd and Mr Sweeney claimed these gifts as tax deductions. Those claims were allowed (T254). In short, Rowlands Pty Ltd made tax-deductible gifts to the Institute totalling $250,000 and Mr Sweeney made tax-deductible gifts to the Institute totalling $150,000. 195 In December 2004, Dr and Mrs Calvo saw a solicitor to seek advice in relation to Mr Sweeney's obligations to pay money for his shares. Mrs Calvo said that she did not believe that they showed a copy of the shareholders' agreement to the lawyer. There is no evidence as to what instructions were given to the lawyer or what advice was given. No complaint was made in December 2004. 196 As I have said, in June 2005 Dr Calvo pressed for payment of $1.56 million, which he said was due for the transfer of 37.5 percent of the shares. Mr Sweeney did not respond by saying that he had no obligation to pay for the 37.5 percent shareholding he had retained and that he had no obligation to pay for any other shares unless he exercised the option. On 15 July 2005 Dr Calvo received from Mr Sweeney a copy of an email that Mr Sweeney sent to Mr Muller. It appears that Ellimark wished to sell its shareholding in the Institute for $2 million. Mr Sweeney said, amongst other things, that they should obtain legal advice to convert the company so that it was a for-profit business because, as a not-for-profit business, the shares were worthless. He also said: " Peter has ambitions that his equity is worth $1.5 million plus. I don't see that being the case but I certainly sympathise with his position and his need for money. Just eighteen months ago, he sold his house and put the proceeds into the Institute, a very honourable act. I don't know the solution for Peter. Again, I don't know what the Institute is worth but if his equity was worth $1.5 million, and we didn't have the money, then the proposal could be to buy his shares out by paying him $1.5 million providing he used the money to buy a house and AIM was allowed to use the house as security to borrow $1.5 million. The Institute would then repay the loan over a period of time. There would be a small tax implications [sic] for both sides but at least it gets Peter a house and the liability is in the Institute. " 197 By this means Mr Sweeney held out to Dr Calvo that he might be paid $1.5 million. Nothing further was done in relation to any such proposal. 198 On 5 June 2006 Mr Sweeney wrote to Dr Calvo proposing that he be given an option to acquire a 20 percent shareholding from Dr Calvo for a fee of $20,000 payable on the signing of the option agreement with the price payable on the exercise of the option being $1.2 million. He said that the Institute would consider extending Dr and Mrs Calvo's employment contract until 31 December 2009. He said: " The intention, if possible, is for the Institute to move from being a not-for-profit organisation. This purchase prices [sic] is not subject to the achievement of any conditions other than your agreement to sell. I will have the option to extend this option for a further seven (7) months for an additional $20,000 payable in December 2006. Timing It is proposed that the period of the option is until 31 December 2006. " 199 Dr Calvo responded on 19 June 2006 as follows: " The following are, with minor modifications to your original offer, what we think as the most favourable to both parties: 1. Yes to 20% sale with minor addition of 60K, i.e., $1.26M. 2. Yes to two years remuneration @ $125K per annum starting on 1 st January 2008 to 31 st December, 2009, with the addition of one year, i.e., 31 st December 2010. 3. Balloon payment equating to $375K payable in 2010 from WPS in exchange for unpaid shares taken @ $1.56M for 37.5% of AIM. This is fair as: 1. $1.26M partly repays equity for dwelling as sold in December 2003 for $1.63M. 2. $125K per annum as remuneration/living cost for the Calvos in recognition of their services, and founding, of the Institute in 1968. 3. Balloon payment to set the Calvos up in retirement and removes third party involvement for WPS at $1.56M for unpaid shares, at the time of share transfer for 37.5% on 27 th September 2004. " 200 Dr Calvo deposed that on 8 May 2006 Mr Sweeney said to him that "everything could be resolved by August" and that at that time he thought that after one and a half years, a conclusion on the payment for the shares was on its way. 201 There was no written response to Dr Calvo's letter of 19 June 2006. In about November 2006 Dr Calvo raised the issue with Mr Sweeney who told him that "various parties who were interested in coming on board with AIM are procrastinating but the deal is 'just that close'". 202 On 2 April 2007 Dr Calvo was told by Mr Sweeney that his contract for working at the Institute would come to an end on 30 June 2007 and he would like him to leave on that date. Dr Calvo said that his employment continued to December 2007. He complained that Mr Sweeney was cutting short his contract by six months. 203 These proceedings were commenced on 19 July 2007. 204 From 27 September 2004 Mr Sweeney acted as the Chief Executive Officer of AIM. He deposed to spending on average about 20 hours per week on those duties for about 40 weeks each year. He says that he performed those duties partly at his offices at PKF and partly at AIM's premises. He did not draw any fees or salary for those services. He deposed that he would not have rendered those services without rendering an account if he was aware that Dr Calvo was demanding the return of his shareholding in AIM. I do not accept that evidence. He continued to provide those services after 19 July 2007 without rendering an account even though these proceedings had been commenced. I accept his evidence that he would not have made the payments of $150,000, nor caused Rowlands Pty Ltd to make payments of $250,000 to AIM referred to at para [194] if he had become aware that Dr Calvo would demand the return of his shareholding in AIM. Fiduciary Relationship 205 In Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, Mason J said (at 96-97): " The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf Phipps v Boardman [1967] 2 AC 46 at 127), viz trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions 'for', 'on behalf of' and 'in the interests of' signify that the fiduciary acts in a 'representative' character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal. It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed ... " (Citation of authority omitted.) 206 To similar effect, in Breen v Williams [1996] HCA 57; (1996) 186 CLR 71, Gaudron and McHugh JJ said (at 107): " ... the categories of fiduciary relationship are not closed, and the courts have identified various circumstances that, if present, point towards, but do not determine, the existence of a fiduciary relationship. These circumstances, which are not exhaustive and may overlap, have included: the existence of a relation of confidence; inequality of bargaining power; an undertaking by one party to perform a task or fulfil a duty in the interests of another party; the scope for one party to unilaterally exercise a discretion or power which may affect the rights or interests of another; and a dependency or vulnerability on the part of one party that causes that party to rely on another. " (Citation of authority omitted.) 207 The fiduciary's obligation, or more accurately the obligation which gives rise to the fiduciary relationship (Bristol & West Building Society v Mothew [1998] Ch 1 at 18) is one of undivided loyalty to the principal. As it is said, the fiduciary's obligation is proscriptive, not prescriptive. Except with the informed consent of the principal (or leave of the court, Breen v Williams at 135) the fiduciary is prohibited from entering into a transaction where there is a conflict or sensible possibility of conflict between the fiduciary's duty to his principal and his personal interest (Chan v Zacharia (1984) 154 CLR 178 at 198), (or between his duty to one principal and his duty to another). 208 In Bristol & West Building Society v Mothew, Millet LJ said (at 18): " A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr Finn pointed out in his classic work Fiduciary Obligations (1977) p 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary. (In this survey I have left out of account the situation where the fiduciary deals with his principal. In such a case he must prove affirmatively that the transaction is fair and that in the course of the negotiations he made full disclosure of all facts material to the transaction. Even inadvertent failure to disclose will entitle the principal to rescind the transaction. The rule is the same whether the fiduciary is acting on his own behalf or on behalf of another. " 209 The plaintiffs say that Mr Sweeney breached a fiduciary obligation of loyalty by placing himself in a position where his duty to the plaintiffs conflicted with his personal interest in acquiring a shareholding and control of the management of the Institute. 210 It was submitted for Mr Sweeney that he was not in a fiduciary relationship with either the plaintiffs or with AIM, but that if any fiduciary relationship existed, it was a relationship between him and AIM. Reliance was placed on the letter of 31 October 2003 set out at para [26] which was addressed to Dr Calvo in his capacity as a director of AIM. PKF's fees were paid by AIM. 211 It was also submitted that Mr Sweeney was only a financial advisor of AIM to the extent that the retainer with AIM required it. It was submitted that neither in preparing the Information Memorandum, nor in identifying potential investors and seeking to persuade them to invest did Mr Sweeney owe any fiduciary obligation. It was submitted that he was providing skilled professional services as an accountant and that the relationship between accountant and client was not usually fiduciary. It was also submitted that if any fiduciary relationship existed, it was confined to the scope of the retainer. It was submitted that when Mr Sweeney conducted negotiations with the Calvos on his own behalf as a potential investor, he was not acting in discharge of any retainer and no fiduciary obligation arose in respect of those dealings. 212 At one point, counsel for Mr Sweeney submitted that the Institute retained the firm of PKF and not Mr Sweeney as an individual to provide services to it. I did not understand any final submission to be based upon this distinction. Mr Sweeney was a partner of the firm PKF and even if the retainer was of the firm, as a partner of the firm, he would be bound by the obligations arising from the retainer. In any event, he was personally retained. 213 Mr Sweeney's retainer was not precisely defined. He was to seek to obtain investments in AIM without any limit to the precise nature of that investment. The investment might be by way of raising equity, that is, subscription for share capital. It might be by way of obtaining "gross sale proceeds" (see letter of 31/10/03 at para [26]). There was no stipulation that any such proceeds be by way of sale of the business and assets of the Institute or sale of all or some of the Calvos' shares. At all times one of the principal identified purposes of raising capital was to pay or repay Dr and Mrs Calvo for the money and time they had invested in the Institute. As 2004 progressed and the financial difficulties of the Institute became clearer, a further purpose was to raise capital to provide additional working capital for the Institute. But at all times the objective included raising moneys to be paid to the Calvos either by way of repayment of moneys advanced by them to the Institute or for a portion of their shares. In his negotiations with potential investors Mr Sweeney was to act "for" or "on behalf of " and "in the interests of " the plaintiffs. That was so even if he was also to act for and on behalf of and in the interests of the Institute. 214 In my view, the letter of 31 October 2003 (set out at para [26] above) does not purport to define the terms of the retainer or the person or persons to whom Mr Sweeney and PKF owed duties. It simply set out what fees would be charged and what information PKF required to prepare the Information Memorandum. The fact that it was addressed to Dr Calvo as director of the Institute did not impliedly exclude any duty to act in the interests of and on behalf of the Calvos. To the contrary, the documents prepared by Mr Sweeney and the conversations he had with Dr Calvo are replete with references to his seeking to raise funds for the purpose, inter alia, of the Calvos being paid. (See the documents referred to at paras 16 and 18, the discussions at paras [21], [25], [29] and [30], the document at para [31], the discussions referred to at paras [38] and [39], the document at para [39], [40] and [41], the correspondence to potential investors referred to at paras [45] and [46], the proposal put to Dr Calvo referred to at para [50], his discussions with Dr Calvo referred to at paras [69] and [70], the discussions on 2 September 2004 referred to in para [76], his correspondence with Mr Keating of 10 September 2004 referred to in para [113], his discussions with Mr Keating and Dr Calvo on 10 September 2004 referred to at para [120], and the negotiations in respect of the Calvos' shareholding referred to at paras [124]-[144].) 215 The Calvos were dependent upon and vulnerable to the exercise by Mr Sweeney of his function as a negotiator on their behalf. The fact that he could not have concluded an agreement with a prospective investor without the Calvos' concurrence did not mean that they were not vulnerable to the way he exercised his powers and discretion in dealing with potential investors. The same is true in respect of Mr Sweeney's negotiations with Ellimark resulting in an issue of shares to Ellimark which diluted the Calvos' shareholding, and the "temporary shareholding" given to Mr Sweeney. Thus if the business were appropriately valued at $5 million (as Mr Sweeney asserted in an email sent to Mr Muller on 16 September 2004) Mr Sweeney could be expected to negotiate a very different deal for the Calvos' benefit than would be the case if the business was virtually worthless and the Institute would be insolvent without a capital injection (as Mr Sweeney asserted or implied in his letter of 10 September 2004 to Mr Keating). The Calvos placed their trust in Mr Sweeney to assess the financial position of the Institute and to present the business of the Institute to potential investors. 216 The Calvos also became dependent upon and vulnerable to the exercise of influence by Mr Sweeney in another way. He sought to impress on Dr Calvo that he was the one who could save the Institute which was on the brink of financial collapse (T331). Mr Sweeney said that if they did not accept the position which he put to them, then he would be happy to walk away. Dr and Mrs Calvo agreed to support Mr Sweeney with Dr Calvo advising Mr Keating on 10 September that Mr Sweeney was the best person to save the Institute and had his support. (See the letter of 10 September 2004 extracted at para [113] and the discussions referred to at paras [120] and [122].) 217 There was also a relationship of confidence. Mr Sweeney obtained unrestricted access to information about the Institute's business. (See paras [42]–[44] and [72]). As noted at para [72], by 30 August 2004 Mr Sweeney's participation in the management of the Institute was such that he proposed detailed amendments to draft budgets. He gradually moved into a position of managing the Institute. He was solely responsible for the final negotiations with the landlord which resulted in the release of the debt for rent and amendments to the terms of the lease. 218 I conclude that Mr Sweeney owed an obligation of loyalty to the Calvos and stood in a fiduciary relationship to them. That is so even though he may also have owed fiduciary duties to the Institute. Whether he did so is not a question which arises for decision in this case. I agree with the submission of counsel for the plaintiff that if a fiduciary relationship arose between Mr Sweeney and the Institute that did not prevent one also arising between him and the plaintiffs. By analogy, directors can owe a fiduciary duty both to the company of which they are directors and a shareholder (Brunninghausen v Glavanics [1999] NSWCA 199; (1999) 46 NSWLR 538; Coleman v Myers [1977] 2 NZLR 225 at 325, 330-331, 371). 219 It is not correct to say that the relationship between an accountant and his or her client is not usually a fiduciary one. It depends upon the work the accountant is retained to do, and the scope of any fiduciary duty might be limited. The relationship of solicitor and client has long been held to be a fiduciary relationship and was so regarded when solicitors undertook a wider scope of work than they do now. (From the 19th century, solicitors' work was increasingly encroached on or taken over by financial advisers, patent agents, brokers and accountants: Abel-Smith & Stevens, Lawyers and The Courts – A Sociological Study of the English Legal System 1750-1965, (1967) at 58). There is no presumption that the relationship between a financial adviser and his client is not a fiduciary one. To the contrary, such a relationship is likely to involve elements of trust, confidence and vulnerability requiring undivided loyalty (Tate v Williamson (1866) LR2ChApp 55; Hadid v Lenfest Communications Inc [1999] FCA 1798 at [817]; Australian Securities & Investments Commission v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963; (2007) 160 FCR 35 at [282]-[286]). Moreover, in the present case, Mr Sweeney was not only a financial adviser. Although not successful in raising capital, he undertook the role of a broker seeking to negotiate the raising of capital for commission. There is little to distinguish his position from that of a stockbroker engaged to buy or sell shares on behalf of his client, who owes fiduciary duties to the client in buying and selling (Daly v Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371 at 384). 220 As a fiduciary, Mr Sweeney's duty was not to put himself in a position of conflict, or sensible possibility of conflict, between his duty to the plaintiffs and his personal interest, without their informed consent. There was no plea of informed consent. 221 Mr Sweeney remained in a fiduciary relationship with the plaintiffs after he proposed dealing with them on his own behalf. He continued to seek other investors. As late as 7 September 2004 he was writing to potential investors. At no time did he convey to the plaintiffs that he regarded his engagement as their adviser and broker to attract investors as being at an end. The case is quite different from McEvilly v Manenti Quinlan & Associates Pty Ltd (Supreme Court of New South Wales, Einstein J, 10 August 1998, unreported) to which counsel for Mr Sweeney referred. The defendant referred to that decision for the proposition that the fair dealing rule should not be applied in a case where the reasons behind the rule do not exist. In that case, Einstein J held that the reasons behind the fair dealing rule did not exist where the relationship between the defendant (who had previously provided advice) and the plaintiffs had come to an end and the defendant had not assumed any obligation to advise or to act in respect of the auction of the property. That is not the present case. 222 I do not accept the defendant's submission that because Mr Sweeney was not acting in discharge of any retainer in negotiating with the Calvos on his own behalf as a potential investor, he was thereby acting outside the scope of any fiduciary obligation. This was an attempt to redefine the fiduciary obligation by putting the very thing that constitutes a breach of the duty outside the scope of the relationship. It was because Mr Sweeney was retained as adviser and broker and had fiduciary duties to the plaintiffs in those capacities that he was not entitled, without their informed consent, to negotiate with a view to taking up a personal shareholding. 223 The conflict which Mr Sweeney faced when he sought to involve himself as a personal investor was manifest from the outset. As noted at para [45], in late June 2004 Mr Sweeney was attempting to attract potential investors on the basis that Dr Calvo would be paid $1 million "upfront for 49% of the company" and would be paid a further $1 million within 12 months on a second capital-raising, at which time his shareholding would reduce to 25 percent, and Dr Calvo would grant an option over a further 10 percent shareholding to be transferred, if the option were exercised, within two or five years. The first time Mr Sweeney put himself forward as a potential investor, that is, on 6 July 2004, he proposed different terms if an investment were made by him which, at least arguably, were less advantageous to the plaintiffs. Whilst it was apparently implicit in the proposal that the Calvos would receive $2 million initially, the moneys would have to have been used by the plaintiffs to acquire a house which would be security for $1.5 million of the moneys which Mr Sweeney would borrow and repay within 12 months; so that there was a risk of losing the property if there was default in payment of the loan. As matters progressed, the offers from Mr Sweeney became less advantageous, such that, ultimately, he acquired 37 percent of the shareholding in the Institute for no, or only a nominal, consideration. (Mr Sweeney ultimately held 3,750 shares. The minutes described the "total issue price payable each applicant" as being $1. I take this to be $1 in total, not $1 per share. The Institute's financial statements for the year ended 30 June 2005 show that contributed shareholder capital had risen from $2 at 30 June 2004 to $8 at 30 June 2005.) 224 Counsel for Mr Sweeney submitted that the issue of shares to Mr Sweeney could not be impugned, even if he owed fiduciary duties to the plaintiffs because the transaction was for their benefit and no other course was available to them which would preserve any value for their shares. According to the submission, the reason for this was that without Mr Sweeney's being personally involved, the Institute would have failed and the plaintiffs would have been left with nothing. In those circumstances, it was submitted, there was no real or sensible possibility of a conflict. In support of this submission, counsel for Mr Sweeney relied upon the English Court of Appeal's decision in Holder v Holder [1968] Ch 353. Counsel also referred to the statement of Austin J in Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; 40 ACSR 83 at [54] in submitting that the court has a discretion not to set aside an impugned transaction if, in all the circumstances, it seems fair. 225 I do not accept this submission. First, it does not logically follow that the conflict, or possibility of conflict, is avoided if there is no other course open. To the contrary, the more desperate the position of the plaintiffs, the easier it was for Mr Sweeney to negotiate advantageous terms for himself. Whilst the Institute faced serious difficulties if it did not qualify for Fee-Help, and needed the promise of an injection of capital to obtain an unqualified audit certificate in order to so qualify, Mr Sweeney regarded the business as being potentially profitable and even highly profitable, and hence the shareholding potentially valuable if AIM's not-for-profit status was changed. (Mr Sweeney said that he ultimately did ascertain that the Institute could be converted to a for-profit organisation and the tax department advised how that could be done (T267-268).) In other words, if Mr Sweeney was the plaintiffs' only potential saviour, that exacerbated, rather than diminished the conflict between his acting for his personal advantage and his doing his best for the plaintiffs. 226 Secondly, for reasons of policy, and subject to one qualification which does not affect the principle, where an agent enters into an engagement where his personal interest conflicts with his duty to his principal, the court will not entertain an inquiry as to whether the transaction was in the interests of the principal and whether it was fair. In Aberdeen Railway Co v Blaikie Bros [1843-60] All ER Rep 249, Lord Cranworth LC said (at 252-253): " A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such an agent has duties to discharge of a fiduciary character towards his principal, and it is a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect. So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the cestui qua trust which it was impossible to obtain. It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee have been as good as could have been obtained from any other person; they may even at the time have been better. But still so inflexible is the rule that no inquiry on that subject is permitted. ... It is true that the questions have generally arisen on agreements for purchases or leases of land, and not, as here, on a contract of a mercantile character. But this can make no difference in principle. The inability to contract depends not on the subject-matter of the agreement, but on the fiduciary character of the contracting party, and I cannot entertain a doubt of its being applicable to the case of a party who is acting as manager of a mercantile or trading business for the benefit of others no less than to that of an agent or trustee employed in selling land. " This salutory principle has often been applied (e.g. McPherson v Watt (1877) 3 App Cas 254 at 272; Daly v Sydney Stock Exchange at 387). 227 The qualification concerns a case where a trustee purchases a beneficiary's interest in trust property. The rule as to a fiduciary avoiding a position of conflict does not apply where the principal gives his or her informed consent. In the case of such a sale or purchase to or from the trustee, the beneficiary will necessarily have consented to the transaction. To ensure that the consent is an informed consent, it is necessary for the trustee to show that he or she has made full disclosure of all the facts which are material to the transaction. But it is also necessary for the trustee to prove (the onus being on him or her) that no advantage was taken of the beneficiary and the transaction is fair and honest (Clay v Clay [2001] HCA 9; (2001) 202 CLR 410 at 434). The enquiry into the fairness of the transaction in such a case does not diminish the principle that in the absence of informed consent, no enquiry into the fairness of the transaction will be entertained. 228 The "self-dealing rule" (that a trustee cannot purchase trust property from himself or from the trustees of which he is one) and the "fair dealing rule" (that a transaction between a trustee and beneficiary is voidable unless the trustee shows that he has taken no advantage of his position and has made full disclosure to the beneficiary and that the transaction is fair) are particular applications of the wider principle that a fiduciary must not put himself or herself in a position where his or her duty and interest conflict (In re Thompson's Settlement [1986] Ch 99 at 115-116; People's Prudential Assurance Co Ltd v Australian Federal Life and General Assurance Co Ltd (1935) 35 SR (NSW) 253 at 265). 229 On similar principles it is not possible to say whether, as the plaintiffs submitted, Mr Sweeney did not pursue alternative sources of capital with sufficient diligence. The plaintiffs did not identify particular avenues for raising capital which Mr Sweeney should have but did not pursue. But one of the vices of a fiduciary putting himself or herself in a position of conflict is that it will probably not be known how the fiduciary would have acted differently had he or she not pursued his or her own interest. 230 Holder v Holder has had a mixed reception (see most recently Chellew v Excell [2009] 1 NZLR 711 at 717-719 [34]-[43]). The aspect of the decision which is of present relevance concerns the rule against a trustee's purchasing trust property for himself, i.e. the self-dealing rule. 231 In Holder v Holder, the third defendant (Victor) was one of three executors. He was a tenant of a farm which formed part of the estate. He attempted to renunciate his office as executor, but because of some minor earlier acts of administration, it was accepted at trial that the renunciation was invalid. He purchased the farm at public auction for a fair price. One of the beneficiaries of the estate sought to have the sale set aside on the ground that as Victor was an executor of the will and trustee of the estate, he was disentitled from purchasing the trust property. That claim failed partly on the grounds of the plaintiff's acquiescence, but also on the ground that in the circumstances, the self-dealing rule did not apply. Harman LJ said (at 391): " The reason for the rule is that a man may not be both vendor and purchaser; but [Victor] was never in that position here. He took no part in instructing the valuer who fixed the reserves or in the preparations for the auction. Everyone in the family knew that he was not a seller but a buyer. In this case the third defendant never assumed the duties of an executor. It is true that he concurred in signing a few cheques for trivial sums and endorsing a few insurance policies, but he never so far as appears interfered in any way with the administration of the estate. " 232 The reason that Victor was not a seller was that probate had not been granted to him and he was not named as a seller on the contract (at 358-359). He had executed a form of renunciation of his executorship. His difficulty was that he had intermeddled in the estate and it had been accepted that his renunciation was invalid. 233 Harman LJ continued: " Another reason lying behind the rule is that there must never be a conflict of duty and interest, but in fact there was none here in the case of [Victor] , who made no secret throughout that he intend to buy. " and (at 392): " Of course, I feel the force of the judge's reasoning that if [Victor] remained an executor he is within the rule, but in a case where the reasons behind the rule do not exist I do not feel bound to apply it. My reasons are that the beneficiaries never looked to [Victor] to protect their interests. They all knew he was in the market as purchaser; that the price paid was a good one and probably higher than anyone not a sitting tenant would give. Further, the first two defendants also acted as executors and sellers: they alone could convey ... " 234 The fact that Victor made no secret of his intention to buy would not preclude there being a conflict of duty and interest if he had been acting as an executor. If he were acting as executor with a duty to obtain the best price for the estate, he would not avoid a conflict by declaring that he intended to purchase. The force of the plaintiff's argument was that because the renunciation was ineffective, Victor had not discharged his duty to the estate to obtain the best price and he was therefore in a position of conflict. 235 It had been conceded that Victor's renunciation was invalid. Danckwerts LJ considered that that concession was mistaken (at 397), although his Lordship acknowledged that it had to be acted upon. Nonetheless, his Lordship said that none of the authorities on self-dealing went "at all near to the facts of this case" (at 397). Danckwerts LJ said (at 398): " It is said that it makes no difference, even though the sale may be fair and honest and may be made at a public auction (see Snell's Equity, p 260); but the court may sanction such a purchase and, if the court can do that (see Snell, p 219), there can be no more than a practice that the court should not allow a trustee to bid. In my view it is a matter for the discretion of the judge." 236 It is one thing to say that a judge has a discretion to sanction in advance a purchase by a trustee of trust property. It is altogether another to say that the court has a discretion not to set aside a purchase by a trustee of trust property if the transaction is fair. In context, his Lordship's observation that "it is a matter for the discretion of the judge" is a statement as to the discretion which a judge exercises when the court's sanction to a purchase is sought. 237 Danckwerts LJ then went on to deal with questions of acquiescence and found that the plaintiff had acquiesced in Victor purchasing the farms. 238 Sachs LJ (at 402) agreed with Harman LJ that the rule against a trustee purchasing trust property: "... is not applicable in the present case, where the plaintiff was in practice 'moribund' qua executor, and was affirmatively established to have gained no helpful knowledge from his position as executor before he executed the deed which was intended to effect a renunciation." 239 His Lordship then said that it was open to argument whether the rule against self-dealing was merely one of practice and the court might reconsider "the rigidity of the shackles imposed by the rule on the discretion of the court" (at 402). His Lordship did not decide that the court had a discretion not to avoid an impugned transaction if it concluded the transaction was fair. 240 In Re Thompson's Settlement, Vinelott J held (at 116) that the decision of the Court of Appeal in Holder v Holder was based on the conclusion that: " Victor, though he might technically have been made an executor notwithstanding the purported renunciation, had never acted as executor in a way which could be taken to amount to acceptance of a duty to act in the interests of the beneficiaries under his father's will. " I respectfully agree. In my view Holder v Holder does not support this part of the defendant's submission. 241 In Re One.Tel Networks Holdings Pty Ltd, Austin J described Holder v Holder as having decided that the court has a discretion in a case of a trustee's purchase of trust property not to set aside the impugned transaction if in all the circumstances the transaction seems fair (at [54]). 242 In my respectful view, that was not the basis for the decision of Harman LJ or Sachs LJ in Holder v Holder. But if it were, such a conclusion would be opposed to the policy of the law that where a trustee or other fiduciary, without the informed consent of his beneficiary or principal, enters into an engagement in which his duty and interest conflict, the transaction is voidable without inquiry as to whether it is fair. I respectfully agree with the conclusion of Allan J in Chellew v Excell at [43] that the approach in Holder v Holder has not attracted significant support and the court does not have a discretion not to apply the rule against self-dealing. 243 If, contrary to my view, I do have a discretion not to grant equitable relief in respect of the transaction if I conclude that the transaction was fair, I would not exercise that discretion in Mr Sweeney's favour. The onus would be on Mr Sweeney to show that the transaction was fair. I am not satisfied that it was. Mr Sweeney made a relevant admission about this. He told Mr Docherty that "I can't believe that I have acquired a business for such a small capital outlay and received a tax deduction in the process". Even if, as Mr Sweeney contended, without his involvement, the Institute would have failed, it was not fair that he obtain a 37.5 percent shareholding, and control over all of the plaintiffs' shares, without any payment to the plaintiffs. 244 It is impossible to say whether, without Mr Sweeney's involvement, the Institute would have failed. It is possible that it would have failed. On the other hand, it is also possible that it would not have failed. It is likely that Ellimark would have agreed to accept an issue of shares in discharge of the debt for rent and would have agreed to vary the terms of the lease without Mr Sweeney's involvement. It had already reached an informal agreement with Dr Calvo in relation to the rent, although nothing had been finalised. Ellimark had considerable goodwill towards Dr Calvo. Contrary to Mr Sweeney's representations to the plaintiffs it did not require there to be a change of management before it would agree to such terms. Reaching such an agreement with the landlord would have substantially improved the Institute's financial position and would have gone a long way in itself to Mr Docherty's being able to give an unqualified audit certificate. However, I think it probable that Mr Docherty would not have given an unqualified audit certificate unless an assurance substantially of the kind provided by Mr Sweeney was obtained from a third party. It is simply impossible to say whether such support might have been forthcoming from a third party had Mr Sweeney not been involved and been prepared to provide the support himself. The question was never ventilated with third parties. The proposals put by Mr Sweeney to potential investors were on different terms from those he secured for himself. 245 It follows that Mr Sweeney has not discharged the onus of showing that the terms offered by him were the best that might have been available to the plaintiffs had he either not been involved at all, or had he not sought a personal gain from the transaction (other than the agreed commission). 246 As well as not being satisfied that the transaction was substantively fair, I consider that there was unfairness in the way in which the negotiations between Mr Sweeney and the plaintiffs proceeded. There were time pressures in the negotiations which were not of Mr Sweeney's making. The time pressures came from the Commonwealth and State Government departments' timetables for granting the relevant approvals for reaccreditation and registration of the Institute as a Higher Education Provider. Although Mr Sweeney was not the source of this pressure, he took advantage of it. He did so by threatening to walk away if his demands were not met. I also consider that Mr Sweeney took advantage of Dr Calvo's unclear thinking in his succession of propositions to take an option to acquire a portion of the plaintiff's shares which led Dr Calvo to believe that the option would be exercised. Dr Calvo was led to believe that he obtained a benefit by giving a call option over his shares when the truth of the matter was to the contrary. The prospect of the option being exercised was further diminished by Mr Sweeney's insistence on having an irrevocable proxy over all of Dr Calvo's shares, which ensured his control over the management of the Institute. This lessened the incentive which Mr Sweeney might otherwise have had to exercise the option. 247 For these reasons, if there were a discretion to withhold equitable relief, notwithstanding the absence of informed consent to the transaction and irrespective of defences of acquiescence, laches and estoppel, it is not a discretion I would be prepared to exercise. 248 Mr Sweeney did not obtain his shares by transfer from the plaintiffs. The issue of the shares is not liable to be set aside. However, on the principles stated by Deane J in Chan v Zacharia at 199, subject to consideration of the specific defences dealt with below, Mr Sweeney holds the shares he received on constructive trust for the plaintiffs. (See also Daly v Sydney Stock Exchange Ltd per Brennan J at 386-387). Undue Influence 249 Similar principles which apply to a fiduciary also apply where one party has "an ascendency or influence over [the] other", or a dependence or trust on the other, where it is incumbent on he who takes a substantial gift from the person over whom an ascendency or influence exists to show that it is not the product of the exercise of that influence (Johnson v Buttress (1936) 56 CLR 113 at 134-135). 250 No presumption of undue influence arises in the relationship between Mr Sweeney and the plaintiffs. However, as Dixon J said in Johnson v Buttress: " The basis of the equitable jurisdiction to set aside an alienation of property on the ground of undue influence is the prevention of an unconscientious use of any special capacity or opportunity that may exist or arise of affecting the alienor's will or freedom of judgment in reference to such a matter. The source of power to practise such a domination may be found in no antecedent relation, but in a particular situation, or in the deliberate contrivance of the party. If this be so, facts must be proved showing that the transaction was the outcome of such an actual influence over the mind of the alienor that it cannot be considered his free act. But the parties may antecedently stand in a relation that gives to one an authority or influence over the other from the abuse of which it is proper that he should be protected. When they stand in such a relation, the party in the position of influence cannot maintain his beneficial title to property of substantial value made over to him by the other as a gift, unless he satisfies the court that he took no advantage of the donor, but that the gift was the independent and well understood act of a man in a position to exercise a free judgment based on information as full as that of the donee. This burden is imposed upon one of the parties to certain well-known relations as soon as it appears that the relation existed, and that he has obtained a substantial benefit from the other. A solicitor must thus justify the receipt of such a benefit from his client, a physician from his patient, a parent from his child, a guardian from his ward, and a man from the woman he has engaged to marry. The facts which must be proved in order to satisfy the court that the donor was freed from influence are, perhaps, not always the same in these different relationships, for the influence which grows out of them varies in kind and degree. But while in these, and perhaps one or two other relationships, their very nature imports influence, the doctrine which throws upon the recipient the burden of justifying the transaction is confined to no fixed category. It rests upon a principle. It applies whenever one party occupies or assumes towards another a position naturally involving an ascendancy or influence over that other, or a dependence or trust on his part. One occupying such a position falls under a duty in which fiduciary characteristics may be seen. It is his duty to use his position of influence in the interest of no one but the man who is governed by his judgment, gives him his dependence, and entrusts him with his welfare. When he takes from that man a substantial gift of property, it is incumbent upon him to show that it cannot be ascribed to the inequality between them which must arise from his special position. He may be taken to possess a peculiar knowledge, not only of the disposition itself, but of the circumstances which should affect its validity; he has chosen to accept a benefit which may well proceed from an abuse of the authority conceded to him, or the confidence reposed in him; and the relations between him and the donor are so close as to make it difficult to disentangle the inducements which led to the transaction. These considerations combine with reasons of policy to supply a firm foundation for the presumption against a voluntary disposition in his favour ." 251 This is not a case in which there is a presumption of undue influence. However, the parties were in an antecedent relationship in which Mr Sweeney exercised influence and ascendancy over the plaintiffs. Mr Sweeney had obtained a position of influence over the plaintiffs where they were dependent on, and placed their trust in, him to do his best for them. Dr Calvo's stroke made him more susceptible to the undue exercise of such influence. 252 That is most clearly seen in the plaintiffs' acquiescence to Mr Sweeney's demand that, as a temporary measure, they concur in the issue of shares to provide him with a 51 percent shareholding of the Institute. The transaction was not documented. There was no agreement as to the circumstances in which Mr Sweeney might be required to retransfer any or all of the shares to the plaintiffs. Influence and ascendency were also demonstrated by Mr Sweeney's being able to take control of the management of the Institute even before he had acquired control over a majority of the shareholding or been appointed to the board. He said that the Institute needed saving and the plaintiffs relied on him to be the Institute's saviour. Dr Calvo clearly expressed this on 10 September 2004 when he told Mr Sweeney and Mr Keating that Mr Sweeney was "the best person to save the Institute and he has my support and I want to agree to the deal". 253 Even if there were not a fiduciary relationship between Mr Sweeney and the plaintiffs, the onus would lie upon Mr Sweeney to show that the transaction under which the plaintiffs agreed to the issue of shares to him for a nominal consideration and Dr Calvo agreed to give him an irrevocable proxy over his shares was not the result of the abuse of that influence. For the reasons given in paras [243]-[246] above, that onus is not discharged. 254 Although there was no voluntary transfer of shares from the plaintiffs to Mr Sweeney, the plaintiffs' acquiescence in the issue of shares to Mr Sweeney for a nominal consideration, which diluted their shareholding, was tantamount to such a transfer. If there had been such a voluntary transfer, the transfer would be liable to be set aside, subject to consideration of the defences dealt with below. This is not a case for setting aside the transfer. But equity requires the party who has acquired property as the result of the exercise of undue influence to account for it and that account is achieved by declaring that the shares are held on constructive trust. Unconscionability 255 Given my findings as to the existence of a fiduciary relationship, breach of fiduciary duty and the exercise of undue influence, it is unnecessary to deal with the plaintiffs' remaining claim that Mr Sweeney took unconscionable advantage of Dr Calvo's position of special disability or special disadvantage. The principles in Amadio were an important and logical extrapolation of equitable principles to cases where there was no existing fiduciary relationship or relationship of undue influence, but where unconscionable advantage was taken of the other party's special disability. If one were to ignore the fiduciary relationship between Mr Sweeney and the plaintiffs and were to ignore the influence which Mr Sweeney had acquired over them, and were thus to treat Mr Sweeney as if he were an external party prepared to make an investment in the Institute in return for shares with knowledge of Dr Calvo's stroke, I would not consider that Dr Calvo was so incapacitated as to attract the principles in Amadio. As there is a fiduciary relationship and a relationship of influence, it is not necessary to have recourse to the principles in Amadio. That is not to say that the effect of Dr Calvo's stroke on his capacity to deal with the issues concerning the Institute and his shareholding is irrelevant. To the contrary, it is relevant to my conclusion that Mr Sweeney has not shown that his acquisition of shares was not the result of an undue exercise of influence. But I would not uphold the plaintiffs' claim on the separate basis of an unconscionable taking advantage of a position of Dr Calvo's weakness, divorced from the earlier relationship by which the plaintiffs placed their trust in Mr Sweeney and were vulnerable to the exercise of his influence. 256 I therefore turn to the particular defences. Acquiescence 257 I use the term "acquiescence" in the sense of a contemporaneous and informed acceptance or standing by which is treated as an informed consent to what would otherwise be a breach of fiduciary duty (Orr v Ford [1989] HCA 4; (1989) 167 CLR 316 at 337). Mr Sweeney did not plead an informed consent to the breach. If there was no informed consent to the breach before and during its occurrence, it is difficult to identify when the plaintiffs might be said to have given their informed acquiescence to the breach after its occurrence. Whilst Mrs Calvo deposed that the plaintiffs saw a solicitor to seek advice as to whether Mr Sweeney was obliged to pay money for his shares, there was no evidence that the plaintiffs sought advice as to whether they could have the transaction set aside or make any other claim against Mr Sweeney. As noted at para [195] Mrs Calvo did not believe that the plaintiffs showed a copy of the shareholders' agreement to the lawyer they consulted. 258 In any event, even if the plaintiffs, by their conduct, could be said to have indicated an informed acceptance of Mr Sweeney having acquired his personal shareholding and control of the management of the company in breach of his fiduciary duty to them, any such acquiescence was on the basis that they would be paid for the shares. I have concluded that Mr Sweeney's various offers to take an option to acquire the plaintiffs' shares was calculated to induce Dr Calvo to believe that the option would be exercised. The plaintiffs believed that they would be paid for the shares. Their standing by after 27 September 2004 was owing to that belief which they had been induced to adopt by Mr Sweeney. This was not a knowing acquiescence in the breach. Laches 259 These matters are also relevant to the defence of laches. In Lindsay Petroleum Company v Hurd (1873-74) LR 5 PC 221, Lord Selborne LC, delivering the judgment of the Privy Council, said (at 239-240): " Now the doctrine of laches in Courts of Equity is not an arbitrary or technical doctrine. Where it would practically unjust to give a remedy, either because the party has, by his conduct, done that which might fairly be regarded as equivalent to a waiver of it, or whereby his conduct and neglect he has, though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted, in either of these cases, lapse of time and delay are most material. ... Two circumstances, always important in such cases, are, the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy. ... In order that the remedy should be lost by laches or delay, it is, if not universally at all events ordinarily ... necessary that there should be sufficient knowledge of the facts constituting the title to relief. " 260 Delay is of greater significance where the plaintiff has stood by and allowed the defendant to conduct a business to which, or the profits from which, the plaintiff then lays claim. In Clegg v Edmondson (1857) 8 De GM & G 787, Knight-Bruce LJ said (at 814): " A mine which a man works is in the nature of a trade carried on by him. It requires his time, care, attention and skill to be bestowed on it, besides the possible expenditure and risk of capital. Nor can any degree of science, foresight and examination afford a sure guarantee against sudden losses, disappointments and reverses. In such cases a man having an adverse claim in equity on the ground of constructive trust should pursue it promptly, and not by empty words merely. He should show himself in good time willing to participate in possible loss as well as profit, not play a game in which he alone risks nothing. " (See also Re Jarvis (decd); Edge v Jarvis [1958] 2 All ER 336 at 341; Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544 at 559). 261 In this case the plaintiffs lay claim to a specific asset, namely the shares held by Mr Sweeney, and not to the business or the profits from the business. The case is not wholly analogous to Clegg v Edmondson. Mr Sweeney did not stand to be compelled to contribute to losses of the Institute. However, he has devoted time and attention, and no doubt skill, to the business and has made tax-deductible gifts to the Institute. Mr Sweeney also guaranteed the Institute's obligations under a hire purchase agreement for 18 pianos. His guarantee was not called on. 262 Mr Sweeney estimated that on average he spent about 20 hours per week on his duties as chief executive officer of AIM from the end of September 2004 for about 40 weeks each year. He deposed that he carried out much of that work from his office at PKF, but in addition, carried out some of it at AIM's premises and some of it at home. The work included attending weekly executive meetings, meetings of heads of departments and monthly finance committee meetings. He also was concerned in all aspects of business planning for the Institute, including developing budgets and forecasts and co-ordinating marketing strategy and promotional activities. He attended to matters of a corporate secretarial nature and to general management issues, including what he called "staff matters, student fees, scholarships and related matters". 263 Mr Sweeney has not been paid for that work. He did not render an account. As noted earlier in these reasons, I do not accept his evidence that he would not have provided the services without rendering an account if he had become aware that Dr Calvo was making a claim to his shares in the Institute. Whilst Mr Sweeney has not made a claim, there is no evidence to suggest that he has released the Institute from any liability it may have to pay for his services. The shareholders' agreement, to which the Institute was a party, provided that the fees payable for Mr Sweeney's services for the period from 1 April 2005 were to be approved by the directors, but could not exceed $200,000 plus GST per year unless the approval of shareholders holding not less than 75 percent of the issued shares were obtained. 264 It is probable that if Mr Sweeney were to sue the Institute for remuneration of $220,000 per year from 1 April 2005 based on the shareholders' agreement the Institute would challenge the validity of that term. I express no views on the merits of such a challenge. But even if such a challenge were successful, prima facie Mr Sweeney would be entitled to reasonable remuneration from the Institute for the work done. If the Institute had a defence to such a claim, it is likely that any such defence would affect the merits of the defence of laches. 265 Mr Sweeney and Rowlands Pty Ltd made tax-deductible gifts to the Institute in November and December 2004 and December 2005. These were not payments made to acquire a shareholding in the Institute. However, Mr Sweeney had made it clear that he would only make the gifts if he obtained control of the Institute. I have found that Mr Sweeney would not have made the gifts or caused Rowlands Pty Ltd to do so had he been aware that the plaintiffs might make a claim to the shares. Prior to making the last donation on 31 December 2005, Mr Sweeney was aware that Dr Calvo was pressing for payment. Dr Calvo asserted that payment of $1.56 million was due for the 37.5 percent of the shares acquired by Mr Sweeney. As noted at paras [196] and [197] Mr Sweeney held out to Dr Calvo that he might be paid $1.5 million for his remaining shares. 266 Mr Sweeney induced the plaintiffs to believe that they would be paid for their shares, albeit that he did not promise to exercise the option. His conduct about which the plaintiffs complain, contributed to their delay in instituting proceedings whilst they waited to be paid. 267 The gifts were not a quid pro quo for the shares or other benefits Mr Sweeney obtained from the plaintiffs; or they would not have been gifts. When Mr Sweeney made his gifts and caused Rowlands Pty Ltd to make its gifts he knew of all of the facts which give the plaintiffs their title to relief. The plaintiffs did not know of their right to have it declared that Mr Sweeney held his shares on trust for them. Mr Sweeney did not make the gifts in the belief that the plaintiffs knew of their rights and had chosen not to exercise them. Mr Sweeney was not induced to make the gifts by anything done by the plaintiffs. Whilst I accept that he would not have made the gifts had the plaintiffs commenced proceedings there was no relevant delay up to the end of 2004, and by December 2005 Mr Sweeney knew that the plaintiffs asserted an entitlement to be paid for the shares he had acquired. Whilst that was not a claim to which they were entitled, Mr Sweeney did not cause Rowlands Pty Ltd to make its gift in 2005 expecting to be free of any claim. 268 I do not consider that it would be just to deny the plaintiffs equitable relief on the ground of laches. Estoppel 269 No separate submissions were advanced for the defence of estoppel. Counsel for Mr Sweeney acknowledged that if the defences of laches and acquiescence did not succeed, the defence of estoppel would not succeed. Just Allowances 270 I do not consider that it should be a condition of equitable relief that the plaintiffs compensate Mr Sweeney for the value of the time he devoted to the affairs of the Institute. Prima facie Mr Sweeney would be entitled to recover at least reasonable remuneration for his services. If there were an available defence to the Institute to such a claim, that would reflect on the justice of his receiving such remuneration. I see no reason why a suit he may have against the Institute should, in effect, be prejudged by ordering the plaintiffs to pay compensation as a condition of equitable relief for the services he provided. 271 Nor is Mr Sweeney entitled to compensation as a condition of equitable relief for the tax deductible gifts he and his company made to the Institute. As noted above, the last payment of $100,000 in December 2005 was made when Mr Sweeney was aware that Dr Calvo asserted that he was liable to pay $1.56 million for his 37.5 percent shareholding. Moreover the payments were gifts. They were not made for an expected return. They improved the financial position of the Institute, but not in a way which can be seen to directly affect the value of the shares. So far as the evidence discloses, AIM's constitution still provides that members are not entitled to dividends or a return of capital. Whilst Mr Sweeney said that he had been advised by the tax office that the company could be converted from a not-for-profit company, it does not appear that that has been done. Ellimark would have to approve any such change to the constitution. There is no evidence that Dr and Mrs Calvo would wish to change the status of the company or that Ellimark would wish to do so. 272 Finally, the making of just allowances as a condition of equitable relief is discretionary. Just allowances may be refused where a fiduciary has been guilty of bad faith (Phipps v Boardman [1965] Ch 992 at 1021; Green & Clara Pty Ltd v Bestobell Industries Pty Ltd (No. 2) [1984] WAR 32 at 38). In Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298, Heydon JA (as his Honour then was) summarised the authorities (at 384 [335]) as imposing an onus on the defendant to negate dishonesty or other grave forms of misconduct, and said that the absence of grave misconduct is a passport to an indulgence in favour of the defendant. I have found not only that Mr Sweeney placed himself in a position of conflict between his interest and duty, but that he took advantage of the plaintiffs and did not deal fairly with them. In those circumstances and having regard also to the earlier matters dealt with at paras [267] and [271], I do not consider that Mr Sweeney is entitled to an indulgence by way of a just allowance. Conclusion and Orders 273 The plaintiffs did not press a claim for a declaration that the shareholders' agreement had been terminated. The exercise period for the call option expired on 31 August 2008. The co-operation deed will come to an end upon Mr Sweeney's ceasing to be a shareholder of the Institute. The plaintiffs sought a declaration that the shares held by Mr Sweeney in the Institute are held by him on trust for the plaintiffs. They are entitled to that relief. They are also entitled to a declaration that the plaintiffs are entitled to be registered as the holders of those shares and an order that Mr Sweeney deliver a share transfer. I will not order rectification of the share register. The Institute has not been joined as a party and the register accurately describes the holders of the shares. No claim for damages or equitable compensation was pressed, save in respect to the claims under the Fair Trading Act and those claims have failed. The plaintiffs did not press their claim to be entitled to the sum of $1.56 million and they are not entitled to that relief. 274 There is no occasion to order an account as it has not been shown that Mr Sweeney has derived any profit from his shareholding. However, in case any such profit has been derived of which the plaintiffs were unaware, or has been derived since the hearing, I will reserve the proceedings for further consideration and grant liberty to apply. 275 For these reasons I make the following declarations and orders: 1. Declare that the shares in The Australian Institute of Music Ltd ("AIM") held by the defendant are held by him in trust for and on behalf of the plaintiffs; 2. Declare that the plaintiffs are entitled to be registered as the holders of the shares in AIM held by the defendant; 3. Order that within 21 days the defendant execute and deliver to the plaintiffs a transfer of the shares in AIM held by him and deliver to the plaintiffs any certificate held by him in respect of such shares; 4. Reserve proceedings for further consideration and grant liberty to apply on reasonable notice; 5. Order that the plaintiffs' claims for relief in para 37(c), (f), (g), (h) and (i) of the further amended statement of claim be dismissed; 6. Order that the exhibits may be returned after 28 days. 276 Prima facie the plaintiffs are entitled to their costs. I will hear the parties on costs. ****** 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. 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