New South Wales Supreme Court CITATION : Thomas v SMP International (No 4) [2010] NSWSC 984 This decision has been amended. Please see the end of the judgment for a list of the amendments. 20 July 2010 26 - 30 July 2010 HEARING DATE(S) : 2 - 6 August 2010 9 - 13 August 2010 16 - 19 August 2010 23 - 27 August 2010 JUDGMENT DATE : 22 September 2010 JURISDICTION : Equity JUDGMENT OF : Pembroke J CATCHWORDS : FIDUCIARY DUTY: loyalty - fair and open dealing - honesty - FIDUCIARY DUTY: accountant - non-traditional category - particular circumstances - EQUITABLE COMPENSATION: causation and principles - Brickenden's case - EVIDENCE: complex fact findings - practical limits in explaining all considerations and impressions - CREDIBILITY: reconstruction - uncorroborated assertions - principle in Watson v Foxman - COSTS: Sanderson order CATEGORY : Principal judgment Abalos v Postal Commission (1990) 171 CLR 167 Aneve Pty Limited & Ors v Bank of Western Australia Limited [2005] NSWCA 441 Beach Petroleum v Abbott Tout (1999) 48 NSWLR 1 Biggs v London Loan & Savings Co [1933] 3 DLR 161 Biogen Inc v Medeva PLC [1997] RPC 1 Breen v Williams (1996) 186 CLR 71 Brickenden v London Loan & Savings Co [1934] 3 DLR 465 Bristol & West Building Society v Mothew [1998] Ch 1 Re Coomber; Coomber v Coomber [1911] 1 Ch 723 Re Dawson (dec'd) [1966] 2 NSWR 211; (1966) 84 WM (Pt 1) (NSW) 399 For the Good Times Pty Ltd v Coltern Pty Ltd [2007] NSWSC 807 Hungerfords v Walker (1989) 171 CLR 125 CASES CITED : John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd & Ors [2010] HCA 19 McKenzie v McDonald [1927] VLR 134 McMurtrie v Commonwealth of Australia [2006] NSWCA 148 Meinhard v Salmon (1928) 249 NY 458 Nocton v Lord Ashburton [1914] AC 932 O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Pavan v Ratman (1996) 23 ACSR 214 Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 Societe d'Avances Commerciales v Merchant's Marine Insurance Co (1924) 20 Ll.L Rep 140 State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (1999) 160 ALR 588 Swindle v Harrison (1997) 4 All ER 705 United Dominions Corporation Ltd v Brian (1985) 157 CLR 1 Warman International Limited v Dwyer (1995) 182 CLR 544 Watson v Foxman (1995) 49 NSWLR 315 Conaglen M, Remedial Ramifications of Conflicts Between a Fiduciary's Duties (2010) 126 LQR 72 TEXTS CITED : Devlin P, The Judge, OUP 1979 Edelman J, When Do Fiduciary Duties Arise? (2010) 126 LQR 302 Gummow WMC, Compensation for Breach of Fiduciary Duty in T G Youdan (ed), Equity, Fiduciaries and Trusts, Law Book Co, Toronto, 1989 Eric Clyde Thomas - first plaintiff John Leslie Sullivan - second plaintiff Softsand Design Investments Pty Limited - third plaintiff PARTIES : SMP (International) Pty Limited - first defendant Eugene King - second defendant David Joseph King - third defendant Gregory Paul Willett - fourth defendant Debra Willett - fifth defendant FILE NUMBER(S) : SC 2003/85446 P E King - for plaintiffs COUNSEL : W Carney - for third defendant R J Weber SC with I R Pike - for fourth defendant F Kalyk - for fifth defendant Hayes Partners - for plaintiffs SOLICITORS : Husseini Lawyers - for third defendant Moray & Agnew - for fourth defendant Bartier Perry - for fifth defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION PEMBROKE J WEDNESDAY, 22 SEPTEMBER 2010 2003/85446 - THOMAS v SMP (INTERNATIONAL) PTY LTD (No 4) JUDGMENT INDEX Subject Paragraph 1 Introduction 1-2 2 Complex Facts 3-10 3 Mr Sullivan 11-15 4 Mr Thomas 16-19 5 Mr Willett 20-21 6 SSDI - Establishment 22-26 7 SSDI - Property Acquisitions 27-31 8 SSDI – Purpose 32-38 9 SMP 39 - Representations 40-44 - Willett in Control 45-47 - Payments by Thomas 48-49 - Events between 24 July & 4 September 50 - Willett & Sullivan in SMP's Business 51-52 - Subsequent Events 53-58 - Further Payments by Thomas & Sullivan 59 Subject Paragraph 10 Fiduciary Analysis – Factual 60-66 11 Fiduciary Obligations – Principle 67-71 12 Causation 72-76 13 Loss & Compensation 77-81 14 Credibility Issues 82 - Mr Willett 83-84 - Mr Thomas 85 - Mr Sullivan 86 - Mrs Liddlelow 87-88 15 Misrepresentation & Misleading Conduct 89-91 - Mr Willett 92-95 - Mrs Willett 96-99 16 Claim against David King 100 17 4 September 2000 Agreement 101-103 18 February 2002 Agreement 104-106 19 Conclusion 107 20 Costs 108 21 Interest 109 22 Orders 110 Introduction 1 From July to October 2000, the plaintiffs, Mr Thomas and Mr Sullivan, outlaid approximately $2 million for the benefit of a business they did not own. The business manufactured surf, ski and skate board clothing. The brand name of the clothing was SMP and the business was conducted by Surf Snow and Skate Pty Ltd ( SSS ). Its parent was SMP (International ) Pty Ltd. The investment was recommended and encouraged by Mr Greg Willett. He was an accountant as well as a manager of sportsmen. His clients included well known rugby league players some of whom were provided with sponsored clothing by SMP. At the time, Mr Willett described himself as the Chairman of SMP. 2 Mr Thomas and Mr Sullivan were neither financially astute nor well educated and have now lost their monies. They contend that they were in a fiduciary relationship with Mr Willett and that he owed them certain duties arising from that relationship. They also make claims based on misrepresentation and misleading conduct. Mr Willett, on the other hand, contends that Mr Thomas and Mr Sullivan were arms length commercial investors who were prepared to take greater risks in return for the prospect of higher rewards. Complex Facts 3 Before setting out my findings of fact, I should make the following preliminary observations. The hearing was lengthy and fact-intensive. There were four weeks of evidence and one week of addresses. It has been frequently said of cases involving an alleged fiduciary relationship that there is "no class of case in which one ought more carefully to bear in mind the facts of the case": Re Coomber; Coomber v Coomber [1911] 1 Ch 723 at 729 (Fletcher Moulton LJ). I have borne in mind that observation. 4 The three protagonists were Mr Thomas, Mr Sullivan and Mr Willett. Other witnesses also played roles, but they were less important. Two of these were Mrs Willett and Mrs Liddlelow, Mr Willett's former secretary. I have had the considerable advantage of seeing and hearing the evidence unfold over almost a month. During that period I have been able to observe, at close range, each of the protagonists, as well as all of the other witnesses. Mr Thomas was cross-examined over seven days, Mr Sullivan over four days and Mr Willett over four days. 5 Numerous questions of competing credibility arose. It is tempting to base my factual findings on those questions by reference to "the subtle influence of demeanour": Abalos v Postal Commission (1990) 171 CLR 167 at 179 (McHugh J). But there were insufficient indicators of demeanour one way or another, and except in an obvious case, I doubt the ability of a judge to discern the truth from a witness' demeanour: Patrick Devlin, The Judge, Oxford, Oxford University Press, 1979 at 63 (cited in State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (1999) 160 ALR 588 at 617-8). I prefer the approach of Atkin LJ in Société d'Avances Commerciales v Merchants' Marine Insurance Co (1924) 20 Ll.L Rep 140 at 152 (also cited in SRA v Earthline (supra) at 617): An ounce of intrinsic merit or demerit in the evidence, that is to say, the value of the comparison of the evidence with known facts, is worth a pound of demeanour. 6 In any event, the resolution of the competing questions of credibility did not, by itself, enable me to determine the true facts on all of the many issues that have arisen. Credibility was important, but it was not always the only relevant factor. In general, I have endeavoured to reach my conclusions on the issues of fact by reference to the probabilities, after comparing the evidence of the witnesses with the proved facts and the competing accounts. The assessment of the credibility of the witnesses was a part of that process and I deal with it separately later in this judgment at paragraphs [82] – [87]. 7 However, because the trial was lengthy, the exhibits numerous, the factual issues multiple and the submissions detailed, there are practical limits to the extent to which it is possible to explain all of the considerations and impressions that have led me to the conclusions of fact that I have reached. This feature of complex factual cases was explained in SRA v Earthline (supra) at 619 (per Kirby J). Lord Hoffmann had used similar language a few years earlier in Biogen Inc v Medeva PLC [1997] RPC 1 at 45: … specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance … of which time and language do not permit exact expression, but which may play an important part in the judge's overall evaluation. 8 In this case, the primary events took place 10 to 12 years ago. The evidence of all witnesses was fallible. Sometimes it was even fanciful. This was partly because of the passage of time and the absence of corroborative documents, and partly because the witnesses' processes of memory and reconstruction were overlaid by perceptions of self interest: Watson v Foxman (1995) 49 NSWLR 315 at 319 (McLelland CJ in Eq). The degree to which perceptions of self interest affected the evidence, and whether that effect was subconscious or deliberate, varied between the witnesses. 9 At a general level only, I thought that Mr Thomas and Mr Sullivan overstated and exaggerated their case. On the other hand, the evidence of Mr & Mrs Willett was somewhat unpersuasive. Each was present in court and followed intently the evidence of Mr Thomas and Mr Sullivan. When their time to give evidence eventually arrived, each was defensive, and sought to deflect any possible criticism by a considered process of denial and non-recollection. Only when they perceived that a question was not threatening, did they occasionally open up. Sometimes these answers were revealing. I have explained in detail, later in this judgment, why I have taken an adverse view of Mr Willett's evidence. 10 Ultimately, after putting aside evidence that was irrelevant, inconsistent, exaggerated or plainly false, I thought there was an irreducible core on which I was able to act, because it was consistent with the probabilities, the contemporaneous documents, the undisputed facts and the evidence of other witnesses on relevant issues. This has led me to conclude that Mr Thomas and Mr Sullivan should succeed, but not on all issues, and not against all defendants. It is necessary at the outset to explain the relationship between Mr Thomas, Mr Sullivan and Mr Willett. Mr Sullivan 11 Mr Sullivan is a man of limited education. Apart from his experience as a commercial diver, he has had little in the way of a regular job or a regular income. During the period with which this case is primarily concerned, he was frequently occupied providing assistance to Mr Willett – delivering documents, assisting in Mr Willett's office, signing papers, conducting the banking, liaising with Mr Willett's clients including sportsmen, and helping with the computers in Mr Willett's office. His only direct recompense for these services was the provision of a petrol card. No doubt Mr Sullivan saw benefits and opportunities in being able to associate and socialise with Mr Willett and the rugby league footballers that he managed. No doubt Mr Willett saw advantages in having at his disposal someone who was so willing to assist. Mr Sullivan agreed with the description of himself as a "gofer" for Mr Willett, no doubt because it was in his interest to do so. But I do not think that it was too far from the truth. He added, quite fairly, that he was always willing to learn. And he showed a keen interest in doing so. 12 Mr Sullivan and Mr Willett had first met at Cronulla High School. Mr Sullivan left the school in 1967, aged 15, and undertook a plumbing apprenticeship. Throughout the 1970s he had some social and business association with Mr Willett, who was training to be an accountant and was also known as a rugby league player in the Cronulla district. Mr Willett or his office prepared Mr Sullivan's tax returns for many years through the 1970s to the 1990s. I am satisfied that he gave some advice and assistance to Mr Sullivan in connection with the purchase of a small business known as the "Juice & Jaffle Bar" in Cronulla in 1977. This business was short lived. In 1978 Mr Sullivan commenced a commercial diving course with Mr Thomas. Later, in 1984, Mr Sullivan was a guest at Mr Willett's wedding. 13 The relevant events in this case commence in 1998, but during the preceding years, a series of transactions took place which help explain the nature of the relationship that developed between Mr Sullivan and Mr Willett. They also reveal a pattern of behaviour on Mr Willett's part which, I have concluded, continued during the period 1998 to 2002. The essence of that behaviour was an ability to persuade other persons to part with their money for investment in transactions in which Mr Willett was interested – directly or indirectly. 14 These earlier transactions involving Mr Sullivan and Mr Willett were as follows: (a) In March 1984, Mr Sullivan received approximately $28,000 from his brother in connection with the sale of a unit. The monies were invested with the firm of T H Waters Halpin & Co. By January 1985, the proceeds of the investment had become $30,427. Mr Willett recommended to Mr Sullivan that he lend those monies to Mr Willett's father-in-law. Mr Willett said that he would guarantee the loan and it would be as if it were a loan to him. Mr Sullivan lent the monies; (b) In March 1987, Mr Sullivan had available $65,000 following the sale of some flats and the purchase of a cheaper house for his mother in Port Macquarie. Mr Willett recommended to Mr Sullivan that he place those monies in his firm's trust account. Mr Sullivan did so; (c) In December 1994, Mr Sullivan received $317,000 as the first instalment of a lump sum payout consequent upon a diving injury. Mr Sullivan informed Mr Willett about those monies. In January 1995 Mr Willett asked Mr Sullivan if he could lend $50,000 as a favour. The borrowers were Kelly Willett, Debra Willett, Barbara Hekking and Pauline Young. Mr Sullivan lent the monies; (d) In December 1995, Mr Sullivan received a second payment of $450,000 consequent upon his diving injury. He informed Mr Willett about the payment. The following month, Mr Willett put a proposal to Mr Sullivan in relation to a loan of $100,000 to a company owned by a client of his. The company was North Shore Furniture Rentals and the client was Chris Rylands. Mr Willett said that he would personally guarantee the loan. Mr Sullivan lent the monies; (e) Two months later, in March 1996, Mr Willett requested Mr Sullivan to lend a further $50,000 to North Shore Furniture Rentals and that he would personally guarantee the loan. Mr Sullivan lent these monies as well; (f) Later in March 1996, Mr Willett asked Mr Sullivan to make another loan to a client of his in the sum of $15,000. Mr Sullivan did so; (g) In March 1997, Mr Willett proposed to Mr Sullivan that he become involved in a business importing furniture from Indonesia which Mr Willett, Mrs Willett and Chris Rylands were going to start. Mr Sullivan was unwilling to be involved. Mr Willett then asked if Mr Sullivan would lend $20,000 for a container load of furniture in connection with the business. Mr Sullivan did so; (h) In July 1997 Mr Willett discussed with Mr Sullivan a loan of $50,000 to assist Eugene King. He told Mr Sullivan that he would personally guarantee the loan. Mr Sullivan lent the monies. (i) Also in 1997, Mr Willett obtained Mr Sullivan's agreement to contribute to the purchase and redevelopment of a property known as 40 Kirkwood Road, Cronulla. Mr Sullivan contributed 50% of the purchase price. In a pattern that was often later repeated, Mr Willett's contribution came not directly from his own resources, but from funds said to have been lent by a client, Mr Hopwood, and obtained from his mother-in-law, Gloria Campbell. 15 Mr Sullivan's credit was attacked and I will return to it. I formed the view that he was not only foolish and commercially naïve, but also simple, and easily led. In connection with the business of SMP, he did not always behave with complete honesty. But nor did Mr Willett. I concluded that Mr Sullivan placed considerable trust and confidence in Mr Willett and was prepared to do what Mr Willett requested him to do. Mr Willett, on the other hand, privately regarded Mr Sullivan with disdain. Mrs Liddlelow, who was Mr Willett's personal secretary from 1996 to 2002, recalls Mr Willett describing Mr Sullivan in words to the following effect: "Sul is nothing but a dumb-arse diver. He's got brain damage from diving." Mrs Liddlelow's credit was also attacked and I will return to it. Mr Thomas 16 Mr Thomas' history before 1998 was as follows. When he left school at the age of 15 years, he obtained an apprenticeship as a fitter, machinist and welder. After completing a commercial diving course, he worked as a hyperbaric welder and diver in the oil industry until 1988. He then became a commercial fisherman. He leased an abalone fishing licence and carried on business from Eden on the far south coast of New South Wales. In 1989 he was involved in a serious motor vehicle accident and spent the next 11 months in the Spinal Ward at Prince Henry Hospital. He became a quadriplegic. He eventually received compensation in excess of $5 million. While he was in hospital, he exercised an option to purchase the abalone licence. He was only able to do so because of the generous assistance of Mr Sullivan who provided security over his own home to Mr Thomas' lender. Although physically incapacitated, Mr Thomas was able to conduct the business by leasing a fishing boat and employing a diver and deckhand. Like other abalone fishermen on the far south coast, Mr Thomas belonged to the Mallacoota Abalone Fishermen's Co-operative. 17 From approximately 1980, Mr Thomas and his wife utilised the services of a local Bega accountant, Mr Kellow. He prepared their tax returns and incorporated a number of private companies for them as Mr Thomas endeavoured to make a living from various aquatic and agricultural ventures. Mr Kellow's main area of work was taxation and the companies appear to have been established to minimise the incidence of taxation. The businesses themselves were simple and uncomplicated with few overheads and only an occasional contractor. Mrs Thomas was trained as bookkeeper but had limited ability to understand complex financial statements. Mr Thomas had even less ability to do so. He was an outdoors man who had neither the temperament, the talent, nor the interest, to master financial statements or the complexities of the retail clothing trade. He was no fool however and has demonstrated an aptitude for the successful conduct of his abalone fishing business. 18 The companies incorporated by Mr Kellow included Extraband Pty Ltd which was the trustee of a trust known as the Abalone Fishing Trust. E C & J M Thomas Pty Ltd which was the trustee of the Thomas Family Superannuation Fund of which Mr Thomas became a director in 1998; Aquaden Pty Ltd which was established to pursue, somewhat optimistically, the business of farming eels; and Tupelo Hill Pty Ltd which was a corporate beneficiary of the Abalone Fishing Trust. Cattle, sheep and deer, in insignificant numbers, generating only modest income, if at all, were farmed in partnership between Mr & Mrs Thomas. Mr & Mrs Thomas did not have a clear or complete understanding of the corporate structure. Nor does the corporate picture indicate any real commercial sophistication on their part. Given the valuable abalone fishing licence, and the size of his personal injury verdict, any prudent accountant could have been expected to advise and recommend similar structures. 19 By 1998, it is clear that Mr Thomas had several things in common with Mr Sullivan. They both had an acquaintance with Mr Willett during schooldays in Cronulla. Both left school at the age of 15 years and undertook trade apprenticeships. Both subsequently became commercial divers. Both suffered an injury which resulted in the payment to each of them of a substantial lump sum. Mr Sullivan's total payments, as I have mentioned, were almost $800,000. Mr Thomas' payment was in excess of $5 million. In summary, both were men of limited education with substantial monies at their disposal, who regarded Mr Willett as financially astute, materially successful and well positioned to assist them by advancing their financial interests. Mr Willett 20 Mr Willett was at all material times a licensed tax agent. In 1978, he obtained a Certificate of Commerce (Accounting Practices) from TAFE. In 1986, he obtained a Bachelor of Business degree from UTS. Throughout the 1980s and 1990s and until 2007, Mr Willett carried on a tax and accounting business in Cronulla in partnership under the firm name of Willett & Associates. He was a long time Cronulla resident and was well known in the district. He grew up in Cronulla; went to school there; played rugby league football there; carried on business there; and married and resided there. His practice as an accountant and tax agent had many clients and appeared to be prosperous. In addition to his taxation and accountancy practice, he operated a seemingly successful sports management business, managing some of the most well known rugby league players in the NRL, as well as surfers and other sportsmen. 21 To persons like Mr Thomas and Mr Sullivan, Mr Willett would have exhibited all of the superficial trappings of material success. His counsel sought to downplay his commercial prowess, describing him as "just a suburban accountant who was no financial genius". But these things are relative and a matter of perception. In any event, he was not just an accountant. I am quite satisfied that Mr Thomas and Mr Sullivan regarded Mr Willett as having skills, expertise, financial training and contacts that were beyond their own capacity or experience. I am also satisfied that Mr Willett knew that, in relation to the events and transactions that I will recount, Mr Thomas and Mr Sullivan trusted and depended on him. The starting point is the establishment of a company known as Softsand Design Investments Pty Ltd (SSDI) in 1998. The end point is the investment by Mr Thomas and Mr Sullivan in SMP in 2000. SSDI - Establishment 22 Mr Willett caused SSDI to be incorporated on 24 September 1998. From that date, its registered office became "c/- Willett & Associates". Mr Sullivan's address, around the corner from the office, was given as the principal place of business. The company register contains a resolution made on 24 September 1998 by the shelf company director and shareholder. That resolution records the issue of one ordinary share to each of Mr Willett, Mr Thomas, Mr Sullivan and Mr Hankinson and the appointment of each of them as directors. Mr Hankinson was a builder. The formal notifications to ASIC relating to the issue of shares and the appointment of directors and office holders were signed as to some by Mr Willett, and as to others by Mr Sullivan. As at 24 September 1998, ASIC was notified of the issue of four ordinary $1 shares and of the appointment of the four directors. Mr Willett was the secretary as well as the firstnamed director. Mr Thomas and Mr Sullivan each signed an application for one share and a consent to act as a director. After 24 September 1998, with one possible exception, Mr Willett did not cause any meetings of the company, or its directors, to take place. The exception relates to a meeting of directors recorded in minutes dated 24 July 2000 and signed by Mr Willett as "Chairman". I will return to it. 23 On 1 October 1998, Mr Willett lodged further documents with ASIC which included notice that Mr Hankinson ceased to hold office as a director and that the issued shares were then allocated as to Mr Willett (2 shares), Mr Thomas (1 share) and Mr Sullivan (1 share). The reason for the establishment of the company, at least initially, was the investment of Mr Thomas' personal injury monies. That was the only money realistically available to SSDI from the shareholders at that stage. Somewhat surprisingly, shortly after its incorporation, Mr Willett owned 50% of SSDI's issued capital. 24 Mr Willett says that this situation came about because, within a few days of the company's incorporation on 24 September, it was decided that Mr Hankinson should not be a director or shareholder. He says that he discussed with Mr Thomas and Mr Sullivan what was to happen to Mr Hankinson's share and that either Mr Thomas or Mr Sullivan said words to the effect: "Leave the two shares with you. We can sort it out later." I reject this evidence. It is inconsistent with the explanation given by Mr Willett in proceedings in the District Court in 2008. I have grave doubts about the honesty of Mr Willett's evidence on this issue. In the District Court proceedings, his explanation was that SSDI was initially established as a joint venture between him and Mr Sullivan. In these proceedings, he has said that from the outset, it was established as a joint venture of which Mr Thomas was a part. 25 Mr Willett's evidence in the District Court was as follows: Q. You made yourself a shareholder in this company without telling either Mr Sullivan or Mr Thomas didn't you? A. No Mr Thomas wasn't coming into it at that time. The person who found the land was a man called Kas James and he told us after we'd done the development of Kirkwood Road, there was three blocks of land up in Bando Road that we should buy for a development. So I formed a company and there was going to be two shares Sullivan and two shares me. Then what happened was Sullivan said, "Mr Thomas wants to come in", and so we went up there and we bought the land in the – but we'd already – because there was going to be four shares issued and that's how come the four share part came about, and I had two and they had one each. Because he told me all Mr Thomas was going to be was we were going to do the deal with the St George Bank and he told me that Mr Thomas would come in and he'd finance the development. So they got a share each for their half and I got my two shares. 26 It is not possible to reconcile the explanation given by Mr Willett in the District Court proceedings with the evidence which he has given in these proceedings. Mr Willett also confirmed in his District Court evidence that at the time, he had no money to contribute to SSDI; that Mr Thomas was primarily putting the money in; and that he (Mr Willett) knew what a fiduciary was. For reasons which will become clear, I regard Mr Willett's conduct in connection with his acquisition of a second share in SSDI as amounting to double-dealing. SSDI's Property Acquisitions 27 On 26 September 1998, two days after its incorporation, SSDI purchased three properties at auction. The properties had been identified by Mr Willett, with the assistance of a real estate agent, and were known as 5, 7 and 9 Bando Road, Cronulla. Mr Thomas was kept informed by telephone during the bidding. He supplied the total purchase price of $1.96 million and took three mortgages from the company to secure repayment, without interest, of the monies outlaid by him. On 23 April 1999, SSDI purchased another property known as 11 Marlo Road, Cronulla. The purchase price was $580,000. Mr Thomas also supplied the purchase price for this property. 28 The submission, on Mr Willett's behalf, that the Marlo Road property was purchased "with a lot of Greg Willett's money" did not have a proper foundation. Despite some tired and confusing oral evidence by Mr Thomas, the submission never accorded with Mr Willett's own contentions, the competing affidavit evidence or the contemporaneous documents. In his affidavit, Mr Willett said no more than that he "may have supplied the deposit for Marlo Road" using funds borrowed from his mother-in-law, Gloria Campbell. He added that Mr Thomas supplied the balance of the purchase price of approximately $550,000. Mr Thomas' affidavit evidence was to the same effect. He said that Mr Willett asked him to deposit $547,000 into the SSDI account for the purchase of the Marlo Road property. This tallies with the amount of $546,829 stipulated in the letter from Cassidy Gibson & Howlin dated 2 June 1999. That firm acted for SSDI on the purchase and was also Mr Willett's solicitors. 29 On 20 August 1999, SSDI agreed to purchase another property. This property was known as 3 Bando Road, Cronulla. The evidence as to the payment of the purchase price for this property is less clear. Mr Willett stated in his affidavit that he recalled paying stamp duty of $40,494. Mr Thomas says in his affidavit that on 30 September, he transferred $370,000 to SSDI towards the purchase of this property. 30 Whatever the precise funding arrangements in relation to 3 Bando Road, Mr Willett was able to state in his affidavit that by mid-2000, SSDI was in a strong financial position. He said that it owned assets consisting of the properties known as 3, 5, 7 and 9 Bando Road and 11 Marlo Road, Cronulla having a total purchase price of $3.54 million. Mr Thomas contributed the vast majority of these purchase monies. In describing SSDI's financial position, Mr Willett did not mention that he had become the holder of 50% of its issued share capital, or that, for a minimal outlay, he had secured a very advantageous position for himself, particularly at the expense of Mr Thomas. Neither Mr Thomas nor Mr Sullivan knew, or had any reason to suspect, that Mr Willett had acquired two shares in SSDI. 31 In 2002, the dispute which led to these proceedings emerged between Mr Thomas and Mr Sullivan on the one hand, and Mr Willett on the other hand. On 23 July 2002, Mr Willett resigned as a director and secretary of SSDI. The Bando Road properties were then sold. They had not been re-developed. Understandably, attempts were made by Mr Thomas and Mr Sullivan to ensure that Mr Willett did not become aware of the sale of those properties. When Mr Willett did become aware, he made no claim for 50%, or any other share, of the proceeds of sale received by SSDI. He brings no cross claim in these proceedings for any such share. SSDI – Purpose 32 In these proceedings, Mr Willett characterised SSDI as a corporate vehicle that was established at the outset for the shared commercial exploitation of mutual investment opportunities – in which Mr Willett, Mr Thomas and Mr Sullivan were co-venturers, on an equal footing, who were prepared to take higher risks in return for higher correlative rewards. 33 On the other hand, in 1998 Mr Thomas was the recipient of very substantial monies from his personal injury verdict. Since 1997, those monies had been placed on deposit with Mr Thomas' bank. In contrast, Mr Willett had no available monies. And Mr Sullivan had no immediate intention of investing monies in SSDI. It is understandable that Mr Thomas was open to suggestions and recommendations from Mr Willett about more effective investment. As Mr Thomas subsequently provided almost all of the funds for the properties purchased by SSDI, it is also understandable that he may have convinced himself that SSDI was his company – especially in the process of reconstruction by him since 1998, overlaid as it no doubt was, by his sense of injustice and perceptions of self interest, conscious or sub-conscious. He says he knew that the three of them were directors, but that he did not know they were all shareholders. Mr Sullivan's evidence was to the same effect. 34 The truth, I think, was somewhere in between Mr Willet's characterisation and the reconstruction of Mr Thomas and Mr Sullivan. In reaching my conclusion, I have had regard to the documentary evidence and the probabilities, the evidence of other witnesses that I accept, and my assessment of Mr Thomas, Mr Sullivan and Mr Willett. It necessarily requires me to reject Mr Willett's explanation and much of the reconstruction of Mr Thomas and Mr Sullivan. The principal relevant factors are as follows: (a) First, Mrs Liddlelow recalls, at the time of the establishment of SSDI, that Mr Willett said to her words to the effect: "Clydie needs his own company". Notwithstanding his statement that Mr Thomas needed his own company, he then told her that there would be four shareholders and directors, Mr Thomas, Mr Sullivan, Mr Willett and Mr Hankinson; (b) Second, Mr Thomas and Mr Sullivan each received numbered share certificates. And in November 1998, after several requests of Mr Willett, Mr Thomas and his wife received a draft balance sheet of SSDI showing that the issued capital of the company was $4 constituted by four $1 shares. Mr Thomas and Mr Sullivan must have understood at the time that they and Mr Willett were not only directors, but also shareholders, of SSDI; (c) But third, I do not think that Mr Thomas and Mr Sullivan understood the implications. They assumed, I am satisfied, that their respective interests in the company were equivalent, at least initially, to the investment (if any) which each of them made. Hence in 1998, Mr Thomas rationalised that the company was for his benefit. And Mr Sullivan believed that he was assisting his friend, Mr Thomas, in a vehicle primarily designed for his benefit, but with some expectation of profit for himself. In my view, neither Mr Thomas nor Mr Sullivan, or for that matter Mrs Thomas, had an adequate understanding of the significance of ownership through a corporate vehicle. They started off thinking that the Bando Road properties might be redeveloped but did not know, or understand, how any redevelopment would be funded or how any profits on resale would be shared through SSDI. 35 But whatever view is taken of the matter, Mr Willett's conduct in bringing about a situation, within a short time after incorporation, where he held 50% of the issued shares of SSDI, was not honest. It was contrary to the natural expectations of Mr Thomas and Mr Sullivan and occurred without any meetings of the company or its directors being held. Mr Willett did not inform Mr Thomas and Mr Sullivan or obtain their consent. Nor did he contribute any significant monies to the purchase of the properties which SSDI acquired. He was, in my view, engineering an opportunity for himself. He perceived that it was not in his interest to be full and frank or to deal openly and directly with Mr Thomas and Mr Sullivan. He saw advantage to himself in opacity, obscurity and non-disclosure. 36 Over time, Mr Willett began to treat SSDI as if it were his own company, available for his private purposes. He already had another company, with a similar name, which fulfilled that purpose – Softsand Design Pty Ltd (SSD). Mr Thomas had no interest in SSD. For many years SSD had been the corporate vehicle through which Mr Willett had conducted the business of managing footballers and surfers, making investments and conducting transactions outside his tax and accountancy practice. He had been a director, and its major shareholder, since 1985. His mother-in-law, Gloria Campbell, had held the offices of director and secretary since 1989. In 1997, in connection with the joint purchase and development of 40 Kirkwood Road, Cronulla with Mr Sullivan, the latter was made a director of SSD and issued with 15 out of 198 A class ordinary shares. This represented 7.5% of its issued capital. 37 With increasing frequency, Mr Willett began to make deposits and payments into and from SSDI's bank account relating to his personal affairs. These deposits and payments included amounts related to footballers (Phil Blake and Craig Gower), his mother-in-law, Gloria Campbell, clients of his taxation and accountancy practice (Chris Rylands and Michael Atkins) and other individuals with whom he was associated in some way (John Murray and Bob Norris). Even part of the proceeds of sale of a Willett family ski lodge was at one stage paid into the SSDI account. The evidence did not permit a thorough or reliable investigation of the source and origin of each deposit and payment. Among other things, Mr Willett contended that a great deal of his paperwork relating to SSDI was stolen. When I asked him whether he could think of any reason why someone might want to take his financial records relating to SSDI, or who any such person might be, he could provide no reason or identify any person. 38 On the other hand, the plaintiffs sought to put much evidence before me, of varying quality and admissibility, designed to show how, over time, many personal expenses of Mr & Mrs Willett were paid out of SSDI's bank accounts. I accept that there were such payments, but it does not matter what the precise amounts were. Mr Willett freely admitted that historically, SSD was his family company into which he had put money from sports management and football earnings, as well as other activities outside his tax and accountancy practice. He explained that he changed his practice and started using SSDI for his private purposes because "Softsand Design did not have money, but SSDI did – because of the contributions initially made by Mr Thomas." I have no doubt that, by July 2000, Mr Willett regarded SSDI as if it were his own. He believed that SSDI was a vehicle available for use in any further investments that he thought appropriate and that he could probably obtain further substantial financial contributions to any such investment from Mr Thomas and possibly from Mr Sullivan. This is what happened in connection with the SMP group commencing in July 2000. SMP 39 In July 2000, Mr Willett was familiar with the SMP group of companies. As I have mentioned, the group manufactured and sold sporting, surfing, ski, skate and snowboarding clothing. The business was effectively owned and managed by Eugene King, a one time snowboarder who was not, I am prepared to infer, particularly commercially experienced or financially sophisticated. Mr Willett had known Eugene King since at least 1997 both socially and in a business sense. Before his involvement in SMP, Eugene King and someone called Bart Joseph had been in a business together importing snowboards. Mr Willett was Bart Joseph's tax accountant and had meetings with both King and Joseph when he was instructed in relation to the separation and split up of that business. Mr Willett and Eugene King then had a continuing association through which Mr Willett gradually learned more about the business. Mr Willett's footballer clients were taken to SMP's premises in Surry Hills, frequently by Mr Sullivan, for the supply and fitting of sponsored clothing. Representations 40 There is no doubt that by mid-2000, Mr Willett regarded SMP as an investment opportunity. He knew that it was under pressure from its banker, HSBC. He believed that it was not well managed under Eugene King. He considered whether the group should be allowed sink and the business bought back from the bank. He had formed the view that the brand was exciting and the cash flow substantial. He not only thought, but also told Mr Sullivan, and probably also Mr Thomas, that: … everyone reckons SMP is a terrific brand and maybe this is a chance to invest at a good time and get in there early before it gets really big. 41 At around this time, Mr Willett was provided with turnover figures for the SMP business. It is more probable than not that he looked at other books and records of SMP. He asked for a list of debtors and creditors. As with some other areas of his evidence, and given the allegations of misrepresentation against him, he was predictably circumspect about what he saw, saying that he could no longer recall the figures with which he was provided. However, he acknowledged that the figures demonstrated to him that the business ought to have been generating a gross profit of about $5.5 million for the next 12 months. It is obvious that Mr Willett analysed the figures and reached a considered conclusion. He regarded the turnover as "huge". He formed the view that the business had short term cash flow problems but was otherwise sound; that it had significant prospects; and that it was a potentially attractive investment opportunity. As usual however, Mr Willett himself had no available funds for investment. 42 Mr Willett had a number of discussions about investing in the SMP brand, first with Mr Sullivan and then with Mr Thomas. I have no doubt that he encouraged and enthused them. In a sense, he had nothing to lose as he had already made clear, at least to Eugene King, that all his funds were tied up, that he did not have a "cracker" and that he was not personally able to help. I do not think however that Mr Willett made a number of the specific representations that Mr Thomas and Mr Sullivan allege against him. There is no contemporaneous written corroboration of what Mr Willett is alleged to have said but Mr Thomas' and Mr Sullivan's account of Mr Willett's representations tended towards hyperbole. The evidence of each of them on this issue was not, I think, knowingly false. But it was affected by their sense of grievance and the process of constant reconstruction and reaffirmation which they had undertaken since 2002. 43 For the reasons that I will make clear however, it is just as much what Mr Willett did not say, as what he did say, that justifies the claims against him. As to what he did say, I am quite satisfied that in July 2000, Mr Willett said to Mr Thomas and Mr Sullivan words to the effect that SMP was still in its global infancy and rocketing in the right direction; that it just needs our financial guidance; that Willett & Associates will now be involved as accountants; that SMP will perform a lot better with our management and accountancy skills; I have reviewed the figures and the turnover is huge; that the potential growth looks fantastic; and we are now in full financial control of SMP. I am also satisfied that he said that the SMP brand would be as big as Billabong. Nor do I have any doubt that after 24 July 2000, Mr Willett was in the habit of saying words to the effect that – we saved SMP; I am in control; SMP is my company; and without me SMP would no longer exist. 44 I am satisfied that Mr Willett conveyed to Mr Thomas and Mr Sullivan that he was offering them a special opportunity. He said that he could do the SMP investment with his footballers and clients, but that he wanted to do it with Mr Thomas and Mr Sullivan. In fact, he also obtained monies for investment in SMP from some of his clients. Mr Willett also made clear that the vehicle for the investment in SMP would be SSDI. Mr Thomas and Mr Sullivan remained unaware that Mr Willett held 50% of SSDI's issues shares. Mr Willett said that whatever each of them put in would be "recorded in our loan accounts with SSDI and reconciled at the end." Mr Willett in Control 45 The contemporaneous evidence supports the inference that Mr Willett took charge of SMP, at least from 24 July 2000. On that day, Mr Willett signed the minutes of a meeting of directors of SMP. That company owned the shares in SSS which was the company that generated the sales turnover. Mr Willett described himself in the minutes as "Chairman" of SMP International. Eugene King is also recorded as being present at the meeting. He had previously been in effective practical control of the SMP group's day to day affairs. It is obvious that Eugene King relinquished control in favour of Mr Willett. The subject of the meeting was the cancellation of the payment of royalties by SSS to SMP International in order to improve the cash flow of the former. 46 Also on 24 July 2000, Mr Willett signed minutes of a meeting of directors of SSDI, describing himself as "Chairman" of that company as well. The minutes record that SSDI will receive "50% of all the companies and the international companies" in the SMP group. They also record that SSDI's aim was to reduce SMP's loans to HSBC by $500,000, by injecting approximately $600,000 cash flow and that Eugene King was to get a share of the profits (in an amount that was not yet decided), if the Bando Road properties were redeveloped. This agreement was further recorded in a letter dated 25 July 2000, on the letterhead of Willett & Associates, from Mr Willett to the directors of SSDI, being Mr Thomas, Mr Sullivan and himself. 47 Thus, in less than two years since the establishment of SSDI on 24 September 1998, Mr Willett had brought about the following series of events. Having started with the $1.96 million which he had recommended that Mr Thomas outlay for the acquisition of the Bando Road properties by SSDI, he was now SSDI's self appointed "Chairman" and the holder of 50% of its issued capital. He had ceased to use his family company (SSD) and had commenced to use SSDI as if it were his own company, available for his private affairs and transactions. He had an agreement in principle for SSDI to acquire 50% of the issued share capital in the SMP group, namely SMP International, SSS and a third company known as SMP Clothing Pty Ltd. He was also now the "Chairman" of SMP International and, for the time being, appeared to be in day to day control of the group's affairs. He managed to achieve all of this without contributing in any significant way to the purchase of the Bando Road and Marlo Road properties in 1998 and 1999. And he had made clear in July 2000, that he personally had no available funds to invest in SMP. Payments by Mr Thomas 48 In this context, and from the advantage of his position as "Chairman" of the SMP group and "Chairman" of SSDI, Mr Willett asked Mr Thomas in July 2000 to provide $1.5 million to enable the SMP group to overcome its short term cash flow problems. Over the next two months, from 28 July to 29 September 2000, Mr Thomas made the following payments totalling $1.4 million for the benefit of SMP at Mr Willett's request and direction - $200,000 (28 July), $300,000 (4 August), $200,000 (9 August), $100,000 (22 August), $100,000 (23 August), $100,000 (23 August) and $400,000 (29 September). On 12 October 2000, Mr Thomas made a further payment of $75,000 for SMP's benefit at Mr Willett's request and direction. 49 Mr Willett said he had no recollection of having any discussions with Mr Thomas about these monies. But this is sophistry. I reject this evidence. Among other things, there are instances of emails to Mr Thomas from Mr Willett's secretary conveying requests from Mr Willett for monies. For example, on 22 August 2000, in relation to one of the amounts that Mr Willett requested, his secretary, Mrs Liddlelow sent an email to Mr Thomas commencing with the words: "Greg asked for $100,000 to be deposited into Capital Textiles Pty Ltd bank account …" and ending: "Greg said he would ring you tonight". Events between 24 July and 4 September 2000 50 On 4 September 2000, a more formal agreement relating to SSDI's acquisition of 50% of the SMP group, was signed by Eugene King. Between 24 July and 4 September, a number of events occurred relating to Mr Willett's fundraising from Mr Thomas and Mr Sullivan in connection with SMP. Those events reinforced the course on which he had embarked with them: (a) In late July, Mr Manauzzi, the external accountant for SMP and Eugene King, attended a meeting with Mr Willett at the offices of Willett & Associates. Eugene King was present and said to Mr Manauzzi in Mr Willett's presence: "Willett & Associates will be taking over doing the books for the SMP group and they will be running everything to get me into line"; (b) On 28 July, Mr Willett attended a meeting on behalf of SMP with HSBC. Others present were Mr Manauzzi, Donna King, a footballer by the name of Phil Blake and Mr Sullivan; (c) Between 31 July and 4 August, Mr Willett attended the premises of SMP or had meetings in connection with SMP almost every day; (d) On 8 August, Mr Willett attended another meeting on behalf of SMP with HSBC (Mr Ian Watson). Mr Sullivan accompanied him. Mr Willett mapped out a plan to reduce SMP's indebtedness; (e) On 11 August, HSBC wrote to Mr Willett, at Willett & Associates, noting that he had been appointed by Eugene King to negotiate with the bank on SMP's behalf. The letter put forward a proposal for the restructure of the debt facilities of SSS; (f) On 14 August, Mr Willett signed a personal guarantee of a loan of $500,000 to Mr Sullivan from Perpetual Trustees Victoria. The guarantee was necessary because Mr Sullivan had no employment or income. The loan was secured over Mr Sullivan's property at 40 Kirkwood Road, Cronulla and the proceeds were intended for investment in SMP. Mr Sullivan, to Mr Willett's knowledge, had no independent means of meeting the loan repayments; (g) On 15 August, Mrs Willett and Mr Sullivan travelled together to review SMP's operations in the United States. I think that it is fair to say that Mr Willett "sent" them. Mrs Willett said she only went for shopping but I regard this as disingenuous. Their purpose was to review the business operations and finalise and document the agreement for SSDI's acquisition of 50% of the SMP group; (h) On about 19 August Mrs Willett returned to Australia. Mr Sullivan remained in California to finalise SSDI's agreement with the SMP group; (i) On 25 August, Mr Willett wrote to Mr Markovitch from K2 Inc regarding a payment schedule in respect of the amounts outstanding to K2 Inc for the SMP trademark; (j) Later on 25 August, Mr Sullivan, at SMP's offices in California, sent a fax back to Mr Willett and Mr Thomas stating that K2 needed a more substantive letter; (k) On 28 August, a more substantial letter to K2 was composed and faxed from Mr Willett's office. It was on the letterhead of SSD, Mr Willett's own company. Mr Willett denied signing it but I am satisfied that he composed and was responsible for it. The letter contained a number of extravagant and false representations in support of a proposal for the payment of the monies outstanding to K2 Inc; (l) On 31 August, Mr Thomas' solicitors (Beston, Macken McManis), who had acted for him in his personal injury litigation, became involved. They did so with Mr Willett's knowledge and approval. They sent to Mr Sullivan in California, a letter agreement relating to the transfer to SSDI of the 50% interest in the SMP group for signature by Eugene King; (m) On 1 September, Beston, Macken McManis sent a revised form of letter agreement to Mr Sullivan for Eugene King's signature; (n) On 4 September, Eugene King on behalf of SMP, and Mr Sullivan on behalf of SSDI, signed the letter agreement together with a handwritten annexure; (o) Also on 4 September, Mr Willett's solicitors, Cassidy Gibson Howlin wrote to Mr Sullivan confirming that his mortgage advance of $500,000 had been paid to SMP's bank, HSBC. Mr Willett & Mr Sullivan in SMP's Business 51 After the 4 September 2000 agreement had been secured, both Mr Willett and Mr Sullivan threw themselves into the SMP business. For the next few months, Mr Willett attended SMP's premises at least several times each week. Mr Sullivan, who had no gainful employment, was there almost every day. Business cards were printed describing Mr Willett, Mr & Mrs Thomas and Mr Sullivan as directors of SMP Clothing. Mr Willett signed SMP cheques. Mr Sullivan busied himself in daily operations including liaising with retailers and suppliers and co-ordinating the transport of stock. Mr Willett reviewed SMP's trading account including the income tax returns that had been lodged for SSS. He prepared a general ledger based on bank account statements. He also arranged for the SMP group to transfer its banking from HSBC to the National Australia Bank. Mr Willett had a subsisting relationship with Neil Gard at the NAB. 52 After 12 October 2000, with one later exception, Mr Thomas refrained from making any further payments to, or for the benefit of, SMP. He began to feel uneasy about the amount of money that he had been persuaded to invest. I have no doubt that, at least initially, Mr Thomas had been encouraged by Mr Sullivan. But the more powerful and influential force was always Mr Willett. Mr Sullivan, because of his trust and confidence in Mr Willett, his simplicity, and his propensity to be easily impressed, was blinded by him. Subsequent Events 53 By January 2002 it had all begun to unravel and the truth emerged. But there were a number of other events that I must mention to complete the intervening picture: (a) In November 2000, to assist with SMP's funding, Mr Willett organised an $800,000 overdraft facility for SSDI and a documentary line of credit and debtor finance facility for SSS, with the NAB, SMP's new bankers. He sought and obtained the agreement of Mr Thomas and Mr Sullivan to guarantee the facilities, where required. Mr Thomas also reluctantly agreed to the provision of a mortgage debenture over SSDI's assets, namely the Bando Road and Marlo Road properties. Mr Willett and Mr Sullivan executed the mortgage debenture on behalf of SSDI. (b) Also in November 2000, Mr Willett caused the employment of Mr O'Toole, SMP's manager in its premises at Surry Hills, to be terminated; (c) In December 2000, Mr Willett arranged meetings at SMP's premises at which he introduced Mr Ian Frykberg to Mr Thomas and Mr Sullivan as a potential new investor in the SMP group; (d) In January 2001, as debts mounted, Mr Willett told Mr Thomas that SSDI's Marlo Road property would have to be sold. The sale occurred in February and the proceeds were disbursed partly to, or for the benefit of, SSS and partly in reduction of SSDI's existing indebtedness; (e) In April 2001, Mr Frykberg became involved and commenced to make a number of substantial payments for the benefit of the SMP group. Mr Frykberg believed that he would receive one share representing a 25% interest in SSDI. This later became the subject of dispute when his accountant ascertained that Mr Willett already held two shares, so that Mr Frykberg's share represented only 20% of SSDI; (f) In May 2001, as debts continued to mount, Mr Willett caused SSDI's overdraft facility with the NAB to be increased from $800,000 to $1.2 million; (g) In June 2001, Mr Thomas and his wife, became more and more concerned with what they perceived was Mr Willett's inability or unwillingness to furnish adequate documentation and make adequate disclosure to them about SSDI and SMP and their financial commitment to those companies; (h) In July 2001, Mr Frykberg gave notice that he was resigning as a director of SSDI; 54 During the second half of 2001, more money was paid to SMP or its creditors. Mr Willett continued to draw cheques on the SSDI bank accounts, especially the NAB overdraft account which he had established. He maintained the cheque book for that account and since late 2000 many personal expenses of Mr Willett had been paid, and continued to be paid, from it. Cheques were also paid from that account for SMP's purposes. 55 During this period, Mr Thomas in particular, and Mr Sullivan more slowly, gradually became suspicious and distrustful of Mr Willett. They received reports direct from the accounting staff at SMP and learned that things were not going as well as had been hoped. By 12 November 2001, Mr Willett became concerned himself. He wrote to Eugene King informing him that he wanted to resign as a director of SMP International. 56 In January 2002, Mr Thomas and Mr Sullivan became aware from Mr Cronin, who was Mr Frykberg's accountant, that Mr Willett held two shares in SSDI. Then, in early February, Mr Cronin recorded in his notes that, in order to keep trading, SSS required an immediate injection of $3 million. On 12 February 2002, an agreement was entered into for the transfer to Mr Frykberg, Mr. Willett, Mr Thomas and Mr Sullivan of 85% of the remaining 50% of the SMP group still held by the King Family Trust. The agreement was predicated on SSDI having already acquired the other 50% of the SMP group in September 2001- although no documentation relating to the transfer of shares to SSDI had ever been lodged with ASIC. The February 2002 agreement was never implemented and nothing eventuated. 57 By April 2002, Mr Thomas had ceased to speak to Mr Willett. Mr Thomas' solicitor, Mr Macken, attended meetings on his behalf and became engaged in discussions for the sale of the SMP group. One proposal was for the sale of SMP to the Bart group. Nothing came of it. On 17 May 2002, Eugene King caused SMP International to terminate the licence of SSS to use the SMP brand and trademark. On 27 May, voluntary administrators were appointed to SSS. On 29 May, the NAB appointed receivers of its assets. 58 The final blow occurred when on 27 May 2002, unknown to either Mr Thomas, Mr Sullivan, Mr Frykberg or Mr Willett, Eugene King caused SMP International and the King Family Trust to enter into an agreement with Garment Corporation Pty Ltd. The agreement provided for Garment Corporation Pty Ltd to subscribe for shares in SMP International to a maximum amount of $2 million. The intended result was that Garment Corporation and the King Family Trust would each hold 50% of the issued capital in SMP International. SSDI's supposed 50% interest in the SMP group arising from the 4 September 2000 agreement, in relation to which no share transfer documents had ever been lodged, was ignored. Further Payments by Thomas & Sullivan 59 During the whole of this period, and in addition to their initial investments of $1.475 million and $500,000 that I described in paragraphs [48] and [50(o)], there were more payments by Mr Thomas and Mr Sullivan which they claim to recoup: (a) On 27 September 2000, Mr Willett drew a cheque on SSDI's bank account for $50,000 for the benefit of SMP payable to Capital Textiles. This resulted in the SSDI account being overdrawn by approximately $32,000. This was covered by a deposit of $50,000 into the SSDI account on 28 September which Mr Willett is said to have procured from Bart Joseph. Mr Sullivan claims this money because he contends that Bart Joseph's $50,000 was in fact owed to him and that he has not been repaid that sum by either Mr Willett or Bart Joseph. The evidence in relation to this transaction is not sufficient to enable me to conclude that Mr Sullivan is entitled to recover the $50,000 from Mr Willett. Nor, as a matter of legal analysis, does it appear necessarily correct that those monies are owing by Mr Willett to Mr Sullivan; (b) On 9 October 2000, Mr Willett drew a cheque for $100,000 for the benefit of SMP. This resulted in SSDI's bank account again being overdrawn. The overdrawn amount was approximately $73,000. Mr Willett spoke to Mr Thomas, saying that he personally had no money to cover it. He requested Mr Thomas to deposit $73,000 into SSDI's account. Mr Thomas did so on 12 October; (c) On 23 November 2000, Mr Sullivan received a cheque for $30,313 from the Public Trustee in respect of his father's estate. Mr Willett urged him to put the money into SMP. Mr Sullivan, as he had done on numerous other occasions, did as Mr Willett suggested; (d) On about 18 September 2001, Mr Willett asked Mr Sullivan if he could use his Mastercard to pay obligations of SMP. I accept that, on this occasion, it is probable that Mr Willett said not only that SMP will make your repayments but also that "If there is a shortfall, I will pay you back personally". Mr Sullivan incurred indebtedness of $14,060 on his Mastercard which neither SMP nor Mr Willett repaid; (e) On about 18 December 2001, Mr Sullivan obtained a bank cheque for $170,000 which he caused to be paid into the account of SSS. I accept that having already borrowed $500,000 to contribute to SMP, Mr Sullivan was reluctant to make available any further monies. He did so because Mr Willett requested and encouraged him to do so; (f) Finally, on 12 February 2002, on the day on which the agreement for the transfer of 85% of the remaining 50% of the shares in SMP International and SSS was entered into, and after Mr Thomas had become aware that Mr Willett had concealed his ownership of two shares in SSDI, Mr Thomas paid another $92,000 for SMP's benefit. These monies are not recoverable from Mr Willett. Mr Thomas paid them in response to a request from Mr Frykberg at a time when he was already aware that Mr Willett had failed to behave honestly towards him. Mr Frykberg is not a defendant. Fiduciary Analysis - Factual 60 Having regard to those findings of fact, I have concluded that Mr Willett was in a fiduciary relationship with Mr Thomas and Mr Sullivan. Mr Willett contended that there was no fiduciary relationship and that he was not their advisor. He said that in their dealings with him in connection with SMP, Mr Thomas and Mr Sullivan were arms length commercial investors who were prepared to undertake a highly risky investment in return for the prospect of higher correlative rewards. He said that he warned them that the investment was a "punt". But except perhaps in the case of treasury bonds, all investments are a "punt" to varying degrees. The issue is always the assessment of risk. I accept that it would have been obvious to Mr Thomas and Mr Sullivan that there were risks involved. They knew, among other things, that the SMP group had not maintained its payments pursuant to its debt and overdraft facilities with HSBC. And Mr Willett did not literally say, at least generally, as Mr Thomas and Mr Sullivan contend, that he personally guaranteed their investments in SMP. Nor did he say that he had a 10% interest in the SMP group or that he had a charge over its assets. 61 What Mr Willett did do was enthuse Mr Thomas and Mr Sullivan in order to advance his own financial interests. He encouraged them with the acclamations about SMP's prospects which I described in paragraphs [43] and [44] above. He made clear that he was now in control. He sought and obtained their trust and confidence. He relied on his superior financial expertise, his long experience of accounting practice, his supposed business management credentials and his past connection with, and knowledge of, Eugene King and SMP. He built on his established relationship with Mr Thomas and Mr Sullivan – since 1998 in the case of the former and over many more years in the case of the latter. He made clear that he was in a position, as the new Chairman of the SMP group, to exercise control over its future direction. 62 The impression that Mr Willett made on Mr Thomas and Mr Sullivan was that, in a sense, he now represented and stood behind the SMP group. This was, of course, more metaphorical than real. In late July 2000, Mr Willett had not put, or promised to put, any of his own monies or assets on the line. But these circumstances and impressions explain why Mr Thomas and Mr Sullivan believed that Mr Willett was "guaranteeing" their investment. They were following him, accepting his recommendations and taking him on trust. Mr Willett knew this. He knew also that they had monies to invest and that he did not – or at least not much. He knew they were open to suggestions from him. His interest was in advancing his financial position and he was prepared to do so at their expense. 63 In July 2000, it was in Mr Willett's financial interests for Mr Thomas and Mr Sullivan to provide almost $2 million to the SMP group. Mr Willett believed that SMP's difficulties were short term and that control of cash flow and sound management would alleviate its problems. He thought, as I have mentioned, that the turnover was "huge". By 24 July, he had procured an agreement in principle for SSDI to acquire 50% of the SMP group. Unknown however to Mr Thomas and Mr Sullivan, Mr Willett owned 50% of SSDI. In April 2002, when Mr Thomas confronted Mr Willett and asked him why he had issued to himself two shares in SSDI, Mr Willett responded by saying: "Deb and I have done all the work and we have put in $1.6 million between us, which entitles us to half the company". I do not think that Mr & Mrs Willett put $1.6 million into SSDI, or anything like it. The evidence was conjectural and unsatisfactory. 64 However, it is not necessary to resolve the issue. What matters is that the position in July 2000, when Mr Willett requested $1.5 million for SMP from Mr Thomas, was that Mr Willett had not paid any monies for the two shares in SSDI held by him; nor had he paid any substantial monies towards the purchase by SSDI of the Bando Road and Marlo Road properties; nor had he paid, or promised to pay, any monies towards the rescue of the SMP group; nor had he informed Mr Thomas and Mr Sullivan that he held 50% of the issued capital in SSDI. In July 2000, Mr Willett had no personal financial exposure to SMP. From his perspective, if monies from Mr Thomas and Mr Sullivan could produce the turnaround in SMP that he hoped and expected, he would have procured for himself an advantageous financial position – by virtue of his 50% ownership of SSDI and SSDI's agreement to acquire 50% of SMP. 65 In bringing about this potentially advantageous situation, Mr Willett did not deal fully, fairly or frankly with Mr Thomas and Mr Sullivan. He took advantage of them and abused their trust and confidence. His conduct was duplicitous. They should never have been in the position in which they found themselves. They did not know, because Mr Willett concealed from them, the fact of his ownership of two shares in SSDI. They advanced monies, for the benefit of the SMP group, on a false premise – in circumstances where Mr Willett knew they depended on him and relied on his good faith and honesty. 66 Mr Thomas and Mr Sullivan were clearly enthusiastic about SMP's prospects, perhaps naively so. But if they had known in July 2000 that Mr Willett had procured for himself two shares in SSDI and, was engineering a situation of potential financial advantage for himself, at their expense, in relation to SSDI and SMP, they would not have outlaid the sums totalling almost $2 million that they paid between 28 July and 12 October 2000 or the other sums which I have described in paragraph [59]. Their trust and confidence in Mr Willett would have evaporated, just as it did when they learned the true facts in January 2002. Fiduciary Obligations - Principle 67 The first duty of a fiduciary is one of loyalty: Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; Bristol & West Building Society v Mothew [1998] Ch. 1 at 18 (Millett LJ). Mr Willett voluntarily assumed the function of advising and assisting Mr Thomas and Mr Sullivan in relation to the advancement of their financial interests, through a company which he established and in which he became a shareholder. He encouraged them to participate with him in a corporate vehicle in which each of them would have an interest. He knew that they trusted him and depended on his superior knowledge, expertise and experience. In those circumstances, Mr Willett occupied a position of confidence towards them. He became a fiduciary subject to the requirements of full disclosure and fair and open dealing: McKenzie v McDonald [ 1927] VLR 134 (Dixon AJ). 68 This is not one of the traditional categories of relationship where the law recognises that fiduciary obligations are a necessary incident – solicitors and trustees being obvious examples. The relationship between a professional advisor and his client may sometimes give rise to fiduciary obligations, depending on the circumstances: Pavan v Ratnam (1996) 23 ACSR 214 (CA); see also Edelman, When Do Fiduciary Duties Arise? (2010) 126 LQR 302. But Mr Willett was more than just a professional advisor. He was both an advisor and a participant. In the circumstances of this case, he had concomitant duties of loyalty and good faith. 69 Like the relationship between the widowed plaintiff and the estate agent and property salesman in McKenzie v McDonald (supra), the fiduciary relationship in this case arises because of the proved existence of the circumstances of trust and confidence, control and power, and recognisable vulnerability. At the core of these circumstances was Mr Willett's voluntary undertaking to advise and assist Mr Thomas and Mr Sullivan, to act on their behalf, and to participate jointly with them. Having induced them to give him their confidence, not to mention their money, he was not free to conduct himself according to the morals of the marketplace. Fair and open dealing were required. 70 Subject to their particular rights and obligations, partners and joint venturers sometimes exemplify fiduciaries who owe to each other a duty "of the finest loyalty". Even on Mr Willett's own case, he was a co-venturer with Mr Thomas and Mr Sullivan. Later his counsel described them as mere co-investors. The following classical statement by Cardozo J in Meinhard v Salmon (1928) 249 NY 458 at 463-4, is high–flown by today's standards, but its essential tenets are applicable to the facts of this case: Joint adventurers, like co-partners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behaviour. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion" of particular exceptions ( Wendt v Fischer, 243 N.Y. 439, 444). Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court. See also United Dominions Corporation Ltd v Brian (1985) 157 CLR 1 at 14-15 (Dawson J); Warman International Ltd v Dwyer (1995) 182 CLR 544 at 557-558 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); cf John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19 at [42]-[44]. 71 For the reasons that I have explained, Mr Willett breached his fiduciary obligations towards Mr Thomas and Mr Sullivan. He concealed a material fact, abused their trust and behaved dishonestly. He sought to take advantage of them for his own benefit. Causation 72 The obligation of a defaulting fiduciary is to make good the loss occasioned by his breach of duty. One means by which this may be achieved is by an award of equitable compensation. This was the basis of the decision in Nocton v Lord Ashburton [1914] AC 932; [1914-5] All ER Rep 45. The remedy was awarded by Dixon AJ in McKenzie v McDonald (supra) and its availability has been affirmed and re-stated by the High Court of Australia: Warman International v Dwyer (1995) 182 CLR 544 at 559; Breen v Williams (1996) 186 CLR 71 at 113 and 135-136; see also W M C Gummow, "Compensation for Breach of Fiduciary Duty" in T G Youdan (ed), Equity, Fiduciaries and Trusts, Law Book Co, Toronto, 1989. 73 The obligation to make good the loss is not however open-ended despite the remarks of Street J (as he then was) in Re Dawson (dec'd) [1966] 2 NSWR 211 at 214-215, (1966) 84 WN (Pt 1) (NSW) 399 who said that considerations of causation, foreseeability and remoteness do not readily enter into the matter. He also said that the enquiry is whether the loss would have happened if there had been no breach of fiduciary duty, not whether the loss was caused or flowed from the breach. Thus, it remains necessary to consider what would have happened if the fiduciary duty had been performed: Beach Petroleum v Abbott Tout (1999) 48 NSWLR 1 at 93 (CA); O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 274 (CA). If the plaintiffs would have acted in the same way even if full disclosure had been made, they are not entitled to recover compensation. As was neatly explained in Swindle v Harrison (1997) 4 All ER 705 at 733: "There is no equitable by-pass of the need to establish causation." 74 Where a defendant behaves dishonestly by taking positive steps to conceal his interest, it is a short step to infer – on the balance of probabilities – that the plaintiff would have acted differently if disclosure had been made. Proof of sufficient causation in such a case is unlikely to be difficult. This is one of those cases. So was Brickenden v London Loan & Savings Co [1934] 3 DLR 465 (PC). In that case, Mr Brickenden had taken positive steps to conceal his interest: Biggs v London Loan & Savings Co [1933] 3 DLR 161 at 167. Those particular circumstances provided the context in which Lord Thankerton made his controversial statement: Once the court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken, is not relevant. 75 Taken literally, that statement does not represent the law of New South Wales. But the essence of Lord Thankerton's dictum is an understandable reluctance to entertain submissions based on hypothesis and speculation when the fiduciary has taken positive steps to conceal his interest. In such a case, the inference of the relevant causal connection is obvious. As it is in this case. It is worth noting that in Canada, the dictum has been reinterpreted to the effect that the fiduciary bears the burden of proving that the claimant would have acted in the same way if there had been proper disclosure. And speculation on that question is not sufficient: Conaglen, Remedial Ramifications of Conflicts Between a Fiduciary's Duties (2010) 126 LQR 72 at 82. 76 In this case, there is no causation problem. I have already found in paragraph [66] above, that if the disloyalty constituted by Mr Willett's material non-disclosure had been revealed in July 2000, the trust which Mr Thomas and Mr Sullivan placed in Mr Willett would have evaporated; the breakdown in the relationship would have been accelerated; and their payment of monies for the benefit of SMP would not have occurred. I am therefore satisfied that the losses suffered by Mr Thomas and Mr Sullivan were occasioned by Mr Willett's breach of fiduciary duty. Those losses are the amounts specified in paragraphs [48], [50(o)] and [59 (b)-(f)]. Subject to one other matter, Mr Thomas and Mr Sullivan are entitled to equitable compensation, including interest, for those amounts. Loss & Compensation 77 The remaining matter goes to the calculation of loss. It was submitted on Mr Willett's behalf that the plaintiffs should give credit for the proceeds of sale of the Bando Road properties. It was also submitted that the monies paid by Mr Thomas and Mr Sullivan were not loans to SMP, and if they were loans to SSDI, the plaintiffs have failed to prove that SSDI is unable to repay those loans. 78 As I have already mentioned, Mr Thomas and Mr Sullivan should never have been in the position in which they found themselves. The monies which they outlaid at Mr Willett's request during 2000 and 2001 for the benefit of SMP, were used and dissipated in the business of the SMP group. The legal status of those payments was opaque at the time and remained so. It is clear however that these monies will never be recovered. It is neither appropriate nor necessary to take into account the profits, if any, that SSDI made on the re-sale of the Bando Road properties. The evidence did not reveal the prices at which the properties were sold or the net profit to SSDI, if any. This would require an accounting of all holding costs, charges and expenses during the period of ownership by SSDI. In any event, the SMP losses were suffered by Mr Thomas and Mr Sullivan, not by SSDI. They paid the monies from their own resources or borrowings. Any net profit that may have been earned by SSDI from the Bando Road properties is a separate matter. It is extraneous to my consideration of the position of Mr Thomas and Mr Sullivan. 79 I mentioned earlier that Mr Thomas is now in control of SSDI; that Mr Willett resigned as a director in July 2002; and that he made no claim for any share of the proceeds of sale from the Bando Road properties. Mr Willett is however still a shareholder of SSDI. He is recorded as being the holder of two of its four issued shares. While Mr Willett was a director of SSDI, and in effective practical day to day control of it, he did not maintain its books and records, including its books of account, in accordance with his obligations under the Corporations Law. He treated the company as if it were his own and intermingled his personal monies with those of the company. He persuaded Mr Thomas and Mr Sullivan to part with their own monies for investment in SMP but did not explain, or record, the nature of the transactions or the basis of the payments. He did not know himself. He was operating hand to mouth, requesting Mr Thomas or Mr Sullivan to make payments direct to SMP's creditors or drawing cheques on SSDI's bank accounts and requesting Mr Thomas or Mr Sullivan to replenish the amounts by which those accounts were overdrawn. 80 SSDI was not a regular company, properly managed. Its records were not properly maintained. That was entirely Mr Willett's fault. Shortly after it was established, it became a cloak for Mr Willett's subterfuge, as a vehicle for advancing his own financial interests. There is no reasonable or equitable basis for requiring, as a condition of equitable compensation, that Mr Thomas and Mr Sullivan engage in the speculative exercise of seeking to recover from SSDI monies that may or may not be standing to their credit in loan accounts with SSDI. Further, and in any event, there was no adequate evidence of the maintenance or the amount of any loan accounts held by Mr Thomas or Mr Sullivan with SSDI. No person on behalf of SSDI was in a position to give reliable evidence of its current financial position or the reality of any loan accounts supposedly existing for the benefit of Mr Thomas and Mr Sullivan. 81 A set of unsigned financial statements was prepared by Mr Willett for SSDI for the period ended 31 December 2001. This was done under pressure from, and at the insistence of, Mr Frykberg or his accountant. I can have no confidence in those pieces of paper prepared by Mr Willett. I would not be prepared to act on the basis of the information recorded in them. No attempt was made during the hearing to verify, sustain or uphold them. Nor is it appropriate to act on the basis of the investigative report of Knights Insolvency dated 7 February 2002. Knights' instructions were to investigate the financial affairs of the SMP group. It was not instructed to investigate SSDI. Further, the investigations were not undertaken as an audit and they were not exhaustive. Credibility Issues 82 As I indicated at the commencement of this judgment, the assessment of the credibility of Mr Willett, Mr Thomas and Mr Sullivan was a part of the process by which I arrived at my findings of fact. To the extent that I have not already done so, I record my credibility findings in what follows. I will deal first with Mr Willett. There were many reasons for not accepting important parts of his evidence and many aspects of it which I considered to be unsatisfactory. I have already mentioned Mr Willett's inconsistent evidence as to how he came to have the two shares in SSDI. This was central in his account of the overall events. I have also rejected a substantial amount of the evidence of Mr Thomas and Mr Sullivan, particularly their accounts of the many representations which they attribute to Mr Willett and to a lesser extent, Mrs Willett. I have summarised below my position in relation to the evidence of these witnesses. Mr Willett 83 The following matters, in addition to those already mentioned, have caused me to doubt the reliability, sometimes the honesty, of Mr Willett's evidence – unless it was consistent with the probabilities and the contemporaneous documents, or was corroborated by other evidence which I accept: (a) Mr Willett denied that he made any request or recommendation to Mr Thomas in relation to the payments that Mr Thomas made to or for SMP in 2000. Mr Willett said "I didn't ever talk to him about money". This was implausible and inconsistent with emails sent by his secretary. I regard it as false; (b) Mr Willett denied ever giving financial advice to Mr Sullivan. I do not accept this. This was evasive; (c) Mr Willett was also evasive about the transfer to him of the fourth share in SSDI. He agreed that it was done in his office. But he said that he was not sure who did it. This was disingenuous. It could only have happened under his supervision and control and with his knowledge; (d) Mr Willett said that he did not create any financial statements for SSDI in 1999, 2000 and 2001 because Mr Sullivan used to carry the books and records around in his satchel and "I did not know what transactions expired (sic) in SMP". This was implausible and risible; (e) When confronted in cross examination with a written guarantee from him dated 14 March 1996, in respect of the loan of $50,000 by Mr Sullivan to North Shore Furniture Rental Pty Ltd, Mr Willett denied that it was a guarantee that he had provided personally. He said he was just a nominee. This contention was unsupportable and the evidence was implausible; (f) Mr Willett sought to distance himself from the letter dated 28 August 2000 to Robert Markovitch, suggesting he did not know about it, did not approve it and was not aware of it. I reject that evidence. The letter was in fact sent twice by facsimile from Mr Willett's office, with a minor alteration to the second version. Mr Sullivan was in the United States at the time. Mr Willett clearly composed it but may not have signed it; (g) Mr Willett denied exercising control over the accounts of SMP or giving directions to the accounting staff. I reject that evidence. He took over control from Eugene King for the express purpose of improving cash flow management and debtor control. 84 Time and language do not permit exact expression of every single unsatisfactory feature of Mr Willett's evidence that has played a part in the impression that I have formed, and the conclusions that I have reached. My overall impression however, over many days, was that whenever Mr Willett perceived that a fair and direct answer to a question might not be in his interest, he resorted to denial, non-recollection or evasion. Frequently, when the substance and purport of a question were obvious, but the language was arguably ambiguous, he would adopt a literal approach, so that his answer was unhelpful. For the reasons that I have explained in relation to the underlying facts, Mr Willett had reason to be defensive. Mr Thomas 85 Mr Thomas overstated and exaggerated his case. On occasions it tended towards hyperbole. I have explained later, when dealing with the claims of misrepresentation and misleading conduct, why I have rejected much of his account of what Mr & Mrs Willett said to him. He was however wronged and I have a natural sympathy for him. He gave evidence from a wheelchair and became easily tired and confused. His cross-examination was lengthy and the evidence which it elicited became less useful the longer it proceeded. Mr Sullivan 86 Mr Sullivan's evidence had many unsatisfactory features. He was consumed by his case and allowed himself to become an advocate. Except in relation to a number of central matters that were clearly established by the evidence as a whole, his uncorroborated assertions of what Mr & Mrs Willett said to him were unreliable. I have elaborated on this in the following section of the judgment dealing with misrepresentation and misleading conduct. In Mr Sullivan's case, I have also taken into account his long relationship with Mr Willett, his almost daily association with him, his available time to devote to the SMP business, and his undoubted enthusiasm for the SMP cause. Nor have I overlooked his simplicity and naivety. In my estimation, at least in relation to the negotiations with HSBC which he and Mr Willett undertook, he slipped easily into dishonesty. But so did Mr Willett. Both of them played a part in the false letter dated 27 July 2000, signed by Phil Blake, and clearly designed to mislead HSBC. Mr Sullivan was much more closely involved in SMP's day to day affairs than Mr Thomas. But ultimately he, also, was deceived by Mr Willett, who used him to advantage himself. Mrs Liddlelow 87 Mrs Liddlelow's evidence was, in my view, truthful. She may have had a falling out with Mr Willett, ceased to work for him and felt animosity towards him. And she did assist Mr Thomas and Mr Sullivan in the preparation of their case and the collation and recovery of documents, for which she was paid at an hourly rate. But her account was measured and plausible. She did not have to give evidence and only did so in order to ensure that the truth, as far as she was aware of it, was put before the court. She responded with dignity, confident in the rightness of her evidence, to the inevitable criticism of her in cross-examination. I was grateful for her evidence. However, it was not, by itself, determinative. 88 My assessment of the reliability and credibility of Mr Thomas and Mr Sullivan was particularly germane to the allegations which they made of misrepresentation and misleading conduct by Mr & Mrs Willett. Misrepresentation & Misleading Conduct 89 In addition to their fiduciary duty case, Mr Thomas and Mr Sullivan allege many false, negligent or misleading representations against both Mr Willett and Mrs Willett. As against Mrs Willett, it is said that she not only engaged in trade and commerce in her own right - and made misrepresentations in that capacity - but that she was also knowingly concerned in her husband's misleading or deceptive conduct. 90 This was the area of the case where the evidence of Mr Thomas and Mr Sullivan was least reliable. It is the area where the well known warning by McLelland CJ in Eq is most apposite: "Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions of self interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience. Each element of the cause of action must be proved to be reasonable satisfaction of the court, which means that the court 'must feel an actual persuasion of its occurrence or existence.' Such satisfaction is 'not … attained or established independently of the nature and consequence of the fact or facts to be proved' including the 'seriousness of an allegation made, the inherent likelihood of an occurrence of a given description, or the gravity of the consequences flowing from the particular finding' … Considerations of the above kinds can pose serious difficulties of proof for a party relying upon spoken words as the foundation of a cause of action based on s 52 of the Trade Practices Act 1974 (Cth) …, in the absence of some reliable contemporaneous record or other satisfactory corroboration". See Watson v Foxman (1995) 49 NSWLR 315 at 319; see also Aneve Pty Limited & Ors v Bank of Western Australia Limited [2005] NSWCA 441 per Hodgson JA at [49]; McMurtrie v Commonwealth of Australia [2006] NSWCA 148 per Hodgson JA at [5]; For the Good Times Pty Ltd v Coltern Pty Ltd [2007] NSWSC 807 per Young CJ in Eq at [184]. 91 The misrepresentation evidence of Mr Thomas and Mr Sullivan substantially consisted of assertions about oral statements made by Mr and Mrs Willett approximately a decade ago. In almost every case, the statements attributed to Mr and Mrs Willett were uncorroborated. Often, their formulation in the evidence appeared artificial and inherently unlikely. Frequently, they bore the hallmark of drafting by interested lawyers. Invariably, the plausibility of the evidence was weakened by the entrenched sense of grievance which Mr Thomas and Mr Sullivan felt. Inevitably, the evidence had been subjected to a continual process of reconstruction, re-affirmation and mutual reinforcement during many years of preparation for hearing. I have no doubt that Mr Thomas and Mr Sullivan have, in the main, convinced themselves of the correctness of their account of what Mr & Mrs Willett said. They did not knowingly give untruthful evidence. But the weaknesses that I have explained lead me to conclude that, in the absence of corroboration or compelling likelihood, I am not able to find that Mr and Mrs Willett made the particular misrepresentations that are pleaded against them. The analysis in Watson v Foxman (supra), its explanation of ordinary human experience, and my own assessment of Mr Thomas and Mr Sullivan, fortify me in this conclusion. Mr Willett 92 On the other hand, there is no doubt that Mr Willett made many encouraging statements about SMP. For that matter, so did Eugene King who may well have been just as culpable. Mr Willett believed that SMP's problems could be rectified and that it had a reasonable prospect of turning the corner with sound financial management and cash flow control. He was genuinely impressed and excited by the cash flow. He conveyed to Mr Thomas and Mr Sullivan that SMP represented a good opportunity, that the brand was exciting and that the cash flow was very encouraging. Mr Sullivan was easily enthused. And he conveyed that enthusiasm to Mr Thomas. However, I do not think that Mr Willett told them that the investment was risk-free, that they would receive interest at 10% and that he would personally guarantee the monies which they outlaid. Nor do I think that Mr Willett said that he had an existing 10% interest in SMP or that he held a charge over its assets. 93 Mr Willett certainly conveyed the impression to Mr Thomas and Mr Sullivan that he was prepared to invest in SMP and that his existing knowledge and understanding of SMP and Eugene King put him in an advantageous position in making his assessment of its prospects. These statements were not false or misleading. Nor were the various acclamations and enthusiasms that I set out in paragraph [43]. They may not have carried much weight with a prudent investor but they were essentially a true statement of his beliefs at the time they were made. 94 When so understood, I am not prepared to find that the pleaded misrepresentations alleged against Mr Willett have been established. What was said by Mr & Mrs Willett was heavily interwoven with puffery, eagerness and undue optimism. But this would have been transparent to Mr Thomas and Mr Sullivan. They knew that Mr Willett was not warranting the unqualified success of the SMP group. They knew that the three of them were in it together and had the same ambitions for SMP's success. They also knew there were risks involved. Having regard to my assessment of the reliability of the evidence of Mr Thomas and Mr Sullivan, insofar as it attributes misrepresentations to both Mr and Mrs Willett, and taking into account the probabilities and the contemporaneous documents, I do not feel an actual persuasion about the pleaded misrepresentation case. 95 There was, of course, other conduct by Mr Willett that was misleading or deceptive. At all times, until the true position became known to Mr Thomas and Mr Sullivan in January 2002, Mr Willett led them to believe that the three of them were co-venturers, on an equal footing, with equal shares in SSDI. This was, from the perspective of Mr Thomas and Mr Sullivan, the foundation of their relationship. Although Mr Thomas and Mr Sullivan may not have fully understood the implications of share ownership in a corporate structure, they believed they were on an equal footing with Mr Willett. It never occurred to them that the corporate vehicle which Mr Willett established, initially with the benefit of Mr Thomas' monies, was owned as to 50% by him. Mr Willett's conduct in this fundamental respect was misleading and deceptive. Mrs Willett 96 That leads me to the position of Mrs Willett. I do not think that there is any proper basis on which I can find that she has contravened the Fair Trading Act, either as an accessory, or by engaging in her own right in misleading conduct in trade or commerce. The accessory case against her must fail because I am not satisfied that any false or misleading misrepresentation concerning SMP has been established against Mr Willett. And there is no claim that she was knowingly concerned in his misleading conduct in connection with the concealment of his full shareholding in SSDI. 97 The separate claim against her based on her own alleged misleading conduct fails at several levels. I do not think that Mrs Willett's roles and activities, in the course of which she is said to have engaged in misleading conduct, constituted trade or commerce. Nor do I think, in any event, that any misleading or deceptive conduct has been established. Mrs Willett was interested, excited and enthusiastic about the potential for the SMP group. Her enthusiasm reflected what one might expect from a spouse in her circumstances. The SMP adventure represented an opportunity for her and Mr Willett to increase their wealth and to become involved, as controllers and part owners, in what they perceived to be a glamorous business. She was a denizen of Cronulla, a skier and a Qantas employee. She had a natural affinity with fashion, surf and ski wear. The prospect of further travel attracted her. I have no doubt that she believed that the SMP brand would become as big as Billabong. But she was not an employee of the SMP business. She was not a shareholder. She was not her husband's business partner. She had her own job and young sons to bring up. It would have been obvious to Mr Thomas and Mr Sullivan that she had no knowledge or information about SMP beyond that which she gleaned from Mr Willett. 98 In this context, the attention given in the evidence to the detailed terms of a conversation which is said to have taken place between Mrs Willett and Mr Sullivan, while travelling from Scots College, Bellevue Hill to Cronulla, with her son in the back of the car, was surprising. The occasion and the context could not reasonably support the case against her for misleading conduct made in trade or commerce. In any event, for reasons which I have already explained concerning the inherent weaknesses in the uncorroborated evidence of the statements attributed to Mr & Mrs Willett, I am not persuaded that the conversation occurred in the terms alleged. 99 It is not necessary to deal separately with the other statements attributed to Mrs Willett. They were few. I will however mention one other which illustrates my lack of persuasion. Mr Thomas asserted that during a telephone conversation with Mr Willett in July 2000, Mrs Willett was hovering in the background at Mr Willett's end of the telephone. Mr Thomas says that he heard her call out certain things such as: "Greg, tell him we have got our money in there. Tell him we are in there – looking after him." Mrs Willett, of course, denies that she was present or that she said those words. I am not persuaded that the statement was made. But even if it was, the prosaic context hardly supports a finding of misleading conduct in trade or commerce – at least conduct, that any reasonable person could have been expected to rely on. The Claim Against David King 100 In addition to the claims by Mr Thomas and Mr Sullivan, SSDI is said to have a claim against David King, although it must be said that the pleading is opaque. SSDI is now controlled by Mr Thomas. Mr Willett resigned as a director in July 2002. David King is and was a newsagent. But he is also the trustee of the King Family Trust. In that capacity, he was the sole shareholder of SMP International. The beneficiaries of the trust included his son, Eugene King. David King said that he did not know much about the trust and I accept his evidence. The claim against him has insurmountable difficulties and must fail. It involves claims for damages consequent upon the non-performance of the two agreements that I have mentioned relating to the SMP entities, the first dated 4 September 2000 and the second dated 12 February 2002. 4 September 2000 Agreement 101 Although the pleading recites the 4 September 2000 share agreement, it does not plead any breach of it by David King. David King was not a party to it. The agreement was signed by Eugene King. However Eugene King, as I have mentioned, was a beneficiary of the King Family Trust and David King was the trustee and held the issued shares in the SMP entities as trustee. Eugene King was the sole director of the SMP entities. As the director, he was the only person who could effect a transfer of the shares in the SMP entities. It may be arguable that, by signing the agreement, Eugene King acted as an agent and bound the trust, thereby exposing his father, David King, to liability for non-performance of the promise to transfer shares contained in the agreement. I need not resolve that issue. The case was not pleaded that way. In any event, there are other more significant difficulties. 102 The substance of the agreement was that 50% of all SMP entities would be transferred to SSDI in return for a share of the profits from the development of the Bando Road properties by SSDI. The handwritten annexure to the letter agreement stated that "This letter does not specify all of the details of the agreement" but a percentage of the profits was later agreed. No transfer of 50% of all SMP entities was ever effected. In February 2002, most of the same parties, together with a Mr Ian Frykberg, entered into a different share agreement. The commercial intention behind the September 2000 agreement was abandoned and replaced by the arrangements set out in the February 2002 agreement. 103 SSDI claims to be entitled to damages for the closed period between September 2000 and February 2002. The damages are said to be represented by the dividend stream which it would have received if the agreement had been performed. There was no admissible or persuasive evidence to support the likelihood, or the amount, of any dividend stream during that period. And the probabilities are against it. SSS recorded substantial operating losses for the years ended 30 June 2000 and 30 June 2001. I am satisfied that there is no reasonable likelihood that dividends would have been paid. The need for strict control of cash flow meant that primary importance was given to reducing indebtedness. To that end, royalties payable by SSS to SMP International were stopped. There is, in my view, no evidence from which I could infer that dividends would have been paid to SSDI between September 2000 and February 2002. February 2002 Agreement 104 The position in relation to the 12 February 2002 agreement is even more straightforward. The commercial situation had become fluid. The agreement represented a salvage operation for whatever remained of SMP. A new investor, Mr Ian Frykberg, had been procured. Mr Thomas and Mr Sullivan had become aware that Mr Willett had owned 50% of SSDI almost from its inception. The agreement assumed that SSDI already owned 50% of the issued shares in the SMP group and related only to the remaining 50%. SSDI was therefore not part of this agreement. The substance of the agreement was that David King, as trustee of the King Family Trust, would transfer 85% of the remaining 50% of the issued shares in the SMP group to Mr Frykberg, Mr Thomas, Mr Sullivan and Mr Willett. 105 The transfer of shares was never effected. But I do not think that there is a proper basis for recovering damages from David King as a result of the non-transfer. Nor is there any admissible or persuasive evidence from which I could infer the value of the lost entitlement, even if David King were otherwise liable. It is quite apparent that many different commercial considerations were in play over the next few months after the agreement was entered into. There was a fundamental change in approach. Discussions took place with the Bart group over a possible sale. Mr Macken, Mr Thomas' solicitor, wrote letters concerning the possible sale. Mr Sullivan was involved. There was a real likelihood that the NAB would foreclose. The parties appeared no longer to wish to support and fund SMP, but to sell it. 106 Thus, the 12 February 2002 agreement appears to have been overtaken by events. From a commercial perspective, it appears to have been ignored. This explains why, although it was open to him to do so, Mr Sullivan did not execute the share transfer documents on behalf of the vendor. The agreement provided that he could do so, as the attorney for David King, if King had not done so within seven days of delivery of the documents to him. There no longer seemed to be any commercial will to carry out and perform the agreement. The claim for damages for breach of the 12 February 2002 agreement is at odds with the commercial realities. It must therefore fail. Conclusion 107 The evidence in this case ranged widely but much of it, on all sides, was difficult to accept and inherently fallible for the reasons that I have explained. The clearest verity to emerge was Mr Willett's duplicitous conduct in taking advantage of Mr Thomas and Mr Sullivan to advance his own financial interests. There should be an award of equitable compensation to make good the losses which they suffered which were occasioned by his breach of fiduciary duty. Costs 108 In my view, this is an appropriate case for a Sanderson order. I therefore propose to order the unsuccessful defendant (Mr Willett) to pay the costs of the successful defendants (Mrs Willett and Mr King) as well as the plaintiffs' costs. A Sanderson order will avoid circuity and is reasonable in the circumstances. It is also fair because the wrongful conduct of Mr Willett was the root cause of the litigation and the joinder of Mrs Willett and David King was a reasonable response by Mr Thomas and Mr Sullivan to the predicament which they faced. An additional factor of which I have taken account is that the evidence indicated the possibility that Mr Willett may not himself own substantial assets and that it was his general practice to ensure that his wife was the owner of real estate which they both enjoyed. In those circumstances, and having regard to Mr Willett's primary responsibility for the losses suffered by Mr Thomas and Mr Sullivan, it would be an unfair result if Mr Thomas and Mr Sullivan were required to pay the costs of the third and fifth defendants. However, if the parties wish me to do so, I will hear submissions on costs. Interest 109 In accordance with well established principles applicable to defaulting trustees and fiduciaries, where the breach of duty was deliberate and wilful, interest should be compounded: Hungerfords v Walker (1989) 171 CLR 125 at 148. If the parties wish me to do so, I will hear submissions on interest. Orders 110 Subject to those matters, I propose to make orders that the fourth defendant pay equitable compensation to Mr Thomas and Mr Sullivan in the amounts specified in paragraph [76]. Interest at the rates prescribed under the Uniform Civil Procedure Act (NSW), 2005, compounding, should be calculated from the date of each payment. The claims against Mrs Willett and Mr David King should be dismissed. The fourth defendant should pay the costs of the plaintiffs and of the third and fifth defendants. The plaintiffs should bring in short minutes of order to reflect these reasons. Attention should be given to the position of the defendants `who did not appear. The exhibits may be returned. 28/09/2010 - Amendment to list of authorities - Paragraph(s) Cover sheet 05/10/2010 - Hearing dates corrected - Paragraph(s) Cover sheet DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.