Supreme Court New South Wales Medium Neutral Citation: H. Polesy & Co Pty Limited -v- Peter Wayne Cherry [2011] NSWSC 1335 Hearing dates: 4 & 6 October 2011 Decision date: 06 October 2011 Jurisdiction: Equity Division - Commercial List Before: Hammerschlag J Decision: Declarations that the second defendant knowingly participated in breach of duty by the first defendant, orders for an inquiry and an account of profits Catchwords: EQUITY - Breach of fiduciary duty - where first defendant found to have breached duties to the plaintiff by channelling away to an enterprises owned by the first and second defendants business opportunities of the plaintiff - where second defendant did not dispute breaches found against the first defendant but disputed that he had knowingly assisted - found that the second defendant had knowingly assisted the first defendant - EVIDENCE - where affidavit sworn by second defendant was not read and plaintiff sought to tender parts of it as admissions - course adopted Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: Farah Constructions v Say-Dee (2007) 81 ALJR 1107 H. Polesy & Co Pty Limited v Peter Wayne Cherry [2011] NSWSC 1334 Wimpole v McIlwraith [1923] VLR 553 Societe Generale pour Favoriser le Development du Commerce et de l'Industrie en France SA [1993] 1 WLR 509 Hampton Court v Crookes (1957) 97 CLR 367 Briginshaw v Briginshaw (1930) 60 CLR 336 Category: Principal judgment Parties: H. Polesy & Co Pty Limited ABN 99 000 572 458 - Plaintiff Kon Bochrinis - Second Defendant Representation: Counsel: C. Lambert - Plaintiff T. Best - Second Defendant Solicitors: O'Brien Lawyers - Plaintiff SDR Law - Second Defendant File Number(s): 2010/318449 EX TEMPORE Judgment 1HIS HONOUR: The plaintiff company sued the first defendant, who was its National Product Manager from about August 2004 until 9 July 2010, for breach of fiduciary duties and breach of statutory obligations imposed on him by ss 182 and 183 of the Corporations Act 2001 (Cth) ("the Corporations Act").. 2It sued the second defendant on the basis that he knowingly participated in the breaches, that is, that he assisted the first defendant with knowledge of the first defendant's dishonest and fraudulent design: See Farah Constructions v Say-Dee (2007) 81 ALJR 1107 at 1145 and following. 3On 14 March 2011 I gave judgment against the first defendant and made the following orders see H. Polesy & Co Pty Limited v Peter Wayne Cherry [2011] NSWSC 1334: 1. Judgment for the plaintiff against the first defendant in the amount of $6,560.10 plus $241.38 representing interest at the court rate from 7 October 2011 to today. 2. The first defendant is ordered to deliver up to the plaintiff any of the following information which remains in his possession whether in hard or electronic form. The plaintiff's: (a) purchase orders containing its customer specifications and pricing, (b) customer purchase orders containing customers' specifications and prices, (c) customer transaction histories derived from its inventory management and accounting software (d) quotations to its customers, (e) customer lists, (f) customer credit applications and approvals, (g) customer credit reference check records, (h) supplier product specifications issued by suppliers to the plaintiff, (i) supplier transaction histories, (j) supplier lists, (k) financial statements of earnings, performance and budget reports and key performance indicators for its Victorian operation, and (n) minutes of management review meetings. 3. The first defendant is restrained from using any of the information of the plaintiff described in order 2 above. 4. The Court declares that the first defendant has breached his contractual, equitable and statutory duties to the plaintiff by improperly using his position and information obtained by him because he was an employee to gain an advantage for himself or someone else or to cause detriment to the plaintiff. 5. The Court declares that any benefits obtained by the first defendant in breach of his duties are held by him on constructive trust for and to the benefit of the plaintiff. 6. The Court orders that an inquiry be held and that an account be taken of all monies received by the first defendant or any other person on his behalf in breach of his duties aforesaid and that the first defendant pay to the plaintiff the amount which shall be found to be due to it upon the taking of such account, together with interest thereon. 7. The first defendant is to pay the plaintiff's costs of the proceedings against him on an indemnity basis from 27 August 2010, excluding the costs of the appearances on 4 March 2011 and 9 March 2011 and excluding the costs of preparation of the affidavit of Mr O'Brien sworn 8 March 2011. 4Relevantly I made the following findings against him: 9. Material in evidence establishes that Compete Textiles had been supplied by one of the plaintiff's suppliers, International Textile Distributors, with products of the type it usually sold by the plaintiff. The evidence also establishes that Compete Textiles sold products usually sold by the plaintiff, to other customers of the plaintiff namely, Elite Supplies, Crown Merchandising, Everton Grange, Careco Australia, Polar Linen, Custom Curtains and Mainlinen. There is material which shows that Compete Textiles received commission in respect of this business. 13. The first defendant occupied a senior executive position with the plaintiff. He owed it duties of fidelity and good faith. 14. Section 182(1) of the Corporations Act 2001 (Cth) ("the Act") provides relevantly that an employee of a corporation must not improperly use his position to gain an advantage for himself or someone else or to cause detriment to the corporation. Section 183 provides relevantly that a person who obtains information because he is or has been an employee of a corporation must not improperly use the information to gain an advantage for himself or someone else or to cause detriment to the corporation. 15. The first defendant has breached both his obligations of fidelity and good faith as an employee and also his statutory obligations, by using both his position and information which he obtained in the course of his employment to channel business on both sides (that is, both with the plaintiff's suppliers and its customers) away from the plaintiff to Compete Textiles. 5I also made a finding that he came into possession of confidential information including customer lists, customer details and other material which he used to benefit himself or cause detriment to the plaintiff. I ordered that he be restrained from using that information further. 6The proceedings continued against the second defendant. 7The Statement of Claim is a lengthy and infelicitously drawn document. In it the plaintiff alleged as against the second defendant knowing assistance in the first defendants breaches of the Corporations Act ("the statutory counts") and in the first defendant's use of the plaintiff's confidential information. Injunctions against the second defendant were sought. 8However, at the hearing the plaintiff abandoned the statutory counts, the claim in respect of confidential information and the claim for injunctive relief. It limited its assertion to one of the second defendant having assisted the first defendant in the latter's breach of fiduciary duties. 9For his part, the second defendant did not challenge any of the findings of breach of fiduciary duty made against the first defendant. He did not put that the breaches found against the first defendant were not dishonest. They undoubtedly, were given that the first defendant intentionally channelled away the plaintiff's business opportunities by using his position and knowledge as a senior employee of the plaintiff. 10The second defendant put in issue only that he had the requisite level of knowledge to be held liable. 11Before proceeding to deal with that issue it is appropriate to note that material before the Court indicates that the joint enterprise in which the first and second defendants were engaged and which came to an end in July 2010 transacted sales of no more than $75,000. From the bar table I was informed that the profit margin of the type of business concerned would be about 30 per cent. Leaving aside any questions of whether those profits were properly those of the plaintiff and any just allowances, the profits earned would be about $22,000. An account of profits has already been ordered against the first defendant. His financial status is unknown to the Court. 12Repeated urgings by the bench that the parties should make every endeavour to reach a commercial resolution were to no avail and the proceedings occupied two full days of hearing. They commenced on Tuesday 4 October 2011 and had to be adjourned before the end of the day because the plaintiff wished to call a witness who it had subpoenaed to be present on 6 October 2011. That witness did not appear on 6 October 2011. The plaintiff informed the Court that it did not wish for the witness to be brought before the Court or that any other steps be taken in relation to his failure to appear. The evidence was accordingly excluded. 13An affidavit sworn by the second defendant on 6 May 2011 had been served on the plaintiff, but at the hearing, was not read. In the circumstances, the plaintiff sought to tender as against the second defendant, as admissions, designated paragraphs of it. The paragraphs are identified in a document entitled Tender of Evidence. 14The first defendant had also sworn an affidavit of the same date. It too was not read. The plaintiff initially sought to tender it but withdrew the tender. 15I was referred to Wimpole v McIlwraith [1923] VLR 553 in which a party sought to tender particular paragraphs of an affidavit. Mann J considered two alternatives. The first was to admit the paragraphs tendered subject to, and along with, any other qualifying paragraphs, to which the defendant's counsel would be at liberty to refer without being taken to be tendering evidence. The second was that the whole document went in but with the reservations that the plaintiff would only be bound by the admissions to which he calls attention subject to any qualifications contained in any other part of the document, and the defendant would not be treated as calling evidence by calling attention to any such qualifications. Additionally, the defendant would not be able to rely on statements in the affidavit as constituting sufficient evidence of facts, the onus of proof of which was on him. 16The plaintiff and the second defendant agreed that the whole affidavit should be admitted on the footing that the second defendant would not thereby be treated as calling evidence or by calling any attention to any qualifications to any matter upon which the plaintiff relied as an admission. 17The plaintiff must establish that the second defendant assisted the first defendant with knowledge in a dishonest and fraudulent design. The knowledge must be within one of the four categories identified in Baden v Societe Generale pour Favoriser le Development du Commerce et de l'Industrie en France SA [1993] 1 WLR 509 (recently referred to and affirmed by the High Court in Farah Constructions v Say-Dee at 174 and following), namely, actual knowledge, wilfully shutting one's eyes to the obvious, wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make, or knowledge of circumstances which would indicate the facts to an honest and reasonable man. 18The evidence (including the absence of evidence) is to be assessed in accordance with the power of a particular party to produce it; Hampton Court v Crookes (1957) 97 CLR 367 at 371 . I am also mindful that the Court must feel an actual persuasion of the occurrence or existence of a fact having regard to the seriousness of the allegation made, the inherently unlikelihood of an occurrence of a given description and the gravity of the consequences flowing from a particular finding: Briginshaw v Briginshaw (1930) 60 CLR 336 at 361-362. 19For the reasons which follow I am satisfied that the plaintiff has established knowledge to the requisite degree on behalf of the second defendant with respect to the transactions which the joint enterprise of the first defendant and the second defendant concluded with customers of the plaintiff up to and including (but not beyond) 9 July 2010. 20By the time the breaches occurred the first defendant and the second defendant had known each other for something like 15 years. The first defendant had channelled business to the second defendant's transport business, Conway Transport, in particular at the time the second defendant was starting that business. 21The two decided to go into the business of Compete Textiles together after the first defendant had told the second defendant that he was not happy with his work situation with the plaintiff. They regard each other as friends. 22The second defendant lent the first defendant money for the purposes of importing a container of towels and hospital supplies. They signed a Deed of Acknowledgment of Debt on 7 October 2009. The instrument provided that the borrower (the first defendant) must pay the sum to be lent once he recoups moneys after sales, clearly a reference to the proposed enterprise. 23The evidence does not clearly establish how much business the plaintiff and the second defendant (through Conway Transport) were doing as at October 2009 but it does establish that during the period March 2007 to September 2009 there were at least 20 deliveries by Conway Transport to the plaintiff and some deliveries on its behalf to the plaintiff's clients, including one delivery on 4 February 2009 of patients gowns and another of face washers where the plaintiff's delivery dockets reflect that the goods were received by "Kon-B" on behalf of Conway Transport, which it may safely be inferred is a reference to the second defendant. 24Another delivery docket dated 17 February 2009 in respect of shade cloth has on it the words "Konway TPT", which is also undoubtedly a reference to the second defendant's business. 25The second defendant registered the name Compete Textiles on 7 October 2009. The name of the enterprise resonates somewhat but I do not draw any inference from that. They were co-proprietors in the enterprise. The registration form describes their relationship as "other partnership". The evidence establishes that the trading address of the enterprise was the second defendant's residential address. 26A bank account with National Australia Bank, Williamtown was opened in the name of Compete Textiles. Compete Textiles imported textiles including cellular blankets, hand towels, cotton calico bags and face washers, and it sold these to the plaintiff's customers. Invoices reflect sales by Compete Textiles of products the same as or similar to those sold by the plaintiff to customers of the plaintiff, delivered by Conway Transport. The address of Compete Textiles on the invoices is the second defendant's residential address. 27Plainly, and it was so accepted on his behalf, the second defendant knew that the plaintiff and Compete Textiles were in the same business. 28It would have been obvious to any person in the position of the second defendant that he and the first defendant, a senior employee of the plaintiff, were going into business in direct competition with the plaintiff. This is so whether or not he was aware of the precise specifications of the products sold by the plaintiff or the identity of its customers. 29The facts of which the second defendant was clearly aware leads to the irresistible inference that he had knowledge of circumstances which would have indicated to him that he was going into an enterprise and assisting the first defendant in that enterprise in competition with the plaintiff. This would indicate to an honest and reasonable man, that he was assisting the first defendant in a breach of his obligations of fidelity and honesty to the plaintiff. 30It would have been obvious to any person in that position that the first defendant owed a duty to the plaintiff not to conduct a business competing with that which he was supervising on behalf of the plaintiff. 31It may be that the first defendant wilfully shut his eyes to the obvious. I tend to think that is also the case. It is certainly the case that he failed to make enquiries as an honest and reasonable man would make 32There is no evidence of any request by the second defendant for, or provision to him of, information by the first defendant of whether or not the products were the same or similar to those being sold by the plaintiff and whether the persons to whom he was delivering, as the evidence shows he did, those products on behalf of Compete Textiles were customers of the plaintiff. Indeed there is no evidence of any enquiry by him at all. 33In all of the circumstances, I am satisfied that orders in the following terms should be made against the second defendant: 1. A declaration that the second defendant knowingly assisted the first defendant in the breach by him of his fiduciary duties to the plaintiff by procuring the sale of products by the joint enterprise known as Compete Textiles to customers of the plaintiff. 2. A declaration that any benefits obtained by the second defendant as a consequence of that conduct are held by him on constructive trust for and to the benefit of the plaintiff. 3. That an inquiry be held and that an account be taken of all monies received by the second defendant or any person on his behalf as a result of such conduct, and that he pay to the plaintiff such amount which shall be found to be due upon the taking of such an account together with interest. ********** 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. Decision last updated: 09 November 2011