Supreme Court New South Wales Medium Neutral Citation: Organic Paradise Pty Ltd v Brett Smith; Just Organics (Aust) Pty Ltd v Peter Melov [2015] NSWSC 1788 Hearing dates: 21, 22, 24, 28 and 29 September 2015 Date of orders: 21 October 2015 Decision date: 21 October 2015 Jurisdiction: Equity Before: Rein J Decision: See [31], [36], [39] and [43] Catchwords: EQUITY - Whether shares were held in trust - Whether directors breached fiduciary duties owed to company - Remedy available to company against director in relation to transfer of business to another entity controlled by director for no consideration - Claim of trespass and conversion of goods Legislation Cited: N/A Cases Cited: Breakout Barrier Release Systems Pty Ltd v Breakout Barrier Release Systems Australasia Pty Ltd [2013] NSWSC 1815 Chan v Zacharia (1984) 154 CLR 178 Warman International Limited v Dwyer (1995) 182 CLR 544 Texts Cited: JD Heydon, MJ Leeming and PG Turner (eds), 'Meagher, Gummow and Lehane's Equity: Doctrines & Remedies' (5th ed 2015, LexisNexis) Category: Principal judgment Parties: 2012/333740 Organic Paradise Pty Limited (First Plaintiff) Brett Smith (First Defendant) Eric Abraham Jury (Second Defendant) Pasquale Coppolaro (Third Defendant) 2013/90782 Just Organics (Aust) Pty Ltd (First Plaintiff) Eric Jury (Second Plaintiff) Pasquale Coppolaro (Third Plaintiff) Peter Melov (First Defendant) Organic Paradise Pty Ltd (Second Defendant) BU Organics Pty Ltd (Third Defendant) Organik Paradise Pty Ltd (Fourth Defendant) Representation: 2012/333740 Counsel: T.J Morahan (Plaintiff) B Smith (in person) (First Defendant) P Coppolaro (in person) (Third Defendant) Solicitors: Lang Noonan Legal (Plaintiff) 2013/90782 P Coppolaro (as a Director) (First Plaintiff) P Coppolaro (in person) (Third Plaintiff) T.J Morahan (First, Second, Third and Fourth Defendants) Solicitors: Lang Noonan Legal (First, Second, Third and Fourth Defendants) File Number(s): 2012/333740; 2013/90782 Publication restriction: nil JUDGMENT 1. There are two sets of proceedings before the Court. The first, which were commenced in the Local Court in 2012 ("the 2012 proceedings") were brought by Organic Paradise Pty Ltd ("Organic Paradise") against Mr Brett Smith ("Smith"), Mr Pasquale Coppolaro ("Coppolaro") and Mr Eric Abraham Jury ("Jury"). Organic Paradise's claim in the 2012 proceedings is that Smith, Jury and Coppolaro unlawfully entered premises at 248 Oxford Street Bondi Junction ("248 Oxford Street"), then occupied by Organic Paradise, and took control of those premises and the equipment and goods which were located there and have converted to their own use that equipment and those goods. Jury and Coppolaro cross claimed in the Local Court and the cross claim is mirrored in the proceedings which they, together with Just Organics (Aust) Pty Ltd ("Just Organics") have brought in the Court against Mr Peter Melov ("Melov"), Organic Paradise, Organik Paradise Pty Ltd ("OPK") and BU Organics Pty Ltd ("BUPL") which are all companies owned and controlled by Melov. I shall refer to these later proceedings as "the 2013 proceedings". I shall refer to the plaintiffs in the 2013 proceedings as "the plaintiffs" in the balance of these reasons. The 2012 proceedings were, by consent, transferred to this Court and both sets of proceedings were heard together. 2. In the week before the hearing the solicitor retained by the plaintiffs and Smith, Ms Pamela Enright ("Enright") (who happens to be Smith's mother) ceased acting in both sets of proceedings. At the hearing, which commenced 21 September 2015, Jury did not appear. Coppolaro and Smith appeared unrepresented and Coppolaro appeared on behalf of Just Organics, he having been appointed to so act by a resolution of the board of Just Organics. Coppolaro and Jury are now the sole directors of Just Organics. Smith appeared for himself in the 2012 proceedings but also took a role of supporting Coppolaro and Just Organics in the 2013 proceedings to which he is not a party. 3. Mr T.J Morahan of Counsel appeared for Melov, Organic Paradise, OPK and BUPL. 4. There was agreement that the outcome of the 2012 proceedings will depend or depend largely on the outcome of the 2013 proceedings. No point of distinction was made between the three corporate defendants controlled by Melov. 5. There are a number of factual issues in dispute, and there are many more that are opaque. Essentially Coppolaro (and Just Organics) claim that Just Organics was created as a corporate partnership in which Coppolaro, Jury and Melov each had a one third interest represented by 100 shares each out of 300 issued shares in the company. The business run by Just Organics was to be a health food café at 244 Oxford Street Bondi Junction ("244 Oxford Street") and an organic fruit and vegetable store at 248 Oxford Street. Prior to Just Organics operating those stores, Melov and Jury were, it is alleged, partners in the café/health food shop run at 244 Oxford Street, but Coppolaro was interested in joining with Melov and Jury and he had two vans and a cool room structure which could be and were brought into the business. The plaintiffs claim that in late 2010 Melov falsely accused Coppolaro of having stolen money from Just Organics, that Jury initially accepted Melov's assertion as fact, that Coppolaro was removed from the business in late 2010 until 2012 when Jury joined forces with Coppolaro to take control of the Just Organics business (or at least part of it). The plaintiffs claim that Melov and or his companies took control of assets of Just Organics in late 2010 and wrongly converted them to his, or their, use. Just Organics sought an accounting until the second last day of the hearing at which point Just Organics limited itself to a monetary claim against Melov and Organic Paradise for two amounts which I will detail below. 6. Part of the plaintiffs' case involved assertions of misrepresentation to Jury (concerning Coppolaro's alleged conduct and also concerning whether Jury was a shareholder of Organic Paradise). Perhaps because Jury was no longer an active party little, if anything, was said about that aspect of the case, with Mr Morahan indicating (at T29.40- T30.2) that he did not understand it to be pressed. 7. Melov's position is that Coppolaro only held the 100 shares in Just Organics on trust for him and that not only was there an oral agreement to that effect but a trust deed signed by Coppolaro in his presence. Also said to be a witness to the execution of the trust deed was Mr John Moore ("Moore") an accountant in Bondi Junction who from time to time did work for Melov and his companies and who says he prepared the trust deed on the instructions of Melov. The same argument seemed to be advanced by Melov in respect of Jury's shareholding but it was not asserted that Jury had executed a trust deed. 8. Before addressing questions of the credibility of witnesses I propose to set out the uncontested facts: 1. the ASIC records of Just Organics reveal that: 1. Just Organics was created on 21 July 2009 2. Coppolaro was a director from 21 July 2009 to 12 November 2011 and from 12 July 2012 and continues as a director 3. Jury was a director from 21 October 2009 to 9 September 2011, and from 18 October 2012 and continues as a director 4. Melov was a director from 21 October 2009 to 30 September 2011 5. a Mr Douglas Williams ("Williams") was a director from 1 September 2011 to 10 August 2012 6. Williams was a shareholder of 200 shares from 21 October 2009 to 17 October 2011 7. Melov was a shareholder of 100 shares from 28 October 2009 but ceased to hold shares from 12 November 2012 8. Coppolaro held 100 shares from 21 July 2009 to 12 July 2012 from which time he held 150 shares 9. Jury held 100 shares from 21 October 2009 to 12 July 2012 from which time he held 150 shares 10. the only shareholders and directors of Just Organics as at the date of the proceedings are Jury and Coppolaro 1. Williams is a friend of Coppolaro's. He has had no involvement whatsoever in the business as a director, there is nothing to indicate that he paid for any shares ascribed to him 2. the lease of 244 Oxford Street was taken in the name of Melov and Jury for a period of five years from 26 September 2007 with an option to renew for a further five years (see tab 5 Exh F) 3. the lease of 248 Oxford Street was taken in the name of Paradise Properties & Investments Pty Ltd ("PPI"). PPI is a company controlled by Jury. That lease was from 29 December 2008 to 28 December 2013 with an option to renew for five years. PPI still holds that lease 4. Melov sought to renew the lease of 244 Oxford Street in his own name and seems to have achieved that (see Exh D tab 31) but that lease was terminated some time ago and none of the parties in these proceedings now occupies 244 Oxford Street 5. the lease at 248 Oxford Street is continuing with Just Organics operating the fruit and vegetable business there (with plans to open a café in the future I was informed) 6. in the period from 2008 to 2009 Coppolaro worked in the business as a volunteer and "to feel his way". From then till November 2010 he worked in the business but his status is in dispute 7. Jury never worked in the business. He did pay the deposit bond for the lease of 244 Oxford Street ($9,100). He claims he also paid some of the rent and says he made other financial contributions but this is in dispute 8. Melov was prosecuted for the sale of raw milk at the Bondi Markets. He pleaded guilty and in November 2010 was fined a substantial amount and was required to pay Court costs of the prosecution which together totalled $98,000. Melov says that it was concern about the effect of the prosecution as identified to him by Moore prior to the outcome of the prosecution being known that led him to need to have others appear to be involved in his business. That he was prosecuted and fined is not disputed by the plaintiffs but that it was this concern which led to their involvement is disputed. The $98,000 which Melov was able to pay out of the earnings of the business is one of the amounts which Just Organics seeks to recover from Melov 9. Jury is 89 years of age and a recipient of an old age pension. He was in receipt of the pension in 2007 when he first met Melov. He once, he says and it is not disputed, was a very wealthy man having owned four of the largest night clubs in Australia as well as a number of other hotels. He was made bankrupt in the 1980's after he lost a significant Court case 10. Jury is a director of a number of companies. One of them is PPI of which he is a shareholder. Another is Barragold Holdings Pty Ltd ("Barragold") and another is Dovade Pty Ltd ("Dovade") 11. Jury signed, with Melov, an application to rent 244 Oxford Street (see p 109 Exh F) in which he gave as his residential address an address in Malabar. He also stated in a section headed "Statement of Assets and Liabilities": "No Mortgage, Business and Building $4,500,000" 1. Jury's evidence in cross examination is that neither he personally nor PPI, Barragold or Dovade had any property worth $4.5 million or at all 2. in 2012 Jury (with Coppolaro's knowledge and consent) changed the locks at 248 Oxford Street which meant that Melov could not obtain access to those premises 3. in 2012 Melov changed the locks at 244 Oxford Street which meant that Jury could not obtain access to 244 Oxford Street 4. Melov was living upstairs at 244 Oxford Street in 2012 and Jury came to 244 Oxford Street on the morning of Sunday 9 October 2012 with Enright and a Mr Geoff Wilson ("Wilson") a retired policeman, seeking to gain entry. Over Melov's opposition Enright, Jury and Wilson went upstairs to the second floor looked at and took photographs of documents there. Some of the pictures taken are in evidence: see Exh B Credit of Witnesses Coppolaro 1. The principal areas of concern as to Coppolaro's veracity relate to what he says he paid into the business and what he took out for himself. In his affidavit he did not depose to having paid any money in to Just Organics and he agreed at T69.5- 10 that he injected no cash into the business. He agreed that he had, in November 2010, removed $20,000 from the account of Just Organics and transferred that to an account that he controlled and that he had recorded this transfer as repayment of a loan made by him to Just Organics. 2. In an endeavour to explain why he had removed the $20,000 he claimed in cross examination that he had made a loan to Just Organics by having the proceeds of sale of $16,000 of his window cleaning business transferred by the purchaser of the business (a Mr Gallo) to Just Organic's account. The following day he produced documents to support this contention. The documents do support the payment of $6,000 from Gallo but not $16,000 from Gallo. There is a reference in Exh G to $8,800 cash but nothing which links that to the business sold by Coppolaro. The other problem is that earlier in his evidence Coppolaro said that the $16,000 obtained from sale of the business was used to pay for a purchase of coconuts in the first quarter of 2010: see T84.44- 87.44. Coppolaro's evidence on the topic was confused and unconvincing. His earlier failure to mention use of the sale proceeds from the cleaning business (see para 48 of Coppolaro's affidavit of 8 December 2014) also undermines his veracity. 3. A second area of concern is Coppolaro's assertion that he recorded what he took from the business for himself on A4 sheets of paper. He gave no evidence of such a practice in his affidavit and he did not say in his affidavit or in his oral evidence that he gave those (or any) sheets of paper recording what he took out of the till to Melov. 4. There is also evidence, although unsupported by documentation, that Coppolaro borrowed $33,000 from Just Organics with Melov's permission and that he paid it back: see T260.48- T261.13. In the absence of accounting it is not at all clear that what was paid in to Just Organics by Coppolaro was not part of the repayment by him of the $33,000. 5. Although for these reasons I think considerable caution is required in accepting Coppolaro's evidence, he was not, in cross examination, demonstrated to have lied about other matters. 6. Another area of concern is the manner in which Coppolaro has acted or failed to act as a director of a company (a concern that applies to Jury and Melov as well). Jury 1. Jury was not an impressive witness. I accept that at 89 years of age his memory may not be as sharp as it was but I gained the impression that his claims not to be able to recall matters were not genuine. He came across as a man who has all his wits about him and who was well aware of the problem that admitting matters might cause him personally, not only with Centrelink but also Housing NSW which, on the evidence before the Court, has provided both Jury and his wife with separate residences. 2. The following are examples of Jury's lack of credibility: 1. he either gave a deliberately false answer to the real estate agent for 244 Oxford Street that he owned property worth $4.5 million or lied to this Court about that 2. his evidence concerning whether he in fact owned $4.5 million of assets in 2007 was evasive and entirely unconvincing: see T201.36- T208.25. It included him asserting that he did not recognise his handwriting on the application to the real estate agent: see T201- T202, but later at T222.40 admitting that it was his handwriting, and at T205.12 admitting that he did not have assets of $4.5 million but then referring to his companies with the implication that they had money- it then being established between T205- 208 that those companies had only losses 3. he said he could not see why telling the estate agent he had assets of $4.5 million when he did not was misleading: T210.14 and only admitting at T211.10 that what he had said was false 4. he gave to the agent as his address an address in Malabar which address was not his residential address but the location of a company owned by his daughter: T202 5. he was argumentative and gave non responsive answers to questions some of which involved him attacking the credit of Melov and others: T234.30 and T232.19- 34 6. he denied that he could recall having transferred his home to someone and been found to have engaged in a fraudulent transaction to defeat his creditors: T230.10 and his evidence at T230- T231 about what he could remember was entirely unconvincing 7. he said he did not realise the importance of an affidavit: see T217.36- 38 and T217.40- T218.7 8. his evidence concerning what he had looked at in preparing his affidavit and the exhibits thereto, and whether he had read the affidavits before signing it only further undermined confidence in his truthfulness: see T214- 215 and T214- 218 9. he asserted that he had "put a lot of money in" Just Organics: T224.28- 49 but was not able to point to any record recording such investment. The only payments he referred to in his affidavits were a payment for the DA plans (of $320) (Tab 7 p 143 Exh F) and of some rent and "sometimes" cash through PPI for supplies for food (see para 39 of his affidavit p 121 Exh A1). He also said at T228.42 that the deal he did with Melov was to pay $9,600 in return for a half share in the business 10. Jury claimed that he had not signed the letter of 11 January 2011 referred to below. The plaintiffs had obtained a handwriting expert report but the report was withdrawn from the Court Book and not tendered. Whether he did or did not sign the letter he clearly had supported the ouster of Coppolaro at the time (whatever his position 18 months later) Smith 1. Smith, being a defendant in the 2012 proceedings, clearly had an interest in the outcome of the 2013 proceedings because if Melov failed to establish Organics Paradise's entitlement to occupy 248 Oxford Street, Smith could not be liable to Organic Paradise for having entered the premises. When the case opened I asked Smith if he had any involvement with the business now being conducted at 248 Oxford Street by Just Organics- he told me he does not work there but his partner Ms Gadd does work there: see T4.28- 44. Smith indicated that he wanted to be present during the hearing and did not seek any separation of the 2012 proceedings when I raised with him the possibility that he might not need to sit through the 2013 proceedings but need only attend for cross examination when called: see T5. 2. Smith sought to play a very active role in the proceedings not only objecting to evidence and seeking to cross examine the witnesses called by Just Organics in an endeavour to bolster Just Organic's case but also making submissions on matters that were very much the province of Coppolaro acting on behalf of Just Organics. Indeed on several occasions Smith sought to explain what was in Coppolaro's mind or why Coppolaro had done or not done something. Some latitude was permitted but eventually I precluded Smith from effectively running Just Organic's case for it. The degree of involvement of Smith became further clouded when Jury gave evidence about Smith's role in Just Organics saying: "he's a partner, we're partners together". I set out some further questions of mine on this topic at T236.39- T237.30: "HIS HONOUR Q. You said before that Mr Smith was a partner of yours in the Just Organics business. A. Mister? Q. Mr Smith you said was a partner of yours now in the Just Organics business. A. Smith? Q. Yes, you said previously that ‑ I thought you said that Mr Smith was a partner of yours in the Just Organics business. A. No, where does he come into it? Smith? Q. Yes, did you not earlier say that Mr Smith was a partner of yours? A. No, no, I don't remember saying that. HIS HONOUR: Did I misunderstand? MORAHAN: I agree with your Honour, that was what was said. HIS HONOUR: All right. Q. So if you said that it was wrong, was it? A. It's wrong. I don't remember, I don't ‑ I, I don't even know who Mr Smith is. Q. The man sitting at the bar table there. You don't know who he is? A. No. Q. Next to Mr Pasquale Coppolaro? You don't know him at all? A. No. Q. The gentleman closest to you now? A. I've always known him as Brett. He is a partner, that's right. I'm sorry. Q. That's what I thought you said earlier. A. I'm sorry, your Honour. Q. I want to know a bit about that, but do you not know that Mr Smith is Ms Enright's son? A. Yes, I know that, yes." 1. Smith was not under oath when I asked him the questions at T4 concerning his connection with the business but if Jury's evidence is accepted about Smith's involvement Smith's failure to inform me of his connection left the Court with a false picture of his interest. Smith did make submissions about Jury's evidence concerning Smith's involvement implicitly saying that if Jury was not credible on other matters he should not be accepted as truthful on Smith's role. That is said, I note, in a context where Smith did not go into the witness box to deny what Jury had said. Having said that, Smith gave no evidence relating to the arrangement between Coppolaro, Jury and Melov. The one relevant matter is Smith's claim that Melov described Jury as his partner which Melov denies. Melov 1. There were aspects of Melov's evidence which induced a concern as to his crediblity: 1. on his own case he arranged the transfer of the business of Just Organics for no consideration. He claims that Just Organics was in debt and in a mess but he has not demonstrated the true financial position of Just Organics as at October/November 2010 2. he (as well as Jury and Coppolaro) have engaged in flagrant failures to meet the standards of directors of a company- failing to ensure that matters of corporate governance have been attended to such as resolutions, meetings and share registers. Mr Morahan and Coppolaro agreed that the affairs of Just Organics have been most irregular. I will return to that aspect of the case at the end of these reasons 3. he asserted that there was an audit of Just Organics: see T257.10- 16 but it has not been established that he was ever provided with an audit and there is no evidence that one was ever completed. Moore's evidence on this topic, a matter I will return to, did not bolster Melov's assertion concerning the audit 4. he asserted that he did not run the business like a proper business: see T263.25. In his email in December 2010 he asserted that Just Organics was a not for profit organisation: see p 425-426 Exh A2 which Moore echoed initially at T273.8 but Moore then agreed that Just Organics was not a not and never had been a "not for profit" organisation: T273.34 5. his assertion that Coppolaro was to be the sole shareholder in Just Organics and to hold those shares in trust for him with Melov not being a director or shareholder in the business gains support from the fact that initially all the shares in Just Organics were in fact issued to Coppolaro. Coppolaro says, however, that he was not aware of that fact and it was not put to Coppolaro that his denial was untruthful (see T72- T73). Moore's letter of 12 May 2009 proposing that a company be formed with Melov holding 50%, Jury holding 25% and Coppolaro holding 25% and with Coppolaro being the secretary and Jury the sole director is consistent with an underlying concern not to show Melov as controlling the company. By September 2009 however the position had changed with Melov and Jury receiving 100 shares each and with Melov and Jury becoming directors in Just Organics. Melov's narrative does not explain how those changes came about 6. Melov asserted that Jury was to provide him with financial advice. That is not what Melov told Moore according to para 4 of Moore's affidavit. Moore says Melov told him Melov was to pay Jury $500 a week in return for Jury putting up the bond. According to Mr Morahan when I asked him why Melov had increased the payment to $1000 a week to Jury he said, presumably on instructions from Melov, that it was "out of the goodness" of his heart: T35.48 7. Melov denies that there was a partnership between him, Coppolaro and Jury. There is not only evidence from Smith (see para 23 of his affidavit) that Melov did describe Jury as a partner but there is evidence which I detail below of Melov describing Coppolaro and Jury as co-shareholders in Just Organics without any assertion or claim of a trust: see [24](3) and (4) below Moore 1. There were a number of aspects of Moore's evidence that were troubling: 1. on Moore's affidavit the only trust of shares was of the shares held by Coppolaro (see para 12). Moore offers no explanation of how Melov and Jury became shareholders and directors and although he gave no evidence that Jury was to hold as trustee or that Jury had executed a trust deed, in the witness box he spoke as if Jury (as well as Coppolaro) never held any share beneficially: see T27- T34 2. Moore said in his affidavit that he nominated Coppolaro as sole director and shareholder and that he prepared a declaration of trust. He also deposes at para 12 to his conversation with Coppolaro concerning the declaration of trust (see p 46 Exh 1) 3. Melov, in his affidavit, said that Moore had not given him a copy of the declaration of trust and that Moore told him that he had later handed over the declaration of trust signed by Coppolaro to Coppolaro: see para 26. Moore's reliability in relation to his assertion that he handed the signed declaration to Coppolaro when he was providing the company documents to Coppolaro "when Peter Melov changed accountants" (see para 12), was undermined. He had no convincing explanation as to why he had not had all of the documents copied or as to what he had retained or why he did not have at least a list signed for by Coppolaro of what Moore, or rather Moore's secretary, it transpired, had handed over: see T275- 276 4. his answers to questions concerning the declaration from T277.26 to T278 as to what he had used to prepare the declaration and the fact that he had found no copy of the documents on his computer: T277.44- 26 and T283.17- 41 reduced the likelihood of any such documents having been prepared 5. he claimed that his chief accountant keeps copies of his files on computer: T284 but said "there is nothing on our file" T285.19 6. he claimed he had written to Coppolaro (see para 15 of his affidavit) but he did not have a copy of what he had written- and he explained that the copy he had would probably have been given to Coppolaro when he handed over the complete file to Coppolaro: T275- 276. That explanation for the absence of the copy must be erroneous because on his evidence he handed over documents (or more accurately arranged for the handing over of documents) in the first half of 2010 before there was any conflict between Coppolaro and Melov and any letter that he would have written to Coppolaro after the conflict would have been in or after November 2010. Moore acknowledged that that must be so at T283.12- 42. A similar theme emerged in relation to the audit: see T284.6 with the same lack of coherence: T284.38 7. at T288.40 he returned to the theme that he wouldn't have much on file because Coppolaro had "taken all the files" 1. The parties appeared to be in agreement as to the importance of one matter in the determination of the 2013 proceedings (with consequential effect on the 2012 proceedings as well) namely did Coppolaro and Jury hold their shares in Just Organics on trust for Melov? I will deal with that question below but the significance appears to be this- that Melov (and Jury on one view of the evidence) asserted that Just Organics had transferred all of its business to Organic Paradise (at the time a company controlled by Melov or Melov and Jury and now controlled solely by Melov) for "no consideration". Mr Morahan contended that since Melov was the beneficial holder of Coppolaro's share he was free to make, with Jury, all decisions concerning Just Organics without regard to Coppolaro's wishes. The assertion (not resiled from in these proceedings) that Just Organics had transferred its assets to Organic Paradise for no consideration was contained in a letter dated 11 January 2011 signed by Melov and Jury (see Exh A2 p 428). That letter was sent to a solicitor then acting for Coppolaro who had issued a statutory demand on Just Organics for $80,554.41 (see Exh J Tab 7 p 114). The letter from Melov and Jury also contained the following assertion: "We, Peter Melov and Eric Jury, are not shareholders or directors of Just Organics (Aust) Pty Ltd" 1. There are a number of points to be made concerning the statutory demand and the response: 1. no explanation for the claim for the amount demanded is to be found in Coppolaro's affidavit: see para 79 Exh A1 p 199 but he was not cross examined on the point 2. that Coppolaro was suing Just Organics is consistent with an acceptance by him that he had been ousted from Just Organics and was not seeking to be reinstated to the company 3. in fact Coppolaro had not at that time been removed as a director or shareholder 4. although the letter of 11 January 2011 on its face is signed by both Melov and Jury, Jury denies that he signed the letter and he was not cross examined on that denial 5. although Melov (and Jury) assert in the letter that they were not directors or shareholders of Just Organics there is no record of any resignation by them at the time as directors and ASIC was not at that time informed of their resignation nor of their relinquishment of shares 6. I regard the letter of 11 January 2011 as inconsistent with any suggestion that Coppolaro held any shares in trust for Melov because as at 11 January 2011 Coppolaro held 100 shares in Just Organics and it would have been highly misleading of Melov to assert that he held no shares in Just Organics if in fact Coppolaro held his 100 shares on trust for him. It is one of the matters which I have taken into account in determining that the shares of Coppolaro were not held in trust for Melov 1. The other matters I have taken into account in reaching the conclusion that the shares of Coppolaro in Just Organics were not held in trust for Melov are these: 1. when asked to particularise the trust the defendants contended that the trust was "wholly oral" and consisted of a conversation between Melov, Jury, Coppolaro and Moore: see p 80 Exh A1 in response to p 78. By their affidavits Melov and Moore assert that Coppolaro in the presence of Moore, Jury and Melov executed a trust deed: see para 28 of Melov's affidavit and para 12 of Moore's affidavit 2. not only was the trust deed not referred to in the particulars, no trust deed was produced. Melov and Moore asserted that Moore provided the trust deed to Coppolaro in early 2010 and that Moore did not retain a copy of that document. Having heard Moore's oral evidence I have no confidence in his assertion that he did hand the declaration to Coppolaro. The defendants bear the onus of establishing that a trust deed was executed by Coppolaro. No deed has been produced and I am not satisfied that the reason it has not been produced is because Coppolaro has it or that any such document was ever prepared by Moore and executed by Coppolaro 3. the reason advanced by Melov for why he wanted Coppolaro to hold the shares was that he was concerned that if he suffered a significant penalty for the sale of raw milk which he could not meet then his business would be under threat. He says this was Moore's idea. In an affidavit of 11 November 2012 filed in proceedings brought by Organic Paradise to set aside a statutory demand issued by Just Organics for $20,000 Melov said the following: "In about September, 2010, the Defendant was trading out of two shops at 244 & 248 Oxford Street, Bondi Junction. Pasqual Coppolaro managed the shop at 248 Oxford Street, Bondi Junction. Pasqual Coppolaro went on leave for five days. In his absence, I discovered gross irregularities in the management of 248 Oxford Street At this time the directors and shareholders of the Defendant were Eric Jury, Pasqual Coppolaro and myself. Eric Jury and I arranged a meeting with Pasqual Coppolaro when he returned. At that meeting Pasqual Coppolaro was dismissed. Eric Jury and I agreed to pay Pasqual Coppolaro, $1,500.00 per week for 2 years in return for his shares in the Defendant on the condition that a satisfactory audit be undertaken of the Defendant's accounts. On 22 November, 2010, Pasqual Coppolaro withdrew from Just Organic's bank account, $20,000.00. A subsequent audit confirmed that the shop was grossly mismanaged. I told Pasqual Coppolaro "All deals are off, you took $20,000.00, that's stealing". In December, 2010, the Defendant stopped trading. Pasqual Coppolaro remains a shareholder of Just Organics." The assertion without qualification that Coppolaro and Jury were shareholders and the offer to pay $150,000 for Coppolaro's shares in Just Organics is entirely inconsistent with Melov's claim that Coppolaro (or Jury) held shares in trust for Melov 1. in an email to Keith Hurst & Associates of 9 December 2010 in response to an email seeking to progress transfer of the bond from PPI to Just Organics (for whom Keith Hurst & Associates had been acting) Melov stated: "Eric Jury And I [major shareholders] have decided not to go through with the transfer of Pacific Properties leases and infrastructure to Just Organics as we are no longer associated with Pasquale Coppolaro. We truly thank Keith and yourself for all the work you have put in, but as we are now at an unworkable position with Pasquale, we cannot continue in any, way, shape or form. We are currently in the process of invoking a self audit, and numerous other actions to recover lost revenue, involving police etc. Thankyou very much.. All correspondence regarding Just Organics should be forwarded to this email address, and this also includes all communication regarding any matters" The assertion that Jury was a major shareholder without any reference to Jury holding shares on trust is inconsistent with Melov's contentions concerning Jury and the statement that Jury and he (Melov) are major shareholders implies there is a minority shareholder (which could only have been Coppolaro) 1. there was no evidence from Moore that Jury was asked to hold his shares in trust for Melov (see paras 11-12 of Moore's affidavit Exh 1) and yet Melov persisted with the claim that Jury (and not just Coppolaro) held the shares in trust. Jury was receiving $500 a week and later $1,000 a week out of Just Organics. Everyone is agreed that Jury did no work of any kind for Just Organics. Melov said that Jury was supposed to provide him with business advice but there is no evidence that he did and it is inconsistent with what Melov told Moore. There is no dispute that Jury did provide $9,100 for the bond for 244 Oxford Street 2. Coppolaro managed the business at 248 Oxford Street, whether ineptly or not, and did work such as banking. Melov was entirely vague on what reward Coppolaro was to receive for the work he did, or the provision of a cool room (however decrepit) or the two vans which I find he did provide. The contribution of equipment by Coppolaro may not have been great but the absence of any clear discussion concerning a wage is consistent with an understanding by all concerned that Coppolaro was a partner in the business in accordance with the equal shareholding of Melov, Coppolaro and Jury 1. Once it is clear that Coppolaro was a shareholder in the business, it was not open to Melov and Jury to transfer the business of Just Organics, including the two leases it held, to Organic Paradise. 2. Even if a declaration of trust was signed by Melov in or around July 2010, Moore and Melov's silence as to the circumstances by which Melov and Jury each became a director and shareholder and the other matters to which I have referred in [23] and [24] above lead me to doubt that as at the end of 2009 Coppolaro held the 100 shares in his name in trust for Melov even if he had done so at an earlier time. 3. I make the following findings of fact: 1. as at September 2009 and at all times till September 2012 Coppolaro, Jury and Melov each owned 100 shares in Just Organics 2. from September 2012 Coppolaro and Jury owned (and continue to own) either 100 or 150 shares each in Just Organics. I put it this way because there is no explanation given as to how Jury and Coppolaro could obtain the additional 50 shares that together constituted the 100 shares previously held by Melov but there is evidence that Melov and Jury disclaimed any interest in the shares 3. as at November/December 2010 and certainly by January 2011, Melov and Jury (or Melov on his behalf) disclaimed any entitlement to shares in Just Organics 4. as at December 2011 Coppolaro made a claim against Just Organics seeking to recover $80,000 from Just Organics 5. the shares of Coppolaro and Jury in Just Organics as and from September 2009 at least were held beneficially 6. the lease of 244 Oxford Street was held by Jury and Melov on behalf of Just Organics 7. the business conducted at 244 Oxford Street was part of the business of Just Organics 8. the business conducted at 248 Oxford Street was part of the business of Just Organics 9. as at November/December 2010 Coppolaro, as well as Melov and Jury, was a director of Just Organics 10. no meeting of the directors of Just Organics was called and no resolution of Just Organics was passed relating to the transfer of the business of Just Organics to Organics Paradise 11. the business of Just Organics was not lawfully transferred to Organic Paradise 12. the transfer of the business by Just Organics to Organic Paradise involved Melov and Jury in breach of their duties as directors owed to Just Organics 13. the lease of 248 Oxford Street held by PPI was held on behalf of Just Organics 14. Melov and Jury disclaimed any interest in the shares held by them and ceased to act as directors of Just Organics although ASIC was not advised of that fact until late in 2011. The disclaimer is evidenced by the letter of 11 January 2011 sent by Melov (at least) to Coppolaro's solicitor 1. I should record that I pointed out to Mr Morahan that since Just Organics, Coppolaro and Smith did not have legal qualifications I expected that he would provide me with assistance on the legal principles relevant to the plaintiffs' claims: see T322.23- T323.32. The only authority mentioned in connection with the principles that might be relevant to any aspect of the case was the one mentioned by me at T325.45 and to which I refer at [30] below. 2. The following conclusions flow from the findings I have made: 1. Melov (and Jury) had no power to transfer the business of Just Organics to Organic Paradise because no meeting of Just Organics directors was ever called and no resolution was passed. If Melov and Jury had abandoned their shareholding and directorships in Just Organics they had no authority to agree to any transfer on behalf of Just Organics 2. If, alternatively, Melov and Jury were directors and shareholders in Just Organics as at the time of the transfer by Just Organics to Organic Paradise it was made: 1. without consideration 2. involved Melov and Jury acting in breach of their duties to Just Organics because they were transferring assets of the business to a company controlled by them for no consideration and to the disadvantage of Just Organics and its creditors (and Coppolaro) 3. Melov and Jury on behalf of Organic Paradise had no right to appropriate the lease of 244 and 248 Oxford Street at that time (late 2010) for themselves, or for the benefit of Organic Paradise 1. in 2012 when Jury determined on behalf of PPI, in effect, that PPI would return to holding the lease of 248 Oxford Street on behalf of Just Organics, PPI and Just Organics were entitled to permit Jury and Coppolaro to enter the leased premises 1. As to the conclusion in [27](12) that the transfer of the business of Just Organics to Organic Paradise by Melov and Jury involved a breach of fiduciary duty I set out [75]- [79] of my judgment in Breakout Barrier Release Systems Pty Ltd v Breakout Barrier Release Systems Australasia Pty Ltd [2013] NSWSC 1815 the relevant principles: "[75] The plaintiff's case is that Mr Watmough as a director of the plaintiff company owed fiduciary duties to it which duties he has breached. The relevant duties owed by directors are those helpfully encapsulated in the following passage in Austin, Ford & Ramsay, Company Directors: Principles of Law and Corporate Governance (2005), LexisNexis Butterworths at p 313, [8.5]: 1. the conflict of interest rule: the director/officer must not, in any matter falling within the scope of his or her office, have an interest that conflicts or may possibly conflict with his or her duty to the company, except with the company's fully informed consent; 2. the conflict of duties rule: the director/officer must not, in any matter falling within the scope of his or her office, have an inconsistent engagement with a third party, except with the company's fully informed consent; 3. the misappropriation rule: the director/officer must not misappropriate the company's property for personal or a third party's benefit; 4. the profit rule: the director/officer must not misuse his or her position for personal or a third party's possible advantage, except with the company's fully informed consent and, therefore, he or she must account to the company for any gain made in connection with the fiduciary office; 5. the business opportunity rule: the director/officer (at least if engaged full time in the service of the company) must not divert any profit-making opportunity, in the same line of business as the company's present or prospective business, to himself or herself or to some other person, except with the company's fully informed consent. [76] Mr McVay referred to Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378, Breen v Williams (Medical Records Access case) [1996] HCA 57, [14]Coomber v Coomber [1911] 1 Ch 174, Hospital Products v United States Surgical Corporation (1984) 156 CLR 41 and submitted in para 124 of DCS that: fiduciary obligations do not arise in the second defendant in favour of the plaintiff just because the second defendant is a director of the plaintiff. There must be an analysis of the relationship between the second defendant and the plaintiff. That is mandatory on the above authorities. I do not accept that approach to the authorities. In my view, there can be no doubt that a director of a corporation owes a fiduciary duty to the company of which he is a director (see Re City Equitable Fire Insurance Co [1925] Ch 407 at 426 per Romer J and Mills v Mills (1938) 60 CLR 150 at 185 per Dixon J andHospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 96-97, 55 ALR 417 per Mason J (and see also s 181(1) of the Corporations Act 2001 for the statutory imposition of a similar duty)). What is in question here is not whether the director owes a fiduciary duty to the plaintiff but the scope of the duty. [77] Mr McVay also submitted that in effect, the entry by the plaintiff company into the PLA with the first defendant erased any duties or obligations of Mr Watmough to the plaintiff company. The plaintiff was, he submitted, clearly on notice that Mr Watmough was a director and shareholder of the defendant company and his only duties and obligations were to that company not the plaintiff. [78] In one sense, I think it is correct to say that entry by the plaintiff into the PLA affected the duties and obligations of the Mr Watmough to the plaintiff. I am not, however, able to accept that his fiduciary obligations were erased or nullified. In part, the point is one of fully informed consent. I accept that the plaintiff could not complain that Mr Watmough was a director and shareholder of the first defendant and in this regard there was an explicit and fully informed consent. It does not follow that Mr Watmough ceased to have obligations to the plaintiff in matters and areas in which the plaintiff had not been given information and had not consented. In some respects the contention that the ambit of the PLA did not extend to the Sanctum Locks highlights the difficulty for the defendant. If the Sanctum Lock was not in contemplation of the parties, the plaintiff did not give fully informed consent to Mr Watmough embarking on manufacture and sale of the pneumatically operated locks that were fail secure. [79] In Chan v Zacharia (1984) 154 CLR 178 Deane J at 433 said: The variations between more precise formulations of the principle governing the liability to account are largely the result of the fact that what is conveniently regarded as the one "fundamental rule" embodies two themes. The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. Notwithstanding authoritative statements to the effect that the "use of fiduciary position" doctrine is but an illustration or part of a wider "conflict of interest and duty" doctrine (see, eg Phipps v Boardman [[1967] 2 AC, 123]; NZ Netherlands Society "Oranje" Inc v Kuys[[1973] 1 WLR, 129]), the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee: see Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd [(1958) 100 CLR 342 at 350]. That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed. The rules were discussed in detail in Streeter v Western Area Exploration Pty Ltd (No 2) (2011) 278 ALR 291 at [64]-[70] per McLure P (with whom Buss JA agreed) and [364]-[444] per Murphy JA in the context of a company director and in Barescape Pty Ltd v Bacchus Holdings Pty Ltd as trustee for Bacchus Holdings Trust (No 9) [2012] NSWSC 984 per Black J in the context of a partner. In Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 at 408 per Dixon J, with whom Rich J agreed, described one of the duties as "that which forbids a partner from withholding from the firm any opportunity of advantage which falls within the scope of its undertakings, and from using for his own exclusive benefit, information, knowledge or resources to which the firm is entitled"." 1. In this case there can be no doubt that Melov and Jury were acting in breach of their duties by taking the business of Just Organics and operating that business through Organic Paradise out of the very premises that Just Organics had been using. Remedy 1. Just Organics abandoned its claims for an account. Just Organics limits its claims to the recovery of money from Melov and Organic Paradise being two amounts namely: 1. $98,000 2. $131,400 1. In relation to the $98,000 this is the amount that Melov had to pay in respect of the raw milk prosecution. Melov's evidence was that he paid that mostly out of Organic Paradise. No more precision was given or sought and I am unable to put a figure on how much was taken out of Just Organics to pay the fine and costs. Having regard to the fact that the fine was imposed in November 2010 the likelihood is that very little was paid out of Just Organics because by 11 January at the latest and probably by November 2010 Melov had transferred Just Organic's business to Organic Paradise. 2. Just Organics makes the point however that if it be found that Organic Paradise was wrongly operating Just Organic's business out of 244 Oxford Street and 248 Oxford Street in breach of fiduciary duties owed by Melov and with full knowledge of that breach by Organic Paradise and if it used money obtained from trading at the premises to pay a personal debt of Melov those payments should be treated as arising out of a use of Just Organic's assets to generate income in order to pay Melov's personal obligations. 3. I have found that Organic Paradise was wrongly using the assets of Just Organics in running the businesses at the two shops. Since the business was able to generate enough money to have Melov repay the $98,000 I think it is reasonable to conclude that at least that much was profit earnt by Organic Paradise by reason of its wrongful use of Just Organic's assets, and that those profits should be treated as held on constructive trust: see JD Heydon, MJ Leeming and PG Turner (eds), 'Meagher, Gummow and Lehane's Equity: Doctrines & Remedies' (5th ed 2015, LexisNexis) at [5-270], Warman International Limited v Dwyer (1995) 182 CLR 544 at 560 and Chan v Zacharia (1984) 154 CLR 178 pp 198- 199. Melov and Organic Paradise who obtained the benefit of that wrongful use with full knowledge of the circumstances since he (and Jury) were the directing minds of Organic Paradise. Melov and Organic Paradise should be required to repay the amount with interest. 4. In relation to the second amount of $131,400 Melov admits that he transferred that amount out of Just Organics' account to Organik Paradise: T252. That amount is due to be repaid with interest to Just Organics. Mr Morahan pointed out that that amount is probably not all profit but that does not matter if it is money taken out of Just Organics account and transferred without any proper basis to a third party. 5. It was Melov's evidence (and he was not cross examined on this) that he paid back debts of Just Organics. He did not give evidence in his affidavit of what those amounts were and given that the plaintiffs were, until 28 September 2015, seeking an account Mr Morahan contended, and it was not disputed by Coppolaro, that he was not required to do so. I think that if Melov has in fact paid debts of Just Organics himself or out of Organic Paradise (or Organik Paradise) then Organic Paradise (or Organik Paradise) should be entitled to offset of the amounts so paid against the amount for which Melov and Organik Paradise are liable to Just Organics. 6. Mr Morahan, after obtaining instructions from Melov, gave as a rough estimate the extent of debts paid by Melov/Organic Paradise as 80% of $131,400 (ie $105,120) (T354.10). 7. I think there are good reasons why a proper accounting should be undertaken but neither Just Organics nor the defendants seek such an accounting. I think the appropriate course is to treat the $98,000 paid by Melov as being derived out of the use of the leased property of Just Organics and the $131,400 paid out of Just Organics as money which Melov and Organik Paradise are required to repay to Just Organics, but allow as offset amounts paid by Melov, Organic Paradise and Organik Paradise to creditors of Just Organics in respect of debts incurred in the period prior to December 2010. I will provide Melov with an opportunity to put on an affidavit evidencing such payments as were made by him, Organic Paradise or Organik Paradise after October 2010 of debts of Just Organics and an opportunity to Coppolaro to test such evidence. The 2012 Proceedings 1. Organic Paradise claims that it was excluded from premises at 248 Oxford Street and hence the business. It follows from what I have said above that Organic Paradise had no right to be in occupation of the premises or to conduct the business there. Just Organics owned the business and Just Organics did not transfer that business to Organic Paradise or if it did that transfer was achieved by a breach of Melov and Jury's duties as directors. PPI owned the lease but I infer that, in the second half of 2012 it held the lease on behalf of Just Organics. There may have been a period in which PPI purported to hold the lease for Organic Paradise but it could only do so if Just Organics had agreed that it do so and Just Organics had not done so, or if it had that agreement was obtained by Melov and Jury in breach of their obligations to Just Organics. 2. Melov's evidence at para 16 of his affidavit of 23 March 2015 does not actually provide evidence as to who had purchased the cool room, scales, cash registers, shelving or refrigerator. He asserts that the stock in the premises had been paid for by Organic Paradise but gives no documentary support for that contention. 3. There may be equipment owned by Organic Paradise located at the premises but I am not satisfied that the equipment identified in the Local Court Statement of Claim was owned by Organic Paradise and if it was that it was purchased by Organic Paradise without recourse to earnings from the business conducted by Organic Paradise as a consequence of the breach of duty owed by Melov and Jury to Just Organics. There is no evidence which would enable determination of the stock taken over by Organic Paradise when Melov and Jury wrongly transferred Just Organics' business to Organic Paradise, and no way of determining if the stock on hand when Jury and Coppolaro resumed control of Just Organics was greater or less than the stock present when Organic Paradise took over the business in late 2010. 4. It follows in my view that Organic Paradise fails in its claims against Smith, Coppolaro and Jury. Costs 1. I will hear the parties on the question of costs but any costs order will need to take into account that Coppolaro and Jury as opposed to Just Organics have failed in their claims and that Jury was privy to the actions of Organic Paradise which saw the business of Just Organics pass to Organic Paradise. It may be appropriate to defer the question of costs until after the net figure due to Just Organics is determined. Referral 1. There is evidence before the Court which suggests that, leaving entirely to one side the question of breach of fiduciary duties by Melov and Jury, Coppolaro, Melov and Jury have not conducted the affairs of Just Organics in a manner consistent with their duties as directors. There seems to be no adequate record keeping or accounting for the company and a cavalier disregard of proper reporting to ASIC concerning the company's affairs. I realise that the company is a small one but nevertheless I intend to have the Equity Registrar refer these reasons to ASIC so that it can give consideration to whether further investigation of Just Organics is warranted. 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: 30 November 2015