Coffee and a Case Note

By James d'ApiceEducation

Coffee and a Case Note episodes

October 31, 2022 "When the rubber hits the road..." | Some practical comments on commercial law at Macquarie Uni
On 31 October 2022 I gave a lecture at Macquarie Uni for Dr Madeline Taylor's commercial law course. We traversed some practical issues that were commercial, but not corporate (and you might recognise a few of them)!
If you would like a copy of the paper, please reach out to me and I can provide it to you. Jd'A #auslaw @Macquarie University #commerciallaw
1 hr 14 min
October 26, 2022 DXC Eclipse Pty Ltd v Wildsmith (No 2) [2022] NSWSC 1330
"Stop competing with the business you sold me!"
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In 2018, P bought a business from the Ds by buying all shares in the Co, ObjectCo, that operated the business from D1 and D2 for $9.5m: [1], [10]

P is a local subsidiary of a multi-national group that sells and installs business software: [2], [3]

ObjectCo sold and installed similar but more complex, pricier software: [4]

ObjectCo’s business was therefore complimentary to, not competitive with, P’s business: [5], [69]

D1 was ObjectCo’s controlling mind. D2 was D1’s company: [8], [9]

The sale contract prevented D1 and D2 from competing with ObjectCo or poaching staff: [10]

After the sale, P integrated ObjectCo’s business into its own and employed D1 until D1’s resignation in July 2021: [11]

In Dec 2021, D1 returned to the software business using NewCo, almost wholly owned by D2: [13]

D1 also joined the board of NewerCo, which dealt in software potentially complementary to NewCo’s: [14]

P claims the businesses of NewCo and NewerCo are a breach of D1’s and D2’s non-compete restraints: [15]

D1 disagrees and says to the extent there’s competition, it’s legitimate: [15]

Interlocutory injunctions were granted. A final hearing followed: [17] - [20]

D1 agreed not to solicit customers or employees from ObjectCo: [22]

P sought further restraints: restricting D1’s involvement with NewCo and NewerCo, restricting D1’s dealings with suppliers, and extending the prevention on poaching employees: [23] - [25]

The question arises: are the restraints in the contract reasonable enough to be enforceable?: [27]

The background of the software environment and its marketing is (with respect) usefully set out at [34] - [53], [70] - [88]

An expert gave evidence that once a firm chooses software, the complexities involved with ending that relationship formed a “barrier to exit”. Clients are sticky: [86]

D1’s plan was to use NewCo and NewerCo to target the high end of “BC” clients and not the more valuable, more competitive “F&O” space where ObjectCo had operated. The issue was: did the restraints in the sale contract prevent this?: [108], [114]

(In considering the issue of whether the upgraded BC product with add-ins was competitive with F&O, an independent expert said this was “like arguing a ute, plus a trailer competes with a B-Double truck”: [81])

The issue then was: does the restraint apply to BC and, if so, was that reasonable?: [115]

Following extended and (with respect) precise analysis of the terms of the clause, the Court found the non-compete did not apply to BC: [149]

The Court found the business of NewCo was not indirectly competitive with ObjectCo: [158]

The injunction P sought to prevent dealings NewCo might have with the supplier of the software was not reasonable to protect P’s interests as the claimed restraint did not have a sufficient relationship with the goodwill P purchased: [182]

P’s claim for a final injunction was dismissed: [190]
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9 min
October 13, 2022 Australian Karting Association Ltd [2022] NSWCA 188
A was the national body responsible for go-karting in Australia and trustee of a related trust: [12]

R was responsible for go-karting in NSW and the ACT, and a member of A: [14]

A’s constitution obliged its members to pay on the fees they collected from go-kart drivers in races A approved: [15], [16]

A was Tee of a fund for the construction of new go-kart tracks: [17]

The trust deed empowered A to distribute trust capital and income to benefs, who were its members: [24], [25]

A, as trustee, would loan funds for track construction to the relevant state body. The loans were 5 for 10 years with interest not charged if terms were complied with. On default, the loan was repayable in full plus the interest: [20]

From 2014 R queried A’s management asked for return of funds held on trust for it: [28]

In 2019 the members of A voted to expel R as a member, a default event: [14]

The net assets of the trust were recorded in the annual financial statements of the trust as $1: [33]

The trust’s financial statements were audited and approved by A’s board (and A’s predecessor’s management committee) in the relevant years: [35], [38]

A sought repayment of its loan plus interest. R cross-claimed seeking unpaid distributions: [2]

A lost on both points and appealed.

A said the money it recorded as held in a loan account for R showed what was to be paid to R (and other benefs in R’s position) when he trust vested, and so was not a distribution: [43]

The question or not it was a distribution was pivotal. If it was, it would have to be paid to R on demand: [44], [49]

The primary judge had found that the recording of the loans in R’s favour were distributions, held by A on bare trust and not as part of the track construction trust: [46]

Importantly, no estoppel by convention claim was raised at first instance, and so was not available on appeal: [56]

On appeal, A argued the loan were a liability contingent on the vesting of the trust, though this new argument was no available on appeal: [58], [64]

In any case, the audited accounts recorded the loans as actual liabilities, not contingent liabilities: [68], [69]

There was no evidence that the benefs intended to make a loan to A, and the financial records acknowledged debt to the benefs in the amount of the unpaid distributions: [70]

A’s argument that it intended to accumulate income was unfounded because of what the financial statements showed: (i) the P and L reflected income as distributed to benefs; (ii) the accounts reflected a corresponding liability; and (iii) the trust assets remained $1.00 rather than increasing: [108]

The resolution of A’s directors to approve the accounts in the relevant years gives rise to an inference A resolved to make distributions to the benefs (including R): [138]

There was no error by the primary judge. A’s appeal was dismissed. Costs followed the event: [144], [147]
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If you'd like to contact me please look for James d'Apice or Coffee and a Case Note on your favourite social media spot - I should pop up right away!
#coffeeandacasenote #auslaw
9 min
October 09, 2022 Case by Case Podcast | Episode 40 with Luke Zadkovich and Calum Cheyne, September 2022
In September 2022 I had an opportunity to appear on the excellent Zeiler Floyd Zadkovich podcast, Case by Case.
Luke, Calum and I dicussed Gillespie v Gillespies Cranes Nominees Pty Ltd [2022] NSWSC 1184 and the possibility of a derivative action being brought by the beneficiary of a trust.
You can also enjoy the chat to its fullest on the Case by Case YouTube channel: https://www.youtube.com/channel/UCvVvoTu3CZlLPE24ovBREkw
You can check out ZFZ here: https://www.zeilerfloydzad.com
#coffeeandacasenote #zfz #zeilerfloydzad #derivativeaction
41 min
September 23, 2022 Gillespie Cranes Nominees [2022] NSWSC 1184
“A trust law derivative action, or a common law one?”
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In the early 80s, a trust was established. Its assets came to be worth around $55m: [5]

A parent established the trust for the principal benefit of their spouse and 4 children, with TCo as trustee: [6], [10]

TCo’s shareholders were 2 of the kids - the Ds: [7]

The trust deed gave TCo a wide discretion to make resolutions on the distribution of income. If there was no resolution, the income was to go to the principal beneficiaries. From 2009 to 2020, TCo made no distributions to principal beneficiaries, but to entities related to the Ds: [12], [13]

P alleges there were no resolutions appropriately passed in some years, or no resolutions passed in good faith and for proper purpose, meaning that the income should have been paid to principal beneficiaries - a breach of trust: [14]

P claimed one fifth of the distributions made, plus interest, and that TCo “make good” the trust fund: [16]

TCo purported to amend its trust deed and distribute ~$58m received on compulsory acquisition of some real estate on an unequal basis between the beneficiaries (including 44% to each of the Ds (!) and 3% to P): [18]

P attacked this on two grounds: saying TCo breached a restriction on amending the substratum of the trust, and that the amendment and later distribution was not for good faith or proper purpose: [19]

P made various other claims, including for the removal of TCo as trustee and that their 3% had still not been paid: [21] - [24]

P also complained about the Ds causing TCo to transfer TCo’s crane business to an entity associated with them: [22]

Importantly, claims other than P’s claims for their own money were derivative - they were claims of TCo’s which P was seeking leave to bring: [26]

The Ds and TCo suggested the right to bring this application had been abolished by s236(2): [31]

The Court was forced to consider whether the derivative application was available in respect of the beneficiary of a trust, or an estate - the “derivative action in equity” - and found it was available in special circumstances: [32] - [41]

The power of the Court to grant leave for this type of derivative action arises from its jurisdiction over the administration of trusts, which the Court considered at length: [45] - [54]

The resemblances between company law and trust law derivative actions does not make them the same: [62]

The s236(2) abolishment of common law derivative actions does not abolish trust law derivative actions. The Court has the power to grant leave to the P: [69], [71]

There was extended consideration of the crafting of P’s claim. Some claims would not be repaid into the corpus of the trust: [106] - [108]

A further e.g. a question of whether equitable compensation would be available if leave to bring the derivative application is granted to P arose: [115]

The Court ordered an urgent hearing about whether P should be granted leave to bring the derivative actions: [129]
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If you'd like to contact me please look for James d'Apice or Coffee and a Case Note on your favourite social media spot - I should pop up right away! #coffeeandacasenote #auslaw
9 min
September 17, 2022 Firmtech Aluminium Pty Ltd v Xie (No 2) [2022] NSWSC 1142
“Freeze those assets. You’ll need them to pay me when I win!”

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D1, D2, P2 - all natural persons - agreed to incorporate a company to sell aluminium-framed glazing products, PCo, and did in fact do so with D2 and P2 holding equal shareholdings: [5]

P2, the active plaintiff, wanted interlocutory freezing orders ahead of final s232 relief and s236 leave to pursue D2 for a breach of their DDs: [7]

Let’s discuss the freezing orders.

The Ps issued substantial NTPs for PCo’s records. The Ds produced no documents. The Ps elected to proceed nonetheless. This meant the Ps did not have balance sheets, BAS, tax returns and like documents they sought: [18], [19]

To get a freezing order, P2 had to prove they had a good claim for final relief, and there was a danger of assets being dissipated or moved out of the jurisdiction: [23], [24]

The Ds accepted P2 had an arguable claim, but said that it would fail at final hearing: [43]

P2’s role in the venture was to provide $1m funding and accounting services while D1 and D2 had experience in the industry. Over time P2 claimed they were “shut out” and D1 and D2 secretly directed business away from PCo to a Co they incorporated where PCo could have done that business: [44], [46]

D1 and D2 said the parties had agreed to go their separate ways, that P2’s loan was repaid, that in any case P2 caused themselves to be repaid, that P2 lost interest and disengaged from PCo, and that D1 and D2 directed business away to their Co because PCo did not supply the relevant product: [45], [88]

There was some evidence suggesting the Ds’ view of the diverted business held water, with PCo accepting some payments as subcontractor of one of D1 and D2’s entities: [90]

P2 was seeking freezing orders in the sum of $10m. It was not clear PCo would get this amount if successful, or that the Ds had it: [50]

The uncertainty about the value of the money diverted away from PCo, and the absence of financial documents, made it impossible to value PCo: [65]

P2 failed to show PCo’s loss in the sum of $10m. Shortcomings included making estimates assuming the 2019 profit margin of ~40% would have continued through COVID: [76] - [78]

There was a real contest about P2’s ceasing to participate in PCo’s business. D1 and D2’s suggestions were not unmerited: [93]

There was no “solid evidence” of the Ds being likely to dissipate their assets: [95]

The position was further clouded by both P2, and D1 and D2 continue to use the Pro branding after agreeing to part ways - including the perverse situation where two “PCo” entities were tendering for the same work: [102], [103]

The Court was persuaded to make orders to preserve the relevant businesses, but not the extensive freezing orders sought by P2: [106]

The Ds were further ordered to prepare accounts and to ensure the profits of the businesses were not dissipated: [109], [110]
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10 min
September 09, 2022 Zong v Lin [2022] NSWCA 136
"You made the company pay too much money for that boat!"
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R owned 55% and A owned 45% of shares in a Co that operated a leisure boat business on Sydney Harbour: [2]

R was the “bank”, contributing funds to the venture. A was to contribute sweat equity, earning a wage while running the Co’s business: [3]

A caused the Co to buy a boat from an entity related to A’s spouse for $315K “as is” with no warranties and no commercial configuration: [4]

A also caused $220K to be transferred out of a Co’s bank account and, responding to a demand on behalf of the Co, repaid $204K. A did not account for the $16K difference: [5]

A made payments from the Co to him and his spouse for purported wages, and used the Co’s money to pay for legal fees relating to A’s dispute with R: [6]

The primary judge ordered: A breached duties in causing the Co to make the payments to themselves, their spouse, and the lawyer; the loss in relation to the boat was $205K, being the difference between the purchase price and present realisable value; the spouse was involved in and aware of the breaches: [8]

R’s claim was made out, the order being for judgment against A for the cash amounts, A’s removal as director, and A transferring their shares to R - interestingly - for no payment: [9]

A appealed.

A’s valuation expert was a boat broker who relied on two photographs in relation to the condition of the boat. R relied on a certified valuer with expertise in marine vessels.

After carefully considering the primary judge’s reasons, and the transcript, the CoA found HH had not erred in their finding about the boat’s (under)value: [37]

Regarding the payments A caused to be made to lawyers, A made no response to a subpoena requiring the production of the retainer, cost agreement, and other related documents that would have been produced by the law firm in the course of acting on the matter: [41]

The primary judge found the payments were made where A had a conflict between their duties to the Co and his and A’s spouse’s interest in the litigation A was making the Co fund: [45]

Regardless of whether A was authorised to instruct lawyers, for A to do so was a breach of their duties to the Co: [47]

A appealed on the basis the primary judged ordered transfer of shares for no payment (so not at “fair value”) was erroneous; those orders having been made as A brought no skill or goodwill to the business, and did not make any financial contribution: [70], [73]

The CoA found s233 allows a wide range of possible relief, and no error was made by HH, including where A made no submissions about alternative orders (including a “fair value” transfer): [77]. [78]

The appeal was dismissed: [91], [93], [94]
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If you'd like to contact me please look for James d'Apice or Coffee and a Case Note on your favourite social media spot - I should pop up right away! And please look out for my podcast, Coffee and a Case Note, wherever you get your podcasts. #coffeeandacasenote #auslaw
9 min
August 18, 2022 C.V. Joint (Aust) Pty Ltd [2022] NSWSC 981
“Get us out, and get a prov liq in!”

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P, A director and 70% shareholder of a Co sought to have it wound up and a provisional liquidator appointed: [1] - [3]

P brought this application shortly after D1 (P’s former spouse, a Dir, and a 20% shareholder) commenced family law litigation: [20]

D2, D1’s sibling who owned the remaining 10% of the Co’s issued shares, commenced their own shareholder oppression proceedings: [4], [5]

The Co sold car parts, both wholesale and retail: [6]

Appointing a prov liq is a drastic step. It requires the Court to consider the prospects of P getting a final winding up order, and whether the balance of convenience favours appointment of a prov liq (including if the Co’s assets are in jeopardy): [12] and [13]

Relations between the parties had broken down leaving the Co in deadlock, with police having been called to the Co’s premises a number of times: [16], [18]

The Co’s financial position was contested. It appeared to be profitable, though was heavily indebted to its landlord with “precarious” tenure. The Co had very little cash, but it appears P directed the Co’s money into one of its accounts: [20] - [25]

The two Ds (in the P’s absence) purported to resolve to increase their salaries slightly. There were also payments of bonuses of $10K per 6 months. The parties were in dispute about the appropriateness of these payments: [26] - [50]

Allegations were made of all parties mishandling cash which was properly the Co’s: [51] - [57]

The P caused money earned from one of the Co’s eBay stores to be paid into an account under his control, alleging the Ds had previously taken funds without a proper basis, pointing in favour of placing the hands of an independent party: [58] - [69]

Further evidence showed P using an account in his own name to pay Co expenses; removing Ds’ oversight from this aspect of the Co’s business: [74]

Neither D opposed the winding up of the Co: [83]

The Court was satisfied a prov liq should be appointed: [88]

The Co was in deadlock, with insecure premises, no sensible basis upon which it might continue to trade, and a real prospect that the Co will be wound up on a final basis pursuant to s461: [89]

All this formed a basis for the P’s application succeeding and a prov liq being appointed.
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7 min
August 02, 2022 Beverage Freight Services Pty Ltd [2022] NSWSC 874
“The new deal you all made breaches the old deal we made!”

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In 2001, some Cos came together to incorporate a new Co. NewCo was incorporated to contract with a big client. The client’s work would then be shared between the shareholders: [3]

NewCo would invoice the big client, and each shareholder would then invoice NewCo such that NewCo never made a profit: [39], [68]

A dispute arose: did that 2001 agreement establish a partnership?: [3], [43] - [45]

The 2001 agreement did not create a partnership including because no profit was shared: [58], [373] - [407]

NewCo did the work for the big client from 2001 to 2012: [65]

Through this time there was discontent about the allocation of the work between the shareholders: [92]

In 2012 the big client made a direction that NewCo was to ensure its trucks were speed-limited: [103]

There were heated exchanges between NewCo’s shareholders about the certification of the speed limiters installed on relevant trucks: [117]

The Ps said the speed-limiter issue was a pretext manufactured to remove the Ps from the business: [123]

The Court disagreed, finding: the big client had a legitimate concern about speed limiters: [126]

After an August 2012 meeting, the content of which was subject to heavy dispute, Newer Co was founded without the Ps involved: [227]

The Ps claimed the pivot from NewCo to NewerCo was a breach of the 2001 agreement, or the relevant fiduciary duties owed: [5]

The Ps said the Ds had caused NewCo’s work with big client to cease in order for NewerCo to do that work: [239]

There was a “troubling inconsistency” in relation to some of the Ps’ evidence of the 2012 meeting: [279]

The Court found it was not implausible that the Ps attempted to take their own “shot” of working with the big client after the 2012 breakdown in the relationship, rather than sit with a deal they considered unfair: [319], [340 - [342]

The Ps claims were made for their own benefit and not for the benefit of NewCo: [369]

After a heavy and lengthy analysis of the evidence, the Ps failed in all of their claims: [408]
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8 min
July 08, 2022 Tzavaras & Sons Pty Ltd [2022] NSWSC 359
“Oi! Let me manage the company I said I didn’t want to manage!”

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One brother, P, tried to wind up a Co, Tee, he owned with his elderly mum and two other brothers. Tee was trustee of a family trust whose ~$5.8m corpus included some real estate related to a family auto repair business formerly operated by Tee: [8], [12]

(There was also a s66G issue that we will ignore.)

P had left the auto repair business in 2012: [22] - [26]

In a 2012 letter, P’s lawyers wrote a letter confirming P intentionally “walked out” of the family business: [28]

P did not attend any meetings of the Tee from 2012 though received and signed some occasional documents: [29]

One of the D brother’s auto repair business later operated from the Tee’s real estate rent free from around 2013: [19]

P claimed he was oppressed as a shareholder of Tee by: having been excluded from management [50], having not received dividends or the benefit of a loan account [51], Tee failing to charge the D brother’s business rent [52], the Tee losing money on a failed transaction [53], and the other brothers having rent-free benefit of the Tee’s holiday apartment [54]
P tendered accounting evidence based on the incorrect assumption that the value of the shares in a trustee Co was proportionate to the assets of the trust: [67]

P pressed for a windup, and no other remedy.

P was unwilling to meaningfully re-engage, apparently believing he would have to work for D brother free to do that. P complaint about rent free use of the Tee’s premises range hollow when he did the same thing with his race cars: [75]

In relation to P’s oppression claims, the Court found: it was not oppressive for P not to be involved day-to-day management of the Tee where he had expressed a wish to cut ties [229] and if that was wrong then the remedy is for P to be provided with notices of future meetings and company documents, not a winding up: [230]

While a failure to pay dividends may be oppressive, here no dividends were paid to any shareholder and drawings were made as part of a regime P absented himself from including for elderly mum’s benefit: [232]

D brother’s business occupying the Tee property rent free could be oppressive, but the remedy would not be wind up the Tee, but to direct it to charge rent: [234]

The directors of the Tee falling victim to a financial fraud was not oppressive: [235], [193]

The use of the holiday unit rent free is not prohibited nor oppressive: [236]

P failed in all of his oppression claims: [237]

If oppression had been made out, the windup sought by P would not have been the appropriate relief: [245]

P’s also failed in seeking a windup on the just and equitable basis: [258]
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11 min

About Coffee and a Case Note

From the publisher's feed

I’m Australian lawyer, James d’Apice. Coffee and a Case Note began as a video series where I sip a coffee and chat about recent legal cases. This is the audio version! I hope it brings you value.