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NSW Crest

Supreme Court
New South Wales

Medium Neutral Citation:
In the matter of Cheal Industries Pty Ltd - Fitzpatrick v Cheal [2012] NSWSC 261
Hearing dates:
7-10 February 2012
Decision date:
21 March 2012
Jurisdiction:
Equity Division - Corporations List
Before:
Ward J
Decision:

Judgment for the plaintiffs

Catchwords:
CORPORATIONS - breach of fiduciary duties or statutory duties pursuant to ss 180, 181 and 182 Corporations Act 2001 (Cth) - director of company set up competing company while still director and employee of first company - director appropriated company name of first and goodwill associated with previous trading history of first company (though not registered trade mark, which was at all relevant times property of director or family trust company) - HELD - breach of director's duties and knowing assistance by second and third defendants - CORPORATIONS - oppression - s 232 Corporations Act 2001 (Cth) - whether conduct engaged in by the first defendant in setting up the competing company and diverting the business of the first company to the new company was oppressive - HELD - conduct of "affairs of the company" by the first defendant objectively unfair and oppressive - REMEDIES - equitable compensation - valuation of shares of company - where intangible assets of the company include value associated with a trade mark used but not owned by the company and the value associated with the business name - HELD - value of shares to be calculated according to value of Net Operating Assets plus an amount attributable to goodwill (if any) independent of the trade mark
Legislation Cited:
Corporations Act 2001 (Cth)
Trade Marks Act 1995 (Cth)
Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited:
Alcock v Robb (1978) 2 BPR 9625
Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507
Arthur Young v Tieco International (1995) 182 LSJS 367
Attorney-General (NSW) v Brewery Employees Union (NSW) (1908) 6 CLR 469
Aubanel and Alabaster Ltd v Aubunel (1949) 66 RPC 343
Backoffice Investments v Campbell [2007] NSWSC 161; (2007) 61 ACSR 144; 25 ACLC 302
Banque Commerciale SA (In Liq) v Akhil Holdings Limited [1990] HCA 11; (1990) 169 CLR 279
Betfair Pty Ltd v Racing New South Wales [2010] FCFCA 133; (2010) 189 FCR 356
Birtchnell v Equity Trustees, Executors and Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384
Boardman v Phipps [1966] UKHL 2; [1967] 2 AC 46; [1966] 3 All ER 721
Bowden Wire Co Ltd v Bowden Brake Co Ltd (1914) 31 RPC 385
Bray v Ford [1896] AC 44
Buckley v Tutty (1971) 125 CLR 353
Campbell v BackOffice Investments Pty Ltd [2008] NSWCA 95
Campbell and Another v BackOffice Investments Pty Limited [2009] HCA 25; (2009) 238 CLR 304; (2009) 257 ALR 610, at 654; (2009) 73 ACSR 1
Canadian Aero Service v O'Malley [1974] SCR 592; 40 DLR (3d) 371
Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178
Charter Carter Pty Ltd v The Shop, Distributive and Allied Employees' Association of Western Australia (1987) 13 FCR 413
Cook v Deeks [1916] 1 AC 554
Copyright Agency Ltd v Department of Education of New South Wales (1985) 80 FLR 332
Delphic Wholesalers Pty Ltd v Elco Food Co Pty Ltd (1987) 8 IPR 545
Doyle v Australian Securities and Investments Commission (ASIC) [2005] HCA 78; (2005) 227 CLR 18; (2005) 223 ALR 218; (2005) 56 ACSR 159
Drinkwater v Caddyrack Pty Ltd [1997] NSWSC 431
Duke Group Limited (in liq) v Pilmer (1998) 27 ACSR 1
Dwyer v Lippiatt; Dwyer v Backpackers R Us.Com Pty Ltd (2004) 50 ACSR 333
Dynasty Pty Ltd v Coombs (1995) 59 FCR 122
ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1995) 15 ACSR 536
Federal Commissioner of Taxation v Murry [1998] HCA 42; (1998) 193 CLR 605
Fexuto Pty Limited v Bosnjak Holdings [2001] NSWCA 97; (2001) 37 ACSR 672; (2001) 19 ACLC 856
General Electric Co v General Electric Co Ltd [1972] 1 WLR 729; [1972] 2 All ER 507
General Tire & Rubber Co v Firestone Tyre & Rubber Co Ltd [1975] 1 WLR 819
Gould v Mount Oxide Mines Limited (in liq) (1916) 22 CLR 490
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41
Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2004] NSWSC 1136
Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2008] NSWCA 206
Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722
Lawfund Australia Pty Ltd v Lawfund Leasing Pty Ltd and Or [2008] NSWSC 144; (2008) 66 ACSR 1
Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452
Mordecai v Mordecai (1988) 12 NSWLR 58
Nocton v Lord Ashburton (1914) AC 932
O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Old v McInnes and Hodgkinson [2011] NSWCA 410
Painaway Australia Pty Ltd v JAKL Group Pty Ltd [2011] NSWSC 205
Pioneer Kabushiki Kaisha v Registrar of Trade Marks (HCA, unreported, Aickin J, 1 November 2011)
Phillips v Phillips (1878) 4 QBD 127
Profinance Trust SA v Gladstone [2002] 1 WLR 1024
Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549
Rankine v Rankine (1995) 124 FLR 340
Ratcliffe v Evans (1892) 2 QB 524
Re a Company (No 002612 of 1984) (1986) 2 BCC 99,453
Re Baumler (UK) Ltd [2005] 1 BCLC 92; [2004] All ER (D) 139; [2005] BCC 181 (Ch D)
Re Bega Co-operative Society Ltd & Anor v The Milk Authority of the Australian Capital Territory & Anor (Unreported, Federal Court of Australia, 12 May 1992); [1992] FCA 200
Re Bright Pine Mills Limited [1969] VR 1002
Re Hollen Australia Pty Ltd; Holt v Burnside [2009] VSC 95
Re Leas Hotel Co [1902] 1 Ch 332
Re Leeds United Holdings Plc [1997] BCC 131
Re London School of Electronics Ltd [1986] Ch 211
Re Scottish Co-operative Wholesale Society Limited v Meyer [1959] AC 324; [1958] 3 All ER 66
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
Shelton v NRMA [2004] FCA 1393; (2004) 51 ACSR 278
Short v Crawley (No 30) [2007] NSWSC 1322
Target Holdings Ltd v Redferns [1996] AC 421
Thomas v HW Thomas Ltd [1984] 1 NZLR 686; (1984) 2 ACLC 610; (1984) 2 NZCLC 99
Vadori v AAV Plumbing Pty Ltd [2010] NSWSC 274
Wayde v New South Wales Rugby League [1985] HCA 68; (1985) 180 CLR 459
WEA Records Pty Ltd v Stereo FM Pty Ltd (1983) 48 ALR 91
Weatherall v Satellite Receiving Systems (Aust) Pty Ltd [1999] FCA 218; (1999) 30 ACSR 698
Webb v Stanfield [1991] 1 Qd R 594
Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484
Texts Cited:
R P Austin and I M Ramsay, Ford's Principles of Corporations Law (13th ed, 2007)
Category:
Principal judgment
Parties:
Simone Leah Fitzpatrick (First Plaintiff)
ACN 089 142 870 Pty Ltd (Second Plaintiff)
James Mitchell Cheal (First Defendant)
Cheal Industries Pty Ltd (Second Defendant)
Chilli Surfboards Pty Ltd (Third Defendant)
Representation:
Counsel
M B Evans (Plaintiffs)
Ms R Francois (Defendants)
Solicitors
Lathams Lawyers (Plaintiffs)
Brown Wright Stein (Defendants)
File Number(s):
09/291052

Judgment

1HER HONOUR : This is an application brought by the first plaintiff (Ms Fitzpatrick) on her own behalf and, pursuant to leave granted in July 2010 by Bergin CJ in Eq under s 237 of the Corporations Act 2001 (Cth), on behalf of the second plaintiff (ACN 089 142 870 Pty Ltd), which formerly traded as Chilli Surfboards Pty Ltd. I will refer to the second plaintiff, consistently with the way in which it was referred to in the proceedings before me, as (Chilli #1). Ms Fitzpatrick is the owner of 50% of the ordinary issued shares of Chilli #1. The remaining shares are owned by the first defendant (Mr Cheal), her former de facto husband. Chilli #1 at the relevant times conducted a business of the manufacture and sale of surfboards bearing a particular Chilli logo (the detail of which I will come to in due course).

2In these proceedings, relief is sought on the basis of alleged breaches of statutory and fiduciary duties by Mr Cheal, in his capacity as a director of Chilli #1. As against the second defendant (Cheal Industries) and the third defendant (the entity subsequently incorporated as Chilli Surfboards Pty Limited and referred to in the proceedings as Chilli #2), relief is sought on the grounds of knowing assistance in Mr Cheal's breach of his duties as a director. Equitable compensation is sought in respect of those alleged breaches. In the alternative, relief is sought by Ms Fitzpatrick on the basis of alleged oppression by Mr Cheal in the conduct of the affairs of Chilli #1, in breach of s 232 of the Corporations Act .

3In broad terms, the plaintiffs' complaint is that Mr Cheal effectively diverted the "business" of Chilli #1 (namely, the business of making and selling surfboards with the Chilli logo), including the goodwill of that business, to Chilli #2 (and dealt with the trade mark, or right to use the trade mark, pursuant to which the Chilli logo was affixed to surfboards made in the course of Chilli #1's business) with a view to excluding Ms Fitzpatrick from the business or a share in the business of Chilli #1 and with the effect that the business and goodwill in Chilli #1 was destroyed. It is alleged that Mr Cheal placed himself in a position in which there was a conflict between his duty to Chilli #1 (to act in the interests of that company and to preserve and promote its business) and both his personal interest and his duties as a director of the other entities which later gained interests in or the right to use the Chilli trade mark (Cheal Industries and Chilli #2); and that Mr Cheal in transferring or diverting the business (including the Chilli trade mark and associated goodwill) conducted prior to 1 July 2005 by Chilli #1 out of that company to a company (Chilli #2) in which he and his wife held interests (and Ms Fitzpatrick did not) breached the duties he owed to Chilli #1 and conducted its affairs oppressively.

4Insofar as Mr Cheal is and was at all relevant times a director of Cheal Industries (to which the Chilli trade mark was assigned in February 2006) and Chilli # 2 (to which use of the Chilli trade mark was licensed from July 2006 and through which a business of shaping and selling Chilli surfboards has since then been conducted), it is contended by Counsel for the plaintiffs (Mr Evans) that the knowledge possessed by him must be possessed by those corporations so that the second and third defendants must be found to have actual knowledge of Mr Cheal's breaches of duty and are liable, along with Mr Cheal, to Chilli # 1 as third parties who have assisted in a dishonest and fraudulent design by a fiduciary in breach.

5Mr Cheal denies being in breach of any relevant duty to Chilli #1 in relation to the incorporation of, and grant of rights in relation to the trade mark to, Chilli #2. The defendants' position, in essence, is that (whatever criticism may be made of the course of action taken by Mr Cheal in commencing to carry on the new Chilli #2 business, to the exclusion of Ms Fitzpatrick, while still a director of Chilli #1) the claims made against them must fail by reason of the fact that Chilli #1 did not at any time own the relevant Chilli trade mark (TM 767677) and that therefore Mr Cheal remained at all times free to dispose of his own intellectual property (and to use his surfboard making skills) as he saw fit (which argument, if correct, must logically mean that Mr Cheal was free at any time, though being a director of Chilli #1, so to act without regard to the effect this would have on Chilli #1 and its ability to continue to conduct its surfboard-making business).

6The entries in Chilli #1's accounts for the period 2001-2004 referring generally to trade marks, which suggest that Chilli #1's intangible assets included (unspecified) patents and trade marks, were explained as being in error and replaced in the 2005 accounts by an entry recording the earlier amount as a receivable (a loan to Mr Cheal). The error was said to have been caused by a book-keeping error in that expenses relating to trade marks were incorrectly recorded on Chilli #1's MYOB accounting software.

7It is further submitted that any decisions by Mr Cheal as to the use of the Chilli trade mark (or as to the ongoing provision or otherwise of his services as a surfboard designer or shaper) were not part of the conduct of the "affairs" of Chilli #1 and could not amount to oppression.

8Even if a claim to relief for breach of directors' duties or oppression is made out, it is contended for the defendants that the goodwill of the business conducted by Chilli #1 resided (solely) in the trade mark and in Mr Cheal's personal labour; and that therefore, at the time Mr Cheal "changed corporate entities", Chilli #1 had no real value.

9Mr Evans contends that the appropriate remedy (assuming the alternative claims for relief are made out) would be an order under s 233 of the Corporations Act for the purchase of Ms Fitzpatrick's shares in Chilli #1, conditional upon the transfer of her share in Chilli #1 to Mr Cheal or his nominee upon payment to her of her aliquot share upon the winding up of Chilli #1. As I understand it, what is contemplated thereby is that Ms Fitzpatrick's shares should be acquired for the amount representing a half share in the value of Chilli #1's business as a going concern at the time and on the assumption that the company had the benefit of the Chilli trade mark and the goodwill that had, over the period from 1999, been derived therefrom. (If the reference to an aliquot share on the winding up of Chilli #1 was to suggest that the share was to be valued on the basis that the company was then to be wound up, that may or may not produce a different outcome - the expert accountant's report in evidence in these proceedings did not address that scenario, as I read the report. In particular, if Ms Fitzpatrick's shares were to be valued on a notional winding up of the company, then account would seemingly need to be taken of the tax implications for the receipt in the company's hands of any amount representing a notional sale of the business and goodwill therein and also of the notional repayment of creditors recorded on the company's accounts.)

10As adverted to above, the plaintiffs rely upon the valuation of an expert forensic accountant (Mr Stephen McMahon), who was the only such expert to give evidence in the proceedings, as to the appropriate valuation of the business of Chilli #1 as at various dates including, relevantly, as at 30 June 2006 when it is said that the business of Chilli #1 was effectively transferred to Chilli #2 (that being in the order of $553,000, of which all but around $110,000 represented the value attributed to the goodwill of the company and that goodwill being treated as the value of the Chilli trade mark). That valuation was on the basis of a sale of the business as a going concern. No expert evidence was adduced by the defendants as to the value of Chilli #1's business or Ms Fitzpatrick's shares in the company. Rather, Counsel for the defendants, Ms Francois, challenged the conclusions reached in Mr McMahon's report on the basis of criticisms as to the accuracy of the calculations made by Mr McMahon and the assumptions on which those calculations were made.

Issues

11The issues for determination in the proceedings, broadly, are as follows:

(i) whether Mr Cheal was in breach of his statutory or fiduciary duties, as a director of Chilli #1, in one or more of the ways alleged, those being in summary:

(a) causing Chilli #1 to transfer Trade Mark 767677 (or the right to use that trade mark) to himself at some time between 1 July 2004 and 30 June 2005;

(b) causing Chilli #1 to enter into an Intellectual Property Agreement with himself in July 2005 (under which the trade mark and associated goodwill were formally licensed by Mr Cheal to Chilli #1 for the first time but only for a one-year term);

(c) entering into the February 2006 agreement for the assignment of the trade mark (and associated goodwill) to Cheal Industries (as trustee of a family trust established for the benefit of Mr Cheal and his family);

(d) causing Chilli #2 to enter into the June 2006 agreement (in which Cheal Industries licensed Chilli #2 to use the trade mark and associated goodwill); and

(e) entering into the 2005/2006 agreements and failing or neglecting, on behalf of Chilli #1, to seek to negotiate further or better terms in relation to the trade mark;

and whether Cheal Industries and/or Chilli #2 knowingly assisted in any such breach of duty.

(ii) whether Mr Cheal conducted the affairs of Chilli #1 oppressively by reason of any of the conduct referred to in (a) - (e) above or by the conduct pleaded in [47] of the pleading (that being, in summary, the following conduct: entry into the February 2006 Agreement assigning the trade mark to Cheal Industries; neglect/failure on behalf of Chilli #1 to attempt to seek an extension of the June 2005 Licence Agreement; steps taken to bring about the acquisition or incorporation of Chilli #2; and entry into the July 2006 Agreement);

(iii) the appropriate relief (having regard to the evidence as to the valuation of the company's business) if the answer to any part of (i) or (ii) is in the affirmative.

12As part of the determination of the above issues, there is a factual question to be determined at the outset as to whether Chilli #1 owned (or had an exclusive right as against Mr Cheal to use) the relevant Chilli trade mark (TM 767677) at any relevant time and, if it did not, then the question whether (having regard to the way in which the case was pleaded) this is determinative (as the defendants contend) of one or all of the claims for relief made in the proceedings.

13On the oppression claim, the issues identified by Ms Francois for determination are whether Mr Cheal's decisions as to the use of his property and personal labour fall within the notion of 'the conduct of the affairs' of Chilli #1 within the meaning of s 232 of the Corporations Act and, if so, whether Mr Cheal's decisions as to the use of his property and personal labour were "oppressive to, unfairly prejudicial to, or unfairly discriminatory against" Ms Fitzpatrick. Ms Francois also submits that an issue arises, if no relief is granted on the plaintiffs' primary claim for breach of directors' duties, as to whether there is any utility in any alternative relief that may be ordered under s 233 of the Corporations Act (as I understand it, on the basis that Chilli #1 had no rights in relation to the Chilli trade mark at the relevant time).

14If an order for equitable compensation is warranted, then Ms Francois submits that questions arise as to whether it should be calculated by reference to the price that "ought" to have been paid for the trade mark in June 2005 or by reference to the value of Chilli #1 when Chilli #2 was established in June 2006; and as to whether any assessment of the value of Chilli #1 requires account to be taken of matters such as the asserted inability of Chilli #1 to borrow any further funds; the financial assistance given by Mrs Cheal to Chilli #2; the goodwill associated with the personal labour of Mr Cheal; and/or the likelihood of any sale with a 'non-compete' clause. (In relation to the last matter, Ms Francois points to the evidence as to Mr Cheal's lack of education and that his only skill lies in his ability to shape surfboards, which it is said makes it unlikely that he would have agreed to a non-compete clause on any sale of the Chilli #1 business. Conversely, such matters might lead to the conclusion that if a sale of the business of Chilli #1 by Mr Cheal included the Chilli trade mark and goodwill therein, Chilli #1 would have been wound up in any event.)

Summary

15For the reasons set out below, I am of the view that:

(i) Mr Cheal was in breach of his statutory and fiduciary duties as a director of Chilli #1 by reason of his conduct (while still a director of Chilli #1) in facilitating the incorporation of Chilli #2 and effectively setting up a competing business to the business (of shaping and selling surfboards with a Chilli logo) that was then conducted by Chilli #1 (in the course of which he, in effect, appropriated for the benefit of Chilli #2 not only the name of Chilli #1 but also any goodwill associated with that name and the period of trade that the company had by then carried on), this being in essence, the conduct referred to in (d) and (e) above).

By that conduct, Mr Cheal diverted to the new company (Chilli #2) or permitted it to assume any goodwill then comprised in the company name (Chilli Surfboards) or associated with the previous use of the trade mark by Chilli #1.

In saying this, I accept that the evidence establishes that (though this is inconsistent with the Chilli #1 accounts for the period from 2001 to 2004) at all material times Mr Cheal was the registered owner of the relevant Chilli trade mark and that Chilli #1 was no more than an authorised user of that trade mark; and that, subject to any obligations that may have persisted on cessation of his employment with Chilli #1, Mr Cheal would have been in a position to cease his involvement with Chilli #1 and, after 30 June 2006, to make use of the Chilli trade mark, if authorised to do so by the then owner, Cheal Industries, in a new business venture separate from Chilli #1. However, I do not accept that this is determinative of all of the claims for relief based on breach of Mr Cheal's statutory or fiduciary duties as a director or oppression, for the reasons considered below.

I further find that Cheal Industries and Chilli #2, through Mr Cheal's knowledge as a director of those companies, knowingly participated in Mr Cheal's breach of directors' duties, at least insofar as that breach lay in him causing those companies to enter into the June 2006 agreement without having regard to his conflicting duty to act in the best interests of Chilli #1.

(ii) Mr Cheal conducted the affairs of Chilli #1 oppressively by reason of the conduct referred to in (i) above and/or the conduct pleaded in [47] of the Further Amended Statement of Claim. I do not consider that the conduct of Mr Cheal can be characterised as no more than a decision as to the use of his intellectual property and personal labour. I consider that the evidence establishes that Mr Cheal engaged in a course of conduct, in relation to the affairs of Chilli #1, which was oppressive within the meaning of 232 of the Corporations Act (in choosing not to pursue any opportunity for the continued operation of that company's main business undertaking and in diverting or permitting the diversion of that business to Chilli #2 without regard to the interests of Chilli #1 or its 50% shareholder, Ms Fitzpatrick, and with the intention of excluding Ms Fitzpatrick from any share in the business formerly carried on by Chilli #1).

(iii) The alternative claims for relief having been made out, the appropriate relief:

(a) for the breach of directors' statutory and fiduciary duties (and for knowing assistance therein) would be for the defendants to compensate Chilli #1 for the value (if that can be separately determined) of the goodwill represented by the Chilli Surfboards company name and associated with the previous use of the Chilli logo as at 30 June 2006 (noting that the Chilli trade mark and goodwill referable specifically to the use of that trade mark reposed not in Chilli #1 but in Mr Cheal and then Cheal Industries);

(b) on the oppression claim would be for Ms Fitzpatrick to be put in a position whereby her share in Chilli #1 is acquired by Mr Cheal for a price calculated as being a half share of the net operating assets of the company at that time ($55,000) and a half share of the value attributable to the Chilli Surfboards company name and associated goodwill had that been purchased by Mr Cheal (or through him Chilli #2) from Chilli #1 as at June 2006; and

to the extent that the value in (a) or the full price for Ms Fitzpatrick's shares in the company in (b) cannot presently be determined because the value (if any) attributable to the goodwill of Chilli #1's name and business separate from the goodwill attributable to the Chilli trade mark cannot be determined by reference to Mr McMahon's report (that having been based on the now proven to be erroneous assumption that the trade mark was owned by Chilli #1), then the appropriate course in my view would be to refer to an appropriate intellectual property expert the determination of that question (ie the separate value, if any, as at 30 June 2006 of the goodwill in Chilli #1 attaching to the company name and its trading history). Valuation of that intangible asset of the company would need to be on the basis that ownership of the trade mark reposed in Mr Cheal and that all Chilli #1 had in that regard, prior to the June 2006 agreement between Chilli #2 and Cheal Industries, was the right to use the trade mark at that time (and perhaps the expectation that such a right would continue beyond the expiry of the fixed term under the 2005 licence agreement or would not be terminated without reasonable notice) and the benefit of any residual goodwill associated with the Chilli Surfboards company name and its previous use of the logo from 1999-2006.

Although there would presumably be a cost saving in referring the determination of that issue to Mr McMahon (who has familiarity with the business from his previous report), it seems to me that the appropriate expert to value any such goodwill (ie any goodwill separate from the Chilli trade mark itself) would be an intellectual property expert.

If it be accepted by the parties that any such separate goodwill would be or be likely to be nominal then in order to avoid unnecessary costs being incurred, it may be appropriate for me simply to fix at this stage a nominal value (if it cannot be agreed)

I will hear submissions on the course to be followed in that regard and as to the costs of the proceedings.

Background Facts

16Ms Fitzpatrick and Mr Cheal lived in a de facto relationship from about 1990 until October 2003. During that time, Mr Cheal learnt how to shape surfboards and, in 1998, he commenced business as a sole trader manufacturing surfboards under the name "Chilli Surfboards". Much was made by his Counsel, during the course of the hearing, of Mr Cheal's limited education and difficulty in reading and writing (due to his dyslexia), which it was submitted amounted to a disability and one that would preclude him from working otherwise than as an unskilled labourer were he not to be in a position to continue to make and shape surfboards (as he presently does through a company which the plaintiffs note currently has a million dollar annual turnover). Having regard to Mr Cheal's acknowledged educational limitations, it is not surprising then that Ms Fitzpatrick assisted Mr Cheal in the administrative aspects of the running of the Chilli #1 business from its incorporation, in particular assisting in relation to the paperwork of the business (that seems to have been attended to in an office in their home at least for some part of the initial years of the company's existence).

17On 17 July 1998, his father apparently having advised him to register the Chilli logo he was using as a trade mark, Mr Cheal lodged an application under s 27 of the Trade Marks Act 1995 (Cth) for registration as a trade mark of the words "Chilli Shapes by James Cheal" accompanied by the image of a chilli. (Mr Cheal's nickname since school had been "Chilli", hence the association with that name.) The said words and image were registered as TM 767677. The trade mark applied both to "surfboards, body boards, leg-ropes, board bags/covers" and to "sunglasses" (though the evidence is that this trade mark was only (or mainly) applied to surfboards). Ms Fitzpatrick had assisted in the filling out of the application form (T 10.26ff) and said that she and Mr Cheal had together worked out the classes of trade mark to which the proposed use of the trade mark related (T 10.46). Mr Cheal had little recollection of the way in which the form was completed or as to how or why Ms Fitzpatrick came to fill in the relevant details on the application form but 'supposed' there would have been a conversation between himself and Ms Fitzpatrick (T 60.28).

18Ms Fitzpatrick accepted in cross examination that both the application to register the trade mark that became TM 767677 and the subsequent application to register the trade mark that became TM 804353 (to which I will shortly refer) were in the name of Mr Cheal (T 12.23) and that this was "because it was always the intention that Mr Cheal own his trademark" (T 12.27), the latter being an answer on which some weight was later put by Ms Francois. In that regard, insofar as the question at T 12.25 is as to the reason for the applications being in the name of Mr Cheal, logically the intention to which Ms Fitzpatrick there deposed (as having "always" been the case) would seem to me to be an intention held up to the time of lodgement of the respective applications (and one which might have changed thereafter - as it clearly did on Mr Cheal's part at least as at 2006 when the trade mark was assigned by Mr Cheal on his accountant's advice to the then newly established corporate trustee of his family trust). Ms Francois submits that this evidence goes further and amounts to an acknowledgement by Ms Fitzpatrick that this was always Mr Cheal's intention up to the present. In circumstances where the allegation that Chilli #1 came at some stage to be the owner of the trade mark was not ultimately pressed by the plaintiffs, I do not consider that anything turns on whether the evidence as to Ms Fitzpatrick's understanding in the witness box of Mr Cheal's intentions was one that persisted after the registration of the trade marks in question. (I note, however, Ms Francois' contention that is of relevance when considering whether the conduct alleged to be oppressive was objectively unfair.)

19Chilli #1 was incorporated on 18 August 1999. Mr Cheal was appointed the director and secretary of the company and owned one A class ordinary share in the company. Ms Fitzpatrick owned one B class ordinary share in the company. Each owned one of the two issued ordinary shares in the company. (There is no evidence that either actually paid the subscription price for the shares, though again nothing in my view turns on this.) Ms Francois relies on the respective parties' contributions to the company as relevant to the objective fairness or otherwise of Mr Cheal's conduct in "changing corporate entities" (itself a revealing choice of words). In that regard, although Ms Fitzpatrick said in cross-examination (T 12.39) that she was involved in the majority of the major business decisions made by Mr Cheal in relation to Chilli #1 during the period 1999 to 2003, there is little evidence as to the business decisions made in that period or how she was involved therein. Broadly, the division of responsibility within the company seems to have been that the creative and marketing role was that carried out by Mr Cheal and that Ms Fitzpatrick's role (not to be discounted for that reason) was on the administrative side in the setting up and conduct of the business (while their relationship was on foot).

20Mr Cheal seemed to accept in the witness box that the incorporation of Chilli #1 was or would have been done on the advice of his accountant (Mr Scott Jago), with whom he had established a working relationship from not long after he had started business as a sole trader (T 50.46-51.6), (see T 52.27; T 52.9), though he could not remember what Mr Jago had said to him (T 52.5). (At T 64.6, he accepted that he had first started shaping boards on his own account trading in his own name as an individual and that then in 1999 Mr Jago advised him to trade through a company and that in August 1999 Chilli #1 was incorporated and he traded through that company.) Mr Cheal did not recall any discussions as to the shareholding of the company or as to his position as a director (see T 55).

21It seemed to me from his evidence that Mr Cheal did not draw much, if any, distinction between the corporate entity that had been set up and himself (and that may not be surprising having regard to the limitations on his education of which I was reminded by Ms Francois on more than one occasion). For example, when asked whether he knew why he had been included as a shareholder in the company, Mr Cheal's response at T 55.35 was:

To me I felt that the way I worked it out is that I'm - it's about me so I'm obviously an owner if you want to say or a shareholder. So to me I don't think twice about if I own something or not.

22That is consistent with the statement in [44] of his affidavit that, from the time that Chilli #1 was incorporated, he operated his business through Chilli #1 (though the proposition that he does not think twice about if he owns something or not is somewhat inconsistent with the assertion later in his affidavit that it "was always my intention that I own the trade mark in my own right" - Mr Cheal explained what he had meant by this statement at T 76.41 when he said that "I felt that the trade marks represented me in my work and how I - ... from my nickname and, so....").

23In any event, Mr Cheal accepted that from August 1999 he understood that the business of shaping and selling surfboards was Chilli #1's business (T 56.1) and that what he got from the conduct of that business was income by way of director's salary, a distribution of profit and the side benefit of the company paying for some travel and other expenses in association with the business (T 56.25), the benefits he obtained out of the company broadly being described by him as a wage (T 56.28).

24As to the "business' carried on by Chilli #1 (and, in particular, Mr Cheal's understanding of what was comprised by that business), I interpose to note that the suggestion by Ms Francois, at various times during the course of objections in Mr Cheal's cross-examination, that there was or might be a confusion on Mr Cheal's part as to what was meant by questions as to or relating to the business of Chilli #1 (see for example at T 56.5, T 61.14, T 64.34, T 65.28), seemingly prompted by the concern that Mr Cheal might make some unintended admission as to the entity in which the intellectual property reposed or as to what if anything was being "transferred" to or conducted by the new company, seemed to me to point to a difficulty in determining what weight should generally be accorded to Mr Cheal's evidence as to matters in respect of the ownership and use of his trade marks or the like. In other words, if Mr Cheal's understanding of concepts relating to corporations and intellectual property was as limited as Ms Francois was concerned to ensure that I appreciated it was, then the manner in which his evidence was couched in his affidavit must also have been affected by such limitations (and hence seems likely to represent his legal representatives' characterisation of what was conveyed to them by him rather than necessarily representing his own understanding of the position). Ultimately, nothing turns on the juxtaposition between the portrayal of Mr Cheal as a skilled surfboard designer with limited education and the impression conveyed by his affidavit of someone understanding the concepts referred to therein, and I draw no adverse inference as to Mr Cheal's credit as a witness therefrom (though my observation was that at least some of the confusion on his part in the witness box derived from the interruption to the flow of the cross-examination by the objections made thereto).

25In broad terms (leaving aside the question as to who was the legal owner of the Chilli trade mark at the relevant times and the distinction, to which little if any of the cross-examination seemed to me to be addressed, between intellectual property and a 'business'), it cannot seriously be disputed (and it was not disputed in the witness box by Mr Cheal) that: prior to August 1999, Mr Cheal was carrying on a business of shaping and selling surfboards that bore the Chilli logo; for the period from August 1999 until the incorporation of Chilli #2, Chilli #1 carried on a business that involved the shaping and sale of surfboards bearing the Chilli logo (and Mr Cheal ceased to carry on his earlier business in his individual capacity); from the time of the incorporation of Chilli #2, that new company carried on a business that involved the shaping and sale of surfboards bearing the Chilli logo (and did so under the same company name that had formerly been that of Chilli #1, using at least initially the same computer designs in relation to the shaping of the boards, operating out of the same premises and using the same equipment, and selling to some of the same customers as Chilli #1 had done); and Chilli #1, from that time, apart from finishing some orders and "glassing" some boards, ceased to carry on the business of shaping and sale of Chilli logo surfboards. The 'business' conducted successively by each of Mr Cheal, Chilli #1 and Chilli #2 was in substance the same (though I accept that Chilli #2 may have since expanded or developed that business).

26The purpose of Ms Francois' objections to the cross-examination of Mr Cheal in this regard seemed to be to meet in advance any suggestion that Mr Cheal might be said to have accepted that the "business" of making surfboards on a day-to day basis (that was from 2006 carried on by Chilli #2), involved the transfer from Chilli #1 of the trade mark under which the Chilli logo was able to be affixed to the surfboards (T 66.10), something I do not consider was in fact then being put to the witness. To the extent that Mr Cheal was later asked questions as to whether he was happy for Chilli #1 to use the logo and that he accepted that this was 'part' of the business that Chilli #1 was conducting (ie prior to the incorporation of Chilli #2) (see T 76.48-77.3), I took this evidence to be descriptive of the arrangements that must at least informally have been in place whereby Mr Cheal (as registered owner of the trade mark) had made no complaint as to its use by Chilli #1 and of the fact (that cannot seriously be disputed) that Chilli #1's business involved the sale of surfboards bearing that Chilli logo.

27There was no written agreement under which Chilli #1 used the Chilli trade mark on the surfboards it manufactured nor was there evidence of any oral agreement by which it was permitted to do so. Similarly, there was no evidence of any licence fee or royalty being paid by it for the period prior to 1 July 2005. In the absence of any such agreement, it would seem that the proper characterisation of the arrangements (subject to any contrary inference to be drawn from the entries in the company accounts) was that there was an implied licence by Mr Cheal to Chilli #1 for the use of the Chilli trade mark/logo (and that such a licence would be terminable at will or at least on the provision of a reasonable period of notice).

28From August 1999, Mr Cheal provided his services to Chilli #1 in the design/shaping of the surfboards; and he managed quality control and the dealings with customers and suppliers. Ms Fitzpatrick provided administrative services to the company by way of attending to the paperwork and correspondence (albeit with the assistance of a part-time bookkeeper). There was no employment agreement between Mr Cheal (or, for that matter, Ms Fitzpatrick) and the company. Both Mr Cheal and Ms Fitzpatrick were paid a wage by the company (Ms Fitzpatrick at T 13.26; Mr Cheal's evidence, already referred to, being that he got the benefit of a wage from the company).

29On 19 August 1999, a further application was made under s 27 of the Trade Marks Act for registration of a trade mark comprising the words "Chilli Surfboards Clothing Shaped by James Cheal", again with the image of a chilli, for use in respect of "clothes, headgear and footwear". The said words and image were in due course registered as TM 804353. Again, Mr Cheal signed this application but it was filled out by Ms Fitzpatrick. (There was a suggestion in Mr Jago's cross-examination that at some stage the company sold T-shirts with the Chilli logo but it is not clear at what stage that occurred, if at all, and nothing turns on it other than to explain why Mr Jago might have seen the entries in the company's accounts to "patents and trademarks" as referring to something other than TM 767677.)

30In mid-2002, Chilli #1's business operation was relocated to leased factory premises in Warriewood. By that time there were 12 employees in the business and the operating sales revenue had grown (from $262,188 in 2001 to $312,424 in 2002). There was an office at the couple's home in Warriewood where Ms Fitzpatrick said she did a lot of the paper work and administration (T 13.8).

31In October 2003, the relationship between Ms Fitzpatrick and Mr Cheal came to an end and Mr Cheal commenced a relationship with his now wife. At some stage thereafter, it seems that there were communications as to a property settlement of some kind between Ms Fitzpatrick and Mr Cheal (since, according to Mr Jago, the couple was going through a family law matter and he was aware of some involvement of a family law practitioner on behalf of Ms Fitzpatrick - T 150.2). Mr Jago's evidence in that regard was that "very early on after their relationship split", documents were prepared "in relation to the shares being signed over", which he said were signed by Mr Cheal but not Ms Fitzpatrick (T 149.30).

32According to Mr Jago, his firm had at some time prepared documents (or perhaps a document) for the transfer of Ms Fitzpatrick's shares in Chilli #1 (T 149.35/45), after a discussion about the matter between himself and Mr Cheal (T 149.49) and after some documentation had been received from a family law practitioner acting for Ms Fitzpatrick. (Ms Fitzpatrick's affidavit evidence was that she had been asked to transfer of her shares in about 2006 but refused to do so as she regarded this as her and Mr Cheal's son's inheritance.) Mr Jago's evidence was that he did not discuss any payment to be made for the transfer of Ms Fitzpatrick's share in the company or the value to be ascribed for her shares (T 151.8ff), and said that he did not have an opinion as to the value of the company (T 148.31) (though he had earlier been quick to volunteer the opinion that "Practically, the company's worth nothing" (T 147.23) as the reason why he would not have been expected to suggest that Ms Fitzpatrick be paid anything for her shares in the company).

33There is no suggestion that any share transfer form was ever signed by Ms Fitzpatrick. The significance of the evidence of its preparation, to my mind, is that it seems to have been understood at least as at that stage (certainly by Mr Jago, on whose advice Mr Cheal seems to have depended and acted throughout the relevant period, and presumably also by Mr Cheal) that Ms Fitzpatrick remained a shareholder of the company. Whether or not Mr Cheal appreciated that as a shareholder Ms Fitzpatrick had or might have certain legal rights/entitlements, and whether or not (as seems to have been the case) there was a concern that his wife should have a beneficial interest in "the business" if her property were to be put forward as security for a loan in respect of the business, it seems to have been understood that it would be necessary to secure Ms Fitzpatrick's agreement to any transfer of her shares in the company and that until this occurred she retained an interest in the company. The complaint now made by Ms Fitzpatrick in effect is that (her agreement to a transfer of the shares evidently not having been forthcoming for whatever reason), Mr Cheal proceeded to take steps or to adopt a strategy to divert the Chilli surfboard making business (loosely so-called) away from Chilli #1, so as to exclude Ms Fitzpatrick from that business. Such an inference is supported by the evidence that an attempt was made to obtain a transfer of her shares and that following her refusal to do so steps were taken to 'change corporate entities' (to use Ms Francois' words) and conduct the business of shaping and sale of Chilli surfboards from a new company. (The suggestion that it was a new business, as opposed to a new company, cannot in my view be sustained.)

34Over the period from 2001 to 2004, the financial statements of Chilli #1 (prepared with the assistance of Mr Jago) recorded an entry under the item "Intangibles" for "Patents & Trademarks" in the sum of $9,183. (In the accounts for the year ended 30 June 2000, the entry for Patents & Trademarks was in the sum of $3,560.) Mr Jago gave evidence that the entries in this regard were based on MYOB entries and were in error, they having initially been accepted by him as correct based on the assumption that the bookkeeper's MYOB entries would have been accurate (see his affidavit para [8] and T 127.20-129.12). (Mr Jago emphasised more than once in the witness box that his concern to be sure that the entries in the company accounts were both accurate and correct or any enquiry as to the accounts was subject to "financial cost constraints" - T 128.41; and see T 130.11, Mr Jago there seemingly being anxious to justify his conduct by reference to what a "reasonable person would be expected to do under the circumstances and again at T 132.6.)

35Mr Jago's evidence in the witness box was that he had queried the entry for Patents & Trademarks in the expense section of the profit and loss statements for the 2000 year with the bookkeeper (as well as an entry for legal fees) on the basis that a patent is not an expense (T 129.1) but that he had not queried the amount there shown. (Nor does it seem that he had queried how that could have increased from $3,560 to $9,183 for the 2001 year (see T 130.20-34).)

36Mr Jago says that he had reprimanded both Mr Cheal and Ms Fitzpatrick for putting the trade marks within a company trading entity (T 130.46/50; T 131.47) both that year (2000) and the second year (2001) and that it "stopped from then on". From that answer, I can only assume that Mr Jago meant that the expenses related to the trade marks were no longer included in the MYOB entries (because the entries themselves were carried in the accounts through until the changes made to the accounting treatment of that item in 2005). Tendered in evidence during the hearing (Exhibit 4) were Mr Jago's record of the MYOB entries on which the initial accounting entries were based.

37The thrust of Mr Jago's objection to what had occurred (which led to his reprimands to both Mr Cheal and Ms Fitzpatrick) thus seemed to be his view that, as a matter of principle, trade marks should not be held by a trading entity (T 132.26), not that the bookkeeper had recorded expenses in relation to the trade marks wrongly in the MYOB records. However, at the same time he was at pains to emphasise (see T 132.34) the wrong accounting treatment of moneys expended in relation to an intangible asset such as trade marks as an expense item (he said that he had corrected the bookkeeper as to the coding of these items as an expense when they were actually an "intangible asset").

38The nature of the objection which led Mr Jago to reprimand Mr Cheal as to the holding/ownership of trade marks by the company therefore suggests that he had assumed at that stage that there were in fact trade marks held or owned by the company (though this is inconsistent with his oral evidence to which I will return in due course). As at 2000 and 2001 the only trade marks that could have been so held were TM767677 and TM804353, as Mr Jago accepted in the witness box. (As to whether Mr Jago was aware that there had been any new trade mark application (or trade mark created) as at 2001 (to explain the increase in the sum recorded as between the 2000 and 2001 years), his response at T 130.38 was that he was aware that Mr Cheal and Ms Fitzpatrick were looking at other trade marks but he does not suggest that he was aware of any such new trade marks having been obtained at that time.)

39For the financial year ended 30 June 2005, there was no corresponding entry in the financial statements of Chilli #1 in respect of "Patents & Trademarks" as had appeared in former years. Instead, the figure of $9,183 was recorded under the hearing "Current Receivables" and described as "James Cheal (Patents & Trademarks)".

40Mr Jago has deposed (in his affidavit filed on 7 February 2012) as to his usual practice in relation to the preparation of the financial statements for Chilli #1, namely that he would review the MYOB entries provided to him by the company's bookkeeper; would use those to prepare the financial statements; would rely entirely on those entries in so doing; was not provided with and did not examine any documents supporting those entries; did not audit the accounts of the company; and that once he had prepared the financial statements Mr Cheal would come to his office to sign them. Mr Jago said that "The only parts of the financial statements that I would occasionally draw to his attention were the profit and loss" ([6]). He has deposed that the entry of $9,183 for "Patents & Trademarks" in the 2001 Financial Statements was based solely on the MYOB entries and that for subsequent years this entry was "simply transferred" from the earlier statements.

41Mr Jago then deposed that at some stage in or about 2005 he was involved in negotiations with companies in the USA and Japan respectively as to the payment of royalties to Mr Cheal and that an enquiry was made in that context as to who owned TM 767677 and TM 804353. (Mr Jago also gave evidence of a proposal by Billabong for distribution by it in Australia and Japan of surfboards made by Mr Cheal.) In his affidavit, Mr Jago said that he then became aware from an employee of Chilli #1 (Mr Eaton, who is now a co-director of Chilli #2) that Mr Cheal was the owner of the trade marks, not the company, and realised that the entries in the financial statements in the company's financial statements for the period 2001 to 2004 were incorrect. He said that he decided to change only the narrations from the year that the mistake was uncovered and that he assumed that the bookkeeper had entered "payments against the trade mark invoices as an expense (balance sheet item)" when "they were in fact payments on behalf of Mr Cheal. Mr Jago said that he corrected the financial statements by recording the sum of $9,183 as a loan to Mr Cheal in note 6 to the 2005 Financial Statements.

42The evidence adduced as to the realisation, and correction, of the error in the accounts seems to have been responsive to the observance by Bergin CJ in Eq on the leave application for the derivative suit as to the lack of any explanation for the change in the accounting entries and to dispel any inference that the relevant trade mark had in fact been transferred to Chilli #1 and was an intangible asset of that company.

43Meanwhile, on 30 December 2004, a fixed charge was granted over the assets of Chilli #1 in favour of National Australia Bank and duly registered. It appears that this was granted in the context of the acquisition at around that time of factory premises at Warriewood from which the company's business was then operated (and suggests that at least some finance was able to be procured in the company's name prior to the decision made to change corporate entities, which has been attributed to the difficulty in obtaining such finance).

44As at mid 2005, therefore, the position was that: Mr Cheal and Ms Fitzpatrick's relationship had come to an end; there may by then have been an attempt to obtain her agreement for the transfer of her share in Chilli #1 in the context of attempts to reach an agreement as to the settlement of the couple's financial affairs at that stage (if Mr Jago's timing of the events is accurate, though Ms Fitzpatrick seems to put the enquiry as to the transfer of her shares at a later time); Mr Jago had been involved in negotiations with other entities looking at proposals for a broader distribution of the surfboards shaped by Mr Cheal in the context of which an enquiry had been made as to who owned the trade mark (an enquiry that, given Mr Jago's expressed confidence that it was Mr Cheal, might conceivably have been met by an immediate response rather than the need for a further enquiry, though I accept that Mr Jago may have wished for accuracy to have confirmation as to what precisely was the position at that stage); and at least some funding had been procured from the National Australia Bank in relation to the factory premises acquired at Warriewood.

45It was in that context that, on 1 July 2005, an Intellectual Property Licence Agreement was entered into between Mr Cheal, as Owner, and Chilli #1, as Licensee, under which Mr Cheal granted to Chilli #1 an exclusive licence (for the period 1 July 2005 to 30 June 2006) to use the Intellectual Property defined therein for the permitted use of the manufacture of surfboards (and all associated and related uses). The Intellectual Property was defined as meaning and including "all of the rights of the Owner in respect of all Trade Marks and copyright in Chilli Surfboard logos, and all other Patent and Design Rights, rights in confidential information, rights in the name and reputation, rights for actions for passing off design rights, methods of manufacture and rights in respect of business systems and methods". The licence fee was $10 per surfboard (with the exception of team and promotional boards). Mr Cheal warranted that he was the owner of the Intellectual Property.

46Under the licence agreement, the parties agreed that Mr Cheal was entitled to assign all or any part of the Intellectual Property and/or his rights under the licence agreement (though as a condition of such assignment he was to procure from the assignee a covenant for the benefit of Chilli #1 to the effect of the licence agreement).

47Pausing there, insofar as the timing of the decision to enter into a formal licence agreement with Chilli #1 (when for the preceding years there had apparently been no perceived need to do so) occurred after an unsuccessful attempt to procure Ms Fitzpatrick's agreement to transfer her share in the company, this could support an inference that the licence agreement was, as Mr Evans contends, a step in the strategy of excluding Ms Fitzpatrick from the business. That could be the case if, by making it clear on the face of the agreement that there was no right to use the intellectual property after the expiry of the term, it was considered that this would make it difficult for Chilli #1 later to assert a continuing right to use the trade mark. However, there is some doubt as to when the request for transfer of the shares was made. Moreover, as at mid 2005 there had been discussions for the broader operation of the surfboard shaping business and the need for documentation of a formal licence arrangement may have been seen as commercially necessary in the context of those discussions. Mr Jago gave evidence that he had been "at" Mr Cheal for a long time "to get written down in a formal way a relationship between whoever he dealt with and the trademark holder" (T 141.45). (There was, I should note, no evidence to that effect in his affidavit (and it seems inconsistent with the suggestion in [16] of his affidavit) that he had not known, prior to discovery of the accounting error, that Mr Cheal was the owner of the trade marks.)

48But for the fact that there were, at the time, commercial negotiations in relation to which the source of the right of Chilli #1 to use the trade marks would have been of relevance, it is possible that an inference might have been able to be drawn that the July 2005 agreement was a step designed to facilitate the termination of the right of Chilli #1 to use the trade mark. (That said, I consider such an inference would have been a tenuous one, since entry into the July 2005 agreement could only have been said to facilitate such a strategy if it operated to deprive Chilli #1 of some entitlement to a longer term right or to a longer period of notice before its termination. From the tenor of the evidence from Mr Cheal, I doubt that he would have appreciated the somewhat attenuated logic of such a strategy.)

49In any event, given the plausibility of the alternative explanation for the July 2005 agreement (that being the context of the negotiations with overseas companies that might involve the use of the trade mark), I do not consider that it can be concluded that entry into the July 2005 agreement was part of an overall strategy to exclude Ms Fitzpatrick from the business of Chilli #1.

50Cheal Industries was incorporated on 12 July 2005, Mr Cheal and his wife being the directors and each owning half of the issued share capital. Mr Cheal is the company secretary. Also in July 2005, a trust was established (the Hunga Trust) with Cheal Industries as the trustee and Mr and Mrs Cheal and their children as beneficiaries. A further trust with the same trustee and beneficiaries was established in February 2006 (the Eskmon Family Trust).

51There was a notification of change of address form completed in September 2005 (CB p49) in relation to the Chilli trade marks, on which the owner of the trade marks was noted as Chilli Surfboards Pty Ltd (ie Chilli #1), not Mr Cheal. However, Mr Cheal's evidence as to the circumstances in which that form was completed was that he did not recall talking to the bookkeeper about what to put on the form (T 78.27) and would not have "picked up on" the fact that it was in the name of Chilli Surfboards (T 78.22). (His evidence in another context was that he did not really take much notice of paperwork (T 78.43), which is consistent with his evidence generally.) I therefore draw no inference from the fact that this document was lodged in the name of Chilli #1.

52On 9 February 2006 (hence some 4 months or so prior to the expiry of the Licence Agreement), Mr Cheal (who deposed in his affidavit to it always being his intention to keep his own interest in the trade mark) entered into an Assignment Agreement under which, as assignor, he assigned to Cheal Industries, as trustee of the Hunga Trust, the "Intellectual Property" (defined in the same terms as that expression was used in the Licence Agreement) in consideration of the sum of $14,500 (that being identified as $12,000 for patents/trade marks and $2,500 for other intellectual property). No covenant was procured from Cheal Industries, as assignee, to perform the obligations of Mr Cheal under the Licence Agreement (in apparent breach of the condition upon which the assignability of those rights had been made subject under that agreement).

53Further trade mark applications were then made by Cheal Industries in May 2006 in relation to the Chilli name and logo. (The basis for, or significance for present purposes of, those applications was unexplained.)

54On 16 June 2006 (shortly prior to the expiry of the term of Chilli #1's licence agreement but also prior to the actual incorporation of Chilli #2), Cheal Industries, as owner, entered into an Intellectual Property Agreement purportedly with Chilli #2 (a company then seemingly yet to be formed). In its terms the licence was to commence on 1 July 2006 and continue "until terminated". Under that agreement, Cheal Industries granted to Chilli #2 an exclusive licence to use the Intellectual Property (defined in the same terms as the Chilli #1 Intellectual Property Licence Agreement) for the same permitted use (at a licence fee initially at $25 per surfboard sold, excluding promotional or team surfboards). By reference to the assignment of intellectual property to Cheal Industries in February 2006, the licence granted to Chilli #2 under the June 2006 agreement extended to the trade marks registered in 1998 and 1999 as well as to the 2006 trade marks. Mr Cheal was involved, as a director of Cheal Industries, in those steps.

55On 23 June 2006, the name of Chilli #1 was changed from Chilli Surfboards to its present (non-descriptive ACN) name. On the same date, Chilli #2 was incorporated under the name of the former Chilli #1. Mr Cheal is a director and secretary of Chilli #2. Cheal Industries owns one A class share and 90 ordinary shares in the company. There is a co-director, Mr Taylor Eaton (the former Chilli #1 employee who had responded to the enquiry in 2005 as to the ownership of the Chilli trade marks). A company by the name of Tecro Management Pty Ltd owns one B class share and the remaining 10 ordinary shares.

56On 1 July 2006, Chilli #2 commenced the business of the manufacture and sale of surfboards bearing the Chilli logo. Although Mr Jago was reluctant to make any concession in this regard (T 142.30/50), it seems impossible not to conclude (and Mr Cheal conceded as much) that this is in substance the same business that was formerly carried on by Chilli #1 (ie the shaping and sale of boards bearing the Chilli surfboard logo). Mr Cheal accepted that when Chilli #2 commenced operating, the same surfboard shapes or catalogue of shapes that had been used up to that date with Chilli #1 were used (T 76.33) and the process of shaping the boards occurred in the same way (T 76.29).

57The distinguishing factors that Mr Jago asserted made it a "new business" were that it was a new company and it was a different licensing agreement (T 142). Such a distinction is not compelling. (Mr Jago ultimately agreed that the "type of business" that Chilli #1 had been carrying on was, from 1 July 2006, going to be carried on by Chilli #2 - T 148.48 - but he did not accept that the end result of achieving the purpose set out in [26] of his affidavit (namely that Mrs Cheal have a beneficial interest in "the business") was that Chilli #1 was effectively of no value since "It's a manufacturing company and it was free to continue on sourcing work from other people and trading, so a bump in the road..." T 148.42; a view on its face inconsistent with the earlier expressed view that as at the time that he was considering the desired purpose of setting up the business so that Mr Cheal and his wife were the beneficial interest holders of "the business" (by which he meant the company), the company was "worth nothing" ("Practically, the company's worth nothing, so why would I do that" T 147.23).

58Mr Jago denied that Mr Cheal had approached him and said that he and his wife had decided that they wished to set up a new company and to run the business through that company and to exclude Ms Fitzpatrick from any involvement in that business (T 140.37) or that Mr Cheal said that he wished to set up a business in such a way that Ms Fitzpatrick was excluded from it (T 141.4). He maintained that the reason for the establishment of Chilli #2 was as set out in [18] of his affidavit (namely so that both Mr Cheal and his wife were "beneficial interest holders in the business") (T 146.34). He referred in his evidence to the financial position of the company:

Well, if you look at the chain of events that I have described, which you are excluding, but if you look at those chain of events there was a sequence and orders for what happened. We had a situation where Chilli's parents were proposing [propping] up Chilli #1 and were wanting to withdraw their money for personal reasons. We had a situation where they were continually complaining that they were short on cash flow. If you understand small businesses it's a huge concern and risk area. I would have continual conversations with them about that. The only way that they were able to secure funding to continue to even keep going or for Chilli to keep going in his business was to get funding from the bank and the way that that happened was from Simone Vince Cheal his wife putting up her property as security. I think it would be unfair for anyone to assume that she would do that without any proprietary interest in a company so certainly I think that was fair, so if you look at the whole story I think it fits.

59Mr Jago (whose role seems to have gone beyond that of the provision solely of accounting services and to have encompassed instead a trusted advisory role) deposed in general terms to having made many attempts on behalf of Mr Cheal to obtain various forms of finance and funding from banks to support Chilli #1 over the period between 1998 and 2006 and that he was unable to secure funding without the provision of security in the form of a real property mortgage (though, as I have noted earlier, there was some funding in 2004 secured by a fixed charge over the company assets). He also deposed that Chilli #2 was incorporated following discussions with Mr Cheal in which "Mr Cheal and I had discussed that the purpose of incorporating Chilli #2 which was so that both Mr Cheal and his wife Ms Vincze-Cheal were beneficial interest holders in the business" ([26]). An alternative way to achieve this, without the cost of setting up a new (and seemingly competing) company would have been to buy out Ms Fitzpatrick's shares in the company but Mr Jago seemed to consider this a surprising suggestion.

60Some 20 months after Chilli #2 was incorporated, an overdraft was provided to Chilli #2 in the sum of $100,000 secured partly on a mortgage over property owned by Mr Cheal's wife. (Perhaps not surprisingly, in the context of the personal relationships involved, Mr Cheal and his wife gave evidence that she was not prepared to allow her property to be used as security for any borrowings unless she had an interest in the business.) The delay between incorporation and the provision of the overdraft (which might be thought to gainsay the impetus for the incorporation of Chilli #2), was attributed by Mr Jago to the usual delays in dealing with banks.

61On the basis of that evidence, it is submitted by Ms Francois that the reason for the incorporation of Chilli #2 was the difficulty that Chilli #1 had encountered in not being able to borrow from institutional lenders to finance its trading activities (and not a strategy of the kind alleged by the plaintiffs of excluding Ms Fitzpatrick from the business). Whether or not there was such a strategy, however, the effect of what was done was to exclude Ms Fitzpatrick from any share in the business then going forward and, relevantly, to destroy the value of the shares in Chilli #1.

62Over the period from 2001-2006, the financial statements of Chilli #1 record growth in the operating sales revenue ($262,188 in 2001, $312,424 in 2002, $398,887 in 2003, $400,901 in 2004, $554,047 in 2005 and $879,374 in 2006). (Ms Francois notes that Chilli #1 had not paid any dividends and had made a retained loss in 2004 ($1,968) and had only small retained profits in 2005 ($947) and 2006 ($24,527). There was a drop in the company's operating sales revenue in the 2007 financial year (to $65,258) and, even further, to $8,033 in the 2008 statements. By contrast, the operating sales revenue in the Chilli #2 financial statements for the 2007 and 2008 years was $1,669,598 and $1,695,551, respectively. No intangibles or patents or trade marks are recorded in the Chilli #2 accounts, nor does any licence fee payable to Cheal Industries under the Chilli #2 licence agreement there seem to be recorded.

63There seems to be no dispute that the steps taken by Mr Cheal in establishing Cheal Industries, assigning the trade marks to it, and then establishing Chilli #2 (on most, if not all of which, Mr Jago seems to have advised) were done without the knowledge of Ms Fitzpatrick. They were also taken at a time when Mr Cheal (as a director and employee of Chilli #1) owed various duties to Chilli #1 (as a director, to promote the business and interests of that company and not to place himself in a position of conflict between his personal interests (or his duty to Cheal Industries/Chilli #2) on the one hand and his duty to Chilli #1 on the other hand; as an employee, one might expect a duty at least of loyalty/good faith).

Pleading

64The case as pleaded, by the time of the hearing, was that contained in the Further Amended Originating Process filed consequent upon leave being given for the bringing on behalf of Chilli #1 of the derivative suit in these proceedings.

65The nub of the defence to the allegations of breach of duty and oppression, in essence, is that the plaintiffs' case rests on the foundation that Chilli #1 was the owner of TM 767677 (that being the initial registered trade mark). Ms Francois took me through the pleading at some length to make good the submission that this was a critical issue on which the plaintiffs' case must fail. (It was conceded by Ms Francois that if Chilli #1 in fact owned the trade mark then the conduct alleged against Mr Cheal would have amounted to a breach of his duties as a director - T 5.47.)

66Ms Francois submits that, of the claims made by the plaintiffs, all but that pleaded in [47] (the general claim of oppression) are predicated on the allegation contained at [15] that:

At some time prior to 30 June 2001 the first defendant [Mr Cheal] caused Trade Mark 767677 or the right to make use of Trade Mark 767677 and any associated goodwill attached to products bearing that Trade Mark to be transferred to Chilli #1 to be used in the business of that company as described in paragraph 13 above [that being, relevantly, the manufacture and sale of surfboards under the brand name 'Chilli Surfboards']. (my emphasis)

67Insofar as [15] alleges the transfer of a "right to use" the trade mark, Ms Francois submits that what must be implicit therein is that the right that was 'transferred' was equivalent to a proprietary right such that Mr Cheal was no longer free after that point in time to deal with the trade mark as his property. (She accepts that there is no contention that Chilli #1 was not able to use Mr Cheal's trade mark, as Mr Cheal's conduct is said to demonstrate; issue being taken only with the proposition that in some way Chilli #1 acquired an exclusive right as against Mr Cheal to use the trade mark.) Ms Francois maintains that [15] must be read as an allegation that Mr Cheal was thereafter no longer free to deal with the trade mark as his own property. It seems to me that this places too much weight on the use of the verb "to transfer". The grant of a right to use a trade mark, for example, would not of itself necessarily imply that the right was one of exclusive use or that Mr Cheal would not have remained able (subject to this being consistent with his duties as director/employee of Chilli #1) to make use in some way of his trade mark. However, where (in later paragraphs of the pleading) a breach is predicated on the transfer back to Mr Cheal of such a right, then I accept that the pleading is premised on Mr Cheal having previously given it away in some fashion.

68As to the allegation in [19], Ms Francois contends (as must logically be the case) that if Mr Cheal was always the owner of the trade mark then there can have been no improper transfer back to himself of the trade mark. She further points out that there is no allegation in [19] of any improper transfer back to himself of the rights to use the trade mark.

69In that regard, while Mr Evans concedes that the evidence shows that Mr Cheal was the owner of TM 767677 at all times from 1998 to about February 2006, he submits that the evidence also shows that, in the period from the incorporation of Chilli #1 in August 1999 until 1 July 2005, Mr Cheal permitted Chilli #1 to use the trade mark in the business then conducted by Chilli #1 of making and shaping surfboards bearing the chilli logo covered by that trade mark. Mr Evans submits that, in that respect, the pleading at [15] is correct and that Mr Cheal did grant to Chilli #1 a right to use TM 767677 during that period. Further, it is submitted that, having permitted Chilli #1 to use the trade mark without fee for the period from August 1999 to 1 July 2005, Mr Cheal had for that period waived his rights with respect to the trade mark (and that the entry into the July 2005 licence agreement must be seen in that context).

70The following allegations are then said to be dependent on a finding that the trade mark in question or the right to make use of that trade mark, and any associated goodwill, had been transferred to Chilli #1 at some time prior to 30 June 2001:

(i) the allegation in [22] (the first allegation of breach of director's duties) that in causing Chilli #1 to transfer TM 767677 to himself (as alleged in [19], namely at some time between 1 July 2004 and 30 June 2005 for a sum equal to the amount recorded as the value of "intangibles" in the balance sheet of Chilli #1 for the year ending 30 June 2004) and in the manner and with the intent pleaded in [20] (namely without disclosure of this action to Ms Fitzpatrick, with the deliberate concealment of the fact of transfer from her and without the informed consent of Ms Fitzpatrick or Chilli #1) Mr Cheal breached the statutory duties owed to Chilli #1 under ss 180, 181 and 182 of the Corporations Act and the fiduciary duty he owed as a director; the pleading in [22] goes on to allege that the breach of statutory and fiduciary duties arose in that Mr Cheal exercised his powers as a director to transfer the trade mark to himself "for the purpose of using that trade mark and the associated goodwill of the business of Chilli #1 to set up a business in competition with Chilli #1 and, in effect, to destroy the business and goodwill of Chilli #1 and to appropriate the benefit of that business and goodwill for himself and Mrs Cheal.

Pausing here, I accept that the allegation of breach of statutory and fiduciary duties pleaded in [22] is clearly predicated on Chilli #1 having acquired either ownership of the trade mark or some kind of exclusive or proprietary right to use it, since otherwise logically there could be nothing to be 'transferred' back to Mr Cheal.

(ii) the allegation of oppressive conduct in [23] (prefaced with the words "further to the matters pleaded in [22]") that, in causing Chilli #1 to transfer TM 767677 to himself as alleged in [19] and in the manner and with the intent pleaded in [20], Mr Cheal acted in a manner oppressive of the interests of Ms Fitzpatrick as a shareholder in Chilli #1 contrary to s 232 of the Corporations Act;

I accept that this allegation is also predicated on Chilli #1 having had an interest in or some kind of proprietary or exclusive right to use the trade mark, though this conclusion flows not from the words "further to the matters pleaded in [22]" but from the fact that otherwise there could be nothing to transfer back to Mr Cheal.

(iii) the allegation in [26] that, in causing Chilli #1 to enter into the Intellectual Property Agreement on 1 July 2005 (as pleaded in paras [24], [25], [25A], [25B] and [25C]) (under which a licence was granted to Chilli #1 to use the trade mark for a one year period) and by entering into it himself, Mr Cheal breached the statutory and fiduciary duties owed by him;

Here, it must be noted that [26] contains both an allegation of breach "by causing Chilli #1 to enter into the July 2005 agreement, as pleaded in [the specified paragraphs]," - those qualifying words being grouped within commas - and an allegation of breach not so qualified by those words, namely the breach constituted "by entering into the said agreement himself".

The conduct that qualifies the first allegation of breach, relevantly includes the allegation in [25A] that the Intellectual Property and associated goodwill was "in whole or substantial part then owned by Chilli #1 and Chilli #1 was, and had at all relevant previous times been, entitled to the exclusive use and benefit of the Intellectual Property and the associated goodwill" and the allegation in [25C] that the 2005 Agreement "was a sham intended to set up a false legal situation" in which Mr Cheal "could claim that he was the lawful owner of the Intellectual Property and the associated goodwill prior to 1 July 2004 and, further, that Chilli #1's right to use the said Intellectual Property was subject entirely to the terms of the July 2005 Agreement which terms included a power available to [Mr Cheal] to terminate the said agreement at any time".

Whether the allegation in [26] is dependent on a finding that Chilli #1 was the owner/exclusive user of the trade mark depends on whether the alleged breach in [26] is to be read conjunctively or not - since it is only the first part of the paragraph that is qualified by the reference to the ownership of the intellectual property.

Mr Evans submits that the case pleaded at [24] to [27] does not rest on the proposition that Chilli #1 was the owner of Trade Mark 767677. Rather, it is said that the breach of directors' and fiduciary duties (and oppression) by entry into the July 2005 Agreement rests on more than the licence agreement being with respect to intellectual property and associated goodwill (alleged in [25A] to have been in whole or substantial part then owned by Chilli #1 and to which it had been entitled to the exclusive use and benefit), namely that it was the first step in the implementation of a strategy by Mr Cheal to transfer the beneficial interest in the business conducted by Chilli #1 into an entity owned and controlled by himself and his wife to the exclusion of Ms Fitzpatrick.

Mr Evans thus submits by entering into that agreement Mr Cheal placed himself in a position in which there was a conflict, or a potential conflict, between his duty as a director to advance and promote the business of Chilli #1 and his personal interest in making use of the trade marks for his own benefit and in effectively transferring the business of Chilli #1 to Chilli #2.

I also note that the consequence of the alleged breach of fiduciary duties in entering into the July 2005 agreement is in [28] pleaded to be that the agreement was void or unenforceable and ineffective to confer any rights on either Chilli #1or Mr Cheal.

(iv) the allegation in [27] (expressed to be "Further to the matters pleaded in paragraph 22 above") that, by causing Chilli #1 to enter into the Intellectual Property Agreement on 1 July 2005 (and, unlike [26], this is not qualified by the words "as pleaded in" any earlier specified paragraphs) and by entering into it himself, Mr Cheal acted in a manner oppressive of the interests of Ms Fitzpatrick as a shareholder in Chilli #1 contrary to s 232 of the Act;

The only textual basis for a contention that this is dependent on the factual finding that Chilli #1 was the owner or exclusive user of the trade mark is the prefatory words "Further to the matters pleaded in [22]". It seems to me that such a contention cannot be maintained. The words "Further to" must in ordinary parlance and in a pleading context be read as introducing an allegation that is separate and additional, hence further, to the previous allegation. I see no basis for reading it as incorporating by reference the earlier allegation as part of the further allegation.

(v) the allegations in [33] and [34] that by entering into the February 2006 agreement (described in [30] as an agreement under which Mr Cheal purported to assign to Cheal Industries the Intellectual Property and associated goodwill at what was said to be a gross undervalue), and by causing Cheal Industries to enter into it, Mr Cheal acted in breach of his fiduciary and statutory duties as a director of Chilli #1;

While [33] and [34] do not themselves make reference to the ownership/right of exclusive use of the trade mark, [31] pleads that the agreement was ineffective at law to assign the Intellectual Property and the associated goodwill "which was then owned by Chilli #1". The words "or in the alternative held by Chilli # 1 pursuant to the July 2005 Agreement" were deleted when the amended pleading was filed.

The allegations in [33] and [34] are not in their terms dependent on a finding that Chilli #1 was the owner of the trade mark in question, although the allegation that it was sold at a gross undervalue logically would suggest that the owner was Chilli #1 since the fact that Mr Cheal may have sold his own intellectual property at an undervalue is surely of itself not something of which Chilli #1 could complain.

(vi) the allegations in [38] that the 2005 and 2006 agreements (and the June 2006 licence agreement with Chilli #2) were all shams "in the sense that they were legal contrivances created with the intent to give the colour of legality to the conduct of [Mr Cheal] in breach of his duties as a director of Chilli #1 as pleaded in [22]" and [39] that, to the extent that they were valid to convey any legal rights to the trade mark or the right to make use of the trade mark, there is a liability on the part of the defendants to compensate Chilli #1 for the transfer and assignment of the trade mark and any associated goodwill "by reason of the matters pleaded in [22]";

In their terms these allegations assume that the matters "as pleaded in [22]" occurred and are to that extent predicated on the factual underpinning for that paragraph. That said, the premise of [39], that the agreements were valid to convey legal rights, seems inconsistent with the allegations in [22] so that there is to that extent a logical difficulty in [39].

(vii) the allegation in [40] that (further to [38] and [39]), in or around July 2005 Mr Cheal sought to claim and take for himself the benefit of the Intellectual Property and associated goodwill "then held by Chilli #1 and then (my emphasis) in or around June 2006, [Mr] Cheal acting in his capacity as director of Chilli #2, sought to negotiate the June 2006 Agreement on terms favourable to Chilli #2 at the expense of Chilli #1";

The first part of this allegation is clearly predicated on Chilli #1 then having the benefit of the trade mark (it falling within "Intellectual Property") and associated goodwill, which seems to be predicated on an allegation that at the time of entry into the 1 July 2005 agreement Mr Cheal did not have the benefit thereof. However, the second half of the paragraph commencing "and then" is not predicated on such an assumption.

Mr Evans also contends that the further or alternative case pleaded in [39], [40] and [41] is not predicated on the assertion that Chilli #1 was the owner of any trade mark (rather, being expressly pleaded on the premise that the July 2005 agreement, the February 2006 agreement and the June 2006 agreement are legally effective, inter alia, to confer rights over TM 767677).

(viii) the allegations in [41], [42] and [43], respectively, that by acting in the manner detailed in [38], [39] and [40], Mr Cheal breached the duty owed under s 180 to exercise his office as a director of the company with a reasonable degree of care and diligence (the particulars to which include neglecting to attempt to extend the July 2005 agreement or to negotiate a new agreement for the use of the intellectual property); the duty owed pursuant to s 181 of the Corporations Act; and the equitable duty not to enter into engagements in which he had an actual or personal conflict of interest.

To the extent that these allegations turn on at least the second half of [40], they are not predicated on any factual finding that Chilli #1 owned or held exclusive or proprietary rights to the trade mark.

71The only allegation that Ms Francois concedes does not rely on the fact of ownership by Chilli #1 of the TM 767677 is the allegation in [47] that:

Further and in the alternative to the above, by reason of Cheal's conduct in entering into the February 2006 Agreement, by causing Industries to enter into that agreement, by neglecting and failing to attempt to seek an extension of the June 2005 Agreement on behalf of Chilli #1, by bringing about the acquisition or incorporation of Chilli #2, by causing Industries and Chilli #2 to enter into the July 2006 Agreement, Cheal conducted the affairs of Chilli #1 in a manner oppressive to the interests of Fitzpatrick.

72Ms Francois, in her opening, made it clear that the defendants' position was that the only case they faced on the pleadings was one based on Chilli #1 having owned the trade mark (T 6.21). (The import of that submission turns, of course, on the proper construction to be accorded to the pleadings.)

73Therefore, before turning to the issues identified earlier for determination, it is necessary to address the submission that the claims for relief (other than for oppression as pleaded in [47]) stand or fall on a finding that TM 767677 as at the relevant time was the asset of Chilli #1 (as opposed to being an asset that it had the right, exclusive or otherwise, to use at that time).

74The general rule that relief is confined to that available on the pleadings is a rule of procedural fairness. Isaacs and Rich JJ in Gould v Mount Oxide Mines Limited (in liq) (1916) 22 CLR 490 (at 517) referred to this in the following way:

Undoubtedly, as a general rule of fair play, and one resting on the fundamental principle that no man ought to be put to loss without having a proper opportunity of meeting the case against him, pleadings should state with sufficient clearness the case of the party whose averments they are. That is their function. Their function is discharged when the case is presented with reasonable clearness . Any want of clearness can be cured by amendment or particulars. But pleadings are only a means to an end, and if the parties in fighting their legal battles choose to restrict them, or to enlarge them, or to disregard them and meet each other issues on fairly fought out, it is impossible for either of them to hark back to the pleadings and treat them as governing the area of contest. (my emphasis)

75The thrust of those observations was repeated more recently by Mason CJ and Gaudron J in Banque Commerciale SA (In Liq) v Akhil Holdings Limited [1990] HCA 11; (1990) 169 CLR 279 at 286-287:

The function of pleadings is to state with sufficient clarity the case that must be met: In this way, pleadings serve to ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and, incidentally, to define the issues for decision. The rule that, in general, relief is confined to that available on the pleadings secures a party's right to this basic requirement of procedural fairness. Accordingly, the circumstances in which a case may be decided on a basis different from that disclosed by the pleadings are limited to those in which the parties have deliberately chosen some different basis for the determination of their respective rights and liabilities.

Ordinarily, the question whether the parties have chosen some issue different from that disclosed in the pleadings as the basis for the determination of their respective rights and liabilities is to be answered by inference from the way in which the trial was conducted. It may be that, in a clear case, mere acquiescence by one party in a course adopted by the other will be sufficient to ground such an inference.

76Modern authorities indicate that the rule is not a technical one. Dawson J in Banque Commerciale said at 296-297:

But modern pleadings have never imposed so rigid a framework that if evidence which raises fresh issues is admitted without objection at trial, the case is to be decided upon a basis which does not embrace the real controversy between the parties. Special procedures apart, cases are determined on the evidence, not the pleadings.

77The rule confining relief to that which is founded on the pleadings usually falls for consideration in the situation where a party has put an issue into contention in the course of trial that was not pleaded. Thus, in Nocton v Lord Ashburton (1914) AC 932, cited by Isaacs and Rich JJ in Gould v Mount Oxide Minds , where the issue was whether (where fraud was charged and the charge failed), the plaintiff could nevertheless succeed on a claim of negligence, it was there relevant that there was no injustice to the defendant as " [t]he same evidence would have been required whether the action had been founded on negligence or fraud, and the defence would have been conducted in either case on the same lines" (per Lord Parmoor at 977-978).

78In Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2008] NSWCA 206, Ipp JA (at 424) set out the following five propositions as to the principles relating to pleadings:

(a) The rule that, in general, relief is confined to that available on the pleadings secures a party's right to a basic requirement of procedural fairness.

(b) Apart from cases where the parties choose to disregard the pleadings and to fight the case on additional issues chosen at the trial, the relief that may be granted to a party must be founded on the pleadings.

(c) It may be that, in a clear case, mere acquiescence by one party in a course adopted by the other will be sufficient to ground an inference that the parties have chosen a different basis to the pleaded issues for the determination of their respective rights and liabilities.

(d) Acquiescence giving rise to a departure from the pleadings may arise from a failure to object to evidence that raises fresh issues - it is in this sense that "cases are determined on the evidence, not the pleadings".

(e) While cases are to be decided upon a basis that embraces the "real controversy" between the parties, the real controversy has to be determined in accordance with the principles stated.

79Here, focus has been placed by Ms Francois, at least in relation to the allegations at [26] and [27] and, by logical extension, [40], on the linguistic construction of the pleadings (with reference to the meaning of the prefatory words "Further to..." and the description of alleged breaches by reference to conduct expressed conjunctively by use of the words "and" or "and then"). For the reasons earlier adverted to, I do not accept that "further to" imports within a particular allegation the preceding allegation to which it is said to be "further"; rather, it introduces an additional allegation.

80Insofar as Ms Francois has submitted that, where a breach of statutory/fiduciary duty is pleaded on two grounds interlinked with the conjunction "and", the pleading must be read conjunctively and that relief for breach of duty cannot be granted where only one of the two grounds is made out on the evidence (even if that ground is sufficient to found a breach of duty), I cannot accept that submission in light of the foregoing principles.

81In Gould v Mount Oxide Mines , Isaacs and Rich JJ held that there was no injustice done to the defendant where:

the defendants, whatever course might have been open to them at the hearing, unquestionably adopted that of fighting the claims as presented in argument upon the evidence as if the particular claims made had been specifically alleged, and as if there were no other evidence upon those claims which the defendants desired to adduce. There is no suggestion even now that other evidence would have been available; and it is perfectly obvious that any objection raised could have been instantly met by a formal amendment, and that no further evidence would have been offered. The case has been fully tried out, as far as the parties desired, on the three matters before us, and the only question is whether the judgment appealed from as to the challenged items should be affirmed, modified or reversed on the merits.

82In the present case, while it cannot be said that the defendants have acquiesced in any departure from the pleadings, the various ways (cumulative or otherwise) in which a breach of the duties is contended to have arisen are clear on the pleadings and evidence has been adduced by the parties as to those matters. The defendants have had the opportunity to meet that evidence. In this regard, the defendants' submission rests squarely on a rather technical complaint regarding the form in which the pleadings were framed. The Full Court of the Federal Court observed in Betfair Pty Ltd v Racing New South Wales [2010] FCFCA 133; (2010) 189 FCR 356 at [55] that:

Betfair's opponents sought to rely at the trial on the general proposition that Betfair would be "held" to its pleaded case. An announcement of that kind by a party misstates that party's capacity to direct the course of the proceedings. The course of proceedings is in the control of the court. That control is to be exercised for the attainment of a just outcome. There will obviously be cases where a pleaded case does not raise an important fact for attention. If that remains the position at the end of the case, the case may be lost on that basis, so far as it depends on that fact. Sometimes it would be unfair to allow a party to amend a case, or a pleading, to raise a new matter which could have been, but was not, raised earlier. On the other hand, mere infelicity of drafting will rarely be allowed to defeat a case on its merits if the merits of the case have been made apparent on the evidence without unfairness to the other party . (my emphasis)

83What is required from a procedural fairness point of view is that there be a clear pleading of the material facts on which the cause of action is founded ( Uniform Civil Procedure Rules 14.7 and, by way of example, Phillips v Phillips (1878) 4 QBD 127 at 133) with a sufficient degree of specificity, having regard to the general subject matter of the claim, to convey to the opposite party the case that party has to meet ( Re Bega Co-operative Society Ltd & Anor v The Milk Authority of the Australian Capital Territory & Anor (Unreported, Federal Court of Australia, 12 May 1992); [1992] FCA 200 at [24] per Neaves J, his Honour there citing Ratcliffe v Evans (1892) 2 QB 524, at 532; Charter Carter Pty Ltd v The Shop, Distributive and Allied Employees' Association of Western Australia (1987) 13 FCR 413, at 417).

84Lander J in Arthur Young v Tieco International (1995) 182 LSJS 367 at 370 (approved by McDougall J at first instance in Ingot v Macquarie [2004] NSWSC 1136 at [46]):

Whether the material facts and whether sufficient particulars have been pleaded must depend upon the cause of action, the complexities of the case and the whole of the circumstances of the case. None of those matters can be considered in isolation any more than each of the paragraphs of the pleading can be considered in isolation.

When the Court considers a pleading it will not consider the pleading with the same degree of scrutiny which the courts are required to give to an Act of Parliament. With the complexities of modern litigation, a pleader can usually point to some deficiency in the opponent's pleadings. One can usually, if one approaches the matter with a critical eye, identify some failing in a pleading. But that is not the approach that in this age ought to be adopted. A court would not sit down in the manner of a nineteenth century pleader seeking to find an error capable of sending a party away to re-plead his claim or defence. Such a technical approach is inconsistent with modern litigation and inconsistent with the court's function which is to try to arrive at a just result. A successful result, if arrived at, after too great an expense may not be considered by even the successful party to be a just result. A court ought to approach a consideration of the adequacy of a pleading seeking to answer the ultimate question; does the pleading give fair notice of the case to be made against the other party at trial, thereby minimising the risk of injustice resulting from surprise. (my emphasis)

85In this case, I consider that the pleadings make clear the various conduct said (in aggregate or otherwise) to constitute the breaches. I do not accept that all of those allegations (other than [47]) are predicated on a finding of ownership. Further, I consider that the plaintiffs should not be confined to any infelicity in the drafting of the pleaded case of the kind to which my attention has been drawn. Where two grounds have been put forward upon which a particular breach of statutory/fiduciary duty or oppression is alleged and both were squarely canvassed at trial, there seems to me to be no injustice to the defendants if a finding of breach or oppression can be (and is) sustained on one of those two grounds without reference to the other conduct alleged.

86On that basis, it seems to me that the allegations at least in the second half of [26], [27] and [40]-[43] (where the allegations in those last three paragraphs refer back to the matters pleaded in [39]), (as well as those in [47], which is conceded by Ms Francois), are not dependent on a finding that Chilli #1 owned or held an exclusive or proprietary right to use the Chilli logo (TM 767677).

Credibility of witnesses

87I next turn to my assessment of the respective witnesses.

Ms Fitzpatrick

88Ms Francois submits that the critical aspect of Ms Fitzpatrick's evidence is that when she completed the trade mark application she knew it was the intention that Mr Cheal own the trade mark. There was no suggestion that Ms Fitzpatrick's evidence was unreliable or should not be accepted.

Mr Cheal

89Mr Evans submitted that the evidence of Mr Cheal in [57] to [59] of his affidavit of 30 September 2011 (and that of Mr Jago at [5] to [17] of his affidavit of 21 September 2011), to the effect that the entries recording "Patents and Trade Marks" in the accounts of Chilli #1 from 2000 to 2004 inclusive were made in error, as well as the evidence of Mr Cheal in [53] of his affidavit of 30 September 2011 that it was always his intention that he own the trade marks in his own right should be rejected. (In regard to the latter, Mr Evans notes in that regard that Mr Cheal readily assigned the Trade Marks to Cheal Industries on the advice of Mr Jago in February 2006 and that he signed accounts recording trade marks as an asset of Chilli #1 for 5 years without objection.)

90Mr Cheal presented in the witness box as a co-operative and honest witness attempting to answer the questions put to him. He apologised when he was unable to recall with precision events or conversations that took place some time ago. He did not seem to me to avoid making concessions that might have been thought to reflect badly on him (such as his non-disclosure to Ms Fitzpatrick of matters relating to Chilli #2 - he quite candidly saying that they were not talking at the time). There were a number of occasions when there was apparent confusion on his part as to the thrust of the questions (such as the line of questioning as to his opinion of the net worth of the business or as to how certain statements came to be made in his affidavit) and he paused for some time when answering questions put to him. However, it seemed to me at the time (and reviewing the transcript and my notes of the cross-examination this impression is reinforced) that some of Mr Cheal's difficulty in the witness box may have been his concern that he was not correctly answering the questions put to him. His evidence seemed to me to become more hesitant and less clear over the course of the cross-examination (and indeed my concern as to this was what prompted my observation during the course of the cross-examination that Mr Cheal should not be placed under unnecessary pressure in that regard).

91Be that as it may, I considered Mr Cheal to be endeavouring truthfully to answer the questions put to him as best he could understand them. I took from his evidence, in essence, that he relied on others (particularly Mr Jago) to make the decisions as to the structure through which the business of making surfboards for sale should be carried on and that he not only paid little attention to the paperwork of the business (including the accounts) but would have had little understanding of matters such as the accounting entries in the Chilli #1 accounts. Mr Cheal's interest was in knowing how the business was performing financially, not how the company accounted for expenses or assets in its business. I also doubt very much that Mr Cheal paid much attention to (or had any real understanding of) the consequences of incorporation (which he said he did because it was 'safe') or the purpose of registering the trade marks in the first place. By the same token, I doubt that Mr Cheal had any real understanding of the consequences of incorporation of Chilli #2 and the conduct of the business formerly carried on by Chilli #1 through that company.

92I consider that Mr Cheal was truthful when he accepted that the use of the Chilli #1 logo was part of the business of shaping surfboards that Chilli #1 had carried on and when he said that he had discussed with Mr Jago the decision to set up a new company in which Ms Fitzpatrick did not have an interest and to use the business (of making surfboards with the Chilli logo) through that company (T 107.30-49). He said that those discussions took place "when I was with my wife and getting, and with her help with money to set up a new business" (T 107.43) to which he later added ("and with my parents" T 108.19) that time being otherwise unspecified.

93In those answers, Ms Francois places weight on the words a "new business'. Mr Cheal explained that by saying "the new business was to me to start up Chilli 2 because my wife would have nothing to do with Chilli 1 if..." (T 108.32) but he accepted that this was "the business of making and shaping surfboards and selling them with the Chilli logo" and that this was the same business that had been running through Chilli #1 (T 108.42) and that he was going to be selling to the same customers as had Chilli #1 (T 108.47). At T 109.12, Mr Cheal said: "To me it was a new business, to me it was the only way forward because my Chilli 1 had no, I had nothing; it was ...". Mr Cheal readily conceded that he had decided not to tell Ms Fitzpatrick about the new business and he also accepted ultimately that setting up Cheal Industries was part of a strategy to exclude Ms Fitzpatrick T 111-112, 114 (though in that regard I have difficulty accepting that he understood how setting up Cheal Industries would have assisted in excluding Ms Fitzpatrick from the business). Further, though he accepted reference to a "strategy" as such, the impression I gained was that what Mr Cheal was accepting was that he had wanted to carry on the business of making the Chilli surfboards without Ms Fitzpatrick being involved any more (and so that it was a business in which he and his wife, not he and his former de facto wife, were involved). Thus I suspect his real desire was to sever the financial relationship between he and Ms Fitzpatrick rather than focussing on the corporate shareholdings as such. Mr Cheal said "I know now" with some feeling when asked if he knew that Ms Fitzpatrick had rights as a shareholder (T 110.25) and although he then accepted that he had known it at the time, I formed the impression that he had not appreciated its significance at that time. That said, for the purpose of determining whether Mr Cheal was in breach of his duties as a director or had behaved oppressively in the conduct of the company's affairs, it is not necessary that he appreciated that this was the case.

Mr Jago

94Mr Evans, as noted above, invited me to place little weight on Mr Jago's evidence as to the accounting entries in relation to the trade marks. I accept that the evidence on this issue was contradictory. I would add that Mr Jago was somewhat defensive in his manner (appearing to react to perceived criticism of the extent of the enquiries he made in relation to the accounts when performing his professional services and arguing his point of view in relation to what he had done over the course of the client relationship with each of Mr Cheal, Chilli #1 and Ms Fitzpatrick). That is not unusual where a witness might be concerned that conduct in a professional capacity is being criticised (and, indeed, the thrust of one line of question that I disallowed focussed on whether he considered that he had been in breach of a duty in relation to the advice given). Clearly, Mr Jago had been reluctant to become involved in what he saw as a dispute between the former couple (each of whom he regarded as a friend).

95That said, I am not satisfied that Mr Jago satisfactorily explained the inconsistency between his evidence in cross-examination that he knew from at or about the time of the incorporation of Chilli #1 that Mr Cheal was the owner of the Chilli trade mark (by which I am referring to TM 767677) and the fact that he was prepared to accept a reference in the accounts to "trade marks" as an intangible asset of the company. It seems that the explanation for this is a distinction drawn between the Chilli trade mark applied to the surfboards and the corresponding trade mark for other goods. However, Mr Jago said that he had made little enquiry as to the basis for the entry of the references to the trade marks so it is difficult to se how he could have formed the view at the time that the entry was referable to one and not the other.

96Moreover, Mr Jago's evidence that he knew that Mr Cheal was the owner of the Chilli trade mark is glaringly inconsistent with the manner in which he gave evidence in his affidavit to what he would have done had he known at the time that Mr Cheal was the owner thereof (a statement predicated on a lack of knowledge).

97At T 132.45, when questioned as to whether he had made an enquiry as to what trade marks were referred to by the entries Mr Jago had seen in the accounts he said:

A. I would have had some knowledge. Yeah at some point that would have been transferred to me what that was, but I also knew that the original trademark had been done in James' name correctly, so yeah

98At T 133.2, he said that he would have been told that the trade mark was done in Mr Cheal's name correctly "when it was done". Tested on this, he said that he could not be clear about whether he knew about the application for TM 767677 when it was lodged "but I would say I either knew about it when it was done or I would have known that it had been done" (T 133.7). Mr Jago said that he was aware, prior to incorporation of Chilli #1, that there had been one application to register a trade mark in relation to "this business" (by which question I understood Mr Evans to be referring to the business of making surfboards) (T 133.13); that logically it could not have been an application to register the trade mark in the name of Chilli #1 (which was not then incorporated) (T 133.44); and that he would have known that before Chilli #1 was incorporated (T 134.1). Mr Jago was adamant that he had not ever been told or formed a belief that there had been a transfer of the trade mark prior to seeing the MYOB entry for the 2000 accounts for Chilli #1 (T 134.21) but when challenged that this could not then have been an entry in the accounts of Chilli #1 as an asset of that company his response was that there was not just one trade mark (T 132.26) and said that he knew that "they were looking at ongoing trade marks in relation to other items" (T 134.33).

99In summary, Mr Jago said that in his conversations with Mr Cheal and Ms Fitzpatrick he knew what the Chilli logo was (T 135.1); knew at some point not far beyond August 1999, if not then, that Mr Cheal was the owner of the trade mark in respect of that logo (T 135.5); generally speaking, knew that was the logo that was applied to the surfboards they were selling (T 135.10); knew that there was one trade mark of which Mr Cheal was the owner (T 135.28); was concerned when he saw the entry for trade marks in MYOB when preparing the 2000 accounts that the trade mark should not be carried as an asset of the company (T 135.32); and discussed that matter with Mr Cheal and Ms Fitzpatrick (T 135.38); but did not accept the proposition that when he saw the MYOB entry when preparing the 2000 accounts it should have been obvious that the only possible trade mark that was being referred to was the trade mark of which Mr Cheal was the owner (T 135.24). He also said that he knew that the trade mark in Mr Cheal's name had not been transferred to the company (because that was his concern but to do a transfer required a bit of work and typically they would contact him if that was the case) (T 135.43).

100At 136.7, when I sought to clarify his (somewhat confusing) evidence in this regard, Mr Jago said that he had made enquiries as to whether the MYOB entry was a trade mark and that there:

...would have been some discussion as to what it was because I remember at the time I was, although I was annoyed that they had done it, I was reasonably unconcerned because I didn't believe it to be a crucial trade mark because I knew it was a small business and this was the one that counted. You can have pie in the sky ideas about making cars with a Chilli logo on but really at that stage we weren't there so it wasn't a concern that stopped the day.

101Although Mr Jago's evidence was that he knew as at 2000 that there was one trade mark registered in Mr Cheal's name (T 136.25) that had not been transferred to the company (T 136.33); it is not clear whether he knew that there were in fact any other trade marks registered in Mr Cheal's name at the time (although the answer at T 136.45 suggests that there was one) but he says that he would not have thought that the entry for trade marks in the 30 June 2000 accounts was for the surfboard logo; rather he says his belief is that it was a reference to merchandise (T 137.13/17). Mr Jago says that he was confident, from 2000 through to 2004, as he was preparing the financial statements of the company that the trade mark in respect of the logo used on the surfboards was in Mr Cheal's name (T 138.1).

102The confidence with which Mr Jago gave this evidence in the witness box must be assessed in the light of Mr Jago's affidavit in which he deposes at [15] that:

Once I was informed that Mr Cheal owned trademark 767677 and trademark 804353 I realised that a mistake had been made in the financial statements up to 2004. (my emphasis)

and particularly at [16] that:

If I had known that Mr Cheal was the owner of the trade marks at the time of preparing the 2000 financial statements and subsequent years , then there would never have been an entry under intangibles for Patents and Trademarks and I would have confirmed that these were expenses for Mr Cheal personally and would then have simply allocated the expense against Mr Cheal's shareholder loan account. (again, my emphasis)

103Mr Jago denied that para [15] of his affidavit suggested that he was learning the facts there set out for the first time when he was so informed by Mr Eaton (T 138.25), then said that he was confident that it was the case that Mr Cheal owned at least one of the trade marks but he had not sighted them (T 138.29). He did not accept that the hypothesis on which para [16] of his affidavit was based conveyed the meaning that he had not known Mr Cheal was the owner of the trade marks at the time of preparing the accounts. If what in fact occurred was that he had simply given little thought to the entries beyond chastising Mr Cheal and Ms Fitzpatrick for putting any trade marks (whichever ones they might have been) into a corporate trading entity and beyond querying the book-keeper as to the particular MYOB entries to see whether they were to be accounted for as referable to the intangible assets or not, then the conflicting explanations for what happened make little sense.

104Mr Evans also points to the inconsistency between Mr Jago's denial in cross examination that, at some time in about 2005, Mr Cheal had told him that he and his wife had decided that they wanted to operate the business through a new entity in which Ms Fitzpatrick had no interest (and that they did not want her to be informed about these matters) and the concession by Mr Cheal conceded in cross examination that his wife and he had come to such a decision and that he had communicated that decision to Mr Jago and sought his advice about how to achieve that outcome.

105Mr Evans similarly submits that Mr Jago's evidence that the reason for pursuing the incorporation of Chilli #2 was nothing more than to enable the business to obtain loan finance should be rejected having regard to his evidence at [26] of his affidavit that its incorporation was so that both Mr Cheal and his wife would be beneficial interest holders in the business (since that could have been achieved otherwise than by incorporation of a new company).

106As I have noted above, Mr Jago struck me as defensive of his position and aggrieved to have been called upon to give evidence in this dispute. He emphasised more than once his view that the enquiries he had made as an accountant had been appropriate having regard to the financial costs constraints in acting for a small company of this kind. I found his evidence as to his knowledge of the facts underlying the relevant entries at the time to be inconsistent and unpersuasive. In one sense, that is immaterial, since I am satisfied that the relevant trade mark was at all times up until its assignment to Cheal Industries owned by Mr Cheal. Where my view of the evidence given by Mr Jago is more relevant is that when weighing his evidence of the discussions leading up to the incorporation of Chilli #2 and the commencement by it of the business of selling the Chilli logo surfboards against that given by Mr Cheal, where there is a conflict I find Mr Cheal's evidence the more credible.

Mr McMahon

107It is submitted by Ms Francois that the Court should be "cautious" about accepting Mr McMahon's opinion having regard to the indication in some aspects of the evidence that he was acting as an advocate. In this regard (without pointing to particular transcript references) Ms Francois referred to "certain answers he gave during cross-examination when he had difficulty accepting certain assumptions; reinforced by the mode of expression in certain aspects of his report; and his correspondence with Mr Latham [the solicitor for the plaintiffs]".

108Mr McMahon is a forensic accountant with over 20 years' experience. He prepared a valuation of the business of Chilli #1 on certain assumptions that he was instructed to make. (It was not his responsibility, unless instructed to do so, to verify the factual basis for the assumptions that he was asked to make - relevantly, as to the ownership of the trade mark in question.) Insofar as it was submitted that Mr McMahon had departed from the role of expert and had acted as an advocate in these proceedings, I do not consider that submission to be well-founded. I accept that there was an element of debate between Mr McMahon and Ms Francois in the course of his cross-examination as to the matters set out in the report. That seemed to me no more than the normal exchange between cross-examiner and an expert witness whose opinions the cross-examiner was seeking to challenge.

109Turning to the criticisms made of his evidence by Ms Francois, the first matter raised was by reference to answers in cross-examination where it is said that Mr McMahon had difficulty accepting assumptions. As I understand it, Ms Francois was here referring to the line of questions as to the likelihood that a sale would be achieved if Mr Cheal was not willing to sell the business with a non-compete clause (see from T 32). My impression of the cross-examination in this regard was that Ms Francois was challenging Mr McMahon as to the basis for the initial answer that he gave (which was that this would certainly reduce the prospects of a sale although the trade purchaser might see other value because of certain matters). In that context, I did not see Mr McMahon's responses as amounting to advocacy for the plaintiffs' position but as addressing the matters that a potential purchaser might take into account in the circumstances Ms Francois had postulated.

110What Mr McMahon seemed readily to accept was that a prudent purchaser of the business would want some form of non-compete or restrictive covenant in place (and that was in fact one of the assumptions made in the report) (T 29.36/5031.4). Where he queried the correctness of an assumption as to capital gains tax that was not within his area of expertise Mr McMahon was quick to concede that he might be wrong (T 33.41/46). Where he was asked to express a view as to the assumption that Mr Cheal would be back to basic unskilled labour and could no longer earn or run a business in any meaningful way if there were to be a non-compete clause, Mr McMahon (in my view quite reasonably) indicated that as a chartered accountant he could not express a view on that issue (see T 34.39- 35.10).

111Having regard to the fact that what Mr McMahon was effectively being asked to do in the course of his cross-examination was to justify the opinions he had expressed in his report and was explaining those opinions, I do not consider that he overstepped the role of expert.

112As to the second of the criticisms made by Ms Francois, this was of some of the expressions in the report. The only expression to which I was taken in this regard was a comment in a note to schedule 3(2) to the effect that it was ironic that a reason proffered for the decline in purchases in 2008 was that there were quality problems in certain supplies because the supplier was a company associated with Mr Cheal. I accept (as did Mr McMahon) that the comment was unnecessary. I do not, however, consider that it detracts from the weight to be placed on his opinion.

113As to the third of the criticisms, Ms Francois referred to communications with the plaintiffs' solicitor. By this, I understand her to be referring to one or both of the following issues raised in cross-examination with Mr McMahon: first, that he instructed the solicitor to delete all copies of draft reports (something that Mr McMahon explained by reference to his firm's policy to ensure that drafts are not confused with final copies) and, second, that in communication with Mr Latham as to what material had been produced in answer to subpoenas he had asked if there was "anything useful to us" (something that Mr McMahon did not recall but in any event he denied that he was looking to find material to support a case for recovery by Ms Fitzpatrick). I do not consider that those matters, in light of the evidence given by Mr McMahon in relation thereto, warrant scepticism of his expert opinion.

114A number of other issues were raised in cross-examination by Ms Francois as to Mr McMahon's role as expert (including cross-examination as to why he had not responded to communications from the defendants' solicitors - his reason being that he understood that the plaintiffs' solicitors had instructed all communication to be directed through them and he had no difficulty with that (T 15.35-50); as to the arrangements by which he had accepted progressive payment by instalments of his fees (due to the plaintiff's financial position; and as to whether he had complied with the Accounting Professional & Ethical Standards Board's standard in relation to the provision of valuation services (APES 225) in certain respects (T 19-20).) None of those matters caused me to have concern as to the independence of Mr McMahon or his role as an expert in this case. I consider later in these reasons the criticism made of the mathematical accuracy of his calculations (and/or the methodology employed by him).

Issues

115I turn then to the particular issues for determination.

(i) Breach of directors' statutory/equitable duties

116The statutory duties alleged to have been breached are those imposed by ss 180, 181 and 182 of the Corporations Act 2001 (Cth):

180 Care and diligence-civil obligation only

Care and diligence-directors and other officers

(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation's circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Note: This subsection is a civil penalty provision (see section 1317E) .

Business judgment rule

(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
Note: This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence)-it does not operate in relation to duties under any other provision of this Act or under any other laws.

(3) In this section:
business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.
181 Good faith-civil obligations

Good faith-directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
Note 1: This subsection is a civil penalty provision (see section 1317E).
Note 2: Section 187 deals with the situation of directors of wholly-owned subsidiaries.
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Note 1: Section 79 defines involved .
Note 2: This subsection is a civil penalty provision (see section 1317E).
182 Use of position-civil obligations

Use of position-directors, other officers and employees

(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
Note: This subsection is a civil penalty provision (see section 1317E).
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Note 1: Section 79 defines involved .
Note 2: This subsection is a civil penalty provision (see section 1317E).

117As to the equitable duties alleged to have been breached, Mr Evans notes that the essential obligation imposed on a fiduciary is that stated by Lord Hershell in Bray v Ford [1896] AC 44 at 51-2:

It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the respondent's, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect. It has, therefore, been deemed expedient to lay down this positive rule.

118Lord Russell in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 said at 144:

The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as to whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well intended, cannot escape the risk of being called upon to account.

119In Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 198, the High Court recognised two fundamental and distinct rules binding fiduciaries, both being of strict application, namely: the duty not to profit by reason of one's position as a fiduciary and the duty not to place oneself in a position of potential conflict (per Deane J):

... 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, e.g., Phipps v. Boardman, at p l23; N.Z. Netherlands Society v. Kuys, at p 1229), 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. (my emphasis).

120In Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at 67 it was noted that these principles have been described as "inflexible" ( Birtchnell v Equity Trustees, Executors and Agency Co. Ltd . [1929] HCA 24; (1929) 42 CLR 384 at 408) and "fundamental" ( Boardman v Phipps [1966] UKHL 2; [1967] 2 AC 46; [1966] 3 All ER 721 at 756).

121As I have noted elsewhere ( Vadori v AAV Plumbing Pty Ltd [2010] NSWSC 274 at [199]), the fact that these duties can breached independently explains the perceived "strictness" or "inflexibility" of the application of the no profit rule in situations where a breach is found irrespective of the beneficiary's ability to pursue the opportunity or the absence of any damage caused to the company and despite the good faith or bona fide intentions of the fiduciary.

122In Canadian Aero Service v O'Malley [1974] SCR 592; 40 DLR (3d) 371, Laskin J said at (25):

An examination of the case law in this Court and in the Courts of other like jurisdictions on the fiduciary duties of directors and senior officers shows the pervasiveness of a strict ethic in this area of the law. In my opinion, this ethic disqualifies a director or senior officer from usurping for himself or diverting to another person or company with whom or with which he is associated a maturing business opportunity which his company is actively pursuing; he is also precluded from so acting even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company , or where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired. (my emphasis)

123At (48) Laskin J went on to say:

.... The general standards of loyalty, good faith and avoidance of a conflict of duty and self-interest to which the conduct of a director or senior officer must conform, must be tested in each case by many factors which it would be reckless to attempt to enumerate exhaustively. Among them are the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director's or managerial officer's relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed, even private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge .

124Whether or not Mr Cheal was aware of his duties as a director (and whether or not Chilli #1 was in a position, financially or otherwise, itself to continue to conduct the business that it had up until 2006 conducted or to pursue the development or growth of that business in the manner in which Chilli #2 did from that time) is not to the point. As a director, Mr Cheal was bound by those duties and they are recognised to be onerous ones.

125The fundamental issue raised by the defendants in the present case was whether, on the pleading, any breach of directors' statutory or equitable duties was alleged other than one predicated on the ownership (or exclusive right to the use) of TM 767677 and, if so, whether Mr Cheal's right to deal with his intellectual property (in the form of TM 767677) or his services as a maker of surfboards was subject to any limitation arising by virtue of his position as a director of Chilli #1.

126I have already concluded that the breaches alleged in the second half of [26] (by himself entering into the July 2005 agreement); [33-34] (by entering into and causing Cheal Industries to enter into the February 2006 agreement); [40] (by acting in his capacity as director of Chilli #2 to negotiate the terms of the June 2006 Agreement on terms favourable to Chilli #2 at the expense of Chilli #1; and [41-43] (by reference to the conduct alleged at least in [40) are not predicated on ownership of the trade mark in question or the exclusive right to use that trade mark. Therefore, the real question is whether Mr Cheal breached his duties as a director in choosing to deal with his intellectual property and/or his personal skills in the manner in which he did.

127As to the latter, Ms Francois noted that a registered trade mark is personal property (s 21(1) of the Trade Marks Act 1995 (Cth)) and that, pursuant to s 20 of the Act, the registered owner of a trade mark has the exclusive rights to use the trade mark and to authorise other persons to use the trade mark in relation to goods and/or services in respect of which the trade mark is registered. Reliance is also placed on s 22 of the Trade Marks Act , as to the rights of Mr Cheal to deal with the trade mark "as its absolute owner".

128The IP Australia records tendered in the proceedings demonstrate that Mr Cheal was the registered owner of TM 767677 prior to 30 June 2001 and there is no record of any assignment from Mr Cheal to Chilli #1 at any time. Although the case as commenced (and as pleaded) included allegations as to the ownership by Chilli #1 of the relevant trade mark, by the time of the hearing it seemed to be conceded (tacitly if not expressly) that, despite the inconsistency in the 2001-2004 accounts, there was no evidence of any transfer of the Chilli trade mark (TM 767677) to Chilli #1.

129I accept that the evidence demonstrates that Mr Cheal remained the registered owner of TM 767677 at all relevant times. (I do not accept that it follows that the necessary factual foundation for each of the breaches of duty alleged in the Further Amended Originating Process must therefore fail.) The position of Chilli #1, up to 30 June 2006, was that it was the authorised user of the trade mark (and Ms Francois conceded that that was the case). Ms Francois, however, also points out that there is no evidence that Mr Cheal granted Chilli #1 'rights' to his trade mark (presumably prior to the 2005 agreement under which there was an exclusive right of use) which fettered his power to deal with his property as he saw fit.

130Mr Evans submits that from August 1999 until 1 July 2005 Mr Cheal granted to Chilli #1 the right to use TM 767677, either by express agreement or by way of a waiver of his rights in that respect (and notes Mr Jago's evidence that he gave Mr Cheal advice that the trade mark should not be held in the company and yet the entry for trade marks in the accounts of the company continued through to 2004). This does not seem to be disputed by the defendants. What Ms Francois submits is that the conduct of Mr Cheal in allowing Chilli #1 to use the trade mark was at all relevant times regulated by sections 8 and 26 of the Trade Mark Act (Chilli #1 being an authorised user of the trade mark within the meaning of s 8 because it was using the trade mark under the control of the owner, Mr Cheal, and thus entitled to exercise the powers set out in section 26 of the Trade Marks Act ).

131Ms Francois submits that s 26 of the Trade Marks Act confers no power on Chilli #1 to fetter Mr Cheal's entitlement to deal with his property as he saw fit and that, without any written agreement or clearly identified understanding between Chilli #1 and Mr Cheal, Mr Cheal's arrangement with Chilli #1 was terminable at will by Mr Cheal. I accept that the arrangement in relation to the use of the trade mark prior to 1 July 2005 was that it was terminable at will, or at the highest on the provision of reasonable notice to Chilli #1. However, insofar as Ms Francois seeks to take from this the proposition that Mr Cheal's rights as owner of the trade mark could not be limited in any way by reason of his position as director of Chilli #1, I do not accept that this follows from the provisions of the legislation to which Ms Francois has referred.

132The nature of "property" in a trade mark was discussed in Attorney-General (NSW) v Brewery Employees Union (NSW) (1908) 6 CLR 469. The registered owner of a trade mark may license another person or entity to use the trade mark (though it had historically been thought that the licensing of a trade mark, by the separation of the owner of the trade mark from the origin of the relevant goods or services, would deceive the public and thereby jeopardise the owner's rights in the trade mark - see Bowden Wire Co Ltd v Bowden Brake Co Ltd (1914) 31 RPC 385, per Earl Loreburn said [at 392]).

133There is authority that the licensing of a trade mark, whether registered or unregistered, will not undermine the owner's rights in the trade mark (provided that a sufficient trade connection is maintained between the owner and the goods or services in respect of which the trade mark is used by the licensee, and provided that the licensee's use of the trade mark is otherwise not likely to deceive the public) ( General Electric Co v General Electric Co Ltd [1972] 1 WLR 729; [1972] 2 All ER 507; Pioneer Kabushiki Kaisha v Registrar of Trade Marks (HCA, unreported, Aickin J, 1 November 2011).

134Further, there is authority for the proposition that use of a registered trade mark by its owner does not amount to infringement of the trade mark even though it may be in breach of an exclusive licence granted by the owner ( Delphic Wholesalers Pty Ltd v Elco Food Co Pty Ltd (1987) 8 IPR 545). However, it would not be correct to suggest that there can be no contractual fetter by the registered owner on use of the trade mark. It was recognised in Delphic that the licensee may have an action for damages against the owner for breach of contract in circumstances where there had been the grant of an exclusive licence even though the registered owner's use did not amount to an infringement.

135I remain of the view expressed in Painaway Australia Pty Ltd v JAKL Group Pty Ltd [2011] NSWSC 205 that s 20(1) of the Trade Marks Act is not to be construed as meaning that the Act precludes a trade mark owner granting an exclusive licence which, during the currency of the licence, fetters or limits the ability of the registered owner of the trade mark from using the mark. (It seems to me that the exclusive right of the trade mark owner to authorise another person to use the trade mark, means that such authorisation can be exclusive of use by the registered owner during that period.) Thus, while the effect of s 20 may be that an action could not be brought for trade mark infringement (as such) if there was use by a registered owner contrary to a contractual provision for exclusive use by the licensee, I do not accept that a licensee could not enforce its contractual rights to restrain a breach of the exclusivity of the licence granted to it.

136Hence I do not accept, as a matter of principle, that the position of Mr Cheal as registered owner gave him carte blanche , vis-a-vis the company of which he was a director to which he owed duties and to which he had given authority to use the trade mark, to do what he wished with that mark (at least while he remained a director of the company).

137Ms Francois' submission is that there was no fetter or limitation on the ability of Mr Cheal to use his own intellectual property arising by reason of his position as a director of Chilli #1 and that to hold otherwise would be to disregard the exclusive rights of a registered owner of a trade mark and would be inconsistent with the Trade Marks Act and the concept that a person is entitled to deal with his or her own property as he or she thinks fit. That, however, takes no account of the fact that it is open to the owner of property (intellectual property or otherwise) to fetter his or her ability to use that property. Such a fetter or limitation may arise contractually. Logically, it must also be capable of arising by virtue of the relationship that person enters into with (for example) a corporate entity established by him and to which the use of that property is made available for the purposes of conducting a business and in the course of which the company builds goodwill.

138Nor does it seem adequately to take into account the proposition that Mr Cheal's ability to deal with his own property/skills might be fettered only for so long as he chose to remain as a director and employee of Chilli #1. The real complaint in this regard (as was the case in Vadori , and in Cook v Deeks [1916] 1 AC 554 and Mordecai v Mordecai (1988) 12 NSWLR 58, discussed below) is that the director in question has chosen to divert a business or set up a competing business (whether or not using his own skills or his own intellectual property) while remaining as a director of the company to which he owes duties of the kind here under consideration.

139I do not accept the premise that underlies much of the submissions made by the defendants, namely that to award relief of the kind here sought would be to force Mr Cheal to do something he does not wish to do with his own property or to require him to enter into an agreement for perpetuity with Chilli #1 in relation to his trade mark. What was required, in my view, was that Mr Cheal fulfil his obligations to Chilli #1 (and if necessary take steps to wind up that business) before embarking on a course of action with Chilli #2 the inevitable impact of which was to destroy the business of Chilli #1 of which he continued (and continues today) to be a director.

140In the course of submissions I referred to the case of Cook v Deeks (the facts of which, briefly, were that after a falling out between the directors and shareholders of a railway construction company, three of the directors began covertly diverting construction contracts to a new company founded by the three defendants, those contracts having been awarded on the basis of the previous good work done by the original company). The House of Lords (at 562-563), on appeal, agreed with the first instance findings that:

The sole and only object on the part of the defendants was to get rid of a business associate whom they deemed, and I think rightly deemed, unsatisfactory from a business standpoint. In other words, they intentionally concealed all circumstances relating to their negotiations until a point had been reached when the whole arrangement had been concluded in their own favour and there was no longer any real chance that there could be any interference with their plans. This means that while entrusted with the conduct of the affairs of the company they deliberately designed to exclude, and used their influence and position to exclude, the company whose interest it was their first duty to protect . (my emphasis)

141The House of Lords found that the three directors had breached their duties to the company by diverting the business opportunities of the company away for their own personal benefit, stating (at 563) that:

... men who assume the complete control of a company's business must remember that they are not at liberty to sacrifice the interests which they are bound to protect, and, while ostensibly acting for the company, divert in their own favour business which should properly belong to the company they represent.

142Relevantly, for present purposes, the House of Lords noted (at 559) that the defendants could have undertaken the business in question, separately from the plaintiff, without being in breach of their duties as directors, if they had first terminated their business relationship and ensuing duties and obligations, by placing the company into voluntary liquidation.

143By analogy, it is one thing to say that Mr Cheal had at all times remained the owner of the Chilli trade mark and could have chosen not to authorise its continued use by Chilli #1 (and to authorise another company to do so), as he could also have chosen (subject to compliance with any obligations as employee) to cease providing his services to Chilli #1 and take up a position with another company. However, what Cook v Deeks makes clear is that while he remained a director of Chilli #1 (and owed it the statutory and fiduciary duties that he clearly did - to act in the best interests of that company and to avoid actual or potential conflicts of interest), it was not open to him to take steps effectively to compete with the business of Chilli #1 or to divert that business elsewhere (which is clearly what happened from at least July 2006). Ms Francois complains that this is not what is pleaded but it seems to me that this is exactly what is pleaded, not simply in the oppression claims (that I consider below) but also in the plea that entering into the February 2006 agreement and/or causing Chilli #2 to enter into the June 2006 agreement there was a breach of directors' duties.

144The options available to Mr Cheal from 2005 (if that was when he in fact decided that he wished to set up a new business to the exclusion of Ms Fitzpatrick) or later in February/June 2006 (June being when he set up the arrangements for what can only be seen as a competing business) were either to resign at that time as an employee and director (at which point it would have been necessary for he and Ms Fitzpatrick to come to a decision as to what was to be done with Chilli #1 - such as giving consideration to whether the company could continue to operate and, if so, doing what and as to what value could be derived for the benefit of the shareholders by a transfer of part or all of the remaining business, assets or goodwill of the company); to seek to sell his shares in the company or to acquire those of Ms Fitzpatrick; or to consider whether or not it was in the interests of shareholders to wind up the company at that stage and put this to Ms Fitzpatrick. None of those options (other than the earlier attempt to obtain a signed share transfer from Ms Fitzpatrick) seems to have been considered. Rather, and perhaps because (as Mr Cheal said in cross-examination) he and Ms Fitzpatrick were not talking at that stage, what Mr Cheal did (with the advice obtained from Mr Jago) was, in effect, to put his head in the sand in relation to Chilli #1 and to proceed to carry on the business of making and selling the Chilli surfboards from Chilli #2 (and, tellingly, to use the Chilli #1 company name in the process).

145Ms Francois submits that this is not a question of whether Mr Cheal could lawfully have done something that was in this case done in breach of his duties as a director (though she also submits that the ability to have done something in a lawful fashion without breach of those duties indicates that there was no relevant oppression). Rather, she submits that the situation is that this was Mr Cheal's own intellectual property that he could lawfully deal with as he chose and that anything else he did that may have had the effect of diverting the business of Chilli #1 to Chilli #2 (such as the transfer of the lease of the equipment, or use thereof, the transfer of the lease of the premises, the use of the computer or the surfboard designs - to which I might add the appropriation of the company name) was not pleaded separately as a matter of oppression (T 182) (and I would infer that this argument was pressed also in relation to the directors' duties allegations).

146What was, however, pleaded (both by way of the breach of statutory and fiduciary duties and as amounting to oppression) included Mr Cheal's conduct in causing the assignment of the trade mark to Cheal Industries, causing Chilli #2 to enter into the licence agreement and himself entering into or causing others to enter into the respective agreements in 2005/2006, and failing to seek to negotiate further or better terms for Chilli #1 to use the trade mark. (As to the plea of oppression in [47], it is not focussed solely on a decision not to extend the use of the trade mark by Chilli #1, something that I accept Mr Cheal was not bound to do, but includes the steps taken to bring about the acquisition or incorporation of Chilli #2.) It seems to me that the defendants' position is one that seeks artificially to confine the ambit of the pleading by reference to the ownership and use of the trade mark, without recognising the broader scope of the actions said to amount to a breach by Mr Cheal.

147In Cook v Deeks , the question posed was as to what would have happened had the directors (instead of taking the benefit of the contracts in the way that they had done) decided to make it clear what it was they were proposing to do and either moved to wind up the company or to consider a resolution that they would not continue in the business of the company. The directors (not having done so) were held liable to account for the profits made from the business opportunity entered into in breach of their duties as directors.

148In Lawfund Australia Pty Ltd v Lawfund Leasing Pty Ltd and Or [2008] NSWSC 144; (2008) 66 ACSR 1, Brereton J considered the position where the relationship between parties to a joint venture had broken down; the joint venture was conducted through a corporate joint vehicle; one of the directors of that company (having been advised that the other wished to terminate the joint venture) vacated the premises then leased by the corporate vehicle and moved to other premises which she caused the corporate entity to occupy under a sublease from her company and caused the corporate vehicle to carry on business for some time, procuring the registration as a trade mark of the name "Lawfund" by the corporate vehicle (Lawfund Leasing Pty Ltd); and then caused that company to cease trading and to transfer its business to her own company.

149Brereton J held that the letter from Lawfund Australia in September 2004 advising that it would be desirable was not repudiatory and did not terminate the joint venture relationship but that the actions of the second defendant were inconsistent with the subsistence of the joint venture; that by October 2004, the parties had abandoned the joint venture agreement as both parties no longer treated it as on foot; and, at the very latest, the relationship was terminated by 21 December 2004 when the plaintiff instituted proceedings to wind up the joint venture vehicle. Therefore, the various alleged breaches of fiduciary duties were considered by his Honour in light of their scope and content after the termination of the joint venture relationship.

150His Honour found that there had been a breach of the second defendant's statutory duties (ss 181(1) and 182(1)) as a director and said at [84]:

While equitable obligations arise in an incorporated joint venture additional to the duties imposed in any event by company law, they do not supplant the statutory duties of a director, although they may to some extent inform the content of those duties. The circumstance that, upon termination of a partnership, the partners may at least in some circumstances be at liberty to set up in business and even exploit existing clients of the joint venture, does not relieve a partner/director from his or her obligation as a director to act honestly in the interests of the company as a whole. In the circumstances of this case, Ms Ward may well not have breached her duties as a director had she after termination simply set up, for her own benefit, a competing business, using her own capital and clientele. But it cannot have been bona fide in the interests of Lawfund Leasing as a whole for Ms Ward to cause it to cease trading, and its business to be taken over by A-Ward, for no consideration. Such a transfer was in Ms Ward's interests, but contrary to those of the company as a whole. By causing Lawfund Leasing to cease operating and in effect to transfer its business undertaking to her own company A-Ward, Ms Ward made use of her position as an officer of Lawfund Leasing for an improper purpose and other than in good faith and in the best interests of Lawfund Leasing, in contravention of s 181(1), and made improper use of her position as a director of Lawfund Leasing to gain an advantage for herself and her company A-Ward and to cause detriment to Lawfund Leasing in contravention of s 182(1). (my emphasis)

151In terms of remedy, his Honour found the second defendant's company to be her "alter-ego" and therefore a person involved in the contraventions of ss 181(1) and 182(1) and that Lawfund Australia was entitled to compensation or an account of profits, with the account limited to profits generated by referrals other than those from the director's own client base (this limitation being grounded in the terms of the joint venture agreement).

152In that case, rejecting a claim that Lawfund Australia had acted oppressively in terminating the joint venture and initiating winding-up proceedings, Brereton J said in obiter dicta at [93]:

I can see nothing oppressive, or unfairly prejudicial, or commercially unfair, in Lawfund's conduct of the affairs of Lawfund Leasing, so far as it did conduct those affairs. If there was any conduct that would attract that description, it would be Ms Ward's conduct of Lawfund Leasing's affairs after September 2004, and in particular the appointment of an additional director without notice to Lawfund, the issue of additional shares contrary to the corporate Constitution diluting Lawfund's shareholding, and the cessation and effective transfer of its business to A-Ward.

153In the present case, the breach of directors' duties claim might be tested by asking what advice Mr Cheal would have been likely to have received had he sought legal advice in 2005/2006 as to whether, while remaining a director of the company, he was at liberty to set up a new company with the intention that it would carry on what in substance was the same business as that carried on by the existing company (though I accept that he may also have had plans at that stage to develop such a business beyond that then carried on by the existing company), and to do so to the exclusion of and without disclosure to the other shareholder of the company. I find it almost incomprehensible that he would have been advised that this was a course of action consistent with his obligations to the existing company (whether or not the existing business and that to be carried on by the new company was dependent on the use of a trade mark owned by him or the provision of his personal services). I would have thought that, whatever the financial difficulties of the existing company, the fact that a motivating factor was to exclude an existing shareholder from an ongoing share of the business would have raised loud warning bells in the mind of any practitioner giving legal advice at that stage.

154It is submitted by Mr Evans that, as the function of a director of a private company is to supervise the carrying on of the business of the company for the benefit of the company and the shareholders and to advance those interests, it is a breach of fiduciary duty for a director to depreciate the value and progress of the company's business by asking the customers to cease to deal with the company and to deal with him in a competing business (reference there being made to Aubanel and Alabaster Ltd v Aubunel (1949) 66 RPC 343 at 346-7 adopted and applied by the New South Wales Court of Appeal in Mordecai at 64C). There is no doubt as to that proposition. The fact that the director in question was the owner of the trade mark under which that company operated (and was the mainstay of the business of that company in relation to the physical task of designing/shaping of the surfboards it sold) does not seem to me to change that position.

155Mordecai is instructive in this regard. In that case one of three directors of the company (all brothers) died. The two remaining directors were executors of their brother's will. In order to prevent the deceased's ex-wife and her son from claiming an interest in the company, the remaining directors set up a new company to which they divested all their current business. There were two issues: first, whether the remaining directors breached their duties in setting up the competing company and, second, how the company was to be valued for the purposes of remedying the breach. I consider the second issue later in these reasons.

156As to the first, Hope JA, with whom Priestley and Samuels JJA agreed, held that there was a breach of director's duties and said at 63:

Whatever the general position may be about the right of directors to compete, it would appear to be established that there are some things which they cannot do. For the purposes of the present case, it is necessary to have regard to precisely what happened. I have referred to a "transfer" of Morpak's business firstly to the partnership and secondly to Associated Packaging, but the evidence merely establishes that Morpak's surviving directors decided that Morpak's business would no longer be carried on and that they as individuals would continue to carry on that business in partnership; that thereafter they would cease to do so and that Associated Packaging would carry it on. There was certainly no sale of the goodwill of the business or of any of its other assets. The persons with whom Morpak had dealt, whether as buyers or as sellers, were contacted and told that thenceforth the appellants would be carrying on what had previously been Morpak's business, and subsequently they were told by the appellants that Associated Packaging would be carrying on that business. By means which do not appear, the appellants and later Associated Packaging took over the business premises occupied by Morpak, and its telephone and telex facilities. A better example of solicitation can hardly be imagined, and the purpose of course had nothing to do with the interests of Morpak; it was simply based upon a private motive of attempting to defeat the interests of Joseph's widow and of his infant son.

157His Honour further said at 66:

This is not a case of directors setting up a business in competition with their company and canvassing its customers. It is a case of directors deliberately closing down the company's business essentially for reasons unrelated to the company's interests, and of taking over the company's premises, means of communication and clientele as their own, and later handing it all over to another company, to the entire exclusion of the estate of which they were trustees and which held 50 per cent of the shares. They treated Morpak's business as their own, to be disposed of as they, for their own private purposes, thought fit. They did not compete with Morpak, for they put an end to the only business with which they could compete. If, as Cohen J pointed out, a trustee being bound to preserve the assets of the trust, it is a breach of his duties to compete with a business conducted on behalf of the trust, even where, as an employee of that business, he was entitled to compete : Re Thomson; Thomson v Allen [1930] 1 Ch 203, it is clear that he cannot simply take over the trust business for himself, and indeed that he must take all reasonably available steps to ensure its continuance. The appellants took no steps to resolve any difficulties in the continuance of Morpak's business. They took the very opposite approach; they decided to destroy it and did so. No attempt to water down the obligations of directors could avail the appellants. They were in breach of their duty both as directors and as trustees. (my emphasis)

158With respect to the directors' submission that the goodwill was theirs to do with as they pleased, his Honour said at 68:

There is perhaps one matter I should mention which was relied on in various ways by the appellants. This is a claim that the goodwill of the business was really theirs and not Morpak's, because it was they, as persons, who had the contacts with the buyers and sellers with whom Morpak dealt. This claim cannot stand. Quite apart from Joseph's involvement in the business, what David and Meyer did was done as employees of Morpak, and no matter what part they played in building up the goodwill, that goodwill belonged to Morpak. What the appellants did was deliberately to destroy Morpak's interest in the goodwill.

159I accept that there is a distinction here, in that the Chilli trade mark was not that of Chilli #1. Mr Cheal was at all relevant times the registered owner of that trade mark and Chilli #1 was simply an authorised user of the trade mark. However, in that capacity, Chilli #1 will have built up goodwill in its business (and presumably that was of some worth since Mr Cheal chose to appropriate the company name for his new company Chilli #2). While it is difficult to see that any such goodwill would subsist for any length of time after Chilli #1 no longer had the right to use the trade mark, what Mordecai makes clear is that as a director of Chilli #1, Mr Cheal had an obligation to take steps to do what he could to preserve and promote its business (and if he wanted to go his own separate way then it was incumbent on him to resolve the position with Chilli #1 in an appropriate manner rather than to take steps with the inevitable effect of the destroying the business it was then conducting).

160It is submitted by Mr Evans that a director who causes a new company to be set up with a different shareholding from the original company, in circumstances in which he has an interest in the new company, and who then causes the 'business' of the original company to be transferred over to the new company, acts in breach of duty, even if the primary reason for the transaction is to enable loan funds to flow into the business. I agree.

161In Re Bright Pine Mills Limited [1969] VR 1002 , the court (at 1013) noted the principle that a director of a company is obliged at all times to act in the company's affairs in what he conceives to be the best interest of the company and its shareholders "and to refrain from making decisions about the company's affairs without regard to its interests, but in order to divert, what might otherwise be a profitable enterprise to another concern, particularly to one in which he himself has a proprietary interest, the real purpose of his action being to prevent a minority shareholder participating in that profit".

162It is further submitted by Mr Evans that although Mr Cheal remained the owner of the trade marks, it does not follow from that that he was free to make use of them for his own benefit or to apply them for use in a business conducted by another company in which he had an interest. In particular, it is contended that, whatever personal rights he had as owner of the trade marks, Mr Cheal also provided his skills and expertise in designing surfboards and his labour generally in the business of Chilli #1 and was not free simply to take those other skills and services over to another company without committing a breach of duty (though Buckley v Tutty (1971) 125 CLR 353 refers to the right of every person to work, in the sense that he or she has a right to make use of his or her labour and personal skills, it is submitted by Mr Evans that when the person in question is a director of a company, the freedom of that person to make use of his or her skills and labour is constrained by the duties owed as a director to the company.) It seems to me that Mr Evans' submission finds support, inter alia, in Lawfund .

163Turning then to the particular allegations of breach, I find as follows:

(a) the allegation in [22] that there was a breach of duty in causing Chilli #1 to transfer TM 767677 (or the right to use that trade mark) to Mr Cheal at some time between 1 July 2004 and 30 June 2005 have not been established - I am satisfied that Chilli #1 did not at any relevant time own the trade mark (notwithstanding the entry in its accounts that suggests that it did) nor am I satisfied that Chilli #1 had a right to the trade mark that excluded the exercise by Mr Cheal of his rights as the owner of the trade mark in such a fashion as to permit there to be a 'transfer' back of those rights to the company;

(b) as to the second of the allegations in [26] (namely that in entering into the July 2005 Agreement (under which the trade mark and associated goodwill were licensed to that company) himself (as opposed to the allegation that there was a breach by causing Chilli #1 to enter into the agreement in the manner pleaded, which includes allegations of ownership of the trade mark that are not established), I am not satisfied that there was a breach of directors' duties - true it is that it might be said that there could have been different or better terms agreed than were in fact agreed, but that is not a matter relevant to the conduct of Mr Cheal personally in entering into the agreement and in any event is something that calls into question business judgment of the director, an area in which the court is traditionally reluctant to intervene; nor can it be said that there was an undisclosed conflict of interest in this regard, since Ms Fitzpatrick had been aware from the outset of Mr Cheal's personal interest in the trade mark.

(In that regard, it was submitted by Ms Francois that there is no authority for the proposition that a director cannot deal with his own property a manner contrary to the interests of the company and that, even if there was authority to that effect, the alleged inherent conflict of interest created by Mr Cheal being the owner of the trade mark and the informal use of that trade mark in Chilli #1's business was waived by the informed consent of the shareholders (namely Mr Cheal and Ms Fitzpatrick) having regard to what was said in Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 at 729 - 730 per Street CJ; approved by Gummow and Hayne JJ in Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507.)

(c) as to the allegations in [33] and [34] that there was a breach of duty by Mr Cheal, by entering into, and causing Cheal Industries to enter into, the February 2006 agreement for the assignment to Cheal Industries of the trade mark (and associated goodwill), I am not satisfied that there was a breach - whether or not the sale was at a gross undervalue must be irrelevant to the position of Chilli #1 - although I accept that thereafter it was no longer in Mr Cheal's hands directly to permit the use of the trade mark by Chilli #1; and I am not satisfied that causing Cheal Industries to take an assignment of the trade mark was a breach of director's duties owed to Chilli #1 - the failure to take any steps to secure the acquisition of the trade mark by Chilli #1 might be another issue but I think more likely that failure should be seen as part of the allegation in [40];

(d) as to the allegation in [38] that the 2005 and 2006 agreements were a sham and the allegation in [39] that there is a liability to compensate for the matters pleaded in [22], causing Chilli #2 to enter into the June 2006 agreement (those being related to the license by Cheal Industries to Chilli #2 to use the trade mark and associated goodwill), those fail as being, in effect, predicated on the ownership of the trade mark; I see no basis to find that the agreements were a sham in any event.

(e) as to the allegation in the second half of [40] that there was a breach of duty by Mr Cheal seeking to negotiate for Chilli #2 favourable terms in relation to the trade mark at the expense of Chilli #1, I am satisfied that there has been a breach - Mr Cheal had a duty to Chilli #1 (as well as a duty to Chilli #2 on incorporation) - his conduct in deliberately moving to deprive the ability of Chilli #1 to continue to use the Chilli trade mark (at a time when he was moving to ensure that Chilli #2 would be in a position to do so to Chilli #1's expense) seems to me to be a clear breach of that duty;

(f) as to the allegations in [41], [42] and [43], respectively I am satisfied that there is a breach of the statutory duties by reason of the conduct in [40].

(ii) Oppression

164Section 232 of the Corporations Act 2001 (Cth) relevantly provides that relief may be granted under section 233 if the conduct of a company's affairs "is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member".

165Ms Francois submits that Mr Cheal's conduct in dealing with his own trade mark cannot be regarded as being the "conduct" of Chilli #1's 'affairs'. Reliance is placed on s 53 of the Corporations Act , which reads:

53 Affairs of a body corporate

For the purposes of the definition of examinable affairs in section 9, section 53AA, 232, 233 or 234, paragraph 461(1)(e), section 487, subsection 1307(1) or section 1309, or of a prescribed provision of this Act, the affairs of a body corporate include:
(a) the promotion, formation, membership, control, business, trading, transactions and dealings (whether alone or jointly with any other person or persons and including transactions and dealings as agent, bailee or trustee), property (whether held alone or jointly with any other person or persons and including property held as agent, bailee or trustee), liabilities (including liabilities owed jointly with any other person or persons and liabilities as trustee), profits and other income, receipts, losses, outgoings and expenditure of the body; and
(b) in the case of a body corporate (not being a licensed trustee company within the meaning of Chapter 5D or the Public Trustee of a State or Territory) that is a trustee (but without limiting the generality of paragraph (a))-matters concerned with the ascertainment of the identity of the persons who are beneficiaries under the trust, their rights under the trust and any payments that they have received, or are entitled to receive, under the terms of the trust; and
(c) the internal management and proceedings of the body; and
(d) any act or thing done (including any contract made and any transaction entered into) by or on behalf of the body, or to or in relation to the body or its business or property, at a time when:
(i) a receiver, or a receiver and manager, is in possession of, or has control over, property of the body; or
(ii) the body is under administration; or
(iia) a deed of company arrangement executed by the body has not yet terminated; or
(iii) a compromise or arrangement made between the body and any other person or persons is being administered; or
(iv) the body is being wound up;
and, without limiting the generality of the foregoing, any conduct of such a receiver or such a receiver and manager, of an administrator of the body, of an administrator of such a deed of company arrangement, of a person administering such a compromise or arrangement or of a liquidator or provisional liquidator of the body; and
(e) the ownership of shares in, debentures of, and interests in a managed investment scheme made available by, the body; and
(f) the power of persons to exercise, or to control the exercise of, the rights to vote attached to shares in the body or to dispose of, or to exercise control over the disposal of, such shares; and
(g) matters concerned with the ascertainment of the persons who are or have been financially interested in the success or failure, or apparent success or failure, of the body or are or have been able to control or materially to influence the policy of the body; and
(h) the circumstances under which a person acquired or disposed of, or became entitled to acquire or dispose of, shares in, debentures of, or interests in a managed investment scheme made available by, the body; and
(j) where the body has made available interests in a managed investment scheme-any matters concerning the financial or business undertaking, scheme, common enterprise or investment contract to which the interests relate; and
(k) matters relating to or arising out of the audit of, or working papers or reports of an auditor concerning, any matters referred to in a preceding paragraph.

as providing some statutory guidance as to the type of conduct encompassed by that expression. Ms Francois also refers to what was said in Weatherall v Satellite Receiving Systems (Aust) Pty Ltd [1999] FCA 218; (1999) 30 ACSR 698 per Whitlam J (at [13]):

The authorities establish that conduct inconsistent with arrangements and understandings between shareholders may be so unfair that it amounts to oppression: Raymond v Cook (1998) 29 ACSR 252 and Fexuto v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 at 29 ACSR 290, and 30 ACSR 20. However, s 246AA is concerned with the manner in which "affairs" of a company are being conducted and, whilst s 53 of the Law gives an extended definition of "affairs" for the purposes of s 246AA, it cannot be said that Mr Wang's failure to pay UST [moneys said to be owing under a deed has anything to do with his position as a director or member of the Company so as to constitute conduct in its "affairs". In my view, such a failure is not "corporation-related".

166There, the allegation (found to have been inadequately pleaded and the subject of much criticism by his Honour in that regard) was that the breach of a share agreement, deed and memorandum of undertaking (relating to an agreement that Mr Weatherall and others would be admitted as equal shareholders and directors, in consideration for a substantial 'investment' of moneys) amounted to oppression. Not surprisingly, that was not accepted - it was a dispute in essence between shareholders and 'investors' as to their rights inter se (notwithstanding that it involved as the subject matter of the dispute their shareholding in a company).

167Reference is also made to Re Leeds United Holdings Plc [1997] BCC 131 where Rattee J said that "An expectation that a shareholder will not sell his shares without the consent of some other or other shareholders does not relate in any way to the conduct of the company's affairs".

168It is submitted by Ms Francois that in the present case Mr Cheal's decisions as to the use of his property (ie his trade mark) are his personal decisions and that, in making those decisions, Mr Cheal did not exercise any of Chilli #1''s powers or deal with its assets. Ms Francois submits that while his private decisions affected the company, his decisions have nothing to do with his position as a director (and that the same considerations apply once the trade mark was transferred by Mr Cheal to Cheal Industries).

169Insofar as it is submitted by Ms Francois that the plaintiffs' oppression case has at its core an allegation that it was unfair for Mr Cheal to decide to devote his personal assets and labour to an enterprise that did not involve his former de facto spouse and that this is tantamount to an obligation by Mr Cheal as a director of Chilli #1 to agree always to allow Chilli #1 to use his property and to work for Chilli #1, I do not accept that the plaintiffs' case can fairly be so characterised.

170However, to focus on the fact that Mr Cheal was the owner of the Chilli trade mark in this context seems to me to ignore the fact that Mr Cheal did not simply decide to withdraw the use of his asset from the company (or to cease to provide his personal services thereto), nor did he simply decide to incorporate a new company to carry on the same business as that formerly carried on by Chilli #1 and take steps through his position as a director of both Cheal Industries and Chilli #2 to facilitate the use of the trade mark by that new company. He also singularly failed to take any step as a director of Chilli #1 either to see whether there was a basis for continuing to use the trade mark in some capacity or to salvage some value out of he goodwill that had been built up in that company out of the use of the trade mark for some time. "Affairs of the company" must in my view include decisions as to whether to negotiate (in the company's interest) for the use of a trade mark or not to do so (and whether it is in the interests of the company for it to seek to restrain an employee or director from actively setting up a new company with a view to carrying on the same business as the kind for which use of the trade mark would be necessary or desirable).

171Although there are particular allegations of oppression in the pleading before one comes to [47], the substance of the oppression alleged seems to me to be encapsulated in that paragraph of the pleading. Ms Francois submits that if Mr Cheal could have resigned as a director and then done what he ultimately did with his trade mark (and the provision of his services) this is not indicative of oppression. I do not agree. Ms Francois says that only conduct in relation to the trade mark is referred to in relation to this allegation and that there is no other conduct pleaded as oppression. The submission is that to say that Mr Cheal's dealing with the trade mark is oppression this will interfere with Mr Cheal's rights as a trade mark owner and that would be inconsistent with the Trade Marks Act . I do not accept that a finding that Mr Cheal has behaved oppressively (as a director of the company) in the conduct of its affairs (in effect leaving the company exposed to the loss of its business without any value being sought to be obtained for that business) is tantamount to forcing someone to leave rights in relation to a registered trade mark with the company of which he is a director in perpetuity.

172Although I accept that there the licences in question belonged to the company not the directors, what has here occurred is not wholly dissimilar from the circumstances considered in Re Bright Pine Mills, where the Full Court of the Supreme Court of Victoria found that certain shareholders had engaged in oppressive conduct by using the licences and facilities of the company to set up businesses in which the applicant had no interest. It was found that o ppression may be established where the controlling directors have pursued a course of conduct designed by them to advance their own interests or the interests of others of their choice to the detriment of the company or to the detriment of minority shareholders. The Court there s aid (at 1013):

This article [referring to an article permitting directors to contract for a profit with the company] does not in any way affect the principle that a director of a company is obliged at all times to act in the company's affairs in what he conceives to be the best interest of the company and its shareholders and to refrain from making decisions about the company's affairs without regard to its interests, but in order to divert, what might otherwise be a profitable enterprise to another concern, particularly to one in which he himself has a proprietary interest, the real purpose of his action being to prevent a minority shareholder participating in that profit.

173Similarly, in Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549, where some of the directors of a courier company in Sydney established a courier business in Melbourne to which business otherwise open to the Sydney company was diverted, to its loss "so that the benefit of any profits would be gained by the ... defendants rather than the plaintiff" (at 557), Waddell J (as his Honour then was) said in respect of the diverted business (at 556):

... the undertaking by Axthorn [the company carrying on the Melbourne business] of these activities instead of by SCS [the company carrying on the Sydney business] is consistent with an inference that it was done for the purpose of enabling the second defendants, as the shareholders of Axthorn, to have the profits of the business to the exclusion of the plaintiff. If it was, it should be concluded that conduct coming within s 320 is occurring and has taken place: Scottish Co-operative Wholesale Society Ltd v Myer .

174The defendants were there found to have engaged in oppressive conduct, having given the business to Axthorn "so that the benefit of any profits would be gained by the ... defendants rather than the plaintiff" (at 557).

175Not only may conduct by a director in taking a benefit at the expense of the company may constitute oppression ( Fexuto Pty Limited v Bosnjak Holdings [2001] NSWCA 97; (2001) 37 ACSR 672; (2001) 19 ACLC 856), so also can an improper diversion of business away from the company to companies in which the 'oppressor' has an interest, but the applicant does not (see the authorities cited at para 11.460 of Ford's Principles of Corporations Law (13th Edition), eds RP Austin, IM Ramsay, namely, Re Scottish Co-operative Wholesale Society Limited v Meyer [1959] AC 324; [1958] 3 All ER 66; Re Bright Pine Mills Pty Limited ; Webb v Stanfield [1991] 1 Qd R 594; Re a Company (No 002612) (1986) 2 BCC 99,453; Dwyer v Lippiatt; Dwyer v Backpackers R Us.Com Pty Ltd (2004) 50 ACSR 333, at 355; [2004] QSC 281; Re Baumler (UK) Ltd [2005] 1 BCLC 92; [2004] All ER (D) 139; [2005] BCC 181 (Ch D); Sanford v Sanford Courier Service Pty Ltd ; Re Hollen Australia Pty Ltd; Holt v Burnside [ 2009] VSC 95, at [69].)

176In Vadori (the legal principles outlined in which are accepted by Ms Francois as applicable here), the conduct in question was that of the company directors in arranging for the practical winding up and dispersal of the company's business and assets without reference to the shareholders. There, the goodwill of the business (largely derived from the personal service of its directors) was destroyed when they set up a new business elsewhere. Although there are distinctions that can be made, the current fact situation is one where the goodwill of Chilli #1 has similarly been destroyed by the business set up in Chilli #2.

177I consider in the present case that oppressive conduct of the kind considered in the above cases can be established. Ms Francois nevertheless submits that if, contrary to her principal submission in this regard, Mr Cheal's dealings with his trade mark can fall within the reach of the oppression provision, Mr Cheal has nevertheless not acted unfairly such as to enliven the Court's jurisdiction under s 233 of the Corporations Act .

178It is well established that fairness under s 232 must not be assessed in a vacuum ( Thomas v HW Thomas Ltd [1984] 1 NZLR 686, at 694; (1984) 2 ACLC 610; (1984) 2 NZCLC 99,148).

179In Wayde v New South Wales Rugby League [1985] HCA 68; (1985) 180 CLR 459 , Mason ACJ, Wilson, Deane and Dawson JJ considered a claim of oppression where what was there done by the board was something within the power expressly conferred on the board. Brennan J said:

In the present case, the relevant expressions are "oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member". .... Section 320 requires proof of oppression or proof of unfairness: proof of mere prejudice to or discrimination against a member is insufficient to attract the court's jurisdiction to intervene. In the case of some discretionary powers, any prejudice to a member or any discrimination against him may be a badge of unfairness in the exercise of the power, but not when the discretionary power contemplates the effecting of prejudice or discrimination. It is not necessary now to decide whether "oppressive" carries in the context of s 320 the meaning which it carried in the context of the statutory precursors of s 320. At a minimum, oppression imports unfairness and that is the critical question in the present case.

... The operation of s 320 may be attracted to a decision made by directors which is made in good faith for a purpose within the directors' power but which reasonable directors would think to be unfair. The test of unfairness is objective and it is necessary, though difficult, to postulate a standard of reasonable directors possessed of any special skill, knowledge or acumen possessed by the directors. The test assumes (whether it be the fact or not) that reasonable directors weigh the furthering of the corporate object against the disadvantage, disability or burden which their decision will impose, and address their minds to the question whether a proposed decision is unfair. The court must determine whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision. (my emphasis).

180Thus, whether the company's conduct was contrary to the interests of the members as a whole or oppressive is based on the objective facts. The motivation or bona fides of the company or its officers does not preclude the availability of a remedy for oppression ( Campbell and Another v BackOffice Investments Pty Limited [2009] HCA 25; (2009) 238 CLR 304; (2009) 257 ALR 610, at 654; (2009) 73 ACSR 1), it not being to the point that the directors may not have intended to deal inappropriately with the assets of the company.

181In Shelton v NRMA [2004] FCA 1393; (2004) 51 ACSR 278 Tamberlin J said at [23]:

It is not practicable to delineate the numerous ways in which oppressive conduct may be established. The Court will generally look at the overall course of conduct and consider whether it is so unfair that reasonable directors would not consider it fair. ... The test of unfairness is objective: see Wayde v NSW Rugby League Ltd (1985) 180 CLR 459 at 472 (" Wayde ") per Brennan J; Morgan v 45 Flers Avenue Pty Ltd (1987) 11 NSWLR 573. The Court should not take a narrow approach to cases of oppression. It is necessary for the Court to come to a conclusion that there has been conduct unfairly prejudicial to or unfairly discriminatory or oppressive to a member before it makes an order to this effect: see John J Starr (Real Estate) Pty Ltd v Andrew (Australasia) Pty Ltd (1991) 6 ACSR 63, and the authorities there collected at 65-67. (my emphasis)

182However, in Doyle v Australian Securities and Investments Commission (ASIC) [2005] HCA 78; (2005) 227 CLR 18; (2005) 223 ALR 218; (2005) 56 ACSR 159, it was said that (even though subjective intention or purpose is not a necessary ingredient in determining improper use of position), the presence of such an intention or purpose may be relevant in assessing impropriety (at [41]). In Duke Group Limited (in liq) v Pilmer (1998) 27 ACSR 1, it was said that evidence of a director's secret shareholding in a takeover target could assist in determining the secret motives of those controlling the company in recommending the takeover to shareholders. Here, reliance is placed on the motivation of Mr Cheal being to exclude Ms Fitzpatrick from the business. I have considered the context in which that evidence should be understood earlier. While I note that Mr Cheal accepted that his purposes was to exclude Ms Fitzpatrick it seems to me that his conduct would be open to be found to be oppressive whether or not he had such an intent.

183It is nevertheless submitted by Ms Francois that such conduct was not objectively unfair. She submitted that the alleged unfairness of Mr Cheal's conduct should be assessed having regard to the facts that: the trade mark was Mr Cheal's personal property (and it is said that, as Ms Fitzpatrick knew, he never intended it to be that of Chilli # 1 - the context of Ms Fitzpatrick's evidence in this regard being a matter to which I have already made comment); that the business of Chilli #1 took over Mr Cheal's business as a sole trader and its growth (though the financial success of this was in issue) was built on Mr Chilli's skill, labour, name and the loans given by Mr Cheal and his parents; that Ms Fitzpatrick made no capital or financial contribution thereto (though the evidence is that she performed various administrative services in relation to the company); that Ms Fitzpatrick contributed nothing to the business after her separation from Mr Cheal in 2003; and that during 1999 to 2003 Chilli #1 made only marginal financial gains and paid Mr Cheal less than the average wage.

184As to these matters, I was left with the impression that Mr Cheal had little understanding of the corporate veil and assumed that the Chilli trade mark (being connected with his nickname and having been used to set up "his" business) at all times remained his to deal with through whatever corporate or trust vehicle it might have been held or used. Similarly, I accept that Ms Fitzpatrick understood the Chilli trade mark to be associated with Mr Cheal (her complaint now being that she has been deprived of the fruits of her joint endeavour with Mr Cheal in the establishment of Chilli #1's business in the first place).

185As to the manner in which the business was set up, Ms Fitzpatrick's contribution was admittedly in relation to administrative matters and it is true that Mr Cheal's parents had made loans to the company. However, the fact remains that Mr Cheal chose to incorporate the company and to run the business through that company and Ms Fitzpatrick was issued shares and has rights in relation thereto. (The fact that it may have been set up on advice from Mr Jago as to income splitting is irrelevant in that regard, although it suggests that Mr Cheal may have obtained a further benefit from Ms Fitzpatrick's role in the company in that regard.)

186As to the financial performance of the company, it does not seem to me to make Mr Cheal's conduct any the less unfair that he (and presumably also Ms Fitzpatrick) had low returns from the company over the years. Ms Francois notes that in 2000 there was a net loss of $441 (Mr Cheal being paid $10,000 in director's fees and salary); in 2001 there was a net profit of $3,990 (Mr Cheal being paid $14,000 in director's fees and salary); in 2002 there was a net profit of $9,733 (Mr Cheal being paid a director's salary of $18,410); and in 2003 there was a net profit of $16,764 (Mr Cheal being paid a director's salary of $33,800). Ms Francois notes that in 2004 there was a net loss of $27,992 though Mr Cheal was paid a wage of $61,350 (Mr Cheal's father having made a further loan to the company in that year); in 2005 there was a net profit of $2,915 (with Mr Cheal paid $49,864 in salary) (the loan from Mr Cheal's father having been increased); in 2006 there was a net profit of $23,579 (and Mr Cheal drew a salary of $18,858 and received royalties of $2,794). The fact that Mr Cheal had only drawn a small wage does not in my view make his conduct in removing the business from the company while still a director any the less oppressive. What that history shows is that Mr Cheal would have been better advised to wind up the company at that stage before commencing afresh (or to have bought out Ms Fitzpatrick's share before moving to exclude her unilaterally from the business).

187It is further submitted by Ms Francois that it is not objectively unfair for Mr Cheal to decide to cease using his labour and personal assets in an enterprise in which his former de facto spouse still has an interest and to which she has contributed nothing of substance to its success. (That, of course, is a value-laden judgment as to the worth of the respective roles in the setting up and running of the company at the outset. The suggestion that there was no contribution by Ms Fitzpatrick is not supported on the evidence and the fact that Ms Fitzpatrick has contributed nothing since the separation is hardly to the point if (as seems likely) she was excluded as a practical matter from making any further contribution.) The relevant question is whether it was objectively unfair of Mr Cheal to decide, in effect, that he would exclude Ms Fitzpatrick from any share of the endeavours in which she had been engaged - by choosing unilaterally to set up a competing business and destroy any value that there may then have been in the goodwill of the company having regard to its history of trading. I have no doubt that it was.

188In Mordecai , one key difference was that the directors were also trustees of their brother's estate and so had two different roles to play in relation the company. However, that difference does not suggest to me that the principles in Mordecai are inapplicable in the present case. In Mordecai , in relation to the question of breach, Hope JA found that the appellants' actions breached both their duties as directors of the company and their duties as trustees of their brother's estate. The trustee relationship was therefore not a necessary condition for his Honour's finding of breach of duty.

189I find that the claim in oppression has been established.

(iii) Relief

190I am satisfied that each of the alternative claims has been established by the plaintiffs (though not each of the particular breaches of duty). The question then arises as to the appropriate relief.

191No claim for an account of profits has been made. In effect, what is sought is equitable compensation by the company (Chilli #1) on receipt of which it would of course be open to Ms Fitzpatrick to seek that the company be wound up and she receive her share of any remaining assets after satisfaction of the company's debts. Alternatively, Ms Fitzpatrick seeks a compulsory purchase order as relief for the oppressive conduct, with her share valued as at 30 June 2006 on the assumption that the oppressive conduct had not depreciated the value of that share.

192As to the measure of any equitable compensation, Mr Evans submits that the relevant question is whether, in determining the appropriate measure of compensation payable to the plaintiffs, the court should discount the value of the business and the goodwill on the basis that (absent some non-compete or other restraint clause) Mr Cheal might be free to resign and then set up in competition. He submits that there should be no such discount (as I understand it in part because the valuation by Mr McMahon builds into the estimated value of the company a discount factor in recognition of that very risk).

193Reliance is placed by Mr Evans on what was said by the Court of Appeal in Mordecai (at 68C to 71G) and in particular at (71B to 71D). He notes that in Vadori at [182], I said as follows:

I accept that the evidence suggests that, without effective non-compete covenants being put in place, the likelihood is that it would have been difficult to sell the business of the company and I do not accept that it should be inferred that any outgoing director not already bound by such a covenant would readily have been prepared to give (nor would he have been obliged to give) such a covenant. Hence, the value of the company's goodwill was clearly at risk and the opportunity of which the company has been deprived is not likely to have been great. Nonetheless, it was not for the directors, without reference to the shareholders, to deprive the company of that opportunity.

194Insofar as the conduct of Mr Cheal has destroyed the value of Ms Fitzpatrick's shares as at 30 June 2006 and conveyed that value to Cheal Industries and Chilli #2, Mr Evans submits that the measure of relief for oppression should be assessed on the same basis as set out in Mordecai and that the most appropriate date for determining the value of that business and its associated goodwill must be 30 June 2006, the date on which the business was effectively transferred.

195Ms Francois submits that it is only possible to ascribe a value to the goodwill of Chilli #1 if (which it does not) it owned the Chilli trade mark and hence that any remedy requiring the payment of compensation to Chilli #1 is of no value or utility.

196Turning first to the basis on which equitable compensation is to be determined, this must be assessed by reference to the amount which is necessary to compensate Chilli #1 for the breach of the directors' duties that has been found (that breach being limited to the conduct of Mr Cheal in relation to the entry by Cheal Industries and Chilli #2 into the licensing agreement in 2006 and his failure to take steps to act in the best interests of Chilli #1 in order to preserve its business or the value of any goodwill in that business not referable to the ongoing use of the Chilli trade mark).

197I accept that Mr Cheal could, without breach of his duties as a director, have chosen no longer to provide his surfboard making services to the company. (Presumably then the company would have had regard to whether it could carry on with a replacement surfboard designer). It was also in his power to deal with the Chilli trade mark (consistently with any rights he had in the meantime given to Chilli #1). The company was thus vulnerable to the loss of Mr Cheal's expertise and to the loss of a right to use the trade mark. However, I am by no means convinced that there was no value to be derived from the existing goodwill of the company (albeit derived from the use of the trade mark and Mr Cheal's services) and in the company name itself (which it surely would not have been open to Mr Cheal to appropriate without the consent of the shareholders of Chilli #1).

198Ms Francois emphasises that without the agreement of Mr Cheal to enter into a non-compete covenant the value of any acquisition of the company would be reduced and that with a non-compete covenant Mr Cheal would be restricted to the position of an unskilled labourer in seeking further employment. That concern serves to reinforce the likelihood that if Mr Cheal had sought to realise the value of Chilli #1 before embarking on the business of Chilli #2, the former company might have been in a position to extract a premium for the use (if nothing else) of the company name. If Mr Cheal himself was the buyer (through Chilli #2 or otherwise) then the issue of the non-compete would be irrelevant.

199I accept that if account is not taken of the vulnerability of Chilli #1 to the loss of Mr Cheal's services and trade mark, the value of the company would seem to be overstated but I am not convinced that it would have been valueless.

200In Mordecai , the directors had argued that it was they who had the contacts and associations with buyers and sellers upon which Morpak's goodwill and its value depended and that Morpak's goodwill was valueless unless they entered into restrictive covenants precluding them from establishing a competing business. It was said that as they would not have given any such restrictive covenants, the goodwill was valueless and no one would buy the company.

201Hope JA rejected those arguments, posing the hypothetical scenario in which the directors were the buyers of Morpak (at 69-70):

In the appellant's submission, there were no potential purchasers, but was this so? The business was of unquestioned value to Morpak, and it was not to be expected to give it away. Moreover the appellants, being directors of Morpak, could not canvass Morpak's customers for themselves. The only way in which, at least while directors, they could have done this was by buying the business from Morpak. It does not lie in their mouths to say that they did not want to acquire the business, for that is precisely what they did. If, as the appellants assert, the goodwill would have been unsaleable to anyone else, it was certainly saleable, at its proper value to them, and as the position stood when they took the business from Morpak, the business had the potentiality, valuable only to them when it was in their hands, to free them from the restraints which the law otherwise would impose on them.

It is well-established that if property has some special potentiality which only one person would buy, it is to be valued on the basis of a notional sale to that person. The property is not valueless or diminished in value because there would be no other buyers: Vyricherla Narayana Gajapatiraju Bahadur Garut (Sri Raja) v Revenue Divisional Officer, Vizagapatam [1939] AC 302 at 316, 317 and Geita Sebea v Territory of Papua (1941) 67 CLR 544 at 557. On this basis, the value of Morpak's goodwill is to be determined upon the basis of a hypothetical sale to the only persons to whom, on the appellants' submissions, it could be sold, and to whom the matters which they submit would render the goodwill valueless in any other purchaser's hands would be irrelevant . (my emphasis)

202His Honour drew support from intellectual property cases, such as WEA Records Pty Ltd v Stereo FM Pty Ltd (1983) 48 ALR 91, Copyright Agency Ltd v Department of Education of New South Wales (1985) 80 FLR 332 and General Tire & Rubber Co v Firestone Tyre & Rubber Co Ltd [1975] 1 WLR 819, for the proposition that the measure of damages where someone has made unlawful use of property should be the amount of royalty paid had they acted lawfully instead. Reasoning from this, his Honour said at 71:

That aptly describes the present case. The respondent is not seeking the return of the goodwill to Morpak; damages are sought on the basis that Morpak was deprived of its goodwill unlawfully. The appellants might have obtained Morpak's goodwill lawfully. Being directors of Morpak, they could have lawfully acquired the goodwill with the informed consent of the members of the company. In their dual character as purchasers and trustee-shareholders, they would have required the court's approval to their giving consent. That approval would have required evidence that the purchase price was a proper price, not diminished by the matters relied upon by the appellants to support the claim that the goodwill was valueless in Morpak's hands. A proposition that the court would approve the appellants acquiescing, as trustees, in the giving of the goodwill to themselves for nothing when Morpak would continue to receive a significant income by retaining it has only to be stated to be rejected. Instead of obtaining the goodwill lawfully in this way, the appellants simply took it, unlawfully. What they must pay by way of damages is to be assessed by reference to the value of the goodwill of the business, determined upon the basis of what they would have had to pay had they obtained it lawfully from Morpak.

203On the basis of that reasoning, Hope JA accepted a valuation of the business that included a value for goodwill predicated on the business contacts and relationships of the directors as the proper and correct basis for assessing damages.

204If similar reasoning were adopted here, it might be presumed that Ms Fitzpatrick's informed consent would impose the same requirement that the "purchase price was a proper price" and not merely nominal or convenient to Mr Cheal.

205In Re Leas Hotel Co [1902] 1 Ch 332 it was accepted that the goodwill of the business of a company was owned by the company, not by any of its directors. Leaving aside for the question of how there is to be an apportionment of the value, there seems to me to be a distinction between the value attributable to a trade mark of which a director is the registered owner (and which the company is simply permitted or licensed to use) and the value of the brand name or company reputation built up by the authorised use of that trade name over the years (that can be seen by the fact that a registered owner is not in a position to make use of a trade mark licensed to others if that would undermine the brand itself).

206In Old v McInnes and Hodgkinson [2011] NSWCA 410 (to which authority Ms Francois drew my attention after the close of the hearing), the Court of Appeal considered issues arising from a partnership dispute in which one of the partners had been found to have been in breach of his duties as a partner in removing files of the business in advance of the termination of the partnership. There, Meagher JA, with whom Beazley and Giles JJA agreed (Beazley JA dissenting only as to the costs issues there before the Court), considered among other things the question as to whether there should have been an allowance in the accounts as between the partners for goodwill acquired or retained by the former partners.

207At [83], Meagher JA referred to the finding by the primary judge that the partnership business had come to an end and that, as goodwill had no existence independent of the conduct of a business, once the business came to an end the goodwill in it could no longer exist. Meagher JA affirmed that the relevant statement of principle was that summarised by Needham J (as his Honour then was) in Alcock v Robb (1978) 2 BPR 9625 at 9630, namely that:

... once a business comes to an end goodwill in it can no longer exist. If the former partners so desire, they can sell the assets of the business including goodwill, but such a sale would prevent any of them from soliciting the custom of the former clients of the firm. They may, alternatively, sell the business to one of their number. In that case, an allowance for goodwill would be proper. If, however, the former partners decide to give up the business and go their separate ways, it seems to me that they destroy the goodwill of that business. Each of them would be liable to restraint if it were to be suggested that they were carrying on the old business. The agreement of the former parties that clients would be circularised and given the opportunity of choosing which of the former partners should perform their work is not an agreement to divide goodwill in specie. No former client can be held to his decision and each could go where he wished. Each party remains entitled to use the name (an integral part of the former goodwill) and the goodwill which each of the former partners builds up is his own goodwill, ie the goodwill of his new business. It cannot be equated or identified with a portion of the former goodwill.

208At [88], his Honour noted the distinction between goodwill (which attaches to a business and cannot be dealt with separately from the business with which it is associated) and the sources of that goodwill (which may be assets of the business which are not themselves elements of the goodwill), referring to Federal Commissioner of Taxation v Murry [1998] HCA 42; (1998) 193 CLR 605 at [22], [24], [30], saying:

The sale of an asset of a business which may itself be a source of the goodwill of the business does not involve any sale of goodwill unless the sale of the asset is accompanied by or carries with it the right to conduct the business. That is because goodwill is the right or privilege to conduct a business in substantially the same manner and by substantially the same means as have attracted custom to it: Federal Commissioner of Taxation v Murry at [23], [31], [45].

and went on at [89] to say that, to the extent that a number of the assets of that business which were sources of its goodwill were acquired or used by one of the former partners in a new entity after the termination of the partnership then the appellant Mr Old was entitled to have the value of those assets brought to account in the winding-up of the partnership and that the value of those assets would usually take account of their potential use "which is an attribute of the asset and not an element of the goodwill", citing Murry at [33], [51]. However, to the extent that those assets might thereafter be said to have generated goodwill, this would be goodwill attaching to the new business.

209His Honour also considered whether the equitable compensation for which the appellant was liable (for breach of his fiduciary duty in removing files prior to the termination of the partnership) included an amount for his having appropriated goodwill or otherwise reduced the value of goodwill of the former partnership. The referee (to whom the taking of partnership accounts had been referred) had recommended that the compensation for breach of fiduciary duty should include an allowance for loss of value of goodwill attributable to the wrongly removed files. The primary judge had rejected a contention that there should be no allowance for any loss of goodwill by way of equitable compensation but had varied the referee's recommendation so as to reduce the amount for which compensation was required to be made. This was on the basis that part of the damage by reason of the breach of fiduciary duty occurred while the partnership was still in existence and that "the mere fact that, on dissolution it ceased to exist does not mean that at the time of the breach of duty it had no value". A discount to the value of the goodwill was, however, applied by the trial judge on the basis that the breach occurred "very close to the obvious finish of the partnership" and "because of the chances of its becoming valueless in any event".

210At [94], Meagher JA noted the appellant's argument that the measure of compensation for breach of fiduciary duty is to be assessed at the date of judgment and that it is assessed as the amount then necessary to put the beneficiary back into the position it would have been in had there been no breach (reference being made to Target Holdings Ltd v Redferns [1996] AC 421 at 437; Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [35] and [50]; O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 274-276) and addressed at [95] the position that would have been the case had the files not wrongly been removed and retained by the appellant (noting that in event the partnership would have generated revenue from those files until 30 June 2003 when the partnership was dissolved and the business ceased to be carried on and that thereafter revenue would have been generated from the files, probably for the benefit of that partnership in its winding-up, until such time as the files were allocated in accordance with the wishes of the clients which process had concluded by late July/early August).

211It was accepted in Old that compensation had been provided compensation in respect of fees generated by the client files up to 30 June 2003 and that an allowance had been made for the costs incurred in July 2003 in locating and dealing with the removed files which he had removed. It had further been conceded that it was not possible on the evidence to establish whether any other losses had been incurred as a result of the removal of the files. Meagher JA said that on no view of the matter would the respondents have received any amount reflecting a proportion of the value of the goodwill of the partnership business and that (at [97]) to award compensation reflecting any part of the value of the goodwill of the former partnership would be to put the respondents in a better position than they would have been in had the breach of fiduciary duty not occurred.

212The question here is as to how to value the loss of the opportunity for Chilli #1 to extract value from its existing goodwill when that goodwill was liable to be lost (and, even if the Mordecai approach is adopted and one assumes that Mr Cheal was required to be treated as the purchaser of that goodwill, it could hardly be postulated that he be required to pay to acquire the rights to use his own trade mark).

213Further, while I consider that theoretically the past goodwill and company name would have had a value, I am not in a position to determine what that value might be (since the expert's report expressly disclaimed any attempt separately the value the company's goodwill from its business independently of the goodwill attributable to the Chilli trade mark.

214At paragraph 2.2 of the Report, Mr McMahon states:

Although it is possible to attempt to separately estimate the value of each identified intangible asset (such as a brand name or a patent) which have a separate identity of their own, independent of the business (as distinct from Goodwill which is regarded as an unidentifiable intangible asset which cannot be separated from the entity), it is often neither feasible nor practicable to do so. We see no good reason to seek to separately estimate the value of the brand name from the value of goodwill for Chilli #1 and regard then as essentially one and the same thing in this instance. Therefore, in the remainder of this report, references to the value of goodwill should be read as including the value of the brand name "Chilli Shapes by James Cheal" as recorded in Trademark 767677 . (my emphasis)

215Mr McMahon explained this in cross-examination as follows:

Q. Mr McMahon, in paragraph 2.2 of your report you say in this case you see no good reason to seek to separately estimate the value of brand name from the value of goodwill for Chilli #1?
A. Yes.

Q. And what you mean by that is that you consider that the value of the trade mark is essentially the goodwill of Chilli #1?
A. No, it's a much bigger picture and I feel that it was impossible to separate the value of the trade mark from the value of the commercial goodwill of the business. I couldn't separate them, I had no precise information to do that.

216Mr McMahon seems to me to be unable to assess the value of the brand name from the value of the goodwill for Chilli #1 because of lack of information, not because the task per se was impossible.

217I therefore cannot assess the measure of equitable compensation that would be appropriate in the present case (and if a remedy were to be sought on that basis it would be appropriate for it to be referred out to an intellectual property expert).

218This brings me to the remedy for oppression.

219The general principle, when determining relief for oppression, was said in Scottish Co-operative Wholesale Society v Meyer , at 86, per Lord Keith to be to determine:

what would have been the value of the shares at the commencement of the proceedings had it not been for the effect of the oppressive conduct of which complaint was made. This is clearly not a matter on which a calculation can be made with mathematical accuracy or by the application of strict accounting principles...

220In that case, Lord Denning, at 89, said:

One of the most useful orders mentioned in the section-which will enable the court to do justice to the injured shareholders-is to order the oppressor to buy their shares at a fair price; and a fair price would be, I think, the value which the shares would have had at the date of the petition, if there had been no oppression.

221The Court, in those circumstances seeks to fashion relief which removes the adverse effects of the oppression ( Shelton v NRMA at [26], cited by Bergin J (as her Honour then was) in Backoffice Investments v Campbell [2007] NSWSC 161; (2007) 61 ACSR 144; 25 ACLC 302, at [93], and reaffirmed in Campbell v BackOffice Investments Pty Ltd [2008] NSWCA 95 , at [195], [332]).

222The remedy chosen should be the least intrusive ( Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452, at 475; Fexuto v Bosnjak Holdings Pty Ltd , Young J (as his Honour then was), at 742).

223In relation to the claim for oppression, when the court is valuing the oppressed shareholder's interest in the determination of the relief to be awarded for oppression, the aim is to put the applicant in the position as if there had been no oppression, as stated by Young J (as his Honour then was) in ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1995) 15 ACSR 536, at 540:

However in cases dealing with the price at which an oppressor is to purchase the oppressed's shares in a company the word ``fair'' has been given significance. For instance in Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 at 369, Lord Denning said that one of the most useful orders that could be made is to "order the oppressor to buy their shares at a fair price: and a fair price would be, I think, the value which the shares would have had at the date of the petition, if there had been no oppression". The concept of "fair price" in this sense has been followed subsequently; see for instance Re Associated Tool Industries Ltd (1963) 5 FLR 55 at 70; Re Golden Bread Pty Ltd [1977] Qd R 44 at 55; Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60 at 102 and cases cited by von Doussa J in that case at para 25.5. The flavour of the judgments in the company oppression cases is that in looking to the fair value one must look at all the circumstances of the case and seek to put the oppressed in the same position as nearly as can be as if there had been no oppression, erring, if there is to be any erring, on the side of the oppressed . (my emphasis)

224In Rankine v Rankine (1995) 124 FLR 340, Thomas J (as his Honour then was), with whom Macrossan CJ and McPherson JA agreed, said at 345-346:

In granting a remedy in favour of an oppressed shareholder under CL s 260(2)(e) or 260(2)(f) by ordering the compulsory purchase of the applicant's shares at a stated price, the court is in effect awarding compensation for the respondents' breach of duty. The nature of the duty is both subtle and complex, and not capable of exhaustive definition, but the most useful expressions of it are collected in McPherson, The Law of Company Liquidation , 3rd ed, Donovan, pp 143-44. One such expression describes it as a duty of probity and fair dealing (Meyer, above, 364, per Lord Keith). The compensatory nature of the remedy is recognised by Lord Denning in Meyer at 369, in Re a Company No 002612 of 1984 (1986) 2 BCC 99 at 495 and in Coombs v Dynasty , above, at ACLC 918. The ultimate finding of the price that should be paid cannot be made until the nature and effect of the oppression has been identified and its effect quantified or allowed for. By contrast a valuation of shares on the basis of the value of the company as a going concern, or by reference to its underlying assets, as has been directed in this case, is a conventional valuation exercise without adjustments for the oppression factors.

225In Short v Crawley (No 30) [2007] NSWSC 1322, White J said at [1237ff] that the overriding requirement when valuing the shares of the company for the purpose of a compulsory purchase order is that the valuation, and the time at which the valuation is to be carried out, be fair. His Honour noted that "[f]airness depends on the facts of the particular case ( Re London School of Electronics Ltd [1986] Ch 211 at 224; Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 at 144; Profinance Trust SA v Gladstone [2002] 1 WLR 1024 at 1034)" and confirmed that the valuation must exclude the depreciating effect on the value of the applicant's shares brought about by the oppressive conduct ( there citing Scottish Co-operative Wholesale Ltd v Meyer at 364 and 369). His Honour did not agree that there was any prima facie principle or starting point of valuation for such a valuation to be undertaken as at the date proceedings are commenced (a submission to that effect having been made to his Honour by reference to what was said in Re a Company per Vinelott J at 99,492-99,493). Rather, his Honour considered that the test was simply as to what is the fair time to adopt as the time for valuation of the shares in question. His Honour observed that in Profinance Trust SA v Gladstone , the Court of Appeal had noted that w here a company has been deprived of its business, an early valuation date (and compensating adjustments) may be required in fairness to the claimant (referring to Scottish Co-operative Wholesale Society Ltd v Meyer ).

226As I noted in Vadori, there is some judicial support for the approach of valuing an applicant's shares in a company which has lost business opportunities due to breaches by the directors (where this conduct also constitutes the oppression) by treating the new company, which took the business opportunity, as if it were a wholly-owned subsidiary of the subject company ( Re Bright Pine Mills , at 1013-1014; Dwyer v Lippiatt; Dwyer v Backpackers R Us , at [83]; Drinkwater v Caddyrack Pty Ltd [1997] NSWSC 431).

227Here, it seems to me clear that the relevant time for valuing the shares would be 30 June 2006 the time immediately before the business was assumed by Chilli #2. Ms Francois submits that an inherent difficulty in establishing a value for Chilli #1 is its lack of profitability and that this causes a difficulty for the use of any earnings based approach to determining value. Criticism was made of the expert valuation report on the basis of the asserted inaccuracy of Mr McMahon's assumed growth rates for the discounted cash flow calculation adopted by him.

228I turn then to the Expert Report (Exhibit A). It is clear that the valuation made by Mr McMahon is predicated upon the trade mark "Chilli Shapes by James Cheal" being (or remaining) an intangible asset of Chilli #1. No criticism is intended of Mr McMahon in this regard. This was an assumption he was instructed to make (as is clearly set out in the report). (As to the criticism made of the mathematical accuracy of the calculations, if Ms Francois' submissions are correct and this is an issue of arithmetic not methodology, then the report does not explain how present value of the business is calculated from the terminal value and therefore, the report provides no way of assessing the present value of the business on Ms Francois' figures.)

229At [2.3], the methodology for calculating the value of the goodwill is set out (Mr McMahon having explained at [2.2] that goodwill in an intangible asset is the amount an acquirer is prepared to pay over and above the fair market value of the Net Operating Assets of a business or entity):

... the value of Goodwill (as described in paragraph 2.2 above) can best be estimated by first valuing the business of Chilli #1 as at the specific dates requested and then deducting from these valuations the fair market values of what we call the Net Operating Assets of the Chilli #1 business at these specific dates. The resultant figure, if positive, is the estimated value of the goodwill (predominantly comprising the value of the brand name "Chilli Shapes by James Cheal") associated with the Chilli #1 business . (my emphasis)

230This approach is reinforced on page 6 of the Report, which sets out the assets and liabilities of Chilli #1 as at 30 June 2005 and 30 June 2006 for the purposes of calculating the book value of "net operating assets". Note b on page 6 states:

... We are instructed to assume that Chilli #1 had the benefit of the ongoing right to the use of the intellectual property and associated goodwill recorded in Trade Mark 767677 and, therefore, we have recorded these Patents and Trademarks as an intangible asset of Chilli #1. This treatment has no bearing on our valuation of the Chilli #1 business or on our estimates of the value of goodwill as this asset is included in the goodwill estimate regardless . (my emphasis)

231This is again stated at paragraph 6.2.5.16:

In arriving at the valuation of the market value of the Chilli #1 business as at 30 June 2006 (and in all valuations) we have been instructed to assume that Chilli #1 had the benefit of the ongoing right to the use of the intellectual property and associated goodwill recorded in Trade Mark 767677 and it could assign or otherwise transfer the ongoing right to the use thereof to the purchaser royalty fee.

232Based on the methodology set out above, no separate valuation has been conducted of the goodwill in Chilli #1 on the scenario (proven to be correct) that TM 767677 is not the property of Chilli #1 and Chilli #1 at the relevant time no longer had the right to use the trade mark.

233The valuation methodology adopted by Mr McMahon, of the two available methodologies - Earnings/Cash Flow Approach and an Assets Approach, was the former on the basis that this was a performing (not underperforming) business; on such an approach Mr McMahon noted that there were two available methods of valuation: a Discounted Cash Flow Method (being a universal method but one where the major difficulty lies in the forecast of further cash flows) and the Capitalised Maintainable Earnings Method (which looks to investment return or the appropriate capitalised rate or earnings multiple). In this regard, he chose the former. Mr McMahon noted at [4.14] that the Discounted Cash Flow Method is suitable to value demonstrable growth businesses that either "do not presently generate positive EBIT or free cash flows but which have the strong potential to do so in the future and for business which are still in the early stages of their development and are exhibiting strong growth in revenues and or free cash flows." (Ms Francois challenged the assumption as to strong growth but it is not necessary to consider this given the conclusion I have reached on the effect of the flawed assumption on which the report was based.)

234Paragraph [4.15] set out the methodology involved in the Discounted Cash Flow Method; that comprising a forecast of "future free cash flows" discounted back to the valuation date using an appropriate risk adjusted discount rate and then capitalised to an "appropriate horizon date". That method produces a ' terminal value' at the start of future horizon year which, in turn, is then discounted back to the valuation date to obtain its present value; the present values are summed to obtain the estimated value of the operating business and an appropriate risk adjusted discount rate is then applied.

235Ms Francois criticised the mathematical calculation of the "growth rate" upon which the yearly cash flows are calculated (that being one of the assumptions in the Discounted Cash Flow Method adopted by Mr McMahon). In summary, it is submitted (and not only does that mathematically seem to be the case, it was accepted by Mr McMahon that this was the case) that what has been used is not the actual average annual growth period over the relevant periods but the growth rate over the relevant period divided by the number of years in that period. This, Ms Francois submits, and Mr McMahon accepted, produces a higher growth rate than the actual average of annual growth (for the period ending 30 June 2005 a rate of 26% as opposed to 22.3%; for the period ending 30 June 2006 a rate of 46% as opposed to the rate of 31.5%, though it must be noted that in that case Mr McMahon adopted a lower rate of 36% than the rate produced on his calculations in order, he said, to be conservative).

236Mr Evans submitted that the calculations provided by Ms Francois were misleading and that the purpose of the growth rate assumption adopted by Mr McMahon was to provide a starting point for projected future growth such that the application of that growth rate to past sales data is of no assistance. Further, it was submitted that the figure of 26% did not represent a compound rate of growth (as Ms Francois had contended).

237It was submitted by Mr Evans that, insofar as the thrust of the criticism of the growth rate methodology applied by Mr McMahon was that it operated unfairly, this proposition was put to Mr McMahon in cross-examination and rejected by him by reference to the common practice in the industry and his view that the alternative method suggested to him would produce an inaccurate result in that it included an extraordinary year for which there may have been a reasonable explanation. (Mr Evans further submitted that the hypothesis of the unfairness of the growth rate methodology adopted by Mr McMahon could be tested with the benefit of hindsight, since the growth rate of 36% assumed by Mr. McMahon in his model for the 2007 sales was below the actual growth rates achieved in both 2005 and 2006.)

238In cross-examination, Mr McMahon gave the following explanation for how he calculated the growth rate (at T 22.20 and T 23.20-23.30):

A. The simple average percentage truly reflects the overall trend in the business which was up quite considerably apart from the 2004 year which did no grow. So I felt that the simple average percentage of those three years was best calculated in the way to demonstrate the overall upward trend of the business.
...

Q. But if one wanted to use a more accurate history in terms of what actually happened the more accurate average percentage is 22.3 in terms of the actual history of this company?
A. No, I don't agree. As I have said before I have explained why I picked 26 percent, and I stand by that.

Q. Is it normal practice when evaluating businesses of this kind to use a certain rate?
A. Yes, it is important to get a feel for the trend in the business, be it up, down or stable, and it is a normal procedure used to calculate that trend.

239I accept that the decision to use the growth rate figures adopted by Mr McMahon is not a question of the mathematical integrity of the calculations, but instead reflects a decision as to the appropriate rate to be applied in the application of the Discounted Cash Flow model applied by Mr McMahon. In the absence of any other expert evidence upon which I could conclude that the methodology adopted by Mr McMahon was incorrect and having had the opportunity to hear Mr McMahon's explanation as to why he had chosen the figures he did, had the issue rested on this I would have accepted the valuation arrived at by Mr McMahon.

240In the present case, however, the valuation proceeded on the basis of an assumption that has not been made out. Therefore, I am unable to accept that the valuation of the business is in the order Mr McMahon estimated. I note that footnote 22 to Mr McMahon's report notes that if Chilli #1 were to be valued after the acquisition of the business then the only value would be the fair market value of the Net Operating Assets with no component for goodwill. The latter conclusion is due to Mr McMahon's conclusion that there is no separate value for goodwill independent of the Chilli trade mark. In this regard, I also note the following answer given by Mr McMahon regarding how to value Chilli #1 if there were no goodwill (at T26.15):

A. I can explain that. For example, if the net operating assets of the business was $114,000 but the discounted cash flow of the business only came to $110,000, there would be no reason to use the cash flow basis because it didn't achieve a value greater than the net operating assets. So there was no goodwill, so therefore you would not proceed using a discount cash flow method. So the test is whether your discount cash flow method exceeds the net operating assets of the business. That's the test, and once that's exceed you know you're on the correct path of valuing it using DCF, using the discounted cash flow method. So the test - does that make sense?

241Therefore, it seems to me that the appropriate approach is to value Chilli #1 according to the value of the Net Operating Assets as at 30 June 2006, plus any amount attributable to goodwill independent of the Chilli trade mark.

Conclusion

242I consider that the appropriate relief on the oppression claim is to order a compulsory purchase of Ms Fitzpatrick's shares at a value that represents half of the fair market value of the Net Operating Assets as at 30 June 2006 (ie half of $110,000 - that being the book value of $119,000 less the $9,000 wrongly attributed in the accounts to the patents/trade marks entry) plus half of the amount (if any) that may be attributable to the goodwill of Chilli #1 independent of the Chilli trade mark. The latter has not yet been valued. It seems to me open to infer that it must have had some value to Mr Cheal or Chilli # 2 since Mr Cheal proceeded to appropriate the company name for the benefit of Chilli #2.

243Absent any valuation of that amount, the appropriate purchase price would be $55,000. (Mr McMahon in the witness box explained that the valuation of a share to be acquired on this basis would not take into account company debt and, in circumstances where there seems to have been no claim in that regard, and the circumstances in which the remedy has been sought, I do not take that into account.)

244Any equitable compensation to the company would require a similar determination (and any value thereafter to be obtained by Ms Fitzpatrick in respect of her shares would require the winding up of Chilli #1 at no doubt further expense). Therefore, it seems to me that that the alternative relief based on oppression would be the relief most consistent with the just, quick and cheap resolution of the real issues in dispute.

245The only question then is whether to refer to an expert the valuation of the goodwill represented by the company name or simply to attribute a nominal value to that in circumstances where it seems unlikely that in quantum it would have approached anywhere near the value attributable to the Chilli trade mark itself. I will hear submissions on this aspect of the relief to be granted and will hear submissions on costs.

Orders

246For the reasons set out above, I propose to order as follows:

1. Declare that the first defendant, by acting in his capacity as director of the third defendant (Chilli #2) to negotiate the June 2006 Agreement on terms favourable to third defendant at the expense of the second plaintiff (Chilli #1) (and neglecting to attempt to extend the July 2005 agreement with Chilli #1 or to negotiate a new agreement for the use by Chilli #1 of the Intellectual Property the subject of that agreement) breached the statutory and fiduciary duties owed by him as a director of Chilli #1.

2. Declare that the second and third defendants knowingly assisted in the breaches of duty by the first defendant that related to its conduct in causing the entry by Chilli #2 into the June 2006 agreement.

3. Declare that the first defendant has conducted the affairs of Chilli #1 in a manner oppressive to the interests of the first plaintiff and so breached s 232 of the Corporations Act 2001 (Cth) in entering into the February 2006 Agreement with the third defendant (Cheal Industries Pty Ltd), causing the Cheal Industries to enter into that agreement, neglecting and failing to attempt to seek an extension of the June 2005 Agreement on behalf of Chilli #1, by bringing about the acquisition or incorporation of Chilli #2, by causing Industries and Chilli #2 to enter into the July 2006 Agreement.

4. Order that the defendants are liable to make payment of equitable compensation to the second plaintiff in an amount to be determined as being the value attributable to the Chilli Surfboards Pty Ltd company name and associated goodwill as at 30 June 2006 (valued on the basis that ownership of the Chilli trade marks reposed in the second defendant at the relevant time).

5. In the alternative to 4 above, order that the first defendant acquire the shares of the first plaintiff in the second plaintiff company for the sum of $55,000 plus half of the value of attributable to the Chilli Surfboards Pty Ltd company name and associated goodwill as at 30 June 2006 (valued on the basis that ownership of the Chilli trade marks TM 767677 and 804353 reposed in the second defendant at the relevant time).

247I will consider the terms on which there should be a referral to an intellectual property expert (failing agreement between the parties) as to the value of the goodwill the subject of the orders in 4 and 5 above, or the attribution of a nominal value in respect thereof, after hearing submissions from Counsel. I will also hear submissions as to costs.

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Decision last updated: 21 March 2012