Amil Dlakic by his tutor Liliane Dlakic v Michael John Vaughan

1. [1]

   The plaintiff in these proceedings is Mr Amil Dlakic. Mr Dlakic sues by his tutor Ms Liliane Dlakic, who is his wife. Mr Dlakic is a solicitor by profession.

2. [2]

   The defendant is Mr Michael John Vaughan. Mr Vaughan is also a solicitor. The events that have given rise to these proceedings primarily concern the affairs of the firm of solicitors known as Johnston Vaughan Solicitors (Johnston Vaughan). In different capacities over the relevant period, Mr Dlakic and Mr Vaughan were colleagues at Johnston Vaughan.

3. [3]

   These proceedings also concern the ownership of the shares in a company called Davlite Pty Ltd (Davlite). At all material times, Davlite has been the proprietor of property known as 1/20 Montgomery Street, Kogarah, (the Montgomery Street property) which are the premises from which Johnston Vaughan has conducted its practice.

Mr Dlakic's claims

1. [4]

   By these proceedings, Mr Dlakic makes a number of separate claims against Mr Vaughan concerning the affairs of Johnston Vaughan and Davlite. I will describe the nature of Mr Dlakic's claims in outline in chronological order.

2. [5]

   The first claim arose in connection with Mr Dlakic's purchase of the business of Johnston Vaughan from Mr Vaughan by a deed dated 19 July 2010 for a price of $550,000. Mr Dlakic financed his obligation to pay $300,000 of the purchase price by entering into a loan agreement with Dr Peter and Ms Eve Vince on 3 August 2010. Mr Dlakic claims that Mr Vaughan agreed to provide him legal advice in relation to the loan documentation, and that Mr Vaughan was negligent in relation to the advice that he gave Mr Dlakic. Mr Dlakic claims damages.

3. [6]

   Secondly in time, Mr Dlakic makes a claim in respect of one of the two shares in Davlite that Mr Vaughan caused to be transferred to Mr Dlakic on about 26 October 2001. Mr Dlakic's claim is that on 27 August 2012 Mr Vaughan represented to ASIC, without Mr Dlakic's consent, that the share in Davlite had been transferred by Mr Dlakic back to Mr Vaughan. Mr Dlakic claims a declaration that the transfer of the share was void, or alternatively an order setting the transfer aside.

4. [7]

   The third claim concerns a deed made on 25 November 2014 between Mr Dlakic and Mr Vaughan, pursuant to which Mr Dlakic transferred the firm Johnston Vaughan to Mr Vaughan for the payment of $1.00 (the buyback agreement). Mr Dlakic's primary claim is for an order setting aside the deed of transfer, on the ground that Mr Vaughan unconscionably took advantage of a serious disadvantage from which Mr Dlakic suffered; being a serious depressive illness, or alternatively that Mr Vaughan exercised undue influence in causing Mr Dlakic to enter into the deed in favour of Mr Vaughan.

5. [8]

   Mr Dlakic makes a further claim in relation to the transfer of Johnston Vaughan to Mr Vaughan, in that he claims that he executed the buyback agreement on the faith of a misleading and deceptive representation by Mr Vaughan that after the transfer Mr Dlakic would continue to receive the whole of the net income of the firm.

6. [9]

   As an alternative to the claim that the buyback agreement be set aside, Mr Dlakic seeks damages from Mr Vaughan for breach of a term of the deed of transfer, under which Mr Dlakic was entitled to receive all of the fees received by Johnston Vaughan after the date of the deed in respect of work done for clients before that date.

7. [10]

   Mr Dlakic's fourth claim arises out of a loan taken out by Mr Dlakic in the amount of $160,000 from a Mr Aysan Fetin on 29 April 2015. Mr Dlakic claims that Mr Vaughan asked him to borrow the money to pay for the expenses of Johnston Vaughan, and that Mr Vaughan agreed to provide legal advice to Mr Dlakic in relation to the loan. Mr Dlakic's claim is for damages in respect of the consequences of negligent advice that he says Mr Vaughan gave to him in relation to the loan.

8. [11]

   It should be mentioned at this point that Johnston Vaughan Solicitors Pty Ltd, a company apparently controlled by Mr Dlakic, conducted the business of Johnston Vaughan for at least the financial years ending 30 June 2012 to 30 June 2014. The balance sheet for that company as at 30 June 2014 includes the goodwill of the practice as an asset of the company valued at $550,000. The deed of agreement made on 19 July 2010 transferred the goodwill of the firm to Mr Dlakic, and the buyback agreement treated Mr Dlakic as the vendor. The parties conducted the case as if Mr Dlakic was at all relevant times after the transfer deed dated 19 July 2010 the proprietor of the firm, and ignored the evidence that the company may have been the owner of the goodwill of the firm.

9. [12]

   Mr Dlakic gave evidence in par 13 of his affidavit in reply of a liquidator being appointed for Johnston Vaughan Solicitors Pty Ltd on 30 June 2015. Nothing was made in the case of the possibility that the goodwill and assets of the firm, Johnston Vaughan, would be an asset of the company, because Mr Dlakic was not entitled to transfer it to Mr Vaughan on 25 November 2014. Mr Vaughan did not assert that Johnston Vaughan Solicitors Pty Ltd, rather than Mr Dlakic, was the correct party to apply for the setting aside of the deed of transfer.

10. [13]

    I will consider each of these four claims in detail below, after I have set out the background facts, discussed my conclusions concerning the credibility of the witnesses who have given evidence, and summarised the evidence concerning Mr Dlakic's psychological condition. I will deal with the claim concerning the share in Davlite last, as it raises technical issues that are not conducive to the issue being dealt with chronologically together with the other claims.

Background

1. [14]

   In order to provide a framework for my consideration of the credibility of the evidence given by the witnesses and the resolution of the individual claims, I will first set out my findings concerning the primary facts that were either uncontroversial or can be supported by the objective evidence. As an exception to this approach, I propose to include aspects of the evidence given by Mr Steven D’Apice, who is an independent witness whose evidence I have accepted as being true.

2. [15]

   Mr Vaughan was born on 11 January 1948.

3. [16]

   Mr Dlakic was born on 6 March 1977.

4. [17]

   Mr Vaughan was admitted as a legal practitioner on 9 July 1982. He purchased the practice Johnston Vaughan from Mr Gregory Johnston in May 1988 for the sum of $300,000.

5. [18]

   Davlite was incorporated on 22 August 1988. Davlite has always had two ordinary issued shares. Initially one share was held by each of Mr Johnston and Mr Vaughan. Mr Johnston was a director of the company until 16 June 1999. Mr Vaughan has been a director of the company since 13 September 1988. He has been the sole director since 26 October 2001. Mr Vaughan has been the secretary of the company since 13 September 1988, save for the period between 26 October 2001 and 23 August 2012, when Mr Dlakic was the secretary.

6. [19]

   Davlite purchased the Montgomery Street property from Mr Johnston on 30 May 1989 for the sum of $400,000.

7. [20]

   Mr Dlakic graduated with a bachelor of laws degrees from Bond University in 1998, and was admitted as a legal practitioner in this State on 7 April 2000.

8. [21]

   After having worked for a short time for another firm, on 20 September 2000 Mr Dlakic commenced employment as a solicitor at Johnston Vaughan under the supervision of Mr Vaughan. Mr Dlakic started on a salary of $35,000 per year. Mr Dlakic's salary rose slowly and by 2010 he was earning about $70,000 per year as a full-time solicitor with 10 years post admission experience. As Mr Vaughan said at par 15 of his general affidavit sworn on 20 June 2017, he "did not consider anything but modest pay rises for [Mr Dlakic] in respect of [Mr Dlakic's] services to the firm". (It is to be noted that Mr Vaughan swore an initial general affidavit on 20 June 2017 and on the same day swore specific affidavits in response to the affidavits of Steven D’Apice, Michael Karam, Mr Dlakic, Zhu Min Ma and Paulus Saleem Nahkle. He swore a further affidavit on 14 March 2018). The evidence concerning the relatively low salary received by Mr Dlakic is relevant to a claim by Mr Dlakic that he was given one share in Davlite in October 2001 in return for a salary sacrifice on his part.

9. [22]

   A form lodged with ASIC suggests that in October 2001 one share in Davlite was transferred from Mr Johnston to Mr Dlakic and Mr Dlakic was appointed as the secretary of Davlite.

10. [23]

    According to Mr Dlakic, in 2003 he purchased an office at 56/301 Castlereagh Street, Sydney, for a price of $199,000. (I will include in this statement of background facts some evidence given by Mr Dlakic as an indication of the financial dealings in which he engaged over the period. In his initial general affidavit, Mr Vaughan at pars 21 to 31 made a number of bald assertions concerning Mr Dlakic's financial dealings, all of which were designed to establish either that Mr Dlakic had been profligate, or he had earned more money than he had acknowledged. These paragraphs of Mr Vaughan's affidavit were rejected because they were defective in form. Nonetheless, in his affidavit in reply Mr Dlakic has responded to these allegations. The responses were admitted into evidence. Although Mr Dlakic's responses were relatively perfunctory, I have included concessions made by Mr Dlakic, as otherwise this background would be deficient because of an absence of any treatment of Mr Dlakic's financial dealings unrelated to Johnston Vaughan).

11. [24]

    Mr Dlakic commenced his relationship with his wife, Liliane, in 2006 and the couple married on 21 December 2010. Ms Dlakic has three children from a former marriage. The children have lived with the couple since they commenced cohabiting in 2008, and Mr Dlakic has acted as their father and taken care of the children since that time; including by paying quite substantial amounts in private school fees.

12. [25]

    In about 2008, Mr Dlakic said that he sold a property owned by him at 149 Rocky Point Road, Ramsgate for a price of $515,000. He said that he entered into a margin lending arrangement with CommSec Margin Lending with a limit of $1,000,000. He acquired $800,000 worth of shares in Rio Tinto using his $500,000 capital from the sale of the Ramsgate property, and a borrowing of $300,000 under the margin lending facility. The shares were valued at $139 per share, but the value fell to $28 over about two months. The lender sold the shares, and Mr Dlakic was left with about $80,000-$90,000. These assertions by Mr Dlakic were not corroborated by any documentary evidence.

13. [26]

    On 19 July 2010, Mr Vaughan, Davlite and Mr Dlakic entered into a deed of agreement. The recitals referred to Mr Vaughan as being the owner of the legal practice known as Johnston Vaughan, and Davlite as being the employer of the staff. It was also recited that the books would be ruled off on 19 July 2010, and Mr Dlakic would be entitled to all monies generated by the practice from that date and would be responsible for all the expenses generated from that date. Recital 4 stated: "… The fees and costs and disbursements earned prior to 19 July 2010 are the property of the vendor". Recital 5 provided that Mr Vaughan would continue to work for Mr Dlakic for a period of three years at a salary of $150,000 per year plus superannuation. Recital 8 required Mr Dlakic to incorporate a company to employ the staff, and be responsible for all "long service leave, holiday pay arising out of the employment of the staff and any of their entitlements past and future".

14. [27]

    The operative part of the deed provided as follows:

15. [28]

    On 19 July 2010, Davlite leased the Montgomery Street property to Mr Dlakic for a term of three years ending on 18 July 2013 for a rent of $1300 per week.

16. [29]

    On 22 July 2010, Mr Dlakic paid Mr Vaughan $250,000 by way of bank cheque in partial payment of the price for the transfer of the firm. Mr Dlakic raised part of the $250,000 by borrowing $191,000 from his parents. Mr Dlakic's parents had an existing mortgage of $690,000 over their Randwick home, which was increased to an amount of about $880,000 so that the parents could assist Mr Dlakic to buy the firm. The balance of the $250,000 was made up from Mr Dlakic's personal savings.

17. [30]

    Mr Dlakic claimed that it was his responsibility to make the whole of his parents' mortgage payments, not just in relation to the $191,000 that he borrowed from them in 2010.

18. [31]

    At the time of the purchase, Mr Dlakic was given a list of the client receivables as at the date of transfer that Mr Vaughan expected to receive. The total amount was $192,330.90 (see Exhibit AD-1 Tab 10, which also includes an unverified list of payments totalling $426,400 that Mr Dlakic claimed were received by the firm between 19 July 2010 and approximately 2014 that were paid to Mr Vaughan).

19. [32]

    The $300,000 balance of the purchase price was borrowed by Mr Dlakic from Dr Peter and Ms Eve Vince under a loan agreement dated 3 August 2010.

20. [33]

    By clause 1.1 of the loan agreement, the $300,000 was to be repaid on or before 25 October 2010 (so the loan was for a short term of about three months).

21. [34]

    By clause 1.2, the interest rate was to be 45% per annum, such interest rate to reduce to 25% if paid on time. Interest payments at the lower rate were stated as being $1438.36 per week, and $2589.04 per week at the higher rate.

22. [35]

    Clause 5.1.2 required Mr Dlakic to pay separate application fees of $19,500 to each of Dr and Ms Vince.

23. [36]

    The parties treated the total payments required to be made by Mr Dlakic under the loan agreement for the short term of the agreement as being equivalent to an interest rate of 87% per annum (although that is not consistent with the interest rates that appear on the face of the agreement, and could only be an effective interest rate having regard to other costs and the short-term period of the loan).

24. [37]

    Mr Dlakic's parents were required to grant a mortgage over their home at 251 Avoca Street, Randwick, to secure Mr Dlakic's liability under the loan agreement.

25. [38]

    Mr Dlakic was also required to give mortgages over properties that he had at 149A Rocky Point Road, Ramsgate and 56/301 Castlereagh Street, Sydney.

26. [39]

    Mr Dlakic's parents were also required to enter into a deed of guarantee in favour of the lenders.

27. [40]

    Mr Dlakic failed to repay the $300,000 due to Dr and Ms Vince on 25 October 2010.

28. [41]

    According to Mr Dlakic, at an unspecified date in 2010, he leased an Aston Martin motor vehicle for an amount of $800 per week.

29. [42]

    According to Mr Dlakic, in about August 2010 he purchased what has become the family home at 7/46 Towns Road Vaucluse at auction. Because of rulings on evidence, there is no evidence as to the price. Mr Dlakic said that he paid a 5% deposit and financed the purchase price with a loan from a brother-in-law and a bank loan. Settlement took place in late January or early February 2011. Mr Dlakic said there was a $22,000 or $23,000 interest penalty for late settlement. Mr Dlakic said that the property was leased for approximately $1400 per week until about May 2014.

30. [43]

    Mr Dlakic also said that at about this time he leased a Porsche motor vehicle for an original lease fee of about $1500 per month, which was later reduced to about $1300 per month.

31. [44]

    Davlite and Mr Dlakic entered into an undated lease of the Montgomery Street property commencing on 8 December 2011 for a period of three years with a three-year option and rent inclusive of GST of $74,360 per annum, increasing at 5% or the CPI whichever was greater on each anniversary of the lease.

32. [45]

    The debt owed by Mr Dlakic to Dr and Ms Vince continued to increase in accordance with the terms of the loan agreement until 8 December 2011, when Mr Dlakic entered into a further agreement with the lenders in which he agreed to pay $316,828 on 9 December 2011, and further payments of $37,500 on each of 20 December 2012, 20 March 2013, 20 June 2013 and 20 September 2013.

33. [46]

    The primary payment was financed by a loan of $350,000 that Mr Dlakic received from Jaara Investments Pty Ltd (Jaara). Mr Dlakic has stated that he still owes Dr and Ms Vince the amount of $150,000 plus interest.

34. [47]

    In the financial year ended 30 June 2012, Johnston Vaughan Solicitors Pty Ltd had a total income of $818,843.

35. [48]

    On about 23 August 2012, Mr Vaughan lodged with ASIC a Change to company details (Form 484) which, although completed in a confusing way, as will be explained below, appeared to advise ASIC that Mr Dlakic had resigned as the secretary of Davlite, and Mr Dlakic's share in the company had been transferred to Mr Vaughan.

36. [49]

    In late 2012, Mr Dlakic refinanced the Jaara debt with the National Australia Bank. He said that the payments required in respect of the new loan were approximately $23,000 per month, being $10,000 per month in principal, over $7600 per month in interest, and about $5000 per month to MLC for life and disability insurance premiums.

37. [50]

    After Mr Dlakic became the principal of Johnston Vaughan, when fees were received from clients for work done before the date of the transfer, the whole of the amount was paid to Mr Vaughan without withholding any amounts for GST or income tax. (It is to be noted that Mr Vaughan, in his affidavit that specifically responded to Mr Dlakic's affidavit, simply denied many of the paragraphs in that affidavit. Mr Vaughan did not deny par 109, in which Mr Dlakic made the assertion that I have just related).

38. [51]

    In the financial year ended 30 June 2013, Johnston Vaughan Solicitors Pty Ltd had a total income of $998,788.

39. [52]

    Davlite's tax returns for the financial years ended 30 June 2013 to 30 June 2015 were in evidence. Each of those tax returns claimed that Davlite had nil total income for the year. Davlite, under the control of Mr Vaughan, did not declare as income the rent that it received from Mr Dlakic.

40. [53]

    In mid-2013, the Deputy Commissioner of Taxation commenced winding up proceedings against Johnston Vaughan Solicitors Pty Ltd in respect of an outstanding tax debt of $299,245.52. While Mr Vaughan denied Mr Dlakic's evidence to this effect, it is evidenced by a letter dated 13 June 2013 from the solicitor for Johnston Vaughan Solicitors Pty Ltd to the solicitors for the Deputy Commissioner of Taxation. Mr Vaughan did not deny Mr Dlakic's evidence that in June or July 2013, the tax claim was settled for a total amount of $150,000. On 2 August 2013, the proceedings commenced by the Deputy Commissioner of Taxation were dismissed by consent, with the costs of the Deputy Commissioner of Taxation being fixed at $4995. Mr Vaughan also did not deny Mr Dlakic's claim that he financed the settlement by borrowing $70,000 and $30,000 from two of his brothers in law, and $50,000 from a client.

41. [54]

    From about mid-2013, Mr Dlakic ceased to cause the trust account of Johnston Vaughan to be reconciled as required by the Law Society's trust account regulations.

42. [55]

    On 17 July 2013, Mr Dlakic wrote a letter to Mr Vaughan in which he noted that Mr Vaughan's employment by the firm was due to expire on 19 July 2013. The letter in effect claimed that Mr Vaughan had not earned the level of fees for the firm that were expected. It said that any future employment would be based upon more realistic terms.

43. [56]

    Mr D’Apice gave evidence that, in mid-to-late July 2013, Mr Vaughan said to him that Mr Dlakic and he had come to an arrangement "where you are to take me off the books and pay me $2000 a week" (par 23). Mr D’Apice said that he then started paying Mr Vaughan $2000 a week in cash from the next pay period.

44. [57]

    In the financial year ended 30 June 2014, Johnston Vaughan Solicitors Pty Ltd had a total income of $1,111,956. The income and expenditure statement for the company that was in evidence showed that in the year director’s fees of $500,000 had been paid, and in the previous year the amount was $278,000.

45. [58]

    According to Mr Dlakic, on an unspecified date in 2014, he paid out the residual value of the Aston Martin that he had leased in 2010. In July 2014 he acquired a Jaguar motor vehicle. Also according to Mr Dlakic, around the same time his wife sold a Porsche SUV motor vehicle.

46. [59]

    Mr Dlakic said that the property at Towns Road, Vaucluse, was renovated in about June to July 2014.

47. [60]

    From mid-June 2014 to about 7 July 2014, Mr Dlakic and his wife travelled to Greece for the purpose of his wife undertaking assisted reproductive surgery.

48. [61]

    When Mr Dlakic was in Greece, he received a number of calls from the trust account department of the Law Society.

49. [62]

    During the first day Mr Dlakic returned to the office of Johnston Vaughan, he was advised by a representative of the Law Society that an audit would be conducted of his trust account. The audit was conducted between August and September 2014 and a report was provided in October 2014. The report found that Mr Dlakic had been in breach of various strict liability offences relating to non-compliance with proper trust account record-keeping regulations.

50. [63]

    The Law Society suspended Mr Dlakic's practising certificate on 30 October 2014. A receiver was appointed to manage the Johnston Vaughan practice.

51. [64]

    During July or August 2014, Ms Dlakic informed Mr Dlakic that she was pregnant with triplets, two of which had been found to have massive physical problems, which led to their termination in order to save the third foetus. Thereafter, Ms Dlakic suffered serious health problem including severe internal bleeding that required her to be hospitalised off and on for the next 2 to 3 months. Ms Dlakic and the unborn foetus also suffered a serious infection that led to Ms Dlakic being hospitalised for a period of 12 days. Ms Dlakic suffered a further massive bleeding episode which led to further periods in hospital, and ultimately to a son being borne prematurely on 28 January 2015.

52. [65]

    Mr Dlakic was referred for treatment to a specialist psychiatrist, Dr Olav Nielssen, on 10 and 17 November 2014 and 1 December 2014. Dr Nielssen concluded that Mr Dlakic had been suffering from the symptoms of depression for a number of years. In a later report dated 14 May 2016, Dr Nielssen expressed the following opinion:

53. [66]

    On 25 November 2014, Mr Dlakic (as vendor) and Mr Vaughan (as purchaser) entered into a deed that was described as "contract sale of business" (the buyback agreement). The deed provided:

54. [67]

    Davlite and Mr Dlakic entered into an undated lease of the Montgomery Street property for a period of five years from 8 December 2014, with an option to renew for a period of five years, and a rent inclusive of GST of $86,028.80 per annum, with a rent review of the greater of 5% or the CPI at each anniversary of the lease. By clause 20(a) a bond equal to 3 months’ rent was payable. This lease is notable for the fact that the premises from which Johnston Vaughan operated was leased by Davlite to Mr Dlakic after the date upon which Mr Dlakic transferred the firm to Mr Vaughan.

55. [68]

    On 3 July 2015, stamp duty was paid in respect of a surrender of lease of the Montgomery Street property from Davlite to Mr Dlakic and the surrender was registered on 14 July 2015. The surrender was signed by Mr Vaughan on behalf of Davlite and Mr Dlakic on his own behalf. The surrender was given the date 30 October 2014, which was the date that Mr Dlakic's practising certificate was suspended.

Contentious issues of fact

1. [69]

   At this point in the chronological consideration of the background facts, the Court's ability to set out the facts in a reasonably comprehensive way based upon the objective evidence, and without preferring the evidence of one party to that of the other, becomes limited. The first reason is that Mr Dlakic makes a number of assertions in his primary affidavit that are simply denied in their entirety by Mr Vaughan, without Mr Vaughan offering any alternative version of events. Mr Vaughan's affidavit that specifically responds to Mr Dlakic's primary affidavit largely either denies identified paragraphs, or ignores other paragraphs entirely. I have assumed that Mr Vaughan does not dispute the paragraphs that he has ignored, but it often appears in relation to paragraphs that have been denied that the denials should have related only to part of Mr Dlakic's assertions, and a more positive response was called for in response to other parts of his assertions.

2. [70]

   The second reason for the difficulty is that Mr Vaughan's compliance with a notice served on him to produce the records of Johnston Vaughan concerning income and expenses, particularly for the period after the buyback agreement, appears to have been deficient. It would be expected that the records kept by a properly functioning law practice would have provided objective proof, either for or against, of a number of significant claims made by Mr Dlakic. Whether or not it is ultimately established that relevant records exist and have not been produced, it must be stated that the absence of the records has hampered the ability of the Court to make a number of necessary findings precisely and accurately.

3. [71]

   In order to facilitate an understanding of the issues that are the subject of factual dispute, it will be convenient to set out the claims made by Mr Dlakic.

4. [72]

   First, Mr Dlakic claims that, in the period leading up to the buyback agreement, Mr Vaughan regularly assured him orally that the purpose of the buyback agreement was to give Mr Vaughan control of the firm's files, but that "all the money that the firm earns will go to you" (par 193), and "I will give you every cent that comes through the general account" (par 194). Mr Vaughan denies that he made these statements.

5. [73]

   Then, Mr Dlakic claims that, shortly after he signed the buyback agreement, Mr Vaughan took him to the bank to open new general and trust accounts in Mr Vaughan's name, but that when that was done, Mr Dlakic was given an authority to access the new general account so that he could "see all the money that comes through on the Internet when you login on your NetBank, and you can just take out all the money when you need it" (par 208). Mr Vaughan denied that these events occurred.

6. [74]

   Mr Vaughan did not deny Mr Dlakic's evidence that, in six withdrawals between 13 and 23 February 2015, Mr Dlakic withdrew a total of $26,261 from the new general account and transferred it to his cash management account. Mr Vaughan did deny Mr Dlakic's claim in par 211 that the withdrawals were in respect of fees paid to the firm after the buyback agreement for work undertaken both before and after that agreement was made.

7. [75]

   Mr Vaughan denied a claim made by Mr Dlakic in par 212 of his primary affidavit that, in late February or early March 2015, Mr Vaughan withdrew Mr Dlakic's authority to operate the Johnston Vaughan general account.

8. [76]

   Mr D’Apice gave evidence that from late February or early March 2015, with the agreement of Mr Vaughan, Mr D’Apice commenced to pay Mr Dlakic $200 each Thursday. That arrangement continued until late May or early June 2015, when Mr Vaughan ordered Mr D’Apice to stop paying to Mr Dlakic the $200 per week.

9. [77]

   Mr Vaughan did not respond to Mr D’Apice's evidence of his instruction to cease paying Mr Dlakic the $200 per week.

10. [78]

    Mr Dlakic gave evidence that, following the buyback agreement, he received some very small amounts in respect of fees paid to Johnston Vaughan for work done before the date of the buyback agreement, and in par 224, Mr Dlakic refers to a spreadsheet exhibited to his affidavit that he originally prepared on 1 October 2014, and updated over the period to 22 May 2017, which takes the form of an aged debtors list in respect of amounts that Mr Dlakic claims represented fees owed by clients that should have been paid to the firm and remitted to Mr Dlakic. The total amount of the list is $1,922,981.44. Mr Dlakic qualified his evidence by explaining in relation to some entries that part of the fees payable by clients accrued before the date of the buyback agreement, and part accrued afterwards. Mr Vaughan simply denied the paragraph, without offering any positive explanation concerning what fees were owed to the firm and what amounts were received.

11. [79]

    Mr Dlakic gave evidence of being aware, by reason of having reviewed some of the Johnston Vaughan trust account ledgers in about October 2015, that some of the fees itemised in the spreadsheet (with a total of about $339,430.35) had been received by Johnston Vaughan. Strangely, Mr Vaughan did not respond to these paragraphs.

12. [80]

    There is one receipt that I am satisfied occurred, because evidence was given as to its receipt by Mr Steven D’Apice, who was a conveyancer employed by Johnston Vaughan at the time, and who also was responsible for all office records concerning receipts in reconciliation to the trust account cash books and journals, all trust account bookkeeping, and the records necessary to complete PAYG and GST declarations. Mr D’Apice gave evidence that in about September 2015, Mr Dlakic attended the office and negotiated the amount of fees to be paid by a client, Mr Paul Calleja, which enabled an amount of approximately $191,000 to be released from the firm's trust account. Mr D’Apice gave evidence that, of this sum, about $180,000 was paid to Mr Vaughan. Mr D’Apice annexed to his affidavit what he called an expense sheet that was given to him by Mr Vaughan. The document lists eight payments totalling $178,439.11.

13. [81]

    It must be noted that two of those payments were described as "Michael Vaughan – rent" for $43,866.25, and "rent in advance" for $24,360. This payment to Mr Vaughan occurred long after the time when the lease of the Montgomery Street property to Mr Dlakic had been surrendered.

14. [82]

    In his specific response to Mr D’Apice's affidavit, Mr Vaughan did not respond to the evidence concerning the release of Mr Calleja's fees from the trust fund or that about $180,000 was paid to him. Mr Vaughan denied Mr D’Apice's evidence that Mr Vaughan instructed him to pay the bills and expenses listed in the document and said (par 21): "I say that the Plaintiff was to pay his obligations to the staff and the rent from the Calleja money. The annexure marked "A" is not a document made by me and the writing on it is the handwriting of the Plaintiff". Irrespective of who was the author of the document annexed to Mr D’Apice's affidavit, Mr Vaughan's response is a clear admission that the money was paid to Mr Vaughan for alleged expenses of Johnston Vaughan at a time long after the date of the buyback agreement.

15. [83]

    Mr Vaughan did not respond to evidence given by Mr Dlakic that, in about March or April 2015, he was told that the lender Jaara, to whom Mr Dlakic still owed a residual loan of $65,000, threatened to call in the loan if it was not refinanced.

16. [84]

    On 27 April 2015, a firm of solicitors, on behalf of a lender called Mr Aysan Fetin, sent a letter of offer to Mr Vaughan on behalf of Johnston Vaughan Solicitors Pty Ltd. The letter offered a loan of $160,000 to Johnston Vaughan Solicitors Pty Ltd, supported by a guarantee by Mr Dlakic and a second unregistered mortgage secured by a caveat over Mr Dlakic's home at Towns Road, Vaucluse. The term of the loan was to be six months at an interest rate of 33% per annum, reducing to 30% per annum if payments were made on time. The necessary documents for execution were provided to Mr Vaughan under cover of a separate letter from the lender's solicitor dated 27 April 2015. The documents have been executed on behalf of Johnston Vaughan Solicitors Pty Ltd and Mr Dlakic.

17. [85]

    An authority to pay addressed to the lender's solicitor signed by Mr Dlakic on 28 April 2015 includes a direction to pay $65,000 to Jaara and the balance of $55,241.95 (after various other payments) to the Johnston Vaughan general account that Mr Dlakic had used when he was the principal of Johnston Vaughan and that was still under his control.

18. [86]

    Mr Vaughan denied the evidence given by Mr Dlakic at par 249 of his principal affidavit that Mr Vaughan asked Mr Dlakic to pay the balance of the loan funds to him because "I need most of it to pay office bills like tax and liabilities".

19. [87]

    Mr Dlakic gave evidence that he paid the running expenses of Johnston Vaughan after the date of the buyback agreement. Mr Vaughan comprehensively denied the truth of this evidence without offering any positive explanation of his own.

20. [88]

    Mr Vaughan did not deny that the statements of account exhibited to Mr Dlakic's affidavit, and referred to in par 230, for the bank account that had previously been Mr Dlakic's general account for Johnston Vaughan, for the period 16 October 2014 to 20 July 2015, were genuine. Mr Vaughan did deny Mr Dlakic's subsequent evidence concerning the significance of the transactions referred to in the statements of account. The statements of account do not directly prove payments to Mr Vaughan. Mr Dlakic gave somewhat complicated evidence in pars 231 to 234 of payments made by him for the benefit of Johnston Vaughan, including rent payments totalling $11,823, almost the whole of the balance of $55,095.95 from the loan made by Mr Fetin, the amounts deducted from the Calleja money, four direct debits of $6181.28 for professional indemnity insurance premiums, wages of $51,115.80 (including the Christmas wages for the staff in the sum of $20,299.50), and further operating expenses of $95,338.03.

21. [89]

    Significantly, Mr Vaughan denied all of these assertions by Mr Dlakic except for the evidence in par 232 that Mr Dlakic paid the four professional indemnity insurance premiums in the period from 25 November 2014 until 2 March 2015 in the total sum of $24,725.12.

22. [90]

    Mr D’Apice gave evidence that he observed in his capacity as paymaster, that Mr Dlakic paid all the bills of Johnston Vaughan from the time that Mr Vaughan became principal. These expenses included Mr Vaughan's wages, the Christmas 2014 staff wages of over $20,000, rent and other incidental expenses that were drawn from Mr Dlakic's general account.

23. [91]

    Mr D’Apice said that Mr Dlakic continued to run and operate Johnston Vaughan from the general office account until about February or March 2015. In about late February or early March 2015, Mr Vaughan said to Mr D’Apice: "Amil's pulling too much money from my general account. I am not going under because of him", or words to that effect. Shortly after that, Mr D’Apice attended with Mr Vaughan to the bank to set up a new office general account that Mr Dlakic did not have authority to operate.

24. [92]

    Mr Vaughan responded to Mr D’Apice's evidence concerning Mr Dlakic having paid the bills of the legal practice by saying that Mr Dlakic paid some accounts but not all of the accounts and he did not pay the rent.

25. [93]

    Mr Vaughan did not respond to the evidence given by Mr Dlakic in pars 256 to 269 of his principal affidavit concerning the default of Johnston Vaughan Solicitors Pty Ltd under the loan from Mr Fetin.

26. [94]

    Apparently for the reason that Johnson Vaughan Solicitors Pty Ltd had been ordered to be wound up, Mr Fetin commenced proceedings in this Court against Mr Dlakic, and on 18 July 2016 consent orders were made by Darke J. Those orders included an order 13 that judgment against Mr Dlakic be given in favour of Mr Fetin in the sum of $198,044.93. The Court also ordered Mr Dlakic to give Mr Fetin possession of his home at Vaucluse, and made orders for the conduct of the sale of that property.

27. [95]

    By email to the Equity Registrar dated 26 August 2016, Mr Fetin's solicitor advised that Mr Dlakic had repaid the mortgage debt in full that day, and requested that the Court not issue the writ to the Sheriff.

28. [96]

    Mr Dlakic gave evidence in par 267, to which Mr Vaughan has not responded, that he paid a total sum of $290,000, including principal and interest of $198,044.93 and costs of $92,314.88. He said that he was only able to settle the possession proceedings by borrowing further funds which have yet to be paid back.

29. [97]

    On 19 May 2016, Mr Vaughan wrote a letter to Mr Byran Collis on behalf of the liquidator of Johnston Vaughan Solicitors Pty Ltd, in which Mr Vaughan gave reasons why the $1.00 payment was fair "consideration given with respect of the sale of the business Johnston Vaughan Solicitors Pty Ltd". Although that letter is consistent with the company rather than Mr Dlakic being the owner of the goodwill of Johnston Vaughan at the date of the buyback agreement, Mr Vaughan did not in the proceedings raise this as a ground for denying Mr Dlakic the relief that he claimed.

Defendant’s response to notice to produce

1. [98]

   It will be convenient to end this consideration of the background facts by dealing with the absence of detailed evidence of the work done by Johnston Vaughan for clients, the amounts of fees billed, and the amounts of fees paid by clients at relevant times. Evidence of those matters may have been significant or helpful in relation to many issues in these proceedings, as it would have assisted the Court to have an objectively based understanding of the real nature of the firm's practice. That evidence would have been necessary to enable the Court to determine whether, and if so to what extent, Mr Vaughan did not pay Mr Dlakic fees received by Johnston Vaughan in respect of work done for clients before the date of the buyback agreement. It would have been material to an assessment of whether the consideration of $1.00 payable under the buyback agreement was inadequate. It would have been material to an understanding of the likely outcome of an accounting that will be necessary if the Court makes an order setting aside buyback agreement.

2. [99]

   It would also have been material for the Court to have evidence of the expenses of Johnston Vaughan at relevant times, and the extent to which those expenses were either paid by Mr Dlakic or were met from fees received by the firm to which Mr Dlakic was entitled under the buyback agreement.

3. [100]

   The Court has not had the benefit of any of this evidence, and has not had comprehensive evidence covering these material financial issues.

4. [101]

   On 7 August 2017, Mr Dlakic served a notice to produce on Mr Vaughan, which relevantly sought production of the following categories of documents:

5. [102]

   Mr Dlakic took the view that Mr Vaughan's response to the notice to produce was tardy and inadequate. Mr Dlakic raised the issue with the Court at a pre-trial conference held on 20 February 2018. At that time the Court was informed by counsel for Mr Dlakic that the parties were conferring about the issue and that it was hoped that full production could be made before the commencement of the hearing.

6. [103]

   On the first day of the hearing, the Court was informed that shortly before the hearing Mr Vaughan had served on Mr Dlakic some 2200 further documents that were copies of tax invoices, but all dated on the date of printout, and many documents were not complete in relation to the information that should have been included in the original documents when forwarded to clients.

7. [104]

   The first morning of the hearing was devoted to dealing with the consequences of Mr Vaughan's response to the notice to produce. An affidavit by Mr Vaughan sworn on 8 March 2018 and an affidavit of Mr Dlakic's solicitor, Mr Hugo Nicholas Antony Paul sworn 12 March 2018, were read in respect of the issue. I permitted counsel for Mr Dlakic to cross-examine Mr Vaughan on the adequacy of his response to the notice to produce.

8. [105]

   I do not propose in these reasons for judgment to deal with this issue in any comprehensive way. The reason is that the result of the exercise was inconclusive. The available evidence does not permit the Court reliably to form a judgment about the extent to which documents falling within the categories sought in the notice to produce exist, what has been produced, or the comprehensiveness of what has been produced. All that the Court knows is that, as a matter of fact, the legal representatives for Mr Dlakic have sought to be in a position where they could tender on his behalf reasonably comprehensive business records of relevant transactions, but they have not been able to do so.

9. [106]

   The subject matter of Mr Vaughan's 8 March 2018 affidavit was his attempt to obtain from the Law Society a list of clients prepared by Mr Dlakic in about November 2014 and handed by him to the manager appointed by the Law Society, certain aspects of the firm's billing and record keeping practices, and an explanation of the three tranches of production of documents in response to the notice to produce, together with additional documents produced in March 2018. As I understand it, on 6 March 2018, with the assistance of a law student who Mr Vaughan claims to be more computer literate than himself, Mr Vaughan produced from the firm's server a series of WIP reports as at 17 July 2010, then every six months and finally the date of the buyback agreement, 25 November 2014. Mr Vaughan also gave evidence that on 6 and 7 March 2018, with the assistance of the student and his secretary, he conducted a search on the firm's server for documents containing the word "tax invoice". The search revealed 2163 documents which all appeared to be tax invoices. Mr Vaughan said that he was not aware that these invoices were stored in the particular archive folder. The documents were provided to Mr Dlakic's solicitor in electronic form on 8 March 2018.

10. [107]

    In his affidavit in response, Mr Paul explained that the invoices that had been produced could not be copies of genuine original invoices, as they were missing essential information and, for example, recorded payments being made both before and after the date of the invoice (par 5). Mr Paul expressed the opinion (par 7) that there had been little meaningful compliance with the notice to produce. Mr Paul's office has assembled the documents produced into 21 lever arch folders. Then, in pars 10 to 24 of his affidavit, Mr Paul expressed opinions as to difficulties and inadequacies with the production that had occurred.

11. [108]

    At the end of her cross-examination of Mr Vaughan, Mr Dlakic's counsel put it to Mr Vaughan that he had not taken compliance with the notice to produce seriously, he had deliberately withheld documents until February, and that he knew that there were further documents that he was refusing to produce in answer to the notice to produce. Mr Vaughan denied each of these suggestions.

12. [109]

    However, in the cross-examination Mr Vaughan accepted that the initial tranches of production of documents were inadequate because he had not caused the firm's server to be searched properly.

13. [110]

    The ultimate result has been that the evidence that Mr Dlakic has been able to tender has in many cases not been the best evidence that ought to have been available, if the records of Johnston Vaughan had been properly kept in a conventional way at all relevant times, and if a proper response had been made to the notice to produce. The Court is at a loss to know whether in fact there are more documents that ought to have been produced but have not been produced. The Court does not know whether more complete and accurate versions of the documents that have been produced can still be produced.

14. [111]

    The Court has no choice but to determine the issues that are before it on the basis of the evidence that has been tendered, but it should do that having regard to the appearance that Mr Dlakic's case has been impaired by the failure of Mr Vaughan to comply with the notice to produce in a complete and timely way. As it is clear that there has not been production of all of the documents that would have been prepared and retained in the ordinary course by a well-run firm of solicitors, the Court should be solicitous to an appropriate extent when considering the fact that in some respects Mr Dlakic has not been able to tender the best evidence that should have been available.

15. [112]

    The deficiency in production will also have the effect that some issues that may otherwise have been capable of being determined finally on the evidence at the hearing will now need to be dealt with as part of an accounting process, if Mr Dlakic succeeds in one or other of his claims arising out of the buyback agreement.

16. [113]

    I will return to this issue below, when I come to consider the orders that should be made at this stage of the proceedings and the appropriate regime for its future case management.

Mr Dlakic's credit

1. [114]

   As I have recorded above, Mr Dlakic has prosecuted these proceedings by his wife as his tutor. Mr Dlakic candidly informed the Court at the beginning of both of his affidavits that his wife helped him to prepare the affidavit.

2. [115]

   As I have also observed above, and will consider in more detail below, by November 2014 Mr Dlakic had been diagnosed as suffering from severe depression. A medico-legal report prepared by Dr Leonard Lee dated 27 July 2018, in respect of proceedings instituted by Mr Dlakic for total and permanent disability claims with AMP and MLC, described the following result of a mental state examination conducted by Dr Lee on 27 July 2015:

3. [116]

   Dr Lee included in the history that he obtained from Mr Dlakic at par 15 that: "He is extremely forgetful".

4. [117]

   Dr Lee gave as his opinion in par 18: "… His mental functioning is described as impaired as is his short-term and long-term memory and concentration".

5. [118]

   To my observation, the views expressed by Dr Lee are consistent with the way that Mr Dlakic gave his evidence in the witness box, at least to the extent that the matters observed by Dr Lee could expect to be exhibited in the course of giving evidence.

6. [119]

   Relevantly, Mr Dlakic conceded in the history that he gave to Dr Lee that he was extremely forgetful, and Dr Lee accepted in expressing his medical opinion that Mr Dlakic's short-term and long-term memory was impaired.

7. [120]

   It follows from this evidence, and Mr Dlakic's concession that he prepared his affidavits with the help of his wife, that there may have been some reconstruction in the preparation of the affidavits.

8. [121]

   When I deal with the specific claims made by Mr Dlakic, I will set out some of the evidence of conversations between Mr Dlakic and Mr Vaughan that are included in Mr Dlakic's affidavits. Notwithstanding that the evidence is expressed to be as to the effect of the conversations, it will be seen that they are set out in relatively minute detail, even though the conversations span a period commencing in the year 2000, and cover the period during and after the development of the serious depression from which Mr Dlakic suffers.

9. [122]

   The concerns expressed by McClelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315 at 318-319 must be especially acute in the present case. His Honour said:

10. [123]

    The following observations made by Hammerschlag J in John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451 are also apposite:

11. [124]

    These considerations are of particular relevance to Mr Dlakic’s evidence of conversations with Mr Vaughan concerning the terms upon which Mr Vaughan allegedly provided advice to Mr Dlakic in relation to the Vince and Fetin loans; to oral assurances made in connection with the buyback agreement; and the basis upon which the share in Davlite was transferred to Mr Dlakic.

12. [125]

    Notwithstanding these concerns, I formed the opinion from listening to Mr Dlakic in cross-examination that he was attempting to give genuine and truthful evidence to the best of his ability.

13. [126]

    I accept that in most instances the evidence given by Mr Dlakic reflected his genuine present recollection of the relevant events. However, Mr Dlakic’s evidence must be treated with due scepticism given the consequences of his psychological disabilities and the consequential effect on the process whereby his affidavits were prepared and his recollection of events established. I have attempted to exercise particular care to measure the plausibility of Mr Dlakic’s evidence against the background of the objective circumstances, and have looked carefully for corroboration in the evidence given by the other witnesses called in Mr Dlakic’s case.

14. [127]

    There are a number of additional concerns that have caused me to exercise caution in weighing the significance of the evidence given by Mr Dlakic.

15. [128]

    A serious residual concern that I have is that I consider that Mr Dlakic has exaggerated Mr Vaughan's moral responsibility for Mr Dlakic's suffering, and he has failed to accept his personal responsibility in that regard.

16. [129]

    There is some evidence that Mr Dlakic's psychological disabilities commenced in about 2010, although they were un-diagnosed until November 2014. Notwithstanding that, it would appear that Mr Dlakic's psychological disabilities grew gradually, and Mr Dlakic made a significant number of financial decisions that were, to my mind, plainly imprudent and could even reasonably be described as prodigal. There was no evidence that these actions by Mr Dlakic were caused by Mr Dlakic’s deteriorating psychological condition, and he did not claim that they were.

17. [130]

    The credibility of Mr Dlakic's evidence has been diminished by his failure to volunteer in his primary affidavit an objective history of his financial dealings unrelated to Johnston Vaughan. A significant focus of Mr Dlakic's primary affidavit was evidence of events allegedly involving Mr Vaughan by which Mr Dlakic sought to suggest that Mr Vaughan had encouraged Mr Dlakic to engage in financially improvident transactions, and then Mr Vaughan had exacerbated Mr Dlakic's difficulties by failing to assist him financially, or failing to pay him money to which he was entitled. Whether or not those claims are true, Mr Dlakic omitted to give a balanced picture of his financial dealings. I refer in particular to his margin lending investment in 2008, his purchase of the Town's Road Vaucluse property in 2010, and his leasing of the Aston Martin and Porsche vehicles at about that same period. These latter transactions occurred in broadly the same time span that Mr Dlakic borrowed the $300,000 from Dr and Ms Vince on onerous terms.

18. [131]

    Consequently, I have concluded that there is a real risk that Mr Dlakic has, over time, come to a reconstructed memory of Mr Vaughan's conduct which paints Mr Vaughan as the sole villain in Mr Dlakic's affairs.

19. [132]

    As will be seen, there are aspects of Mr Dlakic's evidence that I am not prepared to accept, primarily on the basis that the evidence that has been offered to the Court is not sufficiently complete or plausible to be persuasive. The clearest example of this problem is the evidence given by Mr Dlakic in support of his professional negligence claim against Mr Vaughan concerning the circumstances in which Mr Dlakic borrowed the $300,000 from Dr and Ms Vince. Mr Dlakic has chosen to commit himself to aspects of his case that are so thinly supported by the evidence that his choice has impaired his credibility.

Mr Vaughan's credit

1. [133]

   I regret to have to say that I found Mr Vaughan to be an unsatisfactory witness.

2. [134]

   The abiding sense that I gained listening to Mr Vaughan's cross-examination was that he was bemused as to how he could explain his conduct, both in respect of his unconscionable treatment of Mr Dlakic, and the fundamental inconsistencies between his own affidavit evidence and the objective facts.

3. [135]

   Mr Vaughan's evidence was unsatisfactory in a structural sense, in the manner of its being given in cross-examination, and its fundamental inconsistency with the objective evidence.

4. [136]

   I mean by the observation that Mr Vaughan's evidence was structurally unsatisfactory that his specific affidavits in response to Mr Dlakic's witnesses' affidavits consisted of bald denials, absences of any response, and perfunctory explanations. In many cases Mr Vaughan simply denied the entirety of a paragraph, when it appeared perhaps reasonable for him to have denied part of the paragraph (say, a conversation attributed to him), but where the denial of the whole of the paragraph appeared to be irrational, in that Mr Vaughan had denied conventional evidence of circumstances that plainly called for some positive response. There seemed in many cases to be a serious inconsistency between occasions when Mr Vaughan denied whole paragraphs and then did not respond to other paragraphs dealing with related circumstances.

5. [137]

   Consequently, I am not prepared to give significant weight to most of the evidence given by Mr Vaughan in his affidavits.

6. [138]

   I do not consider that Mr Vaughan conscientiously responded to the notice to produce served upon him by Mr Dlakic, which I have considered above. Mr Vaughan, as a very experienced solicitor, must have understood that the documents sought by Mr Dlakic were essential to the proper and efficient determination of these proceedings. Broadly, the documents should have been retained by a properly operated legal practice, and should have been able to be gathered for production in a relatively simple way. I did not find Mr Vaughan's attempt at explaining why he was unable to produce the documents at all convincing. This has caused me to entertain the suspicion that Mr Vaughan was not prepared to address his obligation to produce the documents conscientiously because he was aware of the likely damage that production would do to his defence of Mr Dlakic's claims.

7. [139]

   The evidence justifies a conclusion that it is likely that Johnston Vaughan received substantial fees from clients for work done before the date of the buyback agreement, which on the clear terms of that agreement were required to be paid by Mr Vaughan to Mr Dlakic. Very little of those receipts were in fact paid to Mr Dlakic. It is hard to conceive that Johnston Vaughan does not have records that would prove the receipt of these funds.

8. [140]

   It is also hard to conceive of why Mr Dlakic would have continued to pay very substantial amounts towards the expenses of Johnston Vaughan after the date of the buyback agreement, if there were not a side agreement between Mr Dlakic and Mr Vaughan that Mr Dlakic would continue to receive the net profits from the firm's practice after the date of the buyback agreement. Although, because of the dearth of records, the evidence is incomplete and inexact concerning the amount of the fees received for work done after the buyback agreement, and as to the expenses of Johnston Vaughan paid by Mr Dlakic, the evidence is sufficient to establish that there must have been significant fees received and significant expenses that were in fact paid by Mr Dlakic.

9. [141]

   Yet Mr Vaughan point blank denied that there had been any failure by him to remit to Mr Dlakic fees payable for work done before the date of the buyback agreement, or that there was any side agreement concerning the operation of Johnston Vaughan after the buyback agreement.

10. [142]

    Not only are these denials incredible in themselves, but they heighten the significance of the failure of Mr Vaughan to properly comply with his obligations in respect of the notice to produce.

11. [143]

    Additionally, Mr Vaughan's credit is undermined by his apparent failure to cause Davlite to declare the income in rent that it received from Mr Dlakic. Mr Vaughan’s instruction to Mr D’Apice that he be paid his salary in cash also gives rise to grounds for suspicion about Mr Vaughan’s honesty.

12. [144]

    Quite astonishingly, Mr Vaughan claimed that the payments made by Mr Dlakic, a man who was obviously in dire financial circumstances, of Johnston Vaughan's expenses were a gift (T 248.12-23, 250.22-28, and 252.8-19).

13. [145]

    It is in my view clear that Mr Vaughan caused the surrender of the lease that Davlite granted to Mr Dlakic just before the buyback agreement to be backdated from July 2015 to the date that Mr Dlakic's practising certificate was suspended on 30 October 2014, to avoid the possible discomfort to Davlite of Johnston Vaughan Solicitors Pty Ltd being ordered to be wound up. Notwithstanding the surrender, Mr Vaughan still required Mr Dlakic to pay rent to Davlite (including out of the fees payable by Mr Calleja that I have considered above).

14. [146]

    In my view Mr Vaughan sacrificed the credibility of his evidence by too frequently denying the obvious significance of events that were comprehensively proved by the objective evidence.

15. [147]

    Consequently, I have not accepted Mr Vaughan’s evidence except to the extent that it is corroborated by evidence that I am prepared to accept, or its acceptance is warranted on the basis that it is the most consistent conclusion to draw by reference to the objective evidence.

Credit of other witnesses

1. [148]

   Mr Vaughan did not challenge the credibility of the witnesses called in Mr Dlakic’s case in his final submissions, other than that of Mr Dlakic himself.

2. [149]

   Mr D’Apice was the most significant of those witnesses to the conclusions that have been reached in this judgment. I have described Mr D’Apice’s role in Johnston Vaughan above. The office was a small one and Mr D’Apice had the opportunity on a day-to-day basis to observe the relationship between Mr Dlakic and Mr Vaughan, and to converse with them on the subjects relevant to these proceedings. I found Mr D’Apice to be a straightforward and convincing witness. His evidence was germane to the issues and its substance dovetailed with significant aspects of the evidence given by Mr Dlakic in a manner that enhanced its plausibility. There was no suggestion that Mr Dlakic and Mr D’Apice concocted this evidence together. As I have observed above, I have had no hesitation in accepting Mr D’Apice’s evidence.

3. [150]

   Ms Zhu Min Ma (also known as Annie Ma) is the estranged wife of Mr Vaughan. She married Mr Vaughan on 5 August 2013 and separated from him on about 2 May 2016. The principal relevance of her evidence was her recounting of statements made to her by Mr Vaughan, some of which I have recorded in this judgment. It was suggested on behalf of Mr Vaughan that Ms Ma was antipathetic to Mr Vaughan as a result of the acrimonious breakdown of their relationship. Mr Dlakic responded by suggesting that Ms Ma had given evidence against her own interests in so far as success by Mr Dlakic in the proceedings was likely to reduce the pool of assets that were available between Ms Ma and Mr Vaughan on the dissolution of their marriage.

4. [151]

   Ms Ma appeared to me to be a nervous witness but I have seen no reason to discount her evidence. While it would be appropriate for the Court to approach her evidence with caution because of her apparent animosity towards Mr Vaughan, her evidence as to statements made by Mr Vaughan appears to be credible given the substance of what she recalled that he said. There was no suggestion that Ms Ma concocted her evidence in collaboration with Mr Dlakic. I found the relatively few parts of Ms Ma’s evidence that I have relied upon to be inherently credible.

5. [152]

   The other witnesses called for Mr Dlakic included Mr Paulus Saleem Nahkle and Mr Michael Karam who each gave matter-of-fact evidence as independent witnesses in a credible way, and I am prepared to accept their evidence for the limited purposes for which I have found their evidence helpful.

6. [153]

   Ms Karen Newell, who is Mr Vaughan’s long-time secretary, gave limited evidence in Mr Vaughan’s case. From her recollection she denied various statements attributed to her in the evidence of Mr Dlakic, and said that she could not recall a particular statement attributed by Mr D’Apice to Mr Vaughan. Ms Newell’s evidence was not of great significance, and I am prepared to accept that she gave her evidence to the best of her recollection. It would not be appropriate to reject her evidence, as Mr Dlakic suggested, on the ground of her long-term relationship with Mr Vaughan.

Evidence of Mr Dlakic’s mental state

1. [154]

   Two questions arise in relation to Mr Dlakic's mental state. The first concerns his objective mental health at relevant times. The second concerns the outward manifestation of any psychological problems experienced by Mr Dlakic, which is relevant to the question of whether Mr Vaughan was aware in his dealings with Mr Dlakic that Mr Dlakic was under a serious psychological disadvantage.

2. [155]

   Mr Dlakic tendered the expert medico-legal reports of four consultant psychiatrists prepared for the purposes of other legal proceedings in which Mr Dlakic is engaged. I have set out an extract from the report of Dr Leonard Lee in my consideration of the background above. Mr Vaughan did not cross-examine any of the expert psychiatrists, and did not attempt to contradict their evidence.

3. [156]

   Only Dr Olav Nielssen saw Mr Dlakic in 2014, being on 10 and 17 November 2014 and 1 December 2014. According to Dr Nielsen's 29 May 2015 and 14 May 2016 reports, he also saw Mr Dlakic on 9 and 16 March 2015 and 21 March 2016.

4. [157]

   As well as being seen by Dr Lee on 27 July 2015, Mr Dlakic was also seen by Prof Ian Coyle on 5 October 2016 and Prof Phillip Morris on 20 December 2016.

5. [158]

   The expert psychiatrists all concur in the opinion that Mr Dlakic suffers from Major Depressive Disorder with Anxious Distress, although they formulate his psychiatric condition in slightly different terms.

6. [159]

   Although reliant upon the history given by Mr Dlakic, all four experts accepted that Mr Dlakic's psychological symptoms started to emerge in about 2010, even though he did not realise that he had a severe psychological disability until 2014, and his symptoms were otherwise not diagnosed.

7. [160]

   As Dr Lee recorded in par 9 of his 27 July 2015 report:

8. [161]

   Dr Nielssen said in his 29 May 2015 report, concerning his treatment of Mr Dlakic commencing on 10 November 2014:

9. [162]

   Given the unanimity of the expert psychiatric evidence, it will be sufficient to record the following extract from the report of Prof Phillip Morris dated 20 December 2016:

10. [163]

    In his primary affidavit, Mr Dlakic gave evidence, which I accept, concerning the events in his life which the expert psychiatrists accepted lead Mr Dlakic to be diagnosed with major depressive disorder in November 2014.

11. [164]

    Mr Dlakic also gave the following evidence concerning the outward manifestation of his increasing psychological difficulties:

12. [165]

    Later in his primary affidavit, Mr Dlakic said:

13. [166]

    Mr Dlakic gave evidence of conversations with Mr Vaughan in which Mr Dlakic explained the difficulties that were occurring in his wife's pregnancy, and the stress that was causing him. Mr Dlakic then said:

14. [167]

    In his affidavit specifically in response to Mr Dlakic's affidavit, Mr Vaughan simply denied that all of these conversations took place concerning Mr Dlakic's psychological condition.

15. [168]

    In his general affidavit, Mr Vaughan made the following observation concerning Mr Dlakic's psychological illness:

16. [169]

    Ms Newell, who remains Mr Vaughan's legal secretary and personal assistant, swore an affidavit in which she responded to Mr Dlakic's affidavit. She did not say anything about her observations of Mr Dlakic's apparent psychological condition.

17. [170]

    Mr D’Apice gave the following evidence in his affidavit concerning the circumstances in which Mr Dlakic and Mr Vaughan entered into the buyback agreement:

18. [171]

    I accept Mr D’Apice's evidence as to his observations concerning Mr Dlakic's conduct and appearance in 2013 and 2014. Mr D’Apice's evidence assists me in preferring the evidence given by Mr Dlakic on the same subject over the evidence given by Mr Vaughan. Given the evidence of the expert psychiatrists concerning Mr Dlakic's psychological condition in November 2014, I accept that it must have been obvious to Mr Vaughan that Mr Dlakic was suffering from a severe psychological disadvantage. While I would hesitate to accept that the conversations on that topic that Mr Dlakic claimed he had with Mr Vaughan took place precisely as alleged, I am satisfied that Mr Dlakic did inform Mr Vaughan of his psychological condition and the reasons for it. I reject Mr Vaughan's denials.

19. [172]

    In her 4 May 2017 affidavit, Ms Ma gave the following evidence of conversations with Mr Vaughan related to the buyback agreement:

20. [173]

    Mr Paulus Saleem Nahkle said that he was a client of Johnston Vaughan for about four years from July 2010. In about June 2013, Mr Nahkle loaned Mr Dlakic $70,000 to assist him to pay a liability to the ATO.

21. [174]

    Mr Nahkle gave evidence in his affidavit of observations he made of Mr Dlakic throughout 2013 and 2014 he said:

22. [175]

    Mr Nahkle also gave evidence of a conversation that he had in about June or July 2015 with Mr Vaughan. Mr Nahkle raised the issue of Mr Dlakic's need for income with Mr Vaughan:

23. [176]

    This evidence, given by independent witnesses, reinforces the basis of my conclusion that the symptoms of Mr Dlakic’s psychological disabilities were obvious by November 2014, and Mr Vaughan was well aware at the date of the buyback agreement that Mr Dlakic suffered from a serious disadvantage in relation to his ability to make rational and prudent decisions in his own interest.

24. [177]

    As will be obvious, the evidence that I have extracted is also relevant to the unwritten terms upon which Mr Dlakic agreed to transfer the goodwill of Johnston Vaughan to Mr Vaughan by means of the buyback agreement. I have set out that evidence out of context because of the difficulty in separating it from the evidence relevant to Mr Vaughan’s knowledge of Mr Dlakic’s psychological condition.

The pleaded claim

1. [178]

   Mr Dlakic pleaded in par 46 of his further amended statement of claim that he retained Mr Vaughan to provide legal advice on the loan documentation concerning the loan from Dr Peter and Ms Eve Vince 3 in August 2010. He alleged in par 47 that the retainer was oral or alternatively a “de facto relationship of lawyer and client”. Mr Dlakic alleged that Mr Vaughan said to him: “Mate I will read this now and give you legal advice on it”. Mr Dlakic alleged in par 48 that it was an implied term of the retainer that Mr Vaughan would use all reasonable care, skill and diligence expected of a reasonably competent solicitor in the position of Mr Vaughan.

2. [179]

   Then, in par 49, Mr Dlakic set out the advice given by Mr Vaughan in the following terms:

3. [180]

   Mr Dlakic alleged in par 50 that on 3 August 2010 he signed the loan agreement in reliance upon Mr Vaughan’s advice.

4. [181]

   The alleged breach of duty by Mr Vaughan is formulated in par 51 in the following terms:

5. [182]

   Mr Dlakic alleged in par 52 that the matters pleaded in par 51 involved a breach of duty of care owed to the plaintiff. Mr Dlakic listed his damage in par 53 as being in the total of $714,000, comprising the principal of $300,000, interest paid from 4 August 2010 to December 2011 of $146,000, further interest paid up to December 2012 of $165,000, $65,000 in principal repayments, an amount of $100,000 still owing on the loan, and costs paid of $3000.

6. [183]

   The following aspects of Mr Dlakic’s pleaded claim are of particular significance. First, Mr Dlakic’s particulars of the service Mr Vaughan agreed to provide him specifically concerned “legal advice”. Secondly, the advice that Mr Dlakic identified concerned the amount of interest payable and the proposition that Johnston Vaughan could earn enough that Mr Dlakic would be able to afford to pay the interest. The advice did not relate to the ability of the firm to generate enough income to pay the principal of the Vince loan within the three months term of the loan. Thirdly, sub-pars (a) to (d) of the allegations of breach concerned alleged failures by Mr Vaughan to advise Mr Dlakic of the basic effect of four of the documents that would be required to be signed. That is, Mr Dlakic pleaded that the legal advice given by Mr Vaughan was defective in the fundamental sense that he did not advise what the effect of the various documents required to be signed would be. Fourthly, the pleading confirmed that the claim against Mr Vaughan in relation to the financial consequences of the Vince loan was limited to the ability of Johnston Vaughan to generate income to pay the monthly interest. Finally, Mr Dlakic’s particulars of damage include not only the principal of the Vince loan but also amounts of principal repaid and amounts of principal still owing.

7. [184]

   Mr Vaughan’s response to all of these allegations was simply to deny them.

Mr Dlakic’s evidence

1. [185]

   Mr Dlakic gave evidence that he felt pressure to buy the practice, as from the time that he had commenced employment with Mr Vaughan in 2001 he had frequently been told that the practice would ultimately be his, and he had worked on a low salary in the expectation that he would ultimately become the principal of Johnston Vaughan when Mr Vaughan retired. Mr Dlakic felt that he had to take his opportunity or lose it.

2. [186]

   Mr Dlakic also gave evidence that Mr Vaughan put pressure on Mr Dlakic to pay the balance of the purchase price quickly:

3. [187]

   Although Mr Dlakic said that this conversation made him feel extremely pressured and vulnerable, Mr Dlakic has not pleaded a claim that alleges any unconscionable conduct on Mr Vaughan's part in forcing Mr Dlakic to seek the loan that he ultimately obtained from Dr and Ms Vince.

4. [188]

   Mr Dlakic accepted in his evidence that he obtained the agreement of Dr and Ms Vince to lend him the $300,000 through his own mortgage broker, Mr Grant Hawkswell.

5. [189]

   Mr Dlakic gave the following evidence, which is at the heart of his claim that Mr Vaughan is liable to him for professional negligence:

6. [190]

   If it be accepted for the moment that Mr Vaughan made the statements attributed to him by Mr Dlakic, it should be noted from par 89 of Mr Dlakic's affidavit that Mr Vaughan offered to give him "legal advice" on the documents. There was no suggestion that Mr Dlakic would pay a fee for the advice, or that a file would be opened in respect of Mr Dlakic having become Mr Vaughan's client.

7. [191]

   Mr Dlakic then gave the following evidence concerning his visit to Mr Tsolakis:

8. [192]

   It may be wondered why Mr Dlakic visited Mr Tsolakis with his parents, if Mr Dlakic did not understand that the parents were going to enter into some legal obligation in relation to the loan to Mr Dlakic.

9. [193]

   Mr Dlakic then continued:

10. [194]

    Mr Dlakic did not explain what he understood the purpose to be of his parents signing the documents, as they plainly did at that time.

11. [195]

    In par 37 of his affidavit in reply, Mr Dlakic said: "… The Defendant had already specifically advised me concerning the Dr Vince loan prior to my seeing Vasso. I recall that I said to Vasso: "Michael Vaughan has already explained the loan conditions to me and I just need them witnessed," or words to that effect. Vasso simply witnessed my signature on the loan documents, which was late at night, as previously deposed in my earlier affidavit”.

12. [196]

    Mr Dlakic gave evidence that the agreement contained a term that required Mr Dlakic to pay to Mr Vaughan the gross amount of fees received by the firm for work done before 19 July 2010; Mr Dlakic became responsible for all employment obligations of the firm; and he was required to pay Mr Vaughan a salary of $150,000 per year. In this respect, Mr Dlakic gave evidence that the earnings of Johnston Vaughan were unexpectedly low in respect of his ability to repay the amounts that he borrowed to purchase the firm.

13. [197]

    Factual issues not addressedUpon careful consideration, there was an absence of evidence in Mr Dlakic’s case in respect of a number of significant matters relevant to his negligence claim against Mr Vaughan.

14. [198]

    Mr Dlakic did not give any evidence of his discussions with Mr Hawkswell, or what Mr Hawkswell said to him about the terms of the loan that were on offer.

15. [199]

    It is implicit in Mr Dlakic’s evidence that he took the bundle of documents that he received from the solicitors for Dr and Ms Vince to Mr Vaughan without having attempted to peruse the documents at least to a sufficient extent to identify their general nature. If indeed Mr Dlakic suggests that that is what happened, it would have been an unusual and improbable course of action for a solicitor of some 10 years standing. Mr Dlakic did not give any evidence that he made Mr Vaughan aware that he had not even looked at the documents and was relying upon Mr Vaughan to advise him of their general legal effect.

16. [200]

    The effect of Mr Dlakic’s evidence was that he discovered after he had borrowed the money from Dr and Ms Vince that he could not service the interest payments from the income generated by Johnston Vaughan. However, Mr Dlakic did not lead any evidence at all about the income and expenses of the firm in the period up to 25 October 2010 when the Vince loan was repayable, and thus whether there were insufficient funds to pay the interest. As I have noted above, an income and expenditure statement for Johnston Vaughan Solicitors Pty Ltd for the year ended 30 June 2014 shows that director’s fees were $500,000 and $278,000 for the previous year. Equivalent evidence was not provided for the year ended 30 June 2011. It is not clear whether such evidence was prepared either for Mr Dlakic or the company.

17. [201]

    Further, the evidence was imprecise as to when Mr Dlakic acquired the Aston Martin and Porsche motor vehicles and how the need to pay the leasing fees for those vehicles affected Mr Dlakic’s cash flow. Mr Dlakic also gave evidence of having to pay the whole of the mortgage over his parents’ home and substantial school fees for his step-children, and there is no evidence that permits any assessment as to whether, and if so how, these extraneous expenses affected Mr Dlakic’s ability to service the Vince loan.

18. [202]

    There is no evidence that Mr Vaughan was aware in any specific way of Mr Dlakic’s recurrent financial obligations, such that Mr Dlakic could reasonably have expected Mr Vaughan to be able to give a reliable assurance concerning the likelihood that Mr Dlakic would be able to service the Vince loan. Even if it be accepted that Mr Vaughan made statements concerning the earning capacity of Johnston Vaughan in relation to servicing the loan, without proof that Mr Vaughan was aware of all of Mr Dlakic’s current financial obligations, it would be problematic to characterise any assertions made by Mr Vaughan as material representations concerning the actual ability of Mr Dlakic to service the Vince loan in conjunction with all of his other obligations.

19. [203]

    There is no evidence that Mr Dlakic informed Mr Vaughan that, notwithstanding that Mr Vaughan advised Mr Dlakic to see another solicitor, Mr Tsolakis, when Mr Dlakic did so, he did not obtain full advice for himself and his parents before the various documents were signed. In the absence of such evidence, it would be problematic to conclude that Mr Vaughan ought to have appreciated, in the informal circumstances in which he is alleged to have advised Mr Dlakic, that Mr Dlakic expected Mr Vaughan to give comprehensive advice to Mr Dlakic that would be relied upon as if Mr Vaughan had formally been retained to act as Mr Dlakic’s solicitor.

20. [204]

    Mr Dlakic did not in my view give any evidence that is capable of supporting a finding that he entered into a retainer agreement with Mr Vaughan in which Mr Vaughan agreed in any formal sense to treat Mr Dlakic as his client and to provide legal services to him, whether or not for reward. The most that the evidence could support is a finding that Mr Vaughan casually and informally agreed to provide Mr Dlakic with “legal advice” on the documents that Mr Dlakic had presented to him and that he would do so gratuitously.

Mr Vaughan’s evidence

1. [205]

   In his evidence, Mr Vaughan said in his general affidavit:

2. [206]

   Mr Vaughan therefore effectively denied the whole of Mr Dlakic’s evidence concerning the circumstances in which Mr Vaughan is alleged to have provided Mr Dlakic with advice concerning the documents required to implement the Vince loan. Mr Vaughan said that the occasion upon which he could have given that advice did not occur at all.

Relevant legal principles

1. [207]

   I will set out what I consider to be the basic legal principles governing the degree of care required of solicitors in advising clients in respect of their intention to execute documents to take out loans, particularly in the context where the advice may be required to extend to the commercial consequences of the transaction, and where the advice is given gratuitously. I have not found it necessary to canvass the authorities in detail because, as will be seen, I have concluded that the proper approach is to reject this aspect of Mr Dlakic’s case on the facts.

2. [208]

   In Lauvan Pty Limited & Anor v Bega & Ors [2018] NSWSC 154 (Lauvan) Gleeson JA set out the legal principles relevant to a solicitor’s duty to advise at [421]-[426]:

3. [209]

   In Provident Capital v Papa [2013] NSWCA 36 (Provident Capital) Macfarlan JA, with Allsop P and Sackville AJA agreeing, made statements to the effect that, although solicitors are not ordinarily required to give advice about the financial or business value of a transaction, the “proper execution of a retainer to give independent legal advice concerning a loan and mortgage transaction may, depending upon the circumstances known to the solicitor, require more than an explanation of the legal effect of the documents to be executed” (at [75]). His Honour elaborated at [80] by stating that a solicitor’s obligation is “not simply to explain the legal effect of documents but to advise his or her client of the obvious practical implications of the client's entry into a transaction the subject of advice”. His Honour said the following at [75]-[77]:

4. [210]

   Kenny J in Carey v Freehills [2013] FCA 954, (2013) 303 ALR 445 (Carey) said the following about the circumstances in which a solicitor may owe a duty of care to a person even though the solicitor has not formally accepted a retainer from the client:

5. [211]

   For the purposes of the present case, the significant lessons to be taken from these cases include that the duty on a solicitor does not usually extend to advising upon the wisdom of the transaction (Lauren at [424] and Provident Capital at [75]), but it may do so “depending on the circumstances known to the solicitor” (Lauren at [424]). Whether such a duty has arisen will require a consideration of what material facts were known to the solicitor when the conduct complained of occurred (Lauren at [425]), and whether the solicitor has learned of facts which put him or her on notice that the client’s interests are endangered or at risk unless further steps beyond the limits of the retainer are carried out (Provident Capital at [75]). Even where there is not a formal retainer, by reason of an assumption of responsibility by the solicitor, with known reliance by the plaintiff, a duty of care may arise by reason of an implied professional retainer agreement (Carey at [311]). A duty of care may also arise independently of an express or implied retainer, but that will depend upon the application of the tort principles relevant to the facts of the particular case (Carey at [312]).

Consideration

1. [212]

   The context in which this claim arose, as set out in the consideration of the background facts above, is that on 19 July 2010 Mr Dlakic entered into the purchase agreement under which he agreed to pay Mr Vaughan $550,000 for the practice of Johnston Vaughan.

2. [213]

   On the same day, Mr Dlakic entered into a lease from Davlite that committed Mr Dlakic to pay rent of $1300 per week for a period of three years.

3. [214]

   However, it must also be borne in mind that, at or around the same time, Mr Dlakic's appetite for entering into burdensome financial transactions included his purchase of the Vaucluse property, which was apparently completed in early 2011, and his lease of an Aston Martin vehicle.

4. [215]

   Mr Dlakic entered into the purchase agreement on 19 July 2010 without any secure arrangement for funding the purchase price. By 22 July 2010, Mr Dlakic had paid Mr Vaughan $250,000, which was funded as to $191,000 by an increase in his parents' mortgage.

5. [216]

   Mr Dlakic said in par 61 of his primary affidavit that Mr Vaughan said to him concerning the proposal that he purchase the practice: “This is an engine room for making money; the firm is easily worth $550,000. Future billings in Despot will be at least $250,000 and the Ann Collins matter will be at least $300,000. You get the rest of the practice for nothing," or words to that effect”.

6. [217]

   The point of these observations concerning the purchase agreement is that, whether or not it be the case that the purchase agreement was onerous in some respects, and whether or not Mr Vaughan made proper disclosure in relation to the financial circumstances of Johnston Vaughan, Mr Dlakic has not made any claim arising out of the circumstances in which he entered into the purchase agreement. His claim is limited to the circumstances in which he borrowed $300,000 from Dr and Ms Vince. By the time he borrowed that money he was already committed to the purchase of Johnston Vaughan and owed an outstanding debt of $300,000 to Mr Vaughan.

7. [218]

   When the documents that were signed in connection with the making of the $300,000 loan are examined (Court Book pages 767 to 847) it becomes immediately clear that Mr Tsolakis witnessed the signatures of Mr Dlakic's parents on a number of documents, including the loan agreement, a mortgage of the Randwick property, a deed of guarantee, and the guarantors' acknowledgement.

8. [219]

   In the absence of evidence from Mr Dlakic's parents, I could not accept, on the basis of the limited evidence proffered by Mr Dlakic, that Mr Tsolakis was so remiss in his professional duties that he allowed Mr Dlakic and his parents to sign all of the documents without at least making them aware of the essential nature and effect of the documents being signed.

9. [220]

   By the time the documents related to the Vince loan were signed on 3 August 2010, Mr Dlakic had been a practising solicitor for 10 years. As I have noted above, Mr Dlakic did not give any evidence concerning whether or not he read the bundle of documents provided to him by the lenders' solicitors, or even whether he leafed through them sufficiently to learn their general nature.

10. [221]

    I am unable in the circumstances to accept that Mr Dlakic simply received the bundle of documents, allowed Mr Vaughan to read them for 30 minutes and make the statements attributed to him, and then took his parents to the office of Mr Tsolakis so that the documents could all be signed and witnessed, without either Mr Dlakic or his parents having any clue about the effect of the documents that they were signing.

11. [222]

    If it is true that Mr Vaughan did not mention to Mr Dlakic that the documents included a mortgage by Mr Dlakic's parents over their home, or indeed any other of the documents to be signed by the parents, that could reasonably be explained by Mr Vaughan having an implicit belief that Mr Dlakic, as an experienced solicitor, already knew what the nature and effect of all of the documents was.

12. [223]

    Although Mr Dlakic gave evidence that he signed the various documents connected with the loan in reliance upon the advice that he alleges Mr Vaughan gave to him, Mr Dlakic did not say that, if he had received any different advice from Mr Vaughan, he would not have executed the documents himself, and would not have allowed his parents to do so.

13. [224]

    Mr Dlakic was already under a legal obligation to pay Mr Vaughan the $300,000 balance of the purchase price, and Mr Dlakic has not given any evidence that there was any alternative means for him to borrow the $300,000 either at all, or on more favourable terms than the terms offered by Dr and Ms Vince.

14. [225]

    The problem that Mr Dlakic experienced following his borrowing of the $300,000 was that he was unable to repay the capital and the interest payable by the due date, being 25 October 2010.

15. [226]

    Ultimately, the fact that the documents listed in sub-pars (a) to (d) of par 51 of Mr Dlakic's further amended statement of claim were signed did not have any effect on any loss that Mr Dlakic may have suffered.

16. [227]

    The operative complaint that Mr Dlakic makes in his further amended statement of claim is the complaint in par 51(e) that Mr Vaughan failed to warn him that Johnston Vaughan would not be in a position to generate the necessary gross income in order to meet the monthly Vince loan repayment obligations that Mr Dlakic was personally liable for.

17. [228]

    This is only a complaint about the ability of the firm to generate income to service the loan made by Dr and Ms Vince, and is not a complaint that Mr Dlakic was not warned that the firm would be unable to earn sufficient income to repay the principal borrowed in the three month period for repayment.

18. [229]

    Mr Dlakic gave no evidence that he had any belief that Johnston Vaughan would have earned him enough to repay a principal sum of $300,000 in three months (after allowing for all expenses). That would require that the firm have an earning capacity on an annual basis of a profit of $1,200,000.

19. [230]

    I am not satisfied that the credibility of Mr Dlakic's evidence on this issue is sufficiently superior to that of Mr Vaughan's response to justify the Court in preferring Mr Dlakic's version to the extent and in the detail that would be required in order for the Court to accept Mr Dlakic's evidence and to reject entirely the evidence given by Mr Vaughan. Even if Mr Dlakic's version of events were accepted in detail, I am not satisfied that Mr Dlakic has established a retainer of Mr Vaughan, or that Mr Vaughan accepted a voluntary duty of care, that extended to Mr Vaughan taking professional responsibility for advising Mr Dlakic about the nature and effect of the documents that Mr Dlakic and his parents would be required to sign, or as to whether the fees earned by Johnston Vaughan would be sufficient to enable Mr Dlakic to service the loan. The evidence in my view does not establish with sufficient certainty that Mr Dlakic and his parents did not understand the nature of the documents that they signed. I am not satisfied that Mr Dlakic has proved that he was dependent upon Mr Vaughan's advice to be able to estimate whether he could service the loan from his earnings as principal of Johnston Vaughan.

20. [231]

    As I have observed above, there is no evidence that Mr Vaughan knew that Mr Dlakic would enter into the documents related to the Vince loan, and would permit his parents to do the same, in reliance upon the informal advice given by Mr Vaughan, and not the independent advice of Mr Tsolakis, as Mr Dlakic’s own evidence would show Mr Vaughan was entitled to expect Mr Dlakic and his parents to do. There is no evidence that Mr Vaughan was sufficiently aware of all of Mr Dlakic’s recurrent financial obligations for Mr Vaughan to understand and be expected to take responsibility for any assertion that he did make that Mr Dlakic should be able to service the Vince loan from the income of Johnston Vaughan.

21. [232]

    Viewed strictly, the evidence does not establish that the income of the firm was not sufficient to service the Vince loan, putting aside other obligations of Mr Dlakic which are not shown to have been known to Mr Vaughan.

22. [233]

    For the multitude of reasons that I have considered above, in the absence of a formal retainer from Mr Dlakic to Mr Vaughan, the evidence falls short of establishing either an implied retainer or a level of knowledge on Mr Vaughan’s part that caused him to be subject to any duty of care towards Mr Dlakic as has been alleged.

23. [234]

    Accordingly, I find that Mr Dlakic's claim for damages against Mr Vaughan for breach of retainer or duty of care in relation to the $300,000 loan from Dr and Ms Vince must be dismissed.

24. [235]

    It is therefore not necessary for the Court to assess the damages that would have been payable if Mr Dlakic had made out his negligence case against Mr Vaughan.

25. [236]

    I would observe, however, that the amount of damages claimed by Mr Dlakic in par 53 of his further amended statement of claim has substantially been overstated.

26. [237]

    Mr Dlakic would not be entitled to recover the $300,000 principal that he borrowed. At the time that Mr Dlakic borrowed the money, he was indebted to Mr Vaughan for that amount as part of the purchase price for Johnston Vaughan. Mr Dlakic used the money borrowed to pay that liability. Accordingly, Mr Dlakic did not make any loss from the borrowing of the principal. If he had not borrowed the money from Dr and Ms Vince, he would have had to find the $300,000 from some other source.

27. [238]

    It goes without saying that Mr Dlakic could not be entitled to recover both the amount of the principal borrowed and the $65,000 in principal repayments that he claims, as that claim involves double counting, as does the claim for the $100,000 that Mr Dlakic claims remains outstanding.

28. [239]

    As Mr Dlakic was clearly aware of what he claimed to be the effective rate of interest on the loan (as he pleads in par 49(a) of his further amended statement of claim) and as Mr Dlakic has not proved that he had an alternative and more favourable source of funds, he cannot complain about the interest payable up to the 25 October 2010 date of repayment of the loan.

29. [240]

    If Mr Dlakic had made out his negligence case against Mr Vaughan, in theory he may have been able to prove a case for damages based upon the difference between the effective interest rate he paid and some alternative more favourable interest rate he could have achieved by borrowing the money from an alternative lender. Mr Dlakic did not, however, lead evidence of any more favourable course that he could have followed if he had been advised by Mr Vaughan that he could not service the loan from Dr and Ms Vince from the earnings of Johnston Vaughan.

The pleaded claims

1. [241]

   As I have outlined in the summary of Mr Dlakic's claims at the beginning of this judgment, Mr Dlakic makes two primary claims concerning the buyback agreement. Those claims are pleaded in pars 6 to 33 of the further amended statement of claim.

2. [242]

   The first of the claims is that the buyback agreement is either void or should be set aside. The second assumes the continued effectiveness of the buyback agreement, and claims damages for failure by Mr Vaughan to pay to Mr Dlakic fees received in respect of work done before the date of the buyback agreement, in breach of a term of that agreement.

3. [243]

   As I understand Mr Dlakic's case, the second of these claims will not logically arise if he succeeds on the first. If the buyback agreement is void or is set aside, then Mr Dlakic will continue to be legally entitled to all fees earned by Johnston Vaughan before the date of the buyback agreement, and Mr Vaughan will be liable to account to Mr Dlakic for all such fees that were received afterwards.

4. [244]

   Mr Dlakic has not yet elected which of these two alternative remedies he wishes to obtain. If he is entitled to an order setting aside the buyback agreement, and he elects for that remedy, then the benefit of that remedy to him in money terms will depend upon what is determined from a reconstruction of the accounts of Johnston Vaughan. That is an exercise that has not yet been done. It is not yet clear that it can be done, but the question of whether or not it can be done cannot be answered at present because of the late and incomplete production of documents by Mr Vaughan in response to Mr Dlakic's notice to produce. If the buyback agreement is set aside, then Mr Dlakic will be entitled to all of the fees received, but he will also be responsible for all of the expenses and other outgoings of the practice. Those expenses may include an allowance for remuneration for Mr Vaughan for the work that he did in carrying on the practice of Johnston Vaughan. The evidence before the Court at present does not demonstrate whether Johnston Vaughan made a profit, and if so what that profit was. It is conceivable that the more advantageous remedy to Mr Dlakic would be to leave the buyback agreement in effect, and obtain the benefit of an order that Mr Vaughan pay to him all fees received by the practice after the buyback agreement in respect of work done before. The position is unclear.

5. [245]

   It will be appropriate in the first instance to consider whether Mr Dlakic has a right to have the buyback agreement set aside. Although Mr Dlakic sought an alternative declaration that the buyback agreement is void, he has relied upon the alternative principles of undue influence and unconscionable taking advantage by Mr Vaughan of a serious disadvantage on Mr Dlakic's part. It is clear that if either of those grounds are established, the buyback agreement will be voidable not void. The making of an order setting aside the buyback agreement will be in the discretion of the Court, where that discretion is to be exercised judicially according to a number of established principles: see Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114 at [32].

The misrepresentation alleged by Mr Dlakic

1. [246]

   The starting point of Mr Dlakic's claim that the buyback agreement should be set aside is the allegation made in par 7 of the further amended statement of claim that, on or about 25 November 2014, Mr Vaughan warranted, or alternatively represented to Mr Dlakic that if the files of Johnston Vaughan were transferred back to Mr Vaughan, the net income earned by Johnston Vaughan would continue to be paid to Mr Dlakic. (In his final submissions, Mr Vaughan made an issue out of whether the representation alleged related to the whole of the income of the firm or only the net income, but it is clear from par 7 of the further amended statement of claim that Mr Dlakic only alleged that Mr Vaughan told him that he would continue to receive the net income).

2. [247]

   Mr Dlakic made a series of allegations in pars 11 to 16 of the further amended statement of claim to the effect that Mr Vaughan made a material misrepresentation, or his conduct was misleading and deceptive for the purposes of s 18 of the Australian Consumer Law (having regard to the effect of s 4 of the Australian Consumer Law).

3. [248]

   Mr Dlakic alleged in par 10 that since 25 November 2014, the date of the buyback agreement, Mr Vaughan has retained the income received by Johnston Vaughan. He alleges, in effect, that when Mr Vaughan made the representation he knew it was false, or he was recklessly indifferent as to its truth, or he did not have reasonable grounds for making the representation.

4. [249]

   I do not understand Mr Dlakic to have pursued his alternative case based upon mistake pleaded in pars 17 and 18 of his further amended statement of claim.

5. [250]

   Mr Vaughan's pleaded response to the allegation in par 7 that he made the representation was:

6. [251]

   The first question of fact is whether Mr Vaughan made the representation as alleged.

7. [252]

   Had the evidence been sufficient to answer it, the second question would be whether the allegation by Mr Vaughan in par 7 of his defence was correct, and the fees received by Johnston Vaughan after the date of the buyback agreement in respect of work done before that date were insufficient, after payment of all of the obligations for which Mr Dlakic remained responsible under the buyback agreement, for a balance to be left over to be paid to Mr Dlakic. Because of the dearth of detailed financial evidence, this question cannot be answered with any confidence. There is some evidence that allows some conclusions to be drawn, but it is not possible for the Court to make comprehensive findings.

8. [253]

   I have set out the evidence given by Mr Dlakic on this subject in pars 190 to 195 of his primary affidavit in par 166 above in dealing with Mr Vaughan's knowledge of Mr Dlakic's psychological disability in November 2014.

9. [254]

   I have also set out Mr D’Apice's evidence on that subject in par 170 above when dealing with the same subject.

10. [255]

    Mr Vaughan's evidentiary response was simply to deny that he made the statements attributed to him by both of these witnesses.

Mr Nakhle’s evidence

1. [256]

   Mr Paul Saleem Nakhle is related to Mr Dlakic and retained Mr Dlakic to act for him and related corporations in the years after Mr Dlakic acquired Johnston Vaughan from Mr Vaughan.

2. [257]

   Mr Nakhle gave evidence that in November 2014, Mr Dlakic said to him: “Mate, Michael has drawn an agreement to transfer all the files to [me] for $1. That way the Law Society will be happy as the files go to Michael. He will give me every cent that comes through it will not be different to before” or words to that effect”.

3. [258]

   Mr Nakhle gave evidence that in October 2015, when he was pressing Mr Vaughan to increase the amount of income that he gave to Mr Dlakic, he made an agreement with Mr Vaughan that Mr Vaughan would pay one third of the fees of $35,000 payable by Mr Nakhle to the firm to Mr Dlakic. Mr Nakhle annexed to his affidavit an email dated 14 October 2015 that was written to him by Mr Vaughan. The email set at a calculation as to how the one third was reduced to $9376.05 to cover an identified expense. The email concluded, relevantly: “I will have Steve send that across to you today”.

4. [259]

   Mr Nakhle explained the reason for Mr Vaughan sending part of the fees payable by Mr Nakhle back to him by giving the following evidence. Mr Nakhle said Mr Vaughan said to him: "I don’t want a paper trail showing that I am sending money to Amil. So I am going to send you this $9376.05…" Mr Nakhle said that, at Mr Vaughan's suggestion, he ultimately paid the money to Mr Dlakic's wife.

5. [260]

   Mr Nakhle also gave evidence of a conversation with Mr Vaughan shortly before Johnston Vaughan became entitled to its fees in the Calleja matter. He did so because he was advised by Mr Dlakic that he would be repaid $70,000 that he had advanced to Mr Dlakic out of the money that Mr Dlakic would receive. Mr Nakhle gave the following evidence in par 27 of his affidavit:

6. [261]

   Finally, Mr Nakhle gave evidence of an agreement that he made with Mr Vaughan that Mr Vaughan would pay to Mr Dlakic $2000 out of total fees of $21,497.25 that Mr Nakhle owed to Johnston Vaughan. Mr Nakhle supported his evidence with a letter written by Mr Vaughan on 2 February 2016, which records a deduction of $2000 next to the reference “AMIL”.

Consideration

1. [262]

   I prefer the evidence given by Mr Dlakic to that given by Mr Vaughan, as it is closely corroborated by the evidence of Mr D’Apice and Mr Nakhle, who I regard to be credible witnesses.

2. [263]

   This finding is supported by the consideration that it is improbable that Mr Dlakic would have transferred the practice of Johnston Vaughan to Mr Vaughan for no more than one dollar unless he thought that he was going to continue to receive the earnings of the practice.

3. [264]

   More significantly, the only rational explanation for Mr Dlakic continuing to pay rent to Davlite (including even after the surrender of his lease), and to pay substantial additional expenses of the practice, is that Mr Dlakic believed that he continued to be entitled to the earnings of the practice. As I have observed above, I find Mr Vaughan's explanation of the payment of expenses as being effectively a gift to help him out to be entirely implausible.

4. [265]

   As I have noted above at pars 90 to 92, Mr Dlakic’s claims that he continued to pay the rent and the operating expenses of Johnston Vaughan was corroborated by the evidence of Mr D’Apice.

5. [266]

   On balance, I am prepared to accept the descriptive evidence of Mr Dlakic that he became aware that fees were received by Johnston Vaughan after the date of the buyback in respect of work done beforehand.

6. [267]

   I find Mr Vaughan's allegation that the files that were transferred had no value to be not proved.

7. [268]

   I have considered the evidence relating to the matter involving Mr Paul Calleja as part of the background above at pars 80 to 83.

8. [269]

   I do not accept that the evidence establishes that the fees paid in respect of the Calleja matter were used solely to pay expenses of Mr Dlakic payable under the buyback agreement because they were incurred before the date of that agreement. In his defence, Mr Vaughan refers to cl 3 of the buyback agreement, which effectively makes Mr Dlakic responsible for liabilities in relation to client files that arose before the date of the agreement. Mr Dlakic's liability could not have extended to the $24,360 for rent in advance, or the $20,000 that was taken to pay for the coming Christmas expenses. I do not accept that the $43,866.25 that was paid to Mr Vaughan for rent all related to a period before 25 November 2014. Mr Vaughan did not lead evidence to prove that it did.

9. [270]

   In summary, I do not accept Mr Vaughan's claim that virtually no money was paid to Mr Dlakic under cl 4 of the buyback agreement on the basis that little money was received, and the money that was received was applied against the obligations of Mr Dlakic under the buyback agreement.

10. [271]

    I conclude that, when Mr Vaughan made the representation to Mr Dlakic concerning the latter's entitlement to receive the earnings of the practice after the date of the buyback agreement, Mr Vaughan had no real intention to act in the manner represented. The representation was an actionable misrepresentation, and constituted misleading and deceptive conduct on Mr Vaughan's part.

11. [272]

    Technically, the fact that Mr Vaughan made the representation to Mr Dlakic without having any real intention to implement it has the effect that the representation was made fraudulently. That would provide a separate ground for the making of an order setting aside the buyback agreement. (I will not consider the possibility that in a case involving fraudulent misrepresentation at common law the representee may be able to avoid the contract by the representee’s own act, because of the need in the present case for the Court to make consequential orders to implement the status quo at the time the buyback agreement was made: see Nadinic v Drinkwater at [28] and [44]).

12. [273]

    The circumstances in which Mr Vaughan made the representation to Mr Dlakic will also be material to Mr Dlakic’s claim that Mr Vaughan exercised undue influence and acted unconscionably in causing Mr Dlakic to enter into the buyback agreement.

13. [274]

    It will be appropriate to set out briefly the general principles that govern when a transaction is liable to be set aside for undue influence or for the unconscionable taking of advantage of a special disadvantage.

14. [275]

    Certain established categories of relationships give rise to a presumption of a relationship of influence. The categories are not closed, and a special relationship of influence may be established by one party proving that he or she reposed confidence in another party who occupies or assumes a position of ascendancy or influence over them: Whereat v Duff [1972] 2 NSWLR 147; Whereat v Duff (1973) 1 ALR 363; 47 ALJR 540; Goldsworthy v Brickell [1987] Ch 378 at 401; [1987] 1 All ER 853 at 865; Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923 at 953; [1992] 4 All ER 955 at 964. Dixon J (as his Honour then was) in Johnson v Buttress (1936) 56 CLR 113; [1936] HCA 41; described the two categories of relationships at 134:

15. [276]

    In Jenyns v Public Curator (1953) 90 CLR 113; [1953] HCA 2; Dixon CJ said the following about the second category of relationships of influence at [28]:

16. [277]

    Brereton J (as his Honour then was) in Brown v The NSW Trustee & Guardian [2011] NSWSC 1203 emphasised that the relationship must not be one of mere confidence, but one of ascendancy and dependence at [46]:

17. [278]

    In Thorne v Kennedy [2017] HCA 49; (2017) 350 ALR 1, Kiefel CJ, Bell, Gageler, Keane and Edelman JJ spoke of the “history of the particular relationship” at [34]:

18. [279]

    In Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 Mason J (as his Honour then was) stated the principle at 461:

19. [280]

    Brereton J (as his Honour then was) set out the relevant principles comprehensively in Tillett v Varnell Holdings Pty Ltd [2009] NSWSC 1040 at [49]-[54]:

20. [281]

    Mr Dlakic led considerable evidence of the relationship that he developed with Mr Vaughan over the 10 years to 2010 when Mr Vaughan was Mr Dlakic's employer, and continuing into the period up to the date of the buyback agreement, when Mr Vaughan was formally an employee of Mr Dlakic. Mr Dlakic described Mr Vaughan as his mentor and a father figure. He gave evidence that he was personally close to Mr Vaughan, both professionally and socially, and that it was his inclination to defer to the wise advice of the older man.

21. [282]

    I doubt, however, that the evidence would have established that Mr Vaughan's relationship with Mr Dlakic was such that he had achieved a state of dominion or ascendancy over the will of Mr Dlakic to the extent that Mr Dlakic reposed such trust and confidence in Mr Vaughan as to permit Mr Vaughan to exert influence over the decisions made by Mr Dlakic. In terms of the requirement for establishing undue influence considered by Brereton J, I would accept that there was a relationship of confidence and influence between Mr Dlakic and Mr Vaughan, but I do not accept that the evidence would have established a relationship of dominion or ascendancy.

22. [283]

    The consideration of whether the relationship between Mr Dlakic and Mr Vaughan went further than mere confidence and reciprocal influence was in my view, however, superseded by the developing consequences of Mr Dlakic's serious psychological disabilities that I have addressed above in pars 154 to 177. Whatever the degree of influence Mr Vaughan may have had over the decision-making processes of Mr Dlakic, that became substantially immaterial because by the date of the buyback agreement, Mr Dlakic was in such a compromised psychological state that he was substantially unable to safeguard his own interests. Mr Dlakic's decision to enter into the buyback agreement, and to rely upon Mr Vaughan's representation concerning his entitlement to the income of Johnston Vaughan notwithstanding the terms of the buyback agreement, did not so much involve Mr Dlakic's will being overborn, but by that stage he was unable to make a worthwhile judgment as to what was in his best interests.

23. [284]

    It is clear that Mr Dlakic was in a relationship of "special disadvantage" with Mr Vaughan. Mr Dlakic's practising certificate had been suspended by the Law Society, so to Mr Vaughan's knowledge Mr Dlakic had ceased to be capable of conducting the practice of Johnston Vaughan himself. Mr Vaughan was well aware, as it was obvious not only from what Mr Dlakic told him, but also from Mr Dlakic's visible reactions, that Mr Dlakic was deeply depressed and psychologically inadequate to determine how to respond to events in his own best interests.

24. [285]

    Although there was no evidence of the market value of Johnston Vaughan as at 25 November 2014, I consider that the evidence justifies an inference that the goodwill of the firm was worth more than the one dollar consideration provided in the buyback agreement (given that Mr Dlakic had paid a price of $550,000 for the firm in 2010).

25. [286]

    Although the buyback agreement entitled Mr Dlakic to require Mr Vaughan to transfer the practice back to him in the event that an unrestricted practising certificate was issued to Mr Dlakic within two years of the date of the agreement (albeit only provided for in a recital), I do not accept that Mr Vaughan adequately considered the likelihood that Mr Dlakic would be able to achieve the issue of an unrestricted practising certificate within the period (given that there is no evidence that Mr Vaughan objectively considered the issue, and it was plain for him to see that Mr Dlakic was in an abject psychological condition).

26. [287]

    I consider that the evidence overwhelmingly justifies a finding that Mr Vaughan took advantage of a special disadvantage from which he knew Mr Dlakic suffered, so that Mr Dlakic will be entitled to an order setting aside the buyback agreement, if the grant of that relief is available having regard to relevant discretionary considerations.

27. [288]

    In my view the granting of that relief would separately be justified on the basis of Mr Vaughan's misleading and deceptive conduct in representing to Mr Dlakic that he would continue to receive the income of Johnston Vaughan after the date of the buyback agreement. I am satisfied that when Mr Vaughan gave that assurance to Mr Dlakic he did not have any genuine intention to implement it. However, in the circumstances of this case, the preferable course is to treat Mr Vaughan's conduct in making the misrepresentation to Mr Dlakic as being an aspect of his taking advantage of the special disadvantage from which Mr Dlakic suffered.

28. [289]

    The only discretionary consideration that Mr Vaughan raised in opposition to Mr Dlakic’s claim for an order setting aside the buyback agreement was the consideration that “because after several years [of] retaining and developing the firm since Mr Dlakic surrendered it, there can be no restitution in integrum”, on the basis that “it would be difficult [to] provide Mr Dlakic with the firm in the position that it was in in November 2014 (even without adjustments)” (par 53). Mr Vaughan also submitted that rescission would not “make sense, as Mr Dlakic cannot work as a solicitor”.

29. [290]

    The only authority relied upon by Mr Vaughan was the decision of the High Court in Alati v Kruger (1955) 94 CLR 216 per Dixon CJ, Webb, Kitto and Taylor JJ at 222–4, where their Honours said:

30. [291]

    In the context of setting out this extract from Alati v Kruger, Leeming JA in Nadinic v Drinkwater (with whom Beazley P and Sackville AJA agreed) made the following observations concerning rescission in equity:

31. [292]

    As stated by Leeming JA in Taheri v Vitek (2014) 87 NSWLR 403; [2014] NSWCA 209 at [103]: “…the ultimate issue is whether there may be achieved “what is practically just” to use the language of Lord Blackburn in Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218 at 1218 and quoted in Alati v Kruger”.

32. [293]

    Although Mr Vaughan has asserted that in this case it is beyond the power of the Court to make orders supplementary to an order setting aside the buyback agreement that will achieve what is practically just between the parties to restore them to the position they were in before the buyback agreement was made, he has led no evidence to support that submission and has not explained why the achievement of practical justice is impossible.

33. [294]

    On the basis of the evidence put before the Court in this case there is no discretionary reason for the Court to reject Mr Dlakic’s application for an order setting aside the buyback agreement.

34. [295]

    On the other hand, Mr Dlakic has not paid any attention to the consequences of the Court simply making an order setting aside the buyback agreement. His counsel has referred to the need for an accounting to take place, in part because the inadequacy of the response by Mr Vaughan to the notice to produce has disabled Mr Dlakic from investigating and proving the actual financial performance of Johnston Vaughan at relevant times. However, there is more to the consequences of the Court making an order setting aside the buyback agreement than that. Mr Dlakic remains prohibited from practising as a solicitor. Apparently, he is pursuing insurance claims on the basis that he is totally and permanently disabled, which is inconsistent with him practising as a lawyer again. The Court really has no idea of what the consequences of the making of an order setting aside the buyback agreement will be. The Court must at least take into account the possibility that the making of that order will destroy the value of Johnston Vaughan, leaving the parties to conduct an accounting process over the entrails of the practice.

35. [296]

    The small matter of the entitlement of Johnston Vaughan to practice from the Montgomery Street property is another issue that has been given no attention. As noted in par 67 above, Davlite granted a lease to Mr Dlakic for a term of five years from 8 December 2014, with an option for renewal for five years. However, Mr Dlakic has surrendered that lease in the circumstances described in par 68. There is a real issue as to the viability and value of the practice of Johnston Vaughan if the proprietor is not able to conduct the practice from the Montgomery Street property.

36. [297]

    I propose to defer further consideration of the orders that the Court should make, following Mr Dlakic having established that he has a right to an order setting aside the buyback agreement, until after I have considered the outcome of all of Mr Dlakic’s claims for relief.

The pleaded claim

1. [298]

   Mr Dlakic pleaded in par 34 of his further amended statement of claim that in late February or early March 2015, Mr Vaughan represented to him that Mr Dlakic needed to take out a loan to pay the expenses of Johnston Vaughan. He alleged in par 35 that he then retained Mr Vaughan to provide legal advice on loan documentation concerning a loan from Mr Aysan Fetin for the principal sum of $160,000. Mr Dlakic alleged in par 36 in the alternative that there was a de facto relationship of lawyer and client between himself and Mr Vaughan. An implied term is alleged in par 37 that Mr Vaughan would use all reasonable care, skill and diligence expected of a reasonably competent solicitor in the position of Mr Vaughan.

2. [299]

   The advice given by Mr Vaughan is alleged in par 38 of the further amended statement of claim in the following terms:

3. [300]

   There are therefore three aspects of the advice that Mr Dlakic alleges he was given by Mr Vaughan. The first is that Johnston Vaughan Solicitors Pty Ltd would be liable to repay the debt, and not Mr Dlakic, and Mr Dlakic’s home would not be at risk. That advice concerned the basic effect of the documentation that Mr Dlakic would be required to sign. The second is that the whole of the loan was required for the running of Johnston Vaughan. The third is a representation as to a future occurrence, being that the loan would be repaid in full from fees received in the Calleja matter.

4. [301]

   Mr Dlakic then alleged in par 39 that on 29 April 2015, in reliance upon Mr Vaughan's advice, he signed the loan agreement with Mr Fetin for the principal sum of $160,000.

5. [302]

   Then, in part 40, Mr Dlakic alleged: “At the Defendant's request the Plaintiff provided the monies borrowed from Mr Fetin to the Defendant”.

6. [303]

   It is alleged in par 41 that at no time did Mr Vaughan advise Mr Dlakic that he was personally giving Mr Fetin a mortgage over the property at Towns Road Vaucluse, and then in pars 42 to 44 Mr Dlakic alleged the circumstances in which Mr Fetin commenced proceedings for possession and judicial sale of the Vaucluse property, and the fact that that claim was settled, as discussed above at pars 95 to 97 in relation to the background facts.

7. [304]

   The particulars alleged by Mr Dlakic of his damages for breach of duty by Mr Vaughan, as set out in par 45, are the sum of $290,314.88 paid in settlement of the proceedings, and the costs of $13,376.

Claim concerning effect of the documents

1. [305]

   Mr Dlakic gave evidence in par 243 of his principal affidavit that, when he raised the need for the loan with Mr Vaughan, Mr Vaughan said: "We need to do this properly. When you receive the mortgage contracts I will review them carefully, read them and advise you on your terms. You need the money at the moment, even though you are broke, so I will look at it. I will get you independent advice for you," or words to that effect”.

2. [306]

   Mr Dlakic said that, when he received the bundle of mortgage documents from Mr Fetin's solicitor, he took the documents into Mr Vaughan's office and handed them to him. Mr Dlakic said in par 248: "I did not read the loan documents and at all times, I relied upon the advice given to me by the Defendant".

3. [307]

   The primary evidence given by Mr Dlakic on this issue, in par 245, was:

4. [308]

   Mr Vaughan's response to this evidence from Mr Dlakic was simply to deny the evidence.

5. [309]

   Mr Dlakic did not give any evidence that he advised Mr Vaughan that he had not looked at the bundle of documents or the covering letter to satisfy himself as to who the parties to the documents would be and what type of interests they would create when executed.

6. [310]

   The evidentiary difficulty that arises in this aspect of Mr Dlakic's case is that the communications addressed by Mr Fetin's solicitors to Mr Vaughan at Johnston Vaughan Solicitors Pty Ltd dated 27 April 2015 and their enclosures (Court Book pages 1034 to 1074) contain obvious references to a mortgage over the Vaucluse property owned by Mr Dlakic, as well as the mortgage itself, duly executed by Mr Dlakic. For example, the letter of offer refers in its subject heading to a collateral security by mortgage from Mr Dlakic over 107/46 Towns Road, Vaucluse. The Mortgage Security is described as: "second unregistered mortgage and secured by a caveat over property situated at and known as 107/46 Towns Road, Vaucluse, NSW 2030 being the whole of the land contained in Certificate of Title 7/SP5112 at Woollahra Council".

7. [311]

   For Mr Dlakic to be unaware that he was being required to grant a second mortgage over the Vaucluse property would have required him to entirely shut his eyes to what was written on the documents that he took to Mr Vaughan for advice and later signed.

8. [312]

   Although Mr Dlakic has given evidence that Mr Vaughan positively advised him that he was not personally exposed to the proposed loan, and "Your house is not on the line", it is difficult to accept on the probabilities that Mr Vaughan made these statements, because they were positively false, and readily exposed if Mr Dlakic had taken a moment's care to cast his eyes over the first page of the communications from Mr Fetin's solicitor.

9. [313]

   I am not persuaded as a matter of fact that Mr Dlakic was unaware when he executed the various documents that he was granting a mortgage over the Town’s Road property. I am not satisfied that Mr Vaughan was made sufficiently aware that Mr Dlakic was entirely ignorant of the nature and effect of the draft documents for Mr Vaughan to have appreciated that Mr Dlakic was relying entirely on Mr Vaughan to explain the nature and effect of those documents. Nor am I satisfied that the evidence justifies a conclusion that Mr Vaughan made positive statements as to the nature and effect of the documents that were plainly inconsistent with what the covering letter and the draft documents taken as a whole made clear.

Claim concerning need for borrowing

1. [314]

   Mr Dlakic's evidence in par 243 of his primary affidavit was that Mr Vaughan asked him what the documents received from Mr Fetin's solicitors were about, and Mr Dlakic said to him: "Michael I need to pay out the old Jaara loan of $65,000 and also pay Johnston Vaughan office bills".

2. [315]

   Mr Dlakic's evidence as to how the $160,000 was applied (by reference to the direction to pay that Mr Dlakic signed) was that $65,000 was paid to Jaara, $24,000 was paid to Mr Fetin, various other minor expenses were paid, and the balance of $55,241.95 was paid into Mr Dlakic's old Johnston Vaughan general account. As I have explained above when considering the background at par 88, Mr Dlakic said that he paid most of the $55,241.95 to Mr Vaughan to meet the expenses of Johnston Vaughan.

3. [316]

   Mr Dlakic's own evidence is therefore inconsistent with the allegation in par 34 of his further amended statement of claim that Mr Vaughan represented that Mr Dlakic had to take out the loan to pay expenses of the practice, and the allegation in par 40 that, at Mr Vaughan's request, Mr Dlakic paid the money borrowed from Mr Fetin to Mr Vaughan. That aspect of Mr Dlakic’s claim is only capable of being true in relation to the residual amount of $55,241.95.

Claim concerning repayment of the loan

1. [317]

   Mr Dlakic supported the allegation in par 38(d) of the further amended statement of claim that Mr Vaughan advised him that the loan would be repaid in full once Johnston Vaughan received the proceeds of its work-in-progress from the Calleja Estate matter, by saying in par 246 of his primary affidavit:

2. [318]

   Mr Dlakic’s case is that he received the advice concerning the Fetin loan from Mr Vaughan on 29 April 2015. As I have discussed at par 80 above when considering the background, the fees in the Calleja matter were released from trust in about September 2015. The amount received was approximately $191,000. That amount was sufficient nominally to enable Mr Dlakic to repay the debt of $160,000 to Mr Fetin. In fact, after the fees were released, Mr Vaughan caused $178,439.11 to be paid to cover rent payments due to Davlite and various expenses of Johnston Vaughan.

3. [319]

   I have not found it possible given the state of the evidence to make any finding with confidence as to what precisely, if anything, Mr Vaughan said to Mr Dlakic on 29 April 2015 concerning the likelihood that the amount of the Fetin loan could be repaid out of the expected fees in the Calleja matter. I do not rule out the possibility that Mr Vaughan made some comment to that effect, but I am not persuaded that the evidence establishes that Mr Vaughan gave formal advice to Mr Dlakic in the context of a de facto relationship of solicitor and client (there was clearly no formal retainer) that both men could reasonably have understood Mr Dlakic could rely upon for the purpose of entering into the Fetin loan documents that the principal of the loan would be repaid out of the Calleja fees.

4. [320]

   In any event, the evidence does not establish that advice to that effect would have been negligent if given on 29 April 2015, as subsequent events have demonstrated that it was reasonable for Mr Vaughan to expect that the amount of the fees received in the Calleja matter would be sufficient to repay the Fetin loan. There is no evidence that, if Mr Vaughan made the representation as claimed by Mr Dlakic, at that point in time he intended to cause the fees to be paid in various ways for his own benefit. There is no evidence that it was reasonably apparent on 29 April 2015 that, whenever the Calleja fees were received, they would have to be diverted to cover the expenses of Johnston Vaughan rather than to be used to repay the Fetin loan. The evidence is consistent with Mr Vaughan having decided to divert the fees for the purposes to which they were in fact applied at the time when the fees were released from trust.

Conclusion

1. [321]

   I therefore find, for the various reasons considered above, that Mr Dlakic has not established his negligence claim against Mr Vaughan in relation to the circumstances in which Johnston Vaughan Solicitors Pty Ltd borrowed the $160,000 from Mr Fetin. In due course an order must be made dismissing that aspect of Mr Dlakic’s claim.

Observations on the damages claimed

1. [322]

   As was the case for Mr Dlakic’s negligence claim in relation to the Vince loan, it is not necessary to determine the amount of damages to which Mr Dlakic would have been entitled had he succeeded in his negligence claim against Mr Vaughan concerning the Fetin loan. However, it is appropriate to note that again Mr Dlakic has included in his particulars of loss the principal amount that he borrowed.

2. [323]

   The obligation of Mr Dlakic to pay the $65,000 to Jaara was a leftover from the original borrowing of $300,000 from Dr and Ms Vince. The repayment of that loan did not represent a loss to Mr Dlakic.

3. [324]

   As Jaara was, according to Mr Dlakic's evidence, pressing Mr Dlakic for payment of the outstanding $65,000; as Mr Dlakic himself raised the loan from Mr Fetin through the mortgage broker, Mr Grant Hawkswell; and as Mr Dlakic has not led evidence that he was able to borrow the money on more favourable terms than was offered by Mr Fetin, I cannot see how the costs that Mr Dlakic incurred in respect of the borrowing could constitute damages for which Mr Vaughan is responsible.

4. [325]

   It is also appropriate to bear in mind the relationship between this claim and the claim that Mr Dlakic has made for an order setting aside the buyback agreement. As I have found above, Mr Dlakic has established that the buyback agreement is liable to be set aside, and the remaining question is whether it is appropriate that an order setting aside the buyback agreement be made. If the buyback agreement is set aside, Mr Dlakic will become entitled to the earnings of Johnston Vaughan, but he will also become responsible for its expenses. If it is the case that most of the balance from the loan of $55,241.95 was given to Mr Vaughan and applied by him to pay the expenses of Johnston Vaughan, then those payments will have been made against expenses for which Mr Dlakic will become responsible on the setting aside of the buyback agreement. Even if Mr Dlakic were able to establish his negligence claim against Mr Vaughan, the monies paid for Mr Dlakic's own expenses would cease to be damages claimable against Mr Vaughan.

Davlite Pty Limited share transfer

1. [326]

   Mr Dlakic makes a claim that he is entitled to be registered as the owner of one fully paid share in the company known as Davlite Pty Ltd (Davlite).

2. [327]

   Davlite was registered on 22 August 1988. Davlite owns the Montgomery Street premises out of which the firm Johnston Vaughan operates.

Relief sought by Mr Dlakic

1. [328]

   The relief sought by Mr Dlakic in the further amended statement of claim on this issue is in the following terms:

Allegations made by the parties

1. [329]

   It will be appropriate to set out in full the facts pleaded by Mr Dlakic to support this claim:

2. [330]

   In his further amended defence, Mr Vaughan did not admit that Mr Dlakic became a shareholder of Davlite on 26 October 2001. He admits that on 27 August 2012, Mr Vaughan represented to ASIC that Mr Dlakic had ceased to be a shareholder in Davlite. Mr Vaughan denied that from 2010, Mr Dlakic was undiagnosed with severe mental health illnesses and lacked the capacity to enter into legal agreements. Mr Vaughan did not admit the allegations made in par 58 of the further amended statement of claim concerning the notice or attendance at an annual meeting of Davlite in August 2012, or that Mr Dlakic did not consent to the transfer of his share in Davlite. Mr Vaughan admitted that he did not provide any consideration for the transfer of the share in Davlite to Mr Vaughan. Mr Vaughan denied the allegations in pars 60, 61 and 62 of the further amended statement of claim.

3. [331]

   Finally, Mr Vaughan pleaded the following response to Mr Dlakic’s claim for rectification of the share register of Davlite:

4. [332]

   As I understand Mr Dlakic’s final submissions, he did not pursue a case that, if he is found to have positively consented to the transfer of his share in Davlite to Mr Vaughan, that transfer is vitiated by reason of undue influence or unconscionability resulting from Mr Vaughan’s knowledge of Mr Dlakic’s mental infirmity in August 2012, or on the basis that Mr Dlakic entirely lacked legal capacity to transfer the share as alleged in par 57 of the further amended statement of claim as set out above.

5. [333]

   Mr Dlakic’s claim ultimately was that a share in Davlite had been transferred to him beneficially; and in August 2012 he did not consent to the transfer of that share to Mr Vaughan. This case was put on the basis of Mr Vaughan’s own evidence that, when he discovered that Mr Dlakic appeared to be the holder of a share in Davlite, Mr Vaughan acted unilaterally to amend the register and to lodge a notification with ASIC that the share had been transferred to Mr Vaughan. Mr Dlakic’s case was that even though he could remember engaging in a conversation with Mr Vaughan concerning the transfer of the shares, he did not in fact execute any document that had the effect of consenting to that transfer, and the only document produced by Mr Vaughan has not been signed by any party.

6. [334]

   It may be noted that the case as pleaded by Mr Vaughan, in relation to the circumstances in which any share in Davlite was transferred into the name of Mr Dlakic, was that it would be unconscionable for Mr Dlakic to retain the share because of his knowledge that there was no intention that the share be transferred into his name, and in any event, if transferred, there was no intention that he hold the share beneficially.

7. [335]

   Mr Vaughan’s case did not accept that there was any intention that the share in Davlite be transferred into Mr Dlakic’s name at all, and he did not plead that by reason of the circumstances in which the transfer took place, some form of resulting trust arose in favour of Mr Vaughan.

8. [336]

   Mr Vaughan has not positively pleaded that in August 2012 Mr Dlakic voluntarily transferred the share in Davlite to Mr Vaughan. Apart from admitting that Mr Vaughan did not provide to Mr Dlakic any consideration for the transfer, all he has relevantly done is to not admit Mr Dlakic’s allegation in par 58(c) that Mr Dlakic did not consent to the transfer of the shared to Mr Vaughan.

Structure of the reasoning

1. [337]

   It will be convenient to begin by setting out the objective evidence relevant to this claim. That will form the basis of a number of observations concerning the availability of the relief claimed by Mr Dlakic that arise out of lacunae in the evidence. It will then be necessary to consider the evidentiary effect of various documents issued by or lodged with ASIC that have been tendered into evidence. In the light of those matters, it will then be appropriate to set out the substance of the submissions made by the parties. Following that, the oral evidence given by the parties on this issue will be considered. Finally, having regard to multiple inconsistencies in the positions taken by both parties, the Court must explain the basis of its determination of Mr Dlakic’s claim.

Objective evidence relevant to transfers of share in Davlite

1. [338]

   At the outset it will be convenient to set out the objective evidence concerning the circumstances in which the one share in Davlite may have been transferred to Mr Dlakic and then transferred to Mr Vaughan.

2. [339]

   An ASIC current & historical organisation extract for Davlite issued on 20 January 2017 records Mr Vaughan as having been a director of the company since 13 September 1988. Mr Johnston, Mr Vaughan’s former business partner, is recorded as being a director between 13 September 1988 and 16 June 1999. Another person, Jenelle Aitken was a director of the company between 16 June 1999 and 26 October 2001.

3. [340]

   Mr Vaughan is recorded as being the secretary of Davlite between 13 September 1988 and 26 October 2011, and from 23 August 2012.

4. [341]

   Mr Dlakic is recorded as being the secretary of Davlite between 26 October 2001 and 23 August 2012.

5. [342]

   Mr Vaughan is shown as being the holder of the two issued shares in Davlite (although the shares are not described as being beneficially owned by him).

6. [343]

   Mr Johnston and Mr Dlakic are recorded as being former owners of one issued share in Davlite. Only Mr Dlakic is recorded as being a beneficial owner. The extract does not contain a statement of when each of these persons ceased to hold a share in Davlite.

7. [344]

   An annual return of a company (Form 316) was completed by Mr Dlakic in the capacity of secretary of Davlite and dated 8 March 2002, and lodged by Johnston Vaughan on 14 March 2002. The document records in Mr Dlakic’s handwriting that Ms Aitken ceased to be a director on 26 October 2008, Mr Vaughan ceased to be secretary on 26 October 2001, and Mr Dlakic became secretary on that date.

8. [345]

   The return recorded that Mr Vaughan was the holder of one share in Davlite (although he was not recorded as being a beneficial owner), and then the following entry was made in handwriting:

9. [346]

   By reference to the Form, the 1, Y and Y signified that one share, fully paid, and beneficially owned was held by Mr Dlakic.

10. [347]

    On 20 January 2004, ASIC wrote a letter to Johnston Vaughan, in which it referred to a document received on 19 January 2004, which was stated to be enclosed with the letter. The enclosure was a Change to Company Details (Form 484) for Davlite. The enclosure had been completed by Mr Vaughan and signed by him on 10 November 2003 in his capacity as director of Davlite. The form referred to a change to the register of members, being the removal of Ms Aitken as the holder of one share in the company. ASIC’s letter contained the following request:

11. [348]

    Mr Vaughan must have read this request, because the entry concerning Ms Aitken’s removal from the register of members has been crossed out, and the changes initialled by Mr Vaughan. The revised Form was evidently re-lodged with ASIC on 4 February 2004.

12. [349]

    On 23 August 2012, Mr Vaughan in his capacity as a director of Davlite completed a Change to company details (Form 484) and caused it to be lodged with ASIC.

13. [350]

    The form records Mr Dlakic as ceasing to be the secretary of Davlite on 23 August 2012 and Mr Vaughan becoming the secretary. It also records Mr Dlakic as ceasing to be the holder of a share in the company and becoming the holder of two shares in the company! (I will discuss the contents of the Change to company details form in more detail below)

14. [351]

    In any event, it appears that a minute was attached to the form that was lodged with ASIC. The minute stated:

15. [352]

    This document was not signed in the place provided for either signatory to sign. As will be seen below, the admissibility of this document to prove the facts stated in it is not improved by the fact that it was attached to the Change of company details form and lodged with ASIC.

16. [353]

    There was no objection to the document being admitted into evidence. Nonetheless, the evidentiary significance that the document could have, if any, must be limited by the fact that it has not been adopted by signature by either Mr Dlakic sure Mr Vaughan. It purports to be the minutes of a general meeting, or an annual meeting, held on 23 August 2012, which suggests that it purports to be a meeting of the members of Davlite. But it is then stated to be “by order of the board”, which seems to be a contradiction in terms. The constitution of Davlite is not in evidence, so it is not possible to understand the significance of the attempt in resolutions 1 and 2 to amend the stated memorandum of Association of the company. Resolution 2 is at least strange in so far as it purports to amend article 81 of the memorandum of Association to reduce the shareholders to one, being Mr Vaughan holding two shares. It is also strange that the members of the company should resolve that Mr Dlakic’s share be transferred to Mr Vaughan. At the very least, the document appears to have been produced by someone who had an imperfect understanding of the basics of company law.

Limitation on the available relief

1. [354]

   The evidence that has been set out above is the only objective evidence relevant to the transfer of a share in Davlite to Mr Dlakic and then the transfer of that share to Mr Vaughan. The register of members of Davlite was not tendered. The articles of association of the company are also not in evidence. Share transfers to effect the transfer of the share to and from Mr Dlakic were not tendered, nor were any resolutions of the board of Davlite to accept the transfers.

2. [355]

   As stated above, Mr Dlakic seeks a declaration in Prayer 5A that the share transfer dated 22 August 2012 is voidable and of no effect. Presumably, that is intended to refer to a transfer of one share in Davlite from Mr Dlakic to Mr Vaughan. There was no direct evidence that any such share transfer existed that could be declared void by the Court.

3. [356]

   I do not understand the reference to the date 22 August 2012 in Prayer 5A. The only evidence of the alleged transfer of which I am aware is the Change to company details (Form 484) dated 23 August 2012 that has been referred to above. That document at Section C page 4 of 5 asserts that the change to the register of members of Davlite whereby Mr Dlakic ceased to be recorded as a shareholder occurred on 23 August 2012.

4. [357]

   The absence of a share transfer concerning the alleged transfer of the share from Mr Dlakic to Mr Vaughan leaves open the possibility that there was no effective transfer of the share at all, as well is the possibility that there was a transfer that is capable of being declared void.

5. [358]

   Then, in Prayer 5AA, Mr Dlakic seeks an order for the rectification of the register of members of Davlite.

6. [359]

   However, as I have also noted, Davlite’s share register, in whatever form that record may take, was not tendered into evidence. The evidence does not explain why that is so, whether there was any attempt on behalf of Mr Dlakic to obtain the register for the purpose of tender, or even whether a record in the nature of the register exists.

7. [360]

   In a similar situation, Black J in Re Centura Global Holdings Pty Ltd [2016] NSWSC 62; (2016) 111 ACSR 185 said at [54]:

8. [361]

   The Court could not make an order for the rectification of the register of Davlite without first knowing that the register exists and that it requires rectification. Black J in the case before him granted liberty to apply if the register could be located. In this case I take the view that, if it is determined that Mr Dlakic is entitled to be registered as a member of Davlite, the Court should make case management orders to determine the true factual position so that orders finally disposing of the controversy between the parties can be made.

9. [362]

   It need merely be noted that the Court does have power in a case such as the present to make an order of the type sought by Mr Dlakic in Prayer 5AA(b) under s 1322(4) of the Corporations Act 2001 (Cth), if it finds that the information recorded by ASIC incorrectly records Mr Dlakic as not being a member of Davlite: see for example Re Centura Global Holdings Pty Ltd at [56]-[57] and Re ABI Australia Holding Pty Ltd [2017] NSWSC 1822 at [7]-[8].

10. [363]

    It seems to be becoming a modern habit to think that in cases concerning the formal corporate records of a company, it is not necessary to seek or to tender those records. Rather, parties seem to be content to rely upon whatever forms concerning what should be entered in the corporate records that have been lodged with ASIC to record relevant transactions. From time to time that practice will lead to disappointment!

11. [364]

    Mr Dlakic claims that he became a shareholder of Davlite on 26 October 2001. The Corporations Act 2001 (Cth) commenced on 15 July 2001. Section 168(1)(a) required all companies to set up and maintain a register of members. Section 169(1)(a) required the register of members to contain each member’s name and address, and the date on which the entry of the member’s name in the register was made. In cases where the company had a share capital, s 169(3)(c) required that the register show the shares held by each member. Section 169(5A) required in respect of an unlisted company such as Davlite that the register must indicate any shares that a member does not hold beneficially.

12. [365]

    From 11 March 2002 up until today and continuing, ss 1070A to 1071H and 1072F to 1072H in Part 7.11 Divisions 1 and 2 of the Corporations Act have contained particular provisions concerning the nature of company shares and the transfer of those shares. Between the commencement of the Corporations Act and 11 March 2002, provisions with comparable effects were contained in the Corporations Act in Part 7.13 Divisions 1 and 2, with different section numbers.

13. [366]

    The effect of s 1085(1) of the Corporations Act, at the time Mr Dlakic claims that a share in Davlite was transferred to him, was that a share in a company was personal property and was transferable as provided by the company’s constitution. As stated above, Davlite’s constitution was not put into evidence. By ss (2) of that section, the laws applicable to ownership of and dealing with personal property applied to a share in a company as they applied to other property, and equitable interests in respect of a share in a company could be created, dealt with and enforced as in the case of other personal property.

14. [367]

    Section 1087(1) provided that a certificate issued by a company specifying the shares held by a member of a company was prima facie evidence of the title of the member to the shares. (This provision differs from the s 1070C which replaced it, which specifically required companies to ensure that a certificate was issued specifying the shares held by a member). However, under ss (3), the failure to comply with ss (1), which specified what the certificate was required to state, did not affect the rights of a holder of shares.

15. [368]

    Section 1091(1) relevantly provided that a company must only register a transfer of shares if a proper instrument of transfer had been delivered to the company. That was so despite anything in the company’s constitution.

16. [369]

    Under s 1091D(1), a person transferring shares remained the holder of the shares until the transfer was registered, and the name of the person to whom the shares were being transferred was entered in the register of members in respect of the shares.

17. [370]

    Section 1091E enacted a replaceable rule for the purposes of s 135, that the directors of a proprietary company may refuse to register a transfer of shares in the company for any reason. Section 1094 gave to the Court a power to order the registration of a transfer of shares in certain circumstances.

18. [371]

    Under s 1096(1), within one month after the date on which a transfer of any shares was lodged with the company, the company had to complete and have ready for delivery to the transferee an appropriate certificate, unless the company was entitled to refuse to register the transfer.

19. [372]

    In cases where, upon registration of the transfer of shares, the transferee would not hold the shares beneficially, s 1096A(1) required the transferee to lodge with the company an instrument of transfer that included a notice that upon registration of the transfer, the transferee would hold the relevant shares non-beneficially.

20. [373]

    I have made these somewhat complicated observations concerning the operation of the Corporations Act at relevant times, because they are material to the fact that Mr Dlakic has not tendered to the Court the formal, conventional evidence necessary to establish that a share in Davlite was transferred to him in the first place. It does not follow that his claim must fail, as in an appropriate case the fact that a share was transferred to Mr Dlakic might be proved by secondary evidence. However, this particular problem has not specifically been addressed in the present case.

21. [374]

    Furthermore, the evidence that is before the Court would not support a claim that Mr Vaughan transferred to Mr Dlakic a share in Davlite held by Mr Vaughan. Mr Vaughan initially only held one share in Davlite, and he has continued to hold that share at all material times. The other share was held by Mr Johnston, Mr Vaughan’s former legal partner. It may be that Mr Vaughan became entitled to have Mr Johnston’s share in Davlite transferred to him as part of the terms of Mr Johnston’s retirement from Johnston Vaughan. No evidence was tendered on that subject.

22. [375]

    There is no evidence of Mr Johnston executing a transfer of his share in the company to Mr Dlakic. There is no evidence of any meetings of the directors of the company resolving to accept any relevant transfer, and making any appropriate recording in the register of members. No relevant share certificate has been tendered.

Evidentiary effect of ASIC extracts and records

1. [376]

   In these circumstances it will be necessary to consider the evidentiary effect of the ASIC extract and the returns lodged with ASIC that have been considered above.

2. [377]

   The first record that was produced in time was the Annual Return of a company (Form 316) prepared by Mr Dlakic as the company secretary of Davlite on 8 March 2002.

3. [378]

   In Trade Practices Commission v TNT Management Pty Ltd (1984) 56 ALR 647 Franki J, at 665 to 669, considered the evidentiary significance of an annual return of a company lodged with ASIC, as a public document, so that hearsay statements contained in the document could be received to prove the truth of the statements. Relevantly, his Honour said:

4. [379]

   See also Residues Treatment and Trading Co Ltd v Southern Resources Ltd (1989) 52 SASR 54.

5. [380]

   Section 1274(5) of the Corporations Act has the effect that a copy of the public record constituted by the Annual Return that is obtained from ASIC is “in any proceeding, admissible in evidence as equal validity with the original document”.

6. [381]

   So much of the Annual Return lodged by Mr Dlakic on behalf of Davlite in compliance with a statutory duty to make accurate returns in circumstances where the Annual Return can be inspected by the public will be admissible as prima facie proof of the statements that the statute actually requires be included.

7. [382]

   At the time the Annual Return was lodged by Mr Dlakic, s 345(1) of the Corporations Act, as it was then enacted, required companies to lodge an annual return with ASIC by stipulated date. The required contents of the annual return were set out in a table included in s 348. Item 8 included the names and addresses of the members (if the company had 20 or fewer members). The item also required the annual return to state “whether or not the shares are beneficially owned” (in the case of a company that is not a listed company).

8. [383]

   Consequently, the Annual Return dated 8 March 2002 is prima facie evidence that, on 21 October 2001, Mr Johnston ceased to be a member of Davlite and on the same date Mr Dlakic became the holder of one ordinary fully paid share in the company and that the share was beneficially owned by Mr Dlakic.

9. [384]

   The next document in time lodged with ASIC was the Change to company details form (Form 484) prepared by Mr Vaughan on 23 August 2012 and lodged with ASIC. That document is subject to the same general law evidentiary principles that are considered above as being applicable to the Annual Return lodged by Mr Dlakic.

10. [385]

    As at 23 August 2012, s 178A of the Corporations Act required a proprietary company such as Davlite to notify ASIC within a stipulated time if it was required to add to or alter a particular in its share register maintained under s 169, in respect of particulars including the date of entry of the member’s name into the register, and the number of shares held by the member. Consequently, a notification to ASIC that Mr Dlakic had ceased to be the holder of the share and that Mr Vaughan had become the holder of that share would be prima facie evidence of the transfer.

11. [386]

    It is necessary to analyse the Change to company details form in order to determine what notification ASIC received on the subject of the change of ownership of the share. When this is done, it becomes apparent that the person who filled out the form did not understand how to do so. Part C2 deals with Issue of shares, and only requires completion when new shares are issued by the company. This part of the form has been completed as if two ordinary shares in Davlite were issued on 23 August 2012. There is no suggestion in the evidence that two shares were issued on that date. Part C3 deals with Change to share structure, and has been filled out as if the share structure of Davlite changed on 23 August 2012 in relation to the issue of two ordinary shares. Part C4 deals with Changes to the register of members for proprietary companies. Mr Dlakic is identified as the member whose shareholding has changed. The date of the change is stated to be 23 August 2012.

12. [387]

    There is a table in Part C4 that must be filled out to inform ASIC what the changes in membership have been. One cell that requires information as to the number of the decrease in the shares held by the identified member has been marked “N/A”. That response means that the number of shares held by Mr Dlakic did not change. In the cell headed “Total number now held” the response was “2”. That would signify that Mr Dlakic held two shares, rather than none, after the change to the register. It may be noted that the cell headed “Beneficially held (y/n)” has been completed “No”. While that entry would inform ASIC that Mr Dlakic was not the beneficial holder of the two shares, it remains the case that ASIC has been informed that Mr Dlakic held two shares.

13. [388]

    The form requires a date to be inserted as the “Date of entry of member’s name in register”. The date given is “23/08/12”. That entry would mean that Mr Dlakic was entered into the register of members on 23 August 2012 as holding two shares in Davlite.

14. [389]

    It appears that the alleged minute of the general meeting of Davlite that has been set out above has been obtained from ASIC, as the document is marked page 12 of 12, and follows the Change to company details form that comprises pages 1 to 11 of 12. However, the fact that this document has been supplied to ASIC with the Change to company details form required by s 178A of the Corporations Act does not mean that it is admissible into evidence, or that any hearsay statement included in the document should be received as evidence of the fact.

15. [390]

    As s 178A did not impose upon Davlite a requirement to notify ASIC, so far as is presently relevant, of any change other than the change in the register of members, the only part of the alleged minute that could be admissible on that issue is the statement in par 4 of the alleged resolution of the members: “That the share held by Amil Dlakic is transferred to Michael John Vaughan”.

16. [391]

    It will be remembered that in Trade Practices Commission v TNT Management Pty Ltd, which has been considered above, Franki J refused to receive as evidence of the fact hearsay statements in the annual return that were not provided to ASIC as part of a statutory duty to provide the information.

17. [392]

    The last in time of the ASIC documents is the ASIC Current & Historical Organisation Extract that was extracted on 20 January 2017, which is referred to above. As I have recorded, the extract states that the current member of Davlite is Mr Vaughan who holds the two ordinary shares (albeit not beneficially). Mr Dlakic is described as a former beneficial owner of one ordinary share in Davlite.

18. [393]

    Section 1274B(2) of the Corporations Act provides:

19. [394]

    The ASIC extract purports to have been prepared by ASIC, as required by the subsection, so that it is prima facie evidence of the matters stated in it in the absence of evidence to the contrary: See Gosford Christian School Ltd v Totonjian [2006] NSWSC 725 per Barrett J (as his Honour then was) at [12]-[15]. See also Forrest v Cosmetic Co Pty Ltd [2008] SASC 152; (2008) 67 ACSR 1; and Robertson v Deputy Commissioner of Taxation [2010] NSWCA 58.

20. [395]

    It is not clear how ASIC came to record that the share held by Mr Dlakic in Davlite had been transferred to Mr Vaughan, as the notification of that transfer in the Change to company details form is most unclear. It is possible that the change was notified to ASIC by means of the annual updating of ASIC’s information about Davlite that is provided for in Chapter 2N of the Corporations Act. Whatever the truth may be, the entry in the Current & Historical Organisation Extract is prima facie evidence that currently Mr Vaughan is the holder of the share of which Mr Dlakic was previously the holder. There is no prima facie evidence of the date of the transfer.

21. [396]

    It will need to be borne in mind that although the 20 January 2017 extract may be prima facie evidence that Mr Vaughan is now the holder of the two shares in Davlite, the Change to company details (Form 484) prepared by Mr Vaughan on 23 August 2012 recorded that Mr Dlakic was then the holder of two shares in the company. The 23 August 2012 document was prepared at the time of the alleged transfer of Mr Dlakic’s share to Mr Vaughan. The fact that the entries in Part C4 are inconsistent with the unsigned minute must, by reason of the internal inconsistency, undermine the prima facie evidentiary effect of the documents. Although the contents of the 20 January 2017 extract may be prima facie proof that Mr Vaughan is the holder of two shares in Davlite, the complete absence of evidence as to how the information recorded by ASIC concerning the shareholding in Davlite changed must tend to undermine the evidentiary weight of the extract.

22. [397]

    The Court may be more comfortable in accepting the prima facie effect of the Annual Return of a company (Form 316) completed by Mr Dlakic on 8 March 2002, which records the transfer of one share from Mr Johnston to Mr Dlakic on 26 October 2001, and that Mr Dlakic held the share beneficially, as there is no contest between the parties that Mr Vaughan did cause that transfer to take place. The only issue is as to the beneficial ownership of the share.

23. [398]

    For what it may matter, the Current & Historical Organisation Extract provides prima facie evidence that Mr Dlakic was the beneficial holder of the share, which supports the same prima facie inference that arises from the Annual Return lodged by Mr Dlakic on 8 March 2002.

Parties’ submissions

1. [399]

   Mr Dlakic’s case was that Mr Vaughan gave him the one share in Davlite in 2001 in consideration of his work at Johnston Vaughan, as an acknowledgement of the low salary Mr Dlakic had agreed to accept as an employed solicitor. In fact, according to Mr Dlakic, his salary rose from $56,826 in 2004 to only $69,535 in 2010. Thus, Mr Dlakic argued that he received the share as part of a salary sacrifice. Mr Dlakic also claimed that he was given the share because he had a mentor/client relationship with Mr Vaughan, who regularly said to Mr Dlakic “one day all this [i.e. the firm] will be yours”, as Mr Vaughan saw Mr Dlakic as part of his succession policy. Mr Vaughan was a very senior solicitor who needed to concern himself with being able to get value out of his firm when the time came for him to retire.

2. [400]

   Mr Vaughan submitted that, although his recollection of events so long ago was not entirely clear, he did agree to transfer one share in Davlite to Mr Dlakic in 2001. However, it was never his intention to transfer the beneficial interest in the share, but rather he was mistaken as to the requirements of the Corporations Act, and thought that a company like Davlite required two shareholders. Mr Dlakic gave no consideration for the transfer, and either knew or ought to have known that he was not to have a beneficial interest in the share and that he was the beneficiary of a mistake by Mr Vaughan. Consequently, Mr Dlakic held the share on trust for Mr Vaughan.

3. [401]

   Mr Vaughan further submitted that in 2012, after he discovered that Mr Dlakic may have been seeking to use Davlite as security for his borrowings, Mr Vaughan requested that Mr Dlakic transfer his share back to Mr Vaughan, which Mr Dlakic did. In making this request, Mr Vaughan says that he was merely reclaiming property that Mr Dlakic held on trust for him.

4. [402]

   Upon the apparent understanding that Mr Dlakic claims that any transfer of the share back to Mr Vaughan that he consented to is vitiated by unconscionable conduct, because Mr Vaughan took advantage of knowledge that Mr Dlakic was suffering from a severe psychological injury, or alternatively undue influence, Mr Vaughan submitted that he did not know of the illness at the time, and there was not a relationship of influence between himself and Mr Dlakic.

5. [403]

   As I have observed above, it is my understanding of Mr Dlakic’s final position that his case was that he did not consent to the transfer of the share back to Mr Vaughan, and if the Court found to the contrary, Mr Dlakic no longer pursued his case that the transfer is liable to be set aside on the ground that Mr Vaughan took unconscionable advantage of Mr Dlakic’s psychological illness or exercised undue influence. Mr Dlakic’s case is that Mr Vaughan acted unilaterally and without his consent in creating the appearance that Mr Dlakic had transferred the share back to him.

6. [404]

   It will now be appropriate to consider material parts of the oral and affidavit evidence given by the parties.

7. [405]

   Mr Dlakic gave evidence that he started at the firm in 2000 on a small salary of $35,000 per year (Dlakic pars 19 to 22). He said that he managed most of the firm’s litigation files, and that from 2002 to 2010 he appeared in various Courts on an “almost daily basis” (Dlakic par 24), but that he remained on a small salary from 2000 to 2010, when he earned fees of between $400,000 and $1,000,000 on an annual basis for the firm (Dlakic par 34):

8. [406]

   Mr Dlakic said in his affidavit at par 38 that Mr Vaughan represented that he would receive all of the shares in Davlite if he earned $500,000 a year for the firm:

9. [407]

   Mr Dlakic said he relied on these representations to form a belief that, by acquiring all of the shares in Davlite, he would become the legal owner of the Montgomery Street property (Dlakic par 40).

10. [408]

    Mr Dlakic said he remained on a small salary because he understood from representations made by Mr Vaughan that he would one day acquire the legal practice of Johnston Vaughan and the real estate owned by Davlite (Dlakic par 41). Mr Dlakic said further that, based on those representations by Mr Vaughan, he did not seek employment from another firm for a greater salary in line with his experience (Dlakic par 43).

11. [409]

    Mr Dlakic said that, in late 2001 or early 2002, Mr Vaughan transferred to him all of the shares in, and made him company secretary of, Davlite:

12. [410]

    Mr Dlakic said that, at all times from 2002 until he reviewed the ASIC extract for Davlite on 24 March 2017, he believed that he was the sole shareholder in Davlite (Dlakic par 50). Although Mr Dlakic was aware Mr Vaughan was the sole director of Davlite, he said he did not check to see how many shares were in the company (Dlakic par 51). Mr Dlakic said that, although he was a shareholder in Davlite since 2001, he never received a share of any income in Davlite or the rent Davlite earned (Dlakic par 52).

13. [411]

    It must be noted that the Annual Return for Davlite that was signed by Mr Dlakic on 8 March 2002 states in Mr Dlakic’s own handwriting that he held one share in Davlite beneficially.

14. [412]

    Mr Dlakic says that in about August 2012 Mr Vaughan approached him with the ASIC papers he wanted Mr Dlakic to sign:

15. [413]

    Mr Dlakic says there was no proper corporate governance in relation to Davlite. Mr Dlakic provided evidence of the ASIC document number 028231120 dated 23 August 2012, being a Form 484, which I have referred to above in pars 48, 349 and 384. That form attaches an unsigned copy of a document titled: ‘General Meeting of Davlite Pty Limited Held on 23 August 2012 – Minute of Meeting’ (Dlakic [147]). Mr Dlakic denies such a meeting occurred:

16. [414]

    Mr Vaughan denied ever suggesting that Mr Dlakic would own Davlite or the premises out of which the firm practiced in Kogarah (Vaughan 14 March 2018 par 5). Mr Vaughan said it was his intention, even in 2010 when he sold the firm to Mr Dlakic, to keep the property and rent it to Mr Dlakic (Vaughan 14 March 2018 par 5). At par 6 of his 14 March 2018 affidavit Mr Vaughan said:

17. [415]

    The position that Mr Vaughan initially adopted was in his first affidavit made on 20 June 2017, in which he said:

18. [416]

    This evidence is obviously wrong, because Mr Vaughan did not make Mr Dlakic a director of Davlite. Mr Vaughan was at all relevant times the only director of the company. There is no suggestion in the evidence that Davlite was ever managed as if Mr Dlakic was a director entitled to participate in the business of the board of directors of the company. The Court could hardly accept Mr Vaughan’s evidence that he believed that there needed to be two directors in these circumstances.

19. [417]

    Mr Vaughan’s final position was that he intended for Mr Dlakic to be appointed as a director of Davlite because he mistakenly understood that a company needed to have two directors, but that he never intended for Mr Dlakic to be a shareholder of Davlite.

20. [418]

    At par 10 of his 14 March 2018 affidavit, Mr Vaughan explained why Mr Dlakic was to become a director in the company:

21. [419]

    At par 15 of his 14 March 2018 affidavit, Mr Vaughan explained he never intended Mr Dlakic to become a shareholder of Davlite:

22. [420]

    At par 17 of his 14 March 2018 affidavit, Mr Vaughan said he mistakenly stated in certain other affidavits filed in this matter that he intended Mr Dlakic to become a shareholder:

23. [421]

    Thus, Mr Vaughan’s initial position was that he intended to appoint Mr Dlakic as a director and transfer a share in Davlite to him because of the belief that the company needed two directors and two shareholders. In fact, Mr Vaughan did nothing to appoint Mr Dlakic as director, but steps were taken to make Mr Dlakic a shareholder. In his later affidavit, Mr Vaughan attempted to change his position to say that he intended to make Mr Dlakic a director, but not a shareholder.

24. [422]

    Mr Vaughan was cross-examined about his mistakenly stating in his earlier affidavits that he intended Mr Dlakic to become a shareholder. He clarified that he did mistakenly make Mr Dlakic a shareholder of Davlite, it seems because he did not understand that making someone a shareholder would make them a part-owner of the company, but that if Mr Dlakic was a shareholder it was as trustee for Mr Vaughan (T 258-260):

25. [423]

    This evidence of Mr Vaughan’s understanding of how many directors and shareholders were required for Davlite, and what the nature of Mr Dlakic’s involvement was, and his knowledge of that involvement, can best be described as confused. Although in his later affidavit, Mr Vaughan attempted to correct his earlier affidavit and say that he never intended to make Mr Dlakic a shareholder in Davlite, in cross-examination he clearly accepted that he did intend to make Mr Dlakic a shareholder, and that he did so, but he said that he did not intend thereby that Mr Dlakic would effectively gain an interest in the property from which the firm practised. But then, Mr Vaughan asserted that Mr Dlakic “was supposed to be a director, not a shareholder”, before again accepting that Mr Dlakic was a shareholder (but only as trustee for Mr Vaughan).

26. [424]

    Mr Vaughan at pars 20 and 21 of his 14 March 2018 affidavit (and similarly at par 41 of his 20 June 2017 affidavit) says that around 23 August 2012, Mr D’Apice informed him that he saw Davlite on a mortgage application by Mr Dlakic, to which Mr Vaughan said he was shocked because to his mind Mr Dlakic had “nothing to do with the ownership of Davlite”. Mr Vaughan then states the following at pars 22 to 25 in his 14 March 2018 affidavit:

27. [425]

    Mr Vaughan’s response to this evidence in his 20 June 2017 affidavit in reply to Mr Dlakic’s affidavit was limited to denying pars 148 and 149 and not responding to pars 150 and 152.

28. [426]

    In his 14 March 2018 affidavit, Mr Vaughan added:

29. [427]

    Mr Vaughan did not give evidence that a general meeting of shareholders of Davlite was held, or that any notice of such a meeting was given to Mr Dlakic. He did say that he filled in the Form 484. He did not say that he gave Mr Dlakic an opportunity to read whatever documents were put before Mr Dlakic to sign. Mr Vaughan did not give evidence that Mr Dlakic in clear terms expressed his consent to the share in Davlite that he held being transferred to Mr Vaughan. Although Mr Vaughan said that Mr Dlakic signed a document that was put before him, Mr Vaughan has not identified the document, and now says that he cannot recall what the document was. The document that purports to be the minutes of the general meeting of the members of Davlite that was apparently attached by Mr Vaughan to the Form 484 is not signed. Mr Vaughan did not say that the unsigned document that he attached to the form was an unsigned version of the document that Mr Dlakic signed. He did not explain how it could have been that he attached an unsigned version of the document that Mr Dlakic signed, if that is what happened. In the result, the Court cannot make a finding as to the identity of any particular document as having been signed by Mr Dlakic. Consequently, as Mr Dlakic has not conceded that he signed any document, the Court cannot find that he did so. It does not matter whether or not Mr Dlakic did sign a document, because no such document has been identified and produced to the Court. There is not even secondary evidence of the contents of such a document. The Court should not draw an inference that Mr Dlakic in fact signed the purported minutes of the general meeting of the members, and for some unexplained reason Mr Vaughan wrongly attached a draft and not the signed copy. Mr Vaughan has not given evidence that would justify such an inference being drawn.

Ms Ma’s evidence of a conversation with Mr Vaughan

1. [428]

   Ms Ma gave the following evidence relevant to the issue of the ownership of the share in Davlite that was transferred to Mr Dlakic:

2. [429]

   This evidence tends to support a conclusion that Mr Vaughan considered the share that had been transferred to Mr Dlakic as being “his” share, in the sense of being beneficially owned by Mr Dlakic. This conclusion is reinforced by the concept contained in the statement attributed to Mr Vaughan that he required Mr Dlakic “to give his share back to” Mr Vaughan.

Matters relevant to beneficial ownership of share

1. [430]

   A number of matters arose from the evidence that have an objective bearing on the likelihood that Mr Vaughan transferred the share in Davlite to Mr Dlakic beneficially, and whether Mr Dlakic understood that he was the beneficial owner of the share.

2. [431]

   The significance of these matters is clouded by the fact that it was Mr Dlakic’s evidence that from the time of the transfer to some unspecified time during the course of the proceedings Mr Dlakic believed that he was the beneficial owner of both shares in Davlite. He gave that evidence notwithstanding that the Annual return of a company (Form 316) completed by Mr Dlakic on 8 March 2002 recorded the transfer of only one share from Mr Johnston to Mr Dlakic. If Mr Dlakic believed that he was the sole shareholder in Davlite, then Mr Dlakic could have used the shares in Davlite or the Montgomery Street property as security for the loan to buy the firm, or to repay the Vince loan, without needing Mr Vaughan’s consent; he should have been entitled to dividends related to the rent payable by Johnston Vaughan; after Mr Dlakic purchased Johnston Vaughan, Mr Dlakic should not have had to pay rent if he chose not to; and Mr Vaughan would not have retained any interest in Davlite that could be the subject of the gift in favour of Mr Dlakic in Mr Vaughan’s will.

3. [432]

   The significance that the ownership of the shares in Davlite had on these matters would be different if (as was the fact) both Mr Dlakic and Mr Vaughan were the apparent owners of one share in Davlite each.

4. [433]

   At the end of the day, the evidence that emerged in relation to these issues was inconsistent, and I do not consider that the manner in which the parties dealt with these matters during the hearing resolved the inconsistencies.

5. [434]

   On the issue of whether Mr Dlakic believed that he was the owner of the shares in Davlite and accordingly entitled to offer the shares in the company or the property that it owned as security, there was positive evidence that in 2008, 2009 and 2010 Mr Dlakic sought to borrow money on the security of Davlite. Mr Michael Karam was at the time a finance consultant who sought to assist Mr Dlakic to borrow money. He gave evidence that in the latter part of 2008, Mr Dlakic approached him to assist Mr Dlakic to borrow $1,100,000 to buy Johnston Vaughan from Mr Vaughan, under a proposal that was not finally implemented. Mr Karam arranged finance that involved a security over the Montgomery Street property, a property in Ramsgate owned by Mr Dlakic and his brother, and the property owned by Mr Dlakic in Castlereagh Street Sydney.

6. [435]

   Mr Karam’s evidence on this issue is corroborated by an email dated 12 January 2009 from an officer of Westpac to grant Hawkswell, Mr Dlakic’s finance broker, which advised of Westpac’s conditional approval to a number of loans, one of which was described as: “(3) DAVLITE PTY LTD… BBBL – VR $525.0k”.

7. [436]

   Mr Karam gave evidence that, after the loan approval had been obtained, Mr Dlakic said to him in January 2009: “Michael Vaughan does not agree to this arrangement. You know how I was going to give him $1.1 million for the business? He will not let me mortgage Davlite even though I can”.

8. [437]

   Mr Karam also gave evidence that Mr Dlakic spoke to him about arranging a loan against Davlite to pay out the $300,000 debt to Dr and Ms Vince, Mr Karam could not arrange finance without Mr Dlakic using Davlite as security. Mr Dlakic informed him that Mr Vaughan would not agree to Davlite being used as security.

9. [438]

   These events are difficult to understand if Mr Dlakic believed that he was the sole owner of the shares in Davlite. They are intelligible if Mr Vaughan retained one of two shares (which he did).

10. [439]

    Mr Dlakic was asked why he needed permission from Mr Vaughan to mortgage Davlite, and if that request indicates that he believed Mr Vaughan owned Davlite (T 156):

11. [440]

    Mr Dlakic’s case was that, after he acquired Johnston Vaughan from Mr Vaughan, he entered into leases of the Montgomery Street property, and continued to pay rent even after the buyback agreement. He never asked for any dividends from Davlite.

12. [441]

    Mr Dlakic was asked in cross-examination and denied that the basis on which he paid rent to Mr Vaughan following the purchase of Johnston Vaughan was that he understood Davlite was Mr Vaughan’s company (T 155):

13. [442]

    The significance of Mr Dlakic’s payment of rent to Davlite without claiming any entitlement to share in the benefit of the rent must be balanced against the fact that Mr Vaughan denied that Mr Dlakic continued to pay rent to Davlite after 2010 (T 227):

14. [443]

    Mr Dlakic claimed that he relied on representations by Mr Vaughan that he would become the owner of Davlite after Mr Vaughan’s death. He said that in 2016, he read Mr Vaughan’s executed will which was given to him by Ms Ma, and at that time learned that Mr Vaughan had left the shares in Davlite to his daughter. This evidence is also inexplicable if Mr Dlakic believed that he already was the beneficial owner of both shares in Davlite. Mr Dlakic’s position is more understandable if Mr Vaughan continued to be the owner of one of the two shares.

15. [444]

    Mr Vaughan denied that he represented to Mr Dlakic at any time from 2000 onwards that he would become the owner of Davlite after his death.

Consideration

1. [445]

   There is no evidence that the share in Davlite originally owned by Mr Johnston was effectively transferred to Mr Dlakic in accordance with the requirements of the Corporations Act at the time, by means of the execution of a share transfer that was approved by Mr Vaughan as the sole director of Davlite and entered into the company’s register of members.

2. [446]

   However, in the manner that I have discussed above, the effect of the Annual Return of Davlite lodged by Mr Dlakic and the ASIC Current & Historical Organisation Extract is that there is prima facie evidence that Mr Dlakic became the beneficial holder of one share in Davlite.

3. [447]

   In his evidence, Mr Vaughan accepted that a share in Davlite was transferred to Mr Dlakic, although Mr Vaughan asserted that it was not his “intention” that Mr Dlakic would be the beneficial owner of the share, and he was to hold the share on trust for Mr Vaughan. Mr Vaughan’s evidence was confused and inconsistent about whether he in fact had agreed that a share in Davlite would be transferred to Mr Dlakic, or whether he was to be appointed a director.

4. [448]

   I do not regard the oral evidence of either party to be reliable in so far as the evidence is given as to precise conversations that occurred at the time of the transfer.

5. [449]

   I regard the contents of the Annual Return lodged by Mr Dlakic as having significance going beyond the evidentiary effect that it is given as a public document. It was prepared relatively contemporaneously with the events relevant to the transfer of the share, and is likely to have been completed by Mr Dlakic in a way that conformed to his genuine understanding of the arrangement that had been reached between him and Mr Vaughan. Mr Dlakic completed the form in a way that described him as being the beneficial owner of the share. It was not suggested to Mr Dlakic that he dishonestly included the reference to beneficial ownership.

6. [450]

   There are a number of aspects of the evidence that are capable of introducing doubt concerning the prima facie position, but I have come to the view that they are not sufficient to displace that result.

7. [451]

   I am not persuaded by Mr Vaughan’s confused explanation either that he really intended that Mr Dlakic would be made a director rather than become a shareholder, or that he thought that the applicable company law principles required that Davlite have at least two directors and two shareholders. First, I do not have sufficient confidence in the reliability of Mr Vaughan’s evidence, and consider that it is most likely to be a reconstruction. I do not accept that Mr Dlakic would have produced the Annual Return consistently with him becoming a shareholder, if the real agreement between him and Mr Vaughan was that he would be made a director. There is no explanation for why Mr Vaughan only allowed Mr Dlakic to become a shareholder, if he in fact thought that he needed to appoint an additional director as well is an additional shareholder. More importantly, even if Mr Vaughan was mistaken about the legal requirements, I do not accept that he would have simply made Mr Dlakic a shareholder, if the real agreement was that Mr Dlakic would hold the share on trust for Mr Vaughan, without taking appropriate steps to ensure that the creation of the trust was effectively documented. Whatever the level of legal competence the Court may assume Mr Vaughan had, he clearly had the competence to establish a successful law practice. He must have understood that to simply cause a share in Davlite to be transferred to Mr Dlakic would create the appearance that Mr Dlakic held the share beneficially. Mr Vaughan did not ensure that there was any documentary proof at all that Mr Dlakic held the share on trust for him. I do not accept that Mr Vaughan was so legally naive that he did not understand the need to document the creation of the trust if that is what he intended to achieve.

8. [452]

   On the other hand, I accept that it was an unusual course for Mr Vaughan to have taken to have transferred one of two shares in Davlite to Mr Dlakic relatively soon after Mr Dlakic commenced his employment with Johnston Vaughan.

9. [453]

   That consideration is, however, balanced by the evidence that Mr Dlakic continued to work for Mr Vaughan for many years at a relatively low salary that is consistent with Mr Dlakic having accepted a salary sacrifice.

10. [454]

    Mr Dlakic’s evidence that he thought for many years that he was the sole shareholder in Davlite is also strange, particularly as he completed the Annual Return in his own handwriting and that document recorded that he and Mr Vaughan were the holders of single shares in Davlite.

11. [455]

    Mr Dlakic’s belief that he was the sole shareholder in Davlite also does not sit comfortably with the fact that Davlite was paid rent by the firm, including for periods when Mr Dlakic was the principal of the firm, and Mr Dlakic did not ever receive any share of the rent paid through dividends, and he did not pursue his entitlement to receive the profit from Davlite’s ownership of the property from which the firm’s practice was conducted.

12. [456]

    Mr Dlakic’s evidence concerning an understanding that the property would be left to him in Mr Vaughan’s will is also not consistent with Mr Dlakic understanding that he was already the beneficial owner of both of the issued shares in Davlite, which was the owner of the property. A belief on Mr Dlakic’s part that he would receive full ownership of the property through Mr Vaughan’s will is to an extent consistent with Mr Dlakic understanding that he was the beneficial holder of one of two shares in Davlite, as that would leave room for Mr Dlakic to receive Mr Vaughan’s share through his will.

13. [457]

    Although the aspects of Mr Dlakic’s evidence that I have just considered introduce significant doubt, I consider the effect of Mr Vaughan’s inability to explain in a clear and persuasive way why it was that Mr Dlakic held the share in Davlite that was transferred to him on trust for Mr Vaughan is that the prima facie position that Mr Dlakic held that share beneficially has not been displaced.

14. [458]

    The best reconciliation of all of the conflicting evidence that has been given to the Court that I can derive is that Mr Dlakic’s evidence that he believed that all of the shares in Davlite had been transferred to him was an error of recollection, perhaps affected by his psychological condition. Mr Dlakic must have understood that only one share had been transferred to him when he prepared the Annual return that reflected the transfer of the single share to him. A belief that he only held one of two shares would be consistent with his understanding that he could not mortgage the shares in Davlite or the Montgomery Street property without Mr Vaughan’s consent, and it would leave room for Mr Dlakic’s belief that there remained scope for him to acquire full ownership of Davlite through Mr Vaughan’s will. The terms of the Annual return and the evidence of Mr Dlakic’s attempts to raise finance on the security of Davlite provide evidence that Mr Dlakic believed that he was the beneficial owner of one share in the company. While there is force in Mr Vaughan’s claim that it would not have been sensible for him to transfer one of the two shares in Davlite to a junior employed solicitor, that is exactly what he did do. I do not place weight on Mr Vaughan’s confused and inconsistent stated reasons for transferring the share to Mr Dlakic. Mr Vaughan may well have intended that Mr Dlakic would hold the share on trust for him, but I find that he did not convey that intention to Mr Dlakic, and in fact caused Mr Dlakic to believe that he held the share beneficially. The most likely reality is that Mr Vaughan induced Mr Dlakic to continue to work for a relatively low salary because of Mr Dlakic’s belief that he would ultimately receive the practice of Johnston Vaughan, one aspect of which was his belief that he already beneficially owned one of the shares in Davlite. Accordingly, Mr Vaughan will not now be heard to say that the legal position was that Mr Dlakic held the share on trust for him.

15. [459]

    It is therefore necessary to address the question whether the prima facie position that Mr Dlakic’s interest in his share was validly transferred to Mr Vaughan has been displaced.

16. [460]

    Unlike the position concerning the transfer of the share to Mr Dlakic, there is some positive evidence of the steps that were actually taken in relation to the purported transfer of the share to Mr Vaughan.

17. [461]

    Mr Vaughan gave evidence that he filled out the Change to company details (Form 484) and lodged it with ASIC. The evidence justifies a finding, which I make, that the general meeting of members of Davlite that was the purported subject of the unsigned minutes did not take place. Mr Vaughan did not give evidence of Mr Dlakic orally agreeing to his share being transferred to Mr Vaughan. According to Mr Vaughan’s evidence, the only agreement that Mr Dlakic made was that he would not attempt to grant a mortgage over the shares in Davlite again. Mr Vaughan did not give evidence that Mr Dlakic signed a share transfer, or even that he signed the purported minutes of the general meeting of members of Davlite, an unsigned version of which was attached to the Change to company details form.

18. [462]

    Although Mr Dlakic gave evidence that he could not remember signing the draft minutes of the general meeting of members of Davlite, he did give the evidence that I have set out above that in response to Mr Vaughan’s insistence he did sign a document that “may have been ASIC papers” that were intended to “take [Mr Dlakic] off as shareholder and secretary of Davlite”.

19. [463]

    This evidence gives rise to the question of whether the Court should find that the prima face position that Mr Dlakic’s share in Davlite was effectively transferred to Mr Vaughan has not been displaced because Mr Dlakic gave evidence that he signed a document that was intended to have the effect, even though there is no evidence to establish the content of any document signed by Mr Dlakic; Mr Vaughan has not given such evidence when he had the opportunity to do so; and no explanation has been given as to why the unsigned document that purported to be the minutes of a general meeting of the members of Davlite that did not take place was in fact unsigned.

20. [464]

    Although the necessary analysis of the public documents held by ASIC is complicated, I have explained above at pars 339 to 343 that it is only the ASIC historical extract for Davlite prepared on 20 January 2017 that records Mr Vaughan as being the holder of the two shares in Davlite. The circumstances in which ASIC recorded that information are not known. The Change to company details (Form 484) signed by Mr Vaughan on 23 August 2012 stated in Part C4 that it was Mr Dlakic that held the two shares in Davlite (as I have explained above at pars 386 and 387). It was only the misconceived and unexecuted minutes (set out at par 351 above) that in a manner which is not admissible as part of a public document contains an assertion: “That the share held by Amil Dlakic is transferred to Michael John Vaughan”. That statement was not an effective transfer of the share from Mr Dlakic to Mr Vaughan as, putting form aside, it was not executed by Mr Dlakic. Mr Vaughan did not provide any consideration for the transfer, so equity would not specifically enforce any failed attempt to effect the transfer from Mr Dlakic to Mr Vaughan.

21. [465]

    Notwithstanding the difficulty in making sense of all of the evidence, I have come to the view that the prima facie effect of the record represented by the ASIC historical extract dated 20 January 2007 is overcome by the positive evidence (as well as the absence of expected evidence), which causes me to conclude that beneficial ownership of the share in Davlite owned by Mr Dlakic was not effectively transferred to Mr Vaughan. The only evidence of what transpired on the occasion when Mr Vaughan claims that the share was transferred to him does not prove that there was a valid transfer. Rather, Mr Vaughan took various steps that were ineffective, and because of the absence of an enforceable promise by Mr Dlakic to transfer the share, supported by consideration, Mr Dlakic remains in equity the owner of the share.

Mr Vaughan's claims against Mr Dlakic

1. [466]

   On about 19 October 2016, Mr Vaughan commenced proceedings in the Local Court of New South Wales at Sutherland against Mr Dlakic for a claim of $46,520.65.

2. [467]

   The claim was based on a deed of indemnity dated 20 March 2012 in which, according to Mr Vaughan, Mr Dlakic agreed to indemnify Mr Vaughan in respect of costs arising out of a matter concerning a Ms Lungo, a former client of Johnston Vaughan in certain proceedings. It is sufficient to say that the statement of claim alleged that Mr Dlakic had failed to pay an amount of $44,735.95, which Mr Vaughan had then been required to pay. Mr Vaughan sought to be indemnified for that amount by Mr Dlakic.

3. [468]

   In due course, an order was made for the Local Court proceedings to be transferred to this Court.

4. [469]

   On 19 December 2016, Mr Vaughan filed in this Court a cross claim in the proceedings. In the cross claim, Mr Vaughan repeated his claim to be indemnified for $44,735.59, and he added a claim for $68,000, which he alleged Mr Dlakic had "diverted from collection" by Mr Vaughan between February and June 2015.

5. [470]

   The Court was advised by Mr Vaughan's final written submission (pars 121 and 122) that Mr Vaughan no longer pursues either of these claims.

Conclusion

1. [471]

   The position that has been reached is that Mr Dlakic has succeeded in his claims that in principle he is entitled to an order setting aside the buyback agreement and that he is entitled to be reinstated as the holder of one of the two shares in Davlite. He has failed in his two negligence actions against Mr Vaughan, so that in due course orders will be made dismissing those aspects of his claim.

2. [472]

   It will be necessary for the parties and the Court to address the issue of the orders that are appropriate to be made in respect of those claims for which Mr Dlakic has been successful.

3. [473]

   In relation to the setting aside of the buyback agreement, the Court should not simply make an order to that effect and ignore the consequences. The parties will be given an opportunity to confer about the matter, and in the absence of agreement, to make further submissions to the Court as to the orders that are appropriate.

4. [474]

   I have discussed on a number of occasions the apparent significance of the inadequate response by Mr Vaughan to the notice to produce that was served upon him by Mr Dlakic. I have taken the view that the absence of adequate documentation concerning the affairs of Johnston Vaughan has had serious consequences to the conduct of these proceedings. Primarily, it has impaired Mr Dlakic’s ability to make considered choices about the relief that he should pursue. It has also impaired the capacity of the Court to make case management orders for the just, quick and cheap completion of these proceedings. As to this last matter, the Court would hesitate simply to make an order that an accounting take place, without the Court having an adequate understanding of the practical consequences and being able to facilitate an appropriate and cost-effective determination of the remaining issues.

5. [475]

   I should make it clear that I do not contemplate that the parties will be permitted to lead further evidence where that evidence could have and should have been led at the hearing, to enable them to remedy any deficiencies in the cases that they have presented. On the other hand, I am satisfied that it will not be appropriate for the Court simply to make case management orders and then leave the parties to pursue the attempt on Mr Dlakic’s part, that has failed thus far, to gather the documents that ought to exist concerning the financial affairs of Johnston Vaughan at relevant times. That is an exercise that should take place first, and should be facilitated by the full force of the Court to ensure that all available documents are produced in a timely and complete fashion. Only then will the Court and the parties have some chance to determine how these proceedings should be brought to a proper conclusion.

6. [476]

   Mr Dlakic made an application for the Court to make an order at this stage of the proceedings that Mr Vaughan pay the costs of the accounting that will be necessary, on the basis that it was his failure to comply with the notice to produce that has prevented the accounting effectively being undertaken during the hearing that has now been completed. It is premature for the Court to consider the issue of costs. Mr Vaughan is clearly at risk of an adverse costs order on this issue, but the evidence does not yet establish positively the extent to which Mr Vaughan’s response to the notice to produce was inadequate, or what the consequences have been. It is also likely that a separate accounting exercise would have been necessary in any event.

7. [477]

   It will also be necessary for Mr Dlakic to address the observations that I have made above concerning practical matters connected with his application for an order that the register of members of Davlite be rectified, in particular the fact that the register has not been produced to the Court so the Court does not know whether an order for rectification is necessary, or what form it should take.

8. [478]

   The parties also do not appear to have addressed the consequences of the Court making orders that will have the effect that Mr Dlakic and Mr Vaughan will hold one share in Davlite each. It seems to be inevitable that the consequence will be that there will be a deadlock between the shareholders, and the consequences to the management of the company will depend upon the terms of the Constitution that are not before the Court.

9. [479]

   Though the view could be taken that the consequences of such a deadlock are not matters raised by the pleadings in the present case, it might be material to the entitlement of the proprietor of Johnston Vaughan to conduct the practice from the Montgomery Street property, which is a matter that is germane to the dispute.

10. [480]

    The issue of the cost of the proceedings races complex questions, and a decision will be necessary as to whether those questions should be addressed now or at the conclusion of the proceedings.

11. [481]

    When I deliver these reasons for judgment, I will discuss with the parties the appropriate short-term orders that should be made to enable the parties to consider these reasons, to confer, and to determine what orders should be made now for the future conduct of the proceedings.

12. [482]

    It will be necessary for the parties to arrange with my associate an appropriate time for the making of the necessary orders.