Australian Careers Institute Pty Ltd v Australian Institute of Fitness Pty Ltd

1. [1]

   BATHURST CJ: I have had the advantage of reading the judgment of Sackville AJA in draft. His Honour identified the four issues which arise on this appeal as follows (for convenience I shall use the same abbreviations as those used by his Honour in his judgment):

2. [2]

   I agree with the conclusions reached by Sackville AJA on each of those issues, his orders disposing of the appeal and with his reasons on Issues 2-4. Subject to what I have written below, I also agree with his Honour’s reasons on Issue 1.

3. [3]

   It is well established that the fiduciary duties owed by a person to a company of which he or she is a director include an obligation not to place himself (or herself) in a position of conflict where there is a real or substantial possibility of conflict between the director’s interests and the director’s duty to the company: see, for example, Furs Limited v Tomkies (1936) 54 CLR 583; [1936] HCA 3 at 589–590, 592; Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 at 3; Pilmer v Duke Group Ltd (In Liq) (2001) 207 CLR 165; [2001] HCA 31 (Pilmer) at [78]–[79]; Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36 at 198; Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17; (2011) 278 ALR 291 at [68]–[69]; Howard v Federal Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21 (Howard) at [33]–[34], [59], [91], [110]–[111]; Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 (Grimaldi) at [179].

4. [4]

   However, as was pointed out by the majority in Pilmer at [79] and by Hayne and Crennan JJ in Howard, different minds may reach different conclusions as to the presence or absence of a real possibility of conflict between duty and interest or duty and duty and the doctrine cannot be inexorably applied without regard to the particular circumstances of the relationship: Howard at [60] and the cases there cited. Thus, it is not inevitably the case that a director who occupies board positions in competing companies is in breach of his or her fiduciary obligations to one or the other of them merely by reason of that fact: Bell v Lever Brothers Ltd [1932] AC 161 at 195.

5. [5]

   As was made clear in Howard, it is necessary to give close attention to the duties, interests and alleged manner of conflict said to arise in any case: at [34], [61], [91]. As Gageler J pointed out in Howard, the identification of the subject matter over which the fiduciary obligation extends requires identification of the undertaking in which the company of which the fiduciary is a director is involved: at [111]; see also Grimaldi at [177]; Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384; [1929] HCA 24 at 408.

6. [6]

   The nature of the activities of AIF National can be found first in the Shareholders Agreement of 24 July 2001. One of the parties to that agreement was a company related to Mr Hornsey.

7. [7]

   AIF National was in fact incorporated following execution of the Shareholders Agreement and AIVT, a company also associated with Mr Hornsey, became a shareholder. That company, as Sackville AJA has pointed out, operated a fitness training business in Victoria and Tasmania. The other shareholders operated separate but similar businesses in other states and territories in Australia.

8. [8]

   Recital A to the Shareholders Agreement provided that AIF National was to be formed to act as a national body to market and advance the position of each shareholder in its respective territory.

9. [9]

   The objective of AIF National and the obligations of the various shareholders were set out in cl 2 of the Shareholders Agreement. It was in the following terms:

10. [10]

    Clause 8 of the Shareholders Agreement dealt with funding. Clauses 8(1) and 8(2) are in the following terms:

11. [11]

    Clause 8(4) emphasised the importance of compliance with these obligations. It provided as follows:

12. [12]

    Clause 8(5) provided for the compulsory transfer of a shareholder’s shares in the event of non-compliance with the funding obligations.

13. [13]

    Clause 9 imposed an obligation to provide education and training services in the fitness industry to the highest standard, to promote the shareholders’ affiliation with AIF National and to not do anything to damage the goodwill of that company or its value or standing.

14. [14]

    Clause 10(1) contained a restraint clause in the following terms:

15. [15]

    Clause 26 provided that the relationship between the parties to the agreement was not one of partnership or agency.

16. [16]

    In the circumstances, the undertaking of AIF National broadly can be described as the business of promoting the activities of its various shareholders in the fitness, education and training area. The activities were to be funded by the shareholders and each shareholder agreed to protect the business of AIF National.

17. [17]

    The Shareholders Agreement was varied on 7 May 2010. The following additional provision was included:

18. [18]

    On 17 December 2010, AIF (Vic/Tas), a company related to AIVT and Mr Hornsey, entered into a Licence Agreement with AIF National. The recitals, so far as relevant, were in the following terms:

19. [19]

    Clause 5 of the Licence Agreement dealt with the obligation of the licensee to provide the services, defined as the delivery of courses, assessments and the issuing of qualifications for fitness, business and massage. Clauses 5.1 and 5.2 were in the following terms:

20. [20]

    Clause 6 dealt with the payment of fees. Clauses 6.1 and 6.2 provided as follows:

21. [21]

    Schedule 2, as it originally appeared in the Licence Agreement, provided for a fixed monthly licence fee, a fixed monthly product development fee and a marketing promotion fee of 1.6% of the income earned by the licensee for the month. As Sackville AJA has pointed out, that fee was varied in a manner which, it may be inferred, was unfavourable to AIF (Vic/Tas). The resolution varying the fee provided that one quarter of AIF National’s annual budget was to be shared equally whilst three-quarters was to be shared proportionally by the licensees on the basis of their estimated annual budgeted revenue, adjusted when audited figures became available.

22. [22]

    Clause 10 of the Licence Agreement imposed various obligations on AIF National. It provided as follows:

23. [23]

    The other shareholders of AIF National or their nominees entered into similar licence agreements.

24. [24]

    It can be seen that, at least by the time of the Licence Agreement, the business or undertaking of AIF National involved taking steps to ensure it remained registered as a national training organisation, to license its shareholders and their nominees, to provide services in accordance with AIF National’s registered training organisation accreditation and to meet the obligations contained in cl 10 to assist the licensees in carrying on their business.

25. [25]

    The fee payable for the services came exclusively from the shareholders or their nominee licensees and needed to be at least sufficient to enable AIF National to comply with its obligations under the agreement (cl 10.1.13). Further, although the fee was varied, it was at all times based at least in part on the revenue derived by the various licensees from their carrying on business in their respective territories. Thus, any diversion of business of a licensee affecting its revenue could at least possibly have an effect on the revenue received by AIF National. This is because although the amended funding arrangements effectively provided for an amount sufficient to meet the whole of AIF National’s annual budget, a diminution of the revenue of one licensee and the consequent increased burden on the others could at least potentially lead to the result that the funds made available would not be sufficient to meet AIF National’s budget, due to the inability of one or other of the licensees to meet its obligations. At the very least it did not seem to me to be in the contemplation of the parties that interests associated with one or other of the licensees would set up a competing business to that carried on pursuant to the licence agreement. Although cl 5.2 of the Licence Agreement only contains a restraint on the licensee, it would seem to me surprising that the parties contemplated that it could be subverted by having a similar business carried on by an associated company.

26. [26]

    In these circumstances, it seems to me that the actions by Mr Hornsey in setting up the rival business were actions which could at least possibly adversely affect AIF National in the conduct of its own business. This was so regardless of the manner in which the competing business was carried on but particularly, as Sackville AJA has pointed out at [159], where both the business of AIF (Vic/Tas) and the competing business were carried on by overlapping staff with dual roles and ran the risk of redirecting customers of AIF (Vic/Tas) to the competing business.

27. [27]

    In those circumstances, it seems to me that Mr Hornsey, in establishing the competing business and operating it in the fashion referred to by Sackville AJA, placed himself in the position where his duty to AIF National conflicted with his interests in establishing and promoting the new business.

28. [28]

    For these reasons I respectfully agree with the conclusions of Sackville AJA on the first issue in the appeal.

29. [29]

    MEAGHER JA: I agree with the reasons and proposed orders of Sackville AJA.

30. [30]

    SACKVILLE AJA: This is an appeal from a decision of a Judge of the Equity Division (Sackar J). [1] His Honour heard three matters together. However, the appeal relates to only one of these matters, described by the parties as the “Sage Proceedings”.

31. [31]

    The respondent (AIF National) commenced the Sage Proceedings in the New South Wales Registry of the Federal Court on 9 July 2014. [2] Orders were made by the Federal Court on 11 September 2014 pursuant to s 5(4) of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth) transferring the Sage Proceedings to the Supreme Court. The primary Judge heard the Sage Proceedings together with the other two proceedings (designated as the “Licence Fee Proceedings” and the “Oppression Proceedings”, respectively).

32. [32]

    AIF National joined six defendants to the Sage Proceedings and succeeded in obtaining orders against three defendants, namely the first appellant (ACI), the second appellant (Sage) and the third appellant (Mr Hornsey). The remaining three defendants, against whom no orders were made, are not parties to the appeal.

33. [33]

    The primary Judge found that Mr Hornsey breached his duties as a director of AIF National by setting up and promoting a fitness education business known as the Sage Institute of Fitness, which (on his Honour’s findings) directly competed with the business conducted by AIF National. His Honour made the following declarations (using the original numbering):

34. [34]

    The primary Judge did not make a declaration that Mr Hornsey acted dishonestly or fraudulently. Nor did he make a declaration that Mr Hornsey contravened the duties imposed on directors by the Corporations Act 2001 (Cth) (Corporations Act). However, the declaration in par 10 of the orders implies not only that Mr Hornsey breached his fiduciary duties to AIF National, but that he also contravened specified provisions of the Corporations Act.

35. [35]

    On the basis of the finding that Mr Hornsey breached his duties as a director of AIF National, his Honour made orders restraining Mr Hornsey from acting as a director of AIF National for as long as he retained an interest in the Sage Institute of Fitness. This Court was informed that after the primary Judge made the restraining orders, Mr Hornsey resigned as a director of AIF National.

36. [36]

    In substance, the appellants raise four issues on the appeal. They contend that the primary Judge erred in finding that:

Preliminary Observation

1. [37]

   The primary Judge described the issues in the proceedings before him as “intertwined”. [3] For this reason, his Honour dealt with some matters relevant to the Sage Proceedings in the course of resolving issues arising in the Licence Fee Proceedings and the Oppression Proceedings. The interrelationship of the issues necessarily precluded his Honour from setting out in chronological order events exclusively referable to the Sage Proceedings.

2. [38]

   Counsel appearing on the appeal did their best to isolate the factual issues relevant only to the issues raised by the Amended Notice of Appeal. However, it is quite possible that some matters that influenced his Honour in the Sage Proceedings were not identified or referred to in argument on the appeal because they had been addressed in the context of the Licence Fee Proceedings or the Oppression Proceedings. If there are such matters, they have not been taken into account in this judgment.

AIF National’s Pleaded Case

1. [39]

   AIF National pleaded in the Amended Statement of Claim (ASC) that from 2013 ACI promoted and conducted a business using the name “Sage Institute of Fitness”, which provided fitness-related education and training services in Victoria (par 34). To the extent that the business involved the provision of these services in Australia, ACI operated “in competition with [AIF National’s] business as carried on through its regional licensees” (par 35). [4]

2. [40]

   The ASC alleged that Mr Hornsey as the director of ACI caused ACI to become approved as a Registered Training Organisation (RTO) in relation to fitness-related training and education services and to deliver such services (par 117). In doing so, Mr Hornsey:

3. [41]

   Mr Hornsey’s failure to act in AIF National’s best interests:

4. [42]

   The ASC pleaded that ACI:

5. [43]

   The relief sought against Mr Hornsey included:

6. [44]

   The relief sought against Sage included:

7. [45]

   In addition to a claim founded on Mr Hornsey’s alleged breaches of fiduciary and statutory duties, AIF National originally pleaded that ACI had engaged in misleading or deceptive conduct in contravention of the Australian Consumer Law. However, the misleading or deceptive conduct claim was subsequently withdrawn and thus was not an issue before the primary Judge.

Background facts

1. [46]

   The origins of AIF National lie in a proposal made in late 2000 that various fitness businesses conducted in various parts of Australia should:

2. [47]

   Australian Institute (Vic & Tas) Pty Ltd (AIVT) was incorporated on 2 February 2001. The shareholders and directors of AIVT at all material times were Mr Hornsey and Mr Wade. Mr Wade was not a party to the Sage Proceedings.

3. [48]

   At some stage not disclosed in the appeal papers, AIVT became a wholly owned subsidiary of The Institute Holdings Pty Ltd (Holdings). The shares in Holdings were held by companies associated with Mr Hornsey (42.5 per cent), Mr Wade (42.5 per cent) and Mr Tuchtan (15 per cent). [7]

4. [49]

   On 24 July 2001, six corporations described as “Shareholders” and fourteen individuals described as “Principals” entered into a Shareholders Agreement. One of the parties was Front Desk System Pty Ltd, presumably a corporation associated with Mr Hornsey. Mr Hornsey himself was also a party to the Shareholders Agreement.

5. [50]

   The Recitals to the Shareholders Agreement provided as follows:

6. [51]

   Clause 2 of the Shareholders Agreement dealt with the objectives of the shareholders as follows:

7. [52]

   AIF National was incorporated on 13 September 2001. The original shareholders were the six corporations which had executed the Shareholders Agreement, including AIVT. Mr Hornsey was one of the original directors of AIF National and retained that position until his resignation following the orders made by the primary Judge.

8. [53]

   The six original shareholders in AIF National later became five, each of which held 20 per cent of the shares in the company. The five shareholders at the material times were:

9. [54]

   Australian Institute of Fitness (Vic & Tas) Pty Ltd (AIF (Vic/Tas)) was incorporated on 11 February 2005. AIF (Vic/Tas), like AIVT, was a wholly owned subsidiary of Holdings. The directors of AIF (Vic/Tas) at all material times were Mr Hornsey, Mr Wade and Ms Tuchtan. As has been noted, Ms Tuchtan was a defendant in the Sage Proceedings, but no orders were made against her and she is not a party to the appeal.

10. [55]

    Under the applicable legislation, an entity had to be a RTO in order to be able to provide particular kinds of vocational training and to be eligible for certain government grants. [10] Prior to 2011, AIF National was an RTO with the National Audit and Registration Authority. From about July 2011, AIF National was an RTO with the Australian Skills Quality Authority, and operated under the National Vocational Education and Training Regulator Act 2001 (Cth).

11. [56]

    On 5 September 2006, the board of AIF National resolved that a Memorandum of Understanding should be drafted, the terms of which should be reflected in the constitution of the corporation and the licensing agreements to be executed by shareholders. The resolution recorded in “principle agreement” eight points, including the following:

12. [57]

    On 6 September 2007, the board of AIF National discussed the constitution of the company and the proposed licensing agreements. The minutes recorded the “Resolution/Action” as “No provision for non-compete”.

13. [58]

    ACI was incorporated on 15 January 2008. Like AIVT and AIF (Vic/Tas), ACI was a wholly owned subsidiary of Holdings and had the same directors as AIVT and AIF (Vic/Tas). From 2008, ACI and other “Sage entities” (as the Primary Judge described them) operated a business providing educational and training services initially in areas other than fitness (such as massage, childcare, aged care and certain business courses). [11]

14. [59]

    On 6 June 2010, the Shareholders Agreement was varied by adding an additional clause (cl 29), which provided that:

15. [60]

    On 7 May 2010, AIF National entered into separate Regional Licensing Agreements (RLAs) with AIF (NSW), AIF (Qld), AIF (WA) and AIF (SA/NT).

16. [61]

    On about 24 August 2010, AIF National and AIF (Vic/Tas) entered into a Memorandum of Understanding (2010 MOU). The 2010 MOU recorded that AIF (Vic/Tas) was a company that undertook training and assessment services on behalf of AIF National in Victoria. The 2010 MOU also recorded that AIF National had agreed to allow AIF (Vic/Tas) to deliver services under a “Skills for Victoria contract” and to pay AIF (Vic/Tas) for the delivery of those services.

17. [62]

    In anticipation of AIF (Vic/Tas) executing an RLA with AIF National, the CEO of AIF National wrote to Mr Hornsey on 10 December 2010. The letter stated that in consideration of AIF (Vic/Tas) entering into the RLA, and in accordance with cl 5.10 of the (as yet unexecuted) RLA, [12] AIF National consented to Mr Hornsey and Ms Tuchtan engaging in other business during normal office hours.

18. [63]

    On 17 December 2010, AIF National entered into an RLA with AIF (Vic/Tas), on substantially the same terms as the RLAs between AIF National and the other licensees. The RLA recorded the “Background” as follows:

19. [64]

    Clause 5.10 of the RLA provided as follows:

20. [65]

    Clause 6.1 of the RLA provided that AIF (Vic/Tas) had to pay AIF National the fees specified in Schedule 2. However, cl 6.2 permitted AIF National to vary the fees payable if 75 per cent of the board of AIF National agreed. If the fees were varied, AIF (Vic/Tas) was obliged to pay the new fees (cl 6.3). I refer later to other provisions of the RLA. [13]

21. [66]

    On 3 February 2011, Mr Hornsey and the CEO of AIF National signed a document by which AIVT nominated AIF (Vic/Tas) to perform the “services” under the RLA.

22. [67]

    On 23 May 2012, ACI, which had previously provided courses only in areas other than fitness training, registered “fitness” among its services eligible for RTO accreditation. [14] On 25 October 2012, Sage was incorporated.

23. [68]

    On 19 November 2012, ACI registered the trademark “Sage Institute of Fitness”. It was about this time that disagreements emerged between Mr Hornsey and the other directors of AIF National concerning the appropriate mechanism for calculating licence fees payable under the RLAs.

24. [69]

    On 26 November 2012, the board of AIF National determined, by a special majority of 75 per cent, the formula for the monthly fees payable by each licensee pursuant to cl 6 of the RLA. In substance, a quarter of AIF National’s estimated annual budget was to be shared equally among all the licensees, while three quarters of the estimated budget was to be shared proportionally by the licensees on the basis of their respective estimated budget revenues. The formula contemplated that adjustments would be made to the provisional fees paid by the licensees when audited figures became available after the end of the financial year. According to the resolution, AIF (Vic/Tas) was liable to pay $74,065 in monthly fees, out of AIF National’s total monthly fees of $155,729.

25. [70]

    The effect of this resolution as the appellants accepted, was that if the revenue derived by AIF (Vic/Tas) decreased during the budget period, for example because its customers were diverted to ACI, AIF (Vic/Tas) would receive a credit at the end of the financial year. The other licensees would then be required to make up the shortfall in AIF National’s budget.

26. [71]

    ACI commenced advertising the Sage Institute of Fitness in Victoria in about November or December 2013. The promotional activities included a website, radio announcements and a Facebook page. [15] AIF National became aware of the advertising by about 15 January 2014. [16]

27. [72]

    Students began enrolling in Sage Institute of Fitness courses in early 2014. The courses trained participants to become accredited as personal trainers.

28. [73]

    In late 2014, ACI began advertising the Sage Institute of Fitness in States other than Victoria.

29. [74]

    On 11 December 2014, Rein J dismissed an application by AIF National for an interlocutory injunction to restrain ACI from advertising or promoting the Sage Institute of Fitness.

The Agreements

1. [75]

   I have already reproduced the Recitals to the Shareholders Agreement, as well as cl 2, which set out the objectives of the shareholders. [17] I refer below to other relevant provisions of the Shareholders Agreement.

2. [76]

   Under the Shareholders Agreement, each shareholder was entitled to appoint one director (cl 4(1)). The term “shareholders” was defined to mean “the entities holding shares in AIF National from time to time” (cl 1(1)). Mr Hornsey was expressly named as one of the original directors of AIF National (cl 4(2)).

3. [77]

   All decisions of the board or of shareholders in general meeting were to be made by absolute majority vote (cl 5(1)).

4. [78]

   Clause 8 of the Shareholders Agreement dealt with the funding of AIF National as follows:

5. [79]

   Clause 1(1) of the Shareholders Agreement defined the term “Business” to mean “the business referred to in clause 2(1)”. As has been seen, cl 2(1) did not use the word “business”, but referred to “the interests of shareholders as leading businesses dedicated to education and training in the fitness industry”. However, cl 2(2)(a), which requires its shareholders to use their best endeavours to “ensure that the company [AIF National] successfully carries on the business” appears to imply that AIF would carry on “the business”.

6. [80]

   Clause 9 of the Shareholders Agreement relevantly provided as follows:

7. [81]

   Clause 10(1) of the Shareholders Agreement contained the following covenant:

8. [82]

   Clause 12(3) obliged each shareholder and principal to use any confidential information of another shareholder or of AIF National “only for the purposes of the business” and, subject to specified exceptions, to refrain from disclosing the information to third parties. The term “business” was defined to mean “the business referred to in clause 2(1)”. As has been seen, cl 2(1) referred to the business of the shareholders rather than that of AIF National.

9. [83]

   Clause 26(1) provided that the rights, duties obligations and liabilities of the shareholders were several and not joint or collective. Nothing in the Shareholders Agreement was to create a partnership between the shareholders (cl 26(2)).

10. [84]

    I have previously referred to some provisions of the RLA entered into between AIF National and AIF (Vic/Tas). [18] I refer below to other relevant provisions of the RLA.

11. [85]

    AIF National appointed AIF (Vic/Tas) “to exclusively provide the services on behalf of [AIF National] in the territory for the term” (cl 2.1). The expression “services” was defined to mean “the delivery of courses, assessments and the issuing of qualifications for fitness, business and massage” (cl 1.1). The “territory” meant “the States of Victoria and Tasmania” (cl 1.1). The “term” of the RLA ended on 6 May 2015 (cll1.1 and 3.1).

12. [86]

    Clause 5 of the RLA dealt with “Services” as follows

13. [87]

    AIF (Vic/Tas) was required to pay AIF National the monthly “license [sic] fees”, “marketing and promotion fees”, and the “product development fee” set out in Schedule 2 (cl 6.1). AIF National could vary the fees provided that at least 75 per cent of the board approved the variation (cl 6.2.1). If AIF (Vic/Tas) objected to a variation in the fees payable, it could invoke a dispute resolution mechanism (cl 6.2).

14. [88]

    In providing the services, AIF (Vic/Tas) was required, among other things:

15. [89]

    AIF National was obliged to provide AIF (Vic/Tas) with all reasonable forms of assistance conducive to it performing its duties under the RLA and in complying with all requirements of the regulatory authority (cll 10.1.1, 10.1.2). AIF National was also obliged to do everything necessary to maintain its accreditation as a nationally registered RTO for the delivery of the services (cl.10.1.3).

16. [90]

    AIF National granted AIF (Vic/Tas) an exclusive licence to use the intellectual property in the territory (cl 16.1). The intellectual property included the name and brand of “Australian Institute”, its training products, computer programs, training materials, and sales and marketing materials (Schedule 1). AIF National was obliged to take all steps necessary to protect its intellectual property, while AIF (Vic/Tas) had to provide all reasonable assistance requested by AIF National to protect the intellectual property (cll 17.3, 17.4).

17. [91]

    Nothing in the RLA constituted either party as an agent or partner of the other, nor created an agency or partnership for any purpose (cl 33.1). Except as otherwise specified, neither party had authority to act for or assume any obligations on behalf of the other (cl 33.2).

Primary Judgment

1. [92]

   The primary Judge described AIF National as “a major provider of education and training services in the fitness industry”, operating its business through its shareholders and licensees. Each shareholder/licensee had the right and duty to operate the business in a specified State or Territory and also had the right to use AIF National’s intellectual property for this purpose. [19]

2. [93]

   His Honour found that AIF National:

3. [94]

   After addressing the legal principles relevant to the Sage Proceedings and the other matters before him, his Honour recorded his assessment of the witnesses who had given evidence. Of present relevance is that his Honour was extremely critical of the evidence given by Mr Hornsey. His Honour considered Mr Hornsey’s evidence on occasions to be “palpably absurd” and that some of his claims were “dishonest”. [21] His Honour said that insofar as any issue in the proceedings turned on Mr Hornsey’s credit, he would not accept any of Mr Hornsey’s evidence unless it was corroborated. [22]

4. [95]

   An issue in the Licence Fee Proceedings was whether AIF (Vic/Tas) breached the RLA by obtaining RTO status itself and by using that status to conduct its business. The primary Judge upheld AIF National’s claim that AIF (Vic/Tas) was in breach of the RLA. In doing so, his Honour made some observations about the RLA that are relevant to the Sage Proceedings.

5. [96]

   His Honour considered that cl 9.1.5 (requiring AIF (Vic/Tas) to act loyally and faithfully towards AIF National) and cl 10.1.3 (requiring AIF National to maintain its RTO accreditation) made:

6. [97]

   The primary Judge found that when Mr Hornsey established the Sage business in 2008, his interest was in providing massage training courses. [25] As early as March 2010, the Commander in Chief of AIF National (as he was titled) stressed to Mr Hornsey that Sage had to be separated from AIF (Vic/Tas) at all levels. Mr Hornsey did not disagree and in February 2014 he informed Mr Pettit of AIF National that he was keeping both companies separate. Mr Hornsey did this to allay any fears or suspicion that Sage would have an adverse impact on AIF National. [26]

7. [98]

   Mr Hornsey acknowledged in his evidence that when he registered “fitness” in May 2012 as part of ACI’s RTO accreditation, he intended to move the Sage business into fitness training. The primary Judge was satisfied that Mr Hornsey deliberately kept his intentions secret in the early stages. [27] His Honour also recorded that Mr Hornsey accepted in his evidence that in 2012 he wanted the Sage business to compete actively against AIF (Vic/Tas) and that both were operating in the same market. [28]

8. [99]

   The primary Judge regarded it as “plainly correct” that Mr Hornsey: [29]

9. [100]

   His Honour also accepted AIF National’s submission that it conducted its fitness training business through its licensees and that it had a brand and goodwill to protect. In any event, in his Honour’s view AIF National was entitled to protect the conduct of its business through its licensees. [30]

10. [101]

    His Honour found that for all practical purposes, there was no internal separation between AIF (Vic/Tas) and the Sage fitness business. He accepted that there was a “confusion of roles” which created a “very serious risk of the re-direction (intentional or unintentional) of customers from [AIF National] to the Sage Business”. [31]

11. [102]

    The primary Judge noted that Mr Hornsey had agreed in his evidence that it was inappropriate to set up a competing business and keep it secret from all other directors. This concession was inconsistent with Mr Hornsey’s claim that he was open and honest with the other directors in relation to his plans. [32]

12. [103]

    The primary Judge then referred to what he described as the “so-called agreement” of 5 September 2006 [33] and to the Sage Defendants’ submissions, based on the resolution of that date that the shareholders and directors were free to participate in competing businesses. [34] His Honour addressed the issue as follows. [35]

13. [104]

    In his Honour’s view, the evidence demonstrated Mr Hornsey had implemented a deliberate strategy to “establish, promote and attempt to secure the success of Sage,” a competitor of AIF National, while being a director of both companies. [36]

14. [105]

    The primary Judge rejected the submissions by the Sage Defendants [37] that ACI did not compete with AIF National because it did not itself conduct any courses (the licensees being responsible for providing the courses). [38] His Honour also rejected the Sage Defendants’ submission that since AIF National operated on a not-for-profit basis, there was no real possibility of a conflict between the interests of AIF National and those of ACI and AIF (Vic/Tas). [39]

15. [106]

    The primary Judge found that notwithstanding Mr Hornsey’s attempts to differentiate Sage’s business from the business of AIF National, he deliberately intended to make Sage’s business more attractive at the expense of AIF National:

16. [107]

    His Honour considered that the Sage Defendants’ reliance on the written consent of 10 December 2010 [41] was misplaced since AIF National’s consent to Mr Hornsey engaging in other business during normal office hours could not be understood as extending to Mr Hornsey setting up a business in direct competition with AIF National. [42]

17. [108]

    The primary Judge continued as follows: [43]

18. [109]

    His Honour dealt briefly with AIF National’s claim against ACI and Sage, as follows: [45]

Submissions

1. [110]

   Mr Osborne QC, who appeared with Mr Tomlinson and Mr Stretton for the appellants, did not contend that the primary Judge misstated the principles governing the statutory and fiduciary duties of directors of corporations. However, Mr Osborne emphasised that it had never been part of ACI’s case that Mr Hornsey acquired confidential information in his capacity as a director of AIF National, or that he had misused any such information for ACI’s purposes. Nor had ACI claimed that Mr Hornsey took advantage of a commercial opportunity which he became aware of in his capacity as a director of AIF National.

2. [111]

   According to Mr Osborne, the primary Judge wrongly conflated the activities of AIF National (to which Mr Hornsey owed statutory and fiduciary duties) and the activities of AIF National’s shareholders and licensees (to which Mr Hornsey owed no such duties). In support of that submission, Mr Osborne challenged the primary Judge’s findings that:

3. [112]

   Mr Osborne submitted that AIF National’s role in accordance with cl 2(1) of the Shareholders Agreement was to promote and advance the interests of each of the shareholders or their licensees. AIF National’s ability to carry on its business was not impaired by anything that ACI did regardless of whether ACI’s activities might have affected the business of one or more of the licensees.

4. [113]

   Even if (contrary to Mr Osborne’s submission), AIF National and ACI engaged in the same sphere of business activity, Mr Osborne contended that Mr Hornsey’s duties as a non-executive director of AIF National did not prevent his involvement in a business that competed with that of AIF National. Mr Osborne submitted that it is permissible for a non-executive director of a company to establish a competing business, provided that the director does not misuse confidential information and does not take advantage of commercial opportunities that come to the director in his or her capacity as such. While the potential conflict of interest might require the non-executive director to limit the extent of his or her participation in the company’s decision-making, no breach of this kind had been alleged against Mr Hornsey.

5. [114]

   Mr Osborne challenged the primary Judge’s finding that Mr Hornsey’s conduct was dishonest, [49] but did not dispute his Honour’s finding that Mr Hornsey pursued the business opportunity for his own benefit and for the benefit of ACI. Mr Osborne contended that in any event, even if Mr Hornsey’s pursuit of the business opportunity was “dishonest,” it did not involve any breach of his duties as a director in the absence of misuse of information or diversion of a business opportunity available to AIF National. He pointed out that neither the Shareholders Agreement nor the RLA contained a provision prohibiting a principal from competing with AIF National and submitted that the omission was quite deliberate.

6. [115]

   Mr Osborne accepted that Mr Hornsey may well have been in breach of his duties as a director of AIF National if he failed to disclose the potential conflict of interest and continued to participate in AIF National’s affairs regardless of the conflict. But the finding that Mr Hornsey had acted covertly and dishonestly in not revealing his intentions was not material to the way AIF National pleaded or conducted its case. Mr Hornsey’s lack of openness did not alter the fact that actively promoting a competing business, of itself, did not constitute a breach of his duties as a director of AIF National.

7. [116]

   The appellants submitted that assuming the finding that Mr Hornsey breached his fiduciary duties to AIF National stands, this Court should overturn the primary Judge’s findings relating to the accessorial liability of ACI and Sage. [50]

8. [117]

   The appellants accepted that if Mr Hornsey’s actions in setting up and promoting the Sage business involved him carrying out a dishonest and fraudulent design, ACI and Sage had knowledge of that design and thus knowingly assisted Mr Hornsey’s breach of fiduciary duties. Mr Osborne acknowledged that Mr Hornsey was a directing mind of ACI and Sage and that the two corporations must be taken to have known that Mr Hornsey’s actions were dishonest and fraudulent (if indeed they were).

9. [118]

   Mr Osborne submitted, however, that a finding that Sage knowingly assisted in Mr Hornsey’s breach of fiduciary duties required a finding that Mr Hornsey’s breach was dishonest or fraudulent, in conformity with the principles stated by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [51] and explained in Hasler v Singtel Optus Pty Ltd. [52] Mr Osborne accepted that in view of the Court’s decision in Hasler, it was not necessary for AIF National to plead specifically that Mr Hornsey’s breaches of his fiduciary duties were part of a dishonest or fraudulent design. He also acknowledged that the primary Judge characterised some unspecified aspects of Mr Hornsey’s conduct as “quite dishonest”. Nonetheless, Mr Osborne submitted that it was significant that his Honour made no express finding that Mr Hornsey acted with a fraudulent and dishonest design such as to attract accessorial liability in ACI or Sage. In any event, so he argued, the evidence did not justify any such finding.

10. [119]

    Mr Pritchard SC, who appeared with Mr Emmett for AIF National, accepted that there may be circumstances in which a director of a company can legitimately participate in the activities of a business competing with the company’s business. He submitted, however, that the critical question is whether, having regard to the nature of the competing business, the role of its directors in that business, and other relevant circumstances, the director’s conduct gives rise to the sensible possibility of conflict. [53] In this case, so Mr Pritchard argued, Mr Hornsey did far more than merely maintain an interest in a competing business or company while remaining a director of AIF National. Mr Hornsey’s activities created a real and substantial possibility of conflict between his personal interests and the interests of AIF National which he was bound to protect.

11. [120]

    Mr Pritchard submitted that the primary Judge correctly found that AIF National was a major provider of education and training services in the fitness industry and that it conducted its business through its licensees. His Honour also correctly found that AIF National had an interest in controlling its brand and in ensuring that services were provided nationally in accordance with its RTO obligations. These findings demonstrated that ACI operated in competition with AIF National in the same market place. By diverting customers from AIF (Vic/Tas), ACI was harming AIF National’s brand and business. Mr Hornsey’s activities therefore placed him in a position of conflict between his duties to AIF National and his interest as a shareholder and director of ACI.

12. [121]

    In his oral argument on the appeal, Mr Pritchard agreed that the thrust of his submissions was that the business of AIF National was to advance the interests of its shareholders and licensees and that Mr Hornsey’s conduct in diverting business from AIF (Vic/Tas) to ACI necessarily reduced the ability of AIF National to achieve its objectives. In support of this submission, Mr Pritchard referred to the objectives stated in the Shareholders Agreement and to the terms of the RLA which, so he argued, informed the scope of Mr Hornsey’s duties as a director of AIF National. In particular, the terms of the RLA demonstrated that AIF National had an interest in controlling the use of its material and intellectual property and in protecting its RTO accreditation.

13. [122]

    Mr Pritchard accepted that this Court would follow the decision in Hasler, although Mr Pritchard formally reserved AIF National’s position as to the correctness of that decision, should the matter proceed further. [54] The effect of the interpretation adopted in Hasler of the decision in Farah Constructions, as Mr Pritchard acknowledged, is that in order to render a third party liable for participating in a breach of fiduciary duty in accordance with the so-called “second limb” of Barnes v Addy, [55] the plaintiff must show that the fiduciary’s breach was part of a dishonest or fraudulent design.

14. [123]

    Mr Pritchard sought to uphold the primary Judge’s decision in two ways. First, he submitted that despite Hasler, AIF National does not have to show that Mr Hornsey’s breach was part of a dishonest or fraudulent design in order to succeed against ACI and Sage. Mr Pritchard relied on the principle that a third party corporation can be held liable for a non-fraudulent breach of duty by a fiduciary if the corporation is simply the alter ego of the fiduciary. If the fiduciary uses the corporation to secure the profit or inflict the harm that results from the breach, so he argued, the corporation is liable.

15. [124]

    Secondly, Mr Pritchard submitted that the primary Judge in substance found that Mr Hornsey’s conduct in developing the Sage fitness business was part of a dishonest or fraudulent design. The findings demonstrated, so Mr Pritchard contended, that Mr Hornsey had already departed from the ordinary standards of honest behaviour that a person in his position would be expected to observe.

16. [125]

    AIF National’s written submissions on the appeal accepted that neither ACI nor Sage received property that was subject to a pre-existing trust or fiduciary obligation. In view of its concessions, I did not understand Mr Pritchard to support the primary Judge’s finding that ACI received AIF National’s property in the form of the goodwill and assets of the Sage fitness business.

Breach of Director’s Duties

1. [126]

   Sections 181–184 of the Corporations Act set out the statutory duties owed by directors of corporations. Section 185 of the Corporations Act provides that these duties are in addition to, and do not derogate from, any rule of law imposing duties on directors. The statutory duties therefore co-exist with equitable principles imposing fiduciary duties on directors.

2. [127]

   The argument in this Court did not distinguish to any significant extent between the duties imposed on Mr Hornsey by the Corporations Act and the fiduciary duties he owed as a director of AIF National. However, the primary Judge found that in addition to breaching his fiduciary duties, Mr Hornsey misused his position as a director “for the purposes of s 182 and he was therefore in breach of his fiduciary obligations”. [56]

3. [128]

   It is convenient to reproduce both ss 181 and 182 of the Corporations Act. They provide as follows:

4. [129]

   Section 1317H of the Corporations Act empowers the Court to order a person to compensate a corporation for damages suffered by the corporation if the person has contravened a civil penalty provision and the damage resulted from the contravention. Both ss 181 and 182 of the Corporations Act are civil penalty provisions. [57]

5. [130]

   The principles governing the fiduciary duties owed by a director to a company, as has been remarked, are easy enough to state in general terms, but often difficult to apply to concrete facts. [58] The basic principle was stated by Mason J in Hospital Products Ltd v United States Surgical Corporation: [59]

6. [131]

   The principle was restated by an unanimous High Court in Warman International Ltd v Dwyer [60] as follows:

7. [132]

   The authorities make it clear that there must be at least a real, or a substantial possibility of a conflict, before a director can be said to be in breach of his or her fiduciary duties. The test for whether there is a real and substantial possibility of a conflict between a director’s personal interests and his or her duties as a director is objective. It is to be determined from the standpoint of an objective observer, with knowledge of all the material facts and circumstances. [61]

8. [133]

   The authorities have also warned that the principle cannot be applied “inexorably … and without regard to the particular circumstances of the situation” [62] and that care must be exercised not to convert general principles of equity into instruments of hardship in particular cases. [63] It is therefore perhaps not surprising that the High Court has said more than once that different minds may reach different conclusions as to whether there is a real possibility of conflict between interest and duty in a particular case. [64]

9. [134]

   The scope of a fiduciary’s duties must be accommodated to the particulars of the underlying relationship that gives rise to the duties in the first place. [65] An example that is often given is that a company director who is also a shareholder is permitted to advance his or her own interests as a shareholder, as well as those of the company. [66] Another example, the correctness of which was not challenged by Mr Pritchard, is the statement in Bell v Lever Brothers Ltd [67] that a director is at liberty to become a director of a rival company, provided that he or she does not make use of confidential information.

10. [135]

    In Links Gulf Tasmania Pty Ltd v Sattler, [68] after a comprehensive examination of the authorities considering Lord Blanesburgh’s dictum, Jessup J concluded that the:

11. [136]

    In determining whether there is a conflict between the personal interests of a director of a company, and the director’s duties to the company, it is necessary to identify the functions or responsibilities the director has undertaken in that capacity. As was said by the Full Federal Court in Grimaldi v Chameleon Mining NL (No 2), [71] the actual functions or responsibilities assumed by the fiduciary determine the subject matter over which his or her obligations extend, at least for the purposes of deciding whether there is a conflict of interest and duty or a conflict between duties. While the functions or responsibilities of a director are generally framed in broad terms, the precise scope of the functions or responsibilities in a particular case is a question of fact. [72] Thus, the content of fiduciary duties are moulded to the character of the particular relationship between the director and the company. [73]

12. [137]

    In assessing the circumstances of a case, it is important to bear in mind the protective rationale for the imposition of fiduciary duties. [74] In Chan v Zacharia, [75] Deane J discerned two distinct themes in the “fundamental rule” that a fiduciary is not permitted to put himself or herself in a position where duty and interest conflict: [76]

13. [138]

    It is now not in dispute that Mr Hornsey, in creating and developing ACI’s business as a provider of fitness training courses did not divert a business opportunity that came to him in his capacity as a director of AIF National. Nor does AIF National now contend that Mr Hornsey misused confidential information that he received or was privy to by virtue of his position as a director.

14. [139]

    The absence of any contention that Mr Hornsey diverted a business opportunity from AIF National or misused confidential information does not necessarily mean that the primary Judge erred in finding that Mr Hornsey breached his fiduciary duties. As the statement of principle in Warman International Ltd v Dwyer shows, Mr Hornsey’s role in establishing and expanding the business of ACI could have breached the fiduciary duties he owed to AIF National, provided his conduct created a real or substantial possibility of a conflict between his personal interests and the duties owed to AIF National.

15. [140]

    There is nonetheless force in some of the appellants’ criticisms of the primary Judge’s reasoning underlying his Honour’s conclusion that Mr Hornsey’s conduct involved him in a conflict between his fiduciary duties as a director of AIF National and his personal interest in expanding ACI’s business.

16. [141]

    The primary Judge found that Mr Hornsey set out while a director of AIF National to “devise a rival business which would directly compete with [AIF National”]. [77] His Honour also found that the Sage fitness business was “in direct competition with [AIF National’s] business”. [78] These findings played a part in his Honour’s findings that Mr Hornsey’s conduct necessarily had a “direct and palpable impact” on AIF National’s business [79] and that Mr Hornsey was in a position of conflict between his duties as a director of AIF National and his personal interests. [80]

17. [142]

    The finding that Mr Hornsey deliberately set out to create a rival business to that of AIF National also informed his Honour’s view that Mr Hornsey’s conduct was not only covert (a matter not in dispute), but “quite dishonest” [81] and “blatant”. [82] This can be seen from the significance his Honour attributed to Mr Hornsey’s admission in cross-examination that it would have been inappropriate for him to set up a “competing business and keep it a secret from [AIF National]. [83] Mr Hornsey’s answer had no particular significance to the issues in dispute, unless Mr Hornsey was in fact setting up a business which competed with that of AIF National.

18. [143]

    It is not easy to reconcile the finding that Mr Hornsey set up a business competing with AIF National with the finding made earlier in the judgment, that AIF National never operated so as to make a profit and did not “itself have any business activities related to fitness accreditation”. [84] The latter finding reflected evidence, not in dispute on the appeal, that it was the licensees and not AIF National, who actually conducted fitness training courses and provided associated services to customers, even though they did so with the benefit of AIF National’s promotional activities and the materials supplied by it.

19. [144]

    The primary Judge considered that this difficulty was overcome because the licensees provided services “on behalf of” AIF National. [85] His Honour was referring to the RLA, which states that AIF (Vic/Tas) (and all other licensees) are to provide services in their territory “on behalf of” AIF National. [86] His Honour did not, however, address whether the terms of the RLA apparently creating an agency can be reconciled with cl 33.1, which provides that nothing in the RLA constituted a licensee as the agent of AIF National. I shall return to this issue.

20. [145]

    A second difficulty is that the primary Judge thought that the fact that ACI competed in the same market as AIF (Vic/Tas) demonstrated that ACI’s business must have involved Mr Hornsey in a position of conflict between interest and duty. For example, his Honour referred to Mr Hornsey “conced[ing] quite frankly” that the Sage business and AIF (Vic/Tas) were competing in the same market. [87] Elsewhere, his Honour referred to the Sage business being in direct competition with the business of the licensees, and to the “potential cannibalisation” of the business of AIF (Vic/Tas) by the Sage fitness business. [88] Insofar as the primary Judge may have intended to suggest that harm inflicted on the business of AIF (Vic/Tas), of itself, necessarily placed Mr Hornsey in a position of conflict that cannot be correct. For obvious reasons, AIF (Vic/Tas) made no complaint in the proceedings about its loss of business to ACI.

21. [146]

    A third difficulty is that the primary Judge appears to have attached considerable significance to his finding that Mr Hornsey engaged in a deliberate strategy to establish and promote the Sage Institute of Fitness and that his conduct in some respects had been “quite dishonest”. [89] A finding that a director of a company has been dishonest in dealings with the company or fellow directors may well be cogent evidence that the director has failed, for example, to discharge his or her duties in good faith in the interests of the company. [90] However, when the director is said to have been in a position of conflict between interest and duty, characterising the director’s conduct as deliberate or even dishonest does not necessarily demonstrate that there was in fact such a conflict. Whether or not the director faced a conflict between interest and duty will depend on the considerations identified in the authorities, including the director’s functions and responsibilities in the particular circumstances of the case.

22. [147]

    Conformably with the authorities, it is convenient to begin consideration of whether Mr Hornsey placed himself in a position of conflict between interest and duty by addressing the nature and scope of his functions and responsibilities as a director of AIF National. Mr Osborne did not dispute that this task requires the provisions of the Shareholders Agreement to be taken into account. He accepted that the Shareholders Agreement, to which Mr Hornsey was a party, recorded the objectives of AIF National and provided for the relationship between the company, its shareholders and the principals.

23. [148]

    Mr Osborne, as I understood him, did not concede that the terms of the RLA between AIF National and AIF (Vic/Tas) must also be considered when determining the scope of Mr Hornsey’s functions and responsibilities as a director of AIF National. In my view, however, the RLAs are relevant to the question. Each licensee entered into an RLA with AIF National in almost identical terms. The RLAs provided the framework by which the objectives stated in the Shareholders Agreement were to be achieved by AIF National and the licensees. For example, AIF National’s status as a “nationally accredited registered training organisation for the delivery of courses, assessments and the issuing of qualifications,” as recorded in Recital A to the RLA, was clearly central to achieving the objectives stated in cl 2(1) of the Shareholders Agreement.

24. [149]

    The Shareholders Agreement gave specific content to the duty of good faith owed by Mr Hornsey as a director of AIF National. The objectives to which the shareholders and principals were committed indicate that Mr Hornsey, in his capacity as director, was obliged to act in good faith to enable AIF national to:

25. [150]

    As I have noted, cl 2(1) of the Shareholders Agreement refers to the businesses of the shareholders, but does not state explicitly that AIF National is to carry on a business. However, cl 2(2)(a) required each shareholder “to co-operate and use [its] best endeavours to ensure that [AIF National] successfully carries on the business”. This provision implies that AIF, so far as the shareholders and principals were concerned, was to carry on the business of promoting and advancing the interests of the shareholders’ businesses, albeit not necessarily as a profit-making undertaking.

26. [151]

    Regardless of whether AIF National can be said to have been conducting a “business” its role was unusual. The core of its activities lay in promoting and advancing the interests of each of its shareholders, not only in their capacity as shareholders, but as the operators of businesses (whether by themselves or by nominees).

27. [152]

    The Shareholders Agreement made it plain that the shareholders were not to be regarded as partners or as agents of each other. [93] Nevertheless, the Shareholders Agreement contemplated that the shareholders would co-operate with each other and use their best endeavours to ensure that AIF National successfully carried on its business. [94] In this sense, AIF National was to be a key participant in a co-operative venture (however that venture might be legally characterised) involving the five shareholders and AIF National itself.

28. [153]

    The nature of the co-operation required from shareholders was addressed (among other places) in cl 9(4) of the Shareholders Agreement. This provision required each shareholder:

29. [154]

    Clause 9(4) constituted an acknowledgment by the parties to the Shareholders Agreement including Mr Hornsey that AIF National had goodwill and a reputation to protect, even though AIF National was a non-profit organisation and existed primarily to advance the business interests of its shareholders. In particular, the standing of AIF National’s certification of competency was acknowledged to be important, if not critical, to its capacity to perform its role as the national body undertaking activities designed to promote and advance the businesses conducted by shareholders. Clause 9(4) also expressly acknowledged that actions of the shareholders could adversely affect AIF National’s goodwill, standing and value and thereby affect its capacity to carry on its “business”.

30. [155]

    The funding arrangements dealt with in the Shareholders Agreement recognised that disruption to the revenue stream from one or more shareholders would have consequences for the capacity of AIF National to perform its role as the national body promoting all businesses of shareholders. Each shareholder was required to contribute a proportion of AIF National’s funding requirements, as determined by the board from time to time. [95] Each shareholder acknowledged and agreed that any breach of its funding obligation would cause loss or damage not only to other shareholders but to AIF National itself. [96] While it was contemplated by the parties to the Shareholders Agreement that AIF National would not necessarily be a profit-making entity, these provisions recognise that achieving AIF National’s objective of promoting and advancing the business interests of shareholders depended in part upon each shareholder meeting its funding obligations.

31. [156]

    It is true that the particular funding formula approved by the board in November 2012 provided for adjustments to be made at the end of a financial year if one licensee failed to achieve the budgeted revenue. [97] But the formula could be varied at any time, and it was open to the board, for example, to impose fees that although “proportionate”, were fixed at the beginning of a year. If that was done, a shortfall in the payments made by one licensee would not be adjusted by automatically increasing the contributions from other licensees.

32. [157]

    The RLA set out in detail the manner in which the licensee was to deliver services. The detailed perception of the licensee’s responsibilities was clearly designed to ensure that AIF National could achieve its objectives as a nationally accredited RTO required to promote the business of each of its shareholders. As I have noted, there may be some difficulty in reconciling cl 2.1 of the RLA (appointing the licensee to deliver services “on behalf of” AIF National) and cl 33.1 (nothing in the RLA constitutes the licensee as agent of AIF National). [98] The primary Judge seemed to think that cl 2.1 meant that the licensee delivered services to trainees and others as an agent of AIF National. I doubt that the proposition is correct, at least without qualification. But cl 2.1 and other provisions in the RLA recognised that AIF National had a direct and continuing interest in regulating the quality of services provided by each of the licensees. It was central to AIF National’s role as outlined in the Shareholders Agreement and the RLA that it should maintain and enhance its standing as an accredited RTO and a certifier of training qualifications. The RLA shows that although the licensees were separate corporate entities, their businesses were not autonomous. They were to be conducted in close association with AIF National and with each other.

33. [158]

    As a non-executive director of AIF National, Mr Hornsey was not required to devote all his energies to promoting its objectives and operations. But his functions and responsibilities included acting in good faith in the interests of AIF National, as a company required to advance and promote the business interests of its shareholders and their licensees. The mode of funding for AIF National in force at the time Mr Hornsey was developing the Sage Institute of Fitness meant that AIF National would not make a profit. However, the funding model does not alter the fact that the parties to the Shareholders Agreement, including Mr Hornsey, regarded AIF National as a company conducting activities of a very particular kind.

34. [159]

    Mr Hornsey did not merely set up and promote a business that competed in the same market as the business conducted by one of the licensees (AIF (Vic/Tas)). On the primary Judge’s findings, AIF (Vic/Tas) and ACI had overlapping staff with dual roles. [99] His Honour regarded it as “absurd” to suggest that Mr Hornsey assiduously kept separate the interests of AIF National and the Sage Institute of Fitness. [100] His Honour also found that the overlap led to a confusion of roles and created a very real risk of redirecting customers of AIF National to the Sage business. [101] Whether or not it can be said that AIF National had its own “customers” (it did maintain stands at trade shows), it must follow that there was a serious risk that customers who might otherwise use the services of AIF (Vic/Tas) would be redirected to ACI.

35. [160]

    Redirecting business from AIF (Vic/Tas) to ACI would not only harm the former’s business, it would potentially impair, if not destroy, AIF National’s capacity to promote the business of its Victorian licensee. More generally, it would impair the capacity of AIF National to promote the name “Australian Institute of Fitness” as a national brand capable of advancing the business interests of each of its shareholders. This in substance, is what I understand his Honour to mean when he found that the activities of the Sage business had:

36. [161]

    AIF National’s role, as delineated in the Shareholders Agreement and the RLAs, was to promote the business of each shareholder in the relevant territory. AIF National was to carry out co-ordinating, promotional and supervisory activities in a co-operative venture. While each shareholder was to conduct a business in its own territory, the co-operative venture operated in important respects on a national basis through AIF National. To achieve the objectives set out in the Shareholders Agreement, the co-operation of all shareholders was required. That meant cooperation with each other and with AIF National.

37. [162]

    Mr Hornsey’s actions necessarily impeded the ability of AIF National to achieve its objectives as “the national body to advance the interests of the shareholders”. By promoting ACI at the expense of AIF (Vic/Tas), Mr Hornsey was effectively moving towards withdrawing the Victorian and Tasmanian licenses from the co-operative national venture. If Mr Hornsey succeeded in his endeavours, AIF National could no longer advance the interests of the shareholders “as leading businesses” in all relevant territories, including Victoria and Tasmania.

38. [163]

    I did not understand Mr Osborne to take the point that AIF (Vic/Tas) was not a party to the Shareholders Agreement and was not a shareholder (AIVT being the shareholder representing Mr Hornsey’s interests). In any event, the RLA constituted AIF (Vic/Tas) as the licensee of AIF National. AIF (Vic/Tas) became for practical purposes the entity conducting the “leading business dedicated to education and training in the fitness industry”. Mr Osborne did not suggest that the RLA was entered into otherwise than with AIVT’s knowledge and approval. Whether or not the RLA amounted to an assignment or a transfer of AIVT’s rights under the Shareholders Agreement, [103] AIF (Vic/Tas) became the vehicle by which AIVT discharged its obligations under the Shareholders Agreement (for example, to promote its affiliation with AIF National). [104]

39. [164]

    A further consequence of Mr Hornsey’s actions was a reduction in the monetary contribution AIF (Vic/Tas) (or AIVT) was required to make to the funding of AIF National’s activities. It is true that pursuant to the resolution of the board of 26 November 2012, [105] the other shareholders or licensees would have to make up the shortfall at the end of the financial year. But faced with a substantial loss of revenue from operations in Victoria and Tasmania (the largest source of funding for AIF National), other shareholders and licensees might or might not be willing to continue to make up the deficiency. The “cannibalisation” of the business conducted by AIF (Vic/Tas) created a risk that funding would not be available to enable AIF National to exploit its brand effectively, not only in Victoria and Tasmania, but in other territories.

40. [165]

    As I have explained, the critical question is whether Mr Hornsey’s conduct created a real or substantial possibility of a conflict between his duties as a director of AIF National and his personal interests in promoting ACI’s business. In my view, an objective observer, having regard to the terms of the Shareholders Agreement, and the scope of Mr Hornsey’s functions and responsibilities as a director of AIF National, the primary Judge was entitled to find that there was a real or substantial possibility of such a conflict.

41. [166]

    Mr Osborne referred to three authorities in particular that he said supported the appellants’ contentions. In my view, none of the three is inconsistent with the conclusion that the primary Judge was entitled to find that Mr Hornsey breached his fiduciary duties as a director of AIF National.

42. [167]

    In Streeter, a mining company (WAE) failed in its claim that a director breached his fiduciary duties by investing and becoming a director of another mining company (WANE) which ultimately became extremely successful. The claim failed because it was held to be barred by laches. McLure P, with whom Buss JA agreed, held that in any event the director had not breached what her Honour described as the “conflict rule”.

43. [168]

    After stating the principles governing the conflict rule, [106] McLure P examined the facts closely. Her Honour found that the director had been approached by a group of geologists seeking seed capital for a proposed mining project. The approval was made to the director, not in his capacity as such, but as a substantial investor able to contribute funds to the venture. At the time, WAE was solvent only because the director was providing substantial financial support.

44. [169]

    The director suggested to the group that WAE should be the vehicle for the proposed project. Her Honour found that it would have been in the director’s interest for WAE to be the vehicle, but that the group members rejected the suggestion for sound commercial reasons. Her Honour found that in these circumstances, there was no positive duty on the director to seek to acquire the proposed project for WAE and there was an opportunity for WAE to be the corporate vehicle. [107] Thus, there was no relevant conflict between the director’s interests and the interests of WAE.

45. [170]

    In the present case, for the reasons I have given, Mr Hornsey’s duties as a director included assisting AIF National to perform its role as the national body advancing the interests of the shareholders’ businesses. He was in a position of real conflict because his personal interest in expanding ACI’s fitness training business necessarily impaired AIF National’s capacity to achieve the objectives stated in the Shareholders Agreement.

46. [171]

    The second case relied on by Mr Osborne was Links Golf. In that case, the plaintiff (LGT) operated a golf course on land owned by the defendant and leased to LGT. The defendant owned an adjoining piece of land (Lost Farm), on which he developed a second golf course. At the time the defendant commenced the development of the second golf course, he was a director of LGT. LGT claimed that the defendant had breached his fiduciary duties as a director.

47. [172]

    Jessup J dismissed LGT’s claim. His Honour found that the “reality of the relationship” between LGT and the defendant was that the future use of Lost Farm was a matter for him to determine. [108] His Honour also found that LGT never had in contemplation that it would participate in the development of Lost Farm, despite knowing of the development. [109] In these circumstances, taking up the opportunity to develop Lost Farm was not within the scope of the defendant’s fiduciary duties. [110] For similar reasons, there was no reasonable possibility of a conflict between the defendant’s responsibilities as a director of LGT, and his personal interest in developing his land as a golf course. [111]

48. [173]

    The decision in Links Golf turned on the scope of the defendant’s responsibilities as a director of LGT having regard to the nature of LGT’s activities, the course of dealings between the director and LGT, and his ownership of Lost Farm. The present case is different because Mr Hornsey’s responsibilities as a director of AIF National included advancing the company’s objectives as outlined in the Shareholders Agreement.

49. [174]

    The third case cited by Mr Osborne was Southern Real Estate Pty Ltd v Dellow. [112] The Full Court of the Supreme Court of South Australia held that a director of a real estate agency who resigned and set up a competing agency breached her fiduciary duties and her statutory duty to act in good faith in the interests of the company. The case does not assist the appellant’s argument.

Conclusion

1. [175]

   The preceding analysis differs somewhat from the approach of the primary Judge. However, the conclusion I have reached is within AIF National’s pleaded case and consistent with the findings made by the primary Judge. It also reflects the protective rationale for the principle that a fiduciary is not entitled to obtain a benefit, in circumstances where there exists a significant possibility of a conflict between personal interest and fiduciary duty, namely that the fiduciary should not be swayed by considerations of personal interest. [113] I therefore reject the appellants’ challenge to the finding that Mr Hornsey breached his fiduciary duties to AIF National.

Accessorial Liability

1. [176]

   Mr Pritchard’s first argument relies on the principle stated by the Full Federal Court in Grimaldi. The Full Court in that case observed that Lord Selborne’s ex tempore judgment in Barnes v Addy [114] does not provide an exhaustive statement of the circumstances in which a third party’s participation in another’s breach of fiduciary duty can render the third party liable to equitable remedies. [115]

2. [177]

   The Full Court in Grimaldi identified four “different manifestations” of participation in a breach of fiduciary duty sufficient to render the party participating in the breach liable to the person to whom the fiduciary duties are owed. [116] The first of these:

3. [178]

   In this passage the Full Court cited a number of authorities to support the statement of principle. In most, if not all of these cases, the fiduciary’s conduct was regarded as fraudulent, [117] as “wrongdoing close to fraud” [118] or could well have been characterised as fraudulent. [119] However, I am prepared to accept for present purposes, that the principle stated in Grimaldi applies to the corporate “alter ego” of a fiduciary, even where the fiduciary’s breach of duty does not involve dishonesty or fraud.

4. [179]

   In the present case, AIF National pleaded that ACI and Sage knowingly assisted, or were directly concerned in, or party to, Mr Hornsey’s breach of duties, by reason that Mr Hornsey’s knowledge was also the knowledge of ACI and Sage. The ASC did not specifically plead that either ACI or Sage should be held liable to AIF National as the “alter ego” of Mr Hornsey.

5. [180]

   AIF National’s concluding submissions at the trial referred to the statement of principle in Grimaldi, although without elaboration. AIF National submitted to the primary Judge that ACI and Sage were controlled by Mr Hornsey and Ms Tuchtan (who was a defendant). On this basis, AIF National contended that each corporation should be regarded as having full knowledge of the fiduciary obligations owed by Mr Hornsey and Ms Tuchtan to AIF National. No submission was made to his Honour that if the case against Ms Tuchtan failed (as it did), each of ACI and Sage should be found to be the alter ego (or equivalent) of Mr Hornsey alone. The absence of any such submission was not surprising, given that Mr Hornsey and his wife had only a 42.5 per cent interest in Holdings, the parent company of both ACI and Sage (the balance of the shares being held by interests associated with Mr and Ms Wade and Ms Tuchtan).

6. [181]

   In the primary Judge’s brief reasons for finding ACI and Sage liable to AIF National, his Honour made no finding that either company were simply the alter ego of Mr Hornsey. His Honour cited Grimaldi for the proposition that there was no need for AIF National to demonstrate separate dishonesty on the part of ACI and Sage. His Honour appeared to accept that if ACI and Sage were to be found liable, AIF National had to show that Mr Hornsey’s conduct was part of a dishonest or fraudulent design on his part.

7. [182]

   In these circumstances, I do not think it is open to AIF National to argue on appeal that the principle stated in Grimaldi should be applied. The primary Judge made no finding that either ACI or Sage was the alter ego of Mr Hornsey. No Notice of Contention has been filed seeking such a finding, and the evidence does not appear to support a finding of the kind that is necessary to attract the principle stated in Grimaldi.

8. [183]

   In Farah Constructions, the High Court stated that the second limb of Barnes v Addy, as conventionally understood in Australia:

9. [184]

   In Hasler, Leeming JA said that there was nothing in Farah Constructions to suggest that the High Court was substantially expanding the class of breaches of fiduciary duty which could attract the second limb of Barnes v Addy. [122] His Honour pointed out that the High Court was at pains in Farah Constructions to preclude Australian courts from relaxing the meaning of “dishonest and fraudulent design”. Leeming JA later reiterated that the liability of a third party who participates in, but does not procure or induce a breach of fiduciary duty, is confined to breaches which are dishonest. [123] His Honour said that dishonesty “amounts to a transgression of ordinary standards of honest behaviour [and] it is not necessary to demonstrate that the person thought about what those standards were”. [124]

10. [185]

    It is true, as the appellants submitted, that the primary Judge did not make a finding in terms that Mr Hornsey acted with a dishonest and fraudulent design when breaching his fiduciary duties to AIF National. It is also true that I have not accepted all of his Honour’s reasoning supporting the conclusion that Mr Hornsey was in a position of conflict between his duties to AIF National and his personal interests. Nonetheless, I think that his Honour, in substance, found that Mr Hornsey breached his fiduciary duties dishonestly. I also think that the finding applies to the breaches of fiduciary duties that I consider to have been made out.

11. [186]

    The primary Judge’s finding that Mr Hornsey’s conduct in setting up and promoting the Sage business was deliberate, covert and “in a number of respects…quite dishonest” has to be understood in context. For example, his Honour found that on 27 February 2014, Mr Hornsey informed the Commander in Chief of AIF National that Sage’s business and AIF National’s business were being kept separate. His Honour had no doubt that Mr Hornsey “fully intended to confront and allay any fears or suspicion that Sage would impact on [AIF National]”. [125] This finding clearly implies that Mr Hornsey appreciated that the covert course of conduct on which he was engaged at the time would have, or at the very least potentially would have, an adverse impact on AIF National’s functions as outlined in the Shareholders Agreement.

12. [187]

    The primary Judge also found that:

13. [188]

    In my opinion, the findings made by the primary Judge demonstrated that Mr Hornsey well appreciated that his conduct in promoting ACI’s business, at the expense of the business carried on by AIF (Vic/Tas), necessarily had a significant adverse impact on AIF National’s capacity to discharge the functions conferred on it by the Shareholders Agreement, to which Mr Hornsey was a party. In particular, Mr Hornsey appreciated that diverting business from AIF (Vic/Tas) impaired AIF National’s ability to act as the national body promoting and advancing the business interests of all shareholders.

14. [189]

    Mr Hornsey’s departure from ordinary standards of honest behaviour lay in his knowledge that his conduct advanced his personal interests, at the expense of AIF National’s ability to perform its core functions that, as a director, he was obliged in good faith to advance. The clandestine nature of his activities supports the conclusion that he understood that there was a conflict between his personal interests and his duties as a director, but that he decided to proceed nonetheless. By expanding the business of the Sage Institute of Fitness without the knowledge of his co-directors, Mr Hornsey denied them the opportunity to curtail the harm being done to AIF National and exacerbated the seriousness of the conflict between his personal interests and his duties as a director.

15. [190]

    For these reasons, I consider that the primary Judge’s findings establish that Mr Hornsey’s breaches of the fiduciary duties he owed to AIF national were carried out with a fraudulent and dishonest design.

16. [191]

    As I have noted, the appellants do not dispute that, once this finding is confirmed, ACI had knowledge of Mr Hornsey’s dishonest and fraudulent design. Accordingly, the primary Judge correctly found that ACI was liable to AIF National for its knowing participation in Mr Hornsey’s breaches of fiduciary duties.

Sage’s liability

1. [192]

   The primary Judge seems to have assumed that Sage participated in Mr Hornsey’s breaches of fiduciary duty, but his Honour made no specific finding to that effect. The appellants challenge the grant of relief against Sage on the ground that there was no evidentiary basis for his Honour’s finding [130] that “at the beginning of 2014 it would appear that ACI and Sage launched the Sage fitness business”.

2. [193]

   Mr Osborne submitted that the primary Judge’s description of the steps taken to set up and promote the Sage Fitness Business [131] demonstrated that ACI, but not Sage, was involved in the process. Mr Osborne pointed out that although Sage was incorporated on 25 October 2012, it was ACI that registered the trade mark “Sage Institute of Fitness” and used that name as its trading name. Mr Osborne also pointed to Mr Hornsey’s un-contradicted evidence that ACI conducted the Sage business. Perhaps more importantly, Ms Tuchtan gave evidence that when Sage was incorporated, it potentially could have operated a fitness business, but that in fact, Sage “wasn’t doing anything”.

3. [194]

   AIF National did not identify any other evidence that would justify a finding that Sage, as distinct from ACI, participated in Mr Hornsey’s breaches of his Fiduciary duties. In my opinion, the mere incorporation of Sage, in the absence of any trading or other ongoing activities, does not justify a finding that Sage was knowingly involved in Mr Hornsey’s dishonest breaches of his fiduciary duties. The orders granting relief against Sage should therefore be set aside.

Orders

1. [195]

   The appeal has succeeded in two respects. First, the primary Judge was in error in granting relief against Sage. The declarations and orders made by the primary Judge should therefore be amended to remove references to Sage.

2. [196]

   Secondly, the primary Judge was in error in finding that ACI received AIF National’s property in the form of the goodwill and assets of the Sage Fitness Business. Thus, the declaration made against ACI should be amended to remove the reference to it having received property derived from Mr Hornsey’s breaches of fiduciary duties.

3. [197]

   The Notice of Appeal challenges the findings that Mr Hornsey, ACI and Sage, are liable to AIF National, but does not challenge the form of relief granted by the primary Judge assuming the findings as to liability (or some of them) stand. Accordingly, there is no occasion to consider whether an account of profits is an appropriate remedy in respect of Mr Hornsey’s breaches of fiduciary duties and ACI’s accessorial liability.

4. [198]

   The following orders should be made:

   1. (1)

      Appeal allowed in part.

   2. (2)

      Amend the declarations in paras 8 and 9 of the orders made by the primary Judge on 16 December 2015 so that they read as follows:

   3. (3)

      Amend Orders 11, 12 and 15 made by the primary Judge on 16 December 2015 so that they read as follows:

   4. (4)

      Appeal otherwise dismissed.

   5. (5)

      The appellants pay 85 per cent of the respondents’ costs of the appeal.