CASENOTE: Holyoake Industries v V-Flow Pty Ltd [2011] FCA 1154

  • Author : Tim Donaghey - 30-03-2012

Background

Holyoake Industries (Vic) Pty Ltd (‘Holyoake’) conducted a business which involved supplying equipment to companies engaged in the installation of air conditioning systems. A Mr Brown (‘Brown’) was the general managing director of Holyoake, Mr Matkovic (‘Matkovic’) was the production and factory manager and Mr Aloe (‘Aloe’) was the business development and engineering manager. Each of Brown, Matkovic and Aloe had worked for Holyoake for approximately 10 years until March 2009.

From late 2008 during their employment, Brown, Matkovic and Aloe were involved in commercial negotiations relating to the proposed purchase by Holyoake of a competing business, Variflow Melbourne Pty Ltd (‘Variflow’). Holyoake made no offer for Variflow. Instead, Matkovic and Aloe incorporated V-Flow Pty Ltd (‘V-Flow’) in February 2009, and caused V-Flow to purchase the Variflow business, with settlement occurring on 9 April 2009.  Brown, Matkovic and Aloe resigned from Holyoake, concluding their employment at various times up to March 2009.

In the months leading up to the purchase, Brown, Matkovic and Aloe deliberately concealed their activities relating to the purchase of Variflow from Holyoake directors and management. During this time, Brown also made contact with a number of Holyoake’s customers aiming to secure business for V-Flow. Each of Brown, Matkovic and Aloe resigned from their employment with Holyoake before March 2009, and subsequently worked for V-Flow in the Variflow business.

 

Issues

Holyoake alleged that by involvement in the purchase each of Brown, Aloe and Matkovic breached fiduciary and contractual obligations which they owed to Holyoake, and also contravened sections 182(1) and 183(1) of the Corporations Act 2001 (Cth).

Holyoake alleged the contravention of section 182 was based on Brown, Aloe and Matkovic improperly using their positions to gain advantage for themselves or someone else. Similarly, the breach of section 183 followed from the respondents improperly using information they obtained as a director or employee of Holyoake to gain an advantage for themselves or someone else – namely approaching clients to solicit future business.

THE DECISION

Justice Tracey in the Federal Court of Australia heard the trial.

His Honour found that the respondents had each breached their obligations.  First, they had contravened their fiduciary obligations to subvert their individual interests, to the over-arching obligation of Holyoake.  Further, they had breached their obligations to serve Holyoake with fidelity. In effect, Tracey J found that the respondents had placed their personal interests ahead of those of their employer, by pursuing an interest in a competing business, whilst simultaneously obliged to serve the
employer’s interests.

In reaching this conclusion, Tracey J made particular findings in relation to credit. His Honour first rejected the argument that the opportunity to purchase Variflow had arisen independently of their employment with Holyoake, finding that it arose during and because of the respondents’ employment; second, his Honour rejected the respondents’ argument that Holyoake had no interest in purchasing Variflow or that the work relating to the purchase was completed outside hours.  Finally, Tracey J
found that the respondents lied in several respects:  including as to the existence of probative documents; and as to the reason for giving their resignations.  This was the basis for his Honour finding against the respondents, where evidence conflicted.

Tracey J considered third-party liability.  His Honour found V-Flow liable as a third party with knowledge of the fiduciaries’ dishonest conduct and a knowing recipient of the benefit of the respondents’ misappropriation of opportunity from Holyoake. VFlow’s liability was also based on the notion that Brown, Aloe and Matkovic were the ‘directing minds’ of V-Flow.

Brown, Aloe and Matkovic also failed to make out the equitable defences of waiver/estoppel and laches.  These defences failed as the respondents were not able to establish that Holyoake had necessary knowledge of the respondents’ breaches required to make out the defences. Consequently, this made the 7 months delay in instituting the proceedings ‘unspectacular’.

RAMIFICATIONS

By diverting the opportunity to purchase Variflow to themselves – and then attempting to obscure or hide this fact – the respondents placed themselves in a position of conflict with their obligations to Holyoake.  In such circumstances, the respondents were liable to account to Holyoake for some form of relief.

The respondents took steps to conceal their conflict, whilst employed by Holyoake. His Honour found, quite rightly, that this demonstrated consciousness of wrongdoing. In fact, a clearer conflict of interest and duty can scarcely be imagined.  In my opinion, the respondents will be liable to account to Holyoake for their profits made.

The effect of Tracey J’s findings are broad in their scope: Brown, Aloe and Matkovic (together with V-Flow) are liable in some proportion to account to Holyoake, and to pay damages to Holyoake for their breaches of obligations – in the circumstances of a new business, this can have a wide-ranging effect on the very prospect of the business continuing.

About the Author

Tim Donaghey

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