Contract declared unfair and varied to include exit fee

The contract was declared unfair and varied to include an exit fee due to the unfairness of the original agreement. The decision was made by Schmidt J of the Industrial Relations Commission of New South Wales.

OUTCOME: Allowed

Industrial Relations Commission of New South Wales in Court Session

CITATION : [NAME_1] & Anor v [COMPANY_2] (In Liq) & Anor [2002] NSWIRComm 205 [NAME_1] ACN [PHONE] First Applicant

[NAME_3] Second Applicant PARTIES : [COMPANY_2] [PHONE] (IN LIQUIDATION) First Respondent

AUSTRALIAN AUTHORISED INVESTMENTS LIMITED ACN [PHONE] Second Respondent FILE NUMBER: IRC 4855 of 1999 CORAM: Schmidt J Unfair Contract - telecommunications industry - [COMPANY_5] agreement - second applicant's standing to bring proceedings - standing found - first respondent in liquidation - second respondent held 100% of shares of the first respondent - jurisdiction - claim that contract be varied to make second respondent a party - variation unnecessary - conduct - breach of agreement on termination - unfairness found - payment of exit fee ordered - exercise of discretion as to amount of exit fee - other relief refused as a matter of discretion in circumstances where first respondent's business failed - money orders against second respondent made CATCHWORDS : Constitutional law - whether s106 inconsistent with sections 588V and 588W of the Corporations Act 2001 (Cth) - no inconsistency found Constitution LEGISLATION CITED : Corporations Act 2001 (Cth) Industrial Relations Act 1996 Judiciary Act 1903 (Cth) Autobake Pty Ltd v Budd & Anor (1986) 19 IR 18 Barclays Australia Investment Services Ltd v Nordby (1995) 99 IR 258 Brown v Rezitis (1970) 127 CLR 157 Ex Parte Mclean (1930) 43 CLR 472 [NAME_6] v [COMPANY_6] & [NAME_6] v [COMPANY_7] (No 2) (2001) 106 IR 204 Kwong & Anor v Stone Microsystems (Aust) Limited (1996) 82 IR 255 CASES CITED : Lieberman & Anor v Morris (1944) 69 CLR 69 Metrocall Inc v Electronic Tracking Systems Pty Ltd (2000) 101 IR 66 [COMPANY_8] v [COMPANY_9] (No 2) (2000) 102 IR 309 [NAME_9] v [COMPANY_9] (Administrator Appointed) (2000) 99 IR 69 Stevenson v Barham (1977) 136 CLR 190 Stone Microsystems (Aust) Pty Limited & Anor v Kwong and Anor (1997) 85 IR 237 [NAME_10] v Attorney General for the State of Victoria (1948) 77 CLR 84 HEARING DATES: 08/06/2001; 08/10/2001; 09/13/2001; 04/22/2002; 04/23/2002; 04/24/2002 DATE OF

JUDGMENT: 08/23/2002

APPLICANTS: [redacted] SOLICITORS: [redacted] LEGAL REPRESENTATIVES: RESPONDENTS: [redacted] SOLICITORS: [redacted]

JUDGMENT: - 62 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION

CORAM: Schmidt J

DATE: 23 August 2002

Matter Number IRC 4855 of 1999

[NAME_1] AND ANOR v [COMPANY_2] (IN LIQUIDATION) AND ANOR Application under section 106 of the Industrial Relations Act 1996

1 This application was brought under s106 of the Industrial Relations Act 1996 ('the Act') in September 1999. The claim arose out of a [COMPANY_5] agreement between the first applicant and the first respondent, terminated by the first respondent in June 1999.

2 The hearing of the matter proceeded with some difficulty. The first respondent was placed into liquidation and the applicants were granted leave by the Supreme Court to pursue these proceedings. While an appearance was initially announced for both respondents, the appearance for the first respondent was later withdrawn. The second respondent, Australian Authorised Investments Limited ('[NAME_5]'), finally argued that the second applicant, [NAME_3] had no standing to bring the proceedings; that the Court had no jurisdiction to make the orders sought against it and that, in any event, orders would not be made as a matter of merit.

3 The way in which the second respondent pursued its case requires some comment. In the ordinary way, the matter was conciliated by Peterson J and when the conciliation was unsuccessful, directions were given for the filing of affidavit evidence. The hearing was fixed for 3 days in December 2000. The second applicant then gave his evidence and was cross examined and re-examined. The second applicant was given leave to give further evidence in relation to documents then still to be produced by the administrator. The respondents were then granted an adjournment, because while various affidavits had been filed, they did not have their witnesses available. When the hearing resumed, the applicant gave further evidence about the documents which had been produced in the meantime. During cross examination on that evidence, the [NAME_5] withdrew its instructions from counsel representing it. The appearance for the first respondent had been withdrawn. [NAME_5] then made another adjournment application, advising that if the adjournment were not granted, it would also withdraw its instructions from its solicitors.

4 The application was but partially granted. Upon resumption of the hearing, [NAME_13], the solicitor on the record for [NAME_5], announced that his instructions had also been withdrawn. The hearing then proceeded with [NAME_13], [NAME_5] appearing for it. [NAME_3]'s cross examination continued. Before the matter adjourned until 13 September 2001, certain undertakings were given and liberty was given to [NAME_5] to approach the Court, if it wished to put on evidence, additional to that already filed. [NAME_5] undertook to notify the applicants within 7 days, of any further witnesses to be called. No such notification was given.

5 Upon the resumption of the hearing the following September, the position was that [NAME_13] had again been instructed by [NAME_5], that [NAME_13] of counsel had been briefed and [NAME_13] had, in the meantime, resigned from his position. The parties had filed various motions in the interim. The applicants' motion, seeking the joinder of [NAME_5], [NAME_5] and [NAME_5], was not pressed. The orders sought by [NAME_5] in its motion were that the proceedings be struck out and in the alternative, an order for security for costs be made against the applicants. The second respondent was, however, not ready to proceed and it sought a further adjournment of the hearing.

6 The adjournment application arose, it was explained by [NAME_13], because he had recently been briefed, [NAME_5] no longer wished to rely upon any of the affidavits it had already filed in the proceedings and because difficulties in taking further statements had arisen, after the applicants' joinder motion was served. Counsel put however, that [NAME_5] had serious issues it wished to raise in its defence of the claim. It wished to put on further evidence from [NAME_14], [NAME_5], [NAME_13] and [NAME_5], which was said to go to the heart of the matters between the parties. Reliance was placed upon the approach of the High Court in State of Queensland Holdings v JL Holdings Pty Ltd (1997) 189 CLR 146, where the need to do justice between the parties, particularly in relation to procedural matters, was emphasised.

7 At the conclusion of the proceedings on the previous occasion, [NAME_13] had stated, in declining the applicants' request for an undertaking as to costs, that [NAME_5] had no capacity to pay, it 'could be in liquidation in 7 days'. In those circumstances, I raised my doubt that costs orders, in this case, could provide an answer which would ensure that justice could be done between the parties, if the further adjournment application were granted. After an adjournment to consider its position, [NAME_5] gave the following undertaking to the Court: '[NAME_13]: I have spoken to my instructing solicitor who has spoken to [NAME_5]. [NAME_5] is able and willing to pay $20,000 in trust with [NAME_13], the instructing solicitor, within 21 days and to notify the applicant's that $20,000 has been put in trust and that would be in trust against future costs, that is, the costs beyond today in relation to this matter. If your Honour were minded to adjourn and with liberty to apply on three days notice, that provision being so that if the money is not put in within 21 days, then the parties have liberty to come back. HER HONOUR: And if the costs order were made in respect of today, that would be paid? [NAME_13]: That would be met separately.

8 While the applicants continued to press their objection to the adjournment, it was granted, with costs orders being made against the second respondent and further directions given as to the filing of the further affidavit material upon which it wished to rely. I then observed: 'The parties will have liberty to approach and to have the matter restored to the list for further directions if required. I would expect, and I want it plainly understood, that there would be no further departure by the respondent from the Court's directions and orders, unless consent to that course is obtained from the applicant, or the Court is approached. It seems extraordinary that this should have to be said but I think it does.'

9 When the hearing resumed on 22 April, the position was that [NAME_5] had filed no further affidavits and had not approached the Court or the applicants about any alteration to the directions given. A further notice of motion and a 'Notice of Objection to Competency' had, however, been filed on 16 April. Notices under s78B of the Judiciary Act 1903 (Cth) had also been served, shortly before the hearing commenced.

10 It was then submitted by [NAME_13] that the proceedings were an embarrassment to the Court, given that it had no jurisdiction to hear the application. [NAME_5] then pressed that the hearing again be adjourned; that its jurisdictional arguments be later heard separately from the merits and that after the jurisdictional arguments had been determined, it be given leave to file the further affidavits upon which it wished to rely, if the Court found that it had jurisdiction in the matter.

11 The applicants resisted these applications. While they conceded that the hearing of the jurisdictional argument could not proceed before Wednesday 24 April 2002, in the light of the s78B notices which had been given, they resisted the hearing otherwise being further adjourned. [NAME_15] of the Attorney General's Department then announced an appearance for the Attorney General of New South Wales, expressing concern at the late stage that the jurisdictional issue had been raised with the Attorney and advised that the Attorney had not yet formed a view as to whether any submission would be made on the jurisdictional point raised, but that it was unlikely. [NAME_15] was informed of the adjournment of the jurisdictional issue until the following Wednesday and he withdrew.

12 It was explained by counsel that [NAME_5] had not been in a financial position which permitted it to comply with the directions given by the Court in September, as a result of which it was again not ready to proceed. It was, however, submitted now to be in a position which permitted it to go forward as a corporation. It wished to defend the claim made. [NAME_5], a director of the second respondent was called to give evidence about these matters.

13 [NAME_5]'s evidence was that in the period to 6 December 2001 and thereafter 'to recent date', [NAME_5] 'could not be assured that it would remain as a corporate entity' and that it had not been in a financial position to instruct counsel and solicitors in the matter. Indeed, as at September 2001, it had not been trading for about two years, it had creditors and no business. [NAME_5] was aware of the Court's orders, [NAME_5] had no funds which enabled it to meet them. The directors were occupied seeking to avoid administration and to find an investor. This position firmed in mid-March and was confirmed on 12 April, when it received a tranche of funds which permitted it to continue as a corporate entity.

14 [NAME_5]'s evidence that [NAME_5] had not traded for about the preceding two years, did not sit comfortably with announcements [NAME_5] had made in that period to the stock exchange; various minutes of [NAME_5] meetings in that time; the dealings in its bank accounts and evidence later given by [NAME_5], that he had provided [NAME_5] with various services throughout that time through his company, in respect of which he had been paid something in the order of $3,000 per month. [NAME_5] was also cross examined as to the money paid into Mr [COMPANY_13], in accordance with the undertakings given to the Court the preceding September. He was unable to entirely explain how that money had been dealt with. His evidence suggested, however, that what had occurred was inconsistent with the undertaking which had been given to the Court.

15 In the circumstances I declined the further adjournment application, giving reasons for that decision, which included that it would not do justice between the parties to yet again adjourn the hearing in order to accommodate [NAME_5]'s failures. I was not satisfied that costs orders could address the difficulties existing at that point.

16 As noted, [NAME_5]'s evidence had also revealed that the undertaking which had been given to the Court in September 2001 as to costs had not been adhered to by [NAME_5]. An explanation was thereupon sought by the applicants as to what had been done with the money the subject of the undertaking. None was forthcoming.

17 This led to the applicants making a rather unusual application, namely that the Court not further hear [NAME_5]. Consideration of that application was deferred until the following day. Cross examination of [NAME_3] then continued and [NAME_5] then called [NAME_5]. There was no evidence called in reply and submissions commenced.

18 The following day [NAME_13] informed the Court that [NAME_5]'s efforts to place a further $20,000 in trust having regard to the undertaking earlier given to the Court had not succeeded, but were in hand. A little later in the morning, [NAME_13] made the following statement to the Court: 'I am pleased to note that my clients have deposited the sum of $20,000 into my trust account. $20,000 is not sitting in the trust account for disposition as the court may order. [NAME_11]: If the money is there, I do not pursue that application. We would still like an explanation as to why it went out. That obviously needs to be done because of other considerations whare (sic) now before the court concerning monies which were said to be placed in that account in September last year and remain in that account. [NAME_13]: I think the matter is adequately addressed at this point in respect to those proceedings. HER HONOUR: You have not satisfied [NAME_11]. That is a matter for the respondent, whether it chooses to provide an explanation to the court as to how it came to be that the undertakings given to the court were not abided by. If the respondent chooses to proffer no explanation, it cannot be rung out of you. Undoubtedly I will be hearing submissions on it and consequences might flow from it but that is matter for you or the respondents. [NAME_13]: I can tell the court that the money was paid out on the direction of my clients. I realise now that was against the orders of the court. The money was paid out firstly to satisfy the costs order that was made on the previous occasion and secondly at the direction of my clients. The money has now been returned to the trust account and is available for the auditors. [NAME_11]: I have nothing to say.'

19 The applicants did not further press their application that [NAME_5] not be heard and the hearing continued.

20 [NAME_15] again appeared to inform the Court that the Attorney had not yet determined whether to make any submissions, on the jurisdictional point raised, but that it was most unlikely that any would be made. There was no objection to the Attorney being given leave to make written submissions within 7 days. None were made.

21 [NAME_5] did not finally submit that it had been unable to put on evidence relevant to its case as a result of these developments. To the contrary, it was submitted by counsel that 'As to evidence, the critical evidence we needed is on.'

The Claim

22 I turn then to the orders sought in the applicants' summons. They were: '1. An order adding the second respondent as a party to the [COMPANY_5] Agreement between the first applicant and the first respondent wherein the first and second respondents will be referred to as "the companies".

2. An order varying the said [COMPANY_5] Agreement as follows:

(a) Clause 7.1 be deleted and in substitution thereof be inserted the following clause: "The companies shall pay the management fee to the service provider monthly in arrears. Should the [COMPANY_5] Agreement be terminated by the companies prior to the expiry of the Management Period then the companies shall on the date of termination pay to the service provider the full Management Fee for the balance of the unexpired Management Period."

(b) Clause 7.2 be deleted and the following clause be inserted in its place: "The companies shall pay the Performance Fee to the Service Provider in respect of each Management Year within one month after the relevant Management Year. Should the [COMPANY_5] Agreement be terminated prior to the expiry of the Management Period then the companies shall on the date of termination pay to the service provider the Performance Fee due and Payable as at the date of termination including any pro rata amount for the period from the commencement of the relevant Management Year to the date of termination."

(c) Clause 7.3 be deleted and the following clause be inserted in its place: "The companies shall pay an Exit Fee to the service provider within two months after the termination of this agreement or, as the case may be, the end of the Management Period. Should the [COMPANY_5] Agreement be terminated prior to the expiry of the Management Period then the companies shall on the date of termination pay forthwith to the service provider the Exit Fee as defined by this agreement."

3. An order for the payment of the Management, Performance and Exit Fees based upon the termination of the service provider by the companies. Such order for the payment of money to be made either jointly or severally by the respondents.

4. An order for the payment of interest from the date of termination by the companies of the service provider of the fees referred to above. Such order of the payment of money to be made either jointly or severally by the respondents.

5. An order for the payment of costs. Such order for the payment of money to be made either jointly or severally by the respondents.

6. Such further order or other orders that this [ADDRESS] thinks fit.

23 The provisions of the [COMPANY_5] agreement here in question were clause 7 Remuneration and clause 9 Termination. They provided: ' 7 REMUNERATION 7.1 Payment of Management Fee The Company shall pay the Management Fee to the Service Provider monthly in arrears. 7.2 Payment of Performance Fee The Company shall pay the Performance Fee to the Service Provider in respect of each Management Year within 1 month after the end of the relevant Management Year. 7.3 Payment of Exit Fee The Company shall pay Exit Fees to the Service Provider within 2 months after the termination of this agreement or, as the case may be, the end of the Management Period. 9 TERMINATION 9.1 Termination by either Party Either party may terminate this agreement without cause after the expiry of three years from the Commencement Date by giving 2 (two) months written notice to the other party. 9.2 Termination by Company The Company may terminate this agreement by giving 1 (one) month written notice to the Service Provider but only if: (a) in the reasonable opinion of the Board, the Service Provider or Principal Employee fails to provide the [COMPANY_5] to a satisfactory standard which continues unremedied for ten Business Days after written notice of that failure has been given to the Service Provider; (b) the Service Provider commits a serious or persistent breach of any of the provisions of the agreement evidenced by this document which is incapable of being remedied to the reasonable satisfaction of the Board; (c) the Service Provider fails to remedy, to the reasonable satisfaction of the Board, a serious or persistent breach or default of any of the provisions of the agreement evidenced by this document which is, in the opinion of the Board, capable of being remedied, within 14 days of receiving notice from the Company of that breach or default; (d) the Principal Employee or any member of the board of directors of the Service Provider is convicted of any offence involving fraud or dishonesty or any other offence (except for a traffic offence) which is punishable by imprisonment (whether that person is imprisoned or not); or (e) the Service Provider has a receiver or receiver and Service Provider or liquidator or provisional liquidator appointed. 9.3 Entitlements on termination Upon termination of the agreement evidenced by this document under clause 9.1 the Service Provider is entitled to the Management Fee payable to the Service Provider up to and including the date of termination.

24 The money sums quantified by the applicants were performance fee: $781,826.08 and exit fee: $475,000.00. The performance fee and exit fees were calculated in accordance with the formulae provided in the agreement. The calculation had regard to various information obtained from [NAME_5] and the liquidator. A claim for notice was also advanced.

The evidence

25 Various documents were tendered and evidence was given by the applicant, [NAME_3]. Evidence was called by the second respondent from [NAME_5] and [NAME_5].

The circumstances

26 [NAME_5] held 100% of the shares of the first respondent ('[NAME_2]'), formerly named [COMPANY_2]. It had purchased these shares in April 1998 from [NAME_3], [NAME_5] and [NAME_5], under separate agreements.

27 On the same day, the first applicant, [NAME_1] ('[NAME_1]') entered a [COMPANY_5] agreement with [NAME_2]. It was put to [NAME_3] in cross examination that this agreement had been negotiated by him both on behalf of [NAME_1] and as a director of [NAME_2]. [NAME_3] denied this. He also denied that the agreement had been entered prior to the sale of his shares to [NAME_5]. On his evidence, the negotiations about the terms of these agreements had been conducted with [NAME_5], as purchaser of the shares in [NAME_2]. The [COMPANY_5] agreement had been drafted by its solicitor, [NAME_14] and had been executed in his presence. [NAME_14] had also acted on the purchase agreements.

28 [NAME_5] had also entered a [COMPANY_5] agreement with [NAME_2] that day. Pursuant to these agreements, [NAME_3] became the managing director of [NAME_2] and [NAME_5] a director. [NAME_3]'s expertise was in marketing and sales. [NAME_5]'s in finance.

29 [NAME_2] had been established in March 1997, by [NAME_3] and [NAME_5], with the aim of obtaining an [NAME_5] phone license. They each held 70,000 shares, as did [NAME_5], who [NAME_3] and [NAME_5] had met while they were both employed at [NAME_5]. [NAME_5]'s company, [COMPANY_5], was a software company with expertise in telephony billing. [NAME_5] obtained his shareholding in [NAME_2], in return for licensing his billing software to [NAME_2].

30 [NAME_3] had resigned his employment with [NAME_5] in March 1997, after it had rejected a proposal which he and [NAME_5] had made to its board, that it affiliate with the [NAME_5] system, rather than Telstra. [NAME_3] had been employed at [NAME_5] as General Manager of [NAME_5] as Finance Director. In the period from February 1996, to March 1997, while employed with [NAME_5], its sales revenues had increased from $60 million to $95 million. They were also both directors of [COMPANY_5]. [NAME_2] was successful in obtaining an [NAME_5] phone license in August 1997, enabling it to connect customers to the [NAME_5] network, to bill them for services provided and to sell them other related products.

31 Between March and August 1997 while the Opus Mobile licence was being pursued by [NAME_2], [NAME_3] had also worked as a consultant in the telecommunications industry. He devoted all of his time to [NAME_2], once it obtained its [NAME_5] license. By January 1998, [NAME_3] and [NAME_5] were considering the viability of their company. They became aware of an opportunity to acquire a mobile phone customer database from another company which was in financial difficulties, First Direct. They sought finance for the acquisition and in that process, were introduced to [NAME_5]. They had discussions with [NAME_5], then managing director of [NAME_5], who [NAME_3] understood was a major shareholder of [NAME_5], through a company which he owned. Eventually both [NAME_2] and [NAME_5] made competing bids for First Direct.

32 In April 1998, it was agreed that [NAME_5] would acquire the shares of [NAME_2] from [NAME_3], [NAME_5] and [NAME_5], after a due diligence had been conducted by [NAME_5], [NAME_5], as well as an audit by its auditors, [NAME_5]. As well as the two [COMPANY_5] agreements then entered by [NAME_2] with [NAME_3] and [NAME_5], it also entered a two year billing contract with [NAME_5]'s company, [COMPANY_5]. [NAME_3]'s evidence was that all four agreements were interdependent and signed at the same meeting in the presence of [NAME_5]'s lawyer, [NAME_14]. On his evidence the sale agreements would not have proceeded in the absence of the other agreements.

33 The effect of the [COMPANY_5] agreement was that [NAME_1] was paid $48,000 per annum to provide [NAME_3]'s services as managing director of [NAME_2]. It also provided for a potentially substantial annual performance fee in addition and a substantial exit fee, in the event the agreement was terminated. The claims here made were based on these provisions, because when the agreement was later terminated by [NAME_2], it made no payments in respect of the termination, or in relation to performance.

34 [NAME_3] was cross examined about the terms of the agreement. He agreed that potentially they could have resulted in remuneration being paid to [NAME_1] in excess of $250,000 per year. He agreed that he had executed the agreement for [NAME_1] and that [NAME_5] had executed it for [NAME_2]. His view at the time was that there was no conflict of interest arising from this, given that the agreement had been drafted by [NAME_5], had been approved by it and was executed in its lawyers' presence. He understood that [NAME_14] had received his instructions from [NAME_5] and [NAME_5]. They had not executed the agreement because at the time [NAME_2] only had two directors – he and [NAME_5].

35 After the [NAME_5] acquisition, the two bids for First Direct were combined, but did not succeed. [NAME_3] and [NAME_5] then worked together, conducting the business of [NAME_2] at an office in North Sydney. The board comprised [NAME_3] as managing director, [NAME_5] and [NAME_5] as directors, [NAME_5] having resigned his position. In June 1998, [NAME_14] was appointed company secretary. [NAME_3] and [NAME_5] prepared a new business plan for [NAME_2], which provided for increased funding from [NAME_5]. [NAME_3] understood that [NAME_5] had allocated funding of up to $9 million to develop the business. This understanding was in issue between the parties in the proceedings.

36 In cross examination it was put to [NAME_3] that [NAME_5] did not provide funds to [NAME_2], but from other companies in the [NAME_5] Group. He disagreed. His evidence was that requests for funds were made to [NAME_5]. In his view, if funds were then received after its approval of such a request, the funding came from [NAME_5]. He could not recollect specifically from which accounts particular funds had been paid to [NAME_2]. He accepted, however, that they may not have been directly supplied by [NAME_5].

37 [NAME_5]'s evidence was that [NAME_5] was a publicly listed company which had undertaken an unusual exercise to raise funds – the 'Connect the World' project. [NAME_5] was the Company Secretary and Financial Controller of [COMPANY_16], (as [NAME_5] was renamed in September 2001. I will continue to refer to it as [NAME_5]). At the final hearing he remained the Financial Controller, his services being provided to [NAME_5] through a company under a consultancy agreement He made charges to [NAME_5] on an hourly basis for those services and had been present in Court, when the earlier mentioned undertakings had been given in September 2001. He, too, was aware of the payment made into the trust account from [NAME_5]'s funds as a result, but was not aware of what had thereafter happened to those funds.

38 [NAME_5] gave evidence about the companies comprising the [NAME_5] group, and how money flowed between them, between June 1998 to October 1999. In a flow chart he identified that [NAME_5], a public company, held 100% of the shares in [NAME_2] and two other companies, [COMPANY_2] (formerly known as [COMPANY_2]) and [COMPANY_2] the World. [NAME_5] also owned 57% of the shares of [COMPANY_17], the manager of the 'Connect the World' project.

39 The financier of the Connect the World Project was the [COMPANY_18], which was managed by [COMPANY_19]. In the [NAME_5] accounts for the year ending 30 June, related party transactions were dealt with. It was there noted that receipts from [COMPANY_2] and [COMPANY_2] had been placed on deposit with [COMPANY_20], where they did not earn interest. As at 30 June 2002, $26,586,000 was on such deposit. [COMPANY_17] held 8% equity interest in the shares in [COMPANY_20]. [NAME_5] and [NAME_20] were directors of this company. Various marketing and management fees (totalling $6,600,000) had been paid to [NAME_2] by [COMPANY_2] and [COMPANY_2].

40 It was [NAME_5]'s evidence that the [NAME_5] accounting records did not disclose that $9 million had passed from [NAME_5] to [NAME_2]. Rather, funds had come to [NAME_2] from the other companies in the group, which themselves had received funds from the [COMPANY_18]. Money had also flowed from the other companies in the group to [COMPANY_17] and from it, to [NAME_5].

41 In cross examination, [NAME_5]'s evidence was that [NAME_5] was a small public company which had raised certain funds before the Connect the World project. [COMPANY_17] had issued the prospectus in relation to the Connect the World Project. [NAME_5] understood this was a tax project, very successful in raising money. He described the arrangement as highly unusual. His evidence was that it would usually be the case that the parent company would raise such funds. [NAME_5] did not, but had a 57% shareholding in [COMPANY_17]. He was not aware of how the balance of the shares were held.

42 [NAME_5]'s evidence in cross examination was that as 100% shareholder in [NAME_2], money which it made was for the benefit of [NAME_5]. 43 [NAME_3]'s evidence was that in April 1998, [NAME_2]' revenue was $10,000 per month and that by October, its billing revenue was approximately $300,000 per month. Its customer database had increased in that period and an agency agreement with a seller of international telephone call connections had been entered.

44 In October 1998, [NAME_5] suddenly departed for the United States, leading to an unanticipated uncertainty about the future of [NAME_2]. [NAME_5] resigned as a director of [NAME_2] and [NAME_20] was appointed. [NAME_5] later informed [NAME_3] that he proposed to purchase shares in [NAME_5] held by [NAME_5]'s wife and that this acquisition would enable him to be appointed to the [NAME_5]. [NAME_5] was later noted on ASIC records as having acquired a shareholding in [NAME_5] and on 30 October he was appointed a director of that company.

45 Over October and November, [NAME_3] and [NAME_5] discussed the composition of the boards of [NAME_5] and [NAME_2]. [NAME_5] proposed to become the managing director of [NAME_5] and to replace the other board members. They also agreed to appoint [NAME_13] to the board of [NAME_2].

46 In November, [NAME_3] and [NAME_5] discussed replacing their [COMPANY_5] agreements with [NAME_2]. [NAME_3] envisaged that he would become an employee of [NAME_2] the following July, as he was no longer pursuing outside consultancies through [NAME_1]. [NAME_3]'s evidence was that [NAME_5] suggested to him that he could not continue with his own [COMPANY_5] agreement with [NAME_2], while he was managing director of [NAME_5] and that both his agreement and [NAME_3]'s, would have to be replaced, "because it is too good a deal for both you and me. It's not in the best interests of the shareholders." He also proposed that there be a new contract for [NAME_3], with more specific performance measures identified, with options in [NAME_5] shares and a salary more in line with his position as managing director of [NAME_2].

47 It was put to [NAME_3] in cross examination that the formulae contained in the [COMPANY_5] agreement did not depend upon [NAME_2] making any profits. He agreed. The formulae referred to telephone lines. He also agreed that it was theoretically possible for such lines to be sold at a loss, but for significant payments still to accrue to [NAME_1] under the formulae provided.

48 In November 1998, [NAME_1] was being paid $4,000 a month under the [COMPANY_5] agreement for [NAME_3]'s services. His evidence was that [NAME_5] proposed a new payment of $15,000 per month be implemented. There were also discussions as to the payment to be made to [NAME_3] and [NAME_5], to bring their current agreements with [NAME_2] to an end. [NAME_3]'s evidence was that $250,000 was proposed by [NAME_5], having regard to [NAME_2]' current monthly billings. Another acquisition was being contemplated by [NAME_2] at that time. [NAME_3] and [NAME_5] discussed how this acquisition would operate to increase the payments to be made to them under their agreements, if they were not first terminated. Termination was agreed.

49 From November 1998, the payments made to [NAME_1] by [NAME_2] were increased from $4,000 per month to $15,000. These payments were reflected in the financial accounts of [NAME_2] produced each month, which [NAME_3] discussed with [NAME_5] and were presented to the board of [NAME_2] and he understood, to the [NAME_5]. [NAME_3] also arranged for provision to be made in the [NAME_2]' budget, for the $250,000 termination payment to both he and [NAME_5]. The budget was approved by [NAME_5] and submitted to the board of [NAME_2] on 11 March 1999.

50 In January 1999, [NAME_13] had been appointed a director, [NAME_20] had resigned as a director and [NAME_14] as secretary. In cross examination, [NAME_3] agreed that in January, the management of the company was principally left to him by [NAME_5]. He agreed that [NAME_13] asked him for a cash flow budget, but denied that he had also asked for a full statement of the company's finances, or for an undertaking from the other directors that the company could meet its debts as and when they fell due. In February, [NAME_5] had appointed a new Chief Operations Officer, [NAME_5]. [NAME_5] informed [NAME_3] that [NAME_5] would learn about [NAME_2], while [NAME_3] was away on leave. He was due to be away on his honeymoon in March and April.

51 On 11 March a new consultancy agreement was entered into by [NAME_1] and [NAME_2], after it had been approved by the board of [NAME_2]. This document had also been drafted by [NAME_14], [NAME_5]'s solicitor. The minutes of the [NAME_2]' board meeting of 11 March reflected that the company's financial accounts had been reviewed by the [NAME_5] and that a 3 year cash flow forecast was sought from [NAME_3], as well as a strategic business plan. [NAME_3]'s evidence was that [NAME_5] was to assist him with this plan. [NAME_5] was to be acting managing director in [NAME_3]'s absence. [NAME_3]'s evidence in cross examination was that he never produced these documents, as the result of the events which occurred after his return from his honeymoon. He also agreed that [NAME_13] had described as 'pathetic' the request made in March by [NAME_2] to [NAME_5] for $300,000. It had been made in accordance with the arrangements then in place. His evidence was that the request document had been sent again, after he had received clarification from [NAME_5] as to what information it required.

52 As to the strategic plan, [NAME_3]'s evidence was that there were such plans which he kept on computer and updated monthly. He discussed that material with [NAME_13] on a weekly basis, but had not been asked to produce a hard copy prior to the March meeting. Documents were then produced, although [NAME_3] could not recollect the detail contained in those documents. He agreed that [NAME_13] was not satisfied with the adequacy of that material. His evidence was that it was then agreed that more detail was required and that the material would be produced on his return from leave, with the assistance of [NAME_5], who would familiarise himself with the company's operations during his absence on leave. His evidence was that upon his return he was, however, denied access to his computer and [NAME_2] generally and he thus never produced that material.

53 There were later discussions between [NAME_3] and [NAME_5] as to how the proposed $250,000 payment upon termination of the [COMPANY_5] agreement was to be funded. [NAME_3] departed on his honeymoon, after his wedding on 14 March, expecting payment of $175,000 to be made in accordance with the new consultancy agreement during his absence. The new [COMPANY_5] agreement was, however, subject to ratification by the [NAME_5]. It was not approved and the anticipated payment was not made to [NAME_3]. These proceedings were conducted by the parties on the basis that the result was that the original [COMPANY_5] agreement continued to operate.

54 At the meeting of the board of [NAME_2] on 14 April, during [NAME_3]'s absence, [NAME_13] moved that [NAME_3] be terminated as managing director. This was seconded by [NAME_5] and the resolution carried. The minutes recorded [NAME_13] as being 'appalled at the level of management in the company'. [NAME_13] also noted his intention to resign from the board, given his membership of the [NAME_5]. The board meeting adjourned to 10 May. In cross examination, [NAME_3] agreed that he had spoken to [NAME_5] while he was away on his honeymoon, but denied that his dismissal as managing director had been discussed. His evidence was that he first learnt of this upon his return. [NAME_3] was also cross examined about the business expenses of [NAME_2], including in relation to marketing and premises. It is unnecessary to detail this evidence here.

55 [NAME_3] returned to work on 15 April, to be informed by [NAME_5] that [NAME_5] had conducted a review during his absence and that he had discovered that the [NAME_2] business was not on budget; sales were too low and expenses too high. [NAME_3] was given a new organisation chart and told that he had been removed from the position of managing director, which no longer existed. He was informed that in future he was to work in sales, but he was first required to tell [NAME_5] why he wanted this new job. In cross examination he agreed that [NAME_5] told him that his performance was substandard and that [NAME_5] was to run the company.

56 [NAME_5] told [NAME_3] that he would be paid out his existing contract for $250,000 and he was then given an opportunity to consider his position. On Saturday 17 [NAME_3] and [NAME_5] spoke again, arguing about what had occurred. [NAME_3] told [NAME_5] that if he was not happy with his performance, that [NAME_5] should terminate him and pay him out. [NAME_5] agreed.

57 The following [NAME_5] asked to meet with [NAME_3] to discuss his position. A meeting at the [NAME_5] offices was arranged. Later that day [NAME_3] received two letters addressed to [NAME_1]. One stipulated that he had 10 days to remedy areas of alleged non-performance, including in relation to financial matters and the other advised that the [NAME_5] had refused to ratify the new consulting agreement. Repayment of $55,000 was also required. (This related to the increased monthly payments made to [NAME_1] since November.) [NAME_3] responded in writing, dealing with each of the matters raised with him in detail, sought to discuss the problems raised and asked for notice of the next board meeting. In cross examination he explained that he then did not believe that [NAME_2] was going to honour its agreement and so he withheld repayment of the $55,000, although he acknowledged it was owed.

58 On Wednesday 21 April, [NAME_3] again met with [NAME_5] at the [NAME_5] offices. [NAME_3] was directed to report to [NAME_5] and not to attend the offices of [NAME_2]. [NAME_3] was denied access to its offices, its files, records and staff. It was accepted by the second respondent that these actions were contrary to the requirements of the [COMPANY_5] agreement and reflected relevantly unfair conduct by [NAME_2]. These matters were pursued without success by [NAME_3] at the time, by telephone and correspondence. In a letter of 27 April he was directed to provide various information to the board. [NAME_3] again replied in detail, seeking access to various information. This was not permitted and he was denied access to the office and records of [NAME_2]. Acrimonious correspondence continued.

59 The minutes of the 10 May board meeting noted that it was reported by [NAME_5] that [NAME_5]'s investigations had shown [NAME_2]' revenue was down to 60% of budget and that expenses substantially exceeded budget and that it was suffering serious problems. [NAME_5] was preparing a business plan. It was also noted that [NAME_3] had rejected the criticism of his management and had refused to accept his termination, had refused to provide information sought and had been given time until 13 May to do so, so that the outcome could be reported to the [NAME_5] on 13 May. [NAME_3] did not attend this meeting.

60 On 12 May, [NAME_3] was directed to attend a meeting with [NAME_5] and [NAME_5] the following day, at the [NAME_5] offices, to discuss four itemised points. When he arrived at the meeting, [NAME_3] was informed that a meeting of the [NAME_2] board was to take place. A review of [NAME_3]'s performance as managing director was then sought to be conducted, with [NAME_3] protesting that he had already been removed from that position and had been given no notice of such a review. He was then escorted from the premises.

61 The Board minutes of 13 May record that it was resolved that [NAME_3] had proved himself unfit to be managing director, [NAME_1] was in breach of the [COMPANY_5] agreement and that it should be terminated pursuant to clause 9.2.

62 [NAME_2] terminated [NAME_1]'s agreement in writing, advising that the board considered that it had failed to provide the contractual ramification services in a satisfying standard. Termination was to take effect on 13 June. [NAME_3] understood that this took effect immediately. ASIC records showed that [NAME_3] ceased being a director of [NAME_2] on 13 May. His evidence was that he received no notices of directors' meetings and attended none after 12 March.

63 [NAME_3]'s evidence was that [NAME_5] later telephoned him and asked whether he had made arrangements to have the business of [NAME_2] valued. [NAME_3] then engaged a lawyer and demands for certain payments under the [COMPANY_5] agreement were made upon [NAME_2] and [NAME_5]. No payments in respect of either performance or exit fees were ever made. On 4 August, his solicitors were advised by [NAME_13] that [NAME_2] had been placed into administration. [NAME_1] later provided the administrators a 'without prejudice' informal proof of debt estimated to be $750,000, pursuant to the [COMPANY_5] agreement.

64 Some of the minutes of meetings of the board of [NAME_5] were in evidence. The 18 June minutes recorded that irregularities in the financial records of [NAME_2] had come to light, which suggested that a fraud had been committed. This had been drawn to the attention of the auditors, ASIC and the police, which, it was recorded, had commenced an investigation. On 23 June, [NAME_13] was appointed Chairman of the [NAME_5].

65 The 29 [NAME_5] minutes recorded that it had been revealed that [NAME_5] had drawn a cheque on a [NAME_2]' account, in favour of [COMPANY_20], which was deposited into its account on the same day. Within 24 hours it had paid $250,000 to [NAME_5] and $250,000 to another person. It had been ascertained that [NAME_5] had left the country on 20 June.

66 The [NAME_5] minutes of 2 July recorded that when appointed managing director of [NAME_5] in November 1998, [NAME_5] had been directed to produce a detailed business plan, with financial modelling to show the position of the group. In January 1999, non-executive directors had reprimanded [NAME_5] at a board meeting, for failing to produce the business plan. It was to be presented at the February board meeting. Various unsatisfactory documents were produced in February, March and April. In May, a written direction was given to [NAME_5] about the production of this material. On 11 June, three non-executive directors moved to remove [NAME_5] as a director of [NAME_2]. This resulted in [NAME_5] resigning from the [NAME_5] and all of his other board positions with other companies in the group. It was in the resulting investigation that the unauthorised movement of $500,000 by [NAME_5] had come to light. The minutes also recorded that the board had discovered that ' …it had been consistently misled about the true financial position of [COMPANY_2] by [NAME_5]'. [NAME_5] was appointed Acting General Manager of [NAME_2].

67 On 28 June, [NAME_13] asked [NAME_3] to attend a meeting to discuss a transaction which had occurred while he was managing director. On 29 June, he met with [NAME_13] and [NAME_20]. He was asked if he was aware that in November 1998 [NAME_5] had borrowed $500,000 from [NAME_2]. [NAME_3] explained that he was not; that [NAME_5], the company's financial controller prepared its financial statements, which were presented to [NAME_5]. Only one signatory was required on a cheque. The cheque in question had been signed by [NAME_5]. [NAME_3] was informed that [NAME_5] had tried to discuss the matter with [NAME_5], but that he had left the country, after having been approached about the money, whereupon he resigned from the board. It was understood that he had disposed of his house, car and boat before his departure.

68 [NAME_3] was cross examined about the $500,000. His evidence was that he was told about the cheque drawn by [NAME_5], after it had occurred. At that time only one signatory was required. This requirement was not altered by the board until the following February. [NAME_5] told him that he had placed the sum on deposit with [COMPANY_20]. That deposit was then reflected in the accounts of [NAME_2], which were placed before the board. [NAME_3] had never received any questions from anyone about this term deposit. He had never objected to the steps [NAME_5] had taken. He understood from [NAME_5] that the money was available on 48 hours' notice. He had not queried the terms of the deposit, nor ever asked for the money to be returned, having had no need to do so. He always understood it had been deposited with a related company.

69 On his evidence [NAME_3] reported to [NAME_5] at that time. His evidence was initially that [NAME_5] was then managing director of [NAME_5], although on reflection he was not certain as to the precise date the cheque was drawn and [NAME_5] was appointed managing director, he could then have been the acting managing director. [NAME_3] regarded [NAME_5] as his boss at [NAME_5], even though he was himself managing director of [NAME_2] and [NAME_5] was also a director of that company. He provided monthly reports to [NAME_5] at [NAME_5], as well as reporting to him on a weekly basis, as his direct reporting line at [NAME_5], it owning all of the shares in [NAME_2]. He agreed that he had obligations as managing director and that he also reported to the board of [NAME_2] itself. That board did not meet monthly, but quite frequently. He also agreed that he was responsible to that board, which itself was responsible to [NAME_5]. As managing director, he agreed that he had control of the finances of [NAME_2], subject to the rules established by its board and [NAME_5]. His evidence was that he also attended board meetings of [NAME_5], to present the [NAME_2] accounts.

70 [NAME_3] was asked whether he had signed the deposit documents for the $500,000. He could not recollect whether he had. It was put to him that there was a criminal investigation ongoing into the activities of he and [NAME_5] and that this document was a forgery. [NAME_3] was not aware of this. The document in question was not put into evidence.

71 In re-examination, [NAME_3] explained that he understood from [NAME_5] that [NAME_5] had a controlling interest in [NAME_17], which had an interest in [COMPANY_20], where the money was placed on deposit. He understood that this company was related to [NAME_5], another [NAME_5] director. He also understood [NAME_5] had itself placed funds on deposit with [COMPANY_20].

72 [NAME_3] was also asked why [NAME_2] had asked [NAME_5] for $300,000 in March, when it had $500,000 on deposit with [COMPANY_20]. He explained that the request was made by the financial controller [NAME_5] according to the arrangements in place for the provision of funds between the companies and that he had approved it in the normal way. He had not thought to call on the [COMPANY_20] deposit at that time. [NAME_5] had said that deposit was to be left there for a rainy day, unless absolutely required. At that time his instructions were to call on [NAME_5] for funds. He agreed that at that time [NAME_2] was losing money every month and that this was reflected in its monthly profit and loss statements, which compared budget with actual results. He was also cross examined about loans made to other related companies which [NAME_2] was assisting to manage at the time and sums it paid for acquisition of other entities while he was managing director. He agreed that these payments were made with his approval as managing director, even though he could not then recollect the detail of all of the items on the balance sheets.

73 In August 1999, administrators were appointed to [NAME_2] as the result of action taken by [NAME_5]. They continued to trade [NAME_2]' business. [NAME_3] attended a meeting of creditors on 9 August. [NAME_21] then informed creditors that [NAME_2], the main trading arm of [NAME_5], had total debts of $3.5 million.

74 The administrators gave a report in August 1999, indicating that [NAME_2] had approximately 6,000 long distance subscribers and 1,600 mobile phone subscribers. Efforts were being made to sell the business as a going concern. In the report it was noted at p5: '[NAME_2] has been attempting to grow to critical mass and accordingly undertook considerable investment in advertising and infrastructure. This initial investment was provided in the form of funds provided by participants in the 'Connect the World' fundraising project. These funds are described as having been advanced in the form of "marketing fees". By January 1999, [NAME_2] was accruing airtime with [NAME_5] of approximately $4000,000 per month. The management accounts show that in the six months to 31 December 1998, [NAME_2] had experienced a net loss (excluding marketing fees) of $2.4 million.

Accordingly, [NAME_2]' cash position had deteriorated significantly. The invoice for airtime owed to [NAME_5] for the period 28 January 1999 to 27 February 1999 was not paid by [NAME_2] when it fell due on 31 March 1999, and remains unpaid today. Indeed, no further payments were made to [NAME_5] for airtime that accrued prior to our appointment on 2 August 1999. By the time of our appointment, the total debt to [NAME_5] had reached approximately $2.3 million. A number of other trade creditors were outside terms and claims of trade creditors total approximately $1.0 million.'

75 [NAME_3] was cross examined as to why the [NAME_5] bill had not been paid. His evidence was that it was due to be paid at the end of March, while he was away on his honeymoon. He had left [NAME_5] acting as managing director and expected the bill to be paid. He believed that [NAME_2] then had sufficient funds to pay the bill and did not know why it was not paid.

76 He was also cross examined as to the losses identified in the report. His evidence was that the company was a start up company in a growth phase. In these circumstances it was normal to be trading at a loss.

77 It was also reported by the administrators that discussions with 5 serious bidders were proceeding. A proposal had also emerged from [NAME_5], which required the approval of creditors. The administrators also dealt in their report with the possibility that the directors of [NAME_2] had permitted the company to trade while insolvent, in which case they and [NAME_5], as the holding company, could have liability for its debts. It was concluded at p14 that: '[NAME_2] failed to pay the airtime bill to [NAME_5] relating to the month of February 1999 that fell due on 31 March 1999. No further payments were made to [NAME_5] after that date. Hence, there is a strong argument that [NAME_2] was insolvent at that date.'

78 Note was also taken of payments made to directors and other related parties, which might be recoverable, if [NAME_2] had traded while insolvent. The administrators recommended that it be placed into liquidation, which would permit pursuit of the directors and [NAME_5] for insolvent trading.

79 [NAME_5], a director of [NAME_5], addressed its proposal at the meeting of creditors and the meeting was adjourned to enable consideration to be given to it.

80 [NAME_3] was cross examined as to the rate at which [NAME_5] lines were sold. His evidence was that the amount received from subscribers covered the line costs to be paid to [NAME_5], with a surplus. It was put to him that the business was sold for $1.1 million, but that was a figure which [NAME_3] could not confirm. Nor could he confirm that debts totalled $4.7 million.

81 In September 1999, [NAME_5] announced to the Stock Exchange terms of a restructure, which involved acquisition by a US company of [NAME_5]'s shares in a number of group companies for $5.47 million; an arrangement with another company to raise finance and that it had made an offer of compromise, in the sum of $3,400,000, to the administrator of [NAME_2], which had not been accepted.

82 [NAME_3] also gave evidence as to the unemployment which followed these events and their consequences for his personal life.

The parties' respective cases

83 It was the case put for the applicants by [NAME_11] of counsel that the evidence demonstrated that the [COMPANY_5] agreement had been terminated by the respondents. While at one stage it had been purported to have been replaced by the consultancy agreement entered in March 1999, that agreement was not ratified by the [NAME_5] and hence never came into operation. It was submitted that the manner of the termination, contrary to the terms of the agreement and the way in which the applicants were treated as to termination, manifested the relevant unfairness, such as to warrant the relief sought being granted. So did the fact that there was failure to pay both the performance fee and the exit fee provided by the agreement upon that termination.

84 It was also submitted that the respective conduct of the parties would also be considered. The conduct of [NAME_5] was relevant in this respect, given [NAME_5]'s evidence of the relationship between [NAME_2] and [NAME_5] and that any benefit which [NAME_2] obtained was for the benefit of [NAME_5], given the shareholding. The evidence also disclosed that [NAME_5] was the real player in the termination of this agreement.

85 Reference was made to the decision in Kwong & Anor v Stone Microsystems (Aust) Limited (1996) 82 IR 255 at p315 and on appeal at (1997) 85 IR 237 at p269. The evidence as to the circumstances in which the agreement was entered, as a part of the acquisition of the shares in [NAME_2] by [NAME_5], would be taken into account. It was submitted that the whole basis upon which the agreement was terminated was a ruse, devised by [NAME_5] and others, to provide the groundwork for an assertion that there had been a failure to perform by the applicants, so that the agreement could be terminated without the payments properly due to [NAME_1] thereunder. It was submitted that there had been an attempt to contrive a basis for that termination. Demands were made that certain steps be taken and material be provided, but the applicants were denied access to the material and information necessary to enable those demands to be met. Failure then to meet the demands made, was improperly used as the basis for the termination.

86 The evidence showed that the applicants had not been given a fair opportunity to remedy any breaches of the agreement, even if they existed, which was not conceded. While more notice than was sought in the summons could have been claimed in the circumstances prevailing, a period of 22 months was sought. Performance and exit fees had been calculated on the basis of information which had emerged from the administrator's reports and from [NAME_5].

87 Here, it would be accepted that there was a culpable association demonstrated between the unfair contract and [NAME_5], as discussed by the High Court in Brown v Rezitis (1970) 127 CLR 157. The conduct of [NAME_5], a shareholder in [NAME_5] and its managing director, reinforced this association. [NAME_5] clearly obtained the benefit of the shares in [NAME_2] at a time when a part of the overall sale agreement was the [COMPANY_5] agreement here in issue. [NAME_5] thereupon obtained the benefit of the [NAME_5] license which [NAME_2] held, together with the work performed by [NAME_3] under the agreement. [NAME_2] had gone into liquidation, but leave to proceed had been obtained from the Supreme Court. In all of the circumstances revealed on the evidence, [NAME_5] was the appropriate entity against whom orders should be made.

88 The manner in which [NAME_5] had conducted the litigation, was submitted to be but another reason for the making of the orders sought against it. Its unfair conduct had continued throughout the proceedings, including in relation to various undertakings given to the Court at times when, on [NAME_5]'s evidence, its continued existence was marginal. Those undertakings had not been complied with and that should also be taken into account.

89 It was the case put for [NAME_5] by [NAME_13] of counsel that the Court would not take into account how it had conducted these proceedings. That was said to be irrelevant to any matters here falling to be determined. It was also argued that the Court had no jurisdiction to make the orders sought against [NAME_5] and that they would not be made as a matter of discretion in any event. It was also argued that [NAME_3] had no standing in the proceedings, he not having himself been a party to the [COMPANY_5] agreement.

90 It was also submitted that the Court had no power to vary the [COMPANY_5] agreement, so as to make [NAME_5] a party to it. ([NAME_6] v [COMPANY_6] & [NAME_6] v [COMPANY_7] (No 2) (2001) 106 IR 274.) It followed that the claim would be dismissed, because all of the other orders sought were consequential upon the making of that order. It was, however, conceded, that if that view were not taken as to the formulation of the summons, and if the Court formed the view that [NAME_5] had the necessary connection with the agreement, and the agreement were found unfair, orders under s106(5) of the Act could be made against [NAME_5], even if it were not made a party to the agreement. It was argued that such findings would not be made on the evidence.

91 As to the decision in Kwong, it was submitted to be based in part upon an imbalance in the parties and their relative strengths. Here, the evidence was that the second applicant was a high achiever, who had started his own business with [NAME_5], when their former employer was not interested in pursuing their ideas. A mobile phone license was achieved and the licences and customer base then developed were sold to [NAME_5]. Now it was claimed that in dealing with [NAME_5] the applicants were somehow disadvantaged, or in an unequal bargaining position. That was not made out on the evidence.

92 The evidence was that the second applicant and [NAME_5] had agreed with each other that the deal they had negotiated was too good to continue and not in the interests of the shareholders, so that new terms were agreed. The original agreement had been executed by [NAME_3] and [NAME_5]. [NAME_3] sought to have the terms further improved. The evidence was that the original agreement had been prepared by [NAME_14]. It was accepted that the inference which followed was that it had been drafted in accordance with [NAME_5]'s instructions. It was an agreement which dovetailed with the share sale agreement, which [NAME_5] had also drawn up, but nevertheless, it was relevant that [NAME_5] was itself not a party to the agreement here in question.

93 The agreement provided for an exit fee to be paid, if it was terminated within three years of the commencement date, calculated as 25% of the business value increase. The discussions in November 1998 between [NAME_3] and [NAME_5] were that they were going to pay themselves $250,000 in order to terminate this agreement. That discussion took place in a context where [NAME_5] was to become the managing director of [NAME_5]. It followed that the evidence demonstrated that two directors of [NAME_2] were there helping themselves to $250,000, some 6 months after this agreement was entered, on the basis that a new consultancy agreement be entered. It was submitted to be relevant that this new agreement provided for even further favourable terms.

94 That new agreement was, in fact, entered in the following March, but included as a term, the necessity for the approval of [NAME_5]. Its board did not agree to the new terms and so the payment of $250,000 did not fall due. [NAME_3] was thus left with the existing agreement. The evidence showed that he was a man with aspirations to generate considerable wealth for himself. It would be concluded that he and [NAME_5] were seeking to contrive a basis upon which they would be paid significant sums, simply for moving from one agreement to another. Further, it was relevant that the contemplated increase in monthly remuneration from $4,000 to $15,000 had already commenced to be paid by [NAME_2]. Despite the evidence as to the conversation between [NAME_5] and [NAME_3] as to the reason for the termination of the first agreement, the reality was that the proposed new agreement was similarly generous as to payment on termination.

95 It was further submitted that regard would be had to the liquidator's report, which suggested that [NAME_2] had been trading insolvently since March 1999. [NAME_3] had then departed on his honeymoon, insolvency did not arise overnight. He was the managing director from July 1998 and like other directors, it was incumbent upon him to assess the financial assets of the company and to ensure that it did not trade insolvently. Under the agreement [NAME_1] was obtaining fees from [NAME_2], which bore no relationship to profit. The formulae upon which reliance was here placed, similarly did not place any reliance upon profit. If [NAME_2] be regarded as a start up company, it was accepted that it might suffer losses at the outset and it might ultimately not succeed, but nevertheless it was submitted that any managing director had to assess whether or not the company was going to succeed. It could not trade negatively.

96 It was submitted that a director in making decisions about a company's financial position could have regard to the support which a shareholder such as [NAME_5] was providing. Here, there was no evidence of such support. It was, however, then submitted, after an adjournment that 'We are not here to prove or seek to prove that [NAME_3] knew that [NAME_2] case was trading insolvent, if in fact it was at any time or at the date identified by [NAME_21] and that is 31 March 1999.'

97 Rather the point was that [NAME_3] had never advised the [NAME_2]' board or the board of [NAME_5] that [NAME_2] was in financial difficulties. Nevertheless, [NAME_21] later identified that it was possible that [NAME_2] was trading insolvently, no earlier than 31 March. If not insolvent, it was plainly in severe financial difficulty. In those circumstances how could the Court grant the relief sought? The claim was that [NAME_3] was owed a million dollars, even though [NAME_2] had gone into liquidation. He could not get that sum from that company, so now sought it from the parent, to whom he had never revealed the financial difficulty in which [NAME_2] was placed.

98 While the second respondent was granted an adjournment in order to consider what submissions it wished to put in relation to how orders might be made, as between it and the second respondent, if that view were reached that the agreement was relevantly unfair, no submissions were finally advanced as to that matter. The position of [NAME_5] remained simply that no orders would be made against it.

99 As to jurisdiction, it was submitted that [NAME_3] had no competency under s108 of the Act to commence the proceedings, not being himself a party to the [COMPANY_5] agreement sought to be attacked in the summons. While other claims might have been available to have been advanced in the circumstances, they were not. It followed that he could not be granted relief. It was also argued that all of the relief sought in the summons was conditional upon the claim that [NAME_5] be made a party to the [COMPANY_5] agreement. [ADDRESS] had no power to make such an order pursuant to s106(1) of the Act and thus no other orders could be made against it, including orders under s106(5) of the Act. Were relief on any other basis to be entertained, natural justice would require that the respondents be heard, before such orders were entertained.

100 As to the alleged constitutional inconsistency, it was said to arise with ss588V and 5888W of the Corporations Act 2001 (Cth), which provides: 588V. When holding company liable

(1) A corporation contravenes this section if: (a) the corporation is the holding company of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) one or both of the following subparagraphs applies: (i) the corporation, or one or more of its directors, is or are aware at that time that there are such grounds for so suspecting; (ii) having regard to the nature and extent of the corporation's control over the company's affairs and to any other relevant circumstances, it is reasonable to expect that:

(A) a holding company in the corporation's circumstances would be so aware; or (B) one or more of such a holding company's directors would be so aware; and (e) that time is at or after the commencement of this Act. (2) A corporation that contravenes this section is not guilty of an offence. 588W Recovery of compensation for loss resulting from insolvent trading (1) Where: (a) a corporation has contravened section 588V in relation to the incurring of a debt by a company; and (b) the person to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and (c) the debt was wholly or partly unsecured when the loss or damage was suffered; and (d) the company is being wound up; the company's liquidator may recover from the corporation, as a debt due to the company, an amount equal to the amount of the loss or damage. (2) Proceedings under this section may only be begun within 6 years after the beginning of the winding up.

101 It was also submitted that the fundamental concept of the common law, that a company has a separate legal identity to its shareholders, would here not be overlooked. This required that any statutory abrogation of such rights must appear in express words used in the statute in question. Sections 105 and 106 did not obviate the common law principles, that companies have separate legal identity from their shareholders. There was no warrant for piercing the corporate veil, to raise liability against a parent company for the indebtedness of its subsidiary.

102 By way of contrast, it was submitted that s588V and s588W do provide for the abrogation of the common law principle. It followed that the Act did not provide any statutory basis for the making of the orders sought against [NAME_5] and s588V and 588W relevantly covered the field.

103 It was further argued that the orders sought were in direct conflict with the Corporations Act 2001 (Cth) and thus invalid under s109 of the Constitution. Once the patent inconsistency appeared, the burden fell upon the applicant to demonstrate that there was no inconsistency ([NAME_10] v Attorney General for the State of Victoria (1948) 77 CLR 84 at 122.)

104 In any event, clause 15 of the [COMPANY_5] agreement demonstrated that the parties had contracted out of the benefit of any order available under s106. (Lieberman & Anor v Morris (1944) 69 CLR 69.)

105 In reply, [NAME_11] submitted that the area of apparent difference between the parties was in short compass, namely the breach of the [COMPANY_5] agreement, the way in which the applicants had been unfairly dealt with by [NAME_2] upon termination having been conceded.

106 The applicants relied upon the evidence of [NAME_5] as to [NAME_5]'s beneficial ownership of [NAME_2]. This evidence, it was submitted, also demonstrated that the principles discussed by the High Court in [NAME_22] v [NAME_22], were here satisfied in relation to [NAME_5].

107 Reliance was also placed upon the approach of the majority in [NAME_9] v [COMPANY_9] (Administrator Appointed) (2000) 99 IR 69. It was argued that the breach of the [COMPANY_5] agreement here demonstrated, was itself a basis for the orders sought being made. That unfair conduct provided a proper basis for the relief sought, even if the view were taken that the agreement could not be varied so as to add [NAME_5] as a party. As to the judgment of Boland J in [NAME_6] v [NAME_6], the applicants did not seek to traverse his Honour's conclusion, other than to observe that in Stevenson v Barham (1977) 136 CLR 190, the High Court had observed that the wide words of the section must be given their full effect. There was nothing on the face of s106 which would preclude the abrogation of the common law principles of contract, that a third party would not be made a party to a contract which fell within the jurisdiction, without its consent. It was submitted, however, that perhaps the orders as to such addition were, in any event, unnecessary, given the wide powers conferred by s106(5), which did not require as preliminary step, that there be joinder of a third party such as [NAME_5] to the contract in question, before relief was ordered against it.

108 It was conceded that as a matter of fairness any money orders would have to be adjusted having regard to the payment of $55,000 under the new consultancy agreement not ratified by [NAME_5]. The exit fee, or in the alternative the $250,000 earlier agreed, and the performance fee were claimed under the [COMPANY_5] agreement, as well as payment of the monthly management fee for the remainder of the agreement. This it was argued flowed properly from the manner of the termination of the agreement, which was done inconsistently with cl 9.2.

109 As to the constitutional issue, the applicants argued that no inconsistency arose between the Act and the Corporations Act 2001 (Cth). The provisions of s5E of the Corporations Act 2001 (Cth) put this beyond doubt. It provides: 5E. Concurrent operation intended (1) The Corporations legislation is not intended to exclude or limit the concurrent operation of any law of a State or Territory.

(2) Without limiting subsection (1), the Corporations legislation is not intended to exclude or limit the concurrent operation of a law of a State or Territory that: (a) imposes additional obligations or liabilities (whether criminal or civil) on: (i) a director or other officer of a company or other corporation; or (ii) a company or other body; or (b) confers additional powers on: (i) a director or other officer of a company or other corporation; or (ii) a company or other body; or (c) provides for the formation of a body corporate; or (d) imposes additional limits on the interests a person may hold or acquire in a company or other body; or (e) prevents a person from: (i) being a director of; or (ii) being involved in the management or control of; a company or other body; or (f) requires a company: (i) to have a constitution; or (ii) to have particular rules in its constitution. Note: Paragraph (a)---this includes imposing additional reporting obligations on a company or other body.

(3) Without limiting subsection (2), a reference in that subsection to a law of a State or Territory imposing obligations or liabilities, or conferring powers, includes a reference to a law of a State or Territory imposing obligations or liabilities, or conferring powers, by reference to the State or Territory in which a company is taken to be registered.

(4) This section does not apply to the law of the State or Territory if there is a direct inconsistency between the Corporations legislation and that law. Note: Section 5G prevents direct inconsistencies arising in some cases by limiting the operation of the Corporations legislation.

(5) If: (a) an act or omission of a person is both an offence against the Corporations legislation and an offence under the law of a State or Territory; and (b) the person is convicted of either of those offences; the person is not liable to be convicted of the other of those offences.

110 It was argued that this provision was the end of the matter. There was no suggested limitation on any law of this State – see Ex Parte Mclean (1930) 43 CLR 472 at 483.

[NAME_3]'s standing to bring the proceedings

111 It is convenient to consider at the outset, the claim that [NAME_3] had no standing to bring the proceedings. The second respondent relied upon the provisions of s108 of the Act for the submissions advanced. The proper construction of that section was considered by the [ADDRESS] in [COMPANY_8] v [COMPANY_9] (No 2) (2000) 102 IR 309. At p314 the [ADDRESS] confirmed that the word 'contract' there appearing, had the extended meaning given by the definition appearing in s105 of the Act, which provides:

105 Definitions

In this Part: "contract" means any contract or arrangement, or any related condition or collateral arrangement, but does not include an industrial instrument. "unfair contract" means a contract: (a) that is unfair, harsh or unconscionable, or (b) that is against the public interest, or (c) that provides a total remuneration that is less than a person performing the work would receive as an employee performing the work, or (d) that is designed to, or does, avoid the provisions of an industrial instrument.

112 In the summons initiating these proceedings complaint was being advanced about the [COMPANY_5] agreement, under which the first applicant provided [NAME_3]'s services to [NAME_2] as managing director. That, of course, involved a separate contract between he and [NAME_1]. The summons refers to those agreements in paragraphs 8 and 15: '8. The [COMPANY_5] Agreement named [NAME_4] as the principal employee of [NAME_1]. [NAME_4] as the principal employee was required and did devote his attention to the benefit of the first respondent as a result of the [COMPANY_5] Agreement. This work in turn was to the benefit of the second respondent.

15. The contract between the first applicant and the respondents was at all stages unfair and the conduct of the first and second respondents in the alternative rendered the contract unfair.

In all the circumstances the contract and/or arrangements in relation to the first applicant and the second applicant performing work in the telecommunications industry was unfair, harsh or unconscionable and/or against the public interest. Further the applicants rely upon the affidavit which accompanies this summons as grounds permitting this [ADDRESS] to make the orders sought.'

113 The evidence well established that [NAME_3] personally supplied the services which [NAME_1] had agreed to provide to [NAME_2] under the [COMPANY_5] agreement. That was what the parties intended when his shares in [NAME_2] were acquired by [NAME_5] and it was agreed that his services as managing director would be provided to [NAME_2] by [NAME_1]. That, in my view, was sufficient to give [NAME_3] standing to bring these proceedings, having regard to the provisions of s108 of the Act. There can be no doubt that he was a party to that 'contract', as defined, about which complaint was clearly advanced in the summons, when reference was there made to the "contract and/or arrangements in relation to the first applicant and the second applicant performing work in the telecommunications industry". That the relief sought by way of variation, in order to address the unfairness about which complaint was made, was confined to the express terms of the [COMPANY_5] agreement, one part of the contract in question, is not a proper basis for the conclusion that [NAME_3] did not have standing to bring these proceedings.

114 While complaint was made by the second respondent that the case had not been so pleaded, it was a complaint only raised late in the proceedings, as I earlier outlined. It was advanced at a time when it could only be fairly concluded that [NAME_5] had not suffered from any surprise as to the complaints advanced against it by the applicants and the relief which they sought, given the terms of the summons. All of [NAME_3]'s evidence at that point was also on and indeed, his cross examination, to all intents and purposes, was complete. It was clear that both he and [NAME_1] were complaining about the breach of the contract in question and the unfair conduct of [NAME_2] and [NAME_5] towards them, in respect particularly of its termination.

115 [NAME_3]'s evidence was that the agreements entered in April 1998 were interdependent, namely the sale of shares in [NAME_2] to [NAME_5] by [NAME_3], [NAME_5] and [NAME_5]; the [COMPANY_5] agreement here in issue; that entered with [NAME_2] by [NAME_5]'s company [COMPANY_5] and the software supply agreement entered with [NAME_2] by [NAME_5]'s company [COMPANY_5]. That view was not challenged by [NAME_5] in cross examination and must therefore be accepted. Of itself, this was sufficient to ground a conclusion that these agreements themselves formed an arrangement, sufficient to grant the Court jurisdiction to make the orders here sought.

Jurisdiction

116 As the basis for the submission that there was no jurisdiction to make any of the orders sought, the second respondent relied upon the approach adopted by Boland J in [NAME_6], where his Honour was considering an argument that the Court had no jurisdiction under s106 to vary a contract to add a corporation as a party. His Honour doubted that s106 empowered the Court so to order, but then turned to consider whether, even absent such an order, the Court could make orders under s106(5) against the company there in question. Boland J concluded that in the case before him, such orders might be available and thus declined the application brought to have the proceedings brought against that company struck out.

117 Here, the circumstances are somewhat different, but the result is the same. The test is that discussed by the High Court in [NAME_22]. I am well satisfied that the necessary connection between [NAME_5] and the [COMPANY_5] agreement here in question was established on the evidence, so as to provide a basis for the making of orders against it under s106(5), if the [COMPANY_5] agreement be found unfair, as that term is defined in s105. I have dealt with how the agreement came into being and its connection with the share sale agreement. Thereafter the evidence was that as the 100% shareholder of [NAME_2], [NAME_5] controlled the board of [NAME_2]. It was also closely involved in the company's funding and direction, particularly through the activities of both its managing director, [NAME_5], himself a shareholder in [NAME_5], and of other members of its board, who were also appointed to the board of [NAME_2]. [NAME_5] put the matter entirely beyond doubt with the evidence he gave as to the way in which [NAME_5]'s corporate group operated and how [NAME_2] was conducted, for the benefit of [NAME_5].

118 The argument so advanced as to jurisdiction, also depended upon the view being taken that the first variation sought to the contract in the summons, the addition of the second respondent as a party to the [COMPANY_5] agreement, was the primary relief sought and that the other variations were consequential thereupon. The result being, it was argued, that if [NAME_5] were not made a party, the other relief would not be granted.

119 I cannot accept that submission. The claims advanced concerned the alleged unfairness of the contract in question. Various relief was sought. The addition of [NAME_5] as a party to the agreement was plainly not the primary relief sought, nor was it foundational to the other claims advanced, which concerned payments to be made under the agreement in particular circumstances. This argument must be rejected.

120 As to the submission that an inconsistency arises between s106 of the Act and the Corporations Law, I take the view that the inconsistency argument was untenable. It is difficult to see s106 and s588V and 588W of the Corporations Law as giving rise to any of the types of direct inconsistency, as discussed for example, by the [ADDRESS] in Metrocall Inc v Electronic Tracking Systems Pty Ltd (2000) 101 IR 66 at pp76-77.

121 Sections 588V and 588W are concerned with steps which may be taken on a winding up, to recover from a holding company the amount of a debt incurred by a subsidiary, which was insolvent at the time the debt was incurred, if a person suffered loss or damage as the result of the subsidiary's insolvency. Section 106 is not concerned with debts or their recovery, but with the variation of particular types of contracts, which are found to be unfair. As the authorities have made clear, such contracts may be unfair from their inception, may become unfair over time, during the course of their operation, or may be unfair as a result of conduct which they permit or do not preclude.

122 In some cases, as here, a breach of a contract may provide evidence of a relevant unfairness. In others, unpaid debts may also be argued to evince the relevant unfairness. Section 106(5) does not limit the persons against whom orders might be made in connection with the variation of such unfair contracts, to the parties to the contract or arrangement in question. Such orders may also be made against a variety of others, if their culpable connection with the unfairness demonstrated, be established on the evidence. That, however, is what the section is dealing with, not recovery of a debt incurred at a time when a subsidy was insolvent.

123 An intention, in s588V and 588W, to 'cover the field' cannot not be discerned. Sections 5E and 5G of the Corporations Act 2001 (Cth) must, after all, be given effect. Section 5E appears to put beyond argument that no inconsistency of the kind contemplated by s109 of the Constitution here arises for consideration. Section 106 can only be seen as potentially imposing additional obligations or liabilities upon [NAME_5], in meeting any order made against it under s106(5), in relation to the contracts here in question, to which it was not a party. In enacting the Corporations Law, the Parliament intended to save State law not in direct conflict with the Corporations legislation. I can discern no direct conflict in this case.

124 While I note the submissions made about s106 not being read as evincing an intention to pierce the corporate veil, the argument is in my view untenable, given the judgment of the High Court in [NAME_22] and the many cases which have followed it.

Merits

125 I turn then to the merits of the claim. As I have noted, the [COMPANY_5] agreement formed a part of the arrangement which [NAME_1], [NAME_3], [NAME_5] and [NAME_2] entered in April 1998. Thereby, [NAME_5] gained control of the [NAME_5] phone license which [NAME_3] and [NAME_5] had worked together to have [NAME_2] acquire, together with the customer base which [NAME_2] had developed and the software billing licence which it had obtained. This was the business which [NAME_5] acquired through the acquisition of these shares. Given the terms of the sale agreement, entered after [NAME_5] had conducted a due diligence and audit of [NAME_2], it was apparent that it considered that what had been acquired had real value, even though it was plainly a start up business.

126 The terms of the [COMPANY_5] agreement were then also agreed. Thereby, [NAME_3] provided his services to [NAME_2] as managing director. This presumably resulted from the view which [NAME_5] then took, that it wished to retain his services to continue developing the [NAME_2]' business which it had bought. It was no doubt envisaged that with [NAME_3] and [NAME_5] continuing to work in the business which they had developed together, that it would continue to grow and increase in value, to [NAME_5]'s benefit.

127 The terms of the [COMPANY_5] agreement, with money payments of $4,000, together with formulae agreed for both performance and exit fees, having regard to the size of the company's customer base, rather than profit, reflected presumably that this was a start up business in a relatively new industry; which was pursuing growth. A year or so later, the company went into administration. The offer which [NAME_5] then made the administrators for the [NAME_2]' business, in the order of some $3.4 million, suggested that even then [NAME_5] regarded it as having real value and being a business with which it wished to persist.

128 Who was responsible for the difficulties which arose at [NAME_2], which led it into administration, was not established in these proceedings. Views were expressed by the administrators in their first report, that the directors of [NAME_2], who included [NAME_3] as managing director, may have permitted it to trade insolvently, from as early as 30 March 1998. The board of [NAME_5] in July 1998 appeared to take the view that [NAME_5] had a deal of responsibility for what had occurred, including in relation to a possible fraud, as to some $500,000 taken from [NAME_2].

129 Given the evidence, it is not possible to come to any conclusions about these matters. It was common ground that [NAME_2] had not been wound up. Whether any criminal proceedings are in fact being pursued, was also not clear on the evidence. Nor was there any evidence of any proceedings having been instituted against [NAME_3] or other former directors, in relation to allegations of insolvent trading, or any other deficiencies in their obligations as directors of [NAME_2].

130 In all of these circumstances, it is best not to speculate as to what might have occurred in relation to such matters, but rather to deal with what the evidence in these proceedings revealed, relevantly to the claims advanced.

131 The first point to be made is that there was no real contest that [NAME_2] breached the [COMPANY_5] agreement here at issue, at the board meeting in April 1998, when the board members present resolved to remove [NAME_3] from his position as managing director. [NAME_5] acted upon that resolution, without [NAME_1]'s agreement and purported to require [NAME_3] to apply for a sales position in a new organisational structure. Clause 9.2 of the agreement gave [NAME_2] the right to terminate the agreement if certain opinions were formed and steps were taken to have performance issues addressed by [NAME_1]. This [NAME_2] later purported to act upon, while however excluding [NAME_3] and through him, [NAME_1], from the offices, employees and records of [NAME_2].

132 As [NAME_5] conceded, not only did this involve a breach of the agreement, it was conduct which was inappropriate and unfair. The board of [NAME_2] acted in the absence of [NAME_3], who was neither notified of the meeting or of the resolutions proposed to be adopted in early April, or given a real opportunity to address the board's concerns on his return. The reasons for this approach were not revealed.

133 [NAME_3] had gone on leave in mid March, understanding that there were then concerns about the company's business plan, which he was to address with [NAME_5] upon his return. There was no evidence that before [NAME_3] left, there existed any concern that the company was trading insolvently, either on the part of [NAME_3] or the boards of [NAME_2] or [NAME_5]. By the time of his return, concerns about its financial position had arisen, as the result of [NAME_5]'s investigations. [NAME_3] had left in the expectation that the [NAME_5] bill would be paid by [NAME_2], when it fell due at the end of March, he understanding that it then had the resources to do so. Why that bill was not paid was not explained. Nor was there evidence that [NAME_3] was informed of the particular problem upon his return. He was then excluded from board meetings and the management of the company.

134 To that point in time, [NAME_5] having acquired [NAME_2], with an aim of growing its [NAME_5] phone business, had supported it financially, in order to achieve that aim. The [NAME_5] account would appear to have been a crucial part of that business. What occurred so as to lead [NAME_2] not to pay the account and/or [NAME_5] to withdraw its support to the point that [NAME_5] remained unpaid and eventually moved to place [NAME_2] into administration, was not revealed. As I have noted, [NAME_5] plainly however, later again took the view that the business was one with which it wished to persist, given the steps it subsequently took to acquire the business, albeit unsuccessfully, from the administrators.

135 [NAME_5] apparently fled the country in June, after the [NAME_5] took steps to remove him from his position on the board of [NAME_2], whereupon he resigned from all of his board positions. It was then that the deficiency in relation to the $500,000 placed by [NAME_2] with [COMPANY_20] appears to have come to light. This was after the relationship between the parties to these proceedings had come to an end.

136 [NAME_3]'s evidence was that this deposit was placed by [NAME_5], without his prior knowledge, but was then disclosed to him. He had no reason to have any reservations about the deposit at the time. The funds had been supplied by [NAME_5]. He understood the money to be available on 48 hours call and that it had been placed with a related company, where [NAME_5] had other funds on deposit. The deposit was reflected in the accounts of [NAME_2], which were approved by its board and placed before the [NAME_5]. This evidence was not challenged. It follows that there is no reason for it to be disbelieved. In the circumstances, it is not, in my view, open to lay the blame for these events and [NAME_5]'s apparent fraudulent dealings with that money, upon [NAME_3]'s shoulders alone. The relevant decisions were plainly not ones in which he alone was involved. Nor was there evidence of any concern at the time on the part of other members of the boards of [NAME_2] or [NAME_5] about the steps taken by [NAME_5].

137 The second respondent resisted any orders being made in favour of [NAME_3] as a matter of fairness, having regard to his performance as managing director, which it was submitted had led to the financial difficulties of [NAME_2]. While there may well have been a proper basis for criticism of [NAME_3]'s performance in the role of managing director, that submission was not made out on the evidence. There was some cross examination of [NAME_3] as to decisions he made in relation to various marketing programmes and premises rented by [NAME_2], but that evidence did not make out the submission advanced. There was no attempt made at any analysis of the income and expenditure of the company, its performance and the decisions made by [NAME_3] and other board members, so as to provide a basis for the submission.

138 Indeed, it was expressly submitted that [NAME_5] did not seek to prove that [NAME_2] had ever traded insolvently. In the acrimonious correspondence exchanged by [NAME_3] and [NAME_5] after he returned from leave, [NAME_3] made complaint of decisions made and steps taken by [NAME_2], contrary to advice he had given. These matters were not explored with him. The mere fact that the company was placed into administration, of itself cannot provide a basis for the conclusion that [NAME_3] was to blame for its financial difficulties, especially in the absence of an exploration of the nature of the financial support provided by [NAME_5] to [NAME_2] and the circumstances in which that support ceased to be provided.

139 The evidence was that [NAME_5]'s share acquisition followed upon a view taken by the original shareholders that there needed to be an injection of funds for the business to grow. [NAME_5] acquired [NAME_2]. The business was then expanded. Other businesses were acquired by [NAME_2] and it was being aggressively marketed. [NAME_2] did not itself have the funds to pursue this strategy, they were raised on the basis described by [NAME_5] in his evidence, through the 'Connect the World' project. The strategy was successful in increasing customer numbers, the measure adopted in the [COMPANY_5] agreement for calculation of exit and performance fees. The end result appears, however, to have been that the business was grown to the point where expenditure so exceeded income, that [NAME_5] ceased to provide its support and the company was placed into administration.

140 The decision made at the end of March not to pay the [NAME_2]' [NAME_5] bill for February, was persisted with, apparently, to the point where [NAME_5] moved to place [NAME_2] into the hands of administrators. This was not a decision made by [NAME_3], nor one for which he can be held responsible, on the evidence.

141 Despite these conclusions, I am nevertheless satisfied that the financial difficulties in which [NAME_2] found itself, and its eventual administration can not be overlooked as an important part of the background against which these claims must be considered. This follows from the terms of the [COMPANY_5] agreement, which was drafted by [NAME_5] by reference to business growth, rather than financial performance of the company. It also provided, however, that if there were problems in relation to [NAME_3]'s performance, such difficulties could be raised, so that they could be addressed by [NAME_1] and, of course, [NAME_3] and if not addressed satisfactorily, the agreement could be terminated. That such problems existed can readily be inferred from the matters raised with [NAME_3] by the board, by [NAME_2]' trading losses and failure to meet budget prior to [NAME_3]'s departure. Presumably even a company pursing a growth strategy needs to meet the targets which it sets itself, if its aims are to be achieved and it is to survive.

142 The evidence was that business growth was achieved, but the opportunity to address the alleged problems in [NAME_3]'s performance which the board of [NAME_2] had identified, was denied to the applicants. The consequences of that breach of the agreement, as well as the fact of the breach, require consideration.

143 I then turn to the claims in relation to the exit fee. When the relationship between [NAME_2], [NAME_1] and [NAME_3] was finally brought to an end, the applicants were paid nothing, by way of exit fee as the agreement required, but a demand for repayment of $55,000 was made. This represented the difference between $15,000 per month agreed under the new consultancy agreement entered by [NAME_3] and [NAME_2] in March, but earlier implemented by agreement in November.

144 This agreement was then rejected by [NAME_5], with the result that only $4,000 per month was payable under the [COMPANY_5] agreement, for that period. The $15,000 payments had commenced in November 1998, after [NAME_5] had acquired a significant shareholding in [NAME_5], had joined its board and was about to become, or had become, its managing director. The payments were not kept secret. They were reflected in the [NAME_2]' accounts which were put before its board and [NAME_5]. It was also [NAME_5]'s solicitor, [NAME_14], himself a member of the [NAME_5], who prepared the new agreement, which itself dealt with repayment of those sums, if [NAME_5] did not approve the new agreement.

145 [NAME_3]'s evidence was that he and [NAME_5] had discussed their [COMPANY_5] agreement in November, [NAME_5] having raised the matter because, his own [COMPANY_5] agreement could not continue, given his new role at [NAME_5]. [NAME_5] had assessed that the termination of his agreement gave rise to an obligation that [NAME_2] pay him an exit fee, which he had calculated to amount to $250,000. Whether or not this payment was, in fact, made to [NAME_5] by [NAME_2], was not clear on the evidence.

146 At that time [NAME_2] was in the process of acquiring another mobile phone customer database, which would have increased [NAME_3]'s entitlements under his agreement, if not first terminated. [NAME_5] took the view that the [COMPANY_5] agreement had become too generous to [NAME_3] and not fair to the shareholders, of whom he was now one.

Accordingly, [NAME_5] proposed that [NAME_3]'s agreement also be brought to an end by payment of $250,000 and that a new agreement, with higher monthly payments, and various other arrangements, be agreed. [NAME_3] accepted this and the new $15,000 monthly payments commenced.

147 There was a delay in preparation of the new agreement, which was in March approved by the [NAME_2] board and then entered. [NAME_3] expected to be paid part of the termination amount while he was away on leave, in accordance with the terms agreed. The [NAME_5], however, rejected the agreement and no payment was made. The minutes of the meeting recording that resolution were not in evidence, but it was argued here, that the payment of $250,000, would not in fact have satisfied the exit fee due to [NAME_3] under the old agreement. There was no evidence that this was why the [NAME_5] rejected the new agreement, indeed, the reasons were not put in evidence.

148 It is a construction which did not accord with [NAME_3]'s evidence as to what had been agreed by way of termination of the original agreement and the basis on which the new agreement had been entered. It was a construction also inconsistent with the terms of the new agreement itself, which dealt with the agreed $250,000 termination payment in clause 2.4. That the new agreement also dealt in clause 13 with the manner in which it might be terminated in the future, in some cases on the basis of a payment and in others on the basis of no termination payment, does not detract from this conclusion.

149 The more plausible explanation for what occurred, having regard to the minutes of [NAME_5] meetings which were in evidence, was that it then had a concern about [NAME_5]'s failure to bring before it a business plan, which included a financial picture for the whole of the group and that [NAME_5], [NAME_5]'s new Operating Officer had by that time discovered that the [NAME_2]' revenue was down on budget and expenses were up. That the [NAME_5] might in those circumstances be loathe to authorise a payment of $250,000 to [NAME_3], at the same time as entering a new agreement, which substantially increased the monthly payments due to [NAME_1] for his services and introduced the possibility that another termination payment might fall due, if the new agreement was entered and later terminated, would be entirely understandable.

150 Such a reluctance, however, can not explain, nor excuse, [NAME_2] then breaching [NAME_1]'s [COMPANY_5] agreement and later failing to pay the exit fee due to [NAME_1], on termination of the agreement, when it sought to dispense with [NAME_3]'s services. As the applicants submitted, the judgment of the [ADDRESS] in [NAME_9] provides an illustration of how such a breach can properly lead to orders being made in favour of an applicant.

151 The summons sought the variation of the agreement to require payment of the exit fee forthwith, if the [COMPANY_5] agreement be terminated prior to the expiry of the management period. Given the circumstances I have described, I am satisfied that the variation sought should be made in order to rectify the unfairness which the evidence demonstrated, both in relation to the terms of the agreement and the conduct of [NAME_2] and [NAME_5], towards [NAME_3]. Money orders in connection with that variation must also be considered.

152 It is at this point however, that a degree of caution needs to be exercised in this case. As Barwick CJ observed in Stevenson v Barham (1977) 136 CLR 190 at p192, 'The legislature has apparently left it to the good sense of the Industrial Commission not to use its extensive discretion to interfere with bargains freely made by a person who was under no constraint or inequality, or whose labour was not being oppressively exploited. '

153 In Autobake Pty Ltd v Budd & Anor (1986) 19 IR 18, the Industrial Commission in Court Session said at p18: 'The case is an illustration of the perils involved in seeking to make use of the wide discretions provided by s 88F as a means of rescue where a calculated business risk is taken which, contrary to expectations, turns out not to be as profitable as anticipated and results in loss to all concerned.'

[ADDRESS] also discussed how claims advanced under the predecessor to s106, ss88F of the Industrial Relations Act 1940 were approached. At p20 it was observed: 'Distinct and separate issues arise in relation to an application under s88F, as discussed by the Commission in Court Session in Hodges v Streets Ice Cream Pty Ltd [1985] 11 IR 60. The initial question which arises in relation to a contract or arrangement falling within the opening words of the section, is whether or not it offends against s88F(1)(a)(b)(c)(d) or (e). That is a mixed question of fact and of law. If such a finding is made, the next question involves the exercise of a judicial discretion. It is whether or not the contract or arrangement should be avoided or varied. If the contract or arrangement is avoided or varied pursuant to s88F(1), a further discretion then arises whether or not orders should be made under s88F(2).'

155 The circumstances here arising are not, in any sense, comparable with those considered in Autobake. Nevertheless, it is pertinent to a consideration of the exercise of a discretion in favour of the applicants, that it was not only the respondents who were involved in development of the business of [NAME_2]. Given the circumstances in which [NAME_3] sold his shares in [NAME_2] and [NAME_1] entered the [COMPANY_5] agreement, it was obvious that they too were taking fairly calculated risks, that the proposed expansion of [NAME_2] business, with [NAME_5]'s financial support given that it did not itself have the funds to do so, would lead it to profitable trade. This would obviously have then enabled [NAME_2] to make the payments which had been agreed.

156 Plainly enough, contrary to the expectations which the parties had when they entered upon this venture together, that anticipated profitable operation was not achieved.

157 Nor was there evidence from which it could be concluded that in the agreements when made, the applicants were being exploited or were labouring under any constraint or inequality, as compared to [NAME_2] or [NAME_5]. Indeed, they obviously negotiated favourable terms for themselves. The position altered when [NAME_2] came to terminate the [COMPANY_5] agreement. Section 106(2) requires that the Court have regard to the parties' conduct under the agreements. It is the evidence about these matters which has led me to the conclusion that some relief must here be granted to the applicants. How that discretion is to be exercised, is a more difficult question.

158 The claim in relation to the exit fee was advanced in the alternative. Either the sum due under the formula calculated to be $475,000, or at the least, the lesser amount of $250,000 earlier agreed.

159 I take the view that in all of the circumstances the payment due under the formula provided in the agreement should not be ordered. It was calculated having regard to information emanating from the administrators' reports, as to the relevant matters. There was no argument advanced that these figures did not provide an appropriate basis for the calculation, rather any payment to [NAME_3] was resisted, given [NAME_2]' financial performance. I take the view that all of the circumstances require that payment of an exit fee be ordered, but that they do not fairly permit money orders on the basis of the calculations under the formula.

160 I have come to that conclusion because it seems to me that [NAME_3]'s position as general manager and the circumstances in which [NAME_2] came to be placed into administration, are factors which must incline the Court to a cautious approach in the making of any money orders in favour of the applicants. As the [ADDRESS] in Barclays Australia Investment Services Ltd v Nordby (1995) 99 IR 258 at 279 explained: 'The task of assessing a "just" monetary amount is one which, not infrequently, involves the exercise of a broad judgment without the assistance of defined and identifiable parameters or head or loss or damage.'

161 Like in Nordby, this too was a case where the question of appropriate money orders was polarised, with the applicants contending for all of the sums flowing from the breaches of the agreement here established, as well as those flowing from the variations sought and [NAME_5] contending that no money orders should be made at all. Against that background, I turn to consider what orders justice here requires.

162 [NAME_5] had rejected the agreement which had been reached in November 1998 as to termination of the [COMPANY_5] agreement in return for payment of $250,000. It follows that there is obvious difficulty in the respondents now having the benefit of that lower sum, when adherence to the original terms of the agreement would require payment of a much higher sum to [NAME_1]. This reflected in part the subsequent acquisition of another customer data base. Also to be considered is that in November there was an acceptance by [NAME_3] that the impending acquisition of this new customer base by [NAME_2], should not fairly be taken into account in determining the exit fee, thus new terms were agreed. That new agreement was then implemented, although not formalised until March. In the meantime, [NAME_2] paid the increased monthly sums due there under, in the total amount of $55,000; the new customer base was acquired and [NAME_2] encountered financial difficulties, which eventually led it into administration. As managing director, [NAME_3] was involved in each of those developments. In the circumstances, I take the view that the parties should be held to the agreement reached in November. [NAME_5] did not later accept that agreement, many of the other terms which attached to it, are not here in contention.

163 One relevant exception is the $15,000 monthly payments made after November. The applicants accepted that the total $55,000 paid was strictly repayable, given that [NAME_5] did not approve the new agreement in March, after it had been formalised and could thus be taken into account, if relief was granted.

164 Despite this concession, I have come to the view that in all of the circumstances, justice does not permit the respondents to have the benefit of the most favourable aspects of both agreements. I have concluded that the money order made in favour of the applicants, should be limited to the agreed $250,000 termination payment, but that they should not also be deprived of the benefit of the higher monthly payments made under the new agreement, between November and March.

165 To make the money order which would flow from a strict application of the terms of the original [COMPANY_5] agreement, would lead to a substantial higher payment, already accepted by the applicants as inappropriate in November 1998. The financial problems which flowed from the business growth [NAME_2] then pursued, would, in my view, not fairly lead to the conclusion that the growth in customer base after November, should be reflected in the money orders now made in favour of the applicants, so as to lead to a result 'just in the circumstances'. This approach leaves them with a significantly lower money sum than that which would flow from a strict adherence to the terms of the agreement. The respondents have the benefit of that approach. As I earlier noted however, s106 is not concerned with breach of contracts or debt recovery, but rather with varying unfair contracts and making money orders, if appropriate, just in the circumstances of the particular case.

166 It follows, in all of these circumstances, that an order of $250,000 must be made in favour of the applicants, but without deduction of the sum of $55,000 therefrom. I am satisfied that this reflects a fair adjustment of the competing considerations which here arise as to this aspect of the claim.

167 I turn then to the other money claims. The agreement envisaged a performance fee, payable after the first year of the agreement's operation and then annually. The claim sought to vary the agreement to require pro rata payments for part years. The agreement was entered in April 1998, but commenced to operate on 1 July 1998. It was effectively brought to an end by [NAME_2] in April 1999, when [NAME_1] and [NAME_3] were excluded from access to its operations and then in May, a month's notice of termination was given, the other board members having formed the view that the [COMPANY_5] provided under the agreement had not been provided to a satisfactory standard. A further monthly payment was also made when that notice was given.

168 A performance fee payment fell due for the management year defined as each 12 month period commencing on the commencement date 1 July 1998. The fee was payable one month after the end of the management year. The agreement was then no longer in effect, hence the variation sought for pro rata performance fee payments.

169 In April, [NAME_5] had raised with [NAME_3] serious concerns about the company's financial performance and his own performance. As I have found, the applicants were not given a fair opportunity to deal with these matters, nor one consistent with the terms of the [COMPANY_5] agreement. As I have already observed, given the evidence as to what [NAME_5]'s investigations had revealed and the fact that the company went into administration in August, as the result of steps then taken by [NAME_5], it apparently not having been paid what was owing to it since March 1998, it must be nevertheless accepted that there was in April a proper basis for concern about the company's performance. The [NAME_5] account fell due during [NAME_3]'s absence. On his evidence he expected [NAME_5] to continue to support [NAME_2]. He had no reason to believe that this would not occur and believed the funds necessary to pay that bill were available to enable [NAME_2] to pay that debt when it was due. There is no reason for this evidence to be doubted, even though [NAME_3] was plainly mistaken.

170 Given all of the circumstances I have outlined, I take the view that the applicants can not fairly be sheltered from all of the consequences of the failure of [NAME_2]. [NAME_3], after all, was the company's managing director and prior to his departure on leave, in day-to-day control of its operations. Justice does not permit he and [NAME_1] to be treated as if those travails did not develop.

171 The evidence was that without [NAME_5] support, [NAME_2] could not trade. This was the basis upon which [NAME_1] and [NAME_3] provided his services to [NAME_2]. While the applicants were not given a proper opportunity to meet the criticisms directed towards [NAME_3]'s performance as managing director prior to the termination of the [COMPANY_5] agreement, it cannot be doubted that serious concerns existed about their performance, in a context where the company in fact failed. The position revealed by the administrator's report makes the conclusion unavoidable, that continued support for [NAME_2] would not have been forthcoming from [NAME_5] and that the [COMPANY_5] agreement would have come to an end, even had the terms of that agreement been observed and [NAME_1] gave a proper opportunity to respond to the concerns raised with it in April. The end, in reality, was a matter of timing.

172 The claim for performance fee was calculated at $781,826.08. There was no real criticism of the figures used in the calculation, but opposition to the variation sought and the exercising of any discretion at all in favour of the applicants in these circumstances. I take the view that the circumstances in which the agreement came to an end and the financial position of [NAME_2] revealed by the administrator's reports were such that it is not appropriate for any discretion to be exercised in favour of the applicants as to this claim, namely, to vary the contract so as to require pro rata performance payments for the period prior to termination. The exercise of such a discretion would, in my view, not result in justice as between the parties in all of these circumstances.

173 For similar reasons, I have come to the same conclusion in relation to that part of the claim which depended on the period after the termination of the contract. I have been satisfied that the conduct and breaches of the agreement which I have described earlier provide a proper basis for the exercise of a discretion in favour of the applicants, so far as payment of an exit fee is concerned. In this respect, the applicants relied upon the approach of the majority in [NAME_9], as plainly they were entitled to do. The claim for further payments depending upon the period after the termination of the contract, on the basis that the agreement had not been brought to an end in accordance with its terms and therefore [NAME_2] was obliged to continue making payments under the agreement for the balance of the term of the agreement, that is three years from the commencement date, ignores the financial performance of [NAME_2] being such that it was put into administration. The other fact which cannot be overlooked is that [NAME_5] was no longer able or prepared to support it.

174 I can well envisage that the way in which the contract was brought to an end might, in different circumstances, have provided a basis for relief as to such further payments. Given the financial performance of the company and its subsequent administration, I am satisfied that it would not involve a proper exercise of the discretion to make orders in favour of the applicants on such a basis. I take the view that to make such orders would involve the respondents being required to guarantee that the business of [NAME_2] would be successful. Such orders are not here warranted and would ignore the business risks which I have found that the applicants were plainly taking.

175 As I have observed, s106 is not merely concerned with breaches of contracts and their consequences. I am satisfied that the money orders flowing from this aspect of the claim would not involve a proper exercise of the discretion provided by the section, so as to do justice between the parties in the circumstances here revealed by the evidence.

176 As to the money orders, I have concluded that they must be made against both respondents on a joint and several basis. While that is not the appropriate order in every case, given the evidence of the close control here exercised by [NAME_5] over the operation of [NAME_2] and [NAME_5]'s evidence as to the basis upon which [NAME_2] was operated – namely for the benefit of [NAME_5], I have come to the view that it is the appropriate order here to be made, as reflecting its culpable association with the relevant events as they developed. As I earlier found, it is unnecessary for any order varying the contract to make [NAME_5] a party to it to be made in these circumstances.

177 I finally deal with one point made by [NAME_13] in submission. He pointed to an ASIC record which suggested that [NAME_5] held the shares in [NAME_2] beneficially. Of itself, this did not establish that [NAME_5] held the shares for someone else. Indeed, who it was alleged [NAME_5] held the shares for, was not revealed. That record and those submissions cannot overcome the force of the other evidence to which I have referred, which has convinced me that justice here requires that orders be made against [NAME_5], given its culpable association with the matters here in issue.

Orders

178 For all of these reasons, I make the following orders:

1. I declare the contract between the parties as relevantly unfair. 2. I order that the contract be varied ab initio to provide: 7.3 Payment of Exit Fee The Company shall pay Exit Fees to the Service Provider within 1 month after the termination of this agreement or, as the case may be, the end of the Management Period.

3 I order that the respondents pay the applicants an amount calculated by reference to: (a) the sum of $250,000; and (b) the interest on that amount calculated in accordance with the Supreme Court scale from the date of termination of the [COMPANY_5] agreement until the date of judgment.

179 The usual orders as to costs would be that the respondents' pay the applicants' costs, as agreed or assessed. If the parties are unable to reach agreement as to costs, they have liberty to approach as to that matter, within 21 days of the date of this judgment. ------------------------

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