- Notable Unreported Decision
SUPREME COURT OF QUEENSLAND
Salary Packaging Australia Pty Limited v Andropov & Ors  QSC 167
SALARY PACKAGING AUSTRALIA PTY LIMITED (ACN 009 643 485)
BS11755 of 2011
31 July 2014
14-17 April 2014
EQUITY – GENERAL PRINCIPLES – FIDUCIARY OBLIGATIONS – GENERALLY – where the plaintiff carried on business of salary packaging services including organising novated leases and ongoing administration of the novated leases – where the plaintiff’s general manager assisted a company which was owned by his wife and him to earn brokerage and insurance commissions from organising novated lease services in 391 transactions – where the general manager’s family company’s business was not materially different to the plaintiff’s business – where the general manager failed to prove his involvement in his family company’s business had the informed consent of the plaintiff – whether the general manager by his involvement in the family company’s business breached the fiduciary duty he owed to the plaintiff
EQUITY – GENERAL PRINCIPLES – FIDUCIARY OBLIGATIONS – FIDUCIARY DUTY – ACCOUNT FOR BENEFITS GAINED – where the general manager of the plaintiff received commissions from the insurer under an incentive program for insurance products sold by the plaintiff in connection with novated leases – where the general manager did not have approval of the board to receive commissions – where commissions were not covered in the general manager’s remuneration agreement – whether the receipt of those commissions was a secret profit in respect of his employment
EQUITY – GENERAL PRINCIPLES – FIDUCIARY OBLIGATIONS – GENERALLY – where the plaintiff’s general manager told his wife he had the plaintiff’s permission to seek alternative income – where the general manager’s wife had limited participation in the transactions undertaken by the family company of which she was a director – where the general manager’s wife was not aware the family company’s business in novated leases was conducted without the permission of the plaintiff – whether the general manager’s wife knew the business generated by the family company was procured by the general manager’s breach of the fiduciary duty owed to the plaintiff.
Maguire v Makaronis (1997) 188 CLR 449;  HCA 23, considered
Nocton v Lord Ashburton  AC 932, considered
Warman International Ltd v Dwyer (1995) 182 CLR 544;  HCA 18, considered
D J Campbell QC and D M Favell for the plaintiff
M T Hickey for the first, second and fourth defendants
Adamson Bernays Kyle & Jones for the plaintiff
Tucker & Cowen for the first, second and fourth defendants
- The first defendant Mr Andropov was the general manager of the plaintiff (then called SPNT Pty Ltd) from about September 2003 until 13 May 2011. He was also a director of the plaintiff between 26 November 2002 and 2 October 2009. The plaintiff carried on the business of providing salary packaging services. Salary packaging refers to the arrangement that permits an employee to acquire a piece of equipment (such as a motor vehicle or laptop) in a tax effective manner by the employee entering into a lease which is then novated to the employer and the relevant costs of leasing the equipment and the incidental expenses (such as insurance) are paid from the employee’s salary before it is taxed. Salary packaging reduces the employee’s taxable salary and can create income tax savings for the employee.
- The salary packaging services provided by the plaintiff generally comprised two parts. The first part was arranging finance for the leasing of a motor vehicle provided as part of an employee’s salary package (where the employer had entered a memorandum of understanding with the plaintiff for salary packaging services) and for which the plaintiff was paid brokerage by the financier. The second part was the provision to such employer of the necessary administration on an ongoing basis to operate the salary package for the relevant employee for which the plaintiff received a fee.
- Mr Andropov and the fourth defendant are married. They are both shareholders of the second defendant which was incorporated on 5 September 2007. Mrs Andropov has been a director since the incorporation of the second defendant. Mr Andropov was a director from incorporation until 12 August 2009, when he ceased to be a director. Mr Andropov resumed as a director on 1 July 2011.
- The plaintiff alleges that Mr Andropov breached the fiduciary duties he owed as the general manager of the plaintiff by assisting the second defendant to obtain brokerage from Macquarie Leasing Pty Ltd (Macquarie) and insurance commissions with respect to the salary packaging services provided to the 391 persons identified in Schedule A to the third further amended statement of claim.
- It is not disputed that the first defendant owed to the plaintiff the following fiduciary duties:
- not placing himself in a position in which his own interests conflicted with those of the plaintiff;
- to act in good faith and in the interests of the plaintiff;
- to perform his duties loyally and with fidelity towards the plaintiff;
- not to receive and/or retain a secret profit in respect of his employment or as an officer of the plaintiff; and
- not to improperly use his position to:
- gain an advantage for himself or someone else; or
- cause detriment to the plaintiff.
- The plaintiff alleges that the second defendant participated with knowledge in Mr Andropov’s conduct that breached his fiduciary duties and that the funds received by the second defendant as a consequence of that conduct were obtained in breach of trust.
- The plaintiff also seeks to recover from the first defendant secret commissions in the sum of $41,900 that Mr Andropov admits receiving from Australian Dealer Insurance (ADI) between September 2010 and May 2011.
- Until the commencement of the trial, the plaintiff was pursuing the defendants for the net carbon neutral fees paid by the plaintiff to the second defendant between 30 November 2007 and 31 May 2011, as a result of the fees paid by customers in connection with novated leases for offsetting carbon omissions from the vehicles. Until the commencement of the trial, the plaintiff was also pursuing the second defendant for the misappropriation of the “Dealerpac” trademark. During the opening of the plaintiff’s case, Mr Campbell of Queen’s Counsel, who appeared with Mr D M Favell of counsel for the plaintiff, abandoned the relief sought in respect of the Dealerpac trademark and the claim for damages for the carbon neutral fees paid by the plaintiff to the second defendant.
- When this proceeding commenced, the third defendant was Ms Vicky O’Callaghan who had been the national business relationship manager of the plaintiff between May 2005 and June 2011. In March 2013 the proceeding was discontinued against the third defendant on the basis she would give evidence for the plaintiff in this trial which she did.
- The plaintiff’s claim against the fourth defendant was pursued on the basis that she participated in the second defendant’s activities with knowledge that the business generated by the second defendant was procured by Mr Andropov’s breach of the fiduciary duties owed to the plaintiff. The plaintiff seeks an accounting against the fourth defendant of the funds she received as constructive trustee.
- The first and second defendants defend the plaintiff’s claim in relation to the brokerage commissions on the basis they were paid to the second defendant for business that was not competing with that of the plaintiff. The first and second defendants claim that the second defendant’s business was limited relevantly to providing, in return for payment, administration services to the business conducted by Mr Gregory Harris whose business was concerned with the provision of novated leases for customers. To the extent that the receipt of the commissions from the 391 transactions may have otherwise constituted a breach of fiduciary duty by the first defendant, the first and second defendant claim they were received with the knowledge and consent of the plaintiff. In addition, the first and second defendants submit that many of the employees involved in the 391 transactions were employed by entities that had an exclusive salary packaging arrangement with a competitor of the plaintiff and, as a result, the plaintiff would not have been able to obtain that business.
- Mr Andropov defends the claim in respect of the ADI insurance commissions on the basis that it was an entitlement that arose from industry practice.
- Since the defence filed on 23 August 2013, the fourth defendant has defended the claim on the basis that, apart from undertaking the data entry with Macquarie of the first two novated lease deals done by the second defendant, she ceased undertaking any administrative tasks for the second defendant and she was unaware that Mr Andropov was acting in breach of his fiduciary duty to the plaintiff in the work that he was undertaking on behalf of the second defendant.
- I will address the issues after setting out in narrative form what I have gleaned from the evidence about the formation and development of the plaintiff’s business and the evolution of the second defendant’s business.
- The oral evidence was supported by the documents that became exhibits and particularly the trial bundle. When witnesses are relating events that occurred over a period of years or occurred a few years ago, there is necessarily scope for inaccuracy in recalling dates or periods of time. The narrative that follows incorporates my findings as to the relevant events. Where there is disputed evidence about a conversation or event, I will, when dealing with it, explain which evidence I have preferred for my conclusion of that conversation or event.
- The only witness about whom I wish to make a specific comment is Mr Andropov. There were many times in the course of giving his evidence that Mr Andropov acted as the advocate for his own cause. There was an underlying resentment that it was his idea and hard work that sparked the creation of the plaintiff’s business and built up its goodwill. Mr Andropov tried to rationalise or excuse his own conduct in working for the second defendant whilst remaining an employee of the plaintiff. In setting out the narrative of findings, it is relevant to identify Mr Andropov’s conduct, rather than his explanations for it.
The plaintiff’s business
- The plaintiff is a member of the Kerry’s Automotive Group of companies (KAG) that carries on business in the Northern Territory and is owned and controlled by Mr Kerry Ambrose-Pearce. Around 2001 Mr Andropov was employed as the finance and insurance manager for the KAG motor dealerships in Darwin. It was Mr Andropov’s idea for KAG to investigate salary packaging.
- While Mr Andropov was developing the salary packaging business, he worked for both the plaintiff and KAG. The salary packaging business developed to the stage where it was appropriate for Mr Andropov to be engaged in the oversight of that business on a full time basis. A remuneration agreement dated 1 September 2003 (exhibit 12) formalised the full time employment of Mr Andropov as the general manager of the plaintiff. The agreement provided for commissions to be paid to Mr Andropov of 10 per cent of the net profit of the plaintiff in each year, and a 5 per cent annual bonus of the net profit of the plaintiff, if an agreed budget net profit were reached at financial year end.
- The plaintiff used Macquarie to provide the finance by way of the novated lease. From the commencement of its business, the plaintiff did presentations to prospective employers about the salary packaging services it could provide to benefit employees. The plaintiff’s usual method of operation was to enter into a memorandum of understanding with an employer that allowed the plaintiff to provide salary packaging services to the employees of that employer and access to the payroll section of the employer for the disbursement of the funds of the employee. The plaintiff entered into memoranda of understanding with large employers including Charles Darwin University, Gold Coast City Council and other Councils.
- The most lucrative aspect of the business for the plaintiff was the financing of the motor vehicle for which the plaintiff was paid brokerage by the financier, but the plaintiff also obtained commissions from selling other products such as gap insurance, comprehensive insurance and tyre and rim insurance. The plaintiff charged an administration fee to handle the ongoing administration of the disbursement of the employee’s funds. Mr Ambrose-Pearce described the value of the plaintiff being in the number of clients and the potential number of clients under the memoranda of understanding with employers.
- In 2006 Mr Andropov developed for the plaintiff the concept of “Dealerpac” to increase the use of novated leases by customers acquiring motor vehicles through dealerships. In 2007 Mr Ambrose-Pearce was the national president of the Australian Automobile Dealers Association. At the national conference held in August 2007, Ms O’Callaghan presented a workshop on “salary packaging, take control of your retail market” in which she was referred to as the National Business Development Manager of “SPNT/Dealerpac”. Ms O’Callaghan’s message was that the introduction of salary packaging through the dealership was another way of increasing retail sales. The plaintiff through Mr Ambrose-Pearce, Mr Andropov and Ms O’Callaghan promoted to dealers the concept of employing a business relationship manager in the dealership dedicated to facilitating financing of a vehicle by way of a novated lease. It was also the plaintiff’s aim to encourage large employers who were fleet buyers at the dealership to build up a relationship with the plaintiff for salary packaging.
- Ms Dalton was employed by a dealership on the Sunshine Coast in August 2007 on a base salary plus commission to promote the benefits of salary packaging for customers who necessarily had to be in employment.
- It was cumbersome for an employee of a motor dealer to obtain a quote from the plaintiff for the costs of a novated lease. Ms Dalton had to send the information to the head office of the plaintiff for the fleet department to quote on the salary sacrificing package with resultant delays of up to 24 hours in responding to the customer’s request for the quote. The dealership did not get the results they expected and terminated Ms Dalton’s employment. The plaintiff then employed Ms Dalton as a business relationship manager working from her home in Noosa until June 2009, when she transferred to Darwin to work for the plaintiff.
- Around 2007 Mr Andropov advised Mr Ambrose-Pearce that the Gold Coast City Council advised that a competitor of the plaintiff was offering a green product and that the plaintiff “would need to be seen to be green”. Mr Andropov had an idea about carbon offsetting services that could be provided by the second defendant which would suit the Gold Coast City Council. It worked on the basis that a fee of $500 to $600 would be paid for carbon offsets and a commission of $50 would be retained by the plaintiff. It was introduced for the employees of the Gold Coast City Council and then included in the quotes for other customers.
- Around April 2009 Credit Suisse as agent for another salary packaging company approached Mr Andropov about purchasing the plaintiff. Mr Andropov informed Mr Ambrose-Pearce of the approach. Mr Ambrose-Pearce’s response was that he was interested in selling.
- Mr Ambrose-Pearce told Mr Andropov that, if the plaintiff were sold, he would give Mr Andropov 10 per cent of the net proceeds.
- Nothing came of the approach by Credit Suisse. About six months later, another prospective purchaser contacted Mr Andropov, but again nothing resulted from the approach.
- Ms Dalton identified the documents (exhibits 6 to 9) that related to a transaction that she processed when she was working for the plaintiff for Mr Collins who was a Defence employee. It commenced with a quotation dated 25 September 2009. The plaintiff organised the novated lease, but did not undertake the administration of the novated lease, as it was not on the Defence panel for salary packaging companies.
- By 2009 the plaintiff had internal accounting issues. There was a problem with an accounts department employee who was not invoicing the employers to enable the plaintiff to receive the funds from the employee’s salary to enable lease payments to be made. Lease payments were missed which resulted in default notices being given to the relevant customers. The funds received from employers were paid into the plaintiff’s benefits account, but the plaintiff also conducted an administration account. Funds were allocated incorrectly between the administration and benefits accounts that resulted in KAP Motors Pty Ltd undertaking in a statement to the plaintiff and the auditors that it would guarantee any differences, if that arose. It was problems with the accounting of the funds paid to the plaintiff that Mr Andropov gave as the reason for his resignation as a director on 2 October 2009. He was willing to and did continue in the role as general manager.
- By January 2010 Mr Andropov was working with Ms O’Callaghan on a system of online quoting for business relationship managers when they were on the road or at the dealerships. The finance manager of KAG sent an email to Mr Andropov on 27 January 2010 following up on training of dealership staff on calculating and presenting quotes for salary packaging. Mr Andropov replied on 28 January 2010 referring to a planning meeting that he had with Ms O’Callaghan the previous week and advised that he was working on:
“… an advancement to our computer system to include online quoting for SPNT BRM’S. This would save an enormous amount of time for the BRM’S, will allow them to strike while the iron is hot improving conversion rates and obviously save an incredible amount of resources in the Fleet Management area (almost an entire person).”
- Mr Andropov had met Mr Daniel Richards when they both worked for Toyota Finance. Mr Richards had been the IT manager and Mr Andropov started using him for computer programming design and repair on behalf of the plaintiff. On 24 February 2010 Mr Andropov asked Mr Richards to provide a quote to create a website for the plaintiff that would allow users to create salary packaging quotes with similar functionality to the Dealerpac website which Mr Richards had developed for the second defendant. The quote was provided the next day and was based on copying the database structure from the Dealerpac website. On 26 February 2010 Mr Andropov instructed Mr Richards to proceed with a website for “SPNT Direct”.
- On 29 March 2010 Mr Andropov advised Mr Greg Ambrose-Pearce and Ms O’Callaghan that the online system for business relationship managers would be available within two weeks.
- Mr Richards invoiced the plaintiff on 1 April 2010 for developing the SPNT Direct website. It was not implemented by the plaintiff.
- The first transaction on the list of 391 transactions was one for Mr Sulley which was settled on 29 October 2009. There were problems with the transaction and Mr Sulley complained to the Nissan dealer from which the vehicle was acquired and the complaint was conveyed to Mr Greg Ambrose-Pearce by email dated 7 April 2010. The email made reference to Dealerpac and what had been conveyed by Mr Harris about Mr Andropov being an expert consultant he used in the field of salary packaging. Mr Greg Ambrose-Pearce passed the email onto Mr Andropov. Mr Andropov was unsuccessful in telephoning Mr Greg Ambrose-Pearce, but sent an email on 8 April 2010 that pointed out there were serious errors in what was alleged about his involvement and Mrs Andropov’s involvement. The email stated:
“I have no involvement in Dealerpac. I am and always have been completely committed to SPNT and have never or would never do anything to harm SPNT or compromise my position.
Alex works very part time for Greg in an admin role, Greg has been a family friend for over 15 years. Dealerpac is not a salary packaging company and in no way competes with or is in the same market as SPNT.”
- Mr Andropov did not disclose in his response the “administrative services” he was providing on behalf of the second defendant for referrals from Mr Greg Harris was for financing of customers by way of novated leases. When Mr Andropov was cross-examined to the effect that his statement “I have no involvement in Dealerpac” was untrue, he responded (at Transcript 3-13) with an explanation that cannot be accepted in the light of the terms of the email:
“In context with the email what I was saying was that I had no dealing with this particular client specifically.”
- On 17 August 2010 Ms O’Callaghan received an email from “Alex” which had passwords for the staff of the James Frizelle’s Automotive Group and login instructions for the Dealerpac website. Ms O’Callaghan lived on the Gold Coast and was asked by Mr Andropov to visit the Frizelle dealership. Ms O’Callaghan saw the Dealerpac website at Frizelle, but still did not appreciate that the Dealerpac system was not associated with the plaintiff. She took the opportunity of visiting Frizelle to get new employer referrals for the plaintiff.
- In late 2010, another company Smartsalary expressed interest in purchasing the plaintiff. Although that approach was taken more seriously by the plaintiff than the other approaches, no sale eventuated, as the offer from Smartsalary was too low.
The setting up of the second defendant’s business
- Mr Gregory Harris was a finance broker who in 2009 provided financial services to clients through outlets he had established through Toyota Finance. He would organise finance for motor vehicles by way of consumer mortgages, chattel mortgages, leases, and corporate hire purchase through Toyota Financial Services and St George Bank. At that stage Mr Harris did not organise novated leases. Mr Andropov was a friend of Mr Harris and approached him when the possibility of the sale of the plaintiff’s business first arose. Mr Harris proposed that the first and second defendants perform the administrative functions for Mr Harris that would allow him to offer novated leases as a product. Mr Andropov referred to this in his evidence as the “Harris system”. This is summarised in paragraph 4(a) of the first and second defendants’ defence:
“The Harris System
- was established by Harris on or about July 2009 and provided services to motor vehicle dealerships in the Northern Territory and South Australia (the dealerships) pursuant to which business processed via the Harris System would attract a commission payable to the dealerships.
- was a basic internet site that used publically (sic) available ATO income tax formulas and finance company requirements to quote and apply for finance. This site was registered and owned by Harris. …
- Harris training finance managers at the dealerships on how to use the internet based Harris System including log in details and how to prepare a quote and complete the finance application for a customer;
- Harris providing technical support to the dealership staff;
- The finance managers facilitating quotes and applications for novated leases;
- Employing, training and paying representatives to contact customers on approval of the applications and meet with customers to execute the finance agreements.”
- Mr Harris had access to motor vehicle dealerships in Darwin, such as Bridge Toyota which was controlled by his brother Mr Steve Harris, to which the plaintiff did not have access. Mr Andropov described the Harris system as an extension of Mr Harris’ product range in dealing with motor dealerships, as he could now offer novated leases in addition to the existing forms of finance for which he was a broker.
- Mr Harris registered the domain name “dealerpac.com.au”.
- Even though Mr Richards was the consultant used by the plaintiff, the second defendant retained and paid Mr Richards for the development of the Dealerpac website in August and September 2009 and then for hosting it from September 2009.
- Mr Harris had employees in the motor dealerships who were able to obtain a quote through the Dealerpac website for financing the acquisition of a vehicle by novated lease. If the transaction was to proceed, Mr Andropov’s role on behalf of the second defendant was to input the information into the Macquarie website, in order to obtain the approval for the transaction by way of novated lease. When Macquarie approved the transaction, Mr Andropov would print out the relevant documents and send them through to Mr Harris’ representative to have them signed. The documents would be returned to Mr Andropov who would organise the settlement of the transaction with Macquarie. The funds were paid by Macquarie to the second defendant for disbursement. The second defendant would remit the purchase price of the vehicle to the dealer and pass on the insurance premiums to the insurers. The insurers in turn would pay commission to the second defendant. The second defendant billed Macquarie for brokerage which was paid by Macquarie to the second defendant’s bank account. Mr Harris described Mr Andropov as “doing a backroom job as administration of the business”. It was argued that the second defendant’s business was confined to providing administration services to Mr Harris’ business. It was organised so that Mr Andropov had no involvement with the clients, although that was not always observed, as shown by the admissions made in the defence of the first and second defendants about Mr Andropov’s participation in the transactions particularised in paragraph 10B of the statement of claim. Mr Andropov did the work processing the transactions on his computer at home and mainly in the evening.
- The second defendant was able to login to the Macquarie website as a broker. The second defendant provided the name of Mrs Andropov as the contact person, a contact telephone number and the email address for “Alex” at the Dealerpac website. Mr Andropov explained that it did not matter who used the login details for the second defendant on the Macquarie website, as the contact details in the Macquarie system for the second defendant remained the same.
- The second defendant charged between 8 and 11 per cent of the value of the vehicle as a brokerage. Of that brokerage, the second defendant paid between 6 to 10 per cent of the value of the vehicle back to the dealer for the referral as an incentive for the dealer to do more deals with the second defendant. Mr Andropov said the balance of the brokerage was then divided between the second defendant and Mr Harris. Mr Harris and Mr Andropov on behalf of the second defendant did not document their business relationship at this stage, but both gave evidence that they were receiving a 50/50 split after disbursements, although Mr Harris claims to have taken responsibility for expenses on the sales side, such as paying representatives he used to get documents signed, and says the second defendant “paid for anything to do with the administration side”. Mr Andropov arranged with Mr Harris that any referral for ongoing administration of the novated lease should be given to the plaintiff, given that the plaintiff was for sale and Mr Andropov anticipated receiving 10 per cent of the proceeds. Neither Mr Harris nor his brother at Bridge Toyota were keen to assist the plaintiff but, in deference to Mr Andropov, agreed to refer to the plaintiff any novated lease that required ongoing administration.
- When Ms Dalton was employed by the plaintiff in Darwin, her telephone number was given by Mr Andropov to Mr Harris who offered her an employment opportunity in salary packaging based at Bridge Toyota. She commenced employment with Bridge Toyota around late September/October 2009. She was given the login details to a website for Dealerpac. Her role was to greet customers and discuss salary packaging and also to do the same for customers referred from other dealerships. She would then log onto the Dealerpac website where she would put in the customer’s details to organise a quote for a novated lease. Mr Harris had explained to her that a person by the name of “Alex” would be helping her with the documents and she was given Alex’s email address at Dealerpac.
- Ms Dalton emailed documents to Alex at Dealerpac and received emails in response. Ms Dalton stated that she did speak to someone by the name of Alex by telephone whilst she worked at Bridge Toyota and that it was always the same voice and the person introduced herself as Alex. Ms Dalton estimated that she spoke with Alex once or twice each day in her first week of employment and after that three times per week. Ms Dalton acknowledged the fact that she had been told by Mr Harris that she would be dealing with a person by the name of Alex meant that she assumed that it was Alex that she was dealing with on the telephone and by email.
- Ms Dalton was unhappy working at Bridge Toyota and left that employment after one month and returned to working for the plaintiff from late October/November 2009 to January 2010.
- Ms Dalton understood that after she left Bridge Toyota an arrangement had been put in place between Mr Greg Harris and the plaintiff to enable her to finalise the novated leases for the customers Phillips, Wilson and Lawrence while working for the plaintiff. Ms Dalton received an email from Alex dated 16 November 2009 forwarding the leasing documents for Phillips and Wilson and requesting her to have them signed and also to collect identification and payslips “as well as the usual full set of smart salary documents” for the three customers. All three customers were employed by Defence and the ongoing administration of the novated leases would be undertaken by Smartsalary. There is another email from Alex to Ms Dalton on 18 November 2009 referring to another customer, Bryce Ellis, who it appears was also one of Ms Dalton’s customers from Bridge Toyota who worked for Defence. The transactions for Lawrence, Wilson, Phillips and Ellis are amongst the 391 transactions for which the second defendant obtained brokerage and insurance commissions.
- The gross amount of brokerage earned from the 391 transactions was $863,148.28. The second defendant has not disclosed its breakdown of the commissions that it received from the insurers in respect of the 391 transactions. The only relevant financial documents of the second defendant included in the trial bundle are the financial statements for the years ended 30 June 2008 to 2011 and one bank statement for the period 15 March to 8 June 2011. It is not possible to gain a clear picture from these financial documents as to whether and, if so, how the second defendant reflected in its financial statements payments made to Mr Harris in connection with the 391 transactions. Mr Andropov (at Transcript 3-21) identified from the one bank statement a transfer made on 6 June 2011 for $34,518.97 shown as “GDH Com 0511” which he said would have been the payment for Mr Harris for May commissions and that payments of that kind were made to Mr Harris “every single month”. There is another transfer shown on the same bank statement for 7 April 2011 for $36,746 under code “GDH Com 0311”. Both Mr Andropov and Mr Harris gave evidence that the monthly payments made by the second defendant to him were accompanied by recipient created tax invoices. None was put into evidence at the trial in relation to payments made by the second defendant to Mr Harris. It is clear that the second defendant received the brokerage from Macquarie and the insurance commissions in respect of the 391 transactions.
- The profit and loss statements of the second defendant for the years ended 30 June 2010 and 2011 show that the income received from sales was respectively $342,995 and $1,206,404. In those years the second defendant was receiving payments from the plaintiff for the carbon offsets. As the total amount paid by the plaintiff to the second defendant between 30 November 2007 and 31 May 2011 for carbon offsets was $456,165, approximately $100,000 of the sales of the second defendant for each of 2010 and 2011 must be for carbon offset fees. It is of note that the second defendant’s profit and loss statements show that the commission paid for the year ended 30 June 2010 was only $11,227.27 compared to $532,087.52 for the year ended 30 June 2011. Mr Andropov could not explain (at Transcript 2-78) how these figures were compiled, as he drew a distinction between an operating statement and a profit and loss statement and that the profit and loss statement was affected by how the accountant decided to account for the transactions. Mr Andropov considered that the 2011 profit and loss statement was a “more correct” reflection of how the business accounted for Mr Harris’ income within the commissions paid.
- Although Mr Andropov was not a director of the second defendant during the period in which the 391 transactions took place, he was indisputably the controlling mind of the second defendant.
- Mrs Andropov’s individual tax return for the year ended 30 June 2011 was in evidence. It appears that there was a family trust that was called A Growing Trust that was associated with the second defendant. Mrs Andropov’s tax return shows as distribution from trusts (less net capital gains and foreign income) the sum of $168,337 which was ultimately sourced from the second defendant’s income. It shows as share of franking credit from franked dividends the sum of $50,567.
Was the second defendant’s business different to the plaintiff’s business?
- Mr Andropov was keen to emphasise that the plaintiff’s model was based on attracting employers and then organising the finance by way of novated lease for the motor vehicles acquired by employees as a result of the salary packaging services available through their employers. He maintained that the plaintiff’s Dealerpac system was to gain new employers and that could be distinguished from the Harris system which was an online system at point of sale in a dealership which meant that the plaintiff was seeking a “completely separate market” to the Harris system. That may have been how Mr Andropov rationalised the difference between what the second defendant was undertaking and the plaintiff’s business, but the fact remains it was an integral part of the income earned by the plaintiff to organise the finance by way of novated lease for the relevant transaction. Mr Andropov conceded (at Transcript 2-90) that what the second defendant was doing in each of the 391 transactions was exactly the same as that part of the plaintiff’s business concerned with offering the finance associated with the novated lease. The second defendant used the same leasing company as the plaintiff and with which Mr Andropov had built up his relationship, as a result of his working for the plaintiff.
- The plaintiff acted as the broker (without providing the service to the employer of the administration of the salary package) for the leasing transaction Ms Dalton organised for Mr Collins who was employed by the Department of Defence where the plaintiff was not one of the salary packaging companies that provided ongoing administration services for that employer.
- It is curious that Mr Andropov described Mr Harris’ engagement with the second defendant and implementing an online system at point of sale in the dealership to obtain instantly a salary packaging quote as “simply extending [Mr Harris’] current business”, but did not consider in his role as general manager of the plaintiff he should be looking at a natural extension of the plaintiff’s business by online quoting for salary packaging within dealerships.
- In any case, the plaintiff was heading in the same direction of the use of a website to allow users to create salary packaging quotes, when Mr Andropov on behalf of the plaintiff engaged Mr Richards in February 2010 to develop such a website for the plaintiff.
- The documents generated for the 391 transactions show that the second defendant was the finance broker for organising the finance by way of novated lease for each transaction and also earned commissions on the insurance products that were sold as part of each transaction. The second defendant’s business was not materially different to the plaintiff’s business. The defence based on the artificial distinctions that Mr Andropov insisted on making between markets and business models cannot succeed.
Was Mr Andropov’s involvement in the second defendant’s business undertaken with the knowledge and consent of the plaintiff?
- The defence of informed consent to a breach of fiduciary duty is explained in the joint judgment of Brennan CJ and Gaudron, McHugh and Gummow JJ in Maguire v Makaronis (1997) 188 CLR 449, 466:
“Thirdly, in the circumstances disclosed above, if the appellants were to escape the stigma of an adverse finding of breach of fiduciary duty, with consequent remedies, it was for them to show, by way of defence, informed consent by the respondents to the appellants’ acting, in relation to the Mortgage, with a divided loyalty. What is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given.” (footnotes omitted)
- Mr Ambrose-Pearce was adamant that at no time did he give Mr Andropov permission to operate or be involved in any other business while he was working for the plaintiff and that at no time did Mr Andropov disclose his interest and involvement in the business of the second defendant, the arrangements he had with Mr Harris, or that the second defendant was arranging for novated leases through Macquarie and receiving brokerage for so doing, as well as commissions for arranging associated insurances. In particular, when Mr Ambrose-Pearce questioned Mr Andropov about the charges in the internal accounting processes in favour of the second defendant for carbon offsets, Mr Andropov disclosed that his wife owned the company, but did not mention his involvement. Mr Ambrose-Pearce had never heard of Mr Greg Harris before Mr Andropov left the plaintiff. Ms O’Callaghan stated in her evidence (at Transcript 2-28) that it was “common knowledge” amongst the plaintiff’s staff that business was referred from Bridge Toyota to the plaintiff, as a consequence of Mr Andropov’s relationship with Mr Greg Harris. When it was suggested to Ms O’Callaghan that it was known by Mr Ambrose-Pearce, she responded “I believe so”. Her evidence (which was concerned with the fact of the referrals only and not the reasons for them) does not affect my acceptance of Mr Ambrose-Pearce’s direct evidence (at Transcript 1-77) that he did not know that Mr Andropov was involved with Mr Greg Harris at the relevant times.
- Mr Andropov relies on a conversation that he said he had with Mr Ambrose-Pearce in 2009 after they had had a meeting with Credit Suisse acting for a prospective purchaser of the plaintiff’s business where it was likely that the plaintiff’s employees would not be retained by the purchaser. Mr Andropov said (at Transcript 2-48):
“I said, well, given that if we’re going to sell the business I need to start looking for something else because I’m going to be out of a job, to which he said, well, as long as it doesn’t affect SPNT I’m happy for you to do that.”
- Mr Andropov conceded that he did not have any specific conversations with Mr Ambrose-Pearce in relation to his activities with Mr Greg Harris and the second defendant’s business of providing novated leases.
- After Mr Ambrose-Pearce and Mr Andropov had attended a meeting in Sydney and were together at the airport, Mr Andropov said of the conversation (at Transcript 2-69):
“But I definitely said to Mr Ambrose-Pearce I am exceptionally stressed. I can’t keep doing this. We are coming to the end of our relationship. You need to make a decision whether you are going to sell this company or you are going to restructure it, and I made no bones about the fact that if you restructure the company I will not be in it. I am going to go and pursue my other activities which I’d previously told him about. And I was specific in regards to those people in those other activities are expecting to join them shortly.”
- Mr Andropov estimated that the conversation occurred in March 2011 which was only just prior to his resignation which was given on 13 April 2011 with effect on 13 May 2011. Mr Andropov conceded that in this conversation he did not inform Mr Ambrose-Pearce that the second defendant was undertaking a business of receiving brokerage for novated leases. When Mr Ambrose-Pearce was cross-examined on this conversation that Mr Andropov suggested they held at the airport in Sydney where Mr Andropov flagged that he was going to pursue his other activities which he said he previously told him about, Mr Ambrose-Pearce was quite clear (at Transcript 1-76) that Mr Andropov had not talked to him about moving onto other projects. I found Mr Andropov’s evidence of this conversation to be self-serving and not credible. I have no hesitation in accepting Mr Ambrose-Pearce’s evidence that the conversation did not occur in the terms in which Mr Andropov recalled.
- The first and second defendants have failed to prove that Mr Andropov’s involvement in the second defendant’s business had the informed consent of the plaintiff.
Would the plaintiff have been unable to obtain the business of the 391 transactions?
- Mr Andropov’s analysis of the 391 transactions set out in schedule A to the statement of claim is exhibit 11. Apart from the lease for Ms O’Callaghan’s vehicle, he has identified 59 transactions where the employee was usually employed by the Northern Territory Government and, after the second defendant received the brokerage for the novated lease and associated commissions, the transaction was referred to the plaintiff for ongoing management. There were an additional 16 transactions where ongoing administration was referred to the plaintiff and, as a result, the plaintiff got the opportunity to build up a relationship with the new employer.
- Mr Andropov identified in exhibit 11 that the remainder of the 391 transactions would not have gone to the plaintiff for ongoing administration because either the employer had a closed panel for salary packaging which did not include the plaintiff or the deal was referred from a dealer owned by a competitor of KAG and that competitor would not have referred the deal to the plaintiff.
- Although Mr Andropov highlighted that the 391 transactions were the result of his relationship with Mr Greg Harris which was not available to the plaintiff, that overlooks that Mr Harris was prevailed upon, at least, to refer the ongoing administration of 75 of the transactions to the plaintiff. Mr Andropov’s role as general manager of the plaintiff required him to attempt to procure for the plaintiff the opportunities to undertake the work which the second defendant did. In any case, the fact that the 391 transactions, or the majority of them, may not have been available to the plaintiff is not a defence to a claim for breach of fiduciary duty. As was observed by the court in Warman International Ltd v Dwyer (1995) 182 CLR 544, 558, “it is no defence that the plaintiff was unwilling, unlikely or unable to make the profits for which an account is taken”. To the extent that the first and second defendants rely on a defence that the plaintiff would not have been able to obtain the business of the 391 transactions, that cannot succeed.
Conclusion on Mr Andropov’s breach of fiduciary duty in respect of the 391 transactions
- Mr Andropov by his activities in conducting the second defendant’s business between September 2009 and May 2011 of organising finance by way of novated leases for customers referred through Mr Harris’ contacts in competition with the plaintiff’s business while the general manager of the plaintiff breached the fiduciary duty he owed by virtue of his position with the plaintiff. Mr Andropov placed himself in a position where his own interests as a shareholder (and the controlling mind of the second defendant) conflicted with those of the plaintiff. In addition, he failed to act in good faith and in the interests of the plaintiff and to perform his duties as general manager loyally and with fidelity towards the plaintiff.
- When Mr Andropov worked as the finance and insurance manager for the KAG motor dealerships, the general manager of KAP Motors Pty Ltd, Mr Craig Morris, approved Mr Andropov to receive commissions under the reward program of Swann Insurance. The Swann Insurance operative transferred to ADI. ADI offered commissions as part of an incentive program called the “Reach Program” which was an incentive program for persons who supported the sale of insurance products whether by selling the insurance products or supervising those who sold the insurance products.
- Mr Andropov’s base salary increased significantly when he commenced employment full time as the plaintiff’s general manager.
- Between September 2010 and May 2011 commissions in the total sum of $41,900 were paid to Mr Andropov by ADI as credits on a debit card to which Mr Andropov had access.
- Mr Andropov relies on what he describes as an approved industry standard practice to receive commissions through incentive programs. He argues that he was implicitly entitled to receive the commission because he had been expressly authorised to receive commission of that nature when employed by KAP Motors Pty Ltd and a condition of his employment by the plaintiff was that all financial benefits to which he was entitled that KAP Motors Pty Ltd would be transferred when he began to work for the plaintiff.
- Mr Ambrose-Pearce explained that each incentive program required approval before employees could receive the benefits and approval (presumably by the plaintiff’s board) would not have been given for Mr Andropov to receive ADI commissions, as he was the plaintiff’s general manager. Mr Andropov conceded that he never spoke to Mr Ambrose-Pearce about receiving such commissions whilst employed by the plaintiff. The remuneration agreement between Mr Andropov and the plaintiff did not cover commissions such as that paid by ADI, despite bonus structures being set out in the remuneration agreement. The transfer of entitlements of Mr Andropov on changing his employer covered sick leave, annual leave and the like.
- Without the specific approval of Mr Ambrose-Pearce on behalf of the board to the receipt by Mr Andropov of commissions from ADI, the receipt of those commissions was in the nature of a secret profit in respect of his employment and in breach of the fiduciary duty he owed the plaintiff. The first defendant must repay to the plaintiff the total amount of the commissions of $41,900 together with interest calculated from the date each payment of commission was received.
The fourth defendant Mrs Andropov
- Mrs Andropov was informed by her husband in 2009 about the possible sale of the plaintiff and that Mr Ambrose-Pearce had agreed to Mr Andropov finding alternative income while assisting in the sale of the business.
- Mrs Andropov has worked in education, studied social work and has no experience in the finance or salary packaging industries. Mrs Andropov had no idea of the specific nature of the work Mr Andropov undertook on a daily basis for the plaintiff. It was Mrs Andropov’s intention to perform a simple data entry role in the business run by the family company from a single computer at the family home, whilst looking after her three young children. She found it was impractical to undertake this role with the children, after she had input the first two finance applications and the approvals were received. Mr Andropov thereafter used her email signature and the email address incorporating her name “Alex” which had been loaded into the Macquarie system.
- From the dates of the first quotations using Dealerpac, it is likely that Mrs Andropov put in the details to the Macquarie website of the two finance applications that she did in late September 2009. Although Ms Dalton assumed that it was Mrs Andropov to whom she spoke when she had queries about the progress of applications she had submitted, I have concluded that her assumption was mistaken, in the light of Mrs Andropov’s firm evidence that Ms Dalton never made contact with her and Ms Dalton’s concession (at Transcript 2-4) that there was a possibility that she was speaking to another person named “Alex”.
- Mrs Andropov was cross-examined on an email exchange on the subject of “CNC Invoices” between “Alex” and an assistant accountant at the plaintiff’s office. The email from Alex sent on 24 August 2010 opens with “Vanya advised me that you were sending through an amended copy of the contracts outstanding for April, May and June.” Mrs Andropov was very clear and convincing in her evidence that she did not write the email that purported to be from “Alex” that referred to advice from Mr Andropov.
- Although the first defendant in an email to Mr Greg Ambrose-Pearce dated 8 April 2010 described Mrs Andropov’s involvement in Dealerpac as “Alex works very part-time for Greg in an admin role”, Mrs Andropov was adamant during her evidence that was not the case. The statement in the email was an assertion by the first defendant in a defensive response to an email that called for an explanation from the first defendant about his involvement in Dealerpac which he wrongly denied in the email. Mr Andropov’s assertion about Mrs Andropov was also untrue.
- I have no hesitation in accepting the evidence of Mrs Andropov as to her limited participation in the first two transactions undertaken by the second defendant, that she was not working for Mr Harris part time in an administrative role, and her lack of awareness that Mr Andropov’s involvement in the second defendant’s business was being undertaken without the permission of the plaintiff. The fact that she received a significant income associated with the second defendant (which she understood was a family company) for the years ended 30 June 2010 and 2011 does not alter my view of her lack of knowledge of Mr Andropov’s breach of fiduciary duty owed to the plaintiff.
- It suited Mr Andropov to minimise or hide his involvement in the second defendant’s business by using the email address in the name of “Alex” operated through the Dealerpac website, even to the extent of referring to himself in the third person (as in the email of 24 August 2010). He would also add notes to the applications uploaded on the Macquarie website with information relevant to obtaining leasing approval and sign them off “Alex”.
- The factual matters on which Mrs Andropov has succeeded in defending the plaintiff’s claim were first raised in the defence filed on 23 August 2013. It is therefore appropriate that any order for costs reflects the late stage at which the facts critical to Mrs Andropov’s success were pleaded. In these circumstances and as the plaintiff’s proceeding has largely been concentrated on the activities of the first and second defendants, an appropriate costs order to reflect Mrs Andropov’s ultimate success is that the plaintiff should pay Mrs Andropov’s costs of the proceeding to be assessed limited to the costs from 24 August 2013, and otherwise there should be no order as to costs between the plaintiff and Mrs Andropov.
What is the appropriate remedy against the first and second defendants?
- The remedy for breach of fiduciary duty is flexible and “must be fashioned to fit the nature of the case and the particular facts”: Warman at 559. Although in an appropriate case the measure of equitable compensation may be the improper gain made by the defaulting fiduciary, in another case equitable compensation may be appropriately assessed as the loss suffered by the plaintiff: Nocton v Lord Ashburton  AC 932, 958. In this proceeding, the plaintiff has elected to claim the profit that it would have derived had the income from the 391 transactions been paid to it. The lack of detail in the financial documents disclosed in this proceeding by the second defendant that would have enabled its profits made on the 391 transactions to be calculated supports this election.
- Expert evidence was given for the plaintiff by forensic accountant Mr Stuart Benjamin. He provided a report dated 8 July 2013 that was reviewed by the defendants’ expert accountant Mr Gregory Wiese whose report is dated 19 July 2013. Both accountants then prepared a joint report of experts dated 5 August 2013.
- Mr Benjamin calculated the profits that the plaintiff would have made had the payments that the second defendant received with respect to the 391 transactions been instead received by the plaintiff. Profits were measured as revenue less direct costs, direct labour costs and relevant indirect costs (variable overheads). Mr Benjamin’s resultant figure of $978,335 is the amount which the plaintiff seeks to recover from the first defendant as equitable compensation for breach of fiduciary duty in respect of the 391 transactions. The figure of $978,335 is comprised of $267,176 for the year ended 30 June 2010 and $711,159 for the year ended 30 June 2011.
- Mr Wiese’s instructions were to review the calculations made by Mr Benjamin and the underlying assumptions made by Mr Benjamin. Mr Wiese did not undertake any independent calculations.
- Mr Benjamin’s calculations proceeded on the basis that the 391 transactions can be apportioned as to 111 for the year ended 30 June 2010 and 280 for the year ended 30 June 2011. Mr Benjamin applied the plaintiff’s costs structure and the amounts it would have paid to the various service providers on the basis of the plaintiff’s performance during the period in which the 391 transactions occurred. Mr Benjamin’s analysis of the plaintiff’s performance during the period indicated that it had sufficient capacity to process an additional 111 transactions in 2010 and therefore Mr Benjamin did not allow in his calculations for an additional labour cost for that year. His conclusion was different in relation to 2011. He considered the plaintiff would have employed additional staff to attend to 134 of the 280 transactions for that year and has therefore calculated an additional staff requirement on that basis.
- This approach by Mr Benjamin to the capacity of the plaintiff to undertake additional transactions during the relevant years has some support from his analysis of the actual transactions the plaintiff did in each of 2009, 2010 and 2011. There were 316 settlements done by the plaintiff in 2009 which can be compared to 271 in 2010 and 260 in 2011. Although it is apparent that the plaintiff’s business was affected by accounting issues in 2009, it is not irrelevant that the plaintiff had a decline in transactions in the next two years in which Mr Andropov assisted the commencement and development of the second defendant’s business in relation to novated leases.
- Mr Benjamin’s analysis is comprehensive and based upon an assessment of the plaintiff’s actual financial performance in respect of the incremental transactions. Mr Wiese expressed caution that the assumption embodied in Mr Benjamin’s calculation that in 2010 the plaintiff’s employees were underutilised to a significant extent that they would have been able to accommodate an additional 111 settlements and that the assumption suggested “extravagant management decisions as to employment levels”. He pointed out that the assumption has a material impact on the calculation of profit, if additional labour costs were required for each of the years.
- Mr Wiese’s criticisms of Mr Benjamin’s calculations were theoretical and had less impact when Mr Wiese had not undertaken the same scrutiny of the plaintiff’s financial records as Mr Benjamin. Any extravagance in management decisions as to employment levels occurred under Mr Andropov as the general manager. The excess employment capacity also coincided with Mr Andropov’s building up the second defendant’s business and the drop in the plaintiff’s business from its 2009 figures. Ultimately the defendants did not vigorously challenge Mr Benjamin at the trial on his calculations. I therefore accept Mr Benjamin’s estimate of the plaintiff’s pre-tax profits for the 391 transactions.
- The plaintiff is therefore entitled to judgment against Mr Andropov for equitable compensation in the sum of $978,335 together with interest that is claimed pursuant s 47 of the Supreme Court Act 1995 and s 58 of the Civil Proceedings Act 2011. Although Mr Benjamin did a calculation of statutory interest as part of his report, I will give the parties an opportunity to see if they can agree on the calculation of interest to the date of judgment.
- The plaintiff seeks the same relief against the second defendant as it obtains against Mr Andropov for breach of fiduciary duty, on the basis that the second defendant received the moneys and assisted Mr Andropov in respect of the 391 transactions knowing that Mr Andropov was committing a breach of fiduciary duty in respect of those transactions. It is argued by Mr Hickey of counsel on behalf of the defendants that the second defendant was unaware that Mr Andropov was acting in breach of duty, as Mrs Andropov, who was its sole director for the relevant period, did not have the requisite knowledge of Mr Andropov’s breach of duty.
- The form that Mrs Andropov was the only appointed director of the second defendant during the period of the 391 transactions cannot prevail over the substance that Mr Andropov was the controlling mind of the second defendant during that period. His knowledge of, or recklessness about, his own conduct that was in breach of his fiduciary duty taints the second defendant’s receipt of the brokerage and insurance commissions in respect of the 391 transactions.
- I accept that the second defendant did make payments to Mr Harris out of the gross receipts for the 391 transactions, but that was an expense of the second defendant in calculating its net profit from those transactions. As the plaintiff is entitled to recover equitable compensation for its lost profit based on what it would have earned in respect of the 391 transactions, it is not necessary to allow for any amount for Mr Harris’ role in relation to the second defendant’s business. For a similar reason, no credit should be given for the benefit the plaintiff obtained from the referral of 75 of the 391 transactions to the plaintiff for ongoing administration.
- The plaintiff’s claim for relief in the statement of claim included a claim against the second defendant for an accounting as constructive trustee of the funds received by the second defendant, as a result of the breach of fiduciary duty. The plaintiff’s submissions at the conclusion of the trial sought judgment against the second defendant only for equitable compensation and interest.
- The plaintiff is entitled to the same relief against the second defendant as it is against Mr Andropov.
- It follows that the orders which should be made are:
- The plaintiff’s claim against the fourth defendant is dismissed.
- The plaintiff must pay the fourth defendant’s costs of the proceeding to be assessed limited to the costs from 24 August 2013, and otherwise there is no order as to costs between the plaintiff and the fourth defendant.
- judgment for the plaintiff against the first and second defendants for equitable compensation in the sum of $978,335 together with interest pursuant to s 47 of the Supreme Court Act 1995 and s 58 of the Civil Proceedings Act 2011.
- Judgment for the plaintiff against the first defendant for equitable compensation in the sum of $41,900 together with interest pursuant to s 47 of the Supreme Court Act 1995 and s 58 of the Civil Proceedings Act 2011.
- I will give the parties an opportunity to make submissions on appropriate costs orders as between the plaintiff and the first and second defendants, after the publication of these reasons.
- Published Case Name:
Salary Packaging Australia Pty Limited v Andropov & Ors
- Shortened Case Name:
Salary Packaging Australia Pty Limited v Andropov
 QSC 167
31 Jul 2014
- White Star Case:
No Litigation History