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Entirity Business Services v Garsoft [2011] FCA 76 (10 February 2011)

Last Updated: 11 February 2011

FEDERAL COURT OF AUSTRALIA


Entirity Business Services v Garsoft [2011] FCA 76


Citation:
Entirity Business Services v Garsoft [2011] FCA 76


Parties:
ENTIRITY BUSINESS SERVICES PTY LTD v GARSOFT PTY LTD, SCION BUSINESS SERVICES PTY LTD and ANTHONY GARRARD


File number:
NSD 1418 of 2008


Judge:
MOORE J


Date of judgment:
10 February 2011


Catchwords:
CONTRACTS – contractor’s responsibility for managing accounts of principal – accounts failed to show true position of principal at time of demerger – liability of contractor for rectification of accounts

PRACTICE AND PROCEDURE – pleadings – material difference between pleaded representation and representation about which evidence was given

TRADE PRACTICES – misleading and deceptive conduct – alleged misrepresentation by director of financial position of company – no reliance by company on misrepresentation


Legislation:


Date of hearing:
7, 8, 9 and 10 June 2010, 5 August 2010


Place:
Sydney


Division:
GENERAL DIVISION


Category:
Catchwords


Number of paragraphs:
80


Counsel for the Applicant:
M Elliott


Solicitor for the Applicant:
Turner Freeman


Counsel for the Respondents:
M White and B Kaplan


Solicitor for the Respondents:
Dibbs Barker

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1418 of 2008

BETWEEN:
ENTIRITY BUSINESS SERVICES PTY LTD
Applicant
AND:
GARSOFT PTY LTD
First Respondent

SCION BUSINESS SERVICES PTY LTD
Second Respondent

ANTHONY GARRARD
Third Respondent

JUDGE:
MOORE J
DATE OF ORDER:
10 FEBRUARY 2011
WHERE MADE:
SYDNEY

THE COURT ORDERS THAT:


  1. The parties to file and serve draft orders giving effect to these reasons together with written submissions on the question of costs by 4pm on 18 February 2011.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.


IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1418 of 2008

BETWEEN:
ENTIRITY BUSINESS SERVICES PTY LTD
Applicant
AND:
GARSOFT PTY LTD
First Respondent

SCION BUSINESS SERVICES PTY LTD
Second Respondent

ANTHONY GARRARD
Third Respondent

JUDGE:
MOORE J
DATE:
10 FEBRUARY 2011
PLACE:
SYDNEY

REASONS FOR JUDGMENT

Introduction

  1. These proceedings concern the relationship between two businessmen who entered a joint business venture and the circumstances in which they commenced and conducted their business before they eventually parted ways. The principal vehicle for their joint venture was Entirity Business Services Pty Ltd. The dissolution of their joint venture has given rise to claims and counterclaims by various participants in the business, both corporate and individual. Given the amounts involved, the proceeding should have settled well before this point. Notwithstanding two court annexed mediations, this has not occurred. The legal and other costs of this litigation will be utterly disproportionate to its subject matter.
  2. The applicant, Entirity, brought proceedings against the third respondent, Mr Garrard, a former director and shareholder of Entirity, and two companies in which he is or was a director and shareholder, Garsoft Pty Ltd, the first respondent, and Scion Business Services Pty Ltd, the second respondent. Mr Paul Barlow was and remains a director and a shareholder of Entirity. Both were directors and shareholders until Mr Garrard's resignation ("the joint venture period"). Entirity was incorporated on 8 July 2003. Mr Garrard resigned as director and relinquished his shareholding in Entirity on 10 March 2006 ("the demerger"). I use the terms "demerger" and "joint venture" and their derivatives in these reasons in a descriptive rather than legal sense. These reasons are primarily concerned with the events during the joint venture period.
  3. Entirity contended that through Garsoft, Mr Garrard was responsible for managing its accounts during the joint venture period. It contended that during that period Mr Garrard and Garsoft failed to appropriately manage its accounting system, with the result that the system failed to accurately reflect the true financial position of Entirity and this remained so at the time of the demerger. The accounts were based on software called QuickBooks. Entirity contended that Mr Garrard engaged in misleading and deceptive conduct, in the sense that Mr Garrard misrepresented the financial position of the business at around the time of the demerger. In the result, the demerger occurred in circumstances where had the true financial position been known to Mr Barlow, he would not have agreed to the demerger, at least on the terms in which it occurred. Entirity also contended that it owns the copyright in two programmes, namely Terminal Client and ESS software (the acronym ESS can have a variety of meanings but for present purposes stands for Entirity Student Storage unless the context suggests otherwise), and claimed that the respondents have infringed that copyright. The respondents did not accept that Mr Garrard and Garsoft had responsibility for the accounts, or that Entirity's financial position at the time of the demerger was misrepresented. They also did not accept that Entirity owns the copyright in Terminal Client and the ESS software. Additionally, in their cross-claim, the respondents sought payment of $31,456.16 plus interest of $8,663.10 for unpaid fees evidenced by invoices issued by Garsoft to Entirity. Entirity accepted the cross-claim except for an amount of $2,783.08, which Entirity contended is the result of Garsoft applying incorrect rates and including items for accounting work that should not have been included.
  4. In the result, the principal issues in the proceedings are threefold. First, are Garsoft and Mr Garrard liable for the costs of putting in order the accounts of Entirity at the time of and following the demerger and if so, in what amount. The second is whether Mr Garrard made a misleading representation to Mr Barlow about the financial position of Entirity at the time of the demerger and if so, did he cause Entirity to act to its detriment and suffer damage. If it did, what are the damages. The third is whether copyright subsists in certain works, who owns the copyright and whether it has been infringed.
  5. My conclusions, in summary, are as follows. I have concluded that Mr Garrard and Garsoft were responsible for the accounts during the joint venture period. The evidence establishes that Mr Garrard introduced the accounts software package (QuickBooks), set up the accounts system, interacted with staff engaged on the accounts system, and billed Entirity (through Garsoft) for work performed on the accounts. There was a failure by Garsoft to manage the accounting system appropriately for which it is contractually liable. However this failure did not give rise, on Mr Garrard's part, to a breach of his duties as a director. It was necessary to perform stock rectification exercises on Entirity's accounts around the time of the demerger to correct the systemic errors in the accounts that flowed from the way stock was accounted for in the procedures introduced and overseen by Mr Garrard and Garsoft. Garsoft is liable for the costs of this rectification work.
  6. I am not satisfied Mr Garrard made the pleaded representation to Mr Barlow at the time of the demerger about the state of the accounts. Finally, although the pleadings raise a copyright claim in relation to computer programmes, the evidence as to the contents of the programmes and the circumstances in which they were written were insufficient to establish ownership.

The facts

  1. Unless I indicate or the context suggests otherwise, the following represents findings of fact. Evidence was given by Ms Leanne Hyde, Mr Barlow, Mr Scott Dubois, Mr Garrard, Mr Brian Silvia, Mr Gregory Roberts, Mr Barrie Pike, Mr Michael Hatherly and Mr Robert Bell. Ms Hyde is Mr Barlow's sister. Mr Dubois is Mr Garrard's nephew.
  2. In the years prior to the joint venture period, various businesses competed in providing computer and information technology services to the New South Wales Department of Education and through it to a number of public schools. Those businesses included Executech Consultancy and Garsoft. Executech was the vehicle for a business operated by Mr Barlow, and Garsoft was operated by Mr Garrard and his wife Carole Garrard.
  3. In 2003, the Department of Education encouraged its various individual contractors to collaborate in order to deliver better results to schools. Mr Barlow and Mr Garrard were acquaintances carrying on businesses in the same industry. In mid June 2003, they agreed to establish Entirity as a joint venture. They agreed to establish it without further delay so they could start operating from the beginning of the new financial year. They acquired a shelf company which became Entirity. In July 2003 each contributed $5000 as Entirity's start up capital. Mr Garrard suggested Entirity's office be set up at his home, and Mr Barlow agreed. In July 2003 Entirity's office was established at Mr Garrard's home. Mr Garrard applied for an Australian Business Number and a Tax File Number, registered Entirity for Goods and Services Tax with the Australian Taxation Office, and was recorded as Entirity's public officer with the ATO.
  4. The business was initially run from Mr Garrard's home. In April 2004 it moved to office premises in Parramatta. It subsequently moved to premises in Rydalmere in May 2005. The business of Entirity was the provision of information technology services to public schools in New South Wales. Those services included providing software involving the software in dispute, Terminal Client and ESS, and also included providing a range of installation and ongoing support services. Executech and Garsoft brought their clients to Entirity. Throughout the joint venture period Mr Garrard and Mr Barlow both provided their services to Entirity through their own entities, Garsoft and Executech. Entirity was operated during the joint venture period as a business to generate income then to be distributed to Garsoft and Executech, with Entirity retaining only a certain percentage of the sales revenue to pay for the administration costs of the business. To this end, during the joint venture period from July 2003 to February 2006, no dividends were paid to the shareholders and the directors and other office holders received no fees for acting in those capacities.
  5. At this point, it is convenient to set out matters concerning the accounting system based on QuickBooks which were conceded by Mr Garrard in evidence. Having regard to the concessions but also the evidence more generally, they represent findings of fact I make. Mr Garrard accepted the following. He proposed the use by Entirity of the QuickBooks account keeping software, having, at that time, already used it. He supplied and set up the software for Entirity (though he added the qualification, which I do not accept, that it was in conjunction with Mr Barlow). Mr Barlow told him, I infer when the decision was made to use QuickBooks, that he had no experience in QuickBooks. Mr Garrard set up the software when the business moved premises. He suggested setting up the stock monitoring option. He showed employees such as a Ms Muge Hassip how to use parts of the software (though again he added the qualification, which I do not accept, that it was in conjunction with Mr Barlow), such as importing data from Time Assistant and receiving creditors’ invoices and entering the details of such invoices into the software. He presented information to Mr Barlow about the accounts. He arranged for a company he had used in the past, Gamble and Brown, to be retained to prepare tax returns. He accepted that Mr Barlow may have said in the context of preparing tax returns that he, Mr Garrard, was responsible for Entirity's accounts, a proposition he had previously denied in his affidavit evidence. His company Garsoft issued invoices to Entirity and included in those invoices, in the latter part of the joint venture period, were amounts referable to time spent by Mr Garrard working on the QuickBooks accounts. Mr Barlow gave evidence to similar effect, which I accept, and that he knew very little about the QuickBooks software.
  6. It was common ground that at the time the business was being established a conversation took place between Mr Garrard and Mr Barlow about the accounting system. However what was said was in dispute. On Mr Barlow's affidavit account, Mr Garrard said he would like to be responsible for the company's accounts, Mr Barlow agreed and that Mr Garrard said he was planning to use QuickBooks, he had experience with it and had used it for Garsoft. On Mr Garrard's affidavit account, Mr Barlow asked what were they going to use for accounts to which Mr Garrard said he had been trialling QuickBooks but had little experience in it apart from entering invoices and that "one or other of us said" that Excel would not be sufficient and "the other one of us said" they should use QuickBooks noting that if the company grew both were going to need to develop their skills in it as both would have to generate reports.
  7. The affidavit evidence of both concerned a conversation which took place approximately seven years earlier and a conversation which probably would not have been seen by either at the time as momentous though might have been seen by both as not unimportant. I say this because it is unlikely that either could recall now the precise words used. However Mr Barlow's version appears to me more likely to accord with what was said. Mr Garrard accepted in cross examination that he suggested using QuickBooks, retreating from what he said in his affidavit which clearly was framed to obscure who suggested using QuickBooks. This appears to me important in assessing the veracity of each version of events concerning the accounts. It accords with Mr Barlow's version of the conversation. Also it is inherently more likely that the conversation was along the lines of Mr Barlow's version given that he had not had any experience with QuickBooks and Mr Garrard had, using it to replace another accounting system. I am satisfied that Mr Garrard's account, including the use of expressions such as "trialling" was a deliberate attempt to paint a false picture of what actually occurred, namely that he proposed using QuickBooks, volunteered to manage and be responsible for the accounts.
  8. This conclusion is consistent with a document created by Mr Garrard in April or May 2005 in which Mr Garrard describes himself as Entirity's Business Manager (with Ms Hassip reporting to him) in contradistinction to Mr Barlow, described as Technical Manager. While Mr Garrard gave evidence that it was a document proposing a future management structure, it is difficult to escape the conclusion that it described the essence of what then was the position.
  9. The respondents relied on an e-mail of 14 February 2005 from Mr Barlow to Mr Garrard as evidencing an involvement by Mr Barlow in maintaining the accounting system which was inconsistent with Entirity's case that Mr Garrard had assumed that role. For my part, I do not view the e-mail as establishing this. Indeed the substance of the e-mail points, in my opinion, in the opposite direction. That is because it is Mr Barlow drawing to Mr Garrard's attention a range of anomalies in the accounts. Mr Barlow noted an anomaly in a report on purchases and said "you may have a date wrong in this report" as to reimbursements due to both of them. Mr Barlow asked Mr Garrard whether there was "a chance that some may have slipped through the cracks?" and concluded by saying that Mr Garrard should "do what you're doing, scrutinise the accounts". While the e-mail concludes with Mr Barlow offering to help sort these things out, it appears, overall, to be an e-mail from someone who had noted anomalies in the accounts to someone who was responsible for maintaining them.
  10. Throughout the course of the joint venture period Entirity employed a number of subcontractors most of whom, after around July or August 2005, became employees, including Mr Roberts, Mr Dubois, Mr Beau Flanagan, Mr Michael Hatherly, Mr Joe Durantini, Mr Ryan Benson and Mr Sunil Takaran. Shortly after becoming an employee, Mr Roberts became again, at his request, a subcontractor. A number of employees worked on Entirity's accounts. Ms Helen Dubois (Mr Garrard's niece) assisted in general office and accounting work on a casual basis from June 2004 to November 2004. Ms Hassip worked as an office administrator from July 2004 to September 2005. Ms Hassip's job was to import data from the Time Assistant programme, receive creditors' invoices and then enter their details in the QuickBooks programme. Mr Garrard and Mr Barlow shared tasks concerning the preparation of quotes, and Ms Hassip would prepare invoices for Entirity's clients. Ms Hassip left Entirity in acrimonious circumstances. Ms Hyde started working at Entirity on 10 October 2005. She was hired as an office manager to fill the position left vacant by Ms Hassip. She performed a range of administrative, accounting and management work under the direction of Mr Garrard. She was shown how to perform her accounting work by Mr Garrard and Ms Hassip, who returned for a few days to teach her how to use the accounting system. She performed the accounting work under the supervision of Mr Garrard.
  11. In late 2004, Mr Barlow and Mr Garrard discussed the level of stock Entirity had and, in particular, the fact that in the company's accounts the inventory was overstated, with more stock recorded than that on hand. Several more discussions to that effect took place into early 2005. In early 2005, Ms Hassip was sent on a QuickBooks training course paid for by Entirity. She subsequently arranged for an external bookkeeper, Mr Ratnasabapathy Ratnabala, to examine Entirity's accounts and perform account reconciliations for the financial year 2005. Mr Ratnabala met with Mr Garrard, Mr Barlow and Ms Hassip on 15 June 2005. Mr Ratnabala suggested that Entirity enter stock items as non-stock items in the accounts, so they would be treated as an expense. He also suggested that items of the same type be recorded as one item, to reduce the large number of items on the list and reduce the problem or its effect. Shortly after, at the direction of Mr Garrard and with the agreement of Mr Barlow, Ms Hassip contacted the company that had conducted her QuickBooks training course and organised for it to conduct in-house training at Entirity's Rydalmere offices at no cost to Entirity. During the in-house training Ms Hassip raised the issue of stock control with the trainers by saying "[w]e have had advice from a bookkeeper that we enter similar stock items such as cables as a single generic item despite differences in price". The trainer responded "I don't see why that wouldn't work. However it is preferable to enter all regular purchases as non stock items if the item is being sold immediately and isn't of a high value. You have to be careful because the tax office does not like large stock items being recorded as immediate expenses." During mid 2005 Mr Ratnabala again recommended that items of inventory be entered as non-stock items.
  12. Entirity led evidence, which was unchallenged, of an example of the erroneous way Entirity accounted for stock. On 8 August 2005, Ms Dubois entered into the accounts the purchase of a monitor, computer, laptop and printer from Ingram Micro for Cumberland High School. When the bill was generated, the stock being purchased was entered on to the balance sheet as a stock asset. This was incorrect, as the purchase went onto the balance sheet as an asset which remained on the balance sheet when it was sold to Cumberland High School. The transaction should have been entered as a non-stock item, in which case it would not have gone onto the balance sheet, and the cost of the item would be automatically identified in the profit and loss.
  13. In late 2005 or early 2006 Mr Ratnabala analysed Entirity's balance sheet of 31 December 2005. In his report, he summarised Entirity's financial position as being "an [sic] good profitable company with excellent returns. The financial position is very good. Credit (debtor) collection has to be improved and negotiate better credit terms with the customers. Company has very good future and recommended to continue the business." At some point in January 2006 Mr Garrard returned from holiday and discussed Mr Ratnabala's report with Mr Barlow, with both men noting Mr Ratnabala's positive outlook for the company.
  14. Mr Garrard worked on Entirity's accounts at least during February 2006 making adjustments to the levels of stock shown in the accounts, as the accounts at that time showed erroneous stock levels. By performing stock rectification exercises, Mr Garrard was able to alter the amount of stock shown in Entirity's accounts and as a result affect the profitability of the business. As Mr Garrard worked on the accounts, Entirity's profits fluctuated.
  15. There was a significant divergence in the evidence about precisely when Mr Garrard worked on the accounts and stopped doing so together with what the accounts revealed as they were being adjusted from time to time as well as what Mr Garrard told Mr Barlow.
  16. Mr Garrard said that the last day he worked on fixing historical stock transactions in the accounts was 26 February 2006. According to Mr Barlow, at the end of 26 February 2006, after Mr Garrard's initial rectifications up to that point, Entirity's accounts showed a loss of $45,000. Mr Barlow did not make a backup copy of the accounts as at 26 February 2006, and says that he saw Mr Garrard make a back-up copy which he alleges Mr Garrard has failed to discover in these proceedings. Mr Garrard says that as at 26 February 2006 the accounts showed a loss of $99,063 and equity of $54,000. Mr Garrard says he showed Mr Barlow these on 27 February 2006. Mr Barlow does not accept that Mr Garrard last worked on the stock issue in the accounts on 26 February 2006 or that he was aware the accounts showed a loss of $99,063 on 27 February 2006, instead contending that Mr Garrard continued to work on the stock issue in the accounts in subsequent days, with the effect that as at the demerger on 10 March 2006 the actual state of Entirity's accounts was an even bigger loss. Mr Garrard accepts that he worked on the accounts on 27 February 2006, but says that the work he did on that day was limited to assisting Ms Hyde with tax. Mr Garrard says that Mr Barlow instructed him on 27 February 2006 not to do any more work on the accounts, a proposition Mr Barlow does not accept.
  17. Mr Barlow gave evidence that Mr Garrard said the business would be in a break-even position on a number of occasions prior to the demerger. In his affidavit dated 16 April 2010, Mr Barlow gave evidence of six conversations in which Mr Garrard addressed this question. They were:
    1. Mr Barlow said Mr Garrard said on 24 February 2006 "... As I make changes [to the accounts by performing the stock rectification exercise] the result goes up and down but ultimately it will be at a breakeven point... I don't think we will necessarily be making any profit this year but indications are that it will be at break even point once I have finished." [at para 59]
    2. Mr Barlow said Mr Garrard said in the afternoon of 26 February 2006 "[d]on't worry about the loss – there won't be any loss, Paul... I am confident that after I make all the changes [to the accounts by performing the stock rectification exercise], it will be a break even position. I am also thinking the company would possibly make some profit." Mr Barlow said he told Mr Garrard at that time "[i]f the company breaks even, then I am likely to agree to your proposal", to which Mr Garrard said "Yes, it will break even". [at para 61]
    3. Mr Barlow said Mr Garrard said on the afternoon of 26 February 2006 "... I am confident that the company will break even for the business so far, and it may post a small amount of profit by the end of this financial year." [at para 66]
    4. Mr Barlow said Mr Garrard said on 27 February 2006 "... it is obvious that after all the corrections are made, the company will break even... It will break even. I have noticed movements in both directions. With some corrections, the company's profit decreases whilst it increases with other corrections. Based on the trend so far, I can say that the company will not make as much profit as we had initially thought, but it will at least break even." [at para 74]
    5. Mr Barlow said in a conversation on 1 March 2006 Mr Garrard said "Paul, the company made profits before and even though it is now having some cash flow issues, everything will be fine soon. It may not make the $50,000 profit we originally had thought it would make as at Christmas, but it will break even." At the time, Mr Barlow prepared a diary note. The diary note, which was in evidence, said in part "A/c's ok P+L [graphic of an arrow pointing upwards] 'Break even 06'". In the context, it is clear that 'A/c's' is a reference to accounts, 'P+L' is a reference to profit and loss and '06' is a reference to the year 2006. [at para 78]
    6. Mr Barlow said in a conversation on the morning of 6 March 2006 Mr Garrard said "... Every time I make changes in the accounts, there are large discrepancies – it either goes up or goes down dramatically but in the end, I am confident that it will work itself out and the company will be at a break even point... I am now thinking that the company may actually make a profit of about $10,000 for the business activities so far but [Ms Hyde] needs to tidy up some of the smaller part transactions that I didn't get to." [at para 80] (emphasis added)

Mr Garrard did not accept that he made these statements. It should be noted that three of the alleged statements were said to have been made by the end of the afternoon of 26 February 2006. The substance of what was alleged to have been said in those three statements is repeated in the remaining three statements is said to have been made by Mr Garrard. This, in my opinion, is significant as I discuss shortly.

  1. Ms Hyde gave evidence that appeared to corroborate the case that a representation was made by Mr Garrard about the accounts. Her relationship with Mr Barlow (his sister) suggests she was not an indifferent observer. Ms Hyde said that on various occasions in 2005, Mr Barlow raised cash flow problems with Mr Garrard, who replied "[t]he cash flow problem is a temporary problem... the company is doing fine. Everything will be okay soon...We're having this problem as the clients are taking longer to pay. Do not worry. So long as we're making money, we have nothing to worry about." She said that in mid February 2006 Mr Garrard told Mr Barlow "[t]here are some problems in our accounts. They need to be fixed. I'll have a look at them more closely in the next few days." She said that she saw Mr Garrard working on the accounts during the period 23-27 February 2006 inclusive. She said that on 27 February 2006, she was present when Mr Garrard told Mr Barlow "I have worked on the accounts over the weekend, and made a large number of corrections to the accounts. I will continue to review the accounts today, and I will show Leanne what I am doing... I am confident that everything will be okay. The profit and loss are going up and down as the changes are made, and it will eventually break even... Yes I am [sure]". She said that later that day Mr Garrard refused her offer to assist him. On 2 March 2006 Ms Hyde overheard a telephone conversation between Mr Garrard and Mr Barlow and recorded in her diary, which was in evidence, "Paul on phone – Tony sorted account problem, is still leaving P&L Better [graphic of an arrow pointing upwards]". As with Mr Barlow's note, in the context, it is clear that 'P&L' is a reference to profit and loss. Ms Hyde's diary note corroborates the import of the diary note made by Mr Barlow the day before. Ms Hyde continued, saying that on 6 March 2006, she overheard Mr Garrard say to Mr Barlow "I have closely looked at the accounts, and I have made adjustments, and they are all working towards break even." She says Mr Barlow replied "[t]hat's good. I'd not agree to you leaving the company unless it breaks even", to which she says Mr Garrard replied "[i]t will break even".
  2. I return to earlier events. They bear upon what may have occurred in late February and early March 2006. The import of Mr Garrard's evidence was that his relationship with Mr Barlow deteriorated around late May 2005 and Mr Barlow progressively assumed more control over Entirity than he had previously exercised. Mr Garrard said that Mr Barlow approached him around late May 2005 with an offer to buy his shares in Entirity for $50,000 with an offer of guaranteed employment for two years at $60,000 per annum working 40 weeks per year. He said that he refused the offer, but said he was "happy if you [Mr Barlow] take on the role of managing director and I will step back from the business for the foreseeable future and continue to work generally as a contractor", a proposition he said Mr Barlow accepted. He said that a staff meeting was held in July 2005 where Mr Barlow told all the employees "[t]he directors have agreed that I will be the managing director of Entirity. [Mr Garrard] will take a less active role in the management of the business." This account is broadly corroborated by Mr Roberts in his affidavit. He said that Mr Barlow altered Mr Flanagan's employment status without consulting him, and that this led to a heated discussion between the two of them over Mr Flanagan's remuneration. He said that Mr Barlow made the decision to convert the employment status of all subcontractors to employees. He said that Mr Barlow wanted to buy a truck for the business, and when he disagreed Mr Barlow became agitated. He said that Mr Barlow unilaterally decided to employ Ms Hyde and it was presented to him as a "fait accompli". Mr Garrard also gave evidence that in around November 2005 he had a heated phone conversation with Mr Barlow in which Mr Barlow said he wanted Mr Garrard out of the business. Both Mr Hatherly and Mr Dubois swore affidavits in the proceedings. Mr Hatherly said that he noticed "increasing tension" between Mr Garrard and Mr Barlow in March or April 2005. Mr Dubois said in his affidavit that he noticed "mounting tension" in January 2006.
  3. Mr Barlow painted a different picture, rejecting the proposition that the relationship soured around late May 2005 and instead said that he only felt tension in the relationship in late February 2006. He gave evidence that he did not, in substance, assume more control over Entirity. The import of his evidence was that the idea of the demerger came to him fairly abruptly on about 24 February 2006 when he had begun to appreciate there were problems with the accounts.
  4. I generally accept Mr Garrard's account of the changes occurring in his relationship with Mr Barlow and that the idea of a demerger was raised by Mr Barlow in the latter half of 2005. His account has the ring of truth about it and is corroborated by other evidence. Mr Barlow's account of thinking about a demerger comparatively abruptly in February 2006 I find difficult to accept. I do not think that Mr Barlow and Mr Garrard were on particularly good terms by the time the demerger occurred on 10 March 2006. Indeed I think Mr Barlow was becoming increasingly intolerant in the concluding months of 2005 and early 2006 of what he perceived to be the significant limitations of Mr Garrard's abilities. Their union had been strongly encouraged by the Department of Education's policy position referred to at [9] of these reasons. Mr Barlow was increasingly realising it was a union that should never have been. It is true that there were some aspects of Mr Garrard's conduct which might suggest their relationship was not souring, such as him visiting Mr Barlow's wife in hospital. However the picture that emerges from the evidence in its entirety is that Mr Barlow was becoming increasingly frustrated with Entirity's trajectory and Mr Garrard's role in the business.
  5. An annual general meeting of Entirity was held on 6 March 2006 and resumed on 10 March 2006. In attendance were Mr Barlow, Mr Garrard and Ms Hyde. During the meetings the demerger was effected, with Entirity and Garsoft splitting clients, agreeing not to solicit business from the other's clients for a period of twelve months, organising asset transfers from Entirity to Garsoft and finalising payments due to Mr Barlow and Mr Garrard. The demerger was effective from 10 March 2006, when Mr Garrard submitted his letter of resignation as a director of the company. As part of the demerger, Mr Garrard transferred the 500 shares he held in Entirity to Mr Barlow, for which Mr Barlow paid $500. Entirity paid Mr Garrard $17,180 on account of his equity in the company. Some of the assets that Mr Garrard took with him were a Maximiser demonstration VoIP phone system unit, two laptops, some personal computers and other furniture valued at $9870. Entirity paid Mr Garrard $1968.75 on account of reimbursement of net expenses incurred by him for the company. Each of Mr Garrard and Mr Barlow provided the other with a signed letter dated 10 March 2006 stating, in part, "... I have given full disclosure of issues with the change of directors, that all directors are fully aware of all issues and the decision to change directorship is fully informed."
  6. The minutes of the meetings were in evidence. The minutes for 6 March 2006 state, in part, "2004-2005 accounts needs [sic] to be finished off. Tony needs to sign off on these after viewing by an accountant. To be discussed further later down the track." It is clear the reference to Tony was to Mr Garrard. In an affidavit Mr Garrard did not accept that it was confirmed in the meeting that the accounts were to be sent to an accountant and that he was then to sign off on them, however he later stated in the affidavit that he said at the meeting "I believe I will need to sign off on the 2004/2005 accounts after they have been reviewed by an accountant". The only part of the minutes for 10 March 2006 which could relate to the issue of the level of stock shown in the accounts state, in part, "[o]utstanding work from Entirity will be discussed between Paul and Tony... View this document in consideration with last AGM minutes, signed documentation held by Entirity Business Services and Asset register – xls spreadsheet." I accept the minutes broadly reflect what occurred at the meeting.
  7. On 9 March 2006, the day before his demerger from Entirity was effected, Mr Garrard arranged for the incorporation of a new company, Scion, of which he was a director. Of the total shares issued, eighty percent were to Mr Garrard, with a further ten percent each to Mr Hatherly and Mr Roberts, both of whom were to work with Mr Garrard rather than Mr Barlow after the demerger. Mr Garrard said Scion was arranged that way "to allow the new workers some ownership of the new business after the demerger from Entirity".
  8. On 16 May 2006, approximately two months after the demerger, Mr Barlow and Mr Garrard met at Mr Garrard's offices in Parramatta. Mr Garrard had contacted Mr Barlow in relation to the payments agreed to at the demerger and Mr Barlow had advised that they needed to discuss it as there were other issues. At the meeting, Mr Barlow said he wanted Mr Garrard to forego the Garsoft invoices of $32,000 he claimed from Entirity and pay him $60,000 (there was a dispute about the amount discussed but the difference is immaterial). Mr Garrard asked for time to look at the accounts and suggested a further meeting the next week. At the next meeting on 22 May 2006, Mr Barlow said that Entirity was likely to have losses in excess of $100,000, and asked Mr Garrard to assist in addressing the loss. Mr Garrard did not agree to assist, but rather asked to see the accounts, though they were not provided. Mr Barlow said that the accounts were not provided because, among other things, Mr Garrard had not agreed to assist.
  9. After the demerger on 10 March 2006, Entirity engaged Furzer Crestani, a firm of chartered accountants. Mr Barrie Pike, an accountant at the firm, had been Mr Barlow's personal accountant. Mr Barlow told Mr Pike that the tax return for the 2003-2004 financial year had been lodged by Mr Garrard and the firm of accountants Entirity used previously. Mr Barlow told Mr Pike that the tax return for the 2004-2005 financial year had yet to be lodged, though he said Mr Garrard had told him that the tax return was finalised and ready to be submitted. He told Mr Pike that "all I need you to do is to have a look at those accounts, and do any changes as required. I do not anticipate that there will be many changes. After you approve the accounts, we would like you to lodge it on time." Mr Pike gave evidence in these proceedings. I generally accept his evidence. He said that on inspection of Entirity's accounts, he noted that "... it was clear that certain inventory items had not been costed correctly against invoice revenue as disclosed by the company, and many inventory items had been used as peripheral items and as such no longer existed as inventory in the warehouse... as such it was apparent the trading results in QuickBooks were incorrectly stated." After a further review of the QuickBooks file, he concluded that:
To rectify the company's accounts, it was necessary to ensure that all purported stock items had been correctly matched against invoices raised to the customers... [i]t was clear that the amount of work involved to individually match stock items with actual sale invoices was too substantial and would have effectively required the reprocessing of all transactions in the company from the commencement of trading. The alternative was that each inventory asset from a supplier invoice be recoded from stock items directly to purchases/cost of sales and to rely upon individual stock take balances undertaken at the end of the year to be journalised as the inventory closing balance. This would ensure all payments to the suppliers were expensed to the business and only inventory items that actually existed at the end of the year was credited to the trading results.

Mr Pike said that in June 2006 he observed Mr Barlow and Ms Hyde undertake the process of editing the transactions in QuickBooks to reflect the alternative approach described above of supplier invoices being coded directly to sales, that is, each transaction initially recorded as a supplier item was edited from inventory to cost of sales. Mr Pike later clarified this by saying that "[t]he real issue involved altering of the original transactions from stock items to non-stock items, that process that was undertaken by the employees of Entirity... under instructions from myself." He noted that it became "apparent from our work that there was a decline in the trading results as compared to the original data file prepared by Mr Garrard. Had the original data file been prepared properly, there would not have been any such discrepancy in the figures."

  1. Ms Hyde said that she spent 802.50 hours performing this stock rectification work under the direction of Mr Pike. At the conclusion of the rectification process in July 2006, Mr Pike prepared an amended set of financial statements for Entirity for the 2003-2004 financial year, and finalised the statements for the 2004-2005 and 2005-2006 financial years. In one of his affidavits, he summarised the trading results in the following table and addendum:

"
Gamble Brown & Co ($)
Entirity ($)
FCAS ($)
2003/2004
30,848
30,848
28,484
2004/2005
N.A.
(23,373) *
(7,794)
2005/2006
N.A.
N.A. **
(144,223)

N.B. "N.A." denotes Not Applicable
" * " denotes draft QuickBooks reports
" ** " denotes estimated as allegedly break even for the period until 10 March 2006 (I am not able to provide FCAS statistics effective to 10 March 2006 as my instructions were limited to expediting accurate results for year-end Financial and Income Tax reporting purposes only).
"

Gamble Brown & Co are the accounting firm originally retained by Entirity, and FCAS is Furzer Crestani, Mr Pike's firm.

  1. Mr Barlow tendered the revised QuickBooks profit and loss statement and balance sheet as at 10 March 2006. The profit and loss statement showed net income of -$150,848.86, that is a loss of $150,848.86. The balance sheet showed total equity as -$137,940.62, that is a debt of $137,940.62.
  2. What then should be made of this and other evidence concerning what Mr Garrard told Mr Barlow about the state of Entirity's finances in February and March 2006 and how Mr Barlow responded? This is not a case where there are enough signals from contemporaneous documents together with reservations about the evidence of some witnesses having regard to their demeanour and successful challenges to their evidence in cross-examination to ultimately found a conclusion that one version of the events recounted by one or a number of witnesses should be rejected and another accepted. I treat with considerable circumspection the evidence of Mr Barlow, Mr Garrard and Ms Hyde about what Mr Garrard said to Mr Barlow. The interest of each in advancing a particular version of the events is patent and none impressed me as obviously a witness of truth. Indeed both Mr Garrard and Mr Barlow seemed fairly intent on giving an account of events which favoured their case and which was destructive of the case of the other.
  3. It is possible to address the question of what has been proved about conversations between Mr Barlow and Mr Garrard concerning the state of accounts and Entirity's profit position as the first step in a process of analysis leading then to a consideration of whether, what was proved to have been said, caused Mr Barlow to act in a particular way. However the ultimate factual issue is whether something said by Mr Garrard (whether once or a number of times) caused Mr Barlow to propose the demerger on the terms he did and implement it on substantially those terms. The contemporaneous notes Mr Barlow and Ms Hyde made do suggest they believed the true position concerning the profit and loss position of Entirity would change favourably over time, probably as further work was done on the accounts. I cannot discount the possibility that Mr Garrard said something about the accounts and what they might disclose about Entirity's profit position after they had been rectified. However a fundamental significance, in my opinion, are the contents of an e-mail sent by Mr Barlow late on 26 February 2006 setting out his understanding of the discussion they had had that afternoon concerning the terms on which there would be a demerger. Absolutely no mention was made of any assurance from Mr Garrard that the accounts were then revealing, or would when further adjusted reveal, that Entirity was breaking even. Indeed in the e-mail Mr Barlow noted as one feature of the financial circumstances in which he was discussing the demerger "100k of losses". His explanation in evidence that this was a reference to the changes in the accounts from a $54,000 profit to $43,000 loss of which he was aware from discussions with Mr Garrard is one I do not find at all compelling. Even if this explanation was accepted it shows that Mr Barlow knew that the accounts were then disclosing a $43,000 loss but was nonetheless prepared to agree to a demerger on the terms proposed in the e-mail.
  4. Had anything been said by then by Mr Garrard about the profit position of Entirity which was of moment in Mr Barlow's decision-making I find it extremely difficult to accept it would not have been referred to in this e-mail. The e-mail reflected discussions said by Mr Barlow to have occurred in the preceding 48 hours including on that day (26 February 2006) in which Mr Garrard said things about the accounts and the company's financial position which caused him, in whole or in part, to propose the demerger on particular terms and then to proceed with it. The absence of any reference to the statements allegedly made by Mr Garrard in what is a contemporaneous document leads me to the view that whatever may have been said by Mr Garrard about the accounts did not influence Mr Barlow's decision-making.
  5. Also, on Mr Barlow's account, the last version of the representation made by Mr Garrard before the demerger was that made on 6 March 2006. It would have been this conversation that was most fresh in Mr Barlow's mind when the agreement to demerge was actually given effect to at the meeting that day. It is to be recalled that his evidence was that Mr Garrard said that every time he made changes in the accounts, there were large discrepancies, in that it either went up or went down dramatically. Even if Mr Garrard had said, as Mr Barlow deposes, that he was confident that it would work itself out and the company would be at the break even point and was thinking that the company may actually make a profit of about $10,000 for the business activities, what that statement meant must obviously be substantially tempered by the preceding comment that as changes were being made to the accounts they were going up and down dramatically. I find it difficult to accept, and do not accept as proven, that Mr Barlow's decision-making was influenced by anything Mr Garrard said about the accounts.
  6. In its statement of claim filed 9 September 2008, Entirity pleaded, in part:
    1. In about February 2006 Mr Garrard represented to Entirity that:
      1. he had carefully worked through the accounts for Entirity; and
      2. Entirity was breaking even in the financial year to date (being the financial year that commenced 1 July 2005).
...

  1. In the premises Mr Garrard acted in contravention of section 42 of the Fair Trading Act (NSW).
  2. Entirity bears the burden of establishing its case on the balance of probabilities. It has failed to satisfy me that as a matter of fact, a representation or a number of representations were made by Mr Garrard about the state of Entirity's finances in terms which caused Mr Barlow to agree to the demerger on the basis on which it occurred. Certainly I am not satisfied the pleaded representation was made which leads to another insuperable problem Entirity confronts in its case. I discuss this later in the reasons.
  3. At this point it is convenient to briefly examine some of the evidence concerning the alleged infringement of copyright. For reasons which become apparent later in this judgment, it is unnecessary to descend into great detail. I should also note, at this stage, that the quantum of damages claimed by Entirity for infringement is minuscule. It is $2500.
  4. In Entirity's statement of claim, it alleges the ownership of copyright in two computer programmes. One is described in the pleadings as Terminal Client, the other as Entirity Student Storage. However in the evidence advanced by Entirity, the only claimed infringement involved the licensing of the Terminal Client programme to certain schools in 2007. Terminal Client is software that allows a computer to connect to a terminal server which has installed on it all the necessary software. The software runs on a server rather than the computer but the computer operator views the remote computer operations on the local computer screen. It allows the user to remotely work on the Microsoft Terminal server computer via the local area network, resulting in the user experiencing a fast interaction with the server and having access to the latest versions of Microsoft programmes while running the local Terminal Client software only on older computers that are incapable of running high-level Microsoft operating systems and software. Mr Barlow said it was a cost effective way to access current software while using older computers. The Terminal Client software enabled staff and students in schools who were using dated computers to access more recent Microsoft software than had been made available to the schools. As I understand the evidence, the various versions of Terminal Client (one version which may have been developed by Mr Barlow, on the one hand, and another by Mr Roberts on the other when no longer working with or for Entirity) have their genesis in software which is freely available on the Internet.
  5. It is unnecessary to say much about the ESS software beyond noting that it enabled students in schools to save their files in the one physical location in a storage space on a server to which all of the computers were connected and also enabled teachers to access those files in a central location. It allowed for the automatic deployment of quota areas of a server hard drive (to prevent students from saving too many files onto a server hard disk drive) as well as securing access to these files by individual users. It allowed teachers to check these files covertly and monitor the shared areas of the server.
  6. The following is some of the evidence concerning the contentious programmes. I simply note some of it about the parties’ dealings with the programmes though it is unnecessary to resolve all conflicts in the evidence.
  7. Mr Barlow said that the two programmes in suit were "a succession of terminal client and student storage software packages designed and developed by me since October 1999". He said that he initially developed the programmes through Executech and then through Entirity by which stage other people, including Mr Roberts, were involved in further development of the programmes under his direction. On the other hand Mr Roberts gave comparatively detailed evidence about the programme he developed for Scion some time after March 2006 which was a different version of Terminal Client. It was this programme, he said in oral evidence, which was the subject of the licences which are said by Entirity to manifest the infringing conduct. While Mr Roberts was not a particularly reliable witness and he failed to produce a physical copy of this programme, I am not prepared to reject his evidence. At the very least, what his evidence does is raise a real doubt about whether the transactions said to involve an infringement involved dealings with the software Mr Barlow said he developed or directed to be developed on behalf of Entirity.
  8. The parties accept that in August 2004 a meeting took place at Entirity's offices in Parramatta. Mr Garrard, Mr Barlow, Mr Roberts and Mr Durantini were present. At the meeting, Mr Garrard said "It is important for everyone to understand that Entirity at all times is the owner of the copyright in any software that it comes up with, or you assist it in creating. It is because Paul and I are financially responsible for the company – not any of you." Mr Barlow accepted that as at this time, the ESS software had not been developed.
  9. On 12 April 2005 Mr Garrard, Mr Barlow and Mr Roberts agreed to establish a new company, Telent Pty Ltd ('Telent'). Mr Roberts was the only director, while all three men were shareholders. Mr Garrard gave evidence that Telent was set up "to exploit the [software in issue] products developed by Roberts." Mr Barlow's evidence was that Telent was set up for further work on VoIP technologies, an area of particular interest to Mr Garrard and Mr Roberts. On 17 February 2006, Mr Barlow, Mr Garrard and Mr Roberts had a meeting at which Mr Barlow agreed to leave Telent by divesting himself of the 350 shares he held. This was done at the time of the demerger and Mr Barlow received $500 for his shares. Telent was deregistered in September 2007.
  10. I move from the copyright issue and return to the narrative more generally. Since the demerger, Mr Barlow has continued to run Entirity as the sole director and shareholder. Executech's ABN was cancelled from 11 August 2008. In July 2007 Mr Garrard resigned as director of Scion and continued to work full time as an employee of Scion before gaining employment elsewhere in June 2008.

Liability for rectification of accounts

  1. Entirity contended that from the outset of the joint venture period Mr Garrard made it clear he wanted to be responsible for Entirity's accounts, whereas Mr Garrard, in substance, denied this. Entirity put this aspect of its case two ways, essentially bringing a claim against Mr Garrard for breach of his duties as a director, and a claim in contract against Garsoft. In relation to the latter, Entirity contended that there was a term implied in the contract of retainer that Garsoft would exercise reasonable skill and care in maintaining Entirity's accounts. Entirity contended that the existence of the term was evidenced by the process whereby Garsoft invoiced Entirity for work performed on Entirity's accounts. Entirity contended that the term was breached by the fact, accepted by the parties, that the accounts did not reflect the true financial position of Entirity at the time of the demerger.
  2. In evidence were a number of expert accountant reports, including a report of Mr Brian Silvia prepared at the behest of Entirity, a responsive report of Mr Robert Bell, and that of Mr Pike discussed at [32] which among other things responded to Mr Bell's report. Mr Silvia, Mr Bell and Mr Pike also gave oral evidence in the proceedings. In his evidence, Mr Bell identified an alternative method to rectify the errors in Entirity's accounts, but conceded in cross examination that he did not know whether his alternative would lead to a more accurate result. I favour Mr Pike's evidence that the reason the accounts did not reflect reality at the time of the demerger was a result of the system not being set up properly and not being maintained properly after set up. I also accept Mr Pike's evidence that had the original data file been prepared properly and the levels of stock properly accounted for then there would not have been a discrepancy in the accounts that required rectification.
  3. I accept Ms Hyde's evidence, as corroborated by Mr Pike, that she was required to spend 802.5 hours performing the stock rectification exercise, and do not find that figure excessive as contended by the respondents. I accept that Entirity was required to spend $39,982.50 rectifying the errors in the accounts, a sum comprised of $6000 being the cost of Mr Pike's services, $20,062.50 being the cost of Ms Hyde rectifying the problem, and $13,920 being the cost of Mr Barlow rectifying the problem with Ms Hyde.
  4. It is to be recalled that Garsoft provided services, through Mr Garrard, to Entirity for which Garsoft was paid. One of the tasks performed by Mr Garrard on behalf of Garsoft was to establish and maintain an accounting system. He did so though the operation of the system was, for a long period, seriously flawed having regard to the way stock items were entered. The conversation referred to at [13] together with the activities of Mr Garrard and the payment to Garsoft establish, in my opinion, the existence of a contract, a term of which was that Garsoft would maintain an accounting system and an implied term was that it would exercise reasonable skill and care in doing so: see Foxtel Management Pty Ltd v Seven Cable Television Pty Ltd [2000] FCA 1159; (2000) 102 FCR 464 at [131] per Beaumont J citing with approval Steyn LJ in Trentham (G Percy) Ltd v Archital Luxfer Ltd [1993] 1 Lloyd's Rep 25 and also see RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14; [2010] 1 WLR 753 at 773. In not ensuring that the operation of the system was not flawed, Garsoft breached its contract and is liable for the cost of rectifying the accounts to put them in order.
  5. It is convenient, at this point, to address the only controversial issue in the cross claim of Garsoft which was, in substance, conceded by Entirely. Garsoft is liable for the cost of rectifying the accounts. This includes an amount of $2783.08 in the cross-claim, as it concerns rates and work they performed rectifying the accounts in late February and early March 2006.
  6. I turn now to consider Mr Garrard's duties as a director. Entirity alleged that Mr Garrard breached his obligation under s 180(1) of the Corporations Act 2001 (Cth) to discharge his duties with care and diligence.
  7. Section 180(1) is a civil penalty provision and provides:
A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation's circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

  1. Entirity contended that Mr Garrard did not exercise care and diligence in setting up the system of accounts, did not know how the system operated, did not ensure that the staff knew how the system operated, nor did he check routinely to ensure that no mistakes were made. Entirity also alleged that Mr Garrard refused to take advice regarding the system, which eventually led to a situation where the system did not accurately reflect Entirity's true financial position at the demerger.
  2. Counsel for the respondents disputed that Mr Garrard acted other than as a reasonable director in the circumstances and complied with his duties.
  3. As Jacobson J comparatively recently observed in Chameleon Mining NL v Murchison Metals Limited [2010] FCA 1129 at [103], the principles applicable to the assessment of the duty of reasonable care and diligence in s 180(1) of the Corporations Act are well settled and were summarised by Santow J in Re HIH at [372] and by Owen J in The Bell Group Limited v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 70 ACSR 1 at [4619]. These principles in summary are as follows:
  4. This standard of skill was also discussed in ASIC v Vines [2003] NSWSC 1116; (2003) 48 ACSR 322 by Austin J. That case concerned a director of GIO Insurance who was also the chief financial officer of the GIO Group. His Honour recognised at [46] the "objective duty of care for directors and other officers, supplemented by an objective duty of skill where the appointment was made to a position requiring skill". Reference was made to the reasoning of Clarke and Sheller JJA in Deputy Commissioner of Taxation v Clark [2003] NSWCA 91; (2003) 45 ACSR 332 at 667-8:
Although there was no reference to skill in s 229(2) of the Companies (New South Wales) Code – nor is there in s 232(4) of the Corporations Law, Malcolm CJ in Vrisakis (at WAR 407-8; ACSR 172) thought that the duties imposed by the section reflected the general concept of negligence at common law. This means conduct ordinarily measured by reference to what the reasonable man of ordinary prudence would do in the circumstances. Skill is that special competence which is not part of the ordinary equipment of the reasonable man but the result of aptitude developed by special training and experience which requires those who undertake work calling for special skill not only to exercise reasonable care but measure up to the standard of proficiency that can be expected from persons undertaking such work: Voli v Ingleood Shire Council [1963] HCA 15; (1963) 110 CLR 74 at 84. A director may be appointed because of a particular or special skill and may take up the appointment on the basis that he or she will bring that skill to the performance of the office. In Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490 at 531, Isaacs J and Rich J said:

"No rule of universal application can be formulated as to a director's obligation in all the circumstances. The extent of his duty must depend on the particular function he is performing, the circumstances of the specific case, and the terms on which he has undertaken to act as a director."

  1. In Vines the position of chief financial officer was accepted as a recognised position in large corporations with identifiable specialised skill attaching to the office. The defendant had been appointed because of special skill to a designated position. The degree of care and diligence expected is that encompassing the special skill that is brought to that office and the degree of care and diligence that a reasonable person with similar responsibilities would exercise. Austin J's findings in this regard were upheld on appeal: Vines v ASIC [2007] NSWCA 75, in which the Full Court of Spigelman CJ, Santow JA and Ipp JA said at [129]:
It is quite clear that it was the intention of Parliament to adopt an objective standard, so that the earlier debate about whether or not directors could be excused by reason of their own particular lack of relevant experience or skill was resolved.

  1. The scope of s180 and director’s duties has more recently been considered by the Court of Appeal in Morley & Ors v Australian Securities and Investments Commission [2010] NSWCA 331 observing at [817]:
We do not think this was an occasion of reasonable reliance on management or others... The postulated reasonable person in s 180(1) embraces any special skill or expertise the director or officer possesses, and the non-executive directors were expected to bring to their knowledge and experience to performance of their duties.

and at [33]:

In Vines v Australian Securities and Investments Commission [2007] NSWCA 75; (2007) 73 NSWLR 451 at [109] Spigelman CJ took up the conclusion of Austin J at first instance (Australian Securities and Investments Commission v Vines [2003] NSWSC 995; (2003) 48 ACSR 282 at [38]), in relation to the proceeding ss 229(2) and 232(4) of the Companies (New South Wales) Code, that they-
 
“... encompass an objective standard measured by reference to what a reasonable man of ordinary prudence would do, enhanced where the directorial appointment is based on special skill by an objective standard of skill referable to the circumstances.”

  1. Mr Garrard did not become a director of Entirity because he possessed some special skills concerning the maintenance of accounts and bookkeeping. His appointment was a consequence of the decision he and Mr Barlow made to collaborate in the joint venture and to carry on business through a company they jointly owned and were to operate. It is true he had, on behalf of Garsoft, accepted responsibility for maintaining the accounts. However this does not clothe him with expertise of the type which would render him liable as a director. There is a material difference, in my opinion, between a person assuming a contractual (either on their own behalf or on behalf of a company used by that person to carry on business) responsibility for implementing and maintaining a system of accounts and assuming, as a director with no particular expertise, a duty to either maintain or monitor the accounts, a breach of which would involve contravention of s 180.
  2. Mr Garrard was not in breach of his duty as a director. It is therefore not necessary for me to deal with the submission that if there was a breach of s 180(1) in relation to the accounts Mr Garrard's liability should be excused or reduced pursuant to ss 180(2), 1317S and 1318 of the Corporations Act.

The representation

  1. This aspect of Entirity' case concerned a representation made by Mr Garrard to Mr Barlow about the financial position of Entirity at the time of the demerger. Entirity claimed damages calculated by reference to the difference between the position it is now in, and the position it would have been in had the representations not been made or had the true position been disclosed. Having regard to Entirity's failure to prove Mr Garrard said anything to Mr Barlow about the accounts which caused Mr Barlow to agree to the demerger, Entirity's claim must fail.
  2. However it is appropriate to deal with a specific argument advanced by the respondents that the pleaded case differed from that sought to be established by the evidence. As I noted earlier in these reasons, in its statement of claim filed 9 September 2008, Entirity pleaded, in part:
    1. In about February 2006 Mr Garrard represented to Entirity that:
      1. he had carefully worked through the accounts for Entirity; and
      1. Entirity was breaking even in the financial year to date (being the financial year that commenced 1 July 2005).
...

47 In the premises Mr Garrard acted in contravention of section 42 of the Fair Trading Act (NSW).

  1. The Fair Trading Act 1987 (NSW) provides:
    1. Interpretation
(TPA s51A)

(1) For the purposes of this Part, where a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the person does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.
(2) The onus of establishing that a person had reasonable grounds for making a representation referred to in subsection (1) is on the person.
(3) Subsection (1) shall not be taken to limit by implication the meaning of a reference in this Part to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead.

  1. Misleading or deceptive conduct
(TPA s 52)

(1) A person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
(2) Nothing in this Part shall be taken as limiting by implication the generality of subsection (1).

  1. The role of pleadings was recently discussed by a Full Court in Betfair Pty Ltd v Racing New South Wales [2010] FCAFC 133 (at [49] and following). The Full Court observed:
  2. In this matter, the respondents contended that "special care needs to be taken in the case of a claim based merely on spoken words which are said to have been uttered in the course of conversations which involved the discussion of many aspects of the business while negotiating the demerger agreement." The respondents referred to a decision of the New South Wales Supreme Court, Watson v Foxman (1995) 49 NSWLR 315. In that decision, McLelland J held at [318]:
Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the Court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions of self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.

  1. Counsel for the respondents also referred to the judgment of Kenny J in Pioneer Electronics Australia Pty Ltd v Each Technology Pty Ltd [1999] FCA 142 (at [7]):
For a statement of claim to disclose a cause of action, it must set out the material facts that give rise to the cause of action. In a case such as this, a cause of action for misleading and deceptive conduct is not established unless the statement of claim sets out the circumstances which gave the representation its misleading and deceptive character at the time it was made. It should be borne in mind that the mere non-fulfilment of a statement as to a future matter does not establish that that statement was relevantly misleading and deceptive. If that non-fulfilment is to be relied upon as part of the circumstances which rendered the statement misleading and deceptive, such an inference must be specifically pleaded along with the facts and matters relied on to support the inference: cf Western Australia v Bond Corporation Holdings Ltd [1990] FCA 522; (1990) 99 ALR 125 at 128. A vice in the pleading, in its present and proposed forms, is that it leaves Pioneer to speculate as to the circumstances which it is alleged gave the representations their misleading and deceptive quality.

  1. Counsel for Entirity submitted that the function of a pleading is not to quote the precise words said in a conversation, but rather the effect of what was being represented through those words. Counsel for Entirity submitted the proper way in which the evidence should be viewed is that the representation was made that the accounts were at a break even point at the time of the demerger. I should note that when this point was raised by the respondents about the pleadings during submissions, no application was made by Entirity for leave to amend them.
  2. There is, in my opinion, a material difference between the representation as pleaded and the representation about which Mr Barlow gave evidence. The point taken by the respondents is not a pleading point redolent of litigation in earlier centuries. The difference is significant in two respects. The first is that the representation of which Mr Barlow gave evidence was, in substance, a representation as to a future matter whereas the representation pleaded was to an existing fact. This difference is of some considerable significance in the way the respondents might have conducted their case. The second is that the difference would be likely to have a material bearing on whether Mr Barlow (and Entirity) are unable to make good the claim for damages (under s 68 of the Fair Trading Act) which would depend, in part, on establishing reliance as part of proving causation. It is one thing to assess the probability that Mr Barlow relied on what Mr Garrard said, as a matter of alleged fact, in agreeing to the demerger and quite another thing when making that assessment by reference to the representation pleaded.
  3. I approach the task of characterising the representation that may have been in fact made by reference to the following principles:
  4. In the present case the representation made by Mr Garrard on Mr Barlow's evidence involved, in substance, a prediction as to what would emerge when he had finished the process of rectifying the accounts. The pleaded representation focused on a statement concerning what had been revealed at the conclusion of that process, namely that Entirity was breaking even in the financial year to date.
  5. Had Entirity pleaded the representation as a future matter, these proceedings would in all likelihood have been litigated differently having regard to s 41(2) of the Fair Trading Act. Both that section and its analogue in the Trade Practices Act (s 51A(2)) create a statutory onus on the representor to adduce evidence to address the presumption that the representation as to a future event was not made on reasonable grounds, at which point the Court must then determine whether, on the balance of probabilities, there were reasonable grounds for making the representation: McGrath: Re Pan Pharmaceuticals Ltd (in liq) v Australian Naturalcare Products Pty Ltd [2008] FCAFC 2; (2008) 165 FCR 230 at [192] per Allsop J, Emmett and Stone JJ agreeing at [44] and [72]. A party proposing to rely on s 51A should make it clear in the statement of claim that it is doing so, in order to allow the respondent to know that it has the burden of pleading that it had reasonable grounds for making the representation: Western Australia v Bond Corp Holdings Ltd [1990] FCA 522; (1991) 99 ALR 125 per French J; although s 51A may not need to be expressly pleaded: O'Neill v Medical Benefits Fund of Australia Ltd [2002] FCAFC 188; (2002) 122 FCR 455 per Carr, Moore and Marshall JJ.
  6. In relation to reliance, it might readily be inferred that Mr Barlow was significantly influenced in agreeing to the demerger having regard the representation pleaded but such an inference would be much more difficult to draw in relation to the representation which Mr Barlow contended was made. The pleaded representation involved a misleading, indeed false, statement about Entirity's financial position. The representation Mr Barlow said was made was really only a "best guess" as to what would emerge when the rectification process was complete.
  7. In some circumstances, a discord between the pleadings and eventual findings of fact may be of limited consequence. This is not the case here. Entirity has failed to prove its pleaded case. Its claim for damages under s 68 must fail.

Copyright

  1. In its statement of claim, Entirity contended that it owns the copyright in the computer programmes described at [42], that its copyright had been infringed by Garsoft and Scion, and claimed it suffered loss and damage as a result of those infringements. As I noted earlier, the amount claimed is minuscule. It is $2500. In opposition to Entirity's claim over the copyright, the respondents raised what was, in a sense, a threshold question of whether it had identified the computer programmes in issue with sufficient particularity.
  2. The Copyright Act 1968 (Cth) provides that copyright can subsist in literary works: s 31. A computer programme is, for the purposes of the Act, a literary work: s 10(1). A computer programme is defined in s 10(1) of the Act as "a set of statements or instructions used directly or indirectly in a computer in order to bring about a certain result". In Autodesk v Dyason [No 2] [1993] HCA 6; (1993) 176 CLR 300, the High Court held that 'computer programme' refers to "the expression of a set of instructions" and "an entire set of instructions... which must be identified with some precision". This view was clarified by the High Court in Data Access Corporation v Powerflex Services [1999] HCA 49; (1999) 202 CLR 1, when the majority of the Court commented, after referring to the preceding descriptions in Autodesk, "[t]his passage indicates that it is necessary to identify the 'set of instructions' with some precision."
  3. Entirity has not proved, on the balance of probabilities, that the software which was the subject of licences to schools in 2007 (said to manifest the infringement) was software provided to or written for or on behalf of Entirity rather than software developed by Mr Roberts sometime after March 2006. Entirity's claim of infringement must fail.

Disposition

  1. I propose to give judgment in favour of Entirity against Garsoft in the sum of $39,982.50 but otherwise dismiss its application. I propose to give judgment in favour of Garsoft in its cross-claim against Entirity in the sum of $28,673.08. I commenced this judgment by saying that the costs of this litigation are almost certainly utterly disproportionate to its subject matter. I am prepared to give the parties an opportunity to address me on costs. Written submissions on costs and draft orders to give effect to these reasons should be filed and served by 18 February 2011. Order 62 rule 36A of the Federal Court Rules may be relevant.
I certify that the preceding eighty (80) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.

Associate:


Dated: 10 February 2011

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