Deng v Lieu & Ors [2009] NSWIRComm 5 (20 February 2009)

Last Updated: 27 February 2009

NEW SOUTH WALES INDUSTRIAL RELATIONS COMMISSION

CITATION :
Deng v Lieu & Ors [2009] NSWIRComm 5



FILE NUMBER(S):
IRC 535

HEARING DATE(S):
5 November 2008

DATE OF JUDGMENT:
20 February 2009

PARTIES:
APPELLANT:
Margaret Jia Sha Deng

FIRST RESPONDENT:
Paul Lieu

SECOND RESPONDENT:
Landmark Enterprises (Aust) Pty Ltd

THIRD RESPONDENT:
Dengs Investments Pty Ltd

CORAM:
Boland J President Walton J Vice-President Backman J


CATCHWORDS: APPEAL - Leave to appeal - Unfair contract - Sale of Business Agreement - Shareholders' Agreement - Contract found to be unfair at first instance - Whether trial judge erred in finding that there was any relevant unfairness in any arrangement between the parties - Whether trial judge failed to pay any or any sufficient regard to the rights and obligations of the companies, parties to the proceedings, in respect of any monies which ought properly have been available to them - Whether trial judge erred in failing, after finding that it was appropriate to depart from the presumption that the successful party was entitled to all of its costs, to order that the respondents should pay 50% of the applicants' costs as agreed or assessed - Held there were errors of fact and law - Leave to appeal granted - Appeal upheld

UNFAIR CONTRACT - Appeal - Leave to appeal - Sale of Business Agreement - Shareholders' Agreement - Contract found to be unfair at first instance - Whether trial judge erred in finding that there was any relevant unfairness in any arrangement between the parties - Whether trial judge failed to pay any or any sufficient regard to the rights and obligations of the companies, parties to the proceedings, in respect of any monies which ought properly have been available to them - Whether trial judge erred in failing, after finding that it was appropriate to depart from the presumption that the successful party was entitled to all of its costs, to order that the respondents should pay 50% of the applicants' costs as agreed or assessed - Held there were errors of fact and law - Leave to appeal granted - Appeal upheld

LEGAL REPRESENTATIVES
APPELLANT:
Mr G Hatcher SC with Mr B Cross of counsel
Solicitors: Parry Carroll Lawyers
Mr C Perry
FIRST RESPONDENT:
Mr Paul Lieu (in person) and mentioning for the Second Respondent

THIRD RESPONDENT:
No appearance

CASES CITED:
Agius v Arrow Freightways Pty Ltd (1965) AR (NSW) 77
Brown v Rezitis (1970) 127 CLR 157; [1970] HCA 56
Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371
English v Aradlay Insurance Brokers Pty Ltd (2005) 145 IR 129; [2005] NSWIRComm 253
Fish v Solution 6 Holdings Ltd [2006] HCA 22; (2006) 225 CLR 180
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705
Manni v Scully (1967) AR (NSW) 606
Ross v G N Comtext (Aust) Pty Ltd (2000) 100 IR 89; [2000] NSWIRComm 133
Sin Yong Yim and Tae Sik Kim v Industrial Relations Commission of New South Wales and anor [2007] NSWCA 77
Lieu & Anor v Deng & Anor (No 4) [2007] NSWIRComm 72
Lieu & Anor v Deng & Anor (No 5) [2008] NSWIRComm 67
McDonald’s Australia Holdings v Industrial Relations Commission of NSW [2005] NSWCA 286; (2005) 223 ALR 78
Westfield v Adams [2001] NSWIRComm 293; (2001) 114 IR 241

LEGISLATION CITED:
Evidence Act 1995
Industrial Arbitration Act 1940
Industrial Relations Act 1996


TEXTS CITED:




JUDGMENT:

INDUSTRIAL COURT OF NEW SOUTH WALES

FULL BENCH

CORAM: BOLAND J, President

WALTON J, Vice-President

BACKMAN J

Friday 20 February 2009

Matter No IRC 535 of 2007

MARGARET JIA SHA DENG v PAUL LIEU AND OTHERS

Application by Margaret Jia Sha Deng for leave to appeal and appeal against judgments and orders of Justice Staff given on 30 March 2007, 20 April 2007 and 4 April 2008 in Matter No IRC 2821 of 2001

JUDGMENT OF THE COURT

[2009] NSWIRComm 5

1 Paul Lieu ("the first respondent") and his company, Landmark Enterprises (Aust) Pty Limited ("Landmark" or "the second respondent"), were the applicants in proceedings before Justice Staff. The applicants had claimed that a Shareholders' Agreement and Business Sale Agreement into which they had entered with Margaret Jia Sha Deng ("the appellant") and her company, Dengs Investments Pty Limited ("Dengs Investments" or "the third respondent"), was unfair. Mr Lieu and Landmark sought relief under s 106 of the Industrial Relations Act 1996 ("the Act").

2 Staff J found the contract was unfair and in Lieu & Anor v Deng & Anor (No 4) [2007] NSWIRComm 72 (30 March 2007) made certain orders, including an order that Ms Deng pay Landmark the sum of $85,904.19. In a later judgment, Lieu & Anor v Deng & Anor (No 5) [2008] NSWIRComm 67 (4 April 2008), his Honour decided that the applicants should have 75 per cent of their costs, as agreed or assessed, and ordered accordingly.

3 Ms Deng now seeks leave to appeal and to appeal against the two judgments of Staff J and the orders made by his Honour.

BACKGROUND

4 Through another of his companies, Lieu Investments Pty Limited ("Lieu Investments"), Mr Lieu owned a video hire business. Part of the business was a store in Coogee known as "Movie City". From about April 1993, Ms Deng was the manager of the Coogee store. In February 1996, Big Country Developments Pty Ltd ("Big Country") brought proceedings against Lieu Investments seeking the payment of unpaid rent. Lieu Investments had a judgment against it for $116,000 for the unpaid rent, thereby placing Mr Lieu in financial difficulty.

5 In February 1996, Ms Deng agreed to purchase 51 per cent of the business located at Coogee, with Ms Deng to be the sole manager of that part of the business and its sole Director. On 1 March 1996, Landmark was incorporated. Dengs Investments was incorporated on 5 March 1996. The arrangement was said to be that Dengs Investments would pay $85,000 to Lieu Investments, being 51 per cent of the value of the business and Landmark would be issued with 49 per cent of the shares in Dengs Investments. Landmark was to have a right to acquire Ms Deng's 51 per cent of Dengs Investments upon notice at a subsequent time and at an agreed price. Ms Deng was to continue to work in the business as its manager and was to be paid a salary of $35,000 per annum. Net profits of the business were to be distributed to the shareholders of Dengs Investments by way of dividends in proportion to their shareholding.

6 The two contractual arrangements that were put in place to effect the sale were:

(i) The Sale of Business Agreement between Lieu Investments as vendor and Dengs Investments as purchaser; and

(ii) The Shareholders Agreement between Ms Deng and Landmark.

7 The Sale of Business Agreement (in the form of the standard Law Society of New South Wales agreement for the sale of business) included, amongst other matters, the terms relating to price in Clause 1 as follows:

H	(a)(i) Price	$166,600.00
	(ii) Deposit	$85,000.00
	(iii) Balance	$81,600.00
	(b) Apportionment of price:
	(i) Goodwill	$46,600.00
	(ii) Plant fittings & chattels	$40,000.00
	(iii) Fixtures
	TOTAL	$86,600.00
I	Stock in trade	$80,000.00
J	The deposit is payable to the vendors' agent named above
K	Completion date on or about	8 March 1996

8 Clauses 3, 4 and 30, which are pertinent, were in the following terms:

3. The Purchasers shall upon the making of this agreement pay the sum set out in H(a)(ii) of the Particulars as a deposit in accordance with J of the Particulars. The deposit shall be held as stakeholder and shall vest in the Vendors upon and by virtue of completion and shall be accounted for to the Vendors upon receipt of an order from the Purchasers or their solicitor authorising such payment. The deposit may be paid by cheque. If the cheque is not honoured on presentation, or if the deposit is not paid within 3 days from the date hereof, the Purchasers shall immediately and without notice be in default and the Vendors may terminate this agreement.

4. The balance of the price asset out in H(a)(iii) of the Particulars together with the sum to be paid for the stock-in-trade shall be paid in cash or by bank cheque on completion to the Vendors' solicitor named in E of the Particulars or, if there is no solicitor named, as the Vendors may direct in writing.

...

30. As to the balance of purchase price of $81,600 such sum shall remain outstanding to the vendor until the Vendor gives the Purchaser six (6) months' notice in writing requiring payment of same.

9 The Sale of Business Agreement and the Shareholders Agreement were executed on 8 March 1996. At about this time, Ms Deng paid $40,000 by way of a down payment. After the sale, Dengs Investments paid a number of outstanding accounts of Lieu Investments from before the completion of the sale on 8 March 1996. On 6 May 1996, Ms Deng obtained a bank cheque in the sum of $45,000 payable to Big Country. However, Ms Deng was advised not to pay Big Country because of a claim by the (first) liquidator of Lieu Investments.

10 On 31 May 1996, Lieu Investments commenced proceedings in the Supreme Court against Dengs Investments claiming, among other things:

(i) the $45,000 balance of the purchase price; and

(ii) payment of $80,000 for stock in trade.

11 On 9 August 1996, Ms Deng paid $45,000 to Lieu Investments. On 23 October 1998, a statutory demand was served on Dengs Investments by the liquidator of Lieu Investments claiming the balance due under the Sale of Business Agreement of $81,600 (less credits for debts of Lieu Investments paid by Dengs Investments). On 5 February 1999, the Supreme Court proceedings were settled on the basis of consent orders which provided that the statutory demand be set aside and Dengs Investments pay to Lieu Investments (in Liquidation) the sum of $38,000 forthwith. Ms Deng paid this sum.

12 In March 2000, Ms Deng caused Dengs Investments to pay back to her the purchase price of $85,000. Ms Deng caused Dengs Investments to deposit the amount into a term deposit account. These monies were ultimately deposited into her personal bank account on or about 30 November 2001. Ms Deng kept the sum of $85,000.

13 The application for relief at first instance proceeded by way of an amended summons. The summons sought orders in the following terms:

1. An order varying the terms of the Shareholders’ Agreement and Business Sale Agreement, as each is defined below, (the "Documents") between the parties so as to give effect to the terms of the 1996 Agreement as set out below.

2. An order deleting the following terms or clauses of the Business Sale Agreement:

In Particulars-Clause 1, subclauses H(a)(ii) and (iii);

Clause 3;

Clause 4; and

Clause 30.

3. An order that the Respondents pay to the Second Applicant such amounts of money in connection with the aforementioned contracts as varied as the Commission considers just.

4. An order that the Respondents pay to the Second Applicant interest upon the amount of money ordered to be paid under Order 3.

5. An order awarding costs of and incidental to these proceedings to the Applicants.

14 The "1996 Agreement" referred to in the orders was set out in paragraph B12 of the Amended Summons and was referred to during submissions as the "prior oral agreement":

(a) The First Applicant would procure the sale of a 51% interest in the Business to the First Respondent for $85,000;

(b) The transaction would be structured as a purchase by the Second Respondent of the Business from Lieu Investments, with the shares in the Second Respondent being held as to 51% by the First Respondent and as to 49% by the Second Applicant;

(c) The Second Applicant would not have to make any payment in relation to the issuing to it of 49% of the shares in the Second Respondent;

(d) The Second Respondent would be liable to pay any amounts outstanding, as at 8 March 1996, in respect of any stock of the Business supplied to the Business prior to 8 March 1996 and from which the Business derived rental income on or after 8 March 1996;

(e) The First Respondent would have a right to acquire the Second Applicant’s shareholding in the Second Respondent for the sum of $81,600 (the “First Respondent’s Purchase Right”);

(f) The Second Applicant would have a right to acquire the First Respondent’s shareholding in the Second Respondent from the First Respondent within 12 months for $85,000 and thereafter at a sum calculated as a percentage of the total annual turnover of the Business at the relevant time, being the same percentage of that annual turnover as $85,000 was of the total annual turnover of the Business for the financial year ended 30 June 1995 (that is, approximately 19.67%) (the “Applicants’ Purchase Right”);

(g) The Applicants’ Purchase Right would at all times have priority over the First Respondent’s Purchase Right, so that the Second Applicant would always have a preferential right to acquire the First Respondent’s shareholding in the Second Respondent (the “Applicants’ Priority Right”);

(h) Pending any such acquisition by the Second Applicant of the First Respondent’s shareholding in the Second Respondent or vice-versa:

i. the Business would be managed by the First Respondent, who would be employed by the Second Respondent for that purpose for a salary of $35,000 per annum (or such other sum as may be agreed by the Second Applicant) and would devote herself full time to the interests of the Second Respondent and use her best endeavours to promote the interests and welfare of the Second Respondent; and

ii. the net profits of the Business would, subject to any contrary agreement between the Second Applicant and the First Respondent, be paid to the Second Applicant and the First Respondent by way of dividends on their shares in the Second Respondent, such payments to be made every two months - (the “1996 Agreement”).

SUBSTANTIVE DECISION AT FIRST INSTANCE

15 Staff J commenced his consideration of the claims by noting that central to the respective cases was whether the Shareholders' Agreement and the Sale of Business Agreement reflected the intentions of the parties and whether the contractual arrangements were unfair from their inception. His Honour also observed that it would be necessary to determine whether the contractual arrangements subsequently became unfair by reason of the conduct of the respondents after 8 March 1996.

16 The trial judge found that the essential terms of the 1996 prior oral agreement was that Mr Lieu would procure the sale of a 51 per cent interest in the business to Ms Deng for $85,000; Mr Lieu, through Landmark, would retain ownership of the remaining 49 per cent interest in the business; the transaction would be structured as a purchase by Dengs Investments of the business from Lieu Investments, with the shares in Dengs Investments being held as to 51 per cent by Ms Deng and as to 49 per cent by Mr Lieu, or a company controlled by him (that company being Landmark); and Mr Lieu's purchase right of Ms Deng's shares in the business would at all times have priority over Mr Lieu's purchase rights of the remaining shares in the business so that Landmark would always have a preferential right to acquire Ms Deng's shareholding in Dengs Investments: see [179].

17 Staff J further found that:

[180] Subject to any acquisition by Landmark of Ms Deng's shareholding in Dengs Investments, or vice versa, the business would be managed by Ms Deng, who would be employed by Dengs Investments. She would receive a salary of $35,000 per annum (or such other sum as may be agreed by Landmark) and would devote herself fulltime to the interest of Dengs Investments and use her best endeavours to promote the interests and welfare of Dengs Investments. The profits of the business would then, subject to any contrary agreement between Landmark and Dengs Investments, be paid to Ms Deng and Landmark by way of dividends on the shares in Dengs Investments, such payments to be made every two months.

18 As to the question of whether it was a term of the alleged prior oral agreement that Landmark would not have to make any payment for its 49 per cent shareholding in Dengs Investments, Staff J found it was not. His Honour stated (at [181]):

[A]t the time of the sale of part of the business by Mr Lieu to Ms Deng in 1996, Mr Lieu owned 100 per cent of the business (through his company Lieu Investments). Ms Deng and Mr Lieu agreed that she would pay him $85,000 for the 51 per cent share in the business. It is inconceivable that Mr Lieu would have to pay any money to retain his 49 per cent interest in the business which he already owned. In my view, this part of the claim does not establish any basis for unfairness.

19 The trial judge then proceeded to deal with the remaining issues raised by the claims. First, was payment for stock. The applicants had contended Dengs Investments would be liable to pay any amounts outstanding as at 8 March 1996 in respect of any stock of the business supplied to the business prior to 8 March 1996 and from which the business derived rental income on or after 8 March 1996. His Honour found that the parties' prior oral agreement was that Dengs Investments would own and be entitled to derive rental income from the business stock after 8 March 1996, because it had purchased (and therefore owned) it. At [187] his Honour stated:

[187] In my view, there is nothing unfair about Lieu Investments being required to discharge all debts and liabilities prior to the sale of the business. It is an entirely routine and usual term, which appeared in the then current standard Sale of Business Agreement form for New South Wales and accords with the general principle that a vendor of a business should discharge debts of the business it has previously incurred before selling the business to a purchaser. I find that Lieu Investments sold the stock to Dengs Investments. No unfairness arises in respect of this part of the claim.

20 The next issue was cl 30 of the Sale of Business Agreement, which concerned the balance of the purchase price of $81,600. It was claimed that it was a term of the prior oral agreement that the balance of the purchase price would not in fact be payable by Dengs Investments. Landmark, of course, had a 49 per cent stake in Dengs Investments. Further, cl 30 was inconsistent with cl 4 of the Sale of Business Agreement, which required payment on completion. Staff J found in respect of this issue as follows:

[191] The respondents contend that the adverse consequences of cl 30 being included in the Sale of Business Agreement have been that Dengs Investments, of which Mr Lieu, through Landmark, is a 49 per cent shareholder, had to pay the liquidator the sum of $38,000, as a result of Mr Marsden, the liquidator, seeking the payment of $81,600, as representing a debt to Lieu Investments (in liquidation). Dengs Investments paid the amount claimed, less allowances for the amount of $26,942.59 paid by Ms Deng on behalf of the creditor (Lieu Investments) and $6,056.40, being legal costs, leaving a balance of $48,601. A settlement was reached with the liquidator whereby Dengs Investments paid $38,000. The applicants' contention is that as this amount was never intended to be paid by Dengs Investments, its payment has reduced the dividends or profit of Dengs Investments by $38,000.

[192] The uncontested evidence is that Ms Deng and Dengs Investments paid the sum of $38,000 (less accounts paid by the debtor (Ms Deng) on behalf of the creditor (Lieu Investments)) to Mr Marsden, the liquidator, in good faith and on the basis that cl 30 was enforceable in accordance with its terms. Neither Mr Lieu nor Landmark made any complaint at the time about the payment. Assuming that cl 30 was enforceable, it was to Mr Lieu's benefit that Dengs Investments paid the claim pressed by the liquidator.

[193] It was submitted on behalf of the applicants that the solicitor who drafted the agreements made an error in their drafting of the arrangements. Instead of providing for the consideration for the 49 per cent of the business to be paid by the issue of 49 per cent of the shares in Dengs Investments to Landmark, they provided instead for Dengs Investments, having paid $85,000, to have to pay a further $81,600 for the business. That was not the intention of either party. The error on the part of the solicitor for Ms Deng had adverse consequences for the respondents because Lieu Investments subsequently went into liquidation and the liquidator, no doubt, relying on the terms of the agreement drafted by Ms Deng's solicitor made a demand for the payment of the $81,600.

[194] In my view, to vary cl 30 now would be unfair to Ms Deng and Dengs Investments for a commercial decision taken on 5 February 1999 in the face of a claim from the liquidator on behalf of Lieu Investments (in liquidation). As will emerge later in these reasons, in light of Ms Deng reimbursing herself $85,000 from Dengs Investments, the final result of the transaction was that Dengs Investments paid $81,600 for the purchase of 51 per cent of the shares in Dengs Investments.

[195] I therefore decline to exercise my discretion under s 106 to vary cl 30 of the agreement. Nor do I find any unfairness through its operation.

21 A further issue concerned the $85,000 repaid to Ms Deng by Dengs Investments. The applicants claimed that the contract or arrangements between the parties became subsequently unfair by reason of the conduct of the respondents since 8 March 1996. The applicants contend that the payment of $85,000 from the bank account of Dengs Investments into Ms Deng's personal account is an example of how the arrangement operated unfairly. At [202] and [207] Staff J stated:

[202] The evidence that the $85,000 was a loan is directly inconsistent with the evidence given, on four separate occasions, by Ms Deng in cross-examination, that she did not expect to have the $85,000 repaid to her unless she sold her part of the business. Notwithstanding the fact that Ms Deng still owns 51 per cent of the business, she has used her powers under the Shareholders' Agreement to repay the $85,000 purchase price to herself and kept the fact from Mr Lieu until this hearing. 49 per cent of this amount belonged Landmark.

...

[207] I find the contract or arrangement has therefore operated unfairly in respect to the repayment of the purchase price to Ms Deng. The contract is varied accordingly to provide that in circumstances where Ms Deng is paid $85,000 from the business, Landmark will be paid 49 per cent of this amount. Furthermore, the consequence of the repayment of the purchase price means that Dengs Investments paid only $81,600 for 51 per cent of the business. The agreement was that 51 per cent would cost $85,000. Lieu Investments is entitled to the balance of $3,400. I find that the arrangements have operated unfairly to the extent that Lieu Investments did not receive the agreed purchase price for 51 per cent of the business. The contract is varied to provide that Dengs Investments pay Lieu Investments the sum of $3,400, representing the balance of the purchase price.

22 A further ground of unfairness considered by the trial judge was that there was a reduction in the value of Landmark's shareholding in Dengs Investments. His Honour noted that the basis for the contention appeared to be that if the purchase price of 51 per cent of the shares was treated as a loan in Dengs Investments accounts, this increased the liabilities of Dengs Investments in the period 8 March 1996 to 30 June 1996 which, in turn, diluted the value of Landmark's 49 per cent shareholding in Dengs Investments from $81,600 to $2,218.

23 At [209] Staff J held that:

[209] The accounting evidence was that the value of Landmark and Ms Deng's shareholding in Dengs Investments have declined in value over the nine year period from 1996 to 2005. Increased rentals have affected the business which has contributed to a decline in the value of a share in the business. Both shareholders have suffered a decline in the value of their shareholdings. I do not find that the decline in the value of the shares in Dengs Investments gives rise to an unfairness that requires the Court to further vary the arrangements in light of the variations that I propose to make.

24 As to the issue of Ms Deng's remuneration, the trial judge determined this at [216]:

[216] Both parties were in agreement that remuneration of $35,000 to Ms Deng as the Manager of the business was reasonable remuneration in 1996. It would seem to me to be unfair, regardless of the provisions of the agreement to find that Ms Deng's remuneration could never be increased. However, the increases in remuneration that Ms Deng awarded herself range from between 28 per cent to 63 per cent above her agreed salary of $35,000. I have decided that it would have been appropriate to allow an average of a four per cent increase per annum. On Ms Deng's remuneration, this results in Ms Deng receiving approximately $71,900 on top of such increase in salary. 49 per cent of $71,900 is $35,231, which I find should have been distributed to Landmark as profit. I find that the arrangement has operated unfairly in such profit not being distributed to Landmark. I propose to vary the arrangement to reflect this finding.

25 The issue of Ms Deng's motor vehicle expenses was dealt with at [217]:

[217] Ms Deng was also remunerated by the business with the use of a motor vehicle for her personal use at a cost of in excess of $22,000 per annum. Her evidence was that five to 10 per cent of her use of the motor vehicle was for personal activities and 90 to 95 per cent was for business activities. Mr Dolman, in his report, set out the motor vehicle expenses for the years 1997 through to 2005. In respect of the 2006 year, the applicants claim an average of the previous three years, being $8,900. The total motor vehicle expenses between 1997 and 2006 amount to $114,759. The personal component calculated on the basis of 10 per cent, amounts to $11,475.90. 49 per cent entitlement of Landmark is $5,623.19. For the reasons stated earlier, I propose to rely upon the evidence of Mr Dolman. I find that the arrangement has operated unfairly to the extent that Landmark has not been distributed profits amounting to $5,623.19.

26 A further ground of alleged unfairness was that there had not been any distributions of net profits of the business to Landmark whether by dividends or otherwise. His Honour was not persuaded that there had been any unfairness in respect of the failure to distribute the profits to the shareholders as opposed to such profits being retained in the business: see [221].

27 It was contended for the applicants at first instance that the Shareholders' Agreement was inconsistent with the parties' intentions in that it did not give effect to Mr Lieu's priority right to purchase Ms Deng's shares in Dengs Investments over Ms Deng's right to purchase Landmark shares in Dengs Investments. Staff J found that to the extent the Shareholders' Agreement did not give Mr Lieu a priority right, it was unfair: see [222]-[223].

28 Finally, the applicants claimed that the respective Agreements were unconscionably and unfairly one-sided in favour of Ms Deng. The trial judge did not find unfairness in this respect: see [224]-[228].

29 In his conclusions the trial judge said he had formed the view that the Shareholders' Agreement and the Sale of Business Agreement were unfair at their inception and/or became unfair due to the respondents' conduct in repaying $85,000 to Ms Deng, increasing the remuneration of Ms Deng, and not distributing profits to the shareholders. It followed, his Honour said, that the arrangements would be varied to provide that the applicants received 49 per cent of the $85,000 repaid to Ms Deng, being $41,650, $35,231 representing salary overpayments made to Ms Deng, $5,623.19 representing a 10 per cent share of the motor vehicle expenses and $3,400 representing the balance of the purchase price. The sum of these amounts totalled $85,904.19. The question of costs was reserved.

30 Staff J made the following orders:

1. Ms Margaret Deng is to pay Landmark Enterprises Pty Ltd the sum of $85,904.19.

2. Interest shall be payable upon the amount in order 1 in accordance with Sch 5 of the Uniform Civil Procedure Rules 2005. Interest shall be payable from the date of the filing of the summons for relief being 14 October 2004.

3. The applicants are to file and serve Short Minutes of Order within 14 days reflecting the orders made in this judgment.

4. The terms of the Shareholders' Agreement between Landmark Enterprises Pty Ltd and Margaret Deng dated 8 March 1996 shall be varied so as to give Landmark Enterprises Pty Ltd a priority right to purchase Margaret Deng's shares in Dengs Investments Pty Ltd over Margaret Deng's right to purchase Landmark Enterprises Pty Ltd shares in Dengs Investments Pty Ltd.

COSTS DECISION AT FIRST INSTANCE

31 In his costs decision, the trial judge determined as follows:

[21] I find in the circumstances of this matter, particularly bearing in mind that the primary issue upon which the applicants succeeded was the repayment of $85,000 to Ms Deng which arose on the sixth day of the trial that the presumption that a successful party is entitled to all its costs should be qualified in this matter ...

...

[23] I consider that in the exercise of my discretion a just result would be that the applicants should have 75 per cent of their costs, as agreed or assessed. The applicants also sought that I order that the first respondent pay the costs of the second respondent. The applicants cannot make such an application in my view and it is accordingly refused.

32 His Honour ordered the respondents to pay 75 per cent of the applicants' costs as agreed or as assessed in accordance with the Court's Rules.

GROUNDS OF APPEAL

33 The amended application for leave to appeal and appeal contained 11 grounds of appeal:

1. His Honour erred in finding that there was a relevant contract or arrangement under which work was performed that the parties to the proceedings were party to.

2. His Honour erred in finding that there was any relevant unfairness in any arrangement between the parties.

3. His Honour failed to pay any or any sufficient regard to the rights and obligations of the companies, parties to the proceedings, in respect of any monies which ought properly have been available to them.

4. His Honour erred in finding that it was unfair of the Third Respondent to provide superannuation payments on behalf of the Appellant that the Third Respondent was bound by statute to provide.

5. His Honour erred in finding that the Appellant was obliged to pay $85000 to the Third Respondent in order to obtain a contract under which she was required to work and that the Second Respondent was entitled to the benefit of the work and its share of the $85000 without any consideration.

6. His Honour erred in failing to take into account the fact that the Appellant had personally paid for all petrol for the motor vehicle when finding that the arrangement had operated unfairly and finding that the Second Respondent had not been distributed profits amounting to $5,623.19.

7. His Honour erred in failing, after finding that it was appropriate to depart from the presumption that the successful party was entitled to all of its costs, to order that the Respondent should pay 50% of the Appellant’s costs as agreed or assessed.

8. His Honour erred in finding that the evidence in relation to each of the eleven matters determined was not led separately in respect of each of those claims.

9. His Honour erred in finding that the Appellants had consistently declined to provide the Respondents with the financial records of the Appellants.

10. In the alternative to paragraphs 6 to 8 above, his Honour erred in failing to make costs orders pursuant to Rule 216(6) of the Industrial Relations Commission Rules 1996, particularly where the Summons as it existed at the time the Calderbank offers were made did not include the claim relating to the $85,000.00.

11. For and upon such other grounds and reasons as seem appropriate to the Court on hearing.

APPLICATION FOR CROSS APPEAL AND TO ADDUCE FURTHER EVIDENCE ON APPEAL

34 By facsimile on 29 October 2008 Mr Lieu wrote to the President's Associate indicating that being self represented the first and second respondents did not realise the "variations to the Judgment Orders" which they sought needed to be the subject of a cross appeal. The two respondents consequently sought leave to cross appeal and appeal.

35 The first and second respondents were advised that their application would be dealt with at the hearing of the appeal and that they should advise the appellant of their communication with the President's Associate.

36 At the commencement of the hearing of the appeal the application for a cross appeal was withdrawn by leave.

37 On 30 October 2008 Mr Lieu filed an affidavit sworn by him on that day that purported to address a number of matters relating to the appeal. It appeared that by filing the affidavit the respondents were foreshadowing an application to adduce further evidence on appeal. However, at the commencement of the hearing of the appeal the indication from Mr Lieu was that he did not press the application.

LEAVE TO APPEAL

38 We have decided to grant leave to appeal. We have taken the view that leave should be granted because Mr Lieu did not come to the Court with a just cause. As we later explain, Mr Lieu could not expect to obtain the benefit of his company, Landmark, having been paid $85,000 as the deposit on the sale of the business, plus the benefit of the liquidator of his other company, Lieu Investments, accepting an amount from Ms Deng representing the balance of the purchase price of the business, plus the benefit of Landmark having paid nothing for its shareholding in Dengs Investments, and still be entitled to lay claim to the benefit that accrues from almost half ownership of the business through Landmark's 49 per cent shareholding. To allow the decision at first instance to stand would be to provide Mr Lieu with a windfall to which he was not entitled and which would be inconsistent with the very purpose of the unfair contract provisions of the Act.

CASE FOR THE APPELLANT

39 The appellant described the gravamen of her submission as being that as from 5 February 1999 (when the claim by the Liquidator of Lieu Investments was settled on terms that Dengs Investments would pay $38,000 in full and final settlement of the claims) and certainly from the time that the proceedings were commenced, Mr Lieu, Lieu Investments and Landmark had ceased to have any interest in relation to Dengs Investments, or claim thereto. This was because an amount settling the claim for the balance of the purchase price and Landmark's shareholding, less the amounts paid by Dengs Investments regarding outstanding accounts of Lieu Investments from before the completion and legal costs, had been paid.

40 It was submitted that the effect of the decision at first instance was that Mr Lieu, through his companies Lieu Investments and Landmark, could:

(a) sell 51 per cent of the business for $85,000.00;

(b) claim, and resolve through the Liquidator of Lieu Investments to accept an amount, representing the 49 per cent balance of the business; and

(c) thereafter claim profit distributions as if still a 49 per cent shareholder.

41 Senior counsel for the appellant submitted:

His Honour appears to have proceeded upon the basis that, at all times, Mr Lieu was entitled to 49 per cent of the business at the Coogee shop that Lieu Investments had sold to Dengs Investments. This entirely disregards the fact that Lieu Investments owned the business. If, as occurred, Lieu Investments went into Liquidation, then the creditors of Lieu Investments (rather than Mr Lieu) were entitled to the benefit of the residual 49 per cent of the business. The Liquidator, on behalf of the creditors, compromised that claim.

42 As to salary payments it was submitted for the appellant that Staff J erred in finding any unfairness in the salary received by Ms Deng. It was submitted it was an error of the trial judge to ascribe an arbitrary four per cent per annum figure despite the unchallenged evidence that Ms Deng could work 50 to 60 hours a week and between five and seven days a week and Mr Meade’s unchallenged evidence that the rates paid to Ms Deng were consistent with market rates for a Video Store Manager working 50 hours per week.

43 As to the other matters the subject of the appeal, it was submitted his Honour erred:

(i) in relation to remuneration in that Staff J failed to pay regard to the impact of the Superannuation Guarantee levy, which required companies to pay superannuation contributions in respect of all employees. It was contended that his Honour appeared to accept the evidence of Mr Dolman, admitted over objection without even considering the unchallenged evidence of Mr Meade that the Superannuation amounts recorded in the accounts were in respect of all employees for the financial years 30 June 1998 to 30 June 2000 and not only Ms Deng and represented the statutory percentages for the period 2001 to 2006. Mr Dolman was a Forensic Accountant, who examined the financial books and accounts of Dengs Investments to determine the extent of the applicants' losses;

(ii) in relation to motor vehicle expenses in that the evidence was that the private use motor vehicle expenses did not form part of Ms Deng’s remuneration;

(iii) in finding that there was a relevant contract or arrangement under which work was performed that the parties to the proceedings were party to: Sin Yong Yim and Tae Sik Kim v Industrial Relations Commission of New South Wales and anor [2007] NSWCA 77 at [58] and [59]; Fish v Solution 6 Holdings Ltd [2006] HCA 22; (2006) 225 CLR 180; McDonald’s Australia Holdings v Industrial Relations Commission of NSW [2005] NSWCA 286; (2005) 223 ALR 78 at [83]; and

(iv) in failing to regard himself as bound by the rules of evidence and thereby allowing into evidence the report of Mr Dolman.

44 In relation to costs, it was the appellant's contention that the trial judge erred on the following basis:

(i) Ms Deng was successful in defeating eight of the eleven claims;

(ii) the respondents only succeeded on three claims;

(iii) Ms Deng sought that the applicants below pay 50 per cent of her costs or in the alternative:

· the applicants shall be entitled to their costs up to and including 24 April 2003, on a party and party basis, and the respondents shall be entitled to their costs payable by the applicants thereafter on a party and party basis; or

· the applicants shall be entitled to their costs up to and including 16 December 2004, on a party and party basis, and the respondents shall be entitled to their costs payable by the applicants thereafter on a party and party basis; or

· in the alternative, no order as to costs and order that each party shall bear their own costs.

(iv) his Honour erred in finding that a just result would be that the applicants should have 75 per cent of their costs, as agreed or assessed, as opposed to an order that the respondents should pay 50 per cent of the applicants' costs as agreed or assessed. That error resulted from the erroneous finding that the evidence in relation to each of the eleven matters determined was not led separately in respect of each of those claims.

CASE FOR THE RESPONDENTS

45 The first and second respondents were represented by the first respondent, Mr Paul Lieu. The solicitors for Dengs Investments, the third respondent, filed a submitting appearance, save as to costs.

46 Mr Lieu's case may be summarised as follows:

(1) in response to the appellant's claim that when the third respondent settled the claim made by the liquidator of Lieu Investments the second respondent (Landmark) lost all its shares in the third respondent, the following matters are relevant:

(i) it was common ground that cl 30 of the Sale of Business Agreement did not represent the intentions of the parties,

(ii) it was not the intention of the parties to the contracts for the second respondent to pay for its 49 per cent share of the business,

(iii) it was common ground that on or about 9 August 1999 the two contracts were completed when the balance of the $45,000 owing on the purchase price was paid, and

(iv) the ASIC share register for the third respondent still shows that the second respondent holds 49 per cent of its shares;

(2) in light of the foregoing it is clear that after the completion of the transaction on or about 9 August 1996, the first respondent's 49 per cent interest in the business was transferred from Lieu Investments to Landmark. There was nothing in the two contracts and no evidence the parties intended otherwise that would have the effect of removing Landmark's entitlement to 49 per cent of the shares in Dengs Investments;

(3) there is a legal requirement for directors to keep their share registers up to date. Failure by the appellant to remove Landmark from Dengs Investments share register, or the inability to have it removed, reinforces the first and second respondents' claim that the second respondent owns 49 per cent of the third respondent;

(4) in any event, the liquidator of Lieu Investments made a claim on Dengs Investments based on cl 30 of the Sale of Business Agreement. The resulting settlement of that claim by Dengs Investments had no impact on its 49 per cent ownership by Landmark. As cl 30 was not the intention of either party and was an error on the part of Dengs Investments' solicitor the first and second respondents cannot be burdened by its consequences;

(5) the first and second respondents accept that the appellant could increase her own salary annually consistent with increases in retail industry awards. However, the increases the appellant granted to herself were excessive and unreasonable;

(6) the $35,000 salary package which included provision of a motor vehicle was generous by industry standards and when took account of the store, which was a small one;

(7) the evidence of Mr Dolman should have been preferred to that of Mr Meade in relation to what was an appropriate salary;

(8) the management of the business by the appellant had been "appalling". The business had made little or no profit under the appellant's management. The amount of time and effort put into the business by the appellant did not justify a salary greater than that determined by the trial judge;

(9) superannuation was part of the appellant's total salary package, which was the industry practice;

(10) Mr Dolman's report on motor vehicle expenses should be preferred to the evidence of Mr Meade;

(11) on the question of standing to bring the proceedings at first instance, the Shareholders' Agreement expressly required the performance of work by the appellant; and

(12) as to costs, there was no error on the part of the trial judge.

CONSIDERATION

47 The appellant made submissions concerning the Court's jurisdiction to hear and determine the matter either at first instance or on appeal, contending that the pleaded contracts were not contracts whereby work was performed. The appellant also contested the correctness of other aspects of the trial judge's decision including what was contended to be a failure to make any orders voiding or varying the contract to remedy the unfairness found, a failure to identify the contract that was varied and questioning the validity of the order that Ms Deng pay Landmark the sum of $85,904.19 when Ms Deng was not a party to any relevant contract.

48 The appellant's submission regarding jurisdiction and other asserted deficiencies in the judgment and orders at first instance did not constitute the main thrust of the appellant's attack. Rather, that was reserved for the merits of what was determined at first instance.

49 In the appeal, we have decided to confine ourselves to a consideration of the merits because we have concluded his Honour wholly erred in that respect. It becomes unnecessary in that case to deal with the other matters.

50 In considering the merit issues we are mindful that the contracts sought to be attacked at first instance were the Shareholders' Agreement and the Sale of Business Agreement. The Shareholders' Agreement was an agreement between Landmark and Dengs Investments. The Sale of Business Agreement was an agreement between Lieu Investments and Dengs Investments. Mr Lieu was a director and the controlling shareholder of both Lieu Investments and Landmark. Ms Deng was the sole director and controlling shareholder of Dengs Investments.

51 The Court is empowered to look beyond the express terms of the documents executed by the parties to ascertain the reality of their relationship: Manni v Scully (1967) AR (NSW) 606 at 613. See also Agius v Arrow Freightways Pty Ltd (1965) AR (NSW) 77 at 85-86; Brown v Rezitis [1970] HCA 56; (1970) 127 CLR 157 at 169 per Menzies J; Ross v G N Comtext (Aust) Pty Ltd (2000) 100 IR 89; [2000] NSWIRComm 133 at [31]; English v Aradlay Insurance Brokers Pty Ltd (2005) 145 IR 129; [2005] NSWIRComm 253 at [30].

52 The appellant contended that the trial judge erred in forming the view that the Shareholders' Agreement and the Sale of Business Agreement were unfair at their inception and/or became unfair due to Dengs Investments' conduct in repaying $85,000 to Ms Deng, increasing the remuneration of Ms Deng, and not distributing profits to the shareholders. It followed, according to the appellant, that his Honour also erred in varying the contractual arrangements to provide that the respondents should receive 49 per cent of the $85,000 repaid to Ms Deng (being $41,650), $35,231 representing salary overpayments made to Ms Deng, $5,623.19 representing a 10 per cent share of the motor vehicle expenses and $3,400 representing the balance of the purchase price.

Repayment of $85,000

53 In considering the submission that the Shareholders' Agreement and the Sale of Business Agreement were unfair due to Dengs Investments' conduct in repaying $85,000 to Ms Deng, it is necessary to consider the transactions that occurred between Ms Deng, Dengs Investments, Mr Lieu, Lieu Investments and Landmark.

54 The first relevant transaction was the purchase by Dengs Investments from Lieu Investments of 51 per cent of the video hire business located at 196 Coogee Bay Road, Coogee known as "Movie City" ("the business"). The purchase price for that 51 per cent was $85,000. It was part of the agreement between Ms Deng and Mr Lieu that Landmark would receive 49 per cent of the shares in Dengs Investments. In relation to this 49 per cent holding it was submitted before the trial judge by the Lieu interests that there was an agreement that Landmark would not have to make any payment in relation to the issuing to it of that holding. The Deng interests submitted at first instance that at its highest the evidence was that Mr Lieu had an understanding that no payment was required to be made, but that there was no evidence of any agreement between Mr Lieu and Ms Deng to this effect.

55 The Shareholders' Agreement (made on 8 March 1996) provided that the shares in Dengs Investments were beneficially owned by Ms Deng and Landmark in proportions of 51 per cent and 49 per cent respectively. The Sale of Business Agreement provided that the total price of the business was $166,600. Therefore, according to that Agreement, the balance owing was $81,600 or 49 per cent of the total purchase price. Clause 4 of the Agreement provided that the balance of the purchase price, together with the sum to be paid for the stock-in-trade ($80,000), was to be paid on completion (8 March 1996).

56 In connection with stock, the Sale of Business Agreement also provided in cl 2 that the stock was purchased as part of the purchase of the business and it was given an estimated value of $80,000. Clause 11 of the Agreement provided that Lieu Investments would bear, inter alia, all outgoings in respect of the business up to the date of completion. Staff J found that the agreement was that Dengs Investments (as purchaser of the stock) would own and be entitled to derive rental income from the business stock after 8 March 1996, because it had purchased (and therefore owned) it ([186]). His Honour found at [187] that Lieu Investments sold the stock to Dengs Investments and that no unfairness arose in respect of this part of the claim.

57 Clause 4 of the Sale of Business Agreement was inconsistent with cl 30, which provided that the balance of the purchase price remained outstanding to Lieu Investments until Lieu Investments gave Dengs Investments six months' notice in writing requiring payment of the balance. We will return to the significance of this inconsistency shortly.

58 By 9 August 1996, Dengs Investments had paid the $85,000 for the 51 per cent share of the business. On 27 October 1997, a liquidator was appointed to Lieu Investments. On 19 October 1998, the liquidator served a statutory demand on Dengs Investments claiming the payment of $48,601.01. This amount was arrived at by taking what was claimed to be the balance due under the Sale of Business Agreement ($81,600) less accounts paid by Dengs Investments on behalf of Lieu Investments ($26,942.59) and less legal costs owing by Lieu Investments to Dengs Investments ($6,056.40). It had been submitted by the appellant that the statutory demand was based upon a Report of Affairs executed by Mr Lieu that listed an $81,000 liability (not, it may be noted, $81,600) from Dengs Investments to Lieu Investments. However, that Report (April 1999) postdated the demand (October 1998) by almost six months. The $81,000 debt referred to in Mr Lieu's Report may well have been in relation to the disputed amount for stock, but this is not clear from the evidence.

59 However, in an affidavit sworn on 30 May 1996 in support of a statutory demand for payment of a debt (which was the outstanding amount of $45,000 Dengs Investments owed on the deposit) Mr Lieu deposed that it was a term of the Sale of Business Agreement that Dengs Investments had "agreed to purchase the business for the sum of $166,600 payable by..." the deposit of $85,000 and "the balance of $81,600 when the Creditor gave 6 months notice in writing requiring payment of the same to the Debtor..."

60 A settlement was reached with the liquidator whereby Dengs Investments paid $38,000 "in respect of the subject matter of the Defendant's Statutory Demand". That is to say that in so far as the liquidator was concerned, by 5 February 1999 Dengs Investments had discharged all debt owing to Lieu Investments. In relation to this settlement, Staff J found at [192]:

The uncontested evidence is that Ms Deng and Dengs Investments paid the sum of $38,000 (less accounts paid by the debtor (Ms Deng) on behalf of the creditor (Lieu Investments)) to Mr Marsden, the liquidator, in good faith and on the basis that cl 30 was enforceable in accordance with its terms. Neither Mr Lieu nor Landmark made any complaint at the time about the payment. Assuming that cl 30 was enforceable, it was to Mr Lieu's benefit that Dengs Investments paid the claim pressed by the liquidator.

61 In March 2000, Ms Deng caused Dengs Investments to pay to her $85,000. Ms Deng caused Dengs Investments to deposit the amount into a term deposit account. This account had been created with funds drawn from the bank account of Dengs Investments on or about 8 March 2000. These monies were ultimately deposited into her personal bank account on or about 30 November 2001. Ms Deng kept the sum of $85,000. Ms Deng agreed that she had not sold her shares in Dengs Investments. The trial judge found on the evidence that the $85,000 was not a loan from Ms Deng to Dengs Investments.

62 Staff J found that 49 per cent of the $85,000 that Ms Deng had taken out of Dengs Investments belonged to Landmark because of its 49 per cent holding in Dengs Investments. Consequently, his Honour found that the contract or arrangement had operated unfairly in respect of what he considered to be the repayment of the purchase price to Ms Deng. The contract was varied accordingly to provide that in circumstances where Ms Deng was paid $85,000 from the business, Landmark was to be paid 49 per cent of this amount.

63 If, as his Honour found, Dengs Investments settled with the liquidator in good faith and on the basis that cl 30 was enforceable in accordance with its terms, it would seem to follow that his Honour did not accept the respondents' position that the parties never intended for the balance of $81,600 to be paid, but rather accepted that Dengs Investments owed the balance of $81,600, payable in accordance with the terms of cl 30.

64 Having paid $85,000 by way of deposit and having settled with the liquidator his claim for the balance due under the Sale of Business Agreement (less monies already paid by Dengs Investments), fairness would suggest that the Deng interests had done all that was necessary to purchase the business outright.

65 This leads to the question of Landmark's 49 per cent holding in Dengs Investments. The Lieu interests claimed that the settlement between Dengs Investments and the liquidator had no impact on Landmark's 49 per cent stake in Dengs Investments; that as cl 30 of the Sale of Business Agreement was not the intention of either party and was an error on the part of Dengs Investments' solicitor, the first and second respondents cannot be burdened by its consequences.

66 We do not consider this matter can be so easily dismissed. First, although the respondents contended that cl 30 of the Sale of Business Agreement was not the intention of either party and was an error on the part of Dengs Investments' solicitor, Mr Lieu was prepared to depose in support of a statutory demand that Dengs Investments had "agreed to purchase the business for the sum of $166,600 payable by..." the deposit of $85,000 and "the balance of $81,600 when the Creditor gave 6 months notice in writing requiring payment of the same to the Debtor..." Secondly, the trial judge accepted that Dengs Investments settled with the liquidator in good faith and on the basis that cl 30 was enforceable in accordance with its terms. The Deng interests, therefore, paid the asking price of the business, albeit according to terms of settlement agreed by the liquidator.

67 Notwithstanding that payment, the Lieu interests claim that they are entitled to the benefit of Landmark's 49 per cent stake in Dengs Investments, despite the fact that Landmark, of whom Mr Lieu is the beneficial owner, paid nothing for that stake. The Lieu interests claimed at first instance that it was the intention of the parties that the consideration for the $81,600 balance of the purchase price was the issue of the 49 per cent shareholding to Landmark. If that were so, given that the Deng interests had paid the purchase price of the business, the Lieu interests would receive the benefit of that payment (albeit through the liquidation process) and at the same time would retain a 49 per cent shareholding in Dengs Investments. In other words, the Lieu interests would benefit twice.

68 If the trial judge's decision were allowed to stand it would mean that the Lieu interests could:

(a) sell 51 per cent of the business for $85,000;

(b) resolve through the liquidator of Lieu Investments to accept an amount, representing payment for 49 per cent balance of the business; and

(c) thereafter claim profit distributions as if still a 49 per cent shareholder.

69 Regardless of whether Landmark has, in fact, a 49 per cent shareholding in Dengs Investments, we consider that Landmark's claim to unfairness under s 106 of the Act must be judged against the reality that it paid nothing for its shareholding and in circumstances where Ms Deng had, in effect, purchased the business. It follows that Staff J erred in finding that the Shareholders' Agreement was unfair at its inception and/or became unfair due to the respondents' conduct in repaying $85,000 to Ms Deng. Any condition of the Shareholders' Agreement which deprived the respondents of access to 49 per cent of that payment could not, in the circumstances, represent an unfair term or omission in the subject contract. In fact, the opposite is the case - the respondents would obtain an unjustified windfall by such a payment contrary to any notion of fairness between the parties to that contract. Hence, the finding by Staff J that the contract was unfair pursuant to s 106 of the Act represents an error of fact and law which must be corrected on appeal. It also follows that his Honour further erred in making a money order that Landmark should be entitled to 49 per cent of the $85,000 paid by Dengs Investments to Ms Deng. This was an error in the exercise of the discretion residing in the trial judge.

Ms Deng's remuneration

70 We turn to the question of Ms Deng's remuneration and the admission of Mr Dolman's evidence in that respect. In relation to remuneration the trial judge found as follows:

[213] ... The increases in salary above the agreed $35,000 varied from 28 per cent in 1998; approximately 45 per cent in 1999 - 2000; 63 per cent in 2001; 60 per cent in 2002 and approximately 53 - 55 per cent in 2003 - 2005. (sic) and 28 per cent in 2006. The increased payments to Ms Deng's salary were extracted from financial information provided to Mr Dolman.

[214] Mr Grant contended that no weight should be given to Mr Dolman's evidence so far as his expert opinion was based on assumed or accepted facts, they must be identified or proven in some other way so as to establish that they form a proper foundation for the opinion. Reliance was placed on Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 at 743 - 744: (sic)

[215] One of the difficulties in determining the various issues in this case was the lack of company records. Although Ms Deng gave an undertaking to the Supreme Court that she would deliver to Mr Lieu on a weekly basis a summary of the cash receipts and expenditure of the business, such documentation was only provided on one occasion and that was to the Supreme Court. It is not at all clear from reading Mr Dolman's report that he is expressing an expert accounting opinion in undertaking the task of setting out the overpayments received by Ms Deng. In any event, Mr Dolman was not required for cross-examination by either of the respondents. Once again, I propose to deal with this evidence by applying s 163 of the Act and the observations of Sheldon J in Davies referred to earlier in these reasons.

[216] Both parties were in agreement that remuneration of $35,000 to Ms Deng as the Manager of the business was reasonable remuneration in 1996. It would seem to me to be unfair, regardless of the provisions of the agreement to find that Ms Deng's remuneration could never be increased. However, the increases in remuneration that Ms Deng awarded herself range from between 28 per cent to 63 per cent above her agreed salary of $35,000. I have decided that it would have been appropriate to allow an average of a four per cent increase per annum. On Ms Deng's remuneration, this results in Ms Deng receiving approximately $71,900 on top of such increase in salary. 49 per cent of $71,900 is $35,231, which I find should have been distributed to Landmark as profit. I find that the arrangement has operated unfairly in such profit not being distributed to Landmark. I propose to vary the arrangement to reflect this finding.

71 The appellant submitted that the evidence of Mr Dolman was wrongly admitted. Mr Dolman was asked by Mr Lieu and his solicitors to prepare a report in relation to the litigation between the Lieu and Deng interests. Mr Dolman stated in relation to his report he had read the Expert Witness Code of Conduct and agreed to be bound by it.

72 The appellant submitted that Staff J erred in finding that "it was not bound to observe the rules of law governing the admissibility of evidence" and in relying on the decision of Sheldon J in Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 at 374 where his Honour said:

But the fact that this is not a court of pleading and is not "bound to observe the rules of law governing the admissibility of evidence" (s.83) is a real advantage in this class of case where it is better to have all the cards on the table (even if some don't matter) than to lack vital ones because of difficulties of proof. At times, too, a judicious relaxation of the rules relating to hearsay can help to unravel the truth.

73 The reference to s 83 in the decision of Sheldon J in Davies was a reference to s 83 of the Industrial Arbitration Act 1940. That section provided that the "commission...shall not be bound to observe the rules of law governing the admissibility of evidence." Section 163 of the current Act, however, provides that the rules of evidence and other formal procedures of a superior court of record apply to the Commission in Court Session. Section 151A provides that:

The name of the Commission in Court Session is to be the Industrial Court of New South Wales, and a reference in this Act (or any other Act, statutory instrument or document) to the Commission in Court Session (whether enacted or made before or after the commencement of this section) is taken to include a reference to the Industrial Court of New South Wales.

74 It is clear that Staff J sitting as the Industrial Court was bound to apply the rules governing the admissibility of evidence. This includes the Evidence Act 1995. In deciding he was not bound by the rules of evidence his Honour erred.

75 It would appear, although we cannot be certain from any of the material in the Appeal Books, that Mr Dolman's report was admitted, over the objection of the Deng interests, as that of evidence of an expert. Mr Dolman was not called as a witness. His letter and attached report (there was no affidavit) fell well short of the requirements set out both in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 and in Schedule 7 - Expert Witness Code of Conduct of the Uniform Civil Procedure Rules 2005, especially cl 5 of that Schedule, in particular:

(a) the expert’s qualifications as an expert on the issue the subject of the report,

(b) the facts, and assumptions of fact, on which the opinions in the report are based ...

76 There was simply no probative evidence that Mr Dolman was an expert on the issues that were the subject of his report. Whilst it appears from the transcript of the proceedings that Staff J was attempting to deal fairly with the admission of evidence having regard to the fact that Mr Lieu was appearing as an unrepresented litigant, Mr Dolman's letter and report should not have been admitted as the evidence of an expert. The letter and report were not otherwise admissible: s 76 of the Evidence Act.

77 As it appears from his Honour's judgment, Mr Dolman had provided figures purportedly showing how much salary Ms Deng had paid herself from 1998 to 2006 above $35,000 per annum. His Honour decided this was excessive and determined that it would have been appropriate to allow an average of a four per cent increase per annum.

78 Mr Meade gave evidence for the Deng interests. Mr Meade was a certified practising accountant according to his evidence and he prepared an affidavit in response to Mr Dolman's report. In his affidavit Mr Meade deposed that:

In my opinion and based upon my experience, the gross salary paid by the Company [Dengs Investments] to Ms Deng as its Sole Director and manager of the Coogee video business is consistent with market rates for a video store manger working 50 hours per week including weekends. I have many tax clients with retail and managerial roles comparable with the Coogee video store business.

It was Ms Deng's unchallenged evidence that she could work 50 to 60 hours a week and between five and seven days a week.

79 Mr Meade also stated that the superannuation amounts recorded in the accounts were in respect of all employees for the financial years 30 June 1998 to 30 June 2000 and represented the statutory percentages for the period 2001 to 2006. Mr Dolman, in his report appears to have considered the superannuation payments were paid only to Ms Deng. In coming to his conclusion that Ms Deng "received between $9,946 and $22,240 per year in excess of her agreed salary" his Honour took into account the superannuation payments erroneously recorded by Mr Dolman in his report as having been paid to Ms Deng when the amounts recorded were in respect of all employees.

80 Whilst on the face of it the increases in salary recorded at [213] of his Honour's judgment appear excessive, his Honour erred in finding that Ms Deng received approximately $71,900 in excess of what the trial judge considered was appropriate. It follows that 49 per cent of $71,900 should not have been distributed to Landmark as profit. Our reasons for arriving at this conclusion are as follows:

(1) the salary increases were taken from Mr Dolman's report which was inadmissible;

(2) the increases include superannuation payments to all employees and, therefore, were incorrect;

(3) the amounts recorded as having been paid to Ms Deng were in respect of gross salary and according to Mr Meade's evidence, who was familiar with the industry, were consistent with market rates for a video store manager working 50 hours per week including weekends. This evidence does not appear to have been taken into account by his Honour;

(4) Ms Deng's evidence was that she could work 50 to 60 hours a week and between five and seven days a week. This evidence does not appear to have been taken into account by his Honour;

(5) any salary payments to Ms Deng prior to 5 February 1999 that were in excess of the originally agreed $35,000 between 8 March 1996 and 5 February 1999, were insignificant. For the year ending 30 June 1997 it was $444 and the year ending 30 June 1998 it was $2,200. Those amounts for the years ending 30 June 1997 and 30 June 1998, were less then the four per cent per annum found reasonable by his Honour, being a salary of $36,400 and $37,856 for the years ending 30 June 1997 and 30 June 1998, respectively; and

(6) from 5 February 1999 Ms Deng was entitled to regard the business as her own with no obligation to distribute profits to any person other than herself.

Motor vehicle expenses

81 In respect of motor vehicle expenses, the trial judge relied solely on the evidence of Mr Dolman and accepted Mr Dolman's assertion (which was not based on any information or belief on Mr Dolman's part about the activities of the business, how it operated or its financial affairs other than financial statements) that motor vehicle costs were part of Ms Deng's remuneration package. This was contrary to Mr Meade's unchallenged evidence that such expenses were not part of Ms Deng's remuneration.

82 For reasons similar to those enunciated in respect of salary, we find that his Honour erred in concluding at [217] in respect of motor vehicle expenses that the "arrangement has operated unfairly to the extent that Landmark has not been distributed profits amounting to $5,623.19" and that such amount should be paid to Landmark. Mr Dolman's report should not have been preferred to the evidence of Mr Meade and, in any event, the business was effectively the appellants after 5 February 1999.

Costs

83 It follows from our findings on the appeal that the appellant has been successful and that the appeal must be upheld. The consequences that has for costs is that his Honour erred in deciding that the Lieu interests should have 75 per cent of their costs, as agreed or assessed. The appellant shall have her costs of the proceedings at first instance and on appeal.

84 We note, however, that the third respondent filed a submitting appearance, save as to costs. We intend to provide the third respondent with 14 days to file any submission as to costs in light of our decision in this matter. The appellant and the other respondents have a further 14 days to respond. Costs will be dealt with on the papers.

ORDERS

85 The Full Bench makes the following orders:

(1) Leave to appeal is granted.

(2) The appeal is upheld.

(3) The decisions and orders of Staff J that were the subject of this appeal are set aside.

(4) The third respondent shall within 14 days file any submission as to costs. The appellant and the other respondents shall have a further 14 days to respond. Costs will be dealt with on the papers.

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LAST UPDATED:
20 February 2009