Liability to account for future profits: an expansion of the available remedies for knowing assistance?
In its recent decision in Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited  HCA 43, the High Court has highlighted the expansive remedies that can be ordered against a party who is found to have knowingly assisted in a breach of fiduciary or statutory duty, including ordering an account of anticipated future profits not yet (and potentially not ever) derived. This decision serves as a warning to those who knowingly assist employees, directors or officers and other fiduciaries to breach their duties that the financial liability of such conduct may far outweigh the actual benefits received.
The case involved Mr Woff and Mr Corby who, up until 2010, were senior employees of a business that issued funeral bonds, Lifeplan Australia Friendly Society Limited (Lifeplan). While they were employed at Lifeplan, Mr Woff and Mr Corby secretly presented a proposal to a competitor of Lifeplan, the Ancient Order of Foresters in Victoria Friendly Society Limited (Foresters) to win over Lifeplan’s client referrers to Foresters. Although they were competitors, at the time of the presentation in 2010 Lifeplan derived significantly greater revenue ($68m) than Foresters ($1.6m) and Foresters appeared not to be deriving a profit.
The comprehensive written proposal presented by Mr Woff and Mr Corby to Foresters was prepared using Lifeplan’s valuable commercial information including names of client referrers and associated past and projected revenues. The proposal set out a detailed 5 year plan to attack the client base of Lifeplan with a view to bringing across as many clients to Foresters as possible in the quickest timeframe. The proposal was considered by the Foresters board and ultimately approved. Both the primary judge and Full Federal Court found that Foresters would not have proceeded with the plan without reviewing the proposal including the confidential information of Lifeplan on which it was based.
While still employed at Lifeplan, Mr Woff and Mr Corby took steps to implement the plan including the preparation of documentation and Foresters’ marketing material and attending initial meetings with client referrers designated to be targeted in the first year. Following their resignation from Lifeplan, the plan was implemented by Mr Woff and Mr Corby as employees of Foresters and proved to be highly successful. Foresters’ revenue went from $1.6m in 2010 to $24m in 2 years and Lifeplan’s revenue decreased from $68m to $45m over the same period.
In December 2012 proceedings were commenced by Lifeplan in the Federal Court against Mr Woff and Mr Corby for breach of fiduciary and directors duties. Foresters was subsequently joined to the litigation on the basis of its knowing assistance in the breaches of duty committed by Mr Woff and Mr Corby.
The primary judge (Justice Besanko) found that Mr Woff and Mr Corby had breached their fiduciary duties owed as employees of Lifeplan and also found that Mr Woff had breached his duties as an officer of Lifeplan. His Honour ordered an account of profits against each of Mr Woff and Mr Corby but declined to do so in relation to Foresters. Lifeplan appealed to the Full Federal Court which ordered an account of profits against Foresters in the sum of $6,558,495, being the net present value of profits made and projected to be made by Foresters for the period of the 5 year plan approved by the Foresters board. Foresters was granted special leave to appeal this decision to the High Court. Lifeplan was also granted special leave to cross-appeal in relation to the issue of whether it should receive an account of profits limited to the period of the 5 year plan or an amount reflecting the entire value of Foresters’ business.
Key issues and findings
The two issues on appeal for consideration by the High Court can be summarised as follows:
- Did Foresters’ knowing assistance in the breaches committed by Mr Woff and Mr Corby cause the profits it was ordered to account to Lifeplan?
- Could Foresters be ordered to account for anticipated future profits it never actually derived?
A joint judgment was delivered by Chief Justice Kiefel, Justice Keane and Justice Edelman with separate judgments being delivered by Justice Gageler and Justice Nettle. The Court held that there was a sufficient causal connection between Foresters’ knowing assistance in the breaches by Mr Woff and Mr Corby and the account of profits ordered by the Full Federal Court – including an amount relating to future profits. The Court also held that the account of profits should reflect the entire net present value of the Foresters business ($14,838,063), with Justice Nettle dissenting on the basis that the 5 year limit imposed by the Full Federal Court was reasonable in the circumstances.
In relation to the causal connection between Foresters’ knowing assistance and the account of profits ordered, the majority and Justice Gageler held that it is sufficient to show that the profit would not have been made but for the dishonest wrongdoing and it is necessary to consider the overall effect of the knowing assistance rather than the direct consequence of each act. In making these findings, the majority observed that Foresters played an integral role in the breach of duty by Mr Woff and Mr Corby and construed the benefit derived by Foresters as being the business connections of Lifeplan rather than individual revenue streams received from customers. On this basis, the majority held that Foresters would continue to enjoy these connections for as long as they could be retained in the business which would extend beyond the period of the 5 year plan.
In their joint judgment, the majority indicated that their findings resolved the matter without the need for any revision of principle, however, the fact that Foresters was required to account to Lifeplan for the entire net present value of its business (which necessarily included the value of the business prior to the breach) is an extraordinary outcome.
The Court’s broad interpretation of the benefit derived by Foresters as a consequence of its knowing assistance provided the gateway for the ultimate outcome and it is apparent that the Court was influenced by both Foresters active role in the scheme and also the fact that there was such a direct relationship between the increase in Foresters’ revenue and the decrease in Lifeplan’s revenue in the period immediately following the implementation of the plan. In this regard, the Court was able to conclude that an order to pay such a considerable amount did not present a windfall gain for Lifeplan.
This decision serves as a warning to those who participate in breaches of directors’ and other statutory duties, and who assist in dishonest and fraudulent schemes involving breaches of fiduciary duties, that the potential liability arising from this conduct may far exceed any benefit actually received by the third party. In light of this decision, it is also apparent that the potential financial exposure of such conduct cannot easily be calculated in advance. This will likely undermine the ability of commercial entities to factor in the cost of such conduct as a mere element of the “cost of doing business”.
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