The fate of once-thriving Perth business Habitat 1 provides salutary lessons for investors and company directors, especially those who have signed non-compete agreements.
The fate of once-thriving Perth business Habitat 1 provides salutary lessons for investors and company directors, especially those who have signed non-compete agreements.
In February 2013, when Perth investor Geoff Pritchard was evaluating interior design and construction firm Habitat 1, the business was thriving.
It had achieved 10 years of growth, generating revenue of $11 million and a pre-tax profit of $1.5 million in the year to June 2012.
On the strength of those numbers, Mr Pritchard spent $1 million to buy a 50 per cent stake.
His co-owner was Christian Formby, who jointly established the business in 2004 and whose achievements were recognised with a 40under40 award in 2015.
Unfortunately the men’s relationship broke down irretrievably over subsequent years, to the point where Mr Formby left the business in February 2016, in disputed circumstances.
Mr Formby, who had been managing director, said he resigned, while the company, led by Mr Pritchard as executive chairman, said it dismissed him.
Since then, they have been fighting their battles in court, while in the background the business effectively collapsed.
Last month, Brolga Developments and Constructions acquire Habitat1’s remaining assets, which consisted of one employee (a designer) and the brand.
The legal action between Messrs Pritchard and Formby came to a head last month, when Supreme Court Justice Katrina Banks-Smith upheld many of Mr Pritchard’s claims.
A key factor in the outcome was a non-compete agreement signed by Mr Formby in 2013.
Justice Banks-Smith concluded that Mr Formby was bound by the restraint covenants and that he had breached some of the terms.
She found a period of 12 months from the time of Mr Formby’s departure from the business (up to March 2017) was reasonable for a non-compete agreement, after hearing competing submissions.
Mr Pritchard’s case was based on multiple claims, including that Mr Formby had set up a competing business called Hawk Crest in August 2015, six months before leaving Habitat1.
Mr Formby was not at that time a director of Hawk Crest, but admitted under cross-examination he had always been the “deciding mind” at the business.
In addition, it was alleged Mr Formby had made false and damaging allegations about Mr Pritchard to staff and customers, and taken numerous holidays without authorisation.
The company also found that, after Mr Formby’s departure, he had deleted all of his company emails.
They were subsequently retrieved.
Justice Banks-Smith accepted much of the evidence against Mr Formby.
“Viewed collectively, I consider the conduct comprised a breach of Mr Formby’s duties to the company,” she wrote.
“He utilised Habitat time to promote the interests of Hawk Crest and his own personal interests.
“He failed to focus properly on his duties to Habitat or its interests.”
Justice Banks-Smith also rejected Mr Formby’s suggestion he had implicit consent to delete or copy emails.
“First, to suggest a company would permit a director to delete the contents of his company email account is not credible,” she found.
“Second, there was conduct on the part of Mr Formby both before and after he left Habitat, which indicates that he harboured a certain resentment towards Habitat or Mr Pritchard and was prepared to put his own interests above those of Habitat.”
Justice Banks-Smith’s judgement cited several examples, including attempts to acquire Habitat1’s domain name, advertising in the name of Habitat Interiors on LinkedIn, and setting up and promoting the Hawk Crest business.
“Although some of those steps were thwarted, they indicate Mr Formby was quite willing to conduct himself without regard to Habitat’s consent or the effect his conduct may have on Habitat,” Justice Banks-Smith found.
Despite these findings, Justice Banks-Smith concluded Mr Formby’s behaviour did not constitute gross misconduct, because Habitat failed to prove the conduct had caused damage or discredit to its business.
Therefore, she found he was entitled to some outstanding employee benefits.
The financial consequences extend beyond that, however.
Justice Banks-Smith found that distributions made to the shareholders of Habitat were loans, and not dividends as claimed by Mr Formby.
These loans, of about $430,000, were therefore repayable.
Mr Formby was also found to be liable to repay certain, but not all, of the personal expenses claimed by Habitat1.
Mr Formby, who is currently an architect at Hub Interiors, and an architect and builder at Hawk Crest Construction, told Business News he was working on an appeal, and was preparing his own legal claim against Mr Pritchard.
The saga has been costly for Mr Pritchard, who is still sorting out the company’s financial affairs.
This includes trying to settle payment disputes with several sub-contractors and other parties, some who told Business News they have taken legal action to try and retrieve money owed.
