FEDERAL COURT OF AUSTRALIA
Trade Practices - misleading and deceptive conduct - overstatement of sales figures for hotel - whether parties “knowingly concerned” in conduct - whether overstatement for purpose of supplying to valuer - whether shares in company owning hotel acquired as a result of the valuations - whether damage suffered as a result of entering agreements to acquire shares - whether applicants relied on misleading conduct - whether loss of opportunity to negotiate.
Trade Practices Act 1974 - ss 52, 75B, 82, 87.
Fair Trading Act 1987 (NSW) - ss 42, 68.
RONALD IAN McCARTHY, MAXWELL McCARTHY AND EDLAN NO. 54 PTY LIMITED V NEVILLE McINTYRE, AURO ROMANO McINTYRE, NEVITORO INVESTMENTS PTY LIMITED, ITALA BELINDA McINTYRE AND CHERYL GAI McINTYRE
NG 672 OF 1996
JUDGE: BEAUMONT J.
PLACE: SYDNEY
DATE: 19 may 1998
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IN THE FEDERAL COURT OF AUSTRALIA |
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BETWEEN: |
First Applicant
MAXWELL McCARTHY Second Applicant
EDLAN NO. 54 PTY LIMITED Third Applicant
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AND: |
First Respondent
AURO ROMANO McINTYRE Second Respondent
NEVITORO INVESTMENTS PTY LIMITED Third Respondent
ITALA BELINDA McINTYRE Fourth Respondent
CHERYL GAI McINTYRE Fifth Respondent
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JUDGE: |
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DATE: |
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PLACE: |
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REASONS FOR JUDGMENT
BEAUMONT J:
By their amended application filed on 12 December 1997, the applicants seek relief in several forms under the provisions of Part V of the Trade Practices Act 1974, s 68 of the Fair Trading Act 1987 (NSW) and s 1005 of the Corporations Law upon the grounds appearing in their amended statement of claim.
The present litigation is complex and in the interests of its orderly management it was determined, with the consent of the parties, that of the three groups of causes of action sued upon in the statement of claim, the Court should deal in the first instance with those claims which are grouped under the title in the applicants’ statement of facts, issues and contentions described as "Third Trial - 1993 Transaction".
In the present group of claims, the respondents have made a cross-claim seeking to recover the sum of $360,000, being an amount claimed by Nevitoro Investments Pty Limited (“Nevitoro”), one of the respondents, to be owing to it on a transaction which will be described below. As I have said in argument, it is not appropriate that I deal with that cross-claim at the moment. I have also indicated to the parties during the course of argument that, given the interlocutory character of the present matter, it is not appropriate, in any event, that I enter any formal orders at this stage. What follows is, however, my reasons for judgment on the matters which have been fully contested and fully argued before me.
By their amended application, Mr Ronald Ian McCarthy (the first applicant known as Jack McCarthy), his brother Mr Maxwell McCarthy (the second applicant), and Edlan No 54 Pty Limited (“Edlan”) (the third applicant and a company controlled by the McCarthy family), sue Mr Neville McIntyre (the first respondent), his son Mr Auro Romano McIntyre (the second respondent), Nevitoro (the third respondent and a family company controlled by the McIntyre interest), Mrs Itala Belinda McIntyre (the fourth respondent) and Cheryl Gai McIntyre (the fifth respondent) (who are the wives of Messrs McIntyre).
For present purposes, the applicants seek the following relief in their amended application:
“1. A declaration that the respondents engaged in misleading and deceptive conduct in trade and commerce which conduct caused:-
(a) the applicants and the second respondent to enter into a share sale agreement on 17 August 1993 whereby the second respondent sold certain shares in the third applicant to the second applicant (hereinafter referred to as “the Sale Agreement”);
(b) the applicants and the respondents to enter into a deed of settlement on 17 August 1993 whereby the ownership of certain disputed shares was resolved by transfer to the first applicant and certain advances were agreed to be made by the third respondent to the third applicant (hereinafter referred to as “the Deed of Settlement”); and
(c) the third applicant and the third respondent to enter into a Deed of Charge on 17 August 1993 wherein the third applicant charged to the third respondent all its assets and undertaking to secure the making of the advances described in the Deed of Settlement.
2. Damages for misleading and deceptive conduct under Section 82 of the Trade Practices Act 1974 and or Section 68 of the Fair Trading Act 1987.
...
4. Orders pursuant to Section 87 of the Trade Practices Act 1974 and or Section 72 of the Fair Trading Act 1987:
(a) relieving the applicants from any continuing liability to the second respondent under the Share Sale Agreement;
(b) (i) relieving the applicants from any liability to the third respondent associated with the making of the advance of $360,000 by the third respondent to the third applicants the subject of clause 6.2 of the Deed of Settlement; and
(ii) avoiding clause 12.2 of the Deed of Settlement.
(c) restraining the third respondent permanently from exercising against the third applicant any of its rights, privileges or powers as chargee under the Deed of Charge.”
By their further amended statement of claim, filed in Court on 6 April 1998, the applicants allege, so far as presently relevant, the following:
“3. The first and second applicants are officers of the third applicant.
4. The first and second respondents are and were at all material times officers of the third respondent.
5. On 17 August 1993 the applicants and the second respondent entered into a share sale agreement whereby the second respondent sold certain shares in the third applicant to the second applicant (which agreement shall hereinafter be referred to as “the Sale Agreement”).
6. On 17 August 1993 simultaneously with their entry into the Sale Agreement, the applicants and the respondents entered into a deed of settlement whereby the ownerships of certain disputed shares in the third applicant was resolved by the transfer of the said shares to the first applicant and certain advances were agreed to be made by the third respondent to the third applicant (which deed shall hereinafter be referred to as “the Deed of Settlement”).
7. On 17 August 1993 simultaneously with their entry into the Sale Agreement and the Deed of Settlement, the third applicant and the third respondent entered into a Deed of Charge wherein the third applicant charged to the third respondent all its assets and undertaking to secure the making of certain advances described in the Deed of Settlement.
8. The entry into each of the Sale Agreement, the Deed of Settlement and the Deed of Charge were interdependent transactions and shall hereinafter be referred to collectively as “the Transaction”.
8A. On 11 November 1993 the second applicant paid to Mark Riddell an amount of $313,000 in return for the transfer of the beneficial interest in the shares in the third applicant, the legal interest in which the second applicant received on 17 August 1993, pursuant to the Share Sale Agreement (“the Riddell Share Sale”).
9. At and before entering into the Transaction and in and about negotiations with the first and second applicants leading to the transaction, the first and second respondents, and by them the third respondent, caused there to be supplied to the first and second applicants certain financial statements of the third applicant for the years ending 30 June 1991, 30 June 1992, the six months ending 31 December 1992 and the taking sheets for the Tropicana Hotel for the period 1 July 1992 to 17 May 1993 (“the 1993 Taking Sheets”).
Particulars
The said financial statements and worksheets and the 1993 Taking Sheets were supplied by the first and second respondents to Mr W J Baker, a valuer with Ron Robertson & Partners of 50 Swan Street, Hamilton in the State of New South Wales, with a view to be[ing] used in a valuation by Mr Baker in circumstances where such valuation and financial statements were likely to be given to the first and second applicants and supplied to their prospective financiers. Further, the 1992 financial statements were supplied for inclusion in the Sale Agreement.
10. By supplying the information contained within the said financial statements, the first, second and third respondents engaged in conduct that was false, misleading and deceptive.
Particulars
(i) Overstating sales for six monthly accounts ended 31 December 1992 by $111,917...
(ii) Overstating takings during the period 5 July 1992 to 25 April 1993 by an average of $10,319 per week. (Takings figures supplied to Baker showed average sales and revenues of $47,480 per week... whereas takings sheets found by Mr Woinarski showed takings of $37,161 per week... and the evidence of Mrs Barker was takings of between $35,000 and $37,000).
(iii) Overstating sales/revenues during the period 5 July 1992 to 17 May 1993 by an average of $7,541 per week (takings sheets supplied to Baker showed average sales/revenues of $48,396 per week... whereas sales/revenues from liquor purchases for this period averaged $40,855 per week...; 30 June accounts show average sales of $39,264... and Mrs Barker’s evidence was that even including any black money, total sales was $40,000).
(iv) Overstating sales for the period 31 December 1992 to 25 April 1993 by an average of $13,900. (Takings sheets supplied to Baker showed average sales/revenues for this period of $49,091 whereas sales/revenues calculated from liquor purchases for this period averaged $35,191 per week...
(v) Overstatement of sales and revenues by an average of $11,091 per week for the period 1 July 1991 to 30 June 1992 (accounts supplied to Baker showed average weekly sales and revenues of $48,158 whereas reconstructed accounts showed average weekly sales and revenues of $37,067...
(vi) In the alternative to particular 5 overstatement of sales and revenues by an average of $5,973 per week for the period 1 July 1991 to 30 June 1992 (accounts supplied to Baker showed average weekly sales and revenues of $48,158 whereas sales and revenues calculated from liquor purchases for this period average $42,185 per week...
(vii) Overstatement of sales and revenues by $472,260 for 30 June 1991...
11. The misleading and deceptive conduct described in paragraph 10 hereof was a contravention of section 52 of the Trade Practices Act, section 995(2) of the Corporations Law, section 999 of the Corporations Law and section 42 of the Fair Trading Act.
12. In or about July 1994 the first applicant [repaid] to the third respondent Advance 2 referred to in paragraphs 1.2 and 6.3 of the Deed of Settlement.
13. At all material times the respondents and each of them knowingly concerned in the aforesaid misleading and deceptive conduct and contraventions of the Trade Practices Act and Corporations Law by each of the other respondents.”
By their statement of facts, issues and contentions in the present matter, filed on 4 February 1998, the applicants allege the following facts:
“C. Third Trial - 1993 Transaction
Facts
1. During 1988 the first applicant had a conversation with the first respondent. During that conversation the two parties agreed that the first applicant would accept from the third respondent a fifteen year lease in the Macquarie Arms Hotel (“the Macquarie Arms”) for the sum of $775,000 of which $500,000 was to be expressed as a deposit and on the basis that the balance would be payable upon receipt of the lease.
2. During 1988 the first respondent was restrained by a Court order from issuing a lease in respect of the Macquarie Arms to the first applicant.
3. In or about 1988 when the first applicant became aware that the first respondent was restrained by a Court order from issuing the lease the first applicant demanded the first respondent return the amount of $500,000.
4. In response to the demand referred to in paragraph 3 the first respondent paid to the first applicant an amount of $200,000. These parties then had a conversation whereby it was agreed that the balance [i.e. of $300,000] would be a down payment for the purchase [of] the freehold of the Macquarie Arms for $1.6m.
5. The Court order was not lifted and the Transaction involving the sale of the Macquarie Arms to the first applicant did not proceed.
6. During 1990 a conversation took place between the first applicant and the first respondent. During that conversation the first respondent offered to the first applicant a one quarter share of the Tropicana Hotel for the amount of $300,000 which had not been repaid by the first respondent to the first applicant. The first applicant agreed to this proposal.
7. The purchase of the proposed one quarter share in the Tropicana Hotel took place in or about August 1990. The Transaction was effected by Deed dated 31 August 1990 (“the 1990 Transaction”). Due to an error, the first applicant received fifty per cent of the shares in the third applicant instead of the twenty five per cent share which had been agreed.
8. During the period between the 1990 Transaction and the August 1993 Transaction the first applicant was not aware of the true takings and trading position of the Tropicana Hotel.
9. The first respondent was living at the Tropicana Hotel between the time of the 1990 Transaction and the 1993 Transaction. The first respondent was the principal person who was engaged in the running of the Hotel between those years.
10. In early 1992 a conversation took place between the first applicant and the first respondent. During that conversation it was agreed that the first applicant would purchase the balance of the shares in the third applicant based upon a valuation of the Tropicana Hotel.
Three valuations were performed in respect of the Tropicana Hotel by Ron Roberts and Partners, Valuers which took place at the following times:
(i) August 1991
(ii) December 1992
(iii) June 1993
11. The first respondent supplied certain sales figures for the Tropicana Hotel to K J Carpenter & Co which were used by K J Carpenter & Co in the accounts for that Hotel for the six months ended 31 December 1992. These sales figures were overstated by an amount of $116,748. These figures were attached to the June 1993 valuation.
12. When preparing the June 1993 valuation William Baker of Ron Roberts & Partners attended the Tropicana Hotel to perform an inspection. At that time William Baker was presented with documents purporting to be weekly sales figures of the Hotel for the period 1 July 1992 to 17 May 1993. Those weekly sales figures were provided to William Baker by or with the authority of the first respondent. Those weekly takings figures overstated sales.
13. The June 1993 valuation of Ron Roberts & Partners was the valuation relied upon by the first applicant and second applicant in entering the Transaction on 17 August 1993.
14. As a consequence of the sales figures received by William Baker, he valued the Tropicana Hotel in June 1993 at $3,160,000. If William Baker had received from the first respondent accurate sales figures, William Baker would have valued the Hotel at $1,935,524 or some other amount less than $3,160,000.
15. In reliance upon the June 1993 valuation of Ron Roberts & Partners the applicants and the second respondent entered into a share sale agreement on 17 August 1993 whereby the second respondent sold certain shares in the third applicant to the second applicant (“the Sale Agreement”).
16. In reliance upon the June 1993 valuation of Ron Roberts & Partners the applicants on 17 August 1993 simultaneously with their entry into the Sale Agreement entered into a deed of settlement with the respondents whereby the ownership of certain disputed shares in the third applicant was resolved by the transfer of the shares to the first applicant and certain advances were agreed to be made by the third respondent to the third applicant (“the Deed of Settlement”).
17. In reliance upon the June 1993 valuation of Ron Roberts & Partners the third applicant on 17 August 1993 entered into a Deed of Charge with the third respondent wherein the third applicant charged in favour of the third respondent all its assets and undertaking to secure the making of certain advances described in the Deed of Settlement.
18. As a result of the 1993 Transaction the net asset position of the first and second applicants deteriorated by the amount being the difference between the June 1993 valuation and the valuation contained on the experts report of Brian Goodacre such difference being an amount of $1,226,401.
19. On 11 November 1993 the second applicant paid to Mark Riddell an amount of $313,000 in return for the transfer of the beneficial interest in the shares in the third applicant, the legal interest in which the second applicant received on 17 August 1993, pursuant to the Share Sale Agreement (the “Riddell Share Sale”).
20. The entry into each of the Sale Agreement, the Deed of Settlement, the Deed of Charge and the Riddell Share Sale were interdependent transactions (“the 1993 Transaction”).
21. In or about July 1994 the first applicant [repaid] to the third respondent Advance 2 referred to in paragraphs 1.2 and 6.3 of the Deed of Settlement.”
The applicants then state seven issues in their statement of facts, issues and contentions. The first issue, which was withdrawn on 6 May 1998, was whether there was an error when Mr Jack McCarthy received 50 per cent of the shares in Edlan and a consequential issue arising. Putting that issue aside, the remaining issues as there stated by the applicants are as follows:
“2. Whether the first respondent supplied sales figures for the Tropicana Hotel to K J Carpenter & Co which were used in accounts produced by that firm of Accountants for the six months ended 31 December 1992, which sales figures were overstated by an amount of $116,748?
3. Whether weekly takings sheets were provided by or with the authority of the first respondent to William Baker of Ron Roberts & Partners, valuers during the inspection pursuant to which the valuation of June 1993 was prepared?
4. Whether, if William Baker had received from the first respondent accurate sales figures, the valuation of the Hotel would have been less than $3,160,000?
5. Whether the first applicant knew well the true trading position of the Hotel at all times from August 1990 until the 1993 Transaction?
6. Have the applicants suffered loss as a result of the sales figures supplied by the first respondent to K J Carpenter & Co and Ron Roberts & Partners as referred to in paragraphs 11 and 12 of the Facts section?
7. The quantum of that loss.”
The applicants then make the following contentions in their statement, so far as the present matter is concerned:
“Contentions
1. By supplying the financial information to K J Carpenter & Co and William Baker which was incorrect, the first respondent engaged in conduct that was misleading and deceptive under section 52 of the Trade Practices Act, section 995(2) of the Corporations Law, section 999 of the Corporations Law and section 42 of the Fair Trading Act.
2. As a result of the misleading and deceptive conduct and contraventions of legislation referred to in paragraph 1 above the first and second applicants entered into the 1993 Transaction and undertook the obligations and liabilities created by the Share Sale Agreement, the Deed of Settlement, the Riddell Share Sale and the Deed of Charge and thereafter the applicants suffered loss and damage in the operation of the business of the third applicant.
3. Alternatively, the provision of incorrect information by the first respondent to K J Carpenter & Co and William Baker amounted to a breach of his duty to take reasonable care to prevent financial loss and damage to the applicants.”
The applicants then provide the following particulars of damage:
“Particulars
· Net asset reduction of $1,226,401.
· Incurring of liabilities to Westpac Banking Corporation and the third respondent by all applicants.”
The case sought to be made on behalf of the applicants was succinctly described in counsel's summary of the applicants’ submissions dated 4 May 1998, which is now MFI 28. As is there stated by way of overview, it is alleged that Mr Neville McIntyre engaged in conduct both on his own behalf, and whilst acting on behalf of Mr Auro McIntyre and Nevitoro, which was misleading and deceptive. The conduct complained of is the overstating of the sales achieved by Edlan in the 1991 and 1992 financial years by about $472,000 in 1991 and $452,000 in 1992; the overstating of sales of Edlan for the six month period to 31 December 1992; and the overstating of the sales of the Tropicana Hotel (“the Hotel”) in weekly takings sheets during the period 1 July 1992 to 17 May 1993.
It is claimed, on behalf of the applicants, that the overstated sales information was produced for the purposes of their being supplied to a valuer, and that as a result of the conduct complained of, two valuations were produced by the valuer, Mr Baker, in December 1992 and in June 1993 which valued the Hotel at $3.18 million and $3.16 million respectively. It is then said that, as a result of these valuations, the applicants agreed to acquire the remainder of the shares in Edlan from the interests associated with Mr McIntyre and to pay $2.86 million (that is, $3.16 million less the $300,000 already invested by Mr Jack McCarthy). It is said that the valuations enabled the applicants to obtain finance from Westpac Banking Corporation and thereby complete the share sale agreement and the deed of settlement.
It is further claimed that the December 1992 and June 1993 valuations were relied on by Mr Max McCarthy when he agreed to purchase the beneficial interest in the shares held by Mr Mark Riddell for $313,000.
It is then said that, as a result of entering into these agreements, the applicants have suffered damage. In particular, it is claimed that Mr Jack McCarthy and Mr Max McCarthy incurred a liability to Nevitoro of $100,000 which, as is common ground, was subsequently paid to Nevitoro in July 1994 by Mr Jack McCarthy. Moreover, it is said, Edlan has incurred a liability to Nevitoro for $360,000, which liability is secured by the charge previously mentioned.
It is further said, on behalf of the applicants, that on 11 November 1993 Mr Max McCarthy paid Mr Riddell the sum of $313,000 for shares which were of no value. It is common ground that Mr Max McCarthy paid Mr Riddell the sum of $313,000 for those shares.
In support of their claim that Mr Neville McIntyre engaged in misleading and deceptive conduct in breach of the provisions of s 42 of the Fair Trading Act 1987 (NSW), or was “involved” in a contravention by Nevitoro of the provisions of the Trade Practices Act 1974 (see s 75B of that Act), the applicants say that Edlan's accountant at the time, Mr K J Carpenter, was instructed by Mr McIntyre to increase sales by the sum of $472,000 for the financial year 1991 and by the amount of $452,000 for the financial year ended 30 June 1992. It is said that these adjustments were made for the purpose of showing these sales figures to valuers who, in turn, would prepare a valuation for the purpose of inducing a financier to advance funds to the McCarthy interest, thus enabling the purchase of the shares in Edlan to proceed. It is said, on behalf of the applicants, that these increases were entirely arbitrary and without foundation.
Although Mr McIntyre claimed in his evidence that an amount of some $200,000 should be taken into account in the calculation of sales figures, by way of an allowance for amounts spent at the direction of Mr McIntyre in this period in the construction of a drive-in bottle shop at the Hotel, this amount, the applicants claim, should be substantially discounted.
The applicants further say that the attempt by Mr McIntyre to explain the increase of $472,000 by reference to what Mr McIntyre claimed were "black money" payments, should also be discounted as gross exaggeration. In this connection, Mr McIntyre claimed in his evidence that $32,000 had been spent by way of cash payments in the period in the carrying out of landscaping works at the Hotel. In answer to this, the applicants rely upon the evidence of Mr Bain, who carried out the work, that the amount involved was only $10,000. Moreover, a similar claim made by Mr McIntyre that he paid Mr Hall the sum of $20,000 out of cash takings for painting work, should, the applicants contend, also be discounted in the light of Mr Hall's evidence that the figure was closer to $3,000 or $4000.
The applicants further submit that the claims by Mr McIntyre that “black money”, or at least cash “withdrawals” of funds to Mr McIntyre and Mr Jack McCarthy, were no more than a total of $80,000 over the 20 week period concerned. That is to say, the sum of $4,000 per week. Mr McIntyre, on the other hand, claimed in his evidence that sums of $388,000 and $35,000 were paid to himself and Mr Jack McCarthy respectively. There is considerable force in the criticisms made by the applicants of Mr McIntyre's claims in this area. Certainly, there is nothing in the documentation now available that would support Mr McIntyre's claims to their full extent.
I accept the evidence of Messrs Bain and Hall in the two areas of their concern and to that extent, the assertions made by Mr McIntyre should be rejected. So far as the "black money" or other cash withdrawals, sometimes described in the evidence as "hits", were concerned, no clear picture emerges. This, however, is a matter within the knowledge of Mr McIntyre. He had the control of the operations as the manager of the hotel at the relevant time and the forensic onus was upon him to show that "black money" in the amounts he asserts was withdrawn from the operation.
I am not satisfied that more than $80,000 should be allowed on this account, nor am I satisfied that an amount as large as $200,000 should be attributed to cash drawings in the construction of the bottle shop. It is possible that some money was spent on the bottle shop in 1991 but the main work appears to have been completed in 1989.
I have had the benefit of assistance from expert accounting and valuation evidence from a number of witnesses. It has certainly assisted in my understanding of the issues in this area and it has illuminated the approach which appears to be commonly taken by valuers in this area, that is to say of placing substantial reliance upon gross profit figures in arriving at a valuation. However illuminating the evidence was, and it certainly was of assistance, its ultimate relevance depends upon findings of the actual takings received during the relevant period. It must be acknowledged, of course, that in a cash business of these dimensions and complexity, any attempt to arrive at a figure representing actual takings must involve some degree of estimation. Not only are there very many cash transactions involved, but each transaction is relatively small in amount and from a book-keeping point of view, and from an audit perspective obvious difficulties arise in any attempt to be precise in stating what takings were for a particular weekly period.
For that reason it must follow, I think, that the expert opinion evidence given is of limited assistance here where the real question is the amount of the takings in the relevant period. On that issue, I have received more assistance from the evidence of Ms Pauline Barker who was the bookkeeper at the hotel in the period in question. She is an independent witness, who gave evidence on subpoena, and whose credibility impressed me. Her evidence was that the average weekly takings during the period when she worked at the Hotel between September 1990 and September 1993 were between $35,000-$37,000.
She did, however, concede in her oral evidence that she was not aware of the exact amounts of "black money" or "hits" that may have been taken by Mr McIntyre and Mr McCarthy. She was not directly involved in those transactions but she appears to have had some general knowledge that this was happening. In cross‑examination Ms Barker agreed that the average weekly sales might be as high as $40,000 if account were also to be taken of "black money" or "hits". This evidence is I think, the best estimate in all of the evidence, lay and expert, on the question.
On behalf of the respondents it was submitted in argument that, upon a close analysis of Ms Barker's evidence, the sum of $40,000 should be taken as a starting point rather than a finishing point for present purposes. That is to say, it was argued that the effect of the cross-examination of Ms Barker was that she was prepared to revise upwards her earlier figures of $35-37,000 to $40,000 so that there should be added to the $40,000 the amounts taken by way of "black money" or "hits". On this question, the transcript will speak for itself. But when read in full and when understood in context, I do not read her evidence in that way, nor did I understand her testimony to be to that effect at the time when the evidence was given.
I find, therefore, on the whole of the evidence, that the average weekly sales in the relevant period were approximately $40,000 per week.
It is common ground that the figures supplied to the valuers were considerably more, and in the order of $47,000-$48,000.
Again, I find, on the whole of the evidence, that Mr Neville McIntyre was instrumental in the supply of that weekly sales information to Mr Baker for the purposes of his two valuations. There was an attempt in the conduct of the respondents' case to suggest that Mr Neville McIntyre was not involved in the delivery of this information to Mr Baker. However, I accept Mr Baker's evidence in this regard, without qualification, that this information was supplied to him by Mr McIntyre in June 1993.
It was also submitted on behalf of the respondents that there was no evidence that Mr Auro McIntyre was at least directly involved in any deceptive conduct. Mr Auro McIntyre was not called to give evidence. It is clear from the evidence that Mr Neville McIntyre was the manager of the business operations of Nevitoro, although the beneficial ownership of the equity of the capital of Nevitoro appears to reside in Mr Auro McIntyre and his family. At the same time Mr Auro McIntyre did participate in the business operations of Nevitoro, and as I have said, he was not called to give evidence. I should therefore infer that if called, his evidence would not have assisted him. The evidence as a whole indicates that the McIntyre family interests were involved in the relevant dealings with the two McCarthy brothers. The evidence also indicates that for all relevant purposes, Mr Jack McCarthy represented his brother.
Both Mr Jack McCarthy and Mr Neville McIntyre had previous extensive experience in the ownership and management of hotels. Mr Max McCarthy, on the other hand, is a pharmacist who carries on a pharmacy business in Orange and relied, it appears, very much upon the judgment and recommendations of his brother in any decision making process in the present context.
I find therefore that Mr Neville McIntyre in particular, engaged in misleading and deceptive conduct in the supply of the average weekly sales figures to Mr Barker in June 1993. But I also find that the other members of the McIntyre family and their family company, Nevitoro, at least acquiesced in this conduct and were therefore “knowingly concerned” in it.
However, before any of the causes of action sued upon can be made out, the applicants must show reliance. This is a convenient shorthand expression, or paraphrase of the language of s 82 and s 87 of the Trade Practices Act 1974 which refers to a person suffering loss or damage "by" conduct of another person that was done in contravention of a provision of part V.
As I have said, the notion of "reliance" is a convenient way to describe what is potentially a complex legal question (see e.g. Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 (at 526); Elna Australia Pty Ltd v International Computers (Australia) Pty Ltd (1987) 75 ALR 271 per Gummow J (at 279 and following); Elders Trustee and Executor Co Ltd v E.G. Reeves Pty Ltd (1987) 78 ALR 193 per Gummow J (at 243-244)).
It may be noted at this point that, in some circumstances, the proper measure of loss, both under the general law and under provisions such as ss 82 or 87, is the loss of a chance (see, for instance, C-Shirt Pty Ltd v Barnett Marketing and Management Pty Ltd (1997) 38 IPR 171; Menmel Pty Ltd v The Great Australian Bite Pty Ltd (1997) ATPR 41-553 (at 43-654 and following)). But no such limited case of loss of a chance to negotiate further, for instance, with the McIntyre interests, was sought to be pursued here. Rather, what is contended is that, as a direct result of the misleading conduct of the McIntyre interests, Mr Baker produced the June 1993 valuation, which was approximately $1 million greater than the value Mr Baker would have ascribed to the Hotel if he had been advised that the average weekly sales of the Hotel were $40,000, rather than the sum of $48,396 he was led to believe by Mr McIntyre.
It is then said on behalf of the applicants that it had been the common understanding of the parties since March 1992 that the purchase price of the hotel, namely $3.2 million, would reflect and accord with the value placed on the hotel by an accredited valuer. It is further submitted on behalf of the applicants that the Court should accept Mr Jack McCarthy's evidence that he relied on the 1992 and 1993 valuations produced by Mr Baker when determining how much he would pay for the hotel; and that he would not have agreed to the transaction for its final purchase price, if the valuation had not amounted to that figure. It is then said on behalf of the applicants that Mr Max McCarthy in turn relied on the advice of Mr Jack McCarthy as to the viability of the transaction, so that it should be inferred that Mr Max McCarthy was likewise induced to act upon the valuation in the sense previously described.
In my opinion, when the evidence is considered as a whole, the impression is gained that Mr Jack McCarthy, and therefore Mr Max McCarthy, were at all times prepared to accept that the hotel was worth the $3.2 million. Further, the evidence, considered as a whole, indicates that all of these parties realised that the acquisition by the McCarthy interests of the McIntyre interests in the hotel business through the acquisition of the remaining shares in Edlan, could only be achieved if the existing advances made by the Commonwealth Bank could be refinanced by the McCarthy interests.
That is to say, it was at all times appreciated by all parties involved - that is, on both sides of the negotiation for the acquisition of the shares - that a valuation had to be found that would induce a financier to refinance the Commonwealth Bank loan. This, in my view, is the explanation for the evidence given by Mr Jack McCarthy, repeated in his cross-examination, that he was not interested in the detail of the weekly taking figures, but that, rather, he was interested in the obtaining of an appropriate valuation. I accept this evidence but it seems to me that it has a terminal consequence for the applicants’ case.
I would be prepared to accept that if the procurement of a valuation such as those given by Mr Baker had the effect that Mr McCarthy, or his family, or a company controlled by his family, had entered into a disadvantageous borrowing arrangement with a financier, there might have been loss suffered on that account alone. But that is not suggested here. There is no suggestion that the loan made by Westpac was other than a transaction made in the ordinary course of business, and at ordinary commercial rates of interest. It is true that there were other loan transactions. Indeed, one (in the sum of $360,000) is still outstanding: the advance, said to be by way of "vendor finance" in the total sum of $460,000 (of which $100,000 has already been repaid by Mr Jack McCarthy). But again, there is no suggestion here that such a financing arrangement was made on disadvantageous terms, either as to interest, or in any other sense, or in any other respect.
So far as the Nevitoro advance of $360,000 is concerned, that is a matter which is the subject of the cross-claim previously mentioned and may raise other complications as being an arrangement entered into by Edlan by way of the grant of security in the provision of financial assistance for the acquisition of shares in its own capital. I need say nothing further about that aspect at this stage. I will hear any further submissions in that regard, upon the hearing of the cross claim, or perhaps on the hearing of the other two groups of the causes of action yet to be dealt with. The present point is that the evidence shows that at all times the McCarthy interests accepted that the hotel had a value of around $3.2 million, and that all that remained to be achieved was the introduction of a financier who would be prepared to lend money to the McCarthy interests, so as to enable a refinancing of the Commonwealth Bank loan to the McIntyre interests to take place.
It was recognised by all of the parties to these transactions that such a refinancing could only occur if a suitable valuation could be produced. It was further recognised by all concerned that, in accordance with ordinary valuation practice in dealing with hotels, a valuer would need to be satisfied as to a certain quantum of takings, which would be taken into account by the application of a suitable rate of capitalisation so as to throw up a certain value for the hotel itself. With their extensive experience in the hotel industry, both Mr Jack McCarthy and Mr Neville McIntyre were acutely conscious of all of these matters.
Whilst, therefore, I am prepared to accept, and indeed have found, that the McIntyre interests were guilty of misleading conduct, I do not think that the McCarthy interests have established that they relied on it in any relevant detrimental sense. The party that was induced to act to its detriment (which is not before me at the moment and of course I make no finding in any conclusive sense in that respect) is the financier, Westpac. It appears on the findings I have made that Westpac was induced to advance the sum of $2.1 million on the faith of a valuation which itself was based upon inflated sales figures, but for present purposes, that apparent inducement is not a relevant consideration here.
For completeness I should refer to a number of matters which arose during the course of the hearing and which, on the approach I have taken, are no longer material. I mention them for the benefit of others who may be reading these reasons for other purposes.
The first is issue number 1 as framed in the applicant's statement of facts, issues and contentions, as previously mentioned. There was much evidence and much argument about this question. It is clear that by reason of a number of administrative errors and misunderstandings a false position, formally at least, was brought about. But, in the end, nothing turns on this. Ultimately the litigation was able to go forward on the premise that, at the material time, the McCarthy interests held 50 per cent of the shares in Edlan, and were negotiating to acquire the balance. It follows, in my view, that the applicants’ counsel was correct in withdrawing this as an issue.
Another question which was the subject of considerable evidence and some submissions, is an incident involving the burning by Mr Neville McIntyre of some of the hotel records. But again it appears that nothing turns on this for present purposes.
The third collateral question is the interposition of Mr Riddell and the proposed interposition of Mr Tilley as the purchasers of the remaining shares in Edlan. It is true, as has been mentioned, that Mr Max McCarthy in fact purchased the shares from Mr Riddell on 11 November 1993 for $313,000. It appears that Mr Riddell purchased these shares in September from the McIntyre family but that he was substantially funded for this purpose by advances from McIntyre family interests. The evidence indicates that Mr Riddell was not personally in a position to fund such an acquisition on any permanent basis. For that reason Mr Tilley was proposed to be introduced. As Mr Tilley was a finance broker there were difficulties in this, and possibly other respects, in the matter going forward in this way.
Mr Max McCarthy had previously indicated interest in the purchase but there was a temporary lapse in his interest in that period between September and November 1993. Mr Riddell paid $300,000 for the shares in August 1997. Mr Max McCarthy paid $313,000 two months later for the shares. As the chronology of the events shows, the sum of $300,000 had originally been fixed by both the McIntyre interests and the McCarthy interests as a proper amount to be paid for the shares. In those circumstances, I think that it is appropriate to regard the intervention of Mr Riddell as no more than a temporary interruption in the true course of these negotiations. As I have said, the McCarthy interests were always prepared to proceed with the acquisition at a figure of around $300,000. The only thing that stood in the path of a successful conclusion to a negotiation with the McIntyre interests to this end was the need to obtain a valuation for re-finance purposes that was suitable. Mr Neville McIntyre knew this and further appreciated (as I have found) that a suitable valuation could only be procured if appropriate takings could be demonstrated for valuation purposes. I do not regard the intervention of Mr Riddell as the temporary holder of these shares for the two month period in November 1993 as a decisive consideration against the applicants. I place my conclusions on a much broader ground.
Fourthly, I have not attempted to summarise the formal or informal documentation which was generated during the course of these negotiations. I have not done so for several reasons: In the first place it appears that much of this documentation was rushed, and thus prone to error, and therefore itself capable of misleading an uninstructed reader. Secondly, much of the correspondence failed to give a true picture of what was really happening. Perhaps the best illustration is the letter signed by Mr Jack McCarthy, dated 31 August 1991 instructing Mr Carpenter to increase the sales in the 1991 financial year accounts in the sum of $472,260 for short bankings. The letter is misleading for a number of reasons: (1) It could not have been written before February 1992; (2) Although signed by Mr Jack McCarthy, it was clearly Mr Neville McIntyre's document. He had the knowledge of these events, Mr Jack McCarthy did not. Moreover the journal entries made at the time reflect the reality that the sum of $472,260 mentioned in the letter was an artificial construct.
I turn then to address the issues framed in the applicant's statement of issues as follows:
Issue 2:
2. Whether the first respondent supplied sales figures for the Tropicana Hotel to K J Carpenter & Co which were used in accounts produced by that firm of Accountants for the six months ended 31 December 1992, which sales figures were overstated by an amount of $116,748?
I answer this question in the affirmative.
Issue 3:
3. Whether weekly takings sheets were provided by or with the authority of the first respondent to William Baker of Ron Roberts & Partners, valuers during the inspection pursuant to which the valuation of June 1993 was prepared?
I answer this question in the affirmative.
Issue 4:
4. Whether, if William Baker had received from the first respondent accurate sales figures, the valuation of the Hotel would have been less than $3,160,000?
I answer this question in the affirmative.
Issue 5:
5. Whether the first applicant knew well the true trading position of the Hotel at all times from August 1990 until the 1993 Transaction?
I answer this question in the negative.
Issue 6:
6. Have the applicants suffered loss as a result of the sales figures supplied by the first respondent to K J Carpenter & Co and Ron Roberts & Partners as referred to in paragraphs 11 and 12 of the Facts section?
I answer this question in the negative.
Issue 7 does not arise.
As I previously indicated, I do not propose to make any formal orders at this stage. The matter will stand over for further argument and evidence on the cross-claim and on any other claims that arise.
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I certify that this and the preceding twenty one (21) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont |
Associate:
Dated: 19 May 1998
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Counsel for the Applicant: |
Mr B Coles QC with Mr M Ashhurst |
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Solicitor for the Applicant: |
Hunt Partners |
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Counsel for the Respondent: |
Mr P Biscoe QC with Mr J Stephenson |
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Solicitor for the Respondent: |
K A Garling |
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Date of Hearing: |
16, 17, 19, 20, 23, 24, 26, 27 February 1998, 3, 5, 10, 11, 16-18, 30 March 1998, 1, 2, 6, 7 April 1998, 4-13 May 1998 |
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Date of Judgment: |
19 May 1998 |
