FEDERAL COURT OF AUSTRALIA
Genocanna Nominees Pty Ltd v Thirsty Point Pty Ltd [2006] FCA 1268
TRADE PRACTICES – misleading and deceptive conduct under s 52 Trade Practices Act 1974 (Cth) and s 10 Fair Trading Act 1987 (WA) – misrepresentations made in sale of business – liability of vendor corporation – liability of agent who made representations – liability of director who was knowingly concerned in representations – damages and rescission of lease.
Trade Practices Act 1974 (Cth), s 52, s 75B, s 82, s 87
Trade Practices Amendment Act (No 1) 2001 (Cth)
Fair Trading Act 1987 (WA), s 10, s 68, s 79
Federal Court of Australia Act 1976 (Cth), s 51A
Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 35 FCR 535 cited
Bowler & Another v Hilda Pty Ltd & Others (1998) 80 FCR 191 cited
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 2) (1989) 40 FCR 76 considered
State of Western Australia v Wardley (1991) 30 FCR 245 followed
Murphy and Another v Overton Investments Pty Ltd (2004) 216 CLR 388 cited
Cigna Insurance Asia Pacific Ltd v Packer (2000) 23 WAR 159 cited
Pullen v Guttridge, Haskins and Davey Pty Ltd (1993) 1 VR 27 cited
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 cited
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 cited
Fencott v Muller (1983) 152 CLR 570 cited
Yorke v Lucas (1985) 158 CLR 661 considered/applied
Giorgianni v The Queen (1985) 156 CLR 473 cited
Pereira v Director of Public Prosecutions (1988) 82 ALR 217 cited
Arktos Pty Ltd v Idyllic Nominees Pty Ltd [2004] FCAFC 119 considered/applied
Citibank Ltd v Liu [2003] NSWSC 569 cited
Wong (as Executor of the Estate of the Late Casey Wong) v Citibank Limited [2004] NSWCA 396 cited
Arms v WSA Online Limited (ACN 081 121 495) [2005] FCA 943 cited
Arms v Houghton [2006] FCAFC 46 cited
Caple v All Fasteners (WA) (A Firm) [2005] FCA 1558 considered
Astvilla Pty Ltd v Director of Consumer Affairs Victoria [2006] VSC 289 cited
Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) 141 ALR 525 cited
Cleary v Australian Cooperative Foods Ltd (No 2 & 3) (1999) 32 ACSR 701 cited
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546 cited
Henville v Walker (2001) 206 CLR 459 cited
GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 201 ALR 55 cited
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 cited
GENOCANNA NOMINEES PTY LTD ACN 008 809 649 & ORS v THIRSTY POINT PTY LTD ACN 054 451 768 & ORS
WAD 102 of 2005
LANDER J
22 SEPTEMBER 2006
ADELAIDE (HEARD IN PERTH)
| IN THE FEDERAL COURT OF AUSTRALIA |
|
| WESTERN AUSTRALIA DISTRICT REGISTRY | WAD 102 OF 2005 |
| BETWEEN: | GENOCANNA NOMINEES PTY LTD ACN 008 809 649 FIRST APPLICANT
BRIAN FRANCIS WHITE SECOND APPLICANT
GLORIA ANNETTE WHITE THIRD APPLICANT
|
| AND: | THIRSTY POINT PTY LTD ACN 054 451 768 FIRST RESPONDENT
JOHANNA BAHR SECOND RESPONDENT
MICHEAL WALTER BAHR THIRD RESPONDENT
CROSSCORP ACCOUNTING (A FIRM) ACN 088 925 080 FOURTH RESPONDENT
LEWIS GEORGE CROSS FIFTH RESPONDENT
|
| JUDGE: | LANDER J |
| DATE OF ORDER: | 22 SEPTEMBER 2006 |
| WHERE MADE: | ADELAIDE (HEARD IN PERTH) |
THE COURT ORDERS THAT:
1. The applicants bring into Court short minutes to reflect these reasons.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
| IN THE FEDERAL COURT OF AUSTRALIA |
|
| WESTERN AUSTRALIA DISTRICT REGISTRY | WAD 102 OF 2005 |
| BETWEEN: | GENOCANNA NOMINEES PTY LTD ACN 008 809 649 FIRST APPLICANT
BRIAN FRANCIS WHITE SECOND APPLICANT
GLORIA ANNETTE WHITE THIRD APPLICANT
|
| AND: | THIRSTY POINT PTY LTD ACN 054 451 768 FIRST RESPONDENT
JOHANNA BAHR SECOND RESPONDENT
MICHEAL WALTER BAHR THIRD RESPONDENT
CROSSCORP ACCOUNTING (A FIRM) ACN 088 925 080 FOURTH RESPONDENT
LEWIS GEORGE CROSS FIFTH RESPONDENT
|
| JUDGE: | LANDER J |
| DATE: | 22 SEPTEMBER 2006 |
| PLACE: | PERTH |
REASONS FOR JUDGMENT
introduction
1 This is a claim under the Trade Practices Act 1974 (Cth) (‘the Trade Practices Act’) and the Fair Trading Act 1987 (WA) (‘the Fair Trading Act’)for damages and other relief arising out of the sale and purchase of a liquor store and video hire business at Cervantes in the State of Western Australia.
2 The first applicant is the trustee of the second applicant’s family trust. The second applicant, Mr Brian White, and the third applicant, Mrs Gloria White, are husband and wife. They have three children. Until about the middle of 1999 Mr White farmed a property at Miling in the Shire of Moora in the State of Western Australia. Their two sons worked on the farm. Their daughter lived elsewhere in Western Australia.
3 Mrs White trained as an infant school teacher and began work as a teacher in 1964. She continued to work after her marriage in 1968, although after 1978 she worked part time. In 1979 she started teaching at Miling and, but for a three year break from 1982 to 1985, she continued to do so until she resigned in 2000. She worked between three and four days a week.
4 In or about the middle of 1999 Mr and Mrs White decided on a succession plan in relation to the farm. They decided that they would leave the farm to their sons to jointly farm the property. Mr and Mrs White own two properties in Cervantes. They decided that they would move to Cervantes. They needed income, apart from that generated by the farm, to support them. They decided to buy a business. They realised that if they were to buy a business they would have to borrow to do so.
5 The first respondent owned the premises on which the Thirsty Point Liquor and Video Store was situated and carried on that business.
6 The third respondent, Mr Micheal Bahr, is the sole director of the first respondent, Thirsty Point Pty Ltd. Mr Bahr and his brother, who lives in the United States and who is not a party to these proceedings, are the shareholders of the first respondent. The second respondent, Mrs Johanna Bahr, is the mother of the third respondent.
7 The fourth respondent is an accounting firm and the fifth respondent, a principal of that firm.
8 The applicants settled their claims against the fourth and fifth respondents prior to the commencement of trial. The fourth and fifth respondents agreed to pay the applicants a sum of $170,000 ‘of which the sum of $100,000 shall be attributable to the applicants’ costs’.
9 In that same settlement, the first, second and third respondents agreed to release the fourth and fifth respondents from any claims arising in respect of the sale of the Thirsty Point Liquor and Video Store in consideration of the fourth and fifth respondents mutually agreeing to release the first, second and third respondents from all claims arising from the sale.
10 The settlement was evidenced by a deed executed by the applicants and all of the respondents.
11 Mrs Bahr has lived in or around Cervantes for most of her life. She has conducted a number of businesses in Cervantes.
12 Cervantes is a small town situated on the Indian Ocean with a permanent population of less than 300. Over recent years its permanent population has declined, whilst its visiting population has increased.
13 During the 1990s Mrs Bahr gradually sold off all of her businesses in Cervantes. By 1999 the only business with which she and her family were connected was carried on at Lot 221, 8 Cadiz Street, Cervantes (‘the premises’) and was a liquor store and video hire shop (‘the business’).
14 As I have said, the business was owned by the first respondent. The business was mainly conducted by the third respondent, although he did leave the business in the control of his mother from time to time when he visited his brother in the United States of America.
15 Mr Micheal Bahr is a qualified audio technician. By 1999 he wanted to quit the business and live in Perth where he had employment available to him. At that time, he had a relationship with a woman in Perth.
16 From all of the above, it can be seen that by the middle of 1999 the second and third respondents were keen for the first respondent to sell the business, and the second and third applicants were keen for the first applicant to buy a business in Cervantes.
17 As I have said, this claim concerns the sale by the first respondent to the first applicant and the lease by the first applicant of the premises from the first respondent.
THE WITNESSES
18 Mr and Mrs White both gave evidence. Mrs White was the best witness in the trial. She answered all questions put to her shortly and directly. She did not seek to avoid the consequences of any answer. I accept her evidence in its entirety. I prefer her evidence to the evidence of her husband. Although I think, in the main, Mr White tried to assist the Court he was not as good a witness as his wife. He wanted to argue his case rather than address questions. In one respect, in relation to the sale of one of their houses to their daughter, I do not accept Mr White’s evidence.
19 Mr Ross Moore was Mr and Mrs White’s accountant adviser at the time they purchased the business. I accept Mr Moore’s evidence, although with some reservations which I will address when considering his evidence.
20 Mr Andrew Gilmour provided two expert reports which he addressed in evidence. Mr Gilmour was a very good witness. He gave his evidence directly. I accept his evidence and, in particular, I accept the opinions which he proffered.
21 Mr Micheal Bahr was uneasy in giving his evidence. He was clearly uncomfortable about some parts of his evidence. He was, however, a better witness than his mother who was argumentative and rather outspoken. Where there was a conflict between Mr Bahr and Mrs Bahr, I prefer the evidence of Mr Bahr.
22 Where there is a conflict between the applicants’ evidence, especially that of Mrs White, and the respondents’ evidence, I accept the applicants’ evidence.
23 The applicants were represented by counsel. The second and third respondents represented themselves. I gave leave to the second respondent to represent the first respondent. The respondents complied with all of the directions made by the Court. They conducted their case efficiently and appropriately, and I thought with some dignity.
THE FACTS
24 In the last week of September in Western Australia a public holiday is held to celebrate the Queen’s birthday. The applicants’ case was that they first spoke to Mr Bahr and Mrs Bahr in relation to the business during the weekend after the long weekend in September. It was both Mr and Mrs White’s evidence that the meeting took place on Sunday, 3 October 1999. Mrs White was able to identify that date because the school holidays in that year were from 24 September to 11 October 1999. Both Mr and Mrs White remembered that they had been told by their friend, Joyce Delaney on the weekend before, which was the long weekend, that the business was for sale.
25 Mrs Bahr’s case was that the parties first met in relation to the business during the first weekend in November. Mrs Bahr said that she was present but that Mr Micheal Bahr was overseas visiting his brother. Mr Bahr thought he was not present but conceded it was possible that he was.
26 In his evidence-in-chief, Mr Bahr said that he travelled to the United States on 7 October 1999. He said that Mr Lew Cross of Cross Corp Accounting was appointed his Attorney during his absence from Australia. He said that during his stay in the United States he received a phone call from his mother in early December advising that ‘we had a couple who had also lived in Cervantes who were interested in purchasing the liquor store’. His evidence was that he had other telephone conversations with his mother both before and after the agreement to purchase was signed on 29 December 1999. He returned to Australia on 14 January 1999. He said:
‘During the entire period of the sale of the business until the signing of the documents, at no time do I recall ever meeting the Whites. My first meeting with Brian and Gloria White, my recollection, took place on 16 February 2000 at the signing of the lease at Michael Whyte & Co.’
27 In cross-examination, the following exchange took place:
‘Well the position is, isn’t it, that simply because you don’t recall meeting the Whites on the occasion they said they met you, doesn’t mean to say it didn’t happen?---There’s every possibility but I do not – I distinctly do not recall meeting them.
Right, okay. So then what you are saying is, that there is a possibility that you did but you just don’t recall it?---I can’t say that without any certainty whatsoever.’
28 Mr Bahr later said that he was fairly certain that he had not met them and when pressed on the inconsistency he said, ‘It’s all in words. It’s all in words’.
29 I asked:
‘Mr Mendelow is putting to you, earlier you said you can’t remember whether it happened, now you are saying, it didn’t happen. You appreciate the difference?---Okay. For the sake of not contradicting myself then, I would say then there is a minor possibility that we may have met in one of those – customers that came – the people that looked through the brochure.’
30 This is one of those instances where Mr Bahr was uncomfortable about the evidence he was giving.
31 His evidence-in-chief is inconsistent with that of Mrs White and, of course, Mr White. They both have a distinct recollection that he was present. Mrs White deposed to a conversation she had with him in the store. In my opinion, that is not something that both Mr and Mrs White could be mistaken about. It would be most unlikely they had a false memory of that event.
32 It is important to make a finding as to when the first conversation took place and whether Mr Micheal Bahr was present. If he was not, for reasons which will follow, he could not have been a party to the making of the representations which are relied upon by the applicants in their case.
33 Because I am confident that Mrs White was both a good historian and endeavouring to assist the Court, I am satisfied, and I find, that the parties first met during the first weekend in October and that all four were present at the same time. In doing so, I not only rely upon Mrs White’s evidence but also Mr White’s evidence and Mr Micheal Bahr’s evidence that it was possible that he was present. In particular, I rely on Mrs White’s evidence of the conversation she had with Mr Bahr. If the meeting had taken place in November, Mrs White could not have had that conversation. I reject Mrs Bahr’s evidence that the first conversation took place on the second Sunday in November.
34 During that meeting Mrs Bahr told Mr and Mrs White why it was that they wished to sell the business. Her conversation was mainly with Mr White. Mr White said that Mrs Bahr said she wished to sell the business because she did not want to be bothered with GST. She was ready to stop working, and that she and her son were ready to move on to other ventures. She said the business could be run with casual staff relieving. Mr Bahr spoke with Mrs White. Mrs White said that Mr Bahr ‘did not have much to say but he did with some enthusiasm show me things on his computer to do with the video side of the business’. She also said that Mr Bahr ‘did not address the liquor side of the business much’. Mr Bahr told her ‘how much they charged for a video and where to get the videos from, why they bought their video stock and did not lease them’.
35 Mr White asked to see the figures of the business. Mrs Bahr said that she would not hand out figures unless they were serious about purchasing the business. Mr White said that they were. It was at that point, and at that meeting, Mrs Bahr produced and gave to Mr and Mrs White a brochure which was entitled ‘Thirsty Point Liquor Store & Video Hire’ (‘the brochure’).
THE BROCHURE
36 On the front page there appears a reference:
‘CROSS CORP ACCOUNTING
Ground floor, Colard House
33 Colin Street
West Perth WA 6005
Phone (08) 9226 1660 Fax (08) 9226 2550’
37 Cross Corp Accounting, of course, is the fourth respondent. It carries on the business of Certified Practising Accountants (CPAs). The fifth respondent is a principal of that firm. Their status as CPAs is relevant because of evidence given by Mr and Mrs White, and Mr Moore.
38 The brochure contained the following:
(1) Coloured photographs of the external and internal views of the Thirsty Point Liquor Store & Video Hire.
(2) Disclaimer which read as follows:
‘This information is being provided to assist persons wishing to purchase the business described herin (sic).
This brochure has been completed from information supplied by the vendor. Readers should be aware that the information contained in the brochure is not to be construed as a warranty or promise (either by Cross Corp Accounting or its Principals) as to the correctness of the information, or that it should form of (sic) any contract or agreement.
Interested parties must be sure to undertake their own independent enquiries and investigation and in this way satisfy themselves that any details provided here are true and correct. Do not act without having checked the accuracy of this information.
The content of this report does not form part of any contract. Interested parties must be sure to undertake their own independent enquiries and investigations in consultation with recognised accounting, tax and legal specialists and satisfy themselves as to the likelihood of achieving the results indicated by all projections. Do not act without having checked the accuracy of al (sic) information contained in this report.’
(3) A précis of the business on the third page of the brochure:
‘CROSSCORP ACCOUNTING
Certified Practising Accountants
(A division of Cross Sinclair & Novotny Pty Ltd)
ACN 066 358 889
THIRSTY POINT LIQUOR STORE & VIDEO
PRECIS
BUSINESS NAME THIRSTY POINT LIQUOR STORE
LOCATION: CERVANTES W.A.
SALE DETAILS
PRICE
Goodwill & Plant $340000
Stock 57000 (estimated)
Liquor Store freehold Lot 221 Cadiz St 220000 (optional)
-----------
$617000
=====
RETURN ON INVESTMENT
SALES $373108 per annum
31092 per month
7175per week
EARNINGS BEFORE 145595 per annum
INTEREST TAX AND 12132 per month
DRAWINGS 2799 per week
PROFIT BASED ON : 2 FT Owner/Operator
NO OF STAFF Casual Employees
WAGES $100 per week
OWNER INVOLVEMENT 1 owners (sic) full-time
HOURS OF OPERATION Monday – Saturday 9am to 8pm
Sunday 3pm to 6pm
(Video Hire Only)
BRIEF OVERVIEW
Attractive, profitable and well priced coastal Liquor store with video trade in a modern growing country community.
Ground Floor, Colord House, 33 Colin Street West Perth WA 6005 Postal Address PO Box 334 West Perth WA 6872
Whitford Office – Suite D, 1st Floor, Whitford City Shopping Centre, Hillarys WA 6025
Telephone (08) 9226 1660 Facsimile (08) 9226 2550 email address crosscor@crosscorp.cc’
(4) A profit and loss statement for the 1998/99 financial year (‘the brochure profit and loss statement’) on page 4 of the brochure:
‘CROSSCORP ACCOUNTING
Certified Practising Accountants
(A division of Cross Sinclair & Novotny Pty Ltd)
ACN 066 358 889
THIRSTY POINT LIQUOR STORE & VIDEO
1998/99 FINANCIAL YEAR
PROFIT AND LOSS STATEMENT
INCOME
Liquor and Video $373,109
Stock Purchases $208,143
------------
GROSS PROFIT FROM TRADING $164,966
Less:
OPERATING EXPENSES
Accounting 850
Bank Fees 800
Freight 1178
Insurance 1200
Liquor Tax & Fees 255
Printing and Stationary (sic) 750
Motor Vehicle Expenses 1250
Electricity and Gas 4804
Rates and Taxes 1324
Telephone 960
Repairs and Maintenance 1000
Wages Casual 5000 $19,371
------- -------------
NET PROFIT $145,595
Ground Floor, Colord House, 33 Colin Street West Perth WA 6005 Postal Address PO Box 334 West Perth WA 6872
Whitford Office – Suite D, 1st Floor, Whitford City Shopping Centre, Hillarys WA 6025
Telephone (08) 9226 1660 Facsimile (08) 9226 2550 email address crosscor@crosscorp.cc’
(5) Optional Lease details on page 5 of the brochure:
‘Optional Lease Details
Though the terms and conditions of the lease remain negotiable, interested parties should use the following as a guide.
Term 10 years + 2 x 5 year options or
10 years + 10 year options
Rental $24000pa + VO’s/Rates and Taxes of $2000 a month
Rent Review Annual increase to Market Value
License Included in Lease or remaining location specific with an acceptable “buy back” clause.
*The rent of $24000pa is based on 150m @ $140m indoor & 40m outdoor
License Details
The Thirsty Point Liquor Store trades on a standard liquor license.
The regulations governing this licence are importantly :
1. No one under the age of 18 years can purchase anything within the designated licensed area.
2. The licensed area of the store may trade up to any 12 hour period, six days per week ( as long as it is open during the “core hours” OF 11am to 7pm Monday to Saturday ) Trading on Sundays is prohibited unless under an “Extending trading Permit”.’
(6) Details of Plant and Equipment; Financial Data and the Vendor’s accountant on page 6 of the brochure:
‘Plant & Equipment
The Thirsty Point Liquor Store & Video is attractively fitted out with a high standard of Plant & Equipment.
Find following an itemized list of Plant & Equipment that forms part of the sale of the business.
This plant is being offered unencumbered and in good working order at settlement.
The total value of Plant & Equipment for the purpose of a sale is estimated at approximately $50,000.00
Financial Data
The financial performance of the Thirsty Point Liquor Store & Video is well backed up by considerable (sic) as provided by the vendors.
On the receipt of an offer on the business, the vendors are most happy to provide all requirements of a due diligence procedure (e.g. bank records, liquor tax returns, invoices etc.)
The Vendors Accountant is:
Mr Lewis Cross
c/o Cross Corp Accounting
Ground Floor, Colord House
33 Colin Street
West Perth 6005
Telephone : (08) 9226 1660
Fax : (08) 9226 2550’
(7) Further information on the following pages of the brochure:
(a) Itemised list of plant and equipment.
(b) List of stock.
(c) Business Name Extract from the Office of State Corporate Affairs.
(d) Copy of Certificate of Title Register Book Volume 1971 Folio 974 for the estate in fee simple in Cervantes Lot 221.
(e) Details of water, electricity and communications in Cervantes.
(f) General information in relation to the town of Cervantes, the Coastal Road (Cervantes to Jurien) and maps of the local area.
(g) Various order forms for the supply of liquor and food items.
THE REPRESENTATIONS CONTAINED IN THE BROCHURE
39 As I have already said, the brochure contained on its first page a reference to Cross Corp Accounting. The two pages of financial information contained in the brochure (the précis and the brochure profit and loss statement), as set out above in these reasons, were both on the letterhead of Cross Corp Accounting.
40 The brochure profit and loss statement was not prepared in accordance with accounting standards. Whilst it purported to be a profit and loss statement of a retail business, in fact, it was merely a statement of gross sales less some, but not all, expenses. The brochure profit and loss statement did not identify the cost of goods and, therefore, no meaningful gross or net profit could be arrived at.
41 I find, however, that neither Mr White nor Mrs White were at any relevant time ever aware that the brochure profit and loss statement did not identify the cost of goods and so therefore could not be relied upon as a true statement of the gross or net profits of the business over the relevant period. They understood the document to be informing them of the gross and net profits over the relevant period.
42 The brochure contained the following representations:
(1) That it was prepared by Cross Corp Accounting who were Certified Practising Accountants;
(2) That it contained a financial statement disclosing the gross and net profits of the business during the financial year ended 30 June 1999 which had been prepared by Cross Corp Accounting;
(3) That the gross profit in that period was $164,966;
(4) That the net profit in that period was $145,595;
(5) That the expenses incurred in deriving that net profit totalled $19,371;
(6) That the brochure profit and loss statement was not subject to any accounting qualification;
(7) That the gross and net profits were sustainable;
(8) That the financial performance of the business ‘is well backed up’;
(9) That it was an ‘attractive, profitable and well priced’ business at $340,000 which had a goodwill value of $290,000.
THE APPLICANTS’ PLEADED REPRESENTATIONS
43 In their statement of claim, the applicants pleaded the following representations:
‘11. By the Brochure it was represented that:
(a) for the financial year ending 30 June 1999 the Business generated a gross profit in the sum of $164,966.00 and a net profit in the sum of $145,595.00;
(b) the Business was well priced at the sale price in the sum of $397,000.00 (“sale price”);
(c) the Business was readily capable of generating a gross profit in the sum of $164,966.00 or thereabouts per annum and a net profit in the sum of $145,595.00 or thereabouts per annum and was likely to continue to do so; and
(d) there existed reasonable grounds on which to make the representations pleaded in sub-paragraphs (a) to (c) hereof.’
44 On the morning of trial, the applicants sought to amend to add a further subparagraph (e) to their statement of claim. There being no objection, I gave leave to the applicants to amend paragraph 11 to add subparagraph (e):
‘(e) the accounts contained within the Brochure showing a net profit in the sum of $145,595.00 for the financial year ending 30 June 1999 had been prepared by a Certified Practicing (sic) Accountant.’
45 In my opinion, the applicants have established that the representations pleaded in paragraphs 11(a), (b), (c) and (e) have been made out. I am not satisfied, however, that the plea in paragraph 11(d) has been made out. The brochure either makes the representations or it does not. I think nothing is added by the plea in paragraph 11(d).
the preparation of the brochure
46 A similar brochure had been previously prepared by the accountants for the respondents at the time of the sale of the pizza shop in 1997. The brochure which was handed by Mrs Bahr to Mr White by the respondents on 3 October 1999 was a modified version of the previous brochure. Mrs Bahr said:
‘At this point I extracted the figures from the accounts and made up the brochure as we still had it on the computers when we sold the pizza shop in April 1997. It was only a matter of changing the figures from the pizza place to the liquor figures. I phoned Lew and asked him to put them on his letterhead as he would be handling the sale instead of an agent as we had previously not had much luck with agencies. Every time I put a business and property up for sale, I would do all the work and they would collect all the commission. I asked Lew to look after the sale as I would rather pay him as he was Micheal’s power of attorney and Micheal was leaving again. This was all put into place by myself as the brochure reads with a strong disclaimer in it. I left this word for word as written by Goodwin Mitchell O’Hehir.’
47 Both Mr Bahr and Mrs Bahr said that Mr Micheal Bahr retyped a number of pages of the brochure. I accept their evidence in that regard.
48 Mrs White said that she asked Mrs Bahr where she got all the information on the geographical and tourism matters contained in the brochure. Her evidence was that Mrs Bahr said that ‘Micheal did some research and got some of it from the shire and some from the tourist bureau and he took his own photos of the shop’.
49 It is important to determine what input Mr Bahr had into the preparation of the brochure because it is the applicants’ case that it was the brochure which contained the representations which were false and constituted the misleading and deceptive conduct. The brochure was given to the second and third applicants by Mrs Bahr in the presence of Mr Bahr. In his evidence-in-chief, Mr Bahr said after referring to the respondents’ decision to place the business on the market:
‘It was during this time that we also decided to produce a brochure to help sell the business. Since Murray Brown had produced one for us in the past, outlining the features of Cervantes, we again used the same information. We then decided to include all the current and relevant financial information. Mum had asked Lew Cross if the financial statements could be placed in his letterhead to show due diligence in its preparation. Mum also asked me if I could type out some of the pages for the brochure. Most of it was going to be the same as Murray Brown’s brochure from 1996 but we would add a few pages of our (sic) including the profit and loss statements from Cross Corp. One of the pages I remember typing was the disclaimer. I typed the text information from a disclaimer that Cross Corp had supplied. The remainder of the brochure was photocopied from the original Murray Brown document. My main duties were to make it a presentable document. This was the extent of my involvement in the making of the brochure. I did not prepare any of the figures that were contained in its pages, my mother prepared them all.’
50 In cross-examination, Mr Bahr described his role in the preparation of the brochure as ‘minor’. I reject that categorisation. He knew that the brochure would be circulated to potential purchasers and he knew that those persons would rely upon the information contained in the brochure. He accepted that the brochure gave the impression that it was prepared by an accountant. Mrs Bahr also accepted that proposition, although later she tried to resile from that answer. Mr Bahr accepted that the reference to the fourth respondent and its address on the front page were added by him. He accepted those references gave rise to the impression that it was prepared by an accountant. He said that they added those words to show due diligence. He agreed that the précis which was under the letterhead of Cross Corp Accounting gave the impression that the information on that page was prepared by an accountant. He agreed that the précis gave the impression that an accountant was saying that this was a well priced business. He said, however, he did not prepare that page. He said that it would have been prepared by the fourth respondent.
51 The following question was asked and answered in his cross-examination:
‘So the wording contained in this brochure, apart from the actual information which is annexed such as, matters pertaining to Cervantes, was prepared by you, wasn’t it?---No. The only – the only page I typed out in this – this brochure, was the disclaimer at the front. I distinctly remember typing that. The other stuff, the Cross Corp Accounting pages were supplied to my mother I presume from Cross Corp Accounting. I did not type them. I did not write them. I am not the author.’
52 He was pressed on that evidence. He later admitted that he prepared the document entitled ‘Optional Lease Details’ and the document relating to ‘Plant & Equipment’. He recognised that the font on those two pages was the same as the font on the page containing the disclaimer. Later, he accepted that there was every possibility that he retyped the brochure profit and loss statement. For reasons which will become clear later, that is very important. However, Mrs Bahr said that she prepared the figures for the brochure profit and loss statement and sent those figures to Mr Cross to be put under his letterhead. She said the document came back without any alteration to the figures she provided to Mr Cross.
53 Mr Bahr was not able to say whether he had a blank letterhead from Cross Corp Accounting on which he typed the brochure profit and loss statement or whether he had copied a Cross Corp Accounting letterhead blanking out the contents so as to provide him with a document on which he could type the brochure profit and loss statement.
54 Mr Bahr played an active and important part in the compilation of the brochure. He typed the disclaimer from a document which had been otherwise supplied to him by the fourth respondent. He created, in the physical sense, the brochure profit and loss statement. He also created the document containing the optional lease details and the document describing the plant and equipment. He was party to the compilation of a brochure which was prepared with the intention of creating, in the mind of the reader, that the document had been created by a firm of accountants and, indeed, a firm of CPAs. He knew that representation to be false. The document was created in that way to give the impression that the subject matter of the document had been subject to a form of due diligence by those accountants. The brochure was prepared for the purpose of providing information to potential purchasers. The intention was that those purchasers would rely upon the contents of the brochure.
55 I find that the figures which were included in the brochure, to which I will shortly refer, were figures that Mrs Bahr extracted from the first respondent’s records. I am not, however, on the evidence, able to make any finding as to whether Mr Bahr had any input into the actual figures which were included in the brochure except insofar as he typed them. I find, therefore, there being no evidence to the contrary, that the fifth respondent permitted the brochure to be published under the fourth respondent’s letterhead with the concomitant representation to the reader of the brochure that the financial figures had been prepared by the fourth respondent, a firm of CPAs.
56 For reasons which follow, I find that Mr Bahr and Mrs Bahr both knew that the information contained in the brochure profit and loss statement, and the précis, was false.
57 During the meeting Mrs Bahr told Mr and Mrs White that the asking price, as disclosed in the brochure, was not negotiable. The meeting ended with Mr and Mrs White saying that they would study the information in the brochure to determine whether they wished to pursue the purchase of the business.
THE EVENTS AFTER THE FIRST MEETING
58 Mr and Mrs White said that they discussed the contents of the brochure whilst driving from Cervantes to Miling. Mrs White said that the first thing that impressed her about the brochure was that it was prepared by an accounting firm which she described as ‘reassuring’. She said that she was particularly impressed with the stated net profit of $145,000 and that the business was said to be well priced. They discussed the purchase price, the net profit as disclosed in the brochure, and that the business was well priced. I find that Mr and Mrs White were genuinely interested in buying the business from the outset. I accept their evidence that they discussed the purchase of the business on the drive from Cervantes to Miling. Purchasing a business of this kind was consistent with their earlier stated plan of succession planning.
59 It was the evidence of both Mr and Mrs White, which I accept, that they did not read the disclaimer in the brochure or have any regard to it. I make that finding notwithstanding that Mr White said that it was possible that Mrs Bahr had showed him the disclaimer. Even if the applicants had read the disclaimer that would not have been fatal to their case: Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 35 FCR 535 per Burchett J at 556-558; Bowler & Another v Hilda Pty Ltd & Others (1998) 80 FCR 191 per Heerey J at 207. However, if they had read the disclaimer they might well have concluded the disclaimer was included to protect the first respondent and the CPAs. Paragraph 2 of the disclaimer represents that the brochure has been completed from information supplied by the first respondent. It also represents that the fourth respondent was associated with the provision of that information in the brochure. If they had read the disclaimer it would have supported the applicants’ evidence in that they said that they placed greater reliance on the brochure because it had been prepared by a firm of CPAs.
60 Mrs White was teaching almost full time during 1999. She was teaching at the Miling Primary School for two days and at the Bindi Bindi School for three days per week during the last term of 1999. Harvesting on the farm took place in November. Mr and Mrs White were distracted by reason of their respective responsibilities and I think put nothing in place in relation to the purchase of the business until later in the year.
61 On 14 October 1999 Mr and Mrs White signed a Memorandum of Offer to Sell one of their properties at Cervantes to their daughter and her partner who were then living at Kununurra. They accepted the offer on or about the same day. Originally, it was the applicants’ case that they sold this property because of the transaction they entered into with the respondents. They pleaded that as a result of the sale of this property by reason of entering into the transaction, they had lost the benefit of the increase in the value of the property ‘during the period between 28 February 2000 and the present time … namely the sum of $175,000’.
62 Mr White said in his evidence that the house was sold as a result of entering into this transaction. That could simply not be so. Mr and Mrs White made their offer to their daughter within about 11 days of the meeting with Mr Bahr and Mrs Bahr. At that time they had done nothing more than discuss the brochure with each other. They had sought no professional advice in relation to it or the representations contained in it.
63 I pointed out to Mr White during his evidence that I found it difficult to understand how it was that he claimed that he and his wife entered into the agreement to sell the house property to their daughter as a consequence of the transaction when, in fact, the transaction did not complete until 28 February 2000.
64 During the trial the applicants’ counsel applied to amend the pleadings to allege that the agreement to sell the house property to the daughter was as a consequence of the representations contained in the brochure, rather than as a consequence of entering into the transaction to accommodate the fact that the agreement to sell preceded the transaction.
65 I did not rule on that application but, on the next day of the trial, the applicants abandoned any claim for damages resulting from the sale of the Cervantes property to Mr and Mrs White’s daughter and her partner.
66 I think they were wise to do that. In my opinion, on the evidence, especially that of Mrs White, the agreement to sell the Cervantes property to Mr and Mrs White’s daughter was a consequence of the succession planning. They were planning to leave the running of the farm to their sons. I have no doubt they thought that they had to do something for their daughter and the agreement to sell the property at Cervantes was the result. In those circumstances, I do not need to discuss Mr and Mrs White’s evidence in relation to this transaction in any more detail than I have. However, I should say that I thought Mr White’s evidence was somewhat devalued by his evidence on this topic.
67 As I have already said, Mr Moore was retained as Mr and Mrs White’s accountant. Mr Moore completed a Bachelor of Business Degree in 1997 and graduated in 1998. Mr Moore became a registered tax agent in September 1998. Prior to obtaining his Bachelor of Business Degree, he had worked at Wesfarmers for about seven years from 1981. In about 1988 Mr Moore commenced working for a CPA, although he himself was not a CPA. He described himself as a Public Accountant. He said a CPA was ‘a much higher level of accountancy in terms of professional level’. He said:
‘A CPA usually does a longer course and has to adhere to a higher level of requirement and professional membership as well. A public accountant does not seem to have the same strict membership requirements and educational requirements.’
68 Nevertheless, Mr Moore did, as I have mentioned, complete a Bachelor of Business degree in which he completed 24 study units and majored in accountancy.
69 In 1995 Mr Moore commenced working for himself, together with his wife, in a bookkeeping partnership. It was during the time that Mr Moore worked at Wesfarmers that he became known to Mr and Mrs White, and it appears that Mr and Mrs White became his clients approximately two or three years after he started his own business.
70 It might be expected that Mr Moore’s work history would have made him familiar with the financial statements of retail businesses. It also might be expected that being accredited as a tax agent would have meant that he knew the information that was required to be included in a profit and loss statement for a retail business so as to give a true and fair view of a business’s financial affairs. Having regard to the events which followed, it appears more likely that he was not aware of those matters.
71 In his witness statement, Mr Moore said that Mr White first contacted him about the business in about early November 1999 but he did not take a note of the specific discussions which he had with Mr White. He said, ‘this appears to be the time that Brian first contacted me about having found a business in Cervantes known as the “Thirsty Point Liquor & Video”’. His first note of any conversation with Mr White about the purchase of this business was made on 8 December 1999. There are earlier notes of conversations with Mr White in relation to other matters such as a discussion regarding a front end loader but no note relating to the purchase of a business at Cervantes. In his evidence, he adhered to his witness statement that he had a recollection that he had been approached earlier than 8 December 1999.
72 Mr Moore was an honest witness. He was also careful about his evidence. I accept his evidence that he was at some time in early November 1999 contacted by Mr White and they had a general discussion about the purchase of the business.
73 Mrs Bahr and Mr Bahr relied upon the fact that Mr Moore was first spoken to in November or even December as supporting Mrs Bahr’s contention that the first meeting with Mr and Mrs White took place in November rather than October. Of course, it is not inconsistent with their argument. However, in the end result, I think the evidence does not support Mrs Bahr’s contentions. On Mr Moore’s evidence, he was given some information by Mr White in early November 1999. A further five weeks or so elapsed before Mr White spoke to him again and this time advised him that he would be receiving some information. In my opinion, the gap of five weeks between November 1999 and 8 December 1999 is consistent with my earlier finding that both Mr and Mrs White were distracted by their responsibilities during this period. I do not think the fact that Mr White first contacted Mr Moore in November 1999 and secondly contacted him on 8 December 1999, does support the respondents’ case that the first contact was in November 1999. In the end, I think the evidence is equivocal.
74 Some time probably in late November, Mrs Bahr gave to Mrs White a lever-arch file which contained invoices for purchases which the applicants kept over a weekend and returned on the Monday. Mrs Bahr said that there were two files which contained spreadsheets showing purchases, expenses and price lists. She said that she explained that she would not give them the first respondent’s tax returns because they contained other business dealings and therefore had no relevance to the liquor store. That matter was not explored with the applicants in their evidence. I am not prepared to make a finding that Mrs Bahr said that. I am not prepared to make a finding that, if Mrs Bahr said it, that it was true. I do not accept that the financial statements returned for taxation purposes of the first respondent contained ‘other business dealings’. They may have included a small amount of other revenue but, for reasons that follow, that sum is irrelevant because that amount of other revenue was contained in the sales figures in the brochure profit and loss statement. Mrs Bahr said that when the books were returned on the Monday morning Mrs White told her that ‘Ross said they were one of the best set of books kept he had ever seen’.
75 On or about 8 December 1999 Mr White spoke to Mr Moore and advised Mr Moore that he would be sent some information from the respondents. On 13 December 1999 Mrs Bahr sent to Mr Moore, by facsimile, copies of the following information which had been extracted from the brochure:
(1) Précis of Thirsty Point Liquor Store & Video;
(2) Profit and Loss Statement;
(3) Details of plant and equipment;
(4) A handwritten ledger detailing sales; and
(5) Optional Lease details.
He was also sent a further handwritten schedule which had not been included in the brochure.
76 Mr Moore was not sent the complete brochure by the respondents, nor was it ever supplied him by the applicants. Thus it was Mr Moore never saw the disclaimer in the brochure.
77 Mr Moore said that he ‘was impressed by the fact that the financial information was prepared by a CPA with a West Perth address’. He said:
‘That meant to me that the figures had a high degree of reliability and integrity. I worked for a CPA for a number of years and this had reassured me that the person who had prepared the documents, the subject of this court action, had high qualifications and high ethical standards. I put all CPAs in the same category as a result of my experience.’
78 In response to a question from me regarding the significance of his statement that the financial information was prepared by a CPA with a West Perth address, Mr Moore said ‘the better accountants are generally regarded as having a West Perth address, in comparison to smaller firms that – that tend to operate in outer suburbs’. He said that the firm of Cross Corp was not known to him at that time. Mr Moore said that a CPA was at a higher level in the profession to a public accountant. He said that a public accountant was at the ‘first floor’ level of accountancy. He said that a CPA does a longer course and has to adhere to a higher level of competence than a public accountant.
79 He, as I have said, was a registered tax agent. He agreed that to become a registered tax agent he had to demonstrate that he had a knowledge of the Income Tax Act and a level of knowledge of the preparation of financial statements.
80 Mr Moore’s instruction from the applicants was to examine the financial information which had been extracted from the brochure and to advise the applicants.
81 It was Mr Moore’s evidence that he told Mr White he had no previous experience in this kind of retail business but he would endeavour to advise them in relation to the profitability and the price of the business by comparing the figures contained in the brochure with similar businesses.
82 On about 15 or 16 December 1999 Mr Moore contacted Mr White and advised Mr White that he was making further inquiries and undertaking further research. He said that he recalled saying to Mr White that ‘it looked all right but I needed to make some inquiries and needed more than just one year’s figures’.
83 On 16 December 1999 Mr Moore sought further information from the fourth respondent in a facsimile. He does not now have a copy of that facsimile so he was not able to say what information was sought. At the same time, Mr Moore contacted the Small Business Development Corporation to ascertain whether there was any financial information on liquor stores available to compare the performance of the business under consideration. That was not fruitful but he did obtain information in relation to a liquor store in the southern suburbs which he sent to Mr White on 22 December 1999. That liquor store had a substantially lower net profit than the store in Cervantes.
84 On 17 December 1999 Mr Moore rang Mr Cross and asked him for a split up of the purchases for 1999. On the same day he received a facsimile from Cross Corp Accounting under the hand of Mr Lew Cross providing a split-up of the sales and purchases for the liquor and video store. The facsimile was in the following terms:
‘Re Thirsty Point Liquor Store
The split-up for sales and purchases for 1999 was as follows.
Liquor Videos
Sales 336328 36781
Purchases 196486 58% 11657 32%
* I haven’t got a split-up for the previous years but this can be extracted if required.
The purchases do not include freight which is shown separately.’
85 Mr Moore’s evidence was that on 17 or 21 December 1999 he had a further conversation with Mr Lew Cross in which he asked whether Mr Cross had allowed for changes in opening and closing stock. Mr Moore said he asked that question because the document he had been provided only showed a stock on hand figure at the bottom and not a movement in stock in the stock and purchase figures. He said that Mr Cross told him that the figures did allow a change in stock movement. He said, ‘I felt comfortable with his answer, he told me that everything was accounted for, I had no reason to doubt him and I felt confident that he had prepared the information correctly’.
86 I do not think Mr Moore’s evidence about when that conversation took place is correct. I do not think, however, he was intending to mislead me. I think he was simply confused about when he had that conversation with Mr Cross. Whilst he was not cross-examined on that matter, in fact, prior to 29 December, the only information that Mr Moore had was that contained in the brochure profit and loss statement. A copy of that document was received by Mr Moore on 13 December 1999. That did not show a stock in hand figure at the bottom of it: see item (4) at [38]. I think he is confusing information contained in a later document to which I will shortly refer. Because I think Mr Moore was an honest witness and doing his best to help, I accept he had that conversation but I do not accept that the conversation took place prior to 29 December 1999. The conversation, in my opinion, must have occurred after 6 January 2000 and before 28 February 2000. On 6 January 2000 Mr Moore received a copy of a profit and loss statement for the financial year 1998/99 which did have a stock in hand figure on the bottom. It was after receipt of that financial statement the conversation deposed to took place. The first, second and third respondents did not call Mr Cross and no other evidence contrary to Mr Moore’s assertion was tendered.
87 Mr Moore also had a number of conversations on 19 and 20 December 1999 with Mrs Bahr and was provided with a list of liquor purchases between 1980 and 1988. Mr Moore’s evidence was that he had formed the view by this stage that a business which would generate a net profit of the kind mentioned in the brochure profit and loss statement of $145,000 would meet all of Mr and Mrs White’s objectives. He said that he told Mr White that the business appeared to be a good business and compared to the information contained in relation to the other business to which I have referred, was a good acquisition. He said, in his evidence, that in coming to that opinion he relied on the fact that Mr Cross was a CPA. He said that he was reassured when he met Mr Cross at a meeting which took place on 29 December. Initially I had some doubts about Mr Moore’s evidence that he had relied on Mr Cross’ seniority in the profession and the fact that Mr Cross was a CPA. However, as his evidence unfolded and as I observed Mr Moore, I was satisfied that Mr Moore would have been impressed by the fact that Mr Cross was a CPA. I think Mr Moore established that by the number of inquiries he made of Mr Cross and his uncritical acceptance of what he was told Mr Cross.
88 Mr White said that he spoke to Mr Moore who told him that he had spoken to Mr Cross and Mrs Bahr, and they had confirmed that the business did make a net profit of $145,000 and, accordingly, did appear to be well priced. However, Mr White said that he was told by Mr Moore that (he) ‘should ask for figures for the 1998 and 1997 years’. He said that Mr Moore told him that Mr Moore had asked for those figures but was told by Mr Cross that these were not available because the statements included other businesses mixed in with the business. Mr Moore told Mr White that Mr Cross said he could extract the relevant information and would provide the relevant information at a later date. Mr White said that Mr Moore told Mr White to make the request for the earlier years’ information a condition for the sale of the business.
89 Of course, the conversation Mr White there deposed to with Mr Moore is not admissible to prove the truth of the contents of the conversation. It is admissible, however, for the purpose of proving Mr White’s state of mind. It establishes why he did what he did in the telephone conversation which followed with Mrs Bahr.
90 I find that on 23 December 1999 Mr White believed that the business made a net profit in the financial year 1998/99 in the order of $145,000 and was well priced.
91 On 23 December 1999 Mr White telephoned Mrs Bahr and told her that they would be prepared to purchase the business subject to a number of conditions which he had earlier discussed with Mr Moore. The conditions were that the offer would be subject to finance and that the vendor (the first respondent) provide ‘a split up for sales and purchases for the 1997 and ‘98 years’.
92 On 24 December 1999 Mrs Bahr rang Mrs White and arranged for a meeting to take place on 29 December at 11.30am at the offices of the fourth respondent.
93 On the same day, Mr White sent a facsimile to Mr Moore in the following terms:
‘24th/12/99
10.15am
Ross,
Had a chat with Johanna last night – let her know we would pay the price – with the “subjects too (sic)” as you and I discussed.
She is understandably busy for a few days but promises to have those other figures by 5th Jan. She rang Gloria this morning to say she has set up a day & time to meet & sign. She wants us to meet her at Lou Cross’s office Wednesday 29th Dec. at 11.30am. I’l (sic) have to ask you to keep this time free please. Perhaps we also should clearly outline what we want to include, even if its (sic) only to be pre organised when we get there.
Give us a ring back when you have time please – there’s probably no urgency now.
Brian’
94 That facsimile is contemporaneous evidence of the matters to which Mr White deposed in his evidence and confirms his evidence. I find, therefore, that Mr White did speak to Mrs Bahr on 23 December 1999 and told her that he and his wife agreed to purchase the business subject to the conditions to which I have referred. In my opinion, the imposition of those conditions by Mr White in that telephone conversation confirm Mr and Mrs White’s evidence that they were reliant upon the financial information which had been provided in the brochure in arriving at their decision to purchase the business.
95 It was also Mr and Mrs White’s evidence that they relied upon the fact that the brochure and the financial information contained in the brochure had been prepared by a CPA. I accept Mr and Mrs White’s evidence that that was a matter upon which they relied in entering into the contract of 29 December 1999.
96 At the meeting on 29 December 1999 the first applicant offered to purchase the business for $397,000 which included $57,000 worth of estimated stock. A deposit of $34,000 was payable within 10 days of the contract date and the balance was to be paid at settlement on 28 February 2000.
97 At the same time, the parties agreed to a number of conditions which were reduced to writing and a document entitled ‘Agreement to Purchase a Business’ was signed by Mr Cross, who was the attorney for Mr Micheal Bahr on behalf of the vendors, and Mr and Mrs White on behalf of the purchaser. The signatures were witnessed by Mr Moore.
98 The conditions of the agreement are important. They were:
‘1. Purchasers to apply for transfer of liquor license (sic) and advise vendors of progress of application.
2. Payment for stock to be made with 75% of valuation paid on take over with balance payable within 7 days.
3. The offer is subject to approval of finance by purchaser’s bank (P.I.B.A.) with latest date for approval 30 days from date of contract to purchase.
4. Vendor to provide purchaser with split-up of sales and purchases for the years 1996/97 and 1997/98.
5. Take over date and settlement will be 28th February 2000.
6. A copy of the proposed lease will be provided for final agreement of conditions.
7. Purchaser to obtain approval of Director of Liquor Licensing for transfer of liquor license (sic).’
99 Clauses 3 and 4 of the conditions are consistent with Mr White’s earlier evidence of his conversation with Mrs Bahr on 23 December 1999.
100 Mr White said that he relied upon the representations contained in the brochure and, in particular, the representation that the business earned a net profit of $145,000 in the 1998/99 financial year and that the figures were prepared by a CPA in entering into the agreement on 29 December 1999. I accept his evidence. I have no doubt that he relied upon the representation that the business had earned a net profit of $145,000 when entering into the agreement. He was also asked whether he would have entered into the agreement if he had known that the first respondent’s net profit for that financial year was only $2,983. He said he would not have entered into the transaction.
101 I also accept his evidence in that regard that there was no possibility that if Mr and Mrs White had known that the true net profit for the financial year ended 1999 was $2,983 that they would have entered into the agreement. The reason why he was asked whether they would have entered into the agreement if he had known that the first respondent’s true net profit was $2,983 is because later in the trial the applicants tendered the first respondent’s taxation return for the financial year ended 1999 and its financial statements for that financial year, both of which disclosed a net profit of $2,983.
102 Mrs White said that she relied upon the representations contained in the brochure that the business was well priced and had a net profit in 1999 of $145,000 in signing the contract on 29 December 1999. She also said that if she had known that there was a stock error in the brochure profit and loss statement which caused the net profit by itself to be overstated somewhere between $25,000 and $50,000, she would not have signed the contract to purchase the business. The reason why she was asked if she would have entered into the agreement on that date is that, on any understanding of the brochure profit and loss statement, the gross profit was overstated by in the order of $50,000.
103 I accept Mrs White’s evidence in all respects. I accept that both the second and third applicants, and thereby the first applicant, would not have entered into the agreement to purchase the business on 29 December 1999 except for the representations contained in the brochure to which I have already referred.
104 On 6 January 2000 the first applicant, by Mr and Mrs White, paid the deposit of $34,000 in accordance with the terms of the contract.
105 On the same day Mr Moore received three documents under the letterhead of Cross Corp Accounting, Certified Practising Accountants. The documents purported to be profit and loss statements for respectively the years 1996/97, 1997/98, and 1998/99. Mr Moore’s evidence was that the financial statements had been prepared by Mr Lew Cross. He based that assumption on previous discussions with Mr Cross and the fact that the documents were sent under the cover of Mr Cross’ firm’s letterhead. I accept that evidence. There was no evidence to the contrary.
106 The financial statement for the financial year 1998/99 which was supplied to Mr Moore was said to be a profit and loss statement which was in a similar, but not the same, form as the document contained in the brochure. This was the document which prompted Mr Moore to telephone Mr Cross to ask whether Mr Cross had allowed for changes in opening and closing stock. I find it was some time after 6 January 2000 that Mr Cross told him the figures allowed for a change in stock movement.
107 I set out the profit and loss statement for the financial year 1998/99 (‘the Moore 1999 profit and loss statement’) in its entirety so that the differences can be identified:
‘CROSSCORP ACCOUNTING
Certified Practising Accountants
(A division of Cross Sinclair & Novotny Pty Ltd)
ACN 066 358 889
THIRSTY POINT LIQUOR STORE & VIDEO
1998/99 FINANCIAL YEAR
PROFIT AND LOSS STATEMENT
INCOME
Video 36781
Liquor 336328
Stock Purchase
Video 12071
Liquor 196072
------------
GROSS PROFIT FROM TRADING 164966
Less:
OPERATING EXPENSES
Accounting 850
Bank Fees 800
Electricity and Gas 4804
Freight 1178
Insurance 2000
Liquor Tax and Fees 255
Motor Vehicle Expenses 1250
Printing and Stationery 750
Rates and Taxes 1324
Repairs and Maintenance 1000
Telephone 960
Wages - Casual 5000 20171
------- -------------
NET PROFIT 144795
STOCK ON HAND $57000
Ground Floor, Colord House, 33 Colin Street West Perth WA 6005 Postal Address PO Box 334 West Perth WA 6872
Whitford Office – Suite D, 1st Floor, Whitford City Shopping Centre, Hillarys WA 6025
Telephone (08) 9226 1660 Facsimile (08) 9226 2550 email address crosscor@crosscorp.cc’
108 The income from the two businesses in the Moore 1999 profit and loss statement is identified separately. The purchases for the two businesses are also identified separately. However, like the brochure profit and loss statement, the cost of goods is not identified, although in the Moore 1999 profit and loss statement the stock on hand (closing stock) is identified.
109 The operating expenses in the Moore 1999 profit and loss statement are $20,171, which is an increase over and above the $19,371 shown in the brochure profit and loss statement. The expenses are shown in a different order in the Moore 1999 profit and loss statement. The expenses for insurance have increased by $800, which accounts for the difference in the operating expenses in the two documents.
110 In the Moore 1999 profit and loss statement, the stock on hand is identified at $57,000. Of course, identifying the stock on hand as at 30 June 1999 is not sufficient to determine the cost of goods throughout the period. That could not be determined without first knowing the stock on hand as at 1 July 1998. The document could not be said to be a profit and loss statement which was prepared in accordance with accounting standards and, in that regard, did not disclose the true and fair view of the financial affairs of the first respondent.
111 In any event, as I have mentioned, Mr Moore was also provided with profit and loss statements for the two previous financial years. For the financial year 1997/98, the profit and loss statement (‘the Moore 1998 profit and loss statement’) disclosed:
INCOME
Video 41240
Liquor 327875
Stock Purchase
Video 6109
Liquor 244715
------------
GROSS PROFIT FROM TRADING 118291
OPERATING EXPENSES 23790
--------------
NET PROFIT 94501
Extra Stock on Hand 25883
------------
TOTAL 120384
========
STOCK ON HAND $82883
112 That document is important for a number of reasons, unfortunately, none of which were noticed by Mr Moore or understood by the applicants. First, the Moore 1998 profit and loss statement does not disclose opening and closing stock so that the reader could not identify the cost of goods and therefore could not determine the true gross profit. Secondly, and even more importantly, the author of that document, apparently because there was extra stock on hand, has brought that amount to account by adding it into the profit in determining a net profit. That, on any understanding of accounting principles, is quite wrong and means that the net profit is at least overstated by the amount brought to account of $25,883. Thirdly, the stock on hand as at 30 June 1998 was $82,883. Assuming that figure to be accurate, that figure should represent the opening stock for the financial year 1998/99. If the Moore 1998 profit and loss statement and the Moore 1999 profit and loss statement had been read together and understood properly, it would have been immediately apparent that the net profit disclosed in the Moore 1999 profit and loss statement was overstated by the amount by which the stock had reduced in that financial year, namely $25,883.
113 On any understanding therefore, whether the figures were otherwise accurately identified in the brochure profit and loss statement, the gross and net profits were overstated by the amount by which the stock had reduced in that financial year, namely $25,883. The representations that the gross profit and the net profit for the financial year 1998/99 was respectively $164,966 and $144,595 were false.
114 The profit and loss statement for the financial year 1996/97 (‘the Moore 1997 profit and loss statement’) was again in the same form as the previous documents. It disclosed:
INCOME
Video 40977
Liquor 313105
Stock Purchase
Video 10542
Liquor 219526
------------
GROSS PROFIT FROM TRADING 124014
OPERATING EXPENSES 29533
--------------
NET PROFIT 94481
========
STOCK ON HAND $55000
115 It is important to note that the stock on hand identified as at 30 June 1997 of $55,000 is $27,883 less than the stock on hand as at 30 June 1998. The figure, therefore, by which the net profit was increased in the Moore 1998 profit and loss statement by $25,883 was inaccurate by $2,000. Indeed, the figure by which the net profit was increased was the difference between the 1998 closing stock and the 1999 closing stock. Of course, for reasons already given, it was inappropriate to bring any figure to increase the net profit.
116 Unfortunately, Mr Moore did not appreciate that the documents which had been provided to him did not comply with accounting standards. He did not appreciate that the documents, even if they were accurate in relation to the figures contained in them, did not identify the true profit and loss for each of the years to which they referred. In particular, he did not appreciate that the brochure profit and loss statement, and the Moore 1999 profit and loss statement, did not disclose the cost of goods and thereby overstated both the gross and the net profits.
117 Instead, Mr Moore told Mr White that he could not find anything in the documents provided to him that contradicted the information in the brochure. I accept that he told Mr White that.
118 Mr Moore’s evidence was that he did not suspect that anything was wrong with any of the figures which were provided to him. He said he took all of the figures presented as having been prepared by Lew Cross, from discussions that he had with Mr Cross and also by reason of the fact that the documents were sent under cover of his letterhead.
119 In my opinion, I do not think Mr Moore can be criticised for assuming that the financial documents with which he was provided under the letterhead of the fourth respondent were prepared by that firm and by the fifth respondent himself. The documents announce themselves as being documents prepared by an accounting firm, indeed, a CPA firm, for and on behalf of the firm’s client. They were sent to him by the fourth and fifth respondents. No qualification was placed upon the information contained in the documents.
120 Mr Moore, and indeed Mr and Mrs White and thereby the first applicant, were entitled to rely upon the representations inherent in the documents themselves. I find that Mr and Mrs White continued to rely on the representations contained in the brochure and especially the representations contained in the brochure profit and loss statement at all times after signing the contract on 29 December 1999 and until settlement on 28 February 2000. In that regard, they relied upon the representations which were contained in the brochure and which had been identified above in paragraphs 11(a), (b), (c) and (e) of the statement of claim. They held that state of mind because none of the representations were corrected at any time by any of the respondents, including the fourth or fifth respondents. I will address the first, second and third respondents’ contention that the applicants relied upon Mr Moore’s advice in entering into the agreement on 29 December 1999 and later settling on 28 February 2000.
121 In order to satisfy condition 3 of the conditions of agreement of 29 December 1999, the applicants approached their bank, PIBA Bank, who was managed by Mr Gino Tetti. They may have approached the bank earlier but nothing turns on that.
122 On 13 January 2000 Mr White instructed Michael Whyte & Co to act as their solicitors in relation to the transaction. At the same time, he provided that firm with a copy of the contract. A later email from Mr White to Mr Mal Harford, a solicitor in that firm shows that the reason for instructing those solicitors was a distrust of Mrs Bahr.
123 On 17 January 2000 Mr White sent a facsimile to the fifth respondent in the following terms:
‘Lou – I have decided to engage Mal Harford from Michael Whyte & Co to look after our interests during the forthcoming settlement with “Thirsty Point”. As you can appreciate with the amount of money etc involved I don’t wish to make any mistakes. From my conversation with Mal – you and he know one another & are quite close together there in West Perth so it should work out well. When you have a draft copy of the lease available could you send it to him please. We have submitted details to PIBA & are now awaiting their reply.’
124 In my opinion, that memorandum to Mr Cross is consistent with the findings in relation to Mr and Mrs White’s reliance upon the information contained in the brochure. I am satisfied that Mr and Mrs White were both concerned about the amount of money they were spending in purchasing this business. They wanted to purchase a business which was both secure and profitable. They certainly did not wish to put any of the investment at risk.
125 On 21 January 2000 PIBA Bank approved the first applicant’s loan application and provided the applicants with a letter of offer. The first applicant already had a loan facility in place. On 21 January 2000 PIBA Bank agreed to increase that loan facility by $400,000, to a total of $985,000. That offer was accepted by the first applicant on 24 January 2000.
126 Some time in January 2000, prior to settlement, Mrs Bahr took Mrs White to Perth to introduce her to various suppliers so that Mrs White would get a better background knowledge of the business which was to be acquired and so that she would know the people with whom she would be dealing.
127 On 16 February 2000 the first applicant entered into a lease of the premises with the first respondent so as to enable the first applicant to conduct the business which was to be acquired on 28 February 2000 from those premises. On any understanding, the terms of the lease were onerous. The lease was for a term of 10 years with an option to the first applicant to renew the lease for a further period of 10 years. The commencing rent was $21,000 per annum payable by equal calendar monthly instalments in advance of $1,750 on the first day of each month throughout the term of the lease. The lease provided for a rent review every 12 months in accordance with rises in the Consumer Price Index and in accordance with a formula provided for in the third schedule of the lease.
128 Settlement took place on 28 February 2000. The first applicant incurred transactional costs as follows:
| Accounting costs | $695 |
| Legal costs | $1,120 |
| Stamp duty (transfer and lease) | $10,367 |
| Liquor authority fee | $400 |
| Stamp duty on mortgage (increased loan) | $1,600 |
| Additional mortgage | $1,120 |
| Closing a home loan account | $375 |
| | $15,677 |
129 All of the transactional costs including costs associated with borrowing claimed are clearly related to the purchase of the business, except perhaps the claim for $375. However, that last mentioned cost was incurred when the second and third applicants discharged the existing mortgage over their property so as to provide unencumbered security for the further advance by PIBA of $400,000.
130 I accept, as the respondents contended, that the applicants employed Mr Moore to advise them in relation to the transaction and, in particular, as to whether the purchase price was appropriate having regard to the profitability of the business and on the profitability of the business itself.
131 The applicants, in my opinion, were appropriately cautious about entering into this transaction as a result of which they employed Mr Moore. Their caution is also demonstrated by their employment of solicitors, Michael Whyte & Co.
132 I accept, as the respondents contended, that the applicants relied upon the advice given them by Mr Moore which was to the effect that the business had generated $145,000 of net profit in the 1999 year and that he was ‘not alarmed to suspect anything was wrong with the last three years figures’. However, the advice that was given was also in reliance upon the representations made in the brochure and, in particular, the representations in the brochure profit and loss statement. I accept Mr Moore’s evidence that he relied upon the same representations relied upon by the applicants, being the pleaded representations in paragraphs 11(a), (b), (c) and (e) of the statement of claim.
133 In my opinion, Mr Moore’s advice was wrong. He should have advised the applicants that the gross and net profits were overstated. He should have advised the applicants that the business did not have goodwill of $290,000 or, in fact, any goodwill. He should have advised the applicants that the business was not well priced. Because Mr Moore did not appreciate that the gross and net profits for 30 June 1999 were overstated, at least in the manner to which I have referred, he did not advise the applicants of those matters which meant that the applicants continued to rely upon the representations at all times up until the time of settlement. I find, therefore, that at all times prior to 28 February 2000 the three applicants believed and relied upon the representations that the business had generated a gross profit in the sum of $164,966 and a net profit in the sum of $145,595 in the financial year ended 30 June 1999. I also find that at all times prior to 28 February 2000 the applicants believed and relied upon the representation that, having regard to that net profit, the business was well priced at the sale price in the sum of $397,000. I further find that the applicants believed and relied upon the representations that the business was capable of continuing to generate a gross profit in the order of the gross profit achieved in the year ended 30 June 1999 and the net profit in the sum generated in the same year. They based those beliefs, in part, on the fact that they also believed and relied upon the representation that the brochure, and in particular the brochure profit and loss statement and the brochure précis, had been prepared by a CPA.
134 I find that the profitability of the business was critical to the applicants’ decision to purchase the business because the applicants recognised that the first applicant would incur substantially greater expenses than those incurred by the first respondent. They understood that the first applicant would have two significant additional expenses; namely, the interest paid on the money borrowed of $400,000 and the rent under the lease for the premises.
135 I find that they relied upon the representations made in the brochure as to the profitability of the business. They also relied upon the representations as to the value of the business. The applicants continued to rely upon those representations in the brochure which I have identified, including the representation that the brochure had been prepared by a CPA, at all times up to and including 28 February 2000. For reasons which follow, I further find that if the applicants had known that the gross and/or the net profits were overstated they would not have entered into the transaction.
WERE THE REPRESENTATIONS FALSE?
136 It would be convenient to consider whether the applicants have established that the representations were false.
137 The applicants pleaded in paragraph 13 of their statement of claim:
‘13. The representations pleaded in paragraph 11 hereof were made in trade or commerce and were misleading or deceptive or were likely to mislead or deceive contrary to and in breach of section 52 of the Trade Practices Act and/or section 10 of the Fair Trading Act in that:
(a) for the financial year ending 30 June 1999 the Business did not generate a gross profit in the sum of $164,966.00 or anywhere near that sum, or a net profit in the sum of $145,595.00 or anywhere near that sum;
(b) the Business was not well priced at the sale price in that the Business was worth substantially less than the sale price.
Particulars
Further and better particulars will be provided by way of expert evidence prior to trial;
(c) the Business was not readily capable of generating a gross profit in the sum of $164,966.00 or thereabouts per annum nor a net profit in the sum of $145,595.00 or thereabouts per annum or anywhere near that sum, nor was it likely that the Business would continue to do so.
Particulars
(i) In no other financial year has the Business generated profits in a sum anywhere near to the sums represented.
(ii) Since the date on which settlement took place, the Business has sustained the net losses and/or failed to make the profits represented herein.
Particulars
Particulars will be provided prior to trial
(iii) Insofar as the said representation is a representation as to a future matter, the applicants rely on section 51A of the Trade Practices Act and/or section 9 of the Fair Trading Act and say that none of the respondents had reasonable grounds on which to make the said representation; and
(d) there existed no reasonable grounds on which to make the representations pleaded in sub-paragraphs 11(a) to (c) hereof.’
138 Again, on the morning of trial, the applicants sought and obtained leave to add a further particular to paragraph 13 in the following terms:
‘(e) the accounts contained within the Brochure showing a net profit in the sum of $145,595.00 for the financial year ending 30 June 1999 had not in fact been prepared by a certified Practicing (sic) Accountant.’
139 I can deal with the last mentioned matter first. The brochure was not prepared by the fourth respondent. It was not prepared by a CPA. The brochure profit and loss statement and the précis were not prepared by a CPA. Insofar as the brochure, the brochure profit and loss statement or the précis represented that the brochure, the brochure profit and loss statement or the précis had been prepared by a CPA, the representation was false. I have already made findings as to the circumstances in which the brochure was prepared.
140 Not only was the representation that the accounts contained in the brochure were prepared by a CPA false, but that representation was known by the second and third respondents to be false. The brochure was deliberately constructed by the second and third respondents to give the false impression that it had been prepared by a firm of CPAs. The first, second and third respondents all intended that anyone reading the brochure would think that the brochure, and in particular the financial information contained in the brochure, had been prepared by a CPA.
141 The first respondent’s tax return for the year ended 30 June 1999 was tendered. The return identified the same income and expenses as the trading profit and loss statement disclosed in the financial report of the first respondent for the year ended 30 June 1999 (‘the taxation profit and loss statement’) which was also tendered.
142 As I have already said, the second respondent is the sole director of the first respondent. He and his brother are the shareholders. In cross-examination, Mr Bahr admitted that he was aware that the first respondent had lodged a tax return for 1999. The following exchange took place:
‘Mr Bahr, you’re aware of the fact of course that Thirsty Point Pty Ltd lodged a tax return for 1999?---Yes.
And you’re a director of Thirsty Point?---Correct.
And you’re aware of your obligations as a director?---Correct.
And as at 1999 you were the sole director of Thirsty Point?---Yes.
Is that correct? Were you also the sole shareholder?---At the time I wasn’t aware of it but my brother is also a shareholder.
Right. And I take it that as a director of Thirsty Point you wouldn’t make misleading statements to the Deputy Commissioner of Taxation?---Generally no.
Generally? Would you make misleading statements ----?---No. No, you would not.
And I take it that you wouldn’t allow any such statements to be made?---Correct.
That are misleading. So I take it therefore that the profit and loss statement for the year ended 30 June 1999 for Thirsty Point Pty Ltd trading as a liquor store is true and correct?---To the best of my knowledge, yes.
And I take that the expenses shown therein are expenses of Thirsty Point Pty Ltd trading as Thirsty Point Liquor Store?---Correct.’
143 Mr Bahr’s evidence is unequivocal. Because of the contents of the 1999 taxation return and the taxation profit and loss statement upon which that return is based, his evidence was against his own interests. I accept his evidence in this regard.
144 In particular, I find that the taxation profit and loss statement gave a true and fair view of the first respondent’s trading activities for the financial year ended 30 June 1999.
145 I find, therefore, that the taxation profit and loss statement represents a true and fair view of the first respondent’s trading performance for the financial year ended 1999.
146 I set out the taxation profit and loss statement for that year and for the previous year. The 1998 figures were disclosed in the 1999 financial statements but, in any event, the applicants also tendered the first respondent’s taxation returns for the financial years ended 1997 and 1998.
‘THIRSTY POINT PTY LTD
TRADING AS
THIRSTY LIQUOR STORE
TRADING, PROFIT AND LOSS STATEMENT
FOR THE YEAR ENDED 30TH JUNE 1999
|
| 1999 $ |
| 1998 $ |
| SALES Sales |
364,708 |
|
440,816 |
| LESS: COST OF GOODS SOLD |
|
|
|
| Opening Stock | 82,883 |
| 55,000 |
| Purchases | 233,729 |
| 349,713 |
|
| 316,612 |
| 404,713 |
| Closing Stock | 57,066 |
| 82,883 |
|
| 259,546 |
| 321,830 |
| GROSS PROFIT FROM TRADING | 105,162 |
| 118,986 |
| OTHER INCOME |
|
|
|
| Lease Rentals | - |
| 5,216 |
| Other Revenue | 8,400 |
| 8,578 |
| Capital Gain (Loss) on Sale of |
|
|
|
| Non-current Assets | - |
| 4,200 |
|
| 8,400 |
| 17,994 |
|
| 113,562 |
| 136,980 |
| EXPENDITURE |
|
|
|
| Accountancy Fees | 4,480 |
| - |
| Advertising | 659 |
| 5,233 |
| Bank Charges | 6,077 |
| 7,638 |
| Borrowing Costs | 896 |
| 648 |
| Casual Wages | - |
| 6,000 |
| Depreciation | 12,427 |
| 18,256 |
| Electricity | 10,785 |
| 11,425 |
| Filing Fees | 200 |
| 200 |
| Freight and Cartage | 672 |
| 220 |
| Hire of Plant & Equipment | 245 |
| - |
| Hire Purchase Charges | - |
| 1,964 |
| Insurance | 5,043 |
| 5,219 |
| Interest Paid | 16,899 |
| 16,499 |
| Legal costs | 5,200 |
| - |
| Licensing fees | 2,302 |
| 6,452 |
| Motor Vehicle Expenses | 12,864 |
| 17,656 |
| Printing and Stationery | 4,458 |
| 1,168 |
| Rates and Taxes | 1,963 |
| 2,479 |
| Repairs and Maintenance – Furniture, |
|
|
|
| Fixtures and Fittings | 480 |
| - |
| Telephone | 7,503 |
| 9,137 |
| Travelling Expenses | 3,762 |
| 3,469 |
| Wages | 13,664 |
| 12,000 |
|
| 110,579 |
| 125,663 |
| NET PROFIT | 2,983 |
| 11,317 |
The accompanying notes form part of these financial statements.
This report is to be read in conjunction with the attached compilation report.’
147 The gross profit from trading disclosed in the taxation profit and loss statement was $105,162. The net profit disclosed for taxation purposes by the first respondent was $2,983. The taxation profit and loss statement returned for the purpose of taxation should be compared with the brochure profit and loss statement contained in the brochure.
148 In the brochure profit and loss statement the total income disclosed is $373,109. That figure is the same as the sum of the sales and other revenue ($8,400) disclosed in the taxation profit and loss statement. It would be better for comparison purposes to leave out of account the other revenue when comparing the two profit and loss statements. The other revenue is not a trading profit and may not be generated in the business. That would mean on a comparison basis notionally reducing the brochure profit and loss statement sales by $8,400.
149 The gross profit disclosed in the taxation profit and loss statement is arrived at after taking into account opening stock, purchases and closing stock, i.e. the cost of goods sold. That is in accordance with accounting standards. The taxation profit and loss statement discloses opening stock of $82,883 and closing stock of $57,066. That is nearly the same as the stock on hand in the two profit and loss statements provided to Mr Moore some time after 6 January 2000: the Moore 1998 and 1999 profit and loss statements. The difference of $66 in the closing stock is immaterial. By bringing to account the opening and closing stock, the effect is to reduce the gross profit by the difference, i.e. $25,817.
150 The taxation profit and loss statement discloses purchases of $233,729. That may be compared with the purchases shown in the brochure profit and loss statement of $208,143. The difference is $25,586. There is no reason disclosed in either of the profit and loss statements for the difference. It is simply the case that the purchases disclosed in the brochure profit and loss statement are less. Of course, because the purchases are less in the brochure profit and loss statement, the gross profit and the net profit are higher by that amount.
151 Two factors operate to reduce the gross profit in the taxation profit and loss statement below that of the brochure profit and loss statement. The opening and closing stock is not disclosed in the brochure profit and loss statement which increases the claimed gross profit by $25,817. The purchases in the brochure profit and loss statement are stated to be $25,586 less than in the taxation profit and loss statement which increases the claimed gross profit by that amount. The combined effect is to arrive at a higher gross profit in the brochure profit and loss statement by $51,403.
152 If the figures in the taxation profit and loss statement are correct, which I find they are, the gross profit is overstated in the brochure profit and loss statement by $51,403. Of course, that would mean the net profit was overstated by at least that amount. The respondents did not attempt at any time during the trial to explain why it was that the brochure profit and loss statement overstated the gross profit by that amount.
153 The brochure profit and loss statement discloses ‘operating expenses’ of $19,371. The expenditure in the taxation profit and loss statement is $110,579. There are a number of items listed in the taxation profit and loss statement not referred to in the brochure profit and loss statement. However, it is instructive to compare the amounts claimed for the items included in the brochure profit and loss statement against the corresponding items in the taxation profit and loss statement. I set out that comparison:
| | Brochure | Taxation | Difference |
| Accounting | 850 | 4,480 | 3,630 |
| Bank fees | 800 | 6077 | 5,277 |
| Freight | 1,178 | 672 | (506) |
| Insurance | 1,200 | 5,043 | 3,843 |
| Liquor tax and fees | 255 | 2,302 | 2,047 |
| Printing and stationery | 750 | 4,458 | 3,708 |
| Motor vehicle expenses | 1,250 | 12,864 | 11,614 |
| Electricity and gas | 4,804 | 10,785 | 5,981 |
| Rates and taxes | 1,324 | 1,963 | 639 |
| Telephone | 960 | 7,503 | 6,543 |
| Repairs and maintenance | 1,000 | 480 | (520) |
| Wages – casual | 5,000 | - | (5,000) |
| Total | 19,371 | 56,627 | 37,256 |
154 There is a substantial difference ($37,256) between ‘the operating expenses’ disclosed in the brochure profit and loss statement and ‘the expenditure’ disclosed in the taxation profit and loss statement in relation to the items which are contained in both profit and loss statements. The respondents led no evidence to explain why it was that, for taxation purposes, a further sum of $37,256 was claimed in relation to the same operating expenses which were disclosed in the brochure profit and loss statement. Throughout the evidence there were suggestions, from time to time, by the second and third respondents that the first respondent carried on other businesses apart from the Thirsty Point Liquor and Video Store. I am not prepared to accept that the first respondent did carry on any other businesses during the relevant period. Indeed, I am not prepared to accept that the first respondent carried on any other business after 1 July 1997 apart from the business the subject of this proceeding.
155 On 7 March 2006 the third respondent swore an affidavit which was filed in this proceeding. He deposed:
‘3. In regard to all documents relating to other businesses conducted by the First respondents during the period 1 July 1997 to 30 June 2000:
(i) During this period of July 1st 1997 to 30th June 2000 there were no other businesses owned or operated by the First Respondent – Thirsty Point Pty Ltd other than Thirsty Point Liquor Store.
(ii) No businesses were sold by either the First, second or Third Respondents, during this period. The last business owned, operated and sold by the First Respondent was Pizza Point Takeaways. This business was sold in March 1997 with the lease signed on the 26/3/1997 to Dirk and Marie Frankhuizen (attached and marked “MWB1” & “MWB2” is a copy of said lease)
(iii) There were no Businesses sold, hence there was no funds generated, from a sale of a business.
(iv) There were no Businesses sold, hence there are no purchasers to be identified.
(v) No funds were received, deposited or diverted in regard to a sale of a business.
(vi) Neither was there any businesses registered during this period by either the First, Second and Third Respondents.
4. As to documents as evidence of expenses associated with any properties mentioned in the name of the First Respondent during the period of July 1st 1997 to June 30th 2000, including Interest Payments, expenses associated with loans and extent of fluctuating mortgage, NO records, documents, receipts, bank statements have been kept as they were destroyed after five years. The last disposal of our records occurred in January of 2005.
5. As to other relevant documentation that we have available so as to enable calculations to be made as to the true operating expenses of the First Respondent during the period of 1 July 1997 to 30 June 2000, we have none as all possible documents were destroyed in January 2005.
6. All business that was conducted outside of Thirsty point Liquor Store during this period was (sic) been conducted under the Thirsty Point Pty Ltd name.
7. Work conducted under Thirsty Point Pty Ltd was in regard to construction and motor vehicle repairs.
8. All funds raised by this work were deposited generally into the Thirsty point Pty Ltd cheque account.
9. Due to the length of time that has lapsed no records, documents, receipts, bank statements have been kept as they were generally destroyed after five years. The last disposal of our records occurred in January of 2005.’
156 It is clear from Mr Bahr’s affidavit that no business was conducted by the first respondent after July 1997 apart from the business the subject of this proceeding. It is also clear from paragraph 8 that any funds raised by the work which was said to be conducted in paragraph 7 were deposited into the first respondent’s cheque account and would form part of the total income of the first respondent. I accept the evidence in that affidavit.
157 In my opinion, that explanation was offered for the purpose of attempting to disguise the falsity of the brochure profit and loss statement and the other representations contained in the brochure.
158 There are additional items claimed in the taxation profit and loss statement which are not mentioned at all in the brochure profit and loss statement, being:
| Advertising | 659 |
| Borrowing costs | 896 |
| Depreciation | 12,427 |
| Filing fees | 200 |
| Hire of plant and equipment | 245 |
| Interest paid | 16,899 |
| Legal costs | 5,200 |
| Travelling expenses | 3,762 |
| Wages | 13,664 |
| Total | 53,952 |
159 No evidence was led by the respondents to explain the additional items which were claimed in the taxation profit and loss statement. As I have already said, Mr Bahr accepted that, to the best of his knowledge, the taxation profit and loss statement was true and correct.
160 It is clear from an examination of the two documents that the brochure profit and loss statement has overstated gross profit by $51,403. It has understated expenses by in the order of $91,208. In those circumstances, the representations contained in the brochure profit and loss statement as to the gross and net profit of the business in the financial year ended 1999 are false and materially so. Again, the respondents did not attempt to explain why it was that the first respondent had returned a net income of $2,983 for income tax purposes and, at the same time, represented in the brochure profit and loss statement a net profit for the same period of $145,595.
161 It is also instructive to compare the taxation 1998 profit and loss statement with the Moore 1998 profit and loss statement which was provided to Mr Moore by Mr Cross some time after 6 January 2000. The gross profit is very nearly the same. However, it is arrived at by a different route. In the Moore 1998 profit and loss statement the total of sales is $369,115 which is significantly less than the $440,816 in the taxation 1998 profit and loss statement. The opening and closing stock in the taxation profit and loss statement is the same as the closing stock in the Moore 1997 profit and loss statement and the closing stock in the Moore 1998 profit and loss statement. However, the purchases in the Moore 1998 profit and loss statement total only $250,824 compared with purchases of $349,713 in the taxation 1998 profit and loss statement.
162 Expenditure claimed in the taxation 1998 profit and loss statement is $125,663 compared with operating expenses of $23,790 disclosed in the Moore 1998 profit and loss statement. A close examination shows that the expenditure disclosed in the taxation 1998 profit and loss statement bear no relationship to the operating expenses disclosed in the Moore 1998 profit and loss statement.
163 It would follow, if the taxation profit and loss statement is correct, that the author of the Moore 1998 profit and loss statement has reduced the purchases which would have the effect of disguising the reduction in stock. It must be observed, yet again, that no attempt was made to explain the discrepancies to which I have referred.
164 As I have said, the applicants called Andrew Gilmour, who is a director of RSM Bird Cameron Corporate Pty Ltd, a director of RSM Bird Cameron and a partner of RSM Bird Cameron Partners. He qualified as a chartered accountant in the United Kingdom in early 1985 and migrated to Australia in late 1986. Prior to joining RSM Bird Cameron he was a senior manager with Coopers & Lybrand. He is a forensic accountant. As I have already said, Mr Gilmour was an impressive expert witness.
165 He prepared two expert reports; the first dated 6 May 2005 and the second dated 1 November 2005. Both were tendered. The matters upon which Mr Gilmour was retained to advise in his first report were:
(1) to identify the principal difference in the profitability of the liquor store business as operated by the vendor, Thirsty Point Pty Ltd, to the profitability of the business as operated by the purchaser, Brian White Family Trust;
(2) to compare the profitability of the liquor store business with industry averages as provided by CCH Australia Limited in its Profitable Practice benchmarking publication; and
(3) to review the information provided by Cross Corp Accounting to support the sale of the liquor store business and to consider the value of the goodwill of the business as at 30 June 2004 utilising the same basis of valuation as adopted in the purchase price of the business in the year ended 30 June 2000.
166 In doing so, Mr Gilmour analysed the results of the business for:
(a) the three years ended 30 June 1999 based on schedules prepared by the accountants (Cross Corp Accounting) of the vendor, Thirsty Point Pty Ltd; and
(b) the period of four years and four months, being from the date of acquisition in February 2000 to 30 June 2004 based on the accounts of the Brian White Family Trust prepared by their external accountant, Ross Moore & Associates.
167 He was not aware that the taxation profit and loss statement existed when he wrote his first report. That document was discovered by the respondents later.
168 Mr Gilmour analysed the information which had been provided by the fourth respondent to Mr Moore subsequent to 6 January 2000. He analysed the three profit and loss statements which I have variously described as the ‘Moore 1997, Moore 1998 and Moore 1999 profit and loss statements’. He wrote in his report of 6 May 2005:
‘3.2.3. Stock appears to have been incorrectly accounted for in the year ended 30 June 1999 with profit for that year overstated by $25,883. We have reached this conclusion from our review of the schedules and from analytical procedures we have undertaken and these are both discussed below.
3.2.4. On the schedules prepared for each year by Cross Corp Accounting stock on hand at the end of each year is shown as a note at the bottom of the schedule but, with the exception of the year ended 30 June 1998 no adjustment of stock has been made. Stock on hand at 30 June 1997 was $55,000, at 30 June 1998 $82,883 and at 30 June 1999 $57,000. The profits for the year ended 30 June 1998 have been increased by $25,883 from $94,501 to $120,384 for the additional stock on hand. The results for 30 June 1999 have not been similarly adjusted for the reduction in stock holding in that year. The table below illustrates this issue.’
169 Mr Gilmour prepared the following table:
TABLE 1
| | Year ended 30 June 1997 | Year ended 30 June 1998 | Year ended 30 June 1999 | |||
| | $000 | % | $000 | % | $000 | % |
| | | | | | | |
| Liquor sales | 313 | 100.0 | 328 | 100.0 | 336 | 100.0 |
| Liquor purchases | 220 | 70.3 | 245 | 74.7 | 196 | 58.3 |
| |
|
|
|
|
|
|
| Gross profit | 93 | 29.7 | 83 | 25.3 | 140 | 41.7 |
| |
|
|
|
|
|
|
| Operating expenses | 30 | 9.6 | 24 | 7.3 | 20 | 6.0 |
| | | | | | | |
| Net profit from liquor before stock adjustment | 63 | 20.1 | 59 | 18.0 | 120 | 35.7 |
| | | | | | | |
| Extra stock on hand | - | - | 26 | 7.9 | - | - |
| |
|
|
|
|
| |
| Net profit from liquor | 63 | 20.1 | 85 | 25.9 | 120 | 35.7 |
| | | | | | | |
| Net profit from video | 31 | | 35 | | 25 | |
| |
| |
| |
| |
| Total net profit | 94 | | 120 | | 145 | |
| |
| |
| |
| |
| Stock on hand | 55 | | 83 | | 57 | |
| |
| |
| |
| |
170 He concluded in his report:
‘As shown in Table 1 above the incorrect treatment of stock has overstated the results for the year ended 30 June 1999 with the gross profit increasing from 25.3% for the year ended 30 June 1998 to 41.7% for the year ended 30 June 1999 and net profit of the liquor business being 35.7% of turnover for the year ended 30 June 1999 compared to 25.9% of turnover for the year ended 30 June 1998. Table 2 below restates the results of TPL for the three years ended 30 June 1999 in accordance with generally accepted accounting principles (“Australian GAAP”).’
171 During his cross-examination, Mr Bahr’s attention was drawn to the exercise carried out by Mr Gilmour in Table 1 above. It was pointed out to him that the purchases had decreased markedly and the gross profit had increased by almost 50 per cent. He was unable to explain how that had occurred. The prices did not increase by 50 per cent. It was also put to him that the net profit had increased substantially in the financial year ended 30 June 1999. Again, he could not account for how that had occurred. In the end result, neither the second or third respondent could explain the obvious discrepancies between the different financial statements.
172 Mr Gilmour’s analysis shows that whilst sales increased slightly over the three years under review the purchases, in the third year, which is the subject year, decreased markedly. Because the purchases decreased the gross profit, therefore, the net profit increased markedly.
173 In that first report, because he was unaware of the existence of the taxation profit and loss statement, he assumed, apart from a small stock error, that the other figures contained in the various Moore profit and loss statements were correct. He therefore confined himself to a criticism of the error contained in the brochure profit and loss statement which did not have the opening and closing stock, and two other small errors which are not relevant.
174 Mr Gilmour also undertook a comparison of the trading results over the period between the three years ended 30 June 1999 and the four years ended 30 June 2004. He excluded the financial year when the business was conducted for eight months by the first respondent and four months by the first applicant because he was not provided with the first respondent’s trading figures during that period. He compiled the following table:
TABLE 5
|
| Year ended 30 June 2004 $000 | Year ended 30 June 2003 $000 | Year ended 30 June 2002 $000 | Year ended 30 June 2001 $000 | Year ended 30 June 1999 $000 | Year ended 30 June 1998 $000 | Year ended 30 June 1997 $000 |
| Sales | 554 | 506 | 411 | 400 | 336 | 328 | 314 |
| Cost of sales
| 466 | 412 | 336 | 336 | 222 | 217 | 220 |
| Gross profit
| 88 | 94 | 75 | 63 | 114 | 111 | 94 |
| Gross profit %
| 15.9 | 18.6 | 18.2 | 15.8 | 33.9 | 33.8 | 29.9 |
| Expenses | 91 | 100 | 94 | 98 | 20 | 24 | 30 |
| Net profit/(loss)
| (3) | (6) | (19) | (35) | 94 | 87 | 64 |
| Net profit % | - | - | - | - | 28.0 | 26.5 | 20.4 |
175 In that table Mr Gilmour has made an adjustment to the gross profit in the year ended 30 June 1999 in accordance with his previously expressed opinion.
176 The following matters can be observed. In each financial year sales have increased. During the time that the first respondent conducted the business the cost of sales hardly moved. On the other hand, when the first applicant conducted the business, the cost of sales increased as sales increased. That would be expected because, as sales increased, purchases increased and therefore the cost of sales would have increased.
177 After the adjustment to which I have referred, the gross profit during the period when the business was conducted by the first respondent was either nearly 30 per cent or above 30 per cent. When the business was conducted by the first applicant, the gross profit was nearly 16 per cent or at high 18.6 per cent.
178 During the period when the first respondent conducted the business, expenses reduced even though sales increased. The same phenomenon occurred during the period when the first applicant conducted the business. However, the expenses differ markedly. That could be accounted for in part by the two expenses which the first applicant incurred by reason of the acquisition, namely interest and rent. Even so, there is a substantial difference in the expenses when the business was conducted by the different parties.
179 Lastly, Mr Gilmour compared the average gross profit obtained by the two parties during their respective periods against the industry information for liquor barns and bottle shops for the period 1998 to 2002.
180 During that period, the industry average gross profit was 20.97 per cent. The average gross profit whilst the first respondent conducted the business was 32.53 per cent and when the first applicant conducted the business the average gross profit was 17.13 per cent. He concluded that the gross profit obtained by the first respondent was significantly above the industry average.
181 In his second report, Mr Gilmour identified the extra material which was supplied him, being the financial report for the first respondent for the year ended 30 June 1999 and the income tax return for that company for the same year. He was therefore in possession of the taxation profit and loss statement.
182 Mr Gilmour observed that the gross profit margin disclosed in the taxation profit and loss statement and the expenses contained in the same statement ‘are more consistent with the operations of the Business as referred to in our report of 6 May 2005 than the results recorded in the Cross Corp Accounting schedule’. The ‘Accounting schedule’ to which he was there referring were the 1997, 1998 and 1999 Moore profit and loss statements. He also observed that the results recorded in the taxation profit and loss statement were more consistent with the results achieved by the first applicant when it acquired the business.
183 He carried out the exercise which I have addressed above. In doing so, he relied upon the correctness of the taxation profit and loss statement. For reasons given earlier and for the reasons immediately above, that was an assumption that was appropriate to be made.
184 In Appendix C to his second report he identified the differences in the taxation profit and loss statement and the brochure profit and loss statement which is the same analysis carried out in [147] to [160] above.
185 In that exercise, which I have no doubt was correct, he concluded that the gross profit was overstated by $51,404 and the net profit overstated by $141,812.
186 Mr Gilmour carried out other exercises which indicated that the rate of return for the business after 1 March 2000 was slightly below the industry level. The rate of return, as disclosed in the profit and loss statements provided to Mr Moore, was significantly greater than the industry level. That all supports the applicants’ case that the figures disclosed in those financial statements and, in particular, the brochure profit and loss statement, were false.
187 It was put to Mr Gilmour in cross-examination that he had not taken into account that the first respondent conducted other businesses or other activities. He agreed with that proposition. It was his evidence that he accepted the correctness of the taxation profit and loss statement which was in all respects identical to the figures returned on the first respondent’s tax return.
188 It was put by Mrs Bahr in her cross-examination of Mr Gilmour that the company had been involved in other activities, like building of a home and motor vehicle repairs. He said that he did not see, on the information supplied him, any other income other than income generated by sales of liquor and hire of videos. The only items in the expenditure disclosed in the taxation profit and loss statement which might be affected by any of the work said to have been conducted in paragraph 7 would be motor vehicle expenses and, perhaps, hire of plant and equipment. None of the activities to which Mrs Bahr alluded could have had any material effect upon the opinion expressed by Mr Gilmour.
189 For reasons already given, I reject the respondents’ assertions in cross-examination that the first respondent carried on any other business during the relevant period which affected the income or expenditure in the taxation profit and loss statement.
190 I accept Mr Gilmour’s evidence in its entirety. In my opinion, his evidence clearly supports a finding that the representation made in the brochure profit and loss statement for the year ended 30 June 1999 that the business generated a gross profit in the sum of $164,966 and a net profit in the sum of $145,595 was false.
191 In my opinion, the applicants have established that the representations pleaded in paragraphs 11(a), (b), (c) and (e) were misleading and deceptive, and a contravention at least by the first respondent of the Trade Practices Act.
The events after settlement
192 On or about 28 February 2000 the parties did a stocktake. Mrs Bahr assisted for some few days after the acquisition of the business by the applicants. It was Mrs Bahr’s evidence that she worked for two weeks with Mrs White in the business. Nothing turns on how many days she was involved. She showed them how to operate the equipment. She provided some advice as to how the stock should be priced. The prices recommended by her were very similar to recommended retail pricing guidelines.
193 It was the applicants’ evidence that they ran the business exactly as it had operated previously for the balance of that financial year, even down to keeping the respondents’ casual employees. The applicants adopted the price list provided to them by Mrs Bahr for about 18 months. Mrs White said that she learned through experience that some of the stock was overpriced and, as a result, it did not move off the shelf. There was also stock that just did not sell. The applicants changed the stock composition and deleted lines that were not selling. They focussed their wine sales on boutique Western Australian wines that had good profit margins and were moving quickly.
194 Mrs White made inquiries of other outlets to ascertain their mark-ups. Eventually, the first applicant joined the Western Cellars Group in 2003. Joining that group cost $385 per month but the first applicant usually obtained a rebate of $250 per month. The advantages of being part of a group were buying at a low price and participating in promotions run by the group as a whole.
195 Mrs White observed that each year turnover was increasing but the profitability of the business was not improving.
196 The shop was open long hours. In summer the applicants open the premises from 9.00am to 9.00pm six days a week. During winter the shop is open from 9.00am to 8.00pm six days a week. There is no liquor trading on Sunday. The video side of the business is open on Sundays during summer and winter from 4.00pm to 6.00pm. The premises are therefore open between 74 and 68 hours per week depending upon the season.
197 Over the period that the applicants have operated the business, it was only on one occasion when they traded shorter hours and that was when they were overseas in England and the shop closed at 7.30pm.
198 Up until about 12 months before trial when Mrs White reduced her hours in the business to five days a week, she worked all six days. When she reduced her hours, of course, she had to employ other staff to replace her. I accept her evidence. An examination of the first applicant’s profit and loss statements for the financial years ended between 2000 and 2004 show that little was expended on staff wages:
| 2000 | nil |
| 2001 | 4,500 |
| 2002 | 4,631 |
| 2003 | 6,786 |
| 2004 | 8,671 |
199 The award which governs the rate of pay for an employee in a business like this is The Licensed Establishments (Retail and Wholesale) Award. It appears that the hourly rate of pay would be in the vicinity of $14 or $15, although the rate would have varied over the time. However, it follows that the employees who worked with or relieved Mrs White would not have worked more than 6-12 hours per week. She must have worked over this period for at least 60 hours per week.
200 I find therefore that Mrs White has worked at least 60 hours per week in the business over the period since 28 February 2000.
201 Mr White has continued to carry on some farming activities and has not worked full time in the business. He does, however, work part time in the business. He stacks the cool room. He makes deliveries. He unloads deliveries to the store and he relieves Mrs White so that she can have a rest. Mr and Mrs White estimated his hours worked in the business. I was provided with the workings showing how that figure was arrived at:
| hours per week |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
|
| Jan | 35.0 | 35.0 | 35.0 | 25.0 | 25.0 | 25.0 |
|
| Feb | 32.0 | 32.0 | 32.0 | 22.0 | 22.0 | 22.0 |
|
| Mar | 30.0 | 30.0 | 30.0 | 20.0 | 20.0 | 20.0 |
|
| Apr | 37.0 | 37.0 | 37.0 | 27.0 | 27.0 | 27.0 | Easter |
| May | 20.0 | 20.0 | 20.0 | 10.0 | 10.0 | 10.0 |
|
| Jun | 20.0 | 20.0 | 20.0 | 10.0 | 10.0 | 10.0 |
|
| Jul | 17.5 | 17.5 | 17.5 | 7.5 | 7.5 | 7.5 |
|
| Aug | 15.0 | 15.0 | 15.0 | 5.0 | 5.0 | 5.0 |
|
| Sep | 16.0 | 16.0 | 16.0 | 6.0 | 6.0 | 6.0 |
|
| Oct | 20.0 | 20.0 | 20.0 | 10.0 | 10.0 | 10.0 |
|
| Nov | 28.0 | 28.0 | 28.0 | 18.0 | 18.0 | 18.0 |
|
| Dec | 40.0 | 40.0 | 40.0 | 30.0 | 30.0 | 30.0 | Christmas |
| Average week | 25.9 | 25.9 | 25.9 | 15.9 | 15.9 | 15.9 | 20.9 Avg.5y. |
202 I accept the applicants’ evidence that Mr White has worked in the order of the hours claimed and, on average, 20.9 hours per week in the business. He does not now work as long as he did. On the applicants’ calculations he has probably reduced his hours from 25.9 hours or thereabouts to 15.9 hours which arrives at an average of 20.9 hours.
203 The applicants provide price discounts in an endeavour to attract custom. They have spent money on advertising. They have extended the range of alcohol available.
204 Mrs Bahr cross-examined Mrs White about discounting and put it to her that it was inappropriate to discount in a small town. Mrs White disagreed. She also disagreed with the proposition that discounting adversely affected the profit margins.
205 In my opinion, there is nothing in the respondents’ criticism. The small amount of discounting that has been done by the applicants in the conduct of the liquor business has had no material effect upon the profitability of the business.
206 Mrs Bahr also said that there were substantial changes in the industry after February 2000. Prices dropped sharply. The liquor industry started going crazy. Competition was forcing prices lower and lower generated by competition between big chains, such as Liquorland, Liberty Liquor and Woolworths. The Federal Government introduced GST in July 2000. Mrs Bahr said that in June 2000 the coastal road between Jurien Bay and Cervantes opened which made the trip between the two towns quicker and thereby made it easier for the residents of Cervantes to buy their liquor in Jurien Bay. It was put in cross-examination of Mr and Mrs White that the opening of the road to Jurien adversely affected the business. The applicants would not accept that as a proposition. There is no evidence which would support a finding that the new road had any adverse effect on the business.
207 The applicants were cross-examined about a social occasion in February 2001 when they had dinner with Mrs Bahr and her husband at Mr and Mrs Bahr’s new house. The applicants agreed that they did not complain to Mrs Bahr about any aspect of the business. I would not have thought that they would complain. At that stage, they did not suspect that the information contained in the brochure was inaccurate. By then they realised the business was not as profitable as the brochure had suggested. They had not identified why it was that they were not able to make a better return.
208 Eventually, the applicants reduced the mark-up. It was probably about 18 months after they purchased the business. They were satisfied that the mark-ups were too high and causing buyer resistance. They were also satisfied that the business was not profitable. They thought the way to address that problem was to increase turnover. Thus, they reduced the mark-ups.
209 Mrs White also agreed that she had never complained to Mrs Bahr. I see nothing surprising about that. Having seen Mrs White in the witness box, I would not expect her to be a person who would complain.
210 Mrs Bahr cross-examined both Mr and Mrs White about the lease of the premises and as to why they had not made any inquiries about the extent of the rental that was payable. Mrs White said that the rent would not have been a problem if the business had returned the net profit represented in the brochure profit and loss statement.
211 Mr and Mrs White were also cross-examined about negotiations relating to the purchase of the premises in 2005. In my opinion, the evidence does not establish, as the respondents contended, that the applicants poorly managed the business by discounting the prices of products and by reducing the trading hours of the business. Nor does the evidence support a claim that external factors impacted in any way upon the profitability of the business. In particular, there was no evidence to support the assertion that the opening the new road to Jurien Bay impacted upon profitability. Nor was there any evidence that the actions of competitors and other relevant businesses impacted upon the profitability of the business.
212 Mrs Bahr criticised the applicants for their failure to negotiate with the first respondent in relation to the purchase of the premises, the subject of the lease. A company was formed by traders in Cervantes for the purpose of acquiring land upon which a shopping centre would be built. The applicants, and especially Mr White, were involved in the venture. In 2004 the joint venture vehicle, Goldspark Pty Ltd, made an offer to purchase the premises. Eventually, Mrs Bahr discovered that Mr White was connected with Goldspark Pty Ltd. Negotiations took place but broke down. Mrs Bahr was critical of the applicants for their failure to disclose their association with Goldspark Pty Ltd and for their failure to purchase the premises. There is nothing in that criticism. The applicants were perfectly entitled to take an interest in a company which was formed for the intention of purchasing land in Cervantes to build a shopping centre. They were perfectly entitled not to divulge that information to the respondents or any of them. They were also entitled to allow that corporation to make an offer to the first respondent to purchase the premises. They were under no obligation to disclose their interest in that corporation.
213 Mrs Bahr’s cross-examination, and indeed the whole conduct of the respondents’ case, did not recognise that the brochure profit and loss statement, on any understanding, overstated the gross profit by $51,403.
214 The respondents ran their case upon the assumption that the representations in the brochure were true and that the lower profitability experienced by the applicants after the purchase of the business could be explained by the factors to which I have referred.
215 Unfortunately, the assumption is wrong. For reasons which I have explained, on any understanding, the representations made in the brochure were false. It therefore follows, that all of the criticisms which were made of Mr and Mrs White and the first applicant of the way in which they conducted their business were irrelevant. They were not even relevant on damages because the first applicant presented its case upon the basis that it was entitled to be put back in the position it would have been if it had not entered into the transaction. The first applicant did not seek damages based on trading losses after February 2000. The second and third applicants sought damages by reference to their lost wages and sustained efforts occasioned by their participation in the business after that date. In those circumstances, the criticisms made by the respondents of the applicants’ conduct of the business were mainly irrelevant. In any event, however, none of the criticisms were made out.
216 I find that throughout the period after 28 February 2000 and until trial, both Mr and Mrs White worked the hours that they claimed in the business. They made every attempt to operate the business efficiently and, in doing so, marketed the business appropriately. They did not discount to the point where the profitability of the business was adversely affected. There was no supervening event which affected the profitability of the business after it was acquired on 28 February 2000.
217 Indeed, in my opinion, although the turnover of the business improved markedly through the combined efforts of Mr and Mrs White, the business was not capable of generating any greater profits than can be seen were generated by the applicants.
Was there a delay in electing to bring these proceedings?
218 Mr Moore said that about four months after the business was acquired, Mr and Mrs White approached him relating to their trading results. In October 2000 he analysed the trading results for the period after acquisition until 30 June 2000. The gross profit was about 20 per cent as at 30 June 2000. Mr Moore said that Mr and Mrs White spoke to him about that figure and that all three of them were concerned that the figure was nothing like the respondents’ figures which had been supplied prior to acquisition of the business.
219 Initially, Mr Moore thought that the reduced profitability might be as a result of Mr and Mrs White still learning the business or, alternatively, because of an inaccurate stocktake which was first conducted in June 2000.
220 Mr Moore considered the figures over the next few years. He could never reach a conclusion as to why the first applicant could not achieve a rate of return seemed to be achieved by the first respondent.
221 It was not until 2005 when the applicants decided to sell the business that the applicants realised that the business had been unprofitable to the extent that it had over the period of time during which they conducted the business.
222 I accept the evidence of the second and third applicants that they did not become aware until early 2005 that the business was as unprofitable as it was. It was not until then that they were told by a Mr Murray Brown whom they had employed to advise on the sale of the business that they had paid far too much for the business and that the business, notwithstanding the substantial increase in turnover, since February 2000 was still only worth $150,000 to $190,000, of which $100,000 consisted of stock.
223 I find that the second and third applicants worked hard in the business throughout that whole period. They did everything possible to increase the turnover. At no time prior to early 2005 were they aware that they may have paid too much for the business or that the brochure contained representations which were not true. In those circumstances, it was reasonable for the first applicant to continue to conduct the business and for the second and third applicants to continue to work in the business. It was also reasonable for them to continue to do so after that time whilst these proceedings were on foot.
224 In any event, it is no part of the first, second and third respondents’ case that there was any delay on the part of the applicants in the bringing of these proceedings. Indeed, their case was predicated upon the basis that the applicants bought a viable business which was subsequently badly managed and subject to other circumstances which affected the business’ viability. In those circumstances, this is not a case of the kind in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 2) (1989) 40 FCR 76 where the Court held that the damages should be limited to a point of time when the respondents should have abandoned the business.
225 I do not intend to reduce the applicants’ damages by reason of their continuing to conduct the business up until trial.
THE ISSUES
226 It is the applicants’ case that the representations which I have found made, were made in trade or commerce and were misleading or deceptive or likely to mislead or deceive contrary to and in breach of s 52 of the Trade Practices Act and/or s 10 of the Fair Trading Act. The applicants pleaded that the representations were made by the first respondent through the medium of the second respondent: paragraph 10 of the statement of claim. The representations relied upon are those in the brochure: paragraph 11 of the statement of claim. It is not pleaded that the third respondent made the representations. They claim that they relied upon the representations. The first applicant claims that in reliance on the representations it entered into the agreement of 28 December 1999 with the first respondent and that it paid a deposit, and that it proceeded to settlement on or about 28 February 2000 and acquired the business. It further claims that in reliance upon the representations it entered into a lease with the first respondent of the premises. It is pleaded that the third applicant, also in reliance upon the representations, gave up her job as a teacher to work full time in the business. There is no separate plea that the second applicant did or did not do anything in reliance upon the representations. I will return to that.
227 The applicants claim that, as a result of the representations and the first applicant purchasing the business and entering into the lease of the premises, they suffered loss or damage.
228 The applicants pleaded their losses separately and it will be necessary in due course to say something of those separate claims for damages.
229 The applicants claim that the first and second respondents, in making the representations referred to, contravened s 52 of the Trade Practices Act and/or s 10 of the Fair Trading Act: paragraph 13 of the statement of claim.
230 The applicants plead in the alternative that the second respondent was a person within the meaning of s 75B of the Trade Practices Act who was knowingly concerned in or a party to the contraventions of the first respondent: paragraph 17 of the statement of claim. The applicants have particularised the alternative claim against the second respondent.
231 The claim against the third respondent is that the third respondent was a person, again within the meaning of s 75B of the Trade Practices Act, who was knowingly concerned in or a party to the contraventions of the first respondent or, alternatively, he contravened s 10 of the Fair Trading Act. The plea is important enough to be reproduced:
‘18. Further or alternatively, at all material times the third respondent was a person within the meaning of section 75B of the Trade Practices Act who was knowingly concerned in or party to the contraventions of the first respondent pleaded in paragraph 13 hereof or alternatively contravened section 10 of the Fair Trading Act.
Particulars
(a) The third respondent acted with reckless disregard as to whether the representations contained in the Brochure pleaded in paragraph 11 hereof were true or correct.
(aa) The third respondent was well aware that the Brochure disclosed the operating expenses of the Business to be in the sum of $19,371.00 for the financial year ending 30 June 1999 and the profit and loss statement of the first respondent (which formed part of the first respondent’s tax return for the corresponding period and was not disclosed to the applicant) disclosed operating expenses to be $110,579.00;
(ab) Further, the Brochure disclosed a gross profit in the sum of $164,966.00 for the financial year ending 30 June 1999 and a net profit in the sum of $145,595.00 for the financial year ending 30 June 1999 which level of profitability was entirely at odds with the profit and loss statement of the first respondent for the financial year ending 30 June 1999 (which formed part of the first respondent’s tax returns for the said period) which merely disclosed a net profit for the said period in a sum of $2,983.00
(b) The third respondent well knew that the said representations would be relied on by any prospective purchaser of the Business, including persons in the position of the applicants.
(c) The third respondent being a director and shareholder of the first respondent worked in the Business of the first respondent and accordingly was well aware that the Business generated little or no profit in that:
(a) the tax returns of the second respondent disclosed receipt of the following income from the Business activities of the First Respondent during the period between 1997 and 2000
(A) $1,030.00 for the financial year ended 30 June 1997
(B) $1,000.00 for the financial year ended 30 June 1998
(C) $1,000.00 for the financial year ended 30 June 1999
(D) $1,000.00 for the financial year ended 30 June 2000;
(b) the tax returns of the third respondent disclosed receipt of the following income from the Business activities of the First Respondent during the period between 1997 and 2000;
(A) $6,430.00 for the financial year ended 30 June 1997
(B) $3,600.00 for the financial year ended 30 June 1998
(C) $5,664.00 for the financial year ended 30 June 1999
(D) $6,000.00 for the financial year ended 30 June 2000
(c) order to earn additional income the third respondent at times during the said period worked for West Coast Hi-Fi as an employee.’
232 The applicants claim alternatively that each of the respondents owed a duty of care to persons in the position of the applicants to exercise reasonable skill and care to ensure that the information contained in the brochure was true and correct. It is pleaded that, in breach of that duty of care, the respondents failed to exercise reasonable skill and care so as to ensure that the information contained in the brochure was true and correct.
233 As against the first respondent, the applicants claim damages under s 82 of the Trade Practices Act. Alternatively, the first applicant claims ‘rescission of the lease of the premises [at Lot 221, 8 Cadiz Street, Cervantes] … alternatively such variation of rental and outgoings as in all of the circumstances is just’. In the further alternative, the applicants claim relief under s 87 of the Trade Practices Act as the Court sees fit. There is a separate claim for damages for ‘negligent misstatement’. I take that to be a characterisation of the breach of duty claim. The applicants also claim interest and costs against the first respondent. No relief is sought under the Fair Trading Act even though it is pleaded that the first respondent contravened s 10. For reasons which follow, the applicants do not need to rely upon the Fair Trading Act in their claim against the first respondent.
234 As against the second and third respondents, the applicants claim damages under s 79 of the Fair Trading Act or, alternatively, under s 82 of the Trade Practices Act. Alternatively, the applicants claim damages for ‘negligent misstatement’. Again, the applicants seek interest and costs against the second and third respondents.
235 The first, second and third respondents filed a joint defence. In that pleading, they admitted that the brochure contained the representations pleaded in paragraph 11 of the statement of claim but pleaded that the representations were true. They admit that the first applicant and the first respondent entered into an agreement pursuant to which the first applicant agreed to purchase the business from the first respondent in the sum of $397,000. They do not admit, however, that the first applicant paid a deposit or that the first applicant proceeded to settlement on or about 28 February 2000 and, on that date, paid to the first respondent the balance of the sale price. They do not admit that the first applicant entered into a lease with the first respondent as alleged in the applicants’ statement of claim. They also do not admit that the third applicant gave up her job as a teacher to work full time in the business in reliance upon the representations.
236 Specifically, in relation to the applicants’ plea that the first applicant entered into a lease with the first respondent, the respondents plead that the applicants’ conducted their own due diligence of the business before entering into the agreement to purchase the business and acted in reliance on their own due diligence and the advice of their advisor, Mr Moore, in entering into that agreement to purchase the business.
237 The respondents deny that the applicants have suffered any loss or damage but, in particular, plead that if the applicants have suffered any loss or damage it was as a result of either the poor management of the business by the applicants or external factors, being the opening of a new road between Cervantes and Jurien Bay and the actions of competition and other relevant businesses.
238 The second and third respondents put in issue the applicants’ claim that they are liable, pursuant to s 75B of the Trade Practices Act, as persons knowingly concerned in or party to the contraventions of the first respondent. The respondents deny that the third respondent is a person who has contravened s 10 of the Fair Trading Act.
A MATTER NOT PLEADED
239 Specifically, and this is important for what follows, the respondents did not plead that the applicants’ action was not brought within the time prescribed by s 79(2) of the Fair Trading Act.
240 These proceedings were commenced by application filed on 9 May 2005. The agreement to purchase the business and the lease were entered into on 28 February 2000. The proceedings were therefore brought nearly five years after the transaction was completed.
241 During the hearing I raised with the applicants’ counsel whether the proceedings had been brought within time, as provided for in the legislation relied upon. The applicants have sought relief under both s 82 and s 87 of the Trade Practices Act. At the time when the transactions which were sought to be impugned occurred, s 82(2) relevantly provided:
‘82(1) A person who suffers loss or damage by conduct of another person that was done in contravention of Part IV, IVB or V or section 51AC may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.
(2) An action under subsection (1) may be commenced at any time within three years after the date on which the cause of action accrued.’
242 However, the Trade Practices Act was amended by the Trade Practices Amendment Act (No 1) 2001 (Cth) (the ‘amending Act’) and s 82(2) was amended by Item 20 in Schedule 1 of the amending Act.
243 Item 20 of Schedule 1 of the amending Act provides:
‘20 Subsection 82(2)
Omit all the words after “within”, substitute “6 years after the day on which the cause of action that relates to the conduct accrued.’
244 Item 21 of the Schedule to the same amending Act provides:
‘21 Application of item 20
(1) The amendment made by item 20 applies in relation to conduct engaged in or after the commencement of that item.
(2) The amendment made by Item 20 also applies in relation to conduct engaged in before the commencement of that item, but only if the period that:
(a) relates to the conduct; and
(b) applied under subsection 82(2) of the Trade Practices Act 1974 before the commencement of that item;
had not ended when that item commenced.’
245 Item 21(2) is relevant. It has the effect that Item 20 will apply so as to extend the time within which a party has to bring proceedings to six years in respect of conduct which occurred prior to the commencement of the item where the three year period in which a party had to bring proceedings under s 82(2) had not ended when that item commenced.
246 Section 2(1) of the amending Act provides:
‘2(1) Subject to subsection (2), this Act commences on the 28th day after the day on which it receives the Royal Assent.
247 Subsection (2) is not relevant; it applies to other amendments. The amending Act received Royal assent on 28 June 2001. Item 20 therefore commenced 28 days after that date, namely 26 July 2001.
248 The same reasoning applies to the time limit prescribed by s 87(1CA) as the time limit under s 82(2).
249 Section 87(1CA), before the amendment by the amending Act, provided:
‘(1CA)An application under sub-section (1A) may be commenced—
(a) in the case of conduct in contravention of Part IVA – at any time within 2 years after the day on which the cause of action accrued; or
(b) in any other case – at any time within 3 years after the day on which the cause of action accrued.’
250 Item 31 of Schedule 1 of the amending Act provides:
‘31 Subsection 87(1CA)
Repeal the subsection, substitute:
(1CA) An application under subsection (1A) may be made at any time within 6 years after the day on which the cause of action that relates to the conduct accrued.’
251 Item 32 relevantly provides:
‘32 Application of item 31
…
(2) The amendment made by item 31 also applies in relation to conduct engaged in before the commencement of that item, but only if the period that:
(a) relates to the conduct; and
(b) applied under subsection 87(1CA) of the Trade Practices Act 1974 before the commencement of that item;
had not ended when that item commenced.’
252 Therefore, where the time limit under s 87(1CA) had not expired at the commencement of the item, the longer time limit prescribed by Item 31 applies. The amendment also came into force on 26 July 2001.
253 It follows that the applicants’ action for damages and other orders under the Trade Practices Act have been brought within the time limits provided for in s 82(2) and s 87(1CA) of that Act.
254 Section 79 of the Fair Trading Act is in relevantly the same terms as s 82(1) and s 82(2) of the Trade Practices Act before the amending Act. Thus it is that s 79(2) of the Fair Trading Act requires an action to be commenced at any time within three years after the date on which the cause of action accrued. Unlike s 82(2), s 79(2) has not been amended. The applicants’ action under s 10 of the Fair Trading Act, therefore, was not brought within the time prescribed by s 79(2) of the Fair Trading Act. There is no power in the Fair Trading Act to extend the time within which a party may bring an action. There is no Commonwealth provision which could apply. The Limitations Act 1935 (WA) does not contain any provisions which would empower the Court to extend time for a statutory cause of action. The Limitations Act 2005 (WA) does deal with extensions of time but not to a cause of action under the Fair Trading Act. In any event, the Limitations Act 2005 only applies to causes of action that accrued on or after the commencement date of that Act. My research has not uncovered any other provision in any Western Australian legislation which would enable this Court to extend the time within which the action may be brought.
255 The applicants contended that because the first, second and third respondents have not pleaded the benefit of s 79(2) of the Act, the applicants were not debarred from prosecuting their action for damages under s 79. The applicants contended that the respondents had waived their right to insist that the applicants complied with s 79(2).
256 Section 79, as I have said, is in like terms to s 82 as it was prior to the amending Act. Section 82 of the Trade Practices Act was considered by the Full Court of the Federal Court of Australia in State of Western Australia v Wardley (1991) 30 FCR 245. Section 79 creates a right and gives a remedy. Section 79(2) prescribes a time limitation which has a procedural character. It follows, as was said in State of Western Australia v Wardley at 259, that s 79(2) is ‘a condition of the remedy rather than an element in the right and a prerequisite to jurisdiction which cannot be waived’. The Court said at 259:
‘It follows that it is for a defendant to assert non-compliance, rather than for a plaintiff to assert compliance with s 82(2) as an element of the cause of action.’
257 More importantly, the Court continued at 259:
‘The need for compliance with s 82(2) may be waived by the defendant and an estoppel may prevent the defendant denying such a waiver. If the defendant fails to plead the limitation, this may be taken as a waiver of the need for compliance with s 82(2).’
258 More recently, the High Court said in Murphy and Another v Overton Investments Pty Ltd (2004) 216 CLR 388 at [56] that the onus of establishing that a party’s claim was statute barred lay on the respondent and could be discharged by pleading and establishing that defence.
259 Where a statute of limitations bars the remedy but not the right, the defence under the statute must be expressly pleaded: Cigna Insurance Asia Pacific Ltd v Packer (2000) 23 WAR 159 at 171; Pullen v Guttridge, Haskins and Davey Pty Ltd (1993) 1 VR 27 at 71-72.
260 The respondents were unrepresented at trial but when their defence was filed they were represented by solicitors who settled the defence.
261 Moreover, I raised this matter at trial. I specifically brought to the attention of the parties the question of limitations. No application was made at trial by the first, second and third respondents to amend their defence to plead the effect of s 79(2). After the trial concluded, the first, second and third respondents became represented and new solicitors filed a Notice of Acting. No application was made after judgment was reserved to amend the defence to plead the effect of s 79(2).
262 The failure to plead s 79(2) may therefore be said to have caused it to be waived by the first, second and third respondents. It follows therefore that, in my opinion, the applicants are entitled to have their action disposed of on the merits.
ADDRESSING THE ISSUES
263 The applicants have established that the representations which I have found were contained in the brochure were made and were false. They were made by the first respondent when the second respondent published the brochure to the second and third applicants, and thereby the first applicant.
264 The representations were made in trade or commerce. The transaction which was contemplated in the brochure had, by its very nature, a trading or commercial character. The applicants have therefore established that the first respondent has contravened s 52 of the Trade Practices Act. Subject to the matters raised in the respondents’ defence, the applicants will, if loss is established by the respondents’ conduct, be entitled to damages against the first respondent pursuant to s 82 of the Trade Practices Act. In those circumstances, I do not have to determine whether the applicants are entitled to damages against the first respondent pursuant to s 79(1) of the Fair Trading Act for a contravention of s 10 of that Act.
265 As I have already said, the applicants’ claim against the second respondent is both under the Trade Practices Act and the Fair Trading Act. To succeed under the Trade Practices Act, the applicants, on their pleadings, must establish that the second respondent was a person within the meaning of s 75B of the Trade Practices Act who was knowingly concerned in or a party to the contraventions by the first respondent of s 52. Section 75B of the Trade Practices Act is in pari materia to s 68 of the Fair Trading Act. However, the applicants have not relied upon s 68 of the Fair Trading Act so that section does not need to be addressed.
266 To succeed under the Fair Trading Act, in respect of their claim against the second respondent, the applicants on their pleadings must establish that the second respondent herself contravened s 10 of that Act. I will return to that aspect of the applicants’ claim against the second respondent.
267 Section 75B of the Trade Practices Act provides:
‘(1) A reference in this Part to a person involved in a contravention of a provision of Part IV, IVA, IVB, V or VC, or of section 75AU or 75AYA, shall be read as a reference to a person who:
(a) has aided, abetted, counselled or procured the contravention;
(b) has induced, whether by threats or promises or otherwise, the contravention;
(c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d) has conspired with others to effect the contravention.
(2) In this Part, unless the contrary intention appears:
(a) a reference to the Court in relation to a matter is a reference to any court having jurisdiction in the matter;
(b) a reference to the Federal Court is a reference to the Federal Court of Australia; and
(c) a reference to a judgment is a reference to a judgment, decree or order, whether final or interlocutory.’
268 A corporation may contravene s 52 without intending that its conduct mislead or deceive another person: Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 228. A corporation therefore acting honestly can still be found to have contravened the section: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 197.
269 Section 82 (damages) and s 87 (other orders) make a corporation, as defined in s 4, liable in damages and to other orders for a contravention of s 52. Corporations cannot act, of course, except through a human agency, being its directors, servants or agents: Fencott v Muller (1983) 152 CLR 570 at 583 per Gibbs CJ. The effect of s 75B is to apply the provisions of s 82 and s 87 to any person who has been involved in a contravention of those parts of the Trade Practices Act mentioned in s 75B(1) by reason of any of the conduct in paragraphs (a)-(d) of s 75B(1). Those persons may be the corporation’s directors, servants or agents. It is not only directors, servants or agents who may be caught by s 75B but, for the purpose of this case, it is enough to consider only that class.
270 In this matter the question is whether s 75B applies to either or both of the second respondent and third respondent so as to allow the Court to make an order for damages against one or both of them as persons involved in a contravention of s 52 of the Trade Practices Act.
271 Section 75B(1) prescribes the particular circumstances where a person who has not himself or herself contravened s 52 can be made the subject of an award of damages or may be made the subject of other orders. In that sense, it is a procedural section which widens the class of persons who may be the subject of orders under the Trade Practices Act. The section instances four separate ways in which a person may be made subject to orders under ss 82 or 87. In this proceeding the applicants have, in their claims against the second and third respondents, only relied on one of those paragraphs, namely s 75B(1)(c).
272 Section 75B was considered by the High Court in Yorke v Lucas (1985) 158 CLR 661. In that case, a corporation sold its business to the appellants. A land agent, which was also a corporation, acted on behalf of the vendor. A director of that land agent acted in the sale of the business. The trial judge found that the vendor had contravened s 52 of the Trade Practices Act. He also found that the land agent company had contravened s 52 but unwittingly. He found that a director of the vendor had aided and abetted or, alternatively, was knowingly concerned in the contravention by the vendor and by virtue of s 75B was a person involved in the vendor’s contravention. However, he found that a director of the land agent company was unaware and had no reason to suspect the information supplied by the director of the vendor and thereby the vendor was incorrect. He dismissed the case against the director of the land agent company on the ground that the appellant had failed to prove that the director was aware or should have been aware of the relevant facts before he could be said to have been involved in the contravention. His decision was upheld by the Full Court of the Federal Court and the purchasers appealed to the High Court. The appellants argued that the respondent was caught by paragraphs (a) and (c) of s 75B(1). They argued that s 75B(1), or at least paragraphs (a) and (c), did not require the appellants to prove any intent on the part of the respondent based upon knowledge of the material facts.
273 In dealing with paragraph (a) of s 75B(1), Mason ACJ, Wilson, Deane and Dawson JJ (the majority) applied principles of the criminal law because the words used in s 75B(1)(a) are taken directly from the criminal law. In particular, they relied upon a previous decision of that Court in Giorgianni v The Queen (1985) 156 CLR 473 which had held that in the criminal law where a party is accused of aiding and abetting, the party must have knowledge of the essential matters which go to make up the offence before the party can form the requisite intention even if the party does not know that those matters amount to a crime. The majority said at 667-668:
‘If par.(a) of s 75B imports the requirements of the criminal law, it is clear in the light of Giorgianni v The Queen that Lucas could only be brought within that paragraph if he intentionally aided, abetted, counselled or procured a contravention by the Lucas company of s 52 of the Trade Practices Act. Upon the findings of the trial judge, however, Lucas lacked the knowledge necessary to form the required intent. A contravention of s 52 involves conduct which is misleading or deceptive or likely to mislead and deceive and the conduct relied upon in this case consisted of the making of false representations. Whilst Lucas was aware of the representations – indeed they were made by him – he had no knowledge of their falsity and could not for that reason be said to have intentionally participated in the contravention.’
274 A similar construction was given to s 75(1)(c). The majority said at 670:
‘There can be no question that a person cannot be knowingly concerned in a contravention unless he has knowledge of the essential facts constituting the contravention.’
275 The majority concluded at 670:
‘In our view, the proper construction of par.(c) requires a party to a contravention to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention.’
276 The distinction between the inquiry into the corporation’s conduct for a s 52 contravention and a person’s liability under s 75B(1) was addressed by Brennan J at 676-677:
‘As we have seen, the actual misleading or deception of a person is not an element of a contravention of s. 52, though a person seeking compensation under s. 82(1) must establish that his loss or damage resulted from the contravening conduct. In determining who is civilly liable for a s. 52 contravention under s. 75B(a) no question arises as to whether the person upon whom liability is sought to be imposed knew that another person would or might be misled or deceived by the contravening conduct. But s. 75B(a) does require knowledge of the acts constituting the contravention and of the circumstances which give those acts the character which s 52 defines, namely, “misleading or deceptive or … likely to mislead or deceive”. As the net of civil liability for a contravention does not catch those who would not be caught if s. 52 created an offence, honest ignorance of the circumstances which give a representation which is likely to mislead or deceive is inconsistent with civil liability under s. 75B(a). The operation of s. 75B(a) in conjunction with s. 52 may be incongruous, for s. 52 throws a strict liability on a corporation, but s. 75B(a) does not extend liability for a s. 52 contravention to a person who procures the corporation to engage in contravening conduct if that person is honestly ignorant of the circumstances that give that conduct a contravening character.’
277 He said in relation to s 75B(1)(c) at 677:
‘Nor, in my opinion, does par. (c) of s. 75B impose a stricter liability. The juxtaposition of “knowingly concerned in” and “party to” in a statute defining criminal liability (e.g., s. 5 of the Crimes Act) would deny to the latter term a construction equivalent to “unknowingly concerned in”. A “party to” an offence is one who, by the principles of the common law, would be held to be criminally liable for the offence.’
278 It must be actual knowledge not constructive knowledge that is established. There may be circumstances where knowledge may be inferred: Pereira v Director of Public Prosecutions (1988) 82 ALR 217 at 219-220. But that is still a factual inquiry as to whether the particular person was seized of the actual knowledge. Where knowledge is sought to be inferred it must be the only rational inference available. The person said to be accessorily liable, if s 75B(1)(c) is relied on, must not only have the necessary knowledge, the person must also be involved in a contravention of the relevant provision of the Act. Therefore, there must be some evidence of a participation in the contravention by the corporation.
279 For the reasons already given, it is my opinion that the second respondent well knew that the brochure contained representations which were, in material respects, false. That having been established, the applicants have established an actual rather than a constructive knowledge of the essential matters that make up the contravention. The applicants have established that there is a close rather than a remote involvement in the contravention: Fencott v Muller (1983) 152 CLR 570 at 584. The second respondent was an intentional participant in the first respondent’s contravention. The second respondent constructed the brochure and included the figures which made up the brochure profit and loss statement for the financial statement. She published the brochure to the second and third applicants. She was directly involved in the contravention by the first respondent of s 52 of the Trade Practices Act.
280 It follows, therefore, that the applicants have established that the second respondent was knowingly concerned in or a party to a contravention by the first respondent of s 52 of the Trade Practices Act.
281 In my opinion, the applicants have also established that the second respondent contravened s 10 of the Fair Trading Act. The second respondent’s conduct in publishing to the second and third applicants, and thereby the first applicant, the brochure which contained the false representations means that inevitably a finding must be made that she contravened s 10 of the Fair Trading Act. It was her action which caused the company to contravene s 52 of the Trade Practices Act. Necessarily, her action is a contravention of s 10 of the Fair Trading Act.
282 Arktos Pty Ltd v Idyllic Nominees Pty Ltd [2004] FCAFC 119 (‘Arktos Pty Ltd v Idyllic Nominees Pty Ltd’) was a case in the Full Court of the Federal Court mainly concerned with practice and procedure. However, the case is instructive in relation to the ambit of s 10 of the Fair Trading Act. In that case, the appellant had purchased a business from the first respondent. The primary judge found that the third respondent, who was a director of the first respondent, made misleading precontract representations and held, as a result, that the first respondent had thereby engaged in misleading conduct in trade or commerce contrary to s 52 of the Trade Practices Act. The misleading representation related to profitability and value of the business. The primary judge considered the third respondent’s liability but dismissed the action against him on the ground that, whilst it was pleaded the third respondent had acted within the scope of his actual or apparent authority as a director or agent of the first respondent, the pleading did not allege that the third respondent engaged in conduct in trade or commerce on his own account. He also found that there was no plea that the third respondent was knowingly concerned in the contravention as defined in s 75B of the Trade Practices Act or s 68 of the Fair Trading Act. He concluded at [77] that therefore no ‘derivative liability under the Act or the Fair Trading Act, was made out against [the third respondent] in respect of conduct by Idyllic held to contravene s 52 of the Act or s 10 of the Fair Trading Act’. The appeal was against the primary judge’s failure to grant the appellants relief against the third respondent.
283 In their joint judgment, Carr, Tamberlin and RD Nicholson JJ set out the appellants contentions:
‘7 The first is that the conduct of Mr Price, which was the conduct of Idyllic in this matter, was itself in trade or commerce and attracted primary liability under ss 10, 77 and 79 of the FTA, because that conduct was misleading.
8 Secondly, the appellants contend that it is no part of a cause of action under those sections that a director or agent engages in misleading conduct “on his own account”.
9 Thirdly, the appellants say that the statement of claim adequately raised a cause of action under those sections of the FTA against Mr Price.
10 Finally, the appellants say that, if they do not succeed on their third point, the statement of claim pleaded all the facts found at trial sufficient to sustain a cause of action under ss 10, 77 and 79 of the FTA against Mr Price and he would have been afforded procedural fairness had judgment been entered against him.’
284 The Court observed that the appellants had not only sued the company but also the third respondent and that circumstance indicated that the appellants sought relief against the third respondent. The Court said at [13]:
‘The authorities show that a director of a corporation who acts on its behalf in the course of trade or commerce also acts himself or herself in trade or commerce and, if the corporation is liable under a State Fair Trading Act for their conduct, they also attract primary liability under the same statute: Cleary v Australian Co-operative Foods Ltd (1999) 32 ACSR 701 at [54]-[57]; Lauriana Pty Ltd v Corfield Food Warehouse Pty Ltd, unreported, Supreme Court of Western Australia, Wallwork J, 28 April 1995 at 6 and 22; Citibank Ltd v Liu [2003] NSWSC 569 at [53] and the cases there discussed, and Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) 141 ALR 525 at 541. That is supported in particular by the provision in s 84(2) of the TPA and s 82(2) of the FTA that conduct engaged in on behalf of a body corporate by a director within the scope of actual or apparent authority is deemed ‘also’ to have been engaged in by the body corporate. It is not correct, as the case for the third respondent asserted, that the principle recognized in these authorities is applicable only when there is a finding of ‘separate conduct’ by the director; that is, conduct other than in the capacity of director or agent. It is accepted in J D Heydon, Trade Practices Law, Law Book Company, Sydney, 1989 at 18.350 that corporate officers acting in the course of their employment, or in the scope of their authority as agents causing the corporation to be liable under s 84(2) also have personal liability. It is added there that in normal circumstances such officers will be knowingly concerned in the conduct: s 75B(c).’
285 The Court went on to say that it was not a question as to whether the third respondent had some sort of derivative liability under the equivalent of s 75B of the Trade Practices Act (s 68 of the Fair Trading Act) but whether the appellants had adequately raised a cause of action against the third respondent based upon his contravention of s 10 of the Fair Trading Act. The case then went on on a question of pleading.
286 The passage to which I have referred is, in my opinion, clear. Where a director who is acting on behalf of a corporation engages in conduct which would make a corporation liable for a contravention of the Fair Trading Act, the director or agent also is liable under s 10 of the same Act. The director or agent need not be acting separately or be engaged in conduct in trade or commerce different from that of the corporation. The liability does not attach to the director because of the provisions of s 68 of the Fair Trading Act, although in normal circumstances the director or agent will also be knowingly concerned in the conduct of the contravention. As there is a primary liability under s 10, it is unnecessary to resort to the accessorial liability established by operation of s 68 of the Fair Trading Act.
287 In Citibank Ltd v Liu [2003] NSWSC 569, an employee of a corporation (Mr Wong), who was not a director, presented draw down notices to a bank for the purpose of certifying certain matters necessary for a lease to the company. The notices contained false representations which were not known to the employee. In those circumstances, accessorial liability under s 75B of the Trade Practices Act did not attach. However, Hamilton J, in the New South Wales Supreme Court, held Mr Wong liable under s 42 of the Fair Trading Act 1987 (NSW) which is the equivalent of s 10 of the Fair Trading Act (WA). Hamilton J said at [53]:
‘In my view, no difference is made to the application of the principle by the fact that the representor on behalf of a corporation is an employee. The fact that he is an employee does not negative the fact that he is acting as an agent. That the FTA may impose liability on employees acting as such is illustrated by Australian Competition and Consumer Commission v McCaskey (2000) 104 FCR 8. That was a case under the TPA but, as the conduct involved telephone communications, the provisions bound natural persons as well as corporations. The injunctive orders were made by consent, but French J scrutinised them carefully to see that they were authorised by the Act (see at 21). His Honour made orders against the employee who had engaged in the conduct. In Primcom Pty Ltd v Sgarioto (1994) ATPR (Digest) 46-135, a case under the Victorian FTA, Eames J held an estate agent liable for misleading conduct although his principals selling their own house could not be held liable because not engaged in trade or commerce. The FTA proscribes conduct by natural persons. If that conduct is in trade or commerce and cannot be said not to be misleading conduct of the person who engages in it by reason that that person is acting merely as a conduit, in my view the person is not removed from the purview of the Act by the fact he is engages (sic) in the conduct as the employee of another.’
288 The matter went on appeal to the Court of Appeal and is reported sub nomine Wong (as Executor of the Estate of the Late Casey Wong) v Citibank Limited [2004] NSWCA 396.
289 Mr Wong, who died subsequent to the trial, was the general manager of the corporation of which Ms Liu was the principal. His executor appealed against the finding of the trial judge that Mr Wong had breached s 42 of the Fair Trading Act (NSW). The Court of Appeal said at [17]-[19]:
‘In the course of his reasons, the trial judge referred to John G. Glass Real Estate Pty. Limited v. Karawi Constructions Pty. Limited (1993) ATPR 41-249, where the Full Court held that an agent (in that case a real estate agent), who had transmitted a false misrepresentation to it by the owner, itself engaged in conduct that was misleading and deceptive. Here, his Honour held that it did not matter that the “agent” was an employee. In support of this proposition, he relied upon the decision of French J in Australian Competition and Consumer Commission v. McCaskey (2000) 104 FCR 8 where French J made injunctive orders against an employee who had engaged in the misleading and deceptive conduct.
Counsel for the appellant submitted that McCaskey was not binding on this Court and was of little persuasive authority in circumstances where the issue as to whether an employee could be liable under s.52 had not been fully argued. He submitted therefore that his Honour erred in placing reliance upon it. Although McCaskey is a first instance authority, French J is an experienced Federal Court judge who, in the Full Court system of that court, sits both at first instance and on appeal. His decision commands respect, and, if the appellant wishes this Court not to have regard to it, an attempt should have been made to establish that his Honour was wrong in some respect or that there was some reason why the case had no application or was irrelevant to the issue under consideration. No such attempt was made.
But in any event, his Honour’s acceptance that relief could be granted against an employee for breach, in that case of s.52 of the Trade Practices Act, is clearly correct. As a matter of law, an employee acts as agent for the employer. There is no basis in principle why different rules should apply to agents who are appointed in different circumstances. Provided that a party alleging the contravention is able to establish that the agent is liable within the principles state in Yorke v, Lucas, then liability under the section attaches, notwithstanding that the agent in question is an employee acting within authority in the course of employment.’
290 In Arms v WSA Online Limited (ACN 081 121 495) [2005] FCA 943, the primary judge was concerned with representations made by two employees in the course of their employment of a corporation.
291 The primary judge said at [107] that the researches of Counsel ‘have not revealed a single authority where an employee has been held personally liable for statements made in the course of his or her employment by an employer who, or which, was concededly engaged in trade or commerce’. He then went on to say:
‘109 The consideration just indicated together with my own analysis in the light of the authorities of the common basis on which liability for deceptive or misleading conduct “in trade or commerce” is erected by both the TPA and the Fair Trading Act has led me to conclude that it does not extend to the conduct of Student or Houghton in the present case. That is not to say that a director or sole shareholder of a company may not attract liability for statements made in the course of the company’s business if their making can be characterised as tending to promote the director’s or shareholders own trading or commercial interests. See eg Arktos v Idyllic Nominees Pty Ltd [2004] FCAFC 119; (2004) ATPR 42-005. However, no independent trading or commercial interest can be imputed to Student or Houghton in the present case. The application against those respondents must therefore be dismissed.’
292 That matter went on appeal. The Full Court of the Federal Court in Arms v Houghton [2006] FCAFC 46 discussed the decisions in Arktos Pty Ltd v Idyllic Nominees Pty Ltd, Citibank Ltd v Liu, and Wong v Citibank and concluded at [38] that there was authority both in the Full Court of this Court and in the Court of Appeal in New South Wales that ‘an employee can be found to have engaged in misleading or deceptive conduct for actions taken within the scope of his actual authority; that is, not independently of such authority’.
293 In this case, the second respondent was neither a director or an employee of the first respondent. I think, however, she was clearly the agent of the first respondent and, consistent with the authorities to which I have referred and in particular the authorities of the Full Court of this Court, she would be independently liable under s 10 for her contraventions of the Fair Trading Act for her actions in preparing and publishing the brochure to the second and third applicants, and thereby the first applicant.
294 The applicants have, as I have said also, framed their case against the third respondent on alternative bases. First, it is said, that the third respondent was a person who was knowingly concerned in or a party to the contravention by the first respondent of s 52 of the Trade Practices Act. Its plea is that s 75B of the Trade Practices Act is invoked so as to allow the applicants to obtain damages against the third respondent. In the alternative, it is pleaded that the third respondent has contravened s 10 of the Fair Trading Act. Again, as I have already indicated, in the first, second and third respondents’ joint defence those respondents, relevantly for the purpose of this aspect of the claim, have denied paragraph 18 of the applicants’ statement of claim but have not made any positive plea on behalf of the third respondent.
295 It will be convenient to address the claim under s 10 of the Fair Trading Act first. The third respondent was a director of the first respondent. It was submitted that, in those circumstances, he also contravened s 10 of the Fair Trading Act and he is liable to the applicant: Arktos Pty Ltd v Idyllic Nominees Pty Ltd.
296 In my opinion, that submission cannot be accepted. The critical fact in Arktos Pty Ltd v Idyllic Nominees Pty Ltd which made that director liable under the Fair Trading Act was that the director had acted on behalf of the corporation and made misleading pre-contractual representations within the scope of his authority as a director to the purchaser. In those circumstances, the Full Court concluded that he was liable for the reasons it gave at [13] cited above at [284].
297 It is not enough for an applicant to merely establish that a corporation has contravened s 52 of the Trade Practices Act and thereby claim that any director of that corporation is liable under s 10 of the Fair Trading Act. There must be a contravention by the director himself or herself. That was made clear by Nicholson J in Caple v All Fasteners (WA) (A Firm) [2005] FCA 1558. In that case, it was alleged that a corporation had contravened s 52 of the Trade Practices Act. It was pleaded that the appellant, who was a director of the corporation but who had not been party to any of the representations which had been made, was accessorily liable under s 75B of the Trade Practices Act and, in the alternative, primary liable under s 10 of the Fair Trading Act. The Federal Magistrate found the appellant was accessorily liable under s 75B of the Trade Practices Act, even though the representations were not made by the appellant. He did not find her liable under s 10 of the Fair Trading Act. On appeal, the respondent filed a notice of contention contending that ‘in addition, or in the alternative, to the grounds for liability of the appellant contained in the reasons of his Honour, the appellant is liable to the respondent in relation to her breach (sic) of s 10 of the Fair Trading Act 1985 (WA) as pleaded in the respondent’s re-amended statement of claim’: at [77]. The respondent relied on this Court’s decision in Arktos Pty Ltd v Idyllic Nominees Pty Ltd to support the submission.
298 Nicholson J said at [87]-[89]:
‘In Arktos a Mr Price made misleading pre-contractual representations on behalf of a company of which he was a director. It was held that such representations were made both on behalf of the company and in his individual capacity, thereby grounding his direct liability pursuant to s 10 of the Fair Trading Act 1985 (WA) (sic).
However, here the appellant, although a director of the company, did not make any representation nor was it pleaded or put to her that she had done so. Further, it was not pleaded or put to her that she had given any authority for any representation to be made on her behalf beyond negotiation of the lease of the premises. Nor was it pleaded or put to her that any agent who acted on her behalf exceeded the agent’s actual ostensible authority in circumstances such as to bind her or render her personally liable.
I agree with the appellant’s submissions. The notice of contention cannot be upheld.’
299 There are other decisions of the same effect at first instance; Astvilla Pty Ltd v Director of Consumer Affairs Victoria [2006] VSC 289; Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) 141 ALR 525, particularly at 541; Cleary v Australian Cooperative Foods Ltd (No 2 & 3) (1999) 32 ACSR 701.
300 In my opinion, the third respondent is not liable merely because he is a director of the first respondent. If the applicants are to succeed in their claim that he is directly liable because of a contravention of s 10 of the Fair Trading Act, then they must establish that the third respondent, in trade or commerce, engaged in conduct that was misleading or deceptive or was likely to mislead or deceive.
301 If those matters cannot be established, they will have to establish that he is accessorily liable under s 75B of the Trade Practices Act.
302 It is appropriate to consider the findings which I have already made in relation to the third respondent for the purpose of determining whether he has directly contravened s 10 of the Fair Trading Act or is accessorily liable under s 75B of the Trade Practices Act.
303 The third respondent was the sole director of the first respondent. He was a party to the decision that the third respondent sell its business and lease its premises. He assisted in the preparation of a brochure which he knew the first respondent and the second respondent intended to publish to potential vendors. He knew that potential vendors would rely upon the matters contained in the brochure. He created the disclaimer. He assisted to create a brochure for the purpose of creating in the mind of the reader that the brochure had been prepared by a CPA which he knew to be false. More importantly, he created the précis and the brochure profit and loss statement. He took the brochure profit and loss statement from information provided by the fifth respondent. That information was later provided to Mr Moore in the Moore 1999 profit and loss statement. The brochure profit and loss statement omits a material fact in the Moore 1999 profit and loss statement; the stock on hand at 30 June 1999.
304 In any event, Mr Bahr created the document which represented that the first respondent had made a gross profit from trading of $164,966 and a net profit of $145,595 in the 1999 financial year. Having regard to the taxation profit and loss statement, which disclosed a gross profit of $105,162 and a net profit of $2,983, Mr Bahr must have known that the representations contained in the brochure profit and loss statement were untrue and therefore to publish the document would be to engage in misleading and deceptive conduct. I am fortified in making that finding by the fact that in the previous year the first respondent had made a net profit of $7,117. In the 1997 financial year it had made a profit of $17,079. Having regard to the admissions made by Mr Bahr in his cross-examination, he must have known that the brochure profit and loss statement was false. He was present when the brochure was handed to Mr and Mrs White.
305 In my opinion, the applicants have established, as a matter of fact, that he has himself engaged in misleading and deceptive conduct and thereby contravened s 10 of the Fair Trading Act. They have also established accessorial liability under s 75B of the Trade Practices Act. He had the necessary knowledge. He was involved in a contravention in that he intentionally participated in the first respondent’s conduct. In doing so, he had knowledge of the falsity of the representations contained in the brochure.
306 Subject to proof of loss or damage by the respondents’ conduct and the other issues to which I have referred, the applicants are entitled to relief against the first, second and third respondents.
THE RESPONDENTS’ DEFENCES
307 I have referred to the respondents’ pleas in [235] to [238].
308 Those pleas can be disposed of shortly.
309 The first applicant paid the deposit on or about 6 January 2000. The first applicant entered into a lease with the first respondent on or about 16 February in contemplation of the settlement which took place on 28 February 2000. As I have found, the first applicant would not have entered into the lease but for the representations contained in the brochure. The first applicant proceeded to settle on 28 February 2000 and, on that date, paid the balance of the sale price. The third applicant gave up her job as a teacher to work full time in the business which had been acquired by the first applicant.
310 The applicants retained Mr Moore to advise in relation to the agreement to purchase the business. On no understanding could it be said that Mr Moore carried out a due diligence inquiry. He did make inquiries of the second, fourth and fifth respondents in relation to matters contained in the brochure. He was provided with further information on 6 January 2000. That information contained like misrepresentations to those which were contained in the brochure. Like the applicants, he was misled in relation to the gross profit, the net profit and the value of the business. Because he was misled, he did not advise the applicants that they had been misled. As a result, they continued to rely upon the representations made in the brochure up to, and well after, settlement. Mr Moore’s involvement did not in any way break the chain of causation which resulted in the purchase of the business on 28 February 2000.
311 In Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546, Lockhart J said at 558-559:
‘These decisions support the view that recovery under s 52 is founded by the applicant’s actual reliance upon the misleading or deceptive conduct of the respondent although that conduct was not the only factor in the applicant’s decision to enter a particular agreement, and although the applicant did not seek to verify the representations or did so inadequately and so failed to discover their falsity.
The circumstances of this case do not support the conclusion that Collins Marrickville did not in fact rely upon the misleading conduct of Mr Saade and Henjo. Their conduct not only played some part in contributing to the purchase of the business but was in fact, the major inducement. It matters not that the solicitor’s failure to carry out his client’s instructions prevented what may or indeed would, more likely than not, have been a different result. The fact is that reliance was placed by the purchaser upon what it assumed to be the true position as a result of the conduct of the vendor and the absence of knowledge of the true facts.’
312 The applicants relied upon the pleaded representations, which I have found to be made out, up to 28 February 2000 and indeed beyond. The respondents’ conduct was the inducement for the applicants entering into the agreement to purchase on 29 December 1999 and settling on that agreement on 28 February 2000. It is not the point that Mr Moore did not ascertain the representations were false. His failure to recognise the falsity of the representations was the fault of the respondents who continued to publish the false representations in the Moore 1997, 1998 and 1999 profit and loss statements.
313 In my opinion, the applicants were not careless about the way in which they entered into the transaction. Indeed, the evidence is all to the contrary. They employed an accountant and a solicitor to advise. That was appropriate. Even if there was some want of care on their part, which I reject, that would not mean they could not recover. In Henville v Walker (2001) 206 CLR 459 (‘Henville v Walker’), Gleeson CJ said at 468:
‘It will commonly be the case that a person who is induced by a misleading or deceptive representation to undertake a course of action will have acted carelessly, or will have been otherwise at fault in responding to the inducement. The purpose of the legislation is not restricted to the protection of the careful or the astute. Negligence on the part of the victim of a contravention is not a bar to an action under s 82 unless the conduct of the victim is such as to destroy the causal connection between contravention and loss or damage.’
314 I have already found that the applicants were not poor managers of the business. They worked hard in the business and, as a result, significantly increased the turnover. They were not able to generate significant profits in the business because the business was not capable of making a profit of the kind represented in the brochure or anything near that. There were no external factors which adversely affected the profitability of the business.
315 I have already dealt with the last matter raised by the first, second and third respondents in their defence relating to accessorial liability.
316 For all those reasons, the applicants have established contraventions of all three respondents and they are, subject to proof of damage, entitled to judgment against those respondents.
317 I turn to the question of damages.
DAMAGES
318 Each of the applicants claimed to have suffered loss or damage as a result of contraventions of the Trade Practices Act and/or the Fair Trading Act. They must establish they suffered loss or damage ‘by conduct’ of the respondents: s 82 Trade Practices Act.
319 The Court has the task of selecting ‘a measure of damages which conforms to the remedial purpose of the statute and to the justice and equity of the case’: Henville v Walker per Gleeson CJ at [18].
320 In this case, the representations induced the first applicant to enter into the agreement to purchase the business from the first respondent; to borrow $400,000 upon which it agreed to pay interest; to enter into the lease of the premises for the purpose of carrying on the business; and to incur the transactional costs associated with the purchase, borrowing and leasing.
321 The second applicant was induced by the representations to cause the first applicant to purchase the business and enter into the lease of the premises. That, however, did not cause the second applicant any separate loss or damage. He, however, in reliance upon the representations, gave up his time to work in the business acquired by the first applicant for the purpose of generating the profits it was represented the first applicant could make.
322 The third applicant, in reliance upon the same representations, gave up her paid employment as a teacher to work full time in the first applicant’s business.
323 The first applicant claimed the transactional costs to which I have referred in [128]. I find that those were costs associated with the transaction and were losses incurred by the first applicant by reason of the contravention.
324 The first applicant also claimed in paragraph 14 of the statement of claim:
‘(aa) In order to finance the acquisition of the Business:
(i) the first applicant increased its existing borrowings from PIBA Bank (which subsequently became known as Rabo Bank) (“PIBA”) by $400,000.00 from $585,000.00 to $985,000.00 (of which the sum of $400,000.00 is ascribed to the acquisition of the Business);
…
(ab) During the period between 28 February 2000 (settlement date) and the present time, interest on the Loan referred to in paragraph (aa)(i) hereof has fluctuated between the rate of 7.6-9.35 percent.
(ac) The first applicant claims interest on that component of the Loan referred to in paragraph (aa)(i) hereof ascribable to the purchase price for the Business, namely referable to the said sum of $400,000.00 at the lowest rate referred to in sub-paragraph (ab) hereof, represented by the following sums:
(i) 28 February 2000 to 31 December 2000 - $25,333.34;
(ii) 1 January 2001 to 31 December 2001 - $30,400.00;
(iii) 1 January 2002 to 31 December 2002 - $30,400.00;
(iv) 1 January 2003 to 31 December 2003 - $30,400.00;
(v) 1 January 2004 to 31 December 2004 - $30,400.00;
(vi) 1 January 2005 to 31 December 2005 - $30,400.00; and
(vii) 1 January 2006 to date hereof - $2533.33;
Total $179,866.67
[The date of the amended statement of claim was 3 March 2006 which is for all intents and purposes the date of the trial.]
…
(b) At the time at which the first applicant purchased the Business, the Business was worth substantially less than the sale price. The value of the Business upon acquisition was the sum of $104,105.00 comprising plant and equipment in the sum of $49,105.00 and stock in the sum of $55,000.00.’
325 The first applicant’s claim for damages includes the transactional costs of $15,677, the difference between the purchase price and the value of the business, being $292,895, and the interest on the borrowings of $400,000 to purchase the business, $179,866.67 over the period to which I have referred.
326 The second applicant particularised his damages in paragraph 15 of the statement of claim:
‘(a) At no material times since the Settlement Date has the second applicant been able to draw a salary from the Business.
(b) Further, during the period between 28 February 2000 and the present time the second applicant has worked in the Business for approximately 28 hours per week for no reward;
(c) Pursuant to the Licensed Establishments (Retail and Wholesale) Award 1979 No. R23 of 1977 an employee in a retail liquor outlet is entitled to receive a minimum hourly wage of $14.59 per hour;
(d) The second applicant accordingly claims a sum by way of compensation for his un-rewarded exertions, by reference to the wage rates set out in sub-paragraph (c) hereof:
(i) 28 February 2000 to 31 December 2000 - $17,974.88;
(ii) 1 January 2001 to 31 December 2001 - $21,243.04;
(iii) 1 January 2002 to 31 December 2002 - $21,243.04;
(iv) 1 January 2003 to 31 December 2003 - $21,243.04;
(v) 1 January 2004 to 31 December 2004 - $21,243.04; and
(v)(sic)1 January 2005 to 31 December 2005 - $21,243.04;
Total $124,190.08.’
327 Both the second applicant and his wife abandoned their claim for damages in relation to the sale of the Cervantes property to their daughter.
328 Mr White’s claim for damages therefore can be understood to be for $124,190.08 for unrewarded exertions at least until 31 December 2005.
329 The plea in paragraph 15(b) is not quite in accord with the evidence of the hours worked. It is, of course, the evidence which will govern the claim.
330 The third applicant particularised her damages in paragraph 16 of the statement of claim:
‘(a) Prior to the acquisition of the Business, the third applicant worked as a school teacher, earning an average income of $23,700.00 per annum for the year ended 30 June 1998 and 30 June 1999;
(b) Had the applicants not entered into the transaction, the third applicant would have continued with her teaching career to the present time;
(c) Lost earnings of the third applicant are comprised as follows:
(i) 28 February 2000 to 30 December 2000 (sic) - $23,000.00 (less sum received of $15,953) - $7,047.00;
(ii) 1 January 2001 to 31 December 2001 - $23,000.00 (less lump sum payment of $3989.00) - $19,011.00;
(iii) 1 January 2002 to 31 December 2002 - $23,000.00;
(iv) 1 January 2003 to 31 December 2003 - $23,000.00;
(v) 1 January 2004 to 31 December 2004 - $23,000.00; and
(vi) 1 January 2005 to 31 December 2005 - $23,000.00.
Total $118,058.00.’
331 She also abandoned her claim for damages in relation to the sale of the Cervantes property to her daughter.
332 Her claim for damages to 31 December 2005 for lost wages as a teacher was in the sum of $118,058.
333 So as to avoid any risk of duplicating damages the first applicant’s losses must be addressed first.
THE FIRST APPLICANT’S DAMAGES
334 Apart from the valuation exercises to which I have already referred, Mr Gilmour was asked to carry out a separate exercise to identify the losses suffered by the applicants upon the assumption ‘of restoring them to the position as if they had not entered into the Transaction’.
335 In response to that request, Mr Gilmour adopted the following approach. First, he assessed the value of the business at acquisition. Secondly, he assessed the income foregone by the second and third applicants by their working in the business rather than undertaking some other activity. In that regard, he assessed the amount of income foregone on two bases: the quantum of any trading losses by reference to what they would have earned from their farming and other activities had they not acquired the business; and the quantum of trading losses by reference to exertion of effort. Next, he assessed the value of the business as at the date of his report. Lastly, he addressed any other losses ‘to return Brian and Gloria White to the position they would have been in had they not entered into the Transaction’.
(1) Transactional Costs
336 I have identified the transactional costs earlier in these reasons: [128]. Those costs were incurred as a result of the first applicant purchasing the business and entering into the lease with the first respondent. They are properly claimed as the first applicant’s damages and will be allowed in the sum of $15,677.
(2) The Value of the Business
337 The consideration for the purchase of the business included a figure of a goodwill of $290,000 which was calculated on two years net earnings assuming the net earnings were, as the brochure claimed them to be, in the order of $145,000 (2 x $145,000 = $290,000).
338 Mr Gilmour valued the business on the basis of a price a willing but not anxious purchaser would acquire the business from a willing but not anxious vendor acting at arm’s length. He considered three valuation methods; discounted cash flow; capitalisation of future maintainable earnings; and net tangible assets. There was insufficient data to use a discounted cash flow as a basis of valuation. There was sufficient information to make an assessment of the capitalisation of future maintainable earnings and he adopted that as his primary basis. He also proceeded to value the business on the basis of the orderly realisation of assets. He said that valuation methodology would be appropriate in valuing trading operations on a going concern basis because it assists in establishing the quantum of goodwill implicit in any earnings based valuation.
339 In estimating the future maintainable earnings, he had regard only to the financial year ended 30 June 1999 because it appears that other businesses were being conducted by the first respondent prior to that time. He assumed, rightly in my opinion, that the taxation profit and loss statement correctly recorded the trading results for that year and he therefore assumed a net profit of $3,000 per annum.
340 In identifying the future maintainable earnings, he added back the interest and legal costs of $17,000 and $5,000 respectively, which gave a notional net profit of $25,000. He deducted from the notional profit a sum of $24,000, which represented the cost of the lease of the premises and deducted a notional amount for the operator’s wages. He fixed a figure of $60,000 for the notional wages which would need to be paid to the owners. On that basis, he arrived at an adjusted loss, before interest and tax, of $59,000. In those circumstances, he concluded that the business had no value and no amount should be ascribed for goodwill. In my opinion, the methodology adopted by Mr Gilmour was appropriate. I accept his opinion that the business had no value at the time of acquisition.
341 He then proceeded to his alternative basis of valuation; namely, the orderly realisation of assets. He valued the business at the date of acquisition at $104,105, which comprised plant and equipment of $49,105 and stock of $55,000.
342 In my opinion, his alternative basis of valuation was also correct. I find that the value of the business at acquisition was, as deposed to by Mr Gilmour, in the sum of $104,105.
343 He then valued the business as at the date of his report. He again proceeded on the basis that the primary basis of valuation ought to be capitalised future maintainable earnings, and the secondary basis of valuation orderly realisation of assets.
344 He had regard to the earnings generated by the business since acquisition and he compiled the following chart:
|
| Year ended 30 June 2004 $000 | Year ended 30 June 2003 $000 | Year ended 30 June 2002 $000 |
| Net profit per accounts | 11 | 18 | 4 |
| Adjustments: Add: Interest charge |
15 |
28 |
29 |
| Less: Owners wages | (60) | (60) | (60) |
| Adjusted loss before interest and tax | (34) | (14) | (27) |
345 I think the methodology is appropriate. On the basis of those calculations, it can be seen that the business is running at a notional loss. It was Mr Gilmour’s opinion that it was not possible to value the business on a capitalised future maintainable earnings basis because the business had no goodwill. The present day value of the business, therefore, must be its plant and equipment and stock in trade.
346 Mr Gilmour said that in arriving at the present value of the stock in trade and the plant and equipment, some deduction needs to be made for the fact that both would be sold independent of a business. On a liquidation valuation, an owner could expect to get about 60 per cent of the book value of the plant and equipment, and somewhere between 50 and 70 per cent of the book value of the stock.
347 In the end that evidence does not advance the applicant’s case because Mr Gilmour made no attempt to value the plant and equipment and stock as at 28 February 2000 to determine whether there was any loss in the acquisition of those items. He was right to do that in my opinion. It would have been an impossible task for him to attempt to determine the value of the stock as at 28 February 2000 and the true value of the plant and equipment as at that date.
348 If that exercise had been carried out, another complication would have arisen. Regard would have had to have been had to the value of the plant and equipment and stock as at the date of trial. Whilst the applicants tendered the financial statements of the Brian White Family Trust for the financial year ended 30 June 2004, the balance sheet of that trust disclosed stock on hand for the business of $110,979 and plant and equipment at cost of $57,754 less accumulated depreciation of $29,511. It was conceded by the applicants’ counsel that there was no evidence of the value of those items at trial. A comparison of the value of those two items as at the date of acquisition and as at trial is impossible to make.
349 Mr Mendelow, counsel for the applicants, conceded that the measure of the damages in relation to the acquisition on this aspect would be confined to the sum of $292,895, which is the difference between the cost of the plant and equipment of $49,105 and the stock of $55,000 at settlement and the purchase price. That is the amount claimed in the statement of claim and that is the amount that I allow by way of damages under that head.
(3) Interest on the Loan of $400,000
350 The second aspect of the first applicant’s claim for damages is the claim for interest on the borrowings of $400,000 which was used to pay the consideration for the purchase of the business and the transactional costs associated with that purchase.
351 The first applicant borrowed the sum of $400,000 from PIBA by accepting PIBA’s standard loan terms on 24 January 2000. The evidence was that the monies are still outstanding.
352 It seems to me clear, beyond doubt, that the interest which has been paid on the borrowings is a cost associated with the purchase of the business and is recoverable by way of damage from the first, second and third respondents.
353 During the period of the loan the prime interest rate has varied between 7.6 and 9.35 per cent. As indicated in paragraph 14(ac) of the statement of claim, the first applicant claims interest at the lowest rate, being 7.6 per cent, for the period since 28 February 2000 to the date of trial. To that end, the first applicant simply claims damages for simple interest at the rate of 7.6 per cent over that period of time on the whole of the sum of $400,000. Interest of 7.6 per cent per annum on $400,000 is $30,400 per year.
354 During that same period, the first applicant has claimed interest as an expense in the business. Of course, that is appropriate because interest is a business expense.
355 The taxation records of the first applicant show interest was claimed as an expense in the financial years shown in the following amounts:
| To 30 June 2000 | $11,790 |
| To 30 June 2001 | $31,294 |
| To 30 June 2002 | $29,273 |
| To 30 June 2003 | $28,000 |
| To 30 June 2004 | $15,000 |
356 It is not clear on the evidence why the first applicant has claimed interest in those sums when during most of that period the interest rate on the loan was greater than the lowest rate of 7.6 per cent. It is also unclear as to why the sum of $15,000 was claimed in the financial year 2004 when the actual interest which would have been incurred on borrowings of $400,000 would have been at least $30,400.
357 Of course, the first applicant not only carried on this business but also carried on a farming business. The profit and loss statement for the Brian White Family Trust in respect of its farming business shows that interest in the year ended 30 June 2004 increased to $211,030 from a figure in the previous financial year of $85,564. It may have been that it suited the first applicant to claim interest against the farming operation rather than against the business. But that is a matter of speculation.
358 However, the fact is the real loss to the first applicant is interest at the rate of 7.6 per cent over $400,000 during the period which I have mentioned. I therefore should assess damages by reference to that calculation.
| Interest | | $ |
| 1.3.00 | 30.6.00 | 10,161 |
| 1.7.00 | 30.6.01 | 30,400 |
| 1.7.01 | 30.6.02 | 30,400 |
| 1.7.02 | 30.6.03 | 30,400 |
| 1.7.03 | 30.6.04 | 30,400 |
| 1.7.04 | 30.6.05 | 30,400 |
| 1.7.05 | 16.3.06 | 21,571 |
| | | 183,732 |
359 The total therefore of the first applicant’s damages is:
| Transactional costs | $15,677 |
| Loss on purchase of business | $292,895 |
| Interest on borrowings | $183,732 |
| Total | $492,304 |
360 It was agreed by the parties that I would need to bring into account against the applicants’ damages the sum of $70,000 which was the component of damages included in the settlement with the fourth and fifth respondents.
361 It would be convenient, in my opinion, to offset that amount against the first applicant’s award of damages. I therefore reduce the first applicant’s damages by $70,000 to recognise that fact and conclude that the first applicant’s damages should be assessed at $422,304.
362 Of course, the first applicant will be entitled to an award of interest pursuant to s 51A of the Federal Court of Australia Act 1976 (‘Federal Court of Australia Act’). That award of interest will need to be computed on the sum of $492,304 without regard to the reduction which recognised the fourth and fifth respondents’ contribution to damages because that contribution was made at or near trial and would therefore have no effect on pre judgment interest.
363 I will return to the question of interest.
THE SECOND AND THIRD APPLICANTS’ DAMAGES
364 As I have already indicated, there is no claim by the first applicant for trading losses since 28 February 2000. Rather, the second and third applicants have claimed for their exertions in the business in attempting to make the business earn the profit contemplated in the brochure profit and loss statement. The second and third applicants have received no wages from the business since its acquisition. They tendered their tax returns in support of that claim. I accept their evidence that they have received no wages in the business since 28 February 2000.
365 The second applicant’s intention was, as I have said, to purchase a business and leave the farming to his sons. As it happened, he continued to conduct farming operations after 28 February 2000. But, as I have already found, he worked in the business. If he had not worked in the business he would not have earned any other income in his farming operations.
366 The third applicant, on the other hand, gave up paid employment as a teacher with the Education Department in Western Australia (‘EDWA’) to work in the business. Mrs White received income as a teacher of $26,397 in 1998, $20,010 in 1999and $15,943 in 2000 prior to ceasing employment as a teacher.
367 She later received two further payments from the EDWA, being $3,989 in 2002 which was a lump sum payment and $16,418 in 2003 which represented her eligible termination payment. Those two payments in 2002 and 2003 are, in my opinion, not relevant. She would have been entitled to receive those payments whenever she ceased work with EDWA.
368 Mr Gilmour was asked to assess the second and third applicants’ losses occasioned by their working in the business. He assumed that Mr White would not have earned any further income in the farming operation. He averaged Mrs White’s earnings from EDWA for the financial years ended 30 June 1998 and 30 June 1999 and arrived at a figure of $23,700. I am prepared to assume Mrs White would have earned in the order of $23,700 if she had remained with EDWA and the first applicant had not purchased the business. He compared that figure with the profits or losses made in the business in the relevant periods. He prepared the following table:
|
| Year ended 30 June 2004 $000 | Year ended 30 June 2003 $000 | Year ended 30 June 2002 $000 | Year ended 30 June 2001 $000 |
Total $000 |
|
|
|
|
|
|
|
| Net business profit/ (loss) | 11.0 | 17.7 | 4.5 | (4.6) | 28.6 |
|
|
|
|
|
|
|
| Potential earnings (Gloria White) | 23.7 | 23.7 | 23.7 | 23.7 | 94.8 |
|
|
|
|
|
|
|
| Loss of earnings | (12.7) | (6.0) | (19.2) | (28.3) | (66.2) |
369 There are three assumptions in Mr Gilmour’s opinion which allowed him to find a total loss of earnings for the second and third applicants of $66,200. First, as I have said, he assumed Mr White would have earned no further income if he had continued to farm other than that which he obtained from the farming operation. He therefore assumed no loss to Mr White. Secondly, he assumed that Mrs White would have earned in the order of $23,700 if she had remained in teaching. Thirdly, the profit/(loss) of the business was in the order of the amounts mentioned in the table for each of the respective years and totalled $28,600 for those four years.
370 Mr Gilmour’s opinion was that, on the basis of those assumptions, Mr and Mrs White have together lost $66,200. Indeed, on Mr Gilmour’s assumptions, the loss is only that of Mrs White.
371 It was right, of course, to assume that Mr White would not have earned any further income in the farming operation but I do not think that Mr Gilmour’s assumption that he thereby suffered no loss was correct.
372 When the first applicant purchased the business a need arose for persons to work in the business. The first applicant could have employed persons to carry on the business. That would have increased the first applicant’s expenses and, if claimed, been recoverable as damages against the first, second and third respondents. Instead, the first applicant relied upon the endeavours of the second and third applicants. The second applicant should be entitled to be compensated for his exertions. An award of damages in favour of the second respondent which compensates him for his unrewarded exertions would be just and equitable.
373 In those circumstances, I think it is appropriate to have regard to any loss suffered by Mr White by reference to the hours which he has proved he worked and by reference to the hourly rate of pay under the Licensed Establishments (Retail and Wholesale) Award 1979 which he has pleaded would apply.
374 I will therefore proceed upon the basis that Mr White is entitled to damages for any exertions in the business if those exertions cannot otherwise be met by wages from the business.
375 The first applicant’s financial statements, which I accept are accurate, disclose the following trading results in the business:
|
| Income | Cost of Sales | Closing Stock | Gross Profit | Expenses | Net Profit |
| 1/3/00-30/6/00 | 133,901 LS 14,366 VH 148,268 |
106,991 |
70,545 |
41,277 |
26,297 (Rent 7,017) (Interest 11,790) |
11,980 |
| 1/7/00-30/6/01 | 399,699 LS 34,540 VH 434,239 |
351,626 |
78,990 |
82,613 |
94,307 (Rent 22,809) (Interest 31,294) |
(4,631) |
| 1/7/01-30/6/02 | 411,133 LS 34,713 VH 445, 846 |
351,899 | 84,322 |
93,947 |
89,463 (Rent $23,353) (Interest 29,273) |
4,484 |
| 1/7/02-30/6/03 | 505,950 LS 37,182 VH 543,132 |
430,959 |
104,406 |
112,173 |
94,460 (Rent 24,888) (Interest 28,000) |
17,713 |
| 1/7/03-30/6/04 | 553,524 LS 34,882 VH 588,406 |
494,663 |
110,979 |
93,743 |
82,695 (Rent 26,454) (Interest 15,000) |
11,049 |
376 Mr Gilmour carried out a second exercise in which he has assumed that between them the applicants worked 80 hours per week in the business. He further assumed that under the Licensed Establishments (Retail and Wholesale) Award they would have earned $14.59 per hour for a 38 hour week. Based on 80 hours, he assumed an annual combined income of $60,694.40. He rounded that to $60,000. He prepared the following table:
TABLE 8
|
| Year ended 30 June 2004 $000 | Year ended 30 June 2003 $000 | Year ended 30 June 2002 $000 | Year ended 30 June 2001 $000 |
Total $000 |
| Net business profit/(loss) | 11.0 | 17.7 | 4.5 | (4.6) | 28.6 |
| Potential earnings | 60.0 | 60.0 | 60.0 | 60.0 | 240.0 |
| Loss of earnings | (49.0) | (43.3) | (55.5) | (64.6) | (211.4) |
377 On the basis of that calculation, he calculated that the second and third respondents lost in the order of $211,400 over that period of four years in unpaid wages.
378 The assumptions implicit in this aspect of Mr Gilmour’s opinion are first, that Mr and Mrs White between them worked 80 hours per week; secondly, that they were entitled to be paid in accordance with the award; thirdly, that the business earned a profit or loss as set out in the above; fourthly, that they received no wages from the business except $28,600 which was the total of profits over the period between 1 July 2000 and 30 June 2004; and fifthly, that notwithstanding that Mr White would not have earned any other income as a farmer, he is entitled to be recompensed for his labour in the business.
379 Before I deal with those assumptions, I need to make the following observations. Mr Gilmour’s opinion does not correspond with the way in which the second and third applicants pleaded their case. That is no criticism of him. He was called upon to make assumptions. It is for the applicants to prove those assumptions. Nor does it correspond with the evidence led. The second applicant put his case on the basis that he was entitled to be rewarded for 28 hours actually worked per week at the rate of $14.59 per hour under the Licensed Establishments (Retail and Wholesale) Award 1979. He led evidence of the actual hours which he worked which I have otherwise accepted.
380 On the other hand, the third applicant simply claimed the loss of salary as a teacher over the period of time. Her claim was that if the first applicant had not entered into the transaction she would have continued with her teaching career and, as a result, she has lost earnings at the rate of $23,000 per year: see paragraph 16 of the statement of claim.
381 The second and third applicants did not plead a case upon the basis that they jointly worked 80 hours per week and they should be recompensed in accordance with the Licensed Establishments (Retail and Wholesale) Award 1979. However, they did prove that they worked in the business for 80 hours per week and even more: [196]-[202]. No objection was raised to the evidence which established those matters although, since the first, second and third respondents were unrepresented, that is not surprising. There is an anomaly in Mr Gilmour’s exercise. For the financial year ended 30 June 2001, he has found that they suffered a loss greater than the amount to which they were entitled to be paid. That cannot be right. That raises a different head of damage which goes to the question of trading losses which has never been part of the applicants’ case.
382 For the reasons which follow, there is a further difficulty with the exercise which has not been recognised by Mr Gilmour.
383 I think I should first proceed to consider the second and third applicants’ damages in the light of their pleadings, and in the light of the evidence which has been led in support of their case. In those circumstances, I should proceed upon the basis that the second applicant worked the hours which he claimed and was entitled to be paid at the award rate. That is his plea. I should also proceed upon the basis that Mrs White’s losses are in the order of $23,000 per annum, which is what she would have earned if she had continued in her teaching career. That is her plea.
384 I would calculate Mr White’s losses as follows assuming the hourly rate provided for in the award ($14.59) and accepting his evidence as to the hours worked. His hours were calculated on the basis of a calendar year rather than a financial year. I have made adjustments.
| Financial Year | Average Hours | Loss |
| 30 June 2000 | 26 | 4,930 |
| 30 June 2001 | 26 | 19,725 |
| 30 June 2002 | 26 | 19,725 |
| 30 June 2003 | 21 | 15,932 |
| 30 June 2004 | 16 | 12,138 |
| 30 June 2005 | 16 | 12,138 |
| 16 March 2006 | 16 | 10,908 |
385 I accept that Mrs White could have earned $23,000 if she had remained a teacher. Her claimed loss of $23,000 per annum is modest for the hours worked. One would have thought that her salary would have increased over that period of time but no claim was made in that regard. In her case, regard must be had to the part years in 2001 and 2006. The individual losses suffered by the second and third applicants and the total of their losses therefore are:
|
| Mrs White | Mr White | Total |
| Financial Year | (Loss) | (Loss) |
|
| 30 June 2000 | 7,688 | 4,930 | 12,618 |
| 30 June 2001 | 23,000 | 19,725 | 42,725 |
| 30 June 2002 | 23,000 | 19,725 | 42,725 |
| 30 June 2003 | 23,000 | 15,932 | 38,932 |
| 30 June 2004 | 23,000 | 12,138 | 35,138 |
| 30 June 2005 | 23,000 | 12,138 | 35,138 |
| 16 March 2006 | 20,668 | 10,908 | 31,576 |
| | 143,356 | 95,496 | 238,852 |
386 It follows, therefore, that Mr White should have been paid $95,496 for his exertions in the business. Mrs White should have been paid $143,356 for her exertions, which would have represented what she would have earned if she had remained in her profession.
387 In my opinion, if the business was in a position to pay those wages then the second and third applicants have suffered no loss. If, on the other hand, the business could not pay those wages then the second and third applicants have suffered the amount of that loss.
388 It is necessary to have regard to the first applicant’s profitability and set that off against the second and third applicants’ losses. Otherwise, the second and third applicants will be over compensated. That was rightly recognised by Mr Gilmour in the two exercises which he carried out. So much was accepted by the applicants’ counsel.
389 However, in doing so, it is also necessary to have regard to the interest on the borrowings for which the first applicant has been compensated as a result of these reasons. The interest paid on the borrowings of $400,000 has had an adverse effect on profitability. It has been claimed as a business expense thereby reducing the profitability of the first applicant. However, I have compensated the first applicant for that loss. In my view, the amount by which the first applicant has been compensated should be brought to account to notionally increase the profit in the relevant financial period by reducing the expense. Otherwise the second and third applicants would be effectively compensated twice for those interest payments. The amount which is notionally brought to account should be the amount allowed to the first applicant by way of damages for that head of damage. It would not be appropriate to only have regard to the amount actually claimed by way of a business expense which is less than the amount I have awarded. Thus the exercise must proceed:
| Financial Year | Profit/(Loss) | Notional Interest | Notional Profit | Mr and Mrs White’s Pleaded Loss |
| 2000 | 11,980 | 10,161 | 22,141 | 12,618 |
| 2001 | (4,631) | 30,400 | 25,769 | 42,725 |
| 2002 | 4,484 | 30,400 | 34,884 | 42,725 |
| 2003 | 17,713 | 30,400 | 48,113 | 38,932 |
| 2004 | 11,049 | 30,400 | 41,449 | 35,138 |
| | | | 172,356 | 172,138 |
| 2005 | Not proved | 30,400 | | |
| 2006 | Not proved | 21,571 | | |
390 In the period for which there is evidence of the profit/loss of the first applicant there is little between the notional profits ($172,356) and the claimed losses ($172,138). No loss was suffered provided, as I have said, that the first applicant is compensated for the whole of the interest paid on the borrowings. There is not the evidence to allow any comparison of profitability, interest paid and notional wages since 2004. However, it is likely that because turnover has increased as claimed wages fell (Mr White’s contribution was less in 2004, 2005 and 2006), that no loss of wages was suffered assuming regard is had to the interest recoupment by the first applicant.
391 I raised the question of over compensation with the applicants’ counsel, and the need to have regard to the damages awarded to the first applicant on account of the interest paid, during the trial and during his closing address. I permitted him to make further submissions as to whether the award of damages for the interest paid by the first applicant should be recognised in the claim for damages of the second and third applicants.
392 He did not submit that, as a matter of principle, it would be wrong to have regard to the award of compensation of the first respondent. He said, however, that regard ought to be had to the fact that the entity which has incurred the interest is the first applicant and the parties, who are the victims of unrewarded exertions, are the second and third applicants. That is so but, in my opinion, that is not a reason why the first, second and third respondents ought to pay a greater sum by way of compensation than the first, second and third applicants have collectively suffered. That would not be just. The first, second and third respondents would be required to pay for a loss which was not incurred.
393 In the alternative, he submitted, if I were to take into account of the award of damages in relation to interest in favour of the first applicant I should approach the calculation in the following manner:
|
| Year ended 30 June 2004 $000 | Year ended 30 June 2003 $000 | Year ended 30 June 2002 $000 | Year ended 30 June 2001 $000 |
Total |
|
|
|
|
|
|
|
| Net business profit before interest | 26.0 | 45.7 | 33.5 | 26.4 | 131.6 |
|
|
|
|
|
|
|
| Potential Earnings | 60.0 | 60.0 | 60.0 | 60.0 | 240.0 |
| Loss of earnings | 34.0 | 14.3 | 26.5 | 33.6 | 108.4 |
|
|
|
|
|
|
|
394 That second contention should be rejected because the calculation does not recognise the actual award of damages for interest but only recognises the amount of interest claimed as a business deduction. That is a lesser sum. The approach to damages should be consistent. The actual amount awarded should be brought to account.
395 There is another difficulty with the submission which I have already mentioned. The second and third applicants’ pleaded case was not that they jointly or collectively worked 80 hours per week. Their case, as I have said, was that the second applicant worked 28 hours a week and the third applicant suffered a loss of $23,000 a year by reason of her leaving her employment with EDWA. However, there is evidence, which I have accepted, which does establish that they did work collectively 80 hours per week. I have accepted the applicants’ evidence that Mr White worked 20.9 hours per week (say 20) and I have also accepted their evidence that Mrs White worked in the order of 60 hours per week.
396 The table below indicates the second and third applicants’ losses assuming regard is had to a notional profit which includes the component of damages awarded to the first applicant and 80 hours per week exertion on the part of the second and third applicants at a rate of $14.69 per hour.
| Financial Year | Profit/(Loss) | Notional Interest | Notional Profit | Unpaid Exertion |
| 2000 | 11,980 | 10,161 | 22,141 | 20,054 |
| 2001 | (4,631) | 30,400 | 25,769 | 60,000 |
| 2002 | 4,484 | 30,400 | 34,884 | 60,000 |
| 2003 | 17,713 | 30,400 | 48,113 | 60,000 |
| 2004 | 11,049 | 30,400 | 41,449 | 60,000 |
| | | | 172,356 | 260,054 |
| 2005 | Not proved | 30,400 | | 60,000 |
| 2006 | Not proved | 21,571 | | 42,575 |
397 The applicants were not in a position to prove the trading performance of the business at trial for the financial year ended 2005 and for the period 1 July 2005 to trial. It was suggested that I could average the profit/loss for the proceeding four financial years to arrive at a calculation for those two periods.
398 If that were done:
| Financial Year | Profit/(Loss) | Notional Interest | Notional Profit | Unpaid Exertion |
| 2005 | 7,154 | 30,400 | 37,554 | 60,000 |
| To trial | 5,076 | 21,571 | 26,647 | 42,575 |
|
|
|
| 64,201 | 102,575 |
399 That table shows, upon the assumptions implicit in the exercise, that the hours the second and third applicants worked in the business over 7 years would have returned them a total of $362,629 if they had been paid at the award rate out of the business. The notional profits available to pay those notional wages were $236,557. If they had pleaded their case, as in fact they have proved it, they would therefore have been entitled to an award of $126,072, a quarter of which would be attributable to Mr White’s unpaid exertions ($31,518) and three quarters of which would be attributable to Mrs White’s unpaid exertions ($94,554).
400 The applicants provided the first, second and third respondents with Mr Gilmour’s second expert report dated 1 November 2005 in which Mr Gilmour carried out all exercises based upon those assumptions (except for notional interest). The applicants proved the assumptions to allow the second and third applicants damages to be assessed on that basis.
401 The first, second and third respondents put in issue the question of damages in their defence but did not lead any evidence to contradict Mr Gilmour’s evidence. Nor should I say did they object to that evidence.
402 The question of over compensation was raised by me, not by the first, second and third respondents during the trial. The applicants had no warning of the issue before trial. Indeed, it has not been pleaded, if it needs to be pleaded.
403 I think, in the circumstances, the second and third applicants should be entitled at this late stage to seek leave to amend their statement of claim to plead, as an alternative to their present plea, damages for unrewarded exertions based upon the assumptions mentioned above.
404 If leave is sought and granted, the second applicant would be entitled to recover against the first, second and third respondents the sum of $31,518 and the third applicant would be entitled to recover against the same respondents, $94,554. The second and third applicants would be entitled to interest on those awards.
INTEREST
405 The first applicant claims an award of interest. Section 51A of the Federal Court of Australia Act provides that unless good cause is shown to the contrary, interest should be included in the judgment calculated from the date where the cause of action arose and the date when judgment is entered. Although a lump sum can be allowed in lieu of an award of interest, in this case it would be preferable to calculate interest.
406 In my opinion, there is no reason why interest should not be awarded on each of the three heads of damage allowed to the first applicant, although the time over which the interest will run should not be the same.
407 Section 51A(2)(a) does not authorise the giving of interest upon interest. However, that does not preclude the giving of interest upon an award of damages which is calculated by reference to interest paid on borrowings to finance the acquisition of a business. Section 51A(2)(a) is designed to prevent an award of compound interest on the judgment.
408 Interest should be compensatory and not punitive. It is designed to compensate a successful party for being kept out of his or her money. In this case, the first applicant has been kept out of the transactional costs and the sum paid for the business since 28 February 2000. There should be an award of interest on the sum of those items for the period since that date until judgment. The principal sum upon which interest would run is $308,572 (say $308,000).
409 The interest component which makes up the first applicant’s third head of damage, however, has accrued over the period since 28 February 2000. It would therefore be appropriate to allow interest on those damages for half the period. The other way of calculating interest is for half the amount over the whole period, but the result is the same. That, in a ‘rough and ready’ way, should do justice between the parties on this aspect of the first applicant’s damage. The principal sum is $183,732 (say $184,000).
410 Usually the Court adopts the rate of interest applied by the Supreme Court in the State or Territory in which this Court is sitting: GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 201 ALR 55 at 58. I am not aware of that rate and have not been addressed on that issue. I will need to hear the parties. However, the calculation of interest would proceed:
($308,000 x X% x 6.5) + (184 x X% x 3.25)
(Where 6.5 years represents the period over which interest will run for transactional and purchase costs and 3.25 years represents the period over which interest will run on the damages awarded for interest paid and X % represents the rate of interest applied in the Supreme Court of Western Australia.)
411 If the second and third applicants are granted leave to amend their statement of claim, damages would have accrued over the same period as the interest component over the first applicant’s damages. They would be entitled to interest for half the period. In that case, the respective calculations would be:
($31,518 x X% x 3.25) and
($94,554 x X% x 3.25)
OTHER ORDERS
412 The first applicant seeks an order rescinding the lease of the premises. In his closing address, Mr Mendelow repeated the first applicant’s call for rescission.
413 The lease was entered into before settlement on 28 February 2000. However, it was clearly entered into in contemplation of the purchase of the business. But for the representation contained in the brochure, the first applicant would not have entered into the lease. Rescission is available under s 87 to prevent or reduce loss or damage: Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31. It is necessary to make such an order to prevent ongoing damage to the first applicant.
414 However, it is necessary to hear the parties as to the precise order to be made because any order as to rescission will mean that the business can no longer be carried on on the premises.
MATTERS UPON WHICH THE PARTIES NEED BE HEARD
415 The second and third applicants may seek leave to amend. If they do they should provide the first, second and third respondents and the Court with a formal minute of the proposed amendment. The applicants should be heard on the rate of interest that ought to be applied for the purpose of a calculation of interest under s 51A of the Federal Court of Australia Act. They should supply a calculation of the amount of interest applicable to the separate awards of damages.
416 The applicants should provide a proposed order for rescission of the lease between the first applicant and the first respondent. The applicants and the first, second and third respondents shall be heard on those issues.
SUMMARY
417 These reasons mean that after I have heard the parties the following orders will be made.
1. The application against the fourth and fifth respondents will be dismissed with no order as to costs.
2. All previous costs orders on the application as between the applicants and the fourth and fifth respondents be vacated.
3. The first applicant will have judgment against the first, second and third respondents which will include damages assessed at $492,304 and a component for interest.
4. There will be an order rescinding the lease between the first applicant and the first respondent.
The following order will be made if leave is sought and granted:
5. The second applicant will have judgment against the first, second and third respondents which will include damages assessed at $31,518 and a component for interest.
6. The third applicant will have judgment against the first, second and third respondent which will include damages assess at $94,554 and a component for interest.
The following order will be made if leave is not sought or sought and not granted:
7. The second and third applicants’ application against the first, second and third respondents will be dismissed.
418 I will also need to hear the parties as to costs. The applicants should bring in short minutes to address these reasons.
| I certify that the preceding four hundred and eighteen (418) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander. |
Associate:
Dated: 22 September 2006
| Counsel for the Applicants: | Mr P Mendelow |
|
|
|
| Solicitor for the Applicants: | Feinauer Commercial Lawyers |
|
|
|
| Counsel for the First, Second and Third Respondents: | The First, Second and Third Respondents were unrepresented |
|
|
|
| Counsel for the Fourth and Fifth Respondents: | Mr A P Hershowitz |
|
|
|
| Solicitor for the Fourth and Fifth Respondents: | Tait & Co |
|
|
|
| Date of Hearing: | 13, 14, 15 and 16 March 2006 |
|
|
|
| Date of Judgment: | 22 September 2006 |
