A.J. Thompson Pty Ltd v KLK Manufacturing Pty Ltd

C A T C H W O R D S

TRADE PRACTICES - Misleading or deceptive conduct

- Sale of

business - Representation as to viability and profitability

business - Test to be applied

- Necessity to review totality

conduct - Measure of damages - Factors to be taken into account

- Power to award interest

- Costs.

TF.ADE PPACTICES ACT 1974

- ss.52, 75B, 8 2

SOUTH AUSTRALEMI SUPZEME COURT ACT 1376

- s.30C

A.J. THOMPSON PTY. LTD and ALAN JOHN THOMPSON

Applicants

- and -

K.L.K. MANUFACTURING PTY. LTD., KEVIN ERROL KOCH and	J O H N	SCOTT
SUTTON

Respondents

Fisher J.

I	Adelaide
8 July, 1986.
i

I	IN THE FEDERAL COURT OF AUSTRALIA )

SOUTH AUSTRALIA DISTRICT REGISTRY 1

No.G43 of 1983

DIVISION

GENERAL

B E T W E E N :

A.J. THOMPSON PTY.

LTD and AI;AN

JOHN THOMPSON

Applicants

- and -

K.L.K. MANUFACTURING PTY. LTD.,

KEVIN ERROL KOCH and JOHN SCOTT	i
SUTTON

Respondents

MINUTE OF ORDER

ORDER	MAKING	JUDGE	FISHER J.
WHERE P M E	ADELAIDE
DATE OF ORDEP.	8 JULY 1986.
THE COURT ORDERS THAT:

There be judgment in favour of the first applicant,

A.J.

Thompson Pty. Ltd., against the respondents in the

sum of

$110,000.00.

There be judgment in favour of the second applicant, Alan

John Thompson, against the respondents in the sum of

$5,958.00.

;

The cross-claim

the first and second

'respondents

against the applicants be dismissed with no order as to

costs.

4. The respondents pay to the applicants 75% of their costs, the same to be taxed if not agreed.

1 l

Note: Settlement and entry of orders is dealt with in Order 36 of

the Federal

Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )

)

SOUTH AUSTRALIA DISTRICT REGISTRY	)	No.G43 of 1983
1

DIVISION

GENERAL

B E T W E E N :

A.J. THOMPSON PTY. LTD.

and

ALAN	J O H N THOMPSON

Applicants

- and -

K.L.K. MANUFACTURING

PTY.

LTD.,KE-JIN

S 2 O L EiGCii and

juHN

scorn SuTrON

Respondents

REASONS FOR

JUDGMENT

CORAM: Fisher J.

B July 1986

These proceedings were commenced by application filed on

1 December 1983, which application was accompanied by

a statement

of claim. They relate to the sale and purchase of a business. The applicants contended that in the course of negotiations in

February 1983 leading to this purchase the respondent

K.L.K.

Manufacturing Pty. Ltd.

("K.L.K.")

contravened the provisions of

5.52 and s&.s.59(2)

of the Trade Practices Act 1974

("the Act").

'It	was alleged that by reason of these contraventions the

applicants suffered loss which they seek to recover from

K.L.K.

pursuant to 6 .82

of the Act and from the other respondents as

l	.",	'
I i	I
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persons involved by virtue of

s.75B

in the contraventions. In

the end no re-llance was placed by

-the

applicants on the

allegation that K.L.K.

contravened sub.s.59(2) of the Act.

The

conduct

which

was

said

c ntravene

comprised

representations made during negotiations by the respondents Kevin

Errol Koch ("Mr. Koch") and John Scott Sutton ("Mr. Sutton") on

behalf of K.L.K. which representations were also alleged to have

been made fraudulently, recklessly, innocently or negligently.

No reference was made during the hearing to these further issues

until there was a

debate concerning the power

of the court

award rnterest for the perrod between the date when the cause

action arose and the date of judgment. gefore more detailed

reference 1s made

the

issues

and

the pleadings

it is

necessary

relate briefly the circumstances in which the

contest arose.

Mr. Koch is an elderly man who has had much experience and, it appears, much success as an inventor and engineer. The

particular invention which was the subject matter

these

L I.

proceedings is known as

"Flexebar" which is

a device which when

attached to the front of

a motor vehicle operates

as a protection

additional to the standard bumper bar. At the time of the

negotiations in February

1983

the business

of manufacture and

distrrbution of Flexebars was conducted by Automate Pty. Limited

the name under

which

K.L.K. at that time traded. Automate

changed its name to K.L.K. Manufacturing on 14 July 1983,

after

having earlier sold the right to use the name "Automate" for

$30,000. K.L.K. was at all times a private company with Mr. Koch as dir.ector and executlve, the shares therein

being-_held by

himself and hls wife.

It was one of

a group of Koch family

companies. At the time of sale Mr. Koch

was, through

K.L.K.,

engaged in developing

trailer invention in addition to the

Flexehar business.

earlier years K.L.K. also engaged in the

manufacture and distribution of rear window louvres but this

I I

business

was

sold

June

1980.

Mr.

Sutton

was

and

I	chartered accountant engaged in private practice who acted as financial advisor to Mr. Koch and the Koch companies both as
I
I
I
auditor and as accountant.
I

The applicant Alan John Thompson

( "Mr. Thompson"

) had

had some years prior to the relevant time commercial experience

as an insurance agent. He then managed Doug Godden Pty. Ltd,

("Doug Godden") a

family company of his wife's father which

carried on the business of manufacturing blinds and awnings. He

was the executive director of the applicant

A.J.

Thompson Pty.

Ltd, ("the applicant company") which company acted as the trustee

for certain Thompson family trusts and was on my finding the

purchaser of the Flexebar business.

Early in February 1983 Mr. Koch indicated

at a lunch in

a city restaurant to Mr. Thompson that

was keen to sell the

Flexebar business.

Mr.

Thompson appears to have taken

up, with

some enthusiasm, the suggestion that he should purchase that

business and to have had telephone conversations with Mr. Koch to

- .

this end. As a result a meeting was arranged to be held at Mr. Sutton's office on 18 February 1983, which was attended by Mr. Koch, Mr. Thompson, Mr. Sutton and an accountant engaged by Mr.

Thompson, a Mr. Stevens. It was in the course of this meeting

that Mr. Koch and Mr. Sutton were alleged to have made certain

oral and documentary representations concerning the business, in

reliance upon which

was said the applicant company agreed to

buy the Flexebar business for

$200,000.

This agreement was oral

and not in any way at this stage reduced to writing and appears

to have been conditional only upon the purchaser obtaining

adequate bank finance. The assets of the business sold were

plant and equipment,-stock and goodwill.

The Flexebar invention

was the subject of patent protection both in this country and

elsewhere and the relevant patents were

to be assigned to the

purchaser. Mr.

conclude the sale by the beginning of March 1983, at which time

the applicant company would commence business with the Flexebar

assets on the premises previously used for the conduct of the

Doug Godden business.

Koch

and Mr. Thompson agreed to attempt to

Very shortly after this meeting

Mr.

Thompson and Mr.

Stevens prepared a budget for presentation to the Kestpac Bank in

support of an

application for finance. They used in preparing

this budget information which they received at the earlier

meeting as well as a copy of a budget previously prepared

by Mr.

Sutton for K.L.K.

for its bank. This application was

successful

and Mr. Thompson commenced to move plant, equipment and stock

the new premises. Substantial progress had been made in this

regard, and an amount of

$5,000 paid, by the time when

a further

meeting of the same persons was held on

3 March 1983.

At this

meeting Mr. Thompson complained that the value of the stock

was acquiring was considerably less than that represented to him

at the

meeting

l8 February.

Certain

relatively

minor

made

the purchase price, its break-up in relation to the various

assets, and which also referred to the fact that $100,000 of the

purchase price would remain outstanding as to one half thereof

figures

disclosed

that

latter

adjustments were meeting. Mr. Thompson then signed

a document which referred to

for six months and the balance for one year with interest at	14%
per annum.

In this

manner

the

applicant

company

acquired

manufacturlng business which had in the past

an annual turnover

of $860,000 in 1979/80 and $680,000 in 1980/81, which produced

least three models of Flexebar units together with spare bar sets

and accessories and which sold its products

at varying prices to

different

purchasers.

was

also

a business which was

acknowledged to have "run

down". Virtually the only information

upon which the applicant company made its decision to buy was

that given in very general terms at the meeting of

18 February

1983. Mr. Thompson did not make nor did he direct Mr. Stevens

to make any independent investigation into the reliability of

this information or the ramifications of the Flexebar business

prior to committing the applicant company to the purchase.

. I

. .

By their statement

of claim, as it stood prior to

amendment during the hearing, the applicants alleged that

Mr.

Koch and Mr. Sutton made a number of representations during the meeting of 18 February 1983. It is necessary to set these out in

the form pleaded

the applicants and their advisors undertook

extremely

establish during the hearing the fact that each representation

was made in these words and that each was false. However they

did establish that with the exception of representation (h), Mr.

laborious

task

attempting

the

onerous

and

Koch or Mr. Sutton made

a statement on the topic of each

representation being statements upon which

rely in making my

ultimate findings on the question

of a contravention of s.52

- .

the Act.

representations as pleaded were as follows:

the value of the stock held by the said business

was approximately $50,000.00,

the value of the plant and equipment owned by the

said business was approximately

$50,000.00,

Flexebar was patented in Australia and also in such

countries as

Japan,

West

Germany,

France,

New

Zealand, the United States

of America and Canada,

the cost of

materials, labour and packaging of

Flexebar unit was

$36.00,

the average sale price to distributors

f Flexebar

units was

$65.00,

K.L.K.

Manufacturing Pty. Ltd. had sold as many as

two thousand four hundred Flexebar units per month

and that the average number sold in a month was

eighteen hundred,

the Purchaser of the said business would

be able to

sell eighteen hundred Flexebar units per month,

- .

all dyes (sic), stationery and

like items would

pass to the Purchaser of the said business free of

charge,

there were a large quantity of orders which had not

been filled by K.L.K.

Manufacturing Pty. Ltd. and

that those orders would not be filled but would

pass to the Purchaser of the said business,

the quantity and value of stock held by the said

business would not decrease significantly pending

the sale of the said business,

the

said

business

was

so profitable

that

all

borrowings which A.J.

Thompson Pty. Ltd. would be

compelled

undertake

purchase

the

said

business would probably be able to be repaid from

profits made by the said business within the period

of one year.

At trial a further subparagraph was included, namely	-
"(1) the said business was profitable."

The appli

cants

also alleged that at th

,is meeting Mr.

Koch and

Mr.

Sutton showed to Mr. Thompson documents which

represented -

"(a)

that the value of the stock held by the said

business was then approximately

$50,000.00,

(b)

that the value of the plant and equipment owned by

the said business was approxlmately

$50,000,

(c)

that the cost of materials, labour and packaging of

a Flexebar unit was

$36.00,

(d) that K.L.K. Manufacturing Pty. Ltd. had sold

many as two thousand four hundred Flexebar units

per month and that the average number sold in	a
month was one thousand eight hundred."

Subparagraph ll(e) was included by amendment during the

i	hearing as follows:

"That over

a 12 month period up to about September 1982

the average number of Flexebar units sold per month was

I -.:

about 1,800 and that the average sale price was

$65.00

per unit.

The applicants pleaded representations was false and that

in effect that each of these

K.L.K.

had in trade or

commerce engaged in conduct that was misleading or deceptive in	'1
* :

contravention of 5.52 of the Act. It

was contended that the

applicant company, in reliance upon the representations, entered

into the agreement to buy the Flexebar business. It provided

particulars of its loss

amounting to $788,089. Furthermore

Mr.

Thompson claimed $164,000 in respect of payments

he contended he

had made on behalf of

the applicant company in addition to income

which he said he had

lost

and

personal

liabilities

under

guarantees which	he had given on behalf of the applicant company.
7

As seeking to establish that each of the above representations was

have said the applicants undertook the task of

, '

made by K.L.K. and that each was false. Of necessity this could only be done by them by a process of analysis of and deduction from documents and records discovered by the respondents and

unavoidably it irrelevant to note at this stage that the trial occupied

was

extremely

time

consuming.

It is

not

42 ays

of hearing with

31 witnesses,

151 exhibits and 3,833 pages

transcript. It

was unfortunate and not wholly the fault of the

I. -

parties that a hearing which commenced	on 18 April 1985 did not
conclude until 25 March 1986.

Before I dlscuss in detail the evidence concerning these

representations and the

witnesses it 1s appropriate that

. -

indicate why

I have adopted a different approach from that urged

upon me by counsel for the applicants.

In so doing it will

become apparent that in my

view

it was

possible

for the

applicants

succeed

wlthout

necessarily

establishing

the

falsity of each of the representations.

The essential element is

that the totality of the conduct be found to be misleadinq

likely to mislead.

I find very relevant and helpful in this

regard the approach

of the Chief Justice of

the High Court in

Parkdale Custom Built Furniture Pty. Ltd.	v Puxu Ptv. Ltd. (1982)
149 C.L.R. 191 at p.199 when he said:

"The conduct of

a defendant must be viewed

as a whole.

It would be

wrong to select some words or acts which,

alone, would be likely

to mislead if those words or

acts, when viewed in their context, were not capahle of

misleading.

obvious

that

where

the

conduct

complained of consists of words, it would not be right

to select some words only and to ignore others which

provided

the

context

which

gave

meaning

the

particular words. The same is true

of facts."

Likewise Brennan J. in Gould and Anor v Vxgelas and

others (1984) 56 A.L.R.

31 at p.58 approved the approach of

Connolly J.

at first instance when that judge refrained from

considering separately each representation. Brennan	J. said at
that page -

' I . . .

but

assertions

that

business

was

very

profitable were inherent in the four representations

found to have been made by Mr. Vaggelas (the vendor),

and it was open

to his Honour to find that the qeneral

representation of profitability was one of the factors which induced the Goulds to decide to buy. On a

10.

reading of the whole of his Honour's judgment, I think that is what he found. He quoted from the judgment of

Lord Halsbury

L.C. in Arnison v'Smith supra, to show the

fallacy of attempting to analyse the mental impression

created by of

a number of representations. He said

that the effect of

series of verbal representations

could be ascertained as one might ascertain the effect

of a series of written representations, referring to

Aaron's

Reefs v Twiss C18961 A.C.273,

where

Lord

Halsburv 'observed of a prospectus that it contained

statements

calculated

to-

show

that

the

commercial

adventure in question was a very good thing which

was

likely to produce very large profits'.

I understand his

Honour to have found that the four misrepresentations falsely conveyed a statement that the business was very

profitable and that the Goulds, unable

form 'an

independent judgment' in 'the critical area' but having

'a lively concern about the financial position' were

thereby induced to buy. That finding was open and no

error of law vitiates it."

I refer also to Taco CO of

Australia Inc. v Taco Bell

Pty. Ltd. (1982) 42 A.L.R.	177 per Deane and Fitzgerald JJ.	at
p.199 when they said:

"The

question

whether

particular

conduct

which

complaint is made is misleading or deceptive or more

likely to mislead or deceive is, in the ordinary case,

a question of fact to be answered in the context of the

evidence as to alleged conduct and

to relevant

surrounding facts and circumstances."

!	It is my opinion that the proper approach to this matter

is to assess the conduct of

K.L.K.

as a

whole and to view the

various statements in the context and atmosphere of the meetings rather than to analyse each statement separately for the purpose

of determining its truth or falsity. By adopting this approach

pr,opose considering critically each statement which

I find was

made, not so much for the purpose of determining its intrinsic accuracy but rather for the part it played, in the context

of th

. r

11.

meeting as a whole,

in producing in Mr. Thompson the impression

that the sum of

$200,000 was a fair price to pay for

a -

business

which was said to be viable and potentially profitable.

Before

coming

consider

greater

detail

the

happenings at the two meetings, It is appropriate that

I make

comment on my assessment of the evidence given by each of the

four witnesses thereat. It is relevant to note that Mr. Stevens

was the only person present at the meetings who was not a party

to these proceedings and he thus has no financial interest in

their outcome. Furthermore, the respondents were not separately

represented by solicitors or counsel and thus

must, In partlcular

as between the two natural persons, be taken

to be content to

have the proceedings conducted as a contest between then

o the

one hand and the applicants

on the other. Counsel for the

respondents and indeed counsel for the applicants did not in

their examination attempt to distinguish or differentiate between

them in such

a manner as to impose responsibility

on one for the

benefit or the relief of the other. Many questions

which might

have been considered relevant if this had been the objective were

not put and topics suggested by the bench were not pursued.	I
ultimately formed the opinion that on each side, for different

reasons, the omission

to do so was deliberate.

Mr. Thompson was not a satisfactory witness and conclusion of his‘evidence I was

the

of opinion that much of

itwas

unacceptable unless corroborated. However

I certainly did not

‘LP._	.	.-
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1

12.

1 i

form the opinion that he was deliberately seeking

to mislead the

court or present false evidence. This critical assessment of his

evidence was reached prior to hearing the evidence of Mr.

Koch,

whom I found to be utterly unworthy of credence.

I cannot place

any reliance upon his testimony and this outright rejection

persuaded me

to view

Mr. Thompson's evldence more favourably.

Mr.	Thompson felt very deeply that he has been tricked by Mr.

Koch. At the same time he appreciated that he was to some extent

the author of

his own misfortunes and thus had only himself to

blame.

He appreciated that

his assessment of the proposition to

purchase was excessively enthusiastic and uncritical. In these

circumstances he became an advocate of his own cause,

reconstructing much of what was said in the light

of a desire to

justify his actions.

To the extent however that

Mr. Stevens

corroborates his evidence

I have no hesitation in accepting it.

I accept Mr. Stevens' evidence but unfortunately

his recollection

of what happened and what was said at the meetings was extremely

limited. He came to those meetings with

no background knowledge,

I I

no particular task to perform and in effect merely

as an observer

who might subsequently be asked by Mr. Thompson to act

accountant for the business. I gained particular assistance from

him on the impression he gained from the meeting, namely that the

price was fair and that the business being acquired was viable

and could be made profitable.

As I have said I found the evidence of Mr.

Koch totally

I	unacceptable and unreliable. He was an irresponsible witness who
!

- .

13.

was inclined to ramble and rant, or "waffle"

Mr. Sutton

described him.

He purported to have only a minimal recollection

of what happened at the meeting, preferring to say that

he left

many matters to

Mr. Sutton and thereby avoiding

as far as

possible conflict of testimony

on crucial topics. However he had

happenings both prior and subsequent to the meeting. It was

significant however that no attempt was made to corroborate these

recollection

many

far

less

important

the

clearest

recollections, even when they were of the efforts

he said he made

to persuade Mr. Thompson not

purchase the business. Having

rejected outright his evidence the best that can be said is that

much of it rendered more acceptable. portions of Mr.

Thompson's

testimony which heretofore

I found incredible.

Mr. Sutton's evidence was more difficult to assess. On

the surface it was rational and business-like, a w lcome contrast to Mr. Koch's evidence. He performed well the difficult task of attempting to satisfy me that the respondents acted responsibly.

However I am not satisfied that his evidence and his conduct at

the meeting was thoroughly disinterested.

To the extent to which

his evidence is in conflict with Mr. Thompson corroborated by Mr.

Stevens I prefer-their evidence.

Moreover

there

some

portions of his evidence an indication of a desire held at the

meeting to have the purchase consummated and to refrain from

putting anything other than the most optimistic view of the

proposition

Mr.

Thompson

without

qualification.

significant than what he said at the meeting

was what he

left

- .

14.

unsaid.

It goes without saying therefore that the evidence of

the persons at the first meeting as to what was there said is

greatly in conflict.

I propose to make my findings as to what

was said at the meeting without always referring to what each

the persons at the meeting say was said

or not said. The crucial

representations which

I find were made at the meeting were on the

following topics, namely the average selling price and average cost of manufacture of a Flexebar unit, the level of sales per month which had been achieved by K.L.K., the viability and	. '
, I _ .
potential profitability of the Flexebar business and the fairness	I
of the values placed on the stock, plant and goodwill of the

business.

Many

these

representations

were

made

such

general terms that it was not possible for the applicants

establish conclusively their falsehood.

m a t was to my mind

without doubt false was the impression which

I find K.L.K.,

through Mr. Koch and

Mr.

Sutton, deliberately conveyed to the

applicants as to the viability and potential profitability

well as

the fairness of the overall price

of the business.

i-!

There are however before I turn to the representations.

a number of findings which

I must make

To some extent at least

they bear upon the deliberateness of the conduct

of K . L . K .

There

is no doubt that Mr.

Thompson

had become

by the time of the

meeting

enthusiastic

about he

prospect

of acquiring

the

business.

He had had prior thereto

at least one meeting with Mr.

i	\
i

l	15.
I
I
I

Koch and a

number of telephone conversations.

Mr. Koch agreed

that he was aware that Mr. Thompson proposed that the applicant

company would be the purchaser of the busmess.

There was some

discussion between Mr. Koch and Mr. Sutton prior to the meeting

in circumstances where each was aware Mr. Thompson would be

seeking information at the meeting concerning the business.

virtue of the course they adopted, it was not in the interest of

counsel for either side to investigate this aspect of the matter,

the respondents seeking to present a common front and the

applicants refraining from suggesting that either natural person

was less responsible than the other for the conduct which

occurred at the meeting. However it was establ.ished that

Mr.

Koch told Mr. Sutton not to prepare anything for the meeting and

that it was a preliminary discussion.

This is of significance

when it is appreciated that Mr. Koch had made unsuccessful

attempts to sell the business in the past, had in effect already

sold the "Automate" name and was seeking funds to meet incane tax

commitments.

I also find that Mr. Koch stipulated, and had

stipulated prior to the meeting, that the purchase price was

$200,000. However

before

the

meeting

he had a stock-take,

allocated values to the stock, listed the plant and equipment and

sought information as to its value. All these things were done

in my opinion for the purpose of satisfying the purchaser that it

was receiving fair value for the purchase price. There is no

do&t

in my mind that Mr. Koch formed the view that

Mr. Thompson

was an enthusiastic prospective purchaser and that nothing should

be said at the meeting which might deter him.

16.

I am confirmed in this view by what happened at the outset of the meeting, a happening which indicated the attitude

of Mr. Koch and Mr. Sutton. Both

Mr. Thompson and Mr. Stevens

said that Mr. Sutton was asked to show them financial information

concerning the

Flexebar business. Both agreed that Mr.Sutton

said that it was not possible

to supply this information because

Flexebar was only a portion

of the total business of K.L.K., that

the figures were intermingled and that it was not possible

obtain information of the performance of the Flexebar business

from the accounts of K.L.K. In evidence in chief Mr. Sutton said

"I said that one of my problems was that the financial

statements for the company would be

a bit misleading

because they included other things such

as the louvres.

Up until 81 or 82 they

included

the

expenditure

relating to the new trailer development, and that the best that I could suggest was that I produced some sales figures showing all the monthly sales month by

month going back

1979, and through until October

1982. "

When cross examined he gave the following evidence

"Q.

But the plain fact of the matter is that

you were

in a position in February of

1983 to say to Mr.

Thompson and

Mr.

Stevens: the accounting figures

are here; they show on paper a very substantial

loss, but that is not the true position for these

reasons.

You were in a position to say that to

them were you not?

I could have said that, yes.

Yes.

That would have put them

on notice that at

least a person looking

at the company's records

might

say

that

this

business

was

not

worth

anything, might it not?

A.	It might. "

Later in cross-examination Mr. Sutton gave the following answers:

17.

"Q.	Mr. Gray: But when they asked for the financial

papers you positively dissuaded them from

pursuing it, did you

not?... I suggested

that the financial statements included

other

things

and

would

misleading

without a great

deal

work

extracting that information.

And all was designed to dissuade them from pursuing that

line of enquiry;

you did not want to show

them the financial statement?...

said before, I was

only doing a job and

if instructed to hand them over,	I would
have done so.

You did not want

o?... Why not?

I was not selling the

' I

business; it was not

mine.

l	You did not want to hand the statements over. You had a

problem and

you took positive steps

dissuade them from pursuing

a line of

inquiry about the financial statements of

the business?...	I had a problem you
said?

Yes. Did

you not have a problem with the financial

statements?... Could	I have the question
again?

Yes, we will have the question again.

SHORTHAND NOTE READ

Mr.

Gray: What is your answer?.

. . Yes.

The attitude of Mr. Sutton illustrates what

I see as the

deliberate attempt on the part of Mr. Koch and Mr. Sutton to which they put before him of the Flexebar business. The balance

avoid disclosing any information which might discourage Mr.

sheet, profit and

loss

statements and financial accounts were

readily available to Mr. Sutton and could have been quickly

explained at least

to Mr. Stevens. But the profit and

loss

account of K.L.K.

(under its then name of Automate Pty. Ltd.)

disclosed a loss

for the previous year ending 30 June 1982

$134,877, a considerable increase on the previous year's

lo s of

$56,707. Moreover

the

balance

sheet

indicated

that

the

liabilities of the company at that date exceeded its assets by

amount of $151,396 which compared with a like excess of $16,519

in the previous year. The louvre business had been sold on 17

June 1981 prior to the commencement of the

1981/82 financial year

and thus had no impact upon the accounts for that year. Despite the considerable efforts made to satisfy me that additional

expenditure

developing

the

trailer

($34,162

which

expenditure having been capitalized that

year) would reduce this

loss, I am of opinion that the Flexebar business had traded at a

substantial loss that

year.

The disclosure,

even

with

appropriate qualifications and explanations, of this fact would

have put Mr. Thompson and Mr. Stevens on their guard and prompted

them to consider more critically the statements

of Mr. Koch and

Mr.	Sutton. Such disclosure however would have substantially

diminished the prospects of the applicant company purchasing the

business.

With regard to the statements made by Mr. Koch and Mr.

Sutton at the meeting

of 18

February 1983 it is, in my opinion,

helpful to consider them as tending to create two separate,

although in some respects interdependent, false impressions. The

applicant company was led to believe that $200,000 was a fair

price for the Flexebar business and also that the business was

1	.	.
l
I

19.

viable and potentially profitable. Stating the situation in

_ .

this

manner

does

not

preclude

a finding

that

particular

_ -

representations were false but rather that, considered together,

the representations had the effect

creating a false impression

, .

on these two topics and in consequence were misleading.

I do not

need to take

the

matter

viability

further

this

stage.

F ,

On the matter of the purchase price of the Flexebar

business I have already stated my finding that it was the Single	I >
I
I

amount of $200,000.

When this topic was discussed at the meeting

i..

Mr. Sutton indicated that it was necessary	to allocate a value	I .	1
I, :

for stock, plant and goodWilli at least for accounting and income	.. ,	j ;	!
jl

tax purposes.

Mr.

Koch however had already appreciated the

necessity to justify the purchase price	as a fair price,	i.e. to	i
L .-

satisfy Mr. Thompson that the applicant company was receiving

value for its money paid. For this purpose	he had, as already	? . ~
l.!

related, had listed and obtained information	a stock-take	and	priced	the	stock	and	had	also	I~
L :
1 ;

as to	the value	of plant and	i'
, . 1. :
;-.

equipment.

He indicated that he priced each of these items at

fair value of	$50,000 and the balance of	$100,000 represented the	i .
!

value of the goodwill of the business, including the patents both	: r~
i;'

Australia.

and

overseas.

can

acknowledged

that

any

;

I '

departure

from

these

figures

did

not

necessarily

warrant

i _.

reduction

the significant in assessing whether the	sum of $200,000, but	can be relevant	and	i
I :

impression

created that that

I . .

I ;

price was fair was justified or alternatively was false and	I
I *:
l ,

misleading.

In my opinion the manner in which Mr. Koch sought to

l .

20.

support

the

figures

was

fallacious

and

created

an overly

optimistic impression which was misleading in the circumstances.

The question whether the value assigned to each of the

three items was fair depends, inter alia, upon whether the Flexebar business could be sold as a going concern. The respondents represented that the business had been profitable in

the past, had

run down in consequence of Mr. Koch's

loss of

interest, but was presently viable and capable of being returned

to comparable profitability. This was the context in which

Mr.

Koch represented that the values

werefair. However my ultimate

findings that the business was not viable and not capable of

becoming profitable requires the finding that

Mr. Koch's approach

value was not

justified

and

his

figures

were

greatly

overstated. In particular if the losses of the business had been revealed, it would have been difficult, if	not impossible to sell
it as a going concern and to justify	placing any value on
goodwill. Furthermore, the values placed	at least on the items

of stock was excessively high, particularly if sold otherwise

than in conjunction with the sale of the business as a going

concern.

It is not wholly irrelevant to note that when these

assets were sold by the liquidator of the applicant company

less

than two years later they realized only $31,000.

The

values

which Mr.

Koch placed on stock and plant were set out in

handwritten document prepared for and shown

to the meeting.

In respect of the value assigned to the stock,

Mr. Koch

. .

21.

at	the outset placed upon the various items their highest

possible-value, namely wholesale price being

the price at which

K.L.K. sold these items and substantially above the prlce

asked

and paid by distributors. It follows that these values greatly	i
!:
b
t

exceeded the value disclosed by K.L.K. in its accounts

that

time, namely the lowest of	c o s t ,	replacement price and net	I:
l

realisable value. Furthermore there was unchallenged evidence to

the effect that in valuing

a business sold as

a going concern the

usual practice is to value stock at the lower of cost	or
replacement prlce.

There vas also evtdence which

I accept that even these

inflated values were in some circumstances wrong.

I refer to

clear blocks upon

which Mr.

Koch placed the figures of $7.15

each whereas there was evidence that they were purchased in

preceding months for

$1.60 each. It was accepted that the proper

figure was not more than $1.80 each. Likewise in respect of

Bar Flexebars

Mr. Koch used the figure

of $64.50 which was

K.L.K's wholesale selling price

which in itself was $20 more than

the price at which K.L.K. sold the greater part of its production

to three automotive firms (sometimes identified under the names

Repco,. Q.M.S.A.

and Terret Auto Distributors). The stating

this figure of

$64.50 in the document prepared by

Mr. Koch is

significant as it is virtually

the

figure which the applicants

alleged Mr. Koch represented to be the average selling price of

Flexebars. Mr. Koch also placed

a value of $9.80 on each of the

Polytubes in stock, whereas it was not disputed that the more

2 2 .

correct figure

$4.58.

Mr. Thompson had a stock-take made after the meeting of 18 February and he calculated the value of the stock, based on

the flgures used by Mr.

Koch with the exception of the clear

blocks abovementioned, at $33,041.22.

This was the subject

discussion at the meeting on 3 March and Mr. Thompson's figures

both as to stock and value were not disputed by Mr. Koch or Mr.

Sutton although they refused to reduce the purchase price.

The figure of value of the goodwill and patents was only justified if the

$100,000 which Mr.

Koch stated as the

business was able to be sold

as a going concern, if in fact it

had goodwill and was at least capable

being carried

profitably. Disclosure of K.L.K's. accounts would at least have alerted the applicants to the fact that this was not the case. Furthermore there was little justification for paying a

substantial

sum

for the patents if the patents were under

challenge and the volume of sales of the patented articles was

falling,

least

part

consequence

substantial

competition from Aunger. Neither

of these matters were mentioned

by Mr. Koch or

Mr. Sutton, at least in such

a manner as to ensure

a prospective purchaser was necessarily informed.

In this matter

Mr. nompson was led to believe that

K.L.K.

was viable and had

the potential to make profits. If such had been the case Payment

of a substantial sum could have been warranted.

t , .

23.

!	i .
t .

The placing

excessively high values on stock and

goodwill led the applicants, particularly in the light of the

other circumstances to be subsequently reviewed, to accept that

the sum of $200,000 was fair value for what was being purchased.

,. '

It was reasonable for the applicants to assess that the sum

$200,000 represented value for the price sought.	i .
I

On this aspect of the matter the applicants had fairly

gained the impression, as Mr. Stevens also

had, that it was

reasonable to purchase the Flexebar business for

$200,000. This

impression was confirmed by the representations to which I

now

turn which, taken together, presented the picture of

a business

which was viable and capable of returning

profitability

comparable to that achieved in 1979180 year.

I reiterate that

the applicants sought to establish that each of these statements

considered separately was false or at least

in some

instances

made recklessly. In this regard they were in part successful but

I prefer to rely upon

the overall effect which they produced

of a

business with the aforesaid features.

By way of introduction I draw attention to

Mr. Sutton's

statements that as at February

1983 the Flexebar business had the

capacity to be as profitable as it had been in

1979180

vigorously promoted.

I note that there was no criticism of Mr.

!Chompson's efforts to promote	the business during the months
after he acquired it.

24.

Likewise Mr. Stevens said

that the substance of what

was told by Mr. Koch and Mr. Sutton was that the business was viable. This statement must be considered in the context of the

fact that all parties agree that Mr. Koch and

Mr.

Sutton said

that the turnover of the business was at the time down. Mr.

Sutton and Mr. Stevens were agreed that

it was stated to be down

because of Mr. Koch's involvement with the trailer. Mr. Stevens

said he was told nothing to indicate that there was anything

wrong with the busmess or

that it was not a viable business.

Mr. Stevens was not asked what he attempted to convey

by the word

, .

"viable" but in the context

I have little difficulty in accepting

that he formed the impression that it was able to survive whilst

the turnover was being increased sufficiently to enable the

business to return to profits.

The business could

only

be viable if, stated very

generally, there was sufficient volume of sales with sufficient

margin between cost of manufacture and selling price. There

no doubt that the applicants were led to believe that there was a

considerable margin.

find that the information concerning

turnover was overstated and in one instance false. Moreover they

were not told anything which would alert them to the difficulties

which the applicant company would experience

in attempting to

lift sales in

an intensely competitive market if it adhered to

average selling price of $ 6 5 -

Mr. Koch in the first instance denied that

he said that

i	%
i	I
I

25.

the average sale price of a Flexebar Unit Was $65 Or that that

figure was ever mentioned. However subsequently

he admitted that

he told Mr. Thompson that the trade price was

$65.

Mr. Sutton

said that he remembered the figure of

$84 being mentioned by Mr.

Koch although he could not remember or deny that

$65

was

mentioned.

However

subsequently

agreed

that

Mr.

Koch

mentioned a figure

of $65 although he also said

he cut across Mr.

Koch when

he spoke of selling prices and told

Mr. Thompson to go

to the factory and check some invoices to ascertain the average

selling price.

Mr.

Stevens f o r

his part said that the topic of

average selling price was discussed and that

price of $65 was

stated by either	Mr. Koch or-Mr. Sutton to be the average selling
price.

My finding that Mr. Koch represented

at the meeting on

18 February that the average selling price was

$65 per unit is

confirmed by the fact that

he showed the figure

of $64.50 in the

document he prepared

setting

out

stock

and

plant

values.

Moreover the figure of $65 was

very shortly thereafter used in

budget statements prepared by Mr. Stevens for

the bank. These

statements were shown

to Mr. Sutton who, even if

he only glanced

at them, could not have missed seeing this crucial figure. It

was mentioned on a number

occasions on the first page of the

documents, and he made no comment

this figure used by

Mr.

Stevens for this purpose.

A number of matters rendered this representation highly

26.

misleading, particularly if used by the purchaser for the purpose

of assessing the margin between average selling price and cost of

manufacture. It was also

a simplistic statement in that it did

not take account of the fact that K.L.K. produced a number of

different models of Flexebar units (two

bar, three bar and four

bar units) which it sold to	different classes of purchasers at
different prices.

It is however in the implied invitation to the purchaser

to compare thls selling price with cost price that the statement

was primarily misleading.

The

evidence established that the

three automotive firms abovementioned were K.L.K's principal

customers and that two bar units,

K.L.K's

major selling product,

were sold to them at

$44.50 a unit.

The applicants produced

evidence derived from an assessment of K.L.K's documents that

the average selling price of Flexebar units from March 1982 to

February 1983 was $52.88. This evidence

was not effectively

challenged by the respondents and the only manner in

which the

figure of $65 could be in any way supported

was, as put forward

on their behalf, on the assumption that the total proceeds of

sale represented sales

of Flexebar units. This was in fact quite

incorrect as X.L.K. sold not only Flexebar units but also spare

bar sets and components. I

find that it was represented to the

applicants that the average selling price of

a unit was

$65.

At the meeting Mr. Sutton presented

a document which

supported his statement that $36 was the cost of manufacturing a

- .

27.

Flexebar unit.

Mr. Koch agreed that when Mr. Thompson asked him

what it would cost to make a Flexebar he replied

"$26". Mr.

Sutton however corrected him by

saying that the cost was $36.

Again it was not possible for this figure accurately to

indicate

this cost as K.L.K.

manufactured two bar, three bar and four bar

Flexebars . However this statement as

to cost, taken in

conjunction

with

the

statement

average

selling

price

indicated a substantial gross profit margin of $29 per unit, from which any overheads would be deducted in order to determine net profit. Because I have found that the average selling price was

substantially misrepresented it is obvious that it was quite

misleading to represent bp implication that K.L.K. hzd enjoyed

and the applicant company could expect such a margin.

It is clear that the applicant company, Mr. Thompson and Mr. Stevens, accepted that they could proceed on the basis of such a margin. These figures were included in the budget which

they prepared for presentation

to the

Bank.

The further crucial representation to the applicants was

on the topic of volume of sales achieved by K.L.K. and what the

applicant company could expect to attain. On this topic Mr. Thompson gave evidence to the effect that a document was produced by the respondents at the meeting which disclosed sales of 1,800

units per month.

However the

existence of this document was

denied by the respondents

and Mr. Stevens could

not

recollect

such a document.

In this regard I find Mr. Thompson

was

I I

I	b .
l

28.

mistaken, being doubtlessly confused by the number of documents

produced at the meeting.

Mr. Stevens said that at the meeting there was

discussion concerning the turnover

of the business. He said that

he and Mr. Thompson were told that in the past the business had

achieved 1,800 per month. Mr. Sutton confirmed that

Mr.

Koch

said in answer to a question from Mr. Thompson that the business

had sold as

many as

1,800 per month. Mr. Koch said that Mr.

Thompson asked him whether he

would be able to sell 1,800 per

month

and

he, Mr.

Koch, answered "Allan, that is entirely

dependenr: on

how you operate and I mean

yoii have got to get to

know the industry". Mr. Sutton said that when Mr. Koch first

mentioned the figure

of 1,800 per month he corrected him and said

it was as high as 2,428 per month. Mr. Stevens said the figure of 1,800 was mentioned in the context of an assertion that the business was viable and had achieved such sales.

The first statement by

Mr. Koch was misleading in that

it conveyed to Mr. Thompson the impression that it was reasonably

I. I

possible for him to achieve sales of 1,800

per month. In fact

I ,

such-sales could not possibly be achieved,

Mr. Thompson

ultimately found, if an average selling price of $65 was to be

maintamed. The great majority

of K.L.K's sales were, as Mr.

L .

Koch must or should have known, at prices

$20 per unit lower, and

he was at the time achieving sales very substantially lower than

1,800 units per month.

i	,	r !
I	I -
l
t - I ,.
i
I I
1.:

29. r-

i ,

Mr. Sutton's statement that the business had in the past	,
j :

sold as many as 2,428

units in a month was, as he should have

I '

r ;

known,false. This figure appeared in a document listing sales	in	1
:-
I .

the 1979J80 year

together

with

the

proceeds

such

sales.

The

1 '

figures for the months of February, March and April 1980 were

- 1

follows: I-	as	out	set	. _
I

No. Sales

Before

Tax

February

$47,105.36

754

. .

March

2,428

$77,486.31

Apr

i 1

$50, 49.51"

760

It was, or should have been, patently obvious to anyone seeking

to use these figures in a discussion concerning sales that there

was something seriously wrong with the March figures. Either the

i ,

1 ;

; ..

number of sales was incorrect or the amount of the proceeds of

I .

I ,I

sales was wrong. The fact that on the document produced there

t '.

was an asterisk indicates that some person had earlier noticed

i , I

the error. Mr. Sutton acknowledged that the number	of sales was	i
5 '
I .
!.

incorrect, and obviously incorrect, a matter of	which he was or	I. '
L .:
!.-.

certainly should have been aware. It was misleading for him	in	I
; .'
, I
I

the circumstances to tell	the	purchasers that	K.L .K.	had sold	I
l '

2,428

units in 1979180 the year of record sales and profit which

I ,

. ..

_ .

sales and profit Mr. Thompson

was inferentially told the business

had the capacity again to achieve	if vigorously promoted.	i r
i-:

i '

Mr. business was currently selling

Thompson and Mr.Stevens were not told that the

1,800 units per month or in

fact

how many were being sold each month. They were told that the

current level of turnover

was low.

In the forecast of sales

30.

which Mr. Stevens prepared for his budget he included

600

per

month rising to 1,500 by the end of the 1983 calendar year. He said that he prepared his budget-in this manner because he was

aware the current level

of turnover was

low (in fact it was

approximately 600 units per month) and

Mr. Thompson "needed time

to get the feel of the business".

The

manner in which he

prepared hls budget confirmed the impression which he said he gained from the meeting, namely that sales of 1,800 per month could be achieved. Statements were made at the meeting from

which Mr. Thompson and Mr.

Stevens were reasonably entitled to

infer that the business was viable because

it had a

substantial

gross

profit margin and that it was capable of increasing

considerably its sales and in consequence bectjme profitable.

Furthermore that such

increase in sales could

be achieved at

an average selling price of

$65 per unit. They were also led to

believe that the present low level of sales was due to Mr. Koch's

lack of interest in the Flexebar business and that he was

devoting his attention to develop the trailer. I do not accept

that this was

the principal reason for the fall off in sales,

rather it was the existence of Aunger. The true fact concerning Aunger's competition was one

a major and aggressive competitor,

of many things left unsaid at the meeting. Aunger's competition

was mentioned but Mr. Koch said it was not

a matter of concern.

Likewise there was no mention of the substantial oss which the business had suffered, the challenge to the patents by Grundy, the fact that the average selling price to their major customers

was $44 per unit and the fact that sales

of 1,800 per month had

31.

been achieved once only, namely in October 1979 and not since.

Nothing

but

the

most

optimistic

view

the

business

was

presented to Mr. Thompson and Mr. Stevens.

The evldence of Mr.

Mount, a witness called by the respondents, satisfied me that the

representations as to potential profitability were mlsleading as

they could never be achieved.

I am

opinion

that

K.L.K. engaged

misleading

conduct at the meeting

of 18 February 1983 in that it represented

to Mr. Thompson and Mr. Stevens that the Flexebar business was

viable, in the sense used above, capable of achieving sales

1,900 ?er ==nth vlth a sllbstantial gross profit marqir and that

- -

in the light of the value of the component parts of the business

the

price of $200,000 was reasonable.

I am furthermore of

opinion that Mr.

Koch and

Mr. Sutton were involved, in accordance

' I

with s.75B of the Act, in the contravention in that they were, as

I subsequently find, each knowingly concerned therein.

find

that the applicant company purchased the Flexebar business in reliance upon and induced by this misleading conduct.

An assessment of the applicant company's compensable

loss 1s more difficult.

The matters which prompt my concern

arise out of the fact that Mr. Thompson appears to have accepted

K.L.K's representations without question and to have acquired a commercial business without examination or investigation. It is

incredible to me that he and his company entered into the

transaction and committed themselves to expense with

little

32.

knowledge or understanding of the business which

had

been

acquired and--which the applicant company proposed to conduct.

Such matters should, in

my opinion, be taken into account in

attempting to assess the actual	loss	flowing directly from
K.L.K's contravention.

There was no dispute by counsel in this matter

principles applicable to determine the measure of damages. It

was accepted that they are akin to those recoverable in an action

as o the

of deceit and reference was made

to the formulation by Gibbs

C.J.

in Gould v Vaqqelas supra at p.34. At the outset it

will

necessary for

ne to determine the true value

of the business- ar:

the time of purchase and then the losses incurred by the

applicant company which are not represented by the difference

between that value and the amount paid. Debate however centred

around the extent to

which Mr.

Thompson could be said to be the

"author of

his own misfortunes" and what loss flowed directly

from the contravention, especially with respect to the trading

losses. In this regard the comments of Gibbs C.J. in Gould v

Vasuelas at p.35 are in

point:

"If the purchaser, besides paying more for the business

I- I.

than it was worth, has suffered additional losses which	!
resulted directle from the fraud he ought to be

compensated for

them.

Of course the Court must be

satisfied that the

loss did result directly from the

fraud and not from some superveninq cause such as the

follv. error or misfortune of the purchaser himself,

and must ensure that

no additional compensation is

given for losses when those losses, or the probability of their occurrence has already been taken into account in determining the value of the business."

I have emphasized the particular words

to which

I attach

33.

significance in the last sentence of this extract. His Honour's

concern that no additional compensation

be given when losses have

already been taken into account was referred to by Dawson

J. in

his reasons, although he was

in dissent on the ultimate decision

of the High Court. He said on page 59:

"The difference between the price paid and the actual

value at the time of purchase should reflect the future

of profitability or unprofitability of the business

because the actual value of the business

at the time of

purchase must depend upon its potential

as well as its

present returns. Moreover, it is possible to have

regard to the events which occur after

the purchase

order to assess

the profitability

of the business at

the time of purchase: Potts v Miller,

at p.299. If, as

prima facie it

is, the subsequent profitability or

unprofitability of the business is to be taken into

account in the calculation of its actual value at the

time of purchase, then care must be taken in the

calculation af consequential losses to ensure the same

ground is not

covered

twice.

Moreover, for a loss to

be recoverable it must be clear that it is suffered

a direct consequence

of the deceit and is not referable

to something else such

as the purchaser's ineptitude in

the conduct of the business."

The High Court approved generally the reasoning of the Court of Appeal in Doyle

v Olbv (Ironmonsers) Limited

C19693 2 QB

158.

Winn L . J .

said on page

168 of that case:

'I...

it will be too remote not necessarily because it

was not contemplated by the representor, but in any

case where the person deceived has not himself behaved

with reasonable prudence, reasonable common sense, or

can in any true sense be said to have been the author

of	his own misfortune. The damage that he seeks to

recover must have flowed directly from the	fraud
perpetrated upon him."

Sachs L.J .

said much the same on page

171 -

"The

acquiring

business

normally

entails

the

expenses of moving into fresh premises, keeping the

34.

business going, and at any rate continuing to keep it

going until such time as it can be disposed of; and

then one looks also at the expenses of selling.

The

computation of the

loss may in many cases

not be easy.

Thus, the court must obviously take care

not to include

sums

for

consequences

which

may

due

the

plaintiffs

unreasonable

actions,

and

also

not

include results which are too remote

- matters which

often involve difficult questions of fact

and degree."

Later on page

172 he said on the question of the

I	goodwill of the business bought as a going concern:

"Any value attached to the business itself as being a

going concern on an independent basis was very small

indeed; and it would seem to me that when once the

facts were fully

known to

a purchaser, any sizable

payment for goodwill would have been very unlikely."

...

I -

These principles concerning the assessment of losses under 6 . 8 2 of the Act were restated	i,,
l - I

by the High Court in Gates	v	i	.-
j :

The Citv Mutual Life Assurance Societv Limited

(1986) 63 A.L.R.

600 per Gibbs C.J. at p.603 and Mason, Wilson and Dawson	JJ. at	! ,
I :
p. 607.	,I
!i
P ,
1 .

A further question arises, namely the extent to which, if at all, Mr. Thompson is entitled to be compensated for

i :

the	i	I .
L.

losses which he alleged he suffered in supporting financially the	i. r
I .
1 I.
applicant company and in guaranteeing its chattel leases. On my	I,, I
; .
finding, Mr. Thompson was not the purchaser of the business and	,i:
I "

therefore	his	position	is	analagous	to	that	of	the	Goulds	in	I ..
L !I
!

Gould v Vauuelas supra. On page

36 the Chief Justice said in

such	of	respect	situation	a	-	l -.
t -

"In a case such

as the present,

when the plaintiffs were

not purchasers, the measure of

damages is the

sum which

.. c

- .

. .

_ -

35.

represents the loss which the plaintiffs have suffered

because they altered their position in reliance	on the
fraudulent misrepresentation."

The damage which can reasonably be claimed in this

matter can be assessed under the following heads, namely true

value of business sold, trading losses, Mr. Thompson's losses and

interest.

In respect of the payment of

$200 ,000 for the purchase

of the Flexebar business

do not see the applicant company and

Mr. Thompson as

"the author of their

own misfortunes".

I make

this findinq notwithstanding the criticism which

I already have

made of Mr. Thompson's lack of prudence.

In my opinion Mr.

Koch

and Mr. Sutton went out of their way to represent that the

sum

of $200,000 was a fair price for

a viable business with potential

to return to past profltability. Nothing was said to suggest

warn

the

contrary

and

nothing

but

the

most optimistic

impression

was

given

of individual

aspects.

I do however,

acknowledge that there was specific reference to the fact that

1	the business had run down and that there was	no representation
I
that the business was presently profitable.

However the essential fact to which the applicants were not alerted, notwithstanding their specific request, was that the business was making and had in the last financial year made very

substantial losses.

my opinion if these losses had been

disclosed,

together

with

the

true

nature

of the

Aunger

36.

1 , -

competition	and	the	challenge	by	Grundy	to the	patents,	the	;	:_.
I
!

I	business could not have been sold and would not have been
I

purchased as a going concern. If these facts had been fully	1 'i,
!
disclosed a payment for goodwill would not have been made and	1:.

considerable

doubt

would

have

been

cast

the

value

the

i !

purchaser of the patents.

l	1.
" ,

opinion

that

the

business

could

not

sold

going	concern	has	implications	in	the	assessment	of	the	true	! :
1 :I:

value of stock

and

plant.

They

have

a greater

value

purchaser of a business as a going concern than if sold as the

i-:

assets of an unprofitable business with little if any goodwill.

_,,

r,-.:

Certainly	the	purchaser	of an	unprofitable	business	without	1- :
c

goodwill would not be prepared to

pay the

price

which

the

;. ::

1:: i

owner of this business sold his stock i.e. the wholesale price

b. I

p 3,

l- I

which was adopted by Mr. Koch in valuing the stock.

I-:.

It is my opinion that the true value of the business	at	f !
P-,.-

the time of purchase was $50,000.

I do not suggest that either

this figure or the figure for allowable trading losses is capable

k j

of precise

calculation.

In the

words

Fox J. in Brown v Jam

Factorv	Pty.	Ltd. (1981) 35 A.L.R.	79	at p.91:	L:
t - c .:

"This is largely a matter of estimation, it has been

be	to	said	a 'jury	question'	(D vle	v	z..
:^,

(Ironmonuers)	Ltd. C19691 2 Q.B. 158 at 167 and	169)."	i - ' . i
f. ._

In arriving

at this value

I have placed a minimal figure

goodwill

and

patents

and

have

substantially

reduced

the

value

.-:

37.

which Mr. Koch placed upon stock and plant.

%.."*I

I W v e taken into

account the fact that

X.L.K.

was making losses at the time and

the fact that

was likely to contlnue making losses. In

respect of the latter fact

I propose to ensure

as far as possible

that there is no double count when

I come to consider the trading

losses which the appllcant company claimed.

The trading

losses claimed by the applicant company were

as assessed by Donald Shammall, an independent accountant called

by the applicants. He applied what

was called an "audit test" to

the books, records and accounts

of the applicant company and his

esaminatlon revealed net losses, which

I accept, of

$88,061,

$71,246 and $8,972

for the periods ending 30/6/83, 3016184 and

30/11/84 respectively.

It is fair to comment that at least in

the latter two periods these

losses would have been substantially

greater if it were not

for the fact that Doug Godden made in

excess of $100,000 available as loans

to the company. It appears

that these funds were loaned free

of interest.

It is my opinion that the applicant is not entitled to

claim

all

these

losses

as flowing

directly

from

the

contravention. As I have already indicated

I am very critical of

i	;.
i

Mr. Thompson's failure to investigate thoroughly either himself or through Mr. Stevens the business which he was purchasing. He was justified in relying upon the inducements put to him at the

meeting to purchase the business, but it was utter folly

on his

part to fail to ascertain matters such

the true cost of

_ _

j ;

manufacture

each

the

Flexebar

products,

the

various

customers

the

Flexebar

business

and

the

varying

pr-ices

t :

particular	products	and	the	volume	of sales	to	these	customers.	I
t

These are but some

of the matters which a prudent purchaser would

investigate or have had investigated prior	at	least to commencing	L.
!:

business	operations.	Such	investigation	would	have	stablished,	5 .
i,

in my opinion, that the state of the Flexebar business was such	t
..
that it was incapable of being conducted profitably because it	L . I ..

could not achieve sufficient sales volume.

I also have to

take

into account the fact that some initial losses have been assumed	I:
1:

in the assessment of the true value	of the business.	i
I .
1.

Mr. Thompson was deceived as	to	the true state of the	I;
I

business at the meeting on

18 February 1983 and had committed the

applicant company to the purchase by the time of the meeting

on 3

I':

March 1983.	It	is	fair	to say that	the	company	had	no	I '
I

alternative

but

commence

manufacturing

and

selling

forthwith.

However a prudent purchaser would have earlier commenced critical

:,I

investigations and	in this regard the applicants must accept some	.	1	.
I I
!.

of the blame. In my opinion they should but	for their folly have	I:
! ' :.

ascertained the true state

affairs by the end of that

;

financial year. -The relatively short period, namely four months,	! '
I:

for which I

am prepared to allow the applicant company trading

losses reflects

opinion that the applicants were to some

extent the author of their misfortunes. At the end

June 1983

L .

the

net losses of the applicant

company

totalled

$88,061.

1 :

However these losses must be reduced as the applicants were aware

- . .-

39.

that the business was not trading profitably. at the time of purchase, a matter which.,-,they acknowledged when preparing the budget for the bank. The assessment of the actual value of the

business as $50,000 also reflects some inevitable trading losses.

The best that can be done in this regard is to reduce the actual

net loss for the period

of $88,061 by the amount of the

loss

which it can fairly be said was contemplated by the applicants.

I have used the figures for gross trading profit which the

applicant company provided in its budget for the bank from which determined by Mr. Shammall. This budgeted gross trading profit reflects the performance expected by the applicants as a .result

of the representations at the meeting on 18 February 1983.

The

actual

operating

expenses

w re

independent

these

representations and to

a considerable extent determined by the

applicants. The particular figures are

$79,000 budgeted gross

trading profit and $105,053 actual operating expenses producing

for the period

a net loss of $26,053.

It can fairly be said that

such a

loss was contemplated or has already been taken into

account. It must

be deducted from the actual loss incurred.

this very general and unsophisticated manner

I assess $60,000 as

the additional

loss which flowed directly from the contravention.

Mr.

Thompson

claimed

$74,786, being

amount

personal funds which e said he paid into the applicant company between 15 November 1983 and November 1984. However I reject

this claim on two grounds.

In my opinion it can not be said that

I	.
I I
I I I

40.

this is an amount, wholly

or in part, which Mr.. Thompson lost

because in the words of Gibbs

C.J.

in Gould v Vaqqelas supra at

. I

p.36 he did not in

this respect alter his position

"in reliance

on the fraudulent misrepresentation". It

was, in my view, the

requirements of the company's bank which persuaded him to provide

funds and not the contravention. Furthermore the statement of

the company at the date of liquidation shows Mr. Thompson as

creditor only to the extent of

$4,627.27.

It is apparent that

the majority of the funds which e made available were not paid

directly to the applicant company but in some way through Doug

Godden which company was shown as a creditor to the extent of

$120,520.03.

Mr. Thompson is guarantees to Australian Guarantee Corporation Limited in respect

also personally liable under various

of equipment leased by the applicant company. $11,917.74 is	the
amount of the liability under the guarantees, of which	Mr.

Thompson's share is one half thereof,

his wife being also jointly

and severally liable.

propose to award him $5,958.00 in this

regard, and any claim which

he makes as an unsecured creditor of

the applicant company must take into account this amount received

by him (See per Brennan J. in

v Vaqqelas supra).

I may add

that I do not consider Mr. Thompson is entitled to make any claim

for loss of wages in that there is no evidence that he suffered

any such

loss in the period up

to 30 June 1983.

The upshot is that

I assess damages totalling $210,000

I _. . .	-. .
41.

I should mention that the approach which I have adopted in this matter relieves me from considering the evidence of a substantial number of witnesses. This evidence was in almost all instances given in a thoroughly acceptable manner but was

addressed to topics to which	I have not	found it necessary to
refer.

Both Mr. Koch and Mr. Sutton

have

been

joined as

respondents and the applicants' losses are claimed against them also as persons involved in the contravention in accordance with

5 . 8 2 of the

Act.

Section

75B defines the term "involved in a

contravention" for the purposes of

5 . 8 2 .

In respect of the claims against Mr. Koch and

Mr. Sutton

under s.75B as persons involved in K.L.K's contravention their counsel made a number of submissions. He contended that it was necessary for the Court to consider separately the position of K.L.K., Mr. Koch and Mr. Sutton. If the Court found that some particular conduct of Mr. Sutton brought him within the

provisions of s.75B

then it was necessary he said

to determine

the consequence of this particular conduct and	the	loss
occasioned by that conduct.

Section 75B provides that the reference in 6.82 to a

42.

"person involved in the contravention'' shall be read, as here

pleaded, as a reference to

a person who -

"(a) aided

abetted

counselled

procured

contravention;

(b) induced a contravention;

(c)

has been in any way, directly

indirectly,

knowingly

concerned

in, or

party

to, a

contravention;

(d) has conspired with

others

effect

contravention.

I hereafter refer compendiously to this conduct as "aiding and

abetting".

It is pertinent to note that both

s.EZ and s.75B refer

only to the "contravention"

which

has occurred, which in Lhis

instance was the misleading conduct found against K.L.K. There

is no direct reference to the particular "conduct" of

K.L.K. in

respect of which, wholly or in part, the Court relied in finding

a contravention.

Thus I must determine whether the individual

respondents, neither of whom was separately represented, aided

abetted the contravention which

has been

found to have been

committed by K.L.K. This contravention occurred because

have

found that K.L.K.,

by the representations made on its behalf by

the individuals, in the circumstances created a false impression

that the sum

of $200,000 was a fair price for the Flexebar

business

which

business

was

represented

viable

and

potentially profitable.

Counsel for the respondents did not argue that Mr.

Koch

was not a person involved.

He however laid emphasis upon the

r .

43.

particular position of Mr. Sutton, contending that

he was a mere

or knowledge. Reference was made to the declsion of the High Court

alternatively--did

not

have

the

requisite

conduit

pipe

in Yorke and Another

v Lucas (1985) 61 A.L.R.

307 where that

Court held that sub.s.75B(c) requlred a party

to a contravention

to be

an lntentional participant, with

full knowledge of the

essential elements of the contravention. Likewise the Court held

that

secondary

participation

as an

aider

abetter

under

sub.s.75B(a) could only be established if the person charged was

also found to have knowledge of the essential matters and

intentionally aided or abetted the contravention.

In my opinion the participation of Mr. Sutton was

far

removed from that which the High Court had under consideration in Yorke v Lucas supra. Mr. Sutton was not a mere conduit pipe, as submitted by counsel, conscientiously passing on information

supplied by his employer or principal

with no knowledge that it

was

incorrect

information.

fact

Mr.

Sutton

had

a very

extensive knowledge of the affairs of

K.L.K.

He had adequate

first-hand knowledge of most of the matters under discussion

the meeting and could also be held, if necessary, to have had

constructive

knowledge

other

matters.

opinion

knowingly participated in creating the false impression at the

meeting of 18 February 1983.

As has

already

been

related,

Mr.

Sutton

was

the

accountant, auditor and financial advisor

to Mr. Koch and K.L.K.

-- . -

44.

He had been involved in this capacity since 1975 with Mr. Koch,

K.L.K.

and its predecessors. His involvement was not-limited to

mere

book-keeping.

Mr.

Koch

relied

upon

his

expertise

for

financial advice, he was

in the habit of visiting the

K.L.K.

factory twice

month, was involved in employing staff and

received direct from the bank perlodical statements of that

company's account. Moreover he prepared and supervised financial

procedures and practices for K.L.K;

and had relatively recently

prepared and had approved by directors and shareholders the

accounts of K.L.K.

for the year ending

30 June 1982. He was

obviously aware of the losses

which the Flexebar business was

incurring at the tlme of the meeting

February 1983 and the

fact that, stated in very general terms, it could be said to be

insolvent and to have

a liquidity problem. He was also aware of

the liability of the group for income

tax.

It was, no doubt, in recognition of this background

expert knowledge that Mr. Koch invited Mr. Sutton to the meeting

of 18 February 1983, had him take the chair thereat and open the

proceedings.

Mr.

Sutton acquiesced in this situation. Mr. Koch

said in his evidence that he referred all questions at the

meeting on financial matters to Mr. Sutton.

The latter did not

dispute this statement and it is obvious that matters

this

nature were of crucial significance to the parties present. For

these reasons it is not correct,

as contended by the respondents'

counsel, to see Mr. Sutton

being in the same position

as Mr.

Stevens.

Mr.

Sutton was present on behalf of the company with

45.

full authority to speak knowledgeably on its behalf.

In so

far as the upshot of the meeting was that the

applicants had the false impressions as above related Mr. Sutton

participated, and in my opinion participated knowingly, in the

creation

these

impressions.

fact

he took

the

first

positive step at the outset of the meeting

failing to produce

the recent financial statements of

K.L.K.

and thereby disclose

its parlous circumstances.

The production of

such accounts or

alternatively

the

disclosure

the

losses, albeit

with

appropriate qualifications, was essential to

a fair assessment by

the applicants of

the viability of

the Flexebar operations and

the feasability of the expenditure of

$200,000 in its purchase.

As I	have already sald the viability and potential

profitability of the business was dependent upon the gross profit

and

the

volume

sales

could

achieve.

Mr.

Sutton

participated in these discussions in that

he represented the cost

of manufacture as

$36, allowed the applicants to assume $65

the average sale price and

in fact exacerbated the representation

as to

volume

falsely

stating

figure

2,428

units

having

been in the past achieved. Mr. Sutton

was, or at least

should

have been aware that these figures were unrealistically

optimistic and would convey

the false impression of

an excellent

gross

profit

margin.

must also have been aware of the

impossibility of obtaining

a sufficiently exact figure for the

average sale price by the cursory examination of invoices, which

t,.

1 .

. .

- .

46.

he suggested. Such

a gross profit margin if achieved on the

the attainable, would eventually produce

applicants

were

lead

believe

was

_ _

turnover

which

a most profitable business.

aware unprofitable and his explanation for this, namely that

that

the

business

was

fact

most

Mr. Sutton

was

Mr. Koch

had lost interest, cannot be accepted. The evidence of Miss Hendrie to the contrary and the failure to call Miss Sheridan,

notwithstanding intimations of intention

do,

and who

apparently could have been

relevant witness on this aspect,

. ::

confirms the correctness

of this conclusion.

Likewise in respect of the false impression which

L '

found the meeting created that

$200,000 was a fair purchase price

for the business Mr. Sutton should have been aware that this

false impression was likely

to be created. He was aware that the

! -

Flexebar business was unprofitable and thus	wa unlikely to have	p
1 , I ,
I -

any goodwill

be fairly capable of being sold

as a going

concern.

In these circumstances he ought to have appreciated

that a figure

$100,000

for

goodwill

and

patents

was

I	unjustified,	particularly as competition	was	very	keen	and	the	! .
I	. I

patents were under challenge. He must also have been aware that

the stock was very highly priced. He knew its value at

30 June

I,.

1982 was

ubstantially

below

the

figure

$50,000 and

that

since

c-,

then the business had liquidity problems and was running down

! -

;

with

recent

turnover circumstances it was extremely unlikely that the amount of stock	substantially	reduced.	In	such	I .
i
I :
.>.

on hand would exceed that

at the end of the last financial

47.

period. In

my opinion the applicants are

entitled to judgment

against Mr. Sutton.

.2 ._

Counsel for the applicants also submitted that

his

clients were entitled to have an

award of interest included in

the judgment in accordance with

6.30~ of the Supreme Court Act

1976 South Australia.

The respondents contend that that section

has no application

to these proceedings. There appear to be

conflicting decisions of this Court

on the power to award

interest pursuant to

State legislation, although such apparent

conflict may be the consequence of differing legislation in the

various States. Subsectior: 3Cc!l? is the ernpowering prcvision

in the South Australian Supreme Court Act and it is

as follows:

"30c(l). Unless good cause is shown to the contrary,

the court shall, upon the application of

a party in

favour of whom a judgment for the payment

of damages,

compensation or any other pecuniary amount has been,

is to be,

pronounced, include in the judgment

an award

of interest in favour of the judgment creditor in

accordance with the provisions of this section."

The word "court" is defined to mean the Supreme Court

of South Australia.

It was

said that this power to award

interest

applicable

these

proceedings

virtue

s.79 of

the

Judiciarv Act 1908.

The Pull Court of this Court in Centrepoint

Freeholds Ptv. Ltd. v T.N.

Lucas Ptv. Ltd. (1985) 60 A.L.R.

187

decided (Neaves J. dissenting) that s.79 did render applicable a

somewhat similar provision in the Victorian Supreme Court Act

48.

proceedings in this Court. However

as Toohey J. discerned in

Nella. Brown & Ors v Kinqia Ptv. LXd.- (1985) 61 A.L.R. 603 the majority of the Full Court did not go beyond holding that this Court had such power in the exercise of its accrued jurisdiction

to deal with common law causes

of action. Beaumont J. in Fenech

v Sterlinq (1985) A.T.P.R.

47129 adopted this approach on

page

47,132 and	I am content to	do likewise without repeating his
reasoning.

However, I was

asked in the

alternative

award

interest on the common law causes

action pleaded in the

appiication. In this regard I am not necessarily bound by the

Full Court decision as the majority expressly relied upon the

fact that the provision in the Victorian Supreme Court Act

applied to all Victorian Courts having "jurisdiction" in recovery

of debt or

damages. They therefore held that the language was

wide enough to apply to the Federal Court.

The South Australian provision however applies only to

the Supreme Court and therefore the comments of Mason J. which the Full Court held inapplicable are here in point. He said in

Australian National Airlines Commission	v Commonwealth (1975) 49
A.L.J.R. 338 at p.340:

"No matter

how widely it may travel in some respects

sec.79 does not in my view pick up and apply in this

Court a provision which empowers a particular Court

a State

make

orders

and

enter

judgments

proceedings in that Court."

L T .

.I .. - .

49. , _

i -.

L. ' .

i - .

I am therefore

of opinion that

I am not empowered by

s.30~

award interest in this matter.

If I am wrong I would be

~ .I

inclined	to refrain from exercising this power because, in	my	* '
* .

view, there is "good cause".

The

applicants made no claim for

such interest in their application or statement of claim, the

course of proceedings were restricted to matters under 5 . 5 2

and

s.82 of the Act and

I was not asked to assess damages on the

basis of common law causes of

action until this difficulty was

perceived. It was not until counsel perceived difficulties in

contending for interest under s.30~

of the State Act on damages

assessed under s.82 of the Act that the matter of interest on

award of comon law damages was-raised. In my view there is good

cause to the contrary and	I would if necessary refrain from
making such an award.

In conclusion I award the applicant company

$210,000 by

way of

loss

pursuant to

s . 8 2

of the Act. However $100,000 is

owing by the applicant company being unpald purchase money

which

sum is the subject of a cross-claim.

I consider it appropriate

in the circumstances to dismiss the cross-claim without any order

for costs and

to enter judgment for the applicant company against

the respondents for the sum of $110,000.

I assess the loss

Mr. Thompson as $5,958 which amount	I order the respondents to
pay to him.

The question of costs is difficult in that, as I

have

already

related, I am

opinion

that

the

trial

the

T j

c .

50. , , l

r . .I

. .

\	i i
v .

proceedings

was unnecessarily protracted and that the applicants

I .

I ,

pursued many issues which at the time

I considered irrelevant.-,-

F-:

My opinion to this effect was confirmed during the preparation

I '.

these

reasons.

In the

circumstances

I direct

that

the

respondents pay to the applicants

75% of their taxed costs.

I -.

I certify that this and	I
the4ypreceding pages are	1 ,
a true copy of the Reasons	l

for	Judgment	of	Mr	Justice	L
I .

Fisher.

7 ..

Associate

m -

Dated: 8 July 1986.	, .~
, .

[1986] FCA 313

7 Aug 1986