Argyle Holdings Pty Ltd v Marvelle Investments Pty Ltd
[2008] WASC 7
•11 December 2007
ARGYLE HOLDINGS PTY LTD -v- MARVELLE INVESTMENTS PTY LTD [2008] WASC 7
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2008] WASC 7 | |
| 17/01/2008 | |||
| Case No: | CIV:1480/2007 | 11 DECEMBER 2007 | |
| Coram: | EM HEENAN J | 10/12/07 | |
| 26 | Judgment Part: | 1 of 1 | |
| Result: | Orders for disclosure of additional financial records to permit audit of takings to be performed as sought | ||
| A | |||
| PDF Version |
| Parties: | ARGYLE HOLDINGS PTY LTD (ACN 008 877 923) TEGRA PTY LTD (ACN 008 805 614) BANTOY PTY LTD (ACN 009 125 375) BIRKAI PTY LTD (ACN 009 011 616) YOUSSA PTY LTD (ACN 009 231 467) ROSEMAC PTY LTD (ACN 009 390 916) MICHELA FINI MARVELLE INVESTMENTS PTY LTD (ACN 067 600 140) |
Catchwords: | Commercial Tenancy (Retail Shops) Agreement Act 1985 (WA) Statements of turnover Audited turnover Access to secondary accounting and records for the purposes of the conduct of the audit Order for production of secondary accounting records |
Legislation: | Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), s 7, s 8 |
Case References: | Delhi Petroleum Ltd v Santos Ltd [1999] SASC 37 Frankston & Hastings Corporation v Cohen (1960) 102 CLR 607 In Re London & General Bank (No 2) [1895] 2 Ch 673 Industrial Equity Ltd v Deputy Commissioner of Taxation (1990) 170 CLR 649 Jenolin Pty Ltd v Joint Property Ownership Pty Ltd (Unreported, WASC, Library No 930075, 23 February 1993) Leeds Estate Building & Investment Co v Shepherd (1887) 36 Ch D 787 Manning v Cory [1974] WAR 60 Newton v Birmingham Small Arms Co Ltd [1906] 2 Ch 378 Pacific Acceptance Corporation Ltd v Forsythe (1970) 92 WN (Pt 1) (NSW) 29 R v Jones [1978] 2 All ER 718 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- TEGRA PTY LTD (ACN 008 805 614)
BANTOY PTY LTD (ACN 009 125 375)
BIRKAI PTY LTD (ACN 009 011 616)
YOUSSA PTY LTD (ACN 009 231 467)
ROSEMAC PTY LTD (ACN 009 390 916)
MICHELA FINI
Plaintiffs
AND
MARVELLE INVESTMENTS PTY LTD (ACN 067 600 140)
Defendant
Catchwords:
Commercial Tenancy (Retail Shops) Agreement Act 1985 (WA) - Statements of turnover - Audited turnover - Access to secondary accounting and records for the purposes of the conduct of the audit - Order for production of secondary accounting records
(Page 2)
Legislation:
Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), s 7, s 8
Result:
Orders for disclosure of additional financial records to permit audit of takings to be performed as sought
Category: A
Representation:
Counsel:
Plaintiffs : Mr R E Lindsay
Defendant : Mr J C Curthoys
Solicitors:
Plaintiffs : McCallum Donovan Sweeney
Defendant : Summers Legal
Case(s) referred to in judgment(s):
Delhi Petroleum Ltd v Santos Ltd [1999] SASC 37
Frankston & Hastings Corporation v Cohen (1960) 102 CLR 607
In Re London & General Bank (No 2) [1895] 2 Ch 673
Industrial Equity Ltd v Deputy Commissioner of Taxation (1990) 170 CLR 649
Jenolin Pty Ltd v Joint Property Ownership Pty Ltd (Unreported, WASC, Library No 930075, 23 February 1993)
Leeds Estate Building & Investment Co v Shepherd (1887) 36 Ch D 787
Manning v Cory [1974] WAR 60
Newton v Birmingham Small Arms Co Ltd [1906] 2 Ch 378
Pacific Acceptance Corporation Ltd v Forsythe (1970) 92 WN (Pt 1) (NSW) 29
R v Jones [1978] 2 All ER 718
(Page 3)
1 EM HEENAN J: By this originating summons the plaintiffs seek declarations and orders to specify the nature and extent of powers available to an accountant whom they have engaged to carry out an audit of turnover figures achieved by the defendant in relation to premises held by the defendant under a lease where, in certain circumstances, the rent payable under the lease is determinable in accordance with the turnover of the business conducted from the leased premises. In the present case the rent payable by the defendant under the lease is either a fixed amount or a proportion of the turnover of the premises, as explained later in these reasons. The lease itself contains provisions relating to the calculation of the rent in accordance with turnover but those provisions, and indeed the lease, must be considered and construed in accordance with the provisions of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (the Act) and, in particular, s 7 and s 8.
2 The leased premises comprise shop G15 situate on the ground floor of the Bayview Shopping Centre at Claremont which is known as and is referred to at the hearing as 'Fresh Provisions' at the Bayview Centre. As set out in the Second Schedule to the lease the permitted use of the leased premises is: Fresh Food, Gourmet Deli and Supermarket or such other use as may be permitted by the lessor in its absolute discretion.
3 By a lease dated 5 August 1996 the plaintiffs leased the premises to the defendant on the terms and conditions there set out for a term of 10 years from 9 November 1995 and with four options to renew each for a further period of five years subject to cl 3.02 of the lease and subject to rent review as also provided. Later, by a deed dated 7 November 1996 between the plaintiffs and four other named persons, the lease was rectified by providing that the four named persons became covenantors and guarantors of the defendant's liability under the lease. Nothing turns on the nature or efficacy of that deed of rectification. Furthermore, at some unidentified date in 2001 the lease was 'assigned' to the defendant but, again, nothing turns on the nature or efficacy of that deed. It is only necessary to note these two later deeds in order to make clear that further references in these reasons to the lease should be taken as reference to the lease as so rectified and assigned.
4 The terms of the lease relating to the determination and payment of rent are contained in cl 2.01 as supplemented by the Second Schedule. Clause 2.01 provides as follows:
(Page 4)
- Clause 2.01 - Rent
(a) The Lessee shall yield and pay for the leased premises a commencing rent ('the commencing rent') being the greater of the Percentage Rent and the Fixed Rent. The Commencing Rent shall be payable by equal monthly instalments in advance (except the first and last payments which if necessary will be proportionate ones) with the first of such instalments to be paid on or before the commencement date and then on the first day of each month after that. The minimum amount of the instalments shall be equal to the Fixed Rent less any adjustment for overpayment of Percentage Rent for the previous months. If the Percentage Rent in any month is greater than the Fixed Rent, then the Lessee shall in addition to the Fixed Rent, pay the difference between the Fixed Rent and the Percentage Rent to the Lessor. All rent payable under this Lease shall be paid without deduction to the Lessor at its address stated in this Lease or at such other address as may be notified in writing to the Lessee. At the option of the Lessor to be exercised by notice in writing the Lessee shall pay the fixed rent by irrevocable banker's order.
If the calculation carried out in sub-clause (a) of Clause 2.01 for any Lease year produces a result that:-
(i) No Percentage Rent was payable for that Lease year but Percentage Rental has been paid in accordance with a calculation made during that Least Year;
(ii) The Percentage Rent payable under the calculation carried out for the whole Lease year is less than the Percentage Rent paid during that Lease Year,
THEN such overpayment of Percentage Rent shall be credited by the Lessor against the next payment or payments of rental owing under the provisions of this Lease PROVIDED ALWAYS that there shall be no credit against rental in the manner aforesaid in respect of overpayments of Percentage Rent made in respect of calculations made with respect to sub clause (b)(i) of Clause 2.01.
(b) Percentage Rent means the percentage specified in the Second Schedule of the amount of the Gross Receipts for each month of the term of the Lease or any extension or renewal thereof. The Lessee shall execute the consent annexed in the Fifth Schedule.
(i) If this Lease shall be assigned during the term then the assignor's Gross Receipts from the commencement of the month in which the assignment takes place up to the date of assignment and the assignee's Gross Receipts from the date of assignment to the end of the month shall be
- separately calculated and each such period shall be treated as a portion of a month.
- (ii) For the purpose of ascertaining the amount (if any) payable as Percentage Rent, the Lessee shall prepare and keep at the registered office of the Lessee (or at such other place as the Lessor may from time to time authorise in writing) all records which relate to the ability of the Lessee to calculate its Gross Receipts PROVIDED THAT the Lessee shall make the records available in Perth during normal business hours as soon as is reasonably possible after a request.
(iii) The Lessee shall cause to be recorded at the time of each sale or transaction comprising the Gross Receipts a record in such form as the Lessor may reasonably require of such sale or transaction. The Lessor or its agent or any auditor selected by the Lessor may at any time upon reasonable notice to the Lessee examine such records.
(iv) Within fourteen days after the end of each month after the commencement of the Lease the Lessee shall give to the Lessor a statement certified by the Lessee as to the Gross Receipts during the previous month together with any amount of Percentage Rent due for that month together with a cumulative total of Gross Receipts for that part of the Lease Year when expired. Within forty-two (42) days of the expiration of each Lease Year or the date upon which the Lessee ceased to be in possession of the leased premises, the Lessee shall give to the Lessor a statement accompanied by an audit report from the Lessee's Accountant (being for the purposes of this clause a firm of independent accountants who are either chartered accountants or certified practicing accountants) in respect of the Gross Receipts during the preceding Lease Year or portion thereof, and such report shall certify as to the accuracy of the receipts. The Lessor or its accountants shall have the right to audit the daily records of the Gross Receipts and any books of account of the Lessee relating thereto. If the Lessor's audit discloses that the Gross Receipts exceed those reported by the Lessee by more than two percent, the Lessee shall forthwith pay the cost of the Lessor's audit.
If the audit reveals that the Percentage Rent paid by the Lessee is incorrect then adjustment shall be made between the parties within fourteen (14) days of the incorrectness being notified to the party required to make a payment or refund as the case may require.
(Page 6)
- (c) 'Gross Receipts' means the entire amount of the actual price (including any Sales Tax but excluding any purchase receipt of similar tax or duty added on to the marked or displayed selling price of the goods or the normal price for which the serves are rendered) whether wholly or partly for cash or on credit or wholly or partly payable in money or in kind of all sales (including exchanges) of merchandise or provision of services and all other receipts of all business conducted in or from the leased premises including all resales or articles accepted as trade-ins on sales made at in from or upon the leased premises whether such resales are made at in from or upon the leased premises or elsewhere and all charges made to customers for altering delivering or repairing goods all sales from vending machines all deposits not refunded to purchasers, all money deposited in pay phones or other coin-operated machines all orders taken at in from or upon the leased premises although the said orders may be filled elsewhere and all sales of merchandise or provision of services by any sub-lessee, concessionaire, licensee or other person conducting business at in from or upon the leased premises.
(i) The amount of uncollected credit amounts written off by the Lessee shall be excluded;
(ii) Each sale upon lay-by instalment or credit shall be treated as a sale for the full price in the month during which such sale shall be made irrespective of the time when full or partial payment shall be received from the customer;
(iii) Where goods are hired to customers with an option of purchase there shall be included the whole of the marked or displayed cash price of the goods (whether the same shall be actually received or not) and the whole of the said cash price shall be included in the month when the hiring shall be entered into;
(iv) Where goods are hired to customers without there being an option to purchase, then hiring charges shall be included in the month during which they are charged to the customer;
(v) There shall be excluded the exchange or transfer of merchandise between the stores of the Lessee (where such exchange or transfer of merchandise is made solely for the convenient operation of the business of the Tenant and not for the purpose of consummating a sale which has theretofore been made at in from or upon the leased premises or for the purpose of depriving the Landlord of the benefit of a sale which otherwise would be made at in from or upon the leased premises), the amount of returns to suppliers, shippers, wholesalers or manufacturers, and
- sales of fixtures and fittings which are not a part of stock in trade;
- (vi) There shall be deducted the net amount allowed for any trade-in or for any discounts reasonably and properly allowed to any customer or staff in the usual course of business; the amount of any cash or credit refund made upon any sale previously included in the calculation of Gross Receipts where the merchandise sold, or some part thereof, is thereafter returned by the purchaser, and the sale is cancelled or fees for the services are refunded wholly or partly; and the sale price or any merchandise returned to stock (after deduction from such sale price of any payments made to, and retained by the vendor in respect thereof) and/or the amount of any instalment of purchase money refunded as a result of any cancelled lay-by transaction.
(vii) There shall be excluded the amount of any purchase, receipt or other similar tax imposed upon the purchase price or cost or hire of merchandise or services at the point of sale or hire; the amount of delivery charges; and receipts from sales of tickets in any consultation or soccer football pool, other than amounts derived as commission of fees from those sales.
- (d) 'Fixed Rent' means $90,000.00 per annum at the commencement of the lease adjusted annually pursuant to clause 4.05.
(e) Notwithstanding anything in this lease it is acknowledged that the words 'rent' or 'rental' means both the Percentage Rent and the Fixed Rent.
5 Under the Second Schedule it is provided that the rent for the first 12 month period of the lease shall be the greater of $90,000 per annum, payable calendar monthly in advance by instalments of $7,500 per month (the Fixed Rent) or 3% of 'Gross Receipts' (the 'Percentage Rent') as outlined in cl 2.01. Further, by the Second Schedule the rent is payable on the ninth day of each month during the term of the lease or any extension or renewal thereof.
6 The lease also contains a provision (cl 4.05) for annual rent reviews of the Fixed Rent in accordance with a formula which takes into account increases in the relevant consumer price index, or alternatively by reference to a percentage increase in the 'Gross Receipts' in excess of a notional commencement total of 'Gross Receipts' of $3 million. The rent review formula is drawn in such a way as to permit increases, but not reductions, in the total annual rent payable from time to time.
(Page 8)
7 For present purposes the provisions of the lease contained in cl 2.01(b)(iii) and (iv) are of particular importance in providing records to be kept by the lessee of all 'Gross Receipts' from the business and, at the end of each lease year to give a statement accompanied by an audit report from the lessee's accountant declaring the 'Gross Receipts' during the preceding lease year and certifying the accuracy of the reported receipts. In particular cl 2.01(b), contains a power for the lessor or its accountants to have the right to audit the daily records of the 'Gross Receipts and any books of account of the lessee relating thereto' and, further, provides for an adjustment to increase the 'Percentage Rent' should the audit show that the amount paid by the lessee had been incorrect.
Commercial Tenancy (Retail Shops) Agreements Act 1985: s 7 and s 8
8 In the present case the parties are agreed that this lease is one to which the Commercial Tenancy (Retail Shops) Agreements Act applies and, further, that the formalities required by s 7(1) of the Act have been duly met. Nevertheless, issues arose as to whether or not the power of the plaintiffs to engage an accountant to conduct an audit, as provided for by cl 2.01 of the lease is, and if so to what extent, modified or restricted by s 7(2) and s 8 of the Act. Accordingly, it is necessary to turn to those provisions.
9 Section 7 and s 8 of the Act provide:
7. Rent based on turnover
(1) Without limiting subsection (2)(a), where a retail shop lease contains a provision to the effect that the rent is to be determined either in whole or in part by reference to the turnover of the business and -
(a) the tenant did not, by notice in writing in the prescribed form given to the landlord before the provision was included in the lease, elect that the rent should be so determined; and
(b) the tenant, by notice in writing given to the landlord, objects to the rent being so determined,
the provision is void as from the day on which the notice referred to in paragraph (b) is given.
(2) Where a retail shop lease contains a provision to the effect that the rent is to be determined either in whole or in part by reference to the turnover of the business -
- (a) that provision is void if the lease does not specify the formula by which the amount of the rent is to be determined; and
(b) unless by reason of this section that provision is void, the lease shall be taken to provide that the tenant shall furnish to the landlord -
(i) not later than 14 days after the end of each month in respect of which the rent or any of the rent is to be so determined or at such other times as are agreed between the parties, a statement in writing specifying the turnover of the business during that month; and
(ii) not later than 42 days after the end of each calendar year, or each financial year of the business, during which the rent or any of the rent is to be so determined or at such other times as are agreed between the parties, and at the termination of the lease, a statement of the turnover of the business certified by an accountant to truly and accurately represent the turnover of the business during the last preceding year or, where the lease has terminated other than at the end of a year, during the part of that year before which the lease terminated.
- (3) Where the tenant under a retail shop lease furnishes to the landlord statements in accordance with subsection (2)(b)(i) and (ii) in respect of a period he shall be taken to have satisfied any obligation under the lease to provide turnover figures or statements in relation to the business in respect of that period but shall, at the request of the landlord, permit an accountant engaged by the landlord to carry out an audit of those turnover figures at the cost of the landlord and shall reimburse the landlord for the cost of the audit if the audit discloses that the statement furnished under subsection (2)(b)(ii) understated the turnover of the business during the relevant period by more than 5%.
(4) For the purposes of subsection (2)(b) and (3) and the construction of any provision of a retail shop lease that relates to the determination of rent by reference to turnover (but without limiting the generality of that expression in subsection (1)), 'turnover' does not include -
(a) the net amount of discounts reasonably and properly allowed to any customer in the usual course of business;
- (b) the amount of losses incurred in the resale or disposal of goods reasonably and properly purchased from customers as trade-ins in the usual course of business;
(c) the amount of uncollected credit accounts written off by the tenant;
(d) the amount of any cash or credit refund allowed on a transaction the proceeds of which have previously been included as Gross Receipts where the merchandise is returned and the sale is cancelled or fees for the services are refunded wholly or partly;
(e) the amount of any instalment of purchase moneys refunded to customers where a lay-by transaction is cancelled;
(f) the amount of any purchase, receipt or other similar tax imposed upon the purchase price or cost of hire of merchandise or services at the point of sale or hire;
(g) the amount of delivery charges;
(h) the price of merchandise exchanged between stores of the tenant made solely for the convenient operation of business and not for the purpose of concluding a sale made at or from the retail shop the subject of the lease;
(i) the price of merchandise returned to shippers, wholesalers or manufacturers;
(j) the amount received from the sale of the fixtures and fittings of the tenant from the retail shop the subject of the lease; and
(k) receipts from sales of tickets in any lottery within the meaning of that term in the Lotteries Commission Act 1990, other than amounts derived as commission or fees from those sales.
- (5) Where by reason of this section, a provision of a retail shop lease to the effect that rent is to be determined either in whole or in part by reference to the turnover of the business is void, the rent shall be as is agreed in writing between the parties or determined under Part III by the Tribunal.
8. Turnover figures not generally required
(1) A provision in a retail shop lease -
- (a) to the effect that the tenant is obliged to furnish, or permit the landlord or his agent to gather, figures or statements relating to the turnover of the business; or
(b) to the effect that the landlord is entitled to be furnished with figures or statements relating to the turnover of the business,
- is void unless the figures or statements are required for the purpose of determining rent either in whole or in part by reference to the turnover of the business.
(2) Where a retail shop lease contains a provision of a kind referred to in subsection (1) and the figures or statements to which the provision applies are required for the purpose of determining rent either in whole or in part by reference to the turnover of the business, that provision ceases to have effect upon those figures or statements being no longer required for the purpose.
Differences between the parties
10 Since the commencement of this lease in November 1995 the reported 'Gross Receipts' of the premises only ever exceeded the initial deemed commencing turnover of $3 million per annum on one occasion and then for one year only. Accordingly the rent payable has remained largely static. Because of general buoyancy in the economy and in the food trades this has obviously led to the lessors harbouring doubts about the accuracy of the reporting of gross turnover for these premises in recent years. Consequently, the landlords have invoked their right to engage an accountant to conduct an audit of the turnover figures in accordance with the lease and the Act in order to determine whether any higher 'Percentage Rent' is payable. Differences have arisen between the plaintiffs and the accountant whom they have engaged to conduct this audit, on the one hand, and the defendant and its representatives on the other, as to the extent of the information and records which should be provided or made available for inspection to allow this audit to be conducted. More details of these differences are set out later in these reasons.
11 In this setting the present proceedings were commenced to determine, in effect, the nature and extent of the information and records which should be provided to the accountant for the conduct of the audit. Accordingly this originating summons, as amended, seeks for the plaintiffs the following relief:
4 a declaration that the plaintiffs and their auditors, H L B Mann Judd have a right to inspect for the purpose of audit of the Gross Receipts of the defendant:
- (i) computer generated enquiry reports from the 'Retail Touch' computerised cash register system being print-outs of interrogation reports from the system of sales for the periods up to the year ended 30 June 2005, as requested by H L B Mann Judd;
(ii) the tax returns of Marvelle Investments Pty Ltd for the financial years 2003, 2004 and 3005;
(iii) the financial statements of Marvelle Investments Pty Ltd for the years ended 30 June 2003, 30 June 2004 and 30 June 2005;
(iv) all notes and working papers so far as they exist belonging to the defendant and to its accountants, A S Turner & Associates, containing information pertaining to the Fresh Provisions business at the Bayview Centre for the financial years ending 30 June 2003, 30 June 2004 and 30 June 2005.
- 5 an order requiring the defendant to make available to the plaintiffs and electronic copy of the data file for 'Retain Touch' point of sale system for the period from 1 July 2002 to 30 June 2005 for the inspection and use by the plaintiffs' auditors H L B Mann Judd.
6 a declaration that the plaintiff and its auditors H L B Mann Judd use the records referred to in the preceding paragraphs only for the purpose of determining the accuracy of the rental figure determined by the defendant by reference to the turnover of the business and for no other purpose, as stipulated by s 8(1) of the Act.
Evidence
12 At the hearing the plaintiffs read and relied on three affidavits of Mr Wayne McKenzie Clark sworn, respectively, 1 May, 23 July and 26 October 2007; one affidavit of Mr Barry Ronald Jones sworn 4 May 2007; one affidavit of Mr Ross John McCallum sworn 4 May 2007; two affidavits of Mr Trevor Michael Gorey sworn, respectively, 4 May and 12 November 2007; and one affidavit of Mr Timothy Redvers Mack sworn 4 May 2007. The defendant also read and relied upon an affidavit of Mr Jeffrey William Vibert sworn 17 July 2007 and two affidavits of Mr Shawn Edwards Offer sworn, respectively 16 July and 12 November 2007. A number of other affidavits had been filed on both sides but none of these others was read or relied upon by either party at the hearing.
13 In written submissions filed in advance of the hearing a number of objections were raised by the defendant to the admissibility of certain passages in the affidavits which had been filed for use by the plaintiffs.
(Page 13)
- However, at the hearing once I began to examine these objections, it became apparent that many of them were directed to whether or not a particular deponent had direct personal knowledge of facts asserted in the affidavit or, more frequently whether that deponent had appropriate expertise to allow him to express an opinion on an issue postulated to be of relevance and, in particular, whether it was in the particular circumstances necessary or reasonable for an auditor to seek to obtain particular information or to pursue a certain proposed line of enquiry and if so, why and to what extent. Because of the view which I took of the issues to be decided on the originating summons, namely the extent of the obligation to allow the engaged accountant access to information or records in order to perform the appointed audit and in the light of the submissions by the defendant that the extent of the audit was confined to checking the actual records relied upon by the defendant in preparing the monthly and annual statements of turnover, I ruled that it was unnecessary to determine these objections and that the issues for decision in this case did not depend, to any extent, upon the resolution of conflicting opinion evidence, whether expert or not. I then took the view and ruled that I could and would decide the issues arising from the proceedings upon the historical narrative of facts emerging from the affidavits and the exchange of correspondence between the parties and their representatives. In these circumstances the defendant did not press the objections to the admissibility of the affidavit material and those particular controversies lost their assumed significance.
Background events
14 When reporting on the 'Gross Receipts' for the previous lease year as required by cl 2.01(b)(iv), the defendant's accountant's reports for the years 2002, 2003, 2004 and 2005 showed that the reported 'Gross Receipts' (net of discounts allowed and GST) exceeded $3 million only in 2005 when the turnover figure was $3,298,993.63. The plaintiffs then appointed the accountancy firm H L B Mann Judd, to conduct an audit of Fresh Provisions' reported turnover figures and instructed its solicitors, McCallum Donovan Sweeney, to correspond with the solicitors for the defendant to that end. The plaintiffs' solicitors by letter dated 3 November 2005, sought an audit report, from the lessee's accountant to certify as to the accuracy of the 'Gross Receipts' reported and, by letter dated 8 November 2005 the defendant's solicitors responded by enclosing a report from the defendant's accountants A S Turner & Associates, asserting that the figure reported in each of the years in question was a true and correct figure for the 'Gross Receipts'. Further correspondence ensued as to whether or not the defendant's accountant's certificate
(Page 14)
- satisfied the requirements of the lease and the Act but it is not necessary to go further into that. The plaintiffs appointed H L B Mann Judd as accountants to conduct an audit and the latter firm listed the records required in order to undertake the audit of 'Gross Receipts'.
15 Then followed a series of correspondence, meetings and discussions between Mr Wayne Clark, the partner of H L B Mann Judd appointed to conduct the audit, and representatives of the defendant. These focused on the 'Retail Touch' computerised cash register system utilised by the defendant to record and process all its sales and trading details. The 'Retail Touch' system included daily reports summarising gross sales by various cash register operators; and records of such sales from the daily reports posted to the general ledger. All these records, including the lists of sales and the general ledger, were available only in electronic form. The reported position of the defendant was that the appointed auditor could have access to the daily reports summarising gross sales and copies of the general ledger sales account but not to other accounts in the general ledger and could seek and obtain a computer generated inquiry report form the 'Retail Touch' cash register system upon request. Mr Clark later sought print-outs of 24 general ledger sales accounts for the years 2003, 2004 and 2005; reconciliations between these and the audit certificates provided by A S Turner & Associates for those years; and print-outs of the 'Retail Touch' system of gross sales. After further inquiries and preparation the defendant made available the sales accounts from the general ledger for the relevant accounting periods.
16 Despite the supply of certain information and some other efforts to satisfy Mr Clark's inquiries the evidence is that other records of the defendant sought by Mr Clark had not been supplied as requested. These included:
(a) an interrogation report of the 'Retail Touch' accounting system for annual sales results, which was being sought to establish the accuracy of the reported annual sales results because of its potential to detect errors in intermediary accounts;
(b) a print-out of the interrogation summary being used to design and extract the interrogation report just described;
(c) an electronic copy of the data file for the 'Retail Touch' accounting system so that Mr Clark could conduct his own independent interrogation run of the system;
(d) the annual financial statements of Fresh Provisions for the financial years 2003, 2004 and 2005 to enable the auditor to
- determine the gross profits which had been derived from the sale of its produce in order to compare this with industry averages;
- (e) copies of the defendant's income tax returns for the three years 2003, 2004 and 2005 to enable the auditor to examine whether the financial statements agreed with the returns submitted by the defendant to the Australian Tax Office (ATO);
(f) notes and working papers held by the defendant or its accountants on its behalf to enable the auditor to explore the possibility that sales transactions might have been recorded other than through the cash register system and to allow an audit trail to be followed.
17 The defendant responded in writing, by letter of 3 May 2006, listing information which had been provided as well as information which had not been disclosed. Further correspondence led to the defendant maintaining there was no requirement to make the additional information available but that on 'a good faith' basis tax returns with certain information blanked out would be made available subject to an undertaking by the auditor not to disclose them to the plaintiff or to its agents. The defendant offered to allow access to the 'Retail Touch' electronic information on site but stipulated that no other information would be provided.
18 The basis upon which the plaintiffs are seeking this information for the conduct of the audit is described by the accountant, Mr Clark, in his affidavit of 1 May 2007 at [10]. Summarising that evidence, Mr Clark asserts that he sought an operator generated interrogation report from the 'Retail Touch' accounting system of sales for the year ended 30 June 2005 because this would involve the computer accessing the database of all sale transactions for that year and producing a report giving the total sales result for the period. Mr Clark said that such a report would be an efficient way of obtaining a level of audit comfort as to the accuracy of the reported annual sales results as it should enable the detection of any errors in the intermediary results between the initial point of recording the sales (by the 'Retail Touch' computerised system) and the annual audited certificate of sales as provided by the lessors. Mr Clark also requested an electronic copy of the data file for the 'Retail Touch' accounting system so that he could conduct his own interrogation run independent of the system of Fresh Provisions but this was denied. He sought copies of the annual financial statements for the financial years ended 30 June 2003, 2004 and 2005 so that he could determine the gross profit which had been derived by the defendant from the sale of its produce in order to compare this with industry averages. Mr Clark said that comparing reported gross profit
(Page 16)
- margins and other financial ratios (such as employee expenses as a percentage of sales) against industry standard margins and ratios is an important analytical review tool because any significant differences to industry averages may indicate gross errors. These were denied to him.
19 Mr Clark also requested copies of the defendant's income tax returns for the financial years ended 30 June 2003, 2004 and 2005 in order to ensure that the financial statements which he had requested agreed with the returns submitted on behalf of the defendant to the ATO but, again, these were denied.
20 Mr Clark requested all notes and working papers containing information relating to the Fresh Provisions business at the Bayview Centre to enable him to explore the possibility of sales transactions being recorded other than through the cash register system (eg, through debtors), as well as enabling him to follow an audit trail and thereby providing some corroboration of the accuracy of the information requested in other documents. An experienced independent company auditor, Mr Trevor Gorey, reviewed the audit procedures followed by Mr Clark and described why such records which Mr Clark was seeking would ordinarily be required for an audit of this kind and that they were also consistent with applicable auditing standards.
Plaintiffs' submissions
21 Under the lease the defendant is required to keep at its registered office 'all records which relate to the ability of the lessee to calculate its 'Gross Receipts' so that these records are available for inspection on request (cl 2.01(b)(ii)). Counsel for the plaintiff submits that the data file for the 'Retail Touch' accounting system being sought, and the interrogation report of that system constitute records referrable to the lessees ability to calculate 'Gross Receipts'. Counsel relies upon R v Jones [1978] 2 All ER 718, 720 for the proposition that a 'record' or 'records' may include an account of some fact or event preserved in writing or other permanent form. In that case, Geoffrey Lane LJ said:
Although it is not an exhaustive definition of the word, 'record' in this context means a history of events in some form which is not evanescent. How long the record is likely to be kept is immaterial: it may be something which will not survive the end of the transaction in question; it may be something which is indeed more lasting than bronze, but the degree of permanence does not seem to us to make or mar the fulfilment of the definition of the word 'record'. The record in each individual case will last as long as commercial necessity may demand. (721)
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- The question which arose in that case was whether or not certain bills of lading and cargo manifests prepared in Hong Kong relating to the export of goods to the United Kingdom were admissible as evidence as 'records' of the contents of containers where directors of the transport business were charged with conspiracy to steal goods from those containers. The Court of Appeal upheld the admissibility of the evidence concluding that they satisfied the description of 'records' in the context of s 1(1)(a) of the Criminal Evidence Act 1965 (UK). Although this case dealt with a particular statutory provision dealing with the admissibility of evidence in criminal proceedings, the principle underlying the analysis and definition of the term 'record' appears to me to be of general application and pertinent to the identification of materials constituting 'records' of this defendant's business.
22 The plaintiffs further submit that the right to audit under the Act and under cl 2.01(b)(iv) of this lease is more extensive than a right to inspect or examine certain records. Their submission is that the duties of an auditor are to ascertain, by reference to correlative information, whether the books of account relating to the daily records show an accurate and true view and that the obligation of an auditor calls for a more searching and critical approach than may have once prevailed especially where there may be reason to suspect fraud - Pacific Acceptance Corporation Ltd v Forsythe (1970) 92 WN (Pt 1) (NSW) 29.
23 Furthermore, the plaintiffs submit that the passage in cl 2.01(b)(iv) of the lease which provides that,
The lessor or its accountants shall have the right to audit the daily records of the Gross Receipts and any books of account of the Lessee relating thereto.
- points to a contrast between the primary records and the financial records of the business which demonstrates that the latter books of account or financial records are also subject to the audit. According to the submission this indicates that the annual financial statements and tax returns are also subject to audit and accessible by the appointed accountant for that purpose. The significance of this submission is to refute any suggestion that the distinction drawn by Murray J in Jenolin Pty Ltd v Joint Property Ownership Pty Ltd (Unreported, WASC, Library No 930075, 23 February 1993) 34 - 35, between 'proper books of account' on the one hand and 'vouchers in connection therewith' would exclude either category of documents from the scope of this audit.
24 In response to a written submission made in advance by the defendant, counsel for the plaintiffs submits that s 8(1) of the Act does not
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- restrict the scope of the audit only to those figures and statements actually used by the defendant to determine turnover. Counsel for the plaintiff submits that the audit may properly be directed to records and materials which may exist independently of the primary turnover figures or which may be used to confirm, refute or scrutinise the accuracy or integrity of those primary records. Counsel invokes the observation of Stirling J in Leeds Estate Building & Investment Co v Shepherd (1887) 36 Ch D 787, with regard to an audit of company records, that:
It was in my opinion the duty of the auditor not to confine himself merely to the task of verifying the arithmetical accuracy of the balance sheet, but to enquire into its substantial accuracy. (802)
His business is to ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that. But then comes the question, how is he to ascertain that position? The answer is, by examining the books of the company. But he does not discharge his duty by doing this without enquiry and without taking any trouble to see that the books themselves show the company's true position. He must take reasonable care to ascertain that they do. Unless he does this his audit would be worse than an idle farce.
Defendant's submissions
26 The starting point in the defendant's submissions is that the audit permitted under this lease, as constrained by s 7(3) and s 8 of the Act, is for a limited purpose only - being restricted to ascertaining the turnover of the business in question. Being so limited, anything in the nature of a general audit transcending the permitted purpose is not permitted, and by
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- reason of s 8 of the Act, any such provision in the lease purporting to authorise a more obtrusive inquiry is void. Counsel for the defendant submits that s 7(3) of the Act only provides authority to carry out an audit of the turnover figures or statements provided by the lessor in accordance with the provisions of the lease. These 'figures or statements' so the submission goes, are restricted to the 'figures and statements' which a tenant is required to provide for the purpose of determining rent by reference to the turnover of the business. On this basis, the defendant submits that it is only the primary records used by the defendant to report annual or periodic turnover as required by the lease which are accessible or examinable under the audit and that other business records are beyond the scope of the engaged accountant's inquiry.
27 This argument culminated in the submission that 'in effect, an accountant engaged to carry out an audit is permitted to audit only those figures and statements used to determine turnover' and that any greater access would be void under s 8(1) of the Act.
28 On this basis the defendant submits that the following materials sought by the plaintiffs for the conduct of the audit are outside the scope of the obligation imposed by cl 2.01 of the lease or s 7(3) of the Act, namely:
(a) any of the taxation returns for the financial years 2003, 2004 and 2005;
(b) any of the financial statements for those three financial years;
(c) any of the notes or working papers so far as they exist belonging to the defendant or held on its behalf by its accountants A S Turner & Associates containing information relating to the Fresh Provisions business at the Bayview centre;
(d) any electronic copy of the data file from the 'Retail Touch' point of sale system for the period from 1 July 2002 to 30 June 2005.
29 The argument is emphasised by submissions relating to the claim that the taxation returns should be disclosed in the audit process, on the basis that the taxation returns and accompanying documents are all secondary records, that they were not prepared with a view to determine 'Gross Receipts' and that the same goes for the accompanying notes and working papers.
30 However, in my view this argument overlooks the obvious fact that secondary records, including financial statements and tax returns will usually, if not invariably, adopt and include gross sales figures in order to
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- ascertain a gross profit from which a net profit can then be computed and from which, in turn, a taxable income can be reported or ascertained. The consistency of the figures adopted, whether appearing on the face of the documents or determinable by a mathematical process of working back, gives rise to a high degree of probability that the secondary records may be relevant and pertinent in seeking confirmation, corroboration or refutation of the reported accuracy of the gross turnover figures contained in other primary records or extracts from them.
31 Restriction of the activities of the accountant appointed to conduct this audit to the materials actually used by the defendant for the preparation and certification of the periodic reports of turnover figures would, to my mind, be a denial of the true nature and character of such an audit. Counsel for the defendant submitted at the hearing that there is no need, and therefore no justification, to look beyond those figures because those reports were prepared for the very purpose of ascertaining and reporting the gross turnover figures. That proposition, however, proceeds on the unsupported assumptions that those figures and the reports are accurate, that the system of keeping and producing them is reliable, and that the records have been honestly and accurately maintained.
32 There is no allegation of fraud in this case but, notwithstanding that, such optimistic assumptions are not the working hypotheses of auditors. An auditors role is to check, not merely to accept, the accuracy of records and reported figures and to examine the processing system which has produced them in order to look for mistakes, errors, oversights or misapprehensions which, experience regrettably reveals, only too often lead to accounting errors. This process of investigation and evaluation cannot be performed only by examining the records which have been relied upon by the lessee to report turnover figures when the obligation of the auditor is to ascertain, as accurately as circumstances can allow, the true turnover figures. Further inquiry is justified and necessary to undertake an evaluation of the business system. Comparisons with external criteria, such as profit margins reported by reputable reports of similar trades, seem to me to be permissible means of assisting in that task. In other spheres where it was necessary to ascertain what are 'proper books of account' under the former Companies Act 1961, it has been held that these include such records as are necessary to exhibit and explain the transactions and financial position of the trade or business of the company concerned: Manning v Cory [1974] WAR 60 [62] (Burt J).
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The nature and scope of the audit
33 While it is true that neither the Act nor the terms of the lease expressly define the scope of the audit which is to be conducted by an accountant appointed by a lessor in the circumstances envisaged under s 7(3) of the Act, the nature and scope of the audit may readily be deduced from its purpose. The Act clearly proceeds on the assumption that, in the circumstances where it is permissible to determine rent by reference to turnover and where lessors may impose contractual obligations on lessees to report turnover, an audit may be demanded by the lessor to determine the true turnover figures and thus verify or refute the reported turnover figures. Conditions are imposed relating to the cost of the audit so that if the audit reveals that the true turnover figure is less than 5% more than the reported turnover, the cost of the audit must be met by the lessor and that such audits may not be demanded more frequently than at annual intervals and then in compliance with the Act.
34 The identification of the ascertainment of the true turnover as the purpose of the audit therefore informs the conduct and the nature of the audit to be performed. All or any matters tending to ascertain, determine, corroborate, confirm, refute, supplant or reject the reported figures will be relevant and, as the auditor must be an accountant, that is an accountant qualified as required by s 3(1) of the Act, objective professional qualifications, independence and expertise are brought to the performance of the task. This in turn means that the quest for records or other materials necessary for the performance of the audit will be undertaken according to objective standards by a suitably qualified expert. The tacit assumption is that this accountant will have the experience and judgement to decide what avenues of inquiry, or access to which records, are necessary for the conduct of the particular audit. This is not to suggest or imply that the actions of the auditor are beyond scrutiny because, in any particular case there might perhaps be reason for a court to determine, as is being sought in this case, whether particular actions or lines of inquiry by the accountant who is appointed to conduct the audit are permissible.
35 This case does not involve any challenge to the professional independence, integrity or competence of the accountant appointed to conduct this audit. Rather, it is confined to whether or not the scope of his activities may go beyond scrutinising simply the primary records used by the defendant to prepare the reports required by cl 2.01 of the lease.
36 A somewhat similar argument was advanced and rejected in the case of Newton v Birmingham Small Arms Co Ltd [1906] 2 Ch 378 which
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- involved a question of whether or not a duly incorporated company had power to provide, by its articles of association, that its auditors were restricted in the access to the information which they could obtain for the performance of their statutory audit and, further, whether they could be restricted in the reports which they made of their audit to the shareholders about the true state of the company's affairs. At (387) of the report Buckley LJ rejected the limitations which the company had sought to place upon the statutory obligations of its auditors and said:
[Counsel for the company] argued that these words were satisfied if the auditors report that the balance sheet does not exhibit a true view, and that the statute does not, in these words, say that they shall report what is the true view. This is logically true as regards the language, but, in my judgment the statute is saved from the reproach of having achieved no more than this impotent result by words earlier in that section, which provide that the auditors are to report to the shareholders on the accounts. A report on the accounts involves a report of the result of the accounts, and this necessarily involves, as a matter of substance if not of form, the statement of a balance sheet or the equivalent of a balance sheet. There are, I agree, in the Act of 1900 no affirmative words to the effect of what I am about to state, but I think the language of the Act is sufficient to show that by implication it requires that there shall be annually an audit of the accounts resulting in a balance sheet, to whose accuracy the auditors shall speak.
Questions will often arise as to whether an auditor in a particular case ought or ought not to do this or that particular thing, and such questions are questions of fact. But the word 'audit' is a well known English word, and the general nature of what constitutes an audit seems plain enough. The Oxford English Dictionary defines the noun 'audit' as 'an official examination of accounts with verification by reference to witnesses and vouchers'. Mr R A Irish in his book 'Practical Auditing' (p 1) says: 'An audit may be said to be a skilled examination of such books, accounts and vouchers as will enable the Auditor to verify the Balance Sheet. The main objects of any audit are: (a) To certify to the correctness of the financial position as shown in the Balance Sheet, and the accompanying revenue statements. (b) The detection of errors. (c) The detection of fraud. The detection of fraud is generally regarded as being of primary importance'. (617)
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38 Reference to this passage led Perry J in Delhi Petroleum Ltd v Santos Ltd [1999] SASC 37 to observe that an essential nature of an audit is that it is a verificational exercise. This same concept that an 'audit' is an activity performed in order to make an official systematic examination of accounts for some designated purpose was accepted by Mason CJ, Brennan, Deane, Dawson, Toohey, and McHugh JJ in Industrial Equity Ltd v Deputy Commissioner of Taxation (1990) 170 CLR 649 where unsuccessful objection was attempted by the appellant to the exercise of compulsory audit powers by the Commissioner of Taxation merely because the appellant company was one of the top 100 companies in the country and so within a class which had been selected by the Deputy Commissioner for detailed audit. Their Honours regarded it as important to note that there is a distinction between the reason for performing an act and the purpose sought to be achieved by the doing of the act (661) and that the performance of an audit to determine the extent of the liability of a tax payer to pay tax was a proper and legitimate scope of the exercise of the statutory power even if the selection of the particular tax payer for the audit process was random. The significance of this observation for the present case, is that, once the accountant has been appointed to conduct an audit in accordance with this lease and s 7(3) of the Act his task is to determine the proper annual turnover figure and he should not be circumscribed in the performance of that task by the manner in which the lessee has gone about calculating and reporting the turnover figure to the lessor.
39 That this must be so is obvious from a hypothetical case (not the present), where a lessee has fraudulently kept false records and knowingly reported a false understatement of turnover in order to maintain a lower rent than would be determinable by the proper applications of the provisions of the lease. To restrict an auditor in that situation to an examination only of the false records kept by the lessor, and to prevent him from conducting a real audit to determine the accurate turnover would be to deny the verification process which the Act and the lease allow.
40 For these reasons I am satisfied that the accountant engaged by the lessor is entitled to have access to each of the sets of materials enumerated at [4.1] - [4.4] of the originating summons for the conduct of this audit. I also consider that the accountant is entitled to examine, for the limited purposes for which he has been engaged, an electronic copy of the data file for the computerised sales system and that, therefore, a declaration as sought under [5] of the originating summons should also be made.
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41 It must, of course, be accepted that only limited use can be made of these materials by the accountant in the sense they may be used for no purpose other than conducting the audit of the turnover. The use of this information is protected by s 8(1) of the Act. Therefore a declaration under the terms of [6] of the originating summons ought also be made.
42 I reached these conclusions and announced these decisions at the completion of the hearing on 11 December 2007 giving short reasons on that occasion but explaining that more comprehensive reasons for decision would be given later. These are those reasons.
43 In the result I decided that the following orders and declarations should be made:
1. It be declared that pursuant to cl 2.01 of the lease dated 5 August 1996 and s 7(3) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), the lessor and its auditor H L B Mann Judd, have a right to inspect for the purpose of audit of the turnover of the business of Marvelle Investments Pty Ltd:
(a) computer generated inquiry reports from the 'Retail Touch' computerised cash register system being print-outs of interrogation reports from the system of sales for the financial year ended 30 June 2003, 30 June 2004 and 30 June 2005 as requested by H L B Mann Judd.
(b) the tax returns of Marvelle Investments Pty Ltd for the financial year ended 30 June 2003, 30 June 2004 and 30 June 2005.
(c) the financial statements of Marvelle Investments Pty Ltd for the financial years ended 30 June 2003, 30 June 2004 and 30 June 2005.
(d) all notes and working papers so far as they exist belonging to the defendant and its accountants, A S Turner & Associates, containing information pertaining to the Fresh Provisions business at the Bayview Centre for the financial years ended 30 June 2003, 30 June 2004 and 30 June 2005.
2. It be further declared that an electronic copy of the data filed for 'Retail Touch' point of sale system for the period from 1 July 2002 to 30 June 2005 (the data file) be made available by the defendant for the inspection and use by the plaintiffs' auditors H L B Mann Judd. The plaintiffs' auditors may make a copy, or digital copy, of
- the data file and remove that copy or digital copy from the defendant's premises.
- 3. The plaintiffs auditors may retain copies of the data file or other copies of records obtained from the defendant in the course of the audit and/or pursuant to these orders and declarations until further order of this Court, subject to the restrictions upon the use of that data or those records set out in [6] of these orders. Such data or other records may be retained pending the completion of the audit and, should it eventuate, the adjustment of the rent payable for the premises or periods from 1 July 2002 onward. The defendant shall have liberty to apply to this Court to fix a date by which the plaintiffs' auditors shall comply with [4] of these orders.
4. The plaintiffs' auditors shall, at a date to be fixed, if not agreed:
(a) delete or erase any electronic copies of the data file, or extracts therefrom, from any data bank or recording device held by the plaintiffs' auditors.
(b) deliver the copy or digital copy of the data file and all electronic and hard copies (not erased or deleted) thereof to the defendant.
(c) prepare a report of all copies taken by the plaintiffs' auditors, including a list of such electronic and hard copies, stating:
(i) what copies were taken;
(ii) when they were taken, and in what form;
(iii) which copies are provided; and
(iv) which were deleted or erased and when.
5. The plaintiffs and the plaintiffs' auditors, H L B Mann Judd, may use the records referred to in [1] and [2] of these orders only for the purposes of determining the accuracy of the rental figure determined by the defendant by reference to the turnover of the business and for no other purpose.
6. The defendants have 14 days to file any submission in relation to costs and the plaintiffs have seven days after receipt of the defendant's submissions to file their response. Costs are reserved until after the submissions have been filed and exchanged.
7. The time fixed by the Rules for the defendant to file any notice of appeal from these orders be extended until 21 days after the reasons for decision are published.
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