Backoffice Investments v Campbell - [2007] NSWSC 161

No judgment structure available for this case.

Reported Decision:
61 ACSR 144
(2007) 25 ACLC 302

New South Wales

Supreme Court

CITATION: Backoffice Investments v Campbell [2007] NSWSC 161

HEARING DATE(S): 27, 28, 29, 30 November 2006, 4, 5, 6, 7 December 2006
[written submissions 18 December 2006]

JUDGMENT DATE :
8 March 2007

JURISDICTION: Equity - Commercial List

JUDGMENT OF: Bergin J

DECISION: Plaintiff entitled to declaration of oppressive conduct and order for purchase of share at $853,000

CATCHWORDS: [CORPORATIONS] – Share Sale Agreement/Shareholders Agreement/Services Agreement - Whether vendor's conduct in excluding the purchaser of a 50% share in company from the management of the company amounted to oppression (s 232 Corporations Act 2001) - Whether an order for purchase of the share should be made when provisional liquidator appointed - Fixation of price at which share to be purchased (s 233 Corporations Act 2001) - [CONTRACT] - Whether vendor breached warranties in Share Sale Agreement - Whether appropirate to award damages for breach of warranties where order made for purchase of share - Whether vendor breached implied obligation to co-operate in causing company not to pay purchaser's entitlements under Services Agreement - Whether appropriate to award damages - [MISLEADING OR DECEPTIVE CONDUCT] - Whether vendor's conduct misleading or deceptive - Whether purchaser relied upon alleged representations - [PRACTICE AND PROCEDURE] - Practice Note governing commercial causes - Alleged deficiencies in plaintiffs' pleadings - Timing of complaints about pleadings - Ambit of "cards on the table" approach to litigation - Late application to amend pleadings

LEGISLATION CITED: Corporations Act 2001 (Cth)
Fair Trading Act 1987 (NSW)
Trade Practices Act 1974 (Cth)

CASES CITED: Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470
Aloridge Pty Ltd (prov liq apptd) v West Australian Gem Explorers Pty Ltd (1995) 127 ALR 410
Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153
Cassegrain v CTK Engineering Pty Ltd (2005) 54 ACSR 249
Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60
Dynasty Pty Ltd v Coombs (1995) 13 ACLC 1290
ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1995) 15 ACSR 536
Glover v Australian Ultra Concrete Floors Pty Ltd [2003] NSWCA 80 (Unreported, Sheller, Hodgson and Ipp JJA, 24 April 2007)
Hewlett Packard Australia Pty Ltd v Siltak Holdings Pty Ltd [2005] NSWSC 672 (Unreported, Barrett J, 8 July 2005)
Hogg v Dymock (1993) 11 ACSR 14
John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A’Asia) Pty Ltd (1991) 6 ACSR 63
MacDonald v The Law Union Fire and Life Insurance Co (1874) LR 9 QB 328
Manning Shire Council v Caernarvon Pty Ltd [1977] 1 NSWLR 202
Maye v Colonial Mutual Life Assurance Society Ltd (1924) 35 CLR 14
Minister for Immigration, Local Government and Ethnic Affairs v Dela Cruz (1992) 34 FCR 348
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
National & General Insurance Co Ltd v Chick [1984] 2 NSWLR 86
Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116
Re a Company [1983] 1 WLR 927
Re London School of Electronics Ltd [1985] 3 WLR 474
Sargent v ASL Developments Pty Ltd (1974) 131 CLR 634
Scottish Co-op Wholesale Society Ltd v Myer [1959] AC 324
Shelton v National Roads & Motorists Association Ltd [2004] 51 ACSR 278
The Commonwealth v Verwayen (1990) 170 CLR 394
United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514
Webb v Stanfield (1990) 2 ACSR 283
White v Overland [2001] FCA (Unreported, Allsop J, 20 September 2001)
Yazbek v Aldora Holdings Pty Ltd (2003) 45 ACSR 53
Zempilas v JN Taylor Holdings Ltd (in liq) (No 6) (1991) 5 ACSR 28

PARTIES: Backoffice Investments Pty Ltd (first plaintiff)
Timothy Andrew Weeks (second plaintiff)
Douglas Ronald Campbell (first defendant)
Sentinel Construction Managers Pty Ltd (second defendant)
Healthy Water (NSW) Pty Ltd (third defendant)

FILE NUMBER(S): SC 50047/2005

COUNSEL: JB Simpkins SC/TL Wong (plaintiffs)
DJ Hammerschlag SC/LTG Gibson (first and second defendants)

SOLICITORS: Watson Mangioni Lawyers (plaintiffs)
Rodd Peters Lawyers (first and second defendants)
Dibbs Abbott Stillman (third defendant)

- 67 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

BERGIN J

8 MARCH 2007

50047/05 BACKOFFICE INVESTMENTS PTY LTD & ANOR v DOUGLAS RONALD CAMPBELL & ORS

JUDGMENT

1 This litigation arises out of the purchase by the first plaintiff, Backoffice Investments Pty Ltd (Backoffice), of a 50% share in the third defendant, Healthy Water (NSW) Pty Ltd (in provisional liquidation) (the Company) from the first defendant, Douglas Ronald Campbell (Campbell). Backoffice, a company controlled by the second plaintiff, Timothy Andrew Weeks (Weeks), purchased the share pursuant to a Share Sale Agreement dated 24 January 2005 between it, the Company, Campbell and the second defendant, Sentinel Construction Managers Pty Ltd (Sentinel), a company controlled by Campbell. A Shareholders Agreement and Services Agreements were also executed on the same day. Campbell and Weeks fell into serious dispute within days of the execution of these Agreements and on 7 April 2005 consent orders were made for the appointment of a provisional liquidator to the Company.

2 The plaintiffs claim that Campbell conducted the affairs of the Company in a manner contrary to the interests of the members as a whole and in an oppressive and unfairly prejudicial and discriminatory manner against Backoffice, within the meaning of the Corporations Act 2001 (Cth) (the Act).

3 The plaintiffs also claim that Campbell was in breach of the Shareholders Agreement and caused the Company to breach certain implied and express obligations under the Services Agreement. The plaintiffs also seek damages: for alleged breaches of the warranties in the Share Sale Agreement; for alleged breaches of the Services Agreement; and for alleged misleading or deceptive conduct by Campbell in making representations relating to the financial position of the Company prior to the execution of the Share Sale Agreement. Although Campbell and Sentinel made similar claims against the plaintiffs by way of Cross-Claim those claims were abandoned on the sixth day of the trial. The reference in this judgment to “the defendants” is a reference to Campbell and Sentinel together. The Company was not represented in the proceedings.

The facts

4 In 1993 Campbell began trading as a sole proprietor under the business name “Healthy Water Company” carrying on the business of selling and maintaining water filtration systems to private and corporate customers. The Company was incorporated in about 1994/1995 and continued the same business. In 2004 Campbell retained Bato Partners, Merchant Bankers, to assist him to restructure the Company’s business. Bato Partners prepared a Memorandum of Information (the Information Memorandum) which included the following:

A. Introduction and Background

1.1 Bato Partners has been retained by the proprietor of Healthy Water to assist a capital restructuring of the Company, that may involve the introduction of an equity investor/partner combined with a partial equity sell down by the existing proprietor, or as an outright sale of the business.

1.2 The purpose of this Memorandum is to provide potential investors/purchasers with a brief outline of the business operations so as determine the extent of their initial interest in the business.

1.3 It is clearly understood that any serious prospective investor/purchaser will undertake further investigative activities prior to arriving at a decision of any finality.

1.4 Healthy Water was established by its current proprietor, Doug Campbell, in March 1993 to provide access to clean (ie. safe, pure, healthy and chemical free) drinking water through the supply of and maintenance of leading edge, filtered water systems.

…

1.10 Healthy Water’s customer base is focussed on the commercial market in the Sydney CBD and north shore environs, whilst its growing residential client base is primarily the Sydney lower north shore and eastern suburbs.

…

1.12 The extensive opportunities to further expend the business within the commercial market sector, as well as the growing residential market, require corporate resources (ie. funding, facility management expertise, direct interstate representation etc.) that the present proprietor is unable to provide.

1.15 The business is budgeting for sales of $1.3 million in 2005 with an EBIT of $545,000 based on existing maintenance contracts known new commercial installations.

1.16 A valuation of the business for “asking price purposes” in respect of an equity raising or trade sale, is $2.25 million representing a 24% ROI.

1.17 The business would provide an excellent opportunity for an operator in the facility management industry wishing to expand its product range/activities, or other water/environmental industry participants seeking to expand their existing operations.

…

C. Development and expansion

There are excellent opportunities for further development and expansion identified and under evaluation by the company, including the following:

- Implement intensive telemarketing campaign to target the growing demand for filtered water systems in the major corporates for their multiple locations.

- Evaluate opportunities to joint venture with an existing facility management entity to expand their product range whilst utilising their existing facilities to service the customers.

- Evaluate opportunities to develop the residential market sector by the establishment of concept stores within existing speciality retail chains.

- Evaluate opportunities to replicate the Crows Nest location within our selected regions with similar demographics.

D. Financial

1.1 The attached financial summaries demonstrate the development phase of the company’s business in the establishment of an entity with the capacity to service the commercial market for its filtered water requirements on a national basis (ie. corporate multiple locations).

1.2 The installation sales to date underpin the service agreements that are designed to provide a recurring income stream for the business.

1.3 These summaries have been extracted from the company’s annual statutory accounts, as well as management accounts and budgets.

5 Summaries attached to the Information Memorandum recorded gross sales of $1.014 million for 2001; $1.058 million for 2002 and $1.020 million for 2003. They included a preliminary statement of gross sales for 2004 at $955,000 and a budgeted figure for gross sales for 2005 at $1.35 million. The summaries included EBIT at $208,000 for 2001, $245,000 for 2002 and $251,000 for 2003. The preliminary statement for 2004 recorded the EBIT at $356,000 and the budgeted EBIT for 2005 at $545,000.

6 Weeks was also a client of Bato Partners and was provided with a copy of the Information Memorandum. Phil Raby, Chartered Accountant, a friend and colleague of Weeks, assisted Weeks in the due diligence process prior to Weeks making an offer to purchase the share in the Company. On 1 December 2004 Weeks wrote by email to a partner of Bato Partners, Alan Horn, with whom he and Mr Raby had been dealing. That email referred to recent discussions with Mr Horn and the fact that the value of the business was based on the Company’s current financial year performance and not on its historical results. Weeks advised Mr Horn that for this reason it was important that he received the profit and loss accounts for July to November 2004 together with the November 2004 Balance Sheet and Trial Balance. Weeks also advised Mr Horn that he was assuming, and certainly hoped, that “these numbers are prior to any significant ‘adjustments’, which would be excluded from any valuation consideration”.

7 On 5 December 2004, Mr Horn wrote to Weeks and Campbell enclosing a revised “JV budget” for the year ending 31 December 2005. Mr Horn claimed that this budget was based on the “recent input provided by yourselves, as well as the previous budget estimate”. At this stage it was envisaged that there would be a joint venture between the parties, however that ultimately changed to a share purchase. Mr Horn’s 5 December 2004 email included the following:

The sales budget reflects the JV strategy that will allow Doug to be “free” from the office to initiate major new business, as well as Spiros coming on board and Tim developing new business from selected target areas (ie. childcare, hospitals etc.).

The operating results budget reflects the “new” JV cost structure and focuses on the need to secure new business asap.
The attached are “draft schedules that should assist in the setting of various targets and the development of sales/marketing strategies for the JV in 2005.

8 On 6 December 2004 Weeks wrote to Mr Horn confirming that he had received the statutory accounts together with the Accountant’s “add-backs” for the same years (being 2002, 2003 & 2004). Weeks advised:

As we’ve discussed, the valuation of the business is very much dependant upon the current year’s performance and likely short term outlook, as the proposed valuation is not supported by any historic data. To enable this review, I still need the P & L accounts for July ‘04 to November ‘04 inclusive, the Trial Balance for November ‘04 and the detailed Balance Sheet as at November 04. Although Doug also kindly provided a sales listing, this was by invoice and although providing a lot of detail, did not enable the required analysis.

Obtaining this information was a very simple (15 minute) process and I have set-out the steps to be followed to obtain these reports using MYOB. I have also included examples (obviously taken from my own farm accounts) as these show what I’m looking for. Although Phil was perhaps a little over zealous, it would have been a very simple process to print these off while at Healthy Water, and if it would assist Doug in anyway – I would happy to come-in and do so.

…

Alan, as previously outlined the steps I [am] going through is:

9 Mr Horn had delivered a package of documents to Weeks at his home. The documents were headed “Healthy Water Operating Results” and two in particular are pivotal to many aspects of the plaintiffs’ claims. The first was headed “Non recurring expenses” and was referred to in the evidence as the “Add Backs” document. It will be extracted later when I am dealing with the specific allegations made by the plaintiffs in relation to the contents of that document. The other document was referred to in the evidence as the “Sales Revenue Report”. Similarly it will be extracted later when I am dealing with the plaintiffs’ claims in relation to the contents of the document.

10 The Balance Sheet as at 30/11/2004 was also in the package of documents and recorded a loan to Campbell of $74,507.24. Weeks asked Mr Horn whether Campbell would be repaying that loan prior to settlement and Mr Horn said that he would find out. Weeks agreed in cross-examination that Mr Horn advised him that the Balance Sheet he had given him did not disclose Campbell’s accrued long service leave and annual leave entitlements and that he thought they would be in excess of the loan amount (tr 44). Weeks claimed that Mr Horn advised him that the items in the Add Backs document were Campbell's non-recurring expenses that he had taken out of the business in the last 5 months. Weeks claimed that Mr Horn also said that Campbell realised that the items were not documented in any way and that is why he was providing Weeks with a warranty. Weeks claimed he asked Mr Horn whether there was “an audit trail” and that Mr Horn said:

No, I've had a look at some credit card statements charged to Healthy Water, but nothing I could present to you. These are not the sorts of things Doug wants in the public arena and your protection is he's warranting Healthy Water's performance. It's making about thirty five thousand a month and that's going to continue to improve. Doug’s prepared to guarantee this figure to justify your price, but he's limited as to how much information he can provide.

11 Mr Horn denied that the conversation was in the terms alleged by Weeks. He said that Weeks asked him how the figures in the Add Backs document could be “substantiated” and that the following conversation took place:

Horn: This is fairly simple. The schedule is a summary of certain expenses that would not recur in the event that a purchaser takes over the business. It represents a normalisation of the operating results so as to provide an incoming investor or purchaser with a picture of the business going forward without certain expenses that would not be recurring.

Weeks: I understand that, but how can I satisfy myself as to their validity?

$2600 represents an accounting treatment for obsolete inventories that you can easily verify.

$16,000 represents fees paid to Bato Partners that will not recur under the new ownership. Our fees can easily be checked in the company's accounting records.

This leaves $77,500 for the 5 month period to 30 November 2004 and which represents the difference between the proprietor's drawings from the business and that amount for which a general manager could be employed for a small business of this size.

In essence, Doug receives approximately $271,000 per annum from the business in salary, motor vehicle allowance and other expense allowances whereas we have estimated that a general manager could be recruited for this business at a salary of $85,000 per annum.

The difference is $186,000 per annum and adjusted to 5 months to 30 November 2004, it leaves $77,500 as an expense that is non-recurring for that period.

12 Mr Horn also claimed that he advised Weeks that the Balance Sheet and Profit and Loss Statement in respect of the 5 months ended 30 November 2004 would be part of the sale contract and subject to the usual warranties but that the Add Backs document would not form part of the contract. As it turned out the amount in the Add Backs document was included by reference to the “Proprietor’s estimates” of non-recurring expenses. Mr Horn claimed that he advised Weeks that he would have to undertake his own due diligence “to be comfortable with your estimate of the level of operating performance going forward”. He claimed that Weeks said that he would “certainly” be doing his own assessment of the business’ operating performance going forward. Mr Horn also provided a copy of a Memorandum of Understanding to Weeks. Although it referred to the obsolete plan for a joint-venture, it relevantly stated:

Pricing: The agreed value of the Healthy water business is $2,250,000 with a 50% shareholding to have an acquisition cost of $1,125,000.

The value of the business reflects the current operating results of the business and which on an annualised basis, approximates the original 2005 budgeted annual sales turnover of $1.3 million with a normalised EBIT of $545,000, after taking into account the current order book and existing customer service income etc.

A copy of the management accounts at 30/11/04 will be attached to the contract.

13 On 14 December 2004 Weeks made an offer to purchase the share in the Company in the following terms:

The basis of my offer is as follows:

$’000’s	Annual	Average	3 x EBIT	4 x EBIT
EBIT	EBIT	Annual	AverageAnnualAverage
Management Accounts
2001/2	244.00	732.00	976.00
2002/3	251.00	283.67	753.00	851.00 1,004.001,134.67
2003/4	356.00	1,068.00	1,424.00
2004/5 (P7-12 x 2)	325.00	325.00	975.00	975.00 1,300.001,300.00
2004/5 (Estimate)	400.00	400.00	1,200.00	1,200.00 1,600.001,600.00

· Based upon the operational results provided for Healthy Water as tabled above (adjusted but unsupported), the value of 100% of the Company is around $1.6M. $1.7M tops.

· Purchase of a 50% share would be paid in cash ($850,000 for 50%)

· From January 1, 2005 the directors would each be paid a Salary of $150,000pa, plus super @ 9% and car allowance (as agreed) and a ‘guaranteed’ bonus of $100,000pa to be paid quarterly or thereafter subject to cash funds being available.

· These payments equate to the current forecast level of profitability ($400,000pa) supporting the $1.7M valuation

· Recognising that ‘performance’ expected to exceed the current forecast level of profitability, a performance bonus may be paid to the seller (ahead of any dividend payment) of up to $300,000 on March 31, 2005 or thereafter, subject to cash funds being available and sufficient profitability being achieved. No payment will be made based on profitability after December 31, 2005.

Alan, I think this is pretty straight forward – a purchase price ($1.7M) and a performance bonus (up to $300,000) based upon forecast levels of profitability being exceeded within next 12 months to December 31, 2005.

14 On 16 December 2004 Mr Horn advised Weeks that Campbell was unhappy and that he wanted the money from the guaranteed bonus to come in earlier and that he wanted to delay the payment of Weeks’ bonus. As a result of that discussion Weeks made an amended offer on 16 December 2004 by email to Mr Horn in the following terms:

· Based upon the operational results provided for Healthy Water, which form part of this offer and any subsequent agreement to purchase, the value of 100% of the Company is estimated at $1.7M.

· Purchase of a 50% share would be paid in cash ($850,000 for 50%) on January 1, 2005 – subject to Bank finance being approved.

· From January 1, 2005 the (2) directors would each be paid a Salary of $150,000pa, plus super @ 9% and car allowance (to be agreed) and a ‘guaranteed’ bonus of $100,000pa to be paid quarterly or thereafter, subject to cash funds being available.

· For the first year, payment of this bonus would be as follows:

Doug Campbell	Tim Weeks
March 31, 2005	25,000
June 30, 2005	25,000	25,000
September 30, 2005	25,000	25,000
December 31, 2005	25,000	50,000
$100,000	$100,000

· Recognising that ‘financial performance’ is expected to exceed the currently forecast level of profitability, a performance bonus of up to $300,000 will be paid to the seller, based upon net profitability to December 31st 2005. This performance bonus ranks after payment of the ‘guaranteed bonus’ and is subject to sufficient cash funds being available and sufficient profitability being achieved. Being a ‘performance’ bonus, no payment will be either due or payable if insufficient profitability is achieved.

15 On 22 December 2004 Weeks sent an email to Mr Horn attaching a “P & L Forecast” as a “summary of the various information provided”. Weeks advised that “these numbers are the basis” of the offer he had made to purchase the 50% share in the Company and stated:

Somehow these results need to be warranted as being true and correct and representative of the Company’s performance to date during the current financial year. They also represent the ‘budget’ for the remainder of the current year. I will also be asking my solicitor how these results can be incorporated and warranted in the purchase agreement … so we can adopt some appropriate wording.

16 There was an initial plan that settlement of the share purchase would be completed prior to 1 January 2005, however the Company’s Christmas holiday arrangements prevented this occurring. Mr Horn suggested to Weeks that he should “spend time” in the Company’s offices when it reopened on 10 January 2005 to “get a feel for how the business is being operated” and to conduct whatever remaining due diligence he required “of the accounting and other sale systems”.

Office arrangements

17 Diane Hannah, who had been working with the Company for a number of years was described by Campbell as a “senior scheduler”. Ms Hannah’s role included the maintenance of the customer database on the Company’s computer and the scheduling of the appointments for services of installed products and installation of new products. Ms Hannah was “the link” between the customer and the Company after Campbell had completed the sale (tr 345). The “service department” consisted of the technicians who carried out the installation of products and servicing of the installed products. Those employees would attend the Company’s office in the morning prior to departing in Company vehicles for the scheduled appointments for installation and/or service of the Company’s products.

18 From October 2004 the Company employed Penelope Anne Hunt as a consultant. Ms Hunt described her duties as “day to day management of the office and staff and marketing of the Healthy Water business”. Part of Ms Hunt’s duties included the banking and payroll for the Company. The Company’s banker, the Commonwealth Bank (the Bank), provided a tool known as “Quickline” to which Ms Hunt had access for the payment of some suppliers’ accounts and employees’ salaries directly into their bank accounts. The Bank also provided the Internet banking service, known as “Netbank” but Ms Hunt was not authorised to use this service. Both Netbank and Quickline were linked to the same account with only the former showing the account balance. Ms Hunt made arrangements for the employees of the Company who were using Company vehicles to be provided with fuel cards and e-tags whereby the Company paid the cost of petrol and tolls. From March 2004 to 29 January 2005 Campbell’s son, Chris Campbell, was employed initially as a service technician and later as service manager. During the last week of January 2005 and the first week of February 2005 three new employees (Messrs Tzelis, Brady and Wood) joined the Company.

19 The Company employed a bookkeeper, Andrew Eustace, who, amongst other things, entered the data into the MYOB database and completed BAS statements and the monthly accounts. Mr Eustace attended the Company’s premises from time to time to complete these tasks.

Weeks commences “work”

20 Weeks attended the Company’s premises commencing on 10 January 2005. During the period 10 January 2005 to 24 January 2005 there were a number of email communications between Weeks and Mr Horn and Mr Horn and Campbell’s solicitors, Rodd Peters Lawyers (RPL), in relation to the preparation of the various agreements. On 12 January 2005 Weeks sent an email to Mr Horn which included the following:

We still have not been able to obtain final P&L and Balance Sheets or to close-off FY2003/2004 and December 31st. Andrew Eustace will be in tomorrow (Thursday) with the aim of doing this and having some ‘clean’ figures for inclusion in the agreements and more importantly being able to get on with the business of invoicing and posting creditors.

21 At about this time Weeks requested Ms Hannah and Ms Hunt to “stop invoicing”, apparently to assist the “close-off” referred to in this email. This was a request that caused some controversy, with which I will deal later. On 12 January 2005 Mr Horn sent an email to Weeks advising that he had received the “30/11/04 management accounts” and that he would provide a copy to Weeks “when they are in an appropriate format for inclusion in the contract”. On 13 January 2005 Weeks sent an email to Mr Horn in which he summarised the “items/activities required before completion”, including the following:

2. Completion and closure of HW accounts:

- December 31st, 2004 Balance Sheet

…

5. Reconciliation of Doug Campbell loan and agreement on treatment to discharge loan prior to completion.

22 On the same day Mr Horn sent an email to Campbell in which he asked him to “advise if there are any other financial commitments that we should disclose that have been included in the accounts”. That email included the following:

… the Balance Sheet at 30/11/04 shows a shareholder loan of $74,507.24 owing by D. Campbell to the company, and Andrew was to investigate/reconcile this account for you today. Has Andrew finished this yet?

Also, the accrued annual leave/LSL liability for yourself amounted to $79,637.14 and will be included in the accounts … has Andrew adjusted this yet? Subject to Andrew’s reconciliation of the above loan account, the amounts appear to offset each other.

23 Mr Eustace completed the “adjustments” to the accounts and forwarded them to Mr Horn by fax dated 13 January 2005. The covering facsimile referred to the “updated” Balance Sheet, Profit and Loss to 30 November 2004. The matters to which Mr Eustace referred Mr Horn were: “the reversal of invoice to DC loan account; G J entries for leave accrual (slightly different to your figures, as I excluded sick leave); the $2500 fortnightly trans. to DC loan have been re-allocated to “Financing Costs” expense; ATO Running Balance account has been cleared”. The Balance Sheet to 30 November 2004 enclosed with the fax listed Mr Campbell’s loan to the Company as a liability in the amount of $3,759.76. Total assets were listed as $303,192.55. Total liabilities were listed as $104,304.42 with net assets as $198,888.13. Retained earnings were listed as $163,203.06, current year earnings as $35,683.07 and total equity as $198,888.13. Trade creditors were listed as $9,130.36.

24 Later on 13 January 2005 Mr Eustace sent a further fax to Mr Horn in which he adjusted the Balance Sheet as at 30 November 2004 to change the trade creditors to $63,625.75; a slight adjustment to GST providing a total for liabilities of $154,866.45 with net assets at $148,326.10. Retained earnings were reduced to $116,844.11 and current year earnings were reduced to $31,479.99 with total equity reduced to $148,326.10.

25 Between 10 January 2005 and 24 January 2005 there were a number of conversations between Campbell and Weeks, one of which occurred on 20 January 2005 when Campbell and Weeks met with Mr Horn at Bato Partners’ offices to discuss the share purchase, the future of the business and the allocation of duties. Campbell claimed the following conversation took place at that meeting:

Weeks: I’m going to do a corporate 101.

Campbell: What’s a corporate 101?

Weeks: Alan, he doesn’t know what a corporate 101 is?

Horn: It is an American corporate accounting term or procedure.

Tim, with these service department guys, you will need to tread carefully and lead by example, such as being in the office at 7:30am and being able to deal with service problems as they arise. If we lose one of these guys, it will take us about 6 Mr Weeks to replace them.

26 Campbell claimed that at this stage of the conversation Weeks stood up and shouted at him:

I will not be bullied. I am not going to be an employee of yours. I will own 50% of the company don’t you forget.

27 According to Campbell, Weeks then left the room and slammed the door. Weeks put a different hue on this conversation. He denied that he said the words attributed to him by Campbell, however he admitted that he did say that it was not an employee/employer relationship and that they were going to be joint owners. He denied slamming the door but admitted that “at one point” he did leave the room to attend the bathroom. Campbell claimed the following conversation took place when Weeks returned to the room:

Campbell: I think you should go away and think about whether you really want to be involved in this company. Think very hard about whether or not you want to be involved in this Company, in turn I don’t want you to come back into the business premises until you have made your final decision.

Weeks: Oh Alan, I have been dismissed.

28 The following day Mr Horn telephoned Campbell and informed him that Weeks was still interested in pursuing “the deal”, that he had settled down quite a bit and was apologetic for what had happened. Mr Horn advised Campbell that the possible date for settlement was then 24 January 2005. Weeks telephoned Campbell that morning and the following discussion took place:

Weeks: I guess you know, I’m still interested in coming in to Healthy Water.

Campbell: Yes, Alan has told me. I just want you to understand that the guys you will be working with in the service department are pretty basic in their needs. They won’t be interested in corporate 101. You need to take it slowly, let it happen and build some respect, they will respond.

Share Sale Agreement

29 The Share Sale Agreement dated 24 January 2005, provided for the purchase of the share in the Company by Backoffice for $850,000 (cl 5). It also provided:

7. WARRANTIES
7.1 Warranties by the Vendor

The Vendor [Campbell] warrants to the Purchaser [Backoffice] in terms of the Warranties set out in the Schedules. Each warranty is given as at the date of this Agreement and subject to any disclosure made by or on behalf of the Vendor to the Purchaser or its advisers before the date of this Agreement.

7.2 A Warranty which refers to “the knowledge, information and belief” of the Vendor, or which refers to the Vendor’s “knowledge”, or contains words to that effect, or which refers to the Vendor being aware or not being aware of a matter, must be treated as including an additional Warranty that the Vendor has made due and careful enquiry as to the matter.
7.3 Notwithstanding any other provision of this Agreement;

(a) the Vendor shall have no liability in respect of any claim under the Warranties unless the amount of such claim exceeds the sum of $15,000 for any one event or $25,000 in aggregate;

(b) the Vendor shall have no liability in respect of any claim under the Warranties unless reasonable particulars are given of the claim to the Vendor within twenty four (24) months after the date of this Agreement save and accept for any Claim against the Company by the ATO or Office of State Revenue relating to liabilities arising from the period prior to the Execution Date;

(c) the liability of the Vendor in respect of any claim under the Warranties shall be reduced or extinguished (as the case may be) to the extent that the claim has arisen as a result of any act or omission of the Purchaser.

7.4 The Purchaser acknowledges that:

(a) in entering into this Agreement and undertaking any of the transactions contemplated in this Agreement, it has not relied on any warranty made by or on behalf of the Vendor other than the Warranties given in sub-clause 1 of Schedule 1;

(b) it has been afforded the opportunity of inspecting (either directly or through its advisers) the Company and Assets, and it has availed itself of such opportunities and has relied upon its own conclusions as to the Company and the Assets arising out of such inspections; and

(c) it is not aware of any fact or circumstance that would make any of the Warranties incorrect which have not been disclosed to the Vendor.

8. COSTS

8.1 Each party must bear its own costs in relation to the preparation and execution of this Agreement.

8.2 The Purchaser shall pay and bear all stamp duty and similar duties or charges payable on or in relation to this Agreement.

9. ENTIRE AGREEMENT
9.1 This Agreement:

(a) constitutes the entire agreement between the parties; and

(b) in relation to that subject matter, supersedes any prior understanding or agreement between the parties and any prior condition, warranty, indemnity or representation imposed, given or made by a party.

Schedule 1 to Share Sale Agreement

30 Schedule 1 of the Share Sale Agreement included the following:

3. MATERIAL CONTRACTS AND LIABILITIES

Liabilities disclosed in Schedule 3 and Schedule 7, and the Company is not party to any contract or arrangement which has not been disclosed to the Purchaser.

(g) The Company has not experienced any extraordinary expenses since the Balance Sheet Date and the business of the Company has been operated in the ordinary course and in good faith since the Balance Sheet Date.

4. FINANCIAL MATTERS

4.1 The Vendor warrants that:

…

Profits or Losses

The profits or losses shown in the Balance Sheet have not to a material extent, been affected (except as therein disclosed) by any extraordinary or exceptional event or circumstance or by any other factor rendering them unusually high or low.

…

10. ACCURACY OF INFORMATION

To the best of its knowledge, the Vendor warrants that:-

Information Accurate

All information given by or on behalf of the Company or its advisers to the Purchaser or its advisers material to the sale of the Shares and the Assets is substantially accurate and complete and not misleading.

Schedules

The information in the Schedules is materially accurate and complete and not misleading.

Schedule 3 to Share Sale Agreement

31 Schedule 3 to the Share Sale Agreement contained a one page document headed “Balance Sheet as at 30/11/04” which extracted relevant figures from five pages which followed being: a two page document headed “Balance Sheet as of 30 November 2004”, two pages headed “Entitlement Balance [Detail] Lifetime” (the first setting out the leave entitlements for Campbell and the second setting out the leave entitlements for Ms Hannah) and a one page document entitled “Healthy Water Asset Replacement Cost”. These documents have been referred to in submissions as the “warranted balance sheet” and I will adopt that expression.

32 Schedule 3 to the Share Sale Agreement also contained a one page document headed “Profit and Loss Statement For the 5 Months Ended 30/11/04” which extracted figures from a two page document headed “Profit and Loss Statement 1/07/2004 through 30/11/2004”. These documents have been referred to in submissions as the “warranted profit and loss statement” and I will adopt that expression.

Shareholders Agreement

33 The Shareholders’ Agreement is dated 24 January 2005 and recited that Campbell had agreed to sell 50% of the shares in the Company to Backoffice and that the “Shareholders wish to enter into this Agreement to regulate their rights and obligations among each other as Shareholders of the Company”. The term of the Agreement was for the “Initial Term” of 24 months and then to continue until terminated pursuant to the Agreement (cl 2). The agreement provided that, unless otherwise agreed by the Shareholders, the directors “must” meet at least once every month (cl 5.7). Campbell and Weeks, as Joint Managing Directors, were to have the day-to-day conduct and management of the Business and the Company (6.1). It was agreed that certain matters, including the identity of bank signatories had to be determined by resolution at a directors’ meeting. The initial bank signatories were to be the two initial directors jointly for all financial transactions including electronic transfers. Any change to that arrangement had to be by resolution at a directors’ meeting (6.4(m)). It was agreed to adopt the budget and an initial business plan by 15 May 2005 (9.1(a)). It also provided:

7 RESOLUTION OF BOARD DEADLOCKS

7.1 When a Deadlock Arises

(a) the Directors cannot agree on a fundamental matter about operating the Company or the Business; and

(b) the failure to agree materially and adversely affects the successful operation of the Business; and

(c) the Directors cannot resolve the disagreement within 30 days of it first arising.

7.2 Voting Deadlock

In the event of a Board Meeting voting deadlock the status quo shall remain and the Directors may:

(a) appoint upon a unanimous decision a chairperson who shall have the casting vote; and

(b) reconvene the Board Meeting at which the voting deadlock occurred within three (3) days.

Services Agreements

34 Schedule 5 to the Shareholders Agreement contained two letters, each dated 24 January 2005 from the Company; the first was to Sentinel retaining it to provide the services of Campbell as Joint Managing Director of the Company; and the second was to Backoffice retaining it to provide the services of Weeks as Joint managing Director of the Company (the Services Agreements). The commencement dates of the Agreements were 1 January 2005 and were to remain in force for the Initial Term of 24 months and as long as the Shareholders’ Agreement remained in force (2.1).

35 Sentinel and Backoffice were each to receive a total fee of $150,000 plus GST gross per annum in consideration of providing the services. Clause 5.2 of each agreement provided:

The Fee will be paid in equal monthly instalments by electronic funds transfer into BackOffice’s/Sentinel’s nominated bank account within seven (7) days of receipt of original invoice which shall be issued at the end of each calendar month.

36 The Agreements also provided for a bonus of $100,000 during each year of the term of the Agreement in various instalments over the period (cl 6.1). Clause 6.2 of the Sentinel Service Agreement provided for a Performance Bonus of $300,000 to be paid out of “Available Profit” after the other bonuses had been paid. Both Campbell and Weeks were to attend the premises between 8:30am and 5:30pm Monday to Friday (cl 4) and each was to be provided with a fully maintained motor vehicle, including finance lease payments, during the period of the Agreement (cl 7). Schedule 1 to the Services Agreements provided as follows:

HEALTHY WATER (NSW) PTY LTD
SERVICES AGREEMENT
SCHEDULE 1

POSITION DESCRIPTION
Joint Managing Director (JMD)

SUMMARY

The JMD has joint management and budget responsibility for the complete Business. The JMD is jointly responsible for every facet of the success of the Business; delivering the budgeted Profit; Managing the Business; managing and motivating the people employed by the Business.
PRINCIPAL JOINT ACCOUNTABILITIES

· Accountability for the smooth running of the Business.

· Research, analyse, and monitor financial, technological, and demographic factors in order to capitalize on opportunities and minimize the effects of competitive activity;

· Create and manage strategic objectives in line with Company policy;

· Ensure acceptance and implementation of policies at each level;

· Manage, train, direct and motivate the staff within the Company;

· Provide regular and accurate reports to the Board of Directors on a planned and ad hoc basis;

· Attend professional and social events relevant to the Business as necessary.

PERFORMANCE EVALUATION

Joint General Tasks
Generate new business; Generate new concepts for the business; Liaise with new and existing clients; Develop client relationships; Capitalize on opportunities; Minimize effects of competitive activity; Prepare costings and proposals; Negotiate with suppliers.

Joint Budget Tasks

Control expenditure; Understand and prepare budgets; Check and account for budgets; Liaise with Management Accountant; Liaise with Management Accountant ( sic ); Determine progress and status in attaining objectives.

Other Joint Tasks
Implement new ideas; Represent the Company in professional and business-like manner; Attend internal and client meetings; Look after Company property; Utilize Company computer system; Maintain professional personal presentation which reflects the professionalism of the Company; Liaise with Company personnel; Provide regular reports to General Manager and Directors; Absorb training; Organize training as deemed necessary; Attend professional and social events; Maintain a team focus.

SUPERVISORY RESPONSIBILITIES

37 Campbell and Weeks agreed to divide the Managing Directors’ obligations so that Campbell was responsible for Sales and Marketing and Weeks was responsible for Service and Installation and Finance, IT and Accounts. Weeks prepared a chart setting out those areas that was used at a staff meeting on 25 January 2005.

Netbank access

38 On 24 January 2005 Ms Hunt sent an email to Weeks that included the following:

Netbank Access

Note: to gain access you must have been Id’d by the bank and be a joint signatory to the account.

39 The “form” to which reference was made in this email is probably the form headed “Authority for Non Personal Accounts” receipt stamped by the Bank on 25 January 2005. It was signed by both Campbell and Weeks who were the “persons authorised to operate the account”. In the space provided after the statement “Show method of operation eg, any one to sign, Treasurer plus one to sign or any two to sign etc.”, the words “Any two must sign” were written.

40 On 27 January 2005 Campbell informed Ms Hunt that he had tried to pay some invoices using Netbank but was unable to obtain access. Campbell requested Ms Hunt to ask Weeks “what has happened to Netbank”. The terms of the conversation between Ms Hunt and Weeks on 28 January 2005 are disputed. Weeks’ evidence was that Ms Hunt claimed that he had changed the banking arrangements and expressed concern that she would not be able to run the payroll. Weeks claimed that Ms Hunt suggested that he had been “tampering with the bank facilities” and that he advised Ms Hunt that he had no idea what she was talking about and that he would call the Bank to find out what was going on.

41 Ms Hunt claimed that she asked Weeks whether he knew what happened to Netbank because Campbell could not get access to it. She claimed that Weeks looked at her “blankly and shrugged” and said: “well, so I can’t do any thing”. Ms Hunt claimed that when she expressed her concern that it may affect the payment of employees and suppliers and cause embarrassment to the Company, Weeks responded: “So, I don’t care. Anyway, weekly pay is going to change, it’s ineffective. Everyone will be changed to monthly payments. Also paying suppliers via EFT is not cost effective”. Ms Hunt claimed that she said to Weeks: “it seems that whatever has occurred with you going to the bank this week, is affecting [the Company’s] ability to meet its financial commitments” and that he responded: “I don’t care, what can I do anyway”. Ms Hunt claimed that Weeks refused to assist her and that he later ignored her and walked away from her.

42 Weeks’ claimed that he subsequently called the Bank and was advised by an officer of the bank, Mr McAllister, that the “issue” with Internet banking had occurred because two signatories were then required to sign everything and that two passwords were required to access Internet banking. Mr McAllister advised Weeks that the payroll would not be affected. Immediately after his discussion with Mr McAllister, Weeks advised Ms Hunt that Mr McAllister had said that the payroll was unaffected but that NetBank now required two authorisations. He claimed that Ms Hunt informed Weeks that it was “unacceptable” and she would have to speak to Campbell to “change it back”.

43 On either version of events it is obvious that the relationship between Ms Hunt and Weeks was not a happy one. It is clear on the evidence that the complexity of the commencement of this business relationship between Weeks and Ms Hunt was exacerbated by the fact that Campbell and Ms Hunt were in an intimate relationship. It was not suggested in the evidence that Weeks was unaware of this fact nor is it possible to know when he became aware of that fact. Campbell admitted that he was aware of and very upset about the developing conflict between Ms Hunt and Weeks and claimed that he was doing everything he could to avoid it (tr 445). Campbell agreed that Ms Hunt was making “regular complaints” to him about Weeks (tr 442). He gave evidence that he paid particular notice to what Ms Hunt was saying to him about Weeks because she was “overloaded with” Weeks’ work and “she was trying to cope and it was very difficult” (tr 443).

January invoices

44 Weeks prepared two invoices dated 31 January 2005. The first invoice included the following:

Consulting Services for January 2005 per services Agmt dated 24/1/2005 with 5 days taken as unpaid leave/public holiday – from 1st to 10th January, 2005 (16/20* $150,000/12 = $10,000)	$11,000.00 GST
To reimbursement for the supply of IBM R51 Workstation as approved by DRC. (Copy of Tax Invoice attached)	$3,511.00 GST
January expenses (per attached expense report)	$374.70 GST

45 The second invoice was in the following terms:

To re-imbursement of January ‘05 motor vehicle lease expense per Services Agmt. dated 24/1/05

$2,233.99 GST

46 Weeks’ affidavit evidence was that on 31 January 2005 he discussed these payments with Campbell in a conversation that included the following:

Weeks: How do you want to process our consultant fees? Do you want to run them through the payroll system or use funds transfer, a cheque or what?

Campbell: I don’t know what you’re talking about, it’s the end of January and you only paid your money on the 24th. How can you possibly put your hand out for money when you have only been here for a week and in that time, you haven’t brought in any business. I know your type. All you want to do is to come into my company and take control and strip it of its money.

Weeks: Doug, I’m complying with the terms of our services agreements which are effective from 1 January and requires us to submit our invoice for fees at the end of each month.

Campbell: I don’t give a damn about any agreement. You only paid your money on the 24 January so you can ask for payment on 24 February. Then I’ll consider paying you on 1 March if you bring in some business.

Weeks: Doug, that’s not what the services agreement says.

Campbell: I don’t care about the agreement. It’s not relevant. I’m going to decide what’s happening around here.

Weeks: It’s a legal agreement.

Campbell: I really don’t care about the agreement. You should sue me, plenty have tried before. Bring it on - I’m ready.

47 Later that day, Weeks had a conversation with Mr Horn who, according to Weeks, said that he had raised the fact that the Services Agreement commenced from 1 January 2005 with Campbell. Mr Horn said that he would talk to Mr Campbell and “sort this out”. Weeks claimed that during the afternoon of 31 January 2005 he was scheduled to review the payables procedure with Ms Hunt. Weeks asked Ms Hunt whether she was ready to go over the payables with him and according to Weeks, Campbell shouted from his office words to the effect of, “don’t show him anything, all he wants to do is get his hands on the money”. Both Campbell and Ms Hunt denied that this occurred. In cross-examination Weeks agreed that from the time he had the discussion with Campbell about the invoices for his fees dated 31 January 2005, their relationship commenced to deteriorate. Weeks subsequently communicated with Mr Horn who suggested that perhaps the commencement date for payment for services should be 10 January 2005 rather than 1 January 2005. Weeks advised that he would reduce the amount in the invoice to $10,120 and make the same claim as Campbell for the motor vehicle allowance.

48 The versions of events between Ms Hunt and Weeks in January and early February 2005 are the subject of dispute, however an email that Ms Hunt sent to Mr Horn on 1 February 2005 gives some indication of the environment, at least from Ms Hunt’s perspective. That email referred to the problem with the Internet banking and the conversations with Weeks that Ms Hunt regarded as most unsatisfactory. Ms Hunt also claimed that Weeks behaviour was “offensive” and that he continually reminded her and Ms Hannah of his “superior business experience”. Ms Hunt claimed that Weeks: seemed “obsessed” about Campbell’s previous spending on his Visa credit card “for the past months before his entry into the business”; was “condescending and patronising” and “endeavouring to control and oversee everything”; and was trying to “corporatise” the service team when what they needed was encouragement and leadership. The email concluded:

Last night, I received another explosive lecture from a red faced and finger pointing Tim (again after the rest of the team had left for the day), essentially reminding me that he had invested a lot of money in this acquisition an [ sic ] it’s in his interest to make it work. I said I understand but it is not my business what he spent acquiring a share of HW! I said I was personally frustrated. That as a ‘manager’ of the business, if I escalated an issue to him, that he was not ‘taking ownership of it’. By way of example I told him of the 5D contract not being completed and sent. (5D manage the CBA account, one of our most valued clients) and that even after last Friday, as a ‘critical member of the team’ that he claimed I was, he didn’t once ask whether or not I had managed to be paid or could he do anything to help. Yet, since starting I have received two invoices from him, One dated 1.1.05 for his motor vehicle lease and another today for a new computer.

…

49 The “5D contract” referred to in that email was a contract that Ms Hunt said she gave to Weeks on 14 January 2005 as a result of a request made by Campbell. Ms Hunt ‘s evidence was that when she gave it to Weeks on that day she advised him that Campbell had said that the formalities for renewal needed to be finalised by 31 January 2005. According to Ms Hunt, the finalisation of this renewal was necessary before the Company could attend to service calls to the Commonwealth Bank sites. On Friday 28 January 2005 Ms Hunt sent an email to Weeks in the following terms:

Last week I left in your file a contract which needed to be completed for 5D (Facility Mgrs for CBA)

This is a friendly reminder, [f]ollowing our conversation yesterday, this is due back to 5D no later than 31 Jan 05. (Monday)

50 On 5 February 2005 Weeks forwarded Ms Hunt’s email on to Campbell in the following terms:

This is not something I have either the product or pricing knowledge to complete. If it is critical to our business then I suggest someone works with me to complete.

51 Campbell sent this response to Ms Hunt on 7 February 2005. Ms Hunt then purported to set up a meeting with Weeks by sending an email in which Weeks was identified as a “required attendee”. That meeting did not eventuate and Ms Hunt attended to the material for finalisation of the 5D contract herself. It is obvious that by this time the relationship between Ms Hunt and Weeks had deteriorated very badly and was not assisted by the meetings between Campbell and Weeks on 4 and 7 February 2005 referred to below. Ms Hunt had also commenced to keep a “diary” in relation to the times during which Weeks attended the Company’s premises and some of the conversations that occurred between them. Those vignettes included the following:

When Tim leaves, Diane asks me whether her job is secure. (I say not to worry)

52 On 3 February Mr Horn attempted to negotiate a compromise between Campbell and Weeks in relation to Weeks’ claim for payment pursuant to his invoices dated 31 January 2005. Mr Horn wrote to Campbell in the following terms by email:

Digressing to a housekeeping matter that is obviously emotive … Tim is seeking payment under the service agreement for January as you are aware … perhaps a not unreasonable compromise would be to start him from 10/1/05, as well as for the car allowance that would be parallel to yours. This seems to be a real bone of contention for some reason, and perhaps a compromise now may reap further benefits later.

53 Campbell responded to Horn promptly on the same day in the following terms:

Thanks for your confidence; I am trying very hard Alan to facilitate Tim’s needs and idiosyncrasies, in fact harder than I have ever had to do for someone in 28 years of business life.

His transition to SME life is most difficult for me and also the Staff, made doubly hard because he won’t listen when it comes to important issues like making HW sales and service operationally smooth AND functional. Life here is about hard work, empty bin so to speak thinking on your feet, treating people with respect and encouragement. Earning the respect of other team members is the order of the day.

Just because one invests money into a business as a partner, it is not a license to break the rules of “contracts in business life” or demand special attention and/or dispensation. The people around us work here because they enjoy being here and feel equally important. Further more so they should.

If we give into his wailing about dubious dates to be paid monies … where does it all end? How do I build respect for him? If he was a super contributor it may well be easier to digest, frankly he has really been quite negative to our business operations, and further more he wants us all to believe that he is God’s gift to HW very existence and future progress!

You place difficult decisions in my path.

Management Meeting – 4 February 2005

54 Mr Horn arranged for the Management Meeting to occur on 4 February 2005, in part to attempt to deal with matters that were obviously in need of compromise. Mr Horn had circulated an agenda prior to the meeting. The meeting commenced at approximately 12:30pm and after some discussion about the employees and sales activities, Weeks claimed the following conversation then took place:

Campbell: We can no longer use internet banking because of you. You are deliberately trying to sabotage Healthy Water. All you want to do is get your hands on my money –; you just want to take control. I’ve been running this company for 12 years without you and I’ve always been able to do what I wanted to do.

Weeks: The change in banking arrangements is nothing to do with me – it is a consequence of the requirement for both of us to authorise transactions. This is what we agreed to in the share sale agreement.

55 Weeks then claimed that he tried to explain what had happened with the internet banking arrangements by saying:

Listen and you might learn something, I’ll try to explain what’s happened. Can we concentrate on the solution and not personal abuse.

Campbell’s letter – 6 February 2005

56 On 6 February 2005 Campbell wrote by email to Weeks in the following terms:

I refer to the Healthy Water management meeting held Last Friday 4th February 2005, 12.30pm – 4-45pm at Bato and Partners, Loftus St, SYDNEY.

Present; Alan Horne, [Chair] Tim Weeks and Doug Campbell.

At the meeting several potential problems were highlighted, your request for an unconstitutional back dated service fee payment and other already sanctioned expenditure of approx $22,000, after only eleven days service at Healthy Water and without adding any income at all to the company is particularly concerning. I firmly believe you need more time to adjust to small business life as opposed to your considerable corporate experience.

Subsequently on Saturday 5th Feb 05 I gave proper consideration to our short term projected income vs. Tax commitments, Salaries, consultants, fixed expenditure costs and supplier outstanding invoices due now, if this trend continued, by March 15th 2005 we will exceed the Company’s $60,000 overdraft by $20,000. Please note; I would be totally responsible for the OVERDRAFT extension as you still have not executed documents to support 50% responsibility for the $60,000 overdraft.

In consideration of all these circumstances, I believe it to be imprudent and financially unwise to continue with the current split of responsibilities for each Director and Staff member. These following changes can again be reviewed within 90 days with Alan Horn adjudicating.

Therefore I feel compelled to bring to your attention the following solutions/changes to relieve the strain on the Company’s financial recources [ sic ], I urge you to adopt all without hesitation to protect the company from future financial hardship.

1. Both Directors reduce their fist consultancy fee; due and payable 1ST March 2005 totalling $27500.00 including GST by 50% to $6875.00 each.

2. The laptop computer you have already committed to and purchased for $3511.00 I will concede be paid in full.

3. Your motor vehicle lease of $1400.00 you have requested by made payable back dated to the 1st January instead of pro rata from the 25th of January 2005 the day you consolidated your equity partnership and signed partnership documents, I will concede once only to be paid in full.

4. I ask you to please refrain from any further expenditure commitments without consultation to myself. As such ,Healthy Water will not as a Company enter into any further extraordinary or abnormal expenditure outside normally required, at least until projected 60 day healthy cash flow can be guaranteed.

5. As a further act of prudent management, at this stage we will refrain from purchasing another motor vehicle van, Chris Campbell can relinquish his company motor vehicle which can be given to the new customer service person after his 1 month trial period if we are satisfied he can adequately fulfil the position we have planned for him.

6. I will loan a [sic] Chris my personal motor vehicle at his cost until he makes up his mind regarding full time study at TAFE Meadowbank. He will continue to work part time on Mondays and I have given him 14 days to make up his mind regarding a full time career as HW Service Manager.

7. As HW has been managed by myself successfully for the past 12 years, the Company’s financial and administrative processing should return to being processed and managed by myself with assistance from Penny Hunt. Penny will continue in collections, also assisting you, Spiros and myself as marketing/telemarketing consultant.

8. When you return from unpaid leave in New Zealand it is imperative to the Company’s profitable progress you concentrate on canvassing new and existing business customer opportunities with a view to convert as quickly as practicable to sales orders, I will continue to assist you every way possible to achieve this goal. Apart from the new premises negotiations sales should remain your primary function at Healthy Water until reviewed in 90 days as aforementioned.

9. My role as Sales Director at HW remains unchanged apart from the additional F & A duties.

10. I understand from 2 staff members you returned to the office Friday evening and announced the new Healthy Water East Chatswood premises offer we were still discussing at our meeting Friday afternoon had been accepted, I would appreciate the details of the acceptance be offered to both Alan Horn and I before any further announcement be made elsewhere. I am curious how an acceptance by the vendors could happen less than ½ an hour after our meeting finished, I for one would appreciate an immediate explanation.

11. We need to have a very hard look at the servicing dept labour resources due to some things which have been brought to my attention over this past weekend, it will require our immediate attention and decisive action.

Meeting – 7 February 2005

57 Weeks received Campbell’s letter of 6 February 2005 on that day as an attachment to an email. On 7 February 2005 Weeks met with Campbell and Mr Horn at the Company’s offices. Weeks gave evidence that the following conversation occurred at that meeting:

Weeks: You both know I have borrowed from the Bank to make this purchase and that I have an interest payment each month to service this debt. Now I’m being told that I’m not going to be paid and that Healthy Water does not have the funds to pay me.

Campbell: If you want to be paid it’s simple, just agree to everything I have set out in my letter and I’ll pay you.

Weeks: Doug, this isn’t an employer/employee relationship; I’m a director and half owner. Backoffice’s Services Agreement sets out how I should be paid and when. You can’t blackmail me with refusing to pay me, knowing that I have made your commitments to the Bank, secured against my own home.

Weeks (to Horn): Alan, we discussed this. I confirmed with you that my services agreement was to start on 1 January. You said that you would discuss it with Doug Did you Alan?

Horn (to Campbell): Doug, you remember? I said that there were a couple of outstanding issues that Tim had raised and that I needed to discuss with you.

58 Weeks claimed that further conversation included the following:

Campbell: I know your type; you corporate guys have no idea what business is all about. You sit in your ivory towers and have people running around doing all your work. You just don’t understand what is required in small business and find it all too hard; you can’t take the hard work and the long hours. You don’t know how to treat staff. All you want to do is stick your hand out for money and try and take over my company, well I’m not going to let that happen – why don’t you go back to where you came from, I don’t want you here.

Horn: Look, the solution is simple. All you have to do is agree with Doug’s letter and you’ll get paid.

59 Weeks claimed that Campbell then walked out of the meeting and that he had a discussion with Mr Horn to the following effect:

Weeks: Alan, all I want to do is get on with my job, help Doug grow Healthy Water and get paid. As you know I have financial commitments and need to be paid. This was all discussed and agreed. What is going on – Doug’s telling me Healthy Water has no money?

Horn: Tim it’s simple: Doug just wants you to get out and sell. If you do that I’m sure that he will keep you whole financially. He knows you have debts to meet. It seems there is a need for cash and some urgent sales.

60 He claims that at no stage during the meeting on that day did he agree with the proposal in Campbell’s letter or accept a 50% reduction in the payments due to Backoffice under the Services Agreement.

61 Horn gave a different version of the events of the meeting on 7 February 2005. He claimed that the following conversation took place:

Weeks: You both know that I have borrowed from the Bank to make this purchase and that I have an interest payment each month to service this debt. Now I’m being told that I’m not going to be paid and that Healthy Water doesn’t have the funds to pay me.

Campbell: We have to be commercially prudent about this. My detailed proposals I believe set out a fair way in which we can conduct the business in the next three months. As part of that we’ll both concentrate on sales and leave admin to Penny and Dianne who are more than capable of continuing to manage this function. I realise you need some money to meet personal obligations and I will personally lend you whatever you require tonight. If you agree to the proposals set out in my letter, the company will pay us as per my letter.

62 Mr Horn denied that he discussed with Weeks the start date of 1 January 2005. This denial is far from reliable having regard to Mr Horn’s email to Campbell on 3 February 2005 suggesting a ”compromise” to the start date of 10 January 2005. Mr Horn claimed that the following conversation took place at this meeting:

Weeks: OK I agree to the letter. Can we now get on with running this business.

Horn: Do you accept that Doug? Tim agrees to your proposal.

Campbell: Good. Tim can you please confirm your acceptance overnight by email and I will personally make sure that your financial obligations are covered. But I need a written confirmation of your agreement.

Weeks: OK, OK, I agree. I agree what more do you want?

Horn: Tim, just confirm by email to Doug tonight and Doug will look after you for your personal financial obligations. Doug just believes that the business needs sales. Not more administration as Penny and Dianne can do that as they have done before. Just get out there with Doug and bring in the new business.

Weeks: OK. But I just don’t understand why I can’t be paid what is owing to me.

63 Mr Horn claimed that when Campbell said that he was late for a prearranged appointment he appeared very exasperated and walked out of the office. Mr Horn claimed that the following conversation also took place at the meeting after Campbell had left:

Horn: It is very simple. Doug just needs you to concentrate on working with him to bring in new sales. The administration matters can wait. The company has higher overheads now that you and Spiros are on board, especially at the new salary levels for Doug and yourself and Doug, just wants the primary focus on sales. I understand that the company has money in the bank, as always, but Doug is just being careful and wants to concentrate on new business.

Weeks: OK I will do that.

Horn: Just send the email to Doug tonight in confirmation.

64 On 8 February 2005 Weeks wrote to Campbell by email in relation to an insurance recommendation. That email was in the following terms:

Given your statement of the company’s financial position, I don’t think this is something to be pursued at this time or until such time as we can meet our other obligations. The monthly premium is $1,124 or annually $13,500 with additional legal costs to be incurred on top of the base premiums.

65 On the same day Campbell responded to Weeks’ email on the following terms:

What statement regarding the company’s financial position?

At the moment the company’s financial position is healthy.

66 In the afternoon of 8 February 2005 Campbell sent a further email to Weeks in the following terms:

I understand during your fleeting visit to Healthy Water this afternoon you have downloaded the entire company records from the server:

· I would like to know why you have done this as it always been company policy not to have any customer records off site. And as such it is a serious breach without consultation with me as your co-director.

· Why are you refusing to sign the bank document to enable us to trade effectively?

· Alan and I both knew you were struggling with your duties and personal financial problems.

· At your request after hours Alan and I spent time with you to try to nut out a way to help you.

· Now today you have once again refused to carry out your duties with senior members of the staff, claiming there are “bigger things afoot”. What do you mean by this statement?

· I take it your agreement Monday evening to the terms and revisions letter dated 6th February 2005 is no longer agreed?

· In my view cashing the Company’s Cheque for $3,511.00 during today’s escapade is acceptance of my letter as above.

Tim I think it is reasonable for me to ask for answers to these questions.

Your behaviour in front of the staff today was at the very least unsettling at worst disrespectful to all concerned.

67 On 9 February 2005 the solicitors for Weeks, Watson Mangioni, wrote to Campbell in terms that included the following:

Prior to settlement, Mr Weeks was provided by you with certain financial information purporting to establish the profitability of Healthy Water over a number of prior years and the purchase price of $850,000 paid by Back Office for one share in Healthy Water was based upon a four times multiple of an average EBIT over a period of prior years and an express indication by you that the future profit forecast for Healthy Water in the next 12 months would be around 150 percent of the 2003/2004.

Express assurances were provided by you to Mr Weeks and to Back Office indicating anticipated healthy, positive cash flows in the immediate and medium term future and a solid current asset base.

Subsequent to settlement, there have been a number of management meetings involving yourself and Mr Weeks and on occasions, Alan Horne, in which you have made it abundantly clear that you will not accept equal participation in the management of the affairs of Healthy Water with Mr Weeks. You have told him in no uncertain terms that you are in control. On 7 February 2005, you sent Mr Weeks a letter attached to an email which gives Mr Weeks cause for grave concern.

First, having accepted Mr Weeks’ payment of $850,000 for an equal share in Healthy Water on the basis of buoyant financial predictions and a strong balance sheet you now assert that the company’s financial resources are strained to the point that director’s fees cannot be paid and that motor vehicle and other normal business expenses have to be curtailed.

Secondly, you have purported to unilaterally change the agreed management structure which would effectively relegate Mr Weeks to being your subordinate.

Further, yesterday, you endeavoured to have Mr Weeks sign certain bank authorities on an urgent basis without allowing him the opportunity to ascertain what they were.

This whole situation is entirely untenable. Mr Weeks is entitled to participate equally in every sense with you and the management of the company as a director and to protect and uphold the interests of the shareholders.

Whilst Mr Weeks is overseas until early next week, we have, on his instructions, sent the attached letter to the Commonwealth Bank. Should there be any urgent requirements for business expenses to be made in his absence, Mr weeks [ sic ] will authorise them by direct communication with the Bank. To obtain his authority, you should contact him on his mobile telephone (0412 861 252) to make the necessary arrangements.

Mr Weeks will not countenance any payments being made out of company funds without his joint authorisation with you. Upon his return, he will require a statement of all expenditures of company funds since settlement and will hold you accountable should there have been any inequitable distributions or payments.

245 Campbell’s evidence as to how he reached the estimate was less than satisfactory. However, when it came to describing how the estimates were reached in each line item for the month of December 2004, Campbell’s evidence was totally at odds with Mr Horn’s evidence. That evidence was as follows (tr 380-383):

Q. In the column headed “EST DEC”, do you see that, it is the second column?
A. EST December?

Q. Yes?
A. Yes

Q. That was a column that you spoke to, was it, at this meeting attended by yourself, Mr Horn and Mr Weeks?
A. Yes.

Q. Now do you see that in that column the first figure which is included is one for new business sales, $12,954?
A. Yes.

Q. That’s a figure that you gave to Mr Horn, is it?
A. That’s a figure that we were discussing, yes.

Q. That’s a figure that you gave to Mr Horn, is it?
A. Yes.

Q. You can recall doing that, can you?
A. I can now by looking at it, yes.

Q. What about each of the other figures in this column. Just look at them, take a moment to reflect on what they are?
A. Yes.

Q. Is it your evidence to her Honour that in relation to each of the items for which a figure is included in the “Estimate December” column, you gave that figure to Mr Horn?
A. Those figures were what we discussed and Mr Horn would have them, yes.

Q. Is it your evidence to her Honour that each of those figures in that column you gave to Mr Horn?
A. Yes.

Q. And you gave them to Mr Horn, did you, at some meeting you and he had prior to this document at court book volume 2 page 615 being provided to Mr Weeks?
A. It would have been on a phone call. I recall now we discussed these figures on the phone call before we had the meeting with Tim Weeks.

Q. Where did you get the new business sale figure of $12,954 from?
A. 12,954, it would have been from the small - some of the smaller accounts I mentioned earlier on and some of the other accounts that might have happened at the time, yes.

Q. You are telling us, are you, what you actually recall doing?
A. Pretty much I can, yes.

Q. And you can recall, can you, in the course of a telephone conversation with Mr Horn looking at information available to you for new business sales, is that right?
A. Mm hmm.

Q. Did you, during the course of this telephone conversation with Mr Horn, tell him to write in the document that he was to prepare an estimate for new business sales for December 2004 of $12,954?
A. Yes.

Q. And just explain to me what your process was in formulating that figure for Mr Horn?
A. Okay. New business sales is derived from what you think either it’s going to end up at or its going to be for the period of December; 31st of December.

Q. Well, it’s a very precise looking figure. Did you engage in some process of calculation, did you, to derive it?
A. I would have been looking at the figures on the P & L and at that time they were the figures that I felt were going to happen.

Q. Does that mean that there was a calculation?
A. Well, sometimes what happens, if I may add, is that you move – the figures are moved around in the income streams.

Q. Mr Campbell, it is easy, I think, did you or did you not do a calculation to derive the new business sales figure of $12,954?
A. Yes.

Q. What was the calculation?
A. Based on what had already been sold to that date, and also what I felt was going to sell from there on end.

Q. So ultimately it was just an estimate for December?
A. Yes, it was.

Q. But one that you instructed Mr Horn to include in the precise amount of $12,954?
A. The $12,954 is what it ended up, but there would have been discussion around that figure and how it was derived.

Q. Mr Campbell, the difficulty we are having at the moment – and maybe you can assist – is if the new business sales figure was just an estimate, can you explain, please, why it was included in the very precise amount of $12,954?
A. No, I can’t.

Q. And isn’t it the fact that none of these figures that appear in this column “Estimate December” at court book volume 2 page 615 were figures that you gave to Mr Horn, none of them?
A. I don’t agree with that.

Q. And isn’t the evidence that you have just given this afternoon that you instructed Mr Horn to include these figures something that you have just made up?
A. No, I don’t agree with that either. There are two figures there in the total.

Q. Sorry, you say there are two figures there in the total. What figures are you referring to?
A. There is $87,046.

Q. Yes.
A. And then there is the $100,000.

HER HONOUR Q. Yes, but if you add 12,954 and 87,046 you get 100; don’t you?
A. Correct.

Q. You told her Honour earlier today that your estimate for the new business was a figure that you couldn’t recall, but was something like two to five thousand dollars?
A. Correct.

Q. That estimate of two to five thousand is included, is it, in the figure given for new business sales of $12,954.
A. Correct.

Q. Mr Campbell, it is clear, isn’t it, that the figure that appears in this document for new business sales in the “Estimate December column”, is not a figure that you gave to Mr Horn?
A. No.

246 As can be seen from this evidence, Mr Simpkins gave Campbell every opportunity to suggest that the figures in the column were pro-rata figures based on the estimated $100,000. The evidence that he gave in respect of how he reached the specific figures and the fact that he gave the specific figures to Mr Horn is in my view totally unreliable evidence and I do not accept it.

247 There is an issue as to whether the management accounts for the month of December 2004 were produced and provided to Weeks prior to the settlement of the purchase of the share in the Company. Campbell gave evidence that on a regular basis during 2004 and the early part of 2005, at least until Weeks participated in the business, he would review the actual performance of the Company against the budgeted performance of the Company. He would do this in the first week after the end of the relevant month (tr 323). Campbell said that at the end of the year he would take a lot of paperwork with him on his holidays and do a lot of budget extensions and planning for the future. Campbell claimed that when he returned to work on about 10 January 2005 he had only had a “cursory review” of the comparison between the December 2004 budget and the actual operating result for that month (tr 324). His evidence in cross-examination included the following (tr 324-325):

Q. And you appreciated, may I take it, that that estimate having been given to Mr Weeks was likely to be treated by him as something that he could rely upon for the purpose of making a decision about investment?
A. That's correct. We discussed it at length prior to the holidays.

Q. And didn't you want to satisfy yourself in January 2005 that the estimate that you had given to Mr Weeks and upon which he was likely to rely in fact was consistent with the actual operating result for December 2004?
A. I did and there was about an 8 percent shortfall.

Q. When you say an 8 percent shortfall, are you referring to an 8 percent shortfall in sales?
A. An 8 percent shortfall in the bottom line, I suggested to Mr Weeks and to Mr Horn that we actually had as an estimate, an assessment.

Q. Let us take it step by step. When you referred to an 8 percent shortfall, were you referring to sales or were you referring to something else?
A. Sales.

Q. It is correct to understand that by no later than 10 January 2005 you were aware that the actual sales for December 2004 were not the estimated $100,000 but only about $92,000?
A. That's correct, sir, you're right.

Q. Are you wanting to suggest that that was something that you actually communicated to Mr Horn?
A. Most definitely.

248 Campbell volunteered that a comparison of the estimate for 2004 with the actual operating result would be material to a purchaser (tr 334). Mr Simpkins cross-examined Campbell in relation to his claim that he had communicated the difference between the actual operating result and the budget for December 2004 to Mr Horn and to Weeks. His evidence in cross-examination was as follows (tr 325-329):

Q. Let us take Mr Horn first. When is it, do you say, you told Mr Horn that the actual operating result for December 2004 was for sales only of $92,000 and not the estimated $100,000?
A. Very difficult to recollect exactly the date, but I would suggest it would be mid January. There was still discussions going on with Mr Horn and Mr Weeks and myself from time to time.

Q. So you spoke to Mr Horn your best recollection is sometime in mid January, is that correct?
A. Yes.

Q. And you spoke to him at that time about the shortfall in sales?
A. Yes, but not - there wasn't a lot of emphasis placed on it because it was an estimate and there seemed to be no real concern coming from Mr Weeks.

Q. Let us take it step by step. When you spoke to Mr Horn in mid January and told him about the 8 percent shortfall in sales for December 2004, what do you want to suggest you said to Mr Horn?
A. Well, I think it was just a general discussion. By that time Mr Weeks --

…

Q. What did you say to him?
A. I can't recall exactly the discussion, but I would suggest it was about the shortfall, about a 10 or 15 percent shortfall, maybe more, I am not sure. I don't know what the calculation is, and Mr Horn would have gone away and looked at it.

Q. You told him, did you, words to the effect of "I've looked at the actual operating results for December 2004 and they're about 10 to 15 percent less than the estimate, I'm not sure"?
A. That's correct, something to that effect, yes. Words to that effect.

…

Q. When you spoke to Mr Horn you told him, did you, that looking at the sales figures the operating result for December 2004 was about 8 percent less than the estimate of sales for that month?
A. Well, I spoke to him about it in general terms and said to him there could be a 10 to 15 percent difference but in actual fact it turned out to be an 8 percent difference so there was a benefit.

…

Q. About the time you were speaking to Mr Horn in January you had actually compared the estimate of $100,000 for sales in December 2004 with the actual operating performance for sales for that month?
A. I did.

Q. And you knew as a result of that that the actual shortfall in sales was in the order of 8 percent?
A. I did.

Q. You told Mr Horn that, did you?
A. No I didn’t. I believed that there needed to be a discussion between Mr Horn and Mr Weeks because he was the main person talking to him, so I gave him a shortfall of 10 to 15 percent approximately. It didn’t seem to be too much of a concern at that point. It was an estimate.

Q. When you were speaking to Mr Horn in January 2005, did you realise as a result of the review that you had carried out that not only were the sales down by about 8 percent but also the cost had increased by a percentage that you had not taken account of?
A. In the management accounts, if that is purely what we are talking about, yes.

Q. Well, when you did your review in January 2005 you agreed it was 8 percent out in relation to sales; what percent was it out in relation to expenses?
A. I can't recall. The bottom line was that we had made a profit and a good sized profit.

…

Q. You were concerned, were you, as part of this review that you engaged in in January 2005 to satisfy yourself that the estimate that you had given Mr Weeks about the performance for December 2004 was an accurate estimate?
A. Absolutely.

Q. And to the extent your comparison revealed it might not be accurate you were concerned to pass that information on to Mr Horn?
A. You are correct there. It might not be accurate and I passed it on to Mr Horn.

Q. And Mr Weeks?
A. Mr Horn would have spoken to Mr Weeks. There were some times I had spoken to Mr Weeks but it wasn't a direct discussion we had about that. Once Mr Horn was informed he said, "Doug, I better talk to Mr Weeks and let him understand that." And I left it to them, as I did with most of the negotiations.

Q. Is this right, you never yourself spoke to Mr Weeks and said to him, "The results for December show a shortfall of about 10 to 15 percent on the estimate"?
A. No, I can't recall speaking to him. I may have - he was in the office on and off probably every day during the periods that he was doing his due diligence, but you know, I don't recall saying anything to him during January because it was during the period I was on holidays that I reviewed this.

…

sic

249 Campbell agreed that in January 2005 he had the management accounts for December 2004 available to him (tr 330). He said that Mr Horn asked him for the “latest figures” because he needed to get them to Weeks, and by that time he had already told Mr Horn that his comparison of actual operation against budget had shown that sales for December 2004 were down by 8% (tr 331). He claimed that Mr Horn advised him that he would speak to Weeks about the shortfall (tr 332).

250 Campbell gave further evidence in relation to the management accounts and his knowledge of the difference between the operating result and the budgeted figures for 2004. His cross-examination included the following (tr 368 - 369):

Q. Indeed, you told her Honour earlier today that as a result of realising that there was a difference you communicated with Mr Horn?
A. Of course.

Q. Didn't you do that because you thought the difference to be significant?
A. No, I didn't.

Q. Did you do it because you thought the difference was insignificant?
A. No, I didn't. I think Alan Horn was my representative and he needed to know there was, at that stage there was a difference and would it be a significant thing in regards to having an estimation put in front of Mr Weeks.

Q. You were concerned, were you, by 10 January 2005 about whether the difference was significant?
A. I was concerned, yeah. I didn't want it to be a major difference, no.

…

Q. What did you realise by no later than 10 January 2005 was the reason for the difference?
A. Well, I didn't have any real concerns myself --

HER HONOUR Q. No, what did you realise was the cause of the difference?
A. Your Honour, the only thing that I could see that caused the difference was we hadn't billed everything the way that we wanted to bill it in the income streams because we were very very busy.

Q. When you say you hadn't billed everything, do you mean that you formed the view that there had been work done in December which had not been invoiced in December?
A. Yes.

Q. Was that based upon information that you had available to you about work which had been performed in December but not invoiced?
A. Some, yes.

Q. Being information you had in your office?
A. Being information I gathered from 27 years in business.

Q. Being information you had in your office?
A. No.

Q. Not being information you had in your office?
A. No.

Q. Being information you had in your head?
A. Yes.

251 After this extraordinary evidence, Mr Simpkins pressed Campbell further in relation to the difference between the estimate and the operating result and the following evidence was given (tr 369-370):

Q. You didn't think, did you, by 10 January 2005 that the reason for the difference was that there was work done which had not been billed in December 2004?
A. No, I didn't.

Q. What did you think the difference was between the estimate for December and the actual operating result for December 2004 when you reviewed it in January?
A. Sir, I can't recall.

Q. Weren't you interested, given the fact that you had given an estimate to Mr Weeks--
A. Yes.

Q. … of $100,000 to try and work out what had actually happened in December that had produced a figure under the estimate?
A. Yes.

Q. That was part of your purpose in reviewing the financial information, is that right?
A. When we came back on the 10th you are talking about?

Q. Whilst you were doing the review in January, weren't you concerned once you ascertained that there was a difference to try and work out why it existed?
A. That's correct, sir. I have answered that question.

…

HER HONOUR Q. What was the reason for the difference? What did you think the reason for the difference was between $100,000 and $92,000?
A. There were bills that had to be invoiced and servicing that had to be done. I mean, there were a number of different factors that you take into consideration, but in my experience from what was going on in the office and in the field, I believed that I didn't have any real need to be totally concerned, but it was important to make sure that Alan was abreast of the current situation.

252 This evidence demonstrates once again Campbell’s proclivity to change his position. At first he claimed that the reason for the difference between the estimates for December 2004 and the actual operating results for 2004 was that work had been done which had not been invoiced. He then suggested that this claim was based on his “experience”. He finally agreed that in January 2005 he did not think that the reason for the difference was that invoices had not been issued for work that had been done. When pressed for a reason he resorted to the answer “I can’t recall”. If Mr Simpkins had not pursued Campbell on this topic, his evidence that work was done and not invoiced, which was obviously wrong, to use a neutral term, would have been left unchallenged. Campbell’s evidence on this aspect of the matter is further support for the conclusion that I have reached that he a very unreliable witness.

253 Campbell then claimed that throughout January 2005 he spoke to Weeks on the topic of the difference between the estimates and the operating results on one or maybe two occasions (tr 371). He also claimed that he spoke to Weeks in January 2005 about the management accounts and what they showed for December 2004 on two or three occasions (tr 372). He claimed that the first occasion was on 10 January 2005 when they were driving to a meeting in Chatswood, and Weeks asked him whether the company would achieve the estimates, and he responded “yes”. He also claimed that Weeks asked him whether “servicing” in December had been in accordance with the estimate, and he informed him that it had (tr 372). When it was suggested to Campbell that it was obvious to him that Weeks did not have the December 2004 management accounts, he said that as far as he knew he would have had the estimates, but not the finalised accounts. He agreed that he understood that Weeks would want the management accounts (tr 373).

254 Campbell claimed that in January 2005 he informed Mr Horn that the accounts were in “good order”. He also claimed that on 14, 15 or 16 January, Weeks made an enquiry about whether he could rely upon the December 2004 management accounts. However he suggested that it was “a very fleeting thing” (tr 374). Campbell was cross-examined further as follows (tr 376):

Q. Mr Campbell, you did not provide, did you, to Mr Horn at any time in January 2005 the December 2004 management accounts?
A. No, that's not correct.

Q. You didn't instruct either Miss Hunt or Mr Eustace to produce some accounts that Mr Horn might give to Mr Weeks relating to December 2004?
A. That's not correct either.

Q. You knew, didn't you, that Mr Weeks, in or about January of 2005, was actually seeking to get a copy of the December 2004 management accounts?
A. Yes, I do.

255 Campbell agreed that the management accounts for December 2004 were completed a long while before 24 January 2005 when the Share Sale Agreement was signed but continued to deny he knew that Weeks was not given those accounts (tr 378). Mr Horn’s evidence in relation to the management accounts included the following (tr 267-270):

Q. Did you at any time during the course of December 2004 ask Mr Campbell what the management accounts were showing as the operating results for Healthy Water for that month?
A. For December?

Q. For December 2004?
A. No.

Q. Did you at any time prior to the agreements being entered into on or about 24 January 2005 have any discussion with Mr Campbell about the results for December 2004?
A. No.

Q. No discussion at all?
A. No, not that I can recall.

…

Q. When you got this e-mail from Mr Weeks you appreciated, didn't you, one of the things he was stipulating for prior to completion was the production of Healthy Water accounts showing the profit and loss to December 31, 2004?
A. Yes.

…

Q. You knew however, didn't you, in January 2005 that there was still work which was taking place on the management accounts of Healthy Water?
A. Yes.

Q. And work which was likely to affect or capable of affecting the financial information which you had provided on behalf of Healthy Water to Mr Weeks?
A. That's correct.

256 The following written submission was made on behalf of the defendants in relation to whether Weeks received the management accounts:

It was forcefully put to Campbell that he had not given and Weeks had not received, the management accounts for December 2004. This material was, amongst others, the subject of Weeks emails of 20/12/04 … In his affidavit (28/10/05) paragraph 80 he refers to his email of 13 January 2005 … and does not say he never received the management accounts. This is all consistent with his attempt to portray an image of ignorance.

257 Although paragraph 80 of the affidavit referred to in this submission does not state that Weeks did not receive the management accounts there is a clearly implied claim that he did not receive such accounts in paragraph 92 of the same affidavit in which he claims that he was not aware of the difference between the estimates and the actual results for December 2004. I accept Mr Horn’s evidence that he did not discuss with Campbell in January 2005 the contents of the management accounts for December 2004. I do not accept Campbell’s evidence that Mr Horn informed him that he had received the December 2004 management accounts and that he had “passed on the details” to Weeks (tr 333). When Mr Simpkins asked Campbell whether he had asked Mr Horn what Weeks thought about the 10% to 15% shortfall (which had been identified in the management accounts) Campbell’s answer was (tr 333):

Well, there was an 8 per cent shortfall on revenues. I would have said to him, was there any response, and he said no. He has bunkered down in his farm somewhere and that's it. There was no comment that I can recall, that I could relate to you, that would be of the nature that it was, you know, there was a problem with it.

258 I do not accept this evidence. I accept that Mr Horn did not give Weeks the management accounts. I do not accept Campbell’s evidence that he discussed the December 2004 management accounts and their contents with Weeks during January 2005, prior to entry into the various agreements on 24 January 2005. I accept Weeks’ claim that he did not know that there was a shortfall in revenue as against the December 2004 estimate at the time he executed the Share Sale Agreement.

259 It is abundantly clear that the Sales Revenue Report was prepared in the manner in which Mr Horn claimed it was. It is also abundantly clear that Campbell knew the estimate of $100,000 was 8% higher than the actual operating results for the Company in December 2004 well before the settlement of the purchase on 24 January 2005. I am of the view that Campbell knew that Weeks did not know of the difference between the actual operating result and the estimated budget for December 2004.

Representations

260 There are real issues in relation to the representations that are alleged to have been made by the provision of the Sales Revenue Report to Weeks in December 2004. There is also the issue of whether the representations were continuing up to the date of execution of the Agreements on 24 January 2005. I will assume for the purposes of this analysis that there was a representation that Campbell knew of no information that was material to the accuracy of the estimates in the Sales Revenue Report, which tended to show that they were false, misleading or deceptive. I will assume for the purposes of this analysis that the representation was false.

Reliance

261 It was submitted that the plaintiffs’ case should fail on reliance. It was claimed that on Weeks’ own evidence, he relied on Mr Horn to provide information but was well aware of the disclaimers contained in the Information Memorandum prepared by Bato Partners in July 2004. It is true that the Information Memorandum referred to Bato Partners’ understanding that a purchaser would undertake further investigative activities prior to arriving at a decision of any finality (1.3). It is also true that the front sheet to the Information Memorandum included a statement that the advice, information and estimates in it were provided by the directors of the Company and that Bato Partners had not attempted to verify the accuracy or reliability of it. It also stated that no warranty of accuracy or reliability was given and that no responsibility for omissions was accepted by Bato Partners. Those disclaimers related to information that was provided very early in the negotiations with Weeks.

262 The defendants also referred to clause 7.4(b) of the Share Sale Agreement, which is an acknowledgment by Backoffice that it had been afforded the opportunity of inspecting the Company and the Assets and had availed itself of that opportunity. The defendants accepted that the presence of such an acknowledgment is not definitive but submitted that its presence militates against reliance upon any of the alleged representations. It was submitted that this is particularly so where Weeks had carried out extensive due diligence with the assistance of his accountant, Mr Raby.

263 It was submitted that Weeks’ claim of reliance should not be accepted for a number of reasons. The first was his acknowledgement that the figure for non-recurring expenses was an “estimate” (tr 55) and that he made an allowance for “plus or minus a few thousand dollars” (tr 55). Secondly, Weeks had various views about the prospects for the Company and said that he was imbued by a sense of optimism. He admitted that he considered it to be an exciting prospect and refused to sell his share after disputation arose. The third was Weeks’ experience in evaluating risks, together with his academic qualifications of an Honours degree in Economics and his sophisticated negotiating skills in achieving the locking up of the purchase price into a performance bonus. I accept that all of these matters are important to consider in relation to the question of whether Weeks relied upon the representation.

264 Weeks was obviously having difficulty in obtaining detailed information, including the management accounts for December 2004. His email of 13 January 2005 to Mr Horn set out what he wanted prior to completion. It is clear from that email that Weeks was not happy to rely on the estimates in the Sales Revenue Report. It is clear that he wanted to check the actual operating results for December 2005 for himself. He was not able to do that because the management accounts were not provided to him. He admitted that he abandoned his quest for information in relation to the non-recurring expenses in the Add Back document, in exchange for warranties in the Share Sale Agreement (tr 51, 55-56 and 77). Although Weeks claims in his affidavit (13 September 2007 pars [92]-[93]) that he would not have entered into the Share Sale Agreement if he had known that the operating results for December 2004 were different from the actual results (by overstating sales by $7,147 and EBIT by the range referred to earlier), the real question for determination is whether he relied on the December estimates in entering into the Share Sale Agreement and the alleged representation.

265 When Weeks received the financial documentation from Mr Horn in December 2004, including the Sales Revenue Report that contained the estimated sales figure of $100,000 for December 2004, he estimated an annual result for the Company that he said was “somewhat conservative” (tr 44). He factored in a number of matters, including the fact that he would “come on board and make a positive contribution” with the capacity to “enhance the profitability” of the Company (tr 45). He structured his offer to purchase the share in a way that recognised that he and Campbell had a different view of the value of the Company (tr 47). That part of the offer was contained in the fifth dot point, referred to earlier in this judgment, extracted here again for ease of reference:

· Recognising that ‘performance’ expected to exceed the current forecast level of profitability, a performance bonus may be paid to the seller (ahead of any dividend payment) of up to $300,000 on March 31, 2005 or thereafter, subject to cash funds being available and sufficient profitability being achieved. No payment will be made based on profitability after December 31, 2005.

266 Weeks amended that part of his offer on 16 December 2004 as follows:

· Recognising that ‘financial performance’ is expected to exceed the currently forecast level of profitability, a performance bonus of up to $300,000 will be paid to the seller, based upon net profitability to December 31st 2005. This performance bonus ranks after payment of the ‘guaranteed bonus’ and is subject to sufficient cash funds being available and sufficient profitability being achieved. Being a ‘performance’ bonus, no payment will be either due or payable if insufficient profitability is achieved.

267 Weeks gave the following evidence in cross-examination in relation to that part of the offer (tr 47):

Q. And what you were there proposing was a mechanism recognising that that may be so and that mechanism was to remunerate or compensate Mr Campbell for the additional value if it turned out that was the position?
A. Yes.

Q. And you understood by making that offer you were getting the benefit of any doubt, namely that if the company did not transpire to have the additional value Mr Campbell wouldn’t get it, correct?
A. Correct, just making the point that that bonus ranked behind other bonuses, yep.

Q. So the fact of the matter is that the substance of this proposition that you are putting in dot point five is that Mr Campbell will not get his consideration, the additional consideration for what he thinks is the value of the share if it turns out that the company doesn’t make the expected additional money?
A. Yes.

Q. So that is a protection for you, isn’t it, if the company does make the money he gets it, if it doesn’t the price is lower?
A. Yes, although I would put the reverse of that, I felt the price was only worth X amount and I was giving the option that if I am wrong, I think I used words to that effect, that if it proved to deliver a higher figure than I thought or exceed my expectations then there was a potential up side but I didn’t think there was.

Q. Put it how you like Mr Weeks, the sophisticated thinking behind this dot point was that if the company turned out to be worth more [than was contemplated] Mr Campbell would get it and if it didn’t, he wouldn’t?
A. Correct.

268 Weeks had the assistance of a solicitor, Mr McClure, from whom he sought advice in relation to the Agreements executed on 24 January 2005, including the proposed warranties. An email from Mr McClure to Weeks dated 11 January 2005 that Weeks forwarded on to Mr Horn on 12 January 2005, included Mr McClure’s notation of Weeks’ “reliance on your own investigations, relying on your background over many years in corporate management and the due diligence conducted in respect to “[the Company] carried out over some time by you and your accountant”. Weeks confirmed in his cross-examination that he had informed Mr McClure of this reliance (tr 51).

269 Weeks is a sophisticated businessman with the capacity to review financial records and make judgments about the prospects of a business, using his commercial common sense to his own advantage. That is what he did in making his offer to purchase the share in the Company. I am satisfied that the evidence extracted above establishes that Weeks did not rely upon the estimated sales figures in the Sales Revenue Report. Rather, it establishes that Weeks doubted those figures to the point that he built in a protection for himself if the figures were not achieved. That was a “protection” that was included in clause 6.2 of Sentinel’s Service Agreement, that provided for a “Performance Bonus based upon the Company’s profitability, of up to $300,000” to be paid to Sentinel only if there was “Available Profit”. I am not satisfied that Weeks relied upon the representation as pleaded.

EBIT representation

270 The plaintiffs also claimed that in providing the financial documents to Weeks in December 2004, Campbell represented that the Company had an EBIT (after adjustment for the add-backs) for the 5 months to 30 November 2004 of $163,590. Without deciding on whether the representation was made, the observations I have made in relation to the Add Backs document and the Sales Revenue Report and the structure of Weeks’ offer, also apply to this alleged representation.

271 I am satisfied that Weeks and/or Backoffice did not rely upon the representations. The plaintiffs’ claim of misleading or deceptive conduct fails.

ORDERS

272 Backoffice has succeeded in its oppression suit and is entitled to an order that Campbell purchase its share in the Company for $853,000. Although the plaintiffs have proved that Campbell breached some of the warranties as pleaded and also breached the implied duty to co-operate, it is inappropriate in the circumstances to award any damages for those breaches. The plaintiffs have failed to make out their claims of misleading or deceptive conduct under the Fair Trading Act 1987 and they are to be dismissed. The plaintiffs are entitled to a declaration that Campbell’s conduct by or on behalf of the Company was oppressive, with an order under s 233 of the Corporations Act 2001 for purchase of Backoffice’s share together with an order under s 468 of the Corporations Act 2001 validating that disposition.

273 The parties are to bring in Short Minutes of Order reflecting this outcome, together with an agreed costs order. If the parties are unable to agree on a costs order, I will hear argument when the matter is listed for the filing of those Short Minutes. The parties should make contact with my Associate to have the matter listed for that purpose, such contact to occur no later than 23 March 2007.

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Citations

Backoffice Investments v Campbell [2007] NSWSC 161

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CITATION:	Backoffice Investments v Campbell [2007] NSWSC 161
HEARING DATE(S):	27, 28, 29, 30 November 2006, 4, 5, 6, 7 December 2006 [written submissions 18 December 2006]
JUDGMENT DATE :	8 March 2007
JURISDICTION:	Equity - Commercial List
JUDGMENT OF:	Bergin J
DECISION:	Plaintiff entitled to declaration of oppressive conduct and order for purchase of share at $853,000
CATCHWORDS:	[CORPORATIONS] – Share Sale Agreement/Shareholders Agreement/Services Agreement - Whether vendor's conduct in excluding the purchaser of a 50% share in company from the management of the company amounted to oppression (s 232 Corporations Act 2001) - Whether an order for purchase of the share should be made when provisional liquidator appointed - Fixation of price at which share to be purchased (s 233 Corporations Act 2001) - [CONTRACT] - Whether vendor breached warranties in Share Sale Agreement - Whether appropirate to award damages for breach of warranties where order made for purchase of share - Whether vendor breached implied obligation to co-operate in causing company not to pay purchaser's entitlements under Services Agreement - Whether appropriate to award damages - [MISLEADING OR DECEPTIVE CONDUCT] - Whether vendor's conduct misleading or deceptive - Whether purchaser relied upon alleged representations - [PRACTICE AND PROCEDURE] - Practice Note governing commercial causes - Alleged deficiencies in plaintiffs' pleadings - Timing of complaints about pleadings - Ambit of "cards on the table" approach to litigation - Late application to amend pleadings
LEGISLATION CITED:	Corporations Act 2001 (Cth) Fair Trading Act 1987 (NSW) Trade Practices Act 1974 (Cth)
CASES CITED:	Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470 Aloridge Pty Ltd (prov liq apptd) v West Australian Gem Explorers Pty Ltd (1995) 127 ALR 410 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 Cassegrain v CTK Engineering Pty Ltd (2005) 54 ACSR 249 Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60 Dynasty Pty Ltd v Coombs (1995) 13 ACLC 1290 ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1995) 15 ACSR 536 Glover v Australian Ultra Concrete Floors Pty Ltd [2003] NSWCA 80 (Unreported, Sheller, Hodgson and Ipp JJA, 24 April 2007) Hewlett Packard Australia Pty Ltd v Siltak Holdings Pty Ltd [2005] NSWSC 672 (Unreported, Barrett J, 8 July 2005) Hogg v Dymock (1993) 11 ACSR 14 John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A’Asia) Pty Ltd (1991) 6 ACSR 63 MacDonald v The Law Union Fire and Life Insurance Co (1874) LR 9 QB 328 Manning Shire Council v Caernarvon Pty Ltd [1977] 1 NSWLR 202 Maye v Colonial Mutual Life Assurance Society Ltd (1924) 35 CLR 14 Minister for Immigration, Local Government and Ethnic Affairs v Dela Cruz (1992) 34 FCR 348 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 National & General Insurance Co Ltd v Chick [1984] 2 NSWLR 86 Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116 Re a Company [1983] 1 WLR 927 Re London School of Electronics Ltd [1985] 3 WLR 474 Sargent v ASL Developments Pty Ltd (1974) 131 CLR 634 Scottish Co-op Wholesale Society Ltd v Myer [1959] AC 324 Shelton v National Roads & Motorists Association Ltd [2004] 51 ACSR 278 The Commonwealth v Verwayen (1990) 170 CLR 394 United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514 Webb v Stanfield (1990) 2 ACSR 283 White v Overland [2001] FCA (Unreported, Allsop J, 20 September 2001) Yazbek v Aldora Holdings Pty Ltd (2003) 45 ACSR 53 Zempilas v JN Taylor Holdings Ltd (in liq) (No 6) (1991) 5 ACSR 28
PARTIES:	Backoffice Investments Pty Ltd (first plaintiff) Timothy Andrew Weeks (second plaintiff) Douglas Ronald Campbell (first defendant) Sentinel Construction Managers Pty Ltd (second defendant) Healthy Water (NSW) Pty Ltd (third defendant)
FILE NUMBER(S):	SC 50047/2005
COUNSEL:	JB Simpkins SC/TL Wong (plaintiffs) DJ Hammerschlag SC/LTG Gibson (first and second defendants)
SOLICITORS:	Watson Mangioni Lawyers (plaintiffs) Rodd Peters Lawyers (first and second defendants) Dibbs Abbott Stillman (third defendant)