Cade Pty Ltd & Anor v Thomson Simmons & Anor No. Scgrg-92-2686 Judgment No. S6136

[1997] SASC 6136

CADE PTY LTD & ANOR  v  THOMSON SIMMONS & ANOR

DOYLE CJ

Introduction

This is an action for damages for professional negligence and also, as against one of the defendants, for equitable compensation for breach of fiduciary duty.

A claim for damages is also made under the FairTrading Act, 1987 (SA).  That, in my opinion, raises no issue that is not capable of being dealt with in relation to the claim for negligence.  Accordingly, I propose to say no more about the statutory claim.

The damages are claimed by a proprietary company, originally named Accom Industries Pty Ltd (“Accom”) and by Charles Figallo who was at all times a shareholder and director of Accom.

The damages are claimed from Thomson Simmons, a firm of solicitors. Allegations of negligence are made against Mr Purcell, a partner in the firm, and Mr La Vincente, a legal practitioner and employee of the firm.  Damages are also claimed from Sheahan Sims, a firm of chartered accountants. Allegations of negligence are made against Mr Hayes who was at all times a partner in the firm.

I propose to first set out the events giving rise to the action.  Much of the history is undisputed.  Some of it is the subject of dispute, but, to my mind, on matters which are unimportant or peripheral.  On matters which are significant or which might be regarded as significant in the event of an appeal, I will make some findings along the way.  I will then identify and deal with the allegations of negligence and breach of fiduciary duty and with the question of damages.

For convenience the separate exhibits, and other documents admitted into evidence, have been collected into a single set of documents exhibit P99. Rather than refer to exhibit numbers I will refer, as a matter of convenience, to the page number given to a document in that exhibit.

Accom 1982-1990

The business of Accom is corrosion control.  Accom was incorporated in June 1982.  Figallo established the business which the company took over when it was incorporated.

Accom conducted its business on several parcels of land purchased at various times between 1983 and 1989.  That land was purchased in the name of Figallo and Patrick Cheetham.  This case arises out of a breakdown in the relationship between Figallo and Cheetham.  Some of the money for the purchase of the land was advanced by way of loan by Accom to Figallo and Cheetham.  I do not consider that the details of the purchase need be dealt with by me.

I find that Figallo was the driving force behind Accom.  Although he has no formal qualifications in the field of corrosion control, he has clearly acquired considerable expertise in the field.  I find that at all material times he controlled the development and general direction of Accom, that he was mainly responsible for gaining business for the company and that he provided the expertise needed in the field.  Cheetham is his brother-in-law.  Although a shareholder and director from the outset, he was mainly responsible for supervising on site the carrying out of projects.  I find that he was less important to the business of Accom than was Figallo.  As between the two of them, I find that Figallo made the important decisions and that Cheetham was content to allow him to do so.

Accom was incorporated by Thomson Simmons.  The instructions for incorporation were given by an accountant, Mr Sims of the firm of Sims Richmond.  That firm acted as accountants for Accom and for Figallo and Cheetham until 1990.  When the instructions were given to incorporate Accom Figallo was already conducting business, in a relatively small way, in the field of corrosion control.  When Accom was incorporated Sims advised Figallo (T1499) that because of his role in establishing the business and because of his dominant position, he should protect himself by securing a degree of control over the affairs of Accom.

The share capital of Accom was divided into three classes, designated A class, B class and C class.  In brief, the holder of A class shares was given special rights.  The holder of such shares had the first right to acquire shares of any class proposed to be transferred by an existing shareholder.  At a general meeting of Accom a quorum required the attendance of one A class shareholder.  Each class of shareholders could appoint a director, but the director appointed by the A class shareholders was to be the Chairman of Accom, and had a casting vote in the event of an equality of votes among the directors.  The Chairman of Directors was to preside at a general meeting of the company.  If the Chairman of Directors was not available, the A class shareholders could appoint one of their number as chair of a general meeting.  In the event of an equality of votes at a general meeting, the chairman of the meeting had a second or casting vote.  Unless the directors otherwise resolved, the quorum for a meeting of directors required the attendance of an A class shareholder.

On incorporation there were three shareholders.  Figallo had an A class share, Cheetham had a B class share.  There was a third shareholder Mr Hajszky, who held a C class share.  He left the business early in the piece and his share was transferred to Figallo.  Holding his C class share strengthened Figallo’s control, should resort to formal measures be necessary, over the affairs of the company.

Cheetham’s evidence (T2129 and T2191) was that he never realised that Figallo had special rights because he held A class shares.  Having seen Cheetham give evidence, I accept that.  He clearly had a very limited understanding of such matters.

The business of Accom prospered from early in the piece.  I find that this was due largely to the expertise and to the drive, energy and commitment of Figallo.  I find that he was prepared to work long and hard for the success of Accom.

I find that in 1986 Figallo was concerned that Cheetham was not as committed to Accom as Figallo was.  At that time he gave instructions (T1503-1504) to Sims for the issue of a further B class share to Cheetham.  I find that Figallo made this decision in the hope that equalising the share holding of the two men would cause Cheetham to be more committed to the business. Cheetham and Figallo attended at the office of Sims in connection with this proposal.  I find that in the course of discussing the matter they both told Sims that at some stage Cheetham would pay Figallo the sum of $150,000, to reimburse Figallo for the additional effort Figallo had put into the business of Accom.  This arrangement was never documented.  Sims gave evidence to this effect (T1503-T1504) which I accept.  I do so although Cheetham denied that there was such an agreement (T2130), but agreed that he agreed to a payment of $50,000. I do not consider, however, that this arrangement is important to the dispute before me.

It is clear that the affairs of Accom were conducted relatively informally, meaning by that that minuted meetings of the directors were not used to any significant degree to conduct the business of Accom.  Meetings of directors were held in the formal sense only when necessary for statutory purposes.

The business of Accom continued to expand quite rapidly.  By early 1990 it was a substantial business, but some problems were beginning to emerge. They were nothing to do with the technical skills of Figallo, or with the underlying business of the company.  The main problem was that large amounts were owing to Accom for work already done, and much of the money owing was due to two or three major contractual disputes which had arisen between Accom and certain customers.

For a long time Accom had done its banking with the State Bank of South Australia (“the Bank”).  The Bank was supportive of Accom.  In January 1990 the Bank increased its lending to Accom from approximately $338,000 to approximately $438,000 (T2382).  A significant factor in the need for the additional borrowings was the large amount owed by debtors to Accom. During 1990 Accom’s borrowings from the Bank continued to increase.  By April of 1990 Accom had succeeded in getting the Bank’s agreement to loans amounting to approximately $524,000 (T2383).  Once again the reason given was a need for additional working capital, outstanding debtors remaining very substantial.

In about May of 1990 Figallo became dissatisfied with Sims, who was still providing accounting services for Accom.  Purcell advised Figallo that Accom needed better quality accounting services than those it was receiving from Sims Richmond. Purcell introduced Figallo to Hayes and to the firm of Sheahan Sims.  At about this time also Figallo had got to know Mr D’Ortenzio, an accountant working for the firm of Lawrence Tai Pty Ltd (“Tai”).

In due course Figallo decided to appoint Sheahan Sims to act for Accom. After a meeting with Hayes and Purcell, Figallo wrote to Sheahan Sims by letter dated 14 May 1990 (p48) appointing that firm as “Strategic Financial Advisers”.  He informed Sheahan Sims that he was appointing Tai to handle Accom’s “general accounting functions”.  He said that he expected Sheahan Sims to provide “an independent review” of the work of Tai.  On the same date Figallo wrote to Tai (p49).  This letter confirmed Tai’s appointment “to handle the day to day accounting functions for Accom”.  The services required were the provision of “appropriate financial reports”, provision of “assistance to in-house staff for the maintenance and presentation of financial records/reports” and the taking of “full responsibility for all taxation matters concerning the company.”  He informed Tai of the appointment of Sheahan Sims.

The precise nature of the role of Sheahan Sims was not spelt out, but it is clear enough that Sheahan Sims were to advise on appropriate company structures and on strategies which would benefit Accom and its shareholders.

By this time Cheetham had made it clear that he wished to sell his interest in Accom and to quit the business.  It is not necessary to decide, although it was a matter of some contention, for just how long this had been his attitude.  In particular, I do not consider it necessary to decide whether, as Cheetham claimed, he and Figallo agreed in 1988 that Figallo would buy him out in 1991 if he wished to quit Accom: see T2133 and T2182.  Nor do the precise reasons matter, although it is clear enough that he had some health problems.  Figallo was aware of this desire, and so were Purcell and Hayes.  There had already been some contact with a Mr Rowan on the basis that he might be able to introduce a new investor who would replace Cheetham.

I find that at this time (about May 1990) Figallo was not anxious that Cheetham should go, but was aware of the advantages for Accom if Cheetham could be bought out by someone who would inject badly needed capital into Accom and who might provide some helpful expertise.  The finding of such a person was under consideration, although not regarded as urgent in about May of 1990.  I find that the matter was discussed at the initial meetings involving Purcell, Hayes and Figallo in May 1990.  It was clear that Figallo did not have the funds to acquire Cheetham’s interest in Accom.  I accept the evidence of Hayes (exhibit D2-11, para 9) that an amount of $500,000 for Cheetham’s interest in Accom was mentioned by Figallo in a fashion indicating that Figallo thought the interest was worth about that.

During the second half of 1990 the financial pressures upon Accom continued to grow.  There was still a very large amount of money tied up in three disputed claims.  These were proving very difficult to resolve.  Attending to them was beginning to consume a fair bit of Figallo’s time.  Additional borrowings were required from the Bank, which the Bank allowed without too much difficulty, although it was beginning to express concerns to the directors of Accom and to D’Ortenzio.  In July of 1990 the Bank approved lendings to a limit of about $711,000 (T2384).

I find that by June of 1990 Hayes was already addressing a number of issues relevant to Accom.  It is convenient to set out, in very brief terms, a number of matters raised by Hayes in a letter of 31 May 1990 (p56) addressed to the directors of Accom.  The topics give an indication of the nature and width of Hayes’ instructions.  The letter raised the issues of the corporate structure, cash flow planning, banking arrangements, appointing additional directors, mechanisms for the purchase of Cheetham’s shares in the event of him departing, the staff structure in the light of Cheetham’s anticipated reduced contribution to the company, insurance, tax planning, the approach to financial reporting within the company, assistance that might be provided for marketing purposes and the possibility of taxation benefits arising from research and development.

In about the middle of the year Figallo had some concerns about the control of Accom should Cheetham quit.  I find that Figallo believed, as was the case, that he and Cheetham were equal shareholders.  I find that Figallo was unaware of the power which his holding of A class shares gave to him.  I will say a little more about Figallo later, but suffice it to say at this stage that I find that he had virtually no understanding of the legal and practical aspects of the shareholding structure.

I find that in June 1990 Hayes prepared documents to implement a further allotment of shares in Accom.  They provided for the allotment to Figallo of 50 A class shares and 50 C class shares, and for the allotment to Cheetham of 96 B class shares.  The result of this was that of the shares in Accom Figallo would hold 51% and Cheetham 49%.  Minutes of a meeting of directors of 22 June were prepared by Hayes.  These Minutes included a resolution for the allotment of the shares.  It appears that the meeting never took place, but Figallo and Cheetham were in agreement that the allotment should be made, and it was duly made.

It is common ground that when this was done Hayes did not have a copy of the Memorandum and Articles of Accom.  It is equally clear that in terms of the control of Accom the allotment of shares achieved little, in view of the powers which Figallo had as a holder of A class shares.  I find that Figallo did not understand that the allotment of shares achieved very little in terms of his ability to control the destiny of Accom.

The evidence of Figallo was that the allotment came about because he raised with Purcell some concern about Cheetham possibly going into business with Cheetham’s son and in opposition to Accom.  Figallo said (T174-177) that Hayes and Purcell discussed the matter and then told Figallo that the proposed additional allotment should be made.  Figallo said (T431) that he did not really understand what the purpose was, although he understood the concept of him holding 51% of the shares.

On the other hand Hayes maintained that Figallo proposed to Hayes the issue of the further shares, and that Hayes initially demurred saying that he did not have details of the existing shareholdings and did not have the necessary statutory documents (T694-696 and exhibit D2-11 para 40).  Hayes said that he provided the necessary documentation only because Figallo insisted that he should (exhibit D2-11 para 47).

D’Ortenzio gave evidence (T1363) that Hayes rang him before the share issue took place seeking information over the telephone about the shareholding and share structure of Accom, and that he gave this information to Hayes. Hayes did not ask D’Ortenzio for copies of the Memorandum or Articles.  I find that this did take place.

Cheetham’s evidence about this incident was (T2137) that he agreed to the change because his interest in Accom was “on the market”, and he was agreeable to Figallo having 51% of the shares should a new investor replace Cheetham.  That evidence throws no light on the question whether the change was proposed by Hayes or by Figallo.

I return later to the question of whether the issue of the shares was proposed by Hayes or initiated and insisted upon by Figallo.

I accept the evidence of Purcell (T1759 and T1840) that, contrary to Figallo’s evidence, he had nothing to do with the share issue or with its later reversal.

The fact that D’Ortenzio wrote to Figallo (p73) on 2 July 1990 expressing concern about the outstanding debtors and the downturn in the cash flow of the company is an indication that there continued to be cause for concern on this score.  On 11 September 1990 (p128) he wrote again raising the same issues and suggesting that the company finances be re-arranged, or that there be a sale of 50% of the company, or that the litigation with the disputing debtors be settled.

By letter dated 28 June 1990 (p70A) Hayes had written to D’Ortenzio informing him of the share allotment and requesting copies of tax returns, superannuation and insurance documents, documents relating to relevant companies and trusts and so on.  This was the sort of material which would clearly be needed for the sort of advice which Hayes was to give, and was already considering.  On the following day Hayes wrote to Tai enclosing, for inclusion in the statutory register of Accom, the documents relating to the share allotment.  There is no doubt that at this time the statutory register was in the possession of Tai.

D’Ortenzio gave evidence that at about this time he also received a telephone request from Hayes for the statutory register.  He said that he personally delivered the register to Hayes’ office in about August or September (T1365, T1373 and T1433).  I accept that evidence.

D’Ortenzio also gave evidence that in response to the request for financial records and statements and for other documents he photocopied them and sent them to Hayes (T1364, T1366, T1450).  He was not sure just when he did this. A letter of 7 September 1990 (p125) from Hayes to the directors of Accom repeats a request for the sort of materials that Hayes had earlier requested by letter.  There was a dispute at trial about whether Hayes was given all of the material he needed to provide proper advice.  D’Ortenzio acknowledged (T1452) that perhaps not all of the information which Hayes had requested was provided to him at the outset, and that there might have been some outstanding.  I think that that was probably so and that the records provided to Hayes were not complete.

It is not necessary to resolve this dispute.  It suffices to say that I find that there was a lack of co-ordination been D’Ortenzio and Hayes at times and that there was fault on both sides.  It is not necessary for me to go any further than that.

During August 1990 (p114) Hayes met with the directors of Accom to discuss various matters relevant to Accom.  These included the need to reorganise bank finance, to insulate the assets of the business from the business itself, to provide a mechanism for income to flow to family trusts and to eliminate personal liabilities of the directors resulting from the existing financing arrangements.  It is clear that these matters were of some complexity. I find that at this time Hayes was generally aware of the problems confronting Accom, as was Purcell.  I find also that Hayes and Purcell were each aware in general terms of what the other was doing, although not necessarily aware of all the details.

By August Accom’s financial position had not improved.  By September (T2385 and p132) lendings amounting to $850,000 were approved by the Bank. The reasons for the need for the additional support remained the same. It is obvious that by this time Accom was in some difficulty.  Nevertheless, the underlying business of the company was sound.  But, by now the Bank was attaching fairly stringent conditions to the grant of further facilities, and was seeking additional security (T2386).  This, no doubt, reflected a level of concern about Accom’s position.

In about September 1990 there were some negotiations with Enterprise Investments Limited (“Enterprise”), a company introduced by Rowan, for the purchase of shares in Accom.  Hayes was closely involved in these negotiations.  D’Ortenzio had a limited involvement only.  Purcell was not closely involved.

Almost from the outset attention was given to the sale of Cheetham’s 49% shareholding in the event of an outside investor buying into Accom. Hayes was involved in discussions with Figallo and Cheetham about this, and wrote a number of letters explaining how, depending upon the price to be paid by Enterprise or some other investor, the proceeds could be utilised to pay out Cheetham’s entitlements.  In these letters a range of figures was canvassed, and there was a fair bit of detail about how the payment would be organised, but relevantly the end result in each case was a payment to Cheetham in the range of $300,000 to $450,000 (see for example the letter of 4 October 1990 at p138).  This payment included the assignment of Cheetham’s outstanding loan account of about $154,000 to Figallo.

At a meeting with Enterprise in September 1990, at which Hayes and Figallo and D’Ortenzio were present, one of the representatives of Enterprise made the point that the recent share issue could give rise to capital gains tax problems.  Both Figallo (T172) and D’Ortenzio (T1371) said that when this was pointed out Hayes looked embarrassed.  The implication was that the problem was due to an oversight by Hayes.  Hayes’ evidence was that he was annoyed because, although his advice had been ignored, Figallo did not acknowledge that at the meeting (D2-11 para 73).  Hayes promptly sought advice from Thomson Simmons.  There are two versions of a letter seeking that advice. Neither version says that Figallo told Hayes to arrange for the allotment.  One version (9 October 1990 p140) says that bonus shares should have been issued, and:

“This was not done due to the absence of books and records of the company and the haste with which the issue was undertaken.”

The other version (12 October 1990 p143) says that the allotment was made “in some haste due to the then impending sale of the balance of 49% of the shares” and goes on to say:

“Despite numerous requests to the client and their other accountant, the statutory registers of Accom Industries were not provided to us until after the share issue of 22 June 1990.”

I do not consider that it is necessary for me to decide precisely whose idea the allotment was.  Suffice it to say that if the idea came from Figallo, I am satisfied that he would have deferred to Hayes had Hayes offered clear and firm advice on the matter.  By this I mean advice pointing out that an existing capital gains tax advantage might be lost, and that he could check on the matter quite quickly.  I mean also advice pointing out that the matter was of sufficient importance to warrant a delay of a day or two.  I find that Hayes could easily have ascertained the shareholding structure of Accom and when the existing shares had been issued.  Whether he did or not, I find that he failed to address clearly enough the possible capital gains tax issues and also the issue of whether anything was to be gained by the share issue, bearing in mind Figallo’s rights as a holder of A class shares.  He knew from early on that Figallo had A and C class shares, and Cheetham B class shares.  That should have alerted him to the possibility of differential rights (see T2674 and exhibit D2-11 para 20). It is clear from the advice which Thomson Simmons gave in due course that there was a capital gains tax problem.  I find that Hayes should have realised this and that in that respect his advice was negligent.  By that I mean, his failure to identify the tax problem clearly and firmly to Figallo was negligent.  I also find that his failure to consider and advise upon the merits of the share issue, having regard to the fact that Figallo held A class shares, was negligent.  I find that this was dealt with by Hayes alone.  As I understood his evidence, Hayes acknowledged that by this time he should have acquainted himself with the provisions of the Articles of Accom, having regard to the role which he had undertaken as a strategic adviser (see T2674-T2678).  In that respect also he was in breach of his duty.

I will return to this issue.

It appears that the proposed share purchase by Enterprise fell by the wayside.  Meantime Korvest Ltd (“Korvest”) came on the scene as an interested investor.  Its initial proposal (p151A) envisaged the sale of the business of Accom to a new entity, the ownership of which would be Figallo 40% and Korvest 60%.  Korvest indicated that it thought that the assets of the relevant businesses were worth a total of $1,300,000.

I find that there was a fundamental difficulty with this proposal, although Korvest was probably unaware of the difficulty.  The difficulty is, as I find, that Figallo was strongly resistant to any arrangement which would mean that he lost control, as he understood it, of the entity which conducted the business.

I find that there were continuing discussions involving Hayes, Cheetham and Figallo about this proposal.  There were many aspects to consider, of course, but relevantly the Korvest proposal was discussed as likely to produce a payment to Cheetham for his interest in Accom of about $500,000.  That was, once again, inclusive of the amount of his outstanding loan account.  Hayes was involved in the negotiations and, once again, in providing advice to Figallo and Cheetham about the amount that Cheetham would receive for his shares.  This was, of course, related to the amount to be paid by Korvest.

I find that in about September and October of 1990 Figallo was spending an increasing amount of time on the litigation against the three major trade debtors, ensuring that the Bank continued to provide the required support and dealing with potential investors.  Meanwhile the financial position of Accom was not improving.  However, I find that there was no crisis at this stage.

I accept Purcell’s evidence that although he was aware of these events (T1760), he was not much involved in them.

The Directors fall out

On 4 November 1990 Cheetham’s son was killed in a road accident.  Soon after that, apparently by way of reaction to that tragic event, Cheetham withdrew from any active involvement in the affairs of Accom.  Figallo had previously put up with Cheetham’s lesser commitment to the affairs of Accom, as Figallo saw it, but now Cheetham was making no contribution at all.  He became openly hostile towards Figallo.  The loss of Cheetham’s involvement in Accom, and the state of hostility, increased the pressures upon Figallo.

Meantime, on 27 November 1990 (p163) Hayes wrote to Figallo and Cheetham with revised figures, postulating a payment to Cheetham of $367,000 in the event of Korvest buying into the business.  But, as in previous situations, Figallo was to take over the debt owed by Cheetham to Accom, so once again the overall value of the proposal to Cheetham was about $500,000.  On the last page of this letter (p166) Hayes made the following pertinent point:

“As an adviser to Accom Industries Pty Ltd I must point out that if the agreement with Korvest does not proceed then Accom is not in a financial position to fund a share buy out at the levels detailed above. Indeed I see major problems for Accom in terms of cash flow whilst the legal action for debtor recovery continues.”

A copy of this letter was sent by Hayes to Purcell (T1761).  Purcell realised that a sale of the business might be imminent, and opened a file in connection with that.

On about 30 November 1990 there was a scuffle between Figallo and another person near business premises owned by another son of Cheetham. Figallo believed that this son was intending to or was already competing with Accom, and that Cheetham was assisting his son in that venture while, as things were now, not making any contribution at all to Accom.  This belief of Figallo’s contributed to problems between Figallo and Cheetham.

Soon after that there was a heated telephone conversation between Figallo and Cheetham.  Figallo said (T131) that in that conversation Cheetham  said that he was never coming back to work for Accom, that he wanted to be bought out and wanted nothing more to do with the company.  He said (T132) that in the conversation Cheetham told him that “he had me over a barrel, he had me in a position that I could not do anything but buy him out.”  According to Figallo (T133), Cheetham also said that if Figallo

“didn’t bow to his terms and conditions he would finish the company, he would do everything in his power to finish the company.  I would go broke.”

Cheetham agreed (T2142) that there was an argument in a telephone conversation about this time, during which he said that he would not be coming back to work at Accom.  His evidence of what led up to this differed from that of Figallo (see T2138 and following).  The differences were not so much in what happened as in his perception of the events and of the reasonableness of Figallo’s behaviour under all the circumstances.

I do not consider it necessary to decide who was at fault in this falling out.  The fact is that it did occur.  Each party strongly believed that the other was in the wrong.  The issue for me is not who was in the right, but the competence of the advice given to Figallo and to Accom in light of the dispute.

Nor, although this is to anticipate some later events, do I consider it necessary to decide the rights and wrongs of the irritations and arguments between Figallo and Cheetham over the next month or two.  Quite apart from the practical impossibility of dealing with so many matters, in my opinion it is unnecessary to do so.  There are points to support each side of the story in relation to each matter.  Once again, the issue for me is the competence of the advice given by Thomson Simmons and Sheahan Sims , bearing that in mind.

At about the same time, mid December, according to Figallo, a senior Bank official, Mr Henningsen, came to the premises of Accom.  He was with Mr Stride, the Manager of the Branch with which Accom dealt.  According to Figallo (T145) Henningsen said

“...that Pat Cheetham had been in contact with them and that he had informed them that there was a - that he would no longer be playing a role within Accom Industries.  Barry [Henningsen] let me know that it was causing them great concern because the company could not operate with only one Director.  As a matter of fact, this was stressed...”

According to Figallo (T146) Henningsen said he was there to close Accom up, because Cheetham would no longer co-operate with Accom.  There was an angry discussion, according to Figallo, and in the end Henningsen agreed to allow the company to continue to operate, presumably, by that, meaning that he agreed that the Bank would continue with and not withdraw its existing financial support.  But Henningsen told Figallo that he would now be under strict control by the Bank.  According to Figallo (T146) Henningsen kept stressing that the company could not operate with only one director.

Figallo’s evidence about the fact of the visit (but not what was said) is supported by the evidence of Mr Jones (T1017-T1018) and of Ms Hampson (T1084-1089).  Her evidence suggests that it was a rather angry meeting, but goes no further than that.

Now, in Figallo’s eyes, he had a serious crisis on his hands.  In addition to the other problems and distractions, he had Cheetham telling him that he would destroy Accom if Cheetham were not bought out, and he had the Bank apparently agreeing that the absence of Cheetham from the business of Accom, and his refusal to be involved in its affairs was a serious problem.

It is convenient to make findings now about this incident.

I heard evidence from Stride who, until about this time, dealt with applications by Accom to the Bank for further financial support.

He recalled calling on Figallo at about this time with Henningsen, a more senior Bank employee, who was about to take over the management of Accom’s and Figallo’s accounts.  The change was attributable to the level that Accom’s borrowings had reached, convenience (recent applications had been referred by Stride to Henningsen), and problems which might arise from the falling out between Cheetham (who also dealt with Stride) and Figallo (T2389 and T2408).

Stride had no diary note of the meeting.  He thought that Hayes and Figallo and one other person were present (T2389).  His memory was that it was a “handover” meeting, intended to introduce Henningsen to Figallo (T2389).  He did not think that any threats were made of the sort deposed to by Figallo (T2393).  He was aware of Cheetham’s wish to quit Accom, and the cessation of his involvement in its work, but was not greatly concerned about that (T2421).  While agreeing that his memory could be faulty, he was firmly of the view that the meeting was not of the sort suggested by Figallo (T2412 and following).

Henningsen had no memory at all of the occasion.  He made the point that this was just one of many accounts that he managed.  He did not think that he would have said the things suggested by Figallo.  He had no diary note of the meeting, he did not have authority to make such threats (T2433).  Having heard his evidence, I am satisfied that he would have made a note if he had gone there to give Figallo some sort of ultimatum.

Hayes recalled (T2652) a meeting at Accom in December involving himself, Figallo, Stride and Henningsen.

I am satisfied that there was a meeting involving those persons.  But I am satisfied that it did not involve any threats to close Accom down.  I do not think that Stride would be mistaken about this.  Nor was there any reason for such an ultimatum.  As Henningsen said (T2479), he had not long ago approved new lending limits, and the Bank documents show that at this time it was reasonably content with the state of affairs.  The first ultimatum did not come until May 1991.

I accept that Henningsen may have warned Figallo that the Bank would be fairly firm on Accom’s borrowing limits, and that it would watch the situation brought about by Cheetham’s withdrawal, but I reject the substance of Figallo’s evidence about the meeting.

I consider that Figallo has confused this occasion, to some extent, with a later occasion.  I reject his evidence about what Henningsen said on this occasion.

I find that at this time the Bank was still supportive of Accom and of Figallo, although getting concerned about the failure of Accom to deal with the outstanding debtors and its failure to adhere to the Bank’s lending limits.

During November and December there was a flurry of negotiations between Figallo and Cheetham, involving family members and others as intermediaries, but friendly relations were not restored.  Despite various proposals being canvassed, there was no agreement for Figallo to buy Cheetham out.

At about this time, in November or December 1990, Figallo consulted Purcell about this new crisis.  He told him of the threat from Cheetham and from the Bank (T135-T139).  Hayes also became involved, although the dispute between Figallo and Cheetham was primarily a matter for the lawyers.

Purcell’s evidence (T1762), which I accept, was that he first became involved in these issues at a meeting with Figallo, D’Ortenzio and Hayes on 17 December.  He was told that Accom had serious financial problems, and he learned of the falling out.  He was instructed to write to Cheetham’s solicitors. Hayes’ evidence about this meeting (exhibit D2-11 para 115) is to the same effect.

The pressure on Figallo was now extreme.  All of these things were distracting Figallo more and more from the everyday business of the company.

Events between December 1990 and August 1991

On 16 August 1991 Figallo made the first payment pursuant to a Deed under which he acquired Cheetham’s shares in Accom and Cheetham’s interest in the land upon which Accom conducted its business.  The money that Figallo required came mainly from members of his family together with some from the Bank.  The damages claim is based mainly upon the advice, or lack of advice, given by Purcell and Hayes in relation to that Deed.

It is not practical for me to deal with everything that happened over the period from December 1990 until late in 1991 when settlement under the Deed was more or less completed.  It is sufficient for me to deal with the more significant matters that occurred during that time.

I begin by saying that this was a period during which, as Figallo said and as I accept, he was fighting for the survival of Accom and for his own financial survival.  Figallo spoke with some emotion about this time, and I accept that the pressure upon him was immense.  By this I mean that he was subjected both to great stress and to great demands upon his time.  I think that the pressures upon him, the long hours that he worked, the difficulties under which he worked, and his own feelings about these events, have caused his recollection about some of the events to be unreliable.  I am satisfied that he was endeavouring to tell the truth, but I am equally satisfied that his recollection of events is at times confused.  That confusion is compounded by the fact that, as is clear from his evidence, he did not understand a lot of the legal and accounting details of the matters in which he was involved.  I find that the evidence of other participants in these events, such as Mr Kirschke, Purcell and Hayes is more reliable as far as the sequence of events goes and as to what did and did not happen.

External Investors

During this time there were protracted but ultimately unsuccessful negotiations with Korvest for the acquisition by Korvest of an interest in Accom or in its business.  These negotiations took up a lot of Figallo’s time and a lot of the time of his advisers.  I refer there to Purcell, D’Ortenzio and Hayes.  At some stage it seemed very likely that an agreement with Korvest would be reached, but in the end no agreement was reached.

One obstacle to an agreement was the continuing reluctance by Figallo to part with control of Accom or of its business.  Korvest contemplated acquiring a majority interest.  Another difficulty was the fact that the amount that Korvest was willing to pay went down as time went by.  The reasons for this do not matter.  I find that Figallo was always unenthusiastic about the Korvest proposal but that he was willing, if he had no choice, to accept the proposal (T494-T495).  However, in the end agreement on the amount to be paid by Korvest was never reached.  I accept the accuracy of La Vincente’s evidence (T2002) that the impression that he got from Figallo was that Figallo did not expect the negotiations to succeed.

The negotiations with Korvest provided a backdrop to continuing negotiations between Figallo and Cheetham, and for discussions between Figallo, Purcell and Hayes at various times about what Cheetham would receive in the event of Korvest acquiring an interest in Accom or in its business.

In these discussions the amount that Cheetham would receive remained in the vicinity of $400,000, inclusive of the amount owed by him to Accom under his loan account.  It is not necessary for me to be more precise than that.  The significance of these discussions is the impression which I find that they created in Figallo’s mind that Cheetham’s interest in the company was worth that amount, or an amount of that order.

I find also that Cheetham himself, not unnaturally, formed the same impression.  That is, that the amount that an external investor such as Korvest was prepared to pay provided a basis or reference point for the determination of the value of Cheetham’s 50% shareholding in Accom.

I find that Hayes was closely involved in the negotiations with Korvest. He was assisting with those negotiations, and providing advice to the directors of Accom.  But, from about January 1991 his involvement diminished.  I find that Figallo was never told by Hayes that a proper valuation of Cheetham’s shares might show that his interest in Accom was less than the amount arrived at by reference to the amount that Korvest was at various stages offering to pay for the business of Accom.  I find that Hayes did not advise that a formal valuation should be done, and that he did not advise that, in dealing with Cheetham’s interest, the amount payable by Korvest or any other external investor should be treated as not indicative of, or as a basis for, the valuation of Cheetham’s interest.

I find that Purcell had very little to do with the Korvest negotiations, although he was generally aware of their progress.  La Vincente had nothing to do with those negotiations.

In April 1991 the negotiations with Korvest came to an end.  Figallo told Thomson Simmons about this by letter dated 15 April 1991 (p488) but did not himself inform Hayes at the same time.  This reflects the fact that Hayes had become something of a bystander, although not completely uninvolved.  Figallo assumed (T807) that Hayes would learn of this from Purcell or from La Vincente.

Meantime, Figallo had himself instructed an agent to find an investor.  He did this because he believed that an external investor who would buy Cheetham out was the only solution, and because of a sense of frustration about the manner in which the existing negotiations were proceeding.  This brought Mr Placanica on the scene.  It appears that for some time Figallo negotiated directly with Placanica, getting some assistance from D’Ortenzio.

Once again there were difficulties because Figallo did not want to surrender control of Accom, being determined to retain a 51% shareholding (T244).

This was one of two sticking points in the negotiations.  Placanica wanted to acquire a 50% shareholding but Figallo wanted to sell no more than 49%.

By a letter of 20 May 1991 (P90-Item 14) written to Placanica, Figallo offered him a 49% interest for $320,000.  The letter reads as if it has been prepared by Figallo without professional advice, and is not entirely clear what it is that Placanica is being offered.  It is clear enough that the letter envisages Cheetham being bought out with the money to be paid by Placanica.

On 13 June 1991 (P90-Item 25) Kirschke, the accountant acting for Placanica, wrote to Figallo giving him certain information in relation to resolutions which could be passed by shareholders as ordinary resolutions and as special resolutions.  I accept the evidence of Kirschke that this was in the context of discussions with Figallo, in which Kirschke was endeavouring to explain to Figallo that, in a company such as Accom, there was no significant difference, in terms of the protection of Figallo’s position, between the sale of a 49% interest to Placanica and the sale of a 50% interest.  It is clear that Figallo’s insistence upon retaining a 51% interest in the company was proving to be an obstacle in the negotiations and that Kirschke, as I accept, was endeavouring to explain to Figallo that his insistence upon retaining a 51% shareholding was misguided.

It is relevant to note that on about 19 June Figallo signed the Deed pursuant to which he later purchased Cheetham’s shares in Accom and purchased his interest in the land upon which Accom operated.

I find that Hayes first knew that Figallo had agreed to acquire Cheetham’s interest in Accom, not conditional upon the entry of an external investor, not long before the Deed was executed by Figallo, and probably in late April or May (T2790).  Hayes was not consulted in any significant way in relation to the second Deed.

La Vincente became involved in the negotiations with Placinaca not long after 12 June (T2018).

Later still Figallo involved Hayes in the negotiations with Kirschke. Hayes’ first involvement was at meetings with Kirschke on 29 July and 30 July 1991.  This was in the context of Figallo having already offered to dispose of a 49% interest for $321,000 (see above).  Despite this, when Hayes and Kirschke met, the amount to be paid continued to be a sticking point.  Hayes was maintaining that the interest that Placanica was acquiring was worth $420,000 and Kirschke was maintaining that it was worth $320,000.  The details of the difference of opinion do not matter.  In brief, Kirschke proceeded on the basis that as a valuation of the net tangible assets gave a higher value than the capitalisation of likely maintainable earnings, that was the appropriate basis upon which to work.  This discussion must have alerted Hayes to the fact that a buyer with information about Accom was not prepared to pay more than $320,000 for a half interest.  On the other hand, by now Figallo had already signed the Deed.  Moreover, Hayes had a different point of view, placing more reliance upon Accom’s prospects of future earnings.  The crux of the difference between Kirschke and Hayes was, as Kirschke acknowledged (T1331) the question of whether there should be a premium for future profitability over and above the value of the assets.  In that context Hayes was arguing (T1331) that the profit performance of the last few years was not a true reflection of future profitability.

I found Kirschke to be a sound and impressive witness.  His views about an appropriate price to be paid were persuasive, but it is not necessary for me to decide and I do not decide whether or not he was right.  In terms of negotiations between buyer and seller, I also acknowledge the force of the contrary view being argued by Hayes on behalf of Figallo.

It is also relevant to note that Figallo was present during the two lengthy negotiating sessions between Hayes and Kirschke.  He probably would not have understood all that was being said, but to the extent that it is relevant he could not have failed to miss the point that Placanica was arguing strongly that he should not pay more than $320,000.

However, as I have already noted, Figallo had already signed the Deed obliging him to purchase Cheetham’s shares.

These two meetings were the only meetings in which Hayes was involved in negotiations with Placanica.

No doubt because of pressures upon him, identified by me elsewhere in this judgment, Figallo apparently gave ground.  A draft Deed was prepared by La Vincente, some time in August 1991, under which Placanica was to pay $320,000 for Cheetham’s shares in Accom (T1188 and P90 item 54).  By now Hayes was no longer involved in the dealings with Placanica.

Then on about 12 August 1991, Figallo terminated the negotiations with Placanica.  This came at the very last minute (T1196) and after Placanica and Kirschke thought that agreement had been reached.  Figallo’s decision was, he said, a result of advice from La Vincente (260-261) that Accom could not afford the salary to be paid to Placanica and the preferred dividend to be paid to Placanica under the terms of the draft Deed.  It seems that Placanica required these payments to enable him to cover the cost of his own borrowings (T636). According to Kirschke the reason for the termination of the negotiations was not made clear to him (T1298, 1295, 1297).  I accept the evidence of La Vincente that he discussed the advantages and drawbacks of the Placinaca proposal very carefully with Figallo, but that he did not advise Figallo against the transaction (T2016, T2024-T2026).  The evidence of Mr Michels, who gave evidence for the plaintiffs, tends to support the evidence of La Vincente in this respect (see T1111).  It is not necessary to decide just why Figallo terminated negotiations, but I have no reason to doubt that it was for the reason that Figallo gave in evidence. However, I find that Figallo made up his own mind, albeit under difficult circumstances.  He was under great pressure at the time.  The Bank was putting a lot of pressure on Figallo to arrange for the buy-out of Cheetham (T2021).  The termination clearly came as a great surprise to Placanica and to Kirschke.

For the purposes of this case that was the end of dealings with outside investors.

The relevance of these events is as follows.  First, Thomson Simmons had a relatively minor involvement in the negotiations.  Secondly, although Hayes was heavily involved in the negotiations with Korvest, but mainly in the earlier stages, he had a relatively minor role in negotiations with Placanica.  Thirdly, Figallo’s actions in relation to Placanica show that he was capable of striking out by himself, making use of his usual advisers and of other advisers as and when it suited him.  Fourthly, during the negotiations with Korvest and the earlier negotiations with Enterprise, the price to be paid by the outside investor was treated by Hayes and by Purcell as a basis for determining what Cheetham should be paid for his interest in Accom.  Fifth, neither Purcell nor La Vincente nor Hayes ever advised Figallo that, if he was to be the purchaser of Cheetham’s shares, some other approach to value should be used or that the amount to be paid for the shares should be less than an amount which was based upon the amount to be paid by the external investor.

Dealings with the Bank

During this time there were many dealings with the Bank.

I find that at a meeting on 17 December 1990 (p187) Figallo told Purcell and Hayes that Accom badly needed further support from the Bank.  Accom had serious cash flow problems.

Purcell’s initial instructions from Figallo were to persuade Cheetham and his solicitors of the need for Cheetham to co-operate in an approach to the Bank for additional financial support (T1764).

I find that Purcell and Hayes believed that the Bank might not provide that support if Cheetham and Figallo remained at loggerheads.  I find that they also feared, as a worst case, that Accom’s inability to get further support from the Bank could lead to a situation in which the Bank would withdraw existing support, with the possibility of the appointment of a Receiver, or even worse, the possibility of a winding-up attempt by one of the more pressing creditors of Accom.  On 17 December 1990 Purcell wrote along these lines to Duncan Groom and Hannon, a firm of solicitors whom Cheetham had within the last few days instructed to act for him.  This letter (p192) was faxed to Figallo before being sent to the solicitors.  I have no reason to think that the concerns expressed by Purcell in the letter were not genuinely held, although I realise that one of the reasons for expressing them firmly was to persuade Cheetham to be co-operative.  Cheetham himself would suffer if Accom were to collapse.

On 21 January 1991, Purcell, Hayes, Figallo and his wife had a long meeting with the Bank to inform the Bank about progress of the negotiations with Cheetham.  I find that Figallo was confused in placing this occasion (T144) somewhere in December 1990.

I find that on this occasion and subsequently the Bank remained broadly supportive of Accom and of Figallo.  The Bank was prepared to release Cheetham’s house as a security held by the Bank, and to release Cheetham from guarantees that he had given to the Bank, and to advance further funds to Accom in the context of a resolution of the dispute with Cheetham and the sale of his shares.

Henningsen gave evidence relating to this period.  Although he had no independent memory of events, and was entirely dependent upon his diary notes (which seem fairly thorough), he said that the notes did not reflect serious concern at this time (T2437).

Purcell’s evidence (T1973), aided by a file note, was to the same effect.  If Figallo could arrange to buy Cheetham out, the Bank would seriously consider increasing its lendings to Accom.  There is no suggestion of any threats by the Bank to wind Accom up, although Bank support was conditional upon the dispute being resolved.

I find that during February 1991 the Bank remained quite concerned about Accom’s high level of indebtedness, about Accom’s own high level of debtors, and about Accom’s difficulties in adhering to the limits which the Bank imposed upon its lending.  I find that from time to time the Bank declined to meet cheques drawn by Accom and, that while the Bank remained generally supportive, the limits which it imposed on Accom increased the pressure on Accom and upon Figallo.  I find that the limits which the Bank was putting upon Accom, which from its point of view are quite understandable, put quite severe pressure on Figallo because of Accom’s pressing need for further bank support.  That in turn put pressure upon Figallo to reach a compromise with Cheetham, because that seemed to be the key to the obtaining of bank support. A diary note made by Mr Henningsen from the Bank on 26 February 1991 (p400) records:

“Until satisfactory settlement of the Cheetham/Figallo saga is sorted out, I have again reiterated to Charlie that we do no more than what we have and it is up to him to ensure that they have adequate collection procedures in place to ensure working capital does not suffer.”

I refer also to Henningsen’s evidence at T2439 relating to this time.

I am satisfied that this accurately summarises the Bank’s approach throughout the period in question.  At the same time I have no doubt that at various times the Bank, to induce Figallo to come to a conclusion with Cheetham and to adhere to his lending limits, did threaten him with withdrawal of support and with liquidation of Accom as Figallo claimed (T519, T136, T138).  However, these were not, I find, threats of immediate action so much as warnings of possible action by the Bank.

It is clear that the Bank began to lose patience with Accom’s failure to reduce its debtors and failure to resolve the dispute with Cheetham.

It is convenient to refer here to the evidence of Mr Hawke, to whom Henningsen reported.  He was an impressive witness, who appeared to have a good recall of the matter.  His evidence about the Bank’s attitude made sense to me.

The effect of his evidence was that from when he first became acquainted with the matter, in August 1990, he was quite concerned about the extent of the Bank’s exposure (T2506-2507).  He was aware of all the relevant factors including, in due course, the dispute between Figallo and Cheetham.

He realised that the Bank could not really afford to take action against Accom, or to withdraw its support, because if that happened and Accom collapsed the Bank would lose heavily.

His objective throughout was to avoid, as far as possible, increasing the Bank’s exposure, to keep the pressure on Figallo to reduce the outstanding debtors and to resolve the dispute with Cheetham, and to support Accom until the level of debt was reduced to a level which would make it attractive to an investor or financier (T2510-2511 and T2525).  In short, to nurse Accom without, unless essential, increasing the lending to it, in the hope that it could be restored to health or, preferably, off-loaded to someone else as a customer.

Under his firm guidance that is the approach that Henningsen took.  Bearing in mind the risk of losses to the Bank, there was an element of bluff in what the Bank did.

A diary note of 2 May 1991 (T2447 and p536) shows that on that day Henningsen gave Figallo an ultimatum that he must sort things out by mid-May.  Another ultimatum was given on 16 May (T2451and p562).  Clearly, the pressure on Figallo was mounting.  The Bank was threatening to withdraw support, but still was supportive if, in particular, the problems facing Figallo were dealt with.

During June the Vessey case (see later) settled.

Another and stronger ultimatum was given on 14 August (T2157, pp868 and 871).  The Bank insisted that the Cheetham matter be settled by 21 August.

In due course it was settled then, with assistance from the Bank.

I conclude from this that during the period in question the Bank was exerting pressure on Figallo to deal with Accom’s debtors and to reach an agreement with Cheetham, and was withholding much needed further financial support for Accom until a settlement was reached, but that the Bank was nevertheless indicating that it remained supportive of Accom and was conscious of its own need not to tip Accom over the brink.

I find that it was only in May of 1991 that the Bank first gave Figallo a real ultimatum.  However, I accept that, consistently with Hawke’s evidence, from January 1991 the Bank kept Accom on a tight rein and that Figallo realised from then that there would not be a substantial increase in Bank lending.  I find that Figallo was under considerable pressure because of Accom’s cash flow problems.

Negotiations with Cheetham

I find, as already indicated, that well before December 1990 Cheetham had indicated a desire to quit Accom.  I find that Figallo was aware of this and that provided an outside investor could be found, Figallo was content to see Cheetham replaced.  This had been discussed when Figallo first met with Hayes.

For much of 1990 there was no urgency about this, although as the need for an injection of capital became apparent, it did become more pressing.  The matter became urgent only when Figallo and Cheetham fell out in December 1990.

Soon after they fell out, as I have already noted, Cheetham consulted solicitors, the firm of Duncan Groom and Hannon.  This was about 14 December 1990 (p183).  By then Figallo and Cheetham had been at odds for some weeks.

This dispute added urgency to the search for an external investor, and added an unwanted complication to the dealings with the Bank.  I find that there was considerable bitterness between Cheetham and Figallo.

I find that from December 1990 Cheetham took a firm line.  He wanted to be bought out at what he thought was a fair price.  No doubt influenced by the earlier discussions with Enterprise and with Korvest, and by ongoing discussions with Korvest, he considered that a fair price for his interest was in the region of $400,000 inclusive of his outstanding loan account.

In a telephone conversation on 9 January 1991 Mancini, a solicitor acting for Cheetham, told Purcell of Cheetham’s terms (T1773 and p253).  In essence Cheetham wanted an up-front payment of $100,000, two further payments of $50,000, the provision of a new vehicle, 50% of the proceeds of the claims against Accom’s three main debtors (these claims were for about $680,000 gross), the release of his loan account and the release of his home by the Bank. It can be seen that this package had an overall value of at least $500,000, although much depended upon the amount to be realised from the three claims.

Protracted negotiations then ensued.

A letter of 18 January 1991 from Thomson Simmons (p282) shows that the parties were not in fact a long way apart.  Despite this, the bitterness of the dispute resulted in many minor irritations and disputes along the way, and the parties were having difficulty bridging the gap.  An improved offer was made by a letter of 23 January (p282).

By 31 January Purcell and Mancini, on behalf of their clients, had reached an agreement in principle (T1803).  Purcell then arranged for La Vincente to take over the drawing up of the written agreement.  La Vincente first met Figallo on 1 February (T1980).  La Vincente’s role, as he understood it, was to sort out the details, the essence of the agreement having already been finalised, and to produce a written agreement (T1981).  A draft Deed was prepared quite quickly (T1985).

There then followed quite a bit of negotiation between the solicitors, La Vincente seeking instructions from Figallo as things progressed.  Most of the negotiations and arguments related to details.  Although they were details, the negotiations remained difficult.

Finally, on 15 March 1991 a Deed was signed between Figallo and Cheetham which was conditional upon the purchase by Korvest of the business of Accom (p429).  For his interest in the shares in Accom, and in the land upon which it operated, Cheetham was to get (p433) a payment of $170,000; 50% of the proceeds of the recovery from the three main debtors after deduction of legal costs, out of pocket expenses and income tax; his house was to be released by the Bank; he was to be paid certain amounts in respect to his entitlements as an employee, and there was some other minor benefits. Liability for the amount outstanding on his loan account was to be assumed by Figallo.

La Vincente did not, before 15 March 1991, give Figallo any advice on the wisdom of executing the Deed (T1999).  He did not consider that to be within the scope of the task given to him by Purcell.

When the negotiations with Korvest collapsed in April 1991, the Deed ceased to have effect.

Negotiations over a new agreement began more or less immediately, with Figallo still resisting Cheetham’s terms, but with little success.  The negotiations seem to have been initiated by Figallo writing to La Vincente advising him that the Korvest proposal was at an end, and that a new offer should be made to Cheetham (letter dated 15 April 1991 p488).  Cheetham refused to budge, and the pressures on Figallo to settle were great.

A new Deed was prepared which was not conditional upon a purchase by an external investor.  Cheetham signed the Deed in May 1991.  It was only when negotiations with Placanica were well advanced that Figallo signed the Deed on about 19 June (T246).  Placanica’s investment was to be the source of the necessary funds.  When the Placanica deal itself collapsed Figallo nevertheless proceeded to settle under the Deed using money that he raised from his family and some funds provided by the Bank.  Settlement, or at least the first payments, took place on 16 August 1991.  Figallo raised about $92,000 from family members for this purpose.

The amount to be paid to Cheetham under the second Deed was the same as that to be paid under the first Deed.  In its fundamentals, the Deed was the same as the first Deed.

I have already referred to the collapse of the negotiations with Placinaca on about 13 August 1991.  I have already made findings based on evidence about that.

I accept the evidence of La Vincente that the Bank at this time was applying considerable pressure to Figallo to finalise the purchase of Cheetham’s shares (T2021).  The Bank was willing to provide assistance to Figallo to complete the transaction (T2028).  By letter dated 14 August 1991 (p871) the Bank repeated in writing its ultimatum - unless things were finalised by 21 August, the Bank would “re-assess its position and take whatever action is necessary.”

During this time Figallo was raising money from family members to enable him to settle, and it was in that way that he was able to do so.

Figallo was never advised by Thomson Simmons or by Hayes that he should take a fresh approach to the question of price once the Deed ceased to be conditional upon an outside investor.  On the other hand, as already noted, Hayes had little to do with the negotiations with Placanica during 1991 and little if anything to do with the terms of the second Deed.

At no stage in the negotiations with Cheetham were courses of action, other than negotiating with Cheetham for the best terms available, put before Figallo by Purcell or by Hayes.  Those options included the possible use of Figallo’s powers as an A class shareholder to appoint another director and so to continue to manage Accom without the involvement of Cheetham.  This could have been the means of declining to make any offer to buy Cheetham out, and so resist the pressure from Cheetham and at least, hopefully, get a better price.  Another option to put pressure on Cheetham was to call in loan accounts.

It appears that Purcell never seriously considered these options, nor did Hayes although they were discussed.  Purcell gave a number of reasons for the advice which he gave and did not give in about December 1990.  This evidence appears in his evidence-in-chief (T1780-T1788).  At this stage I will summarise the evidence that he gave. I will return to the topic later.

He said that he advised Figallo to negotiate for the purchase of Cheetham’s interest in Accom, or did not advise against that course of action, for a number of reasons (T1780-T1782).  The reasons were that Figallo wanted to acquire control of Accom.  In addition, further financial support from the Bank was required for Accom, and in Purcell’s opinion that would be forthcoming only if the dispute between Cheetham and Figallo was resolved. That matter had two aspects.  In Purcell’s opinion the Bank would be unwilling to advance further funds if there was a dispute.  In addition, Cheetham was part of the arrangements for banking accommodation and so his co-operation was required (T1780-T1781).  For those reasons it was not possible to ignore Cheetham in resolving Accom’s financial problems.  There was also a concern that if the dispute between Cheetham and Figallo led to the Bank being dissatisfied with the manner in which Accom was conducting its arrangements with the Bank, the Bank might call up its debt and appoint a Receiver.  In addition there was the concern that if Accom could not pay its creditors they might take action and force the company into liquidation (T1780).  That, as I see it, is another aspect of the need for further support from the Bank.

He did not contemplate obtaining a valuation of Cheetham’s shares (T1782).  In his view both Figallo and Cheetham were working on a figure of about half a million dollars for their respective interests in Accom, and he saw the question of buying out Cheetham as a matter of negotiation between the two of them.

In Purcell’s view there was nothing to be gained by Figallo exercising his power under Article 68 to appoint an additional director (T1784).  In Purcell’s view that was not going to help in getting more money from the Bank.  In his view the Bank’s attitude depended, not upon the ability of the Board to make decisions, but upon Cheetham’s approval and co-operation.  He also considered that such action was likely to increase the level of emotion in the dispute and the level of confrontation (T1785-T1786).  He thought there was a risk of Cheetham taking action against Figallo and Accom on the basis of oppression. He thought that there was insufficient time for the appointment of another director because of the time involved in the calling of a shareholders’ meeting (T1787).  In that respect, in my opinion, he was clearly mistaken, because under Article 68 the appointment could be made by Figallo and it required nothing more than the execution of an instrument of appointment.

He did not consider calling up the director’s loan accounts, and thereby alleviating the need of Accom for further funds (T1786-T1787).  He had been told that neither Figallo nor Cheetham had the necessary funds.  He again saw this as potentially an aggressive approach to which Cheetham might react by taking action on the grounds of oppression.  There was also the problem, as he saw it, that if Cheetham did not meet the demand for payment, further time would be lost while action was taken in an attempt to recover the money.

For all those reasons he took the approach that Figallo should negotiate with Cheetham for the best terms he could get, and that is what happened.

Although Hayes was informed from time to time of the progress of the negotiations with Cheetham, it appears that he took no significant part in them (T1810-1811).  I accept the general tenor of his statement (exhibit D2-11 para 133 and following) to the effect that he was kept informed of progress, although not of every event, but was not involved in the actual negotiations with Cheetham in any significant way from about mid January 1991.  In particular, he had no significant involvement in relation to either of the Deeds between Figallo and Cheetham.

Accom’s claims for work done

I have already referred to the strains placed upon Accom by the three disputes over claims by Accom for payment for work done.  All of them proved difficult to resolve and by late 1990 proceedings had been instituted in each matter.

It is convenient to deal here with what happened in relation to these claims, and with the allegation of negligence relating to them.

The amounts claimed were substantial.  One of the claims involved Vessey Chemicals, Pacific Dunlop and SGIC.  In the Statement of Claim the amount claimed is said to be approximately $306,000, but in evidence it was said to be approximately $302,000 (T275).  That action was being handled by Thomson Simmons, by Mr Connell in particular and by Mr Harris as counsel (T277).  A second claim was referred to as the Matthew Hall claim, and the amount claimed was approximately $187,000.  A third claim was referred to as the Cooper’s claim, and the amount involved was approximately $193,000.

The first of those claims was ultimately settled for $180,000 (T276). There were settlement discussions in about August 1991 according to Figallo (T278).  Figallo gave evidence that he was told by La Vincente and by Henningsen from the State Bank that he had to settle for whatever he could get (T278).  Henningsen in particular said, according to Figallo, that if he did not settle the claim at that time the Bank would wind Accom up (T279).  Figallo resisted this, but La Vincente told him that he had no real choice according to Figallo (T279-280 and T287).  The advice from Connell and Harris had been that Accom was likely to recover the amount claimed in full (T285).  In cross-examination it emerged that this action was actually settled on 20 June 1991 (T624).  From the proceeds of settlement some $70,000 went to the State Bank (T627), presumably to satisfy its demand that Accom’s indebtedness be reduced.

Figallo complains that this settlement was improvident, in that there were good prospects of a substantially better outcome at trial, and that he settled only because of threats by the Bank and because La Vincente advised him that he had no choice but to comply with those threats and gave no advice as to how the threats might be resisted.

Evidence was given about this claim by Mr Connell, a solicitor at Thomson Simmons who handled the claim.  He said that the claim was for about $300,000 inclusive of interest.  He thought that the case was a strong one, although there could be difficulty in establishing the quantum of the claim (T2325-T2327).  There were some other risks to consider.  It appears that he kept La Vincente informed of progress, but there is no suggestion from him that La Vincente had any involvement in the case (see eg T2322).  Nor does his evidence, which I accept, fit with Figallo’s evidence that Connell told him (T286) that he had no choice but to settle.

The settlement of the case for $180,000 all inclusive was negotiated by Mr Harris, counsel who was briefed for the case.  A settlement was reached on 20 June 1991, a few days before trial (T2350).  I find, contrary to Figallo’s evidence (T285) that Harris did not tell Figallo that he had no choice but to settle.

Harris also thought that there would be problems with quantum (T2355).  He was aware of Accom’s pressing need for funds (T2355).  He was sure (T2376) that he canvassed with Figallo the option of simply letting the matter go to trial, a trial due to begin in four days’ time.

There is no indication in this evidence, which I accept, that La Vincente played any direct part in the settlement.

I have given careful consideration to Figallo’s evidence about pressure from La Vincente upon him to settle.  The evidence of Connell and Harris does not exclude this possibility, because La Vincente was dealing separately with Figallo.  But, there is no hint that in Figallo’s dealings with Harris or Connell he complained about or questioned pressure or advice from La Vincente.  There is no hint of La Vincente urging Connell, a member of the same firm, to bring about a settlement.  One might expect him to have done that. And there is La Vincente’s evidence that he gave no advice to Figallo in connection with the settlement of this claim or of other claims (T2032-T2033).

I am not satisfied that Figallo was pressed by La Vincente or by anyone else from Thomson Simmons to settle the claim.  I find that he made his own decision, in the light of the likely outcome at trial, the advantages of prompt payment (that was one of the terms) and in the light of Accom’s need for funds.  I find that neither La Vincente, Connell nor Harris advised him that he had no choice or little choice but to reach a quick settlement.  I find that it was probably pressure from the Bank (see above) that caused Figallo to seek a quick settlement.

I therefore find that Thomson Simmons did not advise Accom that it should settle the action “prematurely and urgently”.

Apparently Thomson Simmons acted as solicitors for Accom also in the Matthew Hall claim.  That was settled on 10 October 1991 for $50,000 (T642).

Evidence was given by Mr Goodall, a solicitor at Thomson Simmons, who handled this claim for Accom.  Although his memory of events was limited, I accept the evidence that he gave, assisted by his file notes.

The claim made in the relevant proceedings was for about $176,000 (T2391).  It was ultimately settled on about 15 October 1991 for $50,000 (T2300).  Figallo and Mr Jones from Accom had been in contact with Goodall over some months before that.  It appears that the settlement was achieved by direct dealings between Figallo or Jones and other parties involved in the dispute (T2299-T2300).

I accept the evidence of Goodall that at no time did he advise Figallo that he should settle the claim.  Nor, so far as he was aware, did Purcell or La Vincente play any significant part in connection with the action.  There is no evidence from the plaintiffs to the contrary.

I also accept his evidence that the claim by Accom had good prospects of success, and that had it gone to trial he would have expected Accom to recover substantially more than the settlement amount (T2302-T2303).

I find that inappropriate advice to settle this claim prematurely was not given.  I find that Figallo chose to settle this action because of Accom’s need for funds.

The Cooper’s claim was settled for $72,000 on 21 August 1991 (T642). There is no evidence that this claim was settled on the basis of advice from Thomson Simmons.

The total recovery in respect of these claims, which amounted in all to about $682,000 was $302,000.  The evidence was that after allowing for costs and tax a payment was made to Cheetham under the Deed of an amount of $52,976.52 (T642), that being his half share of the net proceeds.

It does appear that had all of the actions gone to trial, a better outcome would have been achieved.  In a letter of 18 February 1992 written by Thomson Simmons to Henningsen of the State Bank, Thomson Simmons referred to the settlement as having been below what could reasonably have been expected.  That simply confirms earlier evidence to which I have referred.

It follows, in my opinion, that the allegation of negligent advice in respect of these claims fails.  I deal later with the question of whether, because of negligent advice in respect of Cheetham, Accom was left so short of funds that it was driven to settle these claims.  If it was, the loss compared with what would have been recovered had the claims been pursued might be recoverable in that way, that is as a loss attributable to the negligent advice.

Termination of the defendants’ instructions

In 1992 Mr Giles, a consulting engineer, was working full time for Accom.  As a result of things said to him by Figallo, he examined correspondence relating to the dispute with Cheetham, and also the Memorandum and Articles of Accom.  He brought to Figallo’s attention the fact that under Article 68 Figallo could have appointed another director in late 1990 and in that way possibly solved his problems with Cheetham.  The use of Article 68 seems to have been regarded by Figallo and Giles as an immediate solution to the problems faced by Figallo in late 1990 and early 1991.

That led to a series of meetings involving Figallo, Giles, Hayes, La Vincente and later Purcell.

At a meeting on 7 July 1992 Figallo terminated the instructions of Thomson Simmons and of Sheahan Sims (T652).

At this time, and shortly after the termination of the instructions, there were a number of conversations, between the main participants, about the events of 1990 and 1991.  In particular, Purcell and Hayes and La Vincente admitted on one occasion that they had not examined the Articles of Accom at the time of the dispute and did not consider the use of Article 68.

Having heard the evidence of the participants about these meetings, I am not prepared to find that any admission of any significance was made by Purcell or La Vincente or Hayes at these meetings.  I am satisfied that any offers made at these meetings to reduce the outstanding fees then owed by Accom, were no more than an attempt to avoid further disputation.  Any expressions of regret about the events that befell Accom and Figallo in 1991 were not, in my opinion, an admission of any fault by any of the defendants.  I do not consider that these events are of any significance in determining the outcome of the proceedings.  In particular, I do not accept the evidence of Mr Figallo (T367-368) that at the conclusion of one of these meetings Purcell indicated that Thomson Simmons would release Accom from the amount owed, and in addition possibly make a payment to it of about $50,000.  I am satisfied from the evidence of Purcell and La Vincente that this did not happen, and that Figallo has a confused recollection of the conversation.

Credibility findings

I have already made findings which involve the acceptance and rejection of the evidence of some witnesses.  I here set out, for convenience, my findings in relation to the main witnesses.

I am satisfied that Figallo was a truthful witness.  However, I am likewise satisfied that his evidence was often not accurate.  He is skilled at his business, and is a businessman of considerable drive and ability.  However, he is a person who has had a limited formal education, and in legal and accounting matters he is quite unsophisticated.  Purcell acknowledged this fact (T1816).  It is equally clear that he is a person who in legal and accounting matters is heavily dependent upon his advisers, and is likely to act upon the advice given, even if reluctant to do so.  Once again, Purcell acknowledged this to be so (T1817).  So did La Vincente.  But, as La Vincente said (T2096), he is a man who “knows exactly what is going on.”  He would seek information and make his judgments.  In short, while reliant upon his advisers, he was a shrewd businessman.

I have already referred to the great strains imposed upon Figallo in his attempts to manage the crisis which developed in about December 1990.  I have already referred also to the emotional nature of the dispute, being a dispute with his brother-in-law.  It is equally clear from Figallo’s evidence that he still feels very strongly about the events which occurred at this time.  His evidence has to be assessed in the light of those factors.  I do accept much of his evidence about the sequence of events and what was said.  However, I am satisfied that at times his recollection of events is astray, and that at times, which is hardly surprising, his evidence as to the order in which events occurred and what happened is wrong.  In addition it is necessary to bear in mind that because of his very limited understanding of legal and accounting matters he did not always understand what was being said to him.

Often his evidence did not fit with the evidence of other witnesses whom I am prepared to accept, particularly when their evidence is supported by contemporaneous notes.

For those reasons, despite the fact that I regard him as truthful, I have had to be cautious about his evidence.

I am also satisfied that Purcell gave his evidence truthfully.  He was subjected to a searching cross-examination but during that, to my observation, gave his evidence carefully and fairly.  Of course, there was an element of defence when he gave evidence about the advice that he had given late in 1990. But generally, as I have said, I consider that he gave his evidence in a fair and balanced manner.  I accept his evidence by and large about the sequence of events and about what was said, particularly when that evidence is supported by contemporaneous file notes, as most of it was.  He did not claim to have a detailed memory of events independently of his notes, but on the other hand was not entirely dependent upon the notes.  I cannot think of any matter upon which I reject his evidence as to the sequence of events or as to what happened on the occasion of the events in which he was involved.

They readily fit a case which can be described as an entire contract: cf Heywood v Wellers [1976] QB 446. But in the present case the retainer was an ongoing one, intended to embrace whatever Figallo might raise from time to time. Various matters were dealt with. It is not possible, I consider, to identify a single specific task entrusted to the solicitors which they failed to perform.

There is also the difficulty that the accounts are prepared in a form which makes it impossible to allocate amounts claimed to particular work.  Each account covers a period of time and records a single lump sum for the whole period.

Nevertheless, I am firmly of the view that in some respects the work performed was valueless.

Strictly, the issues raised by the dispute over fees can be resolved only by referring the matter to a Master for enquiry and report, by the hearing of further evidence, or by me attempting to guide the parties through a detailed consideration of the amounts, indicating the attendance and work that I regard as of no value.

Faced with these unattractive alternatives the parties invited me to do my best to determine the issues raised by this aspect of Accom’s claim if I was able to do so.

I consider that I can do so without indulging in mere guesswork.

No complaint can be made, in my opinion, about what Thomson Simmons did until about December 1990.  Nor can I see any basis for attacking their work after the settlement with Cheetham, in light of my findings.  None was identified in evidence.

Can it be said that their work between December 1990 and August 1991 was valueless?

I consider that part of it was, because it directed Figallo down the wrong track in his dealings with Cheetham.  Instead of being advised on various courses open to him, he was advised to seek the best terms obtainable from Cheetham.  On the other hand, on my findings a good deal of what was done would have been done in any event.

The first account from Thomson Simmons is dated 31 January 1991, and covers all work to that date.  There is no basis upon which I can distinguish between work that was valueless and work that was not.

The next six accounts cover the period from 1 February 1991 to 31 August 1991.  The amount claimed (exclusive of disbursements) is about $43,000.  I consider that if proper advice had been given, much of this work would not have been done, although other negotiations and attendances would have taken place.  Doing the best that I can, I conclude that about half of the work done in this period can be regarded as valueless, and I hold that the amount claimed by Thomson Simmons should be reduced by the sum of $22,000, attributable to that period.

I have not been able to identify separately the work done in relation to the share mortgage.  I have attempted to allow for this work in the assessment just made by me.

A claim is made in para 23(f) of the Statement of Claim for costs that Accom had to pay to solicitors retained by the Bank much later in the piece when Accom was in default under its arrangement with the Bank.  In view of my earlier findings that claim must fail.

Conflict of interest

The plaintiffs put their case against Thomson Simmons on an alternative basis.  At all relevant times the Bank was an important client of Thomson Simmons.  One of the partners of Thomson Simmons was Chairman of the Board of the Bank.  Based upon the fact that Thomson Simmons acted for the Bank in other matters, and upon Cheetham’s indebtedness to the Bank, the plaintiffs allege (Statement of Claim para 20) that the solicitors were in breach of their fiduciary duty to the plaintiffs.

At one stage information about this came to Figallo’s attention and he expressed concerns about it to La Vincente.  La Vincente gave evidence that he told Figallo that if he was concerned about this, arrangements would be made for Figallo to be represented by another firm.  La Vincente said that he told Figallo that no-one in the firm had, on behalf of the Bank, given him any instructions about the manner in which he should act for Figallo.  Apparently Figallo had expressed a concern that something like that had happened.  I refer to the evidence of La Vincente at T2037 and T2099.

Figallo was never given written advice on this matter, nor was he advised to seek independent advice.

When acting for Figallo, Thomson Simmons was not acting in any sense for or against the Bank in relation to the affairs of Figallo, or Accom.  The Bank was, of course, a lender to Accom, to Figallo and to Cheetham.  The Bank wanted to recover money owed to it by Cheetham.  It was applying pressure to Accom to adhere to existing arrangements and it was applying pressure to Figallo.  But there was no real dispute between Accom and the Bank, although the banker/customer relationship had become a difficult one.  There was no reason to contemplate legal action against the Bank, or to be considering the enforcement of the respective legal rights of the Bank and Figallo against each other, although the rights of the Bank under the documents giving it security were a relevant factor.

In my opinion the situation was one in which the Bank was expressing an understandable concern about its exposure to Accom, a concern that any lender would have expressed.  Accom’s interests required that the Bank be kept informed of what Accom was doing to meet the Bank’s concerns.  That seems to have been done, and Purcell and La Vincente played their part in that. The situation was one in which persuasion of the Bank was called for, not the opening of hostilities. In a general sense, there seems to me to have been nothing called for that could have harmed any relationship between Thomson Simmons and the Bank.  It might have been pertinent to explain to the Bank that its own interests would suffer if it were to take action against Accom, or if it were to deny Accom further support.  But the Bank knew that, and pointing that out, even forcefully, could hardly be harmful to any relationship with the Bank.

I begin from the starting point that in relation to the affairs of Figallo and Accom, Thomson Simmons acted only for Figallo and Accom.  There was no conflicting engagement to act for the Bank as well.

But, Thomson Simmons was acting for the Bank in other matters, and because of its relationship with the Bank might or would (as it was argued) not act with undivided loyalty for Figallo or Accom.  To put it a little differently, the argument was that Thomson Simmons might be or would be reluctant to put their clients’ position to the Bank as thoroughly or as forcefully as it should be put, for fear of upsetting the Bank.

As Finn points out in a leading text book on the topic (Finn, Fiduciary Obligations, 1977, Law Book Company Limited) at pp252-3:

“...the mere acceptance of multiple ‘fiduciary’ engagements or employments is obviously not offensive in itself.  It is the staple of the commission agent, the solicitor, the corporate trustee, the company director and the liquidator.  The vice condemned by the courts only arises when the fiduciary, by his action or inaction in either or both of two relationships, brings about an actual conflict between the duties owed in each relationship.”

To the same effect, see Farrington v Rowe McBride & Partners [1985] 1 NZLR 83 at 90-92 Richardson J and at 96-98 McMullen J. On that approach, one must consider whether there was an actual conflict between such duties as Thomson Simmons owed to the Bank in other matters, or the interest that it had in retaining the Bank as a client, and the duty that it owed to Accom and to Figallo.

To my mind it is clear, as I have already indicated, that this is not a case in which Thomson Simmons had conflicting engagements: cf Commonwealth Bank of Australia and Another v Smith and Another (1991) 102 ALR 453 at 477.

This is, in my opinion, a case in which it was permissible for Thomson Simmons to accept a concurrent fiduciary engagement by the Bank and by Figallo and Accom.  For the reasons already indicated, it was not a case in which informed consent from Figallo and Accom was required before Thomson Simmons could act for them.

I consider that to have cause for complaint Figallo and Accom must establish that events took a turn such that there was, in Finn’s words, an “actual conflict” between Thomson Simmons’ duty to the Bank or interest in keeping it as a client and Thomson Simmons’ duty to Figallo and Accom.  Indeed, something less may suffice.  It may well suffice if there is a reasonably held perception that Thomson Simmons would not do all that should properly be done: see the cases cited below.

On this aspect of the matter, I refer to the manner in which the Court of Appeal in England recently stated the position in Bristol and West Building Society v Mothew [1997] 2 WLR 436 at 450-451:

“He must not allow the performance of his obligations to one principal to be influenced by his relationship with the other.  He must serve each as faithfully and loyally as if he were his only principal.”

Those words were spoken of a fiduciary acting, with informed consent, for principals with conflicting interests, but I consider that they can be usefully applied to the present case.

When I examine the facts of this matter, I find no indication that there was an actual conflict of duty and duty or of interest and duty.  What Thomson Simmons should have done and did was to keep the Bank informed of what was happening and avoid it withdrawing its support.  To say that it might have done things better, or that it might have been more forceful, is not to the point.  That goes to the duty of skill and care, not to the breach of fiduciary duty: cf Bristol and West Building Society v Mothew [1997] 2 WLR 436 at 451. I find no grounds for saying that Thomson Simmons was inhibited from acting properly for Figallo and Accom by its relationship with the Bank. Nor do I accept that its relationship with the Bank influenced the performance of its obligations to Figallo and to Accom.

In my opinion there was no interest arising from the fact that the Bank was a significant client of Thomson Simmons that conflicted with the duty which Thomson Simmons owed to Accom and to Figallo as their solicitors.  The situation was not one in which there was any likelihood or any reasonable perception that Thomson Simmons would not do all that should properly be done for Accom and for Figallo in relation to the Bank: cf Chan v Zacharia (1984) 154 CLR 178 at 205 Deane J; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 103 Mason J. I cannot think of anything that would have been done differently or could have been done differently if, for example, Accom’s banker had been a bank other than the Bank.

In short, I do not accept that there was a breach of the fiduciary duty of loyalty that Thomson Simmons owed.

In putting submissions on this point counsel for the plaintiffs urged me to find that Thomson Simmons was not able to resist effectively the pressure that the Bank was putting on Accom.  I decline to find that its approach to the Bank was in any way influenced by the relationship with the Bank.

During the submission on this topic counsel suggested that in breach of their duty Purcell and/or La Vincente had failed to persuade the Bank to stop putting pressure on Figallo to settle the claims for work done, and in particular the Vessey case.

That is a complaint that had been made indistinctly until made in submissions, although I do not say that it was not made earlier.

The first answer is that, as I find, this was not because of the existing relationship with the Bank.  If a complaint is to be made, it is of a failure to exercise proper care and skill.

As to the question of care and skill, I do not accept that the Bank was imposing pressure that called for a response from Thomson Simmons that went beyond what they were doing at the time. A Bank diary note of 2 May 1991 (p537) shows that the Bank was considering applying pressure if the Vessey case was not settled by 15 May.  But a later diary note of 16 May 1991 (p562) shows that the Bank was prepared to contemplate the case going to trial.  A further note of 17 May 1991 (p564) shows that Purcell had been to the Bank with Figallo to discuss progress of the claim.

I reject the argument that Thomson Simmons failed to deal adequately with the Bank’s concerns about the claims for work done.

In addition, although it is arguable that disclosure of the relationship with the Bank should have been made to Figallo early in the piece, a full disclosure seems to have been made by La Vincente, and Figallo acquiesced in Thomson Simmons continuing to act.

I reject the submission that Thomson Simmons was in breach of the fiduciary duty which it owed to Figallo and to Accom because of the relationship with the Bank, and I dismiss the claim for damages for breach of that duty.

The Plaintiffs’ complaints against Sheahan Sims

The complaints against Sheahan Sims are also inter-related, but once again I will deal with them individually as far as possible.

The rescinded share issue

I have already found that Hayes advised on the further share issue in June 1990 and on its rescission in November 1990.  I find that Purcell had no substantial involvement in this transaction.  I have already found that Hayes was negligent in failing to advise Figallo in relation to the merits of making the issue and in relation to capital gains tax.

The plaintiffs complain that Hayes was further negligent in failing to advise Figallo that he could have been given a majority shareholding without raising a tax problem.  A division of the existing shares into smaller units, and a transfer of some of those units, is one possibility.

They also complain that instead of advising Figallo to have the issue rescinded, Hayes should have advised on an alternative method of securing a majority shareholding for Figallo.

It is alleged that the result of this was that in due course the Bank thought that Accom was deadlocked and that Figallo had to acquire Cheetham’s shares to resolve the deadlock.  This is said to follow from the fact that Cheetham had a 50% shareholding, instead of a 49% shareholding.

Likewise, Cheetham and his advisers are said to have been enabled to make the same claim (of deadlock) and demand (for a sale of his shares), and Purcell and Hayes are said to have advised Figallo that he had no choice but to buy Cheetham’s shares, because of the 50/50 shareholding.

I am not satisfied that the fact that Cheetham held 50% of the shares in Accom rather than 49% made any difference at all to what unfolded in December 1990 and thereafter.  I consider that the same course would have been followed by the various parties even if Cheetham had held a 49% shareholding.

The real issue in December 1990, and early 1991, was the falling out between Figallo and Cheetham, the need of Accom for financial support from the Bank, and the significance of the falling out in relation to the Bank’s attitude.  If Cheetham had been a 49% shareholder, I am satisfied that he would have made the same demands and would have behaved as he did. I am satisfied that the Bank would have been just as concerned as it was in fact.

In short, I do not accept that the failure to ensure, in the latter part of 1990, that Figallo held 51% of the shares in Accom, had any effect on later events.

Indeed, the plaintiffs’ argument on this point contradicts other aspects of their case.  Their case is that Figallo’s A class shares gave him powers which could and should have been used to prevent Cheetham’s pressure from succeeding.  They themselves allege that the share issue was unnecessary (Statement of Claim para 18(a)).  That being so, how could the failure to improve upon that be productive of any adverse consequences?

If the failure had caused misconceptions which affected the conduct of others, there might be something in the point.  But I have found that it did not. And I agree that Figallo’s existing rights were such that he gained nothing of significance in legal terms by moving from 50% of the shares in Accom to 51%.

Accordingly, while I find that the advice of Hayes was not of a proper professional standard, I find that no loss flows from this negligence.

Advice on value of Cheetham’s interest

In paragraph 12(b) of the Statement of Claim the plaintiffs allege that Hayes advised them that Cheetham’s “shareholding and interest in Accom was valued at about $500,000.”  The Particulars refer to three letters written by Hayes on 4 October 1990, 6 November 1990 and 6 December 1990.  The letters relate to the utilisation of the proceeds of a sale of Cheetham’s interest in Accom, and canvas the possible outcomes from Cheetham’s point of view.

Each letter clearly assumes a purchase by an external investor.  It is implicit in each letter that the outcomes canvassed depend upon a sale at the figure indicated.  The benefit to Cheetham is, in each case, indicated as being about $500,000.  (There is a range of outcomes indicated.)

In paragraph 17(b) the plaintiffs allege that each of them accepted that advice and relied upon it for the purposes of the Cheetham settlement.

I can see no basis upon which Accom can sustain any such claim.  The relevant share transaction was between Figallo and Cheetham.  Other than through its impact upon Figallo’s resources, the price to be paid did not affect Accom.  Hereafter, I consider only the position of Figallo.

In paragraph 18(b) the plaintiffs allege that the value indicated was excessive.  In paragraph 18(bb) they allege that during the period 1 April 1991 to 19 June 1991 (the date of the second Deed), Hayes failed to give proper advice relating to the value of the shares of Accom and the land that it used, having regard to the proposal that Figallo purchase Cheetham’s shares and his interest in the land.

It can be seen that there are two aspects to this complaint.  First, allegedly unsound advice that Cheetham’s interest in the shares and land was worth about $500,000.  Secondly, a failure to give advice about the value of that interest in the context of the later emerging proposal for Figallo to acquire Cheetham’s interest, unrelated to an acquisition of an interest in Accom by an external investor.

I have found that the total consideration provided for the shares was $333,000 (after correcting for the error relating to the loan account).  I have found that the shares were worth about $275,000.

Did Hayes advise Figallo in relation to the value of Cheetham’s interest, was that advice negligent, and was the advice productive of loss?

The first argument advanced for Hayes was that he acted for Accom, and not for Figallo or for Cheetham.  That was what Hayes said in evidence.  He was alert to the fact that to advise Figallo in relation to Cheetham’s claims could give rise to a conflict of interest.  He said that any discussion about how Cheetham might, in the context of an external investor buying in, he bought out, was based upon the interests of Accom, not of the shareholders, and was consistent with the desire of both Figallo and Cheetham that Cheetham be bought out (T2656).  He was advising on how that common wish could be accommodated, but not advising Figallo on how he could gain an advantage (T2744).

It is clear enough that Sheahan Sims were appointed to advise Accom, and that any advice to the directors was to be given to them in that capacity, not in their individual capacities.

But I do not consider that this would have been clear to Figallo. Consistently with my findings about him, I am satisfied that the distinction between an adviser to Accom and an adviser to him would not have been apparent.

I also consider and find that Hayes should have been aware of this.

There is no suggestion by Hayes that at any time he explained to Figallo the distinction between acting for Accom and for Figallo, or the limits to the sort of matters upon which he could advise.

Early in the piece, on 14 May 1990, Figallo spoke by telephone to Hayes about means by which Figallo could get a dividend of $100,000 from Accom to reflect the greater effort that he was making compared with Cheetham.  Hayes’ file note (p47) records this, and notes that the dividend was to be “used as a bargaining chip when Pat retires.”  The note records that Hayes was to examine the Memorandum and Articles of Accom and “get back to Charlie.”

I consider that prudence required that on that occasion Hayes give clear advice to Figallo to the effect that he could not consider matters and advise with a view to improving Figallo’s position against Cheetham’s.  There is no suggestion that that advice was given.

Hayes acknowledged (T2806) that he gave no advice about the difficulty of him acting on Figallo’s request (nothing actually came of it) and that he should have done so (T2808).

When Figallo discussed the further share issue with Hayes in June 1990 (see above) Hayes did not explore with Figallo the question of whether this was done in Figallo’s interests (as it apparently was) or in the interests of Accom or of both directors.  It was argued that both directors wanted Figallo to have a 51% interest in Accom, but Hayes admits (T2804) that he was surprised that Cheetham signed the necessary documents.

A letter from Figallo to Hayes of 25 March 1991 (p466) shows that Figallo was expressing to Hayes his reluctance to have to organise to buy-out Cheetham’s interest.  To my mind this letter also reflects an element of reliance by Figallo upon Hayes for advice given to protect Figallo’s own interests. A similar comment can be made about a letter of 15 April 1991 (p496).  I do not find that those were letters seeking advice necessarily adverse to Cheetham, but that they indicate that Figallo was treating Hayes rather like a personal adviser.

A file note of 16 April 1991 (p501) records a proposal to offer Cheetham $100,000 “or bankrupt him”.  Whether this was a threat that Figallo told Hayes he was minded to make, or a strategy discussed by the two of them, it again indicates a blurring of the distinction between adviser to Accom and adviser to Figallo.  Hayes said in evidence that this sort of tactic was not acceptable to him, and nothing came of the idea (T2769).  But, once again, there is no suggestion of advice that the dispute with Cheetham was not a matter on which Hayes could advise Figallo.

I consider that this material, coupled with the absence of any explanation by Hayes at any time about the limits of his role or function, supports the contention that Figallo relied upon Hayes for advice.

I find that Hayes should have known that Figallo was relying upon him for advice in his personal capacity in relation to the acquisition of Cheetham’s shares.  I accept the tenor of Figallo’s evidence to that effect.  In that context, Hayes’ failure to point out that that was not Hayes’ role, neither in a general way nor when matters cropped out that were closely linked to Figallo’s personal position, leads to the conclusion that Hayes should have realised that Figallo was looking to him for personal advice.  Whatever difficulties that might have created for Hayes, I consider that he put himself in a position such that Figallo did rely upon him and Hayes should have realised that.

The next issue is whether Hayes gave advice in relation to the value of Cheetham’s interest.  In my opinion the letters relied upon (see above) did not purport to advise on that matter, and could not reasonably have been so regarded by Figallo.  The letters were written to directors who had a belief from other sources that Accom was worth about $1,000,000.  They were written in the context of offers or possible offers by Korvest, and reflected what Korvest was offering or was thought likely to offer.

Granted, the letters reflected an assumption (not unreasonably made in the context of Korvest’s actions) that Cheetham’s interest was worth about $500,000.  But I fail to see how they could be regarded as an expression of Hayes’s professional opinion about the value of Cheetham’s interest unrelated to any offer by a prospective investor in Accom.

I accept the evidence of Hayes that these letters, and the advice he gave in addition to them, were essentially no more than advice on what funds would become available to the directors if the Korvest proposal proceeded (T2662).

I find that Figallo could not reasonably have regarded the letters pleaded, or other advice given by Hayes in relation to the dealings with Korvest, as advice by Hayes about the value of Cheetham’s interest.  It was advice about how Cheetham might be bought out if an investor were to acquire an interest in Accom, and was always related to the amount to be paid by that investor.

I accept that it would have been better if Hayes had pointed out to Figallo and Cheetham that the true value of Cheetham’s interest was not necessarily measured by the offers being made, but in my opinion the failure to do so was not, in the circumstances, a failure to depart from the standard of care required.

I find further that Hayes’ advice during the second half of 1990 was always in the context of a purchaser of an interest in Accom.

It follows, in my opinion, that in the context of the Korvest negotiations Hayes did not give negligent advice in relation to the value of Cheetham’s interest in Accom.

The next question is whether, once the Korvest proposal came to an end, Hayes should have advised Figallo not to rely upon any value for Cheetham’s interest indicated by the Korvest negotiations, or should have advised that Figallo should have Cheetham’s interest valued before agreeing upon a price.

I have already found that by the time that the Korvest negotiations ended, Hayes had become something of a bystander.  Nevertheless, Hayes’ own file notes and accounts establish that he was still in reasonably regular contact with Thomson Simmons and with Figallo.  I found that Hayes became involved in the Placanica negotiations, but only in a limited way.  I found that Hayes became aware of the proposal by Figallo to acquire Cheetham’s shares without the involvement of an outside investor not long before the Deed was executed on about 19 June 1991.

It is necessary to examine a little more closely Hayes’ role between about February and July 1991, to decide whether he should have given the advice that the plaintiffs claim he should have given.

Relatively early in his cross-examination Hayes said that he first learned that the Korvest proposal had come to nothing in about May or June 1991.  He learned this through one of the Korvest parties (T2660).  Other evidence indicates that the Korvest proposal collapsed in early April 1991.  A little later he said that he learned the Korvest proposal was not going ahead in April or May 1991 (T2755).  He denied that he was aware of this by 16 April (T2757).

I have given careful consideration to this matter.  I accept the general thrust of Hayes’ evidence on the point.  That is, that he was not being closely involved in Accom’s affairs at that time, and did not learn until after the event that the Korvest proposal was at an end.

Hayes accepted that he knew of the proposal for Figallo to acquire Cheetham’s shares, without the involvement of an external investor, by 11 June (T2790).  A letter of that date (p613A) indicated that by then he was aware of the proposal.

There is no document that indicates just when Hayes first learned that Figallo was negotiating to acquire Cheetham’s shares.  Bearing in mind that Thomson Simmons were involved in the negotiations, I find that either Purcell or La Vincente from that firm, or Figallo himself, would have told Hayes of the new negotiations by late April or early May 1991.  I so find even though Hayes has no recall of that, or at least of when, prior to the letter of 11 June 1991, he learned of the new negotiations.

But I accept Hayes’ evidence that he was involved in the negotiations or consulted about them in only a minor way.  Cheetham had signed the second Deed by mid-May (p559), although Figallo did not sign until mid-June.  Figallo clearly regarded the deal as done by the time of a letter that he wrote to Henningsen on 22 May 1991 (p572).  And, by now, Figallo was already negotiating with Placanica, although that was (at least in May and early June) unknown to Hayes.

Was Hayes negligent in not advising Figallo either to have a valuation performed, or not to rely upon the values indicated by the Korvest negotiations, between Hayes learning of the new negotiations in about late April and the time (mid-May) when the deal was done from a practical point of view, or the time (mid-June) when Figallo signed the second Deed?

In answering this question, I have to bear in mind the fact that Hayes was not directly involved in the negotiations, and had relatively (to early times) little to do with Figallo during this time.  I also have to bear in mind that Figallo was, to some degree, running things himself, and seeking advice as it suited him.

On the other hand I have to bear in mind Hayes’ role as a strategic adviser.  That is a term of uncertain import.  It implies a wide ranging role.  It implies an acceptance of an obligation to identify matters that need to be dealt with.  I do not consider that Sheahan Sims can contend that Hayes’ role or duty was closely circumscribed by specific instructions given by Figallo.

Hayes acknowledged (T2799) that at no time during 1991 did he advise Figallo that a valuation should be performed.  Nor did he, when writing the letter of 11 June which alluded to the sale and to valuations, raise the question of how much Figallo was paying Cheetham (T2797).

Hayes also acknowledged (T2799) that Figallo and Cheetham might have relied upon the advice he gave in connection with the Korvest transaction, but made the valid point that his advice was not a valuation but a methodology (his term) of how the money coming from Korvest could be used to achieve a buy out of Cheetham (see also T2662).

My mind has wavered on the question of the extent of Hayes’ duty under all the circumstances.  In the end I have concluded that he was negligent in failing to advise Figallo in April or May 1991 that the question of the value of Cheetham’s interest should be reconsidered, and that the Korvest negotiations should not be regarded as setting an approximate value.  But I do so not solely on the basis of a duty to advise on value.  I do so (anticipating my treatment of the next allegation against Hayes) also  on the basis that at an earlier stage (late 1990) Hayes had been advising on a range of issues, and had consistently taken the approach that Figallo had no choice but to buy Cheetham out (T2770).

I will now summarise the reasons for my conclusion that Hayes was negligent in failing to advise Figallo between about late April and June 1991 in relation to the value of Cheetham’s interest, and in particular in failing to advise on the need to re-assess the value of that interest.

Hayes was a “strategic” adviser who, I have found, so conducted himself that Figallo did rely upon his advice in relation to aspects of Figallo’s own position, and acted reasonably in so relying.  Hayes knew that Figallo was being advised that he had to ensure that Cheetham was bought out, and held that view himself.  Hayes later learned (on my findings) that Figallo was contemplating a direct purchase of Cheetham’s interest.  Despite Hayes’ (by then) relatively minor role, I consider that a competent adviser in his position should have realised that such a purchase raised issues about the amount to be paid not previously identified and considered, and required fresh advice to Figallo, in particular to the effect that the Korvest negotiations were not necessarily a reliable indicator of the value of Cheetham’s interest.  A transfer of Cheetham’s interest to an investor in Accom was one thing.  A purchase by Figallo was another.

If Hayes’ role had been merely to advise on how the Korvest transaction could be arranged to ensure a buy out, my conclusion would differ.  I rely in part upon the wider role, and the advice Hayes gave or joined in giving that Figallo had no choice but to ensure that Cheetham was bought out.  I rely also on the fact that advice on value, or upon the desirability of considering the value afresh, was within Hayes’ professional expertise and was the sort of advice that one could expect from a strategic adviser.

Overall, I consider that Figallo was entitled to expect, from a “strategic” adviser in Hayes’ position, advice about the manner in which the amount to be paid to Cheetham should be approached.

In paragraph 12(c) of the Statement of Claim the plaintiffs allege that Hayes and the solicitors advised Figallo that Accom was “deadlocked” and that, to forestall the Bank taking action, Figallo had to “accede to Cheetham’s demand that Figallo buy out” his interest in Accom.

In paragraph 12(cc) the plaintiffs allege that Hayes and the solicitors advised Figallo to “settle the demand by Cheetham” in terms of the Deed of 19 June 1991.  I reject that allegation against Hayes.  I find that he gave no such advice.  In paragraph 18(c) they allege that the advice on the deadlock was unsound, and in subsequent paragraphs allege a failure to give advice on matters relevant to the alleged deadlock.

On these issues I find in favour of Hayes, but with one significant reservation.

I find that he did join in advising Figallo that he had no choice but to buy Cheetham out.

Purcell (and later La Vincente) played the leading part in relation to the dispute between Figallo and Cheetham.  But Hayes had accepted a role as a strategic adviser, and, in my opinion, cannot escape the consequences that flow from that rather ill-defined role.  In my opinion he assumed the role of a general adviser.  The advice that he gave, or joined in giving, that Figallo had no choice but to buy-out Cheetham was, I find, a causative factor in Figallo forming the belief that he had to find a means of doing that.  I find that it was not competent advice.  Hayes should have realised that there were other possibilities.  He should have examined the Memorandum and Articles (as he himself acknowledged).  I do not impose upon him the duty of a solicitor.  But I consider that he undertook a role which embraced the duty to give general advice, and that by joining in the advice that he gave he fell below the required standard.  He could properly have declined to advise at all on Figallo’s position, but he did not do so.

It follows, in my opinion, that Hayes was negligent in advising Figallo that he had no choice but to ensure that Cheetham was bought out.

Consequences of negligent advice

In my opinion the same consequences flow as I found flowed from the advice given by Thomson Simmons.  The same opportunity was lost.  The two breaches of duty on Hayes’s part that I have identified lead to that one loss.

Accordingly, I would enter judgment in favour of Figallo against Sheahan Sims for $50,000, making it clear that this is in respect of one and the same loss, and that Figallo is entitled to recover no more than $50,000 overall.

I turn to the issue of the fees claimed by Sheahan Sims.

I apply the same principles as those I applied to the claim by Thomson Simmons.  I take the same approach to resolving the matter.

I put aside the account of 19 December 1990 and the earlier account.  Although I have found that work relating to the share issue was negligently performed, and valueless, I cannot identify any amount in respect of that work.

There are four accounts covering the period from 1 December 1990 to 30 September 1991.  The work in each account is broken up under broad headings, an amount being assigned to each heading.  The amounts total just over $17,000.  In my opinion, some of the headings indicate work which was, for reasons I have already indicated, of no substantial value to Figallo.  The amounts are indicated by the following table.

Account  Items  Amount
                  8 April 1991  (2), (3)  $ 3,660.00
                  5 July 1991  (1), (2)  $ 1,557.28
                  14 August 1991                   (1), (2), (3)                 $ 5,630.00
                  25 September 1991             (1)  $     570.00
  $11,417.28

There has to be an element of guesswork in this, but I am quite satisfied that a good part of the time spent dealing with the solicitors, the Bank, and with Figallo himself, was of no value to Figallo.

Accordingly, I would reduce the amount claimed by Sheahan Sims by $11,417.28.

Contribution

Each dependent claimed, by a Contribution Notice, contribution or indemnity from the other.  I consider that each defendant is equally responsible for the loss suffered by the plaintiff Figallo.  I consider it just and equitable that they should contribute equally to the sum of $50,000 recoverable by Figallo.

Conclusion and Orders

For those reasons, in this action I award Figallo the one amount of $50,000 against both defendants.  I order each defendant to contribute equally to that amount.

I award Figallo the further sum of $22,000 against the defendant Thomson Simmons on account of fees paid to Thomson Simmons.

There being no dispute about the amount of $47,877.59 counterclaimed by Thomson Simmons for fees still owing, I will enter judgment on the counterclaim for that amount.

The plaintiffs and Sheahan Sims have agreed that my findings in relation to costs will be given effect in the action by Sheahan Sims to recover its costs.  In that action the amount claimed is to be reduced by $11,417.28.

Judgment should be entered for the defendants on the claims by Accom.

I wish to hear from the parties on the question of interest, of costs, and as to the terms of the judgment that should be entered.