Cameron v McMahon
[2009] VSC 277
•3 July 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 5289 of 2007
| KERRIE LEE CAMERON | Plaintiff |
| v | |
| DANIEL PATRICK MCMAHON and ACUMEN FINANCIAL GROUP PTY LTD (ACN 075 116 826) (formerly known as McMahon Osborne Consulting Pty Ltd) | First Defendant Second Defendant |
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JUDGE: | DAVIES J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 21-22 April 2009, 24 April 2009, 27-28 April 2009 and 4 May 2009 | |
DATE OF JUDGMENT: | 3 July 2009 | |
CASE MAY BE CITED AS: | Cameron v McMahon & anor | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 277 | |
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NEGLIGENCE – Professional negligence – Accountant – Whether duty of care existed in absence of retainer – Whether relationship of proximity existed – Whether assumption of responsibility and reasonable reliance – Alleged representation to prepare loan agreements and protect the interests of the plaintiff – Whether defendant prepared the loan documents – Conflict of interest – Whether defendant warned the plaintiff to seek independent legal advice.
TRADE PRACTICES – Misleading and deceptive conduct – Whether representations made – s 9 Fair Trading Act 1999 (Vic) – s 52 Trade Practices Act 1974 (Cth).
EQUITY – Fiduciary duty – Whether duty existed – Conflict of interest.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T D Best | Frank Randle Lawyer |
| For the Defendants | Mr R S Hay | DLA Phillips Fox |
HER HONOUR:
Introduction
The plaintiff (“Cameron”) has made claims against the defendants in tort and in equity for breach of duties and under statute for contravention of the provisions of the Trade Practices Act1974 (Cth) (TPA) and the corresponding provisions of the Fair Trading Act1985 (Vic) (FTA).[1] The claims are based on representations that the first defendant (“McMahon”), a director of the second defendant (“the Firm”) allegedly made to Cameron and the inadequacy of documents that he allegedly prepared for her. Cameron seeks damages for the loss of funds that she had lent to two companies purportedly in reliance on the representations and documents.
[1]The plaintiff abandoned all other claims in the statement of claim at the hearing.
The context of Cameron’s claim is the failure of a business venture that Cameron embarked on with two brothers, Justin and Greig Sewell (collectively “the Sewells”), being the establishment and operation of a retail store in Sunbury selling extreme sports equipment and clothing. The store was the brainchild of the Sewells who, in conjunction with another interested party, Ben Alexander (“Alexander”), had developed a business plan, identified potential locations for the store and had some consultations with McMahon about store location, set up costs and potential profitability, as well as about how the business should be structured. When Alexander pulled out of the proposed venture in about June 2002, the Sewells, who knew Cameron socially, involved her in his place. Cameron’s first contact with McMahon, though not with his Firm, was when she and the Sewells met with him to discuss the proposed venture. Cameron was already a client of the Firm. Her contact was with another partner, Michael Osborne, who prepared her tax returns and BAS. The store opened in December 2002, financed principally by loans from Cameron to the two companies, Xville Pty Ltd (“Xville”) and Camell Australia Pty Ltd (“Camell”), that were set up on McMahon’s advice to conduct the business. The store closed down in early 2005 with substantial debts. Cameron was not repaid, and could not recover, most of the funds she had lent.
The parties are in substantial disagreement about the relevant facts and, in particular, are in dispute about whether McMahon made the alleged representations and prepared the documents that Cameron claimed to have relied on to make the loans. It will be necessary to refer to the evidence in some detail. Where contemporaneous documents are available I have relied on the documents, rather than the oral evidence, which for the most part was given in general terms.
The Alleged Representations
Three representations are pleaded.
McMahon is alleged to have made the first representation in October 2002. The further amended statement of claim alleges as follows –
7.In or about October 2002 the plaintiff requested the advice and professional assistance of the defendants in respect of the following matters:
(a) how the Financing should be structured;
(b)how the Financing should be documented and made enforceable;
(c)how the Financing should be secured by third party guarantees.
(together as the “October 2002 Advice”).
Particulars
The plaintiff requested the October 2002 Advice at a meeting between the plaintiff, the first defendant and the Sewell Brothers in or about October 2002 that was held at the defendant’s Premises.
“Financing” is defined in paragraph 6(b) as “[the agreement of the plaintiff to advance funds to Xville and Camell] for the purpose of setting up and running an extreme sportswear retail and import business”.
8.In response to the plaintiff’s request for the October 2002 Advice the first defendant represented to the plaintiff on behalf of himself and the second defendant that:
(a)the defendants could prepare and organise the execution of documentation to ensure the Financing was fully secured and legally enforceable including:
(i)executed loan agreements and acknowledgements of debt between the Companies, the directors of the Companies and the plaintiff;
(ii)valid and binding personal guarantees executed in favour of the plaintiff by the Sewell brothers (“the Guarantees”);
(iii)valid, binding and registered fixed and floating charges executed in favour of the plaintiff by the Companies (“the Charges”); and
(iv)any other documentation required to reflect the provision of further funds to the Companies,
(together as the “Financing Documentation”);
(b)the preparation of the Financing Documentation was within or related to the professional expertise of the defendants;
(c)the Financing Documentation would be adequate for the plaintiff’s needs,
(together as the “October 2002 Representations”).
Particulars
The October 2002 Representations were oral and comprised statements made by the first defendant to the plaintiff during the following conversations:
(a)during a meeting between the plaintiff, the first defendant and the Sewell Brothers in or about October 2002 that was held at the defendant’s Premises;
(b)telephone conversations between the plaintiff and the first defendant over the months October 2002 – March 2003.
At the meeting the first defendant prepared a schedule of interest repayments to be made by the Companies (the “Schedule of Repayments”) with respect to the Financing.
McMahon is alleged to have made the second representation in December 2002, pleaded as follows –
8BIn or about mid December 2002 before the opening of the Business the plaintiff sought further advice from the defendants as to the Financing and whether any further loans to the Companies would be properly documented by the defendants by way of further loan agreements and adequately secured by the Guarantees and the Charges (the “December 2002 Advice”).
…
8CAt a meeting held at the Business Premises in or about mid December 2002 the first defendant represented to the plaintiff in respect of the December 2002 Advice that the provision of further loans to the Companies by the plaintiff would be properly documented by the defendants by way of loan agreements and adequately secured by the Guarantees and the Charges,
(the “December 2002 Representations”).
Particulars
The December 2002 Representations were made by the first defendant on behalf of himself and the second defendant.
McMahon is alleged to have made the third representation in January 2003 and repeated it over the period to June 2004, pleaded as follows -
8DFurther to the matters set out in paragraph 8B above the plaintiff sought further advice from the defendants as to the Financing and whether any further loans to the Companies would be properly documented by the defendants by way of further loan agreements and adequately secured by the Guarantees and the Charges (the “Further Advice”).
PARTICULARS
The Further Advice was sought during telephone conversations between the plaintiff and the first defendant and meetings that took place between the plaintiff and the first defendant held at the Business Premises and at the defendant’s Premises over the period 10 January 2003 to 7 June 2004 and on or about the dates the Loans were made as referred to in particulars subjoined to paragraph 20 below.
During periods of 2003 the plaintiff contacted the first defendant with regard to the Further Advice at least two or three times a week.
8EThe first defendant represented to the plaintiff in respect of the Further Advice that the Financing and the making of further loans to the Companies by the plaintiff would be properly documented by the defendants by way of loan agreements and adequately secured by the Guarantees and the Charges (the “Further Representations”).
Particulars
The Further Representations were made and repeated by the first defendant on behalf of himself and the second defendant.
The Further Representations were made and repeated during telephone conversations between the plaintiff and the first defendant and at meetings that took place between the plaintiff and the first defendant held at the Business Premises and the defendant’s Premises over the period 10 January 2003 to 7 June 2004 and on or about the dates the Loans were made as referred to in the particulars subjoined to paragraph 20 below.
The Alleged Documents
Cameron further alleged that McMahon prepared loan documentation in the form of three loan agreements, four charges and four acknowledgements of debts. It is pleaded that:
(a)the defendants did not ensure that those loan agreements and charges were properly executed. [2]
(b)the defendants did not register the charges with the Australian Securities and Investment Commission. [3]
(c)the defendants failed to draft the guarantees or procure their execution by the Sewell brothers.[4]
[2]Paragraphs 12-13 of the further amended statement of claim.
[3]Paragraphs 15 of the further amended statement of claim.
[4]Paragraphs 17 of the further amended statement of claim.
The Alleged Negligence and Statutory Claims
It is pleaded that the defendants were negligent in:
(a) making the representations;
(b) providing the advice and services to Cameron;
(c) failing to advise Cameron to seek independent legal advice in respect of the Financing, loans and loan documentation; and
(d) breaching their fiduciary duty to Cameron.[5]
[5]Paragraph 40 of the further amended statement of claim.
It is alleged that by reason of those matters, the defendants engaged in conduct that was misleading and deceptive.[6]
The Alleged Breach of Fiduciary Duty
It is also pleaded that the defendants owed a fiduciary duty to Cameron and that they breached that duty by failing to avoid a conflict of interest and by the making of the representations.[7]
[6]Paragraph 31 of the further amended statement of claim.
[7]Paragraph 32 of the further amended statement of claim
The Defence
The defendants deny that McMahon made the alleged representations or prepared any loan documentation for Cameron, although they do admit that McMahon gave Cameron certain documents. The relevant pleadings are contained in paragraphs 11.1 and 11.2 of the amended defence to the further amended statement of claim as follows:
11.1 [T]hey say that in February 2003, at the request of the plaintiff, the first defendant provided the plaintiff with:
(a)a one page document headed “Acknowledgement of Debt”; and
(b)a document headed “Charge over Nature of Secured Property”.
PARTICULARS
The documents provided to the Plaintiff were a one page document headed “Acknowledgement of Debt” and a document headed “Charge over Nature of Secured Property” (“the copy documents”). The original version of the copy documents are numbered 43 and 44 in the defendants’ proposed exhibits (“the original documents”). The original documents were photocopied (“the photocopies”) and in the photocopies the names of the parties were “whited out” together with the details of the transactions referred to. The photocopies were then copied and the copies provided to the plaintiff.
11.2The documents provided to the plaintiff as alleged in paragraph 11.1 were provided to the plaintiff on the express basis that:
(a)no advice was being, could or would be provided to her by the Defendants in respect of them;
(b) she accepted them at her own risk; and
(c)legal advice ought to be obtained by her in respect of them and their suitability for her purposes.
The Witnesses
Cameron did not have a detailed recollection of the matters about which she gave evidence. Whilst I am satisfied that she sought to give a truthful account of what happened, her recollection was somewhat deficient and, at times, confused. The evidence about what she discussed with McMahon and what he told her and when was very vague.
Cameron called Justin Sewell (“Justin”). He similarly did not have any detailed recollection about what was said in the meetings with McMahon, although I do not doubt the truthfulness of the evidence he gave, insofar as he was able to recall.
Greig Sewell (“Greig”) was not called as he “hasn’t been seen for some three or four years … he’s overseas somewhere”.[8] The explanation was not challenged.
[8]Counsel for the Plaintiff submitted this explanation during the hearing on 21 April 2009.
The only witness called by the defendants was McMahon. Although McMahon appeared to have a better recollection of the relevant meetings than Cameron or Justin, I had the impression that he was not disclosing the whole truth.
The Evidence
McMahon’s core business is basic accounting work, preparation of financial statements and tax returns. The Firm also advertises itself as carrying out “business advisory services”. The relevant facts begin in May 2002 when the Sewells sought advice and assistance from McMahon in establishing the extreme sport retail store.
The Sewells’ first meeting with McMahon was on 14 May 2002. They discussed the nature of the business, the proposed market, the finance required, the structuring for the business and budgeting. In McMahon’s words, the Sewells were “two of the most – most honestly – two of the most prepared young business people I’ve seen”. Alexander was then an interested participant in the venture and a potential location for the store in Lonsdale Street Melbourne had been found. Funding for the business was discussed at that stage. The Sewells told McMahon that they thought they needed about $90,000 to get the venture off the ground but where that funding was to come from was unresolved. Justin thought he would contribute $10,000 and ask Alexander to contribute another $10,000. Greig would not be putting in any money. The rest, they thought, would come from the family and by way of bank loan. An action plan was prepared out of the meeting. McMahon’s notes of the meeting record that the Sewells were to follow up on how the business was to be financed and that a budget and break even analysis should be prepared.
McMahon learnt at this meeting that Greig and Justin were plasterers by trade, which they intended to keep up and work on a roster basis once the store was set up. McMahon’s file notes recorded a breakdown of their assets and liabilities. For Justin, the notes recorded assets comprised of a house ($180,000), car ($25,000), sporting equipment ($20,000), motor bike ($10,000) and two other cars ($5,000). The liabilities recorded were a house loan ($80,000), car loan ($10,000) and bike loan ($5,000). For Greig, the assets recorded were a car ($4,500), sporting equipment ($3,000) and computers ($4,500), and a car loan of $5,000. The notes also recorded a discussion about setting up a company, to be called Xville, to run the business. McMahon set up Xville on instructions on 21 May 2002. Alexander and Justin were appointed directors.
Another meeting was held in early June 2002 when the Sewells produced a business plan they had prepared and McMahon prepared an analysis of projected sales and operating profit for the first four years of operation and a breakdown of projected set up costs, requiring total funds of $178,364.
The next relevant set of facts starts with the decision of Alexander to pull out of the proposed venture and his resignation as a director of Xville on 30 June 2002 and Cameron’s involvement in his place. The evidence was somewhat vague about the circumstances that led to Cameron seeking the advice of McMahon, although the evidence showed that Cameron knew that McMahon was providing professional assistance to the Sewells on the establishment of the store.
Cameron had been an avionics engineer with Ansett but was made redundant when the airline collapsed. She was given a payout of around $40,000 but continued to do some contract work at Ansett. She also had a source of rental income from some investment properties she owned and a source of income as a “builder … doing dual ops and things”. In her words, the Sewells “were talking to me about – and then they started speaking about the sports shop that they wanted to be involved in. They had already started the process on that and then at parties and things we would discuss it and then we went out for dinner a couple of times and spoke about it and it sounded all fairly good and I was looking at something to do, so we then got – I got a little bit more involved”.
The Sewells had no financing in place for the venture until Cameron agreed to loan the funds required to set up the store. McMahon’s evidence was that Cameron had decided to fund the business before the first meeting. That was confirmed by Justin in cross examination. Cameron did not give inconsistent evidence but said that McMahon knew at that first meeting that she would not proceed unless her funds were adequately protected. Cameron thought that the first meeting took place in October 2002. However, McMahon’s recollection was that it took place in August, which was confirmed from his file records.
McMahon’s recollection of that meeting was that he was told by Justin, Greig and Cameron that “they were going forward in a – a business partnership where [Cameron] would provide the funding” in an amount of about $150,000. He said he was told that Cameron would take an equal interest in the business through Xville, that the funds would be advanced by way of loan and they sought his advice on the interest rate that should be paid and what the terms of repayment would be. He said that he suggested 9% but repayment was not discussed. He also said that he warned Cameron that the proposed loan was risky as the Sewells had few assets. In cross-examination McMahon agreed that he told her that it was his opinion that she would need some security for her loans, as “it was evident [that] there was very little security”. However he denied that he had any discussion with her then about her documenting her loans.
Cameron’s evidence about that first meeting was in the most general terms only. Her evidence was that there were discussions between her, the Sewells and McMahon about how much was required initially for the shop fit-out and to get the business started. She thought the figure mentioned was $90,000. There was also discussion about the finance being provided by way of loan on which interest would be paid at 9%. No repayment schedule was then agreed on. Cameron said in evidence that they had a discussion about Justin owning a house and Justin and Greig having to pay her back. She said that McMahon said that he would prepare “the documentation that if something happened, that I would be covered and my money would be able to be repaid”. The evidence she gave of her understanding from that meeting was that if the shop did not work, “Justin and Greig would have to pay me back and at that stage, I don’t really know exactly what all those documents mean but it was that they would have to pay me back” and that McMahon “was supplying our – the documentation and he let – just let us know when all the documentation was done and when we knew how much money that we were going to put into the business”.
Justin recalled that he and Greig had discussions with Cameron about her funding the business venture before they all met with McMahon. Justin also recalled that he and his brother had “the idea there that we should look after [her]” but thought it was more Cameron’s idea, rather than their idea, that they “would just guarantee her that she would get … her money back”. He did, however, recall that McMahon “brought up [the] idea that [the finance to be provided] should all be documented” in a meeting they had with him before the first loan was made. He was asked questions in evidence in chief directed to establishing what McMahon said about how the loans should be documented. He was unable to recall what was discussed.
I accept that Cameron had agreed in principle to finance the venture before she met with McMahon but the evidence shows that she was looking to McMahon for assistance on what terms she should agree to in making the loans. I also accept that McMahon warned Cameron that she would need some form of security. He did not, however, tell her that it would be prudent for her to obtain independent advice because her interests were different from the Sewells, who were his clients, or advise her that she needed to obtain legal advice in relation to making the loans. The warning about the need for security, such as it was, was wholly inadequate to alert Cameron that she should go elsewhere for the assistance she sought from him. It may reasonably be inferred that Cameron, instead, proceeded on the assumption that she could rely on him to look after her interests, as she continued thereafter to seek his assistance and advice.
The next meeting took place in September 2002. The evidence is again scant on what occurred at this meeting other than that they were then interested in leasing a store in Ringwood, as the Lonsdale St store was no longer available, and that McMahon recommended that Camell be set up to own the stock and trade.
There appears to have been a flurry of activity around October 2002.
The corporate structures for the business were finalised. Cameron was appointed a director of Xville on 25 September 2002 and Greig was appointed a director on 15 October 2002. Justin was already a director. The directors took 40 shares each. On 3 October 2002, Camell was established. Greig, Justin and Cameron were appointed directors and again took 40 shares each.
Around this time, they located the store at Sunbury. McMahon was consulted about the Sunbury store. He said in cross-examination that his role was to ask questions to see if they had done their research on the appropriateness of the location for such a store. He referred them to a Mr Blenkiron, a solicitor who did legal work for him, to organise the lease.
Cameron funded the fit out and initial stock purchase by way of loans to Xville and Camell. In early December 2002, Cameron raised her concern with McMahon about how much it was costing to get the store up and running. McMahon agreed to come to the store to “make sure the boys have spent the money the right way”. Cameron gave evidence that McMahon assured her that what was being spent was reasonable:
I – because I remember lending the $90,000 and that's the sort of amount – money that we had originally thought that the shop would take to set up. And that was when I panicked and said, "Hang on a minute. They're wanting more money." I spoke to Danny. Danny came to the shop, had a meeting with Justin and Greig, had a look around and turned around and said, "Yeah, you're best to, you know, you're safe to invest more money into the shop for setting up." He said, "That is what a shop would cost to fit out."
In evidence she said that she lent more money on the strength of his reassurance. This was disputed by McMahon. McMahon stated in evidence in chief that he visited “after the store had opened … to say hello and have a look at the store.” He stated that he did not provide any advice during that visit nor were any further loans discussed. I find that evidence implausible having regard to the contact he had with her and the Sewells over that time and his knowledge of her reliance on him to assist her in arranging the finance.
The shop eventually opened on 12 December 2002.
In January 2003, McMahon prepared a loan schedule for Cameron to work out what she was owed at that time and the interest, set at the rate of 9%, that had accrued. The loan schedule shows she had lent $160,000, of which $90,000 had gone to Xville and $70,000 had gone to Camell. That does not appear to be in issue. What is striking about the evidence to this point is that McMahon had clearly been providing professional assistance to Cameron in relation to the loans she was making, including the terms on which she should lend to the two companies, for which he charged in an invoice rendered April 2003 to Cameron, Justin, Greig and Xville. The invoice included the following items:
Reviews of the amounts to be loaned from Kerrie Camerson and the terms of the loan … Preparation of loan schedules to determine interest and principal loan repayments on loans from Kerrie Cameron to Xville Pty Ltd and Camell Pty Ltd.
It may be concluded, from the content of the invoice, that McMahon understood that Cameron was consulting him in his professional capacity and that his dealings with her were on that basis, knowing that she was relying on his professional skills. Yet to that point, on his evidence, he said nothing to her about the need to obtain independent advice.
In February 2003, Cameron had a meeting with McMahon to discuss her concerns about the extent of the loans she had made. McMahon’s evidence is that at that meeting, he advised her to document her loans. He also says that in that meeting he gave Cameron two documents, being a form of loan acknowledgement and a form of charge. The documents in question were an actual loan acknowledgement and charge which his firm had entered into. The documents had been drawn by his solicitor, Mr Blenkiron. His evidence was that for the purpose of giving Cameron the “pro-forma documents”, he copied the originals, whited out the names of the parties and copied the whited out pages again. His evidence about this February meeting was as follows:
And what was said at that meeting?---Well, we had a meeting in February where Carrie brought some reports in from her system and we discussed the fact that the loan was $160,000 not $150,000, which was originally discussed. And we talked about – we started then to raise the issue of – of loan documents. Carrie expressed that, you know, confirming chats we had in the August meeting, that – I mean, if the business went well, great. If it didn't go well, well, you know, that we've only got what's left in the company really because there's nothing that the boys have. So, she didn't seem to be placing a lot of importance on documenting all of this even though they had spoken about the fact that the boys wanted to make sure that, you know, she was protected as she could be. So, I said that it was normal to have, you know, document this sort of thing. I mean, many people have businesses where they loan money and don't document it but in this particular case, there was three – three different people involved. We then chatted about the fact that we, in our own firm, had actually borrowed money from a client a couple of years prior and we had our lawyer, Gary Blenkiron, prepare all of the loan documentation and - as you would, and that's documented the loan. Carrie asked me what it would cost. She was curious as to what it would cost to do that and I told her that it cost us approximately $3000 to have all that done. She didn't think that that was – she said that she wouldn't pay that much to – for that – for a loan agreement because if the business did go under, well the boys don't have anything and we'd only be left with what's in the business in any case. So, it was at that point that she asked me if she could take a copy of what we had so she could fill in the details herself and, you know, save a bit of time for – save some legal costs and time. I said, well – I did state that's not what we do. I mean, in terms of giving her a copy of a document because we only provide tax returns and financial statements but I said, look we'll just give her - really if she was to take that, fill her own – I mean, as a blank – with no details init – fill in her own details, take it to a lawyer and have a lawyer engross it, then I saw nothing wrong with that. So, that's when we – I presented, because we had a physical copy of that loan. I didn't leave it to anyone else in the firm to do. I did it myself.
So, what did you do?---I photocopied it and with the photocopy, I used the white out to white out all reference to names, amounts, dates, anything and I knew, of course, that wouldn't be satisfactory cos you can see through the white out so I photocopied that and then of course, you can't see through it. And I gave that to Carrie on the proviso that she – she run it by a lawyer.
McMahon was cross-examined about his explanation. He said “[w]ell, put it this way, my belief at that stage was that she was prepared to do nothing in terms of loan agreements, so for her to take those and she was objecting to what I said was the cost”. When put to him that it was fair to say that Cameron in his view trusted him and was relying upon him, he said that he did not know about that “I mean we’d only met a few times so it was hard to gauge”. I find that answer implausible in light of the consultations she had with him and the work he had done for her to that point for which he had charged. It is also significant that his evidence in chief about giving Cameron the documents “on the proviso that she - she run [them] by a lawyer” fell far short of the allegations he made in his Defence at paragraph 11.2.[9] His evidence in cross-examination added only slightly to the content of what he had said in evidence in chief that he told her:
And you say you knew she was providing this money. You say, in your evidence, that you eventually, in February 2003, gave her some – some documents?---That's right.
And you say that you told her expressly to go and seek legal advice?---That's right.
Or – or have a lawyer settle the documents?---Yeah, essentially take them to a lawyer.
[9]Extracted in paragraph 10 above.
Cameron denied that she had asked him how much it would cost to have loan documentation prepared by a solicitor and denied that she said she would not pay $3000 to have the documents prepared. She also denied that he gave her pro-forma documents. Her evidence was that McMahon prepared loan documentation for her each time she made advances to the two companies and that she was contacted by the Firm’s receptionist each time there were documents to sign and that she would sign the documents at McMahon’s offices. It will be necessary to turn to this in some detail, but it is sufficient at this point to identify the essence of her evidence.
By August 2003, the business was performing poorly and between August 2003 and June 2004 Cameron put more money into it, each time by way of loan to Xville or Camell. Cameron gave evidence that she would call and meet with McMahon “when things were starting to go wrong”. She stated that the invoices which provided for “consultations from time to time throughout the year” were because she would have meetings “with [McMahon] throughout the year” which included “[g]oing in and out of the office discussing certain things about the shop”. Cameron’s evidence has some support from Justin, who noted that “a couple of meetings” between McMahon and Cameron occurred when the “[Sewells] weren’t present”.
Financial statements for Xville and Camell for the income years ended 30 June 2003 and 30 June 2004, prepared by the Firm in September and October 2004, disclosed that the companies made substantial losses in both years. The business closed in early 2005. Xville was dissolved on 18 December 2005 and Camell was dissolved on 31 March 2006. It appears that both companies owed substantial amounts to Cameron, which she has not been able to recover, although the extent of her loss is in dispute. I return to this under the heading “Loss and Damage”.
Loans Made and Loans Documented
The evidence about what loans Cameron made and when was not disputed. What was disputed was whether McMahon knew about the loans as and when made and whether loan documentation that plainly supports some of the loans was prepared by McMahon.
(a) The bank statements
Cameron relied essentially on bank statements to show what amounts she lent and when. It appears from those bank statements that she loaned the following amounts:
To Xville, in the 02/03 financial year:
$40,000 on 9 October 2002
$30,000 on 3 December 2002
$20,000 on 12 December 2002
$10,590 on 30 December 2002.
To Camell, in the 02/03 financial year:
$50,000 on 13 November 2002.
$20,000 made on 3 December 2002.
$20,000 on 10 January 2003 and
$20,000 on 25 February 2003.
To Xville, in the 03/04 financial year:
$17,350 on 12 August 2003
$35,000 on 23 April 2004
$26,732 on 7 June 2004.
To Camell, in the 03/04 financial year:
$20,000 on 14 August 2003
$10,000 on 24 December 2003.
(b) The financial statements
The evidence was that repayments were made from time to time, although it is not possible on the evidence to identify how much and when. However, the companies’ financial statements recorded the loan amounts outstanding at each year’s end as:
Xville 02/03: $93,518
03/04: $140,026
Camell: 02/03: $89,304
03/04: $82,583.32
(c) The loan documentation
The following loan documentation was put into evidence:
(a) Undated Acknowledgment of Debt and attached Charge being for a loan of $40,000 from Cameron to Xville. These documents appear to have been prepared in 2002.
(b) Undated Acknowledgment of Debt and attached Charge being for a loan of $90,000 from Cameron to Xville. These documents appear to have been prepared in 2003.
(c) Undated Acknowledgment of Debt and attached Charge being for a loan of $70,000 from Cameron to Camell. These documents appear to have been prepared in 2002.
(d) Undated Acknowledgment of Debt and attached Charge being for a loan of $90,000 from Cameron to Camell. These documents appear to have been prepared in 2003.
(e) Loan Agreement for $90,000 from Cameron to Xville, undated.
(f) Loan Agreement for $140,025.72 from Cameron to Xville, undated.
(g) Loan Agreement for $82,583.32 from Cameron to Camell, undated.
It is possible to reconcile the loan documentation with the various loans to some extent. A correlation between the loan documentation for the loan of $40,000 to Xville with the loan that Cameron made on 9 October is capable of being made. A correlation is also capable of being made between the loans as detailed in McMahon’s schedule of loans and interest with the loan documentation for the Xville loan of $90,000 and the loan documentation for the Camell loan of $70,000. It is not possible on the evidence to tie in the loan documentation for the Camell loan of $90,000 with any particular event. It is, however, clear that the Loan Agreement for $140,025.72 from Cameron to Xville and the Loan Agreement for $82,583.32 from Cameron to Camell have taken up the year end results as disclosed in the financial statements, which the Firm prepared. In that sense, all loans are covered. It appears that, apart from the loan documentation for the loan of $40,000 to Xville, the loan documentation was prepared after the event, rather than contemporaneous with the loans as and when made.
Findings
I find on the evidence on the balance of probabilities that McMahon created the loan documents the subject of these proceedings.
Cameron said in evidence that each time she lent money to the two companies, she would let McMahon know so that he could draw up the relevant loan documentation. Her evidence was that she was contacted by the Firm’s receptionist on about three separate occasions that the documents were available to be signed. She thought the first time was when she started lending money to Xville in 2002, though said that it could have been early 2003.
Cameron gave evidence that the circumstances under which she came to sign those documents were as follows:
All right. Now, you mentioned that we signed the documentation. What – tell the court the circumstances of the documents that you signed?---Well, Danny just said when the documentation was all prepared and done that he would give us a call and we'd have to come in and sign.
And did that happen?---Yes, it did.
And how often did that happen?---To tell you the honest truth, I couldn't tell you how many times but I think it was about three times we came and signed documentation which was at the desk and Karen or the receptionist – normally it was Karen that was at the reception, would just hand us a yellow envelope and it would have like a cross and a little stick-it where – what pages that I'd go on. I'd open the pages up, signed it off, gave it back to Karen in a big – generally, I think it was in a big yellow envelope and that was it, and I'd leave.
In response to questions put in cross examination she replied:
But you – do you recall whether you were told to sign that document?---Well, I mustn't have been because if I was told to sign it, I would have.
And is that generally what happened?---Yeah. Well, I signed whatever I was asked to sign.
And who was asking you to sign documents?---Sometimes I'd get a phone call just from one of the staff in McMahon's office or I'd actually speak to Danny personally.
And what would he tell you?---That documents they need me to sign are in the office.
Would he say anything else?---Just to go to – it'll be at the front desk. I'd go to the front desk, just sign them and that was it.
Cameron’s evidence about the circumstances under which these documents were produced for signing is supported by Justin‘s evidence that he too went to McMahon’s offices each time there were documents to sign, although he gave conflicting answers to whether he was summoned by Cameron or someone at the Firm. He recollected that the first time was before the business started up.
I reject McMahon’s evidence that he did not prepare the documents and only gave her pro-forma documentation. I also reject his evidence of the basis on which he said he gave her the pro-forma documentation. Although Cameron’s evidence was often imprecise and hazy, there is other evidence consistent with Cameron’s claim that the documents she signed were prepared by McMahon and provided to her without appropriate warnings:
(a) The form of the acknowledgements of debt and charges are identical with the “pro-forma” documents that McMahon claims he gave to Cameron.
(b) Both Cameron and Justin gave evidence that all the documents produced for signature contained pencil markings and sticky notes identifying where to sign, including for Cameron. The documents in evidence do contain pencil marks indicating where to sign. Justin also gave evidence that although he could not explain how the company seals for Xville and Camell came to be affixed to some of the documents, those seals were kept at McMahon’s offices. McMahon confirmed Justin’s evidence in so far as he agreed that the company seals were kept at his offices when the companies were first set up. He recollected that the seals were made available to Mr Blenkiron when the lease was signed but could not recall whether they returned to his offices or not.
(c) Cameron also gave evidence that when she sought legal advice on recovery of her loans, she had to go to McMahon’s offices to get the loan documentation. McMahon said that to his knowledge the documents were not kept at his offices and that the first time he had seen them was in these proceedings. However he admitted that he did not know whether the documentation had been on his file and he did not call the receptionist as a witness to say that the documents had not been kept at his offices.
(d) The correlation that can be made between certain of the loans documents and McMahon’s knowledge of what Cameron had lent.
I am satisfied that McMahon conveyed to Cameron that her loans would be fully secured and legally enforceable under the loan documentation he prepared. McMahon knew that Xville and Camell were substantially reliant on Cameron for funds and that neither Justin nor Greig had sufficient capital of their own to contribute. The evidence also shows that McMahon was aware that she was relying on him to advise her as to how much she should be prepared to put into the business and whether it was prudent to loan more money.
I am satisfied that Cameron would not have loaned any money unless she was certain she would get it back and that she made the loans in the belief that the loan documentation gave her the necessary protections. She repeated several times in evidence that she would not have advanced any funds unless her loans were adequately secured and that she believed that the “documents that I did sign I thought was enough and that’s all I needed to sign”. Her evidence was that “I discussed every time I had to put money out of my account into the business I always discussed it with Danny first” and “I trust Danny knew what – exactly what he was doing. He seemed to know what – exactly what he was doing. I had all the faith in the world. I asked Danny everything before I did anything.” McMahon denied this and claimed that it would have been reflected in his invoices if that had been the case. However, plainly there was contact between McMahon and Cameron throughout 2003 and 2004 and his invoices contain the notation “consultations from time to time throughout the year”. I do not accept that the invoices refute Cameron’s evidence. McMahon knew from the first meeting that Cameron was concerned about her own position. There was, on the evidence, nothing said to her by McMahon which put her on notice that she should be obtaining advice about her own position separately from the advice McMahon was providing on the proposed venture. There is nothing in the evidence to indicate that McMahon advised her to seek independent advice on whether she should lend money and on how to protect her interests if she proceeded with the loan. Moreover, notwithstanding that he was on notice that the proposed loan was risky, he thereafter dealt with her in relation to the loans that she made and he knew that she was relying on him in his professional capacity as an experienced accountant providing business advisory services to herself and the Sewells. I find that Cameron reasonably assumed that McMahon would protect her interests in respect of the loans she made.
I also find that Cameron relied on McMahon to ensure that loans were fully secured. He was assisting her on how much she should lend and the terms of the loans and gave her comfort that the moneys she was providing were being properly spent, for which he rendered the invoice in April 2003. I find Cameron’s version of the events probable. Her version was corroborated, albeit in a general sense, by Justin. The funds loaned for the most part were sourced from a redundancy payment and moneys she borrowed from her mother. She was interested in the venture because she had lost her job with Ansett and was looking for new ways in which to support herself. She was approached by the Sewells and her interest in the project developed out of social contact she had with them. The evidence did not disclose that she had actively sought out an investment prospect or that she was the initiator of her involvement. She had some business experience and was aware of the importance of securing her investment. It is entirely plausible that she would not have advanced the funds unless she believed that she would be able to get all her money back and that the loan documentation that McMahon prepared for her would enable that to happen.
I find McMahon’s evidence implausible. It seems to me improbable that McMahon did not prepare the loan documentation that was executed in light of the evidence that Justin and Cameron went to McMahon’s offices to sign documentation as and when told by the receptionist that it was ready for signing and Cameron’s evidence that, for the purposes of recouping her money, she collected the original loan documentation from McMahon’s premises. McMahon gave no explanation as to how it is that such documents were kept at his premises. Further, it is plausible that he affixed the company seals to the agreements as the seals, at least initially, were kept at his premises. He could not say definitely that he had not retained them. Both Cameron and Justin gave evidence that they had not kept the company seals and as far as they were aware they were kept at McMahon’s premises. Greig was not called to give evidence but an explanation was provided in opening as to why he was not giving evidence and that explanation was not the subject of any challenge.
Liability in negligence and existence of a fiduciary duty
No claim in contract is made.[10] The claim is pleaded as a duty of care owed in tort by McMahon to Cameron in respect of the representations he made and the documents he prepared for her. The onus is on Cameron to show that there was such a duty – such a duty existed only if a relationship of proximity, reasonable reliance and assumption of responsibility were present,[11] in addition to the foreseeability of Cameron suffering a loss if the duty was breached.[12] That is to say, Cameron must show, to discharge the onus, that there was some special significance about the relationship between herself and McMahon that made it reasonable for her to rely on the representations that he made and the documents that he prepared for her, without making any independent inquiry, as the basis for making the loans.[13]
[10]A claim in contract need not be made to give rise to a relevant duty of care: Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1, 78 (Spigelman CJ, Sheller JA and Stein JA).
[11]Hedley Byrne v Heller [1964] AC 465, 486 (Lord Reid), 502-3 (Lord Morris of Borth-y-Gest), 514 (Lord Hodson agreeing with Lord Morris of Borth-y-Gest), 529 (Lord Devlin); Hawkins v Clayton (1988) 164 CLR 539, 545 (Mason CJ and Wilson J), 576, 578 (Deane J).
[12]Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1995) 188 CLR 241.
[13]Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] VSC 27 (Unreported, Gillard J, 20 February 2003) [745], [754].
The establishment of that relationship would also give rise to fiduciary responsibilities to Cameron coterminous with liability in negligence.[14] In determining whether the relationship gave rise to a fiduciary duty it is necessary for Cameron to show that McMahon undertook or agreed “to act for or on behalf of or in the interests” of Cameron “in the exercise of a power or discretion which will affect [Cameron’s] interests in a legal or practical sense”, such that he had “a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position”.[15] The cornerstone of a fiduciary is often referred to as that of being a relationship of trust or loyalty.[16]
[14]Pavan v Ratnam (1996) 23 ACSR 214; Pilmer v Duke Group Ltd (2001) 207 CLR 165; Townsend v Roussety & Co (WA) Pty Ltd [2007] WASCA 40 (Unreported, Wheeler, McLure and Buss JJA, 20 February 2007).
[15]Hospital Products Limited v United States Surgical Corporation & Ors (1984) 156 CLR 41, 96-7 (Mason J); Pilmer v Duke Group Ltd (2001) 207 CLR 165, 196 (McHugh, Gummow, Hayne and Callinan JJ).
[16]See for example Hospital Products Limited v United States Surgical Corporation & Ors (1984) 156 CLR 41, 96 (Mason J).
In my opinion, McMahon owed a duty of care to and was in a fiduciary relationship with Cameron. He knew that Cameron was relying on his skill and experience as an accountant.[17] In addition, they were in a relationship of trust, such that Cameron trusted him absolutely to protect her interests and investment, and he was in a position where he could exercise his power to the detriment of Cameron. He prepared documents understanding that Cameron was lending to Xville and Camell on the faith of those documents and in the belief that her funds were fully secured. He did not indicate to her that he could not protect her interests. He undertook to advise her on the terms of the loans and to prepare documents for her without informing her that her interests may be different to those of the Sewells, when he was in a position of conflict because the Sewells were his client.[18] He did not tell her that she should get independent advice about the making of the loans. He did not advise her that he was in conflict, and that that had implications for her. Moreover, he accepted responsibility for preparing documents although he was not a legally qualified person. He did not tell her that she could not rely on those documents.
[17]Pavan v Ratnam (1996) 23 ACSR 214.
[18]Pilmer v Duke Group Ltd (2001) 207 CLR 165, 199 (McHugh, Gummow, Hayne and Callinan JJ).
A relationship of proximity, reasonable reliance and assumption of responsibility were present.[19] McMahon knew from the outset that Cameron wanted her loans fully protected. He knew by January 2003 at the latest that the loan funds from Cameron exceeded the value of any security that Justin or Greig could provide. He also knew that the business was wholly loan funded so that it may reasonably be inferred that, as an accountant, he would have understood that she had no prospect of recovering the whole of her funds unless the business was successful. Further, he knew from the outset that it was their intention that she be protected if the business failed. He was consulted by her in relation to the establishment of the business. He was consulted with respect to her intention to fund the business by way of loan. His advice was sought on the appropriate interest rate and an appropriate repayment schedule. He also was aware by the end of December 2002 that further funds were required to be advanced to Xville and Camell in order to support the business. Cameron sought his advice concerning the reasonableness of the amounts needed to support the business. He assured her that the costs of establishment were reasonable. He knew that Cameron was concerned about how much she was loaning to the companies. And he knew, or should have known, by February 2003, at the time that he handed over the documents that the loans she had made exceeded the available equity.
[19]Cf Watkins (trading as Watkins Tapsell) v De Varda [2003] NSWCA 242 (Unreported, Sheller, Ipp JJA and Foster AJA, 12 September 2003).
The significant point is that McMahon was fully aware that the Sewells had brought Cameron into the proposed venture because she was able to provide the financing they required and knew that Cameron wanted to ensure that she was safeguarded against default in repayment and knew that it was risky for Cameron to loan funds. McMahon knew that Cameron was relying on him to protect her interests. He also knew that it was outside his skill and expertise to prepare the requisite loan documentation. A prudent accountant in the position of Mr McMahon would have advised her when she first consulted him in August 2002 to seek independent advice on whether she should lend money and on how to protect her interests if she proceeded with the loan. A prudent accountant would have realised that her interests conflicted with the interests of the Sewells.[20] A prudent accountant would not have prepared the loan documentation. Accordingly, the defendants are liable in negligence and for breach of fiduciary duty.
[20]Pavan v Ratnam (1996) 23 ACSR 214; Pilmer v Duke Group Ltd (2001) 207 CLR 165; Townsend v Roussety & Co (WA) Pty Ltd [2007] WASCA 40 (Unreported, Wheeler, McLure and Buss JJA, 20 February 2007).
Breach of Statutory Duties
There was also a breach of s 9 of the Fair Trading Act 1999 (Vic) and s 52 of the Trade Practices Act 1974 (Cth). I am satisfied that McMahon conveyed to Cameron that he would prepare documentation that would ensure that her funds would be fully secured, knowing that Cameron would act on the faith that the loan documentation safeguarded her funds, when the documents were plainly inadequate for that purpose.[21]
[21]Boland v Yates Property Corporation Pty Ltd (1999) 167 ALR 575, 601-2 (Gaudron J); Gray v Morris [2004] QdR 118, 135-6 [53] (McMurdo J, McPherson JA and Chesternam agreeing). See also Edingbay Pty Ltd & Ors v Horwath (Vic) Pty Ltd; Benni Aroni & Ors (third parties) [2000] VSC 351 (Unreported, Hansen J, 8 September 2000); Townsend and Anor v Roussety and Co (WA) Pty Ltd and Anor [2007] WASCA 40 (Unreported, Wheeler, McLure and Buss JJA, 20 February 2007); Metcase Trading Ltd v Hourigan’s Iga Umina Pty Ptd [2003] NSWSC 683 (Unreported, Young CJ in Eq, 30 July 2003).
Loss and Damage
The negligence and breach of fiduciary duty was in the failure to advise Cameron that she should get independent advice and in the preparation of documents that he was not qualified to prepare. The false and misleading conduct was in conveying to Cameron that the loan documentation he prepared was adequate to protect the repayment of her money. The causation question becomes whether Cameron would have acted differently and avoided the loss, if properly advised or warned at the outset and no documents furnished to her.[22] The onus is on Cameron to persuade the Court on the balance of probabilities that she would have acted differently and avoided the loss. McHugh J in Chappel v Hart[23] said:
… (1) a causal connection will exist between the failure and the injury if it is probable that the plaintiff would have acted on the warning and desisted from pursuing the type of activity or course of conduct involved; (2) no causal connection will exist if the plaintiff would have persisted with the same course of action in comparable circumstances even if a warning had been given.[24]
I find Cameron’s evidence plausible that she lent the funds because of her belief, conveyed to her by McMahon, that he would prepare documentation for her that would ensure that her loans were fully secured.[25]
[22]Rosenberg v Percival (2001) 205 CLR 434, 443 [24]-[25] (McHugh J), 463 [87] (Gummow).
[23](1998) 195 CLR 232.
[24]Ibid 247 (citations omitted).
[25]Kenny & Good v MGICA(1992) Ltd (1999) 199 CLR 413, 425-6 [19] (Gaudron J).
On the issue of damages, it is contended that there was no loss because even if Justin and Greig had entered into guarantees, they would not have had any assets to meet a call on the guarantees. However, I am satisfied that Cameron would not have loaned any money unless she was certain to get it back. In my view there is sufficient proof of loss of opportunity in respect of the amounts she lent.[26]
[26]Sellars v Adelaide Petroleum NL (1992) 179 CLR 332, 355 (Mason CJ, Dawson, Toohey and Gaudron JJ).
There was dispute about how much she lent and how much she lost. Cameron has claimed that she is owed $179,672 by Xville and $140,000 by Camell, in reliance on the bank statements. However, in my view, the financial statements are the most reliable evidence of her loan balances as at 30 June 2003 and 30 June 2004.
Accordingly, there will be judgment for the plaintiff and an award of damages in the sum of $222,609.32, calculated as the total of $82,583.32 owed by Camell and $140,026 owed by Xville. I will make no order with respect to the fee that Cameron paid on the invoice. The invoice covered other services as well as services to her personally and it is not possible to identify how much was properly referrable to her. The defendants should pay Cameron’s costs of the proceedings.
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