Crouch v The Bloody Mary Group Pty Ltd - [2020] SASC 68

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
CROUCH & ORS v THE BLOODY MARY GROUP PTY LTD & ORS
[2020] SASC 68
Judgment of The Honourable Justice Doyle
30 April 2020
TORTS - MISCELLANEOUS TORTS
TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - CONSUMER PROTECTION - MISLEADING OR DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS - CHARACTER OR ATTRIBUTES OF CONDUCT OR REPRESENTATION - SILENCE AND NON-DISCLOSURE
In 2016 the plaintiffs entered into an arrangement with the defendants for the joint purchase of the Windmill Hotel through an incorporated joint venture. The plaintiffs allege that in agreeing to enter into this arrangement they were misled by the defendants in that they failed to disclose their receipt of certain rebates referable to the sale of alcohol at the Windmill Hotel, and thereby failed to disclose their conduct in diverting a commercial opportunity away from the joint venture and for their own benefit.
In these proceedings, the plaintiffs allege that the defendants are liable either for the tort of deceit, or in the alternative for misleading and deceptive conduct in contravention of s 18 of the Australian Consumer Law. They also allege breaches of a Unitholder and Shareholder Agreement by reason of the same conduct. The plaintiffs seek to recover the loss they claim to have suffered by reason of their entry into the arrangement to purchase the Windmill Hotel.
Held (per Doyle J):
1.      The second defendant knowingly conveyed false representations, and engaged in misleading conduct, by reason of his conduct in not disclosing to the plaintiffs that he and the fourth defendant planned to keep the forward rebates for their own benefit through the first defendant. The false representations were as to use of the buying power of the first, second and fourth defendants, and the opportunity for the parties to be equal investors.
2.      The fourth defendant knowingly made or adopted the false representation that the parties would be equal investors. By reason of the conduct of both the second defendant and the fourth defendant in not disclosing their planned use of the forward rebates, this representation was false.
3.      The conduct of the second and fourth defendants in making the buying power and equal investors representations, in circumstances where they knew them to be false, is to be attributed to the first defendant. The same applies in respect of the second and fourth defendants’ trustee companies, being the third and fifth defendants respectively.
4.      In investing in the purchase of the Windmill Hotel, the plaintiffs were induced by, and relied upon, both the buying power and equal investor representations. The defendants’ misconduct caused the plaintiffs to invest and to suffer the losses they suffered by reason of that investment.
5. The defendants are thus liable in deceit and for contravention of s 18 of the Australian Consumer Law.
6.      The appropriate measure of the plaintiffs’ consequential losses caused by the defendants' misconduct is the losses made by them on their investment in the purchase of the Windmill Hotel. And as they did not recover anything on their investments, their losses are the total of the amounts they invested or contributed.
7.      The defendants contend that the second and third plaintiffs have not established that they suffered any loss because their 50 per cent was paid by way of gift from the first plaintiff. This contention is artificial and should be rejected.
8.      There is no merit in the defendants’ contention that the plaintiffs’ losses were caused by their own conduct, or that they were otherwise contributorily negligent.
9.      The plaintiffs claim for breach of the Unitholder and Shareholder Agreement is rejected. The requisite causal link between any such breach and the first plaintiff’s potential liability under the director penalty notices has not been made out. In circumstances where there were clearly problems with the financial performance of the Windmill Hotel that went beyond the issue in relation to rebates, there is not a basis to make this finding.
10. The defendants are each liable to the plaintiffs in deceit and for contravention of s 18 of the Australian Consumer Law. The damages payable are $383,609.14 plus interest.
Australian Consumer Law ss 18, 236; Competition and Consumer Act 2010 (Cth) ss 75B, 137B; Corporations Act 2001 (Cth); Law Reform (Contributory Negligence and Apportionment of Liability) Act 200 (SA) s 7, referred to.
Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) (2006) 67 NSWLR 341; Henville v Walker (2001) 206 CLR 459; Lord Buddha Pty Ltd v Harpur (2013) 41 VR 159; Stone v Chappel (2017) 128 SASR 165, applied.
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; Fraser v NRMA Holdings Ltd (1995) 55 FCR 452; Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; Magill v Magill (2006) 226 CLR 551; Smith v Noss [2006] NSWCA 37; Software Integrators Pty Ltd v Roadrunner Couriers Pty Ltd (1997) 69 SASR 288, discussed.
Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112; Briginshaw v Briginshaw (1938) 60 CLR 336; Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; Conlon v Simms [2007] 3 All ER 802; Duke Group Ltd v Pilmer (1998) 144 FLR 1; Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; Gould v Vaggelas (1984) 157 CLR 215; Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564; Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; Lowick Rose LLP v Swynson Ltd [2017] UKSC 32; Metalcorp Recyclers Pty Ltd v Metal Manufacturers Ltd [2003] NSWCA 213; Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191; Potts v Miller (1940) 64 CLR 282; Provan v HCL Real Estate Ltd (1992) 24 ATR 238; Ricochet Pty Ltd v Equity Trustees Executors and Agency Company Ltd (1993) 41 FCR 229; Rosenberg v Percival (2001) 205 CLR 434; Smith New Court Ltd v Scrimgeour Vickers [1997] AC 254; Swiss Re International SE v Simpson (2018) 354 ALR 607; Tresize v National Australia Bank Ltd (2005) 220 ALR 706; Westpac Banking Corporation v Jamieson [2015] QCA 50, considered.

CROUCH & ORS v THE BLOODY MARY GROUP PTY LTD & ORS
[2020] SASC 68
Civil

DOYLE J: In 2016 the plaintiffs entered into an arrangement with the defendants for the joint purchase of the Windmill Hotel through an incorporated joint venture. The plaintiffs allege that in agreeing to enter into this arrangement they were misled by the defendants in that they failed to disclose their receipt of certain rebates referable to the sale of alcohol at the Windmill Hotel, and thereby failed to disclose their conduct in diverting a commercial opportunity away from the joint venture and for their own benefit.
In these proceedings, the plaintiffs allege that the defendants are liable either for the tort of deceit, or in the alternative for misleading and deceptive conduct in contravention of s 18 of the Australian Consumer Law. They also allege breaches of a Unitholder and Shareholder Agreement by reason of the same conduct. They seek to recover the loss they claim to have suffered by reason of their entry into the arrangement to purchase the Windmill Hotel.
Overview
The first and second plaintiffs (Michael Crouch and Nicholas Crouch) are father and son. The second and fourth defendants (Brett Viney and Matthew Mitchell) are business partners, and the directors and shareholders of the first defendant (The Bloody Mary Group Pty Ltd (“BMG”)).
Following discussions between April and June 2016, these men agreed that they would jointly purchase the Windmill Hotel on Main North Road in Prospect for $1,400,000. The purchase was made through a trust structure in which each of them became directors of Windmill Hotel Investments Pty Ltd (“WHI”), a newly incorporated company which was to act as the trustee of the Windmill Hotel Unit Trust, and in which they each indirectly became unitholders.
Settlement of the purchase of the Windmill Hotel occurred on 17 October 2016. The purchase was funded in part by a loan from National Australia Bank Limited, which was guaranteed by each of them as directors of WHI. The balance of the purchase price was contributed by the trustees of the private family trusts of Michael Crouch[1], Nicholas Crouch (Alini Pty Ltd, the third plaintiff), Mr Viney (Runonmanus Pty Ltd, the third defendant) and Mr Mitchell (George Watts Investments Pty Ltd, the fifth defendant) by way of their subscription for units in the Windmill Hotel Unit Trust.
[1] Michael Crouch sued in both his own capacity, and as trustee of the Michael Crouch Family Trust.
The purchase of the Windmill Hotel added to a number of other hotel and restaurant businesses in which Mr Viney and Mr Mitchell already held interests. Those businesses outsourced certain services to a common entity, being the first defendant (BMG), which was itself under the ownership and control of Mr Viney and Mr Mitchell.
The trial of these proceedings took place over five days. There was a significant volume of documentary evidence, which included not only a number of communications between the plaintiffs and defendants, but also a number of communications by the defendants with their accountant on various topics relevant to their investment in the Windmill Hotel, and with breweries in relation to alcohol rebates generated through the sale of alcohol at the Windmill Hotel.
The plaintiffs called evidence from Michael Crouch, Nicholas Crouch and Michael Fairlie (their accountant). The defendants called evidence from Mr Viney, Mr Mitchell and Sean Rusling (a sales representative for Carlton & United Breweries (“CUB”)).
Mr Fairlie’s evidence was largely confined to his recollection of discussions that occurred in May 2016 in relation to the potential investment by the Crouches in the Windmill Hotel. I am satisfied that his evidence was honest and reliable. That said, his recollection of specifics was understandably limited and so other than providing some general corroboration of some aspects of the evidence of the Crouches, his evidence was not ultimately of much significance.
I am also satisfied that the evidence of both Nicholas Crouch and Michael Crouch was honest and generally reliable. While there were some minor aspects of their evidence where it seems that their memories may have let them down, they were both impressive witnesses. They gave their evidence in a careful and considered manner. They were able to, and did, distinguish between matters that they were able to recall, and those where they were reliant upon reconstruction or assumptions.
So far as the defendants’ witnesses are concerned, I am satisfied that Mr Rusling’s evidence – which was confined to the rebates available from CUB – was honest and reliable. However, I had some significant concerns about the evidence of both Mr Viney and Mr Mitchell. For reasons elaborated upon later, both were poor witnesses. They were often evasive, and had a tendency to argue with the cross-examiner. In some instances they showed a significant reluctance to accept propositions that they appreciated might be detrimental to their case but which, upon being pressed, they ultimately accepted. In other instances they adhered to evidence that in my view was either incredible or nonsensical.
While I have accepted the evidence of Mr Viney and Mr Mitchell to the extent that it was not controversial, as will become apparent during the course of the reasons that follow, I have not accepted it in relation to a number of matters where it was contradicted by other evidence or was otherwise contested.
A factual narrative
In this section of my reasons, I set out the findings I have made in relation to the narrative of events relevant to my later consideration of the plaintiffs’ causes of action. Most of them are uncontroversial, and emerge either from the documentary evidence, or the evidence of Nicholas Crouch and Michael Crouch that I have accepted.
Background
As at early 2016, Michael Crouch was 59 years old and his career was in academic research, undertaking cancer research. He holds a Doctor of Philosophy in Physiology, and for more than a decade prior to 2016 had been involved in a private enterprise undertaking research and development in the biotechnology industry.
Nicholas Crouch was 23 years old. He was a student studying at the University of Adelaide for a degree in Law and International Studies. While studying, apart from a six month exchange in 2014 when he was overseas, he had worked as a barman, and then manager, in a number of hotels and restaurants.
Nicholas Crouch first met Mr Viney in around 2011 or 2012 while working as a barman at the Colonist Tavern, where Mr Viney was a regular patron. At some point in 2012, Mr Viney invited Nicholas Crouch to come and work for him, and he thereafter worked at several of the hotels and restaurants owned and operated by Mr Viney and Mr Mitchell. He worked first at the Saracens Head, which was where he met Mr Mitchell. He next worked at Pirie & Co, and then at Grace the Establishment (which later became known as Stone’s Throw).
As at early 2016, Nicholas Crouch was the duty manager at Stone’s Throw. He, Mr Viney and Mr Mitchell had become friends, and socialised outside of work hours.
By late 2015, Mr Viney and Mr Mitchell had direct or indirect ownership interests in several bar and restaurant businesses, including the Saracens Head, Pirie & Co, Stone’s Throw and the Archer. They had incorporated BMG which, as Mr Viney explained, was done so as to centralise the business affairs of their hotel group (such as the accounting, bookkeeping and insurance functions of their hotels). BMG employed Suzanne Hemmerling, whose role encompassed accountant, bookkeeper and operations manager. BMG also used Simon Warner of Wakeful Partners as an external accountant.
The opportunity to purchase the Windmill Hotel
In late 2015, Mr Viney and Mr Mitchell identified the Windmill Hotel as a potential investment opportunity. It was brought to their attention by a hotel broker, Grant Clarke, who worked for McGees. Mr Clarke told them that the owners were looking to sell the hotel to raise capital for another business and that the landlord might be prepared to offer the ‘right tenant’ a reduction in the rent. Mr Clarke provided them with a brochure with information about the hotel (“the McGees brochure”).
The McGees brochure set out various formal details about the Windmill Hotel. It also included a profit and loss statement for the year ended 30 June 2015 that showed a loss of $235,575 (compared with a loss of $40,092 for the preceding year). The notes that followed the profit and loss statement listed various expenses described as “add backs” that would have resulted in an adjusted profit of $311,270 for the 2015 financial year (and $380,344 for the preceding financial year).
Mr Viney and Mr Mitchell also met with Mr Clarke to go through the hotel’s financial figures, including its profit and loss statement and gaming turnover.
While the vendor had wanted between $2 million and $2.2 million for the hotel, Mr Viney and Mr Mitchell were informed by Mr Clarke that he would be able to negotiate the price down to $1.4 million. Mr Viney and Mr Mitchell considered that there would be an opportunity to extend and develop the area that was licensed for food and beverages. They thought that, if properly managed, the hotel would be a sound investment with excellent long-term potential. To that end, they engaged Mr Warner to undertake due diligence in relation to their potential purchase of the hotel.
On 2 March 2016, Mr Viney and Mr Mitchell signed a Heads of Agreement to purchase the Windmill Hotel for a price of $1.4 million. It provided for a deposit of $60,000 upon signing of the formal contract, with the balance due on 4 July 2016 or sooner by mutual agreement.
While Mr Viney denied that the Heads of Agreement was binding upon them, the terms of the document provided as follows:
The parties intend this Heads of Agreement to be a valid enforceable legally binding contract effective from the date hereof notwithstanding the parties intend that Formal Contracts will be entered into at a later date.
This Contract is subject to:
1.Satisfactory transfer of Liquor and Gaming Licence to the Purchaser, and
2.Consent from the Landlord to the assignment of the existing Lease
3.Subject to finance approval from ANZ Bank within 45 days of executing contracts.
It can thus be seen that the Heads of Agreement was binding, albeit conditional. Significantly, neither Mr Viney nor Mr Mitchell ever informed either of the Crouches of the existence of the Heads of Agreement.[2]
[2] At least not the executed copy. It appears that an unsigned draft version was included in the package of hard copy documents provided by Mr Viney to Nicholas Crouch in May 2016.
On 22 March 2016, Mr Clarke emailed Mr Viney, Mr Mitchell and Mr Warner a spreadsheet with the daily takings summaries for the Windmill Hotel for the period 1 July 2015 to 6 March 2016. The covering email from Mr Clarke said that he had met with the vendor’s lawyer the day before to give instructions to prepare the sale contract, and that a draft would be sent to Rick Harley of Hunt & Hunt (which later became Jones Harley Toole), the solicitors for Mr Viney, Mr Mitchell and BMG.
On the same day, Mr Warner emailed Mr Viney and Mr Mitchell, informing them that from his discussions with BankSA, it was likely that it would lend them 50 percent of the purchase price ($700,000), and that it “may look to go to 55% lend” (an additional $70,000) on the basis that this additional amount would be repaid within 12 months. Given the purchase price of $1,400,000, a “55% lend” would leave $630,000 to be funded by investors.
Mr Warner also attached a spreadsheet containing cash flow projections that he had prepared for the business for the 12 months commencing June 2016 (“the Projections Spreadsheet”). This spreadsheet included a line item for “Proceeds & Supplier Rebates”, but the entry was $0 for each month. It also included a section headed “Assumptions” that set out various of the assumptions upon which the cash flow projections were based. It included the following table under the heading “Unit Holders Capital”:
%             Cash $
BV           25            $157,500           $100 of BV c/- CUB group credits
MM         25            $157,500           $100 of MM c/- CUB group credits
Other        25            $157,500
Other        25            $157,500
$630,000
It was accepted at trial that this table reflected the contemplation of Mr Viney, Mr Mitchell and Mr Warner at the time that the purchase of the Windmill Hotel would be funded by finding two additional investors to participate in the acquisition to the extent of 50 per cent of the equity requirement, and that Mr Viney (BV) and Mr Mitchell (MM) would fund a significant proportion of their own investments (about $100,000 each) through alcohol rebates from CUB (referred to in the table as “group credits”).
By April 2016, the solicitors for Mr Viney and Mr Mitchell had commenced drafting the contract for the purchase of the Windmill Hotel. On 12 April 2016, Andrew Fisher of Jones Harley Toole sent an email to Mr Viney (copied to Mr Mitchell and Mr Harley) seeking to check various of the main commercial terms, and making some additional comments and queries. Consistently with the Heads of Agreement, the commercial terms included a price of $1.4 million (plus stock at value), with a deposit of $60,000.
Nicholas Crouch’s trip to Thailand and invitation to invest

In late March or early April 2016, Nicholas Crouch accepted an invitation from Mr Viney to accompany him on a trip to Thailand. They left for Thailand on 8 April 2018 and returned on 16 April 2016.
Prior to his departure from Australia on that trip, Nicholas Crouch did not know anything of the intentions of Mr Viney and Mr Mitchell in relation to the purchase of the Windmill Hotel; nor was he aware of any suggestion of a potential investment by him in that venture. While I accept Mr Viney’s evidence that the trip to Thailand was at least in part to thank and reward Nicholas Crouch for his work, I am also satisfied that he intended to use the opportunity to raise with Nicholas Crouch the possibility of him investing in the purchase of the Windmill Hotel.
During their time in Thailand, Mr Viney and Nicholas Crouch had some informal discussions about the potential for Nicholas Crouch to invest in a venture involving the purchase of the Windmill Hotel. While it is accepted that Nicholas Crouch indicated some interest in looking into the possibility of an investment in such a venture, there was a dispute in the evidence as to content of those discussions, and in particular whether (as Mr Viney suggested, but Nicholas Crouch denied) there was any reference at that point to the availability and use of alcohol rebates. I shall return to the content of these discussions when addressing some of the disputed areas of evidence later in these reasons, but the short point is that I do not accept that Mr Viney did make any reference to the availability or use of alcohol rebates while he and Nicholas Crouch were in Thailand.
Soon after their return from Thailand, Mr Viney told Mr Mitchell that Nicholas Crouch was interested in investing in the Windmill Hotel. Both Mr Viney and Mr Mitchell were keen for that to occur.
Discussions between the parties in relation to the purchase of the Windmill Hotel
Following their return from Thailand, Mr Viney had further discussions with Nicholas Crouch in relation to the possibility of him investing in the Windmill Hotel. Mr Viney told Nicholas Crouch that his investment or share would be about $175,000.[3] Nicholas Crouch indicated that he would need to speak to his father about it, and that he would need to see if his father was willing to fund it. Mr Viney gave Nicholas Crouch a copy of the McGees brochure in relation to the Windmill Hotel.
[3] That is, 25 per cent of an assumed equity contribution of $700,000.
I reject Mr Viney’s evidence to the effect that he was not aware by this point in time that Nicholas Crouch would need his father to fund his investment. I also reject his evidence, contradicted by Nicholas Crouch, to the effect that he told Nicholas Crouch that any investment would require that he manage the hotel as part of his commitment to the business, and that he agreed to this. Nicholas Crouch’s evidence, which I accept, was to the effect that while he agreed with Mr Viney that there would be an opportunity for him to work as manager, there was no discussion of this being a condition of the investment, or that it would be a long-term arrangement. To the contrary, he assumed from their earlier dealings that Mr Viney knew that he intended to pursue a career in the law once his studies were completed.
In the weeks following Nicholas Crouch’s return from Thailand, he and Mr Mitchell also had a number of conversations about the potential for him to invest with Mr Viney and Mr Mitchell in the Windmill Hotel. While those conversations were brief and informal, they involved Mr Mitchell expressing his views as to the positive prospects for the hotel. Mr Mitchell acknowledged in his evidence that during these conversations in April and May 2016 he said words to the effect “we’ve got significant buying power and we can bring that material buying power to bear for the Windmill and that’s an advantage of investing with us.” He acknowledged later in his evidence that during these conversations he was trying to encourage Nicholas Crouch to invest, and that as part of that he made reference to their buying power. At the same time, he did not mention anything about the use of rebates during these conversations.
On 5 May 2016, Mr Viney sent Nicholas Crouch an email stating “FYI” and forwarding the email of 22 March 2016 from Mr Warner referred to earlier, together with the attachments to this email (which included the Projections Spreadsheet). At some point around this time Mr Viney also provided Nicholas Crouch with a package of hard copy documents, which included both the McGees brochure and the Projections Spreadsheet.
As Nicholas Crouch acknowledged in his evidence, while he did not have any recollection of doing so, he would have looked over the documents provided to him, including the Projections Spreadsheet. He did not recall noticing the references under the heading “Assumptions” to “$100 of BV c/- CUB group credits” and “$100 of MM c/- CUB group credits”, and I accept his evidence that he did not at the time appreciate that these were references to Mr Viney and Mr Mitchell each using rebates earned on the sale of alcohol by the Windmill Hotel as part of their capital contributions towards the purchase of that hotel.
Nicholas Crouch was also not able to recall whether he noticed the entry of $0 each month for “Proceeds & Supplier Rebates”, but agreed that this was consistent with the absence of any belief or understanding on his part at that point in time that there would be proceeds from supplier rebates.
Nicholas Crouch considered that the prospect of investing in the Windmill Hotel was a good opportunity. He understood that he would have an involvement in running the business, but was also keen to pursue an opportunity to have an ownership stake in the business.
Prior to May 2016, Michael Crouch had not met either Mr Viney or Mr Mitchell. However, he knew that his son had been working in various businesses associated with Mr Viney, including the Saracens Head, Pirie & Co and Stone’s Throw.
At some point in May 2016, Nicholas Crouch told his father that he had been approached by Mr Viney and Mr Mitchell to invest in the purchase of the Windmill Hotel, and that the amount of his investment would be about $175,000. His father said that he would be prepared to fund his son’s investment, and suggested that they discuss the opportunity with his accountant, Mr Fairlie.
When first informed of the potential investment in the Windmill Hotel by his son, Michael Crouch was told that there was potentially another person (whom his son did not know) interested in being the fourth investor. A short time later, his son told him that this person was no longer in a position to invest. Michael Crouch was concerned about his son becoming involved in an investment with some other person whom he did not know, and so said to his son that he also would consider investing in the hotel. He was prepared to do so in part so as to assist his son, and in part so as to have some oversight and input.
The precise timing of Michael Crouch becoming interested in investing in his own right, as opposed to simply funding his son’s investment, is not clear on the evidence. To the extent it matters, it seems likely that it was at about the time of the 18 May 2016 meeting referred to below. I am satisfied that Michael Crouch was at least contemplating making a personal investment as at that point in time, even if that was not discussed more formally with Mr Viney and Mr Mitchell until some time shortly after that meeting.
On 16 May 2016, Michael Crouch sent an email to Mr Fairlie, copied to Nicholas Crouch, in which he requested that Mr Fairlie meet with his son because his son was “thinking of making an investment in a business as a part-owner”. Michael Crouch’s email also stated that he had told his son that Mr Fairlie was “not a financial advisor, but would rather give information on other aspects of such an investment.” A meeting was arranged for 18 May 2016.
On 17 May 2016, Nicholas Crouch emailed Mr Fairlie, explaining that his “potential business partner Brett has offered to join me tomorrow to answer any questions that I might not have the answer to”, and asking whether that would be useful. Mr Fairlie responded that that was “fine”.
The meeting occurred at the Tregloans offices on 18 May 2016. It lasted a bit less than an hour. In addition to the Crouches and Mr Fairlie, Mr Viney also attended the meeting. There was conflicting evidence as to whether Mr Mitchell attended this meeting, and as to some aspects of the discussion that occurred at the meeting. On the defence case, this was the second occasion upon which Mr Viney disclosed the availability and use of alcohol rebates.[4] On the plaintiffs’ case, this topic was not discussed. I have set out the evidence and my findings in relation to this meeting later in these reasons. In short, I have preferred the evidence of the Crouches and Mr Fairlie over that of Mr Viney, and have found that the availability and use of rebates were not discussed at this meeting.
[4] The first being in his discussions with Nicholas Crouch in Thailand, referred to earlier.
The following day, 19 May 2016, Nicholas Crouch emailed Mr Fairlie requesting a further meeting with him and his father, and attaching a soft copy of the Projections Spreadsheet and McGees brochure that he had earlier received by email from Mr Viney. A meeting was subsequently arranged for 27 May 2016.
Advice from Mr Fairlie
A second meeting at the Tregloans offices occurred on 27 May 2016. It lasted about an hour. It was attended by Mr Fairlie, Nicholas Crouch and Michael Crouch. Both Nicholas Crouch and Michael Crouch gave evidence, which I accept, that during the course of this second meeting, Mr Fairlie said words to the effect that the Windmill Hotel looked like a reasonable or sound investment. Mr Fairlie explained that based on the current performance of the business, but with the potential for growth in gaming, bar and food revenue, it seemed like a good opportunity; that there were also a lot of costs incurred by the current owners that could be reduced or eliminated.
Nicholas Crouch was not sure what work Mr Fairlie had done in order to be in a position to give this advice. He had not himself undertaken any analysis of the projections in order to determine their reasonableness, because he did not have the knowledge or experience to do so. He was not sure the extent to which Mr Fairlie had undertaken any such analysis. While they had in general terms asked Mr Fairlie to “have a look at the figures” there was nothing more formal in terms of a request for advice. He understood that the advice given was in the nature of Mr Fairlie’s “impression that it was a good investment”.
This advice from Mr Fairlie was consistent with Nicholas Crouch’s own reasons for thinking it was a good investment; namely, that there was room to cut costs and grow the revenue, and that Mr Viney and Mr Mitchell were ideally placed to achieve those outcomes given their experience.
Michael Crouch said in his evidence that he was really just asking Mr Fairlie for a “top-level recommendation” on what he thought about the investment. Mr Fairlie did not say he had checked the cash flows, or that he had done his own cash flow projections. While Michael Crouch believed he saw the Projections Spreadsheet himself at some point, he could not recall when he received it, or looking at it in detail. He reviewed it in only a cursory way. He was not an accountant and so was relying upon Mr Fairlie in that respect.
Mr Fairlie’s evidence, which I accept, was that he did not understand that he had been instructed to advise in any formal sense on whether purchasing the Windmill Hotel was a good investment. Rather, he understood that the Crouches would be making their own decision, but that they would appreciate discussing the opportunity with him and receiving his input. He said that he did not undertake any independent analysis but rather accepted the figures that had been presented (particularly the cash flow projections). Based on these figures, there appeared to him to be an opportunity to make some money. He agreed that he said something along the lines that it appeared to be a reasonable investment. He did not put his view in writing, or otherwise take any notes of his meetings in relation to the Windmill Hotel.
There was no reference to rebates at this meeting on 27 May 2016. Mr Fairlie acknowledged that in expressing the view he did, it was based upon the projections that included $0 for rebates. While it was not clear on the evidence that he in fact noticed this line item, he said that he would have regarded it as an appropriately conservative way of presenting the figures because supplier rebates would not be guaranteed revenue. Whilst aware that rebates were sometimes available in the industry, he did not think they should necessarily be budgeted for. He thought it looked like a reasonable investment, on the figures as presented, even without rebates.
A meeting at Stone’s Throw
In early June 2016, there was a meeting at Stone’s Throw attended by each of Michael Crouch, Nicholas Crouch, Mr Viney and Mr Mitchell. The evidence as to the discussions at this meeting was limited. But, as Mr Viney accepted, there was no discussion of, or reference to, the availability or use of rebates on that occasion.
The decision of the Crouches to invest
By 19 June 2016, both Nicholas Crouch and Michael Crouch had agreed with Mr Viney that they would invest in the purchase of the Windmill Hotel, with each making a contribution of about $175,000 and having a 25 per cent interest.
As Nicholas Crouch did not have the funds to invest on his own, he had arranged for his father to fund his share of the investment. Both Nicholas Crouch and Michael Crouch understood that the money from Michael Crouch to fund his son’s share of the investment was a gift rather than a loan. It was not something they discussed, but because they both knew that Nicholas Crouch had no capacity to repay the money at that point, they both viewed it as a gift. There was no discussion or suggestion to the effect that it would be repaid in the future.
The proposed total investment of $350,000 was a significant investment for Michael Crouch. It required him to sell “the lion’s share” of his portfolio of shares, and hence to forego the fully-franked dividend income from these shares.
Michael Crouch’s decision to invest, and the circumstances of it, were set out in his email to Mr Fairlie dated 19 June 2016:
Hi Michael
Nick and I have both met with Brett in the last few days, and I have decided to also invest in the Windmill opportunity.
As I mentioned last time we met, one of the planned investors pulled out, and I was uncomfortable that Nick invest with an unknown partner.
It seemed ideal that I come in to replace that investor.
This will be for the same amount as Nick ($175K), and my share will be held separately to Nick’s.
I would assume this would be best placed in the Michael Crouch Family Trust, but would like your advice on whether you think so also.
If so, could you tell me if there is anything I need to do prior to finalising the deal?
Many thanks. Am happy to come to your offices at short notice if you feel there are things to discuss or documents to sign.
Best wishes
Michael
Nicholas Crouch leaves for Europe
On 4 July 2016, Nicholas Crouch departed on a trip to Europe that he had planned some time earlier. He did not return to Australia until 17 October 2016.
Prior to his departure Nicholas Crouch had arranged for his father to have a power of attorney in relation to his affairs. Although he had decided to, and was keen to, invest in the Windmill Hotel, he gave the power of attorney to his father on the understanding that he was content for his father to make the final decision about the investment. His father had the authority to decide not to invest if he decided it was not in their interests to do so. While he was away, Nicholas Crouch remained in email contact with his father, but was content to leave completion of the arrangements in relation to the purchase of the Windmill Hotel to his father.
Michael Crouch knew that his son was content for him to make any decision in relation to the proposed investment that he thought was in their best interests, including not investing. He considered this appropriate given that he was ultimately funding the investment of both of them.
By the time Nicholas Crouch returned to Australia on 17 October 2017, the paperwork in relation to the acquisition had been completed.
The purchase of the Windmill Hotel
During May and June 2016, the solicitors for Mr Viney and Mr Mitchell, Jones Harley Toole (and in particular, Mr Fisher), were continuing to negotiate the terms of the contract for the purchase of the Windmill Hotel.
It is apparent from several of the email communications between Mr Viney and Mr Mitchell and their solicitors, that their instructions were that they were not prepared to take over any of the supply agreements, particularly beer supply agreements, that the vendor had in place. This is consistent with, and corroborative of, the intention of Mr Viney and Mr Mitchell to enter into supply agreements of their own with a view to obtaining rebates that would be used to assist in funding their share of the investment in the purchase of the Windmill Hotel.
Neither of the Crouches were privy to these communications in relation to the proposed terms of the agreement to purchase the Windmill Hotel.
On 1 July 2016, Mr Viney signed the contract for the purchase of the Windmill Hotel. On the same day, he forwarded a copy of the contract to Stephen Pullen of the National Australia Bank Limited, stating:
Hi mate ..
Sale contract for windmill. Can we look at 60% lend paid back to 55% in over 1st 12 months?
If needs be to cut O/D to 50K.
With nicks dad’s assets it might work.
Cheers.
Also on 1 July 2016, Mr Mitchell sent an email to the Crouches, which in turn attached an email from Mr Warner to Mr Viney and Mr Mitchell setting out the proposed structure for the purchase of the Windmill Hotel; namely, that a corporate entity would act as trustee for the Windmill Hotel Unit Trust, with the four investors to be directors of the corporate trustee, and to each have a 25 per cent shareholding and unitholding.
On 4 July 2016, Mr Mitchell emailed Michael Crouch informing him of the bank details for the $60,000 deposit payable on the acquisition of the Windmill Hotel, and requesting that he pay $30,000 by close of business that day. The deposit was paid that day.
By 5 July 2016, Mr Warner had prepared the paperwork necessary for the incorporation of WHI, which Michael Crouch completed and returned to Mr Warner the same day. WHI was incorporated the following day.
Over the subsequent couple of months, Mr Viney and Mr Mitchell continued to progress the paperwork necessary to give effect to the purchase of the Windmill Hotel, with the assistance of Mr Warner and Mr Fisher.
On 27 September 2016, Michael Crouch met with Mr Viney, Mr Mitchell and Mr Fisher at the Saracens Head. It was an informal meeting to discuss the paperwork that was being prepared. The discussion included reference by Mr Fisher to the inclusion of a clause in the contemplated agreement between the investors that would provide for Mr Viney and Mr Mitchell to be responsible for the management of the Windmill Hotel. Michael Crouch thought this was a logical inclusion given their experience; he was content to be a “hands-off” investor.
In a conversation or conversations at around this time, and probably also during the course of this meeting at the Saracens Head, Michael Crouch said words to the effect that Mr Viney and Mr Mitchell should be paid for their work in managing the hotel business; that he did not expect them to work for nothing; and that all contributions by investors would be equal.

On 30 September 2016, Mr Fisher sent the four investors an email that referred to the meeting at Saracens Head, and the proposed insertion of a clause stating that Mr Viney and Mr Mitchell would manage the hotel (being special condition 31 in the draft Unitholder and Shareholder Agreement (“the Unitholder Agreement”) attached to the email). Special condition 31 was the last term in the draft Unitholder Agreement and stated:
Special Condition – Management
The parties agree that full management of the business will be undertaken by Brett Viney, Matthew Mitchell, and/or their Unitholder entities …
The email also included a recommendation by Mr Fisher that a written management agreement be put in place that would deal with the commercial details such as the scope of duties and remuneration for services provided. Despite this, no such agreement was ever drafted or executed.
Michael Crouch had not had any involvement in the preparation of the Unitholder Agreement other than his participation in the discussion at the 27 September 2016 meeting at Saracens Head. Upon receiving a draft of it attached to this email, he read through the agreement.
By 11 October 2016, the Unitholder Agreement was executed by or on behalf of all four investors and their unitholding entities.[5] Michael Crouch signed both on his own behalf (as trustee of his family trust), and on behalf of Nicholas Crouch’s unitholder entity, Alini Pty Ltd (as trustee of Nicholas Crouch’s family trust), pursuant to the power of attorney mentioned earlier. Mr Viney signed on behalf of Runonmanus (as trustee of the Brett Viney Family Trust No 2), and Mr Mitchell signed on behalf of George Watts Investments (as trustee of the George Watts Trust No 2).
[5] The evidence suggests the Unitholder Agreement was signed by Michael Crouch on 30 September 2016, although the plead case (admitted in the defence) is that this occurred on 11 October 2016.
Nicholas Crouch was not able to recall whether he saw or read the Unitholder Agreement, or even discussed it with his father, prior to it being executed. I am satisfied that even if he did consider it before it was executed, he did not do so in any detail. The first time he looked at it closely was in late 2017 (see below) when he was beginning to become concerned about the finances of the Windmill Hotel business.
On 13 October 2016, settlement of the purchase of the Windmill Hotel occurred. The purchase price was $1,400,000. Of this amount, $770,000 was borrowed from the National Australia Bank, for which each of the four investors gave a personal guarantee. Each of the Crouches caused their family trusts to contribute and subscribe for units in the Windmill Hotel Unit Trust to the value of their 25 per cent share of the equity required at settlement (being $156,654.57 each, or $313,309.14 in total).
The alcohol rebate agreements
Between July and October 2016, Mr Viney signed agreements with three alcohol suppliers for rebates referable to the sale of alcohol by the Windmill Hotel. In particular, he signed an agreement with CUB dated 5 July 2016 (“the CUB Agreement”); an agreement with Asahi dated 14 July 2016 (“the Asahi Agreement”); and an agreement with Coopers dated 12 October 2016 (“the Coopers Agreement”).
Mr Mitchell’s evidence, which I accept, was that he had little role to play in organising the various rebate agreements; that he left this to Mr Viney. However, he saw each of the agreements after they had been executed, and from his discussions with Mr Viney was aware that the rebate agreements were being organised by Mr Viney, that they would be executed in the name of BMG, and that they would be guaranteed by Mr Viney.
These agreements each provided for a prepaid or forward rebate, not to the Windmill Hotel, but to BMG. The amounts of the forward rebates referable to sales by the Windmill Hotel were $160,000 plus GST under the CUB Agreement, $30,000 plus GST under the Asahi Agreement and $21,375 plus GST under the Coopers Agreement. That gave a total of $211,375 plus GST in forward rebates, being slightly in excess of the $200,000 anticipated in the “Assumptions” section of the Projections Spreadsheet.
Turning to the terms of the individual agreements, the CUB Agreement was executed by Mr Rusling for CUB and Mr Viney for BMG. The document states that it was executed by Mr Rusling on 22 July 2016 and by Mr Viney on 5 July 2016. While Mr Viney was equivocal in his evidence, I am satisfied that he in fact signed it on about 22 July 2016 but back-dated his signature to 5 July 2016.
The CUB Agreement named BMG as the “Customer”, with Mr Viney as the Customer contact. The “venue” to which it related was the Windmill Hotel. It covered the period from 1 August 2016 to 31 July 2022 (or until the Customer purchased the minimum volume commitment from CUB, whichever was later). It provided for a “Prepaid Rebate Payment” of $160,000, upon execution of the agreement, as an advance of the volume rebate provided for in the agreement. The volume rebate payable by CUB to the Customer was to accrue at the rate of 154 cents per litre on draught beer and cider purchased by the Customer from CUB during the term of the agreement, with the Customer being obliged to repay any portion of the prepayment not accrued during that term. The agreement provided that the Customer must purchase a minimum volume of 186,000 litres of beer and cider during its term (referred to as the “minimum volume commitment”). Annexed to the agreement was a deed of guarantee and indemnity signed by Mr Viney and dated 5 July 2016.
The CUB Agreement also imposed various obligations upon the Customer in respect of the venue (that is, the Windmill Hotel). They included obligations to the effect that CUB draught beer and cider would be the “First Pour Beer” and “First Pour Cider” at the venue; that CUB would receive a specified minimum (83 per cent) tap representation at the venue; that those taps would be in positions of prominence to be agreed between the parties; that the venue would not sell draught beer or cider from CUB’s competitor Lion; and that CUB would have exclusivity for its products at all functions and special events at the venue unless otherwise agreed between the parties.
BMG sent CUB an invoice for $160,000 plus GST on account of “Upfront rebate – beer agreement for Windmill Hotel”. Mr Viney arranged for the invoice to be sent. It was dated 5 July 2016, but I am satisfied it was prepared later in the month and back-dated upon the instruction of Mr Viney.
The Asahi Agreement also named BMG as the counterparty to the agreement, with Mr Viney as the contact. The agreement was signed by Darren White for Asahi (dated 25 July 2016) and Mr Viney for BMG (dated 14 July 2016). The agreement nominated the premises to which it related as the Windmill Hotel, and covered the period from 4 July 2016 to the later of 4 July 2020 and the date by which the minimum volume specified under the agreement was achieved. The agreement specified minimum volumes of 31,252 litres of draught beer and cider, as well as quantities of post mix syrup and non-alcoholic beverages. The agreement provided for a “signing fee” of $30,000 within 30 business days of execution of the agreement and upon receipt of a tax invoice. The Asahi Agreement also imposed some obligations in terms of tap numbers and positions, and the ranging and exclusivity of Asahi products at the Windmill Hotel.
Mr Viney arranged for BMG to send Asahi an invoice for “Beverage supply agreement Windmill Hotel” dated 6 July 2016 and in the amount of $30,000 plus GST.
The Coopers Agreement was also with BMG. It was signed by Geoff Pevreall for Coopers and Mr Viney for BMG, and dated 12 October 2016. Unlike the CUB and Asahi rebate agreements, it related to more than one venue or premises. It provided for an “upfront payment” of $85,500 plus GST in return for Coopers having certain specified “beer dispensing rights” at Saracens Head, Pirie & Co, Stone’s Throw, the Archer Hotel and the Windmill Hotel. Of this total, $21,375 was referrable to the Windmill Hotel. The agreement provided for a minimum literage of 95,000 litres over three years. It also imposed some obligations in terms of taps and product ranging across the various venues to which it related.
Mr Viney arranged for an invoice dated 12 October 2016 to be sent by BMG to Coopers for the sum of $85,500 plus GST on account of the rebate payable under the Coopers Agreement.
The Asahi rebate was paid to BMG on about 29 July 2016, the CUB rebate on about 24 August 2016, and the Coopers rebate on about 9 November 2016.
In terms of the timing of negotiations leading to the rebate agreements, the evidence includes email communications between Mr Viney and Mr Rusling (of CUB) in relation to the Windmill Hotel as early as 10 May 2016.
It is apparent from documentation produced by Asahi that discussions and communications in relation to the Asahi Agreement had commenced by no later than 18 May 2016. That documentation included an email exchange between Darren White (the Asahi General Manager Sales for SA/NT) and Mr Mitchell on 18 May 2016 (being the very day of the meeting at Mr Fairlie’s offices) that referred to discussions that had occurred between Mr White and Mr Viney, and proposed a payment of “$30k upfront” for two beer taps at the Windmill Hotel.
Indeed, it can be readily inferred, and I find, that discussions and communications in respect of all three of the rebate agreements commenced prior to the 1 July 2016 execution of the contract to purchase the Windmill Hotel. Certainly agreements had been reached, and invoices rendered, in the case of all three breweries prior to the 13 October 2016 settlement of the purchase of the Windmill Hotel.
Neither Nicholas Crouch nor Michael Crouch were informed by Mr Viney or Mr Mitchell of the existence of any of these three rebate agreements, let alone the negotiations that preceded them, prior to their execution, or indeed prior to settlement of the purchase of the Windmill Hotel.
The evidence of Mr Rusling
Mr Rusling was the account manager from CUB who negotiated and executed the CUB Agreement with BMG (through Mr Viney and Mr Mitchell) in 2016. His evidence, which I accept, was to the following effect.
CUB, through Mr Rusling, had a pre-existing relationship with BMG, Mr Viney and Mr Mitchell. They were treated by CUB as a Tier A, or Tier 1, account because they owned or controlled multiple venues and were a group with which CUB was interested in having a long-term relationship. This relationship and status was relevant to the rate of the rebate CUB was prepared to agree (here, 154 cents per litre), and indeed prepaid or forward rebates were generally only available to groups with at least two or three venues.
When asked what level of rebate the Windmill Hotel might have been able to secure from CUB on a stand-alone basis (that is, without any connection with BMG), Mr Rusling said it would depend on various factors, including how the negotiations played out. He said that while it was difficult to pinpoint a number, he thought a rebate of between about 55 and 70 cents per litre might have been agreed. The rebate would likely have been paid on a monthly basis as it was earned, rather than upfront as a forward rebate.
However, Mr Rusling also acknowledged that he would not have been concerned about the name or entity in which the rebate agreement was executed. Thus, even if the agreement was in the name of the Windmill Hotel (or the entity through which it was held), if the agreement was arranged through Mr Viney and Mr Mitchell, and hence was in substance an arrangement that had the support or backing of a Tier A or Tier 1 customer, then the same deal as was made available to BMG would have been available to the Windmill Hotel in its own name.
Events following settlement of the purchase of the Windmill Hotel
After returning from Europe in late October 2016, Nicholas Crouch commenced working at the Windmill Hotel, assisting the general manager of the hotel. In about March 2017, the general manager left the business, and Nicholas Crouch took over that role.
While not the subject of any formal contract with WHI, the terms of Nicholas Crouch’s role were that he would work 50 hours a week on a salary of $65,000 per annum. His role included responsibility for hiring staff, dealing with suppliers, assisting with management, looking after the gaming machines and generally attending to the proper administration of the hotel’s business.
So far as Nicholas Crouch could tell, the business of the Windmill Hotel was steady. It had regular patronage, including from several sporting clubs and a number of local residents. The hotel business involved pub meals, beers on tap, cider on tap and a range of the other drinks usually available at equivalent venues. The pub also had a gaming room, sports betting facilities and occasionally live music.
Nicholas Crouch dealt directly with the breweries that supplied alcohol to the Windmill Hotel. There were three suppliers of beer, namely CUB (which supplied nine taps to the Windmill Hotel, with brands including Carlton Draught, VB, Stella Artois, Matilda Bay and Bulmers Cider), Coopers (which supplied two taps) and Asahi (which also supplied two taps). In addition to beer, Asahi also supplied soft drinks and mixers. Other drinks, including juices and mixed bottles, were purchased online through Australian Liquor Merchants. Wine was also purchased from various wineries.
Nicholas Crouch was responsible for ordering from the breweries. CUB had an ordering system that involved the use of an online portal, and was paid by direct debit from the Windmill Hotel’s trading bank account operated with the NAB. In relation to Coopers, Nicholas Crouch would telephone one of their sales representatives each week, and discuss orders and replacements. And in relation to Asahi, Nicholas Crouch would either telephone or text message the sales representative to place orders. Essentially, Nicholas Crouch would arrange for the requisite number of kegs of beer to be delivered each week from the breweries to ensure they had enough stock on hand.
Nicholas Crouch was also responsible for handling and banking the takings of the Windmill Hotel. He would collect the cash at the end of each day from the tills in the bars, and from the gaming machines, and arrange for it be banked. He would arrange for the preparation of summary sheets of the takings each day, which would then be reconciled against the banking records and every few days taken to the ‘head office’ of BMG at Stone’s Throw.
Throughout his period as the general manager of the Windmill Hotel, Nicholas Crouch generally spoke to Mr Viney and Mr Mitchell about two or three times a week, usually by telephone. It was rare for them to visit the Windmill Hotel.
As mentioned, Nicholas Crouch believed that the business was performing steadily. Although he had a good understanding of the takings of the Windmill Hotel, and access to the hotel’s bank accounts, he had little access to, or understanding of, the wider finances of the business. Matters such as management of the payroll, the payment of superannuation and the payment of some creditors were handled by staff employed by BMG at its head office, and in particular Ms Hemmerling. While Nicholas Crouch was able to see the movements in and out of the Windmill Hotel’s bank accounts, he often did not have the context of what the payments were for. That said, he was aware that at least some amounts were being deducted from the Windmill Hotel bank accounts to meet some expenses incurred by BMG, including the wages of Ms Hemmerling. However, because the amounts were modest (a few hundred dollars at a time) he was not concerned about this.
While working as the general manager of the Windmill Hotel, Nicholas Crouch became aware that there was some form of agreement between the Windmill Hotel and CUB that meant that the business would accrue rebates for beer sold. He assumed, but did not know, that there may have been similar arrangements with Coopers and Asahi. His understanding was that the breweries would offer a rebate, either by way of a discount or refund, linked to the volume of beer and cider sales. But he did not have any precise understanding as to whether, or if so what, formal arrangements existed in relation to those rebates. He also understood or assumed that any discounts or rebates would be paid as they were earned. The first he knew of the potential for forward rebates was when he made enquiries in late 2017, as described later in these reasons.
Nicholas Crouch was also aware from his dealings with the sales representatives from the various breweries that the Windmill Hotel was receiving some discounts on account of the buying power of BMG as a whole. He gave as an example a group-wide discount on Peroni beer when all of the group’s hotels made it available on tap.
As for Michael Crouch, in the period following settlement of the purchase of the Windmill Hotel, he had very limited involvement with its operations. He was involved in some communications in late 2016 relating to the acquisition of some additional gaming machines. But he was otherwise content to leave the running of the hotel, and the business more generally, to the others. For a number of months there were no directors’ meetings, either formal or informal. Michael Crouch understood from discussions with his son that he continued to be involved in the management of the hotel, in the sense of running its day-to-day operations. He was content to be a “hands off” investor and rely upon Mr Viney and Mr Mitchell to attend to the management of the business more generally. He considered this appropriate given their greater experience and expertise in this area.
For a number of months, Michael Crouch had no information or understanding as to the financial performance of the Windmill Hotel. He knew that Nicholas Crouch had password access to the Windmill Hotel’s Bank accounts, but he did not have, or seek access himself. Michael Crouch did not at that point in time know of any arrangements in relation to alcohol rebates.
Attempts to obtain information about the performance of the Windmill Hotel
From around May 2017, Michael Crouch began to make attempts to meet with his fellow directors and investors to discuss the progress of the business.
For example, by email dated 23 May 2017, Michael Crouch wrote to Mr Viney, Mr Mitchell and Nicholas Crouch in the following terms:
Hi Matt and Brett and Nick
Can I suggest we meet up for a casual meal somewhere on the early evening of 1^st June ?
Will be great to catch up, and also to hear on how things are travelling at the Windmill from a financial point of view.
Happy for you to suggest where we go for a bite.
Cheers
Michael
At some point following this email, the four directors had a meal together at Stone’s Throw. It was an informal occasion rather than anything resembling a meeting. There was some general discussion about the Windmill Hotel, with Mr Viney and Mr Mitchell conveying the impression that the business was doing well. But there was no discussion of specifics in relation to the financial performance of the hotel.
By August 2017, Michael Crouch was keen to obtain information about the financial performance of the Windmill Hotel. In an email dated 26 August 2017 sent to the three other directors, he asked Mr Viney and Mr Mitchell “when the accountants will have the final figures for last year to look at? May be a good excuse to catch up again!”
Nothing came of this request, and it was repeated in an email sent to the three other directors dated 4 September 2017. That email stated:
Hi Matt and Brett
Just following up.
Are you guys free in the next week or two for a quick evening meal (eg Archer) to summarise the year’s outcome at the Windmill?
It would be great if the EOY accounts could be emailed beforehand.
Cheers
Michael

The four directors had another meal together in about mid-October 2017. While Michael Crouch’s evidence was that they met at the Archer, it appears more likely on the evidence that it was at the Colonist.[6] In any event, it was again an informal occasion, and there was only some very general discussion about the Windmill Hotel. Despite Michael Crouch expressing his interest in understanding how the business was performing, no specifics were provided in relation to the financial performance of the hotel.
[6] Nicholas Crouch and Mr Viney said it was at the Colonist, although it may be that there was some confusion between this occasion and an occasion when they caught up for a meal together at the Colonist in late 2016. It may also be that Mr Mitchell attended the late 2016 occasion but not the one in October 2016.
Accounts for the year ended 30 June 2017
By email dated 28 November 2017, Mr Warner sent Mr Viney and Mr Mitchell a copy of the “final” version of the 2017 financial statements and income tax return for the Windmill Hotel Unit Trust. The covering email listed three issues “to note and take care on”. One of these was the $65,000 alcohol rebate for the Windmill Hotel that had been recorded in the profit and loss statement, apparently reflecting a portion of the total of approximately $211,000 in forward rebates attributable to alcohol sales through that hotel. The email noted that some of the $65,000 remained unpaid and was reflected in the balance of $26,530 shown in the account reflecting the loan from Windmill to BMG. The email concluded with Mr Warner stating that Nicholas and Michael Crouch were keen to review the accounts, and thus asking Mr Viney and Mr Mitchell to review them over the next 24 hours and to let him know whether they were happy to forward them to the other owners.
Mr Viney and Mr Mitchell did not express any concerns to Mr Warner, about the rebates or otherwise, and by email dated 29 November 2017 Mr Warner provided Nicholas and Michael Crouch with a copy of the 2017 financial statements and income tax return for the Windmill Hotel Unit Trust.
The profit and loss statement provided by Mr Warner recorded that the Windmill Hotel had made a loss for the relevant period in the amount of $93,591. As Nicholas and Michael Crouch noticed at the time, the profit and loss statement included the following items:
·    an expense item “Consultancy fees (Note 6)” in the amount of $85,703, which the notes to the accounts revealed included $83,127 described as “Consultancy fees – The Bloody Mary Group”; and
·    an expense item “Management and administration fees – BMG” in the amount of $29,795; and
·    an income item “Alcohol rebates” in the amount of $65,000.
Neither of the Crouches had been aware of any arrangement or agreement whereby consultancy fees, or any other form of management or administration fees, were to be paid by the Windmill Hotel Unit Trust to BMG. They had not ever approved such fees, in the amounts recorded or at all. That said, both of them did understand that some of the management and administration work necessary for the running of the business was being carried out by BMG, and had considered it appropriate that that work be fairly remunerated. And, as mentioned earlier, Nicholas Crouch had been aware that at least some payments had been made from the Windmill Hotel bank account to BMG (including, for example, to pay Ms Hemmerling’s wages). And Michael Crouch had agreed with Mr Viney and Mr Mitchell that they should be paid for their time in managing the business.
Turning to the item for alcohol rebates, on Michael Crouch’s evidence, this was the first occasion upon which it had been disclosed to him, or had otherwise come to his attention, that there were any alcohol rebates associated with the Windmill Hotel.
As mentioned earlier, Nicholas Crouch had become aware through his role as general manager that there was some form of agreement between the Windmill Hotel and CUB that meant that the business would accrue rebates for beer sold; and that there may have been similar arrangements with Coopers and Asahi. But he did not know anything about the form or detail of any rebate agreements. And when he saw the item of $65,000, he was not sure what it meant. While he saw that it appeared as a line in the profit and loss statement, he was not aware of any such amount having come into any bank account associated with the Windmill Hotel.
Shortly after receipt of the profit and loss statement on 29 November 2017, Nicholas Crouch commenced making his own enquiries directly with breweries about the rebates. As a result, between 1 December 2017 and 11 December 2017, he received emails from CUB, Asahi and Coopers attaching their respective rebate agreements with BMG in relation to the supply of alcohol to the Windmill Hotel.
Having received the rebate agreements, Nicholas Crouch read their terms. This was the first time that he learned the amounts of the rebates provided by the breweries. He also noticed that the customer on the agreements was BMG rather than the Windmill Hotel, but he did not at the time appreciate the significance of this. While he had not been aware of any money coming into the bank accounts of the Windmill Hotel on account of rebates, he did not understand what, if any, rebates had been received and how they had been paid to, or accounted for by, the Windmill Hotel. While the terms of the agreements left him feeling a bit uneasy, and wanting an explanation from Mr Viney or Mr Mitchell, he was not at that stage alarmed or overly concerned. He expected there would be an honest and reasonable explanation. He planned to raise the issue at the meeting that he understood would be occurring later in December 2017.
Michael Crouch did not know what the item for alcohol rebates in the profit and loss statement represented. However, some time after receiving the 29 November 2017 email from Mr Warner, he spoke with Nicholas Crouch, who told him that he had made enquiries and had received copies of the rebate agreements; that they appeared to provide for payments to BMG; that he was unsure about how or whether those payments had come into the Windmill Hotel; and that he intended asking Mr Viney and Mr Mitchell about the rebates when they next met.
Michael Crouch did not fully understand the rebate agreements, and wanted an explanation of them. But, like his son, he assumed there would be an honest and reasonable explanation. He did not ask for a copy of the rebate agreements as his son seemed to be across the issues, and he anticipated receiving an explanation from Mr Viney, Mr Mitchell or Mr Warner when they next met.
On 19 December 2017, there was a meeting between the four investors and Mr Warner at the offices of Wakeful Partners to discuss the 2017 financials. During the course of the meeting, they discussed the financial statements, although they were not formally adopted or signed. Mr Warner explained that there would be no need to file a tax return because WHI had made a loss for the year ended 30 June 2017.
During the course of that meeting, the Crouches raised concerns, and sought explanations, about the fees paid to BMG and the rebate agreements.
On the topic of the fees paid to BMG, Nicholas Crouch said that they did not know about these amounts, and did not understand the amounts to have been authorised. Mr Viney responded to the effect that the payments were to meet office expenses, but that they would not be charging those fees anymore because the pub could not afford it.
On the topic of the alcohol rebates, Nicholas Crouch had copies of the rebate agreements with him at the meeting, and said words to the effect that he and his father needed an explanation of the $65,000 in alcohol rebates; whether anything had been paid to the Windmill Hotel under these rebate agreements; and if so where that money had gone. In response, Mr Viney said words to the effect that “the rebate agreements relate to the wider BMG group”. He also said words to the effect that he was not sure how Ms Hemmerling had entered it into MYOB, but that the $65,000 was the amount of the rebates which were attributable to the Windmill Hotel. He added words to the effect that due to BMG’s extra purchasing power the amount the hotel received in the form of rebates was better than it would otherwise be if it was not part of a group. When Nicholas Crouch said that he could not see where the $65,000 had materialised, he did not receive any response or explanation. I do not accept that Mr Viney said anything at this meeting to the effect that the reference to $65,000 for rebates in the accounts was an accounting error. While that view was much later communicated by the solicitors for the defendants to the solicitors for the plaintiffs (see below), neither Mr Viney nor Mr Mitchell said anything to this effect in the presence of Mr Warner at the 19 December 2017 meeting.
At the conclusion of the meeting, the Crouches remained unclear about the consultancy fees and the rebates. While they were now somewhat concerned about these items in the accounts, they still expected that proper explanations would be provided.
It was proposed that there be a further meeting in mid-January 2018. By email dated 22 December 2017, Nicholas Crouch informed Mr Warner that at the foreshadowed meeting, he would be “looking to get some clarity” on some issues that he then listed. The list of issues included reference to the approximately $211,000 referred to in the rebate agreements ($160,000 for CUB, $30,000 for Asahi and $21,375 for Coopers).
Nicholas Crouch remained unclear about how the rebates had been paid, how they had been dealt with between BMG and the WHI, and why he had not seen the benefit of them come into Windmill Hotel’s bank accounts.
Michael Crouch also remained unclear. He did not have any interaction with Mr Viney, Mr Mitchell or Mr Warner following the meeting. He became very busy in his own scientific research business, but was also awaiting an opportunity at the foreshadowed January 2018 meeting to seek explanations for the various matters that were concerning him.
Another rebate agreement
On 6 December 2017, Mr Viney signed a “Business Support and Supply Agreement” with Treasury Wine Estates (“the TWE Agreement”). BMG was named as the Customer, with the agreement expressed to apply across five venues, including the Windmill Hotel. Those venues were listed as Stone’s Throw, the Windmill Hotel, the Archer Hotel, Saracens Head and Pirie & Co. The agreement had a commencement date of 1 November 2017 and an expiry date of 31 October 2019 (or until the Customer purchases 4,000 nine litre equivalent of Wine Product from Treasury Wine Estates).
The TWE Agreement included provision for the payment of a rebate of $100,000 (excluding GST) (being $25 per nine litre equivalent to a maximum of $100,000 for the term of the agreement) upon execution of the agreement. It also provided that the Customer must purchase a minimum of 4,000 nine litre equivalent of wine from Treasury Wine Estates during the term of the agreement.
Mr Viney acknowledged in his evidence that despite having executed this TWE Agreement only a few days prior to his 19 December 2017 meeting with the Crouches, Mr Mitchell and Mr Warner, he did not mention this agreement to the Crouches during their discussion about rebates at that meeting. Indeed, despite some initial equivocation in his evidence, he ultimately acknowledged that he never told either of the Crouches about this agreement. They only became aware of its existence during these proceedings.
The events of early 2018
In January 2018, Nicholas Crouch obtained full time work as an associate to a Judge of the District Court. He ceased his role as the general manager of the Windmill Hotel, and thereafter only worked a few occasional shifts.
On 16 January 2018, Mr Viney emailed the Crouches and Mr Mitchell, informing them that they urgently needed to put some cash into the Windmill Hotel account. He suggested about $10,000 each to enable the business to get by, and added that they could only hope the business turned around.
At some point following this email, the foreshadowed January 2018 meeting, which had by then been scheduled for 24 January 2018, was cancelled.
However, by email dated 24 January 2018, Mr Warner sent an email to the four investors enclosing a copy of the draft profit and loss statement for the six months ended 31 December 2017. It showed that the Windmill Hotel had suffered a loss of $66,431 for that period. It also included items of $41,352 for “Consultancy Fees – BMG” and $21,792 for “Management & Administration Fees”.
Over the following months, Michael Crouch became increasingly concerned about the performance of the business, and his inability to get information about the same from Mr Viney and Mr Mitchell. He obtained a copy of the rebate agreements with CUB, Asahi and Coopers from his son, and scanned them over for himself. While he was becoming sceptical about how frank Mr Viney and Mr Mitchell were being with him and his son, he was still hopeful that explanations for his concerns would be forthcoming, and that the Windmill Hotel would ultimately receive whatever benefit it was entitled to from the rebate agreements.
Decision to sell the Windmill Hotel
In an email dated 4 June 2018 from Mr Viney to the Crouches, Mr Viney said that in order to get through some cashflow shortages he and Mr Mitchell had contributed about $50,000 over the preceding six months. He asked whether the Crouches were in a position to reimburse them $25,000, or alternatively to match the $50,000 (which Mr Viney said would allow them to pay the March BAS payment in full and to pay some creditors).
In response, the Crouches sought an opportunity to meet and discuss this request with Mr Viney and Mr Mitchell, together with Mr Warner. Mr Viney responded by emphasising that it was “a matter of urgency as we have to get on top of our next BAS and super.” He added that they were starting to see some consistency in the business, and that it was starting to track in the right direction, but that they could not keep funding the cashflow shortages themselves.
On 6 June 2018, Mr Warner sent an email to the four investors which attached the management accounts for the nine months ended 31 March 2018. Those accounts showed that the business was continuing to generate losses. His covering email noted that the business was behind with the ATO in its BAS payments and with superannuation contributions. It also stated:
Clearly in its current format the business cannot trade out of these arrears positions and thus you will need to make some collective and concerted strategic plans on how to correct or resolve. The business also needs to find a way back to profit to ensure the cash flow bleeding can be stopped.
A meeting was arranged for the investors and Mr Warner in July 2018 to discuss the issues that had been raised in the emails referred to above. Ahead of that meeting, Mr Warner provided a further update to the effect that in order to meet the amounts owing to the ATO and for superannuation, a cash injection of $80,000 would be required.
A meeting with Mr Warner was arranged for 23 July 2018. Mr Viney did not attend, but Mr Mitchell and the Crouches did attend.
During the course of the meeting, Michael Crouch asked why consultancy fees were still being paid to BMG when they had been told at the last meeting that they would not be paid. Mr Mitchell said they were not consultancy fees. Rather, they were payments to reimburse office expenses, and in particular to meet the expense of people working in the office.
After some discussion about the performance of the business, a decision was made that they should put it up for sale. To that end, it was agreed that Mr Mitchell and Mr Viney would approach a broker and discuss the terms on which the business might be put on the market.
Mr Viney subsequently identified Langford’s Hotel Brokers Pty Ltd (“Langford’s”) as suitable for selling the business. While the Crouches ultimately agreed to the engagement of Langford’s, they continued to express concerns about several items in the accounts and the financial information provided to Langford’s.
Over the following weeks, Michael Crouch continued to communicate with Mr Warner and Mr Viney about the need for a contribution to meet the Windmill Hotel’s liabilities, including to the ATO and in respect of superannuation entitlements.
On 9 October 2018, Michael Crouch contributed $20,000, which he expressed as being $10,000 from him, and $10,000 on behalf of his son. On 12 October 2018, he contributed a further $5,300.
At around the same time, Michael Crouch became aware that Mr Warner had ceased to act; that he had been replaced by Barrie Mansom of MC Chartered Accountants as the accountant for Mr Viney, Mr Mitchell and BMG. Mr Warner told him that he had ceased to act because he had not been paid. The Crouches continued to communicate with Mr Mansom about the cash flow difficulties and outstanding liabilities of the business.
Also at around the same time, Michael Crouch was issued with director penalty notices dated 3 and 5 October 2018 for unpaid PAYG withholding and superannuation guarantee charges in connection with the Windmill Hotel, in the amounts of $75,643.30 and $75,226.23 respectively.
On 15 October 2018, the Crouches sought legal advice from CCK Lawyers in relation to the director penalty notices, and their dealings more generally with Mr Viney and Mr Mitchell in relation to the Windmill Hotel.
On 18 October 2018, CCK Lawyers wrote to Mr Viney, Mr Mitchell and BMG. Over the following days and weeks, correspondence was exchanged between CCK Lawyers and Charlton Rowley, the solicitors for the defendants.
Amongst other things, CCK Lawyers pressed in this correspondence for an explanation of the alcohol rebates. In a letter from Charlton Rowley dated 19 November 2018, they wrote “We are instructed that the $65,000 entry is an accounting error”.
Despite this suggestion (repeated in the oral evidence of Mr Viney and Mr Mitchell) that the $65,000 entry in profit and loss statement for the Windmill Hotel Unit Trust for the period ended 30 June 2017 was a mistake, no steps were taken by Mr Viney or Mr Mitchell to have the accounts corrected or adjusted.
Throughout the last part of 2018, Langford’s continued to try and find a buyer for the Windmill Hotel business. Communications between the parties, including through their solicitors, continued both in relation to the sale of the business and more generally in relation to the various issues and disputes that had arisen between them. The financial difficulties facing the Windmill Hotel continued to escalate.
On 1 March 2019, Michael Crouch was issued with a further director penalty notice for unpaid PAYG withholding in connection with the Windmill Hotel, in the amount of $33,821.
Mr Viney and Mr Mitchell have also been issued with director penalty notices in respect of amounts owning by WHI.
Deficit from the sale proceeds of the Windmill Hotel
The Windmill Hotel was on the market for many months. On or about 1 March 2019, Langford’s obtained an offer (which was not subject to finance) to purchase the Windmill Hotel business for the amount of $975,000 plus stock to be valued.
While this price was significantly less than the $1,400,000 which they had paid for the business in October 2016, Michael Crouch decided the offer should be accepted. He reached this view based upon the parlous financial position of the business, in combination with the exposure that he and his son had as personal guarantors under the facilities provided by the National Australia Bank and of the lease of the premises of the Windmill Hotel.
A contract of sale was eventually signed on 13 March 2019. The sale proceeded to settlement on 13 May 2019. The sale price was $975,000 plus stock.

I accept that the Crouches both saw the opportunity to invest in the purchase of the Windmill Hotel as a good opportunity and were keen to invest. However, this does not gainsay their reliance upon the buying power and equal investors representations, and the absence of any suggestion to them that forward rebates would be used in a manner contrary to these representations. To the contrary, the Crouches’ expectation that they would share equally in the advantages flowing from the involvement of Mr Viney and Mr Mitchell was central to their keenness to invest.
The defendants contest any reliance upon these matters, and the suggestion that this is a “no transaction” case. They do so on the basis that because the financial projections they received contained $0 for rebates, and they were nevertheless advised by Mr Fairlie that it was a reasonable or good investment, it was unrealistic to think that knowledge that forward rebates would flow to BMG would have made any difference to their decision to invest.
As explained earlier in these reasons, it is true that Mr Fairlie provided advice, and the Crouches decided to invest, on the basis of financial projections that did not include any anticipated revenue from rebates. Mr Fairlie said that he regarded this as an appropriately conservative assumption to make. However, in my view, it does not follow from this that the issue of rebates would have been irrelevant to their investment decision. To so conclude would be to fall into the same error as the trial judge in Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3).[45]The significance of the non-disclosure of the planned use of the forward rebates is to be determined not by hypothesising what the Crouches would have done in the absence of any further information about rebates; or by asking whether they would have been prepared to invest even in the absence of any income from rebates. Rather, it requires consideration of what the Crouches would have done had the true position been revealed to them; that is, had they been informed at some point prior to them committing to their investment in the purchase of the Windmill Hotel that Mr Viney and Mr Mitchell planned to use (and indeed by the time the Crouches ultimately invested, had used) their buying power to extract significant forward rebates from breweries on the sale of alcohol through the Windmill Hotel, and to use those rebates (or a substantial portion of them) for their own benefit and to the exclusion of any benefit to the Crouches as co-investors in the Windmill Hotel. In my view, it is only by considering this hypothesis, or counterfactual, that the true nature of Mr Viney’s and Mr Mitchell’s conduct is addressed, and hence the appropriate purpose or context of the causation enquiry addressed.
[45] Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) (2006) 67 NSWLR 341.
It is also my view that under this hypothesis neither of the Crouches would have been prepared to invest with Mr Viney and Mr Mitchell in the purchase of the Windmill Hotel. That is the natural inference to be drawn from the circumstances, but is also supported by the evidence.
As to the evidence, Mr Fairlie acknowledged that he considered that the Windmill Hotel was a reasonable investment even without any income from rebates. However, he made it plain that disclosure of the intended use of the forward rebates by Mr Viney and Mr Mitchell would nevertheless have affected his advice to the Crouches. As he explained under cross-examination on this issue:
Q.If you were told at that meeting on 18 May that – I’m going to ask you to assume some things – if you were told by Brett that Brett and Matt’s company, The Bloody Mary Group, because it operates several hotels, is getting what they call a group rebate and part of that is referable to sales at the Windmill Hotel, but The Bloody Mary Group would keep those funds and the Windmill Hotel wouldn’t receive them, that wouldn’t have change your assessment of whether or not this was a reasonable business opportunity for the Couches to invest in.
A.I think it would have. The rebates, in many industries, is like the icing on the cake. So they should belong to the business that is being carried on, I would have thought. It would have raised concerns in my mind as to why those rebates wouldn’t be going back to the hotel itself.
Q.But it wouldn’t have changed your view on the financial viability of the investment opportunity, because you eventually, on 27 May, when you told the Crouches that it was a reasonable investment opportunity, you did that on the assumption that there would be no rebates coming into the business.
A.Yes, but it still becomes a question of who’s entitled to those rebates and I would have thought that the rebates should belong to the hotel itself.
Nicholas Crouch was also pressed during cross-examination as to whether learning of the intended use of the forward rebates would have made a difference. He was clear that it would have. His evidence to this effect included the following exchange:
Q.If you were told in May 2016 by Brett that; first, BMG was going to retain the forward rebates that it received due to the buying power of the group and; secondly, that the Windmill Hotel would not receive forward rebates, but would benefit from being associated with the group by being offered lower prices of alcohol, that would not have made any difference to you investing in the Windmill Hotel.
A.It would have made a difference because my understanding is that any benefit derived from the rebates - the very payment of the rebates is the benefit to which you're referring. So if the rebates are paid upfront instead of periodically, there's no more benefit. The benefit is being realised at the time the cash is transferred.
Q. That's your understanding now, isn't it, but it wasn't in May 2016.
A.Yeah, that's true, that's correct. Again, when I first learnt of the upfront rebates, it immediately appeared to me to be extremely unfair, considering that the rebates were derived from the purchase of the hotel to which we were 50% responsible. So I have no doubt that if the issue of upfront payments was raised at that stage, I would have had the same impression that it's incredibly unfair, which would have led me to reconsider the purchase of the business.
HIS HONOUR
Q. Why would it have made you reconsider the purchase of the business.
A.Because, in my view, it's money that properly belongs to the hotel. So for it to be essentially syphoned off and not to the benefit of the hotel that's selling the beer, I think that would have come across as unfair and it would have changed my opinion of the fairness or the opinion I have of Brett and Matt, that they were good operators and I had quite a bit of trust in them. I think that affecting something that I consider to be unfair would undermine that.
Later in his evidence, Nicholas Crouch was asked to consider his position if Mr Fairlie had said to him (i) that the payment of the forward rebates to a different entity was common practice in the hotel industry, and (ii) that even without rebate income the investment was a reasonable investment from a financial point of view. I observe that the evidence did not establish any basis for (i), and even (ii) overlooks the qualification Mr Fairlie would have attached to his advice in those circumstances. But even assuming the appropriateness of the hypothesis, Nicholas Crouch’s evidence was that he still would not have invested. He said that even if it was a normal arrangement in the industry, it still raised issues for him in terms of trust and fairness that would have affected his decision.
Michael Crouch’s evidence was to similar effect. When it was put to him that he would have gone ahead with the investment even if he learned of the Rebate Agreements, he disagreed. He said:
I suggest to you I wouldn’t because it comes down to a matter of trust. If you go into an arrangement with co-investors and they are willing to take money out of the business without you knowing about it, I would say it’s not worth getting into bed with them.
He also said his view would be the same even if advised by Mr Fairlie in terms of (i) and (ii) above. He doubted whether Mr Fairlie would give the advice hypothesised in (i) but said that in any event:
I think if I knew that there was revenue going out of the pub that … should have been going into the pub, which I think leads from that, I would have said no.
I bear in mind the limited weight that can be attached to the Crouches’ evidence as to hypothetical matters. However, in my view, their answers are inherently plausible and in my view, reflect their likely responses to learning of the Rebate Agreements. Even putting to one side any pejorative characterisation of the conduct of Mr Viney and Mr Mitchell, their planned use of the forward rebates ran directly contrary to the buying power and equal investor representations, and hence removed or significantly undermined these key features of the investment opportunity from the perspective of both Nicholas and Michael Crouch.
It is for these reasons that I find that in investing in the purchase of the Windmill Hotel, Nicholas Crouch and Michael Crouch were induced by, and relied upon, both the buying power and equal investors representations. I am satisfied that the defendants’ misconduct caused the plaintiffs to invest and to suffer the losses they suffered by reason of that investment, although I have made some further observations as to causation in the next section of these reasons directed to the measure of these losses contended for by the plaintiffs.
The measure of the plaintiffs’ loss and damage
As explained, the plaintiffs seek to recover damages to reflect their losses consequential upon their decision to invest in the purchase of the Windmill Hotel. As they recovered nothing from the ultimate sale of the hotel, they seek damages reflecting the entirety of their contributions to that investment. They particularise their contributions as follows:
·    $30,000.00 paid in July 2016, being 50 per cent of the deposit required on the purchase of the Windmill Hotel;
·    $313,309.14 paid in October 2016, being 50 per cent of the funds required upon settlement of the purchase of the Windmill Hotel;
·    $20,000.00 paid in October 2018 by way of contribution to WHI’s liabilities;
·    $5,300.00 paid in October 2018 by way of contribution to WHI’s liabilities; and
·    $15,000.00 paid in May 2019 by way of contribution to WHI’s liability to Mr Langford,
giving a total of $383,609.14.
The plaintiffs seek to recover compound interest (or in the alternative, simple interest) on these five components of their loss. They also seek an award of damages, or an indemnity, in respect of Michael Crouch’s potential liability under the three director penalty notices issued to him for amounts totalling $184,690.53.
In cases where a false representation or misleading conduct induces entry into a purchase transaction, the measure of damages will often be the difference at the time of purchase between the price paid and the true or real value of the thing purchased. This is sometimes called the rule in Potts v Miller.[46] However, that measure of damages is not always apposite, particularly in cases where the contravening conduct continues to influence the purchaser after the relevant transaction is complete, or otherwise locks the plaintiff into continuing to hold the thing purchased.[47]
[46] Potts v Miller (1940) 64 CLR 282 at 289, 297.
[47] Smith New Court Ltd v Scrimgeour Vickers [1997] AC 254 at 266, 283; Westpac Banking Corporation v Jamieson [2015] QCA 50 at [119].
The plaintiffs in this case contend that the defendants’ conduct not only induced them to invest in the purchase of the Windmill Hotel, but also locked them into that investment and hence the diminution in value that occurred through to the point of sale. Thus, they claim an entitlement to recover the difference between the amount they paid in 2016 and the amount they ultimately recovered from their investment (i.e. nothing), rather than whatever value their share in the investment might have been at the date of purchase.
In my view, the plaintiffs are entitled to damages measured in the manner they contend. The false or misleading conduct of the defendants that induced them to invest in the purchase of the Windmill Hotel did not become apparent to them until at least late 2017, and hence well over a year after settlement on the purchase of the Windmill Hotel. By that point in time, they were well and truly locked into their investment. And even then the position in relation to what had occurred in relation to the rebates, as well as the final position and performance of the Windmill Hotel more generally, remained somewhat unclear to the Crouches. Their efforts to obtain further information to clarify these matters continued well into 2018. By July 2018 a decision had been taken to sell the Windmill Hotel, and hence for the plaintiffs to exit their investment, albeit that it took until early 2019 to achieve a sale.
In those circumstances, I consider that the appropriate measure of the plaintiffs’ consequential losses caused by the defendants’ misconduct is the losses made by them on their investment in the purchase of the Windmill Hotel. And as they did not recover anything on their investments, their losses will be the total of the amounts they invested or contributed.
I accept that there is no direct correspondence between the losses claimed by the plaintiffs and the amounts of the rebates concealed from the plaintiffs, and not ever paid to WHI. The evidence does not enable me to form a view as to the extent to which the lack of revenue from rebates contributed to the poor performance of the Windmill Hotel business. Certainly it was not the only cause of the business underperforming relative to what the parties expected when they acquired the hotel. However, in my view, that does not mean that the losses claimed were not caused by the defendants’ misconduct. To the contrary, given that the defendants’ misconduct caused the plaintiffs to invest in the purchase of the Windmill Hotel, and left them locked into that investment for a considerable period thereafter, I consider that the defendants’ misconduct was a cause of the plaintiffs’ losses sustained on their investment, measured in the manner contended for by the plaintiffs.[48] On the findings I have made, the defendants’ wrongdoing did more than simply set the scene, or create the opportunity for the plaintiffs to incur their claimed losses. And those claimed losses were not referable to any unreasonable or supervening conduct that might be said to have severed the requisite causal connection.
[48] Henville v Walker (2001) 206 CLR 459.
The defendants have not contested any of the five individual components of the plaintiffs’ claimed losses. The plaintiffs claim that these losses were sustained as to 50 per cent by the first plaintiff (Michael Crouch) and as to the remaining 50 per cent by the second and third plaintiffs (Nicholas Crouch and Alini Pty Ltd).
In relation to the first three components of the plaintiffs’ claimed losses, it is clear on the evidence that they were payments made as to 50 per cent by Michael Crouch, and as to the remaining 50 per cent on behalf of Nicholas Crouch and Alini Pty Ltd. In relation to the fourth and fifth components, the payments were made by Michael Crouch without any express indication that they were split in this way. But in my view that is the natural inference that should be drawn from the circumstances as a whole.
The defendants contend that Nicholas Crouch and Alini Pty Ltd have not established that they suffered any loss because their 50 per cent was paid by way of gift from Michael Crouch. In my view, this contention is artificial and should be rejected. As a matter of common sense and practical reality, Nicholas Crouch and Alini Pty Ltd have suffered 50 per cent of the loss. While they invested a sum gifted to them by Michael Crouch, this does not mean that they did not then lose the sum invested. To the extent it is necessary to identify a principle underpinning this approach, it lies in the maxim res inter alios acta.[49] While the operation of that principle is ordinarily seen in the context of gifts made to a plaintiff after the relevant misconduct or wrongdoing, I see no reason why it would not apply equally in the present context.
[49] See the recent articulation of this maxim in Lowick Rose LLP v Swynson Ltd [2017] UKSC 32 at [11].
In any event, even if the defendants’ submission did have merit, the logical consequence would not be that the defendants would escape liability for 50 per cent of the losses claimed. The consequence would be that Michael Crouch has suffered 100 per cent of the losses claimed. However, as I have rejected the defendants’ contention that Nicholas Crouch and Alini Pty Ltd have not suffered loss, there is no need for me to consider this alternative scenario.
A potential complication arose in relation to the director penalty notices issued to Michael Crouch. I accept that any amount Michael Crouch is ultimately required to pay in respect of these notices would form part of the consequential losses suffered by him as a result of the defendants’ misconduct.
However, the evidence revealed that Mr Viney and Mr Mitchell have also been issued with director penalty notices. It was not clear on the evidence the extent to which these notices all related to the same coordinate liability or liabilities to the Deputy Commissioner of Taxation. The parties ultimately agreed to defer consideration of the position in relation to the director penalty notices until after judgment has been delivered, including whether any liability on those notices should result in an award of damages or an order for an indemnity in the nature of the orders made in cases such as Provan v HCL Real Estate Ltd[50] and Duke Group Ltd v Pilmer.[51] That is what I propose to do.
[50] Provan v HCL Real Estate Ltd (1992) 24 ATR 238.
[51] Duke Group Ltd v Pilmer (1998) 144 FLR 1 at 174.
Contributory negligence
The defendants plead that if they are liable to the plaintiffs for the losses claimed, then they suffered those losses as result of their own negligence. They further plead that the plaintiffs failed to take reasonable care within the meaning of s 137B of the Competition and Consumer Act 2010 (Cth) or were contributorily negligent within the meaning of s 7 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA), and that any damages award in their favour should be reduced to such extent as the Court thinks is just and equitable having regard to the plaintiffs’ responsibility for the loss and damage.
I observe at the outset that there is a difficulty in the defendants’ reliance upon these provisions in circumstances where I have found that the defendants made knowingly false representations, thereby committing the tort of deceit. The defendants’ conduct was intentional or fraudulent conduct for the purposes of s 137B(d) of the Competition and Consumer Act; and was not merely “negligent wrongdoing” for the purposes of s 7 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act.
Further, and in any event, I do not think there is merit in the contention that the plaintiffs’ losses were caused by their own conduct, or that they were otherwise contributorily negligent.
This allegation of contributory negligence was particularised in terms that if the defendants did fail to disclose the arrangements in relation to the forward rebates, then the plaintiffs nevertheless invested in circumstances where:
(a) they did not undertake any or any adequate analysis of the historical trading information relating to the Windmill Hotel business, including as contained in the McGees brochure, when if they had undertaken any or any adequate analysis, they would have understood that the Windmill Hotel business recorded no income from supplier rebates;
(b) they did not undertake any or any adequate analysis of the monthly cash flow projections for the Windmill Hotel business provided to the plaintiffs through Nicholas Crouch by email dated 5 May 2016, in circumstances where these represented that the business received no income from supplier rebates and that the capital contribution of Mr Viney and Mr Mitchell would be from supplier rebates;
(c) they did not undertake any or any adequate steps to investigate or otherwise understand the usual relationships with suppliers of a hotel business, and the Windmill Hotel business in particular; and
(d) they relied on their own judgment when deciding to purchase the Windmill Hotel business and did not rely on any representation of Mr Viney or Mr Mitchell and having taken advice from Mr Fairlie.

Having regard to the circumstances in which the defence was amended to include this plea, and the way in which the case was conducted, the defendants’ allegation of contributory negligence is to be considered on the basis that it is, in essence, an allegation that Nicholas and Michael Crouch were negligent in their failure to appreciate the existence and use of the forward rebates; that if they had taken reasonable care they would have come to learn of these matters. There is no broader allegation of contributory negligence in terms of the care taken by the Crouches in their consideration of the merits of their investment more generally.
Confined in this way, there is a tension between the allegation of the contributory negligence and the basis upon which liability has been made out against the defendants. I have found that the defendants, through Mr Viney and Mr Mitchell, represented that they would use their buying power for the benefit of the Crouches and treat them as equal investors, and that by failing to disclose their planned use of the forward rebates, these representations were knowingly false. I have also found that the Crouches relied upon these representations in deciding to invest with Mr Viney and Mr Mitchell in the purchase of the Windmill Hotel. In other words, this was not a case where the Crouches simply failed to ascertain for themselves the true position in relation to rebates. Rather, it is a case where they were deceived or misled as to the position in relation to rebates. A finding of contributory negligence would sit uncomfortably with the very rationale for my finding of liability.
But even allowing some conceptual room for a finding of contributory negligence in the circumstances of this case, I am not satisfied that such a finding is warranted. Given the imbalance of experience and expertise between the parties in relation to investing in hotel businesses, I consider it was reasonable for the Crouches to defer to a significant extent to the views of Mr Viney and Mr Mitchell. In particular, in circumstances where Mr Viney and Mr Mitchell made it plain that they considered that with their management experience and expertise they could significantly improve the performance of the Windmill Hotel, I consider that it was reasonable for the Crouches to trust and rely upon these views. While this did not mean that the Crouches were entitled to assume their investment would be profitable, I do think that it made it reasonable for them to decide to invest without undertaking any fine or detailed analysis of the monthly financial projections they were provided. They did not in any event have the skills to analyse or critique the detail of those projections.
It is true that the Projections Spreadsheet with which the Crouches were provided did include a reference to the planned use of the forward rebates by Mr Viney and Mr Mitchell to assist in funding their respective shares of the equity required to purchase the Windmill Hotel. However, as I have observed earlier, the reference to the rebates as “group credits” was obscure if not cryptic. Just as the meaning of this reference to the forward rebates escaped the attention of Mr Fairlie, I do not think it was unreasonable for the Crouches to have failed to appreciate the significance of these references, or indeed to have sought clarification of their meaning.
Nor do I think it was otherwise incumbent upon the Crouches to undertake their own investigations sufficient to have revealed to them the potential for forward rebates to have been earned, and to then come to appreciate that Mr Viney and Mr Mitchell had taken the view that they were entitled to keep those rebates for their own benefit. While it might have been expected that Mr Fairlie, with his greater expertise, would have raised the issue of rebates with the Crouches or Mr Viney (at the meeting of 18 May 2016), this did not happen. There was thus nothing in my view that made it unreasonable for the Crouches to proceed on the basis they did.
For these reasons, the defendants’ allegation of contributory negligence on the part of the plaintiffs in failing to ascertain the true position in relation to rebates has not been made out.
Plaintiffs’ claim for breach of the Unitholder Agreement
As mentioned at the outset of these reasons, the plaintiffs also allege breaches of the Unitholder Agreement by the defendants (other than BMG), relying upon essentially the same conduct as is said to give rise to the defendants’ liability in deceit and for misleading conduct.
As set out in my narrative findings, the Unitholder Agreement was executed by or on behalf of the four investors by 11 October 2016. The parties to that agreement were the four individuals (as shareholders of WHI) and the trustees of their respective unitholding entities. As such, each of the parties in these proceedings other than BMG was also a party to the Unitholder Agreement.
I have mentioned special condition 31 of the Unitholder Agreement, which provided that the parties agree that “full management of the Business will be undertaken by Mr Brett Viney, Mr Matthew Mitchell, and/or their Unitholder entities …”.
Clause 6 of the Unitholder Agreement was entitled “Obligations of the Parties” and provided as follows:
Each Party must:
(a)    ensure that the Trustee takes no action which is or could be in conflict with the operation or conduct of the Business by the Trustee;
(b)    cooperate with the other Parties and use its best endeavours to ensure that the Business is carried on successfully by the Trustee;
(c)    not use Confidential Information in a way that damages or is reasonably likely to damage the Business, the Trustee or any of the other Parties;
(d)    not unreasonably delay an action, approval, direction, determination or decision required of it;
(e)    be just and faithful in its activities and dealings with the Trustee and the other Parties; and
(f)     procure the Party’s Associated Director to provide a personal guarantee for the obligations of the Trustee to the landlord of the Business premises and such other third parties as are reasonably required.
In their second statement of claim, the plaintiffs plead that the conduct of Mr Viney and Mr Mitchell in entering into the Rebate Agreements and concealing those Rebate Agreements (and the payment of the rebates to BMG) from Nicholas and Michael Crouch, constituted a breach of the Unitholder Agreement in that:
(i)in breach of clause 6(b), that conduct amounted to a failure, on the part of Mr Viney and Mr Mitchell, to use their best endeavours to ensure that the Windmill Hotel business was carried on successfully;
(ii)in breach of clause 6(c), that conduct amounted to use of information regarding the suppliers of the Windmill Hotel Unit Trust in a way that damages the Windmill Hotel business;
(iii)in breach of clause 6(e), that conduct was neither just nor faithful;[52] and
(iv)in breach of special condition 31, that conduct amounted to a failure by Mr Viney and Mr Mitchell, properly to manage the Windmill Hotel business.
[52] The second statement of claim refers to clause 6(d), but given the reference to “just nor faithful” it must have been intended to refer to clause 6(e).
The plaintiffs further plead that in consequence of these breaches, WHI was deprived of the amount of $211,375 which amount would otherwise have been applied to satisfy the liabilities of WHI to the ATO and its other creditors; and that had the amount of $211,375 been applied in this manner then Nicholas and Michael Crouch could not have been liable to the ATO under the director penalty notices. The pleading then alleges that by reason of the above, Nicholas and Michael Crouch have suffered loss and damage as a result of the defendants’ breach of the Unitholder Agreement. The plaintiffs’ prayer for relief includes a claim for damages for breach of the Unitholder Agreement.
In their second defence, the defendants deny the plaintiffs’ allegations of breach of the Unitholder Agreement, relying largely upon cross-references to matters pleaded in their denial of the claim in deceit and for misleading conduct. They also include a plea that had Nicholas and Michael Crouch made financial and non-financial contributions to WHI equivalent to those made by Mr Viney and Mr Mitchell in accordance with their obligations under the Unitholder Agreement, then they would not have been liable under those director penalty notices or at all.
Thus, as pleaded, it would seem that the plaintiffs’ alternative claim was confined to one seeking relief in respect of the director penalty notices.
The plaintiffs’ alternative claim received only very limited attention in the parties’ submissions at trial, and indeed in the only two paragraphs addressed to this claim in the plaintiffs’ written closing, the claim diverged from the pleaded claim to abandon the claim under special condition 31, and to seek damages not confined to the plaintiffs’ liability under the director penalty notices. Rather, the plaintiffs submitted in their closing that had Mr Viney, Mr Mitchell, Runonmanus and George Watts Investments not breached clauses 6(a), (c), and (e), the plaintiffs would have learnt of the defendants’ conduct, and would have had the opportunity to rescind the suite of arrangements prior to settlement of the Windmill Hotel. They submit that reliance losses (on the basis of a “no transaction” case) are similarly recoverable on this basis.
To the extent the plaintiffs intended to pursue their pleaded claim under the Unitholder Agreement, I reject that claim. Even if the failure to disclose the Rebate Agreements might have involved a breach of one of the clauses relied upon (for example, clause 6(e)), I do not think the requisite causal link between any such breach and Michael Crouch’s potential liability under the director penalty notices has been made out. It is one thing to find (as I have), that the defendants’ false representations or misleading conduct prior to the decision to invest caused the liability under the director penalty notices issued as a result of involvement in that investment. It is quite another thing to find, as the plaintiffs’ pleaded case contends, that a breach of the Unitholder Agreement during the period of that investment[53] resulted in the fact or amount of the director penalty notices. In circumstances where there were clearly problems with the financial performance of the Windmill Hotel that went beyond the issue in relation to rebates, I do not think there is a basis to make this finding.
[53] Bearing in mind that the Unitholder Agreement was executed only shortly prior to settlement on the purchase of the Windmill Hotel.
I also reject the version of the plaintiffs’ claim under the Unitholder Agreement advanced in their closing address. There was no application to amend, and I do not think I should entertain this new version of their alternative case in the absence of such an application.
Further, and in any event, there would be an artificiality about this version of the alternative case. The relevant non-disclosure and consequentially false representations were initially made in April to June 2016. The Unitholder Agreement, however, was not executed until 11 October 2016 and hence only a couple of days prior to settlement on the purchase of the Windmill Hotel. While entry into the Unitholder Agreement was contemplated between the parties for a few months prior to this, and hence formed part of the context in which I held that the defendants made false representations and engaged in misleading conduct, that agreement could only have been breached once executed. In theory the false representations (and misleading conduct) continued between the dates of execution and settlement, but I consider it artificial to treat any breach during this short window of time as having caused the Crouches to invest.
For all of the above reasons, I reject the plaintiffs’ claim for breach of the Unitholder Agreement.
Conclusion and orders
For the reasons set out above, the defendants are each liable to the plaintiffs in deceit and for contravention of s 18 of the Australian Consumer Law. The damages payable in respect of both claims are the same.
I will enter judgments in favour of the plaintiffs against each of the defendants for a total of $383,609.14 plus interest. Subject to hearing further from the parties, I propose to enter two judgments; the first in favour of the first plaintiff (Michael Crouch) against each of the defendants for $191,804.57 plus interest, and the second in favour of the second and third plaintiffs (Nicholas Crouch and Alini Pty Ltd) for $191,804.57 plus interest.
I will also hear the parties further as to the issue of interest (including compound interest if that claim is pressed), and as to any orders to be made in respect of the director penalty notices.