Damian Ison v Kevin Geoffrey Connors

[2003] NSWSC 141

CITATION:	Damian Ison and Anor v Kevin Geoffrey Connors and Ors [2003] NSWSC 141 revised - 14/03/2003
HEARING DATE(S):	18, 19 and 20 December 2002 24 February 2003
JUDGMENT DATE:	14 March 2003
JURISDICTION:	Equity Division
JUDGMENT OF:	Bergin J
DECISION:	Plaintiffs' claims dismissed.
CATCHWORDS:	Whether misleading or deceptive representations were made by defendants in respect of an $80,000 investment by the plaintiffs in a company controlled by the first and second defendants - Whether reliance placed on representations - Claim for debts from a deregistered company - Application to reinstate company abandoned.
CASES CITED:	Ricochet Pty Ltd and Ors v Equity Trustees Executors and Agency Company Ltd (1993) 41 FCR 229
PARTIES :	Damian Ison (First Plaintiff) Kenneth John Ison (Second Plaintiff) Kevin Geoffrey Connors (First Defendant) Joanne Gail Connors (Second Defendant) Adrian Blackburn (Fourth Defendant)
FILE NUMBER(S):	SC 5163/00
COUNSEL:	Mr GE Underwood (Plaintiffs) Mr DA Allen (First and Second Defendants) Mr DG Charles (Fourth Defendant)
SOLICITORS:	Thomas Mitchell Partners (Plaintiffs) Catalyst Partners (First and Second Defendants) Turnbull Hill Lawyers (Fourth Defendant)

- 31 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BERGIN J

14 MARCH 2003

5163/00 DAMIAN ISON & ANOR v KEVIN GEOFFREY CONNORS & ORS

JUDGMENT

1 The plaintiffs, Kenneth John Ison (Mr Ison) and Damian Ison (Mr Ison Jnr), are father and son. They sue the first and second defendants, Kevin Geoffrey Connors and Joanne Gail Connors (Mr and Mrs Connors), and the fourth defendant, their accountant, Mr Blackburn, for alleged loss and damage suffered by reason of their reliance on allegedly misleading or deceptive representations made to them in relation to an investment in a company, Hunter Health Equipment Pty Ltd (HHE), controlled by Mr and Mrs Connors. HHE operated a business selling and hiring fitness equipment and it was named as the third defendant in these proceedings. However it is a de-registered company and the plaintiffs abandoned their application to have it reinstated.

2 It is alleged that Mr Blackburn knew the plaintiffs were relying on his statements in deciding whether to invest in HHE and, by reason of that and other matters, he owed them a duty of care to ensure that representations in relation to their investment in HHE were accurate. It is alleged Mr Blackburn breached his duty of care whereby the plaintiffs suffered loss and damage.

3 This litigation relates to an $80,000 investment made by Mr Ison Jnr and funded by Mr Ison in HHE in June 1996. The litigation was not commenced until four years later in the year 2000. Its outcome will very much depend upon what I find was said by the parties in a bar in the Nags Head Hotel at Adamstown, Newcastle (the Hotel), on the evening of 25 June 1996.

4 Between 1965 and 1990 Mr Ison operated his own business known as John Ison Bricklaying. At times he employed up to ten people and engaged accountants to prepare financial statements for the business. During that period he became familiar with business accounting documents including profit and loss statements and balance sheets. Although no specific evidence was given on the topic, it is apparent that Mr Ison became entitled to the receipt of a disability pension in about 1990.

5 In 1992/93 Mr Ison did the fit-out of a gymnasium known as Body Focus Gym at Wallsend (Body Focus). Body Focus was jointly owned by Mr Connors and two other persons not associated with this litigation. Mr Blackburn apparently provided accountancy services to the owners and to Body Focus. In consideration of Mr Ison doing the fit-out of Body Focus, his other son, Nathan Ison, received a share in the business. HHE supplied fitness equipment to Body Focus.

6 In the latter part of 1995 or early 1996 Mr Ison began working for HHE servicing, maintaining and delivering the fitness equipment. During 1995 Mr and Mrs Connors made a decision to sell HHE which at that time was owned by the company, Amtras Pty Ltd. Mr and Mrs Connors consulted Mr Blackburn for assistance in that process and on 20 July 1995 Mr Blackburn wrote to Mr and Mrs Connors enclosing “Abridged 1995 Trading and Profit and Loss Accounts for Amtras Pty Ltd Trading as Hunter Health Equipment”. The letter included:

We note your instructions setting the sale price for your business which is to be apportioned as follows:

Plant & Equipment/Furniture & Fittings $ 70,000
Goodwill $250,000
Stock (SAV) $130,000
Sale Price $450,000

7 The total trading profit in the Abridged Accounts to the year ending 30 June 1995 was $285,467, an increase of $62,769 over the previous year. The Profit and Loss Account listed the income at $305,513, an increase of $70,050 over the previous year and proprietor’s profit was listed as $102,408, an increase of $14,745 over the previous year. The Notes to the Abridged Profit and Loss Statement recommended that any prospective purchaser should examine the invoices to satisfy themselves as to the accuracy of the turnover figures. They also included the following:

We emphasise that these records have not been audited and recommend that a prospective purchaser investigate the underlying financial documentation such as invoices, receipts, cheque butts and bank statements to determine the accuracy or otherwise of the figures presented.

8 The Notes to the Abridged Accounts advised that certain expenses had been eliminated from the Abridged Profit and Loss Statement including borrowing expenses, depreciation, depreciation full write-off, donations, interest, directors’ superannuation and directors’ salaries.

9 Mr and Mrs Connors had discussions with prospective purchasers in Sydney during 1995/1996, however these discussions did not secure a purchaser. Mr Ison gave evidence that in May 1996 Mrs Connors said to him:

Would you like to buy a share in Hunter Health? This could make the company debt-free. An amount of about $50,000 or $60,000 would make the company debt-free.

10 Mr Ison responded that he could be interested and said, “get your accountant to put something together”. The Further Amended Statement of Claim (FASC) pleads a number of representations, some of which are duplicated. These statements allegedly made by Mrs Connors are pleaded as the first representations (FASC; par 5).

11 Mr Ison gave evidence that he had a number of discussions with Mr Connors about the possibility of purchasing a share in HHE. He said that on one occasion Mr Connors said to him, “So when can you get the money?” Mr Ison claimed that he informed Mr Connors that he wanted to look at the “financials” and that the money had to be repaid in eighteen months so that he could build his house. Mr Ison claims that in response to that statement Mr Connors said:

Yes, that’s fine, the money will get the company up and running again and when you need the money back the company will simply borrow the money for you and pay out your loan.

12 Mr Ison gave evidence that he then said:

Well that sounds great. I will talk to Damian but what I want to do is to put the shares in Damian’s name so that when I get the money back Damian will have a future by having a share in the company.

13 Mr Ison claimed that Mr Connors responded, “Yes, that’s fine. We’ll do that then”. These statements are pleaded as the second representations (FASC; par 7).

14 Mr Connors’ affidavit evidence was that in May 1996 Mr Ison informed him that he was interested in buying into HHE but only on the basis that Mr Connors remained as owner and manager. Mr Connors claimed that Mr Ison informed him that the share would have to be put in Mr Ison Jnr’s name so that it did not affect Mr Ison’s disability pension. Mr Connors also gave affidavit evidence that in these conversations Mr Ison informed him that his nephew, Tony Croese, was an accountant at Crosbie Warren Sinclair (CWS), the firm in which Mr Blackburn was a partner, and asked him if Mr Croese could look closely at HHE’s books for him. Mr Connors claimed that he informed Mr Ison that was “fine”. Mr Connors’ evidence was that he gave Mr Ison a copy of the 1995 Abridged Accounts prepared by Mr Blackburn for the sale of the business. Mr Ison denied that he received these documents. Mr Ison also denied that he asked if Mr Croese could have access to the books or that Mr Croese assisted him in the decision to fund the investment in HHE. Mr Croese gave evidence in which he denied that he was asked to assist in the purchase and also denied that he assisted in the purchase.

15 Mr Ison gave evidence that on 25 June 1996 he was working at HHE and Mr Connors made the following statements (pleaded as the fourth representations (FASC; par 11)):

Adrian has got the paperwork. Why don’t we meet at the pub tonight to discuss it? We’ll meet at ‘The Nags’ after work. Adrian has got some figures for you to look at.

16 Mr Ison gave evidence that he telephoned Mr Ison Jnr and invited him to the meeting at the Hotel and advised him that he would obtain a cheque in the amount of $50,000 in favour of HHE which he would give to Mr Connors if “the paperwork pans out”. Mr Ison said that he arrived at the Hotel at about 5.30pm and that Mr Connors arrived at about the same time. He said that within half an hour both Mr Ison Jnr and Mr Blackburn had arrived and that the four men sat at a table in a bar at the back of the Hotel.

17 Mr Ison’s affidavit evidence was that the fourth defendant handed him a document and said: “These are the figures for the business that you asked for. Everything you want to know is in there”. Mr Ison’s affidavit stated that he “glanced” at the document and the following conversation (pleaded as the fifth representations (FASC; par 12-14)) then occurred:

Mr Ison: It looks interesting. So is the company worth $340,000?

Mr Blackburn: Yes.

Mr Ison: I will get $200 per week and a share of the profits if I buy a one third share?

Mr Blackburn: Yes.

Mr Ison: Yes, okay, it sounds like a good thing to me. I got the money organised. I can give you $50,000 straight away.

Mr Blackburn: A financial statement for Hunter Health is unavailable but will be made available to you when tax returns are completed for it for the tax year 1995/1996.

18 Mr Blackburn denied that a conversation in these terms occurred. Mr Ison claimed in his affidavit evidence that at some time during this discussion at the Hotel Mr Connors said: “the company owes its creditors an amount of about $60,000. That would see the company debt free”, and, “the company is trading profitably”, and, “if you take a one-third share Joanne and I will be the other two shareholders as to one third each. The money for your share would be used to pay creditors. You can work for us for about two days a week if that’s what you want to do”. These statements are pleaded as part of the third and sixth representations (FASC; pars 9 and 15).

19 Mr Ison Jnr gave affidavit evidence that he attended the Hotel on 25 June 1996 and Mr Connors introduced Mr Blackburn to him as his accountant. He claimed that Mr Blackburn gave a document to his father and said: “this is the paper I would like you to have a look at” and his father said: “it looks pretty good. So is the company worth $340,000?”. Mr Blackburn said: “yes”. Mr Ison said: “so I will get $200 per week and a share in the profits if I buy a third share?”, to which Mr Blackburn said: “yes”. Mr Ison then said that it sounded a good thing to him.

20 The plaintiffs alleged that at the Hotel on 25 June 1996 Mr Blackburn gave to Mr Ison a document consisting of two pages. The first page was an original in Mr Blackburn’s handwriting on paper headed “Crosbie Warren Sinclair”. The second page was also an original on paper headed “Crosbie Warren Sinclair” and was in Mr Connors’ handwriting. On the first page Mr Blackburn had written “Hunter Health” in the space for client and “Adrian” in the space for “Prepared By”. It was dated in Mr Blackburn’s handwriting, “25/6/96”. The body of the first page contained the following in Mr Blackburn’s handwriting:

1 Sale of 25% of shares in Amtras P/L $80,000

2 OR

33 1/3% $100,000
50% $150,000
3 Amtras P/L Trading As Hunter Health
valued at (includes Plant, fixtures,
Goodwill) $250,000
Plus Stock (SAV) $ 90,000
$340,000

4 Sale to John Isons discounted to
- $320,000 re: 25% Sale
- $300,000 33 1/3% sale/ 50% Sale

5 Sale Proceeds issued as Share Premium
Reserve in Company which allows the cash
to reduce Company debts and increase
Value of Company.
6 Amtras P/L Share Certificate for 25%/ 33 1/3%
ownership to be issued to John Ison.

21 The next page was in Mr Connors’ handwriting in the following terms:

ADVANTAGES
For $80,000 = 25% $150 per week.
$100,000 = 33 1/3% $200 per week.
$150,000 = 50% $300 per week.

25%/33 1/3%/ 50% shareholder in profits.
sale of business.

22 Mr Connors gave evidence that on 25 June 1996 Mr Croese telephoned HHE’s premises and asked to speak to Mr Ison. Mr Connors claimed the following conversation took place:

Mr Croese: Geoff, I was calling to speak to John. I have had a look at the financials of Hunter Health Equipment as he asked. He tells me he wants to buy in?

Mr Connors: Yes, he has expressed that interest and I told him to look into it.

Mr Croese: Yes, well I have looked into it, it’s not too bad but there are probably better investments. Is he there?

Mr Connors: Yes I will put him on.

23 Mr Croese denied that he telephoned HHE on 25 June 1996 and that he had a conversation in these terms with Mr Connors. Mr Connors claimed that Mr Ison had a short telephone conversation and then said to him:

I have seen enough, I have made up my mind. I like what I see, we just need to work out the finer details.

24 Mr Ison denied that this conversation took place. Mr Connors claimed that after this conversation with Mr Ison he telephoned Mr Blackburn and a conversation in the following terms took place:

Mr Connors: Adrian, John has decided he wants to buy in. How do we work this?

Mr Blackburn: Do you know how much he wants and what he wants to pay?

Mr Connors: Not really, he said we need to work out the finer details.

Mr Blackburn: We had better all get together and work it all out.

Mr Connors: Well John and I are going to the Pub this afternoon to celebrate, why don’t you come on down?

Mr Blackburn: Yeah sure, sounds good. Which Pub?

Mr Connors: The Nags Head, I’ll meet you there about 5.30pm.

25 Mr Blackburn denied that this conversation occurred. Mr Connors’ affidavit evidence was that he attended the Hotel at 5.30pm with Mr Ison and that not long afterwards Mr Blackburn arrived and joined them at the table. Mr Connors claimed a conversation in the following terms took place:

Mr Blackburn: John, I understand you are interested in investing in Hunter Health Equipment?

Mr Ison: Yes I am.

Mr Blackburn: Well how are we going to work it out, have you thought about how much money you want to put in and how much of a share you want?

Mr Ison: Well I was thinking of anywhere between 25% and 50% share in the business.

26 Mr Connors claimed that at this point Mr Blackburn wrote down some figures on a pad and the conversation then continued:

Mr Blackburn: Well, we need to then look at what the business is worth. What do you think the value of the plant, equipment and goodwill?

Mr Ison: From what I’ve seen, I would say about $250,000.

Mr Blackburn: What do you think Geoff?

Mr Connors: Yeah sounds about right, that’s what we came up with when we did those figures when we first decided to sell the business.

Mr Blackburn: What about stock on hand?

Mr Ison: About $90,000.

Mr Blackburn: Geoff?

Mr Connors: I would agree with that.

Mr Blackburn: Well, this gives us a figure of around $340,000.

27 Mr Connors’ affidavit evidence was that during this conversation Mr Blackburn was writing on the pad that he had with him at the Hotel and the conversation then continued in the following terms:

Mr Blackburn: Well we know John so we could offer some sort of discount depending on the share bought.

Mr Connors: Yeah, that’s fine, no problem with that.

Mr Blackburn: Well, why don’t we discount the value of the business to $320,000 if John buys a 25% share, and say, discount it down to $300,000 if a one-third or one-half share is bought?

Mr Connors: Sure, no problems here.

Mr Ison: Yeah, I like that, what do I get out of it all?

Mr Blackburn: Well, we can work it out based on what sort of return you would get from this business which I would say would be about 10% per annum.
Mr Ison: Ok, that sounds pretty good. The only thing is that $150,000 is too much for me at the moment; it will have to be the $100,000 or the $80,000 option. A third or a quarter share?

Mr Blackburn: Okay well its up to you, you need to decide how much of the business you want and how much you want to put in.

Mr Ison: I would like as much as I can but about $100,000 is all I can afford. I’ll take a one-third share for $100,000.

Mr Connors: Sounds great.

Mr Ison: Yeah, I’m happy with that, I can give you $50,000 now, the other half soon.

Mr Connors: Not a problem. It’s all worked out then.

Mr Ison: Yes, all worked out.

28 After one or two drinks, Mr Blackburn said: “well now that it’s all sorted I’ll get on my way”, and Mr Connors responded: “no worries, thanks for coming around and helping us with this”. Mr Connors said that at the time Mr Blackburn left, Mr Ison Jnr arrived and that there was little or no interaction between the two men. Mr Blackburn denied that Mr Ison Jnr was at the table when he was at the Hotel. The plaintiffs and Mr Connors had one or two more drinks and left the Hotel at approximately 7.00pm. Mr Ison and Mr Blackburn denied that Mr Blackburn wrote the notes at the Hotel. Mr Blackburn also denied the conversation alleged by Mr Connors.

29 Mr Blackburn’s evidence was that on 25 June 1996 he had a meeting with Mr Connors at 1pm at CWS’ office. Mr Blackburn claimed that the documents that the plaintiffs claim were handed to Mr Ison at the Hotel were prepared at the 1pm meeting which lasted for approximately one and a half hours. Mr Blackburn gave evidence that he also had a further meeting with Mr Connors at 6pm that day at the offices of HHE.

30 In his first affidavit sworn on 3 May 2002 Mr Blackburn gave evidence that he made notes during the meeting at 1pm. He gave Mr Connors a page upon which Mr Connors made the notes headed “Advantages”. Mr Blackburn’s affidavit stated that at the conclusion of the meeting he handed a copy of the notes to Mr Connors. The notes were included in exhibit “AB1” to his affidavit and consisted not only of the two-page document, but also an additional page in Mr Blackburn’s handwriting in the following terms:

Client: Amtras P/L Prepared By: Adrian Date: 25/6/96
Details: Meeting
DI 1 Allotment of 1 Ord sh to D J Ison
For $1 dated 1.7.96.
DI 2 Co. Name to “Hunter Health and Fitness P/L”
At same time relinquish Bus. Name “Hunter Health Equipment”
Confirm with Geoff re: Name.
JB 3 Raise sh. Prem Reserve 1.7.96 for $80,000
re. Ison’s Share.

31 In contrast to his affidavit evidence, Mr Blackburn said in oral evidence that part of this third page was completed at the conclusion of the meeting at 2.30pm. The balance of the note was completed at a later date when Mr Connors gave him the instructions referred to in paragraph 3. Mr Blackburn regarded this as an internal memo although part of it was made at the conclusion of the meeting. The references to “DI” and “JB” are the initials of the relevant staff members who were requested to follow up the proposed action.

32 In the affidavit sworn on 3 May 2002, Mr Blackburn said that at 6.00pm on 25 June 1996 he went to HHE’s premises and discussed the operation of a share premium reserve with Mr Connors for about twenty minutes. In his second affidavit, sworn on 3 December 2002, Mr Blackburn took issue with Mr Connors’ affidavit evidence and denied that he had any of the conversations referred to at the Hotel as alleged by Mr Connors. Mr Blackburn gave evidence in this affidavit of the discussions that he had with Mr Connors at the 1pm meeting in more detail than had been provided in the first affidavit. His affidavit evidence included a statement that he had discussed the share premium reserve with Mr Connors at the 1pm meeting in the following terms:

The way it would operate would be that you could allot one ordinary share to John Ison for $1.00 at a share premium of $99,999.00. Mr Ison would put $100,000 into the company’s bank account to reduce its debts and increase the value of the company. He would then effectively own one third of the cash which had been injected into the company which would then reduce the cost of his investment by 33 1/3%. Alternatively, the company has increased its assets by $100,000 and John Ison owns one third of a higher valued company.

33 Mr Blackburn said that Mr Connors wanted further clarification of how the share premium worked and that is why he went to HHE’s premises on the evening of 25 June 1996. He said that after the meeting Mr Connors invited him to have a drink with him at the Hotel. Mr Blackburn went to the Hotel and was surprised to see Mr Ison join them for a drink. He said they discussed general things, such as football, and then Mr Ison said to him: “do you think the business is worth the asking price?”. Mr Blackburn said that he felt very uncomfortable and responded: “it is a bit difficult for me to answer that question. I am Geoff’s accountant and that raises a conflict of interest which would prevent me from giving you any advice about the matter. You really should consult your own accountant”.

34 Mr Ison paid $50,000 to HHE on or about 25 or 26 June, and a further $30,000 in August 1996.

35 In September 1996 Mr Ison Jnr was hired by HHE as a sales representative and apparently worked for six months in that role on salary. In early 1997, Mr Connors had a discussion with Mr Ison in which he said that HHE could not afford to employ Mr Ison Jnr other than on a commission basis. That arrangement was put in place from early 1997. Mr Ison gave evidence that in November 1997 he was “perusing the company’s records” when he found an invoice for Worrami Detention Centre which he understood was an account that his son had secured. Mr Ison asked Mr Connors: “what’s this?”, to which Mr Connors responded: “it’s none of your business”. Mr Ison said: “this is Damian’s commission”, to which Mr Connors responded: “it’s none of your business”. Mr Ison said: “that’s it, I’m out of here”. He then resigned his employment with HHE.

36 Mr Ison said that when he resigned his employment with HHE Mr Connors gave him a document entitled “Agreement for Company Share Buy-Back Between Damian John Ison and Hunter Health & Fitness Equipment Pty Ltd”. There are a number of drafts of this document in evidence and each of them provided for the payment of $100,000, less any personal borrowings, to be made to Mr Ison Jnr for the purchase of his share in HHE. Although discussions ensued in respect of the share buy-back arrangement they were not concluded.

37 Mr Ison Jnr gave evidence that he resigned from HHE in November 1997 after a dispute about a proposed contract with Newcastle University.

The first representations

38 Mrs Connors denied the conversation alleged to constitute the first representations. She said that she did not do the books of the company and that she would not have known what was going on with the financial side of it. Indeed she said she did not understand the “financials”. Mrs Connors gave evidence that after she and Mr Connors returned from their discussions in Sydney, she informed Mr Ison that the particular person with whom they had been having discussions in Sydney was not going to buy HHE. She said that Mr Ison informed her that he had some money he wanted to do something with and that he may be interested.

39 There is no doubt that Mr Ison informed Mrs Connors that he might be interested in the business but it is not necessary to decide which version of the conversation is more probable in the light of some evidence given by Mr Ison in respect of the first representations. It was as follows:

Q. The only reliance you place on what Mrs Connors said was to make further enquiries as to whether it would be wise to purchase a share in Hunter Health Equipment. That’s correct, isn’t it?
A. Yes.
Q. You did not buy a share in Hunter Health Equipment because of what Mrs Connors said to you; that’s correct, isn’t it?
A. No, but that was the start of it.

(tr. 16)

40 I am satisfied that whatever Mrs Connors said was not relied upon by Mr Ison in deciding to fund his son’s investment in HHE. In any event, I accept Mrs Connors’ denial that she made the statements and I also accept her evidence that she did not understand the “financials” and that she was occupied, in the main, with looking after her three children, then aged approximately 9, 6 and 3 years.

The second representations

41 In November 1997, each of the plaintiffs had what has been referred to as a “blow up” with Mr Connors (tr. 123). Each of them left the employment of HHE in less than amicable circumstances. That created an impasse between the three shareholders of the company. When the plaintiffs resigned from HHE, Mr and Mrs Connors proposed a share buy back arrangement. Mr Ison’s evidence was that Mr Connors gave him a draft share buy back agreement for his consideration. On this occasion, Mr Ison asked Mr Croese to advise him in respect of the share buy back agreement.

42 Mr Ison claimed that Mr Connors represented that the $80,000 was to be repaid in 18 months time. Although there was no evidence that Mr Ison was induced into the investment by this representation, I will deal with the claim made by the plaintiffs that this was a loan. Mr Connors denied that the amount paid by Mr Ison for the purchase of Mr Ison Jnr’s share was a loan (tr. 126). Note 7 to the Management Accounts up to 15 March 1997 contains an entry of $50,000 as at June 1996 listed as “loan – John Ison”. However that entry disappeared for the year commencing 1 July 1996 and Note 9 refers to a Share Premium Account of $99,999. This is consistent with the $50,000 being paid prior to 1 July 1996 and the issue of the third share on 1 July 1996.

43 Mr Croese’s evidence was that prior to December 1997 no one suggested to him that the amount provided by Mr Ison for Mr Ison Jnr’s share in HHE was a loan (tr. 67). Indeed Mr Croese said that Mr Ison had said to him in late 1997: “we have got a share buy back agreement and that’s how we are going to get the money back” (tr. 66). It was not until after Mr Croese became involved in assisting Mr Ison in relation to the share buy back agreement that Mr Croese saw the $50,000 described as a “loan” for the 1996 year, in the 1997 Management Accounts.

44 There is a direct conflict of evidence between Mr Ison and Mr Connors in respect of these representations. By reason of the problems Mr Connors admitted to having with his memory, referred to later in this judgment, it is necessary to consider documentary evidence at around the relevant time in deciding whether the representations were made. On 18 November 1997, Mr Ison Jnr in his letter to Mr and Mrs Connors, set out in detail later in this judgment, referred to the recent proposal made to buy back his share. He stated that the most suitable method was for the company to buy back the share leaving Mr and Mrs Connors as the only two shareholders and that: “the major problem with this proposal is the company having the funds to repay my investment”. It was not described as a loan but as an “investment”. The final paragraph of that letter includes the statement: “when I purchased the share I accepted there was a need for a deal of give and take”. If this had been a loan, one would have expected the use of the term “when I made the loan” or “when the loan was made” rather than “when I purchased the share”.

45 In December 1997 the plaintiffs’ solicitors prepared a Deed of Agreement for Company Share Buy Back. That Deed made no reference to a loan of $80,000. In a letter of 15 January 1998 the plaintiffs’ solicitors claimed that agreement had been reached whereby Mr Connors had agreed to pay $6,800 forthwith and $200 per week from 11 November 1997. That letter refers to those amounts being in reduction of “indebtedness” to the plaintiffs, but with reference to an alleged agreement after the resignations and the proposed buy back.

46 A letter dated 19 May 1998 from the plaintiffs’ solicitors to Mr Blackburn referred to “our client” reviewing his recollection. The recollection claimed to have been reviewed was of “his purchase of that share and infusion of Capital into the company”. There is no mention in this letter of any amount paid in 1996 being by way of loan. It was not until 20 November 1998 that the plaintiffs’ solicitors wrote to the defendants’ solicitors stating that: “an advance of $80,000 was made to the company in 1996”. In that letter the plaintiffs’ solicitors advised that the plaintiffs considered themselves a creditor of the company and required their “debt” to be repaid upon sale of the company. Mr Ison agreed that was the first time that there had been an indication in writing that he considered himself to be owed $80,000 (tr. 31).

47 The claim that this investment was by way of a loan was pleaded both as the second representations (FASC: par 7 & 8) and part of the sixth representations (FASC; par 15). The FASC claimed that at the Hotel on 25 June 1996 Mr Connors represented that HHE would cause the investment to be “repaid” no later than 18 months after the investment (par 15(e)). In cross-examination Mr Ison gave the following evidence:

Q. On 25 June 1996 there was no discussion at the Nag’s Head Hotel about $80,000 being repayable to you, was there?
A. No, but there was between Mr Connors and I.
Q. The question was, Mr Ison, ..on 25 June 1996 at the Nag’s Head Hotel there was never a discussion about whether any money would be repayable to you from Hunter Health Equipment, that is correct isn’t it?
A. Not on that day, no.
Q. And it would have been an important part of the bargain between you and Hunter Health Equipment, would it not?
A. Yes, it would be.
Q. And being an important part of the bargain it would have been discussed if there was an agreement to repay you money at the Nag’s Head Hotel, wouldn’t there have been?
A. No.
Q. So, on 25 June 1996 at the Nag’s Head Hotel, even though it is an important matter, there was simply no discussion about repaying the loan?
A. No, there was not.
Q. There was no discussion was there, Mr Ison, because there was never an agreement for you to be paid any money from Hunter Health Equipment?
A. Yes, there was.
(tr. 32)

48 If there were discussions with Mr Blackburn at the Hotel on 25 June 1996, as alleged by Mr Ison, it is reasonable to expect that this topic would have been discussed. If there had been a loan of $80,000 made to HHE, it would be reasonable to expect that when Mr Ison sought assistance from Mr Croese in respect of the share buy back agreement, Mr Ison would have informed him of that fact. No such disclosure or claim was made to him. It was not until two years and four months after the alleged “loan” that the plaintiffs’ solicitors referred for the first time to an “advance”. It seems to me that Mr Ison’s statement to his nephew that the share buy back agreement was how they were going to get their money back is significant. This was a venture into which Mr Ison went without any advice from a solicitor or an accountant. He had worked for HHE for some months and had previous contact with Body Focus. I am satisfied that he saw this as an investment for his son, Mr Ison Jnr, having previously secured what he thought was an appropriate share in Body Focus for his other son, Nathan.

49 The “working papers” made no mention of a loan and referred specifically to the “advantage” of being a “shareholder in profits” and “shareholder in sale of business”. The plaintiffs would not have needed a share buy back agreement to get their money back, as discussed with Mr Croese, if this had been a loan.

50 On all the evidence, I am not satisfied that Mr Connors made the alleged representations and I am satisfied that Mr Ison invested this money in HHE not as a loan but for the purpose of obtaining a business interest by way of a share in HHE for his son, Mr Ison Jnr.

The fourth representations

51 These representations are alleged to be the statements made by Mr Connors on 25 June 1996 to Mr Ison that Mr Blackburn “has got the paperwork” and “has got some figures for you to look at” in making arrangements to attend the Hotel that evening. I do not accept that these representations were made. I am satisfied that Mr Blackburn did not give the documents to Mr Ison, for the reasons I have given below in relation to the fifth representations.

The fifth representations

52 Mr Connors was cross-examined by Mr GE Underwood, counsel for the plaintiffs, and Mr DG Charles, counsel for Mr Blackburn. That cross-examination occurred on 19 December 2002, the second day of the trial. On the morning of the third day of the trial, Mr and Mrs Connors’ counsel, Mr DA Allen, sought leave to recall Mr Connors to give further evidence, to which there was no objection. Mr Connors became very upset and broke down into tears. He said that after hearing the evidence the previous day and sleeping on it the previous night, he believed that, “I may have in my own mind, I am not sure of exactly what happened on the 25th” (tr. 145). Mr Connors was so distressed that a short adjournment was necessary.

53 It is apparent from his evidence that Mr Connors was concerned that he had transposed what had happened at a meeting with Mr Blackburn in his office at 1pm on 25 June 1996 into the meeting at the Hotel that evening. It is clear beyond any doubt that Mr Connors’ memory was badly shaken. It is to be remembered that Mr Ison swore his affidavit on 7 March 2002 (re-sworn on 7 May 2002) and Mr Connors did not swear his affidavit until 18 June 2002. His affidavit was responding to Mr Ison’s affidavits in which the allegations were made about the documents being provided by Mr Blackburn at the Hotel.

54 One of the matters that appears to have influenced Mr Connors’ memory that Mr Blackburn had written the notes at the Hotel was that he had a picture in his mind of himself sitting at the table when the notes were written (tr. 135). However I am satisfied that the picture Mr Connors had in his mind was an image blurred by time. I am satisfied that he was sitting at Mr Blackburn’s desk at 1pm when Mr Blackburn made those notes. I am also satisfied that the second page headed “Advantages” was written by Mr Connors during the 1pm meeting with Mr Blackburn.

55 Although the plaintiffs recounted conversations with the defendants in their affidavits, neither gave evidence of what particular statements they relied upon to make the investment. Neither gave evidence-in-chief on this topic of reliance. However Mr Allen bravely entered the fray in his cross-examination of Mr Ison. Indeed Mr Ison’s evidence as to reliance was very significant. He did not bother to obtain any accountancy advice; he did not seek a valuation of the shares in, or the business of, HHE; he did not consult a solicitor and he did not ask for a list of creditors (tr. 33). He eschewed any reliance on statements other than those he alleged Mr Blackburn made at the Hotel on 25 June 1996 in the following evidence:

Q. If you were not confident in your own ability (to assess the worth of the business) you would have, I suggest, at least consulted some type of expert as to the efficacy of purchasing a share in Hunter Health Equipment?
A. No, I believed that the accountancy firm of Warren Crosbie Sinclair, who showed me the documents that I seen, were one of the biggest and one of the most credible accountancy firms in Newcastle. Why should I doubt what they said?
Q. What documents did you see?
A. The ones at the Nag’s head.
Q. The handwritten documents?
A. Of one of the accountants at Warren Crosbie Sinclair.
Q. Of two pages in length?
A. Of two pages in length.
Q. So you based a decision to invest $100,000 in a company based on a two-page hand written document?
A. On the credibility of the accountancy firm, yes.
Q. So, when you decided to purchase the share in Hunter Health Equipment, you did it because of the representations made by Mr Blackburn, is that correct?
A. And what I seen of Hunter Health, yes, and that Mr Blackburn, if I ever bought shares in Hunter Health, would be my accountant.

(tr. 33-34)

56 There is no suggestion by the plaintiffs that Mr Connors gave either of them the two-page document. That is why so much of this case depends upon what I find occurred at the meeting at the Hotel on 25 June 1996.

57 The plaintiffs’ evidence that Mr Blackburn gave advice as to the $340,000 value is in direct conflict with Mr Blackburn’s evidence. Mr Ison Jnr admitted in cross-examination that he had read his father’s affidavit before he drafted his affidavit (tr. 61). He also admitted that when he drafted his affidavit he remembered “roughly” what was in his father’s affidavit (tr. 62). On the following day when cross-examination continued, Mr Ison Jnr claimed that he had been “confused with the question” in relation to his evidence the previous day (tr. 76). He said he read his father’s affidavit after he had sworn his affidavit. The questions in cross-examination the previous day were reasonably clear questions and it is difficult to understand why Mr Ison Jnr would have been confused. I do not accept he was confused. I regard his evidence on the first day as truthful.

58 Mr Connors conceded a number of possibilities about what Mr Blackburn may or may not have said at the Hotel, however having regard to Mr Connors’ difficulties with his memory, I do not intend to take those into account in assessing the probabilities as between the plaintiffs’ versions and Mr Blackburn’s version of events of 25 June 1996. It is necessary to have regard to documents created either contemporaneously or at around the relevant time to assist in assessing the probabilities.

59 On 18 November 1997, a letter signed by Mr Ison Jnr was sent to Mr and Mrs Connors. It is apparent that Mr Ison had some input into the content of the letter. It included the following:

As you are aware I have been seeking advice on your recent proposal to buy back my share in Hunter Health & Fitness Equipment Pty Limited. It would appear the most suitable method is for the company to buy back the share, leaving you as the only 2 shareholders.
The major problem with this proposal is the company having the funds to repay my investment. The advice given to me is that I should insist upon the full repayment immediately. However, I am conscious you will not have funds available to allow this. I would therefore be willing to loan $80,000 to yourselves which you could on lend to the company to buy back the share. I would however only be willing to make such a loan on the basis that it is secured with a second mortgage over the Warners Bay property and is for a term of no more than 12 months. I would also require interest to be paid on the loan at 13% per annum. Before proceeding with the loan I will endeavour to satisfy myself there is sufficient equity in the building to take out such a mortgage. Interest is to be paid weekly in arrears. If, at any time, a share in Hunter Health & Fitness Equipment is sold the $80,000 is to be repaid immediately.

...

When I purchased the share I accepted there was a need for a deal of give and take. Therefore, I have accepted many of the abnormalities which have occurred in this time, however I believe my good faith has been abused. There is little doubt that without the injection of funds I provided and the hours worked by John Ison, the business of Hunter Health & Fitness would have had little chance of surviving to this point. I am keen to resolve all matters raised above as quickly as possible and look forward to your reply.

60 There is no reference in this letter to any documents being handed to the plaintiffs at the Hotel, nor do any other of the letters written between the parties’ solicitors make such a suggestion.

61 On 5 February 1998, the plaintiffs’ solicitors wrote to Mr Blackburn asking for copies of various documents including the Share Certificate, the financial records of HHE and details of any dividend class shares. It was not until 19 May 1998 that the plaintiffs’ solicitors wrote again to Mr Blackburn noting that there had been no response to the letter of 5 February 1998 and stating:

Since November of last year there have been attempts by our client to arrange a share buy back of his share holding by the current director of the above named company although this apparently will not proceed.
In reviewing his recollection of his purchase of that share and infusion of Capital into the company, our client has taken the view that at that time it was represented to him that the company was worth approximately $340,000 and it was on this basis that those monies were paid.
He subsequently became aware and was not informed at the time that the director owed the company more than $250,000 and that there were further additional debts of $50,000. Our client has possession of some working papers apparently prepared by yourselves which indicate the worth of the company but no indication of its indebtedness.
Our client feels that he was induced into this payment without being made fully aware of the company situation.
He now thinks it appropriate that his original request for a share buy back be proceeded with and we wonder if you could let us have a written response in relation to this request.
(Emphasis added) (Ex. A; KJI 13)

62 It is submitted that if it was the case that Mr Blackburn provided the “working papers” to the plaintiffs at the Hotel and had the conversation as alleged about the value of the company, the letter of 19 May 1998 would have included such a claim. That submission seems to me to have force.

63 Mr Blackburn was the only party to keep any records of what happened on 25 June 1996. His diary recorded two meetings, one at 1pm and another at 6pm. It was suggested to Mr Blackburn that the entry at 6pm consisting of 3 units, or 18 minutes, was in fact a meeting at the Hotel. Mr Blackburn denied that the entry related to a meeting at the Hotel and was firm in his evidence that he attended the Hotel for a social reason.

64 Mr Blackburn’s notes of his meeting at 1pm are careful. The additional note that he made is obviously a combination of notes that may have been made at the end the meeting at 2.30pm or at the meeting at 6pm, although Mr Blackburn could not remember if he had his file with him at that meeting, or at a later time when he was advised by Mr Connors that the share was to be issued in Mr Ison Jnr’s name.

65 Neither of the plaintiffs kept any notes in respect of the occurrences of 25 June 1996. Mr Ison was working at HHE five days a week and it is apparent that he and Mr Connors would attend the Hotel regularly, usually on a Friday evening. Mr Ison Jnr claimed that he also attended the Hotel from time to time to have a drink with his father and Mr Connors. It is not surprising that memories of the details, at least of the timing of a meeting, six years prior to the date upon which affidavits were sworn were vulnerable, particularly when the parties had attended the Hotel probably more than fifty times in the period late 1995 to November 1997.

66 Mr Ison was an experienced businessman. He gave evidence that he understood profit and loss statements and balance sheets. His affidavit evidence was that he would only make the investment after he looked at the financials and if the “paperwork” panned out. In his oral evidence he said that when he used the term “financials” he meant the profit and loss statement and the balance sheet of HHE. The two-page document could certainly not be characterised as the “financials” as Mr Ison understood and used that term. Mr Ison admitted that he used the two-page document to come to a recollection of the substance of what was said at the Hotel (tr. 50). The two-page document on its own could not assist Mr Ison in working out if the “financials” panned out.

67 In my view Mr Ison had already decided to invest in HHE by the time Mr Blackburn went to the Hotel that evening. Mr Ison obtained a share in Body Focus for his other son, Nathan, without taking advice from a lawyer or an accountant. It was therefore not out of character for him to have made this investment without seeking advice. If he had sought advice from Mr Blackburn and had relied upon it, as he said he did in his evidence, it is reasonable to expect that such a claim would have surfaced when the plaintiffs’ solicitors were communicating with Mr Blackburn. Rather than such a claim surfacing at that time, there was the oblique statement that the “client has possession of some working papers apparently prepared by yourselves”. The first time it was suggested that the two-page document was handed to Mr Ison by Mr Blackburn at the Hotel on 25 June 1996 was six years later in an affidavit sworn by Mr Ison (originally) on 7 March 2002. Mr Ison Jnr also made a similar claim in his affidavit sworn on the same date. Neither the Statement of Claim filed on 22 December 2000 nor the Amended Statement of Claim filed on 20 June 2001 made such a claim. It was not until the FASC was filed on 12 December 2002, pursuant to leave granted by me on 15 November 2002, that the claim made its way into the pleadings.

68 Although there is some curiosity as to why Mr Blackburn would attend HHE’s premises on the evening of 25 June 1996 to discuss the matter of the share premium reserve with Mr Connors, I accept that he did so. I also accept that it was after that meeting that he went to the Hotel at Mr Connor’s invitation. In the light of all the evidence I accept Mr Blackburn’s evidence that he did not have the conversation as alleged by the plaintiffs at the Hotel on 25 June 1996. I am satisfied that Mr Blackburn made the notes at the meeting with Mr Connors at 1pm and gave the originals to Mr Connors at the conclusion of the meeting.

69 Mr Blackburn has been in practice for twenty years and there is nothing to lead to me to the conclusion that his evidence that he informed Mr Ison that there was a conflict and he should take his own advice was either unreliable or false. I am satisfied that he did not give the documents to Mr Ison at the Hotel. I am not satisfied that the fifth representations were made.

70 A further submission put by the defendants was that, in any event, the plaintiffs have not proved that the $340,000 amount was an unreasonable or a misleading or deceptive value as at 25 June 1996. Although perhaps otiose because of my finding as to these representations, I shall deal with that submission.

71 The plaintiffs claim that Mr Blackburn informed them that the “value” of HHE was $340,000 and that such statement was misleading or deceptive because its net worth was substantially less than $340,000 as at 25 June 1996 (FASC; par 18(e)(i)). The plaintiffs did not call any expert evidence in relation to the value of the company and relied only upon the Management Accounts for May 1996 and March 1997 in support of this claim. Mr Underwood submitted that it was unnecessary to call expert evidence on this topic in the light of the contents of the Management Accounts.

72 Mr Blackburn was not at any stage retained or instructed to prepare a valuation of the companies, HHE or Amtras Pty Ltd. Mr Blackburn is not a licensed business valuer. Although he had made it very clear in his evidence that he had not conducted a valuation, Mr Underwood pressed him for an opinion as to whether $340,000 was a reasonable valuation as at 25 June 1996. Mr Blackburn gave the following evidence:

Yes, I believe the valuation was reasonable. There has been some evidence tendered about Wilsons Business Brokers. They thought that valuation was reasonable. When you look at the balance sheet of Amtras Pty Ltd, please note that there is no goodwill recorded on the balance sheet. The goodwill was developed over a number of years by Mr and Mrs Connors.

(tr. 192).

73 There is no independent evidence of the value of the goodwill, however Mr Blackburn’s evidence must be taken into account. It is a valid suggestion that the value of the goodwill of the business is a relevant factor to be taken into account if one is to place a value on the share in the company that operated the business as at 25 June 1996. There is no evidence of the value of contracts that had been secured by HHE as at 1 July 1996 nor was there any evidence of the number of clients of HHE at that time.

74 The Management Accounts for May 1996 are not audited and although they refer to an accumulated loss of $46,941 they also refer to a total trading profit of $211,504. The later Management Accounts that show an accumulated trading loss of $97,284 and a total trading profit of $142,180 are also unaudited. There were a number of factors that may or may not have had an impact on HHE’s performance both before and after June 1996. They include the discovery that an employee had been allegedly misappropriating funds and his subsequent termination, the relocation of the premises, the failure of Mr Ison Jnr to secure enough sales to warrant a salaried position, the collapse of Body Focus from which HHE had received income and Mr Connors’ decision to take a period of extended leave. Mr Connors gave evidence that the loan from the National Australia Bank referred to in the Management Accounts was secured by mortgage over a house and that there was sufficient equity in the house to repay the loan (tr. 142-143).

75 If these factors had been addressed by expert accounting evidence and there had been an independent expert valuation opinion, the Court would be in a position to make a judgment as to the true value of the share as at 1 July 1996. However in the absence of that evidence and having regard to Mr Blackburn’s evidence, I am not satisfied that the value was unreasonable.

The third and sixth representations

76 The FASC claimed, and Mr Ison’s evidence was, that Mr Connors represented that the company owed its creditors between $60,000 and $80,000. On 21 June 1996, Mr Blackburn’s letter to Mr Connors referred to creditors outstanding as $76,976 (Ex. B). Mr Connors admitted that he said to Mr Ison that the creditors were owed about $60,000 or $80,000. That seems to be consistent with Mr Blackburn’s advice at the time and does not seem to me to be misleading or deceptive.

77 The money paid by Mr Ison was to be used to pay off the creditors and any statement to that effect could not have been misleading or deceptive. There was also a claim that Mr Connors said that the company would be debt free after the investment and that the company was trading profitably. Mr Connors gave evidence that he understood that as at 25 June 1996 HHE was “travelling okay” (tr. 108). He gave evidence that he thought he said it was running “profitable and okay” (tr. 114). After Mr Connors was taken through the Management Accounts in cross-examination, he conceded that HHE was not trading profitably in June 1996 (tr. 128).

78 Mr Connors also gave evidence that there was a decline in sales from the previous year and that Mr Ison was “on hand” during that period and they had discussed the decline in commercial sales (tr. 113). This seems consistent with part of Mr Ison’s evidence in which he claimed that Mr Connors had said that the money that Mr Ison invested would “get the company up and running again”. This statement is consistent with HHE not being “up and running” before the investment.

79 Even if Mr Connors had said that the company would be debt free and was trading profitably, there is a very big problem for the plaintiffs in this case by reason of Mr Ison’s evidence that it was the two-page document, the representation made by Mr Blackburn at the Hotel and what he had seen of HHE that were the bases for the investment (tr.34). As was said in final submissions, the plaintiffs put all their eggs in one basket in the answers given in cross-examination in the portion of the transcript extracted earlier in this judgment (tr. 33-34). I am not satisfied that the plaintiffs have met the “causative threshold” in respect of these representations: Ricochet Pty Ltd & Ors v Equity Trustees Executors and Agency Company Ltd (1993) 41 FCR 229 at 235.

80 Having regard to my findings in respect of the fifth representations there is no need to consider the allegations of breach of duty of care because the cause of action is based on the fifth representations and claims that Mr Blackburn failed to disclose certain matters to the plaintiffs. Mr Blackburn advised Mr Ison to take his own advice and that he could not advise him. There is no claim made against Mr Blackburn in relation to the provision of the “working papers” to Mr Connors.

Amounts loaned to HHE

81 The plaintiffs claimed that $1,800 was loaned to HHE on about 15 July 1996 and a further $5,000 was loaned to HHE in December 1996 (FASC; pars. 30 & 32). The second plaintiff claimed that he had demanded repayment from HHE and it had wrongly refused to repay the amounts (FASC; pars 31 & 33).

82 In written submissions in reply dated 18 February 2003 and in oral submissions on 24 February 2003, the plaintiffs abandoned their application to reinstate HHE. There is no pleading claiming these amounts from the other defendants. In those circumstances, these claims are dismissed.

Orders

83 The plaintiffs’ claims against each of the defendants are dismissed. If the parties are unable to agree on a costs order I will hear argument on a date to be fixed by contacting my Associate no later than 21 March 2003.

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Last Modified: 03/17/2003