Davis v Perry O'Brien Engineering Pty Ltd

Case [2023] QSC 243

SUPREME COURT OF QUEENSLAND

CITATION:

Davis & Anor v Perry O’Brien Engineering Pty Ltd & Ors [2023] QSC 243

PARTIES:

ROY STEVEN DAVIS

(first plaintiff)

AND
COLLEEN JOYCE DAVIS

(second plaintiff)

v

PERRY O’BRIEN ENGINEERING PTY LTD
ACN 077 375 207

(first defendant)

AND
R.B. PERRY INVESTMENTS PTY LTD
ACN 607 303 248 AS TRUSTEE FOR THE PERRY INVESTMENT TRUST
(second defendant)
AND
M.G. O’BRIEN INVESTMENTS PTY LTD
ACN 607 300 201 AS TRUSTEE FOR THE O’BRIEN INVESTMENT TRUST

(third defendant)

FILE NO:

5928 of 2016

DIVISION:

Trial Division

PROCEEDING:

Trial

ORIGINATING COURT:

Supreme Court of Queensland at Brisbane

DELIVERED ON:

1 November 2023

DELIVERED AT:

Brisbane

HEARING DATE:

24, 25, 26, 27 and 28 July 2023, 3 and 11 August 2023

JUDGE:

Applegarth J

ORDER:

1.    The parties to agree, if possible, or otherwise submit forms of order to reflect my findings.

2.    The matter be adjourned to a date to be fixed to hear submissions and to enter judgment.

CATCHWORDS:

TRADE AND COMMERCE – COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION – CONSUMER PROTECTION – MISLEADING OR DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS – where the Sellers of shares in a business provided inaccurate financial information and failed to disclose the truth about the company’s financial performance, profitability, and the extent of its creditors - where the Buyers contend that if they had not been misled by the Sellers and, instead, had been given an accurate account of the financial position they would not have continued with the purchase of the shares and settled the transaction - “No transaction” case – where, but for the misleading or deceptive conduct, the transaction would not have occurred – causation – remedies – applicable principles – whether counterfactual relevant to analysis – whether counterfactual should be pleaded

CONTRACTS – BREACH – damages - sale of company shares – warranties about company’s financial affairs – assessment of damages

DAMAGES – ASSESSMENT OF DAMAGES IN ACTIONS FOR BREACH OF CONTRACT - breach of warranty as to company’s financial information – damages recoverable by Buyers for breach of warranty assessed as difference between price actually paid and what price would have been if accurate financial information had been disclosed

TRADE AND COMMERCE – COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION – ENFORCEMENT AND REMEDIES – ACTIONS FOR DAMAGES – ASSESSMENT OR AVAILABILITY OF DAMAGES – misleading representations as to the company’s financial information – where the Buyers seek compensation to be assessed as the difference between the price paid and the actual value of the shares

Australian Consumer Law, ss 18, 236
Building and Construction Industry (Portable Long Service Leave) Act 1991 (Qld)
Competition and Consumer Act 2010 (Cth), s 137B


AndarTransport Pty Ltd v Brambles Ltd (2004) 217 CLR 424, cited
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549, cited
Berry v CCL Secure Pty Ltd (2020) 271 CLR 151, cited
Cackett v Keswick [1902] 2 Ch 456, cited
Campbell v Backoffice Investments (2009)…

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Details
AGLC
Davis v Perry O'Brien Engineering Pty Ltd [2023] QSC 243
Case
[2023] QSC 243
Decision Date

CaseChat Overview and Summary

The Sellers, who owned Earthpro Pty Ltd, an earthmoving and civil contracting business, agreed to sell their shares in the company to Mr O’Brien and Mr Perry through their respective trustee companies. The Buyers entered into a Sale and Service Agreement (SSA) with the Sellers, but the Sellers provided inaccurate financial information and failed to disclose the true financial position of Earthpro. The Buyers sought damages for the misleading or deceptive conduct, claiming that if they had not been misled, they would not have completed the transaction. The court was required to decide whether the Sellers engaged in misleading or deceptive conduct, whether the Buyers would have entered into the transaction if accurate information had been provided, and what damages, if any, the Buyers were entitled to claim.

The court found that the Sellers breached their contractual obligations by providing inaccurate financial information and failing to disclose the true financial position of Earthpro. The Sellers provided misleading information about the company’s financial performance, profitability, and the extent of its creditors, which led the Buyers to believe that the business had a better financial standing than it actually did. The court also found that the Buyers would not have completed the transaction if they had been given accurate information about Earthpro’s financial position. The court held that the Sellers engaged in misleading or deceptive conduct, which led to the Buyers entering into the SSA under false pretenses.

In terms of damages, the court assessed the Buyers’ damages as the difference between the price actually paid and what price would have been if accurate financial information had been disclosed. The court found that the Buyers were entitled to compensation for the difference between the price they paid for the shares and the actual value of the shares based on the true financial information. The court also noted that the counterfactual scenario, where the Buyers were given accurate information, was relevant to the analysis of the case. The court held that the Sellers were liable for the damages claimed by the Buyers.

The court directed the parties to agree on, or submit forms of order to reflect, the findings made in the decision. The matter was adjourned to a later date to hear submissions and to enter judgment.

Orders

Orders of the court

1. The parties to agree, if possible, or otherwise submit forms of order to reflect my findings.

2. The matter be adjourned to a date to be fixed to hear submissions and to enter judgment.

Background

Background to the litigation

Several issues arise on the Sellers’ claim. They will be discussed later since they make little sense until the details of the SSA and its aftermath are explained.Background The plaintiffs (“the Sellers”) owned an earthmoving and civil contracting business that they conducted through a company, Earthpro Pty Ltd. Mr Davis was its sole director and Mrs Davis worked in the business in connection with its financial administration. The Sellers had built up the business since it was established in 1997. By 2014, Mr Davis wanted to step back from the business and devote more time to his and Mrs Davis’ pastime of motor racing. As a result, the business employed a general manager to take over many of Mr Davis’ tasks in connection with the day‑to‑day operation of the business. This included managing contracts and supervising a staff of about 70 individuals who worked on sites and operated equipment. The office was a small one, with two bookkeepers inputting into a MYOB system invoices that arrived from suppliers, invoicing customers for moneys that were due under claims, and paying invoices if they were approved by Mrs Davis. The general manager did not have access to the MYOB system. The bookkeepers were responsible for the routine operation of the MYOB accounting system and they took their instructions from Mrs Davis or Earthpro’s external accountant, Mr Ings. In 2015, Mr Michael O’Brien and Mr Robert Perry, who were experienced in civil works and earthmoving, expressed an interest in buying the business. They and their accountant, Mr Bristow, had discussions with the Sellers and their accountant, Mr Ings. Matters progressed to a point at which Mr O’Brien and Mr Perry were invited to work in the business with a view to learning more about it as prospective buyers. Earthpro terminated the services of its general manager on 17 August 2015. Mr O’Brien took over his responsibilities in administering contracts, while Mr Perry concentrated on operations in the field, including the business’ plant and equipment. Mr O’Brien and Mr Perry worked in the business without pay. Mr Davis introduced Mr O’Brien and Mr Perry to customers and suppliers as potential buyers. Mr and Mrs Davis remained in control of the business, but they would be absent from it for periods, for example, pursuing their interest in motor racing and attending racing events. The bookkeepers continued to regard Mrs Davis as their boss. In the final months of 2015, Mr O’Brien and Mr Perry attended to the day‑to‑day operations of the business, including staffing decisions and decisions about the operation, repair and replacement of plant and equipment. The proposed purchase was to be by the purchase of shares in Earthpro by Mr O’Brien’s and Mr Perry’s respective trustee companies. These entities, which are the second and third defendants, will be referred to as “the Buyers”. On 4 October 2015, the Sellers and the Buyers entered into a SSA. Under the SSA, all the shares in the first defendant, as well as another company, Earthpro Plant Hire Pty Ltd, were to be sold to the Buyers. The SSA was subject to conditions about due diligence and obtaining finance. It contained numerous other terms including conditions about the accuracy of information provided to the Buyers and the disclosure of information to them prior to completion. Clause 2.6 of the SSA obliged the Sellers to “ensure that the information provided to the Buyer in respect of the Companies or the Business is materially complete and accurate in all respects”. Clause 7.3 provided:“If, before Completion, the Sellers have knowledge or become aware of any matter or thing which has or may be considered by the Buyer (acting reasonably) to have a material effect on the profitability or the value of the Business or the Companies, the relevant Sellers must immediately give notice to the Buyer fully describing the matter or thing and its likely effect on the Business.”

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Presently, I propose to publish my reasons and direct the parties to agree, if possible, or otherwise submit forms of order to reflect my findings. The matter will be adjourned to a date to be fixed to hear submissions and to enter judgment.Summary and Conclusion The Sellers were contractually obliged to give accurate information and not mislead the Buyers, by omission or otherwise, in relation to the written information given to the Buyers up to the date of completion. The Sellers also were under a duty to disclose information that was material for disclosure to a prudent buyer. The Buyers were not given true information about the financial affairs of Earthpro. Instead, they were given misleading or inaccurate information. The Sellers failed to make required disclosures. Overall, they failed to disclose accurate information about a number of aspects of the financial performance, profitability, and creditors of the business. The Sellers thereby engaged in misleading conduct and misled the Buyers. The Buyers always appreciated that the business had difficulties, was making losses and had equipment that was old and poorly maintained. The Sellers had entrusted the day‑to‑day conduct of the business’ operations to a general manager. The Buyers apprehended that the business had not been well-managed and that there was a potential to improve it, return it to profit, and benefit over the long-term. A critical matter for the Buyers was a promise from the Sellers that the business’ current assets and its current liabilities had a ratio of 1.25. This financial buffer was critical to the company’s future and the Buyers’ ability to continue the business and improve it. In negotiating the SSA, the Sellers believed that the business was better than it was and sought a much higher purchase price than it was worth. The purchase price agreed under the SSA had to be reduced in the light of the Buyers’ due diligence. Even after that, it became apparent to both the Buyers and the Sellers that the contractually-promised 1.25 ratio could not be achieved. The Sellers would be required to either again reduce the purchase price or make a large cash contribution to the business. The Buyers were misled that invoices had been obtained from suppliers for work done up to the cut-off date of 25 November 2015 and entered into the company’s accounts. Representations made by the Sellers in late November 2015 understated the company’s creditors and did not disclose the extent of its losses. The information provided by the Sellers’ accountant on their behalf also vastly understated the shortfall that the Sellers were required to cover to achieve the cash equivalent of the 1.25 ratio. Based on inaccurate and misleading information, and a continuing failure to disclose the true facts, the Buyers entered into a deed on 9 December 2015 and completed the purchase on 23 December 2015. If true and accurate information had been disclosed to the Buyers in late November and early December 2015, they would not have been misled and would not have proceeded to complete the SSA. The transaction as it then stood would not have been completed and no alternative sale transaction would have been entered into.

Ratio Decidendi

Legal Principle Established

In the context in which it was given, including the conditions in the SSA about the accuracy of financial statements and disclosure of material information, the provision of the 3 November Profit and Loss Statement represented to the Buyers and their agent that the figures in it were accurate. If the figures were not accurate and required adjustment because additional creditors needed to be included for the reporting periods, then this should have been disclosed to the Buyers or their agent. Three substantial alterations to the 3 November Profit and Loss Statement Three alterations are the focus of submissions. They are helpfully summarised in the Sellers’ submissions, which I will adopt with minor modifications in the next six paragraphs. First, two draft invoices were entered by an Earthpro bookkeeper, Ms Utz, with a transaction date of 30 October 2015 and an aggregate value of $540,500 (excluding GST). However, the draft invoices were later deleted or edited by Ms Utz before she entered the finalised invoices into the accounts. The final invoices were entered into the management accounts with a transaction date in November 2015. The effect was to reduce the income recorded in the accounts for the period ended 31 October 2015, but to increase the income recorded for November 2015. The net profit for the period ended 31 October 2015 thus reduced by $540,500 (excluding GST). Second, Mr Ings entered a series of transactions into MYOB to capitalise certain expenses of Earthpro as stock (in the aggregate sum of $442,896.75) as at 31 October 2015. He later deleted those transactions in early November 2015, because “it was a single‑purpose entry” as Earthpro had not previously accounted for stock, and because “[i]f it were left in there, it wouldn’t roll forward properly, so it was taken back out because it was put in for the purpose of that 30 October figures only”. The effect of deleting the transactions was to increase the level of expenses recorded in the accounts for the period ended 31 October 2015, and thereby to decrease the net profit by $442,896.75 (excluding GST). Third, many supplier invoices were received after 3 November 2015, that were dated and entered into the accounts with a transaction date in October 2015, with an aggregate value of $571,967.04 (excluding GST). The effect of the entry of the Missing October Invoices was to further increase expenses, and to reduce the net profit for the period ended October 2015 by $571,967.04. In summary: the three alterations concern (a) two draft invoices; (b) the capitalisation of certain expenses as stock; and (c) what are described in the submissions as “the Missing October Invoices”. The draft invoices I conclude that the treatment of the draft invoices was not misleading and did not in fact mislead the Buyers. The inclusion of the amounts stated in draft invoices (which had yet to be finalised and sent to the customer) was known about and approved by Mr O’Brien and Mr Bristow. The work had been done in October, and estimates were made about its costing.