DM Tilley Enterprises Pty Ltd v Montesi
[2013] SADC 114
•22 August 2013
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
DM TILLEY ENTERPRISES PTY LTD v MONTESI & ORS
[2013] SADC 114
Judgment of His Honour Judge Tilmouth
22 August 2013
CONTRACTS - PARTICULAR PARTIES - VENDOR AND PURCHASER - DISCLOSURE OF MATERIAL FACTS
Application for the recovery of vendor finance under a Sale and Purchase Agreement of a business granted on the merits. Counter-claim for recission and damages on account of alleged representations dismissed for want of proof of actionable misrepresenation, reliance and causation. Discussion as to the effect of non-compliance with disclosure provisions under the Land and Business (Sale and Conveyancing) Act.
Land and Business (Sale and Conveyancing) Act 1994 (SA) s 8, s 15; Land and Business (Sale and Conveyancing) Regulations 2010 (SA) Form 2; Nguyen v Taylor (1992) 27 NSWLR 48, referred to.
Maguire & Tansey v Makaronis (1997) 188 CLR 449; Sutton v AJ Thompson Pty Ltd (in liq) (1987) 73 ALR 233 at 240, applied.
Piantadosi v Tang (2001) 215 LSJS 58; [2001] SASC 251, distinguished.
Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at [38]; Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281, considered.
DM TILLEY ENTERPRISES PTY LTD v MONTESI & ORS
[2013] SADC 114The issues
The plaintiff and defendant were respectively vendor and the principal purchaser of a sheet metal business situated in Blair Athol. The purchase involved the provision of vendor finance to be repaid in regular monthly instalments. The purchaser fell into default, so that eventually the plaintiff brought these proceedings claiming recovery of the outstanding loan, together with interest. Mr Montesi’s company by counter-claim seeks to set aside the sale and purchase agreement on the grounds of misrepresentation and claims damages for losses sustained as a consequence.
The various agreements
The sale of the business at a price of $200,000, was effected by a Business Sale Agreement executed on 2 March 2009. Although at that time the parties traded under different corporate names, that fact is otherwise irrelevant, so outlining the details would unduly complicate matters. By that agreement what became shortly thereafter DM Tilley Enterprises Pty Ltd (‘Tilley Enterprises’) agreed in clause 4.5 thereof to supply vendor finance to what shortly therafter became Stevens Sheet Metal Pty Ltd (‘Stevens Sheet Metal’) of $150,000, less ‘employee adjustments’. This ultimately crystallised into the sum of $136,452.23.[1] The remainder of the purchase price $50,000, was paid over at settlement. Thereafter 12 payments of $2,083.33 were made more or less monthly. As of 29 March 2010 these totalled $25,000. The last of such payments was made on 27 April 2010 in an identical sum.
[1] Exhibit P1, Tab 5, p 4 – Schedule to loan agreement
The Business Sale Agreement further stated in clause 4.5(e) that the Directors of Stevens Sheet Metal were to provide personal guarantees of performance. Under a separate Loan Agreement of the same date, Stevens Sheet Metal agreed in clause 3 that if it fell into default, interest at the rate of 12 per cent applied on ‘the principle then outstanding, and thereafter such interest shall form part of the principle and shall itself accrue interest …’.[2] Otherwise in circumstances falling short of default, interest accrued at the rate of 8 per cent.[3]
[2] Exhibit P1, Tab 5
[3] Item D to the Schedule
In Item F to the Schedule thereto, it is recorded that a guarantee and indemnity was to be given to the vendor by the defendant Mr Montesi personally. The loan itself was over a period of two years to 2 March 2011.[4] There were also other securities of the same date by way of a mortgage debenture over the assets of Stevens Sheet Metal.[5]
[4] Item E to the Schedule
[5] Exhibit P1, Tab 6
Mr Montesi granted a Deed of Guarantee and Indemnity in favour of Tilley Enterprises committing himself personally to the due performance of the repayment obligations under the Loan Agreement. Hence he is sued in his personal capacity for the default of Stevens Sheet Metal. Notices of default dated 22 October and 26 November 2010 were served on the company and the latter also on Mr Montesi.[6] The assets of the company were realised on the 14th of July 2011, so obviously the business had ceased trading by then. There is no evidence at all of the trading position following December 2009.
[6] Exhibit P3
Statement of prescribed particulars
Prior to settlement, Tilley Enterprises furnished a statement purporting to comply with s 8 of the Land and Business (Sale and Conveyancing) Act 1994 (SA) (the L&B Act). In fact this comprised only a certificate by a qualified accountant with respect to the trading position of Tilley Enterprises. As supplied those particulars were these:
Date 30/06/05 30/06/06 30/06/07 Gross Income $282,588 $313,587 $417,997 Net Profit $ 92,029 $ 88,174 $156,720
The particulars also included a trading statement for the three financial years from 1 July 2004 to 30 June 2007 and a depreciation schedule. These documents were given to Mr Montesi who clearly forwarded them to his accountant, the witness Mr Cavaleri. Cavaleri acknowledged the same in an email to Mr Montesi’s solicitor Mr Dorman of Mellor Olssen, on 11 February 2009.[7] Mellor Olssen drew the documents referred to earlier on the instructions of Mr Montesi. Mr Tilley the Director of Tilley Enterprises, also had his own legal advice. Nevertheless he essentially accepted the documents as drafted by Mellors.
[7] Exhibit P5
It is clear that by late January 2009 Mr Cavaleri had advised Mr Montesi to obtain further financial information, because the figures for the trading period immediately preceding the sale from July 2007 to December 2008 had not been furnished.[8] Consequently on 27 January Mr Montesi emailed Mr Tilley requesting a ‘Form 2’.[9] Mr Tilley responded on 29 January 2009 by facsimile,[10] providing the following additional financial information:
[8] T179.31-180.26
[9] Exhibit D10
[10] Exhibit P8
Date 30 July 2008 July to December 2008 Gross Income $626,013.32 $374,094.39 Net Profit $ 63,040.90 $ 96,259.31
Mr Montesi did not assert that these figures were other than an accurate representation of the trading position of Stevens Sheet Metal at relevant times preceding the loan transaction. Indeed he accepted in the course of his evidence ‘the amount of the turnover … that is not in question’.[11] He further conceded the accuracy of the turnover and profit figures as so provided.[12]
[11] T195.12-.13
[12] T198.2-200.20, and T211.27-.37
Section 8 of the L&B Act requires a vendor to furnish a statement of prescribed particulars in a form required by Form 2 of the Land and Business (Sale and Conveyancing) Regulations 2010 (SA). There was clearly noncompliance with these obligations in as much as the cooling-off rights conferred by s 5 were not given, and the other prescribed particulars in relation to the business were not supplied. So much was conceded by Mr McCarthy counsel for Tilley Enterprises. The purpose that s 8 and its attendant requirements was as Kirby P described in Nguyen v Taylor[13] as being to ‘reduce the opportunity for gazumping’ and to shift to the vendor the obligation to make disclosure.
[13] (1992) 27 NSWLR 48, 52
The consequences flowing from a defective Form 2 statement are dealt with by s 15 of the L&B Act, which provides:
15—Remedies
(1)Where a vendor's statement is not given or certified as required by this Part, or the statement given is defective, the purchaser may apply to a court of competent jurisdiction for an order under this section.
(2)On the hearing of an application under subsection (1) the Court may, if satisfied that the purchaser has been prejudiced by the failure to comply with this Part, exercise any one or more of the following powers:
(a)avoid the contract and make such other orders as the Court thinks necessary or desirable to restore the parties to the contract to their respective positions before entering into the contract;
(b)award such damages as may, in the opinion of the Court, be necessary to compensate loss arising from the non-compliance;
(c)make such other orders as may be just in the circumstances.
(3)Damages may be awarded under subsection (2)(b) against—
(a)the vendor;
(b)if it appears that the purchaser has been prejudiced by a failure on the part of an agent to carry out duties imposed by this Part—the agent,
or both.
In this particular instance although the Form 2 was plainly defective, the figures actually supplied were accurate. The subsequent facsimile sent by Mr Tilley satisfied both Mr Cavaleri and Mr Montesi as to any prior deficiency from their point of view. If compliance had continued to be a problem, the simple remedy was to decline settlement until there was. On the contrary Mr Montesi willingly executed the subject documents with the benefit of legal and accounting advice at his disposal.
Representations
In his pleadings Mr Montesi, who was self represented at trial, claimed certain (mis)representations were made to him by Mr Tilley. These were to the effect that the business could take on more work, that it was a ‘good’ business and that the vendor finance could be repaid within 18 months. The fact of the matter is that on the figures actually provided, the business was in a good trading position and based on those figures, the loan was certainly repayable within 18 months. Those aspects of his counter-claim simply cannot be sustained.
However the gravamen of Mr Montesi’s claim apart from the Form 2 issue, became more evident as the trial proceeded. It condensed into the fact that Mr Tilley had failed to live up to a separate obligation contained within the several documents to manage the business effectively on the purchasers behalf. In his evidence Mr Montesi sought to ‘highlight … the percentage of business my company PB Visual, put through Stevens Sheet Metal’,[14] and he questioned Mr Tilley’s ‘commitment to the business … because of the lack of sales to existing customers’.[15]
[14] T195.14-.15
[15] T196.18-.20
By clause 14.2(b) of the Business Sale Agreement, Stevens Sheet Metal undertook to employ Mr Tilley as manager for 12 months following settlement, at an annual salary of $68,000. This made good sense as Mr Tilley had the necessary working knowledge of the industry and had built up the business after emigrating from the United Kingdom five years earlier, and as Mr Montesi had no knowledge of the sheet metal business himself. In any case it is clear that Mr Montesi was more than fully preoccupied in running his own sign writing business PB Visual Communications Pty Ltd (‘PB Visual’).
Mr Montesi also complained that Mr Tilley took four weeks holiday soon after the sale. It is accepted on both sides that Mr Tilley’s employment was ended by mutual agreement at the end of October 2009, although there are immaterial differences between them as to the precise circumstances bringing that about.[16] Thereafter Mr Montesi engaged his own manager.
[16] T14.10, T18.37-.38, T61.35-63.9, T122.27-123.10, T205.9-.17
Little is known about the operation of the business from 2010 onwards because no books of account, which are in the possession of Mr Montesi or Stevens Sheet Metal, were produced. What is known is that over four months from March 2009 immediately post-settlement, to the end of the financial year June 2009, sales amounted to $222,782.59.[17] If this figure were to be trebled in order to project potential annual sales, the figure would be $666,000 in round terms. That is $40,000 better than the financial year to the end of June 2008. Of the sales to the end of June 2009, $131,676.59 (or 59.1 per cent) was derived from PB Visual. The figures for the period from July to December 2009 produced by Mr Montesi from Stevens Sheet Metal MYOB accounts, reveal an income of $335,140.96. If annualised these could have amounted to projected sales of about $670,000, thus suggesting an improving trading position. Of the former sum PB Visual contributed $182,876.59, equally evincing a consistent contribution by it to the Stevens Sheet Metal stream of income.
[17] Exhibit P12
Based on all this material, the only conclusion that can possibly be reached is that the business only fell into difficulty after Mr Tilley departed. As a matter of fact the figures contained in Exhibit P12 demonstrate the business was growing during the time he remained there.
It can be accepted that the accounting records also demonstrate that as time went on, the amount of business supplied by PB Visual increased to something approaching 60 per cent of total income. It was conceded by counsel for the plaintiff that prior to the sale, the level of business contributed by PB Visual was between 11-15 per cent and that it rose to 59.1 per cent for the period between March and June 2009.[18]
[18] T195.20-196.9
Two conclusions may be drawn from this material. First, there is simply no evidence that during the time Mr Tilley remained with the business that it ran down. That matter has already been discussed. The second is that it furnishes no proof that PB Visual had to prop up the business due to failing custom.
The evidence of Mr Tilley was that the business was already at full production capacity at the time of sale. He said the business had ‘expanded slowly’ over the four and a half years since he had purchased it in 2004 and that it was running to full production capacity at the time of sale.[19] Mr Montesi accepted that this was the position under cross-examination:[20]
[19] T125.12-.29
[20] T228.15-.35
QI take it you didn't take on any additional number of employees.
ANo sir, we didn't have the finances to do that.
QDo you agree at one stage on Mr Tilley's advice there was an attempt to employ more sheet metal workers.
AYeah, very early in the piece, yes.
QAnd you agree that that attempt wasn't successful.
AObviously not, yeah.
QYou didn't disagree with Mr Tilley that the business could use the capacity of a further sheet metal worker at that stage did you.
AAs Mr Tilley said yesterday and I'm in agreeance with him, that we're always looking for new workers or any available worker.
QYou agree if you got such a worker, assuming they were a reasonable worker, that would increase the capacity of the business.
AI would have to take the opinion of Mr Tilley because I'm not a sheet metal worker and I couldn't make that call.
It stands only to reason then that if more out-put was devoted to PB Visual, then less could be undertaken for other customers. Moreover the work-load for PB Visual was given priority on the instructions of Mr Montesi. Mr Tilley said during his evidence that he took instructions from Mr Montesi to undertake PB Visual work,[21] that the firm was ‘flat out’ at those times,[22] and that he effectively had to give priority to that work because of those instructions.[23] That this was so makes sense from Mr Montesi’s point of view, as it would serve to enhance the speed at which PB Visual could satisfy orders for its signs. Obviously if work was prioritised for PB Visual as it was, other customers would necessarily come in second.
[21] T130.29-131.28
[22] T132.19-.28
[23] T168.30-169.31
In any case Mr Montesi has failed to prove a significant down turn in custom, for the evidence presents a contrasting picture. The table he produced to try and demonstrate that was plainly incomplete, when compared with the customer lists in Exhibits P12 and P14. The latter shows an increase in orders from outside sources in some instances.[24] It is not therefore surprising in the least that the work from other customers might have fallen away because they must have grown dissatisfied with the preference given to the work of PB Visual and the corresponding delay in the delivery of their own orders.
[24] Exhibit D7, and refer T261.6-263.4
Nor was there anything unreasonable in Mr Tilley taking three weeks holiday between July 17 and 6 August 2009, or in taking a further week after he left the business between 30 October and 15 November 2009.[25] In point of fact clause 14.2 (b) of the Business Sale Agreement specifically entitled him to take “normal employment entitlements…” upon such terms and conditions as are reasonably agreed.” Such entitlements would have clearly encompassed the taking of annual and accrued long service leave. I do not accept that Mr Tilley would have taken any entitlements without consulting Mr Montesi, still less that he would do so at times that would jeapordise the business.
[25] T107.5-109.33
To the extent that Mr Montesi’s evidence and submissions suggest the contrary on the above topics, I do not accept them. It is impossible to accept that having provided a significant level of vendor finance, Mr Tilley would risk recovery by allowing the business to deteriorate. It simply defies commonsense that he would permit that to happen. The fact is that it did not, as the turnover figures to the end of 2009 conclusively demonstrate.
The causes of action – including the various parallel statutory causes pleaded – based on alleged misrepresentations must necessarily fail. It is not without significance in reaching this conclusion that no complaint or assertion of any misrepresentation was made until a defence was filed over three years later in June 2011 and even then some of Mr Montesi’s current complaints were not pleaded.[26]
[26] T209.3-210.5, 221-222
The breach of the L&B Act
In order to succeed in action under s 15 of the L&B Act, it must be proven that the purchaser was both induced to enter into the transaction in reliance on an actionable misrepresentation, or a misleading deficient Form 2 statement, and that damage thereby was caused: Gould v Vaggelas,[27] Marks v GIO Australia Holdings Ltd.[28] It is equally fundamental that the damage to which a party is entitled on proof of a breach of s 8 of the L&B Act are analogous to those awarded in tort, usually measured by the difference between the amount paid and the value of the business: Kizbeau Pty Ltd v WG & B Pty Ltd.[29]
[27] (1983-1985) 157 CLR 215, 236
[28] (1998) 196 CLR 494 at [38]
[29] (1995) 184 CLR 281
A mere breach of s 8 of the L&B Act does not in and of itself create an immediate right of action sounding in damages. There are passages in the judgment of Lander J in Piantadosi v Tang[30] which at first sight might appear to suggest otherwise. That case involved a virtually complete failure to comply with the L&B Act, particularly since the purchaser ‘received no financial information in relation to the sale of the business’ conducted by the vendor.’[31] That being so his Honour concluded that ‘there is simply no doubt that the respondent was prejudiced by the failure of the appellants to comply with their obligations under s 8’[32] and more to the point later in his reasons:
[68] In assessing those damages where no vendor's statement has been given it would be appropriate to assume that the loss arising from the non compliance is a loss arising from the failure to give a vendor's statement which truthfully reflected the financial health of the business.
[69] As I have already determined, in my opinion, there was a failure by the appellants to provide any of the information required under the Act and Regulations.
[70] None of that information was provided to the respondent. In those circumstances it follows, in my opinion, that the respondent has been prejudiced by the absence of that information.
[30] (2001) 215 LSJS 58; [2001] SASC 251
[31] Above at [30]
[32] Above at [33]
The statement by Lander J at [68] merely reflects established principle that ‘a material representation made which is calculated to induce the representee ... and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation’.[33] It is clear therefore that prejudice did not flow automatically from a breach of the L&B Act in Piantadosi v Tang. Rather the prejudice arose from a representation of ‘income significantly higher than’ was the case,[34] thus serving to demonstrate ‘the prejudice which has been suffered by the respondent in the appellants failing to give the respondents the required Form 2 under the Regulations’.[35] The decision in Piantadosi v Tang accordingly affords no authority for the proposition that damages flow as a matter of right upon proof the breach of the L&B Act.
[33] Gould v Vaggelas above at 236
[34] Above at [86]
[35] Above at [87]
The result in Piantadosi v Tang must also be seen in its factual context. There was substantial and material non-compliance with the Act. There were active misrepresentations.[36] More significantly, the failure to provide the prescribed particulars in that case would have ‘truthfully reflected the financial health of the business’,[37] whereas in this case that which was provided although not strictly in the form prescribed, was in substance a truthful reflection of the financial position of the subject business.
[36] Detailed in paragraph [51]
[37] Above at [68]
Secondly in Piantadosi v Tang it was apparent that if the vendors ‘had complied with their statutory obligations the respondent would have been entitled to information which would have allowed her to make a proper assessment of the value of the business and of the true takings’.[38] In this instance Mr Montesi made his own ‘proper assessment’ on the basis of the material provided to him and his own first level knowledge of the business.
[38] Above at [87]
Thus the decision is distinguishable on the factual bases that there was an actionable misrepresentation which would have been disabused by the supply of the prescribed particulars, one that induced the purchaser to enter into the transaction and which was proved to have caused damage. The situation in the case at bar is the complete reverse on each of these fundamental issues.
It was Mr Montesi’s position that the court should void the subject agreement pursuant to s 15(2)(a) of the L&B Act and award him damages pursuant to s 15(2)(b). There is a fundamental problem with proving damage at the threshold in that he has not produced any primary records capable of demonstrating any loss. As mentioned earlier, the books of account produced at the trial run only to the end of 2009, so there is simply no evidence – primary accounting records or expert accounting reports – underpinning any loss or establishing the value of the business at the time of purchase. Had he proved an actionable misrepresentation or actionable deficiency in the Form 2, then as a self-represented litigant, it would have been appropriate to allow him an adjournment to assemble what evidence he could in that regard. However in light of the above findings and those to follow, that contingency does not arise.
Still further, it is a prerequisite to making any order pursuant to s 15(2) of the L&B Act that the purchaser must have been actually ‘prejudiced by the failure to comply’ with Part 2 thereof. All the documentation concerning the transaction was prepared by Mr Montesi’s solicitors on his instructions. He proceeded to execute them with legal advice close at hand. Once having received the additional figures to the end of December 2008, there were no more requests for any further information, or further compliance with the L&B Act for that matter. Once again this issue came to the surface for the first time only when a defence was filed. Those circumstances constitute a waiver of any formal compliance with Part 2, quite apart from the fact that none of the deficiencies actually caused him to enter into a transaction he otherwise would not have. In any case even if compliance with the L&B Act was an absolute one, only an award of nominal damages could be made in the circumstances, for those reasons and those to follow.
Reliance and causation
As mentioned earlier, Mr Montesi also had the benefit of accounting advice from Mr Cavaleri. It transpires that Mr Cavaleri counselled him against the purchase. He did so for quite different reasons than those relating to any deficiency in the Form 2. Mr Cavaleri was called by Mr Montesi. He gave evidence that he did not regard the Form 2 as complete because the figures were dated. He acknowledged being told that the up-to-date figures were not available at the time of settlement. As it happens the formal accounts for tax purposes were not prepared by Mr Tilley’s accountants until 12 January 2010.[39]
[39] Exhibit D11, Tab 7
Mr Cavaleri explained his advice to Mr Montesi in the following exchange:[40]
[40] T192.2-193.12
QCan you tell the court what you told me or the advice that you gave me just prior to settlement with relation to you being my accountant of both businesses and what your opinion was of my involvement.
AMm-hmm. Well I think what I basically said to you was that I’m not sure why you want to buy into this business. You’ve got PB Visual which is trading pretty well; you’re spending a lot of time in that. As long as this is a stand-alone-type business, and I understanding you were feeding a lot of work into Stevens, so the idea was that you wanted to be buy it because this amount of work was going to basically increase profitability for the whole group. But my view was that you shouldn’t be buying it because you should be focussing on PB Visual. Leaving aside the issues of the Form 2, and we formed our opinion, or our advice was formed on what the information was given to us with a form termed the management accounts, but leaving that aside it was basically, you know, our indication was that, you know, why do you want to buy it and what time can you devote to this; and I think the answer was that you wouldn’t have to devote any time, because it was going to be –
…
So basically I understood that Mr Montesi wanted to buy the business to consolidate it with his other, PB Visual, because he was feeding it work and it was going to increase the profitability of the whole group. And I also understood from Mr Montesi’s discussion with Mr Tilley, that this was a stand-alone business and Mr Montesi was not going to have a lot of involvement in it, apart from feeding it work, and it was going to be run completely on its own. So hence that was my understanding as far as, you know, him trying to convince to a certain degree us, you know, that that’s why he should be buying it. Basically –
QSo your advice was not to buy it, to put a bottom line on it.
AYes
It is inescapable on the basis of this evidence, that Mr Montesi made his own decision to buy into the business, improvident as it might otherwise have been for reasons unassociated with any supposed misrepresentation. It necessarily follows that Mr Montesi did not rely upon any representation or any deficiency in the particulars provided by the vendor which induced him to purchase the business. As stated in Maguire & Tansey v Makaronis,[41] damages extend only to that part of the trading losses which were directly occasioned by the falsity of the vendor's misrepresentations. On the contrary he made his own business decision with legal advice at hand and in the face of accounting advice to the contrary. That being so, no loss attributable to the plaintiff was caused to Stevens Sheet Metal. As explained in Sutton v AJ Thompson Pty Ltd (in liq)[42] ‘…if a person is so determined to enter into a contract that he is not in truth influenced by some false representation made to him, he clearly has no case’.
[41] (1997) 188 CLR 449, 468
[42] (1987) 73 ALR 233 at 240
In all of the above circumstances it is clear that Stevens Sheet Metal and Mr Montesi for that matter, were not prejudiced in any sense by the failure to comply with the Form 2 requirements under the L&B Act.
Orders
The plaintiff has prepared a revised table calculating the outstanding principal and interest thereon, in accordance with the default mechanisms referred to earlier under the Business Sale Agreement at $124,425.31 as of May 13, 2013. These are calculated at the rate of 8 per cent until default on 28 April 2010 and at the rate of 12 per cent thereafter as provided for under the Loan Agreement. The estimate is not disputed by Mr Montesi so far as the arithmetic goes, however he initially maintained the calculations fail to ‘take into account money held in trust by Grope Hamilton which is a payment made by an ex customer of Steven Sheet Metal for work actually done by PB Visual Communicative’.[43] However no issue on this score was taken or pursued in a subsequent submission received from his then solicitors.
[43] Letter to the court 31/7/2013
Accordingly the plaintiff will have judgment in the sum of $124,425.31. For the reasons outlined above the counter-claim of Stevens Sheet Metal under the L&B Act and the other related statutory causes of action invoked, must be dismissed.[44]
[44] Sections 87 and 236 of the Competition and Consumer Act 2010 (Cth)
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