Dyluc Pty Limited v Mally Group Pty Limited
[2013] NSWDC 57
•01 May 2013
District Court
New South Wales
Medium Neutral Citation: Dyluc Pty Limited v Mally Group Pty Limited & Ors [2013] NSWDC 57 Hearing dates: 25 - 27 March 2013 Decision date: 01 May 2013 Jurisdiction: Civil Before: Mahony SC DCJ Decision: Verdict for the First, Second and Third Defendants. For orders see para 107.
Catchwords: Sale of business, misleading and deceptive conduct, tort of deceit, negligent misrepresentation Legislation Cited: The Estate Agents Act 1980 (Vic)
Trade Practices Act 1974
Fair Trading Act 1987
Competition and Consumer Act (Cth) 2010
Evidence Act 1995 (NSW)Cases Cited: Gould v Vaggelas (1985) 157 CLR 215
Nella & Ors v Kingia Pty Limited & Ors 1989 ATPR (Digest) 46-046Category: Principal judgment Parties: Dyluc Pty Limited - Plaintiff
Mally Group Pty limited - First Defendant
Terry-Ann McNuff - Second Defendant
Martin Egon Holgye - Third DefendantRepresentation: K Balendra - Plaintiff
M Vincent - First & Second Defendants
P Horvath - Third Defendant
Slater & Gordon in association with Adams Leyland
Derek Norquay, Solicitor
DLA Piper Australia
File Number(s): 10/241090 Publication restriction: Nil
Judgment
The Plaintiff's Claim
The plaintiff claims damages arising from the purchase by it of a hairdressing business known as Temple Hair Design ("the business") in Albury on 21 January 2009. The first defendant was the vendor of the business and the second defendant was a director of the first defendant corporation. The third defendant was an accountant who was employed by the first defendant to prepare, during the negotiations for the sale of the business, what was known as a "Vendor Statement" which is a statutory requirement for such transactions in the state of Victoria pursuant to s 52 of The Estate Agents Act 1980 (Vic). The transaction in fact took place in New South Wales.
On 27 November 2008 the plaintiff and first defendant entered into a contract for sale of the business. The purchase price of the business was $120,000 made up as follows:
(i) $32,000 for goodwill
(ii) $50,000 for equipment
(iii) $38,000 for stock
The contract for sale of business was the 2004 edition pro-forma contract together with special conditions annexed to it.
In or about September 2008 the plaintiff, through its director, Ms Fiona McDonald, responded to an advertisement for sale of the business placed by the second defendant. There were a number of discussions between the two directors, and Ms McDonald was provided with financial information in relation to the operation of the business. She requested a Vendor Statement which was prepared by the third defendant on 15 October 2008. That document contained financial information for the years ending 30 June 2007 and 30 June 2008, and further information in respect of the three month period between 1 July 2008 and 30 September 2008. The information contained in the document which related to both income and expenses relating to the business, was derived from the financial records kept by the first defendant on a MYOB accounting software system and accurately reflected the content of the tax returns submitted in respect of the business for the relevant accounting periods.
Ms McDonald, on behalf of the first defendant, passed the Vendor Statement onto her accountant, executed the contract for sale and entered into possession of the business on 27 November 2008. The sale was completed on 21 January 2009.
The plaintiff's claim is pleaded by a Second Further Amended Statement of Claim filed on 31 July 2012. The plaintiff's claim against the first and second defendants is brought on the basis of misleading and deceptive conduct pursuant to s 52 of the Trade Practices Act 1974 ("TPA") and/or alternatively s 42 of the Fair Trading Act 1987 ("FTA"). The plaintiff's claim against the 3rd defendant is brought on the basis of alleged misleading and deceptive conduct, and negligent misstatement in relation to his preparation of the Vendor's Statement. The pleading is inelegantly drafted, and one of the prayers for relief claims damages against all three defendants "in tort for misleading and deceptive conduct".
The TPA has been repealed by the Competition and Consumer Act (Cth) 2010, and the Australian Consumer Law found in schedule 2 of that Act. That legislation commenced on 1 January 2011 and I am satisfied that the TPA and FTA apply here.
The Plaintiff's Claim as Pleaded
The plaintiff has pleaded that prior to entering the contract for sale, negotiations that were partly oral and partly written, took place between Ms McDonald on behalf of the plaintiff and the second defendant. During those negotiations certain representations were allegedly made by the second defendant and are set out in paragraph 7A of the Second Further Amended Statement of Claim. The plaintiff abandoned the allegations contained in paragraph 7A(a), (b) and (d). That left the following two representations:
"(c) The business's yearly turnover was as described on the Vendors Statement (sic);
(e) The Hairware Computer program located on the computer in the business premises was the sole computer program used by the business;
Particulars of representation
Oral representation was made by the Second Defendant at first meeting and maintained throughout the course of the negotiations;"
In respect of paragraph 7A (e), in submissions the plaintiff submitted that at no time did the second defendant inform Ms McDonald that she utilised more than one computer system for managing accounts of the business, however, she acknowledged that the second defendant never represented to her that she did not use more than one computer system.
These two representations are closely interconnected, in that it was only after the computer system known as the "Hairware" program crashed in late 2009, did the plaintiff become aware that it contained financial records relating to the business that were different to the taxation returns and the information contained in the Vendor Statement prepared by the third defendant. The background to this, and my findings in relation to it, are set out below.
Thus, distilled to its elements, the plaintiff's case against the first and second defendants are that they overstated the turnover of the business and by doing so, their conduct was misleading and deceptive. The case against the third defendant is that he misrepresented the figures in the Vendor Statement, and did so negligently.
The extent of the alleged overstatement of the turnover of the business relates to the following disclosure of gross income:
Period
Gross Income Disclosed in s 52 Statement
Gross Income Alleged
Difference
1/7/06 - 30/6/07
$269,071.00
$229,888.00
$39,183.00
1/7/07 - 30/6/08
$334,696.00
$221,989.00
$112,707.00
1/7/08 - 30/9/09
$86,569.00
$49,894.00
$36,675.00
Total
$690,336.00
$501,771.00
$188,565.00
Ms McDonald, on behalf of the plaintiff, said that she proceeded with the purchase in reliance on the figures contained in the Vendor Statement. Having obtained a different set of figures from the Hairware program, her case was that the purchase price that she paid for the business did not reflect the value of the business and the damages she claimed were represented by several years of losses following her purchase of the business.
The relief claimed by the plaintiff is set out in the Second Further Amended Statement of Claim is as follows:
"1. Damages against the first and third defendants pursuant to s 88 and/or 87 of the Trade Practices Act.
2. In the alternative, damages against the first and third defendants pursuant to s 68 of the Fair Trading Act 1987.
3. Damages against the first, second and third defendants in tort for misleading and deceptive conduct.
4. Interest
5. Costs"
After the hearing the plaintiff sought leave to amend its pleading by deleting from para 7B the words "from the Third Defendant". The application was opposed and I do not allow it on the ground that the amendment is unnecessary.
The Evidence
Mrs Fiona McDonald affirmed two affidavits on behalf of the plaintiff on 26 July 2012 and 22 October 2012. The first of those affidavits set out briefly the history of the transaction and annexed the Vendor Statement and contract for sale of business. In paragraph 8 of the affidavit she deposed:
"8. From the period between taking possession of the business up until the end of 2009 financial year, I had been perplexed that the takings of the business were not what I had expected from the information provided in the s 52 Vendor Statement."
She went on to state:
"8. As part of the process of undertaking a financial reconciliation of the business at the end of the 2009 financial year, I viewed the records on the computer. When I did this, I saw for the first time financial information of the vendor defendant from the previous financial years. These records had not previously been seen by me. Now produced and annexed to my affidavit and marked with the letters "FJM3" is a true copy of those said financial records.
9. When I examined the financial records that appeared on the computer and reconciled them against the material in the s 52 Vendor Statement, I noticed that there was a considerable discrepancy and it appeared to me to that the gross takings of the business recorded in the s 52 Vendor Statement were inflated."
FJM3 comprised a sales summary and "clients serviced" report in tabulated form.
In her second affidavit, Mrs McDonald deposed that in December 2009 the computer that she had acquired with the business had ceased working and was taken away for repair. Subsequently, she was provided with a printout of all information that had been stored on the repaired computer. These were records stored in the program called "Hairware".
Mrs McDonald deposed that she had, in October 2012, reviewed documents discovered by the first and second defendants which included prior bank accounts and financial accounts of the first and second defendant. A comparison of the documents demonstrated that the merchant facility deposits in the banking records were generally consistent with the Hairware record but that cash deposits in the second defendant's personal account were not generally consistent with the Hairware sales report for the period 1 July 2008 to 30 September 2008.
A comparison of the records for earlier periods being "the months of September 2007 and March 2008" demonstrated that the merchant facility deposits in the bank accounts of the business were generally consistent with the Hairware sales payments reports but that the cash deposits in the second defendant's personal account for the same period was not generally consistent with the recorded figures in the Hairware sales report.
In cross-examination it was established that Mrs McDonald had prior business experience as a director of a small school bus company from 1996. She had basic bookkeeping skills, having done a couple of MYOB courses, and attended to all of the basic bookkeeping tasks in that business. She also was involved with her husband in a number of other businesses, being two car washes, in which she also did all of the bookkeeping work up to preparing the financial documentation for the accountant, Mr O'Brien. She also did the books for a transport company between 2000 and 2006.
Mrs McDonald understood the concept of goodwill as representing an intangible asset of the business. She was not familiar with the concept of due diligence, this being the first business she had purchased.
The second defendant had advertised the business for sale in the local newspaper. Mrs McDonald responded to the advertisement and spoke to the second defendant by phone. The vendor then sent her a facsimile (exhibit D1) which stated that the second defendant had an illness and needed to commence treatment. It stated, "under doctor's orders I have no choice but sell my business". The document then stated:
"Due to the unexpectedness of all this, the books for the salon have not been done for sale of the business. For tax reason (as all accountants will understand) the salon has been running at a loss. We had a great year last year and we tried to keep figures as low as possible for tax reasons again. I'm asking $120,000 W.I.W.O. Obviously I'm looking for a quick sale."
The document then went on to provide other details relating to the business.
Mrs McDonald then received from the second defendant two pages of financial information concerning the business. They were annexure TM-5 to the affidavit of the second defendant, being the Trading Profit and Loss Statement for the year ended 30 June 2008. She understood those documents but sought advice from her accountant.
Mrs McDonald had looked at another hairdressing salon for sale in West Albury with a purchase price of $25,000. She decided without even going into the salon that it was not for her. She attempted to negotiate the purchase price with the second defendant but was told that it was not negotiable. The reason she wished to get the price down was simply because she wished to pay less for it.
That conversation took place prior to Mrs McDonald receiving the Vendor Statement. In respect of that statement, she gave the following evidence:
"Q: Having received the s 52 Statement, as you call it, you then met with your accountant again?
A: It was either a meeting or a telephone conversation.
Q: Did you yourself analyse the s 52 Statement?
A: No. I just knew that I had it.
Q: Did you form a view as to what it meant?
A: To me it meant everything. I have had a massive relationship with my accountant on a professional level, and he said that, 'on the proviso that you get a s 52 on those figures, that's what we need', and for me it was a legal document that was the deal maker or breaker.
Q: So are you saying to the Court that it was the mere fact of having a s 52 Statement that was important to you?
A: Yes. That's one of the factors.
Q: Are you saying to the Court that it wasn't the contents of the document that mattered to you?
A: Well, I didn't completely understand a s 52. I was told by Matt, who was a professional, that I needed to have a s 52, and that would then consolidate that these figures were really true and correct.
Q: Did you yourself go through the exercise of comparing the s 52 with the financial information that you already had from -
A: I sent it all over to Matt. I sort of felt that it was starting to get over my head."
The financial information referred to were the financial documents previously provided by the second defendant which comprised the trading profit and loss statement for the year ended 30 June 2008.
Mrs McDonald visited the salon on 4 or 5 occasions prior to her purchase of it. The stocktake took place on 26 November 2008 which detailed stock to a value of approximately $43,000, $5,000 in excess of the $38,000 provided for in the contract (exhibit D5). Mrs McDonald acknowledged that there was an excess but could not remember the exact figure. She did not herself do a stocktake but did a spot check of several items to make sure they were there. She went into possession of the premises on 27 November 2008.
Mrs McDonald did a stocktake after Christmas 2008 to satisfy herself for the purposes of completion of the sale. At no time did she make any complaint or representations to the second defendant about that stocktake.
Mrs McDonald also acknowledged in cross-examination that the second defendant had showed her through the Hairware computer system prior to completion of the sale. She acknowledged that she had been told that it was used for stock control and to record appointments and sales of product by staff. When it was put to her that she was told about the limitations of the program, her reply was "No, not so much". She was then asked:
"Q: When you say, 'not so much', she did mention them, didn't she?
A: No, my understanding was that she used that for everything. I had no idea that she had two systems going."
It was put to her that the two documents that she received earlier (i.e. TM5) were MYOB documents but she said she had no idea, she believed that it was something that the accountant produced. Mrs McDonald acknowledged that she was told that the second defendant had a full time job at Wodonga Engineering, she had very little time for the business, that she needed to sell for medical reasons, that the business had been running at a loss, and that she was not at the salon during business hours very much.
Mrs McDonald also acknowledged that she had always wanted to do hairdressing . She intended to work full time in the business and saw great potential in it.
Mrs McDonald denied that the second defendant told her that she never used Hairware for the business financials and she had no recollection of the second defendant referring to doing her own figures at home on MYOB. She did, however, recall being told by the second defendant that "the software doesn't stop you changing anything" and, "so you can be left in a real mess".
Mrs McDonald acknowledged that she obtained advice about the contract for sale before she signed it and that it contained Clause 12 and Special Condition 4, which are set out below. When it was put to her that she didn't rely on anything other than what was set out in the contract, she replied:
"A: Yeah, I relied on the s 52",
meaning the Vendor's Statement. She was then asked the following question:
"Q: So why is it that you entered into a contract saying that, when you say now that it's not true?
A: I - I don't have an answer for that. I don't have an answer for that. I seeked legal advice when I did it, and I guess you enter upon an agreement, and I was - based on the figures that I was given. So I had no reason not to believe that that would be the case. Why would I - why would I not sign it when I thought that what I had was real? That they were the correct figures, and they weren't."
Mrs McDonald understood that the Vendor Statement restated the content of other financial documents that had been lodged or filed with the tax office. She was then asked:
"Q: So the s 52 itself doesn't take the matters any further, does it?
A: It did to me. It was a consolidation of whether I should buy the salon or not.
Q: But it wasn't the substance of it, because you already had the financials?
A: No, it was the substance of it, because to me it was a legal document. That was what I was advised by my accountant - that this is actually - what you've been given, that will concrete what you've got."
I then asked what she meant by the expression "that will concrete what you've got" to which she answered:
"A: Well, Matt's idea was if you have the s 52, that's a legal, binding document. So if you've been given those figures, you know that they are true and correct, because they've - it's a legal document. So if you can get a s 52, yeah, it - they are what they seem to be."
Mrs McDonald conceded that she made no representations to the second defendant prior to completion of the sale on 21 January 2008, after she took possession of the business.
She acknowledged that she told the second defendant in a telephone conversation in May 2009 that the business was going well, but qualified that by the following evidence:
"A: Yes, I did say that it was going well, but - and, to be honest, I was probably trying to save face. I was going off the figures that she had told me, and the average was $6,500 a week. I was lucky to be getting $3,000. I thought that I was failing at the business, and I wasn't about to, well, basically, say 'Oh yeah, you were really good at it but I'm crap'. Sorry."
In respect of the Hairware software program, she herself did not ever enter the full financials of the business into that system. She used it for appointments, inventory and sales. There was no financial data on the program when she took possession in November 2008. It was only after the computer had been repaired at the end of 2009 that she became aware that there were records of sales stored on it.
When cross-examined by counsel for the third defendant, Mrs McDonald acknowledged that she knew when she was negotiating to buy the salon that it had been run at a loss. It was not something that was of particular concern to her. She did not agree that the stock was worth $38,000 but had never sued over that. She was, however, comfortable that the equipment included in the sale was worth approximately $50,000. The stock, she believed, was worth $20,000. Notwithstanding that, she gave evidence that the business was worth nothing "as a whole" and that she believed that she got "zero value from the business".
Mrs McDonald was challenged as to her statement that she was "lucky to get $3,000 per week" from the business. She had no evidence to substantiate that claim, and the sales figures demonstrated that she in fact received just short of $5,000 per week. Her explanation was:
"A: Well, I - from what I can understand, the six and a half that I was talking about was GST exclusive, and what I was talking about - although I've said $3,000, I was probably too flippant. It was - what I was talking about was definitely inclusive of GST."
Mrs McDonald agreed that in subsequent years from 1 July 2009 her gross sales have increased well over the $6,000 that she was referring to. She took no steps to sell the business but denied that was because it was making money. She also took on more staff.
Mrs McDonald contended that she had a verbal agreement with the second defendant to keep all of the staff on, but in fact, the contract provided for them to be terminated. That was included in the contract at her request. Notwithstanding her agreement with the second defendant, she did sack one member of the staff in 2010. Her credit was challenged on the basis that she had made representations to the Australian Taxation Office requesting an extension of time to pay her tax in the latter part of 2010 (exhibit D6), and stated:
"Part of the sale contract was that I continue with the employees who are presently employed, and this was a fatal mistake as I was paying more in wages than I was making."
She gave the following evidence:
"Q: So you were well aware when you sent this letter to the tax office that you had no obligation to keep on the staff that had been employed by Ms McNuff when you purchased the business two year earlier?
A: But I didn't have an obligation to any one. If I felt that the - if it wasn't economic to keep any one on, I had no obligation to any one."
Mrs McDonald also agreed that the accountant who prepared the Vendor Statement had not done an audit on the business. It was put to her that the certification by the accountant in the Vendor's Statement was that the content of the Statement was consistent with other information the accountant had seen about the company. She gave the following evidence:
"A: And that he understood the business. That's what I'm saying to you. My understanding is that he had reviewed the figures that he'd been given, and that he had an understanding of the business and, yes, collectively, that's why he signed the s 52.
Q: What do you mean by 'an understanding of the business'?
A: Well, different accountants specialise at different businesses. We primarily went to our accountant because he is very good at transport, so they know all about those things that are claimable; you know, general accountants know the general things, whereas it's specific, I guess the same as you guys. Industry specific."
In re-examination Mrs McDonald was asked what she meant when she said the Vendor's Statement was "gold". She replied:
"A: If I couldn't have obtained a s 52 and gone ahead with the sale, I was acting on, that was from my accountant, who was my confidante as far as business goes - he had suggested that I get a s 52, it was almost a guarantee that everything that we had been provided with, as far as figures go, were what they appeared."
She acknowledged that the second defendant had told her that staff were making mistakes on the Hairware computer system, but when asked whether she knew the second defendant was using MYOB at home she said:
"A: Yeah, I didn't know that she was using MYOB at home until I think this all started. I didn't have any clue.
Q: So just to clarify, what did you think she was using?
A: I really hadn't put a lot of thought into it, but I thought that she was using Hairware because she showed me the wages, how to process wages, and that was one of our meetings on the Monday."
When asked why she did not take steps to sell the business, Mrs McDonald said as follows:
"A: Because I'm not a quitter. When I start something, I finish it. I don't - I don't - I was asked a question 'it was running at a loss why didn't you stop?' Because, if I had have stopped, there would have been staff members out of a job, and they'd become my friends. And that's not who I am. I'm not a quitter, I've never been a quitter. I knew that it had potential. I knew that from the day that I went in there. And now it is - it's going - it was going okay. I'm not a quitter and that's why I didn't stop."
In respect of goodwill, she gave the following evidence:
"Q: What did you base what that business was worth to you?
A: I based the goodwill on the fact that it was an existing business. So, as I said before, I was toying with the idea about starting my own from scratch. So, I figured that we had a database - or a clientele to work with. So I could see the value in that."
Nicole Strauss affirmed an affidavit on 22 October 2012 that was relied on by the plaintiff. She was an employee of Temple Hair Design, having been initially employed by the second defendant in March 2007. Within a month she had been promoted to the position of salon manager and her duties included ordering stock, managing staff, customer services and balancing the till each day. She was not, however, responsible for drawing staff rosters, approving staff leave, setting budgets, paying wages or any other accounts. She deposed that sales were recorded on the Hairware system, which was also used to measure the sales performance of each staff member. At the end of each day she would balance the till and do a printout of the record of sales from the system and then leave that information, together with takings, for the second defendant to collect. It was her evidence that she believed that the business would often average between $3,500 to $5,000 in sales per week.
Ms Strauss was given an offer by the second defendant to buy the business in August 2008. She declined that offer. However, when Mrs McDonald took over the business she was employed as a senior stylist and her role as manager ceased. She deposed to changes that had taken place in the business since its sale, including a rise in sales. Mrs McDonald had, since she took over the business, posted the staff sales figures up for them to see each week, and according to Ms Strauss, there had been a steady rise in those figures and that the sales figures for the business "have risen significantly".
In cross-examination Ms Strauss gave evidence that it was the second defendant who attended to the financial side of the business. She calculated the wages from the Hairware computer system within the salon, otherwise she never had any discussions with the second defendant as to how she would prepare the financial information for the business.
The second defendant swore an affidavit on 29 November 2012. She had purchased the business "Temple Hair Design" in July 2004 as director of Mally Group Pty Limited for $80,000 made up of goodwill of $62,000, equipment of $10,000 and stock of $8,000. The business included hairdressing, makeup and beauty treatments, solarium and massage services. She grew the business, and whilst mostly it was conducted from premises in Albury, some of the business including makeups and massages were conducted by her outside salon hours at other venues. From 26 April 2007 she returned to her former full time job as an administrator at Wodonga Engineering Centre. Prior to her return to full time work, all of the income from the business was deposited to the business account at ANZ Bank Albury. However, after she returned to her full time job, the second defendant commenced depositing income from work she carried out outside the salon, together with the takings from the business into her personal account at the ANZ Bank. She made these deposits at an ATM on her way to work in the morning. The reason she gave was that she did not have an ATM card for the business and therefore she would make the deposit to her personal account and later transfer the greater part of the funds to the business account.
At the time she purchased the business, the previous owner told her that the Hairware software program was unreliable for generating account business records and therefore she spoke to her accountant, Mr Martin Holgye (the third defendant), and decided to use MYOB for the business financial records. She was very familiar with that system and recorded the business information on it at home. From 2004 to 2008, the second defendant used MYOB to collate and record information about the business. That involved her having regular access to the Hairware program for records of stock purchases which she entered into MYOB. The quarterly GST returns and annual financial statements of the business were then prepared from her MYOB entries which she sent to Mr Holgye.
Referring to the affidavit of Fiona McDonald sworn 22 October 2012, and in particular the inconsistencies between monies deposited in the business account and the sales records on the Hairware program, her explanation was that not all business income was recorded on the Hairware program, and secondly, that information recorded on that program was easily changed. All staff had access to it and there were no checks, balances, prompts or flags thrown up by the program that would stop inadvertent changes.
In respect of the financial records referred to by Ms Strauss in her affidavit sworn 22 October 2012, she denied that they were a true, correct and complete record of the sales of the business between April 2007 and September 2008 as they omitted the majority of income for makeups and massages that she generated outside the business.
The second defendant also set out the contents of a number of conversations with Mrs McDonald during the negotiations for sale of the business. The first contained information that the business was running at a loss. This was not denied and is common ground between the parties. She deposed to the following conversation which was denied by Mrs McDonald:
"McNuff: There is a program on the THD computer called Hairware. I've never used it for the business financials. I do my own figures on MYOB at home. I've only used Hairware in a limited way for appointments; to record work done by staff, and for point of sale purchases.
McDonald: What's wrong with it?
McNuff: It's just not reliable. Staff can make a mistake putting information in and it can alter all the records. The software doesn't stop you changing anything, so you can be left in a real mess. The previous owner, Jonathan, told me that he didn't use it for business records. And my accountant told me not to use it, too."
The second defendant also gave to Mrs McDonald the profit and loss statement for the year ended 30 June 2008, (annexure TM5). At the request of Mrs McDonald, she had her accountant prepare a Vendor Statement which was provided to Mrs McDonald. Thereafter, she had very little contact with Mrs McDonald who told her that her accountant had looked at the Vendor Statement and was happy for her to proceed with the purchase. In cross-examination, the second defendant was asked about an email she sent to her accountant dated 29 April 2008 concerning the financial state of the business (exhibit A). In that email she had advised her accountant that she was "a fair bit behind in BAS" and that she may have put incorrect figures into her BAS statements. The email then went on to state "whatever makes the books look good for sale" which the second defendant described as "only a joke".
The second defendant was questioned about deposits she made which are revealed in her 2008 bank statements produced by the second defendant relating to deposits she made at ANZ Bank Wodonga branch in an ATM account. For the period 18 April to 18 July 2008 there was 16 deposits totalling $44,951.85.
Documents produced on subpoena by the ANZ Bank demonstrated that for each of those transactions, the 16 deposits were characterised differently. Fifteen were described as "ANZ Internet banking transfer wages, WEC" and one entry as "ANZ Internet banking transfer reimbursement, WEC". On that basis, it was put to the second defendant that the money transferred from her personal account to the business account was not income from the business at all, but was money she actually received from WEC, her employer. She was asked in these terms:
"Q: The truth is that the transferred money was actually from WEC and not from sales from THD. That's true, isn't it?
A: No, not all of it. No.
Q: And the truth is that you have doctored your version of these bank statements deliberately. That's true, isn't it?
A: That was just so I could have records for the salon."
The second defendant conceded that she had doctored her copy of her own bank statements and that the copy bank statements that she had produced to the Court did not truly disclose where she had got the money from, namely, that the deposits came from WEC and not from sales through the business. Her explanation for that was that WEC would lend her money if cash flow was short. She denied lying in her affidavit and to the Court.
The second defendant was then shown a bundle of documents for the period 15 August 2006 to 20 October 2008. It was put to her that in that group of documents, every time the entry "ATM Wodonga Deposit" occurs, that that entry had been doctored by her, to which she agreed. She did not agree that in each case the entries related to sums of money obtained from WEC and not from the business (exhibit D).
In re-examination the second defendant gave evidence that she had doctored those records (exhibit B) but the information was put there by her "for her personal accounts, bookkeeping purposes". The amounts contained in the ANZ Bank documents for her wages varied due to home loan payments being directly deposited, and overtime being worked. She also gave evidence that to the extent that she paid money to her employer, that money was repaid in full. The purpose of her altering the bank records on her own personal copy, was "just purely for my own records". At that stage of the evidence I gave counsel for the second defendant the opportunity to obtain instructions as to whether he wished to apply for a Certificate under s 128 of the Evidence Act 1995 (NSW). After speaking to his client, the Court was informed that she did not wish to apply for a certificate.
Further evidence was given that bank records were altered by the second defendant, adding the entry "ATM Wodonga" and substituting the WEC entry for the words "ATM deposit". She would do this each quarter, having received the documents from the bank electronically, she would print them out and then white out the entries she wanted to change and type over them the words she wanted to put in for her own personal bookkeeping. She had no purpose in describing the entry as "ATM Wodonga", nor did she intend for any other person to see those records. When asked to produce the bank statements for the purpose of these proceedings, she did not turn her mind to the fact that she had made typewritten and handwritten alterations to the statements. She had never provided them to any person for any purpose.
When asked by me why she went to the trouble of reproducing the same print in respect of those entries, her answer was:
"That was just what the typewriter type had."
The third defendant swore an affidavit on 11 February 2013. He had been an accountant since 1989 and during his career as an accountant had prepared numerous Vendor Statements for the sale of businesses. From 1996 Wodonga Engineering was one of his firm's major clients and from 2004 he had been the principal accountant in charge of their account. In that capacity he had numerous dealings with the second defendant and following her purchase of the business in July 2004, he became the accountant for the business. The second defendant prepared all of the books of account of the first defendant and then for each accounting period, sent Mr Holgye a CD containing the MYOB data file for the first defendant and the business' accounts. He was not retained to conduct an audit of the first defendant's accounts.
It was the third defendant who encouraged the second defendant to use the MYOB system for the financial accounts of the business, and the Hairware software product for inventory control, sales and customer records.
In October 2008 the second defendant asked the third defendant to prepare a Vendor Statement. In his affidavit he set out in detail how he prepared that statement. In essence, it involved a transfer of the financial data from the first defendant's financial statements and tax returns for the financial years ending on 30 June 2007, 30 June 2008 and for the three month period from 1 July 2008 until 30 September 2008. The financial information included in the Vendor Statement therefore recorded with the first defendant's MYOB payroll system, its Australian Taxation office integrated client account and its balance sheet.
Mr Holgye included the following disclaimer in the Vendor Statement:
"We have not audited the books and trading statement of the vendor and therefore will not accept responsibility for the information contained in this trading statement for any person who relies on such information."
The only reports that Mr Holgye received from the second defendant, which had been produced from the Hairware software program, were annual stock reports which listed the stock holdings in the business at the end of each financial year.
In cross-examination Mr Holgye was asked whether he ever checked the information contained on the MYOB data files provided by the second defendant. He said:
"A: What we - that sort of information we call a compliance file, or a compilation file. It's not an audit or a review file. So we do very limited checking. We do have a quality control checklist which we use to check that superannuation is paid, that the GST, as disclosed in a MYOB data file, represents - or closely represents - what has been disclosed on the Business Activity Statement, in case they've made mistakes with the coding on the MYOB data file. We would check that the total wages in the MYOB data file corresponded with the PAYG summaries - they used to be called group certificates a while back - and also with the Business Activity Statements as well. But there was very minimal checking. It was a general review."
Any discrepancies were referred back to the client, in this case the second defendant.
When asked whether he knew that the purchaser would rely on the information contained in the Vendor Statement to make a decision about buying the business, his evidence was:
"A: When you prepare the s 52 Statement - and I have on that one - I've said I've not conducted an audit nor a review. That means; conduct your own due diligence, do your own checking, because I haven't done any checking. I've not done a review, I've not done an audit."
Mr Holgye was asked a number of questions about discrepancies between the MYOB data and BAS statements prepared for clients. He said:
"A: It's not unusual to have immaterial differences. I don't think we have one client out of 1200 within our accounting practice that balances 100%. And I say that because sometimes you have refunds that get put through the sales that the MYOB software has not been correctly set up to deal with those refunds."
He characterised a discrepancy in the 2007 financial documents relating to the first defendant amounting to $2,999.00 as immaterial.
It was put to Mr Holgye that the figures he included in the Vendor's Statement for gross income of the business for each of the three periods were wrong, and he disagreed with each proposition.
The Expert Evidence
The plaintiff relied on Mr Mariano Rossetto, Chartered Accountant, who prepared three reports (exhibit F). Two of the reports were dated 25 May 2012 and the third dated 14 August 2012. In the first of those reports he carried out a comparison of sales for the period 1 July 2006 to 30/9/08 (when owned by the first defendant) and 1 October 2008 to 30 June 2011 (when owned by the plaintiff - see Appendix C). Mr Rossetto provided an opinion that the Vendor Statement was inaccurate, on the basis that it did not reflect the sales figures extracted from the Hairware software system which were attached to his report at Appendix D. That was the only reason why the Vendor Statement was incorrect. He agreed in cross-examination that the Vendor Statement reflected the financial statements of the business for 2007, 2008 and it reflected the income tax returns filed in respect of the first defendant. There was no inconsistency between those tax returns and the Statement.
Mr Rossetto also provided an opinion as to the effect of what were referred to as overstated sales on the value of the business. In crossexamination he agreed that a business with no net profit could still have some value, including goodwill, customer lists and repeat custom.
Whilst he had not prepared a Vendor Statement, his evidence was that he would go beyond the source data if he had no knowledge of the individual transactions that went into preparing the financial records and income tax returns. He gave this evidence:
"Q: Where do you draw the line between doing that and an audit?
A: The difference is do I have knowledge, for example, in this particular case, do I have knowledge that all of the income and all of the expenses relates specifically to the business? How do I know that if I only rely upon MYOB provided to me? What do I know about it? I know nothing. MYOB is simply a recording of transactions provided by a client. If all I do is rely upon that then that is it. I know nothing about that business. Those records could be false, as far as I know."
I then asked the following question:
"Q: Is there no difference between that and doing an audit?
A: The difference between an audit is that you are providing a statement that you have independently verified all of the transactions - well, not all of the transactions because an audit does not go through all the transactions, but you are carrying out a series of tests and checks on a number of issues, a number of elements within the financial statements, followed by auditing standards to sign off on an audit report, in preparing, for the purposes of this s 52 Statement, a statement saying, 'this is the income and these are the expenses of the business'. If all I'm given is MYOB, I'm being given the MYOB of this company, that's all I know."
It was then put to him that the Statement was prepared not only from MYOB but from income tax returns filed with the ATO, those returns and the financial statements, to which he stated:
"A: Sorry, okay. If I am told that all of the BAS, the MYOB, the income tax returns and the financial statements all relate to the business solely, and there is no other activities, then I could rely upon those in the preparation of the s 52 Statement."
Mr Rossetto gave further evidence in cross-examination that he had not conducted an examination of any of the source documents from the business. He had relied solely upon the profit and loss statements that had been provided to him and had made no attempt to reconstruct the financial statements for the business for the period from 2007 to the end of September 2008.
In re-examination counsel for the plaintiff attempted to clarify the concession gained in cross-examination in respect of the preparation of the s 52 Statement based on MYOB data, BAS statements, tax returns and financial statements. He gave this evidence:
"Q: You said that it's possible to prepare a s 52 statement relying only on those didn't you?
A: But, on - conditioned on the assumption that I'm told that everything within - that makes up those records is only in relation to the business activity that's being sold.
Q: In preparing a s 52 Statement, would you actually include that assumption?
A: I would state everything that I've relied upon. And, if I've been relied upon information provided to me by the vendor then, if I was preparing a s 52 Statement, I, personally, would do it. Because it reforms what the basis of what I relied upon. It's not just those documents. It's further information."
The third defendant relied on evidence from another Chartered Accountant, Mr Gregory Meredith. He provided three reports dated 24 January 2013, 26 February 2013 and 12 March 2013 (exhibit D3-8, D39, and D3-10). Those reports did not respond directly to the evidence of Mr Rossetto or his reports. Rather, Mr Meredith gave an opinion that Mr Holgye did not depart from the usual practice of a competent accountant in preparing the Vendor Statement.
Mr Meredith gave evidence that he had some experience with Vendor Statements, the purpose of which was to provide disclosure from the vendor to purchaser about certain matters that are prescribed in the form, in order that the purchaser can understand or be informed about those matters. When asked what reliance could be placed on a Vendor Statement, his evidence was as follows:
"A: That's really a legal matter in terms of - I'm not sure that I can answer that from the perspective of an account. If you were to ask me - if you meant by the question, what would an accountant ordinarily rely on, then an accountant would look at the s 52 Statement and review that, but take into account that it's prepared from the books of account. It's not an audited statement, so I would say that there's a degree of reliance from an accounting perspective, but it's not to the same standard as reliance on audited accounts, for example."
Mr Meredith conceded in cross-examination that if entries in the books of account were shown to be wrong, then there would need to be a disclosure made of some sort.
In the context of another accountant reviewing such a statement, he gave this evidence:
"A: Well, if the disclosure showed that there was material inaccuracies in the books of account, then I would seek to try to understand how those inaccuracies arose and whether, upon the additional disclosure in addition to that obtained from the books of account - whether that provides a reasonable or true and fair view of the operating performance and profit and loss statement, in particular, of the business."
Legal Principles
To establish its case, the plaintiff has the onus of establishing, on the balance of probabilities, the following:
(1) That it was induced by fraudulent misrepresentation of the first, second and/or third defendant to enter into the contract for sale of the business.
(2) That it suffered damage because it acted in reliance on the false misrepresentation (Gould v Vaggelas (1985) 157 CLR 215 at 219 per Gibbs CJ).
(3) To the extent that the claim is brought pursuant to s 52 of the Trade Practices Act, the onus is on the plaintiff to establish that the first defendant engaged in misleading and deceptive conduct, or conduct likely to mislead and deceive, and secondly, that there is a causal connection between the conduct complained of and the loss sustained - see Nella & Ors v Kingia Pty Limited & Ors 1989 ATPR (Digest) 46-046 per French J.
(4) To the extent that the claim against the third defendant is based in negligence (see paragraph 21 of the Second Further Amended Statement of Claim) the questions to be determined are whether he breached his duty of care in preparing the Vendor Statement and, if so, what loss was caused by that breach.
Factual Findings
Having regard to the whole of the evidence, I make the following findings:
(1) At the time she entered into negotiations for the purchase of the hairdressing business, Mrs McDonald had quite extensive experience in her own family's small businesses and had basic bookkeeping skills.
(2) In September 2008 Mrs McDonald responded to an advertisement placed by the second defendant for the sale of the business.
(3) The second defendant sent a facsimile to Mrs McDonald (exhibit D1) outlining her reasons for sale, and advising that the business had been running at a loss. The facsimile set out the purchase price and certain information relating to the business.
(4) Thereafter, Mrs McDonald had a number of meetings with the second defendant. During one of those meetings she was given the trading profit and loss statement for the year ended 30 June 2008 which contained financial information relating to the years ending 30 June 2007 and 30 June 2008. That two page document showed that the business was operating at a loss.
(5) Mrs McDonald requested from the second defendant a Vendor Statement pursuant to s 52 of the Estate Agents Act 1980 (Vic).
(6) The third defendant prepared the Vendor Statement on or about 15 October 2008. The financial information contained in it accorded with the trading accounts of the business and the BAS and income tax returns filed by the first defendant. Whilst the declaration signed by the third defendant at the conclusion of the document set out that the financial information in the statement was in accordance with the "books of account of the Vendor and is true and fair to the best of my knowledge and belief", it contained the following disclaimer:
"We have not audited the books and trading statement of the Vendor and therefore will not accept responsibility for the information contained in this trading statement to any person who relies on such information."
(7) Mrs McDonald received the Vendor Statement on or about 16 October 2008 and did not analyse it. She passed it straight to her accountant, Mr Martin Best, who did not give evidence in the proceedings.
(8) Thereafter, the parties proceeded to enter into the contract for sale of business on or about 27 November 2008, following which, the plaintiff went into possession of the business on or about 27 November 2008. The transaction was completed on 21 January 2009.
(9) I find that it was important for Mrs McDonald to receive the Vendor Statement, notwithstanding that it was not required by the law of this State. However, she made no analysis of its content and merely passed it to her accountant. In the circumstances, I find that there was no reliance by her on the content of the document, particularly the gross sales for each of the three accounting periods referred to therein.
(10) I find that the second defendant and Mrs McDonald did have a discussion about the Hairware computer system prior to completion of the sale. I find that Mrs McDonald was told by the second defendant that the Hairware software program was used for stock control and to record appointments and sales of product by staff.
(11) As to the content of the relevant conversation, I prefer the evidence of the second defendant as set out in paragraph 59 above, as it accords with the history of the second defendant's use of the software. I do not accept the evidence of Mrs McDonald that she was told that the Hairware computer system was used for all purposes, including keeping of the financial records, given the evidence recorded in paragraph 32 above, when it was put to her that she was told about the limitations to the program, her reply was "No, not so much".
(12) I find that Mrs McDonald knew that there were limitations to the Hairware system, having been told that it was susceptible to changes as outlined in paragraph 35 above.
(13) I further find that Mrs McDonald showed a propensity to flavour her evidence with what she thought was material in her best interests, for example, her answer set out in paragraph 40 above, that she was "lucky to be getting $3,000", that is $3,000 per week, when in fact the business was taking much more than that.
(14) Further, Mrs McDonald did not herself ever use the Hairware software program to enter the full financials of the business and used it only for appointments, inventory and sales.
(15) I note the concession made by the plaintiff in its submissions that the second defendant never represented that she did not use more than one computer system.
(16) I find that if Mrs McDonald had no knowledge that the financial information and books of account of the business were prepared on an MYOB system, then that was the result of her own lack of due diligence in investigating the financial position of the business prior to the purchase.
(17) I find that Mrs McDonald knew, when she was negotiating to buy the business, that it had been run at a loss and that that was not a matter that concerned her.
(18) I do not accept the evidence of Mrs McDonald that the business was worth nothing "as a whole" and that she got "zero value from the business" as set out in paragraph 42 above. This was an embellishment on her part.
(19) I find that the sale included equipment valued at approximately $50,000, and that it included stock that was, for the purpose of the transaction, valued at $38,000. There is no basis for finding that that stock had any other value, and I do not accept Mrs McDonald's evidence that the stock was worth $20,000. The stock take carried out on 26 November 2008 (exhibit D5) derived a higher figure than $38,000.
(20) I find that the information extracted from the Hairware computer system, following its repair in late 2009, and upon which Mr Rossetto based his opinions, are not the real trading figures of the business, but merely a record of sales recorded within that system by members of staff from time to time.
Determination
Having regard to the findings set out above, I am unable to find that the second defendant falsely misrepresented the financial position of the business, Temple Hair Design.
I find that the second defendant did represent to Mrs McDonald that the yearly turnover of the business was as described on the Vendor Statement, which reflected the financial books of account and the income tax returns of the first and second defendant. Thus, I find that the representation in paragraph 7A(c) of the Second Further Amended Statement of Claim was established, but that it was not false and/or misleading. The plaintiff failed to establish any reason why the second defendant would prepare financial documents which gave rise to a greater incidence of taxation, and failed to demonstrate where those records were falsified for that purpose. I am not satisfied that that occurred merely to boost the prospects of selling the business.
In respect of the representation contained in paragraph 7A(e) of the Second Further Amended Statement of Claim, I find that the second defendant did not represent to Mrs McDonald on behalf of the first defendant that the Hairware computer program was the sole computer program used by the business. The plaintiff has therefore not established that any such representation was false and/or misleading.
I find that the plaintiff was not induced to purchase the business on the basis of either of the representations pleaded. Mrs McDonald was a keen buyer, however, she had extensive small business experience and bookkeeping qualifications. Whilst it was important for her to receive the Vendor Statement, her decision to purchase the business was not based on any analysis by her of that document. In any event, it reflected the true financial position of the business, albeit on an unaudited basis. I further note that no evidence was adduced from her accountant Mr O'Brien in respect of this aspect of the matter.
Further, the plaintiff proceeded to enter into the contract for sale having obtained legal advice as to its content, and aware that it contained Clause 12 in the following terms:
"12. Restrictions of Rights on Purchaser
The purchase cannot make a claim or requisition or rescind or terminate in respect of -
12.1 A promise, representation or statement about this contract or the business, not set out or referred to in this contract; or
12.1 Anything the substance of which is disclosed in this contract."
Further, the contract contained the following special condition:
"4 The Purchaser acknowledges having inspected the property and the business and agrees that in entering into this agreement the Purchaser has not relied upon any statement, representation or warranty made by or on behalf of the Vendor other than as set out therein."
I therefore find that the plaintiff's claim is not made out against the first and second defendants.
An issue arose in the proceedings relating to the credit of the second defendant, namely, the altering by her of her own copy of her personal banking records with the ANZ Bank. Whilst that was a matter which seemed to be somewhat sinister at the time of cross-examination during the trial, (and was conduct described by her own counsel as "bizarre" in submissions), she gave a not implausible explanation for it in reexamination. In any event, those documents did not form part of the records upon which the plaintiff's claim was based. It was merely an attempt by the plaintiff to provide some alternative explanation for the second defendant to inflate the financial takings of the first defendant. That could only be speculative and in any event, was not established.
I also find that the plaintiff's claim against the third defendant must fail. To the extent that it is based on the tort of deceit, the third defendant did not knowingly provide any false or misleading information. Whilst the case against him is inelegantly pleaded, to the extent that it alleges negligence on his behalf, I accept the evidence of Mr Meredith that the Vendor Statement was competently prepared by Mr Holgye. He did not breach his duty of care in preparing the Vendor Statement.
Mr Meredith was an impressive witness whose evidence I accepted. As his reports did not traverse the opinions contained in the three reports of Mr Rossetto, there is no utility in analysing his evidence by comparison to that of Mr Rossetto. My findings set out above mean that I do not accept the analysis of Mr Rossetto based on sales figures extracted from the Hairware software system, nor do I accept his opinion as to the effect of what were referred to as the "overstated sales" contained in the Vendor Statement on the value of the business. To the extent that he commented on the preparation of the Vendor Statement, and in particular the evidence set out in paragraph 81 and 82 above, I prefer the evidence of Mr Meredith, who had experience in preparing such statements and much experience in analysing them. In any event, the concession made by Mr Rossetto set out in paragraph 83 above really undermined much of his evidence on that subject.
I further find that even if the plaintiff had established its case against any of the defendants, so that any or all of the defendants were liable to it, the plaintiff has failed to establish any loss caused by the impugned conduct of the defendants. I am not persuaded that the alleged losses in the first two years of the plaintiff's trading of the business were anything other than reflective of the market conditions for such services in Albury.
The sales figures in fact were reasonably close to the previous trading figures of the business when it was conducted by the first defendant, and there was significant unexplained increases in the expenses of the business when it was owned by the plaintiff. The comparable sales figures compiled by Mr Rossetto demonstrate that the plaintiff achieved comparable sales results in the first full financial year (ending 30 June 2010) after the sale, and exceeded previous annual sales in the following years (see Appendix C).
I do not accept the evidence of Mrs McDonald that the business she purchased was of no value. The sale included both stock and equipment of significant value, and goodwill represented at least by the database of clients. I am therefore not satisfied that the plaintiff has established any loss caused by any conduct of the defendants in any event.
Conclusion
There will be a Verdict for the First, Second and Third Defendants against the Plaintiff, together with orders for costs.
The Cross-Claims are both dismissed, with no order as to costs.
Orders
I make the following orders:
(1) Verdict for the First, Second and Third Defendants against the Plaintiff.
(2) The Plaintiff to pay the costs of the First, Second and Third Defendants.
(3) The Cross-Claim between the First and Second Defendants and the Third Defendant, and the Cross-Claim between the Third Defendant and the First and Second Defendants, are dismissed, with each party to pay their own costs.
(4) The exhibits are to be returned forthwith.
(5) Parties are to have liberty to apply within seven days in respect of any of the above orders.
(6) I direct that after 28 days hereof the file be returned to the Albury Registry.
Decision last updated: 09 May 2013
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