Florgale Uniforms Pty Ltd v Orders
[2004] VSC 65
•27 October 2004
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMON LAW DIVISION
No. 2000 of 2000
| FLORGALE UNIFORMS PTY LTD (ACN 004 233 167) (Receiver and Manager Appointed) (in liquidation) & Ors | Plaintiffs |
| v | |
| MALCOLM JOHN ORDERS and NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) | Defendants |
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JUDGE: | DODDS-STREETON J. | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 9-13, 16-19, 23-26 February, 1-5 and 10 March 2004 | |
DATE OF JUDGMENT: | 27 October 2004 | |
CASE MAY BE CITED AS: | Florgale Uniforms Pty Ltd and Ors v Orders and National Australia Bank Limited | |
MEDIUM NEUTRAL CITATION: | [2004] VSC 65 | Revised 18 November 2004 |
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RECEIVERS AND MANAGERS – Duty of care in exercising power of sale – Sale of special purpose apparel and linen – Whether breach by auctioning stock rather than closing down sale to existing customer base –Whether breach in process by failure to compare and evaluate different methods of realisation - Whether failure appropriately to prepare stock for auction and adequately advertise auction – Whether breach by failing to accept favourable pre-auction offer for stock prior to its withdrawal – Corporations Law s.420A – Whether right of action conferred – Application to guarantors and ‘third-party’ mortgagors – Breach of duty not established.
Corporations Law s.420A; Corporations Law s.423; Corporations Law s.1234.
GE Capital Australia v Davis [2002] NSWSC 1146; Jeogla v ANZ [1999] NSWSC 563; Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114; Skinner v Jeogla (2001) 37 ACSR 106; Artistic Builders v Elliott & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16; Kyuss Express v Sellars (2001) 37 ACSR 62; Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr P.W. Collinson with Ms C.M. Harris | O’Donnell, Frampton and Salzano |
| For the Defendants | Mr G.H. Garde Q.C. with Mr P. Fary | Russell Kennedy |
TABLE OF CONTENTS
INTRODUCTION............................................................................................................................... 2
THE PARTIES...................................................................................................................................... 3
THE PARTIES’ CONTENTIONS...................................................................................................... 5
(a) Sale of Stock.............................................................................................................................. 5
The Plaintiffs’ Contentions........................................................................................................ 5
The Defendants’ Contentions.................................................................................................... 8
(b) The Yakka Offer..................................................................................................................... 11
(c) Conversion of Computer Equipment................................................................................. 12
FACTS AND EVIDENCE................................................................................................................. 12
PROPOSED SALE TO CUSTOMERS AT A DISCOUNT............................................................ 46
Valuation of Stock....................................................................................................................... 46
Proposed Sale to Customers...................................................................................................... 48
Evidence of John Burnes.......................................................................................................... 48
Customer Witnesses................................................................................................................. 53
Receiver’s Evidence.................................................................................................................. 59
Expert Evidence....................................................................................................................... 60
Conclusion............................................................................................................................... 63
APPROACH TO REALISATION OF ASSETS.............................................................................. 65
Evidence of Mr Wallace-Smith.................................................................................................. 65
Evidence of Mr McVeigh........................................................................................................... 65
Evidence of Mr Orders............................................................................................................... 67
RELEVANT LEGISLATION AND LEGAL PRINCIPLES.......................................................... 71
General Law Principles.............................................................................................................. 71
Section 420A – Position of Guarantors and Collateral Mortgagors..................................... 76
Market Value............................................................................................................................... 83
APPLICATION.................................................................................................................................. 96
Realisation of Stock..................................................................................................................... 96
The Auction.................................................................................................................................. 99
The Yakka Offer........................................................................................................................ 105
LIABILITY OF NAB........................................................................................................................ 109
COUNTERCLAIM.......................................................................................................................... 110
CONVERSION OF COMPUTER EQUIPMENT......................................................................... 111
CONCLUSION................................................................................................................................ 111
HER HONOUR:
INTRODUCTION
In this proceeding, certain corporations (now in liquidation), and the related companies and individuals who secured or guaranteed the payment of their liabilities to the National Australia Bank (“NAB”) pursuant to a number of debentures, seek relief against the NAB and Mr Malcolm Orders, the receiver and manager it appointed pursuant to the debentures.
The plaintiff corporations conducted a business of manufacturing health industry apparel, linen, sporting apparel and corporate uniforms. They allege that the receiver breached his duty pursuant to s.232 and s.420A of the Corporations Law in realising specialised stock by auction, rather than by sale to the existing customers of the business. They further allege that the NAB is liable for aiding and abetting the receiver’s breach, or because the receiver was its agent in relation to the relevant conduct. Stock valued at approximately $2 million in the Florgale Group’s books, which had an estimated auction realisation value of approximately $337,000 was sold for approximately $100,000. The plaintiffs argue that, but for the breaches of duty, the corporate apparel stock alone would have raised over $800,000, and there would have been a sufficient surplus from the realisation of the corporations’ assets to discharge the debt of approximately $1 million owed to the NAB, without recourse to the guarantees and mortgages. The NAB, by counterclaim, seeks judgment against the guarantors and mortgagors for the amount of the Florgale Group’s debt and seeks to apply the proceeds of sale of the mortgaged properties to its reduction.
The plaintiffs originally alleged four specific instances of breach of duty in realising the companies’ assets. They were: forfeiting the opportunity to sell the business as a going concern; failing to accept an advantageous offer, made prior to auction, to purchase certain stock before the offer was withdrawn; the nature of the sale of a particular lot of garments (the VCFL shorts); and conducting a sale by auction of the stock, materials and work in progress.
At the commencement of trial, the issues in dispute were reduced. The plaintiffs abandoned the claim based on failure to sell the business as a going concern (hitherto their principal claim) and the claim based on the sale of a specific lot of garments (the VCFL shorts). The plaintiffs, by leave, filed and served a further amended statement of claim dated 9 February 2004, which reflected the reduction of their claims.
THE PARTIES
The first plaintiff, Florgale Uniforms Pty Ltd (“Florgale Uniforms”), the second plaintiff, Florgale Uniforms NSW Pty Ltd (receiver and manager appointed) (in liquidation) (“Florgale Uniforms NSW”) and the third plaintiff, Professional Uniforms Pty Ltd (receiver and manager appointed) (in liquidation) (“Professional Uniforms”) are all companies in liquidation, with a receiver and manager appointed.[1] They collectively constitute the “Florgale Group”.
[1]The second plaintiff was at all material times inactive and had no relevant assets.
The fourth plaintiff, Group Textile Enterprises Pty Ltd (“Group Textile”) is and was the trustee of the John W Burnes Family Trust. Group Textile was the registered proprietor of a property situated at 5A Union Street, Brunswick (“the Union Street property”). The Union Street property was one of the properties from which the Florgale Group’s business was conducted.
The fifth plaintiff, Thurston Nominees Pty Ltd (“Thurston”) was the registered proprietor of a property situated at 11 Little Gold Street, Brunswick (“the Little Gold Street property”). The Little Gold Street property was also a property from which the Florgale Group’s business was conducted.
The Union Street property was sold on or about 3 March 1999. The net proceeds of sale were $346,648. The Little Gold Street property was sold on 19 March 1999. The net proceeds of sale were $155,013.82.
The proceeds of sale of the properties were deposited in a NAB account. The disposition of the fund is dependent on the outcome of this proceeding.
The sixth plaintiff, Mr John Burnes, was the managing director of the companies in the Florgale Group and of Group Textile and Thurston. In 1989, he executed a personal guarantee of the liabilities of the Florgale Group companies under a finance facility granted by the Bank of New Zealand in January 1989 (“the BNZ finance facility”).
The seventh plaintiff, Mrs Colette Burnes, is the former wife of John Burnes. In 1989, she executed a personal guarantee of the liabilities of the Florgale Group companies under the BNZ finance facility.
The eighth plaintiff, Mr David Burnes, is the brother of John Burnes. David Burnes was a director of certain companies in the Florgale Group and of Thurston. He was the general manager and production manager of the Florgale Group. In 1989, David Burnes executed a personal guarantee of the liabilities of the Florgale Group companies under the BNZ finance facility.
The ninth plaintiff is the estate of Ms Constance Mary Ryan, deceased. In 1989, Ms Ryan executed a personal guarantee of the liabilities of the Florgale Group companies under the BNZ finance facility.
The tenth plaintiff, Mrs Elizabeth Burnes, is the wife of David Burnes, who, in 1992 executed a personal guarantee of the liabilities of the Florgale Group companies under the BNZ finance facility.
The first defendant, Malcolm Orders, is a chartered accountant, registered liquidator, official liquidator and insolvency practitioner who, on 5 November 1998, whilst a partner of the firm Bird Cameron Partners (“Bird Cameron”), was appointed receiver of the companies in the Florgale Group.
The second defendant and plaintiff by counterclaim, the NAB, in 1992 succeeded to a number of debenture charges granted by companies in the Florgale Group, and to mortgages granted by Group Textile and Thurston in favour of BNZ in 1989 to secure financial accommodation granted by BNZ to the Florgale Group.
THE PARTIES’ CONTENTIONS
(a) Sale of Stock
The Plaintiffs’ Contentions
The plaintiffs’ principal contention was that the receiver breached his duty by conducting a sale of the stock by auction on 15 December 1998, rather than selling it by conducting a large‑scale “closing-down” sale targeting the Florgale Group’s existing customer base.
The plaintiffs’ closing written submissions relevantly state:
“The principal aspect of the plaintiffs’ case in relation to the sale of assets is therefore in relation to the manner in which the stock of the company – made up garments, fabrics, work in progress was realised. The plaintiffs’ case in this respect involves two principal contentions. First, a primary case that from about mid‑November 1998, the receiver should have given consideration to affirming the stock to the existing customer base of the company, at discounts from the usual wholesale prices, and the receiver should not have immediately decided simply to sell the stock at auction. The stock of the Florgale Group was special purpose stock – including corporate apparel – which has a quite different market to general fashion garments. This should have been clearly apparent to Mr Orders, given his prior experience with the group in relation to the Quick Evaluation Report, and the advice given to him by the directors of the group as to the special nature of their stock. For stock of this nature, the existing customers would, as a matter of common sense, quite obviously be willing to pay a higher price than general purchasers at auction, and this has been borne out in the evidence of former customers of the Florgale Group. It is also clear that sale of stock of this nature by auction is universally regarded as the option of last resort, which will realise less than other methods of sale.”
The plaintiffs thus argued that the best method of disposal for the Florgale Group’s special purpose stock (assuming that the Florgale Group’s business could not be sold as a going concern) was to approach the existing customer base. In support of that contention, and their claim for loss and damages, they called a number of former customers as witnesses, in order to establish that there was a demand amongst existing customers for the auctioned stock, which would have led to significant purchases and a better net return if a closing‑down sale at a discount had been conducted.
Mr Collinson, counsel for the plaintiffs, argued that the receiver should have conducted a large‑scale closing-down sale at a discount to existing customers, rather than proceeding directly to auction. He argued that the failure to conduct a closing-down sale was the result of an antecedent breach in “process”, in that Mr Orders did not conduct any or any proper analysis of the different options available for disposing of the stock for the best price possible. The plaintiffs argued that instead, Mr Orders first concentrated on the sale of the business as a going concern and, upon the failure of that aim, immediately decided to sell the stock by auction. They argued that Orders’ failure to undertake the analytical process required of a receiver was evidenced by his failure to prepare any budget or documentary analysis comparing the likely costs and benefits of an auction with the costs and benefits of conducting a “closing-down” sale aimed at the Florgale Group’s existing customers.
Mr Collinson argued that the receiver should first have pursued the undisputed primary objective of selling the Florgale Group’s business as a going concern concurrently with a concerted strategy of sales at a discount to existing customers. However, conceding that there may have been some tension between the two objectives, he argued in the alternative that upon the failure to sell the business as a going concern, the receiver should have considered and adopted the strategy of mounting a large “closing down” discount sale of the entire Florgale stock to the existing customers. Further, the receiver should have prepared a spreadsheet analysis comparing the likely costs and benefits of a closing‑down sale to those of an auction.
The plaintiffs ultimately did not dispute that sales of stock occurred during the pre‑auction period. However, they contended that such sales were merely “passive”, rather than “pro-active” sales which were part of a concerted strategy.
The plaintiffs conceded that an auction of the Florgale Group’s plant and equipment would have been necessary in any event, as would a smaller auction of any stock which was not sold to existing customers in the hypothetical closing‑down sale. However, they contended that auction was the method of last resort for the disposal of special purpose stock, and should not have been adopted this case.
In support of the argument that a major closing‑down sale to existing customers at a discount should have been adopted, and would have produced better results, the plaintiffs relied on
(a)the evidence of certain customers of their demand for Florgale Group stock, and their readiness to purchase it at a discount on wholesale price;
(b)the opinion evidence of Mr John Burnes on the returns he believed would have achieved from the strategy of a sale of the entire stock to existing customers within a six week period, at discounts recommended by him.
The plaintiffs contended that not only was an auction the wrong method of realisation, but that the auction ultimately conducted by Taylor Lockwood on 15 December 1998 was “prepared, advertised and conducted badly, so that the auctioned stock realised only a small fraction of what it was worth and what it would have realised had the auction been properly conducted.” The plaintiffs complained that the advertising was confined to three states, although Florgale Group conducted a national business. Further, customers were not notified of the auction and stock was bundled into auction lots which did not contain a range of sizes and styles attractive to existing customers or purchasers of corporate uniforms.
It is undisputed that the receiver’s primary objective, supported by the Messrs Burnes, was to sell the business as a going concern.
However, the plaintiffs contended that during the receivership Messrs John and David Burnes on various occasions warned and advised Orders or his staff-member Quin, that the Florgale Group’s specialist stock should be sold to the existing customers and should not be sold at auction. They also contended that the Messrs Burnes expressed concern about the level of sales occurring during the trade‑on period and prior to auction, complained of the preparation of lots and other arrangements for auction, and advised the receiver to remove corporate logos from logoed corporate uniform stock prior to sale. They claim that such advice was rebuffed on each occasion by Mr Orders or by Mr David Quin, a member of the receiver’s staff who was more or less permanently present at the Florgale Group premises throughout the receivership during the period prior to the auction on 15 December 1998.
The Messrs Burnes gave evidence that the receiver or Quin responded to their complaints or recommendations by excluding them from discussions and or stating that the disposal of stock was none of their business. They testified that at the outset of the receivership, at a meeting on 5 November 1998, Orders expressly prohibited them from making any contact with customers or from concluding any sales at all without his written authority, and handed them a document to that effect.
The Messrs Burnes also testified that on subsequent occasions, John or David Burnes again urged that efforts be made to sell stock to customers, advised against auction, and protested at the bundling of the stock for auction, but that the receiver rejected the advice or recommendations.
The Defendants’ Contentions
Mr Garde, senior counsel for the defendants, submitted that the plaintiff’s principal complaint concerning the method of disposal of stock was based on hindsight. It did not take account of the receiver’s fundamental obligation to balance the costs of a particular mode of disposal against the likely returns, and to weigh all relevant risks, when determining the mode of realisation of assets. He argued that the ultimate goal of the receiver is, (subject to the general law and statutory duties owed to the mortgagor), to maximise the returns to the secured creditor. Although a higher sale price might be achieved by a particular method of disposal, the associated costs might outweigh it.
He submitted that I should reject the Messrs Burnes’ testimony that during the receivership they complained of the receiver’s approach to the sale of stock, advanced the proposal of a large closing-down sale at a discount aimed at existing customers and objected to the decision to sell the stock by auction. Similarly, he contended that I should reject their testimony that they complained of the level of sales of stock achieved prior to auction, the method of compilation of stock into lots for auction and the advertising and notification of prospective bidders for the auction. Mr Garde also submitted that I should not accept the Messrs Burnes’ testimony that they advised that the logoes be removed from logoed corporate uniform stock.
Mr Garde argued that in so far as the plaintiff’s case relied on the disparity between the amount realised at auction and the value ascribed to the stock in the Florgale Group’s financial statements, it was fundamentally misconceived. The Florgale Group’s practice of valuing the stock at wholesale prices less 20% was erroneous, because it included a profit component. Instead, the valuation method of cost of goods (if lower than net realisable value) should have been adopted in the financial statements.
Further, he submitted that the Florgale Group had been making losses and its revenue was declining for approximately five successive years. It had fundamental problems of excessive stock holdings with inflated book values. There was a pattern of increasing stock holdings, while the companies’ operations were increasingly unprofitable. Those circumstances fortified the conclusion that the stock was overvalued in the Florgale Group’s books.
There had also been unsuccessful efforts to sell the entire business for less than the value ascribed to the stock. By October 1998, the directors considered the Florgale Group companies to be insolvent. The appointment of administrators, and the subsequent appointment of a receiver, were public events, which rendered the realisation of stock more difficult. The trade knew of the Florgale Group’s insolvency.
Mr Garde argued that the large closing-down sale discount aimed at existing customers proposed by the plaintiffs was entirely unrealistic. It ignored the trading history of the business both prior to receivership and during the receivership up to the closure of the business. The receiver had sold to existing customers at a discount but had sustained trading losses. Contrary to the plaintiffs’ assertion, the remaining staff had continued to make sales at a discount both before and after the closure of the business, although the sales of items which required continuity of supply were reduced. The plaintiffs’ proposal did not take account of the risks, the practical limitations and significant costs which would be entailed. By the time the receivership commenced, the administrator had already reduced the Florgale staff from 34 persons to about 17. The remaining staff would not have been capable of selling and despatching the Florgale Group’s entire holding stock (which was equivalent to the quantity usually sold within the space of about a year) within a concentrated six week period. It would have been necessary to hire additional staff, and (depending on the time required to sell all the stock) to commit to additional rental for either the existing or alternative premises.
The defendants argued that in order to sell stock by the method of a closing‑down sale at a discount to existing customers advocated by the plaintiffs, it would have been necessary to continue to run the business, which was incurring estimated losses of $43,000 from 11 November 1998 to end of November 1998. Because of the approaching end of year, the latest possible auction date for 1998 was 15 December 1998. If the auction did not take place then, it would have to be delayed until next February at the earliest. The losses of running the business over January and February, including rental, would then have to be funded. The Messrs Burnes, and other related parties, were not willing to cover any losses incurred by keeping the business open. The incurring of additional costs had to be assessed against the risk that the return would not justify them. A better outcome was not, in any event, guaranteed.
Mr Garde submitted that receiver engaged Taylor Lockwood, (an experienced and reputable firm of auctioneers previously retained by the voluntary administrator) to value the stock and to advise on the preparation and conduct of the auction. He accepted Taylor Lockwood’s recommendations in relation to the timing, advertising and conduct of the auction. In particular, the receiver accepted Taylor Lockwood’s advice for two substantial advertisements in “The Age” on successive Saturdays. There was no evidence to suggest that the entire customer base should be notified of an auction and the receiver had already instructed staff, including the Messrs Burnes, to contact existing customers who were likely to be interested in purchasing stock at a discount. Further, about 768 auction brochures or flyers were distributed to recipients across Victoria, New South Wales and South Australia. Although there were Florgale Group retailers and distributors listed in other states, no evidence or statistics established the proportion of its sales achieved outside Victoria, New South Wales and South Australia, other than for Mr John Burnes’ estimate, based on the figures for a three month’s period of operation. There was no basis on which to conclude that national advertising was warranted. Further, the auction catalogue revealed lots containing assorted sizes and styles, contrary to the plaintiffs’ allegations.
Mr Garde ultimately submitted that the cost versus benefit analysis of the methods of realisation was a matter for the judgment of the receiver, which he had exercised on reasonable grounds in all the prevailing circumstances.
The defendants contended that the auction was well conducted and well‑attended. There were 130 registered bidders and about 200 persons who attended. Thirty‑two staff days by Taylor Lockwood staff were involved in the preparation and conduct of the auction. Two auctions were conducted within the day. The plant and equipment was auctioned first, followed by the stock. There was a large number of purchasers. Although the proceeds of the auction were significantly less than estimated, that was not due to any flaw in the advertising or conduct of the auction.
(b) The Yakka Offer
The plaintiffs’ second claim is that the receiver breached his duty by failing to transmit an immediate acceptance of an advantageous but conditional offer made by Yakka Pty Ltd (“Yakka”), a competitor of the Florgale Group, to purchase specified Coles corporate uniform stock for $100,000. The Yakka offer was received late in the afternoon of Friday, 27 November 1998. The Yakka offer was stated to be open for seven days, but it was prematurely withdrawn on Monday, 30 November 1998. It was subject to conditions, including a physical inspection. The Coles stock was subsequently included in, and sold at, the auction on 15 December 1998. The plaintiffs’ closing written submissions stated:
“The other aspect of the plaintiffs’ case relates to the specific failure of the receiver to accept an offer from Yakka to purchase Coles stock. On 27 November, 1998, after the decision had been made to close the business, Yakka made a formal offer to purchase the Coles stock for $100,000. The stock had been given an auction realisation value of $6,879. Despite the fact that the price offered was over 14 times the auction realisation value, and the advice from John Burnes that the offer should have been accepted immediately, it was not, and the offer was withdrawn.”
The defendants argued that in circumstances where there was no apparent urgency and the offer was subject to conditions, it was unrealistic to contend that the receiver breached his duty by failing to accept the offer within the space of a working day.
(c) Conversion of Computer Equipment
The plaintiffs’ third claim is based on the conversion of certain computer equipment valued at approximately $4,000, held by Group Textile pursuant to a hire‑purchase agreement, which was lost during the course of the receivership. The defendants accepted liability for the conversion, but contended that the damages were limited to the value of the goods. The plaintiffs contended that damages included the liability of approximately $18,000 under the hire purchase agreement pursuant to which the converted goods were acquired.
FACTS AND EVIDENCE
The Florgale Group conducted a family business of manufacturing and selling uniforms, business wear, sporting and health care apparel, and hospital linen. Originally it produced coats, but began to manufacture uniforms during World War II. The business then moved into hospital lines and apparel. Several years before the appointment of the receiver, the Florgale Group began to manufacture corporate uniforms, but it achieved only a “negligible” share of that market. It was not a retail business. It sold to large corporations directly, and also sold to a network of retailers. It had agents and distributors outside Victoria. Its customers included a number of hospitals.
The business operated in three related segments:
1.Hospital and medical uniforms and linen
2.Corporate apparel
3.Sporting apparel
The purchase of corporate apparel entailed a taxation advantage to the purchaser, provided that the garments were capable of 3-5 years wear. The Florgale Group corporate garments were relatively long-lasting and did not become obsolete as quickly as ordinary fashion garments. It was not disputed that the corporate uniform stock had a narrower “niche” market than ordinary fashion garments.
On or about 30 January 1989, the Bank of New Zealand (“BNZ”) granted financial accommodation to the Florgale Group, secured by the following:
(a)A debenture charge over the assets of, and an undertaking by, Florgale Uniforms.
(b)A debenture charge over the assets of, and an undertaking by, Florgale Uniforms NSW.
(c)A debenture charge over the assets of, and an undertaking by, Professional Uniforms.
(d)A debenture charge over the assets of, and an undertaking by, Group Textile.
(e)A debenture charge over the assets of, and an undertaking by, Thurston.
(f)A mortgage by Group Textile of the Union Street Property.
(g)A mortgage by Thurston of the Little Gold Street Property.
On or about 30 January 1989, each of the above companies and Australian Outback Travel Company Pty Ltd (“Australian Outback”) (a travel business conducted by John Burnes’ son) executed a cross–guarantee in favour of BNZ.
In January 1989, John Burnes, Colette Burnes, David Burnes and Constance Mary Ryan (now deceased) each executed a personal guarantee dated 30 January 1989, in favour of BNZ in respect of the Florgale Group facility.
On 7 August 1992, Group Textile executed a deed of undertaking in favour of BNZ.
On 17 August 1992, Elizabeth Burnes executed a guarantee and indemnity in favour of BNZ.
On 4 September 1992, the Florgale Group, Thurston and Group Textile executed a deed of subordination in favour of BNZ.
In February 1994, BNZ released Australian Outback from its obligations under the cross-guarantee dated 30 January 1989.
In July 1997, the NAB succeeded BNZ as lender and holder of the above guarantees and securities. It is not disputed that the NAB thereby acquired the benefit of all the guarantees and securities, the validity of which was not challenged.
By 1998, the Florgale Group was experiencing financial difficulties and liquidity problems. Its liability to the NAB was approximately $1 million. The market for health industry apparel had reduced, because hospitals no longer bought uniforms for staff, but left the purchasing to them. Similarly, the market for corporate uniforms had diminished, as corporations no longer purchased uniforms directly to provide cost‑free to their staff, but left it to staff to purchase. John Burnes’ son made an unsecured loan to the business of $250,000. In early 1998, John Burnes informed the Florgale Group staff that sales targets had to be met within the next few months or the business would be wound up or sold, as the Burnes family was not willing to continue to commit further funds.
In March/April 1998, the Florgale Group’s funding arrangements with the NAB were due for review. The NAB was concerned about the continued provision of banking facilities to the Florgale Group. It instructed Mr Orders of Bird Cameron to investigate and report upon the Florgale Group.
In the course of discussions in March/April 1998, John Burnes provided Orders with information concerning the Florgale Group. Orders completed his review and prepared a report dated 9 June 1998 to the NAB (“the Quick Evaluation Report”).
The main findings of the Quick Evaluation Report were as follows:
(a)The Florgale Group had incurred losses in the five financial years ending 30 June 1997, although there was a possibility of a small profit before income tax being made in the current year (ending 30 June 1998). The poor trading results were due to a trend of declining revenues from $10.7 million in the 1992/93 financial year to approximately $5.7 million in the 1997/1998 financial year;
(b)The Florgale Group did not prepare a business plan, and did not have a basic marketing plan;
(c)there was insufficient management control over growth in revenue of the Florgale Group;
(d)the trading losses and decline in sales revenue were due to the decline in the public health market, with hospitals no longer purchasing uniforms, but leaving it to their staff. The corporate uniform market, in which the Florgale Group had attempted to sell product over the past two years, was highly competitive. The Florgale Group had negligible market sales and had lost significant sales due to changes in corporate policy at Coles and Kmart. The corporate uniform market was also becoming more fashion‑oriented;
(e)a number of creditors were refusing to supply goods to the Florgale Group until their accounts were brought within acceptable trading terms;
(f)the accounting systems were inadequate to provide standard profit and loss statements for each of the Florgale Group’s divisions;
(g)there were no adequate strategies being implemented to increase sales;
(h)the NAB should not increase the level of its financial accommodation to the Florgale Group companies;
(i)the NAB should give notice to the Florgale Group companies to re‑finance their debts;
(j)if the Florgale Group companies failed to refinance and the losses continued, a receiver and manager should be appointed to them;
(k)the Florgale Group had only been in the corporate uniform market for one to two years and was still attempting to develop a competitive advantage. The report stated: ‘Mr Burnes advised that Professional Uniforms Pty Ltd’s market share is negligible. Mr Burnes advised that this market is becoming more fashion-oriented and more varied in the number and type of uniforms an employee may have’;
(l)Mr Burnes estimated that the Florgale Group had a market share in health uniforms of 10% to 15% in Victoria and a market share of 15% to 20% in Victoria for linen. The market share for continence care products was 20% to 25%. (The report did not specify whether that market was confined to Victoria or not.) Sporting apparel was sold to the VAFA, the VCFL and a part of the New South Wales Football League;
(m)Mr Burnes was unable to advise of the key success factors for the corporate uniform division, because the Florgale Group was still attempting to develop a competitive advantage. Those factors should have been identified prior to entering the market;
(n)The Florgale Group had incurred significant losses in the past and trading results had been adversely affected by:
a declining market in health;
the declining overall market;
a declining market in corporate uniforms.
(o)Linen was not purchased in December and January, due to the holiday period. The sales of blouses and skirts declined in December and January, due to the holiday period;
(p)the lead-time to purchase linen was approximately three months. The Florgale Group held stock equivalent to approximately five to six months’ sales in raw material and the area appeared to be overstocked;
(q)The corporate uniform stock represented approximately 5.58 months’ of stock, and excessive stock levels appeared to be held.
At a meeting on 24 June 1998 attended by John Burnes, David Burnes, Orders, NAB officers and others, the NAB officers informed the Messrs Burnes that the Florgale Group’s loan facility would not be renewed unless it retained an outside marketing consultant.
At the meeting, Orders recommended the appointment of Business Concepts Pty Ltd (“Business Concepts”) as a suitable external marketing consultant. In his witness statement, John Burnes stated that Orders revealed after the meeting that he had an involvement in Business Concepts. John Burnes subsequently obtained quotations from Business Concepts and another marketing consultancy, on the advice of Mr Grey of Pitcher Partners. The Florgale Group ultimately retained Business Concepts. In cross‑examination, John Burnes conceded that Orders did not say that he had any financial involvement with Business Concepts.
Although there appeared to be a suggestion that Orders’ recommendation of Business Concepts was in some way improper, no impropriety was expressly alleged or established. There is no evidence to suggest that either Mr Orders or his firm, Bird Cameron, had any financial interest in the organisation, or would benefit in any way from its retainer. The Florgale Group chose to retain Business Concepts after having investigated alternatives and calling for quotations.
The plaintiffs contended that the Quick Evaluation Report exaggerated the rate of the Florgale Group’s financial deterioration by inaccurately stating that revenues were declining. By a letter of 21 September 1998 to the NAB, John Burnes criticised the Quick Evaluation Report’s reference to the sales of $10.7 million in 1992/3, which included $4 million worth of sales by Australian Outback, and “the 1992/3 revenue was $6,712K not $10,743K and the Nett loss $215K was abnormally affected by abnormal expenditure to close the Albury factory”. The plaintiffs argued, however, that the Quick Evaluation Report establishes Orders’ familiarity with the Florgale Group’s business operations and the nature of the ‘special purpose stock’, which should be taken into account when determining his liability.
At trial, Orders defended the reference to a trend of declining revenues in the context of a business which “was sitting on 12 months’ worth of stock”. He contended that the Florgale Group needed a substantial increase in revenue if it were to avoid insolvency.
Orders explained that he recommended in the Quick Evaluation Report that the Florgale Group be required to re‑finance notwithstanding a debt of $1 million and net tangible assets valued at $3 million in the companies’ books, because “It’s a question of weighing up the risk profile of the business. This company was carrying an equivalent to about 12 months sales in stock at any point in time and it wasn’t running that stock down. It needed to increase sales to run stock down. The risk is whether this company was capable of doing it … “.
Mr John Burnes appeared evasive and inconsistent when cross-examined on matters included in the Quick Evaluation Report and the state of the Florgale Group business prior to the appointment of Pitcher Partners. He conceded that he had provided information to Orders for the preparation of the report. He agreed that the sales to hospitals were decreasing, but denied that the public health market of the Florgale Group was decreasing. At one point, he asserted that the decline in direct sales to hospitals was compensated for by sales to hospital staff. Ultimately, however, he conceded that the staff purchased less than the hospitals had previously purchased.
He agreed that the Quick Evaluation Report correctly stated that the Florgale Group had only a negligible share of the corporate uniform market and had lost sales because Coles no longer purchased uniforms for its staff.
Mr Burnes agreed that the Florgale Group faced the fundamental problem that its stock level of made-up garments was increasing year by year and that corporate uniforms were becoming more fashion-oriented. He conceded that the Florgale Group could not achieve any reduction in stock, which was absorbing more company money.
Mr Burnes was unresponsive to cross-examination on whether the Florgale Group companies were insolvent at the time of the appointment of the voluntary administrator. He did not answer the question and repeatedly stated that “in my view we needed to restructure”.
At trial, Mr Burnes testified that he believed that the entire Florgale Group stock could have been sold within six weeks to existing customers at various discounts which would have produced total sales receipts of approximately $879,000, a sum sufficient to enable the Florgale Group to satisfy the liabilities to the NAB from its assets.
He conceded that the Florgale Group had not attempted to conduct a large sale of of stock at a discount in response to the financial difficulties experienced in the period leading up to the appointment of the voluntary administrator.
When questioned whether sales in the 10 months ending 10 April 1998 were $572,380 less than for the corresponding period, as stated in the Quick Evaluation Report, Mr Burnes stated that he did not know whether it was right or wrong, could not say whether the figure was “in the ball park”, had never reviewed the Quick Evaluation Report and only “signed off” on his letter to the NAB dated 21 September 1998, which was drafted by the Florgale Group financial controller, Terry Maher.
At trial, Mr Burnes stated that he did not know what the Florgale Group sales figures for the relevant period were. He denied that there was widespread knowledge in the industry that the Florgale Group was experiencing financial difficulties. He denied any knowledge of the companies referred to in the Quick Evaluation Report which had stopped supply on credit. However, he disagreed that the Florgale Group stock levels were too high.
Mr John Burnes’ evidence was inconsistent, confusing and unconvincing. It frequently conflicted with the statements included in, or the tenor of, the documentary evidence. Mr Burnes was uncooperative, unresponsive and defensive in cross-examination. He was not, in my opinion, a reliable or frank witness.
By August/September 1998, the Florgale Group was continuing to experience considerable financial difficulty and it was not meeting its sales budgets. It therefore retained Pitcher Partners to develop a strategy to address its problems. Mr Stewart of Pitcher Partners and John Burnes discussed three options available to the Florgale Group. Those options were: (a) to find an equity partner; (b) to sell two divisions of the business; or (c) to sell all five divisions.
In or about October 1998, Pitcher Partners prepared an Information Memorandum on the Florgale Group. The Information Memorandum proposed a purchase price of $1.5 million for four of the five divisions of the Florgale Group business. (At that stage, David Burnes had an interest in acquiring for himself either the sporting or apparel division of the business.) According to John Burnes, Mr Robert Peake of Pitcher Partners privately advised him that a figure of $800,000 - $1 million for four divisions (excluding the sporting or apparel division) was a realistic figure.
Pitcher Partners approached the Florgale Group’s competitors and others, in order to assess the interest in the proposed sale. Mr Waters of Bizwear, a competitor, by letter to Pitcher Partners dated 21 October 1998 expressed interest in purchasing some assets of the Florgale Group, but stated that he considered the value was substantially less than the $1.5 million indicated in the Information Memorandum. The letter also expressed concerns about some of the information provided in the Information Memorandum.
By an e-mail dated 23 October 1998 to Pitcher Partners, Mr Waters stated that he valued the Florgale Group’s current supply contracts, client list, uniforms, garments, raw material, stock and sundry plant and equipment at approximately $200,000. The e-mail noted that Mr Waters considered the supply contracts to be virtually worthless, the logoed stock to be worthless (as the existing contracts did not bind the clients), and the “stock service stock” to be fairly dated and in poor condition.
Pitcher Partners received further expressions of interest, but did not succeed in their attempts to sell the business (or any part thereof) of the Florgale Group as a going concern. Mr John Burnes was dissatisfied with Pitcher Partners’ efforts to sell the business.
By late October 1998, the sales staff of the Florgale Group had not met the agreed sales budget, so the gross profit was not sufficient to meet budgeted expenses. Concerned about liability for insolvent trading, on 29 October 1998 the Florgale Group’s directors resolved to appoint David Scott of Scott Partners as the voluntary administrator of each of the companies in the Florgale Group.
The voluntary receiver reduced the staff from about 34 persons to 17 staff. At trial, Mr Burnes stated that he could not give the exact number of despatch staff left after the reduction, but estimated three or four persons. Mr Burnes professed not to know what “a significant reduction” of staff would be. Ultimately, he conceded that there was only one despatch staff member left. Although he denied that a single despatch staff member would be incapable of handling the entire contents of the warehouse (for the purposes of a total closing-down sale) he conceded that six staff members in receiving and despatch had handled the normal volume of sales. There were also normally two people in the area of order entry and customer service.
The voluntary administrator also attempted to sell the Florgale Group business. On 31 October 1998, Mr Scott offered the Florgale Group’s business for sale as a going concern. Shortly after, he prepared an Information Memorandum and advertised the business in “The Age” newspaper. There were a number of expressions of interest in response. The voluntary administrator received a number of inquiries from potential purchasers who signed confidentiality undertakings, but no sale was effected.
The voluntary administrator also retained Taylor Lockwood, a firm of auctioneers and valuers, to conduct a valuation of the Florgale Group’s plant and equipment. Taylor Lockwood staff inspected the plant and equipment and, by letter dated 29 October 1998, ascribed an auction realisation value of $65,050 to it.
The directors of the Florgale Group did not notify the NAB of their intention to appoint a receiver. The voluntary administrator notified the NAB. An internal NAB Memorandum by Guy Edwards dated 30 October 1998 noted the appointment of a voluntary administrator to the Florgale Group. It stated that the NAB was unaware of any justification for the voluntary administration process. It estimated that, based on Orders’ previous investigating accountants’ report, stock (which had a book value estimated at about $1.9 million) was likely to realise $500,000 if sold as a going concern, and $303,000 on a “close down” basis.
By letters dated 2 November 1998, the NAB served formal demands on the Florgale Group companies, Group Textile and Thurston, demanding payment of $1,035,346.74, together with interest and bank charges.
On 5 November 1998, the NAB appointed Mr Orders as receiver and manager of the property charged by the debentures. The plaintiffs did not challenge his appointment.
Following his appointment as receiver, Orders, accompanied by two senior members of his staff (Norman Jones and David Quin), arrived at the Florgale Group’s business premises in Brunswick at about 4.00pm on 5 November 1998.
The receiver and his staff met Mr John Burnes. They served the receivership documents on him. A meeting then occurred, attended by Messrs Orders, Jones and Quin, the Messrs Burnes and Florgale’s financial controller, Terry Maher. The directors were handed a document which Orders routinely provided to company officers at the commencement of a receivership, entitled “Acknowledgment
of Responsibilities by Officers of the Company in Receivership” (“the Acknowledgment”).
The Acknowledgment stated, inter alia:
“1.Without the express written authority of the Receiver or a person authorised by the Receiver:
(a)No order will be placed.
(b)No goods will be accepted by the company from any source whatsoever unless they are the subject of a signed order by the Receiver.
(c)No credit will be incurred.
(d)No payments will be made.
(e)No goods will be returned to any supplier.
(f)No goods will be dispatched.
(g)No contracts will be entered into.”
Messrs John and David Burnes signed the Acknowledgment. John Burnes testified that he understood it to prohibit him from making any contact with customers or from making any sales without first obtaining the receiver’s written authority.
There is a conflict of evidence on what was said at the initial meeting on 5 November 1998. The Messrs Burnes contended that Orders expressly prohibited them from making any sales without his prior written approval. In his witness statement, John Burnes stated that at the meeting on 5 November 1998, Orders said that he was now in “complete and total control” of the company and that he instructed John Burnes to “have no further contact with clients regarding any matters unless instructed to do so”. John Burnes stated that he informed Orders of discussions he had had with various parties regarding the sale of all or parts of the business. Orders said that “he or his staff would continue the sales negotiated for the business” and that the directors were not to be involved “in any way”. At trial, John Burnes testified that Orders instructed him not to approach customers without written consent and “to sit in my office and do what he told me”.
David Burnes also asserted that Orders informed those present at the meeting that he was in complete control and that all matters in future were to be referred to him or to his staff. Terry Maher gave evidence that Orders indicated that he would be in complete control of the company from that point on.
Orders testified that at the meeting on 5 November 1998, he advised that the assets of the Florgale Group companies would be under his control and that John Burnes stated that the companies were operating on a “skeleton staff” and had insufficient assets to repay the bank.
Orders denied that he prohibited the Florgale Group directors and staff from contacting clients, to seek orders and conclude standard sales transactions without obtaining his prior authority. He conceded that he instructed John Burnes at some point (which may have been the meeting on 5 November 1998) not to contact “contracted clients” due to the risk of not being able to guarantee supply and losing such customers while trying to sell the business as a going concern.
Orders testified that he emphasised that the companies would continue to trade and that staff should seek orders and contact customers. He did not prohibit any staff member from contacting customers of the business “because I was there to sell stock”. He expected the Messrs Burnes to “contact clients that they deal with” to obtain orders.
David Quin, who was present at the meeting, could not recall Orders prohibiting John Burnes from contacting customers without prior consent and testified that such a comment was unlikely. Mr Quin prepared a contemporaneous file note of the meeting dated 5 November 1998, which states, inter alia:
“MJO explained all assets under his control. Directors’ powers ceased as they did when Administrator appointed.
J Burnes said trying to pay bank but doesn’t believe there are sufficient assets in the company. Advised trust owns three properties which will have to be sold.
Pitcher Partners provided brief valuing of business at $1.5 million with realistic value of $1 million excluding debtors.”
J.B. advised that he has been trying to sell business with Administrator.
The company employs a skeleton staff only at present and is making some profit on orders.
He mentioned Coles contract – advised contract not affected by appointment of Administrator or R&M.”
Norman Jones, another member of Mr Orders’ staff, was also present at the meeting on 5 November 1998 and prepared a file note. Norman Jones’ handwritten file note states, inter alia:
“J.B. trying to pay out bank
Not enough value company to pay out bank
Trust properties to be sold – sell in an orderly way
Went to Pitcher Partners – Equity Role – whole sale
Administration
…going concern
…
…$1.5m - should get $1.0m including stock.
Bizwear expressed cost plus $600,000.
On Friday… all wanted to offer was $200,000
Skeleton staff @ moment…”
John Burnes initially denied that he told Orders that the Florgale Group was operating on a skeleton staff. Ultimately, he was unsure whether he had said “small” or “skeleton”.
Immediately after the receiver’s meeting with the Messrs Burnes and Terry Maher on 5 November 1998, the receiver and his staff addressed a staff meeting.
Norman Jones’ file note of the staff meeting held at 4.35pm on 5 November 1998 states, inter alia:
“All assets… under control of R & M
MJO legal liable for all debts
MJO indicated personal liable
…
Outlines trading position
Security position – Priority creditors
…
How long are we going to trade on
Outstanding orders to be reviewed. DAVID
Cash-flow position
…
Creditors queries …to be put to D.Q.
No guaranties as to … but continue until further notice
With orders – need to ensure stock position…”
Orders testified that he also addressed the staff as a separate group on 5 November 1998, or on the following day. He stated that he told the staff that the Florgale Group companies were continuing to trade and that they should continue to take orders for the business. Although he could not recall who was present, Mr Orders asserted that he encouraged staff to seek orders and did not restrict or prohibit them because “it defies logic to trade a business on and not seek sales”.
At trial, Mr John Burnes initially testified to a “total recollection” and “perfect” recall “like it’s cast in iron” of the meeting on 5 November 1998. Subsequently, in the course of cross-examination, he admitted to uncertainty, lack of recall or weak recall. John Burnes’ account of what was said at the meeting is inconsistent with the contemporaneous diary notes of Messrs Quin and Jones. As discussed in detail below, Messrs Orders and Quin presented as credible and consistent witnesses, whose account of events is, in many instances, supported by, or consistent with, the contemporaneous documents. In the case of conflict, I prefer their evidence to that of Mr John Burnes and Mr David Burnes. I am satisfied that the file notes of Messrs Quin and Jones accurately reflect the principal substance of what was said at the relevant meetings. Further, I do not consider that the Acknowledgment document which Mr Orders routinely distributed would reasonably be interpreted by experienced business people as a blanket prohibition on contacting any customers in order to secure an order or to make any sale without first obtaining consent.
On 5 November 1998, David Scott forwarded the Information Memorandum prepared by the voluntary administrator, together with a list of potential buyer contacts for the business, to Orders’ firm.
Having assumed control as receiver and manager, Orders arranged for circulars to be sent to creditors and correspondence to be sent to the Deputy Commissioner of Taxation. Mr Quin, a chartered accountant and registered liquidator, was mainly based at the Florgale Group’s premises in Brunswick.
Under Mr Orders’ supervision and instructions, his staff operated the business, contacted customers and suppliers, investigated the Florgale Group’s financial position and compiled a new information memorandum to be sent to potential purchasers of the Florgale Group’s business, assets, or parts thereof.
On 10 November 1998, Orders sent confidentiality undertakings to 24 persons who had expressed an interest in purchasing the Florgale Group’s business or its assets.
Quin familiarised himself with the Florgale’s Group’s operations, finalised a stock‑take commenced by the voluntary administrator and considered retention of title claims, employee entitlements, and the collectability of debts. He also dealt with customers’ claims and queries.
In his witness statement, John Burnes stated that in the week commencing on 9 November 1998, he approached Quin and suggested contacting customers and offering them their particular style and colours at a range of discounts, in order to achieve the maximum return for stock. He had prepared a summary sheet listing clients during the voluntary administrator with “various discount points that such stock could be sold at”. Burnes stated that Quin responded that it was none of Burnes’ business and that he (Quin) would make the necessary sales arrangements as he saw fit.
Quin denied that such a conversation ever occurred. He stated “I would never say to a director of a company that it was none of his business. Nor would I say that I would be making all the arrangements”. Quin stated that if Burnes had made suggestions about the sale of stock, he would probably have discussed it with the receiver and sought his advice, because “I know that the receiver and manager likes to consider input from the directors. He would have been interested in hearing any suggestions in relation to the sale of stock.” There is no apparent reason why Quin would respond to a director in the manner alleged by Mr Burnes. There was no contemporaneous complaint. It is inconsistent with Quin’s regular and documented consultation of the directors for approval on sales at a discount and Orders’ documented consultation of them on other matters, discussed below. Further, I considered Mr Quin to be a credible and consistent witness. I accept his testimony.
On 9 November 1998, Quin retained Taylor Lockwood to value the Florgale Group stock. Taylor Lockwood personnel visited the Florgale Group’s premises. They valued the stock on the basis of percentages of cost price to produce market value, existing use, and auction realisation value. Taylor Lockwood confirmed the valuation by letter to Bird Cameron dated 20 November 1998.
Fabrics directly related to the above goods would also be of interest and we request details of these.
Following a review of other stock items, Yakka does not have an interest in these and is unable to make any form of offer”.
It is not disputed that the estimated auction value of the Coles stock was only $6,879. The Yakka offer for Coles stock therefore compared very favourably.
Messrs John Burnes and Quin discussed the offer. There is a conflict of evidence on what was said.
John Burnes’ evidence was that he “immediately responded that I thought the offer was extraordinarily generous and should be accepted immediately, before it might be cancelled”. Burnes testified that David Quin responded with words to the effect that if they were keen today they would be keen next week and he would get around to it in time. On Monday, 30 November 1998 at 4.44pm Yakka withdrew its offer.
At trial, Quin denied that John Burnes told him that the Yakka offer should be accepted immediately. Although he could not recall the precise words, he asserted that Burnes merely indicated that “it’s a good offer and it should be accepted.”
Quin did not recall saying that if Yakka were keen today, they would be keen next week. Quin testified that he was aware that an offer to purchase might be withdrawn at any time prior to acceptance, but had no reason to suspect that it would be withdrawn prior to the date stated in the letter. He testified that he believed that he had a week to consider the offer and that time was needed to consider it.
In his witness statement, Quin stated that he ‘did not have sufficient time to consider the offer and confer with Mr Orders before it was withdrawn’. He could not recall whether he tried to, or did, contact Malcolm Orders on the Friday evening or Monday morning to discuss the offer. Quin stated that the necessary steps to be taken prior to acceptance were to contact Malcolm Orders and to confirm that the stock levels conformed to the requirements of the Yakka offer. He could not recall whether he commenced the process of checking stock levels.
Quin was aware that the auction realisation value of the Coles stock was about $6,879. Orders had stated at the meeting on 24 November 1998 that if an offer was received from Yakka, he would ‘assess the offer and compare value against auction’. Orders and Quin testified that Quin did not have the authority unilaterally to conclude a transaction of the value of $100,000, but was required to refer to Orders. Orders could not recall whether he was informed of the Yakka offer on the night it was received, but if so, as was highly likely, he was not aware of any urgency.
Orders testified was that he would have needed time to evaluate the offer, although he agreed that it was ‘a very good offer’. In particular, Orders did not know of whether all the specified Coles stock was still held and was in good physical condition, or which patterns or fabrics related to the goods. He was therefore not in a position to respond to the Yakka offer on the evening of 27 November 1998 or by the following Monday, prior to the withdrawal of the offer.
The plaintiffs submitted that the Yakka offer was conditional only on quantity and physical inspection of the stock. Therefore, the plaintiffs argued that the expression of the offer as a ‘formal offer’ subject only to physical inspection and availability for collection in good order would be binding on Yakka unless the physical condition of the stock were defective. The disparity between the offer price and the estimated auction value of the Coles stock invited a return facsimile accepting the offer.
The defendants contended that the offer was conditional and could not be rendered binding by the unilateral act of the receiver. Mr Garde pointed out that the Yakka offer expressly related to the Coles stock “detailed in the stock status report as at 30 October 1998”. The letter was received a month later, after some of the Florgale Group October 1998 stock (which may have included Coles stock) had been sold. He argued that any response offering a different quantity of stock would be a counter offer.
Mr Wallace-Smith, the defendants’ expert witness, stated that the practical commercial approach to a conditional but advantageous offer would be to take steps as soon as possible to satisfy the condition. In the case of the Yakka offer, he would have tried to get the prospective purchaser to undertake a physical inspection as soon as possible, and would go to the company’s books and records as a good starting point to check that the relevant stock was available. He would then have tried to arrange a time for the prospective purchaser to view the stock, although the purchaser’s cooperation would be necessary. He would not have relied on the statement that the offer was open until 4 December 1998.
Mr Wallace-Smith testified that he would not have sent an immediate one-line facsimile accepting the Yakka offer, due to its conditional nature. Had there been no conditions, he might have sent an acceptance immediately.
The defendants argued that in circumstances where the offer was subject to conditions, including the identity of the stock, physical inspection, and availability for collection in good order and condition, it was unrealistic to contend that the receiver was culpable for failing to accept, within the space of a single working day, an offer stated to be open for an entire week.
The defendants further submitted that I should reject John Burnes’ account of his conversation with Mr Quin in relation to the Yakka offer. Mr Burnes did not present as an impressive witness. In my opinion, given that at the time, there was no reason to suppose that the offer would be prematurely withdrawn, it is improbable that Mr Burnes would refer to the possibility of cancellation and insist on immediate action after the close of business on Friday evening.
Had the receiver adopted the course advocated by the plaintiffs of transmitting an immediate acceptance late on the evening of 27 November 1998, the purported acceptance would not have been binding on Yakka had the specified stock been unavailable, the physical inspection proved unsatisfactory or the goods been unavailable for collection in good order. The receiver was not in a position to require the prospective purchaser to attend the premises and conclude the physical inspection immediately. Acceptance of the offer in the absence of ascertaining that all the specified stock was available and in good order, would, in my view, be imprudent.
I am satisfied that Quin was required to consult Orders and obtain his authority to conclude a sale of the value in question. There was nothing to indicate that the Yakka offer was likely to be withdrawn within a short space of time. The scheduling of the physical inspection was not within the receiver’s sole control. In my opinion, “reasonable care” on the part of the receiv in such circumstances would not require the receiver to send an acceptance immediately or to ascertain stock levels and take steps to arrange a physical inspection within the space of a single working day.
In my opinion, the failure to accept the Yakka offer outside business hours on Friday 27 November or on Monday, prior to its withdrawal, did not constitute a breach of duty by the receiver.
LIABILITY OF NAB
As I have found that there was no breach of s.420A or s.232 of the Corporations Law, it follows that the plaintiffs’ claims that the NAB is liable on the basis that:
(a)the receiver was its agent for the purposes of the conduct which constituted a breach of duty;
(b)that the receiver, as an officer of the corporation, breached the duty to exercise reasonable skill and care in the exercise of his duty pursuant to s.232(4) of the Corporations Law and that the NAB was liable as a party knowingly involved in the breach pursuant to s.79 of the Corporations Law; and
(c)the NAB was liable as a party knowingly involved in the contravention, pursuant to s.79 of the Corporations Law;
must fail.
Although the special agency relationship of the receiver to the mortgagor pursuant to a provision typically included in a debenture charge is “peculiar” or “special”, it has been recognised as “real”[96]. In the present case, the debenture charge provided that the receiver, in the exercise of his powers, should “conform to the regulations and directions from time to time made and given by the bank.” It also provided that the receiver would be the agent of the mortgagor. In such circumstances, the consequences of the “peculiar”, but “real” agency will be displaced only if the mortgagee directs or interferes with the receiver’s activities[97].
[96]O’Callaghan v Custom Credit Corp Ltd (unreported, Supreme Court, Western Australia, 17 December, 1997).
[97]American Express International Banking Corp v Hurley [1985] 3 All ER 564.
Although the debenture charges in the present case conferred on the bank a power to direct the receiver, I have found that the NAB did not direct, instruct or interfere with the receiver’s activities. Orders reported to the NAB and informed its officers of his views and plans. The NAB concurred in his recommendations and assented to sale, but did not instruct Orders, either generally or in particular, on his conduct of the receivership.
Further, liability as a person knowingly involved in a breach of duty under s.232 requires a knowledge of “the essential facts constituting the particular contravention in question[98].
[98]Yorke v Lucas (1985) 158 CLR 661 AT 670.
The evidence establishes that the NAB was at all times informed, and apprehended, that the receiver would first attempt to sell stock to the customer base prior to sale by auction. Therefore, had the receiver breached his duty by failing to pursue that course, the NAB would not have had the requisite knowledge of the breach to render it liable for knowing involvement.
COUNTERCLAIM
By counterclaim the NAB seeks to apply the proceeds of a sale of the mortgaged properties, currently held in a trust account, to reduction of the Florgale Group’s debt. It also seeks judgment against the plaintiff guarantors and mortgagors. The existence of the Florgale Group’s debt and the validity of the guarantees and mortgages were not disputed. In my opinion, the NAB is entitled to the relief sought in the counterclaim.
CONVERSION OF COMPUTER EQUIPMENT
The plaintiffs allege that on or about November 1998, the receiver converted certain computer hardware and software held by Group Textile pursuant to a hire purchase agreement with Bridge Wholesale Corporation (Australia) Pty Ltd. The equipment was taken for storage, but different computer equipment was returned. The total amount paid on behalf of Group Textile to Bridge Wholesale between 25 November 1998 and 26 March 2001 was $16,336.00.
The defendants admitted the conversion but submitted that damages should be limited to the value of the goods, which was less than the amount due under the hire purchase agreement. Relevant authority indicates that where the value of the goods is less than the amount outstanding under the hire purchase agreement, the element of further special damage will not be made out. In such circumstances, the conversion would not cause the plaintiffs’ loss on the basis of the common sense test[99]. Damages should therefore be based on the value of the equipment.
[99]Garven v Ronald Motors Pty Ltd (1938) 32 QJPR 145; Mizza v McKay-Massey Harris Pty Ltd (1935) 37 WALR 87; Pacific Acceptance Corporation Ltd v Mirror Motors Pty Ltd [1961] SR(NSW) 548; Chubb Cash Ltd v John Crilley & Sons (a firm) [1983] 2 All ER 294; National Australia Bank Ltd v Nemur Varity Pty Ltd [2002] 4 VR 252 at 365-366.
CONCLUSION
It follows that, in my opinion, the plaintiffs have failed to establish their claims. The relief sought by the second defendant and plaintiff by counterclaim should be granted.
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