Goodwill Group Pty Ltd v Pongrass Associates Pty Ltd
[2002] FCA 1203
•26 SEPTEMBER 2002
FEDERAL COURT OF AUSTRALIA
Goodwill Group Pty Ltd v Pongrass Associates Pty Ltd [2002] FCA 1203
PRACTICE AND PROCEDURE – pleadings – directions – failure to comply with directions – self-executing order – requirement to file affidavit evidence in support of application – whether order complied with – sufficiency of evidence – criteria for assessment – summary dismissal – Order 20 – whether reasonable cause of action – whether application frivolous or vexatious – partial compliance with self-executing order – no case disclosed as against one respondent – case dismissed as against one respondent – amendment – statement of claim – security for costs.
Trade Practices Act 1974 (Cth) s 52
Fair Trading Act 1987 (NSW) s 42
FAI General Insurance Co Ltd v Southern Cross Exploration NL (1988) 165 CLR 268
THE GOODWILL GROUP PTY LTD v PONGRASS ASSOCIATES PTY LIMITED AND OTHERS
N661 OF 1999FRENCH J
26 SEPTEMBER 2002
PERTH
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N661 of 1999 BETWEEN:
THE GOODWILL GROUP PTY LTD
ACN 056 258 201
ApplicantAND:
PONGRASS ASSOCIATES PTY LIMITED
ACN 070 660 954
First RespondentPONGRASS INVESTMENTS GROUP PTY LIMITED
ACN 000 704 932
Second RespondentMOUNTAIN SUNSET PTY LTD
ACN 053 954 582
Third RespondentACME AVALANCHE PTY LTD
ACN 058 604 907
Fourth RespondentSTEVEN PONGRASS
Fifth RespondentSTEPHEN CHARLES BERRY
Sixth RespondentPETER GEORGE KENSEY
Seventh Respondent
JUDGE:
FRENCH J
DATE OF ORDER:
26 SEPTEMBER 2002
WHERE MADE:
PERTH
THE COURT ORDERS THAT:
A. On the Respondents’ amended notice of motion filed 12 July 2001 seeking dismissal of the application:
1.The application is dismissed as against the Fifth Respondent.
2.The Applicant is to pay the costs of the Fifth Respondent as taxed or agreed.
3.The motion is otherwise dismissed.
4.The costs of the motion as against the remaining respondents are the applicant’s costs in the proceedings.
B. On the First, Second, Fourth and Fifth Respondents’ Motion filed 19 September 2001 for security for costs:
1.The Applicant is, on or before 24 October 2002, to provide security for the costs of the First, Second and Fourth Respondents of and incidental to these proceedings in the amount of $80,000 by way of bank guarantee to be deposited with the District Registrar at the New South Wales Registry of the Court or in such other form as is agreed between the parties, such security to be in addition to the security given by the Applicant pursuant to the order of Katz J made on 3 August 2000.
2.The costs of the motion be in the cause.
C. On the Sixth and Seventh Respondents’ amended motion for security of costs filed 10 October 2001:
1.The Applicant is, on or before 24 October 2002, to provide security for the costs of the Sixth and Seventh Respondents of and incidental to these proceedings in the amount of $80,000 by way of bank guarantee to be deposited with the District Registrar at the New South Wales Registry of the Court or otherwise in such form as is agreed between the parties, such security to be in addition to the security given by the Applicant pursuant to the order of Katz J made on 3 August 2000.
2.The costs of the motion be in the cause.
D.Further Amended Statement of Claim:
1.The Applicant has leave to amend its statement of claim in the terms of the further amended statement of claim filed in Court on 6 September 2001.
2.The Applicant is to pay the Respondents’ costs thrown away by reason of the amendment.
3.Amended Defences are to be filed and served by 7 November 2002.
E.Directions
1.The parties are at liberty to apply for further and consequential directions.
2.The matter will be listed for further directions on 29 November 2002 at 9am EST with a view to programming to trial and fixing provisional trial dates.
3.At the relisted directions hearing the parties are to be aware of the availability of counsel and witnesses and be in a position to provide reliable estimates of time for trial on the basis that the matter may be listed for trial in March or April 2003.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N661 of 1999
BETWEEN:
THE GOODWILL GROUP PTY LTD
ACN 056 258 201
ApplicantAND:
PONGRASS ASSOCIATES PTY LIMITED
ACN 070 660 954
First RespondentPONGRASS INVESTMENTS GROUP PTY LIMITED
ACN 000 704 932
Second RespondentMOUNTAIN SUNSET PTY LTD
ACN 053 954 582
Third RespondentACME AVALANCHE PTY LTD
ACN 058 604 907
Fourth RespondentSTEVEN PONGRASS
Fifth RespondentSTEPHEN CHARLES BERRY
Sixth RespondentPETER GEORGE KENSEY
Seventh RespondentJUDGE:
FRENCH J
DATE:
26 SEPTEMBER 2002
PLACE:
PERTH
REASONS FOR JUDGMENT
Introduction
In July 1999, a management buyout occurred of a number of businesses operated by companies called the Pongrass Leisure Group. The businesses related to the wholesaling of skiing and camping equipment. The two prime movers in the buyout were directors of two of the companies, Stephen Berry and Peter Kensey. They were supported financially in the buyout by Bradley Cooper and Rodney Adler who, through their nominee companies, became shareholders in the corporate vehicle, Phoenix Leisure Pty Ltd, through which the businesses were acquired.
Cooper’s company, The Goodwill Group Pty Ltd, now sues the former corporate owners of the businesses and their directors together with Steven Pongrass, the principal director of the Pongrass Leisure Group. He does so on the basis that he was induced to acquire shares in Phoenix, by misrepresentations as to the nature of the stock being acquired and the income to be derived from its sale.
The litigation was late in its commencement and has been slow in its progress. It has been characterised by repeated defaults on the part of the applicant. In May 2001, a self-executing order was made by Katz J requiring that the applicant file its evidence in support of the claim by 25 May 2001 in default of which the application would be dismissed. Evidence was filed but it is said by the respondents that it does not disclose the pleaded case, that the self-executing order has taken effect and that the application stands dismissed. Alternatively, the respondents seek orders for the dismissal of the application upon the basis that it discloses no reasonable cause of action, that it is frivolous or vexatious or that it is an abuse of process. The applicant seeks substantially to amend its statement of claim. In the event that the application proceeds, the respondents seek security for costs, additional to the security already ordered in the course of the proceedings.
Katz J who heard the various motions last year had to resign from the Court because of serious illness. By consent of the parties, the matter falls to be determined on the papers including the transcript of proceedings before his Honour.
History of the Proceedings – Beginnings and Interlocutory Steps
On 2 July 1999, two companies, Cervale Pty Ltd and Two Gables Pty Ltd commenced proceedings in the New South Wales District Registry of this Court. Cervale Pty Ltd later changed its name to the Goodwill Group Pty Ltd, which is now the only applicant. The proceedings were brought against four associated companies, Pongrass Associates Pty Ltd, Pongrass Leisure Group Pty Ltd, Mountain Sunset Pty Ltd and Acme Avalanche Pty Ltd. Also named as respondents were Stephen Pongrass, a director of each of the respondent companies, Stephen Charles Berry and Peter George Kensey, directors of Mountain Sunset and Acme Avalanche and Phoenix Leisure Group Pty Ltd. The proceedings concerned a management buyout of the Pongrass Leisure Group companies by Messrs. Berry and Kensey with financial support from Bradley Cooper and Rodney Adler, through Phoenix in which Cooper and Adler’s nominee companies, Cervale and Two Gables, acquired shares.
In the statement of claim as originally filed it was alleged that on or about 2 July 1996 Phoenix made an “Asset Sale Agreement” with Pongrass Associates, Pongrass Leisure, Mountain Sunset and Acme Avalanche. The terms of the Asset Sale Agreement were not pleaded save for the allegation that the assets the subject of sale were valued at $6,995,875. This, it was said, was “the stipulated purchase price calculated on the basis of, inter alia, represented levels of stock and value of stock as set out therein”. Berry and Kensey were said to be parties to the agreement “as guarantors”.
The statement of claim alleged that, at about the time of the asset sale and on the strength of representations by Berry and Kensey, Cervale and Two Gables acquired ordinary and K class redeemable preference shares in Phoenix. Moreover in the period October 1996 through to January 1997, in reliance upon “the matters the subject of the Asset Sale Agreement” and representations by Berry and Kensey they acquired more K class redeemable preference shares. The shares acquired were particularised by reference to the dates of their purchase, the kind and number of shares purchased on each occasion and which of the two companies purchased them. The total outlay was said to have been $3,160,700. The asserted representations were not identified as to date or content or specific representor. The statement of claim went on to allege that all of the respondents, and in particular Berry and Kensey, represented to Cervale and Two Gables that “the levels of stock specified” in the schedule of the Asset Sale Agreement “were not obsolete and could achieve certain specified earnings generated from potential sales”.
The representations as to the levels and value of the stock were said to have been false. Reliance was placed on s 51A of the Trade Practices Act 1964 (Cth) “… to the extent the representations were continuing representations as to future matters”. The allegation of falsity was “particularised” by the rather unhelpful assertions that:
(a)In the events which have occurred the stock levels and value thereof were not in reality as represented in the Asset Sale Agreement.
(b)The stock consisted of obsolete stock.
(c)The stock did not generate the specified earnings on sales as represented.
It was then said that the respondents, in making the representations, engaged in conduct which was misleading or deceptive or likely to mislead or deceive in contravention of s 52 of the Trade Practices Act and/or s 42 of the Fair Trading Act 1987 (NSW). The directors were at all times knowingly concerned in that conduct within the meaning of s 75B of the Trade Practices Act and/or s 61 of the Fair Trading Act. Reliance was placed on s 84 of the Trade Practices Act and s 70 of the Fair Trading Act to attribute to Mountain Sunset and Acme Avalanche the conduct of Berry and Kensey.
Paragraph 15 then asserted:
“In reliance upon the representations and induced thereby the Applicants acquired the shares in the Purchaser as set out above in paragraph 8 and the Purchaser entered into the asset sale agreement.”
It was said that in March 1999, Cervale and Two Gables sold all their shares in Phoenix to a company called Armenilla Pty Ltd for the sum of $900,000. By reason of the conduct of the respondents, the applicants say they have suffered loss or damage being the purchase price of the shares in Phoenix, $3,160,700, less the proceeds received from the sale of those shares, being $900,000, a shortfall of $2,260,700.
The pleaded representations were also alleged to have constituted negligent misstatements by the respondents in breach of a duty of care to Cervale and Two Gables. Berry and Kensey, being directors of Phoenix, were said to have owed a fiduciary duty to it and by reason of the matters previously pleaded, to have been in breach of those duties and/or in breach of a contractual duty owed to Phoenix. The assertion was repeated that they engaged in conduct in contravention of s 52 of the Trade Practices Act and s 42 of the Fair Trading Act. An allegation of unconscionable conduct in contravention of s 52A of the Act and/or unconscionable conduct in equity was thrown in for good measure. The rest of the statement of claim involved repeated assertions of the entitlement of Cervale and Two Gables to the various forms of relief claimed.
The next step taken in the proceedings was the filing of a notice of discontinuance by Two Gables leaving Cervale as the only applicant. The notice of discontinuance was filed on 2 November 1999. Service of the application and statement of claim was not effected until March 2000 as evidenced by affidavits of service which appear on the file. Notices of appearance were filed by all respondents in March and April 2000. There were, between 9 August 1999 and 6 March 2000, some six directions hearings before Katz J who in each case directed that the matter be adjourned.
On 1 May 2000, his Honour gave directions that Cervale was to file and serve any amended application and statement of claim by 15 May 2000 and fixed 17 May 2000 as a return date for any party issuing subpoenas. He also directed that any request for further and better particulars of the amended statement of claim be made by 29 May 2000 and replies be furnished by 13 June 2000, with defences to be filed by 4 July 2000. Programming orders were made for discovery and the filing and service of affidavits of evidence in chief and reply. Subpoenas were issued to Pongrass Associates, Pongrass Investments, Acme Avalanche and Stephen Berry on 11 May. Each subpoena requested the production of:
“All original and copy documents relating to the payment of any money by way of a commission or otherwise, to Stephen Berry in relation to the acquisition of the assets in Pongrass Associates Pty Ltd, Pongrass Leisure Group Pty Ltd, Mountain Sunset Pty Ltd and/or ACME Avalanche Pty Ltd by Phoenix Leisure Group Pty Ltd pursuant to an agreement dated 2 July 1996.”
A listing record before Registrar Quinn on 24 May indicates that no subpoenas were called and no orders were made.
On 19 May 2000, Kensey filed a notice to indicate that his former solicitors were no longer acting and that he would be acting in person thereafter. On the same day an amended application was filed substituting The Goodwill Group Pty Ltd as applicant, that being the new name of Cervale. There were minor amendments to the application including a claim for a declaration that the respondents had contravened s 51AC of the Trade Practices Act. An amended statement of claim was filed at the same time. It pleaded the change of name of Cervale. It also deleted reference to purchases of shares made by the former applicant, Two Gables, leaving only Goodwill Group’s purchases pleaded for a total outlay of $1,580,350. It asserted that it received $450,000 from the proceeds of the sale of the shares, leaving a shortfall of $1,130.350. The amended statement of claim also raised the allegation of the contravention of s 51AC. That section however did not come into effect until 1 July 1998. It had no retrospective operation on conduct in 1996.
On 21 June 2000, a motion was filed by Berry seeking to dismiss the application on account of the applicant’s failure to provide further and better particulars as directed. In the alternative he sought an order for security for costs. The applicant applied to have the directions hearing relisted to vary the programming orders. On 3 July, Katz J gave a direction for the filing of affidavit evidence in respect of the notice of motion and required defences of all parties to be filed and served by 28 July. On 14 July, Pongrass Associates, Pongrass Investments, Acme Avalanche and Steven Pongrass (the Pongrass respondents) also filed a motion seeking security for costs. On 31 July 2000, Katz J made further directions relating to the filing of affidavits in connection with the notices of motion. It appears that those orders were made by consent.
On 3 August, Katz J dismissed Berry’s motion by consent and noted that the applicant had agreed to provide $70,000 security for his costs by way of a bank guarantee. Lists of documents by way of discovery were filed for all respondents other than Kensey on 27 September. The applicant’s discovery was filed on 4 October 2000. Interrogatories were directed to Berry on 7 November 2000 and answers filed on 9 January 2001. Katz J made further directions by consent on 14 November 2000. He authorised the applicant to file and serve a further amended statement of claim by 1 December 2000 or a notice of motion seeking leave to file a further amended claim by that date. The applicant was to file and serve its evidence in chief by 5 January 2001, Berry to file his affidavits in reply by 16 February and the other respondents, apart from Kensey, to file their affidavits by 28 February 2001. Subpoenas were issued and supplementary discovery given by the applicant.
By 5 February 2001, no amended statement of claim or motion seeking leave to file a further amended claim had been filed. Katz J made further programming orders extending the time for the filing of the applicant’s evidence in chief and the evidence in reply of the respondents other than Kensey. On 24 April 2001, all respondents, other than Kensey, filed a motion seeking an order that the proceedings be dismissed and ancillary orders in relation to the security for costs.
On 1 May 2001, Katz J ordered that the notice of motion be heard on 12 July and gave directions in relation to evidence on the motion. He made a self-executing order in relation to the applicant’s substantive evidence for trial in the following terms:
“The applicant’s evidence (for the purpose of the hearing of the application) be put on by 25 May 2001 in default of which the application will stand dismissed with costs.”
Affidavits in support of the motion for dismissal were filed on 1 and 2 May 2001. A notice of appearance was filed on 11 May 2001 on behalf of Kensey indicating that henceforth Hickson Wisewould would be on the record as his solicitors. A flurry of affidavits filed on behalf of the applicant followed between 16 May and 24 May 2001. These were affidavits sworn by Rodney Adler on 15 May, Mark Whittaker on 16 May, Ian Levi on 17 May, Darryl Swindells on 21 May, Bradley Cooper on 17 May, Emma Hodgman on 22 May, Brian Fergusson on 22 May, Bradley Cooper on 21 May, David Gale on 21 May, Bradley Cooper on 23 May and David Gale on 23 May. The applicant also issued subpoenas on 28 May.
On 20 June 2001, the applicant filed a motion for leave to further amend its amended statement of claim. An affidavit in support of the motion was sworn by Ms Hodgman of the applicant’s solicitors on 19 June. On 21 June 2001, Kensey filed a defence to the amended statement of claim.
On 12 July 2001, the dismissal motion came on for hearing before Katz J, but an amended notice of motion joining Kensey in with the other respondents was filed seeking. in the alternative, orders that the proceedings be dismissed as to the whole of the relief sought by the applicant, that they be dismissed generally as disclosing no reasonable cause of action against all the respondents other than Mountain Sunset and, in the alternative, that they be dismissed generally as disclosing no reasonable cause of action against Pongrass. Katz J adjourned the matter on 12 July directing that the amended notice of motion be stood over until 26 July. The applicant’s notice of motion to further amend the statement of claim was to be made returnable at the same time.
History of Proceedings – The Motions Heard by Katz J
An amended notice of motion was filed on 26 July by the solicitors for the applicant. Argument proceeded but at the end of that day Katz J ordered that the matters be stood over to a date to be fixed with dates to be advised in October. A proposed further amended statement of claim was to be filed and served by 17 August. The applicant was to pay the respondents’ costs forthwith in accordance with O 62 r 3(2). Ultimately the notices of motion were relisted for hearing on 10 October. Berry and Kensey were directed to file any motion for security for costs and any supporting material by 19 September.
A proposed further amended statement of claim was filed on 6 September 2001 and a motion by Berry and Kensey for security for costs on 19 September 2001. A motion by the Pongrass respondents for additional security in the amount of $150,000 was also filed on 19 September. An amended notice of motion was also filed on behalf of Berry and Kensey on 10 October seeking additional security in the sum of $150,000. The outstanding motions came before Katz J on 10 October and his Honour reserved his decision. In January 2002, his Honour resigned from the Court due to a serious illness. The matter was later transferred to my docket on the basis that I would decide the motions on the papers, including the transcript of oral argument before Katz J on 26 July and 10 October 2001.
The Questions for Decision
The questions for decision are:
1(a)Whether the application stands dismissed by operation of the springing order of Katz J made on 1 May 2001.
(b)Whether the application should be dismissed in whole of in part pursuant to the amended motion filed on 12 July 2001 on behalf of all respondents.
2.Whether, if the application is not dismissed, the statement of claim should be further amended pursuant to the amended notice of motion filed by the applicant on 26 July 2001.
3.Whether, if the application is not dismissed, there should be an order for additional security for the costs of the action to be provided by the applicant pursuant to the motion of the Pongrass respondents and the amended motion of the sixth and seventh respondents respectively filed on 19 September 2001 and 10 October 2001.
The Evidence Received in Relation to the Motions
A number of affidavits were relied upon in relation to the various motions. They were as follows:
A.Evidence put in by counsel for the Pongrass respondents, Mr Corsaro.
(1)Affidavit of Ronald William Jarvin sworn 24 April 2001 (less par 63 which was not read).
Jarvin is a member of the firm Prentice Jarvin, the solicitors for the Pongrass respondents. In his affidavit he set out a detailed interlocutory history of the proceedings and exchanges of correspondence with the applicant’s solicitors formerly Dibbs Crowthers & Osborne, now Dibbs Barker Gosling. A significant element of the correspondence related to attempts by the applicant’s solicitors to obtain a copy of a written stock audit/inventory said to have been initialled by the parties at the time of signing of the Asset Sale Agreement in July 1996. On 8 January 2001, the applicant’s solicitors advised Jarvin that their client would not be in a position to file and serve its evidence in chief until it had located a copy of the stock audit. In a letter dated 30 January 2001, the solicitors said:
“As you are aware, the applicant’s case alleges that (inter alia) the level and value of the stock to be purchased was misrepresented to it by the respondents. Accordingly the stock audit needs to be considered before the applicant can complete its evidence in chief.”
(2)Affidavit of Ronald William Jarvin sworn 1 May 2001. This affidavit annexed complete versions of documents, incomplete versions of which had been exhibited to the affidavit of 24 April 2001. [Annexures Q and CC]
(3)Affidavit of Steven Ronald Pongrass sworn 23 July 2001. In this affidavit Pongrass referred to the pleadings as they then stood. He noted that although the transaction under the Asset Sale Agreement was completed on 2 July 1996 he was only served with the application initiating these proceedings on 20 March 2000. He was unaware, prior to service of those documents upon him, of any allegation that the applicant had been misled. He noted also that the proceedings were filed three years to the day after the Asset Sale Agreement was finalised. He said he was funding the litigation for the Pongrass respondents as the companies involved had insufficient assets to pay the costs of the action. He referred to the prejudicial effects of the protracted proceedings on him in business circles and the time involved for him in instructing solicitors and counsel and also the effect on his family.
(4)Second affidavit of Steven Ronald Pongrass sworn 23 July 2001. In this second affidavit Pongrass indicated that his legal costs to that date were $69,075.35. He was concerned that the amount of $80,000 lodged by way of security for costs would be insufficient.
B.Evidence put in by counsel for Berry and Kensey – Ms R McColl SC
(1)Affidavit of Alan William Blanch sworn 24 April 2001. Blanch is a partner in the firm Hickson Wisewoulds, the solicitors for Berry, the sixth respondent. Like Jarvin, he set out a detailed interlocutory history and exchanges of correspondence with the solicitors for the applicant.
(2)Affidavit of Christopher Gordon Price sworn 30 April 2001 (filed in Court on 26 July 2001). Price is a solicitor employed by Hickson Wisewoulds, acting for Berry. He exhibited a letter dated 24 April 2001 from the applicant’s solicitors apologising for their failure to comply with the timetable for filing their client’s evidence. The delay was said, in the letter, to have arisen because of the late discovery by the Pongrass respondents of documents which had to be analysed by an expert accountant engaged by the applicant. Price said that this letter was the only communication he had received since a letter from his firm dated 26 March 2001 pointing out the applicant’s failure to comply with the Court’s timetable.
(3)Affidavit of Christopher Price sworn 20 July 2001. This affidavit exhibited correspondence to the applicant’s solicitors seeking further and better particulars of the amended statement of claim on 30 May 2000 and 3 July 2000 and replies from the applicant’s solicitors of 21 June 2000 and 2 August 2000 respectively providing particulars.
(4)Affidavit of Christopher Price sworn 25 July 2001. This affidavit referred to the $70,000 bank guarantee deposited with the Court as security for Berry’s costs. His legal costs to the date of swearing of the affidavit were approximately $64,794. If the statement of claim were further amended total legal costs would considerably exceed $70,000.
C.Evidence put in by counsel for the applicant – Mr B Walker SC
(1)Affidavit of Emma Jane Hodgman sworn 30 April 2001. Ms Hodgman is a solicitor employed by Dibbs Barker Gosling, the solicitors for the applicant. She deposed that at the time of swearing her affidavit the applicant had been unable to file or serve its evidence in chief because of delays in accessing and analysing documents sought from the solicitors for the Pongrass respondents. At the time of swearing the affidavit the applicant’s lay evidence was nearing completion and the expert accountant had prepared a preliminary report.
(2)Affidavit of Emma Jane Hodgman sworn 22 May 2001. This affidavit was by way of a detailed reply to the affidavits of Blanch and Jarvin complaining of delays occasioned by the applicant. In this affidavit, Ms Hodgman identified as the reasons for delay in complying with the Court’s timetable:
(a)the unavailability of the principal of the applicant (Bradley Cooper) to give instructions;
(b)the missing stocktake report and the time spent trying to locate it;
(c)recent delays in obtaining copies of tax returns from the Pongrass respondents for the applicant’s expert witnesses to analyse.
Ms Hodgman attributed part of the delay to the time taken in dealing with the applications for security for costs. She gave a history of her attempts to locate the missing stocktake document. She asserted that the applicant would suffer prejudice if the claim were to be dismissed as it would be statute barred. The applicant had, at the time of her affidavit, spent $92,000 in legal fees on the matter.
(3)Affidavit of Emma Jane Hodgman sworn 19 June 2001. In this affidavit Ms Hodgman annexed letters to the respondents dated 22 May 2001 which had enclosed copies of a proposed further amended statement of claim. Also annexed were letters in reply from the respondents’ solicitors dated 1 June 2001 and 4 June 2001.
(4)Affidavit of Bradley David Cooper sworn 23 May 2001. In this affidavit Cooper said that the applicant is his nominee company through which he became a shareholder of Phoenix in May 1996. He also said he had been unable to locate a copy of the stocktake carried out on the business before it was purchased. This had caused delays. Delays had also been caused as a result of himself not being available to instruct his solicitors. He said he had been working extremely long hours on FAI Home Security Pty Ltd, of which he was Chief Executive Officer and Chairman.
The affidavits filed by the applicant as its evidence in chief between 16 and 24 May 2001 pursuant to the springing order made on 1 May 2001 were referred to in argument. They were relied upon by counsel for the applicant to show that it had complied with the springing order. Counsel for the respondents relied upon those affidavits to demonstrate want of compliance. They were not considered as evidence of the truth of their contents.
A copy of the Asset Sale Agreement referred to in the amended statement of claim was tendered without objection as Exhibit 1 before his Honour. Also admitted, upon tender by counsel for the applicant, were two lever arch files which were exhibits BDC1 and BDC2 to an affidavit of Bradley Cooper sworn 17 May 2001. BDC1 was described in Cooper’s affidavit as “a bundle of documents relating to this matter”. BDC2 was described as “a copy of the acquisition documents”.
The Applicant’s Evidence – Approach to Analysis
What follows is an outline of the affidavit evidence filed by the applicant purportedly pursuant to the order of 1 May 2001. The outline is cast in narrative form as a matter of convenience but does not involve any findings of fact. Its general scope and content is considered against the contention that it did not represent a compliance with the order of 1 May 2001. In this respect reference is made to the text of the affidavits filed and to the exhibits to Cooper’s affidavit sworn 17 May and tendered by counsel for the applicant.
The Applicant’s Evidence – Berry and Kensey Approach Cooper and Adler
Bradley Cooper described himself, in his affidavit sworn 17 May 2001, as Chief Executive Officer and Chairman of FAI Home Security Pty Ltd. Early in 1996 an associate of his, Colin Hughes, asked him to review two reports in relation to the business of the Pongrass Group. The Group carried on the business of a wholesaler and retailer of outdoor leisure goods and in particular ski and camping equipment. One of the reports was prepared by a merchant banker, Bancorp Australia Ltd, the other by Berry and Kensey, who then worked in the Pongrass Group.
Hughes described Berry and Kensey to Cooper as friends who managed the Pongrass Leisure Group. They wanted to know if Cooper would be interested in investing with them as part of a management buy-out of the wholesale business of the Group. Hughes described it to him as “a fantastic business that will make about $1 million every year and it will make $1 million over the next few weeks”. He suggested that Cooper and Rodney Adler, with whom Cooper was associated, should look at the business and buy it. Cooper gave the reports to Adler who was the Chief Executive Officer of FAI Insurance Group Ltd, for him to review. Cooper had no previous involvement in the ski/camping industry. He only agreed to pass the reports on to Adler as a favour to Hughes. He also gave the reports to Mark Whittaker, then Chief Financial Officer of FAI Home Security. He asked Whittaker to review the reports and provide him with a report on the proposed acquisition.
In an affidavit sworn 16 May 2001, Whittaker said he had been employed by FAI Home Security as a financial accountant since 1992 and became its Chief Financial Officer in 1996. He resigned from that position in November 2000. He recalled being asked by Cooper to review the two reports and to prepare his own report on the Pongrass Leisure Group business. He reviewed the two reports. In the course of his review he spoke with Berry by telephone. He did not recall the exact words spoken but recalled asking Berry about the value of inventory. He put to Berry that there was no obsolete stock brought to account in the projections. He asked how confident Berry was of achieving the margins forecast. According to Whittaker’s affidavit, Berry responded:
“We won’t be purchasing any of the old stock from Pongrass and any stock that we do not think will move we will purchase at a reduced price and then sell immediately to realise cash. As for the margins, we have taken a very conservative approach to both camping and ski. There is significant scope to reduce overheads by combining both ski and camping into one company and utilising the workforce to sell both.”
Whittaker’s observation was that if obsolete stock needed to be taken into account in the financial projections he would have expected to see that information disclosed in the Alternative Report and more specifically in the Stock Reconciliation Working Papers. The existence of obsolete stock would affect the cashflows and funding of the business. If the stock did not sell it would be more difficult to utilise the funding facility. In his opinion, the value and movement of stock was critical to the business because it formed the basis of its purchase price and would be critical to any banking facility for the new group as the stock needed to be liquidated into cash to service the banking facility.
Whittaker had some discussion with Adler’s accountant, Michael Storey. Storey was not going to recommend that Adler proceed with the acquisition. Whittaker prepared a report which he forwarded to Adler and Cooper on or about 5 April 1996. Based on the Alternative Report, the Bancorp Report and his conversations with Berry he formed the view that, taking into account the historical data and provided the margins were achievable and the inventory could be sold and converted to cash, then the forecasts were achievable. However when Cooper asked him whether he would buy the business if it were his money, Whittaker replied that he probably would not because it was not a core business and they didn’t have anyone in FAI Home Security with experience in the ski business. Cooper had responded:
“Well, we’re not going to buy it.”
On 9 April 1996, Whittaker received a fax from Berry attaching more recent cashflow forecasts. He noted that the projections in the cashflows did not take into account any allowance for obsolete stock. Berry said to him at some point:
“I need to get in front of Brad (Cooper) and Rod (Rodney Adler) and tell them why they should buy the business.”
After reading Whittaker’s report Cooper was not really interested in proceeding any further with the matter because Whittaker did not give the business a great review. He was unsure about whether Whittaker had sufficient experience to form a view. He recalled Whittaker telling him that Adler’s accountant, Storey, was not going to recommend the business to Adler.
In an affidavit sworn on 15 May 2001, Adler said he agreed to review the documents and that following his review he was interested in speaking with Berry and Kensey about the matter. He telephoned Berry and made an appointment to meet with him and Kensey, which he did shortly thereafter. He had a conversation with Berry in which he asked him why Pongrass was selling the business. Berry replied that:
“Stephen (sic) Pongrass is restructuring and he sees this as a very good opportunity for me. You’ll be getting a real bargain. He is looking after me because I’ve run it for him for so long. It’s a very profitable business. It’s undervalued. There are a lot more earnings there so it can be a lot more profitable.”
Adler had a number of discussions with Berry and Kensey about the business at some of which Cooper was present. He recalled conversations in which he asked Berry and Kensey about the core products of the business. One or other of them told him the core products included Rossignol skis but he could not recall what else they said. He only had a limited knowledge of the ski industry. Asked how much capital would be needed, he said he was told he would have his money back in two years.
He received Whittaker’s report, discussed it with Cooper and then said to Cooper:
“I’m not interested in putting any money into the business but I will stand behind you and be your partner in an informal sense. I don’t want to be formally involved with the business.”
Cooper was content to proceed with negotiations on that basis. Adler discussed the proposed acquisition in principle with his accountant, Storey, but cannot remember what was said. He was not relying on Storey for advice in relation to the proposed acquisition.
In Cooper’s affidavit he deposed to a number of meetings which he had with Berry, sometimes with Adler and sometimes without. At these meetings the proposed acquisition was discussed in more detail. Berry told him it was a great business. It did not need any management. It made a minimum of $1 million every year, but would make a lot more than that. If he bought it then he would get a million dollars in a month’s time and would not have to do anything. Asked why Pongrass was selling it, Berry said:
“He’s not interested in the business any more. He’s a playboy. He doesn’t turn up to work. He’s not growing the business. We’d (Berry and Kensey) love to have equity in it. We want to share in the upside.”
Asked what sort of money was needed to run the business, he was told all that was needed was $3 million. Berry said they would probably get that from their own bank, especially if Cooper and Adler were involved. Asked how the brand and equipment stood up in the market, Berry said:
“The equipment is Rossignol and Mambo, it’s the world’s best. Their reputation and quality are world renowned.”
Cooper also recalled a meeting with Berry and Pongrass at a coffee shop in Double Bay. He asked Pongrass why he was selling the business and was told:
“It’s a fantastic business but I’m not interested in it any more. It’s been very kind to me. I’ve done very well out of it. You’re buying it cheaply. I like Rodney (Adler) but I want you to look after Stephen (Berry). I’ve had long enough with the business and it’s time for Stephen (Berry) to take over.”
Initially, Cooper and Adler decided against the acquisition. On 23 April, Adler sent a fax to Berry saying that he and Cooper had spoken the previous night and had decided against investing with him and Kensey. In the fax he said:
“We want you to know that investing with you and Peter would have been interesting, enjoyable and profitable. However, we decline your offer purely from a time commitment and a lack of synergy perspective.”
Berry and Kensey did not accept this rejection and began what Cooper described as a campaign to convince Adler and himself to buy the business. On 23 April, they sent a fax to Adler requesting a meeting. On 26 April, they sent him a further fax attaching a one page document entitled “Why Rodney Adler & Brad Cooper should do the deal with Steve Berry and Peter Kensey”. A copy was supplied to Cooper. In the document they said that since joining Pongrass Leisure Group in February 1993 they had been responsible for taking the company’s EBIT performance from $400,000 to $1,350,000, an increase of 237% with minimum input from Steven Pongrass. They claimed a joint venture with them would work because they had to make it work to “regain wealth”. Adler and Cooper’s lack of knowledge of the industries would not matter. They had a growing business that was already working and had the potential to grow dramatically. The transaction was simple with vendor financing and negotiations finalised. They had an exceptional window of opportunity of delivering two years’ net profit in fourteen months. They would not take up Adler or Cooper’s time. They said:
“This transaction will make you both a lot of money.”
A further letter to Adler dated 1 May 1996 attached a document with the same title and the subheading “Part II”. In that document Berry and Kensey said that if Pongrass were assured that the deal was done then after completion of a stocktake they could begin shipping goods on Monday, May 6, despite the fact that paperwork would not be completed. Their representatives had been preselling ex-stock inventory for delivery to stores in May and June 1996. This had the effect of increasing the net profit before tax over the eight week period to $1.3 million. Theirs was essentially a question of funding. It was not a greenfield investment but a going concern which needed to be refunded. They were personally guaranteeing $2.5 million in bank debt. They said the business displayed conservative projections and had enormous growth potential. As managers they were both capable and hungry. They attached a cashflow which they described as illustrating “a substantial and beneficial change from the original”. The documents attached were entitled “Projected Facility Usage” and “Projected Trading Results”. According to Adler and Cooper they relied upon the representations set out in the documents of 26 April and 1 May in coming to their ultimate decision to acquire the business. They did not specify which representations they relied upon.
In ongoing negotiations around these communications Cooper asked Berry whether the stock was going to be acquired at the right price. Berry told him “Your getting it at a steal. We’re stealing it. There’s plenty of stock that Stephen Pongrass doesn’t even know about.” (sic) According to Adler, Berry said similar words to him. Cooper followed up with a further conversation with Berry about the stock. Berry assured him they were getting it at the right price but that it was a very written down price. He said:
“There’s some old camping equipment we are getting which you couldn’t give away, like jaffle irons and old BBQs.”
Then, according to Cooper, he said to Berry:
“Are we buying it at the right price? Rod and I will never get involved in running the business, so we are buying you. Are we buying a good business at the right price?”
Berry responded that this was his last shot in life. Cooper and Adler were financially secure. He, Berry, had a wife and young family. He said:
“Do you think I’d do this deal if it wasn’t a good deal? It’s a great price and it’s an even better business. You and Rodney will be very proud of it.”
According to Cooper he relied upon what Berry told him about the stock and his assurances about the profits the business would make.
The Applicant’s Evidence – Agreement in Principle and Subsequent Negotiations - May 1996 to July 1996
The negotiations led to an agreement in principle in early May 1996, according to both Cooper and Adler’s affidavits. Berry arranged to sit next to Cooper and Adler on a flight from Sydney to Brisbane. He had their attention for about an hour. Adler was impressed with Berry’s salesmanship skills. Cooper also was impressed by Berry’s persistence and was convinced by him that the business would make money. Berry said during the flight:
“We’ve been in this business for years. You guys don’t know how lucky you are. It’s going to make you so much money. We’re going to pick up some major retailers and we’ve got plenty of orders coming through.”
According to Cooper it was Berry and Kensey’s apparent expertise, their energy and persistence which caused him to rely on representations they made about the business and ultimately caused him to agree to buy the business. Adler said that in his view the most important thing for a wholesale business was to have somebody who is a good salesman.
Adler and Cooper were told that a firm called Love & Rogers were retained to do a stock audit or stocktake. In a fax to them on 17 May 1996, Berry reported that the stocktake was completed satisfactorily with write-offs and write-downs on the appropriate inventory. The auditors had found only negligible discrepancies. Adler did not recollect ever seeing a stocktake or audit.
Adler observed that in May 1996, Berry and Kensey estimated the earnings before income tax for the business as follows:
1.Year ending 30 June 1997 - $1.8 million
2.Year ending 30 June 1998 - $2.1 million
3.Year ending 30 June 1999 - $2.3 million
He understood the agreement to be that equity injections were to be as follows:
Immediate upon the opening of the bank account for the proposed corporate purchaser, Phoenix, - $500,000
1 July 1996 - $500,000
1 February 1997 - $500,000On 20 May 1996, Kensey wrote to Adler enclosing a copy of a draft contract. Adler was concerned, after looking at the contract, that the basis of the deal had changed. He sent a memo to his accountant, Storey, and a copy of the draft contract requesting that he review it. He did not remember what, if any, discussions he had with Storey about the contract. On 21 May 1996, he wrote to Pongrass raising issues about timing, namely whether sales were going through at the time and who would be entitled to the profit from them. On 22 May 1996, Kensey wrote to him indicating that Pongrass was insisting upon a guarantee for the deferred acquisition payments. This also concerned Adler as a departure from the original agreement.
Ian Levi, in 1996, was a director of Hill Rogers, Chartered Accountants. His affidavit of 17 May 2001 is also relied upon as part of the applicant’s evidence in the proceedings. He said that between May and August 1996, Adler, who was an acquaintance, telephoned him and asked him if he would be interested in advising him about his investment in a company which operated in the ski industry. Coincidentally, Levi knew Kensey and knew he had acted as finance director of a ski business, carried on by Casa Alpina Sports Pty Ltd now known as Acme Avalanche Pty Ltd, the fourth respondent. Levi contacted Kensey to make some general inquiries about the industry. Kensey told him that they were about to be bought by Adler. Levi said he had been approached to act on behalf of Adler but had not been aware it was in respect of Kensey’s business.
Levi met with Adler the following week and agreed to advise him. He sent him a letter of engagement but was told that his fees were to be paid by the proposed acquirer of the business, Phoenix. He was therefore retained by Phoenix to advise generally in relation to the business. His retainer did not commence until after agreements for the sale of the business had already been exchanged although settlement had not occurred. He was not asked to advise on the merits of the purchase and was not involved in negotiating the terms of the deal or documenting it. Adler’s description of Levi’s function was that he was retained shortly prior to settlement to streamline the business and implement a reporting regime. He was also to put together a budget and was responsible for operations, procedures and accounting control.
Applicant’s Evidence – Settlement - 2 July 1996
Settlement took place on 2 July 1996. Cooper was represented at settlement by his solicitor, Paul Etherington.
The acquisition documents were set out in the lever arch file “BDC2” exhibited to Cooper’s affidavit of 17 May. They were as follows:
1. Asset Sale Agreement dated 2 July 1996. The parties were:
(a)Pongrass Leisure Group Pty Ltd, Mountain Sunset Pty Ltd, Acme Avalanche Pty Ltd, Pongrass Associates Pty Ltd as Vendor.
(b)Phoenix Leisure Group Pty Ltd as Purchaser.
(c)Stephen Charles Berry, Peter George Kensey as Guarantors.
(d)Bradley David Cooper as Covenantor.
2.Licence Agreement dated 2 July 1996. The parties were:
(a)Pongrass Leisure Group Pty Ltd as Licensor
(b)Phoenix Leisure Group Pty Ltd as Licensee
(c) Stephen Charles Berry and Peter George Kensey as Guarantors
3. Deed of Guarantee and Indemnity dated 2 July 1996. The parties were:
(a) Stephen Charles Berry and Peter George Kensey as Guarantors(b)Pongrass Leisure Group Pty Ltd, Mountain Sunset Pty Ltd, Acme Avalanche Pty Ltd and Pongrass Associates Pty Ltd as Vendors.
4.Deed of Charge dated 2 July 1996. The parties were:
(a)Phoenix Leisure Group Pty Ltd as Chargor
(b)Pongrass Leisure Group Pty Ltd as Chargee
(c)Stephen Charles Berry and Peter George Kensey as Guarantors.
5.Promissory Note dated 2 July 1996. The Promisor was Bradley David Cooper promising to pay Pongrass Leisure Group Pty Ltd the sum of $850,000 on 1 July 1997 if that agreed sum was not received from the Phoenix Leisure Group Pty Ltd by 1 July 1997. The document was signed by Etherington as Cooper’s attorney.
6Deed dated 2 July 1996. The parties were:
(a)Stephen Charles Berry and Peter George Kensey as Covenantors.
(b)Phoenix Leisure Group Pty Ltd
(c)Cervale Pty Ltd and Two Gables Pty Ltd as Investors.
7.Option Agreement dated 2 July 1996. The parties were:
(a)Two Gables Pty Ltd and Cervale Pty Ltd as Grantors
(b)Peter George Kensey and Stephen Berry as Shareholders.
In this deed Kensey and Berry were referred to as Trustees of the Snowflake Trust and the Berry Trust respectively.
8.Letter of Employment dated 2 July 1996 from Phoenix Leisure Group Pty Ltd to Berry appointing him as Managing Director of the Company.
9.Letter of Employment dated 2 July 1996 from Phoenix Leisure Group Pty Ltd to Kensey employing him as Finance Director of the Company.
10.Minutes of a meeting of shareholders of Phoenix Leisure Group Pty Ltd held on 2 July 1996. The minutes altered the Articles of Association so that a quorum of the Board had to comprise at least two persons, one of whom must be a director of Adler’s company, Two Gables, and the other a director of Cooper’s company, Cervale. Two Gables was to be given the right to nominate the chairman. The Articles were also amended to create “K” Class Redeemable Preference Shares.
11.Notice of meeting of shareholders. This was a notice of the meeting of shareholders of Phoenix Leisure Group the minutes of which comprise the previous item.
12.Application for shares. This was an undated application by Cervale and Two Gables to Phoenix for 1,500,000 “K” class redeemable preference shares.
Whittaker, who took no part in the negotiations for the sale of the business, remembered speaking with Berry a number of times on the phone prior to the completion of the sale so that he could be updated on how the transaction was proceeding. He met with Berry and Kensey to discuss the proposed banking facility for the business. He recalled a conversation with Berry about the stocktake before the completion of the purchase. Berry said words to the effect:
“I am really happy with the stock take because they (Love and Rogers) missed heaps of stock in the warehouse. Pongrass (Stephen (sic) Pongrass) has no idea what’s in the warehouse and we are picking up heaps of stock for nothing.”
The agreed sale price of the assets, including the stock, was $6,955,875 which was to be paid in instalments commencing on 7 June 1996 with the final instalment due on 1 July 1997.
Applicant’s Evidence – The Asset Sale Agreement and the Deed – The Warranties – 2 July 1996
The recitals to the Asset Sale Agreement set out that Pongrass Leisure Group owned premises and provided staff and other facilities used by Mountain Sunset, Acme Avalanche and Pongrass Associates in connection with their respective businesses. Mountain Sunset was engaged in the manufacture, importation and distribution of camping and leisure equipment. Acme Avalanche was engaged in the importation and distribution of ski equipment, clothing and accessories. Pongrass Associates was engaged in the importation and distribution of a limited range of footwear. Berry and Kensey, directors of Mountain Sunset and Acme Avalanche had caused the purchaser, Phoenix, to be incorporated for the purpose of purchasing the assets of the businesses together with certain assets owned by Pongrass Leisure Group.
The term “the Assets” was defined to mean the Pongrass Leisure Group Assets, the Mountain Sunset Assets, the Acme Avalanche Assets and the Pongrass Associates’ Assets. The Assets of each of those entities other than Pongrass Leisure were in turn defined as the assets of the business conducted by the entity. The term “the Stock” was defined to mean the stock in trade of the three businesses as itemised in the Inventory. The “Inventory” was defined as the Inventory of the Stock and its values at the effective date as inspected by Phoenix and initialled by the parties for identification.
The first operative clause was cl 2.1 under which the Vendors sold the Assets to Phoenix for the price and on the terms and conditions set out in the agreement. The purchase price for the Assets was $6,955,875 (cl 3.1). The value of the Assets and their constituent items was agreed to be the amounts set out in Schedule 1 and the Inventory. The price was to be paid by instalments in the amounts and on the dates specified in Schedule 2. That Schedule set out twenty three instalments commencing on 7 June 1996 and concluding on 1 July 1997. If Phoenix were to fail to pay an instalment on or before the due date for payment and the Vendors were not in breach of any of the warranties contained in cl 14.1 of the agreement, then the entire unpaid balance of the price would become due and payable if the instalment were not paid within ten business days following a written notice from Pongrass Leisure Group (cl 3.6.1). The agreement provided for a charge to be given by Phoenix to Pongrass Leisure Group over its assets reflected in a Deed of Charge to be executed and delivered to the Vendors on the making of the agreement.
Clause 4 dealt with stock, plant and equipment and motor vehicles. In particular, it provided that Phoenix would accept the stock in its condition at the Effective Date and the Vendors would not be responsible for any defects or if it should be found that any quantities, sizes, values or other particulars in the Inventory were incorrect.
It was provided in cl 13.1 that the directors, defined in cl 1.1 as Berry and Kensey, were also directors of Phoenix and that all facts, matters and things which were or were deemed to be within their knowledge would be deemed to be within the knowledge of Phoenix and the Investors. The “Investors” was not defined in the Asset Sale Agreement. It was a term however used in the Deed signed on the same day to refer to Cervale and Two Gables. Under cl 13.3 it was said the Purchasers and the Guarantors acknowledged and agreed that, except for the warranties in cl 14.1 they had not, in entering into the Agreement, relied on any warranties, representations, statements or inducements made by the Vendors or any person on behalf of the Vendors in relation to the Assets, the Business or any other matter referred to in the Agreement but had relied entirely upon their own enquiries, inspections, assessments and knowledge.
Clause 14 contained a number of warranties. Clause 14.1 set out the Vendors’ warranties. It included cl 14.1.11 in the following terms:
“[t]he Vendors are not aware of anything which would hinder the Purchaser from carrying on the Business which has not been disclosed to the Purchaser.”
Under the Agreement Berry and Kensey guaranteed to the Vendors that they would be, with Phoenix, jointly and severally liable to the Vendors for the due payment of all moneys payable under the Agreement. In cl 17.4 it was provided:
“The Covenantor hereby unconditionally and irrevocably guarantees to the Vendors the payment of the Instalment of $850,000.00 which is payable to the Vendors on 1 July 1997 and upon the making of this Agreement the Covenantor shall deliver to the Vendors a Promissory Note in the form of Annexure “D” duly executed by the Covenantor.”
Clause 21.5 provided:
“This Agreement constitutes the sole and entire agreement between the parties and any warranty, representation, guarantee or other term or condition of any nature which is not contained or recorded in this Agreement is of no force or effect whatsoever.”
Schedule 1 set out the Assets and their valuations. Mountain Sunset’s Assets were referred to separately and were called MLP Assets by virtue of the fact that the company used to be known as Mountain Leisure Products Pty Ltd. The MLP Assets included stock as per Inventory valued at $2,430,337. Acme Avalanche was called CA as it had formerly been Casa Alpina Sports Pty Ltd. The CA assets included stock as per Inventory valued at $3,300,744. The Pongrass Associates’ Assets, called PA Assets, included stock as per Inventory valued at $215,391.
On the same day as the Agreement was executed, Cooper signed a Promissory Note in respect of his promise as Covenantor.
The other relevant acquisition document was designated DEED. The parties were Berry and Kensey who were called Covenantors. Phoenix was also a party. So too were Cervale and Two Gables which were called “the Investors”. Clause 2 of the Deed set out warranties given by Berry and Kensey in favour of Phoenix, Cervale and Two Gables. They were in the following terms:
“2 WARRANTIES
2.1The Covenantors together and separately provide the warranties and representations to the Investors and Phoenix set out in this Clause 2 and covenant that all of the warranties contain no material omissions and one not misleading. (sic)
2.2The Projections have been prepared in a manner consistent with applicable accounting standards and practices required by the Corporations Law and the statements of accounting standards issued by or on behalf of the Australian Society of Accountants, the Institute of Chartered Accountants and the Accounting Standards Review Board.
2.3The Stock and the Stock on Order are or will be of merchantable quality.
2.4None of the Stock is obsolete.
2.5The Prepayments and the Orders are appropriate and necessary for the Business and all potential liabilities arising from the Orders have been taken into account in the Projections.
.
.
.
2.10The Assets constitute everything of a substantial nature reasonably necessary or desirable for carrying on the Business.
2.11All current operational records necessary or desirable for carrying on the Business have been delivered to or are in the possession or under the control of Phoenix.
.
.
.
2.17To the best of the Covenantors knowledge, information and belief all information given to the Investors, Phoenix and their respective officers and representatives by the Covenantors and each statement made by them in relation to the Business, the Asset Sale Agreement or any matter incidental to the acquisition by Phoenix of the Assets and the Business is complete, correct and not misleading.”
Under cl 3 the Covenantors warranted that the warranties expressed to apply at the date of the Deed would continue to apply until the third instalment date. In cl 4 it was provided:
“The Covenantors acknowledge that Phoenix has relied on the Warranties as an inducement to enter into the Asset Sale Agreement and that the Investors have relied on the Warranties as an inducement to subscribe for capital in Phoenix.”
Clause 8 provided:
“This Deed does not constitute an exhaustive list of all of the representations or Warranties upon which the Investor and Phoenix have relied. This Deed does not limit or vary any rights or causes of action which the Investors or Phoenix may have against the Covenantors.”
Applicant’s Evidence – Phoenix in Operation – The Funding Crisis – July 1996 to December 1996
Following the sale of the business to Phoenix, Whittaker was appointed a director to represent Cooper’s interests. Adler appointed Storey to represent his interests. Terry Youngman, Deputy Chief Executive Officer of FAI Home Security, also attended Phoenix board meetings.
There is another new allegation in a new par 22 that Pongrass, Berry and Kensey, in causing The Goodwill Group to acquire shares in Phoenix engaged in conduct which was unconscionable in breach of s 43 of the Fair Trading Act. The balance of the amendments are relatively minor.
The aspect of the amendments that relates to the so called Representations by Silence is new. The other primary amendment relating to the Stock/Profitability Representations is, in substance, elaboration of the previously existing pleading albeit it puts the primary emphasis on representations as to profitability. In respect of the Representations by Silence so called, these are said to have been introduced following the late discovery in April 2001 of the tax returns of the Pongrass respondents. The amendment in one sense adds little to the representation in relation to profitability pleaded in the proposed new par 11 which representations are falsified by reference, inter alia, to overstatements in the Bancorp Report and the Alternative Report.
In determining whether the proposed amendments should be allowed, I have regard to but do not consider that I should be unduly influenced by the possibility that they may introduce a cause of action which is out of time. The Court may permit such an amendment pursuant to O 13 r 2(3) and 2(7). There is no doubt however that the amendment, generally speaking, puts a new focus on the case very late in the piece for reasons which are not really explained apart from the explanation proffered in relation to the alleged Representations by Silence. In my opinion, however, the amendment should be allowed save as against Pongrass. The action as against him should be dismissed.
In coming to the conclusion that the action against Pongrass should be dismissed pursuant to O 20 I have regard to:
1.The history of the proceedings including their late initiation and late service upon Pongrass and the repeated delays caused by the applicant’s non-compliance with Court timetables, failure in no small part attributable to the unavailability of Cooper to give instructions to his solicitor.
2.Primarily the failure of the applicant to file evidence in response to the order of 1 May 2001 disclosing a case against Pongrass.
3.The prejudice suffered by Pongrass through his continuing involvement in the litigation.
4.The lateness of the attempted construction of a new case against him.
The application against Pongrass as presently pleaded, and having regard to the proposed evidence against him, discloses no reasonable cause of action and is frivolous and vexatious. I will not permit an amendment to be made in order that a case may now be constructed against him.
I do consider that there is the possibility of an arguable case on the statement of claim as presently pleaded against the corporate respondents and Berry and Kensey. That is not to make any comment upon the strength of the case. The order of 1 May 2001 having, in my opinion, being complied with so far as they are concerned. I will allow the statement of claim to be further amended in relation to those respondents. The applicant will have to pay costs thrown away by reason of the amendment in any event.
Security for Costs
It is not really in dispute that there should be additional security for costs provided by the applicant. These are sought in the amount of $150,000 by the first, second, fourth and fifth respondents in their motion filed on 19 September 2001. The fifth respondent will of course fall out of the picture now so that no security will be ordered in relation to him. Additional security is also claimed in the sum of $150,000 for the costs of Berry and Kensey pursuant to their amended motion of 10 October 2001.
In relation to the first, second, fourth and fifth respondents, security for costs in the sum of $80,000 was lodged with the Court on 2 November 2000 pursuant to the order of Katz J made on 3 August 2000. According to the affidavit of Jarvin, their solicitor, their legal costs incurred up to and including the part hearing of the motions on 26 July 2001, amounted to $85,455. On the assumption that the proposed amendments to the amended statement of claim would be allowed, Jarvin estimated that costs incurred by these respondents up to and including the hearing would amount to $144,700. This was broken down into solicitors’ costs of $82,200, counsels’ fees of $52,500 and expert witness fees of $10,000.
I do not accept that the costs incurred thus far for these respondents and the prospective costs as estimated by Jarvin necessarily reflect the costs recoverable as between party and party. Nor do I accept that security for costs must necessarily provide a complete indemnity against prospective party and party costs. I also have regard to the fact that Pongrass who will have a costs order to his benefit arising out of the dismissal of the action, sshould have the right, if it be necessary, to access at least part of the security in order to recover the costs ordered in his favour. In the circumstances, I propose to direct that there be additional security for costs in the sum of $80,000 with liberty to apply, prior to trial, for further security.
In relation to the security for costs sought by Messrs. Berry and Kensey, they have already had the benefit of a bank guarantee in the amount of $70,000. This was lodged on 14 November 2000. As at 19 September 2001 their solicitors had rendered costs of $51,521.50 and the fees of senior and junior counsel were $18,067.50. Their solicitor, Price, estimated costs up to but not including the first day of trial at $101,805. Costs at trial are estimated at $62,750. Breakups of these estimates are given. Again, I do not accept that all of the costs charged to date or estimated would be recoverable on a taxation as between party and party or that the security should provide a full indemnity. In my opinion, however, it is appropriate again that further security be ordered in the sum of $80,000. There will be liberty to apply prior to trial for further security if that can be justified.
Conclusion
For the preceding reasons the following orders will be made:
A. On the respondents’ amended notice of motion filed 12 July 2001 seeking dismissal of the application:
1.The application is dismissed as against the Fifth Respondent.
2.The Applicant is to pay the costs of the Fifth Respondent as taxed or agreed.
3.The motion is otherwise dismissed.
4.The costs of the motion as against the remaining respondents are the applicant’s costs in the proceedings.
B. On the First, Second, Fourth and Fifth Respondents’ Motion filed 19 September 2001 for security for costs:
1.The Applicant is, on or before 24 October 2002, to provide security for the costs of the First, Second and Fourth Respondents of and incidental to these proceedings in the amount of $80,000 by way of bank guarantee to be deposited with the District Registrar at the New South Wales Registry of the Court or in such other form as is agreed between the parties, such security to be in addition to the security given by the Applicant pursuant to the order of Katz J made on 3 August 2000.
2.The costs of the motion be in the cause.
C. On the Sixth and Seventh Respondents’ amended motion for security of costs filed 10 October 2001:
1.The Applicant is, on or before 24 October 2002, to provide security for the costs of the Sixth and Seventh Respondents of and incidental to these proceedings in the amount of $80,000 by way of bank guarantee to be deposited with the District Registrar at the New South Wales Registry of the Court or otherwise in such form as is agreed between the parties, such security to be in addition to the security given by the Applicant pursuant to the order of Katz J made on 3 August 2000.
2.The costs of the motion be in the cause.
D.Further Amended Statement of Claim:
1.The Applicant has leave to amend its statement of claim in the terms of the further amended statement of claim filed in Court on 6 September 2001.
2.The Applicant is to pay the Respondents’ costs thrown away by reason of the amendment.
3.Amended Defences are to be filed and served by 7 November 2002.
E.Directions
1.The parties are at liberty to apply for further and consequential directions.
2.The matter will be listed for further directions on 29 November 2002 at 9am EST with a view to programming to trial and fixing provisional trial dates.
3.At the relisted directions hearing the parties are to be aware of the availability of counsel and witnesses and be in a position to provide reliable estimates of time for trial on the basis that the matter may be listed for trial in March or April 2003.
I certify that the preceding one hundred and thirty (130) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French. Acting Associate:
Dated: 26 September 2002
Counsel for the Applicant: Mr B Walker SC with Mr G Underwood and Mr R Newton Solicitor for the Applicant: Gibbs Barker Gosling Counsel for the First, Second, Fourth and Fifth Respondents: Mr F. Corsaro Solicitor for the First, Second, Fourth and Fifth Respondents:
Counsel for the Sixth and Seventh Respondents:
Solicitors for the Sixth and Seventh Respondents:
Prentice Jarvin
Ms R McColl SC and Mr N Angyal
Hickson Wisewoulds
Date of Hearing: (Before Katz J) 26 July 2001 and 10 October 2001 Date of Judgment: ( French J) 26 September 2002
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