H & Q Cafe Pty Ltd v Melbourne Cafe Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S EAPCI 2022 0073

H & Q CAFÉ PTY LTD (ACN 624 852 179)	Applicant
v
MELBOURNE CAFÉ PTY LTD (ACN 605 627 487)	First Respondent
JIANG ZHANG	Second Respondent

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JUDGES:	NIALL, KENNEDY JJA and J FORREST AJA
WHERE HELD:	Melbourne
DATE OF HEARING:	13 July 2023
DATE OF JUDGMENT:	25 August 2023
MEDIUM NEUTRAL CITATION:	[2023] VSCA 200
JUDGMENT APPEALED FROM:	[2022] VCC 1017 (Judge A Ryan)

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CONSUMER LAW – Application for leave to appeal – Appeal – Contract for sale of café business – Applicant acquired business in reliance on financial records provided by respondents – Applicant’s director discovered that business operated at loss – Trial judge found that representations in financial records constituted misleading or deceptive conduct – Judge held that measure of damages was difference between purchase price and true value of business at time of sale – Judge concluded that applicant failed to prove true value – Whether judge erred in assessing loss and damage under s 236 of Australian Consumer Law – Whether judge erred in treatment of evidence of applicant’s director – Leave to appeal granted – Appeal allowed.

Australian Consumer Law (Competition and Consumer Act 2010 (Cth) sch 2) s 236.

Keys Consulting Pty Ltd v CAT Enterprises Pty Ltd [2019] VSCA 13; Masters Home Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88; Golden Eagle International Trading Pty Ltd v Zhang (2007) 229 CLR 498; HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; Potts v Miller (1940) 64 CLR 282; Ratcliffe v Evans [1892] 2 QB 524.

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Counsel
Applicant:		Ms G Costello KC with Ms A Carruthers
Respondents:		Dr P Vout KC with Mr L Virgona
Solicitors
Applicant:	Verge Legal Pty Ltd
Respondents:	Alderuccio Solicitors

NIALL JA
KENNEDY JA
FORREST AJA:

Introduction

In April 2018, H & Q Café Pty Ltd (‘H & Q’) entered into a contract with Melbourne Café Pty Ltd (‘Melbourne Café’) to purchase a café business (the ‘business’) which operated from leased premises at the Royal Children’s Hospital.
On 2 October 2019, H & Q commenced a proceeding in the County Court seeking damages from Melbourne Café comprising the purchase price for the business, together with lost profits, trading losses and interest on a loan used to fund the purchase. H & Q alleged that Melbourne Café and/or its director, Jiang Zhang, had:
•engaged in misleading and deceptive conduct contravening s 18 of the Australian Consumer Law (‘ACL’);[1] and/or
•breached a term of the contract by which it warranted that information about the business provided to H & Q was true and correct.
[1]Competition and Consumer Act 2010 (Cth) sch 2. The text of the ACL as in force from time to time operates as a law of Victoria pursuant to s 8 of the Australian Consumer Law and Fair Trading Act 2012 (Vic).
The substance of H & Q’s case was that the business had in truth been unprofitable in the year (or years) preceding its purchase and that Melbourne Cafe had, by providing false financial material to H & Q prior to the purchase, misled it as to the true financial position of the business. It relied primarily upon financial documents subsequently obtained by it which it contended painted a very different picture of the profitability of the business to that contained in the material provided by Melbourne Café prior to the sale.
The trial of the proceeding was conducted remotely in the County Court over eight days in February and June 2021.
On 8 July 2022, the trial judge delivered reasons for judgment. Her Honour found that the two principal actors, Xin ‘Cindy’ Qiu (the sole director of H & Q) and Mr Zhang (her equivalent at Melbourne Café), were both untruthful and unreliable.
However, the judge was persuaded that Mr Zhang (and therefore Melbourne Café) had provided false information to H & Q prior to the sale and engaged in misleading or deceptive conduct. Her Honour found that this conduct also amounted to a breach of the contractual warranty. She also determined that this conduct caused H & Q to enter the contract for the sale of the business.
Notwithstanding these conclusions, the judge was not satisfied that H & Q had established any loss as a result of Melbourne Café’s and Mr Zhang’s conduct. Her Honour awarded damages for breach of contractual warranty in the nominal sum of $100.[2]
[2]H & Q Café Pty Ltd v Melbourne Café Pty Ltd [2022] VCC 1017, [5]–[6] (‘Reasons’).
H & Q now seeks leave to appeal the decision and orders of the judge. There is no challenge by Mr Zhang or Melbourne Café to the judge’s conclusion that they engaged in misleading and deceptive conduct and were in breach of the contractual warranty. Nor is there any challenge to her Honour’s finding that these breaches caused H & Q to enter into the contract. The appeal of H & Q is confined solely to the question of the assessment of the loss (if any) of H & Q consequent upon those findings.
For the reasons that follow, we have determined that the judge erred in finding that H & Q had not proved its loss on the purchase of the business and that the application for leave to appeal should be granted and the appeal allowed.
We have also concluded that damages caused by the conduct of Melbourne Café and Mr Zhang should be assessed at $2,150,000.

Background

H & Q was incorporated on 7 March 2018 for the purpose of acquiring and conducting the business. It was the corporate vehicle of Bing ‘Raymond’ Hu and Ms Qiu. Initially, both Mr Hu and Ms Qiu were appointed as directors of H & Q. Mr Hu’s role ceased on 30 October 2018, shortly prior to H & Q commencing operation of the business.
Melbourne Café was the corporate vehicle of Mr Zhang, who was and remains its sole director. Melbourne Café is the trustee of the Melbourne Café Unit Trust which had operated the business for several years.
In February and March 2018, H & Q (via Mr Hu) received ‘financial statements’ of the business from Mr Zhang, namely:
•a profit and loss statement for the 2016 financial year, which recorded a net profit of $231,928.06, addback of $270,535 with an actual profit of $502,463 (the ‘2016 financial statements’);[3]
•a profit and loss statement for the 2017 financial year, as well as the profit and loss statement for July to December 2017. These statements recorded a profit of $541,789.90 and $264,807.02, respectively (the ‘2017 financial statements’);[4] and
•unsigned financial accounts of the Melbourne Café Unit Trust for the 2016 and 2017 financial years (the ‘unsigned records’) in which the 2016 financial year profit and loss statement recorded a net loss of $69,033, and the 2017 financial year profit and loss statement reported a net profit of $264,598[5] —
(collectively described by the judge as the ‘represented financials’).
[3]These are defined by the judge as the ‘First Represented Financial Statements’: Reasons, [13], [65(a)].
[4]These are defined by the judge as the ‘Second Represented Financial Statements’: Reasons, [14], [65(b)]. H & Q also received a copy of the lease with the Royal Children’s Hospital: Reasons, [14].
[5]These are the business records of the Melbourne Café Unit Trust as trustee of Melbourne Café Pty Ltd. They are defined by the judge as the ‘Third Represented Financial Statements’: Reasons, [20], [65(c)].
The represented financials were provided by Mr Hu to Ms Qiu who, in turn, sent them to H & Q’s accountant, Chen ‘Mary’ Cui.
The contract for the sale of the business between H & Q and Melbourne Café was signed on 30 April 2018. The purchase price was $2.4 million. H & Q paid a deposit of $240,000.[6] The balance of the purchase price was settled on 8 November 2018.[7] H & Q had obtained a loan to fund the purchase price from the Commonwealth Bank of Australia (‘CBA’).
[6]Reasons, [19].
[7]Reasons, [28].
Ms Qiu managed the business from November 2018 and continues to do so.
In February 2019, Ms Qiu discovered on a Melbourne Cafe business computer ‘financial records’ relating to Melbourne Café’s operation of the business which had not been given to either Ms Qiu or Mr Hu prior to the signing of the contract.[8] These on their face purported to be:
•a profit and loss statement for the 2016 financial year, which recorded a net loss of $174,004.58;
•a profit and loss statement for the 2017 financial year, which recorded a net loss of $265,401.65; and
•a profit and loss statement for the 2018 financial year, which recorded a net profit of $95,023.21 —
(collectively referred to at trial as the draft or ‘hidden financials’).
[8]Reasons, [30].
Several observations about the ‘hidden financials’ should be made here. First, it was not disputed at trial that these were statements prepared by Mr Zhang (or on his instructions) and related to the operation of the business. Second, and importantly, the ‘hidden’ profit and loss statement for the 2017 financial year was generally consistent with the tax return of the Melbourne Café Unit Trust for that year, lodged with the Australian Taxation Office (the ‘ATO’) on 30 May 2018 which showed a loss of $265,402 (the ‘2017 tax return’).[9] As the taxpayer, Mr Zhang (or his authorised agent) was required to declare that the information contained in the return was true and correct.[10] This return (or a draft of it) had not been provided to H & Q prior to entering into or completing the contract. Indeed, Ms Qiu gave evidence that she discovered the 2017 tax return on the computer server at the café after settlement (along with the other ‘hidden’ financials).[11] Third, whether the documents were properly described as hidden or non-disclosed is a matter of semantics. What is clear is that none of the documents found on the computer by Ms Qiu (nor a copy of a draft or final version of the 2017 tax return) were provided to H & Q before 30 April 2018. Fourth, although Melbourne Café and Mr Zhang referred to an amended 2017 tax return prepared by Mr Zhang (or on his instructions) during the course of the proceeding, no such document was ever lodged with the ATO.[12]
[9]Reasons, [24], [54].
[10]See [160] below.
[11]This evidence does not appear to have been challenged during the cross-examination of Ms Qiu.
[12]Reasons, [39]–[40]. That the document had not been lodged was conceded by Mr Zhang and his counsel.
In late 2019, H & Q attempted to sell the business through a broker it had engaged to identify potential purchasers. On 4 December 2019, Ms Qiu received an offer (via the broker) to sell the business for $250,000 (the ‘December offer’). That offer was rejected and H & Q has continued to operate the business.

The trial

H & Q sought damages under s 236(1) of the ACL, which provides that a person who has suffered loss or damage because of conduct of a particular kind, such as misleading or deceptive conduct, may recover the amount of the loss or damage by action against that other person or any other person involved in the contravention. It contended that the hidden financials and the 2017 tax return demonstrated a picture of a parlous business not disclosed to it. Melbourne Café disputed the accuracy of those figures and maintained, in general terms, the accuracy of the represented financials.
H & Q called Ms Qiu as well as Ms Cui (its tax accountant) and Michael Smith (a forensic accountant).
Ms Qiu gave evidence with the assistance of an interpreter. She said that Mr Hu was more involved than her in the negotiations with Mr Zhang.[13] According to Ms Qiu, while Mr Zhang was not prepared to significantly reduce the advertised price of the business, which was $2.5 million, he ultimately agreed to a reduction of $100,000.[14]
[13]Reasons, [16].
[14]Reasons, [17].
Ms Qiu said that, on the first day that H & Q took over the business in November 2018, she discovered that Melbourne Café had ‘paid half of the wages in cash and then only half of that was taxed’,[15] and ‘I need to make some changes, so slowly I corrected the whole thing’. In cross‑examination, she denied that at the time of purchase she was aware of the arrangements with staff being paid cash and that neither Mr Zhang nor Mr Hu had told her of this fact.
[15]Reasons, [27].
Ms Qiu described the changes that she made to the operation of the business after its acquisition: she changed the catering menu ‘totally’ and the staff roster; organised for a greater range of suppliers and extended the opening hours of the café. Subsequently, in cross-examination, Ms Qiu said that after taking over the business, her attempts at increasing revenue or profit were successful. She developed a client base and increased catering services.
She said that, in February 2019, she was making cash payments to her staff and continued the practice adopted by Melbourne Café, and that the funds for this came out of cash sales. In that month, she also found a large number of documents, including the undisclosed financials, on a computer located inside the office of the café.
On 16 June 2020, Ms Qiu lodged revised Business Activity Statements (‘BAS’), which included ‘the correct super, correct tax’. She said that she needed time to regularise the BAS, stating:
So with the cash part or cash performance I didn’t declare that to the Tax Office. Not all of it. I did declare part of the cash sale income to the Tax Office, but I have all the cash record in my office.
She said that the financial accounts for the 2019 financial year and from July 2019 to May 2020, which were tendered, were accurate, but H & Q, at the time of trial, had not lodged a tax return for the 2020 financial year. On her account, the business had sustained a net loss of $84,902.39 from October 2020 to January 2021.
In cross-examination, Ms Qiu was asked a number of questions about her dealings with CBA in relation to a bank loan she had taken out. She said that the balance sheet and profit and loss statement for the period October 2018 to June 2019 (indicating a net profit of $175,308.38) provided to Simon Wilkins, a loan manager at the CBA, in August 2019 did not accurately reflect the performance of the business but insisted that it was a draft. She also accepted that another profit and loss statement for the period from July 2019 to December 2019 and provided to Mr Wilkins did not accurately reflect the true financial position of the business. In relation to those documents, there was the following exchange:
Now, you have given evidence that you provided a number of financial statements, profit and loss statements and balance sheets to Mr Wilkins of the Commonwealth Bank that were not accurate. Can you please explain to the court why you provided those documents to the Commonwealth Bank?---Yes, I know they were not accurate because I did them.
When then asked to explain why she provided inaccurate information to the bank, Ms Qiu gave a lengthy answer, essentially saying that she was scared because the business may have to shut down if she did not get the loan. In answer to her Honour’s question:
But, Mrs Qiu, it’s more than that, isn’t it? You deliberately gave misleading information to the bank, didn’t you? It was a deliberate decision to give information to the bank which you knew was factually inaccurate. That’s the case, isn’t it? …
Ms Qiu replied:
Yes, I know I did something wrong, but I justify my mistake. I explain to the bank in July 2020, I had meeting with them, I told them the truth.
She went on to explain that in July 2020 she gave Mr Wilkins ‘all the true financials’.
She was also cross-examined at some length about the filing of several amended 2019 BAS and the provision of a new set of financials to Mr Smith, the forensic accountant, in June 2020 (and subsequent to the provision of his first report).
It was put to Ms Qui that the BAS were only amended as a result of a letter sent on 2 June 2020 by Melbourne Café’s solicitors to her solicitors raising the issue of cash payments. She denied that this was the motivation for the amendments and the fresh information given to Mr Smith.
She could not recall whether she had told Mr Smith in preparation for the first report anything about the cash sales or payments to staff. In respect of the original figures that were given to the expert, she said: ‘the stuff I gave to them was a draft’. She was then asked the following:
So are you saying that it is known in the industry that a business of this nature will have some cash sales that sit outside the books?---That I don’t know.
Ms Qiu also gave evidence in relation to the December offer (referred to at [19] above). She said that she rejected the December offer and explained that this was:
Because that was not even enough to pay the bank loan, and then on top of that I put in a lot of money. Even not cover what I invested into this business at all. How can - I can accept this low - this offer?
As discussed later, the judge rejected her evidence in the absence of any independent corroboration.
Ms Cui gave evidence in her capacity as H & Q’s accountant. Ms Cui is an experienced tax accountant, a member of CPA Australia and has Masters degrees in professional accounting and commerce. She has for a number of years operated her own business. She had known Ms Qiu for a long time and, for the last seven years, her firm has acted for Ms Qiu.
Prior to the sale agreement being executed, Ms Cui examined the financial documentation provided by Mr Zhang to H & Q. She considered that the financial reports that she saw emanated from MYOB accounting software. She was not provided with the 2017 tax return or any BAS of the business.
Ms Cui considered, based on the information provided by Mr Zhang, that the café was a ‘good business’, but that she needed the BAS and financial statements from Melbourne Café’s accountant to verify that the income and expense were accurate. She gave this advice to Ms Qiu.
Having sighted the contents of the 2017 tax return, Ms Cui expressed the following opinion as to the business:
[T]he business is having very big loss. It’s too risky to buy such kind of business. No, not good business. If they still want to buy the business, they probably will offer very, very low price or just the transfer the lease to themselves as zero.
Ms Cui said that the business, since its acquisition by H & Q, was operating at a loss, and the trading losses at the date of trial were approximately $940,000, including interest on bank loans.[16]
[16]See below n 97.
Ms Cui went on to say that, subsequent to H & Q taking over the business, she prepared both the original and amended PAYG summaries for the 2019 financial year. The amended PAYG summaries included the addition of a further $98,912 which, it was said, were cash payments to employees not recorded in the original BAS.
Ms Qiu confirmed in cross‑examination that the BAS were amended on 16 June 2020 and that she was not aware, when she prepared the original BAS, of either missed ‘cash sales’ or wages. She had no idea as to the cause of the discrepancy.
Ms Cui was not challenged in cross-examination as to her estimate of the trading losses or her valuation of the business at the time of sale.
The judge accepted her evidence.[17]
[17]Reasons, [43].
Mr Zhang gave evidence on behalf of Melbourne Café and himself. He also called Mr Hu (Ms Qiu’s former co-director) and Victoria Wheeler (a forensic accountant).
Mr Zhang said that, shortly before H & Q commenced operating the business, he had told Mr Hu and Ms Qiu about a book recording cash payments and that some employees’ wages were paid partly in cash.
Mr Zhang said that he was the director of Melbourne Café which purchased the café business at the Royal Children’s Hospital for an all-up cost of just over $2 million in August 2015.

In 2017, he engaged a business broker to sell the business. He had discussions with Ms Qiu and Mr Hu as to the purchase and provided the represented financials to H & Q. These were produced by either MYOB software or by Melbourne Café’s accountants, KST Partners.
Mr Zhang explained the difference between the figure contained in the 2017 tax return (a loss of over $240,000) — a document that was discovered by Ms Qiu along with the hidden financials — and that within the 2017 financial statements (a profit of over $260,000) — part of the represented financials — on the basis that the additional income (apparently all of it) was in cash was not declared to the ATO.
As to the truth and accuracy of the represented financials, Mr Zhang said that the correct financial position of the business was reflected in the represented financials and a set of ‘amended tax returns’ which were prepared in the course of the litigation. He said that a draft amended 2017 tax return had been prepared by his accountants in order to report cash sales to the ATO and allow a percentage for expenses paid in cash — figures that were not included in the lodged 2017 tax return. He described this as ‘my mistake’. He said that the figures recorded in the draft amended 2017 tax return accorded with those in the represented financials and recorded a true picture of the business’ performance.
As to the source documents for the draft amended 2017 tax return, Mr Zhang said:
Well, we lodged the tax return, we didn’t thought we would be caught up. That’s why we lodged tax return, so anything relative to the tax return, we might have it but because we lodged tax return for 1.47 so a lot of cash, cash things, cash evidence, we did destroy it because we not intended to — I knew that’s wrong, to give this one at the beginning, but we not intended to catch this one, to be found, for someone to find it. The reason I got record of the cash one, because we do have cash record, just so I can prove it later on.
Mr Zhang accepted that the lodged tax returns for 2016 and 2017 were inaccurate (indeed, on his account, false) and that he deliberately destroyed documents relating to the payment of wages in cash.[18] He said that although the draft amended 2017 tax return had been prepared, it had not been lodged.
[18]Reasons, [39]–[40].
In cross-examination, he said the following as to distributions to the shareholders of Melbourne Café in the financial years ended 2016 and 2017:
So you’ve said that there won’t be profit to distribute and the reason for that is that there was a loss of $69,033 in FY 16 and a loss of $265,402 in 2017, do you see that?---Yes.
You were correct when you said to Ms Chew on 21 July 2020 that there was no profit to distribute in the FY 16 and FY 17 years, weren’t you?---According to the tax return.
No, you were telling the truth to Ms Chew on that day when you said there was no profit to distribute from the FY 16 or FY 17 years, weren’t you?---Yes, I said that.
It was the truth, wasn’t it?---Well, the cash one - it’s not including cash because we didn’t distribute anything for disclosure or disclose any cash parts.
...
Yes. I will say it again, in the year 2016 and 2017, in this proceeding, you have not provided any documents evidencing any distribution to shareholders, have you?---No, I haven’t.
Then there was the following question and answer in relation to an email from Mr Zhang to Adeline Chew of KST Partners, Melbourne Café’s accountant, in July 2020 concerning the draft amended 2017 tax return:
In it you said, ‘Hi Adeline, just to outline our needs from the solicitor: 1. Amend the tax return and financial FY 16/17 income, $2.2 million. Detail in email.’ Do you see that?---Yes.
So today you’ve given evidence that your accountant at KST partners prepares the tax returns and the profit and loss statements based on what you tell them to put in it, that’s correct, isn’t it?---That’s right.
And you told the accountant on 21 July 2020 to put in income of $2.2 million for the year FY 16/17, didn’t you? ---Yes, probably there is - sorry, there is no attachment with this email?
And:
But my question for you is this, Mr Zhang, you say, ‘Hi Adeline, just to outline our needs from the solicitor’, this request to put in $2.2 million was made because of these legal proceedings, is that correct?---That’s correct.
Mr Zhang reiterated that the adjusted figure of income of $2.2 million in the draft amended 2017 tax return was the result of including cash payments. He also said that the draft did not include wages, salary and superannuation amounts — some of which had been paid in cash (at least the wages) to employees. Mr Zhang confirmed that in both years (2016 and 2017) he used cash to purchase ‘things from suppliers’.
He maintained that he had told H & Q about the cash payments and expenses being paid out of cash receipts.
The judge rejected Mr Zhang’s evidence.[19]
[19]Reasons, [41].
Mr Hu said that it was Ms Qiu’s idea to purchase the business. Mr Hu had been a director of H & Q until 30 October 2018. He explained that Mr Zhang provided him with the 2016 and the 2017 financial statements by email which he in turn gave to Ms Qiu. Mr Hu said that Ms Qiu forced him to withdraw as a director so that she could run the financial side of the business and he subsequently worked at the café as a barista and serving customers.[20]
[20]Reasons, [12]–[14], [26].
The judge accepted Mr Hu’s evidence.[21]
[21]Reasons, [43].
As mentioned, both sides also called expert evidence from a forensic accountant as to the accuracy of the represented financials and in relation to the value of the business and alleged ongoing losses. Each of the experts gave evidence separately and was cross‑examined on the contents of the reports.
Mr Smith, a chartered accountant, and director of CFAS Advisory Pty Ltd, a firm of corporate advisors and forensic accountants provided two reports to H & Q’s lawyers. Initially, a report was prepared by Mr Smith and dated 30 March 2020 based on material provided by H & Q’s lawyers. There was no suggestion in the report that the material provided was in draft form. Then, in late June 2020 (as mentioned) Mr Smith was provided with additional financial statements and tax returns by the lawyers and asked to prepare a second report based on the new information. This report, dated 23 July 2020, was based on an analysis of three sources of financial statements, namely the represented financials, the hidden financials and ‘actual financial statements experienced … since acquiring the business’.
Melbourne Café and Mr Zhang called Victoria Wheeler of Munday Wilkinson Pty Ltd, a firm of chartered and forensic accountants. Ms Wheeler, also a chartered accountant, provided a report dated 11 August 2020, based on the unsigned financial accounts of the Melbourne Café Unit Trust for the 2016 and 2017 financial years as well as business records provided by H & Q for the 2019 financial year and BAS for October 2018 to March 2020.
Mr Smith prepared a table which set out the figures contained in the financial documents referred to by the experts in their reports.[22] The table was tendered by H & Q (referred to as ‘Exhibit P3’) and is set out below with an explanation as to the particular columns:
[22]Reasons, [54].
The valuations of the business as at the time of purchase provided by Mr Smith and Ms Wheeler were calculated using the capitalisation of future maintainable earnings. According to Mr Smith, this method ‘is the most commonly used method of valuing a business’ and ‘involves capitalising the future maintainable earnings at a multiple that reflects the risk and opportunities of the business and the stream of income it generates’. In his experience, a potential purchaser would value the business it proposes to acquire by reference to its earnings before interest, tax, depreciation and amortisation (‘EBITDA’).
Mr Smith said that, based on the represented financials (that is, those provided to H & Q), the value of the business at the time of sale fell within a range between $1.75 and $2 million.[23] This was based on an EBITDA of $500,000 and a capitalisation rate of 3.5 to 4.0 times the EBITDA. Ms Wheeler also provided a valuation based on the represented financials but arrived at a different figure, finding that the value of the business as at 30 April 2018 was within a range between $2.28 and $2.57 million.[24] She relied on an EBITDA of $571,000 and capitalisation rate of 4.0 to 4.5 times the EBITDA.
[23]Reasons, [46].
[24]Reasons, [50]. The discrepancy may be explained by the fact that while both experts relied on the unsigned records, only Mr Smith was provided with the 2016 financial statement and the 2017 financial statement: Reasons, [56].
Mr Smith also said that, based on the ‘hidden financials’ (that is, the ‘profit and loss statements’ for 2016, 2017 and 2018 financial years) and the 2017 tax return, the value of the business at the time of sale was nil, having regard to the facts that the business had made a loss before and after depreciation and that there was an ongoing lease obligation. He conceded that while the hidden financials indicated that the business may have had some value at the time of sale, ‘it would be fairly small’.[25] Ms Wheeler was not asked to provide a valuation based on the hidden financials,[26] nor based on the filed 2017 tax return, which Melbourne Café and Mr Zhang (and/or their lawyers) elected not to provide to her.
[25]Reasons, [48].
[26]Reasons, [51].
Mr Smith also expressed an opinion based on the financial records provided by H & Q for the period between October 2018 to May 2020 as to the current value of the business (that is, at the time of trial). Mr Smith said that the business had no value. This was because the business was trading at a loss and was likely to continue to trade at a loss, particularly given that the term of the lease at the Royal Children’s Hospital would continue until 2026. Contrastingly, Ms Wheeler found that the business was valued between $92,000 and $103,500 based on H & Q’s profit and loss statement for November 2018 to 30 June 2019, and BAS from July 2019 to March 2020.[27] In arriving at this figure, Ms Wheeler used an EBITDA of $23,000 and the same capitalisation rate of 4.0 to 4.5 times the EBITDA. She also conducted a review of H & Q’s level of costs expenditure and found that its depreciation, rent and outgoing expenses and wages and oncosts were higher than the industry benchmarks.[28]
[27]Reasons, [52].
[28]Reasons, [55].
Each expert was also instructed to calculate the operating losses for H & Q for the period commencing upon settlement of the sale of the business and up and until early 2020. Mr Smith assessed the operating loss at $623,428 whereas Ms Wheeler found the operating loss to be $401,494.[29]
[29]The discrepancy may be explained by the fact that Ms Wheeler was instructed to assess operating losses up and until 31 March 2020 whereas Mr Smith calculated the operating loss up and until 31 May 2020: see Reasons, [52]–[54].

The judge’s findings – generally

In precis, the judge’s findings were as follows.

Whether Melbourne Café had engaged in misleading and deceptive conduct under the ACL

The judge rejected Melbourne Café’s submission that it had ‘provided a materially accurate depiction of the historical financial performance of the business’.[30]
[30]Reasons, [73].
Her Honour held that:
•neither Ms Qiu nor Mr Zhang were credible witnesses and that, absent independent corroboration, the judge could not accept their evidence;[31]
•the represented financial statements were inaccurate and contained written representations that were misleading or deceptive under s 18 of the ACL;[32]
•the director of Melbourne Café (Mr Zhang) made admissions to that effect during cross examination;[33]
•in particular, the 2017 financial statements were ‘patently inaccurate and gave a false impression of the profitability of the business’;[34] and
•H & Q had ‘relied’ upon the represented financial statements when deciding to purchase the business.[35]

Whether Melbourne Café had breached a contractual warranty

[31]Reasons, [38]–[41].

[32]Reasons, [107]–[109]. The judge noted that the ‘true figures’ relating to the business will never be known, absent an independent audit: Reasons, [107].

[33]Reasons, [107].

[34]Reasons, [109].

[35]Reasons, [111].

The schedule to the contract of sale contained an express warranty which provided that the written information about the business as provided by Melbourne Café was materially true and correct.
The judge found that:
•the represented financial statements provided to H & Q were ‘written information’ for the purpose of the warranty;[36]
•the represented financial statements (especially, the 2017 financial statements) were not ‘materially true and correct’ (with the result that the warranty was breached);[37]
•Mr Zhang accepted in cross-examination that the information provided to H & Q prior to entering into the contract of sale was inaccurate;[38] and
•Melbourne Café was liable to H & Q under the warranty.

Whether Mr Zhang was personally liable under a guarantee

[36]Reasons, [135].

[37]Reasons, [139]–[141].

[38]Reasons, [139].

The judge noted that the contract for the sale of the business included a term pursuant to which Mr Zhang agreed to:
•guarantee the due and punctual performance of Melbourne Café’s obligations;
•separately indemnify H & Q against all loss sustained as a result of a failure by Melbourne Café to perform its obligations; and
•separately promise to perform Melbourne Café’s obligations without demand if it failed to promptly perform its obligations.
Given her Honour’s conclusion that Melbourne Café did not provide accurate financial statements, it followed that Mr Zhang was also personally liable to H & Q under the guarantee. The judge held that each element required to be proven under s 18 of the ACL was made out against Mr Zhang such that he was primarily liable.[39] In respect of Melbourne Café’s breach of the warranty, the judge found that this was an obligation to which the guarantee and indemnity given by Mr Zhang applied.[40] Consequently, Mr Zhang was also liable for Melbourne Café’s failure to comply with the warranty.[41]

Damages

[39]Reasons, [110]. The judge noted that ‘[i]n the alternative, [she] would also be satisfied that [Mr Zhang] was a person who aided and abetted the contravention on behalf of Melbourne HQ’: ibid.

[40]Reasons, [133].

[41]Reasons, [143].

The judge found that:
•in order to claim damages for misleading and deceptive conduct, H & Q was required to demonstrate the difference between the purchase price paid and the real or true value of the business at the date of sale;[42]
•H & Q failed to provide sufficient evidence of the true or real value of the business and ‘[w]hilst the Court can estimate damages as best it can, it is not permitted to guess’ an appropriate quantum;[43]
•H & Q was not able to claim its trading losses because it was unable to establish that the conduct of Melbourne Café and/or Mr Zhang was the cause of its losses;[44]
•the claim for damages for breach of the contractual warranty failed for the same reasons;[45] and
•ultimately, H & Q had failed to prove its claim for damages and was entitled only to a nominal sum of $100.[46]
[42]Reasons, [82], [128].
[43]Reasons, [129].
[44]Reasons, [6], [126]–[127].
[45]Reasons, [147].
[46]Reasons, [148]–[149].
We now consider these conclusions in more detail.

The judge’s findings as to H & Q’s loss and damage – in detail

Damages for misleading and deceptive conduct

The judge said that the proper measure of damages under s 236 of the ACL is the difference between the purchase price paid and the ‘true value’ of the asset in question.[47] Her Honour said that the principles to be applied in making that assessment are set out in Keys Consulting Pty Ltd v CAT Enterprises Pty Ltd (‘Keys Consulting’),[48] which we have extracted at [114] below. The judge also referred to Kizbeau Pty Ltd v WG & B Pty Ltd (‘Kizbeau’) in which the High Court said that, in some cases of deceit, the defrauded party may also be compensated for losses induced by the fraud and incurred in conducting the business.[49]
[47]Reasons, [81]–[84].
[48][2019] VSCA 136.
[49](1995) 184 CLR 281, 291 (the Court).
The judge noted that H & Q contended that a causal connection between the misleading and deceptive conduct of Melbourne Café and Mr Zhang on one hand, and the loss and damage on the other hand, was all that was required to warrant an award of damages.[50] Specifically, it said that if H & Q had been informed of the true financial position of the business, it would not have entered into the contract of sale.[51] It claimed damages equivalent to the difference between the purchase price of $2.4 million and the real value of the business at the date of sale.[52] It relied on the evidence of Mr Smith that the value of the business as at 30 April 2018 was effectively nil.[53] It also sought to recover consequential loss, comprising ongoing trading losses as well as interest on the loan obtained to fund the purchase of the business.[54] It alleged that these trading losses (including interest on the loan) amounted to $623,428.
[50]Reasons, [93]–[94].
[51]Reasons, [111].
[52]Reasons, [114].
[53]Reasons, [115].
[54]Reasons, [112], [127].
The judge noted that it was necessary under s 236 of the ACL to determine a causal connection between the contravening conduct and the loss and damage alleged.[55] Her Honour held that it was clear that the representations as to the financial position of the business contained in the represented financial statements were relied on by H & Q in deciding to enter into the contract of sale to acquire the business.[56] We pause to reiterate that this finding is not challenged by Melbourne Café or Mr Zhang.
[55]Reasons, [111].
[56]Ibid.
As mentioned earlier, her Honour commenced her analysis of the quantification of the damages claim by analysing the ancillary claims for ongoing trading losses saying that ‘H & Q needs to show that the losses incurred are because of the contravention and not from a supervening cause such as the “folly, error or misfortune” of H & Q’.[57] This was not the primary head of damages claimed and was ancillary to the substantial claim for the capital loss on the purchase of the business.
[57]Reasons, [114], quoting All Options Pty Ltd v Flightdeck Geelong Pty Ltd [2019] FCA 588, [128] (Steward J).
The judge noted that the evidence revealed that the sales made by H & Q after purchasing the business were ‘not insubstantial’ and the business appeared to have operated with some success.[58] Moreover, there was conflicting evidence about the operation of the business and the quantum of total operational losses since the purchase of the business settled on 8 November 2018.[59] In assessing the claim for ongoing trading loss, her Honour concluded that she could not be satisfied that the particularised losses were ‘necessarily accurate’.[60]
[58]Reasons, [124].
[59]Reasons, [117]–[123].
[60]Reasons, [125].
Ultimately, the judge held in respect of H & Q’s claim for trading loss that:
It is difficult or near impossible to find that if the operating losses alleged by H & Q are in fact true and correct, the reason why it was not able to operate at a profit was because it was induced to buy a worthless business. There seems to be a myriad of reasons why the business was not operating as successfully as it had been hoped … I am not persuaded that the operating losses claimed are in fact attributable to the conduct of [Melbourne Café and Mr Zhang] and/or to supervening events or misfortune … I am not satisfied that there should be an award of damages in favour of H & Q for any trading losses alleged to have been suffered.[61]
[61]Reasons, [126].

Having denied any entitlement to damages for trading losses, the judge also declined to find that Melbourne Café and Mr Zhang should be liable for any interest on the CBA loan.[62]
[62]Reasons, [127].
The judge then turned to briefly assess (in the space of three paragraphs) what was the primary claim: namely, the difference between the purchase price paid and the true value of the business at the time of sale. Her Honour observed that the evidence ‘needs to be examined post acquisition to illuminate the true value of the business as at the date of acquisition’.[63] The judge had regard to the following:
•Mr Smith valued the business at nil but had conceded that the business could have had some small (albeit unidentified) value;
•H & Q had tendered financial records of the business for the period following the purchase of the business but the judge considered that these were not a true and correct representation of H & Q’s trading position since settlement; and
•no independent corroboration.
The judge concluded that ‘the Court simply [did] not have sufficient information before it to assess with any degree of certainty what was the true value of the business as at the date of purchase’.[64] As a result, her Honour held that the plaintiff had failed to prove its claim for damages.[65]
[63]Reasons, [128].
[64]Reasons, [129] (emphasis added).
[65]Reasons, [129]–[130].
Although it was not necessary to determine the submissions of Melbourne Café and Mr Zhang with respect to mitigation, the judge said that she would have found that H & Q did not act unreasonably by refusing an offer to sell the business for $250,000 having regard to the low quantum of the offer, the informal nature of the offer and the fact that the offer was made after the proceeding had been commenced.[66]

Damages for breach of warranty

[66]Reasons, [130].

H & Q submitted that damages should be assessed so as to place it in the same position it would have been in had the profit reflected in the represented financial statements been true. It said that it should be compensated for the represented profit of $500,000 per annum for four or five years.[67]
[67]Reasons, [144].
The judge found that where an asset has been purchased and there has been a breach of a warranty as to the true value of the asset, damages are assessed by determining the difference between ‘the value as warranted’ and the ‘real value’ of the asset.[68] However, the plaintiff is not to be placed in a superior position to that in which it would have been, had the contract been performed.[69]
[68]Reasons, [146], citing Radferry Pty Ltd v Starborne Holdings Pty Ltd [1998] FCA 1689.
[69]Reasons, [145], citing Clark v Marcourt (2013) 253 CLR 1, 11 [27] (Crennan and Bell JJ).
The judge concluded that she was unable to determine the real value of the business had the warranty been met as at the date of purchase for the reasons identified above.[70] Accordingly her Honour considered it appropriate to grant only nominal damages which reflected her finding that Melbourne Café and Mr Zhang had breached the warranty.
[70]Reasons, [147].

Grounds of appeal

The proposed grounds of appeal are as follows:
Ground 1:The Primary Judge failed to carry out the task of quantifying H & Q’s loss and damage.
Ground 2:The Primary Judge’s conclusion that there was no loss or damage (or only nominal loss or damage) is contrary to compelling inferences and glaringly improbable.
Ground 3:The Primary Judge erred in her treatment of Ms Qiu’s evidence.

It is convenient to deal with those grounds in a different order in which they appear in the application for leave to appeal. This is because the adequacy of Ms Qiu’s evidence is directly relevant to the claims for loss on the purchase of the business and the ongoing trading losses.

Ground 3: Did the judge err in her treatment of Ms Qiu’s evidence?

We have summarised the evidence given by Ms Qiu at [22] to [34] above. As we have mentioned, the judge concluded that Ms Qiu was not a credible witness and did not accept her evidence unless there was independent corroboration of it.[71]
[71]Reasons, [38].
The approach to be taken by an appellate court on this issue was set out by the High Court in Lee v Lee:[72]
A court of appeal is bound to conduct a ‘real review’ of the evidence given at first instance and of the judge’s reasons for judgment to determine whether the trial judge has erred in fact or law. Appellate restraint with respect to interference with a trial judge’s findings unless they are ‘glaringly improbable’ or ‘contrary to compelling inferences’ is as to factual findings which are likely to have been affected by impressions about the credibility and reliability of witnesses formed by the trial judge as a result of seeing and hearing them give their evidence. It includes findings of secondary facts which are based on a combination of these impressions and other inferences from primary facts. Thereafter, ‘in general an appellate court is in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge’.[73]
[72](2019) 266 CLR 129.
[73]Ibid 189–9 [55] (Bell, Gageler, Nettle and Edelman JJ) (citations omitted), quoting Warren v Coombes (1979) 142 CLR 531, 551 (Gibbs A-CJ, Jacobs and Murphy JJ). See also Fox v Percy (2003) 214 CLR 118, 126–7 [25] (Gleeson CJ, Gummow and Kirby JJ); Devries v Australian National Railways Commission (1993) 177 CLR 472, 479, quoted in Amalgamated Television Services Pty Ltd v Marsden [2002] NSWCA 419, [17] (Beazley, Giles and Santow JJA); Robinson Helicopter Co Inc v McDermott (2016) 90 ALJR 679, 686–7 [43] (the Court); Masters Home Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88, [96]–[98] (Santamaria, Ferguson and Kaye JJA) (‘Masters Home Improvement’).
The judge gave the following reasons for rejecting Ms Qiu’s evidence:
Mrs Qiu gave evidence through an interpreter as her English was said to be limited. However, I formed the view whilst observing her that she had a better understanding of oral and written English than she was prepared to acknowledge. Despite the fact that Mrs Qiu gave evidence through an interpreter, I formed the view that she was at times an unsatisfactory witness given the following:
(a)She was often evasive and frequently gave non-responsive answers to straightforward questions, even to her own counsel.
(b) Whilst her counsel submitted that Mrs Qiu’s evasiveness was more a reflection of confusing questions being subsequently interpreted to her, it was clear that she had a better understanding of English than she was prepared to admit. This was demonstrated on a number of occasions when she would correct an answer given by the interpreter in English on the basis that it did not reflect what she had said.
(c)Her evidence [was] that she knowingly provided inaccurate financial information, including an overstated profit and loss statement to the CBA when responding to requests for information by the bank in August 2019. Mrs Qiu provided a profit and loss statement to the CBA for October 2018 to June 2019. Sales income was said to be $1,098,524.64 and net profit [of] $175,308.38. In cross-examination, she denied the figures were taken from her records and said that she had made the figures up.
(d) Mrs Qiu submitted financial information to her expert witness, Mr Michael Smith, to prepare his first report which was based on information that did not disclose a number of cash sales and cash wage payments. This was only rectified when amended BAS which showed the correct level of cash sales were lodged. The first Smith report recorded the Parkville Café business’ income of $945,000. This figure was increased by some $300,000 in his second report. It was put to Mrs Qiu by counsel for the defendants that the correction to her financial records only occurred following the receipt of a letter from the defendants’ solicitors dated 2 June 2020 which pointed to there being a discrepancy. This suggestion was said to be overcome on the plaintiff’s case by reason of the fact that Mrs Qiu instructed her accountant to amend and correct the financial statements in April 2020 well prior to the letter sent by the defendants’ solicitors. However, it was clear that the information that Mrs Qiu initially provided to Mr Smith provided sales figures that were lower than those actually received by the business by some $300,000. Mrs Qiu’s evidence that Mr Smith’s first report, which was filed and served in this proceeding, was only a “draft” cannot be accepted. This evidence showed a willingness on the part of H & Q to mislead the Court, Mr Smith, and the defendants as to the true state of the financial affairs of H & Q post settlement.
(e) Mrs Qiu admitted in cross-examination to lodging BAS returns which she knew contained inaccurate information.[74]
[74]Reasons, [37] (citations omitted).
By its written case and oral submissions, H & Q asserted that the judge erred in her Honour’s assessment of Ms Qiu’s credibility. We disagree.
The judge was entitled to rely upon the admitted false representations made by Ms Qiu and her conduct in providing inaccurate financial material to the expert, Mr Smith. All this went directly to her honesty and candour. The fact that later (in the course of the litigation) she endeavoured to remedy the situation with the provision of amended BAS is neither here nor there. The point is that the material initially supplied to the ATO and CBA was false.
We are also satisfied that her Honour considered the various explanations provided by Ms Qiu for her conduct and, not surprisingly, placed little weight on them. The judge was entitled to do so. Ms Qiu’s explanations for these falsehoods could not be described as ‘compelling’; to the contrary they defied credulity and were rightly rejected by the judge. Moreover, her Honour had the advantage of observing Ms Qiu as she endeavoured to explain these and other anomalies, which on their face could not be credibly explained, and certainly not in the fashion that she attempted to do so.
Equally, the contention that Ms Qiu’s conduct should be viewed in the light of ‘far graver conduct by the other side’ is misplaced. The proper question is whether the Court could accept Ms Qiu’s evidence (both oral and documentary), not what the judge made of Mr Zhang’s evidence in that context. True it is that Mr Zhang lied to the ATO and destroyed evidence and that this made the case all the harder for H & Q to prove — but that is a separate point which we will deal with later. Ms Qiu’s evidence was to be treated on its own merits and not as part of some competition with the quality of Mr Zhang’s evidence. There is nothing in this submission.
Finally, we do not accept the submission advanced by H & Q that the judge ‘drew unreasonable negative inferences about Ms Qiu because from time to time Ms Qiu corrected or added to the translation provided by the certified interpreter’. In making that submission, counsel for H & Q directed the Court to the judge’s comments as to Ms Qiu’s use of the interpreter at [37(b)] of the Reasons (which are set out at [94] above). The observations made by the judge as to the manner in which Ms Qiu answered questions with or without the aid of the interpreter are part and parcel of a judge’s function in evaluating the evidence and its quality. Judges and juries are routinely required to form an assessment of the candour of the witness in the context of the use of an interpreter. Undoubtedly, the trier of fact takes into account the fact that English is not the native language of the witness, but nevertheless, is entitled to use knowledge and experience in determining whether the witness understands what is being asked and whether he or she is capable, with or without an interpreter, of answering the question. The criticisms of the trial judge for making use of this fact are unsubstantiated.
In summary, having read the documentary evidence referred to by the judge (set out at [94] above) and the transcript of Ms Qiu’s evidence (both generally and particularly that relating to the additional material provided to Mr Smith in June 2020 and that relating to the correspondence between Ms Qiu and CBA), we are satisfied that the judge’s conclusions as to the lack of credibility of Ms Qiu’s evidence and how that evidence should be treated cannot be disturbed.
Her Honour’s findings of fact as to the credibility of Ms Qiu were neither glaringly improbable nor contrary to compelling inferences.
Ground 3 is not made out.

Grounds 1 and 2: Did the judge err in rejecting H & Q’s claim for loss and damage and in granting only nominal damages?

Principles of appellate review of an award of damages

It is necessary to commence by saying something briefly about the role of an appellate court in the review of an award of damages by the court below, none of which is contentious.
First, the assessment of damages by a trial judge involves the exercise of discretion.[75] The constraints imposed on appellate courts in appeals from discretionary decisions were stated in House v The King and need not be repeated here. Essentially, an appellate court should generally not intervene unless able to infer that in some way the discretion miscarried.[76]
[75]See Sharman v Evans (1977) 138 CLR 563, 565 (Barwick CJ), 589 (Gibbs and Stephen JJ) (‘Sharman’).
[76]House v The King (1936) 55 CLR 499, 504–5 (Dixon, Evatt and McTiernan JJ). See also Smith’s Newspapers Ltd v Becker (1932) 47 CLR 279, 300 (Dixon J).
Second, the intervention of an appellate court with an award of damages is not justified merely because it would itself have awarded more or less. The award must be so inadequate as to be beyond the limits of what a sound discretionary judgment could reasonably adopt. As was said by the Queensland Court of Appeal in Calder v Boyne Smelters Ltd:
Where the trial judge has assessed damages under a particular head of detriment and has applied some wrong principle of law, or has misapprehended the facts, relevant to an assessment under that head, the appellate court will be required to be satisfied that such an error has led to the assessment as a whole being outside the range of a sound discretionary judgment made in accordance with the correct legal principle, or proper appreciation of the facts, before it will intervene.[77]
[77][1991] 1 Qd R 325, 349 (Cooper J, Kniepp J agreeing at 326) (‘Calder’). See also McCartney v Orica Investments Pty Ltd [2011] NSWCA 337, [121] (Giles JA, Macfarlan JA agreeing at [192], Young JA agreeing at [193]).
Third, if satisfied that the award is vitiated by error, ‘then the appellate court has a duty to substitute its own assessment and what falls to be done is a total reassessment’.[78] In this respect:
In approaching the task of reassessment the appellate court does not simply adjust the previous award by substituting its own assessment under the head or heads of detriment in respect of which error was established. The appellate court must itself assess under all heads including those heads which have not been the subject of criticism on appeal. The appellate court may or may not be influenced in its view of an appropriate award by the reasoning of the trial judge under those heads which were not subject to appeal or criticism. It is entirely a matter for the appellate court as to what weight, if any, it gives to the trial judge’s reasons in determining for itself a sum of fair compensation.[79]
[78]Calder [1991] 1 Qd R 325, 349. That is so, notwithstanding that the category of case may involve a question of valuation: see Federal Commissioner of Taxation v St Helen’s Farm (ACT) Pty Ltd (1981) 146 CLR 336, 381 (Mason J).
[79]Calder [1991] 1 Qd R 325, 350.
Importantly, a court should in a case such as this, if possible, avoid returning a matter to the court below unless further findings of fact are necessary.[80]

Assessment of damages under s 236 of the ACL

[80]See, eg, Sharman (1977) 138 CLR 563, 589–90 (Gibbs and Stephen JJ).

The ‘statutory misconduct prohibited by s 18 of the ACL only gives rise to a cause of action for damages if, because of the conduct, a person suffers loss and damage’.[81] The legal burden of proof lies with the plaintiff.[82]
[81]Keys Consulting [2019] VSCA 136, [67] (Maxwell ACJ, Niall JA and Macaulay AJA).
[82]Berry v CCL Secure Pty Ltd (2020) 271 CLR 151, 168 [28] (Bell, Keane and Nettle JJ) (‘Berry’).
Section 236 of the ACL is in the following terms:
236 Actions for damages
(1) If:
(a)a person (the claimant) suffers loss or damage because of the conduct of another person; and
(b)the conduct contravened a provision of Chapter 2 or 3;
the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention.
(2)An action under subsection (1) may be commenced at any time within 6 years after the day on which the cause of action that relates to the conduct accrued.
A plaintiff may recover damages under s 236 for:
(a)the direct loss suffered as a result of the impugned conduct — in this case, any recoverable loss in relation to the true value of the business as opposed to that paid to acquire the business as a result of the conduct; and
(b)any loss consequent upon the purchase of the business provided it is relevant to the conduct.[83]
[83]Gould v Vaggelas (1985) 157 CLR 215, 220–3 (Gibbs CJ), 255 (Brennan J), 265–7 (Dawson J).
Her Honour’s statements of general principle (referred to at [78] above) were accurate and reflected the current state of the law on these two components of H & Q’s claim which we now return to.
In HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (‘HTW Valuers’), the High Court explained the approach to be taken in determining loss under s 82 of the Trade Practices Act 1974 (Cth) (that is, the predecessor to s 236 of the ACL):
The approach of subtracting value from price is commonly employed where the acquisition of land, chattels, businesses or shares is induced by deceit. It has also been commonly employed under s 82 of the Act. It is sometimes described as the rule in Potts v Miller. Even in the areas in which that approach is often applied, and even apart from cases in which consequential losses have been recovered, the ‘rule’ is not universal or inflexible or rigid. This perception is not novel. It has existed at least since the judgment of Dixon J in Potts v Miller and has been quite plain since that of Gibbs CJ in Gould v Vaggelas. Even Jordan CJ, who called the rule ‘well settled’, acknowledged that it was only a ‘rule of practice’. The flexibility of the rule can be seen by reference to a number of its characteristics.
One key qualification of the rule which prevents it from being inflexible is that the test depends not on the difference between price and ‘market value’, but price and ‘real value’ or ‘fair value’ or ‘fair or real value’ or ‘intrinsic’ value or ‘true value’ or ‘actual value’ or what the asset was ‘truly worth’ or ‘really worth’ or ‘what would have been a fair price to be paid … in the circumstances … at the time of the purchase’. This distinction is sometimes difficult to draw, but it is old and fundamental.[84]
[84](2004) 217 CLR 640, 656–7 [35]–[36] (Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ) (citations omitted).
Previously, the High Court in Kizbeau held that ‘although the value is assessed as at the date of the acquisition, subsequent events may be looked at in so far as they illuminate the value of the thing as at that date’.[85]
[85](1995) 184 CLR 281, 291 (the Court).

More recently, this Court (Maxwell ACJ, Niall JA and Macaulay AJA) in Keys Consulting said of the principles relevant to assessing damages under the ACL:[86]
[86][2019] VSCA 136, [68]–[71] (some citations omitted) (emphasis in original), cited with approval in Viterra Malt Pty Ltd v Cargill Australia Ltd [2023] VSCA 157, [918], [1099] (Sifris, Walker and Whelan JJA) (‘Viterra’); Sirota v Vainer [2019] VSCA 283, [43] (Beach, Niall and Osborn JJA).
In claims for damages, the plaintiff must prove both the fact of loss and the amount of that loss before he or she can recover substantial damages. If a plaintiff fails to prove either of those elements, he or she may recover nominal damages only where the claim is in contract, or the action fails altogether, where it lies in tort.
However, it is well established that a mere difficulty in quantifying damages does not necessarily defeat the plaintiff’s entitlement to a remedy against the wrongdoer. In appropriate circumstances, where some sort of actual loss has been established, the court must estimate the damages as best it can. Addressing a claim for damages for breach of contract, Street CJ in Howe v Teefy said:
The question in every case is: has there been any assessable loss resulting from the breach of contract complained of? There may be cases where it would be impossible to say that any assessable loss had resulted from a breach of contract, but, short of that, if a plaintiff has been deprived of something which has a monetary value, a jury is not relieved from the duty of assessing the loss merely because the calculation is a difficult one or because the circumstances do not admit of the damages being assessed with certainty.[87]
However, there is a distinction to be drawn between a situation that does not permit damages to be assessed with certainty, and one in which the plaintiff has simply failed to produce evidence that was otherwise reasonably available. The plaintiff is entitled to have the court do the best it can in the former case, but not in the latter. Where a party is able to produce evidence about loss and damage, they must do so with as much certainty and particularity as is reasonable in the circumstances. This principle is long established.
Put succinctly, Devlin J said in Biggin & Co Ltd v Permanite Ltd:[88]
where precise evidence is obtainable, the court naturally expects to have it, [but] where it is not, the court must do the best it can.
[87][1927] 27 SR (NSW) 301, 305–6.
[88][1951] 1 KB 422, 438. See also Longden v Kenaldi Nominees Pty Ltd [2003] VSCA 128, [33]; MA & J Tripodi Pty Ltd v Swan Hill Chemicals Pty Ltd [2019] VSCA 46, [73] (Kyrou, Kaye and Emerton JJA).
The Court in Keys Consulting also explained — consistently with Kizbeau and HTWValuers — that ‘[t]he general measure of damages for deceit is the sum representing the prejudice or disadvantage suffered in consequence of the plaintiff having altered their position under the inducement of the fraudulent representation’.[89] In cases of deceit inducing the purchase of an asset, there is a ‘rule of practice’ that damages will be measured by calculating the difference between the purchase price paid and the true or real value of the business at the date of acquisition — the rule in Potts v Miller.[90]
[89]Keys Consulting [2019] VSCA 136, [77]; Kizbeau (1995) 184 CLR 281, 291. See also Potts v Miller (1940) 64 CLR 282, 298 (Dixon J); Gould v Vaggelas (1985) 157 CLR 215, 220–2 (Gibbs CJ).
[90]Keys Consulting [2019] VSCA 136, [78].
The Court went on to say that in determining the true value of the business, ‘the court is to take into account (and the plaintiff must prove with as much certainty and particularity as is reasonable) events after the sale that arise from the nature or use of the asset that illuminate the value of the asset as at that date (subject to due allowance for any changes in relevant conditions)’.[91]
[91]Ibid [88].

In addition to damages for the true value of the business, a court may also award damages for consequential losses ‘providing they are directly referable to the fraudulent inducement rather than to some supervening cause (such as ineptitude or third-party intervention)’.[92] Supervening events will not include matters that merely ‘expose what was inherent in the asset’ purchased in reliance on the misleading or deceptive conduct.[93] In other words, the event which causes the loss must be an independent extraneous event and not some intrinsic matter which drives home the inaccuracies of the representations said to be misleading or deceptive. While damages will not generally be awarded for ‘a failure to achieve a certain level of profits’,[94] trading losses sustained as a result of operating a loss-making business purchased in reliance on the misleading or deceptive conduct may be recoverable.[95] Sufficient evidence of the performance of the business ought to be adduced to enable findings of fact to be made as to expenses incurred and revenue generated.[96]

The judge’s rejection of the consequential loss claim

[92]Ibid [80] (emphasis in original).

[93]ABN Amro Bank NV v Bathurst Regional Council (2014) 224 FCR 1, 190 [976] (Jacobson, Gilmour and Gordon JJ). See also Potts v Miller (1940) 64 CLR 282, 298 (Dixon J); Gould v Vaggelas (1985) 157 CLR 215, 220 (Gibbs CJ); HTW Valuers (2004) 217 CLR 640, 659 [40].

[94]Slinger v Southern White Pty Ltd (2005) 92 SASR 303, 328 [89] (Besanko J, Duggan J agreeing at 303 [1], Layton J agreeing at 330 [100]); IBEB Pty Ltd v Duncan [2011] NSWCA 368, [51] (Macfarlan JA, Young JA agreeing at [79], Meagher JA agreeing at [80]).

[95]Gould v Vaggelas (1985) 157 CLR 215, 220–4 (Gibbs CJ); HTW Valuers (2004) 217 CLR 640, 668 [66]–[67].

[96]Colin Lockhart, The Law of Misleading or Deceptive Conduct (LexisNexis, 5^th ed, 2018) [11.34] citing Crystal Auburn Pty Ltd v IL Wollermann Pty Ltd [2004] FCA 821, [124]–[130] (Goldberg J).

We have set out the judge’s findings at [78] to [86] above.
As mentioned earlier, the judge’s analysis commenced with an examination of whether H & Q had proved its consequential operational losses.
H & Q claimed that it suffered operational losses in the course of conducting the business after settlement as well as interest on the loan obtained from the CBA to fund the purchase of the business. Each of the accountants produced differing figures. H & Q’s accountant, Ms Cui, calculated the operational loss at $940,000 for the period between settlement and trial based on the figures provided to her by H & Q.[97] Mr Smith, however, found the operational loss to be $623,428 during November 2018 to May 2020, also based on financial records provided by H & Q for that period.[98] Ms Wheeler assessed the operational loss for November 2018 to March 2020 loss at $401,494.
[97]The quantum of operational loss given by Ms Cui was incorrectly transcribed as $140,000. It was later confirmed that this was a typographical error and that the correct figure should be $940,000.
[98]These records are described by Mr Smith as the ‘Actual Financials’ and comprised a profit and loss statement for the year ending 30 June 2019, a profit and loss statement for the period between 1 July 2019 and 31 May 2020, a tax return for the 2019 financial year and a BAS for 1 October 2018 to 31 March 2020.
Calculation of this head of damage came from one source, namely, the evidence of Ms Qiu and the financial records of H & Q (prepared by Ms Cui on Ms Qiu’s instructions and to which Ms Cui deposed).
We have already dealt with the judge’s rejection of Ms Qiu’s evidence. The judge noted that a ‘significant piece of evidence’ was an email sent by Ms Qiu to CBA on 29 August 2019 to which we have already referred.[99] In that email, Ms Qiu informed the CBA that sales were lower than expected due to a range of factors. They included:
(a)significant expenses, which Ms Qiu attributed to increased suppliers’ costs, increased rent, hiring more qualified chefs and repairing kitchen appliances and plumbing;
(b)the emergence of a ‘cutthroat’ competitor in the same building who had ‘undercut’ H & Q’s business; and
(c)the introduction of a requirement by the Royal Children’s Hospital that a certain percentage of food sold had to be of a healthy variety, restricting the types of products that H & Q could sell.
[99]Reasons, [121]. The email was produced in answer to a subpoena addressed to the CBA.
The judge also took into account another email from Ms Qiu to the CBA dated 14 July 2020, in which she referred to difficulties operating the business ‘because Victoria Lockdown again, less staffs and visitors in hospital again’ and ‘no new clients’.[100]
[100]Reasons, [123].
Mr Hu gave evidence that the business was operating well and that he received dividends as a shareholder of H & Q in the form of cash payments of approximately $10,000.[101] Mr Hu said that while he had not observed Ms Qiu’s husband to be working in the business, he nevertheless received a large salary from H & Q. However, Ms Qiu explained that her husband received a weekly income of $1,000 for work he did for the company, which ceased in or around April 2019. There was also evidence that Mr Hu and Ms Qiu received shareholder distributions and wages.
[101]Reasons, [120].
The judge noted that the financial records produced by H & Q indicated that the total level of sales from 8 October 2018 to 31 May 2020 (that is, after settlement) was approximately $2.5 million. However, her Honour considered that this figure was inaccurate given that the documents recorded unexplained expenses.[102] Moreover, a profit and loss statement for the period between October 2018 and June 2019 indicated that the business suffered a loss of $260,000, inconsistent with information provided to the CBA. For example, the profit and loss statement given by Ms Qiu to the CBA in August 2019 recorded a profit of $175,308.38 for the same period.[103]
[102]Reasons, [119].
[103]Reasons, [118].
The judge concluded that she could not be satisfied that the claimed operating losses were accurate, particularly having regard to her assessment of Ms Qiu’s credit and the inaccuracies identified by the accounting experts.[104] Her Honour found that there was a ‘myriad of reasons’ as to why the business was not performing as well as had been expected and that she was ‘not persuaded that the operating losses claimed are in fact attributable to the conduct of the defendants and/or to supervening events or misfortune, such as the pandemic, for which the defendants cannot be held liable’.[105]
[104]Reasons, [125]. As noted, the judge considered that Ms Qiu was not a credible witness: Reasons, [37]–[38], [125].
[105]Reasons, [126].
In respect of interest paid on the loan obtained from the CBA, the primary evidence relied upon by H & Q was the oral evidence of Ms Qiu that she had paid approximately $150,000 by way of interest to the lender. No documentary evidence was adduced to corroborate this. In that context and in light of her Honour’s finding that Ms Qiu was not a witness of truth, the judge was not prepared to allow H & Q to recover any sum paid to the CBA for interest on the loan.
Ultimately, the judge held that H & Q had not established any entitlement to damages for consequential loss, a conclusion which we consider to be correct. This part of the claim turned entirely upon the evidence of Ms Qiu, as her Honour noted. Given the nature of the business (in particular, that Ms Qiu was the sole controlling mind and the only person aware of the extent of cash receipts and cash payments to suppliers, employees or shareholders), there was no other source as to the cause of any loss or its quantification. Ms Cui relied entirely upon Ms Qiu’s instructions. Mr Smith relied solely on this issue on material provided by Ms Qiu which was substantially different between that initially given to him for the purpose of preparing the first report and that for the second report. Ms Wheeler’s opinion was also dependent on the quality of the documentation provided by Ms Qiu.
Once Ms Qiu’s evidence had been rejected by the judge (as her Honour was entitled to do), there was no other evidence adduced which could establish, as a matter of probability, the cause, nature, and extent of the consequential loss.
For reasons we shall now explain, the position in respect of proof of loss on the purchase of the business is considerably different.

The judge’s rejection of the claim for loss on the purchase of the business

As mentioned earlier, the judge gave short shrift to the assessment of the value of the business at the time of sale. That assessment is contained in two paragraphs of her Honour’s reasons which we set out in full:
As the case law makes clear, in order to recover the purchase price paid, as is sought, the Court needs to assess the difference, if any, between the price paid and the true value of the business. The fact that Mr Smith valued the business at nil as at the date of purchase based on the Hidden Financials and Melbourne Café’s lodged tax returns is not the end of the enquiry. The evidence needs to be examined post acquisition to illuminate the true value of the business as at the date of acquisition. Mr Smith said in his oral evidence that Parkville Café could have had some value at time of acquisition based on the Hidden Financials, but did not say what that value could be.
The fact is that the Court simply does not have sufficient information before it to assess with any degree of certainty what was the true value of the business as at the date of purchase. Whilst the Court can estimate damages as best it can, it is not permitted to guess. No independent audit has been done. It can be readily accepted that any figures produced by either side cannot be relied upon with any degree of certainty in circumstances where I have found that the principal witnesses are not witnesses of truth. I am not satisfied that the figures put forward by H & Q are a true and correct representation of the trading position since November 2018. The onus is on the plaintiff to prove with sufficient particularity and certainty the events after sale that arise from the nature or use of the asset, subject to due allowance for any changes in relevant conditions. In my view, the plaintiff has failed to discharge its onus of proof on this issue.[106]
[106]Reasons, [128]–[129].
Bearing in mind the principles we have adverted to at [108] to [117] above and with respect to the judge, we consider that this approach was flawed. In our view, her Honour fell into appellable error in the following ways:
•First, the judge incorrectly treated evidence of the post-acquisition performance of the business as a necessary component of the assessment of loss and damage under the ACL.
•Second, the judge erroneously demanded exact and complete proof of H & Q’s loss, thereby imposing a greater burden of proof on the claimant in an action for damages under the ACL than is ordinarily required in civil proceedings.
•Third, the judge without adequate explanation rejected (or failed to accept) the uncontradicted evidence of the expert, Mr Smith, and to a lesser extent, Ms Cui, in relation to the true or real value of the business at the time of acquisition.
•Fourth, the judge failed to recognise that this was a case in which the facts required to be proven were peculiarly within the knowledge of the wrongdoer, Mr Zhang, who was the controlling mind of Melbourne Café.
We now expand upon those points. First, it is apparent that the judge’s rejection of H & Q’s claim for loss on the purchase relied essentially upon her Honour’s findings with respect to the post-acquisition performance of the business:
As for damages, I was not satisfied on the evidence that the plaintiff proved with sufficient particularity, as it is required to do, the difference between the purchase price paid and the true value of the business as at the date of acquisition in November 2018. I was also not satisfied that H & Q proved it was entitled to recover the amount sought for its trading losses on the basis it failed to establish that the defendants’ conduct was the cause of its losses. There was evidence to show that the sales made by H & Q post settlement were not insubstantial, and that any subsequent operating losses claimed were due to events which were not the responsibility of the defendants but were caused by H & Q’s own conduct of the business and various supervening events. I was also not persuaded that the defendants should be ordered to pay H & Q any amounts representing interest payable on the loan from the Commonwealth Bank of Australia (“CBA”) used to fund H & Q’s purchase of the business. I find that H & Q did not prove any entitlement to contractual damages save as to a nominal sum assessed at $100.[107]
[107]Reasons, [6].
However, as the authorities make clear (in particular, the decisions of the High Court in Kizbeau and HTW Valuers), whilst a court can, in determining the value of the business at sale, take into account subsequent events (but only in so far as they shed light on changes to the conditions that existed at the time of acquisition), proof of those matters is not a necessary component of the assessment of the loss on the sale nor is it required in every (or indeed, any) case. To the contrary, the traditional way of proving a loss consistent with the rule in Potts v Miller[108] is to focus on the evidence relevant to the ‘true value’ at the time of acquisition.
[108](1940) 64 CLR 282, 298 (Dixon J).
So, in Keys Consulting, the Court held that ‘there are two elements to measuring the purchaser’s loss in a situation such as this, each of which must be established by the purchaser. Those two elements are the price paid and the true value of the business at the date of its acquisition’.[109] The Court illustrated the point when it identified the errors made by the judge below in that case, which included that:
the true value of the business at the date of acquisition should have been assessed in the light of events subsequent to the sale, where those events were capable of illuminating the true value at that date. For the reasons we have explained, we think that the post-sale financial performance of the business probably did illuminate its true value at the date of acquisition, but was not adequately taken into account, resulting in an artificial nil-value being assigned to it. Put another way, and perhaps more fundamentally, the error lay in failing to recognise that estimates of future earnings are inherent in the assessed true value at the date of acquisition, and that the examination of the actual post‑acquisition performance is a more reliable means of deriving (or testing) those estimated future earnings. Seen this way, taking account of subsequent revenues and profits as consequential gains, as if independent of true value, is an error.[110]
[109][2019] VSCA 136, [97].
[110]Ibid (emphasis added).
It is clear that here the judge appreciated the distinction between proof of trading loss and proof of loss on purchase of the business. However, on a fair reading and particularly given the contents of [128] of the Reasons (set out at [131] above), it is impossible to escape the conclusion that the judge wrongly regarded the insufficiency of the evidence post-acquisition as fatal (or close to fatal) to assessing the loss and did not adequately consider other evidence (such as that of the trading performance of the business prior to the sale and the opinions of Mr Smith and Ms Cui based on that material).
To put it succinctly, H & Q’s failure to establish the ongoing losses it claimed was not fatal to its claim for damages (or the assessment of those damages) for its loss on the sale of the business nor did it preclude the court from undertaking the valuation exercise based on the evidence adduced by H & Q. Indeed, as discussed, this was a necessary component of the exercise that should have been undertaken by the judge. We shall return to this issue when assessing the quantum of damages recoverable by H & Q.

Second, the judge’s repeated references to ‘sufficient particularity and certainty’,[111] it seems to us, led her Honour into error in determining the exact nature of the burden of proof cast upon H & Q. References to such words (in cases such as Keys Consulting) are intended only to demonstrate the need for a plaintiff to prove its case by adducing appropriate evidence; not by reliance upon mere assertion that the impugned conduct of the defendant led to loss.
[111]Reasons, [6], [129].
The source of these expressions is an old decision of the English Court of Appeal in Ratcliffe v Evans (‘Ratcliffe’).[112] This was an action for defamation which the jury found was established. The plaintiff contended that he had sustained a loss of business as a result of a defamatory statement but failed to adduce any evidence of particular loss. Bowen LJ described the evidence before the jury as follows:
The only proof at the trial of such damage consisted, however, of evidence of general loss of business without specific proof of the loss of any particular customers or orders, and the questions we have to determine is, whether in such an action such general evidence of damage was admissible and sufficient.[113]
[112][1892] 2 QB 524.
[113]Ibid 527.
Bowen LJ went on to say (and this is the part that has been picked up subsequently):
In all actions accordingly on the case where the damage actually done is the gist of the action, the character of the acts themselves which produce the damage, and the circumstances under which these acts are done, must regulate the degree of certainty and particularity with which the damage done or to be stated and proved. As much certainty and particularity must be insisted on, both in pleading and proof of damage, as is reasonable, having regard to the circumstances and to the nature of the acts themselves by which the damage is done. To insist upon less would be to relax old and intelligible principles. To insist upon more would be the vainest pedantry.[114]
[114]Ibid 532–3.
This Court in Keys Consulting was not setting down some specific standard of proof of loss in a particular type of case but rather intending to demonstrate that it was necessary in the circumstances of the case to establish reasonable proof of damage caused by the relevant wrong.
H & Q was required to prove its loss and damage as required by s 140(1) of the Evidence Act 2008. This Court has made it clear in recent decisions,[115] that the test in civil proceedings (qualified at times by the Briginshaw test in s 140(2)) is solely whether on the balance of probabilities a party has proved its loss and epithets such as certainty and particularity are to be avoided when determining whether a party has proved its case. So in this case, the question was whether H & Q had more probably than not proved a loss in accordance with the rule in Potts v Miller (being the difference between the price paid and real or true value) on its purchase of the business — no less and no more.
[115]See Vanta Pty Ltd v Mantovani [2023] VSCA 53 [68], [81]–[83] (Kyrou JA, Sifris JA and J Forrest AJA). See also GP Building Holdings Pty Ltdv Voitin [2022] VSCA 210, [89] (Niall, Sifris and Walker JJA).
It was uncontroversial that the first element of the rule in Potts v Miller was satisfied — H & Q had paid $2.4 million to acquire the business. In determining whether the second element was established (namely, the real or true value of the business at the time of sale), it was necessary to consider the contemporaneous documentary evidence (that is, prior to, and at the time of, the sale) and the evidence of the three accountants.
As the Court said in Keys Consulting, in carrying out this exercise, ‘the Court must estimate the damage as best it can’ applying the standard set by s 140 of the Evidence Act 2008. It seems to us that her Honour’s reasons demonstrate that she was diverted from her true task by focussing on words such as ‘certainty’ and ‘particularity’.
This issue of the valuation of the business at the time of sale could not be resolved by rejection of the oral evidence of the main players; nor by rejection of the documentary evidence post-acquisition on the basis that Ms Qiu was not credible. There remained the evidence contained in the hidden financials, and the 2017 tax return. It was only after analysis of all that evidence (and, most importantly, the financial figures for the 2017 financial year) had been conducted, at a forensic level, that her Honour could reach a conclusion on the balance of probabilities as to whether H & Q had proved its claim for damages. This was not undertaken. We reject the submission made by Melbourne Café and Mr Zhang on the appeal that ‘a full and considered examination of the evidence adduced by [H & Q] was undertaken’. Moreover, the judge did not consider the December offer for the purpose of assessing the value of the business at sale.
Importantly, this is not a case where the claimant in an action for damages brought under s 236 of the ACL simply failed to produce any evidence of the true value of the business, which it could have produced, and which was available to it (as described in Keys Consulting and much earlier in Ratcliffe). As far as we can tell, H & Q led all the evidence it could to endeavour to establish its loss on the purchase of the business. Even if there was some doubt about the precision or exactness in the evidence relied on by H & Q, what was clear from the hidden financials and the 2017 tax return was that the business was making a loss in each of the two financial years preceding the sale.
This leads to the third basis upon which we consider the judge fell into error. H & Q led evidence, primarily from its expert, Mr Smith, but also from Ms Cui, its accountant, relating to the ‘true’ or ‘real’ value of the business based on their assessment of the hidden financials and the 2017 tax return.
Often, the court will be presented with conflicting expert evidence as to the value of the asset acquired. In such cases, the court must ‘form and act on its own original opinion, taking such assistance as it can from the opinion of experts’.[116] The trial judge must subject the competing valuations to critical evaluation and should accept the evidence which best stands up to that critical scrutiny.[117] In Masters Home Improvement, this Court (Santamaria, Ferguson and Kaye JJA) described the task of the court as follows:
Where expert evidence is concerned, the Court’s role is to evaluate it critically. Where the evidence is cogent, it should not be ignored. In this regard, it is not part of the Court’s role to bring a third set of opinions into the arena, nor to piece together its own valuation. However, where there is conflicting expert evidence, it may be necessary to accept part of each expert’s evidence and reject other parts. In some circumstances, it may be necessary for the Court to make adjustments to the conclusion reached by an expert when that expert’s opinion is shown to be flawed in one or more respects or based on an incorrect assumption. Moreover if, after careful examination, the Court forms the view that a piece of expert evidence is not cogent, then it may be disregarded.
Bearing these matters in mind, it is clear that judges should not take on the role of an expert. If an evaluation of the whole of the evidence demonstrates that the experts’ opinions are not well founded, then the judge is left in the position of having to do the best that he or she can if satisfied that the plaintiff has sustained loss.[118]
[116]See O’Kelly Holdings Pty Ltd v Dalrymple Holdings Pty Ltd (1993) 45 FCR 145, 156 (Sweeney and O’Connor JJ).
[117]Caradi Pty Ltd v Secretary to the Department of Transport [2020] VSCA 197, [110] (Tate, Emerton and Osborn JJA), citing Masters Home Improvement [2017] VSCA 88, [420] (Santamaria, Ferguson and Kaye JJA). See also Yelland Security Pty Ltd v Plus Architecture International Pty Ltd [2021] VSC 416, [477] (Nichols J).
[118][2017] VSCA 88, [420]–[421], cited with approval in Viterra [2023] VSCA 157, [914] (Sifris, Walker and Whelan JJA). See also Chant v Curcuroto [2021] NSWSC 751, [275] (Hallen J).
Of course, it is not incumbent on a trial judge to accept the evidence of a particular expert — even if unchallenged. However, it seems to us that the judge simply did not subject the expert evidence in this case to any form of critical analysis and necessary determination.
As mentioned, Mr Smith valued the business at the time of sale based on the hidden financials, particularly, the profit and loss statement for the 2017 financial year and the 2017 tax return. On this material, he ascribed the business a nil value.
We pause to observe that, as the judge noted, Mr Smith conceded during cross‑examination that there might have been some small value to the business based on the hidden financials.[119] It was argued before us that Mr Smith’s evidence was somehow weakened by the fact that he was not asked by H & Q to provide a sum certain for that ‘some small value’. Whilst it might have been preferable to have such an estimate, we do not think it affects the general tenor of Mr Smith’s evidence as to the significant diminution in the value of the business based on the 2017 tax return and the figures within the hidden financials for the 2017 financial year.
[119]Reasons, [48].
Although not as detailed as that of H & Q’s expert, Ms Cui’s evidence (which we set out at [37] to [43] above) supported Mr Smith’s conclusion that the real or true value of the business at the time of purchase was nil.
Ms Wheeler was not given the hidden financials, nor was she instructed to value the business at the date of acquisition on the basis of those documents.[120] In particular, she was not given the 2017 tax return or the 2017 financial documents within the hidden financials consistent with that return. Thus, Mr Smith’s evidence on this critical point (that is, the value of the business at the time of sale based on the hidden financials and the 2017 tax return) went unchallenged. The judge, however, in concluding that there was insufficient information before the court to assess the value of the business at the point of acquisition, effectively ignored Mr Smith and Ms Cui’s evidence and the underlying documentation, including the 2017 tax return.
[120]Reasons, [51].
In respect of the 2017 financial year, Melbourne Café and Mr Zhang correctly conceded at trial that they faced a significant hurdle in assessing the true financial position of the business.[121] Essentially, this hurdle was erected by Mr Zhang and had at its heart his mendacity. It was accepted that there were inaccuracies in the represented financials. Although not directly on point, it is worth noting that, with respect to the accuracy of the represented financials, Mr Smith said as follows:
The Represented Financials in FY17 has sales that is $530,000 greater than the sales on the FY17 tax return. Therefore, the represented net profit of $264,598 becomes a net loss of $265,402 in the tax return (a difference of $530,000). This also caused the gross profit margin to decrease from 72% as per the Represented Financials to 61% in the tax return.
[121]Reasons, [108].
In order to illustrate these matters, Mr Smith prepared the following table:
To address this formidable obstacle, Melbourne Café and Mr Zhang sought to rely on the draft of the amended tax return for the 2017 financial year (referred to at [18] and in the evidence of Mr Zhang set out at [50] above), which they said conformed generally with the 2017 financial statements contained in the represented financials. However, this document was prepared by Mr Zhang’s accountant on his instructions after this litigation had commenced and on the advice of his solicitors. For reasons that were never explained, it was not lodged and its source material had been destroyed by Mr Zhang.[122] Mr Smith correctly said that he was not aware of any evidence capable of corroborating the increased income recorded in that document.
[122]See n 12 above. We note that there was no suggestion on the appeal that the amended tax return had been lodged with the ATO.
Mr Zhang’s evidence was breathtakingly disingenuous. One is left with the distinct impression after reading the transcript that he would say anything regardless of its veracity if he perceived that it improved his financial position. To the ATO in 2017 the business was a loser; to the prospective purchaser it was a winner. His evidence was in exactly that vein.
Unsurprisingly, Mr Smith relied on the 2017 tax return in providing his ultimate opinion that the business had little or no value at the time of sale. Mr Smith gave the following evidence as to why he preferred the 2017 tax return:
Could you tell Her Honour why, in your opinion, you would rely on the lodged, completed tax return rather than the incomplete tax return for FY 17?---I think until a document is lodged, it is really in draft form, or until there's evidence that it's been lodged, then it really is a draft. If it has been lodged, then it’s obviously a declaration by the company and more particularly, the public officer that that represents the income tax position of the company for that year in accordance with tax legislation.
What’s the status of an incomplete tax return, in your opinion?---It’s draft, essentially.
We agree and regard the draft amended 2017 tax return as having no probative value given its provenance and purpose.
Mr Smith said further that the 2017 tax return that had been lodged contained ‘the only official figures’ available to him because it had ‘the gravitas of a declaration by the directors and company to a statutory authority’ and that ‘signing off a tax return gives it some greater official gravitas’. In this respect, we note that the tax return form prescribed by the ATO contains a ‘Tax Payer’s Declaration’ which requires the tax payer to declare that the information contained in the tax return, all attached schedules and any additional documents is true and correct. The form notes that ‘income tax law imposes heavy penalties for false and misleading statements in tax returns’.
A fact in issue may be proved by various means, however, only the best of those means is admissible. Ordinarily, the best evidence will be the original version of a document, for example. The strict application of the best evidence rule has been abrogated by statute.[123] Despite this, the rule has some, albeit limited, application to documentary evidence where the issue is not whether the evidence is admissible, but rather, the probative value of the evidence.[124]
[123]Evidence Act 2008 s 51.
[124]Collier v Rigby Cooke [2004] VSC 488, [13] (Balmford J); LexisNexis, Halsbury’s Laws of Australia (online at 14 July 2023) 195 Evidence, ‘Best Evidence Rule’ [195-140], [195-145], [195-150].
The High Court in Golden Eagle International Trading Pty Ltd v Zhang said as follows:
Despite criticism of it, the ‘best evidence rule’ has not fallen completely into desuetude. Subject to the exigencies of litigation, the circumstances of the parties, and the other settled and statutory rules of evidence, it has vitality. An aspect of the rule is that courts should act upon the least speculative and most current admissible evidence available.[125]
[125](2007) 229 CLR 498, 500 [4] (Gummow, Callinan and Crennan JJ) (emphasis added) (citations omitted).
Accepting that the 2017 tax return was a completed document that had been lodged with the ATO and bore the taxpayer’s (or his agent’s) declaration as to its accuracy — and notwithstanding Mr Zhang’s evidence as to its inaccuracy which we reject — we consider that this document in the context of the shifting sands of this case provided a reasonable factual basis upon which Mr Smith could form an opinion. In circumstances where there was limited available evidence, the judge ought to have concluded that the 2017 tax return, together with the 2016 and 2017 financial statements within the hidden financials, were of sufficient probative value upon which to reach a conclusion as to the true or real value of the business at the time of sale. In other words, this was the best available evidence as to the true or real financial position of the business for the 2016 and 2017 financial years and was critical in assessing its value at sale. Moreover, Melbourne Café and Mr Zhang chose not to challenge Mr Smith’s opinion based on these documents.
Mr Smith’s evidence in general as to the existence of a substantial loss in the two financial years (and particularly that of 2017) preceding the sale of the business should have been accepted. It was cogent, consistent with the evidence of Ms Cui and unchallenged. Moreover, it was the least speculative and most current admissible evidence available. It was a sufficient basis for the opinion expressed by him.
Fourth and finally, the judge did not acknowledge the peculiar difficulties facing H & Q’s case as a result of the conduct of Melbourne Café and Mr Zhang. The evidence to which we have just referred should have been evaluated in that light, notwithstanding the judge’s rejection of the evidence of Ms Qiu and Mr Zhang. If it had been, it would have fortified the reliance on the 2017 tax return and the hidden financials in determining whether a loss had been proved and, if so, to what extent.
The judge found that Mr Zhang behaved deceitfully and had destroyed documents relevant to the business’ performance pre‑acquisition.[126]
[126]Reasons, [40].
Once it could not rely upon post-acquisition evidence to prove its loss, H & Q was constrained, as we have seen, to relying upon evidence solely within the control of Melbourne Café and Mr Zhang — the wrongdoers.
As mentioned earlier, the burden of proof will be discharged ‘by adducing evidence of some fact the existence of which, in the absence of further evidence, is sufficient to justify the drawing of an inference that it is more likely than not that the event occurred or that the state affairs exists’.[127] This process of inferential reasoning is informed by the fundamental principle established in Blatch v Archer that ‘all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted’.[128]
[127]Henderson v Queensland (2014) 255 CLR 1, 27 [89] (Gageler J).
[128](1774) 98 ER 969, 970 (Lord Mansfield). See also Henderson v Queensland (2014) 255 CLR 1, [91] (Gageler J); BCI Finances Pty Ltd (in liq) v Binetter (No 4) (2016) 348 ALR 227, 249–50 [125] (Gleeson J) (‘BCI Finances’); Coshott v Prentice (2014) 221 FCR 450, 468–9 [80] (the Court).
In Ho v Powell, the New South Wales Court of Appeal explained the operation of the principle in Blatch v Archer where there is only limited evidence available:
[I]n deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision …
In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so.[129]
[129](2001) 51 NSWLR 572, [14]–[15] (Hodgson JA, Beazley JA agreeing at [1]), quoted in BCI Finances (2016) 348 ALR 227, 249–50 [125] (Gleeson J).
Indeed, there may be cases where the facts required to be proven by the plaintiff are peculiarly within the knowledge of the defendant. In such a case, ‘if the plaintiff provides sufficient evidence from which the matter may be inferred, the defendant then comes under an evidential burden’.[130] In other words, ‘slight evidence of that fact may suffice to prove the fact unless that evidence is explained away by the party with the knowledge of the fact’.[131]
[130]BCI Finances (2016) 348 ALR 227, 249 [122] (Gleeson J) quoting Krstic v Brindley [2006] NSWSC 1414, [26] (Campbell J).
[131]BCI Finances (2016) 348 ALR 227, 249 [123] (Gleeson J) citing Hampton Court Ltd v Crooks (1957) 97 CLR 367, 375 (McTiernan, Fullagar, Kitto and Taylor JJ); Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333, [121] (Handley JA, Hodgson JA agreeing at [273]).

The presumption that the evidentiary burden shifts to the defendant applies a fortiori where the wrongdoer has destroyed or failed to produce evidence which is required to be proven by the innocent party to establish its loss or damage: ‘it is just that the wrongdoer should suffer the resulting uncertainty’.[132] Where evidence is destroyed or suppressed by a party, the court may infer that the facts essential to that party’s position are lacking or that a particular part of its case is weak.[133]
[132]Berry (2020) 271 CLR 151, 169 [29] (Bell, Keane and Nettle JJ).
[133]BCI Finances (2016) 348 ALR 227, 251 [133]–[135] (Gleeson J).
This proposition fortifies our conclusion that the evidence of Mr Smith and Ms Cui, based on the hidden financials and the 2017 tax return, should have been accepted by the judge. Employing the rule in Potts v Miller, a substantial loss had been established — the only remaining issue is the quantification of that loss which turns upon establishing the value of the business at the time of the purchase.

Assessment of the loss

H & Q established on the balance of probabilities that the true or real value of the business at the time of purchase was either nil (based on Mr Smith’s evidence) or in the region of $250,000 (based on an offer to purchase the business).
Before us, it was contended by H & Q in oral argument that the true or real value of the business at sale was nil. Anticipating that Melbourne Café and Mr Zhang would urge the Court to reject that submission, counsel for H & Q made the alternative argument that even if the business had some value, it was either:
(a)no more than $250,000, based on an offer to purchase the business from H & Q; or
(b)a value within the range of $35,000 to $70,000, based on Mr Smith’s evidence.
We have already provided a brief overview of Mr Smith’s evidence as to the value of the business at the time of sale.[134] It is necessary to elaborate a little further.
[134]See [66] above.
Mr Smith was asked to calculate the value of the business at the time it was purchased by H & Q based on the hidden financials, stock on hand and the Royal Children’s Hospital lease. His conclusion was as follows:
Based on the Hidden Financials (refer table), the business was making a loss before and after depreciation.
…
As per paragraphs 4.6 and 4.7, the lease has the remaining term up to 30 November 2026. Hence, by taking over the lease, the buyer would have taken over an ongoing lease liability for the remainder of the lease till November 2026.
Therefore, any value of plant and equipment would have been offset by the ongoing liability inherent in the lease.
Accordingly, in my opinion, the value of the business was nil at the time it was purchased by [H & Q].[135]
[135]Emphasis added.
We pause to observe that Mr Smith was provided with copies of the lease agreements for each of the two tenancies from which the business was operated at the Royal Children’s Hospital. In his report, he noted that:
(a)the base rent as at 1 December 2015 for the two tenancies was $139,312 (excluding GST) and $26,7413.13 (excluding GST) per annum respectively; and
(b)the rent for each tenancy would increase by 5 per cent for each year between 1 December 2020 and 1 December 2025.
Notwithstanding this conclusion, Mr Smith accepted that the business may have ‘some small value’. Specifically, he said that the hidden profit and loss statement for the 2017 financial year revealed that the EBITDA for the business was $35,675, to which a capitalisation rate of 2.0 should be applied.
In cross-examination, Mr Smith explained that a capitalisation rate of 2.0 is more appropriate than 4.0 where the EBITDA is low:
… certainly, you wouldn’t be applying a 4 times multiple to something that’s making $35,000 a year, or making — the 4 multiple assumes that you’re making $500,000 a year. That’s a substantial enough business. When you start to go down to lower levels, the risk increases that even a small gain might go to a loss. So if anything, yes, there could potentially be some value but it would be fairly small.
That a lower multiple is appropriate for a small EBITDA is consistent with the fact that the capitalisation rate reflects the risk and opportunities of the business (as was conceded by Ms Wheeler).[136] In this respect, it is necessary to have regard to the explanation given by Mr Smith in his report as to the ‘methodology for valuation of the business’. In his report, Mr Smith explains the capitalisation rate (that is, the ‘multiple’):
Capitalisation of future maintainable earnings – This is the most commonly used method of valuing a business. It involves capitalising the future maintainable earnings at a multiple that reflects the risk and opportunities of the business and the stream of income it generates.
[136]Ms Wheeler conceded that a capitalisation rate of 4.0 is not appropriate where the EBITDA is so low (although she did not specify what multiple would be appropriate).
He explained further that when capitalising future maintainable earnings, it is necessary to apply a ‘capitalisation rate’ to the assessed earnings, that is the EBITDA. The capitalisation rate ‘is calculated with reference to the return on investment that would be required by a reasonable prudent investor in this type of entity and reflects the risks and opportunities inherent in the business’. This requires consideration of ‘general economic factors, industry related factors and business related factors’ (e.g. inflation rate, interest rates, unemployment rates, the nature of the business as well as its liabilities and historical trading).
The evidence as to the December offer was, as the judge noted, that Ms Qiu had received an offer from an unidentified third party to purchase the business for $250,000.[137]
[137]Reasons, [34]. See above at [19] and [34].
In cross-examination, Ms Qiu gave the following evidence about the December offer:
[Counsel]: If I could just ask you to turn to 2481 which is in the original court book, the third volume. This is an activity report from a broker you had engaged to look to see if there’s any interest for someone to purchase your business, is that correct?---Yes.
And you had one offer on 4 December 2019, someone willing to purchase the business for $250,000, correct?---I can’t remember the specific date but that was about the right figure.
If you look at 2483, there’s an activity time line. In the middle of the page it talks about a phone call and email on Wednesday, 4 December. So you had the opportunity in December 2019 to sell the business for $250,000, didn’t you?---Correct.
In the Reasons, the judge dealt with the question of the status of the offer. Her Honour noted the submissions of H & Q as follows:[138]
The plaintiff suggests the following three methodologies whereby the Court may approach the award of damages:
…
(c) by awarding damages for the difference between the purchase price and the ‘left in hands’ amount, that is the value of the [business] at a later date, such as an on-sell date or the date of Trial (the business is still trading at no profit and so its value now is nil or at most $250,000 given the offer made for it).
[138]Reasons, [113(c)].
Her Honour appears to have accepted that the offer may have indicated the current value of the business at the time of trial. However, as has been mentioned, no finding in this regard was made by the judge.
In determining the real or true value of the business at the time of sale, a court is required to make a finding as to its value at the time of sale and not at the time of trial.[139]
[139]See Makings Custodian Pty Ltd v Orchid Avenue Realty Pty Ltd [2018] QCA 33 (Gotterson JA, Morrison JA agreeing at [102], Henry J agreeing at [103]).
In essence, the question is whether the Court should accept:
•the opinions of Mr Smith and Ms Cui (discussed above) that the business had no value; or
•the evidence of the real life experience that an offer of $250,000 was made some twelve months after the business commenced operations under the management of H & Q as reflecting the value at the time of sale.
As discussed at some length earlier (see [134] to [135] above), subsequent events may be considered in order to determine true or real value of the business. We do not see any reason to distinguish between the trading performance of a business and a subsequent offer to purchase that business as being relevant to a determination of the real value of the business the time of sale. It follows that the December offer has genuine probative value in relation to the value of the business at the time of purchase of the business.
In this regard the following factors are pertinent. First, it is not disputed that the December offer was a genuine offer and that it was open to be accepted by Ms Qiu. It is not to the point that the offer was rejected by her because she considered that it was insufficient. Second, the business has continued to operate under Ms Qiu’s stewardship until the present time. Third, the lease was a long lease of an established trading business with guaranteed clientele in a protected location. There was only one other competitor within the hospital premises. Finally, and notwithstanding the liability potentially created by the acquisition of the lease, the goodwill, stock in trade and the fixed plant must have had some residual value — particularly to a purchaser keen to continue the business, as appears to have been the case with the maker of the December offer.
In these circumstances, a commonsense approach leads to the conclusion that the business had a residual value at the time that the contract was entered into, notwithstanding the evidence of Mr Smith and Ms Cui. This is consistent with Mr Smith’s concession that the business at time of acquisition had some value but that it was fairly small.
We readily accept that this is an imperfect science and that this is a case of a court doing the best it can on the evidence as adduced at the trial. We also concede that an offer made at a later point in time may have factored into it matters not present at the time of acquisition (favourable or unfavourable). That said, we do not accept the pessimistic views of Mr Smith (somewhat qualified) and Ms Cui that the business had a nil value. The fact that an opening offer was made only 12 months after the business commenced to operate demonstrates otherwise. As does the fact that an experienced businessperson such as Ms Qiu rejected the offer out of hand and has continued to operate the business. On the other hand, we can see no basis upon which to fix on a figure higher than that contained in the December offer.
We conclude that the true or real value of the business at the time that it was purchased by H & Q was $250,000.
Applying the Potts v Miller rule, damages should be assessed at $2,150,000. This amount is the difference between the purchase price ($2.4 million) and the true or real value of the business at the time of purchase ($250,000).

Conclusion and disposition

We have concluded that the application for leave to appeal should be granted and the appeal allowed on grounds 1 and 2. Ground 3 is not made out.
We have also concluded that damages caused by the conduct of Melbourne Café and Mr Zhang should be assessed at $2,150,000.
Paragraph 1 of the orders made by the trial judge on 26 July 2022 should be set aside and in its place, it be ordered that there be judgment for H & Q.
We will make orders accordingly.
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[2023] VSCA 200

25 August 2023