IWPE Nominees Pty Ltd & Anor v Salera & Anor
[2008] VSC 188
•2 June 2008
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
F. 5682
No. 2027 of 2004
| IWPE NOMINEES PTY LTD (ACN 098 527 318) and MGB EQUITY GROWTH PTY LTD (ACN 085 286 228) | Plaintiffs |
| v | |
| PATRICK SALERA and DAMILMIND PTY LTD (ACN 006 264 651) | Defendants |
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JUDGE: | BYRNE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 11–14, 19, 26 March, 28 April, 1, 5–8, 12–15, 19–21 May 2008 | |
DATE OF JUDGMENT: | 2 June 2008 | |
CASE MAY BE CITED AS: | IWPE Nominees Pty Ltd v Salera | |
MEDIUM NEUTRAL CITATION: | [2008] VSC 188 | |
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TRADE PRACTICES - Investment in trading enterprise - misleading and deceptive conduct - whether representations were false – loss and damage – amount invested - interest which might have been earned on the money invested – whether investor mismanaged the enterprise.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr MR Pearce SC and Ms Christine Boyle | Deacons |
| For the Defendants | Ms E Ruddle (from 28 April 2008) | Bleyer Lawyers |
HIS HONOUR:
1. Introduction
The Betta Foods confectionary manufacturing business was established in about 1954 by Pietro Salera. The business appears to have grown over the past half century; it achieved total sales in 2002 of $30m. By this time, however, the management of the business had passed to the first named defendant, Patrick Salera, a son of the founder, and the structure of the business itself had become somewhat complicated. I shall refer to Patrick Salera, the principal actor in the events with which this litigation is concerned, as Mr Salera. His father, I shall refer to as Mr Salera senior. There were two operating companies, Betta Foods Australia Pty Ltd (“BFA”) which, as trustee for the Betta Foods Unit Trust, was responsible for the manufacturing and distribution activities in Australia and Betta Foods New Zealand Pty Ltd (“BFNZ”) which was responsible for these activities in New Zealand. In addition, the Betta Foods factory premises situate at 25-59 King William Street, Broadmeadows were owned by Anatel Pty Ltd. Anatel was a company whose share capital was held as to 50% by Mr Salera, 25% by Mr Salera senior and 25% by Mr Salera’s brother Gino Luigi Salera. Other companies within the Salera group of companies are of no present concern.
Another company within the Salera group is the secondnamed defendant Damilmind Pty Ltd. Damilmind, as trustee of the P Salera Family Trust, owned a valuable commercial property at 2-6 Glenferrie Road, Malvern.
By the end of the calendar year 2002 Mr Salera was seeking an injection of capital into the business and he had discussions with representatives of a private equity fund which was minded to make such an investment. This fund is held in trust by the two plaintiffs, IWPE Nominees Pty Ltd and MGB Equity Growth Pty Ltd. The fund, or perhaps these funds, were referred to collectively as Investec and I shall adopt this terminology unless it be necessary to differentiate between the funds or their trustees.
The negotiations for the investment were conducted on behalf of Investec by John William Murphy and Gregory James Robertson, each of whom was a director of MGB Equity Growth. They were also directors of Investec Wentworth Private Equity Pty Ltd, the manager of the MGB Equity Growth Unit Trust, the trustees of which are the plaintiffs to this proceeding. In late 2002 a proposal was developed whereby Investec would provide $10m which was to be applied as to $3m to enable Mr Salera to buy out the interests of various family members and, as to the balance, for the purposes of the business. These negotiations took place from late 2002 and included the undertaking of a due diligence inquiry in January 2003.
By early 2003 the proposal had developed somewhat. The total advance remained at $10m but $4m was to be made available for the Salera family buy out. The advance was to be made by each of the Investec companies purchasing convertible notes to the value of $5m. A new company, Betta Foods Group Pty Ltd (“BFG”) was to be registered to act as holding company for the operating entities and the holder of the units in the unit trust, and the convertible notes to be issued to the investors would be issued, as to $6m by BFG and as to $4m by Anatel.
These arrangements were consummated by the parties entering into a number of agreements on 17 April 2003 and on 26 May 2003 and the money was paid on or about the latter date. Among the agreements dated 17 April 2003 were a Convertible Note Deed relating to BFG for the subscription of convertible notes to a value of $6m and a similar deed relating to Anatel for the subscription of convertible notes in that company to a value of $4m.
The investment by Investec was not a success. Notwithstanding the substantial injection of working capital, the business continued to suffer losses, albeit at a diminished rate. In the 2002 annual accounts losses were shown as about $1.3m. In the 2003 accounts they were $5.6m. In the five month period to November 2003 they were $1,230,031. Accordingly, on 24 December 2003 Investec agreed to provide a further $2m to the business in exchange for convertible notes in BFG to that value. This was achieved by three tranches: the first, comprising $800,000, was paid on 24 December 2003.
In November 2003, also, Investec appointed Michael Stephen Hawkins Royal, an accountant experienced in costing, to undertake a broad review of capital expenditure forecasts, pricing and profit and loss. Mr Royal proposed a strategy of focussing on profitable products and customers, cost cutting and the increasing of prices. Mr Salera, as CEO, signed off on these recommendations and they were implemented in the New Year 2004.
As will appear, this strategy and others which Mr Royal proposed and himself implemented when he became CEO on 1 April 2004, were much criticised before me by Mr Salera and members of the staff. Counsel for Investec made much of the fact that Mr Salera endorsed the strategies in the monthly management accounts which he signed off as CEO. They contended that the criticisms which he now makes should not therefore be directed to Mr Royal who was not the decision maker. To my mind it would be unrealistic for me to ignore the situation which then existed at Betta Foods. In late December 2003 Mr Royal was employed to take a full senior management role in BFA. The evidence of other witnesses showed that, thereafter, he was the person to whom the second level management reported. Mr Salera’s position diminished. What had previously been run in a relatively informal way as a family business, was subject, increasingly, to the control of Investec and its more professional consultants. The reaction of Mr Salera and his management was, to a greater or lesser extent, that of tolerating the new approach and subjugating their dissatisfaction in the hope that the new and uncomfortable approach would turn the business around.
The second tranche of the December advance of $600,000 was injected on 27 January 2004 and the third, of $600,000, on 23 March 2004.
Even so, the losses continued. The total losses for the nine months to end March 2004 were nearly $3.5m.
In circumstances which will appear, Investec on 30 March 2004 entered into a Settlement Deed under which it agreed to inject a further $2m into the business in exchange for more convertible notes. The deed also provided that, in certain circumstances, Investec might convert its notes to acquire 100% of BFG share capital. Mr Salera’s position as CEO passed to Mr Royal. Notwithstanding that he remained on the board and was retained as a consultant, the managerial role of Mr Salera ceased.
On 12 August 2004 Investec put BFA into voluntary administration and BFA entered into a deed of company arrangement on 16 September 2004.
Meantime the losses continued. For the year 2004 the EBT showed a loss of $6.758m and for the year 2005, $5.555m. In March 2005 the shares in BFNZ were sold for $NZ3.14m.
After 31 March 2004 Investec provided further funds to enable the business to continue. Those provided in April 2004 were in exchange for convertible notes to a value of the payment; otherwise all payments were by simple advance. There were some repayments. The position is as follows.[1]
[1]At this stage, I ignore the fact that certain of these payments and repayments were made by one or other of the plaintiffs.
Date
Advance
Repayment
Balance
30 April 2004
$800,000
$800,000
8 September 2004
$200,000
$1,000,000
1 November 2004
$200,000
$800,000
19 November 2004
$200,000
$1,000,000
24 December 2004
$250,000
$1,250,000
28 February 2005
$200,000
$1,450,000
1 April 2005
$200,000
$1,250,000
10 June 2005
$400,000
$1,650,000
23 December 2005
$100,000
$1,750,000
3 January 2006
$100,000
$1,850,000
28 April 2006
$300,000
$2,150,000
29 May 2006
$600,000
$2,750,000
17 August 2006
$600,000
$3,350,000
7 September 2006
$300,000
$3,650,000
3 October 2006
$1,000,000
$4,650,000
31 October 2006
$1,300,000
$5,950,000
6 July 2007
$192,000
$6,142,000
9 July 2007
$192,000
$6,334,000
2 October 2007
$160,000
$6,494,000
3 October 2007
$160,000
$6,654,000
On 16 April 2005 Alexander Thomas Sloan replaced Mr Royal as CEO and on 1 July 2005 Simon John Crone became CFO. Under their administration the fortunes of the business improved so that EBT on 30 June 2006 showed a loss of less than $1.5m and in the following year a profit of almost $2m.
By agreement dated 24 December 2007 Investec agreed to sell all of its convertible notes to Mr Sloan and Mr Crone. The consideration for this was $7.5m payable in 2012. There is to be a discount of the price if the purchasers agree to make early payment. This means that, if payment is made by 31 August 2008, the required amount will be $3.5m.
2. The Investec Claims
Investec brought this proceeding on 21 June 2004. It seeks damages in the sum of $26m representing the totality of its loss as the consequence of its investment in Betta Foods.
The claims are not brought against the borrowers; they are against Mr Salera for damages for misleading and deceptive conduct and against Damilmind for the same and also for damages for breach of contract. The conduct relied on comprises four representations which are said to have been made by Mr Salera and Damilmind in the contract documentation under which the advances were made. As will be seen, the fifth claim against Damilmind for breach of contract is of no present significance.
It was provided in cl 7.1 of each of the Convertible Note Deeds that the Company, BFA, BFG or Anatel, as the case may be, and the warrantors, Mr Salera and Damilmind, gave to Investec a number of warranties. General provisions relating to these warranties include the following:
7.2The warranties given under clause 7.1 are taken to be repeated on each date that any amount is outstanding under … [the] Convertible Notes on the basis of the facts and circumstances as at that date.
7.3The Warranties … are not extinguished or affected by any investigation made by or on behalf of [Investec] in relation to the structure, business or financial or trading position of the Group or in relation to the condition, assets or liabilities, or financial performance or prospects of the Group.
7.4The Company and the Warrantors acknowledge that [Investec] have entered into this Deed in full reliance on the Warranties … The Company, the Guarantors and the Warrantors acknowledge that they have not relied on and will not rely on any representation or warranty made by or on behalf of [Investec] in deciding to enter into this Deed or to exercise any right or perform any obligation under it.
…
7.6Subject to clause 7.9, each of the Warranties and the Acquisition Warranties is qualified only by any factual matters to the extent that they are fully, fairly and accurately disclosed in the Disclosure Letter, but are otherwise subject to no qualification whatever. No letter, document or other communication will constitute a disclosure for the purposes of this clause unless it is attached to the Disclosure Letter.
…
7.11The Warrantors undertake to [Investec] that they will immediately disclose (after becoming aware) in writing to [Investec] any matter or thing which may arise or become known to them before the Completion Date which may reasonably be considered to be inconsistent with any of the Warranties or the Acquisition Warranties as if they were continuously repeated between the date of this Deed and the Completion Date.
The warranties themselves, which are numerous, are set out in schedule 4 to each of the Convertible Note Deeds. They include the following which are relied on by Investec in this proceeding:
2.2Neither the Company nor any Guarantor has committed under any agreement to which it is a party or by which it is bound, a default which might have a material adverse effect on the issue, redemption, or conversion of the BFG Convertible Notes.
…
3.1None of the property of the Company, and no property of any of the Guarantors, is subject to an Encumbrance other than a Permitted Encumbrance.
…
14.1So far as the Warrantors are aware, the accounts and all other financial statements and reports relating to the Group that have been given to [Investec] or their advisers have been prepared in accordance with the laws of Australia and (unless inconsistent with those laws) generally accepted accounting principles consistently applied.
14.2The accounts and all other financial statements and reports relating to the Group that have been given to [Investec] or their advisers give a true and fair view of the financial condition of the Group as at the date to which they are made up and of the results of operations of the Group for the period that they cover.
…
15.1Since 30 June 2002:
(1)the business and activities of each member of the Group have been carried on in the ordinary and usual course;
(2)other than as fairly disclosed in the management accounts, there has been no material adverse change in the financial or trading position, performance or prospects of any member of the Group;
(3)no material changes have occurred in the assets or liabilities of any member of the Group; and
(4)no member of the Group has, other than in the ordinary course of trading:
(a)acquired or disposed of or agreed to acquire or dispose of any asset; or
(b)assumed or incurred or agreed to assume or incur any liability, expenditure or obligation.
…
15.3The management accounts of the Group show a materially accurate view of the assets and liabilities and trading position of the Group.
18.1The Warrantors have made all reasonable and careful enquiries to establish the truth of those warranties which are qualified by reference to the knowledge, information, belief or other awareness of the Warrantors.
Four representations are asserted in the statement of claim. First, that an item of plant, the biscuit line, had a value of $4.5 million. Second, that another item of plant, a sugar cone machine had a value of $1.5 million and that it was not encumbered. Third, that the value of stock of spare parts of BFA was $1,570,038. Fourth, that BFA was not in breach of any relevant agreement. These representations were contained in warranties given by Mr Salera and Damilmind and are said to be false.
In was not in issue that the warranties were made or that they constituted representational conduct for the purposes of s 9 of the Fair Trading Act 1999 and s 52 of the Trade Practices Act 1974. The contest before me was as to their truth and as to whether Investec relied upon them and as to the resulting loss.
The contractual claim against Damilmind arose from the fact that some $4m was paid by it to Mr Salera senior and his wife. This was said to be a breach of a covenant that Damilmind as trustee of the P Salera Trust would not pay money to the trust beneficiaries before a certain date. This claim was resisted but it was ultimately not pressed because the loss alleged was that the payment had the consequence that Damilmind, having in this way divested itself of an asset, was less able to meet the judgment which Investec expected to recover for Damilmind’s misleading and deceptive conduct. It became apparent that this breach of contract claim added nothing to the other claims because it, too depended upon Damilmind having the resources to meet the judgment.
There are also substantial counterclaims which were also relied on by was of set off. I shall deal with these later.
3. The Biscuit Line Representation
The biscuit line was a collection of machinery including an oven standing in a partly assembled condition at the Broadmeadows factory. It did not appear as an asset of BFA in the books of account as at 30 June 2002. It was, nevertheless, seen as a valuable asset by Mr Salera and he said that he had paid $4-5m for it. Accordingly, this asset was dealt with in the disclosure letter given by Mr Salera and Damilmind pursuant to cl 7.6 of each of the Convertible Note Deeds in these terms:
2Without limiting the information contained in the binders referred to in numbered paragraph 1, Damilmind and Salera make the following specific disclosures against the warranties listed below:
…
(c)Warranty 15.1(3): BFA has purchased a biscuit oven valued at approximately $4.5 million. The asset does not appear as an asset of BFA in its financial records but will be brought to account as an asset as soon as possible. The biscuit oven is as at the date of this Disclosure Letter located at the Broadmeadows Property and is in the process of being assembled for use.
To assist with the acquisition of the biscuit oven, BFA has been advanced 2 loans details of which are contained in annexure B. Repayment of the loans have been personally guaranteed by Patrick Salera. BFA has incorrectly recorded the loans as a credit against the loan account of Patrick Salera in BFA. Both loans should be recorded as unsecured long term liabilities. BFA will so record those loans.
Investec says that Mr Salera and Damilmind were guilty of misleading and deceptive conduct because the biscuit line had a value much less than $4.5m. The valuations in evidence were:
Valuer Date $ Basis Hannah September 2002 500,000 Orderly liquidation Hannah March 2004 300,000 Orderly liquidation Wollaston May 2004 20,000 Auction realisation Schiller January 2006 50,000 Orderly liquidation
The issue here was no mere contest about valuations. The evidence showed that the biscuit line is a complex piece of machinery. Mr Salera said that, over a period of months, if not years, he purchased different components from different sources in Melbourne, Adelaide and overseas. The purchaser appears not to have been put consistently through the books of BFA and payments were sometimes made by Mr Salera from his own funds. In the course of the pre-contractual dealings, before the advance was made, he produced an invoice which was said to support his estimate of the value of this machine. This is invoice No. 99302 dated 22 November 2001 from Butler & England Ltd in the UK for an amount of GBP1,550,000. This amount is noted on the invoice as the equivalent of A$4,222,282. The invoice is stamped as having been paid on 21 December 2001 by cheque No. 21067.
Mr Salera accepted this invoice was fictitious; it was amended by him from an invoice obtained from Butler & England by email when he requested one to cover the machinery. He said that the Butler & England invoice was amended by him with the authority of that company but, in any event, he accepted that no transaction such as that as was described in the invoice ever occurred. He said that he produced the invoice because Mr Murphy and Mr Robertson had told him they needed an invoice to support the asset in the balance sheet and that, if he did not have one, he should create one. This, he said, occurred during a meeting in the course of the due diligence exercise. The BFA chief financial officer, Ennio Di Genova, confirmed that, when the Investec representatives asked for an invoice, they said he should obtain one and that in response to his inquiry as to how this might be done, it was suggested that one be created. Bill Kikos, who was then the factory manager of BFA had a similar recollection. He said that Mr Robertson said at the meeting that in order to bring the biscuit line on to the BFA plant register, it would require an invoice. He said, too, that there was a comment made to the effect of creating an invoice. Each of these three witnesses maintained their account while accepting that they could not recall the precise words used.
Both Mr Murphy and Mr Robertson denied this. Mr Murphy said that he never attended a meeting such as Mr Salera described. He said that he spoke with Mr Salera about getting the biscuit line on to the BFA books but that he recalled no discussion about an invoice. Indeed, he said that he did not ever see the Butler & England invoice. Mr Robertson said only that he asked Mr Salera to produce evidence as to the value of the business. He said that the document was produced by Mr Salera in the course of the due diligence investigation, saying that he, Salera, had bought the plant from Arnotts through an English agent and had paid $4,222,282, as appears on the invoice. They both said that they understood from Mr Salera that he had bought the plant in question as a single item from Arnotts through an English agent for $4-5m.
I return to the invoice document. It is stamped showing that the account was approved, paid and entered. The paid stamp gives the date of payment as 21 December 2001, and the cheque number as 21067. This cheque number is also fictitious; there was no such cheque.
An examination of the Betta Foods computer by forensic analyst, David John Caldwell, has disclosed that the document is present in electronic form on the computer of Elisa Siliato, Mr Salera’s personal assistant. The data attached to this document shows that it was created on 13 November 2002 and modified on 22 April 2003. The creation date might be the date the document was first brought into existence or the date upon which it was loaded onto that computer. The modification date is a week or so after the execution of the convertible note agreements. The document itself appears in a fax from Betta Foods to its accountants Pitcher Partners dated 26 May 2003 and is annexed to a deed of the same date which contains warranties as to the title and condition of the plant. This is consistent with Mr Salera’s account. Since these dates are after the execution of the convertible notes deed, they sit uneasily with Mr Robertson’s recollection that the invoice was produced in the course of the due diligence investigation.
The transaction was processed in the books of BFA by a series of journal entries made some time prior to 30 June 2003. The purchase was shown as a loan from Mr Salera to BFA which is consistent with his having made the purchases from his own funds. The second entry showed that this loan to Mr Salera was reimbursed from BFA’s funds. The third entry records an injection of funds into BFA from BFG. The end result of this was that no BFA capital was required to make the purchase and funds ultimately flowed from BFG to Mr Salera. These entries, it would seem, were made many months after the date of the invoice and probably at about the time when the question of the title and value of the biscuit line was the subject of the due diligence inquiry.
Given the concession that the invoice is fictitious, its significance lies only in its impact on the credit of the witnesses who spoke of the circumstances in which it was brought into existence, particularly that of Mr Salera.
The credit of Mr Di Genova and Mr Salera were subject to attack. The role of both of these men in the GE Capital representation issue shows them to be ready to mislead in order to obtain their own objectives. Moreover, my impression of them, particularly Mr Salera, in the witness box was that they were very ready to seek a scapegoat for their own managerial shortcomings. Very often their answers were evasive and contained non-responsive self-justifications and unwarranted and unsupported criticisms of others. In short, I am wary of acting on the evidence of either of them upon significant controversial issues unless it has independent support. Mr Kikos, who was also criticised, I found to be an honest witness who was doing his best to remember events of long ago. The credit of Mr Murphy and Mr Robertson was not attacked nor was their recollection as to the Butler & England invoice seriously challenged in cross-examination.
In the circumstances, and notwithstanding that the evidence in support of the defendants’ contentions is relatively strong, I decline to make a finding on this issue.
The issue which remains is as to the value of the biscuit line. There is some uncertainty about what the warranty means. It was that BFA had purchased the biscuit oven, by which I take it that Mr Salera had purchased the oven and the associated plant that made up the biscuit line. It was said that this had a value of $4.5m. I take this to be an assertion that its purchase price was of that order and that it had not deteriorated so that the value was about the same.
In support of this valuation Mr Salera said that he had purchased the component parts from various locations in Australia and overseas including from Arnotts in South Australia and Burwood in Victoria. It seems that the main components were acquired from Arnotts in May or June 2002. Mr Salera paid for these items from his own money but the purchase was for the Betta Foods business. He said that he paid between $4m and $5m for them, hence the valuation was given at $4.5m.
At the relevant time the biscuit line was not fully assembled or operational. Many of its components were boxed in the store at Broadmeadows. As to his suggested purchase price, Mr Salera was unable to produce documentation. According to Mr Kikos maintaining records of this kind was not his strength. In his witness statement Mr Salera annexed a number of invoices in support of his purchases, but many of these were irrelevant and those which were arguably referrable to the biscuit line totalled only about $1.1m. Moreover, the two loans referred to in the disclosure letter as being relevant to the purchase of this item total only $145,000.
The values of the items at Broadmeadows presented by Investec, which I have summarised above,[2] range from $500,000 to $20,000 on the basis of an orderly liquidation or auction value. There is, however, evidence that an orderly liquidation price would be expected to achieve about half the market value. I put to one side as not helpful for my purposes the valuations of Mr Schiller and Mr Wollaston; they both valued the items as scrap. For Mr Salera, they represented potentially productive plant. It is relevant that, after 30 March 2004 when he was retained to sell these items, Mr Salera was unable to find a buyer.
[2]Paragraph [27].
In support of his value, counsel for Mr Salera called two witnesses who spoke in general terms of the value of plant of a similar kind. Zoran Glogovac, who was experiencing at sourcing these machines, said that to build such machine with secondhand components would cost between $1m and $3m and a new machine about $13m. Giles Dommisse was a man whose experience was in selling machines for the food industry. He has extensive experience in pricing secondhand machines. He said that the cost of constructing a biscuit line containing items which Mr Salera told him were comprised in his biscuit line was $5.2m.[3] I regret that I derive very little assistance from the evidence of these two witnesses who, after all, were not valuing the items which were the subject of the representation. I am not prepared to act upon Mr Salera’s evidence as to the amount he spent on the biscuit line. I think that this plant has acquired in his mind a value very much greater than its value to a purchaser.
[3]This price was based on parts sourced second-hand.
I find that the value of the biscuit line as it then stood in 2003 was very much less than $4.5m. The true value was closer to $1m or perhaps $1.5m. The first misrepresentation and misleading and deceptive conduct has been made out.
4. The Sugar Cone Machine Representation
A substantial Betta Foods product was sugar icecream cones. For the purposes of making these products there were three Haas TRO 140G sugar cone machines. One of these machines was not on the BFA or the BFNZ asset register at the time of the initial Investec advance and it was, therefore, dealt with in each of the disclosure letters in these terms:
2Without limiting the information contained in the binders referred to in numbered paragraph 1, Damilmind and Salera make the following specific disclosures against the warranties listed below:
…
(c) ...
BFA (NZ) has purchased a sugar cone machine valued at approximately $1.5 million. That asset does not appear on the asset register for BFA (NZ). BFA (NZ) will so record that asset.
As I have mentioned, there were, regarding this third machine, two allegations of a representation contained in this warranty: the value of the machine was $1.5m and that that machine had been purchased by BFNZ. The third representation, that it was not encumbered, arose from the general warranties that the assets were not encumbered otherwise than disclosed. Mr Salera told me that the third machine was purchased by him in February 2002 with his own money in the name of his company registered in Australia, PS Investments Pty Ltd. He said that he made the purchase from the manufacturer Haas Industries in Austria and that the cost was €1.115m including the cooking table and foil wrapper magazine. This is the equivalent of A$1,904,355. He produced to support this contention a Haas invoice No 1343-02 dated 25 February 2002. He said that this machine was later shipped to New Zealand and was the machine referred to in the disclosure letters. Mr Robertson said that this indeed was what he was told by Mr Salera during the due diligence investigation and, further, that the machine was security for a loan of $700,000 from the Bank of New Zealand. He said, however, that Mr Salera told him that the purchase had been made by a New Zealand company within the Salera group of companies, PS Investments 2003 (NZ) Ltd. He told Mr Salera that this machine should be brought into the books of BFNZ and that the encumbrances should be removed before any advances would be made by Investec.
The picture presented on behalf of Investec as the true position was far more sinister. The machine in New Zealand, it was said, was an old machine purchased from Haas in 1993. The Haas invoice was said to be another fictitious document brought into existence about February 2002 by or at the instigation of Mr Salera in order to defraud the Bank of New Zealand which accepted the machine as a new machine worth $1.5m as security for a loan to BFNZ of NZ$700,000. This loan was made by the Bank of New Zealand in March 2003 and the money paid to BFA. Finally, it was said the machine was never transferred to BFNZ.
There was a good deal of evidence led as to these allegations. I find that there were three TRO 140G machines purchased from Haas: machine No. 12093 which was purchased in 1993, machine No. 18706 which was purchased in 1995, and machine No. 901700 which was purchased in 1999. There was no machine purchased in 2002. The invoice of February 2002 is puzzling. It may be that it was prepared by Haas about the time when the third machine, purchased on terms and delivered in 1999, had been paid off. The invoice may then have been intended by Haas to record that, upon payment in full, title in the machine passed to the purchaser. I am satisfied, too, that the purchaser was the Australian PS Investments company.
At some stage, in 2002, it was decided to send the 1999 machine to New Zealand. For a reason which is unclear, or perhaps by mistake, the machine sent to New Zealand was the 1993 machine. It was for this purpose transferred to the New Zealand PS Investments company which had been incorporated for the purpose and on 14 March 2003 it was provided by way of security to the Bank of New Zealand. I interrupt the narrative to observe that this appears to be a surprising transaction, occurring as it did at a time when the Investec negotiations were well advanced.
For the purposes of the Bank of New Zealand loan, the machine was valued in March 2003 by Donald Tomlinson, a valuer in New Zealand. Mr Tomlinson expressed the opinion that the replacement cost of the machine was NZ$1,816,556. I confess that I was not at all impressed by this valuation which appears to have been based upon the incorrect assumption that the machine was only one year old and on the conversion of the invoice price from euros to New Zealand dollars. The witness said he inspected the machine but the primary basis of the valuation was the relatively recent invoice.
A further valuation made in May 2004 was prepared by another New Zealand valuer, Bruce Malcolm Langley. His valuation, prepared on the basis of a sale as a going concern or existing use, was NZ$1.087m. In his oral evidence Mr Langley said that inquiries from Haas disclosed that its replacement cost was of the order of €550,000 to €600,000 which is the equivalent of NZ$1.06m to NZ$1.15m. Other information which he had as to the cost of replacement was as to the cost of replacement from an Indian company for NZ$1.6m including installation and commissioning and from a US company for NZ$1.1m without shipping and installation. Mr Langley estimated that the working life of the machine was 20 years so that it had about 10 years left. He then depreciated the replacement cost on the diminishing value basis and arrived at a value of NZ$500,000.
In a contest between the two valuations, I prefer that of Mr Langley notwithstanding that he had not seen the machine. I do so on the basis that his valuation was the product of careful research and was logically more compelling. I find that the representation as to the value of the sugar cone machine was erroneous.
If the representation was that the machine was owned by BFNZ, it, too, was false. I bear in mind that Investec bears the burden of proof. The evidence shows that it would have been possible to transfer the machine from the New Zealand PS Investments company to BFNZ and that steps were taken to achieve this. There was, however, no evidence that the transfer was ever completed. This is a matter of which BFNZ accounts would have provided an easy answer. These accounts are not available to the defendants but, until the sale of BFNZ in March 2005, they were available to Investec. No explanation was provided for their non-production but I was not asked to draw a Jones v Dunkel inference and I do not do so.
The representation in the disclosure letters is that BFNZ had purchased the machine and would record it as its own asset. I am satisfied that the representation as to the purchase was erroneous: the machine had been purchased, at best, by the New Zealand PS Investments company. Mr Robertson said that this was his understanding in May 2003. The representation that it would be put in the BFNZ register was capable of being fulfilled and I am satisfied that this was at the time of the advance the intention of Mr Salera. As to whether the transfer was ever achieved, the evidence showed only that steps were taken to that end. Mr Robertson said he believed that the transfer did not occur. The plaintiffs, however, assert in the particulars given under paragraph 14(b) of their statement of claim that the transfer did take place and the documents relating to the sale of the BFNZ shares require that this be done. It may be, therefore, that the transfer was in fact completed. In the circumstances, I am not prepared to make a finding to the contrary.
The representation that the machine was unencumbered was erroneous. It was not suggested otherwise by counsel for the defendants.
I conclude, therefore, that the misleading and deceptive conduct as the value of the machine and as to its being unencumbered has been made out.
5. The Spare Parts Representation
The value of spare parts is shown in the 2002 accounts as $1,579,038. This figure was arrived at following a stocktake carried out in June 2002 by Mr Kikos. He identified the stock sheets and confirmed that they represented the result of work in which he was involved with Pasquale Patrick Amuso and George Peev. The value of this item in the accounts previously was only $110,687 so that the revaluation was a substantial increase which had the consequence of reducing the loss for that year by $1.47m.
On behalf of Investec this stocktake figure was challenged as an over-value undertaken in part in order to cover drawings made by Mr Salera from the business. This is a serious allegation proof of which lies on Investec. For my present purpose, however, the allegation of over-value, if proved, would lead to the conclusion that warranties 14.2 and 15.3 given by Mr Salera and Damilmind as to the accuracy of the accounts were untrue and that they were therefore guilty of misleading and deceptive conduct.
An audit of the stock of spare parts was undertaken at the direction of Mr Royal in June 2004. The value which this produced was only $387,150. It was put that some of the difference might be explicable by Mr Royal’s policy of reducing the stock but this could not explain the total disparity.
Counsel for Investec also relied upon the treatment of the revaluation in the general ledger. The increase in the value was brought to account in two entries totalling $1,468,216, dated 29 June.[4] One of these entries was of a figure exactly the total of Mr Salera’s drawings for the year. Counsel’s suggestion that the stock figure was created to match the amount of these drawings involves a finding that Mr Kikos and Mr Amuso contrived or adjusted the stocktake figures to arrive at the desired result and that their denials of this were false. I am not prepared to make such a finding. As I have mentioned, I have confidence in Mr Kikos as a witness of truth. I am not prepared to reject the evidence of Mr Amuso on this point.
[4]There was evidence that one of the entries, that which was equivalent to Mr Salera’s drawings, might have been posted in the general ledger on 2 July.
Counsel criticised the defendants for not calling Pitcher Partners, the accountants, to explain the suspicious entries. I am not prepared to draw any inference from this.
This leaves the disparity between the 2002 stocktake and the 2004 stocktake figures. This is puzzling, especially when the two lists are placed side by side. There is a remarkable disconformity between the numbers of units in the two lists and between the unit values. I do not find that those in the 2002 list are erroneous.
Accordingly, I do not find that the spare parts item in the financial accounts the subject of the warranty is erroneous. This allegation of misleading and deceptive conduct has not been made out.
6. The GE Capital Draw Down Certificate Representations
The working capital of BFA was provided by GE Capital Finance Pty Ltd (“GE Capital”) under a factoring arrangement involving revolving credit advances. It is not necessary that I enter into the detail of this agreement. It is sufficient that I record that the amount of the GE Capital advance was calculated on a daily basis as a proportion of a figure which was based on accounts receivable by BFA. The figure was provided each day by BFA; the actual task of calculating the figures and submitting to GE Capital the daily notices of revolving credit advance or draw down certificates was entrusted to Michael Lepore, the BFA finance manager.
Among the warranties given by Mr Salera and Damilmind was that contained in warranty 2.2, that BFA and BFG had not committed a default under an agreement which might have an adverse effect on the redemption or conversion of the convertible notes. There is also in cl 7 of the Convertible Note Deeds a provision that the warranties are repeated each day[5] and that the warrantors will disclose any matter which may be inconsistent with the warranties.[6] The case put on behalf of Investec was that between October 2003 and March 2004 BFA breached the terms of the GE Capital facility by misstating the sales in the daily draw down certificates. This meant that on every day the representation that there was no breach of agreement was false and that there was a failure to disclose this. This, it is said, amounts to misleading and deceptive conduct.
[5]Clause 7.2.
[6]Clause 7.11.
There is no dispute that the daily sales figures were erroneous in terms of BFA’s obligation under the facility. Mr Lepore told me that, from about October 2003, cash flow became a problem for BFA. He was instructed by Mr Di Genova to overstate the amount of new sales in the daily draw down certificates sufficient to ensure that sufficient capital was received. This had the consequence of overstating the accounts receivable and, in turn, the entitlement of BFA to the GE advance. Mr Lepore expressed to Mr Di Genova his disapproval of this practice but his concerns were assuaged by Mr Di Genova’s assurance that this was but a short term measure. Mr Di Genova also told him that it was legitimate to include in accounts receivable the value of orders received but not met. Shortly before the Christmas close down in 2003, Mr Lepore said to Mr Di Genova that he would not continue to alter the sales figures as requested. He discussed his concerns also with Mr Salera. Mr Di Genova agreed that this was the case. Mr Salera denied this conversation but I prefer the evidence of Mr Lepore and Mr Di Genova. After Christmas, Mr Lepore was no longer asked to prepare the daily draw down certificates.
The practice nevertheless continued until March 2004 when GE Capital discovered that it had made excessive advances to BFA. GE Capital’s internal report of this dated 15 March 2004 shows that the over advances were of the order of $1.5m. It thereupon froze the facility. Mr Robertson said that on 24 March 2004 Mr Salera telephoned him advising him of the problem. Mr Salera said he was unaware of any GE complaints until Mr Robertson confronted him with the results of a GE Capital audit. Again, I do not accept Mr Salera’s account. I find that he was well aware of the excessive claims made by his company. Mr Robertson then negotiated with GE Capital, achieving its agreement to release the advances upon payment of the excess. Mr Robertson invited Mr Salera to contribute to the supply of the funds required for this but he was told that no funds were available. Investec thereupon invested a further $2 million to satisfy GE Capital and for other requirements. This led to the departure of Mr Salera and Mr Di Genova from the BFA business and to the preparation and execution of the 30 March 2004 deed to which I shall return.
The defendants now accept that the draw down certificates were erroneous. Mr Salera, however, said, first, that he knew nothing of this until March 2004. Later, in cross-examination, he denied that the amounts in the certificates were incorrect. Later in cross-examination, he said that it was but a mistake: that he thought it was legitimate to include in accounts receivable the value of orders received notwithstanding that the goods had not been dispatched or invoiced. I reject these explanations. I am satisfied that the daily draw down certificates were false and that Mr Salera knew that misleading certificates were issued to GE Capital and that he approved of the practice. This reflects adversely upon his commercial morality and his credit and also that of Mr Di Genova.
The issue here, however, is more straightforward. Each of Mr Salera and Damilmind warranted[7] at the time of the making of the Convertible Note Deeds that BFG or BFA had committed “under any agreement to which it is a party or by which it is bound, a default which might have a material adverse effect on the issue, redemption or conversion of the BFG convertible notes”. The misstatements in the GE Capital draw down certificates constituted breaches of the GE Capital facility but, not until October 2003, some six months after the entering into of the agreements with Investec.
[7]Schedule 4, clause 2.2.
Investec, however, relied upon cl 7.2 of the Convertible Note Deeds which provided that the warranties were repeated each day that an amount was outstanding under the convertible notes.
It follows from this that Mr Salera and Damilmind breached their warranties on each day from October 2003 until March 2004 when the position with GE Capital was regularised. To this extent, the misleading and deceptive conduct allegation has been made out.
7. Reliance
Counsel on behalf of Mr Salera and Damilmind contended that reliance upon the misrepresentations had not been made out.
It is sufficient for this purpose that the representee shows that the representation was one among many reasons for the making of the advance. I was reminded of the well known observation of Wilson J in Gould v Vaggelas.[8] The inference of reliance is supported by the evidence of Mr Robertson and Mr Murphy that they did in fact rely upon the biscuit line and the sugar cone machine as providing security and upon the values given to these. I add to this the fact the fact that they took the trouble to insert these matters in the contractual documents. The argument to the contrary depended upon the fact that little, if any, reference to these machines or their value was included in the proposals prepared by Mr Robertson and Mr Murphy for consideration of the Investec board. This, it was said, showed that these assets were of no particular interest to Investec which was primarily concerned with the production of jellies. I decline to draw the inference that the failure to make mention of the value of these machines as individual items should lead to the conclusion that Investec did not rely upon what was said about them. I find reliance established.
[8](1985) 157 CLR 215, 238-9.
Reliance in the case of the GE Capital representations is a little different because what is alleged here is a failure to disclose a fact. The fact that the GE Capital facility was in jeopardy due to the breaches of BFA would have been an important matter for Investec. If the fact were known Investec would have taken immediate steps to rectify the position, if only to protect its own investment. Alternatively, it might have terminated its relationship with Betta Foods and cut its losses. In this sense, reliance has been established for this representation also.
8. Investec’s Loss
The case presented on behalf of Investec is that it was induced by the defendants’ pre-contractual misleading and deceptive representations to make the advance of $10m in May 2003 and those that followed. It, therefore, claims the totality of its loss, the loss of the opportunity to use the money invested in Betta Foods to earn profit elsewhere and certain other expenses incurred.
I am satisfied that the pre-contractual representations with respect to the biscuit machine, the sugar cone machine and the value of the stock of spare parts were, each of them, a cause - a non-trivial cause – of the decision of Investec to make the advances which it did make in May 2003 and to enter into the contractual arrangements of April and May 2003 for that purpose.
The methodology underlying the Investec loss and the evidence led in support were not seriously challenged.
The nature of the Investec investments in Betta Foods is contained in the Convertible Note Deeds including the conditions in Schedule 6 to those deeds. The initial investment in May 2003 and those that followed up to April 2004 were in the form of the purchase of convertible notes.[9] The note holder was entitled to redeem[10] the notes or to convert them as prescribed in the agreement. In the meantime, the note holders were entitled to interest on the face value of the notes.[11] The note holders were entitled to convert the notes in shares at any time,[12] the number of shares being calculated in accordance with the agreed conversion formula.[13] Furthermore, on 31 December 2008 or at an earlier date in the event of default[14] the note holders were entitled to redeem the unconverted notes and, in that event, BFG was obliged to pay the face value of the notes[15] plus interest.[16] Furthermore, BFG must pay such additional amount as is necessary for the note holders to achieve a minimum internal rate of return (“IRR”) of 25% per annum.[17] The agreement also contains many provisions which appear to be directed to preserving the assets of BFG which underlie the value its shares in the event that Investec should determine to convert the notes into equity and from which Investec might recover the face value of the notes in the event that it determined to redeem them.
[9]Clause 4.1.
[10]Clause 5.
[11]Condition 3.
[12]Clause 4.
[13]Condition 5.
[14]Condition 9.1.
[15]Condition 8.1.
[16]Condition 8.2(1).
[17]Condition 8.2(2); Convertible Note Deed cl 1.1(59).
The investment of Investec in Betta Foods was not a financial success. It invested a total of $14,800,000 in the purchase of convertible notes and $5,854,000 by loan. Against this outlay, it received no recovery other than that which might be recouped from the sale of the convertible notes to Mr Sloan and Mr Crone.[18] The amount of this will depend upon when the purchase price is paid. For Investec, it was said that the first component of its loss was the amount invested less the present true value of the notes which it purchased. Evidence of the value of the notes purchased by Investec was given by Martin Madden, an experienced insolvency accountant. He said that their present value is between $3.5m and $6.6m. Investec, then, proposes that credit be given at the higher value of $6.6m.
[18]The proceeds of the sale of the BFNZ shares were put into the BFA business.
On behalf of the defendants it was not disputed that the proper measure of damage is the difference between the amount invested by Investec and the true value of the notes which it purchased. Counsel argued, however, that the value of the notes should be assessed at the time Investec committed itself to purchasing them, that is, in May 2003. This, it was said, follows from the usual rule that damages in this kind of case are assessed by comparing the price paid for the notes and their true value at the time of purchase.
In support of their contention that the proper time for assessing the value of the notes is the date of trial, counsel for Investec relied upon the observations of the High Court in HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd,[19] where it was said that it was open for a purchaser, who has made a purchase as a consequence of misleading and deceptive conduct, to bring into account the actual proceeds of a sale occurring sometime after the purchase. The circumstances where such an approach is appropriate would include those where, despite its best efforts, the purchaser has not succeeded in selling the subject-matter of the purchase.
[19](2004) 217 CLR 640 at 660 [43] ff.
A circumstance relevant to this is that Investec did not become aware of the falsity of the misrepresentations until some time after May 2003. Following the discovery of BFA’s overdrawing of the GE Capital facility in March 2004, Mr Salera and his chief financial officer Mr Di Genova were removed from their management roles and Mr Royal took over. The representations were called into question about June 2004 when Mr Royal told Mr Robertson about the problems. Ernst & Young were engaged to investigate the matters and their preliminary report was in the hands of Investec by mid-August 2004.
On 12 August 2004 BFA was put into administration and on 21 June 2004 this proceeding was commenced.
From September 2004 efforts were made to sell the Betta Foods business. The evidence of Jonathan Keith Brett, a director of the plaintiffs, was that he attempted to find purchasers for the Australian business and the New Zealand business. The shares in BFNZ were sold in February or March 2005, but the sale of BFA was more difficult. In January 2005, having made contact with about 34 domestic and foreign prospective parties, Mr Brett desisted. He said that he had exhausted all avenues to achieve a sale of BFA. I accept Mr Brett’s evidence that, despite his efforts, a purchaser was not able to be found for BFA until late 2007 and that this led to the sale of the notes on 24 December 2007 to Mr Crone and Mr Sloan.
Counsel for Investec said that their client was therefore locked into the purchase of the notes. It was in mid-2004 faced with the unpalatable alternative of pressing on or of putting BFA into liquidation with a consequent diminution in the value of its security and the inevitable closure of a business which might otherwise have survived. Against this it was said that Investec always had the option of redeeming the notes and that at a time when the assets of BFG would have been sufficient to pay. Mr Madden expressed the view that, as at May 2003, when the first investment of $10m was made, there was sufficient security available to Investec to recover its debt, even if it were necessary to achieve this by a liquidation sale.
By August 2004 when Investec made the decision to keep the business going in the hope of selling it as a going concern the position had deteriorated. Notwithstanding this, it put into the business thereafter further capital of nearly $6m to achieve this end. The financial position of the business was then not fully known because of the loss of confidence in the accounts kept under Mr Salera’s management but , it seems, Investec remained confident that it could trade out of its present difficulties. Mr Madden now estimates that there would have been a shortfall of between $4.9m and $7.1m as at 31 March 2004 and a shortfall of between $11.4 and $13.2 as at 30 June 2007. I am satisfied that Investec acted reasonably in holding its notes and trading on in the hope of saving the Betta Foods business and obtaining a good price for it. It was reasonable, too – even generous – for it to make further advances to prop up the business in order to achieve this objective.
My concern is to identify the total loss suffered by Investec by becoming an investor in Betta Foods as a consequence of the conduct complained of. This loss must include the amounts invested less the true value of the notes which, I find, in the present circumstances is demonstrated by the sale price achieved in December 2007.
It may be taken that counsel for the defendants contended that not all of this loss was a consequence of this conduct. A suggested matter extraneous to the misleading and deceptive conduct was the incompetent management of the company by Mr Royal from late December 2004 to mid-2005. The question of this management was raised in the counterclaim and I will consider it in detail under that head.[20] In short, I find that the business deteriorated during this period as a consequence of its inherent weakness – a weakness which can now been seen to have existed before April 2003. Any criticisms of the management of the Betta Foods business since that time must been seen in the light of the facts that Mr Salera was the CEO and managing director in fact at least until the end of 2003, although his role diminished from January 2004 until his exclusion on March 2004. It must also be seen in the light of the parlous financial position of the business in early 2004 which meant that strong measures had to be taken to keep it going. Finally, it must be seen in the light of the fact that Mr Salera and Mr Di Genova had had to leave the business following the GE Capital facility crisis in March 2004. The new management inevitably had to undertake a speedy learning process in order to run this specialised business. These matters lead me to reject the suggestion that any part of diminution in the value of the notes was due to an extraneous factor. The amount of the first component of the Investec loss has been made out. This loss is the amount invested less $6.6 million.
[20]See paras [104] – [107] below.
The second component is the interest upon the $20,654,000 invested. The expert witness called on this topic, Vinod Muthanna, was of opinion that Investec might reasonably have expected to earn 15% per annum compound upon an investment such as that in Betta Foods. I accept his evidence which was not seriously challenged. This return, when applied to the sums advanced in this case, produce a total interest foregone of $12,540,128.
The remaining component was $58,084 for the Ernst & Young report and for Mr Royal’s services. I will allow these.
I find, therefore, that the Investec loss suffered as a consequence of the pre-contractual misrepresentations by Mr Salera and Damilmind has been established. It is $12,632,994 for IWPE and $14,019,218 for MGB, a total of $26,652,212. Subject to the counterclaims, there should be judgments for the plaintiffs in those sums.
9. The Counterclaims
The counterclaim is a lengthy document containing numerous allegations. Of these only three claims were pressed. First, that Investec engaged in unconscionable conduct in contravention of s 51AC of the Trade Practices Act when it induced Mr Salera to enter into the Settlement Deed on 30 March 2004. Second, that the conduct of the Betta Foods business by Mr Royal was in breach of Investec’s contractual duty of good faith. Third, that Investec failed to pay to Mr Salera his agreed consultancy fee.
The Settlement Deed
The events underlying this deed commence on 24 March 2004 when GE Capital threatened to freeze the factoring facility following its discovery of BFA’s overstatement of its sales figures in the daily drawdown certificates.[21] Following negotiations with Mr Robertson, GE Capital agreed to reinstate the facility if the account was regularised. The amount to be paid was approximately $2 million. This produced a crisis for Betta Foods, for it could not trade without the support of GE Capital; the money had therefore to be found quickly. Moreover, GE Capital insisted that the matter be attended to by the end of the first quarter, the end of March 2004, which was only a matter of days away.
[21]See para [65] above.
Mr Robertson asked Mr Salera whether he would contribute the money needed and was told that he did not have the resources to do so. Mr Robertson told him that Investec would have to pay the amount required and that this would involve a change in its conversion entitlement under the convertible notes deeds.
On 26 March Mr Robertson advised Mr Salera that Investec would provide the funds necessary but only if he, Salera, resigned as managing director in favour of Mr Royal. Mr Salera, he said, did not disagree.
On 28 March Mr Robertson spoke with Mr Di Genova, and told him that, as a consequence of his role in the GE Capital misstatements, he, Di Genova, would have to resign. This Mr Di Genova did.
The Settlement Deed was then prepared in some haste. It was drawn up by Holding Redlich who were Mr Salera’s solicitors and executed late in the evening of 30 March. The deed provided that Investec would purchase further convertible notes in BFG to a value of $2 million. With respect to Mr Salera, he was to resign as CEO[22] and was no longer to attend the premises of BFA.[23] He remained, however, as a director of BFA and was to be retained as a consultant at a fee of $300,000 per annum. His role as consultant was to find a buyer for the biscuit line and his retainer was to terminate when this was achieved.[24]
[22]Clause 3.2.
[23]Clauses 3.8(d), 3.9.
[24]Clause 3.8
For practical purposes, Mr Salera’s association with the management of Betta Foods now ceased. Today, this is seen by him as a source of shame and grievance. He now says that what was a flourishing business, albeit short of working capital, has been brought to its knees, not by his mismanagement, but by that of Mr Royal and those whom Investec introduced into the business. Moreover, the Settlement Deed by which he signed away this business was executed by him in circumstances whereby he should be relieved of its consequences or compensated for his loss. His allegations that the Settlement Deed was entered into under duress[25] and, as a consequence of misleading and deceptive misrepresentation by Investec[26] are no longer pressed. His case is put on the basis of unconscionability.
[25]Defence para 28.
[26]Counterclaim paras 16-18.
The principal circumstances relied upon as giving rise to unconscionability were four.
First, that Investec was part of a well resourced organisation whereas he, Salera, was in financial difficulties. This produced an inequality of bargaining power. I find no evidence that Investec abused its superior financial position.
Second, that Mr Salera was at the time distressed because his father was seriously ill. I do not find that this affected his judgement or that the Investec negotiators were aware of it or took unfair advantage of it.
Third, that undue pressure was placed on Mr Salera. He was required to pay a large sum of money which he did not have the ability to pay. He was not given sufficient time to consider the implications of the deed. There is no substance in either of these matters. All parties were in a very awkward position with little time to resolve it. It was not unreasonable for Investec to request its 51% partner in the business to contribute, particularly as the crisis was due to his poor management or fraud. Mr Salera had competent independent legal advisors who drew up the deed. He executed it at their office. I can well understand that this was a very stressful time for him, but this does not amount to unconscionability.
Four, that the effect of the deed was to exclude Mr Salera from his business and to hand to Investec the prospect of obtaining 100% of its equity. This, it was said, was an indication of unconscionability since it was out of proportion to the demands of the situation. I disagree. It was apparent to Mr Robertson, and for good cause, that Mr Salera could not be trusted to provide the BFG board with reliable information about the business which he was managing and that he, Mr Salera, had engaged in irregular dealings with respect to the GE Capital facility. It would not have been appropriate to retain him in a senior management position. Indeed, to give him a consultancy at a very handsome fee was, to my mind, generous in the circumstances.
Moreover, I do not consider unreasonable the terms of the deed with respect to the rights conferred on Investec to convert the notes to equity. As Mr Robertson said, Investec was faced with the prospect of making further investment in the Betta Foods business so that its total investment amounted to $14 million. The true financial position of the business was in doubt due to his loss of confidence in Mr Salera and Mr Di Genova. In the circumstances, he said that the thinking behind the new arrangement was that, if the equity value of the business was less than the amount Investec had provided, then Investec could take up to 100% of the equity.[27] Where it was greater, Investec would be entitled to a proportion of the sum invested plus 77.5% of the surplus[28] and it cannot be denied that Investec was providing Betta Foods with a sorely needed and substantial sum by way of consideration for this.
[27]Clause 5.1(h)(i).
[28]Clause 5.1(h)(ii).
There is no unconscionability here.
Commercial Mismanagement
It is next said that, in many respects, the management of the Betta Foods business by Mr Royal was inadequate, as a result of which the business did not prosper. This allegation is put against Investec by Mr Salera as they are both parties to the Stakeholders Deed of 17 April 2003. Under this agreement, Investec agreed to act in good faith towards Mr Salera; to co-operate with him and to work in partnership with him; that they would conduct themselves in order to achieve the common aims of the business; and that they would act fairly towards each other.[29] The mismanagement of the business by its nominee, Mr Royal, and the exclusionary conduct of Investec in March 2004, constitute, it is said, a breach of this agreement. The loss suffered is the diminution in the value of Mr Salera’s shares in BFG.
[29]Clause 3.1.
This claim must confront, and, in this case, must surmount a number of difficulties.
At its most basic, most of the criticisms of Mr Royal’s management are not made out, are exaggerations or simply ignore the parlous state of the business which he was called upon to manage. In short, many of his policies which might not be appropriate for a financially healthy enterprise were necessary because there was just not enough income to meet all the business expenses.
Of the 19 criticisms set out in Schedule 2 to the counterclaim, items ii, iii, vi, xi, xii, xiv, xv and xix were not pressed. Of the remaining eleven items three were explicable as economies driven by the want of working capital. I refer to item viii, maintenance of plant not being carried out at weekends at penalty rates; the consequential item xvi which refers to a deterioration in product quality; and item xvii which refers to economies in the factory cleaning regime. Three items represent Mr Royal’s decision to focus production upon profitable items and customers and to increase charges to boost revenue. These were criticised as short-term and ill-advised decisions by witnesses very familiar with the Betta Foods business, but who were essentially unfamiliar with its financial difficulties. Under this heading, I include item xiii, the decommissioning of the jelly line; item x the discouraging of small customers; and item ix the increasing of freight charges. The remaining items warrant very little consideration; they are ill-conceived or not proved. These are item iv, that GE Capital alleged a default in its facility in March 2004, an allegation which is difficult to see as a criticism by Mr Salera of Mr Royal; item v, that the New Zealand business was sold at an undervalue. No serious attempt was made to establish this; such evidence as there was lent no support for this allegation. Item vii, the appointment by Investec of an administrator. No lawful or commercially sensible alternative was suggested. Item xviii, that Mr Royal permitted competitors to come into the factory to inspect the machinery, thereby exposing the business to a loss of trade secrets. The evidence was that he did not do this. Finally, item i is that the business did not prosper as expected. This is undoubtedly true, but I am not satisfied that this can be laid at the feet of Mr Royal or Investec. Mr Salera himself was unable to make a success of the business. The criticism is a consequence rather than a cause of the financial difficulties which confronted the business from 2003. As I mentioned in argument, if criticism is to be addressed to Investec it is that they were too readily infected with the unreasonable optimism of Mr Salera in 2002 and 2003 that the business was a healthy one.
Other difficulties facing this claim are that although Mr Royal was introduced by Investec into a senior management role at the end of 2003, he was retained not by Investec, but by BFG. There is no evidence that his policies were the policies of Investec or that he was its agent; there is no evidence which leads to the conclusion that Investec should otherwise be responsible for his actions.
Next, the terms of the Stakeholders Deed which are relied upon are those which require good faith and cooperation. Mere errors of judgment, even negligent errors, do not themselves amount to breach of these terms.
Finally, it is said that by inducing Mr Salera to execute a Settlement Deed in March 2004 and by excluding him from management, Investec breached the terms in question. I have already set out the circumstances of this.[30] Mr Salera had, by his own conduct, rendered it inevitable that he be excluded from the management of Betta Foods.
[30]See para [65] above.
I reject the second counterclaim.
The Consultancy Fee
Pursuant to cl 3.8 of the Settlement Deed, Mr Salera was retained as a consultant to sell the biscuit machine. Paragraph (e) provided that, subject to the performance of his obligations to secure the sale, he was entitled to charge a fee of $300,000 per annum (plus GST if applicable). This was to be paid by monthly instalments.
It is common ground that no part of the fee was paid. It is also common ground that no sale of the machine was achieved.
The point taken on behalf of Investec is that the consultancy agreement was entered into, not by it, but by BFA. Mr Salera, accordingly, contends that the non-payment of his fee was a consequence of a breach by Investec of an implied term of the Settlement Deed that Investec would act in good faith and would conduct itself so as to enable Mr Salera to receive the benefit of the Settlement Deed. Other similar terms are pleaded in para 36 of the counterclaim.
I am not at all confident that the suggested terms would be implied in the deed. The fundamental problem which this claim does not overcome is that Mr Salera has not shown that he complied with the precondition to payment of his fee so that he has suffered no loss. Nor has he established the other breaches which he alleges in para 37 of the counterclaim. He has not proved that he was denied access to the technical or engineering information which he now says he required. The evidence shows that, after 30 March 2004, he made little effort to secure a sale. He spoke of having obtained interest from a Malaysian party, but no offer was forthcoming. And he lacked the energy to pursue it. He said that he made no enquiry of other purchasers because his mind was “all over the place”. The evidence of Mr Robertson confirms that this was so. He said that Mr Salera never provided a report as to the progress he was making or what steps he had taken towards finding a buyer.
Moreover there is no evidence which leads me to conclude that Investec, or any person for whom it was responsible, did anything to prevent or impede Mr Salera from fulfilling his obligations as consultant. The suggested breach has not been made out.
The third counterclaim must also fail.
10. Conclusions
It follows from all of this that the claims of Investec have been successful and those of the defendants, not so. I propose, therefore that there be judgments on the claim for the firstnamed plaintiff in the sum of $12,632,994 and for the secondnamed plaintiff in the sum of $14,019,218, in each case with costs including costs reserved. There should also be judgment for the plaintiffs on the counterclaim with costs including costs reserved.
Nevertheless, I will hear counsel further on the precise terms of the orders to be made and as to costs if this be required.
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0
2
0