Java Gold Australia and Ors – v – Java Gold Coffee and Ors
[2013] VCC 645
•26 July 2013
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE CIVIL DIVISION | Revised Not Restricted |
COMMERCIAL LIST
EXPEDITED CASES DIVISION
Case No. CI-11-02989
| Java Gold Australia Pty Ltd & Ors according to the Schedule attached | Plaintiffs |
| - v - | |
| Java Gold Coffee International Pty Ltd & Ors according to the Schedule attached | Defendants |
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JUDGE: | HER HONOUR JUDGE KENNEDY | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 11, 12, 13, 14 ,17 & 18 June 2013 | |
DATE OF JUDGMENT: | 26 July 2013 | |
CASE MAY BE CITED AS: | Java Gold Australia & Ors – v – Java Gold Coffee & Ors | |
MEDIUM NEUTRAL CITATION: | [2013] VCC 645 | |
REASONS FOR JUDGMENT
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Catchwords: Investment in coffee business – whether plaintiffs entitled to damages against fifth defendant for misleading and deceptive conduct in relation to representations about the business under ss9 & 159 Fair Trading Act1999 (Vic) – whether monies received by fourth and fifth defendants recoverable in restitution – whether monies recoverable against fifth defendant for breach of fiduciary duty by third defendant in relation to sale of stock.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr S. Stuckey | Holman Webb |
| For the 4th Defendant | No appearance | |
| For the 5th Defendant | Mr J. Ribbands | T F Grundy Lawyers |
HER HONOUR:
1 This proceeding arises out of an investment in a business to import and sell “Java Gold” coffee which business failed.
2 The plaintiffs claim damages of $942,913.49 for alleged misleading and deceptive conduct engaged in by the fifth defendant, Mr Geoffrey Hesford, prior to the entry into Heads of Agreement for the purchase of the business on 22 June, 2010. They claim, in the alternative, an amount of $42,164.48 in restitution for monies paid to Mr Hesford. Finally they claim the sum of $72,548, by reason of Mr Hesford’s alleged “knowing assistance” in a breach of fiduciary duty in the sale of certain stock of the business.
3 The plaintiffs further claim $201,060 against the fourth defendant, Ms Kholifah, in restitution. An earlier claim in relation to the sale of stock against her was abandoned in closing.
4 Although the fourth defendant did not appear, the fifth defendant was represented by Counsel and challenged each aspect of the plaintiffs’ claims. However, by reason of the matters described below, no issues persist as to the remaining defendants.
5 The issues are therefore whether the plaintiffs have established their claims against each of the fourth and fifth defendants.
Background
Parties
6 The third plaintiff, Mr Sanders, is the director of the first two corporate plaintiffs.
7 The first plaintiff, Java Gold Australia Pty Ltd (JGA) was registered on 15 July 2010 in order to run the Java Gold coffee business formerly carried on by Java Gold International Pty Ltd (JGI) (the first defendant). The second plaintiff, Java Management Services Pty Ltd (JMS), was also apparently set up further to the Heads of Agreement and was registered on 3 August 2010.
8 Mr Sanders’ background was as a fitter and machinist, then as a mechanic in the 1970s. He gave evidence that he had had a number of small businesses including a contracting business working for a gas company in Sydney installing gas mains and services until 2006, and thereafter starting another business exporting power saving and electrical equipment to Papua New Guinea prior to investing in Java Gold.
9 The first two defendants are deregistered, while the sole director of these two defendants, Mr Norton, (the third defendant) is a bankrupt.
10 The fourth defendant, Ms Siti Kholifah, is the wife of Mr Norton. She was aware of the trial date given she appeared on 25 February when the trial was adjourned to 11 June but made no appearance on the adjourned date. Her husband, however, Mr Norton, appeared and produced a doctor’s certificate which stated that she had an unspecified “medical condition” and would be unfit for work from 8 – 15 June. However, Mr Norton advised that she did not wish to apply for an adjournment and, with the consent of the other parties, the matter proceeded in her absence.
11 The fifth defendant, Mr Geoffrey Hesford, was described as being responsible for “Business Development” during the course of the negotiations for the sale of the business. Mr Hesford gave evidence that he was brought in to work for the original Java Gold entities in 2009 by one of the original directors of JGI, John Beyer. He claimed to have been able to offer experience with presentation skills and putting together business plans and accepted he had substantially more experience in matters of business modelling than Mr Sanders. He had also invested some $200,000 in the Java Gold business by the end of 2009.
12 In terms of the counterclaim, as indicated already, the first and second plaintiffs by Counterclaim are deregistered.
13 The trustee in bankruptcy of the third plaintiff by Counterclaim (Mr Norton) elected to discontinue Mr Norton’s Counterclaim by notice of 20 March 2013.
14 The fourth and fifth plaintiffs by Counterclaim were originally joined as plaintiffs to the Counterclaim. However, that joinder was revoked by order of Judge Anderson of 19 October, 2012.
15 It follows that the Counterclaim should be dismissed
16 Her Honour Judge Lewitan has already ordered on 8 May 2013 that the Counterclaim against the third defendant by counterclaim be dismissed. The third defendant to the Counterclaim was the former financier of the Java Gold business, CDIG Australia Co Pty Ltd (CDIG).
17 It is therefore appropriate that the Counterclaim as against the first and second defendants to the Counterclaim (being the first and third plaintiffs) also be dismissed.
Chronology
Preliminary
18 During 2009 the Java Gold business was not actually operating, but was, according to Mr Hesford, “developing an idea”. In late 2009, it did secure an order to supply Metcash with $2 million worth of product (Metcash being an IGA entity). However, given an issue with the financier, CDIG, the business was unable to satisfy the Metcash order. As at February, 2010, then, Mr Hesford stated that the business was in a “great deal of difficulty” and was looking for another funder.
19 At the beginning of 2010 Mr Sanders was working in his export business but, given it did not give him a lot of turnover, he was looking for something else. At the time, he and his ex-wife had a house, two factories and a block of land (his wife also had another commercial property) although there was money owed against these assets.
20 Mr Sanders expressed interest to his former solicitor, Geoff Strong, who acted as his business advisor, (he was a disbarred solicitor) and advised Mr Sanders of a number of potential business opportunities. He told him of the Java Gold International business. Mr Strong thereafter provided Mr Sanders with a document entitled “An Investment Opportunity” which he obtained from Mr Hesford. This document contained a table which gave turnover in year one of $38.52 million with an EBIT of $6.225. These figures increased in year 2 to $52.41million and $8.386 of EBIT.
21 Mr Sanders told Mr Strong he was interested and was advised that the next step would be to go to Melbourne.
22 At this stage, it was proposed that Mr Sanders would contribute all the investment monies of $850,000 in return for a one third share of 51% of the coffee business (with Mr Strong and a Mr Michalk, who worked with Mr Strong, to also have a one third share of the 51%). The arrangement originally contemplated, then, was that the three men were to have 51% of shares in a new company which would purchase the “IP” and property of the old company and for which $500,000 would be paid. They would also have one third of 20% of another company, United World International Trading Company Pty Ltd for $100,000 and also loan $250,000 to the new company.
23 A meeting took place in Melbourne. Although the date is unclear, it appears to have occurred in March/April. It will be referred to further, below.
24 In late March or early April, Mr Sanders, Mr Strong and Mr Michalk also undertook a “due diligence” trip. The details of this trip are somewhat vague, but there was discussion with the lawyers of JGA to determine if arrangements with CDIG could be dismantled.
25 The evidence of Mr Hesford was that in April he was also engaged in putting together information memoranda in conjunction with Mr Michalk for the purposes of raising extra capital.
26 It appears that there were various versions of these memoranda, some of which were shown to Mr Sanders. Two memoranda were adduced into evidence of April and June which both projected sales of around $16 million (although the evidence of Mr Sanders was that he did not actually see the April version).
27 Mr Hesford gave evidence as to his methodology in deriving this amount. He stated that he assumed that the only major contract was $2 million in sale orders from Metcash. He thereby “operated from a base of the first two months, which is a million dollars in sales in the first two sales months.” From that he then “extrapolated out what would be the possible total turnover for the year, being in mind all these other factors … that were involved in producing the model.” He agreed that by reference to the $16 million there was an increasing increment over a period of time which he said required an “integrated plan”, which was in the model. Mr Michalk was “happy” with this model but made some adjustments to increase the sales turnover.
Worst case scenario
28 By 7 April, Mr Sanders was trying to find funding to invest in the business and was receiving questions from his brokers. As a result of this he wrote an email to Mr Strong and Mr Michalk on 7 April as follows:
I had a meeting with a broker yesterday, he asked these questions:
How did Geoff Hesford come up with the profit assumptions for Java Gold, give a full explanation of how figures are to be achieved, what were his assumptions with only Metcash as an account and what would be the figures for a worst case over the next two years.
He also wants a statement of position from Geoff and Warwick.
29 By email of 19 April 2010 Mr Hesford forwarded an email entitled “Worst case modelling” to Mr Strong, Mr Sanders and Mr Michalk. This document contained a “worst case model” which forecasted sales revenue of $5,594,539 in the first financial year. It is a critical part of the plaintiffs’ misleading and deceptive claim and will be referred to, further, below.
30 After receipt of the worst case scenario email of 19 April, 2010, Mr Sanders claimed that he felt “confident” to invest. Not long after this email, it was also determined that Mr Sanders would be the sole investor and that he would not be going ahead with the partnership. He also advised Mr Hesford of this decision.
31 By email of 9 May 2010, Mr Hesford therefore wrote to Mr Sanders alone with a “suggested pathway” for him to consider. This included him funding “the $850,000 as previously agreed for capital and loans” and that he hold 51% of shares in the new company plus 20% of the supply company, UWITC. He suggested that Mr Sanders should also discuss with his financiers as to whether they were also prepared to offer the trade finance “required” of $1.15 million.
32 There were then a series of emails of 28 May 2010.
33 At 12.43 pm Mr Hesford forwarded an email to Mr Sanders about his investment and whether his deposit would be refundable pursuant to the proposed Heads of Agreement. He also wrote that they could ask for 5 container loads (of coffee) to be forwarded (from Vietnam) so as to be assured of invoicing in July. This “would make a go ahead viable irrespective of whether we had trade finance organized at this point, providing you and Brian were to initially purchase some stock (emphasis added)”.
34 However, the parties were simultaneously continuing to attempt to obtain extra “trade finance” consistent with Mr Hesford’s request of 9 May.
35 Thus, by email also of 28 May (at 1.00pm) Mr Sanders wrote to Mr Hesford saying he had had further discussions with the ANZ “re the trade finance” and requesting the costs for all that needed funding. According to Mr Sanders, the ANZ were querying the amount of trade finance being required given it was a “start up” operation. He therefore wrote: “[t]hey are questioning why do we need that much and I am still new to this.” The amount being sought was apparently $1.15 million.
36 At 1.49pm Mr Hesford responded to this query, giving stock items totalling $1.15 million. He notes that they had “scaled sales back from $38 million to $16 million which requires much less finance.” He further states:
We have asked Metcash for us to deliver less than originally ordered. They are ok with this. We have to notify when we can give a firm delivery date and they will reissue the order to the scale we can provide but it will be way less then the original orders received from Metcash. You should have a copy of the original Metcash orders. They will reissue at our request.
Heads of agreement
37 The evidence of Mr Sanders was that in about 28 May he indicated that he was prepared to make the investment they had discussed
38 The parties then arranged finalisation of Heads of Agreement.
39 On 22 June 2010, Mr Norton, Mr Sanders, United World International Trading Company Pty Ltd (UWIT), and JGI executed Heads of Agreement in Melbourne (HOA).
40 The evidence of Mr Sanders was that UWITC was intended to be the entity responsible for importing green beans from Indonesia.
41 The critical terms of the HOA were that:
· Mr Sanders agreed to pay $500,000 for 5100 shares equivalent to 51% of the share capital in a new company of which he would be the sole director (later JGA) (clause 3);
· Mr Sanders agreed to pay $100,000 for 50 shares equivalent to 20% of the shares in UWIT (clause 4);
· There was to be a sale by JGI to the new company of assets “including the benefit of its contract for the supply by it of coffee to Metcash …” (clause 5)
· Mr Sanders was to loan $250,000 to both JGI and JGA for working capital (clause 6).
Post Heads of Agreement
42 On 15 July 2010 JGA was registered. Mr Sanders is shown as the sole shareholder with 1 share and also the director and secretary. The evidence of Mr Sanders was that Mr Norton’s accountant suggested that the other shares should not be raised until the final settlement occurred.
43 On 29 September 2010 a sale of assets agreement was also entered into between JGI and JGA wherein JGI agreed to sell and assign its “assets” to JGA for $500,000 (clause 2). By clause 1.1, the “assets” of JGI were said to be particularised in Part 1 of the Schedule excluding stock in trade, vehicles and coffee machines (although Part 1 makes reference to an “Annexure A” which is not attached).
44 Mr Sanders’ evidence was also that in about August 2010, he raised $910,000 from MKM capital to buy into the business through a mortgage over his land. He had no source of income to meet borrowings apart from the income his investment might produce.
45 The (net) MKM funds were then deposited into the bank account of JGA.
46 However, the parties later determined that some of the funds injected by Mr Sanders for the purchase of shares would be used to pay creditors of JGI so as to defray creditors of Mr Norton’s existing business.
47 In the result, an amount of $520,716.60 was paid as directed by Mr Norton to satisfy creditors of the existing business from October, 2010.
48 A further amount of $348,592.89 of the funds provided by Mr Sanders was also utilised for the purchase of stock.
49 Further, although it appeared that attempts continued to be made to secure extra “trade finance”, the evidence of Mr Sanders was that they agreed to work with the money they had. (He did, however, later take out a second loan to inject further funds into the business).
50 During June 2010 to June 2011 the parties also arranged for the incorporation of a new company, United World Australia Trading Co, to import the green beans as originally envisaged, but with Mr Sanders to have more than the 20% originally envisaged.
51 Mr Sanders also provided the funds for the business to purchase green beans in an amount of $73,604.
52 This meant that a total amount of stock of $422,196.89 ($348,592.89 + $73,604) was purchased for this business, such that the total amount injected into the business was $942,913.49 ($422,196.89 plus the $520,716.60 paid to creditors of the former business).
53 However, no sales ever occurred and Metcash never provided any orders at all.
54 The evidence of Mr Sanders was that he received negative feedback from his sales team (called “teamworks”). He then went around with them and observed problems that appeared to have existed prior to his involvement in the business (including stock that ran out of date which was not taken back).
55 According to Mr Sanders neither Mr Norton nor Mr Hesford suggested that there was a problem because they had not bought enough stock. This was consistent with the absence of any evidence that a request for stock was unfulfilled. Mr Hesford also accepted that it was not possible to sell the stock to any of the supermarkets.
56 According to Mr Sanders: “[t]he problem was too much stock for what we were selling really, considering we weren’t selling anything.” Under cross examination, when it was suggested that $250,000 in working capital was never enough, his evidence was: “It was. It was more than double enough. Nothing was sold. Like, it was 100 per cent too much.”
57 In terms of the green beans, Mr Sanders went to Indonesia to push for delivery of the green beans but found that the person responsible did not have a licence (and he had to pay for the renewal of a permit). When he (eventually) returned to Australia with the documents, he had a meeting with the supposed purchaser, but they refused to pay, suggesting payment would only be forthcoming if they could sell the beans. In the result, the beans that arrived were mouldy and could not be sold anyway. According to Mr Sanders: “nothing was what it was said it was going to be.”
58 Meanwhile, Mr Hesford was also pressing for payments he alleged were due to him for his services.
59 By email of 17 March, 2011 Mr Hesford wrote to Mr Sanders suggesting he was owed $57,496 at the time and that if payment was not received he would serve legal notice that he was in breach of the agreement. The email also referred to his “pecuniary interest” in the Heads of Agreement being settled as a shareholder of JGI.
60 By correspondence of 17 May 2011 Ryan Commercial Lawyers forwarded a default notice to Mr Sanders under the HOA. They said they were acting on behalf of both Mr Norton and Mr Hesford.
61 Mr Sanders alleges that some of the unsold freeze dried coffee then held by JGA was removed by Mr Norton with the assistance of Mr Hesford and sold for $72,548. This issue will be canvassed further below.
62 Mr Sanders did try to sell the remaining stock himself but with no success.
63 Mr Sanders then sought injunctive relief in relation to the stock removed by Mr Norton and then commenced this proceeding.
Witnesses
64 There were only two witnesses called in the case, Mr Sanders and Mr Hesford.
65 Counsel for Mr Hesford submitted that Mr Sanders presented as a less than frank, evasive witness. He cited examples where he dealt with versions of the information memorandum, and also submitted that he had a propensity to “pepper his evidence” with references to Mr Hesford to bolster the case against him (citing an exchange relating to Mr Hesford’s role).
66 Having had an opportunity to observe the demeanour of Mr Sanders over some three days, I did not find this to be accurate.
67 Thus, although Mr Sanders was cautious in giving evidence about the information memoranda, this is understandable given it appeared that he had not received all available versions of it which versions were prepared by Mr Hesford and Mr Michalk. His evidence as to Mr Hesford’s role was also conservative. However, this is also explicable given the complexities of that role which extended beyond that of a “business manager” and given he described himself as having a “pecuniary interest” in the HOA being settled.
68 Overall, Mr Sanders presented as an honest, quietly spoken witness who was ready to make appropriate concessions.
69 By way of contrast Mr Hesford was not an impressive witness and appeared intent on giving evidence which supported his case rather than evidence which was reliable and measured.
70 A feature of his evidence was that he continually sought to support his thesis that the obtaining of finance was critical. For example, he sought to suggest that Metcash required high levels of stock (which would require finance) in order to take orders. This was despite the fact that this was never supported by any witness from Metcash, nor, as will be seen below, was it supported by the documentary evidence.
71 When initially asked if he had a discussion with Mr Sanders about raising further finance Mr Hesford also quickly responded that he told him “it can’t work unless we have this additional finance.” This proposition was not put to Mr Sanders, and was contrary to the email of 28 May which suggested that a go ahead was “viable” irrespective of trade finance. In any event, upon being pressed, Mr Hesford had to concede that he could not specifically recall any such discussion.
72 Mr Hesford also sought to generally downplay his significant stake in the business which meant he stood to gain personally from the injection of funds from Mr Sanders. Thus he was initially reluctant to agree with the suggestion that he had a “significant” investment in the business, referring to his $200,000 as involving only “a few shares.”
73 Although he had difficulty recalling events, he also appeared quick to make broad statements regardless of accuracy. For example, although he initially suggested that he was not involved with suppliers he later had to accept that this bald statement was inaccurate since he did “sometimes.” His statement in an email to Mr Strong that described the business as an “ongoing concern” was also plainly inaccurate
74 Mr Sanders also made claims which were inherently improbable. Thus, at one stage he suggested that he did not have access to the accounts which was not only incredible, but also casts grave concerns over his readiness to prepare financial proposals seeking one to two million dollars of investment
75 Overall, then, I have generally accepted and preferred the evidence of Mr Sanders and have been disinclined to accept evidence of Mr Hesford in the absence of contemporaneous objective evidence.
Misleading and Deceptive Conduct
Alleged representations
76 The plaintiffs only pursued the representations contained in paragraph 13(c) of the Third Further Amended Statement of Claim dated 13 June 2013 (TFASOC) against Mr Hesford in seeking damages for misleading and deceptive conduct.
77 The plaintiffs’ Counsel placed principal weight on the Fair Trading Act1999 (Vic) (FTA) (particularly s4), which will be therefore be the focus, below. The relevant consumer protection provisions of the FTA were replaced by the Australian Consumer Law on 1 January 2011.However, the parties accepted that, notwithstanding such replacement, the former provisions continued to operate in respect of the conduct alleged in this case which occurred prior to such repeal in about April 2010.[1]
[1] Interpretation of Legislation Act 1958 (Vic) s14(2).
78 The alleged representation was:
(c) the business conducted by JG Coffee International:
i. was very valuable; and/or
ii. would generate sales of approximately $50 million over the next two years; and/or
iii. would, in the worst case, generate sales of $5.5 million in its first year of trading.
(“the Representations”).
79 In supporting these representations, the plaintiffs relied primarily on a document provided via Geoff Strong entitled an “investment opportunity” (exhibit A); on alleged representations at the meeting in Melbourne; and on the contents of the “worst case modelling” email of 7 April, 2010.
80 Although this claim was made on behalf of all plaintiffs, the first and second plaintiffs were not in existence as at the time of the alleged representations, nor at any time prior to entry into the HOA on 22 June, 2010. This claim will therefore be examined from the perspective of Mr Sanders alone.
Exhibit A- An investment opportunity
81 That document first contained a number of alleged key achievements of Java Gold which included:
· Over the past six months it has successfully sold product and conducted product and packaging research into IGA outlets
· Sales have been above expectations and has attracted Metcash attention
· Java Gold has received a contract to supply from grocery distributor Metcash on advantageous terms through the National Distribution Centre
· Java Gold has finalised a funding contract to supply 12 product lines to Metcash for national distributional initially to 2,300 outlets
82 The document also contained a table which described “customers” as including Metcash as well as a table of “key financial indicators” which, as described earlier, gave turnover in year one of $38.52 million with an EBIT of $6.225 which increased in year 2 to $52.41million and $8.386 EBIT.
83 Mr Hesford agreed that he provided this document to Mr Strong to attract investment in the company. He said he “had my doubts” about whether the figures were achievable and that they were not his numbers but that he was asked to present them. He did however send them to Mr Strong and did not recall telling him that these documents were unreliable or overly optimistic.
84 After seeing these documents, Mr Sanders advised Mr Strong that he was interested and arrangements were made for the Melbourne meeting.
Meeting in Melbourne
85 Mr Sanders, Mr Strong and Mr Michalk travelled to Melbourne together. Mr Sanders suggests that this was late February though the surrounding documentation suggests it might be later. In any event, Mr Hesford picked them up from the airport and they went to a coffee shop and then to an IGA store where there was some Java Gold coffee for sale. They then went on to the Java Gold office at Kilkenny Court.
86 The evidence of Mr Sanders was that at the coffee shop Mr Hesford said he was the “business development person”. His evidence was that:
He [Mr Sanders] spoke very highly of the business. He said it was a great opportunity. He said it should be making millions of dollars, but it only needs someone to help run it and supply the finance for it because they'd been let down with the finance by someone else.
87 Mr Sanders said that every time, even from the first meeting, Mr Hesford spoke “glowingly” of the business.
88 Mr Sanders then went on to the Kilkenny warehouse where he met with Brian Norton, Brian’s wife (the fourth defendant) and the secretary, Linda Kennett. Mr Sanders’ recollection of the meeting was as follows:
… during that meeting?---During that meeting, there was a lot of talk between Geoff, Brian and ‑ well, Geoff Strong, Brian and Geoff Hesford about the business and the glowing prospects of the business, what they needed, what's been holding it back and how good the investment was. Brian was always talking about how good the coffee was and how much of a demand for the coffee there is and Geoff would always be talking about the figures, on what turnover they expected to get and what the profit margins would be and that.
Do you recall what sort of turnover Mr Hesford was talking about them expecting to get and what margins he was talking about?---His margins were mostly, even after costs, about 100 per cent, you know, like a double of your money even after costs and he kept saying that the only thing holding it back was having enough trade finance to build the business and to be able to get the volume that you needed.
Did he tell you what sort of volume you could get if you had that trade finance? Did he suggest a figure during that meeting?---I think he had a lot of big, like, spreadsheets with high numbers on; he was talking about 30 million on one and in the first year ‑ like, a lot of them just seemed to be extremely optimistic, but I could see that even if it was only half of what he was saying that it would be a very good business.
You've been in court during Mr Ribbands' opening. Did Mr Hesford say anything during the course of that meeting to suggest that the figures he was talking about were unreliable, or he just didn't know?---He told us about that they had orders from Metcash for $2 million and that Metcash really loved the product and if we can get the finance and drive the business, those figures are achievable. It mightn't be in the first year, but they are achievable.
Was there a discussion about why they hadn't succeeded to date?---They told us ‑ meaning Geoff Strong and myself ‑ that the reason they hadn't been successful to date was because their original financier, CDIGA, had reneged on their agreement and didn't provide them with the finance they needed to supply coffee.
89 The evidence of Mr Sanders was that the $38 million was consistently described as achievable with finance to fund those sort of sales and that it was always Geoff who was the person giving the figures and supplying any documentation on figures. Mr Hesford was always saying things were “exceptional” and he was always enthusiastic about how well they were going to do.
90 The above evidence of Mr Sanders was generally not subject to challenge.
91 The evidence of Mr Hesford was that this meeting occurred in April. He otherwise provided little direct evidence stating that it was “hard to recall the detail” of this meeting. However, he denied engaging in “spruiking.”
Worst case scenario
92 As indicated already, Mr Sanders continued to be interested in investing after the Melbourne meeting and saw a number of brokers to fund his investment.
93 As a result of meetings with brokers, he wrote the email of 7 April, wherein he sought figures for a “worst case” over the next 2 years.
94 By email of 19 April entitled “Worst case modelling” Mr Hesford wrote to Geoff Strong, Paul Sanders and Warwick Michalk stating “please find attached the worst case model asked for (emphasis added)." The evidence of Mr Hesford confirmed that he prepared this email after being asked to prepare a worst case model.
95 Attached to that email was a “Profit & Loss (Income) Statement – Java Gold Business Plan.” That showed sales revenue forecasts for the 2010 financial year beginning at $159,761 in July and increasing such that the total forecast was $5,594,539 with a net income figure of $60,187.
96 There is no balance sheet attached but there is an item “Factoring Cost-Trade Finance 2.0%” which totals $111,891 which corresponded with the costs of borrowings if $1 million trade finance was borrowed.
97 The document also contains a long list of “assumptions/notes”; none of which are highlighted (these assumptions also included some emotive language, however, which will be highlighted here):
· July 1 start-up
· Balance sheet includes $1m raised as capital (could be substituted as a loan)
· Have included $111,891 as cost of borrowings for trade finance, in the event the $1m is borrowed, in the actual model. If we were to have a capital raising through a share issue then these expense numbers would not have this figure with sales figures even lower for breakeven point than projected here
· Total sales/marketing cost just over a million (nearly 20% of gross sales-ridiculous) included on cost of operations
· Executive costs includes estimated cost for a sales/marketing manager-although marketing budget could be drawn on for this expense
· Loan of $250,000 included but with the capital raising would not be required (see Cash Flow sheet)
· Loan paid off in full Jan/11
· Sales graduated from $159,000 June-10 to $711,000 July 11.
· With sales continued at May/June 2011 rate, with no growth factored in for year 2, this would result in an NPAT of around $720,000 for Yr2-a reasonable result in itself
· Only sales from Metcash factored in. There is a large potential for additional sales through Woolworths and Coles as well as corporate sales (franchises such as Subway, Red Rooster etc plus wholesalers within the corporate delivery areas)
· Projected sales for this model represents about 0.6% of total supermarket processed coffee market or 3.5% of Metcash market share.
· With profits effectively nil there are no distributions
· I have modelled all supply and expenses at COD, receipt payment terms at 30 days. We will have some 30 day terms from suppliers etc in reality.
98 The email continues with a “Comment”:
… I think that you will have to admit that this is an extraordinary baseline when you take into consideration what Metcash would expect us to sell; as evidenced in the original opening order received.
…
This model should give comfort because we would have to be a pretty ordinary operating group if we achieved these figures.
99 However, although Mr Hesford gave evidence as to how he derived the $16 million projections which were being spoken about at the time, he provided no rationale as to the methodology for deriving the $5.5 million.
100 As is apparent from the document itself, there is also no suggestion therein that sales may not occur at all (as in fact transpired). Under cross examination Mr Hesford sought to give evidence that he had a specific recollection of a conversation with Mr Michalk wherein he said there was a “worse worst-case” scenario wherein there were no sales. I did not find this to be credible. In any event, it was not included in the email of 7 May, nor was it suggested that this had ever been made clear to Mr Sanders himself, even after it was clear that he was to be the sole investor.
101 Under cross examination, Mr Hesford maintained that if there was any less than $1 million in start up capital the thing was “dead in the water.” He suggested that this was made clear by the assumption that the balance sheet included $1 million.
102 He also agreed that there was no suggestion that the thing was “dead in the water” if they did not get multi-million dollar contracts from Metcash. However, his evidence was that he relied on Mr Norton who “firmly believed that we could have those orders reissued. So I was working with the belief, yes, those Metcash orders would be reissued. I didn’t have any doubt.”
103 This was despite the fact that by June, the evidence of Mr Hesford was that he had been growing concerned about Mr Norton’s financial management “for quite some time.”[2]
Summary of Findings re Representations
“very valuable”
[2] This is also consistent with his email to Mr Sanders on 29 September wherein he advised him to document payments as settlement payments but that he should not forward the email to Brian.
104 I accept that Mr Hesford spoke “glowingly” about the business and was “enthusiastic.” However, although such statements provide an important context, many of these statements were vague and not capable of constituting the representation alleged. Instead, such statements were more in the vein of “puffery” and not properly the subject of an operative representation.
105 In any event, I am not satisfied that Mr Hesford represented that the business was actually “very valuable.” Rather, on Mr Sanders’ own evidence Mr Hesford clearly represented that “to date” the business “had not been successful”. The real “value”, if any, was in the potential of the business to generate turnover in the future.
“would generate sales of $50 million” over the next 2 years”
106 I accept that a representation was made in the “investment opportunity” document that a turnover of $52.41 million was projected for the second year.
107 I further accept that Mr Hesford prepared this document and forwarded it to Mr Strong for the purposes of attracting investment in the company.
108 I do not accept, however, that this representation continued to be an “operative” representation which induced Mr Sanders to invest in the business.
109 Firstly, he himself says that he never expected that to happen. Thus, he gave evidence as follows:
Bear with me one moment. What you say is that,
"The business conducted by JG Coffee International was very valuable and would generate sales of approximately $51 million over the next two years"?---That was in his projections and I never expected that, but anyway, go ahead.
You never expected that to happen?---I never expected that to happen, no.
You knew it was overly optimistic, a wild blue-sky projection.
Correct?---He said to me if we were to get those orders from Metcash, as the original orders from them, they were possible. He told me that we won't get that.
Can I suggest that he said to you, "This is wildly optimistic. This involves Coles and Safeway and Aldi purchasing stock," or words to that effect. Does that ring a bell?
---Yes, because - - -
And what he said - - -?---You never get that turnover with Metcash. Everyone knows that.
He said that. He said, "This is wildly optimistic, it's unrealistic," or words to that effect, didn't he?---He said that's what he projects when we get - he believes it. He said to me, "I honestly believe once we get with Metcash, then we can go on to Coles and Woolworths.".
…
Thank you, Your Honour. What I want to suggest to you is that in or about April 2010 in the course of your discussions with Hesford, he said to you, "Those figures are," in effect, "wildly optimistic." Is that right?
HER HONOUR: Which figure?
MR RIBBANDS: The $50 million over the next two years?
Yes, he did say they are optimistic and they were reliant on getting Coles and Woolworths.
But he said words to the effect that, "The only sure thing," if I can put it that way, "that we can actually use by way of projections is the Metcash contract," because that is a known fact. Does that ring a bell?---Yes, that's along the lines of what he said, but he still believed that it would happen, yes.
That's what led to a revised projection which showed I think turnover of about $5 million over one year with a net profit after tax of about $60,000 or so. Remember that?
---Yes.
HER HONOUR: That's the worst-case scenario.
MR RIBBANDS: That's the one, Your Honour, correct.
HER HONOUR: Yes.
MR RIBBANDS: You looked at that worst-case scenario one, I suggest, and you probably thought, "Based on my own experience and my own understanding of what's going on here, that seems to be something a bit more realistic." Fair comment?---Fair comment.
110 Secondly, as the above exchange makes clear, by the time Mr Sanders entered the Heads of Agreement there was a worst case scenario (of $5.5 million). Even on a “best case” scenario, sales had also been “scaled down” to around $16 million, as is apparent from the emails of 28 May.
111 A claim based on projected sales of $50 million is therefore not sustained.
“Would, in the worst case, generate sales of $5.5 million in its first year of trading”
112 I am satisfied that, in the context of a request for the “worst case”, Mr Hesford provided a forecast of $5.5 million of sales revenue for the first year of trading in the “worst case modelling” email of 19 April.
113 Counsel for Mr Hesford submitted:
· That it was not a representation with respect to a future matter for the purposes of s4(1) of the FTA;
· That Mr Hesford was a mere “conduit”;
· That it was a prediction dependent on 2 “qualifying” assumptions.
114 Firstly, leaving aside the alleged “qualifying assumptions”, the communication constitutes a representation as to a future matter; namely what the turnover would be in the first year of trading in the “worst case”. This is confirmed by the terms of the representation itself which purport to communicate a “model” which has some rational foundation and which is supplied in response to a serious request for a worst case where someone was about to invest a significant amount of money.
115 I also do not accept the characterisation of Mr Hesford as a mere “conduit”, particularly in relation to the “worst case” email. Firstly, the evidence of Mr Sanders was that, consistent with the emails, Mr Hesford, was the person responsible for speaking about figures. In any event, the evidence of Mr Hesford was also, consistent with the terms of the email itself, that he prepared the worst case model himself in response to a request where he was being asked to explain his own figures.
“qualifying assumptions”
116 Turning, then to the assumptions, these were described variously, but appear to be that, firstly, finance of at least $1 million would be injected “so as to secure continuity of supply”; and, secondly, that there would be “secure sales with Metcash (National Distribution Centre).”[3]
[3] See Closing Submissions for Fifth Defendant dated 17 June 2013 [45] and [69(e)].
117 The case of Mr Hesford was essentially that, in the absence of the assumptions, the representation as to sales never “crystallised’ and never operated such that they were similar to “disclaimers”.
Metcash
118 It is true that Mr Hesford was asked to give his worst case with only Metcash as an account, and, further, that he explicitly assumes that “[o]nly sales from Metcash” are factored in.
119 However, this is in a context wherein there had been talk of additional sales through Woolworths and Coles. I therefore accept that the representation was directed to the “worst case” on a consideration of sales from Metcash alone. I do not accept that the representation is clearly qualified on the basis that there would be some sales to Metcash. Instead, the “comment” at the end of the email makes explicit reference to “what Metcash would expect us to sell” clearly indicating no reservation or qualification that Metcash might not buy anything. If there really was a “worse worst-case” of no sales at all from Metcash, this should have been spelt out as Mr Hesford now claims to have done with Mr Michalk. This is particularly so given the “glowing” “baseline” estimate of $5.5 million which would only be achieved if they were a “pretty ordinary” operating group.
Trade finance
120 The email does explicitly set out an assumption that the “[b]alance sheet includes $1m raised as capital (could be substituted as a loan).”
121 It is important then to consider the email in the context of Mr Hesford’s conduct as a whole, including the reference to this assumption in determining whether the conduct is misleading and deceptive.[4]
[4] Butcher & Anor v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 [39].
122 Firstly, the representation was being made in a context where Mr Hesford was being asked for the figures for a “worst case” which included a “full explanation of how figures are to be achieved”. If, as he now claims, the obtaining of trade finance was a “qualifying assumption” this should have been spelt out more clearly at this time. The reference to an amount of $1 million in an undisclosed balance sheet within a long list of assumptions is not adequate. This is particularly so given the general flavour of the email, which suggested that this worst case should provide “comfort” to an individual Mr Hesford accepts was less experienced in business modelling.
123 Its confident terms should also be compared with the information memorandum of April 2010 which was prepared by Mr Hesford and Mr Michalk (and which Mr Sanders did not see). This memorandum contain an explicit “ASIC warning” that investing in a new business was “high risk” and “speculative.”
124 It is also significant that at no time prior to entry into the HOA is such a qualification clearly made to the “worst case” figure provided. This, despite the fact that Mr Hesford is made aware of the fact that there was no extra “trade finance” and, further, that Mr Sanders was to be the sole investor.
125 Thus, although the figure of $1.15 million is mentioned in the email of 28 May of 1.49 pm, there is no suggestion that this somehow qualifies the earlier “worst case”. Rather, it was being provided in response to a request via the ANZ as to why trade finance was being sought.
126 The HOA does provide that the shareholders of J.G.2 should “endeavour” to make personal loans to seek to meet the required level of funding (“estimated” for some reason at $1.5 million at this stage). However, it further states that in the event that such loans are not made “then the business is to be scaled down accordingly”, hence suggesting that the business is still viable without the extra finance.
127 Critically, these documents are also consistent with the email of 28 May of 12.43 pm wherein Mr Hesford explicitly states that if Mr Sanders and Mr Norton were to purchase some stock this would “make the go ahead viable irrespective of whether we had trade finance organized at this point (emphasis added).”
128 Although various documents refer to capital raising, neither the worst case email itself, nor the surrounding documents therefore suggest that the worst case estimate of $5.5 million was actually to be qualified and achievable only if there was a particular amount of trade finance. Indeed, the amount of trade finance was not even certain but seemed to be a fluctuating matter: on occasions $1 million (in the worst case scenario with sales of $5.5 million, but also in the proposal of June 2010 with sales of $16 million); $1.15 (in the email of 28 May where sales were $16 million); and $1.5 (in the HOA).
129 In any event, as subsequent events make clear, the obtaining of trade finance could only be necessary in the event that the business was successful with sales attracted in the first place.
130 The trade finance assumption is therefore incapable of qualifying the statement that sales of $5.5 million would actually be attracted even in the worst case. Yet this is clearly the meaning conveyed by a statement that a worst case scenario would generate sales of $5.5 million.
131 This point is highlighted in the evidence of Mr Sanders as follows
In the course of the negotiations, had you been told anything about Metcash?---Yes, they continually talked about Metcash.
What was it that they said, and can you identify who it was that was doing the saying?---Yes, Geoff and Brian both talked about Metcash a lot, yes.
Do you recall what Geoff said about Metcash?---Geoff told us originally that the Java Gold business had done very well with Metcash and that was the whole basis of us getting involved in the business, that Metcash had given Java Gold International a big order. Originally it was going to be supplied through that other company, CDIGA, and they pulled out and if we get involved, we can continue on and get a contract with Metcash and continue on and get good sales and make a lot of money. That's the sort of basic description of it.
132 An exception to this was that Mr Hesford appeared to attempt to suggest that Metcash wanted high volume or “continuity of supply” in order to put sales orders through its distribution centre.
133 However, Mr Sanders was not aware of such a suggestion, which is pure hearsay in any event. Moreover, on the objective evidence, Metcash appeared to have provided the original large sales orders (on 24 September 2009) even before trade finance was arranged (on 9 October 2009). The email of 28 May also made clear that Metcash was “ok” with less stock and would “reissue the order to the scale we can provide”.
134 The existence or otherwise of trade finance, then, could not, and did not, qualify the suggestion that turnover was really out there of $5.5 million even in the worst case scenario.
135 I therefore find that a representation as to a future matter was made; namely, that, in the worst case, sales of $5.5 million would be generated from Metcash in the first year of the business.
136 It remains to consider the other elements.
Reasonable Grounds
137 In order to support this ground, Mr Sanders relied upon s4 of the FTA.
138 Pursuant to s4(1) of the FTA, if a person makes a representation about a future matter and the person does not have reasonable grounds for making the representation, the representation is deemed to be misleading.
139 Pursuant to s4(2) the person making the representation bears the burden of proving that he or she had reasonable grounds for making the representation.
140 The ground relied upon by Counsel for Mr Hesford was that the reasonableness of the representations are demonstrated by the qualifying assumptions referred to already.
141 In relation to trade finance, the insertion of an assumption that there would be $1 million of trade finance does not constitute reasonable grounds. Thus, as described already, the provision of trade finance cannot provide any rationale for a representation that sales of $5.5 million would actually be generated from Metcash.
142 In relation to the assumption that only sales for Metcash were factored in, this begs the question as to the methodology on which the projection of $5.5 million from Metcash was based. I do not consider that the assumption of sales to Metcash was sufficient reasonable grounds for a projection of $5.5 million. This is particularly so given there was in fact no existing order from Metcash and the “worst case” depended on the reissue of orders from Metcash which could be of an unknown level.
143 No other “reasonable grounds” were advanced. In particular, no real rationale was provided as to the way the figure of $5.5 million was derived. As indicated already, there was some evidence for the deriving of the figure of $16 million. However, this critically appeared to be premised on a starting point of $2 million in orders from Metcash. There was no evidence led at all as to the rationale for the $5.5 million, apart from the fact that it was of course, substantially less than the figure of $16 million. There was also no evidence as to the volume of purchases that might be placed by Metcash.
144 In reality, Mr Hesford appears to have relied on the “belief” of Mr Norton that they could have orders reissued by Metcash. It was not suggested however, that these constituted reasonable grounds for the representation. Nor could it be in the absence of any clear indication from Metcash itself and in circumstances where the company had already failed to deliver an order to Metcash. Mr Hesford also appears to have entertained considerable doubts as to the reliability of Mr Norton in any event.
145 The suggestion that the qualifying assumptions made the representation reasonable should also be considered against the concessions made by Mr Hesford himself. Thus he conceded that at the time of the worst case scenario, the business was actually in “a great deal of difficulty”; there was effectively no business; that Metcash would have to reissue orders before there could be sales; there was no market reputation; no established lines of supplying its goods into the market; no customer base; that the business had already had some bad luck in that there had been a major dispute with a finance company; it had failed to fulfil a substantial order and there had been a major dispute with the two directors. He further conceded that an investment would be extremely speculative and high risk.
146 When the alleged reasonable grounds are considered against this context, the defendant has not discharged its burden of proving reasonable grounds for the making of the representation as to the $5.5 million on a “worst case” basis.
Reliance and Causation
147 Pursuant to s159(1) of the FTA, a person who suffers loss “because of” a contravention of a provision in the Act may recover “the amount of the loss” against the contravener.
148 The principles concerning reliance were recently summarised in the Court of Appeal decision of Lord Buddha Pty Ltd (in liq) v Harpur as follows:[5]
[5] [2013] VSCA 101 [159].
1. In cases of deceit or cases brought under s 52 and s 82 of the Act (or under equivalent State legislation), if a material representation is made which is calculated (which is to say, objectively likely) to induce the representee to enter into a contract, and where the representation is of a kind that it is likely to provide an inducement, and that person in fact enters into the contract, an inference may be drawn that the representation operated as an inducement for the person to do so.
2. However, an inference of inducement is no more than an inference of fact, which may be rebutted on the facts of the case. In order to rebut the inference, the representor assumes an evidentiary onus to point to facts inconsistent with the inference arising….
3. The representation need not be the sole inducement. It is sufficient so long as it plays some part in inducing the representee to enter the contract, thereby acting as a real inducement, or one of the real inducements to him to do what caused his loss.
4. The inference may be drawn where commonsense would demand the conclusion that the false representation(s) played at least some part in inducing the representee to enter into the contract.
5. The drawing of the inference, on application of these principles, is but part of the fact-finding which must be undertaken on the whole of the evidence to determine the ultimate question on the issue of material inducement leading to reliance, namely whether or not the representee has satisfied the trier of fact on the balance of probabilities that the representation(s) in question contributed to the respresentee’s decision to enter into the contract such that, whether alone, or with or notwithstanding other things that accompanied it, the representation(s) operated as a real inducement or one of the real inducements, to the representee to do so…
6. The fulcrum of the inquiry in relation to misrepresentation and reliance is the need to identify contravening conduct (the making of the misrepresentation) and a causal connection between that conduct and the loss and damage allegedly suffered, in the sense that the representation(s) played at least some part in inducing the representee to enter into the contract. This must be found on the balance of probabilities before liability can be established. The mere possibility that a misrepresentation might have induced a course of action by the representee is not sufficient to attach liability under s 82 of the making of it.
7. In the application of these principles, the drawing of inferences pursuant to Gould v Vaggelas, is not per se precluded because there is no direct evidence as to reliance upon the alleged representation, nor is it precluded by reason that direct evidence was called, even if the thrust of the direct evidence is rejected. An inference as to reliance may be open to be drawn, or it may not. In each case the totality of the evidence in its context, including any possible inference to be drawn when assessed against the effect of any direct evidence, needs to be examined (citations omitted).
Application of principles
149 The direct evidence of Mr Sanders was as follows:
What was your reaction to this worst‑case scenario in terms of your decision whether or not to proceed with this investment?---It made me feel more confident. It made me confident to invest.
150 He was also asked whether he read the words about giving him “comfort” in the second last paragraph of the email. The evidence was:
Did you read those words when you received the email?---Yes, I did.
What view did you take of their accuracy or reliability?---It gave me the impression that they’re talking of a worst-case scenario and that this would be easily achievable.
Did that play any part in your decision to proceed with this proposal?---Yes, I felt confident that it wouldn’t be such a risk by having a worst case like this.
151 Under re-examination, Mr Sanders further gave evidence that he was confident from “all the facts, all the figures and the information that [he] was given from Geoff” that it was a “good thing”. It was a “safe bet” even though he did not have other income available to pay interest on his loans.
152 Mr Hesford submitted:
· That Mr Sanders acknowledged that the assumptions were part of the model, particularly as to trade finance;[6]
[6] Closing Submissions for Fifth Defendant dated 17 June 2013 [45] – [46].
· That the plaintiffs cannot demonstrate that the projections were not achievable given the assumptions were not met. Instead, the reason the business floundered was because the business never had access to the funding it needed.[7]
[7] Closing Submissions for Fifth Defendant dated 17 June 2013 [50] – [51].
· That Mr Sanders engaged in his own due diligence.[8]
[8] Closing Submissions for Fifth Defendant dated 17 June 2013 [49].
153 Firstly, for reasons given already, I do not accept that the representation was qualified by reference to a need to “secure sales with Metcash”. Although, Mr Sanders was aware that there was no current order from Metcash, the meaning conveyed by the worst case email was that sales would be attracted to Metcash at a level of $5.5 million in even the worst case scenario.
154 For reasons already given I also do not consider that the representation was inoperative in the absence of $1 million in trade finance “to secure continuity of supply”. There was some evidence from Mr Sanders which might suggest that he understood that trade finance, generally, was contemplated. However, his unchallenged evidence was that the worst case projection of $5.5 million made him “confident” to invest notwithstanding the absence of trade finance.
155 In fact, even if the representation was seen as “qualified” on the basis of the securing of trade finance, such qualification would not arise unless sales were first attracted. Thus, as Mr Sanders stated, the purpose of trade finance was to ensure there was a continual stock level once sales were generated and they were waiting for payment from creditors to continue to have stock available. In the absence of any orders there was never any role for trade finance to play. “We never got to a situation where trade finance was required more than what the amount of stock we had.”
156 I am also satisfied that the “worst case” projection is sufficiently connected to the decision to invest such that the loss occurred because there was insufficient sales. Contrary to the defendant’s submissions, I do not accept that the business floundered because there was insufficient finance. Indeed, the evidence of Mr Sanders was that “we’d be in a lot more trouble if we’d got a loan on that [for $1 million in trade finance].” This is corroborated by the fact that the business could not even sell some $400,000 worth of stock.
157 In relation to “due diligence”, this appears to have been undertaken (in late March/early April ) prior to the delivery of the worst case email on 7 April. In any event, whatever transpired through this process, the worst case email was delivered in circumstances where Mr Hesford was being asked to explain and justify his own figures and specifically provide figures for a “worst case”. There was nothing identified from any due diligence which would discount the importance of a response to such a request.
158 A representation about a “worst case” scenario for a substantial investment is clearly of a kind that is likely to provide an inducement. An examination of the terms of the “worst case” email itself also suggests it was objectively likely to induce Mr Sanders to enter the HOA and invest in the business. Thus, the email itself explicitly makes reference to what “Metcash would expect us to sell” and suggests that the model should give “comfort”. This, in response to an explicit request for figures for a “worst case” where an investor was contemplating the investment of some $850,000. It is also consistent with the terms of the surrounding circumstances wherein Mr Sanders was clearly relying on Mr Hesford to provide answers to queries.
159 The representation need also not be the sole inducement. In my view the suggestion that Metcash would buy product of $5.5 million in a “worst case” acted as a real inducement to sign the HOA. Common sense would also suggest this to be so in circumstances where projected earnings played such a significant role in the attractiveness of the business which had not yet earned any income.
160 The direct evidence of Mr Sanders’ “confidence” was also not directly challenged and is consistent with all the evidence before the court.
161 I am satisfied that the representation contributed to the decision to enter the HOA such that it acted as a real inducement in causing the entry by Mr Sanders into the HOA and the payment of investment monies.
Damages
162 Assessing damages for a breach of the FTA/TPA invites a comparison to be made between the position in which the Mr Sanders is in now and the position he would have been in had there been no contravention.[9]
[9] Henville & Anor v Walker & Anor (2001) 206 CLR 459 [162].
163 Mr Sanders submits that a worthless business was purchased. He further highlights that no receipts were received from the business through any sales, nor was any amount received on the sale of any residual stock (some of which was sold by Mr Norton).
164 He therefore seeks the entire amount thrown away as a result of the investment in the business.
165 However, Mr Hesford submitted:
· That this fails to value the “prospect” or opportunity to invest;
· That the green coffee beans represented a “separate” venture;
· That to the extent more than $850,000 is claimed this is not justifiable.
166 Both parties treated the amounts advanced as representing a capital “investment” in the business. Although there may be scope for suggesting that some of the monies represented a loan to JGA, (consistent with the original HOA) there was no evidence of any such loan being recorded. In any event, there was no evidence that JGA had any capacity to repay any loan given its absence of assets and failure to make sales.
167 Returning to the first matter raised by Mr Hesford, where misleading conduct has induced the acquisition of a business or asset that is worthless, the capital loss will be the purchase price.[10] However, the plaintiff should account for any benefits received, including goodwill, assets or stock.
[10] See cases cited in Colin Lockhart, The Law of Misleading or Deceptive Conduct (LexisNexis Butterworths, 3rd ed, 2011) [11.27].
168 The defendant suggests that what was being purchased was a “prospect” which should have been given a value by the plaintiffs. In the absence of any such valuation, it followed that the plaintiffs’ case should fail.
169 However, the “prospect” was never defined with any clarity or precision. Rather, the only thing the business appeared to have was a “hope” or “idea” that someone would purchase coffee which would be imported from Indonesia.
170 On the evidence of the defendant’s main witness, the business was in “a great deal of difficulty” at the time of the execution of the HOA. There was no history of trading with serious concerns as to its future trading given no evidence of market reputation or customer base.
171 Although the HOA referred to “intellectual property”, no evidence was ever adduced as to the existence of any intellectual property, including any trademark.
172 Moreover, by virtue of an Operating and Management Agreement dated 9 October, 2009, JFI had assigned all of its rights in any existing coffee agreements to another company, Java Gold Holdings Limited (clause 9.1), and had further licensed use of any IP to another company, World Bank of Coffee Pty Ltd (clause 9.3 (a)) and undertaken not to use any “IP” (clause 9.3(b)).
173 There was also a charge registered over JGI in respect of its obligations under the facility agreement entered into with CDIG on 9 October, 2009. According to the ASIC Notification of details of the charge, this charged “[a]ll present and future assets and undertaking including unpaid capital.”
174 The evidence was also that the business never made any sales. There was nothing to suggest that conditions altered subsequent to the date of the HOA, so as to suggest some unexpected business decline, particularly given the business had never made any sales in the first place. I therefore consider that this absence of trading is relevant to the value of the business as at the date of purchase.[11]
[11]Kizbeau Pty Ltd & Ors v W G & B Pty Ltd & Anor (1995) 184 CLR 281, 291.
175 In all the circumstances, then, I am satisfied that it is appropriate to describe the business as worthless.
176 It follows that the loss is, prima facie, represented by the full amount of the monies paid into the business.
177 In relation to the purchase of green beans, such a purchase was always contemplated by the parties. Thus, the parties always contemplated a separate company importing green beans which was originally to be UWITC. The only matter that altered later was the name of this separate company and the amount of shareholding of Mr Sanders.
178 In relation to the $850,000 submission, the HOA only ever contemplated a “purchase price” of $850,000.
179 I do not accept that, to the extent the first plaintiff paid in excess of this, that reliance on the “worst case scenario” was sufficiently connected to this excess. Although it is true that Mr Sanders may have felt compelled to keep trying to inject funds to improve the fate of the business, this was a matter of his own choosing and not caused by his reliance on the worst case scenario.
180 It follows that Mr Sanders is entitled to damages in the amount of $850,000, being the amount invested in the business because of the misleading conduct of Mr Hesford.
Conclusion
181 I am satisfied as follows:
· that a representation was made by Mr Hesford to Mr Sanders in trade or commerce that the business would, in the worst case, earn sales of $5.5 million in the first year of trading from Metcash;
· the meaning conveyed was misleading or deceptive or likely to be so given Mr Hesford did not have reasonable grounds for making the representation pursuant to s4 of the FTA;
· that Mr Sanders was induced to enter into the HOA and pay the sum of $850,000 in reliance on the misleading conduct;
· that Mr Sanders suffered loss constituted by the full purchase price of $850,000 because he injected these funds into a worthless business.
Restitution
Against Mr Hesford
182 It is unnecessary to consider this claim on the basis of my reasoning above since this claim was expressly sought as an alternative claim only.[12]
[12] Email dated 19 June 2013 from Counsel for the Plaintiff.
183 However, given my findings may affect the position as against the fourth defendant, I will summarize, briefly, my views.
184 Pursuant to this claim, the plaintiffs sought the sum of $42,164.48, being the amount of payments made directly to Mr Hesford.
185 They sought this on the basis that the HOA should be set aside as void on the basis of the court’s powers to set aside contracts for misleading and deceptive conduct.
186 Alternatively they sought the amount on the basis that the plaintiffs paid the creditors “in the mistaken belief” that they were in satisfaction of “JG Australia’s obligations under the Heads of Agreement” when that HOA is so uncertain it should be set aside.[13]
[13] TFASOC [10] and [12A].
187 Insofar as the plaintiffs rely on the misleading and deceptive conduct, the court has powers under s158(2)(a) of the FTA to order that the HOA is void if it considers it “fair” to do so.
188 However, given that payments have been made to the benefit of third party creditors of JGI, I would be disinclined to make such an order.[14] This is particularly so given damages appear to be an adequate remedy in the circumstances of this case.
[14] See cases cited at footnote 445 in Colin Lockhart, The Law of Misleading or Deceptive Conduct (LexisNexis Butterworths, 3rd ed, 2011) 385.
189 Insofar as the plaintiffs rely on uncertainty, I do not consider that the HOA is so uncertain it should be set aside as void.
190 The plaintiffs highlight that the HOA contains:
(a) a promise by a non-existent company to enter into an agreement on terms to be decided to issue shares (clause 3);
(b) a promise by UWITC to enter into an agreement to issue shares on terms to be agreed (clause 4);
(c) a promise by JGI to enter an agreement with a non-existent company on terms to be settled in the future to sell something that is nothing (clause 5);
(d) a promise by UWITC to enter an agreement with the non-existent company on terms to be agreed (clause 7(i));
(e) a promise by Norton to attempt to make a personal loan on terms satisfactory to him on some amount (clause 7(ii))
191 However:
(a) clause 3 can be understood on the basis that the director of the new company, JG2, (Sanders) would procure the subscription of 51% of the shares to himself on payment of the price of $500,000 (with the agreement of the other shareholder, Mr Norton). Although the name of the new company was not yet clear, the principal undertakings were clear and the price was certain;
(b) the principal undertakings were again certain in clause 4, including number of shares, value and price;
(c) clause 5 again would involve reading in an obligation on the parties to procure such a sale of assets agreement. The fact that the assets were ultimately worthless does not make the agreement uncertain;
(d) the concept of terms “no less commercially advantageous to J.G.2” is capable of ascertainment, but, even if it is not, clause 7(i) is not vital and could be severed;
(e) clause 7(ii) can be read as providing an opportunity for the shareholders of JGA to make loans at a (certain fixed) price of 2% per month. I do not regard it as uncertain.
192 Overall, then, and having regard to my earlier summary of the main obligations under the HOA, I do not consider the HOA to be so uncertain that it should be declared void. Rather, I consider, as the parties did, that it made provision for the parties to be immediately bound while contemplating that further terms would be provided pursuant to further agreements (as occurred).
193 Although it is unnecessary to determine, the plaintiffs would also face some other issues in seeking a return of Mr Hesford’s payment on the basis of mistake; many of which were not addressed by the parties.
194 Firstly, there is no basis for the suggestion that the plaintiffs mistakenly believed that JGA had obligations under the HOA (as is alleged). Instead, only Mr Sanders had such obligations.
195 If it is really being suggested that Mr Sanders should be entitled to a return of the monies (via JGA) he would also have to be able to trace the monies and be entitled to the monies in rem.[15] This appears difficult to establish given the plaintiffs, broadly, allege that payments to creditors were somehow made (via JGA) by Sanders and/or JGA and/or Java Management Services.[16]
[15] Peter Birks, An Introduction to the Law of Restitution (Clarendon Press Oxford, 1989) 439 – 441.
[16] TFASOC [9].
196 Insofar as JGA and JMS are concerned, there was no evidence to suggest they paid monies on the basis of a mistake. Rather, the payments to the creditors appear to flow from a separate contract between JGA and JGI. Thus, pursuant to clause 4.8 of the Sale of Assets Agreement of September, 2010, JGI agreed to apply the purchase price for the “Permitted Purpose” of satisfaction of debts before accounting to itself. Although the plaintiffs submitted that this Agreement was also void (since no assets are actually particularised in Part 1 as contemplated by the definition of “Assets”), the clear agreement of the parties, consistent with the HOA, was for JGI to transfer all the assets of the business to JGA, whatever they actually were (although this excluded stock, vehicles and coffee machines) in return for the purchase price of $500,000.
197 Consistent with the formal documents, JGI and JGA have conducted themselves on the basis that the purchase monies (injected into the bank account of JGA) were to be used to satisfy creditors of the former business. From October, 2010, Mr Sanders, as director of JGA, has permitted this to occur. Under cross examination, he also accepted that it was of advantage to him to ensure that there was no disruption to the various creditors and entities which Java Gold, the brand, had previously traded with. This was because many of the creditors the new business needed to deal with were owed money by JGI.
198 Finally, a real issue would arise as to whether Mr Hesford had a defence based on his receipt of monies in good faith and for valuable consideration for his services as an employee.
199 The claim in restitution, then, appeared to disregard the contractual relationships between the parties, including JGA and JGI and pursuant to which the creditors were actually paid. It is unnecessary to consider these issues further, however, since, given the validity of the HOA, the sum of $42,164.48 is not recoverable on the basis of the mistake alleged.
Restitution against Kholifah
200 In order to recover the amount of $201,060 paid to the fourth defendant, the plaintiffs again invite the court to set aside the HOA on the basis of misleading and deceptive conduct; relying on the conduct already dealt with; as well as the representation contained in paragraph 9(b) of the TFASOC (which was not alleged to be made by Mr Hesford).[17]
[17] The plaintiffs abandoned reliance on the representation at 13(a).
201 In the alternative, the plaintiff sought restitution on the basis of mistake and on the basis of a total failure of consideration.
202 Again, however, I am not prepared to set aside the agreement as void given the impact on other third parties (this would be so even if there was an additional misrepresentation to the effect that JGI was not able to give good title to the assets of the business-see para 9(b) TFASOC).
203 I am also not satisfied that the HOA should be set aside for uncertainty for reasons already given.
204 This leaves the suggestion that there was a total failure of consideration.
205 It will be recalled that, further to the HOA, Mr Sanders became a shareholder and director of JGA (pending completion of the obligations under the HOA). His solicitors thereafter prepared the Sale of Assets agreement wherein his company, JGA, purchased the “assets” of JGI. Once finance was through he was also involved in decision-making and ran the business through JGA.
206 Although Mr Sanders ultimately received nothing of any commercial value, I am not satisfied that there was a “total” failure of consideration given these circumstances.
207 It follows that the claim against the fourth defendant should be dismissed.
Stock
208 It is unnecessary to consider this claim given my findings on the misrepresentation and given the “stock” claim was an alternative claim to the misleading conduct claim.[18]
[18] Email dated 19 June 2013 from Counsel for the Plaintiff.
209 I will therefore provide only a brief summary of my findings.
210 JGA claims that the fifth defendant is liable for knowing receipt of $5000 obtained by Mr Norton in breach of his fiduciary duty.[19]
[19] Plaintiffs’ Particulars of Claimed Quantum dated 17 June 2013.
211 JGA also claims that the fifth defendant is liable for knowing assistance in a dishonest and fraudulent design on the part of Mr Norton, to sell the stock for personal gain in conflict with his fiduciary duty. The plaintiffs claim $72,548 in relation to the knowing involvement/assistance claim.[20]
[20] Plaintiffs’ Particulars of Claimed Quantum dated 17 June 2013; although Mr Hesford objected to an affidavit of Mr Norton which established this quantum, Counsel ultimately did not challenge this quantum in closing.
212 The plaintiffs alleged that Mr Norton owed a fiduciary duty to JGA by reason that he was “… nominated by JG Australia to Capital Liquor as an authorised person to deal with property owed by JG Australia.”[21]
[21] TFASOC [20].
213 However, it was not argued that the relationship fell within any prescribed category of fiduciary relationship. Although the categories of fiduciary relationship are not closed,[22] the plaintiffs also did not develop any argument as to why a fiduciary relationship was otherwise established.
[22] Hospital Products Ltd v United States Surgical Corporation & Ors (1984) 156 CLR 41, 68 and 96.
214 Mr Hesford denied the existence of a fiduciary duty, but without elaboration.[23]
[23] Fifth Defendant’s Defence to the Further Amended Statement of Claim dated 12 March 2012 [21].
215 There are real issues, then, as to whether any fiduciary duty would be established. However, I have presumed, without deciding, that such relationship could exist. On this basis, I will briefly record my findings in relation to the issues addressed as to whether Mr Hesford should be held liable for “knowing receipt” or “knowing assistance”.
Findings
216 On or around 10 May 2011, Mr Hesford and his wife assisted Mr Norton and his wife Siti Kholifah, to conduct a stock take of JGA stock stored at the Capital Liquor warehouse at the end of which Mr Norton took approximately three boxes of samples.
217 About a week later, Mr Norton sent a transport company to pick up the stock which he later sold for $72,548.
218 Under examination, Mr Hesford gave evidence that after the date of the stocktake he had no further discussions with Mr Norton about the stocktake. Further, that he did not discuss with Mr Norton the arrangements for picking up further stock on 16 May 2011.
219 However, under cross examination, Mr Hesford conceded that he knew Mr Norton was going to sell the goods before he sold them, and he knew that he had removed the stock from the warehouse at the time of the sale. Further, when Mr Norton told him that he was going to make a sale of the goods, he claimed to have told Mr Norton that a sale would be a “difficult thing to do because there’s got to be arguments over ownership.” Mr Norton advised him that he had the right to sell the goods because settlement had not been reached.
220 Mr Hesford’s evidence was that Norton called him to ask him to arrange for some samples to be picked up by a commission-selling agent, a Mr Davis. He did this, but informed Brian that this “wasn’t a smart thing to do.”
221 Thus, Mr Hesford confined his dealings with the sales/commission agent to organising samples.
222 In terms of the receipt of funds, Mr Hesford gave evidence as follows:
· he received $5000 from Mr Norton around the same time the stock had been sold (which was on 9 June 2011);
· he did not know where the money had come from;
· he had been pressing Mr Norton for the money he owed him for some time;
· there was a “possibility” or “prospect” that the $5000 could have been sourced from the sale of stock; and
· he knew at the time of receipt that Mr Sanders was suing Mr Norton in relation to the stock
223 On 28 June, 2011, Mr Hesford also swore an Affidavit in opposition to the plaintiffs’ application for orders freezing the stock alleged to be owned by JGA.
Resolution
224 In relation to the “knowing receipt” claim, it is significant that Mr Hesford acknowledged there was a “possibility” or “prospect” that the $5000 could have originated form the sale of the stock. Given he received the monies at the time the stock was sold in circumstances where ownership was being disputed, I consider that he had knowledge of circumstances that would “put an honest and reasonable man on inquiry”, with the result that he would be liable for the amount of $5000. [24]
[24] JD Heydon and MJ Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 7th ed, 2006) [1335].
225 In relation to the “knowing assistance” claim, the plaintiffs relied upon Mr Hesford’s knowledge of the proposed sale; that he knew Mr Sanders was claiming ownership; his assistance insofar as he made arrangements with the commission agent; and his having sworn the Affidavit in opposition.
226 However, to make out this claim, there must be both actual knowledge as well as assistance in a “dishonest design.”[25]
[25] JD Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 7th ed, 2006) [1339].
227 Although Mr Hesford realised there was a question about the ownership of the stock, in circumstances where he believed there were only “arguments” about ownership I am not satisfied that he assisted, with knowledge, in a “dishonest design”. This is particularly so since assertions of this kind of dishonesty require clear, cogent and concise proof.[26]
[26]Briginshaw v Briginshaw (1938) 60 CLR 336.
228 It follows that, although there would be an entitlement to claim $5000 on the basis of a “knowing receipt” claim (if there was a breach of fiduciary duty by Mr Norton), I would not be satisfied that the claim in relation to the $73,604 would be established.
Conclusion
229 I will hear from the parties as to the appropriate form of final orders to reflect these reasons.
230 However, I consider that the following orders would be appropriate:
· The third plaintiff, Mr Sanders, is entitled to judgment in the amount of $850,000 against the fifth defendant, Mr Hesford;
· The claim against the fourth defendant, Siti Kholifah, is dismissed;
· The claim against the third defendant (bankrupt) is dismissed with no order as to costs;
· The Counterclaim as against the first and second defendants to the Counterclaim be dismissed.
231 The parties are invited to prepare a form of proposed final order prior to any further listing of this matter.
SCHEDULE OF PARTIES
| JAVA GOLD AUSTRALIA PTY LTD (ACN 145 240 884) | First Plaintiff |
| JAVA MANAGEMENT SERVICES PTY LTD (ACN 145 575 444) | Second Plaintiff |
| DAVID PAUL SANDERS | Third Plaintiff |
| and | |
| JAVA GOLD COFFEE INTERNATIONAL PTY LTD (ACN 134 085 484) | First Defendant |
| UNITED WORLD INTERNATIONAL TRADING COMPANY PTY LTD (ACN 134 201 264) | Second Defendant |
| BRIAN CHAPMAN NORTON | Third Defendant |
| SITI KHOLIFAH | Fourth Defendant |
| GEOFFREY HESFORD | Fifth Defendant |
| and | |
| JAVA GOLD COFFEE INTERNATIONAL PTY LTD (ACN 134 085 484) | First Plaintiff by Counterclaim |
| UNITED WORLD INTERNATIONAL TRADING COMPANY PTY LTD (ACN 134 201 264) | Second Plaintiff by Counterclaim |
| BRIAN CHAPMAN NORTON | Third Plaintiff by Counterclaim |
| JAVA GOLD HOLDINGS LIMITED (ACN 139 914 604) | Fourth Plaintiff by Counterclaim |
| THE WORLD BANK OF COFFEE PTY LIMITED (ACN 139 837 424) | Fifth Plaintiff by Counterclaim |
| and | |
| JAVA GOLD AUSTRALIA PTY LTD (ACN 145 240 884) | First Defendant by Counterclaim |
| DAVID PAUL SANDERS | Second Defendant by Counterclaim |
| CDIG AUSTRALIA CO PTY LTD (ACN 130 824 412) | Third Defendant by Counterclaim |
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