Lakshmanan v Reddy - [2010] NSWSC 1455

No judgment structure available for this case.

CITATION: Lakshmanan v Reddy [2010] NSWSC 1455

HEARING DATE(S): 22, 24, 25, 26 February; 1, 2, 3, 4 March; 1, 2, 3 September; and 8 October 2010

JUDGMENT DATE :
21 December 2010

JURISDICTION: Equity Division

JUDGMENT OF: Bergin CJ in Eq

DECISION: Plaintiff entitled to recover loss of $4,593,048

CATCHWORDS: MISLEADING OR DECEPTIVE CONDUCT - whether representations were made - whether representations were false - whether the plaintiffs relied upon the representations - whether the plaintiffs are able to recover amounts paid in reliance on representations - CONRACT - alternative claim not necessary for decision where written contract did not reflect purchase price of shares - whether written contract reflected agreement reached - whether defendants entitled to recover damages for breach of contract on cross-claim

LEGISLATION CITED: Fair Trading Act 1987
Trade Practices Act 1974 (Cth)

CASES CITED: Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592
Campbell v Backoffice Investments Pty Limited (2008) 238 CLR 304

PARTIES: Arunchalam Lakshmanan (First Plaintiff / Second Cross-Defendant)
Arun Lakshmanan (Second Plaintiff / First Cross-Defendant)
Anand Lakshmanan (Third Plaintiff / Third Cross-Defendant)
Roman Reddy (First Defendant)
Venilla Reddy (Second Defendant / Second Cross-Claimant)
Meshona Pty Limited (Third Defendant)
Sumeshin Reddy (Fourth Defendant / First Cross-Claimant)
Redmint Pty Limited (Fourth Cross-Defendant)
Anand Nominees Pty Limited as Trustee for the Lakshmanan Family Trust (Fifth Cross-Defendant)

FILE NUMBER(S): SC 2007/255422

COUNSEL: J Stevenson SC / VE Whitaker (Plaintiffs / Cross-Defendants)
C Branson QC / P Knowles (Defendants / Cross-Claimants) (22 February 2010)
C Waterstreet (Defendants / Cross-Claimants)(from 24 February 2010)

SOLICITORS: Gillis Delaney Lawyers (Plaintiffs / Cross-Defendants)
Holman Webb Lawyers (Defendants / Cross-Claimants)

- 126 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BERGIN CJ in Eq

21 DECEMBER 2010

2007/00255422 ARUNCHALAM LAKSHMANAN & ORS v ROMAN REDDY & ORS

JUDGMENT

1 This litigation arises out of a dispute between two families, the Lakshmanan family: Dr Arunchalam Lakshmanan, the first plaintiff (the plaintiff) and his two sons Arun Lakshmanan, the second plaintiff (Arun) and Anand Lakshmanan, the third plaintiff (Anand); and the Reddy family: the late Roman Reddy, the first defendant (the defendant), his wife Venilla (“Dolly”) Reddy, the second defendant (Mrs Reddy) and their son Sumeshin Reddy (Mr Reddy), the fourth defendant. The defendant’s daughter, Ramona Reddy, was involved in some of the events the subject of the proceedings but is not a party to the proceedings.

2 The plaintiff claims that he was misled by the defendant into agreeing to pay $9 million for a 49% shareholding in Meshona Pty Ltd (Meshona), the third defendant, a company controlled and owned by the Reddy family. The plaintiff claims that the defendant made misleading statements in relation to the value, profitability and debt of Meshona. It is also alleged that the defendant made misleading statements about the due diligence process that would be available to the plaintiffs. The plaintiff claims that in reliance on the misleading statements he made payments totalling $4,593,048.22 ($4.59 million) of the agreed $9 million that he claims he would not otherwise have made. The plaintiff makes an alternative claim for damages for breach of contract and seeks the return of the $4.59 million plus interest plus costs.

3 The defendants deny the allegations of misleading or deceptive conduct and by way of Cross Claim against the plaintiffs and their companies, referred to later, seek payment of the balance of the purchase price of the shares and other relief.

Procedural history

4 On 16 September 2009 the matter was listed for hearing for 14 days commencing on 22 February 2010. On Monday 22 February 2010 Mr J Stevenson SC leading Ms V E Whittaker, of counsel, appeared for the plaintiffs and Mr C Branson QC leading Mr P Knowles, of counsel, appeared for the defendants. Mr Stevenson made an application to amend the Statement of Claim to include claims that were reflected in the affidavit evidence. That amendment was allowed. Mr Branson made an application for an adjournment of the trial because he had only been briefed the previous Thursday evening, 18 February 2010. I adjourned the trial to Wednesday 24 February 2010.

5 On 24 February 2010 Mr C Waterstreet, of counsel, announced his appearance for the defendants and sought an adjournment to Thursday, 25 February 2010 to enable him to prepare for the trial. That adjournment was granted. The trial then proceeded on 25 and 26 February 2010 and 1, 2, 3 and 4 March 2010. The plaintiffs’ case concluded on 4 March 2010 and by consent the matter was referred to mediation and for various reasons, the proceedings were adjourned for further hearing for five days on 28 May 2010 and 1 to 4 June 2010 inclusive. Unfortunately the defendant died in May 2010 and the hearing dates in May and June were vacated. The further hearing of the matter proceeded on 1, 2 and 3 September 2010 and 8 October 2010. On 2 September 2010 an order was made by consent that pursuant to Uniform Civil Procedure Rule 7.10(2)(b) Mr Reddy be appointed as the representative of the estate of Roman Reddy for the purposes of the proceedings. That order and this judgment and orders subsequently entered bind the defendant’s estate: UCPR 7.10(3).

The Parties

6 The plaintiff was born in India and moved to Australia in 1970. He has practised as a medical practitioner in general practice in Holbrook, New South Wales since 1971. The plaintiff’s wife died in 1986. Arun was admitted to practice as a solicitor in New South Wales in 1998. He then worked in a number of legal firms. Anand holds a Bachelor Degree in Commerce, majoring in Accounting and a Masters Degree in International Business. He worked in various finance companies from 1998 to 2003. Neither Arun nor Anand were employed in mid 2004 and the plaintiff was keen to provide them with employment opportunities.

7 In 2004 the plaintiffs were involved in a number of companies including Anand Nominees Pty Limited (Nominees) and Redmint Pty Limited (Redmint). The plaintiffs, Nominees and Redmint own commercial and residential properties in New South Wales and Victoria (the Properties). The Properties include home units in Prahran in Victoria and in Eastwood and Kingsford in New South Wales and commercial premises in Camberwell in Victoria. Redmint as the trustee of the AAA Family Trust, is the registered proprietor of an hotel in Sydney known as the Marrickville Tavern. The plaintiff in his own right owns units in York Street, Sydney, Parramatta Road, Cronulla and Market Street, Sydney.

8 The defendant was born in South Africa and lived there until 1986 when he and his family moved to New Zealand. The defendant had been working with National Mutual Life of Australasia (National Mutual) as the General Manager, Distribution since 1983 and was transferred to the New Zealand office of National Mutual in Wellington in 1986. The defendant and his family lived in New Zealand until 1992 and during this time the defendant changed his employment to General Manager, Financial Services, with Westpac Banking Corporation. In 1992 the defendant and his family migrated to Australia. At this time the defendant ceased his employment with Westpac Banking Corporation and took up employment with GIO Australia Limited (GIO) as General Manager, Financial Planning, in which his responsibilities were to obtain and develop business in relation to the funds management business of GIO. The defendant remained in that employment until 1996 when he resigned with the intention of setting up his own business. It is not clear what the defendant did between 1996 and 1999 other than investigate various business opportunities.

9 In February 1999 the defendant established a business of “marketing mortgages” operated by a company, Flexi Mortgage Group Pty Limited (Flexi Mortgage) that was incorporated at about that time. Meshona holds all the issued shares in Flexi Mortgage. The defendant and Mr Reddy worked together in the business of Flexi Mortgage, which also employed sales, marketing and administration staff. Those staff were subsequently employed by another company established for that purpose, Flexi Group (Holdings) Pty Limited.

10 In 2001 the defendant investigated changing the business to that of a programme manager whereby Flexi Mortgage would borrow moneys from wholesale suppliers of funds and on-lend those moneys to other mortgage originators or directly to retail borrowers. Negotiations took place with various funders and Resimac Limited (Resimac) agreed to be the principal funder for the business. In November 2001 Meshona House Pty Limited (Meshona House) was incorporated to carry on that business and to enter into the agreement with Resimac. Mr Reddy became the Chief Executive Officer and sole director of Meshona House. Once Meshona House commenced the new business, Flexi Mortgage ceased arranging loans. At this time Flexi Group (Holdings) Pty Limited changed its name to Meshona Group Holdings Pty Limited (Meshona Group Holdings) and certain aspects of the Meshona House business were conducted through it. Mrs Reddy and Ramona managed the business of Meshona Group Holdings.

11 In 2002 Meshona acquired an interest in the Financial Directions (Australia) Unit Trust and its trustee, Financial Directions (Australia) Pty Limited (FDA). Meshona set up subsidiaries, First Community Finance Pty Limited and Tula Grace Pty Limited through which the financial products and services of Meshona House were distributed. This included investment funding, commercial lending and debt restructuring. An additional subsidiary company, WYD Pty Limited (WYD) was established to provide marketing services to the distribution companies

12 The defendant claimed in his affidavit that the Meshona Group of Companies was essentially family operated and owned in which he acted as the “figurehead” and assisted the members of his family to carry out their duties. Mr Reddy was responsible for supervising the distribution of products and for maintaining the computer systems of the business of the Group of Companies. Ramona was responsible for supervising the administration of the business and the processing of applications for borrowers. Mrs Reddy was the sole shareholder and director of Meshona (which owned all the companies in the Group) and was responsible for supervising the maintenance of the books and records of the Group.

13 The defendant’s affidavit includes reference to a South African consortium, headed by a Mr Isaacs, that became interested in either investing in or purchasing outright the Meshona Group of Companies. It is apparent that this interest may have been expressed in about 2001. The defendant’s affidavit included a claim that he advised Mr Isaacs that the family would not take less than the equivalent of $9 million and would not sell more than 49% of the Group. The defendant also claimed that there was interest from other quarters including Interstar Securities (Australia) Pty Limited, which was later taken over by Challenger Financial Services.

14 In 2003 the defendant decided to investigate whether the Meshona Group could obtain a loan facility directly from either a bank or a superannuation fund because he was of the opinion that loans could be made at more competitive rates and the companies would not have to rely upon wholesale funders who themselves borrowed from such lenders. The defendant expected that a direct facility would effectively be unlimited, but that mortgages securing the loans made by Meshona House would be securitised for every $100 million lent under a securitisation program with the lender. The defendant understood that to establish a direct facility, significant additional issued capital of not less than $5 million would be required. The defendant’s affidavit included a claim that this could only be done by significantly increasing the number of distributors associated with the Meshona Group and expanding the marketing program principally through television marketing. The defendant also believed that it would be necessary to employ an experienced credit manager and risk manager.

15 As at the end of 2003 the Meshona Group had loans or facilities from the Commonwealth Bank of Australia totalling $2.8 million guaranteed by the defendant and secured by mortgages on the family home in Mosman in Sydney. The defendant’s affidavit included a claim that he was not willing to encumber his home any further and it was therefore essential that if such a business plan were to be implemented that another party should become involved in the Group to provide funds for development. The defendant’s affidavit also included a claim that Mr Isaacs informed him in July or August 2004 that the consortium was willing to pay the equivalent of $9 million for 49% of the Meshona Group on the condition that the consortium had two out of four directors.

Plaintiff’s plans for Refinance

16 In 2004 the plaintiff was planning to refinance the Properties for the purpose of raising $15 million to invest in companies known as Revetec Pty Limited (Revetec) and VIP Vending Pty Limited (VIP). The plaintiff had already invested $1 million in Revetec on the advice of Ray Tually and was taking further advice from Mr Tually and Mr Robert Kelly to whom Mr Tually had introduced the plaintiff and his sons.

Introduction to the defendant

17 On Friday 13 August 2004 the plaintiff and his sons met with Mr Tually and Mr Kelly and a representative from VIP at the Radisson Hotel in Sydney. Mr Kelly provided the plaintiff with some information about the defendant and advised him that the defendant would be arranging the refinance of the Properties. Mr Kelly also advised the plaintiff that the defendant wanted to meet him because of the large amount involved.

18 On the same day the plaintiff, his sons, Mr Tually and Mr Kelly attended Meshona’s premises in Sydney. The plaintiff’s version of the conversation at this meeting was that the defendant informed Mr Tually that he could have the funds in his trust account within two weeks and the finance would be for three years on an interest only basis secured against the Properties. The defendant’s affidavit includes a denial that the defendant said that he could have any funds available within two weeks. It includes conversations between the plaintiff and the defendant at this meeting in which the defendant informed the plaintiff that Meshona House could arrange the loans that he was seeking and that the processing of loan applications would commence when he paid a fee of $5,000 that day and an additional fee of $35,000 would have to be paid subsequently.

19 After this meeting the plaintiff, his sons, the defendant, Mr Tually and Mr Kelly then went to the Radisson Hotel for dinner. During this dinner the defendant informed the plaintiff of his family’s background including that they had travelled from South Africa and lived in New Zealand prior to settling in Australia. The plaintiff claimed that the defendant informed him that he had been the head of GIO and responsible for the public float of that company. The plaintiff claimed that the defendant also informed him that he had decided to go into business for himself and his family and had started his own “private bank” which had become an international operation with offices all around Australia and in New Zealand with some business interests in South Africa. The defendant informed the plaintiff that his son, Mr Reddy, was the CEO of Meshona and his daughter, Ramona, was the managing director of Meshona and responsible for approving the loans. The defendant’s affidavit includes a denial that he had said that he was the head of the GIO. It also includes a conversation in which the defendant alleged he informed the plaintiff that he had taken a “backward step” and that his two children were “effectively running the business”. It also included a claim that what he said to the plaintiff about his children was that Mr Reddy was the director of Meshona House responsible for the distribution of the products of the Meshona Group and the computer systems and that Ramona “runs the back office and credit”.

20 The plaintiff informed the defendant that all that he had done in his life was for his sons and their future and that he wanted them to be in successful careers like the defendant’s children. The plaintiff also informed the defendant that this was why he was refinancing the Properties to invest in business opportunities for his sons’ futures. It is clear that the plaintiff and the defendant got on very well at this meeting and a further meeting was arranged on the following Sunday, 15 August 2004, at a Chinese restaurant in Mosman. At this meeting the defendant introduced the plaintiffs to the other members of his family.

21 On Friday 3 September 2004 the plaintiff travelled from Holbrook to Sydney and although there was no mention in his affidavit of a meeting on 3 September 2004, the plaintiff recalled that he attended Meshona’s offices on that day. He agreed in cross-examination that on this occasion he wrote a cheque for $35,000 for fees for the valuations of the Properties to support the loan applications. The plaintiff recalled that his sons and Ramona were present at this meeting and he signed further loan applications.

22 The plaintiff and the defendant also had lunch at Miltons Restaurant in Sydney not far from the Meshona offices, although the timing of this luncheon is not clear. The defendant’s affidavit puts it as “late August” and the plaintiff did not refer to it in his affidavit, although he accepted in cross-examination that it occurred. The discussion at this luncheon is of some significance in relation to a preliminary issue referred to later.

The Agreement - 5 September 2004

23 On Sunday 5 September 2004 the defendant picked the plaintiff up from Arun’s apartment in Market Street, Sydney and drove to the Mosman RSL Club (the Club). The discussion at the Club is of importance because it was during this meeting that the plaintiff claims he was misled. It is therefore appropriate to set out that discussion in detail. The plaintiff’s version of the conversation at the Club was as follows:

Defendant: Laks I think very highly of you and your sons, I think our families get on very well together and that we could get together and form a great business partnership. I want to talk to you about you investing in my companies. You know that our families get on very well and I would like to bring our families together through my company. Instead of investing in the Vending Machines which is risky and you may lose everything, why don’t you invest in my business. I will sell you 49% of my business for $6 million now and $3 million to be paid over 5 years. We will be business partners. The business is making $850,000.00 net profit. I don’t have to lift a finger, I can just sit in my backyard and the money flows. I could sell the business for $20 million or more, but I like you and your sons. They can work together with my family and keep it a family business. The Packer Group wanted to buy my business for $20 million but if I sell it to them my family won’t have a business. As you know my background was through GIO and I then formed the Meshona Group of companies for the benefit of my family. The Meshona Group with its various subsidiaries is worth at least $20 million and I would rather enter into a partnership between our families than sell it off to someone else. I can then give some very good business opportunities for you and employment opportunities for your sons.

Plaintiff: Roman as you know I am concerned about my sons’ futures. They are not working even though they are educated. That is why I met with Ray Tually. He promised to help Anand get a job in his accounting firm. I have worked hard all my life and my sons are my life.

Defendant: I like Arun and Anand. I think that they are very smart. They get along so well with Ramona and Sam. I will teach Arun and Anand everything about the finance industry. I will also introduce to you and the boys all of my contacts in Sydney and in South Africa. During my time with GIO I have made some very influential friends. By you joining with me we will make two families who are strong by themselves into a force to be reckoned with.

Plaintiff: Yes Roman this all sounds very exciting but I would need to know more about the companies in which you are asking me to invest.

The companies are squeaky clean. You will have the opportunity to go through the financials and undertake due diligence. That won’t be a problem. I am very excited for the opportunity for our families to work together. The company is worth more than $20 million and as I said I propose that you put in $9 million from the refinance of your properties for a 49% interest in the companies. We will have no trouble getting you that money as a refinance. We will use your funds to expand the business. Are you interested?

Plaintiff: Yes, I’m very interested, let’s look at doing something together for my sons.

Defendant: We would need to organise the refinancing of your properties so that you can make the contribution. I will be able to give your boys employment with the company and get them to help us with the refinance. Your investment in the company will give you a much higher return than the investments you were looking at and is much safer. You will also be looking after the interest of your sons.

Plaintiff: That sounds good Roman. You would need to provide me all the financial documents so I can look at it.

Defendant: Yes, I will have Ramona provide you with all the financials. She will sign off and show you that the business you are buying is a squeaky clean company. You and me will be designated as principals of the company. The money will be used as capital in the business. With your capital invested in the companies the business will flourish and both families will be stronger.

Plaintiff: This will all be conditional on us reviewing all of the financials and conducting a due diligence.

Defendant: Yes I will give you all the financials. You will be able to do a due diligence. I will provide you with all the documentation.

24 The plaintiff claimed that the defendant then reached out and shook his hand and the two men “toasted with champagne”. The plaintiff’s affidavit evidence was that he and the defendant then travelled to the defendant’s home in Mosman where an announcement was made to Arun, Anand, Mrs Reddy, Mr Reddy and Ramona.

25 The defendant’s affidavit included a claim that in a conversation with the plaintiff the defendant asked him to arrange for Aran and Anand to go to the defendant’s home so that “after you and I have spoken, we can speak to our families”. The defendant’s affidavit included the following conversation that he claimed occurred at the Club:

Defendant: Doctor, I have spoken to my family. As far as I am concerned it would be a good idea for your family to acquire an interest in the Meshona Group. But you will have to convince my family, particularly Sam. There is a problem with Sam as he favours the South Africans. The price if your family buys in will be $9 million for 49% of the Meshona Group. Meshona’s gross commission and trail income is around $800,000 per annum.

Plaintiff: Roman, I agree. Thank you very much.

26 The defendant’s affidavit includes a claim that “during the balance of the conversation” he said the following to the plaintiff:

I have been talking to Macquarie Bank about obtaining funding so Meshona House can lend money directly, so that it does not have to borrow from intermediate lenders. This will involve a substantial investment. I believe that it will require issued capital of at least $5 million. If your family buys into Meshona, your family will have to contribute its share of that amount. That amount will be the minimum which will be required to develop the business to the stage where it will be able to obtain this line of funding. Banks like Macquarie Bank require evidence of systems and resources sufficient to enable large amounts of money to be lent, otherwise they are not interested.

No-one in our group understands prudential credit and lending criteria and guidelines acceptable to Macquarie Bank. We will have to engage managers with the necessary experience. I am currently speaking to a senior officer at Commonwealth Bank who has expressed an interest in taking one of these positions.

We have a satisfactory credit rating but we’ll need a credit rating report from a credit rating agency acceptable to Macquarie Bank or a similar lender before we can obtain such a funding line.

We will have to develop appropriate computer systems including management systems as well as develop extensive distribution networks to enable the business to develop to the level required by the funder.

Your son Arun has legal qualifications. We have been considering engaging an in-house counsel to assist the development of the business. Anand has accounting qualifications. These would be of great assistance to our company as well.

The only debt the company really has is to the Commonwealth Bank of about $2.8 million. There are normal trade creditors. The money paid to acquire 49% would be used to pay off the Commonwealth Bank so that the company does not have that debt. It will also be used for the development of the company.
Your family will also have to put in its share of the development costs over and above the money paid to acquire 49% of Meshona.

27 The defendant’s affidavit included the following paragraph in relation to the version of the conversation referred to earlier that Dr Lakshmanan had included in paragraph 26 of his affidavit:

152. I refer to paragraph 26 of Dr Lakshmanan’s affidavit. To the extent that it differs from the paragraphs immediately above, the version of Dr Lakshmanan’s and my conversation at the Mosman RSL Club set out in that paragraph 26 does not accord with my recollection and I dispute it. In particular, I never said anything to Dr Lakshmanan about us becoming “business partners” or entering into a “partnership” and I would not have considered this to be consistent with his family acquiring less than a 50% interest in the Meshona Group. Additionally, at no point in this conversation did I suggest that $3 million of the $9 million to be paid for 49% of the Meshona Group could be paid over a period of time, such as 5 years. I said the price would be paid in full when the shares were transferred.

Announcement to the families

28 The defendant claimed that when they returned to the defendant’s home he asked everyone to stand around the table and he said that the plaintiff had an announcement to make. He claimed that the plaintiff said:

Roman and I have had a discussion. I have come to a decision that our family purchase 49% of the Meshona Group for $9 million. What do you all think of that?

29 The plaintiff’s version is slightly different. He claimed in his affidavit that he said to the respective families:

I was going to refinance so that I could obtain moneys to invest on my sons’ behalf for their future. Because our families get along so well Roman and I have agreed that it would be in both our families’ interests to join together. I intend to purchase 49% of the Meshona Group. I will be paying $6 million upfront from a refinance and then a further $3 million over the 5 years.

30 There is no issue that Mr Reddy questioned the decision. The defendant claimed that Mr Reddy said that he would be happier with the “South African deal”. The plaintiff claimed that Mr Reddy said that he had spent his life building the company up and that the plaintiff had come in and taken half of it in just a couple of hours. The plaintiff also claimed that Mr Reddy said that if the company was being sold he was glad it was to the plaintiff as he liked Arun and Anand and believed that they could work well together. Both the plaintiff and the defendant recalled Anand asking why “we have to rush into this” and after the plaintiff asked him to “give it a go” or “give it a chance” he agreed.

31 After the announcement the families had lunch together at the defendant’s family home. The defendant also claimed that after lunch he said to the plaintiffs:

Arun and Anand can come into the Meshona offices and look at whatever they want to satisfy themselves about the business. We will set them up in an office of their own and they can have access to all of the Group’s records.

32 The defendant claimed that for around a fortnight from Tuesday, 7 September 2004 Arun and Anand attended the Meshona Group offices on a daily basis. The defendant observed them meeting with Mr Reddy and claimed that he observed Mr Reddy “explaining to them the Group’s business and its finances”. The defendant’s evidence included the following:

I also saw a number of folders piled on the table in the Boardroom where Mr Reddy, Arun and Anand were meeting, including a number of red folders which contained the Group’s financial information. I observed that Arun and Anand were allocated an office of their own within the Meshona Group’s offices for the purpose of conducting their due diligence and that a large number of other folders containing the Group’s business records of various kinds were in that office.

33 The defendant claimed in his affidavit that Ramona advised him after 5 September 2004 but before 10 September 2004 that the valuations of the Properties were not coming up to the values in a schedule that had been provided by the plaintiff. He also claimed that Ramona also advised him that the mortgage insurers were declining some of the loans because they had seen the Properties previously.

34 On 10 September 2004 the plaintiffs each signed a document headed “Retainer/Mandate Agreement” addressed to Meshona Group and headed “Finance Application”. It included the following:

We, being the person(s) named in Item 1 appoint you to arrange finance on our behalf for the amount stated in Item 2 (“Loan”) or such other amount as we agree for the term set out in Item 3 to be secured in the manner set out in Item 4.

35 Item 2 was in the following terms:

The loan amounts will be based on the security offered, exposure, and serviceability of the debt based on Meshona and/or Lenders Guidelines.

36 Item 3, the loan term, was “As per lender requirements”. Item 4, the Security, referred to a Schedule annexed to the agreement which identified the Properties, the owner, the valuation at estimated market value and the gross annual income. The total value of the Properties in the Schedule was recorded as $21.4 million. The agreement also acknowledged that the loan was to be used “solely or predominantly for business or investment purposes”.

Drafting the Agreements

37 Arun’s affidavit evidence was that on 6 or 7 September 2006 he attended Meshona’s offices where he was arranging for the insurance policy certificates on the Properties and preparing other documents required for the refinancing. He claimed that the defendant informed him that he and Mr Reddy should get together and formulate an agreement. Arun claimed that the defendant informed him that if the company was sold to the plaintiffs for $9 million they would have to pay a lot of stamp duty and suggested that Mr Reddy and Arun get together and work out how they could avoid paying unnecessary money to the government. After this conversation Mr Reddy provided Arun with a disc containing a pro forma agreement and advised him that he could use it to draft the agreement.

38 Arun met with Mr Reddy to discuss the draft agreement that he had prepared for the sale of the shares. During that meeting Mr Reddy suggested that they could have one contract and agree to sell 49% of Meshona to the plaintiffs for a nominal amount of say $90,000, and then treat the other payments as a loan. Arun suggested that this would “raise questions” and said:

I mean we are talking about a lot of money and because of what Meshona is worth, I just think we should make it a more realistic amount of say $200,000 but even then to me this seems risky. This is a big transaction and Meshona is worth so much more.

39 Mr Reddy counselled Arun not to worry. Arun met with Mr Reddy on a number of occasions over the next “week or so” to amend the draft agreement. Arun claimed that at one of those meetings the following conversation took place:

Mr Reddy: What we will do is have a separate agreement that states your lending me the balance of $6 million. When the money is coming in I will sign the acknowledgement of receipt of the money. I also want you to sign a document that is undated that states I have paid all the money back.

Arun: Sam you do realise that if anything goes wrong the Courts wont look kindly on this.

Mr Reddy: Don’t worry nothing will go wrong, this is only a formality. I just want something that shows your family is paying $6 million. Don’t worry we are joining our two families together. It will work out. I’m looking forward to working with you for the rest of our lives. You have nothing to worry about.

40 Arun gave evidence that at a later meeting the following conversation took place:

Mr Reddy: You’ll be putting in $9 million. The purchase of the shares will occur when the refinance goes through.

Arun: Sam when will we be getting the financial documents? Dad asked me to ask you if you know when they would be available.

41 Arun’s affidavit included the following:

39. I never intended to loan any money to Sam even though this is reflected in the documents. I did not intend for the documents to have any legal effect.

…

Roman: You are buying a squeaky clean company. You will be getting a debt free company.

44. In late September 2004, Roman said to me:

42 The defendant’s version of events is that he informed Mr Reddy that the agreements did not reflect what had been discussed with the plaintiffs and he asked for an explanation. The affidavit includes a conversation with Mr Reddy as follows:

Mr Reddy: Dad, the Lakshmanans do not have all the money they thought they would have. The money will take time to come through. They can only borrow $6 million at this stage and will have to advance the rest over a period of five years. Arun says they can pay the balance over five years from investment income and income from his father’s practice. They also have money in India. If necessary, this can be used. Arun has agreed that none of the shares are to be transferred to his family until the initial $6 million has been paid in full. The Commonwealth Bank has to be paid and most of the balance of $6 million will be required for working capital for the Meshona Group. I have spoken to Arun and he has agreed that when all the money is paid, we will work out what has been paid for the shares and what has been paid for working capital. I want to give Arun a chance. He is very pressured by this. He wants to work with me in the business and I want him to be involved. The initial $6 million will enable us to develop the business as I want it to be developed.

Defendant: What happens if they get their shares and then try to get their money back by demanding repayment of the loan?

Mr Reddy: Don’t worry, I have got a document saying the loan has been repaid and I do not have to repay it.

43 The defendant’s affidavit also includes a claim that he confronted Arun in relation to the draft agreements and informed him that he was “not happy” with them. It includes claims that he said “they do not reflect my discussions with your father” and that he asked “why are you drafting these agreements”. The defendant’s affidavit also includes a claim that he informed Arun of the identity of a solicitor who did all “our legal work”. The defendant claimed that Arun informed him that: there was no need to get another solicitor; the arrangement was between the families and there was no need to spend money; the agreements were fine; and he knew what he was doing.

Execution of the Agreements

44 In October 2004 the plaintiff travelled to Sydney from Holbrook and attended the Meshona offices with his sons after which the two families went to Miltons Restaurant. Shortly after arriving at the restaurant the plaintiff asked whether Ramona was going to give her presentation about Meshona’s financials. Mrs Reddy informed the plaintiff that they had all been very busy and because it was a busy time of year Ramona had not had time to present the financials. The defendant informed the plaintiff that he had asked Ramona to present the financials before the launch in December 2004. The plaintiff claimed the defendant also said:

Don’t worry this is the joining of our families. You are getting a good business. With the money we will make we will build this business into an empire. I will teach your sons everything about this business. I am an empire builder.

45 The plaintiff claimed that he was then given the Share Sale Agreement that he had not previously sighted. His affidavit evidence was that he was concerned that the document did not show that he was intending to purchase a 49% interest for $9 million and would be given the opportunity to undertake due diligence.

Share Sale Agreement

46 The Share Sale Agreement is between Meshona, as Vendor, and each of the plaintiffs, as Purchasers. Mrs Reddy is also referred to in another schedule under the heading Vendor’s shares. Mrs Reddy is the shareholder and it is not clear why the Agreement referred to Meshona as the Vendor.

47 The Share Sale Agreement is dated 1 October 2004 and includes the following:

Recitals

A. The Vendor is the registered and beneficial owner of the Shares in the capital of the Company set opposite the Vendor’s name in item 3 of schedule 1, which are fully paid. No other shares have been issued to the Vendor.

48 Item 3A entitled “Details of Vendors Current Shares” records Mrs Reddy as the vendor with two fully paid shares. Item 3B entitled “Detail of Vendor’s Shares at Completion” records Mrs Reddy as the vendor of 100 fully paid shares. Item 4 of the schedule identifies Meshona with the Issued capital of the Company recorded as “$200,000.36 in respect of 49 ordinary shares at $4,081.61 per share”.

49 The Share Sale Agreement also includes the following:

2 SALE AND PURCHASE

2.1 The Vendor agrees to sell to the Purchasers 49% of all shares in the Company in accordance with the terms and conditions detailed in schedule 1.

3 PRICE

3.1 The consideration for the sale of the Shares is the payment by the Purchasers to the Vendor of the Purchase Price.

(a) the Deposit on the date of execution of this agreement, receipt of which is acknowledged by the Vendor;

(b) the Balance on the Completion Date.

3.3 Any money payable in accordance with this agreement will be made or tendered in Australian currency either in cash or by a draft or cheque drawn by a bank as defined by the Banking Act1959.

4 DUE DILIGENCE BY THE PURCHASERS

4.1 The Vendor will ensure that the Purchasers has (sic) access to the premises, records, officers, employees and advisers of the Companies for the purpose of enabling the Purchasers to make such enquiries as are in its opinion necessary to:

(sic)

5 COMPLETION

5.1 Completion will occur on the Completion Date at such place or on such other date and place as the Vendor and the Purchasers agree in writing.

5.2 The Vendor will when satisfied with completion increase the number of shares from 2 to 100 as detailed in item 3b for the following to happen:

(a) Make available to the Purchasers:

(ii) properly executed transfers of the Shares to the Purchasers, such transfers to be in registrable form;

(b) procure the Board to resolve that the aforesaid transfers of Shares are registered (subject to the payment of any stamp duty on the said transfers which will be borne by the Purchasers) in the books of the Company;

(c) procure the Directors nominated by the Purchasers to be appointed to the Board as detailed in annexure “B”.

6 WARRANTIES

50 The Purchase Price was recorded in the Schedule as $200,000.36 with a deposit of $100.36. Schedule 2 included the following:

SCHEDULE 2
Warranties

1. The Vendor[s] [jointly and severally] warrant[s] that:

…

The agreement

(a) do not result in a breach of the terms and conditions of, or constitute a default under, any agreement or undertaking, oral or written, or any instrument by which the Vendor may be affected or bound; and

(b) do not breach any order, writ, rule, regulation, injunction or decree of any court, administrative agency or government body or any statute, rule or regulation which applies to or binds the Vendor.

1.6 This agreement constitutes a valid and binding agreement on the Vendor which is enforceable in accordance with its terms and conditions.

…

Books, records and company returns

1.13 The statutory books and books of account and records of the Company at the date of commencement of the Relevant Financial Year are written up to date and in a proper manner.

…

Accounts and Financial Matters

1.16 The accounts being the income statement for the relevant financial period and no adverse material change detrimental to the interests of the Purchasers has taken place or will take place prior to the Completion Date in the position of the Company as disclosed by the accounts.

1.17 The Company has since the last day of the Relevant Financial Year carried on and conducted its business and conserved its assets in the normal manner and since such last day of the Relevant Financial Year there has not been, nor is there, anything existing which would have a material adverse effect on the financial position of the Company.

1.18 There are no contracts, agreements, arrangements, acknowledgements, liabilities or obligations of any description (whether actual or contingent) entered into or incurred by the Company which have not been disclosed to the Purchasers in writing prior to the date of this agreement.

Borrowings

1.19 The Company is not indebted either absolutely or contingently to any person, firm, corporation or government or semi-governmental authority in any sums of money not disclosed by its accounts at the time of completion.

1.20 The Company has not since the last day of the Relevant Financial Year created or given any debentures or charges or indulged in any borrowings.

…

Material Disclosure

51 Annexure A to the Share Sale Agreement (the due diligence Acknowledgment) is in the following terms:

1. The Purchasers acknowledges (sic) that they have completed their due diligence in accordance with Clause 4.

52 At the same meeting at Miltons Restaurant, Arun and Mr Reddy signed two documents entitled “Terms of Arrangement” (First Loan Agreement). The First Loan Agreement is in the following terms:

I as the lender agree to advance the borrower the sum of the loan amount for term set out in the in (sic) Schedule. The repayment of the funds advanced will be repayable in full on the last calendar day of the month set out in the Schedule and or when payment is made in full before the end of the term agreed in the Schedule.

The cost and fees associated with placing a fixed and floating charge and or Caveat over the security in the Schedule will be at the borrowers expense.

In an event of default of the terms set out in the Schedule, the Lender may give you notice stating you are in default. If you cannot remedy or correct the default with in the grace period stated. The Lender may at the end of that period and with our (sic) further notice to you the total amount owing become immediately due for payment. The Lender may Sue you for that amount, or enforce the caveat or fixed and floating charge on the security or both, noted on the schedule.

During this period the security offered as collateral will be insured for the full replacement commercial value.

The cost and or fees associated with removing the fixed and floating charge and or a caveat over the security in the Schedule will be at the borrowers express.

A notice of discharge of the loan will be issued by the Lender to discharge the debt and release the collateral offered as security as to described in the Schedule.

53 The Schedule is entitled “Loan Agreement Schedule”. It is in the following terms:

Date of Agreement: 1 October 2004

Lender: Mr Arun Lakshmanan

Borrower: Mr Sumeshin Reddy

Loan Amount: $5,800,000.00 (Five Million and Eight Hundred Thousand Australian Dollars).

Term of Loan: 10 Years (120 Months) – Base on a 365 Calendar Year.

Security: Un-Secured.
Interest: 10% (Ten per cent)

54 A “Notice of Discharge” signed by Arun and Mr Reddy is attached to the First Loan Agreement that identifies the Lender as Arun, the Borrower as Mr Reddy and includes the following:

The Lender has received a full repayment of the $5,800,000.00 (Five Million and Eight Hundred Thousand Australian Dollars) advanced as per original loan contract dated 1/10/04.

55 The second document entitled “Terms of Agreement” (the Second Loan Agreement) is in identical terms to the First Loan Agreement except that the Schedule identifies Mr Reddy as the Lender and Arun as the Borrower of a loan of $3 million for a period of five years at 10% with security “As per Property Schedule”. The attached Property Schedule is blank.

Trip to South Africa – October 2004

56 In October 2004 the plaintiff travelled to South Africa with the defendant. The plaintiff claimed that during this trip he had a conversation with the defendant in which he asked how Ramona was going with the financial documents. The defendant informed the plaintiff that Ramona would have them ready by the time they returned home. The plaintiff claimed it was during this conversation that the defendant once again said the company was worth over $20 million, that the plaintiff was getting a “good deal” and that “[we] make $850,000 profit now with little effort and with moneys you invest and with your sons we will make much more money”.

Payments by the plaintiff in 2004

57 On 8 November 2004 Arun signed a letter to Mr Reddy in the following terms:

I enclose herewith cheque in the amount of $831,729.04 made payable to the Commonwealth Bank as partial payment of the total monies I am loaning to you.

I understand that the balance of the loan is now $8,168,270.96.

58 On the same day Mr Reddy signed the following acknowledgement:

I, Sumeshin Reddy of … Acknowledge receipt of cheque in the amount of 831,729.04 representing partial payment of the total loan from Arun Lakshmanan …. to me.

59 The plaintiff paid to the defendant/Meshona the following further amounts in 2004: $941,291.40 on 9 November; $30,755.56 on 10 November; and $489,272.22 on 18 November; and $1.5 million on 30 December.

Cabot Square Retained – December 2004

60 On 13 December 2004 Aaron WK Yeung (Mr Yeung), the principal of Cabot Square Accountants, wrote to the plaintiff and the defendant outlining the terms of engagement to “support and strengthen Meshona Group”. The fees referred to in that letter were $24,000 for the following accountancy services: (1) to review and submit BAS returns; (2) to prepare Corporation Tax returns for Meshona Group, Redlaks & Dr Lakshmanan; (3) to prepare income tax returns of 8 individuals; and (4) to provide taxation advice. That letter was signed by Arun as General Counsel of Meshona Group and on behalf of Redlaks and Dr Lakshmanan and also by Mrs Reddy, as financial controller, based on a number of amendments that were notified in a “letter of appointment” dated 21 December 2004. The addition to the signed retainer was the requirement to prepare the BAS statement and tax returns for the plaintiff’s group of companies including his medical practice and his real-estate portfolio.

61 Soon after Cabot Square were retained, Mr Yeung wrote to the defendant and Mrs Reddy advising that he understood that the plaintiff’s family 2004 accounts were “urgent” and it was on his “priority list”. That communication included the following:

They are financial statements, BAS and tax returns for previous years. There are some BAS for year ended 30 June 2004 and 2005. I need to have the books and records for the family accounts, ie the information used to prepare the BAS. Is there a bookkeeper recording the books? The previous accountant has not replied my ethnical (sic) letter, and it is fine. I can telephone him later but I would like to telephone for questions on the family’s accounting and tax issues rather than general questions.

62 Mr Yeung also provided some draft job descriptions for the various roles within the Meshona Group. Those included the Financial Controller (Mrs Reddy); the Supply and Distribution Manager (Anand); the International Commodity Manager (Mr Reddy); the Chief Executive/General Manager (Ramona); and the Company/General Counsel (Arun). The job description in respect of the General Counsel included the following:

63 The job description for Mrs Reddy as Financial Controller included the following:

The Launch – December 2004

64 In early December 2004 the plaintiff attended a cocktail party at the Miltons Restaurant at the request of the defendant. Prior to the party the plaintiff went to the Meshona offices and met with the defendant. During this meeting the plaintiff asked when the presentation of the financial statements would occur and the defendant called Ramona into his office. The defendant informed Ramona that the plaintiff wanted to know how she was going with the sign-off and financial statements. Ramona apologised to the plaintiff and said that she had been “so busy” she had not been able to get it all done but would get them for him soon. At this meeting Mrs Reddy informed the plaintiff that Ramona had been so busy working late into the night and it was just “so busy at the moment”. The plaintiff said that he really needed to look at the financial documents. However the defendant suggested that he should not worry but rather go to the launch party and just “enjoy this moment”.

Meeting – 11 January 2005

65 At a meeting on 11 January 2005 attended by the defendant, Mr Reddy, Arun, Anand and the accountants, it was decided that Anand’s role in Meshona would be as the representative for Meshona’s operations in India with assistance from Arun. It was noted that Anand was leaving for India the following Thursday night. It was also noted that the question of setting up a company in Hong Kong or Singapore was discussed and that the accountant would collect information and make a presentation at the next meeting. There were also discussions in relation to the specification and unit price of garments and fabrics to be imported to South Africa. It was noted that the new trading business was to be funded between the plaintiff and the defendant as to $50,000 each, wholly owned by Meshona Group and would be called “RedLaks”. The accountant suggested that a company should be set up in Hong Kong or Singapore with branches in India and South Africa for its trading operations for “taxation issues and simplicity”. It was also noted that: “Arun will explain to Dr Lakshmanan about this new trading business operation when Dr Lakshmanan is in town.”

66 In late January or early February 2005 the plaintiff had a telephone conversation with the defendant in which he said he was “just chasing up” to see when the financials would be provided to him. The plaintiff claims that the defendant said that he did not know but he would get Ramona to call the plaintiff. Ramona did not call the plaintiff.

67 The plaintiff claims that in about March 2005 he had a further conversation with the defendant in which he said that he needed to get the financials so he could convince himself that he had “bought a genuine business”. The plaintiff claimed that the defendant said, “I will speak to Dolly who is handling all the accounting”. The plaintiff’s evidence was that he did not receive a return call.

68 In late March 2005 the plaintiff had a telephone conversation with Arun in which he advised him that he had not received the financials and asked him what was happening. The plaintiff claimed that Arun informed him that they were still trying to refinance the Properties and there was a problem because the defendant and Mrs Reddy had informed him that the valuations were coming in low and they wanted to meet with him. Arun advised the plaintiff that the defendant and Mrs Reddy sounded really unhappy. When the plaintiff asked Arun why he had not been advised of this before, Arun said he did not know but that the defendant and Mrs Reddy would come to Holbrook to speak to him.

69 Sometime in April 2005 the defendant and Mrs Reddy attended the plaintiff’s home in Holbrook. The plaintiff claims that during that meeting the defendant advised him of the difficulty of refinancing the Properties and said:

Obviously we want to go ahead with the deal, but you will need to make your contribution. I suggest that we look at changing the deal so that instead of relying on the refinance you give to us half of your properties to complete the original deal.

70 The plaintiff observed that if he did as asked he would be paying more than originally agreed and asked what would happen to the $4.6 million he had paid already. The defendant informed the plaintiff that he could have sold the business for $20 million but because they were now two families together it was the only way they could move forward. The defendant said that if he had sold to “the Packers” they would have received the money upfront even though his children would no longer have the business. The plaintiff claimed that the following conversation took place:

Mrs Reddy: People of our kind need to stick together in this foreign country. People never accept us. We have worked hard all our lives and we have built a very successful business. I love your sons like they are my sons. Your sons will be looked after for the rest of their lives. Our families have now joined together.

Defendant: Look we have brought the documents with us for you to sign.

Plaintiff: But Roman when we were doing the original deal you arranged the valuation of the properties. You told me they were worth $20 million. Now you want me to transfer half of my properties which is a lot more than the original deal where we agreed I would pay $9 million for 49% of the Meshona Group.

Defendant: We couldn’t raise enough money on your properties. That is why I want you to transfer 50% of your properties to us.

71 The plaintiff claimed that the defendant then raised his voice whilst pointing his finger at him and said:

I have lost an opportunity to sell Meshona to the Packer Group. The only way to move forward is for you to transfer the properties to us.

72 After this was said, the plaintiff asked the defendant how the loan would be serviced and the defendant responded that the rental income from the Properties would be used to service the loan. The plaintiff claims the following conversation then took place:

Plaintiff: The rental income will also need to be used for the maintenance of the properties. Meshona will also need to contribute to service the existing loan on the properties.

Defendant: Yes that is fine. If there is a shortfall you will have to top it up. It probably won’t happen but just in case there is a shortfall then you will need to ensure that the account is topped up.

Plaintiff: But there will also be profit from Meshona. My share of the property should be used to service the loan, as well as yours too otherwise I am paying everything myself.

Defendant: Yes you will have income from Meshona through your 49% of the shares and from the rental income from the properties. You will receive 49% of the profits. The loan will be repaid from those funds.

Plaintiff: I will be paying a lot more than we had agreed. So if I agree to do this then it will complete the transaction to purchase the 49% of the companies including the $3 million which was due in five years. Meshona should also service 51% of the existing loans on the properties.

Defendant: Yes Laks that’s fine. This will complete the deal.

Plaintiff: It is still more than the $9 million we had agreed.

73 The plaintiff reminded the defendant that Ramona was to present the financials of the business and sign off to him. He once again said that he needed to be satisfied that the company was worth $20 million. The defendant informed the plaintiff that there was no problem and that he would have Ramona provide the documents to him. Mrs Reddy informed the plaintiff that Derrick, the bookkeeper, had been going into the office to do the accounts and that when he was finished she would get the documents to him. Mrs Reddy once again said that Ramona was “so busy” she had not had the time to complete the documentation.

74 There was some further discussion about the two families joining together and the defendant said that because they were “family” he had not called the deal off. The defendant said that he could have sold his company and not had any of the headache, but because he thought so highly of the plaintiff he was proposing the Holbrook Agreement. The plaintiff agreed to go ahead with the agreement but said that he still wanted all the financial documents that the defendant had been “promising from day one”. The defendant said that he would get the documents to the plaintiff but whilst they were all in Holbrook the document needed to be signed.

75 The agreement that was signed on that day (the Holbrook Agreement) iss in the following terms:

RECITALS:

A. Dr Arunachalam Lakshmanan agrees to appoint Venilla Reddy as Trustee for Kayalami Family Trust as manager of the properties detailed in schedules A and B

B. Venilla Reddy as Trustee for Kayalami Family Trust agrees to maintain and service each of the properties detailed in schedule A and B.

NOW IT IS AGREED as follows:

1. Dr Arunachalam Lakshmanan

1.1 In lieu of management rights and/or entitlements Dr Arunachalam Lakshmanan agrees to take out an unregistered 2 ^nd mortgage to the value of 50% (including CPI increases) over the properties detailed in schedule A in favour of Venilla Reddy as Trustee for Kayalami Family Trust.

2. Redmint Pty Limited and/or Trustee

2.1 In lieu of management rights and/or entitlements Redmint Pty Limited agrees to issue and/or transfer 50% of its shares to Venilla Reddy as Trustee for Kayalami Family Trust.

3. Anand Nominees Pty Limited as Trustee for the Lakshmanan Family Trust

3.1 In lieu of management rights and/or entitlements Anand Nominees Pty Limited agrees to issue and/or transfer 50% of its shares to Venilla Reddy as Trustee for Kayalami Family Trust.

IT IS FURTHER AGREED as follows

1. The total rental income for the properties detailed in schedules A and B will be used to service the loans attached to each individual property and shall continue to service each individual loan until it is discharged.

2. In the event that rental income received for any particular month is not able to meet the monthly interest loan payment, then Dr Arunachalam will personally pay the balance for any short fall for that particular month.

3. The properties detailed in schedules A and B will be used for the benefit of securing loans as agreed to by Dr Arunachalam Lakshmanan, Roman Reddy and Venilla Reddy.

GOVERNING LAW
This Agreement shall be governed by and be construed and take effect in accordance with the laws of New South Wales and the parties irrevocably submit to the non exclusive jurisdiction of the Courts of New South Wales.

76 Schedule A to the Holbrook Agreement recorded 5 properties of the plaintiff. Schedule B recorded 1 property of Redmint and 16 properties of Nominees.

77 Shortly after the Holbrook Agreement was signed Mrs Reddy commenced managing the rental income of the Properties that had previously been managed by Arun and Anand.

78 On 4 May 2005 Arun sent his weekly report dated 3 May 2005 to the defendant, Mr Reddy, Mrs Reddy and Ramona which included the following:

Lakshmanan and Reddy Family – I am pleased to announce that we have finalised the joining of the 2 familles (sic). It is agreed to that 50% of Dr Lakshmanan’s real estate portfolio will be transferred to Dolly. I will not go into the specifics of the agreement as we are all aware of them but I would like say (sic) that now both families have the opportunity to move forward in a very big way. With what is happening in Meshnoa (sic) at the moment only goes to show that together we have the backing to go far. No one will ever think of messing with us.

79 On 10 May 2005 Arun and Mr Reddy signed the following document:

Acknowledgment

Acknowledgment of Payment

80 This brought the total amounts paid by the plaintiff or on the plaintiff’s behalf to the defendant/Meshona to $4,593,048.22.

81 Arun’s weekly report of 28 June 2005 included the following:

Meshona Porfolio – Aaron Yeung has provided Martin with the 2004 financials. I have provided Aaron the service trust deed that he requires to update the files. I understand that Westpac have provided further funds or will provide further funds once they have had the chance to view the financials. It may be necessary to utilise this source of funds if we need to move quickly on the Money Shop. I will be working closely with Dolly and Ramona to have all maters (sic) finalised as Roman has requested.

Lakshmanan – v – Janarthanan – I met with Hugh Williamson last week as Janarthanan had finally provided his affidavit in response. The affidavit is at best vague and evasive. Although Janarthanan admits to receiving the funds from Dad, he does not admit to the having the conversations Dada states he had requesting the monies. Hugh has written to Janarthanan solicitors requesting that they provide full and proper evidence in chief.

82 In his weekly report of 5 July 2005 Arun reported on the “Funding Lines” as follows:

Martin has indicated that Aaron will provide the up-to-date figures by Friday. These figures are what Suncorp require. Martin will then meet with Aaron next week to finalise any outstanding questions he has. In the mean time Ramona is sending the financials that Aaron has provided together with the rental schedule for the pub to Westpac. Westpac is probably our best avenue to obtaining the initial $400,000 for The Money Shop deal. It is hoped that we will have approval and the funds next week.

83 In his weekly report of 30 August 2005 Arun advised that he had provided Martin with “all outstanding information that he has requested of me for Westpac”.

Proposed Heads of Agreeemnt

84 On 4 April 2006 Arun forwarded Heads of Agreement to the defendant which were in the following terms:

1. In addition to the $4million paid, Dr Lakshamanan to pay $2million. $1million is to be used for working capital & $1million re purchase of Meshona.

85 The plaintiff claimed that a few weeks after the meeting in Holbrook he had a telephone conversation with the defendant and asked him once again when he would give him the accounts because he had still not “been able to do the due diligence you promised me”. The plaintiff also said that his accountant needed to submit his tax returns and needed the details for the returns. The defendant once again said he would ask Mrs Reddy to attend to this.

86 The plaintiff claimed that on several occasions during 2005 he also telephoned Mrs Reddy asking for “the financials” to be told by Mrs Reddy that the “financials are not ready”. On one occasion in November or December 2005 Mrs Reddy became quite agitated and informed the plaintiff that he was not entitled to the financials as he was not yet a partner. Mrs Reddy said that he had no rights and that she was under no obligation to provide him with anything.

87 Towards the end of 2005 the defendant telephoned the plaintiff and informed him that the solicitor had advised him that the stamp duty on the transfer of the Properties would be about $1.5 million and that he had gone to an accountant to get another advice. The defendant said that the accountant wanted $15,000 upfront before he did anything. The plaintiff had no recollection of any further conversation about the proposed transfer of the Properties or the stamp duty issue.

The “return” of the Properties

88 In mid 2006 the defendant visited the plaintiff in Holbrook and stayed with him at his home. It was during this visit that the plaintiff informed the defendant that he was not happy with the way the Properties were being managed by Mrs Reddy and he wanted to take the management of the Properties back. When the defendant asked why this was so, the plaintiff informed him that it took more than a year to renovate the premises in York Street and Cronulla and that Mrs Reddy had refused to renovate Anand’s apartment. The defendant advised the plaintiff that he was going overseas and that he would advise his family on his return. The plaintiff said that he wanted the Properties back immediately. Approximately a week later, Mrs Reddy telephoned the plaintiff to ask him for some “top-up money” because the Properties were not bringing in enough money. During this conversation the plaintiff complained about the lack of renovations and informed Mrs Reddy that he was not happy with her “running things”. It is apparent that Mrs Reddy hung up on the plaintiff in this conversation.

89 Approximately a week or so later when the defendant returned from overseas, he and the plaintiff had a telephone conversation in which the plaintiff asked to meet to finalise the matter about the Properties. The plaintiff informed the defendant that by transferring the Properties to him along with the money already paid, it would amount to more than $16 million. The plaintiff said:

[w]hat am I left with? I have been topping up the account every two or three months from my own personal income. This has been coming from my practice income as if Meshona owns my practice too. You agreed to service the loan but you never did so. Is there any profit being made by Meshona?

90 The plaintiff also asked why he had not received the financial documents as promised. The defendant invited the plaintiff to “come up and we will talk”. The plaintiff travelled to Sydney from Holbrook and met with Arun and the defendant for lunch at a restaurant in the City. At this meeting the plaintiff claimed that the defendant agreed that the plaintiff should take the Properties back. When the plaintiff asked the defendant where the financial statements were, the defendant informed him that they would be provided “when they are ready”.

91 In about August 2006 the defendant telephoned the plaintiff and informed him that the business needed capital and that the only way to obtain that capital was for the plaintiff to refinance his Properties and that he, the defendant, was trying to organise a refinance through BankWest or the Bank of Queensland. The plaintiff informed the defendant that he was not prepared to pay any more money because he had not received the financials of the company. He asked for “some proof that the company is doing transactions and making money”.

The 2006 correspondence

92 The plaintiff gave evidence that he became more and more frustrated with the arrangements and started corresponding with the defendant. On 16 August 2006 the plaintiff wrote to the defendant thanking him for his telephone call the previous evening. That letter included the following:

I like put (sic) those agreements in the following chronological order, without going into details.

1. Meshona will bear all borrowing costs and costs of breaking contacts from Westpac and Challenger.

2. Meshona will meet interest payment burden because the properties, rental income, net will be around 650K. Because we are borrowing 11 mil., which is 1. mil. more than originally agreed, and I am financing a million more than originally agreed.

3. Also I have already financed by way of loan to Meshona an amount will be most loan for 20K which shall be paid back to me, so that I can clear my overdraft and pay my and my sons income.

4. Three million to be paid in 3 years has been scraped (sic). It was mutually agreed to not to be paid at all.

5. Out of the 11 million loan 3.8 mil is mine which will be paid by me. The balance 7.2 mil will be paid by Meshona.

6. All future investments by Meshona Group will be through Redlaks on 50/50 basis.

7. Financial, business activity statements shall produced (sic) by Meshona Group to me.

93 It is apparent that on the evening of 16 August 2006 the defendant telephoned the plaintiff but he was unable to take the call because he was unwell. On 17 August 2006 the plaintiff wrote to the defendant thanking him for his call and advising him that the stress was taking its toll on him and his sons. That letter included the following:

Please ensure the loan arrangements shall be according to the tax law.

94 On 9 September 2006 the plaintiff prepared a document that was described as “points for discussion urgently”. That document included the following:

1. partnership deeds;

a. Financial statements were not provided even though I have been asking for

3. I did not know that the purchase price was $350,000.00 and the rest was a personal loan to Mr Reddy by Arun, which was paid back on paper. The loan shall be written to Meshona and an interest minimum of 2.6% shall be paid so that I could negative.

4. Working capital shall be equally provided by the both of us. I am providing $1.76 million more than originally agreed.

5. Clearing all my loan (sic) by Meshona shall be the first priority. I have cleared all your debt by that I have borrowed heavily on your advice, which is killing both myself and my son’s (sic). My request is that Meshona shall start to clear my loans as soon as possible. Say if Meshona pays $1 million, your portion will be $510,000.00 and my portion will be $490,000.00 plus $80,000.00 interest minimum, for that $1 million. How can I retire, which you are advising myself to do and move to Sydney, unless the debt is cleared. It looks to me death is my retirement.

5. Arun or Anand shall be involved in all financial transactions.

7. Property, promissory note shall be returned to myself or Arun at once.

95 It is apparent that the defendant became ill and was unable to discuss matters with the plaintiff for a short while. On 12 September 2006 the plaintiff wrote to the defendant expressing his hope that the defendant was recovering from his recent flu and advising that he was looking forward to finalising “our business deeds” on 23 September 2006. The plaintiff indicated that if the defendant could not make it to Holbrook then he would go to Sydney. It is also apparent that a meeting occurred on 24 September 2006 at which the plaintiff claims there was an “outburst” in which the defendant accused the plaintiff of not fulfilling his obligations and claimed that the plaintiff did not have any rights to ask about the financial activities of Meshona.

96 On 5 October 2006 the plaintiff wrote to the defendant setting out the payments that he had made over the previous two years. That letter included the following:

I have contributed a total of 8.1 mil in two years without any income and unable to claim any tax benefit because of your refusal to give financial statements. I have been asking for the BAS for 14 months, no one seem (sic) to respond. More than three times you said I should have asked you and in the end you told me I don’t have any right ask (sic) for it.

You took a bet with saying that you got proof that we did diligence before joining Meshona. I am yet to see that proof. You never provided me any information about the business. I sincerely believe that the price of Meshona was far too high. You said Meshona is bringing 850K/year and you don’t have to lift your finger, that will flow in for life. A week later (by that time I accepted your offer) Dolly told that Meshona’s income was 700K. So who is correct.

On 21-9-06 you accused me that I deliberately over valued my properties. How is it possible for me to over value? You handled, A to Z to arrange loan in such a hurry. Then you said the value has gone further down this year, if so how come BankWest is giving 2 mil more than Challenger. Please don’t show finger at me, we are friends, and inseparable as you say.

You made me to bear 100% of the loss from the so called Indo-South African venture.

How could me justify the price of Meshona, and practically I have paid 8.1 mil, lot (sic) more than what the price asked for. You are telling me that I don’t have any rights to ask for the accounts. In the future my sons either Arun or Anand should be involved in financial transactions and account keeping.

224 Although the plaintiffs signed the due diligence Acknowledgment I am satisfied that no due diligence had been conducted at the time it was signed and I am satisfied that in signing the Acknowledgment the plaintiffs relied upon the representation made by the defendant that they would have the opportunity to review the financial and legal affairs of Meshona. This was not a situation in which the plaintiff paid the $4.59 million and made no further requests for the financial information. I have not accepted the defendants’ claims that there were no requests. The requests made by the plaintiff and on occasions by Arun and Anand, were consistent with reliance upon the representation.

225 I am satisfied that the plaintiffs signed the Acknowledgement because they were informed that it was a “formality”. I am also satisfied that they relied upon the representation made by the defendant that they would have a full opportunity to investigate the financial affairs of Meshona. I am also satisfied that in making the payments of $4.59 million the plaintiff did so in reliance on the representations and in the belief that he would have an opportunity to view the financial statements of Meshona. I am satisfied that if the representations had not been made, the plaintiff would not have proceeded to agree to purchase 49% of the shares in Meshona for $9 million nor would he have made the payments of $4.95 million.

226 I am satisfied that the appropriate relief is to order that the defendants repay the $4.59 million to the plaintiff. It was not suggested by the defendants that if I formed the view that this was the appropriate relief that I should reduce this amount by reason of any benefits the plaintiffs obtained for the payment of $4.59 million. The plaintiff’s claim for interest had not been the subject of detailed submissions and I will hear those submissions, if necessary, when the matter is next listed.

The claim in contract

227 Having regard to the above findings it is not strictly necessary to decide the plaintiff’s alternative claims in contract, however Mr Reddy and Mrs Reddy have brought Cross Claims in reliance on the documents executed on 1 October 2004. There is little issue between the parties that at the meeting at the Club on 5 September 2004 the plaintiff and the defendant agreed that the plaintiff would purchase 49% of the issued shares in Meshona for the sum of $9 million. Both parties appear to agree that due diligence was discussed.

228 The plaintiffs submitted that the agreements executed on 1 October 2004 do not reflect the true agreement between the plaintiff and the defendant. It was submitted that on 1 October 2004 Mrs Reddy and each member of the Lakshmanan family knew that pursuant to the real agreement between the plaintiff and the defendant 49% of the shares in the Meshona Group were to be sold to the plaintiffs for $9 million and not $200,000.36 as recorded in the Share Sale Agreement.

229 The plaintiffs also submitted that they have been frank in giving evidence that the Share Sale Agreement erroneously but intentionally recorded the purchase price of the shares. Indeed the plaintiff’s evidence was that he knew he was deliberately avoiding stamp duty by signing a document for $200,000 and that he signed and allowed his sons to sign the document that he knew was false (tr 100; 126).

230 Each of the plaintiffs signed the due diligence Acknowledgment in Annexure A to the Share Sale Agreement when in fact they each claim they had not performed due diligence. Arun’s evidence was that he signed a document that was false on its face in this respect (tr 312). Arun also gave evidence that he never intended to lend any amount to Mr Reddy nor did he intend to borrow any amount from Mr Reddy pursuant to the two loan agreements that were signed by himself and Mr Reddy.

231 The plaintiffs submitted that the only safe conclusion that can be drawn from the evidence is that the documents executed on 1 October 2004 did not reflect the true agreement between the parties. If the Share Sale Agreement is found not to be a sham document, the plaintiffs claim that the terms as to due diligence have been breached by the defendants.

232 Mrs Reddy gave evidence that she understood that at the meeting on 5 September 2004 the plaintiffs were acquiring 49% of the shares in Meshona for $9 million (tr 686). Mrs Reddy was the owner of the two shares in Meshona and understood that for the transaction to proceed further, shares would have to be allotted so that 49% of those shares could be transferred (tr 686). Mrs Reddy knew in September 2004 that if she sold her shares in Meshona for more than $2 the difference between that amount and the amount that was received for the shares would go into her assessable income as a capital gain (tr 688). She also understood that if that proposal was to be accurately documented there would be a share sale agreement in which she would be the vendor and the plaintiffs would be the purchasers.

233 Mrs Reddy recalled speaking to solicitors at Kemp Strang with the defendant discussing issues of capital gains tax although she was not certain when that discussion occurred (tr 691). Mrs Reddy gave the following evidence in respect of the $200,000 sale price of the shares that was included in the Share Sale Agreement (tr 693 - 695):

A. My understanding was the $200,000 was at the time when the funds were not available because the financing of the properties that they were relying on for purchasing the 49% of the Meshona Group for the 9 million wasn't available and Arun Lakshmanan and Sam had a discussion and they came back with some arrangement because Arun was very keen on maintaining that he doesn't want to lose the opportunity and he will allow for an arrangement that will be acceptable so that they will arrange the payment of a portion of the monies and when they completed with that portion and then the transfer of the 49% will go to the Lakshmanans and that arrangements was discussed and that arrangement was the one that was agreed upon and that's what I understood.

…

Q. But in your mind the amount that had to be paid to you for your shareholding in Meshona was always $9M, wasn't it?
A. But as I'm pointing out to you my understanding is that the $9M wasn't available and that's why they rearranged, Arun and Sam. They discussed this and they rearranged what they needed to do so that they could still have the 49% of the shares available until they could complete the certain amount of monies and the agreement was signed to show how the payment was going to be allocated, and when the payment was done for a certain amount of monies then that 49% was going to be transferred and that's what I understood and agreed on it.

Q. Are you saying the reason you thought the share agreement said $200,000 not $9M was because of some problem that was occurring about when money to pay the purchase price could be raised?
A. I understand that the purchase price couldn't be raised because the funding hadn't been available for the Lakshmanans to complete it. That's what I understand.

Q. But can you explain why that circumstance led to the figure $200,000 going into the share sale agreement?
A. Well, according to the arrangement the $200,000 was a nominal figure that was addressed by Arun Lakshmanan because he did that and if he didn't put in the obligation of the $9M then the arrangement was - well the $200,000 to the $6M was included with the 5.8 million arrangement that they said that they could raise the 6 million and until that 6 million was raised then only would that 49% get transferred, the shares get transferred to the Lakshmanans and that was addressed by Arun and we agreed with it because that's the way that he decided that they'll get the valuation, the funding for the properties and the shares will be allocated later on when the total amount of monies would be acceptable, and I think when the 6 million was going to be completed the shares was going to be transferred and that was done by Arun because I agreed on that because it was discussed with the family and I didn't see that there was any issues with how they did it.

Q. So a nominal amount was put into the shareholders agreement?
A. That's what they called it a nominal amount.

Q. A nominal amount, you say, was put into the share sale agreement?
A. Yes, that's what I understand.

Q. Not the real sale price?
A. I don't - it was a nominal amount that was put in so they waited for the entire 6 million to come into, from the funding to address the 6 million because they've decided to pay the 6 million because that's how much monies that he could have raised at the time.

Q. Ultimately you knew that you as the owner of the shares would get $9 million for the shares, didn't you?
A. I would get $9 million for the shares but the arrangement changed because the Lakshmanans didn't get the moneys and Arun Lakshmanan had said - because I didn't have any reason to question anything because it was the arrangement between Sam and Arun, and they came back with what they can do and that was something that was going to be fixed at a later stage when everything was completed.

…

Q. And you knew that the shareholders agreement had a nominal figure of $200,000, not the real figure of $9 million?
A. Because it was going to be addressed when the company was paid those moneys, and that's the way Arun and Mr Reddy came up with the arrangement and Arun drew up a contract to state that that's what would happen, and yes, we did do exactly that because at the time we agreed on the fact that the funding wasn't available.

234 Mr Reddy was cross-examined in relation to the Share Sale Agreement of 1 October 2004. He gave the following evidence in cross-examination (tr 607 - 608):

Q. No matter what mechanical steps had to be taken of that kind you understood that the share transfer or share transfers of the 49 per cent would be liable to capital gains tax in your mother's hands if the transfer price was expressed to be $9 million?
A. That would be correct, yes.

Q. And that's why you, not anyone else, that's why you proposed that the price on the share transfer be originally $90,000?
A. That's not the case.

Q. And that's why you ultimately agreed that the price to go on the share sale agreement would be $200,000, not $9 million?
A. No.

Q. Because you did not want your mother to have to pay capital gains tax on $2 less the $9 million?
A. No, that's not the case.

235 After these denials Mr Stevenson took Mr Reddy to his affidavit and further cross-examined him as follows (tr 609):

Q. You understood that so far as capital gains tax was concerned there would be no amounts payable by Arun's family?
A. That's correct.

Q. It was your family who had to pay tax?
A. On the shares, yes.

Q. So your position was you didn't want your family, and you meant by that your mother, didn't you, to pay tax if she didn't have to?
A. Correct.

…

Q. You know from what your father and Dr Lakshmanan said on 5 September 2004 that the agreement they had reached in principle was that your mother would transfer 49 per cent of her shares in Meshona to the Lakshmanan family for $9 million?
A. Yes.
Q. To document that transaction there would have to be, wouldn't there, a share sale agreement which provided for your mother as the vendor to transfer to Dr Lakshmanan or other members of his family as the purchaser those shares for $9 million?
A. That would be correct.

Q. And the problem with that as far as you were concerned was that if that's how the transaction was documented your mother would pay capital gains tax on $2 less than $9 million, namely, about $4.3 million?
A. Well, yes, if you look at it in that context. However, when the deal actually - the evaluations were coming in lower, that is, when the deal actually changed into $6 million and $3 million.

Q. What's that got to do with it?
A. Well, it does because one of the things 5 September comes about is that the doctor also says that you fellows are in charge, and that's basically talking about myself and Arun, and the whole thing was left to us to actually sort out and that's the way we came up with the strategy.

Q. The matter you mentioned about the valuations came in low simply had the result on your case that it was agreed that the purchase price of $9 million would be paid as to $6 million when the properties were revalued and $3 million later?
A. Yes, but how would you document that?

236 Mr Stevenson pressed Mr Reddy to admit that the Loan Agreements between himself and Arun did not reflect the “real deal” that had been struck between the two families. He gave the following evidence (tr 620 – 621):

Q. You also have in front of you the notice of discharge which you and Arun have signed?
A. Yes.

Q. Which records Arun as the lender to you of $5.8 million and you as the borrower?
A. Yes.

Q. And in which Arun as lender states he has received full repayment of the $5.8 million?
A. Yes.

Q. The notice of discharge constitutes an acknowledgement given by Arun to you, according to its letter, that he has received from you full repayment of the $5.8 million that that document assumes had been lent by him to you?
A. That's correct but it doesn't have a date of payment on it.

Q. It doesn't have a date of payment?
A. Yes.

Q. No, no, that's because no money was ever lent to you by Arun, was it?
A. It was.

Q. You know, don't you, that Arun did not have $5.8 million to lend to you?
A. This deal was done between Arun and myself and that's how I understood it and that's why the agreement done this way.

…

Q. You understood the real deal was between your mother and the Lakshmanans?
A. Well, the sale of the shares, yes.

Q. For $9 million?
A. Yes.

Q. And the loan agreement, the document purporting to be a loan agreement where Arun purports to lend you $5.8 million?
A. Yes.

Q. Didn't reflect the real deal, did it?
A. It is the deal that we came through when the valuation of properties came in lower and it was only 6 million.

Q. And the truth is that you and Arun agreed that nominal consideration would be on the share sale agreement?
A. Yes.

Q. To save capital gains tax?
A. No, that's not the case.
Q. And that you and he agreed that the balance of the purchase price would be a disguise, can I suggest to you, as loan from Arun to you?
A. No, it's not disguised as a loan. These documents are, as I say, done by myself, who is not a lawyer, right, with Arun and we negotiated through there and the basis of these documents was to actually get to an end goal and that being to abide by both documents or the Lakshmanans with the moneys coming through.

HER HONOUR

Q. What does that mean Mr Reddy?
A. Sorry. Well, when the valuation started coming in low the $6 million that was available for this wasn't going to be $9 million as originally thought and the excess $3 million was originally supposed to come from other sources, such as India and so forth, and by documenting it and my thoughts was what actually happens is in dribs and drabs of money coming in and if we transfer the shares we will be left short, if that makes sense.

STEVENSON

Q. You know full well that the arrangement you came to where, with Arun about how the deal would be documented, had nothing to do at all with the shortfall on valuations?
A. It actually has a lot to do with it, its because if we look at the whole thing it is about the payments that they come in periodically or in bits and pieces and that's why these documents have been drafted in this fashion.

…

Q. Look at the notice of discharge?
A. Yes.

Q. Its not true, is it, that the lender, Mr Arun Lakshmanan, has received full repayment from you of $5.8 million or indeed any dollars?
A. Well, the debt of payment hasn't been done yet because of the deal hasn't been completed.

237 Mr Reddy’s evidence in this regard was highly unsatisfactory and in parts incomprehensible. That evidence was as follows (tr 623 - 624):

Q. The document headed loan agreement schedule with a loan amount of $3 million was never discussed between you and Arun, was it?
A. It was discussed because that was the commitment of what happens if we don't receive the full 9 million. And this was more like a personal guarantee from him to say that this would be done.

Q. So a personal guarantee?
A. Because we were working together.

Q. The personal guarantee works this way, does it, that you pretend to lend to Arun $3 million so that you can what, call on him to repay the $3 million, is that how it works?
A. Well, in terms of the, the 3 million was supposed to be paid over a period of five years, right, at completion of the 6 million that was received and then the share transfer was going to take place.

Q. But you didn't lend Arun $3 million, did you?
A. Well, no.

Q. So there was no loan agreement between you and he where you lend him $4.8 (sic) million?
A. This was a letter or loan agreement based on a commitment that was done between us to say he will take care of that payment over five years because as my thing went on that, the share transfer was supposed to take place when it was at 6 million in the shares transferred across what guarantees did we have that the 3 million will be paid, and that was a personal undertaking.

Q. But what it is doing is disguising an obligation to pay $3 million as part of the purchase price of the shares as a loan, isn't it?
A. I don't see that because the purchase price, the $3 million wasn't going to be paid right at the same time for the share transfer to take place, it was going to be paid over the next five years.

Q. And you say, don't you, that in relation to that $3 million loan that Arun agreed with you that the $3 million loan agreement would be on the same terms as the $5.8 million loan agreement, namely that the full repayment of the loan would be acknowledged at the time of payment of the $3 million?
A. The full repayment of the loan of 3 million will be acknowledged at the time of payment?

Q. Of the $3 million?
A. Sorry, can you explain that in other words please?
Q. I am reading from your cross-claim Mr Reddy, that Arun agreed with you that the $3 million to be paid pursuant to this $3 million loan agreement?
A. Yes.

Q. Will be on the same terms as the $5.8 million agreement, namely that full repayment of the loan will be acknowledged at the time of the payment of the $3 million?
A. Yes, that would be correct because that would move the transfer actually into $9 million.

…

Q. In your cross-claim in these proceedings you are suing him for that $3 million, aren't you?
A. Yes.

Q. How does that work?
A. It is on the basis of completing the deal.

Q. You are suing Arun for $3 million that was loaned on the basis of you lent it to him when in fact you did not?
A. No, it was based on the commitment that he would carry out to actually pay the $3 million after the $6 million was paid and the shares were transferred and that was his guarantee to me to say that $3 million will be paid and that's an undertaking.

…

238 Mr Stevenson returned to the Share Sale Agreement again in an effort to press Mr Reddy for an admission in relation to the inclusion of the $200,000 as the sale price. That further cross-examination included the following (tr 628 – 629):

Q. Let me put these propositions to you. The real deal as you knew it to be was your mother selling 49 per cent of the shares in Meshona to Dr Lakshmanan and his family for $9 million?
A. That is the original contrast (sic) of the deal, yes.

Q. And you and Arun agreed to document it so only $200,000 went into the share sale agreement; that's right, isn't it?
A. The reason for it is that--

Q. But that's right, isn't it?
A. Yes, but it's got to do with the 5.8 also being received and that the 200,000 will be the trigger to actually do the share transfer.

Q. Yes?
A. Yes.

Q. That's not the real reason--
A. I am sorry?

Q. You are not suggesting that the real reason that the $200,000 went into the loan agreement was so that merely upon payment of $200,000, the Lakshmanans could call for the share transfer, are you?
A. No, it was on the basis of 5.8, right, first of all being advanced and the 200,000 being the last amount.

Q. Because you well know that the Lakshmanans have paid to your family a lot more than $200,000?
A. Well, it's 4.5 something million.

Q. Whatever it is?
A. Yes.

239 The purported loan agreements entered into on 1 October 2004 suggested that Arun loaned Mr Reddy $5.8 million and that he had received full repayment of that amount. There was also a purported loan from Mr Reddy to Arun for $3 million. Mr Reddy’s evidence was that although he did not intend to lend Arun $3 million it was a “loan agreement based on a commitment” that the balance of $3 million would be paid. He described it as a personal undertaking and/or a personal guarantee. He denied that it was disguising an obligation to pay $3 million as part of the purchase price for the shares.

240 The plaintiffs seek a declaration that the Share Sale Agreement has been terminated. They also claim that the Holbrook Agreement has been terminated by the parties deciding to abandon it. By Cross Claim Mr Reddy seeks a declaration that Arun was obliged to pay him $3 million prior to 1 October 2009 pursuant to the Second Loan Agreement. He also seeks an order for payment of $1,206,051.78 by way of damages for breach of the First Loan Agreement. Mrs Reddy claims $199,900 by way of damages for breach and/or repudiation of the Share Sale Agreement. Mrs Reddy also seeks damages for breach of the Holbrook Agreement.

241 I am satisfied that the Share Sale Agreement and the two loan agreements do not reflect the real agreement that was reached between the parties. The sale price of the shares was not $200,000 and Mrs Reddy’s Cross Claim seeking to enforce the Share Sale Agreement and seeking damages will be dismissed. The fact that the plaintiff paid $4.59 million in respect of the transaction said to be only worth $200,000 points up the absurdity of this aspect of Mrs Reddy’s claim. The real transaction as agreed between the parties was for the plaintiff to pay $9 million for 49% of the shares in Meshona. I am satisfied that the plaintiff terminated that transaction when it became clear to him that he was not to be given access to the financial information in relation to Meshona.

242 Mr Reddy sought to characterise the loan agreements as personal guarantees when he was confronted with the reality that neither he nor Arun intended to loan any moneys to each other. I am satisfied that the Loan Agreements do not reflect the agreements reached between the parties. Mr Reddy’s claims in respect of the Loan Agreements will be dismissed.

243 The Holbrook Agreement was reached at a time when the parties understood that only $6 million of the $9 million could be raised on security of the Properties. At the time the agreement was signed the plaintiff had already paid over $4 million to the defendant and/or Meshona. This agreement was executed at a time when the plaintiff was asking for access to the financial information about Meshona. The Holbrook Agreement was entered into on the continuing understanding that such information would be provided at a time when the plaintiff was relying on the representations referred to earlier that Meshona was worth $20 million and was debt free.

244 In support of the submission that the parties abandoned the Holbrook Agreement, the plaintiff relied upon the absence from a BankWest funding proposal prepared by Meshona in May 2006 using the Properties as security, of any mention of the transfer of 50% of the equity in the Properties to the defendants. I do not regard this absence as indicative of the abandonment of the agreement because at this time the parties were considering the stamp duty impediments to such transfers. Mr Reddy agreed in cross-examination that it may have been the stamp duty issues that impeded the completion of the Holbrook Agreement. However he did not concede that the parties had abandoned the Agreement (tr 651).

245 I agree with the plaintiffs’ submissions that the parties decided to abandon the Holbrook Agreement when they realised the implications of capital gains tax liability and/or stamp duty liability were. The defendants’ conduct in 2006 in handing back the Properties to the plaintiff is also evidence of the abandonment of the Agreement. Alternatively I am satisfied that the plaintiff terminated the Holbrook Agreement at the same time that he terminated the agreement to purchase the shares when he found out that he was not going to be given access to the financial information. In any event, having regard to my findings in relation to the Meshona Representations I am satisfied that the plaintiff was entitled to repudiate the Holbrook Agreement. The defendants are not entitled to any relief in respect of the Holbrook Agreement.

246 I am satisfied that the Cross Claims brought by Mr Reddy and Mrs Reddy should be dismissed.

Conclusion

247 The plaintiffs have established that the defendants engaged in misleading or deceptive conduct. The defendant made the value of the business representation, the due diligence representation and the debt free representation. Each of the representations was false. Each of the defendants engaged in conduct that prevented the plaintiffs from having proper access to the financial information of Meshona. The plaintiff relied upon the representations and suffered loss of $4,593,048. The plaintiff is entitled to entry of judgment against the defendants in that amount.

248 The plaintiffs’ claim in respect of the profit of the business representation will be dismissed. The Cross Claims brought by the second defendant and the fourth defendant will be dismissed.

249 The plaintiffs also make a claim for interest and costs. The parties are to confer to see if agreement can be reached in respect of those matters. If agreement is unable to be reached I will hear argument when the matter is listed for the purpose of filing Short Minutes reflecting these findings.

250 The matter is listed at 10.00am on 3 February 2011.

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Citations

Lakshmanan v Reddy [2010] NSWSC 1455

Cases Citing This Decision

0

Cases Cited

3

Statutory Material Cited

2

Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd [1978] HCA 11

Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60

Campbell v BackOffice Investments Pty Ltd [2008] NSWCA 95

CITATION:	Lakshmanan v Reddy [2010] NSWSC 1455
HEARING DATE(S):	22, 24, 25, 26 February; 1, 2, 3, 4 March; 1, 2, 3 September; and 8 October 2010
JUDGMENT DATE :	21 December 2010
JURISDICTION:	Equity Division
JUDGMENT OF:	Bergin CJ in Eq
DECISION:	Plaintiff entitled to recover loss of $4,593,048
CATCHWORDS:	MISLEADING OR DECEPTIVE CONDUCT - whether representations were made - whether representations were false - whether the plaintiffs relied upon the representations - whether the plaintiffs are able to recover amounts paid in reliance on representations - CONRACT - alternative claim not necessary for decision where written contract did not reflect purchase price of shares - whether written contract reflected agreement reached - whether defendants entitled to recover damages for breach of contract on cross-claim
LEGISLATION CITED:	Fair Trading Act 1987 Trade Practices Act 1974 (Cth)
CASES CITED:	Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592 Campbell v Backoffice Investments Pty Limited (2008) 238 CLR 304
PARTIES:	Arunchalam Lakshmanan (First Plaintiff / Second Cross-Defendant) Arun Lakshmanan (Second Plaintiff / First Cross-Defendant) Anand Lakshmanan (Third Plaintiff / Third Cross-Defendant) Roman Reddy (First Defendant) Venilla Reddy (Second Defendant / Second Cross-Claimant) Meshona Pty Limited (Third Defendant) Sumeshin Reddy (Fourth Defendant / First Cross-Claimant) Redmint Pty Limited (Fourth Cross-Defendant) Anand Nominees Pty Limited as Trustee for the Lakshmanan Family Trust (Fifth Cross-Defendant)
FILE NUMBER(S):	SC 2007/255422
COUNSEL:	J Stevenson SC / VE Whitaker (Plaintiffs / Cross-Defendants) C Branson QC / P Knowles (Defendants / Cross-Claimants) (22 February 2010) C Waterstreet (Defendants / Cross-Claimants)(from 24 February 2010)
SOLICITORS:	Gillis Delaney Lawyers (Plaintiffs / Cross-Defendants) Holman Webb Lawyers (Defendants / Cross-Claimants)