Li v Mikkelsen
[2021] VCC 2027
•14 December 2021
JanFMYOB
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-20-00733
| Zhiren Li & Anor | Plaintiffs |
| v | |
| Zoey Mikkelsen & Anor | Defendants |
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JUDGE: | Her Honour Judge Burchell | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 18 October 2021 to 22 October 2021, written submissions dated 26 October 2021, 8 November 2021, 23 November 2021 and 29 November 2021, 1 December 2021 and 6 December 2021 | |
DATE OF JUDGMENT: | 14 December 2021 | |
CASE MAY BE CITED AS: | Li & Anor v Mikkelsen & Anor | |
MEDIUM NEUTRAL CITATION: | [2021] VCC 2027 | |
REASONS FOR JUDGMENT
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Subject: MISLEADING OR DECEPTIVE CONDUCT
Catchwords: Share sale contract – misleading or deceptive conduct – representations – working capital contribution – purchase of shares – business valuation – net profits – specific performance – damages
Legislation Cited: Competition and Consumer Act 2010 (Cth) schedule 2 (“Australian Consumer Law”) ss2, 3, 4, 18, 137B, 236, 237, 242, and 243; Civil Procedure Act 2010 (Vic) ss9, 51, 56, 62 and 63; Evidence (Miscellaneous Provisions) Act 1958 (Vic) s89B; Corporations Act 2001 (Cth) s9; Penalty Interest Rates Act 1983 (Vic); County Court Civil Procedure Rules 2018 r 29.12.1
Cases Cited:Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465; Porges v Adcock Private Equity Pty Ltd [2019] NSWCA 79; Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; Houghton v Arms (2006) 225 CLR 553; Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216; Yorke v Lucas (1985) 158 CLR 661; Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556; Tepko Pty Ltd v Water Board (2001) 206 CLR 1; Mitchell v Valherie [2005] SASC 350; Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd [2013] VSCA 158; Feldman v Frontlink Pty Ltd [2014] VSCA 27; Mandie v Memart Nominees Pty Ltd [2016] VSCA 4; Hodgson v Amcor Ltd [2011] VSC 63; Jones v Dunkel (1959) 101 CLR 298; National Builders Group IP Holdings Pty Ltd v ACN 092 675 164 Pty Ltd(in Liq) & Anor [2015] VSCA 260; Ridge Lane Pty Ltd v Gadzhis [2007] VSC 212; Logicrose Ltd v South and Uniting Football Co Ltd (Unreported, Chancery Division, 5 February 1988); British American Tobacco Australia Services Ltd v Cowell (2002) 7 VR 524; House v The King (1936) 55 CLR 499; Black and Decker (Australasia) Pty Ltd v GMCA Pty Ltd [2007] FCA 1623; Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; Northern Health v Kuipers [2015] VSCA 172; Ultra Thoroughbred Racing v Those Certain Underwriters & Ors (Ruling) [2011] VSC 370; Williams v Pisano [2015] NSWCA 177; Gray v Latter [2014] NSWSC 122; R & D Holdings Pty Ltd v Deputy Commissioner of Taxation [2006] FCA 981; Taylor v Crossman (No 2) [2012] FCAFC 11; Fasold v Roberts (1997) 70 FCR 489; Ren & Ors v Simicorp Pty Ltd & Ors [2021] VSC 728
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr P Caillard | Accuro Maxwell (Melbourne) |
| For the Defendants | Mr D Connors | VMC Legal Pty Ltd |
HER HONOUR:
Introduction
1 Forever Exotic Pty Ltd (ACN 614 486 949) (“Forever Exotic”) is a business that sells a range of natural products such as salt lamps, essential oils, aroma diffusers, soy candles, room sprays, handmade soaps and bath bombs. It conducts its sales through pop up shops at shopping centres, party plans, online, through its warehouse and wholesale.
2 In this proceeding, the plaintiffs seek recovery of payments made for shares in Forever Exotic from the defendants (“the Mikkelsens”) based upon an allegation of misrepresentation by the Mikkelsens, which is denied.
3 The plaintiffs assert that they are entitled to judgment because between June 2016 and September 2016, there were representations made by the Mikkelsens to the plaintiffs in relation to the sale of an ownership interest in Forever Exotic’s business. The representations include that:
(a) Forever Exotic had consistently achieved a net profit margin of approximately 30%.
(b) Forever Exotic had achieved net profit of approximately $400,000.00 in the financial year ended 30 June 2016.
(c) Forever Exotic had achieved, excluding cash receipts, net profit of approximately $293,850.67 in the financial year ended 30 June 2016.
(d) Forever Exotic had stable net profit with a bit of growth.
(e) The plaintiffs would recoup their investments within four years if they purchased an interest in Forever Exotic (“the Share Sale Representations”).
4 The plaintiffs claim that the representations made by the Mikkelsens are misleading or deceptive, or likely to mislead or deceive. Had the plaintiffs known the Share Sale Representations were misleading or deceptive, the plaintiffs would not have purchased the shares in Forever Exotic and they would not have contributed working capital to Forever Exotic. As a result, the plaintiffs seek rescission of the contract and damages.
5 The plaintiffs further claim that Jan Mikkelsen represented to the plaintiffs that Forever Exotic would repay their working capital contribution of $60,000.00 within 1–2 years and that the defendants would also contribute $60,000.00 towards working capital (“the Working Capital Representation”). In reliance on the Working Capital Representation, the plaintiffs transferred $60,000.00 into the bank account of Forever Exotic. The Working Capital Representation was misleading and deceptive and the plaintiffs have suffered loss of $60,000.00.
6 The Mikkelsens oppose the plaintiffs’ claim on the following grounds:
· they deny the Share Sale Representations and Working Capital Representation, as alleged, were made;
· the plaintiffs did not rely on and were not induced by the alleged representations in entering the agreement to purchase shares in the business;
· alternatively, the Mikkelsens had reasonable grounds for making the representations as to future matters;
· alternatively, if the statements about the business having consistently achieved a net profit margin of approximately 30% and consistently achieved a net profit margin of approximately $400,000.00 were made, these were mere puffery;
· the plaintiffs had a reasonable opportunity to discover the true facts through due diligence;
· the plaintiffs failed to take reasonable care;
· if the plaintiffs suffered loss and damage (which is denied), the amount should be reduced having regard to the plaintiffs’ share in the responsibility by failing to invest in or expand the business as agreed and due to the plaintiffs’ failure to participate in and operate the business.
7 In my judgment, the Share Sale Representations ground is made out. However, there is a 15% discount on the award of damages, having regard to the plaintiffs’ share in responsibility for the loss and damage suffered. My reasons in respect of each ground are set out below.
8 Accordingly, I order that there is judgment for the first plaintiff in the proceeding in the sum of $59,500.00, and for the second plaintiff in the amount of $476,000.00, together with interest pursuant to the Penalty Interest Rates Act 1983 (Vic). I also order that the defendants pay the plaintiffs’ costs of and incidental to the proceeding on the standard basis, in default of agreement, unless either party has a basis for seeking a different order as to costs. I will invite the parties to prepare draft orders to give effect to these reasons, and will determine any issue concerning costs on the papers.
Factual Background
9 Prior to the incorporation of Forever Exotic on 29 August 2016, Zoey Mikkelsen (“Zoey”) was a sole trader operating a retail business selling salt lamps, essential oils, candles, soaps, clothing and accessories under the business name of Forever Exotic (ABN 96 541 067 712) (“Forever Exotic”). Jan Mikkelsen (“Jan”) is Zoey’s husband and is employed as the manager of Forever Exotic.
10 Once the structure of the deal became refined between the parties, Zoey organised for the incorporation and registration of Forever Exotic in which the plaintiffs proceeded to purchase shares in a company which owned the business.
11 On 8 September 2016, the plaintiffs entered into an agreement with Zoey and Forever Exotic. The agreement dated 8 September 2016 indicates:
(a) Forever Exotic’s business valued at $1,750,000.00;
(b) Zoey Mikkelsen — 88 shares ($1,540,000.00);
(c) Baotong Liu — 8 shares ($140,000.00) (“the second plaintiff”);
(d) Zhiren Li — 4 shares ($70,000.00) (“Joe”, “the first plaintiff”);
(e) the shareholding of the plaintiffs will increase to 50%, being 20% shareholding no later than 30 June 2017 and 18% shareholding no later than 30 June 2018;
(f) the shareholding of the plaintiffs will further increase to 70% within 24–36 months and 20% shareholding will be purchased at the price of $525,000.00; and
(g) Zoey and the plaintiffs will contribute additional working capital of $200,000.00 (totalled $400,000.00) to Forever Exotic to fund the potential expansion into the Asian market.
12 On 9 September 2016, the plaintiffs made a payment of $60,000.00 to Forever Exotic as working capital contribution.
13 On 13 September 2016, the plaintiffs paid $210,000.00 for the acquisition of 12 shares in Forever Exotic.
14 On 3 April 2017, the second plaintiff paid $420,000.00 to Zoey for the acquisition of a further 24 shares in Forever Exotic.
15 The directors of Forever Exotic are the Mikkelsens. The shareholders of Forever Exotic are:
(a) Zoey — 64 ordinary shares;
(b) Joe — 4 ordinary shares; and
(c) the second plaintiff — 32 ordinary shares.
16 It was common ground between the parties that at some stage in 2016 (the accounts differed as to whether it was in January or June), Scarlett Liu (the daughter of the second plaintiff), Brian (Scarlett’s husband) and their friends Joe and Rebecca met Jan and made some purchases of salt lamps to help with hay fever symptoms. Scarlett came back in July 2016 and said that she liked the products and asked Jan if he would be interested in selling part of the business.
17 There were a couple more meetings in July 2016, including a meeting that took place at the business’ office/warehouse wherein there was a tour of the warehouse and there were further discussions about whether the defendants would be willing to sell part of the business.
18 The Mikkelsens did not engage lawyers during the sale transaction and the share sale agreement was drafted by the plaintiffs’ lawyer. However, the plaintiffs’ lawyer did not explain the full terms of the contract, only pointing out the figures, how many shares the plaintiffs bought, the instalments over the two years and when the plaintiffs needed to pay the rest of the money for the shares. There are no letters from the purchasers’ solicitors requiring an independent valuation, stocktake, or filed BAS returns. Zoey said that Jan negotiated on her behalf and she left Jan and her brother Paul Pavlou (“Paul”), the accountant for the business, to deal with the transaction. Zoey said that she delegated to Jan anything to do with figures so she did not know about the alleged representations (oral or written) or never heard it being said.
19 The second plaintiff relied on Scarlett to translate the share sale agreement to him and she signed it on his behalf. He said that he trusted Jan’s word and the financial reports given to him. The second plaintiff said he did not instruct Scarlett to thoroughly investigate the business. As such, the second plaintiff did not seek independent legal or accounting advice.
20 There were two profit and loss statements provided to the plaintiffs. The first was provided to the plaintiffs on 5 August 2016 shortly after the decision was made to sell to the plaintiffs. That was put together by Paul.
21 On 5 August 2016 at 11.52am, Jan sent an email to Scarlett attaching the “unadulterated figures from last year”. The document is headed “Profit and Loss Cash”. About three hours later, Jan sent Scarlett a further email attaching a document containing the Mikkelsens’ proposal. Scarlett then forwarded the email to Rebecca, Joe and Rachel and showed it to the second plaintiff. The second plaintiff took note of the net profit of $392,401.47 and said that he relied on this statement in his decision to purchase the shares. It is common ground that the first statement is wrong.
22 The first proposal is on Forever Exotic letterhead and includes the following statement:
The business value we place on the business is valued real net profit for year 2015-2016. Normally the formula is between 3-5 times. So that would value the business at between $1,177,204.41 and $1,962,007.35…
Our offer is as follows 50% equity in forever exotic for $1,319,802.94 which is 4 times net profit plus 50% of value of stock at retail plus 50% debts owing to company and bartercard. This allows for sweat equity that Zoey and Jan have put into building the business to this point.
23 The plaintiff relies on the calculation of three times the net profit of $392,401.47, which comes to exactly the figure of $1,177,204.41 and a multiple of five times provides the exact sum of $1,962,007.34. Therefore, the plaintiffs contend that the sale price of the shares has been determined by the defendants using the net profit cash statement sent to the plaintiffs on 5 August 2016. Rebecca said that she remembered the 5 August 2016 profit and loss statement and proposal showing the net profit of $400,000.00 and that the price should be four times the net profit because Jan said they would get their investment back in four years.
24 The second profit and loss statement was sent to the plaintiffs on 31 August 2016 and was subsequently accompanied by the BAS statements on 3 September 2016 that had been provided by the company accountant, and were marked with a watermark “client copy”. The Mikkelsens say they were the most up‑to‑date preparation of the BAS at the time. Scarlett said that she did not compare the two versions of the profit and loss statements side by side as she understood that the first statement included cash and the second did not. The second plaintiff could not recall the second statement.
25 Jan said that he was surprised to learn that there had been amendments to those BAS statements and that different BAS statements had been filed with the ATO compared to the BAS statements provided to the purchasers. That is, the ATO BAS underestimated the figures. He said he became aware of the error when the documents were subpoenaed and he received them from their new accountant Wayne Nurse & Associates. He was not aware of the lodging of the BAS. This was done by Paul.
26 The second profit and loss statement and the figures went from $1,403,159.00 down to $845,905.00 in terms of turnover. The profit margin that was alleged went from $392,000.00 to $293,000.00. There is a dispute between the parties as to whether the two sets of profit and loss statements reflected a cash component or whether the first profit and loss statement provided was a “draft” prepared in haste at the request of Scarlett and then subsequently refined by the defendants later on. Scarlett and Joe denied that Jan ever referred to the first profit and loss statement as a “draft” or that the defendants said that the second statement replaced the first. They required a signed accountant’s version of the profit and loss statement to verify the figures as true and correct.
27 The Mikkelsens submitted that the data and the figures that were provided to the purchasers were as good as the defendants could provide at that time, given that they had not set out to sell the business and they were responding to an offer of interest.
Applications
Defendants’ Summary Judgment Application
28 Mr Connors was briefed as trial counsel very late to appear on behalf of the defendants. He raised for the first time in the week leading up to the trial date an argument in relation to whether the factual circumstances of the present case gave rise to a cause of action based on misrepresentation in contravention of s18 of the Competition and Consumer Act 2010 (Cth) schedule 2 ‘Australian Consumer Law’ (“ACL”).
29 This argument was put on three bases.
30 First, the ACL is legislation that provides protection to consumers, it does not legislate or proscribe conduct outside that ambit. This is an investment by investors. The plaintiffs are not consumers within the definition of the ACL.[1]
[1]Competition and Consumer Act 2010 (Cth) sch2 ‘Australian Consumer Law’ (“ACL”) s3.
31 Secondly, what was sold by the first defendant and what was acquired by the plaintiffs were shares in the company. As such, they are not services and nor are they “goods” as defined by the ACL.[2] They do not meet the definition of “goods”. They also exceed the jurisdictional monetary limit of the definition that defines “consumer” at s3(1)(a)(i) and are not saved by the provisions of s(1)(b) of the ACL.
[2] Ibid s2.
32 Thirdly, the transaction between the first defendant and the plaintiffs and the agreement into which they entered is not within trade and commerce.[3] The sale of shares in a business is not within the business or commerce conducted by a company or individual in the exercise of that business. It is outside the scope and ambit of the ACL. This applies also to the working capital contributions claims for the same reasons.
[3]Ibid.
33 The issue as to whether the conduct was “in trade or commence” arose for the first time when trial counsel co-operated to produce the joint statement of issues required by the Court. In response, the plaintiffs sought leave to file and serve a further amended statement of claim to plead in the alternative, negligent misstatements at common law.
34 As no prejudice was suffered by the defendants by reason of the proposed amendment, the plaintiffs claim was revised to be brought on two grounds. First, that the misrepresentations were misleading and deceptive for the purposes of s18 of the ACL, or alternatively, negligent misstatements at common law.
35 The plaintiffs claim that by making the representations, the Mikkelsens, in trade or commerce, engaged in conduct that is misleading or deceptive, or was likely to mislead or deceive. The claim for negligent misstatement is, in essence, the same. It relates to the same facts and representations.
36 The plaintiffs submit that the Mikkelsens knew or ought to have known that they were being trusted by the investors to give information that they knew, or ought to have known, the investors intended to rely upon.[4] The investors relied on the representations in agreeing to enter into the agreement to purchase shares in Forever Exotic. The investors were misled or deceived by the representations and suffered loss.
[4]Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.
37 The plaintiffs contend that the Mikkelsens’ argument that their complaint is not well founded on the ACL is misconceived. They note that:
(a) although it applies to other provisions in the ACL, the term “consumer” is not used in s18.
(b) s18 of the ACL does not only apply to “goods”. By way of example, s18 was found to apply with misleading and deceptive conduct in relation to the appointment of a person as chair of a company to be listed on the ASX and whether a purchase of equity was required.[5]
(c) The plaintiffs accept that s18 of the ACL prohibits a person from “in trade or commerce” engaging in conduct that is misleading or deceptive, however, s18 relates to certain “conduct”. Conduct to induce a person to enter into a commercial arrangement with another person is conduct in trade or commerce.
[5]Porges v Adcock Private Equity Pty Ltd [2019] NSWCA 79.
38 Whether the misrepresentation was “in trade or commerce” will depend on the facts in each case and the nature of the dealings between the parties and the evidence in the particular case. It cannot be dealt with summarily.
39 The plaintiffs contend that s18 of the ACL does not confine the representor to being a “corporation” and the representee can be anyone, not just “consumers”. The plaintiffs relied on the High Court decision in Concrete Constructions (NSW) Pty Ltd v Nelson at [8]:[6]
… What the section is concerned with is the conduct of a corporation towards persons, be they consumers or not, with whom it (or those whose interests it represents or is seeking to promote) has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character (emphasis added).
[6](1990) 169 CLR 594.
40 The defendants put in issue whether the making of the representations was conduct “in trade or commerce”. They submit that this was a single transaction for the parties. The defendants were not in the business of buying and selling companies (or shares in companies) as a business and the plaintiffs were not in the business of buying and selling companies (or shares in companies) as a business.
41 The plaintiffs submit that Forever Exotic was a trading business/corporation. The representations were made in the context of commercial negotiations which were designed to persuade the plaintiffs to acquire an interest in that trading business. Further, the misrepresentations were made for “potential expansion [of trade] into the Asian market” which is, in itself, an activity of trade or commerce.
42 The plaintiffs relied on the High Court’s observation in Houghton v Arms in considering the meaning of “in trade or commerce”:[7]
[S]tatements made by a person not himself or herself engaged in trade or commerce may answer the statutory expression if, for example, they are designed to encourage others to invest, or to continue investments in a particular trading entity (emphasis added).
[7] (2006) 225 CLR 553, 565 [34] (per Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ).
43 In relation to whether the Mikkelsens made a negligent misstatement, there is a dispute between the parties as to whether the requisite “duty” owed by the defendants to the plaintiffs has been established. In my view, given the factual dispute underlying this claim, it is a matter for trial.
44 The plaintiffs submit that intent is not relevant. All that is relevant is whether, tested objectively, the conduct was misleading or deceptive, or likely to mislead or deceive.[8]
[8] Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216; Yorke v Lucas (1985) 158 CLR 661, 666.
45 The plaintiffs claim that a duty of care for negligent misstatement was owed because the defendants knew or ought to have known that they were being trusted to give information that they knew, or ought to have known, the group intended to rely upon.[9] Further, the plaintiffs say that a duty of care was owed to the second plaintiff, in circumstances where Scarlett made it known that he was a potential investor and she was talking on his behalf because he did not speak English. These matters sufficiently raise the applicable legal principles to give rise to a pleading for a duty for negligent misstatement. I agree.
[9] Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556, 571; Tepko Pty Ltd v Water Board (2001) 206 CLR 1, [74].
46 In relation to the submission that there is no cause of action against the second defendant, the plaintiffs say that s18 of the ACL includes conduct to induce a person to enter into a commercial arrangement with another person. Jan does not need to be the actual seller of the business, he just needs to be a person who engaged in conduct that was misleading or deceptive in trade or commerce.
47 The defendants in the alternative relied on the principles of “puffery”. Exaggerations which are so obvious that they are unlikely to mislead anyone are known as “puffery”. Even if a claim is a clear exaggeration, it may be in breach of the ACL if it causes consumers to be misled. Statements that appear to relate to facts rather than opinion, particularly about quality and price, will be misleading or deceptive if they are not accurate. The more seemingly factual a claim is, the greater the risk it is misleading or deceptive.
48 In Mitchell v Valherie,[10] Justice White observed that:
Statements that are so vague as to be incapable of being given any reasonably precise meaning or because they are exaggerated commendatory opinion rather than a statement of any factual matter do not give rise to an actionable misrepresentation.
[10] [2005] SASC 350, [72].
49 Part 4.4 of the Civil Procedure Act 2010 (Vic) (“the CPA”) provides for an application for summary judgment by the defendant (s62). Section 63(1) states that:
… a court may give summary judgment in any civil proceeding if satisfied that a claim, a defence or a counterclaim or part of the claim, defence or counterclaim, as the case requires, has no real prospect of success (emphasis added).
50 In Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd,[11] the Court of Appeal distilled the test to be applied when determining whether to give summary judgment pursuant to s63 of the CPA. At [35], Warren CJ and Nettle JA stated as follows:[12]
[11] [2013] VSCA 158, recently applied in Feldman v Frontlink Pty Ltd [2014] VSCA 27 at [24] and Mandie v Memart Nominees Pty Ltd [2016] VSCA 4, [44]–[48].
[12] Neave JA also agreed with this approach, [36].
Upon the present state of authority:
a.the test for summary judgment under s63 of the Civil Procedure Act 2010 is whether the respondent to the application for summary judgment has a ‘real’ as opposed to a ‘fanciful’ chance of success;
b.the test is to be applied by reference to its own language and without paraphrase or comparison with the ‘hopeless’ or ‘bound to fail test’ essayed in General Steel;
c.it should be understood, however, that the test is to some degree a more liberal test than the ‘hopeless’ or ‘bound to fail’ test essayed in General Steel and, therefore, permits of the possibility that there might be cases, yet to be identified, in which it appears that, although the respondent’s case is not hopeless or bound to fail, it does not have a real prospect of success;
d.at the same time, it must be borne in mind that the power to terminate proceedings summarily should be exercised with caution and thus should not be exercised unless it is clear that there is no real question to be tried; and that is so regardless of whether the application for summary judgment is made on the basis that the pleadings fail to disclose a reasonable cause of action (and the defect cannot be cured by amendment) or on the basis that the action is frivolous or vexatious or an abuse of process or where the application is supported by evidence.
51 Further, pursuant to s64 of the CPA, the Court has a residual discretion that:
… a court may order that a civil proceeding proceed to trial if the court is satisfied that, despite there being no real prospect of success the civil proceeding should not be disposed of summarily because:
(a) it is not in the interests of justice to do so; or
(b) the dispute is of such a nature that only a full hearing on the merits is appropriate.
52 I agree with the plaintiffs that the share sale agreement had a clear trading or commercial nature. The deed involved a going concern and contained clauses setting out how the parties were to continue to work together in the future.
53 I therefore accept the plaintiffs’ submissions in relation to the Mikkelsens’ summary judgment application. This is not a case in which the statement of claim has no real prospect of success. In the alternative, I find that it is not in the interest of justice to summarily dispose of the proceedings and the disputes are of such a nature that a full hearing on the merits is appropriate under s 64 of the CPA. For the reasons set out above, the defendants’ oral summary judgment application is dismissed on all grounds with costs.
Plaintiffs’ Strike Out Application
54 After the conclusion of the parties’ evidence in the trial on 22 October 2021, by email dated 26 October 2021, the plaintiffs sought to have the defence in this proceeding dismissed or struck out pursuant to s56 of the CPA or r29.12.1 of the County Court Civil Procedure Rules 2018 (“the Rules”). The plaintiffs made a similar application on 11 October 2021 before Judge Cosgrave in the week prior to the trial.
55 The plaintiffs attached a copy of submissions to be relied on as well as three affidavits previously relied on by the plaintiffs in their attempts to have the defendants comply with orders made in this proceeding for discovery.
56 The plaintiffs were required to file a fresh summons and seek a return date for the application, following which a proposed timetable for the exchange of affidavits and submissions was proposed by the Court.
57 The plaintiffs’ summons was not filed until 4 November 2021 in response to the defendants’ enquiry as to whether the application was abandoned.
58 The plaintiffs rely on the self-executing orders made by Judge Cosgrave on 4 October 2021, relating to discovery by the defendants. Paragraph 2 of those orders provided:
Non-compliance with orders made on 10 September 2021
2. By 9:30 am on 6 October 2021, the Defendants file and serve the affidavit relating to discovery ordered by Judge Burchell on 10 September 2021. If the Defendants fail to do so, the defence will be struck out and there will be judgment for the Plaintiffs together with interest and costs.
59 The defendants filed a Further Affidavit of Documents on 5 October 2021. The plaintiffs say that during the course of the trial it became “abundantly clear” that the Further Affidavit of Documents was “grossly inadequate” in a number of material respects including:
(a) the failure to disclose the existence of the source material on which the red account books were alleged to have been prepared, being receipt books, daily records maintained by kiosks and EFTPOS receipts; and
(b) the failure to disclose the existence of MYOB accounting software records until 5 October 2021 which was “not available due to the accountant now being incarcerated and not able to be contacted by the defendants”.
60 The plaintiffs contend that the refusal to comply with Court orders — even after receiving two Notices for Default in Making Discovery — was intentional or the product of contumelious conduct where:
(a) there has been a clear unwillingness or inability to co-operate with the Court;
(b) non-compliance has been continuing; and
(c) the defendants’ conduct has resulted in material prejudice to the plaintiffs.
61 The plaintiffs submit that the documents not discovered by the defendants were critical to the resolution of the issues in dispute, given the defendants’ reliance on the “red account books” at trial. The books were disclosed for the first time on 5 October 2021 and became central to the defence.
62 The plaintiffs claim that the failure to produce the documents caused material prejudice to the plaintiffs’ conduct of their claim and it would be an injustice if the defendants were permitted to benefit from their persistent and contumelious disregard for Court orders and processes.
63 Schedule 2 of the Further Affidavit of Documents purported to describe the documents that the defendants had, but no longer had, in their possession, custody or control. The schedule to the affidavit included the following:
2. The records of Forever Exotic as a trading and business name of the first defendant kept by the accountant to the defendants on MYOB accounting software that is not available due to the accounting now being incarcerated and not able to be contacted by the defendants (emphasis added).
64 The plaintiffs assert that this affidavit is false, as during the course of the trial, evidence was given that the accountant, Paul Pavlou, who is the first defendant’s brother, was able to be contacted by the defendants’ solicitor to have a conversation of approximately 30 minutes the week prior to the trial and was able to be contacted by the first defendant on the morning of her evidence on 22 October 2021 and the previous day. Under cross examination, Jan accepted that Paul could have been asked for access to the software in the previous six months.
65 The plaintiffs conclude that this conduct was to avoid giving the plaintiffs access to the MYOB software, being material documents in this proceeding.
66 The defendants’ solicitor, in an affidavit filed post-trial, deposed to speaking with Paul on 12 October 2021, at which time Paul advised him that he had no idea where the computer was, he did not recall the password, and the version of MYOB was only on the computer and not accessible “in a cloud”. This enquiry was made six days prior to the trial and the information not provided to the plaintiffs. The failure on the part of the defendants to make these enquiries in the six months prior to the trial date deprived them of the opportunity to potentially be in a different position where the computer and password could have been available.
67 Further, the defendants failed to discover the EFTPOS receipts, the receipt books or the daily sheets. Evidence was given by Zoey during the trial that “the back of a website” contained the sales information and sales records and that they had the source documents for the “red books at work”.
68 The plaintiffs claim that if they had been given access to the documents, they may have been able to use the source material to verify the accuracy of the handwritten entries in the “red books”. The plaintiffs were prevented from doing so.
69 The plaintiffs also rely on my orders made on 10 September 2021 in which the defendants were to discover all correspondence between Jan and/or Zoey Mikkelsen and Paul Pavlou between 1 July 2011 and 30 June 2019 (“the relevant period”).
70 The plaintiffs claim that the scarcity of email correspondence with Paul discovered demonstrates that insufficient searches were made of his email records to identify all such documents and Jan gave evidence during trial that he deleted email correspondence with Paul falling within the orders made by the Court. The further affidavit of documents does not set out these documents under “b. If [a document in the category described] has been but is no longer in that party’s possession, when that party parted with it and his belief as to what has become of it”.
71 The plaintiffs contend that had the defendants complied with the orders made on 10 September and 4 October 2021 to provide an affidavit, they may have been able to examine the computers of Forever Exotic or contacted the email provider to retrieve those deleted emails, given Paul was not called to give evidence. Paul was solely responsible for preparing the false BAS and it may have identified if particular BAS had been provided to the defendants for approval.
72 Section 56(1) of the CPA requires the plaintiffs to show that there has been a failure to comply with discovery obligations or that there has been conduct intended to delay, frustrate or avoid discovery of relevant documents.
73 The CPA provides for sanctions such as any adverse inference arising from any conduct referred to in subsection (1) (s56(2)(h)) or dismissing any part of the defence (s56(2)(j)).
74 The plaintiffs cite Hodgson v Amcor Ltd,[13] in which Vickery J sets out a number of factors to be taken into account when exercising the Court’s discretion under s51 of the CPA. These considerations include:
[13] [2011] VSC 63.
(a) the effect of the contravening conduct on the just resolution of the real issues in the proceeding in an efficient, timely and cost-effective manner;
(b) the extent of any delay caused by the contravening conduct and the prejudice associated with it, and whether the delay was inordinate and inexcusable;
(c) whether the history of non-compliance by a party is such as to indicate an unwillingness or inability to co-operate with the Court and the other party or parties in having the matter ready for trial within an acceptable period. In determining whether the defaulting party is either subjectively unwilling to cooperate or, for some reason, is unable to do so, the cumulative effect of the party’s defaults may be taken into account;
(d) whether the non-compliance is continuing and is continuing to occasion unnecessary delay, expense or other prejudice to the other party (i.e. a significant continuing default which continues to impose an unacceptable burden on another party);
(e) the prejudice which might reasonably be assumed to follow for the other party arising from the contravening conduct, and that which is shown to have arisen;
(f) the extent to which the achievement of efficiency in the conduct of proceedings by other parties in other cases before the Court have been compromised;
(g) the veracity and reasonableness of any explanation given for the contravening conduct;
(h) whether the default was intentional or the product of contumelious conduct;
(i) whether any alternative remedy by way of a lesser, but equally efficient, sanction is available;
(j) whether the contravening conduct has rendered it impossible to conduct a fair trial, or would make any judgment in favour of the offending party unsafe, or which would render any further proceedings unsatisfactory and prevent the Court from doing justice, or there is a real risk of any of these things happening; and
(k) whether the object of the order which has been contravened is ultimately secured (e.g. the late production of a document which has been withheld on discovery).
75 The plaintiffs claim that the interests of justice and the need to ensure a fair trial are such that the defence ought to be struck out, given:
(a) two Notices of Default in Making Discovery;
(b) non-compliance with orders made by Judge Burchell on 10 September 2021;
(c) frustration of inspection of documents; and
(d) non-compliance with the further orders made by Judge Cosgrave on 4 October 2021 and the inadequacy of the Further Affidavit of Documents.
76 The defendants contend that there has been no significant or material prejudice to the plaintiffs due to a failure of the Mikkelsens to discover the receipt books, daily records from the kiosks, EFTPOS receipts, MYOB records, stocktake software and emails to and from Paul. They submit that:
(a) they admit that the receipt books should have been discovered but their importance and relevance are minimal, given only 300 receipts have been written in the ten years that the business has been operating. About 30 receipts were written for the 2016 financial year for a quantum of approximately $2,000.00;
(b) the daily record sheets were only retained until they were reduced into the “red books”;
(c) the EFTPOS receipts were recorded in the bank statements which were discovered and were contained in the Court Book but not referred to during the course of the trial;
(d) they had referred to the MYOB records at item 2 of schedule 2 of their 5 October 2021 affidavit of documents. The MYOB records were not in the Mikkelsens’ possession;
(e) the stocktake entries were made on the back of a website to which access is no longer available;
(f) Jan gave evidence that he only deleted some emails to and from Paul that were of an irrelevant conversational content.
77 The defendants argue that in circumstances where Judge Cosgrave declined to remove the opportunity of the Court to hear the defence in this matter at the previous strike out application, there must be some demonstration of gross injustice and deliberate and obstructive behaviour of the most material kind to remove a matter from consideration of the Court once all parties have closed their cases. They submit that no material prejudice has been established by the plaintiffs.
78 In reply, the plaintiffs relied on the recent Supreme Court decision of Ren & Ors v Simicorp Pty Ltd & Ors (“Ren”).[14] In that case, Associate Justice Matthews struck out the claim and defences to counterclaim for failure to comply with discovery obligations pursuant to s56 of the CPA. Ren involved a contractual dispute in which the plaintiffs alleged that they entered into contracts of sale with the defendants to purchase apartments developed by the defendants in Box Hill. Orders were made for discovery in 2014 and then for further discovery in 2015, 2016, 2018 and 2019. The documents sought were financial records and emails that were uniquely in the plaintiff’s possession and were critical to the matters in dispute. Her Honour applied the guiding facts set out in Hodgson v Amcor and observed that the dismissal of a party’s case is a measure of “last resort”.[15]
[14] [2021] VSC 728 (per Matthews AJ).
[15] [2011] VSC 63, [100].
79 Although the principles identified in Ren are the same principles to be applied in the present proceeding, in my view, the facts in Ren are distinguishable.[16] First, in that case, the contravening conduct had a profound effect on the just resolution of the issues in the proceeding in an efficient, timely and cost-effective manner in circumstances where the proceeding was issued in 2014 and the trial was still some distance away. In the present case, although there were a number of discovery applications, the proceeding was issued on 24 February 2020 and proceeded to a trial on 18 October 2021.
[16]Ren (n 14) [252].
80 Second, the delay in Ren was found to be inordinate and inexcusable and there still had not been proper compliance with Ren’s discovery obligations under the Court’s orders. Although it is clear on the evidence given by the Mikkelsens at trial that there was non-compliance with discovery, the Court must nonetheless balance the factors of any prejudice associated with the conduct, the effect on the resolution of the real issues in dispute and whether it was impossible to conduct a safe trial.
81 Third, in Ren, in relation to the plaintiff’s history of non-compliance, her Honour found that the plaintiff’s belligerent and argumentative attitude to her discovery obligations was indicative of her unwillingness to co-operate with the Court and the other parties. The Court had found that the plaintiff was variously only willing to discover documents that assisted her case, claimed to have “forgotten” to discover documents, deliberately withheld documents, did not think they were relevant despite specific Court orders, responded in her affidavit of documents in an argumentative and inappropriate manner to the Court ordered categories of documents rather than discover the documents as required, disputed that she could be compelled to discover the documents, relied on a “document retention policy” of seven years and withheld “private information”. None of these factors are present in the instant case.
82 Fourth, in Ren, the non-compliance was ongoing, occasioning unnecessary delay and expense to the other party and occasioned prejudice to Sinicorp arising from inadequate discovery. In the present case:
(a) the plaintiffs conceded at the directions hearing before Judge Cosgrave on 4 October 2021 that they wished to proceed with the trial date on 18 October 2021 in the absence of the missing source financial documents as they did not wish to vacate the trial date and delay proceedings any further.
(b) the CPA (s56(2)(h)) and the Evidence (Miscellaneous Provisions) Act 1958 (s89B) provide for negative inferences to be drawn due to the conduct or the unavailability of the documents.
(c) the defendants’ failure to call Paul also gives rise to submissions made by the plaintiffs in relation to potential negative inferences under the principles of Jones v Dunkel.[17]
(d) the cross examination of the Mikkelsens on the topic of the availability of Paul to give evidence, the MYOB software, the source documents of the “red books” and the emails between the Mikkelsens and Paul all go to the question of their credit in the main proceeding.
[17] (1959) 101 CLR 298.
83 Fifth, in Ren, the Court found that the failures to provide proper discovery in respect of particular classes of documents demonstrates the prejudice to Sinicorp in its defence and its prosecution of its own counterclaim, that prejudice being unfairness to Sinicorp in the trial of the proceedings. In the present case, the application for strike out of defence comes after completion of evidence over the course of a five day trial and prior to the filing of written closing submissions. As such, case management principles must be taken into account given the timing of the strike out application.
84 Sixth, in Ren, the discovery disputes had taken considerable judicial resources with at least four days’ hearing time. In the present matter, the first discovery orders were made on 11 March 2021, and specific categories were ordered to be discovered by the defendants on 10 September 2021, the subject of the application on 4 October 2021 and two notices of default. The discovery issues were the subject of cross examination at trial but did not result in the duration of the trial over running the estimate. The post-trial application issued on 4 November 2021 resulted in the provision of further submissions and affidavits in addition to the closing written submissions, which is now the subject of a separate section in these reasons. However, the efficiency in the conduct of the proceeding pre-trial has not been compromised to the extreme degree as set out in Ren.
85 Seventh, in Ren, the plaintiff’s explanations for her conduct did not stand up to scrutiny. Paul could have been asked for access to the software in the previous six months and the defendants were able to contact him in prison. Therefore, what was deposed to in schedule 2 to the Further Affidavit of Documents was not correct. Jan was evasive in his answers in relation to the deletion of the emails between him and Paul and these should have been disclosed in schedule 2. Similarly, the daily records and the stocktake software should have been discovered in schedule 2. Zoey’s explanation for the failure to discover the EFTPOS and receipt books that she did not think were important is also unreasonable, if properly advised.
86 Eighth, in Ren, the evidence pointed towards the contravening conduct being intentional and there was no reason to think she had not been properly advised by her solicitors. In the present case, the evidence of the defendants’ solicitor is that he did not turn his mind to the actual sales records when he advised the defendants as to their discovery obligations in relation to the 10 September 2021 orders and that the details of the actual sales became important as the trial proceeded. He deposed that the MYOB was the property of Paul and were not in the possession, custody or power of the defendants; he did not enquire about the EFTPOS slips as each transaction was directed to the business’ bank account. He determined that the receipts were not probative as they were so few in number and the “red books” constituted the “best evidence”. These facts differ to those in Ren.
87 Ninth, in Ren, the Court did not consider that an alternative remedy by way of a lesser but equal sanction was available. This was because the defaults in discovery in that case were wide ranging and potentially quite harmful to Sinicorp’s case. The defaults had an effect on every aspect of the claim and counterclaim upon which no proper basis for inferences could be drawn. In the case before me, the absence of the missing source documents could be dealt with through the common law and the statutory negative inferences to be drawn and adverse credibility findings in respect of the defendants. These matters are dealt with in the analysis of the final judgment set out below. In my view, any prejudice has been waived when the plaintiffs consented to proceed with the trial at the hearing before Judge Cosgrave on 4 October 2021 and there are case management principles to consider in light of the timing of the plaintiffs’ application.
88 Tenth, in Ren, the object of the orders had been contravened, being proper discovery. In the present case, the self-executing order had been complied with in form, in that the Further Affidavit of Documents was filed by the due date. Although, the information supplied in the Further Affidavit of Documents was deficient as it failed to discover all books of Forever Exotic (as defined in s9 of the Corporations Act 2001 (Cth)) for the period from 1 July 2016 to present and correspondence with Paul during the relevant period, whether in schedule 2 or otherwise. In all the circumstances, it would be unjust to deprive the defendants adversely affected by the self-executing order the right to the trial on the merits of the proceeding, which has already been conducted. I set aside the self-executing order made on 4 October 2021.[18]
[18]Ridge Lane Pty Ltd v Gadzhis [2007] VSC 212, [8].
89 Finally, unlike Ren, I do not find that the defendants in the present case intended to delay, frustrate or avoid discovery of discoverable documents. In light of the circumstances of the current proceeding, the drawing of adverse inferences where documentary material is not available would be a remedy of a lesser but equally efficient sanction.
90 In National Builders Group IP Holdings Pty Ltd v ACN 092 675 164 Pty Ltd (in Liq) & Anor (“National Builders Group IP Holdings”)[19] the Court of Appeal considered the power under s56(2) of the CPA to impose sanctions for failure to comply with discovery obligations. Justice Vickery made an order striking out the defence of the first defendant but declined to strike out the defence of the second defendant. The decision thus confirms the breadth of the discretion under s56(2) of the CPA to impose sanctions for non-compliance with procedural obligations, including the sanction of denying a party a hearing.
[19][2015] VSCA 260 (“National Builders Group IP Holdings”).
91 The Court of Appeal noted at [7] that the decision to strike out the defence due to persistent failure to comply with the orders for discovery in spite of generous periods allowed for compliance should serve as “a salutary reminder to all civil litigants… that judges will not hesitate to give full effect to the clear intention of Parliament as expressed in the CPA”.[20]
[20] Ibid.
92 The Court of Appeal at [34] rejected the contention that the power of dismissal conferred by s56(2)(j) of the CPA was exercisable only where “a real risk” that the defaulting conduct “amounted to an abuse of process which would render any further proceedings unsatisfactory and prevent the Court from doing justice” per the common law principles in Logicrose Ltd v South and Uniting Football Co Ltd.[21]
[21] (Unreported, Chancery Division, 5 February 1988) quoted in British American Tobacco Australia Services Ltd v Cowell (2002) 7 VR 524, 576.
93 The Court of Appeal in National Builders Group IP Holdings held that there was no basis for reading down the scope of the power conferred by s56(2)(j) of the CPA.[22]
[22]National Builders Group IP Holdings (n 19) [36].
94 The language of s56(2)(j) of the CPA was unambiguously clear that the power is available in respect of any of the conduct referred to in subsection (1), namely:[23]
[23] Ibid [38].
(a) a failure to comply with discovery obligations;
(b) a failure to comply with any order or direction in relation to discovery; or(c) conduct intended to delay, frustrate or avoid discovery of discoverable documents.
95 The only limitation on the exercise of power is that it be exercised lawfully, within the conventional limits governing the exercise of any judicial discretion.[24]
[24]House v The King (1936) 55 CLR 499, [38] (“House v The King”).
96 At [40]–[43] of House v The King,[25] the Court of Appeal rejected the contention that the power to dismiss a claim or defence for non-compliance with discovery obligations was an interference with the “fundamental common law right” to a fair trial on the basis that:
[25] Ibid.
(a) the right to a hearing in a civil proceeding has never been unqualified as it is governed by rules of procedure;
(b) the powers conferred by s56(2) of the CPA are but an extension of powers already available to the Court to deal with non-compliance with procedural obligations;
(c) it was Parliament’s intention to impose a strict discipline on the conduct of civil proceedings through the enactment of the CPA itself;
(d) when enacting the CPA, the Attorney General noted that the Bill “expressly gives the Court powers to strongly sanction failure to comply with, or misuse of, the discovery process”.
97 In Black and Decker (Australasia) Pty Ltd v GMCA Pty Ltd,[26] Finkelstein J observed:
One of the primary objects of a commercial court is to bring the litigants’ dispute on for trial as soon as can reasonably and fairly be done. If, in some instances, the preparation of the case is not perfect so be it. A case that is reasonably well prepared is just as likely to be decided correctly as a perfectly prepared case. …
In deciding whether there is excusable non-compliance the court should take into account, among other factors: (a) the direct and indirect prejudice to the opposing party; (b) the impact of the delay on the proceedings; (c) the reasons for the delay; (d) good faith or lack of good faith on the part of the party seeking to be excused; and (e) the effect of putting off a trial both on other litigants and generally on the court’s ability to efficiently manage its cases.
[26] [2007] FCA 1623.
98 The plaintiffs’ application must be considered through case management principles. In Aon Risk Services Australia Ltd v Australian National University[27] those factors (although in relation to an amendment are generally applicable) are as follows:
[27] (2009) 239 CLR 175.
(a) whether there will be a substantial delay caused by the amendment;
(b) the extent of any wasted costs;
(c) whether there is an irreparable element of unfair prejudice caused by the amendment;
(d) concerns of case management arising from the stage in the proceeding when the amendment is sought;
(e) whether the grant of the amendment will lessen public confidence in the judicial system; and
(f) whether a satisfactory explanation has been given for seeking the amendment at the stage when it is sought.
99 The Court also notes s9(1)(a) of the CPA requires the “just determination of the civil proceeding” in accordance with the overarching purpose.
100 The Court of Appeal considered the CPA overarching obligations in Northern Health v Kuipers[28] and their Honours relied (at [33]) on J Forrest J’s observation in Ultra Thoroughbred Racing v Those Certain Underwriters & Ors (Ruling)[29] at [9] that: “the primary question still remains: what do the interest of justice dictate?...the prism through which these interests are viewed is wider than just that of the moving party”.
[28][2015] VSCA 172.
[29] [2011] VSC 370.
101 Although the defendants’ non-compliances in relation to discovery are inexcusable, and the plaintiffs have been deprived of the opportunity to forensically analyse source financial documents, particularly the MYOB records, the difficulty for the plaintiffs’ application is the timing of the summons. That is, the five day trial on the evidence has concluded and the Court is waiting on closing written submissions to publish a final judgment. The trial of the main proceeding is all but completed. The application sought by the plaintiffs is for a judgment without determination of the merits of the case.
102 In circumstances where the receipt books are minimal; the daily records sheets and stocktake software have been destroyed; the EFTPOS receipts are directly recorded on the bank statements; negative inferences can be made from the unavailability of the MYOB and emails to and from Paul when all other financial documents have been discovered; the plaintiffs have engaged a forensic accountant to provide an expert’s report; the defendants have been extensively cross examined on these matters; and concessions have been made during the course of the trial, in my view, the contravening conduct has not rendered it impossible to conduct a fair hearing of the plaintiffs’ claims.
103 Accordingly, subject to the appropriate sanctions, I agree with the defendants’ submission that there has been no significant or material prejudice to the plaintiffs due to a failure of the defendants to discovery documents, and in the circumstances of this case, it is not sufficient to allow the plaintiffs to remove this matter from the determination of the Court by allowing the defence to be struck out.
104 The plaintiffs’ application filed on 4 November 2021 is dismissed.
Substantive Argument
105 The plaintiffs claim that the Share Sale Representations were of a commercial and financial nature that were made by the Mikkelsens, which were relied upon by the plaintiffs in their decision to invest and at the time of making their statements, the Mikkelsens knew or ought to have known that they would rely on those representations.
106 The plaintiffs relied on the expert evidence of Victoria Wheeler, director of Munday Wilkinson. Ms Wheeler provided three reports in this proceeding dated 22 June 2020, 30 July 2020 and 7 October 2021.
107 Ms Wheeler was provided with Zoey’s personal income tax statements from 2011 to 2016, the business’ BAS for the financial year ending 2016, the first and second profit and loss statements and the company’s tax returns prior to 2016. Although Zoey said that the group were given access to all documents and records of the business, she conceded that she actually did not know that they were given access to all the books and records. She said that she did not personally give the group access to her personal tax returns and bank statements or the BAS lodged with the ATO. She did not know if Paul used MYOB accounting software. Zoey said that she only knows what her husband told her.
108 Jan said that the BAS for the 2016 period shows the sales that conforms with the second profit and loss statement of $845,904.94. Ms Wheeler said that the BAS was different to what was lodged with the ATO. She said that the Mikkelsens would then need to amend what they had lodged with the ATO. Ms Wheeler said she had come across companies that did not declare their cash sales. She accepted that the tax returns and BAS would therefore not always reflect the reality of the sales.
109 Jan said that he was not surprised that they were not paying tax in 2014 and 2015 despite his understanding of the net profit and Zoey’s personal income tax returns because they were buying stock.
110 In relation to each of the alleged representations, Ms Wheeler found:
(a) Forever Exotic had consistently achieved a net profit margin of approximately 30%
Forever Exotic did not consistently achieve a net profit margin of approximately 30% from the financial years 2011 to 2016 based on Zoey Mikkelsen’s 2011 to 2016 tax returns. Forever Exotic achieved the following net profit margins:
| Year ended 30 June | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 |
| Sales/Gross income | 234,529 | 395,579 | 387,801 | 378.930 | 405,850 | 485,497 |
| Profit (Loss) Before Tax | 16,093 | (33,169) | 3,047 | (154,857) | (18,074) | 22,391 |
| Net profit Margin | 6.86% | -8.38% | 0.79% | -40.87% | -4.45% | 4.61% |
(b) Forever Exotic had achieved net profit of approximately $400,000.00 in the financial year ended 30 June 2016
Forever Exotic did not achieve a net profit of approximately $400,000.00 for the financial year 2016. Based on Zoey Mikkelsen’s 2016 individual tax return, Forever Exotic only achieved a net profit of $22,391.00 for the financial year ended 30 June 2016.
(c) Forever Exotic had stable net profit with a bit of growth
Forever Exotic did not have “stable net profit with a bit of growth” from the financial years 2011 to 2016. Forever Exotic incurred losses for 2012, 2014 and 2015. The trading result of the business was only improved from a net loss of $18,074.00 in 2015 to a net profit of $22,391.00 in 2016.
(d) The plaintiffs would recoup their investments within 4 years if they purchased an interest in Forever Exotic.
The plaintiffs would not recoup their investments within 4 years, based on:
• the company tax returns of Forever Exotic Pty Ltd for the years ended 30 June 2017 and 2018 which show trading losses for both financial years;
• debts/borrowing set out in paragraph 6.29 of the First Report; and
• the decrease in sales for the period from 1 July 2019 to 29 April 2020, compared to the same period in FY2018 and FY2019. For details, please refer to Table 6.25 of the First Report.
111 Jan said that he did not know if the income tax returns of his wife for 2011–2015 prepared by Paul were incorrect. When compared to the first statement which discloses sales in the sum of $1,403,159.00, or the second statement of $845,905.00, these are massive increases in sales that appear to be an anomaly compared with the previous years set out above. Jan said that in 2015 they had less staff and shops and in 2016 they upped their operations significantly.
112 Ms Wheeler concludes that a prudent investor would be unwilling to invest their monies into a business that generated losses in the financial years 2017 and 2018. Therefore, the plaintiffs’ 36 ordinary shares in Forever Exotic are unlikely to be sold to other investors.
113 The loss and damage suffered by the plaintiffs was said to be $690,000.00 plus interest. A total amount of $690,000.00 comprises:
a) $210,000.00 paid by the plaintiffs for acquisition of 12 shares in Forever Exotic;
b) $420,000.00 paid by the second plaintiff for acquisition of 24 shares in Forever Exotic; and
c) $60,000.00 paid by the plaintiffs for contribution of working capital.
Analysis
114 The Court is conscious that the witnesses were required to recall events from July to September 2016, some five years ago. The parties conceded that all witnesses were credible and truthful. The only point of difference was in relation to Jan’s evidence.
115 The plaintiffs and the majority of their witnesses required the assistance of a Mandarin interpreter. Even Scarlett, mid-way through her cross examination, requested the assistance of an interpreter. Mr Connors, of counsel for the Mikkelsens, submitted that this request was made at the time when the questions were becoming more “difficult” to answer. The Mikkelsens contended that this indicated that her English skills were compromised when discussing financial and business matters, as opposed to normal conversation and she did not understand everything they had told her. Scarlett claimed that she understood the Mikkelsens completely. The plaintiffs submitted that Scarlett had undergone days of cross examination and was tired and stressed, resulting in her wishing to clarify questions through an interpreter. The second plaintiff was entirely dependent on Scarlett to understand the negotiations and the proposal. The second plaintiff conceded that he has no understanding of English. He can recognise numbers but he required Scarlett to explain the words describing what they mean.
116 On the preliminary issue of whether the representations were made “in trade or commerce”, in my view, what constitutes “in trade or commerce” is determined by examining the circumstances of each activity on a case by case basis. Similar to taxation cases and the “carrying on of a business”, one single venture may satisfy the criteria.[30]
[30] R & D Holdings Pty Ltd v Deputy Commissioner of Taxation [2006] FCA 981 per Justice Finn at [33], [39] and [42].
117 Both parties relied on the High Court decision of Concrete Constructions (NSW) Pty Ltd v Nelson.[31] The relevant factors identified as being “in trade or commerce” are referring only to conduct which is itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character.
[31] (1990) 169 CLR 594, 602–603.
118 Cases such as Williams v Pisano[32] and Gray v Latter,[33] relied upon by the Mikkelsens, stand for authority that statements made in the course of negotiation of the sale of residential real estate are not made in trade or commerce. However, a representation made in a context and circumstances that render the statement as having a commercial character will make the representation one that is made “in trade or commerce”.[34] The person making the representation need not be engaged in trade or commerce at the time of the representation. The question is whether the statement is directed to the undertaking of a commercial enterprise such as its establishment, finance and operation.[35]
[32] [2015] NSWCA 177, [35]–[37].
[33] [2014] NSWSC 122.
[34] Taylor v Crossman(No 2) [2012] FCAFC 11; Russell Miller, Miller’s Australian Competition and Consumer Law Annotated (Thomson Reuters Australia, 2011) 1367.
[35]Fasold v Roberts (1997) 70 FCR 489, 531.
119 The two authorities cited by the Mikkelsens can be distinguished on the facts. Those cases involved the sale of residential property and a private sale of a car and were single transactions. In the present case, the sale of the shares was to facilitate the transfer of an interest in an ongoing business.
120 In my view, representations in relation to a share sale agreement of a business is in trade or commerce. Emphasis must be given to the context of a “business” as opposed to sale of a residential home or private sale of a motor vehicle.
121 For the foregoing reasons, the representations, if accepted, were made “in trade or commerce”.
The Representations
122 The Mikkelsens submitted that what was unusual about the present case was that the second plaintiff did not have any meetings or conversations at all with the defendants prior to the execution of the agreement and that the first plaintiff’s ability to linguistically understand what was being said at the meetings he attended was compromised given his comprehension of English.
123 The plaintiffs were reliant upon Scarlett to accurately report and convey the representations made by the defendants because there was no direct communication between the plaintiffs and the Mikkelsens. The defendants contend that the representations that were conveyed by the daughter to her father were assumptions or inferences that she herself had made, which were not founded upon anything said by the defendants or any documents provided by the defendants. The second plaintiff was reliant on Scarlett’s understanding and accurate memory. It was possible that there was also a language difficulty. Scarlett denied that she made assumptions or inferences. Joe also denied that he assumed that the net profit was $400,000.00 based on the first profit and loss statement. Joe said that Jan clearly told them that the net profit was $400,000.00 a year.
124 The second plaintiff said that Scarlett showed him the emails and financial reports provided by the Mikkelsens, and Scarlett and Brian explained the documents to him. Specifically, he remembered being told:
(a) net profit in the previous year was approximately $400,000.00;
(b) net profit margin was 30%;
(c) Scarlett had asked for further financial documents from the Mikkelsens as she had more questions; and
(d) he would get his full principal back in four years.
125 Joe said that in July 2016, he also remembered Jan saying words to the effect:
The business had a net profit of 30% per year. The net profit in the 2016 financial year was approximately $400,000.00, and it has grown every year. This business can pay your money back in 4 years. It is a very stable business.
126 Rebecca said that she recalled Jan using words to the effect that the business had been operating for around 10 years and has a very good income, the business makes 30% net profit margin every year and the business made $400,000.00 in the 2016 financial year and the net profit had increased every year. Rebecca said, at that time, her spoken English was not very good and she could only partly understand what Jan said. Scarlett interpreted what Jan said to her into Mandarin. She could understand the figures discussed. Rebecca decided to withdraw from the negotiations around mid-August 2016.
127 Brian said that he recalled Jan saying at the meeting that the business was “very good” and “very stable”, that the business net profit margin was 30%, the business made approximately $400,000.00 in the 2016 financial year and this had been increasing each year, the investors would get their money back in four years and the business had been getting at least $100,000.00 of cash income each year.
128 Jan said that he told the group that the business:
(a) was a stable company and had been running for over 10 years;
(b) had good income;
(c) was well established; and
(d) they had slow but steady growth.
129 Scarlett said that Jan told her that the business:
(a) was good and it had stable income;
(b) consistently achieved a net profit margin of approximately 30%; and
(c) had achieved a net profit of approximately $400,000.00 the previous year.
130 Jan denies that he made any specific mention of profits at the early meetings in the last week of July 2016. Jan said they did discuss turnover and possible profits but no guarantees were ever made as the business was fluid and no margins could be guaranteed. Jan denied that he spoke to the group about net profits or that the real net profit for the previous year was approximately $400,000.00 including cash. He said that the conversation was general in nature. Jan said that they discussed profits but not specific figures.
131 Jan said that if he did mention a net profit of $400,000.00, there was a proper basis to say so because he was hands on in the business and he had an idea of what the business was making and there would be a reason for it. He said that he had figures floating around in his head. This was despite the fact that on 27 May 2016, when the Mikkelsens applied for a bank loan to purchase a unit for Jan’s mother, they declared a net profit before tax of $195,000.00 for the end of financial year 2014–2015. This is nine weeks before giving a rough estimate of $400,000.00 to the investors for the 2016 year. The loan application declared that the business “has been successful and ongoing business for over ten years now… their financial records for their business Forever Exotic has been consistent over the past 4 to 5 years”. Jan conceded, however, that Zoey’s income tax return for 2014–2015 declared a loss of the business of $18,074.00.
132 Jan said that he may have said the business consistently achieved a net profit margin of approximately 30%, but he could not recall. If he did say it, he said it carelessly as he had not checked the fact. The plaintiffs contend that Jan was being evasive in his evidence on this point. I agree.
133 Jan denied that he said to the investors that if they purchased an interest in the business, the plaintiffs would recoup their investment within four years. He said that it would not necessarily be false if he had made the statement. He referred to the dividend statement and in the first six months, the plaintiffs received an amount of $24,000.00. However, the plaintiffs said that those calculations only take a selection from March to October which incorporated the busiest sale months. Jan claimed he had a reasonable basis to make the statement.
134 It was common ground between the parties that it was Scarlett, on behalf of the plaintiffs, who approached the Mikkelsens about the possibility of selling part of their business and negotiated the transaction on behalf of the second plaintiff. The second plaintiff wanted to invest in an established business in Australia with a strong income in which Scarlett could work. He asked Scarlett to identify an appropriate business for him to invest in. The second plaintiff said he wanted to invest in an established/stable business with a good income.
135 Joe and Rebecca said that initially they were only wanting to buy a small percentage of shares, in total about 10% of Forever Exotic. They wanted to see the potential in the Asian market and then each party would hold 50% shares in the domestic and overseas operations. Brian agreed that initially the second plaintiff only wanted to purchase a small amount of shares of 10%.
136 The defendants contended that this was not a situation where the Mikkelsens had made a determination that they wanted to place the business on the market and had therefore prepared a suite of documents such as profit and loss statements and returns of the business that one would expect if a vendor was going to the market and inviting offers from the public at large ready to respond to any purchasers’ enquiries.
137 Jan said that he instructed Paul to prepare the first profit and loss statement. Jan said that Paul received his accounting degree in 2014 and worked two days a week at the business and otherwise he worked at Hejaz Accounting and then Swan Taxation Services. He said that Paul prepared the first statement very quickly under Jan’s instructions. Paul was familiar with the business, its books and financial information when he prepared the first statement. Zoey said she trusted her brother as her accountant.
138 Jan said that he did not know what financial information Paul had or took into account when he prepared the BAS and the first profit and loss statement. He said that he knew before the commencement of the proceeding that the accountant used accounting software to keep its records but did not know that they were MYOB records until he discovered them on 5 October 2021 pursuant to (extended) Court orders. However, the MYOB records have not been produced because Paul is now incarcerated and cannot be contacted by the defendants. This is despite the fact that the Mikkelsens’ solicitor had a 30 minute conversation with Paul in the week leading up to the trial and the Mikkelsens are on his approved contact list. Zoey said that if she wanted to speak with her brother on the phone she assumed her lawyer could communicate with him. She spoke with her brother by phone the day before giving her evidence and the morning of giving her evidence.
139 I do not accept Jan’s evidence that the Mikkelsens could not contact Paul in prison and conclude that the Mikkelsens could have easily obtained information from Paul, including access to the business’ MYOB account and obtained a witness statement from him in this proceeding in accordance with the Court’s timetabling orders. The failure to discover the MYOB and the contemporaneous documents such as the receipt books, daily sales records and EFTPOS receipts, despite repeated discovery orders that required disclosure of all books of the business as defined by s9 of the Corporations Act 2001 (Cth) from 1 July 2016 (including self-executing orders and notices of default of discovery) leads to the inferences that these documents could not have assisted the defendants’ case. This is the case even in circumstances where the daily records from kiosks, stocktake software and the emails to and from Paul ought to have been included in schedule 2 to the Further Affidavit of Documents and were not.
140 Jan gave evasive evidence about whether he emailed Paul communications between 2011–2019 in relation to preparation of BAS and tax returns. He initially denied having email exchanges with Paul, then said that he did not remember and then said that he expected there would be emails between Paul and himself. Jan then stated that the emails were not relevant and were in the nature of small talk. No witness statement has been filed by Paul in the proceeding in accordance with Court orders. The defendants sought leave to call Paul as a witness after the close of the plaintiffs’ opening submissions. The application was denied on case management principles and the prejudice that the plaintiffs would suffer. I do not accept Jan’s evidence in relation to the deleted emails and I find that negative inferences ought to be drawn due to the unavailability of those documents and non-disclosure in schedule 2 to his Further Affidavit of Documents.
141 Jan said that he told Scarlett and the group on 5 August 2016 that the first profit and loss statement was a draft document and it gave them a general idea of the profitability of the business. Jan said he had a quick look at the statement before he gave it to the investors. Jan claimed that when he looked at the document, he thought the sales were higher than what had occurred in that year. He did concede that he gave the first statement to the group to give them a rough idea or general idea of the net profit of the business. Jan then said that he thought the figure was generally right and he was happy to send it to the investors. On being shown the loan application declaring net profit before tax of $195,000.00 from 27 May 2016, he conceded that the first statement was wrong. The loan application falsely declared that Paul had been the Mikkelsens’ accountant for 10 years. While Paul had acted as a bookkeeper for the business since 2005, he only graduated with his accounting degree in 2014 and commenced work as an accountant in 2015.
142 However, Jan then said that he sat down with Paul and told him that the figures in the first profit and loss statement looked high and that the business had never done over $1million in sales before and asked Paul to refine the figures. The second profit and loss statement was prepared on the BAS. Jan said that he gave the group the second profit and loss statement in a hard copy at a meeting on 9 August 2016. He then gave a soft copy to Scarlett by email on 31 August 2021. The BAS was also sent by email to Scarlett upon her request. The plaintiffs said that the first time that Jan claimed to have given the second profit and loss statement to them on 9 August 2016 was raised in Jan’s revised witness statement the last business day before the trial. The defence pleads that the revised profit and loss document was provided to the plaintiffs on 31 August 2016 by email at 11.05pm with no mention that it had been provided to them earlier. I find that Jan’s evidence on this issue is a recent invention and Jan conceded that his memory was letting him down given the flux of time. The second profit and loss statement bears a date of 31 August 2016 and time stamp 21.42.55. The second profit and loss statement did not exist as at 9 August 2016. Jan later conceded that he did not give the second profit and loss statement to the investors on 9 August 2016.
143 By email dated 30 August 2016 at 12.49pm, Scarlett asked Jan to send an “official” financial annual report. The plaintiffs said that she would not have sent this email if she had already received the second profit and loss statement on 9 August 2016. Jan said that Scarlett asked for the profit and loss statement to be signed by the business’ accountant and that the second profit and loss statement was signed by Paul. In response to that request, Jan sent the second profit and loss statement to her by email on 31 August 2016 at 11.05pm. I accept that the second profit and loss statement is the “official” financial annual report without cash sales.
176 Scarlett denied that she did not seek legal or accounting advise in relation to the business’ finances because she had seen the underlying sales documents and had access to the “red books”. Brian and Scarlett said the first time they had seen the “red books” was once they had been discovered in the proceeding by Jan on 5 October 2021. Joe denied that he saw the “red books”. I accept their evidence.
177 The defendants contend that there is a point of confusion in relation to the different terminology used by the parties as to what are the “real books” and what are the “official books”. The Mikkelsens say that the “official books” were books that did not reveal or disclose the extra sales of approximately $100,000.00. This was not an extra $100,000.00 a year in profit. Scarlett says that she requested the unofficial accounts, which included cash sales, and Jan Mikkelsen represented the cash sales were approximately $100,000.00. Joe agreed that the difference between the two statements was with cash and without cash. Scarlett, Joe and Brian all said that the first profit and loss statement was not provided to them as a “draft”.
178 Scarlett said that in 2017, as she gained more understanding of the company’s operations and sales, she began to notice that the company did not have a high turnover and the cash sales were nowhere near enough to achieve $100,000.00 a year. She denied inspecting the “red books” to inform herself of the cash sales. The Mikkelsens said that the only place that the cash sale is recorded is in the “red books”. Scarlett said she based this observation from the bank statements and on the fact that the cash dividend decreased.
179 Joe said that as they obtained more data, he and Scarlett felt that something was not right. The income and cash collected by the business did not match what Jan had said about the annual net profit. This was based on the dividend figures and cash flow in and out that Jan presented to them at monthly meetings. The data was not broken down per pop up shop.
180 The plaintiffs say that they received two profit and loss statements, the proposal document and four quarters of BAS from the Mikkelsens. These were the documents that Scarlett showed her father when speaking with him about the investment opportunity.
181 Scarlett says that she asked Jan for a copy of the real profit and loss statement which did not include unreported cash and requested for that copy to be signed by the business’ accountant. She refers to this as the “official statement”. Jan said he could not recall Scarlett using the words “official” with regards to the profit and loss statement. Jan did agree that Scarlett asked for something different and for it to be signed by an accountant. She also requested copies of the BAS. Scarlett said that her father had a look at the documents and she read them to him. Jan recalled that Scarlett asked for the profit and loss statement for the last financial year. He agreed that he would ask his accountant to prepare the unadulterated profit and loss statement for the last financial year.
182 On 31 August 2016, Jan replied, “Hi, Scarlett, is that what you're wanting?”, attaching the second profit and loss statement, which the plaintiffs contend does not include cash, giving a net profit $293,850.67. The plaintiffs say that this statement is also false. Jan conceded that the email does not say to disregard the previous version because it was a draft. However, he said that the heading still had “Profit & Loss [Cash]” and he assumed it still included cash.
183 Jan said that he gave the second profit and loss statement to Scarlett at a meeting on 9 August 2016 to replace and update the first profit and loss statement. Brian denied that Jan gave the second profit and loss statement in hard copy at a meeting, but rather, they received it by email on 31 August 2016 showing the business’ position without cash. I find that Jan gave the second profit and loss statement to the investors by email on 31 August 2016 and not at the meeting on 9 August 2016.
184 Scarlett, Joe and Brian said that the difference between the two profit and loss statements was a net profit of $100,000.00 in terms of cash. Jan gave contradictory evidence that he either assumed Scarlett did the accounting for the group, or that they had an accountant at the time that he sent the profit and loss statements.
185 On 3 September 2021, Scarlett requested the BAS for the business and these were provided shortly before the parties executed the share sale agreement. Jan amended his witness statement in this proceeding to state that “[f]ollowing my review I was shocked to find that [the BAS] seemed to be hugely in error... There was such a large discrepancy between those records and the true sales position”. The plaintiffs say that the BAS given to them exaggerated the sales significantly and as a result, the profit and loss statements given on 5 August 2016 and 31 August 2016 were both wrong. Jan says that the BAS given to the ATO underestimates the sales, presumably with the intention of minimising the tax paid. Jan conceded that he recognised the importance of keeping true and correct financial records. He has not corrected any of the tax statements with the ATO.
186 The second plaintiff said it was important for any business that he invested in to be compliant with rules and regulations, including ATO requirements. As such, the second plaintiff requested his daughter to obtain the tax information for the business for a few years, but he was only given one year. He recalled Scarlett brought some financial materials to show him. He was not concerned that they had only received one year’s tax return. The second plaintiff could not recall seeing the BAS.
187 The BAS had been lodged with the ATO on 2 December 2015 (for the period July 2015 to 11 November 2015) and 18 May 2016 (for the period January to March 2016), and yet Jan gave the plaintiffs the “client copy” of the BAS. Jan accepted that in 2016, he knew or ought to have known that the incorrect income had been reported to the ATO. Jan acknowledged that clause 3 in the Hejaz Accounting services agreement stated that the client will be solely responsible to supply the accountant with all information, materials, data, and documents necessary to perform the services. Clause 3 of the services agreement also stated that the client acknowledges and agrees that the accuracy of the financial information supplied is the sole responsibility of the client.
188 I accept the plaintiffs’ evidence that Jan represented to them that the “net profit in the previous year was approximately $400,000.00”, “the net profit in the 2016 financial year was approximately $400,000.00” and “the business made $400,000.00 in the 2016 year”. These statements were made to the investors at the July meeting, in the first profit and loss statement, at the 9 August meeting and in each of the proposals provided to them. I do not accept Jan’s evidence that if he did mention $400,000.00, that he had a proper basis to make the statement. At the time of making the statements, he had applied for a bank loan that declared a net profit the previous year of $195,000.00 and Zoey’s income tax return for 2014–2015 had declared a business loss of $18,074.00.
189 According to Zoey’s income tax return for 2015–2016, the business made a net profit before tax of $22,391.00. The business had not achieved a net profit of approximately $400,000.00 in the 2016 financial year. Jan also said that when he looked at the first profit and loss statement, he thought it looked high but gave it to the investors anyway.
190 I further accept that Jan represented to the investors that the business had stable net profit with a bit of growth. He made this statement at the July meeting. Jan’s evidence was that he told the group that the business was a stable company, had good income and had slow but steady growth. The table set out above showing the findings of Ms Wheeler demonstrate that the business did not have stable net profit with a bit of growth. The business incurred losses in the years 2012, 2014 and 2015.
191 I also find that the business had not achieved a net profit of $293,850.67, excluding cash receipts, in the financial year ending 30 June 2016. The representation was contained in the second profit and loss statement. I accept the uncontradicted evidence of Ms Wheeler that the business made a profit of $22,391.00.
Future Representations
192 The defendants argued that, as to any future representations, for example, that the investment would be returned within four years, must be seen through a prism that part of the discussions between the parties included a stated intention to try and grow the business by increasing their market reach into Asia and in particular into China, where the purchasers had some contacts. Scarlett said that it was not discussed between the parties that the plaintiffs had contacts in China. She said that Jeff and Mr Zhang had the connections in China but they did not proceed with the investment. The draft of the sale agreement, which included Jeff and Mr Zhang, included the seed capital of $200,000.00 to fund the potential expansion into the Asia market. Scarlett went to China twice and attempted to enter into supply contracts such as the Greater China Region Selling Agreement and Agency Agreement on 1 August 2017. The expansion into China was not successful.
193 Scarlett accepted that the parties had discussed expansion into China and the reason for the working capital contribution was to facilitate the new development in the Asian market (clauses 8 and 11 of the agreement). Joe also agreed that they had discussions that they would like to try to expand into the Asian market. Joe liked the idea and would have liked to have seen it become a reality. Joe said that once they had established the business domestically, they would then expand to the Asian market. Joe said that they used the $60,000.00 seed money domestically to purchase more stock as it was Christmas time and it was a busy time of the year. Joe said that the Mikkelsens requested working capital so that they could operate over Christmas with more stock, staff and more pop up shops. They then could not use the working capital for the overseas market.
194 Scarlett agreed that given the expansion into Asia did not happen, the working capital contribution was diverted to the Australian market. This allowed more pop up shops to open domestically. Joe said that prior to joining Forever Exotic, the business could only open up 2–3 pop up shops. The business had more employees since January 2017 and more pop up shops to open at the same time. The Mikkelsens also agreed with this. Other changes included a new EFTPOS system. The Mikkelsens said that the increased shops and employees increased the business’ expenses. Further, the new EFTPOS system, which was Joe and Scarlett’s idea so that they could track sales more accurately, was an expensive system.
195 In my view, the representations as to the future were not made with the expectation as to an expansion of the business into Asia. The return on the investment was based on the first profit and loss statement and the three proposals that relied on the “real net profit for 2015–2016” and a multiple of four of the net profit in the sum of $392,401.47. This multiple discloses that the return on investment would occur in four years.
Return on Investment
196 The second plaintiff said that he was not worried about receiving only one year’s tax records, as in 2016 the net profit was $400,000.00 and the net profit margin was quite high, the investment capital could be returned in four years and each year the return would increase.
197 Scarlett said that Jan promised her that the second plaintiff would receive his investment back within four years. Joe and Rebecca also said that Jan told them at the meeting in the warehouse they would get their investment back in four years. Jan denied that he said that the plaintiffs would get their investment back in four years. Scarlett denied that she made an assumption when looking at the profit and loss statements that on the figures, the investors would recoup their investment within four years based on the net profit of $400,000.00.
198 Scarlett further said that Jan told her that the business would pay dividends that would to fund the plaintiffs’ acquisition of the rest of the shares. Joe said that he did not receive sufficient dividends to pay for the next instalment. He otherwise did not know if he would have been in a position to pay the second instalment by April 2017. Joe and Scarlett said that Jan suggested to them that the plaintiffs could use the dividends to pay for the balance of the shares and convinced them to enter into the sale share agreement. Joe said that without those assurances, the deal might not have gone through. Jan denies saying this. The second plaintiff said that he did not rely on the dividends to pay for the second instalment of shares.
199 The Mikkelsens submitted that Joe could not rely on payment of dividends on either the first or second profit and loss statements on a 4% shareholding to satisfy the second instalment of $140,000.00. On those figures, Joe would receive a dividend of $12,000.00 or $16,000.00.
200 Scarlett says that on 30 August 2016, she called Jan and asked for the financial statements he had lodged with the ATO for the previous financial year. Jan said that the official financial statements were not ready. She added that if the financial statements were not available, then she wanted a copy of the BAS for the last three quarters of the last financial year. On 3 September 2016, Jan Mikkelsen emailed Scarlett three BAS statements from July 2015 to 30 September 2015, January 2016 to 31 March 2016 and April 2016 to 30 June 2016.
201 The Mikkelsens say that the change in the structure of the sale, the lack of capital contributions, the cost occasioned on the business in terms of EFTPOS payments and the lack of any development of the business into Asia had an impact upon the growth prospects of the business where the profit or the expectations of the purchasers were not lived up to.
202 The plaintiffs contend that there was no evidence to suggest that the representations made as to future earnings, such that the plaintiffs would recoup their investment in four years, was conditional and predicated on the contribution of capital by both parties in the amount of $200,000.00. The value of the business was determined by a multiple of the 2016 net profit. This calculation was not reliant on the possible expansion into Asia.
203 I find that Jan did not have a reasonable basis to represent that if the plaintiffs purchased an interest in the business that they would recoup their investment in four years. I accept the evidence of the plaintiffs that Jan told them at the July meeting that they would get their “full principal back in 4 years” and that the “business can pay your money back in 4 years”. Jan’s evidence was that if he had said that then it would not have necessarily been false because he relied on the first six months of payments made to the plaintiffs.
204 In my view, the fact that the proposals were provided by Jan, in which he used a multiplier of four times the net profit, implies that the investors would receive their investment back in four years. That is the basis for the calculation. Ms Wheeler’s evidence shows that the representation was false as the plaintiffs would not recoup their investment in four years based on the company tax returns, the trading losses in 2017–2018, the debts/borrowings position and the decrease in sales for the period 2019–2020.
205 For the reasons set out above, I accept that the defendants made the pleaded Share Sales Representations to the plaintiffs.
Reliance
206 The defendants submit that the plaintiffs must show that they relied upon the representations. They contend that there is a dichotomy between the parties as to whether the pleaded representations were made and/or made in circumstances to be relied upon. The Mikkelsens say that there was no reliance upon the representations as:
(a) during the sale process, it became a negotiation process with no reference or reliance upon either the business figures or the pleaded representations;
(b) the process became a negotiation as to price of the business and price of the assets;
(c) the negotiation first centred around whether a business should be valued at between three, four or five times the profit of a business;
(d) the negotiations then moved on to negotiations as to how the assets (stock and equipment) of the business should be valued;
(e) there were negotiations as to the amount of the working capital contributions; and
(f) there was a negotiation as to the price of the shares with no reference as to representations or the financial material. The vendor insisted upon $17,500.00 per share and the purchasers wanted to buy at a price of $6,000.00, which was referrable to nothing, save to the plaintiffs wanting to buy at a lower price based upon $300,000.00 for a 50% shareholding.
207 While I accept that there was a negotiation in relation to the working capital contributions and this is reflected in my previous findings, the 50% share of the purchase price for the units, however, was unchanged from the initial offer of the multiple of four of the alleged net profit of around $400,000.00. The difference in the three proposals put by the Mikkelsens was an adjustment in the value of stock from retail price to wholesale price.
208 I find that the plaintiffs would not have would not have entered into the share sale agreement and purchased shares in the company had the Share Sale Representations not been made. The representations are material in relation to issues such as return on investment, determination of the purchase price and value of the shares being purchased.
209 As set out above, the value placed on the business by the parties was based on a multiple of the represented net profit for the 2016 financial year, being $392,401.47 (or approximately $400,000.00). Therefore, in my view, the plaintiffs would not have agreed to instalments had the defendants not represented that the business had consistently achieved a net profit margin of approximately 30% and they would recoup their investment within four years.
210 Although Scarlett, without the knowledge of her father, made a counteroffer of $300,000.00 after Jeff and Mr Zhang left the investment abruptly, the price did not change from the original proposal made by the defendants. The parties discussed the price, but the value of the shares was determined on the consistent representation that the net profit for 2016 was approximately $400,000.00, which was false.
Negligent Misstatement
211 The plaintiffs claim that the defendants owed them a duty of care for negligent misstatement because the Mikkelsens knew or ought to have known that they were being trusted to give information that they knew, or ought to have known, the group intended to rely upon.
212 The defendants contend that there is no contractual or tortious claims that can be maintained against Jan, who is merely an employee of the company, and the first defendant (save for Jan’s enhanced position above other employees, as the owner’s husband).
213 They claim that there is no legal foundation or basis for a claim against the second defendant and the claim against him should be dismissed.
214 The plaintiffs contend that there is no evidence to support a finding that Jan was “merely an employee”. He was the business’ manager and Zoey delegated all financial matters to him and the sales negotiations. The plaintiffs submit that regardless, being a mere employee does not preclude Jan from being liable for negligent misstatement. If Jan breached a duty of care owed to the plaintiffs then he is liable to them. Unlike a contractual claim, there is no need for privity for the tort of negligent misstatement to be engaged.
215 The plaintiffs say they were particularly vulnerable given that the Mikkelsens knew of the language difficulties experienced by members of the group and that a proper due diligence was not being performed. The Mikkelsens were trusted by the group and there was reliance that the financial information provided and the response to questions would be correct. The plaintiffs submit that even in the final days leading up to execution of the share sale agreement, the Mikkelsens were providing false information in the form of the BAS statements, the 31 August 2016 profit and loss statement and the letter from the accountant that was misrepresented as verifying information the Mikkelsens had provided.
216 The Mikkelsens claim that there was no reliance on the representations because Scarlett had attempted to negotiate a reduction in the amount to be paid after Jeff and Mr Zhang pulled out of the deal. However, the representation that the business had achieved a net profit of approximately $400,000.00 in the 2016 financial year was repeatedly made by the Mikkelsens by reference to the first statement and all three proposals. Any reduction in share price (which did not occur) would not change the representation made as to the actual earnings of the business and does not mean that there was no reliance on the representation in relation to the value they expected to receive.
217 The plaintiffs contend that the nature of the false information was clearly material including, for example, the return on investment, purchase price and value to be attributed to the business. The plaintiffs say that evidence clearly demonstrated that they relied on the misrepresentations in deciding to sign the share sale agreement and in deciding to purchase shares in Forever Exotic.
218 The standard of care owed is the standard of reasonable persons in the positions of the defendants. Zoey was the owner of the business which she operated with Jan. They had knowledge of the business’ affairs and financial information. They were the sellers of the shares.
219 The falsity of the representations was the subject of expert evidence from Victoria Wheeler of Munday Wilkinson as set out above.
220 In my view, for the reasons articulated by the plaintiffs, the negligent misstatement ground has been made out.
Damages
221 The defendants submit that in the event that the Court determines that there has been a breach of s18 of the ACL, the lack of due diligence, the failure to engage legal accounting and independent business valuers to assist the plaintiffs in dealing with the purchase of shares in this matter contributed to their loss.
222 I accept the defendants’ claim that there is no evidence before the Court that the plaintiffs undertook any due diligence in relation to the purchase of the shares. As such, the defendants submit that any amount awarded pursuant to s236(1) of the ACL to the plaintiffs should be reduced by reason of s137B of the ACL.
223 I agree that due diligence and professional external advice ought to have been sought by the plaintiffs in this case and a prudent purchaser acting reasonably would have done so, particularly given the quantum involved and the vulnerability of the investors. It is just and equitable that there be a reduction of the amount of loss or damage to reflect the plaintiffs’ failure to take reasonable care.
224 In my view, the amount of the loss or damage that the plaintiffs may recover under s236(1) of the ACL is to be reduced by 15%, being the plaintiffs’ contribution to the loss and damage by failing to take reasonable care.
Conclusion
225 For the forgoing reasons, I conclude that the plaintiffs would not have purchased the shares had the defendants not made the Share Sale Representations. The loss and damage suffered by the plaintiffs in respect of the purchase of the shares was $630,000.00 and ought to be discounted by 15%. The defendants must refund the sum of $535,500.00 (plus interest) to the plaintiffs with costs.
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Certificate
I certify that these 61 pages are a true copy of the judgment of Her Honour Judge Burchell delivered on 14 December 2021.
Dated: 14 December 2021
Andrea Ko
Associate to her Honour Judge Burchell
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