Lucas, D.L. v Economic Freedom Pty Ltd

C A T C H W O R D S

Davld Leslie Lucas

Ors.

v. Ecnnomic FreFrlnm Ptv. Ltd. Fi Ors.

')ld G111 of 1985

I N THE

FEDERAL

COrSRT

AUSTRALIA

QIJEENSLANII DISTRICT REGISTRY	I	QLD G 1 1 1 of	1 9 8 5
GENERAL DIVISION

BETWEEN :

DAVIVID LESLIE LUCAS

Firs t

A p p l i c a n t

MICHAEL HORACE RICE

Second App l i can t

ELIAS DOUFAS

NOMINEES

PTY.

LTD.

Third

A p p l i c a n t

A.N@ :

ECONOMIC

FPEEDOM

PTY. LTD.

First

Respondent

ALOG7ERF.

rlUEEIEiLAND

PTY.

LTD.

Second

Respondent

,.TIIHN 1GAFFEl'T CLAGKE

Third

Fespondpnt

rTITDGE MAKING ORDER :	PINCUS J .
DATE OF ORDER:	11 JUNE 1986

hTHERE

MADE:

BRISBANE

THE COURT ORDERS THAT:

1. The first

and

third

respondents

pay

the

first

applicant the sum of $40.702.25.

2 .

The

second and third respondents pay the second

appllcant the sum of $9,000.

3 .

The second

and

third

respondents

pay

the

third

appllcant the sum of $15,000.

4. The respondents pay %he applicants' costs of and incidental to the proceedings, to be taxed.

NOTE:	Settlement and entry of orders is dealt with m Order 36
O € the Federal Court Rules.

. .

. P

QLD G111 of 1985

BETWEEN:

DA17ID

L E S L I E

LUCAS

First Applicant

MICHAEL

HOFACE R I C E

Second Applicant

E L I A S DOUFAS NOMINEES PTY.

LTD.

Third Applicant

Tt l lS

application in whlch

each

of the

three

applicants has a separate cause of action. No point is taken. however. as to the propriety of the joinder of the three causes

of actlon in the one proceedina

(see 0.6. r.2).Each

claim is

2 .

based

on the alleaation that the respondents made misleading

statements.

The first claim, that

of the applicant D.L. Lucas.

asserts that

subscrlbed on the

basis of

certain misleadinu

statements for

400 shares in the first respondent, Ecnnomlc

Freedom Ftv.

Ltd.

(which will be called

simply

"Economic

Freedom"), for $4n,000.

Althouuh that, allea-atlon is denied in

the defence, the third respondent. Mr. Clat-ke. has admitted in exridence that Mr. Lucas pald hlm $40.000, and that a return of

sllotment

t o €

lodued wlth the

Natinnal

Companies

and

Securities Commlssion

.;how5 4n0

shares ln Munro Stevenson

R V .

Ltd. as havlnu been allotted to Mr. Lucas. That company chanqed its name, on 1 2 November 1984. to Economic Freedom Pty. Ltd. The

allecrations of mlsrepresentation made

by Mr. Lucas have some

compllcations about them and

are set nut below.

The applicant Mr.

Rice. who a l s o took shares. complains

fo lw

representatlons:

that

Mr. rlarke's

accountant

had

assessed th? value of

Ecnnomlc Freedom as heinu In exce59 of

.;100,00n.

that Economir Freedom

o w n ~ d a

computer havlnu

;L value

nf $60,000.

that it held the

riuht to recelve proflts from the

"Avacare"

marketina orqanisatlon, and that

had been very

successful In sellinu

a book referred to below.

The applicant Ellas Doufas Nominees

Ptp. Ltd., another

shareholder, alleaes

that Mr. Clarke told him that the value of

3 .

Economic Freedom was $150,000, that that company held the riqhts to receive profits from the "Avacare" marketing organisation,

marketlnu rlghts

to the same

book and

the franchise to market

"Avacare" products In Sinqapore. and

was engaged in various other

direct

mallincr and multi-level marketing activities, and that

Economlc Freedom had been very successful In sellinu the book.

Because

the

storles

overlap

some

extent,

it is

convenlent to set out the princlpal facts

in chronolouical order.

In April 1384. a

Mr.

Edelsten, who was

an employee of a

company called "Forever Llvlng Products Australla Fty. Ltd.", had a conversatlon w l t h Mr. Clarke &cut a book on multi-level marketinu which Mr. Clarke was thlnklnn a o € wrltlnrr. Hr. Clarke

asked Mr. Edelsten If the

,company, Fnrever L1;:inu

Ft-nrlltcts

Australla Ptv. Ltd., w n u l d br willlnu t o promote the hook

p a r t

of	Its product ranup. By August 19R4, Mr. Clarke had the text n o €

I-he book readv and aske?d Mr. Edelsten's opInlon o€	it.	1 infer
that that op'Lnlon was favourable.

On incorporated a company called Metqold

September

1984,

Mr.

Clarke

caused

Pty. L t d .

That company

becomes of Importance in this history because

seems to have

held interests whlch Mr.

Clarke, from time to time.

has asserted

were owned by Economic Freedom. Accordincr to instruction

given

In 1985 by Mr. Clarke

to his solicitors. it was decided

on l2

September 1984 at a meetina at Mr. Edelsten's office:

"that one

of querist's companies, Economic Freedom

Pty. Ltd. was to incur the costs of productlon

and

distribution of

the book: another company Metgold

Pty. Ltd.

la shelf company which querist acquired

about that time) was to be paid a royalty of $ 2 per copy sold and Edelsten was to receive $1 per copy

of the book sold.

I t is not by any means clear that those instructions are correct.

because there

is no document to support them and

I would be

disincllned

t o accept

anythin?

Mr. Clarke

said.

wlthout

corroboration, about the matters I n contest.	He	was a	most
llnsatlsfactory wltness.

nn 19 October 1984. Mr. Clarke's accountant, Mr. Kilby,

wrote him a letter encloslnu a draft of

a "letter reuardlnu the

formatlon of

Metcrold".

I am satlsfied,

althouuh Mr. Clarke

firmly denled instructions were that Economic Freedom was to be owned

the

fact, that

hat

lme

Mr. Kilby's

as to 60%

by Metuold and as to 40% by one McAndrew.

The proposal further

was that the book was to be produced by Metgold and so ld to Economic Freedom "as requlred" for $13 per copy, the market price bema "approximately $15". It appears from Mr. Kilby's letter

that what happened was that Mr. Clarke prepared

a draft and read

It to

Mr. Kllby and then sent it to him, but Mr. Kilby was, on

reflection. unhappy with the draft and altered

it. The form

approved by Mr. Kilby included the following paragraph:

"From the information you

have supplied to me. it

would appear that the company will be extremely

profitable and althouah

it 1s difficult to value an

entity

under

these

circumstances,

lt would

not

appear unreasonable to place

a value of $100,000 m

the

ntity.

It would appear, therefore. that John

McAndrew should pay $40,000 for a 40% share."

Presumably the purpose

of thls paragraph was to form a basis for

persuadinq McAndrew that

he should pay $40,000 for an interest in

Economic Freedom.

I must say that

I am surprised that Mr. Kllby

would even have contemplated siuninu

letter including that

paragraph, since,

on his

evidence, he plainly had

Insufficient

lnformatlon for estlmatlnq the value

of the company. Howevpr. It

appears that he	did not siun the letter and	50 no harm was done
b y it directly.

Ho,wever, Messrs. Lucas and Fice h n t h say that they were

told bv

Mr.

Clarke that the latter's accountant had valued the

company at

$100,000 - or rather, over $10O.n00.

as to Mr. Rice.

That was mlsleadinu

as (to Mr. Clarke's knowledge) Mr. Xilby

knew

nothina about the company except

what

Mr. Clarke had told him

about its prospects: that point is further discussed below.

Late in October. Mr. Edelsten gave Mr. Clarke

d list of

names of people in

his company who were to take part in the

selling of the book. On

29 October 1984,

one Russell Fryer. on

6 .

behalf

Squirrel

Data Based

Management

Systems.

signed

receipt for

a sum of

$1,000 from Mr. Clarke and his wife as

deposit on "Munroe Computers Squirrel Software". The importance

of that document is that the ownership of the computer and

software is one of the issues

in the case. as wlll appear.

According to 1985 on behalf of Mr. Clarke acrainst Mr. Edelsten, Mr. Edelsten

a District Court plaint Issued on 10 July

told Mr. Clarke on 4 November 1984 that he would not take part In

marketin?

the book. I do not know if

that

date 1 s riuht.

However that may

be, on 5 November 1984. on which date the book

was to be launched, Mr. Clarke aot teleurams

from both Mr.

Edelsten and

his

Immediate superior to say that

Mr. Edelsten

could not

take part in the marketlncr of

the book. There was

rllspute a5 to the

tlme at which Mr. Clarke told

Mr. Lucas about

receipt of

the telesram from Mr. Edelsten.

I am satisfied that

he dld not tell Mr. Lucas about It untll after Mr. Lucas had paid him $40.000 for shares in Economic Freedom. as mentioned above.

The fate of the $40,000

is unknown. It does not appear

in what

Mr.

Clarke says is the company's bank statement.

suspect that part of

it went to pay

a s u m

of $13,868 which was

expended the next day

on a computer and prlnter,

the sum bemg

paid to

Squirrel Data Based Management Systems. However. the

invoice 1 s

made out to Aloe Vera Cueensland

Pty. Ltd. ("for the

Clarke Famlly Trust"), an indicatlon that there was

no intention

that the computer should be owned by Economic Freedom. -About

this time. Mr. Clarke'told Mr. Lucas about the computer and that

it was in his name:	he did not suqgest that it belonged to
Economic Freedom.

On 12 November, the company changed its name to Economic

Freedom, as

mentioned above. and from then on until February it

received and banked

sums

of money

which Mr. Clarke

said

represented the proceeds

of the sale

of the book. Their total

was less than

$2,000.

In February 1985,

Mr. Clarke started to try to interest

Mr. Rice, the second appllcant, in taklnq

an interest in Economlc

Freedom.

He told Mr. Rlce that Mr. Kilby had valued Economlc

Freedom at over $100.000.

Mr. Clarke also told Mr. Rice.

Induce hlm to buv shares In Economic

Freedom,

that the company

owned a computer worth

$60,000.

Mr. Clarke crave evidence that

the company did

in fact own the computer whlch he had

boucrht, and

he explained that it had come to be the property nf the company because it was part of his acontrlbutlon to the rrompany's capltal. The only evldence that it had been assluned to the company was a

statement by Mr. Clarke that he had had

a conversatlon about it

wlth Mr. Lucas.

I do not believe he

had anv such conversatlon.

Even I f

he did, it plainly could not have conveyed the property

to the company.

Mr. Clarke also made other statements to

Mr.

Rice whlch

are mentioned below and

as a result of them. obained

$9,000 from him

f o r shares in Economic Freedom.

In March, Mr. Clarke beuan to attempt

to induce Mr.

Doufas, a director

of the third appllcant. to put money into

Economic Freedom.

He made statements to Mr. Doufas to cause him

to think that the company would receive substantial monevs from

the

oruanisation

"Avacare" . Althouqh

Mr.

Clarke

said

that

arrangements had been made which led him to expect that

such

moneys would become available,

do not believe him and

satisfied that there was never anv basls for expectation that

substantial monevs would come to Economlc Freedom from Avacare:

he produced no documents	on which such an expectation miuht have
been based.

.Aholit this time, Mr. rlarke t,old Mr. Doufas that the

book was sellinu

well, vhich. of course.

~t was not.. But

April he succeeded In persuadinu

Mr. Doufas to cause the third

applicant to

pay $15,000 for shares

In Economlc Freedom. On

April, in

connection with that

transaction, Mr. Clarke wrote a

letter to Mr. Doufas savinu that activities

of Economlc Freedom

included the marketinu riuhts to books published by Metqold.

Auain. althouqh

mention is

made

ownership

the

parauraph of the letter, there is no suggestlon that the company

owned the books.

Mr. Clarke was dealinu

with both Mr. Doufas and Mr.

Rice. and tellinu each of them a dlfferent story. He uave Mr. Doufas to understand that an important asset of Economic Freedom was, or would be. ownershlp of the Avacare oruanlsation in

9 .

Sinuapore: accordinu to the letter of 8 April 1985 just referred to. he expected that transactlon to be finalised about two weeks

from that date. and

was confident of a turnover of $1 million

1J.S.

in the first year. But about the same

time, Messrs. Clarke

and Rice, accordins to the latter, aureed to operate the Avacare

franchise in Sinaapore throuah Metuold

Pty. Ltd. and Economic

Freedom had no interest In it.	I accept what Mr. Rice says about
that.

I shall now deal

with

the

alleuatlon

nf makinu

misleadinu statements

in the order

in whlch they appear in the

Statement of

Claim.

Its flnal

version.

Cnunsel

for

the

respondents made much

of the fact that the Statement of Clalm was

s~unificantlv	amended twlce and that In other respects. the case
presented on	behalf of the appllcants had inconsistencies whlch

should induce applicants' wltnesses.

me. speakinu

enerallv.

not

to accept

Had there been anv credlble denials of

the applicants' evldence. their case mimht well have failed

as it

depends verv laruelv	lipon	the plttlncr of their word aualnst	that
of Mr. Clarke.

However, Mr. Clarke was not a witness In whom one could

have the

sllcrhtest, confidence.

As counsel for the applicants,

Mr. Bland. pomted out, both Mr. Clarke's

pleadinu

and

the

affidavits filed on

hls behalf uave little definite Information.

and to

a larcre

extent the same could be sald

of his oral

evidence. "he applicants placed before me a reasonable account

10.

of how thev were induced bv Mr. Clarke to invest in his nebulous

cnterprlse: there is no competing account coming from him. Apart

from that.

Mr. Clarke (althouuh his demeanour as

a witness was

superficially excellent) made

no serious attempt to tell me the

truth about

a number of critical points. For example,

he was

unable to give me any idea,

or so he claimed. what the Income of

Economic Freedom was. even to the extent

of estimatinu whether it

was more or less than

$1,000. Auain.

he did not seem to

know

what happened to the

$40,000 paid by Mr. Lucas. That was In

accordance with his basic strategy of not admitting anythina, but

decllninu, as far as

posslble, to commit hlmself

to any positive

statements.

In the result.

he dld hlmself no m o d by placlnq

evidence before the Court.

I flnd that. as

alleaed In par.9ra) nf t h e Statement of

Clalm. Mr. Clarke.

actlnq

behalf

of Economlc Freedom,

represented to Mr. Lucas that

an accmmtant, Mr. Kllbv, had

assessed the 17alue nf Economic

Freedom at $100,000.

That was

misleading for the reason Indicated above and. in my view.

operated as an inducement. Counsel seemed to be aareed

that that

statement was

of no areat slanificance, since Mr. Lucas

knew at

the time that the company was merely embryonic;

t.hat is

not a

vlew I share.

The statement was intended to, and dld, give Mr.

Clarke‘s proposal more substance in

Mr. Lucas’ mind than the true

facts warranted.

I am

satlsfled further that, havinu told Mr.

Lucas that the book would be marketed throuah the Forever

Livina

Products oruanisation, he became aware

that that prospect had. if

11.

not

disappeared

completely,

least

been

substantially

diminished by the information that Mr. Edelsten could take

part; Mr. Clarke failed to inform

Mr. Lucas of the fact untll

had his monev.

The conduct of Mr. Clarke in concealinq the vital

information he had obtained plainly

falls within s.4(2)(c)(i) of

the Trade Practires Act:

Mr. Clarke refrained, otherwise than

inadvertently. from alvina Mr. Lucas the relevant information and

is therefore taken

t o have refused tn

do s o :

so hls refusal

constitutes encracrinq in conduct within the meaninu

the Act

and. in partlcular. withln the meaninu of s .52 .

I do not believe

that Mr. Lucas would have paid the $40,000 over if

he had known

that Mr. Edelsten was no loncrer

able

to particlpate in the

wnture;	Mr. Clarke,	for that reason, kept the informatlon from
him.

As to the second applicant, Mr. Rice, I am satisfied that Mr. Clarke told him that the accountant. Mr. Kilby. had

valued Economic Freedom at over

$100,000.

That statement was

made In Februarv

1985.

hThen R simllar statement was made, a s I

have found, to Mr. Lucas in October 1984, it was misleadincr; it

w a s Pven more so when made to Mr. R ~ c P . Bv February 1985, it had

become clear that the book from which Mr. Clarke had professed to

believe qreat profits would be earned was

qoina to

make very

little monev indeed and that the initial unsound foundation

Mr. Kilby's "valuation" had disappeared.

I also accept that Mr.

Rlce was

told that Economic Freedom owned

a computer worth

$60.000.

did not in fact own any computer and the one which

12.

Mr. Clarke had bouaht was worth much less.

Further, I accept Mr.

Rice was told, contrary	to the truth. that the book had been very
successful.

I do

not make any findlnu wlth

respect to par.lO(c) of

the Statement

of Claim concernmu profits from the Avacare

marketinu organlsatlon,

but I am satisfied that the other matters

found were a substantial inducement to Mr. Rice to put hls money In. He was uiven the impresslon by the statements I have mentioned that the company had some real substance whereas in

fact it had none. In consequence,

he bousht $9,000 worth of

shares from the second respondent, whose asent was

Mr. Clarke.

As to

the thlrd applicant, I am

not satisfled that Mr.

Ijoufas was told that the value

of the company was

$150.000.

thlnk he obtamed that Impression from conversatlon wlth Mr. however, that he was told the company held the rluht to recelvo

profits

from

the

Avacare

marketmu organisation.

held

the

franchise to market Avacare products in Sinqapore, was enaaaed in

other, slmllar. activities and was very successful in sellinq the

book.

All

these

thinus

were

said

and

were false; they

constituted an Important inducement to Mr. Doufas to cause Elias

Doufas Nominees Pty. Ltd.

to acquire shares in Economic Freedom

from the second respondent.

13.

Damase

There is a difficulty. acknowledged by

counsel for the

applicants.

determining

the

value

the

any

relevant

date.

However,

it has

to be kept

mind

that

the difficulty 1s entirely due to the respondent, Mr. Clarke. He dld not place, or attempt to place, any coherent account of the company’s affalrs before me, and I am satisfled that only he could do so.

The @nu5 1s. of course, on the appllcants to prove their

loss.

but

rlgorousness

proof required 1 s to

proportloned to the opportunities

of proof

available to them as

compared with those available to Mr. Clarke.

He sald

at one

staue that when he uot the

$40,000 from Mr. Lucas. the company

had no assets but a l s o uave evidence inconsistent with

that.

clalmlng in particular

that It owned the computer mentloned

above. One would have thouuht that at least after payment

of the

$40,000. the company must

have been worth

so much: but on the

evidence I flnd that that sum did not uo into the company’s bank account, and I do not know what it was used for. As was pointed out by counsel, if it was expended on some purpose not havina to

do with the

company‘s affairs, presumably the company acquired a

cause of action aqainst Mr.

Clarke: however, it does not appear

that in these circumstances that cause

of actlon should be

mven

any value: compare Gould

v. Vamcrelas (1984) 56 A.L.R.

31 at

pp.38. 39, 4 3 , 63 and 64.

Mr. Clarke also said, in effect, that

14.

the company had some interest connected with Avacare. Precisely

what connection, if any, it had wlth

that organisation does not

appear from the evidence, but

the whole I am satisfied on the

balance

of probabilities the company had no leaal rlghts in

relation to the Avacare oraanlsation.

There

are only two other

assets to be considered: one 1 s the bank account. and the other the book. Mr. Bland arqued that the book should

be found to have

no commercial value because

the sales results, but there is

fundamental

dlfflculty

relation

it.

That

is to

determlne who owned and owns it.

Mr. Kilbv's draft. referred to

above,

contemplated that the book would be sold

Economlc

Freedom.

but

a more prevalent ldea seems to have been that

Economlc

Freedom

would

own the

"marketinu

rlcrhts". It 1 s

dlfflcult to be preclse, but the balance of evidence favours the

vlew that the intention was not that Economlc Freedom would own

the book. It received moneys from its sale, but as aaalnst that

the evldence is that the prlnter

has not been pald.

Mr. Clarke

accnuntlns for that bv telllnu the improbable

star:? that the

prlnter made too many cnples.

It appears to

me llkely that the

money whlch

went into the bank account

of Economlc Freedom in

respect of sales

of the book was not solely the property of the

company. However, It

1 s unnecessary to reach a conclusion

that,

because counsel for the applicants is content to treat

those funds as belonqinq to the company. It seems probable

that,

apart from those moneys, the company neither

has,

nor had, any

valuable interest in the book

r its marketincr.

15.

In the result,

I accept that the proper findin? is

suagested by Mr. Bland, namely that at no relevant time did the

assets of

the company exceed the sums

in the bank account

which

is in evidence. It appears

me that the proper conclusion,

then, is that the shares are valueless: the cost

of liquidating

the company would

no doubt exceed the

cash in the account.

In the statement

of claim.

the first applicant alleses

that he Incurred "interest and expenses particulars

of which will

be supplled prior to

trlal".

In the course

of hls address.

counsel explalned that the sums In question are those set nut In exhiblt 1, namely fees and duties In connectlon wlth a loan made

to Mr. Lucas to enable him to pay the $40.000, half-yearly loan

service

charffes

and

interest.

Counsel

sald

he were

not

entltled to the Interest actually paid,

he wlshed the clalm to be

considered as Includinu one for interest under 5 . 7 2 of the Dueensland Common Law Practice Act 1972. No oblectlon to that course was made by counsel for the respondent, although the

pleadlnu was not amended.

I must say that allowrng the claim for Interest is not

course which is very appealinq. Althoush,

I have found. Mr.

Lucas

was Induced to come into the venture by misleading and

deceptive statements made by

Mr.

Clarke. there is

no reason to

think that Mr. Clarke regarded the buslness of Economic Freedom

as a trulv worthwhile one. I think he must have appreciated that it was little better than a means of extractmm money from the

16.

uullible. Further, as counsel for the respondents pointed out, even when Mr. Lucas knew of the withdrawal of Mr. Edelsten. he made no determined attempt to uet his money back. He did not

even mention the subject until Christmas 1984 and made

no formal

demand then.

He participated further in the enterprise in

1985

and took at least some part in sendinu out misleadlng material in

an attempt to

sell the book. I am

not prepared to find that

could not have uot his money back if

he had demanded it, as he

should have done, immediately on ascertalning

the

fact

Edelsten’s wlthdrawal - at a time when it presumably had not been expended.

In the result, the

$702 .25 In expenses Incurred

by Mr.

Lucas In obtalninu

the $40,000 will be allowed, but

no Interest.

There will be iudqment fnr

t,he first appllcant,

Mr.

Lucas, arrainst the

flrst and thlrd respondents In the sum

$40,702.25: ~udgment

for

the second applicant, Mr. Rice, aualnst

the second and third respondents for

$9,0n0:

and iudqment for the

third appllcant, Elias Doufas Nomlnees

Pty. Ltd., against the

second and thlrd respondents in the sum	of $15.000: In each case.,
with costs.

;	cerllfy $!77.	t:lss a:?,!	,!-S	/	S	yccc&ng
r ,

p??“; 2;s a ;?:I2

CCY’ c ; 1 ~ 1 3

r -7zxtx for

r , I

j t l - 2 - y ~ ~ ~ ; :

: -c , : , i 3 .

;

kIcz!xIr

h : r . !L.S..CB F;l-aCLIS

,I&/$

7 associate

Daiea 1 1 $-d.,

,986

[1986] FCA 237

6 Nov 1986