National Australia Bank Ltd v Gingis
[2000] VSC 59
•1 March 2000
| SUPREME COURT OF VICTORIA COMMERCIAL AND EQUITY DIVISION | Not Restricted |
No. 5319 of 1995
| NATIONAL AUSTRALIA BANK LTD | Plaintiff |
| v | |
| ARKADY GINGIS & ANOR | Defendants |
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JUDGE: | Byrne J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 14, 15, 16,17 and 23 February 2000 | |
DATE OF JUDGMENT: | 1 March 2000 | |
CASE MAY BE CITED AS: | National Australia Bank Ltd v Gingis | |
MEDIUM NEUTRAL CITATION: | [2000] VSC 59 | |
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Contract – misrepresentations – whether misrepresentations made – whether false – whether relied on – whether loss suffered.
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiff | Mr A. Schlicht | Russell Kennedy |
| For the Defendants | Mr D. Baker | Lewenberg & Lewenberg |
HIS HONOUR:
Arkady, sometimes called Aron, Gingis came to this country from Russia in 1979. He is by profession an engineer, having obtained this qualification in Yugoslavia. In his first years in Australia he worked in the field of electronic engineering. He was a successful salesman. In 1986 he commenced the course leading to the degree of Master of Business Administration at RMIT. In December 1987 when his MBA studies were yet incomplete, he obtained employment as a real estate agent with Gull & Gilbert Pty Ltd ("Gull & Gilbert"). At this time, this company carried on business at Mt Waverley, Ringwood and Wantirna South. Its banker was the Glen Waverley branch of the plaintiff, National Australia Bank Ltd ("the Bank").
Mr Gingis worked out of the Mt Waverley office; indeed, he told me he had not even visited the Wantirna office. After some months, he and two others, John Berkman Johnston, a licensed real estate agent, and Frank Langford Charles Rae, who had some accountancy experience, decided to purchase the Gull & Gilbert business conducted at Wantirna South. The issues in this case concerned representations said to have been made by Ian James Sutherland, the manager of the Glen Waverley branch of the Bank, regarding this business and the consequences of this to Mr Gingis and his wife, the secondnamed defendant, Masya Gingis. The contract for the sale of the business is dated 2 August 1988, the purchaser being Gull & Gilbert (Wantirna) Pty Ltd ("the Company"), a company controlled by the three men.
The proceeding, however, commenced its life as a claim by the Bank against Mr and Mrs Gingis filed on 19 April 1995. As amended, the Bank's claim is brought under a mortgage given by Mr and Mrs Gingis over their home at 26 Wilpena Place, Vermont South. This mortgage was given to secure advances made by the Bank to the Company and to Mr and Mrs Gingis themselves. The Bank alleges that the facilities were called up on 10 February 1994 and that there remains outstanding $152,315.17 under its loan to the Company of which Mr and Mrs Gingis are guarantors and $19,385.47 upon their personal overdraft. Interest is accruing on these sums at the total rate of $45.77 per day. The Bank seeks these sums as well as possession of the property. The Bank's proofs were not challenged and it is clear enough that it is entitled to the relief it seeks, subject to the defence and counterclaim based on the misrepresentations. It is to these that I now turn.
Mr Gingis said that he first became interested in purchasing the Wantirna business following a conversation with Denis Ronald Gilbert, a director of Gull & Gilbert and his co-director, Paul Andrew Castran, in about May 1988. The business was, as I have mentioned, the real estate agency business conducted by Gull & Gilbert at Wantirna but it did not include the rent roll. Mr Gingis said he was persuaded by Mr Gilbert that he should not visit the Wantirna office for fear of affecting the morale of the staff there. He said that he asked Mr Gilbert for financial statements and that he was provided in early July 1988 with a profit and loss account for the Wantirna business for the month of January 1988 only. This showed a commission on sales figure of over $53,000 for the month. Mr Gilbert told him that January was a quiet month and that he might expect monthly commissions of $60,000 plus $5,000 advertising refunds, yielding an average net income of $10,000 to $15,000 per month. When he asked for further and more up to date information he was told by Mr Gilbert that this was the only record they had. Notwithstanding this, the two men negotiated as the price of the Wantirna business, $30,000 for fixtures and fittings plus $2,700 per month over 36 months, or 7% of gross sales commission earned over the same period, whichever was the greater. As things turned out, this represented a price of approximately $130,000.
The transaction then proceeded to document stage. The agreements which were executed bear the date 2 August 1988 and the name of the firm of solicitors, Hicks and Oakley who acted for Gull & Gilbert. The purchasers engaged as their solicitors Harry Singer & Associates of Mt Waverley.
The structure of the transaction, as documented, was this. Under an agreement for the sale and future conduct of the Wantirna business, Gull & Gilbert agreed to sell it to the Company which was then as yet unincorporated, the sale to be effective within seven days of the purchaser being issued with a licence by the Estate Agents Board. The price was $30,000 payable on the commencement date followed by 36 monthly instalments which I have mentioned. Other parties to this agreement were Mr Gilbert, Mr Castran and Mr Gingis. The agreement was executed on behalf of the then non-existent purchaser by Mr Gingis. The agreement, in addition to the purchase, contained a number of provisions which appear to have been directed to ensuring that Mr Gingis conducted the Wantirna business in the future. The shares in the Company were to be held as to 40% by Mr Rae, 20% by a qualified director nominated by Mr Gingis, 15% by Mr Gingis himself and 25% by Maryam Gingis, the mother of Mr Gingis. Mrs Gingis senior, then a retired teacher, was the nominee of her son. The person in effective control of the business was to be Mr Gingis or his nominee for the purposes of the Estate Agents Act, and he was to manage the office administration. Clause 15 created an obligation for the Company to bank only with a bank nominated by Gull & Gilbert so long as any monthly instalments remain to be paid.
There was a second agreement bearing the same date made between Gull & Gilbert and the Company relating to the use by the latter of the Gull & Gilbert name. The premises at Wantirna were held by the Company under a lease of which both Mrs Gingis senior and Mr Rae were guarantors.
On 13 September 1988 the Company was incorporated. Mr and Mrs Gingis were neither shareholders nor directors although Mr Gingis said that Mrs Gingis senior acted as a de facto director for himself because he understood that, as a sub-agent employee, he was not eligible to be a director. In November the Estate Agents Board granted the necessary licence to the Company. It commenced to conduct the business on 1 December 1988 and continued to do so until 20 August 1992 when it was wound up in insolvency by order of this Court.
Following the purchase of the business by the Company it sought and obtained finance facilities from the Bank in the form of an overdraft in the amount of $120,000. These facilities were approved by the Bank on 27 October 1988. The overdraft was secured by a second mortgage granted on 21 November 1988 by Mr and Mrs Gingis over their home and by a debenture granted by the Company in December 1988. Later, on 30 December 1991, a guarantee and indemnity was given by Mr and Mrs Gingis. The mortgage was duly registered and, with the guarantee, is the security the subject of the Bank's claim.
The claim of Mr and Mrs Gingis against the Bank, as pleaded, is, in brief, that at one or more meetings with Mr Sutherland, the Mt Waverley branch manager, in July 1988, the manager told Mr Gingis and Mr Rae that the Wantirna business was financially sound and profitable and represented an excellent purchase and profitable investment. Mr Gingis said that he accepted these assurances, as the Bank was the banker of that business, and ought therefore to be in a position to know these matters. He said that he and his wife entered into the agreements in August 1988 in reliance upon the assurances and that they suffered loss as a consequence of their falsity. Mr Sutherland denied that he met Mr Gingis at that time, or indeed any time before October 1988. He denied that he at any time made any such statement about the Gull & Gilbert business or about its Wantirna business.
It is necessary, therefore, that I first resolve this conflict. It will be noted that the events are nearly 12 years old. Accordingly, I must make allowance for the fragility of human recollection. This causes me to be cautious about embarking upon a minute comparison of the various accounts given by the defendants' witnesses Mr Gingis and Mr Rae. Present also at the first meeting, according to Mr Gingis and Mr Rae, was Mr Gilbert. He was not called but I draw no inference from this as he was not shown to have been in the camp of either party.
Mr Gingis said that, in 1988, he had five or six meetings with Mr Sutherland, two in July and the others around October and November after the Company was incorporated. His first meeting was in early or middle July in the company of Mr Rae and Mr Gilbert. The purpose of the meeting, according to the witness, was to introduce himself and Mr Rae to the bank manager, to obtain the Bank's opinion of the profitability and viability of the proposed purchase and, third, to obtain an indication that the Bank would provide financial support. As to the second matter, Mr Gingis' evidence in chief was as follows:
"Did you ask him directly as to the financial status of the business?---I ask him if the business is profitable. I knew very well they couldn't talk to me specifically about figures because even Gilbert was sitting next to me, I don't think it was appropriate, but to understand his opinion or his valuation of the business, it was very, very important because at the time, and it was 1988, I trusted bank managers. So far, prior to that I had a good experience with them so to me it was very, very important. So I think for my part, no, I can't –
What did he say about the business in response to your request?---He said it's a good, profitable business and it is a good and prudent investment, in those words.
Sorry, all of those words or just some of those words?---Most of those words.
Which ones? Will you be specific, which of those did he use?---It was a good profitable investment, a good profitable business and it was a good – it was a some years ago but it was a prudent investment. In other words, I can't recollect the words but that was the meaning of it. Particularly I discussed with him what Gilbert was telling me about the business where the business is supposed to bring to me 10 to $15,000 net profit after all the expenses, including my salary and Frank's salary and all the rest."
At this meeting, too, Mr Sutherland said that it was quite likely that the Bank would support the new venture. The second July meeting was concerned with this matter. At this meeting Mr Gingis was accompanied again by Mr Rae and by Mr Castran. They discussed the corporate structure for the conduct of the Wantirna business and they told Mr Sutherland that they would require an overdraft facility of $100,000 to $120,000. This was, in essence, the evidence of Mr Gingis.
The evidence of Mr Rae was consistent with this. He said that he met Mr Gingis in 1982 or 1983 when they worked together at Nashua West Pty Ltd. Mr Rae was the accountant and office manager and Mr Gingis a successful salesman. They kept in touch after Mr Gingis left Nashua and, in 1987, they were exploring business ventures together. In 1988 Mr Gingis suggested they take over a real estate business at Wantirna under a franchising arrangement with Gull and Gilbert. Mr Rae told me that, some time in early to mid July 1988, at a time before he had made a decision to purchase, he went to the Mt Waverley branch of the bank and spoke to Mr Sutherland. He had no diary note of the meeting. He said that one of the matters he wanted to discuss with Mr Sutherland was the profitability of the business which he and his friend were buying. He said that the bank manager told them that "the business was a profitable business. It was viable and something for us to look to get into perhaps for our future." They broadly discussed, too, that they would need about $120,000 to pay off the initial purchase price and also for working capital. He said that, after this, he made no further enquiries about the Wantirna business because he trusted the Bank. He had been a long time customer at another branch and he had confidence in that institution. He was asked about other meetings with Mr Sutherland. He mentioned another meeting towards the end of July when the two told the bank manager of a change in the structure of the proposed purchaser company. He recalled that there were subsequent meetings but he had no recollection of them or what was discussed.
Mr Sutherland, for his part, denied that any such meeting took place in July and, later, said that he had no recollection of it. It is, I think, fair to say that he relied heavily on his manager's diary and had no independent recollection of these events of so long ago. He was, however, confident that, if meetings of the type suggested took place, he would have treated it as a potential loan application and it would have been noted.
I look, therefore, to the contemporaneous evidence which may bear upon the issue. It is scanty indeed. Mr Gingis and Mr Rae produced no note of the statements nor even of the July meetings. As an estate agent, it may be supposed that Mr Gingis would have in his diary a record of at least the appointment. He said that he had indeed made a record but that the diary was not in his possession; it was left with Gull & Gilbert when he ceased working for that company. Nevertheless, the significance of its non-production is somewhat diminished by the fact that, until very recently, Mr Gingis conducted his own case. Its importance may therefore not have been apparent to him. Mr Sutherland maintained the customary bank manager's diary. The first relevant entry produced is that of 7 October 1988. Its terms are suggestive of an initial interview. It shows that only Mr Gingis attended, following an appointment made by telephone by Mr Gilbert. According to the manager's diary, Mr Gilbert spoke of "a proposed sale". The diary entry refers to events in the past such as the preparation of three-month cash flow budgets. These were mentioned in evidence but not tendered, one of them being dated 24 August 1988. I infer from this internal evidence that, notwithstanding the use of the expression "the proposed sale", the conversation recorded in the note and the interview with Mr Gingis occurred after 24 August. This was after the contracts were entered into. Mr Sutherland maintained that this was his first contact with Mr Gingis and said that, if there had been an earlier meeting, as suggested, he would have recorded it.
Mr Gingis, without a contemporaneous note, was therefore at a disadvantage. His difficulty was compounded by the absence of any near contemporaneous record or other evidence which suggested, or was even consistent with, the meetings and assurances he described. Indeed, the first mention of these matters is the allegation which appears in the original defence and counterclaim filed on 7 June 1995, some seven years after the event and after the proceeding for possession had been brought. I was pressed by counsel for the Bank with the fact, which I accept, that the falsity of the assurances which were later said to have been given, would have been apparent to Mr Gingis many years before 1995. It was said that the absence of any complaint to the Bank gave the lie to his assertion that the assurances were ever given. Mr Gingis said as to this that he was not aware of the falsity of Mr Sutherland's statement until he had consulted a lawyer on 31 May 1995 after receiving the writ. I reject this. I might be prepared to accept that this was the first occasion he realised that the false statement might form the basis of the legal claim against the Bank or a defence to the Bank's claims for payment. His prior ignorance of these matters might be explicable by his being a newcomer to this country or by a lack of familiarity with the law of contract, although he must have learned something of this in his MBA course. He struck me as an intelligent man who had had commercial experience in this country. He had been involved in some development projects and had been, by 1990, a director of four companies. I cannot accept that his experience with the Wantirna business and its subsequent collapse, which he described to me, did not make it obvious to him that the assurances of Mr Sutherland, if they were given, may have been inaccurate. Mr Gingis said, too, rather inconsistently I thought, that in 1993 when he was being pressed by the Bank he did not wish to criticise it because it held a mortgage over his home and he feared eviction. This I can understand, but his long silence is a telling point against him.
I observed Mr Gingis, Mr Rae and Mr Sutherland carefully in the witness box. I was troubled by the uncharacteristic detail of the recollection of the two former men of the events of July 1988, compared with their uncertainty about other events occurring at that time. It appeared to me that over the years in which he has had to face up to the failure of his business, Mr Gingis has sought an explanation for this, other than his own misjudgment or mismanagement. Explanations he has embraced include allegations of misleading conduct on the part of Mr Gilbert and the Bank which led him to have unrealistic expectations of its profitability. Whether Mr Gilbert misled him I do not say. I am certainly not satisfied that the Bank did. Much of the evidence of Mr Gingis was, in my estimation, a reconstruction directed to self-exoneration or, perhaps, to the avoidance of the Bank's claim for repayment of the money it had lent him. Nor am I comfortable in accepting the evidence of Mr Rae as to these matters.
I conclude from my observations and from the matters which I have mentioned that I should prefer the evidence of Mr Sutherland where it is in conflict with that of Mr Gingis or Mr Rae. I find that Mr Gingis first spoke to Mr Sutherland in October 1988 and that on this occasion he was not given the assurances which he now asserts.
Next it is alleged that the assurances were inaccurate. In this context it must be remembered that the assurances, assuming for present purposes that they were given as alleged, were as to the financial position of the Wantirna Branch of Gull and Gilbert in July 1988. What is put is that this business was not then financially sound, or profitable, and that it did not represent an excellent purchase or investment. There are in evidence no financial accounts of this business at that time. I was pressed to draw this inference, however, from the unhappy experience of the new management from December 1988. I must be cautious about any such inference for a number of reasons. First, there is the passage of some six months between July and December 1988 at a time when the real estate industry was volatile. Second, it appears that the new management introduced new practices and changed a number of staff. Doubtless these were done to improve the business but I do not know if the changes were successful in achieving that objective. All I know is that the business in July 1988 is not necessarily entirely comparable with that of 1989 and following.
Without undertaking a detailed analysis of Mr Rae's twelve month cash flow predictions, it is clear enough that, after an initial settling in period, he assumed an average monthly gross sales commission figure of $50,000 as appears both in the January 1988 profit and loss account and in the ten months sales figures provided, as I find, by Mr Rae to the Bank in October 1988. His projected average monthly cash surplus exceeded $15,000. Moreover, it is interesting to note that this cash flow prediction was substantially accurate for the seven month trading period to 30 June 1989 for which actual accounts are in evidence. Mr Rae predicted a total gross income during this period of $225,000 whereas the actual figure was $257,240. Mr Rae's total predicted expenses, omitting the $30,000 capital payment to the vendor, is $223,800 compared with the actual figure of $261,410. He predicted a net profit of $1,200 against the actual loss of $4,170. Even allowing for the fact that the prediction was of cash flow and that the actual figures were prepared on an accruals basis, the two sets of figures are remarkably close, as Mr Rae confirmed.
The disastrous year for the Wantirna business was 1989-90 when it suffered a trading loss of $196,149 and its current liabilities on the balance sheet increased by about the same amount. This was a difficult year for real estate agents generally, with interest rates high and significant well-publicised collapses of financial institutions. I was told, too, that the property market collapsed in that year. This is demonstrated in the Wantirna business by a decline of average monthly commissions from over $30,000 in the preceding trading period to about $25,000 in 1990. At the same time, the accounts show very substantial increases in major expense items such as advertising, leasing charges, plans and permits, rent and wages. These increases doubtless were due to management decisions, perhaps directed to overcoming the adverse trading environment. I mention these matters, although there was no detailed examination of them, for they strongly suggest that the collapse of the Wantirna business was due to conditions which arose after its purchase rather than to any pre-existing, inherent financial weakness.
I will add to all of this, since fraud is a serious allegation, that there is no evidence before me to warrant a finding that Mr Sutherland in 1988 knew or believed that the Wantirna business was unprofitable. Unaudited balance sheets and profit and loss accounts of Gull & Gilbert for the years ending June 1987 and 1988 were produced from the custody of the Bank from its Gull and Gilbert file. These showed that that company made a net loss of $24,830 in 1986, a net profit of $119,306 in 1987 and a net loss of $34,142 in 1988 on a turnover well in excess of $1M and that as at 30 June 1988 accumulated losses totalled $60,225. For what it is worth, the balance sheets show a surplus of assets over liabilities on balance day 1987 and 1988 and a quick asset ratio on both dates of about 1.4. No evidence was led that the Wantirna business was unprofitable in July 1988 and I would not myself be prepared to draw that inference from these accounts. In any event, these accounts were not prepared until June 1989 and Mr Sutherland, who left the branch in early 1989, said he had not seen them. Such evidence as there was on the question of Mr Sutherland's knowledge of these matters in 1988 shows that he had none. He had been provided with no financial records of the Wantirna business and he had no knowledge of its profitability.
If it were necessary for me to do so, I would find that the Bank, if it gave Mr Gingis the assurances he alleged and in the circumstances he described, owed to him no duty of care to make accurate statements. Accepting, for this purpose, the accounts given by Mr Gingis and Mr Rae, the circumstances in which the statements were made fall far short of those required to give rise to a duty of care. The purpose for which the information was sought was not disclosed. Mr Sutherland was not told that the two men relied upon his statements as they now say they did. The terms of the assurances are more consistent with a general encouraging comment rather than a piece of hard information. They told Mr Sutherland nothing of the representations which had been made to them by Mr Gilbert and Mr Castran as to takings, profit or likely income for the venturers. He was told nothing of any financial arrangements for the purchase which may have had an effect upon profitability.
The defendants allege, too, that the assurances amounted to misleading and deceptive conduct pursuant to section 52 of the Trade Practices Act. This allegation, likewise, must fail on my findings that the representations were not made and that their falsity has not been shown.
Finally, very late in the trial, the defendants amended their defence and counter-claim to include an allegation that the making of the assurances amounted to a breach of fiduciary duty by the Bank. On this point, reliance was placed upon the decision of the full court of the Federal Court in Commonwealth Bank of Australia v. Smith. [1] This case is a far cry from that. Neither Mr Sutherland nor the Bank was acting as a business adviser to Mr Gingis or Mr Rae. They were, each of them, experienced, competent businessmen. Whether it be true, as they told me, that they were contemplating the purchase of the Wantirna business on the faith of one month's trading figures and some verbal assurances, they did nothing to convey to Mr Sutherland that they would rely upon what he had told them about the financial profitability of the business. No fiduciary duty has been established.
[1](1991) 42 FCR 390.
Mr Gingis said that he entered into the agreements in August 1988 in reliance upon the Wantirna profit and loss account for the month of January 1988 and certain assurances given by Mr Castran and Mr Gilbert in general terms as to the financial strength of the business and that he, Mr Gingis, or perhaps the Company, might expect to achieve sales of $60,000 and a profit of $10,000 to $15,000 per month. He said, further, that he relied upon the Bank's assurances made in July. If it were necessary for me to do so, I would find that, of these inducements, it was those given by the vendor which decided Mr Gingis to make the purchase. I mention, too, that it could hardly be said that the guarantee, upon which the Bank sues, was given in December 1991 in reliance upon any such assurance given in July 1988.
This brings me to the claim for damages, a claim which is equally flawed, whatever view one takes of the liability issues. The defendants in their last amended pleading seek damages made up as follows:
(a) the amount owing to the Bank
(b) loss of salary and commissions by Mr Gingis $296,337
(c) loss of share of profits by Mr Gingis $165,000
(d) loss of salary by Mrs Gingis $56,741
When considering these items it is necessary to bear two things in mind. First, the Wantirna business was purchased by and conducted by the Company, not by Mr or Mrs Gingis. The trading losses were likewise those of the Company and not those of the defendants who were not even directors of or shareholders in the Company. Second, the representations relied upon as giving rise to the claim for loss and damage are not that the Wantirna business was capable of producing commissions, income, profit or salary of any particular figure. It is simply that the business was profitable and represented an excellent purchase and a profitable investment, whatever that might mean.
I am entirely at a loss to understand how it could be claimed that the defendants have suffered damage in the amount now sought by the Bank under the mortgage and guarantee.
The claim for unpaid salary and commissions of Mr Gingis is said to represent the difference between the income Mr Gilbert said Mr Gingis could expect to receive from the business and that which he received in fact. It is not suggested that the Bank warranted these representations, if they were made, or that it even knew of them. His claim for 30% profit likewise is predicated on Mr Gilbert's assurance that this is what he might expect to earn.
At its highest, Mr Gingis' case is that he thought the Company purchased a share in a business which he believed to be profitable but which was not. What loss he personally may have suffered from this is a matter of speculation. It has not been proved.
The claim for unpaid salary of Mrs Gingis suffers from the same deficiencies.
It follows from all of this that there is no substance in the claims of Mr and Mrs Gingis. Their defence and counterclaim have not been made out. There must be judgment for the Bank.
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