Olympic Airways v Alysandratos
[1999] VSC 152
•10 May 1999
| . SUPREME COURT OF VICTORIA | |
| CAUSES JURISDICTION | Do not Send for Reporting |
| Not Restricted |
No. 7193 of 1993
No. 6367 of 1995
| OLYMPIC AIRWAYS S.A. | Plaintiff |
| v. | |
| SPIROS ALYSANDRATOS | Firstnamed Defendant |
| and | |
| CONSOLIDATED TRAVEL (VIC.) PTY. LTD. | Secondnamed Defendant |
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JUDGE: | HARPER, J. | |
WHERE HELD: | MELBOURNE | |
| DATES OF EXAMINATION UNDER O.41 SUPREME COURT RULES AND IN ATHENS: | 28-30 SEPTEMBER; 1-2, 5-9 OCTOBER 1998 | |
DATES OF HEARING: | 19-23, 26 and 27 OCTOBER 1998; 2, 4-6, 9-12, 16-19, 23-26 NOVEMBER 1998 | |
DATE OF JUDGMENT: | 10 MAY 1999 | |
CASE MAY BE CITED AS: | OLYMPIC AIRWAYS v. ALYSANDRATOS & ANOR. | |
MEDIA NEUTRAL CITATION: | [1999] VSC 152 | |
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CATCHWORDS: Contract - Purchase of shares agreement - Management agreement - Whether misleading and deceptive conduct - Alleged misrepresentations as to past combined net profit before tax and future earnings of Consolidated Travel group of companies - Whether plaintiff relied on representations in entering contracts - Trade Practices Act (Cth.), s.52 - Fair Trading Act (Vic.), s.11 - Fraud - Breach of warranties - Waiver - Whether plaintiff ratified or affirmed share purchase agreement or management agreement - Whether plaintiff repudiated or terminated management agreement.
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiff | Mr. P. Hayes Q.C. with Mr. A. Paterson | Mallesons Stephen Jaques |
For the Defendants | Dr. C. Pannam QC with Mr. M. Bevan-John | Clayton Utz |
HIS HONOUR:
Olympic Airways S.A. ("Olympic") is a government-owned international air carrier with its headquarters in Athens. It is also the plaintiff in two proceedings brought in this Court against Mr. Spiros Alysandratos and a company with which Mr. Alysandratos, and now Olympic, are associated. This company is Consolidated Travel (Vic.) Pty. Ltd. ("Consolidated Vic."), one of a chain of travel agencies known as the "Parthenon" or "Consolidated" Travel Group ("CTG"). In June 1992, Mr. Alysandratos owned or controlled all the shares in, and was Chief Executive Officer of, all the companies in the group.
It was in that month that, by agreement with Mr. Alysandratos, Olympic acquired half of those shares. It also then entered into a management agreement with Consolidated Vic., pursuant to which the latter was (in broad terms) to manage Olympic's ground operations in Australia. According to Olympic, however, both agreements were entered into upon false premises. It blames Mr. Alysandratos. He vigorously resisted (and resists) the accusations made against him. And so the litigation began.
The first of the two proceedings is No. 7193 of 1993. It was issued on 29 June of that year. In that proceeding, the statement of claim, as amended, commences with formal allegations, admitted by the defendant, to the effect that Olympic is incorporated in Greece, and Consolidated Vic. in Victoria. The defendants also admit the allegation that, at all relevant times, Mr. Alysandratos was the holder of all the issued capital not only in Consolidated Vic. but also in each of the other incorporated travel agencies with which Consolidated Vic. is associated. These are Consolidated Travel (NSW) Pty. Ltd. ("Consolidated NSW"), Consolidated Travel (Qld.) Pty. Ltd. ("Consolidated Qld.") and Hermes Travel Agency Pty. Ltd. ("Hermes"); and it is these companies which, with Consolidated Vic., form CTG.
The disputed allegations begin with paragraph 4 of the statement of claim. It is there alleged that, between April 1992 and the following June, Olympic conducted negotiations with Mr. Alysandratos about the proposed share acquisitions. The specific numbers of shares involved are set out, company by company. It is not alleged that, in each case, the numbers amounted to 50% of the relevant share capital; but the case proceeded upon the basis that this was so. According to particulars under paragraph 4, the negotiations were conducted on Olympic’s side by the then chief executive officer and managing director of Olympic, a man called Loukas Grammatikos, and Olympic's Director of Domestic (i.e. Greek) Sales, Mr. Panayotis Iliadelis; while Mr. Alysandratos represented both himself and Consolidated Vic.
The defendants admit that, in or about 1992, Olympic conducted negotiations with Mr. Alysandratos "concerning the proposed purchase by Olympic from Alysandratos of certain shares". The defendants do not otherwise admit the allegations made in paragraph 4.
The second proceeding is No. 6367 of 1995. It was issued on 30 June that year. The first four paragraphs of the statement of claim mirror their equivalents in the earlier proceeding; and the response in the defence is the same.
Paragraph 5 of each statement of claim is important. Each alleges that, during the negotiations, Mr. Alysandratos made a number of representations to Olympic. These, it is alleged, were made in trade and commerce. Forty-two separate representations are set out in the first statement of claim; three in the second. Particulars of them are given in the separate schedules which are appended to each statement of claim. All are denied.
Of all the issues debated at the trial, none occupied a more important position than those surrounding the representations pleaded in paragraph 5 of the statement of claim in the second proceeding. By that paragraph, it is alleged that during the course of the negotiations Mr. Alysandratos represented that the combined net profit before tax of CTG was, for the year ended 31 December 1989, $2,300,000; for the year ended 31 December, 1990 $3,300,000; and for the year ended 31 December 1991, $3,700,000.
According to the particulars under paragraph 5, these representations were partly in writing and partly to be implied. In their written form, they appeared in a document described as "the NWA valuation" and in the monthly management accounts for each of the specified years. These, so the particulars would have it, were then in the custody of persons whose identity Olympic did not know.
Insofar as the representations were to be implied, the implication (according to the particulars) arose in the following circumstances. First, Mr. Alysandratos and Consolidated Vic. were told by letter dated 7 May 1992 from Olympic that it had agreed to purchase 50% of the share capital of the members of CTG for $20,000,000 "subject to the price being supported by an independent valuation". Secondly, by letter dated 22 May 1992, Olympic engaged Nelson Wheeler Arnold ("NWA"), a firm of chartered accountants, to carry out that valuation. Thirdly, Mr. Alysandratos and, through him, Consolidated Vic., knew of this engagement and knew that Olympic would rely upon the valuation "in deciding whether to purchase the shares for $20,000,000 or at all". Mr. Alysandratos and Consolidated Vic. "thereafter ... provided [to NWA] the information referred to in the NWA valuation"; and, in particular, provided NWA with the monthly management accounts for each of the relevant years, together with a statement of the combined net profit before tax of CTG in each year. Fourthly, Mr. Alysandratos and Consolidated Vic. each knew that the information thus given to NWA had been included in its valuation, but neither informed Olympic that the information was untrue.
These particulars are useful as identifying evidence which the plaintiff intended to call at the trial, and upon which it would then rely. Failure to put the particulars forward in some form or other would doubtless have left the plaintiff open to the charge that it had taken the defendants by surprise. But the particulars are not helpful in their characterisation of the alleged facts which are their constituent elements. It does not make sense for the plaintiff to put forward as constituting a written representation made by the defendants something which appears in the NWA valuation, since that document was prepared by agents of Olympic. Of course each representation came to Olympic not as a representation of NWA, but of the defendants. Each was, however, made by the defendants to NWA, who received them as agents for Olympic. It is, accordingly, inapposite to say of them that, insofar as they are in writing, they are "contained" in the NWA valuation. It would be more sensible, and useful, to say in what form they came to NWA.
The implications upon which the plaintiff relies are likewise difficult to justify as such. It is not as if there is, in the second statement of claim, any allegation to the effect that Mr. Alysandratos had reasonable grounds for believing the truth of any one or more of the representations. If there were, it might be possible to argue that his failure to tell Olympic that the NWA valuation was inaccurate carried the implication that what was there set out was believed by him to be true. As it is, however, the impugned representations were, of necessity, made (through the agency of NWA) to Olympic either orally or in writing. The fact that they came to Olympic indirectly does not carry with it the conclusion that they were thereby to be implied.
Although the corresponding allegations in the statement of claim issued in the first proceeding did not, at the trial, assume the importance of the allegations just examined, it may be convenient at this point to refer to them.
The first representation alleged by Olympic in the first statement of claim is that Mr. Alysandratos had reasonable grounds for believing that, for the year ended 31 December 1992, the combined CTG net profit before tax would be at least $4,700,000: paragraph 5(1). It is said that this representation was made partly in writing and was, in part, to be implied. Insofar as it was in writing, it was to be found in a document described in the particulars as the "consolidated projected results" for the years which ended on, respectively, 30 June 1992, 30 June 1993 and 30 June 1994. Olympic did not, when the pleading was drawn, have that document in its possession. Indeed, the particulars (which are set out in a schedule to the statement of claim) imply that the document was never read by any employee of the plaintiff; it was merely "reviewed" by NWA during May 1992, when that firm was preparing a report for Olympic on the financial standing of CTG.
According to the particulars, the report was, as Mr. Alysandratos knew, material to the question then before the Board of Olympic: whether to purchase one half of the issued shares in CTG. The purchase price which at that time was being considered by Olympic was $20,000,000. Indeed, according to the particulars, Olympic (by the letter dated 7 May 1992 to which I have already referred) told Mr. Alysandratos and Consolidated Vic. that "Olympic had agreed to purchase the shares for the sum of $20,000,000 subject to the price being supported by an independent valuation". It was in these circumstances, so the particulars allege, that on some date before 30 May 1992, Mr. Alysandratos and Consolidated Vic. told NWA "that the combined net profit before tax of the companies for the year ended 31 December 1992 would be at least $4,700,000". NWA subsequently incorporated that representation in a written valuation dated 30 May 1992 "that NWA furnished to Olympic on or about that date". Despite the fact that both Mr. Alysandratos and Consolidated Vic. knew of the incorporation of the representation in the NWA valuation, neither "informed Olympic that the statement was untrue or that he or it did not have reasonable grounds for believing the truth of the statement". To that extent, the representation - i.e. that such grounds did exist - was to be implied.
The second representation (as alleged) is that Mr. Alysandratos had reasonable grounds for believing that, over the same period (i.e. the year ended 31 December 1992) the combined CTG income tax expense would be no more than $200,000. As with the first representation, this statement is alleged to have been made before 30 May 1992 to NWA by Mr. Alysandratos and Consolidated Vic. and subsequently "included in the NWA valuation".
The third representation to which paragraph 5 of the first statement of claim refers is that Mr. Alysandratos "had reasonable grounds for believing that the combined net profit after tax of the companies for the year ended 31 December 1992 would be at least $4,500,000": paragraph 5(3). This representation, too, was made to NWA before 30 May 1992 and was included in its valuation.
The statement of claim then turns to like representations, numbered in the statement of claim (4) - (9), which were allegedly made about CTG's financial position in the years 1993 and 1994. These representations were also, to the defendants' knowledge, "included in the NWA valuation" after having been put to NWA by the defendants at some time before that valuation was published on 30 May 1992. They were that Mr. Alysandratos had reasonable grounds for believing:
(a)that, for 1993, the net profit of CTG before tax would be at least $6,200,000, while for 1994 it would be at least $7,600,000;
(b)that for 1993 the income tax expense of the group would be no more than $500,000, and for 1994 no more than $700,000; and
(c)that for 1993 the after-tax profit of CTG would therefore be at least $5,700,000, and for 1994 would be at least $6,900,000.
Despite the (alleged) fact that the representations were false and that neither defendant had reasonable grounds for believing them to be true, in the case of none of them did either defendant inform Olympic "that the statement was untrue and that he or it did not have reasonable grounds for believing the truth of the statement": see paragraph 7 of the schedule of particulars under the heading "Representation (1)".
Representation (10), as set out in paragraph 5 of the first statement of claim, is that Mr. Alysandratos had reasonable grounds for believing that the turnover of CTG would increase by 5.5% in 1992, 7.5% in 1993 and 9% in 1994. Each of these statements, it is alleged, were made to NWA before 30 May 1992 and each was incorporated in that firm's valuation. Again, the defendants knew that the valuation would incorporate that representation, although neither defendant informed Olympic either that the statement was untrue or that he or it had no reasonable grounds for believing its truth.
The next representation to be alleged in paragraph 5 of the statement of claim, representation (11), was also made by Mr. Alysandratos. It was to the effect that he had reasonable grounds for believing that the annual gross margin of CTG would increase from about $7,900,000 in the year ended 31 December 1991 to about $9,100,000 in the following year. This was put to NWA in the same circumstances as the representations to which reference has already been made, and with the defendants adopting the same stance in relation to it.
The statement of claim does not allege that Mr. Alysandratos made any representations about his actual belief.
Representations (12), (13) and (14) were (as alleged) that the liability of Consolidated Vic. for income tax for the financial year ended 30 June 1991 was no more than $36,894, that the income tax expense required to be recorded was also $36,894, and that no provision was required to be made for the payment of income tax for any earlier period. These representations were made in the accounts of Consolidated Vic. for the year ended 30 June 1991, save that representation (14) was by omission: the accounts did not include any provision for income tax in respect of any period before 1 July 1990. It could therefore be taken that no provision was required; or so the plaintiff would argue.
According to the statement of claim, each of the forty-two representations was false. There is, however, no allegation in either paragraph 5 or paragraph 6 that Mr. Alysandratos knew them to be false; that allegation comes later (paragraph 7). Rather, it is pleaded at this point (paragraph 6) that the first 11 were false because in no case did Mr. Alysandratos have any or any reasonable grounds for believing any of them. Representation (12) was false because Consolidated Vic.'s actual liability for income tax for the year ended 30 June 1991 "was more than $36,894"; and it follows that representation (13) was also false, since the income tax expense required to be recorded was in an equivalent amount to the actual liability for that tax. Representation (14) was false because, contrary to that representation, "provision was required to be made in the accounts of Consolidated Vic. for the liability for income tax of that company in respect of periods prior to 1 July 1990": paragraph 6(14).
The falsity of the representations is taken up by paragraph 6 of each statement of claim. It is there alleged that each of the representations was false; and as particulars of that falsity it is asserted (in the particulars under paragraph 6 of the first statement of claim) that Mr. Alysandratos caused each of the CTG companies to dishonestly keep two sets of accounting records and, in one of those sets, from which the audited statutory accounts and income tax returns of the relevant group member were prepared, to understate the income of that company. In addition (according to the particulars) Consolidated Vic. and Mr. Alysandratos knew that the representations which related to this set of accounts were false and that accordingly the audited statutory accounts and the income tax returns were also false, as were the representations which found their way into the NWA report and into an evaluation carried out by another firm of accountants (Mann Judd Associates Pty. Ltd.). According to the particulars, the calculations necessary to ascertain the figures which should have been provided to Olympic had not then been done.
The particulars under paragraph 6 of the second statement of claim allege that, according to the statutory accounts of the members of CTG, those companies' combined net profit before tax was, for the year ended 30 June 1989, $121,970; for the year ended 30 June 1990, $150,157; for the following year $113,604; and for the year ended 30 June 1992, $1,512,926.
Both the first and the second statements of claim next turn to the question of Mr. Alysandratos' knowledge. According to paragraph 7 of each statement of claim, not only were the representations false, but Mr. Alysandratos knew when they were made that each was false. Each representation was made "so as to fraudulently induce Olympic to purchase the shares for $20,000,000, a price far greater than the true value of the shares": paragraph 8. This constituted a breach of s.11 of the Fair Trading Act 1985 (paragraphs 9 and 10) and a breach of a duty of care owed by Mr. Alysandratos to the plaintiff: paragraphs 11 and 12. Olympic was induced by the representations (a) to enter into the share purchase agreement, (b) to purchase the shares for $20,000,000, (c) to expend $14,000,000 in part payment, and (d) to enter into a share mortgage pursuant to which it mortgaged the shares to Mr. Alysandratos as security for the $20,000,000 purchase price: paragraph 14.
The defendants deny, contrary to the allegation in paragraph 6 of each statement of claim, that the representations or any of them were false. But they had earlier denied that any of the representations were made. Their position therefore must be that the representations were not made but, if they were, they were true. By paragraph 7 of the defence to the first proceeding, the defendants plead that, if Mr. Alysandratos made the representations set out as representations (1)-(11) in paragraph 5 of the first statement of claim, then he "had reasonable grounds for believing the subject matter of each said representation". On the other hand, if these and the balance of the representations up to and including representation (26) were made to Olympic, they were made not by the defendants or any agent of the defendants, but by NWA or Mann Judd. The allegation in paragraph 7 of each statement of claim that Mr. Alysandratos knew that the representations were false is denied, as is the allegation (made in paragraph 8 of each statement of claim) that the representations were made "so as to fraudulently induce Olympic to purchase the shares for $20,000,000, a price far greater than the true value of the shares". The defendants also deny any breach of the Fair Trading Act, or of any breach of any duty of care owed to the plaintiff. They deny, too, that Olympic was induced by any of the representations to enter into the share purchase agreement, to actually purchase the shares, or to expend $14,000,000 to that end. Indeed, if Olympic did purchase those shares and spend that money, it did so not in reliance upon any representations but without making any relevant investigations or assessments or, alternatively, on the basis of its own investigations and assessments, or in reliance upon, or alternatively in disregard of, the advice of NWA, Arthur Andersen or Mann Judd: paragraph 17 of the defence to the first statement of claim, and paragraph 16 of the defence to the second statement of claim.
Paragraphs 14-17 of each statement of claim appear under the heading "Loss and Damage Caused by Alysandratos". By paragraph 15 it is asserted, and by paragraphs 18 and 17, respectively, of the defences to the first and second statements of claim it is admitted, that Mr. Alysandratos continues to claim the difference between the agreed purchase price ($20,000,000) and the amount paid ($14,000,000) and threatens and intends to enforce the share mortgage.
Paragraph 16 of each statement of claim alleges that, at all relevant times, the true value of the shares was nil. Olympic has therefore suffered, and continues to suffer, damages: paragraph 17. These allegations are denied. Moreover, by paragraph 22 of the defence to the first statement of claim, and by paragraph 20 of the defence to the second, the defendants plead that, if Mr. Alysandratos was negligent, Olympic was guilty of contributory negligence. This, however, is not a defence to a claim in contract; and to the extent that the contractual claim covers the same territory as the claim in tort, the former has primacy: Astley & Ors. v. Austrust Ltd. [1999] H.C.A. 6, unreported, 4 March 1999. The assessment of damages will therefore be governed by contractual principles; and in these, there is no place for a reduction in the amount payable by the person in breach where such reduction merely reflects the degree to which, were the principles of the law of torts to be applicable, the plaintiff would be required to accept responsibility for any failure to take due care to protect itself.
Each statement of claim includes a heading, after paragraph 17, which reads "Breach of Warranties by Alysandratos". Each then alleges, by paragraphs 18 and 19, that the agreement by which Olympic acquired half the issued capital in CTG contained "a term" that Alysandratos "made certain ... warranties to Olympic". Among these were a warranty that all the accounts of each of the companies disclosed a true and fair view of that company's financial affairs; a warranty that none of the companies had any liabilities except as disclosed in the accounts; a warranty that no tax return filed by any of the companies was false or misleading; a warranty that Mr. Alysandratos was not aware of any circumstance which might give rise to a dispute with the Commissioner of Taxation; a warranty that each of the companies had paid or had fully accounted for all tax for which the company was, or might become, liable; a warranty that the only liabilities for tax for any of the companies for the period 30 June 1991 - 1 July 1992 would arise out of the normal business and trading activities of the companies concerned; a warranty that none of the companies or any company officers had breached any law, including any law relating to taxation; a warranty that all information which Mr. Alysandratos had given to Olympic or its advisers was complete and accurate; and a warranty that all information which in Mr. Alysandratos' reasonable opinion was material had been disclosed to Olympic. It was likewise warranted (as alleged in the second statement of claim):
(i)that the combined net profit before tax of CTG for the year ended 31 December 1989 was $2,300,000;
(ii)that the combined net profit before tax of CTG for the year ended 31 December 1990 was $3,300,000; and
(iii)that the combined net profit before tax of CTG for the year ended 31 December 1991 was $3,700,000.
According to paragraph 20 of each statement of claim, Mr. Alysandratos was in breach of each of the warranties to which the statements of claim refer. Olympic has suffered damages thereby: paragraph 21.
The management agreement is the subject of paragraphs 22 and following of each statement of claim. It is there pleaded that on or about 2 July 1992 Olympic and Consolidated Vic. entered into a management agreement pursuant to which the former appointed the latter as its manager in Australia. This was, by further agreement, amended on 13 November 1992; and it was by notice dated 20 August 1993 terminated by Olympic with effect from 27 August 1993. The agreement was infected by the representations made by Mr. Alysandratos as set out in paragraph 5 of each statement of claim; and, for the reasons alleged in the paragraphs which follow paragraph 5, Olympic is entitled to the relief sought by each statement of claim. That relief includes (a) damages for fraud, (b) orders setting aside the share purchase agreement, the share mortgage and the management agreement, (c) declarations that the defendants engaged in conduct in contravention of the Fair Trading Act and (as applicable) the Trade Practices Act 1974, (d) damages in respect of such contraventions and (e) damages for negligence. The plaintiff also seeks orders requiring Mr. Alysandratos to repay the sum of $14,000,000.
The defendants join issue with these allegations, and thereby deny the basis of the claim for relief, although they admit that Mr. Alysandratos agreed "pursuant to clause 20 of the purchase agreement" to give certain warranties: paragraph 26 of the defence to the first statement of claim and paragraph 24 of the defence to the second. These, according to the defendants, were specified in a schedule of warranties annexed to the agreement by which the shares were purchased; but they formed no part of the management agreement. The defendants assert that, by the purchase agreement, Mr. Alysandratos was not liable to pay any damages for any breach unless a detailed claim was made in writing within 12 months of the date of the purchase agreement. Such a claim was never made. Moreover, they allege that certain of the claims under the Fair Trading Act and the Trade Practices Act (made by a late amendment to the first statement of claim) are statute-barred and that the share purchase agreement was ratified by Olympic (by payment of part of the purchase price and otherwise) after Olympic came to the view that it could be revoked if induced by fraud and after Olympic had received accountants' advice that the shares might be valueless. Indeed, on 7 June 1993 Olympic entered into a fresh agreement with Mr. Alysandratos the effect of which was to affirm both the purchase agreement and the management agreement. Olympic is therefore disentitled from attempting to set aside either of the agreements in question, or alternatively has elected to waive any rights which it might otherwise have had to set the agreements aside.
By counterclaim in the first proceeding, Mr. Alysandratos claims the balance of the purchase price of $6,000,000. Consolidated Vic. claims damages for Olympic's alleged breach of the management agreement which, according to Consolidated Vic., has been repudiated by Olympic and, Consolidated Vic. having accepted that repudiation, is now at an end.
Olympic filed a reply and defence to counterclaim in the first proceeding, and a reply in the second. It pleads by these documents that, by clause 3A of the purchase agreement, it had three years within which to commence proceedings "in cases of income tax liability". This, Olympic alleges, is just such a case; and each proceeding was commenced within that period. Ratification of the purchase agreement is denied, although Olympic merely "does not admit" the agreement of 7 June 1993. Olympic denies that it affirmed either the share purchase agreement or the management agreement, denies that it is by its conduct disentitled from setting either agreement aside, and denies that it elected to waive its right to have either or both of the agreements set aside.
Olympic admits, in its defence to counterclaim, that each of the share purchase agreement and the management agreement contained a clause the effect of which was that the whole of each agreement was in writing, and that that agreement was contained in a document in which that clause was found. Olympic also admits that on 29 March 1993 it agreed with Mr. Alysandratos that the monthly instalments payable under the purchase agreement were to be varied. It admits failure to pay the two instalments referred to in paragraph 55 of the counterclaim, but denies any obligation to make those payments.
Olympic denies repudiation of the management agreement, and asserts that on 20 August 1993 it exercised its entitlement to terminate that agreement.
These, then, are the issues with which this litigation is concerned. Their exploration may usefully begin with an examination of the information which, having been given to Bruce Kenneth Simmons, the author of the NWA valuation, was used by him in the preparation of that document.
The initial approach to Mr. Simmons had come not from Olympic but from Mr. Alysandratos. The two had known each other since 1969, when Mr. Simmons became a partner in a firm of chartered accountants called Nelson Wheeler. He then, according to his witness statement, became "the partner at Nelson Wheeler with principal responsibility for the work undertaken for Mr. Alysandratos and [CTG]".
Mr. Simmons continued in this role for 15 years. In 1984, the work was taken over by another partner, Mr. Tim Ryan. It is, I think, fair to conclude that by 1984 Mr. Simmons knew Mr. Alysandratos and CTG well; but in 1984 direct contact apparently ceased, and in 1989 Mr. Simmons resigned from the firm. In October the following year, he and a Mr. David Pratt formed NWA. Neither CTG nor Mr. Alysandratos was a client of the new entity.
The plaintiff sought to establish that Mr. Simmons was, by reason of his earlier association with Mr. Alysandratos, incapable of acting independently in the valuation of CTG shares. In this context, the plaintiff relied upon the fact that in the early 1970's, Mr. Simmons and his wife travelled to Cethalonia, a Greek island in the Ionian Sea, at Mr. Alysandratos' expense. They there attended the christening of Mr. Alysandratos' two daughters.
I am not satisfied that Mr. Simmons consciously allowed himself to be improperly influenced by his association with, and friendship for, Mr. Alysandratos. On the other hand, the relationship might explain at least in part why, in 1992, when Mr. Simmons came to examine the financial position of CTG, he applied to the task less than the appropriate degree of intellectual rigour.
Mr. Simmons' initial instructions to prepare the valuation came by fax to NWA on 15 May. The letter was signed by Mr. Grammatikos. It said:
"The Board of Directors of Olympic Airways has decided, in principle, to acquire 50% of the shares of Consolidated Travel ... and would like you to perform an audit and evaluation of this company.
Would you please advise by return if you are interested in performing the work and also duration and cost of the work."
Mr. Simmons responded immediately. On the day on which Mr. Grammatikos' fax was received, he replied on behalf of NWA. He indicated, in his reply, that his firm was "prepared to perform an audit and evaluation on the business of Consolidated Travel". The estimated time within which the work could be completed was eight to nine days and the quoted fee was $30,000.
These terms were accepted by Olympic. On 22 May, NWA received a further fax. This, too,was signed by Mr. Grammatikos. It said:
"This is a mandate to perform an audit and evaluation on the business of Continental (sic) Travel. The work will be completed within eight to nine days and the fee will be $30,000 in accordance with your letter of 15 May 1992."
The reference to "the business" of CTG is, according to Mr. Simmons, significant. He took it to mean that, contrary to the initial communication from Olympic, he was to value the CTG business, not the CTG shares. The distinction was important when the question of taxation came to be considered. According to Mr. Simmons, he:
"... was retained to value the business and not the companies in the Consolidated Group. In my view, the valuation of the Consolidated business, so far as it depended upon financial performance, turned on the past income and likely maintainable income to be generated by the business and not upon how the present owners [Mr. Alysandratos] had structured their taxation affairs. For these reasons, I was most concerned to examine the business records which would verify the last three years' income before tax and to examine the most current trading figures to ascertain whether the growth trend was continuing and maintainable": witness statement of Bruce Kenneth Simmons, para. 37.
This evidence is important when considering Mr. Simmons' explanation for his decision to value the business not so much by reference to the CTG statutory accounts, as by reference to another document. This was prepared by, or at least under the supervision of, Theophanis Petros Beharis, the company secretary of CTG. The document is headed "Group Revenue Income & Expenditure for Period Ended 31 December" ("the group revenue document"). Of all the documents produced in this case, it was subjected to the closest scrutiny. It will be necessary to deal with it in some detail.
First among the points to note is that the group revenue document came into existence because, and only because, Olympic was not prepared to enter into the share purchase agreement until the value of those shares had been ascertained. By a resolution of the Board, made on 7 May 1992, the decision to purchase 50% of the CTG shares was expressed to be conditional upon Olympic first obtaining an independent valuation of their worth. Following a conversation between Mr. Grammatikos and Mr. Alysandratos, during which the identity of the valuer to be appointed was discussed, Mr. Alysandratos arranged a meeting with Mr. Simmons. This took place in early May 1992. It was held in Mr. Alysandratos' office. Mr. Alysandratos told Mr. Simmons "that he was having some dealings with Olympic": witness statement of Mr. Simmons, paragraph 4. The account given in the witness statement continues:
"He [Mr. Alysandratos] said that Olympic was wanting to arrange a valuation of the business of Consolidated because Olympic was considering buying into that business. He said that Olympic did not want to use one of the major firms of accountants. He said this was because the proposed purchase was highly confidential."
Additional relevant information is given by Mr. Simmons in paragraphs 8, 9 and 11 of his witness statement. I set these out below:
"8.Mr. Alysandratos told me that Olympic would be considering engaging one of a number of accountants to be approached and that at this stage the whole matter was confidential. He said that Olympic had already indicated that it would be likely to go ahead with the purchase. He said that agreement in principle had been reached.
9.The meeting broke up on the basis that we would be prepared to act if we were requested to do so and we would wait for further instructions.
11.On 15 May 1992 (Australian time) NWA received a fax from Greece on letterhead of 'Olympic Airways', inviting NWA to perform an audit and evaluation of Consolidated Travel."
I accept this evidence. There can be no question, in the light of it, but that Olympic was not prepared to enter into the share purchase agreement without first being satisfied about the value of the subject matter of the sale. Nor can there be any doubt that Mr. Alysandratos was aware of this.
Between the time of the appointment of NWA and the completion of its valuation, Mr. Simmons attended the premises of Consolidated Vic. at 209 Swanston Street, Melbourne "on a regular basis": paragraph 16 of his witness statement. All the work involved in the assessment itself was done by him. For this purpose, he relied on two principal sources of information: regular discussions with Mr. Beharis, and financial records supplied to him following requests made by him to Mr. Beharis. So much appears from Mr. Simmons' witness statement. I accept this evidence. The only other persons who were, at the same time, both connected with CTG and identified by Mr. Simmons as having any involvement in his work were Mr. Alysandratos himself and Mr. Peter Spathis, an accountant who is currently the financial controller of Consolidated Vic. With Mr. Alysandratos, Mr. Simmons spoke "on one or two occasions": paragraph 18 of his witness statement. He consulted Mr. Spathis "from time to time ... about certain aspects of the financial records with which I had been provided": paragraph 25.
Given the significance in this case of the NWA valuation, it is also important to identify the financial records to which Mr. Simmons had recourse and upon which he relied as his second repository of information. It will be remembered, in this context, that by paragraph 5 of the statement of claim in the second proceeding, the plaintiff charges Mr. Alysandratos with representing, falsely, that the combined net profit before tax of CTG was, for the year ended 31 December 1989, $2,300,000; for the year ended 31 December 1990, $3,300,000; and for the year ended 31 December 1991, $3,700,000. In the particulars under paragraph 5, it is alleged that in their written form these representations appeared in the "monthly management accounts" for each of the specified years, and in the NWA valuation itself. This is a reference to page 9 of the latter document, on which page the net profit for each of the three years in question is set out in amounts which correspond with those alleged in the statement of claim.
I have already commented upon the unsatisfactory nature of the particulars given under paragraph 5. It is not relevant to know, indeed it is incorrect to say, that the impugned representations were made through the vehicle of the NWA valuation. What I must determine is how the information allegedly conveyed by these representations came to Mr. Simmons. In the circumstances, however, this is easy. It was, at the trial, accepted by both sides that the group revenue document was the source of the information reproduced on page 9 of the NWA valuation under the heading "Actual Historical". The figures set out under that heading directly correspond with those recorded in the group revenue document.
The remaining portion of page 9 sets out figures under the heading "Projected". These correspond with the figures which are the subject of the allegations, pleaded in paragraph 5 of the first statement of claim, that Mr. Alysandratos represented to Olympic that he had reasonable grounds for believing:
(a)that, for the year ended 31 December 1992, the combined CTG net profit before tax would be at least $4,700,000, tax would be no more than $200,000, and net profit after tax would be at least $4,500,000;
(b)that, for the year ended 31 December 1993, the group net profit before tax would be at least $6,200,000, tax would be no more than $500,000, and net profit after tax would be at least $5,700,000; and
(c)that, for the year ended 31 December 1994, the group net profit before tax would be at least $7,600,000, tax would be no more than $700,000, and net profit after tax would be at least $6,900,000.
It is a measure of the importance of the group revenue document that Mr. Simmons used it not only as the source of his "actual historical" figures, but also as a platform on which to construct the "projected" figures. He says of this exercise (paragraphs 41 sand 42 of his witness statement):
"41.Once I had satisfied myself that the company records supported the income before tax figures in the group [revenue] document, I considered the likely future maintainable earnings of the business. As I have mentioned above, the 1992 projections were provided to me by Mr. Beharis and I considered his projections to be reasonable. In considering the future maintainable earnings I concentrated particularly on the 1991 figures in the group [revenue] document and the 1992 figures that had been provided to me by Mr. Beharis. Having regard to these figures, I assessed what I considered to be the likely future results for the years 1993 and 1994 ... During the days when I prepared my report [i.e. the NWA valuation] Mr. Beharis was present with me for many hours at a time. We discussed many of my workings from time to time and we discussed some drafts of the report which I prepared prior to completion. In particular, I showed him my projections for combined revenue, commissions received and paid, notional tax and net profit after tax. He told me that he agreed with my conclusions in those regards.
42.In arriving at the projected future maintainable earnings I extrapolated the historical figures and made my own assessment of the prospects for the industry. The projected commissions received and commissions paid were essentially calculated by using the historical ratio of combined revenue to commissions received and to commissions paid. The commissions received figures for 1989, 1990 and 1991 come from the group [revenue] document."
It is clear from this and other parts of his witness statement that Mr. Simmons took the figures in the group revenue document to be actual, historical figures - with no element in them of estimation or projection. As he says at paragraph 23 of his witness statement, the group revenue document was provided to him "in response to a request I made of [Mr. Beharis] for trading figures of CTG for the previous three years." He continued (at paragraph 24):
"After Mr. Beharis provided the group [revenue] document, I requested computer generated records to check various items in the ... document. I perused in detail the financial records of the companies which I requested. I went through them with Mr. Beharis and discussed certain aspects of them with him. Because of the passing of time I cannot now recall the substance of specific conversations or all the financial records I perused. However, I recall that the computer records which I perused supported the figures in the group [revenue] document."
In reliance upon the data in the group revenue document, Mr. Simmons concluded, and the NWA valuation accordingly stated (at page 11), that "a fair and reasonable" value for CTG would be in a range between $48,450,000 to $51,300,000 "based upon a capitalisation of average projected earnings". It was the reliability of the relevant data, and the use to which the group revenue document could justifiably be put by Mr. Simmons, that was a principal issue in this case.
I have already (paragraph 47 above) quoted from paragraph 37 of his witness statement, in which Mr. Simmons asserts that he was "most concerned" to "verify the last three years' income before tax and to examine the most current trading figures". If one accepts this evidence, as I do, it is plain that Mr. Simmons was concerned to be provided with the facts about the recent past, not mere estimates. What he got was the group revenue document. Because of its importance, I set it out, in full, below:
GROUP REVENUE INCOME & EXPENDITURE
FOR PERIOD ENDED 31ST DECEMBER
1989
1990
1991
TURNOVER
COMMISSION INCOME
$170,785,283
$178,736,644
$180,927,314
B.S.P. COMMISSION
$16,606,015
$15,527,881
$16,083,456
OVERRIDE COMMISSION
14,990,357
22,430,119
22,569,121
OTHER INCOME
151,853
324,479
396,324
________________
________________
________________
$31,748,226
$38,282,479
$39,048,901
LESS COMMISSION EXPENSES
$26,088,807
________________
$30,843,501
________________
$31,126,089
________________
GROSS PROFIT
$5,659,419
________________
$7,438,978
________________
$7,922,812
________________
LESS EXPENSES WAGES & SALARIES
1,395,862
1,591,497
1,628,184
WAGES-OTHER-MANAGEMENT
191,336
169,159
162,221
PAYROLL TAX
29,690
47,570
49,300
SALESMEN COMMISSION-RETAIL
90,906
114,385
119,244
WORKCARE INSURANCE
6,312
12,573
12,886
ACCOUNTANCY
39,085
32,468
35,520
ADVERTISING & PROMOTION
51,171
56,034
62,121
BANK FEES & STATE DUTIES
121,528
153,646
155,226
COURIER & CARGO
7,409
7,980
8,120
ELECTRICITY & GAS
15,242
22,840
23,516
ENTERTAINMENT EXPENSES
10,924
8,077
10,219
INTEREST PAID
198,508
245,082
231,164
LICENCE FEES & SUBSCRIPTIONS
12,885
11,637
31,640
MAINTENANCE & REPAIRS
13,085
35,756
22,328
POSTAGE
14,584
19,447
20,217
STAFF AMENITIES
6,788
6,248
6,966
STATIONERY
75,454
77,173
72,349
SUNDRY EXPENSES
47,460
45,994
50,042
TELEPHONE
95,852
99,856
92,361
TRAVEL EXPENSES
35,077
37,304
35,609
INSURANCE
60,938
79,972
61,326
COMPUTER EXPENSES-MAINTENANCE
33,875
52,425
55,827
LEASE EXPENSES
61,752
368,964
368,964
RENT & RATES
586,683
607,449
586,529
EQUIPMENT PURCHASES
49,747
76,123
44,500
LEGAL EXPENSES & OTHER EXPENSES
112,265
______________
94,753
______________
80,662
______________
TOTAL EXPENSES
$3,364,418
______________
$4,074,413
______________
$4,228,931
______________
NET PROFIT
$2,295,001
$3,364,565
$3,693,881
By contrast with the net profit as shown in the group revenue document, the equivalent figures in the statutory accounts for the financial years ending on respectively, 30 June 1989, 30 June 1990 and 30 June 1991 were in fact as alleged in paragraph 6 of the second statement of claim: that is, $121.970, $150,151 and $113,604. Both sides sought to find comfort in the remarkable discrepancies between these figures and those in the group revenue document.
In his evidence, Mr. Simmons said that he sought "computer generated records to check various items in the group document". These "supported" the figures to be found in it: witness statement, paragraph 24. In the next paragraph (paragraph 25) Mr. Simmons added:
"I remember that from time to time I would ask [Mr. Spathis] to show me financial records produced during the course of business for the then current trading year, so that I could compare the information in those records with the historical data contained in the group document."
And indeed the document presents as an historical record of financial transactions which took place, during the period under review, with the results there set out. It does not present as anything else. It does not present as a document containing estimates. On the contrary, the group revenue document appears to be the product of a series of precise calculations all of which continued down to the last dollar. The net profit shown for each year nicely illustrates the point. According to the group revenue document, that profit was, for 1989, $2,295,001; for 1990, $3,364,565; and for 1991, $3,693,881. These figures admit of no other conclusion but that they are based on established fact. Estimates would, of course, be rounded off.
Not surprisingly, Mr. Simmons took the group revenue document for that which it appears to be. It is equally clear, and I find, that he was never told that the figures contained in it, or at least some of them, were estimates. Nothing to the contrary was suggested to him during his cross-examination. Thus, it was not put to him in cross-examination that he knew as a fact that which the defendants now assert was a fact; namely, that override commission as shown in the group revenue document was "estimated on anticipated amounts due, bearing in mind amounts already received": witness statement of Mr. Beharis, paragraph 9. In short, it was not suggested in cross-examination or elsewhere save - equivocally - by Mr. Beharis that Mr. Simmons either knew or believed that some of the figures in the document - and, in particular, the figures for override commission - were estimates.
We now know that they were. Indeed, we now know that not even the group turnover is accurately recorded in the group revenue document. The true turnover for each of the years in question was, for 1989, $167,459,046; for 1990, $176,329,181 and for 1991 $164,012,963. Accordingly, the difference between actual turnover and turnover as shown in the group revenue document was, for 1989, $3,326,237, for 1990, $2,407,463 and for 1991, $16,959,351. In each case, actual turnover was less than that shown in the group revenue document.
I find that Mr. Simmons knew none of this. He did not know, and had no reason to believe, that the group revenue document was of the kind which the defendants now submit it was: that is, an "overview" being "a general picture of the essence of the Consolidated business" showing "the general nature of the receipt and expenditure flows of the group in each of the three stand alone years - 1989, 1990 and 1991 - on the basis that all anticipated revenue generated by the sales in those years was received" or showing "the flows and income and expenditure on a stand alone yearly basis between 1989-1991": defendants' outline of final submissions.
Of course, had Mr. Simmons done his work with the thoroughness it deserved, his check of the "computer generated records" would doubtless have revealed that the group revenue document contained estimates of, not historical data about, the income of the group. I find, however, that Mr. Simmons did not in this regard discover the truth. Given that any finding of contributory negligence would in the present circumstances be irrelevant (I refer again to Astley v. Austrust Ltd.) I take this matter no further.
In their outline of final submissions, the defendants assert not that Mr. Simmons knew the truth about the group revenue document, but that it "should not have been treated by Simmons as the precise and detailed profit and loss account for the years in question". That precision, and that detail "could be found in the statutory accounts to which he had a limited access only" (sic). In preparing the group revenue document, Mr. Beharis was not concerned to replicate that information. On the contrary, according to the outline of final submissions:
"What Beharis was trying to do had nothing whatsoever to do with the way in which the statutory accounts of the group were prepared. He wanted, as requested both by Alysandratos and Simmons, to give an overview of the flows and income and expenditure on a stand alone yearly basis between 1989-1991".
This submission contains an error of fact. There is no evidence, certainly no credible evidence, that Mr. Simmons asked for anything more than "the trading figures for CTG for the previous three years". When asked, under cross-examination by Dr. Pannam, why he made this request of Mr. Beharis, Mr. Simmons replied:
"Well, he was representing the companies to start with so he was the person we were talking to. And I needed to see what the performances were from their point of view for the past three years."
In the following passages from his witness statement, Mr. Beharis, to whom the request was said to have been made, fails to mention it although he does refer to a request from Mr. Alysandratos. He also speaks of his dealings with Mr. Simmons concerning the group revenue document. He says:
"7.In May 1992, Mr. Alysandratos informed me that Mr. Bruce Simmons ... was being appointed by Olympic ... to value the purchase of the half interest in the group and that his valuation was relevant to Olympic ... only. I knew Mr. Simmons from earlier years, when he had been both a member of Nelson Wheeler (as opposed to his later firm Nelson Wheeler Arnold) and Pannell Kerr Forster, the former auditors of some of the companies in the group.
8.Mr. Alysandratos instructed me to make available to Mr. Simmons all the accounting information and records of the group which he required.
9.At the request of Mr. Alysandratos, I also prepared a document entitled 'Group Revenue Income & Expenditure for Period Ended 31 December' ('the group revenue income & expenditure document') to try to show the position of the group upon receipt of all anticipated revenue for the respective periods. The group revenue income and expenditure document was prepared from available company records and supporting documentation ... Override commission was estimated on anticipated amounts due, bearing in mind amounts already received. The estimation of override commission was taken from internally prepared documents (prepared by Peter Spathis) known as a 'Projected Revenue on Sales Analysis' report ...
...
19.From the available information, I was able to demonstrate to Mr. Simmons the anticipated commission receivable for the years 1989 and 1990. The available information included a breakdown by carrier of the estimated flown and non-flown portions of tickets, to which was applied relevant commission rates. For the year 1991, I did some approximate calculations with the help of Peter Spathis to demonstrate to Mr. Simmons the anticipated commission receivable. In this regard, I refer to paragraph 9, above. Calendar years were chosen because it is the industry standard and used by IATA, BSP [a reference to 'Bank Settlement Plan', a scheme administered through IATA for distributing commission to travel agents] and Olympic ...
20.The statutory accounts for the companies in the group had always been done on an individual basis for each company. There were no consolidated or group accounts. During my meeting with Mr. Simmons [presumably, because it is not otherwise identified, the occasion when Mr. Beharis was "able to demonstrate to Mr. Simmons the anticipated commission receivable for the years 1989 and 1990"] I provided him with the financial accounts of each of the companies in the group and the tax returns as well as the financial records of the group. I also gave to Mr. Simmons access to the account totals, which are computer printouts of the various ledgers in [CTG].
21.During our meeting, I reminded Mr. Simmons that although the accurate figures were the audited statutory accounts (with which he had been provided), I believed that the group revenue income and expenditure document better reflected the value of the group business at any given time as it was prepared on anticipated income of flown revenue. [My emphasis.] I told Mr. Simmons that he could ask me any questions about any of the documents. The group revenue income [and] expenditure document was only one out of many documents which I provided to Mr. Simmons."
I do not accept that Mr. Beharis "demonstrated" to Mr. Simmons, or otherwise informed him, that any of the figures in the group revenue document were estimates. On the contrary. This vital fact was concealed from him. There was, it is true, much convincing evidence before me about the difficulty of estimating override commission before it was received. It was also said in evidence, again convincingly, that any such estimates would, if they were to be worth anything, contain a large element of subjectivity born of experience. But there was no evidence that Mr. Beharis "demonstrated" any of these points to Mr. Simmons. Instead, he presented Mr. Simmons with a group revenue document which quantified override commission, and income generally, to the last dollar. In this, it was completely misleading: unbeknown to Mr. Simmons, the figures for override commission were not only mere estimates, but were indeed very optimistic estimates in an area in which precise estimation was impossible, and even approximate estimation was a work of art requiring an appropriate amalgam of experience and subjectivity.
What Mr. Beharis did demonstrate, in his oral evidence before me, was that he was totally untrustworthy. I have seldom, if ever, seen a less impressive witness. In saying this, I make full allowance for the fact that English is not his first language. It was, however, in my opinion quite plain that difficulties with language, to the extent that they existed at all, had nothing to do with Mr. Beharis' almost total failure to give an honest and direct answer to any question put to him, whether in chief or in cross-examination. By the time he left the witness box, not a shred of credibility remained.
In my opinion, the defendants' attempts to justify the group revenue document have been totally unconvincing. It will be remembered that, according to the defendants, it was "a bona fide attempt to provide Olympic with a general picture of the essence of the Consolidated business". They also submit that "in the context the group [revenue] document was not in any way misleading and deceptive". They continue, in their outline of final submissions:
"Olympic wanted to take a 50% equity stake in Consolidated. Consolidated was attempting to show to Olympic the general cash flows and expenditures of its business."
I do not accept that CTG (or Mr. Alysandratos) was attempting to do any such thing. Even if it (or he) were, the group revenue document was not a proper instrument with which to give effect to that purpose. It was misleading, and it did mislead; it was deceptive, and it did deceive.
According to the defendants, any such deception was avoidable. Mr. Simmons had access to the statutory accounts. These contained "the accurate figures". Even if, as Mr. Beharis would have it, Mr. Simmons had been told that the group revenue document "better reflected the value of the group business at any given time" nevertheless Mr. Simmons could and should have had recourse to the statutory accounts. Had he done so, or at least done so properly, all would have been revealed. "What is of fundamental importance" the defendants submit in their outline of final submissions "is that everyone with an interest in the matter was well aware that the statutory accounts told a very very different story". (Defendants' emphasis)
In his witness statement, Mr. Simmons lists the financial records which he can say positively were placed before him by Mr. Beharis. That list does not include all the statutory accounts of each member of CTG for each of the years 1989, 1990 and 1991. Indeed, it makes no reference to any statutory accounts for the year ended 30 June 1989 and no reference to any statutory accounts for Consolidated (N.S.W.) for any year. As against this, Mr. Simmons in his witness statement accepts that, while he cannot now remember whether each document described under the heading "Source of Information" on page 1 of the NWA valuation as "Audited Accounts to 30 June 1991" was made available to him, he does not dispute the proposition that he had access to documents so described. In these circumstances, despite the unsatisfactory state of the evidence on this point, I am prepared to proceed upon the basis that Mr. Simmons was furnished with, or at least given access to, all the statutory accounts of each member of the group for each of the years 1989, 1990 and 1991.
It does not follow that Mr. Simmons "was well aware that the statutory accounts told a very very different story". He said in answer to a question from Dr. Pannam that he did not see the statutory accounts until "well after" he had been given the group revenue document. Since NWA only received its "mandate" from Olympic on 22 May, and since the valuation was completed by 30 May, Mr. Simmons only had about five working days within which to complete the task. If one assumes that the group revenue document was not produced on the first of those working days, and if one also assumes that Mr. Simmons did not receive the statutory accounts until only one or two working days remained, his ability to make meaningful comparisons was limited. This is especially so given that the statutory accounts were prepared for the individual companies, whereas the group revenue document contained group figures; and the former were prepared for the financial years ending on 30 June while the latter covered calendar years.
It is nevertheless true that Mr. Simmons was aware of real or apparent differences between at least some of the figures in the statutory accounts and those contained in what he described as the "working papers" for Consolidated Vic. for the financial year 1990-1991. The latter showed a "net result" of $3,192,643: paragraph 34 of Mr. Simmons' witness statement. The former showed an "operating profit before tax" for the same financial year of a mere $52,671: witness statement, paragraph 35. According to Mr. Simmons, he asked Mr. Beharis about the difference. He was told that "it was part of the group's tax planning": witness statement, paragraph 36. Mr. Simmons continued, at paragraph 37 of his witness statement:
"I did not pursue inquiries concerning Consolidated's tax affairs. I am not a specialist tax accountant. However, I am aware that the tax treatment of business income depends on many factors which are affected by the structure and gearing of the corporate group conducting the business. In the time available to assess the Consolidated business it would not have been feasible for me to fully investigate the taxation affairs of the Consolidated group of companies and associated entities."
Mr. Simmons then went on, in the passage from which I have already quoted (paragraph 47 of this judgment) to say that, in his view "the valuation of the Consolidated business, so far as it depended upon financial performance, turned on the past income and likely maintainable income to be generated by the business and not upon how the present owners had structured their taxation affairs."
But what do the defendants mean when they say that "everyone with an interest in the matter was well aware that the statutory accounts told a very very different story"? Do they mean that Mr. Simmons knew that the story told by the statutory accounts was a different story to that told by the group revenue document, and that the statutory accounts were right while the group revenue document was wrong? Do they mean that, because Mr. Simmons must have appreciated that the statutory accounts were different, he was - or at least ought to have been - put on his guard when deciding whether to accept the accuracy of the group revenue document - and that it was his decision, for which Olympic must accept responsibility, to take the group revenue document at its face value?
Either of these two approaches would be consistent with the defendants' pleadings. Neither, however, is consistent with their conduct of the trial or their outline of final submissions. The defendants maintained throughout the trial that the group revenue document was prepared by Mr. Beharis and Mr. Spathis at the request of Mr. Simmons and Mr. Alysandratos. It "was brought into existence for the specific purpose of the Simmons' valuation": defendants' outline of final submissions, paragraph 24. In the same paragraph, the defendants take that concession to its necessary conclusion. "We do not contend", they admit "other than that it was well known that the figures in the document would be, and were, put forward to Olympic by NWA".
It is not surprising, then, that the defendants do not and did not contend that the statutory accounts were correct and the group revenue document was not. In any event, they could hardly take that position, given Mr. Beharis' evidence (paragraph 21 of his witness statement) that he told Mr. Simmons that the latter document "better reflected the value of the group business at any given time".
So the defendants' position at trial was that the statutory accounts and the group revenue document could be reconciled. In the former, override commission was accounted for on a receipts basis; in the latter, on an accruals basis. This, the defendants submit, is "a small part" of the explanation for what they describe as "the apparent disconformity" between the two: outline of final submissions, paragraph 35. They concede, however, "that the apparent disconformity between the group document and the statutory accounts cannot be explained solely by reference to the difference between receipts and accruals accounting." They further examine the issue at paragraph 36, but without any explicit reference to the "group's tax planning" which, according to Mr. Simmons, was at the heart of Mr. Beharis' explanation. The final submissions state:
"The question then arises as to how, if at all, can the group document's profit figures be reconciled to, or reflected in, the general financial picture which appears from the statutory accounts. We make the following submissions:
(a)First there is the obvious difference that the group document is compiled on a calendar year basis and not a financial year basis.
(b)Second the override commission and expense figures were estimates on a stand alone calendar year basis.
(c)Third the money when it was actually received would be dealt with in the accounts and, if not paid, would have to be adjusted.
(d)Fourth in each calendar year there were end of year adjustments in the accounts."
These submissions come to nothing when one appreciates, as I find to be the fact, that Mr. Simmons was not told that the group revenue document contained any estimates. Moreover, I am convinced, on the evidence put before me, that "end of year adjustments" were not, and could not be, made so as to reconcile the figures in the statutory accounts with those in the group revenue document. Whatever "end of year adjustments" were made to the statutory accounts, the group revenue document was (as the defendants accept, in paragraph 24 of their outline of final submissions) "a one off document which was brought into existence for the specific purpose of the Simmons' valuation." It was not one of the ordinary accounting documents of CTG, and the defendants made no attempt (certainly no attempt for their own internal accounting purposes) to "adjust" the figures in the group revenue document so as to reconcile them with those in the statutory accounts. Any such adjustments would, in any event, principally involve the conversion of estimates into actuals.
It is relevant at this point to note that, in correspondence with the Commissioner of Taxation, the defendants described the group revenue document in terms which not only precluded any reconciliation between its figures and those contained in the statutory accounts, but greatly embarrassed the defendants when the correspondence emerged late in the trial. That correspondence flies in the face of the way the case for the defendants was run. By letter to the Commissioner dated 4 February 1994 Mr. Alysandratos' accountant, after referring to the group revenue document, said:
"This document was prepared for the benefit of Olympic Airways and based upon certain assumptions relating to favourable ticketing arrangements so as to demonstrate to Olympic what the results would have been if Olympic had been a 50% shareholder in Consolidated in the 1989 to 1991 calendar years and the resultant additional commission benefits.
This schedule does not and was never intended to reflect the actual results of CTG. The main assumption used was an increase in commission rate had Olympic been involved in the group which was intended to demonstrate to Olympic what the impact on the bottom line would be if margins improved.
In general the figures were derived from the audited financial statements and tax returns lodged with the Australian Taxation Office for each of the fiscal years 1989-1991 adjusted by Mr. Beharis to reflect these assumptions. This schedule reflects what the hypothetical results may have been if Olympic had been a shareholder in Consolidated over this period."
This letter provides further confirmation of a finding to which in any event I would have had little difficulty in coming. The group revenue document was, and is, fraudulent. The fraud involved both Mr. Beharis and Mr. Alysandratos. Mr. Beharis produced the document for Mr. Alysandratos and showed it to him, albeit (according to Mr. Beharis) briefly. Mr. Alysandratos knew that it was false. He knew that it contained information about override commission which Mr. Simmons thought accurately reflected, to the last dollar, the amount of income received by CTG under that head in each of the calendar years 1989, 1990 and 1991. He knew that CTG did not receive those amounts in those years. He knew that those amounts were estimates, and optimistic estimates at that. He knew that override commission was, within Consolidated (Vic.), accounted for on a receipts basis because it was so hard to estimate that accounting for it on an accruals basis was, at least from CTG's point of view, impractical. He must accept responsibility for Mr. Beharis' statement to Mr. Simmons that the group revenue document better reflected the value of the group than did the statutory accounts; and he must likewise accept responsibility for the fact that for this and many other reasons, Mr. Simmons concluded that, like the statutory accounts, the group revenue document reflected historical figures, and historical figures only. He was aware that the figures under the heading "Actual Historical" on page 9 of the NWA valuation were taken directly from the estimates appearing in the group revenue document. He knew that NWA would, and did, therefore prepare its valuation for Olympic on a false basis.
The fraud continued to be perpetrated throughout the trial. Attempts continued to be made by the defendants to reconcile the figures in the group revenue document with the statutory accounts. These proceeded on the basis that, if the group revenue document contained estimates, it did so only to a strictly limited extent; an extent that allowed the making of meaningful attempts at reconciliation. Meanwhile, the plaintiff continued as late as September 1998 to be under the deluded belief that the NWA valuation reflected "historical" figures for commission income for the calendar years 1989, 1990 and 1991 which had been taken directly from "historical" data contained in the group revenue document. Thus, in September 1998 a witness statement was prepared on behalf of the plaintiff in which Bradley Ross Kidd, a highly qualified chartered accountant, sought to reconcile "the actual historical results shown in the NWA report" with the audited financial statements of CTG. Mr. Kidd concluded that the attempt was hopeless. He clearly did not appreciate the true reason why this was so: that the income shown in the group revenue document was based on estimates which were impossible to make with any reasonable degree of accuracy.
In making these observations, I entirely absolve those acting for the defendants of any complicity in the fraud. I have no reason whatsoever to think that they were aware of the true circumstances behind the compilation of the group revenue document.
I am satisfied that Olympic relied on the figures in the NWA valuation in deciding to enter into the share purchase agreement and the management agreement. It did, after all, commission that valuation. It did so for a purpose. It wanted to know, from an independent source, the value of that which it then thought might be an appropriate purchase. I accept that without a valuation of the shares (or the business) the purchase would not have proceeded; and without the purchase, there would have been no management agreement either. Mr. Grammatikos, in his evidence, swore that he would not have been in favour of the purchase unless Olympic received fair value for the purchase price. Other directors gave evidence to the effect that they were influenced by Mr. Grammatikos' support of the proposed transaction. There is, I think, no doubt that the decision to proceed with the transaction was made by the Board, not by Mr. Grammatikos; and in making that decision the Board was (as Mr. Alysandratos and CTG intended it would be) influenced by the NWA valuation including those figures on page 9 of that document which were either reproduced from, or based upon projections which themselves were founded upon the information contained in, the group revenue document. In my opinion, therefore, the decision by Olympic to enter into the share purchase agreement and the management agreement was affected by the fraud of Mr. Alysandratos and CTG.
There is an argument, firmly founded in fact, that by 30 June 1992, officers of Olympic had access to information which threw doubt upon the NWA valuation. So they did. Before 30 June 1992 Olympic’s Australian solicitors, Minter Ellison, had expressed concern about the transaction. Their reservations found an echo in a letter written to Minter Ellison by the accountants Arthur Anderson on 22 June 1992. Minter Ellison informed Olympic’s in-house solicitor, Ms. Katia Papantonopoulou, of them. And the statutory accounts themselves, having been provided to Olympic on 19 June, stood in stark apparent contrast to the figures upon which the NWA report was based. In addition, the first Mann Judd report, put a value of $28,168,000 on CTG and therefore came in well under the NWA valuation; but since the Mann Judd report is dated 29 June 1992 it was almost certainly not available to anyone at Olympic in time to be of use before the share purchase agreement or the management agreement were executed.
But the point is without substance. Even if the Board of Olympic was relevantly informed, it nevertheless relied on the NWA valuation. Nor (if it matters) did the Board act unreasonably in placing its reliance where it did. If it had to make a choice between competing views, its decision to stick with the NWA valuation was no less reasonable than would have been a decision to rely upon an alternative view. What is absolutely certain is that nobody suggested to anybody that the NWA valuation was based upon figures which were a fraudulent nonsense. Still less was it revealed to Olympic why they were a nonsense: that they were, or were derived from, impossibly unreliable estimates rather than historical data. Indeed, the defendants continued until the end of the trial to contend that the differences between the group revenue document and the statutory accounts were more apparent than real. It is therefore not open to them to argue in the same breath that those differences ought to have caused Olympic to put the NWA valuation aside.
Consolidated (Vic.) was intimately involved in the fraud perpetrated on Olympic. Mr. Alysandratos was Consolidated (Vic.), and Consolidated (Vic.) was Mr. Alysandratos. Because the share purchase agreement and the management agreement were constituent elements of the one package, Mr. Alysandratos could not help but wear two hats when negotiating the one for himself and the other for Consolidated (Vic.).
Both statements of claim plead (by paragraph 25) that representations were made to Olympic by Consolidated (Vic.). Although they were made in the course of the negotiations which resulted in the management agreement, they were, according to the statement of claim, the same representations that are alleged in paragraph 5. There were made in trade and commerce: paragraph 26.
The form allegedly taken by the representations in question has already been set out in some detail in this judgment. They relate to the financial position of CTG, and are relevant in assessing the value of its shares. In putting them forward as also being relevant to, and as having been made for the purposes of inducing the plaintiff to enter, the management agreement, the plaintiff by implication (and, it could be forcefully argued, by necessary implication) alleged that Mr. Alysandratos in his capacity as Chief Executive Officer of Consolidated (Vic.) committed that company to aid and abet himself (as the vendor of the shares) in making the representations for the additional purpose of inducing the plaintiff to enter the share purchase agreement.
It follows that when, on 20 October 1998, I allowed the plaintiff to amend its first statement of claim by adding a paragraph (paragraph 26A) explicitly alleging that Consolidated (Vic.) aided and abetted the making of the representations, I allowed the plaintiff not to allege a fresh cause of action, but to make explicit that which was already pleaded by implication. In these circumstances, it is irrelevant that the amendment was made more than three years after the cause of action arose. I therefore do not accept the defendants' submission that the cause of action alleged in paragraph 26A is barred by s.82(2) of the Trade Practices Act or s.37(2) of the Fair Trading Act.
The representations which are pleaded in paragraph 5 of the second statement of claim and summarised in paragraph 8 of this judgment were, by the nature of the group revenue document, contained within it. The representations which are pleaded as representations (1) - (9) and (11) in paragraph 5 of the first statement of claim (and which are summarised in paragraphs 14-18 above) are likewise all to be found, in tabular form, on page 9 of the NWA valuation. They were included in that document because, in reliance upon the group revenue document and upon Mr. Beharis, Mr. Simmons thought that their inclusion was justified. And this is exactly that which the defendants intended would happen. But since the group revenue document was and is a fraud, and since the information given to Mr. Simmons by Mr. Beharis (acting under the general, if not the specific, instructions of Mr. Alysandratos) was and is similarly tainted, all these representations were misleading and deceptive.
The plaintiff also relies upon the representations which are pleaded as representations (12), (13) and (14). These are summarised in paragraph 23 above. They concern CTG's liability for income tax. In putting forward the proposition that the statutory accounts and the group revenue document can be reconciled, the defendants represented that CTG's tax liability could be assessed by reference to the former.
I am satisfied that this representation, too, was misleading and deceptive. In this context I accept the evidence of Mr. Xenofon Mamakos, an internal auditor for Olympic, and Mr. Konstantinos Mandroukas, Olympic's regional manager for Australia and the Far East. In May 1993, Mr. Mamakos was asked to visit CTG in Australia and discover the truth about its financial position. During the course of his visit, Mr. Beharis admitted that CTG was providing the tax office with false figures in order to avoid the group's tax obligations. At this time, Mr. Alysandratos made like admissions to Mr. Mandroukas.
I referred, in paragraph 31 above, to allegations in each statement of claim that Mr. Alysandratos gave certain warranties to Olympic. The falsity of each of the representations discussed in this judgment amounted to a breach of those warranties.
In proffering the group revenue document as a source of information about CTG upon which NWA, and therefore Olympic, could rely, the defendants engaged in, or aided and abetted, conduct which, in breach of s.11 of the Fair Trading Act and (to the extent applicable) of s.52 of the Trade Practices Act, was misleading and deceptive. The defendants seek to avoid the consequences of this misbehaviour by submitting that the plaintiff has waived any rights to which the offending conduct might otherwise give rise, and has affirmed each of the share purchase agreement and the management agreement.
I reject the submissions. Waiver and affirmation involve a deliberate and informed choice to adopt a particular course. It is clear, however, that although Olympic had its doubts about the veracity of the information received from the defendants and upon which it relied in entering the share purchase agreement and the management agreement, at no relevant time did it know that the group revenue document was fraudulent. Nor was this ignorance self-imposed. In May 1993, Olympic sent two members of its staff (one of whom was Mr. Mamakos) to Melbourne for the very purpose of discovering the truth about the figures behind the NWA valuation. They were denied by Mr. Alysandratos access to financial information which pre-dated 1 July 1992. Not surprisingly, they discovered nothing of relevance.
On 8 June 1993, Mr. Nikolaos Simantiras, the then managing director of Olympic, signed a document at the end of a three-day visit to Australia. His evidence, which I accept, was that he made it clear to Mr. Alysandratos during the course of the visit that any agreement they might reach was subject to approval by the Board following its receipt of advice about (a) issues concerning the management agreement and (b) the appropriate consideration for the shares the subject of the share purchase agreement.
Mr. Simantiras signed what he thought, and what its heading declared, was a minute of his discussions with Mr. Alysandratos. He signed that document while being driven to Melbourne Airport by Mr. Alysandratos before returning to Athens. I am satisfied that a reference in the document to the effect that the share purchase agreement was confirmed was not an accurate record of the relevant negotiations. I am also satisfied that the "minute" was not intended by either party to have contractual force, except insofar as the defendants intended it to be a trap for Mr. Simantiras. In any event, because Mr. Alysandratos had refused to give access to the information which (during the course of Mr. Mamakos' visit, Olympic sought and which has since revealed the fraud behind the group revenue document) it is not now open to the defendants to rely upon the document of 8 June as an affirmation of the share purchase agreement. This conclusion is strengthened when one appreciates that Mr. Alysandratos and Mr. Simantiras had already arranged for the former to visit Athens later that month so that negotiations for the future relationship between Olympic and CTG could be pursued.
I am satisfied that, had the Board of Olympic been aware of the true nature of the group revenue document and of its relationship to the NWA valuation, Olympic would not have entered into either the share purchase agreement or the management agreement. In these circumstances, it is appropriate that I exercise the power given to me by s.41 of the Fair Trading Act and s.87 of the Trade Practices Act to declare the whole of each of the share purchase agreement and the share mortgage agreement to have been void ab initio. The management agreement has already been terminated. It also follows that the defendants' counterclaim should be dismissed.
There remains the question of damages. The defendants submit that clause 3A of the share purchase agreement stands as a bar to any such liability. It provides, in effect, that Mr. Alysandratos shall not be liable in damages "for any breach of any alleged representation, warranty, covenant or obligation whatsoever" unless a written claim is made by 30 June 1993.
This clause only protects Mr. Alysandratos, not Consolidated (Vic.). It does not even protect Mr. Alysandratos against a claim based upon his fraud, or upon the statutory rights granted by the Fair Trading Act and the Trade Practices Act. In any event, I do not think that Mr. Alysandratos is liable to Olympic in damages, but rather for the return of the moneys received by him from Olympic as part payment of the purchase price for the shares. For its part, Olympic must, of course, return the shares.
Olympic relied upon breaches of the warranties to which I referred in paragraph 31 of this judgment. Any such breach - certainly, any breach of the warranties contained in the schedule of warranties which forms part of the share purchase agreement - may entitle Olympic to damages assessed in accordance with the principles of contract (as opposed to tort) law. On this basis, Olympic would be entitled to the difference between the actual value of the shares, and the value they would have had had the warranties been made good. Much time was spent during the trial examining the "synergistic" benefits which Olympic would have received had the transaction generated the results which Olympic expected of it. I need say no more about this than to observe that, in my opinion, no synergies either added to the intrinsic value of the shares, or were relevantly linked to any of the warranties. Nor, contrary to the argument put by the defendants, did any synergistic benefits mitigate Olympic's loss. But the question is academic, since Olympic claims (as its primary relief) and is entitled to an order that the share purchase agreement and the mortgage agreement are, and have been, void ab initio.
As an aider and abetter, Consolidated (Vic.) is liable in damages for the $14,000,000 already paid to Mr. Alysandratos. Any amounts returned by Mr. Alysandratos to Olympic would of course reduce those damages in a like amount.
The plaintiff claims, as damages, the return of the sums paid by it as management fees and other outgoings pursuant to the management agreement. But to allow this claim would simply allow the plaintiff to escape the consequences of getting itself into what it now considers to be a bad bargain. There is no basis for this aspect of the plaintiff's claim.
There will be a declaration that the share purchase agreement and the mortgage agreement are and have been void ab initio. There will be orders that the shares purchased pursuant to the share purchase agreement be returned to Mr. Alysandratos, and that Mr. Alysandratos return to Olympic the moneys received by him as the purchase price of the shares. The defendants' counterclaim is dismissed. There will also be an order that Consolidated (Vic.) pay the sum of $14,000,000 to Olympic as damages, but so that the total amount received by Olympic pursuant to the orders made against the defendants not exceed the amount paid by Olympic pursuant to the share purchase agreement. I will hear the parties on the question of whether any ancillary orders are appropriate.
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