Pasdonnay Pty Ltd v SDS Corporation Ltd
[2005] WASCA 9
•21 JANUARY 2005
PASDONNAY PTY LTD & ANOR -v- SDS CORPORATION LTD [2005] WASCA 9
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2005] WASCA 9 | |
| THE FULL COURT (WA) | |||
| Case No: | FUL:59/2004 | 23 SEPTEMBER 2004 | |
| Coram: | WHEELER J MILLER J JENKINS J | 21/01/05 | |
| 22 | Judgment Part: | 1 of 1 | |
| Result: | Appeal dismissed | ||
| B | |||
| PDF Version |
| Parties: | PASDONNAY PTY LTD (ABN 86 009 131 622) IAN GRAEME REAR SDS CORPORATION LTD (ABN 73 007 980 645) |
Catchwords: | Turns on own facts |
Legislation: | Nil |
Case References: | Expectation Pty Ltd v Pinnacle VRB Ltd [2002] WASCA 160 Foran v Wight (1989) 168 CLR 385 G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd & Anor (1998) 155 ALR 714 Demagogue Pty Ltd v Ramensky (1992) 110 ALR 608 Emhill Pty Ltd v Bonsoc Pty Ltd [2003] VSC 333 Gray v Allen [1977] VR 413 Johnson Tiles Pty Ltd v Esso Australia Ltd (1999) ATPR 41-696 Kyrwood v Drinkwater [2000] NSWCA 126 LE Stewart Investments Pty Ltd v FC & M Legge Building Contractors & Developers [2003] NSWSC 193 Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 Mitchell v Pattern Holdings [2002] NSWCA 212 Murphy v Overton Investments Pty Ltd (2004) 204 ALR 26 Newmont Pty Ltd v Laverton Nickel NL [1983] 1 NSWLR 181 Nina's Bar Bistro Pty Ltd v MBE Corporation (Sydney) Pty Ltd [1984] 3 NSWLR 613 Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd Receiver & Manager Appointed (1997) 42 NSWLR 462 Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 Whisprun Pty Ltd v Dixon (2003) 200 ALR 447 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA TITLE OF COURT : THE FULL COURT (WA) CITATION : PASDONNAY PTY LTD & ANOR -v- SDS CORPORATION LTD [2005] WASCA 9 CORAM : WHEELER J
- MILLER J
JENKINS J
- First Appellant
IAN GRAEME REAR
Second Appellant
AND
SDS CORPORATION LTD (ABN 73 007 980 645)
Respondent
ON APPEAL FROM:
For File No : FUL 59 of 2004
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram : ROBERTS-SMITH J
Citation : SDS CORPORATION LTD -v- PASDONNAY PTY LTD & ANOR [2004] WASC 26
File No : CIV 2435 of 2002
(Page 2)
Catchwords:
Turns on own facts
Legislation:
Nil
Result:
Appeal dismissed
Category: B
Representation:
Counsel:
First Appellant : Mr C G Colvin SC & Mr A R Beech
Second Appellant : Mr C G Colvin SC & Mr A R Beech
Respondent : Mr M L Abbott QC & Mr D M Stone & Ms L A Fuoco
Solicitors:
First Appellant : Cullen Babington Hughes
Second Appellant : Cullen Babington Hughes
Respondent : Williams & Hughes
Case(s) referred to in judgment(s):
Expectation Pty Ltd v Pinnacle VRB Ltd [2002] WASCA 160
Foran v Wight (1989) 168 CLR 385
G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631
(Page 3)
Case(s) also cited:
Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd & Anor (1998) 155 ALR 714
Demagogue Pty Ltd v Ramensky (1992) 110 ALR 608
Emhill Pty Ltd v Bonsoc Pty Ltd [2003] VSC 333
Gray v Allen [1977] VR 413
Johnson Tiles Pty Ltd v Esso Australia Ltd (1999) ATPR 41-696
Kyrwood v Drinkwater [2000] NSWCA 126
LE Stewart Investments Pty Ltd v FC & M Legge Building Contractors & Developers [2003] NSWSC 193
Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494
Mitchell v Pattern Holdings [2002] NSWCA 212
Murphy v Overton Investments Pty Ltd (2004) 204 ALR 26
Newmont Pty Ltd v Laverton Nickel NL [1983] 1 NSWLR 181
Nina's Bar Bistro Pty Ltd v MBE Corporation (Sydney) Pty Ltd [1984] 3 NSWLR 613
Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd Receiver & Manager Appointed (1997) 42 NSWLR 462
Suttor v Gundowda Pty Ltd (1950) 81 CLR 418
Whisprun Pty Ltd v Dixon (2003) 200 ALR 447
(Page 4)
1 JUDGMENT OF THE COURT: This is an appeal from the decision of a Judge of this Court who ordered specific performance of the Business Asset Sale Agreement made on 5 July 2002 between the parties ("the Agreement"). The first and second appellants ("Pasdonnay" and "Rear" respectively) were the first and second defendants in the action. The respondent ("SDS") was the plaintiff.
2 The amended grounds of appeal 1 – 4 raise issues related to the alleged misleading conduct of SDS. Grounds 5 – 9 were not relied upon by the appellants. Grounds 10 – 12 relate to the question as to whether the failure of Pasdonnay to provide due diligence information disentitled it from terminating the agreement by reason of the failure of a condition requiring the consent of the Commonwealth Bank of Australia ("the CBA"). Ground 13 was not pressed. It raised an issue which the respondent conceded can, if necessary, be dealt with at the time of assessment of damages.
Background
3 By the Agreement, dated 5 July 2002, Pasdonnay agreed to sell and SDS agreed to buy Pasdonnay's business assets. The business, trading as International Drill Quip ("IDQ"), involved the manufacture of down-hole percussion hammers and drill bits. The Agreement was first discussed in mid-February 2002 as a proposal to put an end to litigation between Pasdonnay, SDS and another.
4 SDS is a publicly listed company on the Australian Stock Exchange. It is also involved in the invention and manufacture of down-hole percussion hammers and drill bits. The major shareholder of SDS is Mr Fred Moir ("Moir").
5 Rear is the major shareholder in Pasdonnay. He is also the inventor of various pieces of equipment used by Pasdonnay in the business and holds patents for them. By the Agreement, Rear agreed to licence the patents and then transfer them to SDS.
6 The consideration payable by SDS was to be the total value of Pasdonnay's net tangible assets, which the parties estimated at $5 million. Payment of the consideration was by way of a cash component of $1 million, the assumption by SDS of substantial liabilities owed by Pasdonnay, and the issue by SDS to Pasdonnay of convertible notes in the sum of $1 million and the issue of some millions of shares in SDS at 50 cents per share. The shares were to be in escrow.
(Page 5)
7 As part of the transaction, Pasdonnay entered into a put option deed with Moir enabling Pasdonnay to require Moir to purchase all or any of the SDS shares acquired by Pasdonnay at prices specified in the put option deed ("the put option").
8 The trial Judge found that Rear would have much preferred the purchase price to be paid in cash, but because SDS did not have sufficient cash reserves, part of the purchase price had to be in shares if the transaction were to proceed. At a meeting on 5 April 2002 Rear sought to increase the cash component, but Moir would not agree to that.
9 Rear also sought an increase in the purchase price to represent the value of his patents that were made available to the business. Moir responded that SDS would only pay the value of net tangible assets for the business. Moir then said that the shares in SDS that Pasdonnay was to receive would increase in value over the next two years and more than compensate Pasdonnay for the value of its intangible assets (AB 542-3).
10 The various negotiations leading up to the drafting and execution of the Agreement, and the negotiations which continued after the execution of the Agreement, together with the competing contentions of the parties about them are set out in detail in the reasons of the learned trial Judge. All of that detailed background is to be found at pages 7 through to 73 of his Honour's reasons delivered on 27 February 2004. Those portions of the reasons were not the subject of challenge by the appellants, so for the purposes of this appeal we accept them as being correct. The challenge to his Honour's decision is essentially, as noted, on two bases. It is convenient to deal first with the misleading conduct issue.
Misleading conduct as to market price of SDS shares: Grounds 1 - 4
11 Grounds 1 - 4 read as follows:
"1. The trial judge erred in law in that having found that:
(a) Dalydine Pty Ltd ('Dalydine'), a company controlled by Mr Moir, re-entered the market for shares in the respondent ('SDS') on 26 March 2002 the day after SDS made its first written offer to the appellants (on terms that the first appellant ('Pasdonnay') accept SDS shares as part of the consideration for the sale of its business)[410];
(Page 6)
- (b) thereafter, during the period that the parties negotiated the terms of their agreement, Dalydine purchased SDS shares at prices well above the opening price on a number of days and in a market where on a number of days Dalydine was the sole purchaser of SDS shares [411] to [417]; and
(c) Mr Moir did not inform the ASX of the purchases in breach of the listing rules [417] to [419];
the trial judge failed to consider the appellants' case that:
(d) neither Mr Moir nor anyone else on behalf of SDS had informed Mr Rear or anyone else on behalf of Pasdonnay of the facts stated in paragraph 1(b);
(e) such failure to disclose was conduct which was misleading or deceptive;
(f) but for such failure to disclose Pasdonnay and Mr Rear would not have entered into the agreement.
- 2. The trial judge erred in law in failing to find that Mr Moir on behalf of SDS had engaged in misleading and deceptive conduct by:
(a) representing that the SDS shares to be provided by SDS to the Pasdonnay by way of consideration on the basis that they were worth 50 cents per share 'were a good investment and could reach $1.50 to $2.00 per share' [401] & [411]; and
(b) failing to inform Mr Rear of purchases by Dalydine of SDS shares during the period of negotiations between the parties;
(c) in circumstances where (as the trial judge correctly found) Mr Moir knew that the price of SDS shares was important to Mr Rear [422].
3. The trial judge erred in law and in fact in finding that the insistence by Mr Rear on the put option being included in the Agreement lead (sic) to the conclusion that Mr Rear
(Page 7)
- had not relied upon the statements of Mr Moir concerning the share price of SDS shares because the put option would secure the financial interests of Mr Rear even if those statement proved to be wrong [424] when:
- (a) the evidence established (and the trial judge correctly found) that Mr Rear had relied upon the statements concerning the share price of SDS shares [423];
(b) the evidence established (and the trial judge correctly found) that Mr Rear relied upon the SDS shares as providing compensation, by way of upside, for intellectual property [423];
(c) such upside was not secured by the put option; and
(d) the evidence established that had Mr Rear known of the share trading by Dalydine he would have doubted whether there was an informed and objective market for the shares in SDS and would not have agreed to accept SDS shares as part of the purchase price even with the benefit of the put option, which evidence the trial judge failed to consider.
- 4. The trial judge erred in law and fact in finding that the insistence by Mr Rear on the put option being included in the Agreement lead (sic) to the conclusion that Mr Rear had not relied upon the statements of Mr Moir concerning the share price of SDS shares because the put option would secure the financial interests of Mr Rear even if those statement proved to be wrong [424] when the evidence established that:
(a) Mr Rear had relied upon the statements concerning the share price of SDS shares as an assurance that Mr Moir would have the funds to be able to meet his obligations under the put option; and
(b) had Mr Rear known of the share trading by Dalydine he would have doubted whether there
(Page 8)
- was an informed and objective market for the shares in SDS and would not have agreed to accept SDS shares as part of the purchase price even with the benefit of the put option
- which evidence the trial judge failed to consider."
12 Although these grounds tended to be run together in the course of the appellants' argument, they can be better analysed if taken separately.
13Ground 1: His Honour did make the three findings of fact identified at par (a), par (b) and par (c) of ground 1. It is not clear from the submissions of the appellants how it can possibly be said that the trial Judge "failed to consider" the appellants' case as set out in par (d) through to par (f) of ground 1.
14 His Honour devoted [394] through to [424] of his reasons to precisely those issues. He found that Rear had not been informed by Moir or anyone else on behalf of SDS of the share trading by Moir. He recited at [417] the appellants' argument that the conclusion to be drawn from the evidence was that Moir was manipulating the price for SDS shares and that, had Rear known of this, neither he nor Pasdonnay would have entered into the Agreement. His Honour noted (at [420]) that there is no allegation in the pleadings that Moir was deliberately manipulating the share price. That observation is clearly correct.
15 His Honour also found at [421] that he was not satisfied that Moir deliberately failed to disclose to the ASX his share purchases. That finding is obviously one based on his assessment of Moir's credibility, having heard him give evidence. There is no challenge to that finding.
16 His Honour did not in terms make a finding as to whether the conduct of Moir, in failing to disclose his trading to Rear and Pasdonnay, was misleading and deceptive, although at [399] he identified the relevant tests which would be applicable, namely that such conduct will be misleading and deceptive if the circumstances "give rise to the reasonable expectation that if some relevant fact exists it would be disclosed", citing authority on that point.
17 It appears that the reason his Honour did not make that express finding is because he was of the view that the failure to disclose did not, in any event, cause Pasdonnay and Rear to enter into the Agreement. Put negatively, he was not satisfied that, as the appellants assert, "but for such failure to disclose" they would not have entered into the Agreement. His
(Page 9)
- Honour's reasons for that finding are to be found at [422] through to [424] of his reasons, which may be set out in full:
"422 Whilst there can be no doubt the price of SDS shares was important to Mr Rear in the negotiations, and Mr Moir knew that, there can also be no doubt that Mr Rear knew there was no market for SDS shares. Those advising him at the time had pointed that out. He was well aware of it. That was indeed why he insisted on the Put Option being included in the Agreement.
423 So too, although it is true Mr Rear accepted Mr Moir's assurances the price of SDS shares was 'going to take off' and he also accepted the value of the shares as return for intellectual property not the subject of the patent licence annexed to the Agreement, it is implicit in that arrangement that Mr Rear regarded the Put Option as adequately covering that situation should the market price of the shares fall below the return he required. By the Agreement and the Put Option, Pasdonnay and Mr Rear would exit from their SDS shareholding with a 7-1/2 per cent return per annum.
424 Although Mr Rear accepted Mr Moir's generalised assertions about the SDS share price, he was very cautious about that and proceeded only when he had satisfied himself that his position was secure even if the share price collapsed. He (and Pasdonnay) entered into the Agreement not because he accepted Mr Moir's statements about the then current future price of SDS shares, but because he was satisfied he had been able to secure his financial interests even if those statements proved to be wrong."
(Page 10)
19 His Honour's finding in that respect is criticised on a number of bases. First, it is said that it is not correct to say that Rear knew that there was "no market" for SDS shares. As the appellants concede, his Honour did not mean literally that the shares could not be sold at all, since they were listed on the ASX. However, it was certainly the case that, as his Honour pointed out, those advising Rear at the time were aware of the fact that Moir owned the overwhelming majority of SDS shares, that there was very little trading in SDS shares on the ASX, and that there was accordingly no prospect of disposing of the very large quantities of shares which were to be acquired under the Agreement, within any reasonable time frame.
20 Next, it is submitted that his Honour failed to consider Rear's evidence in his witness statement (tendered in evidence) that, had he known of the share trading by Dalydine, he would have "doubted whether there was an informed and objective market for the shares in SDS", and would not have agreed to accept them even with the benefit of the put option. It is also submitted that his Honour failed to consider Rear's evidence that he had relied upon statements concerning the share price of SDS as providing some comfort to him that Moir would have the funds to be able to meet his obligations under the put option.
21 His Honour did not deal directly with these items of evidence in the course of his reasons. However, Rear did give evidence and was cross-examined about his reasons for asserting that he relied upon the representation pleaded. His Honour was not required to accept Rear's evidence. Indeed, even without the advantage of having observed Rear in cross-examination, it can be said that his evidence in this respect is somewhat unconvincing. The assertion in his witness statement is not easy to reconcile with the fact that it had been several times pointed out to him by his advisers that the market in SDS shares was, at best, limited. It is, of course, a statement made with hindsight long after the transaction had soured. In cross-examination, although he asserted that he was concerned about the put option, he conceded that he made no enquiries of Moir as to what assets, other than SDS shares, Moir might possess.
22 His Honour's conclusion is not consistent with Rear's evidence, but that evidence was not, in our view, of such cogency that his Honour was required to address it directly. He must necessarily have rejected it. The conclusion which his Honour did reach is logical, and not inconsistent with any established fact.
23 In our view therefore, ground 1 cannot succeed.
(Page 11)
24 Ground 4: It can be seen that ground 4 refers only to his Honour's alleged failure to consider the evidence of Rear that he relied upon statements concerning the share price as providing comfort, in effect, that Moir would be able to meet his obligations under the put option. We have already dealt with that issue, which it seems to us is really subsumed under the arguments put in respect of ground 1. In our view, it cannot succeed.
25 Ground 2: This centres upon an alleged error by his Honour in failing to find misleading and deceptive conduct by Moir in representing that the SDS shares "were a good investment and could reach $1.50 to $2.00 per share". His Honour did find (at [401]) that Moir did assure Rear that the shares were a good investment and could reach $1.50 to $2.00 in the next two years.
26 However, the allegation that this representation was misleading and deceptive is not to be found in the statement of claim. What was pleaded at [25.2] – [25.6] was:
"25.2 throughout the Negotiation Period, neither Moir nor anyone else on behalf of the plaintiff informed Rear or anyone else on behalf of the first defendant of any of Moir's Undisclosed Purchases;
25.3 during the negotiation of the Agreement, the plaintiff by Moir represented to Rear that taking part of the sale price by way of shares in the plaintiff at a value of $0.50 per share was appropriate because the shares in the plaintiff were holding their own in a depressed market;
25.4 the first defendant agreed to accept shares at $0.50 per share as part of the consideration under the Agreement in reliance on the representation pleaded in paragraph 25.3;
25.5 but for the representation pleaded in paragraph 25.3, further or alternatively the conduct pleaded in paragraph 25.2, the first defendant would not have entered into the Agreement;
25.6 the conduct of the plaintiff pleaded in paragraphs 25.1-25.3 was misleading or deceptive or likely to mislead or deceive in breach of s.12DA(1) of the Australian Securities and Investments Commission Act 1989 ('ASIC Act')"
(Page 12)
- While there may well be a link, and in some cases a very strong link, between the current price of a share and its likely price in the future, there are obviously many factors capable of bearing on the latter price. The representation pleaded is, on any sensible reading of the statement of claim, one relating to the current "value" of the shares of 50 cents per share. There is nothing in the pleading to hint that there is also alleged to have been misleading conduct, or an implicit representation, bearing on the likely future price of the shares. There is nothing as a matter of logic, and nothing in the evidence, to suggest that if Rear had known that the current price of the shares (other than those purchased by Moir) was in the region of 35 cents rather than 50 cents, his assessment of the representation of a future value of between $1.50 - $2.00 would have been affected.
27 Further, we accept that, as the respondent submits, the appellants not having pleaded that s 12BB of the Australian Securities and Investments Commission Act 1989 (Cth) was relied upon, the respondent was not alerted to the need to show that such a forecast was reasonable. That was a matter which could have been the subject of evidence. It not having been pleaded, it is not now open to the appellants to rely upon it.
28 We should add that we have considered the question of whether, notwithstanding it was not pleaded in that way, the case was nevertheless fought on the basis that such a representation was made and that it was misleading and deceptive.
29 However, we are satisfied that it was not. No reference to any such representation is to be found in the opening submissions of the parties. In the written closing submissions on behalf of the appellants, there is a sentence asserting that Rear accepted Moir's assurances that the share price was "going to take off" as a basis for not receiving any return for certain intellectual property. However, it seems to us to be there only for the purpose of bolstering the proposition that, if there was no "true market" for SDS shares, then Rear would obviously not have agreed to satisfy part of the purchase price by accepting shares at 50 cents a share. It was not presented, as it is here in the grounds of appeal, as in effect a separate representation in relation to which his Honour should make a finding. It is plain from the respondent's closing submissions that the respondent did not regard it in that way.
30 His Honour did find that Rear accepted that the value of the shares was "going to take off", but the context in which he did that in [423] suggests that he too understood that as no more than bolstering the
(Page 13)
- assertion that the current price of the shares was around 50 cents, and that that was "good value".
31 It was submitted to us that Rear's witness statement made it clear that "the circumstances relied upon were the surrounding circumstances about these statements being made about the share price" (including the statements that it would increase in value). It is our view that the respondent would not reasonably have understood, from the witness statement, that it was alleged that the conduct was misleading not only in failing to disclose that the present share price was one which resulted from significant trading by a party associated with Moir, but also that that failure to disclose flowed through to render the representation about future price misleading or to infect in some way Rear's evaluation of that representation about possible future prices.
32 It is our view therefore, that, not having pleaded their case in the terms set out in ground 2, the appellants cannot now raise misleading and deceptive conduct by reason of a representation as to a future matter.
33 Ground 3: Ground 3 raises a combination of matters already discussed in relation to ground 2 (in ground 3(b) and (c)), but raising them in the context of an allegation that his Honour erred in finding that Rear had not relied upon Moir's statements concerning the share price, rather than that his Honour erred in failing to find that the conduct was misleading and deceptive. All of those matters have been discussed in relation to grounds 1 and 2. It is our view therefore that ground 3 must also fail.
Grounds 10 – 12: Due diligence and right of Pasdonnay to terminate
34 Some further factual context is necessary in order to understand these grounds. There were a variety of conditions precedent to the sale. Clause 4 provided that "completion is subject to and conditional on", inter alia:
"4.1.4 The Commonwealth Bank of Australia, as financier of [SDS] consenting to the sale and purchase of the Business Assets and the assumption of the Assumed Liabilities in accordance with this agreement and, if consent is conditional where such conditions are satisfactory to [SDS] and [Pasdonnay]."
35 In relation to that clause, cl 4.3.2 provided that:
(Page 14)
- "[Pasdonnay and Rear jointly and separately] must provide all reasonable assistance to [SDS] in procuring the satisfaction of the conditions in cl 4.1.2 and cl 4.1.4."
36 Without setting out all of the detail of SDS's relationship with the CBA, which are to be found in his Honour's reasons, the position broadly was as follows. Responsibility for the SDS accounts with the CBA was with Mr Cowie of the Group Risk Management Section of that Bank. The CBA had been for a time concerned at the level of risk to which it was exposed with SDS.
37 Subsequent to the announcement of the proposed transaction contemplated by the Agreement, but prior to the execution of the Agreement, Mr Cowie asked the accounting firm Ferrier Hodgson to undertake an investigation of SDS on behalf of the CBA. His letter to Ferrier Hodgson noted that the Bank had cancelled SDS's overdraft and trade facilities, with SDS operating its trading account by "credit only" basis. SDS had met all interest payments on the outstanding loans with a small reduction in the principal. He expressed the opinion that SDS's financial performance had improved since November 2001, but not to the extent that it had been able to generate sufficient cash to meet any capital expenditure for principal reductions. Mr Cowie requested Ferrier Hodgson to comment on SDS's group profit and loss budgets, cash flow forecasts and projected balance sheets, both with and without the proposed purchase. He asked the accountants to review and comment on the proposed purchase and related agreements. That review, then, while it had been commenced prior to the parties entering into the Agreement, was plainly an exercise which would have enabled the CBA to form a view as to whether it should give its consent, as contemplated by cl 4.1.4.
38 It does not now seem to be in dispute that as a result of the failure of the appellants to provide information, Ferrier Hodgson did not have information which would have permitted them to perform an adequate assessment of the effect of the proposed purchase, so that the CBA could determine whether or not to give its consent pursuant to cl 4.1.4, although the breach by Pasdonnay and Rear of the obligation to assist in relation to cl 4.1.4 was in some respects an indirect one. What had apparently occurred was that SDS had engaged Deloittes in order to conduct its due diligence investigation; Deloittes had requested information and Pasdonnay and Rear had declined to provide that. It appears to have been common ground that that information would also have been made available to Ferrier Hodgson and incorporated in the report which was being prepared for the CBA; failure to provide the information was
(Page 15)
- therefore pleaded both as a breach constituted by a failure to assist in relation to SDS's own due diligence investigation and also as a failure to assist in relation to the satisfaction of the clause relating to the CBA.
39 His Honour found (at [306]) that:
"… had [the appellants] provided the information …, Ferrier Hodgson could have completed their report in sufficient time for CBA to consent to the transaction prior to 30 September 2002. Whether the CBA would have done so at that time must, to some extent, be speculative, but I am satisfied that the breaches by [the appellants] … at least materially contributed to the failure by the CBA to give its consent before 30 September 2002 …"
40 His Honour also noted (at [311]) the argument of the respondent that, because the appellants materially contributed to the non-satisfaction of the condition precedent, that condition is to be taken as having been satisfied or to have been waived by the appellants. Having discussed the two principal authorities relied upon by the respondent, being G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 and Foran v Wight (1989) 168 CLR 385, his Honour said, at [316]:
"Pasdonnay's breach of the due diligence requirement contributed to the failure of the CBA to give consent by 30 September 2002. That being so, Pasdonnay could not take the benefit of its own failure to comply, such as to afford a proper basis for it to terminate under cl 4.10.1. I further accept the plaintiff's submission that the defendants' refusal to provide the due diligence information … waived the essentiality of the time stipulation that consent had to be obtained by 30 September 2002."
41 The termination clause to which his Honour was referring in the passage just quoted was cl 4.10.1, which provided that in the event that the conditions in cl 4.1.2 or cl 4.1.4 had not been satisfied or waived by 30 September 2002 or such other date as the parties may agree in writing, then the Agreement could be terminated by either Pasdonnay or Rear. No other date having been agreed, the relevant date remained 30 September 2002.
42 Ground 10 is lengthy, and we do not think that it is necessary to set it out in full. It commences as follows:
(Page 16)
- "The trial judge erred in law by applying a test of material contribution [306] & [316] in considering whether the failure by Pasdonnay to provide due diligence information caused the condition precedent to the agreement requiring the consent of the CBA not to be met when he should have found that the onus was on SDS to establish a direct causal link between the failure to provide the due diligence information and the non-compliance with the condition precedent. Had the trial judge applied the correct test then the trial judge should have found that there was no such direct causal link established by SDS because: …"
43 There then follow nine paragraphs identifying the facts which the appellants allege lead to the conclusion that there was no direct causal link between the failure to provide the information and the non-compliance. Some of them are facts which appear not to be in dispute, such as an allegation that by the terms of the Agreement SDS was required to take over or pay out a debt of $3.2 million owed by Pasdonnay to HSBC. Others are facts which it appears it is asserted his Honour should have found, or in some cases relate to an alleged absence of evidence, such as an alleged absence of evidence that SDS could have raised $3.2 million. The gist of these paragraphs, however, is to the effect that, even if the Bank had had the relevant information, it would not have consented (or, as the appellants submitted should it have been put by his Honour, that the respondent had not proved that if it had had the information the CBA would have consented). We will deal with the reasons given for that assertion in a moment, when we come to consider the evidence actually given in relation to that issue, which his Honour apparently accepted.
44 Ground 11 is conditional upon the success of ground 10, to the extent that it alleges that his Honour erred in law by finding that Pasdonnay could not give notice of termination without first remedying its default and giving notice making time of the essence. As the reason for that assertion the ground alleges that as a matter of law Pasdonnay did not lose its right to terminate for failure to satisfy the condition precedent unless either Pasdonnay had repudiated the Agreement (which was not alleged), or SDS proved that the default of Pasdonnay was the direct cause of the failure to satisfy the condition precedent relating to the CBA. It can be seen then that his Honour's alleged error is one which only arises if it is made out by the appellants that, as is asserted in ground 10, SDS failed to prove that Pasdonnay's default was the cause of the failure to satisfy the condition relating to the CBA.
(Page 17)
45 Ground 12 relates to a specific aspect of the evidence relating to the issue of what the CBA would have done, had it had the relevant information.
46 Because ground 10 commences with an assertion of error of law, it is probably desirable to deal with that first. The short answer to the proposition is that there is no error of law which the appellants actually seek to maintain in this case. Although the commencing lines of ground 10 criticise his Honour for applying a test of material contribution, the appellants themselves in their written submissions assert that a correct statement of law (citing Expectation Pty Ltd v Pinnacle VRB Ltd [2002] WASCA 160 at [85] – [90]) is that:
" … a party who causes or contributes to the non-fulfilment of a non-promissory condition may not terminate the contract." (emphasis added)
47 At bottom, the error alleged by these grounds is one of fact, not of law. It turns upon a proper construction of the evidence of Mr Cowie who was called to explain the CBA's position.
48 Mr Cowie's evidence was as follows. At a meeting in June 2002 with Moir and others, to discuss the proposed purchase of Pasdonnay, Mr Cowie said words to the effect that the CBA was likely to support it "if SDS satisfied the CBA that SDS's cash flows after completion (that is the cash flows of the merged businesses) would be satisfactory". In August 2002 Mr Jones of Ferrier Hodgson advised Mr Cowie that, effectively because of the absence of the information which the appellants were to provide, Mr Jones was unable to comment on the impact of the purchase on the cash flows of SDS.
49 Pausing there for a moment, it appears from Mr Cowie's evidence that the failure of the appellants to comply with their obligations resulted in the CBA not having adequate information about the one matter which he had raised at an early stage as something about which the Bank would wish to be satisfied before consenting to the transaction. It seems quite clear that the direct and immediate cause of the CBA not giving its consent as contemplated by the Agreement was the fact that it was simply not in a position to consider the matter adequately, because of that default. In that respect, the default of the appellants was the direct and immediate cause of the failure of the condition.
50 What the appellants then assert, however, is that it was for the respondent to prove that if it had had the relevant information, the
(Page 18)
- condition would have been able to be satisfied, ie that the CBA would have consented. It appears to be accepted by the respondent that the notion of causation in this context does require it to demonstrate that it was the non-provision of the information, rather than for example some other inherent defect in the transaction, which caused the CBA not to consent, and therefore that the respondent is required to demonstrate that if it had been given the information the CBA would have consented. However, we observe that what is being undertaken in a case of this kind is necessarily a hypothetical exercise; because of the absence of information at the relevant time, the CBA was never asked to give its view of the circumstances as they prevailed at the time. In his evidence, Mr Cowie was being asked in effect to speculate about what attitude the CBA would have taken, by the artificial process of putting himself back in the position as it was at the time.
51 Sometimes it will be possible for a person such as Mr Cowie to say with confidence either that the Bank would or would not definitely have approved a transaction; more often, it is likely that he will only be able to indicate that there is a probability that a particular course would have been taken. There are a number of reasons for this: banking policies evolve over time; relationships with clients evolve over time; most significant banking approvals are given after a process which may involve discussion with others within the Bank; and there is of course an inherent difficulty in reconstructing, with hindsight, what course a person or institution would have been likely to have taken in given circumstances. The question whether the respondent has discharged the burden cast upon it is one to be answered in the light of the considerations to which we have referred. It appears to us that the principal vice in the submissions of the appellant in this respect is that they are predicated on the notion that the respondent must demonstrate that it was absolutely certain that the CBA would have consented to the transaction if the information had been provided, rather than that it was more probable than not that this would have been the case.
52 Mr Cowie went on to say in his witness statement that in August 2003 he received a report from Mr Jones, updating an earlier report provided by Ferrier Hodgson in October 2002. By this time, Mr Cowie had still not formally considered the question of whether the CBA would consent to the transaction. This was because he had been advised of the breakdown in relations between the parties and the commencement of litigation. When he did come to consider that question in October 2003, he formed the view that the various reports which he had were out of date and that the CBA would require, as a minimum: June 2003 financial
(Page 19)
- statements for Pasdonnay; to be satisfied that SDS had completed a full due diligence; and to be satisfied of the value of stock, plant and equipment.
53 In October 2003 he received a further report from Ferrier Hodgson, and the CBA then on 31 October 2003 gave its consent in the manner contemplated by cl 4.1.4. Mr Cowie's witness statement says:
"If a report to the same effect had been provided by Ferrier Hodgson in July, August or September 2002 (but obviously limited to 2002 accounting data) the CBA would have considered the report and would have given its consent. I was sufficiently satisfied with SDS's financial position at the time to recommend CBA give its consent to the … acquisition subject to being satisfied as to the cash flows of the continued SDS and Pasdonnay businesses. I expect my recommendation would have been followed."
54 In his examination-in-chief, Mr Cowie's evidence was as follows:
"If they had provided you with a report prior to November 02 which disclosed that there was no adverse effect on SDS's cash flows by the proposed merger via the sale of business asset agreement, would you then have given your consent? ----
I would think that we would have because the one thing we didn't want to do is for any negative impact on SDS – this is on operations ... As long as the worst case scenario was break even for future cash flows, there would be no reason for us to not consent." (TS 482-3)
55 In order to understand the next portion of Mr Cowie's evidence, it is necessary to observe that by the terms of the Agreement, SDS was required to take over or pay out a debt owed by Pasdonnay to HSBC, which was of the order of $3.2 million. The CBA was apparently unaware until the receipt of the Ferrier Hodgson report dated 5 August 2003 of this condition. The appellants assert that because in August 2002 HSBC informed SDS that it was not prepared to agree to the assignment of the debt from Pasdonnay to SDS, the debt would have had to have been repaid. It also asserts that there was no evidence that SDS would have been able to raise funds to enable repayment of that debt. It is asserted therefore that, had the CBA been aware of that condition relating to the HSBC debt, and the other surrounding circumstances to which we have referred, it would have refused its consent to the transaction.
(Page 20)
56 The proposition we have explained above, which is reflected in grounds 10 and 12 of the grounds of appeal, was not put directly to Mr Cowie in cross-examination. The relevant passage of cross-examination is as follows:
"So you would have expected in Ferrier Hodgson's review when they came to do it that they would have ascertained this position with the HSBC debt and the assumption of the liability, which would have been considered particularly as to how security was going to be arranged between the Commonwealth Bank and HSBC, wouldn't it?---Yes, basically how the total funding would be. Now, what that funding entailed we wouldn't necessarily say between the Commonwealth Bank and HSBC but – just on a general funding position on the balance sheet of the proposed merger.
Could I put one proposition to you: at all times until November 2002 there was no chance that you were going to give HSBC Bank priority for securities that they might want to take when you thought you were unsecured to the tune of around $4,000,000. Is that a fair proposition?---Not necessarily. We would have to look at any proposal at the time and depending on – when you're working on an area like ours, we're always going to be unsecured and if we can see future cash flows improving our position, as long as our position wasn't deteriorating because of the transaction, we may agree to it.
But you would have to take account of the cash flow to meet the 3.2 million assumed liability as well, wouldn't you, to HSBC Bank?---That's correct. Well, yes, a lot - - -
That was all going to have to be factored in. In that review you would factor in the fact that your customer, the SDS group, is taking on a further liability, albeit to another creditor, to service a $3.2 million debt?---We would expect at that time that IDQ's cash flow should have funded that debt without SDS's own cash flow's being impacted.
And if they didn't?---Then there would be an adverse impact on SDS and then we wouldn't agree to the transaction." (TS 494-95)
57 An odd aspect of the cross-examination quoted above is that it appears to proceed on the assumption that there would have been some
(Page 21)
- repayment of the $3.2 million from cash flow. That is, contrary to the assertion now made in the grounds of appeal, it appears to assume either that the debt would have been taken over by SDS or that funds from some other source would have been raised. That was an important matter, since there was some evidence that SDS had potential alternative sources of funding to pay out all or a significant portion of Pasdonnay's liability to HSBC. That evidence is discussed at [469] of his Honour's reasons, where his Honour summarises evidence given by Mr Benson, the company secretary, in relation to that matter. His Honour was positively satisfied that at least a facility of $1.95 million would have been available to F Moir Holdings Pty Ltd from the St George Bank. As to the rest of the sum required, although his Honour does not appear to have been positively satisfied of their correctness, he expressed himself to be not satisfied that the other assertions by Mr Benson in relation to potential alternative finance were false. Important flaws in the grounds of appeal on this point, then are: first, that Mr Cowie was not cross-examined on the basis of the facts now asserted in these grounds and that the assertions are at least partly inconsistent with his Honour's findings of fact.
58 In relation to the passage of cross-examination quoted above, the appellants assert that, contrary to one's first impression, it actually demonstrates that the CBA would have been unlikely to consent to the transaction as at 2002, because it would not have been possible to deal with the $3.2 million liability to HSBC without an adverse effect on SDS's own cash flow. That submission, however developed, misses the point. The relevant issue is not what view some qualified objective bystander might have taken either of the wisdom of the CBA giving its consent, or of the likelihood of there being an adverse effect on the cash flow of SDS from the proposed transaction. The relevant question is what the attitude of the CBA would have been, had relevant information which was not made available because of the appellants' default, been made available prior to the last date for its consent pursuant to cl 4.1.4. Mr Cowie's evidence in that respect was plainly that it was his opinion that the CBA would have consented. He was the person who would have made the relevant recommendation, and his evidence was that he expected that he would have recommended consent. His Honour accepted that evidence.
59 In Mr Cowie's witness statement, as we have noted, his view was that if a report to the effect of that eventually provided had been provided to him in July through to September 2002, but limited to 2002 accounting data, the CBA would have given its consent. The appellants submit that this passage should be read as meaning that if the position in 2002 had
(Page 22)
- been the same as the position in 2003, the CBA would have consented. However, they submit, by 2003 SDS's position had improved, so one should draw from this statement the inference that in 2002 the CBA would not have consented. This is a strained and unrealistic view of Mr Cowie's evidence. He had before him, in 2002, a series of reports showing SDS's position, in detail, from 2000 – 2003 (annexures to Mr Cowie's witness statement, 4 AB 779 – 962). In our view, he was saying that had a full report of the kind ultimately provided been made available in 2002, limited of course to the 2002 data (which Mr Cowie had before him), the CBA would have consented. No alternative understanding of that passage in his witness statement was put to him in cross-examination, nor was the basis of the assertion which he made explored in cross-examination.
60 In our view, the tenor of Mr Cowie's evidence was that, although certainty was not possible, it was very likely that, had it had the relevant information prior to 30 September 2002, the CBA would have given its consent. That evidence amply justified his Honour's opinion that the failure of the appellants to provide the information which they were required to provide materially contributed to the failure of the CBA to consent, so that the appellants were not able to terminate for non-fulfilment of that condition.
61 It is therefore our view that grounds 10 – 12 cannot succeed.
Conclusion
62 Although a number of interesting legal issues arose in the course of the submissions of the appellants and the respondent, it is our view, for the reasons given above, that both limbs of the appellants' grounds require a view of the facts to be taken which is inconsistent with the case run at trial, and inconsistent with his Honour's findings of fact. The factual attack being unsuccessful, the appeal must fail.
63 It is not necessary to consider the respondent's Notice of Contention.
7
18
1