Quinlan v Riseley
[2016] WADC 173
•16 DECEMBER 2016
QUINLAN -v- RISELEY [2016] WADC 173
| DISTRICT COURT OF WESTERN AUSTRALIA | Citation No: | [2016] WADC 173 | |
| Case No: | CIV:582/2012 | 17 & 21 OCTOBER 2016 | |
| Coram: | SCOTT DCJ | 16/12/16 | |
| PERTH | |||
| 17 | Judgment Part: | 1 of 1 | |
| Result: | Damages assessed in favour of the first plaintiff in the sum of $160,000 | ||
| PDF Version |
| Parties: | DANIEL JOHN QUINLAN OBERON LIMITED MARK RANDELL RISELEY |
Catchwords: | Default judgment for damages for deceit to be assessed – Whether leave required pursuant to Bankruptcy Act 1966 (Cth) – Assessment When value of shares purchased in reliance on deceit to be assessed Turns on own facts |
Legislation: | Bankruptcy Act 1966 (Cth) s 58(3), s 82(2) |
Case References: | Coventry (as trustees as the Mike and Lyn Coventry Family Trust) v Charter Pacific Corporation Ltd (2005) 222 ALR 202 Foots v Southern Cross Mine Management Pty Ltd (2007) 241 ALR 32 Gould v Vaggelas (1985) 157 CLR 215 Grande Enterprises Ltd v Pramoko [2014] WASC 294 HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 Magill v Magill (2006) 226 CLR 551 Morellini v Adams [2011] WASCA 84 Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd (1997) AC 254 |
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
- IN CIVIL
- First Plaintiff
OBERON LIMITED
Second Plaintiff
AND
MARK RANDELL RISELEY
Defendant
Catchwords:
Default judgment for damages for deceit to be assessed – Whether leave required pursuant to Bankruptcy Act 1966 (Cth) – Assessment - When value of shares purchased in reliance on deceit to be assessed - Turns on own facts
Legislation:
Bankruptcy Act 1966 (Cth) s 58(3), s 82(2)
Result:
Damages assessed in favour of the first plaintiff in the sum of $160,000
Representation:
Counsel:
First Plaintiff : Mr G M Cridland
Second Plaintiff : Mr G M Cridland
Defendant : In person
Solicitors:
First Plaintiff : GG Legal
Second Plaintiff : GG Legal
Defendant : Not applicable
Case(s) referred to in judgment(s):
Coventry (as trustees as the Mike and Lyn Coventry Family Trust) v Charter Pacific Corporation Ltd (2005) 222 ALR 202
Foots v Southern Cross Mine Management Pty Ltd (2007) 241 ALR 32
Gould v Vaggelas (1985) 157 CLR 215
Grande Enterprises Ltd v Pramoko [2014] WASC 294
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640
Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281
Magill v Magill (2006) 226 CLR 551
Morellini v Adams [2011] WASCA 84
Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd (1997) AC 254
1 SCOTT DCJ: This is an assessment of damages for deceit pursuant to a judgment in default entered in favour of the plaintiffs against the defendant on 5 July 2013.
2 At all material times:
(a) The first plaintiff was a director and shareholder of the second plaintiff.
(b) The second plaintiff was a company incorporated in the United Kingdom and was an investment vehicle operating for the benefit of the first plaintiff.
(c) The defendant was the managing director, secretary and a shareholder of Validus International Pty Ltd (Validus) which carried on business as a provider of international healthcare services.
3 In this action the plaintiffs claimed damages against the defendant:
(a) For deceit; alternatively
(b) Pursuant to s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth); alternatively
(c) Pursuant to s 1041I of the Corporations Act 2001 (Cth); alternatively
(d) Pursuant to 82 of the Trade Practices Act 1974.
4 In a lengthy statement of claim, comprising 155 paragraphs, the plaintiffs allege that:
(a) From in or about 2004 the defendant intended that Validus conduct a healthcare business by which it would earn fees for arranging for patients living overseas to undergo medical and surgical treatment in Western Australia which was to be provided by local medical practitioners (business).
(b) From in or about 2004 the defendant actively sourced start-up capital and subsequently further capital from investors in return for which investors would be issued shares in the capital of Validus.
(c) From early January 2005 to February 2008 the defendant made representations to the first plaintiff about and concerning the business which the defendant knew to be false (false representations).
(d) The false representations were made with the intention of inducing the first and second plaintiffs to invest in Validus by purchasing shares issued in the capital of that company.
(e) The defendant maintained the falsity of the representations by at any time failing to disclose to the plaintiffs that the representations were untrue.
(f) In reliance upon the false representations the first plaintiff purchased shares issued in the capital of Validus (shares), particulars of which are as follows:
Particulars
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(g) Validus ceased trading in or about 2009.
5 The defendant filed a defence to the statement of claim.
6 The damages which the plaintiffs claim are contained in the particulars of damages filed 13 October 2016. These damages are alleged to amount to the total sum of $160,000 paid by the first plaintiff to Validus for shares in Validus together with interest at the rate of 6% per annum pursuant to s 32 of the Supreme Court Act 1935.
7 On 27 June 2013 Deputy Registrar Hewitt made a springing order (springing order) in terms that unless within seven days the defendant filed and served specific further and better particulars of his defence and an affidavit of further and better discovery the defence be struck out and judgment be entered for the plaintiff [sic] with costs.
8 The defendant failed to comply with the springing order by reason of which on 5 July 2013 judgment in default of compliance (judgment) was entered in terms that:
1. the defence be struck out;
2. there be judgment for the plaintiffs against the defendant for damages to be assessed for deceit together with such interest as the judge conducting the assessment shall determine; and
3. the defendant pay the plaintiffs' costs of the action to be taxed.
9 The matter before me is the assessment of damages for deceit.
10 The evidence at the hearing of the assessment of damages comprised:
(a) affidavit of the first plaintiff sworn 12 January 2016 and annexures;
(b) viva voce evidence from the first plaintiff;
(c) affidavit from Harvey Eastwood Pickup (Mr Pickup) sworn 16 January 2016 and annexures;
(d) viva voce evidence from Mr Pickup.
11 The defendant did not give evidence by affidavit or otherwise nor was any evidence adduced on his behalf.
12 The plaintiffs say that Validus has not traded since 2009 and is deregistered as a result of which the shares are worthless.
Effect of bankruptcy of defendant
13 From the court file it is apparent that the defendant became bankrupt on 20 September 2016 as a consequence of his debtors' petition. The question arose as to whether leave of the Federal Court was required in order for the assessment of damages to proceed.
14 After hearing from the parties I found that leave was not required. The reasons for that determination were as follows.
15 The relevant provisions of the Bankruptcy Act 1966 are as follows:
58. Vesting of property upon bankruptcy—general rule
…
(3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.
...
82. Debts provable in bankruptcy
(1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.
…
(2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.
16 In Coventry (as trustees as the Mike and Lyn Coventry Family Trust) v Charter Pacific Corporation Ltd (2005) 222 ALR 202 the High Court held the following [5]:
The central question in the appeal hinges on the meaning of s 82(2) of the Bankruptcy Act 1966 and, in particular, what is meant by a demand in the nature of unliquidated damages arising otherwise than by reason of a contract or promise. That expression, used to identify an exception to the definition of debts provable in bankruptcy, has been held not to include a claim for unliquidated damages for fraudulent misrepresentation which induced the party misled to make a contract with the bankrupt (a "bilateral" case). That is, such a claim for damages has been held to be a debt provable in the bankruptcy, and a claim that was to be set off against a claim by the bankrupt estate. But a claim for unliquidated damages for fraudulent misrepresentations where the representations induced the claimant to make a contract with another (a "tripartite" case) has been held not to be a claim provable in the bankruptcy. The bankrupt having made no contract with the party who claims damages from the bankrupt, the claim for damages for fraudulent misrepresentation has been held to be a demand arising otherwise than by reason of a contract or promise.
17 The determination by the High Court applies to this case in which the plaintiffs claim unliquidated damages for deceit in circumstances where they were induced by fraudulent representations by the defendant to make a contract (to purchase shares) with Validus.
18 No contract was made between the bankrupt defendant and the plaintiffs. Consequently the claim for damages for deceit amounts to a demand arising otherwise than by reason of a contract or promise and is thereby not provable in bankruptcy.
19 As to any costs ordered against the defendant the High Court in Foots v Southern Cross Mine Management Pty Ltd (2007) 241 ALR 32 held that a costs order in similar circumstances did not attract the provisions of s 82(1) of the Bankruptcy Act 1966 and was not a provable debt to which the bankrupt was subject at the time of bankruptcy.
Issues for determination
20 The parties agreed in argument that by the judgment the elements of the tort of deceit were satisfied with respect to each of the transactions in which shares were purchased in Validus. Those elements being:
(a) The defendant made the false representations pleaded in the statement of claim.
(b) The defendant made the false representations knowing them to be false or at least in the absence of any genuine belief that they were true.
(c) The defendant made the false representations with the intention that they be acted upon by the plaintiffs.
(d) Alternatively if fraud can be established, it is immaterial that there was no intention on the part of the defendant to cheat or injure the plaintiffs.
(e) The plaintiffs acted upon the false representations. See Magill v Magill (2006) 226 CLR 551 [37].
21 The only issue which falls for determination in this assessment is the provable loss sustained by the plaintiffs or either of them. Specifically, as that issue has been joined by the parties, whether the value of the shares purchased by the first and/or second plaintiff are to be brought to account having regard to their value at the date of purchase or at the date of this assessment.
Plaintiffs' case
22 The plaintiffs say that the appropriate measure of damages is the difference between the sums paid for the shares and the residual value of the shares at the date of this assessment because the false representations made by the defendant which constituted deceit in reliance upon which the plaintiffs purchased each tranche of shares, were continuous.
23 That is that the defendant at no time informed the plaintiffs that the false representations upon which they had previously relied and continued to rely were in fact untrue thereby inducing the plaintiffs to retain the shares. Alternatively the plaintiffs say that by reason of the defendant's deceitful conduct they were locked into the shares which were purchased.
24 The defendant's case is that the ordinary measure of damages in deceit is the difference between the real value of the shares at the date of each purchase and the price paid by the plaintiffs. The defendant says that that is the measure of damages in this case. The defendant says that there is no evidence of the value of the shares at the date of purchase such that damages can be no more than nominal. Alternatively the value of the shares was represented by the price for which shares were then issued to other investors, and as such being the prices paid by the plaintiffs, there was no loss.
Which plaintiff is entitled to damages
25 In the prayer for relief in the statement of claim the plaintiffs claim a joint entitlement to damages. There can be no joint entitlement. In the particulars of damage dated 13 October 2016 filed in support of this assessment, the plaintiffs say that each of the shares purchased in the capital of Validus were paid for by the first plaintiff. That was so notwithstanding that some of the shares were registered, in the records of Validus, in the name of the second plaintiff.
26 In the premises it is my view that the party entitled to any damages is the first plaintiff.
The law
27 The ordinary measure of damages in deceit is the difference between the real value of the thing acquired at the date of its acquisition and the price paid for it: Morellini v Adams [2011] WASCA 84 [41]; Potts v Miller (1940) 64 CLR 282, 297 – 298; Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281, 291; Gould v Vaggelas (1985) 157 CLR 215, 220; HTW Valuers(Central Qld)Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640.
28 In Morellini the court observed that the ordinary rule is no more than a guide to the assessment of damages: [45].
29 In Morellini the court observed at [42] (citing HTW [36]) that the real value is what the asset was truly worth or what would have been a fair price to be paid in the circumstances.
30 A primary reason for the common adoption, in assessing damages in deceit, of the test of comparing the price paid for an asset with its true value when acquired is the desirability of separating out losses resulting from extraneous factors in the later history of the asset which were not related to the deceit. See HTW [65].
31 The court in HTW [66] approved the statement of the House of Lords majority in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd (1997) AC 254 that the general rule will normally not apply where either the misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset, or where the circumstances of the case are such that the plaintiff is, by reason of deceit, locked into the property.
32 In Grande Enterprises Ltd v Pramoko [2014] WASC 294 Le Miere J [79] referred to HTW and said that a plaintiff induced by misleading conduct to enter into a transaction is entitled to be fully compensated. Where the plaintiff would not have entered into the transaction but for the misleading conduct and the investment cannot be realised then the appropriate measure of damages is the difference between the amount paid by the plaintiff for the asset and the value of the asset at the date of trial.
Evidence
Daniel Quinlan
33 In his affidavit Mr Quinlan confirmed the accuracy of the statement of claim in which the false representations, his reliance on those representations and the acquisition of each tranche of shares were detailed.
34 In his affidavit he deposed the fact that:
(a) the false representations were made by the defendant in conjunction with his ongoing requests to Mr Quinlan to invest in Validus (54);
(b) he believed in the truth and accuracy of each of the false representations made to him by the defendant (55);
(c) the defendant did not correct any errors and falsehoods in those false representations (56);
(d) as a consequence of the defendant's silence in failing to correct those false representations and relying upon the truth of those false representations he completed the share offer forms provided to him by the defendant, contacted the defendant to accept the offers the defendant had made to him to invest in Validus, made five investments in new shares to be issued in Validus and made payments totalling $160,000 for those new shares (58).
(e) Validus is deregistered and the shares are untradeable.
35 In cross-examination Mr Quinlan said that he had been investing in shares for 30 years including shares in public unlisted companies and private companies.
36 He said that he had invested in public and private ground capital raisings and currently held shares in small cap (under $100 million) companies and companies under $50 million. He said that they were all publicly traded companies bar one.
37 He agreed that companies listed on the stock exchange are a liquid stock and ones not on the stock exchange are probably not so liquid.
Harvey Pickup
38 He swore an affidavit on 16 January 2016 to which were attached a number of documents relating to Validus. His affidavit and attachments comprised his examination-in-chief.
39 The attachments to Mr Pickup's affidavit included:
(a) electronic MYOB files received from the accountants for Validus under subpoena which included accounts of Validus for the 2006 - 2013 financial years;
(b) letters of instruction from GG Legal to him dated 7 April 2015 and 26 October 2015;
(c) his reports dated 10 April 2015 and 16 January 2016 to GG Legal.
Mr Pickup's report of 10 April 2015
40 Mr Pickup confirmed that his opinion was sought on:
(a) the most appropriate method for determining the true or real value of shares in Validus at the date of the report relying on the assumptions and information made available to him;
(b) why that was the most appropriate method; and
(c) the true or real value at the date of the report of the shares in Validus held by the plaintiffs.
41 Mr Pickup was not instructed and nor did he venture an opinion as to the value of shares in Validus which were purchased by the first plaintiff as at the respective dates of purchase.
42 The assumptions upon which he relied having regard to the instructions to him and after reviewing all documents provided to him were:
(a) Validus had never made a profit. He said that the financial statements would suggest that to be the case.
(b) Validus had never paid dividends which he said was also suggested by the financial statements.
(c) The company's subsidiary Validus Singapore Pte Ltd made significant losses in every year since incorporation except for a small profit in 2009 of $1,375 which appeared to be confirmed from the documents.
(d) Mesdames McCann and Norrish, each of whom were at one stage the chief financial officer of Validus, were concerned with the solvency of the company during various times in the calendar year 2007 and communicated that to the defendant.
(e) In October 2013 the defendant stated under oath in court proceedings that the company was insolvent.
(f) The company had not traded in an operational sense since the GFC.
(g) Since June 2013 the company had no officers managing or operating the company or ensuring its statutory requirements were met.
(h) At October 2013 the company had cash at bank of less than $100.
43 Mr Pickup said that in 2006 Validus adopted a business plan to enter what the defendant considered to be a growth market in the healthcare industry by facilitating the placement of international patients for those seeking either better quality, better service or more affordable healthcare than was available in their country of residence. By the business plan Validus proposed to initially concentrate on the Australian and south-east Asian markets.
44 The principal revenue stream was to be a 25% patient management fee applied to all medical costs and surgical supplies. Mr Pickup referred to a presentation to investors in 2007 (an exact date being unknown) in which Validus projected revenues for the calendar years of 2007, 2008, 2009 and 2010 of 1.1 million, 2.2 million, 2.7 million and 3.3 million respectively. He then said in a further document, referred to as a financial model dated October 2007, the projected revenues had risen to 1.8 million, 9 million, 13.9 million and 21.5 million respectively for those calendar years.
45 He observed that the subsequent presentation was assumed by him also to relate to calendar years because the actual revenue in the 2007 fiscal year of $329,000 would at that stage have already been known.
46 During 2008 he said from the documents he had received it was clear that the company's revenues declined from the 2007 levels and significant losses continued to be incurred. By June 2008 it was evident, Mr Pickup opined, that the business plan was failing. The company effectively wound down its operations and ceased trading during 2009.
Valuation methodologies
47 Mr Pickup said that the traditional method of valuing an actively trading business is the capitalisation of earnings method which involved an estimation of the EBIT (earnings before interest and tax) of the business based principally on historical results and the capitalisation of such earnings at an approximate rate to reflect risk and normal economic return from which is determined the value of the enterprise as a whole including the tangible assets and liabilities required to operate the business such as stock, plant and equipment, debtors and creditors. He said that the value attached to those net tangible operating assets is deducted from the valuation of the business as a whole to arrive at the value of goodwill.
48 He said that where there is no history, or reasonable prospect of earnings in the immediate or medium-term, either past or future, or the capitalisation of earnings does not result in any goodwill, the business is uneconomic or at the margin of economic viability. In such circumstances in his opinion the business is valued according to its NTA (net tangible assets) usually on a going concern basis unless there is the prospect of imminent cessation in which case break-up values would need to be considered.
Current valuation of shares
49 Mr Pickup said that from the documents received by him:
1. During its operating phase from 2006 – 2009 Validus had never derived a profit. Conversely it had incurred substantial losses as follows:
• 2006 – loss of $193,000 on a turnover derived from international patients of $9,000
• 2007 – loss of $701,000 on a turnover derived from international patients of $329,000
• 2008 – loss of $88,000 on a turnover derived from international patients of $306,000 which he noted was the result after accounting for a profit of $142,000 on the sale of a building which appeared not to be part of the company's core business
• 2009 – loss of $55,000 on a turnover from international patients of $69.
- He said it was evident from these figures and the fact that the company had been inoperative since 2009 that an earnings basis evaluation was inappropriate and Validus ought to be valued on a NTA basis.
2. At 30 June 2009 the company's balance sheet showed a deficiency of $74,000. He said that for the purposes of the report he took this position at face value however he made a number of disparaging comments on some 2009 balance sheet items and other issues which he said would impact adversely on the actual size of the deficiency.
50 His opinion was that given the deficiency of Validus on an NTA basis the company had a nil or negligible fair market value and the shares held by the plaintiffs accordingly had a nil or negligible value at the date of his report.
51 In his report of 16 January 2016 he was referred to a number of matters which he said did not materially affect his conclusions in his earlier report.
52 In cross-examination he was referred by the defendant to the impact of the GFC on the level of trade in the health industry in which Validus was involved.
53 Mr Pickup said that he did not consider himself competent to comment on whether there was likely to have been any effect of the GFC on that industry.
54 He was asked whether the GFC would have affected the ability of Validus to attract new investment. He said that he understood there to have been nervousness everywhere with the onset of the GFC. He said he could not opine specifically with regard to Validus but said that there may have been an effect.
55 He agreed that the GFC, generally, may have made it harder for companies to raise debt notes of any form but that would depend on the particular industry. In that regard he gave an example of the mining sector in Western Australia which he said had continued to be quite buoyant after the GFC.
56 He was asked whether he believed that the GFC would have negatively impacted on the revenues of Validus in 2008 and 2009. He said he could only answer that question in general terms as he was not an economist but that the effects on the Western Australian economy tended to be less and more lagged than they were throughout other countries.
57 He said he imagined it would have had an effect but as to quantum he really could not say.
58 He was asked about the preferred method of valuing a start-up entity and said that the entity had to be based on a business plan, the assumptions behind the business plan, the credibility of those assumptions and the personnel involved. He agreed that with respect to a start-up situation a business would not generally achieve its level of earnings immediately. He said that valuing start-up entities was so speculative that he did not get involved.
59 He was asked about the value which he would attribute to a deferred tax asset in the 2007/2008 year. He said that the question from an accounting standpoint was whether it was probable that a future tax profit would be available against which the unused tax losses could be utilised. One would need to consider, he said, the prospect of future maintainable earnings. He said that with respect to Validus his opinion was that there was no value in the tax losses.
60 He was asked whether in his experience he had seen companies being valued as a multiple of revenue. He said that as a general rule he disagreed with that methodology because it is thought to be an inferior methodology to base a valuation purely on turnover rather than profit.
Conclusion as to the date(s) upon which the shares purchased by the first plaintiff ought to be valued
61 In my view in determining the damages suffered by the first plaintiff because he altered his position in reliance upon the defendant's false representations it is not appropriate to assess the value of the shares purchased by the first plaintiff on the respective dates of acquisition.
62 I have reached that conclusion because:
(a) The deceitful conduct on the part of the defendant was constituted by false representations being made to the first plaintiff which were continuous. In reliance upon those false representations the first plaintiff continued to purchase new shares issued in the capital of Validus.
(b) The fact that the first plaintiff did not effect a sale of those shares or endeavor to effect the sale of those shares resulted from the continuous nature of the false representations.
(c) The falsity of the representations made by the defendant were not made known to the first plaintiff until after Validus effectively ceased business.
(d) Further, there was no real market for those shares held by the first plaintiff. As the defendant confirmed from the bar table, there was no occasion in the period during which Validus conducted business upon which any shares issued in the capital of the company to any person, were traded.
(e) The price paid by investors for shares issued in Validus could not be said to be representative of any market value because it is reasonable to infer, as I do, that those shares were issued for a price which was infected by similar representations which were made to and relied upon by the first plaintiff.
63 In this assessment of damages the time for valuing the shares in Validus purchased by the first plaintiff is at the date of this assessment of damages.
64 To that end I am satisfied from the evidence of Mr Pickup that the value of those shares is undeniably nil.
65 In the premises the damages sustained by the first plaintiff amount to the total price paid by him for the shares namely $160,000. There will be judgment for that sum plus interest at the rate of 6% per annum pursuant to s 32 of the Supreme Court Act 1935 as and from the respective dates of payment for each tranche of shares.
66 The orders I consider appropriate are:
1. Damages for deceit be assessed at $160,000.
2. The defendant do pay the first plaintiff the sum of $160,000 together with interest thereon at the rate of 6% per annum pursuant to the provisions of the Supreme Court Act 1935 as and from the respective dates upon which the first defendant paid for shares in Validus.
3. The defendant do pay the first plaintiff's costs of the action and any reserved costs to be taxed if not agreed.
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