Reid v Stephens Luxury Homes Pty Ltd
[2012] QSC 195
•27 July 2012
SUPREME COURT OF QUEENSLAND
CITATION:
Reid & Anor v Stephens Luxury Homes Pty Ltd & Anor [2012] QSC 195
PARTIES:
DAVID JOHN REID & SUZANNE REID AS TRUSTEE FOR THE REID FAMILY TRUST
(first plaintiff)
and
DAVID JOHN REID
(second plaintiff)
v
STEPHENS LUXURY HOMES PTY LTD ACN 122 488 911 AS TRUSTEE FOR STEPHENS
DRH TRUST
(first defendant)
and
RUSSELL STEPHENS
(second defendant)FILE NO/S:
8710 of 2009
DIVISION:
Trial
PROCEEDING:
Trial
ORIGINATING COURT:
Supreme Court at Brisbane
DELIVERED ON:
27 July 2012
DELIVERED AT:
Brisbane
HEARING DATES:
14-18 May 2012
JUDGE:
Dalton J
ORDER:
Judgment for the first and second plaintiffs against the first defendant in an amount of $1,250,000 together with interest of $352,220.11. Judgment in favour of the second plaintiff against the second defendant in the sum of $1,250,000 together with interest of $269,026.82.
CATCHWORDS:
Monies owing under contract; pre-contractual misrepresentations; contractual warranty as to provision of material information; guarantee and indemnity
Supreme Court Act 1995 (Qld)
Trade Practices Act 1974 (Cth)COUNSEL:
Mr IA Erskine for the plaintiffs
Second defendant in person on behalf of both defendantsSOLICITORS:
Tresscox Lawyers for the plaintiffs
Second defendant in person on behalf of both defendants
The claim in this proceeding is for monies owing pursuant to a share sale agreement and on a guarantee and indemnity. On 28 September 2007 the first and second plaintiffs contracted to sell the first defendant one of the two shares in David Reid Homes Australia Pty Ltd (DRH Australia) for an amount of $3.75 million. The first defendant was a company incorporated by the second defendant for the purpose of buying the share. The purchase price was to be paid in instalments:
(a)$1.25 million on completion;
(b)$625,000 on 1 January 2008;
(c)$625,000 on 1 July 2008;
(d)$625,000 on 1 January 2009;
(e)$625,000 on 1 July 2009.
The first and second instalments were paid according to the contract. On the date for the third payment only half of it ($312,500) was paid. It was agreed between the parties to vary the remaining payments so that the second half of the July 2008 payment was due on 1 December 2008 and that the two last payments, of $625,000 each, were paid on 1 July 2009 and 1 January 2010. The payment agreed – $312,500 – was made on 1 December 2008, but the last two payments have never been made. A defence to payment is mounted on the basis of pre-contractual and contractual representations having been made to the first defendant.
The second defendant guaranteed the payments under the share sale agreement, and indemnified the second plaintiff against those payments not being made, pursuant to a document dated 12 November 2007. There have been no payments made under this guarantee and indemnity. It is admitted on the defence that this is despite demand having been made. The defence to the claim under the guarantee and indemnity rests upon the second defendant establishing that there is no money due under the share sale agreement because the first defendant has a counterclaim or set‑off to monies owing under the share sale agreement. That is, there is no independent defence to the claims on the guarantee and indemnity.
Background
The second plaintiff, Mr Reid, was a builder in New Zealand. Together with his father he set up a franchise system in New Zealand building David Reid homes. It appears that he made a deal of money doing that. At some point Mr Reid decided to sell his business in New Zealand and establish himself in Australia. He set up a company DRH Holdings (Australia) Ltd (Holdings), which was based in the Cook Islands. At all times material to this action Mr Reid controlled Holdings. Holdings was invested with the worldwide rights to build houses according to the David Reid systems. Holdings granted DRH Australia what was referred to as a master franchise of the David Reid home building system pursuant to a master franchise agreement dated 1 April 2004. Mr Reid and his wife were the only shareholders of DRH Australia until the share sale agreement. Mr Reid and Mr Baker were the directors of DRH Australia at the time of the share sale agreement. The effect of the share sale agreement was to sell one of the two shares in DRH Australia to Mr Stephens so that he and Mr Reid were equal shareholders in DRH Australia. Mr Stephens and Mr Baker became the directors of DRH Australia. Mr Reid remained in control of Holdings.
The business model behind DRH Australia was that it would recruit investors who wished to be licensed as franchisees, and that these individual franchisees would own and run businesses building homes to the David Reid system. Interposed between DRH Australia and these individual franchisees was what was termed a territory director. The idea was that there would be one territory director in each State. When an individual franchisee contracted to build a house, fees were payable up the line to the territory director, DRH Australia and Holdings. Individuals wishing to purchase a building franchise paid a fee of $200,000 to DRH Australia. A territory directorship also had to be paid for. And in each case, fees were passed up the line to Holdings. Selling franchises and territory directorships, and receiving fees when franchisees contracted to build a house, was how DRH Australia made, or was to make, its money.
Mr Stephens was a self-made Englishman who came on a visit to Australia in 2005. Somehow he found his way to a function hosted by DRH Australia. He applied to buy an individual franchise. The application form he filled in to do so said that he had assets of over $9 million. He had made this money establishing, running, and then selling, a company which sold cleaning products and toiletries in England.
Mr Stephens returned to England at the end of 2005 to organise a more permanent move to Australia. He returned, and on 1 May 2006 purchased the DRH Australia franchise business for which he had applied in August the previous year – Brisbane North – for the sum of $200,000. He had no experience building, or running a building company.
A year later Mr Stephens had purchased a second franchise – Brisbane West – and, in substance, the majority of a third franchise – Brisbane East. He set up a company to run all three franchises as one business. As well, over the next two years Mr Stephens purchased seven lots of land for use as sites for showhomes and built three speculative showhomes. The plaintiff sought to characterise Mr Stephens as an astute and aggressive businessman in these investments. He was certainly enthusiastic, but as will appear, in my view not astute in his investments concerning DRH Australia, including the purchase of the share in that company.
By May 2007 Mr Stephens was also looking to buy a share in DRH Australia. Between May 2007 and 28 September 2007, when the share sale agreement was signed, Mr Stephens undertook what the parties called due diligence on the business conducted by DRH Australia. It was clear that he undertook these enquiries to ascertain whether he wished to buy a share in DRH Australia, and how much he ought to pay for that share, if he did decide to buy it.
During the due diligence period, Mr Stephens spent time in the DRH Australia office. There was a dispute about how many days a week, and for what period he attended the office, but Mr Stephens conceded that he was free to spend as much time there as he wished and access any information about DRH Australia he wished to see while he was there. There is evidence that he became involved in some of the day-to-day decisions which were being made in the company from time-to-time during that period.
As part of the due diligence, Mr Stephens made a trip to New Zealand to visit one of the David Reid franchises that existed there.
In addition, in May 2007, Mr Stephens attended a conference at Hamilton Island with the other existing DRH Australia franchisees. Mr Stephens conceded that by then he understood that the success of the business of DRH Australia depended on the success of the individual franchisees. However, remarkably enough, he did not take the opportunity to talk to the franchisees at this conference with a view to assessing their competence, or assessing the viability of their businesses. He seems to have been overawed by the experience. At that stage, a year after Mr Stephens had bought Brisbane North, that franchise business had no contracts to build. Yet Mr Stephens did not tell anyone this, and did not enquire how any other franchise business was performing. He explains this by saying that the occasion was not one which encouraged such discussion: all the talk was optimistic and self‑congratulatory. So it may have been, but Mr Stephens was contemplating spending millions of dollars to buy into a company which depended on the success in business of the attendees at the conference.
Mr Stephens appointed his own accountant (described on his letterhead as a firm of accountants and business advisors) to assist him with his due diligence process. That accountant assisted him in fixing the value of the share in DRH Australia before the first offer to purchase was made by Mr Stephens; assisted with technical accounting enquiries before and after this offer was made, and was involved in helping to understand, verify and be satisfied about the financial accounts for DRH Australia for the year ended June 2007. For all those purposes Mr Stephen’s accountant corresponded directly with the accountants for DRH Australia. So did Mr Stephens. The evidence was that the DRH Australia accountants were instructed by Mr Reid to provide any information requested by, or on behalf of, Mr Stephens. It is plain from the email traffic that Mr Stephens had considerable involvement in asking questions about the financial accounts for DRH Australia for the year ended June 2007. Further, it is clear that he and his accountant did request much accounting information about this set of accounts, and otherwise.
The purchase price for DRH Australia was set by an offer made by Mr Stephens after he and his accountant spent a considerable time determining the value of the share. After the parties agreed commercial terms, the process of due diligence continued, with Mr Stephens, his accountant and lawyer all involved in this. Mr Stephens had a lawyer acting for him in relation to the matter before, and during the time the share sale agreement was drawn up.
During the due diligence process, Mr Stephens made a deliberate choice not to investigate the businesses of the franchisees. His evidence was that he considered this would have taken unreasonable time and money on his part. Given the business model, as described above, and the short time for which the business conducted by DRH Australia had been operating, this was another remarkable omission.
At the end of the day the business of DRH Australia failed dramatically and Mr Stephens lost virtually all his money. As I have noted above, Mr Stephens was enthusiastic but naïve in his approach to purchasing the share in DRH Australia. The accountant who worked for DRH Australia thought the purchase price for the share surprisingly high. While one has sympathy for Mr Stephens, the case must be decided according to legal principle. And it must be said, the other remarkable feature of the due diligence period was the unrestricted access given to Mr Stephens to the business and accounts of DRH Australia.
The defendants’ case as pleaded is that there were pre-contractual representations and contractual representations made in breach of what was then s 52 of the Trade Practices Act 1974 (Cth), and that, insofar as they related to future matters, they were made without reasonable grounds. Further, that they were made in breach of a general duty of reasonable care. I record that, although the second defendant represented himself and the first defendant at trial, he had at the beginning of the action engaged lawyers, and the defence was well-pleaded and settled by counsel.
Pre-contractual Misrepresentations
The pleading on behalf of the defendants is that four pre-contractual representations were made. I will deal with each in turn.
The first representation is said to be that DRH Australia would be operated in the Pacific Islands. This is said to be the effect of an email sent by Mr Reid to Mr Stephens on 25 May 2007. It is difficult to understand the point of this plea, it must presumably be that the representation involved a promise that Holdings would support DRH Australia in this endeavour and that this would have been of benefit to DRH Australia. It pleaded that, in fact, the franchise business has never been marketed in the Pacific Islands. It was not pleaded, or proved, that such a venture would have been successful. Nor was there any real identification of what geographical area was meant by the expression the Pacific Islands.
The email of 25 May 2007 relied upon in the defendants’ pleading as containing the representation was not disclosed in the proceedings. The plaintiffs made a r 222 request for it, but it was not produced in response. It was not tendered in evidence before me. There is no evidence otherwise which would enable me to conclude that this representation was in fact made. I need go no further than this in dealing with this plea, although it will be apparent from what I have already said that there are other problems with it.
The second representation is said to be that DRH Australia implemented the strategies listed in its “Business Plan”. The pleading is somewhat unclear as to what business plan is referred to, it may be that discussed under the next heading, the third representation. The representation is said to be implied from the provision of a copy of the master franchise agreement to the defendants by email on 25 May 2007.
Again, the email pleaded to have been sent on 25 May 2007 was not disclosed; produced after a r 222 request, nor tendered in evidence. At some point prior to the signing of the share sale agreement, Mr Stephens was provided with a copy of the master franchise agreement – he asked for changes to it which were made by a deed of variation dated 20 September 2007. The defendants did not prove how they came into possession of the master franchise agreement and therefore have failed to prove a representation by the plaintiffs in terms of their plea. That may be more than a technical point as is illustrated by the evidence in relation to representation 4 (below), ie., there is no certainty that one of the plaintiffs provided the copy to the defendants. Further, there is no proof that the copy was provided by email, or in any other way as to attract the operation of the Trade Practices Act 1974 (Cth), or Australian Consumer Law as it is now.
In any case, even ignoring these problems, I cannot see that the defendants have proved anything which would assist them by way of defence to this action.
The term “business plan” is defined in the master franchise agreement to mean an annual business plan to be prepared by DRH Australia in consultation with Holdings prior to the commencement of each trading year. Clause 9.16 of the master franchise agreement provides that DRH Australia and Holdings agree that each year they shall arrange for Holdings’ nominated accountant to prepare the business plan and that the business plan will include all budgeted sales and expenses together with marketing and business strategies to achieve the budgets. The master franchise agreement provides at cl 8.5 that DRH Australia shall comply with the business plan, “by implementing all strategies listed in the business plan and using its best endeavours to meet the sales budgets and other targets included in the business plan to promote the business system.” The business system is defined to mean the distinct business system established by Holdings including the intellectual property belonging to Holdings, in essence the David Reid home building system.
I am not convinced that if he did provide a copy of the master franchise agreement to Mr Stephens, Mr Reid was impliedly representing that all provisions of it had been complied with by both Holdings and DRH Australia. Further, before the share sale agreement was made, it ought to have become apparent to Mr Stephens that the master franchise agreement was not complied with by DRH Australia and Holdings, so far as it created obligations in relation to the preparation of business plans. In particular, it should have been apparent that there was no business plan prepared by accountants which contained strategies such as are referred to in cl 8.5 of the master franchise agreement. The evidence was that Mr Stephens asked Mr Reid for a copy of a business plan during the due diligence and that Mr Reid prepared something then and there, which he described as a business plan, and sent it to Mr Stephens by email. This document is the source of the third representation (see below). It is clearly not prepared by an accountant and one would be hard pressed to identify any precise strategies listed in it.
There is no detail in the defendants’ pleading, nor was there any attempt to prove at trial, what strategies were not implemented, much less that any such failure to implement was causative of loss. I note that this is the only one of the four pre‑contractual representations pleaded where the pleading does not specifically address the way in which the representation is said to have been false (see paragraphs 34-37 of the defence).
Having regard to the foregoing, I do not accept that this pleaded pre‑contractual representation can found a good defence.
The third representation has two aspects. It is said to be implied from the provision of the business plan for DRH Australia for the period 1 July 2006 to 1 July 2007 by email sent 29 May 2007. It is said to have been thereby represented that DRH Australia had (i) systems which enabled franchisees to run a building company without specific building company experience or skills, and (ii) only franchisees who had sufficient financial resources to operate a franchise.
It is pleaded that, in fact, before 1 July 2007 DRH Australia (i) did not have systems enabling a franchisee to run a profitable building company with no specific building company experience and (ii) had sold franchises to four impecunious franchisees who did not have sufficient financial backing and resources to operate a franchise. It is further said that each of these four impecunious franchisees needed to borrow money to buy their franchises and were granted personal guarantees by Mr Reid in order to allow them to do so.
The defendants’ pleaded case is that by an email sent on 29 May 2007 they were provided with a copy of the business plan for DRH Australia for the period July 2006 to July 2007. Once again no such email was disclosed, produced in response to a r 222 request, nor tendered in evidence before me. Exhibit 14 before me was an email from Mr Reid to Mr Stephens sent on 30 May 2007 which attached two documents as “business plans and attached budget for the 2006-2007 financial year.” The trial was conducted on the basis that this is the same email as that referred to in the pleading, and that seems right, having regard to its contents.
The so‑called business plan contained the following dot point:
“Strengths – Systems that enable a franchisee to run a building company with no specific building company experience or skills. Having systems to enable us to track growth, productivity and financial health of our franchisees. No competing system in Australia on a national level.”
The same document contained the general statement, “Key strategies, - recruit high quality franchisees, train them well, ensure their staff are trained well …” It also contained the following under the heading “Risks and rewards”:
“— The biggest risk we face would be having a rogue franchisee who either does not follow our systems or becomes financially challenged. A failure early in our franchise implementation would create a threat to the brand and would impact on both recruitment and the future success of franchisees.
—We address these risks two fold, firstly our selection of franchisees has to be done carefully with regard to the franchisee’s financial strength as well as his ability to run the business, and secondly by maintaining a vigilant watch over his operation specifically in the first 12 month period.
—By selecting the right franchisee we are also limiting how much ‘hand-holding’ will be required before they become a mature business.”
Under the heading “Vital signs” the document reads:
“Are we experiencing cash flow problems? Some of our franchisees experienced cash flow issues. These instances can be attributed to poor job management (GC) or no urgency in making the sale (SCSth).
… Are we paying our bills on time? Some of the franchisees have been slow to pay some bills at times of cash flow issues. DRH Aust got involved and assisted through the process.”
A point is taken by the plaintiffs – if any representation was made in terms of this document it was not made by the plaintiffs but by DRH Australia or Holdings. I reject this having regard to the clear terms of the email – it was the second plaintiff who sent the document to Mr Stephens, apparently as part of answering enquiries made by Mr Stephens as he conducted his due diligence.
As to the first aspect of this representation, which I have called (i) above, I find that there was a representation made in the terms pleaded. But there was no evidence before me that that representation was false or misleading, apart from assertions in that regard by Mr Stephens. There are further problems in that Mr Stephens well knew what systems were available to individual franchisees by May 2007 as he had bought a franchise himself without any building experience or experience running a building company in May 2006. He must therefore have known what the true position was, so it is difficult to see how he relied upon the representation made, if indeed it was false and misleading. Further, no attempt was made to establish any causal link between the falsity of this misrepresentation and loss suffered by the defendants.
The second aspect of this misrepresentation, which I have numbered (ii) above, is again one which I find was made. It is closely linked to the contractual representation relied upon by the defendants (see below). Having regard to the evidence discussed under that heading, I am prepared to find that the misrepresentation was not only made, but it was at least misleading, if not false at the time it was made. However, I am against the defendants on questions of reliance on the representation and causation of loss. My reasons are the same as those expressed below in relation to the contractual representation.
The fourth representation is said to be that the projected net operating profit of DRH Australia for the year ended 30 June 2008 was $5.1 million and for the year ended 30 June 2009 was $9.9 million. This representation is pleaded to have been made because Mr Reid sent an email to Mr Baker showing this and Mr Baker sent it (on behalf of Mr Reid) to Mr Stephens on 15 June 2007.
The email said to contain the pleaded representation was not disclosed, produced in response to a r 222 request, nor tendered in evidence. The plaintiffs admit that an email was sent from Mr Reid to Mr Baker on 19 June 2007 enclosing the documents from which the pleaded figures are drawn, it was exhibit 17. Mr Reid denied that if Mr Baker sent the email it was done on behalf of Mr Reid. Mr Baker was present in Court during much of the trial in the public gallery and rather animated in a way which showed he supported Mr Stephens. Notwithstanding that, Mr Stephens did not call Mr Baker or produce any proof himself that Mr Baker sent an email to him in terms of the pleading. To the contrary, in cross‑examination Mr Stephens said he could not recall if Mr Baker did send the email to him, or whether it was sent by Mr Reid’s father. It has not been proved that the plaintiffs made the representation alleged.
In any event, it would be difficult to see how reliance on the figures in the budgets attached to the email could have been reasonable on the part of Mr Stephens. Mr Stephens had access to the actual financial performance for the 2007 financial year well before entering into the share sale agreement. The emails show that he was very involved in assessing these figures. The 2006/2007 accounts showed that in fact there had been a net operating profit of $484,982 for the 2006/2007 year, and a loss of $93,439 the previous year. The budgets on the email sent to Mr Baker (exhibit 17) showed a net operating profit of $2,070,728 projected for the 2006/2007 year. It is very difficult to see how there could be reasonable reliance on the projections for 2008 and 2009 when the figures projected for 2006/2007 were so wildly inaccurate, especially in circumstances where the figures for 2008 and 2009 were so obviously based on exceptionally fast growth in a company with a very short trading history.
The defendants plead that, in fact, the net operating profit of DRH Australia was $439,000 in the year ending 30 June 2008 and $93,000 in the year ending 30 June 2009. This was not proved, whether by tender of accounts or otherwise. Further, there was no evidence going as to matters of causation of the loss said to be caused by this misrepresentation.
Contractual Representation
The defendants’ pleading additionally relies upon a breach of a contractual warranty as to the information provided during the due diligence period. The share sale agreement provided:
(a)by paragraph 11.20 of Schedule 2, that all information disclosed under the due diligence to be undertaken pursuant to cl 2 of the share sale agreement would be complete, true and accurate and in no way misleading;
(b)by paragraph 11.21 of Schedule 2, that the information provided during the due diligence was prepared in good faith and after reasonable enquiries and did not omit anything material;
(c)by paragraph 11.22 of Schedule 2, a matter would be considered material if it would be material to disclose to a prudent intending purchaser of the franchise business or it might reasonably be expected to materially and adversely affect the financial position, operations, profitability or prospects of the finance business.
It is pleaded that there were material facts within the meaning of cll 11.21 and 11.22 that were not disclosed to Mr Stephens during the due diligence process. I find this established on the evidence. This is the point related to the second aspect of the third pre-contractual representation discussed above. Four of the franchisees licensed by DRH Australia as at June 2006 had been unable to pay the $200,000 franchise fee to DRH Australia at the time they purchased their franchise. They had obtained finance. Each of the four borrowings had been supported by personal guarantees from Mr Reid. Mr Reid said in his evidence that he had disclosed the fact that some franchisees had paid their franchise fee with finance, but conceded that was the limit of the information he gave Mr Stephens in this regard. Mr Stephens denied receiving even this information and swore that he was never told that Mr Reid had personally guaranteed the finance.
There is no doubt that the success or otherwise of the business of DRH Australia depended upon the success of the businesses of the individual franchisees. The individual franchise businesses were to construct homes which averaged in price at around $600,000 to $700,000, that is, they were not to be budget homes. The financial capacity of individual franchisees was important in assessing their viability – see the representations extracted at [32] above and see exhibit 12, and Mr Reid’s evidence about that at trial. The inability of franchisees to raise even $200,000 without assistance from Mr Reid was, in my view clearly something which was material within the meaning of the above provisions. Four represented quite a substantial proportion of franchisees which at that stage numbered only somewhere between 13 and 21 (the evidence is unclear as to this).
Mr Reid in his evidence tried to portray the impecunious franchisees’ inability to obtain finance otherwise than through one particular financier on his personal guarantee as relating to some peculiarity in thinking of financial institutions towards franchise funding, rather than being a reflection of the poor state of the impecunious franchisees’ financial status. I reject that evidence as a matter of commonsense and experience. Also, having regard to exhibits 42 and 43 before me, it is clear that Mr Reid knew the impecunious franchisees lacked the necessary financial resources to go ahead except in the extraordinary circumstance that he gave personal guarantees.
In the end, three of the four personal guarantees given by Mr Reid were called.
It is pleaded that, had the impecunious franchisees been disclosed by Mr Reid, the first and second defendants, respectively, would never have entered into the share sale agreement and guarantee and indemnity. There was no evidence of this. To the contrary, Mr Stephens swore that, had he known of the impecunious franchisees, he would have renegotiated the purchase price substantially. There is no evidence that Mr Reid would have re-negotiated the price. He did not display any tendency to compromise in the negotiations which did take place.
In any case, I am not convinced that Mr Stephens would have attempted a re-negotiation, or reduced his initial offer because of the information. Before entry into the share sale agreement and guarantee Mr Reid sent Mr Stephens an email which showed massive debt by the territory directors for the purchase price of those directorships which had, in effect, been financed by DRH Australia on very generous terms – exhibit 18. There is no evidence that this information caused Mr Stephens to reassess his position, or lower the values he placed on the share in DRH Australia. There is no evidence that he even asked to see documentation supporting the email assertions of this $2.3 million debt, which was apparently interest free, and to be repaid very slowly, and only out of sales, by the franchisees. Further, it is clear from the extracts at paragraph [33] above that quite concerning information as to the ability of some franchisees to continue in business was disclosed to Mr Stephens. Once again, there is no evidence whatsoever that any follow-up questions were asked about this, for example, as to how many franchisees were having cash-flow problems; to what extent DRH Australia had lent money to these franchisees as a consequence of their cash-flow problems; what the terms of those loans were; when, and whether, they were likely to be repaid, or how the franchisees concerned were performing in terms of their financial viability. As recorded under the heading, Background (above), I regard Mr Stephens’ approach to the purchase of the share as naïve. To an extent this is evident in the email correspondence before me – see for example exhibit 13. Mr Stephens’ thinking also displays elements of unreality both before and after his purchase of the share – exhibit 47, exhibit 33 and exhibit 20, all of which contain wildly exaggerated projections of wealth and profit but which even on casual analysis are based on little more than optimism.
It is pleaded that the true value of the share the subject of the share sale agreement was not more than $500,000. There is no evidence to support that plea.
It is clear that the business run by DRH Australia failed and failed spectacularly in a fairly short time after the share sale agreement. However, there was no evidence placed before me as would allow me to even guess at the cause of that failure, much less any safe basis for me to assume that it was because of the existence of the four impecunious franchises, or information which would have come to light had enquiries been made following the disclosure of the existence of these four impecunious franchisees. There were not in evidence any accounts for DRH Australia after 30 June 2007. The evidence touched upon the coincidence in timing between Mr Stephens’ purchase of the share (and indeed his buying three franchises, seven lots of land and building three showhomes) and the GFC. The effect of the GFC on prices for houses and land in Australia is notorious. As well, at some time soon after the share sale agreement, Mr Stephens lost considerable profits he expected from his English business investments. It may be that this so impacted on Mr Stephens’ cash-flow that he was unable to properly resource DRH Australia, and the three franchises Brisbane North, East and West. The evidence does not go so far as to establish this. However, the point is that there were many potential causes for the failure of the DRH Australia business so that I could not safely, even on the balance of probabilities, assume that it failed because of the existence of the four impecunious franchises, or that alternatively, by reason of the four impecunious franchises, the share bought by the first defendant was not worth more than $500,000 at the time of the share sale agreement.
Judgment
It follows from the foregoing that I cannot see any defence to the claims made by the first and second plaintiffs against the first and second defendants. Accordingly, I give judgment for the first and second plaintiffs against the first defendant in an amount of $1,250,000 together with interest of $352,220.11. I give judgment in favour of the second plaintiff against the second defendant on the guarantee and indemnity in the sum of $1,250,000 together with interest of $269,026.82.
As to my interest calculation, interest on monies under the share sale agreement is calculated pursuant to s 47 of the Supreme Court Act 1995 (Qld) and Practice Direction 6 of 2007 at a rate of 10 per cent. It is given on the first outstanding amount of $625,000 over a period of 1,121 days (a rate of $171.23 per day) from 2 July 2009 until 27 July 2012. In relation to the second amount of $625,000 due, it is given for a period of 936 days at a rate of $171.23 per day from 2 January 2010 until 27 July 2012.
Interest on the amount owing under the guarantee and indemnity is given pursuant to cl 3.2 of that document at a rate of 7.21 per cent for the first overdue payment of $625,000 and a rate of 8.15 per cent in relation to the second. Interest in relation to the first overdue payment is given for a period of 1,121 days from 2 July 2009 until 27 July 2012 at a rate of $123.46 per day. Interest in relation to the second overdue payment of $625,000 is given for a period of 936 days from 2 January 2010 until 27 July 2012 at a rate of $139.56 per day.
I will hear the parties as to costs, but my preliminary view is that costs ought to follow the event.
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