Ridgecape Holdings Pty Ltd v Cobb

[2006] WASC 33

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION:   RIDGECAPE HOLDINGS PTY LTD & ANOR -v- COBB & ANOR [2006] WASC 33

CORAM:   BLAXELL J

HEARD:   7 & 27 FEBRUARY 2006

DELIVERED          :   28 FEBRUARY 2006

FILE NO/S:   CIV 1113 of 2006

BETWEEN:   RIDGECAPE HOLDINGS PTY LTD (ACN 112 079 740)

First Plaintiff

H2ONLY WATER PURIFICATION SYSTEMS PTY LTD (ACN 079 709 925)
Second Plaintiff

AND

ANDREW COBB
First Defendant

PRESTON POINT NOMINEES PTY LTD (ACN 062 173 719)
Second Defendant

Catchwords:

Injunction - Application for interlocutory injunction restraining appointment of Receiver under deed of charge - Turns on own facts

Legislation:

Nil

Result:

Grant of interlocutory injunction

Category:    B

Representation:

Counsel:

First Plaintiff                :     Mr M H Zilko SC

Second Plaintiff            :     Mr M H Zilko SC

First Defendant             :     Mr M L Bennett

Second Defendant         :     Mr M L Bennett

Solicitors:

First Plaintiff                :     Maxim Litigation Consultants

Second Plaintiff            :     Maxim Litigation Consultants

First Defendant             :     Bennett & Co

Second Defendant         :     Bennett & Co

Case(s) referred to in judgment(s):

Graham & Ors v Commonwealth Bank of Australia (1988) ATPR 40‑908

Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161

Mainbanner Pty Ltd v Dadincroft Pty Ltd (1988) ATPR 40‑896

Town and Country v Partnership Pacific (1988) 20 FCR 540

Case(s) also cited:

Nil

1. BLAXELL J:  This is an application for an interlocutory injunction to restrain the second defendant from exercising its rights under a deed of fixed and floating charge over the assets of the plaintiffs.

2. The deed of charge secures the balance of moneys due from the first plaintiff to the second defendant for the purchase of shares in the second plaintiff.  However the first plaintiff claims that it is entitled to set off various losses allegedly suffered as a result of misrepresentations said to have been made by the first defendant on behalf of the second defendant at the time of the negotiation of the agreement.  The total quantum of these claims exceeds the balance due under the sale agreement.

The relevant background

1. At all material times the second plaintiff has conducted an Australia wide business of selling and renting water coolers and purification equipment.  Until 31 December 2004 the first defendant was the sole director and secretary of the second plaintiff, and the second defendant was the owner of all of that company's issued share capital.

2. On 31 December 2004 that shareholding was sold to the first plaintiff, pursuant to an agreement reached following negotiations between the parties over the preceding few months.  The purchase price was the sum of $2,450,000, which sum was however to be adjusted if the "net tangible assets" of the second plaintiff as at 31 December 2004 were subsequently found to be less than $300,000.  The purchase price was payable by the sum of $2,000,000 on 31 December 2004 (less an "NTA retention amount" of $100,000), and by payment of the balance on 31 December 2005.

3. The agreement also provided that within 30 days of completion of the sale, the second defendant would provide a nominated accountant with a consolidated statement of the second plaintiff's financial position as at the date of sale.  These "completion accounts" were to be reviewed by the accountant who would then certify the "net tangible assets" (being the sum of tangible assets, less liabilities of the second plaintiff).

4. In the event that net tangible assets were equal to or greater than $300,000 the "NTA retention amount" was to be paid to the second defendant.  However, in the event that the net tangible assets were less than $300,000 then (after allowing for the NTA retention amount) the extent of that deficit was to be made good by the second defendant by way of a payment to the first plaintiff.

5. The first defendant was a party to the share purchase agreement as "guarantor".  The agreement also provided that both defendants represented and warranted that a total of 144 statements of fact.  As set out in the schedule were "true, accurate and not misleading".

6. Concurrently with the share purchase agreement, the plaintiffs and the second defendant executed the deed of fixed and floating charge.  The deed provided for the appointment of a receiver upon there being an "event of default" (which included non‑payment of the balance of purchase price).

7. The sale of the shares was duly completed on 31 December 2004, and the first plaintiff made payment to the second defendant of the sum of $2,000,000 less the "NTA retention amount" of $100,000.  The second defendant subsequently provided the "completion accounts" to the nominated accountant, but the accountant certified the "net tangible assets" to be a negative figure of minus $33,532.  Although the parties are in dispute over this figure, there has been no attempt to resolve this dispute in accordance with specific dispute resolution procedures as set out in their agreement.

8. The first plaintiff did not make payment of any balance of purchase price on 31 December 2005, and it claims to be entitled to set‑off amounts totalling $1,136,711.  On 1 February 2006 the second defendant served a notice of demand on the first plaintiff requiring payment of the balance of $450,000 purchase price within seven days.  The first plaintiff failed to comply with this notice and thereby committed an "event of default" within the meaning of the deed of charge.  Accordingly, the first plaintiff now seeks an interlocutory injunction to restrain the second defendant from exercising its rights under the deed of charge.

The issues raised by the first plaintiff's claims

1. I have before me affidavits from the parties outlining the first plaintiff's nine separate heads of claim (totalling $1,136,711) and the defendants' response to each of the same.  A summary of those claims, and the issues that arise, are as follows:

(1)  False invoice and overstatement of profit:

1. It is common ground that the accounts of the second plaintiff for the month of August 2004 included an invoice in the sum of $25,000 for the sale of 40 coolers to "Autocom".  That invoice was matched by the deposit of a cheque from "Q Contracting" (a business owned by the first defendant's brother‑in‑law).  There was in fact no sale of coolers to Autocom, and the $25,000 was deposited by way of a loan from the brother‑in‑law.  According to the first defendant, the accounting system did not allow for the recording of loans, so a "dummy" sales transaction was created in order to record the transaction.  The loan was subsequently repaid by the first defendant.

2. However on 29 September 2004 the first defendant wrote to Mr Jeffery Love (who was conducting negotiations on behalf of the first plaintiff) providing up‑to‑date revenue and net profit figures which included the 4 August 2004 transaction as a sale.  The plaintiff contends that for this and other reasons, there was an over statement of profits for the quarter ended 30 September 2004 totalling the sum of $55,171.

3. At that time the parties were negotiating a purchase price for the shares based upon a multiple of annual net profits.  There had been an offer to purchase at a multiple of 3.25 followed by a counter offer to sell at a multiple of 5 times annual profit.  In the end, the parties settled on a multiple of 4.91.

4. Although that multiple was applied to the annual profit for the period ending June 2004, the first plaintiff claims that it relied on the figures for the subsequent quarter when agreeing on the purchase price that it did.

5. As a result of these matters the first plaintiff claims that it has suffered a loss of $275,855.  Although the basis on which this figure is calculated is not entirely clear to me, I understand that it is in some way meant to be representative of the component of purchase price attributed to the overstated profits.

6. The defendants take the stance that the purchase price was calculated on the basis of the actual audited profit figures for the year ended June 2004.  Furthermore, the first plaintiff must necessarily have relied upon a due diligence investigation conducted prior to completion of sale and have satisfied itself as to the profitability of the business.

(2)  Unrepeatable Big W profits:

1. It is common ground that during the course of negotiations the first defendant represented to the first plaintiff that Big W was an important customer of the second plaintiff.  However, the first plaintiff asserts that at all material times the first defendant was aware that the second plaintiff's products were on Big W's "quit list" (viz Big W would not be continuing to stock those products).  Big W accounted for 11.5 per cent of the second plaintiff's sales during the year ended June 2005, and the first plaintiff contends that the subsequent loss of that business has diminished the value of its purchase by some $279,206.

2. The first defendant has deposed that he was not at any time aware that the second plaintiff's products had been placed on Big W's "quit list".  (The materials before me indicate that this assertion is likely to be contradicted by witnesses from Big W.)

(3)  Cost of servicing Queensland rental customers:

1. At all material times the business of the second plaintiff has included the rental of some 75 water coolers to customers in Queensland.  The rental contracts require regular servicing of the water coolers and the first plaintiff claims that that servicing was not being carried out prior to 31 December 2004.  Consequently, the costs of meeting these contractual requirements did not appear in the accounts, and it is said that this has resulted in a diminution of value of the business estimated at $49,500.

2. The first defendant denies that there was any breach of the contractual service obligations or that there was any omission from the second plaintiff's accounts.

(4)  Use of non‑compliant pressure limiting valves:

1. The first plaintiff claims that many of the products sold by the second plaintiff prior to 31 December 2004 did not comply with relevant plumbing codes or Australian standards in that they did not contain a back‑flow prevention device.  It is also asserted that the first defendant was aware of this non‑compliance.  Claims have been made for damage occasioned by the use of non‑compliant units, and there are also implications for the second plaintiff's future insurance.  It is claimed that the retro fitting of units with back‑flow prevention devices, the additional costs of manufacturing compliant systems, and additional insurance costs have resulted in losses totalling $152,200.

2. The first defendant has deposed that he was unaware of any breach of plumbing codes or Australian standards, and that he has never had reason to undertake any investigation into this issue.

(5)  Costs of licensed plumber:

1. It is claimed that prior to 31 December 2004 the second plaintiff was in breach of regulatory requirements in failing to perform installations without supervision by a licensed plumber.  Accordingly, the costs of engaging a licensed plumber did not appear in the company accounts.  Subsequently, the second plaintiff has been obliged to engaged a licensed plumber and the "concomitant decrease in the value of the business" is $57,600.

2. The first defendant has deposed that he was unaware of the requirement to engage a licensed plumber.

(6)  Refrigerants Import Licence:

1. The Ozone Protection and Synthetic Greenhouse Gas Management Act 1989 prohibits the import of refrigeration equipment containing hydro fluorocarbons ("HFC's") without a licence.  The first plaintiff claims that prior to the completion date the second plaintiff imported coolers containing HFC's without a licence.  Consequently, the second plaintiff has been obliged to replace the refrigerant in 195 coolers supplied to customers prior to the completion date.  The diminution in value of the business attributable to these costs is said to be $39,088.

2. The first defendant contends that the gas used in the refrigerant systems complied with all relevant Australian standards and that he was unaware of any requirement for a licence.

(7)  Net tangible assets deficit:

1. The first plaintiff claims $233,532 by reason of the deficit in the net tangible assets of the second plaintiff, as certified by the accountant nominated in the agreement.

2. I understand the defendants to deny the accuracy of the calculations by the accountant.  They also point to the failure of the first plaintiff to pursue the dispute resolution procedure set out in the agreement.

(8)  Cost of Big W installations:

1. The first plaintiff claims that as at 31 December 2004 the second plaintiff had an unprovisioned liability for the installation costs of 398 units sold by Big W.  The costs of effecting these installations total $29,929.60.

2. The first defendant asserts that he informed the first plaintiff of its liability during the course of negotiations.  He also disputes the claimed costs of carrying out the installations.

(9)  Fewer rental coolers than agreed:

1. It was a term of the share purchase agreement that as at the completion date the second plaintiff would own a minimum of 1074 rental units.  The first plaintiff claims that there were in fact only 975 rental units as at that date and that the shortfall in value is $19,800.

2. The first defendant has deposed that he cannot adequately assess this claim without full access to the second plaintiff's documents.

Whether there are serious issues to be tried?

1. The facts alleged in respect of the "false invoice" give rise to claims (inter alia) in fraud, breach of warranty (eg warranty 21 in the schedule to the agreement) and misleading and deceptive conduct.  Although the purchase price was calculated as a multiple of the 2003/2004 net profit, the first plaintiff would seem to have a strong case that it also relied on the subsequent quarterly figures when agreeing on that sum.  Although there may well be issues as to the quantum of damages that can be claimed, there is obviously a serious issue to be tried.

2. All of the remaining claims (other than for the "net tangible assets deficit" and the "fewer rental coolers") arise from the defendants' alleged failure to disclose information which impacted on the value of the shares.  On the basis of the facts alleged, each such failure can reasonably be said to constitute misleading or deceptive conduct.  In this regard it is particularly relevant that the defendants warranted in item 144 in the schedule to the agreement that:

   "All information given by or on behalf of the seller, Cobb or their advisors to the buyer or its advisors in respect of the sale of the shares is accurate and complete ... "  (Emphasis is added.)

3. In respect of the "non‑compliant pressure limiting valves", "licensed plumber" and "refrigerants import licence" claims, the first plaintiff can also rely on warranties 24 (that the company held all necessary statutory licences, consents and authorities) and 26 (that the business was being conducted in accordance with all applicable laws).  In my view there is a serious issue to be tried in respect of each of these claims.

4. The claim in respect of the "net tangible assets deficit" arises from the operation of cl 5.7 of the agreement.  However, the first plaintiff also requires a rectification of the contract to give effect to an alleged oral variation whereby rental coolers were to be excluded from the net tangible assets.

5. In this regard, the first plaintiff's version of events is supported by the fact that the initial offer and acceptance (dated 15 November 2004) provided for a purchase price of $2.45 million conditional upon there being at least $870,000 in net tangible assets.  By the time of the formal agreement, this figure for net tangible assets had changed to $300,000, which is consistent with the first plaintiff's assertion that the rental coolers were to be excluded from the calculation.

6. The defendants have not put forward any evidence to explain this change in the agreement in respect of net tangible assets.  Furthermore, I consider it unlikely that the first plaintiff's delay in pursuing dispute resolution procedures under the contract constituted a waiver of its rights (particularly when regard is had to cl 18.4(b) of the agreement).  On the basis of the materials presently before me the first plaintiff would appear to have a reasonably strong case, and accordingly there is a serious issue to be tried.

7. The remaining claim in respect of the "fewer rental coolers" turns upon a simple issue of fact, namely the numbers of those units in existence at the completion date of the contract.  Quite obviously there is a serious issue to be tried.

The balance of convenience and the rule in Inglis

1. The decision of the High Court in Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161 is authority for the proposition that an injunction restraining a mortgagee's powers of sale will not generally be granted unless the amount of the mortgage debt be paid (if not in dispute) or, alternatively, be paid into court (if the amount is disputed). In this regard:

   "The benefit of having a security for a debt would be greatly diminished if the fact that a debtor has raised claims for damages against the mortgagee were allowed to prevent any enforcement of the security until after the litigation of those claims had been completed."  (Walsh J ibid at 165)

2. Subsequent authorities have established exceptions to this general rule, particularly when the enforceability of the security is in question or where the mortgagor is seeking orders under s 87 of the Trade Practices Act 1974 as a consequence of contraventions by the mortgagee (eg Town and Country v Partnership Pacific (1988) 20 FCR 540). However, in Mainbanner Pty Ltd v Dadincroft Pty Ltd (1988) ATPR 40‑896, Pincus J warned against the tendency to relax the rule in Inglis' case merely on it being shown that there is a prospect, however modest, of success on an allegation of oral misrepresentation.  His Honour considered that in the long run this trend could be "pernicious, because it would tend to destroy or weaken people's confidence in such bargains and in the rights of holders of security".

3. The present state of the authorities in this area was perhaps best summarised by French J in Graham & Ors v Commonwealth Bank of Australia (1988) ATPR 40‑908:

   " ... a mere possibility of success in a case of oral misrepresentation may not be enough to justify a departure from the general rule requiring payment into court of the whole amount due as a condition of the grant of interlocutory relief.  The Court is concerned here, of course, with the exercise of a discretion and it is always a dangerous course to extract from earlier decisions exercising that discretion on particular facts any general principles purporting to fetter its exercise.  That is not to say, and should not be taken to imply, that the observations of Pincus J on the importance of confidence in bargains does not expose a significant and relevant factor which will in most cases be given considerable weight.  But in the end, each case is to be judged on its own facts."

4. In the present matter the statement of claim does not specifically seek any relief which would have the effect of voiding the second defendant's security, but there is a general claim for relief under s 87 of the Trade Practices Act.  Relevant to the rule in Inglis' case, the statement of claim also alleges fraudulent misrepresentations by the defendants.

5. The rule in Inglis' case aside, the overall balance of convenience needs to be considered.  In this regard I consider that whatever the outcome of the proceedings, damages are likely to provide an adequate remedy to the victor.  However, there is a risk to both sides that by the time of judgment the losing party or parties may not have the means to meet the same.

6. The degree of likelihood of success is also a significant factor, and in my view, the first plaintiff has reasonably strong prospects of recovering total damages in excess of the balance of purchase price that will be found to be payable.  In this regard, I consider that the first plaintiff has a particularly strong case in respect of its claims relating to the "false invoice", the "unrepeatable Big W profits", and the "net tangible assets deficit", amongst others.

Conclusion

1. In the end I am persuaded I should exercise my discretion to grant an interlocutory injunction in the terms applied for and without there being any requirement for a payment into court.