Rikaton Holdings Pty Ltd v Stephens
[2005] QDC 61
•29 March 2005
DISTRICT COURT OF QUEENSLAND
CITATION:
Rikaton Holdings Pty Ltd v Stephens & Anor [2005] QDC 061
PARTIES:
RIKATON HOLDINGS PTY LTD
Plaintiff
v
CRAIG RONALD STEPHENS and LAEL STEPHENS
Defendants
FILE NO/S:
638/2001
DIVISION:
Civil
PROCEEDING:
Trial
ORIGINATING COURT:
District Court, Brisbane
DELIVERED ON:
29 March 2005
DELIVERED AT:
Brisbane
HEARING DATE:
10, 12, 13 August, 18 October 2004
JUDGE:
Dick SC DCJ
ORDER:
The Plaintiff’s claim is dismissed
CATCHWORDS:
COUNSEL:
Mr B Kelleher for the plaintiff
Mr R Oliver for the defendantsSOLICITORS:
Winchester Young and Maddern solicitors for the plaintiff
Hemming and Hart solicitors for the defendants.
The plaintiff’s claim against the defendants arises from the sale by the defendants to the plaintiff of a business known as “Ultra Print Copy Shop.” The business was conducted from two shops, the first being at Sunnybank and the second at Virginia, (Sunnybank and Virginia being two suburbs of Brisbane). The plaintiff’s claim is based on the allegation that the defendants made certain claims in respect of the business, the defendants acted on those claims which were untrue and the plaintiff thereby suffered damage.
Causes of action
The cause of action relied upon by the plaintiff are for deceptive and misleading conduct in breach of s 52 of the Trade Practices Act, or, alternatively, it is claimed that the representations or claims were made by the defendants well knowing the same to be false or misleading, or not caring whether the same were true or false.
Particulars of claim
The contract provided that the of certain “rental agreements” would be assigned to the plaintiff, whereas the business had the benefit of agreements which were materially different to the “rental agreements” referred to in the contract.
The defendants asserted the business achieved sales of $648,603.50 per annum in 1997, and that the Sunnybank shop was taking $12,000 per week, whereas the business only ever achieved sales of substantially less than $12,000 per week.
The evidence
The defendants were the proprietors of Ultra Print Copy Shop (“the business”) which carried on business at Sunnybank and Virginia. In or about August of 1997, the defendants advertised in a Brisbane newspaper that the business was for sale.
The plaintiff’s director, Mr Saxton, responded to the advertisement and met Mr Craig Stephens, one of the defendants. Mr Saxton arranged for his accountant, Mr Carr, to perform due diligence investigations of the books of the business. The books were held by the Stephens’ accountant, Mr Peter Gower.
The plaintiff’s case
Mr Carr gave evidence that Mr Gower gave him access to all the primary records for 1997 including Mr Gower’s workings (T294). Mr Carr said Mr Gower told him that all the bankings not identified as something else were from sales. Mr Carr arrived at the conclusion that the Sunnybank shop would be likely to earn slightly under $12,000 per week and he gave evidence that Mr Craig Stephens had agreed that the Sunnybank shop would continue to turnover “roughly the same turnover of approximately $624,000 per annum” (T155).
Further, Mr Carr alleges that on three or four occasions before settlement he and Mr Saxton visited the Sunnybank shop and on those occasions Mr Stephens would subtotal the till and say, “It’s $2,000 – we’ve done our total for today.”
Mr Saxton
Mr Saxton gave evidence that the figure of $12,000 per week was reckoned by subtracting the Virginia figures from the total. The Virginia figures were subtracted because that shop had only been operating for three months up to the end of the 1997 financial year. He said he relied on the figure of $12,000 per week to sustain the profitability of the business.
He also said that on at least three occasions when he was at the Sunnybank shop with Mr Carr, Craig Stephens would subtotal the till and say, “We have achieved our $2,000 today.” (T60).
Mr Saxton gave evidence that the plaintiff had an arrangement with Mr Stephens to continue working in the business for six months to provide management, assistance, tuition and service generally to the business. The plaintiff retained existing staff to assist in running the business so that in the transitional period there would be little or no change to the way the business was run (T73). However, after five months Mr Stephens’ employment was terminated after he was charged with theft from the business. Mr Saxton gave evidence that the plaintiff monitored the sales figures and started to become concerned in February to March 1998 when the average figures approximated sales of $7,000 per week. The plaintiff discovered till tapes for the period February 1997 through to July 1997 (before the sale of the business) indicating the amount of approximately $7,500 per week was taken through the till in that period. Mr Saxton conceded that he had not compared the deposit books with the till tapes.
It was put to Mr Saxton that the plaintiff’s day to day operation of the business differed in a number of respects from that of the defendants. The differences raised included:
· the holding of sales;
· advertising;
· sponsorship;
· customers;
· phone system;
· stock.
Mr Saxton agreed that the plaintiff did not hold sales or commit to sponsorship and that the phone system and stock had changed but maintained that he changes to phone and stock were inconsequential.
Mr Bridge
Mr Martin Bridge gave evidence that he worked at Ultra Print from May 1996 as a graphic designer. He gave evidence that prior to the sale of the business Ultra Print was involved in the publication of a magazine known as “Queensland Professional News.” He said that only two editions were published, but did not know anything about the financial arrangements concerned with the publication of that magazine. After the sale of the business he was primarily working at the Virginia Store but did visit Sunnybank, and, on his limited observations, the business did not appear to be any quieter.
He also gave evidence that six or twelve months after the sale of the business a customer he described as “Power Precedents” was lost to the business.
Ms Symons
Ms Sonja Symons gave evidence that she had worked for Ultra Print from approximately 1995 as a shop assistant. She ceased employment with Ultra Print in 2001. Before the sale she worked at the Sunnybank store. She said that she had been trained to write up an invoice and that the invoice transactions were processed through the cash registers. She agreed during cross-examination that invoices to businesses with credit accounts were generated on a computer. In addition, manual invoices were produced. She knew very little about the publication “Queensland Professional News.”
Mr Calabro
The plaintiff called Mr Calabro, a chartered accountant, who prepared an economic loss report. Mr Calabro gave evidence that he reviewed the handwritten sales summaries for the period July 1995 to December 1995, which reflected a turnover for that period of $251,354.41. He also reviewed sales income summary for the periods August 1997 to 18 October 1997, which showed a 17.56 percent reduction for the same period in 1995. It was his opinion that the figures showed that it was very unlikely the sustained sales figures from the Sunnybank shop were $616,738 in 1997.
Mr Calabro said he did not have the deposit slips for all the deposits for the 1996/97 year, but had noticed that some of the deposits on the bank statements did not relate to sales. He identified a number of deposits which he said reduced the actual figures to $626,000 per annum.
Mr Calabro criticised the report of another accountant, Mr Chan. In particular he criticised the use of an Australian Standard applied by Mr Chan which he said was not appropriate for the purposes of valuing a business.
Under cross-examination he conceded that for the exercise performed by Mr Chan, the Australian Accounting Standard was used appropriately. Mr Calabro also agreed that some deposits which had concerned him because of the large amount involved might be from Scottish Pacific Finance, a company which was performing factoring for the defendants.
The defendants’ case
The defendant, Craig Stephens, denied that he or his mother made any significant injections of cash (other than through sales) in 1996. He said that most of the sales went through the till but sometimes cheques did not go through the till if the bank was pressing.
He said the decision to sell was made in 1997. He did not know the gross turnover of the business for 1997 until informed by Mr Saxton.
He described a number of changes in the operation of the business after settlement.
Under cross-examination he agreed that the cashbooks given to Mr Gower had been lost and that the cashbooks contained on his laptop computer had been lost when it was accidentally dropped in late 1998/99. He denied that the material contained on his computer could have been retrieved, and that he had failed to produce the material because it would have been demonstrated that the sales figures had been misrepresented.
He denied telling Mr Carr that the 1997 bankings were all sales.
He was referred to Exhibit 25 (magazine) and denied that it was published by the business and denied that the business received any of the profits from the publication.
Finally, he denied that the figures provided to Mr Gower to prepare the 1997 books contained many deposits that were not sales. Two of the disputed amounts were for direct deposits from “Star Service Station.” Mr Stephens gave evidence that he believed the amounts represented sales.
Mr Gower gave evidence that in 1997 he was engaged by the defendants to do the books for the business. He obtained the 1996 accounts and trading figures from the previous accountant. He then prepared the profit and loss balance sheet (Exhibit 2), and prepared the tax returns for 1997.
In order to do so, he obtained the full books and records of the business, cheque books, deposit books, bank statements, leasing agreements and loan account with the National Australia Bank (T208). He was under some pressure from the bank to prepare the returns so that an application could be made to the Taxation Office to vary the provisional tax.
He said he isolated certain amounts from the bank statements, for example, an amount received by Lael Stephens as compensation from an accident, two bank loans, and the amount of $2,929 from an investment fund. The remainder he attributed to sales. The sales amounted to $648,603, which Mr Gower said he was convinced came from sales.
The 1996 figures prepared by another accountant showed a cash flow in that year of approximately $569,000.
Mr Gower gave evidence that he gave Mr Carr access to all the books and his workings and that Mr Carr raised no concerns.
He rejected the proposition that the business had been “propped up” by the infusion of funds. He said that he did so for the following reasons:
· his experience and the fact that he had formerly worked as a tax investigator and was alive to such conduct;
· he knew the defendants’ circumstances and believed they had no access to funds to prop up the business;
· there were no major unexpected deposits so any “propping up” would have to be by regular deposits;
· to infuse money into the bank account under the guise of sales would increase income tax payments when the defendants were adopting strategies to mitigate tax payments;
· if there was “propping up” in order to sell the business, the plan must have been put into operation before 1996, because the 1997 figures were so close to those prepared by the previous accountant;
· the decision to sell the business was unexpected by him as he had been working with the defendants to increase turnover by $2,000 or $3,000 per week to pay back loans to the bank.
In cross-examination he agreed that two deposits of $11,859 and $7,000 from Nashua Tec were not from sales.
Mr Chan
Mr Chan, an auditor, examined the available books to ascertain whether the business achieved sales of $648,603.50 for the year ended 30 June 1997. He prepared a report dated February 2004.
Because the records which had been with Mr Gower could not be located, Mr Chan adopted an approach of obtaining bank statements for July 1996 to 30 June 1997 to determine total bankings, excluding amounts not sales, and then cross-checking the amounts with invoices and till tapes. Mr Chan then adopted the Australian Accounting Standard number 5 – Materiality, and determined that the amount of $648,603.50 was materially correct. In relation to the till tapes, Mr Chan sighted the tapes for 201 days and estimated the remaining days on an average for the 201 days he had.
During cross-examination it was put to Mr Chan that if he added invoices which were going through the till to the till tapes, it would be a doubling up of the figures. Mr Chan gave evidence that he did try to ensure that the invoices that had been issued were not rung up on the till. He conducted a sample to ensure this. Mr Chan insisted that he attempted to maintain a conservative approach and eliminate as many amounts as possible that were not sales. He agreed that it was not mandatory to apply the Australian Standard in this case, but was of the opinion that it was reasonable to do so.
Summary
I am satisfied on the evidence that Mr Carr calculated the sales figures for 1997 as approximately $12,000 per week. This is in accord with the evidence of Mr Carr and Mr Saxton. It is likely that Mr Stephens may have accepted that figure when it was presented to him by Mr Carr and/or Mr Saxton.
I am satisfied that on at least three occasions in the presence of Mr Carr and Mr Saxton that Mr Stephens rang up the till at the Sunnybank shop and commented that $2,000 or budget had been realised. I have come to this conclusion because Mr Stephens’ evidence in this regard was inconsistent. At p.235 the following exchange occurred:
“You have heard evidence since you have been here about you ringing up the till and you’ve heard Mr Saxton say, ‘Oh, there’s $2,000 today already’ – words to that effect, did you do that? ---- Oh, sometimes two or three or four times a day.
You’d ring the till up? ---- Yes, it was – subtotal it.
Subtotal it, and did you do that when Mr Saxton was there? ---- I don’t recall specifically, I may have, it would have been in that time of the day when I did it.
Right, and would you have said words to the effect, ‘there’s $2,000 already’ or ‘$2,000 a day’ or words to that effect? ---- I don’t recall, I mean if the till tape was telling me that I may have I don’t know.”
At p.250 the further following exchange appeared:
“And in these meetings when Mr Saxton and Mr Carr came to the shop on a number of occasions, I’d like to suggest, that when they were there, you would hit the button on the till and say to them that ‘we achieve sales of $2,000 for the day’? ---- I did that two, three, four times every day.
But on the occasions that you were there you said to them, ‘there we’ve achieved our target’ or words to the effect, ‘we’ve achieved our target of $2,000 for the day’? ---- If I’ve done anything, I would have printed it off the till tape.”
Her Honour: What he has put to you is that you would hit the till as if you were getting readout to date? ---- Yes.
And say we’ve achieved the target of $2,000 for the day? ---- No.
However during cross-examination of Mr Saxton the following was put by counsel acting on behalf of the defendants:
“I suggest to you that he did not represent you that Sunnybank was doing $12,000 a week? ---- $11,800 per week was the agreed figure.
And I would also suggest to you that he didn’t say it was doing $2,000 a day? ---- He did say that.
I’d suggest to you the best it got was that he would regularly open the till and he would comment on the amount of money that had been taken that day and that if it happened to be $2,000 it was $2,000, if it happened to be $1,000 it was $1,000? ---- Every day we visited that store prior to the purchase he would do a subtotal and he would say, ‘We’ve got our $2,000 for the day’” (T201).
On the other hand Mr Carr and Mr Saxton were consistent in their evidence. In coming to this conclusion I have not relied on the evidence that Mr Stephens pleaded guilty to theft from the business. However, it is necessary to look precisely at what was said. It was not a representation that the amount was reached every day, but rather on those three or four occasions Mr Saxton conceded as much. Further there is no evidence before me that such an amount was not achieved on those occasions or on days that might accord with those occasions.
I will turn now to the evidence that the takings of the Sunnybank shop were consistently and substantially lower than $12,000 per week after the plaintiff purchased the business.
It is accepted that the takings of a business after purchase are generally admissible, not only to prove that a representation concerning the takings was false, but also to prove the true value of the business as at the date of purchase: Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 131 ALR 363.
Further, there is evidence that some deposits to the defendants’ bank account were not from sales. In relation to an amount of approximately $3,000, Mr Gower said that this was money which Craig Stephens took from the business and later redeposited, and he was certain that he had isolated that amount from the gross sales figure. He was not challenged on that.
Mr Gower also identified a deposit of $20,000 in December 1996 as a loan which he isolated from the sales figures. I accept his evidence on that point. The amount was identified on the bank statement as a loan. Two amounts identified on the bank statements as “Star Service Station” were in contention. Mr Stephens identified them as sales. I accept his evidence as there is no evidence to the contrary. The defendants concede that two amounts of $11,859 and $7,000 were deposited in a leaseback scheme from Nashua Tec and should not have been counted in the sales figures.
Further, it is contended by the plaintiff that in the circumstances of this case, inferences must be drawn against the defendants that the amount misrepresented is much more than that. The plaintiff points to the late concession about the funds from Nashua Tec and the failure of the defendants to produce records. In relation to the first point I accept the unchallenged evidence that the loss of the books of account was out of the defendants’ control, the books having been lost by the accountants who took over from Mr Gower.
In relation to the latter point it is submitted that the defendants’ explanation for not producing the books of account and the computer copy of his records is lacking in credibility.
As to that submission, I accept the Mr Stephens’ evidence that the computer was damaged as he said. The fact of his criminal conviction does not dissuade me from that view. In coming to this opinion, I have taken into account that Mr Carr had access to all the books during his due diligence search, and therefore it is not the case that the plaintiff has never had access to all the books. Further, there is evidence which has not been seriously challenged that the sales figures for 1996 were in the vicinity of $590,000.
The evidence of the auditor, Mr Chan, that the figures were that the figure was materially correct is also persuasive. While it has been submitted that Mr Chan “doubled up the figures” by counting invoices and till tapes, I accept his evidence that he was careful not to do so. I also accept his evidence that he applied the Australian Standard in the appropriate manner.
Kizbeau was authority for the proposition that the decline in the takings is admissible evidence to prove that a representation about takings was false. One way is to rebut the inference is by pointing to supervening events, but is not the only way. Evidence that the figures were materially correct by the production of the books or by evidence such as Mr Chan’s evidence, that on the books he had available the figure was materially correct, may also rebut the inference. That having been said, there is some evidence of a change in management style, perhaps insufficient by itself to rebut the inference, but in conjunction with the other evidence, it is a factor to be taken into account in assessing whether the plaintiff has proved its case.
The plaintiff has proved that the sales figures for 1997 were inflated by $18,000 leasebacks from Nashua Tec. This falls short of the proof of claim in fraud in that the plaintiff has failed to prove that the Sunnybank shop only ever achieved sales of substantially less than $12,000 per week. (my emphasis)
In relation to the pleaded representation that “the business included the benefit of certain cost copy plans,” very little evidence was led, presumably because on the plaintiff’s case, the plaintiff reserved its rights with respect to those cost copy plans and accordingly has not suffered any loss.
Section 52 Trade Practices Act
Section 52 of the Trade Practices Act provides:
“52 A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”
The pleading does not make any allegation as to how the two individual defendants come within the extended definition of a corporation as provided in s 6 of the Trade Practices Act. There is no evidence that any of the circumstances provided for in s 6 apply in this case.
The plaintiff submits that the defendants are caught by s 75B of the Trade Practices Act in that the defendants aided, abetted, counselled or procured the contravention. The plaintiff submits that there is no requirement that the company Ultra Print Pty Ltd needs to be joined in the proceeding for a person to be liable under s 75B and that there is no requirement to specifically plead s 75B.
I requested further submissions on a number of points. The first point was the question “On the evidence who owned the business of Ultra Print Copy Shop at the time the contract was entered into and/or at the time of settlement”. The Plaintiff submits that an exchange at page 250 ll 29-41 of the transcript makes it clear that the Company became the owner of the business or some part of it. That exchange appears in the transcripts as follows:
“All right. Now you’ve – you’re a director of a company called Ultra Print Pty Ltd; that’s right, isn’t it? – Yes.
And initially the contract was going to be in the name of the company, wasn’t it?—That’s correct.
Okay. Ultimately it was entered into by you and your mother instead?—At the request of Mr Saxton.’
The defendants submit that there is no evidence that the Ultra Print Pty Ltd was the owner of the business at the time of sale. There is no evidence to suggest that the vendors, being the defendants, were not the owners at the time the business settled. The defendants further submit that a perusal of Exhibit 1 “Business for Sale” will show there is no mention of the company, and to the contrary it provides the profit and loss statement for the partnership of the defendants.
I find that there is no evidence that Ultra Print Pty Ltd was the owner of the business at the time of the sale.
In relation to the question “On the evidence who owned the business Ultra Print Copy Shop at the time of the alleged breach of s 52 of the Trade Practices Act?”, the defendants make the following submission. There is no evidence nor was it put to Mr Craig Stephens that any representations he made were as a director for and on behalf of Ultra Print Pty Ltd. Further, it is not pleaded that the representations were made on behalf of Ultra Print Copy Shop Pty Ltd. Further, there is no evidence as to the activities of the company other than that it bears a similar name to the business used by the Stephens. In addition, all the financial returns tendered during the course of the trial were in the names of the defendants trading as Ultra Print Copy Shop.
It was further submitted that the mere fact that a company is registered with that name does not lead to the inference reasonably or otherwise that it engaged in any type of commercial activity relevant to the business the subject of the plaintiff’s claim. Mr Gower, the accountant, only ever dealt with the partnership business and no questions were directed to him about the company.
I find these submissions to be correct.
The next matter about which submissions were sought was, “Is there any evidence of the reason that the contract named the individuals as vendors rather than the company, Ultra Print Copy Shop Pty Ltd?” The Plaintiff submits that it is the evidence of Mr Stephens that the change was requested by Mr Saxton (T 250-251). The defendants submit that there is no evidence that the company had any interest in the business whatsoever, which is one reason why the company was not named in the contract.
There is insufficient evidence to come to a finding on this part.
In relation to the query, “What evidence is there if any of the role played by the company in the negotiations between the parties?” The Plaintiff asserts that the court would infer that Mr Stephens was acting in his capacity as a Director and as an individual. The defendants submit there is no evidence of any role played by the company in the negotiations between the parties, even though a company search was tendered. Mr Saxton was not asked about the company nor was any evidence given by him as to his understanding of its involvement. It was never put to the defendants’ witnesses they were acting as directors for and on behalf of the company. The defendants submit that the company had no relevance to the action. I accept the Defendant’s submission on this point.
Damages
The only evidence given in relation to damages suffered was from Mr Calabro.
The Plaintiff submits that the measure of damages is between the price paid and its value and that the amount calculated by Mr Calabro in his second report (Ex 27) is correct. That amount is $165,293.00 being loss of earnings of $61,985.00 capitalized at 37.5%.
If it were necessary to assess damages, I would assess damages as calculated by Mr Calabro at $165,293.00.
Judgement
I give judgement for the Defendants against the plaintiff and the plaintiff’s claim is dismissed.
I order the Plaintiff pay the Defendant’s cost of and incidental to the proceedings to be agreed or assessed on a standard basis up to the 21st of August 2003.
I order the Plaintiff pay the Defendant’s costs of and incidental to the proceeding and reserved costs to be agreed or assessed on an indemnity basis from the 21st of August 2003.
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