Sanbern Management Services Pty Ltd v Fitzgerald
[2002] VSC 111
•15 April 2002
Liable to it on the 8
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 7818 of 2000
| IN THE MATTER OF LETS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) | |
| SANBERN MANAGEMENT SERVICES PTY LTD | Plaintiff |
| v | |
| LAURENCE ANDREW FITZGERALD & ANOR | Defendant |
---
JUDGE: | Hansen J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 13 & 14 February 2002 | |
DATE OF JUDGMENT: | 15 April 2002 | |
CASE MAY BE CITED AS: | Sanbern Management Services Pty Ltd v Fitzgerald | |
MEDIUM NEUTRAL CITATION: | [2002] VSC 111 | |
---
Corporation – Administrator – Proof of debt – Rejection - Appeal
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr. N. A. Frenkel | O’Donnell Frampton Salzano |
| For the Defendant | Mr. P. M. Bornstein | Phillips Fox |
HIS HONOUR:
This is an appeal against the decision of an administrator under a Deed of Company Arrangement to wholly disallow a claim against the subject company, LETS Pty Ltd ("LETS"), for $100,000. The claim was made by the plaintiff Sanbern Management Services Pty Ltd ("Sanbern") by a proof of debt lodged on 30 October 2000 which described the debt in this way: "Refer Supreme Court Commercial Division Business List. Case No 2000/01380 $100,000". That was in fact a reference to a proceeding which Sanbern had commenced in the County Court on 16 March 2000 against LETS and one Gregory David Flood.
As it happened, on 24 May 2000, unbeknown to Sanbern and its solicitors, LETS was placed in administration by resolution of its directors. It was not until August 2000 that Sanbern became aware of the administration. In October, LETS entered into the Deed of Company Arrangement with the Deed Administrators. Later in October, Sanbern lodged the above proof of debt. Then, on 16 November 2000, notice was given that the claim was rejected.
The notice of rejection stated two grounds for the decision to reject the claim. The first ground was that the claim could not be proven as it would be excluded by s 82(2) of the Bankruptcy Act. This ground was abandoned at the outset of the hearing before me. The second ground was that the claim was not properly made out against LETS as distinct from Greg Flood (referred to above) or Arts Capital Pty Ltd ("Arts Capital"). This ground was maintained by counsel for the Deed Administrators, who are the defendants to the appeal before me, and one of whom signed the notice of rejection. As a result, the case was conducted before me on the basis that Sanbern had to establish, on the balance of probabilities, that LETS was liable to it on the basis of the causes of action pleaded in the County Court proceeding.
For this purpose the administrators are entitled to stand in the position of LETS in opposing the claim.[1] There is no suggestion of prejudice to other creditors should the claim be allowed. I was informed that all other creditors have been paid and that if the claim is allowed, in whole or in part, the administrators will have funds to pay it.
[1]See Tanning Research Laboratories Inc v O'Brien (1990) 8 ACLC 248.
The claim which Sanbern seeks to establish is that LETS engaged in misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act (Cth), and/or negligent misrepresentation. These are the claims made in the County Court proceeding. It was commenced by writ endorsed with a statement of claim. I refer below to the allegations in the statement of claim.
It is convenient at this point to note several matters. The first is that this appeal was commenced by an Originating Process filed on 30 November 2000, shortly after the rejection of the proof of debt.
Secondly, having become aware that LETS was under administration, Sanbern did not continue (or seek leave to continue) the County Court case against LETS, opting instead to pursue its claim by way of the proof of debt. That left the claim in the County Court against Flood, and that claim was settled on terms that were not disclosed to me.
Thirdly, according to its managing director John Anthony Santamaria, who was cross-examined before me, Sanbern provides public accounting services. Sanbern's letterhead describes Sanbern as Certified Practicing Accountants, Business Management Consultants and Registered Tax Agents. Santamaria is an accountant of many years experience. It is evident that he has considerable business experience.
Fourthly, LETS was incorporated in October 1996 with the name Arts Nominees Pty Ltd ("Arts Nominees") which was changed to LETS on 7 May 1998. Flood was a director and chairman of the board from the company’s inception, became executive chairman in 1998, and ceased to be a director on 24 May 2000. There were two issued shares, held by TWU Nominees Pty Ltd (the letters "TWU" standing for Transport Workers’ Union). LETS was trustee of a trust owned by the Transport Workers’ Union Superannuation Fund. It seems that LETS was established as a vehicle for investments of a type reflected in Flood's description of it as the Leisure, Entertainment, Tourism and Sports Trust. If the Board of LETS approved an investment proposal, the proposal had to be put to the Board of the Transport Workers’ Union Superannuation Fund for approval.
Flood was also a solicitor and, at relevant times, a partner in the firm J M Smith and Emmerton. He left the firm in 1998. At the time of the hearing he no longer held a practising certificate. He described himself as a legal consultant.
Flood was also a director of Arts Capital, having been appointed as such in August 1996. Several other persons were also directors of Arts Capital, but Flood was the only director who was also a director of LETS. Arts Capital had 1000 issued shares held by 10 persons in amounts ranging from 1 to 698. Flood held 150 shares. Arts Capital did not itself hold funds. In relation to possible theatrical productions, it would introduce a proposal to investors with a view to raising funds in respect of which it would act as a manager. On 1 June 1999 Arts Capital was ordered to be wound up.
Finally, I note the evidence. Sanbern relied on three affidavits, two sworn by Santamaria and a third by Stewart Niven Macpherson. Santamaria was cross-examined but Macpherson, who resides in New Zealand, was not. Then, on the second day of the hearing, Sanbern's counsel, by leave, called Flood to give viva voce evidence. He had foreshadowed doing so to establish that Flood had been chairman of the board of directors of LETS. Then, in explaining why he sought leave to call him, he said that he wished to avoid any adverse comment by counsel for the administrators that he had not called him. In effect, this seemed to be like calling the opposite party, as Flood was a defendant in the County Court proceeding, and the person alleged to have made the representations that were the basis of the claim in that proceeding. It also meant that he could not cross-examine him, a factor which I take into account in considering the evidence.
No evidence was given by or on behalf of the defendant administrators.
As noted above, the formal proof of debt relied on the claim in the County Court proceeding. The writ was endorsed with a detailed statement of claim which included particulars. On 23 May 2000 a defence was filed on behalf of the defendants LETS and Flood.
Representations were alleged in paras 5 and 6 of the statement of claim. They formed the basis of the claim. In para 5 it was alleged that in or about April 1997 Flood said to Santamaria that:
"(a) Arts Capital was then in the process of raising funds in order to stage a musical production of Jekyll and Hyde in Melbourne (“the production”);
(b) a prospectus in final form has been prepared for the purpose of raising the whole of the funds required for the production, being approximately $4.7 million (“the prospectus representation”);
(c) Arts Capital would contribute the sum of $3.4 million towards the staging of the production (“the Arts Capital contribution representation”); and
(d) the financier Tolhurst Corporate Finance Limited (“Tolhurst”) had agreed to underwrite the raising of the whole of the funds required for the production pursuant to the prospectus referred to in paragraph (b) above (“the underwriting representation”).
PARTICULARS
Flood told Santamaria of the said matters during a conversation between Flood and Santamaria in person at the offices of Messrs JM Smith & Emmerton, solicitors in or about April 1997. The substance of the conversation, so far as is material, was that Flood told Santamaria of the said matters, and Flood asked Santamaria to consider investing approximately $100,000.00 for the purpose of meeting pre-production expenses which would be incurred in relation to the production.”
It was alleged that Flood made the representations in his capacity as a director of Arts Capital or on his own behalf, on a serious business occasion, and to induce Sanbern to invest funds in meeting pre-production expenses in relation to the production of Jekyll and Hyde (para 7).
In para 6 it was alleged:
"Further to paragraph 5(c) above, there was implicit in the Arts Capital contribution representation a further representation (“the LETS funding representation”) that LETS had committed itself to advance sufficient funds to Arts Capital to enable Arts Capital to contribute the sum of $3.4 million toward the cost of staging the production.
PARTICULARS
The LETS funding representation was to be implied from:
(a) the fact that Flood was a director of both LETS and Arts Capital;
(b)the fact that Arts Capital had no sufficient financial resources of its own from which it could contribute the said sum of $3.4 million;
(c)the fact that Arts Capital was a conduit for the investment of monies by LETS in various performing Arts enterprises, and in particular had been the conduit employed by LETS in connection with its investment in a musical production known as “Always” being a production in which Sanbern had also been an investor and in respect of which Sanbern, through Santamaria, had had substantial dealings with Flood, Arts Capital and LETS;
(d)the fact that Arts Capital could only have been in a position to commit $3.4 million to the production if LETS had committed itself to advance sufficient funds to Arts Capital for that purpose;
(e)the fact that each of Flood and Santamaria knew each of the matters referred to in paragraphs (a), (b), (c) and (d) above by reason of:
(i)in the case of Flood, his directorship of Arts Capital and LETS;
(ii)in the case of Santamaria, his involvement in the funding of “Always” and his dealings with Flood, Arts Capital and LETS in respect thereof.”
This representation was alleged to have been made by Flood in his capacity as a director of Arts Capital, or in his capacity as a director of LETS, or on his own behalf, on a serious business occasion, and to induce Sanbern to invest funds in meeting pre-production expenses in relation to the production of Jekyll and Hyde (para 8).
In paras 9 and 10 it is alleged that Sanbern forwarded to the trust account of J M Smith and Emmerton $100,000 for pre-production expenses by the following payments:
1. $20,000 on 8 April 1997
2. $20,000 on 9 May 1997
3. $20,000 on 30 May 1997
4. $20,000 on 6 June 1997
5. $20,000 on 30 June 1997.
It appears from the evidence that the first $20,000 was paid on 22 April but nothing turns on which of those dates was the actual date of payment. It is common ground before me that these payments were made. It is alleged in the statement of claim that the first three payments were made in reliance on all four representations, or on one or more of them. However the final two payments were alleged to be made in reliance on the Arts Capital contribution representation and the LETS funding representation. Thus the underwriting representation was not relied on as an inducement to making the June payments. That was undoubtedly because, by that time, funds were not to be raised by a prospectus and Tolhurst had no underwriting role.
It was then alleged that the prospectus representation was untrue as there was not, in April 1997, nor at any time, a prospectus in final form for the purpose of raising the whole of the funds required for the production (para 11). The defence admitted that there never was such a prospectus.
It was then alleged that the Arts Capital representation was a future representation and that there were no reasonable grounds for the making of that representation (paras 14 and 15).
It was then alleged that the underwriting representation was false in that Tolhurst had not agreed to underwrite the raising of the whole of the funds required for the production (para 18). The defence admitted that Tolhurst had not so agreed.
It was then alleged that the LETS funding representation was false in that LETS had not committed itself to advancing $3.4M or any sum to Arts Capital to enable Arts Capital to contribute it to the costs of production (para 21). The defence admitted that LETS had not committed to advancing any sum to Arts Capital.
In these circumstances, and in relation to each representation, LETS and Flood had engaged in conduct in contravention of s 52 of the Trade Practices Act. It was further alleged that insofar as Art Capital was engaged in any of the contraventions it was aided and abetted by Flood.
Then, in the balance of the statement of claim (paras 24 – 27), a claim of negligent statement was made against LETS and Flood. In making the several representations, for himself and on behalf of LETS, Flood should have, but did not, take reasonable care to determine the accuracy of the representations. Flood’s conduct was alleged to constitute a breach of a duty of care owed by LETS to Sanbern in the making of the LETS funding representation.
The statement of claim concluded with a plea of loss and damage. In the particulars, the claim is specified as being to recover the $100,000 and an amount for loss of use of that money. In the particulars it is stated, and it is fact, that the funds necessary to stage the production were never raised by Arts Capital, and the production did not proceed; that Arts Capital is in liquidation; that Henry and Edward Pty Ltd ("Henry and Edward"), the corporate vehicle through which the production was to be staged, is in liquidation; and that Sanbern has not recovered any part of the $100,000.
In his primary affidavit in support of the appeal Santamaria said that he had known Flood since September 1995. Santamaria’s company Trinity House Limited (“Trinity”), and LETS, through Arts Capital, had invested in a musical called Always, which opened in London in June 1997. Santamaria described Arts Capital as "the conduit for the investment of monies" by LETS. That investment had been organised by Flood, and his dealings had been with Flood. LETS had provided $3M or 50% of the production budget for Always. He said that LETS was the trustee for the Transport Workers’ Union Superannuation Fund. He said that Arts Capital was only a $2 company. He stated that Arts Capital could only commit substantial funds if LETS made the commitment.
Santamaria said that in early April 1997 he met Flood together with Macpherson, the producer of Jekyll and Hyde and a director of Henry and Edward, which was the manager of the production. That had followed a call from Flood to discuss investment in a proposed production of Jekyll and Hyde in Melbourne. Paragraph 9 of Santamaria’s affidavit set out a series of statements allegedly made by Flood at the meeting. These statements corresponded to, and were intended to establish, the representations pleaded in the County Court statement of claim. But there are differences between the pleading and the affidavit evidence which it is important to note. Those differences are, by reference to the pleading quoted above:
1.The prospectus representation: whereas the pleading was that a prospectus "has been prepared", the affidavit stated that a prospectus "was being prepared". In other words, Flood referred to a prospectus that "was being prepared"; he did not say that it "has been prepared". This was a significant departure from the case pleaded. According to Santamaria’s oral evidence, what Flood had said as to the progress of the prospectus at that time was that the prospectus was imminent, and would be prepared prior to 30 June 1997 because the funds had to be raised by that date.
2.The underwriting representation: the pleading concluded by referring to the prospectus "referred to in paragraph (b) above". These words were omitted from the affidavit. There may be no significance in that omission but it is consistent with the change to a prospectus still being prepared.
3.The LETS funding representation: whereas this was pleaded as being implicit in the Arts Capital contribution representation, in the affidavit it was stated to have been an express representation made by Flood in the following terms, namely, that "Arts Nominees would provide the funding to Arts Capital to enable Arts Capital to contribute $3.4 million towards the production".
4.The Arts Capital contribution representation: the affidavit repeated the pleaded representation and added the following, "That is, Arts Nominees would advance the monies to Arts Capital which in turn would advance the money to investors, the investors would invest that money and some of their own money in the production and repay Arts Nominees the loan.”
In his affidavit, Santamaria states that Flood invited him to invest $200,000 for the purpose of meeting pre-production expenses, and that he told Flood he was “interested” but believed he could only raise $100,000. He asked Flood to prepare a document in relation to the proposed contribution. On 11 April 1997, he received a document called Deed of Association between Trinity, Henry and Edward and Macshows Pty Ltd (“Macshows”), whereby Trinity was to provide $200,000 “to meet certain pre-production expenses in order to derive profit was the exploitation of” Jekyll and Hyde. The document recited that Macshows held an exclusive licence to produce the musical, that Macshows had appointed Henry and Edward to manage the development of the musical, and that Macshows and Trinity were willing to enter into an association whereby Trinity would meet certain pre-production costs. The document contained a number of terms governing the arrangement. A payment schedule was to be submitted. The pre-production expenses were specified. On paying the $200,000, Trinity was entitled to a 3.4% interest in the net receipts. Clause 7 was an acknowledgment “that the investment . . . is highly speculative and that no guarantees, warranties, undertakings or the like have been made” by Macshows or Henry and Edward in regard to any return on the investment.
Santamaria told Flood he would not sign the draft Deed in that form. He wanted Sanbern to be the investor, that the sum be $100,000, and that the Deed should identify what was seed capital and what was expenditure. Flood sent him a further draft Deed on 24 April 1997, but none of the changes had been made and Santamaria never signed it.
The next event Santamaria referred to was the receipt on 28 May 1997 of a letter from Macpherson, which Macpherson copied to Flood. The purpose of the letter was to have Santamaria “provide the balance of the proposed $200,000 advance before your departure this week”. The letter stated that Arts Capital had made a commitment to provide 50% of the specified $6M budget, that the balance would be underwritten by D and D Tolhurst, and that the prospectus had been prepared and would be filed imminently.
Santamaria responded by seeing Macpherson on 28 May 1997, following which he wrote to Flood advising him that after discussion with Macpherson he would commit a further $60,000 (by three payments of $20,000 each) “to the ‘seed capital’ component but on the same terms and conditions as outlined in my previous faxes to you concerning the use of funds”. None of those faxes were put in evidence before me. The letter stated, among other things, that when he returned to Melbourne in June 1997, and on the understanding that the prospectus would then be “on issue”, he would underwrite a further $40,000 towards the advertising costs in July 1997.
Then, without explanation as to the course of events, Santamaria’s affidavit stated that in late June 1997 he received from Flood an Information Memorandum relating to Jekyll and Hyde dated 20 June 1997. Santamaria states that he was advised that the prospectus was not going to issue and, instead, funds were to be raised by way of the Information Memorandum. Among other things, the Memorandum stated that Arts Capital was the manager of the musical, and that it had agreed to provide $3M which may be used to provide loan funds to participants, or to sub-underwrite the amount to be raised, or both. Participants were invited to contribute a minimum of $500,000 each, and further multiples of $5,000, and advised they could borrow half the contribution from Arts Capital. The amount to be raised under the Memorandum was $6M.
Santamaria also said in his affidavit that in late June 1997 he received from Flood a Production Management Agreement, a Production Services Agreement and Participation Application forms. He dealt with them as follows. He completed and signed an application for Sanbern for $80,000, and had another application completed and signed by Michael James Shannon for $20,000. Each application was dated 29 June. (The last $20,000 was remitted on 30 June.) Santamaria sent the documents to Flood on 4 July 1997 under cover of a letter which outlined his contributions. He asked Flood to execute copies of the Agreements and return two copies with confirmation that the funds already supplied (that is, the $100,000) constituted the funds for the purpose of the investments. Flood never returned the documents, executed or otherwise.
The funds necessary to stage the production were not raised and, as a result, the production did not proceed. It appears from exhibits to Macpherson’s affidavit that the final collapse of the project came on 22 August 1997, when Arts Capital decided not to forward funds to Henry and Edward. A letter sent that day by Arts Capital to Henry and Edward stated that Arts Capital’s requirements had always been to commit no more than 50% of the pre-production cost of the show, and that it would not be in a position to advance any funds until it was satisfied that the show could be performed. The letter stated that the commitments contained were not enough to guarantee that the show would be performed. The letter noted that Henry and Edward had warned that if cash was not received that day the show would not proceed. It stated that as Henry and Edward had not provided proof that it had raised the balance of the cash required to fund the show, Arts Capital was “not prepared to advance amounts at this time”.
The final point to note about Santamaria’s affidavit is the statement that Sanbern would not have made the payments totalling $100,000 “if not for the representations made by Flood on behalf of LETS set out in paragraphs 9, 14 and 16 herein”. Snatamaria said that Sanbern relied on those representations in making the payments. It is convenient to deal with this evidence at this point.
Paragraph 14 of the affidavit simply referred to receipt of the letter from Macpherson on 28 May 1997, referred to above. While Macpherson copied the letter to Flood, the fact is that this was a letter from Macpherson, not Flood, and without evidence of adoption by Flood in terms that could make it a representation by him, the statements in it were not, and could not be held to be, representations by Flood, let alone by Flood on behalf of LETS. Moreover, the letter was not relied on in that way in the County Court statement of claim.
Paragraph 16 of the affidavit referred to receiving the Information Memorandum in late June 1997. A careful reading of this paragraph, assisted by the oral evidence, indicates that the April 1997 representation concerning a prospectus was not to be met, and that an alternative route to funding was being pursued. By the time the Memorandum was received Sanbern had made all payments bar the last $20,000. In any event, Santamaria had committed to that payment on 28 May 1997. The fact is that no part of the $100,000 was paid by reason of any statement in the Information Memorandum.
In the course of the hearing before me, Sanbern’s counsel conceded, in my view correctly, that Sanbern did not rely on any representation set out in paras 14 and 16 of Santamaria’s affidavit. Counsel limited his case to the representations set out in para 9 of his affidavit, being those made at the meeting in April 1997. And, more particularly, in relation to those representations, counsel for Sanbern based the case against LETS on the LETS funding representation. That was the only representation which counsel relied on as having been made by Flood on behalf of LETS.
I referred earlier to the fact that Santamaria was cross-examined, that Macpherson was not cross-examined, and that Flood gave viva voce evidence. I have regard to all the oral evidence, but first note a submission of Sanbern’s counsel as to acceptance of the evidence of Santamaria and Macpherson.
It was submitted that I should accept their evidence and that the evidence was sufficient to establish the claim. It was submitted that their evidence was consistent and supported that given by the other. Macpherson was not cross-examined, and it was said that there was nothing in his evidence to indicate that it was unsatisfactory or, for some other reason, that it should not be accepted. In a written submission provided at the outset of the hearing it was said the evidence of Santamaria and Macpherson had not been contradicted. Of course, that was before counsel for Sanbern called Flood, whose evidence did contradict that of Santamaria and Macpherson on critical points. As it turned out, having called Flood, in final submissions Sanbern’s counsel said that I should not accept his evidence where it conflicted with the evidence given by Santamaria and Macpherson. Before making findings on the evidence it is appropriate to comment on Macpherson’s evidence.
Macpherson’s affidavit was brief and, apart from exhibiting a selection of letters, set out his account of the meeting with Flood in April 1997, which he attended with Santamaria. The paragraph in which he recounts the meeting states what Flood said in the same manner in which Santamaria states what Flood said. The wording of Macpherson’s account is almost identical to the account given by Santamaria. The differences between them are that Macpherson repeated the representations pleaded in para 5(a)-(d) of the statement of claim, with only immaterial differences in a few words, and that he did not make the changes or additions made by Santamaria referred to at [28] points 1, 2 and 4. Their accounts did not differ as to whether the LETS funding representation was implicit or stated orally. Like Santamaria, Macpherson said that this was stated by Flood. Macpherson used identical words to those used by Santamaria. (See [28] point 3.)
It is to be borne in mind that the meeting occurred as long ago as April 1997 and that the affidavits were sworn in April and May 2001 respectively, four years after the event. Neither deponent (nor Flood) produced a contemporaneous note of the conversation, let alone a letter confirming statements made at the meeting. Nor, as mentioned, did Santamaria produce the faxes containing the terms and conditions of payment. Further, the statement of claim, which pleaded the implicit representation, reflects a careful attention to the facts, and the possible basis on which a connection with LETS might be alleged. The Writ endorsed with the statement of claim was filed in March 2000, a little over a year before the affidavits were sworn. It might be supposed that when Santamaria gave instructions for that case, as he did, his memory was better than it was over a year later.
I also observe in these respects an apparent conflict in Macpherson’s affidavit. According to Macpherson, Santamaria stated at the meeting that he could only raise $100,000. But in his letter to Santamaria dated 28 May 1997, Macpherson referred to the proposed advance being $200,000. In his affidavit, Macpherson did not give any explanation of his understanding that the advance was, or as to how it became, $200,000. He further exhibited a letter to himself from Flood, dated 2 July 1997, in which Flood said that he understood Santamaria was investing $200,000 in the show. This is consistent with Flood having inserted $200,000 in the draft Deed of Association sent to Santamaria in April 1997. I further note, in relation to the question of what request was made at the meeting, that according to the particulars to para 5 of the County Court Statement of Claim, Flood asked Santamaria to consider investing approximately $100,000. Yet, both Santamaria and Macpherson stated in their evidence that the request was for $200,000 and that it was Santamaria who referred to $100,000 as a sum he may be able to raise.
It is relevant to note that the failed project has given rise to some litigation. In addition to the County Court proceeding brought by Sanbern against LETS and Flood, there is a proceeding brought by the liquidator of Henry and Edward against J M Smith and Emmerton in relation to which Flood described the letter of 6 June 1997 as being the crux of the matter. I gathered also from something that Santamaria said in evidence that there had been some litigation, it would seem that it was brought by himself or one of his companies, involving Flood, arising out of the Always production. Flood said that his friendship with Santamaria foundered during the production of Always. From some other vague statements it seemed there might even have been other litigation, but I do not know. What is clear is that relations between the parties foundered, resulting in litigation, that Arts Capital and Henry and Edward each went into liquidation, and that LETS had an administrator appointed. In final address, counsel for Sanbern made some unsubstantiated references of a critical kind against Flood. In the absence of evidence it was not correct to make those references or aspersions against Flood who, after all, counsel for Sanbern had called to give evidence.
In any event, it is seen that Macpherson, or at least his company, Henry and Edward, has an interest in pending litigation against Flood. I am not aware of any of the detail of that case, apart from the reference by Flood, in the course of his evidence, to the letter of 6 June 1997 constituting the crux of the matter. Nor am I aware of how (if at all) any finding on this appeal may reflect on any issue in that case. However, it is evident that the interest of Macpherson is contrary to that of Flood, and that Santamaria has an interest in his own cause. As far as Flood is concerned, Sanbern’s case against him in the County Court was settled. I do not know whether he is otherwise at personal risk in the litigation brought by the liquidator of Henry and Edward. I accept that in giving evidence before me, which he did under subpoena, he had an interest in presenting his side of the story in the best light to him.
I now refer to the oral evidence given by Santamaria and Flood. I do not refer to it all, although I have regard to it in arriving at my conclusions.
Santamaria was shown the County Court statement of claim and said it was true and correct. He also affirmed as true and correct his affidavit in support of the present appeal, in which he set out statements of Flood in the conversation in April 1997. In the former document the LETS funding representation was alleged to be implicit, whereas in the latter it was stated to be express. He was questioned on the conflict. He conceded that he gave instructions for the County Court case and that he had read the statement of claim before the case was commenced. He could see little difference between the funding representation being implicit or express. He insisted that it was express and that he had so instructed his lawyers for the County Court case. Overall, he treated the distinction between implicit and express as being of little substance as the fact was, he said, that Flood had presented the matter on the basis of the representation. His attitude was that it seemed pedantic to quibble about whether it was express or implicit.
As to the conversation itself, Santamaria said that Flood and Macpherson came to see him. Flood advised him that LETS had agreed to provide underwriting and loan facilities for a production of Jekyll and Hyde, which was subject to a prospectus which was being prepared by Tolhurst. In relation to the prospectus, he thought Flood said that it was imminent but would be available prior to 30 June by which time the funds had to be raised. He thought that the capital was $6M, give or take whatever the other dollars were, and that it was being totally underwritten by Tolhurst. LETS would provide funds to enable people to borrow money to invest in the production. Flood was seeking “some financial assistance . . . to keep the production going pending the prospectus being issued and the underwriting and the funds being raised. Flood mentioned $200,000 as the sum needed to which Santamaria said he thought he could raise $100,000 to put through as an advance pending the funds being raised. This would enable the production to proceed to meet some of its ongoing expenses”. He questioned Flood about how LETS was going to provide the funding and the certainty of Tolhurst providing the underwriting. There was some discussion as to Jekyll and Hyde’s success on Broadway.
Santamaria said that Flood came back to him within a day or so regarding the progress of the prospectus. He then made a commitment to advance $100,000 for pre-production costs by five instalments. He would be reimbursed out of the funds raised and would receive a return of about three per cent of the box office takings. He said that the three per cent was agreed by virtue of discussions at the meeting, or the next day on the telephone, and it was referred to in later correspondence. He asked Flood to prepare a document and the document Flood prepared (which Santamaria did not sign) referred to the quantum of the fee.[2]
[2]This would be a reference to the Deed of Association.
When asked how he expected to be reimbursed the $100,000 if the show did not go on, Santamaria said that was not an issue because the underwriting agreement meant that in the event of insufficient investment by the public, Tolhurst would have to put up the balance.
As to the underwriting agreement itself, Flood showed him “some documents . . . to look at” from which he saw that Tolhurst was going to get a fairly substantial fee. He was asked if he considered that the advances were a risky investment. He said that the advances were to be made “pending the monies being raised through the prospectus, and the prospectus, the funding of which was underwritten by a reputable stockbroker. I, I didn’t regard it as risky”. He was then asked, “But you had not seen the prospectus?” To which he said, “I had seen Mr Flood had papers with him and I’d seen drafts of a document which constituted the basis of the prospectus”.
Subsequently Flood told him that the prospectus could not be issued by 30 June, and that they were proceeding under the Information Memorandum and would go to professional investors.
Towards the end of his evidence in chief Santamaria said that he had implicit trust in Flood as he had performed on the Always project. He added that he had made his own inquiries overseas as to how Jekyll and Hyde was going. I interpolate that together with his earlier evidence it is clear that he received a favourable report. Santamaria said that when the prospectus went to the market people would look to see what the nature of the performance was, and he had no reason to suspect things would not proceed as they said they would. It is clear that in giving this evidence Santamaria was reflecting that he anticipated that his favourable view of the likely success of the show would be shared by investors when the prospectus was issued.
In any event, as he said in cross-examination, the show would go ahead because Tolhurst had agreed to underwrite it. Indeed, if he had not been told that it was wholly underwritten he would not have advanced any funds. That, and the involvement of LETS, were the two important factors in his decision to make the advances.
Santamaria said that he understood Let’s role as a trustee in relation to the investment of union superannuation funds, that he knew Flood was only one of several directors of LETS and that anything Flood promised would have to be ratified by the board of LETS. He said he had no reason to think that the board had not decided to invest. I note that Sanbern’s case is put on that basis, that is to say, that when Flood made the LETS funding representation all necessary decisions had been made that LETS would advance the stated amount of funds to Arts Capital. It is no part of Sanbern’s case that the process of decision making on the LETS side was to take place after the making of the representations.
Finally, Santamaria returned the Investment Agreement as it then seemed the only way he could secure any repayment.
Flood’s account was at logger-heads with Santamaria’s account. He recalled a meeting with Santamaria and Macpherson in 1997 but could not otherwise recall the date of the meeting. Nor could he recall the contents of the discussion. He gave evidence of what he considered he would have said. He was asked if there was discussion of a prospectus being prepared, and replied that there would have been, he was sure, and that he would have said he had been asked to draft a prospectus for Jekyll and Hyde and he was undertaking that. He was hoping to get it finalised before the end of the financial year. He was reluctant to give a date as deadlines change. He would have spoken about funding, he could not recall what he said, but he would have said that a prospectus would be coming out to raise funds. At that point “we” were talking to Tolhurst about underwriting the prospectus. He may have said that, but he could not recall. He would not have said that Tolhurst had agreed to underwrite because there was no underwriting agreement in place. He added that when an underwriting agreement arrived at the end of May it was so onerous on the producer, Macpherson, that Macpherson decided not to go ahead with the underwriting agreement and, instead, to change to the process of the Information Memorandum as a way of raising the necessary funding. Flood said that LETS had no role in relation to Jekyll and Hyde. He said that he did not say that LETS was providing the funding. He may earlier have said to Santamaria (for they had spoken prior to the meeting in question) that he would approach LETS but it was clear at that stage that LETS had invested in four “shaky” musicals, and no more money would be available from LETS until it was seen what happened to Always. He told Santamaria that LETS would not be an investor. He did not say that LETS would provide funding to Arts Capital to enable it to raise $3.4M. Flood said that Arts Capital was seeking to raise funds from investors. Macpherson had said he had New Zealand investors contributing $1.8M. To raise the necessary $3M, Arts Capital was to seek $1.2M. He explained how this $3M would fit in with the raising of a further $3M under a prospectus, and the tax side of the matter. He said that there was a later discussion about increasing the funding by a further $400,000 to $3.4M to try to cover some non-deductible expenses. He acknowledged that in the letter he sent on Arts Capital letterhead to Macpherson on 6 June 1997 he stated, in confirmation of “our earlier discussions regarding funding of Jekyll and Hyde that Arts Capital has agreed to invest directly up to $3.4M in the production (our preference is for $3M) and undertakes to find further investment to enable the show to be staged in Melbourne”. The letter stated that the money would be raised by the use of an information memorandum offering participants an interest in the show at a minimum investment of $500,000. This “will be funded 50% by the investor and 50% through a loan from a related company to Arts Capital from the $3 million mentioned above”. Flood stated that the letter was the “crux” of litigation brought by the liquidator of Henry and Edward against J M Smith and Emmerton, which litigation is still to be heard. In his affidavit Macpherson did not depose as to the “earlier discussions”. The fact is, it is clear, there were numerous and on-going discussions between Flood and Macpherson. Further, the letter is readily seen to fit in to a context in which the nature and structure of the financial arrangements was changing and needed to be re-considered from time to time. Flood said, and I accept, that the “related company” was a company to be formed. It was not LETS. Finally, the letter was not sent to Sanbern. Further, Flood did not say that Arts Capital was providing the funding directly; rather, it was raising funding for the show.
Flood described a number of dealings with Santamaria who he described as an experienced businessman. That accords with my impression of him in the witness box.
Flood said that Santamaria had heard about Jekyll and Hyde and that he had indicated an interest in it and in looking at documents. Later he agreed to put in seed capital which Flood described as being high risk for a high return.
Flood said that he had previously explained to Santamaria the process of board approval before an investment could be made by Lets.
I turn now to the question of whether Sanbern has established its claim, on the balance of probabilities.
The claim is based on Flood having made the LETS funding representation and, furthermore, having done so on behalf of LETS. Counsel for Sanbern submitted that, on the evidence of Santamaria and Macpherson, I should be satisfied on the balance of probabilities that the representation had been made. It was recognised that Flood’s evidence had contradicted that of Santamaria and Macpherson but, it was submitted by counsel for Sanbern, he did not have a good recollection, and he had lied in giving his evidence. Hence, it was submitted, I should not accept Flood’s evidence.
I have already made some observations about the witnesses. I have regard to the submission that I should accept the evidence of Macpherson because it was not contradicted and he was not cross-examined. In the end, however, it was contradicted by the evidence of Flood who was called by counsel for Sanbern. Further, the matters previously mentioned concerning his evidence give cause for concern as to the likelihood of his evidence being an accurate recounting of the conversation. Furthermore, there is the interest of Macpherson through his company Henry and Edward, now in liquidation, which has litigation pending against Flood’s former firm J M Smith and Emmerton.
On the other hand, it is to be borne in mind that counsel for Sanbern could not cross-examine Flood and that Flood has an interest, in the context of the litigation, to be seen in the best light. I also bear in mind that Flood had an imperfect recollection of the relevant conversation.
I found that Flood’s evidence supported an impression I had of Santamaria’s evidence, and Sanbern’s case. It seemed to me to have been improbable that when the parties met in April 1997, Flood would have made a set of representations as definite and final as those alleged in the statement of claim and affidavits, having regard to the state of the matter at that time. As far as raising funds, preparing a prospectus, and concluding an underwriting agreement were concerned, it would have been a brave, indeed reckless thing, for Flood to have made those representations. Moreover the falsity of the prospectus and underwriting representations was readily ascertainable by a request for the prospectus and a query to Tolhurst. But, of course, the pleaded prospectus representation was not made; that allegation could never have been established as Santamaria himself had seen what he called a “partial draft”. I find that he saw no more than Flood’s early drafting work. Furthermore, as an experienced business man in this area of raising finance for theatrical productions, Santamaria knew that the preparation and final setting of a prospectus was not a simple task. The same finding holds true in relation to an underwriting agreement which must be found acceptable by a promoter before it could be said that underwriting is in place. Even then an agreement is required to be signed and, hopefully, no conditions invoked by the underwriter to withdraw from the commitment.
Overall, I formed the impression that Santamaria’s evidence had Flood saying things at a higher, or more definite, level than in truth they were likely to have been said. This can happen when a conversation is sought to be recounted several years after it occurred and in circumstances in which no contemporaneous record was made of the conversation. As noted above, Santamaria’s faxes containing the terms and conditions on which the committed funds were advanced were not produced to me.
I do not find that Flood lied in giving evidence. I did not find in his demeanour or manner of answering questions an indication of unreliability, or a lack of honesty. I accept that he had difficulty in recollection, or had present absences of recollection, but I do not accept that he lied. He swore to his best recollection. I considered his admitted lack of recollection, in the context of numerous discussions which he had with Macpherson and Santamaria, and the absence of a contemporaneous note, or correspondence, referring to the statements as made and relied upon, to be consistent with honesty, and the probability of the situation.
To conclude in this way does not mean that I find that Santamaria or Macpherson lied in giving evidence. Rather, taking into account all relevant matters and circumstances, including all the matters previously referred to, I am not satisfied on the balance of probabilities that the account given by Santamaria and Macpherson is correct. An important factor, but not the only factor, in arriving at that conclusion is the evidence of Flood.
I accept that Flood, and Macpherson, talked with Santamaria about raising funds for a production of Jekyll and Hyde, and I find that Flood referred to Arts Capital. I find that he referred to funds being raised by way of a prospectus which had to be prepared. I find he referred to Tolhurst but that he did not say that Tolhurst had agreed to underwrite raising the whole of the funds for the production. I find in regard to Tolhurst that he referred to the then preparedness of that firm to be involved as underwriter. But that is an altogether different thing from the statement of an irrevocable commitment by a third party to underwrite the whole of the funding. Further, not only was there no prepared and agreed prospectus but, as I have said, there was not yet an underwriting agreement. When, subsequently, Tolhurst forwarded a draft underwriting agreement, it contained terms so onerous that Macpherson could not accept them. When the parties spoke in April Flood may well then have hoped and expected that the underwriting would eventuate, and doubtless all parties hoped that would be so, but I do not accept that he lied and represented that Tolhurst had agreed to underwrite the whole of the funding funds required in any event. Moreover, in the circumstances, I do not consider that an experienced person such as Santamaria, or Macpherson for that matter, could reasonably have concluded that Tolhurst had so agreed.
Santamaria said that the Tolhurst underwriting commitment and the LETS funding representations were critical to Santamaria’s decision to advance funds. Without the former he would not have made that decision. But, as noted, the LETS funding representation is the only representation alleged to have been made on behalf of LETS. Again, it is to be noted that this representation is put as a final committed position of LETS. I accept Flood’s evidence that he did not make this representation. I find here that Santamaria’s evidence was affected by a deal of over-swearing in recollection and retrospect, and in inference from the funding situation in the Always matter. In relation to funding, I refer to the evidence of Santamaria that Arts Capital was “the conduit for the investment of monies” by LETS. If this evidence was meant to establish any more than that on a past occasion, or occasions, LETS had advanced funds to Arts Capital, and that it had done so in such circumstances as to imply that if Flood stated that Arts Capital was providing funding it meant, necessarily, to Santamaria, that LETS was providing that funding, I reject the evidence. In fact, the evidence can be traced back to the pleading of the implied term in the County Court statement of claim. But before me, on the appeal, the relevant representation was not based on implication, but stated by Santamaria to have been express.
I find that either in the initial conversation, or within a day or so, it was agreed that Santamaria’s advance would earn a return of about 3% net from the box office. In addition to favourable reports he had heard about Jekyll and Hyde, he was encouraged to advance $100,000. He took a commercial risk.
What has happened, I find, is that a mixture of statements made in the conversation, which doubtless were intended to present an encouraging picture of the likelihood of arrangements being successfully concluded for the production to proceed, have become, in the evidence of Santamaria and Macpherson, hard and fast final positions at a time when Arts Capital was seeking to arrange funding, and a prospectus and an underwriting agreement had to be prepared and finalised for the purpose of raising further necessary funding. I find that Flood referred to Arts Capital seeking to arrange funding. I find that he did not make the Arts Capital contribution representation. Further to the fact that he did not make the LETS funding representation, I find that it was not reasonably open to imply a representation to that effect from anything he said.
For these reasons Sanbern’s claim fails to be established. In these circumstances it is not necessary to consider other issues raised by counsel for the administrators. Those issues include causation of Sanbern’s loss, the difficulty of knowing the terms and conditions on which the money was advanced, the lack of evidence as to how the loss arose in terms of what happened to the money (presumably it went to Macpherson and was spent on pre-production costs), whether Sanbern’s rights as to recovery or return of the money came to be governed by the Investment Contracts and the operative effect of the representations in those circumstances, and whether Sanbern could recover that component of the $100,000 which had been borrowed from Shannon, that is $20,000.
The appeal is dismissed.
---
0