CATCHWORDS, Trade Practices - misleading and deceptive conduct by company - funancial structure of the company - cnanges in its financial structure - representations made relating to its financial structure - involvement of directors in contravention of Trade Practices Act pursuant to s.75B thereof - awareness of essential elements - positive sceps - loss cr damage suffered. COLIN PORTER v. AUDIO VISUAL PROMOTIONS PRY. LTD, & ORS. Trade Practices Act 1974 - 55.52, 53B, 53(2), 75B, 87(1A) Companies Act 1981 (Vic.) - 58.129, 371(2) VG 104 of 1982 Smithers J. 25 May 1984 Melbourne. IN THE FEDERAL COURT OF AUSTRALTA VICTORIA DISTRICT REGISTRY VG NO. 104 OF 1982 GENERAL DIVISION Between: COLIN PORTER (Applicant) And: AUDIO VISUAL PROMOTTONS PTY. LTD. (incorporated in New South Wales) and AUDIO VISUAL PROMOTIONS PTY. LID. (ancorporated in Victoria) and DONALD TAYLOR and Ld. FINNEGAN (Respondents) Judge Making Order: Smithers J. Date of Order: 25 May 1984 Where Made: Melbourne. ORDER Upon an undertaking by the applicant through his counsel that, upon payment of the sum of $20,000 to him pursuant to this judgment, he hold any interest he has in shares in the first respondent on trust for the respondent or respondents who pay such a sum, or in the event of payment of only part of such sum, to hold the same in favour of the respondent or respondéents paying such part to the extent of the payment made by such respondent or respondents the Court orders: Judgment for the applicant for the sum of $20,000 against the third and fourth respondents. Payment of the same or any part thereof by either respondent will operate, as between the respondents and the applicant, as a discharge pro tanto of both respondents. That the third and fourth respondents shall pay the costs of, and incidental to the applicant's application. IN. THR FEDERAL COURT GF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) VG NO. 104 OF 1982 ) ) GENERAL DIVISTON Between: COLIN PORTER (Applicant) AUDIO VISUAL PROMOTIONS PTY. LTD. ¢incorporated in New South Wales) and AUDTO VISUAL PROMOTIONS Pry. LTD. (ancorporated in Victoria): and DGNALD TAYLOR and Ld, FINVEGAN [eg ro a. (Respondents) Coram: Smithers J. 25 Mav 1984 REASONS FOR JUDGMENT By his amended application of 3 September 1982 the applicant (Porter) claimed relief against the first and second respondents in respect or alleged contraventions of the provisions of ss.52, 53B and 59(2) of the Trade Practices Act 1974 (the Act) and on other grounds. The second respondent is a wholly owned subsidiary of the first respondent. For current purposes it is unnecessary to have regard to the first and second respondent as separate? entities. The effective ownership and control of the assets and responsibility for the liabilities of the second respondent was in the first respondent. Ie is sufficient hereafter to refer to the total business undertaking of the two respondents as that of "the company" or "AVP". According to the Statement of Claim relief is also sought against the third respondent (Taylor) and the fourth respondent (Finnecan) on the ground that they were involved in the contraventions of the Act alleged against AVP pursuant to s.75B of the Act, and on other grounds. At the hearing it appeared that AVP were then in liquidation. The consequence was that the actions could not proceed furthee against them because no leave to proceed pursuant to s.371(2) of either the Companies Act (Vic.)1981 or the Companies Act (N.S.W.) 1981 had been sought. AVP were called but did not appeac. To succeed against Taylor and Finnegan as persons "involved" within the meaning of s.75B of the Act there need to be findings that, in the circumstances of this case, AVP engaged in conduct, orf made statements or representations, which constituted a contravention of the Act, and resulted in Porter suffering loss and damage. The contraventions of the Act alleged against AVP were constituted by the publication of an advertisement containing certain statements, and oral representations made to Porter by Taylor and Finnegan in their capacities as director and general manager, and managing director respectively of AVP. To the extent that the publication of the advertisement was authorized by e1ther Taylor or Finnecan and that either of them made oral representations, such conduct, so far as the contents of the advertisement or the representations were misleading or deceptive or false and misleading 1n a material particular. was not only conduct by which AVP contravened the Act, but may also be conduct constituting the "involvement" of Taylor and Finnegan in the contravention by AVP, within the meaning of 8.75B of the Act. So far as involvement in the contraventions are concerned it must be shown that Taylor and Finnegan took some positive steps in the carrying out of the misleading and deceptive conduct of, or the making of false and misleading Statements bv, AVP and they did so with knowledge of the essential facts said to constitute the contraventions of the Act by AVP: see Yorke v. Lucas (1984) 49 ALR 672. Since counsel addressed their arguments mainly in relation to a contravention of s.52 of the Act, in practical terms, 1t may be said that Porter must show that a person said to he involved within the meaning of s.75B took some positive step in yelation to the contravention with the knowledge that the part so played by him constituted the communication of waterial which was misleading or deceptive or likely to mislead or deceive. The issues arise out of negotiations pursuant to wnich oad on 24 April 1981, Porter entered into an employment service agreement with AVP, aterm of which was that he should purchase 10,000 $2.00 shares of AVP for $20,000, and AVP or Taylor and Finnegan undertook an obligation to arrange for the "yepurchase" of the shares at par or better 1n certain events upon 120 days notice. The negotiations commenced as a result of the publication in the Age on Saturday, 28 March 1981 of an advertisement in the following terms: "MARKETING DIRECTOR PARTNERSHIP AND INVESTUENT OPPORTUNITY Senior Marketing Executives, aged 35 to 50 years, with wide business knowiedge and proven sales record, are invited to join our group. Our expanding market demands additional executives to consult with major clients. This company is the sole Australian distributor for Fairchild Projection Equipment. ° An attractive salary and-benefits package of between $30,000 to $40,000 per annum is offered. Extensive in-company training will be provided to successful applicants. Please phone for a confidential appointment. AUDIO VISUAL PROMOTIONS 1A Craine Street, South Melbourne Vic. Phone 699 2622" At all material times Finnegan was managing director, his wife vas a director and secretary, and Taylor was a director and general manager of AVP. The head office and showroom of AVP wag in Sydney. Its business was the manufacture and marketing of audio visual products. Its main business was carried on in Sydney where there were a number of employees. In the Melbourne office there was a small staff and business was poor. The company was incorporated in 1961 and carried on business continuously until 15 December 1982 when it was wound up and a liquidator appointed. On 20 May 1980 the authorized capital of AVP was $10,000. On that day by resolution of the Board of Directors it was increased to $1,000,600 by the creation of 495,000 ordinary shares of $2.00 each. On 27 June 1980 the directors revalued the company's plant and equipment upwards from $24,225 (cost less depreciation) to $274,225 (repiacement value). At the same time Taylor and Finnegan made a valuation of goodwill assessing it at $500,000. The total extent of this re-valuation and valuation, namely $750,000, was brought to account and credited to Asset Revaluation Reserve. On the same day the directors issued to the existing shareholders a seventy five for one bonus issue of fully paid up shares at par out of the Assets Revaluation Reserve. The existing shareholders were mainly the directors. The $500,000 ascribed to goodwill is described by Taylor as the estimated gross profit the company expected to accrue over the following five vears from the exploitation of a distributor agreement which the company entered into on 1 January 1980 with Fairchild Camera and Instrument Corporation (Fairchild) aun respect of certain of its products. That agreement was subject to cancellation by Fairchild, according to Taylor's best memory thereof, on six months notice. In dune 1981 a loss of $235,896 was recorded by AVP. In the previous year (1979/80) there was recorded an operating profit of $32,983 which was $8,111 Greater than the operating profit recorded for the year 1978/79. In the year 1979/80 a loss of $102,921, said to be due to an abnormal item being overseas purchases in an earlier pericad and broucht into the accounts, was recorded. As shown in the accounts of the company ending 30 June 1980, assets, if one includes the goodtvill valued act $500,000 and plant and equipment at replacement value, were $1,042,975. Its current liabilities were $348,811. "Thus a net surplus of $694,164 was disclosed. Tf the qoodwill allocation were excluded and the assets were valued not at replacement value but at cost the surplus would be transformed into a deficit of $54,063. The reason for the capital re-organization of June 1980 1S not stated. No reason is readily apparent. The shareholders stood to gain nothing by such a move. Of course, it did enable anvone so minded to describe the company as a million dollar company with $750,000 paid up capital, anc so convey a picture of the company very different from describing it as a company the authorized capital of which was $10,000. Having regard to what Taylor said to Porter on the point, I have formed the view that one reason for the reconstruction of the company's capital was to provide a basis for a misleading description of the company in negotiations with persons dealing with it. Whatever the purpose of valuing plant and equipment at replacement value rather than cost or realizable value might have had it could not, as a matter of substance, support the issue of fully paid up bonus shares. Similarly an issue of bonus shares if it is to be meaningful, requires to be supported by realizable, or at least, potential real value of the resources of the company. To use replacement value creates an illusion. So far as replacement value exceeds actual value the shares issued against it merely reduce the value of all the other shares. With respect to the introduction into. the accounts of the goodwill fiqure of $500,000 the bona fides of that operation depends on the reality of the belief of the directors of the validity of the valuation made. It was made by the directors themselves and there 1s no statement that it was done after professional advice. If it was just a device understood by all the sharehoiders perhaps it was unimportant. But when it is put forward to a potential subscriber for shares in the company as evidence of the quality of the company, it is another matter. As will become apparent, that is the way in which it was used by Taylor in his negotiations with Porter. As to the reality I" of the belief of the directors thac on commercial grounds the introduction of the figure for goodwill was justified 1t is to be noted that the basis used was five years estimated aross profit as a result of the Fairchild agreement. Gross profit is a weak reed on which to build gqgocdw21ll. And it must be questionable whether it is permissible to engage in the degree of optimism which the directors exhibited in making the valuation and issuing bonus shares against it. In June 1980 the Fairchild agreement entered into on 1 January 1980 had been subject to exploitation for six months, yet the operating profit at June 1980 was only $32,982 compared with $24,872 the previous year. In addition, in April 1981 the company was nine months into a trading year in which the operating loss was $235,896. Whatever the optimism of the directors as to the value of the Fairchild agreement or the goodtvill generally it must have been clear in April 1981 that the Fairchild agreement and the business generally was not producing results to justify a goodwill figure of $500,000. As previously mentioned, in the 1979/80 year the company incurred a loss of $102,921. For the year July 1980 to 30 June 1981 the company's profit and loss account shows a loss for that year of $235,896, the accumulated loss thus being $338,817. Tt us said that the fortunes of the company surfered a serious blow in May 1981 when a processor was damaged and removed by a hostile employee. But it was acknowledged that not all the loss to 30 June 1981 was due to that event. And it is to be noted that Taylor said the sales turnover for 1980-81 was similar to that of 1979-80. He also said that sales figures were supplied to the directors monthly. On 22 April 1981 a petition to wind up the company was presented by the Federal Commissioner of Taxation'(FCT). The claim on which the petition twas based was for group tax and penalties, The tax is said to have been approximately $20,000 and the penalties approximately $40,000. This claim must have been made to the company before 22 April 1981. Failure to pay group tax is quite a serious step to be taken by any employer the sum being a deduction from wages payable. It is not likely to occur in a compeny able to pay its debts. The fact that penalties were outstanding indicates that the company had unsolved tax difficulties. It would appear that after the petition was filed the company paid the $20,000 tax and the petition was not proceeded with. That must have been after 22 April 1981. Whether Porter's money was used to pay the tax liability or not the $20,000 paid by him on 1 May 1981 must have been more than welcome. In December 1982 there was a further petition by the FCT, the amount claimed in the petition including the penalties sought originally in the April 1981 petition. 10. Taylor said that there had been an unrecorded agreement by a taxation official that the penalties would be remitted, but, after the retirement of that official, the agreement was not recognized. AS a result the liability for penalties subsisted and upon that liability, inter alia, the company was wound up in December 1982. As indicated above, in April 1981 the company was nine months into a teading year in which it mede aloss of $235,896, That was a period in fespect of which Taylor and Finnegan certified in December 1981 that the results of the operations of the group during the financial year were not in their opinion affected by any item, transaction or event of a material or unusual nature. Taylor and Finnegan certified also that there had been no item, transaction or event of a material or unusual nature likely in their opinion to affect substantially the results of the operation of any corporation in the company's group of companies. In other words, the pattern of loss in ordinary trading was established, and must have been apparent. It was aqainst this background that Taylor tnterviewea Porter on 12 April 1981 ain connection with the position advertised on 28 March 1981. Taylor showed hima film demonstrating the company's activities. Taylor produced a number of documents including a blank employment agreement and spoke of the proposed terms of employrent and said that the li. company would expect Porter to invest $20,000 in the company. As to this proposition Porter had said in the initial telephone conversation between the two on 30 March 1981 "You have lost me now". Amongst other things, Taylor said that the company was financially sound, that it was a million dollar company with a paid up capital of three quarters of a million dollars and it certainly was not a $2 comvoany. Porter said he had not sold audio visual equipment and Taylor said that the company would provide three weeks 1n house training in Sydney to-get him headed in the right direction. Taylor also said that, there was quite a lot of established business in Melbourne. On about 9 April 1981 Porter was informed expressly or impliedly, by telephone, that he would be appozunted if the $20,000 was available for the purchase of the 10,000 shares in the company. Early in the negotiations Porter said he would expect an undertaking by the directors that in the event of his leaving the company the shares would be repurchased and on the understanding that such an undertaking would be given he set about organizing the provision of the money. On his house worth $60,000 to $65,000 he borrowed $50,000 at 18% interest. Out of that he paid off an existing mortgage and on 1 May 1981 he paid $20,000 tc the company. Porter was invited to Sydney and arrived there on 21 April 1981, He was told that his visit would be for one week 12. rather than three but that Taylor would be making regular trips to Melbourne to help out in the field and give requiar training and help get sales in Melbourne. He was shown the Crows Nest office where he met Mr. Leobold, an employee of the company, whom he understood was to look after him. Porter was taken ona tour around the company's premises at Rockdale including the laboratory and the services section. On 24 April 1981 he was taken to the Rockdale office where he was interviewed by Mr. Taylor who produced the employment agreement, the application for allotment of 10,000 shares at 32 each, and an undertaking in respect'of the "re-purchase" of the shares. The documents were signed by Porter. In the afternoon he was introduced to Mr. Finnegan, the Managing Director. Mr. Fannegan asked Taylor if the paper work had been completed. He was assured that it had. Porter and Finnegan talked about the selling of audio visual products. Finnegan assured Porter that the company was financially sound and added "We do not stay in business for twenty years by not - paying our bills". He gave Porter the names of some potential purchasers of equipment. The agreement, dated 21 April 1981 but signed on 24 April 1981 provided: l. That Porter purchase 19,000 shares in AVP by bank cheque payable on 7 May 1981. 2. That AVP agreed to accept the services of Porter as an 10. 13. audio visual marketing consultant for a fee of $15,000 per annum payable weekly. That AVP would pay Porter a management fee of $1000 per quarter "whilst his services continue to be provided" to AVP. That AVP undertook to pay a bonus management fee within ninety days of the end of each financial year to Porter based upon the profitability of the management services provided by him to AVP. Tnat AVP undertook tc pay commission to Porter on the new accounts introduced to AVP by him. The rate of commission payable. That AVP undertook to provide Porter with a motor vehicle. That AVP agreed to pay telephone expenses. For one month annual leave of absence and two weeks sick leave. _ That Porter undertook not to enter into competition with AVP in the audio visual industry whilst he held shares in the company and for three years thereafter. This agreement for appointment as marketing consultant was for no fixed term. At the time of the signing of this agreement Taylor produced and gave to Porter a document dated 21 April 1981 called a "letter of undertaking". It was on the letterhead of AVP and was in the following terms:- 14. "Pursuant to COLIN PORTER purchasing Shares in AUDIO VISUAL PROMOTIONS PTY. LTD., the Directors of Audio Visual Promotions Pty. Ltd., UNDERTAKE as follows:- i) Should the said COLIN PORTER desire to dispose of his Shares, the Directors of Audio Visual Promotions Pty. Ltd., will arrange for their re-purchase at least par or better, on receipt of one hundred and twenty (120) days' notice. ii) Should Audio Visual Promotions Pty. Ltd. desire to discontinue the relationship with COLIN PORTER, they have the right to request the said COLIN PORTER to dispose of his Shares to a designated party, at least at par or better. iii) In the event of the death of Mr. COLIN PORTER or his incapacity due to illness/accident, Audio Visual Promotions Pty. Ltd. Directors UNDERTAKE to arrange for the re-purchase of Shares held by COLIN PORTER at least at par or better, within 120 days of notice being given to this effect. SIGNED FOR AND ON BEHALF OF ) (SIGNED FINNEGAN) ° ) (SIGNED TAYLOR) AUDIO VISUAL PROMOTIONS PTY. LTD. )" Before 7 May 1981 Taylor had rung Porter or his wife ona number of occasions and urged the earliest possible payment of the $20,000 payable on 7 May 1981 for the shares. The money was paid on 1 May 1981. ' Porter commenced work in Melbourne on 27 April 1981. He found it difficult to make sales of the company's products. He frequently rang Taylor seeking help and advice and requesting Taylor to come to Melbourne. On occasion Taylor gaid he would come down to Melbourne but he never did. Mr. Leobold came on two or possibly three short visits but was 15. engaged largely on matters of his own. For practical purposes Porter received no help from Sydney. His sales performance was low. On 5 November 1981 Finnegan informed Porter by telephone that his services were terminated. Shortly thereafter there was a telephone conversation between Porter and Taylor in which Porter requested repayment of the money paid for the shares and discussed the payment for salary and management fee. Taylor said "they" would do everything in their power to pay back the $20,000. It would seem that Taylor's conception of the liability under the undertaking was that it extended only to the making of an attempt to induce some person to buy Porter's shares at par. The $20,000 has not been repaid. Taylor and Finnegan have taken the view that they have no personal liability in the matter. So far as the company is concerned there was and 1s the problem that a company is unable to purchase its own shares and as put in the letter from Taylor dated 20 April 1982 "therefore no agreement exists between the company and Mr. Porter for the repurchase of his shares." As previously indicated, Porter's claim against Taylor and Finnegan depends in the first instance on proof that AVP committed a contravention of ss.52, 53B or 59 of the Act, although most of the argument was directed towards s.52 of the 16. Act. It is said that the conduct of AVP was, inter alia, misleading and deceptive or likely to mislead and deceive. I think this is proved. To my mind various statements in the advertisement were untrue and misleading. First, what AVP had to offer could not reasonably be described as an investment opportunity. The notion of an investment opportunity is that the investment is likely to prove profitable or at least has the potential to be profitable. There was no chance that the purchase of the shares could be a profitable investment. The value of company's assets were in reality, much less than its liabilities, losses were being incurred in trading, and there was no prospect of any turn around in profitability. The company did not in any real sense require any senior marketing executives. The company did not have a market which could reasonably be described as an expanding market which demanded additional executives to consult with major clients. The market was not expanding, especially in Melbourne, where it had been in the doldrums for at least six months after the departure of the Victorian Manager. The company had no intention of providing intensive in-company training. With respect to statements made by Taylor to Porter during the interview of 1 April 1981, I am satisfied that to say that the company was a million dollar company with a paid up capital of $750,000 was misleading and deceptive. It was said in the context of other statements tending to show that the company had financial strength. In a sense, of 17. course, it was true that the company was a million dollar company with a paid up capital of $750,000 but the question is how, 1n the circumstances, the statement to that effect would be understood or be likely to be understood by the person to whom it was made. In the circumstances the picture to be conjured up by the description of the company was that it was a large company adequately supported by large cash capital contributed by persons who had bought shares, and it was carrying on a successful business. In the circumstances it was a misleading description of a company the bulk of whose shareholding was made up of bonus shares supported by a write up of plant and equipment and a valuation of goodwill supported only by expectation of future business by the exploitation of the Fairchild agreement, which in April 1981 had not materialised in line with, or anywhere near that expectation. Statements such as those under consideration invite the hearer to have full confidence in what is said, and to hear it without suspicion that there may bea catch therein. If he had had more knowledge the hearer might have said "were the fully paid shares actually paid up in cash or were they bonus" shares". But Porter did not have such knowledge or the necessary suspicion to go with it. As was said by Brennan Jd. in World Series Cricket v. Parish (1977) 16 ALR 181 at pp.202-203:- "Although knowledge may be a valuable barrier against deception, the question for the Court to determine is whether there is a prima facie case that the use 18. of the terms complained of would mislead or deceive the class of persons to whom the advertising is addressed. In the present case, there is substantial evidence that the advertising is directed to the general public - the knowledgeable and those who are not, the superficial reader or viewer or Listener as well as the profound, the gullible as well as the cautious." (see also per Bowen C.J. at pp.188-189 and per Franki 'd. at p.195) At Porter's request a document containing company accounts for the year 1979-1980 was made available to him during the negotiating period. It showed the euthorized capital of the company was one million dollars, that 376,884 ordinary shares of $2 each trere "fully paid" at $753,768, that the plant and equipment at ""director's valuation" was $274,225, They disclosed an operating profit for the year of $32,983 and that, as an abnormal item of $142,240 in respect of "overseas purchases of prior years", was brought into the profit and loss account, the company recorded a loss of $102,921 for the year. They did not disclose that the plant and equipment was brought into account at replacement value or that $500,900 recorded for goodwill was the gross profit estimated in May 1980 to be likely to accrue from the Fairchild agreement over 5 years. They did not disclose that $750,000 of the issued shares were issued as bonus shares. All the foregoing was in the knowledge of the directors save that possibly they did not realize the extent of losses being incurred. They knew, however, that they could not pay 19. the group tax due by the company, and were in danger of incurring penalties relating to previous tax years. They knew also that the licuidity problems were serious, notwithstanding the infusion of $80,000 - $100,000 into the company's bank account by persons who, like Porter, had been induced to buy shares on arrangements similar to those of Porter. It is clear now that those liquidity problems were an inability to meet payments as they became due. Having regard to the foregoing I am satisfied that AVP engaged in conduct which was misleading and deceptive and in contravention of both ss.52 and 59 of the Act. And to my mind the critical misleading conduct was that by which Porter was iunduced to believe that he was joining a large company whose financial condition was fundamentally sound, which carried on a successful business, and with which he could look forward to a lengthy and satisfactory association. However, before Porter can obtain the relief sought by him under the Act he must show that Taylor or Finnegan, or both, were persons involved in the contraventions of the Act within the meaning of s.75B of the Act, and that as a result of the contraventions or involvement in the contraventions Porter suffered loss or damage. For Taylor and Finnegan to be seen as persons "involved" in contraventions, the involvement needs to be other than 20. innocent. it must be shown that some positive steps were taken with the knowledge of the essential matters which constituted the contravention by AVP: see Yorke v. Lucas (supra). There can be no doubt that the facts establish Taylor's knowledge of the essential and relevant facts, the main fact being that AVP was not financially sound at the time he made representations that 1t was. He had been party to the capital restructuring of AVP including the revaluation of the company's goodwill and its asset revaluation. He was aware of the loss made by the company in 1979/80 and that losses were being incurred in 1980/81. A petition to wind up the company was on foot at the time he was negotiating with Porter. The representations Taylor made to Porter in relation to the company's financial soundness constitute positive steps taken by Taylor in relation to the contraventions of the Act by AVP. With respect to Finnegan I am satisfied that he said to Porter that the company was financially sound, and did so by way of reassurance. In other words Porter understood Finnegan to be extending an assurance on the facts known to him that, what was to Porter, a large purchase of shares, was a sate investment because AVP was financially sound. Finnegan, added, "We do not stay in business for twenty years without paying our bills". But Finnegan as managing director must have been aware that company was not paying its bills. He must al. have known of the company's non-payment of group tax, and the outstanding liability for penalties and of the continuing liquidity shortage notwithstanding the infusion of $80,000 - $100,000 by the share subscribing employees. He must have been aware of the impending loss of patience by the Taxation Department and that the company was continuing to lose money from June 1980 to April 1981. He was aware of the manner in which the reconstitution of capital was brought about. It is to be noted, however, that when Finnegan gave assurances the employment agreement had been signed. So aiso were Porter's application for shares and the undertaking as to the "re-purchase" of the shares. When Porter was introduced by Taylor to Finnegan, Finnegan looked across at Taylor and asked "has the paperwork been completed", and there was an affirmative response to that. In my view the inference to be drawn is that Finnegan was acquainted with the nature and content of the arrangement between Porter and AVP that he knew that Porter was yet to pay the $§20,000 and that Finnegan desired to promote the completion of the arrangement by the payment of the money. The agreement to buy the shares having been entered into, on the face thereof, Porter was legally bound to pay the money when Finnegan spoke to hin. But obviously from a practical point of view it was essential to ensure that Porter's faith 22. un the soundness of the arrangement, and essentially in the soundness of the company, was maintained. Loss of that faith would certainly have put the receipt of the §20,000 in jeopardy. It vas no doubt to confirm Porter's faith in these matters that Finnegan gave his assurances as to the soundness of AVP. And it is my opinion that when Porter said what induced him to pay the money, thet "it was all tied in together, all the things all added up", he was referring not only to Taylor's statements to him but also to Finnegan's assurances aS to the soundness of the company and its habit of paying its bills. Had Porter lost faith and refused to pay, it would have been impossible both as a matter of law and practicality for AVP to have enforced the agreement against him. Given the belief of Porter that the company was sound and could meet its obligations, the entering into the employment agreement was no doubt rational. But take that belief away and not even Porter, naive as he was, would have paid the money. It was to reinforce and maintain this fundamental belief that Finnegan used his prestige and authority as managing director to re-assure Porter. Although the matter was brought to the attention of Porter's counsel that the involvement of Finnegan was not particularised no step was taken to give such particulars. But as the evidence of Finnegan's statement to Porter had been 23. given without objection, I informed counsel for Finnegan that I would treat the conduct alleged against Finnegan to be that which has heen given in evidence although not formally particularised. I intimated to counsel that in view of this Finnegan might desire to consider whether he would wish to change his mind about not giving evidence. Finnegan did not do so. Accordingly, I am satisfied that both Taylor and Finnegan were persons involved in the contravention of 55.52 and 59 of the Act by AVP. Accordingly, Porter is entitled to relief pursuant to ss.82 and 87 of the Act if he can show that he suffered loss or damage as a result of the contravention. Were AVP itself @ party to this action, in the sense that an order could be made against it, it would in my opinion be proper to declare the employment agreement and the allotment of shares to Porter and their undertaking for the "repurchase" of the shares void under s.87(1A) and to order the refund of $20,000 paid by Porter. In the circumstances, however, it would appear that, at this stage, at any rate, that relnref is not available. But as against Taylor and Finnegan aS persons involved in the contravention of the Act by AVP by which, if 1t can be shown, Porter suffered loss and damage, it is competent for this Court to make such order as iS) Oa will compensate Porter in whole or in part for the loss and damage suffered by him and to daso by making an order as authorised by s.87(1A) of the Act. On the question of the quantum of loss suffered by Porter, in my opinion the shares were valueless or nearly so when Porter applied for them. I have set out the unsound state of AVP's capital structure. In my opinion there was no surplus of assets over liabilities at that stage to give the shares any value. A sale of the shares to any person acquainted with the true state of the company's fortunes would have been impossible at any price. Since then the situation has deteriorated. On this question a submission was made that an action by the liquidator against an insurance company arising out of the damage to equipment in May 1981 might realize some $200,000 to $500,000. I reject this entirely. The directors made declarations dated 14 January 1983 in the report of the provisional liquidator to the effect that the estimated amount which might be recovered was $70,000. But there 1s the agreement by the company that the directors undertook, in events such as those which have happened, to arrange for the "repurchase" of the shares at par or better. It is contended by Finnegan and Taylor that this agreement does not create any personal obligation in them. In theory, accordingly, the obligations under the "repurchase" agreement are those of the company, and Porter has a right of 25. action against the company for damages for the non-performance of its promise that the directors should undertake to arrange for the "repurchase" of the shares. The claim would be that the company was liable because the directors did not fulfil their undertaking to sell the shares at par or better. This claim would certainly be of an unusual nature. And the undertaking is capable of being construed as to do no more than to endeavour to arrange a repurchase of the shares at par or better. There is the further difficulty that the undertaking was to arrange the "repurchase" of the shares. Clearly, the undertaking is capable of being construed as requiring the directors to arrange for AVP to buy back the shares in question. On this basis the agreement is of no effect because of s.129 of the Companies Act 1981 {(Vic.). It is to be noted also that in the light of the report of Finnegan and Tayler as directors of the company dated 14 January 1983 the liabilities of AVP were at the time of liquidation approximately seven times the value of the assets. I do not accept the evidence which would indicate that this position has changed materially. It follows that any claim enforceable against the liguidator would, even if admitted, be for a relatively small amount. Obviously there are serious obstacles to be overcome in any action by Porter against AVP or the liquidator on the "repurchase" agreement. In the result, in my opinion, the value sro Porter of the possible claim in the liquidation on the basis of breach by the company of the "repurchase" agreement is practically nil. 26. It would seem that the possibility that there was liability in the company to Porter under the re-purchase agreement would not reduce his loss and damage ina claim by him against the company for relief under the Act in respect of the contraventions of s.52 or s.59 proved in this case. tT think the same situation obtains where the relief is claimed under s.87(1A) against persons involved in those contraventions within the meaning of s.75B. In the result there must be judgment for Porter against Taylor and Finnegan with costs. Given my judgment in relation to the contraventions of the Act I find it unnecessary to deal with the other grounds relied upon in the Statement of Claim. oe om B ra td Ww 28 [5 fe, Smee cnn en ad SA Re te neat et