CATCHWOROS TRADE PRACTICES - Misleading or deceptive conduct - Sale of business - Representation as to viability and profitability of business - Test to be applied - Necessity to review totality of conduct - Measure of damages - Factors to be taken into account - Power to award interest - Costs. TRADE PRACTICES ACT 1974 - ss.52, 75B, a2 SOUTH AUSTRALIAN SUPREME COURT ACT 1976 - s.30C A.J. THOMPSON PTY. LTD and ALAN JOHN THOMPSON Applicants - and - K.L.K. MANUFACTURING PTY. LTD., KEVIN ERROL KOCH and JOHN SCOTT SUTTON Respondents Fisher J. Adelaide @ July, 1986. IN THE FEDERAL COURT OF AUSTRALTA ) . ) SOUTH AUSTRALIA DISTRICT REGISTRY ) No.G43 of 1983 ) ) GENERAL DIVISION BETWEEN: A.J. THOMPSON PTY. LTD and ALAN JOHN THOMPSON Applicants ~ and - K.L.K. MANUFACTURING PTY. LTD., KEVIN ERROL KOCH and JOHN SCOTT SUTTON Respondents MINUTE OF ORDER JUDGE MAKING ORDER : FISHER J. WHERE MADE t ADELAIDE DATE OF ORDER : 8 JULY 1986. THE COURT ORDERS THAT: There be judgment in favour of the first applicant, A.J. Thompson Pty. Ltd., against the respondents in the sum of $110,000.00. There be judgment in favour of the second applicant, Alan John Thompson, against the respondents in the sum of $5,958.00. The cross-claim by the first and second 'respondents against the applicants be dismissed with no order as to costs. is t " ee 4, The respondents pay to the applicants 75% of their costs, the same to be taxed if not agreed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. ert oe ree - eeprom ete oon tar te IN THE FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIA DISTRICT REGISTRY ) No.G43 of 1983 } GENERAL DIVISTON ) BETWEEN: A.J. THOMPSON PTY. LTD. and ALAN JOHN THOMPSON Applicants - and - K.L.K. MANUFACTURING PTY. LID. ,KREVIN ERROL KOCH and dGGHN SCOTT SUTTON Respondents REASONS FOR JUDGMENT CORAM: Fisher J. 8 duly 1986 These proceedings were commenced by application filed on 1 December 1983, which application was accompanied by a statement of claim. They relate to the sale and purchase of a business. The applicants contended that in the course of negotiations in February 1983 leading to this purchase the respondent K.L.K. Manufacturing Pty. Ltd. ("K.L.K.") contravened the provisions of s.52 and sub.5.59(2) of the Trade Practices Act 1974 ("the Act"). It was alleged that by reason of these contraventions the applicants suffered loss which they seek to recover from K.L.K. pursuant to 5.82 of the Act and from the other respondents as meee epee mp en meee Re et ee eee x ey mot weap see yp penn ae Ta ae : persons involved by virtue of s.75B in the contraventions. In the end no reliance was placed by .the applicants on the allegation that K.L.K. contravened sub.s.59(2) of the Act. The conduct which was said to contravene s.52 comprised representations made during negotiations by the respondents Kevin Errol Koch ("Mr. Koch") and John Scott Sutton ("Mr. Sutton") on behalf of K.L.K. which representations were also alleged to have been made fraudulently, recklessly, innocently or negligently. No reference was made during the hearing to these further issues until there was a debate concerning the power of the court to award interest for the period between the date when the cause of action arose and the date of judgment. Before mare detailed reference 1s made to the issues and the pleadings it is necessary to relate briefly the circumstances in which the contest arose, Mr. Koch is an elderly man who has had much experience and, it appears, much success as an inventor and engineer. The particular invention which was the subject matter of these proceedings is known as a "Flexebar" which is a device which when attached to the front of a motor vehicle operates as a protection additional to the standard bumper bar. At the time of the negotiations in February 1983 the business of manufacture and distribution of Flexebars was conducted by Automate Pty. Limited the name under which K.UL.K. at that time traded. Automate changed its name to K.L.K. Manufacturing on 14 July 1983, after having earlier sold the right to use the name "Automate" for wee ee A eee os aN , Fe I rg oe ge a ee et ee ee aa nee te re ig Sere rie eee oar eo aes oper ree se reer a aati' to 4S sot $30,000. K.L.K. was at all times a private company with Mr. Koch as director and executive, the shares therein being _held by himself and his wife. It was one of a group of Koch family companies. At the time of sale Mr. Koch was, through K.L.K., engaged in developing a trailer invention in addition to the Flexehar business. In earlier years K.L.K. also engaged in the manufacture and distribution of rear window louvres but this business was sold in June 1980. Mr. Sutton was andis a chartered accountant engaged in private practice who acted as financial advisor to Mr. Koch and the Koch companies both as auditor and as accountant. The applicant Alan John Thompson ("Mr. Thompson") had had some years prior to the relevant time commercial experience as an insurance agent. He then managed Doug Godden Pty. Ltd, ("Doug Godden") a family company of his wife's father which carried on the business of manufacturing blinds and awnings. He was the executive director of the applicant A.d. Thompson Pty. Ltd, ("the applicant company") which company acted as the trustee for certain Thompson family trusts and was on my finding the . purchaser of the Flexebar business. Early in February 1983 Mr. Koch indicated at a lunch in a city restaurant to Mr. Thompson that he was keen to sell the Flexebar business. Mr. Thompson appears to have taken up, with some enthusiasm, the suggestion that he should purchase that business and to have had telephone conversations with Mr. Koch to this end. As a result a meeting was arranged to be held at Mr. Sutton's office on 18 February 1983, which was attended by Mr. Koch, Mr. Thompson, Mr. Sutton and an accountant engaged by Mr. Thompson, a Mr. Stevens. It was in the course of this meeting that Mr. Koch and Mr. Sutton were alleged to have made certain oral and documentary representations concerning the business, in yeliance upon which it was said the applicant company agreed to buy the Flexebar business for $200,000. This agreement was oral and not in any way at this stage reduced to writing and appears to have been conditional only upon the purchaser obtaining adequate bank finance. The assets of the business sold were plant and equipment, -stock and goodwill. The Flexehbar invention was the subject of patent protection both in this country and elsewhere and the relevant patents were to be assigned to the purchaser. Mr. Koch and Mr. Thompson agreed to attempt to conclude the sale by the beginning of March 1983, at which time the applicant company would commence business with the Flexebar assets on the premises previously used for the conduct of the Doug Godden business. Very shortly after this meeting Mr. Thompson and Mr. Stevens prepared a budget for presentation to the Westpac Bank in support of an application for finance. They used in preparing this budget information which they received at the earlier meeting as well as a copy of a budget previously prepared by Mr. Sutton for K.L.K. for its bank. This application was successful and Mr. Thompson commenced to move plant, equipment and stock to ; | ' I nee ee ener ne - 4 ot . . the new premises. Substantial progress had been made in this regard, and an amount of $5,000 paid, by the time when a further meeting of the same persons was held on 3 March 1983. At this meeting Mr. Thompson complained that the value of the stock he was acquiring was considerably less than that represented to him at the meeting on 18 February. Certain relatively minor adjustments were made to figures disclosed at that latter meeting. Mr. Thompson then signed a document which referred to the purchase price, its break-up in relation to the various assets, and which also referred to the fact that $100,000 of the purchase price would remain outstanding as to one half thereof for six months and the balance for one year with interest at 14% per annum. In this manner the applicant company acquired a manufacturing business which had in the past an annual turnover of $860,000 in 1979/80 and $680,000 in 1980/81, which produced at least three models of Flexebar units together with spare bar sets and accessories and which sold its products at varying prices to different purchasers. It was also a business which was acknowledged to have "run down". Virtually the only information upon which the applicant company made its decision to buy was that given in very general terms at the meeting of 18 February 1983. Mr. Thompson did not make nor did he direct Mr. Stevens to make any independent investigation into the reliability of this information or the ramifications of the Flexebar business prior to committing the applicant company to the purchase. woe eCard . - ores tye pee ere re ? aM pe mye ieee ed a By their statement of claim, as it stood prior to amendment during the hearing, the applicants alleged that Mr. Koch and Mr. Sutton made a number of representations during the meeting of 18 February 1983. It is necessary to set these out in the form pleaded as the applicants and their advisors undertook the onerous and extremely laborious task of attempting to establish during the hearing the fact that each representation was made in these words and that each was false. However they did establish that with the exception of representation (h), Mr. Koch or Mr. Sutton made a statement on the topic of each representation being statements upon which I rely in making my ultimate findings on the question of a contravention of s.52 of the Act. The representations as pleaded were as follows: ""(a) the value of the stock held by the said business was approximately $50,000.00, (b) the value of the plant and equipment owned by the said business was approximately $50,000.00, (c) Flexebar was patented in Australia and also in such countries as Japan, West Germany, France, New Zealand, the United States of America and Canada, {d) the cost of materials, labour and packaging of a Flexebar unit was $36.00, (e) the average sale price to distributors of Flexebar units was $65.00, (f) K.L.K. Manufacturing Pty. Ltd. had sold as many as two thousand four hundred Flexebar units per month and that the average number sold in a month was eighteen hundred, {g) the Purchaser of the said business would be able to sell eighteen hundred Flexebar units per month, rome creamer — owe an > y ve reeeewe i (h) (i) (3) (k) all dyes (sic), stationery and like items would pass to the Purchaser of the said business free of charge, there were a large quantity of orders which had not been filled by K.L.K. Manufacturing Pty. Ltd. and that those orders would not be filled but would pass to the Purchaser of the said business, the quantity and value of stock held by the said business would not decrease significantly pending the sale of the said business, the said business was so profitable that all borrowings which A.J. Thompson Pty. Ltd. would he compelled to undertake to purchase the said business would probably be able to be repaid from profits made by the said business within the period of one year." At trial a further subparagraph was included, namely - the said business was profitable. The applicants also alleged that at this meeting Mr. Koch and Mr. represented - "(a) (b) (c) (d) Sutton showed to Mr. Thompson documents which that the value of the stock held by the said business was then approximately $50,000.00, that the value of the plant and equipment owned by the said business was approximately $50,000, that the cost of materials, labour and packaging of a Flexebar unit was $36.00, that K.L.K. Manufacturing Pty. Ltd. had sold as Many as two thousand four hundred Flexebar units per month and that the average number sold in a month was one thousand eight hundred." Subparagraph ll(e) was included by amendment during the hearing as follows: VL Wr reece mgs aut ne Te, er etmen pemeeeee > wet ie eee wees ry soya are tous mn Sr Epo yn ey "That over a 12 month period up to about September 1982 the average number of Flexebar units sold per month was about 1,800 and that the average sale price was $65.00 per unit." The applicants pleaded in effect that each of these representations was false and that K.L.K. had in trade or commerce engaged in conduct that was misleading or deceptive in contravention of s.52 of the Act. It was contended that the applicant company, in reliance upon the representations, entered into the agreement to buy the Flexebar business. It provided Particulars of its loss amounting to $788,089. Furthermore Mr. Thompson claimed $164,000 in respect of payments he contended he had made on behalf of the applicant company in addition to income which he said he had lost and personal liabilities under guarantees which he had given on behalf of the applicant company. 7? As I have said the applicants undertook the task of seeking to establish that each of the above representations was made by K.L.K. and that each was false. Of necessity this could only be done by them by a process of analysis of and deduction from documents and records discovered by the respondents and unavoidably it was extremely time consuming. It is not irrelevant to note at this stage that the trial occupied 42 days of hearing with 31 witnesses, 151 exhibits and 3,833 pages of transcript. It was unfortunate and not wholly the fault of the parties that a hearing which commenced on 18 April 1985 did not Conclude until 25 March 1986. ee nope een ene r ve ster miners ee ee a> lee wee pew one me © oe Toh a pr mie ere Ze POR ree rene ay Before I discuss in detail the evidence concerning these representations and the witnesses it 15 appropriate that f indicate why I have adopted a different approach from that urged upon me by counsel for the applicants. In so doing it will become apparent that in my view it was possible for the applicants to succeed without necessarily establishing the falsity of each of the representations. The essential element is that the totality of the conduct be found to be misleading or likely to mislead. I find very relevant and helpful in this regard the approach of the Chief Justice of the High Court in Parkdale Custom Built Purniture Pty. Ltd. v Puxu Pty. Ltd. (1982) 149 C.L.R. 191 at p.1i99 when he said: "The conduct of a defendant must be viewed as a whole. It would be wrong to select some words or acts which, atone, would be likely to mislead if those words or acts, when viewed in their context, were not capable of misleading. It is obvious that where the conduct complained of consists of words, it would not be right to select some words only and to ignore others which provided the context which gave Meaning to the particular words. The same is true of facts." Likewise Brennan J. in Gould and Anar v Vaggelas and Qthers (1984) 56 A.L.R. 31 at p.58 approved the approach of Connolly J. at first instance when that judge refrained from considering separately each representation. Brennan J. said at that page - "se. but assertions that the business was very profitable were inherent in the four representations found ta have been made by Mr. Vaggelas (the vendor), and it was open to his Honour to find that the general representation of profitability was one of the factors which induced the Goulds to decide to buy. On a CATON oo oreo —~ St 10. reading of the whole of his Honour's judgment, I think that is what he found. He quoted from the judgment of Lord Halsbury L.C. in Arnison v'Smith supra, to show the fallacy of attempting to analyse the mental impression created by each of a number of representations. He said that the effect of a series of verbal representations could be ascertained as one maght ascertain the effect of a series of written representations, referring to Aaron's Reefs v Twiss £18961 A.C.273, where Lord Halsbury 'observed of a prospectus that it contained statements calculated to show that the commercial adventure in question was a very good thing which was likely to produce very large profits'. I understand his Honour to have found that the four misrepresentations falsely conveyed a statement that the business was very profitable and that the Goulds, unable to form 'an independent judgment' in 'the critical area' but having 'a lively concern about the financial position' were thereby induced to buy. That finding was open and no error of law vitiates it." I refer also to Taco Co of Australia Inc. v Taco Bell Pty. Ltd. (1982) 42 A.L.R. 177 per Deane and Fitzgerald JJ. at p.199 when they said: "The question whether particular conduct to which complaint is made is misleading or deceptive or more likely to mislead or deceive is, in the ordinary case, a question of fact to be answered in the context of the evidence as to alleged conduct and as to relevant surrounding facts and circumstances." It is my opinion that the proper approach to this matter is to assess the conduct of K.L.K. as a whole and to view the various statements in the context and atmosphere of the meetings rather than to analyse each statement separately for the purpose of determining its truth or falsity. By adopting this approach I propose considering critically each statement which I find was made, not so much for the purpose of determining its intrinsic accuracy but rather for the part it played, in the context of the TH Rn ee er ee ere eee Y i. ws > ray -e of a4 ! aon op = 11. meeting as a whole, in producing in Mr. Thompson the impression that the sum of $200,000 was a fair price to pay for a ~- business which was said to be viable and potentially profitable. Before coming to consider in greater detail the happenings at the two meetings, it is appropriate that I make comment on my assessment of the evidence given by each of the four witnesses thereat. It is relevant to note that Mr. Stevens was the only person present at the meetings who was not a party to these proceedings and he thus has no financial interest in their outcome. Furthermore, the respondents were not separately represented by solicitors or counsel and thus must, in particular as between the two natural persons, be taken to be content toa have the proceedings conducted as a contest between them on the one hand and the applicants on the other. Counsel for the respondents and indeed counsel for the applicants didnot in their examination attempt to distinguish or differentiate between them in such a manner as to impose responsibility on one for the benefit or the relief of the other. Many questions which might have been considered relevant if this had been the objective were not put and topics suggested by the bench were not pursued. I ultimately formed the opinion that on each side, for different reasons, the omission to do so was deliberate. Mr. Thompson was not a satisfactory witness and at the conclusion of his evidence I was of opinion that much of it was unacceptable unless corroborated. However I certainly did not Sane moe = ewe ee wm any 12. form the opinion that he was deliberately seeking to mislead the court or present false evidence. This critical assessment of his evidence was reached prior to hearing the evidence of Mr. Koch, whom I found to be utterly unworthy of credence. I cannot place any reliance upon his testimony and this outright rejection persuaded me to view Mr. Thompson's evidence more favourably. Mr. Thompson felt very deeply that he has been tricked by Mr. Koch. At the same time he appreciated that he was to some extent the author of his own misfortunes and thus had only himself to blame. He appreciated that his assessment of the proposition toa purchase was excessively enthusiastic and uncritical. In these circumstances he became an advocate of his own cause, reconstructing much of what was said in the light of a desire to justify his actions. To the extent however that Mr. Stevens corroborates his evidence I have no hesitation in accepting it. I accept Mr. Stevens' evidence but unfortunately his recollection of what happened and what was said at the meetings was extremely limited. He came to those meetings with no background knowledge, no particular task to perform and in effect merely as an observer who might subsequently be asked by Mr. Thompson to act as accountant for the business. I gained particular assistance from him on the impression he gained from the meeting, namely that the price was fair and that the business being acquired was viable and could he made profitable. As I have said I found the evidence of Mr. Koch totally unacceptable and unreliable. He was an irresponsible witness who ee eS we Ty are ee oy an oe ene " t ' nr ne co areal tal oat te ote ate ve se eee 13. was inclined to ramble and rant, or "waffle" as Mr. Sutton described him. He purported to have only a minimal recollection of what happened at the meeting, preferring to say that he left Many matters to Mr. Sutton and thereby avoiding as far as possible conflict of testimony on crucial topics. However he had the clearest of recollection of many far less important happenings both prior and subsequent to the meeting. It was significant however that no attempt was made to corroborate these recollections, even when they were of the efforts he said he made to persuade Mr. Thompson not to purchase the business. Having rejected outright his evidence the best that can be said is that much of it rendered more acceptable- portions of Mr. Thompson's testimony which heretofore I found incredible. Mr. Sutton's evidence was more difficult to assess. On the surface it was rational and business-like, a welcome contrast to Mr. Koch's evidence. He performed well the difficult task of attempting to satisfy me that the respondents acted responsibly. However I am not satisfied that his evidence and his conduct at the meeting was thoroughly disinterested. To the extent to which his evidence is in conflict with Mr. Thompson corroborated by Mr. Stevens I "prefer: their evidence. Moreover there is in some portions of his evidence an indication of a desire held at the meeting to have the purchase consummated and to refrain from putting anything other than the most optimistic view of the proposition to Mr. Thompson without qualification. More significant than what he said at the meeting was what he left DEA ot ae pet nr ee © op mow ow mas 14. unsaid. It goes without saying therefore that the evidence of the persons at the first meeting as to what was there said is greatly in conflict. I propose to make my findings as to what was said at the meeting without always referring to what each of the persons at the meeting say was said or not said. The crucial representations which I find were made at the meeting were on the following topics, namely the average selling price and average cost of manufacture of a Flexebar unit, the level of sales per month which had been achieved by K.L.K., the viability and potential profitability of the Flexebar business and the fairness of the values placed on the stock, plant and goodwill of the business. Many of these representations were made in such general terms that it was not possible for the applicants to establish conclusively their falsehood. What was tomy mind without doubt false was the impression which I find K.L.K., through Mr. Koch and Mr. Sutton, deliberately conveyed to the applicants as to the viability and potential profitability as well as the fairness of the overall price of the business. There are however a number of findings which I must make before I turn to the representations. To some extent at least they bear upon the deliberateness of the conduct of K.L.K. There is no doubt that Mr. Thompson had become by the time of the meeting enthusiastic about the prospect of acquiring the business. He had had prior thereto at least one meeting with Mr. epee nny en ~The et em were = ep 15. Koch and a number of telephone conversations. Mr. Koch agreed that he was aware that Mr. Thompson proposed that the applicant company would be the purchaser of the business. There was some discussion between Mr. Koch and Mr. Sutton prior to the meeting in circumstances where each was aware Mr. Thompson would he seeking information at the meeting concerning the business. By virtue of the course they adopted, it was not in the interest of counsel for either side to investigate this aspect of the matter, the respondents seeking to present a common front and the applicants refraining from suggesting that either natural person was less responsible than the other for the conduct which occurred at the meeting. However it was established that Mr. Koch told Mr. Sutton not to prepare anything for the meeting and that it was a preliminary discussion. This is of significance when it is appreciated that Mr. Koch had made unsuccessful attempts to sell the business in the past, had in effect already sold the "Automate" name and was seeking funds to meet income tax commitments. Ialso find that Mr. Koch stipulated, and had stipulated prior to the meeting, that the purchase price was $200,000. However before the meeting he had a _ stock-take, allocated values to the stock, listed the plant and equipment and sought information as to its value. All these things were done in my opinion for the purpose of satisfying the purchaser that it was receiving fair value for the purchase price. There is no doubt in my mind that Mr. Koch formed the view that Mr. Thompson was an enthusiastic prospective purchaser and that nothing should be said at the meeting which might deter him. en eee: ee vy ape , cn ay ve Bee ro te ee ene oe eee Meow ptn ey Qe comer cee oe { 16. Iam confirmed in this view by what happened at the outset of the meeting, a happening which indicated the attitude of Mr. Koch and Mr. Sutton. Both Mr. Thompson and Mr. Stevens Said that Mr. Sutton was asked to show them financial information concerning the Flexebar business. Both agreed that Mr.Sutton Said that it was not possible to supply this information because Flexebar was only a portion of the total business of K.L.K., that the figures were intermingled and that it was not possible to obtain information of the performance of the Flexebar business from the accounts of K.L.K. In evidence in chief Mr. Sutton said "I said that one of my problems was that the financial statements for the company would bea bit misleading because they included other things such as the louvres. Up until 81 or 82 they included the expenditure relating to the new trailer development, and that the best that I could suggest was that I produced some sales figures showing all the monthly sales month by month going back to 1979, and through until October 1982." When cross examined he gave the following evidence - "0. But the plain fact of the matter is that you were in a position in February of 1983 to say to Mr. Thompson and Mr. Stevens: the accounting figures are here; they show on paper avery substantial loss, but that is not the true position for these reasons. You were in a position to say that to them were you not? A. I could have said that, yes. OQ. Yes. That would have put them on notice that at least a person looking at the company's records might say that this business was not worth anything, might it not? A. It might." Later in cross-examination Mr. Sutton gave the following answers: we em weer mee a ee 17. "9. Me. Gray: But when they asked for the financial Papers you positively dissuaded them from pursuing it, did you not?... I suggested that the financial statements included other things and would be misleading without a great deal of work in extracting that information. And all was designed to dissuade them from pursuing that line of enquiry; you did not want to show them the financial statement'... As f[ said before, I was only doing a job and if instructed to hand them over, I would have done so. You did not want to?... Why not? I was not selling the business; it was not mine. You did not want to hand the statements over. You had a problem and you took positive steps to dissuade them from pursuing a line of inquiry about the financial statements of the business?... I had a problem you said? Yes. Did you not have a problem with the financial statements?... Could I have the question again? Yes, we will have the question again. SHORTHAND NOTE READ Mr. Gray: What is your answer?... Yes." The attitude of Mr. Sutton illustrates what I see as the deliberate attempt on the part of Mr. Koch and Mr. Sutton to avoid disclosing any information which might discourage Mr. Thompson, put him on his guard or diminish the optimistic picture which they put before him of the Flexebar business. The balance sheet, profit and loss statements and financial accounts were readily available to Mr. Sutton and could have been quickly explained at least to Mr. Stevens. But the profit and loss Ae eoree eee tom pp ee tay Sy ~~ "a 18. account of K.L.K. (under its then name of Automate Pty. Ltd.) disclosed a loss for the previous year ending 30 June 1982 of $134,877, a considerable increase on the previous year's loss of $56,707. Moreover the balance sheet indicated that the liabilities of the company at that date exceeded its assets by an amount of $151,396 which compared with a like excess of $16,519 in the previous year. The louvre business had been sold on 17 dune 1981 prior to the commencement of the 1981/82 financial year and thus had no impact upon the accounts for that year. Despite the considerable efforts made to satisfy me that additional expenditure on developing the trailer ($34,162 of which expenditure having been capitalized that year) would reduce this loss, I am of opinion that the Flexebar business had traded at a substantial loss that year. The disclosure, even with appropriate qualifications and explanations, of this fact would have put Mr. Thompson and Mr. Stevens on their guard and prompted them to consider more critically the statements of Mr. Koch and Mr. Sutton. Such disclosure however would have substantially diminished the prospects of the applicant company purchasing the business. With regard to the statements made by Mr. Koch and Mr. Sutton at the meeting of 18 February 1983 it is, in my opinion, helpful to consider them as tending to create two separate, although in some respects interdependent, false impressions. The applicant company was led to believe that $200,000 was a fair price for the Flexebar business and also that the business was a Sie tee 19. viable and potentially profitable. Stating the situation in this manner does not preclude a finding that particular representations were false but rather that, considered together, the representations had the effect of creating a false impression on these two topics and in consequence were misleading. I do not need to take the matter of viability further at this stage. On the matter of the purchase price of the Flexebar business I have already stated my finding that it was the single amount of $200,000. When this topic was discussed at the meeting Mr. Sutton indicated that it was necessary to allocate a value for stock, plant and goodwill, at least for accounting and income tax purposes. Mr. Koch however had already appreciated the necessity to justify the purchase price as a fair price, i.e. to satisfy Mr. Thompson that the applicant company was receiving value for its money paid. For this purpose he had, as already related, had a stock-take and priced the stock and had also listed and obtained information as to the value of plant and equipment. He indicated that he priced each of these items at a fair value of $50,000 and the balance of $100,000 represented the value of the goodwill of the business, including the patents both in Australia ~- and overseas. It can be acknowledged that any departure from these figures did not necessarily warrant a reduction in the sum of $200,000, but can be relevant and significant in assessing whether the impression created that that price was fair was justified or alternatively was false and misleading. In my opinion the manner in which Mr. Koch sought to ~"s ' Pee ee ee ee " 3+ : 20. support the figures was fallacious and created an overly optimistic impression which was misleading in the circumstances. The question whether the value assigned to each of the three items was fair depends, inter alia, upon whether the Flexebar business could be sold as a going concern. The respondents represented that the business had been profitable in the past, had run down in consequence of Mr. Koch's loss of interest, but was presently viable and capable of being returned to comparable profitability. This was the context in which Mr. Koch represented that the values were fair. However my ultimate findings that the business was not viable and not capable of becoming profitable requires the finding that Mr. Koch's approach to value was not justified and his figures were greatly overstated. In particular if the losses of the business had heen revealed, it would have heen difficult, if not impossible to sell it as a going concern and to justify placing any value on goodwill. Furthermore, the values placed at least on the items of stock was excessively high, particularly if sold otherwise than in conjunction with the sale of the business as a going concern. It is not wholly irrelevant to note that when these assets were sold by the liquidator of the applicant company less than two years later they realized only $31,000. The values which Mr. Koch placed on stock and plant were set out in a handwritten document prepared for and shown to the meeting. In respect of the value assigned to the stock, Mr. Koch 21. at the outset placed upon the various items their highest possible-value, namely wholesale price being the price at which K.L.K. sold these items and substantially above the price asked and paid by distributors. It follows that these values greatiy exceeded the value disclosed by K.L.K. in its accounts at that time, namely the lowest of cost, replacement price and net realisable value. Furthermore there was unchallenged evidence to the effect that in valuing a business sold as a going concern the usual practice is to value stock at the lower of cost or replacement price. There was also evidence which I accept that even these inflated values were in some circumstances wrong. I vefer to clear blocks upon which Mr. Koch placed the figures of $7.15 each whereas there was evidence that they were purchased in preceding months for $1.60 each. [It was accepted that the proper figure was not more than $1.80 each. Likewise in respect of 2 Bar Flexebars Mr. Koch used the figure of $64.50 which was K.L.K''s wholesale selling price which in itself was $20 more than the price at which K.L.K. sold the greater part of its production to three automotive firms (sometimes identified under the names Repco,-9.M.S.A. and Terret Auto Distributors). The stating of this figure of $64.50 in the document prepared by Mr. Koch is significant as it is virtually the figure which the applicants alleged Mr. Koch represented to be the average selling price of Flexebars. Mr. Koch also placed a value of $9.80 on each of the Polytubes in stock, whereas it was not disputed that the more tt yee age 22. correct figure $4.58. Mr. Thompson had a stock-take made after the meeting of 18 February and he calculated the value of the stock, based on the figures used by Mr. Koch with the exception of the clear blocks abovementioned, at $33,041.22. This was the subject of discussion at the meeting on 3 March and Mr. Thompson's figures both as to stock and value were not disputed by Mr. Koch or Myr. Sutton although they refused to reduce the purchase price. The figure of $100,000 which Mr. Koch stated as the value of the goodwill and patents was only justified if the business was able to be sold as a going concern, if in fact it had goodwill and was at least capable of being carried on profitably. Disclosure of K.L.K's. accounts would at least have alerted the applicants to the fact that this was not the case. Furthermore there was little justification for paying a substantial sum for the patents if the patents were under challenge and the volume of sales of the patented articles was falling, at least in part in consequence of substantial competition from Aunger. Neither of these matters were mentioned by Mr. Koch or Mr. Sutton, at least in such a manner as to ensure a prospective purchaser was necessarily informed. in this matter Mr. Thompson was led to believe that K.UL.K. was viable and had the potential to make profits. If such had been the case payment of a substantial sum could have been warranted. ' sal Daemeninc ietiey giemenen bee edeecli eee ee Ie ~T & =A - Le - 23. The placing of excessively high values on stock and goodwill led the applicants, particularily in the light of the other circumstances to be subsequently reviewed, to accept that the sum of $200,000 was fair value for what was being purchased. It was reasonable for the applicants to assess that the sum of $200,000 represented value for the price sought. On this aspect of the matter the applicants had fairly gained the impression, as Mr. Stevens also had, that it was reasonable to purchase the Flexebar business for $200,000. This impression was confirmed by the representations to which I now turn which, taken together, presented the picture of a business which was viable and capable of returning to profitability comparable to that achieved in 1979/80 year. I reiterate that the applicants sought to establish that each of these statements considered separately was false or at least in some instances made recklessly. In this regard they were in part successful but I prefer to rely upon the overall effect which they produced of a business with the aforesaid features, By way of introduction I draw attention to Mr. Sutton's statements that as at February 1983 the Flexebar business had the Capacity to be as profitable as it had been in 1979/80 if vigorously promoted. I note that there was no criticism of Mr. Thompson's efforts to promote the business during the months after he acquired it. Sani? Fer ae cr eer ee 24, Likewise Mr. Stevens said that the substance of what he was told by Mr. Koch and Mr. Sutton was that the business was viable. This statement must be considered in the context of the fact that all parties agree that Mr. Koch and Mr. Sutton said that the turnover of the business was at the time down. Mr. Sutton and Mr. Stevens were agreed that it was stated to be down because of Mr. Koch's involvement with the trailer. Mr. Stevens said he was told nothing to indicate that there was anything wrong with the business or that it was not a viable business. Mr. Stevens was not asked what he attempted to convey by the word "viable" but in the context I have little difficulty in accepting that he formed the impression that it was able to survive whilst the turnover was being increased sufficiently to enable the business to return to profits. The business could only be viable if, stated very generally, there was sufficient volume of sales with sufficient margin between cost of manufacture and selling price. There is no doubt that the applicants were led to believe that there was a considerable margin. I find that the information concerning turnover was overstated and in one instance false. Moreover they were not told anything which would alert them to the difficulties which the applicant company would experience in attempting to lift sales in an intensely competitive market if it adhered to an average selling price of $65. Mr. Koch in the first instance denied that he said that an ee a eee + SEN re ay a ay pr ee er te tee a .t < a) vemrenes et wa re ee t oe ee ee -~f an Tan 25. the average sale price of a Flexebar unit was $65 or that that figure was ever mentioned. However subsequently he admitted that he told Mr. Thompson that the trade price was $65. Mr. Sutton said that he remembered the figure of $84 being mentioned by Mr. Koch although he could not remember or deny that $65 was mentioned. However subsequently he agreed that Mr. Koch mentioned a figure of $65 although he also said he cut across Mr. Koch when he spoke of selling prices and told Mr. Thompson to go to the factory and check some invoices to ascertain the average selling price. Mr. Stevens for his part said that the topic of average selling price was discussed and that a price of $65 was stated by either Mr. Koch or Mr. Sutton to be the average seliing price. My finding that Mr. Koch represented at the meeting on 18 February that the average selling price was $65 per unit is confirmed by the fact that he showed the figure of $64.50 in the document he prepared setting out stock and plant values. Moreover the figure of $65 was very shortly thereafter used in budget statements prepared by Mr. Stevens for the bank. These statements were shown to Mr. Sutton who, even if he only glanced at them, could not have missed seeing this crucial figure. It was mentioned on a number of occasions on the first page of the documents, and he made no comment on this figure used by Mr. Stevens for this purpose. A number of matters rendered this representation highly aay arora' 26. misleading, particularly if used by the purchaser for the purpose of assessing the margin between average selling price and cost of Manufacture. It was also a simplistic statement in that it did not take account of the fact that K.L.K. produced a number of different models of Flexebar units (two bar, three bar and four bar units) which it sold to different classes of purchasers at different prices. It is however in the implied invitation to the purchaser to compare this selling price with cost price that the statement was primarily misleading. The evidence established that the three automotive firms abovementioned were K.L.K's principal customers and that two bar units, K.L.K's major selling product, were sold to them at $44.50 a unit. The applicants produced evidence derived from an assessment of K.L.K's documents that the average selling price of Flexebar units from March 1982 to February 1983 was $52.88. This evidence was not effectively challenged by the respondents and the only manner in which the figure of $65 could be in any way supported was, as put forward on their behalf, on the assumption that the total proceeds of sale represented sales of Flexebar units. This was in fact quite incorrect as K.L.K. solid not only Flexebar units but also spare bar sets and components. I find that it was represented to the applicants that the average selling price of a unit was $65. At the meeting Mr. Sutton presented a document which supported his statement that $36 was the cost of manufacturing a atidy nS rp wees ne nee ee v abe se ee terre ee wee re "r 27. Flexebar unit. Mr. Koch agreed that when Mr. Thompson asked him what it would cost to make a Flexebar he replied "S26". Mr. Sutton however corrected him by saying that the cost was $36. Again it was not possible for this figure accurately to indicate this cost as K.L.K. manufactured two bar, three bar and four bar Flexebars. However this statement as to cost, taken in conjunction with the statement as to average selling price indicated a substantial gross profit margin of $29 per unit, from which any overheads would be deducted in order to determine net profit. Because I have found that the average selling price was substantially misrepresented it is obvious that it was quite misleading to represent by implication that K.L.K. had enjoyed and the applicant company could expect such a margin. It is clear that the applicant company, Mr. Thompson and Mr. Stevens, accepted that they could proceed on the basis of such a margin. These figures were included in the budget which they prepared for presentation to the Bank. The further crucial representation to the applicants was on the topic of volume of sales achieved by K.L.K. and what the applicant company could expect to attain. On this topic Mr. Thompson gave evidence to the effect that a document was produced by the respondents at the meeting which disclosed sales of 1,800 units per month. However the existence of this document was denied by the respondents and Mr. Stevens could not recollect such a document. In this regard I find Mr. Thompson was 28. mistaken, being doubtlessly confused by the number of documents produced at the meeting. Mr. Stevens said that at the meeting there was a discussion concerning the turnover of the business. He said that he and Mr. Thompson were told that in the past the business had achieved 1,800 per month. Mr. Sutton confirmed that Mr. Koch said in answer to a question from Mr. Thompson that the business had sold as many as 1,800 per month. Mr. Koch said that Mr. Thompson asked him whether he would be able to sell 1,800 per Month and he, Mr. Koch, answered "Allan, that is entirely dependent on how you operate and I mean you have got to get to know the industry". Mr. Sutton said that when Mr. Koch first mentioned the figure of 1,800 per month he corrected him and said it was as high as 2,428 per month. Mr. Stevens said the figure of 1,800 was mentioned in the context of an assertion that the business was viable and had achieved such sales. The first statement by Mr. Koch was misleading in that it conveyed to Mr. Thompson the impression that it was reasonably possible for him to achieve sales of 1,800 per month. In fact such sales could not possibly be achieved, as Mr. Thompson ultimately found, if an average selling price of $65 was to be Maintained. The great majority of K.L.K's sales were, as Mr. Koch must or should have known, at prices $20 per unit lower, and he was at the time achieving sales very substantially lower than 1,800 units per month. Lee wt Re rn mee ie nen eee _ we eee we To ey ee ren inn seen a > an mg cee te ee eee ot cons . soe ran) 29. Mr. Sutton's statement that the business had in the past sold as many as 2,428 units ina month was, as he should have known,false. This figure appeared in a document Listing sales in the 1979/80 year together with the proceeds of such sales. The figures for the months of February, March and April 1980 were set out as follows: " No. Sales Refore Tax February 754 $47,105.36 March 2,428 $77,486.31 April 760 $50,049.51" It was, or should have been, patently obvious to anyone seeking to use these figures in a discussion concerning sales that there was something seriously wrong with the March figures. Either the number of sales was incorrect or the amount of the proceeds of sales was wrong. The fact that on the document produced there was an asterisk indicates that some person had earlier noticed the error. Mr. Sutton acknowledged that the number of sales was incorrect, and obviously incorrect, a matter of which he was or certainly should have been aware. It was misleading for him in the circumstances to tell the purchasers that K.L.K. had sold 2,428 units in 1979/80 the year of record sales and profit which sales and profit Mr. Thompson was inferentially told the business had the capacity again to achieve if vigorously promoted. Mr. Thompson and Mr.Stevens were not told that the business was currently selling 1,800 units per month or in fact how many were being sold each month. They were told that the current level of turnover was low. In the forecast of sales a, . 7 See re ee ae ne et nee ae Ee eee ee oa TTT Te * SEIT re eer cee ee erties ee ee noppee oe eee e e qen ey re " ae 30. which Mr. Stevens prepared for his budget he included 600 per month rising to 1,500 by the end of the 1983 calendar year. He said that he prepared his budget-in this manner because he was aware the current level of turnover was low (in fact it was approximately 600 units per month) and Mr. Thompson "needed time to get the feel of the business". The manner in which he prepared his budget confirmed the impression which he said he gained from the meeting, nmamely that sales of 1,800 per month could be achieved. Statements were made at the meeting from which Mr. Thompson and Mr. Stevens were reasonably entitled to infer that the business was viable because it had a substantial gross profit margin and that it was capable of increasing considerably its sales and in consequence become profitable. Furthermore that such an increase in sales could be achieved at an average selling price of $65 per unit. They were also led to believe that the present low level of sales was due to Mr. Koch's Tack of interest in the Flexebar business and that he was devoting his attention to develop the trailer. I do not accept that this was the principal reason for the fall off in sales, rather it was the existence of a major and aggressive competitor, Aunger. The true fact concerning Aunger's competition was one of many things left unsaid at the meeting. Aunger's competition was mentioned but Mr. Koch said it was not a matter of concern. Likewise there was no mention of the substantial loss which the business had suffered, the challenge to the patents by Grundy, the fact that the average selling price to their major customers was $44 per unit and the fact that sales of 1,800 per month had ree pen — oe ce a wh scaaradie inte aaanemnmars onreneet etic eae arr ern ns 31. been achieved once only, namely in October 1979 and not' since. Nothing but the most optimistic view of the business was presented to Mr. Thompson and Mr. Stevens. The evidence of Mr. Mount, a witness called by the respondents, satisfied me that the representations as to potential profitability were misleading "as they could never be achieved. Iam of opinion that K.L.K. engaged in misleading conduct at the meeting of 18 February 1983 in that it represented to Mr. Thompson and Mr. Stevens that the Flexebar business was viable, in the sense used above, capable of achieving sales of 1,800 per month with a substantial gross profit margir and that in the light of the value of the component parts of the business the price of $200,000 was reasonable. Iam furthermore of Opinion that Mr. Koch and Mr. Sutton were involved, in accordance with s.75B of the Act, in the contravention in that they were, as I subsequently find, each knowingly concerned therein. I find that the applicant company purchased the Flexebar business in reliance upon and induced by this misleading conduct. An assessment of the applicant company's compensable loss 1s more difficult. The matters which prompt my concern arise out of the fact that Mr. Thompson appears to have accepted K.L.K's representations without question and to have acquired a commercial business without examination or investigation. It is incredible to me that he and his company entered into the transaction and committed themselves to expense with so little re natn ae we: s yah ee Yate wf 2 f we ' aoe we oe eee 4 a are paen ss Seen were gr va 32. knowledge or understanding of the business which had been acquired and--which the applicant company proposed to conduct. Such matters should, in my opinion, be taken into account in attempting to assess the actual loss flowing directly from K.L.K's contravention. There was no dispute by counsel in this matter as to the principles applicable to determine the measure of damages. It was accepted that they are akin to those recoverable in an action of deceit and reference was made to the formulation by Gibbs C.J. in Gould v Vaggelas supra at p.34. At the outset it will be necessary for me to determine the true value of the business - at the time of purchase and then the losses incurred by the applicant company which are not represented by the difference between that value and the amount paid. Debate however centred around the extent to which Mr. Thompson could be said to be the "author of his own misfortunes" and what loss flowed directly from the contravention, especially with respect to the trading losses. In this regard the comments of Gibbs C.d. in Gould v Vaggelas at p.35 are in point: "Tf the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to he compensated for them. Of course the Court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as_ the folly, error or misfortune of the purchaser himself, and must ensure that no additional compensation is given for losses when those losses, or the probability of their occurrence has already been taken into account in determining the value of the business." TI have emphasized the particular words to which I attach ws PE Ci pre en om ad Ler = retin ied of ot uate ometementa muneereal "adie orenareaetal enced al -aiead annie Do ote te -- 33. significance in the last sentence of this extract. His Honour's concern that no additional compensation be given when losses have already been taken into account was referred to by Dawson J. in his reasons, although he was in dissent on the ultimate decision of the High Court. He said on page 59: "The difference between the price paid and the actual value at the time of purchase should reflect the future of profitability or unprofitability of the business because the actual value of the business at the time of purchase must depend upon its potential as well as its present returns. Moreover, it is possible to have regard to the events which occur after the purchase in order to assess the profitability of the business at the time of purchase: Potts v Miller, at p.299. If, as prima facie it is, the subsequent profitability or unprofitability of the business is to be taken into account in the calculation of its actual value at the time of purchase, then care must be taken in the calculation of consequential losses to ensure the same ground is not covered twice. Moreover, for a loss to be recoverable it must be clear that it is suffered as a direct consequence of the deceit and is not referable to something else such as the purchaser's ineptitude in the conduct of the business." The High Court approved generally the reasoning of the Court of Appeal in Doyle v Olby (Ironmongers) Limited £19691 2 QB 158. Winn L.d. said on page 168 of that case: ".,.. it will be too remote not necessarily because it was not contemplated by the representor, but in any case where the person deceived has not himself behaved with reasonable prudence, reasonable common sense, or can in any true sense be said to have been the author of his own misfortune. The damage that he seeks to recover must have flowed directly from the fraud perpetrated upon him." Sachs L.J. said much the same on page 171 - "The acquiring of a business normally entails the expenses of moving into fresh premises, keeping the a merce pore — — yet tae 34, business going, and at any rate continuing to keep it going until such time as it can be disposed of; and then one looks also at the expenses of selling. The computation of the loss may in many cases not be easy. Thus, the court must obviously take care not to include sums for consequences which may be due to the Plaintiffs umreasonable actions, and also not to include results which are too remote - matters which often involve difficult questions of fact and degree." Later on page 172 he said onthe question of the goodwill of the business bought as a going concern: "Any value attached to the business itself as being a going concern on an independent basis was very small indeed; and it would seem to me that when once the facts were fully known to a purchaser, any sizable payment for goodwill would have been very unlikely." These principles concerning the assessment of losses under 5.82 of the Act were restated by the High Court in Gates v The City Mutual Life Assurance Society Limited (1986) 63 A.L.R. 600 per Gibbs C.J. at p.603 and Mason, Wilson and Dawson JJ. at p.607. A further question arises, namely the extent to which, if at all, Mr. Thompson is entitled to be compensated for the losses which he alleged he suffered in supporting financially the applicant company and in guaranteeing its chattel leases. On my finding, Mr. Thompson was not the purchaser of the business and therefore his position is analagous to that of the Goulds in Gould v Vaggelas supra. On page 36 the Chief Justice said in respect of such a situation - "In a case such as the present, when the plaintiffs were not purchasers, the measure of damages is the sum which we a Sept ones cre mec ' alt. aay eres V>, ns spans ampere ee nee ee eye Mar me. we as 35. represents the loss which the plaintiffs have suffered because they altered their position in reliance on the " fraudulent misrepresentation." The damage which can reasonably be claimed in this Matter can be assessed under the following heads, namely true value of business sold, trading losses, Mr. Thompson's losses and interest. In respect of the payment of $200,000 for the purchase of the Flexebar business I do not see the applicant company and Mr. Thompson as "the author of their own misfortunes". I make this finding notwithstanding the criticism which I already have made of Mr. Thompson's lack of prudence. In my opinion Mr. Koch and Mr. Sutton went out of their way to represent that the sum of $200,000 was a fair price for a viable business with potential to return to past profitability. Nothing was said to suggest or warn to the contrary and nothing but the most optimistic impression was given of individual aspects. I do however, acknowledge that there was specific reference to the fact that the business had run down and that there was no representation that the business was presently profitable. However the essential fact to which the applicants were not alerted, notwithstanding their specific request, was that the business was making and had in the last financial year made very substantial losses. In my opinion if these losses had been disclosed, together with the true nature of the Aunger rane ne nei ae oo me cay we AS om ye ee oe te eee ae 36. competition and the challenge by Grundy to the patents, the business could not have been sold and would not have been purchased as a going concern. If these facts had been fully disclosed a payment for goodwill would not have been made and considerable doubt would have been cast on the value to the purchaser of the patents. My opinion that the business could not be soldas a going concern has implications in the assessment of the true value of stock and plant. They have a greater value to a purchaser of a business as a going concern than if sold as the assets of an unprofitable business with little if any goodwill. Certainly the purchaser of an unprofitable business without goodwill would not be prepared to pay the price at which the owner of this business sold his stock i.e. the wholesale price which was adopted by Mr. Koch in valuing the stock. It is my opinion that the true value of the business at the time of purchase was $50,000. I do not suggest that either this figure or the figure for allowable trading losses is capable of precise calculation. In the words of Fox J. in Brown v Jam Factory Pty. Ltd. (1981) 35 A.L.R. 79 at p.91: "This is largely a matter of estimation, it has heen said to be a 'jury question' (Doyle v OQlby (Ironmongers) Ltd. £19691 2 Q.B. 158 at 167 and 169)." In arriving at this value I have placed a minimal figure on goodwill and patents and have substantially reduced the value me pti oa et ae: f oe eer ear Tp ae 37. which Mr. Koch placed upon stock and plant. J have taken into account the fact that K.L.K. was making losses at the time and the fact that it was likely to continue making losses. In respect of the latter fact I propose to ensure as far as possible that there is mo double count when I come to consider the trading losses which the applicant company claimed. The trading losses claimed by the applicant company were as assessed by Donald Shammall, an independent accountant called by the applicants. He applied what was called an "audit test" to the books, records and accounts of the applicant company and his examination revealed net losses, which I accept, of $88,061, $71,246 and $8,972 for the periods ending 30/6/83, 30/6/84 and 30/11/84 respectively. It is fair to comment that at least in the latter two periods these losses would have been substantially greater if it were not for the fact that Doug Godden made in excess of $100,000 available as loans to the company. It appears that these funds were loaned free of interest. It is my opinion that the applicant is not entitled to claim ali these losses as flowing directly from the contravention. As I have already indicated I am very critical of Mr. Thompson's failure to investigate thoroughly either himself or through Mr. Stevens the business which he was purchasing. He was justified in relying upon the inducements put to him at the mesting to purchase the business, but it was utter folly on his part to fail to ascertain matters such as the true cost of wee oe 38. Manufacture of each of the Flexebar products, the various customers of the Flexebar business and the varying prices of particular products and the volume of sales to these customers. These are but some of the matters which a prudent purchaser would investigate or have had investigated prior at least to commencing business operations. Such investigation would have established, in my opinion, that the state of the Flexebar business was such that it was incapable of being conducted profitably because it could not achieve sufficient sales volume. I also have to take into account the fact that some initial losses have been assumed in the assessment of the true value of the business. Mr. Thompson was deceived as to the true state of the business at the meeting on 18 February 1983 and had committed the applicant company to the purchase by the time of the meeting on 3 March 1983. It is fair to say that the company had no alternative but to commence manufacturing and selling forthwith. However a prudent purchaser would have earlier commenced critical investigations and in this regard the applicants must accept some of the blame. In my opinion they should but for their folly have ascertained the true state of affairs by the end of that financial year. -The relatively short period, namely four months, for which I am prepared to allow the applicant company trading losses reflects my opinion that the applicants were to some extent the author of their misfortunes. At the end of June 1983 the net losses of the applicant company totalled $88,061. However these losses must be reduced as the applicants were aware aR a rs 39. that the business was not trading profitably -at the time of purchase, a matter which.-they acknowledged when preparing the budget for the bank. The assessment of the actual value of the business as $50,000 also reflects some inevitable trading losses. The best that can be done in this regard is to reduce the actual net loss for the period of $88,061 by the amount of the loss which it can fairly be said was contemplated by the applicants. I have used the figures for gross trading profit which the applicant company provided in its budget for the bank from which I have deducted the actual operating expenses for the period determined by Mr. Shammall. This budgeted gross trading profit reflects the performance expected by the applicants as a result of the representations at the meeting on 18 February 1983. The actual operating expenses were independent of these representations and to a considerable extent determined by the applicants. The particular figures are $79,000 budgeted gross trading profit and $105,053 actual operating expenses producing for the period a net loss of $26,053. It can fairly be said that such a loss was " contemplated or has already been taken into account. It must he deducted from the actual loss incurred. in this very general and unsophisticated manner I assess $60,000 as the additional loss which flowed directly from the contravention. Mr. Thompson claimed $74,786, being an amount of personal funds which he said he paid into the applicant company between 15 November 1983 and November 1984. However I reject this claim on two grounds. In my opinion it can not be said that ny mee me : my ~ se 40. this is an amount, wholly or in part, which Mr. Thompson lost because in the words of Gibbs C.d. in Gould v Vaqgelas supra at p.36 he did not in this respect alter his position "in reliance on the fraudulent misrepresentation". It was, in my view, the requirements of the company's bank which persuaded him to provide funds and not the contravention. Furthermore the statement of the company at the date of liquidation shows Mr. Thompson as a creditor only to the extent of $4,627.27. It is apparent that the majority of the funds which he made available were not paid directly to the applicant company but in some way through Doug Godden which company was shown as a creditor to the extent of $120,520.03. Mr. Thompson is also personally liable under various guarantees to Australian Guarantee Corporation Limited in respect of equipment leased by the applicant company. $11,917.74 is the amount of the Liability under the guarantees, of which Mr. Thompson's share is one half thereof, his wife being also jointly and severally liable. I propose to award him $5,958.00 in this regard, and any claim which he makes as an unsecured creditor of the applicant company must take into account this amount received by him (See per Brennan J. in Gould v Vaggelas supra). I may add that I do not consider Mr. Thompson is entitled to make any claim for loss of wages in that there is no evidence that he suffered any such loss in the period up to 30 June 1983. The upshot is that I assess damages totalling $210,000 41. and $5,958 against K.L.K. as the loss suffered by the applicants in consequence of that company's contravention. I should mention that the approach which I have adopted in this matter relieves me from considering the evidence of a substantial number of witnesses. This evidence was in almost all instances given in a thoroughly acceptable manner but was addressed to topics to which I have not found it necessary to refer. Both Mr. Koch and Mr. Sutton have been joined as respondents and the applicants' losses are claimed against them also as persons involved in the contravention in accordance with 5.82 of the Act. Section 75B defines the term "involved in a contravention" for the purposes of s.82. In respect of the claims against Mr. Koch and Mr. Sutton under s.75B as persons involved in K.L.K's contravention their counsel made a number of submissions. He contended that it was necessary for the Court to consider separately the position of K.L.K., Mr. Koch and Mr. Sutton. If the Court found that some particular conduct of Mr. Sutton brought him within the provisions of s.75B then it was necessary he said to determine the consequence of this particular conduct and the loss occasioned by that conduct. Section 75B provides that the reference in 5.82 to a wep rene 42. "person involved in the contravention" shall be read, as here pleaded, as a reference to a person who - "(a) aided abetted counselled or procured a contravention; (b) induced a contravention; (ec) has been in any way, directly or indirectly, knowingly concerned in, or party to, a contravention; (d) has conspired with others to effect a contravention." I hereafter refer compendiously to this conduct as "aiding and abetting". It is pertinent to note that both s.82 and s.75B refer enly to the "contravention" which has occurred, which in this instance was the misleading conduct found against K.L.K. There is no direct reference to the particular "conduct" of K.L.K. in respect of which, wholly or in part, the Court relied in finding a contravention. Thus I must determine whether the individual respondents, neither of whom was separately represented, aided or abetted the contravention which has been found to have heen committed by K.L.K. This contravention occurred because I have found that K.L.K., by the representations made on its hehalf by the individuals, in the circumstances created a false impression that the sum of $200,000 was a fair price for the Flexebar business which business was represented to be viable and potentially profitable. Counsel for the respondents did not argue that Mr. Koch was not a person involved. He however laid emphasis upon the 43. particular position of Mr. Sutton, contending that he was a mere conduit pipe or alternatively--did not have the requisite knowledge. Reference was made to the decision of the High Court in Yorke and Another v Lucas (1985) 61A.L.R. 307 where that Court held that sub.s.75B(c) required a party to a contravention to be an intentional participant, with full knowledge of the essential elements of the contravention. Likewise the Court held that secondary participation as an aider or abetter under sub.s.75B(a) could only be established if the person charged was also found to have knowledge of the essential matters and intentionally aided or abetted the contravention. In my opinion the participation of Mr. Sutton was far removed from that which the High Court had under consideration in Yorke v Lucas supra. Mr. Sutton was not a mere conduit pipe, as submitted by counsel, conscientiously passing on information supplied by his employer or principal with no knowledge that it was incorrect information. In fact Mr. Sutton had a very extensive knowledge of the affairs of K.L.K. He had adequate first-hand knowledge of most of the matters under discussion at the meeting and could also be held, if necessary, to have had constructive knowledge of other matters. In my opinion he knowingly participated in creating the false impression at the meeting of 18 February 1983. As has already been related, Mr. Sutton was the accountant, auditor and financial advisor to Mr. Koch and K.L.K. vt ot tue See ee eee pare ee eee eee Py a ee P 44, He had been involved in this capacity since 1975 with Mr. Koch, K.E.K. and its predecessors. His involvement was not -limited to mere book-keeping. Mr. Koch relied upon his expertise for financial advice, he was inthe habit of visiting the K.L.K. factory twice a month, was involved in employing staff and received direct from the bank periodical statements of that company's account. Moreover he prepared and supervised financial procedures and practices for K.UL.K. and had relatively recently prepared and had approved by directors and shareholders the accounts of K.L.K. for the year ending 30 June 1982. He was ebvicusly aware of the losses which the Flexebar business was incurring at the time of the meeting in February 1983 and the fact that, stated in very general terms, it could be said to be insolvent and to have a liquidity problem. He was also aware of the liability of the group for income tax. It was, no doubt, in recognition of this background of expert knowledge that Mr. Koch invited Mr. Sutton to the meeting of 18 February 1983, had him take the chair thereat and open the proceedings. Mr. Sutton acquiesced in this situation. Mr. Koch said in his evidence that he referred all questions at the meeting on financial matters to Mr. Sutton. The latter did not dispute this statement and it is obvious that matters of this nature were of crucial significance to the parties present. For these reasons it is not correct, as contended by the respondents' counsel, to see Mr. Sutton as being in the same position as Mr. Stevens. Mr. Sutton was present on behalf of the company with -a ee 45. full authority to speak knowledgeably on its behalf. In so far as the upshot of the meeting was that the applicants had the false impressions as above related Mr. Sutton participated, and in my opinion participated knowingly, in the creation of these impressions. In fact he took the first positive step at the outset of the meeting in failing to produce the recent financial statements of K.L.K. and thereby disclose its parlous circumstances. The production of such accounts or alternatively the disclosure of the losses, albeit with appropriate qualifications, was essential to a fair assessment by the applicants of the viahility of the Flexebar operations and the feasability of the expenditure of $200,000 in its purchase. As I have already said the viability and potential profitability of the business was dependent upon the gross profit and the volume of sales it could achieve. Mr. Sutton participated in these discussions in that he represented the cost of manufacture as $36, allowed the applicants to assume $65 as the average sale price and in fact exacerbated the representation as to volume by falsely stating a figure of 2,428 units as having been in the past achieved. Mr. Sutton was, or at least should have been aware that these figures were unrealistically optimistic and would convey the false impression of an excellent gross profit margin. He must also have been aware of the impossibility of obtaining a sufficiently exact figure for the average sale price by the cursory examination of invoices, which 46. he suggested. Such a gross profit margin if achieved on the turnover which the applicants were lead to believe was attainable, would eventually produce a most profitabie husiness. Mr. Sutton was aware that the business was in fact most unprofitable and his explanation for this, namely that Mr. Koch had lost interest, cannot be accepted. The evidence of Miss Hendrie to the contrary and the failure to call Miss Sheridan, notwithstanding intimations of intention so to do, and who apparently could have been a relevant witness on this aspect, confirms the correctness of this conclusion. Likewise in respect of the false impression which [I found the meeting created that $200,000 was a fair purchase price for the business Mr. Sutton should have been aware that this false impression was likely to be created. He was aware that the Flexebar business was unprofitable and thus was unlikely to have any goodwill or he fairly capable of being sold as a going concern. In these circumstances he ought to have appreciated that a figure of $100,000 for goodwill and patents was unjustified, particularly as competition was very keen and the patents were under challenge. He must also have been aware that the stock was very highly priced. He knew its value at 30 June 1982 was substantially below the figure of $50,000 and that since then the business had liquidity problems and was running down with recent turnover substantially reduced. In such circumstances it was extremely unlikely that the amount of stock on hand would exceed that at the end of the last financial eo 47, period. In my opinion the applicants are entitled to judgment against Mr. Sutton. a. Counsel for the applicants also submitted that his clients were entitled to have an award of interest included in the judgment in accordance with 5.30c of the Supreme Court Act 1976 South Australia. The respondents contend that that section has no application to these proceedings. There appear to be conflicting decisions of this Court on the power to award interest pursuant to State legislation, although such apparent conflict may be the consequence of differing legislation in the various States. Subsection 30c{1} is the empowering provision in the South Australian Supreme Court Act and it is as follows: "30c(1). Unless good cause is shown to the contrary, the court shall, upon the application of a party in favour of whom a judgment for the payment of damages, compensation or any other pecuniary amount has been, or is to be, pronounced, include in the judgment an award of interest in favour of the judgment creditor in accordance with the provisions of this section." The word "court" is defined to mean the Supreme Court of South Australia. It was said that this power to award interest is applicable to these proceedings by virtue of s.79 of the Judiciary Act 1908. The Full Court of this Court in Centrepoint Freeholds Pty. Ltd. v T.N. Lucas Pty. Ltd. (1985) 60 A.L.R. 187 decided (Neaves J. dissenting) that s.79 did render applicable a somewhat similar provision in the Victorian Supreme Court Act to See 48. proceedings in this Court. However as Toohey J. discerned in Nelia, Brown & Ors v Kingia Pty. Ltd.- (1985) 61 A.L.R. 603 the Majority of the Full Court did not go beyond holding that this Court had such power in the exercise of its accrued jurisdiction to deal with common law causes of action. Beaumont J. in Fenech v Sterling (1985) A.T.P.R. 47129 adopted this approach on page 47,132 and I am content to do likewise without repeating his reasoning. However, I was asked in the alternative to award interest on the common law causes of action pleaded in the appiication. In this regard I am not necessarily bound by the Full Court decision as the majority expressly relied upon the fact that the provision in the Victorian Supreme Court Act applied to all Victorian Courts having "jurisdiction" in recovery of debt or damages. They therefore held that the language was wide enough to apply to the Federal Court. The South Australian provision however applies only to the Supreme Court and therefore the comments of Mason J. which the Full Court held inapplicable are here in point. He said in Australian National Airlines Commission v Commonwealth (1975) 49 A.L.d0.R. 338 at p.340: "No matter how widely it may travel in some respects sec.79 does not in my view pick up and apply in this Court a provision which empowers a particular Court of a State to make orders and enter judgments in proceedings in that Court." ~ WIT ee ee ee Seeaenied " z ry 49. I am therefore of opinion that I am not empowered by 8.30¢ to award interest in this matter. If I am wrong I would be inclined to refrain from exercising this power because, in my view, there is "good cause". The applicants made no claim for such interest in their application or statement of claim, the course of proceedings were restricted to matters under s.52 and 6.82 of the Act and I was not asked to assess damages on the basis of common ijlaw causes of action until this difficulty was perceived. It was not until counsel perceived difficulties in contending for interest under s.30c of the State Act on damages assessed under s.82 of the Act that the matter of interest on an award of common law damages was_raised. In my view there is good cause to the contrary and I would if necessary refrain from Making such an award. In conclusion I award the applicant company $210,000 by way of loss pursuant to s.82 of the Act. However $100,000 is owing by the applicant company being unpaid purchase money which sum is the subject of a cross-claim. I consider it appropriate in the circumstances to dismiss the cross-claim without any order for costs and to enter judgment for the applicant company against the respondents for the sum of $110,000. I assess the loss of Mr. Thompson as $5,958 which amount I order the respondents to pay to hin. The question of costs is difficult in that, as I have already related, I am of opinion that the trial of the Srey oe ve Teo .oank a : t ' _ ery peers seeenery Pt ee habe sone pe or ee wots fey . ' uy ages cae at as oon act SVT TENT ca ao pier iy e Ww tt ry soa > ' FE ts « Tp the vrahon Foye, pp trae - rey vw en oY ey we Sy " ree om . 50. proceedings was unnecessarily protracted and that the applicants pursued many issues which at the time I considered irrelevant... My opinion to this effect was confirmed during the preparation of these reasons. In the circumstances I direct that the respondents pay to the applicants 75% of their taxed costs. I certify that this and the 47 preceding pages are a true copy of the Reasons for Judgment of Mr Justice Fisher. Associate hed lor — Dated: 8 July 1986. yes eee Seen ee —— oFesteutaneentaerteenecedeattetiend