Meryl Kathleen Arnold v Bells Carpets (Fairfield) Pty Ltd [2003] NSWSC 325

New South Wales Supreme Court

CITATION : Meryl Kathleen Arnold v Bells Carpets (Fairfield) Pty Ltd [2003] NSWSC 325 HEARING DATE(S) : 15/04/03 JUDGMENT DATE : 17 April 2003

JUDGMENT OF : Gzell J DECISION : Judgment for defendant company and for defendant purchaser with costs.

CATCHWORDS : TORTS - Miscellaneous Torts - Other economic torts - Deceit - Sale of share in company on valuation - Whether valuation false and dishonest - Whether valuation approved by solicitor - Whether false and dishonest representation of approval - Whether purchaser acting qua director of company - Whether any cause of action against company CASES CITED : Jones v Dunkel (1959) 101 CLR 298 Schellenberg v Tunnel Holdings Pty Ltd (2000) 200 CLR 121 Meryl Kathleen Arnold - Plaintiff PARTIES : Bells Carpets (Fairfield) Pty Ltd - 1st Defendant Geoffrey Arnold - 2nd Defendant FILE NUMBER(S) : SC 3982/01 COUNSEL : Mr R Johnson - For Plaintiff Mr G Foster - For Defendant SOLICITORS : Burt & Allen Solicitors Phillip A Wilkins & Associates

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

GZELL J

THURSDAY 17 APRIL 2003

3982/01 MERYL ARNOLD v BELLS CARPETS (FAIRFIELD) PTY LTD JUDGMENT 1 Geoffrey Leslie Arnold, the second defendant, his brother, the late Graham Stephen Arnold and their father, Leslie Arnold, held one share each in Bells Carpets (Fairfield) Pty Ltd, the first defendant. That was the entire issued capital of the company. Upon the death of Graham Arnold on 17 September 1996, his share passed to his widow, Meryl Kathleen Arnold, the plaintiff. 2 On 5 November 1998, the plaintiff sold her share in the first defendant to the second defendant for $1,282. The price was in accordance with a valuation prepared by L E Thompson, chartered accountant. 3 The plaintiff claimed damages. She alleged that, in his capacity as a director of the first defendant, the second defendant represented that the valuation was fair and reasonable and had been approved by the plaintiff's solicitor, Phillip Wilkins, when the second defendant knew that such valuation was false or dishonest and had not been approved by Mr Wilkins. 4 In her affidavit, the plaintiff deposed to one conversation with the second defendant in which he offered to buy the share for $1,280 to which the plaintiff responded that she did not want to do anything until she had discussed the matter with the company accountant, Lindsay Conroy, and Mr Wilkins. She said that when the second defendant responded that he had spoken with Mr Wilkins who recommended the amount, she agreed to the sale. She had not seen the valuation of Mr Thompson. 5 The second defendant said there were two conversations. In the first he said that because he was making all the decisions for the company he did not want the plaintiff to be exposed to debts that would put her house at risk. He offered to purchase her share and said that he would speak with Mr Conroy to obtain a valuation and he would see if he could afford it. In cross-examination, the plaintiff agreed that this discussion had taken place and that the second defendant had contacted Mr Conroy to obtain a valuation. 6 The plaintiff and her late husband, together with the second defendant and his wife, had given personal guarantees and mortgages over their homes to the Commonwealth Bank to secure the company's overdraft. The deceased and the second defendant held life insurance policies, the premiums for which were paid by the company. The deceased made a claim on his policy when terminally ill which the insurer accepted and paid out $523,805. That cheque was deposited to the company and utilised to pay out the company's overdraft and other expenses, to pay out the second defendant's mortgage of $43,456.71 and to pay out the deceased's mortgage of $47,796.33. The second defendant said the balance of approximately $100,000 was divided three ways between the plaintiff, himself and his parents. 7 The second defendant said that once the plaintiff disposed of her share in the company, she had the opportunity to seek a release from her personal guarantee from the bank. In cross-examination, the plaintiff said she did not believe she was presently bound by any guarantee to the bank. 8 The second defendant asked Mr Conroy to provide a valuation. Mr Conroy declined because of a conflict of interest and recommended the valuation be taken from Mr Thompson. For that purpose Mr Thompson analysed the profit and loss accounts and balance sheets of the company for the 1994 to 1998 financial years. 9 When he received the valuation, the second defendant said he met with the plaintiff at his house and said the valuation had come through at $1,282 and he would give her that amount. He said the plaintiff responded that it meant she had her house and could do with it as she liked, to which he replied that she could get her deeds from the bank. The second defendant said he gave the plaintiff a copy of the valuation. The plaintiff denied she was given the valuation. Subsequently, the second defendant informed Mr Conroy that the plaintiff had accepted $1,282 and he asked Mr Conroy, who was the company secretary, to transfer the share. Later he and the plaintiff signed a transfer of the share at the company's office where it was witnessed by one of the employees. The second defendant denied that he ever said that Mr Wilkins had recommended the figure. He did not speak to Mr Wilkins about the valuation or the share transfer. It was Mr Conroy who attended to both those matters. 10 In cross-examination, the plaintiff said, when the second defendant offered her $1,282, that if she did not sign and anything happened to the company, she would lose her house. When pressed, she said that was what the second defendant implied. She also said the second defendant said she should not tell anyone. She said she felt compelled to accept the offer or she would lose the house. Neither of these matters was raised in her affidavit. 11 When asked what she thought her share was worth when the second defendant made his offer, the plaintiff said about $100,000. Notwithstanding the large disparity between that figure and the amount of the offer, the plaintiff did not ask to see the valuation. She said she trusted them, they were family. She thought the figure had been approved by her accountant and her solicitor and she would not question them. 12 I find it extraordinary that, knowing there was a valuation, the plaintiff did not ask to see it when her expectations were dashed by an offer to purchase her share at such a minimal price. 13 I found the plaintiff an unsatisfactory witness who was prepared to embellish her evidence. I had struck out a paragraph in her affidavit in which she estimated the turnover of the company from her observation of various unspecified financial records. By leave, in examination in chief, the plaintiff identified the records in question as a cash book in which cheques received and cheques paid were recorded. The plaintiff said she entered up the cash book weekly and banked cheques approximately once a month. Banking was done daily. The bank deposit book was filled out by whoever did the banking. 14 I asked the plaintiff for her estimation of cheques received based on her banking experience and her cash book entries. She replied $500,000 a month. That represents a turnover of $6 million per annum. The financial records analysed by Mr Thompson showed a turnover of $2 million odd over the five preceding years. In her affidavit, the plaintiff swore that cheques received during a month totalled between $250,000 and $300,000 giving an annual turnover between $3 million and $3.6 million. 15 When this discrepancy was put to the plaintiff in cross-examination, she said her estimate of $250,000 to $300,000 was when her affidavit was sworn and she was saying that the company was now making $500,000 a month. The plaintiff left the company in 1999. Her affidavit was sworn in 2001. She said in oral evidence that her estimate of cheque receipts when she was entering up the cash book and attending to the banking, which was before her departure from the company in 1999, was over $500,000 per month. Her opportunistic attempt to overcome this discrepancy reflected poorly on her credit. Where her testimony differed from that of the second defendant, I prefer his evidence. 16 It was common ground that a valuation of the plaintiff's share was obtained before any offer was made to her. The offer that was made was in accordance with that valuation. 17 Howard Triglone, a chartered accountant, provided a valuation of the business conducted by the company. Mr Triglone pointed out that in the year ended 30 June 1998 the company obtained an unsecured loan of $210,911 from the directors. The company had shown a total operating profit in the years ended 30 June 1995 to 30 June 1998 of only $1,344. There was, he said, no capacity in the company to repay such a loan. In cross-examination, Mr Conroy agreed that the only source for repayment of the loan was future profits generated by the company. 18 Mr Triglone took the view that not even a director would lend such a sum unsecured to a company unless the director believed there was a capacity for repayment. Mr Triglone concluded that unbanked cash receipts, of which the plaintiff had spoken, improved the financial position of the company to the knowledge of the directors and accounted for the loan. 19 In 1994 the company had made an operating profit of $77,544. This dropped to $7,075 in 1995, to $5,848 in 1996, to $1,263 in 1997 and a loss of $12,842 was suffered in 1998, notwithstanding an increase in turnover, with one slight decline in 1997, from $1,957,740 in 1994 to $2,413,463 in 1998. 20 Mr Triglone preferred to estimate future maintainable profits in terms of the 1994 result and, having adjusted for income tax, applied a capitalisation rate at 25% to arrive at a value of the business of $217,124. Mr Triglone said this figure should be adjusted for the financial assets and liabilities in the balance sheet of the company at 30 June 1998, $346,422 in assets and $584,261 in liabilities. Mr Triglone said the difference between those figures should be deducted from his $217,124 to arrive at a value of the shares. He made a rough calculation assuming the difference between financial assets and liabilities was approximately $100,000. Mr Triglone was in error. The difference is $237,839 and that figure reduces the value of the shares to nil. 21 Mr Thompson averaged the net profit over the years from 30 June 1994 to 30 June 1998 having adjusted for abnormal expenditure. Mr Triglone agreed with those adjustments. Having arrived at an adjusted average profitability over the 5 years of $2,137, Mr Thompson adopted this as a reasonable estimate of future profitability and applied a capitalization rate of 33.3% to arrive at a valuation of the underlying business of $6,411, a one third interest in which was $2,137 to which he applied a 40% discount for minority holding to arrive at his figure of $1,282. 22 In the end there is little difference between the valuations. Mr Triglone said that if the financial records accurately portrayed the position of the company, the shares were worthless. Mr Thompson valued the underlying business and equated share value with the value of that business. Mr Triglone's adjustments to differentiate share value from the value of the business, accorded no value to the shares. 23 The second defendant estimated that cash receipts were only 2% to 3% of turnover. 2% of $250,000 per month is $60,000 per annum and if that level of cash was unreflected in the financial records of the company, it might have justified Mr Triglone's acceptance of the 1994 results as a more accurate portrayal of future maintainable profits. 24 However, the second defendant in one of his affidavits testified that the cash received was recorded in a day sheet and used for petty cash and the like. There was no challenge to this assertion in cross-examination of the second defendant. The plaintiff said that her instructions were to give any cash to Mrs Beryl Arnold, the mother of the second defendant. She did not know what happened to the cash. 25 In light of the unchallenged evidence of the second defendant, I find that cash receipts were utilised to discharge expenses of the company and were thus reflected in the company's financial accounts. I reject the conclusion reached by Mr Triglone that the net profits revealed in those accounts were understated by the amount of cash receipts. I accept the evidence of both valuers that, in that event, the shares were valueless or were worth very little. 26 The second defendant said the book-keeping work was carried out by his mother, his wife and the plaintiff. He was not familiar with the entries made by them. The defence did not call any witness familiar with the entries in the cash book. It was submitted that I should draw an inference adverse to the defence under the principle in Jones v Dunkel (1959) 101 CLR 298. Mr Thompson was not called but the plaintiff's counsel submitted that no adverse inference should be drawn on that account. 27 The rule only applies where a party is required to explain or contradict something. In the absence of evidence requiring an answer, the failure to call evidence has no probative significance (Schellenberg v Tunnel Holdings Pty Ltd (2000) 200 CLR 121 at 141-143). The plaintiff's evidence was that her instructions were to provide cash to the mother of the second defendant. She did not know what happened to that cash. The second defendant's unchallenged evidence was that the cash was used for petty cash and the like. There was no requirement to call further evidence in support of this contention. 28 There was not the slightest evidence that Mr Thompson's valuation was false or dishonest as is alleged in the statement of claim. Mr Triglone agreed with Mr Thompson's methodology. His difference in approach was based upon the supposition that no one would lend with no prospect of repayment and there must have been further profits in the company to justify the outlay. In any event, in the end, both Mr Triglone and Mr Thompson concluded that the shares were valueless or nearly so. 29 Nor is there the slightest suggestion that the second defendant knew that Mr Thompson's valuation was false or dishonest. It was common ground that the second defendant sought a valuation. He received the report and acted upon it. 30 The plaintiff has also failed to satisfy me that the second defendant represented that Mr Wilkins approved the valuation of the share. While the second defendant conceded that his recollection of his conversation with the plaintiff upon the signing of the share transfer was wanting, he categorically denied that he said that the amount was approved by Mr Wilkins. He said Mr Wilkins had nothing to do with the transfer of the share. It was Mr Conroy from whom a valuation was sought. It was Mr Conroy who recommended Mr Thompson and obtained the valuation from him and it was Mr Conroy who drew up the instrument of transfer. I accept that evidence in preference to the assertion of the plaintiff that the second defendant represented to her that Mr Wilkins recommended the amount. The plaintiff failed to establish the fraud upon which her action for damages for deceit was based. 31 The statement of claim alleged that the representations as to the fairness and reasonableness of Mr Thompson's valuation and its approval by Mr Wilkins were made by the second defendant in his capacity as a director of the first defendant. It was submitted on behalf of the defence that there was no allegation of misrepresentation by the defendant in his personal capacity. In light of my findings it is unnecessary for me to deal with this submission. I would, however, if necessary have entertained an application to amend the statement of claim to make it plain that the allegation was that the representations were made either qua the second defendant's position as director of the first defendant, or in his personal capacity. 32 The representations had nothing to do with the first defendant. It was the second defendant and not the first defendant who was acquiring the share. Counsel for the plaintiff was unable to explain what cause of action lay against the first defendant and, in my opinion, none did. 33 I will enter judgment in favour of both defendants. The plaintiff must pay the costs of both defendants. The parties are to bring in short minutes of orders reflecting these reasons.