Reported Decision : (2003) 44 ACSR 518 New South Wales Supreme Court CITATION : Apple Computer Australia Pty Ltd v George Mekrizis and Ors [2003] NSWSC 126 revised - 11/03/2003 24, 26, 27 and 28 June 2002 1, 2, 3, 4, 5 and 9 July 2002 HEARING DATE(S) : 26 and 30 August 2002 20 September 2002 17, 22 and 25 October 2002 15, 22, 25, 26, 27 and 29 November 2002 JUDGMENT DATE : 11 March 2003 JURISDICTION: Equity Division Commercial List JUDGMENT OF : Bergin J DECISION : See par [410]. CATCHWORDS : [GUARANTEE] - Whether the Guarantee was unjust within the meaning of that term in the Contracts Review Act 1980 (NSW) - Substantive and procedural injustice - Whether the Guarantors are entitled to a reduction in amount guaranteed by reason of: (a) receipts from other guarantors - (b) alleged prejudicial conduct by creditor - and (c) by reason of provisions of A New Tax System (Goods and Services Tax) Act 1999 (Cth) - [FRANCHISE] - Whether agreements were franchise agreements - Definition of franchise agreement under Franchising Code of Conduct - Duty of disclosure - Consideration of section 51AC of the Trade Practices Act 1974 (Cth) - [MISLEADING OR DECEPTIVE CONDUCT] - Whether the plaintiff made certain representations or whether representations should be implied - Whether representations were misleading or deceptive - Whether reliance was placed on representations to enter into Merger A New Tax System (Goods and Services Tax) Act 1999 (Cth) Contracts Review Act 1980 (NSW) LEGISLATION CITED : Conveyancing Act 1919 (NSW) Fair Trading Act 1987 (NSW) Trade Practices Act 1974 (Cth) Agro Holdings Ltd v Flexi-Coil (Australia) Pty Ltd [1999] FCA 1658, unreported, Nicholson J, 26/11/1999 Ankar Proprietary Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549 Apple Computer Australia Pty Ltd v George Mekrizis and Ors [2002] NSWSC 982, unreported, Bergin J, 22/10/2002 Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 Behan v Obelon Pty Ltd [1984] 2 NSWLR 637 Black v The Ottoman Bank (1862) 15 Moo PCC 472; 15 ER 573 BP Refinery (Westernport) Pty Limited v Shire of Hastings (1977) 180 CLR 266 Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 Commercial Bank of Australia Limited v Amadio & Anor (1983) 151 CLR 447 CASES CITED : Comptroller of Stamps (Victoria) v Howard-Smith (1936) 54 CLR 614 Dobbs v National Bank of Australasia Limited (1935) 53 CLR 643 Federal Wharf Company Limited v The Deputy Federal Commissioner of Taxation (1930) 44 CLR 24 Fitzwood v Unique Goal Pty Ltd (in liq) (2001) 188 ALR 566 Holder & Anor v Commissioners of Inland Revenue [1932] AC 624 Hurley v McDonald's Australia Ltd (2000) ATPR 41-741 Je Maintiendrai Pty Ltd v Australia and New Zealand Banking Group (1985) 38 SASR 70 Riches v Westminster Bank Limited [1947] AC 390 Subway Systems Australia Pty Ltd v Thorpe [2000] QSC 099, unreported, Muir J, 28/4/2000 West v AGC (Advances) Ltd & Ors (1986) 5 NSWLR 610 William Brandt's Sons & Co v Dunlop Rubber Company, Limited [1905] AC 454 Apple Computer Australia Pty Ltd (Plaintiff/First Cross-Defendant) Donald Hartono (Sixth Defendant/First Cross-Claimant) Tjipto Hartono (Seventh Defendant/Second Cross-Claimant) PARTIES : Wing Nin Liu (Thirteenth Defendant/First Cross-Claimant) Aircent Pty Ltd (First Cross-Claimant) Kevin McElduff (Second Cross-Defendant) James Likidis (Third Cross-Defendant) FILE NUMBER(S) : SC 50054/01 Mr TEF Hughes QC leading Mr CRC Newlinds on 20 September 2002 and 17 October 2002; Mr CRC Newlinds on all other dates (Plaintiff/First, Second and Third Cross-Defendants) COUNSEL : Mr P Hayes QC, Mr J Hyde and Mr A Paterson on 24 June 2002, Mr RG Forster SC on 26 and 30 August 2002, Dr C Birch SC on 9 July and 20 September 2002 and Mr A Davis on 22, 25, 26, 27 and 29 November 2002 (Seventh Defendant/Second Cross-Claimant) Mr P Hayes QC leading Messrs J Hyde and A Paterson (Thirteenth Defendant/First Cross-Claimants) Clayton Utz (Plaintiff/Cross-Defendant) SOLICITORS : John A Bush Solicitor (Sixth Defendant and Seventh Defendant/Second Cross-Claimant) Wright Pavuk Lawyers (Thirteenth Defendant/First Cross-Claimant) - 151 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST BERGIN J 11 March 2003 50054/01 APPLE COMPUTER AUSTRALIA PTY LTD v GEORGE MEKRIZIS & ORS JUDGMENT Index [par] Introduction [1] The history of the proceedings [4] Background to Merger Plan [12] Hartono/Liu Meetings July 2000 [21] Liu Meets with Arthur Andersen [28] Liu Meets with Mac's Place [30] Mac's Place Due Diligence [31] Liu's Meeting with the Plaintiff on 21 August 2000 [36] Purchase of Mac's Place [49] 8 September 2000 – The Merger Guarantee is signed [61] 13 September 2000 – the Merger Documents are signed [72] Buzzle's problems [76] De-merger proposal [82] Receivers appointed [85] Proceedings commenced [88] The Merger Documents [89] The Merger Deed [90] The Payments Deed [98] The Guarantee [104] An Oral Agreement [112] The Guarantee claim [116] The Defendants' Claims [117] Defences to the Guarantee Claim [125] Form of Certificate [126] $7,186,729.37 for Stock [138] $4,799,916.35 of Apple Debt [180] Unauthorised Reversal of $1,090,226.90 [190] Money received from other guarantors [195] GST Adjustments [201] The Seventh Defendant's position [209] The CRA Claim [229] The Code Claim [237] The Code [240] Was there a single agreement? [252] The Reseller Agreement [253] The Agency Addendum [267] The Centre Addendum [271] The Education Addendum [274] The Manual [276] Was the Reseller Agreement a franchise agreement? [287] Was the K-12 Agreement a franchise agreement? [316] Was the Service Provider Agreement a franchise agreement? [322] Was the Associate Reseller Program Agreement a franchise agreement? [331] Was the Supplemental Agreement a franchise agreement? [334] Misleading conduct case [345] The 21 August Representations [350] The Implied Representations [393] The Sixth Defendant [409] Orders [410] Introduction 1 These proceedings relate to the failed merged business operated by Buzzle Operations Pty Ltd (Buzzle) as a reseller of computer products of the plaintiff, Apple Computer Australia Pty Ltd (Apple). Receivers were appointed to Buzzle in March 2001. The plaintiff sues various defendants for amounts allegedly owing under guarantees given by the defendants in which they guaranteed moneys owing by Buzzle to the plaintiff. 2 The proceedings were commenced by way of Summons filed on 26 April 2001. As originally constituted, the plaintiff sought entry of judgment against thirteen defendants for moneys due and owing under their respective guarantees. A number of the defendants brought Cross-Claims against the plaintiff seeking to avoid liability under the guarantees on the basis, inter alia, of unconscionability and misleading or deceptive conduct. 3 By the time the matter came on for trial, the proceedings had been settled except as against the sixth, seventh, eighth, ninth and thirteenth defendants. They are respectively Donald Hartono, Tjipto Hartono, Stephen Ong, Eva Seok Gin Ong and Wing Nin Liu (Liu). The history of the proceedings 4 As these proceedings took a rather unusual route to conclusion it is appropriate to set out a short history of what occurred. The matter was originally listed for hearing in April 2002, however on the application of the defendants and over opposition by the plaintiff the hearing dates were vacated and the matter was re-listed for three weeks commencing on 24 June 2002. The reasons for the vacation of the trial date are dealt with in my judgment delivered on 11 April 2002. 5 The trial commenced on 24 June 2002 when Mr CRC Newlinds, of counsel, appeared for the plaintiff, Mr P Hayes QC leading Mr J Hyde, of counsel, and Mr A Paterson, of counsel, appeared for the sixth, seventh and thirteenth defendants, and the eighth and ninth defendants appeared in person. On the first day of the trial, Mr Hayes QC sought an adjournment of the commencement of the proceedings until 27 June 2002. That application was supported by the eighth and ninth defendants and opposed by the plaintiff. I allowed the plaintiff to commence its case on 24 June 2002. The Deeds of Guarantee and Indemnity (the Guarantees) and demands upon each of the defendants together with a certificate under the Guarantees were admitted into evidence (Ex. A) and the plaintiff closed its case. I then adjourned the proceedings part heard to 26 June 2002 when the defendants' cases were to commence. 6 On 26 June 2002, Mr Hayes QC advised that his instructions from the sixth and seventh defendants had been withdrawn. Mr J Bush, solicitor, announced his appearance for the sixth and seventh defendants and informed the court that at least the sixth defendant had executed a debtor's petition to be filed that day and that Mr Max Donnelly had consented to act as trustee. Mr Bush also advised that Mr Donnelly had indicated that he would not be taking any further part in the proceedings. The position in respect of the seventh defendant, Tjipto Hartono, was that he took no part in the proceedings from that date until 9 July 2002. 7 On 4 July 2002 the plaintiff and the eighth and ninth defendants settled the proceedings. The trial between the plaintiff and Liu continued on 5 and 9 July 2002. On 9 July 2002, Dr C Birch SC sought leave to appear for the seventh defendant in relation to a matter that had arisen in respect of the amount allegedly owing under the Guarantees. The final submissions continued and on the application of Dr Birch, I stood the matter over for further final submissions on 26 August 2002. 8 On 26 August 2002 Mr RG Forster SC appeared for the seventh defendant. Mr Hayes QC sought leave to rely upon further written submissions filed on 21 August 2002 together with an affidavit of his instructing solicitor. These dealt with new areas not previously the subject of submissions. Over opposition by the plaintiff I allowed reliance on the submissions, however, on the plaintiff's application, I allowed further time to respond to the submissions and to call additional evidence if necessary. 9 On 30 August 2002 it became apparent that the seventh defendant and Liu were seeking to amend their pleadings beyond what had been contemplated on 26 August 2002. I directed the seventh defendant and Liu to file Motions seeking leave to amend their pleadings and call further evidence. I also directed that any evidence in support of the Motion together with all additional evidence proposed to be called, if leave were to be granted, be filed prior to the hearing of the Motion on 20 September 2002. 10 Motions were filed seeking to amend their Defences and Cross-Claims. I heard those Motions on 20 September 2002 and a further application to call further evidence on the Motions on 17 October 2002. I allowed some of the amendments sought, the detail of which is contained in my judgment delivered on 22 October 2002: Apple Computer Australia Pty Limited v George Mekrizis & Ors [2002] NSWSC 982. Although the seventh defendant did not take part in the trial, I allowed him to defend the guarantee claim and to rely upon part of an amended Cross-Claim seeking to set the Guarantee aside under the Contracts Review Act 1987 (NSW) (the CRA). 11 Further hearing of the matter continued on 25, 26, 27 and 29 November 2002 when Mr AA Davis, of counsel, appeared for the seventh defendant and representation for the other parties remained the same. Further evidence was called, final submissions were made and I reserved my judgment on 29 November 2002. Background to Merger Plan 12 The plaintiff's principal activity is the importation and distribution of computer equipment. The immediate parent entity of the plaintiff is Apple Computer Inc. Ltd, a company incorporated in Ireland, and the ultimate parent entity is Apple Computer Inc., a company listed and incorporated in the United States of America. The plaintiff distributes computer equipment through entities known as Resellers that on-sell it and may provide maintenance and/or repair services. 13 In early to mid 2000, seven of the plaintiff's Resellers, who were conducting businesses in what are referred to as "AppleCentres", decided to merge their businesses into a proposed business to be operated by a newly incorporated company. That company was referred to in the planning stages as "Newco" and was ultimately incorporated and named Buzzle with the aim of floating Buzzle Ltd on the Australian Stock Exchange (ASX). An information brochure prepared in mid 2000 (Ex. K; p. 98) described the plan as follows: The Channel Merger Apple Australia's leading channel partners are planning to consolidate operations and merge as a single entity with the announcement planned for July 3, 2000 and possible listing on the ASX some time later in 2000. What It Means The merger involves seven of the largest and most established channel partners in Australia. These include: Choice Connections, GM, Nextbyte, Mac's Place, Designwyse, Status Graph and Manning Computers. The decision to merge the seven operations comes as a major confidence boost for Apple and highlights the vigour and health of the Apple business these channel partners have been enjoying. Immediate and identifiable business gains from this exciting venture will include: · the creation of one entity allowing consortium members to consolidate and streamline businesses; · better negotiation when purchasing volume stock; · increased synergy of operations; · the ability to expand in areas currently lacking an Apple presence; · new and revitalised AppleCentres; · enhanced branding for the consortium and Apple. Extra benefits to Apple include: · the likelihood of increased retail coverage; · ability to continue funding strong growth. The Current Situation The consortium is currently working in conjunction with leading Marketing company "Love" to create the new branding and marketing plan that will drive the new company forward. Arthur Andersen Corporate Finance has been appointed to advise the consortium on the merger details and the potential listing on the Australian Stock Exchange. The Announcement Apple Australia will release a formal media statement which will include quotes from Managing Director Di Ryall and various representatives of the newly formed consortium on July 4, 2000. 14 On 5 July 2000 an article entitled "Apple Retailers Plan Merger" appeared in the Financial Review (Ex. K; p. 57). It included the following: Seven of Apple Computer's Australian retailers have decided to band together into a single corporate entity which plans to list on the Australian Stock Exchange. The seven companies have thirty-one retail outlets between them and combined annual revenues of $200 million. The companies (named) sell product under the Apple Centre banner and see their merger as an opportunity to shed costs by sharing technical resources and pooling funding for new AppleCentres. Apple Australia's Managing Director, Ms Diana Ryall, said the deal may draw flack from Apple's other resellers. "I'm sure they will express some concern, but the growth of Apple is so phenomenal that most comment on how much demand there is," she said. … The combined group is working on a name for the new entity and expects to lodge a prospectus for an IPO by the end of the year. "Apple has seen stupendous growth over the last couple of years, and we intend to float to prepare for further strong growth" said Mr Craig Rispin, spokesman for the group. "We expect to have everything done and ready for Christmas." Apple has applied a single wholesale price to its products regardless of volumes ordered, so the merger would result in lower prices on third-party computer products only, said Mr Rispin. He said the planned merger took the successful Apple Centre model a step further. Arthur Andersen Corporate Finance has been appointed financial adviser for the merger and subsequent ASX listing. 15 On 15 June 2000, a number of the representatives of the plaintiff attended a meeting with the Resellers. The representatives of the plaintiff were the Managing Director, Ms Diana Ryall, the Manager responsible for Apple's channel partners, Kevin McElduff (McElduff), the Director of the Finance and Business Operations, James Likidis (Likidis) and amongst others, Ms Naomi Law, legal counsel for the plaintiff. It was at this meeting that Mr Rispin, speaking on behalf of the Resellers, outlined to the representatives of the plaintiff the advantages to the plaintiff in supporting the Merger. It was Mr Rispin who had developed the idea of consolidating and merging the Resellers. 16 The Resellers and the plaintiff's representatives had a number of meetings throughout June. In the main, those meetings were held between Mr Bright from Arthur Andersen Corporate Finance (Arthur Andersen) and Mr Rispin for the Resellers and Likidis and Ms Law from the plaintiff. On 28 June 2000, Likidis informed Mr Rispin and Mr Bright that from the plaintiff's perspective it would require as a minimum security a floating charge over the assets of the Newco as well as directors' guarantees. He said that would be reviewed after the Newco went public. Likidis also informed Mr Bright and Mr Rispin that other requirements included 100% of non-services revenue to be Apple exclusive or Apple associated product. He said that performance targets would be set and a new reseller agreement had to be signed. Likidis also said that the plaintiff would require financial forecasts for the new entity including revenue, profit and cash. He said that there was to be no change in the margin structure of the financial terms and he asked whether the announcement could be delayed for one week to allow the plaintiff to prepare for a press comment. 17 On 30 June 2000, Mr Bright wrote to Likidis in terms which included the following: (ii) In terms of the security arrangements the key points are as follows: · No changes to the existing arrangements are sought prior to the IPO except that the existing principals' exposures should be linked in some way to their ownership interests and should not increase in relation to the operations of the overall merged entity; · After the IPO, as a public company, with its own capital base and the separation of shareholder and employee roles, all Director's guarantees should be released; and · Without detracting from Apple's security position, Newco should be able to introduce prudent debt levels into its capital structure. We will be in a position in around the second week of July to review these matters with you in further detail based on financial projections that should be available at that time; (Ex. K.; p. 79) 18 On 5 July 2000 Likidis sent an email to Mr Crawford Giles, the principal of Nextbyte, in which he wrote: Following our conversation this morning, below I confirm what we discussed as the process of doing business between Apple Computer and Newco going forward. You advised that business transacted going forward with Apple would be with a new company currently registered in the name of ... (Newco). My understanding is that this company is the company that will be used as the vehicle for merging the other entities. This company is a subsidiary of another new company … Ltd. We need confirmation that my understanding of the above is correct. The time required to have a new agreement completed by 24 July when business commences with Newco, with terms that meet both Apple and Newco requirements going forward, is very short and can not be met. To that end we propose the following: - a new agreement is prepared and completed by 24 July that is in line with the terms and conditions of the current channel Apple reseller agreement. This will be an interim agreement until the new supply agreements are drafted and signed. New security arrangements need to be made. This involves the preparation of documentation giving cross-collateralisation security for Apple over Newco and each member entity included in the merger. As you are aware this is a cost that will need to be met by Newco. You asked for an estimate for this and I will provide you with this shortly. We need to receive legal advice on whether the other new company i.e. the parent of Newco Ltd will need to be included in the cross-collateralisation documents. - A draft agreement is forwarded for Newco with some new terms to reflect new conditions of working with Apple – 7/8/00. - New agreement with Newco agreed and signed no later than 31/8/00 - Further amendments are to be made to the agreement on public float. (Ex. K; p. 109) 19 Mr Crawford responded to Likidis' email, agreeing or stating "OK" to all the propositions and concluded: "in essence I am happy with this. As the documentation comes through we will have our lawyers review the paperwork". It is apparent from the evidence that Nextbyte planned to merge with Mac's Place for the purpose of the merger. 20 The sixth defendant, Donald Hartono, attended a meeting at Apple's offices on about 21 July 2000. Present at the meeting were Likidis, McElduff, Ms Law, Mr Paul Shearer, the then Financial Services Manager, Mr Crawford and Mr Adam Steinhardt from Nextbyte. At this meeting, Mr Hartono informed those present that "we are all aware of Mac's Place negative equity on the balance sheet and want to discuss the financial position of Mac's Place and the level of short fall and debt owed to Apple". Mr Crawford informed the meeting that there was "negative $3 million" and said, "there is a big hole in the Mac's Place accounts in the amount of $3 million". Likidis suggested that the plaintiff may have to appoint a receiver to Mac's Place. Mr Hartono asked Likidis not to do that as he was interested in buying Mac's Place and would inject capital into it as a wholly owned subsidiary of Choice Connections, the business of which he was the principal. Likidis asked to see the balance sheet and advised the group that the plaintiff would also need the "financials" for each of the businesses intending to merge for the purposes of identifying whether any of the others in the planned merger were in financial trouble. Hartono/Liu Meetings July 2000 21 Donald Hartono had met Liu in about 1997. Liu was born in Hong Kong and came to Australia in November 1985. In 1991 he obtained a Bachelor of Commerce degree from the University of New South Wales and after graduation he completed two years of work experience with a chartered accounting firm, Watson Easton & Co, where he worked mainly in the area of taxation. He is eligible for admission as a Certified Practising Accountant (CPA) but has not been admitted. 22 During the period 1993 to 1997, Liu was the Financial Controller of Bayview Country Club Pty Ltd which was involved in residential land subdivision projects in Queensland. His family had an interest in that company and his principal role was to oversee project finance. In July 2000 Liu was the general manager of First Scope Development Pty Ltd, in which his family has an interest. That company developed and managed a joint venture investment project with a number of overseas based companies in the Capitol Square building in George Street, Sydney. Liu's principal role was to oversee project finance and manage the leasing and marketing of the project. In about late 1999, Mr Hartono's computer business, Choice Connections, leased premises in the Capitol Square building to set up an AppleCentre. 23 In late July 2000, Mr Hartono telephoned Liu and asked to see him about a business opportunity. Liu met with Mr Hartono at the ANA Hotel for dinner at which time Mr Hartono informed Liu that over the previous two months he had been involved with the plaintiff and "the seven largest Apple resellers" looking at merging the Resellers and floating the merged company on the ASX. Mr Hartono informed Liu that one of the Resellers, Nextbyte, that had planned to merge with Mac's Place, had pulled out because "there is a hole in Mac's Place balance sheet". He also informed him that there had been disagreement about the share allocation that Nextbyte was going to have in the merged company. 24 Mr Hartono then informed Liu that a rescue plan for Mac's Place had been suggested by the plaintiff and that it "may create an ideal opportunity" for Liu to be involved with the group. Mr Hartono informed Liu that: (1) the merged company would be the largest Apple Reseller in Australia; (2) that he would be investing in a business that would float on the ASX in November 2000; (3) that Arthur Andersen was acting for the merger partners and a lot of work had already been done; and (4) the merger partners had the plaintiff's full support for the Merger. 25 Mr Hartono also informed Liu that representatives of the plaintiff wished to meet with him to "discuss the deal" and that it would be "good for them and good for you". He said: "all the hard work has been done and all you have to do, Wing, is to walk into the deal" and "trust me this would be a good opportunity to be involved". 26 Liu informed Mr Hartono that he was "of course" interested but that he would like to see more details. He asked for any financial statements for Mac's Place and Mr Hartono informed him that he was waiting for more details but would provide him with what he had. Liu said: "I am happy to assist and look into the matter". During this meeting Mr Hartono showed Liu a number of newspaper articles including the Financial Review article referred to earlier. At or shortly after the meeting Mr Hartono also provided Liu with a copy of the information brochure to which reference has already been made. 27 On 30 July 2000, Mr Hartono provided Liu with a copy of Mac's Place's fixed asset valuation that referred to the total value of the assets and leasehold improvements as $485,390. On 4 August 2000, Mr Hartono informed Liu that the plaintiff had engaged Mr Lee Wong of Moore Stephens, accountants, to conduct a due diligence report on Mac's Place and that he was still awaiting more information. Liu Meets with Arthur Andersen 28 In early August 2000, Liu attended a meeting with Mr Hartono and Mr Bright at Arthur Andersen's office. The following conversation took place: Bright: Unless Mac's Place is sold very soon the entire merger will not proceed. I have spoken to Apple who have told me that the merger cannot proceed without Mac's Place because it is a very important Channel partner. Apple wants an investor to fix up Mac's Place and reinstate its balance sheet before the merger. Liu: Can I invest in the merger company directly, rather than buying Mac's Place's business? Hartono: Arthur Andersen has approached Apple on that type of proposal and Arthur Andersen believes the merger group requires operating cash flow to commence the business and about $2 million investment would be helpful to clear Mac's Place existing debts and liabilities. Those debts and liabilities would not be transferred over to the new entity. Bright: Jim Likidis of Apple has already rejected such a proposal. Apple wants to fix up Mac's Place first, so as to keep it in the merger group. Hartono: If the Mac's Place business is not fixed, Apple will appoint a receiver to the company and that would affect the marketing image of Apple and the subsequent merger. This is a key condition for the merger to go ahead. The only way is Apple's way to rescue Mac's Place. (Liu's aff. 4/6/02; par 21) 29 A proposed structure for the sale of Mac's Place that was provided to Liu suggested the establishment of a new company, a contribution of equity capital of $2.6 million, a purchase of the fixed assets from Mac's Place for $3 million and the on-selling of them to Buzzle for $400,000. It was suggested that the $400,000 would be funded by way of loan from Choice Connections with a sale of the shares in the new company to Buzzle in exchange for the issue of shares in Buzzle. Liu Meets with Mac's Place 30 In early August 2000, Liu met with the owner of Mac's Place, Mr Scott Thompson, and Mr Hartono. During the conversation, Mr Thompson said: Mac's Place is one of the most successful Apple resellers in the retail market. It has a turnover of $27 million a year. I started the business in a garage in Melbourne. In five years I have grown the business from one store to seven stores. Mac's Place operated from one retail outlet in Brisbane, two retail outlets in Sydney and four retail outlets in Melbourne. Apple is going to fund me to open another store in Bondi Junction. I have organised the lease of a site next to McDonalds. Everything is ready to go. (Liu's aff. 4/6/02; par 23) Mac's Place Due Diligence 31 On 18 August 2000, Liu received a copy of the due diligence report for Mac's Place prepared by Moore Stephens. After analysing this report, Liu understood that Mac's Place had a deficiency of assets over liabilities of about $3 million and trade creditors of about $5 million. After reading the report Liu telephoned Mr Hartono and the following conversation took place: Liu: I am not interested to proceed. Shit, the deficit is enormous and I can't buy this if the deficit is $3 million. I still do not know what I am buying. Don, I can only trust your judgment on this matter at best. The deal is off. I can't afford it. Hartono: If we can't fix Mac's Place, there will be no merger. This is a good opportunity to revive an Apple business and be part of the merger. Everything has been done for the merger. Liu: Donald, it is too much. I can't afford it. Hartono: I will call you back. We should meet and talk about it. (Liu's aff. 4/6/02; par 26) 32 That evening Mr Hartono telephoned Liu and said: Apple is very concerned at the size of Mac's Place debt and its effect on the merger. Apple does not want to appoint a receiver to Mac's Place. Apple is very concerned that the receivership news of Mac's Place would have a negative impact on the reseller channels and AppleCentre marketing image. Apple is very concerned about the impact on the merger company. It does not want to lose the sales turnover from Mac's Place. This would affect the group's subsequent listing on the ASX and its ability to raise funds to expand the AppleCentre stores on the public listing. Maybe we should meet and talk about it at my place tomorrow. (Liu's aff. 4/6/02; par 27) 33 In a subsequent telephone call that evening, Mr Hartono informed Liu that he had spoken to Likidis who would call Liu direct. Mr Hartono informed Liu that Likidis wanted "to make the deal more attractive". He suggested a meeting in Melbourne on Monday, 21 August 2000 and Liu agreed to attend. 34 On 19 August 2000, Likidis telephoned Liu and the following conversation took place: Likidis: I hear that you are having second thoughts about Mac's Place? Liu: Where did you hear that from? Likidis: We want to make sure you'll be coming down to Melbourne on Monday because we have a proposal to make the deal more attractive for you. Liu: I'll be there. (Liu's aff. 4/6/02; par 29) 35 Also on 19 August, Mr Hartono and Liu met at Mr Hartono's home. The following conversation took place: Hartono: Look, Apple told me that they could sweeten the deal and they would make it more attractive by transferring the actual two properties held by Scott Thompson over to you. This would mean a $1 million discount on the purchase price! Liu: Is that right? What did Scott say about it? Hartono: It's up to Jim. He will talk to Scott and try to make you reconsider your decision. Jim wants me to take you down to Melbourne on Monday so that he can negotiate the deal with you directly. I can arrange to buy the airfare tickets. Liu: Okay, we will go and see what Jim wants to say. (Liu's aff. 4/6/02; par 30) Liu's Meeting with the Plaintiff on 21 August 2000 36 Liu and Mr Hartono met with Likidis, Mr Shearer, Mr Thompson, McElduff and Mr Wong at the offices of Choice Connections in West Melbourne on 21 August 2000. Liu claimed in evidence that Likidis said that he and McElduff had an earlier meeting that day with Mr Thompson about Mac's Place's financial troubles, the appointment of a receiver and the rescue attempts for Mac's Place. 37 There is conflicting evidence of what was said at the 21 August meeting, however Liu gave the following version in his affidavit evidence. Likidis said: Let me kickstart the meeting by saying we are here today to do a deal and I want everyone to focus on the big picture of doing a deal at the end of this meeting. I would like to run the meeting with the following agenda headings: Review of Due Diligence Report of Mac's Place. Agreement on Purchase Price Mac's Place. Proposed Structure of the deal. Proposed Management. (Liu's aff. 8/3/02; par 37) 38 Liu claimed that after he looked at the due diligence report from Mr Wong he informed Mr Hartono that there was no way he could go ahead. Liu then took what he described as a "toilet break". On his return to the meeting room he noticed that Likidis appeared to be chatting intensely with Mr Hartono. Likidis said: Wing, please come in. Donald, close the door. I'd like to have a private conversation with you. Now, the Mac's Place due diligence is showing negative assets of around $3 million. This is what I expect to sell the Mac's Place business for - $2.6 million - $3 million. (Liu's aff. 8/3/02; par 40) 39 The conversation continued: Likidis: How much did Mac's Place turn over last year? Hartono: $27 million. Likidis: Wing, you know you are buying an Apple business with annual sales turnover of $27 million and Mac's Place is a very important Apple Channel partner. Hartono: Mac's Place sales turnover of $27 million is very critical to the merger group and its retail strategy. Mac's Place has very good retail exposure in New South Wales, Queensland and Victoria. Mac's Place business is very important to the float and market valuation. Likidis: Don, how much percentage of shareholding is Wing going to get in Newco? Hartono: About 18.5%. Likidis: Well, look Wing, Mac's Place business will entitle you to get roughly 18.5% shares in Newco. Do you have a copy of the valuation report for Newco? Hartono: Yes, I have a copy of the valuation report here. The report is in my bag. Likidis: Wing, have you seen the valuation report? Liu: Yes, Jim. Donald showed it to me a week ago and he also gave me a copy of the proposed share allocation sheet. Likidis: Can you tell me again, what is the valuation of Newco? Hartono: Based on the Arthur Andersen valuation report, the company will be worth about $113 million. Likidis: Wing, your investment in Mac's Place for $2.6 million will roughly give you about $21 million in return when Newco publicly lists on the ASX. Mac's Place is good value and you will achieve a profit of $18.4 million. That's not a bad return for six months, huh? Liu: I have no knowledge of the Apple business and business risk associated to it, so my investment decision will be based on representations made by Apple for the reasoning to rescue Mac's Place. Does Apple give its full support to the merger and the float? Likidis: Mac's Place business is critical to my decision to let the merger go ahead. Apple Computers Australia is in full support of the proposed merger of the six largest Apple businesses, of which Mac's Place is most certainly one. Of course, Apple is giving its full support to the merger. It is in Apple's interest to see the merger and subsequent float happen. Your success is Apple's success. Wing, how can we close the deal? Liu: Well, I am not willing to pay $2.6 million to buy the business. It is still too expensive. Likidis: I was wondering, how much are you willing to pay for the business? Liu: $2.6 million is still too much to pay. Likidis: How can I make the deal more attractive to you? What if I ask Scott to transfer two of his commercial properties to you? Will you do the deal? Liu: What do you mean, Jim? Likidis: If I throw in two of Scott's commercial properties at 172 Lennox Street, Richmond and 546-548 Whitehorse Road, Mont Albert, worth about $900,000 together as part of the deal. What do you think? Liu: What does Scott say about that? Likidis: It's not up to him. Can we close the deal? Liu: Let's see what Scott says about that. (Liu's aff. 8/3/02; pars 41-47) 40 In his affidavits Likidis denied much of this conversation including the statements in italics. After this conversation the meeting then resumed with Mr Shearer, Mr Thompson and McElduff. Mr Hartono and Liu were asked to leave the meeting room for ten minutes and were then invited to return. On their return Liu claims the following conversation took place: Likidis: How much are your two commercial properties worth? Thompson: I rang the agent, and the agent gave me an over the phone valuation of $600,000 for Richmond and $300,000 for Mont Albert. A total value of $900,000 for the two properties. Likidis: Do you have any mortgages on the properties? Thompson: Yes, about $375,000 with the Commonwealth Bank. Likidis: So, there is about $500,000 of equity in the properties. Scott has agreed to transfer these two properties worth $900,000 to you. (Liu's aff. 8/3/02; par 51) 41 Liu observed Mr Thompson leave the room in what he thought was an emotionally upset state. Likidis denied that Thompson displayed any unhappiness during the meeting. Liu said that he had earlier observed Likidis threaten the appointment of a receiver to Mac's Place with a possible bankrupting of Mr Thompson if the deal did not happen. In his affidavit sworn on 7 April 2002 Likidis gave evidence that he did not direct Mr Thompson to sell the properties as part of the deal and stated that: "Scott made the offer on 19 August 2000 of his own volition". Likidis was cross-examined on this matter as follows: Q. And it was that, (Wong confirming the $3 million hole in Mac's Place) that caused you to ring up Mr Thompson and suggest that he should make the two properties available, to sweeten the deal? A. Yes. Q. You rang him and initiated it, didn't you A. Yes, I did. … Q. It would be wrong if you had suggested in your affidavit that it was Mr Thompson's suggestion that the properties be sold, wouldn't it? A. That's correct. Q. Because it was you who said, put in the properties? A. Yes, it was. …. Q. And you basically said 'If you don't do that we will put you under?' A. No, I didn't. Q. You threatened him with bankruptcy or insolvency didn't you? A. It was not a threat. Q. You said it in a threatening - A. No, it was - Q. - You said it was not a threat, 7hat is your definition? A. I didn't say that. Q. What did you say to him? A. My probably exact words were "Scott, you will probably lose everything if we put you into receivership" because it was a known practice for Apple, if they didn't get paid, to put their place into receivership. Q. And it was not a threat? A. It was an implied threat. Q. And you know it was a threat? A. Yes. Q. And you deliberately conveyed it as a threat? A. Yes. Q. And when you said a moment ago it wasn't a threat, you were telling a deliberate untruth, weren't you? A. No. Q. You are just mistaken again, correct? A. Yes. (tr. 540-541) 42 Liu claimed that McElduff suggested that Liu's company, Aircent Pty Ltd (Aircent), transfer 500,000 shares to Mr Thompson on the float. McElduff said: Scott has always been a cooperative channel partner and an important asset to the channel. The transfer of half a million shares to Scott would be by way of compensation. (Liu's aff. 8/3/02; par 53) 43 McElduff then left the room and Likidis said: Think about it this way, Wing, you will reap a reward of an $18.4 million return on your Mac's Place investment. Now, can we close the deal? (Liu's aff. 8/3/02; par 53) 44 Likidis denies that he said this. Mr Hartono and Liu were then asked to leave the room again and return in ten minutes. On return Liu observed that Mr Thompson looked very much happier. 45 Liu also gave evidence in his affidavits that during the meeting Likidis asked him what the structure of the transaction was and Liu informed him that it was better to acquire Mac's Place Group. Likidis disagreed and said, "I think it is better not to acquire the company but to acquire the assets and accepted liabilities, just leave the mess behind and then sell it to Buzzle". Liu also gave evidence that the following conversation took place at the meeting: Liu: I still cannot afford the deal if it means paying liabilities to Apple in full. Likidis: Don't worry, once the merger will happen in a few weeks, I will let Aircent transfer all Apple Computer/hardware/software stock to Buzzle Operations and I will allow you a credit on all Apple outstanding debt from Buzzle Operations. Liu: This means all debt owing to Apple by Mac's Place will be transferred to Buzzle. Likidis: But I want my money now. I want you to fix up the Apple debt and pay me the overdue sum by Mac's Place for a sum of $2 million on settlement of Aircent's purchase of Mac's Place. Thompson: What about the other unsecured third party creditors? Likidis: Fuck them. I decide who's to be paid from the settlement sum. Thompson: Some of the debts are very urgent, like other Apple third party suppliers, telephone bills and electricity bills. I need some money to pay them too. Likidis: Well, on settlement I want at least $1.5 million paid to Apple. I will then extend the payment term to Wing until the end of September 2000 for the balance. Now, we've fixed the hole, you can start buying more products in order to meet the pre-determined sales target set for Mac's Place for Q4. Of course, that means I can give you more credit. Liu: What is Q4? Hartono: Apple's financial year starts from the first of October. Q4 is the last quarter. Likidis: Wing, I know you have no experience in Apple businesses and you should ask Donald to manage the business for you until the merger is complete because CCA has an accounting/management system in place. It is only a matter of a few weeks. Everything is done for you. This is a good deal. Can we now close the deal? Liu: What about Mac's Place profit and loss statement and cashflow? I could not see it from the due diligence report. Likidis: You got the due diligence. Why do you need profit and loss statements? Anyway, I will ask Scott Thompson to provide you with the cashflow projection of the business. (Liu's aff. 8/3/02; pars 61-64) 46 Likidis denied the majority of this conversation in his affidavit and claimed that he found it "offensive" that it had been suggested that he said the words in italics. He claimed that Liu and Mr Hartono informed the meeting that the sale was now to include Mr Thompson's properties. He also stated that Liu had suggested that Mr Thompson should receive a share issue in the merged company upon the float and that the conversation included the following: Likidis: So Wing you're paying $3 million for this. You know this company is virtually worth nothing at the moment? Liu: Well I look at it this way. I pay $3 million today but get $18 million in November when it floats. This is my way of buying into Buzzle. (Likidis aff. 21/11/01; par 35) 47 Liu was cross-examined about the portion of the conversation he alleged occurred on 21 August in which he claimed he said to Likidis: I have no knowledge of the Apple business and business risk associated to it, so my investment decision will be based on representations made by Apple for the reasoning to rescue Mac's Place. Does Apple give its full support to the merger and the float? (Liu's aff. 8/3/02; par 46) 48 Mr Newlinds put the terms of the conversation to Liu and suggested that he did not say those words. Liu asked for the question to be repeated and the following was his evidence: Q. You didn't say those words or anything like those words did you? A. I said I have no knowledge in the business, in the Apple business. … Q. "I have no knowledge of the Apple business so my investment decision will be based on representations made by Apple." You didn't say that, did you? A. No, I didn't say that. I said I had no knowledge of the Apple business. Q. Did you say anything else? A. No. Q. So look at the bottom of page 9, para 46? A. Yes. Q. You say you said, "I have no knowledge of the Apple business." Did you say the rest of those words set out in the paragraph? Do you know what I am asking you to do? A. You are asking me whether I have said those things. Q. Yes? A. I have said that I have no knowledge in the Apple business. Q. The rest of it you just made up for the purposes of this case, didn't you? A. No, that is not correct. Q. Did you say the rest of it or not? A. (No answer). Q. Mr Liu? A. Yes. Q. Did you or didn't you say those words? A. I have said I have no knowledge of the Apple business. Q. And I put to you that the rest of that paragraph you made up for the purposes of this case and you said "No"? A. No. Q. You didn't make up the rest of those words for the purpose of this case? A. No. Q. Did you say the words or not? A. I repeat myself … Q. Don't repeat yourself, answer Mr Newlinds. Did you say them or not? A. No. (tr. 334-335) Purchase of Mac's Place 49 In August 2000 Mr Thompson forwarded to Likidis, with a copy to Mr Hartono and Liu, "Mac's Place P&L and cash flow forecast for FY 2001". On 24 August 2000 Likidis sent an e-mail to Mr Thompson (Ex. K; p. 306): Thanks for this. I have a very basic question however that I would like Lee to look at. How can the business cashflow $4.4M when the profit is only $786K. This can happen if you had such events as sale of assets or a reduction of inventory or debtors or non-payment of creditors. I don't think any of this is happening. I have not studied this document properly but it seems to be over-stated. Can you please get Lee to review it with you and I will contact you on my return tomorrow. 50 Mr Thompson responded (Ex. K; p. 307): The answer here is very simple. Because we are starting with no creditors to pay and are generating sales every day, and because Apple provide 60 days terms, we will have massive positive cashflow in the first 2 months. If you scroll down you can see the end position of the balance sheet, which shows creditors and debtors as they would appear at the end of the year. Simon is ringing Lee now to make sure he is comfortable with the way the cashflow has been prepared. 51 Between 22 and 24 August 2000 Liu attended a meeting at Arthur Andersen and reviewed the draft Mac's Place Assets Sale Agreement that had been prepared by Andersen Legal. Liu claimed in his affidavit evidence that he did not receive advice from Andersen Legal about the proposed purchase transaction or about the contents of the Sale Agreements. He was unaware for whom Andersen Legal was acting in relation to the sale and at no time did he or his company Aircent receive any invoices from Andersen Legal for acting in relation to the purchase. However Aircent paid $5,392.47 for part of the plaintiff's legal costs associated with the purchase of the Mac's Place business. 52 The Merger partners had met a number of times at Arthur Andersen's offices between 29 May 2000 and 22 August 2000. The first meeting that Liu attended was the tenth such meeting which occurred on 22 August 2000. Minutes of the meetings were kept (Ex. L) and at the commencement of the 22 August meeting the minutes of the previous meeting of 15 August 2000 were tabled. Mr Bright suggested that it may be in Newco's best interest to postpone the float until early 2001 for a number of reasons including obtaining greater comfort in forecasts, implementing some of the identified strategies and giving the CEO time to settle in. Mr Bright stressed the need for principals to submit due diligence documentation so that the current Merger timetable could be achieved. 53 The minutes of the meeting also noted that Mr Thompson of Mac's Place "reported that Mac's Place Pty Ltd has concluded a transaction with Wing Liu which is expected to be completed on Friday 25 August" (Ex. L). The minutes also noted that Mr Max of Arthur Andersen "described the refinements to the transaction mechanism to effect the transfer of businesses" (Ex. L). 54 On 25 August 2000, Liu received a telephone call from Ms Naomi Law while he was with Mr Hartono at his North Sydney office. The following conversation took place: Law: Have you received the documents from Clayton Utz for the settlement? Liu: Yes. Law: You need to take the documents down to Melbourne. Also, Jim told me that you don't have a lawyer to represent you. Scott Thompson has Coadys representing him. Clayton Utz represent Apple. Who is your solicitor? Liu: I don't have a solicitor. Everything has been done by Apple and Andersen Legal. Law: You must have your own legal representative on Monday. Liu: I know no one in Melbourne. I'll speak to Donald. (Liu's aff. 4/6/02; par 46) 55 Shortly after that conversation Likidis telephoned Liu and said: "it is up to you to get a lawyer in Melbourne". Subsequently Mr Hartono advised Liu that he had also received a call from Likidis who had asked him to find Liu a lawyer in Melbourne. 56 On 28 August 2000 Mr Hartono and Liu flew to Melbourne and met with Mr Issac Brott, solicitor, who arranged for a solicitor from his office, Mr Bruce McNab, to provide legal advice to Liu. Liu said he spent some time with Mr McNab and explained the transaction to Mr McNab who looked through the documents and asked where the other documents were. Liu advised Mr McNab that he did not have any other documents. 57 At about 5:30pm on 28 August 2000 Mr Hartono, Mr McNab and Liu attended a meeting at Andersen Legal's office in Melbourne. Ms Cox of Andersen Legal, Ms Law, Mr Shearer and Mr Thompson and his solicitor were also present. Liu said that he still had not received the profit and loss statement for Mac's Place. Ms Law then telephoned Likidis and handed the telephone to Liu. The following conversation took place: Liu: I still have not received the profit and loss statement for Mac's Place. Likidis: You already have a profit and loss statement from Scott Thompson. Liu: No, that was not a proper profit and loss statement only projections. Likidis: I have seen it and it is good enough. Anyway, you already have a due diligence for Mac's Place and that is enough to attach to the contract. Liu: What about the need for independent financial advice? Likidis: You don't need financial advice because you already have the due diligence. We can't delay the settlement of Mac's Place. If there is any delay the merger will not happen. You should waive your right to get financial advice. Liu: I'm only a passive investor, why do I need to sign a guarantee? And why are they asking my mum to sign one? Likidis: This is only a temporary measure for a short period, for the period of time that Aircent owns the Mac's Place business until it is on-sold to Buzzle and that after that, we will release the guarantees. (Liu's aff. 4/6/02; par 54) 58 Liu's affidavit evidence was that during the meeting Mr McNab advised him that changes were needed to the documents but that Ms Law informed them that the plaintiff would not agree to any changes and that the documents needed to be signed as they were. There was no evidence as to what the changes were that Mr McNab suggested. Although the parties stayed at Andersen Legal's office until 8:00 or 8:30 pm that evening, Ms Cox advised that she had to leave and the settlement was postponed until 29 August 2000. 59 On 29 August 2000 Liu attended a meeting at the Mac's Place premises in Richmond, Victoria. Also present were Messrs Hartono, Shearer, Wong and Thompson. During that meeting there were further telephone conversations between Likidis and Liu which included the following: Liu: We have been looking at the list of accepted liabilities. Likidis: I have already decided who is going to be paid, Paul Shearer has the agreed list. All you need do is to prepare the cheques and hand them over at settlement this afternoon. Likidis: Apple will help you clean up Mac's Place, collect the receivables and the creditors. It won't take very long, we will give you a time extension to do it. We should engage Mr Wong for about three weeks. We need a strong finance man to clean out Mac's Place. Liu: What about Simon? Can he do it? Likidis: He is no fucking good. Liu: We will do what you say, Jim. But, who will pay for Mr Wong? Likidis: Apple will contribute to the expenses of cleaning up Mac's Place. We will work it out later. … Liu: I have not arranged finance to pay out the mortgages of the properties that Scott is transferring. How can we settle today? How can I take over the mortgage? I don't have all the finance to buy Mac's Place and settle the properties. Likidis: We can do the transfers later after you get the Bank's approval. (Liu's aff. 4/6/02; pars 60-61) 60 The settlement occurred on 29 August 2000 at Andersen Legal's premises in Melbourne. Mr McNab attended the settlement and gave Liu advice about the effect of the guarantee. Aircent paid $2 million in cheques payable to the plaintiff and various other Mac's Place creditors. Aircent paid a further $500,000 to the plaintiff as part of the purchase price on 29 September 2000. Mr Hartono and Choice Connections managed Mac's Place business from 30 August 2000 until 13 September 2000. 8 September 2000 - The Merger Guarantee is signed 61 On 1 September 2000 Ms Law wrote to Arthur Andersen with copies to the plaintiff requesting details of the Resellers who were to merge and the most current version of the shareholders sell-down positions at the Merger date. Ms Law advised that the percentages were required because "the personal guarantees are to be limited to those percentages" (Ex. K; p. 651). The e-mail continued: I am concerned that if a final position is not decided on soon, then there will be little time for the shareholders to get their independent legal and financial advice that is required before entering into the personal guarantees. (Ex. K; p. 651) 62 Mr Bright advised Ms Law that the final shareholding positions had been provided to Likidis the previous day (Ex. K; p. 652). Later that day, Ms Law once again informed the plaintiff and its solicitors, Clayton Utz, that personal guarantees from the shareholders of Buzzle, limited to their shareholding percentage, would be required and that they should be prepared as soon as possible so that they could obtain their independent legal and financial advice before 11 September (Ex. K; p. 653). At that stage the settlement of the Merger was planned for 11 September 2000. 63 At a meeting of the Merger partners on 5 September 2000 the proposed CEO of Buzzle, Mr Greg Lloyd, advised that stock takes were to take place on 8 September 2000 and that stores were to e-mail all counts by 12:00 am that night (Ex. L). A new accounting system known as "Navision" was to be installed by Deloittes to be used across the network with existing systems kept in the background as backup. At this meeting it was agreed that GM Computer's lawyer, Mr Andrew Ford, would act as "independent legal adviser" to the Sydney-based principals "with respect to the personal guarantees to Apple" (Ex. L). 64 On 8 September 2000 at about 11:15 am, Liu received a telephone call from Mr Max of Arthur Andersen who informed him that a meeting was going to be held at about midday at Andersen Legal's office for the guarantors to sign the "Apple guarantee" and the Buzzle Merger documents. Mr Max informed Liu that he would need to obtain financial advice about the transaction and to arrange for an accountant to attend the meeting. Mr Hartono called Liu and asked him if he knew an accountant that could attend the meeting. Liu telephoned Mr John Scott Pascoe who had been the accountant for a number of his family's companies over the previous five years, and asked him to attend the meeting with him. At this time Liu had not seen the guarantee document or the final Merger documents. 65 This meeting was videoed by Puzzle Media Pty Ltd for the purposes of producing a documentary about the proposed float. All the parties involved in the Merger except the seventh defendant, Tjipto Hartono, Stephen and Eva Ong, and Rosalee Young were present in the room. Also present were Andrew Ford, who was the solicitor retained by the first defendant, Mr George Mekrizis, and Mr Pascoe. The meeting apparently continued for approximately three hours. The video excerpts from the meeting are contained in exhibit 3, which also includes a transcript of the financial advice given by Mr Pascoe to the persons present. 66 Mr Pascoe gave advice about the "financial risk involved in signing the guarantee". He advised that it was fairly self-evident that the reason for the provision of the guarantee was to protect the interests of the plaintiff. He said: So if Apple feels the – isn't paid out all their full dues you're individually going to be responsible for that to the extent as shown in the agreement. (Ex. 3; tr. 8) 67 After confirming that the persons present felt confident that Buzzle was able to operate as a going concern and would be able to pay its debts when they fell due, Mr Pascoe said: Buzzle is being given this financial obligation, being this big, fat trade agreement and you understand that agreement, you understand the financial implications of that and your obligations and Buzzle's obligations to Apple and consequently, your obligations … You're aware of those risks that Buzzle may not be able to pay those obligations to Apple and so you personally may become liable to pay them. (Ex. 3; tr. 9) 68 Liu gave evidence that Mr Andrew Ford explained that each person was required to sign the guarantee and that by signing the guarantee each person was guaranteeing Buzzle's liability to the plaintiff under the Reseller Agreement. He also said that Mr Ford had a copy of the Reseller Agreement but did not discuss it except to say that payment terms were forty-five days. Mr Ford advised the group that the guarantee document was a one-sided document in favour of the plaintiff. Liu read the guarantee and asked particular questions about clauses 6.4 and 7.1, relating to interest and expenses. 69 Mr Ford advised that the plaintiff had informed him that it would release the guarantees at the time of the public float, provided Buzzle's accounts were up to date. After Mr Ford and Mr Pascoe had spoken, Liu signed the Deed of Guarantee and Indemnity (the Guarantee). Mr Ford completed three or four other documents and witnessed Liu's signature. 70 Liu's affidavit evidence was that at the time that he signed the Guarantee he did not have financial information about the various companies participating in the Merger or the level of the debt owed to the plaintiff. However, on 5 September 2000 Liu had attended a further meeting at Arthur Andersen's offices with the Merger partners and Arthur Andersen. The minutes of that meeting record the following: 10. There were no objections to Apple's request that each principal have a copy of all other principal's Profit and Loss Statement and Balance Sheet as at 30 June 2000 as well as the due diligence reports. These were distributed to all principals, with the exception of GM Computer due diligence report which is being finalised. (This report has been subsequently distributed). (Ex. L) 71 When Liu was shown this minute in cross-examination he firstly said that the due diligence reports "could have" been provided. He then accepted that according to the minutes that is what had happened and that he could not deny that was what had happened (tr. 299). 13 September 2000 – the Merger Documents are signed 72 On 13 September Liu attended Andersen Legal's offices in Sydney for the purpose of signing the Merger documents. He described the meeting as long and that it "started in the evening and went for about five hours until past midnight". The meeting was attended by all the Merger partners. 73 At that meeting the partners signed the Merger Deed and the Shareholders Deed. Liu gave evidence that the solicitors from Andersen Legal spent a few hours negotiating with the plaintiff's solicitors the terms of the Payments Deed which was not finalised and signed until the early hours of the following morning, 14 September 2000. Liu's evidence was that the documents signed at the meeting on 13/14 September were: a Deed of Charge between Buzzle and the plaintiff; a Deed of Charge between WT Clean Pty Ltd and the plaintiff; a Deed of Guarantee and Indemnity in favour of the plaintiff from Buzzle and WT Clean; various authorities and statutory declarations; an Apple Reseller Agreement dated 14 September 2000; the Merger Deed; a letter dated 13 September 2000 relating to the effective date of the transaction, being 11 September 2000; a Shareholder's Deed; a Consent to Act as Director and the Payments Deed. 74 During the meeting Liu signed a document the contents of which were as follows: Confirmation of Receipt of Financial Information We confirm that we have received the following documentation in respect of the merger of the businesses of Choice Connections, GM Computer, Mac's Place, Designwyse, Status Graph and Manning Computers ("Merging Businesses") into Buzzle Limited and its subsidiaries: · Profit and loss statement of the Merging Businesses for the year ended 30 June 2000; · Balance sheet of the Merging Businesses as at 30 June 2000; and · Due diligence report of the Merging Businesses as prepared by Douglas & Harrison. (Ex. K; p. 782) 75 During cross-examination, Liu denied that his signature on the confirmation document was inconsistent with the aspects of his case that claim he did not receive the due diligence reports, the profit and loss statement and the balance sheets of the merging businesses. When pressed as to why he had signed the confirmation if, as he claimed, he had not received the materials referred to therein, Liu said: … I can't recall and the information might have been available in a bundle at the time of signing on the document but I cannot recall and I have tried to attempt to look into the video tapes of that date and I cannot recall the information was given to me on the spot or that day to give it to me and I don't have some of them. (tr. 343) Buzzle's problems 76 By 19 September 2000 Buzzle was experiencing difficulties. The Navision computer system was a problem and there were very many complaints from the Resellers in respect of its operation or lack thereof. At a meeting of the Resellers on 19 September 2000 the CEO of Buzzle, Mr Lloyd, said: What we do know is that sales are well under forecast. Seriously under forecast. The September budget sales for the three weeks commencing 11th were 7.9 million and for October we have had to do 13.3. Based on achieving those sales levels, forecast sales levels, we would only have, the budget shows, we would only have approximately 2 million in cash at the end of October surplus after paying all our creditors, including all the dealers. If sales remain poor through to the end of September, we potentially could have a solvency problem for the end of October. (Ex. 3; tr 18) 77 Later in the year Likidis met with Liu and showed him a presentation on software known as Power Point. Likidis informed Liu that because he had invested so much money in Mac's Place he wanted to help him. The presentation referred to steps that Likidis suggested should be taken including the centralisation of Buzzle's financial records, the sale of the finance and administration division and review of the people within the organisation. Likidis gave Liu an organisational chart and suggested that he take over the role of Finance Director. Liu resisted that suggestion and advised Likidis that he did not have the qualifications or experience. 78 It was in early 2001 that Likidis made a threat to Lui that he would not want his family's name ruined by the plaintiff making him bankrupt. Likidis gave the following evidence: Q. You were intending to convey a threat that it would embarrass his family if he was made bankrupt, didn't you? A. Bankruptcy, could have. Q. That was meant to be a threat, wasn't it? A. Um, maybe implied, yes. Q. Not 'maybe implied' definitely, deliberately meant to be a threat, wasn't it? A. Yes, yes. (tr. 543) 79 Likidis and Liu worked together trying to prepare the profit and loss and balance sheets. This proved very difficult and in January 2001 they both flew to Melbourne and spent two to three weeks working very hard trying to ascertain the true position (tr. 304-305). The profit and loss statements were produced and Liu entered the information into a spreadsheet. Liu claimed that it was not until this time that he became aware of lease costs of between $2.2 million and $2.5 million, as against something like $1.2 million in the due diligence reports (tr. 305). By this stage Liu claimed that he understood that Buzzle had real problems. 80 On 22 January 2001 the plaintiff wrote to Buzzle in the following terms (Ex. K; p. 1683): We write further to our recent meetings and to confirm our understanding of the present position. In view of Buzzle's status as a significant reseller of Apple products in the Australian market, it has been agreed that Apple will provide Buzzle with advice and assistance in a proposed internal re-organization aimed at improving Buzzle's commercial performance. In particular, Buzzle wishes to avail itself of Apple's knowledge and experience, gained from its position as a subsidiary of a major international corporation, in order to help Buzzle to operate its business more efficiently and to maximise profitability. For the avoidance of doubt, and to define unambiguously the role that Apple intends to play, Apple wishes to set out the terms on which it offers such assistance: 1. Apple does not wish to become involved in any corporate decision making, either at managerial or directorship level. Whilst Apple is willing to share its expertise and offer practical guidance, it is the Buzzle directors who have the ultimate responsibility for all decisions and they are, of course, at liberty to adopt or reject any advice as they see fit. Accordingly, if Apple is invited to attend any meetings at which corporate decisions are made, for example, a director's meeting it will only do so as an observer and/or adviser; 2. Buzzle will not represent to any third party that Apple's assistance represents any involvement in the management of Buzzle's business. Apple is conscious, that as Buzzle's secured creditor, its interests may not always coincide with those of Buzzle. In the circumstances, Apple strongly recommends that Buzzle gives consideration to retaining professional accounting and/or financial advisers of its own to advise it on the re-organisation. Please arrange for two Buzzle directors to countersign the bottom of this letter to indicate the Board's acceptance of this document. In the meantime, we sincerely hope that Apple's assistance will facilitate Buzzle's commercial development and that our two companies will continue to work successfully together in the future. 81 This letter was countersigned by Mr Hartono and Liu as directors of Buzzle on 9 February 2001. De-merger proposal 82 Liu claimed that in March 2001 the plaintiff proposed a de-merger plan to the six Merger partners. Mr Hartono and Lui intended to set up a new business, Mac's Choice, with a plan to buy back the old business (tr. 306). Mr Andrew Charles Mason, a business consultant, was briefed to assist with the plan. An approach was made to the Bank of China for finance and a document entitled "Mac's Choice Summary Business Plan" dated 16 March 2001 (Ex. C) was used to support the application. It included the following: Mac's Choice is seeking a Venture Capitalist organisation to fund the re-emergence of two companies with histories of success and substantial market reach within Southeast Australia's IT and communications industry, education, professional and business sectors. …. This current initiative follows an abortive attempt to combine the talents and market presence of this organisation in association with several smaller players in this market. Having quickly recognised that this approach restricted the potential growth of the core operation, the Directors of Mac's Choice have now re-positioned this organisation to achieve major organic growth as described above. As a result of the plan outlined within this Business Summary, Mac's Choice expects to generate A$98 million p.a. revenues within 2 years whilst providing high rates of return for investors. The requirement has been established at A$6 million by way of equity finance in order to re-establish the company and to fulfil its stated objectives. Of this total, A$2 million has already been committed. 83 The document then described the retailing skills of Mac's Place and stated: In July 2000, Choice Connections and Mac's Place decided to combine with up to five other Apple resellers. This was designed to represent a further broadening of the capabilities and capacities by incorporating smaller, regional players into a new entity which became known as Buzzle Ltd. As frequently occurs in many larger mergers, differences in corporate culture, systems integration, business philosophy, skill levels, work ethic, commitment and growth strategies can fracture them before completion. This was certainly the case following the decision by Choice Connections and Mac's Place to extend the merger to others. One of the indicators of the unworkability of the proposed mergers was that efficiencies that should be expected to be inherent in such a merger simply did not occur. This was exacerbated by a number of entities bringing to the proposed new operation an unacceptable level of debt. Once the level and impact of this debt became known to the principals of Choice Connections and Mac's Place they immediately set in motion their exit strategy. The difficulties experienced in Buzzle Ltd have depressed the revenue expectation of Mac's Choice for FY 00/01 to A$61 million. Negotiations have now been completed between Mac's Choice and Apple Computers to formally de-merge Choice Connections and Mac's Place from Buzzle. 84 The document then referred to the proposed structure of the group and to the personnel proposed to be involved in the venture. In referring to Liu the document stated: Wing Liu is the Chief Financial Officer for Mac's Choice. Prior to owning Mac's Place Wing was an executive in Choice Connections, responsible for establishing the eCommerce division-Choicenet. He has been Managing Director of a Sydney-based property development company owned jointly by Ipoh Limited, Bank of China and Australian Investment Group since 1993. Wing is a graduate of University of NSW (BComm) and he is a CPA. He was born in Hong Kong and has lived in Australia as a citizen for over 15 years. Receivers appointed 85 On 30 March 2001 Receivers were appointed to Buzzle by the plaintiff. Liu agreed that the plaintiff appointed Receivers because Buzzle owed it $22 million and was not paying the debts owed to the plaintiff (tr. 316). The Receivers' report of 6 April 2001 stated: As you know, Buzzle are trading very poorly and there is a lack of reliable management information systems. Buzzle's financial position and trading performance has deteriorated at an accelerated rate since our Investigating Accountant's report. This is primarily due to the limited ability to source inventory leading to a run-down in inventory levels from which to trade. This position is exacerbated by the directors' and management's attention focused on "demerger" rather than Buzzle's business. (Ex. 4; p 1) 86 Opinions have been expressed about the financial position of Buzzle at the date of the Merger and subsequently. Anthony P Gellert, an expert called by Liu, expressed the view that it was "possible" that the requirement upon Buzzle to "meet repayments of the balance of the debt owing by the Resellers to Apple, may have resulted in management focus being directed to the collection of past debtors, rather than on the urgent need for focus on establishing proper trading systems and procedures for the newly merged entity" (Ex. 10; p. 15-16). It is understandable that Mr Gellert expressed himself in this way because he was not given copies of the Merger Deed or the Payments Deed for the purpose of preparing his report. 87 KPMG noted a number of preliminary observations as to why the Merger was not successful including: (1) failure to plan for the implementation of the Merger, including contingency planning in the event of trading suffering a downturn; (2) poor co-ordination of activities including the absence of centralised purchasing or rationalisation of the service centres and a failure to adequately distribute marketing and sales information on a national basis; (3) absence of appropriate controls, especially financial controls, including: (a) basing the financial and administration team in Melbourne while the financial controller was based in Sydney resulting in a lack of financial leadership and controls; (b) the ineffective and expensive implementation of a new management information system (Navision) that had failed to provide any meaningful or timely management accounts; and (c) the absence of validation of receipt allocation between pre and post Merger debtors; and (4) failure of the management and directors to act cohesively including: (a) individual stores' self interest taking precedence over Buzzle's interests in relation to logistics, stock usage and transfers, purchasing power, treasury and cash requirements; (b) the failure of the group to re-brand its operations with the majority of stores continuing with signage of the Reseller and the employees and customers identifying with the Reseller rather than Buzzle; and (c) directors being reluctant to terminate surplus staff (Ex. 10; p. 33-34). Proceedings commenced 88 The plaintiff made demand under the Guarantee upon Liu and the other defendants on 16 April 2001 and proceedings were commenced by Summons on 26 April 2001. The Merger Documents 89 By reason of the competing claims and submissions, it is necessary to analyse the relevant Deeds that were signed or executed to effect the Buzzle merger. The Merger Deed 90 There were a number of Merger Deeds in identical form except for the names of the parties. In Liu's case the parties to the Deed were Aircent as Vendor, Liu and his company, Cabby Investments Pty Ltd (CIPL), as principals, and Buzzle Ltd and Buzzle as Purchasers. There was also a subsidiary company referred to as Subco. All the Merger Deeds were executed on the same day and provided for the transfer of each of the Reseller's businesses to Buzzle. The businesses were described as the distribution and servicing of computer equipment and related products and the provision of IT related consulting, ISP and web site hosting services. 91 The Merger Deed provided for a cash component and a non-cash component of the purchase price to be paid for the stock, plant and equipment and the shares in Subco. In respect of the non-cash component each of the principals was obliged to subscribe for shares in Subco and to deliver to Buzzle share transfers for those shares in consideration of which each was issued shares in Buzzle. The Deed provided that CIPL was to be issued 12,916,000 shares in Buzzle. 92 Part of the cash component of the purchase price was for stock. The principals and the Resellers were required to conduct a stocktake on or about completion. Stock was defined as stock in trade relating to the businesses owned by the Resellers at completion and included, without further definition, stock-in-transit, raw materials, components, work-in-progress, packaging materials, stationery, advertising material and catalogues. Clause 7 also set out some valuation guidelines by which the stock was to be valued. The Resellers were required to provide the results of the stocktake to Buzzle within two days of completion and Buzzle was required to determine the stock value within five business days of completion. 93 The cash component of the purchase price also included the value of the plant and equipment, which the parties agreed Hyman Asset Management Group would value. The parties agreed that as soon as practicable but, in any event within 12 business days after completion, the Purchasers were to determine the Economic Value and notify the Resellers of that amount. The Deed provided a mechanism for resolution of any disputes about the Economic Value. 94 Clause 6.5 of the Merger Deed is significant to a number of the submissions put on Liu's behalf and it is appropriate to set it out in full. It provided as follows: 6.5 Obligations of the Purchaser The Purchaser must pay the Cash Component as follows: (a) Payment of the portion of the Cash Component attributable (in accordance with the determination made under clause 7) to Stock by Buzzle Operations to the Vendors will be deferred until such time as the directors of Buzzle form the view (on reasonable grounds) that Buzzle Operations has adequate cash flows to pay amounts owing to all Vendors on a pro-rata basis, or in accordance with the requirements of that Vendor to pay its creditors, provided that such payment is made no later than 31 October 2000; and (b) Payment of the remaining amount of the Cash Component by Buzzle Operations to the Vendors will be deferred until the earlier of: (i) the float of Buzzle on ASX; or (ii) the directors of Buzzle forming the view on reasonable grounds that Buzzle Operations has adequate cash flows to pay amounts owing to all Vendors on a pro-rata basis or in accordance with the requirements of that Vendor to pay its creditors. 95 Under clause 3.4 of the Deed the purchaser assumed no Liabilities, except to the extent expressly provided by the Deed, and each Reseller remained solely responsible for the payment, satisfaction and discharge of all Liabilities. "Liabilities" was defined as "liabilities (including obligations) of each (Reseller) connected with the Business or the Assets (or any part of the Business or the Assets) known or unknown and whether actual, contingent or prospective" (cl 1.1). The assets included the business names, the business records, the commercial contracts, the chattel leases, the leases, the goodwill, the intellectual property rights, the licences, the permits, the plant and equipment and the stock. Excluded from the assets were the existing Reseller Agreements between the Resellers and the plaintiff, cash used in the business, the receivables and business records which any vendors were required by law to retain. 96 Clause 6.2 of the Merger Deed set out the steps in a particular order that the parties were required to follow at completion to confer on Buzzle title to, and place Buzzle in the effective possession and control of, the businesses, stock, plant and equipment and the Subco shares. One of the steps required was the execution of the New Reseller Agreement, defined as the reseller agreement between the plaintiff and Buzzle and/or the Subco (cl 1.1 & 2.1). Other documents required to be executed to effect completion were the Infrastructure Provision Agreement and certain securities. 97 Under clause 16 of the Deed each of the Resellers provided the warranties contained in Schedule 3. Warranties in respect of the financial position of the businesses were given and included warranties that the financial records had been fully and properly maintained; were complete and accurate; gave a true and fair view of the trading transactions and the financial and contractual position of the particular Reseller and that since the date of the last accounts, the businesses had not been materially or adversely affected by any matter either financial or otherwise. There was also a warranty that there had been no change in the assets, liabilities or financial condition or profitability of the businesses except changes in the ordinary course of business, none of which, individually or in aggregate, was materially adverse to the businesses. The Payments Deed 98 The parties to the Payments Deed were the plaintiff, Buzzle and the Resellers. The Recitals to the Payments Deed, executed on the same day as the Merger Deed, referred to Buzzle's obligation to make certain payments to the Resellers pursuant to clause 6.5(a) of the Merger Deed. The Recitals stated that the Payments Deed governed the "repayment" of the Resellers by Buzzle and the "repayment" of the Resellers' creditors, including the plaintiff. 99 Clause 3.1 provided that until the Apple Debt was repaid, Buzzle agreed "for the benefit of Apple" not to incur any Financial Indebtedness unless the plaintiff otherwise consented. Excluded from that agreement were debts falling within the definition, "Permitted Financial Indebtedness" (cl 1.1). 100 "Apple debt" was defined as: … any amount owing to Apple by a Vendor as at the date of execution of this document and includes but is not limited to the amounts listed in schedule 2 but, for the avoidance of doubt, does not include any debt in respect of stock returned to Apple by a Vendor and which is supplied and invoiced to Buzzle Operations. 101 Schedule 2 was entitled "Apple Debt – Listing of amounts on account". It listed the name of "the customer", the account number and the amount. The debts of each of the Resellers was listed as Designwyse $894,325.08; GM Computer (including the account styled JoyLine) $2,746,525.03; Jetocopic Pty Ltd $591,702.93; Aircent Pty Ltd $2,187,114.32; Power Distributions $7,330,547.42; Status Graph $1,492,710.14. The schedule concluded "total owed by vendors $15,242,924.92". 102 Clauses 3 and 4 provided: 3. FINANCIAL INDEBTEDNESS 3.1 Restriction on incurring Financial Indebtedness (a) Subject to clause 3.1(b), until the Apple Debt is repaid, Buzzle Operations agrees, for the benefit of Apple, not to incur any Financial Indebtedness other than Permitted Financial Indebtedness unless Apple otherwise consents (such consent not to be unreasonable withheld or delayed). (b) Buzzle Operations may incur any Financial Indebtedness (including, without limitation, Financial Indebtedness incurred in meeting costs in relation to the proposed floatation of Buzzle or otherwise, in each case including, but not limited to, the amounts set out in schedule 4) so long as it is discharged in accordance with its terms solely with funds received in respect of equity raised by the issue of fully paid ordinary shares in Buzzle Operations or other funds raised which are Permitted Financial Indebtedness. 3.2 Repayment to be made on or before 31 October 2000 Buzzle Operations agrees, for the benefit of Apple, to repay all amounts owing by it to the Vendors pursuant to clause 6.5(a) of the Merger Deed on or before 31 October 2000. 4. DEALING WITH CASHFLOW 4.1 Determination While any of the Apple Debt remains outstanding, on or before Friday 22 September 2000 and on or before each subsequent Friday, Buzzle Operations must determine, acting reasonably, based on trading performance, whether it has any Surplus Cashflow available with which to repay amounts owing by it to the Vendors pursuant to clause 6.5(a) of the Merger Deed. 4.2 Notification If, under clause 4.1, Buzzle Operations determines that it has any Surplus Cashflow, it must promptly notify each Vendor and Apple of: (a) the amount of that Surplus Cashflow; and (b) the way in which it proposes to apply that Surplus Cashflow (as contemplated by clause 4.5(a) and on the basis of any information provided to Buzzle Operations pursuant to clause 4.3). 4.3 Vendors and Apple to provide details regarding Vendor Creditors (a) In respect of any day and in respect of each amount owing (whether present or future) by a Vendor to a Vendor Creditor which is or will be payable within 21 days, each Vendor must promptly ensure that Buzzle Operations has up to date details of the name and other relevant details of each such Vendor Creditor, the amount owing (whether present or future) to the Vendor Creditor and the date upon which the amount is, or will become, due and payable. (b) Apple must from time to time promptly provide Buzzle Operations with up to date details of all amounts owing (whether present or future) by each Vendor to Apple. 4.4 Buzzle Operations to provide details to Apple Buzzle Operations will promptly provide copies of any information received by it from a Vendor pursuant to clause 4.3 to Apple. Each Vendor irrevocably and unconditionally consents to Buzzle Operations doing so. 4.5 Payment in accordance with the Merger Deed (a) Subject to clause 4.5(b), Buzzle Operations will use any Surplus Cashflow to pay amounts owing by it to the Vendors under clause 6.5(a) of the Merger Deed on a Pro-Rata basis or in accordance with the requirement of each Vendor to pay its creditors (as contemplated by clause 6.5(a) of the Merger Deed) or as otherwise determined by Buzzle Operations. (b) Subject to clause 4.5(c), if Buzzle Operations proposes to make any payment under clause 4.5(a) other than on a Pro-Rata Basis, it must first obtain Apple's consent (such consent not to be unreasonably withheld or delayed). (c) In deciding whether or not to grant its consent under clause 4.5(b), Apple must not act unreasonably but may take into account its expectation that payments will be made to it in reduction of the Apple Debt in accordance with cashflow and payment projection statements provided to Apple by Buzzle Operations and the Vendors prior to the date of execution of this document. (d) Unless Apple and Buzzle Operations otherwise agree, if and to the extent that any Vendor is liable to pay any of the Apple debt to Apple, that Vendor irrevocably and unconditionally directs Buzzle Operations to make any payment which Buzzle Operations intends to make to that Vendor under clause 4.5(a) to Apple. Buzzle Operations will comply with any such direction. In determining whether any Vendor is liable to pay any of the Apple Debt to Apple, Buzzle Operations may rely upon any information contained in schedule 1 together with any information provided to it by Apple pursuant to clause 4.3 and is not bound to enquire as to the accuracy or otherwise of that information and may act on the basis of that information notwithstanding that it has actual or constructive knowledge of the inaccuracy of that information and notwithstanding any other matter or thing. (e) Each Vendor agrees that it will not require Buzzle Operations to do anything under clause 6.5(a) of the Merger Deed or otherwise which is or would be inconsistent with Buzzle Operations' obligations under this document. 103 "Pro-Rata Basis" was defined to mean "pro-rata by reference to the money owing to each Vendor under clause 6.5(a) of the Merger Deed" (cl 1.1). "Surplus Cashflow" was defined to mean "any operating cashflow of Buzzle Operations not required to meet the ordinary costs of its ordinary business or the costs of the matters contemplated by the definition of Permitted Financial Indebtedness" (cl 1.1). The Guarantee 104 Under the Guarantee the Guarantors, relevantly Tjipto Hartono and Liu, became liable for their "Guaranteed Share", 22.1% and 18.5% respectively, of the "Guaranteed Money" (cl 1.1 & 4.1). "Guaranteed Money" is defined in clause 1.1 as: … all money which is now or may hereafter become or remain due and owing or unpaid by the Debtor to Apple on any account, in any capacity and under or in respect of any transaction, whether actual or contingent, present or future, and including, without limitation, under any Apple Agreements or any Security. 105 The Debtor is defined as Buzzle and "Apple Agreements" are defined in clause 1.1 as: (a) any document or combination of documents however described entered into now or at any time which Apple treats as its "Reseller Agreement" (for the sale of Apple's computers, software and associated services to the Debtor) and/or one of its "Agency Agreements" (for the sale of Apple's computers, software and associated services by the Debtor); and (b) any other document or combination of documents entered into now or at any time pursuant to which the Debtor undertakes to pay or repay any moneys to Apple. 106 "Collateral Agreement" is defined as "any document, agreement or other instrument pursuant to which the Guaranteed Money is or may become owing" (cl 1.1). 107 Other relevant clauses of the Guarantee are: 2. GUARANTEE 2.1 Guarantee The Guarantor irrevocably and unconditionally guarantees to Apple the payment when due of the Guaranteed Money and the performance by the Debtor of all of its obligations under the Collateral Agreements to which it is a party. 2.2 Payment by Guarantor If the Debtor does not pay the Guaranteed Money when due, the Guarantor must on demand from time to time pay to Apple the Guaranteed Money which is then due and payable. 3. INDEMNITY As a covenant separate and distinct from that contained in clause 2.1, the Guarantor irrevocably and unconditionally agrees to indemnify Apple and at all times to keep Apple indemnified against any loss or damage suffered by Apple arising out of: (a) any failure by the Debtor to pay the Guaranteed Money duly and punctually; or (b) any failure by the Debtor to observe or perform any of its obligations under any Collateral Agreement to which it is a party; or (c) any Collateral Agreement being wholly or partly void, voidable or unenforceable against the Debtor for any reason and whether or not Apple knew or ought to have known of that reason, with the result, in any such case, that sums which would (but for the voidness, voidability, or unenforceability) have been Guaranteed Money are not recoverable by Apple under clause 2. 4. LIMIT 4.1 Limit Notwithstanding any other provision of this Deed, each Guarantor will only be liable to pay a maximum amount equal to its Guaranteed Share of the Guaranteed Money regardless of whether a demand is made by Apple under the Guarantee in clause 2 or the Indemnity in clause 3. 4.2 Joint and Several For the avoidance of doubt, the parties confirm that where 2 Guarantors are named together in the definition of "Guaranteed Share" beside a percentage being their Guaranteed Share, such Guaranteed Share will apply to them both on a joint and several basis. 108 Clause 5.2 provides that the liability of the guarantor is not affected by anything which, but for clause 5.2, would release the guarantor, including but not limited to: (j) (Disclosure): any failure by Apple to disclose to the Guarantor any material or unusual fact, circumstance, event or thing known by, or which ought to have been known by, Apple relating to or affecting any Relevant Person before or at any time after the date of this Deed; (k) (Prejudicial Conduct): any breach by Apple of any term of any Collateral Agreement or Security or any other act or omission (negligent or otherwise) of Apple with regard to any Collateral Agreement, any Security or any Relevant Person which is prejudicial to the interests of the Guarantor. 109 Other relevant clauses include: 5.11 No representation by Apple The Guarantor acknowledges that in entering into this Deed it has not relied on any representation, warranty or statement by Apple. 6 PAYMENTS 6.1 On demand All money payable by the Guarantor under this Deed must be paid on demand by Apple in immediately available funds to the account and in the manner notified from time to time by Apple to the Guarantor. 6.4 Interest The Guarantor must on demand by Apple from time to time pay interest on all amounts due and payable by it and unpaid under or in respect of this Deed. Interest will accrue on those amounts from day to day from the due date up to the date of actual payment at the Specified Rate for successive 90 day interest periods commencing on the date of default and, if not paid when due, will itself bear interest in accordance with this clause 6.4. 6.6 No set-off or deduction All payments by the Guarantor under this Deed will be free of any set-off or counterclaim and without deduction or withholding for any present or future Taxes unless the Guarantor is compelled by law to make any deduction or withholding and if this is the case, the Guarantor must pay to Apple any additional amounts as are necessary to enable Apple to receive, after all those deductions and withholdings, a net amount equal to the full amount which would otherwise have been payable had no deduction or withholding being required to be made. 10.1 Certificate of Apple A certificate in writing of Apple certifying the amount payable by the Debtor or the Guarantor to Apple or stating any other act, matter or thing relating to this Deed, any Collateral Agreement or any Security will be conclusive and binding on the Guarantor in the absence of manifest error on the face of the certificate. 10.3 Continuing obligation This Deed will be a continuing obligation notwithstanding any termination by the Guarantor, settlement of account, intervening payment, express or implied revocation or any other matter or thing, and continues to entitle Apple to the due and punctual payment of any of the Guaranteed Money which becomes due or owing or is incurred after termination, settlement of account, payment, revocation or other matter or thing until a final discharge has been given to the Guarantor. 10.5 Form of Demand A demand on the Guarantor for payment under this Deed may be in the form and contain any information as Apple determines. It need not specify the amount of the Guaranteed Money, nor the method or basis of calculation of all or any part of the Guaranteed Money, including without limitation amounts of, or in the nature of interest. 110 On 8 September 2000 Liu made a declaration that he had received independent legal advice regarding the Reseller Agreement between the plaintiff and Buzzle and the Guarantee and that he freely and voluntarily signed the Guarantee after receiving that advice. Liu also signed an acknowledgement of the following legal advice: (a) if the Debtor fails to make any payment on time, I as the guarantor will be liable to remedy that failure, and that could involve me in payment to Apple of all amounts owed by the Debtor to Apple including principal, interest, default interest and Apple's costs of rectifying the default; (b) if as the guarantor I fail to remedy any failure by the Debtor to comply with the terms and conditions of any document, including the obligation to pay principal, interest, default interest, or other charges, Apple can sue me personally; (c) Apple can exercise its rights against me as the guarantor even if it has not pursued the Debtor; (d) my liability under the Guarantee is limited to my percentage shareholding in Buzzle Limited as specified in the Guarantee; and (e) the additional obligations, rights and remedies set out in the documents if the Consumer Credit Code applies; (f) by making a Statutory Declaration verifying the giving of the advice I am making a statement having the force of an Oath which can be relied upon by Apple. 111 Mr Pascoe signed a Certificate of Independent Financial Advice in respect of the Guarantee in which he stated that he had discussed with Liu, amongst other things, his business knowledge, his financial affairs, his knowledge of the business and financial affairs of Buzzle including his expectation of Buzzle's ability to meet its financial commitments to the plaintiff and the financial risks of Liu and Buzzle proceeding with the transaction. An Oral Agreement 112 During the trial, Likidis gave evidence that an agreement was reached whereby Buzzle agreed to pay the plaintiff approximately half of the $15.2 million debt. That meant that Buzzle commenced its operations with a debt to the plaintiff as opposed to a debt to the Resellers. Likidis' evidence on this aspect of the matter was as follows: Q. Were you aware as at 13 September the debt was being divided between Buzzle and the dealers? A. There was an agreement that we reached. Q. And so the answer to my question was yes, I was aware that it was being divided? A. Yes I was aware. Q. Was this a written agreement or oral agreement? A. My recollection was it was an oral agreement. Q. Between whom? A. I have – I can't recall who it was. Q. It was you wasn't it? A. It was me, definitely me, but I can't recall the other party. Q. And you said what had to happen, didn't you? A. No I didn't. Q. Just think about that, Mr Likidis, are you not mistaken again? A. No, I am not mistaken again. Q. Is it the case that the division that was agreed to was at your suggestion and initiative? A. It was on – it was in discussion with the – with the other party and I. Q. Who came up with the idea? A. Maybe I did. Q. Not maybe, you were the one that said, "We will divide 8 million and 7 million," is that right? A. No. I didn't say it that way. Q. You were the one that came up with the 8 million, 7 million division? A. Can I explain to you what happened? Q. Yes. Tell me that first of all, were you the one that came up with the numbers? A. I may have been, I can't recall if it was exactly me. Q. When do you recall you had this discussion? A. I think it was just before the merger documents were signed. Q. And was Mr Wing Liu involved in that? A. I am not aware that he was, no. Q. Well then, who did you have it with? A. I don't recall who it was. Q. Have you got a note of it? A. There is a note in Andersen's file on that. Q. And did you, were you aware at the time you negotiated this division between the 8 million the 7 million that until all debts were paid by the Apple dealers to Apple there was severe restrictions on what Buzzle could spend its money on? A. Yes. Q. And you were aware, therefore, that potentially to leave an $8 million debt with the dealers was going to severely hamper the business of Buzzle weren't you? A. No. Q. Well now, tell me this: how long before 13 September signing of the documents was it agreed orally that there would be an $8 and $7 million division? A. The agreement was done the night before, but the entry was processed toward the end of October. Q. If we were to look at the documentation that was signed on that day, there would be nothing to indicate the 8 million, 7 million dollar divide? A. Correct. Q. Was this a last minute thing? A. It may have been. Q. No – it may not have been? A. I can't recall. Q. You don't remember a discussion before that? A. There was a discussion, it was in Andersen's file. Q. You can't remember a discussion about it prior to the evening before? A. To the signing? Q. Yes? A. I don't recall, no. Q. And you were the person in Apple that would have had the discussion before it occurred? A. Yes. Q. And we take it that, is it was a last minute thing? A. It may have been, yes, yes. Q. And what was it that caused it to happen, why? A. Because of my concern and, and the CEO at the time who I believe was Donald Hartono in the repayment of the Buzzle – of the debt to Apple from the vendor companies and in discussion we agreed to move the 6.2 million, it was initially across, but at the same time we were both aware that Buzzle's financial position was not going to be any worse off, because it would have been decreasing the liability to the vendors and increasing the liability to Apple. Q. Did you make sure that Mr Wing Liu knew of this? A. No, I didn't. Q. Did you make sure that the six dealer principals knew of this? A. They, I personally, I personally didn't, no. (tr. 545-547) 113 In further cross-examination Likidis gave the following evidence: Q. …You said on the evening of 13 September you reached an agreement that the 15 million dollars would be divvied up halfway between the resellers? A. 6.2 to Buzzle. Q. Prior to that, was it your contemplation that the whole debt would be to the resellers? A. Yes. Q. And what was it that caused you to want to divvy it up in this way? A. It was at – again in discussion with Donald Hartono and other people. The concern was – sorry not concern, was what would be the difference in Buzzle owing the money to the vendor. Why couldn't we owe it to Apple instead, and the agreement was yes, I'll agree to that, to help the vendors out, I will agree to that and we processed the transaction of 6.2 and the effect on Buzzle again had a nil – financial effect. Q. And the stock was going to be transferred by the dealers to Buzzle wasn't it? A. That would be 6.2 million. (tr. 550-551) Q. Did Apple intend to get the full $15 million? A. Yes. Q. Where was it going to get the $15 million from? A. It was going to get it from the resellers and from … Buzzle. Q. I thought you were just trying to explain to me … that the $7 million would in effect go as a credit to the account between Buzzle and the dealers? A. Correct. Q. Well, does that mean then that the dealers weren't intending to pay the whole $15 million… A. No. Q. … to Apple? A. No, the dealers would pay – the dealers would pay $15 million to Apple less the 7 million transfer. Buzzle will pay that $7 million to Apple but they would not pay to the dealers. (tr. 553-554) 114 Likidis said that the notification that was given to Liu was by e-mail dated 13 September 2000 from Mr Shearer enclosing a message from him to the Resellers. I will refer to as Likidis' e-mail. It was addressed to Liu at two e-mail addresses and stated as follows: Message from Jim Likidis: Hi all, Assuming that completion takes place of the Buzzle Merger today, the following is the proposed transition plan:- a) Cut off of all orders of Finished Goods and Service Parts to Apple Australia Computers (AAC) will be 4pm tonight 13/9/00. b) All uncompleted orders of the existing resellers (vendors) as at this time will be cancelled by AAC on receipt of the equivalent order by Buzzle via EPO. c) All future orders will be raised by Buzzle via EPO. d) The value of stock on hand that is Apple product as at the time of the merger is to be advised to Apple by each reseller (ASAP but no later than 5pm Thursday 14/9/00). Buzzle will confirm in writing the acceptance of this value to be charged to Buzzle. Apple will credit each reseller and charge Buzzle by Transfer Journal Voucher. This amount will be payable by Buzzle no later than 31-10-00. Would Renai Lawrence and Robert Ruirgrok please contact Paul Shearer, Mary Haynes or Kevin McElduff in respect of any issues each may wish to clarify. (Ex. K; p. 1126) 115 This e-mail was apparently transmitted at 14:57 that day and there is no issue that Liu received that e-mail at some time. On 29 September 2000 Mr Hartono wrote to Mr Shearer and Likidis in the following terms: Please find below the Apple stock figures that was transferred to Buzzle as at 11/9/2000. Choice Connections Australia-$2,948,717.54 Mac's Place-$1,090,226.90 Manning Computers-$71,302.94 GM Computer-$1,279,634.87 Designwyze - $486,826.87 Status Graph-$421,429.95 (Ex. K; p. 1655) The Guarantee claim 116 The Certificate (Ex. A; p. 1808) issued by the plaintiff under the Guarantee was dated 28 March 2002 and was in the following relevant terms: (The plaintiff) hereby certifies that pursuant to clause 10.1 of the Deed of Guarantee dated 13 September 2000 between (the plaintiff) and (the relevant defendants) ("the Guarantors"): 1. the amount due and owing by Buzzle Operations Pty Limited ACN 093 603 895 to (the plaintiff) is at the date of this certificate $14, 176,496.10; and 2. The amount determined by (the plaintiff) pursuant to clause 6.4 of the Guarantee and Indemnity dated 13 September 2000 as to interest payable by the Guarantors is the rate prescribed from time to time pursuant to section 94 of the Supreme Court Act 1970. 3. the amount due to (the plaintiff) by the following Guarantors pursuant to their obligations owed under clause 2 of their respective Deed of Guarantee and Indemnity as at the date of this Certificate is: (a) Tjipto Hartono $3,455,818.92 (being 22.1% of $14,176,496.10 plus interest). … (e) Wing Nin Liu $2,892,880.09 (being 18.5% of $14,176,496.10 plus interest). The Defendants' Claims 117 In his Defence as subsequently amended and filed on 27 November 2002, Liu denies any liability under the Guarantee. He claims that in calculating the "Guaranteed Money" referred to in the Guarantee the plaintiff: (a) wrongly included money debited to the account of Buzzle in respect of the debts of the other Resellers; (b) failed to give credit for amounts received from other guarantors; and (c) failed to give credit for a decreasing adjustment equal to 1/11th of the amount, if any, due to it from Buzzle under section 21-5 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act). The seventh defendant made identical claims in his amended Defence as filed on 31 October 2002. 118 Both defendants also claim in their amended Defences that Buzzle was obliged to pay the Resellers' debts for stock out of "Surplus Cashflow" as that term was defined in clause 1.1 of the Payments Deed. It is claimed that if there is no surplus cash flow then there is no liability to pay for the stock. Both defendants also claim that the plaintiff "transferred" approximately $12 million, made up of approximately $7.186 million in relation to stock and a further amount of approximately $4.779 million, of the Resellers' debts owed to the plaintiff, to the Buzzle account without their knowledge or consent. Liu makes an additional claim that a further $1 million was transferred to the credit of Choice Connections Pty Ltd without his consent by way of a reversal of the transaction that had credited Mac's Place. 119 Both defendants claimed that in so far as the transfers constituted assignments they were in breach of section 12 of the Conveyancing Act 1919 (NSW) and did not bind Buzzle. Both defendants also alleged that the amounts referred to in the transfers do not fall within the term "Guaranteed Money" in the Guarantee and that they are entitled to credits in respect of the amount the plaintiff has received from other guarantors and the plaintiff's entitlement to an adjustment under the GST Act. 120 By Cross-Claim filed on 7 June 2002 and subsequently amended, Liu and his company Aircent make claims against the plaintiff, and its employees, Likidis and McElduff. Liu alleges that the cross defendants' conduct was unconscionable in a number of respects and seeks an order that his Guarantee be set aside because it is "unjust" within the meaning of that term in the CRA (the CRA Claim). 121 Liu makes a further claim that the agreements between the plaintiff and Buzzle were franchise agreements within the meaning of that term in the Franchising Code of Conduct (the Code), a mandatory Industry Code prescribed by the regulations pursuant to s 51AE of the Trade Practices Act 1974 (Cth) (the TPA). It is alleged that the plaintiff breached the Code and that such conduct was unconscionable in breach of s 51AC of the TPA. Liu claims an order that the Guarantee be set aside and damages (the Code Claim). 122 Liu also claims that the cross defendants are guilty of misleading or deceptive conduct for which Liu seeks relief under the TPA and/or the Fair Trading Act 1987 (NSW) (the FTA) (the Misleading Conduct Claim). 123 Aircent alleges that it entered into an agreement with the plaintiff which was a franchise agreement and that the plaintiff breached the Franchise Code in respect of that agreement. It also alleges misleading or deceptive conduct and seeks damages under the provisions of the TPA and the FTA. 124 I allowed the seventh defendant to make submissions in relation to the Code Claim, and to what have been referred to as the "objective unfairness" arguments in relation to the CRA Claim and the amounts allegedly owing under the Guarantee. The seventh defendant supported the submissions made on Liu's behalf and it is convenient to deal with their submissions together. However, I will deal with the seventh defendant's position separately after considering the joint defences. Defences to the Guarantee Claim 125 The defendants' first attack was on the form of the Certificate issued under clause 10.1 of the Guarantee. As to the amounts claimed either under the Certificate or generally, it is appropriate to deal firstly, with the amount of $7.186 million in relation to stock and secondly, with the amounts totalling $4.799 million paid to the plaintiff by Buzzle in respect of the Apple Debt. Form of Certificate 126 Clause 10.1 of the Guarantee provided: A certificate in writing of Apple certifying the amount payable by the Debtor or the Guarantor to Apple or stating any other act, matter or thing relating to this Deed, any Collateral Agreement or any Security will be conclusive and binding on the Guarantor in the absence of manifest error on the face of the certificate. 127 It was submitted that clause 10.1 should be strictly construed: Je Maintiendrai Pty Ltd v Australia and New Zealand Banking Group Ltd (1985) 38 SASR 70 at 71; and that if the Certificate does not comply with clause 10.1 it should be found to be of no effect. It was also submitted that the law construes guarantees in the surety's favour: Ankar Proprietary Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549 at 561; and that creditors must take care that certificates comply with the empowering clause. It was submitted that in this case the plaintiff did not take that care and that it should be prevented from relying upon the Certificate. 128 The defendants placed reliance upon the requirement in clause 10.1 that the plaintiff had to certify the "amount payable" by the Guarantor. It was submitted that the Certificate does not certify an "amount payable". The terms used in the Certificate are, as to the principal sum, "the amount due and owing by Buzzle"; as to interest, "the amount determined" by the plaintiff "as to interest payable by the Guarantors"; and finally "the amount due" to the plaintiff by the Guarantors pursuant to their obligations under their respective Guarantees. It was submitted that the use of the word "due", rather than the word "payable", in the Certificate evidences a failure to comply with clause 10.1 such as to render the Certificate of no effect. 129 The defendants also submitted that clause 10.1 permits only one matter to be dealt with in a certificate and that the Certificate dealt with three matters: (1) the amount due and owing by Buzzle; (2) the amount determined by the plaintiff as to interest payable by the Guarantors; and (3) the amount due to the plaintiff by the Guarantors. It was submitted that the inclusion of these three matters is a failure to comply with clause 10.1. 130 In Ankar, Mason CJ, Wilson, Brennan and Dawson JJ said at p 561: At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety. 131 It is not suggested in this case that there is ambiguity. The first question is whether the use of the words "amount due" instead of the words "amount payable" is a failure to comply with clause 10.1. The purpose of such a clause is "to provide a ready means of establishing the existence and amount of the guaranteed debt and avoiding an inquiry upon legal evidence into the debits going to make up the indebtedness": Dobbs v National Bank of Australasia Limited (1935) 53 CLR 643 per Rich, Dixon, Evatt and McTiernan JJ at 651. In this case the plaintiff set out the calculation of what it certified as the "amount due" to it by the defendants. This certification favoured the defendants in allowing them to know the amount alleged to be owed by Buzzle, the basis of the interest calculation and the calculation of the amount due by the respective Guarantors according to their respective guaranteed shares. 132 Compliance with clause 10.1 is required to ensure that the surety is aware of what is expected of the surety. The ordinary meaning of the terms "payable" and "due" are very similar. "Payable" is defined as "owed; to be paid; due" and "due" is defined as "immediately payable": The Macquarie Concise Dictionary; 3rd Edition, pp 846 and 343. It could hardly be said that the use of the word "due" instead of the word "payable" would disadvantage the surety or cause uncertainty in the recipient of the Certificate. The clause requires the certification of the amount payable. The focus is upon the "amount". Whether one uses the word "due" rather than "payable" in a certificate is in my view not a basis for rendering a certificate of no effect. 133 The defendants' submission in relation to clause 10.1 only permitting one matter to be raised in a Certificate is in this case flawed. The fact that the plaintiff has included the amount owing by Buzzle is, as I have said, to the advantage of the surety so that the surety knows the basis of the calculation. To construe the clause as one prohibiting the plaintiff from including the amount owed by Buzzle in the Certificate for the purpose of setting out the calculation would be to embark upon a process of construction that, in my view, would be inconsistent with what was said in Ankar. It also seems to me that it would be absurd to construe this clause to require the plaintiff to have served three certificates, one setting out the debt owed by Buzzle, one setting out the interest payable by the Guarantor and one setting out the amount due by the Guarantor by reference to those other two certificates. I am not persuaded by the defendants' submissions that the form of the Certificate renders it of no effect. 134 There are a number of complaints made by the defendants in respect of the amount claimed in the Certificate. Although clause 10.1 of the Guarantee provided that the Certificate was "conclusive and binding on the Guarantor in the absence of manifest error", Mr Newlinds, in tendering the Certificate, submitted it was not conclusive and that the defendants could call evidence that rebutted the position (tr. 231). This submission was repeated during the applications to amend the pleadings and Mr Newlinds submitted that if I was satisfied that the Certificate was "wrong" I would deal with it in accordance with the evidence (tr. 902). 135 At the conclusion of the evidence in July 2002 and during what was then apprehended to be final submissions, Mr Newlinds re-opened the plaintiff's case, without objection, and tendered, without objection, the statements of account between Buzzle and the plaintiff (Ex. M) and the statements of account between the plaintiff and the Resellers (Ex. N) (tr. 889 & 890). These exhibits were relied upon to demonstrate what had happened in respect of the transfer of the stock to Buzzle and the crediting of the Resellers accounts in October 2000 and to a lesser extent as a test of the veracity of the Certificate (tr. 883). Exhibit U contains a schedule with cross-references to exhibits M and N, helpfully summarising the transactions in relation to the transfer of the Reseller's stock to Buzzle in October 2000. In November 2002 when the matter was re-listed for a further five days for the completion of the hearing, the plaintiff called Stephen John Kidd, a credit risk analyst employed with the plaintiff, who gave evidence in relation to the various transactions upon which the defendants base their claims that certain amounts have been erroneously included in the alleged amount payable under the Guarantee. 136 The final figure in the statements of account (Ex. M) is greater than that in the Certificate and the difference is claimed to represent the amount recovered by the receiver. During the period in which the defendants' applications were made to re-open and to amend their pleadings, the plaintiff's solicitors notified the defendants that the Receivers had recovered a further amount of $605,000 with the consequence that the amount in the Certificate should be reduced accordingly. 137 The decision made by the plaintiff to rely upon exhibits M and N and the notification of the further amount recovered by the Receivers satisfies me that the Certificate is not conclusive. Liu has submitted that where the debt is for stock directly delivered to Buzzle the basis for the liability for the debt is clear. However it was submitted that the liability for the debt in respect of the Resellers' stock is not clear. I will deal with those latter amounts now. $7,186,729.37 for Stock 138 The transactions contained in the statements of account record that on 16 October 2000 Buzzle's account was debited in the amount of $6,298,138 (Exs. M & U) and each of the Reseller's accounts were credited in the individual amounts contained in Mr Hartono's e-mail of 29 September 2000 set out earlier in this judgment, totalling $6,298,138 (Exs. N & U). This figure represented part of the cash component attributable to stock (the stock cash component) of the purchase price that Buzzle agreed to pay the Resellers no later than 31 October 2000 or at an earlier time if the directors of Buzzle formed the view that Buzzle had adequate cash flows to pay the Resellers on a pro-rata basis or in accordance with the Resellers' requirements to pay their creditors (cl 6.5 of the Merger Deed). There is no issue that this amount was taken into account in the calculation of the alleged debt under the Guarantees. 139 This transaction was effected after receipt of Mr Hartono's e-mail of 29 September 2000 in which he advised that the "Apple stock figures" had been "transferred to Buzzle as at 11/9/2000". This date is an apparent reference to the Completion Date defined in the Merger Deed as 11 September 2000 and the "effective date" as contained in the letter referred to in Liu's evidence. The plaintiff relied upon Likidis' e-mail of 13 September 2000 in which he stated that Buzzle was to confirm in writing the acceptance of the value of the Resellers' stock on hand at the time of the Merger and that Buzzle accepted that such value "was to be charged to Buzzle". It is submitted that Mr Hartono's e-mail of 29 September 2000 was such a confirmation. In his 13 September 2000 e-mail Likidis had informed the Resellers that the plaintiff would credit each Reseller and charge Buzzle by Transfer Journal Voucher and that such amount was payable by Buzzle no later than 31 October 2000. The plaintiff submitted that this is exactly what was done on 16 October 2000 and that the amount was appropriately taken into account in the calculation of the amounts payable under the Guarantees. 140 In addition to the $6.2 million referred to above there is no issue that two other amounts relating to the Resellers' stock were debited to Buzzle's account with a corresponding credit to the relevant Reseller's account. On 22 September 2000 the plaintiff debited Buzzle's account in the amount of $156,462.56 and credited three of the Reseller's accounts for stock that had been ordered by them prior to, but delivered after, the Merger. On 17 October 2000 amounts totalling $732,127.74 were debited to Buzzle's account and credited respectively to the Reseller's accounts in respect of stock ordered by them prior to, but delivered after, the Merger. 141 In final written submissions dated 25 November 2002, Liu's counsel made the following submission in respect of the $6.2 million and the two further amounts of $156,462.56 and $732,127.74, making a total of $7,186,729: 50. Payments by Buzzle of the various amounts transferred would be permitted under the terms of the Payments Deed referred to above, but only if the terms of the Payments Deed with respect to the payment being out of surplus cashflow were met. There is no part of the Payments Deed or any other document that permits the debts to be merely transferred. 142 Liu submitted that the only available avenue by which Buzzle (and the Guarantors) could become liable to the plaintiff for the debt for the stock sold to it by the Resellers, was by the Resellers assigning to the plaintiff the debt owed to them by Buzzle. The Apple debt of $15.2 million included the amount of $7,186,729 being for stock ordered by the Resellers and delivered to them, in the main, prior to the Merger. That amount was the stock cash component of the purchase price Buzzle agreed to pay the Resellers. 143 The plaintiff submitted that the "combined effect" of the Merger Deed and the Payments Deed was that: (1) each of the Resellers agreed to sell their stock to Buzzle at the Merger date; (2) the Resellers and Buzzle agreed that the purchase price for that stock would be as agreed between them at a stocktake; (3) each of the Resellers, Buzzle and the plaintiff agreed that the Resellers' debt at the time of the Merger was $15,242,924.92 (the Apple Debt); (4) Buzzle agreed to pay each of the Resellers the agreed price for the stock when Buzzle had "Surplus Cashflow", but in any event by 31 October 2000; and (5) each of the Resellers directed Buzzle to make the payment for the stock directly to the plaintiff on their behalf to discharge part of the Apple Debt. The parties are at issue in relation to propositions (4) and (5). The plaintiff relied upon clause 4.5(d) of the Payments Deed in support of these propositions. 144 What the Resellers directed Buzzle to pay to the plaintiff were those payments it intended to pay to the Resellers under clause 4.5(a) for the stock cash component (the direction to pay) (cl 4.5(a) & (d) of the Payments Deed and cl. 6.5 of the Merger Deed). The direction to pay was conditional upon: (1) there being no agreement "otherwise" between the plaintiff and Buzzle; and (2) any part of the Apple Debt remaining outstanding. The latter of these conditions was certainly satisfied, however there is an issue as to whether there was an agreement "otherwise" to which I will return later. Firstly, on the assumption that there was no such agreement "otherwise", I will deal with the construction of the Deeds and the direction to pay as to whether there was an assignment to the plaintiff of Buzzle's debt to the Resellers in respect of the stock cash component 145 Under the Merger Deed, Buzzle agreed to purchase from each of the Resellers their stock at a price to be calculated after a stocktake (cl. 6.5, 4.1, 6.2 & 7.1). The relevant clause for consideration is clause 6.5, set out in full earlier in this judgment. The proviso at the end of subparagraph (a) of clause 6.5 seems to me to be quite clear. This subparagraph allowed a deferral of payment of the stock cash component from 13 September 2000 until no later than 31 October 2000. However, if the directors of Buzzle formed a view that Buzzle had adequate cash flows to pay amounts owing to the Resellers on a pro-rata basis, or in accordance with the requirements of particular Resellers to pay their creditors, such payment or part payment might be made prior to 31 October 2000. 146 Clause 6.5(b) did not impose any requirement to pay the cash component of the purchase price, attributable to things other than stock, by a specific date. The time for the payment of that amount was also deferred and fixed as the earlier of either the float of Buzzle on the ASX or the date upon which the directors of Buzzle formed a view that Buzzle had adequate cash flows to pay amounts owing to the Resellers on a pro-rata basis or in accordance with the requirements of a particular Reseller to pay its creditors. If there were not sufficient cash flows, then the payment of that part of the purchase price for things other than for stock did not fall due until the float of Buzzle. This was not the case in respect of the stock cash component. It had to be paid no later than 31 October 2000. 147 The term "Surplus Cashflow" is not used in the Merger Deed. It is found in clause 4.5 of the Payments Deed, which is also set out in full earlier in this judgment. "Surplus Cashflow" is defined as "any operating cashflow of Buzzle Operations not required to meet the ordinary costs of its ordinary business or the costs of the matters contemplated by the definition of Permitted Financial Indebtedness" (cl 1.1). That latter definition set out various debts which Buzzle was permitted to incur prior to the payment of the Apple Debt to the plaintiff. 148 Clause 3.2 of the Payments Deed provided that Buzzle agreed "for the benefit of Apple" to repay all amounts owing by it to the Resellers pursuant to clause 6.5(a) of the Merger Deed on or before 31 October 2000. Clause 4.5(a) of the Payments Deed provided that Buzzle "will use any Surplus Cashflow to pay amounts owing by it" to the Resellers under clause 6.5(a) of the Merger Deed on a pro-rata basis or in accordance with the requirements of each Reseller to pay its creditors or as otherwise determined by Buzzle. 149 Prior to 31 October 2000 and on every Friday from 22 September 2000, Buzzle was required to determine whether it had any Surplus Cashflow available with which to "repay" the Resellers (cl 4.1). If Buzzle determined that it had Surplus Cashflow, it was obliged to promptly notify each Reseller and the plaintiff of the amount of Surplus Cashflow and the way in which it proposed to apply it (cl 4.2). The Resellers were required to provide Buzzle with up to date details of all creditors who were payable within 21 days and the plaintiff was also obliged to provide to Buzzle up to date details of all amounts owed to it by each Reseller (cl 4.3(a) & (b)). 150 Clause 4.5(d) provided that unless the plaintiff and Buzzle otherwise agreed and, if and to the extent that any Reseller was liable to repay any of the "Apple debt" to the plaintiff, the Resellers "irrevocably and unconditionally" directed Buzzle to pay to the plaintiff any payment which it intended to make to the Resellers under clause 4.5(a). However Buzzle was not permitted to make payments to the Resellers other than on a pro-rata basis, without the consent of the plaintiff (cl 4.5(b)). In deciding whether to give its consent, the plaintiff was entitled to take into account "its expectation that payments will be made to it in reduction of the Apple Debt in accordance with cashflow and payment projection statements" provided to the plaintiff by Buzzle and the Resellers prior to the date of the Merger (cl 4.5(c)). 151 When one reads clauses 3.2 and 4.5 of the Payments Deed together, it is clear that there is recognition that, under the Merger Deed, Buzzle was entitled to a deferral of its obligation to pay the stock cash component until 31 October 2000. Clause 4.5 allowed Buzzle to pay the cash component amount out of the Surplus Cashflow on a pro-rata basis without having to obtain the plaintiff's consent. If Buzzle wished to pay the stock cash component out of the Surplus Cashflow to the Resellers in accordance with their requirements to pay their creditors, Buzzle was required to obtain the plaintiff's consent. 152 Clause 3.2 of the Payments Deed does not limit Buzzle's obligation to repay "all amounts" owing under clause 6.5(a) to make it conditional upon the existence of Surplus Cashflow. If that is what was meant then there would be no need for any proviso in clause 6.5(a) of the Merger Deed requiring payment of the stock cash component by "no later than 31 October 2000". Clause 4 of the Payments Deed, entitled "Dealing with Cashflow", dealt with a regime from the date of the Merger, 13 September 2000, until 31 October 2000 when Buzzle's obligation was to pay the stock cash component to the Resellers irrespective of whether the payment was made from Surplus Cashflow or otherwise. 153 The direction to pay related only to the stock cash component. As Buzzle was obliged to pay the stock cash component by 31 October 2000, it is reasonable to conclude that Buzzle would have had the intention to make that payment by the due date, using "any Surplus Cashflow" but not only Surplus Cashflow. The direction to pay was limited to the payments that Buzzle intended to make to the Resellers under clause 4.5(a). There was no direction to pay in respect of payments that Buzzle intended to make under clause 3.2. In my view that means that the direction to pay was a direction to pay the amounts that Buzzle intended to pay to the Resellers for the stock cash component from the Surplus Cashflow. The balance, whatever that may have been, over and above the available Surplus Cashflow, was to be paid to the Resellers "for the benefit of Apple". The only part of the debt that could be assigned under clause 4.5(d) was the portion of the stock cash component that Buzzle intended to pay the Resellers pursuant to clause 4.5(a) of the Payments Deed. 154 If clause 4.5(d) is to be construed as an assignment of that portion of the debt to the plaintiff it would have to comply with a number of conditions. The first is that it must not be revocable and must make clear the Resellers' intention to divest themselves of a debt owed to them by Buzzle: Comptroller of Stamps (Victoria) v Howard-Smith (1936) 54 CLR 614 at 620, 622. An assignment may be addressed to the debtor and it may be couched in the language of command or it may be a courteous request. It may even assume the form of mere permission. It has been said that the language is immaterial "if the meaning is plain": William Brandt's Sons & Co v Dunlop Rubber Company, Limited [1905] AC 454 at 462. 155 Section 12 of the Conveyancing Act 1919 (NSW) requires that express notice in writing of an assignment be given to the debtor. Buzzle was a party to the Payments Deed and I am satisfied that the Payments Deed was appropriate notice to Buzzle. The "fund" out of which the payment was to be made was identified by the reference in clause 4.5(d) to clause 4.5(a) which provides that the fund was "any Surplus Cashflow". The direction to pay stated that it was irrevocable and unconditional. However it only operated in the absence of an agreement otherwise between the plaintiff and Buzzle and if any part of the Apple debt remained outstanding. It is plain that if those circumstances were present, the Resellers intended to immediately divest themselves of their rights and entitlement to the amounts that Buzzle intended to pay them out of the Surplus Cashflow for the stock cash component. 156 If there was no agreement "otherwise", there was probably a valid assignment to the plaintiff by the Resellers of the debt owed to them by Buzzle in respect of the amounts it intended to pay to the Resellers out of the Surplus Cashflow under clause 4.5(d) of the Payments Deed for the stock cash component. The effect of such a finding would be that only those amounts that are the subject of the direction to pay became the debt of Buzzle to the plaintiff and thus part of the "Guaranteed Money" under the Guarantee. 157 There is however an issue in respect of whether the plaintiff and Buzzle had agreed otherwise in relation to the payment for the stock cash component. It is therefore necessary to construe the term "unless Apple and Buzzle Operations otherwise agree" in clause 4.5(d) of the Payments Deed. The Resellers were parties to the Payments Deed, as were the plaintiff and Buzzle. Under clause 4.5(d) the Resellers agreed that it was open to Buzzle and the plaintiff to agree otherwise. There was no requirement for the Resellers to be party to such other agreement. The Resellers left that to the plaintiff and Buzzle. 158 The plaintiff submitted that Buzzle and the plaintiff had in fact agreed "otherwise" as to how the whole of the amount owed by Buzzle to the Resellers for the stock cash component, as opposed to only those amounts Buzzle intended to pay under clause 4.5(a) of the Payments Deed, would be paid to the plaintiff. It was submitted that the agreement is evidenced by a number of written communications between the Resellers, Buzzle and the plaintiff. 159 Prior to the Merger, Mr Shearer wrote to Mr Bright at Arthur Andersen with copies to Liu in the following terms: "I hope all (went) well over the weekend stock take. So we are able to credit the old resellers' accounts for Apple stock on hand and recharge it to Buzzle could you supply today details and amounts to be credited and recharged" (Ex. Q; p. 1). Mr Bright responded and advised that he was seeing all of the principals (Resellers) that afternoon and would find out the status of the count of the stock (Ex. Q; p. 2). The next communication relied upon by the plaintiff was Likidis' e-mail of 13 September 2000, set out in full earlier in this judgment, in which "the proposed transition plan" included the amount of the stock on hand to be notified to the plaintiff by 5 pm on 14 September 2000. Buzzle was to confirm in writing the acceptance of the value to be charged to Buzzle. The e-mail continued: "Apple will credit each reseller and charge Buzzle by Transfer Journal Voucher. This amount will be payable by Buzzle no later than 31-10-00" (Ex. K; p. 1126). 160 On 15 September 2000 Mr Shearer wrote by e-mail to each of the Resellers enclosing a copy of the Likidis e-mail of 13 September 2000. Mr Shearer's e-mail referred to the terms of the Likidis e-mail and advised that he had not received "the details requested on stock that (would) be transferred to Buzzle for payment" (Ex. Q; p. 4). This e-mail also requested the then CEO of Buzzle, Greg Lloyd, to "help in having the details given to us to allow the transfer to Buzzle of Stock on hand". 161 On 29 September 2000 the sixth defendant, Mr Hartono, a director of Buzzle, wrote to Mr Shearer and Likidis by e-mail. The terms of that e-mail are set out earlier in this judgment. The foot of that e-mail refers to Buzzle Ltd and its address in Sussex Street, Sydney, with telephone and facsimile numbers. A copy of that email was sent to Mr Lloyd and also to Liu at an address "wing_liu@buzzle.com.au", although Liu denies receiving this e-mail. 162 On 29 September 2000 Likidis wrote by e-mail to Mr Lloyd enclosing a copy of Mr Hartono's e-mail of the same date, requesting Mr Lloyd to "confirm accuracy of the amount transferred" and advising that "once this is done, we will arrange to make entries between each reseller" and Buzzle (Ex. Q; p. 6). 163 On 10 October 2000 Mr Shearer wrote by e-mail to Mr Paul Patterson of Buzzle, once again enclosing a copy of Mr Hartono's e-mail of 29 September 2000, with a request that he "confirm that we are able to transfer the amounts to Buzzle as listed below" (Ex. Q; p. 7). On the same day Mr Patterson replied to Mr Shearer enclosing his request made earlier that day for confirmation and advised that "these numbers are correct" (Ex.Q; p. 8). 164 On 23 October 2000 Mr Shearer wrote to Mr Patterson by e-mail advising that the plaintiff had that day sent to Buzzle by mail copies of "all transactions relating to the transfer of stock from the old Companies to Buzzle as requested" and that the plaintiff had "also transferred all billings that were charged to the old Companies accounts directly after the merger to Buzzle's account". 165 The defendants placed emphasis upon Likidis' evidence in cross-examination that there had been an oral agreement on the evening before the Merger in relation to the division of the Apple Debt to submit that they were taken by surprise in respect of such an agreement or arrangement. This was used as a basis for the re-opening of the cases and the amendments that I allowed in my judgment of 22 October 2002. Having now had the opportunity to review all of the evidence, it is a little difficult to understand how Liu could have been taken by surprise in respect of the arrangement in relation to the transfer of the stock to Buzzle. 166 On 13 September 2000 the plaintiff's in-house legal counsel, Ms Law, advised the Resellers by e-mail that certain of the amendments they had sought to the Merger documents were accepted but that the plaintiff required the definition of "Apple Debt" to be amended to include the words "includes but is not limited to these amounts" (Ex. 19; p. 51). In explaining the reasoning for this change the e-mail stated: The reasoning for this is because at completion Apple cannot provide a definitive amount for the Apple Debt. This is due to the manner in which Apple reports are processed, and the difficulties of calculating the precise debt in connection with Apple's service business. Accordingly the amount to be listed in Schedule 2 would be an indication of the Apple Debt. I understand that Jim Likidis has explained Apple's position on this point to Stuart Bright and Wing Liu last night and that they in principle agreed with him. 167 Arthur Andersen advised the Resellers on 13 September 2000 by e-mail (Ex. 19; p. 52A) that: As agreed between Buzzle Operations and Apple, the description of the Apple Debt in schedule 2 will be inclusive (not definitive). Apple will be required to provide a final statement of the Apple Debt within 2 Business Days (clause 4.3 (a)). Because there is no definitive statement of the Apple Debt, there is a risk that the Apple Debt could exceed whatever you are obliged to pay pursuant to clause 6.5 (a) of the Merger Deed. You may wish to cap the Apple Debt at that amount. 168 The definition of Apple Debt in the Payments Deed, as executed, included the words "but is not limited to the amounts listed in schedule 2". There was no capping of that amount. The Apple Debt of $15.2 million included the amount of approximately $7 million owed by the Resellers to the plaintiff in respect of stock that was subsequently sold to Buzzle. During his cross-examination Likidis said that he understood that the arrangement that he had reached in respect of the division of the Apple Debt was recorded somewhere and that he thought that it would be in Arthur Andersen's files. Mr Hayes QC cross-examined Likidis about this aspect of his evidence and referred to a document stated to be from Arthur Andersen's files. That evidence was as follows: Q. You certainly were involved in discussions with the dealer principals just before 13 September about the break-up between the eight and the seven million and the question of set-off? A. That's correct. Q. In the Arthur Andersen documents there is a document that has been produced called "Discussion with Jim Likidis", it is not dated, it says, "Last night Jim Likidis called and indicated that it appeared that agreement had been reached on key outstanding issues". A. Yes. Q. Who was it with? A. It would have to have been with Stuart Bright, he was the main contact. Q. When was it? A. That's the question you asked me this morning. I don't recall the date of that but I think it was fairly soon before 13 September. Q. All Apple stock held by the principals at the merger will be credited to each existing reseller account and invoiced to Buzzle, do you remember discussing that? A. Yes. Q. All Apple stock acquired by Buzzle to be settled by no later than 31 October 2000, did you discuss that? A. Yes. (tr. 608-609) 169 That discussion is reflected in the terms of Likidis' e-mail of 13 September 2000. The recipients of that e-mail included Liu and Mr Hartono but not the seventh defendant. In any event, on Liu's own evidence he had known from previous discussions with Likidis at the 21 August meeting that it was the plaintiff's intention, at least as far as he and Aircent were concerned, that after the Merger the plaintiff would allow the transfer of Mac's Place stock to Buzzle with a corresponding credit to Mac's Place. Liu submitted this conversation was "only in very general terms" and that although at the time of the transfers he knew they could occur, he did not know that payments were being made out of funds other than surplus cashflow (Subs. 25/11/02; par 98). 170 Likidis' e-mail of 13 September 2000 stated that: "all uncompleted orders of the existing resellers (vendors) as at this time will be cancelled" by the plaintiff "on the equivalent order by Buzzle via EPO". Liu has not claimed that Buzzle did not issue the appropriate order. 171 The plaintiff submitted that agreement was reached whereby the plaintiff released its charge in respect of the stock sold to the Resellers in consideration of Buzzle's agreement to pay to the plaintiff the amount then owing by the Resellers in respect of the stock. It was submitted that those amounts became debts payable by Buzzle to the plaintiff for stock and that those debts were part of the "Guaranteed Money" being part of "all money which is now or may hereafter become or remain due and owing or unpaid" by Buzzle to the plaintiff. 172 The defendants submitted that there was no valid agreement otherwise and relied upon clause 9.3 of the Payments Deed in support of the submission. That clause provided: "This document may only be amended or supplemented in writing signed by the parties". The agreement "otherwise" contemplated in clause 4.5(d) did not require an amendment or supplement to the Payments Deed. It seems to me that what was envisaged under that clause was a new agreement separate from the Payments Deed and would not require the Deed to be amended or supplemented. I am not satisfied that clause 9.3 precludes what the defendants have called a "legally effective arrangement" (Subs. 25/11/2002; par 87). 173 The defendants also submitted that the Likidis e-mail was sent prior to the execution of the Merger Deed and the Payments Deed and that, in any event, the subsequent e-mails were not consistent with the Payments Deed and are insufficient to found either a variation to its terms or consent to payment outside its terms. It is true that the Deeds were executed on 13 September 2000, however "Completion Date" was defined as 11 September 2000 and the parties agreed that the effective date of the transaction was 11 September 2000. 174 On one view Likidis' e-mail was sent post completion date. In any event, a regular practice in this modern world of e-mails is to enclose previously sent e-mails by reply or even to attach other e-mails for reference. This is what happened in September after the Merger Deed and the Payments Deed were executed. Likidis' e-mail of 13 September was attached to Mr Shearer's e-mail of 15 September 2000 and his subsequent e-mails. Buzzle was at that time given the "proposed transition plan". This was after the date the Merger Deed and the Payments Deed were executed and contained an offer by the plaintiff to credit the Resellers for stock on hand and ordered at the date of the Merger in consideration of the stock being transferred to Buzzle and Buzzle agreeing to pay for the stock transferred to it. 175 The defendants submitted that Mr Hartono's e-mail of 29 September 2000 was only confirmation of what was "transferred to Buzzle" and could not be read as an acceptance of the plaintiff's offer or an agreement whereby Buzzle agreed to pay the plaintiff, as opposed to the Resellers, for the stock transferred. 176 Although it is apparent from Likidis' cross-examination that he understood that there was agreement as to what would happen in relation to the stock after Merger, as the defendants submitted, the terms of the Merger Deed and the Payments Deed governed that matter. However, the Payments Deed contemplated an agreement in relation to stock "otherwise" than in accordance with the Payments Deed (cl 4.5(d)). Not only did it contemplate an agreement otherwise, it contemplated an agreement as between Buzzle and the plaintiff in respect of the stock. 177 The context in which the term is found in clause 4.5(d) of the Payments Deed is in relation to the direction to Buzzle to pay to the plaintiff only those amounts that Buzzle intended to pay the Resellers out of the Surplus Cashflow. It is true that the scheme of clause 4 required the plaintiff's consent to payments by Buzzle out of the Surplus Cashflow other than on a pro-rata basis. However, that scheme in my view does not limit the breadth of any agreement "otherwise" into which the plaintiff and Buzzle entered in respect of the payment for the stock cash component under clause 6.5(a) of the Merger Deed. Clause 4.5(d) referred to clause 4.5(a) of the Payments Deed which in turn referred to clause 6.5(a) of the Merger Deed. 178 I am satisfied that the e-mail from Mr Hartono, for Buzzle, to the plaintiff on 29 September 2000 is not limited in the way the defendants contend. It was directly responsive to Mr Shearer's e-mail of 15 September 2000 which reiterated the plaintiff's offer contained in Likidis' 13 September 2000 e-mail. This was an offer to Buzzle at this time and was accepted by Buzzle in Mr Hartono's e-mail. Alternatively, Buzzle accepted the offer in Mr Patterson's e-mail of 10 October 2000. 179 I am satisfied that the amount of $7,186,729.37 attributable to the stock transferred to Buzzle was properly taken into account by the plaintiff as part of the Buzzle debt and part of the "Guaranteed Money" under the Guarantees. $4,799,916.35 of Apple Debt 180 On 3 October 2000, the plaintiff received $1,595,000 by electronic transfer from Buzzle. This amount was credited to the debts of the Resellers being $195,000 to Designwyse, $500,000 to GM Computers and $900,000 to Choice Connections. 181 On 31 October 2000 the plaintiff received the sum of $2,168,088.71 by electronic transfer from Buzzle. This amount was credited to the Resellers being $660,000 to Power Distributions, $408,088.71 to Status Graph, $100,000 to Manning Computers and $1,000,000 to Mac's Place Group Pty Ltd. 182 On 6 November 2000 the plaintiff received the sum of $1,016,827 by electronic transfer from Buzzle. This amount was credited to the Resellers. All of these payments, totalling $4.7 million, were credited to the Resellers' accounts at the "express direction" of a Buzzle director, Donald Hartono (SJ Kidd aff. 6/9/2002 (SJK); pars 25-54). Mr Hartono claimed it was easier and quicker to make the payments direct to the plaintiff rather than to the Resellers (SJK; par 30). Mr Hartono's statement supports the finding that Buzzle was making these payments on an understanding that it was obliged to make them to the Resellers. The obligation that Buzzle had to make payments to the Resellers, in addition to the payment of the stock cash component, was in respect of the cash component of the purchase price for things other than stock. 183 It was submitted by the plaintiff that each of the directors of Buzzle represented one of the Resellers and that each of the payments that made up the amount $4,779,916.35 "was a payment in fact made by Buzzle to Apple" and that Buzzle "directed that the monies be credited to the various Resellers accounts" (Subs. 25/11/02; pars 55 & 57). That meant that Buzzle paid off part of the Resellers' Apple Debt from its income, rather than paying off its own debt to the plaintiff with its income, at least to the amount of $4,779,916.35. That had the consequence that Buzzle's debt to the plaintiff was $4,779,916.35 greater than it would have been had it not paid off that proportion of the Resellers' Apple Debt. 184 The plaintiff submitted that by clause 3.2 of the Payments Deed the Resellers were required contractually to pay the balance of the $15 million Apple Debt, over and above approximately $7.2 million in relation to stock, to the plaintiff by no later than 31 October 2000 (Subs. 25/11/02; par 54). That clause does not support that submission. Clause 3.2 of the Payments Deed was limited to the amounts due by Buzzle to the Resellers under clause 6.5(a) of the Merger Deed. Clause 6.5(a) of the Merger Deed related only to the stock cash component. 185 The only amounts that Buzzle and the plaintiff were able to agree to be paid otherwise than in accordance with the Merger Deed and the Payments Deed were the amounts relating to the stock cash component of the Apple Debt (cl 4.5(d) of the Payments Deed and cl 6.5(a) of the Merger Deed). The payment of the balance of the Apple Debt was governed by the terms of the Merger Deed and the Payments Deed. Clause 6.5(b) of the Merger Deed dealt with the cash component of the purchase price attributable to things other than stock. As has already been said, that amount was not required to be paid until the earlier of two dates, being the float of Buzzle on the ASX or the date upon which the directors of Buzzle formed the view that Buzzle had adequate cash flows to pay the Resellers on a pro-rata basis or in accordance with the Resellers' requirements to pay their creditors. 186 If the directors of Buzzle determined that there was sufficient cash flow to make the payment of $4.7 million, the Payments Deed and the Merger Deed required Buzzle to pay those amounts to the Resellers (cl 6.5(b)). Buzzle paid the $4.7 million to the plaintiff but did not receive a credit to its account with the plaintiff because the Resellers' accounts were credited with the relevant portion of the amount. As stated above, Mr Hartono advised Buzzle that it was easier and quicker to make the payments direct to the plaintiff. 187 The directors of Buzzle as and from 14 September 2000 included Liu, Mr Hartono and a number of the principals of the Resellers. In deciding to pay the amounts totalling $4.7 million in October and November 2000 the directors of Buzzle are taken to have decided that Buzzle had adequate cash flows to pay the amounts. Whoever Buzzle paid made no difference to the debt Buzzle owed to the plaintiff. If it paid the plaintiff instead of the Resellers (as it did) and there was a credit to the Resellers accounts (which there was), the Buzzle debt would be the same if Buzzle had paid the Resellers. Buzzle was not going to receive a credit to its account on either method of payment. The sooner the Apple Debt was repaid, the sooner Buzzle would be freed from the restriction in incurring financial indebtedness. The fact that Buzzle decided to make the payment direct to the plaintiff rather than to the Resellers does not affect Liu's liability under the Guarantee. 188 In my view it is not possible for Liu, as a director of Buzzle, to take the benefits of the payment of the $4.7 million: (1) to pay that proportion of the Apple Debt thus freeing up, or moving closer to freeing up, the trading arrangements for Buzzle; and (2) to have the directors'/Resellers' account credited in the relevant proportion; and then claim that such amounts should be credited to the Buzzle account for the purpose of reducing the directors' liability under the Guarantee. 189 I am not satisfied that the Buzzle debt should be reduced by $4,779,916.35. Unauthorised Reversal of $1,090,226.90 190 On 17 October 2000, $1,090,226.90 was credited to the Mac's Place account with the plaintiff. On 18 October 2000 the sum of $1,090,226.90 was debited to the account of Mac's Place and credited to the Choice Connections account. That was done pursuant to a request from Mr Hartono as recorded in an internal e-mail of the plaintiff: "The Mac's Place Stock Value of $1,090,226.90 has been included in the credit to Choice Connections as requested by Donald" (Ex. Q; p. 9). Liu claims that this was an unauthorised reversal. The Cross-Claim deals with this alleged unauthorised reversal in a claim that Aircent had made an overpayment. 191 On 16 November 2000 Stephen Ong, the former eighth defendant in these proceedings, wrote by e-mail to an employee of Buzzle, Simon Obel (Ex. T). Mr Ong sent copies of the e-mail to a number of people including Liu. It was in the following terms: Stock transferred from MP to Buzzle on 9/9/00 $2,227,928.62 Payment from Buzzle for the above on 31/10/00: 1. To CCA $1,023,758.21 2. To Apple $1,204,107.41 The above payment cleared all Apple account for MP. Account owing from MP to CCA: 16/10/00 Old MP $1,096,969.25 16/10/00 New MP $355,780.73 Total $1,452,749.98 Less $200,000.00 on 22/9/00 Less $1,023,758.21 on 31/10/00 Net $228,991.77 192 It was submitted on Liu's behalf that even if this was "some sort of debt owed by Aircent to Choice Connections, absent proper consent, there is no justification for Apple debiting the amount to Mac's Place in the manner it did" (Subs. 29/11/02; par 10). Liu was cross-examined in relation to this claim and asked what he did on receipt of the e-mail between Mr Ong and Mr Obel. Liu agreed that between 29 August and 13 September 2000 Mr Hartono/Choice Connections managed Mac's Place with Scott Thompson. Liu agreed that there was an arrangement between himself/Aircent and Mr Hartono/Choice Connections that goods delivered to Mac's Place would be billed to Choice Connections (tr. 1182). 193 Liu gave evidence that he could not recall exactly what he did after he received the copy of the Ong e-mail, but that he said he did do something (tr. 1179, l. 47 to 48). He agreed it was a significant matter but that he could not recall whom he called, although it could have been Mr Obel (tr. 1180). Liu's evidence on this topic does not serve him well (tr. 1183–1184). It appeared to me that he was not answering the questions posed and was doing so intentionally. However with persistent cross-examination Liu ultimately agreed that Aircent owed money to Choice Connections for stock and that Mr Hartono did not chase Aircent for the payment in November 2000 (tr. 1185–1186). He also agreed that it was obvious that Choice Connections had been paid and conceded that he left it up to Mr Hartono to "sort it out" (tr. 1186, l. 47 and tr. 1188, l. 3 to 16). 194 In the light of this evidence I am not satisfied that this was an unauthorised reversal and it does not affect the amount of the debt for which Liu is liable. Money received from other guarantors 195 Liu claimed that on a proper construction of the Guarantee the plaintiff is obliged to reduce the amount of the debt by the amounts received from other Guarantors before calculating Liu's 18.5% liability under the Guarantee. The plaintiff submitted that such a proposition is apt in instances in which guarantors jointly guarantee the whole of the principal amount but is not apt in this case where the Guarantors guarantee the whole debt with a limitation on their total liability, being their individual guaranteed share. 196 The plaintiff submitted that Liu's contention makes commercial nonsense of the Guarantee. Mr Hayes QC cautioned against approaching the matter on the basis of commercial sense and relied in support upon Fitzwood v Unique Goal Pty Ltd (in liq) (2001) 188 ALR 566 in which Finkelstein J said at 580 in par 47: However, a judge must be cautious when there is an attempt to sway a case by reference to commercial good sense, because views may easily differ on what is good sense, and in some cases a party is willing to bargain away a good result on one aspect of a contract because of a perceived advantage in another: Bank of Nova Scotia v Hellenic Mutual War Risks Assn (Bermuda) Ltd [1990] 1 QB 818; [1989] 3 All ER 628. 197 The plaintiff has received payments from other Guarantors but has refused to provide Liu with details of the amounts that have been received. Liu submitted that this refusal is an act that potentially prejudices him in the sense contemplated in Black v The Ottoman Bank (1862) 15 Moo PCC 472; 15 ER 573. 198 If Liu's contention is correct it would mean that those who pay their share of the Guaranteed Money first, even if in the same percentage as Liu, would be obliged to pay more than Liu. For example, if the debt is $100,000 and the first guarantor paid his share at 18.5% being $18,500, the next guarantor whose liability is 18.5% would only have to pay $15,077 ($100,000 - $18,500 = $81,500 x .185 = $15,077). It would mean that the creditor would not be able to recover the debt in full because there would be a reducing amount each time a payment was made. 199 The issue is what the parties intended in signing the Guarantees. The combined Guaranteed Shares (cl 1.1) totalled 100%. "Guaranteed Money" was defined as all money "which is now or which may hereafter become or remain due and owing or unpaid by the Debtor" (cl 1.1). The "Debtor" was defined as "Buzzle" (cl 1.1). "Guarantor" was defined to mean "each of them severally" (cl 1.2). The Guarantors guaranteed the payment when due of the Guaranteed Money, that is the amount owing by the Debtor, but limited in their individual shares of that amount (cl 4.1). 200 It is my view that on a proper construction of the Guarantee, the amount of the debt, the Guaranteed Money, is the amount unpaid by the Debtor, Buzzle, at the date of the demand. It is that amount reduced by the amounts received from the Receivers, for the Debtor, that the Guarantors have agreed to pay in their respective percentages. It is not that amount reduced by amounts paid by other Guarantors. It is only reduced by the amounts paid by the Receivers, thus affecting the amount then remaining due by the Debtor. The amount of the debt is therefore not reduced by amounts paid by other Guarantors. GST Adjustments 201 It is common ground that in calculating the debt referred to in the Certificate the plaintiff did not deduct the amounts representing GST. Liu submitted that the plaintiff is entitled to a refund from the Australian Taxation Office of an amount equal to 1/11th of the principal debt before payments from Guarantors are taken into account. It is submitted that the amount in the Certificate $14,176,496.10 less $605,000 received by the Receivers, totalling $13,571,496.10 should be reduced by 1/11th thus giving a figure for the debt of $13,571,496 – $1,233,772 = $12,337,724. 202 Buzzle commenced trading in September 2000 and all relevant transactions between the plaintiff and Buzzle were subject to GST. The plaintiff was liable to pay GST in an amount equal to 1/11th of the price it charged Buzzle for the supply: sections 9-5, 9-10(1) & (2), 9-25, 9-40, 9-70 and 9-75 of the GST Act. The plaintiff was required to account for GST on a non-cash basis: sections 29-40 and 29-45 of the GST Act. 203 The plaintiff is entitled to claim a refund of GST if it has not received consideration for the taxable supply and if the amount was written off or was overdue for more than 12 months. The plaintiff claims that it has not received consideration for the amounts claimed and it is clear that the amounts have been outstanding or overdue for 12 months or more. In those circumstances it is submitted that the plaintiff is entitled to a decreasing adjustment of 1/11th of the outstanding amount: section 21-5 of the GST Act. 204 Liu submitted that section 21-10 of the GST Act provides for an increasing adjustment when a debt that was subject to a decreasing adjustment has been "recovered". Liu also submitted that in this case the reference to the debt must be a reference to the debt between the plaintiff and Buzzle and that "recovery" from the guarantors is not a recovery of the debt but recovery pursuant to a different obligation. In those circumstances it is submitted that the plaintiff would not be the subject of an increasing adjustment. 205 In support of this submission, Liu relied upon Federal Wharf Company Limited v The Deputy Federal Commissioner of Taxation (1930) 44 CLR 24 at 28, dealing with the characterisation of interest with regard to the compensation payment for compulsorily acquired land; Riches v Westminster Bank Limited [1947] AC 390, dealing with the question of whether interest awarded in a judgment under the Law Reform (Miscellaneous Provisions) Act 1934 (UK) should be characterised as capital or income; and Holder & Anor v Commissioners of Inland Revenue [1932] AC 624, dealing with the question of whether the payment of the interest component of a debt to a bank paid by the guarantor was a payment within the meaning of section 36(1) of the Income Tax Act 1918 (UK). In Holder v Commissioners of Inland Revenue Viscount Dunedin said at 627-628: I think that interest payable on an advance from a bank means interest on an advance made to the person paying. The guarantor does not pay on an advance made to him, but pays under his guarantee. It is true that he pays a sum which pays all interest due by the person to whom the advance is made, but his debt is his debt under the guarantee, not a debt in respect of the advance made to him. 206 Section 21-10 of the GST Act provides: 21-10 Recovering amounts previously written off (taxable supplies) You have an increasing adjustment if: (a) you made a taxable supply in relation to which you had a decreasing adjustment under section 21-5 for a debt; and (b) you recover the whole or part of the amount written off, or the whole or part of the amount that has been overdue for 12 months or more, as the case requires. The amount of the increasing adjustment is 1/11 of the amount recovered. 207 In this section the term "debt" is used in subparagraph (a) but not in subparagraph (b). In my view that is an important difference. If the term "debt" had been used in subparagraph (b), Viscount Dunedin's analysis in Holder v Commissioners of Inland Revenue may have been applicable. The terms of the statute in this case are different from the terms of the statute under consideration in Holder. The plaintiff submitted that if the legislature intended to restrict the taxpayer's liability for an increasing adjustment to recovery from the debtor as opposed to recovery from a guarantor or any other source, it would have used the words "from the debtor" within the section. In my view that submission has force and the use of the words "amount written off" and "amount overdue", as opposed to "recovery of the debt" support the plaintiff's submission that the liability is not restricted to recovery from the debtor. 208 If the plaintiff is entitled to a decreasing adjustment, it appears to me that it will be burdened with a corresponding increasing adjustment for amounts recovered. I am not satisfied that the amount of the debt should be reduced by 1/11th. The Seventh Defendant's position 209 In addition to and separately from the defences relied upon by Liu in which he joined, the seventh defendant claimed that he was not made aware of matters essential for him to give his informed consent to the Guarantee and that, had he been made aware of those essential matters, he would not have signed the Guarantee. 210 The seventh defendant, who was not present at the meeting for the signing of the Merger documents, is Mr Donald Hartono's father. It is apparent that he signed the Guarantee in Melbourne in the presence of Mr McNab, solicitor. The seventh defendant made a declaration that he had received independent legal advice regarding the documents referred to in paragraph 1 of the declaration. Paragraph 1 stated: I am the Third Party Guarantor for Buzzle Operations Pty Limited ACN 093 603 895 (the "Debtor" ) named in certain documents between the Debtor and Apple Computer Australia Pty Limited, ACN 002 510 054 ( "Apple") relating to trade credit facilities. (Ex. A; p. 1297) 211 The "certain documents" were not identified in the declaration, however in a document entitled "Acknowledgement of Legal Advice by Proposed Guarantor" the seventh defendant acknowledged receipt of legal advice from Mr McNab in relation to (1) the Reseller Agreement, (2) a Charge over the assets and undertaking "of the Debtor entered into by the Debtor and the lender", and (3) "Deed of Guarantee and Indemnity between Apple, me and others". That acknowledgement included the following: 3. The advice given to me by my solicitor included that: (a) if the Debtor fails to make any payment on time, I as the guarantor will be liable to remedy that failure, and that could involve me in payment to Apple of all amounts owed by the Debtor to Apple including principal, interest, default interest and Apple's costs of rectifying the default; (b) if as the guarantor I fail to remedy any failure by the Debtor to comply with the terms and conditions of any document, including the obligation to pay principal, interest, default interest, or other charges, Apple can sue me personally; (c) Apple can exercise its rights against me as the guarantor even if it has not pursued the Debtor; (d) my liability under the Guarantee is limited to my percentage shareholding in Buzzle Limited as specified in the Guarantee. (Ex. A; p. 1298) 212 It is also apparent from the Guarantee that the seventh defendant received independent financial advice from Richard Tan, a certified practising accountant, who certified that he had discussed with the seventh defendant his knowledge of the business and financial affairs of Buzzle, including his expectation of Buzzle's ability to meet its financial commitments to the plaintiff (Ex. A; p. 1301). 213 The limitation upon the seventh defendant's participation in the trial is the subject of my judgment of 22 October 2002. Confined to that limitation which, perhaps unsatisfactorily, was referred to as the "objective" unfairness, Mr AA Davis, of counsel, filed submissions on 26 November 2002 which included the following: 9. The whole of the agreements including the Merger and Payments Deeds which were entered into after the Guarantees must be looked at as one interconnected transaction. The contingent Liability under the Payments Deed and the procedures for sweeping the cash from Buzzle were quite beyond what any ordinary person in the position of the Seventh Defendant would reasonably contemplate. 10. In other words no reasonably experienced and reasonably intelligent prospective Guarantor not being party to the Merger Deed nor the Payments Deed (and there is no evidence that my client ever saw these documents let alone read and understood them) could ever contemplate the draconian obligations undertaken by the Principal Debtor. In circumstances such as these no sensible surety would contemplate entering into an agreement to personally guarantee Buzzle's liability to Apple. 214 In West v AGC (Advances) Ltd & Ors (1986) 5 NSWLR 610, McHugh JA said at 619: In determining whether a contract or a provision of the contract is unjust for the purposes of s 7(1), the court is directed by s 9(1) to "have regard to the public interest and to all the circumstances of the case" including the consequences or results arising in the event of compliance or non-compliance with any provision of the contract. Section 9(4), however, directs that the court shall not have regard "to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made". McHugh JA continued at 620: In my opinion the effect of s 9(1), 9(2) and 9(4) is that the court may have regard to any circumstance existing at the time of the contract whether or not a party was aware of that circumstance. But the court cannot have regard to any injustice arising from a circumstance that was not reasonably foreseeable at the time when the contract was made. … Nevertheless, while knowledge of a circumstance by the party against whom relief is sought is not a condition precedent to the consideration of that circumstance, his lack of knowledge may render the circumstance of less materiality than it would if he was aware of it. … In other cases the contract may not be unjust per se but may be unjust because in the circumstances the claimant did not have the capacity or opportunity to make an informed or real choice as to whether he should enter into the contract: cf s 9(2)(a), 9(2)(e), 9(2)(f), 9(2)(g), 9(2)(i), 9(2)(j). More often, it will be a combination of the operation of the contract and the manner in which it was made that renders the contract or one of its provisions unjust in the circumstances. Thus a contract may be unjust under the Act because its terms, consequences or effects are unjust. This is substantive injustice. Or a contract may be unjust because of the unfairness of the methods used to make it. This is procedural injustice. Most unjust contracts will be the product of both procedural and substantive injustice. 215 In this case the seventh defendant relied upon the circumstances in which the Guarantee was signed to submit that the Guarantee is unjust within the meaning of that term in the CRA. McHugh JA in West v AGC (Advances) Ltd said of the definition of unjust in s 4 at p 620-621: The definition of "unjust" in s 4 is not exclusive. It is in my opinion a mistake to think that a contract or one of its terms is only unjust when it is unconscionable, harsh or oppressive. Contracts which fall within any of those categories will be "unjust". But the latter expression is not limited to the so-called "tautological trinity". The Contract s Review Act 1980 is revolutionary legislation whose evident purpose is to overcome the common law's failure to provide a comprehensive doctrinal framework to deal with "unjust" contracts. 216 The plaintiff submitted that there was nothing objectively unfair or unjust about any of the terms of the Guarantee. In responding to Mr Davis' submissions, Mr Newlinds submitted that there could not have been "a clearer guarantee" and that it was not unjust or unfair (tr. 1203). 217 There is nothing in the Guarantee to suggest that the seventh defendant had access to the Merger Deed or the Payments Deed or, more importantly, that he received any advice in relation to those Deeds. Notwithstanding the seventh defendant's guaranteed share in the Guarantee being 22.1% jointly and severally with his son, the Shareholders Deed (Ex. K; p. 1590) executed on 14 September 2000 makes no mention of the seventh defendant as a shareholder. 218 The plaintiff was concerned to ensure that the Guarantors took independent legal and financial advice before signing the Guarantees. Ms Law, the plaintiff's in-house lawyer, advised the plaintiff and its solicitors, Clayton Utz, to prepare the Guarantees as soon as possible in order to give the Guarantors time to take the relevant advice. The plaintiff knew that the seventh defendant was not a shareholder of Buzzle and it was on notice that the seventh defendant was not to be a party to the Merger Deed or the Payments Deed, unlike Liu, who was aware of the nature of the transactions proposed by reason of his meetings with Arthur Andersen and as a party to the Merger Deed and the Payments Deed. 219 Neither the financial nor the legal adviser were asked to sign certificates which certified that there had been an explanation of the transactions within the Merger Deed or the Payments Deed. If those Deeds had been the subject of advice, the seventh defendant would have been informed of Buzzle's obligations to pay the stock cash component of the purchase price by 31 October 2000 and its obligations otherwise in respect of the cash component in relation to things other than stock. He would also have been given advice that the Resellers had directed Buzzle to pay the amounts referred to in clause 4.5(d) of the Payments Deed and, more importantly, that Buzzle and the plaintiff could agree that the payment for the stock cash component could be made otherwise than in accordance with clause 4.5(d). The seventh defendant would have been advised that Buzzle was to commence its trading life with obligations to pay the Resellers the purchase price as referred to in those Deeds. Mr Davis also emphasised the provisions of clause 4 of the Payments Deed whereby money could be "swept", as he put it, to the Resellers. 220 The evidence that I allowed the seventh defendant to re-open his case to call was in an affidavit sworn on 5 September 2002. It contained the following relevant evidence: 5. It has been explained to me by Mr Bush that Apple argue that the guarantee which I signed was wide enough in its terms to include moneys which were previously owed by the various businesses prior to the set up of Buzzle. Mr McNab did not explain to me that the guarantee which I signed was wide enough to include moneys which were owed by companies other than Buzzle. If this information had been given to me I would not have signed the guarantee. 6. From my limited understanding I believe that the guarantee which I was signing was for debts of Buzzle to Apple which might be incurred after the date of the guarantee. I understood that Buzzle would be starting its operations with a fresh start and would not have any prior liabilities. 221 This evidence was not challenged by any requirement for the seventh defendant to be present for cross-examination (tr. 1124). Mr Newlinds submitted that the evidence in paragraph 6 of the seventh defendant's affidavit demonstrates that he understood what he was guaranteeing. In respect of paragraph 5 of the affidavit, Mr Newlinds submitted that the seventh defendant had misunderstood the evidence and further submitted that it was not the way that the plaintiff "put the case". Mr Newlinds also relied upon the certificates in respect of the independent legal and financial advice. 222 Mr Newlinds submitted that there was no difference between Buzzle purchasing the stock from the plaintiff direct or via the Resellers. Buzzle had to obtain its stock so it could commence to trade at the date of the Merger. He submitted that the Resellers could have returned the stock to the plaintiff, then Buzzle could have ordered it from the plaintiff and it could have been delivered to Buzzle and invoiced direct. It was submitted that one way or another Buzzle was going to have to purchase stock and pay for it and the seventh defendant knew that he would be liable for such debts if they were not paid by Buzzle. 223 On a reasonable reading of paragraphs 5 and 6 of the seventh defendant's affidavit, I understand that he would not have signed the Guarantee if he had known that Buzzle had prior liabilities, excluding the amounts it had to pay for the supply of stock in the ordinary course of business. It is one thing to understand that you are guaranteeing the debts incurred in the ordinary course of business, but it is a very different matter if the debts incurred by Buzzle were debts for the sale of the Resellers' businesses to it, admittedly for some stock but certainly for things other than stock, which Buzzle had agreed to pay "for the benefit of Apple" and had agreed to pay on certain terms. 224 Those terms were not disclosed to the seventh defendant prior to signing the Guarantee. This was a Guarantee in which it was stated that the plaintiff was supplying to Buzzle a trade credit facility. In not ensuring there was independent legal and financial advice in relation to the Merger Deed and the Payments Deed that governed Buzzle's obligations "for the benefit of Apple", the plaintiff is taken to have been aware of the real risk that the seventh defendant would not receive an adequate explanation of the Guarantee. 225 In Behan v Obelon Pty Ltd [1984] 2 NSWLR 637 Samuels JA, with whom Glass JA agreed, discussed the requirement and extent of the creditor's disclosure to a proposed guarantor. His Honour referred, at 638, to the formulations of the duty of disclosure in Commercial Bank of Australia Limited v Amadio & Anor (1983) 151 CLR 447 and the fact that "all formulations confine it to unexpected facts or unusual features" present in the transaction between the creditor and the debtor, of which the surety is unaware. His Honour said at 639: … I take the principle discussed to apply generally to creditors and intending sureties, whether or not the creditor is a bank, and to amount to this. A contract of guarantee is not one of utmost good faith, and the creditor is not under a general duty to disclose material facts to the intending surety. But the creditor is bound to disclose anything in the transaction between creditor and debtor which puts the debtor in a position which the surety would not naturally expect. The law has thus imposed upon the creditor party to a contract of guarantee a limited duty of disclosure. 226 The seventh defendant could not naturally expect that Buzzle would be restricted in its ordinary business operations until the Apple Debt was paid off. He would not naturally expect that there would be a debt of $15.2 million, a proportion of which had to be paid by Buzzle by 31 October 2000. Buzzle did have "prior" liabilities of which the seventh defendant was not made aware. I accept the seventh defendant's unchallenged evidence that, had he been informed that Buzzle had prior liabilities, he would not have signed the Guarantee. 227 Although perhaps inelegantly worded, I am also satisfied that paragraph 5 of the seventh defendant's affidavit is a reasonable expression of what the position was under the Merger Deed and the Payments Deed. Under clause 4.5(d), there was a direction to Buzzle to pay the amounts under clause 4.5(a) which in turn referred to clause 6.5(a). The amounts were debts of Buzzle to the Resellers but to be paid for the benefit of the plaintiff. The direction to pay made Buzzle liable for the debts of the Resellers. As the seventh defendant put it, the Guarantee was wide enough to include moneys which were owed by companies other than Buzzle. I accept his unchallenged evidence that, had he known that this was the case, he would not have signed the Guarantee. 228 I am satisfied that on the unchallenged evidence of the seventh defendant he should be discharged from his liability under the Guarantee. By reason of this finding in relation to the seventh defendant, it is now only necessary to consider the balance of the claims in relation to Liu. The CRA Claim 229 In opening Mr Hayes QC said that Liu's case turned on a "thimble" and: Given the 13th defendant does not claim any disadvantage, he is an intelligent, quiet, sophisticated man with business experience, given he received certain financial and legal advice at the time, given he was aware from his own business experience and what he was told by Mr Pascoe there are always risks and he had certain obligations to himself, given the week after he signed up the guarantee the due diligence reports were by then available. (tr. 287) 230 The Cross-Claim alleges that the Guarantee was "unjust" within the meaning of the CRA. Having regard to the concession made about Liu's attributes it seems to me that some of the particulars pleaded in support of this allegation are unsustainable. The first of those is that the plaintiff had materially more bargaining power than Liu. I disagree. Liu essentially had the whip hand in relation to the negotiations in respect of the purchase of Mac's Place. He knew that the Merger partners were effectively dependent upon him coming in to rescue Mac's Place to facilitate the Merger going ahead. He demonstrated his experience in negotiations throughout the discussions in August 2000. On more than one occasion, he threatened to walk away from the negotiations when speaking with Donald Hartono and Likidis. This tactic was to his advantage in negotiating the purchase price of Mac's Place. It caused the offering of a sweetener in the form of a transfer to him, or his company, of two parcels of real property worth approximately $1 million at no cost to him. His skills as a negotiator and quite sophisticated businessman remained with him at the time of the Merger. He had the power to refuse to go forward with the Merger if the terms were not to his satisfaction. I am not satisfied that the plaintiff had materially more bargaining power than Liu. 231 The second matter relied upon by Liu is an allegation that it was not reasonably practical for him, or his company, to negotiate for the alteration of, or to reject, any of the provisions of the Guarantee. Liu was given advice by Mr Ford about the Guarantee and in fact asked a number of questions relating to interest and expenses. One aspect of Liu's case in respect of the impracticability of negotiating any changes to the Guarantee was that at the time that he signed it he did not have financial information about the other Resellers. I do not accept that evidence in the light of the Minutes of 5 September 2000 (Ex. L). Liu's evidence in cross-examination was that he understood the Guarantee (tr. 330). This, combined with his obvious business acumen and well-honed negotiating skills, leads me to conclude that it was not impractical for him, or his company, to negotiate for the alteration of, or to reject any of, the provisions of the Guarantee. 232 The next allegation made in the Cross-Claim was that the terms of the Merger Deed and the Payments Deed, in particular the group of documents that were executed at the time of the Merger, were intended to, and/or were likely to, and/or did, have the effect of increasing Liu's indebtedness under the Guarantee. Liu had legal and financial advice in respect of the Merger documents. It is also clear that negotiations occurred in respect of the definition of "Apple debt" in the Payments Deed. On 13 September 2000 Ms Law wrote to the Resellers advising that the amendments they had proposed, except for the definition of Apple Debt, were accepted. Liu had taken legal advice in respect of the terms of the Guarantee and even if the allegation were true, which has not been proved, Liu understood that he was liable for Buzzle's debts pursuant to those Deeds and Guarantee. There are no particulars in respect of this allegation and it seems to me that it is not a ground upon which I could find that the Guarantee was unjust within the meaning of the CRA. 233 The next allegation is that the Guarantee was unjust because at the time Liu signed it he did not know, and there was no way that he could have known: (1) that Buzzle was to take on a $7 million debt to the plaintiff, formerly the debts of the Resellers to the plaintiff, or (2) that Buzzle's operations were likely to be curtailed because the Resellers could not afford to repay their debts to the plaintiff. This allegation is linked to a further allegation that in the absence of clear and informed consent, it would not be in the public interest to enforce guarantees that permit those in whose favour the guarantees are given, to acquire or transfer debts from other parties and thereby bring them within the ambit of the guarantee. 234 In the light of my findings above in relation to the defences raised dealing specifically with the $7 million for stock, the first ground must fail. I am also satisfied that the second ground must fail. Liu had all the due diligence reports and other financial documents available to him for him to make an assessment of this matter. This is dealt with in more detail in the misleading conduct claim. 235 It was also claimed that the purported transfers were an alteration as to the nature of Buzzle's obligations to the plaintiff and were positive acts done by the plaintiff to prejudice the Guarantors, such that it would be unfair to the Guarantors and would warrant the setting aside of the Guarantee in its entirety. The positive acts in making the payments totalling $4.7 million to the plaintiff were not acts done by the plaintiff. They were acts performed by Buzzle, through its directors, of which Liu was one. There was no alteration of Buzzle's obligations. Clause 6.5(b) of the Merger Deed provided that if the directors formed the view that Buzzle had adequate cash flows to pay the Resellers the cash component attributable to things other than stock prior to the float then it could make those payments. Buzzle decided to make those payment to the plaintiff for and on behalf of the Resellers rather than paying them to the Resellers. For the reasons I have given in dealing with this matter under the defences to the Guarantee Claim, this ground of Liu's Cross-Claim must fail. 236 Liu's CRA claim is dismissed. The Code Claim 237 The Cross-Claim filed on behalf of Liu and Aircent alleges that the plaintiff and Buzzle entered into "a written agreement", the written parts of which included: (a) the Apple Reseller Agreement; (b) the Apple Agency – Addendum; (c) the AppleCentre Addendum; (d) the Apple Higher Education Agency Addendum; (e) the Apple K-12 Education Agency Agreement; (f) the Associate Reseller Program Agreement; (g) the Service Provider Agreement; (h) the Supplemental Agreement; (i) Apple's Business Policies and Practices Manual; (j) Apple's AppleCentre Criteria; and (k) Apple's K-12 Business Policies and Practices Manual (par 30A). 238 It is alleged that "the Agreement" is a franchise agreement within the meaning of reg 4 of the Code and that the plaintiff breached the Code by failing to provide to Buzzle the disclosure document required under the Code. It is also alleged that the Reseller Agreement executed by Aircent at the time of the purchase of Mac's Place in August 2000 was a franchise agreement within the meaning of reg 4 of the Code and that the plaintiff failed to provide the disclosure document to Aircent in breach of the Code. 239 It is alleged that these breaches amount to a breach of s 51AD of the TPA and that such conduct was unconscionable in breach of s 51AC of the TPA. Liu claims that but for the breaches of the Code he would not have participated in the Merger nor would he have signed the Guarantee (par 30Q). The Code 240 The definition of a "franchise agreement" in reg 4 of the Code provides as follows: 4. Meaning of "franchise agreement" (1) A "franchise agreement" is an agreement: (a) that takes the form, in whole or part, of any of the following: (i) a written agreement; (ii) an oral agreement; (iii) an implied agreement; and (b) in which a person ("the franchisor") grants to another person ("the franchisee") the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and (c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol: (i) owned, used or licensed by the franchisor or an associate of the franchisor; or (ii) specified by the franchisor or an associate of the franchisor; and (d) under which, before starting business or continuing business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example: (i) an initial capital investment fee; or (ii) a payment for goods or services; or (iii) a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or (iv) a training fee or training school fee; but excluding: (v) payment for goods and services at or below their usual wholesale price; or (vi) repayment by the franchisee of a loan from the franchisor; or (vii) payment of the usual wholesale price of goods taken on consignment; or (viii) payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement. 241 A "franchisor" includes a person who grants a franchise and a person who otherwise participates in a franchise as a franchisor. A "franchisee" is defined as a person to whom a franchise is granted and includes a person who otherwise participates in a franchise as a franchisee (reg 3). 242 Before entering into a franchise agreement and within three months after the end of each financial year after entering into such an agreement, a franchisor is required to create a document known as a "disclosure document" for the franchise in accordance with Division 2.1 of the Code (reg 6(1)). If the franchise business has an expected annual turnover of $50,000 or more, the disclosure document is required to be in accordance with Annexure 1 to the Code and must be signed by a director or an executive officer of the franchisor (reg 2). 243 The Code states that the purpose of the disclosure document is to give to a prospective franchisee information from the franchisor "to help the franchisee to make a reasonably informed decision about the franchise" and to give a franchisee current information from the franchisor that is material to the running of the franchise business (reg 6A). A prospective franchisee is defined as a person who deals with a franchisor for the right to be granted a franchise (reg 3). 244 A franchisor must also give to a prospective franchisee a copy of the Code with the disclosure document at least fourteen days before the franchisee enters into a franchise agreement or makes a non-refundable payment to the franchisor or an associate of the franchisor in connection with the proposed franchise agreement (reg 10). 245 The franchisor is precluded from entering into a franchise agreement unless the franchisor has received from the prospective franchisee a written statement that the prospective franchisee has "received, read and had a reasonable opportunity to understand the disclosure document" and the Code (reg 11). The franchisor must also receive from the prospective franchisee signed statements that the prospective franchisee has been given advice about the proposed agreement by an independent legal or business adviser or an independent accountant, or has been told about the kind of advice that should be sought but has decided not to seek it (reg 11(2)). 246 The franchisee is entitled to terminate a franchise agreement within seven days after the earlier of either entering into the agreement or making any payment under the agreement (the cooling off period). If the franchisee terminates the agreement within the cooling off period, the franchisor must within fourteen days return all payments made by the franchisee under the agreement but may deduct reasonable expenses if the expenses or their method of calculation has been set out in the agreement (reg 13). 247 Annexure 1 to the Code provides that on the first page of the disclosure document the franchisor must provide details of its name, business or company number, address and phone number, together with the signature of the franchisor and the date of preparation of the disclosure statement. The first page also contains advice to the prospective franchisee including the length of the cooling off period, the prudence of preparing a business plan and a suggestion to obtain independent advice. 248 The franchisor is required to provide personal details together with the names of persons who are likely to have management responsibilities for the franchisor's business operations in relation to the franchise. The franchisor is also required to give a summary of the relevant business experience in the last ten years of each person about whom detail is provided. The franchisor must provide details of current proceedings brought by a public agency against it, relevant to the franchise in Australia, in which there was alleged a breach of the franchise agreement, contravention of trade practices law, contravention of the Corporations Act, unconscionable conduct, misconduct or an offence of dishonesty. The franchisor is also required to provide detail of certain proceedings under the Workplace Relations Act 1996, the Industrial Relations Act 1996 (NSW) and the Industrial Relations Act 1999 (Qld) together with other details including convictions for serious offences and bankruptcies in the previous ten years. 249 Other relevant matters required to be included in the disclosure document as set out in Annexure 1 to the Code include the following: 6. Existing franchises (6.1) Number, sorted by State, Territory or region, of: (a) existing franchise businesses; and (b) existing franchisees; and (c) businesses owned or operated by the franchisor in Australia that are substantially the same as the franchise. (6.2) For each existing franchisee: (a) business address, if this is not the franchisee's residential address; and (b) business phone number; and (c) year when the franchisee started operating the franchised business. (6.3) However, if there are more than 50 franchises, the franchisor may instead give details under item 6.2 for all franchisees in the State, region or metropolitan area in which the franchise is to be operated. (6.4) For each of the last 3 financial years and for each of the following events – the number of franchised businesses for which the event happened: (a) the franchise was transferred; (b) the franchised business ceased to operate; (c) the franchise agreement was terminated by the franchisor; (d) the franchise agreement was terminated by the franchisee; (e) the franchise agreement was not renewed when it expired; (f) the franchised business was bought back by the franchisor; (g) the franchise agreement was terminated and the franchised business was acquired by the franchisor. (6.5) The franchisor is taken to comply with item 6.4 if the franchisor supplies details as far as the franchisor is aware that relate to events that happened before 1 July 1998. 9. Supply of goods or services to a franchisee (9.1) For the franchisor's requirements for supply of goods or services to a franchisee – details of: (a) any requirement for the franchisee to maintain a level of inventory or acquire an amount of goods or services; and (b) restrictions on the acquisition of goods or services by the franchisee from other sources; and (c) ownership by the franchisor or an associate of the franchisor of an interest in any supplier from which the franchisee may be required to acquire goods or services; and (d) the obligation of the franchisee to accept goods or services from the franchisor, or from an associate of the franchisor; and (e) the franchisor's obligation to supply goods or services to the franchisee; and (f) whether the franchisee will be offered the right to be supplied with the whole range of goods or services of the franchise; and (g) conditions under which the franchisee can return goods, and to whom; and (h) conditions under which the franchisee can obtain a refund for services provided by the franchisor, and from whom; and (i) whether the franchisor may change the range of goods or services, and if so, to what extent; and (j) whether the franchisor, or an associate of the franchisor, will receive a rebate or other financial benefit from the supply of goods or services to franchisees, and whether any rebate or financial benefit is shared, directly or indirectly, with franchisees. 10. Supply of goods or services by a franchisee (10.1) For the franchisor's requirements for supply of goods or services by a franchisee – details of: (a) restrictions on the goods or services that the franchisee may supply; and (b) restrictions on the persons to whom the franchisee may supply goods or services; and (c) whether the franchisee must supply the whole range of the goods and services of the franchise. 13. Payments (13.1) Prepayments If the franchisor requires a payment before the franchise agreement is entered into – why the money is required, how the money is to be applied and who will hold the money. (13.2) The conditions under which a payment will be refunded. (13.3) Establishment costs Details of the range of costs to start operating the franchised business, based on current practice, for the following matters: (a) real property, including property type, location and building size; (b) equipment, fixtures, other fixed assets, construction, remodelling, leasehold improvements and decorating costs; (c) inventory required to begin operation; (d) security deposits, utility deposits, business licences, insurance and other prepaid expenses; (e) additional funds, including working capital, required by the franchisee before operations begin; (f) other payments by a franchisee to begin operations. (13.4) For item 13.3, the details for each payment must include: (a) description of the payment; and (b) amount of the payment or the formula used to work out the payment; and (c) to whom the payment is made; and (d) when the payment is due; and (e) whether the payment is refundable and, if so, under what conditions. (13.5) For item 13.4, if the amount of the payment cannot easily be worked out – the upper and lower limits of the amount. (13.6) Other payments For each recurring or isolated payment payable by the franchisee to the franchisor or an associate of the franchisor or to be collected by the franchisor or an associate of the franchisor for another person: (a) description of the payment; and (b) amount of the payment or formula used to work out the payment; and (c) to whom the payment is made; and (d) when the payment is due; and (e) whether the payment is refundable and, if so, under what conditions. (13.7) For item 13.6, if the amount of the payment cannot easily be worked out – the upper and lower limits of the amount. (13.8) If 2 or more of items 13.1, 13.3 and 13.6 apply to a payment, the information required by those items in relation to that payment need be set out only once. 15. Franchisor's obligations (15.1) Summary of the conditions of the franchise agreement that deal with obligations of the franchisor (or references to the relevant conditions of the franchise agreement, if attached), including: (a) an obligation to provide training: (i) before the franchise business starts; and (ii) during operation of the franchised business; and (b) any obligation that continues after the franchised business ceases to operate. 16. Franchisee's obligations (16.1) Summary of the conditions of the franchise agreement that deal with obligations for a franchisee (or references to the relevant conditions of the franchise agreement, if attached) for the following matters: (a) site selection and acquisition; (b) requirements for starting the franchised business; (c) development of the site, premises, vehicles and equipment; (d) training: (i) before the franchised business starts; and (ii) during the operation of the franchised business; (e) opening the franchised business; (f) complying with standards or operating manuals; (g) * * * * * * (h) warranties and customer service; (i) territorial development and minimum performance criteria; (j) maintenance and appearance of premises, vehicles and equipment; (k) insurance; (l) marketing; (m) indemnities and guarantees; (n) participation requirements for the franchisee or its directors, management or employees; (o) records and reports; (p) inspections and audit. 250 Section 51AC(1)(a) of the TPA provides that a corporation must not, in trade or commerce, in connection with the supply or possible supply of goods or services to a person, other than a listed public company, engage in conduct that is, in all the circumstances, unconscionable. The Court may have regard to the requirements of any applicable industry code in deciding whether the corporation's conduct is unconscionable (s 51AC(3)(g)). Section 51AD provides that a corporation must not, in trade or commerce, contravene an applicable industry code. The Code applies to a franchise agreement entered into on or after 1 October 1998 (reg 5(1)). There is no issue in this case that the plaintiff did not provide a disclosure statement to Liu or Aircent. 251 There are few decided cases in relation to the Code. However the principles that emerge from the decided cases in respect of the operation of the Code are: (1) that the franchise must arise from the terms of the agreement: Subway Systems Australia Pty Ltd v Thorpe [2000] QSC 099, unreported, Muir J, 28/4/2000; and (2) the elements of the definition of "franchise agreement" in the Code are cumulative: Agro Holdings Ltd v Flexi-Coil (Australia) Pty Ltd [1999] FCA 1658, unreported, Nicholson J, 26/11/1999. The fact that a Court may have regard to the requirements of any applicable industry code in deciding whether a corporation has engaged in conduct that is unconscionable under s 51AC has been said to enlarge the concept of unconscionability beyond the equitable notion of unconscionability, or what was referred to as "equitable or unwritten law unconscionability": Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253. Unconscionability under s 51AC may be understood to be conduct that is clearly unfair or unreasonable, showing no regard for conscience and/or is irreconcilable with what is right and reasonable: Hurley v McDonald's Australia Ltd (2000) ATPR 41-741. Was there a single agreement? 252 The first question for decision in this claim is whether these Agreements and other documents as pleaded in paragraph 30A of the Cross-Claim form a single agreement. Even if they do not, the Agreements need to be analysed to decide whether any of them are franchise agreements such as to attract the operation of the Code. The Reseller Agreement 253 Each of the Resellers, or their nominee, had previously been a party to a Reseller Agreement with the plaintiff in respect of the business operated by that Reseller before the Merger. Aircent had signed a Reseller Agreement at the time of the purchase of Mac's Place on or about 29 August 2000. The plaintiff required Buzzle to enter into a Reseller Agreement and completion of the Merger Deed was dependent upon its execution (cl 2.1). 254 By Agreement entitled "Apple Reseller Agreement" (the RA) (Ex. K; p. 1580 and Ex. 1; p. 532) the plaintiff appointed Buzzle as an "Authorised Apple Reseller to sell Products, and to provide support to customers during the term". The "term" was from the date of the RA, 14 September 2000, until termination in accordance with clause 16.9. There were three Addenda to the RA: (i) the Apple Agency – Addendum (the Agency Addendum) (Ex. 1; p. 542); (ii) the AppleCentre – Addendum (the Centre Addendum) (Ex. 1; p. 564) and (iii) the Apple Higher Education Agency Addendum (the Education Addendum) (Ex. 1; p. 570). The RA provided that it was intended that the RA and the Agency Addendum were to be read together and if any term of the RA was inconsistent with the Agency Addendum, the terms of the Agency Addendum were to prevail (cl 1.4). 255 The RA defined an "Authorised Apple Reseller" as "a person who is authorised by Apple to resell specified Apple-branded products" and/or hardware and software manufactured by third parties and distributed by the plaintiff as identified in the "Apple Price List" (cl 1.1 & 2.1). Buzzle's appointment as an Authorised Apple Reseller was "non-exclusive" and it was not granted any specific territory, geographical area or particular market (cl 2.1). Clause 2.2 provided: 2.2 Apple reserves the right, at any time without notice and with no liability to any person, to: (a) appoint a distributor or other person to fulfil its obligations under this Agreement; (b) appoint other Authorised Apple Resellers; and (c) make direct sales to any person. 256 Clause 2.6 provided: 2.6 Reseller is an independent contractor and has no power or authority to bind Apple. Nothing in this Agreement creates a relationship such as employer-employee, franchisor-franchisee, partnership or joint venture. 257 Under clause 2.7 Buzzle acknowledged and agreed that: (a) any charge, mortgage or guarantee previously provided to Apple as security for the obligations of Reseller will be security for all amounts outstanding from time to time under this Agreement; (b) if any charge or mortgage includes a definition of "Transaction Document", this Agreement will be a Transaction Document for the purposes of such charge or mortgage; and (c) if any guarantee includes a definition of "Guaranteed Money", all amounts outstanding from time to time under this Agreement will be Guaranteed Money for the purposes of such guarantee. 258 Clause 3 referred to Buzzle's "Scope of Authority" to sell products and to provide technical support to customers in relation to the products. Clause 3.2 provided that Buzzle was not authorised to, and was prohibited from, servicing, maintaining and repairing the products unless Buzzle had entered into an agreement with the plaintiff authorising it to do so. 259 Clause 4 was entitled "Reseller's Obligations" and provided: 4.1 Reseller must: (a) promote, sell and support the Products and achieve and maintain a level of customer satisfaction in accordance with the Business Policies and Practices Manual; (b) provide Apple with relevant Reseller information, documents and records reasonably requested by Apple; (c) promptly notify Apple in writing of any suspected Product Defect or safety problem; (d) determine its own resale prices (any recommended resale prices provided by Apple are suggestions only); (e) place Customer orders on Apple by means of ePO; and (f) at its option, enter into: (i) an agreement with Apple authorising Reseller to service, maintain and repair the Products or; (ii) an agreement with an Apple Authorised Service Provider for the provision of service, maintenance and repair of Products on Reseller's behalf. 4.2 Apple or its nominee will have the right upon reasonable notice to inspect any Authorised Location at any time during regular business hours to verify Reseller's compliance with the terms and conditions of this Agreement and/or any Apple program. 260 Clause 5.1 authorised Buzzle to display the "Apple Marks" and the designation "Authorised Apple Reseller" solely in connection with its promotion of, or support and service capabilities for, the products and in accordance with the Business Policies and Practices Manual (the Manual) and any other written policies of the plaintiff in effect from time to time. "Apple Marks" were defined as the trademarks, service marks and names belonging to or licensed to the plaintiff, including the "Apple" trademark and the Apple logo (cl 1.1). Buzzle agreed that it recognised the great value of the publicity and goodwill associated with the Apple Marks and acknowledged that such goodwill was for the exclusive benefit of, and belonged to, the plaintiff (cl 5.4). 261 Under clause 7.1 the plaintiff was required to provide the products to Buzzle at the "reseller buy price". That term was defined as the "buy price specified in the Apple Price List which is inclusive of GST" (cl 1.1). The "Apple Price List" was defined as "the list of prices of the Products for sale by Apple to Authorised Apple Resellers, which may be varied by Apple from time to time without notice" (cl 1.1). The plaintiff was entitled to increase the Reseller Buy Price so that such increase would apply to the balance of any outstanding order (cl 7.2). Buzzle was entitled to take the benefit of any "price protection policy" which the plaintiff may have had in place from time to time and which it reserved the right to vary at any time without notice (cl 7.3). "Price Protection Policy" was defined as: any policy for the provision of a benefit to Authorised Apple Resellers for the reduction in the wholesale price of Products (other than ABR Products) held in Reseller's stock, as detailed in the Business Policies and Practices Manual. 262 Clauses 7.4 to 7.8 dealt with GST and any other taxes that may have been imposed. The plaintiff was entitled to increase "all amounts payable under this Agreement" to sufficiently cover any GST liability. Clause 7.5 provided in part that the plaintiff "will be entitled to invoice, and receive payments from Reseller, in respect of the amounts payable under this Agreement, as increased in accordance with this clause". 263 Clause 8 provided as follows: 8. Terms 8.1 If payment for the Products is not made in full by Reseller to Apple within 30 days of the date of the invoice, or such other period notified by Apple, Apple may charge interest on the unpaid balance of the purchase price. Interest will be calculated on a daily basis by an amount Apple certifies is sufficient to compensate it for funding the unpaid balance at a rate equal to two percentage points above the 90 day bank bill rate published on the last business day of each calendar month. 8.2 If Reseller breaches any of its obligations to Apple under this Agreement or any other agreement, Apple may recover all monies owing by Reseller as a debt. 8.3 From time to time Apple may provide to Reseller price discounts and rebates which will reduce the price to Reseller of goods and services supplied pursuant to this Agreement or otherwise. All such discounts and rebates will be treated by the parties as inclusive of GST. 264 Title and risk of loss to all products passed to Buzzle at the plaintiff's shipping location (cl 10.1). Buzzle was required to keep in force and effect for each Authorised Location for the term of the RA a sufficient general liability insurance policy with a "reputable insurance company" with limits of coverage not less than $5 million for personal injury and $5 million for property damage or $5 million combined single limit (cl 11.1). Buzzle was also required, if requested by the plaintiff, to take out a comprehensive insurance policy to cover its liability to an amount specified by the plaintiff with respect to any act, omission or breach for which it may have become liable to indemnify the plaintiff in respect of any unauthorised statement, warranty or representation made or given by Buzzle or its employees and any negligent act, omission or breach of the RA by Buzzle (cl 1.2 & 13.3). 265 Clause 17.6 provided: This Agreement and the Business Policies and Practices Manual form the entire agreement of the parties about their subject matter. 266 Either party was entitled to terminate the RA without cause on thirty days written notice to the other party or such other period as agreed between the parties. The plaintiff was entitled to terminate the RA on the appointment of a receiver to Buzzle (cl 16 and sch 4). Upon the expiration or termination of the RA for any reason, the parties were required to comply with any obligations or requirements, or exercise any rights they may wish to exercise as set out in the Manual. Further, Buzzle was required to immediately cease use of the Apple Marks, and otherwise to discontinue representing to the public and trade that it was an Authorised Apple Reseller (cl 16.3). The Agency Addendum 267 Buzzle was identified in the Agency Addendum as the Agent and was appointed as the plaintiff's "agent to sell and supply the Products under the Supply Contracts, and to provide support, to Customers on behalf of Apple during the Term". Clause 1.4 provided: "This Addendum forms part of the Apple Reseller Agreement". The term "Supply Contracts" was defined to mean contracts for the supply of, or authorising Apple to sell, Products to any customer or customers (cl 1.1). "Customers" were defined as "any Education Custom, Government Customers and Key Customers" (cl 1.1). The Schedules to the Addendum listed the various customers. 268 Buzzle's Scope of Authority as "agent" was to promote the products to customers, accept orders from customers, install products and provide technical support to customers in relation to the products (cl 2.1). Buzzle was prohibited from servicing, maintaining or repairing the products unless it had entered into an agreement with the plaintiff authorising it to do so (cl 2.2 (b)). 269 Clauses 6 and 7 provided: 6. Invoices 6.1 The following methods of invoicing as detailed in the Business Policies and Practices Manual may be adopted for supplies made under this Agreement as directed by Apple from time to time: (a) Apple will invoice the Customer at the price specified in the Supply Contract; (b) Agent will invoice the Customer on behalf of Apple at the price specified in the Supply Contract; or (c) Apple will invoice Agent and Agent will invoice Customer in accordance with the procedures detailed in Clause 9. 6.2 If Product is invoiced under Clause 6.1 (a), Agent must not invoice the Customer itself for goods supplied on Apple's behalf. If Agent's administration system requires an invoice to be raised to ship goods, the invoice must be a nil value invoice. 6.3 If Product is invoiced under Clause 6.1(b), Agent must issue a valid tax invoice (in accordance with the A New Tax System (Goods and Services Tax) Act 1999, related Acts and Regulations) to Customer for and on behalf of Apple. 7. Payment 7.1 If Apple adopts the method of invoicing set out in Clause 6.1 (a), Agent must ensure the Customer pays to Apple direct (and not to Agent) any outstanding amount due and payable to Apple direct within 30 days of the date of the invoice. 7.2 If Apple adopts the method of invoicing set out in Clause 6.1(b) or 6.1(c), the Customer may pay any amount due and payable to Agent or to Apple direct. If paid to Agent, Agent must account to Apple for the gross sale proceeds including in the GST within 30 days or in accordance with such other trading terms separately agreed. If paid by the Customer to Apple direct, payment must be made within 30 days of the date of the invoice. Apple will accept payment and promptly credit Agent's account. 7.3 Agent must pay any amount due and payable to Apple under this Addendum within such period of time as Apple and Agent separately agree. 7.4 If Agent fails to comply with Clause 7.1 or 7.2, Apple reserves the right to charge interest on the unpaid balance of the invoice. Interest will be calculated on a daily basis by an amount Apple certifies is sufficient to compensate it for funding the unpaid balance at a rate equal to two percentage points above the 90 day bank bill rate published on the last business day of each calendar month. 7.5 If Agent has complied with Clause 7.3 and the Customer has not paid the unpaid amount within 60 days from the date on which Agent informs Apple of the unpaid debt, Apple will credit Agent's account with an amount representing the unpaid amount minus any penalty referred to in Clause 7.4 and any Commission paid or credited to Agent in respect of the unpaid amount. 270 Under this Addendum Buzzle was entitled to commission for products sold to various customers ranging between 4% and 8% (cl 1.1 & 8 and sch 2). Buzzle was also entitled to any rebate in accordance with any rebate scheme operated by the plaintiff (cl 8.2). The Centre Addendum 271 Under the Centre Addendum, Buzzle was appointed as "an AppleCentre Reseller to sell Products and provide support to Customers during the Term". Clause 1.3 provided: "This Addendum forms part of, and is intended to be read together with, the Apple Reseller Agreement" and also stated that the terms of the Addendum were to prevail if there was any inconsistency with the RA. Clause 2.5 was in identical terms to clause 2.6 of the RA. 272 Under this Addendum, Buzzle was granted the right to use and display the name "AppleCentre" and refer to itself as an Apple Higher Education Agent at the Authorised Locations, conditional upon it complying with a number of obligations including compliance with the AppleCentre Criteria and any advertising or promotional policies decided upon by the plaintiff from time to time (cl 4.1). Buzzle was also required to maintain a show room of the size specified by the plaintiff and dedicated to Apple Products; display within the show room the range of products specified by the plaintiff from time to time; employ sales staff in the number specified by the plaintiff; have the necessary facilities for sales staff to place orders in the manner specified by the plaintiff; employ on-site technical support staff, at least one of whom was to be a level 1 trained technician; ensure that the AppleCentre Location was readily identifiable by means of exterior and interior signage displaying in a prominent fashion the name "AppleCentre"; and comply with any other AppleCentre Criteria which the plaintiff decided upon from time to time (cl 4.2). 273 Buzzle was also required to incorporate the name "AppleCentre" into its trading name but "in such a manner as to indicate clearly the independent ownership of the Reseller's business as a distinct and separate entity from Apple and Apple Computer Inc (cl 4.3). It also had an obligation to conduct its business so as to "bring credit upon all and any other AppleCentre Resellers" and to co-operate with the plaintiff and other AppleCentre Resellers in the implementation of any advertising and promotional activities featuring the AppleCentre program, AppleCentre Resellers and/or AppleCentre Locations (cl 4.4). The Education Addendum 274 Under this Addendum Buzzle was appointed as the plaintiff's "agent to sell and supply the Products under the Supply Contracts, and to provide support, to customers on behalf of Apple during the Term". The term "Customers" was defined to mean any Higher Education Customers that are set out in Schedule 7 to the Addendum (cl 1.1). 275 Clause 1.4 provided "this Addendum forms part of the Apple Reseller Agreement" and stated that its terms prevailed in the event of any inconsistency with the terms of the RA. This Addendum contained similar terms in respect of Invoices (cl 7) and Payment (cl 8) to those found in the Agency Addendum. Commissions were set between 6% and 8% and rebates were also available in terms similar to those provided for in the Agency Addendum (cl 10). The Manual 276 Only part of the Manual is in evidence: Section 2 entitled "Channel Standards"; Section 4(A) entitled "Ordering, Receiving, Returning Apple Product"; and Section 5 entitled "Price Protection". Section 2 of the Manual included a section entitled "Apple Reseller Standards and Guidelines". This section referred to the objectives and the markets to be addressed, including consumers, schools, higher education, publishing and multimedia enterprise and government. It also referred to the financial information that was to be provided to the plaintiff annually or as requested. That included a detailed profit and loss statement with a pre-tax profit of at least 2 per cent of revenue. The detailed balance sheet was to include working capital ratio at a minimum 1.25:1, quick ratio at a minimum of 0.7:1; debt to equity ratio at a minimum 3:1; accounts receivable turnover at a minimum 12 times per annum; and inventory turnover at a minimum 10 times per annum. 277 It also included the following: Location and Premises · The Reseller's facility should be positioned in a location that services the needs of the markets being addressed by that Reseller. · Easily accessible by customers · Carry out customer service and support, with access to an adequately equipped Repair Centre. Refer to the Service of Apple Products section for the various Service Providers and Levels. · Minimum facility requirements are those following: - Reception and Waiting Area - Demonstration Area - An area set aside for private demonstrations The additional facility requirements will be needed where they are deemed necessary to service the markets being addressed by the Reseller. · The Reseller will maintain the public areas (entry, reception, demonstration and where applicable, training, seminar, meeting rooms and repair counter areas) in a professional manner so that they are ready at all times to meet the needs of their customers. · The Reseller's premises will at all times be clean and uncluttered. This includes all counter and workstation areas, which must be free of clutter, including excessive displays of brochures, software, etc. Proper maintenance will include cleaning of carpet, counter surfaces, windows, walls, replacement of light bulbs, etc. maintained to the highest standards. · Any demonstration and training room equipment will be configured properly at all times with connection and power cables hidden from sight, and equipment ready for use. Whenever possible, rolling demonstrations should be used when the equipment on display is not being used for demonstration purposes. 278 Under the heading "Product Support & Service Offering", the Manual stated that the Reseller "will offer a level of service and support that is consistent with the requirements detailed in the Service of Apple Products section". It also stated that the Reseller "will employ the necessary personnel that is consistent with the requirements detailed in the Service of Apple Products section". That section of the Manual is not in evidence. The Manual also included procedures to be used when taking orders from Government customers. It noted that the Reseller was acting as the plaintiff's agent when dealing with Government customers and was required to comply with the terms and conditions of the applicable GITC contract. That contract is not in evidence. 279 The Manual also referred to the appointment of an agent by the Reseller and noted the requirement that the agent had to be linked to the Reseller via a "Principal and Agency Agreement". There is no such agreement in evidence. The Reseller was required to forward to the plaintiff an application form completed by the proposed agent together with a copy of the Principal and Agency Agreement and a brief summary covering the reasons for the proposed appointment. This part of the Manual also provided: Training The training of the Agent is the responsibility of the Reseller. Apple Computer Australia will not accept any training requests directly from an Agent. Where the Reseller considers it necessary for the Agent to attend any course, the Reseller may apply on the Agents behalf to Apple and the Reseller is responsible for any costs/charges. 280 The Manual also referred to the Reseller's appointment of Associate Resellers. It referred to the Associate Resellers as adding another tier to the distribution channels for Apple product. It listed the criteria for approval of Associate Resellers and what was expected to be in an Associate Reseller business plan. The proposed Associate Reseller was required to sign a business plan and agreement before submission to the plaintiff. The Manual refers to the requirement for the Associate Reseller to develop sufficient knowledge of the products so as to be able to explain in detail to potential customers the differences between Apple products and its competitors' equipment. There is no reference in this section of the Manual to the way in which the Associate Reseller is to develop such knowledge. There is nothing in the RA in relation to the training of Buzzle employees, as opposed to agents or Associate Resellers. 281 Section 4(A) of the Manual included details of the methods by which Buzzle was to order products. This section noted that where the financial arrangement with the plaintiff required cash before delivery, orders had to be made at least 24 hours before shipment. It also referred to a 5%, or a minimum of $50, restocking fee which applied to: (a) confirmation orders not clearly marked 'confirmation'; (b) incorrect product codes quoted; (c) incorrect quantity quoted; and (d) duplication of orders. 282 In respect of the "Allocation and Consumption of Credit" and Buzzle's responsibilities in that regard, the Manual stated that two business principles were central to the development of the processes listed in this part of the Manual. They were stated to be: (1) the plaintiff's responsibility to supply the product; and (2) Buzzle's responsibility to have credit. The Manual stated that credit would be consumed at the time of the placement of the order. 283 This section of the Manual also included a part entitled "Finance Credits" which referred to the establishment of the credit limit for each "customer" and stated that it was the task of the credit department to ensure that the credit exposure on a customer's account did not exceed the established credit limit for that account. The credit controllers were to determine when a customer's orders needed to be restricted because of seriously overdue accounts for a balance over the credit limit. The following appeared in this part: Payment Terms Payment terms are net 30 days from date of invoice unless otherwise agreed by the Financial Services Manager. 284 This section also included steps that Buzzle should take before signing for any consignment including such details as checking that the number of boxes received agreed with the consignment note, checking that all boxes were actually part of the same shipment and checking that all boxes were free from visible signs of damage. 285 Section 5 of the Manual was entitled "Price Protection". In this section the Reseller was referred to as a "Channel". This section noted that the plaintiff would set a minimum acquisition figure on which price protection would apply and that in all cases Apple Marketing would determine which products would be price protected. The plaintiff was to notify the Reseller via the Web the day product prices reduced and indicate whether price protection applied. The Reseller was able to claim price protection for unsold stock held, such claim usually having to be made which within two weeks from the date of the price reduction. There are in evidence a number of documents entitled "Finished Goods Pricing & Margin Structure". These documents notified the Reseller of a new margin structure effective from specific dates and referred to rebates including Volume Marketing Rebates and Performance Incentives. 286 The RA, the three Addenda and the Manual together are to be construed as a single Agreement but the other Agreements are separate agreements and must be dealt with individually. I am not satisfied, as was submitted by the plaintiff, that by reason of all these agreements not forming the "written agreement" as claimed in paragraph 30A and following in the Cross-Claim, that the defendants' claim under the Code needs no further consideration. It is necessary to consider each agreement that has been proved to have been entered into to decide whether any of them are franchise agreements within reg 4 of the Code. I will now consider the question of whether the RA (including the three Addenda and the Manual) was a franchise agreement. Was the Reseller Agreement a franchise agreement? 287 Under the definition in the Code, there are a number of elements to a franchise agreement. The first is that it has to take the form, in whole or in part, of either a written agreement, an oral agreement or an implied agreement. There is no issue that this element is satisfied. The second element is that one party (the franchisor) grants to the other (the franchisee) a "right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested" by the franchisor. 288 The plaintiff submitted that although a right to carry on the relevant business was granted under the RA, it did not grant such a right to carry on the business "under a system or marketing plan substantially determined, controlled or suggested" by the plaintiff. It is submitted therefore that the second element contained in subparagraph (b) of the definition is not satisfied and thus, the RA was not a franchise agreement. 289 Although a number of terms are defined in the Code (reg 3), "system" and "marketing plan" are not defined. In these circumstances it is appropriate to give those terms their ordinary meaning in the context of the Code and the relationship between the plaintiff and Buzzle and/or Aircent. A "system" is a set of principles or procedures according to which the relevant business is operated. Alternatively it is an organised scheme or method pursuant to which the business is operated. A "marketing plan" is a detailed proposal for achieving the promotion or advertising of the plaintiff's products. (The New Oxford Dictionary of English, Clarendon Press, Oxford, (1998), pp. 1133, 1417 & 1883). 290 The question is whether the RA identified a system or marketing plan under which the relevant business was to be operated and if so, whether such system or marketing plan was substantially determined, controlled or suggested by the plaintiff. It is not whether such a system or marketing plan developed during the course of the relationship between the parties, it is whether the agreement can be construed as granting a right to carry on the business under such a system or marketing plan. 291 The term "Marketing Plan" is defined in the document in evidence entitled "Associate Reseller Program Agreement" referred to below. That definition refers to a document which sets out the means by which the Associate Reseller was to fulfil its obligations under the Associate Reseller Sales Agreement. This is not very helpful because the Associate Reseller Sales Agreement is not in evidence and, although the Associate Reseller Program Agreement envisages the Associate Reseller on-selling products supplied to it by the Reseller, the extent of its obligations are simply not known. 292 The RA does not define the term "marketing plan", however if one were to assume that it was to be a document which, as in the Associate Reseller Program Agreement, set out the means by which the Reseller was to achieve its obligations under the RA, then it is necessary to focus upon the Reseller's stated obligations in the RA. The first of those obligations appears in clause 4.1(a). It requires the Reseller to promote, sell and support the Products and achieve and maintain a level of customer satisfaction in accordance with the Manual. Those parts of the Manual that are in evidence, as described above, set out the means by which the Reseller is to order, receive and return products. It also sets out the means by which it is to establish the layout of the premises, including the requirement for a reception and waiting area, a demonstration area and an area set aside for private demonstrations. 293 The Manual also sets out the requirements for personnel and the way in which the credit limit will apply to the Reseller's account with the plaintiff. It also sets out the means by which the Reseller will be able to claim price protection. All of these matters, in my view, set out some of the means by which the Reseller will promote, sell and support the products. They also set out the means by which the Reseller will maintain a level of customer satisfaction. 294 The second obligation contained in clause 4.1(b) is that the Reseller is to provide the plaintiff with relevant information, documents and records reasonably requested by it. The system or plan by which this is to be achieved is in part set out in the Manual which details the requirement to produce a profit and loss statement and balance sheet on an annual basis or as requested. The Manual also requires the Reseller to produce a profit and loss statement with a pre-tax profit of at least 2 per cent of revenue. The Reseller is informed specifically what it has to do in respect of its obligations in clause 4.1(b). 295 Clause 4.1 also requires the Reseller to place Customer orders in a particular manner. This process is further detailed in the Manual and falls within the description "system", whereby the Reseller complies with its obligation under the RA. There is also the obligation for the Reseller to determine its own resale prices (cl 4.1(d)). Even in this respect, the plaintiff provides recommended resale prices to assist the Reseller by way of what are referred to as "suggestions only", for obvious reasons, however when viewed with the contents of those parts of the Manual that are in evidence, and specifically the sections on rebates and price protection, I am of the view that there exists within the RA a system under which the business is to be operated. 296 The Reseller was required to comply with the terms of the Manual and the Manual provided minute detail of how the Reseller was to operate the business. For instance, it was required to perform "rolling demonstrations" whenever possible; it was informed that it had to keep the premises clean and uncluttered; and, it was advised that its proper maintenance included cleaning of carpet, counter surfaces, windows, walls, replacement of light bulbs, etc, to the highest standards. All of these matters were part of the "system" by which the Reseller would achieve "customer satisfaction". The plaintiff was even entitled to inspect the Reseller's premises to verify that the Reseller was complying with the RA. 297 The process by which the Reseller was able to make claims for price protection was set out in detail in the Manual. It was up to the plaintiff's marketing section to decide which products were to be the subject of such protection. Once that was decided the Manual advised that the Reseller would be notified which products were price protected and would also be advised of the procedures by which the Reseller would be able to make the appropriate claim in respect of the products it then held. The plaintiff controlled these procedures or alternatively substantially determined them. There is no doubt that the plaintiff suggested these procedures. 298 The sections of the Manual that are in evidence, read with the terms of the RA and the Addenda, satisfy me that the right granted to the Reseller was a right to carry on the relevant business under a system substantially determined, controlled or suggested by the plaintiff. I am of the view that the second element in subparagraph (b) of the definition of franchise agreement in the Code is satisfied. 299 The third element of the definition is that the agreement provides for the operation of the business whereby it will be substantially or materially associated with the trademark, advertising or commercial symbol owned etc by the first party. There is no issue that this element is satisfied. 300 The fourth element, contained in subparagraph (d) of the definition, is that under the agreement, before starting business, Buzzle and Aircent, "must pay or agree to pay" an amount to the plaintiff including "for example": (a) a payment for goods or services; (b) a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or (c) a training fee or training school fee. Payments or agreement to make payments for goods and services at or below the usual wholesale price and payment of the usual wholesale price of goods taken on consignment are excluded from the fourth element contained in subparagraphs (d)(v) and (vii) of the definition. 301 Paragraph 25C(a) of the Cross-Claim alleged that under the RA, before starting business, Buzzle and Aircent were required to pay, or agree to pay, to the plaintiff, a fee, styled a "marketing fee", payable at the rate of 2% on the value of income to the plaintiff from AppleCentre stores conducted by Buzzle. In paragraph 25C(b) of the Cross-Claim a similar allegation was made in relation to a "training fee". It was submitted by the defendants that such a requirement satisfied the fourth element in subparagraph (d) of the definition of franchise agreement in the Code. 302 The plaintiff submitted that the terms of the definitions are clear, in that, before an agreement can be categorised as a franchise agreement, the agreement must require the party to make the payment or agree to make the payment before commencing business. It was submitted that there is nothing in the agreements whereby Buzzle or Aircent were required to make such a payment before commencing business. It was also submitted that there is nothing in the agreements whereby Buzzle or Aircent agreed to make such a payment. 303 The plaintiff submitted that the invoices evidence payments made in consideration of receiving a benefit during the term of the agreement and should not be construed as satisfying the fourth element in the definition. I agree with that submission. It must be a term found within the agreement itself to satisfy the fourth element of the definition of franchise agreement in the Code. 304 There was no evidence called and no reference to the alleged "marketing fee" in final submissions. There was however reliance placed upon Section 2 of the Manual in relation to the training of the Agent. The first sentence of that paragraph states: "The training of the Agent is the responsibility of the Reseller". The paragraph does not state that the Reseller agrees to pay to Apple an amount for a training fee or a training school fee. 305 The paragraph states that the Reseller is "responsible" for any costs or charges incurred in the training of the Agent, specifically if the Reseller considers it necessary for the Agent to attend "any course". It does not say that the "course" was to be conducted by the plaintiff. However it requires the Reseller to apply to the plaintiff to allow the Agent to attend "any course". The paragraph does not state that a training fee or a training school fee will be paid to the plaintiff. "Costs/charges" are said to be the Reseller's responsibility. It may be that the Reseller incurs costs in training the Agent itself, as the first sentence says is its responsibility. It may also be the case that the Agent, if appointed, receives a credit from the Reseller for the cost of the training. The Manual is silent as to the specific manner in which the training will occur. It may be that the Principal and Agency Agreement would be more specific in relation to such matters, however, as I have said, this is not in evidence. The Agency Addendum makes no reference to the training of the Agent. 306 There is reference to "training" in the Service Order Summaries in evidence (Ex. 15). It is apparent that in February 2001, $605 was charged to Buzzle for training of Newton Ferris, Garry Richards, Ross Kershaw, Daniel Ash, Peter Mason and Daniel Bourke on "Imac Selftrak". It is more probable than not having regard to the fact that there was no evidence of the appointment of any Associate Resellers or Agents, that these people were Buzzle employees. I agree with the plaintiff's submissions that these invoices are unable to be relied upon to satisfy the fourth element in the definition of "franchise agreement" in the Code. It must be in the agreement. This is also the position in respect of Liu's junior counsel's reliance in his written submissions in July 2002 upon an entry in an invoice of $99 in respect of software. 307 The fourth element in the definition is quite clear. There has to be a payment or an agreement to pay an amount to the plaintiff. The paragraph relied upon in relation to the training of the Agent, in my view, does not amount to an agreement to pay the plaintiff a training fee. I am of view that this paragraph in the Manual does not satisfy subparagraph (d) of the definition of franchise agreement in the Code. 308 Although the Cross-Claim referred only to the two aspects of "fees" referred to above, the defendant's final submissions referred to the payments agreed to be made by Buzzle and Aircent in broader terms. I should therefore deal with those matters. The plaintiff emphasised Clause 7.1 of the RA which provided that the plaintiff "will provide" products at the Reseller Buy Price and clause 8.1 which provided that "if payment for the Products is not made in full by Reseller to Apple within 30 days of the date of the invoice, or such other period notified by Apple, Apple may charge interest on the unpaid balance of the purchase price". The plaintiff submitted that these clauses could not be construed as requiring payment to be made before starting business or as an agreement to pay the plaintiff for goods and services. 309 The RA does not expressly state that Buzzle or Aircent agree to pay the plaintiff for the products it supplies. Under clause 8 the parties agreed that payment for product within 30 days would not be subject to any interest charge. They also agreed that if payment was not made within 30 days of the date of the invoice then the plaintiff was entitled to charge interest on the unpaid balance of the purchase price. The implication from these terms of the RA is that Buzzle and Aircent agreed to pay the plaintiff for the products it supplied. Such an implication is reasonable and equitable, is necessary for business efficacy and is something that in the circumstances is so obvious that it goes without saying: BP Refinery (Westernport) Pty Limited v Shire of Hastings (1977) 180 CLR 266 at 282-283; Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347. 310 However such an implication is not necessary by reason of the Manual forming part of the RA and the fact that its terms included the paragraph in section 4A referred to above that "payment terms are net 30 days from date of invoice unless otherwise agreed by the Financial Services Manager". The terms of the Addenda are also relevant for consideration because they form part of the RA. Clause 7.3 of the Agency Addendum and clause 8.3 of the Education Addendum required Aircent and Buzzle to pay any amount due to the plaintiff "under this Addendum" within such a period of time as the plaintiff and Aircent and Buzzle agreed separately. The amounts due to the plaintiff under those Addenda could only be in relation to the products supplied to Aircent and Buzzle. 311 These provisions were in the form of a requirement that the franchisee "must" pay the amount due and payable. However I am satisfied that by reason of the execution of the agreement such clause would amount to an agreement by Aircent and Buzzle to pay the amount due and that such agreement was made "before starting business". The next question is whether that agreement to pay the amount due was an agreement to pay for goods and services at or below the usual wholesale price. If Aircent or Buzzle agreed to pay the usual wholesale price for the goods and services or an amount below that price, such agreement is excluded from the fourth element of the definition in subparagraph (d) of the Code. 312 Mr Hayes QC submitted that there is no basis on the evidence for concluding that the Resellers were paying or agreed to pay the "wholesale price". It was submitted that it was for the plaintiff to call evidence relevant to this matter and that it declined to call the only person who could have given evidence as to whether it was the wholesale price that was to be paid (tr. 828). Assuming for the moment that the onus is on the opposing party to a claim under the Code, to establish that any payment fell within the exclusion in subparagraph (d) of the definition of franchise agreement, I would have to be satisfied that there is no evidence from which to conclude that the amount was the wholesale amount, before any adverse inference could be made. 313 The RA contained definitions of "Apple Price List" and "Price Protection Policy" which have been extracted earlier in this judgment. Those definitions in the context of the RA as a whole lead me to the conclusion that the agreement made by Aircent and Buzzle to pay for the goods and services was an agreement to pay the wholesale price of those goods and services. This conclusion is reached having regard to the terms of the definition of "Price Protection Policy" which refers to the reduction in the "wholesale price" of the products. What the franchisee was able to do was to protect that price, on application, when such price had been reduced further by discounting and the like imposed by the plaintiff. It would hardly make commercial sense for Aircent or Buzzle to agree to purchase products from the plaintiff at the retail price. In saying this I have taken into account the caution in relation to the application of commercial good sense referred to by Finkelstein J in Fitzwood (supra). 314 By reason of the conclusion that I have reached that it was the wholesale price that Aircent and Buzzle agreed to pay, the fourth element in subparagraph (d) of the Code is not satisfied because such an agreement is excluded in subparagraph (d)(v) of the definition in the Code. The RA, including the three Addenda and the Manual, is not a franchise agreement within the meaning of that term in the Code. 315 Although executed copies are not in evidence, there are in evidence copies of other unexecuted agreements that the defendants submit Buzzle entered into with the plaintiff. These included the Apple K-12 Education Agency Agreement (the K-12 Agreement) (Ex. 1; p. 581) and the AppleCare Service Provider Agreement (the Service Provider Agreement) (Ex. 1; p. 599). There is also the Associate Reseller Program Agreement (The Associate RA) (Ex. 1; p. 594) and the Supplemental Agreement (Ex. 1; p. 614). The next series of questions that arise relate to whether those agreements were franchise agreements. Was the K-12 Agreement a franchise agreement? 316 Buzzle was appointed as an Authorized K-12 Education Agent to "promote and supply the Products and to provide support to Customers on behalf of Apple" during the term of the Agreement. As with the RA, Buzzle was appointed as a non-exclusive agent solely for the limited purpose of promoting sales of the Products on the plaintiff's behalf. Similarly the plaintiff reserved its right, at any time without notice, to make direct sales to any person (cl 2.2). Under clause 4.1, Buzzle agreed to: (a) conduct its business in a manner that reflects favourably on the good name, goodwill and reputation of Apple and the Products; (b) promote, sell and support the Products and achieve and maintain a level of customer satisfaction in accordance with the K-12 Education Business Policies and Practices Manual. 317 The K-12 Education Business Policies and Practices Manual (the K-12 Manual) is not in evidence. Buzzle was required to appoint an Apple K-12 Education Consultant approved by the plaintiff who was required to complete any and all of the certified K-12 Training Courses conducted by the plaintiff from time to time (cl 5.1). Buzzle was also required to use all reasonable efforts to ensure that the Consultant attended all information and update meetings and training courses conducted by the plaintiff from time to time (cl 5.1(d)). It was also required to submit Business Plans to the plaintiff from time to time for the plaintiff's approval and comply with obligations set out in "the Statement of Work", which is not in evidence. The Statement of Work was defined as: … the statement contained in the K-12 Education Business Policies and Practices Manual which describes the responsibilities and obligations of Agent to promote Products, services and solutions to Customers on Apple's behalf and which statement may be varied by Apple from time to time, with reasonable notice. 318 This agreement does not form part of the RA. It is a separate agreement and requires separate analysis to decide whether it is a franchise agreement. The copy in evidence is not executed and there is no evidence by the defendant that it was executed. However counsel for the plaintiff seemed to concede that all the documents in evidence were in the form of the documents that have been executed and that he had been conducting the case on that basis (tr. 827). Although the extent of this concession is somewhat loose I will assume that this document was executed. 319 This Agreement contained clauses 11, "Invoices", and 12, "Payment", in similar terms to clauses 7 and 8 of the Education Addendum and clauses 6 and 7 of the Agency Addendum. Consistently with my finding in respect of the amount agreed to be paid under the RA, I am satisfied, for the same reasons, that the amount was the "wholesale" amount, and thus does not satisfy the fourth element in subparagraph (d) of the definition in the Code. 320 Clause 22.6 provided that: "This Agreement and the K-12 Education Business Policies and Practices Manual form the entire agreement of the parties about their subject matter". The defendant did not tender the K-12 Manual. Whether there is a requirement or agreement to make a relevant payment contained within that Manual is simply not known. However it is reasonable to assume that if there was such a provision the defendant would have tendered it. 321 As the elements in the definition of franchise agreement in the Code are cumulative, it is unnecessary for me to consider the other three elements in respect of this agreement because it does not satisfy the fourth element. I am of the view that the K-12 Agreement was not a franchise agreement. Was the Service Provider Agreement a franchise agreement? 322 Under the Service Provider Agreement, Buzzle was appointed as an Authorised Apple Service Provider on a non-exclusive basis. Once again, the plaintiff reserved the right to provide services and support directly to any person (cl 2.4). Under this Agreement, Buzzle was required to comply with the requirements set out in the Service Programs Manual, which is not in evidence. Clause 4.2 provided as follows: 4.2 Service Provider must in accordance with the requirements set out in the Service Programs Manual provide Service and Support to the level of accreditation selected and at a minimum must meet the following requirements: (a) perform Service and Support on the Products identified in the Service Programs Manual even if such Products are not currently manufactured by AppleCare and adhere to the Service and Support requirements set out in the Service Programs Manual for each Product; (b) sell and use Service Stock only for providing Service and Support on the Products under this Agreement; (c) maintain a sufficient number of Apple-trained and certified serviced technicians to effectively perform timely Service and Support, including on-site warranty service where required; (d) maintain and update all Service Tools designated by AppleCare as specified in the Service Programs Manual for all Products for which it performs Service and Support and keep its Service and Support personnel apprised of all such revisions and updates. Such information and materials shall be deemed confidential and treated in accordance with the confidentiality provisions set out in Section 6 of this Agreement; (e) comply with all required Service and Support administrative and reporting procedures; (f) honour the Apple Warranty, perform or provide all work required thereunder on AppleCare's behalf, accept reimbursement from AppleCare for such work performed according to AppleCare's then-current rates, and make no other charge for such Service and Support, (g) obtain all necessary certifications, registrations and licenses and comply with all existing and future federal, state and local laws and regulations in performing the Service and Support authorised under this Agreement; and (h) provide Service and Support within the response times, if any, set out in the Service Programs Manual, but in no event longer than the maximum time provided by applicable federal, state and local laws and regulations. 323 Clause 7, "Prices", and clause 8, "Terms", are in similar terms to clauses 7 and 8 of the RA except that in this Agreement there is reference to the "Service Price List" instead of the "Reseller Buy Price" in the RA. 324 "Service Selection Plan" was defined as "the document attached to this Agreement as Annexure "A" which identifies: (a) the level of Service and Support that Service Provider elects to perform in respect of the Products; and (b) how Service Provider will meet Service and Support requirements it has elected not to perform itself; which document is reviewed annually by" the plaintiff (cl 1.1). Annexure A to the Service Provider Agreement (Ex 1; p 612-613) was entitled "Service Selection Plan" with options for either a Gold-Level or Silver-Level Service Provider. The Gold-Level Service Provider was required to pay a yearly subscription of $1,400 for the Service Provider's Package, whereas the Silver-Level Service Provider was required to pay a yearly subscription of $1,150 for the Service Provider's Package. 325 Clause 4.1(f) of the RA provides that the reseller "at its option" must enter into an agreement with the plaintiff authorising the reseller to service, maintain and repair the products. The plaintiff submitted that the reseller is therefore under no obligation to enter into such an agreement. Although there is no specific evidence of the execution of such an agreement on 14 September 2000 by Buzzle or in August 2000 by Aircent, the plaintiff assumed that such were executed for the purposes of its submissions. 326 Annexure A to the Service Provider Agreement refers to the definition of "Service Selection Plan" meaning the document annexed to the Agreement identifying the level of service and support the Provider is to perform in respect of the products. There is reference to the subscription of $1400 for the gold level service and to the lesser amount for the silver level. Although there is no express provision stating that payment is to be made or is to be agreed prior to starting the business, the plaintiff submitted it is tolerably clear that the ordinary construction of the agreement requires payment of the yearly subscription, the amount of which depends on the level of service authorised. Unlike the earlier agreements, there is no evidence upon which it could be concluded that this amount was a wholesale amount. This was not a product that was to be on-sold to customers. Accordingly, the plaintiff assumed for the purposes of its submissions that the payment was a payment within the meaning of subparagraph (d) of the definition of franchise agreement in the Code. 327 However the plaintiff submitted that this agreement does not satisfy the second element of the definition. It is submitted that there is no provision in the Service Provider Agreement requiring that the business of supplying the services be under a system or marketing plan substantially determined, controlled or suggested by the plaintiff. It is submitted that the only obligations imposed upon the service provider are to satisfactorily complete the training (cl 4.1) in which event the service provider is authorised to provide the defined services in support (cl 3.1) and in respect of which the service provider must perform services and support on the relevant products as identified in the relevant Service Programs Manual (cl 4.2). 328 Clause 5.1 of the Service Provider Agreement authorises the service provider to display the Apple Marks. It is submitted however that no part of the agreement contained any provision capable of being described as a "system or marketing plan" in the relevant sense. Indeed it is submitted that marketing, other than the authority conferred to display the Apple Marks, is not addressed at all in the Service Provider Agreement. It is submitted therefore that this agreement does not satisfy the second element and cannot be categorised as a franchise agreement. 329 This Agreement is a separate agreement and needs to be analysed separately to decide whether it is a franchise agreement. Clause 17.6 provided that: "this Agreement and the Service Programs Manual form the entire agreement of the parties about their subject matter. If any term of this Agreement is inconsistent with the terms of the Service Programs Manual, the terms of this Agreement will prevail". The defendant did not tender the Service Programs Manual. 330 Unlike the analysis of the RA in which I was able to review the terms of the Manual, I am restricted in this instance to analysing the terms of the Agreement without the benefit of the Service Programs Manual. The Service Provider's obligations are set out in clause 4 of the Agreement and include an obligation to perform service and support on the products identified in the Service Programs Manual and to adhere to the requirements set out in that manual for each product (cl 4.2 (a)). Although one might assume or infer from this statement that there may well be a system or marketing plan contained in the Service Programs Manual, I am of the view that it is inappropriate to conclude that there was such a system or plan in the absence of the Service Programs Manual. I am not satisfied that the Agreement discloses such a system or plan and accordingly I am of the view that the second element in subparagraph (b) of the definition of franchise agreement in the Code is not satisfied. I am of the view that the Service Provider Agreement was not a franchise agreement. Was the Associate Reseller Program Agreement a franchise agreement? 331 Under the Associate RA the plaintiff consented to the Reseller's supply of products to an Associate Reseller for the purpose of resupply to Customers (cl 2). The Reseller was obliged to ensure that the Associate Reseller was supplied with adequate stock of all marketing and technical information, including brochures and point of sale material, necessary for the Associate Reseller to carry out its obligations under the Marketing Plan (cl 7). "Marketing Plan" was defined as "a document prepared by Associate Reseller and approved by Apple which sets out the means by which Associate Reseller will fulfil its obligations under the Associate Reseller Sales Agreement" (cl 1.1). 332 As I have already said, there is no executed copy of this Agreement in evidence and there is in this instance, notwithstanding the rather loose concession made by counsel for the plaintiff referred to earlier, an inference that this Agreement was not executed. That inference arises in part from the terms of the document in which the definition of "Associate Resellers" refers to the persons listed in Schedule 2 of the Agreement (cl 1.1). Schedule 2 does not list any persons. There is no Marketing Plan in evidence nor is there any evidence of Buzzle having sought the consent of the plaintiff to appoint an Associate Reseller. There is also no Associate Resellers Sales Agreement in evidence. In these circumstances I am not satisfied that I could conclude on the balance of probabilities that this Agreement was executed. 333 Even if this Agreement had been executed, there is nothing within the copy document in evidence that satisfies the fourth element of the definition of franchise agreement in the Code. That matter alone puts an end to any claim that this was a franchise agreement. Was the Supplemental Agreement a franchise agreement? 334 The copy of this document in evidence refers to three parties: the plaintiff as "Apple"; Buzzle as "Reseller"; and Buzzle Ltd as "Guarantor". Recital B states that, "Guarantor has requested that Apple enter into this Agreement for the purpose of modifying the operation of the Agreements, individually and collectively, as herein set out, which Apple has agreed to do, on the terms and subject to the conditions of this Agreement". 335 This Agreement reserved to the plaintiff the right to change distribution arrangements and/or to increase or decrease the number or description of the products available to the Reseller (cl 2.1 & 2.2). Clause 2.3 provided: No special relationship between Apple and Reseller or Guarantor Reseller buys and sells in its own name and on its own account as an independent contractor and will have no power, nor represent that it has any power, to bind Apple or to assume or create any obligation all responsibility, express or implied, on behalf of Apple or in Apple's name. This Agreement shall not be construed as constituting Reseller and/or Guarantor and Apple as partners or creating any other form of legal association or arrangement which would impose liability upon Apple. 336 "Effective Date" was defined as the date of the Agreement (cl 1.1). The time of the agreement was from the effective date until terminated by Apple at any time by notice in writing to the Reseller, specifying a day of termination not less than 30 days after the date of such notice. However if the shares in the Guarantor were listed by the ASX within the six months of the effective date, then the term of the agreement was to commence on the effective date and continue until the first anniversary of the date upon which the shares were first listed (cl 3.1). 337 The Agreement provided that if the shares in the Guarantor were listed, the plaintiff could not terminate the RA, the three Addenda, the K-12 Agreement, the Associate RA and the Service Provider Agreement (referred to as the "Principal Agreements") without cause (cl 3). This Agreement required the Reseller and Guarantor to provide financial information, sales information and other information to Apple at various times (cl 4). 338 Clause 6 provided that the Guarantor guaranteed the due performance and observance by the Reseller of its obligations under this Agreement and under each of the Principal Agreements. Even if this Agreement was executed, it does not satisfy at least the second element of the definition of franchise agreement in the Code: there is nothing within it to suggest that a right was being granted to carry on a relevant business under a system or marketing plan substantially determined, controlled or suggested by the plaintiff. I am of the view that this Agreement was not a franchise agreement. 339 Even if these conclusions are not correct, the failure to comply with a mandatory Code is but one factor that the Court may have regard to in deciding whether the plaintiff is guilty of unconscionable conduct within the meaning of s 51AC of the TPA. It is relevant to look to the claims made by the defendants in respect of the failure by the plaintiff to comply with the Code, assuming for the moment that the Code is applicable. 340 The defendants submitted that the plaintiff would have had to disclose the $15 million dollar debt. It is the case that the plaintiff included that amount in the schedule to the Payments Deed. Not only was the amount of the debt included but also the particulars of the amounts owed by each Reseller. It was also submitted that the plaintiff would have had to disclose the terms of the transfer of the Resellers' stock to Buzzle and the payment arrangements in respect of the stock. This was also done in clauses 3.1 and 6.5 of the Merger Deed and clauses 3.2 and 4.5 of the Payments Deed. 341 The defendants also submitted that the plaintiff would have been required to disclose its intentions if there was non-payment of the debt. The plaintiff's intention was patently clear from the terms of the Guarantee. A further submission was made that the plaintiff would have been required to disclose due diligence reports in a timely fashion and that this was not done. Although Liu claimed in his evidence that this was not done, it is obvious from the terms of the Minutes of the meeting of the Resellers of 5 September 2000, at which Liu was present, that at the meeting each Reseller was provided with a profit and loss statement and balance sheet as at 30 June 2000 and due diligence reports of all Resellers except GM Computers, which was subsequently distributed (Ex. L). It also has to be remembered that Liu was a qualified accountant well versed in reading and understanding such documents. 342 The next submission was that there was a "last-minute" referral of Liu and Aircent to a solicitor prior to the sale of Mac's Place on 29 August 2000. There was legal representation and separate legal advice about which no complaint could be made in this case. Legal advice was obtained prior to Liu and Aircent entering into the Merger and the signing of the Buzzle RA and other Agreements. At no stage was it suggested that there was any lack of understanding about any of the documentation or any of the business plans and processes being put in place for the Merger. 343 It was submitted that the plaintiff was driven by its desire to have its debt repaid and to obtain better security without any regard to its obligations as a franchisor or its duty of disclosure. It was submitted that if the plaintiff had recognised that this was a franchise "it would probably have been all too hard support the merger". This submission does not rely upon any evidence and is unsustainable. It was further submitted that if the plaintiff had made "timely disclosure" Liu would not have bought into Mac's Place as part of the process of the Merger. I do not accept that submission. Liu had all the due diligence reports, the profit and loss statements and the balance sheets as referred to in the minutes. He was a qualified accountant at the time and perhaps better placed than many of the other Resellers to understand the financial statements of each of the other businesses. I am satisfied that the disclosure in this case was not wanting and that the pace at which the Merger was happening was driven by the Resellers rather than by the plaintiff. 344 Even if the Code applied, the facts of this case do not persuade me that the plaintiff's conduct was clearly unfair or unreasonable or showed no regard for conscience. The Code Claim is dismissed. Misleading conduct case 345 After referring to his client's attributes of sophistication, intelligence and business experience Mr Hayes QC submitted in opening (tr. 287): He, nevertheless, was fundamentally misled for two reasons: one, because he was told things that were directly wrong and misleading and because he was not told things in a timely way, making all together inadequate any disclosure, albeit in quite general terms, that occurred. That together with Apple's knowledge of the true stated financial problems, represents just about all of the argument of facts on the Trade Practices Act claim. 346 As I have also said earlier, this case took a rather unusual route to conclusion. During the various hearings, the claims made by Liu about what he was and was not told have not been attended to with a great deal of precision. That seems to be in part a product of late changes in legal representation, amendments to pleadings and preparing a case, which has its complexities, in a rather contracted timeframe. There are however problems that have arisen by reason of Liu's evidence at trial. Although final submissions seemed to restrict the nature and quantity of the representations alleged, there was no express abandonment of the pleaded representations. It seems to me therefore, that the most prudent course in this case is to deal with the representations as pleaded in the amended Cross-Claim filed on 27 November 2002. 347 The Cross-Claim alleges (par 8) that at the meeting on 21 August 2000, Likidis, on behalf of the plaintiff, made a number of representations to Liu, on behalf of Aircent (the 21 August representations). The alleged representations are: (a) Mac's Place had a sales turnover of $27 million and was a very important Apple Channel Partner (thereby inferring that it was one of the most successful Apple resellers); (b) In Apple's opinion the second cross-claimant was likely to make a $21 million profit from his $2.6 million investment, that is a profit of $18.4 million; (c) The continued operation of Mac's Place was critical to the plaintiff's decision to approve the Merger of the 6 Apple Resellers as Buzzle; (d) Buzzle would be fully supported by the plaintiff; (e) The debt owed by Mac's Place to the plaintiff would be transferred to Buzzle to the extent of the unsold stock of Mac's Place; (f) Buzzle would be publicly listed on the ASX within a short period of time; (g) Even if the float of Buzzle did not proceed, Aircent would be part of the strong business and that everything would still work out; (h) Mac's Place was a good value investment and would achieve a good return on the investment. 348 The Cross-Claim alleges (par 8) that further representations are to be implied (the implied representations) from the 21 August representations The alleged implied representations are: (a) The plaintiff knew of no facts, matters or circumstances, including as to its intentions in respect of the merged businesses or Buzzle, why Buzzle would not be able to trade successfully and make a net profit, or why it would not be possible to float Buzzle, or which were likely to impact adversely on Buzzle's profitability; (b) The plaintiff knew of no facts as to the net asset position of the 6 Apple Resellers or of Buzzle and knew of no facts as to its security position for those debts which was likely to adversely affect the profitability of Buzzle or the prospects of successfully floating Buzzle; (c) The plaintiff knew of no facts, matters or circumstances that made it unlikely that Liu/Aircent would achieve a profit of $18.4 million on the $2.6 million investment; (d) The plaintiff had agreed to and intended to do all things reasonably necessary to cause Buzzle to trade profitably, and to assist the float of Buzzle; (e) The plaintiff did not intend to call up or enforce any securities held by it in respect of the indebtedness of Buzzle; (f) That all facts, matters and circumstances known to the plaintiff relevant to Liu's/Aircent's decision to enter into the transactions had been disclosed to Liu/Aircent; (g) The only due diligence report that had been received by the plaintiff was in respect of Mac's Place (this is implied from the provision of the Mac's Place due diligence but no other); (h) That the level of debt of Buzzle was and would be sustainable and would not adversely affect Buzzle's ability to trade profitably or the public float of Buzzle; (j) Arthur Andersen's valuation report as to the financial position of Buzzle, the prospect for a public float of Buzzle and the value of the businesses was correct in the plaintiff's opinion, was based upon correct factual assumption to the plaintiff's knowledge and the plaintiff knew of no fact, matter or circumstance which would render it inaccurate or unreliable. 349 It is alleged that in respect of implied representations (a) to (g) and (j) the implication arises from the fact that the plaintiff did not comment upon or qualify the 21 August representations, and otherwise remained silent about matters which ought to have attracted comment and/or analysis. In respect of implied representation (h) the implication is alleged to arise from the 21 August representations and from the fact that Likidis referred to the Arthur Andersen valuation report. It is alleged that the representations and the implied representations and silence amount to misleading or deceptive conduct under the TPA and the FTA. The 21 August Representations 350 (a) Mac's Place had a sales turnover of $27 million and was a very important Apple Channel Partner (thereby inferring that it was one of the most successful Apple resellers) and (h) Mac's Place was a good value investment and would achieve a good return on the investment Liu claimed in his affidavit evidence that Likidis said: "you know you are buying an Apple business with annual sales turnover of $27 million". Likidis denied this in his affidavit evidence. Liu's affidavit evidence is that the Mac's Place former owner, Mr Thompson, informed him at the meeting he had with him and Mr Hartono in early August 2000 that Mac's Place had a turnover of $27 million a year. The version of the conversation at the 21 August meeting given by Liu is that Likidis asked Mr Hartono what the Mac's Place turnover was the previous year and Mr Hartono responded: "$27 million". Liu claimed that it was after Mr Hartono said this that Likidis said the words "you know you are buying an Apple business with annual sales turnover of $27 million". 351 Mr Thompson, a witness called by Liu, gave evidence-in-chief that at the meeting on 21 August 2000 the turnover of $28 million, as he put it, would have been mentioned by both himself and Likidis (tr. 384). He said that to the best of his recollection the strengths of Mac's Place were discussed in terms of the seven stores, the $28 million turnover and the very high brand recognition in the marketplace (tr. 385). Mr Thompson had sworn an affidavit in which he said that he thought that Likidis had said that Mac's Place was a "high profile and successful reseller". In cross-examination Mr Thompson said that he understood that prior to the meeting Liu had read the due diligence report for Mac's Place and that the report disclosed the turnover of the business at $27 million or $28 million (tr. 390-391). 352 Mr Thompson gave evidence that Mac's Place was a high profile reseller and that it had been successful (tr. 391). They had only found out "suddenly", a week or two earlier, that it had the $3 million deficit (tr. 382-383). Before seeing the due diligence report, Mr Thompson understood Mac's Place to be a successful business (tr. 386). He did not have any understanding as to how the deficit had come about. He was absolutely horrified when he received the report and commenced his own investigation. He discovered that the stock on hand report that he had always relied on was based on an incorrect massive sum (tr. 386-387). He agreed that if Likidis had said that Mac's Place was a high profile and successful reseller, it was in the context of what was set out in the due diligence report (tr. 391). 353 Mr Shearer's recollection of the meeting was that although he was not "a hundred percent", Likidis did say "something along the lines" of Mac's Place being a high profile and successful reseller and that it had a turnover of $27 million (tr. 746). In cross-examination Likidis said he did not recall saying that Mac's Place was a high profile reseller (tr. 581). He did not recall "the mention" of a $27 million or $28 million turnover at the meeting and said "it would possibly have been" mentioned, however he denied that he "discussed" the "topic" (tr. 571). 354 From all this evidence I am satisfied that it is more probable than not that Likidis did mention the $27 million turnover and the fact that Mac's Place was a high profile and successful reseller. However I am also satisfied that these statements were made in the context of the due diligence report in relation to Mac's Place, the contents of which everyone at the meeting was acutely aware, in particular the net deficiency of $3.017 million. 355 The other matter that is relevant in respect of this representation is that Liu had already digested the contents of the due diligence report a number of days before the meeting and had informed Mr Hartono that the deficit was too big for him to be interested in proceeding with the purchase. The reason why he went to the meeting on 21 August was to hear about the "sweetners" that Likidis was going to offer him on the purchase price. He knew from his conversation with Mr Hartono, that if the two properties were included in the deal it would result in an effective discount of $1 million on the purchase price. 356 I am not satisfied that Liu placed any reliance upon Likidis' "mention" of the $27 million, nor the statement about Mac's Place being a high profile and successful reseller. He had the due diligence report and knew that the "black hole" of $3 million existed in Mac's Place. 357 (b) In Apple's opinion the second cross-claimant was likely to make a $21 million profit from his $2.6 million investment, that is a profit of $18.4 million Liu's evidence in respect of this representation is that at the 21 August meeting, Likidis said: "Wing, your investment in Mac's Place for $2.6 million will roughly give you about $21 million in return when Newco publicly lists on the ASX. Mac's Place is good value and you will achieve a profit of $18.4 million. That's not a bad return for six months". Liu also claims that Likidis said: "think of it this way, Wing, you will reap a reward of an $18.4 million return on your Mac's Place investment". 358 From the context in which Liu claimed this representation was made, it was Mr Hartono who claimed that it was Arthur Andersen's report that stated that Buzzle would be worth $113 million. The calculation of 18.5% of that figure gave a total of $20 million, less $2.6 million for the purchase price of Mac's Place, giving a figure of $18.4 million. Liu gave the following evidence in cross-examination: Q. What Mr Likidis said, if you are to be believed, is he simply said "Let's look at the value of the shareholding in total by reference to the Arthur Andersen report", correct? He did that, didn't he? A. Yes. Q. And then he said, "Now, what is your percentage of the shareholding going to be?" and you told him, correct? A. No, I didn't tell him. Q. Someone told him? A. He actually asked Donald what is my shareholdings. Q. And Donald told him? A. 18.5 per cent. Q. And then all he did was a mathematical calculation where he worked out what 18.5 per cent of the total value of the shares was and came up with a $22 million figure? A. He pointed to the valuation report, yes. Q. But it wasn't a valuation of the business, it was a valuation of the shares, correct? A. It was a very thick document with all the cash flow and part of the business plan and an earlier version of a broker's brief. And he said, "The valuation of the new company is $113 million. 18.35 per cent of that you entitled to" and that's, that came up with the figures of $21 million and "You investment in Mac's Place for 2.6 million you will reap $18.5 million profit". Q. You didn't believe, if he told you, that was a certain thing, did you? A. I believe him what he told me and also I believe there were risk involved. Q. All he told you, if he said it at all, was: "Look, if the float comes off and if Arthur Andersen is right, you will have 18.5 per cent of a very big company and it will be worth $22 million"? A. What he said was, "If the business, if the float doesn't go ahead, if the float doesn't go ahead you are still a part of a large business and Buzzle will be the largest Apple reseller in Australia and the business still growing". Q. Could you please focus on my question? A. Yes. Q. When he spoke to you about the $22 million being made from the $3 million, it was obvious that he was talking about the float? A. Yes, he was. Q. And you knew that the float was no sure thing, didn't you? A. I knew there are normal risk involved in any business. Q. And you knew there was extra special risks involved in floating a new company on the Stock Exchange, didn't you? A. And I knew there are risk involved in business. Q. And you knew that all Mr Likidis was doing was pointing out to you what Arthur Andersen's projections were, correct? A. No, that is not what he is pointing to me. Q. Just focus on the statement about making $22 million out of $3 million? A. Okay, that is what he said. Q. All he was doing was saying if Arthur Andersen's valuation is right and the float happens, your share of the value of the company will be $22 million? A. He didn't say if the Arthur Andersen report was right. … Q. Arthur Andersen had been retained by Buzzle and before Buzzle had been created by the various partners to give advice about the proposed float? A. That is what I understand. Q. They had done an enormous amount of work on that topic, hadn't they? A. From, yes, they have done a lot of work. Q. And they produced a very fat report that you referred to, correct? A. That's correct. Q. They were the experts on the float, weren't they? A. They were the project manager of the float. Q. And it was them that you relied on when you formed the opinion that there was some prospect of this float happening, correct? A. No, it is not what all that I relied on. Q. It was them you relied on when you worked out for yourself that if the float happened, your shareholding in Buzzle could be very valuable? A. Yes. (tr. 320–322) 359 Likidis denied that he said the words attributed to him by Liu at the meeting. He denied emphatically that he had ever seen the Arthur Andersen report. Mr Shearer's evidence was that he could not remember the Arthur Andersen report being present at the meeting on 21 August 2000 (tr. 716) and that it was not tabled at the meeting (tr. 731). Mr Shearer also denied that he had ever seen the Arthur Andersen report (tr. 731). He did have a recollection that there was a reference to the Arthur Andersen valuation at the meeting (tr. 731) and there was some discussion about the value of Liu's investment based on the Arthur Andersen valuation (tr. 732). He once again said he was not "a hundred percent sure" but that he thought that there was consensus at the meeting that "that's not a bad investment if that's what Arthur Andersen say is a return" (tr. 733). He agreed that someone said: "for $3 million Wing is looking to get an $18 million return in three months" but said that it could have been said by "one of a number of people". He said it came up in the meeting (tr. 733). Mr Shearer said: "we were working to the Arthur Andersen timetable" (tr. 734). It is commercial fact, at least for most of the commercial community, that if one makes an investment of $3 million and receives a return of $18 million in three months, or even 12 months, that such a return is a good one, or put another way, not a bad one. 360 Liu's own evidence taken together with Mr Shearer's evidence persuades me that even if such a calculation was performed at the meeting by Likidis, it was the Arthur Andersen report and the advice of those accountants upon which Liu relied in respect of the probable valuation of Buzzle when floated. The cross-examination of Liu extracted above really obviates the need for me to decide whether to accept Liu's or Likidis' version of the conversation at least on this aspect of the matter. Assuming that it was said, I am satisfied that it was said in reliance upon the proposed valuation by Liu's own advisers and a timetable for the proposed float. I am not satisfied that Liu relied upon such a representation as claimed. I am not satisfied that he understood Likidis was conveying to him that if he went into the purchase of Mac's Place he was going to make a profit of $18.4 million. He said he understood there were risks and in my view relied upon Arthur Andersen, not Likidis. 361 (c) The continued operation of Mac's Place was critical to the plaintiff's decision to approve the merger of the 6 Apple Resellers as Buzzle There is little controversy over this matter. What the plaintiff wanted was to ensure that it had adequate securities in respect of the merged business. Likidis admitted that if the problems in Mac's Place were not rectified before the Merger, the Merger would not have the plaintiff's "blessing" (tr. 585). It was not so much the continued operation of Mac's Place, but the payment of the creditors, including the plaintiff, prior to the Merger taking place, if Mac's Place was to be part of that Merger, that was critical to Likidis and to the plaintiff. 362 Liu's affidavit evidence was that when he telephoned Mr Hartono on 18 August 2000 and told him that he was not interested in proceeding because of what he had read in the due diligence report, Mr Hartono said: "if we can't fix Mac's Place, there will be no merger. This is a good opportunity to revive an Apple business and be part of the merger. Everything has been done for the merger". 363 There is no doubt that everyone at the meeting on 21 August 2000 understood that if the Merger was to go ahead, the Mac's Place problems had to be solved. There is nothing about this representation that is misleading or deceptive. It was a condition that had to be met if the Resellers wanted to treat with the plaintiff as Buzzle under a new Reseller Agreement. Far from misleading Liu, the plaintiff made it abundantly clear that it wanted to be protected with appropriate security and it wanted the problems within Mac's Place resolved. 364 (d) Buzzle would be fully supported by the plaintiff Mr Shearer said in evidence that the plaintiff, probably the Managing Director Ms Ryall, had said that the plaintiff would "support" the Merger. He said that this was said publicly and that it was probably reiterated by Likidis at the 21 August 2000 meeting (tr. 770). He said such statement was made "subject to all the securities going in place" (tr. 770). However, when it came to particularising what the term "support" meant Mr Shearer said that Buzzle was to have 45 days to pay its invoices and the plaintiff was supplying goods and services to Buzzle and advertising on television (tr. 773–774). When asked by Mr Hayes QC what if anything would be done differently in the plaintiff's relationship with Buzzle as opposed to its relationship with the Resellers individually, he said: "nothing in reality" (tr. 774). 365 Liu had some difficulty explaining what it was that the plaintiff was supposed to do, and did not do, to "support" the Merger. It was about this time in his evidence that Liu seemed to delay answering questions to give himself extra time to think of the answers. As this evidence was relied upon by the plaintiff in support of an attack on Liu's credibility, it is appropriate to set it out in full. He gave the following evidence (tr. 315 –318): Q. Apple did support the merger, didn't they, they agreed to it, correct? A. Yes. Q. They allowed the new company Buzzle to enter into a reseller agreement, correct? A. Yes. Q. They put out very positive press releases about the new venture, didn't they? A. Yes, they did. Q. They told anyone who asked them they were very upbeat and hopeful there would be a good, ongoing business, didn't they? A. Absolutely. Q. They supplied product when they were asked to, didn't they? A. Yes. Q. Is your definition of Apple failing to support the new business the fact that Apple insisted on being paid its invoices? A. Could you repeat your question again? Q. You don't suggest for a moment when Apple said they were supporting the merger that meant you didn't have to pay Apple? A. Oh, no, of course not. Q. So, what is it that Apple did that meant they didn't support the merger? A. Could you repeat the question please? Q. What didn't they do that they should have done in your eyes to support the merger? A. The intention of the merger was going to public listing and to float and they did not support until this time. Q. What does that mean, Mr Liu? A. To raise capital, to expand the internal, to open more shops and to recapitalise the business and to pay Apple's debt. Q. That was what the float was hoped to do, correct? To raise money from the public, to have some capital to expand, correct? A. That is the whole arrangement of merging the business and to be part of a float, yes. Q. I think we all understand that. What did Apple not do to support the float? A. Apple appointed a receiver on 31 March 2000. Q. Apple appointed a receiver because it was owed about $22 million by Buzzle and Buzzle wasn't paying its debts to Apple, that is why Apple appointed a receiver, correct? A. That's correct, yes. Q. Do you suggest that in Apple insisting that it be paid for the goods it sold to Buzzle that in some way amounted to not supporting the float? A. Can you repeat the question again please? Q. You don't really suggest, do you, that when Apple said that they would support the float that meant they didn't have to be paid the money Buzzle owed them, do you? A. Of course not. Q. You don't suggest for a moment that when Apple said they would support the float that meant they weren't entitled to appoint receivers or take such other course as they saw fit in the event of the Buzzle didn't pay its debts? A. Sorry, can you repeat the question again? Q. You suggest they are not allowed to appoint a receiver? A. Of course they are allowed to appoint a receiver. Q. So that did not fall into the category of not supporting the float, correct? A. Yes. Q. I have asked you three times, what is it that you say Apple did that amounted to it not supporting the float and at the moment your only answer has been it appointed a receiver in February, is that the position we are at? A. That's one of the reasons. Q. What other reasons are there, what did Apple not do that they should have done to support the float? A. They should have, they were, repaid program was put to Apple and they did not support it. Q. So, they should have accepted that they didn't have to be paid on time? A. No, there was a proposal for term payment that put forward to Apple and that was rejected. … Q. I'm trying to establish whether part of your case is because Apple said it supported the float, that somehow meant Apple was not entitled to be paid its invoices until the float happened? A. No. Q. I'm going to ask you this one last time … What is it that you say that Apple didn't do that they should have done to support the float? A. I'm sorry, can you give me one moment and can you ask the question again so I can answer? Q. What is it that you say Apple didn't do that it should have done to support the float? A. What Apple didn't do and they should have done to support the float. Can you repeat the question again please, Mr Newlinds? Q. What is that you say Apple didn't do that it should have done to support the float? A. Apple did not accept the payment plan that was put forward to them as the result of the transaction of the merger and that was from the proposal transferred to Buzzle. Q. Apple did not accept your proposal that it be paid on some delayed basis, is that it? A. No, well a repayment. Q. So Apple did not accept the repayment program. And that is what not supporting the float is all about, is it? A. Yes. 366 It seems to me that what the plaintiff did in January 2001, as recorded in Likidis' letter to Buzzle, was certainly to try to support Buzzle, and in so doing, try to support it for the purposes of its commercial development so that it might be in a position to float. It is however apparent that by the end of March 2001, there was little hope that the merged business could survive. A number of opinions have been expressed about the reasons for the failure of the business. Mr Thompson, who was employed as Buzzle's Director of Sales in charge of all sales in all stores, said that the accounting system, known as Navision, was an extremely poorly executed installation. He said that the company installing it was given an inadequate brief so that it was not able to understand the complexities, breadth and depth of Buzzle's business. He also said that there was inadequate time given to install and roll out the system and there was inadequate time given to the amount of hardware and bandwidth required to manage the system (tr. 393). His evidence was that the system did none of the things it was supposed to do, such as raise invoices, accept payments, raise purchase orders and manage the inventory (tr. 393). 367 Mr Thompson said that the most fundamental question that needed to be asked before stock was purchased, was how much of it was needed. By reason of the difficulties he described with Navision, the answer to that question was unable to be given (tr. 395). In addition to these problems, Mr Thompson said that Buzzle was adversely affected by the introduction of the GST and that the Olympics held in Sydney at about the date of the Merger snowballed those problems. Mr Thompson also said that he could feel the stores were empty, that the phones were not ringing and this had a very bad effect on staff morale (tr. 395). 368 There is no controversy about whether the plaintiff said it would "support" the Merger. However Liu has not established that the plaintiff did not offer its "support". I am not satisfied that the representation was misleading or deceptive. 369 I have referred earlier to the plaintiff's attack on Liu's credibility and its reliance upon the way in which he gave his evidence. It is appropriate at this point to refer to another aspect of his evidence upon which reliance was placed in this attack. In paragraph 46 of Liu's affidavit of 8 March 2002, he claimed he said to Likidis at the meeting of 21 August 2000: I have no knowledge of the Apple business and business risk associated to it, so my investment decision will be based on representations made by Apple for the reasoning to rescue Mac's Place. Does Apple give its full support to the merger and the float? 370 The plaintiff relied heavily upon Liu's extraordinary delay in answering questions in cross-examination about this paragraph. Mr Newlinds submitted that this part of Liu's evidence demonstrates a tendency to not answer questions directly and to make statements which he believed supported his case regardless of whether they responded to questions or not. He submitted that the extraordinary pauses were not the product of any difficulty in understanding the questions but were rather a search for the best answer as opposed to a truthful one. 371 Mr Hayes QC submitted that the length of Liu's apparent contemplation prior to answering Mr Newlinds' questions and the admission that the affidavit contained material that was not correct should be viewed as supporting a finding that Liu was an honest witness. It was submitted that if Liu wished to maintain a falsehood, he could have done so by simply suggesting that he had said all the words that he claimed he had said in his affidavit. Although the transcript of the relevant passages of evidence (tr. 333-335) does not convey the length of the pauses, it is conceded by Mr Hayes QC that there were delays in answering the cross-examiner's questions. I should record that the pauses were very lengthy. 372 In re-examination (tr. 358) Liu gave evidence that at the time the affidavit was sworn he believed that he had said the words that he subsequently claimed in cross-examination he had not said. There was no evidence as to what had happened between 8 March 2002, the date of the affidavit, and 27 June 2002, the date of the cross-examination, that caused Liu to hold the different belief. This adds to the curiosity of the situation. 373 Mr Hayes QC submitted that the paragraph in the affidavit, the subject of the controversy, was an extreme embarrassment for Liu because of the pauses in his evidence. He conceded that the proposition put to him by Mr Newlinds that he had deliberately put the conversation in the affidavit because he thought it would damage the plaintiff's case and help his case, was quite appropriate in the circumstances. However Mr Hayes QC submitted that my observations of Liu in the witness box would lead me to the conclusion that it was an exercise in excruciating honesty rather than dishonesty. 374 The plaintiff submitted that Liu's evidence was dishonest rather than honestly mistaken. The admission in cross-examination would be more understandable if Liu had not read the affidavit carefully or had misunderstood its terms, but those alternatives are simply not available because of his evidence in re-examination, albeit in a leading form, that at the time he swore his affidavit he believed he had said those words. There is no doubt that Liu is intelligent and an experienced businessman. I accept that he has a level of sophistication that needs to be taken into account when assessing this matter. 375 The controversial words are important. The affidavit evidence claimed that he had informed the plaintiff that he was relying upon its representations as a basis for making his investment. He also claimed that such reliance was necessary because he had no knowledge of the plaintiff's business or the business risks associated with it. This is not a case in which a witness had not had an opportunity to review an affidavit sworn some months previously before giving his oral evidence at trial. In examination-in-chief Mr Hayes QC carefully placed before Liu his affidavit of 8 March 2002 and asked him (tr. 290-291) to note specific paragraphs including the paragraph the subject of cross-examination (par 46). Mr Hayes QC then asked Liu if he had been through the paragraphs recently to which he responded that he had and when asked whether the paragraphs were correct responded "yes, they are". 376 When Mr Hayes QC attempted to retrieve the affidavit of 8 March and replace it with the affidavit of 4 June, Liu informed him that he had not looked at all the paragraphs, including paragraph 46, when he gave his previous answer. Mr Hayes QC then left the 8 March affidavit with Liu and asked him whether he had gone through paragraphs 36 to 64 the previous evening at his request. Liu said that he had done that. Mr Hayes QC then asked Liu to satisfy himself that the paragraphs in the affidavits with him in the witness box were the same paragraphs 36 to 64 that he had been through the previous evening. Having satisfied himself they were, Mr Hayes QC asked Liu whether they were correct. He answered, "yes, they are". 377 The transcript discloses that on the first occasion when Mr Newlinds asked the question after the portion of the affidavit was clearly identified Liu answered the question directly and said that he did not say all the words in the affidavit and had said only the words "I have no knowledge of the Apple business" (tr. 334, l. 42 to 50). It was only after Mr Newlinds asked for confirmation of the position and put the proposition to Liu that he had made the balance of the conversation up, that the extraordinary pauses occurred. 378 The conversation that Liu swore to in paragraph 46 of his affidavit did not sit happily with the concessions made at the commencement of Liu's case that he was an intelligent and sophisticated man, with business experience and university qualifications in commerce and an entitlement to be admitted as a Certified Practising Accountant. It was not true that he had informed the plaintiff, by his conversation with Likidis on 21 August 2000, that his investment was "based on representations made by Apple". But for a careful cross-examination by Mr Newlinds, the Court would have been left with evidence that was untrue. That is a significant matter to be weighed up when deciding what reliance, if any, Liu placed upon his conversations with Likidis. 379 (e) The debt owed by Mac's Place to the plaintiff would be transferred to Buzzle to the extent of the unsold stock of Mac's Place Liu's affidavit evidence was that at the 21 August meeting he informed Likidis that he could not afford the deal, if it meant paying liabilities to the plaintiff in full. His evidence was that Likidis responded to this statement by saying: "don't worry, once the merger will happen in a few weeks, I will let Aircent transfer all Apple Computer/hardware/software stock to Buzzle Operations and I will allow you a credit on all Apple outstanding debt from Buzzle Operations". Likidis denied that conversation in these terms occurred. 380 Liu's counsel's submissions dated 25 September 2002 included paragraph 8: Mr Liu has never shied away from the fact that he is a sophisticated person who is a qualified, although non-practising, accountant and that he understood guarantees. All that is sought to be put is that Mr Liu did not understand that the Payments Deed and the Merger Deed (which are effectively incorporated into the guarantee by the term "Apple Documents" in the term "Guaranteed Money"), allowed Buzzle to pay the debts of the 6 Apple Resellers regardless of Buzzle's cashflow position and regardless of whether the debt related to stock. This is very different to a general understanding of the guarantee. All that is said is that Mr Liu did not understand a particular interpretation put on the documents that is clearly not obvious on the face of the documents. 381 This paragraph deals with the argument in relation to the construction of the Deeds dealt with earlier in this judgment. It has never been suggested by Liu, or his counsel, that he has abandoned the allegation that this representation was made and that it was misleading or deceptive. Although Likidis denied the terms of the conversation and the context in which it was alleged to have been said, I will assume for the moment that the representation was made. The findings that I have made in relation to the defences earlier deal with this alleged representation. There is nothing about this statement that was misleading or deceptive. 382 (f) Buzzle would be publicly listed on the ASX within a short period of time This alleged representation is very much entwined with representations (a) and (h) referred to above. Likidis gave evidence that he was of the view that it was highly likely that the float of Buzzle would not occur in 2000. Liu's evidence, in relation to the calculation that was performed in respect of the $18.4 million, stated that Likidis said that it was not a bad return in "six months". I am of the view that the discussions about this period were, as Mr Shearer pointed out in his evidence, reliant upon the Arthur Andersen timetable. 383 It was the Resellers, through Mr Rispin, who promoted the Merger to the plaintiff and it was Arthur Andersen who advised the Resellers as to the viability of the Merger and possible float. It was Arthur Andersen together with the Resellers who were deciding on the timetable. This is made abundantly clear from the minutes of the meetings of the Resellers with Arthur Andersen (Ex. L). It was Mr Hartono who informed Liu in their meeting in late July 2000 that Buzzle "will float on the ASX in November 2000". I am not satisfied that Likidis said Buzzle "would be publicly listed" within a short period of time. The timeframe was that provided by Arthur Andersen and according to Liu, Likidis was mentioning the term six months within the timeframe proposed by Arthur Andersen. I am not satisfied that the plaintiff made this alleged representation. Even if such a statement was made by Likidis in relation to the return in "six months" in the context alleged by Liu, I am not satisfied that such a statement was misleading or deceptive in the circumstances referred to above. 384 (g) Even if the float of Buzzle did not proceed, Aircent would be part of a strong business and that everything would still work out Liu's original affidavit (8 March 2002) did not include evidence in relation to this representation. However in his later affidavit (4 June 2002) he gave evidence that in addition to the conversations about which he had given evidence in the earlier affidavit, the following was said: Liu: What will happen if the float doesn't go ahead? Likidis: Apple is supporting the float and it will proceed. However, even if it does not, you will be a part of a strong business that will be the biggest Apple reseller in Australia and that is still growing. You will be in the hands of very successful resellers and everything will still work out. (par 31) 385 Part of Liu's oral evidence, extracted earlier, included: Q. All he told you, if he said it at all, was: "Look, if the float comes off and if Arthur Andersen is right, you will have 18.5 per cent of a very big company and it will be worth $22 million"? A. What he said was, "If the business, if the float doesn't go ahead, if the float doesn't go ahead you are still a part of a large business and Buzzle will be the largest Apple reseller in Australia and the business still growing". (tr. 320-321) 386 There is no doubt that Buzzle was a large business. It is also the fact that Buzzle was the largest Apple reseller in Australia. The term "the business still growing" is consistent with what the Resellers were aiming for in their plans made with Arthur Andersen to float Buzzle. It is difficult to know what the words "everything will still work out" could have been understood to have meant. There is a range of possibilities, including that Buzzle would still be able to deal with the plaintiff as a reseller. It could hardly have been understood to mean that notwithstanding a lack of public listing, there would still be millions of dollars to be returned. 387 Liu's evidence was that he described himself to Likidis as a "passive investor". He also asked Mr Bright of Arthur Andersen whether he could invest in the merger company directly rather than buying Mac's Place. He had no interest in operating a business as an Apple Reseller. His preference was to invest and to rely upon Mr Hartono to operate the business. He had little or no interest in investing in a reseller business that did not float. Mr Shearer gave evidence that Liu said to him at the 21 August meeting: "it is not my business, its Donald's and that's why I am getting Donald to run it for me". 388 Likidis denied that he made the representation. There is no corroborative evidence that this representation was made at the meeting on 21 August and it is an instance in which I have to decide whether such a representation was made and relied upon by Liu to make his investment. 389 There were aspects to both Liu's and Likidis' evidence that were unsatisfactory. Likidis' denials that he made threats to Mr Thompson and Liu were unimpressive in the light of his later admissions that they were meant to be threats. This gave an insight into Likidis' personality, in that he obviously threatened to bankrupt debtors in order to secure the plaintiff's position, either by an offer of money or some other consideration. It was submitted that this should not be held against Likidis because it was his role to ensure that the plaintiff received the moneys that were owed to it and one of the options available to the plaintiff was to commence bankruptcy proceedings. That is so and such a role could hardly be held against him, and it will not be held against him. However it is his pretence that they were not threats that Liu relied upon to submit that his denial that the alleged representation occurred should be rejected. 390 Liu's false affidavit evidence that he said certain things to Likidis about relying upon Apple's representations and his later admissions that he did not say those words were equally unimpressive. But there was more to Liu's evidence that was unsatisfactory. His manner of giving evidence and effectively stalling for time, as I saw it, as the cross-examiner quite properly persisted in seeking an answer was very unimpressive. His repeated answers that he "signed" a document, when being asked why he would do so if it was false, referred to later in this judgment, did not impress me at all. He was stuck for an answer and simply stonewalled. The delays in answering other questions and the claims that he did not see the due diligence reports, to which I refer in detail below, when combined with Liu's lack of interest in Buzzle if the Merger did not happen, lead me to the conclusion that I should accept Likidis' denial that this representation was made. 391 Even if it had been made I am not satisfied that Liu relied upon it. He had an armoury of advisers and I am satisfied that he relied upon them but more to the point he relied very heavily on Mr Hartono who informed him that (Liu aff. 4/6/02; par 17): The merged company will be Australia's largest Apple reseller. You will be investing in a business that will float on the Australian Stock Exchange in November 2000. A lot of work has been done already. Arthur Andersen is acting for the merger partners. We have Apple's full support for the merger. Apple would like to set up a meeting with you to discuss a deal. It's good for them and good for you. I will organise this when the time is right. All the hard work has been done and all you have to do, Wing, is to walk into the deal. Are you interested in being involved and assisting me and Apple to rescue Mac's Place and the subsequent merger? Trust me, this would be a good opportunity to be involved, however I am waiting for more details. Are you interested? 392 Mr Hartono was obviously a good friend of Liu and I am satisfied that it would have been within Liu's capacity to call him to give evidence about whether such a representation was made at the meeting of 21 August. Although it was submitted that the plaintiff could have called Mr Hartono in respect of this meeting, I am of the view that the appropriate expectation is that he would have been called by Liu. Mr Hartono was not called to give evidence. Although this is only a minor factor, it is one that I have taken into account in forming the views that I have expressed above, both in relation to whether the representation was made and the extent of any reliance. The Implied Representations 393 My decision as to whether the implied representations (a) to (d) and (f) to (h) were made will very much depend upon whether I accept the defendant's evidence about what he was not told in respect of the financial position of the other Resellers. Liu's affidavit evidence (4 June 2002) was that the plaintiff did not disclose to him certain financial circumstances of the other Resellers. In paragraph 129 of that affidavit, Liu claimed that the plaintiff had failed to disclose to him the following matters: (1) With respect to Choice Connections Australia – (a) that it had accumulated losses on its balance sheet; (b) that it had negative liquidity ratios in the 1999 and 2000 financial years of more than $2 million in each year; (c) that it had a net profit before tax of only 0.5% of turnover; and (d) that there should have been a provision for obsolete stock of $172,000 to $194,000 in its books. (2) With respect to Status Graph Pty Ltd – (a) that there were concerns about the accuracy of its financial statements; (b) that it had at least $150,000 worth of obsolete stock; (c) that it had not paid the payroll tax in past years; (d) that its profit margins were too low at 0.8% in 1998-99 and -1.3% in 1999-2000; (e) that the past three years' business performance had not been satisfactory; (f) that its management was not satisfactory; and (g) that it had made a loss of $209,379 in the year ended 30 June 2000. (3) With respect to Jetocopic Pty Ltd trading as Manning Computers - (a) that it did not keep records of obsolete stock; (b) that it made a loss of $136,219 in the 1999-2000 financial year; (c) that it had a negative cash position of at least $374,369, which would be increased by the value of any obsolete stock; and (d) that its profit margin in the year 1998-99 was 0.3% and in year 1999-2000 was –1.6%. (4) With respect to Designwyse Pty Ltd – (a) that it had obsolete stock to the value of about $70,000; (b) that it had positive assets of only $133,542; (c) that it had a liquidity ratio in the 1998-99 year of –0.43%, and in the 1999-2000 year of –0.74%; and (d) that its net profit in the year 1998-99 was only $35,123 and in the year 1999-2000 was only $107,471. (5) With respect to GM Computers Pty Ltd – (a) that it had obsolete stock to the value of between $100,000 and $200,000; (b) that there were concerns about the reliability of its accounting system and internal procedures; (c) that there were significant errors in the valuation of stock; (d) that no payroll tax had been paid; (e) that it had a negative liquidity ratio of –1.2% in the year 1999-2000; and (f) it had net assets of only $94,000. (6) With respect to Adtype Pty Ltd, which was part of the GM Computers Group – (a) that it was at best a marginal business that over its life had accumulated losses of $47,429; (b) that its loss for the year 1999-2000 was $131,839; and (c) that its profit margin for the year 1999-2000 was 13%. 394 His affidavit also noted (par 129) that all of these matters were contained in the due diligence reports with the inference that had he had access to them, he would have become aware of these facts. In supplementing his affidavit evidence, Mr Hayes QC asked Liu in evidence-in-chief when he first saw the due diligence reports. Liu gave evidence that he first saw them in about November or December 2000 (tr. 292-293). He was then asked: "was there any earlier time when you were told of their existence?" and he answered: "yes, they were. I actually request a number of times from Donald about, Mr Donald Hartono, about those due diligence" (tr. 293). He said he first requested them in about September/October and that prior to 8 September, when he signed the Guarantee, he had heard from Mr Bright of Arthur Andersen at a meeting on 31 August 2000 that the due diligence reports would be "coming through", but that he did not see them until much later in the year (tr. 293). It was at the Resellers' meeting at Arthur Andersen's premises on 30 (as opposed to 31) August 2000 that Mr Stuart Bright is noted as having informed the Resellers, including Liu, that: "on Apple's request each due diligence report would be provided to Apple as well as to all other principals" (Ex. L). 395 Prima facie, these are fairly significant matters to have known about at that time when Liu was considering becoming part of the Merger. It was established in cross-examination that Liu was present at the Resellers' meeting at Arthur Andersen's premises on 5 September 2000 when the due diligence reports were distributed to the Resellers. I have already referred to the concessions made by Liu in his cross-examination when this Minute was drawn to his attention. He ultimately could not deny that the due diligence reports were distributed at the meeting (tr. 299) and distributed to him (tr. 301). 396 The Minutes of the Resellers' meetings on 31 August 2000 and 5 September 2000 were prepared by Arthur Andersen, the advisers to the Resellers. The plaintiff had no part to play in preparation of those Minutes and was not present at the meetings. These were meetings between the Resellers and their advisers in preparation for the Merger and future float of Buzzle. Also of relevance is the document signed by Liu on 13 September 2000 entitled "Confirmation of Receipt of Financial Information", in which he confirmed that he had received the profit and loss statements ended 30 June 2000, the balance sheets ended 30 June 2000 and the due diligence reports of the merging businesses. Liu's evidence in relation to why he would sign this document if it was the case that he had not received the due diligence reports and other documents, was as follows: Q. So if that be right, why on 13 September did you sign a bit of paper confirming you had received those very same to diligence reports? A. It was part of the process. Q. To sign documents that contained false statements, that was no part of the process? A. No, it is part of the process. Q. Just to sign anything that is stuck under your nose? A. No. Q. Why did you? A. As part of the documents that I signed. Q. Why did you sign it? A. As part of the process to complete the transaction. Q. Just to sign any bit of paper? A. Not any bit of paper. Q. This bit of paper contains a statement that is false on your case. Why did you do that? A. I have signed this bit of paper. Q. Yes, why? A. Because I have signed this piece of paper, yes. Q. Can I suggest to you why? A. No, I could say why. Q. You can tell us why? A. Yes, okay, I can't recall and the information might have been available in a bundle at the time of signing on the document but I cannot recall and I have tried to attempt to look into the video tapes of that date and I cannot recall the information was given to me on the spot or that day to give it to me and I don't have some of them. (tr. 342-343) 397 In the light of the Minutes, Liu's concession that he could not deny that the due diligence reports were distributed to him at the 5 September 2000 meeting, the fact that he signed the "Confirmation of Receipt of Financial Information" document and his rather unhelpful evidence in relation to the signing of that document, I am satisfied that not only were they distributed to Liu on 5 September but also that Liu had the opportunity to read them and did read them and that is why he signed the "Confirmation" document. In those circumstances I am not satisfied that the implied representations (a) to (c) and (f) to (h) were made. 398 Implied representation (d) as pleaded was that the plaintiff had agreed to and intended to do all things reasonably necessary to cause Buzzle to trade profitably, and to assist the float of Buzzle. It was not the plaintiff's responsibility to cause Buzzle to trade profitably and there is nothing in the evidence from which such a representation could be implied. This implied representation has not been established. 399 Implied representation (e) as pleaded was that the plaintiff did not intend to call up or enforce any securities held by it in respect of the indebtedness of Buzzle. Having regard to the portion of Liu's evidence extracted above in relation to representation (d) alleged to have been made at the 21 August meeting (tr. 315-317), there is no doubt that this representation should have been abandoned. This representation has not been established. 400 Implied representation (j) pleaded that Arthur Andersen's valuation report as to the financial position of Buzzle, the prospect for a public float of Buzzle and the value of the businesses was correct in the plaintiff's opinion, was based upon correct factual assumption to the plaintiff's knowledge and the plaintiff knew of no fact, matter or circumstance which would render it inaccurate or unreliable. 401 I accept Likidis' and Mr Shearer's evidence that they did not see the Arthur Andersen valuation. Any calculation performed as claimed by Liu at the meeting of 21 August could not give rise to the implied representation as pleaded. There was no discussion of the contents of the report and there was no suggestion made to Liu by Likidis or Mr Shearer that they had ever read the report. Liu relied upon Arthur Andersen in relation to the valuation report and did not rely upon the plaintiff. This implied representation has not been established. 402 Other matters of significance of which it is submitted Likidis had knowledge but did not inform Liu were: (1) that he was of the view that Liu had virtually no chance of making $18 million on his investment; (2) that as at 13 September 2000 he was of the view that two of the six Resellers could not afford to pay their Apple debt and he had real concerns about them; and (3) that Apple intended to sell online directly to the education market. 403 There is no doubt that Likidis thought that the quick return of $18 million was "pie in the sky" and that the float of Buzzle would not occur in the year 2000. He said that he did not think he was obliged to express those opinions to Liu because he was being advised by professionals who had experience with the public listing of companies and because he had both legal and financial advice in respect of the purchase of Mac's Place and the Buzzle merger. 404 Liu relied upon some documents, referred to as the "Q & A" document, produced by the plaintiff's public relations department. It is apparent that some of the statements made in the document were statements with which Likidis disagreed. Having regard to the fact, as I have found it, that Liu did receive the due diligence reports of the other Resellers, this document, in my view, does not assist Liu. These were statements contained in a document, which Liu did not see prior to this litigation. 405 As to Likidis' opinion of the two Resellers about which he had his doubts, Likidis gave evidence in re-examination that the shortfall in Manning Computers and Status Graph was the topic of discussion at a meeting at Frenchs Forest at which Liu was present prior to the Merger. That meeting was in two parts. Likidis was present at the first part at which he raised with those present the question of how the shortfall was going to be addressed. The Resellers then asked to meet separately from Likidis (tr. 695). I accept that this matter was raised with Liu and in any event he had access to the due diligence reports. 406 As to the decision to sell online to the education market, Likidis gave evidence that although an intention was present prior to the date of the Merger, it was the plaintiff's practice to notify all resellers of decisions such as this at the same time and in this instance it was not practicable to do so until October 2000. There is nothing in the evidence that demonstrates that this conduct had any particular impact upon the operation of Buzzle. There is nothing in the evidence about the amount of sales made by the Resellers prior to the Merger to the education market, nor any figures relating to sales or attempted sales to the education market after the Merger. It was always known to the Resellers prior to the Merger that the plaintiff could sell directly to any person. Indeed each of the resellers had agreed to such conduct by the plaintiff in their reseller agreements and Buzzle also agreed to the plaintiff selling directly to any person in its Reseller Agreement (cl 2.2 (c)). 407 There was detailed cross-examination of Liu as to when it was that he formed the view that he had been misled by Likidis. It was certainly no later than early 2001 that Liu formed that view. The plaintiff highlighted the absence of any complaint to the plaintiff by Liu prior to the commencement of this litigation and his willingness to enter into further agreements with the plaintiff in a de-merged status. These matters are in my view further support for the conclusions I have reached. 408 The misleading conduct claim fails and is dismissed. The Sixth Defendant 409 As can be seen from the history of the proceedings referred to at the commencement of this judgment, the sixth defendant did not appear after 26 June 2002. No submissions were made on his behalf and no evidence has been led to establish the status of the sixth defendant vis-a-vis the Bankruptcy Act 1966 (Cth). The plaintiff's case against Liu under the Guarantee is identical to that against the sixth defendant and having regard to the findings that I have made in the plaintiff's case against Liu I am satisfied that the plaintiff has proved that the sixth defendant is liable under the Guarantee for 22.1% of $13,571,496.10 being $2,999,300.64. Orders 410 The plaintiff is entitled to judgment in its favour against the thirteenth defendant for 18.5% of $13,571,496.10, being $2,510,726.79. I will hear the plaintiff further in relation to the status of the sixth defendant and any further steps it wishes to take. 411 The plaintiff's claim against the seventh defendant is dismissed. The Cross-Claim brought by the thirteenth defendant and Aircent is dismissed. 412 The matter is listed for mention at 9.30am on 17 March 2003 for Short Minutes to be handed up for the entry of judgment with interest and entry of the other orders. If the parties are unable to agree on costs orders I will give directions for any argument on costs on a date to be fixed. *********************** Last Modified: 03/12/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.