New South Wales Supreme Court CITATION : Pure Logistics v Scott & Anor [2007] NSWSC 595 HEARING DATE(S) : 1 June 2007 JUDGMENT DATE : 1 June 2007 JURISDICTION : Commercial List JUDGMENT OF : McDougall J at [1] EX TEMPORE JUDGMENT DATE : 1 June 2007 DECISION : See paras [29] to [34] of judgment CATCHWORDS : PRACTICE AND PROCEDURE - freezing order - interlocutory application pursuant to r 25.14 of Uniform Civil Procedure Rules 2005 - claim for damages quantified - content of requirement for "good arguable case" - whether good arguable case demonstrated for full amount of order sought - unconditional bank guarantee in favour of defendant in support of undertaking as to damages - costs LEGISLATION CITED : Uniform Civil Procedure Rules 2005 CASES CITED : Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG "The Niedersachsen" [1984] 1 All ER 398 Pure Logistics Pty Limited (formerly Scotts Refrigerated Freightways Holdings) Pty Limited (Plaintiff) PARTIES : Bruce Donald Scott (First Defendant) Jan Carolyn Scott (Second Defendant) FILE NUMBER(S) : SC 50152/06 I M Jackman SC/R S Hollo/M J O'Meara (Plaintiff) COUNSEL : N A Cotman SC/R A Parsons/C D Wood (Defendants) SOLICITORS : Minter Ellison (Plaintiff) Dennis & Company (Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST McDOUGALL J Friday 1 June 2007 (Ex tempore, revised 4 June 2007) 50152/06 PURE LOGISTICS PTY LIMITED (formerly known as Scotts Refrigerated Freightways Holdings Pty Limited) v BRUCE DONALD SCOTT & ANOR JUDGMENT 1 HIS HONOUR: These proceedings arise out of a share sale and purchase agreement (the agreement) made on 16 September 2005 between the defendants as vendors and the plaintiff as purchaser. The plaintiff's claim in substance is that the financial position of the subject matter of the sale (four companies formerly controlled by the defendants, and now controlled by the plaintiff) was substantially misrepresented. The plaintiff puts its claim in two ways: (1) a claim for adjustments pursuant to the contract; or (2) a claim for the entire loss suffered by it on the transaction. The latter claim is put on the basis that the plaintiff was induced to enter into the agreement by reason of the defendants' alleged misleading or deceptive conduct, and would not have entered into it but for that conduct, so that it is entitled to recover damages being the difference between what it paid and the true value of what it got. 2 The defendants have recognised that some adjustments were payable by them to the plaintiff, and by a combination of payments and set-off against amounts owing by the companies that were sold to them, have recently paid to the plaintiff, in total, about $5.2 million. 3 The present dispute concerns a freezing order pursuant to UCPR r 25.14. One of the matters that must be shown to that rule is that there is a danger that any judgment recovered may be in whole or part unsatisfied because the assets of the prospective judgment debtor might be disposed of or dealt with in some way so as to diminish the amount available to the prospective judgment creditor. In the present case, the plaintiff says that the first defendant (Mr Scott) has dealt with his assets, and proposes to deal with his assets, in such a way as to demonstrate that the relevant danger exists. 4 When the hearing commenced today, I was informed that Mr Scott concedes, for the purpose of the application but not otherwise, that the plaintiff has made good its case that the relevant danger exists. If I may say so, on the basis of the plaintiff's evidence and Mr Scott's explanation (or lack of explanation) for the matters on which the plaintiff relied in this regard, that concession was wisely made. 5 The debate between the parties focused on the amount for which protection ought be given. 6 Pursuant to orders made earlier by the Court, Mr Scott swore an affidavit on 8 May 2007 in which he purported to disclose his current financial position. That disclosure was updated, in a substantial (although not on the scale of things perhaps very significant) respect by a subsequent affidavit made on 25 May 2007 in which Mr Scott disclosed a further asset. 7 In substance, the position disclosed by Mr Scott (taking into account the further disclosure) was total assets of about $8.4 million. That may be compared with the amount received by Mr Scott, totalling $17.2 million in round figures, as his share of the proceeds of sale, received some eighteen months prior to the date of disclosure. Mr Scott's assets as disclosed must be reduced by an amount of (in round figures) $3 million, to take account of the payment that he, together with the other defendant his sister, has made. 8 The plaintiff claims that it has a good arguable case that its damages might be of the order of $14 million (taking account of the payments that have been made). It says that it is entitled to a freezing order in that sum. In the course of a debate as to whether one of the plaintiff's witnesses should be cross-examined, Mr Cotman of senior counsel, who appeared with Mr Parsons and Mr Wood of counsel for Mr Scott, submitted that he wished to show that even on the evidence as it stood there were amounts that should be deducted from the claim of $14 million so as to reduce the actual likely amount recoverable (if the plaintiff otherwise conceded in full) to about $7 million. When I enquired why this was of any relevance having regard to Mr Scott's asset position, Mr Cotman submitted that Mr Scott could live with a freezing order of $7 million, but not with a freezing order of $14 million. I have to say that if Mr Scott has accurately disclosed his net assets, I find that submission entirely incomprehensible. On the other hand, it would be comprehensible, if, contrary to the state of affairs disclosed, Mr Scott in fact had further assets. Mr Cotman's submission was made after Mr Jackman of senior counsel, who appeared with Mr Hollo and Mr O'Meara of counsel for the plaintiff, had indicated that he did not wish to cross-examine Mr Scott; and no application was made after that submission was put for leave to cross-examine. 9 Thus, whilst I cannot and do not find that Mr Scott has neglected in some way to disclose in full his assets, I am left with a feeling of some unease. That is perhaps relevant bearing in mind whether an order as sought by the plaintiff would have any utility over and above the disclosed amount. 10 The plaintiff's case on the alternative way in which it puts its claim is that it would not have entered into the agreement had it been apprised of the true state of affairs. That proposition is amply supported, for today's purposes only, by the affidavit of the plaintiff's relevant officer, Mr Baldassarre. I am satisfied, in considering whether the plaintiff has a good arguable case on the alternative basis on which it approaches this matter, that it is likely to make out, or may make out, that it would not have entered into the transaction had it been apprised of what it says was the true state of financial health of the companies that were the subject matter of the sale. 11 Thus, I think, as I have already indicated, the real question for debate is the amount for which protection is sought. 12 In this regard, the plaintiff submitted that it was not necessary for it to show that it was more likely than not to succeed in making out its case in the manner that I have indicated. It relied on the judgment of Mustill J in Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG "The Niedersachsen" [1984] 1 All ER 398. In that case, his Lordship considered a number of authorities bearing on the English equivalent of r 25.14, which required the court to be convinced that the plaintiff has "at least a good arguable case". His Lordship concluded at 404 "that the right course is to adopt the test of a good arguable case, in the sense of a case which is more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50 percent chance of success." His Lordship followed this by warning that "the court should not be drawn into a premature trial of the action, rather than a preliminary appraisal of the plaintiff's case." Although that warning was directed to the circumstance that, in the case before his Lordship, the dispute was to be resolved by arbitration, it is I think something to be borne in mind more generally. The Court is approaching the question on the basis of very limited evidence compared to what is likely to be led at trial. The Court should not - indeed, in my view, cannot - undertake more than a preliminary appraisal for the purposes of r 25.14. 13 The plaintiff quantified its claims for damages on the alternative basis by referring to the net amount paid - $30.5 million - subtracting what it said was the true value of the companies bought - said to be $11.8 million - and subtracting from that the cash amounts actually paid - $4.7 million. (The cash amounts paid differed from the amount of $5.2 million to which I have referred, because part of the amounts "paid" were in effect paid by way of set-off through discharge of credits owing to the defendants on their loan accounts.) 14 Thus, the plaintiff derived a figure of $14 million which it noted excluded interest (for two years and running) and costs. 15 In support of this approach, the plaintiff relied, for the key factor, on the audited accounts prepared by KPMG after settlement of the transaction and pursuant to the terms of the agreement. It is those audited accounts on which the plaintiff relies to show that the financial position of the companies sold was misrepresented. It is also those audited accounts on which Mr Baldassarre relied in expressing the views to which I have referred above, to the effect that the plaintiff would not have proceeded had it known the true position. 16 However, in the plaintiff's submission, those accounts have further relevance, because they support (so the plaintiff submits) the net asset figure to which I have referred. The plaintiff submits that it is that net asset figure that should be taken, for today's purposes, to represent the "true" value of the companies bought. 17 Mr Cotman submitted that this was not so. He submitted that the companies that were the subject of the sale had a "business value" over and above their net asset value. This, he said, was apparent from the sale figures themselves, whereby the amount paid exceeded stated net assets by, in round figures, $7 million. This, he said, must be taken to have been attributable to the value of the companies as ongoing businesses. 18 Mr Cotman did not choose to cross-examine the partner of KPMG, Mr Sheppard, who prepared the audited accounts to which I have referred. Nor did he call expert evidence of his own to make good the proposition. He submitted that it was self-evident that adjustments of the kind made by Mr Sheppard, affecting matters such as intangibles and the way that the plaintiff accounted for tax, would not have themselves affected the business value to which he referred. Thus, he submitted, there was a significant prospect that the plaintiff's claim might be reduced by at least $7 million even on its alternative approach. 19 I do not accept that submission. I do not think that I can say, particularly in the light of Mr Baldassarre's evidence (and I should note that Mr Baldassarre has accounting qualifications as well as substantial business experience) that the companies sold would have had a business value of anything like $7 million on the basis of the financial picture that appears from the KPMG accounts (if I can call them that) as compared to the accounts that were annexed to the agreement. 20 Mr Cotman may very well be right. I cannot say that he does not have a good arguable case in support of his contention. But assuming that he does, it does not follow thereby that the plaintiff does not have a good arguable case for the position for which it contends. 21 Mr Cotman also addressed a number of items in the accounts, with a view to showing that the statement of net assets was under-valued. Again, that was not a matter that he put to Mr Sheppard. Again, I do not think that it is a matter that can be said intuitively, or by some process of pure reasoning, not requiring any expert or other evidence, to be correct. Mr Cotman may be correct; I am prepared to accept that he has a good arguable case that he is. Again, for the reasons that I have given, I do not think that the acceptance of that proposition means that the plaintiff does not have a good arguable case for its countervailing position. 22 Mr Cotman relied also on clause 14.5 of the agreement. That clause imposes limits on claims. Relevantly, pursuant to paragraph (b), it provides that the aggregate amount which the plaintiff may recover from the defendants for claims other than "Qualifying Claims, arising under [certain] Vendors' Warranties", arising out of or in connection with the agreement, is limited to 50 percent of the purchase price. In money terms, that limit is (in round figures) $15 million. Mr Cotman submitted that when allowance was made for the $5.2 million already paid or credited, and allowing for the fact that I am talking roughly and in very round figures, the maximum amount of the claim could be no more than $10 million. 23 That submission, if I may say so, has substantial attraction in relation to the claim for breach of contractual warranties. But on the present state of the authorities, I do not think that it could be applied to limit a claim for damages for misleading or deceptive conduct where it is said that, but for that misleading or deceptive conduct, the agreement would not have been made at all. If that case succeeds, then the loss suffered by the plaintiff would be the whole amount of the loss sustained by it from entry into the agreement (to be quantified in accordance with well-known, but often difficult to apply, decisions of the High Court of Australia) and on principle should not be limited or qualified by some contractual provision contained within the agreement. 24 Thus, I do not think that there is any reason based on clause 14.5 to limit the way in which the plaintiff puts its claim, or to suggest that, for today's purposes, there can be no good arguable claim, even in respect of the misleading or deceptive conduct case, in excess of $10 million. 25 Accordingly, I am satisfied that the plaintiff has made good its case under r 24.15, and that it has a good arguable case for protection up to a maximum of $14 million. (If it were necessary, taking into account matters such as interest and costs, I would be satisfied that the relevant amount is higher; but the plaintiff has chosen to limit its case). 26 Thus, prima facie, the plaintiff is entitled to the protection that it seeks. One might wonder what is the utility of the protection in that amount, given Mr Scott's apparent asset position. However, no submission was put that I should not make the order in the amount sought simply because, over and above whatever is the net asset position, it would lack utility. 27 There was read for Mr Scott an affidavit of an expert accountant, Mr Humphreys, sworn 25 May 2007. Mr Humphreys gave evidence of the possible loss to Mr Scott (and his wife), if, by reason of the freezing order, Mr Scott and his wife were unable to make substantial contributions to their superannuation funds by 30 June this year, and further (although less substantial) contributions in the following year. Mr Scott has given evidence that it was his intention, if he were able to do so, to make those contributions both for himself and for his wife. 28 Mr Cotman put no submissions based on that affidavit, or on those aspects of Mr Scott's evidence on which it was based. Thus, it is unnecessary for me to deal with it in detail. There are a number of things that could be said. One is that if Mr Scott had wished to make those contributions, he should perhaps have thought about it before, as apparently he did, he divested himself of very substantial assets. Another is that if, as appears to be the case, that divestiture has been in favour of Mr Scott's wife, it should not be beyond her power to raise the money in some way - at least for herself. A third, and perhaps more comprehensive answer, is that the plaintiff has proffered an unconditional bank guarantee in favour of Mr Scott in support of its undertaking as to damages, and it was not submitted that that guarantee was inadequate in form or amount. Nor was it submitted that the guarantee was inadequate simply because its beneficiary was Mr Scott and not Mr Scott and his wife. The amount of the guarantee was $10 million. Its expiry date is 1 June 2009. Taking into account at face value Mr Humphreys' evidence, it would appear to be the case that the amount of the guarantee is sufficient to compensate Mr Scott at least for such loss as he may suffer from any continuing inability to make the superannuation contributions to which I have referred. 29 I therefore conclude that it is appropriate to make the orders sought by the plaintiff. I note that the plaintiff by its counsel gives to the Court the usual undertaking as to damages. I note that the plaintiff has given to Mr Scott an unconditional guarantee (exhibit AX2 on the application) in support of that undertaking as to damages. I make orders in accordance with paras 1 to 10 of the short minutes of order initialled by me and dated today's date. 30 I will add to the orders that I have made an order in terms of para 6(e) of the short minutes of order initialled by me and dated today's date, an order that the orders may be entered forthwith, and an order that the costs of the plaintiff's notice of motion filed on 30 April 2007 be the plaintiff's costs in the proceedings. 31 I grant the defendants leave to file an amended cross-summons joining as a cross-defendant ABN AMRO Advisory Pty Ltd. 32 I direct that any such amended cross-summons be filed and served on or before 8 June 2007. 33 I extend until 15 June 2007 the time for compliance with order 6 made on 20 April 2007. 34 I extend until 22 June 2007 the time for compliance with order 8 made on 20 April 2007. ****** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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