Supreme Court New South Wales Medium Neutral Citation: Cadence (90) Investments Pty Ltd as trustee of the GDC Discretionary Trust v Simon Dougal Chalmers [2019] NSWSC 1168 Hearing dates: 2 September 2019 Decision date: 06 September 2019 Jurisdiction: Equity - Commercial List Before: Hammerschlag J Decision: Judgment for the first plaintiff against the first and second defendants for $1,066,649.73, with interest calculated to the date of this judgment. Judgment for the second plaintiff against the first and second defendants for $49,986.63, with interest calculated to the date of this judgment. Catchwords: CONSUMER LAW – Australian Consumer Law sections 2, 18 and 236 – misleading or deceptive conduct in trade or commerce – person involved in contravention – where plaintiffs make an investment by way of share subscription relying on information provided by first defendant which is false because revenue is overstated – knowing involvement of the second defendant in the contravention – damages – assessment – where plaintiffs investment is worthless; HELD: plaintiffs entitled to damages against first and second defendants; LEGAL PRACTITIONERS – requirement not to communicate contentious material to a judge of the Court other than in open Court –Solicitors' Conduct Rules – where solicitors for the first and second defendants send without leave or consent contentious material prior to a motion being heard at which they do not intend to appear – impropriety of same – reiterated that legal practitioners should not communicate in this fashion Legislation Cited: Australian Consumer Law Civil Procedure Act 2005 (NSW) Competition and Consumer Act 2010 (Cth) Legal Profession Uniform Law Australian Solicitors' Conduct Rules 2015 (NSW) Cases Cited: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 Cronulla-Sutherland District Rugby League Football Club Limited v Nationwide News Pty Ltd [2013] NSWSC 494 Hampton Court Ltd v Crookes (1957) 97 CLR 367 Henville v Walker (2001) 206 CLR 459 Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653 March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506 R v Fisher (2009) 22 VR 343 Re JRL; Ex Parte CJL (1986) 161 CLR 342 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 Yorke v Lucas (1985) 158 CLR 661 Young v Jackman (1986) 7 NSWLR 97 Category: Principal judgment Parties: Cadence (90) Investments Pty Ltd as trustee of the GDC Discretionary Trust - First Plaintiff Thomas Stevens - Second Plaintiff Simon Dougal Chalmers - First Defendant Bianca Cheah - Second Defendant Sporteluxe Group Pty Ltd - Third Defendant Sporteluxe Pty Ltd - Fourth Defendant TYK Holdings Pty Ltd - Fifth Defendant Representation: Counsel: S. A. Lawrance - Plaintiffs Solicitors: Watson Mangioni Lawyers - Plaintiffs File Number(s): 2018/72713 Judgment 1. HIS HONOUR: The first plaintiff company (Cadence) and the second plaintiff (Stevens) sue the first defendant (Chalmers) and his wife, the second defendant (Cheah), for damages alleged to have been caused by conduct engaged in by Chalmers which was misleading or deceptive or likely to mislead or deceive, in contravention of section 18 of the Australian Consumer Law (ACL), in which conduct Cheah is alleged to have been involved. 2. The conduct complained of occurred in connection with investments made by the plaintiffs by way of subscription for shares in Sporteluxe Group Pty Ltd (SGL), the third defendant. 3. Material in evidence describes Chalmers as a successful business entrepreneur with a passion for start-ups and strategy. 4. Cheah is a yoga instructor, fitness and wellness ambassador, digital influencer, blogger, model, actress and media personality. 5. Cadence is associated with Garren Douglas Cronin (Garren) and his wife Emma Louise Cronin (Emma), first names are used with no disrespect intended. Garren is a chartered accountant who has a corporate finance background. Emma is a nutritionist who has a background in e-Commerce. They have an interest in investing in private ventures. Garran is the sole director of Cadence. 6. The plaintiffs also sued SGL and two other corporate entities associated with Chalmers and Cheah, called Sporteluxe Pty Ltd (SPL) and TYK Holdings Pty Ltd (TYK) respectively. SGL was placed into liquidation on 12 November 2018. Chalmers and Cheah had contractually indemnified SGL. The plaintiffs had leave to bring derivative proceedings against Chalmers and Cheah for the benefit of SGL. However, the plaintiffs have discontinued against SGL, SPL and TYK, and SGL has discontinued against Chalmers and Cheah. 7. On 27 August 2019, the solicitors who had been on the record for Chalmers and Cheah since 13 March 2018, Tisher Liner FC Law (Tisher Liner), filed a Notice of Ceasing to Act. 8. Chalmers and Cheah did not appear at the hearing to defend. Had they sought to do so, there would have been a question whether they would have been heard because, as is described later, they disobeyed orders of the Court to give discovery and remain in default of them: see Young v Jackman (1986) 7 NSWLR 97. They now reside permanently in the United States of America and are beyond the compulsory processes of the Court. 9. Before dealing with the substance of the claim, it is regrettably necessary to deal with an aspect of the conduct of their solicitors which caused the Court significant concern. Some of the procedural history needs to be set out. Procedural history 1. The proceedings were commenced on 6 March 2018, when the plaintiffs sued out of the Court a Summons and accompanying Commercial List Statement. 2. Tisher Liner filed an appearance on behalf of Chalmers, Cheah, SGL and TYK on 13 March 2018. They ceased to act for SGL on 1 November 2018, when it went into voluntary administration. They continued on the record for Chalmers, Cheah and TYK. 3. On 24 May 2019, I fixed the case for hearing (on an estimate of 7 hearing days) to commence on 2 September 2019. I made the Usual Order for Hearing (Annexure 3 to Practice Notice SC Eq 3), with some ancillary directions. 4. Paragraph 14 of the Usual Order for Hearing requires the parties' barristers or solicitors to cause to be filed no later than 10 working days before the hearing (that is, in this case, by Friday 16 August 2019) with the Court a folder of all affidavits, statements and reports to be relied upon at trial with an index which complies with specific requirements set out in the paragraph. Only the plaintiffs' solicitors complied. 5. On 12 July 2019, the Court made, by consent, orders under which discovery of identified documents was to be made by Chalmers and Cheah by 26 July 2019. Cheah made no discovery. Chalmers made incomplete discovery. 6. On 26 July 2019, Tisher Liner filed a Notice of Intention to File a Notice of Ceasing to Act pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 7.29(2). 7. On 9 August 2019, the plaintiffs filed a Motion, which was made returnable on 16 August 2019, seeking orders that Chalmers and Cheah give discovery, failing which judgment be entered against them, damages to be assessed. 8. The matter came before me on 16 August 2019. There was no appearance for Chalmers and Cheah, notwithstanding that Tisher Liner were still on the record for them. Counsel for the plaintiffs, Mr S A Lawrance, told me that Tisher Liner had filed a Notice of Intention to File a Notice of Ceasing to Act. An affidavit by Charles Coleman, a solicitor employed by the plaintiffs' solicitors, Watson Mangioni, recounted a conversation with an Associate at Tisher Liner, during which the Associate told him that Tisher Liner had been instructed not to appear on the Motion and that Chalmers and Cheah did not intend to defend the proceedings. 9. I declined to grant the plaintiffs the relief sought in the Motion, not least of all because there were already orders for discovery. Additionally, I considered that Chalmers and Cheah should be given more time. I did, however, give the plaintiffs leave to amend the Motion to claim judgment, damages to be assessed, and I fixed the Motion for hearing on 20 August 2019. 10. On the morning of 20 August 2019, at 9.11 am, I received the following email directly from Tisher Liner under the hand of the Associate earlier referred to: We refer to the above proceeding in which we are currently the solicitors on record. On 26 July 2019 our firm filed a notice of intention to cease acting and will file a notice of ceasing to act at the expiration of the 28 day notice period. As a matter of courtesy we are writing to the Court to confirm that we do not hold instructions to appear at the motion listed before his Honour at 10:00 a.m. today, 20 August 2019. Our firm is based in Melbourne and we do not hold instructions to brief Counsel (in NSW) to appear to this morning as a matter of courtesy to the Court. Finally, we attach, for the Court's reference, an open letter sent to the Plaintiffs' solicitors, Watson Mangioni on 13 August 2019. The solicitors for the Plaintiffs have been included in this email. Kind regards 1. It is appropriate to set out the attached letter in full: We refer to the above proceeding and the trial which is listed [sic] commence on 2 September 2019. As you are aware, we act for the First, Second and Fifth defendants (collectively our Clients). Notice of Intention to Cease Acting We have been instructed by our Clients to file a notice of intention to cease acting (Notice of Intention) and in accordance with our Clients' instructions, on 26 July 2019 our firm filed a Notice of Intention. Notwithstanding the rules do not provide for the Notice of Intention to be served upon your clients, as a matter of courtesy we attach a copy of the Notice of Intention. Our firm will be filing a notice of ceasing to act at the expiration of the 28 day notice period. We are further instructed that our Clients will not be engaging alternative legal representation to represent them in this proceeding. Upcoming Trial As you are aware Simon Chalmers and Bianca Cheah reside in the United States of America and welcomed their first child in mid-July 2019. Bianca suffered a number of complications during the birth which has resulted in a number of unanticipated medical bills for Simon and Bianca. As you will no doubt be aware, the United States of America's health system is not funded in the same manner or to the same extend [sic] as the Australian health system and can be prohibitively expensive. As a result of a number of factors, including the aforementioned medical bills, we have been instructed that the Defendants do not have the financial means to continue to defend this proceeding, either through legal representatives or as self-represented litigants. Our Clients' decision not to continue to defend this proceedings [sic] (Decision) is in no way an admission of liability, it is simply a consequence of their financial circumstances. Settlement Notwithstanding our Clients' Decision, your clients will nevertheless have to incur the time, stress and expense in preparing for and running the trial in order prove their case in anticipation of obtaining a result in their favour and ultimately a judgment (of some kind) against the first second and/or fifth Defendants. Our Clients' Decision no doubt paves an easier way for your clients to achieve a result in their favour, however, it by no means guarantees a 'slam dunk' win for your clients against the first second and/or fifth Defendants. It is our view that based upon the pleadings and evidence to date, that your clients will not be successful in their claims against the Second or Fifth Defendants. The First and Second Defendants have each filed affidavit material which clearly identifies that notwithstanding the Second Defendant being a director of the Third and Fourth Defendants, the Second Defendant was the creative side of the Sporteluxe business and was not involved in the accounting, finance, fundraising or investment opportunities of the Sporteluxe business (Core Business Operation). At all material times it was the First Defendant who was in control of Core Business Operation. The Second and Fifth Defendants were not involved in the preparation of the following documents: 1. Core information contained in the Pitch Deck. 2. Cashflow Planner; 3. Updated Cash Flow Planner; 4. Sporteluxe Clarification; and/or 5. Draft Cheah Employment Agreement. In addition, the Second Defendant had minimal interaction with the Plaintiffs during the negotiation of their investment into the Sporteluxe business. The Plaintiffs allege that the Second and Fifth Defendants engaged in misleading and deceptive conduction which in turn caused the Plaintiffs to subscribe for shares in the Sporteluxe business. The Plaintiffs' evidence does not establish that the Second or Fifth Defendants participated in, or knew about the alleged conduct. Furthermore, there is no support for the proposition that merely because Cheah was a director of the Sporteluxe business, that made her involved in any alleged misleading and deceptive by the First Defendant. The Plaintiffs have also failed to show any reliance on the purported representations allegedly made by the First and Second Defendants. Notwithstanding the above, our Clients' financial position means that even if your clients are successful at trial and obtain a judgment against the First, Second and/or Third Defendants, were are instructed that our Clients do not have the financial means to meet any such judgment regardless of its amount, nor any order for costs. If our Clients did in fact have the financial means to meet a judgment they would use those means to defend this proceeding at trial. We are therefore instructed to that our clients will agree to a settlement on the following terms: 1. Without any admission of liability, judgment be entered against the First Defendant. 2. No judgment be entered against the Second or Fifth Defendant. 3. The Plaintiffs (on the one hand) and the Second and Fifth Defendants (on the other) provide mutual releases to one another in relation to the claims made in this proceeding. 4. The Plaintiffs and the Second and Fifth Defendants do all things necessary to procure the discontinuance of the Plaintiffs' claim against the Second and Fifth Defendants on the basis that there be no order as to the costs of those parties; and 5. The parties bear their own costs of and incidental to the proceeding. The above offer is conditional upon the parties enter into a formal terms of settlement incorporating the above matters. The offer will remain open for acceptance until 5:00pm on 21 August 2019. 1. The letter was under the hand of a Principal of Tisher Liner, who described himself as an Accredited Commercial Litigation Specialist. The email was copied to the Principal. 2. It will be immediately apparent that the sending to me of this letter was improper. 3. It was sent directly to me (via my Associate), with no leave from the Court or consent from the plaintiffs previously had or obtained. 4. It contains highly contentious argumentative material. 5. It was sent in circumstances where there was intended to be no appearance at the hearing of the Motion. It was plainly sent to place that contentious argumentative material before the presiding judge, by direct communication not in open Court, to influence the Court. 6. In Re JRL; Ex Parte CJL (1986) 161 CLR 342 at 350, Mason J said: A central element in the system of justice administered by our courts is that it should be fair and this means that it must be open, impartial and even-handed. It is for this reason that one of the cardinal principles of the law is that a judge tries the case before him on the evidence and arguments presented to him in open court by the parties or their legal representatives and by reference to those matters alone, unless Parliament otherwise provides. It would be inconsistent with basic notions of fairness that a judge should take into account, or even receive, secret or private representations on behalf of a party or from a stranger with reference to a case which he has to decide. This principle immediately distinguishes the judicial branch from other branches of government, except in so far as they may be relevantly affected by the rules of natural justice. In conformity with the principle, every private communication to a judge made for the purpose of influencing his decision in a case is treated as a contempt of court because it may affect the course of justice (In re Dyce Sombre (1849) 1 Mac &G 116, at p 122; 41 ER 1207, at p 1209, per Lord Cottenham L.C.). Indeed, it is regarded as a serious contempt. 1. Added to this, clause 22.5 of the Legal Profession Uniform Law Australian Solicitors' Conduct Rules 2015 (NSW) provides: 22.5 A solicitor must not, outside an ex parte application or a hearing of which an opponent has had proper notice, communicate in the opponent's absence with the court concerning any matter of substance in connection with current proceedings unless: 22.5.1 the court has first communicated with the solicitor in such a way as to require the solicitor to respond to the court; or 22.5.2 the opponent has consented beforehand to the solicitor communicating with the court in a specific manner notified to the opponent by the solicitor. 1. The sending of the letter was contrary to the cardinal principle enunciated by Mason J, and would be regarded as a serious contempt. It was contrary to the Solicitors' Conduct Rules, the policy behind which is the prevention of interference with proper Court process. 2. One of the many mischiefs these Rules seek to avoid is enabling a party, after the event, to assert that it had put arguments to the Court of which no proper account had been taken, even though there had been no appearance at the proper time for those arguments to be adduced. 3. In the face of this communication, I considered that it was inappropriate for the Motion to proceed at the time. 4. I directed the solicitor having supervision of the Associate, to be present at 2.00 pm the following day. I conveyed to the solicitors that I wished to hear submissions as to whether the Court should exercise its supervisory jurisdiction in relation to the sending of the email and the letter. 5. On the afternoon of 20 August 2019, I received a communication from a partner at Tisher Liner that he was the supervising partner in the matter and would attend Court. He was the author of the letter. 6. At 2.00 pm on 21 August 2019, the partner was present in Court when the Motion was called on. He did not have instructions to, and did not, appear on the Motion. After hearing the Motion, there was a colloquy between the Court and him. 7. He tendered an unreserved and unqualified apology to the Court for what had been done. Whatever had been his or his Associate's state of mind when the email and letter had been dispatched to me, it was readily apparent that it was now clearly understood and acknowledged that sending them had been seriously improper. He sought to withdraw the letter, and requested that it be disregarded, as plainly it must, in determination of the real issues in the proceedings. 8. He assured me that Tisher Liner accepted responsibility for the payment of the plaintiffs' costs thrown away by their conduct (which caused the adjournment of the Motion) and that those costs would not be recovered from Chalmers and Cheah. 9. He told me that it was not intended, in sending the email and letter, to influence the Court. I record that I did not accept this. There is no other way to view what was done other than as a perceived method of putting arguments before the Court for the Motion, where there would be no appearance at which those arguments could otherwise be put. 10. But I did accept the apology. The processes of the Court will not, as it has turned out, be undermined. The plaintiffs will not be prejudiced. The plaintiffs did not suggest that any perception of apprehended bias had arisen as a result of the sending of the email and letter. 11. I consider that the apology was genuine. 12. I informed the partner that I would not request the Registrar of the Court to commence proceedings for contempt. 13. It is, unfortunately, an all too frequent occurrence that legal practitioners send contentious correspondence to judges, where they should plainly not do it, and where they should be acutely aware that they must not. The Courts have stressed this on numerous occasions: see, for example, R v Fisher (2009) 22 VR 343 and Cronulla-Sutherland District Rugby League Football Club Limited v Nationwide News Pty Ltd [2013] NSWSC 494. I stress it again. 14. I now turn to the case. The Case Striking out and judgment 1. Section 61(1) of the Civil Procedure Act 2005 (NSW) (CPA) provides: (1) The court may, by order, give such directions as it thinks fit (whether or not inconsistent with rules of court) for the speedy determination of the real issues between the parties to the proceedings. 1. CPA s 61(3)(c) provides: (3) If a party to whom such a direction has been given fails to comply with the direction, the court may, by order, do any one or more of the following: […] (c) it may strike out any defence filed by a defendant, and give judgment accordingly, 1. The affidavit of Charles Coleman, earlier referred to, made it clear that Chalmers and Cheah had no intention of defending the proceedings, and by clear implication that they had no intention of complying with directions of the Court for the preparation of the hearing. They did not instruct solicitors or counsel to appear on the Motion. 2. They were, at the time of the Motion and at the time of the hearing, in default of the discovery orders. 3. Chalmers did produce a List of Documents, which was served on the plaintiffs' solicitors on 5 August 2019. Enclosed with the List of Documents was an affidavit of Chalmers, affirmed on 23 May 2019, attesting that he had, or had within the 6 months prior to the commencement of proceedings, no documents in his possession responsive to certain classes of documents sought by the discovery order. Category 21, which required production of documents 'recording the total advertising revenue earned by each of SPL and Wylde for FY15, FY16 and FY17', is one such class. However, the evidence shows that: 1. on 12 February 2018, Chalmers sent an email to Garren which attached sales ledgers for SPL and the Wylde Group Inc for the period 1 January 2017 to 31 December 2017; 2. on or around 21 October 2018, Chalmers apparently provided Mr Gideon Rathner, an administrator of SPG and SPL, with a Balance Sheet and Income Statement for the Wylde Group Inc for the period 1 January 2018 to 31 October 2018; and 3. in a second affidavit affirmed on 23 May 2019, Chalmers stated that he had 'been through SPL's Xero records' to identify certain SPL advertising revenue for the period 22 April 2016 to 17 November 2016. 1. Chalmers, at the very least, had documents in his custody or control which were responsive to category 21, but he did not discover them. 2. Cheah did not file a List of Documents in the proceedings and she did not give discovery as ordered. I infer from her stated intention to not defend the proceedings that she never intended to remedy her default. 3. Pursuant to CPA s 61(3)(c), I made orders on the plaintiffs' Notice of Motion to the following effect: * the defences of Chalmers and Cheah were struck out, and * if by 28 August 2019 the Chalmers and Cheah had not complied with the orders for discovery made on 12 July 2019, there would at midnight on 28 August 2019 be judgment for the plaintiffs against Chalmers and Cheah, damages to be assessed. 1. I ordered Chalmers and Cheah to pay the costs of the Motion on the indemnity basis. 2. On 27 August 2019, Tisher Liner ceased to act for them. 3. Chalmers and Cheah did not comply with the Court's orders, and there was judgment against them with effect from midnight on 28 August 2019. Relevant statutory provisions and approach 1. The ACL is contained within Schedule 2 of the Competition and Consumer Act 2010 (Cth). 2. Section 2(1)(c) of the ACL provides relevantly: (1) In this Schedule: [...] involved: a person is involved, in a contravention of a provision of this Schedule or in conduct that constitutes such a contravention, if the person: […] (c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or […] 1. Section 18(1) of the ACL, which is in Chapter 2, provides relevantly: (1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. 1. Section 236(1) of the ACL provides relevantly: (1) If: (a) a person (the claimant) suffers loss or damage because of the conduct of another person; and (b) the conduct contravened a provision of Chapter 2 […] the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention. 1. Although the defences of Chalmers and Cheah were struck out and the plaintiffs obtained judgment (with damages to be assessed), the remedy which the plaintiffs seek is the statutory one under ACL s 236. 2. To allow a claimant to recover loss or damage, the Court must be satisfied that such loss or damage has been suffered because of the conduct of the contravener or a person involved in the contravention. 3. There must be sufficient connection between the conduct and the damage suffered for the latter to be regarded as 'because of' the former. This is essentially a question of fact, to be determined by reference to common sense and experience and one into which policy considerations and value judgments necessarily enter: March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506; Wardley Australia Ltd v Western Australia (1992) 175 CLR 514; Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304. 4. The conduct complained of does not have to be the sole cause of the loss – it must merely be a sufficient cause: Henville v Walker (2001) 206 CLR 459. 5. Despite the absence of any defences from Chalmers and Cheah and despite the plaintiffs having judgment against them, I take the view that for the plaintiffs to recover they must nonetheless establish: * conduct in contravention of ACL s 18, * that they suffered loss or damage because of that conduct, and * the amount of the loss suffered. 1. As regards Cheah, the plaintiffs must establish the elements necessary to make out that she was involved in the contravention. 2. For the reasons which follow, the plaintiffs have established entitlement, against both Chalmers and Cheah, to the award which they seek. The merits 1. "Sporteluxe" is (or maybe was) the name of an internet-based publishing, marketing and advertising business, apparently founded by Cheah in 2012 'from her kitchen table'. The business model looked to 'leverage an existing and growing user community into a premium subscription box'. Its website referred to Cheah as 'one of Australia's most stylish spokespersons for wellness'. She is described in its advertising material as 'living the values of Sporteluxe every day'. 2. Cheah had a written agreement with International Management Group of America Pty Ltd (IMG), under which IMG would act as her management representative and would undertake sole responsibility for the development, negotiation and organisation of all income-producing activities and career development opportunities available to her on a 'worldwide basis'. Material in evidence enables the Court to infer that as at 31 March 2017, Cheah had received income, in her own right, attributable to activities covered by her agreement with IMG. 3. The Sporteluxe business was, until November 2017, when it was transferred to SGL as part of the transaction which is the subject of these proceedings, conducted by SPL. At all material times, Cheah was a director of SPL. Chalmers was a director of SPL from 1 May 2016 to 5 May 2017. 4. The Sporteluxe website included a link for making general enquiries and for making enquiries relating to Cheah. 5. On 14 August 2017, using the website, Emma directed an investment enquiry to Cheah. 6. There then followed what may be colloquially referred to as a due diligence exercise, in which financial information concerning the Sporteluxe business was made available to the plaintiffs. Information was made available by Chalmers directly to Garren, who passed it on to Stevens, and some information was made available by Chalmers to both Garren and Stevens. The information was, self-evidently, conveyed for the purpose of encouraging the plaintiffs to invest. It was undoubtedly contemplated by Chalmers (and for that matter Cheah) that information given to Garren (on behalf of Cadence) would be made available to Stevens. The conduct in providing it was plainly in trade or commerce. 7. Information was provided by Chalmers, amongst others, by way of: * a "Pitch Deck", which I now understand to be a description of a body of information given as part of a pitch (in the sense of a gambit) for business in the form of a metaphorical deck structure (a deck of cards comes to mind), dated 17 August 2017, * a computer file described as a "Cashflow Planner" sent on or around 22 August 2017, * an email described as an "Updated Cashflow Planner" sent on about 6 October 2017, and * an email referred to in the plaintiffs' Commercial List Statement as "the Sporteluxe clarification" sent on 11 October 2017. 1. The information included, critically, historic and forecast advertising sales revenue. 2. The Pitch Deck showed historic revenue for 2017 totalling $588,000. 3. The Cashflow Planner showed such revenue for 2017 as $526,184, made up as follows: Q1 2017 (historic) 93,679 Q2 2017 (historic) 106,605 Q3 2017 (forecast comprised in part by actual revenue figures) 153,900 Q4 2017 (forecast) 172,000 1. These figures are false and misleading. Revenue of $167,537.57 included in revenue represented to have been earned by the Sporteluxe business was not earned by that business, but by Cheah in her personal capacity from her IMG activities. SPL's records (to which the plaintiffs obtained access much later) reveal that this income was reallocated, deceptively, as income of the Sporteluxe business operated by SPL. The following is the entry in SPL's ledger of Advertising Sales Transactions: Date Type Transaction Reference Debit Credit 31 Mar 2017 MJ IMG income reallocated from Bianca loan account – IMG income reallocated from Bianca loan account #5721 $167,537.57 1. It is apparent from this business record that an amount equivalent to this income had, before the reallocation, been lent by Cheah to SPL. The economic effect of the reallocation is not only to discharge the loan obligation, but to reflect revenue which was not earned by SPL as revenue that was. 2. The provision by Chalmers of financial information, which included this amount as revenue of the Sporteluxe business run by SPL, was conduct, in trade or commerce, which was misleading or deceptive in contravention of ACL s 18. 3. Its provision was misleading or deceptive in another significant respect. 4. In the Sporteluxe clarification, it was stated that growth in advertising sales revenue and advertising sales had been "organic". This is a representation that the performance of the business was due to its own revenue generating capacity, without external contribution. Contrary to this representation, a material proportion of the 2017 represented revenue was not revenue of SPL but came from an outside source, namely Cheah's IMG activities. 5. The wrongly included income accounts for 47% of the actual and forecast revenue for the first three quarters of 2017. 6. I turn then to whether Cheah was a person involved in the contraventions. She will have been if she was in any way, directly or indirectly, knowingly concerned in, or party to, them, that is if she knew of the facts and circumstances giving rise to the contravention: Yorke v Lucas (1985) 158 CLR 661. I find that she did have such knowledge. 7. The original approach by Emma was to Cheah. Although the direct provision of financial information was then left principally to Chalmers, Cheah was plainly aware that financial and other information was being provided to the plaintiffs as a precursor to investment being sought by her. 8. Cheah was a signatory to both share subscription agreements on behalf of SGL, and a party in her own right. The share subscription agreements include a warranty by her that documents and materials (including emails) made available by SGL to the plaintiffs as part of the due diligence material were accurate and complete in all material respects, and that all information disclosed by SGL was true, accurate and complete in all material respects when disclosed and not, by omission or otherwise, misleading in any material respect. 9. Cheah was at all material times a director of SPL. 10. Having regard to the aforegoing, it is close to inconceivable that Cheah did not know: * that historic and projected revenue figures were being provided by Chalmers to the plaintiffs as part of the due diligence process, * that she, under an agreement to which she was a party, and not SPL's business had earned the IMG revenue, * that she had lent her own money to SPL, * of the reallocation and its effect on SPL's revenue, and * that the revenue figures given to the plaintiffs showed or would show her IMG earnings as revenue of SPL's business. 1. But inconceivability of the negative is not required, only the balance of probabilities of the positive. 2. It may safely be inferred, and I find, that it is more probable than not that Cheah had knowledge of all of these things, that is, of the facts and circumstances constituting the contravention. 3. Evidence is to be weighed according to the power of the party to produce it: Hampton Court Ltd v Crookes (1957) 97 CLR 367 at 371-2 per Dixon CJ. 4. The fact and extent of Cheah's knowledge is peculiarly within her own knowledge. This does not relieve the plaintiffs of the necessity of having to show some evidence of Cheah's knowledge, but slight evidence is enough unless explained away by her. 5. Added to this, Cheah's defence was struck out, the allegations against her (including of her knowledge) are untraversed, she did not defend the case against her, she did not give evidence and she failed, in breach of orders of the Court, to give any discovery in circumstances where she is beyond the Court's jurisdiction, leaving the plaintiffs powerless to procure full and frank disclosure by her of material pertinent to her knowledge. 6. These considerations do not constitute evidence or fill any gaps, but they provide an additional level of comfort that the findings against her are justified. Damages 1. On 11 November 2017, Cadence entered into a Share Subscription Agreement with SGL, under which it agreed to subscribe for 49,015 shares in SGL for $1,066,649.73. In fact, Cadence paid the subscription monies on 3 November 2017. 2. On 14 November 2017, Stevens entered into a Share Subscription Agreement with SGL, under which he agreed to subscribe for 2,297 shares for $49,986.63. In fact he paid the subscription amount on 10 November 2017 (the day he signed the agreement). 3. Before the shares in each instance were subscribed for, SPL's Sporteluxe business was transferred to SGL. 4. Garren, who is the sole director of Cadence, gave evidence, which I accept, of the matters upon which he relied in committing Cadence to the transaction. The factors included the consolidated advertising revenue figures for 2017 dealt with above. He understood that advertising sales had been organic, which provided him with comfort that the forecast in upside advertising revenue was achievable once the new funds were invested and additional sales resources hired. He understood that Cheah undertook modelling and endorsement work with IMG, but had no knowledge of its extent. He had no knowledge that the figure of $167,537 had previously been accounted as monies owed to Cheah in connection with her modelling and endorsement work. 5. Stevens gave evidence, which I accept, that in committing to his transaction he relied on the 2017 advertising revenue in the Pitch Deck and Sporteluxe Clarification. 6. The evidence satisfies me that in paying over their money for shares in SGL, Cadence and Stevens relied on the misleading financial information given to them and consequently suffered loss because of the misleading or deceptive conduct complained of. 7. The evidence satisfies me that, in doing so, Cadence and Stevens lost their money. The shares in SGL for which Cadence and Stevens subscribed are worthless and, on the true figures, were worthless at the date they were issued to Cadence and Stevens. The latter fact is established by the expert report of a forensic accountant, Marnus Beylefeld, called by the plaintiffs: see Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653 at 685 and following. 8. In their statutory report, dated 14 January 2019, the liquidators of SGL say that at the current time there is not expected to be sufficient funds to pay a dividend to any creditors. 9. The report makes somewhat interesting reading. The liquidators say that based on their investigations to date it appears that of the $1,116,636.36 raised from Cadence and Stevens: * $699,381.41 was paid to The Wylde Group Inc (TWG) (a Delaware corporation associated with Chalmers and Cheah which carried on the Sporteluxe business in the USA and by which Chalmers was employed under the role and title of President and Cheah was employed under the role and title of Chief Executive Officer), [1] * $209,911.00 was paid to SPL, including $92,612.30 on paid to TYK, * the remainder appears, on initial review, to have been used to pay business related expenses. 1. The liquidators' record that they are not satisfied that the payments to TWG have been adequately explained and substantiated. Chalmers and Cheah have disclosed that they 'have little or no assets available from which an order could be paid if an action against them is pursued and is successful.' They have stated that they 'each earn $500 per month from TWG'. 2. I conclude that: * Cadence is entitled to judgment against Chalmers and Cheah for $1,066,649.73, and * Stevens is entitled to judgment against Chalmers and Cheah for $49,986.63. 1. There will be judgment accordingly. 2. Cadence and Stevens are also entitled to pre-judgment interest from the respective dates of payment to the date of judgment pursuant to CPA s 100(1) at the rates specified in Practice Note SC Gen 16. 3. Chalmers and Cheah are to pay the plaintiffs' costs. 4. The plaintiffs are to bring in short minutes reflecting this outcome, with interest calculated to the date of this judgment. 5. The Exhibits are to be returned. ********** Endnote 1. The shares in this entity were apparently transferred to SGL as part of the transaction. 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. Decision last updated: 06 September 2019