Backoffice Investments v Campbell

Backoffice Investments v Campbell - [2007] NSWSC 161 - NSWSC 2006 case summary — Zoe

[32]

1.4 The original operating results have been adjusted by the company's external accountants in respect of abnormal/non recurring items so as to establish a financial history of the company's present activities. 5 Summaries attached to the Information Memorandum recorded gross sales of $1.014 million for 2001; $1.058 million for 2002 and $1.020 million for 2003. They included a preliminary statement of gross sales for 2004 at $955,000 and a budgeted figure for gross sales for 2005 at $1.35 million. The summaries included EBIT at $208,000 for 2001, $245,000 for 2002 and $251,000 for 2003. The preliminary statement for 2004 recorded the EBIT at $356,000 and the budgeted EBIT for 2005 at $545,000. 6 Weeks was also a client of Bato Partners and was provided with a copy of the Information Memorandum. Phil Raby, Chartered Accountant, a friend and colleague of Weeks, assisted Weeks in the due diligence process prior to Weeks making an offer to purchase the share in the Company. On 1 December 2004 Weeks wrote by email to a partner of Bato Partners, Alan Horn, with whom he and Mr Raby had been dealing. That email referred to recent discussions with Mr Horn and the fact that the value of the business was based on the Company's current financial year performance and not on its historical results. Weeks advised Mr Horn that for this reason it was important that he received the profit and loss accounts for July to November 2004 together with the November 2004 Balance Sheet and Trial Balance. Weeks also advised Mr Horn that he was assuming, and certainly hoped, that "these numbers are prior to any significant 'adjustments', which would be excluded from any valuation consideration". 7 On 5 December 2004, Mr Horn wrote to Weeks and Campbell enclosing a revised "JV budget" for the year ending 31 December 2005. Mr Horn claimed that this budget was based on the "recent input provided by yourselves, as well as the previous budget estimate". At this stage it was envisaged that there would be a joint venture between the parties, however that ultimately changed to a share purchase. Mr Horn's 5 December 2004 email included the following: The sales budget reflects the JV strategy that will allow Doug to be "free" from the office to initiate major new business, as well as Spiros coming on board and Tim developing new business from selected target areas (ie. childcare, hospitals etc.).

[40]

Horn: The schedule details $96,100 of non-recurring expenses. $2600 represents an accounting treatment for obsolete inventories that you can easily verify. $16,000 represents fees paid to Bato Partners that will not recur under the new ownership. Our fees can easily be checked in the company's accounting records. This leaves $77,500 for the 5 month period to 30 November 2004 and which represents the difference between the proprietor's drawings from the business and that amount for which a general manager could be employed for a small business of this size. In essence, Doug receives approximately $271,000 per annum from the business in salary, motor vehicle allowance and other expense allowances whereas we have estimated that a general manager could be recruited for this business at a salary of $85,000 per annum. The difference is $186,000 per annum and adjusted to 5 months to 30 November 2004, it leaves $77,500 as an expense that is non-recurring for that period. 12 Mr Horn also claimed that he advised Weeks that the Balance Sheet and Profit and Loss Statement in respect of the 5 months ended 30 November 2004 would be part of the sale contract and subject to the usual warranties but that the Add Backs document would not form part of the contract. As it turned out the amount in the Add Backs document was included by reference to the "Proprietor's estimates" of non-recurring expenses. Mr Horn claimed that he advised Weeks that he would have to undertake his own due diligence "to be comfortable with your estimate of the level of operating performance going forward". He claimed that Weeks said that he would "certainly" be doing his own assessment of the business' operating performance going forward. Mr Horn also provided a copy of a Memorandum of Understanding to Weeks. Although it referred to the obsolete plan for a joint-venture, it relevantly stated: Pricing: The agreed value of the Healthy water business is $2,250,000 with a 50% shareholding to have an acquisition cost of $1,125,000.

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18 From October 2004 the Company employed Penelope Anne Hunt as a consultant. Ms Hunt described her duties as "day to day management of the office and staff and marketing of the Healthy Water business". Part of Ms Hunt's duties included the banking and payroll for the Company. The Company's banker, the Commonwealth Bank (the Bank), provided a tool known as "Quickline" to which Ms Hunt had access for the payment of some suppliers' accounts and employees' salaries directly into their bank accounts. The Bank also provided the Internet banking service, known as "Netbank" but Ms Hunt was not authorised to use this service. Both Netbank and Quickline were linked to the same account with only the former showing the account balance. Ms Hunt made arrangements for the employees of the Company who were using Company vehicles to be provided with fuel cards and e-tags whereby the Company paid the cost of petrol and tolls. From March 2004 to 29 January 2005 Campbell's son, Chris Campbell, was employed initially as a service technician and later as service manager. During the last week of January 2005 and the first week of February 2005 three new employees (Messrs Tzelis, Brady and Wood) joined the Company. 19 The Company employed a bookkeeper, Andrew Eustace, who, amongst other things, entered the data into the MYOB database and completed BAS statements and the monthly accounts. Mr Eustace attended the Company's premises from time to time to complete these tasks. Weeks commences "work" 20 Weeks attended the Company's premises commencing on 10 January 2005. During the period 10 January 2005 to 24 January 2005 there were a number of email communications between Weeks and Mr Horn and Mr Horn and Campbell's solicitors, Rodd Peters Lawyers (RPL), in relation to the preparation of the various agreements. On 12 January 2005 Weeks sent an email to Mr Horn which included the following: We still have not been able to obtain final P&L and Balance Sheets or to close-off FY2003/2004 and December 31st. Andrew Eustace will be in tomorrow (Thursday) with the aim of doing this and having some 'clean' figures for inclusion in the agreements and more importantly being able to get on with the business of invoicing and posting creditors. 21 At about this time Weeks requested Ms Hannah and Ms Hunt to "stop invoicing", apparently to assist the "close-off" referred to in this email. This was a request that caused some controversy, with which I will deal later. On 12 January 2005 Mr Horn sent an email to Weeks advising that he had received the "30/11/04 management accounts" and that he would provide a copy to Weeks "when they are in an appropriate format for inclusion in the contract". On 13 January 2005 Weeks sent an email to Mr Horn in which he summarised the "items/activities required before completion", including the following: 2. Completion and closure of HW accounts: - December 31st, 2004 Balance Sheet - P&L to December 31st, 2004 - Quick reconciliation of Debtors, Creditors and Cash (to Bank statement) - I'm anticipating no significant changes from November '04 B/S

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In view of your warranty requirements in the sale contract, and in the light of the recent accounting disclosures in respect of the debtors and employee entitlement liability adjustments, it would be very prudent to conduct the physical stocktake with Tim asap so as to ensure that there are no unpleasant surprises in that area. 23 Mr Eustace completed the "adjustments" to the accounts and forwarded them to Mr Horn by fax dated 13 January 2005. The covering facsimile referred to the "updated" Balance Sheet, Profit and Loss to 30 November 2004. The matters to which Mr Eustace referred Mr Horn were: "the reversal of invoice to DC loan account; G J entries for leave accrual (slightly different to your figures, as I excluded sick leave); the $2500 fortnightly trans. to DC loan have been re-allocated to "Financing Costs" expense; ATO Running Balance account has been cleared". The Balance Sheet to 30 November 2004 enclosed with the fax listed Mr Campbell's loan to the Company as a liability in the amount of $3,759.76. Total assets were listed as $303,192.55. Total liabilities were listed as $104,304.42 with net assets as $198,888.13. Retained earnings were listed as $163,203.06, current year earnings as $35,683.07 and total equity as $198,888.13. Trade creditors were listed as $9,130.36. 24 Later on 13 January 2005 Mr Eustace sent a further fax to Mr Horn in which he adjusted the Balance Sheet as at 30 November 2004 to change the trade creditors to $63,625.75; a slight adjustment to GST providing a total for liabilities of $154,866.45 with net assets at $148,326.10. Retained earnings were reduced to $116,844.11 and current year earnings were reduced to $31,479.99 with total equity reduced to $148,326.10. 25 Between 10 January 2005 and 24 January 2005 there were a number of conversations between Campbell and Weeks, one of which occurred on 20 January 2005 when Campbell and Weeks met with Mr Horn at Bato Partners' offices to discuss the share purchase, the future of the business and the allocation of duties. Campbell claimed the following conversation took place at that meeting: Weeks: I'm going to do a corporate 101.

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You are responsible for all employees within the Company. 37 Campbell and Weeks agreed to divide the Managing Directors' obligations so that Campbell was responsible for Sales and Marketing and Weeks was responsible for Service and Installation and Finance, IT and Accounts. Weeks prepared a chart setting out those areas that was used at a staff meeting on 25 January 2005. Netbank access 38 On 24 January 2005 Ms Hunt sent an email to Weeks that included the following: Netbank Access In order for you to have access to the HW bank account, I've left a form on your desk which requires your signature. This will give you a client Id and your own password to give you access to the HW bank account. Once signed, please send the original back to the bank for processing. Note: to gain access you must have been Id'd by the bank and be a joint signatory to the account. 39 The "form" to which reference was made in this email is probably the form headed "Authority for Non Personal Accounts" receipt stamped by the Bank on 25 January 2005. It was signed by both Campbell and Weeks who were the "persons authorised to operate the account". In the space provided after the statement "Show method of operation eg, any one to sign, Treasurer plus one to sign or any two to sign etc.", the words "Any two must sign" were written. 40 On 27 January 2005 Campbell informed Ms Hunt that he had tried to pay some invoices using Netbank but was unable to obtain access. Campbell requested Ms Hunt to ask Weeks "what has happened to Netbank". The terms of the conversation between Ms Hunt and Weeks on 28 January 2005 are disputed. Weeks' evidence was that Ms Hunt claimed that he had changed the banking arrangements and expressed concern that she would not be able to run the payroll. Weeks claimed that Ms Hunt suggested that he had been "tampering with the bank facilities" and that he advised Ms Hunt that he had no idea what she was talking about and that he would call the Bank to find out what was going on. 41 Ms Hunt claimed that she asked Weeks whether he knew what happened to Netbank because Campbell could not get access to it. She claimed that Weeks looked at her "blankly and shrugged" and said: "well, so I can't do any thing". Ms Hunt claimed that when she expressed her concern that it may affect the payment of employees and suppliers and cause embarrassment to the Company, Weeks responded: "So, I don't care. Anyway, weekly pay is going to change, it's ineffective. Everyone will be changed to monthly payments. Also paying suppliers via EFT is not cost effective". Ms Hunt claimed that she said to Weeks: "it seems that whatever has occurred with you going to the bank this week, is affecting [the Company's] ability to meet its financial commitments" and that he responded: "I don't care, what can I do anyway". Ms Hunt claimed that Weeks refused to assist her and that he later ignored her and walked away from her.

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Weeks: I'll confirm my understanding with Alan and we'll need to discuss this at Friday's management meeting. 47 Later that day, Weeks had a conversation with Mr Horn who, according to Weeks, said that he had raised the fact that the Services Agreement commenced from 1 January 2005 with Campbell. Mr Horn said that he would talk to Mr Campbell and "sort this out". Weeks claimed that during the afternoon of 31 January 2005 he was scheduled to review the payables procedure with Ms Hunt. Weeks asked Ms Hunt whether she was ready to go over the payables with him and according to Weeks, Campbell shouted from his office words to the effect of, "don't show him anything, all he wants to do is get his hands on the money". Both Campbell and Ms Hunt denied that this occurred. In cross-examination Weeks agreed that from the time he had the discussion with Campbell about the invoices for his fees dated 31 January 2005, their relationship commenced to deteriorate. Weeks subsequently communicated with Mr Horn who suggested that perhaps the commencement date for payment for services should be 10 January 2005 rather than 1 January 2005. Weeks advised that he would reduce the amount in the invoice to $10,120 and make the same claim as Campbell for the motor vehicle allowance. 48 The versions of events between Ms Hunt and Weeks in January and early February 2005 are the subject of dispute, however an email that Ms Hunt sent to Mr Horn on 1 February 2005 gives some indication of the environment, at least from Ms Hunt's perspective. That email referred to the problem with the Internet banking and the conversations with Weeks that Ms Hunt regarded as most unsatisfactory. Ms Hunt also claimed that Weeks behaviour was "offensive" and that he continually reminded her and Ms Hannah of his "superior business experience". Ms Hunt claimed that Weeks: seemed "obsessed" about Campbell's previous spending on his Visa credit card "for the past months before his entry into the business"; was "condescending and patronising" and "endeavouring to control and oversee everything"; and was trying to "corporatise" the service team when what they needed was encouragement and leadership. The email concluded: Last night, I received another explosive lecture from a red faced and finger pointing Tim (again after the rest of the team had left for the day), essentially reminding me that he had invested a lot of money in this acquisition an [ sic ] it's in his interest to make it work. I said I understand but it is not my business what he spent acquiring a share of HW! I said I was personally frustrated. That as a 'manager' of the business, if I escalated an issue to him, that he was not 'taking ownership of it'. By way of example I told him of the 5D contract not being completed and sent. (5D manage the CBA account, one of our most valued clients) and that even after last Friday, as a 'critical member of the team' that he claimed I was, he didn't once ask whether or not I had managed to be paid or could he do anything to help. Yet, since starting I have received two invoices from him, One dated 1.1.05 for his motor vehicle lease and another today for a new computer.

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We will write to you under separate cover (without prejudice) to propose a settlement of the dispute between the parties. 73 In the meantime on 9 February 2005, Ms Hunt had sent an email to Weeks advising that she was "frustrated" and had decided to list a number of what she described as "pressing issues". Those so-called pressing issues were listed as follows in the email. Consequently, I have listed a number of pressing issues, which require your attention, in short these are: · Bank Documents As you are aware, we are now unable to trade with our suppliers when you refused yesterday to co-sign the relevant banking documents you & Doug had requested Diane apply for. With payments due to suppliers, and me not having access to you to co-sign the cheques, this is going to cause supplier concerns and prevent us from trading effectively. (Classic example was when the Photocopier was returned to the office today) · Overdraft Documents: Have you completed this documentation as previously agreed with Doug? · Service Team. I raised an issue with you last week with regards to the Service Team. They are keen for some direction and leadership. We have received some call outs as a result of the work Pat & Mick did last week. Mick has also asked when you will be in the office as he had some matters he wanted to discuss with you one on one. · Info Link. With the impending deadlines, I need a full brief from you on your expectations before I undertake the relevant work. Vivien has called for you every day this week, at least twice per day. I have been forwarding you messages via email. Can you please call her. · 5D Contract. I have completed the necessary paperwork on your behalf and apologized to 5D for the delay with returning the materials. However, as this is quite a common request from our customers, I wanted to take you through it for future requests. · Saturday Supervision. A lead of the business (you or Doug) must be available for Saturday supervision from 9.30am till 12.30pm. I understand that you and Doug were going to do 2 Saturdays per month each. I would like to roster these days by alternative Saturdays. Please tell me when you will be starting your Saturday work. · Telephone Messages: It's very embarrassing to manage phone call enquiries when your appointments call to discuss meetings you had previously arranged with them. It's also difficult when no one in the office has an idea of your diary movements to try and re-organise appointments for you. · New Premises. When you returned to the office last Friday, you mentioned that we were moving premises. The team are asking me questions about dates, location etc. Can you please provide an update. · Purchase Order. You mentioned an order we were expecting for approx. $80,000. At the time you mentioned one of the orders was from your brother. He needed multiple floors of a building installed with drinking water facilities. Can you please provide his name & contact so I can organize an appointment to progress with the sale?

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Penny, I hope this covers your outstanding questions. At this stage I'm planning to be in the office tomorrow and please feel free to raise any other queries with me then. 75 On 17 February 2005 Weeks and Campbell attended a coffee shop in Crows Nest for the purpose of signing a number of cheques. Weeks claimed that he signed cheques for the day to day running of the company at this meeting. Campbell's evidence was that Weeks refused to sign a number of cheques at this meeting and claimed that he did not have to sign what he believed to be unnecessary. Campbell claimed that Weeks said to him: "I am keeping the pressure on you Mr Campbell". Weeks denied saying these words but admitted that he declined to sign cheques for expenses that he did not believe were to pay for valid business expenses. Weeks sent an email to Campbell on 2 March 2005 suggesting that Campbell should let him know if there were creditors that required payment so that cheques could be drawn and processed. That email also suggested that he could always be contacted on his mobile. Campbell's evidence was that he accepted that he was writing to him indicating a willingness to sign cheques but that he had refused to sign some cheques that he regarded as "not necessary". 76 Between about 9 February 2005 and 17 February 2005 there were negotiations occurring between the parties which "stalled" on 17 February 2005. The respective lawyers made an arrangement that Weeks would not attend the office during the negotiations but after the negotiations failed he recommenced attendance from 21 February 2005. On his return to the office Weeks received a letter from Campbell dated 18 February 2005 together with an attached letter dated 21 February 2005 addressed to Campbell from Mr Pusell of the Bank. The letter from Campbell referred to the "ongoing discussions" with Weeks regarding his "continued refusal to sign a joint and several personal guarantee in support of the $60,000 overdraft facility" available to the Company for the previous eight years. The letter went on to advise Weeks that he had seven days to sign the relevant documents otherwise it would be necessary for Campbell to withdraw his personal guarantee which was supporting the overdraft facility. The letter from the Bank advised Campbell that even though the Bank held a charge over the Company's assets it still required a guarantee from all directors and shareholders. 77 On 23 February 2005 Campbell sent an email to Weeks in which he claimed that Weeks had ignored his letter regarding the overdraft. That email also made a raft of other complaints against Weeks including: ignoring Campbell's "urgent plight" to find new business premises since late January; ignoring general invoicing duties; inappropriately burdening a staff member with his personal grievances against Campbell; and a failure to discuss with Campbell current business opportunities. Campbell alleged that he believed Weeks was deliberately putting him under severe work pressures while trying to undermine him to staff. 78 Campbell's email of 23 February 2005 prompted a lengthy email from Weeks on 24 February 2005. That email included a claim by Weeks that Campbell was 'blocking' his remuneration under his service contract and that Campbell was advising him that the Company could not meet its financial commitments. In those circumstances Weeks advised that he was simply not in a position to expose either himself or his family further with the personal guarantees that would be required to purchase a suitable alternative property. That email included the following: When the investment in Healthy Water was presented, I was told the Company was 'very' profitable and with a positive cash flow. You have indicated more than once that this is not the case, which is obviously a huge concern to me; as it should be.

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While I am of course concerned that Healthy Water is not financially the Company it was represented to be, I would have preferred that we discuss this, understand the issues and agree mutually an appropriate course of action going forward. That's what partners do! 79 On 24 February 2005 Weeks advised Campbell by email that he wished to call a board meeting for 3 March 2005 at 10am at the Company's offices, the agenda for which included: selection of new rental premises; bank signatories and authorisation of payments; director's guarantee for bank overdraft; car allowance and reimbursement of business expenses and directors' service agreements. 80 By this stage Campbell and Weeks were exchanging insults in emails: on the one hand Campbell was refusing to pay Weeks any money and on the other Weeks was not signing the guarantee for the overdraft. In respect of this guarantee Weeks' evidence was that he rang Mr Pusell at the Bank and advised him that he was a director of the Company and that he had recently acquired the Company. Mr Pusell advised Weeks that the Bank's records did not reflect that position. Mr Pusell advised Weeks that the Bank would not be able to process any guarantee provided by Weeks until such time as the ASIC records reflected that Weeks was a director. 81 There was debate between Weeks and Campbell as to whether Mr Horn could be present at the proposed board meeting. Weeks initially accepted that Mr Horn could be present at the meeting but should not chair the meeting. Weeks then changed his mind and advised Campbell that he did not believe that the issues for discussion required Mr Horn's presence. Campbell suggested that the board meeting be postponed for a week and proposed additional items for discussion at the meeting including the letter that he had written to Weeks on 6 February 2005. 82 In an email of 8 March 2005 Weeks provided Campbell with a document entitled "Report to the Board of Healthy Water (Australia) P/L". In that document Weeks referred to operating losses and significant cash payments prior to January severely impacting on the Company's cash flow. This document also referred to Campbell's alleged obstruction of any payment to Weeks pursuant to his Service Agreement in the amount of $30,000. Weeks noted that Campbell had been paid. The communications between Weeks and Campbell declined even further after this report and in an email to Weeks dated 17 March 2005, Campbell advised that he had estimated that they would each need to provide a loan to the Company of approximately $30,000. Weeks' response was that he felt that the Company should be structured in such a way that it could fund its operations without the need for ongoing cash injections. Weeks advised Campbell that "given the current circumstances" it was unlikely that he would be investing further in the Company and that it would have to operate within the current resources. By the end of March 2005 Weeks had sought access to the bank statements and cheque books of the Company, but was not provided with such access. By this stage Weeks had advised the Bank that cheques were being written without his signature, apparently causing the Bank to put a stop on the trading account of the Company. 83 On 31 March 2005, RPL wrote to Mr Weeks advising that they had been kept abreast of developments that had transpired since the acquisition of the 50% share in the Company. That letter included the following: It is abundantly clear from the correspondence between you and Mr Campbell, the actioning of stop orders with the Commonwealth Bank, the inability to hold directors meetings and to resolve day to day issues of the company and a number of other matters that there has occurred a loggerheads in the management of the company. In the circumstances, we have taken advice on behalf of our client from Senior Counsel who has advised that the company should be placed into voluntary administration. 84 Attached to the letter were proposed minutes of a meeting of directors of the Company, signed by Campbell and dated 31 March 2005 in which the following appeared: Resolved : It is in the opinion of the Directors that the company is insolvent, or is likely to become insolvent at some future time.

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For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company. 92 The Court may make any order under that s 233 of the Act that it considers appropriate including: that the company be wound up (s 233(1)(a)); that there be a purchase of any shares of a member of the company (s 233(1)(d)); that there be a purchase of shares with an appropriate reduction of the company's share capital (s 233(1)(e)); appointing a receiver or receiver and manager of any or all of the company's property (s 233(1)(h)); or that a person do a specified act (s 233(1)(j)). 93 The defendants submitted that it is necessary for the plaintiffs to delineate precisely whether the conduct in respect of which complaint is made is contrary to the members as a whole or against particular members and to spell out the conduct relied upon. In this regard the defendants relied upon the following passage from Tamberlin J's judgment in Shelton v NRMA [2004] 51 ACSR 278: [25] The operation of s 232 of the Corporations Act was recently considered by Campbell J in Turnbull v National Roads and Motorists' Assn Ltd (2004) 50 ACSR 44 ( Turnbull v NRMA ). In that case, his Honour had to consider whether the grounds in relation to the conduct set out in s 232(d) and (e) provided two separate bases for the court's intervention, namely, being contrary to the interests of the members of a whole, or being oppressive to, or unfairly prejudicial to, or unfairly discriminatory against, a member or members in whatever capacity. After reviewing authorities and considering the legislative history, his Honour came to the conclusion that the ground of being "contrary to the interest of members as a whole" in s 232(d) was intended to be independent to the ground of being "oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or any other capacity" in s 232(e). I agree with the conclusion his Honour reached on this point. In my view, the pleading should spell out the respects in which it is said that the conduct is contrary to interests of members as a whole pursuant to s 232(d), and should also precisely delineate the basis on which s 232(e) is relied on. This has not been done. It is of course possible that there will be a considerable amount of overlap between the grounds relied on in relation to subss (d) and (e), but this does not provide a basis for omitting to address each of the two heads relied on .

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[26] In the present case, however, the ASOC does not draw any distinction between the two grounds, and a substantial number of allegations combine the two criteria without laying the ground for each of these separate bases which can give rise to orders under s 233. The ASOC does not refer to ss 232 or 233 of the Corporations Act in terms or by reference but at times it does use in a rolled-up the language of s 232. It does not specify how the extensive relief sought, presumably under s 233, will have the effect of remedying the conduct complained of or the consequences of that conduct. This is largely a result of the fact that the pleading does not delineate the way in which the conduct is unfairly prejudicial, oppressive or discriminatory, nor how the NRMA, in the conduct of its affairs, has impacted detrimentally upon the organisation and its members. There is a leap from the reference to a alleged irregularities to the allegation that in some unspecified way it is "just and equitable" that the constitution of 2003 should be set aside or dramatically modified, and the previous constitution re-instated. The remedies provide for in s 233 are designed to alleviate or remove the adverse consequences of conduct carried out in contravention of s 232, but the ASOC is silent as to how this is to be achieved if the applicant is successful. Even if it were to be established that one or more acts of the NRMA, the board, or "majority" shareholders were to contravene s 232, it does not necessarily follow that the relief sought should or would be granted under s 233 . 94 The defendants maintained the submission that in the present case the plaintiffs have used a "rolled up format" and have failed to specify whether the conduct complained of offends s 232(d) or s 232(e) of the Act. The outcome of a complaint of this type will depend upon the particular characteristics of each case including, the nature of the pleading and the manner in which the trial is conducted. It may also depend on the timing of the complaint, whether it was made pre-trial or otherwise, and the impact, if any, it is alleged to have, or have had, on the defendants' capacity to meet the allegations. Shelton was decided at the pre-trial stage and in written submissions in reply (18 December 2006), the plaintiffs submitted that Tamberlin J's reasoning does not apply where there has been a full hearing, during which the plaintiffs' claims of oppression have been fully articulated both in the evidence and in detailed written and oral submissions. 95 The first time the pleading point was raised in this case was at the end of the evidence on the second last day of the trial. Mr Hammerschlag advised that "there will be submissions about this in due course" and that the "pleading is improper and does not come within the sections" (tr 549). The next time the pleading point was raised was when the defendants' written outline of submissions was filed after the completion of plaintiffs' closing submissions on the last day of the trial (tr 589). The written outline contained the defendants' submissions referred to above. However in final oral submissions Mr Hammerschlag said (tr 592): "I am not a great fan of pleading points. The point about it is that when your Honour comes to assess whether this is oppressive or not, your Honour doesn't have the assistance of how this fits into the subsections … which is not a matter of mere form …". Mr Hammerschlag was drawing the distinction between a claim that conduct was oppressive to the members of a company as a whole and a claim that the conduct was oppressive to an individual member of the Company. 96 There was no claim made on the defendants' behalf that they were unable to understand the case made against them or that they were prejudiced in any way in the conduct of the litigation. In paragraph 20(c) of the FAS the plaintiffs make claims under both subsections of s 232 of the Act. The written and oral submissions went into precise detail as to how it is alleged Campbell's conduct was oppressive. In my view this so-called pleading point is of no real consequence.

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97 In reviewing the evidence for the purpose of determining whether the affairs of the Company were conducted unfairly, the test is whether on the balance of probabilities the objective commercial bystander would be so satisfied: Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704 per Young J; Cassegrain v CTK Engineering Pty Ltd (2005) 54 ACSR 249 at [84] per White J. 98 To state the obvious, there must be an entitlement to share in the management of the Company before an "exclusion" from such management can be an indicium of unfairness. There is no doubt that Backoffice, through the provision of Weeks as a joint managing director, was entitled to share jointly in the day-to-day management of the affairs of the Company with Campbell (cl 6.1 Shareholders Agreement). Backoffice was entitled to the payment of the Fee under the Services Agreement for the procurement of Weeks to provide that day-to-day management of the Company. Backoffice claims that the conduct of the affairs of the Company was oppressive, unfairly prejudicial and unfairly discriminatory to it by reason of the exclusion of Weeks, and thus it, from the management of the Company. It also claims that the failure to pay the Fee to it pursuant to the Services Agreement was oppressive, unfairly prejudicial and unfairly discriminatory to it. 99 In support of the submission that improper exclusion from the management of the Company may be oppressive the plaintiffs relied upon Hogg v Dymock (1993) 11 ACSR 14 and Yazbek v Aldora Holdings Pty Ltd (2003) 45 ACSR 53. Hogg v Dymock was a case decided under the Corporations Law (the Law) in which a 50% shareholder complained of oppression by the conduct of the other shareholder in dismissing her from employment with the company. The complainant applied for an interlocutory injunction to retain the position as employee. Malcolm CJ refused the interlocutory injunction on the ground, inter alia, that it had not been shown that damages were an inadequate remedy. In concluding that there was a serous issue to be tried his Honour said at 20: The directors of a company are required to conduct the affairs of the company in the interests of the company and its shareholders as a whole. They may not engage in conduct which would be oppressive or unfairly prejudicial to or unfairly discriminatory against a shareholder. Such conduct clearly can exist in a small company such as the present. In Sanford v Sanford Courier Services Pty Ltd (1986) 10 ACLR 549; 5 ACLC 394 the high level of salaries and other payments made by a couple who ran the business to themselves were held to be oppressive because the plaintiff, who was an equal shareholder but no longer a director did not receive any salary and so did not share fairly in the company profits.

[218]

Removal from a salaried position within the company may be unfair, even though it might be a valid exercise of the powers of the majority of the directors: Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 378-9 per Lord Wilberforce. While that case involved a partnership which had been converted into a company, it is common ground that the parties in this case envisaged in the first instance that they would be partners and share equally in the day to day conduct of the business as well as in the management of it at the level of directors. In the Westbourne Galleries case there was an expectation of continuing participation. This was also the case in Diligenti v RWMD Operations Kelowna Ltd (1976) 1 BC 36 in which a founding member was removed as a director and dismissed as a salaried manager. 100 There is no doubt that in the present case there was an expectation of continuing participation in the management of the Company. One issue in Yazbek v Aldora Holdings Pty Ltd was the validity of a meeting of shareholders in respect of which there was a claim that the notice of the meeting was deliberately sent to an incorrect address. There was also a question as to whether there was a quorum. There was a further claim that the conduct of the defendant, including the conduct relating to the meeting, was oppressive. Austin J held that the meeting was invalid and although his Honour was satisfied that oppression and unfair prejudice had been established and that the plaintiff was entitled to relief under s 233 of the Act, he concluded that the appropriate relief was to declare the meeting invalid and make orders reversing its effect. The passage of the judgment relied upon by the plaintiffs in respect of the improper exclusion from the management of the Company is as follows: 60 The plaintiff submits that the evidence as a whole constitutes strong evidence that the affairs of Aldora Holdings have been conducted, at least since April 2002, in a manner oppressive to the plaintiff or unfairly prejudicial to him. Apart from the evidence relating to the purported share transfers and the invalid meeting, the plaintiff draws attention to the fact that since April/May 2002, Robert, Annette and Leila have purported to control the affairs of Aldora Holdings so as to exclude the plaintiff from management and to keep him away from financial information in relation to the company. The information from which he was excluded extended to information as to the litigation in proceeding No 1507 of 2002, and information as to the purported disposal of Robert's shares, which Robert knew the plaintiff regarded as his primary asset for the purpose of negotiating and settling their litigation. I agree with these submissions. In my opinion a strong case of oppression and unfair prejudice has been made out: see Martin v Australian Squash Club (1996) 14 ACLC 452.

[219]

101 In the present case the plaintiffs submitted that Campbell excluded Weeks from the management of the Company within a very short time of the execution of the various Agreements on 24 January 2005. The defendants submitted that the plaintiffs' complaint is really one of "relegation" rather than exclusion. I do not accept that it is appropriate to characterise the claim for exclusion from management in that manner although I do accept that part of the plaintiffs' complaint is that Campbell decided that some of Weeks' directors' duties would be reallocated to Ms Hunt. 102 The plaintiffs relied on the letter of 6 February 2005 to demonstrate that Campbell had decided to exclude Weeks, unless he agreed to terms that were quite different to those that had been agreed two weeks earlier both in the Agreements and the arrangements that had been made as to the division of duties pursuant to those Agreements. That letter was in many respects quite extraordinary. Within less than two weeks of receiving $850,000 for the half share in the Company Campbell was claiming that the Company needed to be relieved of the "strain" on its financial resources. To that end he "urged", although I am satisfied it was a demand, that Weeks/Backoffice accept a reduction in the consultancy fee that had been agreed to only two weeks previously. I have no doubt that the reallocation of Weeks' directors' duties was a direct result of the complaints Ms Hunt made to Campbell about Weeks. 103 Campbell agreed in his oral evidence that he did not intend to pay any money to Weeks/Backoffice unless there was agreement to the terms of the 6 February 2005 letter (tr 442). Indeed Campbell refused to pay any of Backoffice's invoices for the Fee, notwithstanding that Sentinel was being paid. Campbell's evidence in relation to the refusal to pay the invoices included the following (tr 432-439): Q. Isn't the view that you took, Mr Campbell, in late January 2005, and for the months of February and March 2005, that you would run Healthy Water as you wanted to, regardless of any arrangements that you had made with Mr Weeks about the conduct of the business? A. That's not correct.

[289]

104 This evidence, like a great deal of Campbell's evidence referred to elsewhere in this judgment, contains a number of inconsistencies. Campbell initially denied that he accepted that any part of Weeks' claim was "valid". He then accepted that Weeks was entitled to be paid from 24 January 2005. He initially claimed that the meeting on 7 February 2005 was "very subdued", but when pressed by Mr Simpkins he admitted that not only did Weeks make it clear that he was very unhappy but also that he, Campbell, was also unhappy. In some instances when a witness changes position during the course of evidence, a conclusion may be reached that the witness was honestly mistaken and is attempting to do his best to give accurate and honest evidence. Having observed Campbell giving his evidence and having carefully reviewed his evidence in context and in conjunction with the documentary evidence I am satisfied that such a conclusion should not be drawn in relation to Campbell. 105 Ms Hunt's evidence in relation to the way in which she approached her business relationship with Weeks demonstrated a lack of openness and/or maturity. In a delicate and very effective cross-examination, Mr Simpkins established that Ms Hunt was motivated to record only matters adverse to Weeks in her diary. Ms Hunt agreed that within the first few days of Weeks' arrival, she recorded matters in her diary about Weeks because he made her feel "uncomfortable" and because she did not trust him (tr 516). Ms Hunt claimed she recorded in her diary Weeks' direction to her and Ms Hannah to "stop invoicing" so that she would have a record to justify her actions if someone asked about it "down the track" (tr 517). When pressed by Mr Simpkins as to whether she had asked Weeks for the reason for the cessation of invoicing at that time Ms Hunt claimed that she "would have" asked him (tr 517). When Mr Simpkins explored this matter further, Ms Hunt's following evidence was extremely unimpressive (tr 518): Q. If you had asked Mr Weeks what his reason was, is that something that you would have entered up in this diary you were maintaining? A. I am sorry?

[296]

106 Later in her evidence Ms Hunt tried to suggest that the reason there was no entry in her diary recording the explanation Weeks gave in relation to his direction not to invoice was because "he never gave an answer that justified it" (tr 525). When pressed about this answer Ms Hunt said: "He never justified why, he never gave an explanation as to why, that I recall" (tr 525). Ms Hunt then resorted to further unimpressive evidence as follows (tr 525): Q. If you asked Mr Weeks for an explanation and he refused or failed to do it, you would inevitably, as part of your diary recording, have made a note of that fact; isn't that right? A. No. Because I don't record every detail of the day in my diary. It is just pieces of information. 107 What Ms Hunt did was to report to Campbell that Weeks had given the instruction in relation to invoicing and obtained from Campbell a direction to continue with the invoicing. When asked whether she had advised Weeks of Campbell's instruction to continue invoicing, Ms Hunt said: "Probably. I can't remember. I'm sorry" (tr 519). Ms Hunt accepted that the "reasonable thing to do" was to pass that information on to Weeks and although she claimed that she "probably would have" informed Weeks, she ultimately agreed that she had no recollection of doing so (tr 520). It is clear to me that Ms Hunt did not ask Weeks for any explanation and did not advise him of Campbell's direction to continue invoicing. 108 As I have discussed elsewhere in this judgment, I have no doubt that Campbell's relationship with Ms Hunt; the need, as he saw it, to keep her happy; and Ms Hunt's constant complaints against Weeks, blinkered Campbell from dealing fairly with Weeks and ultimately with Backoffice. I have no doubt that, notwithstanding Campbell's and Ms Hunt's denial of the conversation, that Campbell instructed Ms Hunt to "give him nothing". I also have no doubt that Campbell said that Mr Horn should "get [Weeks] out of here". 109 The defendants submitted that Campbell's letter to Weeks dated 6 February 2005 was prompted by Weeks presenting his invoices on 31 January 2005 and also by the meeting of 4 February 2005. It was submitted that by this time Weeks had already caused frustration, disillusionment and upset with the staff and that, whatever the rights and wrongs, shortly after 10 January 2005 something occurred which prevented the payment of bills electronically. It was also submitted that Weeks failed to follow up an important contract for 5D and had only responded to Ms Hunt's requests after the deadline had been missed. The defendants also submitted that what occurred was in substance a deadlock which might have grounded a winding up of the Company on the just and equitable basis, but that the conduct relied upon when viewed in context was not on ordinary principles, oppressive, unfairly discriminatory or unfairly prejudicial so as to attract the operation of s 232 of the Act. I disagree.

[307]

117 The Shareholders Agreement required that meetings of directors take place at least once every month (cl 5.7). On 24 February 2005, Weeks suggested that a board meeting take place on 3 March 2005 at the offices of the Company. Campbell's initial response was: "you know exactly what is required to get the business and us working at full potential, so I do not get the point of another Board Meeting". On 25 February 2005, Weeks responded advising that this was the first board meeting that had been called. It appears that Campbell may have thought that the meetings that had occurred between Weeks, himself and Mr Horn were board meetings. 118 On 28 February 2005, Campbell said that he would not attend any board or management meeting unless Mr Horn was chairman. As I have said earlier, Weeks initially agreed that Mr Horn could attend the board meeting but subsequently withdrew his agreement for such attendance. Campbell indicated that he was not going to be available on 3 March 2005 and when Weeks tried to reschedule the meeting, Campbell indicated that he was "busy then too". Campbell subsequently advised Weeks that he was not willing to attend a board meeting with him unless Mr Horn was present. 119 The defendants submitted that the Shareholders Agreement provided machinery in the event of a "deadlock" and that Weeks did not avail himself of that mechanism. Clause 7.1 of the Shareholders Agreement must be read with clause 7.2. The mechanism was clearly one to be used in the event of a "Board Meeting voting deadlock". That point was never reached because Campbell would not attend the proposed board meeting. The breaking of the deadlock by the appointment of a Chairperson to have a casting vote was only to occur after a voting deadlock had been reached at a Board Meeting. Campbell was not entitled to demand that Mr Horn attend the Board Meeting, at least under the mechanism in clause 7.2 of the Shareholders Agreement. Obviously Mr Horn could have attended if both directors agreed, but that was not the case.

[310]

123 In Campbell's affidavit of 3 November 2006 he claimed that he reached Agreement with Weeks that once Weeks came on board, personal expenses would no longer be run through the Company. Campbell understood that to mean that there should no longer be any automatic payment of $750 to the credit card used by Campbell (tr 429). The plaintiff submitted that despite such agreement the Company continued to make payments to Campbell's personal credit card of $750 per week. Campbell was aware that the Company was making those payments at the time they were being made (tr 431-432). There is little doubt that Campbell continued to receive these payments inappropriately and inconsistently with the agreements between the parties. The fact that Campbell was receiving these payments whilst at the same time denying Weeks' claims for payment and refusing to pay Weeks or Backoffice any money, except for a laptop computer, is further evidence of Campbell's unfair and rather high-handed treatment of Weeks and Backoffice. 124 I am satisfied that Campbell's conduct was oppressive of Backoffice. Remedy 125 Backoffice seeks an order that Campbell purchase its share in the Company pursuant to s 233(1)(d) of the Act. The defendants submitted that an order for winding up is ordinarily a last resort: John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'Asia) Pty Ltd (1991) 6 ACSR 63. It was submitted that seeking a buy-out order when the consequence of the plaintiffs' own actions (in appointing a provisional liquidator) is to obtain relief involving the "destruction of the underlying subject matter (the Company's business) and the erosion of its value" is an attempt to unjustifiably and simultaneously approbate and reprobate. It was submitted that such an approach is inconsistent with the remedy sought: Sargent v ASL Developments Pty Ltd (1974) 131 CLR 634 at 641-642; The Commonwealth v Verwayen (1990) 170 CLR 394 at 408. 126 The defendants submitted that the plaintiffs are not entitled to bring this action. It was submitted that where a company is in liquidation, an action by a minority shareholder "will not lie". In support of this submission the defendants relied upon Zempilas v JN Taylor Holdings Ltd (in liq) (No 6) (1991) 5 ACSR 28, the facts of which are distinguishable from the present case in that an order had been made winding up the subject company. The action had been commenced by a minority shareholder seeking the appointment of a provisional liquidator, an order winding up the company, declarations of breach of the Companies (SA) Code by certain of the directors, certain restraining orders and damages against the directors. After the Court made the winding up order, the liquidator made an application to have the subject company substituted as the plaintiff. It was in these circumstances that Debelle J referred, at 30, to: the "general principle" that the only proper plaintiff in an action to redress a wrong done to a company is the company; and that where an order winding up a company has been made, the "ordinary rule" in the "ordinary case" is that the authority to decide whether the company should bring or continue any action to recover damages or secure any other relief for any wrong done to the company vests in the liquidator. His Honour said, at 30: So, it follows that a minority shareholders' action will not lie if a company is in liquidation. The appropriate procedure in such a situation is for the liquidator to bring the action on behalf of the company or, if he refuses to do so, a contributory may apply to the court for an order authorising him to bring an action in the company's name or compelling the liquidator to do so on such terms as to indemnity as the court considers appropriate: see Fargo Ltd v Godfroy [1986] 3 All ER 279.

[312]

128 The plaintiffs submitted that the primary function of the "provisional" liquidator is to maintain the status quo pending the determination of the proceedings. The defendants also submitted that the plaintiffs' oppression suit must fail because the Court will not order compulsory purchase of shares after a company has been wound up. In support of this submission the defendants relied upon Webb v Stanfield (1990) 2 ACSR 283. That was a case in which there were cross-applications, one brought by Webb for orders, inter alia, that Stanfield purchase his shares in the subject company, and the other, later, application brought by Stanfield for an order that the company be wound up. Webb and Stanfield acquired the subject company to carry on the business of insurance agent for Capita Assurance group commencing on 1 October 1988. The business was not successful. There was disputation between Webb and Stanfield and their working relationship had been brought to an end by 26 April 1989. Webb claimed that Stanfield, on his own behalf, appropriated to himself or to a new company controlled by him, the advantages of the subject company's agency agreement or business with Capita. 129 At first instance, Webb's application was dismissed and after a contested hearing the primary judge ordered that the company be wound up on the ground of insolvency. In dismissing the appeal, the Court (Demack, McPherson & Williams JJ) observed that at 26 April 1989 "if not before, the company, was by all accounts, insolvent" (at 285). Although counsel for Webb argued that the "winding up" made no difference to his client's application for an order that Stanfield purchase his share, the Court held (at 287) that to allow the application to "continue unabated is to ignore that fact that the company is presently in the process of being wound up under an order of this court that remains unchallenged" and that an order for compulsory purchase of the share "at once confronts the statutory prohibition in s 368(1) [in relevantly similar terms to s 468 of the Act] against share transfers after winding up has commenced". The Court then observed that even if that difficulty were to be overcome by an order of the court under that subsection, Webb had difficulties bringing himself within the terms of s 320(1) of the Companies (Qld) Code [in relevantly similar terms to s 232 of the Act]. The Court observed that Webb's complaint was that Stanfield had acted on his own behalf and not "by or on behalf of the company" (287). In the present case the defendants have not claimed or suggested that Campbell's actions were on his own behalf. In any event I am satisfied that the conduct complained of was conduct by or on behalf of the Company. 130 The plaintiffs emphasised the distinguishing features of that case of the company being in liquidation rather than "merely" provisional liquidation and that the appellant had failed to bring himself within the relevant section warranting relief. The plaintiffs also submitted that there is no prohibition on the transfer of shares prior to a winding up order being made. In this regard the plaintiffs relied upon s 468(3) of the Act, which provides that a Court may validate a disposition where an application for winding up has been filed but a winding up order has not been made. It was further submitted that the remedy sought by Backoffice against Campbell cannot be pursued by means of a proof of debt, and will not result in any prejudice to the creditors of the Company: Hewlett Packard Australia Pty Ltd v Siltak Holdings Pty Ltd [2005] NSWSC 672 (Unreported, Barrett J, 8 July 2005). 131 I am not satisfied that the appointment of the provisional liquidator precludes the plaintiffs from seeking an order under s 233(d) of the Act for the purchase of Backoffice's share. 132 The defendants also submitted that the plaintiffs should not be granted any relief under s 233(1)(d) of the Act by reason of the fact that Weeks/Backoffice had received an offer for the purchase of Backoffice's share and had refused such offer. In an email to Weeks dated 23 February 2005, Campbell claimed that "an offer was put to buy you out". Weeks responded by email dated 24 February 2005 that he had not received such an offer but that if he were to receive one he would give it due consideration. There is no evidence of the nature of the alleged offer and there is no evidence upon which a judgment can be made as to the reasonableness or otherwise of the offer, if made, or its rejection. The fact that there may have been an offer that was rejected is not an impediment to the exercise of my discretion in the plaintiffs' favour. 133 I am satisfied that the appropriate remedy in all the circumstances of this case is an order under s 233(1)(d), that Campbell purchase Backoffice's share in the Company. Price of the share 134 In Scottish Co-op Wholesale Society Ltd v Myer [1959] AC 324 Lord Denning said at 369: One of the most useful orders mentioned in the section-which will enable the court to do justice to the injured share-holders - is to order the oppressor to buy the shares at a fair price: and a fair price would be, I think, the value which the shares would have had at the date of the petition, if there had been no oppression. Once the oppressor has bought the shares, the company can survive. It can continue to operate. That is a matter for him. It is, no doubt, true that an order of this kind gives to the oppressed shareholders what is in effect money compensation for the injury done to them: but I see no objection to this. The section gives a large discretion to the court and it is well exercised in making an oppressor make compensation to those who have suffered at his hands.

[315]

138 The plaintiffs submitted that in the present case the appropriate date for valuation of the shares is 24 January 2005. By valuing the share at that date it was submitted that the Court will be able to exclude the financial effects of the oppressive conduct. In Re a Company [1983] 1 WLR 927 it was recognised that it could be appropriate to value the share as at the date that exclusion from the affairs of the company occurred (at 937). 139 It was within days of the acquisition of the share by Backoffice that Campbell decided the Company would not allow Backoffice to have the benefit of its purchase of the share and its entitlement to the Fee under the Services Agreement. Campbell and Sentinel have had the benefit of receiving payments out of the Company from 24 January 2005, whilst Weeks and Backoffice received nothing, except a small amount for a laptop computer and some fuel. 140 After the provisional liquidator was appointed, Campbell purchased the residual assets of the Company and continued to develop the business. That business was then sold to a competitor (tr 293). During the trial, the plaintiffs served a Notice to Produce on Campbell and Sentinel for the production of documents relating to the purchase of the assets and any subsequent sale. The defendants subsequently filed in Court a Motion to set aside that Notice to Produce. The defendants abandoned their Cross-Claim and the plaintiffs did not thereafter call upon the Notice to Produce. In the circumstances, the only evidence in relation to the transactions in which Campbell purchased the residual assets of the Company and then sold them to a competitor is the fact that they occurred. The marginal relevance of this fact is that it provides some support for the observation I make below in relation to the potential of the Company, but for the oppression. 141 The question of the valuation of the share in the Company was the subject of discussion between the experts. The plaintiffs relied upon the evidence of Goodwin Cullimore Allen Gower, a director of and chartered accountant with the firm GCA Gower & Co, Chartered Accountants. The defendants relied upon the evidence of Paul Alexander Russell, a chartered accountant and partner of the firm Sims Partners. Mr Gower and Mr Russell produced a Joint Report dated 23 November 2006 (Ex PD). 142 The experts approached the valuation of the share in the Company on different bases. Although they were not able to reach agreement on the value of the share, they were able to reach agreement on a number of related matters including that: (a) the most appropriate methodology to value one share in the Company is the capitalisation of future maintainable earnings (FMEs); (b) the valuation multiple of 3 to 4 times is an appropriate valuation multiple to adopt in valuing the share; and (c) in determining an appropriate level of FMEs it is necessary for the valuer to have regard to the historical and projected earnings of the business being sold after considering add-back adjustments and any other unusual variations in historical and forecast earnings. 143 On the one hand Mr Gower valued the share at 30 November 2004 and at 24 January 2005 on an historical basis, annualising earnings up to those particular dates. Mr Russell also valued the share on that basis, but in addition considered the budget and the potential of the Company to 30 June 2005, the end of the financial year in which the acquisition was made. This latter valuation approach of Mr Russell's was referred to as the "potential" approach. 144 Mr Gower valued the share as at 24 January 2005 as the mid-point between $300,000 and $520,000 at $410,000. Mr Russell valued the share on this basis as the mid-point between $496,404 and $661,872 at $579,138. Mr Russell's "potential" approach took into account the budget for the Company and concluded that the valuation was the midpoint between $731,085 and $974,780 at $852,933. The budgeted figures reflected increased levels of trading from new and identified customers. Mr Russell candidly conceded that he made no assessment of whether those levels of trading were justifiable. Indeed he was not instructed to do so. However, he did point to the $300,000 in annualised sales as a factor that he bore in mind in valuing the share on the "potential" basis (tr 541).

[320]

152 Mr Gower and Mr Russell were able to reach substantial agreement on the Company's December 2004 adjusted operating results. This relates to a claim by the plaintiffs that Campbell failed to inform Weeks in January 2005 that the operating results for December 2004 differed from the estimates for December 2004 in the Sales Revenue Report provided to Weeks in December 2004. Mr Gower and Mr Russell agreed that the Sales Revenue Report overstated the sales revenue of the Company by $7,147 and the EBIT of the Company in the range of $15,318 to $20,022. Although the experts agreed that the amounts were "overstated", it seems to me that it is more appropriate to describe the figures as "differing" from the estimates that were made in the Sales Revenue Report. Warranted balance sheet 153 Trade creditors: The first complaint made by the plaintiffs in respect of the warranted balance sheet is the alleged understatement of trade creditors. The warranted balance sheet recorded the Company's liability to trade creditors as at 30 November 2004 as $51,388.27. Mr Eustace's second fax of 13 January 2005 to Mr Horn, referred to earlier in this judgement recorded the Company's liability to trade creditors as $63,625.75. Mr Horn gave the following evidence in relation to that figure (tr 290-290): Q. You realised, didn't you, that one of the things that Mr Eustace had done was to increase the current liabilities item described as trade creditors from the figure in his earlier document of $9,130.36 to an increased figure of $63,625.75? A. Yes. Q. Did you communicate with Mr Andrew Eustace to obtain an understanding of what it was that had led him to make that provision? A. Yes. Q. Did you do that by telephone? A. I don't believe so. Q. Did you did do that in writing? A. I think it was later, actually it might have been the next day, all I did was I noted that one of the schedules he sent with that was the detailed listing of the creditors which amounted to 63,000 and that agreed with the trade creditors figure in the balance sheet.

[321]

Q. You accepted, did you, as a result of engaging in that process that Mr Andrew Eustace in this balance sheet provided to you under cover of the sheet at Court book page 702 was correct when a revised trade creditors to the figure of $63,625.75? A. I couldn't say whether that was correct, all I can say was his detailed listing of the payables agreed to the figure in the balance sheet. 154 The various positions adopted by Campbell in his evidence in relation to the changes Mr Eustace made to the MYOB records on 13 January 2005 (which included the increase of the amount of the Company's liability to trade creditors) does little to assist Campbell's credibility (tr 488-491). Although claiming positively that he recalled speaking to Mr Horn about what Mr Eustace was doing on 13 January 2005, when asked for his recollection of that discussion he moved to the position that he could not recall it and then moved to the position that "there was no discussion" (tr 489). He claimed that he would only have said "hello" to Mr Eustace and exchanged the "normal courtesies" with him when he was in the office on 13 January 2005 (tr 488). When he was asked whether on that day Mr Eustace spoke to him about what he was doing, he said: "Not to my knowledge"; but then added: "He may have caught me in between appointments. I don't know" (tr 489). He then claimed that Mr Eustace did not discuss the detail of changes to payroll, holiday leave, long service leave, depreciation and a number of other items with him and then he said: "All he did was highlight that this had happened" (tr 490). He then claimed to have a recollection that Mr Eustace "would have been making, reversing" the entries that he found that were "inflating the expenses and so on" (tr 490). When asked when he became aware of the changes that Mr Eustace had made he claimed: "I can't give you a date. I don't recall those sort of details" (tr 491). When Mr Simpkins challenged Campbell in relation to this claimed inability, by reminding him of his earlier evidence that he was regularly reviewing the operating results in the MYOB system against actual results, he claimed that such review related to "only the bottom line and the big numbers" (tr 491). He claimed that if Mr Eustace made changes he remained ignorant of them (tr 491). 155 Campbell's evidence on this aspect of the matter was in my view quite unsatisfactory and I do not accept it. I am satisfied that he was well aware that Mr Eustace was present in the office to make the adjustments to the accounts prior to the sale of the 50% shareholding in the Company to Backoffice. In other evidence referred to later in this judgment, Campbell claimed that he was reviewing the MYOB records because of the imminent sale of a 50% shareholding in the Company (tr 328; 348). Although Campbell claimed that he was limiting his review of the MYOB records to ascertaining the amount of profit, I am satisfied that for such purpose he would have been aware of the figure for the liability to trade creditors. Mr Eustace was the Company's bookkeeper and if the entry for trade creditors that he recorded on 13 January 2005 was erroneous or if it was a figure that was not discussed with Campbell then Mr Eustace could have given that evidence. Mr Eustace was not called as a witness. I am satisfied that Campbell was aware of the nature of the adjustments that Mr Eustace made on 13 January 2005.

[322]

156 A balance sheet for the Company as at 30 November 2004 was printed out from the Company's records by the provisional liquidator in May 2005. In that balance sheet, trade creditors are recorded as $63,748.70. When that balance sheet was tendered as part of Mr Gower's report, an objection was raised. That document (Attachment 8 to Mr Gower's report, Ex B) was admitted on the agreed basis that it was to rise "no higher than the ultimate proof or lack of it of the underlying source materials" (tr 17-18; 133-134). The "underlying source materials" for the figure recorded for trade creditors in the balance sheet would include the invoices or similar records from trade creditors and the various entries in the MYOB documents of the Company, relating to the amounts outstanding as at 30 November 2004. Those documents are not in evidence. Although an officer from the liquidator's office, Thomas James Dawson, gave evidence in the plaintiffs' case that he printed the subject balance sheet out on 27 May 2005, there was no cross-examination of him in relation to the underlying documents. I am satisfied that I am able to take the figure recorded for trade creditors in that balance sheet as some support for the accuracy of the figure that Mr Eustace recorded in the balance sheet as at 13 January 2005. 157 The financial documentation provided to Weeks by Mr Horn in December 2004 recorded the Company's liabilities for trade creditors as at 30 November 2004 at $49,983. The figure in the warranted balance sheet was $51,388.27. The figure "adjusted" by Mr Eustace on 13 January 2005 was $63,625.75. The additional liability of $12,630 was in the circumstances of this Company's operations for the year to 30 November 2004 a matter of moment or significance and thus material: Minister for Immigration, Local Government and Ethnic Affairs v Dela Cruz (1992) 34 FCR 348 at 352; Manning Shire Council v Caernarvon Pty Ltd [1977] 1 NSWLR 202 at 204-205. 158 I am satisfied that the entry in the warranted balance sheet of the amount for trade creditors of $51,388.27 was $12,360 less than the actual liability of $63,625.75. I am satisfied that such entry was a breach of the warranty in clause 3.1(a) of Schedule 1 of the Share Sale Agreement, that the Company had no liabilities other than the liabilities disclosed in Schedule 3 of the Agreement. 159 An essential aspect to the plaintiffs' claim that this was also a breach of clause 10.1 and or 10.2 of the Share Sale Agreement is Campbell's knowledge that this figure was inaccurate or incomplete or misleading, which I have discussed later in this judgment. On this aspect of the warranted balance sheet I am satisfied that Campbell did have the requisite knowledge that this figure was inaccurate. I am satisfied that this was in breach of clause 10.1 and 10.2 of the Share Sale Agreement. 160 Campbell's loan: The warranted balance sheet recorded under the heading "Non-current Liabilities", the entry "Doug Campbell Loan to HW $74,507.24" The next entry was recorded as "Total Non-Current Liabilities", with a negative figure of $74,507.24. Mr Gower's report (Ex B) referred to that entry as follows: "item is a negative liability in Warranted Balance Sheet - i.e. Doug Campbell owed $74,507". 161 Weeks admitted in cross-examination that Mr Horn had advised him that Campbell claimed he did not owe the Company the amount in the loan account. He also admitted that Mr Horn advised him that Campbell had leave entitlements that would possibly allow an offset against the loan account amount. The balance sheet printed out by the provisional liquidator included the entry "Doug Campbell Loan to HW $3,759.76". 162 Weeks claimed that he did not receive any response to his email dated 13 January 2005 to Mr Horn, in which he sought a reconciliation of Campbell's loan and an agreement on the treatment to discharge the loan prior to completion. It was the work of Mr Eustace on 13 January 2005 that reversed the amounts stated in the accounts as owed by Campbell to the Company and converted it into a liability of the Company to Campbell of $3,759.76. Mr Horn's evidence in relation to this reversal was that as at 13 January 2005 he did not believe that the matter had been properly reconciled or finalised. Mr Horn went so far as to suggest that Mr Eustace was "unsure of what he was doing" and that he really did not place "much reliance on what he had done" (tr 279). This was an explanation provided after he agreed that he had not informed Weeks of the changes made by Mr Eustace. This observation seems to me to be unfair to Mr Eustace. Mr Eustace was the Company's bookkeeper and at the time of trial was still providing services to Campbell. If Mr Horn held that view, it is very odd that he would not communicate it to Campbell at that time. Mr Horn knew that Weeks wanted to finalise the matter of Campbell's loan account prior to the entry into the Agreements. The only 'response' to Weeks' query was the warranted balance sheet. 163 Mr Simpkins submitted that the logical conclusion to be drawn from the evidence is that Campbell believed that he did not owe the Company any money and that he gave an instruction to Mr Eustace to reverse the entries in relation to his loan account. Mr Simpkins submitted that it is inconceivable that Mr Eustace acted 'on a frolic of his own' and that Campbell was not aware on 13 January or thereabouts of what had been done. I agree. 164 Weeks gave evidence that at the time of entering into the Share Sale Agreement, he was not aware that the liability identified on the warranted balance sheet as 'Doug Campbell loan to HW' had a balance of positive $3,760 instead of negative $74,507.24. The adjusted Balance Sheet prepared by Mr Eustace listed Campbell's leave entitlements under "Payroll liabilities" and in this way adjusted the "loan" to a positive figure of $3,759.76. The warranted balance sheet did not include those entitlements in the Payroll Liabilities but listed them on a separate page entitled "Entitlement Balance". An 'offsetting' of these figures against the loan figure would result in a positive figure of either $2,508.13 or $5,129.90, depending upon whether the figure for sick leave accrual is taken into account. 165 The information contained in the warranted balance sheet in relation to Campbell's loan was in breach of the warranty in clause 3.1(a) of Schedule 1 to the Share Sale Agreement in that the Company did have a liability other than that disclosed in the warranted balance sheet. It had a liability of $3,760 to Campbell. This seems to be technical rather than a matter of real substance having regard to the fact that Weeks knew that it was probable that Campbell's leave entitlements would probably be set-off against the loan and that those figures were included in the warranted balance sheet. 166 Adjusted net assets: The plaintiffs also claim that the warranted balance sheet overstated the adjusted net assets. The amount in the warranted balance sheet was $210,856.89 and the figure in the balance sheet adjusted by Mr Eustace on 13 January 2005 was $148,326.10. 167 Mr Horn gave the following evidence in cross-examination in relation to that difference (tr 290-292): Q. I take it one of the things you also considered was what the balance sheet showed to be the net equity of Healthy Water, is that right? A. Perhaps, yes. Q. And you were aware that what had been stated in the balance sheet given to Mr Weeks was that the net equity of Healthy Water was slightly in excess of $293,000? A. I believe so, yes.

[331]

Q. Did you have any further communication with Mr Campbell about the financial information that had been provided to Mr Weeks? A. No. 168 The claim the plaintiffs make in relation to this part of the warranted balance sheet is that it was a breach of the warranty in clause 10.2 of Schedule 1 of the Share Sale Agreement. That was a warranty that "to the best of [the Vendor's] knowledge" the material in the Schedules was "materially accurate and complete and not misleading". The warranty that the information in the warranted balance sheet was "materially accurate" means that there were no significant inaccuracies, or inaccuracies of moment, within it. The figure of $148,326.10 for net assets in Mr Eustace's adjusted balance sheet of 13 January 2005 is a figure reached in consequence of the other adjustments, including the increase in the figure for trade creditors. It could hardly be suggested, and in fact it was not, that the difference between those figures was not a material inaccuracy. Rather the defendants focused upon the fact that the warranty was prefaced with the words, "to the best of [the Vendor's] knowledge". 169 In final oral submissions, Mr Hammerschlag submitted that the plaintiff had failed to plead that Campbell had the knowledge that the figure for net assets was materially inaccurate or misleading. Mr Hammerschlag submitted that the pleader had failed to make a claim that recognised the words "to the best of the Vendor's knowledge" in clause 10. This submission occurred in oral submissions on the last day of the trial. However on the fifth day of the trial, Mr Simpkins asked Campbell the following question (tr 406): Q. Mr Campbell, one of the things that you were conscious of, in December 2004, was the importance of exercising an appropriate care in formulating add-backs that would be stipulated to Mr Weeks as appropriate to be considered in order to normalise the accounts for July through to November 2004? 170 Mr Hammerschlag objected to that question. I disallowed the question. Mr Hammerschlag suggested that there was another basis for the objection that I indicated was not necessary to raise at that time. Mr Simpkins asked the following question: Q. You thought it important, didn't you, to be very careful in the way in which you formulated these add-backs? 171 Mr Hammerschlag once again objected and the following exchange took place (tr 407): HER HONOUR: What is the point?

[350]

175 The matters that arise for consideration in relation to the defendants' submissions outlined above and the plaintiffs' written submissions in reply are: (1) whether the FAS contains a proper claim that the figure for net assets in the warranted balance sheet was in breach of the warranty in clause 10.2 of the Share Sale Agreement (Issue 1); (2) if not, whether the plaintiffs should be permitted to amend the FAS at this stage to include such a claim (Issue 2); and (3) whether the plaintiffs should be permitted to amend the FAS to make a claim that Campbell breached the "additional" warranty (Issue 3). 176 As to issue (1); Practice Note SC Eq 3 (the Practice Note) provides that matters in the Commercial List are to be commenced in the general form of Summons prescribed under the Uniform Civil Procedure Rules 2005 and that a Commercial List Statement is to be filed with the Summons. The Practice Note relevantly requires the plaintiff to set out within the Commercial List Statement in summary form, inter alia, the nature of the dispute, the issues the plaintiff believes are likely to arise and the plaintiff's contentions (par 8). The Practice Note also provides that the plaintiff's contentions should, inter alia, avoid formality, state the allegations the plaintiff makes with adequate particulars and identify the legal grounds for the relief claimed (par 9). In the Commercial List Response the defendant is required to set out in summary form matters including its response to the plaintiff's contentions, including the legal grounds for opposition to the relief claimed in the Summons (par 11). The Practice Note governs the way in which cases in the Commercial List are "pleaded" and although the Court sitting in the Commercial List (and previously in the Commercial Division) has not been known as a court of strict pleading, the Summons and Commercial List Statement and the Commercial List Response (and any relevant additional particulars) define the ambit of the issues to be determined at trial: Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153, per Heydon JA at 171 [53]. A party is entitled to hold its opponent to the case "pleaded" against it, unless there is some reason, such as the way in which the parties have conducted the trial, justifying an expansion (or contraction) of the case so "pleaded". 177 The claim of breach of the warranty in clause 10.2 of the Share Sale Agreement in relation to the net assets in the warranted balance sheet was pleaded in the Commercial List Statement as follows: 34. Schedule 3 to the Share Sale Agreement relevantly stated as follows: (a) that the non-recurring expenses for the five months ended 30 November 2004 were reasonably estimated to be $96,100.00 (the "Add-Backs" ); ; (b) that the income from sales for the five months ended 30 November 2004 was $407,142.01, that such income produced a gross profit of $352,321.24 and that there was other miscellaneous income of $14,500; (c) that the adjusted operating profit of the Company for the five months ended 30 November 2004 (being the net profit plus the Add-Back) was $163,078.99; (d) that the amounts owing to trade creditors of the Company as at 30 November 2004 totalled $51,388.27; (e) that the liability identified on the balance sheet as "Doug Campbell Loan to HW" was negative $74,507.24 (meaning thereby that Doug Campbell owed $74,507.24 to the Company). (f) that the adjusted net assets of the Company as at 30 November 2004 (being net assets less accrued employee entitlements) were $210,856.89;

[360]

179 The claim in paragraph 37(vi) of the Commercial List Statement that the overstatement caused the warranted balance sheet to be substantially inaccurate, incomplete or misleading could not, on its own, amount to a breach of the warranty in clause 10.2. In MacDonald v The Law Union Fire and Life Insurance Co (1874) LR 9 QB 328, Lush J, at 331 drew the distinction between a statement that facts are "truly set forth" and a statement that facts are true "to the best of my knowledge or belief". In Maye v Colonial Mutual Life Assurance Society Ltd (1924) 35 CLR 14, Isaacs ACJ described a warranty of truth "to the best of my knowledge and belief" as a "limited pledge of truth" (at 25). In National & General Insurance Co Ltd v Chick [1984] 2 NSWLR 86, the application for insurance included the statement that "that the answers given above are to the best of my knowledge true and correct, and I have not withheld any information likely to affect acceptance of this proposal". The applicant had listed her husband's occupation as a "clerical officer" when he was actually working as a private investigator. When the respondent's husband died, the insurance company rejected her claim. All members of the Court [Hutley, Samuels and Mahoney JJA] found that the respondent knew to the best of her knowledge at the time she made the warranty, that the information she was providing was incorrect. Samuels JA said at 109: If the first warranty were not qualified [by the words "to the best of my knowledge], it would entail strict compliance; that is to say, it would require not only subjective truthfulness but absolute accuracy. The qualification is inserted, in my opinion, to mitigate the rigours of this doctrine, and not to modify the duty to disclose. 180 An essential element of a breach of the warranty in clause 10.2 is Campbell's knowledge that the figure for the net assets was not accurate or complete and was misleading. The claim in paragraph 36 of the Commercial List Statement that Campbell failed to disclose the overstatement is an implicit claim that Campbell knew that the assets were overstated. In paragraph 25 of the Response, the defendants denied that Campbell failed to disclose the deficiencies and also denied that there were any deficiencies. There was no express statement in the Response that Campbell did not know that the assets were overstated, but it seems to me that these denials infer or implicitly claim that Campbell did not know that the assets were overstated. I am of the view that although both the Commercial List Statement and the Commercial List Response are infelicitously pleaded in relation to this aspect of the alleged breach of the warranty in clause 10.2, the parties joined issue and understood that it was alleged that Campbell knew that the net assets in the warranted balance sheet were overstated at the time the Share Sale Agreement was executed. 181 As to Issue (2): Having regard to the conclusion I have reached in relation to Issue (1), there is no necessity to decide this issue. However if my conclusion on Issue (1) is wrong I would allow the plaintiffs to amend the FAS to make the claim explicit instead of implicit, having regard to the way in which the trial proceeded. Campbell's knowledge was tested, in particular at tr 489-491, referred to earlier in this judgment. I have already rejected Campbell's claims that he was unaware of the changes made by Mr Eustace. 182 As to Issue (3): I am not satisfied that the parties understood that the additional warranty was in issue in the proceedings. It was never suggested to Campbell that he understood that he had warranted that he had made due and careful enquiry. The case run at trial was not that Campbell had warranted that he had made due and careful enquiry as to the accuracy of the material and that he had breached the warranty by failing to make such due and careful enquiry. It was that he had made enquiry and knew that the warranted material in the Schedule was inaccurate. This is clear from the claim in paragraph 36 of the Commercial List Statement, that Campbell failed to disclose the deficiencies; and from the cross-examination as to his knowledge of the changes that were made by Mr Eustace. I refuse the plaintiffs' application to amend the FAS to plead the "additional" warranty in relation to the net asset position in the warranted balance sheet. 183 It may seem unsatisfactory that these issues were not fleshed out until the last day of the hearing and after the plaintiffs' final submissions had been made. The "cards on the table" approach to litigation is now accepted: Glover v Australian Ultra Concrete Floors Pty Ltd [2003] NSWCA 80 (Unreported, Sheller, Hodgson and Ipp JJA, 24 April 2007); Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116: White v Overland [2001] FCA 1333. However, a distinction needs to be drawn between a requirement on a party to notify the opponent that it has misconceived the party's case and a requirement on a party to notify the opponent that the opponent's case is in fact misconceived. It will depend upon the facts of each case as to whether either of these requirements is triggered, but it seems to me that to make the latter a requirement in aid of the "cards on the table" approach to litigation may be to go too far. The qualification to that observation is, as I have said, that it will depend on the facts of each case. I do not need to decide whether it was necessary to do more before the last day of the trial because I have decided that Mr Hammerschlag's analysis of the pleaded position in relation to the warranty in clause 10.2 should not be preferred.

[370]

189 The plaintiffs claim that in this document the non-recurring expenses of the Company were overstated by: including $2,600 as obsolete inventories; including in the general expense allowance of $10,000 an amount of $4,167; including in the business "expense allowance" of $60,000 an amount of $25,000; and including in the credit card reimbursement amount of $65,000 an amount of $27,083. Obsolete inventories 190 The item of obsolete inventories was the subject of discussion between Campbell and Mr Horn. Mr Horn's evidence was in relation to what Campbell told him was as follows (tr 193): He told me that it was obsolete stocks, where it related to payments that he makes at the end of a period of hire, where he has hired out filtered systems to customers and he gets third party financing on that. So at the end of the period of hire he deals with the financing companies that he had to buy the equipment, at an agreed value, back from, the financing company who finances the deal, and when he has to pay the agreed value on that, which is like a sort of a residual value, and some of those payments I think were about $13,000, which he writes off. However, a lot of that equipment can be used again. It can be repaired or for used parts and some of the equipment he used, et cetera. So he estimated that about at least 20 per cent of those payments he could utilise in stocks or in other parts. So in other words, the write-off of the $13,000 was too high and an adjustment of, say, 20 per cent of that would be appropriate as an add-back. 191 Mr Horn accepted that the explanation Campbell gave to him is not what is recorded under the heading Obsolete inventories in the Add Backs document (tr 223). He also accepted that the explanation he gave in his evidence above about what Campbell told him regarding those inventories was "irreconcilable" with the entry in relation to obsolete inventories in the Add Backs document. His evidence was that "in hindsight" the entry in the Add Backs document had not been "very well worded" (tr 224). 192 Campbell said that he personally formulated the obsolete inventories add-backs because no one else understood it (tr 407). He accepted that the description in the Add Backs document was not a "proper" description and accepted that it would not be easy for anybody to understand what it meant (tr 408). However he then gave the following evidence (tr 408-410): Q. What is wrong with that? A. Well, it is partly right. It says "Replacement cost averages 20 per cent higher than original cost." The $20,000 - do you want me to explain how I did it?

[384]

Q. So that a regular part of the business carried out by Healthy Water was that it could recover stock formerly rented out and it would use or find it could use about 20 per cent of the reclaimed stock? A. That is a fairly accurate description. 195 As can be seen from the above, Campbell initially accepted that the description was not "proper" and not easy for anyone to understand. He later moved to the position that the description was "accurate and understandable". 196 Weeks' evidence was that he understood the entry in the Add Backs document to mean that the item was included in the books of the Company, but that somehow an inventory provision would have been set up against the item writing it down to zero. Weeks said that he did not make any investigation in relation to the $2,600 amount because he did not "consider it as a material amount" (tr 35-36). Notwithstanding this evidence, Mr Simpkins submitted that although Weeks did not regard the figure of $2,600 "alone" as a material matter, the plaintiffs should still be entitled to rely on this item in conjunction with the other items in the Add Backs document. In my view, Weeks' evidence was focused on the investigations that he was conducting. It was the fact that Weeks was of the view that the amount was not "material" that caused him not to investigate this item further. That evidence would be relevant in relation to whether this particular item was relied upon in the claim in relation to misleading or deceptive conduct, but it is not fatal to the plaintiff's claim that the item was not properly characterised as a non-recurring expense and should not have been added back to the revenue of the Company. 197 Mr Gower expressed the opinion that the obsolete inventory is an ordinary cost of a business and therefore should not be added back to the income or revenue of the company as a non-recurring expense. Mr Russell was instructed that the $2,600 add-back adjustment was determined by Campbell to provide an account of the value of stock from expired customer agreements that was capable of being reused, despite having been written-off for accounting purposes. Mr Gower expressed the further opinion that if this add-back adjustment related to 'refurbished' rental stocks, the benefit was part of the usual operations of the Company and therefore not appropriately characterised as a non-recurring expense. 198 This item in the Add-Backs document suffers from the flaws of description identified by Mr Horn and in part by Campbell. However, it seems to me that the utilisation of the stock that was otherwise written off falls more appropriately into the category of the usual operations of the Company rather than that of a non-recurring expense. Accordingly I am satisfied that the item for obsolete inventories was not accurately described as a "non-recurring expense". General Expense Allowance 199 Weeks gave evidence that Mr Horn advised him that the general expense allowance was an amount that reflected items that were charged to Campbell's credit card and that those items were reimbursed by the Company and charged to the Company. The amount claimed in the Further Amended Summons of $4,167 is the amount alleged to have been overstated as a non-recurring expense and it is claimed that it should not have been added back. Weeks gave evidence that by the time his offer to purchase the share in the Company was accepted, he had still not obtained any satisfaction in respect of the verification of the estimates of the general expense allowance and the business expense in the Add Backs document. He gave the following evidence in cross-examination (tr 50-51): Q. To just summarise your position Mr Weeks, the position was you couldn't get satisfaction, correct? A. Yes.

[415]

HER HONOUR Q. How would he know? How would he know what your general expense allowance was? A. Because we would have discussed it on the past and built a picture around it. 201 Mr Gower expressed the view that there should be no amount added back for general expenses. He identified the expense as one relating to telephone and travel reimbursements to Campbell. He expressed the opinion that the payment of such expenses of business executives is usual business practice. He considered it was reasonable to assume that such reimbursements would continue to be paid in the ordinary course of business. 202 Mr Russell expressed the view that $4,778 (and not $4,167, as included in the schedule) should be added back as a non-recurring expense. Mr Russell's conclusion was based on the instruction that the amount of $4,778 represented undocumented telephone and travel claims paid to Campbell. Mr Russell's reasoning to characterise this item as a non-recurring expense seems to have been based solely on the fact that Campbell had not provided any substantiation or supporting documentation for these claims. The sloppiness of Campbell's approach to these claims does not mean that they were not incurred for travel and telephone expenses. I understand that Mr Russell formed the view that such expenses, if unsubstantiated, should not be allowed, but on the methodology adopted it does not mean that such expenses (properly substantiated) would not recur. However, it seems to me that Mr Russell's approach to these particular amounts as properly added back should be preferred. Business expense allowance 203 Weeks gave evidence that he asked for information concerning how the business expense allowance estimate was arrived at in the Add-Backs document and that he never received it (tr 41). He agreed that he was "perfectly conscious" when he made the offer to purchase the share in the business, that the adjustments which had been given to him in the Add-Backs document were unsupported but that he took the decision to proceed in any event (tr 41). His evidence was that he asked Mr Horn about the business expense allowance and that he was advised that he could not give him any figures because it was Campbell's estimation. He gave the following evidence in cross-examination (tr 77). Q. You are a person who is experienced in matters of financial import. You get told by Mr Horn that it is Mr Campbell's estimation and you just keep quiet. You don't go and ask. Is that right? A. Yes, that's what I did.

[416]

[417]

206 I accept that Mr Horn advised Campbell that he would need to be sure about the figures that were included in the Add Backs document. Campbell claimed that it was Mr Horn who provided the figures to him and that Mr Horn had "chosen to pull out of the past figures" a number of items and asked him if they were "acceptable figures" to give to Weeks as part of the sale of the business. Campbell suggested that it was Mr Horn who created the document and it would be better to ask Mr Horn about the items within it. 207 Mr Gower conducted a detailed review of all of the expenses posted in the Company's MYOB system for the five months to 30 November 2004. Mr Gower was unable to identify any payments amounting to $25,000 paid to Campbell which could be regarded as a "business" expense allowance. Mr Gower did identify "financing costs" amounting to $25,000 paid to Campbell in that period. Both Mr Gower and Mr Russell agreed that it would be incorrect to allow for an add back adjustment for $25,000 of 'financing costs' paid to Campbell, because it was not reflected as an expense in the warranted profit and loss statement. Mr Gower concluded that the expenses listed by Campbell largely reflected ordinary business expenses and were not appropriate to be characterised as non-recurring expenses required to be added back. 208 Mr Russell accepted that the $25,000 was a "business" allowance. He reviewed the amounts listed in Campbell's affidavit and whilst he was of the view that some of that expenditure would be likely to be recurring, the amount of $25,000 appeared conservative out of a total of $49,730. It is very difficult to assess the true nature of these amounts in light of the very unsatisfactory evidence given by Campbell. The experts each have reasoned views in light of this very unsatisfactory evidence. I am of the view that the better view is that these amounts would not recur in a more rigorous and disciplined business environment and thus were added back appropriately. Credit card reimbursement 209 Mr Horn gave evidence that when he had the meeting with Campbell on 9 December 2004, he made a note of an Add Back item of $60,000 as an entertainment allowance. The credit card reimbursement item in the Add Backs document of $65,000 reflects the figure of $60,000 as the entertainment allowance. Mr Horn could not recall how the additional $5,000 was included or the basis for it (tr 224). He gave evidence that he informed Weeks that the credit card reimbursement add-back was an amount payable in respect of certain expenses that would not recur and that it was supported by various accounting records of the Company including credit card statements and could be "easily verified" (tr 248). Campbell claimed that Mr Horn gave to him the figure for credit card reimbursements and that that figure came from credit card statements (tr 411). Although there was nothing in any of his statements or affidavits, Campbell claimed in his oral evidence that he went through his credit card details with Weeks on a number of occasions during the process of due diligence (tr 502). 210 Mr Gower reviewed the detailed credit card expenditure and made a judgment as to whether the items were "business" or "private" expenditure. He concluded that of $31,751 credit card expenses reflected in the warranted profit and loss statement, an amount of $19,207 should be categorised as private expenditure, thereby requiring add-back. Both Mr Gower and Mr Russell identified $8,770 credit card expenses not reflected in the warranted profit and loss statement and agreed that the appropriate add back for those expenses (because they related to private expenses) was $3,730. Mr Gower therefore concluded that the figure to be added back for credit card reimbursement as non-recurring expenses was $22,937. There is very little difference between Mr Gower and Mr Russell in relation to the required add back for credit card reimbursements. Mr Russell concluded that the amount to be added to the agreed $3,730 should be $21,991, amounting to $25,720. What is clear from the experts' evidence is that some part of the amount for this item should not have been added back, however it is not necessary to decide the specific amount because of the conclusion I have reached as to whether Campbell committed a breach in this instance. Was there a breach? 211 The document in Schedule 3 recorded that the add-backs were the "Proprietor's estimate" of the non-recurring expenses. The plaintiffs claim that Campbell breached the warranty in clause 10.2 of Schedule 1 of the Share Sale Agreement, because the estimate overstated the amount of non-recurring expenses. The plaintiffs pleading in relation to this breach is extracted earlier, and consistently with my ruling in relation to the net asset figure, I am satisfied that the Commercial List Statement and the Commercial List Response do permit the plaintiffs to claim that the breach of warranty is that Campbell knew that the estimate for non-recurring expenses was inaccurate, or incomplete and/or misleading. 212 The plaintiffs sought leave to amend the FAS to plead the existence of the additional warranty, that Campbell had made due and careful enquiry as to the accuracy and completeness of the estimates of the non-recurring expenses, and due and careful enquiry that the estimates were not misleading, and that he breached that warranty. The questions that were objected to tr., 406-407, extracted earlier, were of course questions about these very estimates. In cross-examination Campbell agreed that it was important to be very careful about the "confirmation" of the add-backs (tr 407); and that in December 2004 he was ensuring to make sure that the entry for the obsolete inventories was properly described (tr 408). In their final written submissions (18 December 2006), the plaintiffs submitted that there is no reliable evidence of any detailed calculations being undertaken to prepare the Add-Backs document and that such estimates were really "guesstimates". That may well be the case, but the trial was not conducted on the basis of the existence of this "additional" warranty. The breach pleaded was a breach of clause 10.2 and as I have said earlier, an essential element of such a breach is proof of Campbell's knowledge that the estimates were not accurate or complete and that they were misleading. If the "additional" warranty had been pleaded, then the plaintiffs would only have had to prove that Campbell did not make due and careful enquiry that the estimates were accurate, complete and not misleading. This would perhaps have been a lesser burden on the plaintiffs than having to prove Campbell's knowledge that the estimates were not accurate or complete and that they were misleading. The "additional" warranty was not pleaded. I am not satisfied that the manner in which the trial was conducted justifies an amendment to the pleading at this late stage. I refuse the plaintiffs' application to amend the FAS.

[424]

Q. What did you say? Q. My only recollection of the discussion was when he said that and I agreed that they should all cease, he said okay, we can use those as an add-back which are not a re- a non-recurring expense to the company. 215 In my view this evidence does not support a finding that the plaintiffs' approach is misconceived. The process of removing expenses from the Company's books, thus increasing the profit of the Company, is not done simply on the basis of different styles of management or some subjective whimsical fiat. It must have a proper basis and I have no doubt that the basis upon which Mr Horn and Campbell intended to remove expenses, was that they were able to be justified as proper expenses of the business and thus would not recur under the new management. 216 Mr Horn agreed that Campbell did not give him any detail of the components of the $60,000 business expense, other than an advertising component (tr 225). In fact it appeared to me that the discussions that Mr Horn had with Campbell in relation to the add-backs were very much dependant upon Campbell giving Mr Horn very general information without supporting documentation. Of course, Campbell claimed that it was Mr Horn who came up with the figures rather than himself. 217 The warranted items were said to be the "Proprietor's estimate of non-recurring expenses for the 5 months ended 30/11/04". The defendants submitted that if one takes all of the matters raised by Mr Gower in the plaintiffs' favour, the difference between the parties as to what was permissible as add-backs is $35,162. An "estimate" is "an approximate calculation or judgment of the value, number, quantity, or extent of something": The New Oxford Dictionary of English, Clarendon Press, Oxford, 1998. The add backs were warranted as Campbell's judgment of the value of the non-recurring expenses. There is an added difficulty for the plaintiffs. An "estimate" is not appropriately characterised as "complete". An approximation may be appropriately characterised as "accurate" or "misleading" but that would depend upon the circumstances of each case. In this case, the experts have endeavoured to express their opinions as to whether certain of the expenses should not have been added back. The experts' opinions have been described earlier and it can be seen that the divergence between them is not great.

[427]

BREACH OF SERVICES AGREEMENT 221 The Services Agreement was between the Company and Backoffice. Backoffice was entitled to a "Fee" of $150,000, plus GST per annum "in consideration of providing the services". Backoffice agreed to procure Weeks to provide the services of Joint Managing Director. It was also agreed that the Company would provide to Weeks a fully maintained motor vehicle, including finance lease payments. The plaintiffs' claim, as contained in paragraphs 30 to 32 of the FAS, is that the Company failed to make the payments to which Backoffice/Weeks were entitled under the Services Agreement. Mr Hammarschlag submitted that this claim lies only against the Company that is in provisional liquidation and does not affect the other defendants. It was submitted that it was Weeks' own conduct in moving for the appointment of a provisional liquidator that has placed the Company in a position of being unable to meet the claim. 222 Mr Simpkins conceded that the plaintiffs do not seek any relief against the Company in respect of this claim. Although I granted leave to proceed against the Company, such leave was limited to the validation under s 468 of the Act, if the plaintiffs obtained an order in the oppression suit for purchase of Backoffice's share in the Company. 223 The plaintiffs claimed and the defendants admitted that both the Shareholders Agreement and the Share Sale Agreement contained the implied terms that: (a) the parties to the respective agreements would do all such things on their part to enable the other party to have the benefit of the agreement; and (b) neither party would act in a manner calculated to deprive the other party of the benefit of the agreements (implied duty to co-operate). There is no claim in the FAS that the Services Agreement contained an implied duty to co-operate. There is no express reference to the Services Agreement in the body of the Shareholders Agreements. However, the Services Agreements are contained in Schedule 5 to the Shareholders Agreement. Clause 6.1 of the Shareholders Agreement provides that: "Campbell and Weeks, as Joint Managing Directors, shall have the day-to-day conduct and management of the Business and the Company".

[429]

225 Backoffice made a number of claims for payment of the Fee, the first of which was in late January 2005 and sparked the decline in the relationship between Weeks and Campbell. Campbell refused to pay Weeks any amounts other than the amount for the laptop computer, which he said he would "concede". In the meantime Campbell and Sentinel were receiving payments from the Company, although the evidence in relation to the specific amounts received is lacking precision. Campbell admitted that in February and March 2005, Sentinel received payment from the Company (tr 412-413). He agreed that in the period January 2005 to the time the provisional liquidator was appointed, Sentinel received "$6,000 something" (tr 413). The following rather telling evidence was given by Campbell in cross-examination (tr 413): Q. You were seeking to convey, weren't you, in your various discussions with Mr Weeks, where he was making complaint about payments that you weren't being able to take any money out of the business either. Is that right? A. Yes, we had - well, as you said, there was a dispute at the end of 4 days, 5 days after he started, and being such a small business, everybody realised what was going on and there were claims for what everybody knew was not legitimate. And if I'd have drawn money or co-signed cheques for both of us, it would mean $30,000 to $40,000 in total of any expenditure within 4 or 5 days of Mr Weeks joining the company and paying his money, and the staff would have, we would have had two resignations immediately. 226 This evidence clearly suggests that one reason Campbell did not pay Weeks was because he was concerned that he may have had two resignations on his hands, one of which he admitted was Ms Hunt (tr 446). It is obvious that Ms Hunt was quite dissatisfied at the prospect that Weeks' January 2005 invoices might be paid. Her email to Mr Horn dated 1 February 2005 extracted earlier refers to Weeks' lack of enquiry as to whether she had been paid or whether he could do anything to help, followed immediately by the statement: "Yet, since starting I have received two invoices from him … ". The friction between Ms Hunt and Weeks was not handled well by anyone. It is obvious that Ms Hunt's dislike for Weeks had an adverse impact on Campbell's capacity to deal with the matter maturely and fairly when it came to Backoffice's/Weeks' entitlements. I am satisfied that Campbell let the relationship with Ms Hunt take precedence over a proper and businesslike relationship with Weeks. The prospect of Ms Hunt resigning should not have formed any basis of Campbell's refusal to pay Backoffice its entitlement.

[430]

227 Mr Horn's sensible suggestion in his email to Campbell on 3 February 2005 of a compromise in relation to Weeks' January 2005 invoices was met with a rather churlish response from Campbell. Rather than focusing properly on the Company's obligations under the Services Agreement with Backoffice, Campbell claimed that the "people around us work here because they enjoy being here and feel equally important", with the emphasis "furthermore so they should". After suggesting that Weeks was not a "super contributor", Campbell fell into the rather emotional language that Ms Hunt had deployed in her email to Mr Horn two days earlier, with the conclusion: "he wants us all to believe that he is God's gift to HW very existence and future progress!". 228 Campbell seems to have been blinkered to the reality that Backoffice had just paid $850,000 for a 50% shareholding in the Company and that it and Weeks expected and were entitled to be treated with some semblance of commercial courtesy. There was no proper basis for not paying to Backoffice the amount claimed at the very least in the amended January 2005 invoice, and I do not accept Campbell's suggestions that he did not make the payments because he regarded Weeks as having failed to perform his duties. Campbell's evidence in relation to the payments during the period January to April 2005 included the following (tr 413): Q. Isn't what you were telling Mr Weeks, when this dispute started to emerge, that both you and he were being put under financial pressure because there wasn't enough money to go around? A. Not at all. No, that's not correct. 229 That evidence is totally inconsistent with the tenor of Campbell's email of 6 February 2005 to Weeks in which he suggested a reduction in directors' fees and a restraint on further extraordinary or abnormal expenditure to accommodate the "strain on the Company's financial resources" and the need to avoid "future financial hardship". It is also at odds with his later evidence as follows (tr 413-415): Q. Didn't you tell Mr Weeks that you weren't being paid either? A. Yes, I did.

[440]

232 The plaintiffs claimed an entitlement to damages for the whole of the term of the Services Agreement. If damages were to be awarded for this breach by Campbell I am satisfied that they should be limited to the total amount of the invoices rendered by Backoffice up to the time of the appointment of the provisional liquidator as pleaded in the Commercial List Statement, except that the amount for the January 2005 invoice would be the amount in the amended invoice. However I am satisfied that such an award is inappropriate in the circumstances of this case. 233 This is not a claim against the Company, the party to the Services Agreement. The plaintiffs 'got around' the problem of the Company being in provisional liquidation by the rather clever pleading that Campbell breached the implied obligation of co-operation in the Share Sale Agreement and the Shareholders Agreement. In the oppression suit the plaintiffs have achieved the remedy under s 233 of the Act with the fixation of the "fair price" of the share as at 24 January 2005. As I have said earlier Mr Russell's "potential" valuation approach took into account the budget for the Company during the period January to June 2005, part of the period for which the plaintiffs claim damages for Campbell's breach of the implied duty to co-operate. Although the budget was not "verified" by Mr Russell in the "potential" valuation approach the new and identified customers were an integral part of that budget. Those customers could only have been secured and retained by the joint efforts of Campbell and Weeks/Backoffice. In the earlier section of this judgment dealing with the remedy for oppression, I have recorded my conclusions about the capacity for the growth of the Company by reason of the business and commercial attributes of both Campbell and Weeks. Those conclusions were part of the justification for adopting Mr Russell's "potential" valuation approach and took into account the work that would have been provided by Weeks/Backoffice in the period January to June 2005. In those circumstances I am satisfied that it is not appropriate to compensate the plaintiff for any additional amount for the breach of the implied duty to co-operate. To do so would be to overcompensate the plaintiff. MISLEADING OR DECEPTIVE CONDUCT The Add Backs 234 The first document in relation to which the plaintiffs bring an action for breach of the Fair Trading Act 1987 by Campbell, is the Add-Back document. It is alleged that the provision of that document to Weeks was a representation that the Company had incurred non-recurring expenses of $96,100 for the five months ending 30 November 2004. It is alleged that the document contained false and/or misleading and deceptive information. In this regard the plaintiffs repeated the claims made about this document that were made in the breach of warranty claims. It must be remembered that this document was understood by Weeks to be Campbell's "estimation, you know, plus or minus a few thousand dollars" (tr 55). The evidence clearly establishes that at the time of the delivery of the document and subsequently, Mr Horn advised Weeks that they were Campbell's estimates. The representation as pleaded is not in terms of an estimation of this kind but rather of a firm statement of incursion of that specific amount. I am not satisfied that the representation as pleaded was made. However even assuming for the purposes of this analysis that the representation as pleaded was made, the plaintiffs have further difficulties. 235 In written submissions (27 November 2006), the plaintiffs submitted that they are not precluded from seeking relief in relation to this representation by reason of its "inclusion in the Share Sale Agreement as a contractual warranty". In support of this submission, the plaintiffs relied upon Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470, a case in which three particular warranties had been made in a written contract as to the sole beneficial ownership of copyright in a certain accounting product, the entitlement to assign it and the absence of any claims in relation to that copyright. The primary judge was asked to answer the question as to whether the giving of the warranties, or any of them was, as a matter of law, capable of constituting misleading conduct within the meaning of s 52 of the Trade Practices Act 1974. The primary judge answered that question in the affirmative. That answer was held to be correct (Lockhart and Gummow JJ, Northrop J dissenting). The allegation was that the relevant "conduct" that was misleading or deceptive was the making of the contract itself and not any conduct that had occurred before the contract was made (Per Northrop J (dissenting) at 492). 236 The present case is quite different. Here the plaintiffs do not claim that the contractual warranties given by Campbell in the Share Sale Agreement were misleading or deceptive in breach of the Fair Trading Act 1987. They claim that the representation alleged to have been made by Campbell before entry into the Share Sale Agreement was misleading or deceptive. Here the defendants claim that there was no reliance upon the representation made before entry into the Share Sale Agreement by reason of Weeks' conduct in abandoning his quest for supporting information in relation to the Add Backs in exchange for the warranties. It depends very much on the evidence given by Weeks as to whether there was reliance upon the alleged representation. Some of this evidence is extracted earlier but it is appropriate to repeat it here in this context. It included the following (tr 50-51, 55 and 77): (tr 50-51) Q. By this time [the making of the amended offer on 16 December 2004] you tell her Honour you still had obtained no satisfaction with respect to the verification of the estimates of general expense allowance and business expense allowance in the 9 December document at page 614 of the bundle, correct?

[453]

Q. That is an absurd suggestion, Mr Weeks, I put it to you, that you would let that just lie without asking Mr Campbell. What do you say about that? A. Well, I preface that by the fact that all of the financial discussions were with Mr Horn. I had been directed that all of those approaches should be made to Mr Horn. I had a number of conversations with Mr Horn about the add-backs, what comprised them, and I did, on at least one or more occasions, say that, you know, how can I support these? We then reached the point of, there isn't a lot of detailed support and then we initiated a conversation, and I think, taking Mr Hammerschlag's point, yes there was concern so I then initiated a conversation of, well, I need some kind of comfort level. If can't have an accounting comfort level or documentary comfort level, I need some other kind of comfort level and initiated the warranty discussion. 237 I am satisfied that Weeks was, as he said, "concerned" about these estimates. He did not rely upon them but went about trying to obtain documentary support for them. When that proved futile he decided that rather than rely upon them, he would rely upon a statement of warranty by Campbell in the Share Sale Agreement. This is a different situation to that discussed in Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd. Here, at least on Weeks' evidence, there was a clear indication that he could not rely upon the figures represented before contract, because there was no supporting documentation. That is why Weeks abandoned his quest to arrive at a conclusion that he could rely upon them and opted instead for the contractual warranty. 238 I have referred to Weeks' evidence in relation to the way in which he structured his offer to purchase the share in the Company in the section of this judgment below dealing with the Sales Revenue Report. The observations I have made in relation to that offer apply equally to this alleged representation. Weeks did not rely upon these estimates. He structured his offer to ensure that if the estimates turned out to be wrong, he was, as he put it, "protected" from having to pay an extra $300,000 to Campbell by way of performance bonus. The Sales Revenue Report 239 The plaintiffs' claim also relates to the estimates in the Sales Revenue Report of sales revenue for December 2004 of $100,000 and the EBIT for December 2004 of $37,500. It is claimed that those estimates were express representations that they were a reliable prediction of the sales revenue and profit that would be achieved by the Company and were suitable to be used for the purpose of estimating the value of the Company. It is further alleged that the estimates in the Sales Revenue Report amounted to implied representations that: there was no information known to Campbell which was material to the accuracy of the estimates which tended to show they were false, misleading or deceptive; the Company would achieve those estimates; and that there was a reasonable basis for the belief that the estimates would be achieved. It is claimed that the representations should be implied on the basis that the Company's financial records were in the control of Campbell; that Campbell was aware that Backoffice was relying upon him to provide it with all financial information regarding the Company that was material to the purchase of a share in the Company; and that Campbell was aware that Backoffice was relying on the December 2004 estimates in the Sales Revenue Report when determining what price to offer for the share in the Company. It is alleged that the estimates overstated the sales revenue by $7,147 and the EBIT for December 2004 by approximately $25,000. 240 The Sales Revenue Report (at Court Book 615) was prepared by Mr Horn and included the following: 5 Mths. Est. 6Mths. Est. Est. 6 Mths. 12 Mths. 30/11/04 Dec. 31/12/04 30/06/05 30/06/05 $ $ $ $ $ Sales Revenue New business sales 52,410 12,954 65,364 300,000 365,364 Existing business sales 44,427 10,984 55,411 70,000 125,411 Shop/mail - out sales 3,111 768 3,879 7,500 11,379 Filter service income 253,954 62,768 316,722 330,000 646,722 Installations/ systems 1,735 429 2,164 7,500 9,664 Rentals 19,171 4,738 23,909 25,000 48,909 Parts (miscell.) 544 134 678 2,000 2,678 Relocation of systems 7,337 1,814 9,151 12,000 21,151 Urgent customer call -outs 21,354 5278 26,632 30,000 56,632 Freight recovered 539 133 672 1,000 1,672 352,172 87,046 439,218 485,000 924,218 $ 404,582 100,000 504,582 785,000 1,289,582

[568]

Q. Is the reason that you say you had no reason to be totally concerned the fact that you did have a concern about what had happened in December? A. I always have a concern if I'm giving an estimate, particularly in light of the fact if I was giving it to the bank or to Mr Weeks and Mr Raby, I wanted to make sure it was close enough to be the figure that I had been -- I had estimated. 252 This evidence demonstrates once again Campbell's proclivity to change his position. At first he claimed that the reason for the difference between the estimates for December 2004 and the actual operating results for 2004 was that work had been done which had not been invoiced. He then suggested that this claim was based on his "experience". He finally agreed that in January 2005 he did not think that the reason for the difference was that invoices had not been issued for work that had been done. When pressed for a reason he resorted to the answer "I can't recall". If Mr Simpkins had not pursued Campbell on this topic, his evidence that work was done and not invoiced, which was obviously wrong, to use a neutral term, would have been left unchallenged. Campbell's evidence on this aspect of the matter is further support for the conclusion that I have reached that he a very unreliable witness. 253 Campbell then claimed that throughout January 2005 he spoke to Weeks on the topic of the difference between the estimates and the operating results on one or maybe two occasions (tr 371). He also claimed that he spoke to Weeks in January 2005 about the management accounts and what they showed for December 2004 on two or three occasions (tr 372). He claimed that the first occasion was on 10 January 2005 when they were driving to a meeting in Chatswood, and Weeks asked him whether the company would achieve the estimates, and he responded "yes". He also claimed that Weeks asked him whether "servicing" in December had been in accordance with the estimate, and he informed him that it had (tr 372). When it was suggested to Campbell that it was obvious to him that Weeks did not have the December 2004 management accounts, he said that as far as he knew he would have had the estimates, but not the finalised accounts. He agreed that he understood that Weeks would want the management accounts (tr 373). 254 Campbell claimed that in January 2005 he informed Mr Horn that the accounts were in "good order". He also claimed that on 14, 15 or 16 January, Weeks made an enquiry about whether he could rely upon the December 2004 management accounts. However he suggested that it was "a very fleeting thing" (tr 374). Campbell was cross-examined further as follows (tr 376): Q. Mr Campbell, you did not provide, did you, to Mr Horn at any time in January 2005 the December 2004 management accounts? A. No, that's not correct.

[578]

Q. And may I take it you were concerned to ensure in January 2005 that if there were changes made to the information that you had provided to Mr Weeks that you were given a copy of the document making the change so that you in turn could ensure it was given to Mr Weeks? A. Yes. 256 The following written submission was made on behalf of the defendants in relation to whether Weeks received the management accounts: It was forcefully put to Campbell that he had not given and Weeks had not received, the management accounts for December 2004. This material was, amongst others, the subject of Weeks emails of 20/12/04 … In his affidavit (28/10/05) paragraph 80 he refers to his email of 13 January 2005 … and does not say he never received the management accounts. This is all consistent with his attempt to portray an image of ignorance. 257 Although paragraph 80 of the affidavit referred to in this submission does not state that Weeks did not receive the management accounts there is a clearly implied claim that he did not receive such accounts in paragraph 92 of the same affidavit in which he claims that he was not aware of the difference between the estimates and the actual results for December 2004. I accept Mr Horn's evidence that he did not discuss with Campbell in January 2005 the contents of the management accounts for December 2004. I do not accept Campbell's evidence that Mr Horn informed him that he had received the December 2004 management accounts and that he had "passed on the details" to Weeks (tr 333). When Mr Simpkins asked Campbell whether he had asked Mr Horn what Weeks thought about the 10% to 15% shortfall (which had been identified in the management accounts) Campbell's answer was (tr 333): Well, there was an 8 per cent shortfall on revenues. I would have said to him, was there any response, and he said no. He has bunkered down in his farm somewhere and that's it. There was no comment that I can recall, that I could relate to you, that would be of the nature that it was, you know, there was a problem with it. 258 I do not accept this evidence. I accept that Mr Horn did not give Weeks the management accounts. I do not accept Campbell's evidence that he discussed the December 2004 management accounts and their contents with Weeks during January 2005, prior to entry into the various agreements on 24 January 2005. I accept Weeks' claim that he did not know that there was a shortfall in revenue as against the December 2004 estimate at the time he executed the Share Sale Agreement. 259 It is abundantly clear that the Sales Revenue Report was prepared in the manner in which Mr Horn claimed it was. It is also abundantly clear that Campbell knew the estimate of $100,000 was 8% higher than the actual operating results for the Company in December 2004 well before the settlement of the purchase on 24 January 2005. I am of the view that Campbell knew that Weeks did not know of the difference between the actual operating result and the estimated budget for December 2004. Representations 260 There are real issues in relation to the representations that are alleged to have been made by the provision of the Sales Revenue Report to Weeks in December 2004. There is also the issue of whether the representations were continuing up to the date of execution of the Agreements on 24 January 2005. I will assume for the purposes of this analysis that there was a representation that Campbell knew of no information that was material to the accuracy of the estimates in the Sales Revenue Report, which tended to show that they were false, misleading or deceptive. I will assume for the purposes of this analysis that the representation was false. Reliance 261 It was submitted that the plaintiffs' case should fail on reliance. It was claimed that on Weeks' own evidence, he relied on Mr Horn to provide information but was well aware of the disclaimers contained in the Information Memorandum prepared by Bato Partners in July 2004. It is true that the Information Memorandum referred to Bato Partners' understanding that a purchaser would undertake further investigative activities prior to arriving at a decision of any finality (1.3). It is also true that the front sheet to the Information Memorandum included a statement that the advice, information and estimates in it were provided by the directors of the Company and that Bato Partners had not attempted to verify the accuracy or reliability of it. It also stated that no warranty of accuracy or reliability was given and that no responsibility for omissions was accepted by Bato Partners. Those disclaimers related to information that was provided very early in the negotiations with Weeks.

[579]

262 The defendants also referred to clause 7.4(b) of the Share Sale Agreement, which is an acknowledgment by Backoffice that it had been afforded the opportunity of inspecting the Company and the Assets and had availed itself of that opportunity. The defendants accepted that the presence of such an acknowledgment is not definitive but submitted that its presence militates against reliance upon any of the alleged representations. It was submitted that this is particularly so where Weeks had carried out extensive due diligence with the assistance of his accountant, Mr Raby. 263 It was submitted that Weeks' claim of reliance should not be accepted for a number of reasons. The first was his acknowledgement that the figure for non-recurring expenses was an "estimate" (tr 55) and that he made an allowance for "plus or minus a few thousand dollars" (tr 55). Secondly, Weeks had various views about the prospects for the Company and said that he was imbued by a sense of optimism. He admitted that he considered it to be an exciting prospect and refused to sell his share after disputation arose. The third was Weeks' experience in evaluating risks, together with his academic qualifications of an Honours degree in Economics and his sophisticated negotiating skills in achieving the locking up of the purchase price into a performance bonus. I accept that all of these matters are important to consider in relation to the question of whether Weeks relied upon the representation. 264 Weeks was obviously having difficulty in obtaining detailed information, including the management accounts for December 2004. His email of 13 January 2005 to Mr Horn set out what he wanted prior to completion. It is clear from that email that Weeks was not happy to rely on the estimates in the Sales Revenue Report. It is clear that he wanted to check the actual operating results for December 2005 for himself. He was not able to do that because the management accounts were not provided to him. He admitted that he abandoned his quest for information in relation to the non-recurring expenses in the Add Back document, in exchange for warranties in the Share Sale Agreement (tr 51, 55-56 and 77). Although Weeks claims in his affidavit (13 September 2007 pars [92]-[93]) that he would not have entered into the Share Sale Agreement if he had known that the operating results for December 2004 were different from the actual results (by overstating sales by $7,147 and EBIT by the range referred to earlier), the real question for determination is whether he relied on the December estimates in entering into the Share Sale Agreement and the alleged representation. 265 When Weeks received the financial documentation from Mr Horn in December 2004, including the Sales Revenue Report that contained the estimated sales figure of $100,000 for December 2004, he estimated an annual result for the Company that he said was "somewhat conservative" (tr 44). He factored in a number of matters, including the fact that he would "come on board and make a positive contribution" with the capacity to "enhance the profitability" of the Company (tr 45). He structured his offer to purchase the share in a way that recognised that he and Campbell had a different view of the value of the Company (tr 47). That part of the offer was contained in the fifth dot point, referred to earlier in this judgment, extracted here again for ease of reference: · Recognising that 'performance' expected to exceed the current forecast level of profitability, a performance bonus may be paid to the seller (ahead of any dividend payment) of up to $300,000 on March 31, 2005 or thereafter, subject to cash funds being available and sufficient profitability being achieved. No payment will be made based on profitability after December 31, 2005. 266 Weeks amended that part of his offer on 16 December 2004 as follows: · Recognising that 'financial performance' is expected to exceed the currently forecast level of profitability, a performance bonus of up to $300,000 will be paid to the seller, based upon net profitability to December 31st 2005. This performance bonus ranks after payment of the 'guaranteed bonus' and is subject to sufficient cash funds being available and sufficient profitability being achieved. Being a 'performance' bonus, no payment will be either due or payable if insufficient profitability is achieved. 267 Weeks gave the following evidence in cross-examination in relation to that part of the offer (tr 47): Q. And what you were there proposing was a mechanism recognising that that may be so and that mechanism was to remunerate or compensate Mr Campbell for the additional value if it turned out that was the position? A. Yes.

[585]

268 Weeks had the assistance of a solicitor, Mr McClure, from whom he sought advice in relation to the Agreements executed on 24 January 2005, including the proposed warranties. An email from Mr McClure to Weeks dated 11 January 2005 that Weeks forwarded on to Mr Horn on 12 January 2005, included Mr McClure's notation of Weeks' "reliance on your own investigations, relying on your background over many years in corporate management and the due diligence conducted in respect to "[the Company] carried out over some time by you and your accountant". Weeks confirmed in his cross-examination that he had informed Mr McClure of this reliance (tr 51). 269 Weeks is a sophisticated businessman with the capacity to review financial records and make judgments about the prospects of a business, using his commercial common sense to his own advantage. That is what he did in making his offer to purchase the share in the Company. I am satisfied that the evidence extracted above establishes that Weeks did not rely upon the estimated sales figures in the Sales Revenue Report. Rather, it establishes that Weeks doubted those figures to the point that he built in a protection for himself if the figures were not achieved. That was a "protection" that was included in clause 6.2 of Sentinel's Service Agreement, that provided for a "Performance Bonus based upon the Company's profitability, of up to $300,000" to be paid to Sentinel only if there was "Available Profit". I am not satisfied that Weeks relied upon the representation as pleaded. EBIT representation 270 The plaintiffs also claimed that in providing the financial documents to Weeks in December 2004, Campbell represented that the Company had an EBIT (after adjustment for the add-backs) for the 5 months to 30 November 2004 of $163,590. Without deciding on whether the representation was made, the observations I have made in relation to the Add Backs document and the Sales Revenue Report and the structure of Weeks' offer, also apply to this alleged representation.

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