Was there error in the evaluation of the Benelong Crescent claim?
62 The Garbake cross-claim, it will be remembered, concerns the Benelong Crescent apartment. It is the subject of the fourth and fifth grounds of appeal. Mr Baker contends in ground 4 that the federal magistrate erred in failing to find that he was likely to recover damages (plus interest) equal to or greater than the judgment debt or at least to the tune of $400,000 to $450,000. In ground 5 he says (in the alternative) that her Honour erred in failing to find that the Benelong Crescent claim was a real claim of sufficient integrity to warrant him being given an opportunity to litigate it (and therefore that she should have adjourned the hearing of the petition).
63 The primary question for the federal magistrate's consideration was whether Mr Baker had before a court a legitimate claim to funds sufficient to satisfy the petitioning creditor's debt: Ling v Enrobrook at 25A. Her Honour answered that question, but in doing so did not make findings on the legitimacy of the claim, contenting herself with the conclusion that it could not equal or exceed the value of the judgment debt. She also expressed concerns about why the claim had not yet been brought and about when it would be determined.
64 Mr Darke submitted first, that the claim was a real claim which was likely to succeed because Mr Baker's evidence was unchallenged.
65 Secondly, Mr Darke submitted that the true value of the claim was $1.249 million of which Mr Baker was entitled to at least half, namely $624,500, together with interest. Applying interest to that sum at NSW Supreme Court rates from 2008 to the end of 2012 (by when, he contended, the claim should be determined) gives a total of around $900,000, which is significantly greater than the Triprush judgment debt.
66 I accept the submission that the claim was a real one which was likely to succeed. Perpetual raised no argument against the submission and the evidence supports it.
67 The evidence before her Honour was contained in an affidavit sworn by Mr Baker in the Garbake proceeding ("Garbake affidavit"), which was an exhibit to Mr Baker's February 2011 affidavit. The Garbake affidavit was sworn on 4 December 2009, more than four months before the cross-claim was filed. The following account is taken from that affidavit. Mr Baker was not cross-examined so as to suggest that anything in it was wrong.
68 Mr Baker said that he and Garbake purchased the Benelong Crescent property as tenants-in-common in equal shares. Mr Baker was Garbake's sole director and shareholder. They developed the property into three units and in March 2007 Mr Baker engaged a real estate agent to sell them. At that time the agents estimated that unit 1 would sell for $4.2 million, unit 2 for $4 million and unit 3 for $4.1 million. In April 2007 they sold unit 1 for $4.2 million, and in May 2007, they sold unit 2 for $4.75 million. Unit 3 remained unsold.
69 In late 2007 Mr Baker was considering refinancing a loan secured over unit 3. At the time the outstanding debt over the property was around $3.7 million. On 5 December 2007, Craig Hitchings of Challenger Commercial Lending Ltd offered a loan to Garbake from Challenger and Perpetual to be secured by unit 3. On 18 December 2007, Mr Hitchings sent Mr Baker a valuation prepared by LandMark White (NSW) Pty Ltd for Challenger and Perpetual and dated the same day. LandMark White valued the property at $5.595 million (excl GST). Later that day Mr Baker and Mr Hitchings had a telephone conversation. Mr Baker told Mr Hitchings that he was surprised at the valuation as it seemed high but Mr Hitchings endorsed the valuation, telling Mr Baker that "they" were happy with it, that the offered loan would be made on the basis of it and, in effect, that LandMark White had got it right.
70 Mr Baker said he was persuaded by the valuation, the fact that a large banking organisation like Challenger was prepared to accept it and endorse the valuer, and by what Mr Hitchings had said to him. On that basis Mr Baker said he believed unit 3 was worth about $5.5 million. Consequently, in early 2008 he rejected an offer to purchase it for $4.25 million. Had it not been for the valuation and Mr Hitchings's endorsement, Mr Baker said he would have accepted that offer; indeed, he would never have entered into that mortgage in the first place. Despite marketing the property continuously from early 2008, Mr Baker never received any interest in it at or around $5.5 million. On 11 December 2010 unit 3 was sold in a mortgagee sale for $3,001,000.
71 The cross-claim names both Challenger and Perpetual as two of three cross-defendants (the third is the valuer, LandMark White) and claims damages against all three of them. But the material facts necessary to support the relief sought against Perpetual are not pleaded. The cross-claim relevantly pleads that by Mr Hitchings's conduct, Challenger made a number of misrepresentations to Mr Baker, including that the market value of unit 3 was $5.595 million (when it was less than that), and that the LandMark White valuation was the product of due care and skill (when it was not). Amongst other things, the making of these misrepresentations is alleged to have constituted misleading and deceptive conduct by Challenger, contrary to s 52 of the Trade Practices Act 1974 (Cth) ("TPA"). Consistent with what he said in his affidavit, that conduct is said to have caused Mr Baker loss and damage, including by inducing him to reject the offer to purchase the Benelong Crescent property for $4.25 million.
72 The claim Mr Baker wanted to make against Perpetual and which is the subject of the second ground of opposition is based on the same facts. In his Garbake affidavit Mr Baker said that he intended to claim that in engaging in the misleading conduct Mr Hitchings was acting on behalf of both Challenger and Perpetual and that both companies are liable for his conduct.
73 As Mr Darke submitted, the only modification needed to convert the pleaded claim against Challenger into one against Perpetual, too, would be to allege that Mr Hitchings's conduct was engaged in on behalf of Perpetual within the terms of s 84(2) of the TPA. Section 84(2) provided:
Any conduct engaged in on behalf of a body corporate:
(a) by a director, employee or agent of the body corporate within the scope of the person's actual or apparent authority; or
(b) by any other person at the direction or with the consent of agreement (whether express or implied) of a director, employee or agent of the body corporate, where the giving of the direction, consent or agreement is within the scope of the actual or apparent authority of the director, employee or agent;
shall be deemed, for the purposes of this Act, to have been engaged in also by the body corporate.
74 For s 84(2) to apply there is no need to establish a formal relationship of principal and agent between Perpetual and Mr Hitchings or Challenger: see Lisciandro v Official Trustee in Bankruptcy (1995) ATPR ¶41-436 at 40,903-4. As Kiefel J said in that case, the sub-section was intended to extend the common law. Its purpose was to attribute to a company the conduct of others for which it may not ordinarily be responsible. It is possible, her Honour indicated, that the conduct of a person who is associated in business with a company but not authorised as its agent for the purpose in question could make the company liable. It is arguable, at least, that Mr Hitchings was such a person. Certainly, a properly formulated claim based on the evidence in Mr Baker's affidavit in the Garbake proceeding is clearly open. Perpetual did not contend otherwise. In his February 2011 affidavit Mr Baker said that Mr Hitchings told him in response to a direct question as to the source of the money for the loan, "We do the deal, the money comes from Perpetual, we represent Perpetual". He was not cross-examined on this evidence.
75 I now turn to consider the controversial question - the value of the claim.
76 Mr Baker's case on appeal is based on his unchallenged evidence that, but for the misleading conduct, unit 3 would have been sold for $4.25 million, and the evidence Perpetual led that it was sold for only $3.001 million (the difference between those two figures is the $1.249 million mentioned above). This was the way the case was put in the notice of opposition.
77 These grounds of appeal proceed on the basis that in the Court below Mr Baker made a concession he ought not to have made, one that was in fact incorrect.
78 In his February 2011 affidavit Mr Baker said (at [48]):
If I am successful in the Cross claim I claim between $400,000.00 and $600,000.00 plus interest from around February 2008 to the present plus costs.
79 The claim, as Mr Baker formulated it in his affidavit, took into account the outstanding debt on the property. This was the way the case was put below, save that Mr Neggo accepted that, because of Garbake's interest Mr Baker was only entitled to a half share, reducing the value of the cross-claim to $200,000 to $300,000. On appeal, however, Mr Baker's case is that he was mistaken in what he said in his affidavit and that he should recover considerably more than this if he succeeds on the cross-claim. Perpetual did not contend that Mr Baker should not be able to put this argument having regard to the evidence in his affidavit. There was no suggestion that the argument could possibly have been met by calling evidence below: Water Board v Moustakas (1988) 180 CLR 491 at 497.
80 It is common ground that damages had to be assessed by comparing the position in which Mr Baker finds himself with the position in which he would have been had it not been for the misleading (or contravening) conduct. To succeed he had to show a loss caused by the contravening conduct. See Marks v GIO Australia Holdings Limited (1987) 196 CLR 494 at [42]. It is not suggested that the federal magistrate did not at least purport to follow this approach. To the extent that her Honour's decision on this question reveals her reasoning process it indicates that she accepted the concession made by Mr Baker and then his counsel about the value of the cross-claim.
81 Mr Darke contended, however, that the concession as to the gross value should not have been made because it was calculated on the false premise that the amount owing under the mortgage would have to be taken into account. Applying this approach, Mr Baker's share of the damages would be half of the difference between $4.25 million (the counterfactual sale price) and $3.001 million (the actual sale price), i.e. $624,500 plus interest (see [65]).
82 In the alternative, Mr Darke submitted that, if the amount owing under the mortgage is to be taken into account, it must be set off against both the sale price in the counterfactual scenario and the sale price actually achieved. If that is so, the value of Mr Baker's cross-claim would be even greater. That is because the amount outstanding under the loan was so much greater by the time of the actual sale because of the accrual of interest under the loan. Shortly before the time of the projected sale the amount outstanding under the mortgage was at least $3.72 million. Shortly before settlement, the debt had risen to $5,136,688. Thus, (so the argument ran) Mr Baker's position after the sale was that he and Garbake remained in debt to the tune of $2,135,688. On the other hand, if the misleading conduct had not occurred, he and Garbake would have enjoyed the surplus of the counterfactual sale price ($4.25 million) over the amount outstanding under the loan at that time (which both parties were content to assume was $3.72 million), i.e. $530,000. In this alternative approach, Mr Baker's share of the damages would be half of the difference between a profit of $530,000 and a debt of $2,135,688, namely $1,332,844, to which interest must be added.
83 Mr Bedrossian, for Perpetual, contended that damages would be calculated as the counterfactual sale price ($4.25 million) less the amount outstanding under the loan at the time of the counterfactual sale ($3.72 million) and transaction costs of 1.5% on the counterfactual sale ($63,750), plus transaction costs of 1.5% on the actual sale (which would otherwise not have been incurred) ($45,015), giving a total of $511,265, of which Mr Baker would be entitled to half, namely $255,633, to which interest must be added. On this view, whether interest was calculated up until the time of the hearing of the creditor's petition or until the time of the prospective hearing of the Garbake proceeding, the amount Mr Baker would recover if he succeeded on the cross-claim would be less than half the Triprush judgment debt.
84 In my view, Mr Bedrossian is correct. In the counterfactual scenario Mr Baker would not have recovered $4.25 million on the sale of the apartment. At the time he had a debt of at least $3.72 million secured by the apartment. Mr Darke's primary submission was that the mortgage debt should not be deducted because "it was not in any relevant sense causally related to the allegedly misleading conduct". He also submitted that the notion that the amount owing under the mortgage would have to be taken into account rested on a false assumption that, in order to sell the property, the owners would have had to pay out the loan when they could have refinanced. The problem with the argument, however, is that if the sale had gone ahead in early 2008 the effect of Mr Baker's evidence is that he would have discharged the debt. In the cross-claim itself the particulars of loss and damage recite that "had the property sold [at the time the $4.25 million offer was made] the entire loan and mortgage would have discharged …". Mr Baker's evidence was that he would have realised between $400,000 and $600,000 from a sale for $4.25 million. Those figures only make sense if the debt were to have been discharged on the counterfactual sale. Similarly, in his Garbake affidavit Mr Baker stated that, had he sold the property for the amount on offer in early 2008, he "would have been able to fully discharge the alleged debt (the subject of the [Garbake] proceedings) to Challenger/Perpetual" and have a surplus of about $400,000 to $600,000. Her Honour referred to his evidence at [45] of her reasons. In other words, Mr Baker's case, in substance, was that, but for the misleading conduct, he would not have had the debt from early 2008 onwards. For this reason both the principal and the alternative arguments must be rejected. There is an additional reason to reject Mr Darke's alternative argument. The mounting level of interest is a liability to Perpetual from which Mr Baker would be relieved if he succeeded in his cross-claim. It would not sound in damages. Otherwise Mr Baker would receive a windfall. The purpose of damages is not to profit the injured party but to compensate him. Damages, in my opinion, would be assessed as the net amount Mr Baker would recover from a sale in early 2008 together with the difference in the transaction costs. That is the amount that would put him in the position he would have been but for the misleading conduct. It therefore follows that her Honour did not err in concluding that the value of the cross-claim was significantly short of the judgment debt.
85 Nor do I think that her Honour fell into appealable error in refusing an adjournment. Mr Darke argued that it was likely that the cross-claim (as amended) could be heard and determined before the year was out. That may well be so but no evidence was led on the question and Mr Baker did not explain why, despite his expressed intention to do so, he had not yet amended his pleading. I have already said that solvency was not irrelevant. In Re James, where the debtors opposed the making of a sequestration order for a similar reason, Olney J, noting that the debtors had called no evidence to show they were solvent, would not have adjourned the creditor's petition. He said (at 22):
Given that the proof of their ability to pay their debts would be a basis upon which the Court could be expected to dismiss the petition, the inevitable inference which must be drawn from the absence of evidence of that ability is that the debtors are not presently, nor would they be upon a successful conclusion of the trade practices proceeding, be able to pay their debts. There is therefore no reason to adjourn the petition.
86 This, in substance, was the same conclusion her Honour reached.
87 Grounds 4 and 5 should be dismissed.