Business Custodians Ltd v Upintheair Pty Ltd

Judgment

1. The plaintiffs are Business Custodians Ltd ("BCL") and Pepperprint Pty Ltd ("PPL"). The defendants are Upintheair Pty Ltd ("UPL") and Mr Jamie McKinnon. The cross-claimants are UPL and Mr McKinnon. The cross-defendants are PPL and Mr Bruce Dwyer.
2. Most of the documentary evidence in this matter is contained in two folders which I marked as Exhibit A. They were generally referred to as the Court Book. Pages referred to using the letters CB are in these folders.
3. The first defendant, UPL was formerly called Coffs Colour Printers Pty Ltd. This company was incorporated in 2010 by Mr McKinnon for the purpose of owning and running a printing business called Pepper Print Colour Printers. This business had been started by Mr McKinnon (initially with a partner) in 2001. The name change to UPL occurred in January 2014.
4. The first plaintiff, BCL was, and is, a business concerned with the purchase of businesses on behalf of one or more investors. Mr Bruce Dwyer is one of the directors of BCL. In July 2013 BCL was granted an Australian Financial Security Licence.
5. Mr Dwyer was also a business broker and, through Seachange Business Brokers, became the agent of UPL with the task of selling the Pepperprint business. To that end Mr Dwyer introduced a Mr and Mrs Gleeson to the business. They were apparently interested in purchasing the company and carried out a number of steps of due diligence. This included the use of an accountant, Mr Rob Caldwell, to inspect the business's financial records.
6. The Gleesons did not proceed with the purchase, it would appear because the price was too high and, perhaps also, because they wanted a business that had some association with water. They later bought a company concerned with motor boat engines.
7. In 2013 Mr Dwyer, now in his capacity as a director of BCL, made contact with Mr Jamie McKinnon, a director of UPL, to purchase the business. He had always thought the business was attractive. In his own examination of the business he relied on the due diligence inquiries that had been made on behalf of the Gleesons.
8. An agreement was reached. The second plaintiff, Pepperprint Pty Ltd ("PPL") was incorporated specifically to purchase the business. The initial directors were Mr Dwyer, Ms Wilson and Mr McKinnon.
9. On 13 December 2013 the contract for the sale of the business was exchanged. The purchase price was $950,000 (CB 622).
10. On the same day a consultancy agreement was entered into between Mr McKinnon and PPL under which Mr McKinnon, for a fee of $1,000 per week plus GST, would provide services to PPL for a period of five years (CB 653).
11. The final settlement of the contract took place on 31 January 2014. Part of the purchase price was $100,000 provided by way of vendor finance. This finance was utilised because there had been some delays and shortfalls in raising finance and, said Mr Dwyer, to involve a level of security derived from the vendor's interest in the soundness of the sale.
12. The plaintiffs assert that in all of the negotiations leading up to the purchase of the agreement it had been a stipulated and clear requirement that the business would only be purchased if there was a demonstrated net profit over 12 months of an amount over $400,000. To this end profit and loss statements were provided to substantiate this level of net profit. In particular a Financial Statement was provided in July 2013 for the period from 1 July 2012 to 19 June 2013. The statement discloses printing sales of $897,350.62 and a net profit of $404,370.72. A later statement, to the end of the financial year, was consistent with the earlier statement.
13. Shortly after the settlement of the purchase the plaintiffs discovered an anomaly concerning a number of invoices. Ms Esther Hughes was the bookkeeper who made the discovery. She said she found a number of 'sales' which were suspicious because the sale proceeds could not be identified in the bank records. She checked with the invoicees to see if they had ordered the work. They had not. In other words there were a number of invoices for work done which had not been done or even ordered. Despite this, allege the plaintiffs, the invoiced amounts were included in the sales which the business had made.
14. A meeting was requested with Mr McKinnon which occurred on 19 March 2014. Precisely what was said at this meeting was a major area of contention in the case. The plaintiffs say that as a result of the meeting, and their prior investigations, it became apparent that about $100,000 of the asserted $897,350.62 in sales had not actually been derived from printing sales. They said it was apparent that a number of fictitious invoices had been created recording non-existent sales of about $100,000.
15. The plaintiffs' reaction to the revelations, together with other information concerning invoices to a company called Olympicon Pty Ltd (owned by Mr McKinnon's brother), was to claim from the defendants a reduction in the purchase price. It was said the purchase price had been agreed on the basis of the pre-condition of the approximately $400,000 net profit. Thus if the net profit was less, then the purchase price would necessarily also decrease. In essence, therefore, the first part of the plaintiffs' case is that as a result of the misrepresentation concerning net profit, they have suffered a loss which should be measured as the difference between the value of the business with the reduced net profit and the price actually paid. This is $205,000. The reduced valuation was provided by Mr Graham Long, a small business valuer. His report starts at CB 251. His opinion was not challenged subject to the assumptions he relied upon being established.
16. In addition, the plaintiffs have claimed an amount of $7,800 per month being the loss of profits they have incurred as a result of alleged breaches of warranties given by the defendants.
17. This is a convenient point to raise a pleading issue that was heavily relied upon by the defendants. Paragraph 13 of the Statement of Claim recounts the discovery of the fictitious invoices and says they totalled $100,402.80. The pleading goes on to say that the work referred to in the invoices was never carried out. Thus far the defendants do not dispute the allegation.
18. Paragraph 14 of the Statement of Claim then says that the $100,402.80 was included in the printing sales that had been previously disclosed to the plaintiffs and therefore formed part of the basis upon which a net profit of over $400,000 had been generated. The defendants submitted that the allegation as framed necessarily meant that the false invoices referred to in paragraph 13 had been created before the Financial Statements had been provided in July 2013.
19. Because, according to the defendants, the fictitious invoices were created in December 2013, the sales they particularise could not have been included in the Financial Statement provided in July 2013 and therefore the plaintiffs' allegation, and with it their entire case, must fail.
20. The defendants further say that if the pleading had stated the correct factual circumstances, namely that machinery sales of a different amount (to the fictitious invoices total), were included in the printing sales, then the defence would have been conducted differently. Accordingly a strict approach needed to be taken to the pleading because otherwise there would be irredeemable prejudice to the defendants.
21. The plaintiffs' response to this pleading point is twofold. Firstly it is said that on a proper reading of paragraph 14 it is the $100,402.80, not the invoices, that was included in the relevant Financial Statement. In other words the pleading says the amount of the sales was included in the Financial Statement even if the invoices said to reflect those sales were created later.
22. Secondly the plaintiffs say that the invoices were in any event probably created before the Financial Statement was provided.
23. I agree with the plaintiffs' first submission about the pleading on the basis of a plain reading of what it states. I think it worth including paragraph 14 here: "14. The $100,402.80 total of the Fictitious Tax Invoices was included in the income of the Business from printing sales in the period 1 July 2012 to 19 June 2013 of $897,350.62 in the Financial Statement."
24. Paragraph 14 does not require the invoices to be part of the trading figures, only the inclusion of the false sales. If the invoices were created later it is logical that they would be created to reflect the sums that had been wrongly included.
25. As will be seen below, I also agree with the plaintiffs' second point, that the invoices were probably created before the Financial Statement was provided.
26. Returning to the March 2013 meeting, Mr McKinnon says he admitted that the invoices were fictitious but he gave a plausible explanation to the effect that there had been genuine sales of machinery included in the sales figures. He only created the fictitious invoices in January 2014 when he was stressed about the upcoming completion of the contract and after his wife had told him that the invoices for the sale of machinery should have been identified separately to printing sales. Notwithstanding the explanation, Mr McKinnon offered to resolve the emerging dispute by transferring ownership of about $100,000 worth of printing machinery to the plaintiffs. The offer was rejected.
27. The $1,000 per week consultancy fee to Mr McKinnon has never been paid because, say the plaintiffs, the consultancy agreement was founded on the sale agreement so that if the sale agreement was entered into pursuant to misrepresentations by Mr McKinnon then he could not be entitled to the rewards of the consultancy agreement. In addition he never did any work to justify the claim. The consultancy agreement was formally terminated by a notice dated 21 November 2014 (CB 243). The termination is stated to be made pursuant to clauses 11.1 and 11.4 of the consultancy agreement (CB 673). The unpaid fees are the subject of the Cross-Claim.
28. Another subject of the Cross-Claim arises from the vendor finance of $100,000 as well as interest on that sum. The claim for $100,000 is conceded by the cross-defendants, but they challenge the claim for interest.
29. What I have stated so far represents a general background to the dispute between the parties. I do not intend to summarise all the material in the court book or the oral evidence. Despite the length and complexity of the matter the parties chose not to order a transcript. However I think it important to make specific findings about the fictitious invoices, the meeting on 19 March 2013 and on the credit of the witnesses who were cross-examined.
30. For reasons which I hope will be apparent below I preferred the evidence of the plaintiffs' witness to those of the defendants. It was submitted that even though Mr McKinnon had falsified the invoices he had 'owned up' to his wrongdoing and this should be seen as giving credence to his evidence. The other approach, which I think is the case, is to regard Mr McKinnon as continuing his deceit in an attempt to extricate himself from the predicament he had cast upon himself. Mrs McKinnon was described, by plaintiffs' counsel, as having made a "heroic" but failed attempt to assist her husband's case. I agree the attempt failed. I do not agree that it was heroic.
31. Mr McKinnon's explanation for the fictitious invoices effectively begins at CB 324 under the heading 'Machinery Sales'. He describes his purchase of machinery from the University of Newcastle during 2014 for $40,000. Mr McKinnon said that following the purchase of the machinery he spent about three weeks in Armidale dismantling the equipment and then sending it to Coffs Harbour. While he was doing so he made some enquiries to see if there might be persons interested in purchasing the equipment. There were and they included JW Graphic Engineering and Stewart Graphics Pty Ltd. Three invoices (totalling $62,800) were issued to JW Graphic Engineering as set out at CB 325. Notably the first invoice is dated 14 March 2013. However the date of the receipt of the $40,000 issued by the University of Newcastle is 18 March 2013.
32. Two invoices were issued to Stewart Graphics Pty Ltd in June 2013, totalling $26,210. The total of the machinery sales was $89,010.
33. It seems odd that the first invoice to JW Graphic Engineering would have been issued before payment of the purchase of the equipment, especially having regard to Mr McKinnon's evidence that about three weeks was spent in Armidale dismantling the equipment and then freighting it to Coffs Harbour.
34. One could imagine many innocent explanations for this anomaly but it is important to remember the plaintiffs' position in respect of these invoices is that they are also fictitious.
35. Mr McKinnon, in his affidavit, goes on to explain (CB 329) that on about 13 January 2014, after some discussion with his wife, he decided to change the invoices that had been issued for the sale of the machinery to JW Graphic Engineering and other purchases so that the invoices appeared to be sales of printing material or services. He says he did this because he was very stressed by the sale process that was currently occurring and he rejected his wife's advice that he needed "to tell Bruce about the machinery sales invoices". She told him that these invoices should have been in a different category.
36. If machinery sales were a known part of the company's business I would not regard Mr McKinnon's failure to tell Mr Dwyer about them as remarkable. However, still proceeding on the above assumption, what I do find most remarkable is the decision to then either amend or create invoices which were patently false. If machinery sales were part of the business I do not understand why there was a need to cover them up. If they were not, then the more logical time to have created the fictitious printing sales invoices was when the machinery sales were being substituted for the company's normal business. This was in March 2013 when Mr McKinnon and some staff left Coffs Harbour, and the printing business, to travel to Armidale to deal with the machinery that had been purchased. They were away for some weeks, necessarily at the same time, leading to a reduction in printing sales.
37. The plaintiffs' position is that the original machinery sales invoices, as described by Mr McKinnon in paragraphs 91, 92 and 93 of his affidavit (CB 326), were in fact created after Mr McKinnon became aware that the plaintiffs had discovered the suspicious invoices. In other words, the invoices that Mr McKinnon says were legitimately created in 2013 in respect of the machinery sales were actually only created in 2014.
38. The plaintiffs submitted that the 2013 invoices for machinery sales must have been created in 2014 because they bear the heading 'Upintheair Pty Ltd'. Because the change of name to Upintheair Pty Ltd only occurred in January 2014 the invoices could only have been created after January 2014. Thus if one compares, for example, the amended (fictitious) invoice at CB 798 bearing No. 13384, and under the letterhead of Coffs Colour Printers Pty Ltd, to the asserted original invoice No. 13384 (at CB 715) it can be seen that the invoice to JW Graphic Engineering, which on Mr McKinnon's case was created before the amended invoice, implausibly bears the letterhead of Upintheair Pty Ltd.
39. Mr McKinnon could not satisfactorily explain this anomaly. His initial, effective guess, that it was caused by the MYOB system was not convincing and I reject it. Mr McKinnon later referred to a separate file of figures and to his wife being better able to explain these matters. The inconsistencies are patent on inspection of the documents. Despite this no evidence was put on by Mr or Mrs McKinnon before 8 October 2015 (ie, until during the hearing) to explain the inconsistency.
40. The issues raised by the plaintiffs mostly arose from the documentary evidence that had been put before the court, frequently by the defendants. These issues would have been apparent from the pleadings and alerted the defendants to the necessity for there to be an explanation of the details of the documents, such as the invoices. Mr McKinnon frequently said that he had no detailed knowledge of the bookkeeping background to the documents. This knowledge was in the possession of his wife.
41. As I have already said no evidence was put on by Mrs McKinnon prior to the hearing. Mrs McKinnon was present in court during the first two days of hearing when it would have become apparent that a number of bookkeeping issues needed clarification. To that end an attempt was made to tender an affidavit by Mrs McKinnon annexing a good deal of documents seeking to explain the inconsistencies that had arisen.
42. I allowed only part of the material tendered to go into evidence but when Mrs McKinnon was called to give oral evidence I did allow some questions to be asked in particular because the detail of the invoices had become very important. Mrs McKinnon's ultimate explanation concerning the headings on the invoices was that any amendments made to the invoices on the MYOB system would remain notwithstanding that the invoices might refer to a period prior to the date they were originally created.
43. Thus once there was a change in the name of the company the new name would appear on the invoices even though the invoices had originally been created when the company had a different name.
44. Mrs McKinnon said she had about 10 years' experience with the MYOB system. Despite this I did not find her explanation convincing. In addition Mrs McKinnon, in endeavouring to explain the anomalies in the invoices, said there were effectively two MYOB folders from which material could be accessed. This had occurred because, prior to the sale of the business, the MYOB folder had been altered to remove personal entries relating to Mr and Mrs McKinnon. If this were the case I would have expected the original folder, which was provided to the purchasers of the business, to have not included Upintheair as the business name. Once again I did not find Mrs McKinnon's explanation sufficient to cure the inconsistency.
45. Although Mrs McKinnon gave her evidence in an apparently straightforward manner I had the distinct impression that, with the benefit of having been in court for two days before giving evidence and hearing the detail of matters that were in dispute, Mrs McKinnon was making a belated attempt to repair her husband's case.
46. There is another important point about the machinery. Mr McKinnon said in his oral evidence that not all of the machinery purchased in Armidale was sold to JW Graphic Engineering and Stewart Graphics Pty Ltd. He said there was an amount of machinery left over which was sent to a broker in Sydney. This is the machinery he is referring to in his affidavit which he described (CB 333) as "$100,000 worth of machinery I have with a broker in Sydney". If this statement was true then it suggests that the machinery he purchased for $40,000 had a resale value of at least $189,000. On any objective analysis this was a remarkable deal on his part.
47. In addition, if he was being honest about his assessment of there being $100,000 worth of machinery in Sydney which he was offering to the plaintiffs one wonders why he would make such a generous gesture if he in fact, as he states, had done nothing wrong in relation to the sales figures.
48. Further, if the machinery purchases and sales were part of the printing business, then the machines purchased by the business would, until resale, have remained the property of the business. How then was Mr McKinnon in a position to offer the machines to the business, at the 19 March 2014 meeting, if the machines were already owned by the business?
49. There is however a powerful piece of evidence to refute the plaintiffs' case that the machinery sales invoices were themselves fictitious and that there were no such sales in 2013. This evidence is the bank statements which are Exhibit 2. The entries showing payments from JW Graphic Engineering and Stewart Graphics Pty Ltd correspond to the machinery sales in the invoices, or at least to the description of the machines sold. I do not see how the bank statements could have been manipulated to disclose false deposits into the account.
50. Exhibit 2 compels me to find that the machinery sales did in fact take place in 2013 and that the invoices relating to those sales are genuine. What remains however is the fact that the fictitious invoices were created to mask the machinery sales as sales of the printing business. This in turn indicates that the representation that there were printing sales of $987,350.62 and a net profit of over $400,000, from printing sales, was incorrect.
51. The validation of the machinery sales invoices does not, of itself, give any weight to the Mr McKinnon's assertion that the fictitious invoices were created in December 2013. On one approach the genuine machinery sales, and corresponding invoices, lends weight to the argument that the fictitious invoices were created before 19 June 2013, because this was the specific time that the printing sales were down and a 'cover up' was called for. Mr McKinnon wanted to sell the business and he knew the sales had been affected by the machinery dealings.
52. Mr McKinnon was taken to CB 141. He agreed that the sales figures recorded on this document included the machinery sales. However, it is to be noticed first of all that the cost of purchasing the machinery is not included in the cost of the sales. Secondly if one takes out the machinery sales, thus reducing the total sales by about $90,000, there has been only about a 5% increase in sales from the previous year, inconsistent with the projections that were made by Mr McKinnon in the document at CB 134.
53. Factoring in both the reduction in sales because of staff being in Armidale and the reduced increase in profit, a logical explanation arises for the fictitious invoices being created. The amount of the fictitious invoices (regardless of when the invoices themselves were created) bolstered sales to a degree that would have satisfied Mr Dwyer's requirements for a profit level of over $400,000, as stated in paragraphs 16 and 29 of his affidavit (CB 116 and 119 respectively).
54. Thus although I am satisfied that the machinery sales invoices were genuine (but only because of Exhibit 2 and not because of anything said by Mr or Mrs McKinnon) I am satisfied that the fictitious printing sales invoices were created sometime before 19 June 2013 in order to maintain or increase printing sales of the business.
55. If I had preferred the defendants' reading of paragraph 14 of the Statement of Claim (the pleading point) it would be effectively dealt with by the findings made in the previous paragraph. My finding is that, reading Paragraph 14 of the Statement of Claim in the manner submitted by the defendants, the fictitious sales were in the Financial Statement showing trading up to 19 June 2013.
56. Turning now to the meeting on 19 March 2014. There are essentially four versions of the meeting. It was attended by Mr Dwyer, Ms Hughes, Ms Wilson and Mr McKinnon. The first three witnesses gave evidence on behalf of the plaintiffs. The versions given by these three witnesses are not identical but I would not expect them to be. They do however reflect some common threads. These include that Mr McKinnon never said the invoices were in reality for equipment sales and he never said that the sales figures previously given were still correct.
57. Not because of the numbers involved (3 to 1) but rather because of my assessment of the witnesses I generally prefer the versions given by the plaintiffs' witnesses. In particular I found the evidence of Ms Wilson to be the most persuasive not only because of the manner in which she gave evidence but because she had made an almost contemporaneous note of the details of the meeting shortly after it occurred and she referred to that note immediately before preparing her affidavit.
58. I add here that I do not accept the defendants' submission that the plaintiffs were aware of the sale of the equipment when the purchase was occurring. Support for this assertion is said to come from paragraph 29 of Ms Wilson's affidavit (CB 77). The "late February or early March" referred to in paragraph 29 is clearly in 2014. The reference to "early March 2013" in paragraph 30 was accepted as a typographical error and should have recorded 2014.
59. A related matter which assisted me in reaching conclusions about the meeting is that Ms Wilson and Ms Hughes said that prior to the meeting Mrs Catherine McKinnon (Jamie McKinnon's wife) had told them that there were no equipment sales included in the sales figures (eg CB 45, paragraph 11). It was put to Ms Hughes and Ms Wilson that this conversation had not occurred.
60. Support for the defendants' case was said to come from paragraph 34 of Ms Wilson's affidavit (CB 34). I disagree with the defendants' interpretation of the words used by Mr McKinnon. I think the words are more consistent with the plaintiffs' case to the effect that the fictitious invoices were included in the Profit and Loss Statement provided in August 2013.
61. Although Mr Dwyer conveyed an air of superiority in dealing with certain questions I do not think he was attempting to mislead the court. There were some areas in which he was at times clearly mistaken. For example, the document at CB 83 was originally said by Mr McKinnon to be part of a flyer put out to potential investors. It later became apparent that it was part of a submission made to ASIC in BCL's application for a licence to operate a wholesale fund, that is to collect money from investors for investment in assorted businesses. This licence (an Australian Financial Security Licence) was granted in July 2013. The result was that BCL became an unlisted public company.
62. Much was made of the document at CB 83 and in particular under the heading "Portfolio Composition" where the following is written: "As stated above, it is intended to only select businesses demonstrating a sustainable EBITDA equating to a minimum 25% return on the total acquisition cost."
63. Although no evidence was given to this effect I took EBITDA to be a reference to 'earnings before interest, taxes, depreciation and amortization'.
64. The importance of the 25% issue was that it was said to contradict the alleged condition before purchase of the printing business that it could demonstrate a net profit over 12 months of more than $400,000.
65. The evidence about the 25% was to some extent confused and confusing. Ms Wilson was adamant that 33⅓% was the minimum return that would be considered for investment but she said the 25% had been inserted to meet the suggestion by the company's solicitors, Sparke Helmore, that the licence application to ASIC necessitated the lower figure. Ultimately I do not think the reference to 25% at CB 83 is of much significance. I accept the evidence of Ms Wilson concerning the investment policy.
66. Whatever was the actual position in relation to Exhibit 1, the important point is that the condition imposed by Mr Dwyer was that the business had a net profit of over $400,000, whatever percentage that may have represented.
67. Another issue arising from the March 2013 meeting and the fictitious invoices concerns work apparently done by Mr McKinnon's brother, Mr Matthew McKinnon. A number of the invoices identified as suspicious by Ms Hughes at CB 44 are issued to Olympicon. The specific invoices can be found commencing at CB 49. They total $13,459.
68. According to the defendants these invoices were for printing work done for the second defendant's brother, Matthew McKinnon, when and after he said he set up a business called Olympicon. The invoiced amounts were not chased up because there was a "contra" agreement with Mr Matthew McKinnon effectively setting off the value of the printing work for the value of services he had provided when Mr and Mrs McKinnon were building a residence in about 2011.
69. I found Mr Matthew McKinnon to be a particularly unconvincing witness. Annexed to his affidavit is a quote that he gave Mrs Catherine McKinnon's parents for electrical work on a residence they were building between 2009 and 2011. The property was constituted by a duplex arrangement in which Mr and Mrs Jamie McKinnon would occupy one unit and Mr and Mrs Bienifelt would occupy the other unit. Although Mr Matthew McKinnon protested that as an electrician he was not familiar with the precision of the English language I do not accept that his often repeated use of the phrase "per unit" was beyond his understanding. I do not accept that the work that is referred to in the quote was to be only for Mr and Mrs Bienifelt, although it may well be that the majority of the work was for them. I also notice that the quote is addressed to Mr and Mrs Bienifelt care of Mr Jamie McKinnon.
70. Mr Matthew McKinnon said that the work that he did on the property for his brother was electrical work to the value of about $9,000 together with other work such as being a site foreman and doing some landscaping. He thought the printing work that had been done for him had a value of about $14,000.
71. This issue raises another problem with Mrs McKinnon's evidence, the result of which could extend to her evidence generally. Mrs McKinnon annexed a general ledger to her affidavit (Annexure B). The purpose was presumably to show that the work done for Olympicon was treated as a loan from the shareholders of Coffs Colour Printers Pty Ltd. The problem is that the account transactions ledger annexed to the affidavit of Ms Wilson (12 October 2015) does not have the corresponding entries for Olympicon. This could mean they had been removed by Mrs McKinnon because they were a personal matter, and not part of the alleged contra, or there had been some manipulation of the 'books', the latter being 'in line' with the plaintiffs' general allegation against the McKinnons. Whichever is the case, I reject the assertion that there was work done for Olympicon which was to be treated as a contra for the electrical work performed by Mr Matthew McKinnon.
72. In addition the printing company should not have had to bear the cost of the electrical work on the personal property of the McKinnons.
73. The total of the Olympicon invoices ($13,459) and the fictitious invoices ($88,153.80) is $101,612.80. This is $1,210 more than the figure stated in paragraph 13 of the Statement of Claim. I'm not sure why there was this difference but it does not seem to be of significance and was not raised by the defendants as a matter on which any particular submission turned.
74. There are two more issues that need to be dealt with at this stage. The defendants submitted that one of the allegedly fictitious invoices was in fact genuine. This is the invoice to Baringa Private Hospital for $1,891. The basis for the submission was the excerpt from the customer ledger which is Exhibit 3. This exhibit raises an inconsistency with the evidence of Ms Hughes who said, in her oral evidence, that she rang every single person to whom a suspicious invoice had been issued. Although Exhibit 3 has the appearance of validity because it is on a piece of paper it is also a product of the MYOB system which was controlled by Mrs McKinnon. Notwithstanding Exhibit 3's documentary nature I do not accept it over the evidence of Ms Hughes. I can see no reason why an affidavit could not have been obtained by the defendants from a representative of Baringa Private Hospital. I infer that evidence from that source would not have assisted the defendants' case.
75. The second point is that, in making the findings that I was asked to make by the plaintiffs, the defendants submitted that I should be satisfied to the 'Briginshaw' standard. This arose from the serious nature of the allegations. I am not sure that is correct; however, lest there be any doubt, I have applied the standard to my conclusions.
76. I will turn now to the question of whether or not there had been a stipulated condition that the business would only be considered for purchase if there had been a net profit over 12 months exceeding $400,000. Mr McKinnon, in his evidence, certainly concedes there was discussion about this amount but says this was never a precondition and the discussions were vague and not detailed to a specific amount.
77. Mr McKinnon did however agree with the conversation with Mr Dwyer that had been put to him (CB 117). Having regard to my rejection generally of Mr McKinnon's evidence, and acceptance of Mr Dwyer's evidence, I think it an easy step to conclude that the condition alleged by Mr Dwyer, namely that the business would not be purchased unless it had a net profit over the preceding 12 months of more than $400,000, existed.
78. It also follows that I accept that Mr McKinnon, both orally and through the profit and loss statements he provided, represented that the required profit had been made. Factoring in my conclusion about the true state of the sales it follows that I am satisfied that there was a misrepresentation about the profit and that that misrepresentation had been acted upon, and relied upon, by the plaintiffs in the purchase of the business.
79. There was no challenge to the reduced value of the business if there was the reduced level of profit (CB 255). It follows therefore that the plaintiffs are entitled to damages of $205,000.
80. The next issue is whether the plaintiffs are entitled to damages arising from a breach of contractual warranties. This is said to arise in the following way: The misleading representations were breaches of the warranties contained in the sales agreement (Clause 48 at CB 642 and the Schedule at CB 645 and 646). If the original sales figures had been correct then at least the same figures should have been achieved after the sale. They were not and therefore the vendors are liable for the loss of profits.
81. Because I have found that there had been misleading conduct by the vendors, there was an initial attraction to the plaintiffs' claim. There are two matters which defeat this initial impression: 1. There is not sufficient evidence to satisfy me that the ongoing conduct of the business was not affected by the specific running of the business since its purchase. 2. The plaintiffs are being compensated for the reduced 'size' of the business by a reduction in the purchase price of $205,000. They will therefore be placed in the position of having bought the 'smaller' business, which they have continued to run. To add lost continuing profits to the above compensation would, in my view, amount to double compensation. In addition the plaintiffs will be entitled to interest on the amount of the price reduction. It is not relevant that this interest might be less because of any set-off arising from the conceded claim for return of the vendor finance. As will be seen below, I do not in any event think a set-off is appropriate.
82. In relation to interest, and in the exercise of the discretion emanating from Section 100 of the Civil Procedure Act 2005, I think the rates set under Rule 36.7 of the Uniform Civil Procedure Rules 2005 (the "UCPR") should be applied. Interest on $205,000 from 31 January 2014 to 3 November 2015 is $23,384.87. The plaintiffs will accordingly succeed on the misrepresentation claim for $228,384.87.
83. I will now turn to the Cross-Claim and begin with the alleged breach of the consultancy agreement. The agreement commences at CB 654. The term of the agreement is 5 years and the fee is $1,000 per week (CB 681). Termination is dealt with in clause 11 (CB 673).
84. Mr McKinnon claims the fee for 260 weeks (paragraph 30 of the Cross-Claim). There is no dispute that no consultancy fees have ever been paid and that Mr McKinnon has never done any consultancy work. His claim is a product of his alleged rights under the agreement.
85. The plaintiffs say Mr McKinnon's claim is wholly or partly defeated for one of the following reasons: 1. Section 243 of the Competition and Consumer Act 2010 (Cth) enables the court to refuse to enforce the consultancy agreement in circumstances such as the present (assuming positive findings for the plaintiffs on their misrepresentation claim). 2. The agreement was terminated, by agreement between the parties, at the 19 March 2014 meeting. 3. Alternatively, if the contract remained on foot after the meeting it was wrongfully terminated by Mr McKinnon because a non-payment of monies is of itself not repudiatory conduct. 4. The cross-defendants were entitled to terminate the contract under clause 11.1, which action was taken by a notice served on 21 November 2014 (CB 245).
86. Reliance on Section 243 is derived from Mr McKinnon's conduct leading to the completion of the sale of business agreement. The plaintiffs submitted that if this agreement had not been made there would have been no consultancy agreement. Because the sale agreement had come about because of Mr McKinnon's (mis)conduct he should not be entitled to the fruits of the consultancy agreement.
87. I found above the sale agreement was entered into as a result of reliance by the plaintiffs on the misrepresentations of the defendants. I am satisfied that if the defendants had not made the misrepresentations the plaintiffs would not have entered into the agreement. There would then have been no need to have the consultancy agreement. I think this is an appropriate circumstance for the application of Section 243 and in particular the making of an order under subsection (c) "refusing to enforce any or all of the provisions of such a contract or arrangement".
88. There was no dispute that the consultancy agreement was a contract which could potentially be the subject of an order under Section 243.
89. The defendants' conceded that if I reached the conclusions that I have in respect of the misrepresentation case (including reliance) then the consultancy agreement would not have been made. Accordingly there would have been no agreement to enforce and this part of the Cross-Claim would fail.
90. If I am wrong on the misrepresentation case I would have found the agreement was terminated by the parties at the 19 March 2014 meeting. The termination was not in writing, as required by clauses 11 and 16, but in my view was accepted as effective by Mr McKinnon. This is the only explanation for Mr McKinnon stating that he had been offered a job twice by PPL (CB 336, paragraph 147). Why would this have occurred if he was already 'on the payroll' at $1,000 per week? I do not accept the offer was for a different purpose to that envisaged by the consultancy agreement.
91. Although Ms Wilson did not agree that she had offered Mr McKinnon a job it is clear that following the revelations of falsifying invoices, the plaintiffs considered any business relationship with Mr McKinnon had ended. On this basis, at best, Mr McKinnon might have recovered about 6 weeks in consultancy fees.
92. Turning now to the claim for the unpaid vendor finance, the starting point is clause 52 of the sale agreement (CB 642). Under this clause $100,000 was provided by way of vendor finance and was repayable "no later than 90 days after the completion date". The completion date was 31 January 2014.
93. By clause 52.3 interest was payable at the rate of 20% per annum "on or by the date which is 90 days after the completion date".
94. As already noted the cross-defendants conceded the obligation to repay the $100,000. In respect of interest however the cross-defendants submitted that, under clause 52.3, there was no obligation to pay interest after 90 days. Secondly they submitted that if there was any such obligation the interest should not be 20%. In addition it was submitted that the vendor finance repayment should be set off against any verdict in favour of the plaintiffs arising from the primary claim (of $205,000).
95. Firstly I do not agree that the interest should only be paid for 90 days; however, I do agree that the 20% rate should only be applicable for that period. The cross-claimants have been kept out of their money since they provided the finance so that they are entitled to interest. On my reading of clause 52.3, however, I think that the rate of 20% only applies to the first 90 days. Accordingly interest thereafter is at the discretion of the court under Section 100 of the Civil Procedure Act 2005. In my discretion, once again I think the same rates as would be applicable under Section 101 (and UCPR 36.7) are appropriate.
96. I note here that the basis, which was not disputed, for the verdict on the Cross-Claim for interest against Mr Dwyer arises from his role as a guarantor.
97. Interest on $100,000 at 20% per annum for 90 days is $4,931.50. Interest from 1 May 2014 to 22 October 2015 on $104,931.50 is $10,288.40. The total amount of interest is therefore $15,219.90.
98. I do not think it is possible to set off the vendor finance against the plaintiffs' claim. This is because the parties to the plaintiffs' claim are different to the parties to the Cross-Claim. Although there is some commonality, and perhaps in essence the parties are the same, they are not strictly so, therefore I think there should probably be separate verdicts going each way.
99. The parties however asked me not to make final orders so that they could consider practical elements arising from the two sides to the various disputes effectively being the same.
100. The findings which should result in final orders are as follows:
101. Statement of Claim 1. On the misrepresentation claim Pepperprint Pty Ltd succeeds against Upintheair Pty Ltd and Mr Jamie McKinnon in the sum of $228,384.87 ($205,000 plus interest of $23,384.87). 2. On breach of warranty (loss of profits) claim Upintheair Pty Ltd and Mr Jamie McKinnon succeed against Pepperprint Pty Ltd. 3. Cross-Claim 4. On the vendor finance claim Upintheair Pty Ltd succeeds against Pepperprint Pty Ltd and Mr Bruce Dwyer for $100,000. 5. On the interest on vendor finance claim Upintheair Pty Ltd succeeds against Pepperprint Pty Ltd and Mr Bruce Dwyer for $15,219.90. 6. On the consultancy agreement claim Pepperprint Pty Ltd succeeds against Mr Jamie McKinnon. There should be an order under Section 243 of the Competition and Consumer Act 2010 refusing to enforce the provisions of the consultancy agreement made between Pepperprint Pty Ltd and Mr Jamie McKinnon.
102. The total monies found in the plaintiffs' favour are $228,384.87. The total monies found in the defendants' favour are $115,219.90.
103. I will ask the parties to confer on final orders and costs. The orders should also deal with Business Custodians Ltd which is not the specific subject of any of the findings in paragraph 100, above.

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