non-disclosure of material facts
284 Applicant's case: Finally, Mr Clifford points to the following undisclosed information and sequence of events to prove he was misled and deceived by the respondent's silence:
· The monthly board package issued to shareholders (but not him) on or about 10 July 2006 showed sales for June 2006 were $1,069,319 under budget and sales for January to June 2006 were $2,639,289 under budget.
· On 28 July 2006, Vegas' overdraft facility with Westpac had a limit of $1,500,000 and was drawn to $1,900,548, being $400,548 in excess of the limit.
· On 3 August 2006, Vegas' overdraft facility with Westpac had its limit of $1,500,000 increased to $2 million and was drawn to $2,194,513, being $684,513 in excess of the original limit. Mr Clifford says the limit had been $1,500,000 since at least 2002, as disclosed in Vegas' financial reports.
· Or about 10 August 2006, the monthly board package showed sales for July 2006 was $621,166 under budget and sales for January to July 2006 were $3,260,455 under budget.
· On 31 August 2006, shareholders of Vegas in combination paid $1 million to Vegas as long term shareholder loans.
· On 7 September 2006, Mr Hart met with Mr Clifford to discuss Mr Clifford's "investing and joining Vegas". Mr Hart informed Mr Backshall that Mr Clifford was "interested in becoming a shareholder" and Mr Backshall discussed the issue with other shareholders of Vegas but some of the foregoing information was mentioned.
· On or about 10 September 2006 the respondents were aware that sales for August 2006 were $2,348,115 under budget and sales for January to August were $5,607,893 under budget.
· On 29 September 2006, Vegas' overdraft facility with Westpac had a limit of $1,500,000 which was drawn to $1,780,201 being $280,201 in excess of the limit.
· On 24 October 2006, Vegas' CFO, Mr Rayney, met with Westpac and, in an email exchange on 25 October 2006, explained the use to be made of Mr Clifford's funds "going into Vegas" to Westpac, including "repayment of any existing or planned shareholder loans" from the "Clifford injection".
· On 26 October 2006 Mr Clifford wrote to the respondents confirming an intention to take up an invitation to invest, "subject to due diligence work on the last three years audited accounts with a focus on the use to be made of the funds, revenues, expenditures and the history of dividend payments to shareholders".
· The next day, on 27 October 2006, Vegas' overdraft facility with Westpac of $1.5 million was increased to $2 million and was drawn to $2,474,001, being $474,001 in excess of the new limit to $974,001 in excess of the limit disclosed in the statutory accounts;
· On 3 November 2006, Vegas' overdraft facility with Westpac had its limit of $1.5 million increased to $2.5 million and was drawn to $2,421,946;
· On 17 November 2006, Vegas' overdraft facility with Westpac had its limit of $1.5 million increased to $3 million and was drawn to $1,739,899.77, being $239,899.77 in excess of the original limit.
· On 30 October 2006, shareholders of Vegas provided shareholder loans of $260,000, $100,000 of which was from Mr Backshall.
· On 30 November 2006, shareholders of Vegas provided shareholder loans of $240,000, $200,000 of which was from Mr Hart.
· On 30 November 2006 he met with Mr Backshall at the offices of Vegas at which time he signed his letter to the respondents dated 29 November 2006. The letter said in part that he had relied upon the statutory accounts provided to him by the respondents and Vegas' "projected income upon the acquisition of the global licence and a moderately improved performance by C&C in the North American Market". The only material provided to Mr Clifford with "projected income" was that contained in the spreadsheet and the explanation given to him by Mr Backshall of the "forecast sales growth for Vegas" he had prepared.
· On 10 December 2006, by the monthly board package, the respondents were aware that sales to November 2006 were only $155,809 (or 0.75%) ahead of sales to November 2005 and sales for December 2006 to June 2007 needed to beat the 2005 annual results by $4,027,399 to even be anywhere near the sales for 2007 represented to Mr Clifford by the respondents in the spreadsheet.
· The respondents received updates of sales orders for periods up to six months in advance. The sales orders for the period January to June 2007 were $18,870,555 against required sales to make the 2007 budget ($45,512,163) of $21,790,091. Of the $18,870,555 of sales orders for January to June 2007, $2,885,343 was rejected. This was 15.3% of sales, significantly higher than the "comfortably under 5%" resulting from the respondents' "focus on minimising amount of excess inventory". This meant that, by about 10 December 2006, on the respondents own figures, to the knowledge of each respondent, Vegas was going to fall short of its represented sales by $3,863,064, even if the rejected orders were only 5% and not 15.3%.
· Vegas' sales for December 2006 were $1,568,760 under budget for December 2006.
· On 14 December 2006, Vegas repaid shareholders' loans of $490,000, $200,000 to Mr Hart, $100,000 to Mr Backshall.
· On 19 December 2006, Vegas paid the applicant's funds into its overdraft facility.
285 The applicant says the respondents did not disclose any of these matters, not even at or after the 30 November 2006 meeting (a reference to the occasion on which he signed the 29 November letter to Vegas) when he made known his intention to invest in reliance on the information provided by the respondents, subject to Vegas obtaining independent legal advice on the transaction.
286 Vegas' case: Dealing with the non-disclosure of sales figures, Vegas recognises that the monthly board package issued around 10 August 2006 showed that for the month of July 2006 actual sales were below the budget that had been prepared. However, Vegas refers to Mr Backshall's evidence (witness statement at [108]) (upon which he was not cross-examined) to emphasise that the sales figures for 03/04-05/06 were "actuals". There Mr Backshall says the sales figure for 06/07 was taken from Vegas' budget prepared by Vegas accounting staff, Mr Rayney and himself in May/June 2006. The 06/07 budget assumed growth in sales from 05/06 of about 9%. At the time the draft profit and loss statement was prepared, sales were consistent with the 06/07 budget.
287 Vegas also challenges the accuracy or completeness of the account of the dealings between Vegas and Westpac referred to by Mr Clifford. Vegas says that Mr Clifford had been the lawyer to Vegas since the late 1980s and no important decisions were made by Vegas without consulting with him. Mr Clifford was a friend and business adviser to both Mr Backshall and Mr Hart (Mr Backshall's witness statement at [36]; Mr Hart's witness statement at [17]; transcript, 131). Mr Clifford and Mr Backshall surfed together (Mr Backshall's witness statement at [36]; transcript, 132-134). From July 2006, Mr Clifford was chairman of Rdot and one of Vegas' nominated directors on that company (Mr Backshall's witness statement at [78]; exhibit 80; exhibit 81; transcript, 125). Vegas says Mr Clifford advised Vegas extensively on all aspects of the acquisition of Mr Preisendorfer's interests of 51.4% of the issued shares in Rdot and termination of the royalty stream that Vegas had previously paid to Mr Preisendorfer's interests (see Mr Backshall's witness statement at [38]-[51], [56]-[58], [66]-[67], [73]; transcript, 123, 128‑129). The Vegas acquisition of Mr Preisendorfer's interests, Vegas emphasise, was funded by Westpac (Mr Backshall's witness statement at [68] and exhibit 218 at 1126).
288 Vegas say that, as of July 2006, Vegas had various financing facilities with Westpac, including an overdraft facility with a limit of $1.5 million. The shareholders of Vegas each provided guarantees to Westpac. Vegas point to the fact that Mr Clifford gave advice regarding the Westpac documentation and signed documents associated with the Vegas acquisition (see, for example, Mr Backshall's witness statement at [71]; exhibit 77; transcript at 390). Vegas submits it can be inferred from these matters that, in July 2006, Mr Clifford knew of the guarantees provided by Vegas shareholders to Westpac. At transcript 391, Mr Clifford, when pressed about these matters, said he "might have known" but does not remember.
289 In or about August 2006, Vegas says it was in discussions with Westpac and requested of Westpac an increase in borrowings to provide working capital for Vegas to meet a shortfall in cash flow. On 2 August 2006 Westpac agreed a variation to Vegas' finance arrangements to increase the limit of the overdraft facility to $2 million on the basis that it was to reduce to $1.5 million by 8 September 2006. In these circumstances, Vegas contends there is no evidence that the Westpac overdraft facility was increased by $2.5 million at any time as is alleged in para 7 of the amended statement of claim.
290 Vegas say that as Westpac would only increase the limit of the overdraft facility by $500,000, Mr Backshall approached the shareholders to loan $1 million to Vegas (see Mr Backshall's witness statement at [80A]).
291 Vegas point out that by early September 2006, the limit on the overdraft facility was reduced to $1.5 million (Mr Backshall's witness statement at [89]).
292 As to the shareholders' loans, Vegas says there is no issue that in August 2006 all of the shareholders of Vegas provided shareholders' loans to Vegas in the aggregate sum of $1 million for working capital, and refer to Mr Backshall's witness statement at [81A].
293 Vegas says that, by at least November 2006, Mr Clifford knew of these shareholder loans. In this regard, Vegas referred to the evidence of Mr Sutton (witness statement at [11]), which was not challenged. Mr Sutton's evidence was that he mentioned the loans to Mr Clifford at the time he agreed the sale of C Breeze Pty Ltd shares to Mr Clifford. Mr Clifford, at transcript 424, said he "can't say [Mr Sutton] definitely didn't say it, but I don't remember him saying it".
294 Vegas contends that by reference to the knowledge that Mr Clifford had concerning discussions between Vegas and Westpac in July and August 2006, it is open to find that he knew of the shareholder loans before November 2006 when Mr Sutton says he spoke with him. Vegas submits that Mr Clifford's evidence to the contrary (transcript, 399) should not be accepted.
295 In relation to the September/October discussions with Westpac, Vegas says that on 29 September 2006, Westpac agreed a variation to Vegas' finance arrangements to increase the limit of the overdraft facility by $500,000 on the basis that it was to reduce to $1.5 million by 30 November 2006 (see Mr Backshall's witness statement at [89] and p 1423).
296 Vegas says the monthly board package issued around 10 October 2006 showed that actual sales were slightly below budget (Mr Backshall's witness statement at [91]). By 16 October 2006, forward orders received by Vegas for the period January to April 2007 were up 7.8% from the orders received in the same period in 2006 (Mr Backshall's witness statement at [92] and p 1511).
297 In early November 2006, Westpac agreed a variation to Vegas' finance arrangements to increase the limit of the overdraft facility by $500,000 to $2.5 million (see Mr Backshall's witness statement at [124] and pp 2869, 2871 and 2885).
298 On 14 November 2006, Vegas says Westpac agreed a further variation to Vegas' finance arrangements to increase the limit on the overdraft facility by a further $500,000 to $3 million, on the basis it was to reduce to $1.5 million by 30 November 2006 (see Mr Backshall's witness statement at [124] and pp 2869, 2871 and 2885).
299 Around November 2006, Vegas says it drew down on the overdraft facility to a maximum of around $2.3 million (Mr Backshall's witness statement at [124] and pp 2948-2966). By 28 November 2006, Vegas says the limit on its overdraft facility was reduced to $1.5 million (see Mr Backshall's witness statement at [124] and p 2901 ‑ 2906). Thus Vegas say there is no evidence that the Westpac overdraft facility was increased by $2.5 million as alleged in the amended statement of claim at any time.
300 Vegas submits the documents relied on by Mr Clifford (annexure AA to Mr Clifford's witness statement of 2 December 2009) does not support Mr Clifford's proposition, namely, that increases to the Westpac overdraft facility in October or November 2006 were conditional upon Vegas' shareholders loaning $500,000 or any sum.
301 As to the shareholders' loans in October/November 2006, Vegas says the facts are as follows. In October and November 2006, shareholders of Vegas provided shareholder loans totalling $500,000 to provide further working capital by reason of an overpayment to the Australian Taxation Office (see Mr Backshall's witness statement at [119]).
302 By 10 November 2006, actual sales and profit for 2006/2007 were ahead of budget (Mr Backshall's witness statement at [122] and p 2931).
303 On 16 November 2006, Vegas received a refund of around $500,000 from the ATO.
304 By 10 December 2006 actual sales and profits for 2006/2007 were ahead of budget (see Mr Backshall's witness statement at [133]).
305 On 14/15 December 2006 (prior to the Sheraz acquisition of shares), the shareholder loans were repaid.
306 Vegas says, to the extent it is relevant at all, given the shareholders' loans were repaid prior to the Sheraz acquisition, by at least November 2006, Mr Clifford knew of the shareholder loans, having regard to the evidence of Mr Sutton which was not challenged. By reason of all of these matters, Vegas submit it is open to find that the Mr Clifford knew of the shareholders' loans before December 2006.
307 So far as the overdraft facility in the period 25 July to 30 November 2006 is concerned, Vegas relies on the facts set out above and says that by 28 November 2006 the limit of Vegas' overdraft facility was reduced to its pre-August 2006 level of $1.5 million. The $1.5 million overdraft appears in the un-audited accounts for the year ended 30 June 2006 (Mr Clifford's witness statement dated 19 October 2009, at 283). Mr Clifford concedes that he reviewed these un-audited accounts prior to acquiring the shares.
308 Vegas says the overdraft facility was in credit immediately prior to the acquisition of shares by Sheraz.
309 It follows, Vegas submits, that the funds provided for the Sheraz acquisition were not used to repay the $500,000 in shareholder loans. These were paid out on 14/15 December 2006 prior to the Sheraz acquisition. At the time the Sheraz funds were paid into the overdraft facility on 19 December 2006 the account was in credit and remained in credit until late January 2007. Mr Clifford's funds could not, therefore, "reduce" the overdraft facility, given it was already in credit.
310 Vegas strongly contends that the Court should infer that Mr Clifford knew that the limit on Vegas' overdraft facility varied during the second half of 2006 and his evidence that he did not know of this (at transcript 446) should not be accepted. In this regard, Vegas relies on the following evidence:
· As the provider of legal services to Vegas for approximately 17 years, Mr Clifford has acquired a reasonable historical knowledge of Vegas (Mr Backshall's witness statement at [35]-[36] and Mr Clifford's witness statement dated 19 October 2009 at page 294).
· Mr Clifford was the sole lawyer to Vegas for 17 years, a commercial barrister in Western Australia, a close and trusted advisor to Mr Hart (Mr Hart's witness statement at [15] and [17]) and someone who Mr Backshall trusted completely and highly valued his opinions and guidance (Mr Backshall's witness statement at [35] and [36]).
· Mr Clifford was a director of Rdot and the chairman of Rdot and in those positions was very aware of solvency issues facing Rdot (see transcript 425) and Rdot's need for financial support from its shareholders who included Vegas (Mr Backshall's witness statement at [82], [83] and [121A]).
· Mr Clifford was in regular contact with the CFO of Vegas, Mr Rayney (see transcript 176, 180 and 217). An example of the relationship is the fact that Mr Clifford maintained contact with Mr Rayney after Mr Rayney resigned from Vegas (transcript 247).
· In late 2006, Mr Clifford was regularly at the offices of Vegas (Mr Backshall's witness statement at [74], [96A] and Mr Hart's witness statement at [23] and [26]) and Mr Sutton's witness statement at [11] and transcript 160).
· Vegas made available to Mr Clifford all of its documents, including financial records (Mr Backshall's witness statement at [96A]).
· As a legal practitioner and commercial lawyer skilled in a variety of commercial areas Mr Clifford was well aware of the steps that ought to be taken in a due diligence of any company prior to investing in it. In fact, Mr Clifford prepared a 20 page memorandum on 1 April 2004 on this topic (Mr Backshall's witness statement at [217]). Mr Clifford was in a better position to know what documents and information he required for the purpose of his due diligence.
· To the extent that it is necessary to accept one version of events to another, Mr Clifford's evidence should not be accepted because:
(1) Mr Clifford was selective in the preparation of his witness statement (transcript 167) and selective in his discovery (transcript 168, 678-679);
(2) Mr Clifford was evasive in cross-examination (see, for example, the "dancing bear" topic at transcript 141-144);
(3) Mr Clifford should not be accepted as a witness of credit. In general he created the impression of a person who is willing to invent evidence rather than concede any matter which might be unfavourable to him (see his answers regarding the date he received the C&C process at transcript 180-199; Mr Clifford's fresh allegation that Vegas' CFO was "discouraged" from providing Mr Clifford with full disclosure of Vegas' financial records in 2006 at transcript 431-432);
(4) Where there are contemporaneous documents, those documents should be preferred to Mr Clifford's versions of events. By way of example, Mr Clifford's memorandum of 19 July 2007 to shareholders of Vegas candidly shows his assessment, 7 months after the Sheraz acquisition, of the value he ascribed to the Sheraz acquisition. In that memorandum he concluded:
"on any view of Vegas it is worth between two and three times more than he was at 5 June 2007 …If the brand is successfully relaunched in the US and Europe in five years, the value of the current partners' equity will be many multiples higher than it is today…"
(See Mr Backshall's witness statement at [163] and p 4954/exhibit 142)
311 Second and third respondents' case: Messrs Hart and Backshall generally support the submissions made by Vegas. Messrs Hart and Backshall say, in respect of the allegation that Vegas was not meeting its budgeted sales in the period July-October 2006, that Mr Clifford has only attempted to prove the knowledge of Messrs Hart and Backshall of the position for the months of July and August 2006 (see transcript 701-703). This was at the very beginning of the relevant financial year to which the budgeted sales figures related and was well before the acquisition by Sheraz of the shares. They submit Mr Clifford has not attempted to rebut the evidence contained in the monthly board packages annexed to the witness statement of Mr Backshall that evidences the facts alleged in para 5 of the substituted defence of Messrs Hart and Backshall. In particular, Mr Clifford has not disputed the evidence of Mr Backshall that by 10 December 2006 actual sales for July to November 2006 were ahead of budget. In his witness statement at [133], Mr Backshall says that around 10 December 2006 he received a monthly board package which contained the Vegas actual sales figures from 1 July 2006 to the end of November 2006. Total income was AUD$22.153 million against a budget of AUD$21.977 million. Total expenses were $6.959 million against a budget of $7.125 million. Net profit before tax and interest was $2.348 million against a budget of $ 2.037 million.
312 Thus, these respondents contend that Mr Clifford's case based on non-disclosure of an alleged failure to meet budgeted sales is based on allegations of fact that have not been proven. To the extent that certain limited facts are proved they are immaterial.
313 Messrs Hart and Backshall support the factual position contended for by Vegas and submit there is no evidence to suggest that it was a condition of any agreement with Westpac to increase the overdraft facility limit that Vegas' shareholders provide loans to Vegas for working capital.
314 They also submit there is no evidence to suggest that Mr Hart knew of the status of the overdraft facility in this period.
315 Messrs Hart and Backshall submit that the increases to the overdraft facility limit were temporary and did not extend to or beyond the date of Sheraz's acquisition of shares. Accordingly, they submit Mr Clifford's case based on non-disclosure of increases in, or exceeding, the overdraft facility limit depends on allegations of fact that are incorrect or, to the extent that they are correct, are immaterial.
316 Messrs Hart and Backshall submit the true factual position in relation to the shareholders' loans is:
· In August 2006, the shareholders of Vegas provided loans to it in the aggregate sum of $1 million to provide working capital (Mr Backshall's witness statement at [81A]);
· In October and November 2006, the shareholders of Vegas provided further loans to it in the aggregate sum of $500,000 to provide further working capital by reason of an overpayment of $500,000 to the ATO made in June 2006 (Mr Backshall's witness statement at [119]);
· On 16 November 2006, a refund of $466,710 was received from the ATO (Mr Backshall's witness statement at [119]; and p 2953 thereto);
· Vegas repaid the $500,000 to shareholders on 14 December 2006 (Mr Backshall's witness statement at [139] and pp 3333-3339 thereto and exhibit 220);
· The balance of the shareholders' loans in the amount of $1 million remains outstanding (Mr Clifford's witness statement dated 19 October 2009 at p 347 and p 395).
317 Messrs Hart and Backshall also rely on the evidence of Mr Sutton who said that Mr Clifford was advised in late November 2006 that shareholders had made loans to Vegas. Mr Clifford's evidence was that he could not definitely say that Mogga did not say that he had to put money back into Vegas, but he did not remember him saying it (transcript at 424). They point out that Mr Sutton was not cross‑examined as to this evidence.
318 They deny that $500,000 of the proceeds of $2,370,986.57 received by Vegas for the issue of shares to Sheraz was used to repay shareholders' loans. Rather the $500,000 had been repaid on 14 December 2008 (139] of Mr Backshall's witness statement, pp 3333-3339 thereto and exhibit 220).
319 Messrs Hart and Backshall further contend that the purchase price paid by Mr Clifford for the shares was not used to "pay down the undisclosed increase in Vegas' loans" as alleged by the applicant. In fact:
· By 28 November 2006 (before the relevant share issue and acquisition) the amount drawn down by Vegas from the overdraft facility had been reduced to $1.5 million (Mr Backshall's witness statement at p 2942).
· At 18 December 2006 (the day before the share issue and acquisition by Sheraz), the amount drawn down by Vegas from the overdraft facility was only $74,732.84 (Mr Backshall's witness statement at p 2928).
· On 19 December 2006 (the day of the share issue and acquisition) and immediately prior to receipt of the proceeds of the share issue, the overdraft facility had a positive balance of $368,088.73 (see Mr Backshall's witness statement at [143] and p 2928 thereto).
· The proceeds of the share issue were paid by Vegas on 19 December 2006 to the overdraft facility account (Mr Backshall's witness statement at [143], [146] and p 2928 thereto).
320 Messrs Hart and Backshall submit that it can be concluded there were no material facts or matters regarding shareholder loans that were not disclosed to Mr Clifford.
321 They also submit further to these submissions and in any event that the whole of the relevant circumstances concerning Mr Clifford's involvement with Vegas permit only the following conclusions:
· Mr Clifford already knew much (if not enough) that was relevant to his investment decision from his longstanding position as legal advisor to Vegas, particularly his detailed involvement in the purchase of Rusty Preisendorfer's interest in Rdot.
· Mr Clifford knew better than the respondents what information to request in order to conduct a proper due diligence for the purpose of his investment decision.
· Against that background, it must have been assumed that Mr Clifford knew all he needed/wanted to know to make his investment decision and, if he did not, he would have asked for more information.
· Accordingly, Vegas and its directors could not have been or expected or assumed they were, under any obligation to consider what Mr Clifford might or might not know, or what he might or might not be interested in or need to know for the purposes of his investment decision.
322 Messrs Hart and Backshall submit that the relevant circumstances that support these conclusion are:
· Mr Clifford was a trusted advisor of Vegas and had been for some 15 years.
· Specifically, he advised Vegas in great detail on what due diligence was, what it entailed and how it was to be carried out (exhibit 22).
· He proffered to Vegas, Messrs Hart and Backshall his views as to he value of Vegas and thereby held himself out as someone sufficiently informed and capable of forming that opinion (Mr Backshall's witness statement at [47] and p 317 thereto transcript at 130 and transcript at 322-323).
· He advised Vegas on commercial matters, including the Rusty Preisendorfer transaction (see Mr Backshall's witness statement at [35] and [36]).
· He initiated the proposal to invest in Vegas as the idea did not come in the first instance from any of the respondents (see Mr Hart's witness statement at [19] and [20] and Mr Backshall's witness statement at [84]).
· His proposal came on the back of Rusty investing in Vegas and the price of Mr Clifford's acquisition was set by the price struck in the Rusty transaction (see Mr Backshall's witness statement at [96A] and [97]; exhibit 92; transcript at 409; annexure M at p 293 of Mr Clifford's witness statement dated 19 October 2009).
· Mr Clifford was the chairman of Rdot and knew it was in deep financial trouble and that Vegas had to contribute to alleviate that stress (transcript at 397; Mr Backshall's witness statement at [120]-[125] and [153]; exhibits 100-111 and 113-122).
· As chairman of Rdot, it could be assumed that Mr Clifford was obliged in that role to ascertain the financial health of Vegas as the (interim) licensor.
· The due diligence work Mr Clifford sought to undertake was limited to Vegas' audited accounts for the financial years 2004, 2005 and 2006, that is to say, historical financial information (see Mr Clifford's witness statement dated 19 October 2009, annexure G and annexure M).
· The factual matters Mr Clifford alleges ought to have been disclosed are said to have arisen in the 2007 financial year, subsequent to the last of those accounts.
323 Consideration: It is well understood that whether a party has a duty to disclose information to another, such that their conduct in not making disclosure will be considered misleading or deceptive, or likely to mislead to deceive, will depend upon the circumstances of the case. The authorities establishing this proposition are too numerous to mention all of them. In Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97, Hill J found that the respondent merchant banker had no duty to disclose to the applicant information concerning a developer's financial affairs and other matters between the merchant banker and the developer, and so no contravention of s 52 of the TPA was established. Hill J made a number of points (at 113-114) that should be borne in mind, including that s 52 is directed against a class of conduct, namely, that which is misleading and deceptive or likely to mislead or deceive, therefore, one should not too readily categorise a case as a "silence case". His Honour noted that in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83, Lockhart J at 95 had emphasised that silence may be relied on in order to show a breach of s 52 when the circumstances give rise to an obligation to disclose relevant facts. Hill J, by reference to other authority, noted that the failure to advise may, in a particular case, be conduct which is misleading and deceptive, but only because the person to whom the representation was originally made is entitled to expect to be informed of that information. Hill J drew his analysis of the authorities together and stated (at 114), "Whether such a duty exists will clearly depend upon all the circumstances of the case". In Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, the Full Court of the Federal Court (Black CJ, Gummow and Cooper JJ) had occasion to deal with the circumstances in which silence may constitute a contravention of s 52 of the TPA. Black CJ, at 32, observed that silence is to be assessed as a circumstance like any other. The Chief Justice added:
To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that has misleading or deceptive… To speak of 'mere silence' or a duty of disclosure can divert attention from that primary question.
More recent authorities, such as Townsend v Roussety & Co (WA) Pty Ltd (2007) 33 WAR 321 (Buss JA at [89] - [90]) and Vitek v Estate Homes Pty Ltd [2010] NSWSC 237 (Vitek) (Barrett J at [34] - [40]) survey the authorities and confirm this same approach has consistently been taken over time in "silence" cases. In Vitek, at [40], Barrett J considered that the test is one of "reasonable expectation". That is to say, an entitlement to expect or infer that the other party will disclose, if it exists, will be found in the whole of the circumstances in which the parties dealt with one another. I respectfully agree this test may be drawn from the authorities. In the end though, whether or not particular conduct complained of is misleading or deceptive, or likely to mislead or deceive, is to be determined by reference to all the relevant circumstances.
324 Mr Clifford, as applicant, also bears the onus of establishing the materiality of the alleged non-disclosure. This too is well understood. In Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, a case which confirms that the question whether or not there is a contravention of s 52 depends upon all the circumstances of the case (see, for example, the discussion at the Full Federal Court at 463-465), the Full Federal Court, at 467, emphasised that where the contravention of s 52 alleged involves a failure to make a full and fair disclosure of information, the applicant carries the onus of establishing how or in what manner that which was said involved error or how that which was left unsaid had the potential to mislead or deceive. Errors and omissions to have that potential must be relevant to the topic about which it is said that the respondents' conduct is likely to mislead or deceive. The Court (Black CJ, von Doussa and Cooper JJ) at 468, then added:
The need for an applicant to establish materiality is of particular importance in a case like the present one where the proposal is complex, and involves difficult questions of commercial judgement in matters of degree and conjecture as to the future about which there is room for a range of honestly and reasonably held opinions. If every possible formulation of the commercial objective of the proposal, and arguments for and against every theoretical possibility, was set forth the total package of information to members would be likely to confuse rather than to illuminate the issue for decision, even if the people having a familiarity with corporate law and commerce.
These comments were made at a time when s 51AF of the TPA had not been enacted. They are apposite to a misleading or deceptive conduct claim under the Corporations Act and the FTA.
325 From all the evidence, I am left with the strong impression that Mr Clifford was very pleased to take up the invitation to invest in Vegas when it was offered to him by the company's directors in October 2006. I have found above that the essential details of the invitation were settled at a meeting at Vegas' offices between Messrs Hart and Backshall and Mr Clifford on the evening of 24 October 2006. While he had not been involved in the management of the business, Mr Clifford had come to understand much about Vegas' operations during his 15 or so years close involvement as the company's trusted legal adviser. His evidence overall disclosed a detailed appreciation of what Vegas did and, generally speaking, how it did it. He liked the idea of the business. He liked surfing. He enjoyed his association with such legendary surfing people as Rusty Preisendorfer. He was a good friend socially of Mr Backshall and surfed with him. By mid 2006, following the Vegas acquisition of a controlling stake in Rdot, and associated dealings with Mr Preisendorfer, all concerned including Mr Clifford considered Vegas' star was on the rise. The directors and Mr Clifford were talking about an IPO - the floating of the company on a securities exchange. This offered the shareholders the prospect of turning their current holdings in a small private company into highly valuable holdings in a much larger, potentially world-wide public company. While the possibility of Mr Clifford joining Vegas may well have been mentioned at earlier times by Mr Hart, as Mr Clifford suggests it was, I have no doubt that Mr Clifford ultimately initiated the possibility of his becoming an investor in Vegas in September 2006, following Vegas' significant commercial plays. He chose first to speak to Mr Hart on his own to sound out the idea. Mr Hart was the major shareholder. Without his support the idea could effectively go nowhere. As it transpired it suited Mr Hart and Mr Backshall (and the other shareholders) to have Mr Clifford "on board", as they put it, in order to advance the IPO options, as well as to provide a range of ordinary legal services to Vegas effectively on a reduced fee basis. It was agreed that Mr Clifford should become a "partner" and part of the executive management team (like most of the other "partners") and paid as such, not at the higher rates of a senior independent barrister.
326 Mr Clifford, soon enough after Sheraz was registered as the holder of the Vegas shares, found himself defending the C&C litigation that C&C had been threatening since at least October. He, along with Rdot, Vegas and Messrs Hart and Backshall, was a party to the litigation. He handled the litigation in house for Vegas and instructed lawyers in California to defend the proceedings. An interim injunction soon complicated matters. However, Mr Clifford did not necessarily see the litigation as a setback for Vegas. He told Mr Backshall as soon as the proceedings were launched that C&C had made the wrong move in bringing the litigation. I do not doubt that he said this and meant it. He considered that C&C were in fact playing into Vegas' hands, by presenting Vegas with a means of hastening the removal of C&C as a rival in the operation of Rdot and the North American Rusty operation.
327 All the evidence, including Mr Clifford's own testimony, suggests Mr Clifford is, and was at material times, not only an astute lawyer and a good judge of a commercial opportunity, but also a disciplined and resolute person. I have no doubt that the good estimation the directors had made of him, over the years he had been advising the company, was well based. His advice and commercial stratagems were based on a deep understanding of how his client's business worked and an appreciation of where its strengths and weaknesses, and future, lay. His legal expertise combined with his apparent commercial savvy was invaluable to them. The level of confidence the directors had in Mr Clifford was exemplified by their invitation to him to become a director and chairman of Rdot when Vegas gained its controlling interest in Rdot in July 2006. Mr Clifford's detailed knowledge of Rdot and Vegas' ambitions made him the obvious candidate for the job.
328 Mr Clifford's performance in giving evidence and responding to cross-examination over nearly six days was also instructive in this regard. Mr Clifford listened intently to every question put to him and responded politely, if not crisply on occasions, to every question with a carefully crafted answer. His answers were designed to answer only the question asked. Usually he avoided embellishment. He seemed, however, on occasion to take care to avoid what he feared might be viewed as an admission or concession. Mr Clifford seemed very concerned at all times not to leave the transcript of his evidence open to reinterpretation, from his point of view. He also displayed a precise understanding of the formal pleadings filed in the proceeding, as one might expect of a litigant/barrister, and of the finer points of his claims. Counsel for the respondents were equal to the task that Mr Clifford set them, not permitting any question to be left unanswered or, from their perspective, half answered, or amenable to a later submission that the answer given was ambiguous. This explains in part why the cross‑examination was as lengthy as it was.
329 I have little doubt that, when Mr Hart and Mr Backshall responded to Mr Clifford's proposal that he become an investor in Vegas, they saw this as a boon, not because they considered Vegas was in straightened financial circumstances - as Mr Clifford implies - and could take Mr Clifford for a business novice whose investment of around AUD$2.4 million would help them out of a financial hole, but because he was a person with the legal expertise, commercial savvy, personality and drive to help Vegas take the next steps towards an IPO. To accept Mr Clifford's proposal would result in Mr Clifford having the motivation to work hard to achieve his own interests and, in doing so, advance their own. In such a commercial setting I have little doubt that the directors treated Mr Clifford's proposal as a fair proposal.
330 I also have little doubt that the two directors, as persons who had closely worked with Mr Clifford for some 15 or so years, and who trusted his advice and valued his friendship - mostly recently in relation to the successfully concluded Vegas dealings over Rdot and Mr Preisendorfer's interests - took Mr Clifford at his word when he raised the investment proposal. They assumed he would raise whatever queries he may have with them as part of his due diligence. He knew the business well and he was obviously pleased to be buying in. And he was not commercially naďve. On the evening of 24 October 2006, he told Mr Hart and Mr Backshall he wanted to do 'due diligence' and confirmed this in writing on 26 October. He wanted to take his own steps to evaluate the proposed share acquisition. They were all well aware of the notion of 'due diligence' - something Mr Clifford had advised on and assisted Vegas with in respect of C&C's contractual arrangements with Rdot not long beforehand. He also told Mr Backshall that the company needed to take independent legal advice on the transaction given their long and close association.
331 In the circumstances just mentioned, though, just what Mr Clifford's due diligence required was not entirely clear. In my view, in the circumstances, the directors were entitled to assume that Mr Clifford was knowledgeable about Vegas in all respects relevant to the proposed purchase and would ask for whatever information he required to complete his due diligence. He knew about its past. He was a complete authority on its intellectual property rights. He understood perhaps better than they did exactly what IPO options lay ahead of the company - and like them he was motivated to exploit the opportunities that might enable all shareholders to reap the rewards of an IPO. He knew generally about the company's recent trading history, and that generally speaking its sales were down in the 2005/2006 financial year compared with the previous financial year. As chairman of Rdot, he well knew what financial demands Rdot was placing on Vegas and the difficulties this created for Vegas. He also knew (at least constructively) from what Mr Sutton had told him around November 2006, when he was discussing the purchase of the shares Mr Sutton controlled in Vegas, that the existing shareholders had recently made loans to Vegas. In my view, if there was anything in particular that Mr Clifford felt he needed to know about Vegas that he considered material to the proposed investment, then the directors were entitled to assume that he would make it known to Vegas through them as part of his due diligence. Mr Backshall had already made it clear in his email on 25 October, that Mr Clifford could approach Mr Rayney, the CFO, for financial information. The reasonable expectation in the circumstances was not that the respondents would disclose anything in particular to him, but that they would respond to Mr Clifford's reasonable requests for information in the course of his due diligence.
332 What Mr Clifford actually asked for in his email to Vegas sent to Mr Backshall on 26 October 2006, knowing at that point that Mr Backshall was hopeful that the acquisition could be settled as of 30 November - just over a month away - as explained in his email to Mr Clifford of 25 October, was the audited accounts for the preceding 3 years. They were provided. However, there is no evidence that Mr Clifford ever asked for any other information he considered material to the share acquisition.
333 At this point, I should also deal with an evidentiary matter that bears on the question whether the respondents ever took any steps, at material times, to prevent Mr Clifford or to make it more difficult for Mr Clifford to obtain financial information from Vegas through Mr Rayney, the CFO. In the course of cross‑examination of the applicant by senior counsel for Vegas (transcript 431‑433) Mr Clifford suggested that he had been told in January 2009 by Mr Rayney that he had been "dissuaded" from giving financial information to the applicant by Mr Backshall. However, there was no reference to any such advice in the applicant's witness statement. Nor in cross‑examination of Mr Backshall did the applicant put such allegations to Mr Backshall. The allegations made by the applicant in the course of cross‑examination were simply not corroborated by any other evidence. In my view they indeed run counter to the evidence and were made gratuitously. In fact, Mr Backshall expressly invited Mr Clifford in his email on 25 October 2006 to approach Mr Rayney. There is no evidence to support the allegations made by Mr Clifford in cross‑examination that at some point Mr Rayney had been dissuaded by Mr Backshall from giving any financial information if it were requested by Mr Clifford. I discount Mr Clifford's evidence in this regard completely.
334 As a matter of fact the applicant had available to him the draft P&L or spreadsheet document that he had discussed with Mr Backshall. As noted above, Mr Backshall recalls discussing its content in November. Mr Clifford has a similar timing sequence as to when he received it. As best one can say, the draft P&L document was received by Mr Clifford from Mr Backshall in early to mid November 2006. It was not provided, however, for the purposes of the due diligence, as I have found above. Nonetheless it was a document having a serious purpose - the one explained by Mr Backshall at the time Mr Clifford received it from him. I have accepted Mr Backshall's testimony as to what the provenance of the document was, its purpose and intended purpose and what he said to Mr Clifford about its content. I am not satisfied that Mr Backshall said the things that Mr Clifford claims he said during the discussion about the document or at any other time material to the events the subject of this proceeding. I have little doubt, as I have also found above, that over the course of dealing with Rdot's affairs and with C&C concerns, such matter as international royalties and their manner of payment, and the sale of Vegas product in various parts of the world, had been discussed as part of the range of topics to do with the Vegas' future strategies, but were not the subject of the representations alleged by Mr Clifford. As I have already found above, I do not consider the applicant has made out the three pleaded representations, including this concerning the sales representations.
335 In these circumstances I find that Vegas and Messrs Hart and Backshall were entitled to assume that Mr Clifford was knowledgeable about Vegas in all respects relevant to his proposed purchase and would ask for whatever information he required to complete his due diligence. The reasonable expectation was that Mr Clifford would ask for whatever information he needed. In such circumstances, the respondents did not labour under any practical duty to disclose any of the matters that the applicant alleges in this proceeding they should have disclosed. Consequently, I find that the failure of the respondents to disclose information to him at material times concerning the undisclosed facts pleaded, did not in the circumstances of this case constitute misleading or deceptive conduct or conduct that was likely to mislead or deceive, for the purposes of the claims brought under the Corporations Act and the FTA. (If I am wrong about the non‑application of s 52 of the TPA, in the circumstances of this case, then I would also have found that the respondents had no "duty to disclose" such information to the applicant under s 52 either and that no such contravention had been proved for the purposes of the TPA.)
336 I should however proceed to deal with each of the specific areas of alleged non‑disclosure during the material period. So far as the non-disclosure of sales figures is concerned, I have found that Mr Clifford did not receive the monthly board packages issued to shareholders at material times from July through to December 2006. I accept that that package for July 2006 showed sales for June 2006 were $1,069,319 under budget and sales for January to June 2006 were $2,639,239 under budget, as alleged by Mr Clifford. I also accept that the monthly board package of 10 August 2006 showed sales for July 2006 were $621,166 under budget and sales for January to July 2006 were $3,260,455 under budget (see exhibit 218, DD0439 and exhibit 219). I accept that these figures also were not disclosed to Mr Clifford. I also accept, as Mr Clifford alleges, that sales for August 2006 were $2,348,115 under budget and sales for January to August were $5,607,893 under budget (exhibit 218, DD0459 and exhibit 219). Similarly, I accept that the monthly board package for 10 December 2006 showed that sales to November 2006 were only $155,809 (or 0.75%) ahead of sales to November 2005.
337 Nonetheless, as Mr Backshall explained, by 10 December 2006, actual sales for July to November 2006 were ahead of budget. In his witness statement at [133], Mr Backshall states that around 10 December 2006 he received a monthly board package which contained the Vegas actual sales figures from 1 July 2006 to the end of November 2006. Total income was AUD$22.153 million against a budget of AUD$21.977 million. Total expenses were $6.959 million against a budget of $7.125 million. Net profit before tax and interest was $2.348 million against a budget of $2.037 million. I accept this was so. In my view, the apparent underperformance of sales against budget in the period July through to November 2006 was, on the face of it, arrested by November having regard to this evidence. A decline in sales was improving.
338 The question though, is whether Mr Clifford was entitled to have this sales information produced to him monthly or at least to be fully updated on the 2006/2007 performance from the time he accepted the invitation to invest in late October 2006. Were the respondents obliged to provide it to him, even if he did not ask for it?
339 As found above, Mr Backshall provided Mr Clifford with the last three years' audited accounts of Vegas as requested. He also gave Mr Clifford the draft P&L or spreadsheet following an incidental discussion about it. At no time did Mr Clifford make any specific request for sales data, either at about the time of September and October 2006 when the question of the invitation was being discussed or at any time up to and including 19 December 2006.
340 The evidence also needs to be assessed in the context that the accounts provided to Mr Clifford showed that sale of goods in the 2005/2006 financial year was $38.9 million against a higher sales figure of $41.8 million in the previous year, 2004/2005. Similarly, the consolidated net profit was $2.1 million in the 2006 year, versus $3.9 million in the 2004/2005 year. The franked dividends were $2.5 million however in the 2006 year compared with $2 million in the previous year. There is no detailed evidence about this but this suggests that dividends were not linked to sales performances or profit, as they were higher in the 2006 year against falling sales and falling profit. The point is the applicant was aware of this information, and that sales had fallen in the 2005/2006 year from the year before.
341 So many aspects of this proceeding and the facts that pertain to the various causes of action are unusual. It is so unlike a case where an unrelated, uninvolved third party seeks to buy a business or a share of a business whose profits depend on sales and revenue, thus dictating the level of investment that ought prudently be made. One simply expects in such circumstances that the prudent investor will demand and scrutinise sales information. At no stage did Mr Clifford, on the findings I have made, do that. He received the spreadsheet information in mid November concerning the projected sales, but as I have found above in relation to the sales representation, did not rely on it. That he did not rely on such information also suggests, for present purposes that the sales information the applicant says should have been disclosed to him was not and would not have been material to his decision to invest, and I so find. After 24 October 2006, time was very much of the essence in concluding the deal. The parties were initially seeking to conclude the acquisition by 30 November. Nothing in the sequence of events suggests that Mr Clifford wanted any more information on sales than he had.
342 In the case that he has run in this proceeding, the applicant has placed much focus, as the second and third respondents submit, on the shortfall of sales over forecasts in the July and August 2006 period. The reality is that the sales position in fact improved so that, immediately prior to the date of the share acquisition on 19 December 2006, the board pack circulated around 10 December suggested that the position had been arrested.
343 The applicant contends, however, that the respondents received updates of sale orders for periods up to six months in advance. The applicant says the sales orders for the periods January to June 2007 were $18,870,555 and refers in this regard to exhibit 221. That figure is shown against required sales to make the 2007 budget ($45,512,163) of $21,790,091 (which is to be found in exhibit 218). The applicant submits that of the $18,870,555 of sale orders for January to June 2007, $2,885,343 were rejected, as indicated in exhibit 221. This was 15.3% of sales, significantly higher than the 5% the respondents had at earlier times considered they would be comfortable with. The applicant says this means that by about 10 December on the respondents own figures, to the knowledge of each of the respondents, Vegas was going to fall short of its represented sales by $3,863,064 even if the rejected orders were only 5% and not 15.3%. None of this was disclosed.
344 Vegas says there is no evidence as to when exhibit 221 was created and in particular if it was created before the Sheraz acquisition. It says it can be inferred from Mr Backshall's testimony (transcript 714) and the fact that the document includes details of rejected orders for all of the calendar year 2007, that the document was created in 2008 - after the Sheraz acquisition. Vegas also submits there is no clear evidence of the period to which exhibit 221 relates. In the end I accept the provenance of exhibit 221 is uncertain and I accord the document little weight. I also accept the cross‑examination of Mr Backshall on the document was based to a large extent upon assumptions (see transcript 715 ‑ 716). As a result, I do not accept the evidence supports the unequivocal contention made on behalf of the applicants, that by about 10 December, Vegas knew it was going to fall short of represented sales.
345 In the circumstances of the relationship between the applicant and the respondents and the manner in which the investment proposal initially broached by Mr Clifford had developed - first the preliminary discussions with Mr Hart and then the detailed resolutions with the two directors at the meeting on the evening of 24 October - I do not consider Mr Clifford was entitled to expect that the respondents would provide him with sales information. To some extent, of course, as noted, he was both privy to such information generally speaking when the spreadsheet was provided to him in November. But on the findings I have made, while Mr Clifford found that information of general interest, I am not satisfied that he in fact relied upon any representations conveyed by that document as to projected revenue. He certainly did not follow up with any queries as to current performance.
346 Ultimately, in my view, it is the unusual nature of the relationship developed over 15 or 17 years between the applicant and the second and third respondents that explains why they and Vegas in the period that the applicant was conducting his own due diligence laboured under no duty to disclose the progressive sales performance of Vegas during the 2006/2007 financial year, to Mr Clifford.
347 But I also consider that the actual (upward) movements in the sales figures over the period between 24 October and 19 December 2006, was such that there was no reasonable entitlement to expect such figures would be disclosed.
348 Finally, having regard to my findings above concerning the sales representations, I am not satisfied that the applicant has established that in light of such knowledge as he had, the sales information was, or would have been, material to the applicant's investment decision.
349 In relation to the alleged failure to disclose the shareholders' loans, first in August 2006 in the aggregate sum of $1 million and then in October/November 2006, in the aggregate sum of $500,000, I am quite satisfied that those loans were made to provide Vegas with working capital and that the evidence including the communications between Westpac and Mr Rayney, properly construed, does not constitute a condition that such shareholder loans be made before the overdraft account with Westpac was extended.
350 I should comment in passing however in relation to the applicant's submission in relation to the evidence that on 30 October 2006, shareholders of Vegas provided shareholder loans of $260,000, $100,000 of which was from Mr Backshall. This submission is made on the basis of exhibit 220, an extract from the general ledger. I accept the submission made on behalf of Vegas that at its highest the first page of exhibit 220 is evidence of the posting date of the aggregated shareholder loans, not evidence of the date when those loan funds were paid to Vegas. Similarly, I find that in relation to that exhibit at its highest it is evidence of the posting date of aggregated shareholder loans of $240,000 on 30 November 2006 and not evidence that the loan funds were paid to Vegas on that date. It was never put to Mr Hart that his funds were paid to Vegas, for example, on 30 November 2006.
351 Mr Sutton, who agreed to sell some of his shares to Mr Clifford, said that around late October or early November, Mr Clifford came to see him in his office at Vegas. He explained to Mr Clifford that he wanted to sell some shares because in the last six months he had put money back into Vegas' loan funds and was not sure when he was going to get that money back. He told Mr Clifford that he did not want to borrow more money from the bank to complete his holiday house. He also told Mr Clifford about his holiday house at Molloy Island and how excited he was about the opportunity to have such a great place. Mr Sutton says that Mr Clifford told him how much he and his family loved his place at Yallingup. They agreed to a share transfer for the sum of approximately $170,000. Mr Sutton said he told Mr Clifford that this would be enough to ease his financial situation. He asked Mr Clifford if they could settle in mid November, as final handover for the holiday home was the last week in November. Mr Clifford said this would not be a problem as he had the money sorted. They then shook hands on the deal and went on talking about surfing.
352 Mr Sutton says that around the time they were supposed to settle in mid November, he spoke to Mr Clifford on the telephone and Mr Clifford advised him that there had been a delay with his financing and that settlement would have to be delayed until the end of November. The settlement ultimately occurred on 19 December 2006 and it was on that date that he received a $170,000 from Mr Clifford. He left the share transfer issues to Mr Rayney, the CFO, and Mr Clifford to sort out.
353 Mr Sutton was not cross‑examined about this evidence when he gave it. Earlier, however, Mr Clifford was cross‑examined concerning the substance of this evidence. When asked about the conversation with Mr Sutton, Mr Clifford recalled that he had been told Mr Sutton had to sell because he wanted to complete the house he was building on Molloy Island without the need for bank borrowing. When initially asked whether Mr Sutton also told him that he had to make a contribution to Vegas financially, Mr Clifford said no. But when he was asked whether he was sure about that, whether he might have, Mr Clifford at first stated that "It's possible but…" and then when further asked whether he could not recall it, answered "It's something I'd be likely to recall if he'd said it and I can't recall it". He then further denied that Mr Sutton had told him that he'd also put some money back into Vegas.
354 I accept the evidence given by Mr Sutton. He was not shown to be a witness who had any particular motivation to colour his evidence one way or the other. While there was an objection on behalf of the applicant to the reception of Mr Sutton's witness statement because it was late, I ruled that the evidence could be received: see Clifford v Vegas Enterprises Pty Ltd (No 4) [2010] FCA 326. When Mr Sutton gave his evidence, his witness statement was tendered. He was not cross‑examined on behalf of the applicant.
355 In those circumstances, taking into account the earlier responses by Mr Clifford in the course of cross‑examination to the substance of Mr Sutton's evidence, and the fact that there was no cross‑examination of Mr Sutton to test the veracity of his evidence, I have little hesitation in accepting the account given by Mr Sutton.
356 The substance of Mr Sutton's evidence is that he actually told Mr Clifford in the October/November period, but well before the end of November (that being when the two men initially hoped the share transfer would be effected), words to the effect he had made shareholder loans to Vegas and that he had paid some money back. It is reasonable to infer that other shareholders must have been asked to do the same thing and that Mr Clifford would have understood that. However, at no time did Mr Clifford make any inquiries of Vegas or the directors (or anyone else such as Mr Rayney, apparently) concerning the position with shareholders' loans.
357 In all the circumstances, I do not consider that the respondents laboured under any practical duty to inform the applicant of the making and repayment of shareholders loans in the period leading up to the share acquisition on 19 December 2006. The applicant had no reasonable entitlement to expect this information would be given to him.
358 Further, in the light of the evidence of Mr Sutton, I find that Mr Clifford in fact had knowledge of the making of shareholder loans sufficient, if he were materially interested in the details of the shareholders' loans, to have made inquiries for further details concerning those loans.
359 In these circumstances, I also do not consider that the shareholders' loans in question were, or would have been, if more information had been provided about them, material to the investment decision made by Mr Clifford.
360 In relation to the proceeds of the share acquisition received by Vegas, in the sum of $2,370,986.57, I find that contrary to the allegation of the applicant, the sum of $500,000 from that payment was not used to repay shareholders' loans. The facts recounted above disclose that the $500,000 in shareholders' loans had been repaid on 14 December 2006, five days prior to the settlement of the share acquisition involving Vegas and the applicant.
361 I also generally accept the respondents' submissions that the funds paid by the applicant on the share acquisition were not used to pay down the "undisclosed increase in Vegas' loans" as alleged by the applicant and that, in fact:
· By 28 November 2006, the amount drawn down by Vegas from the overdraft facility had been reduced to $1.5 million.
· At 18 December 2006, the amount drawn down by Vegas from the overdraft facility was only $74,732.94.
· On 19 December and immediately prior to the receipt of those proceeds from Mr Clifford, the overdraft facility had a positive balance of $368,088.73.
· The proceeds of the share issues were paid by Vegas on 19 December 2006 to the overdraft facility account.
362 So far as the overdraft facility is concerned, Vegas had various financing facilities with Westpac, as Mr Backshall explained in his evidence, including an overdraft facility with a limit of $1.5 million. The shareholders had provided guarantees to Westpac in respect of these facilities. In fact, Mr Clifford had given advice regarding the Westpac documentation and signed documents associated with the Vegas acquisition. He was, therefore, not lacking in knowledge about the general financing position. However, I do not accept the submission of Vegas that it can reasonably be inferred that in July 2006, Mr Clifford knew of the guarantees provided by Vegas shareholders to Westpac. Knowledge of Vegas' financing for the Vegas acquisition, in my view, does not necessarily support such an inference, at least not without additional primary facts.
363 When working capital was then needed in August, Westpac agreed on 2 August 2006 to a variation of the finance arrangements to increase the limit on the overdraft facility to $2 million on the basis that it was reduced to $1.5 million by 8 September 2006. By early September, the limit on the overdraft facility was reduced back to $1.5 million.
364 Again, the correspondence between Westpac and Mr Rayney, the CFO of Vegas, in my view does not support Mr Clifford's contention that the increases to the Westpac overdraft facility in August or September were conditional on Vegas shareholders loaning $1 million or any sum. No doubt the bank understood what Vegas was doing in respect of its working capital, but in my view, it cannot reasonably be contended that the bank had made it a condition of the increase in the overdraft facility they were prepared to grant that the shareholders loan that sum.
365 I should say, however, that despite a submission on behalf of Mr Hart that he had no knowledge of the status of the overdraft facility during the relevant period, it seems to me in all the circumstances that he must have. He had dealings himself with the bank and I infer, in any event, that the knowledge of Mr Backshall was his during that period.
366 In any event, in September, Westpac agreed to a further variation to increase the limit of the overdraft facility by $500,000 on the basis that it was reduced to $1.5 million by 30 November. In early November, Westpac agreed to a further variation to increase the limit by $500,000 to $2.5 million.
367 On 14 November, Westpac agreed a further variation to increase the limit on the overdraft facility by a further $500,000 to $3 million on the basis it would be reduced to $1.5 million by 30 November.
368 I find, as Vegas contends, that Vegas drew down on the overdraft facility to a maximum of around $2.3 million and that by 28 November 2006, the limit was reduced to $1.5 million, as Mr Backshall stated in his witness statement at [124].
369 In these circumstances, I accept the respondents' contention that there is no evidence that the Westpac overdraft facility was increased by $2.5 million as alleged in the amended statement of claim at any time.
370 The next question is whether the evidence discloses or it may be inferred that Mr Clifford knew that the Vegas overdraft facility varied during the second half of 2006.
371 The evidence does not disclose that the applicant had express knowledge of the variations in the facility agreed with Westpac at various times, as just set out, or the draw downs and repayments at various times on the facility. The question then is whether it may be inferred that the applicant had a general knowledge that the facility varied during the second half of 2006. The respondents contend for the position that the applicant must have had this knowledge, particularly when one has regard to the surrounding circumstances. Vegas, for example, as noted above, points to the following factors:
· Mr Clifford was the provider of legal services to Vegas for 17 years and had acquired a reasonable historical knowledge of Vegas.
· Mr Clifford was the sole lawyer to Vegas for 17 years, a commercial barrister, a close and trusted adviser to Mr Hart and someone who Mr Backshall trusted completely and highly valued his opinions and guidance.
· Mr Clifford had become a director of Rdot and the Chairman of Rdot, in mid 2006 and in those positions was very aware of solvency issues facing Rdot and Rdot's need for financial support from its shareholders, including Vegas.
· Mr Clifford was in regular contact with the CFO of Vegas, Mr Rayney, and indeed maintained contact with Mr Rayney after Mr Rayney resigned from Vegas (sometime after the share acquisition in question).
· In late 2006, Mr Clifford was regularly at the offices of Vegas.
· Vegas made available to the applicant all of Vegas' documents, including financial records.
· As a commercial law practitioner with skills in a variety of commercial areas, the applicant was well aware of the steps that ought be taken in undertaking a due diligence of any company prior to investing in it.
· To the extent that it is necessary to prefer one version of events to another, the applicant's evidence should not be accepted:
372 I am not satisfied that any of these factors or these factors taken as a whole permit the drawing of a reasonable inference that the applicant had any particular knowledge about variations or fluctuations in the overdraft facility that Vegas had with the Westpac bank. I think the most that can be said is that the evidence suggests that Mr Clifford might not have been surprised to learn that was the case, if he had been informed expressly about the position. In particular, given his historical knowledge of the company and the circumstances of Rdot, after he became a director and chairman in mid 2006, he understood the financial demands were fairly constantly being placed on Vegas to support Rdot. It is one thing, however, to say or infer that Mr Clifford was or may have been aware that the business of Vegas depended on the overdraft facility, but another to infer he had knowledge of the fluctuations or variations to that overdraft facility by agreement between Vegas and Westpac during the latter half of 2006.
373 The question really is whether, in all of the circumstances, where the overdraft facility did vary from time‑to‑time but was repaid from time‑to‑time and indeed was in credit at the time of the share acquisition by Sheraz, the respondents had any obligation to disclose the variations in the overdraft facility to the applicant at material times before 19 December 2006. While I have little doubt that, in a different circumstance of an unrelated, uninvolved third party considering purchasing a business or an interest in a business that third party would wish to know about what liabilities the business had incurred - including in the nature of variations to its ordinary overdraft facility - in the circumstances of this case, I consider that Vegas and its directors could not have been, or expected or assumed that they were under any obligation to consider what the applicant might or might not know or what he might or might not be interested in or need to know, for the purposes of his investment decision.
374 When one takes into account as well that in late October or into November 2006, on the findings I have made, Mr Clifford was aware that Mr Sutton had made shareholder loans to Vegas around that time, it would reasonably follow that the applicant was on notice that the operations of Vegas required some cash injections. Any such inquiries would, it may reasonably be said, have led to the applicant making general inquiries as to the current financial arrangements between Vegas and Westpac if he considered the matter material to the proposed investment. He was of course already aware that Vegas maintained financing facilities with Westpac and that the shareholders had provided guarantees in respect of the funds provided for the acquisition of a controlling interest in Rdot and the termination of the royalty stream enjoyed by interests associated with Mr Preisendorfer.
375 In those circumstances, I do not consider that the conduct of the respondents in failing to disclose variations in the overdraft facilities with Westpac was misleading or deceptive conduct. Put shortly, as in relation to the other alleged issues of non‑disclosure, the circumstances were such that the respondents were entitled to expect that Mr Clifford would raise with them any issues concerning the operation of the company that might touch on such issues. He did not.
376 Additionally, in these circumstances, I do not consider the applicant has established that the fluctuations in the overdraft facility were, or would have been, material to his decision to invest.
377 In the result, the applicant has failed to discharge the onus he has to prove that the pleaded non‑disclosure of information constitutes misleading or deceptive conduct, or conduct likely to mislead or deceive, for the purposes of the Corporations Act or the FTA.