FORTE -v- RAITH NOMINEES PTY LTD ATF FOR THE BITDORF FAMILY TRUST [2016] WASC 337 (18 October 2016)

2 On 23 August 2016, a registrar ordered that judgment be entered for the plaintiff. The defendants appealed. Following amendment to the rules in 2015, an appeal from a decision of a registrar is 'by way of a new hearing of the matter that was before the registrar': Rules of the Supreme Court 1971 (WA) O 60A r 6. Accordingly, I heard the plaintiff's application for summary judgment under O 14.

3 Summary judgment may only be granted where the defendant has no defence to a claim included in the writ, or to a particular part of the claim. On an application for summary judgment, the question is whether the material before the court demonstrates that the application should not be permitted to go to trial in the ordinary way because the defence must fail. The power to order summary judgment must be exercised with 'exceptional caution' and should not be exercised unless it is clear that there is no real question to be tried: see Webster v Lampard [1993] HCA 57; (1993) 177 CLR 598, 602. Great care must be exercised where the ultimate outcome turns on the resolution of a disputed issue or issues of fact: Webster v Lampard (603). A party should only be denied the opportunity to proceed in the ordinary way, and after taking advantage of the usual interlocutory processes, if there is a high degree of certainty about what the outcome would be should the matter go to trial: see Agar v Hyde [2000] HCA 41; (2000) 201 CLR 552, 575 576 [57]; Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; (2006) 226 CLR 256, 275 [46].

4 The plaintiff, Danne Adam Forte, brings his claim against five defendants. The third defendant, Paul Bitdorf is a director and shareholder of the first defendant, Raith Nominees Pty Ltd; Mr Bitdorf and his wife, in their capacity as trustees of the Bitdorf Superannuation Fund, are the second defendant. The fifth defendant, Ronnie MichelElhaj, is the sole director, company secretary and shareholder of the fourth defendant, Protégé Corporation Pty Ltd.

5 Mr Forte, and two companies associated with him, Asterm Pty Ltd and Euro Pacific (WA) Pty Ltd, and the defendants jointly formed and/or controlled four companies; Alliance Developments Management Pty Ltd (ADM); Australian Property Alliance Pty Ltd; Wealth WA Pty Ltd; and Projex Management & Construction Pty Ltd. ADM acted as trustee for the Alliance Management Unit Trust. The four companies and the unit trust were, together, the NicheLiving Group.

6 Following a dispute about the affairs of the Group, the parties entered into a written deed of settlement and release. Under the deed, the defendants were to pay to the plaintiff a settlement sum of $1.5 million in two payments: the first of $375,000 on 11 May 2016, the balance ($1,125,000) on 16 June 2016. Mr Forte and the companies associated with him (the Forte parties) would deliver up duly executed forms to transfer units in the unit trust, and shares in ADM and Projex to the first and fourth defendants. The Forte parties would also assign interests in trust distributions and dividends, and resign from positions in the NicheLiving Group: cl 4.

7 The defendants were jointly and severally indebted to pay the balance of the settlement sum, and acknowledged and agreed that they would not contest or dispute the payment, and that the plaintiff did not have to make any demand for payment: cl 5. Each party jointly and severally released and discharged the other from and against all claims that the other party might have had but for the deed: cl 6. By cl 8, the deed may be pleaded as an absolute bar to any claim brought in breach of it.

8 The parties made general acknowledgements, including that they had not entered the deed in reliance on or as a result of any promise, statement, conduct or inducement other than as expressly provided in the deed: cl 10.1.

9 The Forte parties complied with their obligations under the deed. The defendants paid the initial $375,000 but have refused to pay the balance.

10 On 14 July 2016, the plaintiff applied for summary judgment, on grounds set out in an affidavit of the plaintiff, sworn 12 July 2016. The affidavit attached the deed. The plaintiff deposed that he believed that the facts set out in the statement of claim are true, and that there was no defence to his claim.

11 The defendants have not filed defences. Although a draft defence was foreshadowed in an affidavit sworn by Mr Bitdorf on 28 July 2016, that is not now relied on. The defendants' position is set out in some detail in recent affidavits by Mr Bitdorf and Mr Michel-Elhaj, both sworn 23 September 2016. Mr Michel-Elhaj substantially relies on the narrative and documents in the affidavit of Mr Bitdorf. Mr Bitdorf and Mr MichelElhaj filed further brief affidavits on 12 October 2016.

12 Mr Forte relies on two affidavits dated 12 July 2016 and 4 August 2016.

13 In the earlier affidavit, Mr Forte sets out the deed and the failure of the defendants to pay the second instalment on 16 June 2016. He attaches an email of 16 June to a solicitor who had acted in relation to the deed, in which Mr Bitdorf advised:

Please pass on to Danne that clause 5.1 of the Deed cannot be complied with as the funds for the second instalment are sourced from overseas investors with which he is aware.

The overseas investors have to be satisfied with the accounts of the various companies. I have provided the accounts to them.

The overseas investors have raised various queries in respect of the accounts which I have answered.

The overseas investors require a further 10 days. I will keep you updated.

14 In his second affidavit, Mr Forte responds to matters raised by the defendants. In particular, he states that Mr Bitdorf was also a director of Projex, and Mr Bitdorf and Mr Michel-Elhaj were also directors and/or shareholders of the NicheLiving Group for 13 years, all of them operating from the same office and with full day to day knowledge of the affairs of the group.

15 Mr Forte refers to the opening of an electronic 'data room' at the offices of William Buck Accountants by which relevant information about the group was made available to potential investors. Cash flow forecasts, the projected profit and losses and balance sheets of each company in the group were prepared by the relevant people for that purpose, and given to the accountants to verify and put into the data room. NicheLiving was successful in obtaining an investor, Net Pacific, which signed a Binding Term Sheet on 28 April 2016.

16 Mr Forte says that he was primarily responsible for collating the cash flow forecasts in relation to Projex, while Mr Bitdorf and Mr MichelElhaj were responsible for providing similar information for other companies in the group. He says that he adopted a process of preparing projections summary sheets, based on actual projects in hand and in the pipeline. He then prepared management and construction cash flow forecasts based on the information in summary sheets. The group's accountants used that information to prepare projected profit and loss and balance sheet statements. The projected profit and losses and projected balance sheets were also provided to William Buck Accountants, who in turn produced consolidated three-year profit forecasts. Information was provided on an ongoing basis with various updates to the financial information.

17 Mr Forte deposes that, in preparing forecasts, he used anticipated commencement dates and anticipated durations that were provided to him by Mr Bitdorf and Mr Michel-Elhaj. Each forecast was accurate to the best of his belief, based on information available to him at the time.

18 The defendants rely on an affidavit of Mr Bitdorf, sworn 23 September 2016. He deposes that the most significant trading entity in the NicheLiving Group was Projex. The business model for the NicheLiving Group was to acquire land for subdivision, creating relatively small blocks upon which dwellings would be constructed. ADM acquired the land; Projex provided the ability to control design, construction and delivery of residential dwelling on the lots.

19 Mr Forte was the managing director of Projex, controlling and directing its day to day operations. Mr Bitdorf was a director of Projex, but deposes that he had no practical knowledge of the building operations of Projex and relied solely on information provided by Mr Forte.

20 In late 2015, Mr Forte advised that he wished to retire from the NicheLiving Group. By reason of shareholders and unitholders agreements, the Forte parties needed approval of the others before they could dispose of their interest in Projex and ADM. Mr Bitdorf states that he advised Mr Forte that approval could not be given unless an investor could be found to provide sufficient funds to allow the defendant parties to acquire the Forte parties' interests, provide further working capital for growth, and reduce debt.

21 Mr Bitdorf also describes the setting up of the data room at William Buck Accountants. He states that Mr Forte gave instructions, reviewed and approved the historical financial statements, income tax returns, and projected profit and losses and projected balance sheets and cash flows for Projex for the purpose of entry into the data room.

22 Although Mr Bitdorf was also a director of Projex, Mr Forte had the day to day control and supervised the preparation of all the accounting records for Projex on which the financial projections were based; Mr Forte also controlled access to the accounting records and accounting staff for Projex.

23 Financial data was updated and corrected from time to time.

24 On 13 April 2016, Mr Bitdorf entered a non-binding 'Amended Term Sheet' with Net Pacific.

25 On about 18 April, Mr Bitdorf received from Mr Forte a projected profit and loss statement, a cash flow forecast and a projections summary sheet 'by development'. There were significant changes from earlier documents. Mr Bitdorf says that he spoke to the employee whose duties included financial control and asked why the changes had been made. She told him that Mr Forte had been 'lying' to her. An email exchange followed between Mr Bitdorf and Mr Forte. Mr Bitdorf states that, as a consequence, he expected that all financial information to be subsequently provided by Mr Forte would be accurate and reliable.

26 After that email exchange, Mr Bitdorf received from Mr Forte a projections summary sheet by development, projected profit and loss and balance sheet and cash flow forecast for Projex.

27 Mr Bitdorf and Mr Michel-Elhaj both say that they relied upon the information disclosed in that document in entering a Binding Term Sheet with Net Pacific on 28 April 2016.

28 Mr Bitdorf then negotiated with Mr Forte regarding Mr Forte's retirement from NicheLiving Group. Mr Bitdorf says that in those negotiations he relied on what had been disclosed to him. He specifically says that he relied upon the financial information provided in agreeing to the purchase of the Forte parties' interests in the group for $1.5 million and in entering into the deed.

29 The deed was signed on 6 May 2016, a Friday. Mr Forte left the business on the Monday, 9 May 2016, and took with him his work computer. The new chief financial officer of the Group then gained full access to and inspected the accounting and business records of Projex.

30 In summary, in pars 90 to 95 of his affidavit, Mr Bitdorf sets out matters that were only then revealed. These include overstatement of projected receipts, and significant undisclosed liabilities. In particular, among those liabilities, are liabilities or potential liabilities to Choiceliving (WA) Pty Ltd, arising out of agreements signed by Mr Forte on behalf of Projex. Choiceliving has now commenced proceedings against Projex, claiming under agreements made in 2015, and for money it lent or advanced to Projex.

31 Mr Bitdorf also refers to evidence of funds transferred into Projex from other bank accounts, funds to which Projex is not entitled; and to the suspension of Home Indemnity Insurance in March 2016, which affected the ability of Projex to commence new stages in existing developments and, as a result, its cash flow.

32 Mr Bitdorf says that as a result of those matters, the whole of the projected profits in the last of the projections given to him before entering the deed would have been 'wiped out'.

33 The information in the data room was updated and Net Pacific informed. Net Pacific withdrew their investment.

34 Mr Bitdorf and Mr MichelElhaj intend to seek relief against Mr Forte, and parties associated with him, seeking to set aside the deed and recover monies already paid.

35 Counsel for Mr Forte submitted that the evidence put forward on behalf of the defendants does not disclose an issue worthy of trial.

36 First, to the extent that the defendants seek relief under s 18, s 237 and s 243 of the Australian Consumer Law, the relief sought is both extraordinary and discretionary. Granting relief would require an unwinding of the transactions in the deed, which have been fully performed on behalf of the Forte parties.

37 Those considerations may have weight at trial, but they are not an absolute bar to relief under the Australian Consumer Law. Section 87 of the Trade Practices Act, the predecessor to s 237 and s 243, was described as conferring 'a wide discretionary power on courts to make remedial orders in appropriate cases in order to ensure a fair result': Kizbeau Pty Ltd v WG & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281, 298; and see Warwick Entertainment Centre Pty Ltd v Alpine Holdings Pty Ltd [2005] WASCA 174; (2005) 224 ALR 134 [66] [79]. The difficulties that may attend rescission of the agreement are not a sufficient reason to deny the defendants a trial.

38 Second, to obtain relief the defendants will need to prove reliance. Counsel identified several issues which, he submitted, must affect the credibility of the defendants' claim of reliance: initially, they referred to the availability of funds from the overseas investor; then, they said they were misled by projections provided to them on 30 March 2016, and now rely on later projections made on or about 22 April; they seek to rely on additional evidence, with no explanation of why that evidence was not put before the registrar.

39 Counsel also submitted that Mr Bitdorf was a director of Projex, and Mr Michel-Elhaj held an interest in it. They worked together with Mr Forte from the same office, and may be inferred to be sufficiently familiar with and interested in Projex to have identified any material errors in the projections at the time of receiving them.

40 Reliance will be a critical issue should this matter proceed to trial. The question on this application, however, is whether the defendants' claim so lacks credibility that it is not worthy of trial. The defendants say (notwithstanding cl 10.1 of the deed) that they did rely on the projections. And, as the defendants submitted, they do not have to prove that the plaintiff's conduct was the sole inducement to their entering into the deed.

41 Further, there is evidence of Mr Bitdorf regarding Mr Forte's control of Projex, and his control of accounting information and accounting staff. The defendants have explained the earlier reference to the projections of March 2016 as a mistake. The email referring to overseas investors is set out above. It is not necessarily inconsistent with the case the defendants advance. In short, I am not satisfied that the claim of reliance is so untenable that it should not be permitted to proceed.

42 Third, counsel submitted that the question of whether conduct is misleading or deceptive must be answered by analysing the relevant surrounding facts and circumstances: Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592, 605 [39], 625 [109]. Here, the conduct was preparing or providing a forecast or a budget projection. It was prepared for a particular purpose: to provide information to accountants to verify and then make available to potential investors in the data room. It was not prepared for the purpose of negotiating the dispute between Mr Forte and the defendants. The financial position of Projex was not part of the matters included in the settlement deed.

43 Further, the mere fact that representations as to the future are not realised does not make them misleading. The defendants must also show knowledge of falsity or reckless indifference as to accuracy: see Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304, 344 345 [113] - [115], 349 [132] [133]. The plaintiff says that the basis on which he prepared the forecasts was reasonable, and his method had not been challenged. He has testified that the forecasts were accurate to the best of his belief, and based on the information available to him at the time of preparation. On this basis, the plaintiff submitted that the case relied on by the defendants did not meet the legal test for a claim under s 18 of the Australian Consumer Law.

44 In my opinion, however, counsel for Mr Forte has addressed a more limited case than that outlined in the affidavits relied upon by the defendants. The defendants do not rely solely on the forecasts proving to be inaccurate. Counsel for the defendants submitted that the defendants will contend that the forecasts were unreasonable. Counsel also submitted that the representation about future cash flow includes implied representations regarding present fact: for example, by representing that projected receipts had not already been received when, on the evidence the defendants have adduced, that was incorrect. The defendants have put forward evidence that, in the projections he provided, Mr Forte did not disclose significant liabilities that were known to him. That conduct may be characterised as misleading or deceptive. These are matters for trial.

45 I am satisfied that the defendants have shown, by the evidence adduced on affidavit, that there is an issue to be tried. The judgment entered for the plaintiff will be set aside. I would grant the defendants leave to defend. I will hear the parties regarding further orders and directions for the conduct of the action.