Hawkins v Clayton

Hawkins v Clayton - [2007] WASC 29 - WASC 2007 case summary — Zoe

[70]

61 Mr Leahy says that either he or Mr Macri subsequently received instructions from Mr Jones to establish a company. Mr Leahy says that he does not recall any further dealing with the plaintiffs concerning the Company until about February 1995. At about that time Mr Macri told Mr Leahy that the gross profit margins based on the financial information provided by Mr and Mrs Jones, for the partnership and for the Company were inconsistent. Mr Leahy told Mr Macri to check his figures and if his figures were right then Mr Jones must have made an error in the information he had given to Mr Macri and Mr Macri should discuss the figures with Mr Jones. Later, in or about February 1995 Mr Macri showed Mr Leahy amended accounts for each of the partnership and the Company. The amended figures showed a significantly lower amount for opening work in progress than that which had been recorded in the draft account prepared in 1994. With the adjusted work in progress figures, the profit margins for each of the partnership and the Company became more or less consistent. The effect of reducing the closing work in progress figure of the partnership was to decrease the assets of the partnership at the time they were acquired by the Company. When Mr Macri prepared the accounts for the Company based on the reduced opening work in progress figure, it became apparent that at the time the business was transferred from the partnership to the Company, the Company acquired less assets from the partnership than the liabilities of the partnership which the Company had assumed as at 28 February 1994. By 30 June 1994 the deficiency in the assets over liabilities had become approximately $120,000. Mr Leahy says that he did not know what the asset and liability position of the partnership had been at the time the business was transferred to the Company, that is 1 March 1994. Mr Leahy was not aware of any deficiency in the assets of the Company at the time it commenced trading, that is 1 March 1994. Mr Leahy says he did not become aware of that deficiency until Mr Macri brought it to his attention in about February 1995.

[72]

63 Mr Leahy says that Mr Jones attended his office and met with him and Mr Macri in about February 1995. Mr Leahy said to Mr Jones that as a result of amended closing and opening work in progress figures that Mr Jones had given to Mr Macri there was a deficit in the assets of the Company over liabilities of about $120,000. Mr Leahy said that to make the Company's balance sheet balance an item had to be included as an asset and the item could be recorded as a director's loan account, that is a debt owed to the Company by Mr and Mrs Jones. If it was recorded as a directors' loan then Mr and Mrs Jones would have to repay the loan at some stage. Mr Leahy said that in his view the Company should not have the director's loan account showing that Mr and Mrs Jones owed it money for three reasons. First, in the event of liquidation of the Company Mr and Mrs Jones would be personally liable for this debt to the Company. Secondly, fringe benefits tax may be payable on the loan and it may be considered a deemed dividend under the applicable taxation legislation and therefore income tax would be payable on it. Further, the directors should only draw income from the Company in the form of salaries and wages or dividends and not as loans from the Company. It was unlikely the Commissioner of Taxation would accept that, on the transfer of the business from the partnership to the Company, the partnership had a nil value for goodwill and, accordingly, some value must be assigned to the goodwill of the partnership at the time of the transfer of the business to the Company. Mr Leahy said to Mr Jones that with a directors' loan account the Company would be less attractive to investors unless the loan was repaid. Mr Leahy said if $120,000, as goodwill, could be reasonably justified it would eliminate the debt owed by Mr and Mrs Jones to the Company, would set up a cost base in the Company for capital gains tax purposes and would recognise Mr and Mrs Jones' work in building the business in the Black Swan name.

[176]

161 The defendant continued to provide services to the plaintiffs and the Company until the Company went into liquidation. Those services included preparing income tax returns and financial statements for the plaintiffs, the partnership and the Company. From time to time the defendant undertook other specific tasks for the plaintiffs or the Company and provided advice to the plaintiffs and the Company. The defendant, through Mr Leahy, advised the plaintiffs to incorporate the business. The defendant undertook work for the plaintiffs and the Company to establish or acquire the Company and transfer the business from the partnership to the Company. The defendant provided taxation advice to the plaintiffs. That included advice concerning the tax treatment and consequences of leasing a motor vehicle or acquiring a motor vehicle by hire purchase, the taxation advantages of transferring the business to a company and the tax deductibility of interest paid by the plaintiffs on a loan to purchase real property. The defendant, through Mr Macri, advised Mr Jones of the advantages and disadvantages of self-managed superannuation funds but did not advise the plaintiffs that they should establish a self-managed fund. The defendant, through Mr Leahy and Mr Macri, assisted the plaintiffs to establish banking facilities with the NAB in early 1996. That assistance included introducing Mr Jones to the West Perth branch manager of the NAB, Mr Nayler, and preparing financial statements and other information for the plaintiffs and the Company to provide to Mr Nayler. Mr Macri also attended a meeting at the NAB with Mr Nayler and Mr Jones. However, I find that neither Mr Leahy nor Mr Macri advised the plaintiffs or the Company to increase the Company overdraft from the NAB. I find that the defendant did not previously, or at any time, advise the plaintiffs or the Company to increase the overdraft facility with the ANZ Bank. Neither the plaintiffs nor the Company requested advice from the defendant whether they should increase their loan or loans from or overdraft facility with the ANZ Bank or subsequently the NAB. The defendant did not assume responsibility to advise the plaintiffs or the Company about the size of the loans or overdraft facilities and the plaintiffs did not rely upon the defendant for such advice.

[183]

168 The plaintiffs have not established that the defendant breached its duty of care to them by failing to advise them not to incur further borrowing to set up their own superannuation fund and to contribute excessive amounts to that fund. The Company was required by statute to pay to or on behalf of the plaintiffs, superannuation in the amount of 4 per cent of wages and salary paid to the plaintiffs. It may be inferred that some costs were involved in establishing the self-managed superannuation fund. However, there is no evidence that the costs of establishing the superannuation fund significantly contributed to the borrowings of the Company. In the course of the trial the plaintiffs complained that the benefits of establishing a self-managed superannuation fund did not justify the costs of operating a fund with the comparatively small amount contributed to the Black Swan Superannuation Fund. However, those costs were costs incurred by the superannuation fund and reduced the amount of that fund, they were not costs incurred by the Company and did not increase the borrowings of the Company. The real issue concerns the funds contributed by or on behalf of the plaintiffs to the superannuation fund. The plaintiffs' case is that directly or indirectly those contributions added to the Company's borrowings. I accept Mr Macri's evidence that he did not give Mr Jones any advice concerning the amount, if any, which the plaintiff should contribute to the superannuation fund over and above the 4 per cent of wages and salary paid to the plaintiffs that the Company was required to contribute by statute. At the time the superannuation fund was established and Mr Jones drew a cheque for $25,000 on the business account and deposited it in the superannuation fund bank account, the defendant was under no duty to advise the plaintiffs in relation to the amount which should be deposited in the account or the amount which should be drawn on the business bank account for that purpose. The plaintiffs had not sought advice from the defendant in relation to that matter, the defendant had not assumed responsibility to give advice in relation to that matter and the plaintiffs did not rely upon the defendant for such advice. The relationship between the parties at that time did not give rise to such a duty of care.

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (223 paragraphs)

JONES & ANOR -v- LEAHY & PARTNERS PTY LTD [2007] WASC 29 (14 February 2007)

Parties

Cases Cited (2)