Jardein Pty Ltd v Stathakis

THE EVIDENCE BEFORE THE PRIMARY JUDGE 10 Mr Smith prepared his valuation of Jardein's share in ACMP after reviewing the company's books. His reason for concluding that the entire business was basically worthless was primarily because he calculated its liabilities as exceeding its assets by more than $260,000. At the same time, he estimated ACMP's "future maintainable earnings" to be a modest $40,000 per annum. 11 As previously indicated, Mr Blashki valued Jardein's half share in ACMP at between $124,676 and $179,812. Both Mr Smith and Mr Blashki adopted essentially the same methodology. They agreed that the business should be valued on the basis of capitalisation of future maintainable earnings. They also agreed, in general, on the multiple to be applied to those earnings. Mr Smith thought the appropriate range was 3.0 to 3.5 while Mr Blashki thought it should be 3.5 to 4.0. 12 The critical difference between the two valuers turned upon their treatment of the company's records. Mr Blashki concluded that ACMP had received more than $300,000 in cash in the period May 2003 to June 2006. Those cash payments had not been recorded in its official records. That meant that ACMP was significantly more profitable than Mr Smith had assumed. 13 In addition, Mr Smith had valued the business upon the basis that ACMP had expended significant amounts on what Ms Stathakis described as "collating". Those amounts, totalling over $230,000, were said to represent cash paid to casual workers who manually put the various newspapers and other publications together. The liabilities created by those cash payments exceeded the entire revenue generated by ACMP. Mr Smith therefore concluded that the net asset position of the company was negative. That largely explained how he arrived at the assessment that the value of the business was nil. 14 Mr Blashki on the other hand took a different view of the collating expenses. He was not satisfied that those monies had in fact been expended on collating. He noted that the payments had not been properly accounted for, and were not recorded correctly in the company's books. He therefore did not bring those monies to account. He concluded that they had been misappropriated by Mr Stathakis, and ought therefore to be treated as an asset of the company. For that reason he was much more positive in his assessment of the company's net asset position, and of its value. 15 The evidence before his Honour regarding collating expenses came primarily from Ms Stathakis. She acknowledged that the payments were not recorded in any of the company's official records. However, she pointed out that they were noted in earlier handwritten entries in what was described as "the Red Book". It seems that this Red Book contained informal records of cash receipts and payments. 16 Importantly, so far as Mr Blashki was concerned, there were no primary records relating to the "collating" expenses. There were no timesheets or other work records to indicate to whom payments had been made, or for what precise services. 17 Ms Stathakis was first employed by ACMP in about July 2003. She was involved in the financial side of the business from that time, although she did not assume responsibility for maintaining the financial records of the company until 2005. By her own admission, she was implicated in significant tax irregularities. She was also possibly party to breaches of the Corporations Act 2001 (Cth) and various industrial relations laws.

GROUND 1 18 As indicated above, Ms Stathakis gave the critical evidence upon which Mr Smith's opinion rested. Had his Honour not accepted her evidence, he would necessarily have rejected Mr Smith's valuation. 19 One might have thought, given the importance of Ms Stathakis' evidence, that she would have been extensively cross-examined as to credit. In fact, nothing of the kind occurred. She was questioned in an almost genteel manner, and her evidence was virtually unchallenged. In particular, it was never put to her that her evidence regarding the payments for collation was false. 20 In addition, it was not submitted to his Honour, in closing submissions, that Ms Stathakis should be disbelieved on her oath. All that then counsel for Jardein submitted was that in the absence of primary documents to support the entries in the Red Book, his Honour should not find that any payments had been made in relation to collating expenses. 21 Having regard to the manner in which Jardein's case was run at trial, it is hardly surprising that his Honour rejected that submission. It was scarcely likely that large numbers of cash payments made to anonymous casual workers would have generated primary documents to support entries of the kind found in the Red Book. Ms Stathakis said that only the crudest form of record keeping was undertaken in relation to those cash payments. The hours worked by each casual worker were simply noted on loose sheets of paper which no longer existed. 22 The primary judge found Ms Stathakis to be an honest and truthful witness. Jardein contends that this finding should be set aside because her evidence was "glaringly improbable" and/or at odds with "incontrovertible facts". 23 In making that submission Jardein relies upon Fox v Percy (2003) 214 CLR 118. There a majority of the High Court observed, after reviewing the relevant authorities, that a finding of fact by a trial judge, based on the credibility of a witness, could only be set aside on appeal in two circumstances, namely: · where incontrovertible facts or uncontested testimony demonstrate that the judge's conclusions are erroneous; or · where it is concluded that the decision at the trial was glaringly improbable or contrary to compelling inferences in the case. 24 Fox v Percy plainly builds upon earlier High Court authority which is to the same effect. See generally Warren v Coombes (1979) 142 CLR 531; Abalos v Australian Postal Commission (1990) 171 CLR 167; Devries v Australian National Railways Commission (1993) 177 CLR 472; State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (in liq) (1999) 160 ALR 588; and Effem Foods Pty Ltd v Lake Cumbeline Pty Ltd (1999) 161 ALR 599. 25 Jardein relies upon a number of factors which, it submitted, showed that his Honour had erred in accepting Ms Stathakis' evidence regarding the collating expenses. These included:

1. Indications that the company was of some value, for example: a. the business had operated for about 20 years prior to the takeover by Mr Stathakis; b. although it was alleged that ACMP had suffered losses in recent years, the company still employed an unknown number of employees; c. ACMP was still carrying on business with a turnover in the period ending 30 June 2006 of more than $3,600,000; d. Mr Stathakis had worked for the business for 20 years before acquiring it, and must therefore have thought it had some value. He had been willing to invest money in the company for that purpose, in particular he had invested an initial amount of $45,000; e. Mr Stathakis had brought his daughter and son into the company as employees; f. management had purchased additional valuable and expensive pieces of machinery; g. Mr Stathakis had secured heavy liabilities over his own personal home, which suggested that he had an expectation of profit; h. Mr Stathakis was experienced in the printing industry and had been working for the business for 20 years; and i. it would only make sense that there was "black money" if there was income larger than the disclosed expenses.
2. Ms Stathakis could not be considered a witness of truth because she, and the other employees under her direction, had maintained three sets of financial records. Jardein submitted that this was serious misconduct, which involved breaches of tax law, corporations law and employment law.
3. Ms Stathakis had not filed an affidavit in the proceeding, but had instead simply been called to give evidence. That meant that then counsel for Jardein had had no opportunity to consider what she would say, or to investigate her evidence properly. 26 Jardein's submissions regarding this first ground of appeal would have had greater force had its counsel at trial mounted any sort of challenge to her credibility. As previously indicated, there was no such challenge. 27 Where a party intends to contradict or challenge the testimony of an opposing party's witness, the party is obliged to put that witness on notice that his or her account will be challenged: Browne v Dunn (1893) 6 R 67. This gives the witness an opportunity to respond to the allegations. The reason this is done is as a matter of basic fairness. See Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 per Hunt J. 28 Adherence to the rule in Browne v Dunn also gives the party calling the witness the chance to adduce supporting evidence which might not otherwise have been led. 29 Compliance with the rule requires only that the substance of the contrary version is put to the witness, and not every detail of the challenge: White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169 at 217 per Goldberg J. 30 In a civil case the consequences of a failure to observe the rule will vary. However, they will usually be related to the central object of the rule which is to secure fairness. 31 In Seymour v Australian Broadcasting Commission (1977) 19 NSWLR 219 Mahoney JA said (at 236-237): "This kind of problem may arise at different times in the litigation. It may arise during the trial. Thus, where a party fails to cross-examine a witness at all or on a particular matter, it may be prudent for the trial judge at the time to draw the attention of counsel in an appropriate way to the effect this may have on the later conduct of the trial. It may be that the question arises at a later stage in the trial when counsel seeks to call evidence contradicting the witness or discrediting his evidence, or seeks to address upon the basis that the witness' evidence is untrue. The trial judge may then have to determine what course should be followed. Sometimes the interests of justice may be served by having the witness recalled for cross-examination. Sometimes the circumstances may be such that the only way in which justice can be achieved is by directing that, for example, it is not open to counsel, in address, to make such suggestion. What is to be done will depend, as I have said, upon the circumstances of the case." 32 A possible consequence of a breach of the rule may be that the party in breach will be prevented from suggesting that the witness' testimony should be disbelieved. Another possible consequence will be the exclusion of evidence that challenges the witness' account with respect to those matters upon which there was no cross-examination. A third possible consequence will be to permit the witness to be recalled so that the breach can be remedied. One thing is clear. The rule is not simply to be ignored. 33 The rule in Browne v Dunn has not been abrogated under the uniform Evidence Acts: Heaton v Luczka (unreported, New South Wales Court of Appeal, 3 March 1998) per Beazley JA. Indeed, s 46 of the Evidence Act 1995 (Cth) specifically enables the recall of a witness where there has been a breach of the rule and therefore implies its continued existence. 34 Given the way its counsel conducted the case at first instance, Jardein can hardly complain that the primary judge found Ms Stathakis to be an honest and truthful witness, and that he chose to act upon her evidence. In our view, there was nothing "glaringly improbable" in what she said regarding cash payments having been made to casual workers. There were no "incontrovertible facts" inconsistent with her account. Her explanation of the work involved in collating publications, and the costs associated with that work, rings true. Of course her willingness to be involved in such payments, as part of the black economy, is hardly a mark in her favour. The primary judge would have been well aware of that fact. Nonetheless, his Honour had the advantage, which this Court is denied, of having seen and heard Ms Stathakis give evidence. He was plainly entitled to conclude that she was a witness of truth.

GROUND 2 35 This ground of appeal arises indirectly out of the orders that the primary judge made on 20 June 2006. In substance, his Honour required Mr Stathakis to ensure that the books and records of ACMP would be made available to Mr Smith so that he could carry out his independent valuation of the business. 36 After Mr Smith was appointed, Jardein approached David Ferrier of Pitcher Partners to provide a valuation of ACMP's business. Mr Ferrier was given access to ACMP's books and records, which he duly inspected. However, within a short time Mr Ferrier left Pitcher Partners, ironically to join Horwath. 37 Mr Blashki took over Mr Ferrier's role. He was troubled by a lack of detailed information regarding the affairs of the company. So much so that on 20 October 2006 he wrote to Mr Stathakis' solicitors seeking answers to a large number of questions. 38 In substance, Mr Blashki requested information regarding the following matters: · details of any MYOB ledger retained for the year ended 30 June 2004; · any documentation detailing sales not recorded in the MYOB ledgers for the period 17 December 2005 to 30 June 2006; · any sales made that were not recorded in the MYOB ledgers, the Red Book and the Excel workbook; · GST paid on cash sales; · discounts granted to specific publications; · bank statements for the year ended 30 June 2004; · the collating expenses and any supporting documentation; · the roles of specific employees; · pay increases for Ms Stathakis and Mr Stathakis; · payments made to contractors; · remuneration paid to Jardein for the use of its collating machine; · the lease agreement; · reductions in waste paper sales; and · inventory balances and stock sheets. 39 Perhaps not surprisingly, the solicitors for Mr Stathakis declined to answer these queries. Counsel for Mr Stathakis below characterised Mr Blashki's letter as containing a series of interrogatories, which was possibly an apt description. When counsel for Jardein complained to the primary judge that the letter had been ignored, his Honour replied that although some of the questions posed were legitimate many were not. It is important to note, however, that the complaint was not pressed. In particular, counsel below did not seek any orders for the provision of further documents or information to Mr Blashki. 40 In these circumstances Jardein cannot reasonably complain of any failure on the part of the primary judge to require the solicitors for Mr Stathakis to answer the questions posed in Mr Blashki's letter. 41 It should be noted that counsel appearing for Mr Stathakis before this Court submitted that all of ACMP's books, documents and records had in fact been made available to Mr Ferrier, who passed on whatever information he had to Mr Blashki. Counsel also drew attention to the fact that in cross-examination Mr Blashki had conceded that Mr Ferrier had not complained of any lack of information. 42 In our view, the primary judge did not err when he characterised a number of Mr Blashki's questions as travelling beyond the legitimate role of an expert, and intruding into matters that were for the Court to determine. 43 For these reasons there is no substance in ground 2.

GROUND 3 44 The third ground of appeal complains of the primary judge's decision to order a buy out of Jardein's share, even when it became apparent that ACMP's assets were significantly exceeded by its liabilities. Jardein contended that having reached that conclusion his Honour had no choice other than to proceed to a winding up of the company. That was because ACMP must have been insolvent, yet was continuing to trade. 45 A related but subsidiary point was Jardein's contention that his Honour's orders as finally pronounced did not involve a buy out, but were rather in the nature of "a forced gift". 46 There is no substance in this ground of appeal. Once it became clear that his Honour preferred the evidence of Mr Smith to that of Mr Blashki, there was nothing to stop Jardein from seeking to reopen the question of a buy out. No such application was made. 47 It must be remembered that the basis upon which the winding up order was sought had nothing whatever to do with any alleged insolvency on the part of ACMP. Any suggestion that the company was in fact insolvent would have raised entirely new issues. There would have had to have been a fresh inquiry into the company's ability to pay its debts as and when they fell due. It is of course clear that a company may have a negative net asset position without that company being relevantly insolvent: see generally Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd[1999] FCA 728. 48 As to the related but subsidiary point, it is in our view devoid of substance. The shares in ACMP were found to be worthless. Generally speaking, one cannot have a sale for nil consideration. His Honour was therefore entitled to fix the nominal sum of $1.00 as the price to be paid to Jardein for the buy out. 49 The fact that the sum of $1.00 happened to equate to the par-value of the single share owned by Jardein was, as it happens, merely coincidental.

CONCLUSION 50 For the reasons set out above the appeal must be dismissed. The appellant must pay the respondent's costs of the appeal to be taxed in default of agreement. The executed share transfer, presently in the custody of the Court, should be delivered to Mr Stathakis' solicitors. I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices North, Weinberg and Middleton.

Associate: Dated: 12 September 2007 Counsel for the Appellant: Mr M D Broun QC

Counsel for the Respondent: Mr J Tsalanidis with Mr M P Kennedy

Solicitors for the Respondent: Wainwright Ryan Eid