Kyuss Express Pty Ltd v Sellers [2001] VSC 10

[2001] VSC 10

CORPORATIONS - sale of business made by Receivers in breach of duty under s. 420A Corporations Law - whether company suffered any loss as a result of the breach of duty.

2. The plaintiff company ("Kyuss") claims damages against the defendants, Kenneth Stewart Sellers and David Neil Lockwood ("the Receivers") who were appointed by the defendant, Commonwealth Bank of Australia Ltd ("the Bank"), as receivers and managers of Kyuss on 10 October 1997. Two weeks later, on 24 October 1997, the Receivers sold the business of Kyuss, known as "Trinity Furniture" and "Decorator Warehouse", to Laskin Nominees Pty Ltd ("Laskin") for the sum of $120,000 which sale was settled on the same day. Kyuss alleged that the Receivers failed to sell the business for the best price reasonably obtainable having regard to the circumstances existing at the time of the sale in breach of the duty imposed by s. 420A of the Corporations Law ("the Law") (see paragraphs 11 and 12 of the statement of claim).

5. The proceeding as between the plaintiff and the Bank was resolved and a challenge to the validity of the appointment of the Receivers pursuant to a deed of charge given to the Bank in December 1996 was not therefore maintained. The Bank played no part in the proceeding.

8. Peter William Lawler ("Lawler") is the sole director and shareholder of Kyuss which is the trustee of the Lawler No. 2 Trust, a discretionary family trust created by trust deed dated 24 November 1994. Kyuss was appointed as such trustee on 9 December 1996. Lawler was born in 1950. He worked in the 1970s for his father, a bricklayer, who carried on business as a subcontractor and builder and, after his father's retirement, he continued to work as a subcontractor and became a licensed builder in about 1986, building residential housing. He became bankrupt in October 1990. Subsequently he became involved in the gemstone industry as, so he deposed, a miner and a gemstone dealer.

11. Daniel John O'Connor ("Mr O'Connor") is a director of Laskin and had been a friend of Lawler since their schooldays. In about 1984 Mr O'Connor commenced operating in partnership a business of manufacturing upholstered furniture called "Trinity Furniture" in Heidelberg. Later, Mr O'Connor became the sole proprietor of the business. In early 1987 Mr O'Connor first suggested that Lawler acquire a share in the business. It is unnecessary to detail the ensuing events except to note that a retailing outlet for the manufactured products was established at premises leased in about October 1987 at 377 Hawthorn Road, South Caulfield and trading as "Decorator Warehouse". For a time Mr O'Connor owned the manufacturing business and Mr O'Connor and his wife owned 50% of the retail business while Lawler owned the other 50%. In late 1987 or early 1988 Mr O'Connor relocated the Trinity Furniture business from Heidelberg to the South Caulfield premises. Mr O'Connor operated Trinity Furniture. Lawler was essentially a silent partner in Decorator Warehouse and Mrs O'Connor ran that retail side of the business. In late 1988 Lawler, who needed the funds, sold his share in the retail business to Mr O'Connor who had in fact, for his own reasons, suggested this sale. The two remained on very good terms and Lawler, who for business reasons travelled overseas often over the next few years, when in Melbourne called in from time to time at the South Caulfield premises.

14. In mid 1996, on one such visit, Mr O'Connor said to Lawler that he wished to retire and would like to sell Lawler the whole business including the South Caulfield property, which by then he had purchased. Negotiations followed. Mr O'Connor gave Lawler an estate agent's written valuation of the South Caulfield property in the sum of $650,000. Lawler consulted his accountant, Mr John Gloury, who looked at the tax returns and trading figures of the business for the previous three years as provided by Kieran Liston & Co ("Liston"), Mr O'Connor's accountants. Mr O'Connor also gave Lawler cash-flow projections for the business for the next three years.

17. Lawler and Mr O'Connor agreed that Lawler would buy the business and the South Caulfield property provided he could obtain finance. They agreed on a price of $1.3M, $650,000 for the South Caulfield property and $650,000 for the business (comprising $480,000 for goodwill, $134,000 for stock and $36,000 for plant and equipment). Lawler told Mr O'Connor that he thought that he could come up with about $500,000 of the purchase price, and that he would have to obtain the rest from the bank. He also told Mr O'Connor that of his $500,000, $400,000 would be paid in cash and $100,000 by a transfer of 2,000 shares in a gold mining company in which Lawler held shares. Mr O'Connor agreed to this.

20. Lawler said that he wanted Mr and Mrs O'Connor to remain as employees of the business. It was agreed that Mrs O'Connor be in charge of the retail business, as well as doing some records and book-keeping, and that Mr O'Connor be in charge of commercial sales and that Mr Lawler would run the manufacturing business. Written employment agreements were subsequently entered into between Kyuss and Mr and Mrs O'Connor.

23. Lawler and Mr O'Connor then jointly put together a document to be used in seeking bank finance entitled "Proposal for purchase of Trinity Furniture, Decorator Warehouse and Freehold Premises at 337 Hawthorn Road, South Caulfield by Peter Lawler..."

26. The Proposal described itself as comprising documents which are "the property of Trinity Furniture for the sole use of Peter W Lawler to assist in obtaining funds for purchase of the above...". The Proposal described Trinity Furniture as the manufacturer and that it now manufactured for Decorator Warehouse (a strictly retail outlet) as well as for interior decorators and commercial properties from hotels through to airline lounges. The Proposal stated that Decorator Warehouse had developed into an "excellent cash flow business" and that Trinity Furniture "has branched into the contract furniture arena" with "a list of contracts that is second to none in the industry" (reference being made to a number of contracts including ongoing contracts with Qantas, Ansett and the Windsor Hotel). The Proposal included a Profit Statement and Reconciliation for the Trinity Unit Trust (Laskin) prepared by Liston for the financial years ending 30 June 1993 to 1995 and nine months ending 31 March 1996.

29. A Trading Account and a Profit and Loss Account showed the following, in summary:

33. The Reconciliation showed the following in summary:

Amended Trading profit (after adding back owners cost (inc Directors' salaries and superannuation))

37. The Proposal also contained a "3 Year Cash Flow Projection" for 1997-1999 projecting operating profits as follows:

41. The Proposal also contained strong testimonials to the service, efficiency and quality of the business from Ansett Australia, The Windsor Hotel, Becton Corporation Pty Ltd and Fletcher Construction Australia Ltd. Praise was expressed in relation to the proprietors, in two cases mentioned as "Dan and Trish O'Connor".

44. In or about early September 1996 Lawler had a meeting with bank employees, a manager, Mr Ledwidge, and his assistant Ms Sue Murray, at the Frankston Business Banking branch of the Bank. Lawler told Mr Ledwidge that he wished to buy the businesses of Trinity Furniture and Decorator Warehouse from the O'Connors. He gave Ledwidge a copy of the Proposal document either at that meeting or most probably at some stage thereafter.

47. A written application dated 23 September 1996 was prepared by Mr Ledwidge. The application indicates that the funding being sought was $850,000. $800,000 was for the purchase of the business and $50,000 was to be an overdraft facility to be used to fund cash flow requirements including the importation of furniture from the Philippines. The balance of the purchase price ($500,000) was to be paid for by the sale of Lawler's shares in the gold mining company.

50. Lawler received a letter from Mr Ledwidge dated 4 October 1996 seeking further financial and other information. In October 1996 the Bank obtained a valuation report on the South Caulfield property which valued the property at $625,000. On or about 15 October 1996 Mr Ledwidge received an amended cash flow projection from Lawler reducing the projected sales for the year ended 30 June 1997 from $2,618,000 to $1,457,400 "due to the anticipated Crown Casino contract going to another contractor".

53. Lawler received a further letter from the Bank signed by Mr Ledwidge dated 12 November 1996 stating that the Bank had approved the following financial accommodation (subject to a number of conditions):

(a) an overdraft of $50,000 for working capital;

(b) a bill discount facility of $300,000 for 6 months to be repaid at $100,000 every 2 months; and

(c) a $500,000 fixed rate term advance for 72 months repayable by monthly instalments of principal and interest.

There were various schedules attached to the letter and Lawler signed the last page agreeing to the Bank's conditions on behalf of Kyuss.

60. Lawler had instructed his solicitors, Williams & Williams of Mornington, to prepare a contract of sale for the businesses. Bevan-Rhys James, solicitors, represented Mr and Mrs O'Connor. Mr and Mrs O'Connor's solicitors were to prepare the contracts for the sale of the South Caulfield property by another O'Connor company.

63. By the end of November 1996 the finance had been approved by the Bank and Laskin was ready to settle the transaction. However the sale of Lawler's shares had not been completed and Kyuss was not in a position to settle. Lawler spoke to Mr O'Connor and told him of his problems. Mr O'Connor said that he was anxious to proceed despite Lawler's problems. Lawler said he could only complete the deal if Mr O'Connor would accept shares in lieu of the cash payment of $400,000. Lawler offered that, in addition to the 2,000 shares in the gold mining company which he had already agreed to transfer, he would transfer a further 8,000 shares (making a total of 10,000 shares) which he said he thought were worth about $US50 each. Mr O'Connor agreed. Lawler said that he would guarantee that the value of 8,000 of the shares was worth at least $400,000 but that if it turned out that the shares were worth less than that he would make up the difference. Lawler gave Mr O'Connor a letter to that effect.

66. On 2 December 1996 Lawler signed a "Contract of sale of real estate" pursuant to which Kyuss agreed to purchase the South Caulfield property. Settlement was to occur on 9 December 1996. The purchase price was $650,000. At about this time Kyuss also executed an agreement with Laskin and Mr and Mrs O'Connor pursuant to which Kyuss was to acquire the businesses of Trinity Furniture and Decorator Warehouse for $650,000. The executed agreement is undated and is also incomplete or silent as to a number of matters including the amount of the deposit, the time of payment of the balance of purchase price and the agreement to transfer the shares to Mr O'Connor. In the end, nothing turned on these matters.

69. On or about 6 December 1996 Lawler executed a number of documents including an application on behalf of Kyuss for financial accommodation from the Bank, a mortgage debenture in favour of the Bank by Kyuss, a guarantee in favour of the Bank in relation to the debts of Kyuss, a mortgage of the South Caulfield property by Kyuss, a power of attorney for the anticipated commercial bills and a commercial bills authority.

72. Completion of the agreements occurred on 9 December 1996 and Kyuss took possession of the South Caulfield property and the businesses on 10 December 1996. $800,000.00 of the purchase price was paid to Laskin and the vendor of the real estate with the balance being paid for by the transfer of the 10,000 shares. Lawler testified that as a result of expenses at settlement and a number of other factors there was virtually no working capital to run the businesses and that an added strain was placed upon the cash flow of the business because it also began to concentrate on "several large contract projects". These projects were managed by Mr O'Connor while Lawler apparently managed the manufacturing part of the business.

75. The $300,000.00 bill facility was due to be repaid by three payments in February, April and June 1997 of $100,000.00 each. Lawler testified that he anticipated that the repayments would be made from the sale of his shares in the gold mining company. The sale did not eventuate, and Kyuss was unable to make the payments. On 13 March 1997, Lawler had a long discussion with Mr Ledwidge and Mr and Mrs O'Connor about the performance of the Kyuss account and the future prospects of the business. He told Mr Ledwidge that he expected to receive funds from various sources. He and Mr O'Connor informed Mr Ledwidge of the details of some of the larger contracts that had been negotiated by Kyuss. Lawler had a further meeting with Mr Ledwidge on 21 March 1997 to discuss excesses in the Kyuss account.

78. In about February 1997 Mr O'Connor had been introduced to A Genzer & Associates (Aust) Pty Ltd ("Genzer"). Genzer was developing about 36 one and two bedroom apartments in Dandenong, known as the James Apartments, for a serviced apartment operator known as Quest.

81. Mr O'Connor testified that his usual procedure with contract work involving the fitting out hotel rooms or serviced apartments was to mock up prototype rooms and submit costings. Usually they supplied everything in the room including furniture, electrical appliances, manchester, curtains, crockery etc. Once the mock-up and costings had been prepared, negotiations were held, the quality and style of fittings were discussed, as were the costings. Once the mock-up and costings had been approved, the "deal" was done. Mr O'Connor said that it was usual to have ordered all materials and started on production long before formal written contracts were exchanged. By about March 1997, both Genzer and Quest had "signed off" on the mock-up rooms for the James Apartments. R.M.B.L. Pty Ltd ("RMBL") was the financier of the project. As a part of the arrangements Genzer was to pay Kyuss a deposit of $90,000 and Kyuss was to give RMBL a bank guarantee for $90,000 as security for the deposit (which the Bank later provided). The contract was finally completed in July 1997.

84. In April 1997 Lawler had a lengthy discussion with Mr Ledwidge in which he informed him of the problems he had with the sale of the gold shares. He told him that he would go overseas and try to address the problems. Following the conversation in April 1997, Lawler continued to keep Mr Ledwidge and Ms Murray informed about Kyuss's position.

87. At Lawler's request the Bank on 21 April 1997 agreed to the deferment of the principal repayment of $300,000.

90. Kyuss provided to the Bank in April or May 1997 a "Compliance Certificate" for the period 10 December 1996 to 31 March 1997. An attached chart compared actual results with the budgeted amounts derived from Liston's original cash flow projections. Actual sales for the period totalled $110,242 against budgeted sales of $300,000 resulting in a negative cash flow greatly in excess of that projected.

93. A Bank memo dated 19 June 1997 refers to an application by Kyuss for a temporary increase in its overdraft to $150,000. The overdraft at that stage had a balance of $67,184.

96. On or shortly after 2 July 1997 Lawler received a letter from the Bank dated 2 July 1997, which advised that approval had been granted to increase the total facility granted to Kyuss taking total loans to $1,049,333.

99. By a letter dated 3 July 1997 the Bank approved a temporary increase in the overdraft limit of Kyuss from $100,000 to $150,000 until 14 July 1997. The letter stated that approval was subject to early presentation of financial information for the year ended 30 June 1997.

102. From 9 July 1997 to 16 July 1997, 13 cheques drawn by Kyuss were dishonoured by the Bank.

105. On 10 July 1997 Lawler sent the Bank a facsimile which set out Kyuss's expected income and expenses over the next few days. At about this time Lawler spoke to Ms Murray by telephone and discussed the dishonoured cheques with her. She said that there was nothing that she could do about it, that Mr Ledwidge was away and there was another manager there, Mr Garry Smith. Lawler made an appointment to see Mr Smith.

108. On 18 July 1997 Lawler met with Mr Smith and Ms Murray. At the meeting Lawler requested a temporary increase in the overdraft facility to enable Kyuss to continue trading.

111. By letter dated 21 July 1997 the Bank informed Kyuss that it had approved a temporary increase in the overdraft limit of Kyuss from $60,000 to $110,000 until 31 July 1997 to assist with working capital requirements.

114. By letter dated 5 August 1997 Kyuss was advised that the bill facility of $300,000 had been rolled over until 9 September 1997.

117. On or about 6 August 1997 Lawler completed a compliance certificate in relation to Kyuss's financial position for the period 1 April 1997 to 30 June 1997 and provided it to the Bank. Attached to the certificate was a statement of profit and loss of Kyuss for the year ended 30 June 1997 bearing the heading "Draft Accounts for Discussion Purposes only" and showing a net profit for the year of $73,504.

120. In mid 1997 Kyuss was introduced to another Quest project. It involved the full fit-out of about 81 one and two bedroom apartments at 172 William Street, Melbourne for Walker Corporation ("Walker").

123. Lawler, at his request, together with Mr O'Connor, had a meeting with Mr Ledwidge (and possibly Ms Murray) in August 1997. At the meeting, repayment of the $300,000 bill facility was discussed at some length. Lawler and Mr O'Connor informed Mr Ledwidge that Kyuss had been successful in obtaining a contract with Walker and that production was expected to start in September 1997 under the contract and that the completion date of the contract was January 1998. They expected Kyuss to be paid by no later than January 1998. The value of that contract was said to be in the vicinity of $1,000,000 with expected profits of about $300,000 (or some such estimate). Lawler told Mr Ledwidge that the proceeds from this contract would be sufficient to pay out the commercial bank bill facility. Mr Ledwidge expressed concern. He said that he would put a proposal to the Bank's head office not to pay out the entire commercial bill facility from the Walker contract, but to pay it out in staggered payments, perhaps of an initial payment of $50,000.00 in October 1997 a second payment of $100,000.00 at the completion of the Walker contract and $150,000.00 six months later. Mr Ledwidge said that this would ensure that Kyuss would not have cash flow problems in the future, as it had experienced in the past. Lawler agreed. Ledwidge said that he would put the proposal to the Bank's head office in Melbourne. Several days after the meeting with Mr Ledwidge, Lawler telephoned him and asked him what was happening with the overdraft position as they had just commenced production on the Walker contract. He advised Mr Ledwidge that if the overdraft was not increased, he would be forced to find alternative funding for the Walker contract. He requested this information from Mr Ledwidge as a matter of urgency because, if the Walker contract was not commenced in September 1997 it would be impossible to complete the contract by December 1997 as required by the contract. Several days later Mr Ledwidge telephoned Lawler and said that an accounts manager from the city (Mr Barry-Murphy) wanted to look at his operations and representatives of the Bank were going to visit him at the South Caulfield property. Mr Ledwidge told him that Mr Barry-Murphy wanted to get first-hand knowledge of the business.

126. On about 28 August 1997, Lawler met with Mr Barry-Murphy, Mr Ledwidge and Mr Barry-Murphy's assistant at the South Caulfield property. Mr O'Connor was not present at this meeting. They discussed again the issues which had been raised in the previous meeting with Mr Ledwidge. Lawler said that the Walker contract was the way to proceed to pay out the commercial bill facility in its entirety.

129. After the meeting on 28 August 1997, Lawler telephoned Mr Ledwidge who said that the meeting had gone well. Mr Ledwidge told Lawler that Kyuss's account had been moved from the Frankston office into the City and was now in the hands of Mr Barry-Murphy. Mr Ledwidge said that matters had been taken out of his hands. Mr Ledwidge said that Lawler would now be dealing with Mr Barry-Murphy in respect of the day-to-day operation of the overdraft account.

132. On 5 September 1997 Lawler sent a facsimile to Mr Barry-Murphy which, inter alia asked for the position of the Bank to be clarified as soon as possible.

135. From 8 September to 15 September 1997, a number of Kyuss cheques were dishonoured.

138. On 11 September 1997 Kyuss received two letters from the Bank dated 10 September 1997 by facsimile. One letter stated that the Bank was unable to accede to Kyuss's requests for additional funding but would further consider the matter on the basis that an investigating accountant be appointed at the cost of Kyuss. The letter sought Lawler's agreement to this by 12 September 1997. The second letter advised that the failure to pay the amount of the bills that had matured ($300,000) was a default and that the amount had been debited to an account styled "Kyuss Express Pty Ltd as trustee for Lawler No. 2 Trust Bills Matured Account" and that the accommodation limit had been cancelled. The letter sought immediate repayment of the sum of $300,000.

141. By about September 1997, Kyuss had completed two or three mock-up rooms for Walker. The mock-ups and costings for this Quest project had been substantially agreed by about the end of September 1997. Kyuss had ordered materials and commenced work by this time. The project was due to be completed by 10 December 1997.

144. On 23 September 1997 the defendants Sellers and Lockwood were appointed by the Bank as investigating accountants to:

"a) Satisfy the Bank on the safety of its existing exposure b) Investigate the background to the Filipino Gold Mine investment and form a view on the likelihood of this investment being utilised to repay the $300,000 bill facility c) If the Bank can be satisfied with the above, whether additional funding is warranted and appropriate terms and conditions to be attached."

148. By a facsimile letter to the Bank dated 25 September 1997, Lawler advised that Walker was "now supplying" an unconditional guarantee for 30% of the contract price (which was approximately $1,000,000) as a deposit on the contract. The letter enclosed an unexecuted copy of the Walker contract. The letter asked Mr Barry-Murphy to reconsider the decision to appoint an investigating accountant to Kyuss and enquired what the Bank's "minimum requirement" was to bring the facilities "to an acceptable level in order to get to the end of the Walker contract". On 26 September 1997 Kyuss received a letter from the Bank of that date in reply, stating that the Bank, as a minimum, required the cooperation of Kyuss in enabling the investigating accountant to commence his review of Kyuss's current financial position.

151. On 29 September 1997 Lawler met with Sellers and an assistant Mr Andrew Hede.

154. On 29 September 1997 Kyuss advised the Bank by facsimile that it had retained Fedor Kiraly of Vernons, solicitors, to represent it in future discussions with the Bank.

157. After 29 September 1997, Lawler approached the National Australia Bank ("NAB") to re-finance Kyuss and the NAB appointed an accountant, Mr Barry Jenner, to assess the business of Kyuss. About one week later, the NAB advised that a facility would not be granted.

160. The Bank decided to appoint a receiver and manager to Kyuss on 7 October 1997 after receiving the investigating accountants' report dated 6 October 1997.

163. The report from the investigating accountants was constituted by a ten-page letter signed by Sellers and a number of attachments. After referring to their terms of engagement, the accountants set out their findings under a number of sub-headings. The findings made by the accountants show the state of mind in which they entered thereafter upon the receivership. They were not relied upon, of themselves, as evidence of their truth. Some of these findings were:

"We are advised that traditionally the company operated as a supplier of furnishings to major organisations such as Qantas and Ansett for utilisation in their passenger lounges. Additionally, the company sold furnishings direct to the public from its trading premises. As a result of a reduction in spending by both Ansett and Qantas within Australia, the business has sought to obtain alternative markets. The company has now established relationships with a number of developers to provide all furniture for fully furnished apartments and hotels on a contract basis. It is in this area where the company perceives the majority of its future sales will be derived. [In substance the above was common ground at trial. ] ... We have met with Mr Lawler on two occasions to discuss the financial position of the company and additionally make an assessment of the viability of the business. As a result of these meetings, we have noted that although the company purchased the business in December 1996, and Mr Lawler assumed control at this time, Mr and Mrs O'Connor remain employed by the business and appear to have an active role in its management. It is our belief that Mr Lawler has little involvement in the day-to-day running of the business, and his knowledge in relation to the company's business and financial position is limited. [This last sentence was disputed at trial.] Mr and Mrs O'Connor appear to be active in the development of the contract work of the business. It would appear that many of these contracts have been predominantly obtained as a result of Mr O'Connor's contacts in the marketplace, and we therefore query that should Mr and Mrs O'Connor discontinue their involvement with the company, whether it could continue to source such works. We are advised by the Bank that Mr and Mrs O'Connor have entered into a service contract with the company, however we have not been provided with a copy of same and question whether there are any restrictions on them competing against the company either in these agreement or the original sale contract. We consider the company's accounting system to be sub-standard and unreliable, and as such, any information provided to both the Bank and ourselves cannot be relied upon. ... The company does not maintain any formal debtors' ledger either on a manual or computer basis. The company's invoicing system is a manual system and there is no method by which paid invoices are recorded and no ongoing reporting is maintained in respect of outstanding trade debtors. As such, we have serious concerns as to the reliability of the information provided to us (as detailed in Annexure 'B'). ... The company maintains a basic trade creditors' listing, which appears to be updated on an intermittent basis by the company's bookkeeper. Given the overall lack of controls in place, we consider the information contained therein to be unreliable. [] ... With the exception of a weekly wages summary book and wages book sorted by employee, there appears to be no system by which employee entitlements are monitored. As noted, the company is currently four months in arrears in the payment of group tax, and we suspect that the company is similarly in arrears in relation to the payment of superannuation. Company's bookkeeper has advised that although he calculates the amount of superannuation payable in respect of each employee, he is not responsible for the payment of same, and Mr Lawler has advised that he is unaware of the current position. The company was also unable to provide us with details of outstanding employee entitlements, such as annual leave. [] ... We consider the cash flow projection to be unreliable on the following grounds: * The projection provides essentially for an even distribution of sales over the relevant period. As the Bank is aware, the Walker contract is due for delivery on 14 December 1997. However, payment will not be received until 14 January 1997(), with any deposit payable prior to this date. Accordingly, the projections should provide for a sizeable cash inflow during January 1997(). * Under the terms of the draft Walker agreement, the company is required to provide a Bank guarantee to Walker Corporation for 10% of the fitout amount. We understand that this will equate to a guarantee for $65,844. * The cost of goods sold/direct costs contained within the projection, is calculated on a percentage basis of that month's sales. As noted, the Walker contract is due for delivery in December 1997, and Mr Lawler acknowledges that all sub-contractors' costs/direct costs will be payable at that time. Accordingly, the company is projected to have a sizeable outflow (approximately $535,000) during December 1997. * The projection is based on an assumption that payment for all sales is received during the month of the sale, which does not accord with the company's current trading practice. * Direct costs, such as costs of goods sold and outgoings, are based on historical information, which we have been unable to confirm. * The cash flow projection does not include an opening and closing bank balance so as to detail any funding requirements, which the company may have. Given the issues highlighted above, we consider the cash flow projection to be of little use in reviewing the company's funding requirements on a monthly basis although for a total period basis they may bear some correlation to the actual position. ... The above issues do not provide any comfort in respect of determining the current financial position of the business and the viability of future trading activities, and it is difficult to express an opinion in relation to same. Similarly, the company's bookkeeper was eager to point out that he was not an employee of the company, merely a consultant, and had no advisory capacity in respect of the running of the business. Such comments would appear to demonstrate concerns on his part. ... As noted, Mr Lawler envisages that the majority of future sales for the company will be derived from contract works obtained from developers for fit-outs of residential apartments and hotels. Mr Lawler has confirmed that a contract with Walker Corporation Limited ('Walker'') was executed on 26 September 1997. We are further advised that the contract has a value of $962,000, which is due for completion during December 1997. At the time of our review, Mr Lawler advised us that the executed copy of the contract was with Walker for their execution, and he provided us with a draft contract (Annexure 'G') which he stated was almost identical to the final document, with the exception of the price. As we have not been provided with a copy of the executed contract, we are unable to confirm its existence, and accordingly recommend that Mr Lawler be required to provide the Bank with an executed copy as a matter of urgency. We have also been provided with a costing for the Walker project, which details that costs will approximate $595,500. In support of this, we have been provided with a schedule detailing the direct costs for the project (Annexure 'H'). In our discussions with Mr Lawler, he has advised that on such projects, the company aims to achieve a profit margin of approximately 30% (inclusive of overheads). Mr Lawler further added that in relation to the supply of white goods and certain other items as part of the contract, there was effectively a zero profit margin, and that manufactured items such as sofas and chairs would therefore generate a profit margin of 60%-70%. It is difficult to review the accuracy or otherwise of these projections, given that there is limited financial information as to historical performance or detailed costings for the project. However, given the competitive nature of the industry in which the company trades, we query its ability to generate such margins in respect of a project of that size. An important term of the Walker contract is that payment will not be made until 30 days after the delivery date (14 January 1998). However, the company envisages that all suppliers will require payment on or about the delivery date (14 December 1997), therefore creating a cash requirement of approximately $536,000 as at 14 December 1997 (refer Annexure 'H'). Given that the company is already in excess of its approved overdraft limits, and that it has limited trade debtors or stock capable of conversion, we fail to see how the company will be able to fund the contract."

The accountants then dealt with the financial position of Kyuss as follows;

"We have conducted a review of the company's financial position, a summary of which is as follows: (a) Trade Debtors Although the company does not maintain a debtors' ledger, we have been provided with a schedule (enclosed as Annexure 'B') as at 28 September 1997, detailing outstanding trade debtors of $106,044. ... Should a formal appointment be made to the company, it would be envisaged that considerable time would be required to be spent to reconcile the ledger and confirm the validity of amounts detailed as owing therein. (b) Work in Progress Enclosed as Annexure '1' is a schedule which Mr Lawler advised detailed all confirmed orders which the company had. We note that of these orders, only the orders of Qantas and Ansett have been able to be confirmed by reference to supporting documentation, and note that we have been unable to sight the executed Walker contract. The remaining two orders (Queen Elizabeth Hospital and Quest Flemington) are yet to be confirmed. Accordingly, further information is required in this regard. (c) Plant and Equipment and Stock As part of our review, we have not conducted a valuation of the plant and equipment of the company, however, during our review of the company's premises, noted that such equipment was limited, given that the company's works are effectively limited to assembly and upholstery of furniture. As such, the equipment is estimated to have a minimal resale value. We have been provided by Mr Lawler schedules detailing relevant stock holdings of the company (enclosed as Annexure 'J') which may be summarised as follows: [151,723] ... (d) Employee Entitlements As noted, we are unable to express any opinion as to the current level of employee entitlements, given that the company has been unable to provide us with information in regard to same. However, we would consider it likely that the company has a substantial superannuation liability given its recent non-payment of Group Tax. (e) Unsecured Creditors We have been provided with two summaries as to current unsecured creditors. The first summary (Annexure 'K'), which was prepared by Mr Lawler, details creditors as at 28 September 1997 of $117,548.17. Subsequently, we have been provided by the company's bookkeeper with an additional summary (Annexure 'C') which he advises details unsecured creditors up to and including 23 September 1997 totalling $117,607.22. As previously noted, we have considerable doubts as to the accuracy of this schedule, given that only two months of the company's outstanding indebtedness to the Australian Taxation Office has been incorporated in the list, and additionally, the inclusion of no amount for outstanding superannuation contributions. Furthermore, as the company does not maintain an aged creditors' listing, we are unable to provide any comment as to the time period in which these amounts have been outstanding."

The accountants dealt with the security of the Bank:

"Enclosed as Annexure 'L' is a schedule detailing a preliminary estimate as to the security position of the Bank, based on information provided to us during the course of our review. Based on this analysis, we would consider that the current shortfall to the Bank would range between $70,000 (best case scenario) to $256,000 (worst case scenario). As you will note our security review has been based on estimations of assets values and the level of priority claims, and should be read accordingly. Should the Bank require a more detailed assessment we suggest that formal valuations be conducted."

After considering other options open to the Bank, the accountants concluded:

"In the event that Mr Lawler is unable to immediately obtain an alternative financier or adequately reduce the Bank's current exposure significantly in the very short term, we recommend that a Receiver and Manager be appointed. Given the likely cash shortfall which the company is expected to experience during December 1997, we would consider that the appointment of a Receiver and Manager would be required at or before this time. However, consideration should be given to the fact that if the company proceeds with the Walker contract, should the appointment be made at or about the delivery date for this contract, much of the contract value may be collected by a Receiver and Manager, thereby improving the Bank's security position. However, it is also noted that the draft Walker contract requires the company to provide a Bank guarantee in the sum of $65,844. On balance, given the requirement for a Bank guarantee, the company's very poor management controls and the inevitable deterioration of the working capital position whilst the Walker contract is progressed, we recommend the appointment of a Receiver and Manager as early as practicable, assuming Mr Lawler's refinancing attempts are not successful."

173. As at 10 October 1997, the outstanding balances of Kyuss's accounts with the Bank were:

177. On Friday 10 October 1997 Sellers and his partner Lockwood were appointed by the Bank as Receivers and Managers of Kyuss under the Bank's debenture.

180. The firm of which Sellers was a member was a firm of Chartered Accountants specialising in providing business recovery, reconstruction and insolvency services and Sellers was an Official Liquidator. Sellers came to the South Caulfield property at about 11.30 am on 10 October 1997. Sellers told Lawler that he had been appointed as receiver and manager. Sellers told Lawler that he was now in charge of Kyuss and that Lawler was redundant. Sellers also told Lawler that Lawler had no power to negotiate any refinancing deal on behalf of Kyuss. Sellers spent approximately an hour at the premises. He left two members of staff there.

183. Kathryn Elizabeth Locke ("Locke"), was a manager in the employ of Sims Lockwood. She had the day to day running of the receivership (with one assistant named Robinson). On 10 October 1997 Locke accompanied Sellers when he went to the premises of Kyuss. Locke testified that the Receivers sought access to information, documentation and records in relation to, inter alia, the debtors, employees and creditors of Kyuss. There were no computerised records. Later that day Mrs O'Connor gave Locke some copy invoices and a handwritten list from which she reconstructed a debtors' ledger. Kyuss did not have any readily available or current ledgers, journals or financial statements. There were two filing cabinets but I am satisfied that the only relevant information available to Locke therefrom comprised disorganised bundles of documents, in particular, invoices and statements from creditors, invoices to customers and some banking records. In addition, there were some records of work in progress. However, most of the documents were old and of no current relevance.

186. Locke walked around the premises. She saw very little stock or plant and equipment. It did not appear to her, she testified, to be an operating business of any material size. The area used for an office was in her view "disorganised and unbusinesslike".

189. In relation to her state of knowledge concerning the Walker job, Locke had been told on 10 October 1997 (so her notes reveal):

She also knew that there was a mock-up room on the site but she did not go there to inspect it. She was told that the specifications had been largely done and that the orders had been placed with suppliers to make sure the required quantities were available. She constantly asked the O'Connors (mainly Mrs O'Connor) for more precise details but none were provided. In particular, having been told that there was $100,000 worth of work in progress, precise details were not provided despite frequent requests.

201. At the request of the Receivers, Dominion Valuers and Auctioneers inspected the plant and equipment at Kyuss's premises on 10 October 1997. They subsequently prepared a valuation dated 13 October 1997. The valuation valued the plant and equipment and stock of Kyuss at $154,115 on the basis of "market value for existing use" and at $36,315 on the basis of "auction realisation".

204. Mr O'Connor first learned of the appointment of the Receivers when, in mid morning of 10 October 1997, Kyuss's receptionist called him while he and his wife were inspecting the mock-up on site for the Walker contract. At the time they were discussing a change to the cabinetry with Mr Constantinou, the managing director of Quest. The receptionist handed the call to Sellers who asked that Mr O'Connor get back to the office immediately. The O'Connors returned to the office.

207. Upon his return to the office, Sellers told Mr O'Connor that the business would close its doors within the next 10 days (he expected it would take 10 days to complete works in progress). Sellers told Mr O'Connor that he was to run the business for that time and that Lawler would no longer have any role in the business. I am satisfied that Mr O'Connor uttered words to Sellers which in substance conveyed to Sellers that the O'Connors had only stayed on with Kyuss to assist Lawler and that otherwise they "would not be around". Sellers then asked Mr O'Connor whether he was interested in buying back the business.

210. On Tuesday 14 October 1997 Mrs O'Connor told Locke, upon inquiry, that there was work in progress associated with the Walker contract valued at $100,000. Locke asked for details and Mrs O'Connor said that Mr O'Connor could give the details. On the same date Mr O'Connor submitted an offer to purchase "the Building and Business" for the sum of $460,000. Sellers rejected the offer and invited an offer for the assets of the business only. Mr O'Connor was in New Zealand on Wednesday 15 October 1997 but on about this date he offered to buy the business for $120,000 and Sellers said that he wanted $200,000 for it. Mr O'Connor had spoken to Mr John Marriott of the NAB and asked him how much the bank would be prepared to lend him. Marriott said that the bank would lend a maximum of $120,000. On Thursday 16 October 1997 Sellers received an offer by facsimile from the O'Connors to purchase the "stock, work in progress, pending contracts, plant [and] equipment, for $120,000". Upon receipt of that offer Sellers told Mrs O'Connor that he would accept $140,000 on condition that employee entitlements were assumed by the purchaser.

213. Later that day Mrs O'Connor advised Sellers that $120,000 was the highest they would go but that they would assume all employee entitlements. A fax to this effect was sent to Sellers later that day. This offer equated to a value, in Sellers' view, of approximately $163,000, given the estimated $43,000 in employee entitlements saved. In addition, the business's debtors were excluded from the sale. At or about the trial date, Sellers had realised approximately $35,000 from these debtors and collection activities were continuing.

216. On 10 October 1997 Lawler had consulted a solicitor, Mr Brian McMahon, and instructed Mr McMahon to see if he could negotiate a solution with the Bank and, if necessary, arrange for re-financing of Kyuss's loans. Mr McMahon approached a finance broker, Mr Ian Shearer, to assist.

219. By a "without prejudice" letter dated 14 October 1997 from a company, Nasot Pty Ltd, to McMahon, headed "To Whom it May Concern", it was "confirmed" that Nasot had agreed to purchase a "one third share" in Kyuss for $300,000.00, settlement to take place after the execution of all necessary documentation. Mr Edgar C Burke signed the letter as a director of Nasot and wrote to Mr McMahon at Lawler's request. Also, by a letter to Ian Shearer dated 14 October 1997, a conditional offer was made by Feingolds Solicitors, on behalf of a client, to provide a first mortgage loan of $422,000 to Lawler on certain conditions.

222. Mr McMahon spoke to Mr Burke who told him that it would take a couple of weeks for him to come up with the money. Mr McMahon wrote to the Bank by facsimile letter on 15 October 1997. In that letter he proposed repayment to the Bank by Kyuss of $722,000 on or before 31 October 1997, the balance of the outstanding facilities in two further instalments on 14 January 1998 and 14 March 1998, the immediate removal of the Receivers and the assignment to the Bank of the proceeds of the Walker contract.

225. Mr McMahon wrote again to the Bank by facsimile letter on 16 October 1997, for the attention of Mr Barry-Murphy, stating:

"I refer to my discussions with your Mr Thompson yesterday and now provide the following information in respect of my client's offer on a Commercially in Confidence basis: A: Copy of a loan offer issued by Mr Ian Shearer. B: An offer from Nasot Pty Ltd (Mr Ted Burke, Director) to purchase a 1/3rd share in the business known as Trinity Furniture and Wharehouse.[sic] I await your response to my client's offer contained in my letter of 15 October 1997, so that I can commence to process the refinancing application and prepare the necessary legal documentation in relation to the purchase of 1/3rd share by Nasot Pty Ltd in Kyuss Express Pty Ltd."

229. Mr Barry-Murphy spoke to Mr McMahon in relation to this correspondence on 16 October 1997, indicating in substance that the Bank required cash or cleared funds within 2 days (i.e. by the end of Friday 17 October 1997). Mr McMahon's proposals were also rejected by the Bank by letter dated 16 October 1997. Sellers was aware of the foregoing matters.

232. Kyuss employed a part-time book-keeper (Murray Gilmore) who used to come to the premises every Thursday. On Thursday 16 October 1997 he produced a wages book and some information including a list of creditors which he provided to Locke's assistant, Robinson.

235. The negotiations between Sellers and the O'Connors were concluded on or about 22 October 1997 when, after a short discussion, the terms subsequently reduced to writing were in substance agreed. I find that Sellers then said to Mr O'Connor, in substance:

"I would have sold you the business for less. That was easy, I wish all my work was this easy . . ."

Mr O'Connor also testified that, during the course of negotiations, Sellers mentioned the Walker contract and said that it was an ongoing contract that gave the business value and goodwill.

240. Thereafter Sellers instructed Lander and Rogers, solicitors, to prepare an agreement for the sale of certain of the assets of the business to the O'Connors (i.e. Laskin.) The agreement was prepared and executed by all parties on Friday 24 October 1997 (2 weeks after the Receivers had taken possession). Under the agreement, Kyuss sold to Laskin the "Assets" defined as "the Contracts, the Equipment, the Materials, the Stock and the Work in Progress". The "Contracts" were specified in "item 6 of Schedule 1". Item 6 in turn referred to Annexure "C". Annexure "C" was a copy of an undated and unexecuted Fit Out Agreement between Walker, Kyuss and William Street Operations Pty Ltd. The Fit Out Agreement related to 56 apartments at 172 William Street, Melbourne with a total fit-out cost of $658,437 and provided for commencement of the fit-out on 1 December 1997 or such date either 14 days before or 14 days after that date as Walker might notify to Kyuss with a Completion Date, 14 calendar days from the Commencement Date. On or about 28 October 1997 Sellers received a bank cheque in settlement of the agreement with Laskin.

243. Following this sale to the O'Connors, Sellers was approached by Williams and Williams, solicitors, who were acting for the O'Connors in relation to the Walker contract, to provide a Deed of Cancellation of the Walker contract. Apparently Walker negotiated directly with the O'Connors and made a new contract with Laskin. I note Mr O'Connor's evidence that Laskin completed the Walker contract in about February 1998.

246. Sellers testified that, to the best of his knowledge and belief, Lawler did not have any substantial involvement or contacts in relation to the operational side of the business, but instead purportedly focussed on its financial management. He testified that he was told by Lawler that the O'Connors were retained by the business and had entered into service agreements with Kyuss but that copies of the service agreements were not provided to him at the time of his appointment.

249. In relation to the original sale of the business from Laskin to Kyuss, Sellers deposed that he had ascertained that the Bank had provided finance in the amount of $800,000 to Kyuss to purchase the business from Laskin and the real property from another of the O'Connors' companies. In addition, the Bank provided an overdraft facility of $50,000. Of these amounts the amount of $300,000 comprised a bill facility which was due for repayment in late 1997. Funds for the repayment of this bill facility were to be provided from the sale of shares in a mining company held by Lawler. This did not however occur.

252. Sellers deposed that in relation to the sale of shares in the mining company, Lawler advised him that the transaction had been negotiated by a third party and that part-payment was received by way of a quantity of gold bullion which Lawler believed was brought into the country by the third party, but not declared to the relevant authorities. Lawler told Sellers that the gold bullion was given directly to the O'Connors in part-payment of the purchase price for the business. Sellers said that he was unable to obtain confirmation from the O'Connors as to the existence of this gold bullion transaction. Although this and related issues occupied some court time, final submissions made clear that they were of no relevance to the real issues.

255. Sellers testified that a copy of the sale of business contract between the O'Connors and Kyuss had been requested from Lawler. Lawler at first advised that his solicitor was interstate. However, after further requests, Sellers said that only a copy of the sale of real estate contract was received, which Lawler advised was the only document provided by his solicitor. Sellers said that as a result he was never able to form any view as to the actual purchase price paid for the business by Kyuss nor the terms upon which the sale was entered into apart from the information which had previously been provided to the Bank by Lawler. Sellers said that he therefore had significant doubts as to whether the sale figure of $650,000 was ever paid for the business.

258. Sellers testified that the business was in his opinion never going to be an entity which could merely be advertised for sale in the market generally. He had held that opinion due to a number of factors:

(a) his previous experience in trying to effect sales of furniture businesses as a receiver and manager, where he found it exceedingly difficult to sell such businesses as going concerns;

(b) the poor state of the financial records of the business upon his appointment, which made it almost impossible in his opinion for any would-be purchaser to conduct a "due diligence" of the business;

(c) the lack of any written long-term contracts or orders for the business at the time of the appointment, except for the "Walker contract", which he considered to be of dubious value to the business;

(d) the paramount involvement of the O'Connors in the business because he was of the view that in order for the business to have any ongoing value, it was necessary that the O'Connors be retained in some way but Mr O'Connor had told him that if the receiver sold the business to anyone other than O'Connor, he would not "go with it".

264. In relation to the Walker contract, Sellers said that he had considered that the Walker contract, which required significant working capital and a bank guarantee to be sourced prior to any proceeds being received thereunder, was a factor which would affect the price obtained at any sale of the business.

267. Sellers testified that on 29 September 1997, Lawler told him that Kyuss had executed a contract with Walker totalling approximately $960,000 and that this contract was due for completion during December, 1997 and included a profit margin of approximately 30%. Sellers wished to substantiate what he thought was an unusually high profit margin and requested, at this time, a copy of the Walker contract. Lawler advised him that the executed copy of the contract was with Walker for execution. Lawler then provided a draft contract which Lawler stated was almost identical to the final document, with the exception of price. Sellers said that during his period of appointment as Investigating Accountant and as Receiver and Manager and until discovery in this proceeding he never saw a copy of the executed Walker contract.

270. Sellers deposed further in relation to the Walker contract that, inter alia:

(i) costings prepared for the Walker contract indicated total external costs of approximately $595,500;

(ii) payment under the contract was not due to be made until 30 days after the delivery date (ie January 1998), with no interim deposit being received. However, it was envisaged by Kyuss that it would be necessary for all suppliers to receive payment on or about the delivery date (ie December 1997). As such, the structure of the contract was going to create a cash requirement of approximately $536,000 as at December 1997. Given that Kyuss was already in excess of its approved overdraft limits, and that it had limited trade debtors or stock capable of conversion, it appeared impossible for Kyuss to be able to fund and complete the contract;

(iii) under the contract, Kyuss was also required to provide a bank guarantee to Walker for 10% of the fit-out amount ($65,844). Kyuss did not have the funds or available facilities to provide this guarantee;

(iv) tight deadlines for completion of the work were imposed and there were significant financial penalties if these deadlines were not met. Without the assistance of the O'Connors, it was doubtful that Kyuss could have met these deadlines; and

(v) the appointment of a receiver and manager was an event of default under the contract, and entitled Walker to immediately terminate it should it wish to do so. Therefore, there was no guarantee that the contract had any ongoing value to Kyuss or to any would-be purchaser of the business.

276. Sellers said that, following his appointment, it became evident to him that while Kyuss may have had a significant opportunity in terms of the Walker contract, he was not as receiver and manager in a position to obtain the funding required, nor was he in any position to retain the O'Connors on a long-term basis and therefore the contract effectively represented little value. He concluded that the only readily apparent way to maximise "the value of the contract" was to sell the business for the best price possible to the O'Connors.

279. Sellers testified that he did not believe that the Walker contract was something that could easily have been assigned to a party other than the O'Connors, for the following reasons:

(i) the O'Connors were well known and trusted by Walker;

(ii) the O'Connors were fully aware of the requirements of the Walker contract. This included the specific design requirements for the fit-out. Obviously, this involved liaising with various suppliers and sub-contractors etc to ensure that the fit-out could be completed. Sellers had doubts that third parties could have continued with the fit-out plans that were already in place at the time that Kyuss went into receivership, so as to meet the various timeframes under the Walker contract. Obviously, uniformity in the fit-out was essential and this necessitated uniformity of supplier;

(iii) the O'Connors had contacts with suppliers. For example, Mr O'Connor went to New Zealand during the sale negotiations, to inspect the Fisher and Paykel plant. Fisher and Paykel were to supply all appliances under the Walker contract;

(iv) the O'Connors were known on the Walker site and despite being "non-union labour" were allowed onto the site without incident.

285. In summary Sellers deposed that in his opinion the O'Connors were the only people in a position to obtain an assignment or re-execution of the Walker contract and ensure that continuity and conformity of supply was obtained within the relatively short time frame available and probably the only people who could complete the contract on time.

288. Sellers considered that in light of Kyuss's inability to complete the Walker contract, the value of the business essentially was represented by the value of its debtors, stock, plant and equipment, and client list. At the time of his appointment, due to a run-down in stock, these items were of negligible value. Given the valuations received of plant and equipment and stock and that some of the stock sold was obsolete and included many componentry items which would be difficult to realise, Sellers considered that the consideration received of $120,000 (together with the purchaser assuming employee entitlements of $43,000) was satisfactory, particularly in view of the fact that there were minimal books, records and documents. Any meaningful due diligence by any prospective purchaser would have been impossible. Further, in his opinion the physical condition of the business was not conducive to any sale.

291. I interpolate that Sellers' evidence did not make explicit whether his opinions (summarised in paras. [77] to [84] ) were held in October 1997 as well as at the time of giving evidence but I am satisfied that in substance, if not in full detail, they were opinions which he held at the time of sale.

294. On 11 December 1997 the South Caulfield property was sold for $815,000.

297. On or shortly after 5 March 1998 Lawler received a letter from the Bank which reported that the sale of the South Caulfield property had settled on 4 March 1998 and that receipts totalling $777,495.71 were received and applied to the debts of Kyuss. The letter also reported that the debt then outstanding was $85,534.13.

300. Lawler complained to the then Australian Securities Commission ("ASC") about the conduct of the receivership. As a result and in reply to correspondence from the ASC, Sellers wrote to the ASC by facsimile letter dated 26 May 1998, stating in relation to the sale of the business (inter alia):

"d) Due to the paramount involvement of the O'Connor's in the business, the business was never going to be an entity which could merely be advertised for sale in the market generally. For the business to have any ongoing value, it was necessary that the O'Connor's be retained in some way.

e) A further problem encountered by the business was the existence of future contracts, which required significant working capital to be sourced prior to any proceeds being received. In particular, the company was said to have entered into a major development fit out with Walker Corporation whereby:-

i) The contract, which was not sighted, was said to have a value of $962,000 and was due for completion during December 1997.

ii) Costings prepared for the Walker project indicate total costs would have been approximately $595, 500.

iii) Payment under the contract was not to be made until 30 days after the delivery date (ie. January 1998), with no interim deposit being received. However, it was to be necessary for all suppliers to receive payment on or about the delivery date (ie. December 1997). As such, the structure of the contract was going to create a cash requirement of approximately $536,000 as at December 1997. Given that the company was already in excess of its approved overdraft limits, and that it had limited trade debtors or stock capable of convulsion, it appeared impossible for the company to be able to fund the contract.

iv) Under the contract, the company was also required to provide a Bank guarantee to Walker Corporation for 10% of the fit out amount. We understand that this would have equated to a guarantee of $65,844.

As such, following my appointment, it became evident that while the company had a significant opportunity in terms of the Walker contract, it required material funding advances so as to be able to undertake the work, and it also required the ongoing cooperation of the O'Connor's.

As Receiver and Manager, I was not in a position to obtain the relevant funding required, nor was I in any position to retain the O'Connor's on a long-term basis. As such, at this time, it was determined that the Walker contract was unable to be completed by the company and therefore, effectively represented no value to the company.

In light of the company's inability to complete the Walker contract, the value of the company essentially then vested in the value of its plant and equipment, stock and client list.

At the time of my appointment due to a rundown in stock, these items were of negligible value. I consider that the figure of $120,000 obtained for the sale of the business, which essentially represented a purchase of remnant materials and plant and equipment, was a good result. I believe that this result was over and above what would have been achieved on an auction realisation basis, should a going concern sale of the business not have eventuated.

I note that the ability of the O'Connor's subsequently complete the Walker contract and achieve whatever profit was possible under that contract, is due to their own personal endeavours and the ability to obtain the requisite working capital funding required to complete the project. The company was never going to be in this position.

I trust the above position is to your satisfaction and provides an adequate account of the realisation process undertaken in the administration. At present, the administration is continuing for the purpose of collecting remaining debtors of the company, which did not form part of the sale of business."

315. In response to further queries, Sellers again wrote to the ASC by facsimile letter dated 3 June 1998 stating (inter alia):

"1. Sale of Business Process As you will be aware, my appointment as Receiver and Manager of the above company on 10 October, 1997 was disputed by the former Director of the company, Mr Peter Lawler. As I understand, Mr Lawler's bases of objection to the appointment related to:-

i) the short notice period enforced by the Commonwealth Bank of Australia ("the Bank") under its Notice of Demand; and

ii) the fact that at the time of my appointment, Mr Lawler stated that he was already negotiating a sale of the business.

Primarily due to reason ii) above, following my appointment the Bank allowed Mr Lawler a period of grace within which to seek refinancing of the Bank debt or alternatively, orchestrate a sale of the business. In the interim, as Receiver and Manager I continued to advertise the company for the sale as a going concern but was to delay any sale decision until Mr Lawler's offer/actions could be finalised. Mr Lawler was given until Friday, 17 October 1997 to finalise any such offers. In that interim period between my appointment and 17 October 1997, the only correspondence received by my office in relation to a refinancing proposal by Mr Lawler is that as attached. Following receipt of this correspondence, the Bank obviously requested further information as to whether funding of the proposal had been confirmed. In spite of the deadline within which Mr Lawler had to act, no further information as to confirmed sources of funding was received and as such, in the week commencing Monday 20 October 1997, I concluded a sale of the business to the O'connor's. In relation to your complainant's allegation that the Receiver and Manager was in possession of an offer for one third of the `Trinity Furniture' business for $130,000, (sic) I can provide no further details."

323. Section 420A(1) of the Law deals with the duty of care of a controller (which includes a receiver or receiver and manager - s. 9) in exercising a power of sale in respect of property[1] of a corporation. A controller must take "all reasonable care" to sell the property for:

"(a) if, when it is sold, it has a market value - not less than that market value; or

(b) otherwise - the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold."

329. At the outset I noted that by its statement of claim Kyuss claimed damages in respect of the alleged breach of duty owed by the Receivers to Kyuss to sell the property of Kyuss for the best price that was reasonably obtainable having regard to the circumstances existing at the time when the property was sold (paras. 11-12 statement of claim).Thus the statement of claim framed the plaintiff's cause of action in terms of s. 420A(1)(b) of the Law. However, in opening, the plaintiff placed its reliance upon a breach of s. 420A(1)(a) of the Law and further contended that the Receivers had sold the business of Kyuss for substantially less than its market value. Both parties accepted that s. 420A(1)(b) only came into play when s. 420A(1)(a) could not apply because the property had no market value[2].

332. Neither party contended that the business of Kyuss had no market value, although they differed fundamentally as to what that market value was. It would follow - and the parties appeared to proceed upon this basis - that s. 420A(1)(a) was the applicable provision for the purposes of this case.

335. In relation to the proper construction of s. 420A, I note that it is not easy to rationalise the concept of a property which has no value at all being saleable for anything more than a nominal price, so that, unless "market value" means something more restrictive than "value", there is little room for the operation of s. 420A(1)(b) which speaks of the best price that is reasonably obtainable[3]. However, in this case the parties both accepted that "market value" referred to the traditional Spencer's case test which enables an objective determination of a hypothetical value. The plaintiff contended that the market value of the business was substantially more than the price obtained from Laskin. The Receivers contended that the market value was no more than that received upon the sale to Laskin.

338. The reference to "market value" in s. 420A(1)(a) no doubt serves to emphasise a controller's obligations in ordinary circumstances to take all reasonable steps to advertise or notify the availability of a property to potential buyers and to ascertain the market value of the property before selling[4].

341. The plaintiff pointed to a number of cases which illustrated the propositions that in most instances: a controller should advertise sufficiently to bring the property to the attention of prospective purchasers[5]; a controller should test the market in some way such as by advertising and responding to all inquiries and expressions of interest[6].

344. The plaintiff submitted that in breach of their duty the Receivers acted with undue haste in the sale of the business, selling it to Laskin only two weeks after their appointment. The plaintiff further submitted that the Receivers had (contrary to their false statement in a letter to the ASC) neglected to advertise the business for sale as a going concern and neglected to obtain a valuation of the goodwill of the business or of the business's contracts. It was also submitted that the Receivers had failed to investigate the offer by Nasot Pty Ltd to purchase a one-third share of Kyuss for $300,000 and failed to enlist the assistance of Lawler in the sale of the business.

347. The plaintiff claimed that as a result Kyuss had suffered loss and damage. In opening, this loss was put as the difference between the value of the sale to Laskin ($163,318) and the market value of the business (between $670,000 and $770,000) - thus damages of at least (in round figures) $500,000. However, in closing submissions, the plaintiff put its loss in a number of other ways as well, which I will deal with in due course.

350. For reasons which will hereafter appear, I am not satisfied on the evidence that the market value of the business of Kyuss exceeded the value of the sale to Laskin. However I do not think that Sellers, who made the decision to sell, had reasonable grounds to reach that conclusion at the time of the sale, although his commercial experience probably led him to suspect that that was the position. Nor do I think that Sellers had reasonable grounds to believe that he had achieved the best offer from the O'Connors.

353. In my opinion, the Receivers failed to take all reasonable care to sell the business either for not less that its market value whatever that may have been or, insofar as relevant, for the best price reasonably obtainable in the circumstances.

356. Given that the Walker contract was the main asset of the business, the Receivers were negligent in failing to make inquiries or hold discussions with Walker and Quest in order to ascertain whether or on what terms the benefit of that contract might be passed to a purchaser of the business. The Receivers took insufficient steps to properly ascertain, or attempt to ascertain, the market value and prospects of the Kyuss business both with and without the Walker contract and any other Quest business. They took no steps to investigate the bona fides and timing of the Nasot offer, or to negotiate with Nasot, in order to see whether a competitive bid might be developed. After all, an offer to buy one-third of the business for $300,000, if achievable, was better than the O'Connors' offer for the whole of the business.

359. Importantly, the Receivers were negligent in failing to advertise the sale of the business and to call for tenders for the purchase of the business. At worst, such a process would have established that there was no offer other than from the O'Connors or no offer better than that obtained from the O'Connors. Given the special value of the business to the O'Connors, the failure to adopt that procedure also eliminated any chance that the O'Connors might be induced to increase their offer. Instead, Sellers sold the business to the O'Connors with undue haste while failing to take those steps which Receivers acting reasonably ought to have taken to protect the interests of Kyuss as contemplated by s. 420A of the Law.

362. I turn to the question whether Kyuss suffered loss and damage as a result of the Receivers' said breaches of duty. The Receivers contended that in any event no such loss had been proven. In that regard, it is necessary first to consider the significance of what I will call the Quest connection, next the evidence as to the market value of the business, then the significance of the Nasot offer and finally other aspects of the claim for damages.

366. The Receivers said in their written submissions that "[a]lthough no executed copy has been tendered it may be assumed that the [Walker] contract was executed on 9 October 1997." I understand that to be a concession that Kyuss executed the Walker contract on 9 October 1997 and not a concession that any other party executed the Walker contract on that or any other date. I am not satisfied that Kyuss had executed the Walker contract on any date prior to 9 October 1997 but nothing appears to turn on the precise date of execution by Kyuss. There was no evidence, or no acceptable evidence, that the Walker contract had been executed at any time by the other proposed parties, namely Walker and William Street Operations Pty Ltd ("the Quest company"). However the Receivers were content to make their submissions on the basis that the Walker contract was in existence, namely, an agreement upon the terms contained in the unexecuted Fit Out Agreement in evidence, under which Kyuss had been retained to fit-out apartments at 172 William Street, Melbourne at the request of Walker and with the consent of the Quest company. In substance, the Receivers did not seek to resist Kyuss's stance that the Walker contract had been adopted by conduct of the parties.

369. However (as the Receivers submitted) the position was that:

(a) Kyuss was not in a financial position to complete the Walker contract nor had it provided the bank guarantee for 10 per cent of the fit-out amount required by cl. 5.2.2 of the Walker contract;

(b) Walker was entitled to terminate the Walker contract by reason of the appointment of the Receivers (cl.14.4);

(c) Kyuss had no power to assign or transfer any of its rights or obligations under the Walker contract without the prior written consent both of Walker and of the Quest Company (cl.17.6).

375. No evidence was called from any witness from Walker. However, evidence was given by Paul Steve Constantinou who was at all relevant times the chairman of the Quest group of companies which, by way of a franchise network, operated serviced apartments. He said that in 1997-1998 a Quest company entered into an agreement with Walker to lease 55 apartments at 172 William Street Melbourne on the completion of certain agreed works. The agreement provided that Walker would be responsible for purchasing and arranging for the installation of the furniture and other contents of the apartments.

378. Constantinou said that he suggested to Walker that he consider appointing Mr O'Connor as the subcontractor to conduct the fit-out. Constantinou had first come to know about Mr O'Connor and become familiar with his work during his involvement in a Quest project in Dandenong.

381. Constantinou testified that "the fit-out business is a notoriously fickle one and therefore the only safeguard when appointing a subcontractor to undertake a fit-out is their general reputation in the business and their prior working history".

384. Constantinou testified in substance that whatever the particular corporate entity involved in the fit-out at 172 William Street Melbourne he was only prepared to deal with an entity which was operated by Mr O'Connor. He had not been aware that Kyuss was owned or controlled by Lawler whom he had never met.

387. He said that the completion of the fit-out was urgent and that if the Receivers had sold the business to anyone other than Mr O'Connor, the Quest company would have "taken the fit-out ourselves and managed it ourselves."

390. I am satisfied that there was no real likelihood that the Quest company would have agreed that Walker should allow any entity to take over the Walker contract from Kyuss other than an entity associated with Mr O'Connor. This finding has considerable bearing upon the plaintiff's claim for damages because, as Mrs O'Connor's evidence confirmed, the Walker contract was the main contract which Kyuss had in October 1997. The evidence, including that of Mrs O'Connor, also leads to the conclusion that the Quest connection was a very substantial part of Kyuss's goodwill but that the prospect of future work for the business coming from Quest rested upon the continuing involvement of Mr O'Connor. I also accept Mrs O'Connor's evidence that: "There was a lot of other work going on, because we had the shop, you would have individual orders going through. You know, 20,000 a month, 30,000 a month." However the evidence does not make at all clear how Mrs O'Connor's estimate of turnover of work, other than Quest work, would support any and what assessment as to the profit of the business or its value, in the absence of work from Quest.

394. Howard George Tily, a well qualified accountant with experience in investigations, audits and the valuation of businesses and in most aspects of a private general accountancy practice, testified on behalf of the plaintiff that in his opinion the value of the business conducted by Kyuss as at 10 October 1997 was between $670,000 and $770,000. This valuation was based on a future maintainable earnings calculation (see page 1 of Exhibit "P") as follows:

398. The annualised NPBIT for 1996-1997 of $146,370 was calculated by taking a net profit before tax of $73,054, adding back interest paid, and annualising the result. The net profit of $73,504 was derived from the Kyuss "draft accounts for discussion purposes only" for the period December 1996 to 30 June 1997. I am satisfied on the whole of the evidence that these accounts were substantially accurate.

401. The estimated NPBIT for 1997-1998 of $734,690 was calculated on the basis of an estimated net profit before tax of $653,090. The estimated profit from the Walker contract was a major element in this estimate of $653,090.

404. Mr Tily took the "initial" value of the Walker contract of $970,000 and, for the reasons he gave, applied a net profit percentage of 20.7%, resulting in a forecast profit (in round figures) of $200,000. Mr Tily also acted upon instructions given to him that "the ultimate value of the [Walker] contract was $1.3 million ". Applying 20.7% to that value, he forecast a profit of $269,000. Mr Tily's valuation of future maintainable earnings was based on an average of two years only - one annualised period of historical profit and one year of estimated profit. He did not (correctly I think) seek to rely upon the earnings of the business before it was purchased by Kyuss because the nature of the business had changed.

407. However, there are in my view a number of flaws underlying Mr Tily's calculations which give his valuation little or no validity:-

(i) a major flaw is the failure to take into account in estimating the future profit of the business in 1997-8 the reality that the Walker contract would be lost as a result of the receivership and/or that this and other work from Quest would not be retained or obtained in the absence of Mr O'Connor. I am satisfied that it was most unlikely that Mr O'Connor would have taken employment with any purchaser of the business and the plaintiff did not contend that he would have been under any legal obligation to do so;

(ii) the evidence that the contract sum of $658,000 contained in the unexecuted Walker contract had increased was most unsatisfactory - this written amount would yield only approximately $130,000 net profit;

(iii) taking the higher Walker contract profit estimate of $269,000, Mr Tily did not set out precisely how the balance of $384,000 making up the sum of $653,090 had been calculated by him. Mrs O'Connor spoke of "other work" totalling at best $360,000 in sales per annum. Applying to that the "normal" profit percentage calculated by Mr Tily, of 10.8%, this would only yield an additional $39,000 of estimated net profit before tax. However, it seems that Mr Tily's estimate of $653,090 must have been substantially based upon what he described as "the expectation that the business would obtain contract work to fit-out serviced apartments and that the business had been awarded some contracts of this type and commenced building prototypes and production for some of these contracts". But that expectation was subject to the risks already referred to. Any attempt to make into account specific risk factors would yield a much lower valuation. To illustrate this, a forecast net profit of $300,000 for 1997-8 would yield a valuation of about $112,000 for the business assuming the rest of Mr Tily's calculations and formulae were unaltered;

(iv) Mr Tily assumed that the cashflow projection for Kyuss (Annexure HT-1) was an accurate and realistic forecast when prepared - what part this assumption played in his estimate of net profit for 1997-8 is not disclosed but there is no satisfactory evidence that this projection was either realistic or relevant to Kyuss's business in October 1997;

(v) Mr Tily noted as part of his assumption that Laskin had sold the land and business to Kyuss for $1.3m of which $450,000 was appropriated to goodwill. To the extent that Mr Tily took into account this goodwill figure for the purpose of verifying or cross-checking his valuation, it was in my view of no weight particularly having regard to the special relationship of vendor and purchaser and the curious nature of the arrangement for payment of the balance of the contract sum of $500,000 (which in fact was never paid). In fact, only $150,000 was paid by Kyuss for the business - all lent by the Bank. In addition I note that Laskin, in its last trading period from 1 July 1996 to 10 December 1996, had a net operating loss of $46,210;

413. In the end, I am not satisfied that the business had a market value in excess of the value of the sale to Laskin. The key point is that the Walker contract probably added no value to the business unless the O'Connors were the purchasers.

416. It is convenient to deal here with another contention of the plaintiff relating to the Walker contract. It was said by the plaintiff that the value of the business included the work in progress under the Walker contract, worth $100,000, but that this had not been taken into account on the sale to Laskin. I am not satisfied that there was work in progress under the Walker contract worth $100,000 or any other significant sum. I am satisfied that to the extent that Kyuss had stock and materials on hand (with the exception of prototypes at the mock up site) it was valued for the Receivers and taken into account on the sale. In addition, there were stock and materials on order. There was no evidence as to how much (if any) had been ordered and paid for. There was some evidence that much of what had been ordered by Kyuss had not been paid for by Kyuss and later had to be paid for by Laskin. I am satisfied that the plaintiff has failed to demonstrate a loss put on this basis.

420. As recited earlier, Nasot Pty Ltd, by "without prejudice" letter dated 14 October 1997 addressed to Lawler's solicitor, had "confirmed" that Nasot had agreed to purchase a "one third share" in Kyuss for $300,000, settlement to take place after the execution of all necessary documentation. The letter was signed by a director of Nasot, Mr Burke, who had been a friend of Lawler for about 20 years. Mr Burke shortly thereafter told Mr McMahon that it would take a couple of weeks for him to come up with the money. Mr Burke, a certified financial adviser, was called as a witness by the plaintiff.

423. Mr Burke testified by his witness statement that he had on four of five occasions between June and October 1997 lent Lawler sums ranging from $4,000 to $9,000 "to help him with cashflow and the payment of wages for the business of [Kyuss]." Mr Burke testified that, shortly after 10 October 1997, Lawler came to see him and told him of the appointment of the Receivers and of the amount owed by Kyuss to the Bank. Lawler also told him of the details of the Walker contract and that Kyuss expected to make profits in excess of $200,000 from that contract. According to Burke, Lawler also told him that when the value of the work and materials already supplied by Kyuss (payment for which had not been received) was added to the expected profit, the value of the Walker contract was between $300,000 and $400,000. Lawler made some other positive statements relevant to the future prospects of the business and gave Burke a projected cash flow for the business. Lawler then asked Burke if he was interested in buying one-third of the business. Burke deposed that on the basis of the foregoing and his "knowledge of the business" he decided that he was prepared to buy one-third of the business for $300,000.

426. By a supplementary witness statement, and by a third verified witness statement prepared from his instructions by the Receivers' solicitors, Burke made clear (as appears from his letter) that his offer was not to purchase one-third of the business alone but one-third of Kyuss (the company). As Kyuss was a trustee, presumably the intent of the offer was to purchase from Kyuss one-third of the total undertaking of Kyuss (including the real estate). This is confirmed by Burke's reference to his intent to subdivide and develop the premises. In his supplementary statement, Burke added that his intent had been to clear the debt to the Bank as follows:

[I note that these sums do not take into account the arrears due to employees of $43,000.]

431. The valuation of the business implicit in Nasot's offer for one-third of Kyuss was nearly $1,000,000, calculated as follows:-

435. The letter from Nasot was marked "without prejudice", that being intended in my view to preclude any possibility that the offer might be capable of acceptance or lead to a binding contract. It was delivered to Lawler's solicitor for his utilisation on behalf of Lawler but Nasot made no attempt to approach the Bank or the Receivers in relation to the offer. The offer, made by a certified financial adviser, was made without any attempt to verify the financial position of a heavily indebted business in receivership and yet placed an implied value upon the business of nearly $1,000,000. I am satisfied also that Burke did know that further substantial sums would be required to finance the Walker contract, which Kyuss did not have. I am not satisfied that it was at all likely that Nasot would have followed up this offer, if further time or opportunity had been allowed, with any like offer capable of acceptance. I do not accept Burke's supplementary evidence that he had at the time any plan or intent to have Kyuss's debt to the Bank cleared in the manner indicated.

438. The plaintiff sought to utilise the Nasot offer in a number of ways. One way was to support its contentions as to the market value of the business. In the circumstances disclosed, I do not think that the Nasot offer provides any reliable evidence as to the market value of the business. Another way was to provide the foundation for substantial claims for damages, some not initially opened. Thus the plaintiff contended that, if the Nasot offer and plan had been effectuated, Kyuss would have received future profits the present value of which was $895,069 (based on Mr Tily's evidence) and which was lost as a result of the Receivers' breach of duty. Because I am not satisfied that there would have been any likelihood of Nasot's intent and plan being effectuated (viz. to buy one third of the undertaking and to cause the Bank's debt to be cleared), if the opportunity had been allowed, the plaintiff has failed to prove the likelihood of any loss of future profits. In any event I do not accept Mr Tily's evidence as to the value of those profits, briefly for the following reasons:

(i) his average rate of growth was based upon the records of Laskin's business which was different to that of Kyuss;

(ii) his ratio of net profit to sales was based on unsubstantiated cashflow projections;

(iii) he assumed that (if the Bank had been paid out) Kyuss would have then been able to put itself in a position to finance the completion of the Walker contract but I am not satisfied that any real likelihood of obtaining such finance was shown.

445. In closing written submissions the plaintiff said:

(a) $895,069 being the present value of future profits foregone according to Mr Tily's schedule 12A;

(b) alternatively to (a), $800,000 being the difference between the Burke offer worth $1,788,000 and the $164,000 effectively paid for the business plus the $815,000 paid for the land and buildings;

(c) alternatively to (b), $506,000 being the difference between Mr Tily's minimum figure of $670,000 and the $164,000;

(d) alternatively to (c), $200,000, being the loss of the value of the Walker Contract, ie. 20% $960,000;

(e) alternatively to (d), $100,000, being the value of the work in progress pursuant to the Walker Contract."

454. As to claim (a), that fails for the reasons already stated.

457. As to claim (b), that assumes that the Nasot offer supports a market value for the business of some $900,000 and fails for the reasons already stated.

460. As to claim (c), that represents the claim for damages as opened, and fails because I am not satisfied, for the reasons already stated, that the market value of the business exceeded the value received from Laskin.

463. As to claim (d), the profit on the Walker contract was lost because of the insolvency of Kyuss - its inability to pay the bank and to pay its employees, let alone to finance the completion of the Walker contract. No doubt the claim is really made upon the assumption that the Nasot plan would have been effectuated and the Walker contracted then completed - if so, the claim fails for the reasons already stated and for the same reasons that claim (a) fails.

466. As to claim (e), I have already stated reasons for the rejection of that claim.

469. Finally, it was submitted that clearly Kyuss had suffered some loss and damage. It is arguable that the Receivers' conduct of the sale deprived Kyuss of any chance of obtaining a better price from the O'Connors, the only prospective purchasers for whom the profitable Walker contract was likely to remain available. However, the O'Connors said that they were unable to offer any more for the business and, given their preferred status with Walker and Quest, it is most unlikely that any other party interested would have made a competing bid after reasonable inquiry. It is, of course, a hypothetical question and the chance or possibility that the O'Connors might have been induced to make a higher bid in circumstances of advertising and a call for tenders cannot be ruled out.

472. I think that a limited value only can be placed upon that chance or possibility. Accordingly, and doing the best I can, I assess the plaintiff's damages at $20,000. The Receivers submitted that Kyuss suffered no loss because any extra consideration received (if a small amount) would only have gone to reduce the outstanding debt to the Bank. That argument is obviously fallacious because any additional amount recovered by the Bank would reduce Kyuss's liabilities.

475. I will hear submissions as to interest and costs.

[1] For the wide definition of property, see s. 9.

[2] See Jegola v ANZ [1999] NSWSC 563 at [427], per Einstein J.

[3] See generally Jegola v ANZ supra at [405] - [427].

[4] Commercial & General Acceptance Ltd v Nixon [1981] HCA 70; (1981) 152 CLR 491, 505 per Mason, J.; Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VicRp 26; [1976] VR 309, 313.

[5] Commercial & General Acceptance Ltd v Nixon, supra; Everson v Custom Credit Corp Ltd (1991) Q Conv R 54-414; McKean v Maloney [1988] 1 Qd R 628.

[6] Davy v Nathan Securities Ltd (1989) 4 NZCLC 65, 321; Diddams v CBA (unreported, Federal Court, Branson, J., 17.7.98.)