Metzke & Anor v Sali & Anor [2010] VSCA 267

Metzke & Anor v Sali & Anor [2010] VSCA 267 - VSCA 2010 case summary — Zoe

[54]

Mr Allen perceived, quite correctly, that it was necessary for him to separately advise the Sali brothers about the proposed cash injection in October 1999. I accept his account of the advice he gave them. That advice was correct, as far as it went. He advised them that, on the basis of Ron Panozzo's analysis, the $200,000 was necessary to enable the company to continue and he advised them that there was no guarantee that that sum, if advanced, would be recovered.
One of the graphs presented to the board at the October meeting suggested that a loss had been incurred in the 1998/1999 financial year of over $200,000. At the time of the meeting that Mr Allen had with the Sali brothers and with Ron Panozzo to consider advancing funds to the company, Ron Panozzo's preliminary work for the financial accounts for the 1998/1999 year was in Metzke & Allen's offices. Mr Allen had not at that stage looked at it, although an employee of his had done so.
My conclusion is that Mr Allen should not have advised the plaintiffs on the issue of whether $200,000 should be advanced to the company without first reaching an informed view as to the outcome of the 1998/1999 financial year and advising the Sali brothers of that view. He had the material available which would have enabled him to do that. The indications were that the outcome would not be a good one.
In cross-examination Mr Allen himself substantially conceded the correctness of this conclusion.
The proposition repeatedly put, particularly early in the trial, on behalf of the plaintiffs that Mr Allen failed in his duties in October 1999 and thereafter because he did not inform Mr Sali that the company was 'insolvent' is misconceived. If by 'insolvent' what was meant was that the company could not pay its debts as and when due unless further funds were made available to it, then the directors, including Sam Sali, were aware of that. That is the very subject matter of Mr Panozzo's 19 October 1999 document which led to the proposal that further funds be injected.
It was clear in Mr Sali's own evidence that this 'insolvent' analysis does not reflect his real concern. His concern was whether the company's position was 'hopeless'. In other words he was concerned about the prospects of the money being lost if advanced. In that context, he and his brother ought to have been advised as to the position as at 30 June 1999 as best Mr Allen could determine it, and indeed as to the position after 30 June 1999 insofar as it was known. Mr Allen did not take the steps that were necessary to give the Sali brothers this advice, and he ought to have done so.
It is because of my conclusion that the 'insolvent' analysis is misconceived that I do not need to resolve the difference between the experts on that issue.
The issue then arises as to what the Sali brothers would have done had Mr Allen taken steps which would have enabled him to advise them in relation to the company's position as at 30 June 1999. It seems to me that, on the evidence before me, the conclusion must be that the funds would still have been advanced.
The first reason for this conclusion is that the final result for the year ended 30 June 1999 was not unexpected. It is not entirely clear when the financial statements for the year ended 30 June 1999 were signed by the directors, save to say that it was in early 2000. The accounts as finalised were presented to the board in February 2000. There is no indication in the contemporaneous documents that the final result for 30 June 1999 came as a surprise to the directors. As I have indicated, the directors at the October 1999 board meeting had had a chart before them indicating a loss in excess of $200,000 for the year ended 30 June 1999.
The second reason is the agreement made in April 2000. By then the outcome of the 30 June 1999 financial year was known. Sam and Alan Sali made a decision then to, in effect, advance further funds to the company in that knowledge.
Finally, it is significant that both Sam and Alan Sali were experienced businessmen. They knew from February 1999 that additional cash of in excess of $200,000 was sought for the expansion. The amount they advanced in October 1999 was somewhat less than what they had been led to expect would be required in February and March 1999.

[172]

Metzke & Allen do not contend that Mr Blizzard is liable to S Sali & Sons on the basis of some general duty owed by him as a director to Universal Logistics' creditors. What Metzke & Allen say is that Mr Blizzard presented monthly profit and loss statements to Sam and Alan Sali in circumstances where he was aware by reason of the discussion in April 2000, and by reason of the subsequent conduct of S Sali & Sons, that those monthly profit and loss statements would be relied upon by Sam and Alan Sali, as directors of S Sali & Sons, in assessing whether or not to permit the forbearance arrangement reached at the board meeting in April 2000 to continue. Metzke & Allen rely on the principles in Esanda Finance Corporation Limited v Peat Marwick Hungerfords.

The High Court decision in Spies v The Queen does not address the matter raised by Metzke & Allen in this case. Spies v The Queen is not authority for the proposition that a director who makes negligent misstatements to a creditor of the company can never owe that creditor a duty of care. I accept Metzke & Allen's submission that the issue here is to be analysed in accordance with the ordinary principles applicable to negligent misstatement, as set out by the High Court in Esanda Finance.

Under those principles, where the claim is for pure economic loss, as it is here, mere foreseeability of loss is not sufficient to give rise to a duty of care. A relationship of proximity is required before there is a duty of care. This relationship can be established in a number of ways. It might be established where information or advice is sought from a person possessing some special skill and where that person knows or ought to know that reliance is being placed upon the information or advice. Liability will also be imposed whenever a person gives information or advice to another upon a serious matter where that person realises or ought to realise that he or she is being trusted to give the best of his or her information or advice and it is reasonable for the person receiving the information or advice to act on it.

In this connection, in the absence of any evidence or submission from Mr Blizzard, I have reached the following relevant conclusions:

(a) At the discussion at the board meeting in April 2000 Sam and Alan Sali must have been acting as directors of S Sali & Sons, and must have been receiving information in that capacity, in addition to acting as directors of Universal Logistics. It is only because they were acting in both capacities that the forbearance arrangement was able to be made. This must have been apparent to all present, including Mr Blizzard.

(b) What was revealed in February 2001 was, in substance, that what had been presented as a significant asset ('other debtors') was, to say the least, not properly accounted for. This was significant not only in relation to the balance sheet but also in relation to the previous profit figures, and was seen as such at the time. The uncovering of this circumstance prompted action which brought the forbearance arrangement to an end, and, indeed, brought the company's entire operations to an end. One reason the company continued on as long as it did was because Sam Sali had been given confidence by the false profit reports which led him to believe the company could be turned around, or which meant he was not disabused of that belief.

(c) Just as Sam and Alan Sali were acting in their capacity as directors of S Sali & Sons in April 2000 when the forbearance arrangement was made, they continued to act in that capacity during the latter part of 2000 when they permitted the arrangement to continue in the false belief that profits were being earned.

(d) Mr Blizzard, as managing director, had special skill and knowledge in relation to the subject matter of the profit reports which were eventually revealed to be false.

(e) Mr Blizzard's profit reports between July 2000 and December 2000 were prepared by him or under his supervision. They were either deliberately false or were prepared in circumstances which must have involved negligence on Mr Blizzard's part.

(f) Mr Blizzard must have known Sam and Alan Sali were relying on his false profit reports, and must have intended them to do so.

My conclusion is that Mr Blizzard is a concurrent wrongdoer and that the Wrongs Act requires me to limit Metzke & Allen's liability accordingly.[42]

At a glance

Court

Decision date

Before

Source

Judgment (247 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (14)