North Shore Property Developments Pty Ltd (in liq) v Haddad

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

1. The first applicant (North Shore) is a company in liquidation. The second applicant (Ms Erskine) is its liquidator. The principal relief that the applicants seek is a declaration that a deed of settlement and release (the settlement deed), entered into by the former liquidator of North Shore (Mr Iannuzzi) and the respondents, has been validly rescinded. Ms Erskine also seeks damages or equitable compensation in respect of certain costs that she claims to have incurred as a result of a document referred to as the Reston appraisal.
2. Prior to its liquidation, North Shore was controlled by Mr John Haddad and was involved in the business of property development. In April 2010 it bought land at 72-74 Gordon Crescent, Lane Cove, NSW, and between around August 2012 and late 2013 it developed a multi-level block of residential units on that land (the development).
3. On 17 April 2014 North Shore entered into contracts with the second respondent (72-74 Gordon) to sell four units in the development (designated as units 2.03, 5.01, 7.04 and 9.01) (the units) for $400,000 each. Three of the four contracts refer to multiple folio identifiers, which I understand refers to the fact that the units had car spaces allocated to them. On 1 May 2014 North Shore entered into a contract to sell four further car spaces in the development to 72-74 Gordon. Settlement of these contracts occurred in June 2014.
4. 72-74 Gordon had been incorporated on 4 March 2014, for the purpose of acquiring the units, with the first respondent (Mr Haddad) as its sole director and shareholder. Mr Haddad is the brother of John Haddad and had been the project manager for the development.
5. North Shore was wound up by an order of this Court made on 11 February 2015 and Mr Iannuzzi and Mr Murray Godfrey were appointed as liquidators. Mr Godfrey died in June 2015 and Mr Iannuzzi continued as the sole liquidator of North Shore until 18 September 2017 (except for a brief period when he and Mr Steven Naidenov were joint administrators).
6. On 20 February 2017, Mr Iannuzzi wrote to Mr Haddad as director of 72-74 Gordon asserting that the units had been sold to 72-74 Gordon at an undervalue, being an uncommercial transaction for the purposes of s 588FB of the Corporations Act 2001 (Cth) (the Corporations Act), and demanding repayment of an amount of $7,550,000. He made the same claim in a letter dated 18 April 2017. 72-74 Gordon denied that the units had been sold to it at an undervalue.
7. The claims advanced in Mr Iannuzzi's letters of 20 February and 18 April 2017 proceeded on an incorrect understanding that the car spaces attached to the units acquired by 72-74 Gordon were additional units. Once this misunderstanding was corrected, Mr Iannuzzi's claim was effectively that the units that had been sold to 72-74 Gordon for $400,000 each were worth, respectively, $700,000 (unit 5.01), $750,000 (each of units 2.03 and 7.04) and $850,000 (unit 9.01); so that the total difference between true value and sale price was $1,450,000. It is also not necessary, for the purposes of these reasons, to discuss a claim advanced by Mr Iannuzzi (by a letter dated 21 February 2017) that Mr Haddad had benefited from an unreasonable director-related transaction caught by s 588FDA of the Corporations Act.
8. On 20 June 2017 a settlement conference (the settlement conference) was held at the office of Mr Iannuzzi's firm (Veritas Advisory). Mr Haddad attended with a lawyer. Mr Naidenov and another employee of Veritas Advisory, Mr Roer Jimenez, attended representing Mr Iannuzzi. During the discussions at this conference Mr Haddad asserted that the prices 72-74 Gordon had paid for the units were fair because they had significant construction defects which he had had to rectify. As will appear below, there was an in-principle agreement at the settlement conference to settle the claims against the respondents for $32,500; however, this was subject to documentary material supporting Mr Haddad's assertion being provided.
9. Two days later an email containing a link to a dropbox folder was sent by the lawyers for the respondents to Mr Naidenov. The folder (the dropbox folder) included a number of documents, one of which was the Reston appraisal.
10. The Reston appraisal was on the letterhead of "Reston Real Estate", dated 6 February 2012, and apparently signed by "Eric Muriniti, Manager". Its text was as follows.

Sales Appraisal for Units off the plan for 72-74 Gordon Cres Lane Cove North

To whom it may concern,

RestOn Real estate appreciates your interest in sale prices for the above mentioned development: we are happy to provide you with a complimentary market appraisal for the current sale value of the property.

Based on the current strength in the current marketing and taking comparable sales into consideration and advanced pre purchase off the plan, RestOn Real Estate believes that the values for the below apartments as follows:

Lot 5 - 3 Bedroom - $485,000.00

Lot 23 - 3 Bedroom - $475,000.00

Lot 49 - 3 Bedroom apartment - $490,000.00

Lot 53 - 1 bedroom apartment - $445,000.00

These prices reflect the current market condition within the next 60 days based on the option agreement supplied by Eddy Haddad.

The team at RestOn Real Estate Looks forward to hearing from you soon and continuing a long term relationship.

1. Emails were exchanged over the following days concerning the terms of a potential deed of settlement. A file note by Mr Jimenez of Veritas Advisory dated 12 July 2017 records a conclusion that the decision to accept the offer to settle for $32,500 was correct.
2. The settlement deed was executed in July 2017 (the exact date is not filled in). It is headed "Deed of Release and Settlement" and was entered into by Mr Haddad, 72-74 Gordon, North Shore and Mr Iannuzzi (in his capacity as liquidator). Its recitals included that:

(a) Mr Iannuzzi claimed that Mr Haddad and 72-74 Gordon owed North Shore monies due to:

(i) unreasonable director related transactions totalling $322,508.00 (not the subject of these proceedings); and

(ii) uncommercial transactions (ie, the sale of the units) totalling $1,600,000; and

(b) Mr Haddad and 72-74 Gordon denied these claims.

1. The deed provided for payment by 72-74 Gordon to Mr Iannuzzi of a settlement sum of $32,500 and for mutual releases.
2. On 25 August 2017 the Deputy Commissioner of Taxation applied to have Mr Iannuzzi removed as liquidator. Orders of this Court made on 14 September 2017 noted his intention to resign and on 18 September 2017 he was replaced as liquidator by Ms Erskine. (Mr Iannuzzi's name was later removed from the register of liquidators in the light of misconduct in the liquidation of several companies.)
3. On 12 December 2017 Ms Erskine applied to the Court for an extension of time under s 588FF(3)(b) of the Corporations Act to commence proceedings in respect of what she considered might be voidable transactions relating to North Shore including the sale of the units (the Yates J proceeding). 72-74 Gordon was the first defendant in that application; the second defendant was an accounting firm connected with it and the third and fourth defendants were parties to separate transactions involving North Shore. The second, third and fourth defendants did not appear to resist the extension of time.
4. At the time of commencing the Yates J proceeding Ms Erskine had only recently been appointed as liquidator, was not aware of the settlement deed and had limited funding. The settlement deed was annexed to an affidavit sworn by Mr Haddad and relied on as a barrier to any of the proposed claims against 72-74 Gordon. Ms Erskine was not in a position to lead any evidence concerning the background to the settlement deed or put her case any higher than that it warranted further investigation. On 25 July 2018, Yates J made orders generally granting the extension of time sought but expressly excluding the claims which had been compromised by the settlement deed (Re North Shore Property Developments Pty Ltd (in liq) [2018] FCA 1094). His Honour ordered Ms Erskine to pay 72-74 Gordon's costs of the proceedings. An appeal by Ms Erskine was dismissed on 16 April 2019 (Erskine as liquidator of North Shore Property Developments Pty Ltd (in liq) v 72-74 Gordon Crescent Lane Cove Pty Ltd [2019] FCAFC 62). Ms Erskine paid a sum of $155,000 on 28 October 2019 in discharge of the costs order made by Yates J.
5. On 30 October 2020 Ms Erskine commenced proceedings for the conduct of public examinations in relation to the affairs of North Shore, including the circumstances surrounding the execution of the settlement deed. Between then and June 2022 summonses and orders for production were issued to various persons including Mr Muriniti. Mr Muriniti gave evidence on 3 February 2021 and later provided documents requested by lawyers for North Shore and Ms Erskine. In the course of his public examination, Mr Muriniti was shown the Reston appraisal (which, as noted above, bore his signature) and said that it was not a genuine document.
6. On 8 September 2023 lawyers for North Shore and Ms Erskine wrote to Mr Haddad's lawyers purporting to rescind the settlement deed on the ground that it had been entered into in reliance on fraudulent misrepresentations relating to the Reston appraisal. This proceeding was commenced, against Mr Haddad, on 21 September 2023.
7. Two further letters from the lawyers for North Shore and Ms Erskine, dated 6 December 2023 and 4 March 2024, contained further purported rescissions on the basis of other asserted false representations.
8. On 31 January 2024, 72-74 Gordon (which had been voluntarily deregistered on 5 January 2022) was ordered to be reinstated pursuant to s 610AH(2) of the Corporations Act and named as the second respondent in the proceeding.
9. As noted above, the applicants seek a declaration that they have validly rescinded the settlement deed. This, evidently, is intended to clear the path for further efforts to recover money from Mr Haddad for the benefit of the creditors of North Shore.
10. The costs incurred by Ms Erskine, in respect of which her second further amended originating application seeks damages or equitable compensation, are:

(a) the costs that she incurred in the Yates J proceeding at first instance and on appeal; and

(b) the costs of these proceedings on an indemnity basis (including the costs of her examinations and investigations in so far as they related to the Reston appraisal).

1. In submissions, counsel for the applicants accepted that the costs of the proceedings should be dealt with separately from damages or compensation but pressed the claim to recover part of the costs of the examinations and investigations.

1. As noted above, the applicants seek a declaration that they have validly rescinded the settlement deed (rather than rescission by way of a court order). They thus invoke the concept of rescission at law, rather than in equity (see Nadinic v Drinkwater [2017] NSWCA 114; 94 NSWLR 518 at [28]- [29] (Leeming JA, Beazley P and Sackville AJA agreeing) (Nadinic)). It is not in contest that a contract may only be rescinded at law for fraudulent misrepresentation (Nadinic at [23]). There is considerable overlap between this concept and the basis of liability for the tort of deceit, although for the purposes of rescission fraud is sufficient (see Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 586 (Brennan, Deane, Gaudron and McHugh)); there is therefore no need for proof of damage. The parties thus proceeded on the basis that it was necessary for the applicants to show:

(a) the making of a false representation by one or both of the respondents;

(b) the maker of the representation having made it with knowledge that it was false (or being reckless as to whether it was false);

(c) the maker of the representation having made it with the intention that it would be relied on; and

(d) the applicants having acted in reliance on the representation (although the representation need not have played more than a minor part in motivating the decision to enter into the settlement deed).

1. The applicants put their case at this level. By their third further amended statement of claim (3FASC), the applicants plead that:

(a) Mr Haddad (in his personal capacity and his capacity as sole director of 72-74 Gordon) caused certain misrepresentations to be made (3FASC [36]);

(b) the representations were false to his (and 72-74 Gordon's) knowledge (3FASC [37]-[39]) and made with the intention that they would be relied on by Mr Iannuzzi (3FASC [40]-[41]);

(c) Mr Iannuzzi and his representatives relied on these representations (3FASC [42]); and

(d) in reliance on the representations Mr Iannuzzi entered into the settlement deed (3FASC [43]).

1. The representations said to have been made and relied on are identified in 3FASC as follows.

(a) The "valuation representation" is identified by 3FASC [25] as follows:

Among other documents, the Dropbox link contained an electronic version of a market appraisal of the value of the 72-74 Gordon Units (Reston Appraisal) on an 'off the plan' basis as follows;

(a) Lot 5 (being unit 2.03) - 3 bedroom - $485,000.00;

(b) Lot 23 (which later became Lot 27 and unit 5.01) - 3 Bedroom - $475,000.00;

(c) Lot 49 (which later became Lot 50 and unit 7.04) - 3 Bedroom apartment - $490,000.00; and

(d) Lot 53 (which later became Lot 57 and unit 9.01) - 1 bedroom apartment - $445,000.00,

(Valuation Misrepresentation).

(Document reference omitted; emphasis in original.)

(b) "Condition representation 1" is said to have been contained in a letter dated 14 June 2017 and is defined by 3FASC [20(b)] as follows:

(i) the 72-74 Gordon Units were defective; and

(ii) the defects were rectified by Eddy Haddad;

(iii) that as a result of the defects, the 72-74 Gordon Units were purchased at fair value,

((i), (ii) and (iii) together, the Condition Misrepresentation 1).

(Emphasis in original.)

(c) "Condition representation 2" is said to have been made at the settlement conference and is defined by 3FASC [23(a)] as follows.

representations were made by Eddy Haddad that the 72-74 Gordon Units had significant waterproofing defects and that Eddy Haddad rectified these defects himself (Condition Misrepresentation 2);

(Document references omitted; emphasis in original.)

(a) whether each of these representations was made by Mr Haddad;

(b) whether one or more of them was false;

(c) whether Mr Haddad knew of that falsity; and

(d) if one or more of the representations was false to Mr Haddad's knowledge, whether:

(i) Mr Haddad intended it to be relied upon; and

(ii) Mr Iannuzzi relied on it in agreeing to enter into the settlement deed.

1. The link to the dropbox folder, which contained several documents including the Reston appraisal, was sent by Mr Aydn Shaba (one of the lawyers acting for the respondents) to Mr Naidenov on 22 June 2017. This was evidently done on the instructions of Mr Haddad: emails exchanged between him and Mr Shaba on 20 and 21 June 2017 indicate that Mr Haddad was providing the documents to Mr Shaba for this purpose. I understand the applicants' proposition to be that the inclusion of the Reston appraisal among those documents constituted a representation that the units had been valued by Mr Muriniti, a real estate agent, on the date of the Reston appraisal (6 February 2012) and found to have the values set out in that document.
2. It was submitted for the respondents that, rather than purporting to have been prepared in February 2012, the Reston appraisal should be understood to be an ex post facto (or "as at") valuation constituting Mr Muriniti's assessment at a later time of what the values of the units would have been in 2012. I reject this submission. The Reston appraisal is dated 6 February 2012, bears no other date, and nothing in its language suggests that its purported author was engaging in a retrospective exercise. It is a document which, if genuine, was written in February 2012 and expressed Mr Muriniti's opinion at that time. By including the Reston appraisal among documents that were being provided to Mr Iannuzzi's staff in the aftermath of the settlement conference, I am satisfied that Mr Haddad intended to convey (and did convey) that Mr Muriniti had expressed the views contained in the Reston appraisal concerning the values of the units in February 2012.
3. It will be recalled that the contract of sale for the units was not entered into until April 2014. In February 2012 construction of the development had not yet begun, and any sale of the units would have been "off the plan". There is in evidence a "deed of call option" dated 3 May 2012, by which North Shore granted Mr Haddad an option to purchase the units in exchange for an option fee of $320,000 (the option deed); however, this document fails to specify a purchase price for any of the units. Also in evidence is a document entitled "Heads of Agreement", seemingly dated 17 April 2012, by which North Shore agreed to grant the option to purchase the units at a price of $400,000 each and with the terms of the agreement "to be documented in a legally binding call option agreement". On the face of these documents, read together, North Shore and Mr Haddad entered into an agreement on 17 April 2012 by which (in exchange for a fee) he would obtain an option to buy the units when they were complete for $400,000 each (which, of course, is the price Mr Haddad's company 72-74 Gordon ultimately paid). If Mr Muriniti had valued the units ("off the plan") at between $445,000 and $485,000 in February 2012, that would arguably indicate that there was nothing untoward about the prices that were agreed (especially if, as appears to be the case, Mr Haddad had also paid an option fee equivalent to $80,000 per unit).
4. The applicants objected to the tender of the Heads of Agreement and sought to develop an argument that it was a fraudulent document which had no probative value. However, this argument was not pressed after I rejected an affidavit which was sought to be relied upon in that connection. The affidavit was sworn by Mr Nugent-Young, a solicitor at the firm representing the applicants, on 25 February 2025 (the second day of the hearing and the day before this issue was agitated). Mr Nugent-Young's affidavit described his attempt to locate and speak to a Ms Madusha Saranathna, whose signature appears on the Heads of Agreement as a witness, and a brief telephone conversation with her. His file note of the conversation was annexed. If admitted, this evidence would tend to show that the purported witness had not signed the document on the date it bears (or possibly at all). Briefly, my reasons for rejecting this affidavit were as follows.

(a) It was sought to be introduced very late (during the hearing and long after the deadlines for filing affidavit evidence), with minimal notice to the respondents and after the respondents had made the decision not to call Mr Haddad as a witness. To some extent this was explicable in that it was evidence on the voir dire in relation to the Heads of Agreement (which was tendered in the respondents' case), and the applicants' counsel had been expecting to be able to cross-examine Mr Haddad. However, that explanation does not take the applicants far. They have had the document since it was tendered in the Yates J proceedings in 2018 and could have inquired into its authenticity at any time since then. Their suspicions concerning that issue may have arisen much more recently, but it is apparent from the terms of the affidavit that Mr Nugent-Young commenced his efforts to track down Ms Saranathna on 18 February 2025 and spoke to her on 20 February 2025. Meanwhile, there was clearly a prospect that Mr Haddad would not give evidence and the applicants cannot claim to be taken by surprise by the decision not to call him.

(b) The evidence that is relevant to the authenticity of the Heads of Agreement is hearsay. That is not necessarily fatal in itself, but the way in which it was obtained was less than satisfactory. Ms Saranathna (who, to be fair to Mr Nugent-Young, obviously did not wish to be involved in the matter) did not have the Heads of Agreement in front of her and was only interviewed once in a telephone call of around 11 minutes. She was not acquainted to any real degree with the background or the issues in the proceeding. She said at one point that she did not know what a "heads of agreement" was. Such evidence is problematic as a basis for an allegation of fraud.

(c) As explained below, the Heads of Agreement is in any event not an important document in these proceedings. The resolution of its admissibility was not a sufficiently important issue to justify the reception of new, unheralded evidence raising a fresh allegation of fraud.

1. Despite not persisting with their submission that the Heads of Agreement should be rejected because it was not a genuine document, the applicants submitted that it should be given limited if any weight because of doubts concerning its provenance. The submissions in support of this point emphasised that no witness had given evidence to verify that the document was entered into on the date it bears; the (ostensibly handwritten) date on the document looks as if it may in fact have been pasted on to the document and then photocopied; Mr Haddad has said in response to requests that he does not have the original; and the document was never produced by Mr Haddad until it was referred to in the second affidavit that he swore in the Yates J proceeding, even though it was clearly relevant to a notice that had been issued to Mr Haddad by the Australian Taxation Office in 2016 seeking details of how the units were purchased.
2. It is not apparent that a submission that I should give the Heads of Agreement "limited weight" is different in substance from the submission (discussed above) that the document is not what it purports to be. The document is the only direct evidence as to whether an agreement to grant an option was made on or around 17 April 2012; to make a finding on that issue it is necessary either to accept the document as embodying such an agreement or reject it as a later concoction. Meanwhile, the reasons given for doubting the provenance of the document are all, in substance, reasons why it might be concluded that the document is not what it purports to be.
3. The point is in any event peripheral at best.

(a) Even if the Heads of Agreement was created at some later time and backdated in an attempt to give an impression of regularity, it does not follow that North Shore and Mr Haddad did not reach an agreement concerning an option to purchase the units and a purchase price before they executed the option deed on 3 May 2012. The option deed on its face does not constitute a workable agreement because it does not specify a price for the units and it is most unlikely that the parties would have negotiated and executed the deed without agreeing on a price. The most likely explanation emerging from the evidence is that the price that had been agreed, but was omitted from the option deed through oversight, was the price ($400,000 for each unit) that was eventually paid.

(b) More importantly, it is not part of the applicants' pleaded case that no option was granted to Mr Haddad before the units were constructed, that no price was agreed at that time, or that the sale price of the units was below their true value. They allege the falsity of a specific representation: that the units had been assessed by Mr Muriniti, in February 2012, as having the values set out in the Reston appraisal.

1. Returning to the Reston appraisal, I am comfortably satisfied that it is not a genuine document.
2. First, this was Mr Muriniti's evidence from the moment he was shown the document during his public examination.
3. Secondly, Mr Muriniti gave equally clear evidence by way of an affidavit in this proceeding. In particular, he gave evidence (which was not challenged) that the letterhead used to create the Reston appraisal was inconsistent with the stationery of Reston Real Estate and that there was no entity trading under that name in February 2012. Mr Muriniti himself was involved, in December 2012 and January 2013, in the preparations for Reston Real Estate to begin operations.
4. Thirdly, the Reston appraisal was uploaded to the dropbox folder in the form of a pdf file, the metadata of which says that its author was Mr Haddad and it was created on 20 June 2017 from a Microsoft Word document.
5. Evidence given by Mr Michael Gray, an expert in digital forensics, which I accept, indicates that the pdf was created on a computer running a specific version of Mac OS X. Tests conducted by Mr Gray using the relevant version of Mac OS X showed three methods of converting a Word document into a pdf file. One (using "Save as PDF" in Word's print menu) produced a pdf file showing the name of the Computer User in the "author" field. The other methods (one using the "Save As" function with "PDF" as the desired format, the other using "Save as Adobe PDF" in the print menu) produced a pdf file with a blank "author" field. The metadata of the Reston appraisal in the form in which it was uploaded to the dropbox folder thus indicates strongly that the document was created by converting a Word document, on the afternoon of the day the settlement conference occurred, on a computer whose registered user was Mr Haddad. This can only be consistent with Mr Muriniti having written the Reston appraisal in 2012 if he sent it in Word format to Mr Haddad, who saved it in that form and kept it on his computer for five years (which is inherently unlikely and was not put to Mr Muriniti).
6. It was put to Mr Muriniti that he might have created the Reston appraisal in June 2017 using Mr Haddad's computer. Mr Muriniti denied this and I accept his evidence in this respect. Mr Muriniti accepted that he and Mr Haddad had a friendly relationship and Mr Muriniti did visit Mr Haddad's office and sometimes work on computers there. Photographs were tendered which apparently showed Mr Muriniti in a room in Mr Haddad's offices working on a computer; however, this raised at most a theoretical possibility that Mr Muriniti could have contributed to the creation of the Reston appraisal. Mr Muriniti's diary for 20 June 2017 was tendered and does not suggest that he had any appointment with Mr Haddad on that day; rather, it shows him having attended meetings in several parts of Sydney fairly remote from Mr Haddad's office.
7. Given my rejection of the argument that the Reston appraisal can be understood as a retrospective valuation, the theory that Mr Muriniti played a hand in creating it on Mr Haddad's computer on 20 June 2017 involves Mr Muriniti's conscious participation in a fraud. It should not be adopted on the basis of speculation or mere possibility and in the face of Mr Muriniti's evidence. Further, and in any event, even if the document was brought into existence by (or with help from) Mr Muriniti, it was Mr Haddad who conveyed it via his solicitors to the respondents.
8. I therefore find that it was Mr Haddad who created the Reston appraisal; that he did so in June 2017; that he provided the Reston appraisal to his solicitors for the purpose of it being sent to Mr Iannuzzi's staff; and that he did these things knowing that he had not obtained any valuation of the units from Reston Real Estate in February 2012. There could be no reason for doing this, at the time it was done, other than to seek to persuade Mr Iannuzzi that a valuation of the units had been obtained, before the grant of an option to purchase, which supported the prices agreed to.
9. However, there is no evidence of reliance on the valuation representation.

(a) No evidence was called from Mr Iannuzzi or anybody who was working for him at the relevant time.

(b) The representation was made after the settlement conference and there is therefore no reference to it in the records of that conference.

(c) Mr Iannuzzi, the relevant decision-maker, was not an addressee of the email from the respondents' solicitors and there is no evidence of the email having been forwarded to him (or the contents of the dropbox folder being put before him in some other way).

(d) The only evidence of the rationale for agreeing to enter into the settlement deed is a document entitled "File Note - Decision Sheet" (the decision file note) prepared by Mr Jimenez and dated 12 July 2017. That document made no reference to any valuation. It referred to the agreed price for the units and the option fee of $320,000. The author appears to have understood that the option fee was in substance a "deposit" for the sale price of $400,000 each rather than an additional amount. Under the heading "Recommended Action" in connection with the units, the document said:

1. Units

2. The sale of the properties to Eddy Haddad was not undervalue, as he purchased the property at the time "as shell", no construction has occurred at the time, thus he could argue:

• ➢ Valuable consideration was given.
• ➢ He acted in good faith.
• ➢ There was no reason to suspect the Company's insolvency.
  1. As there is a deed option in place and provision of the Deed of option were meet accordingly and all the sale proceeds have been accounted, there is an unlikely a claim against EH for the uncommercial transaction regarding the under value of the sale of the property.
  2. The initial Information provided by the ATO regarding the sale of the properties does not conclude that a deed option was in place which allow EH to purchase the property for the lower value, which is not uncommon with the development of the plan.

Thus, there is no claim for the above purported uncommercial transactions.

(Emphasis in original.)

(e) The Reston appraisal was part of a bundle of documents of around 339 pages that was sent to Mr Naidenov. It is reasonable to infer that one of Mr Iannuzzi's staff would have noticed it and read it. However, there is no reason to conclude that Mr Iannuzzi himself would have read the document, let alone given it any thought, without having his attention drawn to it.

1. For these reasons, it has not been established that the valuation representation provided a basis for the applicants to rescind the settlement deed.

1. Assuming the condition representations to be true, there were several faults in the construction of the development which required money to be spent by the purchaser of the units and thus reduced their value. The earliest communication in the evidence concerning construction defects appears to be an email received by Mr Haddad (presumably in his capacity as the project manager) on 3 April 2014, listing a significant number of (mostly minor) defects that had been noted in several units. This was before the contracts for sale were entered into and could rationally have affected the price that a willing buyer would offer (and that a willing seller would accept) for the units. The point is not simple, however, because the sale of the units involved the exercise of an option to purchase them, granted to Mr Haddad (at an agreed price) before construction had begun.
2. There is also a good deal of later documentary evidence concerning problems with the units and the development more generally, particularly in relation to water ingress (starting in August 2014 and continuing until at least August 2016). It appears that these problems arose at least partly because of inadequate drainage, which was a problem in the original design and construction of the development and thus something inherent in the units at the time they were purchased. However, there was no evidence of the extent to which these problems were known to the parties to the contracts of sale at the time they were executed, and no detailed explanation in the submissions of how this bore upon the question whether the units had been sold to 72-74 Gordon at an undervalue.
3. These issues can be put to one side, however, because the issues in the present proceeding are narrow. The issues relate only to the making of specific representations in the context of the settlement negotiations, whether they were knowingly false and whether they were relied upon.

1. A letter from Mr Haddad's solicitors to Mr Iannuzzi, dated 14 June 2017, said in part:

The properties bearing the following folio identifiers contained defective works:-

[the units in issue in this case].

Our client was required to rectify the defective works himself. There is currently an approximately $2,000,000.00 claim made by the owners corporation in relation to the defective works.

As a result of the defects, the properties listed above were purchased by our client at fair value.

1. The 3FASC alleges only that the condition representation was made by 72-74 Gordon. However, nothing turns on this. The letter relayed the position of "our client", without specifying who that was, but the sales to which Mr Iannuzzi's letters had drawn attention were identified as sales to 72-74 Gordon and his letters were addressed to Mr Haddad as director of that company. It is clear that the first two elements of condition representation 1 as pleaded (set out above at [26(b)]) were conveyed by way of the solicitors' response of 14 June 2017.
2. The problem lies in the third element: that, as a result of the defects, the units were purchased by 72-74 Gordon "at fair value" (the fair value proposition).
3. The applicants submit that this proposition was part of what was represented on 14 June 2017. They then contend that this had to mean that the defects in the units were so significant as to have the consequence that the units, which Mr Iannuzzi had claimed (in his letters of 20 February 2017 and 18 April 2017) were worth between $750,000 and $850,000, were actually only worth $400,000 each. This, they submit, was false because the defects were for the most part relatively minor.
4. I do not accept that the fair value proposition was part of a representation made on 14 June 2017 in any sense that is relevant to a claim for rescission of the settlement deed. If it was relevantly part of such a representation, I do not accept that it was relied on by Mr Iannuzzi.
5. As to whether there was a representation to the effect that the defects in the units explained away any apparent undervalue, a "false representation" for present purposes is a representation of fact. In Stuart v Rabobank Australia Ltd [2021] FCA 1388 at [502] Halley J drew this proposition from Edgington v Fitzmaurice [1885] UKLawRpCh 83; (1885) 29 Ch D 459 at 483 (Bowen LJ), which was one of the authorities cited by Gummow, Kirby and Crennan JJ in their statement of principles in Magill v Magill [2006] HCA 51; 226 CLR 551 at [114]. The fair value proposition, however, is either a statement of opinion or an argumentative proposition. I do not accept that in their letter of 14 June 2017 the respondents' solicitors were stating as a fact that the units had been sold for fair value and that this was a consequence of the existence of defects. The very words "fair value" are conclusory and evaluative.
6. It is also relevant in this connection that the letter of 14 June 2017 went on to say:

In light of the above, our client wishes to resolve this matter amicably to avoid unnecessary legal costs being incurred for all parties. Accordingly, our client is prepared to partake in an informal settlement conference to discuss a possible resolution of the matter.

Please advise whether you agree to participate in the informal settlement conference. If so, we will provide you with our available dates in due course.

1. This makes it even clearer that the solicitors were not making a representation of fact when they asserted that the units had been sold at fair value, or seeking to have Mr Iannuzzi rely on such a representation. They were stating their client's position and proposing a discussion from which, it was suggested, a compromise might emerge.
2. As to reliance, a settlement conference did take place on 20 June 2017 as noted above. Two of Mr Iannuzzi's staff attended. A transcription of a handwritten note of the conference made by the respondents' solicitor includes:

Uncommercial transactions

• Valuations on the properties.

• Properties were purchased at the beginning of the development. Not yet completed. Major defects in the properties.

• The 4 units - were they done by a option? Yes - Opt.

[Copy of agreement required].

[Market value of each of the properties.]

Steve needs to look at whether the purchase was for fair value.

• Potential claim for $1.4M - $350,000.00 short fall re each unit.

We can establish the units were purchased by way of option at an early point - discounted rate.

• We may be forced to liquidate 72-74 Gordon Crescent Pty Ltd.

[Illegible, but may be the word 'When'] settlement occurred, major defects.

• Only one unit is left.

• Mortgage on the unit - $700,000.00.

[Send letter with all the relevant information and offer.]

Purchased at option. Substantial defects. Company - [illegible, but may be the word 'one'] unit left - $800,000.00 (Value of the property).

Eddy had to tile the defective units and waterproof them. (Copy of invoice).

(The square brackets in this extract and the text inside them, other than those noting illegible words, were part of the original text.)

1. Having looked at the handwritten note, I consider that the illegible word in the eighth dot point above probably is "when". The assertion was thus being made that the units had defects at the time of settlement of the sale.
2. The decision file note (prepared by Mr Jimenez, who worked for Mr Iannuzzi) summarised the settlement conference in broadly similar terms, relevantly as follows.

- EH [presumably Mr Haddad] advised the properties were purchased off the strata plan with an option to exercise at a later date, prior to the construction and development of the property around 2013 and that such an agreement existed and would be provided to substantiate same.

- EH believes the property were not purchased undervalue as the purchase occurred under the executed deed of call option of $400K at that time as a way to inject further capital into the business.

- EH advised that there were significant waterproofing defects that impacted on cashflow and claims against the Company and director for approximately $2M, as evident in the Strata Inspection Report dated November 2014.

- EH advised 3 of those properties have since been sold to third parties. There should only be 1 property available, however this was also recently sold.

- EH made a verbal offer to settle the claim with the Company.

- SN [presumably Mr Naidenov] requested EH to provide all supporting documentation regarding the Option deed between EH and the Company to verify EH's claim as to consequences of the transaction of the sale, and all reports with respect to defects and damages.

(a) there was some reference in the discussion to valuations of the units (some valuations were in evidence in this proceeding, but I have not found it necessary to canvass them given the narrow scope of the issues that arise on the pleadings);

(b) it was pointed out that the units had been acquired by way of an option, agreed at an "early point" and at a "discounted rate", and this was advanced as part of the reason why the sales were at fair value;

(c) it was envisaged that a letter would be sent with "all the relevant information"; and

(d) thus the existence of construction defects was far from the only point being relied on by Mr Haddad to support the prices he had paid.

1. It appears from both notes that an in-principle agreement as to the amount to be paid by the respondents to settle the dispute was reached at the conference; however, this was subject to provision of documentary material to support what had been said on the part of Mr Haddad (and, presumably, subject also to a final decision by Mr Iannuzzi). After the conference, the documents in the dropbox folder were made available to Mr Iannuzzi's staff by way of the email of 22 June 2017. Relevantly to the issue of defects, the documents in the folder included the following.

(a) Minutes of meetings of the strata corporation. A meeting on 1 July 2015 included a resolution to appoint builders to attend to water penetration issues into unit 5.03 and other resolutions (proposed but withdrawn) to proceed with remediation works in relation to "various water penetration issues throughout the property".

(b) A letter from Whelan Property Group to the owners' corporation on 14 July 2016. This letter reported that a storm a few weeks earlier had resulted in flooding in some parts of the development (on several floors); water penetration on the western wall of one unit; a lift out of order for six days due to water collecting; and water entering apartments either from hallways or through ceilings. The main cause was reported to be inadequate drainage on terraces, arising from the use of pipes that were too small or not laid correctly, and pipes blocked by builder's rubbish.

(c) Photographs datestamped between August 2014 and July 2016. These showed warped or detached floorboards and wet carpet in one of the units.

(d) A report, dated 1 August 2016, describing the findings of an engineering inspection of moisture damage to (inter alia) several units in the development, common areas on two levels, the underground parking area and the external common property area. The report detailed a large number of problems ranging from relatively minor (eg insufficient sealing around a window perimeter) to more significant (eg inadequate falls of tiled surfaces for proper drainage; inadequate waterproofing membranes; inadequate drainage outlets; and a flat roof allowing water to pool).

(e) An earlier consultant's report on building defects dated 4 November 2014. This included a schedule of defects (mostly concerning common areas rather than particular units) running to 60 pages.

1. The proper inference is that, having received these documents, Mr Iannuzzi's staff looked at them and formed their own conclusions about the defects and their relevance to the value of the units. They were able to consider for themselves how persuasive the fair value proposition was. This is inconsistent with reliance being placed on the proposition per se.
2. The relevant reasoning in the decision file note is set out at [56] above. Other than in its summary of the settlement conference, the decision file note does not mention construction defects. Mr Iannuzzi may have read the letter of 14 June 2017 and seen the general contours of what the respondents were arguing in relation to the value of the units. However, the issue of construction defects was not mentioned by his staff in their summary of issues in the decision file note (and no other document is in evidence recording deliberations within Veritas Advisory). In the absence of evidence from Mr Iannuzzi or any of his staff, there is therefore no sufficient basis for a finding that he had any regard at all to the existence of construction defects in deciding to enter into the settlement deed.
3. Indeed, because of the evaluative and conclusory nature of the fair value proposition, it is almost impossible to imagine a person in Mr Iannuzzi's position being found to have relied on it (or a representation of which it formed part) in any relevant sense. In substance, the fair value proposition conveyed that the position taken by Mr Iannuzzi in his letters of 20 February 2017 and 18 April 2027 was wrong and the units had not been sold at an undervalue. It was not a specific factual assertion that might have been taken on trust. "Reliance" on the proposition would have involved Mr Iannuzzi accepting that, if the respondents said he was wrong, he must be wrong. That would involve a complete abdication of his responsibilities as a liquidator.
4. For these reasons, it is not necessary to determine whether any part of condition representation 1 was false (or that the person making the representation knew it was false). The first and second elements of the representation (that there were defects and that they were remedied by Mr Haddad) are repeated in condition representation 2 and the applicants' submissions concerning their veracity will be considered below. The fair value proposition, because of its evaluative character, is not really capable of being false (although it might be shown to be incorrect or untenable as a matter of expert opinion). If I were wrong in that assessment, I would find that the evidence that has been adduced (which consists only of business records and does not include an expert report specifically directed to this issue) does not support any conclusion as to the extent to which the values of the units were diminished at any particular time by construction defects. The applicants have therefore not established that any element of condition representation 1 was false.

1. Condition representation 2, said to have been made at the settlement conference, is that the units had significant waterproofing defects and Mr Haddad had rectified these defects himself.
2. There is a reference to substantial defects and to Mr Haddad being "required to rectify the defective works himself" in the letter of 14 June 2017 that was alleged to contain condition representation 1. However, according to the contemporaneous records of the settlement conference, what was said was (relevantly) either:

... Major defects in the properties.

...

• [Illegible, but may be the word 'When'] settlement occurred, major defects.

...

• ... Substantial defects ...

Eddy had to tile the defective units and waterproof them. (Copy of invoice).

- EH advised that there were significant waterproofing defects that impacted on cashflow and claims against the Company and director for approximately $2M, as evident in the Strata Inspection Report dated November 2014.

1. I am therefore not persuaded that any representation was made at the settlement conference to the effect that Mr Haddad had personally rectified all of the problems that had (he claimed) affected the value of the units. Rather, there was a more limited claim concerning Mr Haddad having had to tile "the defective units" and waterproof them.
2. Evidence (to which the applicants refer) showing that some repairs to things such as balconies and windows were performed by the strata corporation at its expense therefore does not in itself point to falsity in condition representation 2.
3. Relatedly, the applicants point out that there is no evidence of there having been damage to one of the units (unit 2.03)). The absence of evidence may not take the applicants far in circumstances where they bore the onus of proving falsity. However, in any event, the evidence includes a strata inspection report prepared in respect of that unit which addresses defects in the building. Defects in the building, such as inadequate drainage (a problem which does emerge from the documents), were prima facie a cost to the owners' corporation; and, to the extent that the cost of rectification could not be recovered from the builder, it would be borne by the owners. This was clearly a matter capable of affecting the value of the units.
4. Bearing in mind that qualifiers such as "major", "substantial" and "significant" import an element of opinion or evaluation which is neither strictly factual nor inherently likely to be relied upon (see my reasons above in relation to condition representation 1), the "representation" made at the settlement conference reduces to a representation that the units suffered from defects which Mr Haddad considered significant (and which affected their value to some extent), and Mr Haddad had been required as a consequence of these defects to undertake some tiling and waterproofing work.
5. It has not been established that these limited representations were false. The existence of problems in the development affecting the units in issue in this case (and at least capable of being regarded as significant) emerges from the documents in the dropbox folder referred to above, and is also supported by:

(a) an email to Mr Haddad from an acquisitions manager at Defence Housing Australia dated 3 April 2014; and

(b) several email exchanges between Mr Muriniti (who was retained by the respondents as property manager for the units) and Mr Haddad, concerning problems in the units requiring repairs, between September 2014 and July 2016; and

(c) a Defect Rectification Specification report, relating to remedial works including on unit 9.01, dated 11 July 2017.

1. Additionally, for similar reasons to those given above in relation to condition representation 1, it has not been established that Mr Iannuzzi relied on condition representation 2 (whether that representation was made in the form pleaded or in the more limited form suggested in the previous paragraph).

(a) At the settlement conference Mr Naidenov asked for (inter alia) "all reports with respect to defects and damages" to be provided, and it seems that Mr Haddad agreed to do this. A substantial body of documents was later provided by way of the dropbox folder. The proper inference is that Mr Iannuzzi's staff looked at these documents and formed their own conclusions about the defects and their relevance to the value of the units. The representation made during the settlement conference, in itself, is unlikely to have had any material effect on their deliberations once they had considered the relevant material themselves.

(b) The issue of construction defects is not mentioned in the relevant part of the decision file note (set out at [43(d)] above). There is thus no evidence that it was raised with Mr Iannuzzi as an issue of potential significance. In the absence of evidence from him, there is no basis on which it could be found that the issue played any role in his decision to enter into the settlement deed.

1. It has not been established that either of the condition representations was made in the terms pleaded. To the extent that representations of fact were made, to the effect that the values of the units were significantly affected by construction defects, it has not been established that they were false in any material way or that they were relied on by Mr Iannuzzi.
2. Although I have not separately analysed in my reasons above whether the representations were made with the intention that they would be relied upon, I note that their content and the circumstances in which they were made tell strongly against any conclusion that such an intention was present. It may be accepted that there was an intention to persuade Mr Iannuzzi that his claim as to sale at an undervalue was unlikely to succeed (and that he should therefore be prepared to settle). However, it could not realistically have been imagined that Mr Iannuzzi would simply take the representations at face value and accept, without more, that they were correct. The terms of the letter of 14 June 2017 and the notes of the settlement conference indicate that Mr Haddad and his solicitors hoped to persuade Mr Iannuzzi to accept a settlement through negotiations and the provision of supporting documents.
3. For these reasons, it has not been established that either of the condition representations provided a basis on which the applicants were entitled to rescind the settlement deed.

The claim for damages or equitable compensation

1. The claim for damages or equitable compensation depends on the applicants having suffered loss as a result of Mr Iannuzzi's reliance on the pleaded "Misrepresentations" (3FASC [44]). Indeed, the claim is more confined than that because the losses in respect of which damages are sought consist only of costs incurred as a result of the Reston appraisal (ie, the valuation misrepresentation).
2. The claim appears to be put primarily as one for indemnification in equity. There is authority that, where a contract is rescinded on the basis of fraud, equity has power to order an indemnity for "loss directly caused by the fraud" as an aspect of restoring the parties to their "previous position": Nadinic at [34]-[36] (Leeming JA, Beazley P and Sackville AJA agreeing). As a result of the conclusions I have reached above, the applicants are not entitled to rescind the settlement deed, and there is no loss identifiable as having been caused by the valuation representation.
3. Additionally, the claim is brought only by Ms Erskine (not by North Shore). It is hard to see how there can be a "previous position" involving Ms Erskine, who was not involved in the negotiation of the settlement deed or a party to it, or why she has a claim in equity in her own right against parties alleged to have deceived Mr Iannuzzi.
4. To the extent that common law damages are sought, the foundation would seem to be the tort of deceit. Such a claim also must fail in the light of my conclusions above. Because it has not been proved that Mr Iannuzzi relied on the Reston appraisal, common law deceit is not made out; and the promulgation of the document by Mr Haddad was not causative of any loss incurred by Ms Erskine.
5. A further problem, again, is that it is only Ms Erskine who seeks damages. It was not suggested that Ms Erskine was the victim of any deception, in the sense of having acted in reliance on a fraudulent misrepresentation made by the respondents to her (or made to someone else with the intention that she would rely on it). This appears to stand in the way of any recovery by her in tort (see eg Commercial Banking Co of Sydney Ltd v RH Brown & Co [1972] HCA 24; (1972) 126 CLR 337 at 343 (Menzies J), 346-347 (Gibbs J)).
6. Consideration of the costs incurred by Ms Erskine, on the hypothesis that Mr Iannuzzi did rely on the valuation representation in deciding to execute the settlement deed, emphasises how distant the facts of the present case are from the normal situation of a party seeking to recover the losses caused by their reliance on a misrepresentation. Ms Erskine has not at any stage or on any view relied on the valuation representation. Instead she has, on this hypothesis, incurred costs in attempting to remedy the detriment caused to North Shore by Mr Iannuzzi having relied on that representation. Whether Ms Erskine can recover any of these costs by way of equitable compensation or common law damages involves significant issues of principle which it is preferable that I should not decide unless they actually arise.

1. The application must be dismissed.
2. The respondents sought an opportunity to make further submissions on costs. My orders will therefore make provision for the filing of written submissions (and any relevant evidence) on costs, and for that issue to be decided on the papers unless a further oral hearing appears necessary.

I certify that the preceding eighty-three (83) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Kennett.