Roumanus v Orchard Holdings

REASONS FOR JUDGMENT 1 A short issue arises in this appeal on the uncontested facts found by the primary judge. No issue of general principle arises and the result of the appeal turns entirely upon the factual inferences to be drawn from the facts of the case. 2 The issue as encapsulated by Mr Walker SC may be stated briefly. It is, whether, when directors who were also the controlling mind of the corporation, negotiated with an investor for the sale of shares held by one of the directors in the corporation and promised to lend the proceeds of sale to the corporation, certain false and misleading representations made by the director or his co-director to induce the sale were also made by the company. 3 The appellants, who were investors in the company, argued in the alternative that the company was liable as an accessory for the directors' conduct. 4 The primary judge set out in a comprehensive and lucid fashion at [159] his factual findings. It is therefore unnecessary for us to recite the facts. 5 In summary, the only directors of the company known as Orchard Holdings Pty Limited (Orchard), at all relevant times were Mr Sarkis (who was the vendor of the shares) and his business partner, Ms Mona Kady. 6 His Honour said at [166]: Whilst it is true that, in order to persuade the investors to part with their money and to buy shares in Orchard which Sarkis wanted to sell, Sarkis assured the investors that, by some means or another, he would put the proceeds which he personally received from the sale of those shares into Orchard in order to assist Orchard to progress and ultimately secure the development consent of which he often spoke, the sale of shares in Orchard by an existing member to another member or an outside investor, without more, would have produced no money for Orchard. It is the sweetener constituted by the promise to put the proceeds into Orchard which might have resulted in a potential benefit to Orchard. But that sweetener was offered by Sarkis in order to secure the sale of his shares in Orchard. It was not offered by Orchard but by Sarkis. It was not a necessary or ordinary incident of the share purchase transactions undertaken by the investors. 7 His Honour continued at [167] to [168] 167 In my judgment, the share sale transactions undertaken by the investors were intended to be for the benefit of the vendor and the purchasers of the shares. The sweetener was directed at locking in the transaction. These transactions were not part of Orchard's business. It was not a party to any of them. It had no role to play in any of them. 168 There is no doubt that the actual representors were Mona Kady and Sarkis. The issue is: In what capacity did they make the representations? In the case of Sarkis, was it purely to advance his own cause or was it on behalf of Orchard? In the case of Mona Kady, was it to assist Sarkis, or was it on behalf of Orchard 8 The error for which Mr Walker contends is that the conduct of Mr Sarkis and, where relevant, Ms Kady, could also be characterised as conduct which was engaged in by them and Orchard together, that is to say by Mr Sarkis as vendor and by Orchard acting through Mr Sarkis and Ms Kady as directors. 9 In particular, Mr Walker submitted that when Mr Sarkis promised the appellants that he would lend the sale proceeds to Orchard, that promise was not just a representation made by Mr Sarkis as representor but also a representation by the borrower, Orchard, to the effect that it would borrow the funds from Mr Sarkis. 10 Thus, Mr Walker characterised the representations concerning what Mr Sarkis would do with the proceeds of sale as including a representation made by Orchard that it would borrow the money for the purpose of giving effect to the representations made by Mr Sarkis. 11 One of the principal difficulties with this submission is that his Honour expressly found at [169] that there was no evidence of express authority to make that statement. Also, the effect of what his Honour found at [170] was that Mr Sarkis and Ms Kady had no implied or ostensible authority from Orchard to make statements on its behalf to encourage potential investors to purchase shares from Mr Sarkis. 12 The issue on the appeal turns, as it did before the primary judge, on the characterisation of the conduct of Mr Sarkis and Ms Kady in the circumstances referred to above. It is significant that his Honour did not make any finding that the investors understood when dealing with Mr Sarkis and Ms Kady that Orchard was making any representations to them. 13 In short, the correct position was set out by his Honour at [171]. He there contrasted the situation which arose in Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic (2007) 231 CLR 160 with the situation which arises where a director/vendor makes a representation about the financial prospects of the company in order to induce an investor to purchase shares from the vendor. 14 In this case, his Honour's factual findings were that Mr Sarkis' assurances (perhaps aided by Ms Kady) were made in their private capacities. Mr Sarkis was selling his shares and he or Ms Kady made representations to the investors about the company's prospects and also what Mr Sarkis would do with the proceeds of sale, that is to say, that he would lend the proceeds to the company. 15 His Honour's description of the latter representation as a "sweetener" was a finding that the investors understood that Mr Sarkis and Ms Kady were acting for themselves and not for Orchard. 16 Despite Mr Walker's able submissions, we are not persuaded that he has demonstrated any error in the findings of the primary judge. 17 Moreover, Mr Walker conceded that if he were to fail, as he has on the question of primary liability, no error in the primary judge's finding of lack of accessorial liability by Orchard can be shown. 18 For these reasons the appeal must be dismissed. The liquidator is entitled to his costs of a submitting appearance. The orders of the court will be: 1. Appeal dismissed. 2. Appellants to pay the costs of the liquidator's submitting appearance. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Jacobson, Rares and Farrell.