Sanguine Technology Pty Ltd ACN 124 894 088 v Abacus Calculators

Federal Court of Australia|2010-03-25|Before: Lander J

The applicants' proceeding be dismissed. 2. Judgment be entered for the cross-claimant (the first respondent) against the cross-respondents (the applicants) in the sum of $414,857, made up of $321,971 plus interest of $92,886 calculated at the rate of 10% from 7 May 2007 to today's date. 3. The applicants pay the respondents' costs of the proceeding. 4. The cross-respondents pay the cross-claimant's costs of the cross-claim. 5. Liberty to the cross-claimant to apply for an order that the second and third cross-respondents pay the cross-claimant's costs on an indemnity basis. Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

GENERAL DIVISION WAD 252 of 2007

AND: ABACUS CALCULATORS (W.A.) PTY LTD ACN 009 092 513

Introduction 1 This is an application by the applicants for damages pursuant to s 82 of the Trade Practices Act 1974 (Cth) (TPA) for contraventions by the respondents of s 52 of the TPA and a breach of a warranty in an agreement for sale of a business. The proceeding concerns the sale in early 2007 by the first respondent of a business to the first applicant. 2 The proceeding also includes a cross-claim by the first respondent against the first applicant for the unpaid portion of the purchase price, and a cross-claim against both the second and third applicants on a guarantee given by those applicants in relation to the payment of the purchase price. At trial the applicants did not lead any evidence that contradicted the cross-claim and the cross-claim was admitted in the amount of the claim, viz $321,971.49 and interest at the rate of 10% per annum pursuant to the provisions of the contract from 7 May 2007 until judgment. Judgment will be entered in favour of the first respondent against the applicants in that sum together with interest from 7 May 2007 at the rate of 10% to judgment according to the terms of the contract. 3 The first applicant was incorporated on 13 April 2007 as a special purpose vehicle for the purchase of a business owned by the first respondent. The second and third applicants are husband and wife and the directors of the first applicant. The first respondent was the owner of a business, the Abacus retail business, which was sold to the first applicant. The second respondent was the sole director of the first respondent. 4 The dispute between the parties relates to the extent of the information given by the respondents to the applicants on 9, 13 and 15 March and 26 April 2007. In particular it concerns the financial information relating to the business which was included in a brochure which contained a spreadsheet given to the second applicant on 9 March 2007 and the further financial information given on 13 March 2007. An important issue is what further information was given, if any, at the meetings of 15 March and 26 April 2007. 5 A further question is whether the applicants relied upon the information which was provided in entering into the agreement to purchase the business. 6 The documents do not provide a complete history in relation to the provision of information by the respondents to the second applicant, and the first question in dispute must be resolved by reference to the oral evidence of the witnesses. The second question is to be resolved by reference to the documentary evidence and to the second applicant's evidence.

Pleadings 7 I will identify the issues raised on the pleadings and examine the evidence in light of the issues raised. The parties conducted the trial in accordance with the issues raised on the pleadings.

Statement of Claim 8 The applicants' pleaded claim is that on 9 March 2007 the second applicant received a brochure promoting the sale of the first respondent's business which included a summary of the profit and loss results for the business for the financial years ended 2004, 2005 and 2006, and for the period ended 31 October 2006 headed 'Retail GL Acct Totals - Retail Group' (P&L summary) which disclosed sales in the period 1 July 2006 to 31 October 2006 of $2,496,951 and a spreadsheet headed 'Retail Division - Consolidated Profit and Loss' which disclosed the actual sales for July, August, September, October and projections in relation to November 2006 to June 2007. 9 It is pleaded that on 13 March 2007 the second applicant received a 'profit/loss statement' for the business for the period 1 July to 31 December 2006, which includes sales and a profit and loss figure for the period to 31 December 2006. The sales for the period 1 July 2006 to 31 December 2006 were $3,659,690 which translated into a profit of $49,419. 10 The applicants claim that in reliance upon the spreadsheet and the profit and loss update the first applicant entered into an agreement with the first respondent for the purchase of the business on or about 17 April 2007 (the Agreement Date). They identify the terms of the agreement including certain warranties that were given by the first respondent. It is pleaded that Annexure A to the agreement contained, relevantly, the following terms: 10.2 by Annexure "A" to the Agreement: (a) ... (b) [clause 5] the first respondent warranted that the first respondent was not in possession of any knowledge or information which if then revealed could cause the first applicant, as purchaser of the Business, to substantially modify the terms of the offer or to withdraw the offer to purchase the Business ("Warranty"); and 10.3 [General Condition 24] the first respondent represented to the first applicant that at the Agreement Date and as at the Settlement Date: (a) [subclause (e)] all representations made by the first respondent, or GMO, in respect of past sales, expenses, profits, losses or other financial information were accurate to the best of the first respondents information and belief ("First Representation"); and (b) [subclause (h)] all information known to the first respondent relating to the Business or the Agreement which was material to be known by the first applicant had been disclosed to the first applicant ("Second Representation"). 11 Paragraph 10.2 addresses the warranty and defines it. Paragraph 10.3 addresses two other conditions which are not warranties and are not defined as warranties. 12 It is pleaded that in further reliance upon the profit and loss summary, the spreadsheet and the profit and loss update the first applicant completed settlement under the agreement on about 7 May 2007, and the second and third applicants entered into guarantees supporting the first applicant. Paragraph 12 of the statement of claim summarises the financial information which they were given. 13 It is pleaded that the sales for January 2007 to the end of April 2007 were significantly less than the projected sales in the spreadsheet. The percentage variations between the sales achieved and the projected sales are pleaded in paragraph 12.4 of the statement of claim: 12.4 Column 4 - the percentage variances between the sales achieved and projected sales in each month listed. Month Column 1 Column 2 Column 3 Column 4 Projected Sales Sales Achieved Variances % Variance Jul 06 594,000 589,759 4,241 1% Aug 06 697,000 695,246 1,754 0% Sep 06 716,000 717,030 (1,030) 0% Oct 06 482,000 481,787 213 0% Nov 06 658,000 633,274 27,254 4% Dec 06 658,000 529,485 141,964 22% Jan 07 658,000 523,155 134,845 20% Feb 07 658,000 505,545 152,455 23% Mar 07 806,000 399,535 406,465 50% Apr 07 1,014,000 311,356 702,644 69%

14 The applicants claim in paragraph 13 of the statement of claim that representations (the first representation) were made by the first respondent or Goodwin, Mitchell & O'Hehir Business Brokers (WA) Pty Ltd (GMO) acting on behalf of the first respondent: ... in respect of past sales, profits, losses and other financial information relating to the Business, were not accurate to the best of the first respondent's information and belief insofar as: 13.1 the Spreadsheet projected that the sales would be $658,000 in each of January and February 007, $806,000 in March 2007 and $1,014,000 in April 2007; 13.2 after about December of 2002 the first respondent had in place a system for reporting sales achieved to each of its store managers on a daily, weekly and monthly basis so that the first respondent knew sales in a month at the commencement of the following month; 13.3 as at the Agreement Date the first respondent knew that sales were $523,155 and not $658,000 in January 2007, $505,545 and not $658,000 in February 2007 and $399,535 and not $806,000 in March 2007; and 13.4 as at the Settlement Date the first respondent knew that sales were $523,155 and not $658,000 in January 2007, $505,545 and not $658,000 in February 2007, $399,535 and not $806,000 in March 2007 and $311,356 and not $1,014,000 in April 2007. 15 The applicants plead that the first representation constituted misleading or deceptive conduct by the first respondent and gave rise to a contravention of s 52 of the TPA. 16 In paragraph 15 it is pleaded that the first respondent made further representations (the second representation) by not disclosing all information which was then known to the first respondent which was material information to be known by the first applicant, being: 15.1 the Spreadsheet projected that the sales would be $658,000 in each of January and February, $806,000 in March and $1,014,000 in April of 2007; 15.2 after about December of 2002 the first respondent had in place a system for reporting sales achieved to each of its store managers on a daily, weekly and monthly basis so that the first respondent knew sales in a month at the commencement of the following month; 15.3 as at the Agreement Date the first respondent knew that sales were $523,155 and not $658,000 in January 2007, $505,545 and not $658,000 in February 2007 and $399,535 and not $806,000 in March 2007; and 15.4 as at the Settlement Date the first respondent knew that sales were $523,155 and not $658,000 in January 2007, $505,545 and not $658,000 in February 2007, $399,535 and not $806,000 in March 2007 and $311,356 and not $1,014,000 in April 2007; and 15.5 the first respondent made no disclosure to the first applicant before the Agreement Date or before the Settlement Date as to the matters in paragraphs 15.3 and 15.4 above. 17 The applicants plead that the second representation was also conduct which was misleading and deceptive and a contravention of s 52 of the TPA. 18 Next it is pleaded that the representations made by the first respondent as to the projected sales for January 2007 to June 2007 were representations by the first respondent as to future matters and, at the time when the brochure was provided to the second applicant on 9 March 2007, the first respondent had no reasonable grounds for making each of the representations. It is pleaded that that conduct constituted misleading and deceptive conduct and was a further contravention of s 52 of the TPA. In that regard the applicant relied upon s 51A of the TPA. 19 It is pleaded in paragraph 20 of the statement of claim that the second respondent was a person who was knowingly concerned in each of the three contraventions. 20 Lastly, in paragraph 22 of the statement of claim, the applicants rely upon clause 5 of Annexure A to the agreement for the sale and purchase of the business which provided that the first respondent was in possession of knowledge or information which if then revealed could cause the first applicant, as purchaser of the business, to substantially modify the terms of the offer or to withdraw the offer to purchase the business. It is claimed that the first respondent breached that warranty in that the true sales recorded for the business in the month of January, February and March 2007 which were known to the first respondent were substantially less than the sales forecast in the spreadsheet. 21 The pleas in paragraphs 22 and 23 are: 22. In breach of the Warranty the first respondent was as at the Agreement Date in possession of knowledge or information which if then revealed could cause the first applicant, as purchaser of the Business, to substantially modify the terms of the offer or to withdraw the offer to purchase the Business, namely, that true sales in the months of January, February and March of 2007 were 20%, 23% and 50% respectively less than sales forecast in the Spreadsheet. 23. By reason of the first respondent's breach of the Warranty the first applicant has suffered loss and damage as pleaded in paragraph 21.1 above. 22 The claim for breach of warranty is limited to a claim that the respondents did not provide the financial information for the months of January, February and March 2007 which, if revealed, would have caused the first applicant to substantially modify the terms of the offer or to withdraw the then offer. That plea picks up the warranty in paragraph 10.2. There is no plea that the respondents breached the conditions in paragraph 10.3 of the statement of claim. 23 It is claimed that the three separate contraventions of the TPA and the breach of the warranty has caused the applicants' loss and damage. 24 In his closing submissions Mr Metaxas, counsel for the applicants, contended that the applicants have also pleaded in paragraph 13 a breach of the General Conditions and, in particular, clauses 24(e) and 24(h) of those conditions. Clauses 24(e) and 24(h) of the General Conditions of the agreement provide: The Seller represents (to the intent that such representations shall survive settlement) that at the date of this Agreement and Settlement: … (e) All representations made by the Seller or the Seller's Agent in respect to past turnover, expenses, profits, losses or other financial information are accurate to the best of the Seller's information and belief. … (h)That all information which is known to the Seller relating to the Business or this Agreement which is material to be known by a Buyer, has been disclosed to the Buyer. 25 As already noted, paragraph 10.3 does refer to those conditions but there is no plea in the remainder of the statement of claim that these conditions were breached. I do not agree therefore that the statement of claim does claim a breach by the respondents of clause 24(e). Paragraphs 13, 14, 15 and 16 of the statement of claim are confined to contraventions of the TPA. They are the express pleas in paragraphs 14 and 16 based upon the material facts pleaded in paragraphs 13 and 15. The only plea which can be understood as being a plea of breach of the contract is that contained in paragraphs 22 and 23, and that is limited to the warranty in paragraph 10.2 of the statement of claim. In my opinion, the applicants should be confined to their pleadings.

Defence 26 The respondents admit the provision of the information pleaded by the applicants on 9 March 2007 and 13 March 2007. The respondents assert that the information provided on 13 March 2007 showed a profit for the period to 31 December 2006 of $149,419 rather than $49,419 pleaded by the applicants. 27 They further assert at paragraph 6 of the defence that on 15 March 2007 the second respondent stated to the second applicant words to the effect that the sales figure contained in the spreadsheet relating to the months including and after November 2007 were figures created by the first respondent for budgeting purposes only, and were based on sales and profits in previous years and were not a forecast of future sales and profits. 28 The respondents plead that the second applicant and the first respondent entered into an agreement to purchase the business from the first respondent on 16 March 2007 and refer to the terms of that agreement (the first agreement). The respondents plead that in March 2007 the second applicant requested the first respondent to agree to rescind the first agreement and to enter into a second agreement in the same terms as the first agreement, save that the party to the second agreement purchasing the business was to be the first applicant. The respondents admit the first applicant entered into the written agreement with the first respondent on 17 April 2007 pursuant to which the first applicant agreed to purchase the business from the first respondent. 29 The respondents plead that the second agreement contained a number of terms which addressed representations which had been made prior to the entry into the agreement. In addition, the respondents rely upon Special Condition 1 of Annexure A to the second agreement: 7.6.3 [Special Condition 1 of Annexure A] The Agreements were conditional upon Abacus supplying to Sanguine within 7 days of the Agreements copies of such accounts, books, Business Activity Statements and/or financial information relating to the business ("the Financial Information") as Sanguine's accountant may reasonably require and Sanguine could in its absolute discretion give written notice of its intention to terminate the Agreements within 14 days of receipt of the Financial Information if it was dissatisfied with the report from its accountant in respect of the Financial Information. 30 In particular, the respondents deny at paragraphs 7.8 and 8.6 of the defence that the first applicant or the second and third applicants relied upon the spreadsheet which was provided to the second applicant on 9 March 2007 in entering into the first agreement or the second agreement. 31 The respondents address paragraph 15 of the statement of claim in paragraph 12 of the defence. They plead: 12.1 The respondents deny paragraphs 15.1 and 15.5 of the Statement of Claim. 12.2 The respondents admit paragraphs 15.2, 15.3 and 15.4 of the Statement of Claim. 12.3 The Respondents say further that on or around 21 March 2007, Mr Philip Fernihough, an accountant employed by the First Respondent provided to Mr Peter Guthrie, an accountant retained by the Applicants to conduct the due diligence of the purchase of the Business a document printed from the First Respondent's accounts which set out the following: the sales of the Business in January 2007 were $521,900; the sales of the Business in February 2007 were $500,215; and the sales of the Business to around 20 March 2007 were around $260,000. 12.4 The Respondents say further that on or around 26 April 2007, the Second Respondent, provided to the Second Named Applicant a document entitled March Retail Sales Comparison that set out, inter alia, the daily sales for each store of the Business, the total daily sales of the Business and that the total sales of the Business for the period from 1 March 2007 to 31 March 2007 were $399,535. 12.5 The Respondents say further that on or around 26 April 2007, the Second Respondent, provided to the Second Named Applicant a spreadsheet entitled "Sales for Period 1 April 2007 to 24 April 2007" that set out the following information: The sales of the Joondalup store of the Business for the period from 1 April 2007 to 24 April 2007 totalled $23,804.64 The sales of the Cloisters Square store of the Business for the period from 1 April 2007 to 24 April 2007 totalled $41,672.79 The sales of the Rockingham store of the Business for the period from 1 April 2007 to 24 April 2007 totalled $31,608.06 The sales of the Osborne Park store of the Business for the period from 1 April 2007 to 24 April 2007 totalled $45,184.79 The sales of the Cannington store of the Business for the period from 1 April 2007 to 24 April 2007 totalled $82,583.35 The sales of the Morley store of the Business for the period from 1 April 2007 to 24 April 2007 totalled $25,397.71 32 The respondents deny that any of the representations which were made were such as to give rise to misleading and deceptive conduct. They deny the allegations of contraventions of the TPA and repeat in paragraph 13 of the defence that the respondents made no representations as to the projected sales of the business for the period January 2007 to June 2007. All other matters are denied.

Reply 33 The applicants admit the fact of the first agreement, but otherwise join issue on the matters raised in the defence.

Cross-Claim 34 The respondents raised a cross-claim in the document which included the respondents' original defence. Paragraph 4 of the cross-claim addresses the financial terms of the agreement and identifies the amount payable by the first applicant: 1. $100,000 for goodwill 2. $150,000 for fixtures 3. $750,000 for stock in trade subject to adjustment 35 It is pleaded that it was a term of the agreement that if the value of the stock in trade exceeded $500,000 the first applicant would pay any sum in excess of $500,000 within 180 days of settlement. Interest would run on the amount unpaid at 10% from settlement. 36 Paragraphs 5 and 6 of the cross-claim address a contemporaneous loan agreement by which the first respondent loaned the first applicant the sum of $100,000 which was repayable within 180 days of settlement and, again if unpaid, would carry interest at the same rate as the amount unpaid for stock. 37 Paragraph 7 refers to a Guarantee by which the second and third applicants guaranteed the payment by the first applicant of the sums mentioned above. The terms of the Guarantee are referred to in paragraph 8 of the cross-claim. 38 In paragraph 12 the cross-claimant (the first respondent) identifies the amount claimed in the cross-claim: 12. Pursuant to the terms of the Second Agreement and the Loan Agreement, the amount owing by Sanguine to Abacus at 7 May 2007 was $321,971.49 calculated as follows: Stock in excess of $500,000.00: $224,076.27 Vendor Finance after adjustments per settlement statement of 13 August 2007 and clause 16(a) of the Second Agreement: $53,102.11 Error in adjustments in settlement statement regarding May 2007 rental of Cloisters Square store, incorrectly credited to Sanguine: $14,924.16 Cannington Bank Guarantee: $28,500.00 Monies withheld by Sanguine pursuant to invoice 704910 not received by Abacus: $1,368.95 TOTAL: $321,971.49 39 Although that amount was not payable until 180 days after settlement, interest runs from the date of settlement, namely 7 May 2007: paragraphs 4.3 and 6.3 of the reply. 40 The cross-respondents (the applicants) filed a defence to cross-claim, but because there was no issue at trial in relation to the cross-claim it need not be addressed.

Witnesses 41 The two principal witnesses in the trial were the second applicant and the second respondent. The third applicant, surprisingly, did not give evidence, notwithstanding she claimed that the guarantee which she gave of the first applicant's liabilities was entered into in reliance on the information contained in the spreadsheet and other documents. However, her absence from the trial meant that there was no evidence that she did anything in reliance upon any act or representation made by the respondents. 42 The respondents contended that the third applicant's failure to give evidence meant that her claim must fail and that 'the Court should conclude from the third applicant's failure to give evidence that her evidence would not have assisted the first and second applicants in respect of the allegations made': Jones v Dunkel (1959) 101 CLR 298. There is no evidence that the third applicant had any involvement in the transaction at all. There is no evidence that she ever read any of the documentary evidence provided by the respondents. She was not present at any of the meetings between the parties and therefore cannot give any evidence as to what was said or happened at those meetings. I am not prepared to infer that her failure to give evidence means that her evidence would not have assisted the applicants' case. I think she did not give evidence because she could not add anything to the evidence given by the second applicant because she had no evidence to give. I will not therefore draw a Jones v Dunkel inference. However, her absence means that there is no evidence that she relied upon any representations made by the respondents in entering into the guarantee of the first applicant's obligations. 43 The applicants contended that the second respondent was untruthful in his evidence. The respondents contended that the second applicant was untruthful in his evidence. A finding that a party or a witness has deliberately given false evidence should only be made if it is necessary for the purpose of the decision: Smith v New South Wales Bar Association (1992) 176 CLR 256 per Deane J at 271. 44 The applicants contended that the second respondent was untruthful about a number of aspects of his evidence. 45 First, in relation to his evidence of a meeting held on 15 March 2007 the applicants contended that not only was the second respondent's evidence on this aspect untruthful, but so too was the evidence of Mr Phillip Fernihough, the Administrations Manager of the first respondent, who was called by the respondents. For reasons which I will give, I do not accept the contention that the second respondent and Mr Fernihough were untruthful about their evidence on this matter. The second respondent's evidence was corroborated by Mr Fernihough's evidence. I thought that Mr Fernihough was an honest witness who was making every attempt to assist the Court. The evidence in chief of Mr James Goodwin, a director of GMO, also corroborates the second respondent's evidence in this regard. Indeed I have accepted their evidence as to the events of the 15 March 2007 meeting and rejected the first applicant's evidence that no such meeting occurred. 46 Secondly, the applicants contended that the second respondent was untruthful about the information provided to the second applicant at a meeting held on 26 April 2007. I also reject that contention. There was other evidence which was not challenged which tended to support the second respondent's evidence. His evidence was again corroborated by Mr Fernihough. The evidence was also supported by the statement of Mr Cyril Martin. His statement was tendered without objection and the applicants' counsel did not seek to cross-examine Mr Martin. For those two reasons, I reject the applicants' contention in that regard. 47 Thirdly, it was contended that the second respondent was untruthful in his evidence about when it was that the applicants were supplied with all of the first respondent's financial records relating to the business. The second respondent said in cross-examination that the financial information was provided to the second applicant at settlement. Later he said the information was provided prior to the first applicant providing its cheque for the purchase of the business. Later he said that it was done prior to settlement. In his witness statement the second respondent makes no mention of providing any financial information to the applicants on 7 or 8 May 2007. He was cross-examined by counsel for the applicants on the contents of an affidavit which was sworn on 6 June 2008. 48 In that affidavit the second respondent said that financial information was provided by him to the second applicant on 7 or 8 May 2007. At paragraphs 43 to 45 of his affidavit he deposed: 43. The Applicants have requested copies of sales relating to the Abacus business in the period from 1 July 2005 to 7 May 2007. The Respondents have discovered sales reports from 24 February 2005 which were sent to all of the stores now owned by the First Applicant. 44. Unless the First Applicant has disposed of them, those sales reports have been in the First Applicant's possession since 8 May 2007 and have not been discovered by the First Applicant. 45. On or around 8 May 2007, the First Respondent provided an IT business retained by the First Applicant, Power Business Systems, which access to the financial history of the First Respondent's business for the purpose of enabling the First Respondent to take electronic copies of the First Respondent's financial records. I believe that the Power Business Systems copied a number of the First Respondent's financial records and has not discovered those documents. 49 The second respondent's evidence in cross-examination on this issue was: Mr Metaxas: If it please, your Honour. Mr Ford, do you have that affidavit still in front of you? Second Respondent: I do. Mr Metaxas: Please look at paragraph 44? Second Respondent: Yes. Mr Metaxas: You said in paragraph 44 that the documents that are dealt with in paragraphs 43 and 44 and 45 have been in the first applicant's possession since 8 May 2007. That's correct, isn't it? It's what the document says, we can all read it? Second Respondent: That's correct, yes. Mr Metaxas: Settlement was 7 May, we know that, don't we? Second Respondent: Yes. Mr Metaxas: So there was never any exchange of information before settlement, was there? In the terms that you've previously suggested? Second Respondent: There was ‑ ‑ ‑ His Honour: I think that question is too vague, with respect. Mr Metaxas: I'm sorry. The exchange of information between the IT people and ‑ ‑ ‑ His Honour: And Power Business Systems. Mr Metaxas: That was managed by Power Business Systems, that was managed by Mr Martin on your behalf, did not occur before settlement? Second Respondent: Not that I'm aware of. His Honour: You're agreeing are you? You're agreeing that it did not occur before settlement? Second Respondent: That's right, yes. I'm sorry, your Honour, I'm saying as far as I'm aware that's when it happened. His Honour: When? Second Respondent: In relation to - since 8 May. His Honour: But Mr Metaxas is now putting to you that that means there was no exchange of information with Power Business Systems before settlement. Do you agree with the proposition? Second Respondent: Yes. Mr Metaxas: Then why did you previously say that all of this information was available to Mr Aziz before settlement? Second Respondent: I was asked - I thought it was in relation to when the check took place. I was asked, I think, your Honour said, this before you got paid or words to that effect. His Honour: Did you not get paid a settlement? Second Respondent: No, it was after 7 May. His Honour: When did you get paid? Second Respondent: I believe it was 11 or 12 May. His Honour: But settlement was on 7 May? Second Respondent: Yes, your Honour. 50 Mr Zilko SC, counsel for the respondents, said there was some confusion in the questions and evidence about the concept of settlement and payment of the cheque. The first applicant did not provide the first respondent with a cheque until a few days after settlement. The information was provided to the applicants in the meantime. I think that Mr Zilko is right about that and there may have been some confusion in the second respondent's evidence as to the distinction between settlement and the payment of the cheque. 51 However, there are difficulties with the second respondent's evidence which for whatever reasons was unsatisfactory. There was no mention of the provision of the information in his evidence in chief. The evidence emerged in cross-examination as an attack on the second respondent's credibility. The second applicant was never cross-examined as to whether the second respondent did provide the financial information referred to in the second respondent's affidavit to him at settlement. For those reasons, I am not prepared to find that the second respondent did provide the financial information deposed to by the second respondent to the second applicant on or about 7 or 8 May 2007. 52 The fourth matter upon which the applicants said the second respondent's evidence was untruthful or, at the least, unreliable was in relation to the provenance of the spreadsheet. 53 The second respondent's evidence in relation to the spreadsheet was most unsatisfactory. He made every attempt to distance himself and the first respondent from the spreadsheet. The gist of his evidence was that the document was first prepared in May 2006 for the purpose of presentation to the first respondent's bankers in relation to future credit provision. It was put to him that the document was intended to be reliable but he denied that. In the end, contrary to Mr Fernihough's evidence, he said that the document in its previous form was never presented to the Bank. 54 The second respondent's evidence in cross-examination in relation to the document was: Mr Metaxas: Is it the case that the information was provided to the bank for the purpose of some - when I say the information, the document - financial facility that was in existence between Abacus and its banks or bank? Mr Ford: It was a document that the bank - when we first went with Westpac, asked us to use a document called WinForecast and we would use this document from the past figures in relation to their requirements for our back to school calculators. … Mr Metaxas: Was it your understanding that the - could I call it the spreadsheet, for the benefit of just a compendious expression, that the spreadsheet was for the purpose of informing the bank of what your cash flow requirements might be, referable to the finance facility over that financial year, '06/'07? Mr Ford: Yes. Mr Metaxas: Thank you. So that the figures provided to the bank were intended to be, from your perspective, reliable? Mr Ford: No, the document that we give the bank is updated as we move through the year. Mr Metaxas: Yes, I accept that. But as at the date this document was created, which I assume was a little after the end of October 2006, and before the end of the month, this was the document that was intended to be reliable? Mr Ford: No. The document was in actual fact created back in April, May of '06 on the basis that we had to give our forward purchase to our suppliers for school calculators. We - the figures that we used were just a mirror image of the previous sales of the 2004/2005 year. Mr Metaxas: So the sales reported to the end of October in 2006 in the spreadsheet, were not actual sales? Mr Ford: They were the updated ones as I explained. As we moved forward with our information, we would update those figures. … Mr Metaxas: If it please, your Honour. Mr Ford, we were talking about the spreadsheet before we adjourned. Can I put the proposition to you that the spreadsheet was prepared for the bank to understand your likely financing requirements under your overdraft facility. Is that your understanding? Mr Ford: It was a forecast in relation to our back to school calculator needs. Mr Metaxas: Well, are they relevant to only one month in the spreadsheet, or are they relevant to every month in the spreadsheet? Mr Ford: They're relevant - our back to school funding usually started around the October, November depending on the quantity required and finished around the March figure. Mr Metaxas: All right, so was it your intention that the bank would rely on the document? Mr Ford: It was an indication for our own - Mr Metaxas: Was it your intention that the bank should rely on the document, Mr Ford? Mr Ford: No. Mr Metaxas: No? All right. The bank, what, should have just got it and thrown it in the bin, should they? Mr Ford: It was not given to the bank in that format in as much as that it was a part of a full consolidated for the whole group. Mr Metaxas: Well, was there something other than that document that qualified the report that is in the spreadsheet? Mr Ford: There would have been the total group sheet, not retail group. His Honour: The particular document, Mr Ford, was created when? I'm not talking about the consolidated document, I'm talking about this particular document. Mr Ford: Originally, your Honour, that would have been created around April, May. His Honour: For what purpose? Mr Ford: For the purpose to see what our needs were for our back to school period. His Honour: Was it created for the purpose of publishing it to the bank? Mr Ford: It was allowing us to guide the bank of our possible needs. His Honour: That's not my question? Mr Ford: Sorry, your Honour. His Honour: Was it created for the purpose of publication to the bank? Mr Ford: Yes. His Honour: Right. Was it published to the bank? Mr Ford: I don't recall. His Honour: If it was created for the purpose of publication to the bank, presumably you expected the bank to rely upon it? Mr Ford: Yes. 55 He was then cross-examined about a later version of the document created after October 2006: His Honour: Do you see it? That document was prepared some time after the end of October 2006, was it not? Mr Ford: It was. His Honour: For what purpose? Mr Ford: It was - it wasn't; it was updated. His Honour: For what purpose was that particular document created? Mr Ford: Originally created? His Honour: I'm not asking - this document, the one that includes the October figures. For what purpose was it created? Mr Ford: This was to show Mr Kerry O'Hehir of GMO the budgeted expenses, which he'd asked for, for each of the retail stores for the overheads. His Honour: So this was specifically created for the purpose of educating your business brokers relating to the sale of the business? Mr Ford: No. The original document was - sorry, your Honour, I'm - His Honour: Mr Ford, you have to follow the questions please? Mr Ford: Okay. I will. His Honour: I'm talking about the document which went with the brochure, not the document that was originally created in April of 2006. Do you understand that? Mr Ford: Yes. His Honour: The document that was created which went with the brochure was created after the end of October 2006? Mr Ford: That is correct. His Honour: Because it contains the October 2006 sales? Mr Ford: Yes. His Honour: For what purpose was it created? Mr Ford: I apologise, your Honour. It was to keep us updated for our own cash. It was an internal document used. His Honour: You just said a short time ago it was created at the behest of Mr O'Hehir? Mr Ford: No, it was given - His Honour: You just said - no, just answer the questions? Mr Ford: Yes. His Honour: That's what you said, did you not? Mr Ford: Yes, your Honour, I misunderstood the question. His Honour: I see. Well then, if this was created for that - sorry, what was the purpose of creating a document of this kind for internal purposes? Mr Ford: To keep us up-to-date with our cash flow requirements. His Honour: Well, how did that help? Mr Ford: Well, it gives us up till October, what our sales have been. It then gives us an indication for the following, up till March, of what we believe that the sales may be; to give us a part of the total group of the group's funding requirements. His Honour: Was it published to the bank, this document? Mr Ford: No. His Honour: The only information that this document has apart from the budget figures are the actual sales for July, August, September, October are they not? Apart from that it has no other actual sales or actual figures? Mr Ford: No. His Honour: How could that help with cash flow? Mr Ford: Well, it showed us when we were expecting the cash to come into the business so - His Honour: How did it do that? Mr Ford: By projecting to see what the possible inflow of cash would be from the retail stores and all the other various parts of the division of the company. His Honour: So it was created for the purpose of advising you of your future forecast - for your forecast of cash flow? Mr Ford: Yes. Mr Metaxas: Was it used by you for that purpose? Mr Ford: No. Mr Metaxas: It wasn't used at all? Mr Ford: No. Mr Metaxas: All right. His Honour: Mr Ford, I find that difficult to understand, why you would create documents that were of no use to you? Mr Ford: It was to satisfy - His Honour: And not used? Mr Ford: It was to satisfy - His Honour: It was what? Mr Ford: It was to satisfy the banks - one of the bank's requirements that we use the program WinForecast, to give them some sort of indicative figure for the - for our back‑to‑school purchases. His Honour: But I thought it wasn't supplied to the bank? Mr Ford: We used it internally, your Honour, so that we could - if we felt that we needed additional funding, that we could then produce it to the bank and discuss it with them. His Honour: I thought you've given two answers - one, that it wasn't supplied to the bank and, (b) that it was of no use internally? Mr Ford: It was originally supplied to the bank ‑ ‑ ‑ His Honour: Is that your evidence? Mr Ford: I thought I said that originally we'd given it to the bank ‑ ‑ ‑ His Honour: Was that your evidence please? Mr Ford: Sorry, your Honour, I don't understand the question. His Honour: Did you not say in the last few minutes that the document was not supplied to the bank and it was not used internally? Mr Ford: We - His Honour: Did you say that? Mr Ford: Yes, your Honour. What I - can I explain? His Honour: I'll ask you another question if I might? Mr Ford: Sorry. Yes. His Honour: In view of that evidence, what was the purpose of creating the document? Mr Ford: Originally was - ongoing was that if we felt that our cash flow requirements were to increase or decrease, we could then present that to the bank in relation to any additional funding at that time. 56 On the other hand Mr Fernihough provided the following answers in relation to the document: Mr Metaxas: Well, it was intended to be reliable, wasn't it? Mr Fernihough: It was intended to be a budget; budgets tend not to be reliable. Mr Metaxas: Well, I'm sorry, I have a difficulty with that proposition. The document was prepared, as I understand it, for the purposes of the bank that was providing an overdraft facility to the company? Mr Fernihough: Yes. Yes. Mr Metaxas: Was the document provided to the bank? Mr Fernihough: Yes, it was. Mr Metaxas: The WinForecast was provided to the bank? Mr Fernihough: Yes. Mr Metaxas: Was it provided to the bank on an updated and ongoing basis? Mr Fernihough: No, it was only actually - we were going to update it in December. … His Honour: It was provided to the bank for what reason? Mr Fernihough: To get our - we applied for a yearly additional funding to cover back-to-school period for school calculators, your Honour. His Honour: It was provided to the bank for the bank to rely upon? Mr Fernihough: Yes, it was. 57 I do not accept the evidence of the second respondent to which I have referred. I prefer Mr Fernihough's evidence which is inherently more likely to be accurate than the second respondent's. I accept the criticism by the applicants of the second respondent's evidence in relation to the provenance of the spreadsheet. It is impossible to think that the first respondent would have prepared a document for the purpose of presentation to the Bank, which was not presented to the Bank and upon which the respondents did not expect the Bank to rely. 58 I am not prepared to find that the second respondent was deliberately untruthful in respect to his evidence on this matter, but I reject his evidence on this topic. 59 Whilst I am not prepared to find that the second respondent was untruthful, he was, in some respects an unsatisfactory witness because he tended not to answer questions directly. In the end result, I have formed the opinion that the second respondent's evidence should be treated with caution and the weight to which his evidence should be given should depend upon whether it was corroborated by the evidence of a witness of credit or by reliable documentary evidence. As it happens, for reasons which I will give later, I am prepared to accept in its entirety the evidence of Mr Fernihough whose evidence often did corroborate the evidence of the second respondent. 60 The respondents contended that the second applicant's evidence was untruthful in some respects and unreliable in other respects. 61 Mr Metaxas argued that the second applicant was not a sophisticated businessman and was not able to think quickly. His evidence, it was contended, ought to be understood in that light. I do not think there is sufficient evidence to determine whether the second applicant was a sophisticated businessman or not. During the events in March, April and May of 2007 he behaved like a confident and competent businessman. Whether he was is not a matter for my judgment. I did not form the opinion that he was not able to think quickly as his counsel contended. I formed the view that he took time to answer questions because he was concerned about the import of the question and the effect of any answer. I formed the opinion that he thought he was on trial and that he would have to be quite careful about the answers which he gave. 62 The respondents contended that there were four aspects of his evidence which materially affected his credit and which, if accepted, would enable me to find that he deliberately falsified his evidence. 63 First it was contended that the respondents had established that the second applicant had failed to discover two particular documents: Exhibit R2 which was a copy of a letter from the second applicant's then accountants to the second applicant dated 18 January 2008; and part of Exhibits R3 and R21, an assignment proposal form. In support of that contention the respondents tendered three lists of documents provided by the applicants for discovery of their documents, each of which was verified by an affidavit sworn by the second applicant. I am satisfied that neither of the documents was discovered by the applicants. Both of the documents are directly relevant to issues raised on the pleadings and address the question of reliance. Both documents contained information which was adverse to the applicants' case. The documents should have been discovered. The second applicant said when pressed in relation to this issue that he had given all his documents to his solicitor and he could not explain why it was the two documents were not discovered. The applicants' solicitors at trial were not those who had prepared the list of documents. 64 I am not prepared to infer that the second applicant deliberately failed to discover these documents because he thought they may be adverse to his case. I have no knowledge of what documents were given to his solicitor or who made what decision in relation to the discovery of those documents. It would be unfair to the second applicant to infer that he deliberately failed to discover these documents in accordance with his discovery obligations. 65 The second matter which the respondents relied upon related to a letter of demand which was written by the applicants' then solicitors on 16 November 2007. That letter was written in reply to a letter of demand written by the first respondent on 13 November 2007, claiming the balance of the purchase price together with interest. In the applicants' solicitors' letter, a number of points were taken in relation to why the amount was not presently payable and a number of complaints were made about the value of the stock which was purchased by the applicants. A number of other complaints were made including a complaint that the business did not make a net profit of $811,483 in the financial year ended 30 June 2006. The applicants' solicitors sought a number of documents from the first respondent in order to make out their claims. Significantly, no complaint was made in that letter that there were any representations in the spreadsheet which were false, or that there was any misleading or deceptive conduct by the respondents in relation to the financial information produced by the respondents relating to the business after 30 June 2006. The respondents contended that the letter established that the applicants had never relied upon the spreadsheet, and that any later claim that they did was invented for the purpose of bringing this proceeding. As at 16 November 2007 the applicants' then solicitors did not claim that the spreadsheet or any other financial information after 30 June 2006 provided by the respondents gave rise to any misleading or deceptive conduct. However, in my opinion, that does not mean that the claim now of misleading and deceptive conduct in relation to the spreadsheet was invented for the purpose of supporting this proceeding. 66 The applicants' solicitors' letter was written in response to a demand by the first respondent and necessarily therefore in haste. I do not know, and I am not entitled to know, what instructions were given by the applicants to their solicitors between 13 and 16 November 2007 but, whatever those instructions were, only three days passed between the receipt of the letter of demand and the reply, and the applicants' solicitors would not have had the chance to investigate with any thoroughness the circumstances surrounding the purchase of the business. I do not accept that the letter supports any finding that the claim that the spreadsheet was relied upon is falsely made. 67 The third matter upon which the respondents relied was the applicants' statement of claim which was filed on 24 December 2007 (the first statement of claim) when this proceeding was commenced. 68 In the first statement of claim a number of matters were raised which have not been pursued in an amended statement of claim which was filed on 17 December 2008 (the second statement of claim). Nothing, in my opinion, can be inferred from the failure of the applicants to present those claims because during that time the applicants' solicitors changed. It may have been that the now solicitors for the applicants thought it would be in the applicants' interests to narrow the case to the issues which have been the subject of this trial, rather than to attempt to pursue the very many complaints which were in the first statement of claim. I simply do not know why it was that the applicants abandoned a number of issues and I am not prepared to infer, by reason of the abandonment of issues, that there is no strength in the present claim. 69 The respondents argued that in the first statement of claim the spreadsheet representations only referred to a failure to provide information relating to the months of March, April, May and June 2007. In the second statement of claim the complaint includes the additional months of January and February 2007. It was contended that the first statement of claim was at odds with the second applicant's evidence at trial to the effect that he did not receive the January and February 2007 actual sales figures from the respondents. There is an apparent inconsistency between the allegations in the first statement of claim and the case which has been presented at trial. As the respondents have pointed out, the second applicant claimed at trial that he did not receive the actual sales figures for January and February 2007 but he made no such complaint in the first statement of claim. 70 The difficulty, however, in relying upon the inconsistency as evidence of a recent invention of the present claim is that the Court cannot know what instructions were given by the applicants to their then solicitors, or what inquiries their solicitors made prior to the filing of the statement of claim. Again, I am not prepared to infer, by reason of the pleading in the first statement of claim, that the applicants' claim now lacks credibility. 71 The fourth criticism relates to the second applicant allowing a finance application to be made by his finance broker, Mr Coombes. The application contained two matters which were not true and would have been known to the second applicant to be untrue. One related to the profitability of the business to be acquired and would have misled any reader. I will refer to the application later in some detail. That application reflects adversely on the second applicant's credit. 72 The second applicant was not a good witness. He was evasive. He did not answer questions directly. He contradicted himself on a number of occasions and his evidence sometimes became confused. As I have said, I gained the impression that he was concerned about the reasons why questions were asked and how they should be answered so as not to do his case any harm. He also tried to argue his case from the witness box. He allowed a document to go forward for the purpose of obtaining finance which included two misrepresentations, one of which was material and would have misled a financier. His evidence must also be treated with caution. I am not prepared to accept his evidence when it is inconsistent with or contradicted by a witness of credit. 73 Neither of the two parties who gave evidence were satisfactory witnesses. Both of them made the cardinal mistake of thinking it was necessary to argue their case from the witness box rather than leaving that to their lawyers. They had trouble answering questions directly and, as a result, they both appeared to be somewhat evasive. I cannot therefore resolve this matter by preferring the evidence of one of the parties to the other. 74 Therefore, in the absence of documentary evidence in relation to the principal issues and in the absence of a clear preference for the evidence of one or other of the non-corporate parties, the matter must be resolved by reference to the evidence of the other witnesses called in the trial. 75 The applicants called Mr Peter Guthrie who was an employee of John Osborne & Associates Pty Ltd which was retained by the second applicant to carry out a due diligence inquiry in relation to the business to be acquired. I am satisfied that Mr Guthrie was an honest witness who was attempting to assist the Court. However, his evidence is in conflict on a material matter with the evidence of a witness called by the respondents, Mr Fernihough, and their evidence cannot be reconciled. I have, for reasons which I will explain, reached the conclusion that where Mr Guthrie's evidence is in conflict with Mr Fernihough's evidence, Mr Guthrie's evidence is in error. I do not mean by that that there was any attempt on his part to mislead me. I think he simply has a faulty recollection. 76 The applicants called two witnesses on damages. Ms Mei Ching Chek prepared the financial accounts of the first applicant after the acquisition of the business. If damages were to be assessed there would be no reason not to accept her evidence. Mr Andrew John Gilmour is an expert accountant who gave evidence in relation to the value of the goodwill which was purchased by the first applicant. The same may be said of Mr Gilmour. I accept his evidence. 77 The respondents called a number of witnesses all of whom, but for one, were employed by the first respondent at the relevant time and at the time of trial. Notwithstanding their relationship with the first respondent and thereby the second respondent, I did not detect that any of those witnesses' evidence was affected by their employment relationship. 78 Mr Fernihough was and is the Administrations Manager of the first respondent and has the responsibility for managing the accounts of the first respondent. He has been employed with the first respondent since 1996 and, at the relevant time, had the responsibility of providing the first respondent's agent, GMO, with financial information in relation to the business which was subsequently acquired by the first applicant. 79 I thought Mr Fernihough was a good witness. He gave his evidence directly and confidently, but not too confidently. His evidence supports the evidence of the second respondent. Where his evidence confirms the evidence of the second respondent, then I accept the second respondent's evidence in that regard. 80 Mr Fernihough's evidence is inconsistent with Mr Guthrie's evidence in a material particular relating to the provision of financial information to Mr Guthrie on 23 March 2007. As I have said, their evidence is irreconcilable. On the one hand, Mr Fernihough said that he gave financial information to Mr Guthrie on that day and, on the other hand, Mr Guthrie said that he did not receive the information. Because of other evidence which, in due course, I will discuss, I think that Mr Fernihough's evidence is to be preferred to the evidence of Mr Guthrie on that matter. The respondents have pleaded in paragraph 12.3 of their defence that the financial information was provided on 21 March 2007. That was not an issue at trial and indeed nothing turns on this difference. I find that the financial information was provided on 23 March 2007. 81 The respondents called Mr Michael Coombes who was employed by Southshore Finance Brokers to produce documents. He was called later to give evidence. He produced the applicants' application to the Commonwealth Bank of Australia (the Bank) which he had prepared seeking finance for the acquisition of the business and which was apparently submitted some time in March 2007. That document was important in two respects. The application which was put to the Bank did not disclose the true financial position of the business to be acquired. It did not contain the most recent financial information relating to the business, which on any understanding of the evidence, was known to the second applicant. If in fact the most recent financial information had been given to the Bank, it may be inferred that the second applicant knew that the Bank would not have financed the acquisition. The application in its form would have misled the Bank. The application also contained a representation that the second applicant had been awarded a degree of Masters of Business Administration which was untrue, but was information which the second applicant had provided Mr Coombes in a document prepared by the second applicant. A representation that the second applicant had such a qualification would also have misled the Bank. I accept Mr Coombes' evidence. His evidence of course throws further doubts on the reliability of the second applicant's evidence. 82 Ms Dellene Latimer was the Regional Manager of the first respondent at the relevant time. She had the responsibility of overseeing the running of the six retail stores by carrying out administrative duties. She first met the second applicant in March 2007 at the Osborne Park store where she showed him around that store. She said that members of the staff told the second applicant in her presence that the stores were quiet and pointed to a lack of stock. At a later time she had a private discussion with the second applicant which lasted 15 minutes and told him that three things needed to be addressed; stock , staff and advertising. She told him the business had insufficient stock and there had been insufficient advertising. She was employed by the first applicant after the purchase. She gave evidence of conversations with the second applicant after the purchase of the business but left her employment in May 2008. I accept her evidence. 83 Mr Goodwin is a director of GMO and together with Mr Kerry O'Hehir listed the Abacus retail business for sale at the request of the second respondent. GMO was the agent of the respondents. On 1 March 2007 Mr Fernihough emailed Mr O'Hehir, another director of GMO, the sales reports for the period 1 January and 28 February 2007. Mr Goodwin said that at that time he was unaware that that information had been provided to GMO, and says that he was only aware that that information had been provided to GMO at that time when GMO was required under subpoena to produce the file it held for the first respondent in November 2007. Mr Goodwin said the information was not retained on the file. That information was consequently not included on 9 March 2007 when Mr Goodwin sent by email to the second applicant a 'full profile' of the Abacus business which included the brochure together with the document headed 'Retail GL Acct Totals' and each of the business' stores' trading accounts from 2003 to October 2006, a spreadsheet, the 'Profit & Loss Forecast' for the business' Cloisters Square store and a 'Consolidated Profit & Loss' spreadsheet. On 13 March 2007 he sent a further email to the second applicant with the profit and loss statements for the six months to 31 December 2006 for the business in general and its individual stores. This did not include the sales reports for 1 January and 28 February 2007 which meant that the second applicant did not receive the most up-to-date information at that time. Mr Goodwin was later involved in a number of meetings with the second respondent, Mr Fernihough and the second applicant. He remembered three meetings on 15, 16 and 19 March 2007. I accept his evidence which supported the second respondent's evidence. 84 Mr O'Hehir was employed by the vendor as an agent in the sale of the Abacus business to the second applicant. He said that GMO did receive documents providing information on the Abacus business directly from Mr Fernihough but could not recall the documents. He could not recall any meetings with the second applicant. On 1 March 2007 he apparently received documents from Mr Fernihough being the sales reports for 1 January 2007 to 28 February 2007 which he did not give to Mr Goodwin. They were not placed on the file and Mr Goodwin was unaware of their existence. The failure by Mr O'Hehir to place relevant documentation on the file is surprising. It was also surprising that he had such a poor recollection of the events but in the end his evidence was of no assistance. 85 A statement of Mr Cyril Martin was also tendered. He is a systems manager employed by Abacus Calculators (WA) Pty Ltd and was responsible for, inter alia, distributing sales reports. Mr Martin said that the daily and monthly sales reports up to 24 April 2007 were provided to the second respondent, at the second respondent's request, for the meeting between the second respondent, Mr Fernihough and the second applicant on 26 April 2007. He said he gave three copies of the report to the second respondent. His evidence is important because, if accepted, it supports the respondents' claim that they did provide the first applicant with all the current financial information concerning the business to 24 April 2007. The applicants' counsel did not seek to cross-examine him. His evidence was not challenged. I accept his evidence. 86 Mr Adam Burnie is a former manager of the Abacus store at Cloisters Square. He said that he indicated to the second applicant, at a visit to his store, that stocks were low and sales were down, and that the business would have to fix its advertising in order to improve sales. I accept his evidence. 87 Mr Mark Burnie was employed as a senior sales manager at Abacus Calculators (WA) Pty Ltd. He was involved in the business' purchasing and marketing decisions, and sales. He said that he also told the second applicant, after the second applicant took over the stores, that re-stocking of stores and advertising was needed. I accept his evidence.

The Events 88 It may be assumed unless it is stated otherwise that I accept as established the uncontroverted facts which follow. I shall make express findings where the evidence is either unclear or in dispute. 89 The second applicant is also a director of Sanguine Group Pty Ltd which has operated a profitable Ranger Outdoors franchise at Canning Vale in Perth since December 2004. 90 In or about May 2006 Mr Fernihough created a document which he called a WinForecast for the financial year commencing 1 July 2006 and ending on 30 June 2007 for the purpose of providing it to the first respondent's banker to obtain an overdraft facility. That document was the predecessor of the spreadsheet which was included with the brochure supplied to the second applicant in 2007. 91 Around late May 2006 the second respondent told Mr Fernihough that he wanted to sell the 'Abacus retail side of the company'. At that time the first respondent operated a number of businesses apart from the Abacus Retail business including a photocopy sales division, a photocopying service division, a computer services division, a dictation division and a schools division. The last business involved the first respondent selling calculators to schools. The second respondent told Mr Fernihough to contact GMO to ascertain whether it would be able to list the retail business of the first respondent for sale. In June or July 2006 Mr Fernihough contacted and met with Mr O'Hehir of GMO for the purpose of listing the business for sale. At that time the second respondent was overseas. Mr Fernihough provided Mr O'Hehir with 'some superficial information about the business'. When the second respondent returned from overseas in September 2006, he asked Mr Fernihough to 'start putting together the information GMO had requested to further investigate the sale of Abacus Retail'. At that time the first respondent used an accounting software package called Pronto. The Pronto software package tracks all purchases, sale and expenses. The information is stored by use of a code which specified the information being entered and the store to which the information related. 92 On 14 December 2006 the second respondent appointed GMO as its agent to sell the business. Mr Fernihough provided GMO with: 1. Profit Statements for each store and retail support for the 3 years to 30 June 2006 and for the period from 1 July 2006 to 31 October 2006. 2. Summary profit statements for all stores and retail support for the 3 years to 30 June 2006 and for the period from 1 July 2006 to 31 October 2006. 93 In mid-January 2007 Mr O'Hehir requested Mr Fenihough to provide GMO with the breakdown of the monthly costs for each store. Mr Fernihough produced those documents from WinForecast which was used internally to determine cashflows figures. The documents provided included the actual sales for each of the stores and the retail business up to October 2006. They also included the forecasted expenses which had been included in the predecessor document which had been created for the purpose of production to the bank. 94 On 1 February 2007 Mr Fernihough was requested by Mr O'Hehir to reconsider the budgeted costs for the business' Cloisters Square store. Mr Fernihough recognised an error in the budget already supplied and offered to produce a further budget in respect to the Cloisters Square store to Mr O'Hehir. 95 In February 2007 Mr Fernihough prepared a document which set out the sales and expenses and represented a profit and loss statement for the period 1 July 2006 to 31 December 2006. On 23 February 2007 Mr Fernihough emailed that document to Mr O'Hehir of GMO. Those documents described a net profit to 31 December 2006 of $149,419, which was $233,022 less than the corresponding period to 31 December 2005. 96 On 1 March 2007 Mr Fernihough created two excel spreadsheets which set out the sales for the Abacus Retail Business for the period from 1 January 2007 to 28 February 2007 which he emailed to Mr O'Hehir on the same day with a message: 'please find sales figures for January and February'. As I said earlier, those documents were not forwarded to Mr Goodwin who prepared the brochure which was later sent to the second applicant. Mr O'Hehir has not explained in his statement why these documents were not passed on to Mr Goodwin. 97 The documents which were created by Mr Fernihough referred to an item 'GFT'. GFT was an acronym for 'Glenn Ford Tax', which was a sum added internally to the cost of wholesale goods in order to deter staff from offering too great a discount on those products to retail customers. The idea was to condition staff to give a discount which would eat into the GFT but not to discount the price of goods below the wholesale cost of the goods. On 8 March 2007 Mr Fernihough emailed Mr O'Hehir with a description of how GFT worked. He wrote: KERRY THE WAY THE PRICING ADJUSTMENTS WORK IS AS UNDER WE BUY 30 NOTEBOOKS @ 1500.00 EA WE THEN RE-COST THEN TO SAY 1700.00 EA WHICH CREATES A PAPER PROFIT OF 200.00 PER UNIT THE STOCK IS THEN TRANSFERRED TO THE STORES AT 1700.00 EA WHICH ARE THEN SOLD SAY AT 1900.00 EA SO WE HAVE CREATED A PROFIT IN RETAIL SUPPORT WHICH IS SHOWN AS PRICING ADJUSTMENTS OF 6000.00 AND THERE WAS A GROSS PROFIT AT THE STORES OF 6000.00 IF WE HAD NOT RE COSTED THE STOCK THEN THE GROSS PROFIT ON THE DEAL WOULD HAVE BEEN 12000.00 I HOPE THIS CLARIFIES THE PROCEDURE PHIL FERNIHOUGH 98 In early 2007 the second applicant decided that he ought to acquire a further business to operate in addition to his Ranger Outdoors business at Canning Vale. To that end, he contacted Mr Goodwin of GMO and informed him that he was looking for a business to purchase. 99 On 9 March 2007 Mr Goodwin emailed the second applicant enclosing a 'full profile' on the business known as 'Abacus Computers & Technology'. The email contained a brochure which had been prepared by GMO as agent for the vendor. The business was described in the brochure: Abacus Computers & Technology is a long established manufacturing/supply company which also has retail and service components and specialises in computer equipment. Multiple retail outlets spread throughout the city and metro area. This business has a strong infrastructure and would benefit from a focused and experienced retailer. The business has been operating since February 1981 and it has been owned by the current owners for 25 years. The business has many different products and services some of them being - Laptops - Printers - Scanners - Calculators - Software - Photocopiers The business has over 10,000 customers, they use Yellow Pages, Internet Advertising and Newspaper Advertising to build up their customer base. The sales of the business are initiated by means of over the counter, phone enquiries, fax orders, internet and referrals. The business has strong growth prospects with greater focus by the owner on the retail section of the business. Products such as notebooks, digital cameras, GPRS products, MP3 players etc are carried with sales continuing to increase, particularly on notebooks. 100 The brochure said the business employed 17 persons and was carried on at six different locations in Perth and in the suburbs of Perth. 101 Included in the brochure were a number of financial documents. They were not the most up-to-date financial information on GMO's files. The first was a document entitled 'Retail GL Acct Totals' (the Retail GL document) which disclosed the profits of the business in the three financial years ending on 30 June 2006 and the profit to and including 31 October 2006. Relevantly, the brochure disclosed that the business had made a profit of $811,483 in the financial year ending 30 June 2006 and a profit of $176,203 in the period 1 July 2006 to 31 October 2006. That document disclosed that the business had recorded sales in the period 1 July 2006 to 31 October 2006 of $2,496,951. The brochure also included separate trading accounts for each of the stores for the same periods as the Retail GL document. The Retail GL document was a summary of the separate trading accounts for each of the stores. 102 Also enclosed with the brochure was a document (the spreadsheet) which was entitled: Abacus Calculators (W.A.) Pty Ltd Retail Division Consolidated Profit and Loss The spreadsheet contains the actual sales for each of the stores for the period of 1 July 2006 to 31 October 2006 but does not include the actual expenses incurred over the same period. It does not include the sales for the period 1 November 2006 to 28 February 2007 which had been notified to GMO on 1 March 2007. 103 It is necessary to set out the spreadsheet because of its importance in the proceeding. That is the documents which is relied on for the plea in paragraphs 12 and 15 of the statement of claim and is said to support the first and second representations upon which the applicants rely.

Jul 06 Aug 06 Sep 06 Oct 06 $ $ $ $ TURNOVER Sales 594,000 697,000 716,000 482,000 DIRECT COSTS 501,000 573,000 588,000 405,000 GROSS PROFIT OVERHEADS Advertising Bank Charges - Cleaning 130 Consultancy Fees 900 Credit Card Charges Debt Collection Cost 730 Delivery Costs 80 General Expenses 720 Insurance GE Interest Free Charges 2,640 Legal Fees Motor Vehicles Payroll Tax Postage 250 Provision for Annual Leave 4,440 Recruitment Costs Rent Power Charges Security System - Rates & Taxes Levy Charges 800 Repairs & Maintenance Rent Allocation 300 Stationery Staff Amenities 90 Subscriptions 375 Superannuation Telephone Data Communications Salaries 158,883 162,183 167,453 186,330 TRADING PROFIT OTHER EXPENSES (INCOME) Extended Warranty Other Income Advertising Rebates - Rebates Received Commission (61,180) (49,880) (78,489) (57,540) NET PROFIT ABNORMAL INCOME (EXPENSE) Pricing Adjustments 22,000 45,000 50,000 40,000 OPERATING PROFIT NET PROFIT AFTER ABNORMALS 17,297 CUMULATIVE Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 May 07 June 07 Total $ $ $ $ $ $ $ $ $ 594,000 697,000 716,000 482,000 658,000 658,000 658,000 658,000 806,000 1,014,000 830,000 775,000 8,546,000 658,000 658,000 658,000 658,000 806,000 1,014,000 830,000 775,000 8,546,000 501,000 573,000 588,000 405,000 544,000 544,000 544,000 544,000 688,000 865,000 706,000 662,000 7,164,000 544,000 544,000 544,000 544,000 688,000 865,000 706,000 662,000 7,164,000 93,000 124,000 128,000 77,000 114,000 114,000 114,000 114,000 118,000 149,000 124,000 113,000 1,382,000 23,000 26,000 30,000 50,000 50,000 60,000 60,000 40,000 40,000 35,000 30,000 50,000 494,000 - - 100 350 - - - 600 - - - 1,050 130 130 130 130 130 130 130 130 130 130 130 1,560 1,200 1,200 1,200 1,300 1,500 1,500 900 1,200 900 1,200 1,000 14,000 5,550 5,550 5,550 5,550 5,550 5,550 5,550 5,550 5,550 5,550 5,550 5,550 66,600 730 730 730 730 730 730 730 730 730 730 730 8,760 80 130 130 180 180 80 180 180 80 180 180 1,660 720 720 720 720 720 720 720 720 720 720 720 8,640 2,350 2,350 2,350 2,350 2,350 2,350 2,350 2,350 2,350 2,350 2,350 2,350 28,200 2,640 2,640 2,640 2,640 2,640 2,640 2,640 2,640 2,640 2,640 2,640 11,680 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 12,000 2,071 2,071 2,071 2,071 2,071 2,071 2,071 2,071 2,071 2,071 2,071 2,071 24,852 3,720 3,720 3,720 3,720 3,720 3,720 3,720 3,720 3,720 3,720 3,720 3,720 44,640 250 250 250 250 250 250 250 250 250 250 250 3,000 4,440 4,440 4,440 4,440 4,440 4,440 4,440 4,440 4,440 4,440 4,440 53,280 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 30,000 39,970 39,970 39,970 39,970 45,088 45,088 45,088 45,088 45,088 45,088 45,088 45,088 520,584 2,560 2,560 2,560 2,560 2,560 2,560 2,560 2,560 2,560 2,560 2,560 2,560 30,720 - 1,220 - - 1,220 - - 1,220 - - 1,220 4,880 1,105 1,105 1,105 1,105 1,105 1,105 1,105 1,105 1,105 1,105 1,105 1,105 13,260 800 800 800 800 800 800 800 800 800 800 800 9,600 700 700 700 700 700 700 700 700 700 700 700 700 8,400 300 300 300 300 300 300 300 300 300 300 300 3,600 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 2,900 14,200 90 90 90 90 90 90 90 90 90 90 90 1,000 375 375 375 375 375 375 375 375 375 375 375 4,500 3,640 3,640 3,640 3,640 3,640 3,640 3,640 3,640 3,640 3,640 3,640 3,640 43,680 4,050 4,050 4,050 4,050 4,050 4,050 4,050 4,050 4,050 4,050 4,050 4,050 48,600 1,945 1,945 1,945 1,945 1,945 1,945 1,945 1,945 1,945 1,945 1,945 1,945 23,380 50,367 50,367 50,367 50,367 51,567 51,567 51,567 51,567 51,567 51,567 51,567 51,567 614,004 190,051 204,121 202,801 182,301 184,421 177,201 172,601 193,621 2,884,970 (65,883) (38,183) (39,453) (109,333) (79,051) (90,121) (88,801) (68,301) (66,421) (28,201) (48,601) (80,621) (802,970) (39,200) (39,200) (39,200) (39,200) (39,200) (39,200) (39,200) (39,200) (39,200) (39,200) (39,200) (39,200) (470,400) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) (36,000) - (909) (2,660) - - - (4,875) - - (940) (682) (10,066) (11,600) (300) (28,000) (5,300) (2,600) (30,000) (19,000) (2,000) (6,000) - - (25,000) (119,800) (7,380) (7,380) (7,380) (7,380) (7,380) (7,380) (7,380) (7,380) (7,380) (7,380) (7,380) (7,380) (88,560) (52,180) (69,580) (68,580) (56,455) (55,580) (49,580) (50,520) (75,262) (724,826) (4,703) 11,697 39,036 (51,793) (26,871) (20,541) (20,221) (11,846) (10,841) 21,379 1,919 (5,359) (78,144) 22,000 45,000 50,000 40,000 80,000 80,000 40,000 80,000 80,000 90,000 80,000 40,000 727,000 80,000 80,000 40,000 80,000 80,000 90,000 80,000 40,000 727,000 17,297 56,697 89,036 (11,793) 53,129 59,459 19,779 68,154 69,159 111,379 81,919 34,641 648,856 56,697 89,036 (11,793) 53,129 59,459 19,779 68,154 69,159 111,379 81,919 34,641 648,856 17,297 71,994 161,030 151,237 204,366 263,825 283,604 151,750 420,917 512,396 654,215 648,856 648,856

104 Because of the period of time which it addresses, the spreadsheet clearly announces itself as a budget or forecast and not an historical document. 105 Although it does not actually say so, the spreadsheet includes the actual sales of the business for the period July 2006 to the end of October 2006. However, that might be inferred from reading the spreadsheet itself. It would be the conclusion a reader would make if the reader read the spreadsheet in conjunction with the Retail GL document. The total of the sales for that period correspond with the total of the sales in the Retail GL document. The document also includes the actual purchases to 31 October 2006. 106 The spreadsheet includes the projected sales and purchases for the further period 1 November 2006 to 30 June 2007. 107 The spreadsheet includes the business' overheads but, in all respects, they are budgeted or forecasted figures rather than actual figures for the whole of the financial year. The actual overheads for the period 1 July 2006 to 31 October 2006 are not incorporated in the spreadsheet. That is easily discerned from a reading of the document. 108 The spreadsheet therefore includes the gross profit measured by actual sales against the cost of purchases for the business for the period 1 July 2006 to 31 October 2006. Otherwise the spreadsheet includes only projections or forecasts. That means that the spreadsheet does not disclose the actual net profit for the period to 31 October 2006. The spreadsheet therefore is of limited value. However, the net profit for that period can be gleaned from the Retail GL document. 109 The spreadsheet therefore can be described as a budget or a forecast except for the actual figures for sales and purchases in the limited period 1 July 2006 to 31 October 2006. 110 Even though this document was not presented to the second applicant until 9 March 2007, it could not have been thought that the spreadsheet contained any more actual information than I have described. Indeed, the second applicant did not suggest otherwise. The spreadsheet forecasts a net profit for the year of $648,856 based upon the actual gross profit for the period 1 July 2006 to 31 October 2006 and the forecast sales and purchases for the period 1 November 2006 to 30 June 2007 and the forecast overheads for the whole of the financial year. 111 The spreadsheet budgets for a gross profit for each month of the financial year and a total gross profit forecast of $1,382,000. 112 In each month the business' overheads exceeds the gross profit so the budget assumes that the business will incur a trading loss of $802,970. The spreadsheet assumes that the business will receive other income apart from income by way of sales by receiving extended warranties, other income rebates and commission totalling $724,826. That other income will not be sufficient to make the business profitable. However, it is forecast that the business will receive pricing adjustments to the value of $727,000 which will make the business profitable. The spreadsheet does not explain how the business will receive both the other income and the pricing adjustments. 113 The spreadsheet is the document upon which the applicants' case rests. It was the applicants' case that the spreadsheet misrepresented the profitability of the business which was to be acquired. The spreadsheet did forecast, as has been pleaded in paragraphs 13.1 and 15.1 of the statement of claim, that sales would be $658,000 in each period of January and February of 2007, $806,000 in March 2007 and $1,014,000 in April 2007. 114 As I have said, the second respondent and Mr Fernihough both said that the predecessor of this document was first prepared in May 2006. It was updated as actual sales and purchases were recorded month by month and at some stage it was presented to the Bank. The second respondent attempted to dismiss the document as unimportant. He would not concede that the document was intended to be reliable. He also said that it was not intended that the Bank should rely upon the document, notwithstanding it was to be provided to the Bank. I reject that evidence. I accept Mr Fernihough's evidence to the effect that the predecessor of this document was originally created for the purpose of submission to the Bank and with the purpose that the Bank rely upon it. 115 In particular, I find that this particular document which was included in the brochure was prepared in response to a request from Mr O'Hehir of GMO to show the budgeted expenses for the period 1 July 2006 to 30 June 2007, and the budgeted sales and profits over the same period. 116 The second applicant said that he read the brochure and, in particular, the spreadsheet which he noted at the time contained the 'financial information for Abacus to October 2006 was actual results and the information for the following months (on the last page) was a projection'. He noted the financial information which disclosed a profit in the financial year 2005/2006 of $811,483 and a profit of $176,203. That information was not on the spreadsheet but in the Retail GL document. The spreadsheet disclosed a profit of $151,237 to 31 October 2006 after inclusion of other income and pricing adjustments, based upon budgeted expenses to 31 October 2006 and actual expenses. The spreadsheet forecasts a net profit for the year of $648, 856. 117 On 13 March 2007 the second applicant met with Mr Goodwin, Mr Fernihough and the second respondent at the first respondent's Gordon Street premises. The second applicant says that this meeting occurred at GMO's offices, however I accept Mr Fernihough's evidence that this meeting occurred at the first respondent's premises. Mr Fernihough explained to the second applicant that the first respondent had an unusual pricing structure in that the first respondent artificially increased the cost of stock by 'GFT'. He explained 'GFT' in the manner described above. 118 Mr Fernihough also explained to the second applicant the structure of the Abacus business; that the Abacus business was the retail business of the first respondent; that profit and loss statements were provided for each store within the retail business division; and that profit or loss that could not be attributed to any one store was allocated to the 'Retail Support' division of the business. 119 The second respondent said that he had been thinking about selling the Retail Business for many years but had never followed through. He said that he had been away from the business extensively over the previous twelve months and his absence had affected sales, profit, advertising and stock levels of the retail stores. The second applicant was told by Mr Goodwin that the second respondent had taken his foot off the pedal in the last six months and that the business needed a new owner. 120 The second applicant asked Mr Goodwin to secure further and more up-to-date financial information. Mr Goodwin said that he would speak to the second respondent or Mr Fernihough about obtaining more up-to-date figures. The second applicant requested further and more up-to-date financial information because in my opinion he recognised the paucity of the information which was contained in the spreadsheet included in the brochure. 121 On 13 March 2007 Mr Goodwin sent the second applicant financial information relating to the first half year trading to 31 December 2006. The documents which were sent to the second applicant included the individual trading results for each of the five stores, together with the trading results for head office which was the recipient of the 'GFT'. Also enclosed was a summary of the total trading figures to 31 December 2006. The first respondent's financial systems, Pronto, allowed the first respondent to know on a daily, weekly and monthly basis its retail sales so that the first respondent could know at the beginning of each month the sales for the previous month. Indeed on 1 March 2007 Mr Fernihough emailed Mr O'Hehir the sales reports for 1 January to 28 February 2007. However this information which should have been provided in the brochure sent to the second applicant on 9 March 2007, or when the second applicant requested more up-to-date financial information, was not received by Mr Goodwin and so was not provided. The applicants have established the pleas in paragraphs 13.2 and 15.2 of the statement of claim. 122 The documents sent by Mr Goodwin to the second applicant disclosed that sales for the first half year of 2006 were in the order of $2,797,713 less than the sales for the first half year of 2005. Net profit had reduced from $382,441 in the period 1 July 2005 to 31 December 2005 to $149,419 for the period 1 July 2006 to 31 December 2006, a reduction of $233,022. Importantly, the net profit for the half year of $149,419 was significantly less than the budgeted net profit in the spreadsheet of $263,825. Sales for November were $633,274 and December $529,465 compared with the budgeted sales in the spreadsheet of $658,000 for each month. 123 On the same day the second applicant emailed Mr Goodwin saying that the figures looked a lot worse than expected and that the net profit for the period was $150,000, and asking whether that would mean that the expected profitability for the current financial year was only $300,000. He wrote: Thanks Jim. Going through the figures and at the moment they look a lot worse that I expected - unless I am not reading it correctly (to six months Dec 06 Net profit of $150K?? Does this mean expected profitability for this financial year is only $300K?? Please call me when you are able to. Also, still can not (sic) find their advert in the Yellow Pages?? Can find Arrow and everyone else but no Abacus? 124 The second applicant relied, for the comments which he made in that email, on the later financial information which he had been provided to 31 December 2006 rather than the spreadsheet. The second applicant said in his evidence that the sales to 31 December 2006 were lower than those that had been forecasted in the brochure. He said that this seemed to be according to him because sales in December were $100,000 less. He also thought that that was consistent with the second respondent having lost interest in the business. I find that after the second applicant received the documents on 13 March 2007 with the information which disclosed an actual net profit of $149,419 to 31 December 2006, he no longer put any reliance on the information contained in the spreadsheet at all. After 13 March 2007 the information in the spreadsheet was no longer relevant. In particular, he did not thereafter rely upon the accuracy of the budgeted sales figures for the period 1 January 2007 to 30 June 2007. 125 On the same day the second applicant sent a further email to Mr Goodwin querying the pricing adjustments for December 2006. Mr Goodwin did not reply to either email because his practice was not to comment upon financial details provided by a vendor. 126 The second applicant visited all of the first respondent's business' stores between 10 and 15 March 2007. 127 Some time between 13 and 15 March 2007, after the second applicant had received the financial information sent by Mr Goodwin on 13 March 2007, the second applicant prepared some 'working papers' to assist him in deciding whether to purchase the business. His working papers reflect three levels of profit $811,483 (the business' profit in the financial year ending 30 June 2006), $648,856 (the budgeted profit in the spreadsheet) and $300,000. In his working papers the second applicant assessed the goodwill at each of the assumed levels of profit; $750,000 on a profit of $811,483 which after provision for borrowing expenses (interest and the like) of $185,000 would provide a net profit of $628,483; $400,000 on a profit of $648,856 which after provision for borrowing expenses of $150,000 would provide a net profit of $498,856; and $100,000 on a profit of $300,000 which after borrowing expenses would provide a net profit of $206,000. The second applicant was cross-examined on this document. In due course the second applicant offered and the respondents accepted the sum of $100,000 for goodwill. It was put to the second applicant in cross-examination that he had assessed the profitability of the business for the financial year to 30 June 2007 at $300,000: His Honour: Was that your assessment of the value of goodwill provided that the projections at page 40 were accurate? Second Applicant: I was trying to work out how much it would go towards goodwill based on that, yes. His Honour: Well, what's your answer to my question? Second Applicant: Sorry? His Honour: What's the answer to my question? Second Applicant: Am I… His Honour: Does this document accurately recall your assessment of the value of the goodwill provided the forecasts were made out? Second Applicant: Six hundred and forty-eight, yes. His Honour: Yes. Thank you. Mr Zilko: All right. Now going to the right-hand column, because you were satisfied that the forecast was not going to be made out, you've calculated the amount of goodwill based on $300,000 profit, didn't you? Second Applicant: No. We only have… Mr Zilko: Just answer my question. It's a pretty straight forward question. Did you - because you were satisfied that the $300,000 was the true profit, or the more likely profit than 648,856, you reduced the goodwill to $100,000, didn't you? Second Applicant: I can only confirm profit to $300,000. Yes. Mr Zilko: On that basis you offered $100,000 worth of goodwill, did you not? Second Applicant: Yes. Mr Zilko: Therein lies the answer to this trial, doesn't it, you didn't… Mr Metaxas: Well, he's not competent to answer that question. His Honour: Well, to answer the question… Mr Zilko: Therein lies the seed of an idea. You relied on your assessment of $300,000 as the profit and not the projected figure, didn't you? Second Applicant: I can only confirm profitability to $300,000 at the time. Mr Zilko: Thank you. You could not rely on the projected figure, could you? You just said I could only confirm profit to $300,000 at the time? Second Applicant: Up to December - 31 December, that's all we could confirm. Mr Zilko: Now, stop just for a minute, Mr Aziz. The profit to December was 150,000. You wrote to the business broker and you've showed us the email and we've put it into evidence, but you doubled that figure? Second Applicant: Correct. Mr Zilko: …to get a profit of $300,000. That was something you did and you told me this morning that did it; nobody did it for you? Second Applicant: Yes, correct. Mr Zilko: On that basis, you concluded that an appropriate offer for goodwill was $100,000? Second Applicant: Yes. Mr Zilko: Not $400,000, Mr Aziz, is that correct? You didn't offer 400,000 at any stage, did you? Second Applicant: No. Mr Zilko: You would have offered 400,000 perhaps, Mr Aziz, if you had been satisfied that the projected figures were true and correct, mightn't you? Isn't that what we read from this - we read from this? Look at it? Second Applicant: If the profitability came in at, for the six months, 300 and… Mr Zilko: No, no. You're not answering my question, Mr Aziz. If the profitability of the business - if you were satisfied that the profitability of the business was as per the projections, that is 648,856 you might have been minded to offer 400,000 for goodwill? Second Applicant: It's possible but… Mr Zilko: But you weren't satisfied about the projections, were you? You've just told me that you could only be satisfied… His Honour: One questions at a time, Mr Zilko. Mr Zilko: I'm sorry, your Honour. His Honour: One question at a time. Mr Zilko: I'm sorry. You weren't satisfied that the profit was 648,856 were you? Second Applicant: No. Mr Zilko: Thank you. You didn't rely on the projected figures at all because you couldn't be satisfied that that was the profit. That's correct, isn't it? Second Applicant: No. We're talking… Mr Zilko: Let me just get this straight. You just said - we're getting a transcript of this, I'll be able to quote this back to his Honour later at the of the trial? Second Applicant: Yes. Mr Zilko: You just told me a moment ago that the only amount of profit you could be sure about was $300,000. Correct? Second Applicant: We could only verify profitability to 31 December at 150. I have doubled that to look at what I would offer for this business. Based on that, I've offered a million. Mr Zilko: That's right? Second Applicant: Knowing that I've still got all this other amounts to look forward to, which is not yet proven. Mr Zilko: But you didn't rely on those because you just doubled your figure of 150 to get 300. You relied only on a profit of 150 in the second six months, Mr Aziz? Second Applicant: That is the only thing that I can confirm is for the past six months. I can't predict what will happen in the next six months. Mr Zilko: Let me ask it this way, did you, for the purposes of making your offer, assume that the profit in the second six months - that is January to Jun 07 - would be $150,000? Second Applicant: I assumed that from my calculations but I expected a lot more. Mr Zilko: Well, I put it to you, Mr Aziz, that these figures bear out that you formed a view of your own, independently, even of your own accountants who were doing the due diligence, that the profit on this business, regardless of anything else that was written anywhere, was $300,000 for the full financial year. Is that much conceded by you? Second Applicant: Only doubling what we knew for the six months, yes. Mr Zilko: You doubled it - so let me put that into really fundamental speak - you had a profit of $150,000 in the first six months, which was proved by the figures - agreed? Second Applicant: Yes. 128 The second applicant prepared his working papers in so far as they relate to the offer subsequently made assuming a net profit to 31 December 2006 in the order of $150,000 and doubling it for the full year net profit. He took that base figure from the documents he had been provided on 13 March 2007 which disclosed a net profit of $149,419. He did not add to that figure the projections in the spreadsheet for the second half of the financial year or the budgeted sales for the rest of the financial year. He simply doubled the 31 December 2006 net profit figure for the purpose of ascertaining the likely profit for the financial year and the value of the business' goodwill. At no time after 13 March 2007 did the second applicant rely upon the information contained in the brochure or the spreadsheet. There is no suggestion that the financial documents which showed a net profit of $149,419 to 31 December 2006 were in any way inaccurate. I find that at the time the second applicant prepared the working papers which was some time after 13 March 2007 and no later than 15 March 2007, and before any offer was made for the business, that the second applicant did not believe that the business had the level of profitability represented in the brochure and more particularly in the forecast sales in the spreadsheet. I find that after 15 March 2007 the second applicant placed no reliance, if he ever had relied, on the information contained in the brochure. 129 A meeting occurred on 15 March 2007. The second applicant said that on that day he met with Mr Goodwin and no-one else. The second applicant said that he told Mr Goodwin that he wished to make an offer to purchase the business. In his evidence in chief he said that he said to Mr Goodwin on 15 March 2007, 'Having looked at the numbers I see a profit of $150,000 for 6 months or $300,000 for the year so I am valuing the business on that basis'. 130 The second applicant claims that he has no recollection of any meeting or speaking with the second respondent 'until after the contract was signed'. On the other hand the second respondent, Mr Fernihough and Mr Goodwin gave evidence that all three met with the second applicant on 15 March 2007. The second respondent said that he explained to the second applicant that the spreadsheet 'was prepared on WinForecast for the bank for our back to school calculator finance requirements' and that 'these budgeted figures were no reflection of the current retail sales or overheads'. He said to the second applicant that 'he shouldn't even have the document as it was intended for internal use only'. He pointed out to the second applicant that 'the actual November and December 2006 profit and loss and sales figures were lower than the WinForecast spreadsheet figures and none of the overheads had been adjusted from the original budgeted cash flow figures. They were the same for each month'. Mr Fernihough's recollection of the meeting supports the second respondent. He said that the second respondent 'explained to Salam that the document was part of our cash flow budget prepared for our back to school funding and did not contain actual sales after October 2006', and 'that these budgeted figures did not reflect the current retail sales which had dropped'. Mr Goodwin said that he has no memory of what was said. I accept the evidence given by the second respondent and Mr Fernihough as to the fact of the meeting and what was said. It is quite likely that the second respondent and Mr Fernihough would have said something to that effect because they knew that the second applicant had received the November and December figure. Mr Fernihough had also provided Mr O'Hehir with the January and February sales figures expecting those documents to be supplied to the second applicant. Nothing that the second respondent and Mr Fernihough said would have been a surprise to the second applicant in view of the emails he sent to Mr Goodwin on 13 March 2007. I also accept Mr Goodwin's evidence as to the fact of the meeting. I reject the first applicant's evidence that he only met with Mr Goodwin and that the second respondent and Mr Fernihough were not present at the meeting. 131 The second applicant denies the second respondent told him at the meeting 'or at any later time that the sales figures in the brochure for November 2006 and later months were for budgeting purposes only and were not forecasts'. I reject that evidence. I find that at the meeting of 15 March 2007, at which the second applicant, the second respondent, Mr Fernihough and Mr Goodwin were present, the second applicant was told that the spreadsheet was a budget only and not a forecast; that the budgeted figures were no reflection of the current retail sales or overheads; that the actual November and December profit and loss sales figures were lower than the spreadsheet figures; that the overheads in the spreadsheet had not been adjusted; and that the budgeted figures did not reflect the current retail figures which had dropped. If there were any misrepresentations in the spreadsheet in relation to budgeted sales figures for the period 1 January 2007 to 30 June 2007, and if contrary to my earlier finding the second applicant was of the opinion that those budgeted sales figures could be relied upon, he was told in clear terms on 15 March 2007 those sales figures could not be relied upon because they did not reflect the current retail figures which had dropped. 132 That afternoon Mr Fernihough emailed Mr Goodwin providing details of price adjustments relating to computer build costs which were presumably requested at that meeting. Later that day Mr Goodwin sent the second applicant a draft offer to purchase the Abacus Retail Business which the second applicant signed on the evening 15 March 2007 (the first agreement) and returned to Mr Goodwin on the following day. The first agreement was in the form of a Real Estate Institute of Western Australia standard form for an agreement for the sale of the business as a going concern (Sale Agreement). The offer to purchase the business was made by the second applicant 'on behalf of a company or entity to be incorporated or formed for the purpose of the transaction'. The offer was $1 million made up of: Goodwill $100,000 Fixtures $150,000 Stock in trade $750,000 133 The offer reflected an assessment of a gross profitability of $300,000 which was the lowest of the three figures addressed in the working papers. The second applicant had in those working papers ascribed a figure of $100,000 for the goodwill of the business assuming a profit (before borrowing expenses and the like) of $300,000. 134 The first agreement included clause 24 relating to "SELLER'S REPRESENTATIONS". Clause 24 relevantly provided: The Seller represents (to the intent that such representations shall survive settlement) that at the date of this Agreement and Settlement: ... (e) All representations made by the Seller or the Seller's Agent in respect to past turnover, expenses, profits, losses or other financial information are accurate to the best of the Seller's information and belief. ... (h) That all information which is known to the Seller relating to the Business or this Agreement which is material to be known by a Buyer, has been disclosed to the Buyer. The first agreement was said to be an entire agreement. 135 The first agreement also was subject to a number of conditions including finance. Importantly the agreement was conditional upon the purchaser being granted access to the first respondent's financial information and obtaining a due diligence report. 136 Clause 1 of Annexure A provided: 1. This Agreement is conditional upon the Vendor supplying to the Purchaser within 7 days of this Agreement copies of such accounts, books, Business Activity Statements and/or financial information relating to the business (called "the financial information") as the Purchaser's accountant may reasonably require AND the Purchaser may in their absolute discretion give written notice of his intention to terminate this Agreement within 14 days of receipt of the financial information if they are dissatisfied with the report of their accountant in respect of the financial information AND in that event this Agreement shall be at an end and the vendor shall forthwith return to the Purchaser all the purchase monies paid pursuant to this Agreement. 137 The offer was not accepted by the first respondent but a counter-offer was made in much the same terms as the original offer, except it had different terms in relation to computer software, none of which are relevant. The second applicant received the counter-offer from Mr Goodwin on 16 March 2007 and accepted the counter-offer on 19 or 20 March 2007 by signing the first agreement at GMO's office. 138 At this time, John Osborne & Associates Pty Ltd (John Osborne) was the second applicant's accountants. On 20 March 2007 the second applicant informed Mr Tucker, a partner in that firm, and Mr Guthrie, an employee accountant at that firm, that he had signed the first agreement to purchase the retail business, but that the contract was subject to due diligence. The second applicant was referring to Clause 1 of Annexure A of the Sale Agreement. The second applicant told Mr Tucker and Mr Guthrie that he wished John Osborne to carry out a due diligence inquiry. The accountants agreed to carry out the inquiry and Mr Guthrie was delegated to perform the exercise. The purpose of the second applicant instructing John Osborne was to satisfy himself as to the profitability of the business to be acquired and of the value of the business. At that time the second applicant was of the opinion that the level of profitability was no greater than $300,000 before taking into account the cost of finance. 139 No specific instructions were given to the second applicant's accountants and, in particular, Mr Guthrie as to how the due diligence inquiry should be carried out. The meeting lasted only about 30 minutes. Mr Guthrie's evidence was that he was not provided with the brochure at that initial meeting, but received it at some time after he started the due diligence inquiry. I accept his evidence in that regard. Mr Guthrie was not in possession of the spreadsheet or the information contained in the spreadsheet when he commenced his inquiry. 140 On 21 March 2007 the second applicant, the second respondent, Mr Goodwin and Mr Fernihough met. They discussed the Pronto system which was a software program that the business used to keep track of its sales. They discussed how the business might operate under the control of the second applicant. A further meeting was set for the following day to visit the Osborne Park store to see how it could be used as the business' head office. 141 The second applicant said that Mr Martin was also present at the meeting on 21 March 2007. Mr Martin said in his statement that he did meet the second applicant prior to the meeting but had left before the second applicant met with the second respondent, Mr Goodwin and Mr Fernihough. I accept Mr Martin's evidence which was, like all of his evidence, unchallenged. 142 The second applicant said that they 'discussed the profit and loss to December 2006 and how to increase profit levels back to the level of previous years'. He said that there 'was no discussion at this meeting about financial performance since December 2006' and that he 'did not ask for more up-to-date financial information'. 143 Mr Fernihough said that the second applicant is 'incorrect when he says that we discussed the profit and loss to December 2006 and how to increase profit' at that meeting he said that topic had been discussed at the meeting of 15 March 2007. I have found that the second applicant discussed the financial information with the second respondent and Mr Fernihough in the presence of Mr Goodwin on 15 March 2007. Mr Fernihough's recollection is more likely to be correct. There would be no need to discuss these matters given that they had been previously discussed on 15 March 2007. Although not much turns on this dispute, for the reasons given earlier I prefer Mr Fernihough's evidence. 144 On the same day Mr Tucker emailed Mr Goodwin requesting information in order to carry out the due diligence inquiry: We have been discussing with Salam this afternoon and this is the items that we wish to look at for Due Diligence. · Copy of tax return to reconcile profit and loss to figures provided Employees · What are the annual leave and are there any long service leave provisions · Any workers compensation problems that are around · Are there any insurance issues on the employees · We need to look at the wages records to verify to the trading statements · How are the bonuses issued? Sales · Verification of the extended warranty and how are the gift vouchers to be redeemed · Verification of the sales (sales invoices to track), discount and rebate structures · We need to look at the pricing adjustments · Look at a selection of purchases to track onto the Pronto system and the flow through bank, stock etc · Evaluate the control of the stock rotation · Stock ageing - ensure that the stock is all saleable for the business purchase We would like to look at these for the last 12 months to February 2007. If any are problems tell Salam at the meeting tomorrow morning. 145 Mr Tucker wanted to satisfy himself that the profit and loss figures which he had were reliable. That was the purpose of the request for income tax returns. He also wanted to verify sales and the gross profit on sales. Of course, both of these matters would be envisaged as standard in a due diligence report. On 22 March 2007 the second applicant, Mr Fernihough and Ms Latimer met at the first respondent's business' Osborne Park store. The second applicant was given a tour of the premises and an opportunity to meet some of the staff working in the store that day. Ms Latimer said that some of the staff spoke with the second applicant about the down turn in business. They said that the business was low in stock. Mr Fernihough also provided the second applicant with a copy of the store asset register, which as the name suggests detailed the store's assets and the quantity of each item. 146 On the same day Mr Fernihough also received an email from Mr Goodwin forwarding the email Mr Goodwin had received on 21 March 2007 from Mr Tucker. The email contained a request 'to assist Salam Aziz in due diligence'. 147 On the same day the second applicant emailed Mr Goodwin: As discussed few points for consideration… 1. Carpets at Joondalup 2. Hopefully I will be getting all I need to have (sic) the head office and the stores as complete and operational 3. Any other plants that should be included that may be based at West Perth such as Tools for the build and manufacturing No evidence was lead as to the content of the discussion that the second applicant refers to in his email. Mr Goodwin responded to the second applicant's email on the same day: I have discussed these points with Phil and I will come back to you on each of these asap. He provided the second applicant with contact details of a person who could provide options regarding the use of operating systems for the business. 148 On 23 March 2007 Mr Guthrie met with Mr Fernihough at the first respondent's Gordon Street premises to conduct the due diligence inquiry. Each point identified for consideration in the email from Mr Tucker on 21 March 2007 was discussed. Mr Guthrie asked for copies of the first respondent's tax returns. Mr Fernihough explained that the first respondent carried on a number of businesses and the tax returns included details of all of these businesses, and therefore the tax returns were not relevant. Mr Fernihough provided Mr Guthrie with the details of employees' pay for each store for the period of 1 July 2006 to 31 December 2006. He also provided Mr Guthrie with details of employees' leave for each store as at 22 March 2007. Mr Fernihough explained to Mr Guthrie by way of examples how GFT (as explained above) applied, and how it was 'critical to the business'. 149 Mr Fernihough said that after discussing pricing adjustments Mr Guthrie requested the sales and gross profit figures to 28 February 2007. Mr Fernihough said he would give him the monthly sales figures from January up to a couple of days before the meeting. In his evidence in chief he said: 86 I printed a sales report for the period from 1 January 2007 to 31 January 2007 which set out the sales for all the retail stores in that period. I said that the report showed the cost, sales and gross profit. I pointed each of these out on the report. I gave the report to Mr Guthrie. 87 I also printed a report for the period from 1 February 2007 to 28 February 2007. I gave the report to Mr Guthrie. 88 I also printed a report for the sales for the month of March 2007 up to around 20th or 21st of March 2007. I gave the report to Mr Guthrie. I did not retain a copy. 150 Mr Fernihough produced to the Court copies of the documents which he had reprinted more recently. He said the figures which had been supplied to Mr Guthrie, were the latest figures available although he did not have net figures at that stage because not all of the accounts of the suppliers had been received from each division. He said that when he handed the documents to Mr Guthrie he said that the sales were still deteriorating 'as he could see'. He said he also provided Mr Guthrie with a stock-on-hand report from Pronto which set out the stock holding of the Retail Business and set out the value of that stock. It was put to him in cross-examination that he believed that the second applicant was already in possession of the January and February 2007 reports which he believed the second applicant had received from GMO. He agreed. It was then put to him that his evidence in relation to the documents he provided to Mr Guthrie was a fabrication and later put it was a lie, both of which he denied. 151 Mr Guthrie's evidence was that the meeting of 23 March 2007 occupied some three to four hours which included time when Mr Fernihough left the room from time to time to copy or print documents. Mr Guthrie said that he asked for verification of the profit and loss statements but was advised by Mr Fernihough that that was not possible because the profit and loss statements 'can't be verified against tax returns because the tax returns are consolidated'. Mr Guthrie said he was given the retail stores' trading accounts to October 2006 and a spreadsheet which showed a facsimile date of 1 February 2007. In response to his request for later information he was given information up to 31 December 2006. In his evidence in chief he did not address any later figures than those. Mr Guthrie said he did not receive the documents which Mr Fernihough said he had given him relating to the January and February 2007 figures. He has searched his file and they are not on his file. He was not then aware as to whether the second applicant had received the January and February 2007 figures. The only figrures he has seen was to 31 December 2006. 152 It is difficult to reconcile the competing accounts. Both were adamant in their evidence in chief and neither resiled in their cross-examination. As I have already said, I do not think that Mr Guthrie was in any way dishonest but I prefer the evidence of Mr Fernihough for three reasons. First, he had already supplied the information with the January and February sales figures to GMO and there would be no reason not to supply the same information to Mr Guthrie. The information as far as he was concerned was like all the other relevant information already available to the second applicant, and the suggestion put to him in cross-examination that he fabricated or lied about the provision of this information to bolster the respondents' case must be rejected. Secondly, I think Mr Fernihough is a better disciplined accountant than Mr Guthrie. I say this reluctantly but I think Mr Guthrie's due diligence exercise was, with the greatest of respect, inadequate and failed in a number of respects to address issues which needed to be addressed to allow the second applicant to make an informed decision in relation to the purchase of the business. Thirdly, the respondents contended that there was tangible evidence which showed Mr Guthrie's account to be wrong. Mr Guthrie sent the second applicant an email on 28 March 2007 in which he relevantly wrote: Hi Salam, I have obtained a Retail Store listing as at 20th March, Phil Fernihough has stated that the Stock is worth $824,000, my check shows $824076.20, the figures are broken down by store on the attached Stock Valuation Report. The email was not, for reasons unexplained, on Mr Guthrie's file. The importance of the email is the reference to a 'Retail Store Listing as at 20 March'. Mr Guthrie was cross-examined on this reference. He conceded that a reference to a Retail Store Listing was a reference to the profit and loss statements for the individual stores. He said, when pressed, that the wording in the email might have been incorrect and he meant that the document was received on 20 March 2006. I do not think that could be right. There would be no need in that email to refer to the date upon which the documents were received. The email supports the respondents' contentions. The date of 20 March 2007 is also consistent with Mr Fernihough's evidence that he gave up-to-date profit and loss figures to Mr Guthrie on 23 March 2007. I find that the information that Mr Fernihough said was supplied to Mr Guthrie was supplied. It follows that the second applicants' agent had the latest actual profit and loss statements as at 23 March 2007. Whilst that was after the parties had entered into the first agreement, that agreement was later rescinded by the parties and a second agreement was executed. 153 On 23 March 2007 the second applicant received via email from Mr Goodwin a draft summary of trade restraints for the consideration of the second applicant which would apply to the first applicant after the business was purchased. The second applicant replied by asking who would own the business' logo. Mr Goodwin replied that the logo could be used by the second applicant but would remain the property of the first respondent. On 26 March 2007 the second applicant emailed Mr Goodwin inquiring whether a copy of the 'plant and equipment list' had been received. 154 On either the 27 or 28 March 2007 Mr Guthrie spoke to the second applicant relating to an interim due diligence report. Mr Guthrie said it was the 27 March 2007 and before he had written the report. The second applicant said it was the 28 March 2007 and after he had received the report. It does not matter who is correct. What is important is that Mr Guthrie told the second applicant that there was a downturn in sales of the order of $1.1 million and that there had been a consequent drop in profits. 155 On 28 March 2007 Mr Guthrie provided the second applicant with an Interim Report which is headed 'Due Diligence' and sub-headed 'Notes as at 2.00pm 28 March Interim Report', in which he identified steps he had taken to verify the business' financial records to 31 December 2006. He addressed Mr Tucker's 'urgent fax to Phil Fernihough of Wed 21/03/07': Question: Copy of Tax return to reconcile profit & loss to figures provided. Answer: Not available. Divisional figures are amalgamated for tax return. P & L Report to 30/12/06 supplied. On this report: Rent at $238886 appears to be stable compared with prior year. ProRata calculation shows as 99.5% of prior year figure: Wages In payroll system shows as $389,607 In P & L shows as $355,003 Shortfall $34,279 This Discrepancy would reduce the net profit for the year to $117,371 Profit & Loss Retail Shop reports as at October 2006 do not reconcile to the Profit & Loss Supplied report, discrepancy is shortfall $6,690 This Discrepancy would further reduce the net profit for the year to $110,681

The Interim Report addressed a number of questions relating to employees sales and purchase of stock which are unimportant and concluded: General Notes and Observations It is proving difficult to get up to date, accurate and verifiable information in this exercise, about the only accurate information that I have are the Stock lists and purchase and sales data which are direct from Pronto and external sources. The spreadsheets which were supplied at the start of our engagement have proved to be inaccurate and no credence can be afforded to them. I would suggest that the profitability of the business at $151K should be halved due to wage and stock adjustments. Peter Guthrie 28/03/07 14 Hours expended 156 Mr Guthrie has addressed his enquiry to '30/12/06', meaning 31 December 2006. The Profit and Loss section refers to Retail Shop reports as at October 2006. That expression is consistent with the evidence to which I have already referred in relation to Mr Guthrie's 28 March 2007 email which was that those reports were profit and loss statements for the individual stores. 157 However, Mr Guthrie was not in the Interim Report addressing the profit and loss of the business as at October 2006 notwithstanding the ambiguous reference to October 2006. That is so because the two adjustments he makes to wages and profit and loss total $40,969. When these adjustments are added to the net profit which he has calculated it can be seen that he was working from the actual profit and loss statements to 31 December 2006, not the spreadsheet in the brochure. That finding supports the finding earlier made. No reliance was put upon the spreadsheet after 13 March 2007 by anyone. After 13 March 2007 both the second applicant and Mr Guthrie proceeded by reference to the profit and loss statement to 31 December 2006. That is confirmed by the reference to a figure of $151,000 on the last sentence of the Interim Report. 158 In a report such as this, one would expect the author to indicate the historical earnings and his assessment of the maintainable earnings and the methodology used to arrive at that assessment. Mr Guthrie did not have available to him taxation returns and the like because the first respondent's Abacus business was part of the first respondent's larger business concern. There were no separate financial statements for the business to be sold which were capable of providing verification as a tax return might. Although the absence of taxation returns and separate financial statements of the business to be acquired would make the enquiry more difficult, there is no obvious assessment of the integrity of the profit and loss figures with which he was supplied. Mr Guthrie said that spreadsheets to which he was referring in his Interim Report, which he said were inaccurate and that no credence could be put upon them, had been supplied to him by Mr Fernihough shortly after he commenced his engagement and presumably on 23 March 2007. He said he was not there referring to the spreadsheet in the brochure. He was not challenged on that evidence and I accept that evidence. 159 Mr Guthrie's Interim Report shows that he must have been satisfied that at that time there had been a strong downward trend in sales over the half year to 31 December 2006. Mr Guthrie said he did not ask for any further financial information subsequent to 31 December 2006 because he had sufficient information to form a picture as at 31 December 2006. 160 On 28 March 2007 Mr Guthrie emailed the second applicant addressing details of the value of stock. He said that there might be some old stock which the second applicant may wish to take into account when negotiating the purchase of the business. On the same day Mr Guthrie emailed Mr Fernihough questioning discrepancies between figures shown in the profit and loss statement up to 31 December 2006 and the sales accounts for each Abacus individual store, and requesting more accurate profit and loss statements or information to address those discrepancies. On 29 March 2007 Mr Fernihough sent by facsimile sales reports for each warehouse, a revised profit and loss statement up to December 2006, payroll report, and updates on the business accounts to Mr Guthrie. 161 Around late March 2007 the second applicant engaged Southshore Finance to prepare a finance application on behalf of the first applicant (which at the time was yet to be incorporated) for a loan of up to $940,000. The finance application contained financial information relating to the first respondent's business to be acquired but did not contain the most up-to-date information which, on any understanding, was available to the second applicant. The financial application predicated an income from the business of $568,038 less any commitments for finance. The second applicant would have known at that time that such a return was inconsistent with the financial information with which he had been supplied. It was quite inconsistent with the advice which he had received from Mr Guthrie in his Interim Report. It was also inconsistent with the assessment that he had made of the business' profitability. Mr Coombes of Southshore Finance confirmed that he would have relied on the second applicant's accountants for the information necessary to make the application, and that it was his practice to use the most up-to-date information provided. 162 The application also contained personal information about the second and third applicants. Mr Coombes confirmed that this information was supplied by the second applicant to Southshore Finance when it was previously engaged to make a finance application for another business of the second applicant's, 'Ranger Camping and Outdoors'. The application wrongly represented, on the information supplied by the second applicant, that the second applicant had been awarded a Masters of Business Administration degree. The application was signed by the second applicant. 163 The application contained two misrepresentations. The first in relation to the profitability of the business was very serious, because it would induce the bank to lend when otherwise it might refuse the application. The second was less serious, but not inconsequential. The second applicant must have made that representation because he thought it would assist in obtaining finance. As I have already said in the reasons relating to the witnesses, the misrepresentation in the application reflects very badly on the second applicant's honesty and credibility. 164 The second applicant contends there was a subsequent meeting with the second respondent and Mr Fernihough on 3 April 2007. He is however wrong about that. Mr Fernihough said that he was overseas in Bali from 30 March 2007 and did not return to Australia until 13 April 2007. I accept that evidence. 165 On 3 April 2007 the second applicant did, however, meet with his solicitor to discuss the trade restraints provisions that were provided in the second agreement, which were provided by Mr Guthrie to the second applicant on 23 March 2007. At this meeting the second applicant's solicitor provided the second applicant with a draft trade restraints provision. 166 On 4 April 2007 Mr Guthrie produced his final 'due diligence' report on the business to the second applicant. Before completing that report Mr Guthrie had spoken to Mr Osborne about the difficulty in the business maintaining profitability and cash flow. He and Mr Osborne discussed the future profitability of the business and apparently agreed that it would barely achieve a break even point. They agreed that the business was unlikely to succeed mainly due to high payroll and high rent. Their forecasts for the financial year to 30 June 2007 indicated sales of $7.3 million about $1.1 million less than the first respondent's budget. The report was published to the second respondent on the 4 April 2007. The report concludes: The business ABACUS COMPUTERS & TECHNOLOGY is not registered with the appropriate authorities, this means that another party could register the name and use it with a similar signage and logo's. All shops run at a loss caused mainly by high rents & high wages, all profits are made at Retail Support/Head Office level and are highly reliant on Pricing Adjustments, Commissions, Rebates and Extended Warranties. The pricing adjustments appear to be variable and would depend on the level of purchasing skills to provide discounts to work with. The business has been allowed to become run down and possibly has been priced accordingly, (which the current owners admit), it will need to be identified which parts of the business are actually being sold, and whether Mr Ford wishes to retain the areas of the business which traditionally have been the most profitable in the industry. This will make it extremely difficult to expand into the higher margin areas. The report does not contain any assessment of the profitability of the business acquired. It does not identify historical earnings or future earnings. It makes no assessment of any maintainable earnings. It does not address the value of the goodwill in the business or if in fact there was any goodwill. It does however make clear that all shops run at a loss 'and are highly reliant on Pricing Adjustments, Commissions, Rebates and Extended Warranties'. No assessment is made of the continued availability of those items or the level at which they might be maintained. The report is, with respect to the author, a very ordinary attempt at due diligence. The second applicant did not give any evidence in chief of his reaction to this report. He was cross-examined on the report and agreed that he understood the import of Mr Guthrie's comment that all shops were running at a loss subject to relative support. He understood the business was run down. He said the businesses were still profitable. He could not remember whether he was told by Mr Guthrie or Mr Tucker that they were only break even. The report was accompanied by a spreadsheet which addressed three separate scenarios; a profit of $151,630 to 31 December 2006; a full year profit of $303,260 (which was arrived at by doubling the first figure); and an adjusted profit of $115,579 for the financial year to 30 June 2007 which assumes sales of some $675,007 less for the full financial year. 167 On 10 April 2007 the second applicant met with, Mr Guthrie and Mr Osborne. The second applicant requested that they prepare a cash flow scenario ('What if' scenarios) which took into account how the business might run in light of future cash flow and profitability problems as outlined in Mr Guthrie's final report to the second applicant. 168 On 13 April 2007 Mr Osborne wrote to the second applicant addressing the requested 'What if' scenarios. The scenarios were based on 10 assumptions: 1. Income is based on sales being down 44% for months January-June and we have used actuals for other months. 2. Other income has been arrived at on the some (sic) basis. 3. No cash has been allocated for holiday pay or Long Service Leave. 4. Preliminary expenses have not been included. 5. Advertising is in line with your suggestion of $20,000 per month. 6. Comparison is attached. 7. All figures are net GST where applicable. 8. Assuming our assumptions are correct it would seem that the business is only operating at just above break even once we factor in the interest payments that you will be incurring. 9. Before proceeding with your offer we will need to have a new company in place registered for GST so that we can claim the ongoing business exemption. 10. This has been prepared on the basis that you will not have industry credit in the first instance and will be on cash basis. The eighth assumption brought to the second applicant's attention that the business would be at best 'break even'. His evidence in relation to this aspect of the letter was: Mr Zilko: You couldn't have been told any more plainly that once you factored in your own financial obligations you weren't going to make any money or you were going to be 'just break even'. That might mean a dollar, I suppose. Did you see that? Second Applicant: Yes. Mr Zilko: You were being told very plainly that you weren't going to make any money? Second Applicant: Yes. Mr Zilko: But you ignored that, didn't you? Second Applicant: Yes. A letter written by Mr Osborne of 18 January 2008 recalls the events of that day. Mr Osborne wrote: Dear Salam RE: PURCHASE FROM ABACUS CALCULATORS On the 9th of April 2007 I requested Peter to arrange a meeting with you which he did. The object of the meeting which was held on the Tuesday 10th of April 2007 was for the 3 of us to discuss the figures provided by Abacus and how you intended to run the business if you did proceed with the purchase. At the meeting I expressed my concern as to the sustainability of the sales figures after the change of ownership. We discussed Hire, Government and Corporate Supplies and I cautioned you to give a lot of thought before proceeding as looking back on my experience in the industry, it is an extremely competitive industry and difficult to maintain market share. We went through the figures supplied by Abacus and agreed to prepare a scenario for you taking into account: 1. A reduction in turnover 2. Improved Margins 3. A reduction in advertising 4. Changing the telephone system to "Skype" or similar to achieve savings 5. Deleting payroll tax and provision for annual leave as they would not apply to your new business immediately This was a "What if" exercise. You expressed your main concern being that if for some reason there was a downturn that the business would continue to cover all your overheads. We gave you the figures on the Friday 13th April 2007 and you advised that you would take these figures and our advice into account when making your decision to proceed or not to proceed. We had no further discussions and input into your final decision as to the purchase of the business. Yours faithfully JOHN A OSBORNE The second applicant acknowledged that he had received the advice but said that he chose to ignore it. 169 On 16 April 2007 the second applicant emailed Mr Goodwin twice. The first email to Mr Goodwin requested him to take action on matters in relation to the transition of the business' head office to Osborne Park and of the business generally he wrote: Jim, Following points for discussion or meetings or notes only: 1. Business name that will purchase Abacus Computers and Technology is "Sanguine Technology Pty Ltd". 2. Need to resume visit of all the stores asap (only done Osborne Park) 3. Is the confidentiality clause still in place or are we in a position to talk about sale of the Abacus Computers and Technology with others (i.e. stock taking company, advertising firms, etc)? 4. Lease documents need to be drawn up and negotiated in some cases? 5. Supplier Account Application forms to be filled in and processed 6. Osborne Park head office to be setup. Can I get access to this facility prior to take over? This will be required to setup and test the computers and software from all stores. 7. I have a copy of all the stock in stores. Can this inventory report be re-printed to include quantity of these items sold in the last 12 months? Also, can these reports be produced in Microsoft excel formats. I was looking at these to help with the stocktaking exercise. If it can not (sic) be in one report then happy to use two separate electronic reports (sales & inventory) which I can combine into one report. 8. Is it possible to identify and move all head office items into Osborne Park? Couple of items that I can think of is stationary (sic) and Abacus Computers that are put together in head office are packed into "Abacus" card board boxes. If future assembly is to be done at O/Park then these packaging will also be required at this site. 9. Can I please get access to electronic logo's and design materials? This will allow me to get business cards, stationary (sic), adverts, etc to progress. 10. Copy of employee conditions, awards, AWA, etc 11. Others?? Please let me know if you require anything from my end. 170 The second email contained a copy of the first applicant's Certificate of Registration of a Company. The first applicant was incorporated on 13 April 2007. 171 On 17 April 2007 the second applicant on behalf of an entity to be formed signed a Rescission of Agreement to Purchase a Business in Relation to Abacus Calculators (WA) Pty Ltd (the Rescission of Agreement), terminating the first agreement between the second applicant and the first respondent. Later on the same day the second applicant on behalf of the first applicant subsequently signed a second agreement, a Real Estate Institute of Western Australia standard form for an agreement for the sale of the business upon exactly the same terms and conditions as previously agreed in the first agreement except the date of settlement was 30 April 2007. The settlement date was later extended by agreement between the second applicant and second respondent to 6 May 2007. 172 On 19 April 2007 the second respondent signed the Rescission of Agreement. 173 On 20 April 2007 the second applicant emailed Mr Hopkins of Burgess Rawson (WA) Pty Ltd, the landlord of the business' Joondalup store, with a completed 'Assignment Proposal Form' requesting that the lease for the Joondalup premises be assigned from the first respondent to the first applicant. 174 The 'Assignment Proposal Form' sought business plans. The second applicant replying on behalf of the first applicant wrote: Initial focus will be on advertising. Abacus Computers and Technology is a well known brand that the public associated with sale of quality computer products. In recent times advertising has been non-existent. This is a key area that needs to be re-launched urgently. In addition, all of the stores are low in stock and hence stock levels to be driven up. Further, there will now be a owner (sic) focused on the growth and success of the retail group. 175 On 23 April 2007 the second applicant visited the stores and staff. 176 On 24 April 2007 the second applicant emailed Mr Goodwin requesting that they meet. On 26 April 2007 the second applicant, the second respondent, Mr Goodwin and Mr Fernihough met. 177 Mr Martin's evidence was that on that morning at the request of the second respondent he printed a number of sales reports which he provided to the second respondent. He printed the end of month sale reports for March 2007 which had been prepared earlier in April 2007. When the second respondent spoke to Mr Martin, the daily sales report and the latest monthly sales report had been prepared up to 23 April 2007. He said he would normally have prepared those reports up to the previous day but because the previous day was ANZAC Day, he had not done so. He said he prepared new daily and monthly reports which included all sales up to 24 April 2007 and printed three copies which he provided to the second respondent. His evidence was not contested and he was not subject to cross-examination. I accept his evidence and find that at the meeting of which occurred on the 26 April 2007 the second respondent had the documents which Mr Martin said he had provided him. 178 There is dispute as to whether the second applicant was provided with the sales reports to 24 April 2007. The second applicant claims that he was not provided with any documents at that meeting. The second respondent and Mr Fernihough say that the second applicant was provided with those figures and Mr Fernihough said that the second respondent had 'briefly explained to Salam what each spreadsheet tracked'. The documents supplied were a spreadsheet recording the March 2007 figures with a comparison of March 2006 figures; a spreadsheet that further showed the sales up to 24 April 2007 including sales in relation to other businesses; and a spreadsheet which showed the sales on 24 April 2007. I accept the respondents' evidence in relation to this issue for two reasons. First, because Mr Martin was asked and did provide the information prior to the meeting. There would be no point in the second respondent seeking three copies of those documents unless he had intended to publish them at the meeting. Secondly, for reasons already given I accept the evidence of Mr Fernihough generally and in particular on this issue. The sales in March 2007 totalled $399,535 compared with March 2006 sales of $1,001,587. The gross profit for March 2007 was $82,114. The net profit was not disclosed. The sales to 24 April 2007 totalled $250,248. The sales for 24 April 2007 totalled $13,984. The March and April 2007 sales compared with budgeted sales in the spreadsheet included in the brochure of $806,000 in March 2007 and $1,084,000 in April 2007. Thus the actual March 2007 sales were half the budgeted sales. The sales for nearly the whole month of April were less than a quarter of the budgeted April 2007 sales. The provision of that information put the applicants on notice that the business to be acquired was not performing at anywhere near the level assumed in the budget. 179 I am satisfied that at this meeting on 26 April 2007 the second applicant was made aware of the business' gross profit in March 2007 and the sales to and including 24 April 2007. I have already found that the second applicant and therefore the first applicant did not rely upon the spreadsheet after 13 March 2007. If there were misrepresentations made on the spreadsheet relating to the budgeted figures from 1 March 2006 to April 2007, those misrepresentations were corrected by the conversation of 15 March 2007 and the provision of the January and February 2007 sales figures on 23 March 2007 to Mr Guthrie, and the provision of the March and April 2007 figures to the second applicant on 26 April 2007. Those misrepresentations in the spreadsheet could, having regard to the actual figures for March and April of which the second applicant was aware, have no longer lead the applicants into error. 180 The applicants' case is that the second applicant did not receive that information on 26 April 2006. It was put that it was inconceivable that the second applicant would have received that information which indicated sales less than fifty per cent of the budgeted sales in the spreadsheet and done nothing with that information. I do not agree. The second applicant had at that time proceeded with the purchase knowing that the half yearly profit was $149,419 as against the budgeted figure of $283,000 and a budgeted whole of year profit of $686,000; knowing that the January and February 2007 figures were significantly lower than budgeted; knowing that Mr Guthrie thought that the real profit for the half year was $110,000 after adjustments which should be halved; and knowing that his due diligence advice was the business was break even. Having regard to the facts and advice which he had received to that point of time it is quite conceivable that he would, as he did, press on. 181 On the same day Mr Goodwin emailed the second applicant and second respondent: Good afternoon Glenn and Salam Re $100,000 Vendors Finance Please find below a proposed clause: Agreement To Purchase Abacus Computers And Technology: Annexure C The Vendor (Abacus Calculators Wa (sic) Pty Ltd) agrees to provide and the Purchaser (Sanguine Technology Pty Ltd) agrees to take a loan in the sum of $100,000.00, to be utilised to satisfy the bank guarantees for the rental properties at settlement ("the Loan"). The Loan will be repayable by the Purchaser to the Vendor within 180 days of the completion of Settlement on an interest free basis, if payment is completed timeously (sic). If payment is not made within the 180 day period then interests calculated at 10% per annum shall be paid by the Purchaser to the Vendor. The Loan will be unsecured save for the requirement of personal guarantees to secure the performances of the Loan being provided by Abdus Salam Aziz and Laree Jeanette Aziz and the guarantee of Sanguine Technology Pty Ltd. _____________________ Signature _____________________ Signature _____________________ Signature Regards Jim Goodwin 182 On the same day the first applicant and the first respondent executed the Agreement to Purchase Abacus Computers and Technology: Annexure C. 183 Further on the same day the second and third applicants signed the 'Deed of Guarantee and Indemnity' on behalf of the first applicant, in which the second and third applicants became guarantors for the first applicant. 184 On 27 April 2007 the second applicant emailed Mr Goodwin querying the rent for one of the business' stores at Morley. On the same day, the first applicant and the first respondent signed an 'Extension of Settlement Date' extending the date of settlement to 6 May 2007. 185 Mr Adam Burnie, a former Business Development Manager of the first respondent, recalled meeting the second applicant at the Cloisters store 'about a week or two before' settlement. He said that the second applicant, the second respondent, Ms Latimer, Mr Mark Burnie and he were at the meeting. Ms Latimer also confirmed that a meeting did occur at the Cloisters store. I think the witnesses were speaking of the same meeting, and therefore accept their evidence in that regard. At this meeting the second applicant had a conversation with Mr Adam Burnie and Ms Latimer. They told the second applicant about the low levels of stock in the store. They said that advertising would need to be increased in order to improve sales when the second applicant took over the business. 186 On 1 May 2007 the second applicant emailed Mr Goodwin requesting that questions 6-10 in his email of 16 April 2007 still needed to be answered 'urgently'. The questions related to setting up the Osborne Park store as the head office; a report on stocks at each store; access to the business' logos; and copies of employees' employment contracts and agreements. No evidence was led as to Mr Goodwin's reply. However on the same day Mr Goodwin emailed the second applicant a letter regarding carpeting. The letter attached to the email was not produced. It was presumably written in relation to the re-carpeting in the Morley and Joondalup stores as requested by the second applicant, because Mr Fernihough's email appearing below in Mr Goodwin's email suggests this. 187 Later that day the second applicant received an email from Ms Heidi Emery of Ronson Mackinlay Conveyancers, who were acting for the first applicant. The email provided the second applicant with the new lease conditions for the Cannington store. The lease attached was not provided in evidence. 188 Before replying to Ms Emery, the second applicant wrote to Mr Goodwin: Couple of quick questions to you before I respond back to Heidi: 1. Do you think I will be able to negotiate down the Bank Guarantee (rather put money into stock than have it aside in the form of bank guarantee) 2. Public Liability insurance under the current lease with current lease (sic) is at $10,000,000 whereas they are seeking this to increase to $20,000,000 3. Annual increase under current lease is at 3%, in new lease they are seeking this to be 4% 189 On 2 May 2007 Mr Goodwin forwarded an email from the landlords of the Cannington store. The email addressed the options for renewal of the Cannington store lease and provided a 'summary of the essential lease terms as they would appear in the new lease'. The email requested a reply the following day. On 3 May 2007 Mr Goodwin sent by email to the second applicant a document which had been requested by the second applicant, being a valuation of the Morley store as at 17 November 2006. 190 The parties conducted a stock-take for all stores on 5 and 6 May 2007, and on 7 May 2007 the second applicant acknowledged receipt of Stock-take Value Reports in respect of all stores. Settlement occurred on the same day. Although the parties had agreed to an extension to 6 May 2007 the settlement did not occur until 7 May 2007, but nothing appears to turn on that. The second applicant received from the settlement agent a 'Revised Settlement Statement: Sanguine Technology Pty Ltd Purchase of Abacus Computers & Technology' which showed that the total amount due at settlement by the first applicant was $921,930.52. The first applicant obtained a loan of $940,000 in order to finance the purchase. 191 After settlement Mr Fernihough provided the invoices for the stock to be purchased by the first applicant the value of which was $729,766.35. On 8 May 2007 the first respondent received $114,186.17 from the first applicant. 192 For the reasons already given, I do not accept that the respondents provided the applicants with further financial information on 7 or 8 May 2007. 193 On 11 May 2007 the first respondent received a further $546,897.89 from the first applicant. 194 The second applicant did not have personal access to the business' sales reports until about a week after settlement. 195 On 14 May 2007 the second applicant emailed the second respondent and Mr Cameron Hopkins of AST Stocktaking regarding some obsolete stock for the business. On 16 May 2007 Ms Dargie, on behalf of the second respondent, provided the second respondent's response to the matters raised by the second applicant. The second respondent disputed some of the second applicant's reasons for no longer wanting certain stock and said that the stock was necessary for the purpose of setting up displays and for demonstration models, which were necessary for advertising purposes. On 17 May 2007 Mr Hopkins responded to the comments of both the second applicant and second respondent in relation to the disputed stock. He emailed the second respondent's settlement agent and noted that a deduction in the value of stock to $6,048.71 was in order, taking into account the comments made. On 19 May 2007 Mr Fernihough provided the first applicant with an invoice for $729,766.35 for the total amount of stock that was to be purchased by the first applicant from the first respondent. 196 On 28 May 2007, at the request of the second applicant, Mr Mark Burnie obtained the business' sales figures for the period of March to May 2007 and emailed these to the second applicant. In June 2007 Mr Mark Burnie provided the second applicant with spreadsheets setting out the monthly sales for the business from May 2006 to April 2007. On 6 June 2007 a management meeting was attended by the second applicant, Ms Latimer, Mr Mark Burnie and another staff member. The minutes of that meeting showed that the forecast sales figure to that date was $6,097,453.82 but the actual sales figure was $5,589,332.67. 197 On 3 August 2007 Mr Fernihough said he had a phone conversation with the second applicant in which the second applicant mentioned that he wanted to finalise issues regarding the payment of some staff long service leave and the final settlement figures to be paid. Mr Fernihough asked the second applicant to 'email what issues he wanted resolved so that we could finalise it'. 198 On 6 August 2007 Mr Fernihough wrote to the second applicant, referring to their conversation on 3 August 2007: Further to our conversation on Friday the 3rd of August regarding all outstanding issues in relationship to your purchase of the Abacus Retail Stores, I request that you email a list of your concerns so that the (sic) be finalised as soon as possible. As yet I have not received the list of issues and would appreciate this as soon as possible. I have being (sic) trying to speak to Heidi of Ronson Mckinny (sic) to ascertain the final settlement details and also any issues that you have requested her to resolve, but despite numerous messages being left she does not return mine or Glenn's calls. 199 Between 7 and 10 August 2009 a number of emails passed between Mr Fernihough and Ms Emery in an attempt to finalise the settlement between the first applicant and the first respondent. The emails evidenced a disagreement as to what the first respondent was liable to pay towards certain employees' long service leave entitlements. 200 On 13 August 2007 Mr Fernihough emailed Mr Goodwin, copying the second respondent, second applicant and Ms Emery to the email: Jim As you are aware we have being (sic) endeavouring to obtain a final figure from Heidi since the 7th May 2007. So that we can settle all outstanding issues including the payment to Alex Iden for his entitlement for pro rata, long service leave, so that we can forward all funds due to Salam. As you are aware Salam has not yet signed the lease for Morley due to all the outstanding issues not being addressed. We now require that all the outstanding issues including the final settlement figure be provided by 4:00pm Tuesday the 14th August 2007. Should the information not be finalised we will not only appoint another settlement agent and charge Ronson Mackinlay Conveyancers with any costs incurred and we will instigate legal action against all parties involved withn (sic) the sale and settlement of the retail stores. We are hoping that all the issues can be finalised in an efficient and amical (sic) manner so as to avoid possible litigation. Kind regards Phil Fernihough 201 On 16 August 2007 Ms Emery emailed a revised settlement statement to Mr Fernihough, the second respondent and Mr Goodwin. The settlement statement disclosed that the first applicant was indebted to the first respondent in the sum of $111,294.40 taking into account settlement adjustments. That sum was paid on 23 August 2007. 202 In the revised settlement statement the first applicant was credited with the sum of $7,462.08 (exclusive of GST) being for the May 2007 rental and outgoings for the Abacus business' Cloisters Square store. Mr Fernihough said that this sum was paid by the first respondent. The invoices supported that evidence. Mr Fernihough said that the amount should have been credited to the first respondent and not to the first applicant, as provided in the revised settlement statement. 203 Mr Fernihough said the amount owed by the first applicant to the first respondent at settlement was $320,991.91, calculated as follows: Stock in excess of $500,000: $229,766.35 Less reduction from AST: - $6,048.71 Plus Digital Tuner: $748.00 Plus Bank Guarantee: $28,500.00 Plus Vendor Finance: $53,102.11 Plus Error relating to Cloisters credit: $14,924.16 TOTAL: $320,991.91 204 The amount was not paid. The second applicant continued communications with the second respondent and Mr Fernihough in order to finalise the payments for stock, payments to employees' (employed by the previous business and who have continued to work for the first applicant) for long service leave and payments for rent for the stores. 205 On 12 November 2007 the second applicant emailed Mr Guthrie twice. In his first email he wrote: Peter I note the following point in your interim report: Question Verification of Sales (sales invoices to track) discount and rebate structures Answer A sample of Sales Invoices is being worked on, with tracking back to purchase invoices, Discounts and Price adjustments appear to be on an Ad Hoc basis, there does not appear to be any Standard Process for this. As the total Business Profitability is structured around Discounts and Price adjustments a critical person in the future business will be the purchasing manager. Was there any other notes made in relation to "rebate" structures? i.e. which supplier(s) and/or how much?? 206 In his second email he wrote: Peter, Do you have any evidence or substantiation of cost of any items that you were shown during due diligence that you have with you now?? There appears to be a lot of items with GFT still on it! If you have copies or notes of any supplier costs for items, I would like to review against what I have paid for them. 207 On 13 November 2007 Mr Fernihough wrote to the first applicant demanding payment of $320,991.91, 'plus interest at 10% per day' after 8 November 2007 (the date the amount was due) pursuant to the contract of sale. 208 Evidence was adduced from Mr Gilmour of RSM Bird Cameron of the actual sales for the period July 2006 to April 2007. He compared those sales figures with the spreadsheet figures and calculated the shortfall percentage. Month Monthly Sales Shortfall Shortfall percentage Actual Brochure $ % $ $

Jul-06 589,759 594,000 (4,241) (1%) Aug-06 695,246 697,000 (1,754) 0% Sep-06 717,030 716,000 1,030 0% Oct-06 481,787 482,000 (213) 0% Nov-06 630,746 658,000 (27,254) (4%) Dec-06 516,036 658,000 (141,964) (22%) Jan-07 523,155 658,000 (134,845) (20%) Feb-07 505,545 658,000 (152,455) (23%) Mar-07 399,535 806,000 (406,465) (50%) Apr-07 311,356 1,014,000 (702,644) (69%)

Table 2: Comparison of actual results to Sales Brochure figures 209 The figures for actual sales for November and December vary slightly from the pleaded figures, but the variation is immaterial. 210 I find that the second applicant was provided with the actual sales for March 2007 on 26 April 2007, being the same figure to which Mr Gilmour refers. The second applicant was provided with the sales to and including 24 April 2007, which were $264,232. The sales for the whole of April were $311,356. The 24th of April 2007 was a Wednesday. There were only four more trading days in April, assuming trading on Saturday. In the first 20 trading days in April sales were $264,232, or an average of $13,210. In the last four trading days the sales were $47,124, or an average of $11,781. There was no material difference in the average sales in those last four days of trading in April that would have impacted on any decision to buy the business. Sales had already dropped significantly, as Mr Gilmour's evidence shows.

Application of Section 52 211 Section 52 of the TPA provides that a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. A contravention of s 52 will occur whether or not the conduct is intended to mislead or deceive: Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre (1978) 140 CLR 216 at 228. The section is not concerned with fault: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191. Conduct will be misleading and deceptive if it induces error or is capable of inducing error. The conduct must be identified and the question then to be determined is whether that conduct considered objectively is misleading or deceptive or likely to mislead or deceive in the sense that it induces or is likely to induce error. In this case the conduct to be examined is as the pleadings and the evidence show the representations made by the respondents in the documents supplied to the second applicant which constitute the first and second representations as pleaded in paragraphs 13 and 15 of the statement of claim. 212 The respondents submitted that 'no conduct can mislead or deceive unless the representee labours under some erroneous assumption': Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at 200; Campomar Sociedad Limitada v Nike International Limited (2000) 202 CLR 45 at [104]. 213 That submission must be accepted. If a false representation is made to a party but corrected before that party does any act to that party's detriment in reliance upon the representation, the party cannot claim that the party who made the representation has caused that party loss or damage. 214 The applicants claim damages pursuant to s 82 of the TPA. Section 82 provides that a person who suffers loss or damage by the conduct of a corporation that was done in contravention of s 82 may recover the amount of loss or damage. In a claim for damages for a contravention of s 82 the applicant must prove that the loss or damage was caused by the conduct which was the contravention: Wardley Australia Ltd v Western Australia (1992) 175 CLR 514. In that case Mason CJ said at 525: The statutory cause of action arises when the plaintiff suffers loss or damage "by" contravening conduct of another person. "By" is a curious word to use. One might have expected "by means of", "by reason of", "in consequence of" or "as a result of". But the word clearly expresses the notion of causation without defining or elucidating it. In this situation, s. 82(1) should be understood as taking up the common law practical or common-sense concept of causation recently discussed by this Court in March v. Stramare (E. & M. H.) Pty. Ltd. (1991) 171 C.L.R. 506, except in so far as that concept is modified or supplemented expressly or impliedly by the provisions of the Act. Had Parliament intended to say something else, it would have been natural and easy to have said so. 215 An applicant will make out the applicant's claim for damages if the applicant can establish that the applicant was induced to enter into an agreement. That may be done in a case where it is said that the respondent made false representations by establishing that the applicant relied upon the truth of the representations and did or did not do something which caused that applicant loss or damage. If reliance can be established then causation will have been established. 216 Reliance may be inferred. In Gould v Vaggelas (1984) 157 CLR 215, Wilson J considered whether false representations made to the appellants caused the appellants to purchase an unprofitable business. His Honour, after a consideration of the authorities stated the applicable principles to be considered at 236: 1. Notwithstanding that a representation is both false and fraudulent, if the representee does not rely upon it he has no case. 2. If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation. 3. The inference may be rebutted, for example, by showing that the representee, before he entered into the contract, either was possessed of actual knowledge of the true facts and knew them to be true or alternatively made it plain that whether he knew the true facts or not he did not rely on the representation. 4. The representation need not be the sole inducement. It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract. 217 His Honour continued at page 238: [A] plaintiff carries the burden of establishing every element of his cause of action. … Where a plaintiff shows that a defendant has made false statements to him intending thereby to induce him to enter into a contract and those statements are of such a nature as would be likely to provide such inducement and the plaintiff did in fact enter into the contract. However, it is open to the defendant to obstruct the drawing of that natural inference of fact by showing that there were other relevant circumstances. Examples commonly given of such circumstances are that the plaintiff not only actually knew the true facts but knew them to be the truth or that the plaintiff either by his words or conduct disavowed any reliance on the fraudulent representations. Gould v Vaggelas was an action in deceit but the principles stated by Wilson J are relevant to contraventions of s 52 of the TPA: Sutton v AJ Thompson Pty Ltd (in liq) (1987) 73 ALR 233 at 240. Not only is fault not an issue in determining whether the impugned conduct is a contravention, nor is care or want of care on the part of the party claiming a contravention an issue in determining whether the conduct has misled or deceived or is likely to mislead or deceive that party. In Henville v Walker (2001) 206 CLR 459 Gleeson CJ said at 468: It will commonly be the case that a person who is induced by a misleading or deceptive representation to undertake a course of action will have acted carelessly, or will have been otherwise at fault, in responding to the inducement. The purpose of the legislation is not restricted to the protection of the careful or the astute. Negligence on the part of the victim of a contravention is not a bar to an action under s 82 unless the conduct of the victim is such as to destroy the causal connection between contravention and loss or damage. 218 The parties did not address the question of s 51A. The representations in the spreadsheet relate to future matters i.e. the budgeted sales for 1 November 2006 to 30 June 2007 and the budgeted overheads. Section 51A provides: (1) For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading. (2) For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not have had reasonable grounds for making the representation. (3) Subsection (1) shall be deemed not to limit by implication the meaning of a reference in this Division to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead. Section 51A(1) is an interpretive section. If the corporation does not have reasonable grounds for making the representation the representation shall be taken to be misleading. Section 51A(2) throws the onus onto the corporation to call evidence to establish that it had reasonable grounds for making the representation, failing which the corporation will be deemed not to have reasonable grounds for making that representation. The cases are divided as to whether that merely places an evidential onus upon the respondent corporation, which if not met will give rise to the deemed result or imposes a legal burden on the respondent corporation to positively prove that it had reasonable grounds for making the representation. That conflict does not need to be addressed because the first respondent did not adduce any evidence to suggest it had reasonable grounds for making the representation. The respondents' case was that the information included in the spreadsheet was budget information and not intended to be relied upon as forecast of sales and profit. In those circumstances they could not and did not attempt to prove that there were reasonable grounds for representing the figures in the spreadsheet as reflecting their view of future sales and profitability. 219 The respondents submitted that, '[i]f a person is so determined to enter into a contract that he is not in truth influenced by some false representation made to him, he clearly has no case': Sutton v AJ Thompson Pty Ltd (in liq) 73 ALR 233 at 240. That of course is a factual enquiry to determine whether in fact the conduct complained of did induce the applicants to enter into the agreement or whether in fact the applicants were so determined to do so that they placed no reliance on any false representations that were made. 220 In this proceeding in relation to the TPA contraventions there are two issues which include sub-issues. First, was the respondents' conduct a contravention of s 52? Secondly, did the applicants rely upon the contravening conduct in entering into the second agreement on 16 April 2007? If either of these questions is answered in the negative, then the applicants' claim must fail. 221 In my opinion both questions must be answered adversely to the applicants and the proceeding must be dismissed insofar as it relies on the TPA contraventions. 222 It is contended that the respondents in providing the spreadsheet engaged in misleading or deceptive conduct of the kind prescribed in s 52. There is no doubt that this business sale was a matter in trade or commerce. 223 The respondents contend that the second applicant failed to adduce any evidence to indicate his reliance on the spreadsheet. The second applicant's statement does not state that he relied upon the spreadsheet for the purpose of making a decision to purchase the Abacus business. The second applicant did not claim that he relied upon the spreadsheet for entering into the second agreement. 224 On 13 March 2007 he had later figures, being the half yearly profit and loss statement. He had obtained them from Mr Goodwin. Clearly he was relying on the information in that document when he emailed Mr Goodwin on that day and referred to the half yearly profit of $150,000. I have already found that after 13 March 2007 the second applicant put no reliance, if he ever had, on the spreadsheet. 225 The second applicant created his 'working papers' which he confirmed were produced by him for the purposes of calculating how much the second applicant was willing to pay in terms of goodwill proportionate to the amount of profit the business was expected to make. In this document it showed, inter alia, that the second applicant was willing to pay $100,000 goodwill if the expected profit of the business were to be $300,000. The second applicant admitted at trial that $300,000 was reached by his own doubling of the amount of $150,000 (the profit margin he received from Mr Guthrie's report of 4 April 2007). Again that shows he was not then relying on the spreadsheet. 226 I am of the opinion that the second applicant must have relied on Mr Guthrie's profit margin of $150,000 and not the projected profit in the spreadsheets ($648,856). The assumed amount of goodwill offered which formed part of the offer was based upon an assumption of profitability that had no relation to the profitability in the spreadsheet, indicating the second applicant's understanding at the time that the business was not making the profits as indicated in the spreadsheets. 227 On 15 March 2007 the second respondent and Mr Fernihough explained to the second applicant the purpose for the preparation of the spreadsheet and the limited use to which the document could be put. The second applicant knew then because he had been told at that meeting that the budgeted figures did not reflect the current retail sales which had dropped. 228 The second applicant entered into the first and second agreements without placing any reliance upon the spreadsheet which, on any understanding, was no longer relevant, if it ever was. I have already found that at the time the second applicant signed the first agreement he did not believe that the business had the level of profitability or the sales disclosed in the brochure and spreadsheet. 229 The offer that the second applicant made reflected an estimate of profitability before the cost of finance of $300,000, which again shows an absence of reliance on the spreadsheet and a reliance on the half yearly profit and loss figures which no-one suggests were inaccurate. 230 The first agreement was entered into before the first applicant employed John Osborne to do the due diligence report. However, John Osborne was employed to do a due diligence report for the purpose of the second applicant satisfying himself that the profitability of the business was in the order of $300,000 which was the level he estimated on half yearly earnings of $150,000 and the level he had assumed for assessing the value of the goodwill. 231 On 23 March 2007 Mr Guthrie was given the monthly sales figures for January and February 2007 by Mr Fernihough. Mr Guthrie was the second applicant's agent. There is no evidence which would support a finding that Mr Guthrie produced those figures to the second applicant. 232 On 27 or 28 March 2007 Mr Guthrie told the second applicant that sales had gone down by in the order of $1.1 million. The second applicant could not rely upon the sales in the spreadsheet after receiving that information. 233 On 28 March 2007 the second applicant received Mr Guthrie's Interim Report which assessed the half yearly profit at $110,000 and suggested that the profitability of the business at $151,000 'should be halved'. The second applicant could not thereafter be relying on anything in the brochure and spreadsheet, and in view of his experts' advice that the half yearly figures to 31 December 2006 'should be halved'. 234 On 4 April 2007 the second applicant received Mr Guthrie's final report. That contained the spreadsheet which addressed the three levels of profitability. 235 On 10 April 2007 the second applicant met with Mr Guthrie and Mr Osborne. On 13 April 2007 he was told in a memorandum that the business would only operate at break even. The second applicant agrees he was told that he was not going to make any money but he ignored his experts' advice. 236 The second applicant made a decision to purchase the business despite Mr Guthrie's negative report of the business. The second applicant could have at that stage rescinded the agreement. He however chose to continue with the purchase notwithstanding that he was told by his experts that the business would only break even. At that stage, he was not relying upon any financial information provided by the respondents. 237 On 26 April 2007 the second applicant was provided with the sales figures for March and April to 24 April 2007. March sales were half of the budgeted figures and the April sales were about a quarter of the budgeted figures. Despite this negative information, the second applicant continued with the purchase of the business. It is clear from his conduct that he was not relying on the spreadsheet at the time. 238 Indeed, the second applicant did not claim that he relied on the information in the brochure or spreadsheet. He did claim that he relied upon the figure of $150,000 in the 31 December 2006 financial statements. But there is no suggestion that the profit to 31 December 2006 was overstated. There is no evidence that the second applied relied upon any representations in any of the financial statements which were false and which induced him to enter into the agreement. 239 Although reliance may be inferred, I am not prepared to draw that inference when it is clear from the whole of the evidence that the second applicant had regard to other matters on entering into this agreement. 240 I am not satisfied that the applicant purchased the business in reliance on any information contained in the brochure and spreadsheet. In any event, any representations contained in the brochure and spreadsheet had been corrected by the provision of the further financial information to which I have referred and the conversation at the meeting of 15 March 2007. 241 The second applicant entered into the agreements to purchase the business and settled on those agreements in disregard of the financial information with which he had been supplied by the respondents and in disregard of the advice given him by the experts he had retained. The cause for his loss is not the information contained in the brochure or the spreadsheet. He thought wrongly, apparently, that he could turn the business around. The effective cause of his loss is his own misjudgement: Elders Trustee and Executors Co Ltd v E G Reeves Pty Ltd (1983) 78 ALR 193. 242 The claim for damages under s 82 of the TPA by reason of conduct of the kind in s 52 of the TPA is dismissed. If I am wrong and the claim for damages under s 82 of the TPA has been made out, I would accept Mr Gilmour's and Ms Chek's assessment on damages, as there was no other evidence on damages to the contrary and the evidence was not challenged. 243 The applicants also relied upon clause 5 of Annexure A to the agreement for the sale and purchase of the business in paragraphs 22 and 23 of the statement of claim. 244 Mr Metaxas contended in paragraph 29 of his closing submissions that clause 5 provided a 'warranty as to disclosure of information which if revealed could cause the purchaser to modify or withdraw its offer'. He also contended in paragraph 27 of the written submissions that clause 24(e) and (h) were written representations given by the first respondent 'that additional financial information would be provided if it fell within the stated parameters of materiality'. It was contended in paragraph 30 of his written submission that because the second applicant was not provided with the financial information for the end of April 2007 at settlement, this meant that the second applicant 'settled in reliance upon an express representation that everything material had been revealed to him'. 245 I have found that the respondents provided the second applicant with all of the first respondent's financial information up to and including 24 April 2007. In those circumstances, the plea relying on the warranty must be dismissed. That plea claimed the breach of the warranty was the failure to provide the relevant financial information for the period 1 January 2007 to 31 March 2007. That claim fails on the facts. 246 I have said that the applicants must be confined to their pleadings and that there is no plea in the statement of claim relying on Conditions 24(e) and (h), although there is a reference to the clauses in paragraph 10.3 of the statement of claim. There is, however, no claim of breach of those conditions. No application was made to amend the statement of claim to enlarge the claims. For those reasons, Mr Metaxas' contention must be rejected. 247 If I am wrong about confining the applicants to the pleaded case, all material information, namely the sales figures up until 24 April 2007 were provided by the respondents on 26 April 2007, and there would not have been any other information which would have been 'material' for the second applicant to know between 24 April 2007 and 7 May 2007 (date of settlement). The information which was provided to the applicants on 24 April 2007, being the financial information to that date, gave the applicants the information material to the applicants at the date of settlement. The sales for the further four trading days in April did not disclose any trend different to that in the first 20 trading days. For those reasons, there was no information material to the buyer to be disclosed. If the applicants were permitted to rely on pleas not made in the statement of claim, the pleas would be dismissed for those reasons. The pleas would fail for the same reasons as the pleas of the contraventions failed. 248 There were no representations current at the time settlement occurred on 7 May 2007 which were not accurate, nor was there any material information not disclosed. The applicants' proceeding must be dismissed. 249 The cross claim was conceded. The cross claimant (the first respondent) is entitled to judgment against the three cross respondents (the applicants). Judgment will be entered for the respondents in the sum of $414,857 made up of $321,971.49 plus interest of $92,886 calculated at the rate of 10% from 7 May 2007 until today. Costs must follow the event. Costs on an indemnity basis were sought by the cross-claimant against the second and third cross-respondents (the second and third applicants) 'pursuant to clause 10 of the Guarantee'. As that is a special order, I will grant the cross-claimant liberty to apply if so advised for costs on an indemnity basis against those cross-respondents. I certify that the preceding two hundred and forty-nine (249) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander.

Trade Practices Act 1974(Cth)ss 51A, 52, 82

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