"See if interim accounts are available for the current financial year - even though from what we got from Wheeler in the past I doubt that we could rely on these."
47 Some of these items, including the last, have a tick after them and from the photocopy originals TX3132-3, the more likely scenario is that these ticks were made during the interview with the Timms.
48 Mr Rosenfeld says that up until early November 1991 he had understood that the Timms were looking to purchase the whole business. He was then informed that the Wheelers were to retain 25% and were to continue to work in the business.
49 On 11 November 1991, Mr Rosenfeld had a further meeting with Mr and Mrs Timms. He says that he told Mr and Mrs Timms that having examined the statutory accounts, he had to tell them that they showed a significantly different picture from the in-house accounts. He advised Mr Timms to meet with Mr Wheeler and get a comprehensive explanation for the differences and he should also reconcile the sales between the two sets of accounts, especially the customer deposits. Mr Timms said that he would meet with Wheeler to get a comprehensive explanation. Mr Rosenfeld then said: "You should get an expert to examine the stock, not only the finished goods but also the raw materials and in particular the leather, and to comment on its quality and suitability for the furniture." Mr Rosenfeld also said: "I'm concerned about reports of the Wheelers' poor financial circumstances." He said that he was particularly concerned because the Wheelers were to continue to have an equity in the company. Later in the conversation Mr Rosenfeld says that he said to the Timms: "The accounts I have seen cannot be relied upon as the accounts have not been audited. If the two sets of accounts agreed it would be less of a concern but because they are so different it is hard to form an opinion about the viability of the business. Because the accounts cannot be relied upon the only way to satisfy yourself is to go back to the source documents such as the deposit books and the bank statements."
50 Mr Timms then said: "The Wheelers seem like nice people - we've been seeing a lot of them lately. Wheeler is staying in the business - he wants an option to buy back in. He must have confidence in the business." Mr Rosenfeld replied: "Look, I think the guy's desperate - if you are going to go ahead with this purchase, you should drive a hard bargain with him."
51 Mr Rosenfeld said he had a meeting in his office with both Mr and Mrs Timms and Mr Wheeler. Mr Wheeler did provide certain explanations, but during the meeting Mr Rosenfeld said: "I believe you are in financial difficulties. If so could you explain what these difficulties are?" to which Mr Wheeler replied: "They are not related to the business but to personal property investments. The business itself is sound." After Wheeler left the meeting, Mr Rosenfeld said to the Timms: "Richard Wheeler seems desperate to sell. I believe they need to reduce personal liabilities. Considering the Wheelers' apparent financial circumstances, if you are going to buy the business you should drive a hard bargain in negotiating a price. I'm not in a position to advise you in relation to the value of the Business because the accounts I have seen aren't audited and can't be relied upon." He kept saying that to Mr Timms from time to time.
52 Shortly after 9 December 1991, Mr Rosenfeld received from Mr Murrell of Priestley & Morris, copies of the business' trading accounts for the year dated 30 June 1990. These were not the actual tax returns and Mr Rosenfeld gave them very little weight.
53 On 12 December 1991, Mr Rosenfeld spoke on the phone with Mr Hart. Mr Hart said: "I want a letter from you about the Artrona group's accounts. I need you to verify that they represent a true and accurate account of the group's performance based on your investigations." Mr Rosenfeld said that he hadn't carried out an audit, and he couldn't certify the accuracy of the accounts. All he could say was that the accounts the Bank had sent were the accounts that he, Rosenfeld, had looked at. Mr Hart said: "Okay - send me a letter confirming that." Mr Rosenfeld telephoned Mr Timms and told him that Mr Hart had asked him to verify the business accounts, but he couldn't do that because he hadn't carried out a due diligence and that "I've told him all I can do is confirm that the accounts I have looked at are the same as the ones he has." Mr Timms said "Fine".
54 There was a meeting at 8 am between Mr Timms and Mr Rosenfeld in the latter's office at which various matters were discussed as to what Mr Timms should look to in the purchase of the business. In a telephone conversation later in the day, Mr Murrell advised Mr Rosenfeld that the 1991 tax returns had not yet been filed, but he could fax the 1991 trading statements that the returns would be based on, and he did so. Later that day Mr Timms phoned and Mr Rosenfeld said that he'd received 1991 trading statements unaudited.
55 On the same day Mr Rosenfeld sent to the Bank the following letter:
"We refer to your facsimile of 12 December, 1991 regarding funds being borrowed from the abovenamed in order to complete the purchase of the Artrona Group. We would like to confirm that the initial financial information for Artrona Group covering period 30 June 1989 to 30 June 1991 upon which we advised our clients, is the same as the information attached to your facsimile. Please note that we have not carried out an audit of these accounts."
56 The Timms also involved a solicitor in the purchase, Mr B D Atkinson of Armidale. Mr Atkinson recalls that there was a conversation with Mr Timms on 1 November 1991 in which Mr Timms said, inter alia, "There are two problems with the business. First, although Mr Wheeler is a brilliant designer he is not a manager so the business has development financial problems. Second, Mr Wheeler has attempted to expand the business by developing an export market but his attempts have been a failure because he has lacked sufficient capital. I am sure the business will grow and be successful if we retain Wheeler's services to work on design and to assist in developing the export market." This conversation was had in the context of Mr Atkinson drawing a covenant which would tie Mr Wheeler to the business.
57 Mr Hart said that his first approach from Mr and Mrs Timms was in October 1991. He was made aware, he can't remember by whom, that the Artrona business conducted accounts at the Barrack Street branch of the Commonwealth Bank. He telephoned that branch and later received a memorandum from an officer of that branch. I will come back to these.
58 He received further material from the Barrack Street branch and the Wheelers. He prepared a submission for Zone dated 11 November 1991 which Mr Walker signed. That letter, which, of course, Mr and Mrs Timms did not see at the time, noted -
"We have confirmed with Barrack Street branch that the partial sale of the Group has been sought by the existing Directors to substantially reduce personal outside borrowings in relation to various residential investment properties, both in Sydney and the Gold Coast.
"The sale proceeds are also to be utilised to finalise existing CBA indebtedness, Group and payroll tax, sales tax, creditors and all redundancy/superannuation benefits to existing personnel who will be re-employed…
"We are privy to an investigating Accountants report dated 21/11/90 conducted at the CBA's request… which confirms that substantial Group cash flow was directed by the Directors to assist servicing of individual outside borrowings. …"
59 It was this proposal which in due course was rejected with an intimation that without commitment it might be reconsidered. Mr Hart then prepared a revised submission which was approved.
60 Mr Hart gave evidence that he was disappointed when the initial application was rejected and rather surprised, as he thought that Zone would lend the money.
61 With respect to the affidavits filed by the Timms, Mr Hart generally denies making any of the vital statements relied on by the plaintiffs. He denied that the Bank had a policy of not lending for new businesses and he said he had no recollection of Brian Timms saying "I know that the Bank prefers to lend for established businesses." He denies that he ever said "It's a very good business. You are getting a very good buy" or "The business is viable and profitable." He denies saying "The business appears to be profitable. They are not having any current difficulties". He says in fact he knew that Artrona was experiencing cash flow problems which he believed were aggravated by excessive drawings by the Wheelers to service their own personal borrowings. He did not say the Bank takes a very dim view of selling family homes. He denies that he ever said "We know it is a good business." He denies that Mr Walker ever said that in his presence.
62 Mr Walker also denied he had ever given any advice to the plaintiffs which might suggest that he held the opinion that Artrona was a good or viable business.
63 The material which Mr Hart received from the Bank's Barrack Street branch is in evidence. It showed that the Bank had put in one of the large accountancy firms to prepare a report on the companies in the then not too distant past. Essentially that report showed that the Bank was likely to lose money that it had lent to the Wheelers and to Artrona unless it continued to support the companies operated by Mr Wheeler. The business, however, was then currently trading profitably so that the Bank was hopeful that in due course it would recover its loan. However, Mr Wheeler was in default with paying group tax and sales tax and owed suppliers. The Bank had instituted strict controls as a condition of meeting salary cheques each week. The purpose of those conditions appears to have been to prevent Mr Wheeler withdrawing cash out of the business for his own purposes.
64 Although the submissions of all counsel contained some complex submissions including submissions as to law, the basal problem in the instant case is to resolve the conflicts of fact. All the key witnesses were cross-examined at length before me.
65 Mr Timms was not an impressive witness. His life history was that he was born in 1945 and so was 46 years of age at the time of the transactions now being considered. He matriculated into the Sydney University Law School, but dropped out after one or two years. He was employed as a computer operator from 1964 becoming a self-employed computer consultant in 1978.
66 Mrs Timms had left school at 15. She was 49 at the relevant time and had run her own cleaning business from 1974 to 1978 and had also operated a small importing business in the jewellery line in 1975.
67 Mr and Mrs Timms had invested in land at Cambridge Park in 1972 and made a profit of $9,000 over an initial $10,000 investment. They had twice upgraded homes in the 1970s with the aid of the Commonwealth Bank and at each time made a capital profit. In 1984, again with the aid of the Bank, they acquired a warehouse as an investment property which shortly later they sold at an 80% profit.
68 Accordingly, when the present transaction came about, Mr and Mrs Timms were not new to the business of borrowing money for investment purposes. They were in the dangerous position that their small investments to that date had all been successful, with a very high percentage profit. That is a scenario which can often lull people into a false sense of security as to their own ability to earn investment income.
69 A great problem for the plaintiffs' case was the way in which the evidence for Mr and Mrs Timms was presented to the Court. As I have indicated, the conversations which were vital for their case to succeed were set out virtually identically in both Mr and Mrs Timms' affidavit. Where one has an affidavit recalling a conversation that took place some eight or nine years earlier, one expects there to be divergence and gets suspicious if there is not.
70 This situation led counsel for the plaintiffs to seek to read an affidavit of their instructing solicitor, and this, in due course, was done. The solicitor swore that he prepared both the affidavits of the natural plaintiffs, that he had a number of conferences with the male plaintiff for the purpose of preparing a draft affidavit for him, and that he did so without Mrs Timms being present.
71 Paragraph 5 of the affidavit was as follows:
"Shortly before 5 July 1999 (the date when the affidavits were sworn) I had a conference with Mrs Timms for the purpose of preparing her affidavit. Prior to that, I had had a number of conferences with Mrs Timms for the purposes of taking instructions generally, but I had not taken instructions for her affidavit as to the terms of any conversations she had had with officers of the Bank or Mr Rosenfeld. In preparing Mrs Timms' draft affidavit, I adopted the following procedure. I brought up on my computer a separate copy of the draft of Mr Timms' affidavit. I said to Mrs Timms who was sitting opposite me on the other side of my desk words to the effect 'I want you to give me your recollection of the conversations which you heard'. If Mrs Timms gave an account which I considered to be substantially the same as Mr Timms' account, I simply left the wording from Mr Timms' draft unchanged in Mrs Timms' draft. Otherwise I modified the draft as I proceeded. Mr Timms was not present and I did not provide a copy of his draft affidavit to Mrs Timms either before or during the conference."