The allegation against the bank under this heading is that, at the relevant time, it knew that the business was not sound and, by failing to disabuse the Timms of their belief that the bank considered the business to be extremely sound, the bank engaged in conduct proscribed by s.52 of the Trade Practices Act .
38 The third claim - the "certification claim" - entails an allegation against the bank that it failed to obtain from Mr Rosenfeld the certification (or "clarification") described in the bank's letter of 10 December 1991, that is, a certification in the terms referred to at paragraph [32] above. The bank's failure to obtain any such certification or "clarification" from Mr Rosenfeld (the content of his fax to the bank dated 16 December 1991 being in no sense of the relevant description) is said by the Timms interests to entail both breach of a duty of care in negligence owed to them by the bank and conduct on the bank's part prohibited by s.52 of the Trade Practices Act.
39 The Timms interests further say, as part of each of the three complaints, that, if the bank had not made the alleged representations involved in the "good business claim" or had not remained silent in response to the part of Mr Timms' letter at the centre of the "non-disclosure claim" or had informed the Timms interests that Mr Rosenfeld was not in a position to certify the accounts (or that the certification had not been received by the bank), they would not have purchased the business and consequently would not have taken up the financing facilities made available by the bank upon completion of the purchase on 12 March 1992.
The claims of the Timms interests against the accountants
40 The Timms interests sue the accountants upon causes of action based in contract and negligence. They allege a retainer to advise comprehensively on the proposed purchase of the business, with the accountants aware that the purchasing entity required return, in due course, of the purchase price, servicing of borrowings made to effect the purchase and a reasonable return on funds outlaid in the purchase and conduct of the business.
41 It is alleged against the accountants that they made certain positive representations about the business that were inaccurate and failed to take certain steps that they should have taken that would have caused them to appreciate that the representations were inaccurate. As a result, the Timms interests say, the accountants breached a duty of care owed by them and the terms of their contract of retainer.
The approach taken to the claims against the bank
42 Central to the issues in contention is the state of the bank's knowledge about the condition of the Artrona business in the period leading up to 16 December 1991 when the Timms interests entered into the purchase contract. That matter will be addressed first since each of the "good business claim" and the "non-disclosure claim" become academic unless the bank is shown to have held a particular opinion as to the state of the business.
43 The next matter for investigation concerns steps taken by Mr and Mrs Timms to assess the business. This is relevant not only to questions of reliance (should those questions ultimately arise for decision) but also because of the light it will throw on the meaning and significance of other elements of the evidence.
44 Against the background provided by findings in relation to these two matters, it will then be appropriate to consider, and make findings in relation to, events at the meeting of 26 November 1991, that being the occasion on which the words at the root of the plaintiffs' principal contentions in relation to the "good business claim" were allegedly spoken. A corresponding examination of events at the early November 1991 meeting will then be undertaken for the same reason.
45 The next step will be to examine the evidence and make findings relevant to the "non-disclosure claim" and the "certification claim".
46 With findings complete in relation to all the matters just mentioned, it will be possible to address the claims based on a fiduciary duty allegedly owed by the bank.
The bank's knowledge of the business
47 The plaintiffs introduced into evidence a number of documents from files kept by the bank at its Barrack Street branch, being the branch at which the accounts of the Wheeler interests (including Artrona and 2001 Interiors) were maintained. It will be recalled that one of the documents that came into the possession of officers at the Five Dock branch in response to their request to Barrack Street for information was a report by Deloitte Ross Tohmatsu dated 21 November 1990 in respect of the Artrona and 2001 Interior businesses. On 5 July 1991, Mr Carmont, manager of the Barrack Street branch, received from Deloitte Ross Tohmatsu a copy of a statutory demand that had been served by that firm on Artrona in respect of $7,410 unpaid professional fees. The fees related to the preparation of that report. The copy of the statutory demand was sent to Mr Carmont under cover of a letter dated 5 July 1991 saying that despite several promises made by Mr Wheeler to Deloitte Ross Tohmatsu, payment had not been forthcoming and the firm therefore had no option but to send the demand.
48 On 22 July 1991, Mr Carmont sent a memorandum to the bank's Central Metropolitan Zone (which I shall call "Central Zone") referring to the Artrona connection, the nature of the business, the background of Mr and Mrs Wheeler and the circumstances in which the bank had acquired the connection from the National Australia Bank in November 1987. At the request of the Central Zone, the memorandum provided additional information to enable the zone to consider the branch's proposal of 31 May 1991 "for continuance and tolerance of position until end August 1991". The memorandum went on to provide information, including the position in relation to arrangements with the Australian Taxation Office relating to arrears of company tax, sales tax and group tax, the position in relation to arrears on lease commitments to the bank's finance company, CBFC, the position in relation to indebtedness to an unrelated building society and details of outstanding creditors as at 31 May 1991. The creditor details highlight creditors described as "pressing", being those in respect of which payments were required within thirty days. The memorandum also detailed the order position and the possibility of the sale of Mrs Wheeler's car and certain real estate on the Gold Coast with a view to debt reduction. Towards the end of the memorandum appeared the following paragraph:
"Clearly it is evident that both company and Wheeler are heavily committed and technically insolvent. A further aspect is the fact that Wheeler has advised that the months June through to August traditionally provide increased sales with the company accounts through to January proving the most expensive due to holidays and closure of factory provides little comfort for CBA over the longer term."
49 The recommendation at the end of Mr Carmont's memorandum was:
"As outlined in our memorandum dated 24 May 1991 i.e. should position not improve by end of August 91 its [sic] our recommendation that an Administrator or Receiver Manager be appointed."
50 On 13 August 1991, Ms Saar, management assistant at the Barrack Street branch, prepared a diary note which began by reciting the general background set out in Mr Carmont's memorandum of 22 July 1991 and went on to refer to events at a meeting that took place on 8 August 1991 and was attended by Mr Wheeler, Mrs Wheeler, Mr Carmont, Ms Saar, Mr Kapeleris (described as "assistant manager loans"), plus Mr Dean of Central Zone. According to the diary note, the meeting received information from Mr Wheeler about cash flow of the business and he was asked to prepare a cash flow budget for the financial year to 30 June 1992. The position with respect to creditors was discussed, as were the bank's concerns about the Wheelers' private debt levels and the short term operations of the business. The file note contains the following passage:
"The only major trade creditor, 'E Astley And Sons', continues to support business by allowing them favourable payment arrangements ie that when Artrona make a reduction by way of Bank Cheque, they are then allowed to redraw this amount to obtain leather for current production. Whilst Richard is confident that suppliers will continue arrangements, it is obvious that should their support be withdrawn it is unlikely business could continue to operate.
Customer believes that he is handling other creditors well, although by his own admission they are met on a cyclic basis - when one creditor becomes pressing, payment to them is made in preference to others."
51 Ms Saar's diary note of 13 August 1991 concludes:
"After the meeting, discussions then took place between Manager and Phil Dean, CMZ, regarding client's request to allow some overdrawings until end of August. Whilst it was obvious that the Bank was reluctant to again allow debt to increase, even if only short term, it was acknowledged that this would allow customers to improve weekly Cash Flow by ensuring materials for week's production are available earlier. Accordingly, it was agreed to acceded to customer's request on the understanding that position would be reviewed from week to week and Richard was not to automatically assume that we would allow accounts to overdraw. This decision as relayed to client by telephone on 8/8/91.
In conclusion, until Cash Flow Budget, for current financial year, is received and assessed, no further decisions can be made as to what course of action the bank should take.
In the meantime, we would appear to have little option than to continue to closely monitor account. However, would consider it appropriate that we now request in writing that Cash Flow Budget be provided by 19/8/91 and confirm the above arrangement."
52 Endorsed on this diary note of 13 August 1991 in handwriting are comments which appear to have been placed there by Mr Carmont. Insofar as presently relevant, they are as follows:
"The situation or arrangement with major creditor E. Astley & Son concerns me as their continued support is essential to ensure on going operations. Change of management/ownership or Bank pressure could easily change Astley's attitude which would 'sound the death nell [sic]' for Artrona. Little we can do however but to assume that Astley's indulgence will continue to be forthcoming."
53 On 5 September 1991, Mr Cranston, deputy regional manager, Central Zone, sent a memorandum to the Barrack Street branch headed "Artrona Pty Limited and related accounts". This apparently followed a telephone conversation between Mr Cranston and Mr Carmont. The memorandum begins:
"As you would be well aware we have been uncomfortable with this connection for some time with the decision to allow the company time to trade out of its difficulties being made following an investigation by Ian Struthers from Deloitte Ross Tohmatsu in November 1990."
54 After referring to the bank's disappointment that other creditors appeared to be receiving priority to the bank, Mr Cranston said that the bank should not be allowing overdrawings on the working account as advised in a memorandum from Mr Carmont. Mr Cranston then said:
"Under no circumstances are further cheques to be paid that would increase CBA's exposure further and every effort is to be made to bring the account into order as proposed. The cash flow that was previously provided by Mr Wheeler is inaccurate as it indicated that the company should be currently cash flow positive which is obviously not the case. This would throw doubts on Mr Wheeler's management ability."
55 Mr Cranston went on to say that Central Zone had been contacted by CBFC collections and informed that unless a payment of $4,000 was made in respect of outstanding lease commitments by the end of the then current week, CBFC would be considering recovery action. In apparently rhetorical vein, Mr Cranston added:
"I wonder how many other pressing creditors are considering action?"
56 The memorandum concluded:
"As the position has now become critical and whilst not disagreeing that CBA needs to take some positive action, would you please contact Mr Wheeler and obtain the following information as a matter of urgency:
· Up to date position in respect of Sales/Payroll/Group Tax. Has any formal agreement been reached with the ATO? Copies of relative correspondence would be of assistance;
· Up to date list of creditors/debtors including ageing thereof. Details of any pressing creditors would also be of assistance. Perhaps an updated cash flow which shows the true position could also be sought; and
· The current amount of stock that is held in the Brookvale factory and Crows Nest and Gold Coast retail outlets.
Upon receipt of the above information we will further consider our position which may involve the appointment of an inspector under the provisions of CBA's R/E/M."
57 On 18 September 1991, Mr Carmont made a diary note following a conversation he stated to have taken place between him and Mr Cranston concerning payment of a wages cheque of approximately $11,000 on that day. Mr Carmont referred to a conversation he had had with Mr Wheeler in which Mr Carmont had informed Mr Wheeler that the provision of further funds for raw material purchases was "completely out of the question", as the bank's exposure was "far too high". Mr Carmont reports Mr Wheeler as having replied that if he could not purchase raw materials he would not be able to finish essential work in progress and production would have to cease. The diary note continues:
"The situation has now reached an intolerable position and I cannot see the company having sufficient cash flow to pay wages and acquire sufficient raw materials to continue production. The only alternative available to the bank is to appoint an agent as a matter of urgency."
58 On the same day, 18 September 1991, Mr Carmont signed and issued a number of related documents. They were demands upon Artrona, 2001 Interiors, Mr Wheeler and Mrs Wheeler for the payment of $186,228.24 and notices to Artrona and 2001 Interiors purporting to convert floating charges over assets into fixed charges. These latter documents also stated that the mortgagor was not at liberty to sell or dispose of or encumber any of its assets without the prior consent of the bank. The notices to Mr Wheeler and Mrs Wheeler expressly referred to the bank's second mortgage over their home at Bayview.
59 On 20 September 1991, Deloitte Ross Tohmatsu sent a letter to the Barrack Street branch in which it reported the result of a further investigation of the affairs of Artrona undertaken at the request of the bank. The report discussed the Artrona group's financial position in some detail. After referring to assets and liabilities, it stated that there existed an estimated shortfall in shareholders' funds of $1,032,194. The following conclusions were stated:
"Given the level of current orders in place and the levels of WIP and the average gross margin being achieved on sales, if the bank wished to be substantially paid out then the following should be undertaken.
(i) as the appointment of an Agent for the Mortgagee in Possession is now doubtful as a means of avoiding the payment of group tax, the appointment of a Receiver and Manager over only the stocks and WIP would result in group tax not being paid and through the completion of orders in hand an amount of $138,000 is estimated to be realised after the payment of employee entitlements resulting in an estimated deficiency to the bank of $65,000 subject to the costs of the administration.
The Receiver and Manager would complete current orders on hand and realise finished goods. The appointment of a Receiver and Manager would achieve an estoppel re catch up payment for group tax, sales tax, payroll tax, etc which would maximise the cash available to the bank by 30 November 1991.
As an alternative the following could be considered:
(i) the Directors be given 21 days to organise the pay out of the Commonwealth Bank's facility. The Directors have indicated that they have approached equity partners with the prospect of a partial sale taking place. If this pay out did not take place or satisfactory arrangements entered into then the Bank should appoint a Receiver Manager over the stocks and WIP. In this 21 day period Deloitte Ross Tohmatsu should review all cheque payments to ensure funds are not diverted i.e. make payments which would be to the Bank's detriment."
60 A diary note prepared by Ms Saar on 24 September 1991 refers to a meeting held the previous day at the Wheelers' request and attended by Mr Wheeler, Mrs Wheeler, Mr Carmont, Ms Saar and Mr Chaston (the bank's regional manager for Region E of Central Zone). After discussion of the then current position, Mr Chaston is reported as having said:
"… after the investigation of the business recently completed by Deloittes, that the bank feels that there are only three options now available:-
1. Refinancing of the debt by outside party.
2. Injection of capital.
3. Appointment of receiver.
On the information available, at this time Option 3 would seem the only realistic alternative."
61 The file note says that Mr Wheeler then advised that upon receipt of the letters of demand the Wheelers had "commenced proceedings to sell the business" and were "to hold discussions with a 'serious' prospective purchaser on 24/9/91". There is then a record of what Mr Wheeler is reported to have said about price and the state of negotiations. Mr Wheeler is also reported as saying that, should the forthcoming discussions not be conclusive, he was confident that he could obtain a 50% equity partner who would inject between $400,000 and $500,000 into the business. The file note continues:
"Mr Chaston advised that time was of the essence and whilst the Bank would be prepared to allow a stay of proceedings until after the meeting, we would have to be convinced at that time that a successful sale can be achieved within an acceptable time frame to prevent us from appointing Receiver Manager."
62 The file note also contains the following paragraph:
"Meeting concluded on the understanding that Mr Wheeler was to contact Mr Carmont immediately after discussions with prospective purchaser and the Bank will make a further decision at that time."
63 On 24 September 1991, Mr Chaston, the regional manager, prepared a memorandum which it appears was sent to the Barrack Street branch. He referred to the meeting on 23 September 1991 that was the subject of Ms Saar's file note just mentioned. Among the statements in Mr Chaston's memorandum are the following:
"CBA's position was clearly put to the directors and it was emphasised that time for the company was running out quickly."
"We have agreed to stay our hand for a few days only because the directors are going to meet a prospective purchaser of the business at 10.30 am 24 September 1991. According to director, Richard Wheeler, the prospective purchaser is 'cashed up' and the discussion will revolve around a purchase price of $1.25m. Wheeler is however, prepared to negotiate to $800,000!!"
"If this deal evaporates, Wheeler claims to have someone else interested in a 50% acquisition for $400,000/$300,000."
64 Towards the end of the memorandum Mr Chaston recorded:
"There is no doubt that issue of Demand has had a salutary effect on the directors who seem to be making every possible endeavour to sort out the mess they are in. I have reservations that they can bring off a sale in an acceptable timeframe. We will wait and see what happens over the next five days, say, but I believe we may be delaying the inevitable."
65 On 25 September 1991, Mr Carmont made a diary note of a telephone call received by him on that morning from Mr Wheeler to report the outcome of discussions held the previous afternoon and evening (24 September 1991) concerning possible sale of the business. In that diary note, the "prospective purchaser" is named as "Brian W Timms and his wife, who is principal shareholder in B.D.A. International Pty Limited a family company, which banks CBA Five Dock". The diary note continues:
"Enquiries with manager (Greg Walker) and AML (Mike Hart) CBA Five Dock reveals that the connection is well and favourably known at the branch. Brian Timms is a computer consultant who has been engaged by our EDP Department over the past 6 years, and is well known to senior executives of the Bank.
Five Dock branch executive is aware that Timms is looking to buy a business apparently for his wife. Only 3 weeks ago the branch was approached for a loan of $500,000 to set up a new agency for the importation of sports gear. In the absence of historical trading data the application was declined but referred to CDB for their consideration.
Whilst Timms has not broached with the Bank the prospect of buying Artrona, he does have the necessary credibility to be given a serious hearing and would have sufficient freehold security to support borrowings of $1.25M. Naturally the branch would need to establish repayment capacity.
We feel therefore that Wheeler is serious about selling the business and certainly has a credible prospective purchaser. Letter from Wheelers' solicitor Anthony Sunman & Co, is attached setting out basically what has been reported in this memorandum. He has been informed that agreement on the sale must be reached as a matter of urgency for the Bank not to proceed.
To facilitate orderly and meaningful negotiations it is recommended that a stay of proceeding be granted to say 5 pm Monday 30 September. In the meantime account is being monitored daily and only essential cheques relating to production and distribution are being paid."
66 On 1 October 1991, Mr Carmont sent to Central Metropolitan Zone, Region E, a memorandum which began by setting out some matters of history relating to the Wheeler/Artrona connection and continued:
"Further to our telephone conversation of 30/9/91 Kapeleris/Cheston. We attach copy of letter received from Mr Wheeler in respect to the proposed sale of his business (copy of letter faxed to your office 30/9/91).
Mr Wheeler called by appointment to discuss content of letter referred to above with Manager, and according to Wheeler negotiations are progressing in a positive light, however under a different scenario than original advised.
During discussions 24/9/91, Wheeler advised that proceedings had commenced to sell the business at a negotiable price of $1.25M (Wheeler was prepared to accept 800k). However, you will note from contents of letter received that a 50% equity sale is now being considered by B.D.A. International Pty Ltd for reasons outlined in the attached letter.
According to Wheeler at this point in time a price has not been mentioned or set but he expects a minimum of 400k which will be utilised to repay CBA debt and condition some creditors.
Wheeler was advised that time was of the essence and we would need solid evidence that sale can be achieved within an acceptable time frame. In this regard Wheeler mentioned that a further meeting is to be held this week with principals of B.D.A International to discuss formalities and sale price and expects to be in a position within 10 days to provide CBA with solid evidence of sale.
It was once again pointed out to Wheeler that the position was critical and whilst hesitant Manager agreed to stay our hand for a maximum of 10 days. However, the latitude allowed on this occasion will not be permitted to continue and the Bank's recovery action will be reinstated to full effect.
Matter is under constant daily follow-up and you will be kept informed of developments as they occur."
67 These documents in the possession of the bank at its Barrack Street branch show quite clearly that, by 18 September 1991, the bank had developed such a concern about the ability of Artrona and 2001 Interiors to trade out of plainly recognised and extreme financial difficulties that it considered it necessary or, at least, desirable, to make formal demand under facilities and securities and to convert floating charges into fixed charges preventing dealings with property by the corporate customers without the bank's consent. The policy of close monitoring referred to in the memorandum of 24 May 1991 part of which had been sent to the Five Dock branch had not produced improvement. On 20 September 1991, the bank was advised by Deloitte Touche Tohmatsu that a receiver and manager should be appointed in respect of the assets and undertakings of the companies, or that 21 days should be allowed to "organise the pay out of the Commonwealth Bank's security". By 24 September 2001, the regional manager, Mr Chaston, was of the view that, in light of the then recent investigation by Deloitte Touche Tohmatsu, there were only three options, viz, refinancing of the debt by an outside party, injection of capital and appointment of a receiver.
68 The bank's decision to "stay our hand for a few days", referred to in Mr Chaston's memorandum of 24 September 1991, was wholly attributable to the fact that Mr Wheeler was about to meet a "cashed up" prospective purchaser. The following day, Mr Carmont became aware that the prospective purchasers were Mr Timms and Mrs Timms. He made it his business to obtain from both Mr Walker and Mr Hart information about their financial substance. He did this on the day he was informed by Mr Wheeler of the identities of the prospective purchasers and at a time when, according to what Mr Walker and Mr Hart told him, Mr Timms and Mrs Timms had "not broached with the Bank the prospect of buying Artrona". Mr Carmont's diary note of 25 September 1991 shows that his purpose in obtaining information from the Five Dock branch was to enable him to come to a conclusion that potential purchasers identified by Mr Wheeler were likely to have the financial resources to make the purchase. Having reached a positive conclusion, Mr Carmont put to one side the plan to appoint a receiver and was content for Mr Wheeler to be allowed to pursue the sale possibility, provided that this was done quickly and with the tight financial controls placed by the bank on the Artrona business continuing.
69 This evidence leaves no doubt that, as at November-December 1991, the bank had actual knowledge that the businesses carried on by Artrona Pty Limited and 2001 Interiors Pty Limited were in a parlous financial state, in that revenues generated by those businesses were insufficient to cover outgoings even for basic essentials such as salaries and raw materials. The serious financial plight was not related solely to the companies that carried on those businesses. The companies were apparently under-capitalised. The Wheelers had, it appears, starved them of capital because of their need for funds to meet personal financial needs. But the situation was not one where businesses capable of holding their own financially were housed within companies from which excessive extractions were made. The objective information in the bank's possession as at November-December 1991 cannot be said to have borne out the statement in the 24 May 1991 memorandum extract that "the Artrona business is basically sound". The businesses themselves, viewed apart from the companies that owned and operated them, were not in any state of financial equilibrium that would have justified a view that they were "sound" or "profitable" or "viable". Based on the evidence of what was in the possession of the Barrack Street branch, there is no basis on which anyone with knowledge of that material could have held the view that the businesses were "sound", "profitable" or "viable".
70 I therefore find that the bank, as an organisation, did not, in November-December 1991, hold the opinion that the combined business of Artrona and 2001 Interiors was "sound" or "profitable" or "viable". The information in the possession of officers at Barrack Street and the Central Zone was entirely inconsistent with the holding by the bank of any positive opinion on those matters.
71 The state of the knowledge or opinion of the bank officers at Five Dock (being the only officers with whom Mr and Mrs Timms had relevant contact) is, of course, another matter. At all material times, the information about the business in the possession of Mr Walker and Mr Hart was confined to the Deloitte Ross Tohmatsu report of 21 November 1990 and the extract from the internal memorandum of 24 May 1991 (both forwarded by Ms Saar on 18 October 1991), the profit and loss accounts forwarded by Ms Saar on 4 November 1991 (these were the "management accounts", as distinct from the "statutory accounts", referred to below), the cash flow and "synopsis" created and provided by Mr Timms and whatever information had been provided orally. The documents provided by Ms Saar on 18 October 1991 would have alerted Mr Walker and Mr Hart to the difficulties the bank was having with the Artrona connection. But the Deloitte report was by then almost a year old and the memorandum extract was almost six months old. So far as those somewhat out of date sources were concerned, the "bottom line" to which Mr Walker and Mr Hart would have been expected to have regard is the statement in the internal memorandum extract that "the Artrona business is basically sound". The events of August-October 1991 reflected by the Barrack Street documents and central to the conclusion that, at Barrack Street and Central Zone levels, it must have known as at November-December 1991 that the business, as a business, was not "sound" or "profitable" or "viable" were not known to the officers at Five Dock. The information they received from Barrack Street did not deal with anything later than 24 May 1991. There was therefore no reason why they should not have subscribed to the "basically sound" opinion expressed in the extract from the internal memorandum of 24 May 1991.
Steps taken by the Timms to assess the business
72 The Artrona business was the fifth identified by Mr and Mrs Timms for potential purchase in a period of about two years. The other four were, in chronological order of consideration, a business of importing knitwear and leather goods from South America, a protective floor covering business, a jewellery business known as "Danusha" and a business of importing and selling "Baleno" clothing.
73 The bank submits that evidence concerning these earlier possibilities shows that Mr Timms considered himself able to understand balance sheets and profit and loss accounts and of making his own judgments as to the viability of businesses. I accept that Mr Timms professed himself to have a certain degree of ability in that direction. But the fact remains that, in relation to the Danusha and Baleno possibilities, as well as the Artrona purchase itself, he saw fit to seek advice (both for himself and for Mrs Timms as co-purchaser) from Mr Rosenfeld. It is clear that Mr Timms did not consider himself to possess sufficient accounting expertise to make unaided the financial investigation he considered necessary in connection with the purchase of a business, particularly an existing business with a track record. It was for that reason that he engaged Mr Rosenfeld. Indeed, in a fax to Mr Golosky, the business broker, dated 27 September 1991, Mr Timms said that, before any commitment could be made, "we will need to have our accountant provide us with advice as to the financial viability of the business".
74 There is then the matter of Mr and Mrs Timms' enthusiasm to buy the Artrona business. There is no doubt that, as a result of their discussions with the Wheelers and their general assessment of the situation they became very keen on the idea of owning the Artrona business. By 1 November 1991, Mr Timms said, in a document sent to his solicitor, Mr Atkinson:
"As it is our intention to buy the businesses operated by the above companies, not the companies themselves, we plan to form a new company (Company X) which will acquire the said businesses (but not their liabilities)."
75 An intention to buy had been formed by that point; but, of course, intentions can always be revised. It is also pertinent to quote Mr Atkinson's evidence (in his affidavit of 20 January 2000) of what he recalled Mr Timms saying in a telephone conversation on the same day:
"Anastasia and I have decided to purchase a furniture business."
"If you know how to manage one business you know how to manage any business. This is a million dollar business. It involves the manufacture and sale of the best, most prestigious leather furniture there is. It is top of the range."
"We have got to know the principals of the vendor companies, Mr and Mrs Wheeler, over this time. We have become good friends with the Wheelers."
"There are two problems with the business. First, although Mr Wheeler is a brilliant designer he is not a manager so the business has developed 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. I want Wheeler to be contracted to the company and to stay. I want him to be tied to the company."
76 It may be accepted that Mr and Mrs Timms were enthusiastic about the idea of becoming the owners of the Artrona business. But their enthusiasm cannot be regarded as so pervasive and all-consuming that it would have caused them not to act with reasonable prudence.
77 Mr and Mrs Timms made investigations of their own about the Artrona business. In the first place, they received and obviously read certain documents sent to them by Mr Golosky, being a one page description of the business, a second one page document (containing the name of the vendor, type of business, details of leases, takings, gross profit, adjusted net profit, directors' drawings and the purchase price), a draft consolidated profit and loss account of the Artrona companies for the year to 30 June 1991, a summary of the performance of the Gold Coast shop for the last three years and a graph of cash banked. In addition, Mr and Mrs Timms met on several occasions with the Wheelers to discuss matters relating to the business. A statement of the position Mr and Mrs Timms had reached by 27 September 1991 is set out in a fax sent by Mr Timms to Mr Golosky on that date:
"As indicated to you the other day we are interested in looking further into the possibility of purchasing all or a portion of the abovementioned business Before we are able to make a firm commitment we will need to have our accountant provide us with advice as to the financial viability of the business. He, in turn will need access to appropriate finance records etc. Before we invite our accountant to examine the books, we think it appropriate to reach an understanding and informal agreement with the vendor as to the nature of our proposed participation in the business.
Subsequent to our meeting with the vendors, Virginia and Richard Wheeler, there are some relevant observations which we wish to make. Firstly, it is clear that Richard's participation is key to the future growth of the company. Secondly, the company has great potential for growth in both the domestic and export market and therefore has the potential to move from being a small business to a medium scale corporation. Growth of this nature has inherent risk and the risk factor is exacerbated if most (if not all) of the decision making and responsibility is shouldered by one individual.
If we wanted to adopt a 'steady as she goes' approach we would probably offer to buy 100% of the company and lock Richard into a management contract for 2 - 3 years. However, that is not our vision for the company, and we do not believe that it is the Wheeler's vision either. We see a five year period of tremendous growth as Artrona expands nationally and internationally. For this future to be realised, we see the need for a dynamic management team to provide the required leadership and develop the necessary business strategies. We believe that with the talent available from members of the Wheeler and Timms families and the synergy which appears to exist between the parties we have the people to make this happen. We would rather own 50% of a company with an annual revenue of say, $20m than 100% of a company with a revenue of $3m.
What we are suggesting, therefore, is that we purchase 50% of the company and actively participate in the management of the affairs of the company. The advantages and disadvantages of partnerships are, I am sure, well known and understood by all of us. Mechanisms can be put into place which protect the interests of one party in the event of the other party wishing to sell its interest. The advantages of being able to take a holiday with the family without having to worry about the business are obvious. The details can be thrashed out at a later date. The main decision which the Wheeler family has to make now is whether they are interested in a proposal of this nature.
We do not think that the business can reach its true potential unless we have an arrangement of this type. We are very excited at the prospect of being able to work together with the Wheelers and we hope that we can reach a satisfactory agreement."
78 Mrs Timms said in her affidavit of 5 July 1999 that she agreed with and adopted the contents of this fax. In cross-examination during the hearing before me, Mrs Timms said that Mr Timms showed her the letter of 27 September 1991 before sending it. She also said in that cross-examination that she had not, in September 1991, considered expanding the business, thus contradicting what she had said in her 1999 affidavit. She sought to blame her previous solicitor for poor drafting to the affidavit. I find that unconvincing. I am satisfied that the letter of 27 September 1991 reflects an accurate portrayal of the attitudes of both Mr Timms and Mrs Timms as they existed at that time. The document also confirms that Mr Timms and Mrs Timms had undertaken investigations and given thought to the state of the business and its potential for growth.
79 Mr Timms prepared two documents to give to the bank in connection with the loan application. They are the "projected cash flow for period 1/11/91 - 31/10/92" and the accompanying "synopsis" to which brief reference has already been made. Mr Timms' evidence was that he prepared the cash flow in consultation with Mr Wheeler. It set out, for each month from November 1991 to October 1992, items of income in one aggregate line marked "Total inflow" and items of expenditure under some 23 subheadings under the heading "Cash outflows". There was a separate page with some short explanatory notes. The "synopsis" document was prepared by Mr Timms. It should be quoted in full:
"The Artrona group of companies which were founded by the vendors, Richard and Virginia Wheeler, have been successfully involved in the manufacture and retailing of top quality leather lounge furniture in Australia for over twenty years. In recent years, Artrona has exported its products to many countries including Hong Kong, Japan, Singapore and Taiwan. Artrona operates a manufacturing facility in Brookvale and retail showrooms in Crows Nest and on the Gold Coast. Apart from past export activities, Artrona operates as a vertical manufacturer/retailer and does not engage in wholesaleing.
Artrona has a history of steady revenue growth in spite of the current and previous recessions in Australia and enjoys an excellent reputation with its bankers, CBA Barrack Street. In the last five years revenue has grown 42%, from $2,289,301 in 1987 to $3,254,829 in 1991. A 5% revenue decline in 1989 (from $2,709,698 to $2,573,919) was due to executive management attention being focussed on export business to the detriment of domestic issues. Should export business be pursued in future, the aforementioned situation will not be repeated due to the addition to the existing management team (Richard and Virginia Wheeler) of two extra working directors (ie. Anastasia and Brian Timms).
The business is offered for sale for $1,250,000 as follows:
$160,000 - Fixtures and fittings & machinery
$700,000 - Stock
$ 40,000 - Sundry assets (leases, air cond plant etc.)
$350,000 - Goodwill.
Nevertheless, we have negotiated a deal which effectively values the business at $1,000,000 and locks in the Wheelers as part owners and working directors!
The basics of the deal are as follows:
· We purchase 90% of the business for $900,000.
· The Wheelers agree to re-purchase 20% of the shares within 12 months and to re-purchase a further 20% within the next 4 years bringing their total holding to 50% within 5 years.
· The Wheelers will work with the Timms' in the management of the business.
Apart from showroom stock, no finished stock is held pending sale. Furniture is not manufactured until an order has been received. A majority of orders are accompanied by a 50% deposit, thereby creating an excellent on-going source of working capital.
Net profit for 1991 was $437,993 after allowance of $80,000 for Director's fees. The Wheelers have agreed to work for an annual management fee of $80,000 plus a share of profits in line with their shareholding. Expense savings of around $100,000 pa can be readily achieved by, firstly relocating the factory and reducing the rent (this has recently been done) and, secondly by reducing the management overhead in the factory by utilising the additional executive management manpower. The conclusion, therefore, is that a net profit before tax of over $500,000 (based on 1991 turnover with no allowance for revenue growth) is very realistic and achievable.
The potential for the business is unlimited and it is planned to achieve revenue growth by a number of means. Firstly, we plan to set aside some profits to fund the establishment of additional retail stores in Australia. It is envisaged that, over time, we will be operating a retail store in all large capital cities. Secondly, we plan to introduce into the stores a range of accessories (coffee tables, rugs etc.) which naturally complement the furniture. Thirdly, we plan to move overseas by the establishment of direct retail outlets either on a wholly-owned or joint venture basis."
80 Mr Timms was asked in cross-examination in both trials where he had obtained the various figures in the synopsis about past financial performance. At the first trial, his answer, as the question was put to him about each figure in succession, was that he did not know or did not recall how he had obtained it. After a series of questions was answered in that way and it was clear that the figures in the synopsis corresponded with those in the "management accounts" (see paragraph [85] below), Mr Timms was asked whether he could explain why they were the same. He said that he could:
"I got the figures either from my accountant Mr Rosenfeld or from the vendor Mr Wheeler."
81 Subsequently, the following question was asked and the answer given:
"Q. Do you actually remember receiving that information from anybody?
A. I remember getting it from somebody but, as have been saying, I don't remember exactly who."
82 By the time of the hearing before me, Mr Timms professed to have recaptured a quite detailed recollection of how he obtained the figures he put into the synopsis:
"Q. Do you accept that those figures are sourced in the various management accounts relating to the business?
A. I accept that they are the same as the figures in the management accounts.