Mensie Services Pty Ltd v Newserv Pty Ltd

1. [1]

   These proceedings concern competing claims regarding agreements entered into for the sale of a cleaning services business previously operated by the plaintiff, Mensie Services Pty Ltd (Mensie Services) under the name “All Groups (Aust)” (the Business).

2. [2]

   On 25 June 2019, Mensie Services, as seller, entered into an agreement entitled “Sale of business – All Group (Aust)” with, among others, Newserv Pty Ltd (Newserv), the first defendant, as buyer to sell the Business to Newserv for a total purchase price of $3 million (Sale Agreement). The purchase price was payable as to $1.5 million in cash on completion and as to the balance of $1.5 million on deferred payment terms as an “advance” under a loan agreement entered into contemporaneously between Mensie Services as lender, Newserv as borrower and Mr Simon Bartter, the second defendant, as guarantor (Loan Agreement). While Newserv made the initial payment of $1.5 million of the purchase price and paid interest payments on the advance up to 9 March 2020, it made no further payments to Mensie Services after that time.

3. [3]

   The plaintiff brought these proceedings claiming the whole of the $1.5 million advance plus interest, totalling $1,783,726.03, plus costs on an indemnity basis.

4. [4]

   The defendants, by way of their defence and cross-claim, seek to recover damages for breach of warranties contained in the Sale Agreement to the effect that the financial information provided during the due diligence was accurate, complete and not misleading or, alternatively, for misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law (ACL). It seeks to set-off those damages against the liability to pay the balance of the purchase price or, alternatively, an order under s 237(1) of the ACL to reduce the purchase price under the Sale Agreement to “such sum as the Court considers appropriate” with effect from 29 July 2019.

Parties and witnesses

1. [5]

   Mensie Services, the plaintiff, was formerly called All Group (Aust) Pty Ltd. It was incorporated on 12 February 2007 with Ms Julyana Dankha as the sole director and shareholder. Subsequently, her husband Mr Mensie Menashie became a director and acquired 50% of the issued shares of the company. Both of them gave a guarantee in respect of the obligations of Mensie Services under the warranties in the Sale Agreement and are defendants to the cross-claim. Ms Danka played no active role in the operation of the Business during the negotiations leading up to the execution of the Sale Agreement.

2. [6]

   Newserv, the first defendant and first cross-claimant, was incorporated on 14 June 2019 for the purpose of entering into the transaction the subject of these proceedings. Mr Simon Bartter (Mr Bartter), the second defendant and second cross-claimant, was at all relevant times the sole director of Newserv and his son, Mr Harry Bartter, was the sole shareholder.

3. [7]

   The fourth cross-defendant, Menashie Services Pty Ltd (formerly called All Group Holdings Pty Ltd), is a company of which Mr Menashie and Ms Dankha are both directors. It was a party to the Sale Agreement. However, while no relief is sought directly against it in the cross-claim, it was made a defendant to the cross-claim because one of the alternative forms of relief sought under s 237(1) and s 242 of the ACL was an order varying the terms of the Sale Agreement.

4. [8]

   Mr Menashie and Mr Bartter gave evidence and were cross-examined.

5. [9]

   Two accountants were involved in the course of the negotiations leading to the transaction. They were Mr Gregory Richards of Page Harrison & Co, the accountant for Mensie Services who advised Mr Menashie, and Mr Peter Knight of Knight Partners, the accountant for Newserv who advised Mr Bartter. Each of them gave evidence and was cross-examined.

6. [10]

   Three valuation experts prepared individual reports and a joint report as to the market value of the Business as at 30 June 2019. They gave concurrent evidence at the hearing.

Background

1. [11]

   Mensie Services commenced the Business in around 2006 and it was, at all relevant times, the only activity of the company. The Business involved the supply of contract cleaning and facilities management services to its customers, and it engaged local contractors in the various states and territories where it operated to supply those services to its customers (referred to as subcontractors).

2. [12]

   In late 2018, Mr Menashie decided to sell the Business. He engaged Australian Franchise Sales Pty Ltd trading as AFS Brokers (AFS) to act as the business broker for the sale. In early 2019, Mr Bartter (the second defendant) was contacted by AFS regarding the potential acquisition of the Business.

3. [13]

   On 29 January 2019, Ms Stephanie Parsons of AFS sent an email to Mr Bartter which stated:

4. [14]

   On 18 April 2019, Mr Bartter sent an email to Ms Parsons stating:

5. [15]

   On 23 April 2019, Ms Parsons responded by email to Mr Bartter attaching the financial reports for Mensie Services for the year ended 30 June 2017 and added: “As Mensie changed accountants mid last year they are still finalising the most recent figures but I am pushing to have them across to you this week or at the latest early next week.” These accounts stated that for the 2017 year sales income was $6,433,993, subcontractor expense was $4,924,842, the gross profit from trading year was $1,509,151 and the net loss before income tax was $8,748.

6. [16]

   Later on 23 April 2019, Mr Bartter responded to Ms Parsons by email as follows:

7. [17]

   Later that day, Ms Parsons responded by email stating that “I have followed up regarding the financials and asked they be prepared as requested. I am also expecting the amended contract in the next day or so.”

8. [18]

   On 29 April 2019, Mr Bartter signed a document entitled “Non-binding Offer” which stated that the offeror was Mr Bartter and the relevant (purchaser) entity was “SPB Group Pty Ltd or a new trust” and then set out the nature of the offer to be made as follows:

9. [19]

   In cross-examination, Mr Bartter said that he regarded $4 million as an asking price and that he signed the non-binding offer to proceed with the due diligence in order to see what the number showed and then negotiate a price; that he considered $4 million to be too high an asking price and he never intended to pay that price; and that “the adjusted net profit was what we were interested in, so that’s why we proceeded with due diligence to review what the business was all about. And then we come to a price.” I accept this evidence.

10. [20]

    In early May 2019, Ms Parsons forwarded further information to Mr Bartter, including financial statements of Mensie Services for the year ended 30 June 2018 which showed sales income of $7,158,197, subcontractor expense of $5,089,906 (representing 71.1% of sales income of $7,158,197) and profit before tax for the year of $905,412.

11. [21]

    Around this time Ms Parsons also forwarded to Mr Bartter a profit and loss statement of Mensie Services printed from the MYOB system of Mensie Services on 8 May 2019 at 11.52am for the period “July 2018 to April 2019”. The document showed sales income of $5,036,775.03, subcontractor expense of $3,242,907.57, and operating profit of $1,002,871.86 for that period. This is the first of four documents relied on by Newserv in respect of its misrepresentation claim (Document 1).

12. [22]

    On or around 28 May 2019, Mr Bartter engaged Mr Knight, an accountant, to undertake due diligence for the purchase. On the same day Mr Knight sent an email to Ms Parsons seeking specified financial information regarding Mensie Services and other information about its Business for the purposes of the due diligence.

13. [23]

    On 29 May 2019, Mr Knight sent an email to Ms Parsons setting out his “initial queries at this early stage in our DD”. On the following day Ms Parsons responded to those queries by an email which had embedded within it the responses provided by Mensie Services’ accountant, Mr Richards of Page Harrison & Co, and Mr Menashie. The relevant questions for the purposes of these proceedings were questions 3 and 7 which are set out below, with the answers given (in italics).

14. [24]

    The answer to question 3 was contained in an email sent by Mr Richards to Ms Parsons, but I am satisfied based on the evidence of Mr Richards and Mr Menashie in cross-examination that Mr Menashie provided the answer to Mr Richards who simply passed it on to Ms Parsons in the email. Mr Menashie said in cross-examination that at the time the answer was given he believed it to be true, but when asked for the basis of that belief he was unable to explain it.

15. [25]

    In relation to the answer to question 3, Mr Knight in cross-examination accepted that this answer was fundamentally and obviously incorrect as total sales were decreasing since 2018. Mr Knight said that he was focused on the percentages and could not recall if he thought the answer was wrong and that he took the answer at face value. He also said that it was possible he expressed this view about the answer to question 3 to Mr Bartter in subsequent discussions about the email. Mr Bartter said that he took the answer at face value and relied on confirmations from Mr Menashie and Ms Parsons that they were actual numbers. It was put to him in cross-examination that he knew the answer could not be correct:

16. [26]

    In relation to question 7, again although it was contained in an email sent by Mr Richards to Ms Parsons, it was Mr Menashie who provided the content of the answer to Mr Richards for that purpose. He gave evidence in cross-examination that he believed the answer to be true “according to the bookkeepers” and believed Mr Richards did work to check the answer but could not recall what work that was. When asked why the answer stated that the increase in profits was “sustainable and growing” he said that sometimes the Business was “winning more contracts than losing contracts”, and winning contracts with more profit than some sites where the company did not make much profit, the profit margin on the contracts varying between 10-30%. In relation to the answer that “outgoings have been refined to a proper level”, Mr Menashie agreed that he was intending to convey that the subcontractor expense had reduced from the level it was in previous years, but could not explain what he meant by “outgoings have been refined to a proper level”.

17. [27]

    Neither Mr Bartter nor Mr Knight was cross-examined regarding the answer to question 7.

18. [28]

    On 30 May 2019, Ms Parsons sent an email to Mr Bartter attaching “[a] complete folder of everything that has been provided” which included the financial statements and MYOB records referred to above. Shortly after receipt of that email, Mr Bartter spoke to Ms Parsons and said words to the effect, “just confirming that the P&Ls in the financials are actuals?” and Ms Parsons responded in words to the effect “yes”. Mr Bartter’s evidence was that when he asked whether the profit and loss statements were “actuals” (both on this occasion and subsequently as mentioned at [68] below) he was seeking confirmation that the figures in those statements were “actual, accurate numbers”, and understood that Ms Parsons was confirming this to be the case.

19. [29]

    On 31 May 2019, Ms Parsons sent an email to Mr Knight (with a copy to Mr Bartter) attaching various documents which had previously been requested. In relation to the item “Latest aged Accounts Payable”, Ms Parsons said:

20. [30]

    It may be noted that this states that the aged payable record (showing each outstanding liability to trade creditors of the company and its age) needed to be updated but did not suggest that any expense item in the financial information provided with the email (or previously) needed to be updated.

21. [31]

    On 3 June 2019, Mr Bartter sent an email to Ms Parsons in which he said:

22. [32]

    On the same day, Ms Parsons responded by an email as follows:

23. [33]

    Mr Bartter responded by email on the same day:

24. [34]

    Ms Parsons replied to the email on the same day:

25. [35]

    These emails on 3 June 2019 put Mr Bartter on notice that the MYOB system had not been updated since December 2018 due to issues with Mensie Services’ bookkeeper, but he was also told that “that’s all being rectified this week”. Although this email indicated that Mr Menashie’s bookkeeper had flown to China, Mr Menashie’s evidence in cross-examination was that she had access to the relevant financial information on the MYOB live system while she was in China and was able to use it to update the MYOB records.

26. [36]

    Also on 3 June 2019, Mr Knight and Mr Bartter had a telephone conversation. Mr Bartter’s recollection of the conversation is that Mr Knight said words to him of the following effect:

27. [37]

    Mr Knight’s recollection of the conversation is slightly different. He recalls that he said words to the following effect:

28. [38]

    Shortly after this conversation, on 11 June 2019, Mr Bartter put forward a revised offer to Ms Parsons of $3 million (see below). I infer that he did so because he was advised by Mr Knight that an appropriate multiple for a business of this kind was three times the net profit of the business. The business had been represented to him as having an adjusted net profit of $1 million (see [13] above). While Mr Bartter did not refer to Mr Knight’s advice regarding the 3x multiple in the statement of the effect of the conversation in his affidavit, I am satisfied that he was told this by Mr Knight.

29. [39]

    On 4 June 2019, Ms Parsons sent an email to Mr Knight as follows:

30. [40]

    On 5 June 2019, Mr Knight sent an email to Mr Richards which stated:

31. [41]

    Mr Richards responded on the following day by an email in which he stated:

32. [42]

    On 6 June 2019, Ms Parsons sent an email to Mr Bartter stating that Mr Menashie proposed walking away from the sale due to the delay by Mr Bartter progressing the matter. Mr Bartter responded on 11 June 2019 by email which stated relevantly:

33. [43]

    Following this email, there were several emails exchanged culminating in Mr Menashie agreeing to accept a further offer made by Mr Bartter where the sale price was $3 million (as an asset sale) with $1.5 million payable at settlement and the balance of $1.5 million payable as vendor finance over 3 years at an interest rate of 8% per annum, together with a bonus payment at the end of the third year if sales had reached an $18 million threshold.

34. [44]

    On 11 June 2019 at 3.33pm, Mr Bartter responded by email which stated:

35. [45]

    Ms Parsons replied by email at 3:54pm, stating:

36. [46]

    On 14 June 2019, Newserv was incorporated and Mr Bartter was appointed as sole director and secretary of the company. On or around the same day, Mensie Services as vendor and Newserv as purchaser entered into a Sale of Assets Agreement (Sale of Assets Agreement) which provided relevantly as follows:

37. [47]

    Under cl 1.1, “Assets” was defined to mean “the goodwill of the Business of the Vendor, equipment and Intellectual Property listed in Schedule 1 to this Agreement but does not extend to any book debts of the business”. Business was defined to mean “the business carried on by the vendor known as “All Group Australia””; the completion date was defined to mean 19 June 2019 or such other date as agreed; “Intellectual Property” was defined to include relevantly the customer list and all customer details of the Business and the supplier list and all supplier details of the Business.

38. [48]

    On the same day, the parties entered into a loan agreement, general security deed and consultancy agreement. The loan agreement set out the terms on which the balance of the purchase price of $1.5 million would be paid by Newserv to Mensie Services. Under the general security deed, Newserv gave a charge to Mensie Services in respect of its obligations under the loan agreement. Under the consultancy agreement, Newserv appointed Mr Menashie as a consultant to provide certain services for a period of 3 months from the completion date under the Sale of Assets Agreement.

39. [49]

    It will be seen that the Vendor gave no warranties as to the assets or the financial position of the Business and Newserv had a right to rescind at any time before midnight on 18 June 2019.

40. [50]

    On 17 June 2019 at 2:13pm, Ms Parsons sent an email to Mr Bartter and Mr Knight attaching an aged payables report, an aged receivables report and a profit and loss statement for the period January to May 2019, which had been printed on that day at 1:08pm. The profit and loss statement is the third of the four documents relied on in the cross-claim (Document 3) and disclosed services income of $2,380,869.15, subcontractor expense of $1,150,383.29 and operating profit of $906,488.21. In relation to the profit and loss statement, Mr Knight said in cross-examination that he essentially ignored it because it could not be checked against the BAS and did not relate to a period that was useable.

41. [51]

    Following receipt of the documents referred to in the previous paragraph, Mr Bartter and Mr Knight sent emails to Ms Parsons raising concerns with the aged payables report. Mr Knight observed that it did not “make sense, given that $1.15m has been spent on Sub-contractors so far this year, yet the AP shows only $18k owing, and most of that is over 90 days ($13.3k)”. Ms Parsons responded by email to Mr Bartter requesting that he or Mr Knight “send through exactly what you need”. Shortly afterwards, by an email at 3:06pm on 17 June, Mr Bartter sent an email to Ms Parsons stating that:

42. [52]

    On 18 June 2019 at 8:35am, Ms Parsons sent an email to Mr Bartter and Mr Knight stating:

43. [53]

    This email focused on the aged payables report which Mr Bartter had been seeking and the manner in which problems with it would be addressed. Mr Bartter explained in cross-examination that he wanted the aged payables in the summary format that showed each creditor, including zero balances and the problem with the one supplied by Ms Parsons on 17 June was that it was missing relevant information and also appeared to be incorrect on its face.

44. [54]

    Mr Bartter responded by email at 9:42am on 18 June 2019 to Ms Parsons relevantly as follows:

45. [55]

    The reference to the “financial information requested” includes the profit and loss statement for July 2018 to May 2019, requested in his email of 17 June 2019 which had not at that stage been provided.

46. [56]

    Ms Parsons responded by an email at 12:11pm on 18 June 2019, suggesting that the meeting should be held “once the contract of sale is unconditional which is customary”, and that Mr Bartter should meet the staff on the following Friday (21 June 2019), giving him time to complete his due diligence. Mr Bartter responded by email at 12:28pm that day stating:

47. [57]

    On 19 June 2019, at about 2:30pm, Mr Bartter and Mr Knight attended the plaintiff’s office where they met with Mr Menashie. Mr Menashie’s bookkeeper, Louise, was there, having returned from China the previous day. Mr Menashie met with Mr Bartter and Mr Knight in the boardroom and there was a discussion about the Business, including whether the subcontractors had been paid up to date. Mr Bartter and Mr Knight recall Mr Menashie as having said that the subcontractors were paid up to date, whereas Mr Menashie’s recollection is that he said words to the effect that all have been paid up to date or will be paid up to date. Nothing turns on which of those recollections are correct. Mr Menashie agreed that Mr Knight had said to him words to the effect “there is nothing to pressure test. It is chaos.” Mr Bartter asked Mr Menashie if it was okay for Mr Knight to call the subcontractors to confirm that they had been paid and that he responded to the effect that he would have to think about that as he did not want them knowing that Mr Menashie was selling the Business. Ultimately, this was resolved by the variation made to the Sale of Assets Agreement on the following day to permit Mr Knight to “anonymously contact the top 5 sub-contracting suppliers to the business, so that the purchaser can complete the purchaser’s due diligence”.

48. [58]

    Later on 19 June 2019, by an email sent at 3:41pm, Ms Parsons forwarded to Mr Bartter an email from Mr Menashie earlier that day at 9:47am attaching a profit and loss statement for Mensie Services for the period 1 July 2018 to 19 June 2019 printed from the MYOB system. This is the fourth document relied upon by Newserv in the cross-claim (Document 4). In this document, service income was stated at $5,516,485.67, subcontractor expense was stated at $3,254,908.24 and operating profit was stated as $1,345,348.23. Mr Menashie’s evidence in cross-examination was that when he forwarded this profit and loss statement to Ms Parsons he thought that it was accurate and that he intended it to be forwarded by Ms Parsons to Mr Bartter for him to take it into account in deciding whether to buy the Business. Mr Bartter’s evidence was that around the time he received that email he had a telephone discussion with Ms Parsons in which he asked her to confirm that “these P & L’s are actuals” and that she replied “yes”.

49. [59]

    Ms Parsons was not called to give evidence, nor was Mr Bartter cross-examined on his recollection of this conversation and I accept his evidence that it occurred.

50. [60]

    In cross-examination, Mr Knight accepted that he knew the subcontractor expense in Document 4 was not correct because it had only increased by $12,000 from the corresponding figure in Document 1 (being the previous profit and loss statement to 30 April 2019). He also said that given that Document 4 was created to a “random date of 19 June” it was hard to draw too many conclusions from it.

51. [61]

    Mr Bartter was cross-examined at length on Document 4. It was put to him that he did not believe that the figure for subcontractor expense in Document 4 was accurate. He accepted that he and Mr Knight had their doubts about the number, but he checked with Ms Parsons and because he was told that the figure was accurate he believed it was. His cross-examination included:

52. [62]

    The focus of the cross-examination of Mr Bartter on Document 4 was the figure for subcontractor expense. I find that he had doubts about its correctness, but did not know that it was wrong. This is the effect of his evidence and it is supported by the assurances given to him by Ms Parsons that the MYOB accounts were being updated in early June and her confirmation to him in the conversations referred to at [28] and [58] above that the profit and loss statements he was provided were “actuals” (which he understood to mean that they were accurate). It is true that Mr Bartter had previously been told that the MYOB data file was not up to date, but he was also assured by Ms Parsons on a number of occasions that it was in the process of being updated (see [32], [41] and [52]) and the conversation he had with Ms Parsons referred to at [58] is explained by his need to have assurance that this updating had been done. The presence of doubt in his mind about the correctness of Document 4 is entirely consistent with his requirement that Mensie Services give warranties as to the correctness of the financial information provided including Document 4 (see [68] below).

53. [63]

    On 20 June 2019, the plaintiff and Newserv signed a Variation to the Sale of Assets Agreement which changed the “completion date” to 28 June 2019 (or such other date as is agreed in writing between the parties) and replaced cl 3.2 with the following:

54. [64]

    Also on 20 June 2019, prior to the Variation Agreement being entered into, the solicitor for Newserv, Mr Scroope, sent an email to the solicitor for the Vendor, Ms Jones, which foreshadowed that a new contract would need to be entered into. The email stated relevantly:

55. [65]

    Later on 20 June 2019, at around 3:10pm, Mr Knight sent an email to Mr Bartter stating:

56. [66]

    Subsequently, the plaintiff gave permission for Mr Knight to contact 6 subcontractors of the plaintiff. Mr Knight then spoke to 5 of those subcontractors and confirmed that amounts owing to them by Mensie Services were paid up to date.

57. [67]

    On Friday, 21 June 2019 at 5:10pm, Mr Sikiotis, another solicitor acting for Newserv, sent an email to Ms Jones, solicitor for Mensie Services which stated, “Our client’s due diligence is completed and attached is a contract for your review”. This was the new contract foreshadowed in the earlier email of Mr Scroope on the previous day referred to above. It appears that this draft included warranties and guarantees in respect of those warranties from Mr Menashie and his wife.

58. [68]

    The immediate response of Mr Menashie and Ms Dankha to the proposal that they each give guarantees of the warranties given by Mensie Services was to resist it. The Managing Director of AFS sent an email to Mr Bartter indicating the various concessions which Mensie Services had made in relation to the transaction, including changing from a share sale to an asset sale and agreeing to reduce the price by $1,000,000 and he requested that no guarantee be provided by either Mr Menashie or his wife. Mr Bartter responded by an email on 25 June at 4.00pm which stated:

59. [69]

    Shortly after this email was sent, Ms Jones, the solicitor for Mensie Services, sent an email confirming that Mr Menashie and his wife would give a guarantee of the warranties given by Mensie Services.

60. [70]

    Effectively, Mr Bartter had, through the terms of the deed of variation signed on 20 June 2019 the ability to walk away by rescinding the Sale of Assets Agreement on 25 June 2019, and he used this to negotiate the representations and warranties contained in Annexure W of the Sale Agreement, and the guarantee of those warranties provided by Mr Menashie and his wife.

61. [71]

    Later on 25 June 2019, Mensie Services and Newserv entered into the Sale Agreement. Recital G states that it replaces the Sale of Assets Agreement as varied by the deeds signed on 18 and 20 June 2019. The parties to the Sale Agreement were Mensie Services as Seller, Newserv as Buyer, All Group Holdings Pty Ltd, Mr Menashie and his wife as guarantors in respect of the Seller and Mr Bartter as guarantor in respect of the Buyer.

62. [72]

    At or about the same time the parties entered into the Loan Agreement, a General Security Deed and a Consultancy Agreement in the form annexed to the Sale Agreement, which are in materially the same terms as those entered into in connection with the earlier Sale of Assets Agreement.

63. [73]

    On 5 July 2019, the parties to the Sale Agreement executed a Deed of Variation which changed the date for the completion of the sale to 31 July 2019, required the first part of the purchase price of $1.5 million to be paid as to $400,000 on 5 July 2019 and as to $1.1 million on 31 July 2019. Newserv paid $400,000 to Mensie Services on 5 July 2019 and a further amount of $1.1 million was paid to Mensie Services on 29 July 2019. Under a new cl 10 inserted into the Sale Agreement, title to all takings and profits of the Business passed to Newserv from 5 July 2019. Mr Menashie worked for Newserv as a consultant from that time until November 2019.

64. [74]

    In the period from completion until 9 March 2020, Newserv made payments of interest in accordance with the Loan Agreement totalling $77,917,79 but made no further payments after that date.

65. [75]

    Consequently, on 8 April 2020, the whole of the unpaid advance of $1.5 million became due and payable under cl 6.1 of the Loan Agreement, plus ongoing interest on that amount at a rate of 8% per annum under cl 4.1 of the Loan Agreement.

66. [76]

    On 8 April 2020, Mensie Services demanded repayment by Newserv of the $1.5 million advance plus unpaid interest on that amount, plus enforcement costs incurred to date and to be incurred in the future. Mensie Services also demanded payment from Mr Bartter of that amount pursuant to the guarantee he gave under the Sale Agreement.

67. [77]

    On 27 January 2021, the financial statements for Mensie Services for the financial year ended 30 June 2019 (2019 year) were finalised. The profit and loss statement for that year states that sales income was $6,060,922, the subcontractor expense was $4,048,106 and profit before income tax was $870,189.

Relevant terms of the Sale Agreement and Loan Agreement

1. [78]

   Clause 2 of the Sale Agreement relevantly provided:

2. [79]

   In cl 1.1, the term “Assets” is defined to mean “each of the assets of the Seller used in the Business on completion …”; “Business” is defined to mean “the business known as All Group (Aust) conducted by the Seller from the Premises”; and “Purchase Price” is defined to mean $3 million.

3. [80]

   Under cl 20.3, completion was to occur on 28 June 2019 (or such other date as may be agreed) at which time Mensie Services was to give title to and possession of the Business and the Assets to Newserv.

4. [81]

   Clause 18 deals with warranties and provides as follows:

5. [82]

   As stated in cl 18.4, the “Warranties” are contained in Annexure W which provides relevantly:

6. [83]

   At around the same time as the Sale Agreement was executed, the Loan Agreement and a General Security Interest Deed (under which Newserv gave a charge to secure its obligations under the Loan Agreement) were entered into.

7. [84]

   Clause 6.1 of the Loan Agreement provides relevantly that the whole of the Advance (defined as $1.5 million) shall at the option of the Lender (Mensie Services) immediately become due and payable by the Borrower (Newserv) upon default in payment of any part of the Advance or interest thereon.

8. [85]

   Clause 8.1 of the Loan Agreement provides relevantly that “the Borrower will pay the Lender’s reasonable costs of enforcement or attempted enforcement of this Agreement”. Another provision regarding the recovery of costs is cl 1.4 of the guarantee given by Mr Bartter in Annexure G of the Sale Agreement which provides that he indemnifies Mensie Services from and against all costs and expenses which it “may suffer or incur out of any breach or non-observance by the Buyer of any of the provisions contained or implied in this contract”.

Value of the Business as at 30 June 2019

1. [86]

   Mr Nick Gaudion (accountant) prepared a valuation of the Business as at 30 June 2019 on joint instructions from Mensie Services and Newserv. Annexed to his report is a schedule he prepared (Schedule D6) summarising the profit and loss account of Mensie Services for the 2017, 2018 and 2019 financial years together with (under the column headed MYOB 19) the corresponding information taken from the MYOB data file for the 2019 year provided to him by the solicitors for Mensie Services. A copy of Schedule D6 is attached to these reasons. Further expert valuation evidence was obtained from Mr Andrew Clifford (an accountant retained by Mensie Services) and Mr Tony Arena (a business valuer retained by Newserv and Mr Bartter).

2. [87]

   Mr Gaudion, Mr Clifford and Mr Arena prepared a joint expert report dated 6 May 2022 (the Joint Report). The experts were in agreement that the appropriate methodology for valuing the Business is the capitalisation of future maintainable earnings. The experts have agreed that the most appropriate multiple to adopt for the value of the Business as at 30 June 2019 is 2.1. The experts have agreed on the following value of the Business as at 30 June 2019 depending on 4 scenarios:

3. [88]

   The “scenarios” adopted (on instructions) are as follows:

4. [89]

   Mensie Services contended that the value of the Business was $1,959,300 as at 30 June 2019, as scenario 1 is appropriate.

5. [90]

   Newserv accepted that this would be the value of the Business as at 30 June 2019 if the Court accepts that the subcontractor expense for the 2019 year is $4,048,106. However, Newserv contended that the Court should adopt one of the alternative amounts for subcontractor expense for which it contended. The parties accepted that if the Court made a finding that the subcontractor expense for the 2019 year was different to the amount used under any of the scenarios in the above table, the market value could be readily ascertained by substituting the correct amount to determine a revised EBIT for the 2019 year and then a revised future maintainable earnings figure using the methodology applied by the experts, to which the 2.1 multiple could then be applied.

Claims

1. [91]

   The plaintiff claims from Newserv and from Mr Bartter as guarantor the balance of the purchase price of $1.5 million under cl 2.2(b) of the Sale Agreement, or alternatively under cl 5.1 of the Loan Agreement. While the claim is put in the alternative, it was not suggested there was any difference between the two claims. The Loan Agreement did not evidence a loan or advance in the strict sense but rather recorded the terms on which the payment of the balance of the purchase price of $1.5 million under cl 2.2 would be payable by instalments over 3 years at an interest rate of 8% per annum, and in substance merely restates what is already contained in cl 2.2 of the Sale Agreement. The plaintiff also claims against Newserv and Mr Bartter its costs on an indemnity basis under cl 8.1 of the Loan Agreement and cl 1.4 of the Guarantee.

2. [92]

   As at the date of commencement of the hearing, the total amount claimed by Mensie Services from Newserv is $1,783,726.03 plus costs on an indemnity basis.

3. [93]

   By its defence and cross-claim, Newserv claims that Mensie Services made the following representations to Newserv (Representations):

4. [94]

   Newserv claims that each of the Representations was a breach of cl 18 of the Sale Agreement and the warranties in Annexure W to the Sale Agreement (set out at [81]-[82] above), because it was inaccurate, misleading and not updated as to material changes prior to completion of the Sale Agreement.

5. [95]

   In the alternative Newserv claims that each of the Representations, being inaccurate, was misleading or deceptive in contravention of s 18 of the ACL. In final submissions, Newserv do not press Document 3, but rather relied on it only as support for the submission that Mr Bartter and Newserv relied on Document 4.

6. [96]

   The relief claimed by Newserv is damages for the amount of its loss for breach of warranty or alternatively for breach of s 18 of the ACL. It seeks to set off those damages against its liability to pay the balance of the purchase price under the Sale Agreement (or to repay the Advance under the Loan Agreement).

7. [97]

   Alternatively, it seeks an order under s 237 and s 242 of the ACL varying the purchase price under the Sale Agreement or the Advance under the Loan Agreement to “such sum as the Court considers appropriate” (in effect, to achieve a similar result as a set-off of damages against the amounts owing under the Sale Agreement and/or the Loan Agreement). This alternative relief was claimed in the defence and then repeated in the cross-claim. I accept that this alternative relief was properly brought by way of defence: see Britannia Pty Ltd v Parkline Constructions Pty Ltd (2006) 67 NSWLR 9; [2006] NSWCA 238; O’Brien v Bank of Western Australia Ltd [2013] NSWCA 71 at [1], [11]-[13] and [112]-[114]. In any event, the alternative relief is also claimed in the cross-claim.

8. [98]

   Certain other relief sought in the cross-claim was not ultimately pressed. First, Newserv also sought damages against Mr Menashie and his wife for contravention of s 18 of the ACL and a claim against Mensie Services for unconscionable conduct contrary to s 20 or s 21 of the ACL. Neither was pressed. Second, Newserv also originally sought an order declaring that the purported termination of the Sale Agreement by an email sent on 29 July 2020 by the solicitors for Mensie Services to the solicitors for Newserv is void. Ultimately, Newserv accepted that this relief would not be available if the Court found that any amount is owing by Newserv to Mensie Services. Given that this is the conclusion the Court has reached, this issue does not arise. I note further that the email relied upon was not in evidence and consequently nothing further can be said about it.

Alleged falsity in the Representations

1. [99]

   The allegations in the cross-claim as to the falsity in the Representations relevant to both the claims of breach of warranty and breach of s 18 of the ACL focus on two elements, services income and subcontractor expense, and their impact on the operating profit of the Business.

2. [100]

   As to services income, it is clear from the evidence of Mr Bartter that there was no relevant falsity. He accepted in cross-examination that Document 1 conveyed to him that services income on an annualised basis was $6 million and this is the ultimate position in the final accounts for the 2019 year ($6,060,922) and also in the “2020 MYOB” data file comprising Ex 1 ($5,995,260.73). So far as Document 4 is concerned, this understated the sales revenue for the year on an annualised basis and, hence, if anything, under-represented profit.

3. [101]

   As to the subcontractor expense, Newserv pleads in [25] and [26] of its cross‑claim that the Representations (ignoring Document 3 which is no longer pressed) were inaccurate in the following respects:

4. [102]

   As I understood Newserv’s argument, the allegation in both (a) and (b) were put as supporting the allegation in (c). In other words, the relevance of the misstatement of the subcontractor expense both absolutely and in percentage terms was that it led to an overstatement of profit of the Business. This in turn caused Newserv to agree to pay a higher purchase price than it otherwise would have done. It is necessary therefore to consider whether the representation as to the subcontractor expense, and consequently profit, was false.

Amount of subcontractor expense in the 2019 year

1. [103]

   The amount of the subcontractor expense recorded in the financial statements for the 2019 year is $4,048,106. Mensie Services contended that this should be accepted as accurate because it appears in the final accounts which were prepared by Mr Richards, and although they were not audited by him, they had not been shown to be incorrect. Newserv contended that the preparation of the 2019 year accounts by Mr Richards does not prove that the subcontractor expense item of $4,048,106 is accurate. I accept that submission.

2. [104]

   The compilation report signed by Mr Richards which accompanied the financial statements for the 2019 year states:

3. [105]

   Mr Richards gave evidence that the financial statements were based upon the MYOB file as at November 2020, as revised in about January 2021 by Mr Tiwari, the bookkeeper for Mensie Services at the time and at the time of the hearing, who performed a reconciliation which Mr Richards and his firm were not involved in. Mr Richards gave evidence as to the process he adopted to prepare the financial statements as follows:

4. [106]

   Nothing said in this explanation contradicts the clear statement in the compilation report that neither Mr Richards nor his firm undertook a review of the correctness of the subcontractor expense item in the MYOB file to verify its accuracy. While he undertook an exercise to check that the balance sheet reconciled with the bank statements, that did not involve checking whether the subcontractor expense was accurate because it was calculated on an accruals basis and not a cash basis.

5. [107]

   It is clear that neither Mr Richards nor anyone from his firm checked the items forming part of the subcontractor expense of $4,048,106. Nor was Mr Tiwari or any other previous bookkeeper for Mensie Services called to give evidence to explain how the amount $4,048,106 had been calculated.

6. [108]

   Newserv submitted that the correct amount of the subcontractor expense for the 2019 year should be calculated by taking the following steps. First, the amount of $4,121,103 should be used as the starting point because it was the (agreed) total of a number of invoices in evidence identified in Ex 13 found at CB 2238-2239 (Table). The submission was that the sub-ledger 6-1020 account in the MYOB data file identifies who were the subcontractors of Mensie Services according to its accounting system for the 2019 year. The invoices in the Table are for amounts payable to those subcontractors evidenced by the invoices themselves which are in evidence.

7. [109]

   While it is true that the total amount of these invoices exceeds the amount for subcontractor expense in the 2019 year accounts of $4,048,106, and the difference is unexplained, this evidence must be weighed according to the proof which was in the power of one side to have produced and in the power of the other side to have contradicted: Blatch v Archer (1774) 1 Cowp 63 at 65. Mensie Services is the party with the power to explain the difference because it conducted the Business throughout the 2019 year and therefore would need to retain copies of records to support its income and expenses for that year for income tax purposes (Income Tax Assessment Act 1936 (Cth), s 262A). Mr Menashie in cross-examination said that Mensie Services did not have copies of the invoices because he left them at Newserv’s office in late 2019 (T 63). However he could not explain why Mensie Services did not keep copies of the invoices. Further, Mensie Services has been on notice since the filing of the cross-claim and the correspondence between the parties regarding the draft of the Table that Newserv put in issue the quantum of the subcontractor expense as appearing in the accounts. Mensie Services could have adduced evidence explaining why the invoices referred to in the Table were not included in the subcontractor expense in the MYOB data file and final 2019 year accounts but chose not to. There is a witness, Mr Tiwari, who could be expected to be called by Mensie Services to explain the discrepancy between the two amounts and his absence is unexplained. For these reasons the invoices which support the figure of $4,121,103 are evidence of the actual amount of the subcontractor expense which accrued in the 2019 year.

8. [110]

   The second step which Newserv submitted should be taken was to add to the amount of $4,121,103 an amount of $96,180 appearing in Table C2 at CB 2240. This represented the difference between the total amount of the expense for the relevant subcontractors identified in sub-ledger account 6-1020 in the MYOB file given by Mensie Services to the experts, and the total amount of the invoices for those subcontractors in the Table itself. It was said that the Court should infer that there were further missing invoices which would support the additional amount of $96,180.

9. [111]

   The most significant example of this found in Table C2 is the subcontractor expense payable to Hantour Cleaning Services Pty Ltd. The MYOB data file recorded the total amount of expense for that subcontractor for the 2019 year as being $487,534 whereas the total amount for that subcontractor shown in the invoices in the Table was $434,967. The difference of $52,567 has been included in Table C2 and Newserv submitted that the inference to be drawn is that Mensie Services had received an invoice for the difference between the two amounts at the time the initial MYOB entries were made. The same process of reasoning is applied to the other subcontractors in Table C2 given the evidence of Mr Menashie that the entries in the MYOB system for the subcontractor expense were based on invoices received by the bookkeeper either by email or by fax and she would then enter the relevant amount in the MYOB system (T 116). It was also clear from his evidence that the invoices from subcontractors were generally entered into the MYOB system before they were paid (reflecting the fact that Mensie Services accounted for the expenses on an accruals basis). Again, it was submitted by Newserv that absent an explanation from the bookkeeper for Mensie Services, the inference should be drawn that the correct subcontractor expense for the 2019 year should also include the additional amount of $96,180. I accept that submission.

10. [112]

    Third, Newserv submitted that an additional amount of $244,964.28 should be added to the first two amounts based on the entries in Table B2 at CB 2240. These were various items said to be sourced from the account 6-1020 for the subcontractor expense in the MYOB data file for the 2019 year. There are a number of difficulties in including this amount. The first is that the explanation for each item as it appears in the MYOB record does not clearly identify it as an amount paid to a subcontractor for services. Second, there was a very significant reversal of $233,000 to avoid double counting. The evidence was unclear in relation to the significance of that reversal but the result of both matters is that I am not satisfied that the additional amount of $244,964.28 is properly accounted for as a subcontractor expense for the 2019 year.

11. [113]

    Fourth, Newserv also submitted that a further amount should be included in the subcontractor expense item for fees paid to two state managers who were relatives of Mr Menashie. However, the evidence was inconclusive as to whether an amount was actually incurred by Mensie Services for these services. Accordingly, I am not satisfied that it should be added to the subcontractor expense item.

12. [114]

    For the above reasons, I am satisfied that Newserv has established on the balance of probabilities that the subcontractor expense for the 2019 year was $4,217,283 being the sum of the first two amounts referred to above. Accordingly, I find that the subcontractor expense for the 2019 income year was $4,217,283.

13. [115]

    The parties accepted that the impact of this finding on the market value of the business as at 30 June 2019 could be determined by substituting the amount of the subcontractor expense in the relevant table in the Joint Report with the amount which was found to be the correct subcontractor expense. In this case, it is appropriate to use scenario 2 but with the variation that the subcontractor expense for the 2019 year is $4,217,283 rather than $4,198,273. Adopting the same methodology used by the experts in the Joint Report, the adjusted EBIT for the 2019 year is $758,271 and the future maintainable earnings is $847,978. The market value of the business applying the multiplier of 2.1, is therefore $1,780,753. I note that this is similar to the market value under scenario 3 as would be expected given the basis upon which that scenario was calculated.

Breach of contractual warranty

1. [116]

   Newserv’s contention is that the amount of the subcontractor expense for the 2019 year was underestimated in Documents 1, 2 and 4 and is a breach of the representations and warranties in cll 1.1, 1.2, 1.3, 1.4, 2.2 and 2.3 of Annexure W. The most relevant warranty is cl 2.2 of Annexure W which is a representation that the Accounts (being the balance sheets, the profit and loss accounts and financial information of the Business given to the Buyer) are materially accurate, do not overstate the profitability or net financial position of the Business, and are not affected by an unusual or non-recurring items.

2. [117]

   Each of Documents 1, 2 and 4 fall within the definition of “Accounts”, and the most relevant for present purposes is Document 4 as it covers almost the entirety of the 2019 year (i.e. 1 July 2018 to 19 June 2019).

3. [118]

   Mensie Services contended that there was no breach of warranty for essentially 3 reasons. First, cl 1.1 of Annexure W was not engaged because it could only extend to information given by Mensie Services in the course of negotiations leading to the Sale Agreement, and therefore could refer only to information provided between 21 June 2019 (when Mr Bartter first proposed that there be a new contract to replace the then existing contract) and 25 June 2019 when the Sale Agreement was entered into. In my view, this takes too narrow a construction of the words “in the course of negotiations leading to the Contract” in cl 1.1. While the Sale Agreement was a new contract, which replaced the earlier one, all the negotiations from March 2019 lead to the final Sale Agreement signed on 25 June 2019. In any event, cll 1.3, 1.4 and 2.2 of Annexure W do not contain an equivalent limitation.

4. [119]

   Second, Mensie Services contended that the question is whether Documents 1, 2 or 4 misrepresented what the true subcontractor expense was for the 2019 year on an annualised basis. On the basis that only Document 1 was relied on, the subcontractor expense grossed up for the full year was $3,891,489.08 in the case of Document 1 which was only 3.9% less than the actual subcontractor expense in the final 2019 accounts of $4,048,106 which is not “material” within the meaning of the warranties.

5. [120]

   While cll 1.2 and 2.2(a) do contain a materiality requirement, Mensie Services relied upon some evidence given by Mr Richards that for accounting purposes, an amount which is less than a 5% variance is immaterial, an amount greater than 10% is material and an amount between 5 and 10% would require a matter of judgment as to whether it was material or immaterial.

6. [121]

   Clause 2.2 requires that the accounts are “materially accurate” and “materially accurate” in this context means that there is no significant inaccuracy or inaccuracy of moment. I do not accept that the accounting concept of materiality is the one which applies for the purposes of Annexure W. Based on my earlier finding that the actual amount of the subcontractor expense for the 2019 year was $4,217,283, the understatement of the subcontractor expense (on an annualised basis) in each of Document 1 and Document 4 was material. Further, the consequence of the understatement of the subcontractor expense in Document 4 is that the profitability of the Business for the 2019 year was overstated, and cl 2.2(b) contains no materiality requirement.

7. [122]

   Third, Mensie Services contended that if any of Document 1, Document 2 or Document 4 involved a breach of the warranties in Annexure W, none of them was causative of any loss suffered by Newserv. In relation to Documents 1 and 2, they could not be causative of loss because Mr Bartter knew at the time each was provided to him that the MYOB on which they were based was not up to date, and hence the information regarding subcontractor expense contained in Documents 1 and 2 was wrong. As far as Document 4 is concerned, it was contended that Mr Bartter did not rely on it when making his decision on 11 June 2019 to purchase the Business for $3m, and consequently was not causative of any loss.

8. [123]

   As a general principle, it is not necessary to show in a claim for damages for a breach of representation, which is a contractual term, that the claimant relied on the representation: Karim v Wemyss [2019] EWCA Civ 27 at [26]. What the claimant must show is that the breach is a cause of the loss, taking a common-sense approach to the matter. I am satisfied, based on the evidence, that Document 4 involved a breach of cl 2.2 of Annexure W, which was causative of the loss suffered by Newserv. Mr Bartter required that a new Sale Agreement be entered into, including representations and warranties regarding the accuracy of the financial information being provided to him by Mensie Services because he wanted the vendor and in particular, Mr Menashie, to confirm by a contractual term that this financial information, in particular Document 4, was accurate: see [62] above. The provision of that warranty, as shown by the email at [68] was one of the reasons why he agreed to enter into the Sale Agreement, rather than walking away from the transaction.

Damages for breach of contractual warranty

1. [124]

   The correct measure for damages for breach of warranty is the amount that, so far as money can do it, would place Newserv in the same position as if the warranted position had been correct: Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54 at 80. The corollary of that principle is that Newserv is not entitled, by the award of damages upon breach, to be placed in a superior position to that which it would have been in had the warranted position been correct: Amann Aviation at 82.

2. [125]

   An immediate measure of damages in accordance with that principle is the difference between the price paid for the asset and the true value of the asset at the time: EW Blanch Pty Ltd v Cooper [2005] NSWCA 217 at [118]. However, that immediate measure will not be appropriate in all cases, such as one where the method used to determine the actual price paid for the asset is different from the method used to determine market value: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 at 357 [164].

3. [126]

   In particular, it is open for a defendant in a breach of warranty case to argue that even as warranted, the company was worth less than the purchase price and that the plaintiff had “in any event made a bad bargain”: Eastgate Group Ltd v Lindsey Morgan Group Inc [2002] 1 WLR 642 at [18]. This is consistent with the corollary to the general principle in Amann Aviation that the plaintiff should not be placed in a superior position to that in which it would have been had the contract been performed.

4. [127]

   Ultimately, it was common ground between the parties that, in the circumstances of this case, the damages for breach of warranty are the difference between the value of the Business if the warranties were true (using the methodology agreed by the experts) and the actual value of the Business as at 30 June 2019. For the reasons given at [115] above, the latter amount is $1,780,753. The market value of the Business if the warranties were true should be determined by adopting the representation in Document 4 that the operating profit was $1,345,348. Using this figure instead of the operating profit of $897,960 in scenario 1, the adjusted EBIT for the 2019 year is $1,374,836. The future maintainable earnings is recalculated as $1,156,260, and the market value after applying the multiple of 2.1 is $2,428,147. Accordingly the amount of the damages is $647,394 (i.e. $2,428,147 less $1,780,753). I note that this is less than the damages for breach of s 18 (see [140] below).

Breach of s 18 of the ACL

1. [128]

   Section 18 of the ACL provides that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. Section 236 of the ACL provides that if a person suffers loss or damage because of the conduct of another person which contravened s 18, the claimant may recover the amount of the loss or damage by action against that person. Section 237 of the ACL gives the Court power to make compensatory orders for contravention of s 18, including an order for payment of compensation and the other types of orders listed in s 243 (including an order varying a contract in such manner as is specified in the order).

2. [129]

   It is necessary to determine first whether the impugned conduct being in this case the making of the Representations, viewed as a whole, has a tendency to lead Newserv into an error concerning the quantum of the subcontractor expense for the 2019 year and consequently the profitability of the Business. The focus should be on Document 4 because it effectively superseded Document 1 and Document 2 because it was a more up to date statement of the financial position of the Business. Document 4 contained a statement as to the subcontractor expense and operating profit of the Business for the period 1 July 2018 to 19 June 2019. This was a statement of fact. The parties proceeded on the basis that whether this was misleading or deceptive could be tested by converting it to annualised figures of $3,365,557 for subcontractor expense and $1,359,103 for profit before income tax, and that these amounts could then be compared to the actual amounts of the subcontractor expense and profit before income tax for the full 2019 year.

3. [130]

   Mensie Services did not dispute that the representation as to both the subcontractor expense and the profit before income tax in Document 4 was false and therefore a breach of s 18. Rather, in order to recover damages under s 236, the applicant must prove that loss or damage was suffered (or likely to be suffered) because of the conduct in breach of s 18. The relevant question is whether or not there is sufficient connection between the conduct and the damage suffered for the latter to be regarded as because of the former: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 at [102]. The breach will have the necessary causal connection where it materially contributed to the damage: Merck Sharp & Dohme (Aust) Pty Ltd v Peterson (2011) 196 FCR 145; [2011] FCAFC 128 at [104]. Newserv did not dispute that these are the relevant principles to apply.

4. [131]

   Mensie Services submitted that, for the same reasons as the contractual warranties claim, the breach of s 18 did not cause the loss because Mr Bartter knew that the financial information in Documents 1 to 4 was incorrect and not up to date and further, in relation to Document 4, Mr Bartter had already made his decision to purchase the Business on 11 June so Document 4 did not influence that decision. For the same reasons given above in relation to the contractual warranties claim, in my view the misrepresentation in Document 4 was causative of the loss because he did rely on the representation by Mensie Services that Document 4 was accurate in agreeing to enter into the Sale Agreement.

Damages for breach of s 18

1. [132]

   Newserv submitted that the measure of damages commonly adopted where the acquisition of an asset is induced by misleading or deceptive conduct is the difference between the real value of the asset at the date of acquisition and the price paid for it: HWT Valuers (Central Qld) Pty Ltd v Aston Land Pty Ltd (2004) 217 CLR 640; [2004] HCA 54 at [35], [37]. However, Newserv accepted that this test was no more than a guide to the assessment of damages under s 236 and should give way where there is another more appropriate measure to give effect to the overriding compensatory rule: Henville v Walker (2001) 206 CLR 459; [2001] HCA 52 at [18]; Zong v Wang [2022] NSWCA 80; 401 ALR 698 at [52]-[56].

2. [133]

   Ultimately, it was common ground that, as Mensie Services submitted, the appropriate measure in the present case was the difference between what was paid for the Business and what would have been paid for the Business if the representation had been true: Leadenhall Australia Ltd v Peptech Ltd [2001] NSWCA 272; 39 ACSR 265 at [56]. It was also common ground that what this requires is the determination of what different transaction would have been entered into had the representation been correct and then to compare the position in which Newserv would have been had it entered into that transaction with its actual position. It was accepted that this amounted to the determination of what the purchase price would have been had the breach of s 18 not occurred.

3. [134]

   Mr Bartter gave evidence that had he known at the date of the purchase that the services income of Mensie Services for the 2019 year was $5,995,261 and that the subcontractor expense was $4,211,017 he would not have been prepared to have Newserv purchase the Business for more than $1 million. This evidence was admitted subject to relevance and he was not cross-examined on it. Newserv accepted that Mr Bartter’s evidence to this effect is not determinative and that the correct approach is for the Court to weigh Mr Bartter’s statement in light of the entire factual matrix in order to determine what the price would have been under the different transaction.

4. [135]

   While Mr Bartter was not cross-examined on his evidence referred to in the previous paragraph, in my view the statement that he would not have paid more than $1 million should be given no weight as no rational explanation is given for the figure of $1 million. Rather, weight should be given to Mr Bartter’s evidence in cross-examination as to how he actually determined the price he offered, relying on the advice given to him by Mr Knight. In particular it is clear that the relevance of the quantum of subcontractor expense of the Business was the effect that it would have on the level of operating profit and he had principal regard to the operating profit of the Business in determining the price he was prepared to pay. Further, he had received advice and acted on it, from Mr Knight that the price should be three times operating profit. He acted on it in setting the original price of $3 million (see [38] above) and he also acted on it when he signed the Sale Agreement after the receipt of Document 4, in which the operating profit for the period 1 July 2018 to 19 June 2019 was stated to be $1,345,348.

5. [136]

   Mensie Services submitted that the Court could determine the price which Mr Bartter would have paid if he had known the true position in one of two ways:

6. [137]

   As to the first alternative (a), it is unlikely that Mr Bartter would have adopted the operating profit for the 2018 year as he knew that sales income and subcontractor expense were different for the 2019 year. As to the alternative (b), it is unlikely that Mr Bartter would have selected the actual net profit of $870,189 as shown in the final accounts for the 2019 year given that it adopted a figure for the subcontractor expense which I have found to be inaccurate.

7. [138]

   A comparison of the financial data in Schedule D6 annexed to these reasons shows that the main difference between the profit and loss account for the 2018 and 2019 financial years was the amount of the gross profit from trading, as the other income and expenses are broadly the same. The significant variance between the two years is that sales income dropped from $7,158,197 (2018 year) to $6,060,922 (2019 year) and the subcontractor expense dropped from $5,089,906 (2018 year) to $4,048,108 (2019 year). A logical approach to calculating the purchase price Mr Bartter would have been prepared to pay if the true subcontractor expense had been known is to recalculate the net profit for the 2019 year adopting the correct figure for subcontractor expense. That amount is $701,012, (i.e. $870,189 + $4,048,106 - $4,217,283). On this basis, the price Mr Bartter would have been prepared to pay is $701,012 x 3 = $2,103,036. This is likely to have been rounded down to $2.1 million.

8. [139]

   While this approach uses the accounts for the 2019 year which were not finalised until after 30 June 2019, I do so for two reasons. First, Mensie Services accepted that the Court could use the 2019 accounts for the calculation (see [136] above), no doubt because it means the outcome is grounded in accurate numbers (with an appropriate adjustment for the subcontractor expense). Second, if the MYOB numbers in Schedule D6 are used, the overall result is substantially the same. This is because the calculation would be $939,402 + $3,978,943 less $4,217,283 giving $701,062.

9. [140]

   It might be thought that the actual price under this different transaction approach might involve a further negotiation between Mr Bartter and Mr Menashie after Mr Bartter offered a reduced price. There was no evidence from Mr Menashie as to what that further bargaining might involve but such evidence would, in any event, have been speculative. Nor is it submitted that there was insufficient evidence for the price under the different transaction approach to be determined. Rather, both parties submitted that the Court could on the evidence, reach a view as to the likely price under the different transaction. Bearing in mind the previous course of the negotiations in which Mr Menashie had acceded to the revised price put forward by Mr Bartter of $3,000,000, it is likely that he would have done so again had Mr Bartter offered a reduced price of $2.1 million given that it is calculated on the same basis as the actual price of $3,000,000. Accordingly, I find that the damages for breach of s 18 are $900,000 (being $3 million less $2.1 million).

Alternative relief under s 237 of the ACL

1. [141]

   Under s 237 and s 243 of the ACL the Court has a discretionary power to make an order to compensate for the loss suffered by a person because of the contravention of s 18 of the ACL or to prevent or reduce that loss. I have found that Newserv suffered a loss of $900,000 because of the contravention by Mensie Services of s 18. In the circumstances of this case, the most appropriate way to compensate Mensie Services for that loss is an order reducing the purchase price under the Sale Agreement to the amount of $2.1 million leaving the amount remaining outstanding by Newserv in respect of the purchase price at $600,000. On the basis that the variation to the purchase price takes effect from the date of the Sale Agreement, interest will be payable on that amount at 8% per annum from the completion date, with a credit given for the interest already paid by Newserv. A corresponding variation to the amount of the “Advance” under the Loan Agreement should be made for the same reason.

Mr Bartter’s evidence

1. [142]

   Mensie Services submitted that the Court should not accept Mr Bartter’s evidence except where it was corroborated by contemporaneous documents or other witnesses. I do not accept this submission. I accept that Mr Bartter was an honest and reliable witness. I accept his evidence but have taken into account when evaluating it all the other evidence, including contemporaneous documents and the evidence of other witnesses.

Conclusion

1. [143]

   For the reasons given above, Newserv is entitled to an order under s 237 and s 243 of the ACL that the Sale Agreement be varied by reducing the “Purchase Price” from $3 million to $2.1 million and an order varying the Loan Agreement to reduce the “Advance” from $1.5 million to $600,000.

2. [144]

   Accordingly, the plaintiff is entitled to judgment in the sum of $600,000 plus interest at the rate of 8% per annum from the completion date less amounts of interest already paid.

3. [145]

   There was no evidence before the Court as to the amount of the costs claimed under cl 8.1 of the Loan Agreement (and cl 1.4 of the guarantee) and accordingly no relief can be given for such amount.

4. [146]

   I will hear the parties in relation to costs.