Upintheair Pty Ltd v Business Custodians Ltd

McCOLL JA: I agree with Stevenson J’s reasons, save in relation to the issue of interest on the vendor finance. In that respect, I agree with Macfarlan JA’s reasons and the orders his Honour proposes.

MACFARLAN JA: Subject to one matter, I agree with the judgment of Stevenson J.

The point upon which I disagree with his Honour is the issue relating to interest on the $100,000 vendor finance.

The relevant provisions of the Contract are set out in his Honour's judgment at [86]. They provided for the Purchaser to repay the sum of $100,000, together with interest on that sum at the rate of 20% per annum, on or by the date which was 90 days after the completion date. As his Honour notes, the provisions did not expressly state what, if any, interest was to be paid in respect of any subsequent period if the $100,000 was not paid within the time specified. As a result, to substantiate a claim for contractual interest (whether at the rate of 20% or otherwise) for any period after the specified date the Purchaser would have to demonstrate that the Contract contained an implied term entitling it to that interest. As the express provision is unambiguous in its terms there is in my view no room for simply concluding instead that that further entitlement to interest is implicit in the express provision.

The test for implication of terms was stated in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 as follows:

The relevant express contractual provisions were here contained in a formal contract which was complete on its face. They were not in an informal contract, such as that under consideration in Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 422; [1995] HCA 24, to which a less rigid approach may be appropriate (see at 422).

It is sufficient for the purposes of the present case to conclude, as I do, that the implication of a term that the Purchaser pay further interest is neither necessary to give business efficacy to the Contract nor so obvious that 'it goes without saying'. Without the term, the relevant contractual provisions are in no sense unworkable. They provide for interest to be paid in respect of the specified period. Their silence as to what happens thereafter does not hinder the operation of the express terms.

In BP Refinery the Privy Council observed in relation to the implied term there in question that: "if an officious bystander had asked whether [the term represented] the common intention of the parties the answer would have been 'Of course'" (at 286). I do not consider that the answer would necessarily have been the same if the same question had been posed in the present case. Whilst the Vendor might have answered "of course" with alacrity, the Purchaser may well have resisted the proposition and pointed out that the Vendor's interests would be protected, without the relevant implied term, by the Court's power to award pre-judgment interest at such rate as it considers appropriate (see s 100 of the Civil Procedure Act 2005 (NSW)).

For these reasons, I agree with the primary judge's conclusions on this issue. The appeal should therefore be dismissed with costs.

STEVENSON J: By contract dated 13 December 2013 (“the Contract”), the second respondent, Pepperprint Pty Ltd (“the Purchaser”) agreed to purchase from the first appellant, Upintheair Pty Ltd, then known as Coffs Colour Printers Pty Ltd (“the Vendor”), a printing business conducted by the Vendor at Coffs Harbour (“the Business”) for $950,000.

The sale was negotiated by a business broker, the third respondent, Mr Bruce Dwyer, on behalf of the first respondent, Business Custodians Ltd. Business Custodians held an Australian Financial Security Licence and raised the funds for the purchase from investors following the issue of an Information Memorandum dated 1 October 2013.

It was a term of the Contract that the Vendor would loan the Purchaser $100,000 on account of the purchase price to be repaid with interest 90 days from completion.

By a further contract made the same day (“the Consultancy Agreement”), the second appellant (Mr Jamie McKinnon), a director of the Vendor and the founder of the Business, agreed to provide “services” to the Purchaser for five years for a weekly fee of $1,000 (plus GST).

The Contract was completed on 31 January 2014.

In June 2013 Mr McKinnon, on behalf of the Vendor, gave Mr Dwyer a Profit and Loss Statement (“the P&L”) for the Business for the period 1 July 2012 to 19 June 2013 (which period I will refer to as “FY13”) which stated that:

The Purchaser sued the Vendor in the District Court of New South Wales for damages for breach of contract and for misleading and deceptive conduct.

It was common ground in the Court below that the Vendor, by provision of the P&L, represented to the Purchaser’s pre-incorporation agent (Business Custodians) and thus, in effect to the Purchaser, that the income from the Business for FY13 from printing sales was $897,342.84 and that the net profit from the Business for FY13 was $404,370.72. As the Business was a printing business, the latter representation was, in effect, as to the net profit of that printing business. I will refer to these as “the Representations”.

It was also common ground that Mr McKinnon, on behalf of the Vendor, created invoices (which the parties referred to as the “Fictitious Invoices”) that falsely recorded printing sales of the Business as having occurred during FY13. There was a dispute as to when this occurred.

It was the Purchaser’s case that the total value of the Fictitious Invoices was $100,402.80 and that they comprised:

In fact, those invoices total $101,612.80, not $100,402.80. Nothing turns on the difference.

The Vendor accepted that the 11 invoices referred to at [19(1)] were fictitious (“the Admitted Fictitious Invoices”) but contended that the Olympicon invoices and the Baringa Hospital invoice were genuine.

The Purchaser became aware of the existence of the Fictitious Invoices shortly after completion when the administrator of Business Custodians, Mrs Esther Hughes, discovered invoices in respect of which no printing work appeared to have been done and no income received.

Mr McKinnon confessed to creating the Admitted Fictitious Invoices at a meeting on 19 March 2014.

In the proceedings below, Mr McKinnon said that he did this to disguise the fact that some of the income recorded in the P&L as printing sales in fact represented the sale of machinery. He said that during FY13, the Vendor sold printing machinery to two arm’s length purchasers (JW Graphic Engineering and Stewart Graphics Pty Ltd) for a sum very close to the amount of the Admitted Fictitious Invoices (the difference is immaterial). He said the Vendor sent genuine invoices to those entities for that machinery (“the Machinery Invoices”) and received payment of those invoices and that he substituted the Admitted Fictitious Invoices for the Machinery Invoices in the records of the Vendor.

It was common ground that, if the value of the Fictitious Invoices is excluded from consideration, the value of the Business at the date of Contract was $745,000, not $950,000 (a difference of $205,000).

The primary judge found, amongst other things, that:

In this Court, the Vendor accepted it made the Representations but otherwise challenged these findings. It also challenged other findings made by the primary judge, which I discuss below.

I would uphold the Vendor’s challenge to the primary judge’s decision as to the rate at which interest accrues on the $100,000 loan (which will result in a relatively minor adjustment of the overall amount payable by the Vendor to the Purchaser) but otherwise dismiss the appeal.

There was a dispute before the primary judge as to what the Purchaser had to prove to make out its case as pleaded in its statement of claim.

The relevant paragraphs of the statement of claim were:

The Vendor contended before the primary judge, and in this Court, that this pleading, and par 14 in particular, required the Purchaser to prove that the Fictitious Invoices themselves (and not merely amounts equivalent to the amounts in the Fictitious Invoices) were included in the P&L.

The primary judge did not accept that submission and held that the pleading “does not require the invoices to be part of the trading figures [reflected in the P&L], only the inclusion of the false sales”.

In my opinion, the primary judge was correct.

The allegation at par 13 of the statement of claim relates to the matters that the Purchaser “discovered”, namely the existence of invoices which purported to be for printing sales during FY13 but which were fictitious. Particular (i) refers to “[t]he goods and services” described in those invoices. However, in the context in which those words appear, it is clear that what is being referred to is “the printing services” described in the invoices. Particular (ii) asserts that the Vendor did not receive “the payments” referred to in those invoices. I read that to mean that the Vendor did not receive the amounts stated in those invoices as being due for printing services.

Paragraph 14 of the statement of claim states that the $100,402.80 “total” of the Fictitious Invoices was included “in the income of the Business from printing sales” for FY13.

The paragraph does not assert that the Fictitious Invoices were included in the income of the Business for printing sales for FY13. It asserts that the “total” of those invoices ($100,402.80) was so included. The paragraph directs attention to the amounts in the invoices, not to the invoices themselves. I do not read the paragraph as asserting, or implying, that the Fictitious Invoices themselves existed during FY13. I read the paragraph as alleging that the total dollar amount of those invoices (whenever they may have been created) was included as part of the income of the Business from printing sales.

That is how the primary judge construed the pleading. In my opinion he was correct.

The Olympicon Invoices comprised five documents purporting to be invoices issued by the Vendor during FY13 to Olympicon for printing work.

The Vendor’s case was that these invoices had been satisfied by a “contra” in respect of services allegedly provided by Mr McKinnon’s brother, Mr Matthew McKinnon, the principal of Olympicon.

Mr Matthew McKinnon is an electrician and the work done to effect the “contra” was said to be electrical work done at a property occupied by Mr Jamie McKinnon, his wife Mrs McKinnon and Mrs McKinnon’s parents.

Mr Matthew McKinnon said in an affidavit:

The evidence established that the Vendor did some printing work for Olympicon in June 2012, although there was no evidence as to the value of that work. The Olympicon Invoices purport to be dated in November and December 2012 and contain no description of the work allegedly done.

Mrs McKinnon annexed to one of her affidavits a copy of what purported to be the Vendor’s general ledger that showed amounts owing by Olympicon to the Vendor on 3 January 2013 and 14 February 2013 totalling $13,459 (the total of the Olympicon Invoices).

But that document is not consistent with the arrangements described by Mr Matthew McKinnon.

According to those arrangements, there is no question of Olympicon owing any money to the Vendor for printing work; payment for any such work was to be satisfied by electrical work done by Mr Matthew McKinnon, not for the Vendor, but for Mr Jamie McKinnon, Mrs McKinnon and Mrs McKinnon’s parents.

In any event, in the version of the General Ledger given to the Purchaser, the two entries showing amounts owing by Olympicon to the Vendor do not appear. The primary judge observed:

The primary judge said he “found Mr Matthew McKinnon to be a particularly unconvincing witness” and concluded by rejecting “the assertion that there was work done for Olympicon which was to be treated as a contra for the electrical work performed by Mr Matthew McKinnon”.

In my opinion, the correct analysis of these facts is that if the Vendor did any printing work for Olympicon, it was not printing work to the value set forth in the Olympicon Invoices and was not work done in the expectation of the Vendor receiving any payment from Olympicon. The Olympicon Invoices thus did not reflect income the Vendor expected to receive and should not have been included as part of the “printing sales” in the P&L.

This is, in substance, the effect of the primary judge’s conclusions. I see no basis on which to interfere with them.

This invoice purported to be dated 18 February 2013 in the amount of $1,891.

Before the primary judge, the Vendor relied upon what purported to be an extract from its customer ledger showing a sale to, and payment from, Baringa Hospital in this amount at about that time.

The primary judge was understandably sceptical as to the veracity of the Vendor’s financial records and preferred the evidence of Mrs Hughes, who investigated the financial affairs of the Business after completion of the Contract, and who, during cross-examination, gave this evidence following a question from Mr Fernon (who appeared below, and in this Court, for the Vendor):

That evidence was not responsive to Mr Fernon’s question. However, Mr Fernon did not apply to have the answer struck from the record or to suggest to Mrs Hughes that what she said was not true.

In my opinion it was open to the primary judge to treat Mrs Hughes’ evidence as evidence that she had rung, amongst other organisations, the Baringa Hospital, and had been told that it had not received any invoice from the Vendor; and to prefer that evidence over what the Vendor’s financial records purported to show.

It is true that the primary judge also suggested that a Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8 inference should be drawn against the Vendor because it had not adduced evidence from a representative of the Baringa Hospital. Whether or not that inference was justified, I do not see it as being decisive to the primary judge’s consideration of this aspect of the matter.

The Vendor challenges the finding of the primary judge that the Purchaser entered the Contract in reliance on the Representations.

Consideration of that question directs attention to the Representations and their falsity.

As I have said, in this Court, the Vendor accepted that by provision of the P&L it made the Representations.

The Representations were untrue, as the Vendor did not, during FY13, have an income from printing sales of $897,342.84. In truth, that figure included the amounts in:

None of these amounts reflected printing sales. Thus the net profit figure referred to in the P&L ($404,370.72) was not solely derived from the printing sales stated in the P&L.

I have dealt with the Olympicon Invoices and the Baringa Hospital Invoice. The primary judge held that they were, in effect, fabrications. For the reasons I have set out, in my opinion, he was correct to do so.

The primary judge held that the Machinery Invoices were genuine, that the sales referred to in those invoices (“the Machinery Sales”) took place and that the proceeds of those sales were paid into the Vendor’s bank account during the Period. There is no challenge to that finding on appeal.

However, it does not follow that the Machinery Sales could or should be regarded as part of the ordinary or regular income of the Vendor’s printing business. Mr Fernon accepted that the Machinery Sales were not made as part of the Vendor’s normal course of business. They were certainly not part of the Vendor’s printing business. Mr McKinnon’s evidence below was that in about March 2013 he learned that the University of New England at Armidale “was selling a large amount of commercial printing equipment”, which he inspected and concluded he could “onsell…at a profit”. That is what happened. Mr McKinnon caused the Vendor to purchase the machinery in March 2013 for $40,000 and, between March and June 2013, to onsell it for $89,010. So far as the Vendor was concerned, this was a one-off transaction.

In any event, as his Honour asked rhetorically, “[i]f machinery sales were part of the Business I do not understand why there was a need to cover them up”.

The explanation that Mr McKinnon gave was that Mrs McKinnon said to him in January 2014 (after exchange of contracts and before completion) that “[y]ou need to tell [Mr Dwyer] about the machinery sales invoices”, that he was “feeling very stressed by the entire sales process” and did not “want anything to compromise the completion”. He decided to ignore Mrs McKinnon’s advice and fabricate printing sales invoices equivalent in value to the Machinery Invoices.

Plainly, Mr McKinnon thought it material to conceal from the Purchaser the true nature of the income the Vendor had received from the Machinery Sales. I see his conduct as bespeaking a clear understanding that the Purchaser was concerned about the income from printing sales and not from a one-off sale of something else (as it turned out, machinery which was never actually used in the Business).

As the primary judge said, although the Machinery Invoices were genuine:

The Vendor does not challenge that finding. It is obviously correct.

The evidence as to the Purchaser’s reliance on the Representations was given by Mr Dwyer.

He said that in August 2013 he had the following conversation with Mr McKinnon:

Mr Dwyer said that in August 2013 he had a further conversation with Mr McKinnon:

Mr McKinnon agreed that he had conversations with Mr Dwyer to this effect.

Mr Dwyer continued:

Mr Dwyer then said:

The primary judge referred to a passage in the Information Memorandum (see [2] above) which stated that Business Custodians intended “to only select businesses demonstrating a sustainable EBITDA equating to a minimum 25% return on the total acquisition cost” and to evidence from Ms Lisa Wilson, a director of Business Custodians, that the minimum return that would be considered for investment was 33 1/3 per cent.

Nonetheless the primary judge concluded that:

His Honour noted that Mr McKinnon agreed that he had conversations with Mr Dwyer as set out above and concluded:

Mr Fernon submitted that in coming to these conclusions, the primary judge did not take into account the evidence given by Mr Dwyer, set out at [74] above, that he would not have authorised the purchase of the Business had he known that “the true net profit was less than $350,000 per annum (a minimum 35% return on investment)”. Mr Fernon submitted that, even if the Fictitious Invoices were excluded from consideration such a return on investment would be achieved and that it followed that Mr Dwyer would have authorised entry by the Purchaser into the Contract even if he knew the true position concerning income from printing sales.

I do not agree.

First, as Wilson J observed in Gould v Vaggelas (1985) 157 CLR 215; [1985] HCA 75 at 238:

Second, as Mr Priestley SC, who appeared for the Purchaser below and in this Court, pointed out, in cross-examination Mr Fernon took Mr Dwyer to the relevant paragraph of his affidavit. The following exchange occurred:

Mr Fernon did not pursue the matter further.

Third, it does not follow from the fact that Mr Dwyer would not have authorised the purchase had he known that the “true net profit was less than $350,000” that he did not rely on what was in fact represented to be the net profit of the Business. The primary judge held, correctly in my opinion, that the Representations were false. Mr Dwyer said he relied on that false representation in causing the Purchaser to enter the Contract. The primary judge was in my opinion entitled to accept that evidence.

Fourth, part of the Purchaser’s pleaded case was that the Vendor warranted in the Contract that all information concerning the Business that had been provided to the Purchaser prior to contract was complete and accurate in all respects and not misleading or deceptive. The Purchaser was entitled to fulfilment of that promise in any event. The promise was not fulfilled. The information in the P&L concerning income and resultant net profit was not accurate and was misleading.

For those reasons, I do not accept that aspect of the Vendor’s challenge to the primary judge’s decision.

Clauses 52.2 and 52.3 of the Contract were in the following terms:

Clause 52.3 obliged the Purchaser to repay the $100,000, together with interest at 20 per cent per annum, within 90 days of completion.

The clause is, in terms, silent as to what (if any) interest was to be paid if the $100,000 was not paid within the time specified.

The primary judge concluded that “the rate of 20% only applies to the first 90 days” and that thereafter interest was only payable if the Court exercised its discretion to order interest under s 100 of the Civil Procedure Act. His Honour did exercise that discretion and ordered interest at court rates for the period beyond 90 days.

I do not agree with this construction of cl 52.3. Although the clause does not, in terms, address the question of the interest rate applicable to the loan if it is not repaid within the agreed period, a reasonable business person in the position of the parties would, in my opinion, understand that interest would continue to accrue at the specified rate until repayment. In my opinion, that is implicit in the clause (Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [47]; Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; [2014] HCA 32 at [22] and [113]). Otherwise, the Purchaser would be in a better position after having defaulted in repayment of the principle than it was before repayment was due. That cannot, in my opinion, have been the intention of the parties.

It follows from these conclusions that a number of the Vendor’s grounds of appeal do not, strictly, arise for consideration.

Nonetheless, I will consider them, albeit briefly.

Properly understood, the pleadings did not require that the Purchaser prove when the Fictitious Invoices were created. Even if they were created in January 2014, as Mr McKinnon contended, at least to the extent of the Admitted Fictitious Invoices, an amount equivalent to their total was still recorded in the P&L as income from printing sales when, in truth, there had been no such printing sales.

Nonetheless, the primary judge concluded that all of the Fictitious Invoices were created during FY13 and not, as Mr McKinnon contended, in January 2014.

Because of my conclusion in respect of the pleading point, it is not necessary for me to consider whether the primary judge was correct in reaching this conclusion.

However, I do not think that he was.

As Mr Fernon submitted, the primary judge’s finding on this question was not based on any accounting evidence or forensic review of the Vendor’s accounting systems. Rather, it was based on what Mr Fernon described as the primary judge’s “theories” that:

The difficulty I see arises from the primary judge’s conclusion that the Machinery Invoices were genuine and paid during FY13. That being so, there was simply no reason why Mr McKinnon would, during FY13, create fictitious printing invoices in a corresponding amount unless he proposed falsely to inflate the Vendor’s income for FY13 by including an equal amount for both printing and machinery sales. But there is no suggestion that this is what occurred. The Purchaser’s case is that Mr McKinnon created Fictitious Invoices so as to disguise the fact that a significant component of the income referred to in the P&L as “printing sales” was in truth not from printing sales.

For those reasons, my opinion is that the primary judge erred in concluding that the Fictitious Invoices were created during FY13. However, as I have said, in view of my conclusion as to the pleading point, this does not assist the Vendor or affect the overall result.

On the third day of the trial, the Vendor sought to read an affidavit sworn by Mrs McKinnon to establish, by reference to sequential receipt numbers recorded in the Vendor’s cash receipt journals, that, as Mr McKinnon contended, he created the Fictitious Invoices in January 2014 and not during FY13.

At this point in the trial, and against the possibility that the Vendor’s contentions concerning the pleadings were correct, the Purchaser sought leave to file a reply to make clear that the Purchaser’s case was that the amounts of the Fictitious Invoices (rather than those invoices themselves) were included in the P&L.

For reasons his Honour gave in a brief ex tempore judgment delivered on the third day of the hearing, the primary judge decided to deal with both of these issues together and refused both the Vendor’s application to lead the further evidence from Mrs McKinnon and the Purchaser’s application to file a reply.

Mr Fernon submitted that the primary judge’s discretion miscarried as he failed to have regard to the fact that he, on behalf of the Vendor, pointed to prejudice which he contended would arise if the reply were allowed whereas Mr Priestley said that he could “probably meet” Mrs McKinnon’s evidence.

As it was not, in my opinion, necessary for the Purchaser to prove that the Fictitious Invoices were created during FY13, the correctness or otherwise of his Honour’s decision can make no difference to the outcome of these proceedings.

However, I see no basis on which to interfere with the primary judge’s decision.

Although Mr Priestley did say that the Purchaser was “not prejudiced at the moment” he also said that “we would like to reserve our position”. He also made clear that he had not yet had an opportunity to read all of Mrs McKinnon’s affidavit and that it would be necessary to make “further investigations into this material” to “work out what’s changed” and that “if anything arises I’d seek leave obviously to make the necessary application as it might be at that time”.

The trial was conducted at Coffs Harbour and when this issue arose it threatened to occupy the entire week of the October sittings. In those circumstances, the primary judge was understandably concerned with the possible implications of allowing Mrs McKinnon’s evidence.

On the other hand, the prejudice to which Mr Fernon referred was based on the fact that he had conducted the case to that point because of his understanding of what the pleadings required the Purchaser to prove. One matter to which Mr Fernon referred was that he had already cross-examined Mr Dwyer but may have done so differently had he understood that the Purchaser sought to make out a case as set forth in the reply. Mr Fernon did not, however, seek to have Mr Dwyer re-called for further cross-examination.

The primary judge was called on to make a difficult decision half way through the trial. It was necessary for him to weigh up a number of considerations and reach a conclusion that was bound to have adverse implications for one or both parties. In all the circumstances, I am not satisfied that the primary judge’s discretion miscarried.

The primary judge found that the Consultancy Agreement was “terminated by the parties” at the meeting of 19 March 2014 at which Mr McKinnon confessed to creating the Admitted Fictitious Invoices.

The Vendor challenges that finding.

Mr Fernon accepted however that if, as in my opinion, the primary judge correctly found the Contract was entered into in reliance on the misleading conduct of the Vendor, the Consultancy Agreement would not be enforceable and that the primary judge’s order under s 243 of the Australian Consumer Law (see [26(g)] above) should not be disturbed.

Thus the question of when the Consultancy Agreement was terminated is of no moment.

However, were it relevant to do so, I would not interfere with the primary judge’s conclusion.

The Consultancy Agreement was expressed to be for a term of five years and to be terminable for cause by notice in writing signed by the Purchaser.

The primary judge’s conclusion was based on the fact that Mr McKinnon gave evidence that in November 2014 he had been twice offered a job with the Purchaser (which his Honour saw as being inconsistent with already being “on the payroll”) and because his Honour thought it “clear that following the revelations of falsifying invoices, the [Purchaser] considered any business relationship with Mr McKinnon had ended”.

The primary judge accepted the evidence of the Purchaser’s representatives (over that of Mr McKinnon) as to what was said at the meeting of 19 March 2014 including that, following Mr McKinnon’s confession concerning the false invoices, Mr Dwyer said to him:

On 10 April 2014, Mrs McKinnon sent Mrs Hughes a number of tax invoices purportedly for consultancy work done between 31 January 2014 and 2 May 2014. However, Mrs McKinnon gave evidence that she did not send those invoices at Mr McKinnon’s suggestion, but rather at the suggestion of her solicitor.

Mrs Hughes’ evidence was that “we never received any further tax invoices after that” from Mr or Mrs McKinnon. That is hardly surprising following Mr McKinnon’s confession to having created the Admitted Fictitious Invoices. It is inconceivable that, following such confession, he regarded the Consultancy Agreement as still on foot.

In my opinion, the conclusion to which the primary judge came was one that was open on the evidence.

For these reasons, I would propose that the following orders be made: