Cadence (90) Investments Pty Ltd as trustee of the GDC Discretionary Trust v Simon Dougal Chalmers

1. [1]

   HIS HONOUR: The first plaintiff company (Cadence) and the second plaintiff (Stevens) sue the first defendant (Chalmers) and his wife, the second defendant (Cheah), for damages alleged to have been caused by conduct engaged in by Chalmers which was misleading or deceptive or likely to mislead or deceive, in contravention of section 18 of the Australian Consumer Law (ACL), in which conduct Cheah is alleged to have been involved.

2. [2]

   The conduct complained of occurred in connection with investments made by the plaintiffs by way of subscription for shares in Sporteluxe Group Pty Ltd (SGL), the third defendant.

3. [3]

   Material in evidence describes Chalmers as a successful business entrepreneur with a passion for start-ups and strategy.

4. [4]

   Cheah is a yoga instructor, fitness and wellness ambassador, digital influencer, blogger, model, actress and media personality.

5. [5]

   Cadence is associated with Garren Douglas Cronin (Garren) and his wife Emma Louise Cronin (Emma), first names are used with no disrespect intended. Garren is a chartered accountant who has a corporate finance background. Emma is a nutritionist who has a background in e-Commerce. They have an interest in investing in private ventures. Garran is the sole director of Cadence.

6. [6]

   The plaintiffs also sued SGL and two other corporate entities associated with Chalmers and Cheah, called Sporteluxe Pty Ltd (SPL) and TYK Holdings Pty Ltd (TYK) respectively. SGL was placed into liquidation on 12 November 2018. Chalmers and Cheah had contractually indemnified SGL. The plaintiffs had leave to bring derivative proceedings against Chalmers and Cheah for the benefit of SGL. However, the plaintiffs have discontinued against SGL, SPL and TYK, and SGL has discontinued against Chalmers and Cheah.

7. [7]

   On 27 August 2019, the solicitors who had been on the record for Chalmers and Cheah since 13 March 2018, Tisher Liner FC Law (Tisher Liner), filed a Notice of Ceasing to Act.

8. [8]

   Chalmers and Cheah did not appear at the hearing to defend. Had they sought to do so, there would have been a question whether they would have been heard because, as is described later, they disobeyed orders of the Court to give discovery and remain in default of them: see Young v Jackman (1986) 7 NSWLR 97. They now reside permanently in the United States of America and are beyond the compulsory processes of the Court.

9. [9]

   Before dealing with the substance of the claim, it is regrettably necessary to deal with an aspect of the conduct of their solicitors which caused the Court significant concern. Some of the procedural history needs to be set out.

10. [10]

    The proceedings were commenced on 6 March 2018, when the plaintiffs sued out of the Court a Summons and accompanying Commercial List Statement.

11. [11]

    Tisher Liner filed an appearance on behalf of Chalmers, Cheah, SGL and TYK on 13 March 2018. They ceased to act for SGL on 1 November 2018, when it went into voluntary administration. They continued on the record for Chalmers, Cheah and TYK.

12. [12]

    On 24 May 2019, I fixed the case for hearing (on an estimate of 7 hearing days) to commence on 2 September 2019. I made the Usual Order for Hearing (Annexure 3 to Practice Notice SC Eq 3), with some ancillary directions.

13. [13]

    Paragraph 14 of the Usual Order for Hearing requires the parties’ barristers or solicitors to cause to be filed no later than 10 working days before the hearing (that is, in this case, by Friday 16 August 2019) with the Court a folder of all affidavits, statements and reports to be relied upon at trial with an index which complies with specific requirements set out in the paragraph. Only the plaintiffs’ solicitors complied.

14. [14]

    On 12 July 2019, the Court made, by consent, orders under which discovery of identified documents was to be made by Chalmers and Cheah by 26 July 2019. Cheah made no discovery. Chalmers made incomplete discovery.

15. [15]

    On 26 July 2019, Tisher Liner filed a Notice of Intention to File a Notice of Ceasing to Act pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 7.29(2).

16. [16]

    On 9 August 2019, the plaintiffs filed a Motion, which was made returnable on 16 August 2019, seeking orders that Chalmers and Cheah give discovery, failing which judgment be entered against them, damages to be assessed.

17. [17]

    The matter came before me on 16 August 2019. There was no appearance for Chalmers and Cheah, notwithstanding that Tisher Liner were still on the record for them. Counsel for the plaintiffs, Mr S A Lawrance, told me that Tisher Liner had filed a Notice of Intention to File a Notice of Ceasing to Act. An affidavit by Charles Coleman, a solicitor employed by the plaintiffs’ solicitors, Watson Mangioni, recounted a conversation with an Associate at Tisher Liner, during which the Associate told him that Tisher Liner had been instructed not to appear on the Motion and that Chalmers and Cheah did not intend to defend the proceedings.

18. [18]

    I declined to grant the plaintiffs the relief sought in the Motion, not least of all because there were already orders for discovery. Additionally, I considered that Chalmers and Cheah should be given more time. I did, however, give the plaintiffs leave to amend the Motion to claim judgment, damages to be assessed, and I fixed the Motion for hearing on 20 August 2019.

19. [19]

    On the morning of 20 August 2019, at 9.11 am, I received the following email directly from Tisher Liner under the hand of the Associate earlier referred to:

20. [20]

    It is appropriate to set out the attached letter in full:

21. [21]

    The letter was under the hand of a Principal of Tisher Liner, who described himself as an Accredited Commercial Litigation Specialist. The email was copied to the Principal.

22. [22]

    It will be immediately apparent that the sending to me of this letter was improper.

23. [23]

    It was sent directly to me (via my Associate), with no leave from the Court or consent from the plaintiffs previously had or obtained.

24. [24]

    It contains highly contentious argumentative material.

25. [25]

    It was sent in circumstances where there was intended to be no appearance at the hearing of the Motion. It was plainly sent to place that contentious argumentative material before the presiding judge, by direct communication not in open Court, to influence the Court.

26. [26]

    In Re JRL; Ex Parte CJL (1986) 161 CLR 342 at 350, Mason J said:

27. [27]

    Added to this, clause 22.5 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (NSW) provides:

28. [28]

    The sending of the letter was contrary to the cardinal principle enunciated by Mason J, and would be regarded as a serious contempt. It was contrary to the Solicitors’ Conduct Rules, the policy behind which is the prevention of interference with proper Court process.

29. [29]

    One of the many mischiefs these Rules seek to avoid is enabling a party, after the event, to assert that it had put arguments to the Court of which no proper account had been taken, even though there had been no appearance at the proper time for those arguments to be adduced.

30. [30]

    In the face of this communication, I considered that it was inappropriate for the Motion to proceed at the time.

31. [31]

    I directed the solicitor having supervision of the Associate, to be present at 2.00 pm the following day. I conveyed to the solicitors that I wished to hear submissions as to whether the Court should exercise its supervisory jurisdiction in relation to the sending of the email and the letter.

32. [32]

    On the afternoon of 20 August 2019, I received a communication from a partner at Tisher Liner that he was the supervising partner in the matter and would attend Court. He was the author of the letter.

33. [33]

    At 2.00 pm on 21 August 2019, the partner was present in Court when the Motion was called on. He did not have instructions to, and did not, appear on the Motion. After hearing the Motion, there was a colloquy between the Court and him.

34. [34]

    He tendered an unreserved and unqualified apology to the Court for what had been done. Whatever had been his or his Associate’s state of mind when the email and letter had been dispatched to me, it was readily apparent that it was now clearly understood and acknowledged that sending them had been seriously improper. He sought to withdraw the letter, and requested that it be disregarded, as plainly it must, in determination of the real issues in the proceedings.

35. [35]

    He assured me that Tisher Liner accepted responsibility for the payment of the plaintiffs’ costs thrown away by their conduct (which caused the adjournment of the Motion) and that those costs would not be recovered from Chalmers and Cheah.

36. [36]

    He told me that it was not intended, in sending the email and letter, to influence the Court. I record that I did not accept this. There is no other way to view what was done other than as a perceived method of putting arguments before the Court for the Motion, where there would be no appearance at which those arguments could otherwise be put.

37. [37]

    But I did accept the apology. The processes of the Court will not, as it has turned out, be undermined. The plaintiffs will not be prejudiced. The plaintiffs did not suggest that any perception of apprehended bias had arisen as a result of the sending of the email and letter.

38. [38]

    I consider that the apology was genuine.

39. [39]

    I informed the partner that I would not request the Registrar of the Court to commence proceedings for contempt.

40. [40]

    It is, unfortunately, an all too frequent occurrence that legal practitioners send contentious correspondence to judges, where they should plainly not do it, and where they should be acutely aware that they must not. The Courts have stressed this on numerous occasions: see, for example, R v Fisher (2009) 22 VR 343 and Cronulla-Sutherland District Rugby League Football Club Limited v Nationwide News Pty Ltd [2013] NSWSC 494. I stress it again.

41. [41]

    I now turn to the case.

Striking out and judgment

1. [42]

   Section 61(1) of the Civil Procedure Act 2005 (NSW) (CPA) provides:

2. [43]

   CPA s 61(3)(c) provides:

3. [44]

   The affidavit of Charles Coleman, earlier referred to, made it clear that Chalmers and Cheah had no intention of defending the proceedings, and by clear implication that they had no intention of complying with directions of the Court for the preparation of the hearing. They did not instruct solicitors or counsel to appear on the Motion.

4. [45]

   They were, at the time of the Motion and at the time of the hearing, in default of the discovery orders.

5. [46]

   Chalmers did produce a List of Documents, which was served on the plaintiffs’ solicitors on 5 August 2019. Enclosed with the List of Documents was an affidavit of Chalmers, affirmed on 23 May 2019, attesting that he had, or had within the 6 months prior to the commencement of proceedings, no documents in his possession responsive to certain classes of documents sought by the discovery order. Category 21, which required production of documents ‘recording the total advertising revenue earned by each of SPL and Wylde for FY15, FY16 and FY17’, is one such class. However, the evidence shows that:

   1. (1)

      on 12 February 2018, Chalmers sent an email to Garren which attached sales ledgers for SPL and the Wylde Group Inc for the period 1 January 2017 to 31 December 2017;

   2. (2)

      on or around 21 October 2018, Chalmers apparently provided Mr Gideon Rathner, an administrator of SPG and SPL, with a Balance Sheet and Income Statement for the Wylde Group Inc for the period 1 January 2018 to 31 October 2018; and

   3. (3)

      in a second affidavit affirmed on 23 May 2019, Chalmers stated that he had ‘been through SPL’s Xero records’ to identify certain SPL advertising revenue for the period 22 April 2016 to 17 November 2016.

6. [47]

   Chalmers, at the very least, had documents in his custody or control which were responsive to category 21, but he did not discover them.

7. [48]

   Cheah did not file a List of Documents in the proceedings and she did not give discovery as ordered. I infer from her stated intention to not defend the proceedings that she never intended to remedy her default.

8. [49]

   Pursuant to CPA s 61(3)(c), I made orders on the plaintiffs’ Notice of Motion to the following effect:

9. [50]

   I ordered Chalmers and Cheah to pay the costs of the Motion on the indemnity basis.

10. [51]

    On 27 August 2019, Tisher Liner ceased to act for them.

11. [52]

    Chalmers and Cheah did not comply with the Court’s orders, and there was judgment against them with effect from midnight on 28 August 2019.

Relevant statutory provisions and approach

1. [53]

   The ACL is contained within Schedule 2 of the Competition and Consumer Act 2010 (Cth).

2. [54]

   Section 2(1)(c) of the ACL provides relevantly:

3. [55]

   Section 18(1) of the ACL, which is in Chapter 2, provides relevantly:

4. [56]

   Section 236(1) of the ACL provides relevantly:

5. [57]

   Although the defences of Chalmers and Cheah were struck out and the plaintiffs obtained judgment (with damages to be assessed), the remedy which the plaintiffs seek is the statutory one under ACL s 236.

6. [58]

   To allow a claimant to recover loss or damage, the Court must be satisfied that such loss or damage has been suffered because of the conduct of the contravener or a person involved in the contravention.

7. [59]

   There must be sufficient connection between the conduct and the damage suffered for the latter to be regarded as ‘because of’ the former. This is essentially a question of fact, to be determined by reference to common sense and experience and one into which policy considerations and value judgments necessarily enter: March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506; Wardley Australia Ltd v Western Australia (1992) 175 CLR 514; Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304.

8. [60]

   The conduct complained of does not have to be the sole cause of the loss – it must merely be a sufficient cause: Henville v Walker (2001) 206 CLR 459.

9. [61]

   Despite the absence of any defences from Chalmers and Cheah and despite the plaintiffs having judgment against them, I take the view that for the plaintiffs to recover they must nonetheless establish:

10. [62]

    As regards Cheah, the plaintiffs must establish the elements necessary to make out that she was involved in the contravention.

11. [63]

    For the reasons which follow, the plaintiffs have established entitlement, against both Chalmers and Cheah, to the award which they seek.

The merits

1. [64]

   “Sporteluxe” is (or maybe was) the name of an internet-based publishing, marketing and advertising business, apparently founded by Cheah in 2012 ‘from her kitchen table’. The business model looked to ‘leverage an existing and growing user community into a premium subscription box’. Its website referred to Cheah as ‘one of Australia’s most stylish spokespersons for wellness’. She is described in its advertising material as ‘living the values of Sporteluxe every day’.

2. [65]

   Cheah had a written agreement with International Management Group of America Pty Ltd (IMG), under which IMG would act as her management representative and would undertake sole responsibility for the development, negotiation and organisation of all income-producing activities and career development opportunities available to her on a ‘worldwide basis’. Material in evidence enables the Court to infer that as at 31 March 2017, Cheah had received income, in her own right, attributable to activities covered by her agreement with IMG.

3. [66]

   The Sporteluxe business was, until November 2017, when it was transferred to SGL as part of the transaction which is the subject of these proceedings, conducted by SPL. At all material times, Cheah was a director of SPL. Chalmers was a director of SPL from 1 May 2016 to 5 May 2017.

4. [67]

   The Sporteluxe website included a link for making general enquiries and for making enquiries relating to Cheah.

5. [68]

   On 14 August 2017, using the website, Emma directed an investment enquiry to Cheah.

6. [69]

   There then followed what may be colloquially referred to as a due diligence exercise, in which financial information concerning the Sporteluxe business was made available to the plaintiffs. Information was made available by Chalmers directly to Garren, who passed it on to Stevens, and some information was made available by Chalmers to both Garren and Stevens. The information was, self-evidently, conveyed for the purpose of encouraging the plaintiffs to invest. It was undoubtedly contemplated by Chalmers (and for that matter Cheah) that information given to Garren (on behalf of Cadence) would be made available to Stevens. The conduct in providing it was plainly in trade or commerce.

7. [70]

   Information was provided by Chalmers, amongst others, by way of:

8. [71]

   The information included, critically, historic and forecast advertising sales revenue.

9. [72]

   The Pitch Deck showed historic revenue for 2017 totalling $588,000.

10. [73]

    The Cashflow Planner showed such revenue for 2017 as $526,184, made up as follows:

11. [74]

    These figures are false and misleading. Revenue of $167,537.57 included in revenue represented to have been earned by the Sporteluxe business was not earned by that business, but by Cheah in her personal capacity from her IMG activities. SPL’s records (to which the plaintiffs obtained access much later) reveal that this income was reallocated, deceptively, as income of the Sporteluxe business operated by SPL. The following is the entry in SPL’s ledger of Advertising Sales Transactions:

12. [75]

    It is apparent from this business record that an amount equivalent to this income had, before the reallocation, been lent by Cheah to SPL. The economic effect of the reallocation is not only to discharge the loan obligation, but to reflect revenue which was not earned by SPL as revenue that was.

13. [76]

    The provision by Chalmers of financial information, which included this amount as revenue of the Sporteluxe business run by SPL, was conduct, in trade or commerce, which was misleading or deceptive in contravention of ACL s 18.

14. [77]

    Its provision was misleading or deceptive in another significant respect.

15. [78]

    In the Sporteluxe clarification, it was stated that growth in advertising sales revenue and advertising sales had been “organic”. This is a representation that the performance of the business was due to its own revenue generating capacity, without external contribution. Contrary to this representation, a material proportion of the 2017 represented revenue was not revenue of SPL but came from an outside source, namely Cheah’s IMG activities.

16. [79]

    The wrongly included income accounts for 47% of the actual and forecast revenue for the first three quarters of 2017.

17. [80]

    I turn then to whether Cheah was a person involved in the contraventions. She will have been if she was in any way, directly or indirectly, knowingly concerned in, or party to, them, that is if she knew of the facts and circumstances giving rise to the contravention: Yorke v Lucas (1985) 158 CLR 661. I find that she did have such knowledge.

18. [81]

    The original approach by Emma was to Cheah. Although the direct provision of financial information was then left principally to Chalmers, Cheah was plainly aware that financial and other information was being provided to the plaintiffs as a precursor to investment being sought by her.

19. [82]

    Cheah was a signatory to both share subscription agreements on behalf of SGL, and a party in her own right. The share subscription agreements include a warranty by her that documents and materials (including emails) made available by SGL to the plaintiffs as part of the due diligence material were accurate and complete in all material respects, and that all information disclosed by SGL was true, accurate and complete in all material respects when disclosed and not, by omission or otherwise, misleading in any material respect.

20. [83]

    Cheah was at all material times a director of SPL.

21. [84]

    Having regard to the aforegoing, it is close to inconceivable that Cheah did not know:

22. [85]

    But inconceivability of the negative is not required, only the balance of probabilities of the positive.

23. [86]

    It may safely be inferred, and I find, that it is more probable than not that Cheah had knowledge of all of these things, that is, of the facts and circumstances constituting the contravention.

24. [87]

    Evidence is to be weighed according to the power of the party to produce it: Hampton Court Ltd v Crookes (1957) 97 CLR 367 at 371-2 per Dixon CJ.

25. [88]

    The fact and extent of Cheah’s knowledge is peculiarly within her own knowledge. This does not relieve the plaintiffs of the necessity of having to show some evidence of Cheah’s knowledge, but slight evidence is enough unless explained away by her.

26. [89]

    Added to this, Cheah’s defence was struck out, the allegations against her (including of her knowledge) are untraversed, she did not defend the case against her, she did not give evidence and she failed, in breach of orders of the Court, to give any discovery in circumstances where she is beyond the Court’s jurisdiction, leaving the plaintiffs powerless to procure full and frank disclosure by her of material pertinent to her knowledge.

27. [90]

    These considerations do not constitute evidence or fill any gaps, but they provide an additional level of comfort that the findings against her are justified.

28. [91]

    On 11 November 2017, Cadence entered into a Share Subscription Agreement with SGL, under which it agreed to subscribe for 49,015 shares in SGL for $1,066,649.73. In fact, Cadence paid the subscription monies on 3 November 2017.

29. [92]

    On 14 November 2017, Stevens entered into a Share Subscription Agreement with SGL, under which he agreed to subscribe for 2,297 shares for $49,986.63. In fact he paid the subscription amount on 10 November 2017 (the day he signed the agreement).

30. [93]

    Before the shares in each instance were subscribed for, SPL’s Sporteluxe business was transferred to SGL.

31. [94]

    Garren, who is the sole director of Cadence, gave evidence, which I accept, of the matters upon which he relied in committing Cadence to the transaction. The factors included the consolidated advertising revenue figures for 2017 dealt with above. He understood that advertising sales had been organic, which provided him with comfort that the forecast in upside advertising revenue was achievable once the new funds were invested and additional sales resources hired. He understood that Cheah undertook modelling and endorsement work with IMG, but had no knowledge of its extent. He had no knowledge that the figure of $167,537 had previously been accounted as monies owed to Cheah in connection with her modelling and endorsement work.

32. [95]

    Stevens gave evidence, which I accept, that in committing to his transaction he relied on the 2017 advertising revenue in the Pitch Deck and Sporteluxe Clarification.

33. [96]

    The evidence satisfies me that in paying over their money for shares in SGL, Cadence and Stevens relied on the misleading financial information given to them and consequently suffered loss because of the misleading or deceptive conduct complained of.

34. [97]

    The evidence satisfies me that, in doing so, Cadence and Stevens lost their money. The shares in SGL for which Cadence and Stevens subscribed are worthless and, on the true figures, were worthless at the date they were issued to Cadence and Stevens. The latter fact is established by the expert report of a forensic accountant, Marnus Beylefeld, called by the plaintiffs: see Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653 at 685 and following.

35. [98]

    In their statutory report, dated 14 January 2019, the liquidators of SGL say that at the current time there is not expected to be sufficient funds to pay a dividend to any creditors.

36. [99]

    The report makes somewhat interesting reading. The liquidators say that based on their investigations to date it appears that of the $1,116,636.36 raised from Cadence and Stevens:

37. [100]

    The liquidators’ record that they are not satisfied that the payments to TWG have been adequately explained and substantiated. Chalmers and Cheah have disclosed that they ‘have little or no assets available from which an order could be paid if an action against them is pursued and is successful.’ They have stated that they ‘each earn $500 per month from TWG’.

38. [101]

    I conclude that:

39. [102]

    There will be judgment accordingly.

40. [103]

    Cadence and Stevens are also entitled to pre-judgment interest from the respective dates of payment to the date of judgment pursuant to CPA s 100(1) at the rates specified in Practice Note SC Gen 16.

41. [104]

    Chalmers and Cheah are to pay the plaintiffs’ costs.

42. [105]

    The plaintiffs are to bring in short minutes reflecting this outcome, with interest calculated to the date of this judgment.

43. [106]

    The Exhibits are to be returned.