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Federal Court of Australia |
Last Updated: 21 July 1998
CORPORATIONS LAW - statutory and common law duties of a receiver - whether receiver failed to take reasonable care in selling business - no question of principle.
Corporations Law ss 79, 232(4), 420A, 1317DB, 1317HD, 1324(1)
SYDNEY
17 JULY 1998 IN THE FEDERAL COURT OF AUSTRALIA BETWEEN: First Applicant
JANE LAVINA DIDDAMS
Second Applicant
WHITFIELD INVESTMENTS PTY LIMITED (ACN 002 653 796)
Third Applicant
BARROT PTY LIMITED (ACN 003 562 445)
Fourth Applicant AND: First Respondent AND CROSS CLAIMANT
PETER MURRAY WALKER
Second Respondent AND CROSS CLAIMANT
JUDGE(S):
NEW SOUTH WALES DISTRICT REGISTRY NG 3401 of 1996
JOHN FLOWER DIDDAMS
COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124)
BRANSON J DATE OF ORDER: 17 JULY 1998 WHERE MADE: SYDNEY
THE COURT ORDERS THAT:
The respondents are to bring in within seven days of today's date short minutes of order to reflect the reasons for judgment published today.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
|
IN THE FEDERAL COURT OF AUSTRALIA | |
| NEW SOUTH WALES DISTRICT REGISTRY | NG 3401 of 1996 |
|
BETWEEN: | JOHN FLOWER DIDDAMS
First Applicant
JANE LAVINA DIDDAMS Second Applicant
WHITFIELD INVESTMENTS PTY LIMITED (ACN 002 653 796) Third Applicant
BARROT PTY LIMITED (ACN 003 562 445) Fourth Applicant |
|
AND: | COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124)
First Respondent AND CROSS CLAIMANT
PETER MURRAY WALKER Second Respondent AND CROSS CLAIMANT
|
JUDGE(S):
BRANSON J DATE: 17 july 1998 PLACE: SYDNEY REASONS FOR JUDGMENT
This proceeding arises out of the appointment by the first respondent ("the Bank") of a receiver and manager of the fourth applicant ("Barrot") and the subsequent sale by such receiver and manager of the assets of Barrot. These assets were principally a business comprised of a nightclub known as "Rogues" and an associated restaurant, known at one time as "Streetons" but at the relevant time as "Pete and Andy's Bar & Grill" ("the Business").
The applicants allege that the second respondent ("Mr Walker"), in his capacity as receiver and manager of Barrot, failed to exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances (Corporations Law s 232(4)). In essence, the applicants assert that Mr Walker failed to take all reasonable care to sell the Business for the best price that was reasonably obtainable, and that the Business was in fact sold by him at a price well under its market value.
Essentially the same complaint is pleaded by the applicants as a breach of duty by Mr Walker under s 420A of the Corporations Law and as a breach of equitable duties owed by Mr Walker to Barrot. For the purposes of s 420A of the Corporations Law Mr Walker was a "controller" of the property of Barrot (see s 9 of the Corporations Law). Section 420A provides as follows:
"(1) In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:
(a) if, when it is sold, it has a market value - not less than that market value; or
(b) otherwise - the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.
(2) Nothing in subsection (1) limits the generality of anything in section 232."
As against the Bank, the applicants plead that it aided, abetted, counselled or procured Mr Walker to contravene s 232(4) of the Corporations Law or was directly or indirectly knowingly concerned in or a party to such contravention (Corporations Law s 1324(1)). Further or in the alternative the applicants plead that the Bank was involved in Mr Walker's contravention of s 232(4) of the Corporations Law (Corporations Law s 1317DB). The first, second, and third applicants seek orders restraining the Bank from enforcing securities given by them. The fourth respondent seeks an order for compensation or damages against the Bank.
The Bank has cross-claimed against the first, third and fourth applicants, to recover the amounts outstanding by Barrot to the Bank.
THE PARTIES
Barrot is a company deemed to be incorporated in New South Wales in accordance with the Corporations Law. As is mentioned above, it was, at the time with which this proceeding is concerned, the owner of the Business.
The first applicant ("Mr Diddams") was one of two directors of Barrot. The other director was a Mr Simpson who, by reason of ill health, was playing a limited role in the management of Barrot at the time with which this proceeding is concerned. Mr Simpson is now deceased.
The second applicant ("Mrs Diddams") is the wife of Mr Diddams. In December 1991 Mrs Diddams provided to the Bank a term deposit in the sum of $100,000 by way of security for the repayment of advances made or to be made by the Bank to Barrot.
The third applicant ("Whitfield") is a company deemed to be incorporated in New South Wales in accordance with the Corporations Law. Whitfield is the trustee of the "John F Diddams Family Trust" and a shareholder in Barrot. Its directors are Mr and Mrs Diddams. In about September 1990 Whitfield granted to the Bank a mortgage over certain property in New South Wales of which Whitfield was the registered proprietor to secure the repayment of advances made or to be made by the Bank to Barrot.
The Bank is a company deemed to be incorporated in New South Wales in accordance with the Corporations Law. At the time with which this proceeding is concerned, it acted as banker to Barrot.
Mr Walker is an accountant, a registered liquidator and a partner of the firm Ferrier Hodgson (New South Wales) ("Ferriers"), Chartered Accountants. He was appointed by the Bank as receiver and manager of Barrot on 28 September 1993.
BACKGROUND FACTS
The Business operated from premises at 16-18 Oxford Square, Oxford Street, Darlinghurst ("the Premises"). The Premises were leased by Barrot from Donoro Pty Limited ("Donoro") as to 18 Oxford Street by an undated lease for a term commencing on 1 November 1988 and terminating on 29 August 1997, and as to 16 Oxford Street by an undated sub-sub-lease for the same term. The one rent was payable under the lease and the sub-sub-lease. They will together hereafter be referred to as "the Lease". The minimum rent payable under the Lease and the rent payable for the first two years of the term was $187,200. The rent review provisions of the Lease had the effect that after the first two years of the term the rent payable under the Lease would increase annually by not less than 10%. Moreover, such provision provided for a review to market rental at the end of each period of two years of the term, provided that such review could not result in a decrease in rental. The Lease also provided for the lessee to pay to the lessor on demand the amount of rates and taxes and insurance assessed in respect of the land on which the premises are erected.
The directors and only shareholders of Donoro at the relevant time were David Fox ("Dr Fox") and Elizabeth Fox ("Mrs Fox").
On 20 November 1989 Barrot created a fixed and floating charge securing the payment to the Bank of all moneys then or thereafter to become owing or payable to the Bank by Barrot. On 28 March 1989 Mr Diddams guaranteed to pay to the Bank on demand all moneys then or thereafter to become owing or payable to the Bank by Barrot. On 18 September 1990, Whitfield mortgaged to the Bank certain land for the purpose of securing to the Bank the payment of all moneys then or thereafter to become owing or payable to the Bank by Barrot. On 17 December 1991, Mrs Diddams provided a guarantee to the Bank by way of term deposit in the sum of $100,000 so as to secure, possibly amongst other things, advances by the Bank to Barrot.
In about September 1989 Mr Diddams, and presumably Mrs Diddams, left Australia to live in London. They did not return to Australia until about May 1991. During this time Mr Simpson managed the day-to-day affairs of Barrot.
By letter dated 21 November 1990 solicitors for Donoro gave notice to Barrot under the rent review provisions of the Lease of the amount which Donoro considered to be the current market rent of the Premises. Barrot as lessee did not give any notice under the Lease disputing such assessment. By letter dated 18 December 1990 the solicitors for Donoro confirmed that the annual rental under the Lease had become $307,200 plus outgoings.
By letter dated 27 February 1991 the solicitors for Donoro advised Barrot that it was in arrears of rent in an amount of $35,000 and threatened winding-up proceedings. On 6 February 1991, Mr Simpson on behalf of Barrot wrote to Donoro's solicitors. He referred to conversations between himself and Dr Fox and asserted that Barrot was not able to agree to the increased rent. On the same day he wrote to Dr Fox in similar terms, seeking an opportunity to meet with him.
Nothing more seems formally to have happened with respect to the determination of the rent payable with respect to the Premises until 31 May 1992. By letter of that date Mr Diddams wrote to Dr Fox referring to previous discussions and to a suggestion apparently made by Dr Fox that a specific proposal to resolve the matter be put to him. In that letter Mr Diddams referred to the financial statements of Barrot to the end of March 1992 and went on -
"For the record, sales have fallen from $3.4 million in the year to 30 June 1990 to $3.0 million to 30 June 1991. Based on trading for the 10 months to March 1992, sales for the year to 30 June 1992 are forecast to be approximately $2.3 million. This translates to a reduction in sales revenue of some 23% over the past year and a reduction of over 33% since 1990.
Clearly, we have drastically reduced the overheads of the business during this period, including return on investment/remuneration to the owners/directors, to a level necessary for survival."
The letter proposed a reduction in the annual amount payable under the lease for rent and outgoings to $180,000. No response appears to have been received to this letter.
In or about September 1992 Barrot sought additional finance for its business and obtained a fully drawn advance of $224,835 from the Bank. At the same time lease finance in the sum of $149,835 was repaid. An existing overdraft limit of $75,000 was varied to a basic overdraft facility of $20,000 and a temporary overdraft facility of $40,000.
By letter dated 3 February 1993 addressed to Dr Fox, Mr Diddams proposed a further reduction in the annual amount payable under the Lease for rent and outgoings to $120,000. He noted in the letter that the January 1993 turnover of the Business was 32% down on that of the previous January. He further noted that -
"the alternatives of our selling the business, or you trying to find another tenant, in this climate are virtually nil ...".
On 23 April 1993, Mr Diddams sent a facsimile transmission to Dr Fox on the topic "Ammendments [sic] to Barrot Lease from Donoro". The substantive content of the transmission is as follows:
"It is now nearly 3 months since my letter of 3 February and a month since I requested your urgent attention to the lease/rent matters so I can deal with the CBA and others in what is, to say the least, a very difficult financial situation.
I am still waiting for the figures on outgoings for the past 4 years that I have repeatedly requested, been promised but never seen!
When I see you in person, you promise a letter within days but nothing arrives. Are you going to deal with this issue or are you just hoping it will go away? I can assure you that if you do not deal with it, it will go away but to neither of our benefits!!!
Please respond to my earlier correspondence as a matter of urgency."
By letter dated 18 June 1993 solicitors for Donoro advised Barrot that no indulgence by way of rent or outgoing relief was offered by Donoro. The letter claimed payment of a total amount of $160,969.20 being $93,401.20 for rent as at 31 December 1992 and $67,568 for outgoings as at the same day. In response, by facsimile dated 13 July 1993, solicitors for Barrot denied that Barrot had any liability to pay the amount claimed in the letter of 18 June 1993, alleging a waiver by Donoro based upon acceptance of payments made to it by Barrot. By a "without prejudice" facsimile of the same date the solicitors for Barrot sought a meeting to resolve the matters in dispute. On the same day the solicitors for Barrot wrote also to Mr Diddams confirming Donoro's legal entitlements under the Lease, adverting to the possibility of a waiver by Donoro of its strict legal rights and describing the matter as being in the "grey area".
On 22 June 1993, Mr Diddams, on behalf of the directors of Barrot, gave notice of an extraordinary general meeting of the shareholders of Barrot to be held on 14 July 1993. In a memorandum accompanying the notice, Mr Diddams referred to the company's need for an injection of cash in the order of $100,000 and to the refusal of the Bank to increase Barrot's overdraft limit. Mr Diddams stated in the memorandum that unless Barrot received an injection of cash in the order of $100,000 -
"I can see no alternative to placing the company in the hands of a receiver/liquidator".
The minutes of the extraordinary general meeting of Barrot held on 14 July 1993 record that the proposal that shareholders provide the necessary funds by subscribing for secured convertible notes was defeated. The shareholders resolved as follows:
"That the directors should seek an alternative source of finance to ensure the company had sufficient funds with which to pay its licence fees and other debts."
On the same day the directors of Barrot resolved to borrow the sum of $70,000 for a term of six months from a lender and to secure such loan, plus interest at 10% per annum, by a second ranking floating charge over the assets of Donoro. Mr Diddams had identified Valetta Services Ltd ("Valetta"), a company associated with Leon Phillip Carr ("Mr Carr") as a potential lender to Barrot.
On 15 July 1993, the sum of $70,000 was deposited with the Bank to the account of Barrot by Whitfield. Whitfield was subsequently reimbursed this amount when formal documentation concerning a loan of $70,000 by Valetta was finalised on 14 September 1993. The sum of $70,000 was used to pay liquor licensing fees, to redecorate the Premises, and to provide working capital. It was at this time that the name of the restaurant was changed from "Streetons" to "Pete and Andy's Bar & Grill".
Discussions and correspondence concerning payments allegedly due by Barrot under the Lease continued. For example, by correspondence dated 12 August 1993, the solicitors for Barrot put an offer of settlement to the solicitors for Donoro. In the alternative an offer was made to have the rent payable under the Lease determined by an independent valuer instructed to determine the market rent for the Premises. These offers were not accepted.
On or about 10 August 1993 Mr Diddams contacted Warren Panzer ("Mr Panzer"), chartered accountant of the firm Ferrier Hodgson. He sought advice as to his obligations and responsibilities as a director of Barrot in the light of his increasing concern about Barrot's capacity to trade because of long term creditors which could not be paid from current cash flow. Mr Panzer proposed and arranged a subsequent meeting attended by Mr Diddams, Mr Panzer and Mr Walker.
At such subsequent meeting, held on 12 August 1993, Mr Walker raised the possibility of his being appointed by the Bank as receiver of Barrot. In response to a statement by Mr Diddams that Barrot was not in default with the Bank, Mr Walker said "that can be fixed". Also discussed at this meeting were, in the words of Mr Diddams, the "totally uncommercial and unrealistic" rent demands of Donoro and Barrot's unpaid liabilities to the Commissioner of Taxation. The business part of the meeting concluded with the following exchange between Mr Diddams and Mr Walker:
[Mr Diddams] "Fox is desperate for cashflow at the moment. We intend to cease paying any rent until the dispute is resolved. Fox is heavily mortgaged. If he (referring to Fox) continues not to service his debts he will surely be thrown out by his lenders. That would give Barrot and more specifically, any receiver, the ability to write a sensible lease. There will be a limit as to how long he can remain unreasonable while Dorono [sic] is receiving no income. I will write to Fox and tell him that we will lodge the rent with our (Barrot's) Solicitor pending an agreement."
[Mr Walker] "Seeing the business put into receivership will make him sit up and realise that he has to be commercial in his demands. As far as the taxation department is concerned we can write to them and organise a repayment schedule. That should relieve some of the pressure."
[Mr Diddams] "I am in your hands. Would you please write the letter to the tax department and I'll get together figures for the business and send them over."
On 31 August 1993 Mr Walker wrote to the Australian Taxation Office proposing a schedule for the payment of group tax areas and seeking withdrawal of a summons issued against Barrot on 24 August 1993. I interpolate that in early September 1993 Mr Walker learnt that the proposal contained in this letter was not accepted by the Australian Taxation Office. After the meeting held on 12 August 1993, Jack Bournelis ("Mr Bournelis"), an employee of Ferrier Hodgson worked with Mr Diddams to prepare a cashflow budget for Barrot for the financial year to 30 June 1994.
By facsimile dated 1 September 1993 the solicitors for Donoro wrote to Barrot asserting that unpaid rent under the Lease amounted to $204,510 also demanding payment of $50,000 by 12.00 noon on Friday 3 September 1993 and agreement to a repayment schedule, and threatening termination of the lease and re-entry into the premises unless the demands in the letter were met. Mr Diddams responded on 2 September 1993 in terms which included the following:
"Let me address the real issue at hand. The business, as you can see, is trading very poorly, and if you don't believe the figures I gave you, pop next door any time and judge for yourself. Leo Schofield didn't do the restaurant any favours and the new nightclub, "Riva", has well and truly [sic] usurped Rogues [sic] position and customers, in the nightclub scene. You can say you don't care about that but you should, because that's where your rent comes from.
So where do we go from here? The business does not have have [sic] a spare $50,000 to pay you at 12 noon on Friday 3rd, nor can the business possibly sustain a monthly rent of $24,513.60 which, as we have stated in previous correspondence, we do not agree with as being the correct rent.
...
From my point of view, quite frankly, if you do what you threaten, it will be a blessed relief. As you are aware, I have other business interests and I will get on with them with a hole in my pocket but few regrets.
...Be advised that this will be the last communication you will get from me on this subject. If you want to meet with me to formalise a sensible lease arrangement for the future and allow me to share my current thinking on how we (you and I) can get the best out of this difficult situation, I am available at your disposal."
On 3 September at approximately 11.30 am Mr Diddams received a telephone call from Dr Fox. Dr Fox advised Mr Diddams that he (ie. Dr Fox) was in severe financial difficulties and asked if Barrot could pay anything, saying even $15,000 would help. Mr Diddams advised that he was considering placing Barrot in receivership. He asked if Dr Fox was going to carry out the threat of taking possession of the Premises. Dr Fox said that he was not. During the afternoon of the same day Mr Diddams sent by facsimile transmission to Dr Fox a letter apparently drafted by him before the telephone conversation of that morning. By that letter Barrot proposed immediately to suspend all payments to Donoro until the Lease was substantially amended in accordance with terms proposed by Barrot.
On 9 September 1993 Mr Diddams met with Mr Bournelis and Steven Sherman ("Mr Sherman"), another employee of Ferrier Hodgson. Agreement was apparently reached at this meeting that the Bank should be requested to appoint a receiver to Barrot. On 14 September 1993 Mr Diddams and Mr Sherman met with two officers of the Bank. At that meeting it was agreed that Mr Diddams would write to the Bank advising that Barrot could not repay its temporary overdraft facility and requesting the appointment of a receiver. Mr Diddams sent such a letter to the bank by facsimile transmission on 23 September 1993. It was Mr Diddams' expectation that the Bank, which had also provided finance to Donoro, would be able to place pressure on Dr Fox to cause Donoro to enter into a new lease with Barrot providing for a commercially realistic rent.
As is mentioned above, the appointment by the Bank of Mr Walker as receiver and manager of Barrot took effect on 28 September 1993.
Mr Sherman, with Mr Bournelis, had control of the administration of the receivership of Barrot. Mr Sherman arranged for a manager to operate the Business pending the negotiation of a commercial lease from Donoro, and the subsequent marketing and sale of the Business. He entered into negotiations with Dr Fox concerning terms upon which tenancy for the receiver could be secured and an ongoing lease of the Premises on market based terms entered into. In fact, no agreement was ever reached with Dr Fox on the issue of an ongoing lease of the Premises.
On 5 October 1993, Ferrier Hodgson received written advice from Manenti, Quinlan & Associates Pty Ltd ("Manentis"), a company which specialises in hotel and liquor industry valuations. Such advice referred to the limitations inherent in the form of liquor licence pursuant to which the nightclub "Rogues" operated. It asserted that the "salesability" of the Business was dependent upon a sound commercial lease being provided by the lessor which would not be onerous on the tenant. On that basis, and provided that trading figures could be provided, Manentis advised that the market would pay between $150,000 and $200,000 for the licence, goodwill, fittings and equipment of the Business. Manenti recommended a private treaty sale with a negotiable asking price after an initial advertising campaign of three advertisements in the Sydney Morning Herald and their contacting their in-house clients who had expressed interest in other nightclubs which Manenti had for sale.
At a meeting held at 10.00 am on 11 October 1993 between Mr Diddams and Mr Sherman, Mr Diddams was informed that it was the receiver's intention to market the Business as soon as possible with a view to sale provided that a commercial lease from Donoro could be obtained. Mr Diddams was further advised that if an agreement could not be reached with Donoro, it would be necessary to remove all of Barrot's equipment from the Premises and effect a sale of such equipment in due course. Mr Sherman's file note of this meeting records that Mr Diddams queried whether, if a sale of equipment were to take place, the Bank would consider lending money to him to give him the opportunity to bid for the equipment in competition with Dr Fox, whom he considered to be the most likely bidder for the plant and equipment of the Business. Mr Sherman's file note records that he advised Mr Diddams that this was a matter which Mr Diddams would have to raise directly with the Bank.
On 11 October 1993, at about 4.30 pm, Mr Sherman spoke to Dr Fox by telephone. Mr Sherman again made a file note of the conversation. This file note records, amongst other things, the following:
"Fox believed that if there was no agreement by the bank to agree to any form of splitting of the proceeds of any sale, that he would be better off entering the premises and running the business by himself. I requested Fox advise as to how he would profess to proceed with such action. He advised that he already had a buyer in tow and that it was up to us now to come up with a commercial based proposal that was acceptable to him."
A meeting was held on 12 October 1993 at which Mr Sherman, Mr Bournelis, Dr Fox, Dr Fox's brother Peter Fox and a solicitor acting for Donoro were present. Mr Sherman made a file note of what happened at the meeting. At that meeting Donoro's solicitor advised that Dr Fox was not prepared to enter into any negotiations concerning a long term lease of the premises. An agreement was reached at the meeting that:
"a. There would be no lease entered into between the receiver and Donoro Pty Limited.
b. That parties would obtain a valuation as to the subject plant and equipment and that it was the intention of Donoro to put in an offer to acquire the plant and equipment at its in situ value and that this would be done in approximately 1-2 weeks."
Mr Sherman's file note continues, after recording the above items of agreement, as follows: "I then proposed that a work-out timetable be framed so as to allow me an orderly wind down of the business activities. Fox asked what I considered to be a reasonable time period and I proposed until 31 December 1993. In return I did offer Fox a maximum of $2,000 a week occupancy fee during this period of occupation and advised that this would be backdated to the date of my appointment. Fox rejected this proposal out of hand and advised that he considered the timetable to be 1-2 weeks subject to acquiring the valuations as advised and enabling the bank to consider an offer from Donoro to purchase the plant and equipment.
In addition, I advised that Mr Diddams had given an indication that he was willing to talk to Fox relative to any proposal as to the sharing of resultant sale proceeds after payment of group tax, employees and the Commonwealth Bank in full. Fox flatly rejected any potential discussions with John Diddams along these lines."
By letter dated 15 October 1993, Mr Sherman reported for Mr Walker to the Bank on the receivership of Barrot. His letter concluded as follows:
"Subject to any matter you may wish to raise, in accordance with our discussions on 14 October 1993 I propose to adopt the following course of action.
1. Subject to the continuation of a positive cash flow, continue to trade the business on a week to week basis pending the landlord making an offer to purchase the plant and equipment or attempting otherwise to determine our occupancy.
2. On receipt of any offer from the landlord for the equipment, or any other offer, a decision will need to be made as to whether to accept the offer or to remove the assets from the premises and effect a sale by auction. (Further discussions would necessarily ensure [sic] with the bank at this time.)"
In the meantime Mr Diddams was continuing his efforts to reach an agreement with Donoro via Dr Fox, including proposing that he and Dr Fox together "structure a deal" whereby the Business with a secure lease would be sold to a new company in which Dr Fox would be given a 20% interest. In a memorandum to Dr Fox dated 15 October 1993, Mr Diddams stated, amongst other things:
"I am, and always have been, an arms length investor. I have never wanted to be "the owner of Rogues" nor to be in the restaurant/nightclub business for any other reason than to make money. That happened in the early years but since my return from living in London a bit over two years ago that has not been the case. I was forced to take a more active part in the day to day running but for many and some obvious reasons was unable to run it like a real business. Opportunities were lost and once lost, can never be retrieved.
So what do I want? Only to remove my liability for the guarantees to the bank and the secured lender. Nothing more and nothing less. I have other business interests I wish to pursue and to be quite frank, consider Rogues business nothing more than a pain in the arse!"
Mr Diddams provided to Mr Sherman copies of his significant memoranda to Dr Fox.
By letter dated 22 October 1993, the Bank advised Ferrier Hodgson as follows: "... the Bank is not prepared to let this matter drag on indefinitely.
Unless the landlord has either offered a new lease on commercial terms or an acceptable offer on the plant and equipment by 29 October 1993, then consideration will be given to closing the business."
By a memorandum dated 27 October 1993 transmitted to Mr Diddams by facsimile Mr Sherman advised as follows:
"I refer to our telephone conversation on 26 October 1993 and confirm that I have received instructions from the secured creditor to the effect that in the absence of having received confirmation from the landlord as to his preparedness to deal in a commercial lease or in the alternative having received a firm offer relative to the acquisition of encumbered plant and equipment in situ by Friday 29 October 1993, that they are desirous as to examining the finalisation of the administration.
In this regard, I confirm that in your position as a guarantor of the facility, should the receiver be unable to secure a going concern sale of the business (unlikely at this stage given the current attitude of the landlord) then the estimated funds available to the secured creditor will depend on the amount that is able to be realised from the sale of the plant and equipment. Accordingly, should you be giving any consideration as to making an offer for the said goods/business and be prepared to assume the risk associated with the landlord, you should do this as a matter of urgency so that discussions can progress between yourself and the bank in conjunction with the receiver in the week commencing 1 November 1993".
By the same memorandum Mr Sherman also advised Mr Diddams that he (ie Mr Sherman) would be absent overseas for the period 29 October 1993 to 10 November 1993 and that Mr Diddams should during that period deal with Mr Bournelis or, should he be unavailable, a Mr Graeme Campbell, one of his co-directors of Ferriers.
On 26 October 1993, Mr Bournelis received a telephone call from Charles Platcher ("Mr Platcher") of Growthcorp Pty Limited ("Growthcorp"). Mr Platcher indicated that he was interested in purchasing the Business. Mr Bournelis advised Mr Platcher that there was no current lease of the Premises and that Mr Platcher would have to contact Dr Fox in that regard. He asked Mr Platcher to put any offer to buy the nightclub in writing. On 27 October 1993, Growthcorp wrote to Ferriers in the following terms:
"We wish to submit a firm offer of $250,000 for the purchase of trading names, Rogues Nightclub, Streetons Restaurant including furniture fittings, stock and current goodwill.
I understand the premises does not hold a current lease. As advised, my company is prepared to review negotiations with the lessor to obtain a new lease."
Also on 27 October 1993, Ferrier Hodgson were advised by certain solicitors that their client Brink Developments Pty Ltd was interested in the possible acquisition of the Business. On 28 October 1993, Mr Walker provided to such solicitors certain information concerning Barrot sought by then, and also provided similar information to Growthcorp to enable it to "formalise" its offer. On 2 November 1993, a written expression of interest in "tendering an offer for a Leasehold and/or Freehold" for the Business was received from "City Plaza Motel". Mr Walker also caused information concerning Barrot to be provided to "City Plaza Motel".
In the meantime Mr Sherman had shown Mr Diddams the Growthcorp offer and Mr Diddams had spoken to Mr Carr seeking to interest him in joining with Mr Diddams in purchasing the Business. Mr Carr asked Mr Diddams to provide him with "the figures", but I accept Mr Carr's evidence that he had no intention of actually investing in the Business. He sought to avoid the discourtesy of a blunt refusal. Nonetheless, I find that Mr Diddams believed that Mr Carr would be interested in investing in the Business provided that its financial records suggested that such an investment would be profitable.
By letter dated 4 November 1993, the solicitors for Donoro wrote to Ferriers in the following terms:
"We confirm that our client will purchase the tenant's fixtures and fittings. An offer will be submitted to you by the close of business today. We are instructed that such offer will be a minimum of $30,000.
Our client requires vacant possession, the keys of the premises together with transfer of the existing Liquor licence to be delivered at noon on Friday 5th November to Dr Fox, 1st floor, Medical Centre, 10-14 Oxford Square, Darlinghurst.
Our client considers a fair and reasonable occupation fee since 28th September, being the date you took control of Rogues and Pete & Andy's Bar & Grill is $5,000 per week."
By letter of the same date sent by facsimile transmission in response to the above letter, Mr Bournelis on behalf of Mr Walker responded negatively to the contents of the above letter and concluded:
"... I require five (5) business days notice of your client's request for the delivery of the keys of the premises and of your client's intention to re-enter the premises."
Also on 4 November 1993 Mr Bournelis, on behalf of Mr Walker, made a report to the Bank in which he considered options open to
the receiver, noting that Growthcorp appeared to have lost interest in purchasing the Business. The report concluded that, if Mr
Diddams could not succeed in reaching a "deal" with Donoro, a decision needed to be made between a closure of the Business followed by the transfer of the assets for sale by auction
and acceptance of the landlord's offer as set out in the Donoro's solicitors correspondence of 4 November 1993.
On 5 November 1993, Mr Campbell on behalf of Mr Walker sent a "without prejudice" letter to the solicitor for Donoro in which the offer made in their letter of 4 November 1993 was refused. The letter made a counter-offer of "$300,000 for the tenant's plant, equipment, furniture and fittings together with a transfer of the liquor licence and business/trade names to the landlord or its nominee". The letter offered to give vacant possession of the premises by 12 noon Wednesday 10 November, 1995. The letter advised that unless a commercial settlement in respect of the sale of Barrot's assets was reached, the receiver would remove them from the premises and separately pursue the sale of the business names "for which there have been several inquiries".
It appears that Dr Fox arranged for the locks on the premises to be changed during the night of Sunday 7 November 1993.
By facsimile dated 8 November 1993, the solicitors for Donoro advised Ferriers that the landlord had "re-entered and repossessed" the premises and terminated the lease. By the same letter an offer was made on behalf of Donoro to purchase the tenant's fixtures and fittings for $50,000. The letter required the settlement of the purchase of the tenant's fixtures and fittings to be effected at the same time as the payment of occupation fees by the receiver at the rate of $5,000 per week commencing on 27 September 1993. The letter is ambigious as to whether Donoro sought also to have the right to use the business names "Rogues" and "Pete & Andy's Bar & Grill". It may well be that the letter was intended to convey that Donoro did seek the right to use such business names but did not consider that any payment for such names should be made by it.
On the same day, solicitors for the receiver wrote to the solicitors for Donoro, noting that their client had been locked out of the premises and demanding immediate access to the premises to remove the plant and equipment of the business and for collection of the books and records of the business. The letter threatened legal action unless arrangements for such access were made by 5.00 pm that day.
A meeting was held on 8 November 1993 between Messrs Bournelis and Campbell and Dr Fox and Mrs Fox. At that meeting Dr Fox, after negotiation, offered to purchase the tenant's plant and equipment, business/trade name and transfer of the liquor licence for $100,000 and to waive any occupancy costs in respect of the period during which the receiver occupied the premises.
On the same day Mr Bournelis advised Mr Diddams of Dr Fox's offer. Mr Diddams' evidence, which I accept, is that Mr Bournelis further said and that it was up to the Bank to accept or reject it. Mr Diddams referred to Growthcorp's higher offer. I accept Mr Bournelis' evidence that he reminded Mr Diddams that Growthcorp's offer was conditional on that company being able to obtain a lease from Donoro.
By at least 9 November 1993, Mr Bournelis was of the view that the only realistic choices open to the receiver were to remove the physical assets of Barrot from the Premises and arrange an off-site auction of them or to accept the offer put by Dr Fox on behalf of Donoro.
By letter of 9 November 1993, Mr Campbell on behalf of Mr Walker reported to the Bank in relation to the events of the preceding five days. The letter concluded:
"A decision needs to be made as to whether to accept the landlord's offer or to seek appropriate Court orders to remove the company's assets from the premises. In this regard we do not believe that Fox will increase his offer to any degree.
Should Fox's offer be accepted we would, as part of the arrangement, obtain his consent to trade for an additional week in order that the receiver could immediately give notice to permanent staff thereby extinguishing a potential liability of $6,500.
With respect to the guarantor paying out the secured creditor, advice has been sought from `ATRK' with respect to the receiver's obligations (if any) relative to pre-appointment priority creditors (ie. Group Tax/Employee Entitlements)."
Mr Diddams had been absent from his office between 1 and 10 November 1993. However it appears that he learnt of Donoro's offer to purchase Barrot's assets for $100,000 by 9 November 1993. On that day he sent by facsimile transmission a letter to Mr Catto of the Bank. In that letter he asserts as follows:
"I have put in place a syndicate to bid to a minimum [sic] of $310,000 at auction which, if the final bid, would see the bank net $250,000 ( ie no shortfall) and in control the assets outside the receivership. We are then prepared to negotiate with Fox for a lease, at a holding cost only of $3,000 a month against his holding costs of $30,000 a month ....
...
My syndicate includes the principal of Valetta (the second secured lender to Barrot who advanced the $70,000 in July) ... .
If Fox refuses to allow Ferriers access to hold inspections and ultimately the auction within a reasonable length of time I suggest Ferriers seek an injunction to remove all assets from the premises and cancel the liquor licence. The assets could then be sold for say $60,000 (your valuation) which would cover the priority payments. My syndicate has agreed (for separate consideration) to provide up to $150,000 (in addition to my $100,000) to cover the shortfall in the event that the bank does not recover its debts in full and calls on my guarantee ....
I ... believe that other buyers will bid at the auction in the belief that they will buy the assets well and be able to wait for Fox to come to a deal."
I find that Mr Diddams had not, as at 9 November 1993, put in place a syndicate which was prepared to take the steps set out in the above letter. In particular I find that Mr Carr, the principal of Valetta, had not agreed to join any such syndicate.
Mr Diddams spoke to Mr Catto on 9 November 1993. There is a dispute as to precisely what was said during the course of this conversation. I find that Mr Diddams raised with Mr Catto during this telephone call his (ie. Mr Diddams') letter of the same date and that Mr Catto said that it had not been considered by the Bank. I further find that Mr Diddams asked that the Bank start considering it and that Mr Diddams said that "there are a number of players with an interest in acquiring Rogues, and an auction is the best way to flush them all out". I also find that Mr Catto said words to the effect "there is no point in having an auction when there is no lease in place" and that Mr Diddams challenged this view. I find that Mr Catto did not provide advice to Mr Diddams during this conversation to the effect:
"I have received your facsimile, there is no offer. You refer to putting together some syndicate to bid at an auction. There will not be an auction, it is not viable. If you are serious about an offer than you should make it, to Ferriers now, otherwise you will miss the opportunity."
I am not satisfied that Mr Catto has a good recollection of the terms of this telephone conversation of which he made no contemporaneous notes. Moreover, I am satisfied that if such advice had been made to Mr Diddams he would probably have made some note of it in his diary. Moreover, I am satisfied that if such advice had been provided to Mr Diddams he would have responded in terms which Mr Catto would be likely to have remembered. Mr Catto did not suggest in his evidence that he had a memory of any response by Mr Diddams to the advice which Mr Catto suggested that he provided to him. I find that Mr Diddams said to Mr Catto during the course of the conversation:
"I will bid as much as is necessary to see me off my guarantee and liability to the ATO which I estimate to be $310,000. I don't particularly want to remain in the restaurant business but if I am going to have to pay under my guarantee anyway then I might as well do so in a way which sees me own the assets."
Mr Catto forwarded a copy of Mr Diddams letter of 9 November 1993 by facsimile transmission to Mr Bournelis of Ferriers on that day. Mr Catto by a note on the facsimile cover sheet indicated to Mr Bournelis that the letter was being provided to him for his consideration and further discussion with the Bank. The note went on:
"Please ensure contents is not discussed with Diddams or other partys [sic] at this stage".
Mr Catto in his evidence was not able to give any explanation for this direction to Mr Bournelis.
Mr Bournelis, also on 9 November 1993, sent a written note to Mr Campbell, to which Mr Diddams letter was attached, in the following terms:
"Can we please discuss the attached. My feelings are
1. To hold an auction for the sale of the business is a ludicrous proposition given that
. The owner has possession
. The owner can have the liquor/restaurant licence as owner in possession
. The costs associated with holding an auction
. The staff are being terminated today
2. If Diddams wants to purchase business now he should make an offer. He can deal with the landlord and the other issues. As long as offer is higher than Foxs [sic] current offer and above our valuation of the business ($160K - $250 range) I don't see any problems".
Later in the day on 9 November 1993 Mr Catto was informed by his superior officer in the Bank, Vince Kelly ("Mr Kelly"), that as Dr Fox had made an offer to purchase the assets of Barrot the Bank might be in a position of conflict. As is mentioned above, Donoro had borrowed monies from the Bank. Shortly thereafter, on 9 November 1993, Mr Catto was told by Mr Kelly to arrange for the Barrot files to go to Bradley Fowler ("Mr Fowler") who worked in a different section of the Bank. He did so, sending a handwritten memorandum with the files.
Mr Catto advised Mr Diddams of the transfer of the Barrot files within the Bank either on the afternoon of 9 November 1993 or on 10 November 1993. Mr Diddams gave evidence that at this time Mr Catto apologised for the Bank's handling of the Barrot matter. Mr Catto's evidence was that he said "I am sorry but I no longer have control of your file". I prefer the evidence of Mr Catto in this regard. However, I do not accept Mr Catto's evidence that during this conversation at which the transfer of the Barrot files within the Bank was discussed he said to Mr Diddams:
"You have not actually made an offer. If you want to make an offer to purchase the business you should contact Ferriers immediately".
It is not disputed that during this conversation Mr Diddams suggested to Mr Catto that the Bank was protecting its third mortgage position in relation to debts owed by Dr Fox to the bank at the expense of Barrot.
In or about mid-November 1993, Mr Diddams had a telephone conversation with Warwick William Doughty ("Mr Doughty"), a business acquaintance whom he had kept informed about developments concerning the Business. During that telephone conversation
Mr Doughty indicated that he and his business partner would be prepared to be part of a syndicate put together by Mr Diddams to buy
the Business. Mr Doughty and his partner had money which they were seeking to invest at this time. I find that they would have
been willing at this time to invest in the Business as a going concern.
On 11 November 1993 Mr Diddams received a telephone call from Mr Fowler. Mr Fowler advised him that the Bank was awaiting Ferriers' advice re the Growthcorp offer, but that the Bank would be better off accepting Dr Fox's offer than taking Barrot's equipment out of the Premises and selling such equipment. During this conversation Mr Diddams referred not only to Growthcorp's offer but also to his own, meaning his letter of 9 November 1993. I find that Mr Fowler referred to Growthcorp's offer being conditional upon a lease being obtained from Donoro and, that it is more likely than not that he invited Mr Diddams, if he wanted to do so, to put to Mr Sherman an unconditional offer to purchase the Business "as soon as possible". Mr Fowler advised Mr Diddams at this time that all other interested purchasers had gone away when they had to deal with Dr Fox. He further advised Mr Diddams that the Business would not be auctioned as the receiver was no longer in occupation of the Premises and had nothing to sell. On 15 November 1993 Mr Sherman advised Mr Diddams by telephone that Dr Fox had rejected Growthcorp's offer and would not deal further with that company. Mr Sherman also made it plain during this conversation that both he and Mr Fowler considered that the best way forward was to try to convince Dr Fox to improve his offer to purchase the Business. There is a dispute between the parties as to whether Mr Sherman during this conversation said words to the effect that "if Mr Diddam wanted to make an offer then he was welcome to do so and should do so immediately." I consider it more likely than not that Mr Sherman said something to that general effect during this telephone conversation.
On 15 November 1993 Mr Diddams sent a communication to Mr Kelly again urging the Bank to seek, in effect, to take advantage of Dr Fox's financial difficulties and to use its position as a creditor of Dr Fox or his companies to place pressure on him to grant Barrot a new lease of the Premises. Mr Diddams, who was required to attend to unrelated business affairs out of Sydney over the next two days, sought a meeting with Mr Kelly on 18 November 1993.
On 18 November 1993 Mr Fowler sent a letter to Mr Diddams by facsimile transmission confirming that Mr Kelly was no longer involved with the control of Barrot's accounts. By this letter Mr Fowler indicated a willingness to meet with Mr Diddams "at any time" but that "we ... did consider it preferable to do so after sale of the nightclub has been finalised". He also indicated that the Bank would not discuss Dr Fox's financial arrangements with Mr Diddams with the Bank as such arrangements were confidential.
Later that same morning there was a heated telephone exchange between Mr Diddams and Mr Fowler. Mr Diddams sought an urgent meeting with Mr Fowler and Mr Sherman. Mr Fowler declined to meet with him until the sale of the Business had been finalised and made it plain that even then he would not discuss Dr Fox's affairs. Mr Diddams replied to the effect: "It is no good meeting after a sale. I want to meet today. How can you consider Fox's offer when I have said that I will pay more. I believe that you must give me the chance to mitigate my loss under my guarantee to you. If I buy the assets at least I will get something for my money. Why are you shutting me out of this process and favouring Fox?".
Mr Diddams further said words to the effect:
"But have you considered my offer of $310,000? If I have to pay under the guarantee I might as well own the assets and be in a position to force Fox to deal with me on the Lease".
I do not accept that Mr Fowler said, as he asserts, that he replied in words to the effect:
"If you want to make an offer you should put it in writing and send it to Ferriers. You had better do it soon. Fox is threatening to use the premises and if we want to stop him we will have to make an application. That will involve more cost and time."
In my view it is inconsistent with Mr Fowler's other actions on that day for him to have invited Mr Diddams during the course of this conversation to make an offer in writing to purchase the Business. Mr Fowler gave evidence that he spoke with Mr Sherman at least twice on 18 November 1993 before Dr Fox's offer to purchase the Business was accepted. Mr Sherman gave evidence of only one such conversation. Their recollections of what was said differ. However, it is not suggested by Mr Fowler that he at any time informed Mr Sherman that he had invited Mr Diddams on that day to make an offer in writing for the Business. Moreover, it appears that it was probably within less than an hour of Mr Fowler's conversation with Mr Diddams that Mr Fowler instructed Mr Sherman to accept Dr Fox's offer to purchase the business. I accept Mr Sherman's evidence that in instructing him to accept Dr Fox's offer, Mr Fowler said "there doesn't seem to be any better offer available". Such a comment made shortly after Mr Fowler allegedly invited Mr Diddams to make an offer in writing to purchase the business is inconsistent with a belief by Mr Fowler that Mr Diddams would make such an offer. Although the absence of such a belief is not itself inconsistent with Mr Fowler inviting Mr Diddams to make an offer, I find that he did not at this time invite an offer from Mr Diddams. Mr Fowler, I find, was by the time of this conversation, committed in his mind to a sale of the Business to Donoro. On 18 November 1993 Mr Sherman contacted the solicitors for Donoro and Dr Fox and advised that Dr Fox's offer to purchase the Business was accepted.
On 23 December 1993 Dr Fox sold the Business for $350,000 and granted the new owners of the Business a lease of the premises for a term of five years for an initial rent of $240,000 per annum.
THE CLAIM OF THE APPLICANTS
It is not in dispute that Mr Walker was under a statutory and common law duty in selling the Business to obtain the best price reasonably obtainable having regard to the circumstances existing when the Business was sold.
The applicants contend that such duty required Mr Walker to advertise a proposed sale of the Business. I do not accept this contention having regard to the circumstances in which the receiver came into possession of the Business. I accept the evidence of Mr Manenti that it would not have been a reasonable course of action for Mr Walker to advertise or auction the Business without either a lease of the Premises or the agreement of the Landlord to enter into a lease. Mr Walker was unable to secure a lease of the Premises from Donoro at a commercially viable rental. It may be that he could not have secured a lease of the Premises at all without agreeing to pay to Donoro the same rent as that payable under the Lease plus all amounts claimed by Donoro as past rent. The evidence before me established that the rent payable under the Lease could not be supported by the Business and, if required to be paid, would have rendered the Business financially unviable.
The problems flowing from the terms of the Lease were exacerbated, so far as a potential sale of the business as an ongoing concern was concerned, by the nature of the liquor licence under which the Business was operating. As is mentioned above, the nightclub Rogues was operating in reliance upon a restaurant licence and not in reliance on a liquor licence appropriate for a nightclub. I find, however, that the liquor licensing problems alone would not have rendered futile the advertising of the Business for sale futile.
I find that it would not have been reasonable in the circumstances for Mr Walker to re-establish the Business in alternative premises for the purpose of then advertising it for sale. The risks and costs of such a venture, including the costs associated with the obtaining of an appropriate liquor licence and holding costs until the business could open and become established, would have been too high.
The applicants further complain that Mr Walker did not adequately investigate the offers of Growthcorp and others.
By letter dated 27 October 1993 addressed to Mr Bournelis, Growthcorp submitted "a firm offer of $250,000 for the purchase of trading names, Rogues Nightclub, Streetons Restaurant including furniture, fittings, stock and current goodwill". It was not contended by the applicants that this offer should have been accepted by Mr Walker. In my view it would have been imprudent of Mr Walker to have accepted this offer which was in entirely general terms. Moreover, at about the time that Mr Walker received this letter, interest in purchasing the Business was being shown by other parties. It was appropriate for Mr Walker to investigate the intentions of such parties. On 28 October, 1993, Mr Walker provided information to Growthcorp to enable it to "formalise" its offer. It seems that shortly after the date of this letter there were negotiations between Growthcorp and Dr Fox which did not lead to an agreement and, indeed, eventually broke down completely. On 11 November 1993, Growthcorp made a fresh offer to the receiver to purchase the Business. This offer was conditional upon the obtaining of a lease from Donoro. It operated, in my view, to revoke the earlier offer of 27 October 1993. Growthcorp did not thereafter make an unconditional offer to purchase the Business. All of its later offers were conditional upon its obtaining a lease of the Premises from Donoro. Donoro at no time agreed to grant a lease of the Premises to Growthcorp, to any party introduced by Mr Walker, or to Mr Walker in his capacity as receiver of Barrot. I am satisfied that Dr Fox could not have been persuaded by Mr Walker to grant a lease to any party on reasonable commercial terms. I am further satisfied that it was the difficulties concerning the Lease of the Premises that caused Mr Walker, through staff of Ferriers, not to investigate further than he did approaches from Growthcorp and others concerning the Business. I do not consider that Mr Walker's conduct concerning the offers of Growthcorp and others is open to criticism.
The applicant's complaint concerning Mr Walker's failure to negotiate with Mr Diddams has, in my view, more substance. As early as 11 October 1993, Mr Diddams had indicated to Mr Sherman his interest in buying Barrot's equipment if it were to be sold after removal from the Premises. Mr Sherman acknowledged this by his memorandum dated 27 October 1993 to Mr Diddams in which he advised -
"...should you be giving any consideration as to making an offer for the said goods/business and be prepared to assume the risk associated with the landlord, you should do this as a matter of urgency so that discussions can progress between yourself and the bank in conjunction with the receiver in the week commencing 1 November 1993."
More importantly, on 9 November 1993, Mr Diddams advised Mr Catto that if he were to be required to pay under his guarantee he might as well do so in a way which would see him own the assets. There was considerable logic in that approach. It was, I find, the case that Mr Diddams wished to be free of the Business and free to devote himself to other business interests. He did not seek in his evidence to suggest otherwise. Moreover, I find that when Mr Diddams asserted to Dr Fox in his facsimile of 2 September that the Business was trading poorly and that Rogues' position as a nightclub had been usurped by a new nightclub, he was being truthful, if perhaps a little fulsome. Nonetheless, I find that Mr Diddams did in the period October-November 1993 hold the view that it would be in his best interest to buy the Business if he were left with no other option, provided that the amount which he was personally required to pay was not more than the liability which he would have to the Bank were the Business, or Barrot's physical assets, sold to another purchaser.
I accept the contention of the respondents that Mr Diddams did not at any time make an offer to purchase the Business, or Barrot's physical assets, which was capable of acceptance so as to lead to a contract. I also accept that Mr Diddams was invited to submit an offer to Mr Walker if he were interested in purchasing the Business and that he did not do so. However, although Mr Diddams' letter to the Bank of 9 November 1993 did not constitute an offer to purchase the Business, and notwithstanding my finding that it would not have been appropriate for Mr Walker to seek to auction the Business, whether by way of public or private auction, the letter was a significant one. It confirmed at a late stage in the receivership that Mr Diddams was prepared to contemplate being involved in the purchase of the Business even if such were not his preferred option. The letter was consistent with his earlier assertions that, in effect, if he were to be required to pay money to the Bank he would rather do so to purchase the Business than by making payment under his guarantee to the Bank. Mr Diddams' belief that the Business was of significant value must have been apparent both to the Bank and to Messrs. Walker, Sherman and Bournelis. Mr Diddams conceded in his evidence that his letter of 9 November 1993 was intended to serve the function of being "a stake in the ground", in the sense that he thought that unless the offer contained in it were withdrawn it would prevent Mr Walker selling the Business for less than $310,000. I nonetheless find that the letter had the significance which I have identified above.
It is not to the point, in my view, that Mr Diddams had been invited by Mr Sherman on 27 October and 15 November 1993 and by Mr Fowler on 11 November 1993 to make an offer to purchase the Business, and Mr Diddams had not done so. The issue before me is not whether Mr Walker and the Bank treated Mr Diddams fairly having regard to his conduct, or whether Mr Diddams deliberately engaged in a game of brinkmanship with the Bank and Mr Walker. The issue is whether Mr Walker took the steps necessary to comply with his duty to obtain the best price reasonably obtainable for the Business having regard to the circumstances existing when the Business was sold. It has not been suggested that Mr Walker had any reason to believe that Mr Diddams did not have the means to purchase the Business.
I am satisfied that the Bank and Mr Walker, by his staff, had a preference for dealing with Donoro through Dr Fox rather than with Mr Diddams. It is not necessary for me to speculate as to why this was so. I note, however, that no real explanation was provided to the Court by Mr Catto for his curious note to Mr Bournelis of 9 November 1993 that Mr Bournelis should ensure that the contents of Mr Diddams' letter of the same date were not discussed with "Diddams or other partys [sic] at this stage". Nor has a real explanation been provided for Mr Fowler's unwillingness on 18 November 1993 to meet with Mr Diddams until "after sale of the nightclub has been finalised". As is mentioned above, I accept that on 18 November 1993 Mr Diddams protested Mr Fowler's unwillingness to meet him until after the sale of the Business saying:
"How can you consider Fox's offer when I have said I will pay more. I believe that you must give me the chance to mitigate my loss under my guarantee to you. If I buy the assets at least I will get something for my money. Why are you shutting me out of this process and favouring Fox?"
I also accept that shortly after the above conversation Mr Fowler instructed Mr Sherman to accept the Donoro offer saying that "there doesn't seem to be any better offer available".
In my view, notwithstanding the history of the matter, the duty on Mr Walker to obtain the best price obtainable for the Business in the circumstances which prevailed on 18 November 1993 required him to ensure that Mr Diddams was advised that a sale of the Business was imminent and given an opportunity to better the purchase price offered by Donoro. No convincing explanation for such a step not having been taken by staff of either the Bank or Ferriers has been given. Indeed, Mr Campbell, whose involvement with the Barrot receivership had come to an end before 18 November 1993, agreed in cross-examination that it was a "fair proposition" that someone at Ferriers should have telephoned Mr Diddams and said: "Here is your option, John, we have got $100,000 on the table from Fox, you have said you will bid up to 310, what is your bid?".
Mr Walker referring to the Donoro offer, gave evidence that he agreed that -
"you would try to approach Mr Diddams or any other party to improve on that offer, if possible".
In evidence, Mr Sherman also agreed that it would have been appropriate for Mr Diddams to have been telephoned to see if he would better the Donoro offer.
Notwithstanding that it was not Mr Diddams' wish to be in the nightclub and restaurant business, and that he would have preferred the Business to be sold to a third party at a price which would result in his having no financial obligations to the Bank rather than be involved in the purchase of it himself, I find that he would have made an offer which bettered the price of Donoro if given the opportunity on 18 November 1993 to do so, provided that he were persuaded that were he not to do so the Business would immediately be sold to Donoro.
It is, however, necessary for consideration to be given to what would have happened had Mr Diddams been given the opportunity to better the Donoro offer and had bettered such offer. To better the Donoro offer Mr Diddams would have been required to offer to purchase the Business and stock, without any guarantee of obtaining a lease of the Premises, for more than $127,000 plus an amount equivalent to the benefit gained by the receiver from Donoro's abandonment of its claim against Mr Walker for an occupation rent of the Premises for the period of the receivership. Had Mr Diddams made such an offer Mr Walker could either have accepted such offer thus giving rise to a contract to purchase the Business, or he could have sought to use the offer to negotiate a higher offer from Donoro.
I turn first to consider what would have eventuated had Mr Walker accepted Mr Diddams' offer. Could Mr Diddams have completed the purchase of the Business when required to do so? Mr Diddams did not suggest by his evidence that he had available to him in November 1993 funds or realizable assets sufficient to allow him alone to purchase the Business and recommence its operations. I find that it is more likely than not that he did not have the financial means to undertake this course of action. To the extent that Mr Diddams gave serious consideration to purchasing the Business, he contemplated buying it with the financial assistance of others. Dr Fox, I find, would not at any time have agreed to join with Mr Diddams in the purchase and operation of the Business. Nor, I find, would Mr Carr. I find that it is likely Mr Doughty and his partner would have joined with Mr Diddams in the purchase of the Business as a going concern. However, it is necessary for me to consider the issue of whether the Business would ever have been available as a going concern to Mr Diddams and Mr Doughty and his partner.
The Business could not have been re-opened and operated as a going concern without a lease of the Premises being obtained. Dr Fox, I find, would have prevented Donoro from granting to Mr Diddams, or any partnership, company or joint-venture proposed by him, a lease of the Premises, other than at a rent which would have rendered the business unviable. Dr Fox, in my view, would have remained intent on reaping the special value which he recognised that the Business had to Donoro as the lessor of the Premises. I am not satisfied that had Mr Diddams, and not Donoro, agreed to purchase the Business on or about 18 November 1993, Donoro would have lost possession of the Premises to a mortgagee shortly thereafter, thus enabling Mr Diddams to negotiate for a lease of the Premises with a mortgagee in possession. Donoro completed its purchase of the Business for $127,118.50 on 19 November 1993. As at 1 December 1993, Donoro was alleged by Mercantile Mutual to be it was in default under its mortgage obligations to Mercantile Mutual in an amount of approximately $30,000, and a notice had been issued to it by Mercantile Mutual pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW). There is no evidence before me to suggest that it did not rectify this default. It may have done so utilizing the proceeds of its sale of the Business which it received on 23 December 1993. However, had it not purchased the Business on 18 November 1993 it would not have paid out to Mr Walker $127,118.50 on 19 November 1993. I conclude that it is likely, had it not purchased the Business on 18 November 1993, that Donoro would have been able to avoid losing possession of the Premises for, at least, some months thereafter. The Bank, as third mortgagee of the Premises, would not have been likely to take possession of the Premises. The value of the Premises at the relevant time, it is accepted, did not exceed the amounts secured by the first and second mortgages over the Premises.
I thus find that had Mr Diddams made an offer to Mr Walker on or about 18 November 1993 to purchase the Business, which offer was accepted by Mr Walker, he would have been required to complete such purchase without having been able to negotiate a lease of the Premises. That is, he would have been required to purchase the Business other than as a going concern. There is nothing before me to suggest that Mr Doughty and his partner, or either of them, would in such circumstances have been willing to join in such a purchase. To have done so would have exposed them to the risk of not obtaining within a reasonable time, or possibly at all, a lease of the Premises, or alternatively, to the risk associated with, and the additional cost of, finding suitable premises for the Business and re-establishing the Business in such premises. I find that it is highly unlikely that Mr Diddams could have found anybody willing to provide him with the financial means to complete a purchase of the Business in such circumstances. I must therefore conclude that had Mr Diddams been given on or about 18 November 1993 the opportunity to better the offer of Donoro to purchase the Business, and had he taken such opportunity he would not have been able to complete such purchase. I conclude that Donoro has not suffered loss or damage as a result of Mr Diddams not having been given such an opportunity (Corporations Law s 1317 HD(1)).
I turn then to consider what would most likely have eventuated had Mr Walker sought to use an offer from Mr Diddams to negotiate a higher offer from Donoro. Would Dr Fox have caused Donoro to lift its offer to purchase the Business? I am not satisfied on the evidence before me that he would have done so. Dr Fox was, the evidence suggests, a person willing to take risks and drive a hard bargain. I note that Mr Diddams' judgments about what commercial reality would require Dr Fox to do had proved wrong in the past. The Business had special value to Donoro which Dr Fox appears to have well appreciated that it did not have to anyone else, with the possible exception of the first, second and third applicants.
I accept the evidence of Mr Robertson that the auction value of the physical assets of Barrot, removed from the Premises, was approximately $60,000. The total value to Mr Walker of Donoro's offer exceeded such value.
Mr Robertson expressed the opinion that no prudent purchaser would have been prepared to purchase the Business with the Lease in place. I accept the accuracy of this opinion. Mr Robertson acted on the basis, that I also accept, that the only logical purchaser of the Business was the landlord. It was, as Mr Robertson pointed out in his report, in the landlord's interest to buy the plant, equipment and fittings rather than let the tenant remove them, as the cost of re-equipping the premises would be considerable. I note further that time is consumed in re-equipping and refitting a business. Mr Robertson valued the Business on this basis at $80,000. In doing so, he placed no value on the name "Rogues". I am inclined to think that the name "Rogues" had some value but, having regard to the recent poor trading history of the Business in late 1993, a modest value. I am satisfied that the price paid by Donoro for the Business exceeded its "market" value in the circumstances.
Dr Fox had refused to accept higher counter-offers put to Donoro previously. Having regard to Donoro's strong bargaining position as landlord of the Business, and the option open to it of causing Barrot's fittings and fixtures to be removed and replaced, I do not consider it to be likely that Dr Fox would have caused Donoro to offer significantly more than "market" value for the Business, even were he thereby to risk losing the name "Rogues". He continued to hold the trump card of controlling the landlord, Donoro, and thus access to the Premises. I am therefore not satisfied that if Mr Walker had sought to use an offer by Mr Diddams to negotiate a higher offer from Donoro that such higher offer would have been forthcoming. I conclude that Barrot has not suffered any loss or damage as a result of Mr Walker's failure to obtain an offer from Mr Diddams to purchase the Business for the purpose of using such offer in an endeavour to negotiate a higher offer from Donoro.
I am not satisfied that there was any breach by Mr Walker of his duties as receiver in failing to protect the assets of Barrot by seeking an injunction to overcome the effects of the changing of the locks on the Premises. In the circumstances, even if the Donoro offer had not been accepted, the incurring of significant expense earlier than 18 November 1993 by seeking such an injunction could reasonably have been seen as premature. Dr Fox agreed to meet with, and did meet with, representatives of Mr Walker on 8 November 1993. On that day, Donoro's offer, which was eventually accepted, was first put forward. It was appropriate for Mr Walker to weigh the cost and risk of seeking an injunction against the likely need for, and practical benefit of, obtaining it. It has not, I conclude, been shown to be inappropriate in the circumstances for Mr. Walker not to seek an injunction.
I reject the contention that the Bank was under an obligation to the applicants, or any of them, to take action in respect of the failure of Donoro to meet its financial obligations to the Bank for the purpose of placing pressure on Donoro to grant a lease of the Premises to Mr Walker or Mr Diddams. In my view it would have been improper for the Bank to have done so. Nor do I consider that it would have been proper for the Bank to have sought to encourage another financial institution to take action against the Bank's client Donoro for the purpose of assisting the applicants.
The applicants further complain that the respondents did not retain control of all negotiations concerning the sale of the Business, but rather referred some potential purchasers to Dr Fox. The only occasion of significance when a potential purchaser was referred to Dr Fox occurred on 26 October 1993 when Mr Bournelis advised Mr Platcher that there was no current lease of the Premises and that Mr Platcher would need to contact Dr Fox in that regard. On 12 October 1993, at a meeting at which Dr Fox was present, Donoro's solicitor had advised Messrs Sherman and Bournelis that Dr Fox was not prepared to enter into negotiations concerning a long term lease of the Premises and an agreement was reached that there would be no lease entered into between the receiver and Donoro. Having regard to Dr Fox's attitude as expressed at the meeting of 12 October 1993, there was, I find, nothing inappropriate in Mr Bournelis referring Mr Platcher to Dr Fox on 26 October 1993.
I am not satisfied that the respondents breached any duty to the applicants or any of them, by failing properly to assess the respective positions and bargaining strengths of the landlord and the receiver. Indeed, it seems to me that by allowing the financial vulnerability of Barrot to become apparent by instigating the appointment of the receiver at a time when Barrot was in breach of its obligations under the Lease, Mr Diddams did much to strengthen the bargaining position of Dr Fox and Donoro at the expense of Barrot. This is not to say that Mr Diddams acted other than appropriately in the circumstances, in acting on professional advice to authorise the appointment of Mr Walker as receiver of Barrot. However it was not reasonable for the applicants to expect the Bank to fund a war of tactics and brinkmanship with Dr Fox, the outcome of which was uncertain.
So far as the applicants seek to place reliance on the fact, as they allege, that the respondents had no adequate or proper system for dealing with the Barrot files, no claim is pleaded on this basis. Nor, in my view, can any loss or damage be shown to flow from any such deficiency. I do not consider it appropriate to consider it further.
In conclusion, I am satisfied that the applicants have demonstrated only one instance of conduct by Mr Walker in contravention of his statutory and common law obligations as receiver of Barrot. That conduct was his failure to ensure that Mr Diddams was given an opportunity to make an offer to purchase the Business immediately before the offer to do so by Donoro was accepted. However, for the reasons given above, I am satisfied that no loss or damage was suffered by Barrot, or any of the applicants, as a consequence of such conduct.
In the circumstances I do not consider it to be appropriate to make any declaration or declarations with respect to such conduct. Nor do I consider that Mr Diddams is entitled pursuant to the Corporations Law, or in equity to orders permanently restraining the Bank from enforcing his guarantee of the obligations of Barrot to the Bank. Similarly Mrs Diddams is not, in my view, entitled to an order that the Bank repay to her $100,000 plus interest. Nor is Whitfield entitled, in my view, to an order restraining the Bank from taking any further steps to enforce the Whitfield mortgage.
The application will be dismissed against both respondents.
THE CROSS-CLAIM OF THE BANK
The cross-respondents have put forward no defence to the cross-claim against them other than their claim. As such claim is to be dismissed, there must be judgment for the Bank on the cross-claim.
The respondents are to bring in short minutes of order to reflect these reasons for judgment.
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I certify that this and the preceding thirty-three (33) pages are a true copy of the Reasons for Judgment herein of the Honourable
Justice Branson |
Associate:
Dated: 17 July 1998
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Counsel for the Applicant: | Mr M Williams |
| Solicitor for the Applicant: | Esplins |
| Counsel for the Respondent: | Mr R Forster QC |
| Solicitor for the Respondent: | Corrs Chambers Westgarth |
| Date of Hearing: | 4, 5, 6, 7, 8, 11, 12, 15 May 1998 |
| Date of Judgment: | 17 July 1998 |
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URL: http://www.austlii.edu.au/au/cases/cth/FCA/1998/839.html