Dialog Group Pty Ltd v Qureshi [2011] QDC 113

DISTRICT COURT OF QUEENSLAND CITATION: Dialog Group Pty Ltd v Qureshi [2011] QDC 113 PARTIES: DIALOG GROUP PTY LTD (Plaintiff/Respondent) V ZIA QURESHI (Defendant/Applicant) FILE NO/S: 1136 of 2010 DIVISION: Civil jurisdiction PROCEEDING: Application ORIGINATING COURT: District Court DELIVERED ON: 22 June 2011 DELIVERED AT: Brisbane HEARING DATE: 1 March 2011 JUDGE: Devereaux SC, DCJ ORDER: 1. Application dismissed. 2. The applicant is to pay the respondent’s costs of the application on the standard basis. CATCHWORDS: PROCEDURE – JUDGMENTS AND ORDERS – AMENDING, VARYING OR SETTING ASIDE – whether Applicant satisfactorily explained failure to defend claim – whether Applicant had plausible defence in fact or law Uniform Civil Procedure Rules 1999 (Qld) r 290 Aboyne Pty Ltd v Dixon Homes Pty Ltd [1980] Qd R 142 AVS Property P/L v QLD-1 P/L & Ors [2007] QSC 365 Evans v Bartlam [1937] AC 473 NMLA v Oasis Developments [1983] 2 Qd R 441 COUNSEL: Mr M. Martin for the plaintiff/respondent Ms J. Payne for the defendant/applicant SOLICITORS: ClarkeKann for the plaintiff/respondent James Conomos Lawyers for the defendant/applicant -- 1 of 7 -- 2 [1] On 14 July 2010, the Deputy Registrar entered judgment in default of filing a Notice of Intention to Defend. This is an application by the defendant made under r 290 of the Uniform Civil Procedure Rules 1999 (Qld) to set aside the judgment. [2] The judgment - that the defendant pay to the plaintiff the sum of $245,952.50 including interest and costs - relates to money owed under a share sale agreement. The defendant agreed to purchase shares from the plaintiff for $500,000 to be paid in certain instalments. [3] The defendant’s proposed defence is set out in the draft defence and counter claim which was exhibited to his affidavit in support of the application. The defendant pleads that he was induced to enter into the share sale agreement by the misleading and deceptive conduct and false representations of the plaintiff including that the company in which he purchased shares was “breaking even”, was worth more than $1 million and had retained losses of only $12,000. The defendant says the company was actually trading at a loss and had retained losses of somewhere as high as $2 million. [4] The written agreement for the share sale was made on 13 October 2008 and had as its completion date 4 September 2008. The parties’ relationship began much earlier. The defendant explains in his affidavit that he established a consultancy business, Business Catalyst International (BCI) in 1996 after acquiring the Sydney business of a Perth based consultancy firm. The business grew between 1996 and 2005 but then suffered a decline. The defendant was introduced by a business broker to Allan Key, the managing director of the plaintiff. In September 2006 the defendant sold his business to the plaintiff for $1 million “plus an earn-out based on the profits generated from the business”. [5] The plaintiff incorporated Business Catalyst Consulting Pty Ltd (BCC) as a wholly owned subsidiary to purchase the business of BCI. The defendant was appointed chief executive officer and a director of BCC and Mr Key was chairman and director. A third person named Tisdall was appointed company secretary and director. BCC funded the purchase of the business of BCI through a loan from the plaintiff. Mr Doessel, the chief financial officer of the plaintiff, deposes that the plaintiff also provided a loan of $1,500,000 to BCC. The affidavits of Mr Key and Mr Doessel deal with the history of BCC leading up to discussions between Mr Key and the defendant about the company’s performance and future. Alleged misrepresentations [6] The defendant deposes to a meeting with Mr Key in Sydney in July 2008. He says Mr Key made the following misrepresentations:- a. the retained losses for the company as at 30 June 2008 were approximately $12,000 or specifically $12,741.73; b. the company was in a good financial position and was “breaking even”; c. the company had achieved overall good financial results; d. the profits of the company were such that the defendant would be able to meet the deferred payments under the agreement from those profits; e. the company was worth more than the plaintiff had paid for it in September 2006 based on the profits generated from the business; f. the balance sheet of the company dated 31 July 2008 contained in Schedule 4 of the agreement gave a materially accurate view of the assets, liabilities and financial position of the company as at 31 July 2008. -- 2 of 7 -- 3 [7] Mr Key denies making the representations. I will return to his detailed response later. [8] The defendant states that an agreement was reached that he would acquire Dialog’s shares in BCC for $500,000 and take over the “employee liabilities” of the company. The amount was to be paid by an initial instalment of $150,000 followed by payments of $10,000 for three months and then $20,000 a month until the balance was paid. The acquisition was to occur on 1 August 2008. [9] On 7 August 2008, Mr Doessel sent a draft “Term Sheet” to the defendant. The term sheet includes the following under the heading “Assets”, • Plant and equipment at an estimated value of $20,000 and • Intellectual property rights, business name, all related patents and copyrights and the ownership of any intellectual property, documents or products. No software licensing included – Purchased in 2006 for $1 million, currently worth more given subsequent investment. Total estimated assets $1,020,000 [10] Mr Doessel prepared the written agreement and the sale balance sheet, which became schedule 4 to the written agreement. It included an entry for “retained earnings” of $12,741.76. Note 2 at the foot of the document reads, “The loan owed to Dialog Pty Ltd has been written down to realisable value at 31 July 2008.” [11] The defendant’s accountant, Mr Guest, swears that he received the 2007 financial report and the 2008 statement of financial position of BCC in October 2008 (14 days after completion of the agreement). He refers, incorrectly, to the annexure of these statements as exhibit ZQ2 to the defendant’s affidavit. In fact, 2007 financial statements are exhibit ZQ3 to the defendant’s affidavit. They show a retained loss for the year of $146,113. A document entitled “financial statements for the year ended 30 June 2009” which includes figures for 2008 and was compiled by Mr Guest, is exhibit ZQ4 to the defendant’s affidavit. Mr Guest points to that document as showing “an actual loss” for the 2008 year of $789,216.08. Adding the previous year’s retained loss, Mr Guest says the true position of BCC at the end of June 2008 was a loss of $932,328.95. [12] Mr Guest also states that the “aforementioned 30 June 2007 financial report stated that the company had retained losses of $1,246,112.87 at 30 June 2007 (and not $146,112.87).” That figure does not appear in exhibit ZQ3 but it does not seem to be in contest. Mr Doessel explains the “adjustment” was made, in about November 2007, so that Dialog could use $1,100,000.00 of BBC’s loss for taxation purposes. The amount was referred to as income, “Promotional fees”, in the 2007 financial statements. Mr Guest’s point is that BCC’s true position at 30 June 2008 was a loss of around $2,000,000. Plaintiff’s response to allegations [13] Mr Key recalls the meeting in the North Sydney office of Dialog on or around 3 July 2008. He says, on affidavit, that he expressed his concern with BCC’s performance against the defendant’s forecasts. He canvassed four options for the future of BCC – -- 3 of 7 -- 4 further investment by the plaintiff; sale to a third party; a management buyout and closing the operation of the company and absorbing employees into the plaintiff. [14] Mr Key asserts he made no representations as to the soundness of the company beyond discussing the financial results regularly provided to the defendant and the defendant’s forecasts. Mr Key denies using the figure of $12,000 and claims no knowledge of such a figure at the time of the discussion. Mr Key denies agreeing that the part payments would be contingent on the cash flow of BCC. He says the defendant proposed the terms of the deal and the plaintiff accepted them. [15] Mr Key asserts: “The defendant was the CEO and was responsible for the day to day business of BCC. He held the major relationship with both clients and staff. He was fully in control of all day to day operations and was kept abreast of the financial situation of the company and made forecasts of its future activity and profitability. My role was to review past forecasts against what was achieved and critically review future forecasts made by the defendant.” [16] Mr Doessel, in his affidavit, describes in some detail the history of Dialog’s purchase of the BCI business and answers several of the defendant’s assertions. I will not canvass some that do not directly relate to the pleaded misrepresentations. Mr Doessel asserts that after the purchase by BCC of the business, the defendant, as CEO, had the day to day control of BCC’s activities. The defendant’s forecasts for the company’s profits were not met. [17] Mr Doessel says, “Detailed monthly management accounts were prepared by Dialog’s finance team and provided to the directors and senior management (of whom the defendant was one) each month by e-mail. Management accounts included a summary of results and narrative, a detailed profit and loss and balance sheet, the status of the drawdown on the Dialog loan facility and an utilisation report of all BGI personnel.” He attaches to his affidavit a schedule of the distribution of the monthly accounts and a copy of the accounts of July 2007, as being typical. [18] Mr Doessel says he prepared the sale balance sheet and provided it to the defendant on 22 August 2008. That sheet included the figure $12,741.76, which represented “the retained losses of BCC after Dialog had forgiven the value of its loan to BCC which was not recoverable in accordance with generally accepted accounting principles.” [19] So, Mr Doessel asserts, “It is not possible for Mr Key to have made the statement ascribed to him in the early July meeting because the $12,000 was not calculated by me until well after his conversation with the defendant.” [20] Mr Doessel deals with several other factual matters asserted by the defendant or Mr Guest, the defendant’s accountant. For example, he asserts: • Mr Guest requested the reports received in October 2008 for the purposes of applying for a corporate credit card, not, as he claims, for the purpose of preparing the financial reports of the company. Mr Doessel prepared a set of accounts specifically for the relevant bank; -- 4 of 7 -- 5 • all significant “post balance day” adjustments – which were set out in an e-mail sent 24 October 2008 - were discussed during the sale negotiations or were disclosed in the management accounts. • the claim in the term sheet that the assets of BCC included intellectual property rights valued greater than when Dialog bought the BCI business was an opinion truly held: “The intellectual property rights purchased by Dialog in 2006 were exactly the same as those purchased by the defendant in 2008. In the intervening time, the defendant used approximately $2 million of Dialog’s money to promote his brand and improve his credibility in the management consultant industry.” • Neither the defendant nor Mr Guest indicated to him a reliance on a warranty that the instalments could be met from profits. Applicable legal principles [21] It is not asserted the judgment was irregularly entered. The considerations applying to an application to set aside a regularly entered judgment include: (1) whether the defendant has given a satisfactory explanation for failing to appear; (2) whether there has been delay in bringing the application; (3) whether the defendant has a prima facie defence on the merits to the claim. 1 [22] In NMLA v Oasis Developments [1983] 2 Qd R 441 at 449, McPherson J said, “Speaking generally, it may be said that it is the last of these considerations that is the most cogent. It is not often that a defendant who has an apparently good ground of defence would be refused the opportunity of defending, even though a lengthy interval of time had elapsed provided that no irreparable prejudice is thereby done to the plaintiff.”2 [23] The defendant explains that he has, since 2008, primarily lived and worked in Dubai and Libya. He became aware of the proceedings through Mr Guest “who had received correspondence from Dialog regarding the matter in or around July 2010”. He did not have the resources with which to engage lawyers. He instructed Mr Guest to negotiate “concerning the time for payment”. He found the default judgment in the mail when he returned home in October 2010. He expected that, through Mr Guest’s agency, he would be able to reach a commercial settlement with Dialog. Upon receiving a substantial fee payment in December 2010, he engaged a Sydney law firm who, eventually, engaged Brisbane solicitors and the application was filed on 31 January 2011. [24] The defendant’s assertion that he became aware of the proceedings in July 2010 is inconsistent with the affidavit of George Slater that he personally served the defendant with the claim and statement of claim at Killarney Heights in New South Wales on 3 May 2010. His claimed attempt to reach a commercial settlement is not unreasonable 1 Aboyne Pty Ltd v Dixon Homes Pty Ltd [1980] Qd R 142 2 Authorities omitted -- 5 of 7 -- 6 but does not explain his failure to enter a defence. It speaks of a person cognisant of his liabilities and hoping to negotiate a solution to his difficulties. [25] By the draft defence and counterclaim, the defendant says the agreement should be declared void or unenforceable because he was induced to enter into the contract by misleading and/or deceptive conduct in contravention of provisions of the Trade Practice Act 1974 (Cth)3 or the Queensland or New South Wales Fair Trading Act4; that the plaintiff was fraudulent; that the agreement was unjust within the terms of the Contracts Review Act 1980 (NSW); that it is unfair and unconscientious for the plaintiff to rely on the agreement. He counterclaims for declaratory relief and damages in the sum of $280,000, being the total of the amounts paid under the agreement, pursuant to the various pieces of legislation. [26] Insofar as the representations relied on by the defendant were said to have been made orally, the plaintiff contests the making of them. Insofar as the representations are contained in documents, the plaintiff purports to explain them as not unusual accounting measures. It is not for me, on this application, to decide such disputed facts and the credibility of individuals. The question is whether by its draft pleading and evidence the defendant has shown a prima facie “defence on the merits” – an “apparently good ground of defence”. The setting for this assessment is an application to set aside a regularly entered judgment for a substantial amount of money. At the heart of the proposed defence is the claim that the defendant was induced by the various representations. [27] The defendant introduces himself by deposing as follows: “2. Between approximately 1982-1992, I worked in various accounting firms, including PriceWaterhouseCoopers in various position[s] including as a qualified chartered accountant. In 1990 I was selected to join the prestigious Price Waterhouse World Firm programme in the USA and was appointed to the position of Senior Manager. In 1992, I returned to the Sydney office of Price Waterhouse where I was promoted to Practice Leader of Internal Audit and Risk Management. 3. In 1996, I established the consultancy business, Business Catalyst International (BCI) after acquiring the Sydney business of a Perth based consultancy firm, Stanton Partners. 4. From 1996 to 2005 the business achieved substantial growth and had developed an excellent portfolio of clients which included Qantas Airways, Commonwealth Bank, Woolworths, Crane Group, Fairfax Holdings, EDS, Rheem, Snowy Hydro, Transfield Group, Westpac Banking Corporation, AMP, Pacific Power International, Australia Pharmaceutical Industries, P&O Australia, TransGrid, MIM Holdings, CSR and Energy Australia.” [28] The defendant was buying, in 2008, for $500,000, the shares in a company whose only business was the business he had sold it for $1,000,000 in 2006. In the meantime he had been its chief executive officer. His claim that no information was sent to him is squarely met by Mr Doessel’s evidence that the defendant received monthly financial statements. His claims to having been induced by misrepresentations and to having 3 As in force before the Commonwealth Competition and Consumer Act 2010 4 ibid -- 6 of 7 -- 7 been in a position of special disadvantage are, if not incredible, unpersuasive. That he was a largely absent chief executive officer does not materially alter the position. The detail of the materials provided to the defendant by Mr Doessel tend to negate the defendant’s assertions that he was unaware of the true state of the company and was misled by statements made by Mr Key. [29] The defendant’s reasons for failing to enter a defence in the first place, and his explanation for not applying to set aside the judgment upon learning of it, are unimpressive. This is not a case where these deficiencies can be overlooked because the applicant has shown “an apparently good ground of defence” to the claim. [30] I decline to exercise the “completely unfettered”5 discretion provided by Rule 290 to set aside the default judgment. 5 AVS Property P/L v QLD-1 P/L & Ors [2007] QSC 365 at [10] referring to Evans v Bartlam [1937] AC 473 -- 7 of 7 --