Providing accurate information when selling a business

The concept of “misleading and deceptive conduct” doesn’t only arise in the context of consumer law, requiring a seller to ensure that it does not mislead or deceive, or engage in conduct which is likely to mislead or deceive, its consumers in relation to the product or service that it is selling.  The concept also applies in the context of a business owner selling its business to another, so that the vendor ensures that it does not mislead or deceive the purchaser as to the true nature (and importantly, the true worth and value) of the business.

The Supreme Court considered this issue regarding the sale of a pharmacy located in Sydney’s Queen Victoria Building.

QVB Pharmacy Pty Ltd v Le [2022] NSWSC 1612 (1 December 2022)

Facts:

• The parties entered into a contract for the sale and purchase of a pharmacy in Sydney’s Queen Victoria Building.
• During the course of negotiations, the vendor provided various financial documents to the purchaser, which the purchaser then provided to its valuer for an opinion as to the goodwill of the business. The vendor also provided other documents including script analysis reports detailing total Pharmaceutical Benefits Scheme (PBS) payments and private script sales.
• In reliance on that valuation, the purchaser then made an offer to purchase the business – which included a component for goodwill in the amount of $750,000.
• It wasn’t until after the sale was completed that the purchaser got access to the systems containing the source documents, and within a few months, it became evident that the takings of the business – and the number of prescriptions prescribed - were nothing like the financial records indicated.
• On further investigation, the purchaser discovered that the vendor used 3 methods to inflate the turnover – Medicare claims, cash injections and erroneous calculations to determine the OTC (over the counter) income.

The claim:

• The purchaser claimed that the information contained in the financial statements provided during the course of the negotiation were “inaccurate, wrong or false”, constituting misleading and deceptive conduct, contrary to section 18 of the Australian Consumer Law, as contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth)
• The purchaser noted that if it had known the true position, it would not have purchased the business.
• The purchaser sought damages from the vendor for misleading and deceptive conduct

The defence:

• The defendant argued that the financial statements were unaudited, and he was not asked to confirm the accuracy of the financial documentation, nor did he provide a warranty or representation that the financial statements were accurate.
• The defendant denied that any representations made were not truthful or inaccurate. He relied on his accountant to prepare the financial statements.
• The defendant referred to various clauses within the contract by which the purchaser acknowledged that it was purchasing the business as a result of its own inspection, and wasn’t induced to enter into the contract by any warranties or representations whatsoever – except to the extent that any were expressly contained in the contract.
• The defendant suggested that if there were any apparent discrepancies within the documentation provided, then the purchaser should have made its own enquiries to reconcile the discrepancies.

The Court's consideration

The Court referred to the 2007 authoritative case of ACCC v Telstra Corporation Ltd which set out a 2 step analysis:

1. Ask whether each or any of the pleaded representations is conveyed by the particular events complained of; and
2. Ask whether the representations conveyed are false, misleading or deceptive or likely to mislead or deceive – this is a “quintessential question of fact”.

Intention to mislead or deceive is irrelevant.

The Court noted that the vendor provided all of the information and documentation to facilitate the sale – and in the knowledge that the purchaser would be relying on the accuracy and truth of them.  It was not enough for him to rely on the fact that his accountant prepared them and he believed that they were accurate – he might not have intended to mislead or deceive, but that it is irrelevant.

The Court rejected the vendor’s assertion that he was not familiar with source documents such as the “end of day history” or “script analysis reports”, and the content of BAS statements. It also noted that the vendor was aware that the purchaser was obtaining a valuation of the business, based on the information and documentation provided by the vendor.

Importantly, the Court noted that the clause in the sale contract regarding the purchaser’s reliance on its own enquiries did not limit the vendor’s liability. It is clear that the purchaser was relying on the accuracy of the information and documentation provided to it.

On a final note, the Court looked at the issue as to whether the selling agent could be proportionately liable.  The Court noted that whilst he had a role in convincing the purchaser to purchase the business, “he did no more than pass on the documentation from [the vendor] to [the purchaser]”.  The Court was uncertain as to the basis on which the selling agent was a “concurrent wrongdoer”, and noting that the claim against the selling agent was settled between the parties, it did not make any further comment.

The Court accepted that the purchaser would not have entered into the contract at all if not for the misrepresentations, and in determining the amount of damages payable with this “no transaction case”, the Court noted the difference in the amount paid for goodwill, and the true value of the goodwill – being an amount of $748,114.  The purchaser was also entitled to reimbursed for interest that it paid on finance for the purchaser ($275,138.63), as a separate head of damages. Together with other amounts, the total amount ordered against the vendor was $1,027,163.52, plus payment of the purchaser’s costs.

Learnings

For business purchasers:

• Ensure that the business owner confirms the accuracy of any financial or other documentation provided to you as part of your due diligence, and supports that with a warranty that the information and documentation provided to you is accurate.

For business vendors:

• Ensure that any information or documentation provided to the purchaser as part of its due diligence is accurate, if you know that to be the case. If you are unsure as to its accuracy, or if the information has not been independently verified (e.g. not audited), make this clear to the purchaser and suggest that the purchaser rely on its own investigations and enquiries.