BRIAN NORMAN LINDSAY v VAUCLUSE HOLDINGS LIMITED [2000] NZCA 82 (13 June 2000)

IN THE court of appeal of new zealand

ca58/99

	between	BRIAN NORMAN LINDSAY
		Appellant

	and	VAUCLUSE HOLDINGS LIMITED
		Respondent

Hearing:	31 May 2000
Coram:	Gault J Doogue J Robertson J
Appearances:	P F Dalkie for Appellant M A Gilbert and C F Cook for Respondent
Judgment:	13 June 2000

judgment of the court delivered by GAULT J

[1] Mr Lindsay sold to Vaucluse Holdings Ltd (inter alia) 800,000 shares in the company Fruehauf Pacific Ltd (FPL).The price for the shares was agreed but was conditional on the receipt of satisfactory audited financial statements. The acquisition audit for the year ended 31 August 1994 showed net earnings after tax of $682,247, substantially below Mr Lindsay's forecast.In light of that the price for the shares was renegotiated and fixed at $3.10 per share.A formal agreement was executed.It included vendor's warranties and representations generally relating to the accuracy of the settlement balance sheet.

[2] The appeal is from the judgment of Salmon J delivered in the High Court at Auckland on 3 March 1999 on claims by Vaucluse as purchaser arising from matters subsequent to the settlement of the sale and purchase.The first was described by Salmon J as follows:

On 23 December 1994 Mr Jefferies of [Ernst and Young], the partner of that firm responsible for the audit, advised the plaintiff that he needed to make some substantial negative adjustments to the 31 August 1994 financial statements. In January 1995 E & Y forwarded a further set of accounts for the year ended 31 August 1994 showing a net profit after tax of $494,221.As a consequence, Mr Milloy and Dr Wong, on behalf of the plaintiff, met with Mr & Mrs Lindsay and commenced discussions on adjusting the price that Vaucluse had agreed to pay for its 800,000 shares in FPL.

Mr Lindsay contended that E & Y's findings, which resulted in the adjustment to the net profit figure, represented one off aberrations and would have no impact on FPL's on going earnings capabilities.

[3] There followed an exchange of letters in which it was proposed to ascertain whether the downturn in net earnings of FPL was ongoing and to provide for adjustment to the price of the shares should that be the case.Among other terms, the proposal was that there should be a further audit of FPL's earnings for the six month period ending on 28 February 1995.If earnings after tax were less than $315,000 the purchase price would be adjusted downward by $8 for every $1 earnings were below that figure.

[4] In the original statement of defence, while the correspondence was admitted, it was denied that it formed part of any settlement agreement or indeed that any claims for breaches of warranty were available.The amended statement of defence admitted the settlement agreement as alleged.Salmon J proceeded on the basis that the correspondence constituted an agreement without addressing any arguments to the contrary.

[5] Ernst and Young were instructed to complete the further audit for the period ending on 28 February 1995.Subsequent events are summarised in the judgment under appeal as follows:

The audited accounts for 28 February 1995 were received in early April.These showed a net profit after tax for the six month period of $376,110.E & Y had earlier advised that the net profit was going to be well in excess of the $315,000 figure and as a consequence a portion of the balance owing was paid to the defendant in March with the remainder paid on 18 April once the audited financial statements had been received.The plaintiff also paid interest on the balance which had been outstanding.

Once that final payment had been made the plaintiff was able to appoint its own chief executive, who in turn appointed a new financial controller.In about May of 1995 these new executives discovered some very substantial liabilities not disclosed in either the 31 August accounts or 28 February 1995 statements. Mr Jefferies of E & Y was immediately advised of these errors.After some discussion between the plaintiffs and E & Y they advised, by letter dated 16 August 1995, that although they had not yet been able to verify the reported errors they would be withdrawing their audit report.The letter included this request:

In order to action this promptly, we would be grateful if you would advise all persons to whom you have issued the audit report of our withdrawal.

Upon receipt of that letter [Milloy, Reid, Wong & Co Ltd] asked E & Y to undertake the necessary audit work to establish the extent of the material errors and to issue a qualified audit opinion on the existing financial statements describing the errors and their impact on the financial performance for the six months to 28 February.On 3 October E & Y provided all directors of FPL with a draft of the proposed qualified audit report and advised the directors that they should consider reissuing the financial statements for the six month period ended 28 February 1995 to take account of the discrepancies identified and outlined in the draft report.

That report indicated that the discrepancies discovered totalled $236,787 after tax and that the effect was to decrease net earnings before tax for the six month period ended 28 February 1995 by $353,412 and net earnings after tax for the same period by $236,787.

The directors issued revised accounts and E & Y issued an unqualified audit opinion in relation to those accounts.That showed the net earnings after tax as being $170,648.The same figure was shown as being the net earnings before taxation.The explanation given for not showing any tax on this earnings figure was that by that time the accounts for the full year had been completed showing a loss and that consequently no tax was paid for the full year.

The plaintiffs maintain that the tax figure must be taken into account and that as a consequence the after tax figure should be reduced to $100,039.This is a figure some $214,961 less than the minimum figure referred to in the March agreement and by applying a multiple of eight the plaintiff claims $1,719,688.

The plaintiffs issued a claim for summary judgment for this amount.Judgment was declined on the basis of a defence raised that the plaintiffs had repudiated the March settlement and that that repudiation had been accepted by the defendant.An appeal against the Master's judgment was unsuccessful.

Before turning to the factual basis for the repudiation allegations which have remained central to the defence, I record that subsequent to the summary judgment E & Y was joined as a defendant to the proceedings.A settlement was achieved with E & Y for an all in figure of $1.35 million.The Court was advised that that figure included interest at the judicature rate of 11 per cent per annum from 2 December 1994 being the date of the agreement for the sale of shares, to the date of settlement, totalling $380,000 and a contribution to costs of $70,000.The plaintiff acknowledges that credit must be given to the defendant for the amount of the settlement with E & Y.

The defendant also had a cross claim against E & Y and that also has been settled.

The plaintiff's evidence is that the defendant was kept fully informed of the settlement discussions with E & Y and at no stage suggested that the amounts received in settlement were less than appropriate.

[6] The issues in contention in the High Court were first, whether, by claiming for breaches of warranties in the formal agreement for sale and purchase, the purchaser repudiated the alleged settlement agreement embodied in the correspondence, and secondly, whether by acting upon the first audit report on the accounts to 28 February 1995 the parties satisfied the terms of the settlement agreement.Salmon J found on the facts that there had been neither repudiation nor acceptance of repudiation of the settlement agreement.He also found that the true intention of the parties to the settlement agreement was that the actual tax paid earnings for the six month period should be ascertained so as to encompass the corrections to the audited accounts.He went on to make findings on further adjustments shown to be necessary to ensure that they reflected the true position.In the result he fixed the net earnings before tax for the period at $195,648 with an adjustment to be made appropriately for tax.He left to the parties the calculation of the amount payable and interest, reserving leave to apply.

[7] On appeal Mr Dalkie had four grounds none of which had been argued or ruled upon in the High Court.The first was that the settlement agreement embodied in the correspondence was a variation of the formal agreement for sale and purchase of the shares but was not supported by consideration and could not be sued upon.This is a new point raised neither in the amended statement of defence nor in argument at the trial.We ruled in the course of the hearing that it could not be raised for the first time on appeal.In taking that course we had particular regard to the fact that between the original statement of defence and the amended statement of defence the pleading that the correspondence did not constitute agreement was abandoned.To allow argument on the issue of consideration would have been, in effect, to resurrect what had been deliberately abandoned.

[8] The second and third grounds were that the Judge was wrong to receive and act on as accurate the accounts for the period ended 28 February 1995 as amended in the Ernst and Young report of 3 October 1995.These grounds encompass the two points of initial proof of the accounts and their use as the basis for the decision.

[9] It was said that the accounts were not properly proved in evidence.But there was no objection to admissibility at the trial.Copies were included in an agreed bundle of documents on the basis that they were copies of what they purported to be.They were the subject of argument on the need for further adjustments.It is too late now, on appeal, to contend these accounts were not properly before the court.

[10] It was said also that the Judge was wrong to accept the amended accounts as accurate.He did not do so.He accepted evidence of their inaccuracy and ruled that the stated earnings before tax should be increased by $25,000. There is nothing in this point.

[11] By the final ground of appeal counsel sought to have us make a further adjustment to the amended accounts.It was argued that they brought into account (by reduction of earnings) depreciation on assets that had been revalued upwards.This was not an adjustment argued for in the High Court.On its face the increased depreciation resulted from a revaluation of assets before the purchasers of the shares became influential in the business of the company.To go anywhere this argument would need to rest on interference by the purchasers with the method of preparing the accounts and could not be entertained without giving them the opportunity to lead evidence on the point. It therefore cannot appropriately be raised for the first time on appeal.

[12] All grounds being without merit the appeal is dismissed.

[13] The respondent is entitled to costs which we fix at $3,000 together with disbursements including the reasonable travel and accommodation costs (if any in view of the other case heard at the same time) of one counsel as approved by the Registrar.

Solicitors

John Langford, Wellington, for Appellant

Chapman Tripp Sheffield Young, Auckland, for Respondent.