In an application before the Federal Court, investors in a failed group of companies have recovered their lost money from the group’s former directors directly. The Court held that the directors’ misleading and deceptive conduct induced the investments and awarded damages in respect of the misrepresentations made.

Background

The two personal respondents in RRG Nominees Pty Ltd v Visible Temporary Fencing Australia Pty Ltd (No 4) [2019] FCA 686 (‘RRG’) were the directors of a business which was established to on-hire temporary fencing of the kind commonly found at construction sites, entertainment venues and the like.

The father and daughter duo had no previous experience in hiring out fencing panels, but over the course of several years established separate companies in every state and territory of Australia barring the ACT.

The respondents enticed a group of investors to finance their operations through a series of predominantly oral representations about the future prospects of the business, including statements that fencing supply contracts had been entered into with Rio Tinto, the organisers of the Melbourne Grand Prix and VicRoads.

Misleading and deceptive conduct

The applicants claimed that the respondents had breached section 18 of the Australian Consumer Law (‘ACL’) and section 1041H of the Corporations Act.

Section 18 of the ACL provides:

A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

The applicants alleged that the representations concerned future matters and relied on section 4 of the ACL, which provides that such representations are taken to be misleading unless the person making the representation can demonstrate there are reasonable grounds for making it.

Section 1041H of the Corporations Act provides:

A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.

The term ‘financial product’ is defined in s 763A to include the shares in a company. The applicants alleged that 10 of the 15 representations pursued at trial were made in relation to shares.

The misrepresentations and loss of investments

In simple terms, the applicants in RRG needed to prove:

  • the alleged misleading or deceptive conduct had actually occurred;
  • they had suffered loss; and
  • the misleading or deceptive conduct had caused the investment and therefore the loss.

The Court was satisfied that most of the misrepresentations pleaded had actually occurred and that they were made in the course of trade or commerce. The contemporaneous file notes made by one of the applicants of his meetings and discussions with the respondents were crucial in this regard.

As the companies’ businesses had failed and were effectively worthless, the applicants were taken to have wholly lost the sum of their investments, barring a small amount that liquidators anticipated paying out as a dividend.

The Court found that the applicants had relied on the misleading or deceptive conduct and that there was a sufficient causal connection between the loss claimed and the applicants’ reliance on the misleading conduct.

Misrepresentations made to experienced investors

The respondents argued that the applicants were experienced in business and were aware that an investment into a start-up company was highly speculative and risky.  Although the Court accepted this premise, the argument failed for several reasons:

  • even experienced business people can be misled by misrepresentations, especially in the context of a niche market where the representor claims specialist knowledge; and
  • there is no requirement that an applicant’s reliance upon misleading or deceptive conduct be reasonable.

In finding for the applicants, the Court noted that the case would also have succeeded under the tort of deceit, had this been necessary.

Lessons for investors and directors

Prospective investors should carefully assess and record any representations made to them when considering investment proposals.  Although the investors in RRG succeeded at trial, thorough due diligence may have prevented the loss altogether.

Company directors seeking to raise capital must be aware that they may be personally liable for claims of misleading and deceptive conduct if a person invests into their company based on material omissions, inaccuracies or errors in information that they provide.

Pointon Partners can assist with misleading and deceptive conduct claims and related litigation.

Please contact Nick McCarthy , Carl Millington or Ben Drysdale to discuss.

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