GABJET PTY LTD & ANOR v FUNK FRANCHISE ... - courts.sa.gov.au · Web viewThe calculation is wrong because the factor to which the multiplier (as the second factor) is applied is

DISTRICT COURT OF SOUTH AUSTRALIA(Civil)

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GABJET PTY LTD & ANOR v FUNK FRANCHISE PTY LTD & ORS

[2021] SADC 88

Judgment of his Honour Judge Slattery

2 August 2021

CONTRACTS

EQUITY - GENERAL PRINCIPLES - FRAUDULENT AND INNOCENT MISREPRESENTATION

CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION - OFFENCES - FALSE OR MISLEADING STATEMENTS OR INFORMATION

TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - CONSUMER PROTECTION - MISLEADING OR DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS

First Applicant: GABJET PTY LTD Counsel: MR C MUNT - Solicitor: DUNCAN BASHEER HANNANSecond Applicant: JETGAB PTY LTD Counsel: MR C MUNT - Solicitor: DUNCAN BASHEER HANNONFirst Respondent: FUNK FRANCHISE PTY LTD Counsel: MR E BELPERIO - Solicitor: HUME TAYLOR & COSecond Respondent: FUNK LEASING PTY LTD Counsel: MR E BELPERIO - Solicitor: HUME TAYLOR & COThird Respondent: FUNK COFFEE & FOOD PTY LTD Counsel: MR E BELPERIO - Solicitor: HUME TAYLOR & COFourth Respondent: FUNK CBD PTY LTD Counsel: MR E BELPERIO - Solicitor: HUME TAYLOR & COFifth Respondent: ARTHUR DAMASKOS Counsel: MR E BELPERIO - Solicitor: HUME TAYLOR & COSixth Respondent: JOANNA KAKAS DAMASKOS Counsel: MR E BELPERIO - Solicitor: HUME TAYLOR & COHearing Date/s: 17/08/2020, 18/08/2020, 19/08/2020, 20/08/2020, 21/08/2020, 24/08/2020, 25/08/2020, 26/08/2020, 27/08/2020, 28/08/2020, 06/10/2020, 07/10/2020, 08/10/2020, 09/10/2020, 12/10/2020, 13/10/2020, 22/10/2020, 02/12/2020File No/s: DCCIV-18-1527B

The Victoria Square store

On 17 June 2016, the applicant Gabjet Pty Ltd agreed to purchase from Funk CBD Pty Ltd a Funk franchise business operated from premises in Victoria Square, Adelaide. Between 17 June 2016 and 14 July 2016, Gabjet Pty Ltd agreed to enter into: a franchise agreement with Funk Franchise Pty Ltd and a license to occupy with Funk Leasing Pty Ltd.

Gabjet Pty Ltd contends that at the time of and prior to the entry into these agreements, at least eleven financial representations were made by Funk Franchise Pty Ltd and Funk CBD Pty Ltd all of which were misleading, and which were made in trade and commerce.

Gabjet Pty Ltd contends that in reliance upon this and other misleading conduct of those respondents, it entered into the Victoria Square sale and purchase agreement, the franchise agreement for the Victoria Square store and a license to occupy the Victoria Square store and as a result, it has suffered loss because, on a proper assessment, the value of the business which it purchased for $410,000 was nil and the only benefit it obtained was the written down value of the plant and equipment, fixtures and fittings of that business.

Gabjet Pty Ltd contends that the loss it suffered was caused by the conduct of the respondents.

Gabjet Pty Ltd further contends that as the guiding hands and minds of each of the respondent companies, each of Mrs Joanna Damaskos and Mr Arthur Damaskos and so Funk Coffee and Food Pty Ltd, Funk Leasing Pty Ltd and Funk Franchise Pty Ltd were knowingly concerned in or aided and abetted the breaching conduct of Funk CBD Pty Ltd in and about the procurement of Gabjet Pty Ltd to purchase the business and to enter into the franchise agreement.

Gabjet Pty Ltd further contends that as a result of its reliance upon the breaching conduct of the respondent corporations and the individuals, it is entitled to recoup its assessed loss being the difference between the amount paid for the business and the actual value of the business, namely nil. It further contends that it is entitled to recover from the respondents the amount of its trading losses for the period to 13 November 2018, being the date upon which the respondents repossessed the Victoria Square premises and recommenced operating the business at those premises.

Following the repossession of the business on 13 November 2018, the respondents have not accounted to Gabjet Pty Ltd for the value of any asset belonging to Gabjet Pty Ltd of which it took possession on 19 November 2018.


Gabjet Pty Ltd further contends that the Franchising Code of Conduct under the Competition and Consumer Act had application to the circumstances of the granting of the franchise by Funk Franchise Pty Ltd.

In the period between 2010 and 2013, Kindred Group Pty Ltd was a franchisee of Funk Franchise Pty Ltd having purchased the business from the respondent, Funk Franchise Pty Ltd.

In 2012, Kindred Group Pty Ltd alleged that Funk Franchise Pty Ltd had engaged in misleading conduct in making representations to the Kindred Group Pty Ltd which induced it to purchase the Victoria Square store, requiring it to repurchase that business or proceedings would be issued.

In 2013, Funk Franchise Pty Ltd entered into a deed of settlement with Kindred Group Pty Ltd for the repurchase of the Victoria Square store and the Angas Street store for payment to Kindred Group Pty Ltd of the sum of $805,000 together with the discharge of liability of Funk Franchise Pty Ltd.

In its disclosure document, Funk Franchise Pty Ltd represented to Gabjet Pty Ltd that it had repurchased a business of the Victoria Square store and later orally informed Gabjet Pty Ltd that the repurchase occurred because Kindred Group Pty Ltd were mismanaging the businesses. Funk Franchise Pty Ltd failed to inform Gabjet Pty Ltd about why Kindred Group Pty Ltd ceased to operate those businesses as required by items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code.

Gabjet Pty Ltd contends that if it had been properly informed of the circumstances in which the previous franchisee had ceased to operate, it would have had the opportunity to make enquiries of the officers of Kindred Group Pty Ltd and ascertain the true position about the termination of the franchise arrangements between Frunk Franchise Pty Ltd and Kindred Group Pty Ltd.

Whether Funk Franchise Pty Ltd failed to comply with the requirements of items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code.

Whether the conduct of the respondents in providing the financial information, in making the financial representations and the other conduct was misleading conduct for s 18 of the Australian Consumer Law.

Whether Gabjet Pty Ltd relied upon that conduct and, induced thereby, entered into the Victoria Square sale and purchase agreement, the franchise agreement and the license to occupy.


Whether Gabjet Pty Ltd has suffered loss and damage resulting from its reliance upon the conduct of the respondents and the individuals.

Whether in breach of s 75B of the Competition and Consumer Act 2010, Mrs Damaskos and Mr Damaskos and so Funk Coffee and Food Pty Ltd, Funk Leasing Pty Ltd and Funk Franchise Pty Ltd were knowingly concerned in or aided and abetted Funk CBD in engaging in conduct in breach of s 18 of the Australian Consumer Law.

Whether the loss and damage suffered by Gabjet Pty Ltd was caused by the respondents’ breach of s 18 of the Act.

Whether Gabjet Pty Ltd has suffered loss and damage in the amount claimed or in any other amount and if so, what amount.

Whether the respondents are entitled to an order on their counterclaim.

Held:

1. Funk Franchise Pty Ltd failed to comply with the requirements of items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code by failing to inform Gabjet Pty Ltd of the circumstances in which the previous franchisee, Funk Group Pty Ltd ceased to operate the Victoria Square store.

2. The statement by the respondents that they terminated the franchise arrangements with Kindred Group Pty Ltd because of mismanagement of the Victoria Square store were untrue and misleading; as a consequence, Gabjet Pty Ltd made no enquiries of Kindred Group Pty Ltd and lost the opportunity to obtain an understanding about why Kindred Group Pty Ltd terminated its franchise arrangements with Funk Franchise Pty Ltd.

3. The whole of the conduct engaged in by the respondents including but not limited to the provision of the financial information and the making of each of the representations to Mr Emanuele and so to Gabjet Pty Ltd occurred in trade and commerce and was misleading conduct for s 18 of the Australian Consumer Law.

4. Mr Emanuele, and so Gabjet Pty Ltd, relied upon that misleading conduct.

5. Induced by the misleading conduct, Gabjet Pty Ltd executed the Victoria Square sale and purchase agreement, the franchise agreement and the license to occupy.


6. Gabjet Pty Ltd has suffered loss and damage as a result of its reliance upon the misleading conduct engaged in by the respondent.

7. The loss and damage suffered by Gabjet Pty Ltd was caused by the breaching conduct engaged in by each of those respondents.

8. Each of Mr Damaskos and Mrs Damaskos and so Funk Coffee and Food Pty Ltd, Funk Leasing Pty Ltd and Funk Franchise Pty Ltd were knowingly concerned in or aided and abetted the breaches of Funk CBD Pty Ltd.

9. The loss and damage suffered by Gabjet Pty Ltd may be calculated by the deduction from the sum paid by Gabjet Pty Ltd for the purchase of the Victoria Square store plus fees less the value of the business at the time, namely the written down value of the plant and equipment, and the fixtures and fittings.

10. Gabjet Pty Ltd is further entitled to an assessment of its loss following the conversion by the respondents after 19 November 2018 of the plant and equipment, fixtures and fittings owned by it at that date.

11. Gabjet Pty Ltd is not entitled to an order for the recovery of its trading losses.

12. The respondents are entitled to orders upon their counterclaim.

13. The court will hear the parties further in relation to the final calculation of the damages payable to Gabjet Pty Ltd, the calculation of interest and on costs.

The Waymouth Street store

On 10 October 2016, Mrs Damaskos of the respondents provided to Mr Emanuele a business profile document containing financial information for the Waymouth Street store conducted by Funk Coffee and Food Pty Ltd for the period between 1 July 2015 to 30 June 2016, and 1 July 2016 to 30 September 2016.

The Waymouth Street financial information disclosed significant trading losses for the Waymouth Street store before attribution of any amount for the cost of franchise fees after the costs incurred for the full year of trading as at 30 June 2016.

The Waymouth Street financial information discloses a very small trading profit for the same store before the attribution of any amount for the cost of franchise fees and other costs for the period 1


July 2016 to 30 September 2016; after the attribution of franchise fees and other costs for that period, the Waymouth Street store would have traded at a substantial loss.

On 29 March 2017, Funk Franchise Pty Ltd entered into a franchise agreement with Jetgab Pty Ltd and a license to occupy the premises at 27 Waymouth Street, Adelaide. On 29 April 2017, Jetgab Pty Ltd entered into a sale and purchase agreement for the purchase of the Waymouth Street store from Funk Coffee and Food Pty Ltd as trustees for the A&J Damaskos Family Trust, for the sum of $225,000 on a walk in walk out basis.

Settlement on the sale and purchase of the Waymouth Street store occurred on 12 July 2017.

Whether any of the financial information supplied to Mr Emanuele and relied upon by Jetgab Pty Ltd was misleading and whether Jetgab Pty Ltd or Mr Emanuele relied upon this information on deciding to purchase the Waymouth Street store.

Whether Jetgab Pty Ltd has suffered loss as a result of any conduct engaged in by Funk Coffee and Food Pty Ltd as vendor in breach of s 18 Australian Consumer Law.

Whether Mr and Mrs Damaskos engaged in conduct amounting to being knowingly concerned in or aiding and abetting any breaching conduct by Funk Coffee and Food Pty Ltd.

Whether in any event, Jetgab Pty Ltd is entitled to an order for the value of its plant and equipment, fixtures and fittings seized by Funk Franchise Pty Ltd on 19 October 2018, the date upon which it took possession of the Waymouth Street store.

Whether Funk Coffee and Food Pty Ltd is entitled to an order on its counterclaim.

Held:

1. The Waymouth Street financial information disclosed that the Funk business conducted there was, at best, marginal and most likely to be trading at a loss and was of no value.

2. Jetgab Pty Ltd and Mr Emanuele were in possession of that information for a period of about 6 months prior to the execution of the sale of business agreement for that store and for 7 months before settlement upon that sale and business contract.

3. The financial information supplied by Funk Coffee and Food Pty Ltd as trustee for the A&J Damaskos Family Trust disclosed only a limited amount of financial information for a business that was then offered for sale but was of no or of minimal value.


4. The decision of Jetgab Pty Ltd to purchase the business for $225,000 on a walk in walk out basis was not caused by any misleading conduct on the part of Funk Coffee and Food Pty Ltd.

5. Mr and Mrs Damaskos were not knowingly concerned in any breach by Funk Coffee and Food Pty Ltd in relation to the Waymouth Street premises.

6. The applicant Jetgab Pty Ltd is not entitled to a remedy under s 18 Australian Consumer Law.

7. The applicant Jetgab Pty Ltd is entitled to be recompensed the value of its plant and equipment, fixtures and fittings seized by Funk Coffee and Food Pty Ltd on 19 November 2018.

8. The respondent Funk Coffee and Food Pty Ltd is entitled to an order on its counterclaim.

The court will hear the parties further in relation to the calculation of the amount of damage payable to Jetgab Pty Ltd, any amount payable to Funk Coffee and Food Pty Ltd, the calculation of interest and of costs.

Australian Consumer Law s 4, s 18, s 20, s 236, s 237, s 243; Australian Competition and Consumer Act 2010 (Cth) s 51ACB, s 51ACA, s 75B, s 82, s 87; Franchising Code of Conduct ; Misrepresentation Act 1972 (SA) s 7; The Competition and Consumer (Industry) Codes – Franchising Regulations 2014 (Cth), referred to.Briginshaw v Briginshaw (1938) 60 CLR 336; Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 ; Macks v Viscariello [2017] SASCFC 172 ; Master Education Services Pty Ltd v Kerchel (2008) 236 CLR 101; Travel Compensation Fund v Tambree & Ors (2005) 224 CLR 627; Chappel v Hart (1998) 195 CLR 232; Allianz Australia Insurance Ltd v GSF Australia Pty Ltd (2005) 221 CLR 568 ; March v E & M H Stramare Pty Ltd (1992) 175 CLR 514 , discussed.Director General of Department of Community Services; Re Sophie [2008] NSWCA 250; Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 ; I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 ; SPAR LicenDing Pty Ltd v MIS Qld Pty Ltd [2014] FCAFC 50 ; Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 ; Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357 ; Global Sportsmen Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCA 82 ; Barnes v Forty Two International Pty Ltd [2014] FCAFC 152; Australian Competition & Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; Fitzgerald v Penn (1954) 91 CLR 268 ; Henville v Walker [2001] HCA 52 ; Creatives Landscape Design Centre Pty Ltd v Platz BC 8908450 12 September 1989; Khneiger v Cookson [2009] SASC 203, considered.


GABJET PTY LTD & ANOR v FUNK FRANCHISE PTY LTD & ORS[2021] SADC 88

Civil

1 There are two applicants in this action, Gabjet Pty Ltd (“Gabjet”) and Jetgab Pty Ltd (“Jetgab”). Each of those companies is owned and controlled by Mr Giuseppe (Johnny) Emanuele (“Mr Emanuele”). The company Gabjet was formerly the operator and franchisee of a Funk Coffee and Food store in Victoria Square, Adelaide. Jetgab was formerly the operator and franchisee of a Funk Coffee and Food store in Waymouth Street, Adelaide.

2 Each of those applicants as franchisees of the two franchise businesses, operated under separate franchise agreements and traded as Funk Coffee and Food respectively.

3 The applicants contend that the defendant franchisor Funk Franchise Pty Ltd (“Funk Franchise”) terminated each agreement and that such termination was wrongful. As a consequence, the wrongful termination was to be treated as a repudiation which was accepted by the applicants and is therefore to be treated, on the applicants’ case, as a wrongful termination which gives a remedy in damages. The respondents deny this contention and also deny that there was any act of acceptance.

4 The company Funk Franchise has always carried on the business as a franchisor of a franchise business called “Funk Coffee and Food”. It was the franchisor of the Victoria Square franchise and the Waymouth Street franchise.

5 The company Funk Leasing Pty Ltd (“Funk Leasing”) is the under lessee of the Victoria Square premises pursuant to a memorandum of lease with the lessor CCES Inc. Gabjet occupied the Victoria Square premises under a licence agreement with Funk Leasing and with the consent of the lessor. The company Funk Coffee and Food Pty Ltd (“Funk Coffee and Food”) was the lessee of the Waymouth Street premises under a lease made with the lessor of those premises and until about 30 June 2017, operated a business under the Funk Coffee and Food franchise system name from the Waymouth Street premises. Funk Coffee and Food also acts as the trustee of the A&J Damaskos Family Trust which is the discretionary family trust of Mr Arthur Damaskos (“Mr Damaskos”) and Mrs Joanna Damaskos (“Mrs Damaskos”).

6 The company Funk CBD Pty Ltd (“Funk CBD”) operated a Funk Coffee and Food franchise business from the Victoria Square premises up until about 19 July 2016. The individuals Mr Damaskos and Mrs Damaskos have and always been the directors of each of the four companies.

7 As will become clear, each of Mr and Mrs Damaskos were intrinsically involved in the business at Victoria Square and Waymouth Street. They were responsible for the making of all of the arrangements, through their various

companies, for the establishment of the stores at those premises, the creation through the firm of solicitors, DC Strategy, of the franchise system and the decisions about if and when particular stores would be franchised. They control the trustee of the A&J Damaskos Family Trust. They are the guiding hand and mind of these companies and their actions, as directors, are the actions of the company.

8 I will initially focus my comments upon the applicant Gabjet. That company alleges that the respondents engaged in misleading conduct and unconscionable conduct in connection with the entry by Gabjet into the franchise agreement for the Victoria Square store and conduct in breach of the Franchising Code of Conduct (“the Code”). It is on that basis that Gabjet seeks its remedy in damages from the respondent companies which each deny the allegations and deny that there are any remedies available including for damages.

9 At all material times, Gabjet was owned and controlled by Mr Emanuele and it conducted the Victoria Square Funk Coffee and Food franchise business between 22 July 2016 and 15 November 2018. The franchise agreement under which it operated that business was dated 20 July 2016 and from on or about that date, Gabjet purchased the existing business of Funk Coffee and Food from Funk CBD which had previously been the operator of that business. In order to take a franchise of that Victoria Square premises, it was necessary for Gabjet to enter into a franchise agreement with Funk Franchise.

10 The Victoria Square business was purchased by Gabjet by an agreement dated 17 June 2016. The agreement was made with Funk CBD, the owner of the business and the purchase price was $410,000. The evidence on the topic about how Funk CBD calculated its purchase price for the Victoria Square store at a sum of $410,000, is described below.

11 The process of the calculation of this price is intrinsically involved with the misleading conduct alleged by the applicants. At the outset, the respondents provided to the applicants a document entitled “Financial Information” (“Financial Information document”). It disclosed financial results for three periods of trading by Funk CBD but only one full year ending 30 June 2016. This disclosed an amount said to be available to an operator of $126,380.77 from trading for the year. Mr Pasquale Versace (“Mr Versace”) was retained as the selling agent, he was given the Financial Information document and was asked to advise on the value and to calculate the asking price for the business. Mr Versace used the Financial Information document as the basis for his calculation using the capitalisation of earnings methodology. He applied a multiplier of 3.2 to the sum of $391,780.77 and the rounded-up sale price was set at $410,000.00. The content of the Financial Information document was axiomatic to the calculation of the sale price through this method of valuation. As I describe below, the vendor knew that the figure of $391,780.77 could not be justified and it was not sustainable. It was wrong.

12 The agreement for the purchase of the Victoria Square store was conditional on the entry by the purchaser Gabjet into a franchise agreement with Funk Franchise. After receiving a disclosure document, Mr Emanuele caused Gabjet to enter into the purchase arrangement for the Victoria Square premises. He personally signed the guarantee of the performance of Gabjet. On 20 July 2016, Mr Emanuele signed for Gabjet and for his own right as guarantor a licence to operate the Victoria Square premises. Upon the entry into the franchise agreement, a liability fell upon Gabjet to then pay an initial franchise fee of $30,000.

13 Jetgab purchased the Waymouth Street store from Funk Coffee and Food for $225,000 under an agreement made on 28 April 2017. On 7 March 2017, Jetgab received a disclosure document in respect of a franchise arrangement and on 29 March 2017, Mr Emanuele signed the Waymouth Street franchise agreement for Jetgab and also a guarantee of the obligations of Jetgab under it. On the same day, Mr Emanuele signed a licence to occupy the Waymouth Street premises for Jetgab and in his own right as a guarantor. Jetgab then paid an initial franchise fee of $30,000.

14 On 8 October 2018, Funk Franchise served upon Gabjet a breach notice dated 5 October 2018. On the same day, Funk Franchise issued a breach notice to Jetgab also dated 5 October 2018 in respect of the Waymouth Street store.

15 By notice dated 13 November 2018, Funk Franchise sought to terminate the Victoria Square franchise agreement and the Waymouth Street franchise agreement for an alleged failure to remedy defaults under the notices delivered.

16 There is a dispute between the parties whether on 5 October 2018 Funk Franchise was in a position to deliver a breach notice or any form of termination notice to Gabjet or Jetgab.

17 The resolution of that issue requires a consideration of the parties’ pleaded cases and the whole of the evidence. I will turn first to the pleadings.

The Victoria Square store18 Mr Versace, as principal of Versace Business Services, was retained by

Funk Franchise to procure a new purchaser for the Victoria Square store. Although I will develop this later in detail, this was not the first occasion in which this business was advertised for sale externally. It had earlier been owned under largely the same franchise arrangements by a company called Kindred Group Pty Ltd (“Kindred”). The relationship between the Funk Group Companies (Funk Group) and Kindred ended in the background of threatened legal proceedings made by Kindred. There was a settlement reached between Kindred and the Funk Group under which the threat of legal proceedings was withdrawn, the businesses returned to the Funk Group in consideration of a payment of $805,000 made by the Funk Group to Kindred. I will return to this topic in detail later when discussing the evidence. One important feature of this

circumstance of the threatened legal proceeding made by Kindred is that the settlement and its circumstances were not disclosed by the Funk Group to Mr Emanuele, Gabjet or Jetgab. I will return to that topic later in this judgment.

19 Mr Emanuele saw the advertisement and made an enquiry of Mr Versace. There were negotiations between Mr Emanuele and Mr Versace, as the respondents’ agent which followed. At the completion of those negotiations, Mr Emanuele signed a Victoria Square franchise agreement and a Victoria Square sale of business agreement. In the course of negotiating those agreements, Mr Versace sent to Mr Emanuele a document entitled “Business Profile 250 Victoria Square” which included a page entitled “financial information (10/13-31/12/15)”. On 16 June 2016, Mr Versace sent to Mr Emanuele a further copy of the same material together with additional draft information for the period 1 January 2016 to 31 March 2016. The applicants contend that this information was obviously and substantially incomplete and was misleading.

20 The Victoria Square financial information to 31 December 2015 was annexed to the business sale agreement signed by Gabjet on 17 June 2016. The financial information to 31 March 2016 was not included in that Annexure. There is no apparent reason why that was the case but I do not think that anything turns on that failure.

21 This financial information document is at page 920 of the tender book Exhibit P2. There are three columns of result being “sales less cost of sales” (gross profit); “less overhead expenses” (net profit); an add back credit reflecting the salary for a manager and a deduction of the total of 7% of the gross turnover of the business as reported for the cost of the franchise and marketing fees. The net result is described as an amount available to an owner/operator.

22 The three financial periods described on the face of the document are: first, the period between 2 October 2013 and 30 June 2014; second, the period between 1 July 2014 to 30 June 2015; and third is described as Q1 and Q2 2016 and may be assumed to cover the period between 1 July 2015 and 31 December 2015. The gross profit figures are achieved by the turnover figures less the cost of goods sold. Looking at each of the columns for 2014, 2015 and the first half of the 2016 year, the cost of goods sold as a percentage of turnover is 32.2%, 31.4% and 30.1%. The gross profit percentage is 67.8%, 68.6% and 69.9%. These figures are in a relatively stable continuum. The level of the percentage of cost of goods sold is almost identical but is falling across the three years. The level of the gross profit percentage as a percentage of turnover is increased to, statistically, 70% by the end of the first half of the 2016 financial year. The importance of the continuum of stability of these figures is that they convey to a reader the results of a stable business that has been able to maintain its gross profit percentages notwithstanding the usual exigencies that may be experienced by the operator of such a business. These figures do not suggest or imply the involvement of any other person or entity in the conduct of the

business, the cost of whom or which should be but are not included in the overhead expenses of the business.

23 At the bottom of the expenses column and under the amount allegedly available to the owner, there are two asterisks. It reads as follows:

** Funk Group expenses excluded

24 I am unable to identify where on the Financial Information document those asterisks appear. I raised that with counsel during the trial. Neither counsel was able to elucidate where those asterisks may be found, so that a reference point for them could be identified. There was no explanation within the document of the meaning of “Funk Group Expenses.” I was later told and it is now accepted that Funk Group expenses are cleaning expenses and expenses such as the washing of tea towels. Although these were not calculated as a gross sum or as a percentage of the full amount of overheads, it was accepted that these are very small expenses, and, for example, are not material.

25 A list of expenses is set out below the gross profit figure. There is no indication within that list that any particular expenses have been included or excluded or that the figure of expenses do not reflect all of the expenses actually incurred. That is, there is no indication within the figures that they are incomplete or that these expenses may have been involved in the generation of gross profit or the net profit figures. The business profile document1 states on the first page that the document is provided as background information to assist in preparing a detailed business plan and to assess its own expectations of performance, expenses and any future capital requirements.

26 At many levels, this is a curious opening paragraph because the document itself speaks of gross profits, net profits and the add back of a notional manager’s salary. None of this suggests any inaccuracy in the presented information or that, for example, an inquiry must be made about the very accuracy of the figures provided. For the reasons that I develop below, the true position was very different such that a properly and truthfully informed potential purchaser would be required to investigate and verify almost the whole of the figures produced by the respondents.

27 The net profit figure is then disclosed as a percentage of turnover for the three years, the net profit percentages are 14.1% for the 2014 year, 15.8% for the 2015 year and 15.4% for the first half of the 2016 year. These percentages are consistent with the increasing level of the gross profit as a percentage of turnover and the reduction in the cost of goods sold as a percentage of turnover. The slight reduction in the first half of the 2016 year may be explained by the fact that there was insufficient of the full trading period to make a proper calculation. This information discloses an increasing level of profitability, called a net profit figure. For the 2014 period (2 October 2013 - 30 June 2014) the amount is

1 Business profile document, Exhibit A2, vol 1, tab 2.

$78,697.53. For the full 2015 period the figure is $117,818.54 and for the first two quarters of the 2016 year, the net profit figure is $61,386.14, which may be annualised to about $120,000 after allowing for seasonal differences

28 Within the list of the overhead expenses, there are particular expenses which are obviously not included. These include an interest expense and the cost of depreciation which of course is not an outgoing but is properly to be taken into account having regard to the age of the plant and equipment. However, as obvious as those exclusions may be, the expression “net profit” is misleading because as the respondents’ own expert, Mr Opie said in evidence, the figure represented here as being generated by sales less cost of sales less overheads are not the net profit figure at all. It is more accurately described as earnings before the cost of interest depreciation tax and amortisation (EBITDA). The incorrectness of the description “net profit” is then compounded by the adding back of the cost of a manager’s salary.

29 There is then an amount said to be available to an owner/operator and that Funk Group expenses are excluded. It is unclear at a first glance why Funk Group expenses are not defined to include, for example, depreciation, interest and other such expenses. Also, there is no information as to why the financial information to 31 March 2016 which was then available to the Funk Group was not also included in the annexure.

30 Mr Emanuele alleges that there were many representations conveyed by this Financial Information document.

31 The first allegation is that this Financial Information document conveyed the meaning that the business in Victoria Square was reasonably capable of being viable when operating under the franchise system (First VS Financial Representation). Mr Emanuele alleges and Funk Group denies that Funk Group represented that it derived a substantial net profit for the 2014, 2015 and 2016 years or alternatively that a business conducted from the Victoria Square site under this franchise arrangement would derive a substantial profit plus a salary for a franchisee as a manager (Second VS Financial Representation). There are some important features about the issue of the manager’s cost. In the Financial Information document which is disclosed, the manager’s costs are added back as a credit after the derivation of the net profit. Taking the 2015 year as an example, this would mean that the manager’s cost of $60,828.99 could be added back to the net profit figure of $117,818.54 giving a total of $178,647.53. From that would be deducted the 7% franchising fee of $52,346.76 leaving an amount allegedly available to an owner operator of $126,300.77 from a full year of trading.

32 There are some obvious and distinct anomalies with this information. The first and perhaps most pronounced is to credit a manager’s cost is inappropriate accounting. The value of a business must, in the ordinary course, take into account the cost of a manager’s salary. The process of valuation of a

business must always take into account the manager’s cost otherwise there is no real comparator when it is known that a person would not necessarily borrow money or contribute money to purchase the business but could otherwise, and separately and without incurring such cost, obtain employment elsewhere. Therefore, in the usual accounting approach, it would be necessary to make provision for the cost of a manager’s salary in the derivation of profit. Otherwise, the figure of net profit would be artificially inflated.

33 The second anomaly is that the bottom line assessment is described as “available to owner operator” and three separate figures for each of the financial periods are disclosed. That figure cannot be correct for a number of reasons. First, what is described as Funk Group expenses are excluded. There is no suggestion that the expenses which would be incurred in cleaning and the cost of tea towels for a particular shop would not be incurred by a new operator. However, having including asterisks for Funk Group expenses, there is no asterisk to indicate that the amount available to the owner operator does not take into account what might be described as the usual expenses by an owner operator. I will discuss this matter further later in these reasons. When account is taken of the prospect of other expenses being incurred such as interest and the cost of depreciation being taken into account, the amount available to the owner operator must be less than the figure there disclosed.

34 Thirdly, the applicant alleges and the respondents deny that this Financial Information document also represented that if the business was conducted reasonably and there was a franchisee manager employed, the amount of $126,000 could reasonably be expected to be available after the salary of the franchisee manager had been accounted for in the way proposed (Third VS Financial Representation). It is further alleged that the Financial Information document represented that if the period between 1 July 2015 and 31 December 2015 an amount of $64,000 would be derived as a trading profit available to an operator after a proprietor’s salary of $30,531.33 was taken into account (Fourth VS Financial Representation). This is also denied.

35 In relation to the draft Victoria Square financial results,2 it is alleged that there is a representation that for the period 1 January 2016 to 31 March 2016 an amount of $28,793.88 would be available after a salary of a proprietor of $15,265.64 was taken into account which is also denied (Fifth VS Financial Representation).

36 In relation to the 30 June 2015, and in relation to the representation conveyed by the financial information for that full financial year, the applicant alleges and the respondent accepts that a sum of $117,818.54 would be generated as net profit from the year of trading (Sixth VS Financial Representation). That is accepted by the respondents only so far as it was exclusive of any optional or Funk Group related expenses. It is also alleged that for the period 1 July 2015 to 31 December 2015, (the third column: Q1 and Q2 2016) that a business trading

2 Exhibit P2, p 921.

from Victoria Square made a net profit of $61,386.14 (Seventh VS Financial Representation). The respondents admit this allegation but only so far as those amounts were exclusive of group related expenses, cleaning costs and supplies for cleaning (Eighth VS Financial Representation).

37 The applicants assert and the respondents deny that the financial information carries the following further representations namely: that in the financial year ending 30 June 2015 the Victoria Square business incurred overall expenses of $395,172.72; (Ninth VS Financial Representation) that for the period 1 July 2015 to 31 December 2015, the Victoria Square business paid expenses of $214,556.05; (Tenth VS Financial Representation) that during the period 1 January 2016 to 31 March 2016, on the draft figures, the Victoria Square business incurred overall expenses of $110,119.10 (Eleventh VS Financial Representation). These allegations are admitted but only to the extent that it was exclusive Funk Group expenses and apart from Funk Group optional expenses. It is known that Funk Group expenses, which were included were only that which is being described as cleaning expenses of a very minor amount. Funk Group saw fit to make an exclusion and to identify it. In the ordinary course, the provider of information should and will attempt to provide as much information as is necessary to inform the reader and insofar as there are exclusions, to identify them. The identification of one exclusion amongst many may mislead a reader who may misapprehend that it is the only exclusion applicable. All of that may depend upon the sophistication of the reader of the information. The document identifies an amount available to an owner operator. That must be adjusted according to the amount of the exclusion of the Funk Group related expenses. However, as the evidence developed, there were a number of other expenses that potentially were excluded such as, for example, the cost of depreciation and interest costs. In the ordinary course, it may be expected that the proprietor of a business may be incurring interest costs from time to time.

38 There is then what may be described as an overarching feature of the content of the document which derives from the overall effect of the document. It may be described as the creation of either a positive or negative view of the business according to the content of the document. This statement of financial information shows a decreasing level of cost of goods sold as percentage of turnover. It shows an increasing level of gross profit. It shows an increasing level of net profit as a percentage of turnover and an increasing amount available to an owner as a percentage of turnover and as a percentage of net profit. These figures create a very favourable impression of the business. An objective reader of this information would reasonably obtain the view that the business is successful, it is profitable, its turnover is increasing, its costs of goods sold as a percentage of turnover is decreasing, it enjoys an increasing level of gross profit and net profit and that an amount available to an owner operator who is an investor will increase over time.

39 Gabjet contends and it is not put in issue that the respondents were operating in trade and commerce when providing the Victoria Square financial

information. Gabjet contends that the representations were misleading and deceptive and insofar as the representations were as to future matters, there were no reasonable grounds to make the representations and they were known to be false and were made recklessly by the respondents. It is contended that in truth, the Victoria Square business did not derive a substantial net profit, nor did it derive a lower profit. Gabjet also contends that the franchise business was not reasonably capable of deriving a substantial profit plus a salary for a franchisee manager. The respondents deny all of these contentions. The respondents also deny that Gabjet reasonably conducted the business and incurred losses in so doing.

40 Kindred previously operated two franchise stores: first the Victoria Square store and later the Angas Street store. I will develop the detail later in these reasons but it is known that Kindred made allegations against the respondents of misleading conduct connected with the financial information which it alleges induced Kindred to purchase the Victoria Square business and to purchase the Angas Street business, which caused substantial losses. An action was threatened. The dispute was resolved by the respondents agreeing to repurchase the two businesses for $805,000. The applicants contend and the respondents deny that they were not informed of the respondents’ dispute with Kindred.

41 The respondents assert that Kindred did not conduct the Victoria Square store effectively or reasonably. That plea is incorrect and cannot be justified. Kindred threatened action against the respondents and following negotiations, the respondents agreed to take two businesses back from Kindred, one in Victoria Square and one in Angas Street and to pay a large amount of money. I am satisfied on the evidence that Kindred conducted the Victoria Square store effectively. Any contention of the respondents to the opposite is wrong. The respondents also contend that none of the representations made to the applicants were false and were reasonably made in respect of contemporaneous trade and profit information then available to the respondents. I also consider this contention to be without foundation having regard to the evidence before the court. It is not open to the respondents to contend that the representations were reasonably made and only in respect of contemporaneous trade and profit information. I will return to that issue later.

42 The respondents also contend that Gabjet did not conduct the Victoria Square business reasonably, just as it contends that Kindred did not conduct the Victoria Square efficiently and effectively. The respondents also agree that the Funk Group expenses within the financial information provided to Mr Emanuele were excluded from the documentation. It is said that they were optional expenses and were required to be investigated and included by any person who was conducting the purchase of the business. It is said that these costs are not standard or absolute costs of operation and the applicant Gabjet incurred unnecessary expenses such as IT costs, staff costs, bank interest costs and car expenses. Any further expenses incurred by Gabjet were not incurred by the respondents in the conduct of the Victoria Square business.

43 In relation to other representations and in particular in relation to the third, fourth and fifth representations, the applicants contend and the respondents deny that there were no reasonable grounds to make the representations, they were known to be false to the respondents. The applicants also contend and the respondents deny that the financial information contained material overstatements about what could reasonably be expected to be generated from the business, not all costs for a reasonable franchisee were included and so it gave a false picture of profitability and viability and many expenses that were generally day to day expenses were not included. Those costs were reasonably necessary to be incurred in order to operate a franchise business. Also, it is alleged that the disclosed costs were lower than would be incurred by a franchisee because of the special purchasing arrangements enjoyed by Funk Group within its own peculiar arrangements.

44 On the sixth, seventh and eighth Victoria Square financial representations, the applicants contend and the respondents deny that the profit amount was materially overstated. On ninth, tenth and eleventh Victoria Square financial representations, the applicant Gabjet contends and the respondents deny that the overall expenses were materially understated. The applicant contends and the respondents deny that those representations concerning the Victoria Square business were calculated to and did induce Gabjet to purchase the business, that Gabjet was misled and was induced by the information that was received, it relied upon the representation and that the connection between the information it received and these representations caused it to purchase the Victoria Square business. That conduct it is alleged contravened s 18 of the Australian Consumer Law (ACL). Alternatively, Funk Franchise or Funk CBD was knowingly involved in the contravention as were Mr and Mrs Damaskos who were involved in the contravention of s 18 of the ACL by Funk Franchise or Funk CBD. This was because the sale agreement was conditional upon Gabjet and Funk Franchise entering a franchise agreement. To become a franchisee, Gabjet needed to purchase the business. Funk Group had a vested interest in Gabjet becoming a franchisee because of the benefits it would receive as a franchisor and it would receive the purchase price of $410,000. Mr and Mrs Damaskos were involved in the preparation of the Funk Group financial information and they provided the Funk Group financial information to Mr Versace. They knew of the Funk financial information being included within the sale agreement. Mrs Damaskos always actively involved herself in the monitoring and supervision of the business including from commencement. This also included the transfer to Kindred, the repurchase from Kindred and then the transfer to Gabjet. Mr Damaskos was similarly involved. Mr and Mrs Damaskos as directors were responsible for the financial information, they signed off on the accounts of the companies and they signed off on the accounts of the trusts that were operating at the time.

45 Notwithstanding the admissions of the involvement of Mr and Mrs Damaskos, the respondents deny that each of the companies and Mr and Mrs Damaskos knew of the representations being made. It is difficult to reconcile that

denial in light of the knowledge of Mr and Mrs Damaskos and the companies of the activities leading to the transfer to Kindred, the repurchase from Kindred and the transfer to Gabjet. Similarly, the respondents deny that the Funk companies, Mr and Mrs Damaskos and the A & J Damaskos Family Trust through its trustee were aware of the representations and that they were intended to induce Gabjet to enter into the Victoria Square franchise. This is even though the respondents admit that Kindred was a former Victoria Square franchisee and that it ceased to operate on or about 1 October 2013. In relation to Kindred, the respondents admit the dispute, the claims and the settlements but deny that the repurchase of the business was connected with claims of Kindred that the financial information given by Funk to Kindred was misleading. That contention is also wrong for the reasons which I will develop below. The repurchase from Kindred occurred following a claim by Kindred that Funk had engaged in misleading conduct by understating the costs of goods sold and the level of salaries paid to employees in the Victoria Square business. The respondents deny that the information provided to Kindred was misleading for the same reasons as the information provided to the applicants was misleading. Similarly, the respondents deny that in relation to all of the misleading information, Funk Franchise, Funk CBD, Mrs Damaskos and Mr Damaskos were knowingly concerned in the breach by overstating the trading performance. They deny that the course of conduct was engaged in for a purpose of receiving a benefit namely fees, royalties, marketing and funds and that Funk Coffee and Food and Funk CBD shared in the benefit and Funk Franchise, Funk CBD, Mr Damaskos and Mrs Damaskos aided and abetted, induced or conspired or were knowingly concerned in the Victoria Square representation.

46 The applicant Gabjet says that absent the representations then the deal would not have proceeded. Similar allegations are made in relation to the Waymouth Street store. There are some universal allegations made in relation to the franchise agreement.

47 The respondents dispute the contentions of the applicants about their right to terminate from 16 October 2018. They deny that there was any bona fide dispute or that it failed to implement the correct dispute resolution process and so contend that the termination is effective. The applicants contend that the repudiation of the franchise contract thereby enunciated is accepted by them and seeks remedies. It also contends that there was non-compliance with item 27 of the Code which is a requirement for a reasonable notice for an intention to terminate for breach and that the 14-day time period given was unreasonable. Also, the applicants contend and the respondents deny that the rent and outgoings were only due for a 12-day period, that Funk Group was aware of real concerns about the electricity and advertising costs and the use of the marketing fund and the allegation that in relation to the Waymouth Street store the electricity charges were excessive. The contravention notices are therefore invalid because of contraventions of the Code and Funk Franchise therefore contravened s 51ACB of the Competition and Consumer Act 2010 (“CCA”).

48 All of these allegations are denied including that the applicant suffered loss and damage. The wrongful conduct is also accepted as repudiatory.

49 The applicant alleges that there was a misrepresentation within the disclosure document required to be produced under the Code. Schedule 13 of the Code requires a declaration by a franchisor whether a particular franchise shop or business has been previously franchised. There was no declaration in the Schedule B of the disclosure document that there had been an earlier franchisee, Kindred, whereas in a different part of the disclosure document reference is made to Kindred as a prior franchisee.

50 Therefore, in the disclosure document there was a disclosure of Kindred. In the same document at Schedule B there is a declaration that the Victoria Square store had not earlier been franchised. The document is obviously inconsistent and the respondents contend that the applicants were not misled. The applicant contends that this constituted a misrepresentation because the business had earlier been franchised to Kindred. In her evidence, Mrs Damaskos says that the failure to make this disclosure in the Schedule B document was the work of solicitors because she had given them the correct information and they were the authors of the document. There was no pleading to this effect. The respondents also contend that the entries were inconsistent and these inconsistencies were obvious to any reader of the document. Also, the applicant received advice from solicitors and all information about Kindred was also provided in the business profile document provided by the respondents to the applicant. On the respondents’ case, there was sufficient information available to indicate that there was a prior franchisee and that Gabjet made its own decision to proceed to purchase regardless of whatever was done correctly or incorrectly by the respondents.

51 Gabjet contends that it was not aware of any earlier franchise to Kindred, that it did not read paragraphs 6.4 to 6.6 of the disclosed document and if Mr Emanuele had known of the prior franchise agreement with Kindred, he would have attempted to make contact with Kindred before entering into the franchise agreement. Mr Emanuele would also have sought solicitor’s advice regarding the position of Kindred, he would have contacted Kindred and if he received any adverse feedback, it was unlikely he would proceed. Gabjet also pleads that it would not have been incorporated and would not likely have proceeded to purchase. As a result, Gabjet has suffered and damage because of the conduct of Funk Franchise.

52 Alternatively, the company Jetgab would not have been incorporated and would likely not have proceeded. As a result, Gabjet has suffered loss and damage because of the conduct of the Funk Group. These allegations are all denied by the respondents.

53 The applicant also contend that the Victoria Square disclosure document does not comply with the Code requirements because it does not comply with comply with item 8(3) of the Code. Annexure 1 of Schedule 1 of the Code

requires a statement of whether the site previously was franchised in the prior ten years and if so the details and circumstances of its cessation of operations. The disclosure document at Schedule B says that Victoria Square was not previously franchised. There was no detail in relation to the Kindred business including its name, the duration of its operation, who were its directors and managers and it contains no detail of the circumstances in which Kindred ceased to operate, why it did so and whether this was on account of any material dispute. It is alleged that Funk thereby contravened s 51ACB of the CCA. Those allegations are merely denied by the respondents and there is no positive case pleaded.

54 Gabjet contends that if it had known of these facts, it would likely have made sufficient enquiries such that it was likely to have not proceeded with the purchase of the franchise business. If it did not proceed it would not have suffered the losses. Annexure 1 of Schedule 1 of the Code requires disclosure of businesses purchased in the last three financial years. The Waymouth Street store was repurchased in the last three financial years but this was not disclosed. This the same as for the Victoria Square store. If that had been disclosed, the purchase of the Waymouth Street store would likely not have proceeded.

55 The applicant also contends there was a cumulative effect of the disclosure document representations, the prior franchisee Code contraventions and the franchisee bought back Code contravention. If not for them, information would have been discovered and it would be unlikely for the purchasers to proceed. It would have been known that the Funk Group had repurchased three franchises between November 2012 and October 2013. It would have found that Kindred ceased as franchisee in the midst of a legal dispute and were paid out. The applicant would have sought legal advice from solicitors. If Gabjet had not proceeded, neither then would have Jetgab.

56 Allegations are also made in relation the marketing fund. Two percent of weekly growth revenues are required to be paid in a marketing fund. In breach, Gabjet has not spent the marketing fund. This is a breach of s 51ACB of the CCA. In further breach, there was a failure to comply with s 15(1) of the Code about the financial statements for the financial years ending 30 June 2017 and 30 June 2018. There was insufficient detail of the receipt of the Fund and this is a further contravention of s 51ACB of the CCA. This was also a failure to act in good faith because the respondents did not make the required monetary contributions to the Funk Marketing Fund or properly administer the funds so this was in breach of item 6 of the Code. Mr and Mrs Damaskos, Funk CBD and Funk Coffee and Food were knowingly concerned in these breaches. For the same reasons, all of those matters, when taken separately or together constitute unconscionable conduct.

57 The financial information adds back the manager’s salary and the deduction of the franchise and marketing fee which provides a prediction of an amount that might be available to an owner operator.3 I have earlier expressed my views about

3 Exhibit P2, p 920.

the inherent contradictory nature of those entries. Leaving that issue aside, there is an element of a prediction of a future event or matters arising in the future because this is a forecast to induce a prospective franchisee to purchase a business based upon an expected level of profit that might be received after the adding back of the manager’s cost. This was something that might eventuate in the future. Under s 4 of Schedule 2 of the ACL, unless there are reasonable grounds for representation in relation to the future math and unless evidence is adduced to the contrary, if I am not satisfied that there was sufficient evidence adduced to the effect that there was a reasonable basis for the representation, that representation is taken to be misleading.

58 Before proceeding to consider the evidence, it is appropriate that I give a summary of the information available concerning the relevant trading of the Victoria Square store. I will for the moment put aside the question of the Waymouth Street store.

59 These documents are gathered in Exhibit A3. It is appropriate that I discuss those documents first, although I will more specifically discuss them in the context of my decision below.

Documents in Exhibit A360 The first document is the Financial Information document. I have earlier

discussed this in some detail. I have identified the turnover figures, the cost of goods sold figures, the gross profit figures and the various percentages. I have identified that in this document, the costs of goods sold as a percentage of turnover reduced from 32.3% in the period between 2 October 2013 and 30 June 2014 to 30.1% in the period ending 31 December 2015. I have earlier identified that gross profit as a percentage of turnover increased from 67.8% in the period 2 October 2013 to 30 June 2014 to 69.9% in the period ending 31 December 2015.

61 I have also identified that the overheads which are then deducted do not include a number of usual overheads that might be seen such as accounting expenses, the expense of depreciation, the cost of interest and other expenses. The figures that are reported show that net profit as a percentage of turnover in the first period ending 30 June 2014 was 14.1% whereas it rose to 15.8% in the period ending 30 June 2015. I have also identified that there was an add back of the cost of the manager’s salary, which would otherwise have been included within the wages figure reported as an overhead, and then there was a deduction of the 7% franchise and marketing fee from gross profit. This then achieved an amount available to an owner operator. Funk Group expenses were excluded. The evidence suggests that this was an amount of $5,000 per year. If these accounts were audited (and they were not) the amount of $5,000 per year would not have been a material item and would have been ignored.

62 One of the outstanding features of this document is the overall impression that it creates about the Victoria Square store. That impression is one of positivism: that the store is increasing its level of sales, decreasing its costs of

goods sold as a percentage of turnover and that its profitability is increasing. It also creates the impression that an amount available to an owner operator may be calculated by taking the net profit figure, adding back in as an asset the manager’s cost, deducting the franchise and marketing fee from gross revenue and then achieving an amount available to an owner operator. The figure is fundamentally wrong because it could never identify an amount available to an owner operator without having taken into account all of the expenses that might be incurred by an owner operator and the Funk Group expenses which are identified are not material.

63 The same considerations apply to the draft document at Exhibit A2 page 921 which is the turnover for the period January to March 2016. The second document in Exhibit A3 is the content of Exhibit P2 at page 291. It is described as the Funk CBD profit and loss spreadsheet for Victoria Square for 2013 to 2014, 2014 to 2015 and 2015 to 2016 financial years. For the period between 2 October 2013 and 30 June 2014, the trading profit derived is $60,704.33. This of course is different from the figure shown on the financial information4 of $78,607.53. It also has an item of an interest expense paid to Funk Franchise but no amount is shown. Wages are also described as a service fee and a note to the account states that wages and superannuation expenses are paid by Funk Coffee and Food and Funk CBD. Therefore, the question of the amount of the service fee must be assessed against the breakdown of the fee and the allocation of the fee to, for example, wages, superannuation and any other service charge payable to Funk Coffee and Food by Funk CBD. The same considerations apply for the 2015 financial year. The trading profit is identified as $111,131.35. This is less than the figure of $117,818.54 shown in the financial information.5 This spreadsheet6 also makes allowance for ASIC fees, accounting fees and interest expenses to be paid and so the document is therefore incomplete. The same considerations apply to the 2016 year7 and so the same comments relate to the question of the wages and service fees payable, the ASIC fees, accounting fees, bank account fees and interest expenses payable. No net profit is shown but only a trading profit. To that extent, those documents are incomplete.

64 Tab 3 of Exhibit A3 commences with Funk CBD Profit and Loss Statement for year ended 30 June 2014 (2 October 2013-30 June 2014). The sales match the earlier documents. There is no opening stock. The purchases are the same and there is a credit ($8,000) for closing stock. The gross profit from trading is therefore slightly increased by that credit for closing stock but this is no more than a timing issue.

65 The expenses include bank charges, general expenses and then what is described as service charges. There is no separate item for wages. If that charge is compared to the wages charge in, for example, the financial information8 which 4 Exhibit P2, p 920.5 Exhibit P2, p 920.6 Exhibit P2, p 2919.7 Exhibit P2, p 2926.8 Exhibit A2, p 920.

is identical to the spreadsheet amount9 it is apparent that there is a charge of $17,000 over and above wages. This is because the total service charge is $197,601 whereas the wages charge on the earlier documents is $180,870.66. It is apparent that the charge of $17,000 over and above the wages figure is for services provided. The profit before income tax is therefore reduced to $68,704.

66 The next document is the Funk CBD Profit and Loss Statement for the year ended 30 June 2015.10 The sales figure is the same, there is a credit for the opening stock as a deduction, then a deduction for the same amount of purchases but then a further credit of $8,000 in respect of closing stock. It is a little curious that as between two years, the stock figure could be exactly the same. However, the gross profit from trading remains the same and thus the credits and debits in relation to opening and closing stock are merely accounting entries which balance.

67 In relation to overheads, there is for the first time an entry for depreciation. Inexplicably, there was no entry for the cost of depreciation in the 2014 accounts.11 There is then a separate account for general expenses as well as an account for interest paid in the amount of $21,870. Again, inexplicably, there was no interest paid expense shown in the 2014 accounts.12 There is then a service charge of $241,660. This may be compared with the wages figure on the earlier financial information of $220,693.61.13 These figures disclose that over and above the wages figure, there is a further charge made by an entity to Funk CBD in the amount of at least $21,000 and presumably in relation to services supplied by that other entity to Funk CBD. There is no note in the accounts indicating by whom the services were provided or to whom or what the amounts were paid. This is a fee for services supplied. Having regard to that addition, and other expenses, the profit before income tax is reduced to $80,12514 when compared to the figure on the financial information document of $117,818.54.15

68 The final document behind tab 3 of Exhibit A3 is the departmental trading and profit and loss statement of Funk CBD for the year ended 30 June 2016. There is a total trading figure for the year of $820,685. There is the same debit and credit for opening stock and purchases and an identical figure in respect of the previous year for accounting fees, which is perhaps unusual. There are then increased figures for bank charges, reduced figures for cleaning, a depreciation expense which is now reduced to $448 from $11,373. The difference is unexplained in the evidence. The only likely explanation is that the depreciation amount for the 2015 year had written down the value of the plant and equipment to almost nil thus explaining the very low depreciation figure of $448 in the 2016

9 Exhibit A2, p 2914.10 Exhibit A2, p 2922G.11 Exhibit A2, p 2915.12 Exhibit A2, p 2915.13 Exhibit A2, p 920.14 Exhibit A2, p 2922G.15 Exhibit A2, p 920.

year. However, the evidence before the Court in relation to the plant and equipment would not support that explanation.

69 The insurance cost in both years of $1,811 is identical. This suggests an apportionment of a general insurance charge in the same amount to each of the entities. However, that is not necessarily accurate because the question of risk is the basis of apportionment.

70 The interest paid figure is reduced from $21,870 in 2015 to $16,421 in 2016. The service charges are increased from $241,660 in 2015 to $284,371 in 2016.

71 When a comparison is made to the financial information document, wages disclosed for the half year, to 31 December 2015 are $120,000. 16 If annualised, this would give a total wages figure of about $240,000. The figure of $284,371 disclosed within the actual financial returns, indicates that the service charges include other charges imposed upon Funk CBD for services supplied to Funk CBD which are not identified. The net profit for the full year is disclosed at $91,484.17 The profit for the half year disclosed in the financial information is $61,386.14. These figures are obviously anomalous.

72 Tab 4 of Exhibit A3 are the compilation reports for Funk CBD signed by the directors which show that for the 2014 year, there was no profit before income tax. In the context of a service entity, and a trading entity within a trust arrangement, that is not necessarily significant. The sales are identified as $892,00518 whereas the sales recorded in the profit and loss statement were $558,607;19 purchases are increased from $179,391 to $293,598; the level of closing stock credit is doubled; the gross profit from trading is changed from $387,216 to $614,417; and bank charges and cleaning expenses are increased. There is an entry for depreciation of $8644 and apart from other items being increased including, for example, light and power from $600 to $11,748, service charges are increased from $197,601 to $299,726. The profit and loss statement discloses that there is no profit before income tax for that 2014 year.

73 A balance sheet is also disclosed.20 Current assets are the usual cash and inventories. The non-current assets disclose plant and equipment of $137,757 which comprise land and building, property improvements less accumulated depreciation and plant and equipment less accumulated depreciation. The plant and equipment is valued at $40,610 and after depreciation is $33,943. Intangible assets are valued at $805,000 which apparently reflect an amount for goodwill. In light of the fact that the company has not generated a taxable profit then in the ordinary course, some assessment would be made of the carrying value of intangibles in the form of goodwill. Having regard to the requirement of the

16 Exhibit A2, p 920.17 Exhibit A3, tab 3; Exhibit A2, p 2927.18 Exhibit A2, p 2912D.19 Exhibit A2, p 2915.20 Exhibit A2, p 2912E.

Australian Accounting Standards there must be considerable doubt about whether the carrying value of intangibles may be justified. The derivation of this figure is obvious. This is the amount paid to Kindred on the repurchase of the business in 2013. But it is just as apparent that this is not a figure reflecting value. It is the figure at which Kindred was prepared to settle with the respondents on its claim for misleading conduct. That claim derived from the falsity of the representations made by the respondents which induced Kindred. This figure has been used by the respondents as a balancing figure within its balance sheet.

74 Tab 5 of Exhibit A321 is the compilation report for Funk CBD for the period 30 June 2015. There is no profit before income tax report and sales are recorded at $1,208,541 whereas on the financial information22 they are recorded as $747,810.88. Accountancy fees are identified and there is a significant increase in depreciation from $8,644 to $20,758 in respect of written down assets worth $33,000. The interest expense is increased from $10,388 to $43,740, the cost of light and power is doubled, management fees are increased from $113,000 to $116,000, rent is increased by $45,000 and service charges are increased by $90,000. There is no note to the accounts identifying which charges are included within the service charges entry. The figure of $388,059 may be compared to the financial information23 of wages of $220,693.61 and the service charges in the profit and loss statements24 of $241,660. It is apparent that there is a service charge of $150,000 over and above that amount but there is no explanation how that service charge is calculated. The intangible asset of goodwill, continues to be carried at $805,000. The carrying of goodwill at an unchanged value again fails to comply with the obligations under the Australian Accounting Standards which require that goodwill must be assessed on a diminishing basis.

75 Tab 6 of Exhibit A3 is the consolidated profit and loss statement for Funk CBD for the 2016 year. Sales are recorded as $1,314,019 and a capital loss on sale of non-current assets of $359,324 is also recorded. This leads to a loss before tax of $359,325. In that context, in the overhead expenses column, service charges are increased from $388,059 in the 2015 year to $519,155 in the 2016 year.25 In the same document, rent is increased from $163,743 to $224,882 but depreciation is reduced from $20,758 to $2,258. Interest paid is also decreased from $43,740 to $32,842. Light and power is again increased to $23,323 from $22,993. Although a management fee of $116,539 was charged in the 2015 year, no management fee is charged in the 2016 year.

76 The sale of the business is reflected in the write down of the value of goodwill in the balance sheet. However, a review of the figures within the overhead column of the profit and loss statement discloses that the service charges are increased by 34% between 2015 and 2016. There is no explanation of

21 Exhibit A3, p 2920.22 Exhibit A2, p 920.23 Exhibit A2, p 920.24 Exhibit A2, p 2922G.25 Exhibit A3, tab 6; Exhibit A2, p 2930A.

to whom the service charges are payable. There is no correlation between the total amount of the wages paid and the total amount of the service charge.

77 The first trading year in the Victoria Square premises for Gabjet ended on 30 June 2017. In that year, although sales were increased to $804,661, the cost of goods sold was also increased to $319,904.26 Gross profit from trading was $484,757. Total overhead expenses were $563,919 and thus there was a loss before income tax of $79,162. The major item of expense was wages of $242,835. There was an interest expense of $11,466.

78 In the 2018 year, sales were again increased to $834,603, costs of goods sold decreased to $319,182 and gross profit from trading was $515,421. Of the overhead expenses, there was a reduction in cleaning charges, a small increase in consultancy fees, an increase in franchise fees payable due to the increase in gross turnover; there was a small increase in interest paid of $4,000, an increase in light and power of $5,000; a small increase in rent of $4,000 and an increase in wages of $40,000. The loss before income tax was $105,036. On the balance sheet, invested costs of the business continued to be carried at the purchase cost however trade creditors increased from $54,000 to $137,000, bank loans increased from $213,000 to $279,000 and there was some reduction in shareholders loans. Total liabilities increased from $570,000 to $716,000 and there was a deficiency of capital of $184,199.

79 In the 2019 year,27 income from sales was $314,825, costs of goods sold was $113,607 and gross profit from trading was $201,218. The total overhead expenses were $233,900 and there was a loss before tax of $32,682.

80 There are some significant features arising from a comparison of these financial statements that require comment. The first is that the Funk CBD statements must be seen in the context of a trust arrangement. That may explain some of the charges made against that company which are recorded in the overhead expenses but there is no evidence to that effect before me. The second is that there was substantial charges being made upon Funk CBD whilst it operated the Victoria Square premises. These were brought to account only in the consolidated accounts and led to a reporting of no profit from trading. The evidence satisfies me that the Funk Group provided a number of services to Funk CBD and appear only to have properly accounted for the expenses of those services in the consolidated accounts. They were not accounted for in the financial statements initially produced to the applicant Mr Emanuele. The services in respect of which the charges are made within the consolidated accounts are services required to be provided by or to Funk CBD. These are expenses that would ordinarily be incurred by Funk CBD in the conduct of the business of the Victoria Square store and the other Funk businesses that it operated. A number of things follow. First, if a proper accounting is made of those expenses, the level of overhead expenses must increase due to the proper

26 Exhibit A2, p 2267B.27 Exhibit A3, tab 16; Exhibit A2, p 2269.

adjusted amount of those expenses. The converse of that position is that a failure to record those expenses in respect of services actually being provided means that for each of these Funk businesses an inaccurate picture of the level of overhead expenses actually being incurred by that entity is presented. It also follows that for the services being provided, there is a cost properly to be attached as the expense of the provision of the services. A proper accounting would require the inclusion of the costs of those services in the overhead expenses. A failure to so include means that there is a failure to report those expenses which leads to inaccurate accounts.

81 As a result, even if the applicant increased the amount of turnover in the business, it would still be necessary to make adjustments to the costs incurred in generating that further turnover because of the further expenses that are incurred. This compounds the effect of not identifying the cost of those services within the accounts that are provided for the business.

82 For these reasons, I am satisfied that, without more, there is a very serious doubt about the accuracy of the figures provided by the respondents to the applicants within the financial information. This is because there is evidence before me that Funk CBD incurred a higher level of costs of operation of its company owned stores that were paid through service charges which it discharged but which were not necessarily charged to the operation of the individual store. The Victoria Square store was one such store and it was the flagship store of the Funk franchise system. As I discuss below it generated about 62% of the gross revenues of Funk CBD. There is no evidence that Funk CBD made a separate charge upon the Victoria Square store for these expenses which it paid to Funk Coffee and Food as trustee for the A & J Damaskos Family Trust. I will return to this topic later.

The factual backgroundMr Johnny Emanuele

83 The principal witness called on behalf of the applicant is Mr Giovanni Peter Emanuele, usually called Mr Johnny Emanuele. The CV of Mr Emanuele is admitted to evidence.28

84 From 1988 onwards, Mr Emanuele held a number of roles within a political party. Prior to 1993 he was employed in the office of a shadow minister for two and a half years and then was involved with campaigning for and assisting the minister with her portfolio work. From 1993 to 2014, Mr Emanuele was employed in his family’s business of an ISUZU franchise. At that time, ISUZU had about 50 to 60 franchise stores operating in South Australia and Mr Emanuele’s family owned stores at Burton, Port Augusta, Whyalla, Roxby Downs, North East Road Windsor Gardens and Lonsdale. The dealer principal of these stores was Mr Emanuele’s father.

28 Exhibit P2, 92A-92D.

85 His initial work was in sales and then he progressed to sales management of the sales team at Burton. He was set monthly targets of sales and part of his remuneration package was connected with achieving the sales targets.

86 Mr Emanuele’s father passed away in 2012 and there was then a readjustment of the arrangements of all of the ISUZU franchises operated by the family. Mr Emanuele’s brothers took over those stores within an existing family arrangement. He had an option to remain within the family business but he chose not to pursue that option and decided to pursue his fortunes elsewhere.

87 From 2014, Mr Emanuele was self-employed in purchasing and auctioning ex-army equipment, such as jeeps, trucks, Mac trucks, trailers and pallets. From 2014 to 2015 he was employed for a period of nine months by Manheim Auction House (Manheim), which is a national auction house dealing in heavy vehicles, plant, machinery, cars and salvaged vehicles. He was responsible for truck machinery and plant in South Australia.

88 Sometime in February 2016, Mr Emanuele left Manheim and started looking for separate business opportunities, particular franchise opportunities. The idea of having a franchise was appealing to Mr Emanuele because he was familiar with his father’s involvement in the ISUZU franchises and so he was familiar with franchise systems. He had not previously operated his own business.

89 In his search, he saw an advertisement by Versace Business Services advertising that the Funk Victoria Square café business was for sale. Mr Emanuele rang Mr Versace on 20 May 2016 and there was a conversation about the business opportunity.29 On the same date, Mr Versace sent to Mr Emanuele an email attaching a document entitled ‘Business Profile 250 Victoria Square’ which included on the title page financial information for the period between October 2013 and 31 December 2015.30 This business profile document was provided by Mr Versace as agent on behalf of the company Funk Franchise and Funk CBD. It was said to be only a preliminary document. In the email, Mr Versace informs Mr Emanuele that:

You will see in the business profile that because this franchise is a company store, and being sold by the franchisor, there are some savings.

90 Mr Emanuele understood the expression ‘company store’ meant that the store was owned by Funk CBD or Funk Franchise.

91 The front page of the document states that the document is provided as background information to assist Mr Emanuele to determine his level of initial interest in the Funk franchise.31 It is provided to assist Mr Emanuele and his business advisors in preparing a detailed business plan, to conduct his own

29 Exhibit A2, tab 30, p 429.30 Exhibit A2, tab 30, p 428.31 Exhibit A2, tab 30, p 431.

evaluation of the business and to form his own views. It then said that he should conduct his own market research and assess his own expectations of performance, expenses and any future capital requirements.

92 The front page then goes on to say that the information contained within the document is historical and unaudited, the franchisor reserves the right to amend the information and the business profile document can only be distributed to professional advisors, it cannot be distributed generally and Mr Emanuele must not directly approach any staff, customers or suppliers of the business without permission of the franchisor. If Mr Emanuele does not intend to proceed to purchase the business, he must return the business profile document which, at all times, remains the property of Funk Franchise.

93 Some of these statements are anomalous and slightly inconsistent. The information is said to be historical and unaudited but it does not suggest that it may not be relied upon and it may be distributed to the business advisors and consultants retained by Mr Emanuele and upon which he may obtain advice. It would logically follow that such advice would be obtained upon the figures within the document itself and that having read that document, there would be no reason for Mr Emanuele not to accept the accuracy and reliability of the information contained within it.

94 There was then an executive summary.32 It states that the business commenced in May 2009 and has been trading as Funk Coffee and Food – Victoria Square. It says that the franchisor took over on 2 October 2013, suggesting a prior operator of the business but, for example, that could be another company in the Funk Group. It sets out the gross turnover for the 2015 financial year of $747,811 with an adjusted net profit of $126,301 and there is no suggestion that there needs to be any other adjustment to the gross turnover figures or the adjusted net profit figures. The average reader would understand that these two figures were those which had been achieved by Funk at the time that it operated the business. The asking price for the business was $450,000. There are also other costs to be paid for legal costs for the franchise agreement, the initial franchising fee of $30,000 and an initial training fee of $10,000. These were all exclusive of GST.

95 Mr Emanuele said that he printed and read the document including the executive summary. His principal interest was in the turnover of the business and the asking price. He did not notice the entries about the business commencing in May 2009 and the franchisor taking over on 2 October 2013. These things did not mean anything particularly to him. I am satisfied that his position would have been very different if the contract and then the termination of Kindred was disclosed.

32 Exhibit A2, tab 30, p 432.

96 There was financial information within the document which is a standalone document amongst other pre-prepared documents.33 He read this information and understood the disclosed net profit figure to be indicating profit was generated by the business after the deduction of expenses and he understood the expression “amount available to owner operator” to mean the profit that the business was making after taking into account the cost of a manager’s salary. He would be the initial manager of the business and he would be drawing, according to that, a salary of some $60,000. He also understood that in addition to that wage, he would have available a profit component as reflected in this financial information.

97 He read each of the columns and had an understanding of the general set out of the document. He obtained all of these understandings by his reading of the documents the respondents provided through their agent.

98 He then made an arrangement to meet with Mr Greg Rundle his accountant of the firm ‘360 Private’ in order to discuss the potential purchase of the Funk Victoria Square business.34

99 The meeting with Mr Rundle took place on or about 26 May 2016 at the premises of Mr Rundle’s business. Mr Emanuele took the business profile document with him to the meeting. At the meeting, they discussed the financial information and Mr Emanuele asked Mr Rundle for his advice about the information in the document. At the time, Mr Rundle was looking at the document headed ‘No. 6 Financial Information’.35 Having viewed that material, Mr Rundle told Mr Emanuele that the figures looked OK on face value. The discussion then progressed from there to discussing the structure of the business, the incorporation of a purchaser for the business, the registration of business names and other things that would need to occur prior to the purchase including obtaining finance for the purchase price. At that meeting, Mr Rundle suggested a meeting between Mr Emanuele and Ms Bridget Edwards from the National Australia Bank (NAB) in order to discuss and arrange finance. Mr Emanuele thinks it was at that meeting that Mr Rundle made an arrangement for him to meet with Ms Edwards at some future time.

100 On 27 May 2016, Mr Emanuele had a meeting with Mr and Mrs Damaskos and Mr Versace.36 The purpose of the meeting was to discuss the potential purchase of the Victoria Square business and for Mr Emanuele to become a franchisee of the Funk business. From Mr Emanuele’s point of view, he thought it was for Mr and Mrs Damaskos to see whether he would be a good fit for the business. At that meeting, there was no mention of there being a previous franchisee. He said that if the topic of a previous franchisee was raised in discussion, then he would have wanted to talk to that previous franchisee about the conduct of the business from the Victoria Square site. Mr Emanuele gave a 33 Exhibit A2, vol 1, p 438.34 Exhibit A2, tab 33, p 548.35 Exhibit P2, tab 30, p 438.36 Exhibit A2, tab 34, p 549.

firm indication that he was interested in purchasing the business but subject to him obtaining finance and he asked Mr and Mrs Damaskos if there was a discount available. They responded that there was not. There was then a further meeting between, Mr Emanuele, Mr and Mrs Damaskos and Mr Versace on the same day. At that second meeting, Mr Emanuele again indicated that he wanted to proceed with the purchase of the business but he had not filed an application form at that point. Again, nothing was said of any previous franchisee. If a previous franchisee was raised, he would want to have made some investigations of it. He can recall that in that discussion, he told Mr and Mrs Damaskos that he intended to be a hands-on manager of the business. He can recall that they made reference to the Victoria Square premises being the flagship store which he understood to mean that it was the most important store. That said, he cannot recall being told why the business was being sold. He was not told that there were some expenses excluded from the financial statements.

101 In his email to Mr Emanuele of 27 May 2016 sent at 2.00 pm,37 Mr Versace enclosed a number of documents. They were the application form, which required completion and a fee of $4,000, a business sale contract and Annexure A inventory of plant and equipment. The financials which he has would be attached to the contract. In addition to the contract price of $410,000, there would be a franchise fee of $30,000 plus GST and a training fee of $10,000 plus GST. This would be a total of $450,000 as agreed with the stock being included in the contract.38

102 Mr Emanuele then had a meeting with a Mr Gerry Sun. He was an accountant from Infinity Accounting. The meeting took place at Mr Emanuele’s home. The purpose of the meeting was to discuss the Funk Victoria Square opportunity. Mr Emanuele knew Mr Sun because they had worked together at ISUZU for about three years.

103 At that meeting, Mr Emanuele had with him the business profile document. He spoke to Mr Sun and asked him words to the effect: “How do you know if these figures are correct?” Mr Sun replied: “the only way for you to know that these figures are correct is to ask for tax returns, BAS returns and copies of the balance sheet”. Implicitly, Mr Sun understood that the business profile document was a sample of the financial results of the operation of the Victoria Square store that needed to be verified. He advised that those figures could be verified by a review of the tax returns, the BAS returns and a copy of the balance sheets of the business. In their conversations, Mr Sun did not cast doubt upon the provenance of the documents given to Mr Emanuele but advised that it would be necessary to compare that document to the documents ultimately struck as the financial returns of the business in order to test their veracity.

104 On 31 May 2016 Mr Emanuele sent an email to Mr Versace asking whether it would be possible to be provided with the tax returns, the BAS Statements and

37 Exhibit A2, tab 34, p 549.38 Exhibit A2, tab 34, pp 549-667.

the balance sheets as suggested by Mr Sun. There is no evidence of any immediate response by Mr Versace. There is no evidence Mr Versace arranged for those documents to be forwarded to Mr Emanuele despite his request. There is no explanation for this failure.

105 At the same time, other steps where being taken by Mr Emanuele. He was liaising fairly constantly with Mr Greg Rundle, his accountant, regarding the application for finance from the NAB. On 27 May 2016, Mr Rundle informed Mr Emanuele about his expectation of hearing back from someone in a specialised banking section or franchise lending.39 On 31 May 2016, in a further email, Mr Rundle informed Mr Emanuele that he found a banker who was keen to speak with them.40 In a further email of 31 May 2016, Mr Rundle arranged with Ms Edwards of NAB and Mr Emanuele for a meeting to discuss the opportunity to purchase the Funk Victoria Square business and for any potential funding arrangements with NAB.41 In that document, Mr Rundle said that he had the financial information about the Funk Victoria Square business. This was despite the fact that Mr Sun’s recommendation to Mr Emanuele which had been communicated to Mr Versace had not been answered. The evidence of Mr Rundle was that he reviewed the financial information coming from the respondents and understood that it was accurate and complete. He did not see the need to test that financial information in the same way as had Mr Sun. At the same time, Mr Emanuele had made a request to Mr Versace for the respondents to provide further information in accordance with the recommendation made to him by Mr Sun. The response to that request is significant in this matter.

106 On 1 June 2016, Mr Emanuele completed the Funk Franchise application.42 This application was approved on 3 June 2016 by Funk Franchise. Mr Emanuele was approved as a prospective franchisee. This was communicated by email on 3 June 2016.43 There appears to be some contention raised by the respondents about the status of this document. I consider that it does no more than record the formal application by Mr Emanuele to become a franchisee.

107 Prior to that time, there had been a meeting between Mr Emanuele, Mr Rundle and Ms Edwards held at the offices of Mr Rundle at ‘360 Private’. Mr Emanuele met Ms Edwards for the first time at this meeting and the topic of discussion was the provision of finance by NAB for the purchase of the business. Ms Edwards informed Mr Emanuele what information he needed to gather and to give to the bank and she then also took a copy of the business profile document supplied by the respondents.

108 This meeting was immediately followed by an email of 1 June 2016 from Mr Versace to Mr Emanuele in response to Mr Emanuele’s email of 31 May

39 Exhibit A2, tab 35, p 669.40 Exhibit A2, tab 35 p 668.41 Exhibit A2, tab 37 p 674.42 Exhibit A2, tab 3, p 43.43 Exhibit A2, tab 40, p 680.

2016.44 The email in response from Mr Versace to Mr Emanuele is important.45 It reads:

Hi Johnny,

Please see answer from Jo below. Please give me a call and I will explain a bit more, the number I have for you … says not connected.

Regards

109 Attached to that email is a copy of an email from Mrs Damaskos to Mr Versace. That email response to the request by Mr Emanuele to Mr Versace following his discussion with Mr Sun. It reads:

Hi Pat,

Thanks for the below.

Please be advised that other businesses also operate under the same entity, so we are unable to provide the below.

Regards

Joanna Damaskos

110 The “below request” the request set out in the email from Mr Emanuele to Mr Versace for the following:

1. Tax returns

2. BASS statements

3. Copy of the balance sheet.

111 For the reasons which I will discuss below, I do not accept that the respondents were unable to provide to Mr Versace and then to Mr Emanuele the requested documents. I also consider that, based upon the evidence before the Court, Mrs Damaskos knew that such documents could be provided. I also am of the view that the statement by Mrs Damaskos is misleading and deliberately so because I am satisfied that in their dealings with Kindred, the respondents had been asked to provide the same information. The genesis of that request was the financier that Kindred had approached and which was not satisfied with the financial information supplied in largely the same form as was given to Mr Emanuele. The Bank insisted upon the provision of that information. The respondents dissembled in the same way but in the end provided to Kindred (and so its bank) stand-alone financial statements for the Victoria Square store. Those were provided by BCFR Chartered Accountants (“BCFR”), the accountants for the respondents. Mr and Mrs Damaskos well knew that the information could be provided following a request to their accountants. Their refusal to do so was as

44 Exhibit A2, tab 36, p 670.45 Exhibit A2, tab 39, p 677.

deliberate as their response was misleading. They knew of the risks to them if these returns were provided and that any prospect of a sale of a diminishing asset would become fraught.

112 The email from Mr Versace to Mr Emanuele was then followed up by telephone call between Mr Emanuele and Mr Versace. They discussed the fact that the tax returns, BAS returns and balance sheets could not be provided to Mr Emanuele. Mr Versace relayed his instructions that there was more than one business that operated under the same entity and that those businesses could not be separated out, implicitly in any meaningful way. Mr Versace told Mr Emanuele that he had not been asked the question about tax returns, BAS returns or balance sheets before and Mr Versace then said that the figures that had been received by Mr Emanuele were correct. This statement was wrong and was misleading. It gave a misplaced level of comfort to Mr Emanuele.

113 In a later conversation on or about 16 June 2016, Mr Versace affirmed to Mr Emanuele that the financial information he had been given was correct and he followed up by giving him third quarter details.46 This statement was equally wrong and misleading. In the email of 16 June 2016, Mr Versace included a further copy of the same financial information as had already been provided to Mr Emanuele plus a draft of the results for ‘250 Victoria Square’ in the same form as had been provided in the financial information document. No thought appears to have been given as to how it was that these figures had been extracted.

114 Following these discussions, Mr Emanuele did not again challenge the provenance or accuracy of the financial information that he had been given. He accepted at face value the accuracy of the material that had been forwarded to him by Mr Versace by email and the statements of Mr Versace including that the businesses operated under the same entity and the requested materials could not be provided. That statement was wrong. It was misleading and I am satisfied that at that time, 1 June 2016, Mrs Damaskos was quite aware that the requested information could be provided. It was her decision not to provide it.

115 The provision of the stand-alone financial statements for the Victoria Square store and other financial material was the subject of a strenuously contested interlocutory application brought by the applicants. After argument, I made orders for the provision of a fairly broad range of financial records, all of which have, to differing degrees, been used in evidence before me. The respondents deliberately and strenuously resisted requests made for disclosure of this material and just as vigorously contested the interlocutory application for the provision of that material. This attitude of the respondents was both misguided and misconceived. The documents are relevant and should have been disclosed.

116 The stand-alone profit and loss statements generated by BCFR, was one such item of discovery. There is a factual dispute about whether the respondents were in possession of these documents or had them in their power I am satisfied

46 Exhibit A2, tab 55, pp 919-921.

that they were in the power of the respondents to produce them by, as it were, the press of a button (by BCFR). The content of these documents has become a substantial matter of significance. In a series of correspondence commencing on or about 4 February 2020,47 requests were made for provision of this financial information. It was not provided willingly. There is no reasonable explanation for the failure to provide this information.

117 In the result, if the request for the provision of this information had been properly met in a timely way, then on 3 June 2016 the 2014/2015 consolidated financial statements for Funk CBD, which extended to all companies which were operated by Funk CBD and individual profit and loss statements for individual Funk Company stores (including Victoria Square) would have been received by the Funk Group from its accountants BCFR.48 The consolidated financial statements for Funk CBD are to be found at Tab 321, page 2920; I will consider each of those in turn.

118 In the consolidated profit and loss accounts for Funk CBD for the year ended 30 June 2015, the sales are calculated at $1,208,541. Purchases are calculated at $389,159 which discloses a cost of goods sold, percent of annual turnover of 32.2% and therefore a gross profit percentage of 67.8%. The expenses include an amount for accountancy fees in the sum of $1,860. It may be expected that this is not the full amount of the cost of provision of accountancy services. There is a depreciation expense of $20,758, up from $8,644 in the previous year. There is an interest expense of $43,740 up from $10,388 in the previous year. There is a management fee of $116,539 up from $113,224 in the previous year. There is an increase in rent of almost $50,000 and service charges that are increased to $388,059 from $299,726. There is no separate entry for wages.

119 At least two things appear to follow. First, there is a management fee charge in respect of the consolidated businesses of Funk CBD. There is no identification of precisely for what the management fee is paid. In the usual course, management fees are paid for the cost of provision of management services by one entity to another. It is a recognition of the cost to the entity of the provision of the services which would otherwise be required to be provided by the entity at its own cost. Implicitly, the cost payable in respect of management fees will be competitively priced with the cost that might be incurred of the entity providing that service through other service providers.

120 The description service charges also raise the prospect of a charge on the expense column for wages but also for other services. That is, there would be an allowance for wages plus other services supplied in respect of which a wage would otherwise ordinarily be payable. Hence the description ‘service charges’.

47 Exhibit A2, tab 222D, pp 2096H-2096ZAY.48 Exhibit A2, tab 222N-222P, pp 2096ZL-2096ZAA.

121 The important feature of the profit and loss statement is that there has been a distribution of a number of the expenses such as accountancy fees, the cost of depreciation, the attribution of interest payable and the cost of provision of services through the charging of the management fee and a portion of a service charge. Implicitly, there is a level of sophistication within the controls exercised within the Funk CBD businesses to ensure that proper attribution is made in respect of any particular business and the cost to Funk CBD of the provision of those services and the proper allocation of those costs.

122 I have also earlier discussed the content of the balance sheet. 49 In the balance sheet, the carrying of the asset in the form of an intangible in the amount of $805,000. It appears that this intangible relates to the Victoria Square business. If that business was not profitable, the amount carried for that intangible must be written down. The second major item in the balance sheet is trade and other creditors payable.

123 These are the consolidated figures for Funk CBD the owner of the business in Victoria Square. The issue then becomes the separation out of those figures into separate accounts. That has occurred.50 The Funk CBD profit and loss statement for sales for the Victoria Square premises is instructive. The sales are recorded at $747,811, being about 62% of the total sales of the Funk CBD business. The purchases are recorded at $234,813. This is 60% of the total purchases of the Funk CBD business. The expense column of accountancy fees is exactly half of the accountancy fees incurred by Funk CBD ($930 of a total of $1860). Bank charges are approximately 60% of the charges for Funk CBD in total. The depreciation expense is 52% of the total paid by Funk CBD. The insurance cost is of a similar amount. The interest paid is just under 50% of the total amount paid by Funk CBD. Rent is 71% of the total amount paid by Funk CBD. In the separate accounts for Funk CBD for Victoria Square, no charge is made for a management fee.

124 In the consolidated accounts, for the 2015 year, there is an expense charge of $116,539, up from $113,224 in the 2014 year. The service charges are 62% of the total amount of service charges in the consolidated account. That is, in the separate accounts, the service charges are $241,660 and in the consolidated accounts they are carried as an expense at $388,059. These separate figures may be anomalous. No management fee is charged separately in relation to the business of Funk CBD for Victoria Square. However, a management fee is charged in the consolidated accounts.

125 In the ordinary course, based upon the breakdown of the figures separately and in the consolidated accounts, between 50% and 60% of that management fee may be expected to be charged in relation to the business of Funk CBD Victoria Square because the business appears to be generating income, purchases and expenses in the range between 52% and 62% of the total reported in the

49 Exhibit A2, tab 321, p 2922B.50 Exhibit A2, tab 321A: pp 2922A.

consolidated accounts. In those circumstances, and taking a figure of, say 55%, arguably there should be a further charge upon the accounts of the sum $75,289.50 (55% of $116,539).51 If that was the case, there would be no reportable profit for Funk CBD for the 2015 year. A further anomaly is the question of what the service charges comprise. It is not known, for example, whether the service charges within the consolidated accounts include salaries paid to persons who are providing services to Funk CBD and to other companies within the Funk Group or to other businesses within the Funk Group which have not been properly allocated.

126 The profit and loss statement for the Victoria Square store could have and should have been provided to those advising Mr Emanuele upon his request. If they had been supplied, then further enquiries could have been made. Those advisors, such as Mr Sun or any other accountant, would have identified the inconsistency between the Funk CBD consolidated accounts and the treatment of management fees in those accounts and the failure to include any item for management fees in the separate accounts. Any ordinarily competent accountant would have identified that there is an allocation of expenses for accounting fees, bank charges, depreciation, service charges and the like but no allocation for the management fee. It is almost impossible to conceive of the possibility that the management fee would only have been attributable to the management of the consolidated company. The consolidated company accounts combine the operations of the various departments and there is an attribution of portion of the expenses in each of those departmental accounts. The only exception is management fees.

127 The evidence does not support a conclusion that there would have been no management fee attributable to, for example, the Victoria Square store, bearing in mind that it generated 62% of its income and a similar amount in relation to the costs of goods sold and overhead expenses.

128 The departmental trading and profit and loss statement of the Victoria Square business for the year ended 30 June 2016 has also been prepared.52 It is not suggested that this document would have been prepared as at June 2016 as such documents may take up to 12 months to be prepared and then settled. The 2015 document would more likely have been available as at 30 June 2016. There is no evidence about how soon after the balance date (being 30 June 2016) this document could be prepared.

129 On 3 June 2016, a meeting took place between Mr Emanuele, Mr Rundle (his accountant) and Ms Edwards of NAB. The topic of the meeting was the potential purchase of Funk Victoria Square and funding arrangements with NAB.53 On 3 June 2016, Mrs Damaskos sent to Mr Emanuele an email attaching the Funk Franchise documentation which included the disclosure document with

51 cf Exhibit A2, p 2922A.52 Exhibit A2, tab 2222M, p 2096ZK.53 Exhibit A2, tab 37, p 673; tab 38, p 675.

the annexed franchisor financials and template financial agreement. The date of the email, Friday 3 June 2016, was the date upon which Mrs Damaskos received from BCFR the financial statements being the profit and loss account for Funk CBD and for the separate stores for the 2015 year. In her email, Mrs Damaskos says nothing of those records, notwithstanding the earlier request of Mr Emanuele. She apparently does not turn her mind to the ease with which his request could be satisfied. I am satisfied that she deliberately and contumaciously refused to satisfy this request. She attaches the Funk Franchise agreement template, the disclosure document with annexed financials, a copy of the Code, the prospective franchisee advice statement, which needed to be completed and returned and the certificate of receipt of the documentation which also needed to be completed and returned. She says that once queries had been answered, she can then on-forward the last portion of the documentation.

130 It is apparent from the content of this email that the respondents are working on the assumption that Mr Emanuele is working towards a purchase of the Victoria Square store. The Franchise Agreement may be found between pp 684 and 743 of Tab 41 of Exhibit A2. The Director’s Declaration under the Funk Franchise Trust is to be found at p 743. The compilation report of BFCR, signed by Mr Jerry Rossi dated 21 September 2015 is to be found at p 742 of the exhibit. In that declaration, Mr Rossi says he has compiled the accompanying special purpose financial statements of Funk Franchise Trust which comprise a balance sheet and a profit and loss statement for the year ended 30 June 2015, a summary of significant accounting policies and other explanatory notes. It goes on to read:

The specific purpose for which the special purpose financial statements had been prepared is to provide information relating to the performance and financial position of the trust that satisfies the information needs of the directors of the trustee company and of the beneficiaries.

131 He then sets out the responsibilities of that trustee and says:

The responsibility of the trustee

The director of the trustee company is solely responsible for the information contained in a special purpose financial statement, the reliability, accuracy and completeness of the information and for the determination at the basis of accounting used is appropriate to meet their needs.

132 There is then included the profit and loss statement of the Funk Franchise Trust for the year ending June 2015. It discloses a net profit of $7,265 and a carry forward balance of ($11,994). In the previous year there had been a loss of $19,259. That document gives no information to a prospective purchaser. The profit and loss statement of the Funk Franchise Trust for the year ending 30 June 2015 shows income of $175,655 plus a marketing levy of $70,262 for a total of $245,917. It discloses expenses including administration costs of $146,000 to a total of $238,652. The balance sheet discloses that the largest asset is the intangible asset of $75,639. Unpaid trust distributions total $94,988, notwithstanding, there is a deficiency in equity of $11,984.

133 There is then a compilation report of the Funk Marketing Fund signed by Mr Rossi and by Mr Damaskos. It shows a small profit for the 2015 year of $664, a total equity of $71 and an audit report.54 The disclosure statement for a prospective franchisee commences at p 757 of Exhibit A2.55 There is a disclosure of the litigation involving the franchisor Funk Franchise, the preparation date is 31 October 2015.56 In relation to litigation, there is a disclosure that there is one piece of litigation concerning an alleged contravention of the Trade Practices Law but names of the parties to litigation are not disclosed.

134 At p 763 of Exhibit A2, there is a schedule of details of events of the last three financial years. It discloses that only one franchise agreement has been terminated, namely Hype Investments Pty Ltd (“Hype Investments”) in respect of a store at 80 Flinders Street, Adelaide. No location details are provided except that the address of the store at 80 Flinders Street, Adelaide. In subparagraph (f), there is a declaration about the franchise agreement bought back by the franchisor three years earlier. There is a disclosure of Kindred trading as Funk Coffee and Food Victoria Square. No details are given in relation to the last contact details. The only declaration is that the business was bought back on 2 October 2013. The evidence discloses that the former franchise agreement between Funk Franchise and the Kindred was terminated by agreement of the parties in or about 2013. No declaration to that effect is made at subparagraph (c) of this part of the declaration. A similar declaration is made in relation to a business of Funk Coffee and Food at 100 Angas Street, Adelaide. The declaration suggests that it was bought back on 2 October 2013. There was a further disclosure that in the past year, Funk Franchise has also purchased back a franchise store at 45 Grenfell Street, Adelaide, formerly operated by New Legend Pty Ltd. The last known contact details for Ms Michelle Jun are given. The date of repurchase was 1 September 2015.

135 Item 13 of the Code provides as follows:57

13 Sites or Territories

13.1

13.2 Details of whether the territory or site to be franchised has, in the previous ten years, been subject to a franchised business operated by a previous franchise granted by the franchisor and, if so, details of the franchise business, including the circumstances in which the previous franchisee ceased to operate.

136 The only information given on the circumstances in which in the previous franchisee ceased to operate is that it was bought back on 2 October 2013. The Code requires the provision of detail including the circumstances in which the previous franchisee ceased to operate. One of those circumstances is, for

54 Report of Major May and Associates, Chartered Accountant, 29 September 2015; Exhibit P2, tab 41, p 756.

55 Exhibit A2, tab 41, p 759.56 Ibid p 757.57 Item 13.2 of Annexure 1 of Schedule 1 of the Code.

example, where the previous franchisee ceased to operate if there were particular circumstances that require disclosure. That is consistent with other portions of the disclosure document that require full disclosure of other litigation in which the franchisor has been involved. The disclosure document provided by the respondents does not give a fulsome description of those matters.

137 There is then a further Schedule B within the same disclosure document.58 It is a specific reference to the franchise site. It reads:

Where applicable this Schedule B will record whether the territory or site to be franchised to the franchisee has been subject to a previous franchise granted by the franchisor.

Site or Territory previously franchised?

138 There is then a declaration within the document which states:

This site has not been previously franchised.

139 That declaration is incorrect. So much is obvious from the declarations at paragraphs 6.4 to 6.6 however, the declaration at paragraph 6.4 to 6.6 is also incorrect because it does not record that the Waymouth Street store had been formerly operated by the company Boss 260 Pty Ltd until November 2012,59 a disclosure that was required under the Act.

140 Having received the email from Mrs Damaskos of 3 June 2016, Mr Emanuele noted that the disclosure document was dated 31 October 2015 and he had not seen one before. It was a standalone page. He thought the document confirmed what he then believed, that the site had not previously been franchised. He identified the reference to the Funk Franchise Trust and could not recall whether he read the page titled “for litigation”. He was particularly interested in the financial information. He also knew that he was going to incur accounting and book keeping fees and he knew the Funk Group expenses were excluded but thought they were very small. He understood that one franchise store may be different from another but he would have expected that relevant expenses would have been included in a list of expenses. He did not think that he needed to consult other documents to find out what had occurred in the business. He read the statement under the heading “establishment costs” but said that the information is provided as a guide only and is based on the franchisor’s experience and is not to be relied upon by the prospective purchaser or a franchisee. That is why he did not look closely at the figures. He said the business profile document was not attached to the email.

141 He did not recall seeing the document that refers to franchise businesses bought back by the franchisee at paragraphs 6.4 to 6.6. He said that if had seen that document, he would have enquired about who or what Kindred was and the circumstances under which the Victoria Square store had been bought back. The 58 Exhibit A2, tab 41, p 778.59 Ibid p 763.

answers to those questions would have given him some indication about the earlier relationships between Kindred and Mr and Mrs Damaskos.

142 In relation to the Kindred court action document, Mr Emanuele said he did not recall seeing the document that refers to the District Court action taken by Kindred against the Damaskoses. He said he was aware of some action prior to entering into the contract. He said that fact was significant to him. He questioned either Mr Versace or Mr Damaskos about it. They told him the action arose from the mismanagement of the business. Implicitly, he understood that to mean mismanagement of the business by Kindred which led to some dispute between Kindred and the Damaskoses which had been resolved by the company taking back the franchise. That does not address the failure by the respondents to identify that the earlier franchise agreement with Kindred had been terminated.

143 In the same conversation, Mr Damaskos said he was happy to say that Mr Emanuele had been approved as the franchisee of the flagship Victoria Square store. Mr Damaskos said he would be in contact with Mr Emanuele to arrange a time to execute the contracts. It was Mr Damaskos who suggested Monday 4 July as a possible settlement date.

144 Mr Emanuele said that at the time, the information contained in the documents was not as significant to him as the information he saw in the business profile. His principal focus was upon the financial results. He expected the business profile document to be a true and correct representation of what had happened in the business. He did not think that he had to look to other documents to in some way qualify the financial information that he had been given. He had been used to obtaining financial information and this had been done in the past when he was working with the Isuzu franchise of his family. He said that his expectation was that everything he needed to know would be in one document. He did not notice any section of the final document listing Kindred as a previous franchisee and the buy-back of Mr Michael Marinos’ contract with the Waymouth Street store.

145 On 3 June 2016, Mrs Damaskos sent to Mr Emanuele a copy of the June 2016 rental statement and a copy of a template licenced to occupy.60 On 5 June 2016, Mr Emanuele sent the franchise advice statement to his accountant, Mr Rundle. He asked for advice whether he should sign sections 1 and 3. He was then going to obtain legal advice from a solicitor. On 5 June, Mr Emanuele sent an email to Mr Rundle asking for advice about what was the 2015 Funk Franchise Trust and what were the other trusts. These requests were made of him by the solicitors who were giving him advice. These questions were to be sent on to Mrs Damaskos in line with her suggestion in her email of 3 June 2016 that he should email her with any questions that he had. Mr Rundle responded to Mr Emanuele on 6 June 2016.61 He said that the Funk Franchising is the trustee of the Funk Franchising Trust.

60 Exhibit P2, tab 42, p 873.61 Exhibit A2, tab 45, p 891.

146 Mr Emanuele then set about the process of obtaining funding for the purchase. He also asked to speak with one or two franchisees in the following week because he wanted to see what their experiences in the franchise system were. If they reported that their experiences were good, he would have gone ahead. If it were the opposite it would have made him stop and think.

147 If he was told that there was a previous franchisee in the Victoria Square store, he would always have wanted to have spoken to that franchisee to find out what had happened and, implicitly, why they were no longer a franchisee. Mr Emanuele also had discussions with Mr Damaskos about the Point Of Sale (POS) system. He wanted to ensure the extent to which the store was then using that system and what it could do. Following that request, Mr Emanuele was shown a couple of POS reports and he formed the view that the system was similar to the DHS system.

148 Following the request he sent to Mr Rundle, Mr Emanuele had a number of meetings with Mr Rundle perhaps on one or two occasions to seek advice about the viability of the business. He can recall receiving advice from Mr Rundle from time to time and certainly recalls advice from Mr Rundle that he thought the business was viable. He also recalls that Mr Rundle did not raise with him the topic of any other expenses that might be incurred by the business at any meeting. In general, Mr Rundle was positive about the business and considered that it was viable. Nothing was said to Mr Emanuele by Mr Rundle that would lead to the conclusion that he had anything to be concerned about. On 7 June 2016, Mr Rundle at the behest of Mr Emanuele started the process of meetings with the NAB representative to address the final amounts of loans that might be sought and the final arrangements that might need to be made. Arrangements were made for a meeting. Mr Emanuele sent the business profile document for Funk Victoria Square and said that those documents were sent to him by the Funk Group. He knew that Mr Rundle had other documents apart from the business profile document.

149 I refer to the business profile document provided by the respondents particularly at p 905.62 This document does not disclose a number of the expenses that had been incurred by the Funk Group. It is not the case, as earlier discussed, that the Funk Group did not have this information. In the documentation supplied by the Funk Group at Schedule D,63 there is a schedule provided as required by items 14.6 to 14.10 of the schedule to the agreement and Annexure 1 of Schedule 1 of the Code. It is a list of recurring or isolated payments that is within the knowledge or control of the franchisor or is reasonably foreseeable for the franchisor that may be payable by the franchisee to a person other than the franchisor or an associate. These expenses include, for example, accounting expenses, insurance expenses, staff expenses, electricity, gas telephone and rubbish expenses, laundry, stationery, internet and software licencing fee

62 Exhibit A2, tab 49, p 905.63 Exhibit A2, tab 41, p 785 et set.

expenses, which were not reflected in the financial information. I will address the content of this document below.

150 Mr Emanuele did have a meeting with a solicitor for advice as required under the Code on 9 June 2016. He does not recall whether there was any discussion whether there had been a previous franchisee of the Victoria Square store and he did not recall whether he asked any questions about that topic. He cannot recall any discussions about Schedule B to the disclosure document, nor can he recall any discussion about the part of the disclosure document that referred to misleading and deceptive conduct litigation.

151 There was then an email exchange between Mr Versace and Mr Emanuele on 16 June 2016 in which Mr Versace provided to Mr Emanuele the existing financials that he was given, plus the third quarter financials and Mr Versace would ring to go through the figures. Attached to that email are two pages. The first is the document called “the financial information” which had already been previously provided on two occasions. The second64 is a draft of the third quarter results for the business to March 2016. It shows a calculation of a gross turnover figure and it sets out a list of expenses. It does not include all of the expenses such as the management fee.65 The structure of the third quarter results to 31 March 2016 is in the same form as the financial information up to and including the period ending 31 December 2015.

152 By 8 June 2016, Mr Emanuele had sent to NAB all of the Funk Franchise documentation including the Victoria Square business profile. By mid-June, meetings had occurred between Mr Emanuele and the Keswick Funk franchisee. Mr Damaskos also attended the meeting. Those meetings preceded the email of 16 June 2016 from Mr Versace to Mr Emanuele with the attachment containing the further financial information. That further financial information to 31 March 2016 was prepared by the respondents. Following receipt of that information, Gabjet was incorporated on 17 June 2016.66 On the same date, the sale of business agreement was executed as between Funk CBD and Gabjet for the purchase of the Funk Victoria Square store.67 The purchase price was $410,000 on a walk-in-walk-out basis and there was no apportionment of the overall purchase price. The agreement was conditional upon Gabjet entering into a franchise agreement with Funk Franchise and the same financial information as had been previously provided, namely the document entitled “No 6 financial information” and the draft of the material to 31 March 2016 was included.

153 Clause 10 of the agreement provided as follow:

10 DUE DILIGENCE

64 Exhibit A2, tab 55, p 921.65 Exhibit A2, tab 321A, p 2922G.66 Exhibit A2, tab 397, p 4014.67 Exhibit A2, tab 4, p 67.

The purchaser acknowledges that it has prior to entering into this agreement sought and relied upon its own financial and accounting advice and carried out and relied upon its own enquiries and analysis of the business hereby sold independent of the vendor or its directors and agents. For the benefit of the vendor to the intent that the purchaser does not make any claim against the vendor or its directors or for misleading conduct or for misrepresentation in relation to any matter that might affect the future performance of the business, the purchaser further acknowledges that it is experienced in the marketplace in which the vendor operates and that it has made an assessment to purchase the business independent of matters or predictions made by or on behalf of the vendor and that in entering into this transaction, it has relied on its independent evaluation of the clients, the products and the market. Notwithstanding the above clause, the vendor warrants that the purchaser may rely on that which is contained in this agreement and the financial information provided by the vendor which is also attached to this document.

154 The financial information provided and attached is as described. They were not the full financial statements of the vendor. The only exclusion in relation to one page of that financial information is that it does not include Funk Group expenses. It is known that those expenses do not exceed $5,000 per annum.

155 This purchase price of $410,000 was calculated by Mr Versace based upon a multiplier of 3.2 being applied to the 2015 net profit figure shown on the financial information provided by the respondents. The amount calculated was rounded up to $410,000. It is known that the figure of $126,000 in the 2015 year was not a calculation of net profit. Mr Versace relied upon the figures in the Financial information in the same way as did Mr Emanuele. The calculation is wrong because the factor to which the multiplier (as the second factor) is applied is incorrect. It is not net profit and this was known by the respondents. There was an exchange of emails on 14 June 2016 the topic of which was the independent advice that Mr Emanuele was required to obtain in respect of the business. On 16 June 2016, Mr Versace sent to Mr Emanuele an email saying that he would run through the figures with him. On 21 June 2016, Mr Rundle sent to Mr Emanuele an email enclosing the advice statement.68 In that document, Mr Rundle says that he has given advice to Mr Emanuele about the proposed franchise agreement and the franchise business. Mr Emanuele said that he did receive advice from Mr Rundle about the proposed franchise agreement and business.

156 Later, there was a meeting between Mr Emanuele and Ms Edwards of NAB at Mr Emanuele’s home. The finance application of Mr Emanuele was discussed at that meeting and arrangements were being made for NAB to supply some finance for the purchase of the Victoria Square premises. At about that time, Mr Emanuele met with a Mr Kevin Li at the Victoria Square store. There was a discussion about the Funk Group and Mr Emanuele told Mr Li that he was happy with the Funk franchise arrangements. After about 20 to 25 minutes of discussion, Mr Damaskos attended and wanted to know whether everything was okay with the meeting. Mr Emanuele told him that the meeting was positive.

68 Exhibit A2, tab 56, pp 922-930.

157 Mr Emanuele said that he was unable to speak to the Angas Street store franchisee but that did not concern him because he had information from Mr Li which gave him a reasonable picture of what was going on. Shortly afterwards, there was a discussion between Mr Emanuele, Mr Versace, and Mr Emanuele recalls at some stage Mr Damaskos. The discussion concerned the action brought by Kindred against the Damaskoses. Mr Emanuele recalled that this discussion occurred sometime prior to him entering into the sale agreement and the franchise agreement and he was aware of the existence of Kindred and the termination of the franchise agreement before he signed the documents.

158 Mr Emanuele was told that the action was instituted in response to mismanagement of the franchise on the part of the franchisee. From his understanding of what was said to him, there was a termination by the Funk Group of the franchise owned by the Kindred of the Victoria Square store. The disclosure document also identified that Kindred owned the Angas Street store. Mr Emanuele understood from what he was told that Funk was active in the termination of the Victoria Square franchise due to the failures of Kindred. Those statements and that impression were created in the mind of Mr Emanuele both by Mr Versace in his role as the agent for the Funk Group and by Mr Versace and Mr Damaskos together. Mr Versace was authorised to communicate that version of events to Mr Emanuele and he was the conduit between his principals. The impression was created by the statements made by Mr Versace and then by Mr Damaskos, were statements of fact which were wrong; and I am satisfied that Mr Damaskos knew them to be wrong. The termination of Kindred’s involvement in the Victoria Square store came about because of allegations of wrongdoing made by Kindred against Mr and Mrs Damaskos and the Funk Group. The respondents reached a settlement with Kindred because they knew of the exposure of their own position in light of the allegations of misleading conduct made by Kindred.

159 The further effect of such statements was to intentionally distract a potential purchaser from attempting to make contact with the former franchisee because of a doubt about the veracity of what he might be told by Kindred if contact was made. A person in Mr Emanuele’s position would take what he was told on face value; this is what he did. He said that if he knew about the buyback he would not have gone ahead with the transaction because it would have made him stop and think that someone had terminated the franchise. He would have obtained a clear understanding that Mr and Mrs Damaskos were in conflict with a former franchisee of this site which culminated in the termination of the franchise and the buyback of the site. If he had known the truth, he would have understood that the franchise was purchased back at a very high cost to the respondents in circumstances where it was a step taken in the avoidance of proceedings about that franchise. This was part and parcel of the creation in the mind of Mr Emanuele of a very positive attitude to the prospects of operating a franchised store in the Funk Group. This was enhanced when reference was continuously made by Mr Versace, and Mr and Mrs Damaskos, of the Victoria Square store being the flagship store.

160 In relation to the Victoria Square financial statements that he received, Mr Emanuele said in his evidence that he did not identify any difference between the latter document he received and the business profile document that he had earlier looked at and so he placed his initials at the bottom right-hand-side of the page. Mr Versace, as the agent for the vendor respondents, did not indicate that there were other financial statements available other than what was sent in the email. It is known that on 3 June 2016, a suite of financial statements for 30 June 2015 had been provided to Mr and Mrs Damaskos by Mr Rossi of BCFR. If it was requested, Mr Rossi could quickly have produced a stand-alone profit and loss statement for the Victoria Square store as at 30 June 2015.

161 If a comparison was then made between the activities disclosed on the consolidated accounts and the separate accounts, it could have been seen and known that, on a broad basis, the activities of the store at Victoria Square constituted between 55% and 62% of the turnover, cost of goods sold and overhead costs of the business of Funk CBD. It could also be seen and known that management fees were charged as expenses within the Funk CBD franchise statements, but these were not separately allocated within the financial statements of the Victoria Square franchise. If, for example, 55% of the total management fees paid by Funk CBD to Funk Franchise were allocated to the financial years 30 June 2015 and 30 June 2016 of the Victoria Square premises, that business would not have generated any net profit. The financial information provided to Mr Emanuele carried with it both the representation of the availability of profit, adjustments for the salary of an owner-operator and a business that has increasing profitability and decreasing expenses.

162 On 23 June 2016, NAB requested further information from Mr Emanuele and also asked for a 12 month cashflow projection. A response was sent on 23 June 2016 but a 12 month cashflow projection was not prepared. There was then a following email sent by NAB to Mr Emanuele on 27 June 2016 and thereafter a meeting was held between Ms Edwards and Mr Emanuele on what information was required to be provided in order to obtain approval for the loan. On 28 June 2016, the firm of solicitors DC Strategy, who were the solicitors acting for the respondents, sent a letter to Mr Emanuele signed by Mr Andrew Barr. The letter was copied to Mrs Damaskos and it states that the solicitors understand that Mr Emanuele was considering the purchase of a Funk Coffee and Food franchise and enclosed was:

the disclosure document and separate receipt paid;

a copy of the Franchising Code of Conduct and information statement;

franchise agreement in the form to be executed with certificate of independent advice;

prior representation deed; and

licence agreement.

163 Mr Emanuele was asked to return the receipt for the disclosure document signed and dated, the signed franchise agreement in duplicate, signed, together with a certificate as to independent advice, the signed prior representation deed, and the signed licence agreement.69

164 Schedule B of that disclosure document said: ‘This site has not been previously franchised.’70 It also does not refer to the buyback of the Waymouth Street store formerly operated by Boss 260 Pty Ltd until November 2012.71 Disclosure of that event is required under Item 6.4 to 6.6 of the Code.

165 By an email of 29 June 2016, Mr Emanuele informed Mr Barr of DC Strategy that he had an appointment on the following Friday morning to review, sign and return the documents that had been provided to him the previous day. A meeting did take place between a solicitor of the firm DBH Commercial Lawyers (“DBH”) and Mr Emanuele on 1 July 2016. The purpose of the meeting was to review the documents referred to in the email sent by Mr Emanuele on 8 June 2016. No advice was provided in relation to any previous franchisee. Nothing that was said in that meeting gave Mr Emanuele any concern about proceeding with the transaction.72 On 2 July 2016, Mr Emanuele made the first payment of the initial training fee of $10,000 plus GST through the accounts of Gabjet. The payment was made to Funk Franchise.

166 In preparation for his financing arrangements, Mr Emanuele sold a nine-acre property that he owned on the corner of Port Wakefield Road and Waterloo Corner Road to finance his purchase of Funk Victoria Square. On 14 July 2016, he also received an email from Ms Edwards informing him that his loan had been approved. Mr Emanuele also contributed some other money available to him. He financed the balance of the purchase price by using the amount of $30,000 that his mother had loaned him. This covered the franchise fee and some other costs associated with that fee.

167 On 14 July 2016, Ms Edwards of NAB sent an email to Mr Emanuele confirming approval by NAB of the loan facilities and the requirements for a bank guarantee for Funk Victoria Square.73 The funding package was for a $200,000 market rate facility together with a $35,000 bank guarantee to be signed by Mr Emanuele to assist with the purchase of the Victoria Square store. Mr Emanuele had other property at Waterloo Corner which he intended to sell.

168 On 16 July 2016, Mr Emanuele signed the statement regarding the independent advice and on 20 July 2016, he executed the franchise agreement for the Victoria Square store.74 He signed for Gabjet and signed as guarantor.75 The

69 Exhibit A2, vol 4, Tab 65, pp 953-1155.70 Ibid, p 1145.71 Ibid, p 1130.72 Exhibit A2, tab 66, p 1156.73 Exhibit A2, tab 75, p 1167.74 Exhibit A2, tab 7, p 94.75 Exhibit A2, tab 8, p 95.

initial franchise fee was $33,000 inclusive of GST and the initial training fee was $11,000 also inclusive of GST. The royalty was set at a rate of 5%. This was payable on weekly gross revenue plus GST. There was also a weekly marketing gross contribution of 2% of weekly gross revenues plus GST. Therefore, there was an impost upon gross revenues of 7% on a weekly basis payable to the franchisor.

169 He then executed the business sale agreement. The date of execution is not specified however he recalls signing the document in two places as purchaser and as guarantor. He signed that document in presence of Mr Versace at Mr Versace’s office. On or around 20 July 2016, the licence to occupy the Funk Victoria Square store was executed between Funk Leasing, another company in the Funk Group, Gabjet and Mr Emanuele.76 In that context, Funk Leasing was the principal underlessee of that premises from the lessor. There is no evidence that the lessor/owner of the premises consented to or was aware of this licence agreement.

170 On 22 July 2016, the formal approval of the loan was received from NAB and on the same date, Gabjet obtained a bank guarantee facility for $35,000 from NAB. This was in relation to the lease/licence to occupy and was granted in favour of the lessor, the CCES Inc.77

171 On 22 July 2016, settlement occurred on the sale and purchase of the Funk Victoria Square business and the full purchase price of $410,000 was paid together with the franchise fee that Mr Emanuele had borrowed from his mother.78 The sale included all plant, fit-out and equipment and was on a walk-in-walk-out basis. There was no apportionment for plant equipment in the sale process. Mr Emanuele said that from his point of view, on 22 July 2016, he had invested over $410,000 into the business. He also paid the franchise fee and the training fee plus GST. Additionally, he had also committed himself to a licence agreement to occupy those premises.

172 Mr Emanuele occupied the Victoria Square store on 2 July 2016 and initially he was employed by Gabjet as the day-to-day manager of the store. He went through a training period for a time before he fully took over the running of the business. He maintained one car park. He knew the store’s clients at the time included SA Water, the Adelaide Magistrates Court and the CCES Inc. In his role, he worked on a full-time basis between July and November or December of 2016 and worked in the vicinity of 40 hours per week. He would arrive at work between 6.00 am and 6.30 am and his duties included putting out the newspapers, assessing catering and checking on all of the services in the café. His other duties throughout the day including catering, washing dishes and assisting the barista. He did not do much, if any, serving of customers direct either at the counter nor at tables.76 Exhibit A2, tab 28, p 416.77 Exhibit A2, tab 347, p 2980; cf Demand by the lessor for payment and debit amount of $34,666:

Exhibit A2, p 3314.78 Exhibit A2, tab 9, p 145.

173 In relation to POS information, he said that he inherited what he described as a spreadsheet system from the Damaskoses. This system was a recording on a spreadsheet of invoices received from trade creditors. These invoices would first be put into a folder and then entered onto a spreadsheet. This was a record of outgoings and sales that was in existence at the time he took over. He found that system to be inadequate because it required a manual double entry of invoices by a third party. He could not be sure of the accuracy of the entries that he was reading on the spreadsheet system. He also thought that the data in the current system was prejudiced. For example, the procedure on the close of the business of the day was that the system produced a set of figures but those figures were not reset back to zero. Thus, he could not have a proper understanding of takings and therefore he could not have a proper and accurate assessment of monies to be banked.

174 His expectation was that he would find one ‘closed loop’ system for recording purchases, sales, banking and other financial information. Instead, he inherited a number of systems all of which suffer the possibilities of human errors. This was unacceptable to him.

175 He also found that a stocktake only occurred once per year. He thought that a stocktake should take place at least twice per year at half year and year end. He wanted to establish a POS system within the business so it could accurately record income and expenses within the business on a much more efficient and speedy basis. This was the advice that had been given to him from the outset from Mr Sun. Mr Emanuele’s intention was that the POS system would be used to generate purchase orders, staff would enter invoices into the one system, the system would close the till and automatically do daily balances and it would allow an accurate stocktake.

176 Mr Emanuele received advice from Mr Damaskos that he should not make any major changes during the first six months of the operation of the store to ensure that he became familiar with processes and could make any decisions in a more informed way. Mr Emanuele observed this advice. In the first week or two after settlement on 22 July 2016, he had training with the store’s manager, Ms Mel Cameron. He did most of the things Ms Cameron suggested and he may well have told her that he was intending to change the POS system and that he might have intended to implement more stocktaking.

177 In cross examination, it was put to Mr Emanuele that one of the early things he did in his conduct of the business was to give his staff a pay rise. 79 He was closely cross examined about this decision. I understood the purpose of the cross examination was to identify that he had never discussed that action with Mr Damaskos or Mrs Damaskos before implementing it. He agreed that he did not ask them whether a pay rise to staff was a good idea and the amount of the pay rise (the level of salary previously paid to the staff) was never identified. I understood the further purpose of the cross examination was to show that

79 T277.

Mr Emanuele was not a prudent manager of a business because he so readily gave a pay rise to his staff without an eye on expenses and income. This attack upon a credibility of Mr Emanuele wholly failed. There was no basis for the attack because there was no comparator prior to or after the pay rise and there was no examination of the productivity of those employees prior to and after the pay rise. The only independently verifiable fact is that in the years in which Mr Emanuele operated the business, there was a significant increase in sales.

178 About four to six weeks after settlement, Mr Emanuele began to make some changes within the business. He had previously been introduced to a Mr Roger Close by Mr Damaskos and Mr Emanuele had raised with Mr Close the concerns he had about the POS system. Mr Close then put into place a plan to introduce a new POS system into the business and Mr Sun also became involved in that plan. Mr Emanuele said that Mr and Mrs Damaskos were an obstacle when executing that plan because they were attached to the existing system that they had and that is the basis upon which they received information. In cross examination, it was put to Mr Emanuele that he was already contemplating implementing that system before commencing as a franchisee. He denied that proposition. It is not necessary for me to resolve that matter. Whether or not he was contemplating implementing that system before he became a franchisee is I think relevant only in the context of him thinking about a business that he had been persuaded to purchase having regard to the representations that had been made to him. I do not accept because it is unsupported on the evidence, that any thought given by Mr Emanuele to the POS system prior to becoming a franchisee strikes at the heart of the representation case that he puts before the court. This contention of the respondents is unsupported on the evidence.

179 A new POS system was eventually installed and Mr Emanuele said the advantage of the new POS system was that he could close the till at the end of the day and he could accurately identify sales and purchases. The bank would get an email describing the day’s takings after the business was closed. There would also be a proper accounting done electronically in relation to sales and purchases which did not require a manual spreadsheet system. Mr Emanuele accepted that the cost of preparing and implementing the POS system was in the thousands of dollars however, any change of systems within a business will always have a high upfront cost. This will include the cost of software changes, hardware changes and training for staff. There is then the cost of inconvenience for as long as it takes for people to get used to the system and so any significant change will have a high upfront cost. His belief that he was purchasing a profitable and successful business was the catalyst for Mr Emanuele to examine the POS system and to spend the money on improving that system. The situation would have been different if he had a clear understanding of the true position of that business. I will deal with that matter later.

180 Mr Emanuele also said that when looking through the Microsoft Outlook records on the store’s computer, he found emails from Kindred and their accountant to the respondents. For the first time, he obtained an understanding

that the relationship between Kindred and Mr and Mrs Damaskos was poor and not as it had been represented to him by Mr Damaskos, namely that the relationship had broken down because of the failures by Kindred and the alleged mismanagement of the franchise by Kindred. By then, Mr Emanuele was a franchisee having paid the full amount of the purchase price. When he discovered these emails, Mr Emanuele approached Mr Damaskos who said that the difficulties arose between Kindred and the Damaskoses about the management of the store. Mr Emanuele did not press that discussion because he believed what he was told. He also wanted to keep his relationship positive with Mr Damaskos and so he accepted what Mr Damaskos told him about Kindred. At that time, he knew nothing of the difficulties between the Damaskoses and Kindred, the threat of proceedings or the settlement of the issues as between them. If he had known those matters, he would have taken quite a different attitude. He had been informed from the outset that the issue was one of management difficulties.

181 In the weeks before 10 October 2016, some 10 to 12 weeks after he took over the Victoria Square store, Mr Damaskos commenced raising with him the possibility of taking over the franchise store on Waymouth Street or in North Adelaide. At that time, Mr Emanuele did not know that either of these stores were available for purchase. He had not been looking for another franchise at that time. He had a discussion with Mr Damaskos at the Victoria Square store and he said he should make sure the Victoria Square store was streamlined before thinking about purchasing another business. In that context, part of his streamlining was to introduce the POS system. Mr Damaskos raised with him that there was a possibility of the purchase of another store but he was negotiating with people who were interested in purchasing the Pirie Street store. There was also a discussion about master franchise rights at that time. Nothing came of these discussions.

182 Having heard about the North Adelaide store, Mr Emanuele did not pursue any enquiries about it. He spoke to Ms Cameron who said one was better than the other and he should leave the North Adelaide store alone. Shortly thereafter the North Adelaide store closed.

183 On 10 October 2016, Mrs Damaskos sent an email to Mr Emanuele in relation to the potential to purchase the Waymouth Street store. Attached to the email was a document called “business profile 76 Waymouth Street Adelaide”. This included a page entitled “financial information”. This page contained financial information for the periods 1 July 2015 to 30 June 2016 and in draft for the period from 1 July 2016 to 30 September 2016.80 I refer to the financial information document at p 1264 of the exhibit. This is in the same form as the financial information previously given to Mr Emanuele for the Victoria Square store. There is a reference to a Government department tenanting a vacant building opposite the shop and that three floors remaining vacant in the building. The margins for the operation of the shop are very small. After adding in a manager’s cost of $44,235.75 for the first three quarters of the 2016 year, the 80 Exhibit A2, tab 85, p 1255.

adjusted owner/operator profit is $4,980.52. There was otherwise a deficiency. The gross expenses otherwise exceeded the gross profit by an amount of $39,255.23. For the fourth quarter of the 2016 year, there was after a very small adjustment for manager’s costs, a very small net profit and an adjusted owner/operator income of $26,577.02. I have earlier dealt with that arrangement of the allocation of expenses and calculation of profit. To credit a manager’s costs is the wrong accounting approach because it would always be necessary to pay a manager and in any event the shop would have no value unless it could generate sufficient profits over and above a manager’s salary. This shop, on these figures, could not.

184 There were discussions between Mrs Damaskos and Mr Emanuele after 10 October 2016. Mr Emanuele expressed interest in purchasing the Waymouth Street store and also interest in maintaining the existing manager. He said he looked at the business profile and excluded fees. He said that absent those fees and looking at other benefits, there was a potential for growth. He saw also a growth potential in the Victoria Square store however, the advantage of the Waymouth Street store was that it had a bigger kitchen and he considered he could do far more preparation in that facility with greater efficiencies. He could also swap staff members between stores.

185 Mr Emanuele said that it was difficult to make an assessment of the profitability and he believed there was nothing fundamentally wrong with the store. He thought that the store was just disorganised and had the wrong accounting system.

186 Mr Emanuele had a discussion with Mr Adrian Mercorella a week or two after receiving this Waymouth Street business profile. A discussion took place at the Victoria Square store and it was in and amongst the discussion that was going on about the POS system. Mr Emanuele thought that Mr Mercorella was telling him the store would deliver the bottom line he was planning eventually. When he had discussions with Mr Damaskos about the Waymouth Street store, Mr Damaskos reiterated a number of times that it was more than likely that the three floors of the vacant building previously occupied by the Australian Tax Department (“ATO”) which sat immediately opposite this shop would be tenanted and he said that as a result, that it would be worth at least another 50 to 60 cups of coffee per week plus any ancillary trade. Mr Emanuele accepted what was said to him by Mr Damaskos.

187 In the period between November and December 2016, Mr Emanuele continued to focus upon the procedures for accounting and bookkeeping at the Victoria Square store. He was closing tills using the new POS system, which allowed him to measure the hours that his employees were working through that system and that is the basis upon which he paid his staff. One difficulty he had was that he did not know whether staff were ordering stock correctly although he knew his weekly expenses. Each day, invoices were collated, dropped off to the bookkeeper and the bookkeeper then entered them into an accounting system

called Xero. On occasions, invoices went missing which is the weakness of the system. For example, he could say that before the POS system, a banking report was generated by the system at the end of each day and reconciled with the cash in the till and the EFTPOS balance, but he could not be sure whether or not that was accurate. All he could say was that the daily sales were probably accurate. He had no way of finally testing the accuracy of those figures.

188 In the week before 21 December 2016, a discussion occurred between Mr Emanuele and Mr Damaskos. By that time, Mr Emanuele was using the new POS system as a way to keep track of when his employees started and finished work and whether the business was over-rostered. Prior to that time, staff hours were tracked by using a sheet on a wall. On 21 December 2016, Mr Damaskos sent an email to Mr Emanuele attaching a summary of the agreed terms for the purchase of the Waymouth Street store. Then, in the period between December 2016 and January 2017, Mr Emanuele appointed Ms Rachel Gordon as the manager of the Victoria Square store. He had decided to undertake other duties and he was spending his time between focusing upon the Victoria Square store and in the afternoons making his enquiries about the Waymouth Street store. He focussed on the end of day operations in the event that something went wrong. As part of that process, he gave Ms Gordon a carpark and she was part of the POS overhaul.

189 On 29 March 2017, a franchise agreement for the Funk Waymouth Street store was entered into by Funk Franchise, Jetgab and Mr Emanuele as guarantor.81 The initial franchise fee was $30,000 plus GST and the initial training fee was $10,000 plus GST. There was a royalty fee of 5% of weekly gross revenues and a weekly marketing contribution of 2% of weekly gross revenues, both of which were plus GST. Notwithstanding, the sale of business agreement for the Waymouth Street store was not executed until 28 April 2017.

190 On 29 March 2017, the sale and purchase agreement for the Waymouth Street store was executed and Mr Emanuele and Jetgab did not need to obtain finance to purchase the store. It was not until 28 April 2017 that Jetgab and Mr Emanuele entered into the franchise agreement for that store by signing a sale of business agreement and guarantee.

191 By that time, the POS system overhaul was about 60% to 70% complete.

192 Mr Emanuele said that at the time that he executed the contract for purchase of the Waymouth Street store, he did not know that the Victoria Square store was trading at a significant loss. If he had known that fact, he would never have entered into the agreement for the Waymouth Street store. He then set about to do an overhaul of the POS system at the Waymouth Street store and Mr Close was involved in that overhaul. He made sure that the database was clear, he installed scanners to scan in the drinks and he said the aim of the POS system and the rewards system was to change customer behaviour. There was a system

81 Exhibit A2, tab 16, p 212.

called “Rewardle” which is a common enough system amongst cafes. A card gives customers a discount after a certain number of purchases and he had a number of meetings from the people from Rewardle. He was told that the Rewardle card allowed him to capture customer details.

193 Eventually on 13 June 2017, Jetgab obtained a loan facility for $220,000 from NAB in order to settle upon the purchase of the Funk Waymouth Street store. This was contrary to the initial plan of Mr Emanuele.82 Prior to that, on 13 June 2017, Gabjet had obtained a business options instalment loan of $215,000 from NAB.83

194 As at 30 June 2017, Mr Emanuele was drawing a small wage from the Victoria Square store of about $500 per week. His wife was drawing a similar wage. He paid her a salary because she was giving him assistance. By 12 July 2017, settlement occupation of the Waymouth Street store had occurred. Ms Nissrine Dater was the day-to-day manager of that store and Mr Emanuele fulfilled the same role there as he fulfilled at the Victoria Square store.

195 Very soon after the settlement of the Waymouth Street store occurred, and Jetgab had paid the purchase price of $220,000,84 the issue of the cost of electricity for the Waymouth Street store arose. On 18 September 2017, Mr Emanuele sent an email to Mrs Damaskos regarding the price for the consumption of electricity at the Waymouth Street store.85

196 Very early on, there was a challenge to electricity bills.86 In his email of 18 September 2017, Mr Emanuele asked to see the original bill and asked whether there was a separate meter for the store and if so where was it. It was apparent that Mr Emanuele was concerned about the very high level of electricity charges for this store. On 19 September 2017, Mr Emanuele had a telephone conversation with Mr Craig Ellis of the agents in which Mr Emanuele asked whether he had a right to view the original electricity bills. Mr Ellis told Mr Emanuele that the landlord was allowed to charge a percentage more above a prescribed amount.87

197 There appears to have been at least a tacit acceptance by the respondents that the cost of electricity was too high. Mr Damaskos wrote to the agent Knight Frank requesting a lower electricity tariff for the Waymouth Street store.88

198 In about October 2017, Mr Emanuele was satisfied that the POS system had been fully implemented and from his point of view, it was very close to giving reliable financial results. When he began analysing these results, he noticed that the businesses were not doing very well. He could identify losses being sustained as a result of the trading. Mr Emanuele thought his rent should be no more than 82 Exhibit A2, tab 349, p 3050.83 Exhibit A2, tab 348, p 3013.84 Exhibit A2, tab 19, p 283.85 Exhibit A2, tab 129, p 1739.86 Exhibit A2, tab 129, p 1739.87 Exhibit A2, tab 128, p 1737; tab 130, p 1734; tab 131, p 1749.88 Exhibit A2, tab 133, p 1754; tab 136, p 1779.

10% of turnover, cost of goods sold should be around 30% to 35% and staffing costs should be no more than 30% to 35%. At the time, his stock target was 26% and his wages target was 27%. He could keep control of these matters by a daily and weekly POS report. On 19 November 2017, Mr Close generated a report entitled “weekly trade out for the Waymouth Street store”. Mr Close recommended and Mr Emanuele decided that he needed to meet the stock and wages figures that are set out in the report. Mr Close said the sales income on the stock target and on the overhead expenses would leave Mr Emanuele with a trading profit of only $441.28 per week. He said that the budget of $21,000 for expenses was based upon part turnover and was rounded up for owner’s payments of $500 per week, telephone and internet costs of $30 per week and carparking for managers for both stores of $135 per week. Even if the stock target of 26% was achieved, this would only generate a profit of $400 per week and Mr Emanuele knew the business could not survive on this type of return. One of the things he found difficult was that he could only use Funk approved products and so he could not act to stem the losses he was incurring. The gross profit percentage was about 62% and when Mr Close listed what had happened in the last 12 months, Mr Emanuele made the decision to reduce costs by 10%. He then produced weekly trade outcome reports, the last of which was produced on 1 April 2018. He found it very difficult to get on top of wages and cost of goods sold.

199 By email of 17 April 2018, sent from Mr Emanuele to Mr and Mrs Damaskos, Mr Emanuele informed that it is his intention to sell both stores as soon as he can within reason. By return email of 17 April 2018, Mr Damaskos said that he would look for possible purchasers.89

200 Mr Emanuele found he was paying $1,000 per week as electricity cost for the Waymouth Street store and he could not understand why it was so expensive. He was able to compare it to the costs incurred in the Victoria Square store which was approximately $5,000 per quarter, which was less than half the cost of the Waymouth Street store, and the Victoria Square store was a much bigger store.

201 Mr Emanuele was provided with the monthly invoice from Knight Frank in respect of electricity charges and Mr Emanuele requested to be present at the next meter reading to see the original bill. He never saw the original bill. Mrs Damaskos recommended that Mr Emanuele meet with the agent. The meeting occurred and Mr Damaskos was present. The agent showed him the meter reading but not the original bill. Mr Emanuele was convinced he had been overcharged for electricity.

202 On 26 September 2017, Mrs Damaskos sent an email to Mr Emanuele attaching a tax invoice for rent with monthly electricity charges of $4,231. 90 Mr Emanuele knew that with charges of that rate, the shop was not sustainable and asked about installing his own meter. He got no help from Mr Damaskos. In

89 Exhibit A2, tab 164, pp 1897-1898.90 Exhibit A2, tab 134A, p 1765A.

an email of 10 November 2017, Mr Damaskos told Mr Emanuele that nothing could be done to lower the electricity tariff.91 Mr Damaskos told Mr Emanuele that there was no alternative but to pay for the invoiced amounts. He then said:

Going forward, my only advice can be to make staff fully aware to be mindful of instore appliance use.

203 As I said at the time in evidence, I considered that response to be very surprising. This is a sandwich bar which must have appliances operating in order to serve customer needs at peak demand times.

204 On 6 December 2017, Gabjet refinanced its business loan with NAB and obtained a business options instalment loan of $295,230 together with a replacement bank guarantee for $35,000.92 On the same day, Jetgab obtained a business options instalment loan of $287,850 from NAB in relation to Funk Waymouth Street. This instalment loan superseded the facility that had earlier been obtained by Jetgab on 29 June 2017.93

205 Subsequently, there was a meeting between Mr Emanuele and Mr Damaskos. By that time, the relationship had broken down. Mr Damaskos expressed his unhappiness with the situation. Following that meeting, Mr Emanuele got the company Benchmark Business Sales and Valuations (“Benchmark”) to value the businesses. He received those valuations and decided it would be very hard to sell the businesses.

206 From that time on, Mr Emanuele did everything he could to reduce costs. He reduced the number of employees but was still required to pay such things as marketing funds. He paid his parking cost because he needed to pick up supplies and deliver them. Once the businesses came to an end, it was necessary for him to refinance loans. He did receive an income from the Waymouth Street store in the financial year ending 30 June 2018 and this was related to a managerial role. When he received the breach notices from the respondents on 5 October 2018, he was satisfied that the relationship had reached a point of irretrievable breakdown. He was looking for a mediation but was prepared to go to court and use an injunction proceeding in an attempt to restrain the respondents. If he could not restrain the respondents, he would lose everything. He had nothing to bargain with if that was the case.

207 Following the termination of the businesses, Ms Gordon made a claim for unpaid annual leave. This was after the businesses had been repossessed by Funk Group. The outstanding employee entitlements of $2,658.76 on the accounts related to Ms Gordon. He was aware that Ms Gordon intended to recover that amount. He was given some advice that the obligation to pay Ms Gordon could be transferred to the Damaskoses. He did not attend a conference at the Industrial Court about this claim because he thought the claim had been resolved.

91 Exhibit A2, tab 133, p 1754.92 Exhibit A2, tab 350, p 3087.93 Exhibit A2, tab 351, p 3106.

208 Ultimately, Mr Emanuele was locked out of both the stores at Victoria Square and Waymouth Street. Despite that, Jetgab and Gabjet had, respectively, owned the plant and equipment, fixtures and fittings at both stores. As a result of being locked out, those companies lost the use and control of that plant and equipment and had lost the realisable value of them.

Kindred Group209 Mrs Marissa Bueti (“Mrs Bueti”) gave evidence. Mrs Bueti is an accountant

employed by LBH Accountants as an associate and senior accountant. She has been employed there for about 17 years and is now partner of that firm. She was a director of the company Kindred and she held that role between 2002 and 2016. Her husband Mr Giuseppe (Joe) Bueti (“Mr Bueti”) became a director of Kindred on 1 March 2010 and he remains a director of that company. Mr Bueti has always been involved in the hospitality and the greengrocery trade. Mr Salvatore (Sam) Izzo (“Mr Izzo”) was a director of Kindred between 2002 and 2017. Mr Izzo’s background is in retail and as a financial manager. Mrs Annunziata Izzo (“Mrs Izzo”) was also a director of Kindred between 2002 and 2016 and her background is also in retail within the same business as Mr Izzo.

210 The history of the involvement of Kindred with the Funk Group commenced with Mr Bueti and Mr Izzo who were looking to get into the hospitality industry in a bigger way. They saw and answered an advertisement advertising a Funk Franchise available for purchase. The plan was for Mr Bueti and Mrs Izzo to be working within the franchises on a day-to-day basis if they were acquired by Kindred. Mrs Bueti said that over time, Kindred became involved with Funk in the operations of the Victoria Square store and then the Angas Street store. Kindred was not incorporated to acquire those franchises and it had previously operated in various businesses. Mrs Bueti had a role within the stores as the accountant for the business. On occasions, she would help out in the businesses when she had a day off.

211 When Kindred became interested in purchasing the Victoria Square store, Mr Damaskos provided financial information to Mrs Bueti for both the Victoria Square store and the Waymouth Street store. In an email from Mrs Bueti to Funk management of 18 January 2010, addressed to the attention of Mrs Damaskos, Mrs Bueti informed Funk that she had looked at the figures supplied for the Victoria Square and Waymouth Street stores. She asked for information for the December 2009 quarter. She indicated that for the Victoria Square store, the asking price is excessive on the current turnover when compared to the turnover of the Waymouth Street store. She said when loan repayments are taken into account, assuming a finance of the whole purchase price of $400,000 and royalties of 7%, the result is negative. Mrs Bueti then asked for more information to enable Kindred to make an informed decision. She asked for a breakdown of the employees at each location, their hours worked and their hourly rates; an indication of the percentage of catering for each of the stores in the turnover; what plans there were for keeping up with society trends in relation to food and coffee to remain competitive with other franchise systems such as Gloria Jeans

and Cibo Espresso; how often, for example, shop refits are to be done; and for an indication as to what is planned for the Waymouth Street store and the planned move of the nearby ATO tenants to Franklin Street.

212 A response was sent by Mr Damaskos on 19 January 2010. He said he could not yet provide the December 2009 figures because of work being incomplete. He then set out a return on investment calculation for each store. There is no return on investment for individual financial positions because of each person’s different circumstances. He said in relation to the asking price for the Victoria Square store, the fit out of the store was in excess of $400,000 and it has only just completed its second full trading quarter. He said the asking price had been diligently reviewed by the solicitors DC Strategy and an accountant and reflected an owner/operator model and are competitive. The name of the accountant is not provided.

213 For the first quarter, the 13 weeks re-adjusted trading was shown at $44,310 plus expenses being cleaning and tea towels. There was then a deduction from the gross takings of 7% and that was then amortised out into a 51-week trading period. A manager’s wage, a wage saving and a bottom-line figure of $211,327 was added which was said to be a return on investment of 42%. No employee breakdown is given and it would only be given if negotiations proceeded. Mrs Bueti said the catering percentage varies between 7% and 10%. The Funk Group did not consider Cibo or Gloria Jeans as direct competition and they continually reviewed existing product ranges and offerings to ensure something new and different is available. Shop refits will depend on the age of the store and the plant and equipment. Usually, there is repainting at 5 years and then Mrs Damaskos says:

5. Please conduct your own due diligence regarding the ATO. The ATO is only a small component of the existing trade.

214 Mrs Bueti understood this material to mean that the (13 weeks) referenced was to the sales and the turnover of the business for a 13-week period. The 7% figure related to the franchise and marketing fees. She understood that the amortisation over the 51-week period and that the manager’s wage of $65,000 would be taken over by her husband and Mrs Izzo. They were hoping for a higher amount to be shown as profit after taking into account the manager’s wages. At that stage, the Funk Group were only looking at selling one of the businesses.94

215 On 9 February 2010, Mrs Damaskos sent a copy of the second quarter trading to 31 December 2009 for the Victoria Square premises. It showed the net of GST, the turnover was $201,203.09. The cost of goods sold was $70,674.25 and gross profit turnover was $130,528.84 which was 64.87% of the net turnover. Therefore, the cost of goods sold was 35.13%. After taking into account expenses, the net profit was $34,317.94 which is inclusive of a manager’s wage. If annualised, the wages in total would be $224,000 (being $56,540.51 multiplied

94 Exhibit A2, vol 14, tab 378, p 3402-3405.

by 4). However, during Kindred’s operation of the business, no manager’s wage was included in that wage’s cost. That became a point of contention between them.

216 In an email to Mrs Damaskos of 15 February 2010, Mrs Bueti informed Funk that the Kindred were in negotiations with their bank. Before those negotiations could go any further, the bank had requested financials for the year ending 30 June 2009 and then interim financials for July 2009 to end of January 2010. These were required to be prepared by and signed off by an accountant.95 In a response of 15 February 2010 sent by Mrs Damaskos, Funk advised that the January 2010 financials had not been finalised and that would only be done at the end of the quarter. Mrs Damaskos could email weekly sales and cost of goods sold. She said financials are prepared on a group basis so accountant prepared financials are not available on an individual store basis.96 I consider that this statement is untrue. So much is apparent from the material sent to the Funk Group in 2016.

217 Mrs Bueti informed me in evidence that, as an accountant, she would not accept that explanation. It indicated to her that Funk were not completely cognisant of the stores’ financial positions. She was familiar with electronic accounting systems including the capacity of those systems to generate reports as and when required. These include drawing out from any electronic systems separate accounts in relation to different profits centres in the business. She said by 2010, that was the capacity of even the most basic accounting system.

218 On 15 February 2010, Mrs Bueti emailed Mrs Damaskos and said that before they could go any further with the negotiations with the bank they needed financials for the year ending 30 June 2009 and interim financials for the period to 31 January 2010. In a further email of the same date,97 Mrs Bueti told Mrs Damaskos that she had been over the matter with the bank and they insist on financials as they cannot make a decision based upon a client-prepared spreadsheet. Mrs Damaskos said the only other thing she could think of is if the accountant could prepare a statement similar to the spreadsheet and sign off on it as being a correct record as what is being lodged for the quarter BAS reports for the particular location. She said this is a request that is often made by the banks in relation to her own clients. In a response of 15 February 2010,98 Mrs Damaskos said she would ask the accountants to prepare profit and loss reports (I presume cash statements) to 30 June 2009 and to the two quarters to 31 December 2009 and place them on letterhead. This is a peculiar response because if that can be done, then Mrs Damaskos’ earlier statement that it could not be done, is incorrect.

219 In an email to Mrs Bueti of 17 February 2010, Mrs Damaskos provided to Mrs Bueti the figures from December 2009 and noted that depreciation has been 95 Ibid, p 3411, 3412.96 Ibid, p 3411.97 Ibid, p 3415.98 Ibid.

included for 30 June 2009 for the Victoria Square store.99 In a later email, Mrs Bueti confirmed that she had received a trading and profit and loss statement for the year ending 30 June 2009 and for the period ending 31 December 2009. Her belief was that the store had not been operating for an entire financial year at that stage.100

220 Upon receipt, Mrs Bueti considered those financial statements in connection with her analysis of the opportunity to purchase the Victoria Square store and she considered that the opportunity was better than she first considered because of the figures she had been provided and the location. These were then provided to the bank and finance was approved. Kindred borrowed $460,000 to purchase the business. The sale of business agreement was executed on 7 May 2010 and in entering into that agreement, Kindred relied upon the information she had been provided by Mr and Mrs Damaskos, the representations Mrs Bueti had received and in particular the content of the financial statements. All of these led Kindred to enter into a sale of business agreement to pay a purchase price of $440,000 and to execute the franchise agreement.101

221 In her evidence, Mrs Bueti said initially she had a lot of contact with Mrs Damaskos about how the business was to be conducted and before issues of difficulty arose, their relationship was really good. That relationship turned sour when Kindred identified there was something wrong with the business.

222 Mr Sam Izzo sent to Mrs Bueti an email of 21 November 2012 concerning the termination of the trading of Kindred in the Victoria Square store. The purpose of the email was to test the information that had been given to Kindred and in particular the wages figures. The problem that had been encountered by Kindred was that it was not possible to generate anywhere near the gross income that had been represented to them at the time of the purchase of the business. Mr Izzo then set about to test the 2010 figures to show that Kindred did not believe the manager’s wages were included in the profit and loss figures. This meant there was an extra salary of $65,000 to pay which was essentially the equivalent of the profit being generated. That in turn affected the value of the business. The net result was not what they expected to achieve and it was not what they could afford having regard to the cashflow of the business.

223 A dispute then arose with Funk about the business.

224 Mrs Bueti looked at what had been sent to her by Mr Izzo and she agreed with that interpretation. If a wage figure of $30,000 was added back, it was only adding back the wage of one employee to the bottom line figure which was not a full manager’s wage. There was an assumption from the outset that the manager’s wage of $65,000 would be added back. When that was done (the allowance for the manager’s salary for one manager) then the net benefit from a purchase of the business was $146,000 not the $410,000. This indicated there 99 Ibid, p 3418.100 Ibid, pp 3420-3421.101 Ibid, p 3487; ibid Exhibit A2, tab 384.

was a substantial problem with the value of the business, the profitability of the business and its future as a business. That led to a significant difficulty between Kindred and the Funk Group.

225 In 2012, Kindred instructed Haarsma Lawyers. The firm of solicitors DC Strategy were already working for the Funk Group. Haarsma Lawyers sent a letter to DC Strategy dated 10 September 2013.102 Due to the length of the letter, it is not of assistance to set it out in full. In summary, Kindred offers to Funk Group to repurchase the Victoria Square business and the Angas Street business, then having been purchased by Kindred for a total of $800,000 payable as to $150,000 on handover, $150,000 on 10 January 2014 and $500,000 on 1 April 2014. There are terms to secure those debts in the event there is a purchaser of the business. There are negative covenant terms under which a purchaser will not:

Dispose of assets of the two businesses except in the ordinary course of business;

Kindred will have a right of refusal in relation to any sale of any of the businesses, as well as in relation to the assignment of any of the leases;

That there be arrangements in relation to the position if there is a default in payment, arrangements in relation to the replacement of security given by Kindred;

Arrangements in relation to the handover of the businesses and all administrative steps that are necessary in relation thereto;

Arrangements of payment of the debtors of the business from the settlement amount; and

Arrangements for the execution of settlement agreements.

226 The last paragraphs of the letter read as follows:

We understand that all of the above terms are now common ground…

We also understand that given the matter appears to be settled, your client will take no further action, without providing reasonable written notice to us…

We are instructed to advise that the above represents our client’s final position…

Could you please take instructions…

227 Mrs Bueti said there had been ongoing negotiations between November 2012 and September 2013. The position had changed during the negotiations on many occasions and that was a cause of significant cost for Kindred.

102 Exhibit A2, tab 385, p 3558-3563.

228 Part of the settlement process was to do with the Angas Street store. It had been acquired a year after operation commenced at Victoria Square and she was not involved in the purchase price. Mrs Bueti did provide financial statements for the year ending 30 June 2012103 and comparative figures for the year ending 30 June 2011.104 These were 100% accurate and Kindred found that only a very small profit was generated after salaries. There was therefore no return on capital indicating that there was no benefit in the purchase of the business. Also, for the 2011/2012 financial years, she did not charge accounting fees. They would normally be of at least $600 per annum and all the work was done in her own time. The normal charges would be in the order of $2,500. There was carparking for the two directors and office expenses were incurred in relation to the business. There were staff amenities and costs. The company took the staff out for lunch a couple of times and there were staff sundry costs including medicals. The working directors were Mr Bueti and Mrs Izzo. They were paid a total salary of $79,000 in 2011. They were only paid a salary of $35,000 each in 2012. This was a full wage for one director and a part wage for the other. The company had to substantially reduce all wages including the directors in order to survive. All wages were connected with the Victoria Square store.

229 In relation to the settlement, the payment of $805,000 did not take into account the trading losses from the businesses.

230 Upon the letter of offer, there was an immediate response from DC Strategy accepting the terms of the settlement. There was to be a legally binding agreement to settle all aspects of the dispute but the exchange of the letter of offer and its acceptance was the contract. There was some delay. Mrs Bueti suffered some ill health and she was not involved in the arrangements for the finalisation of the dispute, she said she left that to others.

231 In its contentions about what had occurred prior to the purchase of the businesses, Kindred alleged it had relied upon certain conduct by Funk in entering the Victoria Square franchise agreement which was misleading and deceptive.105 From its point of view, the misleading conduct was that the wages were not correct and had been understated in the figures provided. Mrs Bueti formed that view after looking at the employee summary and the payrates. She also looked at the cost of goods sold, sales and wages. She conducted this analysis about three or four months into the trading. Mrs Bueti lowered the stock levels as much as was possible and they were “scraping” to keep the stock and percentages down and stock would turnover quickly to keep profit margins going. She said they were never able to achieve 33% to 35% on cost of goods sold. She said Kindred was able to achieve 30% of cost of goods sold if the stock was stripped back to the minimum and they could not go lower that 30%.

103 Ibid, tab 380.104 Ibid, p 3466.105 Exhibit A2, tab 387.

232 Things moved very quickly following the exchange of letters on 13 September 2013. There was handover of the Victoria Square store on 1 October 2013 and on that date $150,000 was paid. The two further payments of $150,000 and $500,000 were paid on time in 2014. There was then a deed poll of settlement of 25 June 2014 and a reoccupation by the Funk Group after 24 June 2014.

233 After Kindred ceased to be involved with Funk Group, Kindred purchased the East Terrace Continental Deli, conducted from 6 East Terrace Adelaide.106 That business was operated from April 2015 until October 2019.

Mr Rundle234 In his evidence, Mr Rundle informed me that he is employed by 360 Private

as an accountant and that had commenced about 25 years ago. He said in 2016, his specialities were small to medium enterprises and family groups involved in manufacturing, professional work, small businesses, retail, general accounting, taxation, preparation of financial statements and consultancy advice. He said he has worked for a number of franchisees and since 2007 to 2008 his firm had looked after the Bakers Delight franchise as well as the Lenard’s Chicken franchise.

235 In 2016, he acted as the accountant for Mr Emanuele’s mother and as a result of that connection, he was approached by Mr Emanuele to obtain advice and assistance regarding a business he was looking at purchasing.

236 Mr Rundle said he first had a meeting with Mr Emanuele on 26 May 2016.107 He can recall being shown the business profile 250 Victoria Square document and he and Mr Emanuele looked through the financial information on p 41 of the document. Mr Emanuele asked him if he thought that the financials looked OK. Mr Rundle looked at the financials and saw a profit at the end of the year and said from a franchisee point of view he thought the numbers were based on the summary review and looked reasonable from an investment point of view. It was a company owned store, it was not being sold by a franchisee and he therefore immediately looked at the bottom line to see if there was a profit outside of the owner’s drawings. The question he addressed was whether there was enough profit to support a return on the investment. He said the traditional advice he would always give a prospective franchisee is “you might as well save yourself the money and the cost of borrowing money and go and find a job for the same amount of return if all you are getting is a proprietor’s salary”. That is because there would be no return on investment on the capital you put in.

237 Mr Rundle said after looking at the Financial Information documents, he was able to identify that in the financial years he was looking at, there was a net profit position generated and he then looked at the owner’s wage entries to determine whether there was a return on investment. He said when he looked at

106 Exhibit A2, vol 21, p 5603.107 Exhibit A2, vol 2, tab 33.

the entries in relation to the manager’s wage, he knew the salary and wages were included above the line and then it was added back to profits. Mr Rundle said if you are adding back the manager’s cost for the purpose of selling, it can only be something that is also being derived by the owner and he therefore interpreted the $60,000 as being something that would otherwise have been included in the wages of $220,000. In terms of the figure available to operator of $126,000, he thought that relative to the net profit of $117,000 and in the context of the owner’s salary plus profit, there was an amount clearly available to an owner/operator.

238 Mr Rundle saw the asterisks and the entry “Funk Group expenses excluded”. He did not query that at the time and said if financial information was put into a business profile document and given to a prospective purchaser/franchisee, he would trust that information as being complete for the purposes of providing information and making an assessment of the business. If there were expenses that were relevant and therefore applicable to the store, he would make the assumption that they would be included. He did not think it was necessary to consider whether there might be other non-group related expenses incurred by the franchisee purchasing the business. As far as he was concerned, any business profile document of this nature must be complete and there should not be any omissions.

239 He understood that the figures were in relation to a particular store, that they were complete and that there was a focus on the 2015 financial year because it was a complete year. Mr Rundle said that part years are sometimes hard to interpret because of seasonality and when he saw that the franchisor “took over the store on 2 October 2013” that confirmed in his mind why the 2014 trading year was only a part year.

240 In his discussion with Mr Emanuele, he did not raise with him any possibility that there was a previous franchisee or that Mr Emanuele told him anything which led him to understand that there was a previous franchisee. In light of all of that information, he advised Mr Emanuele that there would be a return on capital and they then discussed how the business might be financed.

241 Mr Rundle sent an email to Mr Emanuele and Ms Edwards at NAB on 31 May 2016. He informed Ms Edwards that he had met with Mr Emanuele to discuss the opportunity to purchase a business and he said he had all of the financial information. He would like to introduce the parties and he asked for a meeting. At that time, all he had was the business profile document and he can recall Mr Emanuele saying to him that there was other information available but he does not know when he became aware of that. From the content of his email, he only had the business profile document.

242 He was aware that NAB had specialised bankers for franchise lending and he was waiting to hear back from Ms Edwards. He passed this on to

Mr Emanuele in an email.108 He heard back from Ms Edwards and a meeting was arranged for 3 June 2016. On that date, he received the documents that were attached to an email between Mrs Damaskos and Mr Emanuele of 3 June 2016. The purpose of the meeting was to get the ball rolling on an application for finance and he does not specifically remember but either Ms Edwards requested the documents to be provided or he anticipated the request and made arrangements for the documents. In an email to him of 5 June 2016, Mr Emanuele asked Mr Rundle to look over the disclosure documents that he received and to comment on the 2015 Funk Franchise Trust and other trusts. He received the disclosure document and saw Schedule D, payments to third parties, and the schedule of list of indicative costs.109 Mr Rundle said he spent no significant time looking at those documents because he had the summary of them within the Business Profile document which set out the profit and loss position of the business. He would trust that document and he thought that indicative costs in a range might not be as relevant. He would rather see the costs actually incurred cost. Also in the email, Mr Emanuele asked whether he could read the franchise advice statement and sign sections 1 and 3. He would then pass it on to the solicitor.110 Mr Rundle then sent to Mr Emanuele an email of 6 June 2016 in which he said he had looked through the documents and answered any queries. He asked Mr Emanuele if he would like to catch up and talk about signing the documents. Mr Rundle then sent an email to Ms Edwards at NAB and Mr Emanuele of 7 June 2016 in which he said he did not know whether Ms Edwards and Mr Emanuele had gotten together but if there was to be a meeting, it should happen.111 There was then a series of emails between Mr Rundle and Mr Emanuele of 8 June 2016.

243 Mr Rundle recalls having several discussions with Mr Emanuele about the statement concerning independent advice. Mr Rundle was of the view that he would be happy with the broadness of the question that was being asked in respect of his sign-off. Eventually he did send back to the solicitors a statement of advice.112 He did not sign the document as there was no place for him to sign. He completed it on the understanding that it was all that was required of him. He took that task very seriously and he needed to be sure of what he was signing and what he was agreeing to. He says that if the document had been more detailed, he may not have signed it. For example, if it had required him to state that he had reviewed the cash flows of the business and that he was comfortable with the profit and loss as being fair and reasonable, he would not have signed it as he did not have had that level of information. However, given the broad nature of the material that he had, he was comfortable in signing the document.

244 The NAB did make a requirement for a 12 month cashflow projection.113 Mr Rundle became aware of an exchange of emails between Mr Emanuele and Ms 108 Ibid, p 669, email from Mr Rundle to Mr Emanuele 27 May 2016.109 Ibid, tab 41, p 785 et seq.110 Ibid, tab 47, p 894.111 Ibid, tab 48, p 895.112 Ibid, tab 57, pp 922-924.113 Ibid, tab 58, pp 926-927.

Edwards. In particular, he was aware of an email of 23 June 2016 which was a series of questions or comments by Ms Edwards and a series of responses in red.114 He said that in relation to any cashflow projections, he did not prepare them and if they were prepared and forwarded, he had nothing to do with it. In relation to the return on capital calculations, his state of mind at the time was that servicing was going to be tight on a borrowing of $275,000. He was not involved in that process, although he was aware of it, and he was not asked to consider it. In relation to the responses in red at Exhibit A2,115 he did not have any input into those documents. He did have an understanding that Mr Emanuele owned some property and did not have an understanding he was selling those properties or that he needed to sell them to service debt. Mr Rundle also did the application for the Australian Business Number (ABN), the tax file number and the incorporation of Gabjet.

245 After the consultation with Ms Edwards, Mr Rundle really did not have anything significant to do with the matter.

246 Mr Rundle knew that the Victoria Square store was a company owned store and that the disclosures on the financial documents were those incurred as a company owned store. He did not turn his mind to whether any particular expenses might have been omitted. He is aware that there was no interest expense included, but said that as profit and losses for the sale of businesses work on earnings before income and tax generally, he would expect interest to be either added back or not included at all. He did not provide that advice to Mr Emanuele when he was considering the potential profit and interest but it is something he ought to have considered. He gave no advice to Mr Emanuele in relation to the proposed franchise agreement because his obligations were purely accounting. He knew that Mr Emanuele intended to borrow money and he would be paying interest on that money.

Mr Marinos247 Mr Marinos, an earlier franchisee of the Waymouth Street store gave

evidence. He was franchisor for a number of years and his franchise was bought back from in November 2012.

248 He became aware of the opportunity through Versace Business Services. He was provided with financial information. He had previously looked at Victoria Square store and thought that the financials for the Waymouth Street store were not as bad as the Victoria Square store. He spoke with Mr Damaskos about the opportunity and said he would look at it when he returned from overseas at which time he contacted either Mr Versace or Mr Damaskos. He then had a conversation with Mr Damaskos about the possible relocation of the ATO and WorkCover from their Waymouth Street building. Mr Marinos said he insisted upon the insertion of a special clause within the business contract that if the ATO and WorkCover moved then the business would be purchased back by the Funk 114 Ibid, tab 59, pp 928-929.115 Exhibit A2, pp 928-929.

Group. Having now viewed the contract, I am unable to accept that evidence. I found the evidence of Mr Marinos generally unsatisfactory and I do not accept this part of his evidence.

249 He said that if he was asked to give any recommendations about Mr and Mrs Damaskos, he would have said that they were not trustworthy, they are liars and thieves. In relation to the financials, he would have told any prospective purchaser not to touch the Waymouth Street store for the price they are asking because their figures are wrong. On my assessment of the evidence given by Mr Marinos, I was unable to accept his assertion that there was a buy-back clause within his contract. I am satisfied from the exchange of correspondence and emails that he either genuinely had a health problem or feigned a health problem and relied upon the Damaskoses buying that business back from him. There is no clear indication how that process started but in the context of their relationship, I accept the evidence of Mr and Mrs Damaskos and I therefore reject the evidence of Mr Marinos that the business was repurchased following Mr Marinos announcing that his health had failed. Notwithstanding, I do accept the evidence of Mr Marinos which was not seriously challenged, that if he was asked to express a view of the business at the Waymouth Street store, he would have said that the Damaskoses were not trustworthy, that the business was not worth the purchase price and that it should not be pursued.

250 It is not necessary for me to decide whether that view of Mr Marinos was correct. The important feature here is that I am satisfied that this is the point of view he would have expressed to any potential purchaser of the business. There is at least an indirect suggestion that the Damaskoses were aware of the animus of Mr Marinos directed towards them. In the disclosure documents, they did not disclose the prior proprietorship of the Waymouth Street store by Boss 260 Pty Ltd, the company owned by Mr Marinos. I am not satisfied on any of the evidence given by Mr and Mrs Damaskos about why they did not make the disclosure of that proprietorship. I remain satisfied that if that proprietorship had been disclosed as it should have been, and the failure to disclose is a breach of the Franchising Code, then any enquiry directed towards Mr Marinos as the controller of Boss 260 Pty Ltd would have been met with an extremely unfavourable assessment of Mr and Mrs Damaskos and the value of the business. That is a matter that I will take into account in my assessment of the case of the applicants in relation to that business.

Mr Mercorella251 Mr Adrian Mercorella commenced providing accounting advice to

Mr Emanuele in January or February 2017 after Mr Emanuele had purchased the Victoria Square store. Mr Mercorella is the principal of Mercorella and Co accountants specialising in taxation, management accounting and superannuation. His business is generally involved in small to medium businesses including health professionals and cafes. He previously worked with North East Isuzu and came to know Mr Emanuele through his employment at that company.

252 In his role as an accountant for Mr Emanuele and the Victoria Square store, he was to prepare business activity statements, reconcile PAYG payments, reconcile WorkCover for wages, superannuation and oversee the reconstruction of the accounting system at the store.

253 At the time of his engagement, there was a POS system that he thought was not accurate. He understood that the information from the POS system was transferred to an Excel spreadsheet which was then used to prepare financial reports. He considered that the use of a spreadsheet in that way had a high tendency for inaccuracies.

254 Mr Close was involved in the redevelopment of the POS system and in data entry. Mr Close told Mr Mercorella not to rely on the information on the POS system or any other spreadsheet documentation recorded between July and December 2016. Mr Mercorella thought that it was very unreliable information.

255 For the figures for July to December 2016, he said he tried to get most of the bank statements for that period because he found he could not rely on the financial statements that had been prepared. He also reviewed and discussed the previous business activity statements and tried to get the POS system running so that it would accurately report to Xero and put accurate information back through to the Xero accounting system. The process of recreating that data took a long time and so the system did not start working reasonably until November 2017. The rework of the POS system was necessary and it was essential in order to establish an accurate assessment of the turnover of the business.

256 Mr Emanuele was involved in the day-to-day operation of the store and he was responsible to ensure stock was purchased and recorded correctly; Ms Rachel Gordon was the manager of the store.

257 During 2017 through to November 2018, Mr Mercorella attended the store twice per week to oversee the work of the bookkeeper and to check if the POS system was working correctly. He discussed with staff financial reporting, cashflows, the high level of expenses being experienced by the Victoria Square store and the need for reduction of those expenses. He discussed methods to become more efficient with purchases, to have better stocktaking, managing BAS and tax debts and superannuation. He thought Mr Emanuele’s relationship with his staff was good. He found the annual turnover to be somewhere near $900,000 which he thought was low compared to other cafes with which he had experience.

258 Mr Mercorella said he became concerned about the financial position of the Victoria Square business either in the last quarter of the 2017 year or early in the 2018 year. By then more accurate information was produced in the financial system. He and Mr Close began doing weekly cash flow analyses in the period after June 2017. He then compared the actual versus projected costs for sales, cost of goods held and volumes of expenses. He found that the cashflow was always low and expenses were always high. He then gave consideration to what

arrangements needed to be made with creditors. For example, he and Mr Emanuele made an arrangement with the ATO for the payment of outstanding tax debts.

259 He was taken to Exhibit A7 which are the financial statements for Gabjet trading as Funk Café Victoria Square. In the 2017 year, there was a loss before income tax of $79,162 and in the 2018 year, there was a loss before tax of $105,036. On the balance sheet, there was an equivalent loss or deficiency in the 2017 year of $79,162. In the 2018 year, there was a carry forward deficiency of the product of the two amounts namely $184,199. The Victoria Square store was making losses for those periods.116 He knew that if that position was not corrected, the business was not viable because of the ongoing nature of the fixed and variable costs. If those costs were not managed, the business would run into very heavy losses.

260 Mr Mercorella was familiar with the reports prepared by Mr Close about the Victoria Square store.117 They show a stock target at 26%, which he thought that was very low. He knew of the ATO benchmarks which, upon a survey, recommend maintaining a stock level sufficient to generate a cost of goods sold figure of between 30% and 35% sufficient to pay overheads and other expenses. The higher the cost of goods sold percentage, the lower the gross profit figure and therefore the more difficult it would be to meet overhead expenses. Mr Mercorella thought it was always very difficult to significantly reduce the cost of goods sold as a means of increasing profitability. He also pointed to the wages target of 27%. He said there was an overload on wages at the time and so he tried to cut that down by the doubling of employee’s duties and ensuring that overtime was not incurred. He said it took a little time but eventually they were able to get a control of wages.

261 In May 2017, a significant expense was incurred for the POS overhaul. However, Exhibit A7118 shows a comparison for the wages between 2017 and 2018 showed that wages had increased some $45,000 and he was unable to explain the difference. However, in the end, he could identify that the figure of $90,880 on the second page of Exhibit A7 was a breakeven sales figure. It was a notional figure. It would mean there was no profit and no loss. Otherwise, he could not explain any difference in the sales figures as they were recorded. On the first page, they were $74,756.91 and on the second page they were recorded as $84,441.

262 In relation to Exhibit A3, the Gabjet financial statements for year ending 2018, Mr Mercorella explained the difference between the wages figure of $242,800 and $287,800 as being that the 2017 year was not a complete year. That would explain the difference. That would also explain that wages were kept at a particular level and were not increasing over that period of time. Those figures 116 Exhibit A7, p 4 et seq.117 Exhibit A2, vol 21, tab 422 and 433, pp 5635-5666. The Close reports in relation to the trading at

Waymouth Street are at tab 433.118 Exhibit A7, p 2267B.

were accurate. At the time Mr Emanuele was not being paid a wage but drew an income of $500 per week. That income is treated as drawings and therefore there is a loan account in debit in the name of the drawer of the funds and the debit in that amount must be repaid to the company. Otherwise, the amount of money is declared as being wages in the individual’s tax return. If it is in debit at the end of the financial year, it has to be declared as wages and tax paid or alternatively it must be repaid with interest under a Division 7A arrangement. Those particular wages are not included at tab 7 because of that arrangement. He said that the business was still making losses between the 2017 year and the 2018 year but he was satisfied that those losses had been capped and were not as great as they were previously. He thought that the business would never make a substantial profit. Mr Emanuele did not receive any wage from the Waymouth Street store but his wife did receive a wage. No carparking expenses were incurred for Mr Emanuele but only for a manager’s carpark.

263 There was a detailed payment summary report prepared from Xero.119 Although it records Mr Emanuele as having been paid $50,892, he was not paid that amount and he does not know why it was recorded in that manner. He did not enter the recording. He said it is another inaccuracy within the Xero system.

264 Mr Mercorella was not satisfied enough about the accuracy of the financial information to be satisfied that he could prepare accurate profit and loss statements and tax returns prior to November 2017. An informal Xero profit and loss statement for the year ending 30 June 2017 prepared by Mr Mercorella is reflected in a document dated 15 July 2019.120 He used the information contained in the Xero system but there were no other statements that he could find on his file relating to either store.

265 The Gabjet profit and loss statements for year ending 30 June 2017 were prepared although no formal profit and loss statements were prepared for Gabjet or Jetgab prior to 2019.121 Mr Mercorella was not sufficiently confident of the figures to be satisfied that he could prepare accurate accounts. Tax returns were not lodged in 2018 because under the lodgement program for tax agents, they have at least 6 months after the end of financial year to lodge the tax returns. The returns also recorded a loss; the tax office does not penalise late lodgements for loss making entities.

266 The 2017 accounts do not show a comparator for the 2016 year.122 Sales had increased to $804,661 but there was a loss before tax of $79,162 after taking into account the full amount of the expenses incurred, including franchise fees of $55,908. A balance sheet was also prepared123 as well as financial statements.124

119 Exhibit A2, vol 10, tab 276.120 Exhibit A2, vol 9, tab 257A.121 Exhibit A2, vol 9, tab 258.122 Exhibit A2, tab 258, pp 2261A-2261E.123 Ibid, tab 259, p 2261H et seq.124 Ibid, vol 10, tab 260-260A.

These were prepared at around the same time as the financial statements. 125 The financial statements for year ending 30 June 2018 disclosed on the trading and profit and loss statement a further increase in sales and a loss before income tax of $105,036.126 Expenditures included a franchise fee of $59,815.127 I have earlier described the effect on the balance sheet of those ongoing losses. The deficiency as at 30 June 2018 was the combination of the losses of the current year and the previous year, being a total of $184,199.128 It is likely that this deficiency is understated because in the balance sheet, the investment cost on the purchase on the business is carried as an asset at $446,751. It is apparent that a business which generates such losses has no value. All of the financial statements prepared in the 2019 disclosed trading losses and deficiencies on the balance sheet.

267 Mr Mercorella said that the Jetgab financial statements were prepared at the same time as the Gabjet statements. Copies of those documents are contained within Exhibit A3 at tab 7. The 2018 trading and profit and loss statement is to be found at Exhibit A3 tab 7 p 2667B, C, and D et seq. The notes to the financial statements are to be found at p 2667H. The documents were signed off on 24 June 2020129 and these reflected the numbers generated in the formal financial statements prepared in 2019.130 Those financial statements were accurate. There was no cost of depreciation because he had no records or other information to pinpoint the purchase date of assets and so the financial statements were prepared on an accrual basis. The 2017 year results were being transported into the 2018 result.131

268 There were some outstanding expenses in the Gabjet account which are reported on an accrual basis,132 namely Fleurieu Milk, PAYG tax accounts, GST tax accounts and BAS. Mr Mercorella made an arrangement with the ATO about those expenses. It would have been necessary to get reporting obligations up to date and to disclose those assets. A similar position applied in relation to Jetgab although it was on a smaller scale. Jetgab had outstanding superannuation liabilities which was then included in the superannuation figure in the accrual account.133

269 For the end of financial year 30 June 2019, no tax returns had been filed. Mr Emanuele instructed Mr Mercorella to wait and see the outcome of the trial and in any event, the accounts disclose substantial losses and there was therefore no urgency to lodge the returns.

125 Ibid, tab 258-259.126 Ibid, tab 260-260A.127 Ibid, p 2262.128 Ibid, p 2263.129 Exhibit A3, p 2667J.130 Exhibit A2, vol 9, p 2261A et seq.131 Ibid, vol 9, tab 260.132 Exhibit A3, crossclaim tab 7.133 Ibid.

270 At some stage, late in the trading of Gabjet at the Victoria Square store, Mr Emanuele raised with Mr Mercorella the possibility of the sale of the business. They discussed retaining a business called Benchmark to do the sale and providing some financial information to it. His recollection was that no financial statements had been prepared for taxation purposes prior to the conversation although there were interim statements that had been obtained off the Xero ledger.

271 He sent an email of 23 August 2018 to a Mr Troy Foran at Benchmark and attached an annual report for Gabjet for year ending 30 June 2018 and financial statements for the Waymouth Street store for year ending 30 June 2018. Mr Mercorella accepted that if a comparison was made of the financial statements provided to Benchmark with those signed by Mr Mercorella, there is a difference. Mr Mercorella signed off on those financial statements on 24 June 2020.

272 He accepted that for the 2018 financial year, purchases are listed at $319,000.134 Sales are in the amount of $804,661. The sales figure does not change. However, the purchaser’s amounts shown on the Benchmark financial statements are in the amount of $265,912.135 Also, consultancy fees of $22,000 listed on the financials do not appear in the Benchmark financial statements. He explained that these fees related to IT costs for the preparational remodelling of the whole accounting system from the POS to Xero and some accounting fees. These were not included in the Benchmark financial statements as Mr Mercorella did not think they were relevant as a prospective buyer was not going to have those kinds of costs in fixing up the accounting system. There was a rent figure that was also different which Mr Mercorella corrected. He was aware that when he prepared these accounts, Mr Emanuele was involved in a court case against the Funk franchisors. He accepted that when one looked at purchases, a reader would be able to identify that the level of purchases as contained in the Benchmark material was between the 30% to 35% range but he did not accept that the purchases on profit and loss for the Benchmark figures were false. He did not discuss with Mr Emanuele the changes he was making under the expenditure heading however, he did discuss with him in broad terms that he was taking out expenses he considered to be irrelevant. The point of this cross-examination was that Mr Mercorella was, in part, making some of the same exclusions as the Funk Group.

273 Mr Mercorella was then shown Exhibit R9 which is a bundle of documents produced under a Notice to Produce delivered to Benchmark. Exhibit R10 is a bundle of Benchmark business appraisal documents for the Funk Coffee and Food businesses. He was not aware that his name had been placed upon the documents prior to the purchase by Jetgab of the Waymouth Street store. He said he did not give independent advice prior to Jetgab executing the financial

134 Exhibit A2, vol 9, tab 258, p 2261A et seq.135 Exhibit A3, tab 7; T479.

agreement. He only passed comments such as that the profit margins were thin but that the business could be turned around.136

274 He had discussions with Mr Emanuele when doing accounting work for the Victoria Square store. They talked about the extra expenses that had been incurred which were not included however, as an accountant he then formed his own view about what would likely be the extra expenses and there would be the ability to increase sales as well so that it presented as a viable business opportunity. He told Mr Emanuele he thought it was a viable business and this followed the work he did as well as him having regular meetings with his bookkeeper. He saw the sales and expenses figures for the Victoria Square store at least once per week and he always had concerns that the expenses at the time were not transferred correctly into Xero.

275 In the result, Mr Mercorella accepts some of the exclusions he made from the financial information of Gabjet and Jetgab provided to Benchmark were similar to the exclusions that were made by the Funk Group at the time it provided the financial information to Mr Emanuele for the Victoria Square store. He said in his evidence that properly characterised, these were extraordinary expenses that would not be incurred by an incoming purchaser because by that time, the systems operated and it was not necessary for those expenses to be incurred.137 That is why he did not include them. Also, there was an aspect of discretionary spending amongst some of those expenses and that was a matter for the incoming purchaser. This was the same view as was expressed by the witnesses for the respondents in their evidence. However, Mr Mercorella also said that the cost of sales was reduced to bring the percentages within the 30% to 35%. I have not been able to identify that an instruction might have been given to him by Mr Emanuele to do this or any basis upon which it could be done such that it fitted a percentage of 30% to 35% of the annual turnover, which was increasing year to year. To that extent, the approach taken by Mr Mercorella is inconsistent to an extent with the case put by Gabjet.

276 Mr Mercorella was then questioned about valuation methods. He was closely cross examined about his approach however, as became clear from my questions to him, the valuation of the business undertaken by Benchmark on the figure including immediately following the date of purchase of the business by Mr Emanuele was very low.

277 I asked Mr Mercorella to look at Exhibit A3.138 In the reported figures for the 2017 year, there was a loss before tax of $79,000 and in the following year a loss before tax of $105,000. I then took Mr Mercorella to the valuation document of Benchmark. At p 4 of that document, there are a series of valuations done at a capitalisation rate of 100%, 83% and 67%. These calculations are done on an adjusted net profit over the last year of $36,064 without any adjustment for 136 Exhibit A2, vol 9, tab 258, p 2261C; T499; T500; Exhibit R9, tab 13; T506; Exhibit R10, tab 16, p

261; T506.137 T442-445.138 Exhibit A3, tab 7, p 2267.

wages paid to the owners. The same calculation is done on a figure of $43,791 so that two calculations are separately done on $55,807 and $31,774. If those two figures are added together and divided by two, an average figure of $43,791 is achieved.

278 That is the adjusted net profit on an average basis over the two years according to the documents provided to Benchmark. In each case, there was an adjustment of zero for wages paid to owners and so the figure going forward is $43,791. That in turn is capitalised on a capitalisation of income basis at the rate of 100%, 83% and 67% and valuations of business are obtained. At 100%, the figure is $43,791. At 83%, the figure is $53,549. At 67%, the figure is $65,686. These figures are all inclusive of stock and this is the capitalised value of the business on the figures that had been produced. Therefore, if a business such as the Victoria Square business in two years of trading incurs losses of (rounded up) $79,000 and then $105,000, there is a total loss of $184,000 and on average $92,000 loss per year. The capitalisation rates could be then applied to that figure. Mr Mercorella agreed that the investment cost of $446,751 shown on the balance sheet as I have earlier referred to means what has been invested to purchase the business is $446,751 now has a capitalised value of either $43,791, $53,549 or $65,686 on the methodology used by Benchmark.139

279 On this evidence, and when regard is had to the content of Exhibits A3, R9 and R10, the conclusion is that within a year of having paid $446,751 for the Victoria Square store, at best it is valued at $65,686. This is the value of the plant and equipment, fixtures and fittings of the store. In my opinion, it is apparent that irrespective of the figures given to Benchmark for the purposes of its evaluation, the value of the Victoria Square business is reflected by the value of the plant and equipment, fixtures and fittings on a written down basis. On this evidence, the conclusion follows that there is no correlation between the sum of $446,751 carried forward as a purchase price from the 2016 financial year into the 2017 financial year and the value of the business. On this evidence, the value of the business is reflected in the capitalisation of the amounts disclosed in the valuations set out in Exhibits R9 and R10. Therefore, the impact of anything done with the figures by Mr Mercorella is irrelevant. Nothing was done with them by Benchmark, they are equally wrong and, properly adjusted, prove that. Within two trading periods, the business has no value.

Mr David Crase280 Mr David Crase was called by the applicant to give evidence on the two

expert reports that he prepared and the joint report he prepared with Mr Opie. The transcript of his evidence is to be found between transcript p 527-623. The two reports of Mr Crase are to be found in tender book Exhibit A2.140 Mr Ben Opie, a Chartered Accountant was called to give evidence on behalf of the respondents. Mr Crase and Mr Opie prepared a joint report. It is to be found at

139 T503.25 et seq.140 Exhibit A2, vol 18, pp 4643-4939; Exhibit A2, vol 20, tab 423, pp 5402-5463.

Exhibit A2.141 In order to fully comprehend the evidence given by Mr Crase, it is necessary to survey in a general form, his first report, second report, the joint report and the transcript of his evidence in chief and his cross-examination.

281 Mr Crase produced his first report and that report was the subject of commentary by Mr Opie in his report of 1 November 2019.142 I will separately consider Mr Opie’s report and his responses in the joint report.

282 The second report of Mr Crase largely replicates the information that is contained in his first report but it makes adjustments arising out of his consideration of Mr Opie’s report. It also reflects some further additional instructions received from the applicants’ solicitors in their letter of 13 December 2019.

283 In each of his reports, Mr Crase has used the approach of identifying future maintainable earnings as the proper method of valuation of the Victoria Square business. He considered that it was important to determine what are the future maintainable profits and through that what are future maintainable costs. As part of that process, he reviewed the costs of the applicants in these proceedings and looked at whether those costs included all relevant items and, where appropriate, he made adjustments.

284 In the first instance, he relied upon historical information provided by the Funk respondents and then assessed whether that financial information incorporated all relevant information and all relevant costs for the purpose of determining a value for the applicants. He made an adjustment for the cost of franchise fees because an assumption would need to be made that a purchaser must incur franchise fees. Such a cost would not have been incurred by the respondents at the time that they operated the businesses. Mr Crase concluded that there were some operational costs which would ordinarily be incurred by a franchise business that were not included in any profit and loss statements provided by the respondents to the applicants connected with the operation of the Victoria Square or the Waymouth Street stores. He then compared the costs incurred by the businesses conducted by the applicants and the respondents from the same places and assessed them having regard to commercial experience and expertise. Each of those businesses was assessed separately.

285 Mr Crase identified, and I accept, that the annualised sales of the Victoria Square store conducted by the applicant Gabjet, exceeded the sales of the businesses conducted by the respondents. For example, the total sales of the respondents in the year 30 June 2014 were in the order of $750,000. For the year ended 30 June 2017, the sales of the business when conducted by Gabjet were in the order of $850,000. Thus, the applicants achieved a higher level of sales revenue at the Victoria Square store.

141 Exhibit A2, tab 424, pp 5463-5471.142 T532 et seq; Exhibit A2, vol 20, tab 422, pp 5210-5401.

286 Mr Crase analysed the profitability for the period from 2 October 2013 to 30 June 2016 during which the respondents operated the Victoria Square store. He used three sources of information. First was a profit and loss summary, the second was an Excel spreadsheet summary and the third was the financial statements prepared by BCFR. The Excel spreadsheet summary was prepared inhouse and the profit and loss summary was prepared by BCFR in conjunction with inhouse staff. The Excel spreadsheet summary sheet was prepared as a POS record of sales being generated within the store. The reason for the difference was because there were various operational costs such as goods for own use, accounting costs, depreciation and interest paid which were not properly reported.

287 The applicant was not able to generate a profit in the period from July 2016 until 15 November 2018 and in the year ended 30 June 2017 made a loss of $79,162; in the year ended 30 June 2018 a loss of $105,036 and in the period to 15 November 2018 a loss of $32,682. This was despite the increase in sales revenue generated in each financial period. A direct comparison of the financial information available shows that in the part year to 30 June 2014, the respondents made a net profit of almost $79,000; in the year to 30 June 2015 a net profit of $80,000 and in the year to 30 June 2016 a net profit of some $83,000-$84,000. Conversely, in the period immediately following, the respondents generated losses as described above. I am unable to accept that in some way or other, anything done by Gabjet could explain this difference. As I have earlier explained, there is considerable doubt about the accuracy and veracity of the financial statements of the respondents relevant to the operation of the Victoria Square store.

288 In his first report, Mr Crase attempted to identify the earnings before interest, tax, depreciation and amortisation (EBITDA) and the earnings before income and tax (EBIT) after the allowance for various costs that had not been included or may have been understated by the respondents’ financial statement provided to the applicants. A comparison was then made between operating costs. Mr Crase was able to identify a significant increase in other operating expenses being costs which exclude employment costs in the period after the applicants took occupation and operated the business. For example, in the year to 30 June 2016 the respondents reported other operating expenses of approximately $185,000. In the year to 30 June 2017, on an annualised basis, the applicants recorded other operating expenses of $294,000.

289 Mr Crase then analysed some of the key operating cost differences. These were identified as:

Bank charges and merchant fees

Consultancy and accounting fees;

Motor vehicle expenses;

Subscriptions and licencing;

Light and power;

Staff training and welfare;

Miscellaneous expenses;

Waste disposal costs;

Franchise fees;

Management fees;

Costs of goods sold;

Depreciation; and

Interest paid.

290 Mr Crase then assessed each of those costs and formed a view in relation to them. In his second report, he has reassessed those matters having regard to the comments of Mr Opie in his first report.

291 At paragraph 7.11 of his second report,143 Mr Crase performed a recalculation of adjusted EBITDA and adjusted EBIT after taking into account each of those items, a-m described above. In the 2014 year, Mr Crase identified that the adjusted EBITDA was in the amount of $9,389, in the 2015 year the adjusted EBITDA was $15,746 and for the 2016 year the adjusted EBITDA was $2,462.

292 After making an allowance for depreciation, the adjusted EBITDA for the 2014 year was ($14,189), for the 2015 year was ($9,346) and for the 2016 year it was ($3,938). Mr Crase expressed the view that bank guarantee fees are generally of an ongoing nature. These were paid by the applicant. It was a necessary cost of operating a business after excluding loan establishment fees. Mr Crase calculated that the applicants incurred bank charges and merchant fees of 1.2% of sales revenue. After comparing the position of the applicants and the respondents, Mr Crase concluded at paragraph 7.14.10 that whilst the actual cost of the first applicant was 1.2% of sales revenue, for the purposes of his report he has recalculated adjusted bank charges and merchant fees both at 1% of sales revenue. This provides adjustments for each of 2014, 2015 and 2016 years in the amounts of ($3,267), ($3,840) and ($4,044) respectively.

293 In relation to consulting and accountants’ fees, Mr Crase opined that, after adjustments, the amount of $20,000 per annum was consistent with the costs actually incurred by Gabjet. He then separately considered consulting, accountancy and subscription costs, and consulting and accountancy fees and 143 Exhibit A2, vol 20, tab 423, p 5418.

identified that the respondents had reported consulting and accounting costs on a flatline basis of nil in 2014, and $930 at 30 June 2015 and 30 June 2016. Although he was asked to assume that the directors or associates of the respondents undertook accounting processes, he said that in his professional experience, a franchise acquiring a coffee and food café would not necessarily have the necessary accounting, bookkeeping, POS and consultancy skills. It is therefore necessary to make an adjustment for the fair consultancy and accounting costs that would be borne by a franchisee of the Victoria Square business. He thought that a reasonable consulting and accountancy cost would be in the amount of $8,000 per annum. He made an adjustment for the comparatively shorter period for the June 2014 year of $6,000.

294 On the question of motor vehicle expenses, Mr Crase rejected the criticism of Mr Opie that the question of any adjustment for those costs was a matter of the choice of the proprietor. There are two main bases for his opinion. The first is that he considered it reasonable to include those costs as part of the operation of the business. The second being that one of the respondents actually incurred motor vehicle expenses.144 As a result, Mr Crase would not adjust his calculations.

295 In relation to subscription and licencing fees which includes information and technology costs, Mr Crase rejected the assertion of Mr Opie that these costs were exclusively in respect of accounting software. The cost of the applicants also included amounts paid to a marketing firm. In any event, Mr Crase was of the view that subscriptions to accounting software were a valid and reasonable cost to be incurred and are relevant costs to be incurred when assessing the future net earnings of a Funk Coffee and Food franchise for valuation purposes.

296 In relation to light and power, it is accepted that power costs started to increase significantly in the 2015 to 2017 years and that these increased costs, which did not abate, were inherently likely to have an ongoing impact of increasing the operating costs of a franchise. Mr Crase would not accept that in three financial years for the Victoria Square store, the cost of light and power for full financial years was $600, $1,951 and $8,263 respectively.

297 Mr Crase was of the view that an assessment of the future maintainable earnings of the Victoria Square store would reasonably require consideration of future power costs. These could materially impact net profitability and business values.

298 Mr Crase opined that the Victoria Square store would incur miscellaneous expenses such as office administration, general operating expenses, printing, stationary, freight costs and bank fees, which are charged separately.

299 No franchise fees were incurred in respect of the Funk Victoria Square store for the relevant period prior to 30 June 2016 that are payable by a franchisee. Mr

144 Paragraph 12.9.8 of the first Crase report.

Crase identified that in the one page financial information document for the period to 31 March 2016, franchise fees paid are shown. These are paid as a percentage of gross sales revenue being 5% and a marketing contribution of 2% also upon gross sales revenue. Mr Crase said that there would be a need for the applicants to take into consideration a franchise fee of 7% and that adjustment is disclosed to the accounts.

300 At [7.24] of his report,145 Mr Crase addressed the item in the accounts: cost of goods sold. He said the cost of sales at the Victoria Square store prior to 30 June 2016 averaged 33.3% of gross sales. When operated by the respondents, the figure was 38.5%, being a difference of 5.2%. In the second year of trading in 2018, that was brought down to around 38%. On sales of $820,000 per annum, the increase of 5% in cost of goods sold would have an adverse profit impact of $41,000. The ATO benchmark for average sales above $600,000 is that costs of goods should be at 35%. The benchmark for sales of less than $600,000 is that it should be at 38%. There was progressive reduction from 40%, to 38% and then to 36% over the three years. However, in each of those years, the percentage of sales remained materially in excess of the actual of costs of goods sold margin that the respondents reported. Accepting that the first applicant did have a higher level of cost of goods sold, it should not have exceeded the ATO benchmark of 35%. Mr Crase would make an adjustment based on that information alone. This is because the ATO benchmarks infer that as a business grows, its costs of goods reduce as a percentage of sales revenue. This may be due to economies of scale or some other purchase efficiencies. However, in the case of the respondents, they achieved a significantly lower cost of goods sold in the period of 30 June 2016. These were lower than the ATO benchmark averages. This indicates that the respondents derived economies of scales or purchase efficiencies from operating multiple Funk Coffee and Food sites, or some purchase costs may not have been properly attributed to the Victoria Square store and/or the sales revenues for the sites were overstated.

301 Following the receipt of Mr Opie’s report, Mr Crase accepted the possibility that the applicants as a new and inexperienced operator may not achieve the same level of gross profit as the respondents. However, the applicants obtained much higher sales in the first year which would not fully support the contention about the effect of such inexperience. There was a progressive reduction of the cost of goods sold over the three years but this percentage remained well in excess of that which was reported by the respondents which averaged 33%.

302 Mr Crase concluded that the applicants reported a higher cost of goods sold compared to the respondents but maintained that he would use the rate of 35% of cost of goods sold revenue in valuing the business based on the ATO benchmark.146 Inferentially at least, he doubted the accuracy of the reported cost of goods sold figure of the respondents. He also accepted that the respondents

145 Ibid p 5431.146 Exhibit A2, tab 423, p 5434 at [7.24.11].

operated a number of company owned cafés which were likely to provide operational efficiencies.

303 At [7.19] of his first report, Mr Crase concluded that there should have been a depreciation of assets in the Victoria Square store over time. This is because a depreciation expense represents the reduction in the value of an asset due in particular to wear and tear. It is a typical cost of a business which uses plant and equipment.147 When compared to the actual depreciation booked by the respondents, Mr Crase identified that no depreciation expense was booked in the year ended 30 June 2014 and this was an incorrect approach. He also concluded that the Funk Victoria Square business was a division of Funk CBD which accounted for 62% of sales revenue, 60% of the employment costs and 37.3% of the total depreciation costs of Funk CBD. I have set out of those percentages earlier in these reasons.

304 Again, at least inferentially, it may be expected that this ‘flagship store’ would account for greater than 50% of the expenditures of Funk CBD on the services that it provided. He concluded that it would be unusual for Funk Victoria Square business not to be attributed with a greater proportion of the depreciation costs claimed by Funk CBD given that the Funk Victoria Square business accounted for 62% of the sales of that business. This is an anomaly.

305 Mr Crase then addressed the valuation of the plant and equipment in the reports of Mr Codling of Mason Gray Strange. In his second report, Mr Crase opined that in his experience, most items of plant and equipment used in a coffee and food business will be depreciated at a rate of 10% or higher for taxation purposes to reflect typical wear and tear. He adopted that rate of depreciation having regard to the valuation of the assets in the reports of Mr Codling. He assumed a rate of 10% and for the 2014 year an adjustment of ($4,800) for the 2015 year an adjustment of ($6,400) and for the 2016 year an adjustment of ($6,400).

306 Mr Crase then addressed the business profit and viability for the Victoria Square store. In his first and second reports, he opines that the financial information provided by the respondents to the applicants was properly described as EBITDA and adjusted EBIT. Mr Crase undertook updated calculations of the EBITDA and EBIT for the Funk Victoria Square store using financial statements of the respondents for the year ended 30 June 2014 to 30 June 2016 inclusive. These were then adjusted to take into account costs which, in the opinion of Mr Crase, would ordinarily have been incurred by a franchisee in operating those businesses. These include franchise fees, accounting and motor vehicle costs.

307 The adjusted EBITDA represented the estimated future maintainable earnings excluding depreciation of the Funk Victoria Square store when operated by a franchisee. As at June 2014, the adjusted EBITDA was ($9,389), as at 30 June 2015 it was ($15,746) and as at 30 June 2016 it was ($2,462).

147 Exhibit A2, p 4680, [7.19.3].

308 For the same three periods, the adjusted EBIT was ($14,189), ($9,346) and ($3,938) respectively. Mr Crase opined that in order for a business to be commercially viable, it must generate surplus cash flow after capital expenditure, loans and industry payments and tax. It must also generate a cash buffer to withstand periods of poor trading or unexpected costs. Based upon his adjusted calculations, Mr Crase opined that the Funk Victoria Square store had no or negligible profitability after allowance for both franchise fees and relevant other adjustments. He expressed the view that the business was not profitable nor commercially viable when operated by the respondent, or for that matter any other entity as a franchisee. Mr Crase produced two valuations of the business. In the first, he adopted the amounts included in the financial statements of the respondents for the year ended 30 June 2016 subject to adjustment. He opined that the indicative high value of the business was between $100,000 and $150,000 as at 15 June 2016. That is to be compared with a valuation of the business as at 15 November 2018 when proper account is taken of the trading performance of the business. He said that because of that very poor trading performance, such a valuation would be based solely on the value of plant and equipment plus fit out of any net value. He said that there would be no goodwill value uplift because of the very poor financial trading position.

309 The second scenario is a valuation of the business as at 30 June 2016. It is necessary to consider that method in detail.

310 The respondents provided profit and loss statements to the applicants for the period 2 October 2013 to 30 June 2016 in three forms namely profit and loss summaries, Excel spreadsheets and financial statements. Mr Crase relied upon the financial statements and then looked to see whether there are any additional costs which may be borne by the purchasers which are not the costs of the vendors. At [7.1] of his reports, he identified a series of costs attributable to the business of the Victoria Square store which are not recorded and which have an effect upon the adjusted EBITDA. Pre-adjustment for the year ended 30 June 2014, the EBITDA was ($68,704) and after adjustment was ($27,863). For the 2015 and 2016 years, the EBITDA pre-adjustment was ($113,611) and ($108,853) respectively. After adjustment of the EBITDA the figures were ($9, 193) and ($22,841). I have earlier explained the reasons for these adjustments. Mr Crase said that after adjustments, where the average EBITDA of the respondents in the business to 30 June 2016 was a loss of ($21,781), the value of the business will not be high. A purchaser would likely incur real or notional finance costs in respect of the acquisition. These must be taken into account. Allowance must be made for principal and interest repayment and these must be assessed having regard to the properly assessed EBITDA.

311 Also to be taken into account is depreciation of assets and the possibility of those assets needing to be replaced having regard to their rate of usage.

312 On the question of valuing the business of the Victoria Square store, Mr Crase said that his approach would depend upon an assessment of the risk of

the investments and the reasonable likelihood of a return. A business exhibiting greater risk characteristics in achieving its maintainable profit will be attributable with a lessor multiplier. A stronger business will be given a higher multiplier. Mr Crase was of the view that the more realistic scenario takes into account other costs and expenses that would reasonably be incurred in the conduct of the business. Apart from franchise fees, and some allowance in relation to interest, these are costs and expenses that would have been incurred or suffered by the respondents when Funk CBD operated that business. When those adjustments are taken into account, as set out in [7.1] of his first report, the business has no going concern value as at June 2016 based upon the adjusted EBITDA. A fair market value would be the value of the plant and equipment, fixtures and fittings.

313 Mr Crase then determined that after taking into account the other adjustments, depreciation costs and interest costs, then under the appropriate scenario, scenario B, the losses would amount to ($56,318). A valuation of the business would only be the written down of the plant and equipment. Mr Crase then made an adjusted calculation of the losses sustained by the applicants.

314 Mr Crase then gave evidence in chief in relation to his two reports. He emphasised that EBITDA excludes depreciation and amortisation and that maintainable earnings depend upon what basis will be adopted namely whether EBITDA or EBIT are used as the basis of calculation of maintainable earnings. He said that the greatest level of impact of depreciation is where items are continuously in use and at some stage the replacement cost of those items must be taken into account. This is irrespective of the lease period that may be applicable for such items. Also, calculations must be made about return on investment relative to such items which may need to be replaced within that ten-year period.

315 Mr Crase then emphasised that depreciation is a real cost of business. Items employed in a business which are used for the generation of income will need to be replaced and depending on use, the need for that replacement may arise sooner than later. That is why in a number of circumstances, it is permissible some plant and equipment to be written down in the first year of use in the business. That circumstance of use and wear and tear also must be taken into account as part of the overall assessment about the return on investment. That informs the question of the calculation of the number of years it takes to pay for a business. Ultimately, it would become a cash outgoing. The whole premise of the business valuation is based on discounted cash flow which must take into account the concept of replacement capital items.

316 Mr Crase relied upon the financial statements prepared by BCFR because he thought that these were more reliable reports of the financial position of the business. He was aware of the documents in the form of an Excel spreadsheet and other documents that were prepared which are set out in his report. Therefore, his calculation is based upon those documents adjusted for the various adjustments that he has made.

317 Mr Crase referenced Exhibit A3 at tab 2 which sets out a number of spreadsheets in relation to Funk CBD for Victoria Square for a number of financial years. These form Appendices 15, 16 and 17 of his report. He was informed that the respondents did not use accounting software such as MYOB, Xero or any similar form of accounting software. Its practice was to use Excel spreadsheets which were manually created from source documents to account for purchases. All source documents were otherwise manually entered into the spreadsheets.

318 Mr Crase thought that the use of spreadsheets in a business of the size of Funk CBD was unusual. He knew that there was a Victoria Square store, a Waymouth Street store and there were a number of other franchise stores operated by other franchisees. It was unusual because most businesses of a certain size will adopt double entry accounting of sales, costs and expenses. That is why such businesses use MYOB, Xero or QuickBooks which captures both sides of the transaction namely the sale, the banking and also the expense side. A reconciliation is then made electronically and balances are readily available.

319 He said that with a spreadsheet, there is no reconciliation of the other side of the entry and therefore there is no immediate clarity as to whether or not the other side of the entry has actually occurred.

320 Also, other types of accounting systems capture GST and some items do not attract GST. For example, the sale of a bottle of water does not attract GST; in contrast, a prepared meal will attract GST. Therefore, an off the shelf accounting system captures all that information and records it automatically; a spreadsheet would not do so and there would need to be manual adjustments to give rise to those calculations. Therefore, it is unusual even though he does not have any basis upon which to say that whatever was done was accurate or inaccurate. His real query is whether or not all of the costs have been captured. In particular, he emphasised that in his view, there were a number of costs that should have been attributed to the businesses that have some connection with the proper allocation of costs. These would include accounting costs and whether they should be apportioned between the businesses being sold and other businesses. The same applies to the other outgoings set out above in sub paragraph (a-m). This is important because 62% of the turnover of sales of the business of Funk CBD was generated out of the Victoria Square Funk store.

321 Mr Crase was asked to make an assumption that the Funk company stores are operated by separate entities within the group. A number of them are operated by Funk CBD. A separate number of them are operated by Funk Coffee and Food in its capacity as the trustee of the A&J Damaskos Family Trust. Funk Coffee and Food also supplies services to company stores that are operated by Funk CBD amongst other companies. Funk Coffee and Food supply staff to be used by Funk CBD in the operation of its business. It also supplies some form of office/administration service to Funk CBD. Thirdly, Funk Coffee and Food supplies goods to Funk CBD for it to use in its sales in the stores that are

operated by it including, until 2016, the Victoria Square store. In that context, Mr Crase was asked to comment upon the use of the manual spreadsheet accounting system in that background.

322 Mr Crase said that in his opinion, the spreadsheet system had real control issues in the recording of costs and the proper apportioning of costs in the businesses. The spreadsheet system does not capture both sides of the transaction. Where service entities supply both staff and stock there will usually be difficulties associated with the proper allocation of costs from one entity to another within the group, which raises a further issue of whether or not that allocation is fair and appropriate. He does not think that a spreadsheet system would be a proper means by which to record this material. In answer to a question from me, he said the process is fraught because not only in the method used but also the recording being only as good as the person who is recoding and also the accuracy of the work done by that person.

323 Mr Crase then addressed the question of commercial viability of the Victoria Square business in the context of cash flow after allowance for capital expenditure, costs, loan and interest repayments and tax. Capital expenditures include for replacement of plant and equipment bearing in mind the depreciation of assets.

324 Mr Crase opined that merely because a business generates a profit does not mean that it is viable. It must be able to generate enough money to pay tax, to pay for replacement plant and equipment and to be able to withstand cyclical seasonal changes that beset any business. He opined that the Funk Victoria Square store had no or negligible profit after allowance for franchise fees and proper adjustments. When he had made all of those relevant adjustments, the quantum of profit would not be sufficient and material to enable repayment of loans, to pay franchise fees for the cost of replacement of plant and equipment or to pay income tax. He said that it is a matter for the Court to determine whether those adjustments are fair and reasonable.

325 In order to be satisfied that these adjustments are fair and reasonable, is it necessary to consider the whole of the evidence and to reach conclusions based upon that evidence. I do so hereunder.

326 In coming to his conclusion that the business was not viable, he relied upon two conclusions. The first was to adjust for franchise fees and the other was to adjust for franchise fees and the other appropriate adjustments. He kept in mind that the purchase price of the business was $410,000. On the first scenario, the profit generated of $18,000 would, and at best, justify a purchase price of between $100,000 - $150,000. In a valuation of the business, he would use the future or maintainable profits method which requires the valuer to take into account what sales the future may hold and what costs will be incurred, usually assessed from the immediately preceding year of trading. Other methods such as the averaging over three years may be used. However, in this instance, that

would have provided a much worse result because of the poor trade in the 2014 year. Therefore, he used only the basis of trading of the immediate preceding year.

327 He did not think that he could justify an assessment of a valuation of the business on scenario A namely between $100,000 - $150,000. He thought that scenario B, the value of the plant and equipment, was more realistic when assessing future maintainable earnings. This is because it takes into account the additional costs or adjustments which he would describe as normalised costs for any business. This also reflects the adjusted EBITDA which takes into account all of the adjustments. In summary, he thought that the best estimate of the value of the business was the plant and equipment and fit out. It is normally described as a sale at the auction realisation value (of a failed business). That value would always be lower than on a going concern basis because there was no value in the business as the returns would not justify a fair market value on a commercial level.

328 Mr Crase was then taken to his assessment of the proper calculation of the costs of goods sold. He described it as the inverse of gross profit and he made his assessment by looking at various source documents provided including the excel summary sheets. He also had regard to the financial statements and once he assessed all of those documents, he formed the view about the gross profit of that amount. One of those sources of information were the financial documents. These are to be found in Exhibit A3 at tab 1 and following. These included packaging as an overhead expense. He said that packaging and wrapping costs are usually a cost of sale and they would form part of the cost of goods sold. They would be a variable cost and depend upon the level of sales turnover. That is why it is appropriate to include them above the line. The absence of the inclusion of those amounts would give rise to a higher gross profit percentage. This would imply, on a gross basis, that the business was more profitable. In relation to the 2015 year, there is an indication of a gross profit of 68.6% or 69% rounded up. If wrapping and packaging are included above the line, that gross profit margin falls to 66%. Thus, the impact of the packaging cost is about 3%.

329 In his report,148 there is a description of three columns of activity. The first is Funk Victoria Square, the next column is other stores and then a total for Funk CBD. The first column relates to the financial accounts that were provided by the respondents. The third column also relates to the financial accounts but is confined to the operations of Funk CBD which operated both the Victoria Square store and another company store. The middle column is deduced from the information available. He took the information available for the Funk Victoria Square store and then attributed the balance of each item to the other store. For example, the total sales for Funk CBD were $892,005. It is known that for the 2014 year, sales at the Victoria Square premises were $558,607. By deduction, the sales for the other stores must be $333,398. He could then observe that in the

148 Exhibit A2, Appendix 7, p 4798; Exhibit A3, tab 16.

2014 year, the gross profit margin was quite consistent at around 66% or 67%. 149 There was a change in 2015 because the other store attracts a gross profit margin of 64% but the Victoria Square store continued to generate a profit of 66-67%. It was not clear to Mr Crase why the financial statements record a higher gross profit for Funk Victoria Square store. It might be because of size or it might be because of efficiencies. It may also be the result of the misallocation of costs which is a risk of the method being used.

330 On the question of costs of goods sold, Mr Crase added that larger organisations which have a higher turnover and a bigger overall size may be in a position to negotiate better supply terms or cheaper supply terms. However, he was of the view that Funk Coffee and Food stores provide very similar things and this cannot explain that the disparity in the gross profit figures.150 On the costs of goods sold, when an assessment is made of all of the published financial reporting, he would infer that some purchase costs may not have been properly attributed to the Victoria Square business or that sales revenues for that site were overstated. These are only possible explanations. Another is economy of scale from a buyer power advantage. However, that does not explain the discrepancy in gross profit percentages between Funk stores. He would assume that if there was a buying power advantage it would be spread across all stores evenly.

331 Mr Crase then addressed the question of whether or not there would be any effect if the proprietors of the vendor entity worked in the business but were not paid fair remuneration. He said that could give rise to a further basis for adjustment. The same would apply if Mr Emanuele worked in the business after purchase but was not paid a proper salary.

332 Mr Crase said that the proper approach is to make adjustments to reflect the fair wage cost. If there were excessive wages paid or if there was an underpayment of wages, there should be an adjustment in one way or the other in order to determine accurately the future maintainable earnings. At [16.1.3] of his first report, Mr Crase said that directors of the respondent companies provided a higher level of managerial oversight over both of the company owned Funk Food and Coffee outlets. On a proper assessment of future maintainable earnings, it would be reasonable to make or to attribute the making of a payment to any person or company who provides higher level managerial services to each store. To the extent that anyone did provide relevant labour then on the calculation of future maintainable earnings there would need to be a recognition of the time spent and the expense for that time. This would have the effect of reducing the profit and would then have the flow through effect of reducing future maintainable earnings. If the fair and reasonable costs attributable to the owners was, for example, $20,000, that would have the effect of reducing the EBITDA by the same amount to reflect that labour cost.

149 Exhibit A2, p 4798.150 T563.16-20.

333 Mr Crase was then taken to Appendix 5 et seq of his first report. Appendix 5 comprises one page.151 Mr Crase said that this document is based entirely on the financial accounts prepared by the respondents. It is not based on the excel schedules nor is it based on the information provided by the respondents to the applicants as part of the process of the sale of the business. The expression “FA2014” means financial accounts 2014. The prefix ‘FA’ is to be seen as an appendices reference across each year. He says that this schedule disclosed that there are significant discrepancies between the costs borne by the applicants as opposed to those costs borne by the respondents. In some instances, there are no costs shown but there are costs incurred by the applicant. The costs borne by the applicants are disclosed in the financial accounts 2017, 2018 and MA19. They are those costs described in the last three columns across the page. Mr Crase has already expressed a view in relation to the reasonableness or otherwise of those expenses. An obvious exception is the amount of the franchise fees paid.

334 An adjustment has been made by Mr Crase to reduce the reasonable costs of accounting fees for the period after 30 June 2016. This is because higher costs were incurred than might otherwise be incurred for example, when connected with the POS system modifications. However, they are one off costs and it is difficult to make a final assessment in relation to them. If the improvement was to have a lasting value, it might be appropriate to itemise the cost of the improvement over a period of time during which that system would be implemented. It may be treated as an annual cost and proportionately incurred in a relevant year. In any event, he did not have sufficient information before him to do a wholesale review of the appropriateness or otherwise of the accountancy and consultancy fee expenditure incurred by Gabjet. Otherwise, he thought that the amounts incurred were fair and reasonable.

335 Mr Crase was then taken to Appendix 6. He described the purpose of this appendix is to highlight the difference of information that is being provided by the respondents over time. Some part of it was provided prior to the applicants acquiring the business. Some of it was provided after acquisition such as financial accounts.

336 The appendix highlights the differences that arise between the three different sets of numbers of the respondents for the year 2014 and 2015 and the four different sets of numbers that apply in relation to the 2016 year. It also shows that there are some differences in terminology. At line 27, reference is made to merchant fees of $2,319 in the 2014 year. That is reflected in charges made at line 10 in the actual financial accounts. So, there are differences and there are also costs that do not appear on any earlier documents. An example is flowers and decorations, at line 16, which is not shown in the documents provided to the applicants nor the original summarised profit and loss nor in the Excel summary. However, it does appear in the financial accounts.

151 Exhibit A2, vol 18, p 4795.

337 Mr Crase referred to line 36 of the total costs excluding employment. Some of those costs are buried or consumed within other things. An example is flowers and decorations at line 16. That is in the financial accounts for 2014 in the amount of $986. It is in the financial account for the 2015 year at the amount of $1,588 and in the financial accounts in the 2016 year in the amount of $1,152. It does not appear elsewhere. Then, when comparing the excel spreadsheet to the financial accounts, the total costs on the Excel spreadsheet and the financial accounts (excluding employment) is $101,440. That is different to the Financial Information document which shows $85,447. In the result, there were other extra costs determined during the extra accounting process. It would follow, that subsequent to the preparation of the business profile document additional information about costs was received but there could be no other explanation why there would be the determination of a cost. It was included in the accounts because someone within the respondent has attributed the cost and adjusted the accounts so that the level of operating expenses is adjusted. Mr Crase opined that he could not understand why that was not done in the first document, the Financial Information document, and it may have been too hurriedly prepared and missed some information.152

338 On the question of the accuracy of the excel spreadsheet data, Mr Crase said that the recording in 2014 seems to have been accurate. However, in 2015, the excel summary spreadsheet shows total costs excluding employment of $136,494 and the financial information document shows costs of $129,807. However, very differently, the financial accounts show total costs excluding employment of $170,667. A major factor in the difference in between those two figures is that, for the first time in the 2015 year, there was an attribution of interest paid of $21,870. That substantially explains the difference as well as the attribution for the depreciation of $11,373 at row 14. When asked to comment upon the criticisms of his approach made by Mr Opie in his report, Mr Crase said that in his experience, particularly dealing with businesses that have multiple entities and profit centres, it is always important to look to the other entities to gather the right information and where appropriate to disclose that information so that a buyer knows the profit that the business is generating. He used as an example line 9, being accounting fees. There were no accounting costs in the 2014 or 2015 year except in the financial accounts. Mr Crase said that this was quite striking giving that the business was generating a turnover of $558,000. For example, it would be assumed that some form of tax return would need to be lodged for the flagship store. There would have to be some separate accounting function in relation to a business that generated over half a million dollars in sales in 2014 and three quarters of a million dollars in sales in 2015.

339 Mr Crase said that in his experience, when dealing with a business of this size, which is being offered for sale, one must first look to see whether the accounting costs are within the reported results or whether they are being paid for by another entity. He would then make the relevant adjustments in providing the accounts. That has not occurred here although in 2015 there was an attempt to do 152 T573.4-8

that.153 However, in that year, there was only an attribution of half of the cost of the accounting. The entry reflects that $1,860 was incurred for accounting fees and 50% of that was attributed to the flagship store. Even accepting that factual background, there was nothing shown in the business profile financial information supplied to the applicant about those account costs. It was only when the financial accounts were prepared that there was an attribution. When involved in the part of the sale of the process for a business, his role as an accountant is to capture the information and make sure the buyer is not missing information that may be relevant. This is because all of this information is vital to a buyer to understand what is the true profit of the business that the buyer will be acquiring. Therefore, if the situation is that the business being purchased is associated with another entity that provides all the services and that other entity is being paid for those services in some different way, for example, through a service trust arrangement, then there is a need to take into account those costs that may be relevant to that particular store as the cost of the service being provided by that other service entity. That may involve an arbitrary assessment but it is not beyond an ordinary competent accountant to make such an attribution.

340 In any event, the accounting process should make reference to that process whether it is arbitrary or otherwise and it should be disclosed.154 In the Form 2, there is always an opportunity for an accountant to qualify comments. However, in the Form 2, there is no qualification by any accountant in relation to those matters and the accounts were signed off so that the information provided on the Form 2 was accepted by the accountant as being fair and accurate in relation to that business. Mr Crase said that is not the correct position. When there is another business involved, there is likely to be a distortion and that must be stated.155

341 Mr Crase was of the view that in the final result when material is going to be presented by a potential franchisor to a potential franchisee and where, in 2015 there was an attribution of the sum of $980 to the cost of accountancy fees, it does not matter what costs might have been incurred by the franchisee. The correct position is that some attribution of a figure must be included within the accounts. This would form part of the operating expenses if it has been incurred. That is the position whether or not the franchisee incurs the accounting expenses and the franchisor, for example, might be a person who is an accountant. There must still be an attribution of an expense incurred by the franchisor which is brought to the attention of the franchisee. If that approach was not adopted, then any franchisor and potential vendor of the business could, in effect, bury all relevant costs into some service entity and none of them would be disclosed.156

153 T574.34-36.154 T574.16-38.155 T576.1-9.156 T576.15-30.

342 The factual position is that Funk Coffee and Food was the trustee of the A&J Damaskos Family Trust. It performed a function similar to a service trust in the way in which it provided various services and incurred various expenses on behalf of company stores including those operated by Funk CBD. Mr Crase would expect that if that was the position, any financial information provided to a prospective franchisee would include some attribution of those expenses to the extent that they were incurred by a Funk Coffee and Food for the benefit of Funk CBD.157 That would be a reasonable approach consistent with what was accepted practice amongst accountants. In the opinion of Mr Crase, accountants should show the relevant costs so that the purchaser is informed when making a decision to buy.158

343 Mr Crase was then taken to Exhibit A3 tab 1 which was the business profile document for Victoria Square provided to Mr Emanuele prior to the purchase of the business. It discloses a net profit for 2015 year of $117,000 but it does not include any cost of depreciation.

344 Mr Crase then referred to in the same exhibit; the BCFR financial statements for Funk CBD for the same year, ending 30 June 2015.159 The cost of depreciation in the amount of $11,373 is reflected in Mr Crase’s workings at Appendix 6 of his first report.160

345 The cost of depreciation is now shown in the figures for the 2015 year. Taking this cost into account means that the profit figure of $117,000 represented on the business profile document does not represent the true profit for the business. The figure of $117,000 is disclosed on the business profile document in the calculation of EBITDA and not profit because it makes no reference to either depreciation or to interest expenses.161 Mr Crase then said that if a prospective purchaser was reading those financials at Exhibit A3 tab 1 and treated the reference to net profit as being a net profit and EBITDA, or a variation of EBIT, it would not be accurate to use the term net profit having regard to the actual financials appearing at tab 3.162 It is misleading for that reason, also because it is not a calculation of profit at all, and to describe it as profit creates a misleading calculation.

346 Mr Crase said that where a prospective vendor provides information to a prospective purchaser and uses the expression ‘net profit’ (and not EBITDA) then the calculation of that net profit should include the cost of depreciation and the payment of interest. There are two alternatives. The first would be that the item should be described as earnings before interest taxed, depreciation and amortisation. Alternatively, there should some sort of sub-notes to the effect that

157 T576.32-577.6.158 T578.14-21.159 Tab 3, p 2922G.160 Exhibit A2, pp 4796-4797.161 T579.19-27.162 T579.28-37.

a table of information provided does not include depreciation and interest.163 To that extent that one or other of those things is not done, the document is misleading by its very nature.

347 Mr Crase was then taken to Appendix 7 of his first report.164 He said that the intent of this document is to review the allocation of costs of Funk CBD. Reference was first made to the percentage of turnover of the Victoria Square store which was about 62% of the total revenue of Funk CBD. A review was then made of selected costs to ascertain how those costs may have been applied or attributed to the Victoria Square store. An example is row 10, namely bank charges. This is in an assessment of the 2014, 2015 and 2016 years. When focussing upon the 2016 year, total bank charges were $7,006 in the Funk CBD financial statements. The actual bank charges attributed to the Victoria Square store were $4,163 which rounded up is about 59% of the total bank charges paid. That is roughly in line with turnover which was 62% of the total. Merchant fees (row 27) were stated to be $2,959 for the company but no part of those costs was applied to Funk Victoria Square. Accounting costs in total were $1,860 of which $930 or 50% was attributed to Funk Victoria Square. However, for items such as consultancy fees, motor vehicle expenses, subscription and licencing and general expenses, there were no costs said to have been incurred by the Victoria Square store in the year ending 30 June 2016.

348 There was a general expense item at row 19 in the previous two years, in the 2014 year that general expenses were $5,475 and for the 30 June 2015 year were $3,315. However, the report suggests that there were no such expenses incurred in the year preceding sale and Mr Crase said that seems highly unlikely. An allowance was made for depreciation for the Victoria Square store of $448 of a total amount of depreciation in the financial accounts of $2,258. However, in the prior financial year being 2015, the total amount of depreciation for the Victoria Square store (of the total amount of $20,758) was $11,373 or 54%. Mr Crase said there would need to be some explanation why only 20% of the depreciation charge in the 2016 year was attributed by Funk CBD to the Victoria Square store whereas previously it had been in the range of 54% to 55%. Mr Crase said that the more likely position is that this has been an allocation by choice.165 The effect of that choice was to reduce overhead expenses and therefore boost profitability.

349 The same position pertained when charges are made between associated entities or in a trust arrangement. The charge must be made to an entity and paid by the entity or through that entity so there is proper reporting on both sides of the ledger in relation to the charge in compliance with the principle of double entry accounting. When interest and depreciation are excluded, the result is the calculation of EBITDA not net profit.166

163 T580.17-31.164 Exhibit A2, vol 18, p 4798.165 T584.14-17.166 T598.29-599.3.

350 In relation to the adjustment for bank fees, Mr Crase has reached the figure of 1% for bank fee on a calculation of actual bank fees incurred.167 The identified actual bank charges and adjustments for costs that would not be properly attributable as bank charges such as loan establishment fees. His criticism of the information about bank charges produced by the respondents is that it appears to understate the bank charges and merchant fees. In Appendix 14, there is a reference to merchant fees in the amount of $2,319. He attempted to determine whether this was a fair reflection of merchant fees and bank charges attributed to the Victoria Square store. He produced a schedule which discloses that in some places this cost is described as merchant fees and in other places it is described as bank charges. He then reviewed the bank charges and the merchant fees incurred by the applicant for the year end June 2017 and these are reflected in Appendix 5.168 The amount recorded of $3,263 related to loan fees, loan application fees and those were excluded. The charges of $5,303 were entirely bank charges giving a total in the 2017 year of $9,446 paid by the applicants. Mr Crase could not see where the respondents had incurred or were shown to have incurred 1.2% for bank charges plus merchant fees. He inferred, based upon the operating performance of the applicant that it was incurring about 1.2% or 1.3% of costs as bank charges. In [7.14.10] of his first and second reports, he reduced that figure to 1%. The proposition was put to Mr Crase in cross-examination that no bank fees were incurred.169 Mr Crase would not accept that proposition and he said that in his experience, where there is a turnover of $800,000 the business would ordinarily incur bank charges.

351 Mr Crase agreed that if he was shown the business profile document, he would ask whether there were accounting costs incurred but he said this depends upon the skill of the purchaser who may not know to ask those questions.

352 Mr Crase had also taken the view that there were motor vehicle expenses in the form of parking that were incurred by the applicants and also motor vehicle expenses incurred by the respondents but in a different entity. It was appropriate to include them as a genuine cost of the business.

353 Similarly, subscriptions and licencing fees were predominantly in relation to accounting software. A purchaser with the software does not need to subscribe. However, a small business or a business that is generating sales of $800,000 would most certainly need an accounting system. He would expect that there would be some sort of subscription licencing cost as part of the provision of that accounting system.

354 Mr Crase was challenged in cross examination on whether or not there should have been an adjustment for light and power for the 2014 and 2015 years. He said that from a future maintainable profits point of view, he wanted to be consistent and so there was no requirement specifically to amend the 2014 and

167 Exhibit A2, vol 20, p 5429. 168 Exhibit A2, vol 18, line 9.169 T602.23.

2015 years. He did that because it enabled him to get some perspective and to ignore that cost would mean that the 2014 and 2015 years would become irrelevant. He has always referred to the year immediately preceding the year of sale and he therefore used 2016 as the primary bench mark but wanted to make sure of consistency across the board.

355 When challenged about the gross profit percentage, he reaffirmed that the gross profit distortion that was achieved by the applicants was very significant when compared to that of the respondents.170 He said that the gross profit distortion between the performance by the respondents and the performance by the applicants was so great that it needed to be explained. He said the 5% difference between 38% and 33% needed to be explained somehow because it was such a significant difference and would have such a material effect upon the operation of the business and its profitability.

356 It was put to Mr Crase that it would always be necessary to add back a manager’s wage when assessing the value of a business for purchase. Mr Crase strongly disagreed with this proposition.171 It was illogical, he said it would always be necessary to include as an incurred cost a reasonable wage cost of a manager or an owner who was performing the role of the manager. In the event that that was excluded, there would have to be an adjustment to include it. There will always be an adjustment up or down to the extent that that was appropriate. 172 Mr Crase said the intention was to look at the value of the business and that would be after allowing all relevant costs. If a cost was a wage that was paid to an external manager or to an owner, that might be quite separate but the intent here of his table of calculations was to assess the value of the business. When he looks at assessing the value, he has to ensure that he takes into account either the cost of the manager’s salary or a cost attributable to the salary of a manager as the management cost in order to make an assessment whether or not you will pay $410,000 for a business. That is the correct way to proceed.173

357 I accept the evidence given by Mr Crase. To the extent that the cross examination of Mr Crase purported to put a contrary proposition, I am satisfied that that approach is wrong. It is generally accepted that in the valuation of a business, it is always necessary to take account of a salary that might have been paid to a proprietor. This is because a failure to do so would give a false positive result. If, for example, the employees of a business comprised three or four casual employees and the predominant work is done by an owner/operator, the future maintainable earning valuation of the business could not ignore what would otherwise be the salary payable to that owner. That is because to do otherwise would be to ignore the notional cost of that work being done which would otherwise be done by a senior employee paid the equivalent salary of a senior employee. Therefore, the result would be a false positive and an

170 T610.10-15.171 T612.32-613.20.172 T613.3-5.173 T613.21-30.

overvaluation. Put another way, the value of a business can only be assessed once the full notional cost of the provision of labour to the business has been assessed in the calculation of its profits. Once those profits are assessed in that fashion, then the appropriate multiplier can be determined in calculating future maintainable earnings. In turn, only then could it be properly assessed whether or not the business has a value of or anywhere near $410,000. Therefore, to exclude that salary would be to artificially inflate the value of the business. Such an approach is misguided.

358 I was impressed by the evidence given by Mr Crase. He readily acceded to common sense propositions put to him in cross examination. His report does not purport to make particular findings and relies upon a number of findings to be made by me on the evidence. To the extent possible, and subject to those findings, I accept his evidence.

359 For the avoidance of doubt, in reaching my conclusion about each of the claims in this action, I have thoroughly considered all of the submissions and arguments made by all parties. Even though I may not have necessarily identified, considered and separately announced, my decision on each of those arguments raised by both parties does not mean that I have not undertaken that exercise. So much is obvious from the decisions that I have made here in this most difficult matter.

The Briginshaw Principle360 The applicants submit that the respondents Mr and Mrs Damaskos

deliberately deceived them about the performance of the Victoria Square store, including the history of the tenancy of that store, and the performance of the Waymouth Street store, including the history of the tenancy of that store. The applicants seek findings of the court that Mr and Mrs Damaskos and the other respondents each knew of the failure to make proper disclosure of the historical performance of these stores and that each were knowingly concerned in the breaches by the other respondents.

361 Such allegations are serious and any assessment must take into account the consideration required by Briginshaw v Briginshaw.174

362 The requirement that in determining whether evidence adduced proves a fact to the civil standard, the trier of fact should take into account the significance and consequences of the finding of fact to be found in accordance with the judgments in Briginshaw.

363 In Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd,175 Mason CJ, Brennan, Deane and Gaudron JJ said:

[2] The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities. That remains so even

174 (1938) 60 CLR 336.175 (1992) 67 ALJR 170 at [2].

where the matter to be proved involves criminal conduct or fraud. On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary “where so serious a matter as fraud is to be found”. Statements to that effect should not, however, be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct. As Dixon J commented in Briginshaw v Briginshaw:

“The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved …”

There are, however, circumstances in which generalisations about the need for clear and cogent evidence to prove matters of the gravity of fraud or crime are, even when understood as not directed to the standard of proof, likely to be unhelpful and even misleading. In our view, it was so in the present case. (Citations Omitted)

364 A recent pronouncement of the application of the Briginshaw principle is to be found in the decision of the Full Court of the Supreme Court of South Australia in Macks v Viscariello176 where the Court said at [531]:

A function of the Briginshaw considerations is to bring to the forefront of the judge’s thinking the seriousness of the allegation and the gravity of the consequence of it being established. However it always remains incumbent on the judge to determine the issue by reference to the balance of probabilities. The requirement stated in Briginshaw does not change the standard of proof, but merely “reflects the perception that members of the community do not ordinarily engage in serious misconduct”.177

365 This conduct alleged against Mr and Mrs Damaskos is particularly serious and the consequences that may flow from any findings of that nature that I would make against them are very significant at many levels.

366 In deciding whether the alleged conduct of Mr and Mrs Damaskos has been proved, I do so taking into account the innate seriousness of the allegations and the gravity of the consequences of it being established, in the background of all of the issues before me. I will not continually reiterate that I am taking this approach in relation to Mr and Mrs Damaskos.

The case for the respondents367 The principal witness called by the respondents was Mrs Damaskos.

Mrs Damaskos had been present in court for the majority of the case led by the applicants. She had the opportunity to hear and understand the case being made against the applicants. On occasions, Mr Damaskos was present and at the time that evidence was given but on less occasions than Mrs Damaskos. I obtained the clear impression from her evidence that Mrs Damaskos is the controller of the

176 [2017] SASCFC 172 at [531].177 Director General of Department of Community Services; Re Sophie [2008] NSWCA 250.

accounting function, the corporate function and the commercial areas of the business of the Funk franchise business.

368 When she gave her evidence, I had an opportunity to closely assess her demeanour, the accuracy of her evidence and then to make an assessment of her reliability and honesty as a witness. Mrs Damaskos was a very poor witness. From the outset, she gave me the impression that she thought the case of the applicants against the respondent was more of an inconvenience and a nuisance than a legal claim. I also formed the impression, she thought the whole process was more of an irritation that should not have to be borne by the respondents.

369 Mrs Damaskos informed me that she has a Bachelor of Economics and Commerce and accounting qualifications. She has worked with a bank in a business banking role. She was a corporate and commercial area general manager for Bank West for between 15 and 20 years. She did a lot of business lending and construction financing.

370 I gained the clear impression that in giving this evidence, Mrs Damaskos intended to create the impression of her professional qualifications in accounting and finance, her corporate experience and her management experience. I gained the impression that having worked for 20 or more years in corporate, commercial and business lending that she had a clear understanding of the operation of general lending principles, the ability to read and understand balance sheets, profit and loss, cash statements and financial statements generally and an appreciation of the operation of business accounting software. She also understood the creation of corporate and trust structures and their optimum use. She was a commercially experienced person.

371 Mrs Damaskos said that the first Funk store was opened on Frome Road in 2006. Then, after about two years, she and her husband, Mr Damaskos, engaged DC Strategy, lawyers, to create a franchise system. DC Strategy were to set up the franchising process, prepare the relevant documents and manuals for the franchising system so that Mr and Mrs Damaskos could commence franchising their businesses after that time. In 2006, Mrs Damaskos remained employed at Bank West but by about 2008 and 2009, she had left the bank and was employed full time in the Funk business.

372 Mrs Damaskos said that there are 16 Funk stores that the family currently owns, of those eight are franchises. Recently, two of the company owned stores, Grenfell Street and Golden Grove have been closed. She said this was due to COVID-19 restrictions, however, no financial information was provided in relation to the operation of those two stores and I will proceed on the basis these stores were not viable for one reason or another.

373 The process used by the respondents’ company to find franchisees is to place advertisements on the internet advertising site “Seek”, to engage business brokers and then to manage enquiries through the website. Sometimes there are enquiries by word of mouth.

374 Mrs Damaskos was then shown the business profile document.178 She said that she prepared the document. She described it as a document that provides a background of the Funk business for the specific Funk store at Victoria Square. It provides the lease details, a history of trading, historical financials and a roster. It is generally prepared each time they intend to sell a franchise store.

375 She said that she prepared the financial information on the basis of the historical financials. She is the person who decides what to include and what to exclude from that information and her intention is to provide any prospective franchisee with a full listing of the costs pertaining to the store. I have some difficulty accepting that evidence when it is known and as became clear in cross-examination, that Mrs Damaskos knew that a full listing of the costs was not provided in the document. She also said that when any purchaser looks at the information, they will always ‘add back’ depreciation and interest and she specifically advises prospective franchisees that Funk does not include an accounting fee or any fees that pertains to Funk specifically because these are referred to in the disclosure document. She was not able to say on what basis or in respect of what the add backs of depreciation or interest may be calculated.

376 Mrs Damaskos did not prepare the disclosure document.179 There were no bank charges disclosed there because the individual stores and their business accounts do not incur bank charges. They have a deal with the bank. If a minimum credit balance in the business account is maintained, there are no bank charges or transactional fees.

377 She agreed that there were accounting fees paid by the Funk Group in relation to preparation of financial statements. She does a lot of the accounting work for the Funk Group and she is paid a salary for that work. At the time that Mr Emanuele was a franchisee, Mrs Damaskos spent part of each day collating the weekly invoices from each store. Store managers have a spreadsheet on which they record all incoming invoices. That spreadsheet is provided to Mrs Damaskos by email or in hardcopy. She then checks off the entries on the spreadsheet which are then keyed into an electronic system.

378 She says that the stores have always operated the same POS system, which breaks up the tenders of the sale, generates financial reports and banking reports at the end of each day, breaks down the sales on an average dollar spend, the number of sales per day and the sales per employee.

379 That system can generate any report that may be required in relation to sales. However, she agreed that expenses are not captured in the POS system and she says that she always recommends that franchisees have a cost of goods spreadsheet and writes in the amount for stock level purposes. Mrs Damaskos is therefore recommending two separate recording systems in relation to sales and

178 Exhibit A2, vol 1, tab 2.179 Exhibit A2, tab 1.

costs of goods sold which then requires the marriage of those two systems to achieve a result that reflects sales from trading and cost of goods sold.

380 She said that a debtor’s trial balance is produced by each store at the end of each month and a statement is produced for a customer for example, SA Water which pays within 45 days of month end.

381 Mrs Damaskos said that there is a variation in relation to costs of goods sold depending upon the percentages of coffee sold when compared to actual food sales and if an owner operator or manager does not follow the extensive food manuals on the Funk Dropbox site, then costs of goods sold can become much higher than they should be and there is then the possibility of a manager overordering on supplies. However, she also said that all stores use the same systems for ordering from exactly the same lists.

382 She said that the respondent company was also in charge of marketing. It uses the same marketing techniques such as competitions, giveaways, holidays and other things. She said that the most effective marketing was collateral marketing in stores and they have always found that group turnover does not necessarily increase proportionately with the dollar spend on advertising. The best response is through loyalty competitions and so there has been a focus upon collateral instore marketing material. She was then asked some questions about the administration costs for the marketing funds. She said that there was an administration and management fee for the marketing fund.180 Mrs Damaskos said that she always specifically advises prospective franchisees that Funk does not include its accounting fee or any fees that pertain specifically to Funk. She had a general discussion with the franchisees about their thoughts on topics such as bookwork and whether a bookkeeper or an accountant would be prepared to maintain their financial records.181 Insofar as this evidence-in-chief was intended by Mrs Damaskos to satisfy me that she had such a discussion with Mr Emanuele, I would not accept such evidence. It is unsupported evidence, and no propositions of this nature were ever put to the applicants’ witnesses in cross examination. I have found that this was a consistent position in relation to the evidence of Mrs Damaskos.

383 Mrs Damaskos said that the Funk Group annually paid between $1,800 and $1,900 in accountancy fees but that this charge related to the business of Funk CBD. The business of Funk CBD was a substantial portion of the business of the Funk Franchise arrangements. Conversely, she said that Funk Coffee and Food is charged maybe $4,000 to $5,000 in accountancy fees.182 There was no documentation provided to substantiate this distinction. She said that she was paid a salary and she did a substantial amount of accounting work for the Funk Group. There was no cost attribution for this work within the Funk accounts. She said that historically, she collated all the weekly invoices for the store, she

180 T652.32-36.181 T635.1-16.182 T636.10-11.

gathers the spreadsheets, she compares the invoices to the spreadsheet and then imports the cost of the invoices.183 She said initially that she did not prepare the disclosure documents for Victoria Square. This was contradicted by her later evidence where she said that she prepared the material and the items for the disclosure documents for the Victoria Square store but did not prepared Schedule D because that was done by the solicitors.184

384 She was asked about meetings with Mr Emanuele, Mr Damaskos and Mr Versace. Part of the evidence she gave was as follows:

So, at the initial meeting, basically we go through the prospective franchisee’s background … we tell them about ourselves, our background … I specifically recall my husband telling Mr Emanuele that the Victoria Square store had been franchised previously and he explained that we were very cautious on who we were looking to sell the franchise to again as the previous franchisees weren’t successful there and we weren’t – so we were a bit cautious … there was a lot going on and we needed the right operator …185

385 She also referred to the fact there was a lot of catering and they wanted the right operator. The balance of this answer covered almost a full page of transcript.186 It was no more than a gathering of generalisations, none of which was helpful to me and I obtained no assistance from this answer. There was no cross-examination of Mr Emanuele to the effect that Mr Damaskos had told him that the Victoria Square store had been franchised previously. Mr Emanuele was asked about the topic and he was told that the business had been maladministered. Neither Mrs Damaskos or Mr Damaskos gave any evidence about how, for example, they identified Mr Emanuele as the right person for their franchise store.

386 She then said that Mr Emanuele accepted what he was being told, that he would be there all the time, and that he would be behind the counter.

387 She was then asked about the POS system and, in an answer that required a full page of transcript, she explained the POS system.187 She then identified that expenses are not captured in that POS system and they are required to be recorded on a cost of goods sold spreadsheet. There is no contemporaneous records of sales and cost of goods sold. She was not aware that Mr Emanuele was changing the POS system. When they found out, Mr Damaskos was extremely concerned because it was a modification to an existing POS system; he was not an accountant and she expressed no concern about that. She was then asked about the different factors that would affect cost of goods sold and that answer occupied almost two pages of transcript and it was of no assistance to me because of its rambling nature.188 She then suggested that from her observation,

183 T636.18-29.184 T926.8-11; T956.12-15.185 T637.7-32.186 T637.187 T639-640. 188 T643-644

Mr Emanuele misreported the costs incurred from the Northland supplier which provides packaging, crockery, bins, bin liners, brooms, chemicals, sanitizers and paper towels. This would not normally be included in the cost of goods sales calculations. However, as has been observed by Mr Crase, this does not change the bottom line figures.

388 Mrs Damaskos said Mr Emanuele was focused on stock control but he did not seem to have a grasp on the actual cost in the stores. This was because managers did all the ordering; those managers were employees of the store (then operated by the respondents) at the time that Mr Emanuele became an owner and there is nothing to suggest that those managers did not have a full grasp of the costs of goods sold. She also criticised Mr Emanuele for allowing staff to eat and drink without paying for lunch. There was no cross-examination on any of these points. Without further evidence, I am unable to accept those assertions.

389 Mrs Damaskos gave evidence about Kindred earlier being the Victoria Square franchisee.189 It was the first franchisees to which the respondents sold the Victoria Square store. She said that in Kindred there were two families, the Buetis and the Izzos. The purchase occurred in 2010 Mrs Damaskos said that Kindred were keen to trade from the Angas Street kiosk in the SAPOL building at 100 Angas Street. She said that Funk assisted Kindred in the tender process and lease negotiations. It was not a Funk lease.

390 She said that everything was amicable between the respondents and Kindred until 2013. She then criticised Kindred saying that the Victoria Square store was not finely tuned. She said that there were too many people in the store not doing enough and their costs were not right from a wages perspective. There was no basis put by Mrs Damaskos to support that assertion, it was a mere observation and I am unable to accept it because I prefer the evidence of Mrs Bueti which I found to be truthful, credible and reliable.

391 Mrs Damaskos then said that there was a lot of doubling up and that there were file notes on file from her area manager but those have not been disclosed to this Court. She also criticised the operation of the Victoria Square and Angas Street stores and the doubling up of management roles. She particularly criticised the Angas Street store. She said that there was not a “handle on costs and wages” there. There was no evidence to support this assertion. She then said that she believed that they were suffering cash flow difficulties from the opening of the Angas Street store but again there was no evidence to support this assertion. Any such assertions, if put in cross-examination of Mrs Bueti were strenuously denied. I found Mrs Bueti a very credible witness who was truthful and reliable. Conversely, I am not able to accept the truthfulness or the reliability of the evidence given on this and other topics by Mrs Damaskos. At every opportunity, she attempted to deflect criticism to other people not involved in the respondent group.

189 T653.29.

392 For example, Mrs Damaskos said that she knew that Mrs Bueti was very frustrated with the situation at the Angas Street store. That was strenuously denied by Mrs Bueti. I accept her evidence. I am unable to accept the assertion by Mrs Damaskos who said that eventually, the Funk Group took over both sites and this meant that it would take over a site then leased by Kindred at Angas Street.190

393 In her evidence-in-chief, Mrs Damaskos was asked about the settlement with Kindred. She said that it appeared all too hard for them. 191 She suggested that rather than Kindred placing the stores on the market and actually finetuning them, they sought legal advice and went down a legal path. She thought it was all very sickening.192 She then said that they did not have much to do with solicitors. However, that is inconsistent with her evidence wherein she said that as soon as a decision was made to go into a franchise system, they immediately instructed DC Strategy.

394 I reject the evidence given by Mrs Damaskos on this point and I accept the evidence of Mrs Bueti. The context of the settlement is set out in the letter of the solicitors Haarsma Lawyers which I have earlier referred to in this judgment. That letter describes the complaints of Kindred about the representations made to it by the respondents in and about the purchase of the Victoria Square store. It makes quite clear that the costs of goods sold figures that were communicated to Kindred in relation to the Victoria Square store were unsustainable. The Funk Group operated the Victoria Square store for about 18 months after this settlement and then put the business back on the market with an asking price of $410,000. This was the same business in respect of which allegations of misleading conduct had been made and that it was incapable of generating gross or net profit as represented. It was also a business about which assertions had been made that it could not be made profitable having regard to the costs of goods sold and the other overhead costs attributable to the operation of the business together with the 7% franchise fees payable on gross turnover. All of this was known to the Funk Group at the time that it made its representations to Mr Emanuele in early 2016. I am satisfied on the evidence and based upon the expert opinion expressed by Mr Crase that the issues about the costs of goods sold figure representations (by the respondents) as complained about by Kindred were the same issues that confronted Mr Emanuele once he commenced to trade for a sufficient period of time at the Victoria Square store. This was also in the background that Mr Emanuele increased the turnover of the store in each year in which he had management of it, notwithstanding the trenchant criticisms made of his management style by Mr and Mrs Damaskos. I consider that those criticisms by them are both convenient and quite misconceived. They have no support in the evidence and are without foundation.

190 T654.17-T655.23.191 T655.26-28.192 T655.36-37.

395 I am also satisfied on the evidence given by Mrs Bueti, the documents tendered before the Court in relation to the trading of Kindred, the correspondence and the settlement made between Kindred and the Funk Group that at least implicitly, the Funk Group were aware of the difficulties associated with the representations made to Kindred concerning turnover, costs of goods sold and overhead expenses such that the only alternative open to the Funk Group was to make a settlement with Kindred.

396 I am therefore also satisfied that the content of the schedule within the Form 2 provided to Mr Emanuele that the Victoria Square store was purchased back from the Funk Group is at least implicitly misleading. That is because the businesses were returned to the Funk Group in consideration of the payment of $805,000 paid by the Funk Group to Kindred. This settlement was reached in order to avoid legal proceedings threatened by Kindred against the Funk Group for alleged misleading conduct in or about the purchase of the Victoria Square business by Kindred. Objectively, that would have been the proper disclosure about the position of the Funk Group and Kindred. This disclosure was not made to Mr Emanuele.

397 Mrs Damaskos gave evidence in relation to the operation of the Waymouth Street store by Mr Marinos. I have earlier assessed this evidence. I accept the evidence of the Funk Group witnesses that Mr Marinos operated the store for a period of time, apparently successfully and that when it became clear that the ATO was moving from its then premises in Waymouth Street to Franklin Street, that a large proportion of the business that once was sourced from that building would now flow to the Franklin Street precinct. I am satisfied that there was no put and call option clause within the Marinos contract. I am satisfied that the repurchase of the Waymouth Street store by the Funk Group from Mr Marinos was negotiated at arm’s length. The reasons were that Mr Marinos complained of ill health and his incapacity to go on operating the business at the maximum level necessary for a profitable operation. I have earlier rejected any evidence of Mr Marinos to the contrary. However, I have also accepted the evidence of Mr Marinos that if any enquiry was made to him by, for example, Mr Emanuele, he would have strongly criticised the Funk Group operations and have told any prospective purchaser not to have anything to do with the shop. I will need to address that matter later.

398 Mrs Damaskos then addressed the reasons why the stores operated by Mr Emanuele were the subject of breach notices and termination of franchises. She said that she relied upon the material supplied to Mr Emanuele which alleged that he was in arrears with his rent, that for example, the Waymouth Street store was at risk of being lost because of the threats being made by the landlord. There were also some threats being made by the landlord of the Victoria Square store. She said that the Funk Group relied upon the content of its notices. Whether or not those notices are of any merit, is a matter for my consideration.

399 Mrs Damaskos was cross-examined at length. Mrs Damaskos was asked questions about the process of disclosure in this action.193 The purpose of the questions asked of Mrs Damaskos were to identify that from the outset and at the time of the delivery to Mr Emanuele of the Form 2 statement and at the time of the negotiations with Mr Emanuele prior to the delivery of that statement, the Funk Group had the ability to provide separate financial statements such as profit and loss accounts which reflected the separate operation of each of the stores within the Funk Group. The Victoria Square store and the Waymouth Street store were such stores in the group.

400 This process of questioning elicited responses from Mrs Damaskos wherein she understood, on her evidence, that Funk Group were being asked to provide copies of financial statements that were available. She confirmed that separate financial statements, such as statements, tax returns and ATO notices of assessment were not available solely for the Victoria Square store. 194 She was not asked about tax returns and ATO notices of assessment. It was known that the Victoria Square store was part of the business of Funk CBD. As a qualified accountant, Mrs Damaskos was aware that the separate businesses would not be filing separate tax returns and receiving separate notices of assessment under the umbrella of Funk CBD. The focus of this questioning was upon the financial statements. She confirmed that financial statements were not available solely for the Victoria Square store nor were balance sheets available.195 This followed upon a letter dated 15 April 2020 which had been sent by DBH to DC Strategy, the then solicitors of the Funk Group. It refers to a previous series of letters and says as follows:

We refer to your email of 18 March 2020, our letter dated 23 March 2020 and your letter dated 9 April 2020.

It is evident from the above correspondence that your clients’ position is that:

1) For the financial year ending 30 June 2014 both the consolidated annual financial statements for Funk CBD Pty Ltd and the individual store financial statements relating to stores operated by Funk CBD Pty Ltd in particular for Victoria Square, were received by your clients from BCFR in final form on or around 17 February 2015; and

2) For the financial year ending 30 June 2015, both the consolidated annual financial statements for Funk CBD Pty Ltd and the individual store financial statements relating to stores operated by Funk CBD Pty Ltd in particular for Victoria Square, were received by your clients from BCFR in final form on or around 3 June 2016.

Given the matters set out in the correspondence, for the purposes of these proceedings our clients intend to proceed on the basis that your clients’ position is as set out in items 1 and 2 above.

If your clients disagree with any aspect of what is stated above, please advise us by return correspondence no later than 24 April 2020.

193 T663-691.194 T691.30 et seq195 T691.35-38.

If we do not hear from you in that regard by that time, our clients will rely on your clients’ position being as set out in this letter for the purposes of these proceedings (including without limitation with respect to interlocutory steps that may have been taken by our clients).

Finally, we consider that all communications passing between your clients and BCFR in connection with the preparation of the individual store profit and loss statements for Victoria Square for the financial year ending 30 June 2015, plus all draft profit and loss statements prepared by BCFR for Victoria Square for the financial year ending 30 June 2015, are directly relevant and disclosable by your clients – extending to draft profit and loss statements in the possession of BCFR, which are in your clients’ control.

401 There was then a request for further disclosure.

402 I am satisfied on the evidence that a copy of this letter was sent by DC Strategy to Mr and Mrs Damaskos. They were aware of its contents and were required to address both the request for further discovery and the request for instructions. Mrs Damaskos agreed with that proposition in her evidence.

403 The firm of solicitors DC Strategy addressed the letter of 15 April 2020 from DBH in a response of 8 May 2020. It said:

15 April 2020 letter

We are advised that the only additional email or correspondence that can be provided is one from Mrs Joanna Damaskos to BCFR dated 16 May 2016, attaching the financials that would otherwise make up the individual store profit and loss statements. There are no further emails or other written correspondence to be provided in regard to the preparation of the individual store and loss statement for Victoria Square for the financial year ending 30 June 2015. We otherwise remind you that the profit and loss statement itself was provided at page 2 of the letter recently provided to you from BCFR.

It is noted that aside from what has already been provided, all that otherwise occurred between our clients and BCFR was to call as otherwise received from BCFR, following which our clients attended to the BCFR office for signing of the same. There were therefore also no draft copies of the same provided to our clients for any interim reviews.

To this extent, we advise that nothing further may be provided by our clients in respect of this request.

404 I think it is plain enough that the letter of 15 April 2020 from DBH to DC Strategy identifies very clearly that for the 30 June 2014 year, the individual financial statements for the Victoria Square premises could have been obtained upon request to BCFR at the same time as the consolidated accounts were received by the Funk Group on or about 17 February 2015 and for the 30 June 2015 year on or about 3 June 2016. On the evidence. I am also satisfied that any failure by DC Strategy to directly address those questions in paragraphs 1 and 2 of the letter from DBH of 15 April 2020 was a deliberate omission on the part of the respondents. The questions are plain enough; Mrs Damaskos agreed that the letter had been forwarded to her for instructions and those instructions had been supplied and Mrs Damaskos was aware of the responses sent to the solicitors.

The Funk Group was receiving copies of all correspondence between the solicitors.196

405 In summary, it is apparent that the solicitors for Mr Emanuele were attempting to extract from the solicitors for the Funk Group, information about the preparation of financial statements for the year ending 30 June 2014 and 30 June 2015 and when they were available to the directors of the Funk Group. It is demonstrably clear that, from the perspective of both the applicants and respondents, the preparation of and the availability of these documents to the respondents (and potentially to the applicants) was of a very high level of importance. It is equally clear and I find that this very high level of importance of these documents, was well known and understood by Mrs Damaskos.

406 Initially, Mrs Damaskos said that she understood financial statements to include the balance sheets. She maintained that the balance sheets were not available as part of the financial statements.197 The issue at hand was the profitability of the business. As is well known, any losses generated by a business are taken to the bottom line of the balance sheet and accumulated losses are taken into account. Those accumulated losses increase the liabilities of the entity, such that, in a double entry accounting sense, reduce the overall value of the business. However, it is also well understood in an accounting sense, that it is not necessary for a balance sheet to be prepared in order to understand the trading position of a business if a profit and loss account or a cash statement is properly prepared. This was well understood by someone in the position of Mrs Damaskos with her training as an accountant and her commercial experience in finance and banking. Her sensitivity to the difficulties that arose as a result of the preparation of the separate financial statements then became apparent.

407 Mrs Damaskos agreed that if the answer of the respondents to the request of DBH in their letter of 23 March 2020 was a denial then this denial would have been included in the letter of DC Strategy of 9 April 2020, reflective of instructions of the respondents. She agreed that nowhere within that letter is there any indication that there was a denial of the propositions put by DBH in their letter of 23 March 2020. Mrs Damaskos was then taken to the letter from DBH to DC Strategy dated 15 April 2020.198 The letter pertinently states:

It is evident from the above correspondence that your clients’ position is that for the financial year ended 30 June 2014 both the consolidated and annual financial statements for Funk CBD Pty Ltd and the individual store financial statements relating to stores operated by Funk CBD Pty Ltd in particular for Victoria Square, were received by your clients from BCFR in final form on or around 17 February 2015.

408 There is no denial of this proposition within the correspondence sent on behalf of the respondents.

196 Exhibit A2, vol 8, tabs 222A-222ZC.197 T691.37-38.198 Exhibit A2, vol 8, tab 222R, p 2096ZAE.

409 Mrs Damaskos denied the proposition that on the date that she signed the consolidated financial statements for Funk CBD, she was provided with individual profit and loss statements.199 DBH positively asserted that both sets of documents were received from the same accountants on the same day. Mrs Damaskos then agreed that she may have seen the correspondence from the solicitors and she may have been aware that the solicitors DBH were inviting her solicitors, DC Strategy, to identify any disagreement with any aspect of their letter setting out their understanding about the materials provided to Mr and Mrs Damaskos by BCFR. In particular, her attention was drawn to the statement in the letter of DBH that:

… if we don’t hear from you in that regard by that time, our clients will rely upon your clients’ position being as set out in this letter for the purposes of these proceedings.

410 Mrs Damaskos then said that she did not treat the document as being particularly significant. She thought it meant consolidated financial statements were prepared and received at around those dates.200 I am unable to accept that evidence. I think it strains credulity and it is untrue. Counsel for the applicant also referred to a jointly agreed chronology which stated at paragraph 10 that it was agreed between the parties that in February 2015, the 2014 financial year consolidated financial statements for Funk CBD and individual profit and loss statements for individual Funk company stores were received by the Funk Group from BCFR. Item 22 of that agreed list, records that for the financial year ended 2015, both the consolidated financial statements and individual profit and loss statements for all individual company stores including Victoria Square were received by the Funk Group from BCFR on 3 June 2016. Mrs Damaskos then said that these (agreed) facts were untrue.201 The 2015 documents were signed on or around 3 June 2016.202 Mrs Damaskos denied that at the time that those consolidated accounts for the 2015 year were provided, that she received separate profit and loss accounts for the Victoria Square business.203 She then denied that it would have been very important for her to know what the profit and loss was for each of the stores, and that was why those documents were prepared for each of the 2014, 2015 and 2016 financial years. Mrs Damaskos denied that it was important to be in possession of each of those financials at the end of each of those trading periods.204

411 Apart from accepting that the individual departmental profit and loss accounts were not prepared except upon request, I do not accept any of those denials of Mrs Damaskos. I am satisfied on the evidence that Mrs Damaskos was attempting to avoid an obvious conclusion of fact based upon the whole of the evidence which she knew was very damaging to the case that was to be put on behalf of the respondents. If Mrs Damaskos accepted those propositions, then she

199 T701.12.200 T702.1-7.201 T703.35; T704.6.202 T705.8-10.203 T705.11-22.204 T705.22-36.

would also accept the proposition that upon his request she could have provided quite accurate, up-to-date figures to Mr Emanuele at the time that he was considering purchasing the Victoria Square store. He could have then made his assessment of the true value of that store. The actual profit and loss statement in relation to a full year of trading for the 30 June 2015 year disclosed a profit before tax of $80,125 which was significantly less than the profit shown on the financial statements with the material enclosed in the business profile document.205 For obvious reasons, the financial return does not show any charge for franchise fees on gross earnings at the rate of 7%. If that figure is taken from the profit of $80,125, the result is a profit before tax of only $45,000. That would need to be further reduced by a salary payable to a manager. There is no evidence that Funk CBD made an allocation for a manager’s salary within the service charges and it follows that, the business was not profitable. It could not sustain borrowings of $410,000, or any amount up to $410,000, or above the $200,000 which Mr Emanuele planned to contribute as capital to the purchase price derived from the sale of his own other business assets. Using a multiplier of three on that figure of $45,000, at best, the business was worth between $100,000 and $125,000. There is another question whether a multiplier of three is appropriate in those circumstances where the profit is so low.

412 In her evidence, Mrs Damaskos attempted to deflect from any suggestion that proper financial information could have been given to Mr Emanuele at the time of the negotiation for the sale and purchase of the Victoria Square store. I am satisfied that such information was available, it was in the control of the respondents and a deliberate decision was made by the respondents not to provide that information to Mr Emanuele.

413 That view is confirmed by the content of the affidavit of Mrs Damaskos of 12 August 2019.206 This affidavit was sworn in the response to an application by Mr Emanuele for further and better disclosure by the respondents. At paragraph 5 in the affidavit, a response is made to paragraph 2.1.3 of the applicant’s application. That paragraph seeks bookkeeping and accounting records including profit and loss statements relating to the individual operation of the Victoria Square store. In paragraph 5 of the affidavit. Mrs Damaskos says that there are no other financial statements available apart from those that have been disclosed. A proposition is then put to her in cross examination as follows:207

Q I suggest that at that time (in 2019 (as well as in 2015 and 2016)) you in fact well knew when you signed your affidavit that the profit and loss statements for Victoria Square, for the financial years ending 2014, ‘15 and ‘16 were in fact available via either your records or BCFR’s records?

A I did not have those records at the time.

Q And I suggest that when you swore this affidavit, what you have stated on oath in paragraphs 3 and 5 was not correct.

205 Exhibit A2, vol 1, tab 2, p 33.206 Exhibit A16, tab 3, p.228.207 T706.5-24.

A No.

414 I reject the evidence of Mrs Damaskos. It is neither truthful nor reliable. It is demonstrably incorrect. It is without foundation.

415 Mrs Damaskos agreed that the individual profit and loss accounts for the Victoria Square business for the 2014, 2015 and 2016 years, were not disclosed until the respondents fifth list of documents and only after several applications had been made for the production of those documents. She was also aware those documents were available to be produced by BCFR from their system at request. If they needed them, they could be prepared.208

416 Mrs Damaskos was then taken to the request of 1 June 2016 from Mr Versace in relation to the tax returns, business activity statements and copies of balance sheets for the Victoria Square business.209 She agreed that she knew at that time Mr Emanuele was seeking further financial information that BCFR had the capacity to provide that information, even if the documents were produced on a consolidated basis.

417 Mrs Damaskos denied that she had any understanding that Mr Emanuele was seeking some formal verification of what was in the spreadsheet information.210 I am unable to accept her response. It is apparent that Mr Emanuele was seeking to verify information, as he had been advised by Mr Sun. When Mr Emanuele requested the taxation returns, she did not read too much into it. She did not give any thought to the request and responded that the respondents were unable to provide the information. She did not volunteer that BCFR could have provided the information if asked. She was content to say that was not what was asked.211 I am unable to accept the truthfulness or the reliability of that evidence. Mr Emanuele was seeking further financial information when giving consideration to whether or not he would purchase the Victoria Square business. These requests made were made by Mr Emanuele after Mr Versace emailed the business profile document to Mr Emanuele on 20 May 2016.

418 Some four days before Mr Versace’s email of 26 May 2016, Mrs Damaskos had generated a spreadsheet of financials which showed a slightly lower profit than that was being represented by Mr Versace to Mr Emanuele. These results followed the deduction of actual expenses incurred in relation to what was described as optional cleaning expenses.212 Mrs Damaskos knew that at the time that the information was sent with the email of 16 May 2016, there was to be further consideration of the financial material provided after consideration by the accountant.213 Mrs Damaskos then said the only modifications the accountant makes is to add depreciation or interest expenditure if applicable.

208 T713.2-25.209 Exhibit A2, tab 39, p 678.210 T715.1-5.211 T715.18-716.3.212 T716-717.22.213 T717.26-35.

419 Mrs Damaskos was then taken to Funk CBD’s final profit and loss statement for the Victoria Square store prepared by BCFR.214 There, it is disclosed that BCFR recorded accountancy fees, depreciation, further general expenses, interest paid and other additional expenses.215 She agreed that she knew that at that point in the chronology, the accountants were in the process of finalising the results for the Funk Group which may have an effect upon the financial information contained in the business profile document.216 She knew that changes may be made to the financials that had been provided to BCFR on 16 May 2016,217 and she knew that the business profile document did not make reference to those matters that would be adjusted by the accountants.

420 All of this was known by Mrs Damaskos at the time that Mr Emanuele sought further financial information on 31 May 2016; this was only two weeks after that information had been supplied to the accountants. Mrs Damaskos then said any additional expenses would be in the consolidated financial statement but she agreed that there would be information prepared or available from the accountant which would include additional expenses for Victoria Square solely.218

421 When challenged about whether or not she said to Mr Emanuele that the accountant was in the process of finalising financials and they could be provided, Mrs Damaskos’ response was as follows:219

I’m not privy to the conversation that Mr Versace (the agent) had with Mr Emanuele about extra financial information. I responded on the email and Mr Versace is fully aware that we provide Form 2 and profit and losses that are prepared by our accountant if requested by any prospective buyer, so I am not privy to their conversation on if Mr Emanuele required a profit and loss statement from the accountant.

422 This is a further example of Mrs Damaskos attempting to deflect responsibility from her failure to provide appropriate financial information to Mr Emanuele at the time of the first negotiations with him after his initial contact, at the time of the provision of the business profile document and subsequently at times when he sought further financial information. This evidence of Mrs Damaskos overlooks the fact that Mr Versace is the agent of the vendor/respondents. He communicates the information provided to him by the vendors. In his evidence, Mr Versace did not agree with these propositions including that if requested, further financial information could be provided to a prospective buyer. I reject that evidence of Mrs Damaskos. It is without any credibility, I consider it is not truthful or reliable and it is without foundation. In the end, Mrs Damaskos said she would rely upon Mr Versace’s response to Mr Emanuele.220 In my opinion, this merely compounds the futility of the positions of the respondents because Mr Versace was communicating to Mr

214 Exhibit A3, tab 3, p 2922G.215 T719.1-25.216 T719.27-719.35.217 T720.10-13.218 T720.24-34.219 T721.2-9.220 T722.10-14.

Emanuele what he had been told by his vendors. I then asked questions of Mrs Damaskos in an attempt to ensure that my understanding of her evidence was correct. That transcript is as follows:221

HIS HONOUR

Q. Well, can I perhaps then - so that I am clear, my understanding for the answer to the question is no, and although you didn't see it at the time because it's not copied in to you, you are now saying that you would rely upon Mr Versace's response to Mr Emanuele following on from your email, is that right.

A. Yes, because he has been provided with form 2s before from us and profit and loss statements, so -

Q. Well, leave aside that. I need to put this proposition to you -

A. Yes.

Q. - and then I will wait for your comment. I have heard all of your evidence in relation to this. I have seen the request to Mr Versace from Mr Emanuele, which is on p.678, and three items are set out. Your response to Mr Versace is to say 'Other businesses operate under the same entity, so we are unable to provide the below', you see that.

A. Yes.

Q. My reading of that document, I want your comment on this, my reading of that document is that you plainly understood that you were being asked for separate documents in relation to the Victoria Square premises, separate financial reporting documents in relation to the Victoria Square premises. What do you say to that.

A. I didn't read too much into it. It was a case of our BAS statements are lodged on a consolidated basis so it would be no use to Mr Emanuele. Our tax returns were on a consolidated basis.

Q. No, I understand all of that, but your response, as I read your response, is that you understood that you were being asked to provide separate financial information in relation to the Victoria Square premises but you are saying because you operated under the same entity, you were unable to provide them.

A. Yes, we were unable to provide those requested documents.

Q. But at that time you understood - as I understand your evidence - you understood that if you asked the accountants they could press a few buttons on their accounting software and they could produce a profit and loss account and balance sheet for the Funk Victoria Square business.

A. Not a balance sheet, that I'm aware of, but a profit and loss, yes.

Q. All right, leave aside balance sheet, a profit and loss.

A. Yes.

221 T722-724.

Q. So am I right then that you understood that you understood that you were being asked for separate documents in relation to Funk Victoria Square and your response was 'Well, we can't do that because we operate under the one entity'.

A. Yes.

423 Based on the information provided to Mr Emanuele in the business profile document and in dealing with the requests made of them by Mr Emanuele for further financial information in relation to the conduct of the business of the Victoria Square store, I am satisfied that the respondents were aware that, after the deduction of the 7% amount for franchise fee and before the attribution of any amount for a manager’s salary, the profit before tax was almost $45,000. Accepting only for the sake of this discussion, the use of a multiplier of 3 (as described in the report of Mr Crase) the business was not and could not be worth $410,000. I consider that the conduct of the respondents by the provision of the business profile document and the refusal to provide further financial information on request was an active and intentional misleading of Mr Emanuele at a time that he was considering entering into the purchase of the Victoria Square store.

424 Having regard to the content of the business profile document, and the manner in which the respondents dealt with Mr Emanuele, I am satisfied that they were deliberately attempting to create in the mind of Mr Emanuele the most favourable impression possible about the performance of the Victoria Square business. This positive impression was misleading because the respondents knew from that such a positive impression could not be justified and, on proper analysis, the business of the Victoria Square store operated as a franchise store was barely, if at all, profitable. That was known from the time that the store was operated by Kindred under a franchise agreement. Mrs Damaskos eventually accepted that if requested, the separate profit and loss accounts for each of the sites could be extracted, particularly for the Victoria Square store.222 She also understood that in preparing those accounts, there would be a proper attribution of expenses for accounting costs, depreciation and interest.223

425 Mrs Damaskos then said that she was not aware that the separate profit and loss account was available as at 3 June 2016; prior to Mr Emanuele committing himself to the purchase of that store. I am unable to accept that evidence. The earlier evidence of Mrs Damaskos was that she was well aware before Mr Emanuele signed the business sale contract on 17 June 2016 that she had the capacity to generate a separate profit and loss account statements for the Victoria Square store and for every other store operated separately. She was well aware of their preparation and of their possession by the Funk Group. She also agreed that she assumed, as a qualified accountant, that a prospective buyer would add back interest depreciation and other expenses, but that is not something that she said to Mr Emanuele.224

222 T726.22-23.223 T727.16-19.224 T728.28-729.6.

426 Mrs Damaskos was taken to the sale of business agreement. 225 Within the agreement, a warranty is given that the purchaser may rely upon the financial information contained within the document.226 This was the same information as contained within the business profile document.227 She said that she did not, but could have, asked the accountant to have done a formal profit and loss statement for the Victoria Square store. She also accepted that, at a minimum, she could have sought to verify what was the true profit and loss for the financial year ended 30 June 2015, before the contract was given to Mr Emanuele to sign.228 She did not do so. She also accepts that the figure of $117,000 shown on that financial information is not the true net profit for the Victoria Square store.229 Mrs Damaskos was therefore aware the use of the description ‘profit’ was wrong because it was not a calculation of profit as that term is understood and of its misleading nature. In light of that answer, I asked Mrs Damaskos why, in the circumstances where there were already some asterisks at the bottom of the financial information, the vendor did not put in a second form of asterisk such that it would read: ‘Accounting interest and depreciation excluded’.230 In her response, Mrs Damaskos agreed that the more appropriate expression was not net profit but EBITDA.231

427 I am satisfied that by no later than 2010, and from 2010 until 2016, Mrs Damaskos was well aware that if a request was made to the accountants BCFR, separate profit and loss statements for the Victoria Square store could be prepared within a day or two. This follows the negotiations between the respondents and Kindred. In an email of 15 February 2010, Mrs Bueti wrote to Mrs Damaskos saying that Kindred is in negotiations with the bank, however before Kindred can go any further, the bank has requested financials as follows: the financials for the year ended 30 June 2009 and interim financials of 1 July 2009 to 31 January 2010. It was Mrs Damskos who responded with an email of 15 February 2010 to Mrs Bueti saying that the January 2010 financials have not been finalised and will only be done at the end of the quarter. She goes on to say:

As previously advised, our financials are prepared on a group basis so accountant prepared financials are not available on an individual store basis…

428 Mrs Damaskos knew that Kindred had decided to pursue the purchase of the Victoria Square store. In response to the email of 15 February 2010, Mrs Bueti said to the respondents that she had gone over the matter with the bank and they are insisting on financials, as they cannot make a decision based upon client-prepared spreadsheets. She suggested the only other possibility could be that the accountant prepare a statement similar to the spreadsheet and sign off on it as being a correct record of everything that has been lodged on the quarterly BAS

225 Vol 1, tab 4, p 74.226 T729.35-730.3.227 T730.28-30.228 T731.11.229 T732.8.230 T732.25-27.231 T732.28-T733.3.

statements for that particular location. Mrs Bueti also said that she had a feeling that the bank would come back with this as she, as an accountant, always has these requests when her clients are looking to sell their businesses.

429 As a result, Mrs Damaskos was aware from 2010 of the insistence of a bank for the provision of prepared financials. She instructed BCFR to prepare whatever was needed.232 Two days later the accountants provided the requested financials to the respondents and then to Kindred.

430 In an email of 17 February 2010 Mrs Damaskos sends to Mrs Bueti the financial statements for the Victoria Square business to December 2009, in which she emphasises that depreciation has been included, and figures to 30 June 2009 for the Victoria Square store. 233 These were prepared on her instruction to their accountant. The 2009 figures the Victoria Square store had been extracted from Funk Group financials and there was a reference to start-up costs. Mrs Damaskos offered to do a reconciliation item by item. A profit and loss account (cash statement) was prepared, which reflected the position of the Victoria Square store, as at 31 December 2009 and 30 June 2009.234 These profit and loss statements were extracted from the group result two days after the request made by Mrs Damaskos to BCFR. Therefore, Mrs Damaskos was aware by no later than 2010, and as at 2016, that if a separate profit and loss statement for a company store such as Victoria Square was required, BCFR could deliver that document in short order.

431 Mrs Damaskos was also aware that in her role as an accountant, Mrs Bueti was telling her that banks always make these types of requests. These are the very same requests that were made of Mr Versace and therefore the respondent, on 3 June 2016, some 14 days before Mr Emanuele signed for the purchase of the Victoria Square store. I do not accept the evidence of Mrs Damaskos that there was any difficulty in producing these documents. I am satisfied from the evidence, and also as a matter of common sense and experience, that if such financial statements are required, they can be readily prepared on instructions being given. Any contention to the opposite is wrong. The statement by Mr and Mrs Damaskos through their agent to Mr Emanuele that separate financial statements could not be prepared (after Mr Emanuele had received his advice from Mr Sun) was to their knowledge was wrong. It was misleading and Mr Emanuele believed what he was told. Mr and Mrs Damaskos were also aware of this belief of Mr Emanuele and that it was wrong. They were aware that this conduct was misleading. Their conduct deflected Mr Emanuele who was not sufficiently experienced to continue to make the same requests of them as had been made by Mrs Bueti, who was then an accountant in public practice. Mr Emanuele was actively misled by the respondents and they intentionally deflected him from pursuing his enquiries about the financial performance of the Victoria Square store.

232 T739.14-15.233 Exhibit A2, vol 14, p 3418.234 Exhibit A2, vol 14, p 3420 (30 June 2009); p 3421 (31 December 2009).

432 Mrs Damaskos accepted that the business profile document was provided by both Funk Franchise in its capacity as the trustee of the A & J Damaskos Family Trust, as the respective franchisor, and by Funk CBD as the vendor of the business.235 When she provided figures to Mr Versace on 9 May 2016, she was content about the accuracy of those figures. The intention was to provide a summary of information to a prospective franchise with a view to obtaining the signature of that franchisee to a contract and to take the store as a franchisee. She would not agree that it was to induce a prospective franchisee to purchase the business.236 I am unable to accept that evidence. I think it is demonstrably incorrect. The reason why any form of financial information is provided to any person who answers an invitation to treat in relation to a business is to inform the person and by use of that information to persuade that person to purchase the business.

433 Mrs Damaskos then agreed that any financial information was provided to Mr Emanuele as a prospective franchisee to provide him with a full background on the business site. She accepted that Mr Emanuele could use the information and rely upon it when considering his decision about whether to pursue that opportunity or not.237 That was the purpose of providing the business profile document.238 It enabled Mr Emanuele to give consideration to the opportunity and to have the financial figures properly analysed. The purpose was for him to rely upon the financial information and therefore to assess whether to pursue the opportunity. He was initially only provided with the financial information initially and he had not been provided with the disclosure documents.239

434 The business profile document was provided to Mr Emanuele on 20 May 2016 in an email from Mr Versace and the disclosure document was subsequently provided on 3 June 2016.240 In his email accompanying this document, Mr Versace said that the franchise is a company store and is being sold by the franchisor 241 and there are many savings in franchise fees, training and stock of the business.242

435 It was the intention of Mrs Damaskos that once that financial information was provided, that Mr Versace as the agent of the vendor would immediately send out the franchise agreement, the licence to occupy and further financial information.243

436 Mrs Damaskos also knew that Mr Emanuele had no previous involvement in the food industry. His experience was limited to the Isuzu franchises and the experience he might have gained in the conduct of those franchises. She initially 235 Exhibit A2, vol 1, tab 2.236 T743.19-24.237 T730.238 Exhibit A2, tab 2, p 41.239 T743.25-744.18.240 T744.30-38.241 Exhibit P2, tab 30.242 T745.36-746.11.243 T747.13-748.9.

maintained the denials within the respondents’ pleadings that the material contained in the Victoria Square financial information did not constitute a representation that the business conducted by Funk CBD from the Victoria Square premises derived a substantial net profit during the financial years or partial financial years ending 2014, 2015 and 2016. She was pressed about whether she maintained that denial. She said she would need to refer to her solicitors. Notwithstanding that in her evidence in chief she informed me of her wealth of experience in banking, finance and commercial life generally; she could not say whether this reported sum was a substantial profit.244 She would only say that it was a profit of $117,000 for the financial year ending 30 June 2015.245 This was based upon a turnover of $747,000 of net sales.246

437 Mrs Damaskos also maintained the denial of the respondents that the financial material did not convey a representation that a business conducted from the Victoria Square premises by a franchisee under the system was reasonably capable of deriving a substantial profit plus a salary for the franchisee’s manager if employed by a manager of the business.247 In the end, Mrs Damaskos said that the question of profit is up to everybody’s interpretation.248

438 Mrs Damaskos was then taken to the material within the Financial Information.249 She said that the Financial Information reported there was merely an illustration.250 She agreed this information conveyed a representation that if a franchisee was to operate the business and achieve the same result as those achieved by the Funk Group, then the benefit of the amounts available to the owner/operator would be as set out in that financial information.251 However, she disagreed that the material was prepared and delivered on the basis that it was an illustration about what a franchise could achieve if operating the business in the future. She said this was only based on historical information.252

439 I am unable to accept this evidence. That Financial Information was generated on the basis of what was intended to disclose the amount that would be available to an owner/operator after taking into account franchise and marketing fees of a total of 7% of gross turnover and adding back the manager’s cost out of the wages expense paid by the Funk Group. It was more than historical information. Mrs Damaskos denied that this financial information went further than that. I am unable to accept that evidence. The intention of the documentation is plain enough; it is to inform a prospective franchisee of the benefit that may be obtained by a prospective franchisee having regard to the financial information there provided. Mrs Damaskos also agreed that if a prospective franchisee was to be the manager of the business then it would reduce the wages payable to another 244 T753.7-35.245 T753.17-19.246 T754.2-7.247 T755.12-756.2.248 T756.2.249 Exhibit A2, p 41.250 T756.28.251 T756.38-757.22.252 T757.15.

who may be employed when the store was operating as per the materials provided by the respondents.253 This was because the wages cost would decrease by the manager’s wage if the manager’s wage was paid to the franchisor.

440 In answer to questions from me, Mrs Damaskos confirmed that when regard is had to the whole of the information contained within the Financial Information,254 the impression created is of a business which is increasing in profitability year by year so that, under the control of respondents, the business is increasing its turnover, managing its costs and increasing its profitability. She agreed that the impression created was of an upward trajectory of the fortunes of the business between the commencement of the 2014 financial year and the end of the second quarter of the 2016 financial year.255 She also agreed that when providing this financial information in the business profile document, she intended to communicate to Mr Emanuele that a prospective benefit was available based upon the historical figures of the Funk Group.256 In that way, it would convey a favourable impression of the fortunes of the business. Mrs Damaskos maintained the denial of the respondents that the figures contained within this financial information did not contain costs and expenses that were reasonably necessary to be incurred by a franchisee in operating a business.257 She agreed that when providing this information, her intention was to provide all of the costs associated with the store to a prospective franchisee so that it may be understood as on the basis of future operations of the store by a prospective franchisee, based upon historical figures.258 Thus, it was important to ensure that when the financial information was provided, there was a signed receipt of that financial information.259

441 Mrs Damaskos was then shown the actual financial reports for the operation of the Victoria Square store in each of the financial years for 2014, 2015 and 2016. These are contained within Exhibit A3. In the 2014 financial year, Funk CBD derived a net profit in the order of $68,000. That was absent a notional deduction of 7% of the gross turnover for franchise fees that would have to be paid by a franchisee. Mrs Damaskos agreed that in the 2015 year, the financials prepared by the accountants show a profit of $80,000 as opposed to $118,000.260 Mrs Damaskos said that it is subject to depreciation, interest, and an apportionment of accounting fees. In relation to the fit out, Mrs Damaskos agreed that there was correspondence sent to Kindred disclosing that the fit-out cost $400,000 and by that time it was about 7 years of age.261 The written down value of the fit out at the time Gabjet acquired the business in 2016 was about $127,000. That was the depreciated value of the business assets being purchased

253 T758.13-21; Exhibit A2, p 41.254 Exhibit A2, p 41.255 T760.1-30.256 T761.11-16.257 T763.1-15.258 T763.6-21.259 T763.36-764.16.260 Cf. p 41, 2015 figures.261 Vol 14, tab 378, letter 19 January 2010.

by Gabjet. Mrs Damaskos also agreed that it would be reasonable for a prospective franchisee to take depreciation of the plant and equipment and fit out into account in assessing the viability of the business.262 However, Mrs Damaskos then said that she would defer to her accountant on that point.

442 In the preparation of the financial information, she did not defer to her accountant on that point. She accepted that a prospective purchaser would want to take into account depreciation of plant and equipment at the written down value when assessing the price to be paid for the business. This would be relevant on at least two bases. The first, being the level of depreciation already claimed by the vendor and second, being an assessment of the value of the plant and equipment. Mrs Damaskos agreed that at the time that the respondents negotiated with Kindred, the respondents provided to Kindred financial statements which did provide an item for depreciation. It is very difficult to understand why a different approach was made when dealing with Mr Emanuele. No explanation was given by Mrs Damaskos as to why there was a different approach taken.263

443 On the question of interest, Mrs Damaskos agreed that Mr Emanuele had said that he was intending to take a loan but she was not sure of the amounts. The cost of interest would affect profitability if applicable, which Mrs Damaskos accepted.264

444 Mrs Damaskos said that the way the financial information document265 was presented was that it was intended to give an indication of the costs that a franchisee reasonably needs to incur in the operation of the Victoria Square store from an historical point of view. Leaving aside any question of extraordinary expenses, she agreed that, for example, accounting and bookkeeping expenses are ordinarily and reasonably incurred by a franchisee in the running of its business. However, she said that is an advice that they gave to every prospective franchisee. Some are savvy and prepare their own financials; others employ accountants. It is a matter for their personal decision. This is the same for office administration and general operating expenses.266

445 Mrs Damaskos would not agree that it would be reasonable where a franchisee operating a Funk store with a turnover of between $750,000 and $800,000 would have an accounting software package. She said that would be specific to the franchisee. I am unable to accept that evidence. Any business with that level of turnover would, according to the evidence of Mr Crase, reasonably require an accounting software package in order to track both income and expenses. To do otherwise would be to fail to operate the business properly. I do not accept the evidence of Mrs Damaskos that it would be an issue specific to the franchisee. I consider that consistent with the evidence of Mr Crase, which I accept, that is a matter for all franchisees. She also said that motor vehicle 262 T774.11-17.263 T774.20.264 T775.20-25265 Exhibit A2, tab 2, p 41.266 T778.27-T780.3.

expenses were specific to a franchisee as were such things as staff training and welfare expenses. However, she would not accept that in general, staff welfare expenses would be reasonable for a franchisee to incur.267 She said in the end that it was a matter for the franchisee. I do not accept that evidence. Where a business has a turnover of in the vicinity of $800,00 per annum, and it is labour intensive as a café style business is, then it is always necessary to give consideration to staff and welfare expenses.

446 Mrs Damaskos also would not accept that a franchisee might incur bank fees.268 She agreed that within the financial information provided by their accountant, an amount is reported for bank charges. For example, in the Funk CBD accounts for the year ended 30 June 2014, there was an item under expenses for bank charges of $3,448.269 This was inconsistent with the evidence that Mrs Damaskos gave in chief that there were no bank charges incurred by the business. She said that these related to a loan facility not day to day bank charges in the business trading accounts.

447 She was then also taken to the 2015 financial report.270 This shows an accounting fee of $1,860. However, there was no accounting fee recorded as an expense for the 2014 year. In answer to questions from me, she was taken to the interest paid column. In the 2014 year, interest paid by Funk CBD was $10,388. In the 2015 year, it was $43,740. She said that it was likely that the business had made significantly larger bank borrowing in that 2015 year.271 The notes to the balance sheet are to be found within Exhibit A3.272 The current liabilities are trade and other payables. The non-current liabilities are borrowings, in the amount of $805,000. Note 8 to the notes to the balance sheet discloses that the borrowings are in fact two loans. The first from A&J Damaskos Family Trust of $370,000 and the second from the Kakas Family Trust of $435,000, totalling $805,000. That loan had also been recorded in the balance sheet for the previous year ending 30 June 2014.273 Therefore, the business of Funk CBD was capitalised through borrowing from the family trusts of Mr and Mrs Damaskos and the family of Mrs Damaskos. Therefore, rather than paying a bank interest amount, a differential amount of interest was paid to the family trusts. In the 2014 year, the interest paid was $10,388 on a borrowing of $805,000. In the 2015 year, an amount of interest of $43,740 was paid on borrowings of precisely the same amount. Plainly enough, the sum of $805,000 was borrowed from family trusts to pay the settlement to Kindred. The borrowing must incur interest to the lending family trusts in order to comply with the usual obligations as a trustee of those trusts. In the usual course, the interest rate applicable would be a commercial rate; this is a fundamental obligation of a trustee in this position.

267 T780.38-781.23.268 T781.24-28.269 Exhibit A3, tab 4, p 2912D.270 Exhibit A3, tab 5, p 2922A.271 T788.22-789.2.272 Exhibit A3, tab 5, p 2922B.273 Exhibit A3, tab 5, p 2922F.

448 Mrs Damaskos said that there was a differential amount of interest paid because the loan may not have been taken out in the full year. However, the notes to the accounts do not disclose that to be the case. The closing balances as at 30 June in each year are the same and there is a differential amount of interest paid. Therefore, in the year ended 30 June 2015, there were total current liabilities being trade and other payables of $146,627 and total non-current liabilities of $805,000, in total $951,627. The balancing figure on the balance sheet was an intangible asset of $805,000. That was described in note 6 to the account as being an amount for goodwill. That is, Funk CBD was carrying a goodwill credit in its balance sheet of $805,000. That was so for the previous financial year. The accounting standard274 required a writing down over time of the value of goodwill unless there was evidence to sustain the calculation of goodwill. Ordinarily intangibles are written down over the life of the asset. That has not occurred in the Funk CBD accounts.

449 Therefore, the balance sheet is only sustained by the recording of an entry for goodwill of $805,000 without compliance with the accounting standards in relation to the write down of that goodwill or any independent assessment of its value.

450 Mrs Damaskos agreed that within the financial information provided to Mr Emanuele, there was no reference to any office administration or general operating expenses document.275 There is an entry ‘Other/R&M’. This disclosed the expenditure of the amount of between $1,000 and $2,000 per annum for the three financial periods. This would be the only place such expenses would be recorded. She now has no record of any of the breakdown of those expenses as a ledger sheet record is no longer in her possession. She accepted that other expenses such as IT services or subscription costs must fall within that general description.276 She did accept that there were no staff welfare expenses incurred in the wages expenses.277

451 Mrs Damaskos then denied that the Victoria Square store benefited from the costs in the nature of those paid by Funk CBD for IT costs, subscription costs, depreciation, interest costs, staff and welfare expenses. I am unable to accept that denial, and it is demonstratively incorrect. Viewed objectively, any business operating in this shop front environment with a turnover of greater than $800,000 has incurred and will continue to incur some or all of those expenses. Mrs Damaskos was then taken to her affidavit sworn 19 September 2019. This was filed in response to an interlocutory application filed by the applicants of 25 July 2019 in relation to further disclosure of documents and subsequent to the filing of the fifth list of documents.278 When addressing the separate costs incurred by the various stores, Mrs Damaskos said at paragraph 4:

274 AASB 138, 18 June 1996.275 Exhibit A2, tab 2, p 41.276 T792.12-16.277 T792.23-25.278 Exhibit A16, Tab 6.

4. The Third and Fourth Defendants operate between each other all Corporate Stores in the Funk Network and to this extent prepare and lodge tax returns and BAS statements which account for the combined income of all corporate stores. The Third and Fourth Defendants, in light of comments in paragraph 3 above, are therefore unable to provide these documents in a form which only accounts for either the Victoria Square or Waymouth Street store.

452 In paragraph 3 of the same affidavit, Mrs Damaskos said the respondents do not use or have access to any third-party accounting software such as MYOB or Xero. The receipts and expenditures are managed by a manual spreadsheet system. It was in that context that Mrs Damaskos addressed the question of the separate reporting of expenses and income incurred by and derived from the separate businesses. At paragraph 9 of her affidavit, she said:

9. The Defendants note that individual Corporate Stores are not invoiced or allocated against their Profit and Loss statements, any costs and expenses otherwise incurred by the Defendants directly in regard to the operation and management of the Funk Network as a whole, including accounting costs for Corporate Stores and/or office administration, vehicle or IT services, even if stores such as Victoria Square and Waymouth Street may have benefited from the outlays made by Funk Head Office, as per all other Corporate Stores. All expenses that are accounted to individual stores have otherwise been disclosed.

453 I consider that the meaning of this paragraph is clear enough. Costs are incurred in relation to the operation and management of the stores within the Funk network of stores. These may include accounting costs for corporate stores, office administration, vehicle expenses or IT services. Those are not separately allocated. Any other expenses that are accounted to individual stores have been disclosed. There are other incurred costs over and above the disclosed costs which are referrable to the operation of the corporate stores such as Victoria Square but these are not separately allocated to those stores and are accounted for at the level of, in this case, Funk CBD.

454 Mrs Damaskos affirmed that the content of the affidavit was true.279 She then denied that the meaning of the paragraph is that there are circumstances in which stores such as Victoria Square have benefited from outlays made by Funk CBD.280 I am unable to accept that evidence. Mrs Damaskos attempted to make a distinction about the use of the words ‘may have benefited’ within the paragraph and as I understand her evidence, she attempted to say that there wasn’t necessarily a benefit. I am unable to accept that evidence. The apparent meaning of the affidavit is that those costs are met at the higher level of Funk CBD. 281 She said that they may have benefited, not that they did benefit. I asked Mrs Damaskos whether she agreed with the proposition that the clear meaning of the paragraph is that she was addressing the question of expenses that occurred at the highest level which may have benefited the stores themselves in IT, vehicle, administration or accounting expenses. She agreed. She said she did not know whether they had benefited the individual stores. She also agreed that 279 T793.28.280 T793.36-794.2.281 T794.21-35.

notwithstanding such a concession, any expenses that were known to be attributable to individual stores had been disclosed.282 That of course did not address the question of the costs incurred at the higher level which had been paid by Funk CBD and about which she knew nothing, or of the failure to attribute those costs separately to the stores. Mrs Damaskos agreed that Funk Group expenses relating to head office are attributed to the Funk Group as a whole and they are not necessarily involved with the running of stores. Any costs incurred at the head office level (Funk CBD) were not reflected in the business profile information because she did not believe that any head office expenses were to the benefit of those stores.283 She denied the proposition that costs incurred at that level of the operation of Funk CBD would be attributable to the stores.

455 Mrs Damaskos was then taken to Exhibit A12. This was a document prepared by Mr Crase showing that the sales from Funk Victoria Square represented 62% of the gross sales of Funk CBD. He then compared the costs allocated to the financial statements of the business of the Victoria Square store in each of the financial years. For example, in relation to bank charges, 59% of the bank charges incurred by Funk CBD were allocated to the Victoria Square store. This was down from 67% in the 2014 year and 65% in the 2015 year. In the year prior to sale, merchant fees of $2,959 were incurred. None were allocated to the Victoria Square store, but in the same year 50% of the accounting fees were allocated to the Victoria Square store. No consultant costs were allocated nor were any vehicle, subscription and licensing costs or general expenses. 20% of the depreciation of the costs of the Victoria Square store in the year prior to sale were allocated. However, in the 2015 year, 55% of the total depreciation costs were allocated and in the same year 50% of the general expenses were allocated to that store. Thus, it can be seen that in various years, there was an inconsistent selection of costs and expenses to be allocated to the Victoria Square store. Bank charges were allocated in each year. Some accounting fees were allocated, some general expenses were allocated and some costs of depreciation were also allocated. The approach is inconsistent.

456 Mrs Damaskos was unable to explain why this differential application of costs occurred. There was no connection to particular events or circumstances that may have offered an explanation or a reason. I am satisfied that the application of particular costs at a given time was capricious in that it did not reflect particular circumstances or events. I am similarly satisfied following my rejection of the evidence of Mrs Damaskos that the financial information provided to Mr Emanuele was misleading at a number of levels including that it did not make disclosure of the costs and expenses incurred in the operation of the Victoria Square store, of which the respondents were well aware. The decision to include or exclude those actual expenses that I am satisfied were incurred was made by the respondents.

282 T798.13-29.283 T804.1-7.

457 Mrs Damaskos said that in the 2014 to 2016 years, the respondents operated another store which she thought was the Grenfell Street store. It may have been the Angas Street store in 2015. However, she recalled that the Angas Street store might have been refranchised during the 2016 year. Therefore, in the 2014 and 2015 years, when the majority of costs were allocated to the Victoria Square store, there were only two stores that the respondents were operating, namely Victoria Square and Angas Street through Funk CBD. In the 2016 year, the Angas Street store was refranchised. Mrs Damaskos agreed that if there was any overlap in the 2016 year it might be minor and that in the 2015 year, the Victoria Square store generated 62% of the overall income. Mrs Damaskos also agreed that there were no costs shown in either the individual profit and loss statements for Victoria Square or in the consolidated financial statements for Funk CBD for consulting costs, motor vehicle costs, or subscription and licensing.284 However, in the 2014 year, there were consolidated general expenses of $5,475,285 but on adjustment the correct figure is $5,129.

458 Mrs Damaskos also agreed that the role of Funk Coffee and Food in relation to the Funk Group was not limited to operating the company stores that are owned by it. It also provides services and incurs expenses in relation to company owned stores.286 The online payroll services are done through Funk Coffee and Food, not through Funk CBD, and there was a service fee charged between those two entities for staff wages and superannuation. Funk Coffee and Food provided services to Funk CBD over the period October 2013 until mid-2016, immediately prior to Gabjet acquiring the Victoria Square business.287 In Exhibit A3, there is a recording of computer expenses, general expenses, motor vehicle expenses, staff training and welfare expenses.288 Mrs Damaskos denied that any of those expenses related to Funk CBD’s role in providing services and incurring expenses in relation to the stores that were owned by Funk CBD. However, Funk Coffee and Food was the trustee of the family trust and it was providing services to Funk CBD at a cost, charged as management fees.289 Mrs Damaskos was then taken to the consolidated profit and loss statement of Funk CBD for the year ended 30 June 2016.290 She agreed that in relation to these financial statements, there were no costs for computer expenses, or motor vehicle expenses. Mrs Damaskos said that individual stores had their own computers although Funk CBD also operates its own computer services and charges service charges to the entities to which it provided services including the Funk Victoria Square store.

459 Mrs Damaskos said that motor vehicle expenses were incurred by the family trust and Funk CBD did not benefit from this expenditure. She said that the motor vehicle expenses only benefited the stores that were run by Funk 284 T807.22-37.285 T808.13-33.286 T811.10-24.287 T811.29.288 Exhibit A3, tab 12, p 2965.289 cf Exhibit A3, tab 5, p 2922A.290 Exhibit A3, tab 6, p 2930A.

Coffee and Food rather than under Funk CBD. She did not know this of her own knowledge and she relied upon the advice of her accountant.291 I am unable to accept that evidence. If the trustee of the trust provides the services and charges for the service and there was no delineation in the use of the motor vehicles in relation to the business of, for example, Funk CBD stores such as Victoria Square, then it is an artificial attribution of an expense merely to keep that expense within the trust and not allocate some portion of the expense to the entity in respect of which the expense was incurred. Thus, it is not said by the respondents that motor vehicles were not used in and about the business of the Victoria Square. Rather, this is an allocation by an accountant and a mere accounting entry. In those circumstances, I am unable to accept this evidence of Mrs Damaskos and she was only able to say it was a head office expense that the accountants have allocated to a particular entity.292 However, it is plain enough that the motor vehicle expenses were generally incurred and were an expense which would usually be attributed to the particular store or stores according to need and use. Mrs Damaskos was also not able to say how much benefit Funk CBD received from that expenditure. She reiterated that the cost was allocated to Funk Coffee and Food in its capacity as trustee even though Funk CBD benefited as did the stores which were owned by Funk CBD.293 I then asked Mrs Damaskos this question:294

Q If that’s right then you couldn’t be sure how much the other entity got from that either, could you

A No.

Q But I want to be clear on this; you’ve signed some declarations as directors in relation to the accuracy of the accounts. I just need to warn you about that. As I would understand, if there’s no allocation in relation to that then the assumption made by the accountants is that there is a general spread of benefit in relation to both entities; that is that merely because it’s not in one doesn’t mean that it’s not being used for the other.

A I know that the vehicles are owned by the Funk Coffee and Food entity.

460 I am satisfied from the answers given by Mrs Damaskos that the allocation of costs by the accountant is a decision by the accountants. It does not reflect the reality because Mrs Damaskos could not be sure how much benefit Funk CBD received from, for example, the expenditure of costs on motor vehicles. She did not say, and realistically she could not say, that no benefit was received by, for example, the Funk Victoria Square store on the expenditure of costs on motor vehicles allocated to Funk Coffee and Food. I think her evidence on that point is wrong and all she could say was that the vehicles were owned by Funk Coffee and Food. That is no more than saying that the costs in relation to those motor vehicles were allocated to a ‘silo’ of costs in a particular entity without

291 T813.3-24.292 T813.22-24.293 T814.1-5.294 T814.7-19.

attribution of the benefit ofthe expenditure of those costs where those costs might otherwise have been incurred by, say, the Funk Victoria Square store.

461 The inconsistency of the approach, about accounting allocations, is borne out by a comparison of the financial statements for Funk Coffee and Food in the 2016 and 2015 years. In the 2015 year, there was an allocation of staff training and welfare costs of $6,840 and in the 2016 year, there was no allocation of any cost for staff training and welfare. However, in the 2015 year, those costs that were incurred in relation to Funk CBD, are not allocated to that entity. Mrs Damaskos said that she could not explain why that was the case except to say that the allocation may have related to other stores under the trust. 295 Similarly, there was no allocation in the 2016 financial year of general expenses to Funk CBD.296 Mrs Damaskos said that there was an allocation for the previous financial year so she would assume that those other general expenses of $7,215 would have related to other stores.297 However, this was mere guesswork on the part of Mrs Damaskos and as a director and the person in charge of the general accounting function for each of these companies, she had no comprehension of the basis of the allocation of these costs.

462 The situation is the same in the 2017 year.298 There, there was an allocation of computer expenses the same amount as the previous financial year; the allocation of general expenses had a difference of only $1 from the previous year, and the allocation of motor vehicle expenses of $14,918 is $2 different from the previous financial year. Mrs Damaskos denied that those items were treated as standard costs that were incurred by Funk Coffee and Food in relation to both of the stores operated by Funk CBD or that Funk CBD benefited from the incurring and payment of those expenses.299 I am unable to accept that evidence. I think it is wrong. These costs were incurred by Funk Coffee and Food as the trustee of the trust and so they can only relate to general expenses attributable to both head office and also the expenses such as computer expenses, general expenses, motor vehicle expenses and the like attributable to the stores including those operated by Funk CBD. That company was operating stores, incurring or paying expenses and management fees to Funk Coffee and Food and services were provided to that company which operated only two stores at that time, the Victoria Square store and, for a time, the Angas Street store. 62% per cent of the income of Funk CBD was generated from the Victoria Square store. In the 2016 year, the Angas Street store was under the umbrella of Funk CBD for a portion of the year. The services provided to Funk CBD were employed in the operation of its stores. In return, Funk CBD paid a management fee to Funk Coffee and Food so that the trustee could generate the income and deal with it through the trust arrangement. That was the process used for the aggregation of income. That is the usual process and so also is the allocation of expenses. For these reasons, I am unable

295 T815.1.296 T815.8-12; Exhibit A3, tab 6.297 T815.12-14.298 T815.29-34; Exhibit A3, tab 13, p 2976.299 T816.3-11.

to accept this evidence of Mrs Damaskos. Mrs Damaskos accepted that all staff working in the Victoria Square store between October 2013 and June 2016 were employees of Funk Coffee and Food and that Funk CBD paid a service charge to Funk Coffee and Food connected with the supply of those employees.300 Mrs Damaskos also agreed Funk Coffee and Food provided staff and administrative services to Funk CBD. She would not agree that motor vehicle expenses, computer expenses, general expenses or staff welfare expenses were paid for in the same way.301 She was then asked the following question:

Q And I suggest that Funk CBD Pty Ltd paid a management fee to Funk Coffee and Food Pty Ltd in relation to those services that I have indicated, and expenses were incurred by Funk Coffee and Food Pty Ltd in relation to company stores owned and operated by Funk CBD Pty Ltd.

A My understanding is that a management fee is paid from Funk CBD to the trust as a redistribution of profit.

463 I considered that this answer was not responsive to the question which was ultimately a culmination of questions and answers concerning the incurring of these expenses. I then asked Mrs Damaskos this question:302

Q Is that a …. Yes, that it is, a management fee has been paid?

A A management fee to the extent of a redistribution of profit.

464 Mrs Damaskos accepted the content of the Funk CBD profit and loss statement for year ending 2014303 disclose that Funk CBD paid a management fee of $113,224 in the 2014 financial year to Funk Coffee and Food. In the 2015 year, the management fee was $287,000.304 Mrs Damaskos was then challenged that this must include the management fee paid by Funk CBD. Mrs Damaskos’ answer was:305

A I think so, but I’d have to refer to my accountant.

465 The income returned by Funk Coffee and Food as the trustee of the A&J Damaskos Family Trust is in the amount of $287,542.306 This amount was the management fee paid to Funk Coffee and Food which included an amount paid as a management fee by Funk CBD. In the accounts of the trustee there was also a separate entry in relation to service fees. For example, in the 2015 year, Funk Coffee and Food received a service fee of $388,059 connected to the supply of staff by Funk Coffee and Food. Mrs Damaskos agreed this entry in the accounts represented the wages and superannuation that are incurred in relation to staff

300 T816.18-23; Exhibit A3, tab 5; Exhibit A3, tab 3.301 T816.17-38.302 T819.9-22.303 Exhibit A3, tab 4, p 2912D.304 Exhibit A3, tab 12.305 T821.16.306 Exhibit A3, tab 12, p 2964.

supplied to the various stores. The following proposition was then put to Mrs Damaskos:307

And I there suggest to you that the management fees must relate to services provided by Funk Coffee and Food Pty Ltd to Funk CBD Pty Ltd other than in respect of the supply of staff.

466 Mrs Damaskos said that she could not answer that question.308 I am unable to accept that answer. I am satisfied that costs have been incurred other than in respect of staff for the reasons set out above. Mrs Damaskos could not say whether this was a genuine charge for management fees, she only believed it was genuine.309 She said that Funk Coffee and Food were providing overall management services to Funk CBD stores.310 Those answers are inconsistent with her earlier answers that this was merely a means by which profit was brought into the trust. Rather, these responses were consistent with her evidence that genuine expenses were being incurred by Funk CBD and paid to Funk Coffee and Food in relation to services extending beyond the supply of staff.311 Mrs Damaskos was then asked whether these would include management fees, matters relating to the supply of administrative type costs and the incurring of administrative costs by Funk Coffee and Food for the benefit of Funk CBD. Mrs Damaskos’ answer was:

A Not necessarily those itemised costs that you’ve referred to.

467 She gave the same answer to the suggestion that these costs were included for computer expenses, general expenses, motor vehicle expenses and staff training and welfare expenses. I am unable to accept that answer. It is quite clear on the evidence that there is a connection between Funk Coffee and Food as the trustee of the family trust, Funk CBD as the then proprietor of the businesses at Victoria Square and the expenses being incurred in Victoria Square that were paid through Funk Coffee and Food which were allocated to the expenses of Funk CBD paid to Funk Coffee and Food. This explains the entries, for example, about other income of the trust, there were management fees and other separate service fees received.312 Mrs Damaskos agreed with the proposition that none of those expenses appeared in the business profile financial information provided to Mr Emanuele. 313 She then said that they were not specific to Victoria Square. I am unable to accept that evidence. Having regard to a proper reconciliation of the accounts of Funk Coffee and Food, Funk CBD and the separate accounts prepared by the accountants for the Victoria Square store, it is clear that those expenses were incurred and paid for through the services provided by Funk

307 T821.22.308 T822.1-14.309 T822.37.310 T823.5-9.311 T823.4.312 Exhibit A3, tab 12, p 2964.313 T824.16-23.

Coffee and Food that were expensed to Funk CBD. I do not accept the denials of Mrs Damaskos.314

468 Mrs Damaskos was then asked the following question:

Q But you were providing the business profile document as purporting to represent the expenses – on your evidence yesterday, you were providing the business profile document as purporting to include expenses that would be relevant to a franchisee in operating the store.

A Yes.

Q Those expenses of that administrative nature were relevant to a franchisee operating the Victoria Square store.

A No, I don’t think so.

Q You knew that as a director of the company the reason why they weren’t included under the accounts for Funk CBD Pty Ltd was because they were being incurred by a different entity, Funk Coffee and Food Pty Ltd; first of all, what’s your answer to that?

A Sorry, could you repeat the question.

Q You well knew that the reason why those expenses don’t appear in either the consolidated financial statements and profit and loss for Funk CBD or the individual profit and loss statements for Funk CBD was because they were being incurred by another entity in the group being Funk Coffee and Food Pty Ltd?

A No.315

469 I am unable to accept those denials. I think it is quite plain that the expenses were being incurred, they were being paid for within the relationship between Funk Coffee and Food and Funk CBD and are within the expenses described as management fees and service fees. The following questions and answers then followed:316

Q You well knew as a director of the company that they were being incurred in relation to the Victoria Square store but they were being incurred by another entity being Funk Coffee & Food Pty Ltd.

A No.

Q The reason why those expenses did not appear in either the consolidated profit and loss for Funk CBD or in the individual profit and loss for Funk CBD was because those expenses appeared in the financial profit and loss statements for Funk Coffee & Food Pty Ltd.

A No.

314 T824.5-826.28.315 T825.6-28.316 T826.

Q You well knew that the reason for that, the reason why they appeared in the financial statements for Funk Coffee & Food Pty Ltd was because Funk CBD was paying a management fee to Funk Coffee & Food Pty Ltd in relation to, among other things, expenses of that nature.

A I don’t think it was in relation to those specific expenses.

Q You well knew that and at no time did you inform Mr Emanuele that the financial information provided to him was not complete because it didn’t include those various expenses that I have discussed with you.

A The list of those other expenses are included in our disclosure document.

Q You were providing the business profile document as purporting, on your own evidence yesterday, to represent costs that would be relevant for a franchisee to incur.

A Yes.

Q You weren’t providing them on the basis that a franchisee investigating the opportunity needed to look to two sources of information.

A This is the initial document in relation to the historical financial information of the Victoria Square store –

Q Yes.

A – we refer our prospective franchisees to the disclosure document and the list of all the other costs that they may have to incur.

470 Mrs Damaskos then agreed that she prepared the Financial Information document given to Mr Emanuele from historical financials on file. These were the spreadsheet financials that she had prepared. In doing so, she wanted to provide all of the costs associated with the individual site. She was then asked why, in light of the charging of administrative costs between Funk CBD and Funk Coffee and Food which was known to her, she did not provide in that business profile all of the costs that were associated with the individual site in Victoria Square because those costs would not have been in the Victoria Square spreadsheets but were rather in the consolidated financial statements for Funk Coffee and Food. Mrs Damaskos denied that allegation. I was alert to the fact that cross examining counsel was alleging Mrs Damaskos was being untruthful as a witness. I insisted that he fulfil his obligations as counsel and the following exchanges occurred:317

Q I suggest to you that as a director of company and a person with accounting experience you well knew that a management fee was being incurred by Funk CBD payable to Funk Coffee and Food Pty Ltd.

A Yes.

Q And you well knew that that management fee relating to the provision of overall administrative and other services by Funk Coffee and Food Pty Ltd to Funk CB Pty

317 T829-830.

Ltd including in respect of the Funk Victoria Square store.

A I’d say it was an overall management, but an owner/operator of a franchise would be managing their own store and so providing that overall management in store.

Q You well knew that as a result of that arrangement concerning the management fee, you well knew, as a director and a person with considerable accounting experience, you well knew that there were expenses being incurred in relation to Victoria Square in historical operation of the business over the period of October 2013 to June 2016 that were not listed in the spreadsheet financial information that you prepared.

A Sorry, was that the same question? I didn’t follow.

Q You well knew when you came to preparing the spreadsheet financial information in relation to Victoria Square on which the financial information contained in the business profile was based, that the expenses contained in the spreadsheet, profit and loss statement prepared by you did not include relevant expenses concerning the operation of the Victoria Square store.

A No.

Q And when you caused that financial information to be provided in the business profile document you again well knew that that was the case.

A No.

Q And when you gave your evidence yesterday that when you put this financial information together in relation to Victoria Square, at p.41, based on your spreadsheet profit and loss statements, you well knew that you hadn’t, in fact, provided all the costs that were associated with Victoria Square when you caused this financial information to be provided to Mr Emanuele.

A No.

Q Therefore you, not only, when you gave your evidence yesterday that you wanted to provide all of the costs associated with the individual site, when you gave that evidence you were not telling the truth.

A No, I was telling the truth.

Q And when you provided the financial information to Mr Emanuele in relation to Victoria Square that is contained in the business profile you knew that it did not represent all of the costs relating to that specific store that were likely to be incurred by a franchisee.

A No, again, we refer all prospective franchisees to any other costs in the disclosure document.

Q And you well knew that the information that you had provided in that business profile document, the financial information, you well knew that it was, firstly, likely to be relied upon by a franchisee looking to purchase the business.

A Yes.

Q And secondly, by reason of it not containing the complete expenses that were associated with the Victoria Square store, you well knew that the information was misleading.

A No.

471 In light of the evidence about the connection between Funk Coffee and Food, the charging of management fees and the provision of services and the service fees charged in relation to the provision of staff made available to and paid for by Funk CBD in relation to, inter alia, the Victoria Square. I am unable to accept that the answers given by Mrs Damaskos are credible, reliable or truthful. I reject her evidence.

472 Mrs Damaskos said that in relation to the allocation of corporate store wages and employees’ wages, especially for those employees working across multiple stores, this was all done upon a spreadsheet and the number of hours were allocated to relevant stores. The payrolls were then adjusted accordingly. When asked whether there were any documents available to show how the wages of employees working in Victoria Square from October 2013 to mid-2016 were apportioned, she said there was only really a break down document for each quarter. She thought that had been provided.318

473 She was then taken to a letter from the applicants’ solicitor to the respondents’ solicitor of 14 October 2019.319 This letter was sent following orders made by me on 3 September 2019 for further and better disclosure to be made by the respondents. In the letter, at Item 1B, the applicants’ solicitors seek bookkeeping accounting or source documents relating to the calculation and allocation of wage expenses or service fees as described in group financials for the Funk Group for either Victoria Square or Waymouth Street. The same information is sought for the calculation and allocation of purchases or costs of goods sold from the Funk Group accounts to the spreadsheet as well as the departmental financials for the Victoria Square or Waymouth Street store. The solicitors’ letter emphasises that they are seeking underlying records showing how these calculations and allocations have occurred. In a response from the respondents’ solicitors,320 advice is given that source documents in respect of goods purchased are no longer available and that wage costs were keyed into a spreadsheet but those group wages records do not give a breakdown of the number of hours of staff numbers at different store locations. Those statements contradict the evidence given by Mrs Damaskos that there was a breakdown done and attention was paid to a proper breakdown of the costs of purchases for each store and the cost of staff wages to be allocated to each store, by Funk Group head office. The letter goes on to advise that the respondents are unable, in retrospect, to divide the records so as to provide information solely pertaining to staffing costs at the Victoria Square and Waymouth Street stores and that those records are incapable of providing the information sought by the applicants. In

318 T831.29-T832.8.319 Exhibit A2, vol 8, tab 221, p 2093.320 Exhibit A2, tab 222.

her evidence, Mrs Damaskos was unable to identify which particular documents might have been referred to and where those documents might be now.321 Mrs Damaskos claimed that those spreadsheets had been provided to the Court.322 That material is not before the Court.

474 Mrs Damaskos then gave evidence about historical figures for the Victoria Square store. In the 2010 year, there is an annualised wages figure of $224,000 (there was a reported figure of $56,000 which was multiplied by four), which Mrs Damaskos said was largely consistent with the wages information provided to Mr Emanuele.323 It is known that Kindred alleged that the Funk Group had understated the wages incurred in operating the Victoria Square business. Mrs Damaskos was aware that in its claim made against the respondents, Kindred alleged that the wages figure provided to it by the respondents did not include any manager’s wage.324 Mrs Damaskos was aware of those allegations that she provided the business profile document to Mr Emanuel.325 She was also aware that by letter of 4 July 2013, Haarsma Lawyers, on behalf of Kindred, sent to the respondents’ solicitors a Notice of Dispute.326

475 The Notice complains first that the wages and salaries within the preliminary documents supplied by the respondents were understated, the net profits were overstated and that the respondents did not have reasonable grounds for making the representations. A breach of the Code is alleged at paragraph 9 and it provides as follows:

9. The conduct of the respondent as set out above is in breach of section 51AD of the Trade Practices Act 1974 as item 19 of the disclosure document provided to the complainant prior to entering into the agreement:

9.1 was false in that it stated that “VT franchisor does not give earnings information about the Funk business” when it fact such earning information was provided to the complainant as set out in paragraph no. 6;

9.2 was false in that it stated that “VT franchisor cannot estimate earnings for a particular franchise” when the franchisor (respondents) did estimate earnings for the franchise purchased by the complainant;

9.3 did not provide the disclosure required by Item 19 of Schedule 1 of the Franchising Code of Conduct. The action sought within the notice is for the Victoria Square business to be repurchased for $600,000 and the Angas Street premises to be purchased for $350,000 plus damages of $300,000.

476 Mrs Damaskos was aware of all of these allegations made by Kindred and that Kindred alleged the figures supplied by the respondents were misleading, that the wages bill was understated because it did not include a manager’s wage and that the expenses incurred were understated because it did not include all of 321 T832.27-834.4.322 T834.8.323 T835.19-25.324 T835.26-836.10.325 T836.11-15.326 T836.17. The letter of dispute is within Exhibit A17.

the expenses of running the Victoria Square shop.327 She was also aware that allegations were made by Kindred of misleading conduct because she read all of these documents that were provided to her by the solicitors at the time.328

477 Mrs Damaskos also agreed that following the provision of that material, there was a settlement reached. A proposition was then put to Mrs Damaskos that there was real substance in the allegations made by Kindred within the Notice of Dispute.329 Mrs Damaskos vehemently disagreed.330 Mrs Damaskos said that if there was any problem with the existing franchise, it was inexplicable how that franchisee would pursue a second store over a year later. They would have had some financials by that time. She said that the respondents were extremely upset, disappointed and disillusioned by the actions of Kindred. She said that Ms Bueti was an accountant so that if the numbers did not stack up, she does not know how they could have pursued a second store.331

478 The proposition was then put to her that the Victoria Square store could not be operated by incurring wages of around $220,000 as was represented and that the financial information provided to Mr Emanuele was an underestimate of wages because it suggested that the store could be operated for a wages bill of around $220,000. Kindred alleged that the respondents engaged in misleading conduct because the Victoria Square store could not be operated for a total wages bill of around $220,000 per year. Kindred alleged that this was an understatement of wages. Following the letter from Kindred’s solicitors, there was a settlement of the claims made by Kindred. Mrs Damaskos then said that, from what she had seen, Mr Emanuele’s 2017 financials were in line with those of the respondents. However, that did not take into account the fact that, as was the case, Mr Emanuele was not receiving a manager’s salary at that time according to the evidence of the accountant Mr Mercorella.332 Mrs Damaskos criticised the management of the Victoria Square store by Kindred and said that there were many staff members at the Kindred stores and there was a lot of inefficiencies. She said that if the respondents were misleading in any way, then how would it be that Kindred would look to pursue a second store.333

479 She was then asked to confirm her view that the wages figures incurred by Kindred were on her case as the result of the mismanagement of the store and she said they were extremely excessive. That proposition had not been put to any of the Kindred witnesses prior to that time; all that had been put was that there was disagreement in relation to the management of stores between Mrs Izzo and Mr Bueti. There was no suggestion that the wages figures incurred by Kindred were excessive. I asked Mrs Damaskos whether she said that the wages costs incurred by Kindred were completely beyond reason in the way that they

327 T837.5.328 T837.12-26.329 T838.5-7.330 T838.8.331 T838.8-T839.18.332 T840.4-8.333 T841.14-16.

managed the store.334 Mrs Damaskos said that to an extent this was the case and gave some explanation about family members receiving wages, lack of streamlining, lack of specific roles, and everyone doing a bit of everyone else’s job. She then said that it was extreme.335 I am unable to accept that response or that evidence. There is no evidence before the court to suggest that the method of operation of Kindred meant that the wages incurred by Kindred in operation of the stores was excessive, that they were extreme or anything like it. I have accepted the evidence of Ms Bueti that the stores were run efficiently. From time to time she was present in the stores and saw them running. She assisted at any time she could get free from her accounting practice. There is no evidence that Kindred ran the stores inefficiently. There was no evidence that there were inefficiencies or, lack of streamlining, or doubt about particular people’s roles. I consider that this evidence of Mrs Damaskos is neither truthful nor reliable.

480 Mrs Damaskos then agreed with the proposition that the two franchisees of the Victoria Square store each suffered the same problem that the wage levels were not as they had been represented in the financial information provided to them.336 Mrs Damaskos said that in Mr Emanuele’s case, he increased the pay rates for his employees and she thought his modifications to the POS system would mean that more hours would be needed for staff. However, she was also aware that precisely the same allegations had been made by Hype Investments in relation to the Flinders Street store which was the subject of a claim for misleading conduct in the District Court. Mrs Damaskos said that she was not aware that one of the allegations made by Hype Investments in its claim was that wages were understated.337 I am also unable to accept that evidence as I consider that it is neither truthful or reliable. Mrs Damaskos satisfied me that she was quite aware of the claim in the Hype Investments action that had been litigated, that there had been a judgment in the District Court of his Honour Judge Tilmouth and that the matter had proceeded on an appeal before the Court of Appeal of South Australia.338 Similar to the evidence that she gave in relation to both Kindred and in relation to Mr Emanuele, Mrs Damaskos said that the Flinders Street store purchased by Hype Investments not managed to its full capacity and that the manager of the store, Mr Sebastiano was not an active manager.339 I am satisfied that this evidence of Mrs Damaskos is also not truthful or reliable. I do not accept it.

481 Mrs Damaskos was then taken to the financial documents for the turnover for the Waymouth Street store and the Victoria Square store and she agreed that on an annual basis, the turnover for the Waymouth Street store was $554,000 as a rough guide.340 The turnover for the Victoria Square store was about $800,000 at

334 T841.22-23.335 T841.32.336 T842.9-843.1; T843.2.337 T843.28-843.32.338 The appeal has now been dismissed.339 T845.3-4.340 T854.13-17.

the time in 2016/2017.341 She also agreed that on an annualised basis, the salary and wages cost for the Waymouth Street store was $190,000. Therefore, according to turnover, the wages figure was about 40% of turnover. Mrs Damaskos accepted that when a comparison is made with the Victoria Square figures for 2015 year, the wages paid are only 30% of turnover and there is a large discrepancy in the percentages of wages relative of turnover for the Waymouth Street and Victoria Square stores.342 She rejected that by using this comparison leads to the conclusion that the level of wages in the Victoria Square financial information were under-disclosed or she knew of any disclosure or that she was personally involved in any under-statement of wages. Mrs Damaskos was the person in charge of the accounting function for the respondent. In his evidence, Mr Damaskos said that he did not play any major part in the preparation of the financial information; he left those matters entirely to his wife and to the accountants. He also relied upon legal advice that he received from his then solicitors.

482 I am satisfied on the evidence that for the Victoria Square store when a comparison is made between the sales and costs of goods sold figures for all of the financial years and then a comparison is made of the level of salary paid to generate those sales, that there is a distinct and obvious difference between the financial records provided by the respondents and those generated within the Victoria Square store by Kindred in relation to the same store. I am satisfied that based upon this comparison as well as the other financial information that I canvassed earlier, there has been an understatement of wages by the Funk CBD in respect of the operation of the Victoria Square store.

483 Mrs Damaskos then denied that she was personally involved in that knowing understatement of wages. I am satisfied on the whole of the evidence that she was aware of the level of stated wages for the Victoria Square store, the level of resources supplied from outside of Funk CBD to the Victoria Square store and, on the papers before the Court, the failure of Funk CBD to properly account in the departmental returns for each shop of the costs of those wages. I am satisfied that she knew of the understatement of wages; there can be no doubt about that proposition. I am satisfied of that proposition on the Briginshaw onus as earlier discussed.

484 In relation to costs of goods sold, Mrs Damaskos said that she understood that quarterly figures were provided which justified the figures within the business profile financial information. Mrs Damaskos was aware of and familiar with the correspondence following orders made by me for further and better disclosure by the respondents, and the letter from the applicants’ solicitors to the respondents’ solicitors of 14 October 2019.343 She was aware that this letter contended that there are a number of further documents within the scope of further disclosure orders made by me that had not been disclosed. These included

341 T854.23-25.342 T856.34-857.3.343 Exhibit A2, vol 8, tab 221, p 2093.

bookkeeping or other sourced documents relating to the calculation, allocation of purchases/cost of goods sold from the Funk Group accounts to the spreadsheet and departmental financials for the Victoria Square or Waymouth Street stores. She was also aware of the request for the provision of the spreadsheet financial prepared by her that formed the basis of the financial information contained within each of the business profile documents for the Victoria Square and Waymouth Street stores. She was aware of the request for the departmental financials concerning the standalone BCFR Profit and Loss Statements for the Victoria Square and Waymouth Street stores.

485 Mrs Damaskos authorised the respondents’ solicitors to inform the applicants’ solicitors that further source documents were no longer available. She thought that quarterly summaries had been provided but she was unable to say where they were in the tender book Exhibit A2.344 I am satisfied that despite the orders of the court, no further source documents in respect of goods purchased had been produced. She was aware that the solicitors for the respondents were asked to clarify what was meant by that statement that the documents are no longer available outside of what has been disclosed.345 Mrs Damaskos said that whatever invoices were in the possession of the respondents had been provided. There was a “mountain of invoices”, everything was keyed in and the proper allocation was made to the various store. They were not stored electronically and they could not be provided. Therefore, there was no source records from which it could be ascertained whether a proper allocation of cost had been made or when such an allocation had been made. That position was confirmed in a letter from the respondents’ solicitors to the applicants’ solicitors on 24 February 2020.346

486 Mrs Damaskos was then taken to her third affidavit sworn 19 September 2019 which was filed in response to the application for further and better disclosure.347 Paragraph 8 of the affidavit reads:

8. Only at the end of each week are invoices for purchases made collected by the defendants, in combination with the store’s cost sheet which is completed with all stock purchases per the invoice. These are then checked off by me on payment of invoices at the end of each month, the weekly total cost amounts are inputted as total purchases in my costs spreadsheet for the store. Copies of these invoices are then kept for a maximum period of six months.

487 Mrs Damaskos said that the whole of the system used by the Funk Group at that time was a manual system; there was a manual recording of costs of goods sold using a manually prepared spreadsheet of bookkeeping across the entire Group, and there was no accounting software used in the Funk Group over that period of time. She said that the input of dates is the important function, the

344 T858.22-32; Exhibit A2, tab 222.345 Exhibit A2, tab 222D, p 2096J.346 Exhibit A2, tab 222K.347 Exhibit A16, tab 6.

person inputting the data must make sure it is accurate.348 She said that mistakes could also be made on software.349

488 In the period between October 2013 to mid-2016, the Funk Group comprised 14 stores.350 She thought there might have been a combined turnover in the millions of dollars. For example, the Victoria Square store had a turnover of $750,000 to $800,000. The combined turnover would have exceeded $2,000,000 and she could not say whether for those stores, stock purchases would likely to have been over $1,000,000. However, she agreed that when looking at the Financial Information document,351 the cost of goods sold for the Victoria Square store for the 2015 financial year was $235,000.352 She also agreed that the purchases of stock were not tracked by the POS system but were tracked using a manual system for each store. That material was then entered into a spreadsheet. The system also then required each of the managers of the stores to keep track of all the purchases invoices and then to supply them to the head office.353 Once that information was received in head office, it would be recorded and there would be an allocation of the cost of the invoice to the appropriate store. She did not think that that was susceptible to error. She said that she received a separate folder from each store and so the store was allocated their proper expenses. There was a second cross check at the end of the month when purchases were required to be paid. She denied there was any possibility of manipulating the invoices to allocate costs to different stores. However, now a MYOB system is used which electronically stores all of this information.

489 Mrs Damaskos was not aware that Mr Crase calculated a cost of goods sold margin based upon the BCFR financial statements for the Funk CBD.354 She was aware that in his calculations, he had included the Northland supplier but he had used the wrapping and packaging figures contained in the BCFR profit and loss statement and he had calculated an average cost of goods sold margin from October 2013 to mid-2016 at around 33%.355 When a comparison is made to the Victoria Square business profile information, the 2014 figure showed a cost of goods sold percentage of 32%, 31% for 2015 and 30% for the first two quarters of the 2016 year. She knew that Gabjet was unable to achieve a cost of goods sold margin in the vicinity of either 31% to 33%.356 A comparison was then made to Kindred figures.357 For the 2011 year, the cost of goods sold margin was 35% and in the following year 33% but the evidence from Mrs Bueti is that Kindred made a significant effort to cut back on stock purchases due to the poor financial position of the business. It would not have done so if the business was as profitable as had been represented. 348 T861.32-33.349 T861.26-34.350 T862.25-28.351 Exhibit A3, tab 1.352 T863.12-15.353 T864.22-27.354 T869.30-34.355 T869.35-870.14.356 T871.11-15.357 Exhibit A2, vol 14, tab 380.

490 Mrs Damaskos said that the cause of all of Kindred’s problem was because it had mismanaged its own business.358 She said that stock levels were all over the place and there was general chaos in the Victoria Square store at the time. There is no evidence to support this assertion. I am unable to accept it as being truthful and reliable evidence. I think it is demonstrably wrong. I was very impressed with the evidence given by Mrs Bueti. I am satisfied that Kindred was not able to achieve the cost of goods sold margin at anywhere below 33% and most likely had a margin much higher than that, notwithstanding that every effort was made by Kindred to operate the stores properly, efficiently and in a way that would have ensured the cost of goods sold margin had been reduced. I reject any suggestion by Mrs Damaskos that there was mismanagement or general chaos in the Victoria Square store.359 She asserted that she became aware about six to nine months after Kindred acquired the Victoria Square store of the problems and that she formed a belief then that it was mismanagement of the business which affected the costs of goods sold percentages. Her concerns were about the number of staff, and their particular roles.360 This evidence cannot sit with her willingness to franchise the Angas Street store to Kindred after 12 months.

491 She had a very favourable view of Kindred initially because everyone was very enthusiastic, on good terms and pitched in to make it a successful business. Notwithstanding that view, the defence filed by the respondents at paragraph 37.4 pled that Kindred did not conduct the business efficiently and effectively having four directors operating in Victoria Square, at least for the years of owning Victoria Square who were constantly in dispute and or creating an environment of tension between all directors which was regularly expressed by those directors to Mrs Damaskos and Mr Damaskos.361 Mrs Damaskos gave the instructions for that defence to be filed. She then said that she knew all of this was going on at least by the end of the first year of operation and that the directors of Kindred were coming to her complaining about them being in dispute and there being an environment of tension.362 She formed that view after the first year. She said they were not getting financial statements.

492 Notwithstanding all of those concerns, the respondents agreed to grant to Kindred a franchise for the new Angas Street store.363 I consider that the evidence of Mrs Damaskos criticising the operation of the Victoria Square store by Kindred and then the readiness and willingness of the respondents to allow Kindred to take up the Angas Street store cannot stand together. If the evidence of Mrs Damaskos were to be accepted, it would not be possible for Kindred to successfully operate the Angas Street store because of the ongoing difficulties between the directors and the constant tension between them which was the subject of private complaints by some or all of the directors to Mr and Mrs Damaskos made before the Angas Street store was created and franchised to 358 T872.23-29.359 T872.27-29.360 T873.3-24.361 T874.1-11.362 T875.8-12.363 T876.30-33.

Kindred. I consider that the evidence of Mrs Damaskos on that topic is also not truthful and reliable and is calculated to damage the status of Kindred and its capacity to operate franchise stores. I am unable to accept this evidence.

493 Mrs Damaskos refused to accept that the costs of goods sold figures for the Victoria Square business profile document were understated.364 She was then taken to the documents that the respondents had provided to Kindred in 2009 or 2010.365 Mrs Damaskos accepted that the document was provided to Kindred for the purpose of their assessment of business opportunity. She was asked whether it was prepared by the respondents based upon historical information from establishing and operating stores. She said that she believed that the document was initially prepared by DC Strategy on behalf of the respondents but based on historical information gleaned from establishing and operating company stores.366

494 This was a curious response because DC Strategy could only have been preparing documents and inserting information based upon the instructions that they received. There was no evidence to suggest that DC Strategy were in some way acting independently of the respondents and the information that was said to be provided to the firm of solicitors was not identified. The identified stores were described as Stores 1, 2, 3 and 4. The first store with a turnover of $733,000 was established in February 2005 and she thought might have been the Frome Street store. She agreed that the cost of goods sold margin for that store was 37.7% and that all of the four stores had on average a cost of goods sold margin of 34%. This was well above the cost of goods sold margin that had been represented in respect of the Victoria Square store to the applicants. Mrs Damaskos then denied the proposition that having regard to that information, a cost of goods sold margin of between 31% and 33% was not reasonably achievable for Victoria Square. I am unable to accept that evidence as truthful or reliable.

495 Mrs Damaskos was then taken to the financial statements for the operations of the Victoria Square store after the respondents resumed possession of that store.367 The goods sold margin was 36.4% and Mrs Damaskos said that when an underperforming store is resumed, it takes 12 to 18 months to restore turnover. However, in this case that explanation is not relevant because the applicants were achieving a turnover greater than the turnover achieved by the Funk Group at the time that it resumed possession. Notwithstanding, Mrs Damaskos would not accept the proposition that it was impossible for the Victoria Square store to operate on a cost of goods sold margin of less than 35% as had been represented by it in the financial information.368 I am unable to accept these denials of Mrs Damaskos. The evidence discloses that it was not possible for a franchisee to achieve a cost of goods sold margin the same as was represented by the respondents. I am satisfied that the respondents were only able to achieve their

364 T878.25-28.365 Exhibit A2, vol 14, tab 382, p 3479.366 T879.19-28367 Exhibit A2, vol 9, tab 255A.368 T884.16-27.

reported figures because of a failure to properly account for and report the total costs incurred in the operation of the Victoria Square store.

496 I am satisfied that Funk CBD knowingly understated the costs of the goods sold in the Victoria Square business. Mrs Damaskos was the director who controlled the accounting function of both of those companies in the respondents group and she was aware of that conduct.369

497 In relation to Kindred and the repurchase by the respondents of the Victoria Square and the Angas Street stores, a proposition was put to Mrs Damaskos that Funk CBD purchased the businesses back from Kindred in connection with claims made by Kindred to the effect that the financial information provided to it about those businesses including profitability and viability was misleading. That was the allegation made from the outset from Kindred in the correspondence sent from Haarsma Lawyers. Mrs Damaskos was asked to accept that that was a true fact.370 She said that the respondents had bought back the Victoria Square business (and the Angas Street business) and wanted to get rid of Kindred after allegations had been made by Kindred that the financial information supplied by the respondents was misleading and deceptive.371 Mrs Damaskos agreed that the repurchase of the business occurred because of the allegations that were made by Kindred. She said:372

…we couldn’t believe the allegations and we wanted to get rid of the Kindred Group.

498 She was then asked the following question:373

Q. But you accept that you also bought them back as a result or in connection with claims made by Kindred concerning misleading or deceptive financial information.

A. We may have bought the businesses back even if they hadn’t made any claim.

499 I consider that this evidence has no credibility and it is neither truthful nor reliable. I am unable to accept the evidence of Mrs Damaskos that the respondents wanted to buy the businesses back and to get rid of Kindred. I am satisfied that the catalyst for the repurchase of the business by the respondents from Kindred were the allegations of misleading conduct made against the respondents concerning the provision to them of the financial information upon which they relied in the purchase of the Victoria Square business. I reject the evidence of Mrs Damaskos that there was ever any desire on the part of the respondents to purchase back the business as, to do so, it became necessary for the respondents to go back into occupation of and to operate the businesses to become responsible for all of the staff costs and other costs and then to pay out a very large amount of money. Kindred were claiming in the area of $1.4 million including for damages. The evidence is neither truthful nor reliable.

369 T884.36 – T887.16.370 T888.10.371 T888.11-16.372 T888.20-21.373 T888.27-32.

500 Mrs Damaskos was then asked the following questions and gave the following answers:374

Q. I suggest to you that as a course of conduct engaged in by the Funk Group in relation to both Kindred on the one hand and Gabjet on the other hand, the Funk Group knowingly overstated both the profitability and viability of the Victoria Square business.

A. No.

Q. And that you were personally involved in that conduct.

A. No.

Q. And you did so, you and the Funk group, did so for the purpose of inducing prospective franchisees to purchase the Victoria Square business and acquire a franchise.

A. No.

Q. And in order to receive benefits accruing as a result of, firstly, franchise fees and ongoing royalties from the franchise.

A. Could you repeat the question.

Q. You did that firstly in order to receive franchise fees and ongoing royalties under a franchise agreement.

A. We did, sorry.

Q. You knowingly overstated the profit and viability of the Victoria Square business to both Kindred and Gabjet in order to, firstly, receive franchise fees and ongoing royalties under a franchise agreement with those entities.

A. No.

Q. And in order for the vendor entity to receive proceeds of sale from both Kindred and Gabjet.

A. No.

Q. I suggest that you were, again, personally involved in that conduct.

A. No.

501 Having regard to the evidence, I consider that each of the answers given by Mrs Damaskos are wrong and the propositions put to her are correct.

The Waymouth Street store502 She was then asked the same questions about the Waymouth Street business

profile financial information. It was provided by Funk Franchise as a prospective franchisor and by Funk Coffee and Food as the vendor of the business. Mrs

374 T888.33-889.25.

Damaskos accepted that the same purpose existed in relation to the provision of the Waymouth Street financial information ask existed in relation to the Victoria Square business namely to inform the prospective purchasers of the representations made by the vendor of the business.

503 The business profile document for Waymouth Street was sent to Mr Emanuele on 10 October 2016.375 A disclosure document was then sent between the parties’ solicitors on 7 March 2017.376 There was therefore a five-month gap between the provision of the business profile information on 10 October 2016 and the disclosure document provided by the solicitors on 7 March 2017.

504 The financial information disclosed in relation to the Waymouth Street business profile were derived from spreadsheet profit and loss statements prepared by Mrs Damaskos.377 Similarly, there was an exclusion of Funk Food expenses and the calculations were performed personally by Mrs Damaskos with input from Mr Damaskos who saw the profile document and the calculations disclosed.378

505 Mrs Damaskos confirmed that those documents were historical financials. However, they do not include a cost of the 7% of the franchise fees (being franchise fees and marketing fees) calculated upon the gross turnover of the business.379 Mrs Damaskos could not explain why that was not there. She did not know whether they were not included because if they were, then the business would have been in loss or marginally profitable when being considered by a franchisee. She also knew that Mr Emanuele was not intending to manage the business by himself although she was not sure what he going to do. In any event, she agreed that all of the information was aimed at Mr Emanuele as a prospective franchisee, notwithstanding the 7% franchise and marketing fees were not included.380

506 She also agreed that the manager’s cost figure is included because it is intended to show that if a franchisee was managing the business then the franchisee would obtain a benefit in terms of a wage. She agreed that that would be a benefit.381 Peculiarly, she would not agree that a wage was a benefit. She said:382

A. Well is a wage, yes.

507 She also agreed that, for example, using the quarter for the 2016 figure it represented the net profit derived in respect of that period was approximately

375 Exhibit A2, vol 4, tab 85.376 T890.29-37; Exhibit A2, vol 5, tab 98, p 1442.377 Exhibit A3; T891.30-36.378 T892.7-14; Exhibit A3, tab 9, p 1264.379 T892.25-28.380 T893.8-11.381 T893.22-28.382 T893.30.

$11,000 for the quarter prior to the 7% reduction. She agreed that it represented to the prospective franchisee that for that quarter there could be a wage derived of $15,000 in addition to net profit of approximately $11,000 gross of the 7% resulting in a total of approximately $26,000 for the quarter.383

508 Mrs Damaskos refused to accept that this was a forecast of future profitability and expenses based upon historical information. She said it was only historical information. She also refused to accept that based upon the historical figures, it was intended to show a prospective franchisee what could reasonably be achievable operating the business in the future. She said that it only showed what a franchisee may have achieved if he was the manager over that period historically.384 I do not accept that evidence. It is neither truthful nor reliable. The proposition put to Mrs Damaskos was correct because it was known that the respondents did not pay a manager.

509 Mrs Damaskos was then taken to the BCFR financial statements for the Waymouth Street business for the 2017 financial year.385 Sales are listed at $519,000 which, when compared to the annualised figures within the financial material provided to Mr Emanuele disclosed a sales expectation of $554,000, a reduction of some $35,000. In the BCFR accounts, expenses are listed at $324,000 compared to the annualised amount on the financial information document of $336,000. A profit of $19,000 is shown for the full financial year. On an annualised basis working upon the financial information provided to Mr Emanuele, the figure of profit is $40,000. Profit is therefore halved. The sales figures are generated from the POS system at Waymouth Street which generates accurate records. All sales figures are exclusive of GST. Therefore, a report could be generated on a monthly basis via the POS system for GST exclusive figures on a monthly basis but that report has never been discovered or produced.

510 Notwithstanding the difference between the reported figures and the draft figures produced by Mrs Damaskos allegedly from the POS system, she would not accept that the first quarter of 2017 financial year figures were inaccurate, or that the sales were overstated or that the expenses were understated. She rejected the proposition that all of this was knowingly done by Funk Franchise and Funk Coffee and Food or that she was personally involved in that conduct. She refused to accept that a profit of approximately $10,000 was not reasonably capable of being achieved on a quarterly basis by a franchisee operating the store or that in the fourth quarter of the 2016 year a profit of $11,000 was reasonable achievable. None of that potential was reflected in the actual figures that were generated by BCFR. Mrs Damaskos accepted that after the time they repossessed the Waymouth Street business and after allowing for unpaid rent, significant losses were incurred by the respondents. She refused to accept that the business was unprofitable when it was sold to the applicants.

383 T894.8-15.384 T894.22-26.385 Exhibit A3, tab 11, p 2971.

511 Mrs Damaskos was then taken to the profit and loss statements for Funk Coffee and Food for the year ending 30 June 2016.386 She agreed that the management fee of $118,000 was paid and she agreed there were a number of expenses incurred by Funk Coffee and Food as a proportion. These include accountancy fees, computer expenses, general expenses and other expenses. She agreed that some of those general expenses related to the Waymouth Street store. She did not agree that the motor vehicle expenses incurred benefited the Waymouth Street store. She did not know. She agreed that there were staff training and welfare costs but she could not confirm that Waymouth Street benefited in part from that. There were no other expenses attributable to Waymouth Street and therefore no general expenses attributed to the Waymouth Street store. Also, there were no motor vehicle expenses in the business profile information and that would not be included within other expenses.

512 Mrs Damaskos agreed with the proposition that in relation to the Waymouth Street store and to the extent the accountancy fees, computer expenses, general expenses, motor vehicle expenses and staff training and welfare expenses were incurred by Funk Coffee and Food for the benefit of the Waymouth Street store, those expenses were incurred by the same entity that was selling the Waymouth Street business to Mr Emanuele.387 Mrs Damaskos agreed that at least a portion of those expenses were incurred for the benefit of the Waymouth Street store and that they were not disclosed in the business profile information provided by the respondents when negotiating with Mr Emanuele for the purchase of the Waymouth Street store.388

513 Mrs Damaskos then denied the proposition that when the business profile financial information for the Waymouth Street store was provided to Mr Emanuele, she knew that it did not include all relevant costs that were incurred by Funk Coffee and Food in relation to the Waymouth Street store. She denied that it did not include all relevant costs that were necessary for a franchisee who was operating a business to incur or, that if those additional relevant costs were included in the business profile document that it would show that the business was in fact incurring either a loss or at best a nominal profit.

514 I am satisfied on the evidence that, similar to the Victoria Square store and having regard to the information tendered before the Court and the evidence of Mrs Damaskos, that costs were being incurred by Funk Coffee and Food in relation to the Waymouth Street store that were not being attributed directly to the costs of the operation of that store. Notwithstanding her denials, I am satisfied that the business profile information provided was misleading. Again, Mrs Damaskos was the author of the majority of that information. I am satisfied, for the same reasons, that she was aware of the inaccuracy of the information. I am not able to accept her evidence on the Waymouth Street store. I am satisfied

386 Exhibit A3, tab 12.387 T907.11-32.388 T908.5-9.

that Mrs Damaskos was aware of the content of the material and was aware of its misleading nature.

515 Despite the findings that I have made about the Waymouth Street store representations, it remains necessary for me to make separate findings about whether the information supplied by the respondents was misleading.

516 I have earlier canvassed the circumstances in which Mr Emanuele was introduced to the prospect of purchasing the Waymouth Street store. This was early in the life of his operation of the Victoria Square store and before he had received final detailed accounts reflecting its performance. This store had been purchased back from Mr Marinos’ company Boss 260 in around 2012. The business suffered from downturns associated with changes in tenancies of businesses in the Waymouth Street area.

517 It is apparent from a cursory reading of the financial information supplied by the respondents that the Waymouth Street store was, at best, marginal. For the full 2016 trading year it generated a loss before interest, tax and depreciation of ($28,013.26). Once interest and depreciation expenses are included, the deficiency would substantially increase.

518 I have earlier addressed the circumstances surrounding the introduction of Mr Emanuele to the prospect of purchase by Mr Damaskos. Although it is not necessarby to make findings on the point, it is apparent that Mr Emanuele was targeted by the respondents as a potential purchaser of Waymouth Street. Those circumstances also entirely contradict any suggestion by them that they had reason to doubt the capacity of Mr Emanuele as an operator of the Victoria Square store. I have also already canvassed the purchase by the respondents of this store from Boss 260 Pty Ltd. I will assume that the price paid for the store reflected its value.

519 The evidence satisfies me that the value of the store diminished from that time on, even accepting the amount paid to Boss 260 was a fair market price. In his evidence, Mr Versace informed me of his valuation method for the Victoria Square store, which used a multiplier of net profit. This process was fraught and erroneous as the multiplier was applied to EBITDA, not net profit.

520 Mr Versace did not do a valuation exercise for the Waymouth Street store. The respondents fixed a purchase price of $350,000. This was not the agreed price but at the outset this purchase price could not be justified on any notional basis. That is the genesis of the difficulties I have with the case of the applicant on this plank of the claim. Objectively, a purchaser will receive information and will process that information about the business in a logical way. Predominant amongst the steps in that process is the need to assess the performance of the business based upon the available information about its financial position and the trading results it has achieved.

521 In the 2016 financial year the Waymouth Street store was surviving only because it was a company store. It could not generate a profit from trading and it was incurring losses. It had no value and in other circumstances and objectively assessed it would be closed, based upon the reasoning described in the report of Mr Crase. That position worsens considerably if allowance is then made for the cost of interest, the allowance for depreciation and then the deduction for the cost of the 7% payable for franchise fees upon gross turnover. I have earlier discussed the extraordinarily debilitating effect this impost has upon a business. In the case of the Waymouth Street store, such an impost increased the trading deficiency of an already seriously failing business.

522 In light of this discussion, the essential question becomes whether there has been misleading conduct on the part of the relevant respondents. I accept the submission of the applicants that particular representations were made about the future performance of this store, that the tenancy of Boss 260 Pty Ltd was not disclosed and that no opportunity was given to discuss the performance of this store with Mr Marinos.

523 There are a number of matters that should be restated. The Waymouth Street store was given up by Boss 260 Pty Ltd some three to four years before this transaction, when Mr Marinos could not or would not continue with the store. There was no put and call option in the contract for his benefit. He was able to negotiate the repurchase of that store by some of the respondents. I have not been assisted by any of the evidence given by Mr Marinos. He was severely critical of the respondents however I am unable to place any weight upon that evidence. I gained the clear impression that Mr Marinos would say to the applicant Jetgab whatever he thought was in his best interests. I am unable to place any importance in this context of misleading conduct upon the failure of the relevant respondents to disclose the prior franchisee Boss 260.

524 The most important matter from the perspective of the claim of Jetgab is that the business profile document for the Waymouth Street store shows a failed or failing business which on any view and using any method of valuation was worthless. Applying the test of objective reasonableness to these figures and this information overall, the Business Profile document conveyed to Jetgab that the relevant respondents were seeking purchasers for the Waymouth Street store at a price of $350,000 when it was worth only the written down value of the plant and equipment, and the fixtures and fittings. That is the only objectively reasonable view that may be formed. I accept that representations may have been made about the future performances of this store but these do not assist Jetgab because, objectively assessed it was necessary for the business to be completely turned around from a loss matrix to profit.

525 I also accept that this situation reflects adversely upon the respondents. They were seeking to be paid $350,000 for a loss-making business. They may well have not been able to believe their good fortune when they settled upon the sale of this franchise but that does not render their conduct misleading or place

them in breach of the ACL and the Code. Leaving aside for the moment the complexities of language that so often accompany discussion upon the question of cause, reliance and loss, the delivery of the business profile in these terms and the purchase by the applicants Jetgab of the business for such an extraordinary premium does not, without more, give rise to a remedy in its favour. The remedy is available to the foolish and the gullible but only where the conduct of a representor is an actionable misleading conduct.

526 For those reasons, I find that Jetgab has not proved to my satisfaction that there has been a misleading conduct in relation to its purchase of the Waymouth Street store.

527 Mrs Damaskos was then taken to the content of the Franchising Code of Conduct. Item 20.1 of Annexure 1 of Schedule 1 of the Code states that earnings information may be given in a separate document attached to a disclosure document. Mrs Damaskos agreed that the business profile documents that were provided by the respondents in relation to both the Victoria Square and Waymouth Street stores were provided prior to the disclosure documents being provided to Mr Emanuele. She agreed that the disclosure documents that were provided for both stores did not provide any information about earnings of those businesses in the nature of that contained within the business profile documents. Those business profile documents were neither attached to the disclosure documents or referred to in it.389

528 Earlier in these reasons I dealt with the evidence given by Mrs Damaskos concerning the disclosure document that was provided to Mr Emanuele in relation to the Victoria Square store. The version of the document was dated 13 October 2015, and it represents an update as required under the provisions of The Code. Mrs Damaskos said that the document was updated annually without reference to the need to provide it to any particular franchisee, and that is attended to by their solicitors DC Strategy.390 Mrs Damaskos asks specific questions on what changes need to be made to the standard document, and the solicitors inform her of any changes which they make. It is not required to be provided to any existing franchisee, unless requested.

529 The update for the 2015 version was done by Funk Franchise with DC Strategy in late 2015. She was responsible for giving instructions to DC Strategy. Exhibit A18 is the document that was produced by those solicitors in response of the Notice to Produce. Mrs Damaskos said that DC Strategy would have produced that document in response.391 She said the document was in the possession of DC Strategy and it was produced by them pursuant to the notice to produce.392 The document produced contains entries of comments made by a solicitor, Mr Barr, about instructions that he was receiving from the respondents. A copy of the document was emailed to Mrs Damaskos for instruction. A 389 T917.11-917.34.390 T920.4-15.391 T919.10.392 T921.16-18.

reference was made to Schedule B, namely the franchise site. There are two options, the first being the site has not been previously franchised and the second, that the site has previously been franchised. That section is not filled in within the generic updated disclosure document that is required each year. This is because it would relate to a specific franchise site.393 It will therefore need to be completed on a case by case basis for a prospective franchisee, who was considering purchasing a franchise store.394

530 The first communication Mrs Damaskos had with the solicitors in relation to the potential franchise to Mr Emanuele, was an email sent from Mrs Damaskos to the solicitors dated Monday 27 June 2016.395 This was only the second time the communication had been had with Mr Emanuele after he had completed a franchise application form.396 The disclosure document was provided to Mr Emanuele on 3 June 2016, accompanied by an email letter signed by Mrs Damaskos, addressed to Mr Emanuele.397 This was delivered after Mr Emanuele had completed the franchise application form, but he had not yet been approved as a franchisee. When the disclosure document was provided to Mr Emanuele, the generic document was prepared by the solicitors. It was in a PDF form. Mrs Damaskos said that she had made no changes to the PDF document. As I understood her evidence, she was attempting to persuade me that she could not make arrangements for the amendment of a PDF document. However, she said that the generic document was updated in 2015, and was submitted to Mrs Damaskos once it was finalised at that time.398 The document that had been sent to Mr Emanuele was the finalised generic document settled by Mrs Damaskos.399

531 Mrs Damaskos said that the document she sent was the template document. It was a generic document. She could not recall whether there was an option A and option B in Schedule B, however, it had to include those options because the generic document was not for a specific store, but she assumed so. 400

532 She was then taken to the document sent to Mr Emanuele.401 It shows that in Schedule B, the second option is filled in, that is the site has not been previously franchised. Mrs Damaskos was asked to explain this. She said that she did not know why DC Strategy had updated the document in that way.402

533 This document is to be found in Exhibit A2 Tab 1A commencing at page 32A. Within that document are a number of schedules. Schedule A is to be found at page 32A. Schedule A[f] describes the franchise business bought back by the franchisor. Disclosure is made of a purchase back by the Funk Group of

393 T922.13.394 T922.14-17.395 Exhibit A2, vol 3, tab 61, p 933.396 Exhibit A2, tab 20.397 Exhibit A2, vol 3, tab 41, pp 683-872.398 T924.10-14.399 T924.34-37.400 T925.18-35.401 Exhibit A2, p 778.402 T927.6-.11.

the Funk Coffee and Food Victoria Square premises and the Funk Coffee and Food Angas Street premises in 2 October 2013. There is then a Schedule B which is to be found at page 32W of the Exhibit. It reads as follows:

Schedule B SB franchise site FS.

Where applicable, this Schedule B sb will record whether the territory or site to be franchised to the franchisee has been subject to a previous franchise granted by the franchisor.

534 Below that entry is a box. The box carries the heading as follows:

Site or Territory previously franchised?

535 Within the box the following entry is to be found:

This site has not been previously franchised.

536 A further copy of this document is to be found at Tab 41 of Volume 3. Mrs Damaskos agreed that a copy of the disclosure document was provided to Mr Emanuele as at 3 June 2016.403 She said that when producing that document, the generic form had been produced and that had been updated by the solicitors DC Strategy in late 2015.404 The document was a PDF and she made no changes to the PDF document. The document was updated by DC Strategy and that firm submitted it to her once it had been finalised.

537 Exhibit A18 was an earlier draft of the disclosure document prepared in 2015 by the solicitors. Mrs Damaskos said that the document sent to Mr Emanuele was the final copy of the October 2015 disclosure document that had been finalised by the solicitor.405 Mrs Damaskos said that this document had to be updated annually and she used the generic version for the update and then provided it to Mr Emanuele.

538 She was asked whether, in completing the Schedule B that she identified that there were two alternatives: that the site or territory had been previously franchised or that it had not been previously franchised. Mrs Damaskos denied that she gave consideration to that question and said that she sent the generic copy of the document along with the other templates including a copy of the Code and a copy of the franchise agreement template on 3 June 2016. 406 She could not recall what was in Schedule B; it was merely the generic document. It was then put to her that in Schedule B where the box is filled in to state that the site had not previously been franchised, that that was a change that she had made to the generic disclosure document finalised in late 2015.407 Mrs Damaskos denied that proposition. She said that the template document was finalised in October 2015. She then said that she could not amend that document that comes from DC 403 T923.32.404 T924.1-4.405 T924.25-27.406 T925.14-22.407 T926.1-6.

Strategy unless it is an editable form for the changes per the initial draft if they wanted her to add comments.408 As I understood this evidence of Mrs Damaskos, it would only be if the solicitors asked her to make changes or add comments that she would make any changes to the generic form of the document that had been prepared by the solicitors and sent by her. Earlier in her evidence, Mrs Damaskos had said that the generic version completed in late 2015 could not include in Schedule B whether or not the site had been franchised because it was relating to a specific site. Mrs Damaskos said that she did not know why the solicitors had updated the generic copy.409

539 I detected that this response raised a difficulty within the solicitor and client relationship because the statement within the disclosure document in Schedule B that the site had not previously been franchised is incorrect and potentially misleading I considered that there was a potential conflict between solicitor and client which, if unresolved amounted to an actual conflict. At this time this evidence was given, no issue was raised by the respondents’ counsel. I considered that the matter had to be resolved. I therefore asked the following questions:

HIS HONOUR

Q. Do you think they might have updated it without your instructions.

A. Yes, your Honour, because I don't - I don't actually physically go in and update this. I can't update that without it being track changed. The document that comes to me is the final version, I can't edit a final version.

Q. So you didn't give instructions for the amendment to be made -

A. No.

Q. - from the template.

A. No.

Q. But you would accept that the amendment has been made -

A. Yes.

Q. - in that it now reads 'This site has not been previously franchised'.

A. Yes.

Q. So are you saying the solicitors did that of their own account.

A. Yes.

Q. Without your instructions.

A. Yes.

408 T926.7-11.409 T927.8.

540 The evidence of Mrs Damaskos was that, without instructions, the solicitors had, on their own account, inserted an entry into a disclosure document prepared for the respondents which was misleading.

541 This in turn raised a number of quite difficult issues. The first, the ongoing relationship between DC Strategy as solicitors and the respondents as clients. The second, was the issue of the credibility of the witness. The third, was the question of the continuation of the trial in the then circumstances having regard to that evidence.

542 In that background, the following exchange took place:410

HIS HONOUR: Do you need to get instructions, Mr Belperio?

MR BELPERIO: Yes, I can take instructions, but I -

HIS HONOUR: It's being alleged against your solicitors, in respect of a matter which is of vital importance to this trial, that they've amended a document without instructions and have done so in a way which is going to be alleged to be misleading.

MR BELPERIO: Yes.

HIS HONOUR: They have to consider their position.

MR BELPERIO: Yes.

HIS HONOUR: I don't want to overdramatize this but I also don't want anyone to be left out on warning.

MR BELPERIO: Yes. Could I ask for a short break?

HIS HONOUR: Five minutes?

MR MUNT: Before we break, can I ask one further question?

HIS HONOUR: Yes, certainly.

XXN

Q. Mrs Damaskos, I took you to vol.3 and in particular to tab No.61, which is an email from yourself to Mr Mak and Andrew Barr of 27 June 2016.

A. Yes.

HIS HONOUR: I'm sorry, what tab did you say it is?

MR MUNT: 61.

XXN

Q. And your instructions were that this was the first time that you had communicated with DC Strategy in relation to the prospective franchise to potentially be taken by

410 T927.32 – 928.33

Mr Emanuele.

A. Yes.

Q. So why then would there have been any basis for DC Strategy to have made any change to the generic disclosure document before you provided it to Mr Emanuele in your email of 3 June 2016.

A. You'd have to go back and ask the solicitors of the time, that are no longer at DC Strategy unfortunately, but I haven't ever asked them to put that in and I believe that was the generic document that was forwarded to me.

543 There was a break for 15 minutes for counsel to obtain instructions. Upon resumption, I received the following submissions:411

HIS HONOUR: Mr Belperio.

MR BELPERIO: Your Honour, I've taken limited instructions. If it pleases the court, I'm happy for the cross-examination to proceed and I propose to take fuller instructions at the end of the cross-examination from both of my clients, which will enable an assessment as to whether there is, in fact, a conflict.

HIS HONOUR: That merely underscores the problem. I understand what you're saying to me, but I have evidence now, I have evidence that's now been given to me three times in relation to something. It's going to be put to me that that's not true. It's going to be put - it may not be put to the witness, but if that's so, then there is a significant element of credibility involved in that, which will be put to me is to infect the whole of the evidence, or a substantial part of the evidence. If that evidence is known to be untrue and is known to be untrue by your instructing solicitor, she has a duty to me to tell me something.

MR BELPERIO: Yes.

HIS HONOUR: And she has a duty to act in a particular way, and if she acts in a particular way, I'll completely understand it and I'll understand your position, but to delay is to compound the problem.

MR BELPERIO: Yes. There is a difficulty, your Honour, there is no-one at DC Strategy. No-one works there now who worked in 2016, as a lawyer, I'm instructed.

HIS HONOUR: I think the only appropriate thing for me to do is to say to you that to proceed is fraught because of the problems of the compounding of what might be the difficulties created by the evidence. I think I can only say that and do no more, but I'm not assisted by you telling me that there's nobody there. One might imply from that that there might be a presumption of regularity in relation to instructions, for example. If the evidence is wrong, then where does that take this trial and where does this take the question of the credibility of the witness?

MR BELPERIO: Yes.

HIS HONOUR: That's my concern.

MR BELPERIO: Yes. Given your Honour's comments, is it appropriate to break until tomorrow morning?

411 T928.36-930.20.

HIS HONOUR: Yes. People ask for 15 minutes and I say 'You probably need three hours, and you might want to go and talk to somebody'. Look, I think we should break until tomorrow morning.

MR BELPERIO: Yes, thank you, your Honour.

HIS HONOUR: Mr Munt.

MR MUNT: I'm in your Honour's hands. Obviously I'd prefer to -

HIS HONOUR: I know you would.

MR MUNT: - proceed. Can I move to another topic?

HIS HONOUR: No. No, because you would have anyway, but that's the point.

MR MUNT: Yes, your Honour.

HIS HONOUR: You don't need any more answers, on the issues that I'm raising. I have to ensure regularity, and as I've said, I'm going to ensure that nobody is left on a limb. They have to have the chance to have a mature reflection and come back to me

544 On the following day, the trial resumed. I was informed by counsel that instructions had been obtained. I was informed of the following matters:412

MR BELPERIO: As a result of what transpired yesterday afternoon my instructing solicitors are only prepared to continue to act on certain terms and those terms are not acceptable to the clients with the consequence that I'm unable to appear on instructions from my instructing solicitors. As I said, it pertains to the terms of engagement upon which my instructors are prepared to continue.

My proposal, if it pleases the court and I'm in the court's hands, is that the respondents to this action be given an opportunity to consider who their new - as your Honour knows, there are town agents, Hume Taylor on file but they've had no involvement, really at all, it's been DC Strategies as the solicitors.

If it please the court my proposal is that we continue on 6 October with the eight days set aside by which time the clients will have had an opportunity to get new instructors. The respondents' preference actually was to finish at least the cross-examination of Ms Damaskos. I'm just not sure how that would be probable.

HIS HONOUR: It's not I don't think. I have some bad news about that. I've negotiated with the Chief Judge last night, I won't know until the end of the day today whether that time's available. As part of that negotiation I'd carved out more time next week, so I'd shifted away Wednesday morning, that's gone. So I had more time next week. In light of what the chief was saying to me about time. Leave that with me but you're first application is to seek leave to withdraw.

MR BELPERIO: On behalf of my instructing solicitors, yes.

HIS HONOUR: You no longer have instructions to be retained to put the respondents' case in this trial.

412 T932.1-934.12.

MR BELPERIO: Yes.

HIS HONOUR: And you would seek to withdraw.

MR BELPERIO: Yes.

HIS HONOUR: You have my leave. Mr Belperio, I'm very grateful to you for the position you've taken and I'm very grateful to you that you've had some difficult decisions to make and that the relation between bench and bar is sacrosanct and you've fulfilled your duty and I'm very grateful. You have my leave to withdraw.

MR BELPERIO: Thank you.

HIS HONOUR: Mr Munt?

MR MUNT: My only comment would be that I appreciate DC Strategy have been the primary solicitors. There are, however, town agents that are on record as solicitors for the respondents. Mr Belperio is, of course, fully prepared in relation to the matter. In my submission there should be no obstacle, given the extent to which the cross-examination has already proceeded, for, at a minimum, the cross-examination to be completed next week with the town agents remaining to be on record or other -

HIS HONOUR: Stop there. The town agents are town agents for their principal. Their principal is DC Strategy.

MR MUNT: Yes.

HIS HONOUR: The town agent's position is no different from their principal and I fully understand the position of DC Strategy because I referred to it yesterday. Therefore I cannot be with you on that argument.

MR MUNT: Thank you.

HIS HONOUR: The best I can do is bring you back on Monday afternoon and get a report back in relation to where we are in the matter.

MR MUNT: Thank you.

HIS HONOUR: Someone needs to act quickly, it's not you, it's the respondents need to act quickly at least to get their house in order and to tell me what's proposed. If possible I will use everybody weapon in my armoury - or every effort, is a better expression - every effort to carve out those days from 6 October to finish this matter. You would anticipate the difficulties of that but there is sufficient time, one might think, between now and then. However, I've got to manage this.

MR MUNT: I understand.

HIS HONOUR: You'll have an application for costs which I will hear and I will give full consideration to in all respects. I don't think we should ventilate that now.

MR MUNT: No, I agree.

HIS HONOUR: I think what we should do is adjourn the matter until 2.15 on Monday.

545 I was therefore given to understand that the firm of solicitors DC Strategy were only prepared to continue to act on particular terms. I was told that those terms were not acceptable to the respondents including Mrs Damaskos. Therefore, DC Strategy terminated the instructions given to counsel on the basis that they were would no longer continue on the terms of engagement and from which the instructions had been given to counsel.

546 The only question for my consideration is the credibility of the evidence given by Mrs Damaskos about the content of Schedule B. Her evidence is that this Schedule was completed by the solicitors without instructions from her and after a decision made by the solicitors.

547 I consider that evidence has no credibility at all. Having reflected further upon the whole of the evidence given by Mrs Damaskos, I considered that she was wrong in that evidence. It is not necessary for me to decide whether she was attempting to actively mislead the Court. It is sufficient for me to say that this evidence was demonstrably wrong, without any credibility, of doubtful truth and was a construct by Mrs Damaskos to avoid what she knew was a difficulty in relation to the documents that she had provided to Mr Emanuele. It was an attempt to avoid dealing with a portion of the disclosure document that is said to be misleading.

548 I consider that this was one only but a primary example of the lack of credibility of the evidence given by Mrs Damaskos. It is not necessary to make further findings about it.

549 I do not accept the evidence of Mrs Damaskos. That view is borne out by the fact, that in answer to a Notice to Produce on 10 August 2020,413 DC Strategy produced to the court, a USB flash drive of the Microsoft Word versions of the disclosure document created in 2015 or 2016. Each of them are Word documents and therefore, each of them are editable. Mrs Damaskos would not confirm, that what was on the USB flash drive was provided by the solicitors to the Court. I am satisfied therefore, that the document produced by these solicitors, and held by the respondents, was an editable form of a standard document. The completed form was produced by the respondents. I am also satisfied that any election made in the relation to Schedule B to the document was made by the respondents. In any event, I would not accept without further proof, any suggestion that the solicitor unilaterally amended the document without the instructions of their client. No such evidence was given.

550 The evidence also discloses that Mrs Damaskos was very familiar with the Code, and the schedules and regulations to the Code.414 She told Mr Emanuele that the respondents would send through only template documents for prospective franchisees to peruse. Once comfortable with those, the final documents would be prepared. She disagreed with any suggestion that there was

413 FDN 88.414 T950.11-19.

nothing on the face of the document sent to Mr Emanuele on 3 June 2016 to indicate that it was anything other than a final version of the disclosure document. Mrs Damaskos said that it was a template document that was on file that was forwarded for the perusal of Mr Emanuele.415 I am unable to accept that evidence. The disclosure document sent on the 3 June 2016, and the document executed, and the document finally sent by Mr Emanuele did not change.416 I informed Mrs Damaskos of the difficulty I was having understanding her answers and accepting her evidence. Ultimately, she said that these are merely template documents, and she sent out whatever she had on file. She did not check them. She did not ensure that they were accurate. She knew that there was an obligation to provide accurate information.

551 Mrs Damaskos also accepted that a disclosure document was sent on 28 June 2016 from Mr Barr, a solicitor at the firm DC Strategy, to Mr Emanuele copied to herself. This was in the same form of the original disclosure document sent on the 3 June 2016. Mrs Damaskos was also referred to an email she sent to the Solicitor Mr Barr, on 28 June 2016.417 The email deals with a number of items and it says in the last sentence that they would go to the documents and advise. Mrs Damaskos denied that one of the documents that they would go through (at Funk) was the disclosure documents.418 I am unable to accept that evidence. I think it is quite obvious that she was referring to documents other than the contract of lease document that were being referred to by Mr Barr; that is a plain and obvious inference from the documents. I do not accept the answer given by Mrs Damaskos that she cannot now know what they were intending to go through on that morning. She denied noticing the completion of the Schedule B, that the store had not been previously franchised.419 However, unless she had gone through the documents, she could not be in a position to say what she did or did not notice.

552 On the issue of whether or not she reviewed the document adequately, she agreed that on 28 June 2016, she reviewed the documents for a second time and she did not identify whether the content of Schedule B was accurate. She said that she relied upon DC Strategy at the time.420 It is worth mentioning again, that by this time in her evidence, DC Strategy had ceased to act and another firm of solicitors were acting for her in the circumstances that I have earlier described. She said that she was relying upon her solicitors, and so she did not check every single page.421 She denied that her state of mind on 3 June 2016, and 28 June 2016, was to deflect any attention away from the former franchisee Kindred. 422 She denied that, by failing to mention Kindred in Schedule B, this would reduce the chances of a prospective franchisee, such as Mr Emanuele attempting to

415 T951.11-12.416 T952-954.417 Exhibit A2, vol 3, tab 64, p 942.418 T959.12.419 T959.28-31.420 T960.29.421 T962.1-4.422 T962.15.

make contact with Kindred. She did not think it was necessarily the case that if someone contacted Kindred, such a prospective franchisee would not then proceed. There was no confidentiality obligation which would have hindered Mr Emanuele’s capacity to go and speak to Kindred.

553 Mrs Damaskos was then taken to her evidence in chief in which she said that she could recall Mr Damaskos telling Mr Emanuele that the Victoria Square store had been previously franchised.423 She was taken to an affidavit made on 8 February 2019 filed in these proceedings. The purpose of the affidavit was to address evidence given by Mr Emanuele, that no mention had been made to him in negotiations that Schedule B was incorrect, and that the store had been previously franchised.

554 In relation to the dispute with Kindred, she said that at all times they advised Mr Emanuele that the dispute with the previous franchisee related to mismanagement of the store by Kindred. Nothing was said about any claims of misleading and deceptive conduct.424

555 Mrs Damaskos also accepted that in the disclosure document first given to Mr Emanuele, the buyback of the Waymouth Street store from the Boss 260, was not disclosed. She agrees that it should have been there. It was re-purchased in November 2012. She knew it was an important obligation under the Code at the time the disclosure document was provided to Mr Emanuele.

556 Mrs Damaskos accepted that she knew that Kindred achieved a gross profit percentage of 32% only by reducing the level of stock. Kindred generated a superior gross profit than that which was being produced by the respondents.425 Kindred achieved a turnover of $850,000 for each of the 2011 and 2012 financial years, which was significantly greater than the amount earlier achieved by the Funk Group. Gabjet also achieved a turnover higher than what had been achieved by the Funk Group. Mrs Damaskos agreed that on the basis of turnover, the performance of both Gabjet and Kindred was better than the performance of the Funk Group.426 Notwithstanding, she maintained that the allegations of mismanagement by Kindred, including in their instructions to Mr Opie, the expert, were true.427 I do not accept that evidence for the reasons I have already expressed.

557 Mrs Damaskos was then cross examined on the marketing fund. I am satisfied that there was a shortfall in the marketing fund, required to be contributed by the respondents. The shortfall was in respect of the period 1 January 2015 to 30 June 2017. To that extent, there was a shortfall of expenditure on the marketing fund because of the failure by the respondents to contribute the proper amount to the marketing fund. Overall, the shortfall was $128,000. At the

423 T637.23.424 T973.425 T985-986; Exhibit A2, vol 14, tab 378.426 T990.8-19.427 T990.21-32.

time that the notice of termination was issued, the respondents were also in breach of their obligations under the Code and the franchise agreement.

558 Mrs Damaskos also agreed that Mr Emanuele wished to take possession of his assets, namely the plant and equipment in the Victoria Square store and the Waymouth Street store. She admits that he was locked out of both of those stores and that he was prevented from ever taking possession of the plant and equipment. She was aware of the exchange of correspondence between solicitors on that topic. She agreed that the directors of the Funk Group ensured that Mr Emanuele did not take access to that plant and equipment and were prevented from ever obtaining access to it. She agreed that the Funk Group have gone on using that plant and equipment since that time.

559 Mrs Damaskos agreed that from July 2017, the Funk Group had no issues of any significance that were critical of the operation of the Victoria Square store by Mr Emanuele. That continued right up until the time that he purchased the Waymouth Street store. She understood that he was happy as a franchisee at that time that and were happy with him as a franchisee. Mr Damaskos also had no complaints about him as a franchisee.

560 She agreed that the only difficulty that arose between the Funk Group and Mr Emanuele was the failure to pay rent and outgoings.428 Prior to the termination of the franchises, the only issues ever raised between the Funk Group and Mr Emanuele related to in store inspection reports, minor miscellaneous matters such as sale of non-approved products, some complaints about catering issues and expiry of a public liability insurance coverage, WorkCover registration and the certificate for SA Water.429 Prior to the current litigation commencing, no assertion had ever been made by anyone at the Funk Group that Mr Emanuele had mismanaged the businesses.430 Also, it was never suggested to Mr Emanuele that he did not have sufficient involvement in the two businesses or that, for example, Ms Carly Piggott was not suitable as manager of the Waymouth Street store.431

The evidence of Mr Arthur Damaskos561 Mr Damaskos said that there are 16 Funk stores but two are not

operational.432 There are nine franchise stores and five company operated stores.433 He had no involvement in preparing the business profile document for the Victoria Square store. The preparation of all documents is done by Mrs Damaskos.434 He also had no involvement in the preparation of the disclosure documents for Victoria Square or the business profile documents or disclosure documents for Waymouth Street; that was all done by Mrs Damaskos.428 T1057.9-1058.38.429 T1058.7.430 T1059.13-18.431 T1059.4-1060.5.432 T1076.37-38.433 T1077.2-3.434 T1078.4-11.

562 He attended a meeting with Mr Emanuele which he thought was a meet and greet meeting and he can recall Mr Emanuele talking about his own work history.435

563 At the meeting, he told Mr Emanuele about the Victoria Square store. He said they took the store back in 2013 as part of a mutual decision between Funk and the former franchisees.436 He said nothing about alleging mismanagement by the previous franchisee, Kindred. The evidence of Mr Damaskos is inconsistent with that of Mrs Damaskos. I was not prepared to accept the evidence of Mrs Damaskos on the point. I also do not accept that the termination of Kindred was merely a mutual decision between Funk and the former franchisees.437 It is wrong.

564 He could recall that Mr Emanuele told him at the meeting that he understood franchising because of his family business. It was then that he told Mr Emanuele that Kindred basically mismanaged the store and that is why they took it back.438 He suggested to Mr Emanuele, in contradistinction to the position of Kindred that they wanted a hands-on franchisee to maintain it as they required.

565 On the topic that Kindred mismanaged the Victoria Square store, he said that by the efforts of the Funk Group, the store was restored to its turnover.439 The evidence does not support that contention. It is incorrect. Both Mr Emanuele and Kindred as operators significantly exceeded the turnover generated by the Funk Group from the Victoria Square premises. I reject any suggestion by Mr Damaskos that anything done by the Funk Group in some way restored the fortunes of the Victoria Square store.

566 Mr Damaskos also said that Mr Emanuele said to him that he did not really care about the past and the only thing he cared about was what he was going to do now.440 That evidence is inconsistent with the actual requests made by Mr Emanuele to be given the historical trading information such as BAS return, tax returns and financial statements. These were requested but were not supplied. They were available if a request was made for them to be provided from BCFR. I am unable to accept this evidence. I think it is neither truthful nor reliable.

567 Mr Damaskos was also critical of Mr Emanuele in the training process established for the store. He said that the store was in a filthy state when it was taken back from Kindred. There is no evidence to support this contention. It was never put to Mrs Bueti and I reject it as truthful and reliable evidence. He accepted that Mr Emanuele was allowing the staff to do their jobs. He agreed that there was very capable staff in the Victoria Square store. He therefore had

435 T1078.35-1079.7.436 T1079.7-14.437 T1079.13-14.438 T1079.29-31.439 T1079.31-37.440 T1080.10.

no real complaints about the way Mr Emanuele ran the store, particularly in the first six months which he said were crucial.441

568 He said that he was never aware that Mr Emanuele intended to make any changes to the POS system. Permission was never sought from him for Mr Close to do this work.442

569 He said that two or three months into the operation of the Victoria Square store, Mr Emanuele asked him if he had any other stores to purchase. He tried to deflect Mr Emanuele by saying he should get used to the store first but Mr Emanuele insisted upon making further enquiries. He later took over the Waymouth Street store. Soon afterwards, he had difficulties with the electricity accounts. This was following a state-wide increase in electricity costs on 1 July 2017. He said that as best as he could, he tried to mediate the issues between the property manager and Mr Emanuele but it could not be resolved.

570 He was also in charge of the expenditure from the marketing fund. He said that there were outside costs which were absorbed that would otherwise have been marketing fund costs, such as setting out extra menu and the like. He agreed that for the first two years from 2015 to 2017, in breach of the Code, the Funk corporate stores were not contributing to the marketing fund. This was brought to his attention in the course of these proceedings and following that, they sought advice from their lawyers. The lawyer’s advice was they should not restore the fund and only go on paying from the time that it was brought to their attention. The lawyer’s advice was not put before the court. My understanding of this evidence is that the respondents asked the court to accept that a firm of solicitors would have advised their clients to maintain their breach of their obligations under the Code and to cure the breach from the time that it was brought to their attention. I consider this alleged outcome of the advice of the solicitors to be so inconsistent with plain common sense that it is fanciful and it is neither truthful nor reliable evidence. I do not accept it.

571 Mr Damaskos was then asked to explain what happened to the Kindred franchise. He said that Kindred started first in the Victoria Square store and then opened the Angas Street store. In his opinion, wages were incredibly high and too many people were employed in the businesses. This evidence is inconsistent with the evidence given by Mrs Bueti whom I found to be a credible, truthful and reliable witness. To the extent that any evidence of Mr Damaskos on that topic is different from the evidence of Mrs Bueti, I prefer the evidence of Mrs Bueti.

572 Mr Damaskos gave the following evidence:443

I don’t think they were doing the turnover the thought they would be doing. They flagged with us that, you know, there was discrepancies with information we provided when they

441 T1081.10-28.442 T1083.3-11.443 T1087.18-24.

first took over Victoria Square. We strongly deny. We went to a mediation and we bought back both stores, we agreed on a settlement and bought back those stores.

573 I consider this evidence is not credible, accurate or reliable. It is known that Kindred had a higher turnover than the respondents at the Victoria Square store. The complaint of Kindred was that the cost of goods sold as a percentage of turnover could never match that which was alleged by the Funk Group. The Funk Group percentages were always in the order of 30% to 31%. The best that Kindred could do was in the order of 32%, but by slashing stock and so its carrying costs. Even then, Kindred could not achieve the level of profitability that had been represented to them by the Funk Group.

574 Mr Damaskos said that in April 2018, Mr Emanuele requested a meeting and told him that he wanted to get out of the stores. Mr Emanuele wanted to sell the stores almost immediately and move on, and he asked him to buy back the stores. Mr Damaskos refused and said that he should get the stores into order, get a broker and put them on the market. He did not see Mr Emanuele again.444

575 He said that Mr Emanuele refused to pay his rent and the contracts were terminated.

576 In cross-examination, Mr Damaskos said that he was aware of the preparation of the business profile documents.445 He was aware that these documents were regularly prepared by Funk in relation to sourcing prospective franchisees for stores and that had been done prior to 2015. This was their purpose.446

577 Mr Damaskos accepted that the information in the business profile document could be relied upon by a franchisee as an inducement towards purchasing a business.447 He was managing directors of the Funk Group but had not read this particular business profile given to Mr Emanuele and even though he was discussing the question of the opportunity with Mr Emanuele. He said that his Mrs Damaskos took primary responsibility for the preparation of the document but he would have discussed it with her.448 He did not discuss with Mrs Damaskos the actual information that she was going to include in the document.449 He did not ever see it before it was provided.450 He had discussions with the prospective franchisee without seeing the financial information the prospective franchisee had been given.451 When pressed as to whether he would be interested in the information given to a prospective franchisee, he said that it was Mrs Damaskos’ job and he had 100% faith in what she did.452

444 T1088.28-T1089.8.445 Exhibit A2, vol 1, tab 2; T1090.5-20.446 T1090.10-20.447 T1091.3-8.448 T1091.19-24.449 T1091.28.450 T1091.35.451 T1091.36-1092.5.452 T1092.27-31.

578 He agreed that after the Funk Group took the Victoria Square store back from Kindred, he was involved in the operation side of the store. He said that Ms Cameron was the manager.453 He visited the store regularly and as managing director he kept abreast of the operations of the business such as weekly turnovers, cost of goods sold, rosters, wages and other things. However, he did not have a complete handle on financial information. His job was to ensure that cost of goods sold were between 30% to 35%, wages were held in check of between 30% to 35% and the turnover was at the level required. Mrs Damaskos filled in the rest of the information.454 He was aware that any prospective franchisee was going to rely on any information that was provided to him. He was interested, for example, in any net profit figure that was represented to a prospective franchisee. This was all involved with what he considered to be the profitability.455

579 He thinks that Mrs Damaskos and Mr Versace did most of the talking about the financial figures, particularly Mr Versace. That was what they employed him to do and he was authorised by them.456 Despite that, he knew the profitability of the businesses and he understood that Mrs Damaskos was communicating with Mr Versace about those figures. They then spoke to Mr Emanuele. Mr Versace was therefore communicating everything said to him by Mr and Mrs Damaskos.457 He had to have the profitability figures in his head when he was talking to Mr Emanuele.458 He also needed to have some knowledge of what Mr Emanuele could expect to achieve if he was operating the business as a franchisee.459

580 He treated any figures given to Mr Emanuele as merely historical figures which were a guide to him about what he could expect to generate as a net profit. However, Mr Emanuele in doing so would have to make the same turnover for the year and would have to work 38 hours as Ms Cameron did and everything else would have to fall into line.460

581 He was also aware that Mr Emanuele was given the figures and he knew what Funk CBD had achieved when it was operating the store.461 He knew that taking the 2015 figures, Mr Emanuele was proceeding on the basis of a net profit in the vicinity of $117,000, less additional expenses of 7% of gross turnover for the franchising and marketing fee.462 He knew that Mr Emanuele had information to that effect even though he had not read the business profile document.463 This was despite the fact that he did not really have a complete handle on the type of information that had been given to Mr Emanuele. He only knew that he had been

453 T1092.37.454 T1093.17-23.455 T1093.35.456 T1094.3-7.457 T1094.12-15.458 T1094.20-22.459 T1094.26-30.460 T1095.17-21.461 T1095.27.462 T1096.20-23.463 T1096.34-37.

given information to that effect.464 It was common at the time for the Funk Group to provide information of that nature to prospective franchisees.465 He was the person who had previous dealings with prospective franchisees and knew that they had been given historical information achieved by the Funk Group. This was to include turnover, deduction of a manager’s costs and the addition of a 7% of gross turnover.466 This was also despite the fact that he was not completely familiar with every document. He also had never discussed with Mrs Damaskos what type of information would be provided in the business profile documents.467 All he had was an understanding of the profitability of the store.468 He relied upon Mrs Damaskos and Mr Versace to provide all of the information of a financial nature to Mr Emanuele.

582 Mr Damaskos then gave evidence that he did not know what financial information was provided to Mr Emanuele or, as it seems, what information might have been requested by him. He said that as he sees now the document that was presented to him and agrees that seeing it now was how it was presented to him.469 This was despite the fact that he had an understanding of the profitability amounts of $117,000 for the 2015 financial year but he really did not understand much else.470 Mrs Damaskos did not tell him what she was putting into the form and he never saw it notwithstanding that he was the managing director of the company and that he knew that he was making a representation as to the profitability of the business.471

583 He did not put any particular sales pitch to Mr Emanuele. He said that that was all done by Mr Versace who talked over the numbers with Mr Emanuele. As I understood his evidence, Mr Damaskos was intending to convey that at any meeting with Mr Emanuele, it was Mr Versace who was communicating financial information. That is contrary to the evidence of Mr Versace and also contrary to the evidence of Mrs Damaskos. I am unable to accept that evidence. I do not accept that Mr Damaskos would have involved himself in a conversation with Mr Emanuele about the potential sale of the business and in the background knowledge of the profitability of the business as it was represented in the documents and not have any conversations with Mr Emanuele about that financial information.

584 In his mind, it has always been about the profitability of the store.472 I accept that evidence however, common sense dictates that in order to have a discussion about profitability, it is necessary to have a discussion about the performance of the store. When he had his dealings with Mr Emanuele that was

464 T1097.13.465 T1097.20.466 T1097.21-38.467 T1098.5.468 T1098.9-10.469 T1098.29-31.470 T1099.3.471 T1099.15-16.472 T1105.5-6.

the approach that he adopted.473 Mr Damaskos signed the sale of business agreement and initialled each page; an example, he initialled page 90. He said that he was aware that there were three columns of figures upon the page, looked at them, assumed that they were correct and then went on to the next page. He would not challenge the content of those pages but relied upon Mrs Damaskos to get that information correct.474 Even so, he could not say that he read any particular line on that document such as the bottom line:

Available to Owner Operator

585 All he looked at was the numbers.475 He agreed however that the only two entries on that page that stand out like beacons are the net profit figure and the figure of available to owner operator.476

586 Mr Damaskos knew that all of the financial information shown on page 90 of the business sale agreement was prepared by Mrs Damaskos.477 He was also aware that if requested, BCFR could generate a profit and loss statement for a particular store on a standalone basis.478 Mr Damaskos agreed that on 3 June 2016 he had signed group financial statements including the performance of the Victoria Square store. This was some 14 days before the signature on the sale of business agreement.479

587 In an answer to a question from me, Mr Damaskos said that he was interested in the stores performance but he never looked at the report, even though he was managing director.480 I have considerable difficulty accepting this evidence for a number of reasons. As managing director, he was intimately involved in the operations of the stores, he provided services to the stores and he attended them constantly. He had an overview of the staff, their performance, the operations of the stores and their profitability. As managing director, he received all of the financial statements. He said that as managing director, he would not have had much regard to those financial statements which showed the individual performance of the stores. I think that is very unlikely. I do not accept this evidence as truthful and reliable.

588 He knew that Mrs Damaskos received individual profit and loss statements for each of the company stores at or around the time the consolidated accounts were provided by BCFR.481 These were discussed between them, particularly if she wanted to point something out.482 As managing director she kept him

473 T1100.7-9.474 T1101.27-36.475 T1107.4-11.476 T1107.21-28.477 Exhibit A2, vol 1, tab 4, p 90.478 T1108.15-25.479 Cf Exhibit A2 tab 4, p 68 and Exhibit A3, tab 5, pp 2921-2922A.480 T1111.34 – T1112.6.481 T1112.38.482 T1113.1-3.

informed of the level of profits of each of the individual stores on a financial year basis.483

589 Mr Damaskos was asked to compare the business profile document for Victoria Square with the financial information prepared by BCFR.484 That material discloses that in the 2014 financial information a profit of $68,000 was reported whereas in the financial statements a profit of $78,000 was reported. In the 2015 year, the BCFR accounts show an $80,000 profit compared to the financial information document of $117,000. When asked whether he understood that the business profile document did not represent the true profitability of the business for those financial years, Mr Damaskos said he could not comment on that because he had nothing to do with the preparation of the documents.485 He only had a rough idea of the profitability of the businesses.486 Mrs Damaskos would generally keep him informed of the terms of the profit level achieved by the company stores in relation to the documents prepared by BCFR.487 Despite all the information he had and was being given, he did not know that there was a difference in net profit recorded in the BCFR profit and loss statements compared to the business profile financial information given to Mr Emanuele.488 He was not aware of the differences between the financial statements in relation to the store performance and its profitability including the net profit figure generated and the figures represented within the financial information document.489

590 I am therefore satisfied that, in that background, Mr Damaskos conducted negotiations with Mr Emanuele for the sale and purchase of the business and allowed financial information to be provided to Mr Emanuele when, the Financial Information document provided to Mr Emanuele that was then included within the sale of business agreement, was inaccurate. Mr Damaskos was aware of the exchange of correspondence on 1 June 2016 that was sent to the Funk Group by the agent Mr Versace.490 It was responded to by Mrs Damaskos.491 Mr Damaskos was aware of that response but he did know of the request by Mr Emanuele for additional financial information as set out in the email request made two days before the signature of the consolidated financial statements and the provision of the separate statements.492 Mr Damaskos was asked whether, in light of the information provided on 3 June 2016, the response of 1 June 2016 made by Mrs Damaskos was inaccurate. His answer was:493

A You would have to ask her, she responded.

483 T1113.4-8.484 Exhibit A2, vol 1, tab 2, p 42; Exhibit A3, tab 3, p 41.485 T1116.8-14.486 T1116.23.487 T1116.28.488 T1117.10-17.489 Exhibit A2, vol 1, tab 4, p 90.490 Exhibit A2, vol 2, tab 39, p 678.491 Ibid page 677.492 T1117.18-T1119.36.493 T1119.12.

591 When challenged about that answer, and when asked about the fact that he knew that a prospective franchisee, Mr Emanuele wanted to obtain further financial information, Mr Damaskos said that he personally did not know that information was available. He said Mrs Damaskos had the dealings with BCFR and that he would never have known that on 1 June 2016, that the consolidated information was going to become available on 3 June 2016.494 I am unable to accept that evidence. I consider that it is a contrivance. Mr Damaskos had already given evidence that he knew of the capacity of BCFR to produce and the fact that they did produce individual profit and loss statements for different stores. For example, in 2016, he knew that the 2014 individual profit and loss statements were available.495 He also accepted in answer from questions from me that accountants will send along copies of documents and ask for confirmation of the accuracy of the content of those documents before they are produced as a final copy and are executed.496 That was the way that BCFR usually operated and this was the usual commercial run of things.497 He knew that when the email of 1 June 2016 was sent, there would have been earlier drafts of the 2015 financial statements that would have been circulating.498 At the time, he would have also had the financial returns for 2014 year.

592 Notwithstanding these answers, he denied an intention on the part of the Funk Group not to provide Mr Emanuele with formal profit and loss figures but with the knowledge of the inclusion within those formal documents of further expense not contained with the business profile document.499 I am unable to accept that evidence. I am satisfied from the evidence given by Mr Damaskos that he knew of the capacity of BCFR to produce individual profit and loss and balance sheet statements prepared for each of the financial years upon request. He was aware of the individual profit and loss accounts prepared from time to time for each of the individual stores operated by the company. I am satisfied that he knew of those documents that could have been provided by a simple request to BCFR in response to the request made by Mr Emanuele on 1 June 2016. I am satisfied that the failure to provide that information was deliberate on the part of the Funk Group.

593 When he signed off on the financial information in the business sale agreement, Mr Damaskos was aware that for the Victoria Square store, there had been expenses incurred by Funk CBD for accountancy fees, the cost of depreciation, general expenses and interest but none of those items were reflected in the financial information. It was deliberately prepared on that basis.500 He relied upon the statement within the business profile document that individuals should take advice about the content of the financial material they were being provided. This is because franchisees all work in different ways. 494 T1119.32-36.495 T1120.11.496 T1120.34.497 T1121.1.498 T1121.7; Exhibit A2, vol 2, p 677.499 T1121.27.500 T1123.8-12.

Notwithstanding, he agreed with the proposition that I put to him that if the Funk had answered the email of 1 June 2016 by delivering the most recent draft of the profit and loss statements for Funk CBD for 30 June 2015, then some idea might have been given to the recipient of the expenses being incurred by Funk CBD.501

594 In relation to the value of plant and equipment, Mr Damaskos was aware that it had been purchased for about $400,000 and had been written down to a value of about $127,000. He knew that Mr Emanuele was borrowing money to purchase the Victoria Square store and also to purchase the Waymouth Street store. Mr Damaskos accepted that, for example, it would be reasonable for a franchisee to incur motor vehicle expenses and other expenses associated with the employment of staff, staff training and other expenses. These were not included on any document given to Mr Emanuele.502 He knew that at the time even though the Funk Group incurred expenses of that nature in operating the various company stores that Funk operated.503

595 Mr Damaskos agreed that if additional costs of the nature that were being incurred by Funk CBD were included, there would be a reduction of a profit. However, he thought that that was an individual choice for particular franchisees.504 He accepted that costs such as accountancy fees, depreciation, administration expenses, general expenses, interest expense, motor vehicle expenses and the like are very commonly incurred in the operation of businesses such as the Funk store. He said that that was why franchisees needed to get information from their advisors. I am unable to accept this evidence. The Funk Group was in a position to produce individual profit and loss statements for the various stores, as well as detailed profit and loss statements in relation to the operation of the Funk CBD business and other businesses. A request to BCFR on 1 June 2016 would have produced within a day or two the documents and financial information which Mr Emanuele had requested but which was refused. Mr Emanuele was left to deal with the information that he had which was deficient on the level of the actual expenses incurred by Funk CBD in the operation of this and other stores. Therefore, the financial information was deficient. The following exchange then occurred between Mr Damaskos and I:505

HIS HONOUR

Q. What I understand you to be telling me is that in relation to the document which is behind tab 2 on vol.1, which is called the business profile, that the person looking at, for example, p.41 could not use - as you would - as I understand your evidence to me 'Don't use those figures, pay them no regard. You have to go and get all of your own advice and someone is going to have to come back and completely redo these figures'.

A. No, that's not what I stated.

501 T1124.18.502 T1127.9.503 T1127.12-24.504 T1127.25 – 1128.27.505 T1128.23 -1129.14.

Q. What are you saying.

A. I'm saying these figures are basically the operational profit and loss for the store.

Q. If that's the case, then the amount available to the owner operator on the last line is not correct, is it. That's an amount available to an owner operator, the amount available to the owner operator is only available if all of the proper expenses were attributed to the operation of the business and you had, for example, in Exhibit A3 behind tab 3 at p.2922G an idea of all of those expenses, including the four that we've talked about.

A. Well, that's why I think we give these numbers to a prospective franchisee, so they can go away and work out their individual circumstances and what costs they're - because not everyone has a bank loan, not everyone drives a car. Yes, granted, everyone has accounting fees that need to be factored in but that's why we give these documents, for someone to go away and work their own situation within these numbers.

596 I am unable to accept this evidence. The content of the financial information, at the bottom line, with the exception of Funk Group expenses excluded which are very minor, is a description of an amount available to an owner/operator. A request was made for provision of further financial information that was available to the Funk Group. The Funk Group refused to accommodate that request. The same request was made by Kindred, it was refused in the same way. The information was eventually provided within two days by BCFR. It was in that context that the answer given by Mr Damaskos must be considered.506 The only person or entity which had the correct financial information was the Funk Group and when requested to provide the information refused to do so. It would be impossible for a prospective franchisee to accurately factor in costs about which they knew nothing. A prospective franchisee could only work with the information given to that prospective franchisee by the Funk Group.

597 The position would have been entirely different if, for example, Mr Emanuele had insisted upon the provision of the information. However, that is not to the point because the opportunity was available to the Funk Group to provide the information but refused to do so. The statement made on or about 1 June 2016 that the information was not available to the Funk Group was untrue as well as misleading because that information was available from BCFR upon a simple request. In the result, Mr Emanuele was left with the sheet of financial information which he had been provided. It was misleading, it misled him, and he relied upon it to make his decision to purchase the Victoria Square store. It did not include any of the operating expenses incurred by Funk CBD such as depreciation, interest costs, office administration costs, general expenses, motor vehicle expenses and the like.

598 Mr Damaskos accepted that he incurred motor vehicle expenses in relation to the Victoria Square store.507 It was an operating expense but he said that he 506 T1129.7.507 T1130.31-38.

was not physically going to the store as a director but only to see how things were. He then agreed it was an expense after admitting that he was then acting as an executive director rather than a non-executive director.508 He also agreed that even though the financial information did not record staff welfare expenses, the staff did receive 25% off food and other benefits. These are not recorded.509

599 Mr Damaskos was then taken to a comparison of the wages figures. On an annualised basis, the wages figures on the financial information provided to Kindred in 2010 showed an annualised wage figure of $224,000. For the 2015 year, the representation was that the wages figure for a full year was $221,000. There was no explanation about how, in 2015, the wages figure for the Victoria Square store could have been less than the wages figure represented to Kindred in 2010. Mr Damaskos denied that there had been an under disclosure to Kindred of the total amount of wages paid for the Victoria Square store. He was aware of the allegation of misleading conduct made by Kindred that Funk had understated the wages figure paid.510 He denied that he knew that this was the case when he provided the financial information to both Kindred and to Mr Emanuele.511 I am unable to accept this evidence as truthful and reliable.

600 I am satisfied that the historical information provided by the Funk Group to Mr Emanuele was incorrect. Mr Damaskos agreed that in the financial information given to Kindred, the cost of goods sold margin achieved by the Funk Group was approximately 35%. He said that the Funk Group worked assiduously over an 18-month period after taking the business back from Kindred to generate a higher level of margin on cost of goods sold, to reduce from 35%. He also contended it was profitably operating in 2010, but it could only generate a cost of goods sold margin of at or near 35% and nowhere near 30% to 31%. Then, in the business profile document given to Mr Emanuele, the cost of goods sold margins for the 2014 year was 32%, for the 2015 year was 31% and the 2016 year was 30%. Mr Damaskos denied that the information supporting the calculation of these margins was incorrect. I am unable to accept that evidence because the historical evidence shows that at the time in 2010 when the business was sold to Kindred, the cost of goods sold margin could not be much below 35% and yet at a time when the business is supposedly recovering from the alleged damage caused to it by Kindred, its cost of goods sold margin were 32%, 31% and 30% in three consecutive financial periods.512 I consider this evidence is both untruthful and a contrivance.

601 I am satisfied that when the particular circumstances of each store were properly and reasonably factored in, there was no reasonable prospect of a prospective franchisee achieving either the profit or benefit to the amount anywhere near the region that is stated in the financial document. Mr Damaskos 508 T11318.1-13.509 T1131.20-21.510 T1134.18; 22; 26.511 T1134.30.512 Cf Exhibit A2, vol 14, tab 378, p 3407; p 3410; p 3421; and Exhibit A2, vol 2, tab 2, p 41; T1134-

1136.

disagreed and said that nobody forced anyone else into not doing their due diligence on the numbers provided and their own personal circumstances.513 There was every opportunity for Mr Emanuele to come back and ask questions. This is something Mr Emanuele did. This evidence led to an exchange between myself and Mr Damaskos as follows:514

HIS HONOUR

Q. But how can you do due diligence when you wouldn't give him the financial statements for the operation of the business as you prepared them.

A. We gave him this financial information.

Q. Well, that's the point. That's the point of my question. I've asked you a number of times now as to why on 1 June 2016 you recall that email. Your wife said 'I can't provide you with separate reporting information in relation to Victoria Square'. How would it be in your mind having regard to your answer that a person could go ahead and do the due diligence in light of the absence of that information.

A. Because those -

Q. Will they have to guess.

A. No, those figures reflect the way we operated the store.

Q. That's my very point. It's a pretty good place to start, isn't it. Having a look at what you incurred, for example, interest, having what you incurred - 'What expenses do I have to look out for, for example accounting expenses, interest expenses, other things. General expenses'.

A. Yes, but we didn't know the franchisee's personal circumstances and what costs they would incur.

Q. You've said that to me a number of times now but it's not answering the question I'm putting to you. All I'm suggesting to you is the starting point that you have the financial information, the full suite of financial information of the vendor of the business, bearing in mind that you've said a figure of $410,000 plus $33,000 of franchise fees, when you've set that figure and you're asking that price, you've not given them the most basic of information in relation to your financial performance on request. Do you agree with that.

A. I agree with what you've just stated.

602 I am satisfied that Funk CBD and the Funk Group were aware that this information was available, it could have been provided quickly upon a request to the company’s accountants soon after than 3 June 2016 and well before Mr Emanuele signed the contract for the sale and purchase of the business.

603 Mr Damaskos was then asked to compare the operating performance of Kindred.515 In the 2011 financial year Kindred incurred an operating loss of

513 T1144.11-21.514 T1144.22-1145.31.515 Exhibit A2, vol 14, tab 380, p 3469.

$6,000 and for the 2012 year a profit of $27,000 but only because there was a reduction in the manager’s wage and a reduction of claimed expenses. For example, accountancy fees were incurred but not charged. They were covered by Ms Bueti. These would otherwise have been a cost of the business. Mr Damaskos was asked how it would be that the very first franchisee of the flagship store was unable to make the business viable. He suggested that as these were Mrs Bueti’s figures, he would not comment because he does not know where they came from.516 I asked him whether he thought the figures were fabricated and his answer was that he could only comment on the turnover because that is all the information that he could receive.

604 I am unable to accept that evidence. A clear implication arises that Mr Damaskos was suggesting in his evidence and that the Kindred figures were fabricated. I reject that suggestion. No such proposition was ever put to Mrs Bueti in her evidence, there is no evidence of such fabrication. This was a contrivance by Mr Damaskos to avoid the issue of the absence of any basis to reconcile the representations made by the Funk Group to Kindred and the operations of the Victoria Square store by Kindred. Mr Damaskos would not accept that the figures generated by Kindred meant that the Victoria Square business was not a viable business to be operated by a franchisee having regard to the costs that would need to be incurred by a franchisee necessarily in operating the business. Mr Damaskos disagreed with that proposition.517 I am unable to accept that evidence. I think it is wrong. I am satisfied that each of the financial figures provided by the Funk Group to Mr Emanuele in relation to the Victoria Square store are wrong.

605 Mr Damaskos then denied that this information was provided in order to induce Mr Emanuele to purchase the business.518 He also denied that this was done to enable the Funk Group to receive benefits in the form of franchise fees. He denied that profit was intentionally overstated and expenses were intentionally understated. I am unable to accept that evidence. I am satisfied that Mr Damaskos and Mrs Damaskos acted in concert to induce Mr Emanuele as a prospective franchisee to purchase the business and to acquire the franchise for the purpose of the Funk Group achieving a benefit. I have formed this view notwithstanding the denials of Mr Damaskos in his evidence.519 The following exchange took place between myself and Mr Damaskos:520

HIS HONOUR

Q. Have you got vol.2 in front of you, tab 39.

A. Yes.

Q. If you start at p.678, Mr Emanuele is communicating with Mr Versace.

516 T1147.10-11.517 T1147.25.518 T1149.1-5.519 T1149.17-31.520 T1150.24-1151.27.

A. Yes.

Q. He's asking for tax returns, BAS statements and copies of balance sheets, and you've agreed in the tax returns, the corporate tax returns, there will be financial statements, including a profit and loss account, you've already covered that with Mr Munt, but you'll see going up the page what Mr Versace does as an agent, he says 'See message below from Johnny as received. Please advise'. So he passes it straight on to you -

A. Yes.

Q. - within half a day. So it's 31 May he asks the question, first thing next morning - sorry, yes, 31 May, at 10.40 p.m. that night, first thing next morning Mr Versace comes to you, within an hour or so your wife responds 'Please be advised that other businesses also operate under the same entity so we are unable to provide the below'. It is 'unable to provide'.

A. Yes. That's a question for Joanna.

Q. I hear you say that, but you understand that, having regard to the questions that are being asked by Mr Emanuele, he's been told 'We are unable to provide you that information, so you have to make do. You probably have to make do with what's on p.41', for example. Do you see the point I'm making to you.

A. I see the point.

Q. You're dealing with a man like, for example, Mr Emanuele who comes to you with his level of experience and education and he's asking that question and gets that answer and you're saying that person could have made any inquiries he wanted to. I have to say, I'll be quite blunt with you, I'm having some real trouble with that evidence. Do you want to say anything more to me.

A. Nothing further than what I've said. Joanna sent this email to Pat, I suppose that was more a question for her. This is dated June the 1st. We signed that on June the 3rd. I've seen that now, I've got no further comment.

606 Mr Emanuele was advised to ask for further information, he did ask for the further information, and he was deliberately rebuffed by the Funk Group when the Funk Group was aware that it could have provided the information with a request to BCFR. I am unable to accept the evidence of Mr Damaskos on this point; it is a contrivance to avoid responsibility for the representations made by the Funk Group to Mr Emanuele and I am satisfied upon which he relied.

607 Mr Damaskos was then taken to the turnover figures for the Funk Group up to the time that Kindred took over the business, the turnover figures whilst Kindred had the business, the turnover figures after Funk took back the business and the turnover figures for the time when Mr Emanuele operated the business. Once he was shown all of these figures, Mr Damaskos agreed that Funk initially had the business for between 12 and 18 months. It was then sold to Kindred based upon the financial records about which Kindred made its complaints. Once Kindred took over the business, it increased the turnover. There was then a purchase back of the business by the Funk Group. After the Funk Group

takeover, it could not match the turnover figures that had been achieved by Kindred. After the sale to Mr Emanuele, there was an increase in turnover. Therefore, in the context of turnover, the worst performer was the Funk Group.

608 Having admitted those matters about turnover, Mr Damaskos refused to accept that the difficulties experienced by Kindred were in relation to expenses.521 In particular, he refused to accept that Kindred were unable to operate the business at the level of wages as had been represented by the Funk Group because of the understatement of wages.522 In the 2011 financial year, there were two working directors in the Kindred business but they were only paid a salary of $79,000. In the 2012 year, even though there were two working directors again, the salary paid was $35,000. As a result, Kindred was only able to cover its interest commitment. Mr Damaskos could not explain how that could be the case.523 When Kindred operated the business, he had no criticisms of their method of operation. So much so that the Funk Group gave Kindred another franchise being the Angas Street store. He agreed that irrespective of the passion that Kindred might have had to open the Angas Street store, if they could not operate the Victoria Square store properly, then Funk Group would never have considered them.524

609 It was then put to Mr Damaskos that the only time that the Funk Group made any allegations of mismanagement by Kindred was after Kindred first raised the allegation of misleading conduct by the Funk Group. He denied that it was the Funk Group modus operandi to allege mismanagement when a franchisee makes allegations of misleading conduct against the Funk Group.

610 In relation to the disclosure document, Mr Damaskos said that the preparation of all of these documents and their delivery to Mr Emanuele was the responsibility of Mrs Damaskos. He is aware of the importance of those documents including the purposes of disclosure to prospective franchisees of information to allow them to make a reasonably informed decision about whether or not to proceed with the purchase of the franchise. He does not in any way disclaim any responsibility for the content of that document.525

611 He was then taken to item 13.3 of the Code which requires a disclosure document to include details regarding whether a site had been franchised in the previous ten years and operated by a previous franchisee. If that is so, then the details of the previous franchisee business must be provided in a separate document apart from the disclosure document. He was not aware of that requirement. He was aware of the importance of a prospective franchisee being informed in writing of a former franchisee within a disclosure document.526 However, he was not aware that written notification was required to include

521 T1215.1-6.522 T1215.7-19.523 T1215.7-T1216.19; Exhibit A3, tab 1, p 3468 et seq.524 T1218.22-26.525 T1222.3-5.526 T1231.28-1232.4.

details of the franchise business and the circumstances in which it ceased to operate. He left all of this to Mrs Damaskos.

612 He was then taken to the settlement with Kindred. The first document, is a letter from Haarsma Lawyers to DC Strategy dated 10 September 2013.527 Mr Damaskos accepts that following that letter, there was further negotiations between the parties. The letter reflected what had been resolved at the mediation but there were further negotiations.528 Therefore, even though the firm of solicitors DC Strategy replied by letter of 13 September 2013,529 there was a deed of settlement agreed between the parties. It is described as a deed poll of settlement dated 23 June 2014. 530 It was executed by Kindred, the Kindred directors, Mr and Mrs Damaskos as directors and by Funk. Clause 7 of the deed of settlement reads as follows:

Details not to be disclosed

Kindred hereby requests, for the purposes of items 6.6 of annexure 1, to the franchising code of conduct as prescribed by section 51 AE of the Competition and Consumer Act 2010, that it’s details not be disclosed in any disclosure document, prepared or issued by Funk Franchise.

613 Mr Damaskos said he had nothing to do with the inclusion of that term and that appears to have been done by the solicitors. He rejected any suggestion that was something that they wanted. Mrs Damaskos gave instructions.

614 He rejected any suggestion that his first discussion with Mr Emanuele about Kindred did not take place until after Gabjet had taken occupation of the Victoria Square business. Mr Damaskos maintains that he told Mr Emanuele that they had previous franchisees. His memory was that he told Mr Emanuele that Kindred had mismanaged the business and that the flagship store had been taken back to protect the Funk brand. This was untrue at the time and it misled Mr Emanuele. It deflected him from making any further enquiry of Kindred and so to learn the truth about the termination of Kindred.

615 At the time, he knew that Kindred considered the business not to be profitable and that the Funk Group was guilty of misleading conduct about the overhead expenses incurred in the operation of that business, in particular, that that wages had been understated. He was also aware of Exhibit A17, the Notice of Dispute sent by Haarsmas Lawyers to Funk Franchise, which was issued under both franchise agreements complaining of the respondents’ misleading and deceptive conduct.

616 The Notice of Dispute included sixteen separate subparagraphs. Paragraph 6 sets out the representations made by the Funk Group to Kindred. Paragraph 7 contends that Kindred relied upon those representations in entering the

527 Exhibit A2, vol 14, tab 385, pp 3558-3563.528 T1233.1316.529 Exhibit A2, vol 14, tab, 386.530 Exhibit A2, vol 14, tab 387, pp 3565-3587.

agreements. Paragraph 8 then sets out the basis upon which Kindred says that those representations were misleading conduct. The proposal of Kindred was that Funk Group re-purchase the business. This was the basis upon which the parties mediated and he attended that mediation in his role as managing director of the Funk Group. In preparation for that attendance, he read the Notice of Dispute and understood the allegations of misleading conduct directed at the Funk Group by Kindred. Mr Damaskos was aware of all of the allegations made and he had them in his mind at the time he entered into communications with Mr Emanuele about the purchase of the Victoria Square business.

617 In answer to my questions, he agreed that the making of the allegations was devastating to himself and to the Funk Group because they struck at the Funk Group as a franchisor, the franchise business, that he was attempting to sell to Mr Emanuele.531 These were the matters that were in his mind at the time that he was attempting to sell the business to Mr Emanuele.

618 I am satisfied that in his dealings with Mr Emanuele, Mr Damaskos intentionally avoided any mention of Kindred. He mentioned the previous franchisee of the Victoria Square store only in the context that the change occurred because of poor management of that franchisee. He said nothing about the franchise having been purchased back after the franchisee made allegations in the Notice of Dispute. This conduct of Mr Damaskos was intentionally directed toward deflecting any attention of Mr Emanuele about the conduct of the previous franchisee, the reason why the previous franchisee departed from the Victoria Square store and then the settlement reached with that franchisee. It is unnecessary for me to find whether this conduct amounted to deliberate deception on the part of Mr Damaskos. It is sufficient to say that I am satisfied that it was misleading conduct in the circumstances. I am similarly satisfied that if Mr Emanuele was made aware of all of those circumstances he would not have proceeded to purchase the franchise.

619 Mr Damaskos acknowledged that for a period of almost two years and six months, there was a failure of the Funk Group to make contributions to the marketing fund. After realising they were in breach, they followed the advice of their lawyers. He became aware over time that the shortfall was $120,000. He had no memory of being aware of the amount of the shortfall at that time and this was a further example of the selectivity of his memory.532

620 There were exchanges of correspondence very soon after the breach notices were delivered commencing in October 2018 when letters were forwarded to the respondents’ solicitors by DBH, the solicitors for Mr Emanuele. That letter alleged both a shortfall in the marketing fund and a breach of the Code. In relation to the shortfall, he understood the advice from DC Strategy was that the Funk Group did not need to restore the fund and needed to contribute to the fund from a particular date. I then questioned Mr Damaskos about his understanding

531 T1245.22 - 1246.1.532 T1262.13.

of the requirements for the preparation of the marketing fund financial information within four months of the financial year. A copy of the marketing fund statement and an audit report must be provided within 30 days of preparations. Mr Damaskos understood it was necessary to provide a fund statement and for an independent auditor to be retained to audit the statements; he understood the importance of the certificate of an auditor.533 When the letter from DBH of 16 October 2018 was received, neither he nor Mrs Damaskos did anything to assess any amount of shortfall.534 The respondents did not address the issues raised by DBH in their letters in October 2016. Thereafter, the franchises were terminated.535 He was also aware that the marketing fund statements did not comply with the Code,536 and left the compliance issues with Mrs Damaskos who had the authority of both of them.537 He was also aware that following those disclosures, Mr Emanuele refused to allow any marketing levies to be taken from his bank account in light of Funk Group failing to pay at least $120,000 into the marketing fund.538 Mr Damaskos thought it was not reasonable for Mr Emanuele to be dissatisfied with the conduct of the Funk Group. Mr Damaskos said that their next step was to terminate Mr Emanuele in accordance with the advice that they had received from their solicitors.539

621 He then authorised a proposal to Mr Emanuele for a quick and amicable settlement without ever having gone through a dispute resolution procedure. This was because so many attempts had been made to discuss the matter with Mr Emanuele but he could not pay his bills and he continuously referred them to his solicitors because of their failure to be compliant with the requirements of the Code.540 They also saw the arrears with Mr Emanuele as being in two different categories, the first was his obligations under the Franchise Agreement, and secondly, his obligations to pay rent and electricity as well as other suppliers.

622 In relation to the Waymouth Street store, Mr Damaskos knew that the average price for electricity was between $3,400 and $3,500 per month plus GST. He refused to accept that if a business of that size was required to pay an electricity account of that amount, it could not survive and was unsustainable. He said that the difference was only $300 to $400 per month.541

623 He did have some communications with the agents, Knight Frank.542 He said that he tried to make statements to the agent reflecting what Mr Emanuele was telling him that the electricity costs were high. Notwithstanding his denial that the rise in electricity costs were not crippling, he sent a letter to Mr Vieraitis, the agent from Knight Frank responsible for the building and said:533 T1267.1-19.534 Exhibit A2, vol 7, tab 200; T1269.35-1270.17.535 T1273.10.536 T1279.17-19.537 T1280.24 – 1281.7; Exhibit A2 vol 7, p 2023.538 T1281.8-22.539 T1282.7-18.540 T1283.12-21.541 T1294.1-36.542 T1295.31 – 1296.3; Exhibit A2, vol 6, tab 133, p 1763.

As you can appreciate, the recent significant increases in tariff rates has had a severe impact on the business…. We simply can not sustain a $1,000 per week electricity expense for (this) and need to do everything we can to get the number down.

624 Mr Damaskos said that he was merely going into bat for his “client”, however he then said that he believed in what he was saying. He believed that the business could not be sustained. He thinks he made that statement after a $4,400 bill came in for the Waymouth Street store. He was shocked.543 Notwithstanding, he would not accept that the cost of the electricity was a crippling cost and that it was merely him going into bat for his franchisees. He only thought that the costs were high. He probably did not need to use the word crippling.544

625 He also made a request to the agent for a discounted tariff rate for the tenancy from the landlord. He reiterated that the increases as explained are debilitating to the business.545 However, on a question from me, he would not accept that what he said was accurate; notwithstanding what he wrote in the letter to the landlord, that was not his view. All he was trying to do was to put pressure on the property manager. He wanted to give Mr Emanuele some relief for the tenancy. He was using hyperbole and stronger expressions in what he otherwise would have thought were appropriate because he was simply painting a glossy picture.546 He hoped to obtain a benefit either for himself or for the franchisee.547 In doing so, he hoped that Mr Vieraitis would accept what he was saying and act upon it.548 When pressed up on whether he thought Mr Vieraitis would act upon it, he said ‘not necessarily; he would consider it’.549 He accepted that in his own mind he was misrepresenting the position in order to get a benefit.550 He was aware that he was putting a gloss on what he thought was the truth and that there was a prospect that the property manager, and therefore the landlord would accept what he was saying and act up on it. This was no different from the conduct alleged by Mr Emanuele against the Funk Group in relation to the purchase of the Victoria Square premises. Mr Emanuele also alleged that statements were made to him “in the hope and expectation” that he would accept them, act upon them and enter into the franchise agreement, relying on the accuracy of what he was saying and so the Funk Group would benefit.

626 In relation to the financial difficulties in which Mr Emanuele encountered, the position taken by the Funk Group was that if Mr Emanuele was given any assistance, then the same level of assistance had to be given to every other company franchisee.551 The door was always open and the Funk Group was always more than willing to listen to anything that Mr Emanuele wanted to say. The Funk Group was not willing to make any compromise on any aspect of the

543 T1297.2-25.544 T1299.22-26.545 Exhibit A2, vol 7, p 1761.546 T1300.30-33.547 T1300.34-37.548 T1301.1-15.549 T1301.7.550 T1301.18.551 T1316.18.

debts allegedly owed by Mr Emanuele for any aspect of the operation of the businesses of which he was a franchisee.552 That was a position that the Funk Group could have taken. It did not assist Mr Emanuele because he was the person who had relied upon the information given to him by the Funk Group in relation to the Waymouth Street store which was incorrect. Mr Damaskos would not accept that Mr Emanuele was falling behind in his payments because he could not afford to pay the electricity.553 In that knowledge, and in the knowledge in all of the difficulties being faced by Mr Emanuele, Mr Damaskos would not accept that by proceeding to terminate the franchise agreement, the Funk Group was not acting in good faith and was acting in contravention of the Code.554

The agent Mr Pat Versace627 The agent Mr Pat Versace gave evidence. He has been working as a sale of

business agent for the Funk Group since 2012 and in 2016, he was called in by the Funk Group to sell the Victoria Square business. His memory was that the Funk Group had tried unsuccessfully to sell the business themselves. He did a business appraisal and worked out a value. This business appraisal was done based upon the figures in the Financial Information document. He used a multiplier of 3.2 times profit; the profit figure he used was $126,000 per annum.555 He also annualised the two most recent quarters which came out to be roughly the same figure. Therefore, he used the calculation of net profit for the calculation of the value of the business.

628 The first observation to be made is that the amount of net profit set out in the financial information was not net profit at all. It was EBITDA. Mr Versace used that figure as net profit and applied a multiplier of 3.2 times the net profit of one fulltime owner operator.556 He calculated the asking price of $450,000, plus stock. He had no involvement in preparing the business profile information and accepted it at face value when it was given to him. He did not identify that it was not accurate to describe that figure as net profit. It is not and the evidence of both experts, Mr Crase and Mr Opie, is that it represents EBITDA only. That is not the amount to which Mr Versace would apply a multiplier of 3.2.

629 Mr Versace then said that he could recall Mr Emanuele making a phone enquiry about his advertisement on 20 May 2016. He could not explain to me how he had such a specific memory of date, times and places without reference to something to refresh his memory. He then said that a meeting was arranged with the franchisors for 27 May 2016 but he could not explain how he had such a detailed memory of that date.

630 Present at the meeting were himself, Mr and Mrs Damaskos and Mr Emanuele. There was a general discussion about people’s backgrounds and

552 T1316.24.553 T1318.3.554 T1318.8.555 T1343.14.556 T1330.4.

Mr Emanuele said that he would be a hands-on operator and he could recall a discussion about Funk Group expenses which he said were described as being tea towels, cleaning and the like. He said that there was then a discussion about accounting and interest, things that would not necessarily apply to Mr Emanuele if he did them himself.557

631 He was then asked whether there was any discussion then about any previous franchisee. He said there was a previous franchisee that was mentioned and that it was not performing that well. He said it was considered a flag ship store and the Funk Group acquired it back and ran it for a period of time before putting it back on the market. He said that the words ‘Kindred Group’ were mentioned. He said at the meeting that Kindred were not performing that well, the franchisors were not that happy with how things were going and they came to an agreement whereby the Funk Group acquired it back.

632 Those propositions were not put to Mr Emanuele in cross examination. There is no evidence that Kindred were not performing that well. To the contrary, based upon turnover, Kindred were performing at a level well in excess of that which of what was achieved by the Funk Group. That statement of Mr Versace was both wrong and misleading. The statement that the franchisors were not happy with how the business was being run by Kindred was also misleading. I am satisfied that the franchisor made its settlement agreement with Kindred in the face of the accurate assertions made by Kindred of misleading conduct of the Funk Group at the time that the initial franchise agreement was made. Therefore, each of those representations were misleading. As misleading was the impression created the mind of Mr Emanuele, that any difficulties faced by the previous franchisees were the problem of those franchisees.558 That is untrue and it deflected him from making any enquiry of Kindred.

633 Mr Versace was then challenged about his memory. He said that he was only contacted about giving evidence some two to three months prior to the date upon which he gave evidence and he had not thought about the transaction for some three or four years. It was just another transaction to him. He did about 100 such transactions per year. He was asked how he could fix a date of 20 May 2016 in those circumstances. It was only after he was challenged about his memory and he had deflected that challenge by saying that he had a good memory that he said that he had looked at his files.559 This was done recently. He could not say on what day for example, he had then been asked to first recollect the detail of these meetings. He said it was Mr Damaskos who made reference to the previous franchisee and that the business had not been run effectively. However, he then said that he would not necessarily expect that at such a meeting, any information would be given about a previous franchisee or that it might be referred to.560 He said that when reference was made to the Funk Group financial information,

557 T1332.12-14.558 T1333.1-7.559 T1336.3.560 T1337.6.

there was the discussion about laundry, cleaning of tea towels, uniforms and cleaning of the premises, including the internal windows. When he was challenged about whether the only thing discussed was cleaning and tea towel costs, Mr Versace responded that interest and accounting expenses may also have been discussed. In the end, he did not have a clear recollection. He was challenged about whether he actually did have a clear recollection about those matters and he said that the cleaning and the tea towels were the two distinct points he did recall.561 The following exchange then took place:

Q You have a distinct recollection about the cleaning, the windows and the tea towels but you don't actually have a recollection about accountancy fees and interest.

A No, they may or may have not been discussed.

634 When he gave this evidence, I obtained the clear impression that Mr Versace did not have a clear memory about anything else being discussed except the cleaning and tea towel expenses. I would not accept any evidence that he had a memory of anything else except those figures. In the end, as the above evidence indicates, he could not be sure if any other aspects were discussed. I gained no assistance from this evidence of Mr Versace. I accept only that in discussion, the topic of vendor’s expenses arose and that these were said to be cleaning and tea towel expenses. Mr Versace really knew nothing of the former franchisee Kindred or its termination several years earlier. The evidence of Mr Versace did not cast any doubt upon the evidence of Mr Emanuele.

635 The respondents then called in a number of current franchisees. The first was Mr Kevin Li who owns three franchise stores. At the request of Mr Damaskos, Mr Li met Mr Emanuele. He said initially that he was quite happy with the Funk franchise however he said that the POS system is adequate for measuring sales but not for tracking of stock. Compared to another franchise system in which he is involved, the Funk system was very old. He also had a number of concerns about the marketing fund. He thought that the Funk marketing fund was not properly directed and he obtained very little benefit from it. He thought that the POS system should have been updated a long time ago having regard to its functionality. He knows that Mr Close is able to provide assistance in relation to the update of the system using other IT people however, he would want another system for the tracking of expenses. Mr Li has therefore had the same difficulties which were encountered by Mr Emanuele and with the same effect.

636 Mr Aiden Patrick Wilson-Kelleher is the one of the franchisees of the Mount Barker store, Funk Coffee and Food. He has been there for two years. He had previously run a car mechanics franchise. He is happy with the support that he receives from the franchisor. He and his brother operate the store. They have local marketing which is local newspapers and letterbox drops. In measuring his expenses and cost of goods sold, he uses the Xero accounting software. The purchases of goods are recorded through the accounting software and that is how 561 T1342.5.

he is able to track his expenses and profits because those expenses are recorded directly into the accounting software.562 For those reasons, I obtained little assistance from this evidence.

637 The respondent then called three witnesses who formerly worked with Mr Emanuele at either or both of the Victoria Square and Waymouth Street stores. My understanding from the opening from Mr Belperio, counsel for the respondents, was that the purposes of calling this evidence was to, in some way, corroborate the assertions made by Mr and Mrs Damaskos that Mr Emanuele operated the businesses poorly. The evidence does not support the contention and it wholly failed to support the contentions of the respondents. I consider that these witnesses largely corroborated the evidence of Mr Emanuele.

638 Ms Caitlin Rhue said that she was originally taken on by Mr Emanuele to work in the Victoria Square store and was later moved to manage the Waymouth Street store when Ms Piggott went on a long holiday to America. She started at the end of 2017 and moved to Waymouth Street in the middle of 2018. She could remember, near the end of his tenure, that there were difficulties in supplies being paid and some were being paid in cash. She did not ever raise this with Mr Emanuele. She observed him in the store. He worked on his laptop in the dining room of the store. He did not supervise the employees much in the Victoria Square store. There were times when stock had to be purchased elsewhere. There was one occasion when, at the end Mr Emanuele was aggressive it the way that he spoke to her. However, she knew that towards the end of 2018 there was severe money issues in relation to the operation of the store and she knew Mr Emanuele was under real pressure. Prior to that time, Mr Emanuele had treated her decently. She was very grateful to him for the fact that he had given her a job and she had maintained that employment.

639 Ms Gordon was employed at the Victoria Square store at the time of when Mr Emanuele took over in July 2016. Mr Emanuele made her the manager of the store after a period of about three months. At the time he commenced, she received a pay rise and then she received an increased salary when she became a manager. She noticed that on some occasions, there was a stock shortage and they had purchased different stock from other suppliers. This was usually things such as donuts, and cookies and different cakes.

640 In the first twelve months of operations, Mr Emanuele was in the store quite often but that lessened, until over time he was hardly in the store at all. She said that when she started as a manager Mr Emanuele continued to work and assisted her with her management duties. Those duties included checking the store flow and stock flow amounts were correct, closing the till and exporting the POS system data to Xero. She also obtained a great amount of assistance from Mr Close. He was doing all the programming and was giving her assistance. That was by arrangement with Mr Emanuele. She also liaised with Mr Emanuele

562 T1366.12.

about staff rostering and he liaised with her to manage her with achieving a certain target level of wages.

641 She was familiar with purchasing stock and Mr Emanuele implemented a new system that involved purchase orders which she put into the system. Mr Emanuele and Mr Close took her through those arrangements so that she knew what to do. The POS system was updated. She also dealt with Mr Emanuele or Mr Close in relation to stocktakes. She agreed that it was only very late in the piece that she had any real issues with Mr Emanuele and at that time she knew that creditors were chasing up payments.

642 She was a competent manager of the store and she received significant assistance over a 15-month period from Mr Emanuele and then Mr Emanuele and Mr Close in relation to her management of the store. There has never been any criticism of her management of the store. The judgement of Mr Emanuele to make her the manager of the store is justified by her performance. She was a competent manager who did everything to ensure the successful operation of the Victoria Square store. Mr Emanuele made the correct decisions about the optimum operation of the store by the best use of staff resources.

643 Ms Cameron is the store operations manager for Funk Coffee and Food and she had been working with Funk since 2005. She looked after the company stores and provided training over a period of over four weeks for Mr Emanuele when he started as a franchisee. She found that as the training progressed, Mr Emanuele said that he did not really want to be hands on as much as he thought he might and the training became predominately focused on talking about day to day operations and the running of the stores.

644 Ms Cameron had been the previous manager of the Victoria Square store for a period of over two years. They were the two years of operation after Kindred finished. The turnover of the Victoria Square store for that two-year period was significantly lower than during the time that Kindred operated the premises and was also lower than at the time when Mr Emanuele operated the Victoria Square premises.

645 Mr Emanuele told Ms Cameron that he intended to make Ms Gordon the manager of the premises and she advised against it, saying that she was too young and she was not up for the challenge. The evidence satisfies me that Ms Gordon has proved to be a highly adequate and competent manager. It was during her tenure of management that the turnover of the business increased to well in excess of that achieved by Ms Cameron. I think that the judgement of Ms Cameron was wrong.

646 Ms Cameron also strongly advised Mr Emanuele against giving pay rises to staff on the basis that Mr Emanuele should first become familiar with the staff. There is no clear evidence as to when Mr Emanuele increased the salaries of his staff. However, it is known as a fact that the staff worked sufficiently well to significantly increase the turnover of the business through an increase of sales of

the business. The business achieved a much higher turnover than the respondents as did Kindred. I am satisfied that this evidence shows the wisdom and correctness of the decisions of Mr Emanuele. He put together a dedicated and motivated staff to operate the Victoria Square store.

647 I am satisfied that whatever difficulties there may have been in any relationship between the employees and Mr Emanuele, they were only related to the difficulties Mr Emanuele was facing in the operation of the stores because of the financial position of those stores. The judgement calls made by Mr Emanuele, for example, to appoint Ms Gordon as the manager of the store was the correct decision. It is not necessary to speculate about whether or not Mr Emanuele may have been a better manager if he was a hands-on person. He made the judgement call to appoint Ms Gordon as the manager of the Victoria Square store and the evidence satisfies me that she has fulfilled that role competently; she has gone onto be a manager of other Funk stores throughout Adelaide. The most that Ms Cameron could say was that personally she does not know whether she would have made the same decision as Mr Emanuele.563 That is not the test.

648 The question for my consideration is whether or not the decision made by Mr Emanuele was a competent decision and that, as a result, the business was managed properly. I am satisfied of both. Ms Gordon proved to be a highly competent manager, that the business thrived under her management, its turnover increased and Ms Cameron’s judgment is not correct. I obtained no assistance from the evidence of Ms Cameron, and the evidence given by Ms Rhue and Ms Gordon satisfied me that the management decisions made by Mr Emanuele were the correct ones. So also am I satisfied from the evidence from the other proprietors of Funk stores elsewhere that there were difficulties in relation to the focus of the advertising and also difficulties in relation to stocktakes. Ms Gordon had no such difficulties because of the changes implemented by Mr Emanuele.

649 Mr Opie provided an expert’s report for the respondents. His first report is to be found in Exhibit A2.564 Mr Opie has provided two further reports. The first called a “joint report” with the expert Mr Crase called on behalf of the applicants dated 27 February 2020.565 A third form of report is Exhibit R31, was tendered at trial.

650 There were objections to the content of the report of Mr Opie. I heard argument upon the objections and I delivered a schedule of the paragraphs of the various report which I rejected or which I accepted or which I accepted only on the basis of the issue of weight. I said at the time that I delivered this schedule that I would in these reasons explain my determinations.

651 The principle contention of the respondents was that the reports of Mr Opie were merely responsive to the reports of Mr Crase. The applicants strenuously contest that submission. The applicants say that Mr Opie is largely putting 563 T1381.5.564 Exhibit A2, vol 20, tab 422, p 5209.565 Exhibit A2, vol 20, tab 424, p 5211.

himself in the position of a trial judge and expressing an opinion as if the trial judge had made the same decision that he would make. The respondents contend that when properly assessed, Mr Opie was expressing an opinion on what should have been subjectively apparent to Mr Emanuele in particular circumstances. The report discusses particular circumstances and then draws conclusions about what the position ought to be concerning alleged representations.

652 That position is to be distinguished from the expression of opinion of Mr Crase who performed a valuation in accordance with his instructions. Mr Crase assessed the costs that would be reasonably incurred by a franchisee conducting the business. Within those costs, he has included things such as bank fees and other expenses as, in his opinion, those costs would reasonably be incurred by a franchisee in operating the business. That approach is to be distinguished, on the applicants’ case, because what Mr Opie does is reject any need for an adjustment for example in relation to bank fees because he accepts the factual position that the respondents were not in a position to estimate or disclose likely bank fees that they would have incurred in and about the operation of the Victoria Square premises. Therefore, the opinion of Mr Crase and the adjustments that he would make are to be seen in the estimation of future maintainable earnings for the business.

653 The applicants contend that Mr Opie’s opinion is not to be accepted because he is in effect expressing an opinion about alleged representations and whether or not, for example, alleged representations were misrepresentations on such things as bank fees or accountancy fees which may have been included in the business profile document. Therefore, a comparison of the work done by Mr Crase and the work done by Mr Opie is not informative. This is because it does not illuminate the actual issue between the parties. Mr Opie has provided an opinion on whether or not certain items should have been disclosed by the respondents or whether further enquiries should have been made by the applicants in relation to those costs, the applicants knowing that they would incur those costs in and about the operation of a franchise business.

654 In Exhibit R31, Mr Opie expresses the opinion that the alleged representations were not misrepresentations because they were in respect of administrative or overhead expenditure which it was not uncommon for vendors of businesses not to disclose to potential purchases. Alternatively, the matters complained of by the applicants and which are disclosed within the report prepared by Mr Crase are discretionary forms of expenditure which historically have not been incurred by the respondents.

655 It is first necessary to consider the letter of instruction given to Mr Opie in a letter from DC Strategy to Mr Opie dated 1 November 2019. The solicitors sought responses to three questions namely:

1. Your responsive comments to the report of David Crase issued 10 October 2019;

2. Your responsive comments as to staff salary expenses, otherwise pleaded within the provided third statement of claim, filed 18 October 2019;

3. Your comment and opinion as to the adjustments to financials made by David Crase.

656 On paragraph 2 of the letter, there are a series of assumptions which Mr Opie is required to make. It is appropriate that I make some comment upon these assumptions in light of my discussion of the evidence. I will need to consider each of them in turn. They are:

1. The purpose of buy-back of the store at Victoria Square from the former franchisee (Kindred Pty Ltd) was for the purpose of resolving a dispute between the parties as to the mismanagement of that store and another located at Angus Street Adelaide.

657 This assumption is incorrect. I am satisfied on the evidence that the buy-back of the store at Victoria Square from the former franchisee occurred because of the assertions made by Kindred of misleading conduct connected with representations made by the respondents about the cost of goods sold and overhead expenses represented to Kindred at the time it purchased the Victoria Square store. The respondents thereby avoided imminent legal proceedings. I reject any suggestion of mismanagement of either the store by Kindred. The assumption is wrong.

2. The wholesale cost increase in electricity of 76% does not account for the retail cost actually incurred by the consumers.

658 There is no proof of this assumption and in evidence, it was generally accepted that in 2017, there was a very broad and significant increase in the retail cost of electricity.

3. …

4. …

5. Nissrine Daher was acting as manager of Waymouth Street at the time of sale but ceased working for Jetgab Pty Ltd as at October 2017. Ms Daher was almost immediately replaced with a less capable and experienced manager. A decline in the Waymouth Street business performance was observed by the defendants soon after.

659 There is no evidence on this point. It is also wrong. The manager of the Waymouth Street store became Ms Piggott. There is no evidence that the business performance of the Waymouth Street store under her management was a cause of any decline in the Waymouth Street store. The assumption is wrong.

6. Employees of the plaintiffs were employed on either a full time or part time basis, whilst the defendants employ all staff on a casual basis.

660 The assumption is wrong. The evidence called from the witnesses of the respondents, for example Ms Rachel Gordon, was that she has always been

employed on a casual basis.

7. The point of sale system was modified by the plaintiffs, at both store locations, during occupation in order to provide additional information to Xero on a per item basis, for the benefit of the plaintiff’s management of the businesses. This modification has not been requested or conducted by any other franchise or corporate store and is outside the ordinary scope of franchisee expenses. This modification should be accounted for nevertheless in any consideration of expenditure on equipment/fittings.

661 This is a correct assumption to be made. However, it fails to request the expert to account for the benefits obtained by virtue of the modifications which, according to the evidence given by the employees of the respondents called in the respondents’ case, was of benefit. It was also a weakness in the system as identified by Mr Li.

8. Franchisees pay $300 per year on account of support and updates to the POS systems as set up in accordance with Franchise Network requirements. This cost is shown in financials as “Other/R&M costs”.

662 There is no evidence to support this assertion.

9. Invoices relating to David Franczak Consulting, to the understanding of the Defendants, relate to IT services generally, not the modification of the POS System by the plaintiffs.

663 There is no evidence to support this assertion.

10. Other franchise businesses in the Funk network directly manage their businesses and do not rely on employed managers, other than one store. To this extent, there is not usually a double up of remuneration for this task.

664 There is no evidence to support this assertion; on the evidence, it is wrong. Mr Li uses managers over the three of his franchise businesses. There is no evidence of a double up on remuneration for these managers. The evidence of Mr Li directly contradicts this assumption. It is wrong.

11. …

12. Financials relating (to) the Damaskos Family Trust when referred to by Mr Crase, are being linked to Funk CBD which relates to Victoria Square despite the costs incurred by the trust being unrelated to Victoria Square.

665 This assumption is wrong. As I have earlier found in this judgment, a level of costs relating to the Victoria Square business were incurred (within the arrangement for the A&J Damaskos Family Trust) through Funk CBD and were accounted for only as between Funk CBD and the A&J Damaskos Family Trust which received a management fee annually from Funk CBD. A portion of this income was generated through franchise fees. There was a direct relationship between the Damaskos Family Trust, Funk CBD and Jetgab.

13. …

14. …

15. …

16. …

17. …

18. …

19. Sales at Victoria Square at the time of termination decreased in comparison to the time at which the applicants took occupation.

666 This assumption is factually wrong. From the time that Kindred took over the business in 2010, sales were increased each year for a period of three years. After the time that Funk CBD repurchased the business, and when it was managed by Ms Cameron, the sales decreased. After the time that the applicants took over the business as franchisee, the sales increased. The assertion is wrong.

20. The plaintiff, at least in respect of Victoria Square, was observed by the defendants as offering “combo deals”, with food and drink being offered below cost. Gabjet was also observed as offering unapproved products such as donuts, which have a very short life span.

667 There is no evidence to support this assertion. It is in any event wrong.

21. It is never advised to franchisees that a vehicle is required to operate a Funk business and that vehicle costs are required to be incurred, including parking and fuel costs.

668 Irrespective of whether advice was given to franchisees, the assumption is wrong. The evidence of Mr Damaskos was that he used a vehicle and incurred motor vehicle expenses which were paid by the entity Funk Coffee and Food in its capacity as trustee of the Damaskos Family Trust in respect of work that he did in and about the oversight of the franchises and earlier, the management of the franchises. The assumption is therefore not consistent with the evidence, it is wrong.

22. Any vehicle expenses claimed by the defendant entities were not apportioned to either store and were absorbed as expenses of the trust. This entity operates multiple corporate stores, the number of which varies over time.

669 This assumption is correct but fails to identify that the motor vehicle expenses incurred by Mr Damaskos were a benefit to all of the stores including the Victoria Square store at the relevant time before it was managed by the applicant Jetgab.

23. …

24. ..

25. …

26. …

27. …

28. Costs at 7.13.5 were in fact costs relating to Christmas party for staff and one off staff medical expenses, not staff training.

670 There is no evidence to support this assumption.

29. Staff within corporate stores are required to buy their own uniforms and most franchisees within the Funk network adopt the same policy.

671 There is no evidence to support this assumption.

30. Trading losses at Waymouth Street prior to the plaintiff’s occupation were as a result of surrounding buildings becoming vacant, resulting in a downturn of customers.

672 There is no evidence to support this assertion except that the Workcover building and the ATO building on Waymouth Street were vacated at around the same time but the ATO building had been occupied except for three floors by the Department of Environment and Water of the State Government. There is no other evidence on the topic. It is inaccurate.

31. Management fees as shown by the defendant are adjusted according to profits made and are not charged if and where no profits are made by a particular store.

673 There is no evidence to support this assertion and in any event, it is wrong. The management fee paid by Funk CBD to the trustee of the trust is in a lump sum. It is not apportioned according to the particular stores. As well, this overlooks the fact that the Victoria Square store generated 62% of the business activity of Funk CBD. No separate allocation was made by Funk CBD in relation to the costs and expenses incurred by it in and about the supervision of that store. I have earlier set out my reasons about why a proper adjustment has not been made for the expenses incurred in relation to the Victoria Square store. I have also earlier set out a discussion about the amount of management fee paid annually by Funk CDB to the trustee of the A&J Damaskos Family Trust.

32. The quarter immediately prior to sale of Victoria Square had higher than average turnover.

674 There is no evidence to support this assumption. In any event, it is wrong.

33. …

34. The obtaining of a loan is not an expense that is required to operate the franchise and is a decision of the individual franchisees.

675 Although correct, this merely emphasises that the financial information provided by the respondents to the applicants was properly described as EBITDA. It is not profit. That distinction is important because Mr Versace said that when he gave advice to the respondents on the asking price for the Victoria

Square business, he used that financial information and accepted the profit figure of $126,000 to which he applied a multiplier of 3.2. However, it is known that was not profit and there are at least two consequences. First, the correct profit figure must be established and second, that a judgment must be made about the correct multiplier.

35. The equipment referred to in respect of depreciation was fully depreciated by the time the defendants were in occupation of the premises. To replace the equipment today would cost $400,000.

676 There was no evidence to support the assertion that the actual cost of replacement of the equipment today would be $400,000. That was merely a conjectural piece of evidence given by Mr Damaskos.

677 Under the heading “fee estimate and engagement” and after being asked to provide a fee estimate, the following was requested of Mr Opie:

We ask that in your engagement you consider the plaintiffs’ alleged representations, in conjunction with the analysis of both Mr Crase’s report and the evidence in itself and provide opinion as to the representations alleged to have been made.

678 There is no challenge about the assessment of the report of Mr Crase however, Mr Opie has been asked to consider the “evidence in itself”. He is asked to provide an opinion as to the representations alleged to have been made. Mr Opie is not the final arbiter of fact; that is my role. At the time he was briefed, Mr Opie could not be in a position to assess “the evidence in itself” because it was not before him; it is before me in my role as the final arbiter of fact. Any opinion that he then expressed would be of minimal, if any, weight. That absence of weight is emphasised when it is known that he was asked to provide an opinion as to the representations alleged to have been made. It is unclear what Mr Opie is being asked to do. Is he asked to step into the shoes of a judge and provide an opinion about alleged representations? Is he being asked to accept that the representations were being made and then to provide an opinion about whether or not they were misleading? Is he being asked to provide an opinion about whether he thought the representations were actually made and, if so, the effect? The demonstrable weakness in the request also underscores the lack of utility of any opinion that might be expressed in response. I have not seen any evidence that Mr Opie considered this paragraph and asked for clarification.

679 I turn then to the content of the expert report of Mr Opie of 1 November 2019. I have delivered to the parties a schedule of my decisions in relation to the objections of the applicants. I deal with each of those objections now. Where there are objections of the same nature, I will identify the issue in my decision about the objections.

680 I have deleted the portion of the second sentence paragraph 2.15 in the preamble. It is a question for me whether the adjustments are without basis in the context of the applicants’ misrepresentation claim. Mr Opie is not in a position to express that view. In relation to the balance of the content of paragraph 2.15,

Mr Opie continually uses the form of expression that “… the respondents were not in a position to estimate or disclose …” That is a matter for me. I will give that view no weight at all and it is inconsistent with any findings on the evidence.

681 I have excluded paragraph 2.25. I am satisfied that the views expressed there are matters for me as the trial judge. They are not matters for the expression of an opinion by an expert witness.

682 Paragraph 2.26 is one formulation of loss of the applicants, namely the difference between the consideration paid and the consideration that would have been paid had the misrepresentations not been made. The evidence which I have accepted is that if the misrepresentations had not been made, then the applicant would not have entered into the transactions. I will develop that later.

683 In paragraph 2.35, I deleted the phrase “I have concluded that these adjustments are without basis in the context of the applicants’ misrepresentation claim.” That is a question for my consideration. It is not a matter for the expression of an opinion by an expert accountant. The same applies to paragraph 2.49. Paragraph 2.50 is the same reformulation of loss to which I have earlier made reference. I consider that it is merely commentary and is of no assistance to me. It carries no weight.

684 Paragraph 2.61 contains an expression of an opinion that the increases in the payroll costs for Gabjet had no nexus with any representations made by the respondents prior to sale. That is the matter for me. I would not accept that view expressed by Mr Opie.

685 Paragraph 4.4 is a preamble to a discussion about the consulting report prepared by Mr Crase. There, Mr Opie opines about matters that a vendor of a business might ordinarily have regard to when presenting financial information and matters that a prospective purchaser might have regard to in reviewing historical financial information. I have allowed that paragraph to remain in over the objection of the applicants. In my opinion, it does not assist the respondents because two of the issues raised are at the heart of the applicants’ case.

686 In paragraph 4.6, Mr Opie opines about matters that a vendor may recognise about a potential purchaser when selling a business and in the presentment of information to a prospective purchaser. I consider that this is little more than commentary and carries little weight. However, in paragraph 4.7, Mr Opie suggests that a vendor would seek to narrow the information and representations they make about the historical trading performance of a business to income and expenses that are directly attributable to its operation but avoid any representation in relation to types of expenditures that will inevitably differ from purchases. I have disallowed that paragraph in full. It is no more than commentary. If it were accurate, there would be little part for the ACL and Competition and Consumer Law Provisions to play.

687 Paragraph 4.10 of Mr Opie’s report speaks of the matters that might be considered by a potential purchaser. It is of some assistance but little weight. In paragraph 4.11, Mr Opie opines that it is incumbent upon the acquirer, the applicants, to have regard to the historical financial information concerning the subjective business and consider their own circumstances and intentions. That may be accepted. However, it must be seen in the context of the factual findings that I have made about the historical financial information that was sought by and provided to the applicants in this matter.

688 Paragraph 5.19.2 is excluded. It is a question for me whether the additional costs identified by Mr Crase should have been included as part of the costs disclosed by the respondents. For the reasons already expressed, I have formed the view that they should have been. Paragraph 5.19.3 speaks of adequate due diligence however, that is subject to the question of the information provided in response to requests made by the applicants.

689 Paragraph 5.33 may remain over the objections of the applications however, the view expressed here suffers the same difficulties as other views expressed by Mr Opie namely that they are expressed in a vacuum of relevant fact, the findings about which I have made earlier in my reasons. Paragraph 5.34 is to be treated in the same way as is paragraph 5.35.

690 Paragraph 5.41.3 is removed because it purports to express the view about the vendors’ roles and responsibilities. That is not the province of an expert accountant. Paragraph 5.41.4 raises a question of evidential weight. In light of the facts, very little weight can be given to this expressed view. Paragraph 5.45.2 is excluded because it again purports to express a view about what should have been disclosed. That is a matter for me as the trial judge. Paragraph 5.45.3 remains but carries very little weight in light of the findings of fact that I have made. Paragraph 5.60.3 is excluded as it is mere commentary and is not the province of the expert accountant. Paragraph 5.60.4 remains however, it is the expression of a view and carries very little if any weight. Paragraph 5.73.1 is deleted because it purports to made a decision that is the province of the trial judge. Paragraph 5.73.2 remains however, it is of little or no weight. Paragraph 5.77, preamble, I will exclude the expression “… CCGs adjustments are without basis in the context of the plaintiffs’ misrepresentation claim …” That is a matter for me as trial judge not a matter for an expert accountant. Paragraph 5.81.2 is removed. It is a matter for me as the trial judge.

691 Paragraph 5.102.1 is not received. It is commentary and not the expression of an expert opinion. Paragraph 5.102.4 is an expressed view that a purchaser should take into account particular matters as part of a due diligence. However, it carries little weight because it is necessary to fully understand the background of the due diligence in order to understand that expressed view. Ultimately, it is a matter for me as the trial judge. Paragraph 5.106.2 is not received. It is an expression of opinion which is ultimately a matter for me as the trial judge.

692 Paragraph 6.21.2 is not received. It is commentary and is not the expression of an expert opinion. Paragraph 6.21.3 is an expression of a view which has very little weight in light of the findings that I have made about the material facts. Paragraph 6.29.2 is not received. It is not the expression of an expert opinion. Paragraph 6.37.3 is not the expression of an expert opinion and 6.37.4 is received but is of very little weight in light of the material facts upon which I have made findings. Paragraph 6.41.2 is not received because it purports to be a finding about a matter which is the province of the trial judge. Similarly, paragraph 6.41.3 is the expression of a view but in light of the findings of fact that I have made, it carries very little if any weight.

693 In the preamble of paragraph 6.54 there is an expression of an opinion that Crase Consulting Group’s adjustments are without basis in the context of the plaintiffs’ misrepresentation claim. That is a matter for me as the trial judge. It is not the matter for an expression of an expert opinion. Paragraph 6.54.4 is a matter for evidence. It is of limited weight. Paragraph 6.54.5 is a matter for the trial judge and is of no weight. Paragraph 6.54.6 is a statement in effect that franchise fees are payable by a franchisee. Paragraph 6.94.2 is an expression of an opinion about the law which is the province of the trial judge. It is not a matter for the expression of an expert opinion.

694 Paragraph 7.15 is the expression of a view about whether a particular fact has a nexus with any part of a misrepresentation claim. That is a matter for me as the trial judge.

695 In the joint report of Mr Crase and Mr Opie, paragraphs 6.4 and 6.5 are excluded. Those views are the province of the trial judge.

696 In relation to the schedule, paragraphs 1.3, 1.8, 1.9, 1.10, 1.12, 1.13, 1.14 and 1.15 are not accepted. They are all the province of the trial judge.

697 Mr Opie provided a report dated 1 November 2019. He was instructed to comment upon the report of Mr Crase dated 10 October 2019 and provide his opinion as to the adjustments to the financials made in that report. He was also instructed to provide his comments about the allegations in the Third Statement of Claim concerning salaries and wages. He refers to the attached copy of the letter of instructions from DC Strategy dated 1 November 2019. I have earlier described what I consider to be the factual errors disclosed on the face of that document.

698 At paragraph 2.13 of his report566 Mr Opie makes reference to the adjustments that the Crase Consulting Group report (CCG report) makes to the Funk CBD’s earnings described in paragraph 7.1 of the CCG Report. This part of the CCG Report details various costs that have not been included or are alleged to have been understated in Funk CBD’s financial statements for the 2014, 2015 and 2016 financial years.

566 Exhibit A2, vol 20, p 5215.

699 At paragraph 2.15 of his report, Mr Opie opines that having considered each of the CCG adjustments he has concluded that:

Higher bank fees were cost specific to Gabjet’s circumstances;

Bookkeeping and accounting expenses were specific to Gabjet’s circumstances and that the respondents were not in a position to estimate or disclose them;

Consulting expense related to a modification of the existing POS system and the respondents were not in a position to foresee or disclose them;

Motor vehicle expenses were discretionary costs incurred by Gabjet, which the respondents were not in a position to foresee or disclose;

The reported electricity costs accorded with the actual electricity costs incurred by the respondents and that the applicants were told that they there would likely be higher costs in the future and this was a matter for the applicants to consider as part of their due diligence;

Staff training and welfare costs related to carparking, which was a discretionary expenditure and which the respondents were not in a position to foresee or disclose;

Stock and waste disposal costs were not disclosed as a cost of Victoria Square business because they were a cost for the landlord;

Franchise fees were a cost payable by the franchisee and were a matter for the franchisee to take into account.

700 There was no obligation for the respondent to disclose its earnings based on a benchmarked rate of gross profit in lieu of the gross profit that it actually reported.

701 At paragraph 2.17, Mr Opie refers to the conclusion of the report that after making adjustments, the Victoria Square store was not profitable or commercially viable when operated by Gabjet and was not profitable, nor was it viable, to be operated by a franchisee independent of the respondents.

702 At paragraph 2.18, Mr Opie says that in his opinion, the Victoria Square store was a profitable and viable business for the respondents. It was being operated by people with considerable experience in running those stores, it had a benefit of administering several franchisor operator stores through a central office and was not required to pay franchise fees.

703 At paragraph 2.19, Mr Opie opines that on a preliminary and limited basis, so much may be accepted but this view provides no assistance. The business generated by Funk CBD did not attribute all of the costs incurred by Funk CBD in its operation. This is the position after a full consideration of all of the

evidence of the directors. If all of the costs had been fully attributed, the business was at best marginal. If the cost of the franchise fees were then attributed, the business would have been loss making. These are the findings that I have made: that the adjustments recorded by Mr Crase were appropriate and are justified. On my assessment of the evidence, I find that they are both material and correct.

704 The profitability of the Victoria Square business depended upon the skills and experience Mr Emanuele brought to the business, his preparedness or ability to work in the business, and the choices made in operating the business. He also opines at paragraph 2.20, that the profitability of the Victoria Square store depended upon Gabjet’s ability to maintain or grow sales, its ability to achieve a rate of gross profit consistent with or exceeding that achieved by the respondent, its rate of borrowings and the costs it would incur in administering the business and its ability to minimise other operating costs.

705 From paragraph 5.88, Mr Opie concludes that Gabjet was able to achieve a marginal increase in sales in the period it traded the business but was unable to achieve a rate of gross profit consistent with that achieved by the respondents. It borrowed money to fund the purchase of the business and incurred interest and higher costs in the operation of the business. Therefore, it was a matter for Mr Emanuele to consider whether he could operate the Victoria Square business on a profitable basis having regard to the historical performance of the business operated by the respondents, his assessment of the commercial risks and how he intended to finance the purchase of the business. Again, so much may be accepted if the historical performance of the business could be known accurately. That depended upon the disclosure made by the respondents. That disclosure, if made, was misleading, inaccurate and wrong. It was misleading because of the failure to make full and proper disclosure to Gabjet.

706 Mr Opie then considered the CCG Report in relation to the Waymouth Street store and that assessing the A&J Damaskos Family Trust financial statement and making adjustments thereto, the CCG report concluded that the earnings of the Waymouth Street store were in the negative. The business was not profitable when operated by Jetgab and was not profitable when operated independent of the respondent. Properly adjusted, it was never in profit.

707 The adjustments made by CCG used as their starting point, the earnings report in the Damaskos Family Trust accounts and Mr Opie opines, that on his instructions, the accounts of the Damaskos Family Trust were not provided to Jetgab in advance of it acquiring the Waymouth Street store and these accounts related not only to the Waymouth Street store but to other Funk stores operated from time to time. However, the allegations in the Third Statement of Claim are based upon representations allegedly made in the Waymouth Street store profile information and he opines that the analysis does not align with the pleadings.

708 He then considers the adjustments made by CCG having regard to the Damaskos Family Trust financial statement and costs that had not been included

or were understated in those financial statements. These are understood by Mr Opie as costs that were not disclosed but should have been disclosed. Mr Opie opines that having considered each of those adjustments separate, he has formed the following views:

Higher bank fees were cost specific to Jetgab’s circumstances in operating the business, which the respondents were not in a position to estimate or disclose;

Bookkeeping and accounting expenses and subscription and licencing fees were cost specific to Jetgab’s circumstances and respondents were not in a position to estimate or disclose them;

Consulting expenses related to modification of the POS system, which was discretionary expenditure and which the respondents were not in a position to foresee or disclose;

Motor vehicle (car parking) expenses were discretionary costs incurred by Jetgab which the respondents were not in a position to foresee or disclose; and

Franchise fees were a cost payable by the franchisee and not the franchisor.

709 On the question of viability, Mr Opie said at paragraph 2.38, that the respondents incurred losses in trading in the Waymouth Street store in the 2015 and 2016 financial years. 2016 was slightly less than 2015 due in part to an increase in the business sales brought about by a substantial government tenant commencing occupation in Waymouth Street. It appears that Mr Opie is prepared to accept that profitability would increase with an increase in sales turnover. That was the position achieved by both Kindred and by the applicants in their conduct of the business at the Victoria Square store.

710 There was an increase in profit of $19,000 in the 2017 year and Mr Opie opined in paragraph 2.40 of his report that the Waymouth Street store had become a profitable and viable business for the respondent but more marginal than the Victoria Square store. The fact that it has historically been loss making and had only recently become marginally profitable was clear from the materials disclosed to the applicants.

711 At paragraph 2.44 of his report, Mr Opie opined that the viability of the Waymouth Street store under the ownership of Jetgab depended upon its ability to maintain or grow sales after acquisition, to achieve a rate of gross profit consistent with the rate of gross profit achieved by the respondent, whether it borrowed to purchase the business and its ability to minimise business administrative and other operating costs.

712 Mr Opie accepts that Jetgab was able to achieve a marginal increase in sales following the purchase of the business but was unable to achieve a gross profit

consistent with that achieved by the respondents, made bank borrowings to purchase the business and incurred higher costs of operation.

713 Therefore, in his opinion, the question of whether or not the business should have been purchased by Mr Emanuele was a decision for him having regard to the way in which the business had been historically loss making, the commercial risks associated with achieving further improvements and profitability, the risk of the requirement to pay franchise fees and the cost implications of business administration. I accept this opinion of Mr Opie and it is not necessary that I consider his further opinions about the Waymouth Street store.

714 At paragraph 2.52 and following, Mr Opie considered the issue of salaries and wages. He addressed the content of the Third Statement of Claim and the allegations that the amount of wages represented in both the Victoria Square financial information and the Waymouth business profile and Financial Information Document were materially less than the amounts that were actually incurred and a franchisee operating the business would incur or pay wages materially higher than those amounts.

715 At paragraph 2.54 and following, Mr Opie assessed the Victoria Square financial information concerning wages expenses. He had regard to the employee roster which appeared in the Victoria Square business profile and assumed that it incorporated an adequate level of staffing to operate the business. Staffing costs were therefore in the order of $240,000. That is inconsistent with the assertion in the Third Statement of Claim that the Victoria Square store paid wages materially higher than the amounts it had represented.

716 He then assessed Gabjet’s reported wages of $242,835 for the 11½ months to June 2017, the sum of $287,854 for the 2018 financial year and $112,478 for the period to 15 November 2018, which is annualised to approximately $300,000. He opined at paragraph 2.59 that the Gabjet wages in the period to June 2017 were broadly consistent with the quantum of wages disclosed in the financial information and then at paragraph 2.6 opined that the increases in Gabjet’s salaries and wages costs in the 2018 financial year and the period 15 November 2018 were out of step with the wages that Gabjet incurred in the period to June 2017. He concluded at paragraph 2.61 that the increases arose as a consequence of staffing decisions made by Gabjet over 12 months after purchasing the business.

717 In assessing these matters, it is necessary to repeat the comments set out by me earlier about the inaccuracies within the letter of instructions given to Mr Opie. Any discussion about the content of the report of Mr Opie must be understood in the background of those mistakes and inaccuracies. That is not a criticism of Mr Opie but it is a function of the material that he was asked to deal with and the basis upon which he was asked to approach that material.

718 Mr Opie was referred to the first document given to him called a Brief to Advise.567 This document was prepared by DC Strategy, the former solicitors for the applicant. It consists of five full pages of instructions. It was received by Mr Opie on or about 9 October 2019 but ultimately did not become his final instructions which were received on 1 November 2019.

719 Mr Opie was referred to item 10 on page 3 of the document. That item reads as follows:

10. Financials relating (to) the Damaskos Family Trust, when referred to by Mr Crase, are being linked to Funk CBD (Pty Ltd) which relates to Victoria Square despite the costs incurred by the Trust being unrelated to Victoria Square.

720 The relevant trust was the A&J Damaskos Family Trust, the relevant details concerning which I have referred to earlier in these reasons. Mr Opie confirmed that he was being asked to assume that any costs incurred by the A&J Damaskos Family Trust were unrelated to the operation of the Victoria Square store by Funk CBD.568

721 In his response, Mr Opie said that paragraph 10 of this document blurs the precise manner in which the financials for the two businesses were set out. This was because the accounts of the A&J Damaskos Family Trust reflected the divisional profit and loss statement or divisional operations of the Waymouth Street store as well as income and expenses associated with the operation of other franchise run Funk stores and included some costs of an overhead or administrative nature that related to the broader Funk Group. The same divisional profit and loss statements for the Victoria Square store appeared in the Funk CBD financial statements.

722 I then put to Mr Opie that paragraph 10 of the DC Strategy document is wrong.569 Mr Opie agreed with that proposition.570

723 Mr Opie was then taken to Exhibit A32, an email from DC Strategy to Mr Opie in which the solicitors instructed Mr Opie based upon a draft report and comments received from the respondents. It requests amendment and in relation to paragraph 2.11.1 reads:

2.11.1 We clarify that “accounts of Funk CBD” were not provided due to multiple stores operated under the entity. Perhaps want to clarify this so to avoid any assumption of trying to minimise information provided.

724 The accounts of Funk CBD were not provided to Mr Emanuele. That is not in contest between the parties. At paragraph 2.11.1 Mr Opie says:

2.11 It is my understanding that:

567 Exhibit A22.568 T1466.35-T1467.16.569 T1467.17.570 T1467.22.

2.11.1 The accounts of Funk CBD were not provided to Gabjet in advance of it acquiring the Victoria Square business as they contain financial information pertaining not only to the Victoria Square business but also other stores operated by the defendants from time to time; and

2.11.2 The allegations in the Third Statement of Claim are based on representations allegedly made in the Victoria Square financial information.

725 I have earlier assessed the Funk CBD financial statements and the information contained therein. I have made a comparison of the business activity of Funk CBD in the Victoria Square business and in the other business that it operated. I have reached the conclusion that the Victoria Square business constituted about 62% of the overall business activity of Funk CBD at the time that the business was sold to the applicant Gabjet. So much must have been apparent to those instructing Mr Opie. There has been no explanation why the solicitors did not fully and accurately brief Mr Opie. Also, there was nothing preventing the separate profit and loss accounts for the stores being prepared by BCFR. I consider that it was inappropriate that the solicitors did not make these available to Mr Opie and properly instruct him about them.

726 A second email was sent by DC Strategy to Mr Opie dated 10 October 2019.571 At paragraph 7, it refers to paragraph 7.11.5. of the first draft report of Mr Opie. The relevant notation on the solicitor’s email at p 2 reads as follows:

7.11.5 – Again refers to the A&J Damaskos Family Trust for subscriptions, Vic Sq trades under Funk CBD. The expense under the trust entity does not relate to Vic Sq and relates to the stores that were trading under the trust in those periods. In the group family trust financials there is a $918 subscription fee in the 2017 FY from memory this is our membership to Restaurant and Catering SA. Again not specific to any store.572

727 Mr Opie received this email in connection with the comments provided by Mrs Damaskos about the report prepared by Mr Crase.573

728 On 1 November 2019, Mr Opie sent an email to DC Strategy attaching an update draft of the report incorporating the salaries and wages chapter and dealing with the matters identified by Mrs Damaskos within Exhibit A33. Mr Opie accepted that after he had prepared his first draft report, he was given further information by Mrs Damaskos regarding salaries and wages all of which were received by email. He could not recall the effect of that information. He said that he only received such information by email.

729 Mr Opie was then taken to his report of 1 November 2019. He confirmed that when he provided his report, he did so on the basis that whether, in his opinion, any adjustments made by Mr Crase in the CCG report, should have been made in the context of the misrepresentation claim. That was the footing upon which he provided his report because those were the instructions that were given

571 Exhibit A33.572 Exhibit A33, p 2, paragraph 7.573 T1469.23-25.

to him.574 He was also asked to consider, in his engagement, whether he considered that the applicants alleged representations and then provide an opinion as to whether the representations were alleged to have been made. That was the context in which he considered these adjustments in the CCG report.575 Mr Opie said that in providing his opinion on the basis of the instructions that he received from DC Strategy, he had regard as to whether in his opinion the representations were misrepresentations and if he arrived at the conclusion that the representations were not misrepresentations, then his opinion was that an adjustment was not reasonable.576

730 Mr Opie also confirmed that in considering whether the representations were misrepresentations, he had regard to the expenses listed in the financial information contained in the business profile documents for Victoria Square and Waymouth Street. In doing so, he had regard to either an assumption or belief that those expenses represented all of the expenses that had been allocated by the Funk Group to the respective stores. He said that he assumed that they were a faithful representation of the expenses that had been incurred within those divisions and allocated to each of those stores.577 He said that the assumption that he worked on was that by virtue of these expenses being reported divisionally, they were the income and expenses relevant to the operation of the stores.578 This was the basis upon which he was asked to express his opinions by DC Strategy. He was wrongly instructed and the assumptions he was asked to make were, in part, demonstrably wrong. That is not a criticism of Mr Opie, it is a function of the wrong instructions given by solicitors.

731 Secondly, Mr Opie confirmed that in providing his opinion, he was guided by the opinion that he held that it was not in fact a misrepresentation for the Funk Group to not include in the business profile financial information expenses that may be incurred by a franchisee that were not included in that financial information. He said that there was a body of costs, which he called administrative or overhead costs, that had not been included in the Funk Group documents but that a prospective purchaser had been notified that there would be a body of costs that would be relevant to the operation of the business by virtue of what he described as Funk Group expenses which had been excluded. That was one of the fundamental assumptions that he made in the preparation of his report.579 To the extent that these costs comprise cleaning and tea towel costs, this view is correct. But that is not the basis upon which Mr Opie prepared his opinion. Those expenses carry no level of materiality and are of no significance. I gained the very clear impression that Mr Opie had not been instructed correctly about these matters and he assumed the topic referred to outlays of much greater significance. He was not properly instructed on these matters.

574 T1470.26-35.575 T1471.8-16.576 T1472.8-17.577 T1472.24-30.578 T1472.31-33.579 T1472.34 - 1473.15.

732 At paragraph 2.15, Mr Opie referred to and accepted that the respondents would not be in a position to estimate or disclose various expenses such as bank fees, bookkeeping and accounting expenses, subscription and licencing fees, motor vehicle expenses and staff training and welfare costs.580 He opined that expenses of that nature and any adjustments to be made in relation to them that were made by Mr Crase were really matters for due diligence to be undertaken by prospective purchasers.581

733 Mr Opie confirmed that the time that he prepared his report and his drafts, he had not been provided with a disclosure document for any of the stores. He was then taken to Schedule D, the document described as the disclosure document which carries the date of 31 October 2015.582 It purports to be provided pursuant to the requirements under items 14.6 to 14.10 of Annexure 1 of Schedule 1 of the Code. It lists recurring or isolated payments that are within the knowledge or control of the franchisor or are reasonably foreseeable by the franchisor, that are payable by the franchisee to a person other than a franchisor or an associate of the franchisor. Within that list of payments there is stock, financial expenses such as accounting fees, merchant fees, bank fees and insurance, staff expenses such as wages and salaries, WorkCover, superannuation and recruitment, staff amenities discounts and allowances and trainee expenses and other forms of expenses. Mr Opie did not see this document until about three weeks prior to him giving evidence. It was put to Mr Opie that in fact the franchisor was in a position to provide an estimate of those expenses. He said that the document that the information provided in Schedule D was not precise and would not allow the generation for example of a particular profit figure. The information was provided in a broad format. I accept this opinion. It is correct but this does not assist the respondents.

734 The Funk Group as franchisor were required to comply with the requirements of items 14.6 to 14.10 of Annexure 1 to Schedule 1 of the Code. It could only have done so by drawing upon the information that it had within its own accounts even if that information was contained within a particular range. Also, any franchisor providing such a document, would be required to make the best estimate that it could, on the information available to it at that time. Here, the estimation could be made by the Funk Group based upon the information available to the franchisor and therefore one of the fundamental propositions and assumptions underlying the report of Mr Opie is wrong. He has not been properly instructed by the solicitors for the Funk Group.

735 Mr Opie was then asked questions about the use of the expression misrepresentation. He was not aware that the applicants make allegations against the respondents of misleading conduct which is a broader concept than misrepresentation. When he made his comments about misrepresentation, he had

580 T1473.16-38.581 T1474.5.582 Exhibit A2, vol 1, tab 1A, p 32ZD.

not understood the nuance of that difference.583 Mr Opie said that he was instructed that the financial reports prepared by Funk CBD and the A&J Damaskos Family Trust incorporated divisional profit and loss statements that captured the revenue and expenses directly attributable to each of the Victoria Square and Waymouth Street stores.584 Therefore, in relation to paragraph 1.3 of Exhibit R31, and his reference to divisional profit and loss statements therein, he is referring to the standalone profit and loss statements for the Victoria Square and the Waymouth Street stores. This is incorrect and again is a failure of those instructing Mr Opie. He said that it is common for divisional profit and loss statements to be prepared that allocate the income and expenditure from individual stores to those divisional profit and loss statements to represent the standalone position of each. When they are combined, an overall profit and loss statement for Funk CBD may be prepared.585

736 Mr Opie therefore accepted the accuracy of the divisional profit and loss statements and, at paragraph 1.3 of Exhibit R31 he also accepted those divisional profit and loss statements were prepared as part of the financial reports of Funk CBD and the A&J Damaskos Family Trust. When looked at together, all of the individual divisional profit and loss statements for the businesses of Funk CBD, when combined, would give the overall profit and loss statements for Funk CBD. That is, he had no basis to doubt the accuracy of the allocation of the figures within those documents.

737 Mr Opie was then taken to the Funk CBD profit and loss statement for 30 June 2014.586 There are also similar financial statements for the 2015 and 2016 years. These are the divisional profit and loss statements to which Mr Opie makes reference. Tab 4 is the compilation report for Funk CBD, signed by Mr and Mrs Damaskos for the year ended 30 June 2014 which relates to the Victoria Square store and other stores.

738 Mr Opie said that he understood that these divisional profit and loss statements did not incorporate all of the administrative overhead expenses that were being incurred by the broader Funk Group. They only captured the direct income attributable the Victoria Square store and the costs that were directly attributable to or associated with the operation of that particular store. Mr Opie was referring to the document behind tab 3 of Exhibit A3.587 The same applies to Waymouth Street. He said that the divisional profit and loss statement faithfully represented or were consistent with the income and expenditure set out in the business profile documents for each of the Victoria Square and Waymouth Street stores but that is on the assumption that those documents record all of the costs directly attributable to the Victoria Square store.588

583 T1475.22-30.584 T1476.1-7.585 T1476.18-35.586 Exhibit A3, tab 3.587 T1477.19-32.588 T1478.8.

739 Mr Opie was aware that these divisional reports were not provided to Mr Emanuele because he was told that multiple stores operated under the one entity. He did not take account of that situation and proceeded on the basis of the information within the business profile document and checked those against the divisional report for similarities. However, Mr Opie also said that each of the divisional profit and loss statements do not report costs that would be described as administrative or overhead in nature and that these are only reported in the profit and loss statements for the A & J Damaskos Family Trust. He said that is where these costs have their home.589 Mr Opie was of the opinion that only direct costs were recorded within the divisional financial statements, for example, the direct costs attributable to the Victoria Square premises. However, he was of the opinion that the only place in which the total administrative or overhead costs are to be found are within in the financial statements of the A & J Damaskos Family Trust. On those type of costs, Mr Opie agreed that if, for example, a director of Funk CBD, or Funk Coffee and Food, in its capacity as the trustee for the trust used the vehicle to travel to the Victoria Square store and worked there, that expenditure on motor vehicle expenses would have been for the benefit of the store. If for example, accountancy fees were incurred for Funk Group administrative expenses and they were not reflected in the divisional profit and loss statements then it would be expected that those costs would have a benefit for the individual store such as Victoria Square590 and it would be necessary in attribution of those costs within the accounts.591

740 Conversely, Mr Opie expected that an individual store such as Victoria Square, operated by a franchisee would incur office administration and general expenses.592 He would also expect that the Funk Group operating the Victoria Square store as a company store, will have incurred administrative and general expenses at head office level. 593

741 Mr Opie agreed that there would be a whole body of administrative and other costs that would benefit and be attributable to the stores within the group, namely the Funk Group portfolio. And if individual franchisees were running the store, then those stores would have to incur those types of costs.594 Therefore, where costs are incurred by an entity, which is in effect a holding company but those costs are directly attributable and are incurred for the purpose or benefit of the subsidiary operating entity, then within the accounts of the subsidiary operating entity, there should be an attribution of those costs incurred. This is because the incurring of those costs and expenses at any level would be of a benefit to the operating entity. And in any event, the individual stores would, if operated separately, be expected to incur those costs and therefore, there should be an attribution of those costs to the operation of the entity. In simple terms, where costs are incurred by Funk CBD, or by Funk Coffee and Food, in its 589 T1479.2-8.590 T1479.10-14.591 T1479.30.592 T1480.6.593 T1480.12-13.594 T1480.15-21

capacity as the trustee of the trust and are accounted for in the trust, and those costs are, in whole or in part, attributable to or are of benefit to the Victoria Square premises operated by Funk CBD as a company franchise, then the divisional accounts relative to the operation of the Victoria Square store should reflect the incurring of those costs. In the ordinary course, those are costs would need to be incurred in the running of the store.

742 In that background, Mr Opie was asked to assume that Funk CBD did incur certain expenses in relation to the operation of the Victoria Square store that were allocated to the divisional profit and loss statements but those expenses did not appear in the business profile information. On that assumption, this information would have an effect upon his opinion and the view expressed in his reports. This would be the case if the Court was of the view that Funk CBD was in a position to estimate and address those expenses in a business profile financial information. This would have an effect on the opinions that he has expressed in his report. 595

743 Mr Opie was then asked about the entry within the financial information of ‘Funk Group expenses excluded’. In paragraph 3.8 of his report, at 3.8.1, Mr Opie said that group expenses is a term generally understood to incorporate costs of an administrative nature that are incurred in another entity or entities in a corporate group that relate to a group’s broader operations. He said in paragraph 3.8.2 that such expenses are often excluded as they can be difficult to allocate meaningfully to an individual business within a group and, for example, how they may bear a relationship to a cost that a purchaser would incur in the undertaking of the same tasks. However, it is understood that the Funk Group expenses that are excluded relate only to laundry and to tea towel expenses. Mr Opie accepted that if those group expenses were not of the nature as he understood them, that would change his opinion. 596 He would also accept that if Mr Emanuele was told that those terms had a meaning different from what he understood, then that would affect the opinions that he has expressed.597

744 He explained that any vendor of a business who operates in a particular way and so administers a number of stores centrally from head office, will incur costs that may be completely different to a cost a prospective purchaser would incur in performing the same tasks. They may bear a relationship but not necessarily in terms of quantum.598

745 Mr Opie then said that he agreed with Mr Crase that as part of the valuing of the business, it is relevant to consider first the costs that would be incurred by the purchaser in operating the business, but not historically incurred by a vendor, and then consider any increase in costs that it is apparent will be incurred by the purchaser when compared to those historically incurred by the vendor. All of those matters are relevant to the assessment of future maintainable earnings of 595 First report of Mr Opie, para 2.15; Exhibit A2, volume 20, p 5216; T1481.15-1482.8.596 T1483.24.597 T1483.36.598 T1484.14-27.

the business.599 Those matters are fundamental to the question of the assessment of the value of the business from the perspective of a purchaser and adjustments are important to reflect those matters.600 This would include making adjustments on account of expenses to be incurred by a franchisee that were not necessarily incurred by a franchisor as this would inform the particular franchisee’s views as to value.601 However, there were some costs, and he used the example of car parking costs, that might be seen to be essential to one franchisee but might be ignored by another franchisee and would not be borne by that franchisee. He also agreed that franchise fees would not necessarily be taken into account in the valuation in exercise.602

746 Mr Opie agreed, having regard to the content of his report at paragraph 2.16 and following603 that he formed the view that the Victoria Square business was a profitable and viable business for the respondents. He confirmed that the respondents have the benefit of administrating several franchisors operated stores through a central office and were not required to pay franchise fees. The Funk Group was likely to have had some operational and administrative cost savings by economies of scale which would not have been available to the operator store or even a small number of stores.

747 Mr Opie confirmed that he was ultimately not asked to provide an opinion about whether or not it was likely to be profitable and a viable business for a franchisee to operate. This was pertinent and applicable to both of the Victoria Square or the Waymouth Street stores.604 He has therefore not given any opinion about whether any of the businesses were profitable and viable business for a franchisee to operate. In that background, he accepted that when the financial information provided by the Funk Group referred to, what he described as a metric being available to an owner operator which was intended to reflect the net income that a franchisee might expect to derive from operating the business, that is the objective understanding of that material. That is the way he approached it.605

748 In any discussion about administrative expenses, he considered that the note on the financial information ‘** Funk Group expenses excluded **’ related to administrative expenses and not to any other form of expenses. This is the case even though there was no specific reference to administrative expenses. Mr Opie had earlier accepted that if his understanding of that expression was wrong, then that would affect his opinion. He was not asked to express any further opinion and he accepted there may be further inaccuracies. Nor he was asked to make an assumption that for the Victoria Square business, at all times a store manager was employed. If that was wrong, it would affect his opinion as well. When he

599 T1484.31-1485.3.600 T1485.5-11.601 T1485.13-18.602 T1486.17-25.603 Exhibit A2, vol 20, p 5217 at sec604 T1487.16-29.605 T1488.1-10.

provided his report, he had no information regarding the advice that Mr Emanuele had received from Mr Rundle of 360 Private in relation to the purchase of Victoria Square.606 Nor did he have any information about advice received from Mr Emanuele from Mr Mercorella about the purchase of the Waymouth Street store.607 He therefore could not comment one way or the other about what Mr Emanuele did in his process of due diligence.

749 Mr Opie also confirmed the content of paragraph 4.10 of his report, that when a prospective purchaser is making an estimation of future profit to be derived from a business, that the purchaser will have regard to the likelihood that the business’ historical costs will not necessarily reflect all the costs that would be incurred by the purchaser.608 Mr Opie agreed that the financial information that had been provided by the Funk Group to Mr Emanuele was not provided on the basis of historical information because it also contained information that indicates amounts that might be available to a franchisee operating the business. Mr Opie agreed that the information provided, when assessed by him in his capacity as an expert, goes one step further by adding the matters that may have been included at the bottom of that financial information page under the heading ‘available to owner operator’.609 For example, when asked about paragraph 5.9 of his report, and the reference to the Victoria Square financial information, it was presented as exclusive of interest tax and depreciation.610 Mr Opie agreed that there is no reference within that financial information that records or the amount is announced in the appropriate way that the amount called ‘net profit’ is exclusive of depreciation and interest.611 Mr Opie agreed, that in his experience in relation to the due diligence process, if financial information is presented exclusive of depreciation and interest, then that would ordinarily be noted upon the records as presented for the purposes of that due diligence. That is because it would normally be presented as EBITDA, or EBIT, as the case may be.612 Therefore, when reference is made to Exhibit A3, it may be seen that the expression ‘net profit’ is not technically correct and is inaccurate.613

750 Mr Opie agreed that when regard is had to this financial information, it refers to a net profit but technically a net profit would, if depreciation or interest were incurred, be required to reflect those two costs. This has not happened in the financial information provided by the Funk Group and so the term net profit is not accurate. Mr Opie said that as the accounting term is understood, net profit would ordinarily be a term applied after including those amounts.614 That evidence is consistent with the evidence given by Mr Crase and is consistent with the content of his reports. It is consistent with the view that I have formed and

606 T1493.20-24.607 T1493.29-33.608 T1495.4-12.609 T1496.12-24.610 T1496.25-30; Exhibit A2, vol 20, p 5241; report of Mr Opie of 1 November 2019, para 5.9611 T1497.18-21612 T1497.6-17.613 Exhibit A3, tab 1, p 920.614 T1497.6-28.

earlier expressed in these reasons that the reference to ‘net profit’ on the financial information provided by the respondents to the applicants is both inaccurate and is misleading.

751 Mr Opie was then taken to the content of paragraph 5.97 of his report.615

752 In that paragraph, he expresses an opinion about the inability of Gabjet to maintain a level of gross profit for the Victoria Square business consistent with that achieved by the respondent. He opined that gross profit levels are critical to a business viability and profitability and therefore, any small difference in a gross profit percentage is going to have a very significant impact on the profitability of a business.616

753 Mr Opie was then taken to his discussion about salary wages at item 7 of his report.617 At paragraph 7.6 of his report, Mr Opie said that in order to assess the reasonableness of the wages expenses included in the Victoria Square financial information, he has had regard to the employee roster that appeared in the Victoria Square business profile. He concludes at paragraph 7.10 that based on that roster, the level of staff appeared to have been adequate for the operation of the business. He agreed that he was not provided with any other records relating to employees for the purposes of that analysis apart from rates paid to various employees.

754 Mr Opie confirmed that he was not provided with any records about the hours worked by employees in the business and he knew that all employees of the Funk Group were employed by Funk Coffee and Food. It follows that all of the staff working, for example, at the Victoria Square store when it was company operated, were employed by Funk Coffee and Food. There was a contract between Funk Coffee and Food and, for example, Funk CBD in relation to those Victoria Square staff.618

755 Mr Opie confirmed that he was not provided with any records that did a breakdown of group employees costs on a per store basis even though he was aware that various employees worked at different stores, depending upon need. Therefore, he had no understanding that, for example, there may have been occasions when Funk Coffee and Food provided additional employees to work at the Victoria Square store beyond the hours set in the employee roster. He worked on a total employee cost reported by the franchisor in relation to each of the stores. He compared that to the employee costs that were incurred by the applicants.619 The total employee costs of the respondents was calculated from the divisional profit and loss statements but he did not have access to any records which indicated which employees worked for the Victoria Square store, the Waymouth Street store or any other store on any particular day in any particular

615 Exhibit A2, tab 422, p 5254.616 T1497.29-1498-12.617 Exhibit A2 vol 20, tab 422, p 5274.618 T1501.1-12.619 T1501.33-38.

week.620 He also did not have any information about how many hours those employees worked and therefore he assumed that the overall employee cost for any financial year was as recorded in the business profile document or the divisional profit and loss statements.621 He agreed that the exercise he did could be described as a big picture analysis and therefore he did not perform any form of audit or investigation about whether or not the figures as listed in the business profile information and the divisional profit and loss statements were in fact accurate.622 He had no expertise to determine what the staffing requirements for any particular store were at any particular time.623

756 Mr Opie did not know that Mr Emanuele worked as a full-time manager of the Victoria Square store for a period of three months from the time the business was acquired by Gabjet in July 2016. He did not know that Ms Gordon was employed as a full-time manager from late October 2016 and in that period, Mr Emanuele did not draw any wage, nor did he for the whole of the 2016/2017 financial year. If a notional income/wage was attributed to Mr Emanuele for the work that he did, there would be a significant effect on the wages cost which should properly be attributable to the Victoria Square store, namely those costs would be higher.624 Mr Opie agreed that the costs would be higher than, for example, the costs that he reports at paragraph 7.12.1 of his report.625

757 Mr Opie was then taken to paragraph 7.22 and following of his report. This paragraph sets out Jetgab’s report wage costs for the 2018 financial year at paragraph 7.25. He was then taken to the Jetgab annual report for the year ended 30 June 2018.626 The report wages cost was 3% higher than set out in the Waymouth Street business profile but was lower in the 4½ months from 1 July 2018 to 15 November 2018, being the date of termination. He was not aware of the possibility that as a result of the performance of the store, there had been a cut in staff. Mr Opie was then taken to Exhibit R14 which is the ATO coffee shop key benchmark and performance benchmark report. He was asked to compare the benchmark range for a shop with an average turnover of more than $600,000 which has a labour to turnover percentage of 25% to 33%.627 This is to be compared, for example to a turnover percentage of between 18% to 28% for coffee shops with a turnover of between $65,000 and $200,000 and 20% to 29% for coffee shops with a turnover of between $250,000 and $600,000.628

758 Mr Opie was then asked to compare those percentages with the financial information provided by the respondents.629 For the full year 2015, there is a wages costs of $220,000 which is 29.5% of turnover. If a comparison is then 620 T1502.9-15.621 T1502.22.622 T1502.36.623 T1503.12.624 T1505.13.24.625 Exhibit A2, vol 20, tab 422, p 5275.626 Exhibit A3, tab 14, pp 2707A-2707K.627 Exhibit R14, p 3 of 7.628 Ibid.629 Exhibit A3, tab 1

made to the $216,000 financial information, a different result is disclosed.630 The total cost of salaries for a full year was $181,000 and the turnover was $440,000, which is a percentage of wages to turnover of 41%. Mr Opie had not done that calculation and when confronted with those figures, he agreed that having regard to such a large variation in wages costs relative to turnover, that would be something he would want to investigate and including why it was so much lower at Victoria Square. The need for that investigation would be informed by the benchmark information provided by the ATO to be found Exhibit R14. Mr Opie said that it is peculiar that two businesses could have such different results when run by the same entity. All he could say was that the percentage for the Victoria Square premises fell within the range in Exhibit R14 of the $600,000 a year turnover for a coffee shop in the ATO benchmark. However, that was not the turnover represented in the financial information for the Victoria Square store.631 He said it is peculiar that the two businesses run by the same entity would have such differing results. He said that it may be explicable where, for example, there is a lower turnover shop but it is still necessary to maintain staff for peak hour work. He said there was also some stepped costs there which might mean that the smaller business had a greater ratio of staff costs to turnover.632

759 Mr Opie agreed that the figures produced in the financial information before for the Waymouth Street store were not consistent with the ATO benchmark figure and he agreed that the Victoria Square business was much bigger based upon turnover. In answer to a question from me, he agreed that there were two peculiarities about the Victoria Square financial information.633 These were that whether the percentage figures for the Victoria Square store were correct and secondly that there must be an explanation for the difference between the benchmark information and the turnover for the Waymouth Street store having regard to the content of Exhibit R14.634

760 I asked Mr Opie to comment upon the difference of 12% between the ratios for the Victoria Square store and the Waymouth Street store, which he thought could only be explained by some unavoidable costs in structuring the staffing. There is no evidence on that point. However, when he addressed the difference, he agreed that difference of between 11% and 12% is too great a difference. If, for example, the Victoria Square was operating the way it should be, then the difference of 11% to 12% in relation to Waymouth Street would suggest there is something wrong, even accepting the embedded costs theory, which he was discussing. Mr Opie said that he accepted that on the face of it, the difference is substantial and could only be explained by something other than embedded costs. This relates both to the performance of the Victoria Square store and to the performance of the Waymouth Street store. That is something he would certainly

630 Exhibit A3, tab 9, p 1264.631 Exhibit A3, tab 1.632 T1510.10-1511.34.633 Exhibit A3, tab 1.634 Exhibit R14, p 2 of 7.

wish to investigate.635 He would want to know whether there is any plausible explanation for such a substantial difference.636

761 I have been greatly assisted by the evidence given by Mr Opie and Mr Crase. I found them to be reliable, professional and honest witnesses. They attempted to give me every assistance possible in my consideration of the relevant information before the Court.

762 I am satisfied from the evidence given by Mr Opie, which was not materially different from the evidence given by Mr Crase, that in the financial information provided by the respondents to the applicants, the description “net profit” is not an appropriate description. It is properly described as EBITDA and therefore the description of an amount available to an owner/operator is also inaccurate for the same reasons. I find that it is misleading.

763 I am satisfied that in the conduct of the Victoria Square store, resources were provided by Funk Coffee and Food and Funk CBD, which have not been properly accounted for within the financial information. I am satisfied, from the evidence of both experts, that there are costs that have been incurred which in the operation of the Victoria Square store properly form part of the overhead expense after the determination of the gross profit percentage, that should have been but are not included within that financial information.

764 I am also satisfied that when an historical view is taken of the percentages of costs of goods sold compared to turnover and therefore the gross profit percentage, it is not reasonably possible for the amount of the costs of goods sold as a percentage of turnover to achieve the figures of 32.2% for the 2014 year, 31.4% for the 2015 year and 30.1% for the first two quarters of the 2016 year. Those figures were never achievable by the applicants, or by Kindred, in operating the Victoria Square store when the turnover was higher than for the period in which the Funk Group operated the Victoria Square store. I accept the evidence given by Mr Opie that a very small percentage change in that costs of goods sold percentage has a significant influence upon the profitability of such a business. I further accept his evidence that any small change in that percentage could have a very deleterious effect upon the overall profitability of the business. I also accept his evidence that when a comparison is made between the Victoria Square store and the Waymouth Street store in relation to benchmark figures of labour costs as a percentage of turnover, there is an inexplicable difference between the wages figures paid at the Victoria Square store and the wages figures paid at the Waymouth Street store, by the same operator, operating under the same conditions.

Findings of fact1. On the 7 March 2010, the respondent Funk CBD entered into a

franchise agreement with Kindred for the Victoria Square premises;

635 T1512.25-38.636 T1513.3.

2. Prior to the entry into that agreement, Kindred, at the behest of its bank, requested financial statements specific to the operation of that store;

3. The respondents refused to provide any financial statements, saying that because reporting occurred on a consolidated basis, it was not possible to prepare a separate report;

4. The banker of Kindred insisted upon the provision of the report. The report was prepared by the respondents’ accountants, BCFR;

5. On a day after 7 March 2010, Kindred sought and obtained from the respondents, permission to take up a “green fields” franchise site at 100 Angas Street, Adelaide;

6. On 1 September 2013, Haarsmas Lawyers, acting on behalf of Kindred, sent a letter of demand to the respondents, alleging misleading conduct of the respondents upon which reliance was placed to enter into the Victoria Square franchise. Kindred alleged that the respondents made misrepresentations about the costs of goods sold and the amount of overheads incurred in the operation of the Victoria Square franchise;

7. On 23 June 2014 and 24 June 2014, Kindred and the respondents resolved the claims of Kindred by the execution of a deed of settlement, the transfer to the respondents of the Victoria Square store and the Angas Street store and the payment to Kindred of $805,000;

8. On 2 October 2013, the respondents resumed operation of the Victoria Square store;

9. In their operation of the Victoria Square store before and after 2 October 2013, the respondents were unable to achieve a gross turnaround of sales as had been achieved by Kindred in the period from 2010 to 2013;

10. In the period 20 October 2013 to 12 June 2016, Funk CBD operated the Victoria Square store. Funk CBD paid an annual service fee to Funk Coffee and Food in its capacity as the trustee of the Damaskos Family Trust;

11. In the period up to 17 June 2016, Funk CBD received the benefits of office administration services, printing and stationery costs, motor vehicle expenses, accounting and bookkeeping services, and IT expenses and costs provided inter alia by Funk Coffee and Food, Mrs

Damaskos, a director of Funk CBD and an employee of Funk Coffee and Food and from Mr Damaskos, a director of Funk CBD, Funk Coffee and Food and an employee of Funk Coffee and Food, in and about the operation of Victoria Square store (the benefits);

12. The benefits were applied to the advantage of the operation of the Victoria Square store in consideration of the payment by Funk CBD to Funk Coffee and Food as trustee of the annual service fee. There was no delineation or discrimination by Funk CBD or Funk Coffee and Food as to the value and cost of the benefits provided for the Victoria Square store and the annual cost of the provision of those services, apart from the direct labour cost;

13. In 2010 and thereafter, the respondents were in a position to prepare and upon request had prepared separate profit and loss statements for the Victoria Square store in which there was a partial attribution of the expenditure and cost to produce some of the benefits. These statements could be prepared expeditiously upon request by BCFR;

14. The respondents Mr and Mrs Damaskos made the decisions about the attribution of the type and level of costs in respect of some of the benefits attributable to the operation of the Victoria Square store. This treatment by those directors was indiscriminate in that it was not supported by general ledger entries or balancing adjustments from a general ledger and so the entries into the separate Victoria Square store profit and loss accounts reflecting the cost of provision of some of the benefits were determined by these directors;

15. Each of Mrs Damaskos and Mr Damaskos, as the sole directors and guiding hands and minds of each of the respondent companies were aware of the provision of the benefits, the absence of any balancing adjustments for the provision of the benefits and of the indiscriminate nature of the allocation of the costs for the provision of these benefits;

16. In 2015, the respondents unsuccessfully attempted to sell the Victoria Square store and in 2016 retained the services of Versace Business Services as agent for the sale of the business. The retained agents advertised the business for sale publicly and invited offers from the public after having reviewed some financial information prepared by Mrs Damaskos on 9 May 2016;

17. On 20 May 2016, Mr Versace sent to Mr Emanuele a document called “Business Profile 250 Victoria Square” which disclosed financial information about the performance of the Victoria Square store between 2013 and July 2015. The respondents failed to provide to Mr Versace then or at any time thereafter a copy of the profit and loss

accountant/cash statement for the Victoria Square business for the reporting periods within the same time period;

18. On 26 May 2016, Mr Emanuele conferred with an accountant, Mr Rundle for advice on the financial information provided by Mr Versace. Mr Rundle advised Mr Emanuele on the assumption of the completeness of the financial information and that Mr Emanuele must be doing more than merely purchasing a job and must obtain a return and capital over and above any salary paid to a manager. He assumed that the financial information included all of the expenses a franchisee could expect to incur in the operation of this franchise;

19. The next day, 27 May 2016, a meeting was held between Mr Emanuele, Mr and Mrs Damaskos and Mr Versace. No mention was made about any additional costs which may need to be incurred by a franchisee of the Victoria Square franchise. On the same day, Mr Versace sent to Mr Emanuele a proposed sale agreement and franchise application form, and said that the financial information already provided, that is the business profile document, are to be attached to the business sale agreement;

20. In the period between 27 May 2016 and 31 May 2016, Mr Rundle arranged for finance to be obtained from NAB for loans to Gabjet to finance the purchase of the Victoria Square store. The respondents were aware that the applicants intended to borrow funds to make the purchase;

21. In late May 2016, Mr Emanuele also consulted with an accountant, Mr Sun of Information Accounting, for advice about the purchase of the Victoria Square store. Mr Sun advised Mr Emanuele to obtain tax returns, BAS returns and financial statements for the Victoria Square store. A request was made of Mr Versace for this information. The respondents instructed him that these documents could not be provided. The instructions of the respondents were untrue. These actions of the respondents deliberately deflected the applicants from further enquiry about the financial information provided by them;

22. On 1 June 2016, Mr Emanuele made an application for approval as a franchisee and this was given on 3 June 2016. On the same day, the respondents signed off on the 30 June 2015 financial accounts for Funk CBD, the vendor of the Victoria Square store. The respondents could have but did not at that time prepare separate profit and loss cash statements for the Victoria Square store. At that time, the respondents were aware that of the stores operated by Funk CBD, the Victoria Square store generated between 60% and 65% of its annual income received and the outlays made by Funk CDB for that financial period;

23. Each of the respondents were also aware at the same time the Victoria Square financial information supplied to the applicant made the following representations:637

a. The agent of the respondents provided to Mr Emanuele a document entitled “Business Profile 250 Victoria Square” (“the Victoria Square business profile”), which contained financial information for the period October 2013 to 31 December 2015, and then on 16 June 2016 provided a document entitled “Financial Information” which also contained draft financial information for the period 1 January 2016 to 31 March 2016 for the Victoria Square store (“the Victoria Square financial information”). At the time, the prospective franchisor of the business was Funk Franchise and the vendor of the business was Funk CBD;

b. That financial information was annexed to the business sale agreement signed by Gabjet on 17 June 2016 and the Victoria Square financial information expressly or impliedly represented that:

i. The Victoria Square business was capable of being a viable franchise business;

ii. The business conducted by a Funk CBD from those premises derived substantial net profits during the financial periods disclosed in the financial information and any business conducted from that place was reasonably capable to deriving a substantial profit together with a salary for the franchisee;

iii. For the period ending 30 June 2015, if the business had been conducted reasonably and the franchisee was employed as manager, then an amount of $126,000 could reasonably be expected to have been available including the salary of a franchisee manager;

iv. For the period 1 July 2015 to 31 December 2015, a business conducted reasonably by a franchisee from the premises and the franchisee was employed as a manager, the amount of $64,000 could reasonably be expected to be available to the owner/operator which included the salary of a franchisee manager;

637 Third statement of claim, FDN 53, paras 28A-28G.

v. In the period between 1 January 2016 to 31 March 2016, on the draft figures in the same circumstances as described in (iii) and (iv) above, an amount of $28,000 could reasonably be expected to be available to a franchisee owner/operator;

vi. For the financial year ended 30 June 2015, the Victoria Square store made a net profit of $117,818.54; for the period 1 July 2015 to 31 December 2015, the store made a net profit of $61,386.14; and for the period 1 January 2016 to 31 March 2016, on the draft figures, the store made a net profit of $27,486.18;

vii. In the financial year ended 30 June 2015, the Victoria Square store incurred expenses of $395,179.72; for the period 1 July 2015 to 31 December 2015, the Victoria Square store incurred overall expenses of $214,556.05; and for the period 1 January 2016 to 31 March 2016, on the draft figures, the Victoria Square store incurred overall expenses of $110,119.10.

24. Each of these 14 representations were misleading in that:a. A business trading from the Victoria Square premises was not

reasonably capable of being a viable business because it was necessary for the proprietor of that business to cover the cost of the notional outgoings that were incurred by Funk CBD but which were not disclosed to the applicants.

b. The business so operating also could not achieve a profit and generate a salary for the franchisee personally or as a manager.

c. The financial information on the business profile document overstated the amount that could reasonably be expected to be available to a franchisee operating the business, generated as profit and also because it did not disclose costs actually incurred such as office administration expenses, printing and stationery costs, motor vehicle expenses, accounting and bookkeeping expenses, IT expenses and subscription for software and IT services.

d. As a result, the profitability of the Victoria Square business was overstated and its expenses were understated. In the divisional profit and loss accounts for the Victoria Square store for the year ended 30 June 2014, the actual net profit generated was $10,000 less than shown in the Victoria Square financial information. For the year ending 30 June 2015, the actual

reported net profit was $37,000 less than the figure shown in the Victoria Square financial information.

e. The information provided by the respondent Funk CBD in the Schedule G to the disclosure document does not elucidate the issue of non-disclosure. Each entry provides only a range of information that in most instances is so broad as to be meaningless because it fails to connect or to enable the reader to discern the misleading nature of the content of the Financial Information for the Victoria Square store. For example, wages and salaries are estimated to be between $100,000 and $450,000 and rent is said to range between $45,000 to $250,000. These estimates are not directly connected to the Victoria Square store and are based upon past experiences with existing franchises in the network; it does not inform about the Victoria Square store; it recommends consultation with an accountant which is futile because of the refusal of the respondents to provide requested information.

f. A franchisee would still be required to account for costs such as depreciation, motor vehicle expenses and other general operating expenses. Mr Emanuele was not informed by Mr and Mrs Damaskos about any other additional costs that may need to be incurred in the Victoria Square franchise and I reject their evidence to the contrary. Mrs Damaskos did not mention the disclosure document when giving evidence about the initial meeting with Mr Emanuele. She gave no evidence about this topic being raised on 27 May 2016 at their meeting and there was no proposition put to Mr Emanuele in cross examination about this topic.

g. The general information provided by the respondents about inclusive costs was incomplete and did not include head office expenditures which were to the benefit of the Victoria Square business.

h. At the time of entry into the agreement, the applicants and its officers had no understanding of the actual expenses incurred in the operation of the Victoria Square store in order for a franchisee to successfully operate that store nor did the applicant have an appreciation of the effect that the separate incurring of those expenses would have upon the profitability and viability of that business. The applicants relied solely upon the representations made by the respondents and were induced thereby to enter into the contract of sale of the business and the franchise agreement.

i. There was no statement made about whether any of the material of the nature of the qualifications of the information provided. The disclosure document is not such a qualification. It records indicative costs only in a range that is so broad as to be meaningless because it fails to connect or to enable the reader to discern the misleading nature of the content of the Financial Information for the Victoria Square store and for the reasons earlier disclosed. Furthermore, it related only to costs payable to third parties and so does not include those operating costs incurred but not accounted for as payments.

j. The respondents and each of them were possessed of this knowledge but did not convey that information to the applicant. Each of them knowingly overstated the profitability and viability of the Victoria Square business to induce the applicant to purchase the business and to obtain a benefit.

k. Mr and Mrs Damaskos were the guiding hands and minds of the Funk Franchise, Funk CBD and Funk Coffee and Food, in its capacity as trustee of the Damaskos Family Trust. Each of them were involved in the contraventions of the other. They each intentionally participated in the offending. They each therefore had knowledge of each of the essential integers of the breaching conduct.

l. Mr and Mrs Damaskos prepared the Victoria Square financial information, provided it to Mr Emanuele, and arranged for it to be annexed to the Victoria Square sale of business agreement. Each of them understood why this information was prepared and then provided to Mr Emanuele and that it was likely he would be induced by this information. Each of them were aware that the Victoria Square financial information did not truly or accurately represent the net profit of the business. As Mr Opie said, it was a record of EBITDA and it did not carry the usual qualification warning that it was not ‘net profit’ as that expression is understood.

m. Each of Mr and Mrs Damaskos and so the other respondents were aware that the financial information did not record all of the expenses incurred in the operation of the Victoria Square store, that no proper assessment could be made of the profitability of the business, its value then and in the future without disclosure of the incurring of those expenses and their amounts.

n. The Victoria Square store was not reasonably capable of being a viable business under a franchise arrangement with the respondents.

o. The applicant has suffered loss because of the conduct of the respondent that I have found to be misleading and in breach of the ACL. I am similarly satisfied that the same loss has been incurred/suffered as a result of the contravening conduct.

p. I am also satisfied for the same reasons that there is a distinct and identifiable connection between the contravening conduct of the respondents and the loss that has been suffered by the applicant. The misleading conduct of the respondents led the applicant to accept the summary of the financial information provided by the respondents which was incomplete and inaccurate when the respondents were in a position to provide a more accurate financial statement to the applicant. The respondent Funk CBD deliberately refused to provide that information.

q. The applicant accepted the accuracy of the representations made and he also obtained the professional advice recommended, none of which cast doubt upon the Financial Information. Same as for Kindred, the respondent Funk CBD and Mr and Mrs Damaskos as the directors misled the applicant by saying that separate financial statements could not be provided. They were available upon a request and they could be quickly provided. If obtained they disclosed a very different financial position than was portrayed in the Financial Information.

r. The applicant entered into the contract to purchase the Victoria Square store relying upon the representations made by the respondents. They were the reason why he pursued this commercial opportunity as he understood it. The applicant has suffered loss because, having been induced by those representations he entered the contract to purchase a business for $410,000 which did not have a value greater than the written down value of plant and equipment, fixtures and fittings. The business traded at a loss because of the further expenses that it had to incur. The applicant has thereby suffered prejudice and disadvantage because of the steps it took to purchase the business in reliance upon the misleading conduct of the respondents. The loss suffered by the applicant was causally linked to the conduct of the respondent upon which the applicant relied. The applicant does not carry any burden of

proof about which particular components of loss that it suffered is referable to any particular contravening conduct.

s. I am satisfied that in the usual course, the measure of loss in these circumstances is the difference between the amount paid for the business and the actual value of business at the time it was purchased. This is the method adopted by Mr Crase. However, here there was a resumption of the business by the respondents. This occurred because of the threats made at the time by the landlords to resume possession of the premises for failure to pay the rent. The respondents have operated the store since that time using plant and equipment, fixtures and fittings belonging to the applicant. There has been no accounting by the respondents for these assets or for their use. In evidence, from the respondents’ witnesses, there was no suggestion that the respondents were prepared to return these items to the applicants. It is not clear to me how the respondents have accounted for the accumulation of these assets at no cost.

t. I am satisfied on the evidence that, on the balance of probabilities, it has been proved that the damages claimed by Gabjet were caused because of or by the contraventions of the respondents which contravened the requirements of s 18 of the ACL. I am satisfied that the applicant would not have entered into the transaction to purchase the Victoria Square store absent the misleading conduct of the respondents. I am also satisfied that there was no mismanagement of the Victoria Square store by the applicant. The turnover was increased and that level of turnover had never been achieved by Funk CBD yet its costs of goods sold was lower and its costs of goods sold as a percentage of turnover were allegedly sometimes 3% to 5% better than the applicants. I consider those figures of the respondents to be illusory for the reasons already given. There is no evidence that the applicant acted unreasonably.

765 As a result, I am satisfied that Gabjet has proven the allegations made in paragraph 28F to paragraph 28O inclusive of the third statement of claim.

766 Having made these findings it is then necessary for me to announce my decisions about the adjustments that were identified by Mr Crase in his report. I have accepted the correctness of those adjustments for the reasons which are set out below based upon my assessment of the evidence as described above. My findings are set out below.

767 I have earlier described the anomalies arising out of the structure of the Funk Group. I am satisfied that the Financial Information not only failed to identify the cost of depreciation and of interest, it failed to properly account for

the other costs of operation of the Victoria Square store that should properly have been brought to account. These were costs incurred directly or indirectly in the operation of this amongst other Funk stores. It was the flagship store. It generated 62% of the revenue of Funk CBD.

768 I am satisfied that although special arrangements were made with its bank, it incurred some bank charges and merchant fees. It incurred accountancy fees at two levels. First, the professional fees paid to outside accountants and the second, for the services provided by Mrs Damaskos. It is known that as a director, she controlled the accounting function of the Funk Group. She drew a salary as part of the expenses. It is not necessary that I calculate the amount but I am satisfied that the benefit which she brought to the operation of the store was not reflected in a line cost item in the accounts.

769 I am also satisfied that Mr Damaskos employed a vehicle from time to time for the benefit of this store. The cost properly attributable includes not only the actual time when the vehicle was so employed but also the holding cost of that vehicle.

770 There were costs incurred by the store for subscription and licensing that are not properly attributed. These costs were exported to a Funk entity and paid for at a higher level and an adjustment must be made to reflect the fact that the greater proportion of these costs were incurred in this flagship store. Staff training, welfare and miscellaneous expenses fall into the same category. I am satisfied that the cost of the provision of labour to this store and the entries in the accounts attributed to that expense does not attribute and does not reflect the complete cost of the provision of that service. Those costs are accounted for elsewhere and provide a cost deduction against income in the particular and peculiar arrangement of the Funk Group.

771 Earlier in these reasons I have explained that the cost of goods sold amount is understated and there was no reporting of the cost of depreciation and interest paid. The description of net profit is wrong and is misleading to that extent alone because the respondents were aware that the accounts did not report those costs and did not qualify the financial information to disclose those omissions. I have also earlier explained that the cost of goods sold figures allegedly generated by this business cannot stand with the operation of Kindred before 2013, and Gabjet after 2016, when both had a higher turnover and were therefore more successful from a sales perspective. After challenging the level of salaries allegedly paid by Funk Coffee and Food as operator of the store before 2010 Kindred also identified that the reported cost of goods sold figure was unsustainable and must be wrong. The same error is reflected on the fact of the information given to Gabjet. I consider that it is wrong. The Funk Group operated the Victoria Square store after Kindred. It could not achieve the turnover level of Kindred but reported a lower cost of goods sold percentage which allegedly increased its profitability. These results could not be achieved by Kindred or Gabjet despite every attempt to do so. The reported figures of the Funk Group are unattainable

and are fallacious. It is not necessary that I calculate the error. It is sufficient to say that the error exists.

772 The same considerations apply in relation to overhead costs. It was not possible for Funk CBD to operate the Victoria Square store whilst separately incurring only the costs which it reported. So much was shown by Kindred, especially in relation to wages. This was the same experience for Gabjet. The level of overhead costs, leaving aside interest and depreciation could not match that which had been represented by Funk CBD. Those costs were appropriate and necessary overheads and they were paid. That they were incurred is consistent with the evidence of Mr and Mrs Damaskos. It is unnecessary that I identify which entity paid those overheads. It is only necessary that I be satisfied on the balance of probabilities that they were incurred and that they were paid for within the Funk Group arrangements. I am so satisfied. I am also satisfied that these expenses were material items and that they were not disclosed to Gabjet. The failure to disclose them was misleading. For the same reasons, I accept the opinion of Mr Crase expressed in his reports.

773 As Mr Crase opined, a higher sales turnover will, in general, lead to a lower cost of goods sold percentage of turnover. This is because more is being sold whilst employing the same level of resources. In this case, the respondents are said to have enjoyed a lower cost of goods sold percentage with a lower turnover. I consider that is only possible if the respondents enjoyed an advantage as the purchaser of goods that is not enjoyed by a purchaser at arm’s length. No doubt there were economies of scale in the Funk Group’s operation which I accept. These cannot explain this advantage claimed by the Funk respondents which is not justified on the evidence. At most, for the respondents, these special arrangements should have been disclosed, if they existed. I make no finding on that point. I do find that the cost of goods sold representations are misleading.

774 In relation to the first Victoria Square financial representation, I therefore find, without more, that Mr Crase is correct in his opinion and for the reasons I have described within this judgment, nothing said by Mr Opie changes that opinion. I accept that the business was not viable in July 2016 and has not been viable in the time Gabjet was a franchisee.

775 I turn then to the operation of the Code.

The Code Victoria Square Disclosure Document Item 13.2 and 13.3 of Annexure 1 of the Code

776 The Victoria Square disclosure document is inconsistent in relation to information about whether the site was previously franchised. Schedule B to that document discloses that the site had not been previously been franchised. I have earlier dealt with the evidence of Mrs Damaskos on that topic and I have rejected her evidence. Earlier in the document, there is a disclosure that it had been

franchised to Kindred.638 It is apparent that Schedule B to the document is incorrect. So also was the assertion by Mrs Damaskos that this part of the document was completed by the solicitors without any input from the respondents. I have made a finding that Schedule B of the document was completed by the respondents. They were aware of its content. I here deal only with the question of whether or not items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code have been complied with. As I have earlier set out, those items require the provision of the detail of former franchisees of the business as well as the circumstances in which the previous franchisee ceased to operate.

777 I will proceed on the basis that, as is apparently the case, the content of these items is directed to the protection of an incoming franchisee who will, in the ordinary course, be interested in a former franchisee of the business and why that former franchisee terminated the franchise (if that be the case). These quite obvious reasons for the inclusion of items 13.2 and 13.3 within the Annexure 1 of Schedule 1 of the Code. When regard is had to the enquiries made by Mr Emanuele of the respondents about other franchisees and their satisfaction with the franchise system, it is apparent that if Mr Emanuele had been provided with the correction information, then, on balance, he is very likely to have made enquiries of the Kindred about the termination of their franchise. He would have been informed of the truth of the matter and not as was represented by the respondents that the Kindred Group terminated because they were poor managers of the franchise store. He would have also been informed that the reason why the franchise was purchased back by the respondents was because of the threat of an action for misleading conduct. I consider that items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code should be given their natural and ordinary meaning. The fulfilment of that obligation would meant that the prospective franchisee would have sufficient information to be able to identify and then make contact with the former franchisee. The prospective franchisee would then have sufficient information to be in a position to make a properly informed decision about the purchase of the franchise. All of that information had to be contained within a separate document.

778 On the question of the circumstances in which the previous franchisee ceased to operate, again, I think that those words should be given their natural and ordinary meaning in the background that they are contained within a disclosure document being considered by a potential franchisee who was performing a due diligence process. I consider that at a minimum, such a document should have disclosed to Mr Emanuele the notice of dispute raised by the Kindred in the letter from Haarsma Lawyers, then the settlement between the Kindred and Funk Franchise such that Mr Emanuele would have become aware that after the Kindred made allegations of misleading conduct against Funk Franchise, that settlement occurred and the business was purchased back in consideration of the payment of the sum of $805,000. I consider that the failure to refer to Kindred in Schedule B of the Victoria Square disclosure document, notwithstanding the earlier mention of the Kindred Group in that document, 638 Exhibit A2, p 32W.

together with the failures to provide the details of the franchise business and the circumstances is a contravention of the Code. In his evidence, Mr Emanuele was unable to say that he took particular note of the content of the whole of the disclosure document. He focused on the content of Schedule B and said he could recall that content. A review of the document discloses that Schedule B is in a more prominent position within the document. He received advice from an accountant, Mr Rundle, and from a solicitor, Mr Peter Pedler about the content of the documents. He did not receive any advice about the content of Schedule B or any inconsistency between Schedule B and any other part of the document. He said that when he read the content that the Funk CBD franchise took over the store on 2 October 2013, he did not connect that statement with any previous franchisee. He reasonably may have thought that this was when the store became a Funk store. I think it is also slightly misleading to say that the franchisor took over the store on 2 October 2013.639 The respondent commenced operations in the Victoria Square store prior to 2010. The business was sold to Kindred and it was then repurchased from the Funk Group by the respondents and was then conducted by Funk CBD after 2 October 2013. I accept that Mr Emanuele did not make any connection between what was said in the document and the possibility that there was a previous franchisee. I have earlier accepted his evidence that in his meeting with Mr and Mrs Damaskos and Mr Emanuele, nothing was said of any previous franchisee. Each of Mr and Mrs Damaskos and Mr Versace said that the previous franchisee was mentioned.640 I have not accepted that evidence. I do not accept that the memory of Mr Versace was so reliable that he can recall a discussion about a previous franchisee. I have rejected the evidence of Mr and Mrs Damaskos on the topic. I accept that if Mr Emanuele had been told about the previous franchisee, he would have taken steps to make enquiries about the termination of the previous franchisee. He was left with being told that the franchisor took over the business on 2 October 2013. I accept that the first he knew of the previous franchisee was when he looked at the exchange of emails which he found on the computer. I accept that if Mr Emanuele became aware of the Funk Group, of any indication of the termination of the Funk Group franchise or anything of that nature, he would have contacted that previous franchisee and made enquiries. He was the person who asked to speak to other franchisees within the group. That is how he came to speak to for example Mr Lee. However, it is known that Mr Lee was conservative about what he said because he did not want to adversely affect his relationship with the franchisor. In his evidence, Mr Lee informed the Court of the difficulties he was facing in the franchise system, particularly the POS system arrangement which he thought were well out of date. These were the matters that Mr Emanuele set about to correct from the moment he became a franchisee. It is also unclear on the evidence whether Mr Versace even knew about the prior franchisee Kindred. There is no record within his files of any discussion about that group.

779 I am not satisfied, on the balance of probabilities that Mr Emanuele was informed of the Funk Group as an earlier franchisee at the meeting on 27 May 639 Exhibit A2 volume 1 tab 2 page 41.640 T1236.5-1239.24; T637.23-638.5; T964.30-965.4; T967.13-20; T973.12-31; T974.12-32.

2016 or at any time prior to that. I have earlier dealt with the doubts about the memory of Mr Versace. Initially he told me that he had been contacted by Mr Damaskos to give evidence some two or three months earlier but then said that counsel Mr Belperio had contacted him a year or so earlier. This was after he informed me that he had an exceptional memory for meetings and dates. After challenged by me, he conceded that his memory may be incorrect.

780 None of that evidence affects my finding that there was a contravention of the requirements of items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code.

781 I turn then to the question whether or not the failure to advise about the previous franchisee, as required by the items, was intentional or was an aspect of recklessness. I have earlier dealt with the evidence of Mrs Damaskos about the content of Schedule B of the disclosure document. I have found that her version of events cannot be accepted. I have found that she was untruthful in her evidence. I have rejected her evidence at the firm of solicitors DC Strategy amended Schedule B so that it read differently to the disclosure document that was given to Mr Emanuele by Mrs Damaskos on 3 June 2016. I am satisfied on balance that Mrs Damaskos completed Schedule B of that disclosure document that was given to Mr Emanuele on 3 June 2016. She provided that document to him. I am satisfied that she knew of the content of Schedule B at the time that she provided the document.

782 Mrs Damaskos sent an email to the firm of solicitors DC Strategy on 28 June 2016. Portion of that email said that the respondents would go through the documents and then advise. One of those documents that was reviewed was the disclosure document that had been provided by DC Strategy and I am satisfied that she provided instructions to DC Strategy to send the disclosure document to Mr Emanuele. That document was in the same form as she had given Mr Emanuele on 3 June 2016. I am satisfied that she is the person who changed the content of Schedule B. I am satisfied that she did so when she knew that the site had previously been franchised. Under the Notice to Produce, two documents were provided, Exhibit A18 and A20. Each of those Exhibits contained a Schedule B including Option 1 and Option 2 and no Microsoft word document was produced by the solicitors that included the wording Schedule B that the site had not been previously franchised. That was different to the disclosure document that was provided to Mr Emanuele on 3 June 2016 and 28 June 2016.

783 I have earlier referred to the information provided to me by counsel for the respondents at the time that DC Strategy ceased to act. It will be recalled that the solicitors informed the court through counsel that they were only prepared to continue to act for the respondents in the event that the respondents accepted a particular factual position, which those respondents were not prepared to do. Although it is not strictly necessary for me to make a finding on the topic, it is obvious enough that there was a difference between the respondents and DC Strategy about the content of the Schedule B prepared by the solicitors and the

content of the Schedule B provided by the respondents to Mr Emanuele on 3 June 2016 and 28 June 2016. The solicitors could not continue to act.

784 I am also satisfied that if Mr Emanuele had been apprised of the information about Kindred, he would have sought out and made contact with Kindred and would have been informed of the true position in relation to the determination of its franchise. I am satisfied that with that information, he would have done one of two things, that he would have terminated the agreement or alternatively would have sought to renegotiate the agreement down to a proper price payable which reflects the true value of the business. I think that the second alternative is unrealistic because I am satisfied that on no occasion, would the respondents have been willing to renegotiate the terms of the contract. Therefore, I am also satisfied that the only avenue open to Mr Emanuele at the time would have been to terminate the contract and not proceed to acquire the Victoria Square business.

785 I have already made findings that are described by the applicants as the Victoria Square disclosure document misrepresentation, the previous franchisee code contravention and the franchise bought back code of contravention. These are set out in paragraphs 78 to 82 of the statement of claim. It is obvious enough that the intention of the code is to protect franchisees and prospective franchisees by ensuring the accuracy of the information given to them. That information is provided within the disclosure documents. Item 6(2)(a)(i) of Annexure 1 of Schedule 1 of the Code is mandatory in its operation. It is also necessary to provide up to date information and information which addresses each of the requirements of the Code. Therefore, all information which is relevant must be addressed and included, and the information required to be produced is the minimum information that may be delivered by a franchisor to a prospective franchisee.

786 The applicant contend that the failures of the respondents reflect a systematic problem with the Funk franchise system and that those systematic failures are likely to have impacted on the quality of the decisions made by Mr Emanuele. The applicant contends that the only appropriate remedy is for the contracts to be undone.641 Alternatively, a claim for damages is sought. In light of my earlier findings, I do not think it is necessary that I make a separate finding in relation to these matters.

787 The applicant then made submissions on the invalidity of the termination notices however, in light of the content of the pleadings, and in light of the position now taken by the applicants that it would accept the repudiation of the contract, it is not necessary for me to consider that matter further.

788 Item 6 of the Code imposes a general obligation to act in good faith. This obligation arises between parties to a franchise agreement and also in respect of anyone who proposes to become a party to a franchise agreement. The applicants

641 See paragraph 111.6 of the statement of claim.

contend that the respondents have contravened the good faith obligation by reason of the Victoria Square financial representations conduct, the Victoria Square disclosure document misrepresentation, the previous franchisee code contravention, the franchise bought back code contravention and the conduct in relation to the marketing fund. The applicants contend that there has been a systematic failure by the respondents to comply with the obligations under the code in dealing with the applicants and then by terminating the contract. The expression “good faith” is a common law concept. In testing whether a party has acted in good faith, a court must address whether the parties have acted honestly and not arbitrarily and whether the party cooperated to achieve the purpose of the agreement. A party is therefore required to conform to the general community standards of honest behaviour. I have earlier set out the conduct and contravention about which I have made findings.642 In order to act in good faith, a franchisor must honestly disclose information about the franchise and faithfully and accurately inform the prospective franchisee, for example, of any previous franchise, the purchase back of such a franchise, the necessity to disclose the financial results of the franchise business and the requirement to accurately complete a disclosure document. The respondents each failed to comply with their good faith obligations for the reasons that I have set out above.

789 I am satisfied that in respect of the good faith obligation, any relief to be granted will be the same as the separate relief to be granted in relation to each aspect of that conduct.

790 In light of those findings, it is unnecessary for me to make separate findings in relation to unconscionable conduct.

791 I have earlier identified that on 15 November 2018, the respondents took possession of the plant and equipment and fixtures and fittings as part of the fit-out of the Victoria Square store. It has used those assets and had the benefit of them since that time. Each of the respondents have known of the benefit obtained by the other respondents in and about the operation of the Victoria Square store using those assets. The distinguishing feature in this matter is that, on the argument about the providence of those assets since the termination of the franchise, the applicants have never had the benefit of them because the applicants have never been in a position to be paid for or to sell those assets. It is not in contention that the respondents have refused the applicants permission to take possession of the Victoria Square plant and equipment and fit-out. A lien has been claimed over that equipment by the respondent and a security interest on the Personal Properties Security Register (PPSR) has been registered.

792 In its pleadings, the applicants accepts a set-off in favour of the respondents in the amount of $7,815. The agreed value of that plant and equipment was $105,815. I am satisfied that on the evidence before me, the content of the agreed

642 The Victoria Square financial representations conduct; the Victoria Square disclosure document misrepresentations; the previous franchisee code conduct contravention; and/or the franchise bought back code contravention.

facts and the evidence of Mr and Mrs Damaskos, there was no valid basis for the refusal for Gabjet to remove its plant and equipment, for the lien or for the security interest to be registered. I am satisfied that the applicants are entitled to equitable compensation in the amount of $98,000 net of the set-off.

Remedies and legal principles793 After seeking a declaration that the Funk breach notices and termination

notices were invalid and in breach and repudiation of the franchise agreements, the applicants seek orders against Funk Franchise, Funk CBD, Funk Coffee and Food and the Damaskos’ under s 87 of the CCA, or s 237 and s 243 of the ACL connected with:

The alleged Victoria Square financial representations conduct;

The breach notices code contravention;

The Victoria Square disclosure document misrepresentation;

The previous franchisee code contravention;

The franchise bought back code contravention;

The marketing fund clause 31(2) code contravention;

The marketing clause s 15(1)(b) code contravention;

The good faith code contravention; and/or

The unconscionable conduct.

794 The applicant Gabjet claims for a refund of the following:

The purchase price of $410,000 paid by them to Funk CBD under the Victoria Square sale agreement;

The initial franchise fees of $30,000 paid by them;

A refund of the initial training fee of $10,000 paid by them;

A refundable marketing fees paid to Funk Franchise under the franchise agreement;

The payment to the plaintiffs of loss and damage; and

Declarations that the Victoria Square franchise agreement and the Victoria Square licence agreement are void from the date of judgment.

795 Alternatively, a claim is made for damage to be assessed under s 236 of the ACL for misleading conduct in relation to the Victoria Square financial

representation and the Victoria Square store disclosure document and misrepresentations.

796 Based upon the same allegations, the applicants also seek orders for the breach of franchise agreements by virtue of an invalid termination, under s 82 of the Competition and Consumer Act by reason of the breach notices code contravention, s 7 of the Misrepresentation Act, s 82 of the CCA for the previous franchisee code contravention and s 236 of the ACL.

797 Declarations are also sought that Funk Franchise has contravened the franchising code in relation to the previous franchisee code contravention, the franchise bought back code contravention, the marketing fund clause 31(2) code contravention, the marketing fund clause 15(1)(b) code contravention and the good faith contravention.

798 In the further alternative, equitable compensation and other relief in tort and in contract is sought.

799 The primary remedies sought are based upon the operation of the prohibition upon the breach of any industry code under Part IV B of the Australian Competition and Consumer Act and for breach of Schedule of the ACL.

800 Section 51ACA of the CCA defines applicable industry code in relation to a corporation that is a participant in an industry to mean:

The prescribed provisions of any mandatory industry code relating to the industry and the prescribed provision of any voluntary industry code that binds the corporation.

801 ‘Mandatory industry code’ is defined in the same section to mean:

An industry code that is declared by Regulations under s 51AE to be mandatory.

802 The Franchising Code of Conduct is a mandatory code. The Competition and Consumer (Industry) Codes – Franchising Regulations 2014 (Cth) are also mandatory regulations. For the purposes of this action, the current version of the Code which came into effect 1 January 2015 is applicable.

803 Under s 51ACB, a corporation must not in trade or commerce contravene an applicable code. It is well accepted that this section is intended to obtain compliance by corporations with the requirements of relevant industry codes. Within the same part, there are provisions dealing with the contraventions of those codes. In Master Education Services Pty Ltd v Kerchel,643 the High Court held that the intent of the code was to regulate the relationship between franchisors and franchisee and to provide remedies for non-compliance. It purports to address the imbalance in power between a franchisee and a franchisor.

643 (2008) 236 CLR 101 at [21].

804 The enforcement provisions connected with Part IV B are to be found within Part VI of the Act. An action for damages is provided under s 82 of the CCA. A person who suffers loss or damage by conduct of another person that was done in contravention of Part IV B of the Act may recover the amount of the loss or damage by action against the other person or against any person involved in the contravention. This section is the primary basis for compensation claims under Part IV B and the measure of compensation is the amount of the loss or damage sustained. Any loss sustained must be caused by conduct in breach of the Act which is otherwise called contravening conduct.644 The offending conduct need only play a part in the loss or damage claimed by an applicant.645

805 Under s 87 of the CCA, the court is empowered to make other compensation orders or any other form of order that it thinks appropriate. These include, under s 87(2), an order declaring the whole or any part of the contract made between the person who suffered the loss or damage and the person who engaged in the conduct to be void and, if the Court thinks fit, to have been void ab initio or at all times on and after such date as specified in the order and an order varying such a contract or arrangement in such manner as is specified in the order.646 There are other powers contained within s 87(2)(a)(g) inclusive. These are wide powers and may be used in circumstances where there has been a contravention of the Code.647

806 The ACL is to be found in Schedule 2 to the CCA. In Part 2 – 1 of the Australian Consumer Law are the general protection under Chapter 2. Section 18(1) and (2) of the ACL provide as follows:

18 Misleading or deceptive conduct

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

(2) Nothing in Part 3-1 (which is about unfair practices) limits by implication subsection (1).

807 Under Parts 2 – 2, the ACL deals with unconscionable conduct. Section 20 of the ACL provides as follows:

20 Unconscionable conduct within the meaning of the unwritten law

(1) A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time.

(2) This section does not apply to conduct that is prohibited by section 21.

808 Remedies for breach of the ACL are to be found in Part 5 – 2 of Schedule 2 to the CCA under the ACL. Section 236 of the ACL provides as follows:

644 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at [525] per Mason CJ.645 I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 at [62].646 s 87(2)(a)(b).647 SPAR Licensing Pty Ltd v MIS Qld Pty Ltd [2014] FCAFC 50 per Farrell J.

236 Actions for damages

(1) If:

(a) a person (the claimant) suffers loss or damage because of the conduct of another person; and

(b) the conduct contravened a provision of Chapter 2 or 3;

the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention.

(2) An action under subsection (1) may be commenced at any time within 6 years after the day on which the cause of action that relates to the conduct accrued.

809 Section 237 of the ACL provides as follows:-

237 Compensation orders etc. on application by an injured person or the regulator

(1) A court may:

(a) on application of a person (the injured person) who has suffered, or is likely to suffer, loss or damage because of the conduct of another person that:

(i) was engaged in a contravention of a provision of Chapter 2, 3 or 4; or

(ii) constitutes applying or relying on, or purporting to apply or rely on, a term of a consumer contract that has been declared under section 250 to be an unfair term; or

(b) on the application of the regulator made on behalf of one or more such injured persons;

make such order or orders as the court thinks appropriate against the person who engaged in the conduct, or a person involved in that conduct.

(2) The order must be an order that the court considers will:

(a) compensate the injured person, or any such injured persons, in whole or in part for the loss or damage; or

(b) prevent or reduce the loss or damage suffered, or likely to be suffered, by the injured person or any such injured persons.

(3) An application under subsection (1) may be made at any time within 6 years after the day on which:

(a) if subsection (1)(a)(i) applies—the cause of action that relates to the conduct referred to in that subsection accrued; or

(b) if subsection (1)(a)(ii) applies—the declaration referred to in that subsection is made.

810 Under Subdivision C of the ACL, s 243 provides as follows:

243 Kinds of orders that may be made

Without limiting section 237(1), 238(1) or 239(1), the orders that a court may make under any of those sections against a person (the respondent) include all or any of the following:

(a) an order declaring the whole or any part of a contract made between the respondent and a person (the injured person) who suffered, or is likely to suffer, the loss or damage referred to in that section, or of a collateral arrangement relating to such a contract:

(i) to be void; and

(ii) if the court thinks fit—to have been void ab initio or void at all times on and after such date as is specified in the order (which may be a date that is before the date on which the order is made);

(b) an order:

(i) varying such a contract or arrangement in such manner as is specified in the order; and

(ii) if the court thinks fit—declaring the contract or arrangement to have had effect as so varied on and after such date as is specified in the order (which may be a date that is before the date on which the order is made);

(c) an order refusing to enforce any or all of the provisions of such a contract or arrangement;

(d) an order directing the respondent to refund money or return property to the injured person;

(e) except if the order is to be made under section 239(1)—an order directing the respondent to pay the injured person the amount of the loss or damage;

(f) an order directing the respondent, at his or her own expense, to repair, or provide parts for, goods that had been supplied by the respondent to the injured person;

(g) an order directing the respondent, at his or her own expense, to supply specified services to the injured person;

(h) an order, in relation to an instrument creating or transferring an interest in land, directing the respondent to execute an instrument that:

(i) varies, or has the effect of varying, the first mentioned instrument; or

(ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the first mentioned instrument.

811 The applicant makes claims connected with other parts of the CCA and the ACL. However, these are the principal heads of claim. Claims are also made under the common law. I will deal with each of them in turn. Here, I intend to deal first with the misleading conduct claims concerning the Victoria Square business. Before doing so, it is appropriate to identify the involvement of the respondents and their particular roles as well as the roles of Mr and Mrs Damaskos.

812 Funk Franchise was the principal franchisor of the Funk Coffee and Food system. It was the franchisor of the Victoria Square franchise agreement and the Waymouth Street franchise agreement.

813 Funk Leasing is the lessee of the Victoria Square premises under an agreement made with the lessor. It was the entity which granted the licence to Gabjet to occupy the Victoria Square premises and carry on the Funk Coffee and Food franchise from those premises.

814 Funk Coffee and Food is the lessee of the Waymouth Street store and until 30 June 2017, operated the business of Funk Coffee and Food from those premises. It has a second role namely it operated as the trustee of the A&J Damaskos Family Trust. It is also sued in that capacity.

815 Funk CBD previously operated a business under the name Funk Coffee and Food from the Victoria Square premises up until about 19 July 2016. Each of Funk Franchise, Funk Leasing, Funk Coffee and Food, and Funk CBD have as their directors and shareholders, Mr Damaskos and Mrs Damaskos, the personal respondents in the action.

816 The primary focus for the applicants’ case in relation to Victoria Square, was the provision of the document described as the Funk Coffee and Food Business Profile 250 Victoria Square.648 The intent of the document was to provide background, an executive summary of the detail of the business, an overview of the business and a franchise overview. The executive summary is important. It was seen and read by Mr Emanuele and represented that the gross turnover for the 2015 financial year was $747,811 and the adjusted net profit for the 2015 financial year was $126,301.649 For the 2015 year, it discloses a turnover of $747,811, a net profit of $117,818.54 and an amount available to owner/operator of $126,300.77. That figure is achieved by taking the net profit figure, adding back the manager’s cost of $60,828.99 and then deducting the 7% franchise and marketing fund fee which is calculated upon the gross turnover figure. I have earlier explained that the adding back of the manager’s cost is fallacious. If Mr Emanuele was not working in the business as he would be working somewhere else and employing a manager. If he is working in the business, he will logically, draw a manager’s wage. The business would only have value to him after an allowance for a full manager’s salary. It is on that basis that he would pay for the value of the business. For those reasons, the adding back of the manager’s cost is a fallacious process. Also, there is no evidence that at the time, any manager was being paid an amount of $61,000 per annum. To the contrary, all staff were casuals and were paid the minimum hourly rate.

817 There is a second and greater fallacy. It is suggested that there is an amount available to an owner/operator of $126,300.77 based upon the earlier net profit

648 Exhibit A2 Vol 1, tab 2, p 33-42.649 Exhibit A2, tab 2, p 41.

calculation. The evidence which I accept is that the description of that figure as net profit is wrong. It is not net profit. It is a calculation of earnings before income tax, depreciation and amortisation, EBITDA. It is not a record of net profit generated in the business. This description is misleading. So also then is the assertion of an amount available to an owner operator of $126,300.77. This description is misleading for the same reasons. There is no explanation for the expression “adjusted net profit”.650 The only reference to an adjustment is said to be Funk Group expenses that are excluded. They have been explained as minor laundry and other cleaning costs in the order of between $1,500 to $3,000 per annum. They are not material when compared to a turnover of $748,000 per annum. As Mr Opie said, this is usually a reference to excluded administrative costs peculiar to the vendor. This is not such a case.

818 There is no announcement within the document of the exclusions from the financial information that were pertinent to the operation of that business. These included accountancy fees, interest expense, general expenses and general staff expenses. There are others. The document is also misleading because of those omissions.

819 I am satisfied that the respondents deliberately presented this financial information in that form and knew or ought to have known that it was deficient and was misleading. The only purpose of doing so was to make the business look more attractive. I have earlier expressed my conclusion that there was no value in the business if all proper costs incurred in and about the operation of the business were included within its financial results. The standalone profit and loss figures produced by BCFR disclose that when an account is taken of the amount of the franchise fee payable based upon gross turnover, there is very little, if any, value in the business. A purchase price of $410,000 could not be justified on any basis.

820 In the course of these reasons, I have indicated my attitudes to the central witnesses. I have found that Mr Emanuele was a witness of truth. At times his evidence disclosed that he was a slightly gullible individual however, I accept that he believed the information he was receiving from the respondents and that he acted upon it in full reliance upon it. I accept the evidence of Mr Rundle and Mr Mercorella in so far as it involved the advice which they gave to their client Mr Emanuele. A number of the aspects of Mr Mercorella’s evidence were unsatisfactory and in particular those questions asked of him in cross-examination where he said that he could not recall particular circumstances. In assessing his credibility, I have taken into account those unsatisfactory aspects of his evidence. Notwithstanding, I have accepted his evidence in relation to the advice that he gave to Mr Emanuele. I found Mrs Bueti an impressive witness who was truthful, honest and reliable. So also did I find the evidence given by Mr Rundle, truthful, honest and reliable. The only aspect of the evidence of Mr Marinos that I would accept was that if asked, he would have given an adverse reference to the Funk Franchise system. I would not otherwise accept his evidence.650 Exhibit A2, vol 1, tab 2, p 35.

821 I found Mr Crase to be an impressive and thoroughly professional witness as did I find Mr Opie. However, for the reasons that I have already explained, I have obtained the greatest assistance from the evidence of Mr Crase. During cross-examination, it became clear that Mr Opie was unable to sustain a number of the opinions that he expressed because he had not been properly instructed or because he had not been given all of the necessary documents, or both.

822 For the reasons that I have already explained, I found Mrs Damaskos a very unsatisfactory witness. On occasions, I consider that she deliberately misled the court when she gave evidence that DC Strategy completed Schedule B of the disclosure document without instructions. For the reasons explained earlier, this evidence was demonstrably false. I am satisfied that it was an attempt by Mrs Damaskos to deflect blame for an incorrect entry in Schedule B. I am unable to accept the evidence of Mrs Damaskos that the solicitors unilaterally varied the document without instructions. Otherwise, unless satisfactorily corroborated, I would not accept any of her evidence. So also did I find Mr Damaskos an unsatisfactory witness. Although I found him more credible than Mrs Damaskos, I was not prepared to accept his evidence unless it was suitably corroborated.

823 Mr Versace proved also to be an unsatisfactory witness. He purported to suggest that he had completely clear memories of events that had happened for four or more years before the day upon which he gave evidence. When I questioned him about his memory, and he was challenged about some of the recollections that he purported to have, he freely admitted that he may have been wrong about his recollections. I found that I obtained no assistance from his evidence.

824 Mr Li gave evidence in relation to the Funk Franchise system as did Mr Aidan Wilson-Kelleher. I found that both Mr Li and Mr Wilson-Kelleher were witnesses of truth. The purpose of calling the evidence of Mr Li, as I understood it, was to corroborate some of the evidence given by Mr and Mrs Damaskos. He did not do so. He expressed dissatisfaction with the POS system and with the money spent on the marketing fund.

825 Ms Rhue, Ms Gordon and Ms Cameron were all called to give evidence. As I said in my assessment of their evidence, my understanding was that the intention of calling their evidence was to diminish the evidence of Mr Emanuele as the operator of the business. I would be asked to more easily draw an inference that the downfall of Mr Emanuele at the Victoria Square premises was due to his ineptitude. As I have earlier indicated, if that was the intention of the evidence called from these three witnesses, it completely failed. To the contrary, to a very large extent they corroborated the evidence of Mr Emanuele and his capacity as a manager. Having seen and heard Mr Emanuele in the witness box and having heard these witnesses, I am satisfied that the management decisions that he made to promote Ms Gordon to the position of manager and to give greater responsibility to Ms Rhue were the correct decisions. I found Ms Cameron to be an unimpressive witness who appeared to measure her evidence through the

prism of her own view of the world. For example, she would not agree that Ms Gordon was capable of or should have been appointed as a manager, notwithstanding, that it is apparent to me on the evidence that Ms Gordon proved to be a highly successful manager of the Victoria Square store. There was no reason why Ms Cameron should suggest in her evidence that the appointment of Ms Gordon was misconceived. I do not accept the evidence of Ms Cameron where it contradicts of Ms Rheu, Ms Gordon or Mr Emanuele.

826 Mr Opie was a highly qualified and impressive witness. He gave his evidence thoroughly and well. Notwithstanding, I was unable to accept the opinions expressed by Mr Opie due to the failure by the respondents to properly instruct him and to properly furnish him with all relevant information. Mr Opie freely and competently made concessions where they were required and attempted to assist me in my task in every way possible.

827 There are also some other unsatisfactory aspects about the involvement of Mr and Mrs Damaskos in this action. In her evidence, Mrs Damaskos informed me that she was involved in the discovery process. In 2019, I heard an application by the applicants for further and better disclosure which was opposed by the respondents. A request was made for disclosure of the financial statement or profit and loss account for the Victoria Square and Waymouth Street stores. This was opposed and Mrs Damaskos filed an affidavit of 12 August 2019 that such material was not available.651 I am satisfied that at the time, and as is apparent on the evidence, Mrs Damaskos was aware that the individual profit and loss statements could be obtained from BCFR quite readily. This attitude was reflected in the correspondence between solicitor preparatory to the hearings before the Court. As the argument proceeded, it became clear that these documents were available and could be provided. I have earlier discussed these documents in detail and in my opinion, they illuminate in many but not all ways, the misleading nature of the material of the statements made to Mr Emanuele on 1, 2 and 3 June 2016.

828 I am also satisfied that, despite the statements that she made in her evidence in chief, Mrs Damaskos never attempted to provide Mr Emanuele with a full list of costings pertaining to the Victoria Square store. I am satisfied that she was aware that costs were being incurred within the Funk Group that were not being allocated to individual stores and that were being recouped into Funk Coffee and Food in its capacity as a trustee of the A&J Damaskos Family Trust through management fees, charged to the various companies within the Funk stable of companies.

829 I have earlier rejected the evidence of Mrs Damaskos as to how Schedule B in each of its versions came to be included within the Victoria Square disclosure document. There are two versions. The first was emailed by Mrs Damaskos to

651 Exhibit A2, tab 39.

Mr Emanuele on 3 June 2016.652 Another version was emailed to Mr Emanuele by DC Strategy on 28 June 2016.653

830 I also accept the strident criticisms made of Mrs Damaskos by the applicant in their written submissions at paragraphs 45 and 46. I am satisfied that the operation of the Victoria Square outlet by Funk CBD benefited from expenses incurred in relation to the operation and management of the Funk network as a whole or from outlays made by Funk head office. I think the true position is set out in paragraph 9 of the affidavit of Mrs Damaskos sworn 19 September 2019.654

831 I turn to the claim made by the applicants and the relevant legal principles that have application thereto. This discussion involves the operation of the CCA and the ACL. I turn first to those matters.

832 I intend to only set out the relevant principles supported by, in the main, High Court authority. In that context, it is always worth recording that cases vary according to their peculiar facts. An example is the decision of the High Court in Travel Compensation Fund v Tambree & Ors.655 In decided cases, references are regularly made to [32] of the decision of Gleeson CJ, which provides as follows:

Misrepresentation will rarely be the sole cause of loss. If, in reliance on information, a person acts, or fails to act, in a certain manner, the loss or damage may flow directly from the act or omission, and only indirectly from the making of the representation. [footnote omitted]. Where the reliance involves undertaking a risk, and information is provided for the purpose of inducing such reliance, then if misleading or deceptive conduct takes the form of participating in providing false information, and the very risk against which protection is sought materialises, it is consistent with the purpose of the statute to treat the loss as resulting from the misleading conduct.

833 A close reading identifies that the Chief Justice was there dealing with two concepts. The first that a misrepresentation will rarely be the sole cause of a loss, and acting or failing to act in a particular manner in reliance upon a misrepresentation may lead to losses flowing from that act (or omission) and only indirectly from the representation.

834 Gleeson CJ then dealt with reliance involving the undertaking of a risk and information provided for the purposes of inducing such reliance. The context of that case was a decision by the underwriter to accept an underwriting risk of a travel agent who was permitted to participate in a travel compensation fund and be accepted as an underwriting risk based upon reliance by the underwriter upon what was a negligently prepared and a misleading audit report about the travel agency business. The underwriter relied upon the audit certificate and so undertook the risk of underwriting where the information provided by the audit led to the acceptance of that risk and that information was misleading. His Honour held that if in those circumstances, the risk against which the protection

652 Exhibit A2, vol 1, tab 41.653 Exhibit A2, tab 65.654 Exhibit A16, tab 6.655 (2005) 224 CLR 627.

of the audit certificate was sought then materialises, the loss suffered resulted from the misleading conduct.

835 Properly understood, it would not be in every circumstance that the provision of a misleading audit report will be actionable at the suit of third parties. In that case, the underwriter relied upon the certificate and so undertook the risk. The certificate was misleading, the risk materialised and loss was suffered. That loss resulted from the misleading conduct.

836 The purpose of this discussion is to explain that in many cases, principles may only be derived at the highest level and it is always necessary to keep those matters in mind when assessing the facts of the matter. In Tambree the respondents to the appeal argued that the conclusion reached obscured the circumstances in which the risk eventuated as being relevant to decision whether the respondent should be held liable for the losses. This was because the losses largely occurred through dealings between the agent and customers after participation in the travel compensation fund had been terminated. At the time, the agents were unlicensed and their actions were unlawful but characterising that trading as illegal was found by Austin J and by the NSW Court of Appeal to be irrelevant to the question whether the compensation fund suffered loss by its misleading conduct. It was not a question of whether or not the conduct of the auditors was a cause of the loss. Rather, the illegal trading by the agent would have been prevented if the auditors had acted properly and competently. At [45] – [46] Gummow and Hayne JJ said as follows:

It is now clear that there are cases in which the answer to a question of causation will differ according to the purpose for which the question is asked. As was recently emphasised in Allianz Australia Insurance Ltd v GSF Australia Pty Ltd, it is doubtful whether there is any “common sense” notion of causation which can provide a useful, still less universal, legal norm. There are, therefore, cases in which the answer to a question of causation will require examination of the purpose of a particular cause of action, or the nature and scope of the defendant's obligation in the particular circumstances.

In Allianz, McHugh J noted that considerations of legal policy may enter into the selection of those causative factors which are determinative of liability. However, to accept that proposition, as it should be, is not to adopt a quite different proposition that in any given case the ultimate issue is whether “the defendant ought to be held liable to pay damages for [the] harm [suffered]”. This approach to questions of causation taken by Ipp JA in Ruddock v Taylor was adopted by the Court of Appeal in the present case.

837 Kirby J delivered a separate judgment and at [54] – [58] where his Honour held as follows:

In the context of a claim, such as this, arising out of statutory provisions, it is self-evident that the starting point for charting the boundaries of contested issues of causation is a thorough examination of the facts and of the statute. In such matters, the duty of a court is not, as such, to give effect to common law notions but faithfully to carry into force the objects of the legislation, as understood from the language and structure of the statutory text.

To this extent, I agree with what has been written in this appeal by Callinan J. Specifically, I agree that the test for resolving contested questions of causation, applicable to claims based on legislation such as the Fair Trading Act, remains that stated by this Court in March v Stramare (E & M H) Pty Ltd. Relevantly, it is as explained in the passage from the reasons of Mason CJ in March, extracted by Callinan J. There is no occasion in this appeal to alter or re-express what was stated there.

It follows that the reasons of Gummow and Hayne JJ are correct in pointing out that the extent of the liability of the respondents to the Fund was to be ascertained by the application of the Fair Trading Act. Yet, as will often be the case, in charting the limits of such legal liability, both at common law and under such legislation, the outer bounds will be defined by similar notions of commonsense, practicality and reasonableness, as these concepts appeal to judges expressing the common law, and to Parliament enacting legislation such as the Fair Trading Act.

Values and policy judgments in issues of causation

Approach to issues of causation: The point of departure of my reasoning from that of my colleagues concerns any attempt to restate or qualify the approach to issues of causation explained by Mason CJ in March, by excluding from that approach the “second question” that his Honour identified as integral to such decisions. His Honour described this “second question” (“whether a defendant is in law responsible for damage which his or her negligence has played some part in producing”) as one to be answered in determining whether recovery was available in the particular case. It cannot be doubted that this is a policy question where value judgments have to be resolved. The contrary proposition is inconsistent with both earlier and later authority of this Court. Nothing in the Fair Trading Act suggests the need for a different approach in that statutory context.

The authority of this Court: There are many other remarks by judges of this Court that acknowledge explicitly that identifying the outer limits of legal recovery for loss or damage, in cases of this kind, cannot be explained solely by reference to the “but for” test of temporal relationships; nor to considerations of “commonsense” or other such verbal formulae. Thus in Wardley Australia Ltd v Western Australia, the joint reasons of four members of this Court analysed the limits of recovery under s 82 of the Trade Practices Act. They did so by reference to various considerations culminating in what is declared, in the circumstances, to be a matter of “justice” and “reasonableness”, “practical” and “fair” and “sensible”. Clearly, these are words connoting a value judgment of the kind identified in March. To say the least, they do not conjure up the image of a refined rule or precise principle of law.

838 Kirby J set out what his Honour considered to be the correct expression of the applicable principles at [61] – [63] as follows:

The correct expression of the applicable principle

This steady, frequently applied and unchallenged line of authority is now cast in doubt by unnecessary observations in this appeal criticising the references in the Court of Appeal to “value judgments”. Given that, in referring to “value judgments”, Sheller JA in that Court (and Ipp JA earlier in Ruddock v Taylor to which reference was there made) did no more than to use language repeatedly deployed by Justices of this Court, I consider that the criticism of them for doing so is unwarranted.

Moreover, the criticism represents an attempt to return this area of legal discourse to the sophistry that suggested that contested questions of causation (including in cases such as the present) can be resolved by the application of a legal formula or by an appeal to a

“legal principle”. In Australian law, we have progressed beyond such a masquerade to a more candid acknowledgment that some questions, presented for judicial decision, are not susceptible to such verbal formulae. They require more detailed explanations. They oblige reference by the judicial decision-maker to the factors (whether the terms of any applicable statute or the purposes of the relevant rules of the common law) that lead him or her to the conclusion that is reached. It seems that unrealistic presumptions, fictitious postulates and argument-closing “legal principles” may now be returning to vogue in Australia whereas, elsewhere in the common law, realism, a functional analysis and greater transparency in judicial reasoning represent the modern norms. If this is what is meant by a return to “strict legalism”, I respectfully decline to embrace it.

Although I do not agree with all of his reasoning, I certainly concur in Callinan J's remark that, in deciding cases such as the present, tribunals of fact cannot resort to “an invariable scientific formula”. They must draw on commonsense, experience, understanding, a multiplicity of community values and their own judgment. They should explain their reasoning “with candour” which “demands the acknowledgment … of the use of … common sense in determining causation [questions]”.

839 In Chappel v Hart,656 Gummow J accepted that decisions about the meaning of the outer boundary of recovery on questions of causation could not be reduced to a neat verbal formula. At [62] his Honour held:

… the “but for” test is not a comprehensive and exclusive criterion, and the results which are yielded by its application properly may be tempered by the making of value judgments and the infusion of policy considerations.

840 In Allianz Australia Insurance Ltd v GSF Australia Pty Ltd,657 McHugh J said:

Where several factors operate to bring about the injury to a plaintiff, selection of the relevant antecedent (contributing) factor as legally causative requires the making of a value judgment and, often enough, consideration of policy considerations. This is because the determination of a causal question always involves a normative decision.

841 McHugh J referred to the reasons of Gummow J in Chappel v Hart as authority for his decision in Allianz Australia, which relied upon the test enunciated by Mason CJ in March v E & M H Stramare Pty Ltd.658

842 As set out above in [58] of the decision of Kirby J in Travel Compensation Fund v Tambree, at least four members of the High Court in Wardley Australia v Western Australia addressed whether there were limits for recovery under s 82 of the Trade Practices Act 1974 by reference to expressions such as “a matter of justice”, “reasonableness”, “practical”, “fair”, and “sensible”. As was said by Kirby J at [58] these appear to be the very kinds of value judgments as contemplated by Mason CJ in March v Stramare when his Honour enunciated the second question for consideration.

843 This discussion emphasises the care that must be taken in respect of each aspect of a case relying upon an alleged breach of the ACL and the CCA. It is in 656 (1998) 195 CLR 232.657 (2005) 221 CLR 568 at [55].658 (1992) 175 CLR 514 at [533].

that background that I then turn to described the relevant principles applicable to an assessment of first, whether conduct is said to be misleading. In this discussion, I will deliberately not use the term “or deceptive”. Although I am aware of early discussion about whether or not these words add anything to the expression “misleading” those views appear not to have been maintained and the common view presently is that the words “or deceptive” add no further meaning to the expression misleading which, it is commonly understood creates a standard which requires a norm of conduct and the failure to observe that standard of conduct has consequences.

844 In that background, I now set out the general principles which have application in the case at bar:

845 In order for conduct to be misleading, it is necessary to undertake an objective analysis of the conduct in question and whether, the conduct is likely to have or has a tendency to have a misleading effect upon a person such that the person induced into error.659

846 It is always a question of fact for the Court to decide whether conduct is misleading and that question must be assessed in the whole of the background circumstances of the case by an assessment of the complete course of dealings between the parties. That assessment is also made objectively.660

847 The question for the Court’s consideration is whether the conduct is misleading when viewed in the whole of the background of objective facts and where it does lead the affected person into error.661 The position is same for a misleading document which must be considered in the context of the whole of the evidence which will require an examination of the circumstances in which the document was brought into effect and was communicated.

848 It is necessary for the court to assess, in the objective background circumstances about the effect of the conduct on a person in the position of Mr Emanuele in the background knowledge of each of the parties about Mr Emanuele and by reference to the conduct itself.

849 Conduct will be misleading if there is a real chance that it is likely to mislead a person and that likelihood is not required to be measured on the balance of probabilities.662

850 There must be reliance upon the misleading conduct and the question of whether there has been reliance is a matter for the determination of the Court on an objective basis having regard to the whole of the evidence about the effect of

659 Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592.660 Ibid; Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at [102].661 Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357 at

[14] – [15].662 Global Sportsmen Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCA 82 at [87].

the representation. It is necessary for the Court to be satisfied on the balance of probabilities that there has been reliance.663

851 As a matter of common sense, where a representation has been made which is misleading and it is likely to create a particular impression in the mind of the recipient and it is apparently objectively intended to have that effect, a Court will readily draw the inference that there has been reliance. This will particularly be the case where, as here, there is benefit to the respondents as representors in making such an impression upon the representee, Mr Emanuele.664

852 An inference of inducement is rebuttable and the onus is upon the representor to rebut that inference.

853 The misleading conduct must play some part in the inducement of the recipient representee to enter into the contract. It thereby becomes a real inducement or one of those real inducements to enter into a contract which, in the end, causes loss.

854 The drawing of inferences is a common-sense exercise such that, it will be made where common sense demands the conclusion of the inference of reliance.

855 The Court must examine the whole of the course of conduct and address the question whether the representee has been induced by the conduct of the representation and having been so induced has acted upon that inducement to its detriment.

856 In that background, it is first necessary to consider the Victoria Square Financial Information Document and its operative effect as one of the primary pieces of evidence together with the disclosure document on these issues.

857 It is not in contest between the parties that the Financial Information document did not include expenses such as interest, depreciation, accountancy and consultancy fees, bank charges, motor vehicle expenses and general expenses. I am satisfied on the evidence that it was necessary for these expenses to be incurred, by any franchisee, in operating the business. I am also satisfied that these expenses were incurred in the operation of the Victoria Square business. They were paid for by Funk CBD as the operator of the store and such costs were incurred through, inter alia, Funk Coffee and Food providing services to that store as well as other company stores. Earlier in these reasons, I have at length explained the concept of the management fee paid in respect of services. I am also satisfied on the evidence that in her affidavit of 19 September 2019 at [9], Mrs Damaskos said that these expenses were incurred but were not allocated to the Victoria Square store.

858 Although Mrs Damaskos did not make admissions on these topics in her examination in chief and cross-examination and notwithstanding the content of

663 Barnes v Forty Two International Pty Ltd [2014] FCAFC 152.664 Australian Competition & Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54 at [55].

her affidavit of 19 September 2019,665 Mr Damaskos said in his evidence that various expenses such as depreciation, interest, accounting fees, office administration and the like were incurred by the Funk Group in connection with the operation of the Victoria Square store operated by Funk CBD. Mr Damaskos said these were normally expenses for a franchisee to incur in operating the business. He knew this to be the case at the time that the Victoria Square financial information was provided to Mr Emanuele and he accepted that these expenses were operating expenses. He thought it was the responsibility of a prospective franchisee to do sufficient due diligence to work all of that out.

859 This creates an obvious evidential conundrum for the respondents. Only the respondents knew the true position in relation to the incurring of these costs and their discharge within the Funk Group of companies. I am satisfied that no amount of due diligence could, in a reasonable time and at a reasonable cost have identified all of these expenses that were known to have been incurred by those preparing and then putting forward that financial information. I am satisfied that the Victoria Square financial information did, to the knowledge of Mrs Damaskos and Mr Damaskos and so Funk CBD, Funk Coffee and Food and Funk Franchise, incur other expenses paid for within the group of companies in the operation of the business.

860 Mr Damaskos agreed that Mr Emanuele had not been given the most basic of information about the performance of the Victoria Square store which was information that was requested by Mr Emanuele in his email of 31 May 2016 after his conference with a third accountant, Mr Sun. I am satisfied that on their own admission, Mr Damaskos and Mrs Damaskos behaved in a misleading way by refusing to provide to the applicants the financial information requested and which was available upon request, and at the same time to provide the applicant with sufficient information to enable the applicants to make an informed decision. Based upon their evidence which I have canvassed. They did so knowingly and their conduct was unconscionable. It was in contravention of the good faith obligation under the Code because it was intended to and did deflect the applicant Gabjet from making any further enquiries or receive the specific information that was both so readily available and which I accept would have had such a profound effect upon the applicant, Mr Emanuele.

861 That view is not changed by the content of the Victoria Square disclosure document and the inclusion of indicative costs payable by a franchisee to third parties. The range of costs are included in such a broad spectrum and width that they do not inform the prospective franchisee and they are almost meaningless because it fails to connect or to enable the reader to discern the misleading nature of the content of the Financial Information for the Victoria Square store. I am also satisfied that in order to cure the effect of the misleading conduct as disclosed within the financial information, it was necessary for the respondents to have provided to the applicants copies of the departmental compilation report for the separate premises so that a proper assessment could be made of the true net 665 Exhibit A16, tab 6.

profit position and then to have informed Mr Emanuele that other costs and expenses were incurred that were attributable to the operation of the Victoria Square store. Absent the provision of that information, there needed to be a substantial and clear qualification to the financial information documents. None was included.

862 The same conclusion may be reached upon an assessment of the whole of the background material before the Court about a number of the major items within the financial information. I have earlier recounted that the gross profit percentage for the 2014 period (eight months) was 67.8% and therefore the percentage of costs of goods sold was 32.2%. For the full financial year of 2015 it was 68.6% and 31.4% and for the period of the 2016 trading, it was 69.9% and 30.1%. In the period prior to the applicant taking control of the Victoria Square store, it was operated first by the respondents, then by Kindred, then again by the respondents and finally in 2016 the applicants commenced operation. The store was purchased by Kindred based upon financial information presented in a form not dissimilar to that which was given to Mr Emanuele. Further information was provided at the insistence of the directors of Kindred after their bank refused to proceed to consider any finance application unless it was provided. This was after the respondents had refused to provide on the same basis as communicated to Mr Emanuele.

863 It is also not in dispute that in the period in which Kindred operated the store, its gross turnover was increased; it was also increased at the time that the applicant operated the store. Neither Gabjet or Kindred were able to achieve the costs of goods sold margins as low as those represented in the Victoria Square financial information. Prior to the sale of the Victoria Square store to Kindred Group, the Funk Group could not achieve a cost of goods sold percentage lower than 35%. It is inexplicable that, in the same circumstances and under the same conditions, it could achieve in three different financial periods a cost of goods sold percentage of 32.2%, 31.4% and 30.1%. A clear inference arises that the costs of goods sold figures in the financial information are materially understated. In his evidence, Mr Opie said that a very small change in that cost of goods sold percentage would have a significant affect upon profitability. The information provided to Kindred was not comparable to the information provided to Gabjet in relation to the Victoria Square premises. Having regard to its method of operation which, on the evidence, did not change, and in light of the seamless transition between the respondents and Gabjet, this difference cannot reasonably be explained. An inference clearly arises that the total amount of the costs of goods sold is not being properly disclosed and more pertinently, was not accurately declared.

864 I have earlier made findings about the unsatisfactory nature of the information provided by the respondents about the wages representations made within the financial information. The principal attack of Kindred was, initially at least, in relation to its inability to achieve overall wages costs consistent with the information provided by the respondents. It is known that Kindred took every

step available to it to reduce its overhead costs; namely it did not pay directors’ salaries and reduced overhead costs to a minimum. It was never able to operate a store of the size of Victoria Square on an acceptably profitable basis. The applicant Gabjet had the same experience. I accept that an evidentiary inference arises that the information provided by the respondents in the financial information concerning salaries and wages is inaccurate. That information was generated by Mrs Damaskos and Mr Damaskos was aware of its detail. I am satisfied from the evidence, on the basis that I have earlier set out, that Mrs Damaskos was aware of the inaccuracies and therefore misleading nature of that material.

865 I have earlier assessed the evidence of Mr Crase and Mr Opie. Notwithstanding that I found them both to be highly competent and helpful witnesses, I was only able to obtain assistance from the evidence of Mr Crase because I am satisfied that the instructions given to Mr Opie were deficient and a large number of the assumptions that he was asked to make were unsustainable. I accept the evidence of Mr Crase that the Victoria Square store was incapable of being a viable business for a franchisee to operate. I accept his evidence about the additional expenses that were reasonably necessary to be incurred by a franchisee and therefore his opinions about the value of the business.

866 In submissions, the applicant made much of the similarities between the evidence given by and on behalf of Kindred and the evidence given about the operations of Gabjet and the Victoria Square store. The approach that I have taken is that this evidence sits in the background of the decisions that I am required to make. I am satisfied that there are significant differences between the operations of Kindred and the operations of Gabjet. My task is not to make a comparison of them. More pertinently, I am satisfied that Kindred with its experienced directors and staff suffered the same difficulties as was suffered by Gabjet in the operation of the Victoria Square store. Very early in the operation of that store, Kindred were approached to take over another franchise at Angas Street, some 100 metres east of the Victoria Square store.

867 The importance of that evidence is that the Damaskoses did the same thing to Mr Emanuele. He entered into the agreement to take over the store and then soon after was approached to identify whether he had any interest in the Waymouth Street store. The Waymouth Street store was historically a loss-making venture and it had no value. The Angas Street store was a “green fields” store with no history and no comparison could be made to the Waymouth Street store. The importance of the evidence about Kindred is the identity of the experiences of both operators when compared to the financial information provided by the respondents.

868 I have not accepted the assertions of the respondents that the business was mismanaged by Gabjet (or by Kindred) and therefore I would not accept the respondents’ contention that but for that mismanagement, the business was viable. I have earlier recounted that in my opinion, when an objective assessment

is made of all of the circumstances, the decision by Mr Emanuele to appoint Ms Gordon as the manager of Victoria Square premises was not only the correct decision but his choice was an example of his very sound business judgment.

869 Some explanation is required. Throughout the course of the evidence and the trial, I had the opportunity to observe Mr Emanuele. In the context of a café business he was very obviously not a “front of house” person who would be at the vanguard of customer service. He understood his own limitations and showed real commercial wisdom to appoint Ms Gordon as the store manager. I have earlier discussed the evidence about the capacity of Ms Gordon.666 Ms Gordon has enjoyed a successful career as a store manager for the Funk Group despite the doubts expressed by other staff of that Group.

870 For the same reasons, I am satisfied that the description of a net profit ‘figure’ for each of the three financial periods disclosed on the financial information document is not supported in the evidence. As Mr Opie said, the description of ‘net profit’ is inaccurate because it is a description of EBITDA. I am also satisfied that the gross profit figure is incorrect because I am satisfied that the cost of goods sold percentages amounts are unsustainable even though it is not possible to say what were the correct figures. Earlier in these reasons, I explained that if, for example, a comparison is made to the standalone departmental profit and loss statements for the Victoria Square prepared by BCFR, the net profit is about $10,000 less than was shown for the 2014 year but most importantly, about $37,000 less than was shown for 2015 year. If there was an application of a deduction from that figure in, say, the 2015 year of 7% of gross turnover (the franchise and marketing fees), then the profit figure would be in the order of about $29,000. If the multiplier used by Mr Versace was applied to that figure, the business could only have been worth around $90,000. This was little more than the written down value of the plant and equipment.

871 I am also satisfied that the representations of profit as complained of by the applicants were made by the respondents within the Victoria Square financial information and were not corrected up until the time that Gabjet executed the Victoria Square sale of business agreement. Those representations were misleading for the reasons explained and there has been a contravention of s 18 of the ACL.

872 I am also satisfied for the same reasons that the business was not capable of being profitable as well as providing a salary for a franchisee manager. Expenses were understated, costs of goods sold were understated and it was not reasonably possible for a franchise to derive the substantial profit together with the salary as a franchisee manager.

873 I was not particularly assisted by Mr Emanuele’s evidence that if he had seen the separate BCFR figures he would not have proceeded to purchase Victoria Square. The question is whether or not there has been reliance upon the

666 See [645], [646], [647] and [648] of this judgment.

financial information. That is a question of fact for my determination. I am satisfied that there has been reliance by Mr Emanuele upon the financial information that was provided to him. There was no qualification upon those figures as being draft figures and they were annexed to the Victoria Square sale of business agreement and identified within it as the financial statements for the business.667 At the same time, it was known that the standalone departmental profit and loss statements were readily available from BCFR and the information contained thereon was quite different. I have discussed those differences earlier in these reasons. I am satisfied that in reaching his decision to enter into the Victoria Square sale of business agreement, Mr Emanuele relied upon that information.

874 In the evidence, there was significant controversy about whether or not the standalone departmental profit and loss statements were provided applicant. It is not necessary for me to make a finding on that matter. The evidence is that on 31 May 2016, Mr Emanuele, at the behest of an accountant, Mr Sun, asked for standalone profit and loss statements, BAS, and tax returns. The request was communicated by Mr Versace to Mrs Damaskos and the response was that as it was a combined reporting entity the separate documents could not be provided. Mr Emanuele accepted this statement which was wrong and Mrs Damaskos knew that it was wrong. The same request had been made only a couple of years earlier by Kindred whose financier would not proceed until such time as standalone profit and loss accounts for the Victoria Square business had been provided. They were requested to be prepared by BCFR and were provided within a day or two. There was no evidence that the situation was any different at the time that Mr Emanuele asked for the same documents. Knowing that she could provide those documents upon request to BCFR, Mrs Damaskos instead untruthfully informed Mr Emanuele that they could not be provided.

875 Mrs Damaskos, in her capacity as a director, with all of her financial background and her skills as a qualified accountant knew that from before 20 May 2016 and at all times thereafter, expenses were incurred by Funk CBD for interest and depreciation that were not included in the Victoria Square financial information. If the individual profit and loss statements for the Victoria Square store were obtained from BCFR, they would have included an expense for interest and depreciation.

876 I accept as proved that within two days of the response on 1 June 2016 refusing the request for separate departmental profit and loss statements, that Mr and Mrs Damaskos signed off on the financial statement for Funk CBD. These were the final version of the documents that had earlier been prepared by the accountant and circulated. Mr and Mrs Damaskos accepted in their evidence that there had been a number of drafts of these documents prepared by the accountants and submitted to them for their consideration. It was the Damaskoses who approved the final version of these accounts prepared by the accountants. They both knew that BCFR could provide departmental profit and loss accounts 667 Exhibit A2, tab 4, p 89.

on request. They did not provide them to Mr Emanuele on request even though it could be done with no difficulty. I do not accept as credible the evidence of Mrs Damaskos that she thought she was only addressing the specific request of Mr Emanuele. Mr Damaskos thought that an individual profit and loss account for the Victoria Square store would be available. It was available from 3 June 2016 and prior to 17 June 2016, being the day of execution of the sale of business agreement.

877 Therefore, each of the Funk companies of which the Damaskoses were the directors, as well as the Damaskoses were aware that as at and prior to the time of the execution of the Victoria Square sale of business agreement, individual profit and loss returns could easily be prepared for the Victoria Square business, the financial position of the business shown in them was very different to that shown in the Victoria Square financial information and that a deliberate decision was made not to provide that material to Mr Emanuele. That conduct was misleading in the overall context of the objective facts as I have found them. I am satisfied that the Damaskoses were aware from May 2016 up until 17 June 2016 that the financial information provided to Mr Emanuele was inaccurate for failure to identify the cost of depreciation, the cost of interest, accountancy costs, general expenses and other expenses incurred or likely to have been incurred by Funk CBD connected with the operation of the Victoria Square business. I am satisfied that the conduct of the Damaskoses and therefore their companies was also misleading for that reason.

878 Mr Opie said that the financial information at the net profit level represented EBITDA. Both Mr Crase and Mr Opie accepted that it is common for interest and depreciation expenses to be excluded from financial information provided to prospective purchasers. The reason is that this is an expense that may be unique to the vendor of the business and the prospective purchaser of the business may be in a quite different financial situation. Each of Mr Crase and Mr Opie said that the exclusion of those two costs should be specifically identified in financial information by the descriptive term EBITDA or that it is otherwise noted. By this approach, the user and reader of the document properly understands what the financial information actually represents. It is not a calculation of net profit, that other expenses are relevant and must be considered for inclusion and that the profitability and so the value of the business cannot be calculated except after adjustments.

879 As a result, the Victoria Square financial information was not reliable, truthful or accurate. Mr Emanuele accepted the truth and accuracy of the information after obtaining advice from three accountants. Mr Emanuele was never told of other expenses that were excluded.

880 Mr Versace said that at the meeting on 27 May 2016, there may have been some discussion about accountancy fees and interest expenses, but he did not mention the cost of depreciation. I challenged him on that evidence and he then conceded that those items might not have been discussed at all and his memory

may not be reliable. I obtained little or no assistance from the evidence of Mr Versace and I have found that those matters were not discussed at the meeting on 27 May 2016 and no such proposition was ever put to Mr Emanuele in cross examination. Further, I have obtained no assistance from the evidence of Mr Opie that group expenses might have a particular meaning because, although I accept that that might be the case in some particular circumstances, that is not the case in these circumstances as it was commonly understood to be limited to laundry and cleaning expenses. This was another example of the failure to properly instruct Mr Opie. I am satisfied that if he had been properly instructed, his opinion would have been quite different.

881 Also included within the financial information was a representation about an amount that would be available to an owner operator after adding back a manager’s cost and then deducting 7% for franchise and marketing fees. The figure for 2014 was $81,313.78, the figure for 2015 was $126,300.77 and the first two quarters for 2016 year was $64,274.22. I have earlier criticised the process of adding back the managers cost as a credit.

882 As a matter of common sense, it is illogical to add back the managers salary. This was the evidence of Mr Crase and no contradictory evidence was led by Mr Opie on that topic. There is no evidence that, for example, at any particular time, the manager was paid for example in the 2015 year, a salary of $60,828.99. The deduction of that figure artificially reduced the wages cost. There is then a deduction of 7% of the franchise and marketing fees which is calculated according to the turnover, for example in the 2015 year of $748,000. The second logical deficiency in the approach is that for Gabjet no proper salary was paid to Mr Emanuele or to his wife for the work that they did as manager or overseeing the work of the manager, Ms Gordon. There is an understatement of the costs incurred by Gabjet in its conduct of the store.

883 Clause 10 of the Victoria Square sale of business agreement states that Gabjet may rely upon the financial information in the Victoria Square financial information document, as opposed to, for example, the Victoria Square disclosure document.

884 Within the Victoria Square disclosure document there is a described range of indicative costs about the operation of the Victoria Square store such that, it is said, Mr Emanuele could not have been misled by the Victoria Square financial information. Implicitly, it is suggested that there is an inconsistency between or at least the difference between what is contained in the financial information and what is contained within the Victoria Square disclosure document. I think that is a correct proposition however that cannot, in these circumstances, assist the respondents. As set out above, clause 10 of the Victoria Square sale and purchase agreement records that Gabjet may rely upon the financial information. That recommendation and statement was not qualified in any way.

885 Mr Emanuele readily conceded that he was aware that there were other expenses to be incurred in the operation of the business. He gave two examples of accounting and bookkeeping expenses not disclosed in the financial information. I do not accept that there was any discussion between he and any of the respondents about those topics. It is clear that the disclosure document annexed to the Victoria Square sale of business agreement had detail within it as Mr Emanuele had emailed it to the accountant, Mr Rundle, seeking his thoughts. Mr Rundle did not raise any issues about the content of these documents. He expected that any financial information provided would include all the relevant expenses that a prospective franchisee and purchaser could reasonably expect to incur. It should be complete. That is the basis upon which he proceeded.

886 The chart of indicative costs within the disclosure document is very broadly based. It states a range that is so broad as to be almost meaningless because it fails to connect or to enable the reader to discern the misleading nature of the content of the Financial Information for the Victoria Square store. I have addressed these matters earlier. There is no particularity about it. It relates to costs payable to a third party and does not include significant expenses such as depreciation, motor vehicle expenses or general operating expenses which are charged internally. Take as an example any of the financial expenses. The range for accounting fees is $2,500 to $7,000, and for staff expenses, the range of wages and salaries is $100,000 to $450,000. On property expenses, the range of rent is $45,000 to $200,000, and in running expenses, electricity ranges between $7,000 and $50,000. These are all estimates of payments to third parties and there is a note at page 30 of the document which states as follows:668

Please note that the range of indicative costs provided in this Schedule G are: (a) annual charges and (b) indicative only and are subject to fluctuations in the Consumer Price Index (CPI) and may vary during the term of the franchise agreement.

Staff expenses will largely vary depending on the number of the fulltime/part-time employees the franchisee chooses to employ and will also largely depend on the geographical location of the relevant franchisee’s business, size of its operations, level of expertise and experience of the individual employee.

Please note

The estimates of payments to third parties contained in this Schedule G are based upon the franchisor’s past experience in the Funk Coffee and Food business and its dealings with the existing franchisee’s in the network. The franchisor has made its reasonable endeavours to ensure the accuracy of these figures. However, they should be used for guidance purposes only and should not be solely relied upon as your forecast to operate a Funk Coffee and Food franchise in your area. Please consult your accountant for further professional financial advice.

Your expenditure and requirements for third party payments will vary largely depending on the relative size of the premises, success, location and performance of your Funk Coffee and Food franchise.

668 Exhibit A2, vol 1, tab 1, p 30.

887 One primary difficulty with the disclosure document in light of the financial information document is that it is known that in the operation of the Victoria Square store, there was a level of expenses incurred by Funk CBD (and within the Funk Group) that are not disclosed in the financial information and which were known by Funk CBD and by Mr and Mrs Damaskos to have been incurred. They were deliberately not included within the Victoria Square financial information document. That is a failure to make full disclosure and it is misleading. Another difficulty is that the breadth of the material contained within the disclosure document, especially in relation to the ranges that are suggested, mean that the information is almost meaningless because it fails to connect or to enable the reader to discern the misleading nature of the content of the Financial Information for the Victoria Square store. Further, the qualification notes to the document suggest that no particular reliance could be placed upon the document because in the end, the expenses that are incurred are a matter for the franchisee.

888 I do not accept the contention that this document gave Mr Emanuele a proper appreciation of the additional expenses that were reasonably necessary for Gabjet as franchisee to incur in the operation of the business, or the financial effect of the incurring of those business would have upon the business itself. I am satisfied on the evidence that as a result of the misleading conduct of the respondents, Mr Emanuele, and Gabjet could not appreciate the financial effect and so the impact of those matters, did not understand them, and the misleading effect of the financial information was not in any way assuaged by the provision of that document.

889 Mrs and Mr Damaskos accepted that the Victoria Square financial information contained no qualification that regard must be had to the incurring of other expenses needed to be incurred by a franchisee where the financial information was provided in order to demonstrate viability, profitability, and prospective benefits for a franchisee. It was intended to induce a franchisee to rely upon it. Both Mr Crase and Mr Opie agreed in their evidence, that it was necessary for the financial information to contain a clear qualification that other expenses would reasonably need to be incurred by a franchisee and should be taken into account in assessing viability, profitability, benefit and value. As a matter of common sense and experience, where it is necessary to include such a qualification within the financial information, it is obvious that it is required to be read with the financial information so that the financial information itself is not misleading. In this case, any qualifying information was required to be contained within the disclosure document which, I have demonstrated above, was heavily qualified and which was so general and broad as to be of little assistance.

890 I am satisfied that the Victoria Square financial information provided by the respondents to Mr Emanuele overstated the profitability and the viability of the Victoria Square business, understated expenses such as wages, did not state expenses which were incurred but paid for within the Funk Group and that this financial information was known by the Damaskoses and each of the companies

within the Funk Group. The settlement on the sale and purchase of the Victoria Square premises occurred on 22 July 2016.669 At settlement, Gabjet paid the purchase price of $410,000 plus $30,000 franchise fees, being $440,000 in total. It commenced to operate the store from that day. There was some differences between the parties about whether or not Mr Emanuele involved himself in the operation of the business from that date. A suggestion was made that he immediately appointed Ms Gordon as the manager for the Victoria Square store. I have earlier found that the contentions of the Funk Group about that topic are not correct. I am satisfied that Mr Emanuele was a day to day on-site manager from the time of settlement to at least until about October 2016. It may well have been later.670

891 Very soon afterward, Mr Damaskos approached Mr Emanuele and enquired of him about whether he would be interested in purchasing another store, namely Waymouth Street, or North Adelaide. The evidence of Mr Damaskos was that he was approached by Mr Emanuele about this. I have earlier recited the doubts I have about the accuracy and truthfulness of the evidence given by Mr Damaskos, although I considered him to be more truthful witness than Mrs Damaskos. However, I consider there are a number of indications that tend to the correctness of the evidence given by Mr Emanuele when assessed upon an objective basis.

892 When proper account is taken of the financial statements connected with the operation of the Waymouth Street store, it is quite apparent that the store was incurring trade losses, or alternatively, was not making any profit and that it had no value at all. It may be described as a wasting asset of the Funk Group. Accepting that franchisors are always keen to install franchisees in their franchise stores, the imperative for doing so, was far greater here than might of otherwise have been the case. In 2012, the store had been re-purchased from the company of Mr Marinos, Boss 260 and was operated by the Funk Group from then on. There had been a distinct change in the level of tenancies in the immediate vicinity of the Waymouth Street store. The ATO had moved to a new building in Franklin Street and WorkCover had moved to a new premises and so there were two very large unoccupied buildings in the street. Much of the balance of the east end of Waymouth Street to King William Street was, on the northern side, occupied by restaurants and coffee shops in competition with the Funk Group. Therefore, the Funk Group store required localised custom. There were other coffee shops to the west of the store on the northern side of Waymouth Street (as was the Funk Coffee and Food store) and they were also in competition with the Funk store. It was a loss-making venture. Mr Damaskos would have been very keen to move it on. He equally would have been keen to move on the North Adelaide store of the Funk Group. Mr Emanuele said that he was offered both the Waymouth Street store and the North Adelaide Street store. Very soon after that offer was made, the Funk Group closed the North Adelaide store as a loss-making venture.

669 Exhibit A2, vol 1, tab 9, p 145.670 T1373.25; T168.22-169.4.

893 I consider that on the balance of probabilities the greater likelihood is that it was Mr Damaskos who approached Mr Emanuele. He then provided to Mr Emanuele the Waymouth Street business profile.671 That financial information was in the same form as for Victoria Square. However, there were significant differences in its content. It discloses that for the first three quarters of the 2016 financial year, before interest, depreciation and amortisation, the store had made a loss of $39,255.23. It could only achieve an adjusted profit if there was an add back of a manager’s cost of $44,235.75. Therefore, for those three quarters, an owner operator could have expected to achieve $4,980.52. For the fourth quarter of the 2016 year, the net profit was $11,241.97, a managers cost was allowed at $15,335.05, and the adjustment for the owner operator was $26,577.02. However, if the net profit figures were combined, the loss would be in the order of $28,000 on a net profit basis. If Mr Emanuele was to take over the store, it would be necessary to employ a manager and so there is the same level of artificiality and error in adding back a managers cost.

894 For the full 2016 financial year, the loss on a net profit basis was $28,013.26 ($39,255.23 - $11,241.97). This disclosed loss on this financial information document was incurred by the Funk Group in its operation of the Waymouth Street store. It is therefore another loss-making venture within the stable of stores owned by the Funk Group. I accept that Mr Damaskos had a favourable view of Mr Emanuele as a businessman at that time. He thought that the Victoria Square store continued to be a great flagship store for the Funk Group. However, I am also satisfied that having regard to the loss-making history of the Waymouth Street store, that Mr and Mrs Damaskos wanted to shift off the burden of that store to a purchaser as soon as possible. I am unable to accept the evidence of Mr Damaskos that he told Mr Emanuele to take things slowly. In his email of 12 September 2017,672 Mr Damaskos agreed that it was a quick settlement. The Form 2 for the Waymouth Street store was signed on 7 March 2017, and on the 29 March 2017, a franchise agreement for the Waymouth Street store was entered into with Jetgab and Mr Emanuele as a licensor. The licence to occupy was executed on 29 March 2017. I am not satisfied that the financial information document, and the other material contained within the relevant exchanges between the applicants and the respondents in Waymouth Street discloses the same level of misleading conduct on the part of the Funk Group. Mr Emanuele and Jetgab paid $225,000 for the Waymouth Street store as well as a $30,000 franchise fee. I am satisfied that any reasonable reading of the financial information provided for Waymouth Street discloses that it is a loss-making business and that on any view, significant research and enquiry would need to be made as to why any amount would have been paid for the value of the business. During evidence, I obtained the clear understanding it was a business that, in one sense, the Funk Group would have been pleased to be rid of at any price.

671 Exhibit A2, vol 4, tab 85.672 Exhibit A2, vol 5, tab 108.

895 My adverse views about this transaction are only deepened when I have reviewed the evidence of the decision-making process of Mr Emanuele about the Waymouth Street store. I am satisfied that he did proceed too quickly, that his review of the information about the store was only perfunctory, and that he made his assessment about the store in the context that he thought he could use some of the resources of that store to assist in the operation of the Victoria Square store and that he could supplement the staff at the Victoria Square store as and when required from the Waymouth Street store. In summary, I am unable to make any finding of misleading conduct, or breach of the Competition and Consumer (industry codes-Franchising Regulations) or on any other basis in circumstances of when a purchaser is informed that the business offered for sale is loss making, and the purchaser has agreed to pay $225,000 for that business. I accept the criticisms made by Mr Emanuele and Jetgab about the financial information. Properly assessed, and having regard to the report of Mr Crase, the losses sustained at the store are significant however, the financial information itself discloses a significant loss being incurred on an annual basis. The disclosure of that loss in those circumstances, notwithstanding the absence of information within the provided financial information concerning Waymouth Street, does not, in my opinion, amount to misleading conduct.

Accessorial Liability896 The applicants contend that if Funk Franchise or Funk CBD, or both of

them, did not directly contravene s 18 of the ACL, connected with the Victoria Square financial representation, then each of them were involved with the contravention of that section. They also contend that Mr and Mrs Damaskos were involved in the contraventions of one, or other, or both of them for s 75 B of the CCA. That section provides as follows:

75B Interpretation

(1) A reference in this Part to a person involved in a contravention of a provision of Part IV or IVB, or of section 55B, subsection 56BN(1), 56BO(1), 56BU(1) or 56CC(1), section 56CD, 60C, 60K or 92 or a civil penalty provision of the consumer data rules, shall be read as a reference to a person who:

(a) has aided, abetted, counselled or procured the contravention;

(b) has induced, whether by threats or promises or otherwise, the contravention;

(c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d) has conspired with others to effect the contravention.

(2) In this Part, unless the contrary intention appears:

(a) a reference to the Court in relation to a matter is a reference to any court having jurisdiction in the matter;

(b) a reference to the Federal Court is a reference to the Federal Court of Australia; and

(c) a reference to a judgment is a reference to a judgment, decree or order, whether final or interlocutory.

897 It is well settled that in order for there to be liability under s 75B CCA, it is necessary for the person liable to intentionally participate in a breach and therefore that person must have knowledge of the essential matters which go to make up that breach. These are principles derived from the criminal law and the requirements in relation to proof of them are the same.

898 Section 75B(1)(c) also creates a liability for a person who is knowingly concerned in a contravention of the CCA. Similar to aiding and abetting, for that person to be guilty of that contravention, the person must have knowledge of the essential facts constituting the contravention. To that extent, the requirements about each of them are closely related and lead generally to the same enquiries.

899 In my discussion of the evidence, I expressed the view that Mr and Mrs Damaskos were intrinsically involved in the preparation of the Victoria Square financial information. Mrs Damaskos did the majority of the work for the preparation of that material but Mr Damaskos knew of its content. Each of them knew that this document was annexed to the Victoria Square Sale of Business Agreement and each of them willingly stood by the material contained within those documents.

900 I have already found that the Victoria Square financial information document is misleading. It’s references to descriptions of net profit and amounts available to an owner operator, based on that net profit figure, are misleading. They were expressed in that way but were only a description of EBITDA and that having regard to the evidence before the Court, a number of the entries within the document are inaccurate. There is no explanation of how the Funk Group could have achieved the reported cost of goods sold figure over the three financial periods. The evidence satisfies me that there were a number of expenses that were incurred either at head office level or by Funk Coffee and Food, Funk Franchise, or Funk CBD, that are not reflected in that document.

901 I am satisfied that each of Mr and Mrs Damaskos were aware of the inaccuracies of the financial information, of the provision of the document to Mr Emanuele and that he would likely be induced by that financial information to enter into the Victoria Square transaction. This was confirmed by the annexation of that document to the Victoria Square Sale of Business Agreement. They were aware that the net profit figure as described is not truly net profit but EBITDA as I have described and there was a failure to properly disclose that further expenses were incurred in the operation of the businesses. These were expenses that were reasonably necessary to be incurred by a franchisee operating the business.

902 Mrs Damaskos took the role of the Director who was primarily responsible for the recording of all financial information, the keeping of the books of the various companies, the allocation of costs and income, the charging of maintenance fees and the preparation of final accounts. I am satisfied that she

was fully aware of the deficiencies within the financial information from the time that they were prepared.

903 Even though Mr Damaskos did not have an intense involvement in the accounts side of the business, which he left to Mrs Damaskos, he was aware of the financial information being prepared and delivered to Mr Emanuele and he was aware that such information was delivered to a prospective franchisee. He was also aware that a number of expenses incurred by the Funk Group in relation to the Victoria Square business were not included within that information.673

904 I am also satisfied that the knowledge of Mr and Mrs Damaskos was the knowledge of Funk Franchise, Funk CBD, and, it must follow Funk Coffee and Food. The knowledge of Mr and Mrs Damaskos is inseparable from the knowledge of Funk Franchise and Funk CBD. Both of those companies stand in the same position as Mr and Mrs Damaskos on the question of accessorial liability. There was no serious challenge to the consequence of a finding against Mr and Mrs Damaskos on the topic of accessorial liability.

Causation and Loss905 Earlier in these reasons I have set out in s 236 of the ACL. I need only

emphasise that the claimant person must suffer loss or damage because of the conduct of another person which contravenes the act. If that is proved to my satisfaction, on the balance of probabilities, then the claimant person may then recover the amount of the damage or the loss by an action against the person involved in the contravention. There is an obvious difference between the wording of s 236 ACL and s 82 CCA. The preamble of s 82(1) CCA reads:

82 Actions for damages

(1) A person who suffers loss or damage by conduct of another person that was done in contravention of:

(a) a provision of Part IV or IVB; or

(b) section 55B, 60C or 60K; or

(c) subsection 56BN(1), 56BO(1), 56BU(1) or 56CC(1) or section 56CD; or

(d) a civil penalty provision of the consumer data rules;

may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

(2) An action under subsection (1) may be commenced at any time within 6 years after the day on which the cause of action that relates to the conduct accrued.

No adverse costs orders

673 T1122.25-1123.12.

(3) A person who brings an action under subsection (1) in relation to a contravention of a provision of Part IV may at any time during proceedings on the matter seek an order under subsection (4) from the court hearing, or that will hear, the matter.

(4) The court may order that the applicant is not liable for the costs of any respondent to the proceedings, regardless of the outcome or likely outcome of the proceedings.

(5) The court may only make an order under subsection (4) if the court is satisfied that:

(a) the action raises a reasonable issue for trial; and

(b) the action raises an issue that is not only significant for the applicant, but may also be significant for other persons or groups of persons; and

(c) the disparity between the financial position of the applicant and the financial position of the respondent or respondents is such that the possibility of a costs order that does not favour the applicant might deter the applicant from pursuing the action.

(6) The court may satisfy itself of the matters in subsection (5) by having regard only to the documents filed with the court in the proceedings.

(7) A person who appeals a decision of the court under subsection (4) is liable for any costs in relation to the appeal.

906 Under section 82(1): “A person who suffers loss or damage by conduct of another person that was done in contravention of … may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.” A body of common law authority has developed in and around the use of the word “by”. That expression was not taken up in s 236 of the ACL which uses instead the expression “…because of…” In the absence of the authority to the contrary, I proceed on the basis that there is no material difference between the two expressions, although the expression ‘because of’ is a much easier expression to understand. I will also proceed on the basis that the authorities that inform the operation of s 82 CCA which was the general action for damages provision in the old Trade Practices Act 1974 will have application to the ascertainment of whether or not there has been reliance and causation and whether and if so, whether there may be an assessment of damages.

907 The essential enquiry is whether or not there has been a causal connection between conduct and loss suffered. It is to those matters to which I now turn. I am satisfied that in reaching his decision to purchase the Victoria Square store, Mr Emanuele relied upon the information that had been provided to him. It was he who sought out the assistance of three accountants, Mr Rundle, Mr Mercorella, and Mr Sun and he made his decision based upon the information he had been given and in relation to the financial information, it’s content, and confirmation by those accountants.

908 I am also satisfied that his consideration of the financial information was central to his thought process in deciding to purchase the store. He relied upon the information in reaching his decision and therefore I am satisfied of the

connection between the provision of the information, and its consideration and his decision to proceed to purchase the store.

909 I have earlier identified that the ACL and its predecessor the Trade Practices Act, by the s 18 in Chapter 2 (and section 52 of the Trade Practices Act) established a standard of behavior, or a norm of conduct in trade and commerce. A breach of that standard, and in circumstances where there is reliance and which is causative of loss gives rise to a remedy in damages.

910 In submissions, the applicants referred to the decision of the High Court in Comcare v Martin,674 where at [42] French CJ, Bell, Gageler, Keane and Nettle JJ held:

Causation in a legal context is always purposive. The application of a causal term in a statutory provision is always to be determined by a reference to the statutory text construed and applied in its statutory context in a manner which bests effects its statutory purpose. It has been said more than once in this court that it is doubtful whether there is any common sense approach to causation which can provide a useful, still less universal legal norm.

911 Their Honours referred to Tambree675 to which I have earlier referred. In my view, it must be accepted that it is doubtful whether there is any common-sense approach to causation which can provide a universal legal norm. However, that has always been the case. So also has it been accepted that the “but for” (causal sine qua non) test is not and has never been the exclusive test of causation in negligence cases. The decision in March v Stramare concerned a driver driving at excessive speed and with excess alcohol in his bloodstream who collided with a parked truck on East Terrace in Adelaide. The trial judge, Perry J, found the truck driver liable to the extent of 70% and the driver of the car liable to the extent of 30%. The decision of the trial judge was reversed on appeal which by a majority held that the negligence of the truck driver was not causative of the appellant’s injuries. Rather, in the legal sense, the cause of his loss was his negligence in driving at speed and with a high level of alcohol level in his blood and applied the doctrine of “last opportunity” or “last clear chance” against Mr March.

912 Mason CJ held at that different from McHugh J, he would not accept that the “but for” test has ever been or what now should become the exclusive test of causation in negligence cases.676

913 After discussing the historical development of theories of causation and the difference between what may be described as the legal concept of causation and its difference from philosophical and scientific notions of causation, Mason CJ said as follows:677

674 [2016] HCA 43.675 (2005) 224 CLR 627 at 642.676 At p 508.677 At p 515.

Commentators subdivide the issue of causation in a given case into two questions: the question of causation in fact – to be determined by the application of the “but for” test – and the further question whether a defendant is in law responsible for damage which his or her negligence has played some part in producing. It is said that, in determining this second question, considerations of policy have a prominent part to play, as do accepted value judgments. However, this approach to the issue of causation a) places rather too much weight on the “but for” test to the exclusion of the common sense approach which the common law has always favoured; and b) implies or seems to imply that valued judgment has, or should have, no part to play in resolving causation as an issue of fact. As Dixon CJ, Fullagar and Kitto JJ remarked in Fitzgerald v Penn:678

It is all ultimately a matter of common sense and in truth the conception in question [i.e. causation] is not susceptible of reduction to a satisfactory formula. [my emphasis]

914 Accepting for the sake of discussion, that Mason CJ was there dealing with the issue of causation in a negligence case, it is difficult to identify where, it might be said, that his Honour was attempting to establish common sense as some universal legal norm. This is particularly so when Mason CJ said as follows:679

Conclusion

Viewed in this light, the respondents’ negligence was a cause of the accident and of the appellant’s injuries. The second respondent’s wrongful act in parking the truck in the middle of the road created a situation of danger, the risk being that a careless driver would act in the way that the appellant acted. The purpose of imposing the common law duty on the second respondent was to protect motorists from the very risk of injury that befell the appellants. In these circumstances, the respondents’ negligence was a continuing cause of the accident…

915 As is apparent, his Honour was addressing the two stages of consideration which he earlier postulated.680 There his Honour addressed the two questions of causation in fact by the application of the test of whether the respondent’s negligence was, as a matter of common sense, a cause of the accident and second, whether the defendant was responsible in law for the damage which his or her negligence paid some part in producing.

916 This was the analysis carried out by Callinan J in Tambree. After quoting with approval the judgment of Mason CJ in March v Stramare,681 as I have set out above, Callinan J said as follows:682

[81] With respect I agree with his Honour’s observations. It would be a delusion to think that a disputed question of causation can be resolved according to an invariable scientific formula and without acknowledgment that common sense, that is, the sum of the tribunal’s experience as a tribunal, its constituents’ knowledge and understanding of human affairs, its knowledge of other cases and its assessment of the ways in which notional fair minded people might view the relevant events is likely to influence the result… all of that is to say no more than that perfect justice, the availability of a perfect

678 (1954) 91 CLR 268 at 277-278.679 At p 519.680 At p 515.681 At p 515.682 At p 515.

test for liability, is beyond human reach. But tribunals of fact have to do the best that they can. And that which has to be done is better done with candour and candour demands the acknowledgment by any tribunal or any judge called upon to resolve a matter, of the use of his or her common sense in determining causation. Valued judgments may sometimes be inescapably involved, but that they may, does not justify the division of the question into a “but for” test and a further enquiry whether a defendant should in law be held responsible for a plaintiff’s damage.

917 In the following paragraphs of his judgment, Callinan J criticised the decision of the Court of Appeal on the application of the test of causation in the statutory context. The error of the Court of Appeal was that at the second stage, the enquiry of the Court of Appeal was whether the auditors could not be responsible for what was said to have intervened namely the continuation of trading illegally by Mrs Fry. The emphasis was upon that illegality. At [84] and in this statutory context, the same as in this case, Callinan J said:

…that the trading after the termination of the licence was illegal was incidental only. What is to the point are the facts that (the agent) had been given a licence to trade, that it had been renewed, that she had traded under it, that it had been given a number, that the quotation of the number was probably necessary for continued trading in the travel business, that the licence had to be displayed at the place of business and in particular after the licence was terminated, that [the agent] used it, and the number allocated to it, to continue to trade. Underlying these, and directly and naturally contributing to them, including the subsequent incidentally illegal trading, with a negligent accounting and auditing and the misrepresentations consequent upon them.

918 In the decision of Mason CJ in March v Stramare, his Honour held at 515 as follows:

That said, the “but for” test, applied as a negative criterion of causation, has an important role to play in the resolution of the question. An example was the decision of the High Court in Fitzgerald v Penn.683 In, for example, collision cases, it may be necessary to ask the question whether a trier of fact could be satisfied that a particular collision would not have taken place with the same results if one driver had been driving at a reasonable speed and so, a factor which secures the presence of a plaintiff at a particular place where and at the time when that plaintiff was injured is not causally connected with the injury unless the conduct of that plaintiff meant that the risk of the accident occurring at that time was greater.

919 At 516, Mason CJ held as follows:

The “but for” test gives rise to a well known difficulty in cases where there are two or more acts or events which would each be sufficient to bring about the plaintiff’s injuries. The application of the test “gives the result, contrary to common sense, that neither is a cause”: Winfield and Jolowicz on Tort, 13th ed (1989) p 134. In truth, the application of the test proves to be either inadequate or troublesome in various situations in which there are multiple acts or events leading to the plaintiff’s injury… the cases demonstrate the lesson of experience namely, that the test, applied as an exclusive criterion of causation, yields unacceptable results and that the results which it yields must be tempered by the making of valued judgments and the infusion of policy considerations. That in itself is something of an irony because the proponents of the “but for” test have seen it as a

683 (1954) 91 CLR 268, especially at 276-277.

criterion which would exclude the making of valued judgments and evaluative considerations from causation analysis…

920 The decisions which have fallen from the High Court on the question of causation in the statutory context do not attempt to prescribe an inflexible test which is to be applied irrespective of matters of common sense and experience. As the decision of Callinan J in Trambree indicates, it is necessary to take an approach to causation and damage in this statutory context by the application of common sense and the application of the second question as postulated by Mason CJ in March v Stramere whether here, the respondents are in law responsible for the damages which their conduct has played some part in producing. This is a policy question that involve the making by me of value judgments in the resolution of that question. That is the approach which I will adopt. Obviously enough, some level of flexibility must be involved in the application of that approach.

921 In doing so and in formulating whether or not a remedy is available, I am required to act with flexibility and proceed in a way which reflects the approach outlined by Gleeson CJ in Tambree where his Honour said that a misrepresentation will rarely be the sole cause of the loss where there is reliance any loss or damage may have flowed directly from an act or an omission, which is a consequence of the breaching conduct but which may be seen to be only indirectly the consequence of the making of the misrepresentation.

922 This approach must be adapted to the circumstances. This is consistent with what fell from Gleeson CJ in Henville v Walker where his Honour said:684

The task is to select a measure of damages which conforms to the remedial purpose of the statute and to the justice and equity of the case. The purpose of the statute so far as presently relevant is to establish a standard of behaviour in business by proscribing misleading and deceptive conduct, whether or not the misleading or deception is deliberate and by providing a remedy in damages.

923 In this case, it is necessary for the applicant to prove prejudice or loss suffered by it as a consequence of relying upon the breaching conduct of the respondents. In that exercise, it is necessary to show first the breaching conduct, the consequences of the breaching conduct upon the claimant and the detriment suffered by the claimant.

924 Under s 236 of the ACL, it is necessary for the applicant to prove that it has suffered loss because of the conduct of the respondents. Consistent with what fell from Mason CJ in March v Stramare, causation will be established where the conduct is found to be a cause of the loss or damage suffered and the loss may flow directly from the act or omission, but only indirectly from the making of the representations. However, it is always necessary to prove the connection as a

684 [2001] HCA 52 at [18].

matter of causation between the breaching conduct, the reliance, the causative effect of that reliance and then the loss or damage suffered.685

925 In their submissions, the applicants have contended that because the respondents have retaken control of the business, that the usual assessment of loss is different. In the usual case, where there has been a purchase of a business in reliance upon representations which are found to be misleading, then an assessment is made first of the losses directly involved in the purchase of the business. Those losses are assessed in the usual course by calculating the difference between the amount paid for the business and the actual value for the business at the time of purchase. In this case, that exercise has been done by Mr Crase. The calculations done by Mr Crase were not challenged by Mr Opie.

926 The secondary question is the fate of the business itself. That question varies according to the circumstances. On occasion, the wronged party will announce that it treats the contract as void ab initio for, for example, fraud, and invites the vendor to retake the business. In the usual course that does not occur until the court has resolved the question of whether or not there has been fraudulent conduct. On other occasions, but in the same circumstances, a purchaser may announce that it considers itself no longer bound by the contract and that it brings to account whatever it can obtain upon the sale of the business itself. Such a sale is not an affirmation of the contract but merely a step in the process of the assessment of damages. The courts have long recognised that merely because a party remains in control of a business is not an affirmation of the contract and thereby removing the right of the party affected by the misleading conduct to sue for damages connected with reliance upon the misleading conduct to its detriment.686

927 The submission of the applicant is that the asset of the business has been converted by the respondents for their own use and that the written down value of the plant and equipment is now further reduced because it could only achieve an auction realisable value and the fit out has no value other than in situ for an operating business. There are a number of measures of damage that are involved here. The first is the difference between the value of the amount paid by the applicants for the Victoria Square business and the difference between that amount and the value of the business at the time that it was purchased. This calculation has been done by Mr Crase. Different from the position that pertained in the decision in Creatives Landscape Design Centre Pty Ltd v Platz,687 in this action no order is sought that the contract for the purchase of the business be declared void ab initio. To the contrary, the first order sought by the applicants in [111.1] of the pleadings is a declaration to the effect that the breach notices and termination notices provided by the respondents are invalid and in breach and 685 Campbell v Back Office Investments Pty Ltd (2009) 238 CLR 304 at [25] per French CJ; see also

Gleeson CJ in Henville v Walker 206 CLR 459 at [68] and McHugh J at 135.686 See generally the decision of the Full Court of the Federal Court of Australia in Creatives Landscape

Design Centre Pty Ltd v Platz BC 8908450 12 September 1989; Bowen CJ, Sheppard and Von Doussa JJ; appeal from a decision at first instance by Fisher J: appeal dismissed.

687 Creatives Landscape Design Centre Pty Ltd v Platz BC 8908450, 12 September 1989.

repudiation of the franchise agreements. On the submissions of the parties, there is little doubt that the respondents have treated the franchise agreements as having been repudiated by the conduct of the applicants. However, even if a declaration as sought under [111.1] of the Statement of Claim was made, the effect of any such order would not have effect ab initio. It would have effect only from the date of the invalid notices.

928 The balance of the orders sought by the applicants are in damages. The first basis for the calculation of damages is to identify the difference between the price paid for the business and the true value of the business at the time it was purchased. In his expert report, Mr Crase has opined that the value of the business at the time it was purchased consisted of the plant and equipment and fixtures and fittings of the business. He then made a calculation based upon those figures. In making that calculation, he used the written down value of the plant and equipment and fixtures and fittings and there has been no challenge to that methodology, notwithstanding that there was a challenge to the correctness of the applicant’s claim. It is knowns as a fact that the respondents have terminated the franchise agreements and have re-entered possession of the Victoria Square store. Even though it did so wrongfully it is not necessary for me to consider that matter further because the respondents seized control of the assets belonging to the applicants in the Victoria Square store namely the plant and equipment, fixtures and fittings and have now used them in their conduct of the Victoria Square store. The respondents have evinced an intention to maintain possession of those assets to the detriment of the applicants and it is necessary in those circumstances to account for the value of those assets.

929 At [10.2] of his report, Mr Crase provided for a credit for the plant and equipment sale at fair market value of $63,770 following valuations made of that plant and equipment. When that figure was adjusted to the asset write off of $410,000, being the purchase price of the business, this showed a net business write off of $346,230. When added to the cumulative net loss to 15 November 2018 of $216,880, the total loss was $563,110. For the reasons which I explain below, Gabjet is not entitled to an assessment of the loss of the value of the business and trading losses. The inclusion of both in an assessment of damages is inconsistent and illogical. If the remedy is to restore Gabjet of its loss of bargain then any losses in trading must be to its account.

930 In conclusion therefore, it is only necessary in these circumstances to debit the net loss figure by a further figure equivalent of the fair market value of the plant and equipment.

931 In their defence, the respondents contend that the applicants did not operate the Victoria Square store reasonably. This, it is said, is the reason why the applicants did not achieve the same level of profitability at the Victoria Square store as was achieved by the respondents and as is reflected in the Victoria Square financial information. It appears that the respondents contend that the conduct of the applicants has been so poor that, if any loss is suffered, then the

real cause of that loss is that conduct of the applicants. I am unable to accept that contention. I think it is wrong.

932 The onus is upon the respondents to satisfy me that some or all of the loss suffered by the applicants was caused by the conduct of the applicant and not by reliance of the applicants upon the breach in conduct of the respondents. In large part this discussion devolves to a discussion about loss having been suffered by the applicants which has no real connection to the conduct of the respondents but is caused from some of the intentional conduct of the applicants. It is said that such conduct breaks the chain of causation, or in some way means that the loss suffered by the applicants is not connected with, or is not caused by, the reliance by the applicants upon the representations of the misleading conduct of the respondents. It has been suggested that if there has been unreasonable conduct of the applicants following misrepresentation which could be called a supervening cause, then such conduct may well affect the assessment of damages.688 For example, in this case, the respondents contend that the applicants have taken a profitable business and turned it to a non-profitable business and that they should not be visited with the failures of the applicants to maintain it as a profitable business by some form of inappropriate conduct of the applicants. The concept of identifying inappropriate conduct carries with it the need to be able to specify with sufficient particularity, that some form of intentional conduct on the part of the applicant, objectively assessed, is able to be separately identified as the cause of losses suffered by the applicant and which should not be visited upon the respondents.

933 Applying this criteria to the facts of this matter, I am not satisfied that there has been any such conduct on the part of the applicants. I do not accept that the applicant took control of a profitable business and by some intentional conduct, or inappropriate practice on its part, changed the business from a profitable business to a non-profitable business and thereby have suffered loss. As I have said earlier in these reasons, I am satisfied that the decisions made by Mr Emanuele, in and about the management of the Victoria Square store were correct. He identified that Ms Gordon was the appropriate person to manage the store, he remained involved for a sufficient period of time, the store continued to operate properly, and its sales increased. However, notwithstanding its sales increase, the store could never achieve the represented cost of goods sold and sales percentage of total sales or pay a salary for a manager. It incurred costs and expenses similar to those that had been incurred previously by the respondents but which had never been disclosed by the respondents for the reasons discussed earlier and it could not afford to pay 7% of its gross turnover as an impost prior to the calculation of any form of profit. As was opined by Mr Crase, the value of the business was the written down value of its plant and equipment.

934 I am satisfied that the applicant did everything in its power to restore the fortunes of the business. It was not able to generate sufficient gross profit and because it needed to incur overhead expenses in the operation of the store to the 688 Khneiger v Cookson [2009] SASC 203.

extent that was necessary nothing done by it has caused those losses, or alternatively, that anything could have been done to avoid the losses that it did sustain. None of the conduct on its part was so unreasonable that there was any break in the chain in the causation of losses between the conduct of the respondents upon which it relied, its decisions about the business and the losses that it sustained. I am therefore unable to accept these submissions of the respondent and in any event, I do not accept that the respondents have discharged the onus upon them of proof in these matters.

935 I am satisfied that the applicants have suffered the losses claimed. I am also satisfied that the losses that have been sustained under a calculation made pursuant to s 236 and s 237 of the ACL, are no different from those losses that would be calculated under an assessment separately made under s 82 of the CCA in relation to the Code breaches. I consider that I need do no more than summarise the effect of my findings in relation to those matters.

936 For the reasons set out earlier, I am satisfied that the conduct of the respondents in and about the disclosure of the previous franchisee, Kindred was misleading. I accept that the first that Mr Emanuele learnt of the existence of the difficulties between the respondents and Kindred, was when he identified some emails passing between Kindred and the Funk Group in and about the dispute which led to the settlement. I do not accept the evidence given by Mr and Mrs Damaskos about the alleged disclosure in the meeting between them, Mr Versace and Mr Emanuele. Mr Versace was not able to remember one way or the other whether that had been discussed. Mr Emanuele came away from that meeting with a clear understanding that the respondents terminated the Kindred franchise because of dissatisfaction with Kindred.

937 I accept the evidence of Mr Versace and the exhibited documents which disclose that the name Kindred is identified within the sale of business document and the disclosure document. I also accept the evidence of Mr Emanuele that when, at the time prior to the purchase of the Victoria Square store, the topic of Kindred was raised with Mr and Mrs Damaskos. In particular, Mr Damaskos told Mr Emanuele was told that there was a cessation of the relationship with Kindred because of the deficient management of the store by Kindred. This was accepted by Mr Emanuele as a truthful statement. It was not truthful. I am not satisfied on any of the evidence that there was any deficient management by Kindred of the Victoria Square store. Kindred was not able to obtain any return on investment because of the misrepresentations that had been made to it by the Funk Group before the purchase of the Victoria Square store. I do not accept that the Funk Group would have purchased both of the businesses back at a premium, as it did, for any other reason than that the respondents understood that they were exposed to a claim from Kindred.

938 It is in that background that when Mr Emanuele saw Schedule B in the disclosure documents at the time of the execution of the purchase contract of the business, he then had only a limited and wrong understanding of the existence of

Kindred or that there had been any prior franchisee. I therefore accept that when assessed overall, the conduct of the Funk Group respondents in relation to the disclosure of Kindred was misleading.

939 I accept that it was necessary, in order for the Funk Group to comply with its disclosure obligation, to declare that there was a dispute between Kindred and Funk in which Kindred made allegations of misleading or deceptive conduct against the Funk Group, in those circumstances, the business was purchased back from Kindred. I accept also that the Schedule B to the Victoria Square disclosure document contains a statement which is misleading about whether or not the Victoria Square business had previously been franchised. However, that was in the background in items 6.4 to 6.6 of that document, there was mention of Kindred. Mr Emanuele could not recall seeing that material but he could recall reading Schedule B, which he thought appeared more prominently in the document. I accept that schedule B to the document does appear more prominently and that was his understanding. However, subsequent to the receiving the documents, he received legal advice and accounting advise as was required of him. For the same reasons, I am unable to accept the submissions of the applicant in relation to the misleading aspects of Schedule B without having assessed that matter in the background of the assistance item 6.4 to 6.6 of the Victoria Square disclosure documents.

940 I am satisfied that in breach of items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code, there was no disclosure of the circumstances in which the previous franchisee terminated those items. Items 13.2 and 13.3 of Annexure 1, Schedule 1 of the Code requires details to be provided of whether, in the last ten years, the site has been the subject of a franchisee business operated by a previous franchisee, and if so, details of the franchise business including the circumstances in which the previous franchisee ceased to operate. This was not done.

941 I am satisfied that if Mr Emanuele was provided with the details as prescribed under items 13.1 and 13.2 of Annexure 1 of Schedule 1 of the Code, he would have become aware of the circumstances in which that group ceased to be a franchisee. He would have learnt sufficient to put him on enquiry to find out precisely what had happened. What was said to him by the respondents meant that he was denied the possibility of making that enquiry and what he was told distracted him from his pursuit of the truth in that matter.

942 Earlier in these reasons, I have rejected the evidence of Mrs Damaskos about the circumstances in which both versions of the Schedule B of the Victoria Square disclosure document came into existence.

943 I find that Mrs Damaskos completed Schedule B in the disclosure document that was provided to Mr Emanele on 3 June 2016. In so doing, she knew that the content of Schedule B was incorrect. She knew that the site had previously been franchised to Kindred. In doing so, she knew that she was misleading Mr

Emanuele. She was aware of that position when she went through the documents with Mr Emanuele. Mrs Damaskos instructed DC Strategy to send the disclosure document to Mr Emanuele in the same form that had been earlier provided on 3 June 2016. That was done by DC Strategy on 28 June 2016. At all times thereafter, Mrs Damaskos was aware of the content of Schedule B in the provided document, that its content was incorrect and it was misleading. I also consider that an inference is clearly available to me on the evidence that I have earlier canvassed that DC Strategy no longer acted for the respondents because it was in a position of conflict.

944 I am satisfied from the evidence of Mr Emanuele that if he had been given a document which properly disclosed within Schedule B the involvement of Kindred and if he had been provided with a document in satisfaction of the requirements of items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code, he would have made an attempt to contact Kindred personally or through his solicitors. He would have learned the truth of the termination of the relationship between Kindred and the Funk Group and that he would have been most unlikely to have proceeded with the purchase of the Victoria Square store.

945 In relation to the Waymouth Street store, I am also satisfied that no document in compliance with the requirements of items 6.4 and 6.5 of Annexure 1 of Schedule 1 of the Code was provided to Mr Emanuele. If Mr Emanuele had been provided with that document, he would have made contact with Mr Marinos and if he had done so, Mr Marinos would have been highly critical of the Funk Group. The difficulty is that it is impossible to tell whether such a report would have been truthful or what effect such a statement may have had.

946 In relation to the Victoria Square store, I am satisfied that the Funk Group has made misrepresentations within the disclosure document, it has not properly reported about previous franchisees of the Victoria Square store and it has not properly reported in relation to the purchase back of the Victoria Square store. In relation to each of those three items, it is in breach of the requirements of the Code. It has not enjoyed the protections that are built into the provisions of the Code.

947 I am satisfied that the failures of the Funk Group in relation to the requirements of the Code were endemic and reflected the difficulties associated with the franchise system used by the Funk Group. These failures affected the decisions that were made by Mr Emanuele when he resolved to acquire the Victoria Square business such that, if he had known the true position, I am satisfied that he would not have gone ahead with that purchase.

948 I have earlier dealt with the question of the marketing fund. I am satisfied on the evidence that for a period of two years, and in breach of the requirements of the Code and the franchise agreements, the Funk Group failed to make proper contributions to the marketing fund. In evidence, I was informed by Mrs Damaskos that the issue was raised with solicitors and she was informed that it

was not necessary to restore the fund but only to make prospective contributions. At the time this evidence was given, I expressed significant reservations about its accuracy. Her evidence was that the Funk Group followed the advice of its solicitors and did not restore the fund. The failure to make the payments into the fund is a breach of the Code. I am unable to accept as credible or reliable, this evidence of Mrs Damaskos that the advice of the solicitors was not to restore the fund. This evidence was a waiver of the privilege attaching to that advice but it was not confirmed by the solicitors. By the time this evidence was given those solicitors had withdrawn and a new set of solicitors was appointed as solicitors on record.

949 The applicant made significant submissions in relation to the question of unconscionability. In light of the findings that I have already made, I do not think it is either helpful or necessary that I consider those matters.

Assessment of damagesCauses of Action: Findings

950 I am satisfied of the following:

The Victoria Square financial representations.

1. The applicant pleads a first Victoria Square financial representation in relation to a future matter. In light of my findings below, I do not find it necessary to decide whether or not there has been a representation in relation to a future matter. I have dealt with the matter on the basis of the balance of the Victoria Square financial representations as pleaded.

2. Based upon my findings about the Victoria Square financial representations, the respondents represented and the applicant Gabjet understood that the Victoria Square business produced a substantial net profit during the years ended 30 June 2014, 30 June 2015 and 30 June 2016, as well as generating a salary for a franchisee.689

3. In the period ended 30 June 2015, the business traded from the Victoria Square premises under the franchise arrangement did, after payment of the manager’s salary, generate a net profit of around $126,000.690

4. That for the period between 1 July 2015 and 31 December 2015, if the Victoria Square store had been reasonably traded under the franchise arrangement and the franchisee was employed as a manager of the business, then an amount of $64,000 would have been available to the owner after payment of the salary of the franchisee manager.691

5. In the period between 1 January 2016 to 31 March 2016, if the Victoria Square store had been conducted reasonably under the franchise

689 The second Victoria Square financial representation: Third Statement of Claim paragraph 28E.690 The third Victoria Square financial representation: Third Statement of Claim paragraph 28E.3.691 The fourth Victoria Square financial representation: Third Statement of Claim paragraph 28E.4.

arrangements and if the franchisee was employed as a manager, then on draft figures available an amount of about $28,000 would be generated for the benefit of the franchisee.692

6. For the financial year ended 30 June 2015, the Victoria Square store generated a net profit of $117,818.54.693

7. In the period between 1 July 2015 to 31 December 2015, the Victoria Square store generated a net profit of $61,386.14.694

8. In the period between 1 January 2016 to 31 March 2016, the Victoria Square store generated on draft figures, a net profit of $27,486.18.695

9. For the year ended 30 June 2015, the Victoria Square store incurred or paid overall expenses of $395,179.72.696

10. In the period between 1 July 2015 to 31 December 2015, the Victoria Square store incurred expenses of $214,556.05.697

11. In the period 1 January 2016 to 31 March 2016, the Victoria Square business paid overall expenses, on draft figures, of $110,119.10.698

12. For the financial year ended 30 June 2015, the Victoria Square business incurred or paid wages of $220,693.61.699

13. For the period between 1 July 2015 to 31 December 2015, the Victoria Square business paid wages of $119,979.33.700

14. These representations were made in trade and commerce in connection with the inducement of Mr Emanuele, and then for Gabjet to purchase the Victoria Square business.

15. Each of the first to tenth and 14th and 15th Victoria Square financial representations were false or misleading for the following reasons:

i. The Victoria Square store was not reasonably capable of being a viable business to operate under a franchise system; both Gabjet and Kindred were unable to generate the profit represented to them by the respondents and in the case of Gabjet, sustained losses. In the case of Kindred, notwithstanding every effort made by it, and despite increased sales, its costs of goods sold percentage could not

692 The fifth Victoria Square financial representation: Third Statement of Claim paragraph 28E.5.693 The sixth Victoria Square financial representation: Third Statement of Claim paragraph 28E.6.694 The seventh Victoria Square financial representation: Third Statement of Claim paragraph 28E.7.695 The eighth Victoria Square financial representation: Third Statement of Claim paragraph 28E.8.696 The ninth Victoria Square financial representation: Third Statement of Claim paragraph 28E.9.697 The tenth Victoria Square financial representation: Third Statement of Claim paragraph 28E.10.698 The eleventh Victoria Square financial representation: Third Statement of Claim paragraph 28E.11.699 The fourteenth Victoria Square financial representation: Third Statement of Claim paragraph 28E.14.700 The fifteenth Victoria Square financial representation: Third Statement of Claim paragraph 28E.15.

be reduced below 32% and could not match the representations made to it by the respondents.

ii. The Victoria Square business conducted by Funk CBD did not derive a substantial net profit in any of the years ended 30 June 2014, 2015 or 2016 or alternatively its net profit derived was significantly lower than that as shown in the Victoria Square financial information.

iii. A franchisee business from the Victoria Square store could not derive substantial profit plus a salary for the franchisee.

iv. Gabjet did conduct the Victoria Square business reasonably but, notwithstanding, incurred overall losses.

v. The Victoria Square financial information referred to the expression “**Funk Group expenses excluded**” but there was no specification of which group expenses were excluded and which administrative expenses were included or excluded within the financial records. A proper account of the actual expenses incurred by Funk Coffee and Food and Funk CBD, the financial returns for Funk CBD in relation to the operation of the Victoria Square store would have provided a complete and accurate representation of its profitability. The absence of the inclusion of those expenses means that the business derived either a loss or a small profit that was substantially less than was shown in the Victoria Square financial information.

vi. The failure to include all of the Funk Group expenses within the Victoria Square financial information means that the financial information given to the applicants was misleading. The appropriate inclusion of all of those expenses would have disclosed to the applicants that the Victoria Square business could only generate a very small profit or alternatively a loss.

vii.The third, fourth and fifth Victoria Square financial representations:

(i) Materially overstated the amount that the business could reasonably have been expected to generate under a franchise arrangement with the respondents;

(ii) Did not reflect the whole of the costs and expenses reasonably necessary to be incurred by a franchisee in the operation of the business and which were in fact incurred by the Funk Group in and about the operation of the Victoria Square business.

(iii) Meant that the costs of goods sold figure within the Victoria Square financial information was lower than that would have been incurred by a franchisee in operating that business because Funk CBD, as part of the Funk Group obtains benefits as part of the Funk Group including for supplies at prices that are not attainable by the franchisee and also obtained the benefit of other cost savings.

viii. In relation to the sixth, seventh and eighth Victoria Square financial representations, the profitability of the business conducted from Victoria Square premises was as a result materially overstated.

16. The Victoria Square financial representations were made to Mr Emanuele and were relied upon by Gabjet in entering into the Victoria Square franchise arrangements. They were not corrected and as a result, Gabjet was misled or deceived by those representations. It was induced to enter into the contract in reliance upon them and as a result, Funk Franchise and Funk CBD have contravened s 18 in Schedule 2 of the ACL, the CCA 2010.701 Gabjet would not have entered into the transaction to purchase the Victoria Square store absent the representations made to it by the respondents.

17. The respondents Mr Damaskos and Mrs Damaskos were the Directors and controlling hands and minds of Funk CBD and Funk Franchise. They were involved in the preparation of the Victoria Square financial information, in its provision to its agent for delivery to prospective purchasers and arranged for the annexation of that Victoria Square financial information to the sale of business agreement.

18. Mr Damaskos was involved in and largely controlled the day to day operation of the companies in the Funk Group and Mrs Damaskos was actively involved in the day to day office administration bookkeeping and accounting functions for the businesses that formerly operated the Victoria Square premises when owned by Funk CBD and when it was formerly owned and operated by Funk Coffee and Food before the sale to Kindred. She was also involved in the day to day administration and bookkeeping for Funk Coffee and Food in its capacity as the trustee of the Damaskos Family Trust all of the other Funk businesses operated as corporate stores by Funk CBD and Funk Coffee and Food.

19. Both of Mr Damaskos and Mrs Damaskos were responsible for the information contained in the annual financial statements prepared by those companies for the content of the Victoria Square financial information and

701 It is unnecessary that I continually set out in full the reference to Schedule 2, Australian Consumer Law. Hereafter, I will refer only to s 18 ACL.

each of them knew of the Victoria Square financial representations. Each of them knew of the misleading nature of that information. Their conduct was calculated to induce Gabjet to enter into the Victoria Square sale and business agreement and to become a franchisee in the system. Each of them were involved in the misleading information provided to Kindred and in the generation of the settlement with Kindred in relation to the alleged misleading conduct alleged by Kindred in and about its entry into a franchise arrangement with Funk Coffee and Food in 2010.

20. Funk Franchise, Funk Leasing, Funk Coffee and Food, Mr Damaskos and Mrs Damaskos were each knowingly involved in and a party to the overstatement of the profitability and viability of the Victoria Square business at the time that it was sold to Gabjet by Funk CBD. That conduct was engaged in for the purpose of companies in the Funk Group receiving funds from Kindred and funds from Gabjet under the Victoria Square sale and business agreement. The individuals were the sole directors of the Funk companies and were their guiding hands and minds. The companies were the corporate manifestation of the relationship between Arthur and Joanna Damaskos.

21. Each of Funk Franchise, Funk CBD, Funk Leasing, Funk Coffee and Food, Mr Damaskos and Mrs Damaskos aided, abetted, counselled or procured the Victoria Square financial representations conduct and were directly knowingly concerned in the Victoria Square financial representation conduct by Funk CBD. Each of them are liable for the Victoria Square financial representations.

22. In accordance with the requirements of the Code, a franchise disclosure document said to be prepared as at 31 October 2015 was delivered to Mr Emanuele. It is dated 21 September 2015. In Schedule B on page 22 of the document, it states that the site has not previously been franchised. That is incorrect. The site had previously been franchised from 2010 to 2012 by Funk Coffee and Food to Kindred.

23. Elsewhere in the disclosure document in Schedule A,702 there is purported compliance with items 6.4 to 6.6 of Annexure 1 of Schedule 1 of the Code. It discloses that the Funk Coffee and Food Victoria Square business was bought back by the franchisor from Kindred on 2 October 2013. It also discloses the purchase back of the Angas Street store from Kindred on the same date.

24. Items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code require that in a separate document to be provided with the disclosure document, must be provided about whether a site has been franchised in the previous 10 years, the details of that business and the circumstances in which the previous franchisee had ceased to operate. Items 13.2 and 13.3 of

702 Schedule A, p 7.

Annexure 1 of Schedule 1 of the Code have not been complied with by the Funk Group.

25. Schedule B of the Victoria Square disclosure document is wrong and is misleading. The store had previously been franchised to Kindred and that is disclosed in the disclosure document. The details required by items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code about the Victoria Square store were not provided. As a result, Mr Emanuele and Gabjet were not put on notice that the purchase back of the Victoria Square store took place in circumstances where Kindred had made allegations of misleading conduct against the respondents and in order to obviate legal proceedings connected with that store, the respondents had purchased that store and the Angas Street store back from Kindred.

26. Although the statement within Schedule A of the disclosure document is technically correct, when it is combined with the failure by the respondents to comply with items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code, the information contained within the disclosure document and the Annexure are misleading. First, the statement within Schedule B that the site had not previously been franchised is demonstrably incorrect. It is also inconsistent with Schedule A. The information contained within Schedule A although strictly technically correct, is misleading because of a failure to comply with items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code which requires Mr Emanuele and Gabjet to be informed of the circumstances in which the previous franchisee ceased to operate.

27. If Mr Emanuele and Gabjet had been informed of those circumstances and in light of the other inconsistencies within the disclosure document, Mr Emanuele would have had the opportunity to make enquiries with Kindred. Those enquiries would have elicited an allegation of the misleading conduct of Funk Coffee and Food and of the difficulties associated with the conduct of a franchise business from the Victoria Square store. Mr Emanuele lost the opportunity to make those enquiries in those circumstances.

28. The position could not reasonably be put any higher than the loss of an opportunity because the name of Kindred was included in the disclosure document and Mr Emanuele did not seek out the officers of that company. That opportunity was lost but it also remains that he did not make those enquiries from the outset because of the misleading conduct of the respondents.

29. The result would have been the same even if Mr Emanuele had difficulty in making contact with the proprietors of Kindred. The evidence of Mrs Bueti was that that company remained registered and operating in the years following 2013 and as at 2016, could have been ascertained by a

simple company search. Mr Emanuele or Gabjet would not have had any difficulty in making contact with Mrs Bueti. If they had done so, they would have ascertained that Kindred terminated its relationship with Funk Franchise as a result of a legal dispute and in order to obviate that dispute, there had been a buy back of the Victoria Square store and the Angas Street store from Kindred.

30. Mr Emanuele would have also ascertained that the representations made to Kindred by Funk Coffee and Food prior to its entry into the franchise arrangements in 2010 were not sustainable, were misleading and, at least implicitly, Funk Coffee and Food accepted that it had engaged in misleading conduct at the time that there was an agreement to purchase the businesses back from Kindred. He would have also ascertained that the trading of Kindred was not profitable or was profitable only to a minimal and unacceptable level having regard to the risk of capital. He lost the opportunity to ascertain all of those matters.

31. Gabjet has suffered loss and damage caused by its reliance upon the contravening conduct of the Funk Group and Mr and Mrs Damaskos because Gabjet would not have entered into the transaction for the purchase of the Victoria Square store in the absence of the representations upon which it relied.

32. In the maintenance of the marketing fund, the respondents are in breach of item 31(2) of the Code.

33. I make orders against Funk Franchise, Funk CBD, Funk Coffee and Food, Funk Leasing and Mr Arthur Damaskos and Mrs Joanna Damaskos pursuant to s 82 of the CCA and pursuant to s 236 of the ACL in relation to the Victoria Square financial representations conduct, the breach notice code contravention, the Victoria Square disclosure document misrepresentation, the previous Franchisee Code contravention, the Franchisee Bought Back Code contravention, the Marketing Fund Clause 31(2) Code contravention and the Marketing Fund Clause 15(1)(b) Code contravention for damages to be assessed. I make order under s 75B of the CCA that each of Mr Damaskos and Mrs Damaskos, Funk Leasing, Funk Franchise and Funk Coffee and Food were knowingly concerned in each of the branches of Funk CBD. An order for the payment of damages may be made against them pursuant to s 82 of the CCA.

34. Before proceeding to an assessment of damages, it is necessary to identify a number of matters. The first is that a claim is made for recoupment of trading losses from the Victoria Square store. The quantum of these losses was challenged by the respondents however, based upon the evidence that I have received, and based upon the Agreed Facts, I am satisfied that for the Victoria Square premises, the trading losses for the year ended 30 June 2017 was $79,162; for the year ended 30 June 2018 were $105,036 and

for the year ended 30 November 2018 they were $32,682. There were amounts on the respondents’ cross claim which were not challenged. In relation to the Victoria Square store, these amounts were for $7,815 and an amount unpaid to Fleurieu Milk of $5,000. I have decided not to allow these trading losses. Although they were relevant to only one full year of trading namely for the 30 June 2018 year and otherwise were for part years and I am not satisfied that any criticism could be made of Gabjet for maintaining the business for that period of time.

35. I consider that the proper assessment of damages is that postulated by Mr Crase which is on the basis of a “no transaction case” as I have found above. The only possible value received by Gabjet was the written down value of its plant and equipment. In the ordinary course, an applicant would remain in possession of those assets and hence a deduction would be made for the value received. Here Gabjet has been put out of the assets when the Funk Group went back into the Victoria Square store in 2016. As a result, the loss on that aspect of the claim is the equivalent of the value of that asset at the time.

36. On this assessment of damages that I have made, I consider that there is no entitlement to claim trading losses. Gabjet is entitled to recoup the amount of its capital loss as if the business had not been purchased (or purchased for the correct value). Trading losses cannot logically be for the claim of Gabjet because it is restored to its correct position. Trading losses must then logically be for its own account.

37. I would allow the loss claim in relation to the amount of $7,815 as disclosed on the respondents’ cross claim and the amount $5,000 unpaid to Fleurieu Milk. There has been no challenge to these claims and they are for the account of Gabjet.

38. I have earlier dealt with the situation concerning the plant and equipment, fixtures and fittings of the Victoria Square store. The respondents went back into possession of that store. The respondents did not account to the Gabjet for the value of the plant and equipment, fixtures and fittings which were seized at the time that repossession occurred. In the report of Mr Crase the fair market value of those goods at the time of the repossession was $47,915.703 I will hear the parties further on that issue.

39. The assessment of damages suffered by Gabjet is calculated as follows:

i. Loss on amount paid on purchase of the Victoria Square business: $410,000, less the fair value of plant and equipment, fixtures and fittings on the date of purchase;

ii. Less set off in relation to the cross-claim: $7,815;703 First investigating accountant’s report of Crase Consulting, paragraph 10.5; Exhibit P2 Volume 18,

page 4694.

iii. Less amount owing to Fleurieu Milk: $5,000;

iv. Plus the initial franchise fees and training fees paid for Victoria Square: $40,000;

v. Plus the legal fees relating to the acquisition of the businesses and franchises for Victoria Square: $3,569; and

vi. Plus the proper assessment of the value of the plant and equipment, fixtures and fittings of the Victoria Square store at fair market value on the date of repossession of the business.

40. For the reasons given, I have reached the conclusion that the losses sustained by Jetgab in relation to the Waymouth Street business are, apart from the value of the plant and equipment, fixtures and fittings seized by Funk Coffee and Food, not attributable to the actionable conduct of the respondents. If I am wrong about that, I would assess the damages as follows:

i. Purchase price for the Waymouth Street business: $225,000, less the fair value of plant and equipment, fixtures and fittings, at the date of purchase;

ii. Less unpaid amount to Fleurieu Milk: $7,500.

iii. Plus the initial franchise fees for Waymouth Street, and initial training fees for Waymouth Street: $40,000.

iv. Plus the legal fees relating to acquisition of businesses and franchises for Waymouth Street: $3,693.

v. Plus the proper assessment of the value of the plant and equipment, fixtures and fittings at fair market value for the Waymouth Street store on the date of repossession of the business.

951 It follows that the counterclaim in relation to the action by Jetgab in relation to the unpaid amount to Fleurieu Milk is found as proved. The counterclaim is allowed at $7,500.

952 I would allow the plant and equipment, fixtures and fittings claim in relation to the Waymouth Street store on the same basis.

953 I will hear the parties as to the value of the plant and equipment, and fixtures and fittings at each of the two stores, costs and interest.