A judge has said one of Ballarat's leading legal and accounting firms and its director engaged in ' a dishonest and fraudulent design' in a case involving some of the city's most well-known business people.
Justice Jim Delany gave his findings in a scathing judgment concluding the first stage of a Supreme Court civil trial between the plaintiff, excavation consortium Porter Group, and the firm Mulcahy & Co Accounting Services over the purchase of a Ballarat truck and trailer-body building business, Chris' Body Building, known as CBB.
The founder and former managing director of Porter Group, Timothy Porter, and former Porter Group chief financial officer Christopher Conheady contend the director of Mulcahy & Co, James Mulcahy, and others, breached their fiduciary and retainer duties by purchasing CBB for a third entity, BFMM Investments Pty Ltd, a co-defendant.
James Mulcahy is a director of BFMM Investments along with solicitor Bradley Matthews, accountant Rohan Ford and grain merchant Stephen Broadbent. Mr Porter and Mr Conheady allege the defendants acted in breach of confidentiality when they purchased CBB, which Porter Group sought to buy over a year.
The defendants denied the allegations, saying they were within their rights to purchase CBB after the Porter Group deal fell through.
Mulcahy & Co prepared a business profile of CBB in October 2016, after owners Chris and Anthony Debono indicated they were keen to retire and sell.
The profile reported an adjusted annual average profit for the business of $5 million and an estimated value range of $12.6 million to $14.7 million. Shortly after, in 2017, Mr Mulcahy contacted Mr Porter regarding the potential purchase of CBB, to which Mr Porter agreed, subsequently signing a confidentiality agreement.
At this point the recollections of the two parties diverge, with Mr Conheady alleging Mr Mulcahy provided advice on purchasing CBB. Mr Mulcahy denied he ever provided information.
According to the Supreme Court judgment, from mid-2017 Mr Porter pursued the opportunity to acquire a controlling interest in CBB.
"Between June 2017 and March 2018, Mr Porter and also Mr Conheady, at times on behalf of Mr Porter, at other times on his own behalf, and still at other times in conjunction with Mr Porter, engaged in negotiations with Mr Debono with a view to acquiring a controlling interest in the Business. In June 2017 Mr Porter and Mr Debono agreed the value of the Business... was $12m."
Over a series of meetings held at various Lake Wendouree venues, the details of which are disputed, the plaintiffs and defendants negotiated the purchase of CBB. Mr Conheady and Mr Porter eventually agreed to taking an 80 per cent interest in the company.
I have found that the fiduciary obligation that was breached by the Mulcahy parties included an obligation not to take advantage of a business opportunity that might come their way as a result of their retainer by Mr Conheady so as to obtain any unauthorised benefit or profit.Justice Jim Delany
"In the meantime, unbeknown to Mr Conheady and Mr Porter, Mr Mulcahy had begun dealing directly with Mr Debono, leading to what later became the acquisition of a 70 per cent interest in the Business by BFMM," the judgment says.
Mr Mulcahy says he was entitled to make the offer to Mr Debono on behalf of BFMM, and was not bound by any agreement after January 2018. BFMM formalised its investment in CBB by July 2018.
It transpired an independent valuation of CBB gave it a value of $21 million, rather than $12 million, and directors of BFMM were aware of this valuation, as it was provided by Mr Conheady. At trial, BFMM directors either denied this knowledge, or averred the valuation carried 'zero weight' or 'no kudos'.
Assessing the statements by the parties, Justice Delany was critical of these responses by BFMM directors. Mr Broadbent "was not a satisfactory witness," he said.
"When it was put to him that if the Business was truly valued at $21m and was for sale at $12m, it would be a very good deal, Mr Broadbent's responses were less than convincing."
He was highly critical of Mr Mulcahy's behaviour.
"I do not accept as truthful his evidence about why he did not disclose that he and his co-investors had procured the opportunity to acquire a controlling interest in the Business for themselves. He did not tell Mr Conheady because he wanted to secure the Business for himself and not put securing that objective at risk as would have been the case if he had disclosed the truth to Mr Conheady.
"I did not find Mr Mulcahy to be an impressive witness. As to a number of matters, his evidence was not truthful. I formed the impression that Mr Mulcahy had reconstructed events of the past based upon emails and documents in a manner he thought would suit his case rather than giving evidence based on his best recollection of what occurred.
"Mr Mulcahy engaged in a 'dishonest and fraudulent design'. His actions went well beyond trivial breaches of fiduciary duty. As I have found, they were not motivated by altruism for the Business or for Mr Debono, they were not well-intentioned."
He was similarly reproving of Bradley Matthews:
"Mr Matthews demonstrated a better understanding of conflicts of interest but nonetheless failed to act appropriately in the face of conflict. On 20 June 2017 he wrote to Mr Conheady and informed him about a potential conflict with Porter Group. However, when the 'opportunity' to personally acquire an interest in the Business was raised with him by Mr Mulcahy on 14 December 2017, he put conflict considerations to one side and joined with Mr Mulcahy in the pursuit of the opportunity."
In an extensive series of referrals to precedents, Justice Delany found for Mr Porter and Mr Conheady, saying it was clear retainers existed between the parties, and as such Mr Mulcahy, acting as a certified practicing accountant in the matter, had breached the Code of Ethics for Professional Accountants.
The defence provided by Mulcahy & Co, and BFMM, was not sustainable, Justice Delany found, saying the parties had failed to act in good faith; that Mr Mulcahy had acted improperly as an adviser, and had used confidential information to his and the other defendants' advantage.
"I have found that the fiduciary obligation that was breached by the Mulcahy parties included an obligation not to take advantage of a business opportunity that might come their way as a result of their retainer by Mr Conheady so as to obtain any unauthorised benefit or profit," he wrote.
"The business opportunity that Mr Mulcahy usurped was usurped by him by reason of his breach of fiduciary duty so that he and his co-investors in BFMM might profit. The plaintiffs never authorised the receipt of any such benefit or profit by Mr Mulcahy."
Justice Delany indicated he will deliver his findings on relief at a second stage of the trial if it is required.
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