Director liability for non-disclosure in sale process

Friday 31 May 2019

Authors: Jesse Wilson and Brad Ward

​​Last week, the Court of Appeal held a company director personally liable for non-disclosure during the due diligence process for the sale of a commercial property owned by his company.1

The judgment serves as a cautionary reminder that a director may be personally liable even if they are only acting as an agent and director.​​

Background

The case concerned the sale of a commercial property with seven tenants (a service station and an adjoining food court).

The sale agreement was a modified form of the ADLS real estate sale terms. The terms were modified to make the agreement conditional on the purchaser being satisfied after a due diligence investigation.  

During due diligence, the purchasers inquired about the total OPEX paid by the vendor company and the extent to which those expenses were recovered from the tenants. The vendor company disclosed a shortfall in recovery of OPEX from the tenants.

The purchasers haggled for a price variation and then declared that the due diligence condition had been satisfied.

After the agreement became unconditional, and shortly prior to settlement, the purchasers became aware that one of the tenants had challenged the OPEX allocated to it for the previous financial year. It transpired that the vendor had been aware of the tenant's challenge for some time (including throughout the sale negotiations). The purchasers settled the OPEX dispute with the tenant post-settlement on terms that the tenant would pay less OPEX.

High Court decision

The purchasers issued proceedings against the vendor and its director for the reduction in the value of the property caused by the corresponding reduction in net income from the property. The claim was brought on four grounds:

  • That the failure to disclose the OPEX dispute was a misrepresentation under the Contractual Remedies Act 1979;

  • That the vendor had breached its obligations under the sale and purchase agreement (in particular, its obligations under the due diligence clause);

  • That the failure of the vendor to disclose the dispute with the tenant was misleading and deceptive conduct under the Fair Trading Act 1996 (FTA); and

  • That the director had personally engaged in the same misleading and deceptive conduct and was personally liable under the FTA.

The High Court dismissed all four causes of action. In relation to the claims against the company, the Court interpreted the due diligence obligations narrowly and held that the purchasers "had simply not asked the right question" to trigger an obligation on the vendor to disclose the OPEX dispute.

On the director's personal liability under the FTA, the High Court held that the relevant statements had been made by the vendor company and its agents and not by the director personally. On that basis, as the Court of Appeal described it, any attempt to hold the director personally liable was "doomed to fail".​

Court of Appeal decision

The Court of Appeal overturned the High Court decision and held that the vendor was liable for breach of contract (breach of the due diligence clause) and also for misleading and deceptive conduct under the FTA for failing to disclose the dispute with the tenant.

The Court of Appeal considered that the High Court had interpreted the due diligence clause too narrowly and had applied it in a "commercially unrealistic" manner. In the circumstances, the Court of Appeal held that the failure to disclose the tenant's challenge to the OPEX calculation was a breach of the due diligence obligation in the agreement.

Of particular interest, the director of the vendor was also held to be personally liable under the FTA for his role in the failure to disclose the dispute with the tenant.

Section 9 of the FTA provides that:

​​​No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

The Court accepted that, at all relevant times, the director was not acting on his own account but was simply acting on behalf of the vendor in his capacity as a shareholder and director. That raised an issue as to whether his conduct was "in trade" for the purposes of the Act.

On that issue, the Court confirmed that the "in trade" requirement of the FTA is to be interpreted broadly. It is not confined to individuals trading on their own account. Rather, a company director may be acting "in trade" even if they are only acting as an agent and director of a company.

On the issue of whether the director's conduct was "directly and causally" involved in the misleading and deceptive conduct, the Court of Appeal noted:

  • The director was closely involved in the dispute with the tenant. The tenant's correspondence was sent to him and he had supervised the response to the tenant.​

  • The director was directly involved in the sale process generally and, in particular, was well aware of the purchasers' ongoing efforts to clarify the OPEX position. He was copied on key correspondence and was closely involved in preparing responses to the purchasers.

  • Finally, the director accepted in cross-examination that he was responsible for not disclosing the correspondence received from the tenant raising issues with the OPEX allocated to it.

Taking these points together, the Court concluded the director was causally involved in the vendor's misleading and deceptive conduct.

The appeal was allowed. The High Court decision was overturned and judgment was entered for the purchasers against the vendor and the director. Damages were assessed at $424,371 (being the capitalisation of the reduction in net rent caused by the lower recovery of OPEX from the tenant).

Takeaways

The judgment should serve as a caution for company directors as to the potential reach of the FTA. In particular, the judgment:

  • Clarifies that the "in trade" requirement of the FTA is not limited to individuals acting on their own account and extends to directors acting as agents for a company.

  • Confirms that misleading and deceptive conduct is not limited to positive representations. The failure to disclose relevant information can be misleading and deceptive and can trigger liability under the Act in some circumstances.

  • Demonstrates the scope and flexibility of the FTA and the potential for claims to be brought under the FTA in addition a claim in contract. ​

If you would like to discuss any of the matters raised in this article, please contact the authors or your usual Bell Gully advisor.​


1 Sullivan v Wellsford Properties Ltd [2019] NZCA 168.​​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Jesse Wilson

    Partner Auckland
  • Jenny Stevens

    Partner Wellington
  • Brad Ward

    Senior Associate Auckland
Related areas of expertise
  • Litigation and dispute resolution
  • Corporate governance and advisory
  • Property and real estate