Roumanus v Orchard Holdings (NSW) Pty Ltd (in liq) [2013] FCAFC 19

The Full Court has delivered its decision in Roumanus v Orchard Holdings (NSW) Pty Ltd (in liq) [2013] FCAFC 19, an appeal from Foster J’s decision in Roumanus v Orchard Holdings (NSW) Pty Limited (In Liq) [2012] FCA 775 (20 July 2012).

In dismissing the appeal, the court held that false and misleading representations made by company directors, Ms Kady and Mr Sarkis to induce the sale of shares held by the directors, in circumstances where the directors promised to lend the proceeds of sale to the corporation, were made in their private capacities and not made by the company, Orchard Holdings (NSW) Pty Limited (In Liquidation) (Orchard).

The Facts

Ms Kady and Mr Sarkis represented to investors that that a property development venture needed $3.5 million to attain the required development consent and to build the necessary infrastructure. They said that, once these stages had been completed, the property would be worth $30 million.

From time to time Ms Kady and Mr Sarkis made statements directly to the investors that suggested a DA would be lodged or had been lodged and was “progressing well”, was “close”, was “on track”, or similar. No DA was ever lodged by or on behalf of Orchard and the company went into liquidation.

The Primary Decision

The primary judge was of the clear view that the statements were false and therefore misleading and deceptive. The investors relied upon these false statements when each of them made the investments which they made in Orchard. His Honour observed that the shares acquired by the investors were probably worthless when acquired.

Based on these considerations, Foster J found that Orchard did not play a role in the making of the misleading and deceptive statements nor did Orchard play a role in the share transactions. In addition, Ms Kady and Mr Sarkis were not acting as agents of Orchard.

The Appeal

The appeal asserted that the conduct of Mr Sarkis and Ms Kady  could also be characterised as conduct which was engaged in by them and Orchard together, that is by Mr Sarkis as vendor and by Orchard acting through Mr Sarkis and Ms Kady as directors. 

In particular, the appellants submitted that when Mr Sarkis promised the appellants that he would lend the sale proceeds to Orchard, that promise was not just a representation made by Mr Sarkis as representor but additionally a representation by the borrower, Orchard, to the effect that it would borrow the funds from Mr Sarkis.

The Appeal Decision

A difficulty with the appeal submission was the express finding that there was no evidence of express authority to make representations about  Orchard borrowing funds.  Also, Mr Sarkis and Ms Kady had no implied or ostensible authority from Orchard to make statements on its behalf to persuade potential investors to purchase shares from Mr Sarkis.

The Full court affirmed that the correct position was set out by his Honour when he characterised Mr Sarkis’ assurances (possibly aided by Ms Kady) as being made in their private capacities: Mr Sarkis was selling his shares and he or Ms Kady made representations to the investors about the company’s prospects and also what Mr Sarkis would do with the proceeds of sale, that is, that he would lend the proceeds to the company.  His Honour’s description of the latter representation as a “sweetener” was a conclusion that the investors knew that Mr Sarkis and Ms Kady were acting for themselves and not for Orchard.

The court noted the contrasting situation which arises where a director/vendor makes a representation about the financial prospects of the company in order to induce an investor to purchase shares from the vendor.

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