Being aware of financial arrangements for the $38 million purchase of Orcon in 2013 meant property lawyer Jeffrey Lai was by implication liable for a breach of the Fair Trading Act when he acted on a client’s misrepresentation about the level of equity contributed. Investor Greg McAlister sued to recover a $200,000 investment.
Mr Lai represented Mr Warren Hurst in negotiations to buy telecoms company Orcon in early 2013. With settlement looming, Mr Hurst was struggling to finalise financing. The Court of Appeal was told of a critical April 2013 meeting held in Mr Lai’s office between Mr Hurst and Mr McAlister. Mr McAlister had been lined up to become Orcon’s CEO. He had agreed to put $200,000 of his own money into the $38 million deal, subject to suitable terms being negotiated. At the April meeting, discussion centred on terms for a convertible note recording Mr McAlister’s investment. Orcon’s proposed debt/equity ratio was critical in determining a conversion ratio for the McAlister convertible security. At the meeting, Mr Hurst said he was putting up $8.5 million by way of equity funding. Mr Lai prepared a convertible note on this basis for Mr McAlister to sign. In fact, Mr Hurst was looking to put up next to nothing; the deal would be almost entirely debt-funded. He planned to fold his company Vivid Networks Ltd into Orcon at a value of $2.5 million. Further cash was to be raised by the sale and leaseback of Orcon assets netting a further $3.25 million. When Orcon subsequently suffered a cash flow crisis, Mr McAlister’s $200,000 convertible note lost most of its value. Mr Hurst was bankrupted.
Mr McAlister sued Mr Lai. He alleged Mr Lai, as Mr Hurst’s legal adviser, breached the Fair Trading Act. The Court of Appeal said Mr Lai had helped structure the proposed Orcon sale and leaseback deal. He would have been aware Mr Hurst had misrepresented to Mr McAlister the level of equity contributed to the Orcon purchase. Mr Lai was personally involved in calculating terms for the McAlister convertible note knowing the debt/equity ratio was incorrect, the Court ruled. It was not a case of being fresh to the transaction and working off figures given him by the parties, the Court said.
It was misleading and deceptive in breach of the Fair Trading Act for Mr Lai to calculate the conversion rate for Mr McAlister’s investment using an incorrect equity figure. Damages require a High Court assessment as to the full extent of Mr McAlister’s losses.
McAlister v. Lai – Court of Appeal (7.05.18)
18.096