Big payout ordered for misleading sale
The former owner of a Christchurch kitchen retailer has to pay millions in damages to the business’ new owner after a court found she was misled over its true value when she bought it five years ago.
The High Court in Christchurch has ordered European Interiors Limited and its sole owner and director, Ronald Frederick Neale, to pay Kate Cunningham $2,308,000 in damages, plus interest and legal costs.
In 2019, European Interiors Limited was trading as Palazzo Kitchens & Appliances when it decided to sell the part of its business that related to the Canterbury area.
European Interiors entered into a sale and purchase agreement with Kate Cunningham, with the sale subject to her being satisfied with a due diligence investigation of the business.
Neale signed the agreement giving all the warranties and undertakings of European Interiors. This included a turnover warranty of over $2.2 million for the period of April to December 2018.
Cunningham and her husband, Blair Cunningham, engaged accounting firm Kendons Scott MacDonald Ltd to advise them about the purchase.
Having been advised the business was viable and suitable for purchase, Cunningham incorporated KB Kitchens and bought Palazzo for $1.28m in April 2019.
However, the Cunninghams later discovered the turnover warranty and related information provided to them was incorrect and misleading. They sued European Interiors, Neale, and Kendons for damages.
In their claim to the court, the Cunninghams argued the business’ actual turnover between April and December 2018 was just over $1m, much less than the $2.2m stated in the sale agreement.
They submitted had the turnover warranty been correct, KB Kitchens would have recovered profits of about $2.3m, much more than what was recoverable with the true state of affairs.
The Cunninghams told the court the true value of the business at the date of settlement was about $195,000.
They said the information European Interiors provided misrepresented the business’ margins and profitability.
They claimed European Interiors was guilty of breach of contract and misleading and deceptive conduct under the Fair Trading Act, while Neale was guilty of breach of contract. They also stated Kendons was guilty of negligence and breach of contract.
On the eve of the trial, Kendons entered into a settlement agreement with the Cunninghams and the claims against it were discontinued.
However, court proceedings against European Interiors and Neale went ahead and the case was heard by the High Court in March. This was despite European Interiors having since been put into liquidation, and Neale being declared bankrupt.
In reviewing the evidence submitted to the court, Justice Osborne said he was satisfied the turnover warranty European Interiors provided was “materially incorrect” and that KB Kitchens and Kate Cunningham had suffered damages as claimed.
He ordered European Interiors and Neale to pay KB Kitchens and Cunningham over $2.3m in damages, plus about $123,000 interest.
European Interiors and Neale were also ordered to pay Cunningham about $159,000 in legal and other costs.