A businessman learns that one of his competitors is about to cease trading and wants to sell its business assets.  After meeting with the competitor and confirming that the assets are in good order, an agreement is reached and the assets are sold.  Then, years later, a person the businessman has never met turns up wanting to know where all his business assets have gone.  How could this happen!?

The judgment in Rosecell Pty Ltd v JP Haines Plumbing Pty Ltd [2015] NSWSC 1238 is a warning of how important it is to know who you are dealing with, and to never assume that the person running a business is actually its true owner.

The facts of Rosecell are exceptional.  Rosecell was owned by a member of the Finks outlaw motorcycle club.  After a disagreement with another club member, the owner was tortured (a fact proven by hospital admission records) and forced to flee town, but not before handing over control of his business accounts, records, and assets to the person who tortured him.  That club member then operated Rosecell’s business, presenting himself as a “partner” of the true owner who had run away.

Over time, the club member sold off the business assets, with none of the purchasers questioning who they were dealing with; all appear to have accepted that the sole person running Rosecell’s business and controlling its assets must have been authorised to sell those assets.  After the assets were all sold, the club member (so far as the Court’s judgment records) seems to have disappeared.

Some time later, the original business owner returned and sought to salvage what was left of his business’s assets.  After learning that the assets had been sold, he sued the purchasers, who argued that they were entitled to assume the person who had been left in control of the business was entitled to deal with that business’s assets.  That argument was rejected by the Court, which held that it was up to the purchasers to satisfy themselves that the person they were dealing with was entitled to deal with the business assets, and that having failed to do so they had to pay compensation for the goods that they had purchased (effectively meaning they had to pay for them twice).

While an extraordinary set of facts, this is a stark lesson of the need for due diligence, including as to the person you are dealing with, as part of any high-value business transaction.

For more information, please contact Stephen Polczynski on 02 9234 1500.