Misleading and Deceptive Conduct when Selling your Business

If you are considering selling your business, you must ensure you provide potential buyers with accurate information. The provision of false or untrue information may make you liable for engaging in misleading and deceptive conduct.

Section 18 of the Australian Consumer Law – found within Schedule 2 of the Competition and Consumer Act 2010 (Cth) – expressly prohibits individuals from engaging in misleading or deceptive conduct in trade or commerce. Under section 4 of the Australian Consumer Law, this includes representations made with regard to future matters that are not based on reasonable grounds.

It is difficult to provide a concise description of what comprises misleading or deceptive conduct given consideration must be made of the context in which a statement is made and the circumstances surrounding the sale.

Laws against misleading and deceptive conduct are broadly applicable, however, extending or applying to:

• Companies, as well as individuals;
• Transactions made anywhere within Australia;
• Written or oral statements, or a combination of the two;
• A failure to speak where the information withheld may have affected the truth of something you have communicated;
• Silence where the circumstance is one where you would ordinarily be expected to disclose particular facts;
• Promises, where there is no intention of keeping the promise;
• A prediction as to the future, or an inaccurate opinion, where there are no reasonable grounds for making it; and
• Representations that are likely or liable to mislead (as well as those which have the actual effect of misleading or deceiving).

While the phrase ‘misleading or deceptive conduct’ may suggest an intention to deceive, intention is not relevant. Additionally, the person misled or deceived does not need to establish loss or damage.

In 2022, a case went to the NSW Supreme Court with the plaintiff alleging that the defendant had provided financial statements containing ‘inaccurate, wrong, or false’ information, and that had they known the true financial position of the business, they would not have made the purchase.

While the defendant argued that they had relied on their accountant to prepare the financial statements; that the statements were not audited; that they were not asked to confirm the accuracy of the financial documentation; and made no warranty or representation that the statements were accurate, the Court found the defendant liable for misleading and deceptive conduct. In their decision, the Court held that – irrespective of the defendant’s intention – the plaintiff had relied on the accuracy of the financial documentation in its valuation of the business and would not have entered the contract if not for the misrepresentations made.

Finding the defendant liable for misleading and deceptive conduct, the Court noted that it was not relevant that they had not intended to mislead the plaintiff, it being sufficient that the plaintiff had relied on the accuracy of the information in making a decision to purchase the business.

Successfully establishing misleading or deceptive conduct may attract the following remedies, inter alia:

• A court order invalidating the contract of sale (as per ss 236, 237, 243 of the Australian Consumer Law);
• A declaration providing that the seller’s conduct was misleading or deceptive; or
• Damages

 

Avoiding misleading or deceptive conduct

To mitigate the risk of engaging in misleading or deceptive conduct, even unintentionally, in the sale of business a business should ensure that any information or documentation provided to the purchaser as part of their due diligence is accurate. If you are unsure of the accuracy of any information provided, or if the information has not been independently audited, ensure that this is made clear to the purchaser and suggest that they undertake their own investigations and enquiries.

*This article was prepared with the assistance of Clea Philips