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[2019] VSC 23
General information, not legal advice.
Supreme Court of Victoria
2019-02-19
Kennedy J
Original judgment source is linked above.
SHAREHOLDERS - Settlement of oppression proceeding - 'Fair value' of shares to be determined by valuer - Whether valuation in accordance with contract - Failure to consider and apply 'fair value' test in contract - Failure to consider actual performance of company where consideration given to forecast figures - Valuation set aside.
1 This is the trial of a question as to the validity of a valuation prepared pursuant to terms of settlement of an oppression proceeding.[1] The first issue is whether any of 3 alleged errors are established such as to vitiate the valuation. The second issue is what is the appropriate remedy if an error is established.
2 Mr Michael Sklovsky (the second applicant) is the sole director of the first applicant (Udaipur Lake) and founder of the 'Ishka' business. He was formerly a director of the first respondent (MS Pty Ltd) which trades as 'Ishka.'
3 Mr Toby Darvall, the third respondent, is (now) the sole director of MS Pty Ltd and also a director of Darvall Group Pty Ltd (DG Pty Ltd), the second respondent.
4 The Ishka business has been trading since 1971 and sells handmade clothing, jewellery, furniture and homewares.
5 Udaipur Lake has 384,000 shares as a minority shareholder of MS Pty Ltd. DG Pty Ltd has 576,000 shares. Another entity has 40,133 class B shares (which carry the same rights as ordinary shares).
6 On 17 January 2018, Udaipur Lake commenced this oppression proceeding seeking relief, inter alia, that its shares be sold, and seeking to restrain the holding of a meeting to issue new shares (which would thereby dilute the shareholding of Udaipur Lake).
7 On 7 March 2018, the parties[2] agreed to settle the matter pursuant to terms contained in a 'Term Sheet for Settlement of Claim' dated that day (Term Sheet). Pursuant to cl 2 of the Term Sheet DG Pty Ltd agreed to pay Udaipur Lake the Purchase Price in consideration of Udaipur Lake transferring all interest in its shares in MS Pty Ltd by the earlier of the date the second respondent notified that it was ready and willing to pay the purchase price, or 30 June 2018.
8 Pursuant to cl 5 the Purchase Price was the 'Valuation' plus $160,000. Clauses 10 to 18 then provided for the obtaining of a Valuation and read:
9 Pursuant to cl 31 of the Term Sheet Mr Sklovsky was also to resign as a director of the first respondent with effect from 8 March 2018.
10 On 20 April 2018, a joint brief was prepared for Mr John McGuiness as the jointly nominated valuer (Valuer).
11 On 30 April 2018, the Valuer provided a draft engagement letter, draft scoping letter and requested information which included specified financial information including monthly management accounts to January 2018.
12 On 9 July 2018, the Valuer made a further request which included a request for sales summaries up to week 47 of the financial year ending 30 June 2018 (FY18).
13 On 11 July 2018, revised versions of the scoping and engagement letters were sent from the Valuer and were subsequently signed for and on behalf of the parties formalising the engagement. The engagement letter recorded the scope of the work as being to 'provide a valuation of ULPL [Udaipur Lake's] interest in Michael Sklovsky Pty Ltd as at 31 January 2018.' In terms of timeframe it recorded that:
Timeframe
You have advised that the parties will require a report to be done on a reasonable timeframe. We will work to deliver a report within a reasonable timeframe which will depend on timely access to personnel and information.
14 There was further correspondence from the Valuer as set out in Appendix A to his report (e.g. on 27 July 2018, 7 August 2018, 27 August 2018 and 11 September 2018). This included, inter alia, specific questions in relation to accounting information which had been provided, as well as follow up requests for information which had not been provided.
15 Responses were provided from the parties' solicitors from June 2018 to September 2018, including information provided via 'drop box' on 19 June 2018. In particular, by communications from KCL Law dated 29 August 2018, and from Cornwall Stodart dated 30 August 2018, it was agreed by the parties that the Valuer would determine the 'standard of value'. This matter had previously been the subject of considerable debate.
16 Submissions were also adduced from Lonergan Edwards & Associates (for the respondents) of 18 June 2018 and from Ferrier Hodgson (for the applicants) of 19 June 2018.
Draft valuation report and request for confirmation of factual accuracy
17 On 17 September 2018, a redacted draft version of the valuation report was provided to the parties. The document contained a number of appendices. Appendix A was entitled 'Instructions' and relevantly included the following:
(a) 'A23 KCL Law Confirmation Letter, [ ] September 2018'; and
(b) 'A24 Cornwall Stodart Confirmation Letter, [ ] September 2018'.
18 Paragraphs 1.3.9 and 1.3.10 were highlighted as follows:
1.3.9 I provided a draft of this report (absent findings) to Cornwall Stodart and KCL Law on [17 September 2018] for confirmation of the factual accuracy of comments in the draft report.
1.3.10 I was provided with [certain / no] matters of clarification by KCL Law on [19 September 2018] (Appendix A23). I was provided with [certain / no] matters of clarification by Cornwall Stodart on [19 September 2018] (Appendix A24).
19 The draft did not advise the parties what method of valuation would be adopted. Further, although there was reference to figures in the FY18 budget (which included forecast EBITDA[3] of $5,304,778 at 5.3.4), the 'Valuation Analysis' section 7 was excised, with the result that the draft did not record how, if at all, the budget FY18 figures would be utilised.
20 By email of 17 September 2018 Mr McGuiness then wrote to the solicitors as follows:
I enclose a draft (absent findings) for the purpose of confirmation of factual accuracy.
I ask that you consider the content of the draft (absent findings) and respond to me as to your confirmation or clarification. I think the timetable was for two business days, so if I could have your comments on Wednesday 19 September, I can work to having a final report with you on 24 September 2018 ... (emphasis added)
21 By letter from Cornwall Stodart dated 19 September 2018 (19 September 2018 Letter) the solicitors wrote:
We refer to your emails dated 17 September 2018 and to the redacted draft valuation attached thereto, and also to your letter dated 27 August 2018 (in particular, wherein you requested that the parties provide comments as to the factual accuracy of the draft report (absent findings).
This letter responds to the abovementioned request to confirm the factual accuracy of the draft report. Please be aware we have taken a narrow view of your meaning, and limited our response accordingly. Should the response from KCL Law take a broader view of the request, and make submissions about any of the matters referred to in the draft report, we reserve the right to reply.
We are instructed that, save for as outlined below, our client agrees that the matters referred to in the draft report (absent findings) are accurate and reflect the source material provided to the valuer.
To the extent the figures extracted in your report, in various tables, refer to "30 June 2018" or "30 June 2018 Budget" amounts, we are instructed that our client agrees that they reflect the amounts in the Special Purpose forecasts provided to the company's financier (that was amongst the documents uploaded to Dropbox). However, we are instructed that they do not accurately reflect the 30 June 2018 actual amounts.
In particular, the table at paragraph 5.3.4 refers to a budgeted EBITDA of $5,304,778. We are instructed actual EBITDA (before normalisation or adjustment) was:
2 first half year to 31 December 2018 [sic] - $3.420 million;
3 second half-year (1 January - 30 June 2018) - $160,000
4 Total EBITDA FY2018 - $3.58 million (32.5% below forecast)
It is a matter for the valuer to determine the extent to which "hindsight" and budgeted figures for the period 1 February 2018 - 30 June 2018 are relevant to a valuation as at 31 January 2018. The point we wish to make is that actual figures to 31 January [sic] 2018 demonstrate that forecast EBITDA would exceed actual EBITDA. (emphasis added)
22 On 20 September 2018 KCL Lawyers for the applicant also provided a letter (20 September 2018 Letter) which stated as follows:
We refer to the draft report that you forwarded to us and Cornwall Stodart on 17 September 2018, and Cornwall Stodart's letter to you dated 19 September 2018. Our comments are as follows:-
23 There were no further communications from the Valuer prior to production of his final report. In particular, the Valuer did not seek access to any financial records which supported the FY18 EBITDA figure referred to in the 19 September 2018 Letter.
24 On 24 September 2018, the Valuer provided his formal report (Valuation).
(a) determined that the applicable standard of value was 'fair value' (2.1.3, 3.3.10);
(b) used the 'capitalisation of earnings' as his primary methodology of valuation with a 'discounted cash flow' analysis as a secondary method together with an orderly realisation of assets analysis (3.1.12);
(c) obtained an expected EBITDA figure of approximately $4.7 million (7.2.12, 7.2.17) and applied an EBITDA multiple in the range of 3.3 to 3.4 times (7.2.21) to 'estimate the enterprise value' in the range of $15.3 to $15.9 million (7.2.25); and
(d) applied a pro-rata value of the 38.4 per cent interest of Udaipur Lake and concluded that the fair value of the interest in MS Pty Ltd was 'in the range of $2.58 million to $2.82 million, or a mid-point value of $2.70 million.' (7.2.33).
26 The critical EBITDA figure of $4.7 million was derived despite that, as highlighted by the respondents, a summary of the financial position of the company detailed that the actual performance of the company had only ever reached a high point of EBITDA of $3.39 million for the financial year ended 30 June 2017 (FY17) (5.3.4).
27 In calculating this $4.7 million EBITDA figure the Valuer, in turn, relied on a 'forward revenue' figure of $49.9 million which was based on a number of factors. Significantly, he explicitly states that one of his 'reference points' is the 'budget revenues' figure of $52.2 million in FY18 (7.2.7). He further states:
On balance, I have estimated revenues of $47.5 million at 31 January 2018. This gives a forward revenue figure of $49.9 million which falls within the range of revenues for FY17 of $41.3 million and the budget revenues for FY18 of $52.2 million [(7.2.9)].
28 The report also contains a number of other references to the increased performance of the company based on the budget figure for both revenue and EBITDA for FY18 (e.g. 5.3.9, 5.3.10, 5.3.19, 5.3.26). The budget FY18 figures also gave the Valuer more comfort as a reasonable comparable for estimated future financial performance (e.g. 5.3.17, 5.3.35), most significantly as a comparable for his 'forward revenue figure of $49.9 million' (7.2.9).
29 Notwithstanding such reference to budget figures for 2018, there was no reference to the EBITDA figures contained in the 19 September 2018 Letter concerning the actual performance for FY18 (which were apparently based on the management accounts). Further, although that letter did not disclose the precise figure for actual revenue, the Valuer did not seek to elicit the financials which would disclose that figure (despite putting much weight on the forecast predicted revenue figure).
30 It is true that the 19 September 2018 Letter is cited in the Valuation Contents index as part of Appendix A instructions as 'A24 Cornwall Stodart Confirmation Letter, 19 September 2018' and that it is also then annexed to the report (as is the 20 September 2018 Letter). The Valuation also records:
1.3.9 I provided a draft of this report (absent findings) to Cornwall Stodart and KCL Law on [17 September 2018] for confirmation of the factual accuracy of comments in the draft report.
1.3.10 I was provided with certain matters of clarification by KCL Law on 20 September 2018 (Appendix A23). I was provided with certain matters of clarification by Cornwall Stodart on 19 September 2018 (Appendix A24).
1.3.11 I proceeded to issue the final report which is binding on the parties.
31 However, it was not suggested by the applicants that there was any other analysis or active consideration of the matters the subject of the 19 September 2018 Letter (or for that matter, the subject of the KCL letter of 20 September 2018). This is despite the fact that the Valuer generally found that there was a 'level of confidence' in using the management accounts (5.1.4).
32 In terms of the reference to the 'fairness' standard, the Valuer acknowledged that fair value generally does not account for adjustments for lack of control and lack of marketability associated with a minority interest (3.3.11). He also makes reference to this standard in a conclusory way (e.g. 2.1.4; 7.2.32-3).
33 However, there is no analysis as to why the methods chosen were determined to be 'fair' (e.g. 3.1.12, 7.1.1, 7.3.1, 7.3.12). Moreover, the report contains references to other irrelevant standards. Thus it suggests that, after selecting a method, it was important to review the 'reasonableness' of the indicated values (3.1.7; see also 7.2.2, 7.2.22, 5.3.13). There are also references to the concept of an 'enterprise' value (3.1.17; 7.2.24; 7.2.31; 7.3.11).
34 In the case of Legal & General Life of Australia Ltd v A Hudson Pty Ltd (Legal & General)[4] a lessee sought a declaration that the valuation prepared pursuant to a rent review clause in the lease did not validly determine the value of the premises. The lessee succeeded at first instance but the New South Wales Court of Appeal allowed the lessor's appeal.
35 McHugh JA found that the valuer had erred in determining the rent but that this finding was not determinative of the proceeding. He stated:
In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.[5]
37 In Holt, the articles of association of a company provided that Mr Cox's shares were to be, upon termination of his employment with the company, offered by him to the plaintiffs, who held all of the remaining shares, at a 'fair price' determined by the auditor of the company. Santow J held that the auditor's determination was not made in accordance with the articles. This was principally because the auditor disregarded the right of Mr Cox on a winding up of the company to receive 20 per cent of any distribution of capital. First, the winding up right was required to be valued. Second, it was unfair to disregard the prospect of a sale of the company's business and its winding up.[8]
38 The NSW Court of Appeal upheld the decision of Santow J. Mason P highlighted that mistake is not itself a ground of vitiation as in each case the critical question is whether the valuation was made in accordance with the terms of the contract.[9] The ultimate view was that the error in the handling of the issue of wind up prevented the determination from being the 'fair price' required by the contract.[10]
39 In AGL, the Victorian Court of Appeal drew a distinction between an error in the exercise of a judgment, opinion or discretion entrusted to an expert, and an error which involves objective facts or a mere mechanical or arithmetic exercise. Nettle JA, citing Holt v Cox, highlighted that the situation in reviewing a valuation is somewhat analogous to that which faces a court in judicial review of administrative error. He stated:
Therein lies the distinction drawn in some of the authorities, and observed by the judge in this case, between an error in the exercise of a judgment, opinion or discretion entrusted to an expert, and an error which involves objective facts or a mere mechanical or arithmetical exercise. Subject to the contract in question, it is easier to suppose that parties to a contract contemplate that an error of the former kind be beyond the realm of review than it is to think that they intend to be fixed with errors of objective fact or in processes of mechanical calculation.
...
The question in each case is what the parties should be presumed to have intended, and that is to be determined objectively from the terms of the contract, bearing in mind the context in which it was created. (citations omitted)[11]
40 More recently in the Court of Appeal decision of The Gull Lexington Group Pty Ltd v Laguna Bay (Banongill) Agricultural Pty Ltd[12] the Court summarised the principles as follows:
However, it is important to recognise that the categories of grounds for setting aside a valuation or other expert determination are not closed. The reason why this is so may be seen from 'the critical question' posed by McHugh JA in Legal & General and refined over time by Mason P in Holt v Cox and Nettle JA in AGL - namely, whether a valuation is binding upon the parties is to be determined by reference to whether the parties would have objectively intended to be bound by the valuation, having regard to the terms of the contract appointing the valuer and bearing in mind the context in which that contract was created.[13] (emphasis added)
41 The respondents fairly conceded that three grounds only were to be pursued,[14] which were:
(a) that the Valuation wrongly contained a range of values;
(b) that the Valuer's adopted EBITDA for 2018 (of $4.7 million) and opinions as to growth were contrary to an objective fact i.e. that total EBITDA for 2018 was only $3.58 million; and
(c) that the Valuer failed to apply the 'fair' standard, which included a failure to consider the known performance of the company.
42 Significant weight was placed on ground 3 (which also overlapped with ground 2) with very little advanced in support of ground 1. However, given ground 1 was not abandoned, it will be dealt with, relatively briefly, first.
43 The respondents submitted that the valuation breached cl 16 of the Term Sheet set out above.
44 In written submissions the respondents highlighted that a range figure was given for various parts of the calculation supporting the ultimate determination. In particular, it was submitted that the agreement required the Valuer to adopt single figures for the EBITDA multiple, EBIT multiple and cash flow multiple.
45 In oral submissions the respondents submitted that the 'range approach' also directly contravened the second sentence of cl 16 which did not permit a range.
46 Clause 16 of the Term Sheet provides that the Valuer is to provide a single value as to value of the interest of Udaipur Lake. The second sentence does provide that 'no range of value' is permitted. However, this prohibition is clearly directed to the ultimate single value of the 'interest of the Applicant' and does not prevent the Valuer from identifying ranges of figures constituting amounts leading up to, and giving rise to, this ultimate figure.
47 I therefore accept the submission of the applicants that, by disclosing ranges of values for the components leading up to his ultimate figure, the Valuer has merely disclosed his mathematical calculations so as to reveal his path of reasoning. This is not prohibited by cl 16.
48 Most significantly, at paragraphs 2.1.4 and 7.2.33 of the Valuation, the Valuer did determine the value of the interests of Udaipur Lake in MS Pty Ltd at a (mid-point) single value of $2.70 million. This complies with clause 16.
49 There is no breach of cl 16 as the Valuer has provided the 'single value' as to the value of the Udaipur Lake's interest as required.
51 As indicated above, this was the ground which was given most significance, although there was some considerable overlap with ground 2.
52 Prior to consideration of this ground it is necessary to consider the relevant principles.
53 As highlighted already, in Holt, the failure to give rise to the possibility that the company might be sold and the company wound up meant that the valuation was not in accordance with the requirement to determine a fair price.
54 Both Counsel also made extensive reference to Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd[15] (Candoora).
55 In that case, Candoora had exercised an option under a put option deed which required the majority shareholder to purchase its 25 per cent shareholding. Pursuant to the terms of the put option deed (absent agreement) the valuer was required to determine the 'fair value' of the shares.
56 Hargrave J (as he then was) found that the valuation was invalid because it was not given in accordance with the deed.
58 He further found that the valuer was required to give separate consideration to whether the value was a 'fair value' which he did not do.[18] He highlighted that the valuation contained no reference to the need for the valuer to ensure that the value which was determined was 'fair, just or equitable'[19] and did not accept a submission that the valuer gave consideration to the criterion of fairness.[20]
59 His Honour noted that there was no occasion within the report where the valuer considered whether the valuation methodology was likely to lead to a fair value or whether the value reached constituted a fair value in all the circumstances.[21]
Principles - Construction of contract and relevant information
60 It is also necessary to construe the relevant provisions of the Term Sheet in accordance with the general principles of contractual interpretation.
61 Pursuant to the principles set out in the judgment of French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd & Anor the rights and liabilities of parties under a provision of a contract are to be determined objectively, by reference to its text, context and purpose.[22] Moreover, in determining the meaning it is necessary to ask what a reasonable businessperson would have understood the terms to mean.[23]
62 It was accepted by both parties that the contractual documents were constituted by reason of the Term Sheet; the email enclosing the joint letter of engagement to the Valuer dated 20 April 2018; the letter from the Valuer dated 11 July 2018 signed by and on behalf of the parties; and the communications of 29 and 30 August 2018 as stated above.[24]
63 In particular, it was not suggested that MS Pty Ltd's Shareholder Agreement shed any light on the construction of 'fair price' in the Term Sheet.[25] The Constitution does however contain reference to 'fair price' in the context of share transfers.[26]
64 Overall, then, the Valuer was to value Udaipur Lake's interest as at 31 January 2018 at a 'fair' value to be completed in a reasonable time frame from 11 July 2018 taking into account the access to information.[27]
65 However, this did not mean that the Valuer was restricted to information as at 31 January 2018. Rather, as highlighted by the High Court in the decision of HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (HTW),[28] with reference to its earlier decision of Kizbeau Pty Ltd v WG & B Pty Ltd,[29] assessments of value are commonly made taking into account all matters known by the later date of assessment.[30] The Court also referred to what Dixon J had said in the specific context of shares in Potts v Miller[31] as follows:
[T]he real value of what the plaintiff got must be ascertained in the light of the events which afterwards happened, because those events may show, for instance, that what the shares might have sold for was not their true value or that it was a worthless company.[32]
67 The respondents submitted that at no point in time did the Valuer give any consideration as to whether the figures he reached complied with the notion of fair value. The failure to consider whether the value reached was 'fair, just or equitable' (as cited in Candoora) meant that the valuation was not in accordance with the agreement of the parties. In particular, that it was not fair to rely on the EBITDA figure of $4.7 million while ignoring the fact that the business was actually performing at 32.5 per cent below budget (i.e. when EBITDA for FY18 was actually only $3.58 million).
68 In oral submissions significant weight was given to the decision in Candoora. It was submitted that there were two steps the Valuer was required to take. First, he was required to turn his mind to whether the valuation method was appropriate to determine fair value. Secondly, he was required to determine whether or not the ultimate value at the end was fair, just and equitable in all the circumstances.
69 It was submitted that the Valuer had not in any way considered whether the chosen methodologies were likely to lead to a fair result. Nor did he 'stand back' once he got to the end result and turn his mind to whether the value reached was fair. More particularly, there was no specific discussion as to whether there ought to be an adjustment on the basis of the actual EBITDA as advised in the 19 September 2018 Letter in circumstances where there was a 32.5 per cent difference.
70 The written submissions were not clearly directed to the grounds as ultimately formulated by the respondents.
71 However, there appeared to be four critical matters raised by the applicants in written submission:
(a) there was no obligation under the agreement to consider actual performance beyond 31 January 2018. This is particularly so given the critical dates of 20 April 2018 (for provision of the report) and 30 June 2018 (for the completion date);
(b) there can be no mistake in circumstances where assertions were made in the 19 September 2018 Letter with no actual monthly management accounts documents provided;
(c) it would be unfair to take account of this subsequent information in circumstances where the first applicant had agreed to sell his shares and had ceased involvement as director; and
(d) there is no evidence that there would be a different result even if the matters were taken into account.
(a) that there was no obligation in the context of an oppression case to have regard to events post the date that the oppression commenced;
(b) that the letter was 'bald assertion' and not supported by primary documents as was necessary pursuant to cl 12 of the Term Sheet; and
(c) that the matters may well have been taken into account by the Valuer and dismissed.
73 In the particular context of the 'fair' test, the applicants first highlighted that there was correct identification of the 'fair value' test in 'Valuation Principles' annexed as Appendix D (in particular at D1.1 and D1.3). Secondly, that the decision in Candoora was distinguishable since in that case the contract had required fair value and the valuer used the market value method. Finally, that it could not be said that the figure was unfair by 'standing back' and having regard to Counsel's calculations (which gave an EBITDA of around $5.2 million based on actual monthly amounts to January 2018).
74 First, notwithstanding the oppression context, the contract provides that the valuer was to determine a 'fair value'. Consistent with HTW above, the Valuer was entitled to consider subsequent actual performance in undertaking his Valuation. Given the terms of the Valuer's engagement letter dated 11 July 2018 and signed by the parties, and the delays in provision of information, I also consider that the critical dates were extended beyond 30 June 2018 (as enunciated above).
75 This position is strengthened in this case given the Valuer himself considered budget figures which forecasted performance for a period after 31 January 2018 (to June 2018) as highlighted already. Given those forecasts appear to have been treated as a material consideration in determining value, it is only fair that there also be consideration of the actual results, particularly where those result appeared to be so markedly different to the forecast (i.e. where EBITDA was 32.5 per cent less than that forecast).
76 It is true that the 19 September 2018 Letter did not annex the relevant financial documents. However, the rules of evidence do not apply. The form of the letter is also explicable given the nature of the request which was urgent (requiring a response within 2 business days) and required merely 'confirmation or clarification.' The Valuer was also able to (and had previously) sought relevant financials where he deemed this appropriate, which could have included the actual revenue figures (as he was entitled to do under cls 13 and 14 of the Term Sheet).
77 There was also no suggestion that the applicants challenged the figures. To the contrary, the 20 September 2018 Letter merely sought to make the point that actual FY18 EBITDA figures were reduced by actions of Mr Darvall (outside of Mr Sklovsky's control). If necessary to decide, I also do not consider cl 12 of the Term Sheet to be applicable, which applies to submissions (which had already been provided). Instead, the parties were responding to a specific request of the Valuer under cl 14.
78 I also reject the suggestion that the matters the subject of the 19 September 2018 Letter were taken into account and dismissed. I say this for two reasons. First, as highlighted already, a comparison between the draft and final reports suggest that there was only a formalistic process of annexing correspondence without any active consideration. Secondly, if there had have been consideration of the material, one would have expected reference to it at various points where the budgeted FY18 figures were cited. This, however, did not occur as set out above.
79 Overall then, I do not consider that the Valuer has given actual consideration to the matters contained in the 19 September 2018 Letter.
80 The issue then arises as to whether his failure to take these matters into account means that he has breached the contractual requirement to give a fair value.
81 Turning to the question of fairness more generally, the Valuation contains no analysis of fairness principles. I am not satisfied that the (unsourced) 'Valuation Principles' contained in Appendix D are helpful in this regard. They do not provide any analysis of this case and, in any event, are not relied on in the valuation analysis. Moreover, they do not cite the correct test of 'fair, just and equitable' consistent with Candoora.
82 More significantly, there is nothing in the report where the Valuer considers whether the methodologies chosen are likely to lead to a fair value, nor whether the valuation reached as a whole constitutes the fair value.
83 In this way the case is similar to Candoora even if not identical. As cited already, there also appears to be reference to other 'non-fair' values such as 'enterprise' and 'reasonableness'.
84 Moreover, the fact that the applicants' Counsel may arrive at a rough figure which justifies the decision is not to the point. It is the Valuer's task to apply the correct test. In this respect, Counsel fairly conceded that she was unable to identify a statement where the Valuer effectively stood back and said 'this is fair and just for the following reasons...'[35]
85 I am therefore satisfied that the Valuer has not asked himself the correct question in the contract as to whether the value was a 'fair' value. In particular, the Valuer has not considered whether the chosen methodologies were likely to lead to a fair value, or whether the valuation reached on application of those methodologies constituted a fair value.
86 I am further satisfied that the Valuer has not taken into account the matters referred to in the 19 September 2018 Letter as to the actual EBITDA performance to 30 June 2018. This is not 'fair' in circumstances where he has chosen to take into account budget forecasts relating to performance up to 30 June 2018, but has failed to take account of material as to actual performance to that time.
87 This is not to say that the Valuer will necessary reach a different result. Thus, after provision of further documentation and submissions he may or may not have a different view (including on the basis of the matters raised by the applicants).
88 However, I consider that he has not properly assessed 'fair' value in circumstances where he has simply ignored the actual EBITDA for FY18.
89 For these reasons I am satisfied that the valuation was not made in accordance with the contract.
90 The respondents submitted that there had been a failure to have regard to 'objective facts' as advised in the 19 September 2018 Letter, namely, that the FY18 budget EBITDA had not been met and that actual EBITDA was 32.5% below budget.
91 For reasons already given, I consider that this failure supports a conclusion that the Valuer did not apply the 'fair value' term in the contract. Given this finding, it is unnecessary to consider whether such failure might also constitute a further independent breach of the contract in its own right.
92 Having concluded that the valuation was not made in accordance with the contract, there should be a declaration that it is invalid and does not comply with the contract. It should also be set aside.
93 An issue then arises as to what should then occur.
94 The respondents submitted that the matter ought be remitted to a different valuer. The only reason advanced for this was that there was the problem of someone having come to a position, such that it would be difficult to consider the matter afresh in circumstances where the Valuer might not be prepared to do it 'properly.'
95 The applicants submitted that the matter ought be sent back to the same Valuer, emphasizing the cost and delay. Counsel further cited paragraph 8.1.4 of the Valuation wherein the Valuer reserved the right to amend any conclusions should any further information become available (Disclaimer).
97 In the absence of a contractual term (either express or implied) dealing with the issue, the Court may, pursuant to its general jurisdiction, determine whether the contractual question should be re-determined by the same expert or not.[38]
98 I am not satisfied that there is any express or implied term in this case. Moreover, the Disclaimer cannot operate where the valuation itself has been declared invalid. The error also extends beyond a failure to consider material.
(a) it is only where the objection is reasonably based that the court will usually direct re-determination before a different expert;
(b) where the only objection is based on a mistake as to an objective fact it would usually be unreasonable to object to remission to the same expert; and
(c) delay, increased cost and inconvenience may be taken into account.
100 Ultimately in Candoora (No 2) his Honour considered that it was inappropriate for the existing valuer to conduct any subsequent valuation. In so saying he determined that there were reasonable grounds for one of the parties to assert that the original valuer would not bring 'a fair and balanced mind' to any further valuation.[41] There were two reasons for this. First, the original valuer's error was of a most substantial kind. Second, the original valuer had written a letter which demonstrated a propensity to support the impugned valuation.[42]
101 Here, it is true that I have determined that the Valuer did not apply the correct test. However, I do not consider that this supplies reasonable grounds for any suggestion that he would not bring a fair and balanced mind to any further valuation. No such submission was made by the respondents.
102 I am also entitled to take account of the costs and delay in the context of a long standing oppression proceeding. I am fortified in this approach by the provisions of the Civil Procedure Act 2010 (Vic).[43]
103 I will accordingly order that the matter be remitted to Mr McGuiness who should reconsider his valuation in the light of these Reasons.
104 I will declare that the valuation is invalid because it was not given in accordance with the contract. I will also order that the valuation be set aside.
105 There will be an order for re-determination by Mr McGuiness of the fair value of Udaipur Lake's interest in MS Pty Ltd pursuant to the contract in the light of these Reasons.
106 I will otherwise hear from the parties as to the precise form of orders, which should also make provision for the submission of further material to the Valuer.
[1] Order of the Honourable Justice Elliott in Udaipur Lake Pty Ltd & Ors v Michael Sklovsky Pty Ltd & Ors (Victorian Supreme Court, S ECI 2018 00011, 1 November 2018) (November Order) recorded that the parties were in dispute as to whether the valuation contained in the report of John McGuiness dated 24 September 2018 was binding upon them. His Honour thereby set the proceeding down for trial on the question of the validity of the valuation in accordance with the Term Sheet.
[2] The parties included the then existing parties to the proceeding and Mr Sklovsky and Ms Jane Darvall, Mr Darvall's wife. Mr Sklovsky was subsequently joined as the second applicant to the proceeding pursuant to order 1 of the orders of the Honourable Justice Elliott in Udaipur Lake Pty Ltd & Ors v Michael Sklovsky Pty Ltd & Ors (Victorian Supreme Court, S ECI 2018 00011, 26 October 2018). Ms Darvall was subsequently joined as the fourth respondent to the proceeding pursuant to order 2 of the November Order.
[3] Earnings before interest, tax, depreciation and amortisation.
[8] Holt v Cox (1994) 15 ACSR 313, 338-40.
[9] Holt [1997] NSWSC 144; (1997) 23 ACSR 590, 597.
[11] AGL (2006) VSCA 173 [53]-[54].
[14] Transcript of Proceedings (31 January 2019) 2.
[19] Ibid [82]. This phrase was adopted by Santow J in Holt v Cox (1994) 15 ACSR 313, cited at Candoora [2008] VSC 367 [53].
[20] Candoora [2008] VSC 367 [83].
[21] Ibid [25], [34] and see also [83].
[22] [2015] HCA 37; (2015) 256 CLR 104, 116 [46].
[24] Transcript of Proceedings (31 January 2019) 13 - 17, 92.
[25] It contains quite different formulae for exercise of put and call options with no reference to 'fair price', see cl 10.4 and 11.5).
[26] For example paragraphs 118, 112 and 113.
[27] As per the terms of the engagement letter dated 11 July 2018.
[29] [1995] HCA 4; (1995) 184 CLR 281, 291-296.
[30] HTW [2004] HCA 54; (2004) 217 CLR 640, 658 [39] per Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ.
[32] HTW [2004] HCA 54; (2004) 217 CLR 640, 658 [38] citing Potts v Miller [1940] HCA 43; (1940) 64 CLR 282, 299.
[33] HTW [2004] HCA 54; (2004) 217 CLR 640, 657 [36]-[37], 661 [45].
[35] Transcript of Proceedings (31 January 2019) 118.
[36] This was an appropriate stance since it was not a situation where the contractual machinery for the determination of a value has failed. Rather the expert has failed to properly undertake the task. See United Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea [2014] NSWSC 1289 [212]-[213] citing Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd [2008] VSC 478 [15].
[37] Transcript of Proceedings (31 January 2019) 148, 150-151.
[38] Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd & Anor (No 2) [2008] VSC 478 [19]; 122 Pitt St Pty Ltd v Universal 1919 Pty Ltd [2015] NSWSC 234 [81].
[43] Section 7 of the Civil Procedure Act 2010 (Vic) provides the overarching purpose to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute. In making any orders or giving any directions in a civil proceeding the Court shall further this overarching purpose pursuant to s 9.
Udaipur Lake Pty Ltd & Anor
Michael Sklovsky Pty Ltd & Ors [2019] VSC 23
(1985) 1 NSWLR 314
(2015) 256 CLR 104
(2004) 217 CLR 640
(1995) 184 CLR 281
(1940) 64 CLR 282