St George Bank loan facility proposal - Submissions - Respondents
496 Mr Lander and Mr Sierakowski were trying to get $8m from St George. They had put forward detailed and accurate information in terms of what had actually been achieved. At the heel of the hunt they threw in at Mr Sierakowski's instigation these figures and said nothing about them. Mr Sierakowski came to a view about it, Mr Lander did not agree with it, and there it was, it was done.
497 Both Mr Kinghorn and Mr Medway denied quite specifically that they knew that these things had gone in to the bank. There is no evidence at all from which such a conclusion could be drawn. They each deny it. The mere fact they deny it, whether the Court accepts the denial or not, does not prove anything other than the denial. There is no evidence they did know.
498 In the cross-examination of Mr Medway he was asked about when he found out about the figures being included. Mr Medway ultimately said he did think about whether he should say anything to St George whenever it was that he did find out about matter and he thought the facility had been paid out so there was not any point.
499 The PowerPoint presentation to BankWest was made by Mr Sierakowski and Mr Bickerton in October 1998. The PowerPoint presentation to St George was made by Mr Sierakowski and Mr Bickerton and Mr Lander in November.
500 Mr Medway attended for part of the St George Bank presentation to meet and greet and wave the RentWorks flag, but he had no recollection of attending any meeting with BankWest. Neither Mr Bickerton nor Mr Lander recalled him being at that presentation, although Mr Sierakowski thought that he might have been. So, on the one hand Mr Sierakowski says he might have been, he was not sure; Mr Medway said he was not; Mr Bickerton and Mr Lander do not recall him being there. The respondents ask the Court to find he was not there.
501 There was no subsequent discussion with anyone from BankWest or St George about the figures. That is clear. There is no basis in the evidence to suggest that anyone at RentWorks other than Mr Sierakowski and Mr Lander had any knowledge at the time that these figures had been sent either to BankWest or St George.
502 The fact that the 5 year figures were sent to BankWest and St George in these circumstances adds nothing to the assessment of whether or not they represented, as the applicants would have it, an official and considered view of the directors or senior management of RentWorks as to its likely future financial performance.
503 Mr Lander's evidence that he did not want to attach the 5 year figures to the proposal is said to be inconsistent with the fact that the draft proposal to the Commonwealth Bank includes some three-year projections. The applicants never said to Mr Lander anything to the effect of the submission they are now putting. He never had a chance to deal with it (see Browne v Dunn).
St George Bank Loan facility proposal - Board approval of 5 year plan - Consideration
504 The significance of the loan facility proposals to the banks in these proceedings lies in the fact that the annexures to the proposals included a copy of the "5 year Divisional Budget RENTWORKS Australia".
505 The applicants submitted that sending the 5 year financials to the banks allowed an inference to be drawn that the figures represented an official and considered view of the Board or senior management of RentWorks as to its likely future financial prospects.
506 The applicants emphasised that a letter dated 17 November 1998 to St George Bank, RentWorks had said that "the accrual budgets for the year to 30/6/99 have been based on a minimum achievable result" whereas in a second letter, sent on the same day to PwC, RentWorks had advised that "it is unreasonable to suggest that the level of earnings to be generated out of this volume [$130m in new business volume] are maintainable".
507 The St George Bank loan proposal was put together by Hugh Lander in conjunction with Mr Sierakowski. Mr Bickerton was not involved, and recollected that after the bank had asked for more information after the presentation to it, Mr Kinghorn had instructed that the only person to provide such information was Hugh Lander.
508 In relation to his approach to the banks, Mr Sierakowski said that "talking to bankers, we talked in a positive mode in regards to sales and the future of the company".
509 Mr Sierakowski explained what the banks would do with the information sent to them:
They are after an understanding do we understand where our business is going? So they would look at the story and say yes, they have a business a viable business, and their thought processes are right in regards to growing the business. As far as the financial figures are concerned you would take the first few years and understand that is where the business notionally would go from the documentation, but, and that it is you would look at serviceability because you are taking out a facility over a period of time so you would like to hope that the Rentworks could prove that they could service that over a period of time.
Whether or not they agreed with the fourth and fifth year et cetera was never discussed, and it is not really part of the banking submission you just don't. They look at the next two years and say yes, it is around about right the same as we would do. (my emphasis)
...
A Yes, my belief is that I had general discussion with regards to the bank management, I apologise I don't know the person that we were dealing with.
Q Fiona Milligan?
A Yes, as to what she needed for us to get across the line to get the money if she wanted, she wanted strategic plan which we discussed , and the figures going out, projections going out in the future which are just part of a normal loan submission. We were going to supply that, that is all. (my emphasis) (Transcript p 387)
510 In the St George Bank proposal one can see material taken from the IBIS document under headings that include "environmental review", "understanding the New Age/The Infotronics (Services) Age 1965-2040", "New Age" society/enterprises/growth industries", and "new business rules in the Infotronics Age 1965-2040".
511 The presentation given by Mr Sierakowski and Mr Bickerton to St George Bank in November 1998 was basically a carbon copy of what they had given to BankWest earlier.
512 The St George Bank's internal document "Advance Application" in relation to RentWorks' application for a loan facility of $8 million was prepared on 7 December 1998. The purpose of the facility was to repay $4m of an existing loan to Kalomo Pacific Leasing Limited (KPL) (an offshore financier) and $4m for working capital purposes. The Borrower was to be RentWorks Limited.
513 In the Branch Analysis of the company it was noted under "weaknesses" that it "relies upon the generation of secondary income", and under "opportunities" to capture the substantial cash deposits that are generated".
514 The St George Bank analyst was someone else who could not find a perfect fit with an industry category in relation to RentWorks' risk grading, the closest being deemed to be Computer Wholesaler. It was noted that the balance sheet gearing was 1.56x, however 2.67x had been used.
515 Under "security" one item recorded was a guarantee and indemnity limited to $10 million from J Kinghorn. Mr Kinghorn's personal guarantee of $10 million was for the full amount of the loan, plus interest, and some coverage for the Bank in the event of default. A condition on the proposal was for John Kinghorn, described by the analyst to be believed to be "a high net worth individual", to provide a signed assets and liability statement, confirmed by his Accountant, showing a net asset position not less than $10 million.
516 In the St George Bank's internal analysis of the proposal, the major competitors listed match those named by Mr Medway to PwC.
517 The 5 year financials document was sent to St George as an annexure, but the strategy document was not. (The information in that document may have been part of the earlier presentation to St George as part of the IBIS document was referred to in the St George proposal.)
518 The St George Bank analysis reproduced one page of the "RentWorks 5 year plan" (there being in it one change to "total expenses" in St George Bank document from the 5 year plan financials handed out on 22 September). The note below it said:
The above 5 year plan is based on consolidated results and reflects that the strong profitability trend is expected to continue.
519 St George had the actuals until October 1998.
520 Mr Sierakowski believed that the 5 year plan had value. He had the understanding that the 5 year plan was to be prepared to get finance from the banks. That understanding was not confirmed by the evidence, for instance of the Formosa minutes, but it explains why he had no diffidence in directing Mr Lander to attach the 5 year financials to the finance proposals to BankWest and St George Bank. He was in a position in the company where he could direct Mr Lander to include the 5 year financial calculations in the presentation to BankWest and St George Bank. He did so.
521 Mr Lander, who had been present at the 22 September meeting had no recollection that the financials had been rejected.
522 Mr Lander said he prepared the bulk of the content of the report/financing proposal to St George Bank in November 1998 then gave it to Mr Sierakowski for discussion and his input. Mr Lander said that what went into the final report was determined by Alan Sierakowski. Mr Lander had an actual recollection that in the draft proposal he gave to Mr Sierakowski item 4 in the Summary of Annexures, "5 year Divisional budget RENTWORKS Australia" (item 4), was not included. He discussed the draft with Mr Sierakowski and Mr Sierakowski wanted the 5 year divisional budget to be included in the bank report. Mr Lander believed that earlier he had not actively considered whether item 4 should go in the draft, but he did not think it should go in in that form.
523 What ultimately caused Mr Lander to include item 4 was the fact that Mr Sierakowski "told me to include it" and "I was instructed to put the document in the proposal" (Transcript p 4386). He inserted it at the most relevant position within the summary, but noted that he had not drawn attention to it at all in the narrative.
524 Mr Lander's personal view was that item 4 should not be attached to the proposal because he did not believe it had gone through sufficient testing or that it was a rigid enough document. By "testing" Mr Lander meant the 5 year plan financials had not gone through the necessary hard core analysis with people questioning the numbers within it.
525 I accept that that view was genuinely held by Mr Lander.
526 I do not accept the applicants' criticisms of Mr Lander in relation to his attaching the 5 year figures to St George despite any doubts he may have had. The doubts were simply that the figures had not been sufficiently tested. His supervisor, a director, instructed him to attach them. Although the applicants' place great weight on them in these proceedings, there was nothing at the time to indicate that they had any particular importance. Why take such a minor issue to Mr Medway or Mr Kinghorn?
527 Mr Bickerton's evidence, in relation to the figures for which he was responsible in the 1998/99 budget, that he obtained information from a number of sources and gave the number to Mr Sierakowski, who took the number Mr Bickerton gave him, showed that Mr Lander's belief that the 5 year financial figures had not been sufficiently tested was well founded.
528 It was the responsibility of Mr Sierakowski to bring the 1998/99 Budget to the Board. It was also Mr Sierakowski who had been responsible for co-ordinating the 5 year strategic plan including the financials. I do not accept that the impression that Mr Sierakowski said he took away from the Board meeting of 22 September 1998, that neither the plan nor the figures had been condemned by the Board, but that both needed to be worked up more was not his genuine belief. It seems to me that with that background it would not have occurred to Mr Sierakowski (he was not asked about it) that it would not be appropriate for him to attach the 5 year financials either to the bank proposals or to the Budget sent forward for the Board's consideration at a later date. I think the financials and the Budget were bound together, but I do not infer from that that whereas the Budget was later approved at some unknown date, that the 5 year financials were similarly approved. They remained in that budget package as the 22 September version. They had needed more work after 22 September, and they still needed more work. Mr Kinghorn's and Mr Medway's views on those figures as at 22 September have been set out earlier.
529 Mr Sierakowski and Mr Bickerton said they were not approved.
530 Mr Sierakowski said that the 5 year strategic plan with the financial figures were supplied to Mr Kinghorn and Mr Medway probably in late October as finalising it for the bank submission. He did not recall Mr Kinghorn making any request about the information to be supplied to the banks. Mr Medway had asked to be informed at all stages of the bank submissions so Mr Sierakowski "would say" Mr Medway was well aware of the submissions going to the banks.
531 Mr Medway said he knew that Mr Sierakowski and Mr Lander were seeking funds from BankWest and St George Bank. He did not recollect seeing the funds applications.
532 Mr Bickerton accepted that no mention was made in the Board minutes for September and October 1998 to funding proposals being made to either BankWest or St George Bank. Although mention was made of them in the November minutes, the funding proposals documents were not given out at the time.
533 Mr Sierakowski's responsibilities were to upgrade the accounting, secretarial and corporate governance support functions of the business, to start to report better to the Board and help improve those reports to the Board to look more at the details of the budget to show why there were variations and more commentary on differences in achievements to expectations.
534 The need for such upgrading was demonstrated by the lack of documentation of approval by the Board of the1998/99 budget and of further consideration by the Board of the 5 year plan financial figures. That situation was advanced by the applicants as supporting their claim of Mr Kinghorn's malign involvement in the process and that those 5 year plan figures had been accepted at the same time by the Board as an official and considered view of management.
535 In the applicants' final submissions, it was stressed that it had not been asserted in the applicants' claim that there was a formal Board approval of the 5 year figures. What has been asserted is that there was sufficient, by inference, knowledge or assent, on the part of Mr Medway or Mr Kinghorn, from the circumstantial evidence of it being sent to them after it had been the subject of inquiries by way of clarification from Mr Sierakowski, for that inference to be drawn.
536 To me, that whole process was part of the way RentWorks had been run generally and, indeed, was one of the areas Mr Sierakowski had been brought in to fix as part of a long term possibility of floating the company.
537 It is not relevant that no evidence was called from St George Bank to explain what value had been placed on that document in its overall consideration of the proposal put to it by RentWorks. The applicants' submissions were directed to the value that the respondents had placed on them.
538 I accept the respondents' contention that the process to be undertaken by the Court in relation to the 5 year figures and their usage by the respondents, in particular in their being sent to the banks, is a fact finding exercise. The applicants have made a submission that because the 5 year figures were sent to the banks the inference arose that they represented managements' considered view as to growth.
539 That submissions is one like any other submission, that has to be examined in the light of all the evidence.
540 I accept that a version of the 5 year plan financial figures were sent to Mr Kinghorn and Mr Medway in mid October 1998. That version was the same one presented to the Board on 22 September. The Board had not approved it in September, nor according to Mr Bickerton or Mr Sierakowski was it intended that it should be approved. The changes shown to have occurred in the version sent to St George were not, in my view, such as to make it likely that the Board would, in any event change its original views on the worth of that document.
541 Of course, as was asserted by the applicants, Mr Kinghorn was interested in the St George Bank loan, interested enough eventually to provide a personal guarantee for $10 million in relation to a loan for $8 million. That interest of itself does not necessarily translate into approval of the 5 year plan, even if it was looked at when bound, as I believe it was, with the 1998/99 budget sent to Mr Kinghorn and Mr Medway in October.
542 The fact remained that as at the time in October Mr Kinghorn and Mr Medway were seeking to finalise the budget, the 5 year plan had not progressed, other than there having been some minor changes to the figures, after 22 September. It had not been helpful or constructive as at 22 September as providing either positive planning or a blue print to achieve growth in profits and it remained that way.
543 One cannot come to a conclusion, nor even an inference, that because Mr Medway had asked on 2 November to be included in all the initial (my emphasis) presentations to the banks and, according to Mr Sierakowski, asked to be informed at all stages (my emphasis) of the bank submissions, that he was therefore aware in detail of the contents of the documentation that supported those submissions.
544 There was some disbelief expressed by the applicants' counsel that the senior executives would not know what information was going to the banks. Mr Kinghorn and Mr Medway did know the banks were being approached to try to obtain a loan facility, and that those approaches were being co-ordinated by a senior director. Why would they need to be provided with the "nitty gritty" of the submissions being made by Mr Sierakowski?
545 Mr Sierakowski said Mr Medway had a "hands off" approach to a certain degree in certain parts of the business. Because Mr Medway travelled a lot, a lot of directions from him at different stages was via email or telephone. Mr Kinghorn, though he undoubtedly kept in touch with RentWorks management, did not have an office there, only a car space, and, in any event, in 1998 was heavily involved in his endeavours to keep RAMS from going under.
546 Even if Mr Kinghorn and Mr Medway had seen, or were aware, that the five year plan figures had been attached to the BankWest and St George Bank funding applications, the question comes back to what detriment was suffered by the applicants because those same figures were not given to PwC for their consideration in the valuation?
547 The short answer is "none" because, in the first place, the 5 year figures did not have the value asserted by the applicants, and, in the second place, that fact would have been recognised by Mr Pope once he made any serious inquiry in relation to them.
548 Asked in these proceedings as to what he would have done if he had been given a copy of a so-called 5 year plan document during the valuation, he said:
I would most likely have asked Mr Lander to inform me of the circumstances in which and the purposes for which each of the documents was created; to explain to me the processes by which each had been created; to inform me of the use, or uses, to which each had been put; and to inform me of the status of the documents in the sense of whether or not they were the final and considered views of senior management which have been reviewed, considered and accepted by the Board of Directors of RentWorks as a reliable indication of senior management's views as to the future financial aspects prospects of the business.
549 He said in cross-examination as to the significance to him of the fact that the 5 year figures document had been given to BankWest and St George - "I think my review of the document was not primarily focussed on what they had been used for, but more what lay behind their preparation".
550 I would expect that PwC would have no less reason to cast a critical eye across management forecasts that were being prepared at a time co-incident with a valuation.
551 Mr Banks also said that a valuer would seriously consider the information contained in the document in the sense that he would study it, attempt to understand it, and attempt to see how the information had been compiled.
552 Mr Pope said the 5 year figures would not have led to a change in the valuation.
553 In par 33 of his affidavit Exhibit 163, Mr Pope first listed five documents (the three 5 year plan documents and the BankWest/St George Bank financing proposals) which he had not previously seen and then listed 28 facts and matters that he was asked to assume in relation to those documents. He said that if he had seen those documents prior to finalising his valuation, he would have made enquiries of Mr Lander and if, as a result of those enquiries learned the matters he was asked to assume, "I would not have regarded the Five Year Figures as a reliable management forecast other than in respect of the financial year ending 1999".
554 In the course of final submissions, the respondents handed up a document which provided references to the evidence and submissions of the respondents which they said made good the 28 assumptions set out in par 33.
555 Leave was granted for the filing of further written submissions limited to that matter only. The applicants submitted that many of the 28 assumptions were fundamentally wrong or omitted significant relevant facts. In their earlier submissions, the applicants had accepted, and said the case was not being put, that if Mr Pope had been given the 5 year figures, he would have simply incorporated them without questioning in his valuation.
556 I do not consider that the later submissions advanced by the applicants detract from Mr Pope's assessment of the 5 year figures. The Court's reasons for rejecting the 5 year figures are set out earlier and encompass some of the matters raised in those submissions. That rejection did not depend upon the view expressed by Mr Pope, although regard was paid to it.
557 I find that the attachment of the 5 year figures to the BankWest and St George Bank proposals do not allow an inference to be drawn that those figures represented an official and considered view of the Board or senior management of RentWorks as to the likely future financial prospects of RentWorks.
Mr Murray's knowledge of 5 year plan - Submissions - Applicants
558 On 20 November, when Mr Murray received a list of the documents that had been sent to PwC, the narrow view was taken by Mr Lander that what he was going to get was what was referred to in the valuation report, as if to say that the only things which could influence Mr Murray's position in this process adversely were things which were referred to in the PwC report expressly.
559 What he never got before 24 December, and which he did not get until these proceedings, were the two emails of 9 and 14 September, and an understanding that these two communications had even taken place. The fact that he did not get the emails means he never has the opportunity of putting a case to PwC.
560 There was at a time very early in the process, very close to when the letter of engagement was being signed by all the parties with PwC, that there was an expression of view acted upon by Mr Lander, which showed a desire on the part of Mr Kinghorn and others acting upon that desire for the 5 year plan not to go to PwC.
561 Now, it would be extraordinary that even if Mr Murray did raise that subject in November with PwC, when he found out some facts about the 5 year plan, that things would have been different because Mr Kinghorn was showing a determined course on 10 September to communicate to Mr Lander early in the process the fact that this document should not be used.
562 Mr Murray was cross-examined about this and his main difficulty, which must have been genuine, is that he did not want to reveal to Mr Kinghorn or Mr Medway that there had been another employee who had been giving him this information. That was a genuine concern on his part because the Court has the evidence in this case of the bankruptcy threat to Mr Murray and has seen Mr McDonald cross-examined about how he came by plans and information from being an employee of RentWorks.
563 Another non-revealing question could have been asked. Firstly, Mr Murray said he did not think about it, but secondly, if that question had been asked, that is by PwC, "Do you have every forecast document available?", given the determination shown on 10 September to keep the document away from PwC at such an early stage, it is the applicants' submission that that question would not have produced the document. Asking that question would not have made any difference because of the attitude being displayed by RentWorks as early as this in the process and, again, at the end after 2 December.
564 In reply, the applicants said there is just one simple answer to the plan to sue allegations by the respondents. There is one commonsense answer sitting there right at the front and the simple answer is this: how could it possibly be assumed that if Mr Murray got a fair valuation which produced a just result that he would have simply sued to get more money over and above that? The whole nature of the allegations in these proceedings, the whole of the valuation evidence which has been called has been based upon the fact that the valuation which was produced was too low and it effectively did what Mr Medway's devaluation note said that it came in at an undervalued figure.
565 The plan to sue allegations cover a period of October, November, December, in particular, 1998. There are two important things to remember. One is that it is a mask for what was really going on at the time and that was what the respondents were doing and what Mr Murray did not know about, such as the misleading correspondence sent by Mr Lander to PwC on 17 November.
566 Mr Murray, if he was plotting against these individuals, did not have a chance. What happened when Mr Murray tried to do something after 1 December was that RentWorks refused to supply the information requested by PwC.
567 Even if it were true that out of defensiveness, out of caution, out of lack of information, out of suspicion, all of which would be justified on what the applicants now know, Mr Murray took some preparatory steps to defend his position in the event that the valuation was adverse that is not to be held against him.
Applicants' knowledge of 5 year plan - Submissions - Respondents
568 The applicants' complaints were not complaints which were genuinely made. These complaints were, in effect, held back and created by the very conduct of the applicant, based upon an intention to sue no matter what. Whatever the merits, whatever would have happened to this valuation Mr Murray was going to sue.
569 It goes to the heart of the case because the complaints which now come down to what information was given to PwC, or not given to PwC, are all matters which Mr Murray could have brought to the attention of PwC at the time. The 5 year plan he did not bring to their attention. The abnormals was a matter he could have raised, but chose not to.
570 That was in a context where, from September onwards, he had been talking to Harmers, Harmers who were perceived by him to be experts in s 106 cases, and in circumstances where he had advice from Mr Pye as to what he should have done.
571 Exhibits 83 and 84 are notes made by Mr Harmer and Ms Cooper. These notes are pretty clear and no-one from Harmers was brought to court to say to gainsay, one, what is in the notes and, two, what sensibly follows from them, and that is Jones v Dunkel working appropriately in this case.
572 This is a meeting between Mr Harmer, Ms Cooper and Mr Murray held on 18 November 1998. This is just before he gets the draft 20 November valuation from Mr Lander, but after the one of the 11th has gone to Mr Lander and, Mr Murray was told about that by someone at RentWorks and he was told that Mr Lander had deduced a figure from it.
573 The reference in the note to "crossroad" was them trying to think up a reason why he can take the money and still sue under s 106. They had always planned to sue here. They were going to allege that there was a manipulation of information because that is the easiest way, so they think, to attack a valuation like this. They were going to do that come what may without any proper basis. If that is not the construction to put on that, then perhaps Mr Harmer could come along and tell the Court. He has not. They did not have a complaint; they were looking for one.
574 According to the notes, Mr Murray will say he disagrees with a valuation due to X, Y and Z. The note went on:
"JK first quoted. (Put in writing - leave paper trail.)"
575 Now, "put in writing, leave paper trail". A paper trail for this case. These people are plotting this case without any basis for bringing it whatsoever and it is a disgrace. They are cowboys of the worst kind. It should not have happened. That note tells the Court that every single thing that came out of Harmers or Mr Murray in this period has to be looked at very carefully indeed. Things cannot be taken on their face.
576 In submissions in rejoinder to the applicants' submissions on this issue, the respondents said that if there is any doubt about the meaning of the solicitors' notes, the Court will construe them the respondents' way because nobody came to explain them. The second point is Mr Murray was cross-examined extensively about all of this and he either agreed with the interpretation the respondents were putting on them, or he said he could not remember. That was where his evidence went. It went nowhere else.
577 What is being written from the applicants, are suggestions of all sorts of theories and explanations as to what the solicitors' notes mean, which are beside the point because Mr Murray never gave that evidence or those explanations. He was not denied the opportunity to do so because the documents were in the ring.
578 There is the problem about the false allegation of concerns as to the independence of PwC. That is a matter Mr Murray knows full well, he should not allege. He reveals his concern about allowing it to his solicitors and yet, nonetheless, does so because he thinks it might actually be a pressure point; and he has sworn to the fact that he held such a concern when he plainly did not.
Applicants' knowledge of 5 year plan - Consideration
579 The letter of engagement for PwC included the understanding of PwC that "information provided to PwC will also be provided to Christopher R Murray".
580 Mr Kinghorn did not specifically recall discussing with Mr Lander whether or not Mr Murray should get copies of whatever documents were going from RentWorks to PwC, or at what stage he should get them, though he was generally aware that Mr Murray wanted such copies. He had had no discussions with Mr Lander as to sending either draft of the valuation to Mr Murray.
581 The decision not to send to Mr Murray a copy of the draft valuation of 11 November that had mistakenly retained one number was made by Mr Pope not by Mr Lander. In any event, Mr Murray had been given from someone in RentWorks, the figure that Mr Lander had guessed by working back from the one figure in the draft of 11 November.
582 The second draft was sent by Mr Pope for the directors of RentWorks to comment on it for factual accuracy, but he accepted the comment made to him the day before by Mr Lander that it was probably appropriate for Mr Lander to provide a copy of that draft to Mr Murray.
583 It was Mr Lander's decision, based on an incorrect understanding that the applicant was working for a rival company, to ask PwC not to supply post 30 June 1998 information to Mr Murray. The information was not withheld from PwC and indeed some post June material was supplied to the applicant after the copy of the draft valuation was sent to him. It was also Mr Lander's decision not to supply the October figures requested, although the applicants' submitted that it was perfectly evident Mr Lander had spoken to Mr Medway before replying. In fact there is no evidence that either Mr Kinghorn or Mr Medway in any way were involved with that decision that Mr Lander said he made.
584 It was submitted by the applicants that an important component of the information that was not provided by RentWorks to PwC was the growth estimates for the five years commencing on 1 July 1998 (i.e. the 5 year plan). Mr Slattery, in opening, had this to say about that issue:
... that information wasn't provided and what we say is that if it had been provided, it would have also, under the PwCCoopers' conditions, to have gone to Mr Murray. That would have in fact put him in a very good position to go to PwCCoopers.
He did go to PwCCoopers, but without much information going back. (Transcript p 84)
585 The point to be made in respect of that submission as to the 5 year plan is that Mr Murray, independently of formal advice from either RentWorks or PwC, revealed in cross-examination that he did have prior knowledge of the 5 year plan but he did not take that information back to PwC before the valuation was produced.
586 A draft of the factual matters and matters of information obtained by PwC and upon which they were going to rely was provided to Mr Murray. Mr Murray had a meeting with Mr Armstrong and Mr Pope on 1 December. That meeting was the opportunity for Mr Murray to raise his concerns as to the 5 year plan. He raised other matters, but not that one.
587 He said he did not bring it to the attention of Mr Armstrong or Mr Pope because he did not want the position of the person inside RentWorks who told him of it, to be compromised.
588 If the applicant had confided in Mr Pope and Mr Armstrong as to his knowledge of the 5 year plan and to the concerns he had for the RentWorks employee, Mr Pope may have recalled the outcome of his earlier enquiries for that document and so have been able to follow it up without revealing any advice from the applicant.
589 Having talked to Mr Murray on 1 December, Mr Armstrong contacted Rentworks about matters raised by Mr Murray: residual recovery, actual performance figures until 30 October as the trend in business volumes could show the management forecast for 1998/99 was very conservative; the special purpose transactions and cash investment figures for new leasing business (a matter requested by Mr Armstrong, not Mr Murray). Mr Armstrong asked for material additional to that sought by Mr Murray, not all of which was supplied by Mr Lander: the P & L for October. On the evidence of Mr Pope that would have made no difference to the final result of the valuation.
590 It is not clear if the cash investment figures for new leasing business were supplied. In any event Mr Pope later said that getting those figures would not have made any difference.
591 It was submitted on behalf of the applicants that there would have been no point in Mr Murray's raising the matter of the 5 year plan with PwC, because RentWorks had refused to supply other information requested by PwC. Most of the material was supplied. One can only speculate as to whether the 5 year plan would have been made available to PwC if requested.
592 One consequence of Mr Murray's discussion on 1 December 1998 of the draft valuation with PwC was that the assumption that "there is a marginal decline in the level of residual recoveries" in PwC's assessing maintainable earnings was re-examined. PwC wrote to RentWorks and having considered the reply, increased an earlier figure of 2.25 to 2.37, in relation to the assumed recovery rate on residual positions used in the report, a change that increased Mr Murray's share by $400,000.
593 As was stated in the solicitors' notes of his discussions with them, Mr Murray came to a "crossroads" as to what his future actions would be after he received the valuation. He saw Mr Pye and discussed it with Harmers.
594 Mr Murray accepted in cross-examination that at his meeting with Mr Kinghorn and Mr Medway on 15 December 1998 he made no complaints to them about the valuation, the lack of independence of PwC, that they together with Mr Lander had dishonestly and improperly manipulated the information that went to PwC, accepting the position put to him by counsel that he had quite consciously and carefully concealed from them every concern he had at the time, answering a question as to whether he thought that was fair behaviour, by saying "I would say I was holding my cards to myself".
595 The applicants complain that the respondents were deliberately misleading PwC in order to depress the valuation result and had treated Mr Murray's interests with contempt as exampled by the delay in sending him a copy of the valuation. That complaint was made by a person who had enjoyed Mr Kinghorn's confidences as to his concerns on the litigation he was currently involved with and then used those confidences in the planning of his own litigation against RentWorks.
596 There is a difference between preparing for the eventuality of a court case in the future to laying the groundwork for such a case. In my view, Mr Murray's own evidence, even without reference to the records of his discussions with Harmers, makes it clear that that, in fact, was the course he had adopted as to the 5 year figures.
597 In relation to what may be termed the "clean hands" issue, (Mr Murray's failure to take up the opportunity to voice to PwC his concerns as to the 5 year plan), the applicants' counsel relied on Saliba v John Hearder Pty Limited (Saliba) ( (1985 )15 IR 36) (an authority relied upon by the respondents for a different reason) and Davies v General Transport Development Pty Limited (Davies) (1967 AR 371).
598 In Saliba (at p 38) Macken J stated that "there is a wealth of authority that one should not sleep on one's rights and that one should come before the Industrial Commission under s 88F with clean hands". Nevertheless while acknowledging that the employees' conduct was dishonourable, Macken J was not satisfied that the employee's conduct should altogether defeat his claim. The respondent's relied upon the principle as enunciated by Macken J, while the applicants stressed that he had directed his attention to the unfairness of the arrangement concerned in awarding compensation to the applicant.
599 In Davies, Sheldon J (at p 385) said that while the applicant could be criticised as to some of his actions, the issue was not "whether Davies was foolish or negligent but whether he was overborne or defrauded". The findings I have made in this decision do not support a description of Mr Murray as being either "overborne or defrauded".
600 I accept the principle as set out in Saliba but in the application of the principle the Court will take into account the circumstances of the case before it.
601 Whether or not Mr Murray's stated reason for not mentioning the 5 year plan to Mr Pope, that he would expose his source, is true, or an ex post facto explanation conjured up by Mr Murray as submitted by the respondents, is not particularly important. The important facts are that Mr Murray knew of the 5 year plan; he had a specific opportunity to raise that matter with Mr Pope when he raised other concerns; by his own decision he did not do so. He allowed Mr Pope and Mr Armstrong to go forward on the basis that he had brought to their attention all of his concerns. He made no complaints to Mr Kinghorn and Mr Medway when he met them on 15 December.
602 He cannot say that he did not receive independent advice to take the concern up with PwC prior to the finalisation of the valuation. Mr Pye had advised (on 23 November 1998) the applicant to bring any concerns he had to the attention of PwC. Mr Nichols of counsel when consulted on 23 November had given similar advice.
603 The only person who was not completely candid with PwC was Mr Murray. He had raised some of his concerns with Mr Pope and Mr Armstrong. They were followed up.
604 The applicant chose not to raise his concerns about the 5 year plan to PwC on 1 December, instead storing up that knowledge for later use. It was the 5 year plan that was the cornerstone of his attack on RentWorks in these proceedings. However, having made that decision, he cannot now turn around and rely upon that knowledge to attack RentWorks in these proceedings. The time has passed.
605 If the applicant had brought the 5 year plan to the attention of Mr Armstrong and Mr Pope on 1 December 1998, and RentWorks had not provided it when requested to do so, then in these proceedings the applicants might have been operating from the high moral ground. As a matter of practicality, however, the outcome would not be any different, because the 5 year plan lacks the substance to support the applicants' submissions that it could have caused PwC to come to a different view on the valuation.
606 In response to one final submission that was made, two wrongs do not make a right. If it was wrong for the applicants to deliberately hold back information from PwC for whatever reason, then such conduct remained wrong no matter what they said the respondents might have been doing. The conduct of both parties, in the light of all the evidence, would be a matter to be considered by the Court in the exercise of its discretion.
Independence of PwC - Submissions - Applicants
607 The applicants did not attack the credibility of Mr Pope or Mr Armstrong, but submitted that in coming to their valuation they had been either misled by RentWorks or had not been supplied by RentWorks with the information necessary for them to come to a proper valuation. Mr Pope did not press for information requested after 2 December because it might have soured the relationship of PwC with RentWorks.
608 It would have been better, in fact, so that such a factor was unlikely to have such sway, for a firm other than PwC to be doing this work. That was an example of how PwC's involvement in effect could lead to a possibility of that sort of escalation occurring and being influential upon the valuer. One of the things sought as relief is that someone other than PwC would be appointed as the valuer.
609 In his final submissions, Mr Slattery stressed that it was not submitted that Mr Pope had been prevailed on between 9 and 14 September not to request the 5 year plan. The applicants accepted that it had been Mr Pope's own decision not to request it then or later. What was submitted was that whatever was advised to him by Mr Lander that advice was misleading and that such advice had been given at the instigation of Mr Kinghorn.
Independence of PwC - Submissions - Respondents
610 There does not appear to be any allegation of impropriety against Mr Pope or Mr Armstrong.
611 What seems to be, in the end, suggested is that either Messrs Pope and Armstrong were honest, competent and diligent but were induced into error by reason of the withholding of information or the conveying of misleading information, that is one view of it, or that Mr Pope, as the representative of the two of them who did the valuation, was a weak man who was prevailed upon to take a particular view of matters which was not one he would have taken had he not been prevailed upon.
612 It seems that there is no suggestion, however, whatever is said about Mr Pope, that he was involved in any dishonesty or any impropriety, falling short of outright fraud or dishonesty, of a character which meant that he had, in effect, produced a valuation which was not his true effort.
613 The respondents' submit Mr Pope was an honest man who dealt honestly with all concerned during the valuation process and in preparing his valuation. He was also a truthful witness, and presented as a careful, competent and intelligent man who knew what he was doing, and his work speaks for itself in this regard.
614 Referring to documents produced by the applicants' solicitors following a ruling as to waiver of privilege (10 May 2002) Mr Foster submitted that the true position as to the whole matter of alleging, as a particular of unfair conduct, that PwC were not independent when they undertook the valuation of RentWorks was the idea of Mr Harmer to be used as a point to put pressure on the respondents. That allegation had not foundation and should not have been pressed but was persisted with even in final submissions.
615 It was submitted by the respondents that one of the reasons the applicant did not bring the 5 year plan to the attention of PwC was because he appreciated that PwC were independent and Mr Pope would have followed up his concerns. If that had been done, the applicant would have lost one of the grounds of complaint he was conjuring up against RentWorks.
616 The actual PE multiple changed during the course of consideration by Messrs Pope and Armstrong. It began as consideration of the appropriate multiple with the preliminary figure in early November of four times. Mr Pope then reassessed this figure to 4.5 by 11 November, the time the first draft went out. Then, after further consideration and discussion with Mr Armstrong, he finally settled on a multiple of five.
617 All that occurred without the slightest suggestion of any discussion with anyone at RentWorks about what Mr Pope was thinking, or about the fact that there was any particular figure, or, indeed, about the matter at all.
618 There was then a movement from four to five and that ultimately increased the valuation of the Australian leasing business by $7.286 million, and thus the valuation of MacDome's 12.75% shareholding by $929,000.
619 The assumptions in this PwC report, as set out in the Appendix are not a no-growth scenario at all; it is a scenario that assumes the same level of profitability notwithstanding the squeeze on margins that might otherwise exist.
620 PwC make the obvious point in par 5.21 of the final valuation:
We would stress that the assumptions used in the indicative discounted cashflow valuation [which was the cross check to their earnings based valuation] are subject to significant uncertainty. In particular, the assumption of maintaining average investment at 2% and net residual at 8% may be difficult to achieve in an environment of increasing competition. Intuitively, the optimism of this assumption may be offset by the low level of growth in business volumes assumed.
PwC valuation
621 Extracts from the draft valuation show the approach of PwC (comments in round brackets are submissions by the respondents):
In performing the valuation, we have been provided with management forecasts of financial performance in the year to 30 June 1999. The forecasts are the responsibility of management and our reference to the forecasts should not be construed as an expression of opinion on the forecasts. To the extent that we have prepared an indicative future cashflow model to consider the value of the Australian business utilising a discounted cashflow analysis, we note that the model is heavily reliant on the assumptions made, some of which will inevitably not materialise.
...
In assessing maintainable earnings, we have had regard to the current earnings streams adjusted to reflect the lags in receiving secondary income on leasing business. While the business has historically achieved growth in business volumes -- Increasing competition in the leasing of computer equipment suggests that the earnings impact of further growth is likely to be offset by the reduced profitability of business written.
622 (That last sentence refutes the claim that PwC said there was no growth in this business, and shows how baseless was Mr Banks' approach that because the PwC valuation shows no growth, it must be wrong.)
623 The valuation referred to technical obsolescence as a risk. Evidence on this point was given by Mr Pope in cross-examination:
Q. Before I go to the next one you want to refer to, can I ask you about this one: all you mention in the fourth bullet point in relation to this, it could relate to volatility of the industry sector, that is recoveries may be affected by technical obsolescence of equipment or increasing competition putting pressure on the company to write business at higher residuals.
A. You say "all", but I think technical obsolescence is a serious matter in the industry where you are talking about the whole profitability of the business is allied to the business to sell three or four year old computers in the market, so I think technical obsolescence is a feature in the market.
Q. But technical obsolescence of computer equipment was not a new item, a new idea as at 1998...
624 Mr Pope said that:
...it is not something that happens necessarily at a constant rate.
Q. Technical obsolescence is not something which has resulted in observable industry volatility to you prior to this point of time in that industry, was it? A. Well, I'm aware of in London, probably in the main frame era in the 80s, and I think a very large number of companies in the UK in the computer leasing sector went bankrupt, exactly because of these issues, that they were writing operating leases on, you know, the computers that became obsolete. (Transcript p 4862)
The valuation continued:
... management believe there is a pricing pressure and a trend towards increasing residual periods which may ultimately reduce the scope to achieve historic returns on residual positions for computer equipment;
While these adverse trends have been identified, we note that the budget for 1998/99 projects continuing growth in business.
...
Not all 'value-adding' initiatives have been successful, and, for example, as at 30 June 1998, a decision had been taken to terminate Intraworks and BIB businesses following the incurrence of significant losses. Consistent with this experience, we have not applied any value to the newly established remarketing function or the EDIT 21 business.
625 (It is to be noted that Mr Banks took the same position on those businesses.)
* the amount of recoveries is inherently uncertain;
...
As the primary technique for evaluating the leasing business, we have capitalised estimated future maintainable earnings.
(Mr Banks in his first report agreed that that was appropriate in valuing this business.)
In applying the capitalisation of maintainable earnings technique, we have reflected the following commercial factors:
* the RentWorks business has been in growth phase.
* however, there is uncertainty in relation to the extent of future growth, based on the competitive nature of the computer leasing sector.
* management perceive the market for leasing computer equipment in Australia is close to maturity and a substantial number of large competitors with links to financiers or equipment manufacturers have entered the Australian market.
Competition may require increased residuals and potentially reduce secondary income.
Management identify a similar trend in New Zealand. * most income and cash flow is generated towards the end of a lease cycle.
As a consequence, secondary income is subject to technological and market risk; * there is a lagging of income and hence where a business is growing secondary income associated with current business volumes will not be achieved for up to three years.
To reflect the considerations in assessing maintainable earnings we have referred to the earnings for the year to 30 June 1998 -- [which is at the top end of the growth cycle] and adopted the following assumptions: * levels of new leasing business and packaging fees achieved in the year to June 1998 are maintained.
(The respondents submitted that to make that assumption was a big assumption in favour of the business.)
In practice, there may be some increase in business levels offset by a decline in the percentage packaging fees achieved on new business.
No incremental element is ascribed to new business activities, such as remarketing and EDIT 21, reflecting the early stage of these activities.
Revenue is adjusted to remove the lag in recognising secondary income. The reported earnings in 1998 have been adjusted to reflect the expected secondary income that would be generated on the net residual of the business written in that year. We have been provided with the following information on historical returns on net residuals achieved ... i.e. In 1997 it was 2.79 times net, 1998 - 2.52;
Management analysis estimates net recoveries after broker share on the current Australian portfolio of residual positions of 2.37 times net residual. Reflecting the trend of declining recoveries, we have used an estimated recovery of 2.25 times (implying secondary income is equal to 1.25 net residual positions realised). This generates an estimate of maintainable secondary income (based on net residual positions of $10.33 million written in 1998) of $12,915,000.
626 That last figure was changed in the final valuation: expected secondary income went up from $12.915 million to $14.152 million, which translated through to an adjusted profit before profit share up from $11.351 million to $12.588 million, and an estimated maintainable profit after tax of $7.286 million, up from $6.58 million.
627 In the final valuation this is said:
Based on the two above adjustments, RentWorks management estimate the total recovery (after broker share) on the portfolio of residual positions at 30 June 1998 would be 2.37 times net residual.
To estimate the secondary income applicable to business written in the year to 30 June 1998, we have applied the estimated recovery rate of 2.37 (implying secondary income is equal to 1.37 times net residual positions realised). This generates an estimate of maintainable secondary income (based on net residual positions of $10.33 million written in 1998) of $14,152, 000. To the extent that these may be a decline in recoveries on residual positions in future resulting from competition forcing RentWorks to take higher residual positions, we have considered this in the context of selecting appropriate earnings multiples. Secondary income reported in the 1998 results relates to lease agreements written in prior years. To avoid double counting, this secondary income is eliminated.
628 (As emphasised by the respondents, the effect of that change was that it increased the expected secondary income taken into account by PwC to derive future maintainable earnings, quite significantly, and it was a result of changing the figure of 2.25 up to 2.37. That was a matter that Mr Murray raised on 1 December.)
The assumption of business stabilising at $130 million per annum implies that it will be necessary to fund a larger portfolio of residual positions in future.
We have not included any incremental expense in relation to additional interest costs as, we are advised, the net funding requirements over the next year will be met by calling for repayment of an interest free loan (or part of that loan) due from the controlling shareholder.
We estimate, therefore, $6.58 million, [which went up to $7.286 in the final valuation].
...
629 At paragraph 5.13, there are extracted historic and prospective PE multiples. PwC differentiated RentWorks from the banks, because they considered the banks did not provide an appropriate benchmark, and they raised other matters which included:
* the small size and specialist nature of RentWorks leasing business and its reliance on key employees. Listed companies will have significantly lower risk inherent in earnings streams as a result of diversification and greater absolute size.
...
* our analysis of maintainable earnings adjusts actual reported earnings to derive an estimate of future maintainable earnings based on current business performance. RentWorks is not currently achieving normalised earnings (and would not be expected to do so for approximately two years) and hence the multiple to be applied is prospective rather than a historic multiple.
630 That statement was carried forward into the final valuation:
* while the Australian leasing business is generating profits, the business is not currently cash-positive and does not have a capacity to pay dividends.
Independence of PwC - Consideration
631 On 8 September 1998, the PwC engagement letter was sent to each of the shareholders. On 18 September the signed copies were sent to Mr Pope.
632 Asked in cross-examination when he first thought it possible that PwC was not independent Mr Murray answered "that thought was ostensibly without substance, but it was an intuitive feel". (Transcript p 1638) He had started to get that intuitive feeling during the course of the valuation because RentWorks had had prior knowledge of the value of the business before the draft valuation came out and the position taken in the draft had extremely downplayed the future prospects of the business. He had known prior to receiving the draft valuation the figure indicated for his shares. His further evidence was that by 24 November 1998, he "felt that [PwC] had been instructed to downplay the value of the company, in effect to decrease the value of the company for the benefit of the other shareholders". He felt that as at 24 November, PwC had complied with that "instruction", those persons doing the instructing including Mr Medway, Mr Kinghorn and Mr Lander. He accepted he had absolutely no basis for believing that, giving answers such as the following on a number of occasions in cross-examination, "No, I said that earlier. I said I had no substance for it. It was an intuitive feel". (Transcript p 1639) Knowing what the company was being valued at he was concerned, on the basis of that, "about Pricewaterhouse's independence and propriety in regard to the valuation because of the extensive links" between PwC and Mr Kinghorn.
633 Still in cross-examination, Mr Murray said the attack on the valuation "was all on intuition". Mr Pye had told him that PwC and Mr Pope, whom Mr Pye knew personally, were honest and reputable.
634 (Mr Murray appeared to rely on intuition in some important matters. He had had a "gut feel" about Mr Medway.)
635 His evidence on that point is probably summed up in the following extract from transcript:
Q Wasn't this the position, Mr Murray: that by 1 December 1998 you had no basis whatsoever to think that there was any impropriety on the part of RentWorks or Pricewaterhouse or Kinghorn, Medway or Lander, that had taken place up to that point in time concerning this valuation?
A I had no substance to that thought, that is correct. It was an intuitive feeling. (Transcript p 1651)
636 Mr Murray had already had dealings with PwC in relation to an earlier valuation (one not conducted on the same basis as the one conducted as an outcome of cl 4 of the SHA). On 23 April 1997, PwC had conducted a valuation of RentWorks on a pure net cash basis (not including goodwill). The valuation was used for the purpose of determining the initial share purchase price for Mr Murray and Mr Medway. The applicants advised that there is no issue in these proceedings about the appropriateness of that valuation. That valuation was described by Mr Slattery as being the gateway, so to speak, between the old trust structure and the new shareholding structure.
637 On the basis of the applicant's evidence I find that the applicant's view was that PwC were acceptable to him as a valuer. He knew that its valuation department was a different department from whence RentWorks' auditors came. He had had a meeting in February 1998 with Mr Pope, Mr Clarke and Mr Medway as to how the valuation would be undertaken. He had been advised that the minority shareholder discount could be up to 70% if not otherwise specified in the SHA. In the light of that advice, he had agreed, reluctantly, with Mr Medway's proposal that a minority discount of 15% should be specified in the SHA. There is no evidence that Mr Kinghorn expressed a view that a larger discount would be more appropriate.
638 The applicant had been told by his friend Mr Pye, that based on the latter's experience with PwC and Mr Pope personally, PwC were not only honest and reputable, but likely to arrive at a higher valuation than other reputable valuers might come to.
639 At the first meeting with the valuers on 28 August, at which meeting Mr Murray was present, it was envisaged that the valuation could be completed in four to six weeks, by 31 October. (That meeting was held the day after Mr Murray had had lunch with Mr Kinghorn, and two days after the return from Formosa.) Mr Lander was delegated as the contact point with RentWorks to provide PwC with the documentation/information requested by them.
640 The background of Mr Pope and of Mr Armstrong are set out below.
641 Both Mr Armstrong and Mr Pope are members and/or fellows of their respective professional institutes.
642 Ian Gordon Pope is a chartered accountant and is a director in the Financial Advisory Services department (the FAS department) of PwC. He has worked for PwC and its predecessor firms since 1982 both in London and Sydney. Since 1990 he has worked in the FAS department where he specialises in corporate value consulting. He has performed over 20 valuations involving unlisted companies or entities during the course of his career.
643 Ian Alexander Armstrong is a chartered accountant and retired as a partner in the FAS department of PwC on 1 January 2001. He was with PwC, and before that PW, for over 40 years and was a partner for 23 years. He had been in the FAS department for 15 years and estimated that he had carried out more than 100 valuations of unlisted companies.
644 Mr Armstrong said he knew John Kinghorn personally albeit on a limited basis. He corrected a statement by Mr Murray that Mr Kinghorn was once a partner in PW (as it then was). Mr Kinghorn was employed by PW over 30 years ago.
645 Mr Armstrong described the processes of the valuation undertaken by PwC. He had signed the letter of engagement on 4 September 1998. He recalled discussing technical issues relating to the valuation as they arose with Ian Pope but was not actively involved with the Rentworks valuation on a day-to-day basis, the majority of the technical and report drafting work being carried out by Mr Pope with John Doyle's assistance. He reviewed numerous drafts of the report throughout this process. He attended at least two meetings with Hugh Lander, but did not have personal contact with either Robert Medway or John Kinghorn.
646 The meetings with Mr Lander were not only to receive information provided by RentWorks to PwC but also to obtain a good understanding of the current and future prospects for the business. PwC did not audit that information but performed an analytical review of the data provided.
647 Mr Armstrong recalled discussing the multiple and future maintainable earnings aspects of the RentWorks valuation with Ian Pope at length and on several occasions. Those are key factors in an earnings based valuation.
648 Issues he recalled discussing also included the difficulty of benchmarking comparisons to apply to RentWorks, trends from historical earnings data, such forecasts as were available and any actuals as far up to date as possible. That was an ongoing process and as more and better information became available, they used it to determine their estimate of the future maintainable earnings. Mr Armstrong said that that process also involved discussions with management.
649 Mr Armstrong reviewed the draft report, made changes to it and discussed various points with Ian Pope, before sending the draft report to RentWorks for factual verification on 11 November 1998. A second draft report was sent on 19 November 1998.
650 Mr Armstrong described the meeting of himself and Mr Pope on 1 December with Mr Murray. (Details of the concerns raised by Mr Murray with him, and Mr Armstrong's response were set out earlier.)
651 In final submissions the applicants accepted that it had been Mr Pope's own decision as at 14 September and continued to be his own decision after that date, not to call for the 5 year plan. The applicants continued to press their submission that it had been misleading information from Mr Lander that led him to make that decision.
652 The corollary to the applicants' claim that Mr Pope and Mr Armstrong had been misled and did not realise they had been so misled was that Mr Edwards had been similarly misled.
653 Rather than being a disadvantage to the applicants for different divisions of PwC to be both responsible for auditing RentWorks and for valuing it, there was one distinct advantage. Mr Pope ran his draft valuation past Mr Edwards who had audited RentWorks' accounts for some years. If there had been any discordance between the factual situation presented in it, including that advised by management, and the knowledge Mr Edwards had of RentWorks after several years, then Mr Pope would have been quickly made aware of that fact. Mr Edwards obviously saw nothing there that was contrary to his knowledge of the Rentworks business and its prospects.
654 Mr Pope in the witness box, was completely straightforward, to the point, and almost painfully honest.
655 When it was put to Mr Pope by counsel for the applicants that he had been influenced from pressing for the further information requested by Mr Murray, but refused by Rentworks, because to do so might upset the relationship between PwC and RentWorks, he did not give a glib reply in the negative. He took time to consider that question before he firmly denied it.
656 Even taken at its highest, Mr Armstrong's evidence as to his contacts with Mr Kinghorn, showed that the so-called "extensive links" between Mr Kinghorn and PwC were in fact minimal.
657 A major part of the answer to the applicants' submissions that PwC were either misled by RentWorks, or were refused information that they needed to complete the valuation, lies, in my view, in the evidence of Mr Pope. First of all, before he sent out the first draft to Rentworks for checking as to factual accuracy, he said he was satisfied he had had all the information he needed to finalise the draft. The further information that Mr Murray wanted obtained was for the most part obtained. At the time, and from further matters put to him in these proceedings, Mr Pope was satisfied that that additional information would not have caused him to revise the valuation.
658 To support the submissions that the 5 year figures would have made a difference to the result, the applicants relied on Mr Robertson's evidence as to the potential effect of those figures in the selection of the PE multiple, the respondents' "vigorous attempts" to keep those figures from PwC, the work that Mr Bickerton and Mr Sierakowski had put into the figures "to produce what was indeed the only collective management view of the future performance of RentWorks" and the evidence of Mr Banks as to the effect of those figures on the assessment of a PE multiple.
659 Only one assumption was put to Mr Robertson. He was asked if, instead of the 11 assumptions he had been asked to assume in par 132 of his report of 30 March 2001 (Exhibit 57), he made a different assumption: that [the 5 year figures] document represents an official and considered view of the directors or senior management of the likely future performance of the business of RentWorks and that that was an official or considered view reached in October of 1998, that in the selection of a PE multiple that assumption was likely to cause him to reach a higher PE multiple than the one he did reach in Exhibit 57. His answer was:
A If I was instructed to assume that what we call the St George Bank five-year plan represented management/the board's best estimate of performance over that five-year period, then, yes, it would serve to increase the multiple that I would apply to maintainable earnings. (Transcript p 4955)
660 After some further questions and objections, he said:
... If the question is if I was in PwC's shoes at the time and I got that document with the description that attaches to it, then, yes, I would want to find out the story behind the documents. (Transcript p 4957)
661 Mr Robertson's evidence on that point did not support the applicants' ultimate submissions.
662 The allegations made by the applicants against Mr Kinghorn, Mr Lander and Mr Medway as to active interference in ensuring that certain information was either not given to PwC and/or misrepresenting information that was given were not sustained.
663 In my consideration of the 5 year plan I reject the applicants' claim that the respondents attempted to keep those figures from PwC and I have found that the work of Mr Sierakowski and Mr Bickerton ultimately produced a document of no worth as support for the future growth of RentWorks to the extent set out in the 5 year plan.
664 Insofar as the applicants' claim is that PwC were not provided with relevant information as to the management's considered views as to the prospects of growth for RentWorks, in that the 5 year figures were not supplied, I have found that those figures were not figures of substance, and if supplied to PwC, Mr Pope would have come to that conclusion.
665 There is no evidence to sustain a submission that Mr Pope and Mr Armstrong were either misled by information supplied, did not recognise that they were being misled by RentWorks, or did not press for information that they believed was necessary to come to a proper valuation of RentWorks.
Conduct of RentWorks after 25 February 1999 - Submissions - Applicants
666 The point being made there is that when one looks closely at the correspondence that takes place, particularly in March and early April of 1999, that a series of demands are made and pressure was being placed on Mr Murray.
667 One example of that is that:
Immediately after the sending of the letter on 25 February 1999 and before the settlement of 1 March 1999, during the working day of Friday, 26 February 1999, the letter of demand was sent by Baker & McKenzie on behalf of Copeswell to Mr Murray. This is the letter that Mr Kinghorn agreed he probably saw on 26 February 1999. He also agreed that he gave some instructions about its subject matter.
The letter was designed to apply pressure to Mr Murray to accept money in accordance with the clause 4 process because he was showing signs of not doing so.
Although Mr Kinghorn also denied it, the timing of these letters was clearly designed to minimise the amount of time Mr Murray might have to commence proceedings to stop any settlement of the share sale transaction.
668 What could be construed as a threat of bankruptcy was made outside the Court in 2002 by Mr Kinghorn to Mr Murray. Mr Kinghorn denied that this was a threat and that he used those words in order to attempt to intimidate Mr Murray.
Conduct of RentWorks after 25 February - Submissions - Respondents
669 What happened in the period after the sale of the shares under attorney in January and the money being offered to MacDome, until 2 July 1999, was just a device in order to postpone the receipt of this cash until the next financial year for the express purpose of giving Mr Murray and MacDome some time to think about how to deal with the rather unfortunate matters of capital gains tax. He knew before the end of that financial year that if those shares were transferred, there was a capital gains tax liability falling on MacDome as at the date of transfer, irrespective of when the proceeds of sale came in and that the liability fell on the consideration paid or the true value, whichever was the higher.
670 The applicants said nothing to the Commissioner of Taxation at all for years. Then they originally came to this Court and made an application to the Court that the Court should adjust the transfer date of these shares from 1999 to the date when judgment is given, a date much later than 1999 so that they could say to the Commissioner of Taxation "Look, this was transferred much later by order of the Court. The value is as determined by the Court and the ATO cannot charge penalties because the transaction has just only recently taken place." That application was made in this proceeding until eventually, after cross-examination and an application by the respondents to get hold of his advice, they dropped it.
671 That is the quality of the applicant who comes here. That is the person who writes hundreds and hundreds of pages of submissions about the credit of the respondents' witnesses. It is certainly a matter that goes to Mr Murray's credit, but it is much more than that. It demonstrated a propensity here to deal with matters in a way which is at the worst end of dishonesty and impropriety. The Court will view everything that this man has done in this case against that background. This is uncontroverted.
672 The respondents rely on that unfortunate and sorry episode because it cannot be swept away by the device of the last minute, and under the pressure of full exposure to the Commissioner of Taxation, abandonment.
Conduct of RentWorks after 25 February - Consideration
673 As for the applicants' complaints as to the conduct of the respondents in the period after 25 February, the sale of the shares had gone forward in accordance with the terms of SHA. The delays in the payment of the moneys to the applicants had been at the instance of the applicants.
674 The applicants did not deny the Copeswell loan, but sought to use the timing of the request for its repayment as evidence of the respondents' conduct going to making the contract unfair. Mr Kinghorn's explanation of that timing seemed quite reasonable in all the circumstances.
675 I take note of the parties' submissions on the taxation issue. As stated earlier, I consider questions of credit in relation to specific issues. The claim for adjustment was not proceeded with, and one would expect that it will eventually be finalised elsewhere.
676 I find that nothing in the respondents' conduct in that period rendered the SHA an unfair contract in terms of s 105(a).
J H Banks Valuation - Submissions - Applicants
677 Mr Slattery conceded that the ruling about the ABS figures created a gap in Mr Banks' reasoning, that is, there is one assumption in relation to growth that is not established; the others are. That goes to one part of the reasoning only. Mr Banks relies upon some other assumptions he makes that he feeds into his model. The Court can in effect deal with confidence with those assumptions.
678 The Court can be satisfied upon another basis, by in effect finding that that 5 year plan is as the applicants say it is, so that finding is an independent factual basis upon which the Court can in effect find that Mr Banks' growth assumptions are reasonable. How it could be done is this: in relation to the 20%, 17. 5% and the other growth assumptions that Mr Banks made in that section, the Court can find on the evidence that the collective view of management was that RentWorks would perform in accordance with the 5 year figures, be it the BankWest or St George version. Mr Banks' assumptions are way, way below that in terms of aggressiveness and he made a comment about his conservatism in light of those.
679 The PE multiple 9 to 9.5 was reached through the reasoning process. With later access to the St George figures, Mr Banks thought that 11.5 to 12 is an appropriate PE multiple. The Court does not have to accept that completely, but if the Court regards the growth assumptions which are set out in paragraph 40.56 as reasonable, the reasoning is there for the Court to find, in effect, the appropriate multiple is either 11.5 to 12 as at the proposed valuation dates, or in the alternative, at least 9 to 9.5.
680 Mr Robertson set out in his table, in effect, that the views of the parties about future maintainable earnings are identical and that the only difference in the valuation is on the issue of the selection of the PE multiple. He indicated that if the St George material were given to him with the description that the applicants say it should have, that that would tend to increase the price earnings multiple that he would select.
681 The Court has guidance here from Mr Banks as to what, in his judgment, with the St George figures, an appropriate PE multiple should be. If the Court were to make a finding as to what a reasonable growth assumption was that, in light of the 5 year figures, the Court has, in effect, got the components of the reasoning process to get the Court to this final table, which is the result of Mr Banks' reasoning processes, applying a PE multiple of 11.5 to 12.
682 If the Court thought that a lesser PE multiple was appropriate, no doubt it was one of the ones mentioned by Mr Banks in 9 to 9.5 in his first report, the material is available for that. If the Court were to come to the view that some intermediate figure was appropriate, no doubt the parties could do a calculation.
Banks Valuation - Submissions - Respondents
683 Mr Banks does not have expertise in the operating lease industry in Australia or anywhere else.
684 Mr Banks would not be accepted by the Court unless otherwise corroborated.
685 Mr Banks misconceived his role.
686 In particular, it is clear that Mr Banks' clearly failed to appreciate that his role was to offer opinions based solely on assumed facts and not on the basis of his own underlying assumptions. This misconception has irremediably tainted his evidence, which is, as a result, permeated with assumptions made by him which are simply inconsistent with the evidence as it emerged before the Court and which are not supported by other evidence, and in particular in relation to the prospects of this business and of the leasing market generally.
687 The assumptions which he made are now acknowledged by the applicants to be unsupported, except in so far as the Court can get support for them from the 5 year figures.
688 Mr Banks, in the end, told the Court that his process was that in August 1999 he did a DCF as at June 30, 1998. He built into that assumptions about growth, which were very high. There was a loading up of growth in the early years, and the effect of that, arithmetically, is to load up the valuation.
689 He wanted to support those assumptions by his own assertions about the leasing industry, and that material was not allowed in as proof of the fact through him, but rather as an assumption. The applicants were compelled to go down the path trying otherwise to prove those assumptions, and they failed.
690 There was no attempt to bring forward an expert, someone who could have, even a competitor, assisted the Court with this type of material. In the end the fact is that the evidence that came from the respondents on this ought to be accepted by the Court because it was unchallenged in circumstances where no attempt was made to take it on, and if it were to be challenged or challengeable, then one would expect that it would have been challenged.
691 The respondents attacked Mr Banks as a credit-worthy witness, submitting that he was biased, unprofessional, and quite capable of distorting matters in order to present a particular point of view. He was an advocate, a player in the exercise of bringing this case to the Court.
692 Mr Banks conceded in cross-examination that his cash investment assumption was an important assumption underlying his DCF valuation, second only to his growth assumption in terms of its impact on the ultimate value so that if his cash investment assumption could not be supported by appropriate evidence then the result of his DCF valuation was 'wrong'.
693 They were the assumptions which in the end the applicant said were to be supported by the ABS material and the black book material which was not admitted. Those assumptions are unsupported. He said in paragraph 40.46(iii), that any effect on RentWorks competition in the operating lease market in Australia would be substantially offset by growth in that market. That is a presumption he makes. He cannot prove it and there is no evidence whatsoever to support that.
694 The applicants rely upon the 5 year figures. Even if the 5 year figures are what the applicants say they are, they do not support Mr Banks' growth figures because there is no reasoned or rational support for the 5 year figures as such coming from anybody.
695 If the 5 year figures do not support what is in par 40.52, as to his growth projections, then it is accepted by the applicants that those assumptions in par 40.52 are not proven.
696 If that is right, Mr Banks' DCF valuation, which is the core foundation platform for everything he did, is wrong, or cannot be supported, and in one sense that is the end of Mr Banks.
697 The growth and the cash investment assumptions are the most substantial contributors to the difference between Mr Banks' DCF result and other people's valuation of this business.
698 Yet it emerged only in cross-examination that Mr Banks' selection of the average historical figures over the preceding two years or so as the basis for this very important assumption as to cash investment, without any adjustment, carried with it the critical but completely undisclosed assumptions that: (a) nothing had changed which would make history a poor guide to what was likely to happen in the future and, in particular, that he was assuming that "going forward for 10 years there will be no competitive pressures on this business which will require a greater cash investment in transactions than has historically been so". It is common ground they were competitive pressures on this business and that assumption could not possibly be one that was validated by the evidence. Then: (b) that management's own estimates as to what was likely to happen in the future in relation to cash investment, as embodied in the board-approved budget for 1998/99, were to be 'ignored'. This was because the budget had in his view been prepared to present a knowingly false picture of the affairs of the business.
699 The fundamental assumptions not proven were the assumptions on growth and the assumptions on cash recoveries. Mr Banks agreed that his 'assumptions' as to the future growth of RentWorks' Australian business were absolutely fundamental to the difference between his opinion as to the value of RentWorks and that of PwC and Mr Robertson. In particular he agreed that: (a) If he adopted a view as to expectation of future growth consistent with that taken by PwC, then he would lower his price earnings multiple by three or four times: taking the second figure, this would reduce Mr Banks multiple from 9 to 9.5 to between 5 and 5.5 which is totally in line with PwC and Mr Robertson, and: (b) If he made the same assumption as PwC as to growth, cash investment and competition then his valuation of RentWorks' business would be substantially the same as theirs.
700 That was an inevitable concession he had to make, given the assumptions leading to it.
701 These assumptions are, in truth, totally arbitrary. They are the product, not of any rational consideration of the actual facts that prevailed at 30 June 1998, but are the product of nothing more than Mr Banks' speculation as to a matter on which he has no qualifications to express an admissible opinion. They run completely counter to the overwhelming weight of evidence before the Commission as to the market and competitive environment facing RentWorks as at 30 June 1998, including not just the evidence of Mr Medway, but also the evidence of Mr Kinghorn, Mr Lander, Mr Getley, Mr Van Niekerk and Mr Bickerton and a large number of contemporaneous documents.
702 Mr Banks' assumptions as to growth in non-DSE business volumes were not, as one might think, based on his assumption of growth in the operating lease market, i.e. simply increase that business by the 6 to 7.5 per cent rate per annum which he assumes will be the rate of growth of the entire market. Again, an assumption not ultimately proven. Instead, on the basis of that assumption, Mr Banks' assumption for 1999-2000, of 17.5 per cent growth is growth of more than two to three times the rate of growth of the entire market.
703 Mr Banks' assumptions as to RentWorks' competitive environment is reflected in his DCF model in its: (a) Assumption that RentWorks would continue to earn on non-DSE business the 0.6% positive cash fee that it had earned, on average, in recent times, as opposed to the 2.5% cash investment being forecast by management as its benchmark figure in the 1998/99 budget and the 2% cash investment figure utilised by PWC in its indicative DCF crosscheck; and: (b) otherwise making no variation over that period to the same assumed residual recovery rate of 2.37 times net residual and residual investment of 8% as were utilised by PWC in their indicative DCF crosscheck."
704 Mr Banks' DCF calculation, however, assumes historically constant levels of cash investment and margins, but grows business volumes at the rates for DSE and non-DSE business assumed above. In other words, PWC assumed more or less constant levels of real profits going forward on the basis that any business growth would be offset by the effects of competition on margins and Mr Banks assumed continuing growth in business volumes with no impact of competition on margins. Of course the differences produced dramatic effects. By 2002/03 (i.e. half way through the ten year period of the DCF calculation) Mr Banks' model is assuming new business written of $194 million and profit after interest and tax of $18 million whereas PwC's model is assuming new business written of $147 million and profit after interest and tax of $14 million. In other words, Mr Banks' model is assuming 32 per cent new business written and 29 per cent more profits.
705 There was no evidence to support Mr Banks' assumptions re competition, and evidence against it, including that of Mr Bickerton
706 If Mr Banks' reports were to have any evidentiary weight, it was necessary for the applicants to prove the truth of the assumptions (see Ramsay v Watson (1961) 108 CLR 642) ). Notwithstanding this, a fundamental problem with Mr Banks' reports is that the applicants have ultimately failed to prove many of the important assumptions which he says formed the basis of his opinions.
707 It is therefore submitted that the applicants have failed to make good assumptions going to the very core of Mr Banks' report, in particular, the issue of the likely future growth and profit performance of the RentWorks business. On that basis alone, Mr Banks' reports could not be adopted by the Court as of any significant weight as giving the value of RentWorks at the relevant dates.
708 The third and perhaps most telling revelation which came to light in the process of obliging Mr Banks to fully explain his reasoning process, was that the whole basis of Mr Banks' reasoning process for his earnings multiples at all dates covered by his reports was in fact his DCF calculation as at 30 June 1998, a fact which was not mentioned at all in his earlier reports. Indeed, his first report suggested that he had done no such thing but had only utilised the earnings-based method.
709 In section 5 of Mr Banks' first report he expressed the view that the theoretically most appropriate method of valuing RentWorks was using the DCF method, but that he was 'unable to conduct a DCF valuation' as at 30 March 1999 because he lacked information to do so. He therefore 'elected to use a maintainable earnings based method'.
710 He never mentioned the existence of his DCF work.
711 Mr Banks actively mislead the Court. Not only did he fail to disclose through his first two sets of reports that he had relied on his 30 June 1998 DCF analysis in coming to his views as to the appropriate multiple to apply to the valuation of RentWorks at 31 March 1999, he actively sought (by suggesting that in his final report that it was only a 'cross-check' and stating in paragraph 50 of his second explanatory supplement - Exhibit 116 - that he arrived at his valuation at 30 June 1998 by working backwards from his valuation as at 31 March 1999 when he actually did the exact opposite) to conceal from the Commission the fact that this analysis was, not merely 'a factor' in his valuation of views, but was the decisive consideration in his valuation opinions at all of the dates at which he expressed a view.
712 The applicants' nominated primary position is that if the Court finds relevant unfairness, it would give them money. But when one comes to look at how they seek to support that, there is very little said to rely upon the evidence of Mr Banks.
Banks Valuation - Further Submissions - Respondents
713 The applicants advanced Mr Banks to contest Mr Pope's valuation.
714 Mr Banks said in his report:
PwC have had significant regard to the forecasts and views provided by RentWorks management. These forecasts are overly pessimistic and do not accord with the historical performance of the business.
The views put forward by RentWorks in respect of the likely prospects of the business which were relied upon by PWC in preparing their report, contradict the views of management in their communications with lending institutions at the same time.
PwC were provided with inappropriate information upon which to formulate a realistic view.
715 They were the only points of criticism he made.
716 PwC took an earnings-based method approach and did the two cross-checks. No criticism was made by Mr Banks or Mr Robertson of this approach by PwC in terms of valuation methodology. Nor was any such criticism put to Mr Pope in cross-examination. Nor were any submissions made by the applicants that PwC had erred in their methodology in any way. The Commission may therefore safely conclude that there was no flaw in PwC's methodology.
717 In short, as Mr Pope said in his evidence, the earnings multiple used needed to reflect the sustainability of earnings, the potential growth in earnings, and the risks inherent in the business.
718 These matters are ultimately taken into account by the valuer in an exercise of judgment which considers and weighs the various, sometimes competing, considerations. Despite appearances to the contrary in Mr Banks' final set of explanatory supplementary reports, this is not a mathematical exercise in which the valuer makes precise mathematical adjustments to a putative multiple in order to reflect each relevant consideration.
719 That is a matter which, in the end, is not the subject of any dispute. As Mr Robertson explained in his evidence, the reasoning process is not nearly so precise. Nor, as it ultimately emerged in cross-examination, was this, in fact, the way in which even Mr Banks approached that task. As he admitted, his "mathematical" exposition of the process was more a reconstruction and attempt to explain the relevance of the various considerations than an accurate representation of the way he actually proceeded.
720 In relation to the DCF used by Mr Banks the respondents submitted that an important feature of the method, however, is that its apparent mathematical precision in fact disguises much the same sorts of judgments which are involved in the earnings-based method but which tend to be 'sort of swept up in the multiple'.
721 All the valuers agreed that a DCF really was not the appropriate way to value this business, even though in truth, Mr Banks had done a DCF in August 1999 and had used that really as the basis of everything he did thereafter. Even though he himself said that it was not the appropriate method to use as the primary method.
722 One consequence of the apparent mathematical nature of the DCF analysis is that relatively marginal changes in the parameters as the assumed rate of growth in earnings or the discount rate can produce enormous variations in value produced by the calculation.
723 The two big drivers in Mr Banks' DCF which make the difference are the growth he assumes in the new business volumes in the first three years, which is massive, compared with less in the DCF done by Mr Pope and the cash investment figure. They produce most of them many millions of dollars of difference.
724 Valuers do look at long term forecasts of earnings with extreme caution. Mr Pope says this:
...in my opinion and experience the achievability of the results embodied in forecasts may be subject to very significant uncertainty...
...particularly if those forecasts cover periods of time beyond the next financial year, except perhaps in relation to particular businesses the earnings of which are inherently stable and thus able to be reliable predicted. This is particularly so of smaller businesses operating in relatively volatile industry sectors. From what I knew of RW and its businesses in 1998, it would be appropriate to classify it as operating within the class of business referred to in the last sentence.
725 That is "smaller businesses operating in a relatively volatile industry sector". That is a finding which the respondents ask the Court to make based upon the evidence.
Banks' Valuation - Consideration
726 Three sets of reports from Mr Banks were tendered. The necessity for that series of reports arose because the respondents' objections to the first and second sets on a number of bases, but, particularly, that they failed the tests in Makita (Aust) Pty Ltd v Sprowles (Makita) (2001) 52 NSWLR 705 were upheld by the Court. Leave to file those additional reports was not opposed by the respondents.
727 As a consequence of the Court's rulings and concessions by the applicants, a substantial number of Mr Banks' assumptions were admitted on the basis that they were assumptions only, which would have to be proven by other evidence.
728 The respondents made in depth closing submissions as to the Banks' reports in support of their contention that the Court would not accept Mr Banks' opinions where those opinions differed materially from those expressed by Mr Robertson and PwC for the following reasons:
(1) Mr Banks fundamentally misconceived his role as an expert witness in a way which had irremediably tainted his evidence by intermingling his opinions with "findings" and unstated assumptions as to the facts of the matter;
(2) Mr Banks' opinions were crucially based on assumptions as to the likely future financial performance of RentWorks which were not merely unsupported by evidence but are contrary to the overwhelming weight of evidence before the Court; and
(3) Mr Banks' opinions are thoroughly tainted by bias, lack of objectivity and willingness to act as an advocate in his clients' cause.
729 I accept the general thrust of those submissions by the respondents, but do not attempt to deal with them in detail because to do so would inordinately bulk out this judgment. What I do though is to refer to various parts of Mr Banks' evidence as being indicative of the bases on which I do not accept that his reports support the applicants' submissions that Mr Banks' ultimate valuation of RentWorks should be accepted instead of that of PwC.
730 Mr Banks agreed that in the DCF most of the difference in the end value between his valuation and those by PwC and Arthur Anderson was driven by the growth assumptions made and the cash investment assumptions made. (Transcript p 2908)
731 The evidence of Mr Banks was that his view when he first read the PwC document was that the value seemed to be very low and he could not understand how it was so low. He said that "my simple belief or honest belief is that management were trying to pay a minimum amount for the value of the shares at the date to Mr Murray". (Transcript p 2952) Having quickly looked through it, Mr Banks came to a number of views about the PwC valuation on 8 April: the 2.5% growth was "just silly", at least 8 as a multiple could be justified and 15% (the minority discount?) was wrong. Of course, when Mr Banks first read the PwC valuation, he did so in a taxi on the way to his first meeting with Harmers on 8 April. As at that date Mr Banks had only very recently returned from holidays and had spent not much more than an hour before the meeting looking at the material sent by Harmers. (By way of contrast, Mr Pye had told Mr Murray that PwC had the reputation of coming in with higher valuations.)
732 According to the evidence, on 29 March 1999, Harmers had prepared a letter and some supporting information and had sent it to Ms D'Ambra at KPMG. That letter had with it the shareholders agreement, the draft valuation, a bundle of documents provided to PwC by RentWorks for the purpose of the valuation, the December 1998 letter from PwC to RentWorks, with the letter from RentWorks in response to the actual 1998-99 figures and the final valuation of 22 December.
733 Mr Banks' brief was in the following terms:
We have been instructed by MacDome to retain you initially for the purpose of providing your general views regarding:
(a) Whether the methodology utilised by PWC in determining the value of MacDome's shares was appropriate. In particular whether:
. PWC should have sought additional information from RentWorks prior to finalising the valuation.
. appropriate valuation principles were utilised.
. a correct Price Earnings Multiple was utilised; and.
. there were any other deficiencies in the PWC valuation or the process utilised by PWC.
(b) Whether, based on the information that is being provided to you, the value which was ultimately attributed to MacDome's shares was appropriate and if not, a 'ball park' estimate of the appropriate value."
We would like to meet with you to discuss your initial views...on 8 April 1999 at our offices. Could you please confirm that you will be in a position to formulate your views regarding the above by this date and that the appointment is suitable for you.
After receiving your initial views, our clients will make an assessment regarding whether they intend to proceed with this matter. If a decision is made in the affirmative, we would like to retain you to:
. assist in drafting a subpoena seeking all documents which will be required by you to prepare your own valuation of RentWorks;.
. following receipt of such documentation, prepare a valuation of RentWorks to be used as an expert's report; and.
. if necessary, attend as an expert witness at any hearing.
734 In relation to the meeting with Harmers on 8 April, which Mr Banks did not think was very long, the following extracts from transcript were, to me, enlightening as to Mr Banks' starting point for his valuation:
Q What did you tell them?
A I told them, I think, basically I didn't spend much time looking at it [the valuation], but that Diana had looked at it and that the PE that was used, on the basis of being used, seemed to be way out of court. I thought it had to be at least 8, and Diana might have made a suggestion as high as 11, but I don't recollect exactly. It was more than 8 on a preliminary view.
Q And you had arrived at this view, had you, by a quick read of the letter, a look at the valuation but no reading of the documents?
A No, I had had that advice from Diana. She had actually worked on one of their competitors not long before, I believe, FlexyRent and got information on that. She had other information on the files from somewhere in the market. I can't recollect exactly what it was, but she had actually seen it and gave some information to me as well.
Q So something she had done led you to think that the Pricewaterhouse result was wrong?
A Well, my own reading of it, plus having been told by her of other information, the answer is yes.
Q Would you describe the information you had available to you at the time you expressed those views on 8 April to those present as information that could be fitted on the back of a postage stamp, Mr Banks?
A I had had the valuation report in front of me and I have had Diana D'Ambra who was in senior management in the corporate finance business at the time, experienced in finance, experienced in valuations, who is now a director of the company, and who had looked at it as well and came up with her view.
Q But she had had no opportunity to do any research or to consider the matter fully at all, had she, by the time of the 8 April conference?
A I don't think she had done any research apart from looked at the files she had already from previous jobs.
Q Previous jobs from some other business?
A Some other leasing company that sold its rental stream to financiers.
Q But no work had been done at all, I suggest to you, by 8 April, either by you or by her or by anybody else at KPMG, that could be dignified with the word research?
A No work had been done in respect of the specific job. We had only had the material given to us, and she had looked at what she had from before, but we had done no specific work on this job until after we had our brief confirmed.
... (Transcript pp 3144-3145)
735 Mr Banks agreed in cross-examination, that anybody who formed the view that PwC were wrong, simply by reading the valuation, would be doing so without any proper foundation.
736 In their valuation, PwC noted that the two year prospective price earnings ratios for mid size US leasing companies in September 1998, following some market decline, were in the range of 5 to 10.
737 It was common ground that in valuation practice if one is looking at earnings to be coming in the future, one should apply a prospective multiple. However, if one is valuing a business by reference to historical earnings (in this case up to June 1998) then one would use an historical multiple. In textbook terms, to apply a prospective multiple to historical earnings, or a historical multiple to prospective earnings, is "a common error".
738 A historic multiple would be higher than a prospective multiple, and applying the historic multiple inappropriately as Mr Banks did in the course of his valuation to prospective earnings, had the effect of wrongly inflating his valuation. That was an error in relation to which Mr Banks had said "using a historic PE versus a prospective earnings as such, is a basic error in valuation". Both Mr Pope and Mr Robertson had correctly used prospective multiples.
739 When Mr Banks set out for the Court in his second explanatory supplement (Exhibit 115 par 41) the reductions for various factors that had led him to reduce his earnings multiple, at that point, from 20.25 to 12.1, he had deducted 8.15 points, (a huge deduction in comparison with the other deductions he made) to take account of "differences in size and lack of diversity and vulnerability to the departure of key employees".
740 However in Exhibit 54 at par 2.2.2. Mr Banks had said that in assessing the price earnings multiple, PwC had had regard to factors that he would consider "only marginally, if at all, affect the assessment of an appropriate price earnings multiple". The factors he specified included "relatively small company" and "reliance on key employees".
741 Taken to what he had stated, he said "the mistake is that there is a reduction - a significant reduction required for a company the size of RentWorks, and so those words are incorrectly stated". (Transcript p 3321) Therefore:
In the current form, the words 'relatively small company' are incorrect and misleading, those words in that paragraph, and I would like to have those three works struck out.
742 He said the words had been included by the mistake of someone else assembling the report.
743 In my view, Mr Banks' description of his criticism of PwC, that they had taken into account the relatively small size of RentWorks, when this was a marginal or irrelevant factor, as a "mistake" was another instance of Mr Banks' determination that the PE multiple he arrived at would be above the "8" he had decided in the taxi would be appropriate.
Cash investment - Mr Banks' assumptions - Consideration
744 The assumptions as to cash investment was an area of major difference between Mr Banks and PwC.
745 Mr Banks' assumption of the cash investment required by RentWorks going forward for 10 years, was 0.54% for 1998/99 as against the 2.5% in the 1998/99 budget. PwC's assumption for 1998/99 was 2%.
746 One basis for Mr Banks' assumption of 0.54% cash investment was, as emerged only in cross-examination, his assumption that nothing had changed that would make history a poor guide to the future and, in particular, that "going forward for 10 years there will be no competitive pressures on this business which will require a greater cash investment in transactions than has historically been so". That assumption was quite contrary to the evidence and to the common ground that were such pressures on the business.
747 Taken to the 5 year figures, Mr Bickerton had said in relation to cash investment, that because of the position taken on the volume of business written he had increased it by that same (5 ½) percentage increase "and that is basically my understanding or being conservative that I thought going forward that there may have been more competition, we may have to invest more in the deals that we are writing and that would reflect on your business income going forward". (Transcript p 495) He accepted Mr Fosters' summary of "more cash in the business, lower margins".
748 A second basis was Mr Banks' astonishing evidence, raised for the first time during the course of cross-examination (and later dealt with in re-examination) given when answering questions directed to his reasons for choosing 0.54% as cash investment in his DCF, when he knew that the figure in the 1998/99 budget as approved by the Board was 2.5%. He said that he thought that the budget was prepared quite late in the piece, though he did not know when, going on to say "and whether it was prepared to help this event or otherwise, I mean the valuation". (Transcript p 2827)
749 He accepted that his point was that the Board had knowingly painted in the 1998/99 budget a general picture of the business that was unduly low, an artificial depressing of its profits, with an eye to influencing the PwC valuation downwards.
750 As to the 1998/99 budget not being normal, he said "I guess I jump to conclusions, incorrectly or correctly" when the ratios did not look logical, cash investment did not agree with anything in the past and at October 1998 the profit figures were significantly above budget". (Transcript p 2827)
751 In re-examination, Mr Banks was taken to the landscaped document headed: "Total RentWorks Australia Budget (includes remarketing and EDIT 21/Budgeted Profit and Loss (after Consolidation Adjustments)/For the year ending 30 June 1999), and asked to identify the ratios he had said did not look logical.
752 The ratios he identified really came down to those between "broker shares" and "secondary income", "services & others" to "new business", and "investment" to "new business" of 2.5%.
753 Mr Banks had noted that "broker shares" (a direct expense) had increased from $305,000 (actuals, P & L accounts for 1997/98) to a budgeted forecast in 1998/99 of $1,375,454, i.e. increased by a ratio of more than 400%. The ratio "broker shares/secondary income" on that same basis was less than 5%, "secondary income" (actual) in 1997/98 being $7,330,000.
754 In evidence in chief Mr Lander was taken to the document: RentWorks Consolidated Profit and Loss for the month ending 30 June 1998 and his attention directed to all the items raised by Mr Banks as illogical ratios. He dealt with them comprehensively, but, in the interests of comparative brevity, I discuss only the "broker shares/secondary income" ratio.
755 In relation to the entry "Broker Shares", he noted that there were dollar amounts listed for the months April, May, June 1998, totalling some $305,000 but $0 in each of the July 1997 to March 1998 columns. He explained that prior to April 1998, broker shares expenses were netted off against the secondary income figures which appeared in the direct income section of the P&L. From April 1998, the Board requested that they be shown separately, i.e. not netted off but displayed separately in the direct expenses line item.
756 On the basis of brokers shares for 3 months to June 1998 being $305,000, Mr Lander assumed an amount of $100,000 per month for that financial year for those expenses. On the assumption that the brokers share total for 1997/98 was $1.2 million, he had calculated the ratio of brokers share over the entire secondary income as depicted in the 1998/99 budget, referred to by Mr Banks, as being around 15%. For 1998/99 he put the ratio as 16% whereas Mr Banks said about 20%. In any event all ratios were well above the less than 5% Mr Banks thought not logical.
757 As can be seen, Mr Banks' original comparison was a comparison of twelve months expenses against three months. When the three months comparison was properly made the broker shares expenses were $305,000 (April - June 1998) (1997/98) against $343,765 (April - June 1999) (1998/99).
758 That basis for labelling the 1998/99 budget fraudulent because of a 400% increase fell by the wayside, as did the other allegations upon investigation.
759 That allegation by Mr Banks, of course, not only encompassed Mr Kinghorn and Mr Medway, but was also that all Board members including Mr Hughes and Mr Bickerton had connived to artificially depress the value of the business. It also was an indictment of PwC in not seeing something that was so obvious to Mr Banks. However, in other parts of his evidence, Mr Banks relied upon that 1998/99 budget, despite its allegedly artificially depressed figures, to support others of his submissions to the opposite effect. For instance, Mr Banks said that in arriving at his 20 per cent growth assumptions for 1998-99 he also took into account the projected growth in non-DSE business in the 1998-99 budget from $90m to $130m.
760 Mr Bickerton was responsible for the final determination of 2.5% cash investment in the 1998/99 budget. Mr Lander had been involved in the decision to budget for that 2.5%. His thinking in relation to it was that it was a reasonable cash investment which was consistent with RentWorks being able to acquire high quality residual investments. Asked if he had particular investments in mind that were either expected or might be undertaken in 1998/99, he answered:
A RentWorks was targeting some tender business and also some government business which typically had a requirement for a larger cash investment than ordinarily was required. For example, the Department of Education transaction initially requires to invest up to 8 per cent in cash in the deals until we managed to sell half the equity to Textron which brought the cash investment back down to about 2.5 percent. There was other deals that I was directly involved like in the Crown in the right of Tasmania which was a hypobaric chamber which required us to also put in a cash investment around 4 per cent. It was my view too that in order for us to increase the non-DSE volume from 90 million, which was the actual to the year ended 30 June '98, to the 130 million in the budget to 30 June 1999, that we were going to have to win some significant tender business which would then require us to invest a higher percentage than we had in the past in deals. Also we were aggressively trying to target new equipment types such as health care and telecommunications equipment which typically required larger cash investments because they were longer term assets than IT equipment. (Transcript p 4335, 4336)
761 I do note that that claim as to the 1998/99 budget being fraudulent was not taken up by the applicants, but I have placed substantial weight on it as indicating the approach of Mr Banks to justify, in the exercise of his valuer's judgment, what assumptions he chose to rely on.
762 It was not only on the cash investment issue that Mr Banks made adverse assumptions, on a matter not within his prerogative but that of the Court, in relation to the integrity of the management of RentWorks. In evidence he said that if the 5 year figures did not correctly reflect management's belief as to future growth, then the supply of them to the banks, showed a lack of integrity, whereas if the 5 year figures did correctly reflect management's belief as to growth, the non-supply of those figures to PwC also showed a lack of integrity.
763 On that point, Mr Banks had said:
A valuer who had been given the [5 year] figures would seriously consider that information examine the foundation of it with the directors and satisfy themselves as to the overall veracity of the figures. (Exhibit 54 par 7.2.1)
764 He did not do that but, on the basis that the 5 year figures were sent to the banks he also disbelieved what Mr Medway had said about anything to do with the prospects of the company.
Banks' Valuation - Approach to Growth
765 Mr Banks said that by the time of the second report, when he was aware of the St George proposal, he had formed the view "very strongly that really the biggest problem with the PwC report, and it still stands, is the lack of information given to them, that sent them to the view that they believed there was no real growth in that business. That is really the foundation of our differences - there is no real growth in the business. Everything else they have done is a workmanlike job". (Transcript p 3172) As he accepted in cross-examination, he had held the belief that PwC had made a mistake about the matter of growth, from his first quick look at the report.
766 I also note that the letter from Harmers which accompanied that report asserted that PwC had assumed no further growth in the business.
767 The applicants sought on three occasions, on different grounds, on each occasion opposed by the respondents, to tender certain ABS figures in support of Mr Banks' assumptions as to growth in par 46 of Ex 115, those assumptions being:
(i) demand for computers and other high technology equipment in Australia in the foreseeable future will increase at a rate greater than the nominal Gross Domestic Product (being real GDP plus inflation);
(ii) the whole operating leasing market in Australia will grow in the foreseeable future at least at the rate of growth of demand for computers and other high technology equipment;
There was a third assumption but the tender was not directed to support it:
(iii) that any effect on RentWorks of competition in Australia would be substantially offset by growth in that market.
There was no evidence to support that third assumption.
768 In par 40.47, Mr Banks said that "making those further assumptions and having regard to RentWorks past earnings growth trend ... I concluded that it was possible for me to make reasonable projections about the future growth in RentWorks' gross business volumes". One problem with that conclusion is that the figures show that there was no past earnings growth trend because of the way those figures in previous years went up and down from year to year.
769 The third occasion the applicants sought to tender the ABS documents, (though a lesser number than on the previous occasions) was during the course of final submissions, submissions on the point occupying a little over a day.
770 Mr Slattery sought to show that they were what is called at common law a public record and that they were admissible as such, both at common law, and the common law fitting into the Evidence Act provisions. They were admissible as a public record, which is an exception to the hearsay rule itself, and it is a basis of admissibility, quite apart from it being a business record.
771 The respondents opposed the tender on a number of bases: applicants' application really one to reopen case; the Evidence Act 1995 covers the field as to "public document"; the various elements of the common law exception to the common law rule against hearsay had not been made out, and the documents should be excluded under s 135 as causing the respondents prejudice.
772 The parties were advised on 11 June 2003 that the documents were rejected but no reasons were published.
773 I can be very brief as to the reasons for rejecting the tender of those ABS documents.
774 My tentative view is that the ABS documents do not fall within s 59 as an exception to the rule against hearsay evidence. That view takes into account the legislative/LRC history in relation to the public documents exception. In my view, s 9(1) of the Evidence Act 1995 would be rarely available, and would more likely to be so in relation to exceptions that had not been so well considered prior to the enactment of the Evidence Act.
775 In any event, even if they were, as "public documents" or "public records", an exception to the hearsay evidence rule, that would merely have the facilitative effect of other sections relied upon by the applicants: s 155, s 156, s 182 and/or s 159. They would still need to satisfy the requirement of s 69.
776 There was no explanation as to the methodology behind the collection of the information which was the basis of the figures or as to its presentation.
777 On the face of the figures presented, questions remained unanswered. For instance, as a matter of judicial knowledge, I am aware that the Statistician from time to time issues corrected figures or changes the basis on which information is collected or presented. In the case of these particular ABS figures, the way they were presented changed. That may simply have been a change from recording the figures in millions, rather than hundreds of thousands, but it may not.
778 Without evidence from some appropriate person from the ABS, the Court would not be assisted by simple tables of figures. Even if the ABS documents were admissible on the same basis as those issued by or of the Reserve Bank, they would not, without further evidence, have assisted the Court in terms of Makita to follow Mr Banks' chain of reasoning.
779 Finally, even if I had accepted the substantive submissions of the applicants on that point, I would have, because of the stage of the proceedings at which they were again tendered, refused to admit them under s 135(a) on the basis of prejudice to the respondents.
780 Mr Slattery conceded that the Court's ruling rejecting the tender of those documents had left a gap in the evidence to prove those assumptions. He then submitted that the 5 year figures filled that gap, a submission I have dealt with elsewhere in this judgment and rejected.
Banks Valuation - Conclusions
781 Mr Banks in his first report (Exhibit 53) expressed the view that theoretically the most appropriate method of valuing RentWorks was the DCF (discounted cash flow) method but that he was "unable to conduct a DCF valuation" as at 31 March 1999 (par 5.2.9) because he lacked the information to do so. He said he therefore "elected to use a maintainable earnings based method", i.e. the same primary valuation methodology used by PwC.
782 In his second report (Exhibit 54) he said he had undertaken a DCF calculation as at 30 June 1998 "for the purpose of comparison with PwC's report" (par 1.1.2). In his second explanatory supplement (Exhibit 115) he stated that in arriving at his earnings multiple as at 31 March 1999, he had utilised a DCF analysis as at 30 June 1998 (see par 41(i)) which had in fact determined, as was admitted in cross-examination, his price earnings multiple of 9.00 to 9.5 times. (Transcript p 3111.19) The result of his earnings based calculation had been 10 times.
783 Mr Banks had therefore used the implicit PE multiple he had derived from his DCF analysis performed as at 30 June 1998 to derive a PE multiple appropriate to be used for a valuation as at 31 March 1999, saying that the difference in dates should not make any difference. The following extract from transcript was illuminating:
Q Would you agree, Mr Banks, that what you really did when you came to do your valuation as at 31 March 1999 and your first report, is that you started with a proposition that you had to get to 9.5 as a PEM for RentWorks' Australian business and reasoned backwards from there?
A No, I don't think I did exactly that. I think I just - it went though the general steps you do with a PEM, started at the front end and worked down, but I do agree that there would always have been a tendency that 9.5 was what I, you know, probably should have finished up with.
Q And, in substance, you presumed the validity of the 9.44 you had derived [from your DCF analysis as at 30 June 1998] and were merely running through these other factors said to be relevant to deriving the PEM as a rough check against that 9.44 you derived?
A I think that is probably true, yes. (Transcript pp 3111-3112)
784 How can the requirements of Makita be said to be complied with when there is revealed such a lack of openness as to how the expert's "opinion" was arrived at? In Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705 Heydon JA said:
…
64 The basal principle is that what an expert gives is an opinion based on facts. Because of that, the expert must either prove by admissible means the facts on which the opinion is based, or state explicitly the assumptions as to fact on which the opinion is based. If other admissible evidence establishes that the matters assumed are "sufficiently like" the matters established "to render the opinion of the expert of any value", even though they may not correspond "with complete precision", the opinion will be admissible and material: see generally Paric v John Holland Constructions Pty Ltd [1984] 2 NSWLR 505 at 509-510; Paric v John Holland (Constructions) Pty Ltd (at 846; 87). One of the reasons why the facts proved must correlate to some degree with those assumed is that the expert's conclusion must have some rational relationship with the facts proved.
...
85 In short, if evidence tendered as expert opinion evidence is to be admissible, it must be agreed or demonstrated that there is a field of "specialised knowledge"; there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; the opinion proffered must be "wholly or substantially based on the witness's expert knowledge"; so far as the opinion is based on facts "observed" by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on "assumed" or "accepted" facts, they must be identified and proved in some other way; it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: that is, the expert's evidence must explain how the field of "specialised knowledge" in which the witness is expert by reason of "training, study or experience", and on which the opinion is "wholly or substantially based", applies to the facts assumed or observed so as to produce the opinion propounded. If all these matters are not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge. If the court cannot be sure of that, the evidence is strictly speaking not admissible, and, so far as it is admissible, of diminished weight. And an attempt to make the basis of the opinion explicit may reveal that it is not based on specialised expert knowledge, but, to use Gleeson CJ's characterisation of the evidence in HG v R (1999) 197 CLR 414, on "a combination of speculation, inference, personal and second-hand views as to the credibility of the complainant, and a process of reasoning which went well beyond the field of expertise" (at [41]).
...
87 There is no doubt about Professor Morton's authority, experience, qualifications and skill. It is also the case that Professor Morton's report is quite lengthy and detailed. But, given that the court is not obliged to take the opinion of an expert as conclusive even though no other expert is called to contradict it, can it be said that Professor Morton's report goes beyond a series of oracular pronouncements? Does it usurp the function of the trier of fact? More vitally, did it furnish the trial judge with the necessary scientific criteria for testing the accuracy of its conclusions? Did it enable him to form his own independent judgment by applying the criteria furnished to the facts proved? Was it intelligible, convincing and tested? Did it go beyond a bare ipse dixit? Did it contain within itself materials which could have convinced the trial judge of its fundamental soundness?
785 In terms of Makita, the reports of Mr Banks did not enable the Court to form its own independent judgment as to his valuation of RentWorks, firstly by not supplying the necessary criteria that could be applied to the facts proved, because, in important respects, the "facts" remained assumptions and had not been independently proven, and secondly, the Court was not convinced, upon examination of it, of its fundamental soundness.
786 The valuation by Mr Banks did not demonstrate to the Court that the valuation undertaken by PwC was deficient either as to the calculation of fair market value arrived at in accordance with cl 6 of the SHA or as to the process undertaken by them.
RNZAF - Special Purpose Transaction - Submissions - Applicants
787 As described by the applicants, the "NZ Airforce Transaction" consisted of two lease transactions with the NZ Airforce. The first involved a lease of three Beechcraft aircraft and the second involved the lease of thirteen CT-4E Airtrainer aircraft.
788 Agreements relating to the first of RentWorks NZ's two lease transactions with the NZ Airforce, the lease of three Beechcraft aircraft, were executed on 13 March 1998. The second of the transactions was executed in August 1998.
789 In the Further Amended Summons for Relief, the applicants sought declarations that two Multilease Joint Venture Agreements dated 7 December 1995 (Fourth JV Agreement) and 1 July 1995 (the July JV Agreement) were unfair contracts. They sought orders that either those Agreements be varied to include a provision that "The Royal New Zealand Airforce Transaction identified in paragraph 93 of the Affidavit is a "special transaction" within the meaning of paragraph 4 of the Fourth JV Agreement and paragraph 4 of the July JV Agreement" or alternatively the payment of money.
790 (The applicants explained that there was a question as to which of the July and December JV Agreements was applicable in 1996, and so sought orders in respect of both of them. However, insofar as "special transactions" were concerned, the differences between them were not material.)
791 The applicants contended that the NZ Airforce Transaction fell within the description of a "special transaction" in terms of cl 4 of the July JV Agreement and should have been designated as such. The failure of the respondents to so designate it resulted in the applicants being deprived of the sum of $124,950 (12.75% of the "book value" of the NZ Airforce Transaction in the RentWorks NZ Annual Report for the year ended 30 June 1999). That was because PwC did not take account of the NZ Airforce Transaction in its determination of the value of the shares. That failure meant that MacDome received a lower price for those shares, while simultaneously being denied the benefit it would have received had the NZ Airforce Transaction been treated as special purpose under the JV Agreements.
792 Mr Murray ought to have been consulted by the other shareholders as a matter of fairness about the decision not to nominate the NZ Airforce Transaction as a special transaction. Much of the work in relation to it had occurred prior to the formal execution of the leasing documents in March and August 1998. In March 1998 Mr Murray was still a director of the company and in August MacDome was still a shareholder.
793 The unilateral decision by RentWorks not to classify the NZ Airforce Transaction as a special purpose transaction was unfair conduct and rendered the terms of the JV Agreements unfair.
Special Transaction - RNZAF - Submissions - Respondents
794 There is no basis to treat the New Zealand Aircraft transactions as special purpose transactions under the terms of the old joint venture agreement to which MacDome was a party before becoming a shareholder in RentWorks, because the transactions in question were entered into after the effective date of Mr Murray's resignation from Rentworks, and the joint venture agreements to which MacDome was a party ceased to operate when Mr Murray and Mr Medway converted their joint venture interests to shareholdings in RentWorks in 1997.
795 Those joint venture agreements, in any event, do not require that any transaction ever be treated as a special purpose transaction, but merely contain a mechanism by which a transaction might come to be treated as a special purpose transaction by agreement between all of the parties to the joint venture, and there is no basis for finding that there was or ever would have been such an agreement reached between those parties. They are not the parties of this litigation. There is some commonality, but not completely.
796 The fact is that if this is a transaction that properly belonged to the corporation in New Zealand, it would have been improper to channel it off into some other entity unless all the shareholders of the New Zealand entity agreed.
797 If the transactions had been treated as special purpose transactions, Mr Murray would have been required to contribute pro rata to the very substantial cash investment involved in the transactions and to assume the risk which was, in fact, assumed by RentWorks New Zealand as to whether the transaction would ultimately produce a profit or not.
798 That risk is still being borne by RentWorks New Zealand and the final profits, if any, on the transactions, will only be realised when the lease is terminated in 2008 or 2018. There is no evidence or undertaking from Mr Murray to suggest that he would ever have agreed to put up the money, or that he is prepared to do so now. There is no attempt to deal with any of these matters in the submissions made by the applicants.
799 Finally, the applicants say nothing about who the proper parties to the special purpose transaction are, or what the percentage of those parties should be declared to be. The declaration, therefore, is too vague to be ever properly made. This problem is exacerbated by the fact that some of the parties to the joint venture are not parties to the proceeding.
800 Secondly, as a matter of fact, it is not correct to assert that PwC did not take these transactions into account in their expert determination of a fair market value of shares.
801 On the contrary, the evidence is clear that the transactions were included in the 1998/99 budget for RentWorks New Zealand, which was taken into account by PwC in arriving at the valuation.
802 Moreover, this alleged complaint is not pleaded, nor is it the subject of any application for leave to amend the further amended summons, and any such leave as sought ought not be given at this late date. It is not sought. The Court does not need to worry about that.
803 It is also noteworthy that Mr Pope was not cross-examined to suggest these transactions had not been incorporated into PwC's valuation.
804 Finally, the applicants have made no real attempt to put before the Court any proper evidence as to 'loss' if any Mr Murray is alleged to have suffered as to the non-participation in these transactions. The Court does not know even whether they are now expected to be profitable. At most, on the applicants' case, what Mr Murray lost was the chance to persuade the other shareholders, some of whom are the parties, to treat these aircraft leases as special purpose transactions.
805 On the evidence, this chance was of no value because there is no suggestion that Mr Kinghorn or Mr Medway or Mr Goodall or Mr Getley would ever have agreed to such a proposal. The value of the chance was, in any event, included in the RentWorks' valuation, so to compensate MacDome again for losing it would be to double count it.
806 Even if this was not the position, there is no evidence which would enable the Court to quantify what benefit would be expected to apply to MacDome or Mr Murray as a result of treating the leases as a special purpose transaction.
807 The applicants never mentioned this transaction in their oral submissions.
RNZAF - Special Purpose Transaction - Consideration
808 Mr Goodall had been involved since the latter part of 1997 in RentWorks (NZ) in the leasing of aircraft to the RNZAF. He did not want it as a "special purpose deal". He said that RentWorks (NZ) never had any cash profits to transmit to Australia while he was there. There was investment in RentWorks (NZ) from RentWorks Australia.
809 The NZ Airforce Transaction was ultimately dealt with by being treated as a transaction on the books of RentWorks NZ. PwC in the course of their valuation, were supplied with the budgets for the Australian and New Zealand business for the year to 30 June 1999, analysis of historical results for the Australian and New Zealand leasing business, estimates of the secondary cash (after broker shares) that would be generated by the net residual positions of the Australian and New Zealand businesses at 30 June 1998, advice in relation to profit share arrangements with certain employees in Australia and New Zealand and management accounts for the Australian and New Zealand business for the three months to 30 September 1998.
810 I would expect that the July JV Agreement would persist in relation to special purpose transactions that were already operative in accordance with the terms of that Agreement prior to April 1997, that being the date of the issue of shares in RentWorks to MacDome.
811 Even if I accepted the applicants' contention that the terms of the Fourth JV Agreement (described by Mr Kinghorn as "the Amended Multilease Australia Joint Venture") persisted in relation to special purpose transactions, in the absence of any specific provision in the SHA, and against the evidence of Mr Kinghorn that that Amended Agreement terminated on 20 September 1997, its business then being owned 100% by RentWorks, the terms of cl 4 of the Fourth JV Agreement as to Special Transactions were not utilised to declare the NZ Airforce Transaction a "special transaction".
812 Furthermore, the July JV Agreement provides in cl 3.8 that each participant will have the number of votes equal to the percentage of their interest in the venture and a "majority vote" shall mean a voting majority of the participants together with a vote of not less than 2 of the participants. From 30 June 1996 those percentages were MacDome 11.25%, Spokane (Medway) 11.25%, Adelante (deBono) 7.5% and RentWorks 70%. If that Agreement was still in force in 1998, the combined votes of two of the participants, Robert Medway and RentWorks, would have been sufficient to validly decide that the NZ Airforce Transaction would not be pursued as a "special transaction" in accordance with cl 4. The evidence is clear that that was their view. No matter what Mr Murray's views on the issue were the practicality is that they would have made no difference to the outcome. In any event it was a New Zealand transaction and Mr Goodall did not want it as a "special purpose deal".
813 Also contrary to the applicants' submissions, the NZ Airforce Transaction, as an item on RentWorks NZ books, was available to PwC to take into account in their valuation.
814 I have dealt with the July JV Agreement on the assumption that it may be, but without deciding the issue, a contract or arrangement in terms of s 105 or s 106(a). It may be that the applicants' remedy is elsewhere in relation to MacDome's status as a shareholder.
815 On the basis of that assumption, I find that the terms of the Fourth JV Agreement and of the July JV Agreement were not unfair at their commencement, nor did they become unfair as a result of the conduct of the respondents.
Legislation
816 The relevant legislation is set out below:
Division 1 Definitions
105 Definitions
In this Part:
contract means any contract or arrangement, or any related condition or collateral arrangement, but does not include an industrial instrument.
unfair contract means a contract:
(a) that is unfair, harsh or unconscionable, or
(b) that is against the public interest, or
(c) that provides a total remuneration that is less than a person performing the work would receive as an employee performing the work, or
(d) that is designed to, or does, avoid the provisions of an industrial instrument.
Note. The jurisdiction of the Commission under this Part is exercisable only by the Commission in Court Session.
Division 2 Unfair contracts may be declared void or varied
106 Power of the Commission to declare contracts void or varied
(1) The Commission may make an order declaring wholly or partly void, or varying, any contract whereby a person performs work in any industry if the Commission finds that the contract is an unfair contract.
(2) The Commission may find that it was an unfair contract at the time it was entered into or that it subsequently became an unfair contract because of any conduct of the parties, any variation of the contract or any other reason.
(3) A contract may be declared wholly or partly void, or varied, either from the commencement of the contract or from some other time.
(4) In considering whether a contract is unfair because it is against the public interest, the matters to which the Commission is to have regard must include the effect that the contract, or a series of such contracts, has had, or may have, on any system of apprenticeship and other methods of providing a sufficient and trained labour force.
(5) In making an order under this section, the Commission may make such order as to the payment of money in connection with any contract declared wholly or partly void, or varied, as the Commission considers just in the circumstances of the case.
Unfairness of the Contract, Arrangement etc
817 The applicants submitted that the Court was not required to make a finding of "serious impropriety", the term used by the respondents in their heading "Findings of serious impropriety and the principle in Briginshaw v Briginshaw (Briginshaw) (1938) 60 CLR 336, in determining a claim under s 106.
818 I accept that the appropriate standard of proof to apply is that stated in Briginshaw i.e. on the balance of probabilities, a principle now embodied in s 140 of the Evidence Act 1995.
819 As long ago as 1980 it was said in A & M Thompson Pty Ltd v Total Australia Ltd (Thompson) [1980] AR 399 at 419 that "the absence of fraud, deceit or cheating is not in itself an answer to a claim of unfairness. ... In a proper case, in which fraud is not present and in which the complaining party fully understood the bargain, an order may be based on unfairness".
820 For relief to be granted, the Court must first be satisfied that the impugned contract is unfair etc in terms of s 105(a). It is only then that it would turn to consider the question of relief. In this case the applicants allege that the respondents' conduct has caused detriment to the applicant, that detriment in this case alleged to be the undervaluation of RentWorks. If there is no detriment, there is no basis for orders to be made under s 106, either for variation of the contract, arrangement etc or for orders for money to remedy the alleged unfairness.
Relief
821 The applicants submitted that very clearly this is a case in which the Court should with respect seek to reach, so far as it is possible, complete finality between the parties in the judgment and determination given. What the applicants say is if the Court is otherwise of the view the relief should be granted, and the way it should be granted is by way of a money order under s 106(5), if the Court accepts Mr Banks' reasoning and the Court were to make this finding, the Court should in effect apply the rest of Mr Banks' reasoning and find multiples of the kind that he says should be found in respect of the future maintainable earnings of this business.
822 The applicants made detailed submissions in relation to a number of alternative orders that the Court might make in the event of its finding in favour of the applicants. The respondents made similarly detailed submissions as to why the orders sought either could not be, as a matter of jurisdiction and also lack of quantification, or should not be, as a matter of discretion, made. In the light of my decision as to this application, I do not set out those submissions, nor consider them further.
Valuation Date - Submissions - Applicant
823 The only dates that the applicants contend for are either 8 February when the offer made to sell the shares was accepted or 31 March 1999, when the shares were actually transferred, or, alternatively, 30 June 1998, as the relevant valuation dates.
824 The best construction on the SHA and the ordinary legal concepts would tend to compel to the conclusion that, in accordance with cl 4, the valuation should be dated as at the date of the agreement to sell the shares and that date is in fact 8 February 1999.
Date of Valuation - Submissions - Respondents
825 Clause 4 does not say in terms what date these shares are to be valued, nor does it set out in terms a formula for determining that date, but it is clear that what is contemplated by the valuation exercise set out or activated under clauses 4 and 6 is that the shares will be valued as at the date of the termination of employment.
826 There has to be, as a matter of commonsense a date as at which the valuation is to be performed because the valuer has to have a bench mark or a point in time at which all has to be considered. It cannot be a moving feast right up to the point he signs off, because he is forever investigating the matter up to that point and it becomes completely circular and it lacks commonsense and commercial credibility.
827 What the clause actually means as presently drawn is that the date as at which the shares are to be valued is the date of the cessation of employment of the selling party, be it Mr Murray or Mr Medway; in this case, 30 June 1998. Of course Mr Murray agreed to that date anyway, fully appreciating and knowing the implications of his agreement.
Valuation Date - Consideration
828 During the course of proceedings a number of dates had been raised by the applicants as being the appropriate valuation date, but in final submissions it was only those dates mentioned above that were pressed.
829 The date stipulated in the PwC engagement letter was for a valuation date of 30 June 1998. There must be a fixed reference point against which the valuers can consider the factors to be taken into account in their valuation exercise.
830 That is especially so with a company such as RentWorks. It is not listed on the Stock Exchange.
831 A valuation had to be completed before the other shareholders could decide whether they wished to purchase the vendor's shares at the price determined.
832 Mr Murray deposed in his affidavit (Exhibit 19) that in early July 1998, with the assistance of Cutler Hughes and Harris, solicitors, he drafted a letter of resignation to RentWorks. He had drafted his written resignation so that it would be effective from 30 June 1998, the reason being to save RentWorks additional expenses. RentWorks' financial records were always completed up to 30 June each year, and if his resignation date was anytime after 30 June another audit would have had to be completed under the terms of the Shareholders Agreement (pars 68 and 69). That resignation letter was handed to Mr Kinghorn on 28 July 1998.
833 In his affidavit dated 19 March 2001 Mr Kinghorn said that at the meeting with Mr Murray on 28 July 1998, he had suggested the valuation date of 30 June 1998, and that Mr Murray had agreed.
834 There is nothing in either the SHA or in the circumstances of Mr Murray's resignation from RentWorks that would justify either of the 1999 dates contended for by the applicants.
835 I find that 30 June 1998 is the appropriate date as at which MacDome's shares in RentWorks should be valued.
Conclusions
836 I find that Mr Murray's deliberate withholding from PwC his knowledge of, and his concerns about, the 5 year plan, that plan being the core of his current claim as to the SHA being an unfair contract, would be sufficient, as a matter of discretion, to come to an adverse finding as to this application. However, the Court's rejection of that application is not based on that finding, but on its findings that:
1 The Shareholders Agreement signed on 15 June 1998, was a contract or arrangement etc in connection with a contract or arrangement whereby a person performed work in an industry;
2 The Shareholders Agreement signed on 15 June 1998, to which the applicants were parties, was not an unfair contract or arrangement as to any of its terms, and, in particular, cl 4.1(b), cl 6.1(a) and (b) and cl 6.2, in terms of s 105(a);
3 There was no unfair conduct by the respondents, as to the circumstances of the applicants entering into that Agreement. They did not withhold information, or provide information that would mislead, to PwC in their task of valuing the shares in RentWorks in accordance with the Shareholders Agreement;
4 The valuation reached by PwC in accordance with the Shareholders Agreement by PwC was carried out with competence and integrity by PwC, and in particular by Mr Pope and Mr Armstrong. They had received from RentWorks all the information they felt was needed to come to a proper valuation. That information was not misleading. To the extent that information was sought, but not supplied after 2 December, that information would not have affected the valuation, or at least would not have led to it being revised upwards. The integrity of their final valuation was not breached by the evidence of Mr Banks.
5 Assuming that the Multilease Joint Venture Agreements of July and December 1995 were contracts or arrangements etc that fell within the terms of s 105(a), the failure to designate the NZ Airforce transaction as a "special transaction" did not render those Agreements unfair.
837 In the light of those findings of the Court that there is no contract or arrangement etc that is unfair in terms of s 105(a), or has become unfair in terms of s 106(2), the Court does not have the jurisdictional basis to make any orders in accordance with s 106.
838 The application is dismissed.
Costs
839 It was common ground that the issue of costs should await the judgment.
840 If the parties are unable to agree as to costs they have leave to approach the Court on that issue.
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