Fagenblat v FGT Custodians Pty Ltd [2004] VSC 196

Fagenblat v FGT Custodians Pty Ltd [2004] VSC 196 - VSC 2004 case summary — Zoe

[7]

"In my opinion both Mr Borsky and the learned judge were in error in concluding that the respondent would remain with the firm as a consultant employee for any relevantly significant length of time, so that the valuation relied upon and given effect to by his Honour was likewise vitiated. What was in issue, of course, was whether it was likely that the respondent would remain as an employee into the indefinite future, for it could certainly be inferred that if he had departed, or if it were shown that it was probable that he would depart, relatively shortly thereafter without being subject to a covenant restraining him from dealing with any of the firm's existing clients, that must have had a bearing on the valuation, albeit that that had to be calculated as at 30 June 2000. On a proper examination of the evidence I would conclude that there was, at that date, no established likelihood that he would remain with the firm as an employee solicitor for more than a few weeks. It is not a conclusion dependent on credibility, for a question of this kind is one primarily resolved by the drawing of inferences, not the acceptance of one witness's testimony or another's, about which there were very few findings. This is a conclusion I would also reach having regard only to the evidence up to that date, although, if necessary, I would hold that one might have regard to the events over the succeeding two months, for the purpose solely of determining what was the likelihood of the respondent's continued employment as at 30 June, to the extent that that evidence reflected on both the actual relationship between the parties and their intentions as at that date. ... For myself I would prefer to rest my conclusion on an objective consideration of the matters which took place up to 30 June. I would use the later materials only in this way. If it be suggested that what had occurred was merely hard bargaining and that suddenly there would be light at the end of the tunnel, with a happy outcome and with all parties satisfied as to the terms for extended employment of Mr Fagenblat, then one could have used the evidence of the later events to show that conclusions of that kind were ill-informed as to that negotiating position. It is more than clear, however, that the attitude of the remaining partners here remained equally tough, equally intransigent at least in the case of Mr Feingold, and the negotiations continued to their end substantially in the way that they had begun and continued through to 30 June. There was indeed no real probability that the respondent would be employed as a solicitor for any substantial length of time after 30 June 2000."[3]

[47]

Mr Kenfield's change, which surfaced late in the hearing, arose out of the appropriate adjustment to be made to the starting profit figure in each year for the notional salary which would have to be paid to an employee solicitor if the partner were not there. Both Mr Lom and Mr Kenfield agreed that an amount of $460,000 or $115,000 per partner should be deducted from the starting profit figure in the year ended 30 June 1998 and an amount of $480,000 or $120,000 per partner in each of the following two years. However, Mr Kenfield also deducted a further 20% for on-costs ($92,000, $96,000 and $96,000 in the three years). Subsequently, Mr Kenfield produced a document in which he added back the 20% of on-costs on top of partners' notional salaries, which he had previously deducted. However, rather than adding back the appropriate amount to each year's profit figure before averaging, he added back the amount of $96,000 after averaging and deducting his lost net profit of $187,000. Mr Kenfield agreed in cross-examination that he may have made a mistake in taking out the 20% on costs because they were "already in the costs of the practice". He said that he was not convinced that it was correct to take out the $96,000 but he was also not convinced that it was not prudent to put it back in. He also agreed that by adding back at this stage the last two years' figure of $96,000 instead of the average of $94,667 he had made a further mistake. He suggested he had been "ultra-conservative". After adding back the figure of $96,000 Mr Kenfield's new adjusted future maintainable profits became $180,097, not $84,097. Capitalised at 30%, this produced a total practice value of $600,323 or $150,081 per partner. Thus, on Mr Kenfield's amended figures, Mr Fagenblat would appear to be entitled to a small amount for goodwill on top of his agreed share of the value of the assets of $129,797 ($22,284 to be precise). However, as will be seen, the logic of Mr Kenfield's approach remained that Mr Fagenblat should receive nothing more than the agreed figure of $127,797 because there was no goodwill in the practice.

[139]

The plaintiff submitted that the "partnership" whose goodwill was to be valued in compliance with the order of the Court of Appeal was the business of Feingold Partners Pty Ltd as it stood at 30 June 2000 in the light of matters known, or which reasonably could have been expected, at that date. It was not "the business" as altered by unforeseeable management decisions made after 31 August 2000. Nor was it "the business" as actually conducted by the defendant after 30 June 2000. It was the business owned by the four partners at the date of the retirement of the plaintiff, namely 30 June 2000. This was what the parties had agreed and was what Mr Fagenblat would have been entitled to pursuant to s.47 of the Partnership Act 1958 if there had been no agreement. Mr Dreyfus submitted that the share was to be valued as at 30 June 2000, by reference to information known at that time and not by reference to events occurring afterwards, except so far as those events threw light on the value at that time.[10] Reference to the agreed facts, in particular paragraph 5, illuminated the risk that Mr Fagenblat would compete and take clients away from the practice, but did not establish the quantum of any earnings which would be lost. Mr Dreyfus submitted that just as it was not permissible to look at the earnings of the new three person partnership in the year ended 30 June 2001 to assist in valuing the goodwill of the practice as at 30 June 2000, because of all of the supervening events, in particular the management decision concerning the continuation of the litigation department, so it was equally not permissible to look at part of that picture, such as earnings actually received by Mr Fagenblat in a subsequent period, to assess the value of goodwill at the earlier date. Agreeing to certain facts simply avoided the need to spend time proving them and carried no concession as to their relevance. Mr Dreyfus therefore submitted that Mr Lom had performed his valuation on a proper basis because the risk that the future maintainable profits would not continue at the assumed level because of the loss of clients to Mr Fagenblat was built into the capitalisation rate chosen by him.

At a glance

Court

Decision date

Before

Source

Judgment (211 paragraphs)

Parties

Cases Cited (4)