(g) None of the participants were subject to any restraint of trade in event of resignation, retirement or removal.
69. I assume, however, that in maximising the value of the Practice's goodwill for the remaining participants any sale or transfer of the goodwill would be made to suitably qualified person in a manner that ensures an orderly transition process and usual restraint of trade contractual provisions.
18 The defendants contend that there is an inconsistency between those two passages, and that it was inappropriate for the referee to make any such assumption about "usual" restraint of trade contractual provisions. Mr Finney gave evidence to that effect, but he added that, as things transpired in this case, Mr Forrest took very little with him and as a matter of practicality disregarding this assumption would have made no material difference in the valuation outcome.
19 In my view, the defendants' contention (and Mr Finney's original position) misconceives what the referee was saying and doing in paragraphs 68 and 69. The referee had accurately recorded that, in the event of resignation, retirement or removal from the practice, no individual participant is subject to any contractual restraint, but he assumed that if the proprietors sold the practice as a whole to an arm's length purchaser, then they would act in their financial interests by giving a "usual restraint of trade" in the Contract for Sale of the practice. The referee's first reference, in paragraph 68(g), was to the absence of restraints in the Shareholders Agreement. That is quite a different matter from the assumption, in paragraph 69, that in the hypothetical Contract for Sale of the practice, there would be a "usual restraint of trade provision". The referee's assumption in this regard seems to me an entirely reasonable one. In the course of his cross-examination, Mr Finney came to accept that he may have misconceived what the referee was assuming in paragraph 69.
20 Even if there were some error in this respect, which I do not accept, it is of marginal significance and minimal impact. It was one of many factors which affected selection of the capitalisation rate. The referee said that the appropriate multiplier for similar practices was usually in the range of 2.5-5, and that in this case a multiplier in the lower end of that range, namely, 2.5-3 was appropriate. The science is an inexact one, and it is far from apparent that absence of the assumption about a restraint of trade would have made a significant difference. Indeed, Mr Finney's own evidence was that, as it transpired, it made no material difference. Accordingly, even if I thought there were some error in this regard, as a matter of discretion, in accordance with the principles I have summarised above, I would be disinclined to reject this aspect of the referee's report.
The Recoverability of Receivables
21 I turn then to the third issue, which is that of recoverability of receivables. As I have recorded, the referee concluded his report with a caveat that his valuation was reliant on recoverability of the practice's receivables as at December 1999, including related party loan accounts. A little earlier in his report, he had indicated that he similarly assumed, in accordance with the balance sheet, that all receivables were recoverable. The report does not reveal any examination of receivable balances to ascertain whether or not they truly were recoverable, or whether or not a hypothetical purchaser would insist on some discount, having regard to a risk as to recoverability. The defendant contends that the referee in that respect failed to apply proper valuation practice and principles in assuming recoverability without examining it, and that his valuation cannot, therefore, be relied on, because a critical assumption has not been made good.
22 Amongst the assets of the practice, which underpin the referee's ultimate valuation of $1,324,000, are three related party loan accounts, namely Manoral Pty Limited at $563,489, KM Australia Pty Limited at $8,000, and Morgage Pty Ltd at $2,150. Manoral was the trustee of the Appleyard Forrest Unit Trust, through which Mr Forrest's and Mr Appleyard's interests in the practice were held; it was entitled beneficially to 90 percent of the practice, minority interests holding the other 10 percent.
23 Even making the adjustment concerning the Tomato Project to which I have referred, the value of the practice as a whole, on Mr Gower's approach, would exceed $1 million, and Manoral's 90 percent would therefore exceed $900,000. In his report, Mr Finney said that, as Manoral was the trustee of the Appleyard Forrest Unit Trust and the vehicle by which Mr Appleyard and Mr Forrest participated in the practice, it might be argued that Manoral's indebtedness to the practice might be offset by its share of the practice and that it had, in effect, already taken out of the practice its share up to the extent of its indebtedness. He added:
Provided Manoral's 90 percent share of the value of the practice exceeds the amount Manoral owes to the practice there should be no need to further consider the ability of Manoral to repay its indebtedness, ...
24 For reasons which Mr Finney has not explained, he nonetheless proceeded to examine the ability of Manoral otherwise to repay its indebtedness, although it is fair to say that in the summary of his report he made no adjustment for recoverability, and when he addressed the question in a supplementary report, he plainly did so only as a matter of assumption and not as a matter of opinion. But if it be necessary to go further than that first opinion of Mr Finney, and to "drill down" into the evidence of Manoral's financial position, what emerges can be summarised as follows.
25 Manoral's 1999 balance sheet shows an excess of assets over liabilities of some $624,000, after providing for its indebtedness to the practice. Mr Appleyard suggested that that figure of $624,000 had to be reduced, because the capital profits reserve of $750,000 reflected goodwill in the practice which was no longer to be valued at $750,000, but (according to Mr Gower) at $440,000. However, this argument addresses the wrong side of the balance sheet. The capital profits reserve on the liabilities side is the result of revaluations on the asset side of the balance sheet. It would only be if the value attributed to Manoral's interest in the practice - that is in the AFCE Unit Trust - were reduced, that any corresponding reduction in the capital profits reserve would be appropriate. As the AFCE Unit Trust is shown at $900,000 in Manoral's balance sheet, (being 900,000 $1 units at cost), and, on Mr Gower's valuation, 90 percent of the valuation of the practice is or exceeds $900,000, no such reduction is appropriate.
26 However, the surplus of assets in Manoral remains underpinned by a number of further related party loans, relevantly $148,000 due from Mann Street Properties Pty Limited (an Appleyard company), $582,000 due from Computer CAV Pty Limited (another Appleyard company), and $347,000 due from Balvale Pty Limited (Mr Forrest's company).
27 Balvale and Computer CAV, which are the unit holders in the Appleyard Forrest Unit Trust, were beneficially entitled to the net assets of Manoral in its capacity as trustee of that trust. So far as Balvale is concerned, Mr Appleyard argues that the debt it owes Manoral should be regarded as irrecoverable, because of some slight evidence as to the financial position of Balvale and its attitude to repayability of that loan. So far as I can see, the only evidence of Balvale's financial position is an admission attributed to Mr Forrest in paragraph 14 of Mr Appleyard's affidavit, namely, that Balvale really has no assets "other than its investment in the Appleyard Forrest Unit Trust." Based on the balance sheet of Manoral, Balvale's investment in the Appleyard Forrest Unit Trust would be worth about $312,000, and while that would not fully cover the $347,000 said to be due to Manoral, it would leave only a small portion irrecoverable. However, further concern is occasioned by the fact that, in proceedings brought by Manoral against Balvale to recover that loan account, Balvale has denied that the advance represented by this figure is a loan at all. For present purposes, I am prepared to proceed on the basis that the Balvale debt to Manoral would be regarded by a hypothetical purchaser of the practice as of dubious recoverability. But even writing it off in totality would still leave a surplus of $300,000 in Manoral after providing for its debt to the practice, and so would not justify discounting the debt due to the practice for any risk as to recoverability.
28 So far as the Computer CAV debt is concerned, the balance sheet of Computer CAV discloses, as Mr Appleyard points out, a net deficiency of funds of $301. However, it does so after claiming as the value of its investment in the Appleyard Forrest Unit Trust only $19.34, because that investment is valued at cost, not at valuation. When revalued to valuation, according to the Manoral balance sheet, that would increase the assets of Computer CAV by approximately $312,000. There would then be no deficiency, but a surplus of just under $312,000 in Computer CAV. That does not bespeak an inability to repay its debts. It is true that, in turn, Computer CAV's balance sheet is underpinned by loans to Mr and Mrs Appleyard totalling some $568,000. Mr Appleyard prepared balance sheets of his and his wife's position at the relevant date, referring at least to their main assets and liabilities, which show that he had net assets of some $17,000 and she net liabilities of $106,000. However, in the course of Mr Appleyard's evidence, he was unable to explain how the value attributed to his interest in Computer CAV was brought to account, it being shown at only $135,000, when between him and his wife it would seem that their interest in Computer CAV would be in the order of just under $312,000. When their interests in Computer CAV are revalued, the joint assets of himself and his wife would appear to be adequate, though not by much, to pay all his and her liabilities.
29 It is true that there may be a small deficiency in respect of the repayability of the Mann Street Properties loan, but not such as to impact ultimately on the recoverability of the practice's loan to Manoral, having regard to the extent of the surplus of assets over liabilities in Manoral.
30 I have considered whether some allowance ought to have been made for the risk that the Manoral loan would not be recoverable by the practice. However, as it seems to me, an arm's length purchaser of the practice would prudently insist that outstanding related party loans be repaid at the time of purchase and sale of the practice, out of the share of that proprietor who owed the money. In other words, in very rough terms, if the purchaser were to pay a million dollars to acquire the practice, of which Manoral (as 90% owner) was entitled to $900,000, and Manoral owed the practice $500,000, then upon settlement the purchaser would be in a position to insist that the price payable to Manoral of $900,000 and the debt due by it to the practice of $500,000 be set off. In those circumstances, I do not think there was any material risk of non-recoverability of the Manoral loan. The other two companies which were indebted to the practice owed such relatively small amounts that, in the context of Mr Appleyard's earning capacity of some $200,000 per year, I do not think they would realistically be seen, on a commercial basis, to be not recoverable.
31 In my view, therefore, there was an error of valuation principle in the referee's approach. He failed to undertake part of the essential task, namely, to form a view as to the recoverability of the loans, when he simply assumed their recoverability. The error could have been a very material one, but examination of the evidence adduced on this application shows that, in fact, the assumption was correct, so that no interference with the referee's result in that respect is warranted.
The Consequences and Conclusion
32 Accordingly, I have concluded there were two material errors of principle in the referee's report, one in respect of his approach to the Tomato Project, and the other in respect of his approach to recoverability of debt. If I were left with no more than that, it would have been necessary to reject the report in part and remit it for reconsideration.
33 In circumstances where my original judgment on liability was delivered in April last year, and it took almost a year to resolve the initial reference, and then a further four months to the present to review it in this Court, it seems to me that it would achieve nothing to visit further delay and further substantial costs on the parties by remitting the matter to the referee for further consideration, when the evidence that has been adduced in this Court enables me to form a view on the issues that otherwise would be remitted.
34 Uniform Civil Procure Rules r 20.24(1)(d) authorises the Court to decide any matter on the evidence taken before the referee with or without additional evidence. The above discussion of the recoverability of debt issue shows that ultimately no provision for irrecoverability is warranted. I do not overlook the fact that Mr Finney gave evidence that there should be a 2 percent deduction for risk on trade debt, but that seems to me a matter well within the realm of any ordinary valuation process and if it were to be argued, it ought to have been argued before the referee. I am not prepared to revisit a matter as relatively minor as that, that was not pursued before the referee; the reference is not to be treated as a "trial run".
35 So far as the Tomato Project is concerned, the Information Memorandum pursuant to which investments were made contained forecasts of results for the years 1998, 1999, 2000, 2001 and 2002. While losses were projected for the first two of those years, those years had already passed by the valuation date. For the ensuing two years, net approximate returns were projected of $2,845, $2,942 and $3,041 respectively per farm. This suggests a level of maintainable earnings per farm of about $3,000 per annum. In the course of Mr Finney's oral evidence, he agreed that it would not be unreasonable to approach the matter by adopting a capitalisation rate of 30 percent (or a multiplier of 3.33) in respect of that level of maintainable earnings in that context, although it must be said that he added the caveat that he had not closely considered the appropriateness of any multiplier, but conceded that the one that was suggested to him was one which implied a substantial degree of risk. That would produce a value of $10,000 per farm, or $150,000 for all 15 farms that the practice acquired. Mr Finney pointed out that expectations had not been met and losses had been greater than planned in the first two years of the project and, on reflection, that has persuaded me, in the interests of adopting a conservative approach, that a slightly lower capitalisation rate should be adopted; I would use a multiplier of 3 rather than of 3.33. On that basis, the 15 farms in the project would be valued at $135,000.
36 Mr Gower, it will be recalled, valued them at net $229,000; accordingly a reduction in his total valuation of $85,477 is required, producing a fair market value of the practice of $1,149,484.
37 It follows that it is in the interests of justice to admit the further evidence tendered by the defendants as it will facilitate the quick, just and cheap resolution of the outstanding issues in these proceedings.
38 My orders are: