Hosking v Ipex Software Services Pty Ltd [2004] VSC 299

Supreme Court of Victoria|2004-08-25|Before: HABERSBERGER J.

CONTRACT - Assessment of damages for breach of agreement to give plaintiff 5% of the equity in a group of companies and unit trusts - Meaning of entitlement - Proof of plaintiff's claim - Admissibility of expert's report - Capitalisation of future maintainable earnings - Relevant factors.

The plaintiff's claim in this proceeding was for damages for breach of an agreement made with the first to sixth defendants ("the Ipex Group", "Ipex" or "the Group"). After a trial on liability only in August 1998, Hansen J found in favour of the plaintiff, Mr Mark Hosking, on 24 February 1999. The factual background, which I do not propose to repeat, is set out in his Honour's detailed reasons for judgment. However, it is necessary to refer to the agreement and, although it is quite lengthy, I will set out its terms virtually in full.

The agreement was dated 29 April 1994 but was found to have been signed on 29 and 30 August 1994. It read as follows:

"The parties agree that the following is an accurate outline of agreement reached between J Schwalb, 'Ipex Group', D Cohen (or nominated entity) 'DC', J Sheiman (or nominated entity), 'JS' and M Hosking (or nominated entity) 'MH'. 1. The Ipex Group, 'the group' is defined as all current and future Australian trading entities consisting of: a) Takapana Investments Pty Ltd ATF The Schwalb Family Trust No. 1. b) Ipex Information Technology Group Pty Ltd. c) Ipex Research and Development Pty Ltd. d) Toren Pty Ltd ATF Toren Unit Trust. e) Ipex Software Services Pty Ltd ATF Ipex Software Services Unit Trust. f) Melton Gully Pty Ltd ATF The Schwalb Family Trust No 2. 2. The parties hereby agree that the following agreement is to be effective from 1 July 1994 ('The effective date'). 3. The fundamental basis of the agreement is that David Cohen and J Sheiman and M Hosking are to become entitled to the following % of the equity in the group: DC 14 % JS 5 % MH 5 % 4. The above entitlements are unconditional and effective immediately except that in the case of JS the following vesting arrangement is to apply: a) Immediate unconditional entitlement to 1.5%. b) Balance of entitlement to be 'vested' over 2 years commencing 1 July 1994 in equal proportions for each completed year. c) In the event of a formal group restructure or listing prior to the expiry of the 2 year period the balance of the entitlement % will automatically vest in JS. d) ... e) ... 5. Due to commercial constraints the parties agree that a formal restructure of the group is not currently feasible but that the agreement is intended to be as legally and commercially binding as if a restructure had been completed. 6. The group referred to in 1 above consists of companies and trusts and thus have different taxation treatments applying to profits generated in the respective entities. 7. Notwithstanding the above, it is agreed that all future profit generated in trust structures will be distributed to companies in the defined group, such that the value of the group will be increased each year by the increase in the groups net profit after tax (i.e. not assets). 8. Furthermore, if dividends are paid from companies in the group then a proportionate distribution of profits will be made from trust structures to entities associated with DC or JS or MH. (It is noted however that dividends and distributions are in any case restricted by conditions imposed by the group bankers, Hong Kong Bank). 9. The entitlement referred to in 3 above is to be formally restructured and given effect to in the following circumstances: a) A proposed sale of the group or part thereof prior to or in the course of a formal restructure or listing of the group, or b) In any event by 1 July 1996. 10. In the event of the death, or total & Permanent Disability of DC, JS or MH prior to a formal restructure, the Ipex Proprietors (Schwalb family) will be required to make a termination payment to DC, JS or MH in a manner mutually agreed between the parties. 11. The termination payment shall, in the absence of an agreed amount to be [sic] determined by reference to the following formula: A = X% (G+NA) - 1A Where A = Termination payment X = % entitlement of DC or JS or MH G = Goodwill of the group calculated as being the average group net profit after tax for the prior 3 completed financial years multiplied by a price/earnings multiple of 10. NA = Consolidated net tangible assets as at 30 June of the last completed financial year. LA = Insurance amount payable referred to in 14 and 15 below (if any). 12. By way of indication based on the group consolidated results for the 3 years ended 30 June 1993, the goodwill valuation would be approximately $10M and net tangible assets were approximately $1.8M at that date. 13. Any loan account balances owing at the time of death, will also need to be paid out or deducted as the case may be. 14. ... 15. Any amount due under 11 above shall be paid to DC, JS or MH or their beneficiaries as soon as possible but at least at the rate of equal monthly instalments over 3 years with interest accruing at bank overdraft rates from time to time on the outstanding balances. 16. ... 17. In the event of resignation or termination the following procedures are to apply: a) The departing party is to remain entitled to the equity percentage referred to in 3 above and will be entitled to a formal shareholding consequent on the events specified in 9 above. b) The departing party will be free to dispose of his entitlement or shareholding in any manner and to any party, subject to a first right of refusal being held by the remaining parties. c) The value of the entitlement or shareholding and terms of sale is not hereby fixed but will be subject to negotiations between the parties at that time. d) ... 18. Consolidated group financial accounts at 30 June 1994 are to be prepared and presented to the parties by 31 December 1994, setting out the net assets of the group at 30 June 1994."

The judgment given by Hansen J on 25 March 1999 read as follows:

"THE COURT DECLARES THAT: 1. On 30 August 1994 the Plaintiff and each of the First to Sixthnamed Defendants (collectively 'the Ipex Group') entered into a binding agreement ('the agreement') which was effective from 1 July 1994 and pursuant to which: (a) the Plaintiff acquired the right to 5% of the equity in the Ipex Group; (b) the Ipex Group agreed to give effect to that entitlement on or before 1 July 1999. 2. The First to Sixthnamed Defendants breached the agreement in that they each refused and failed and continue to refuse and fail, to give effect to the Plaintiff's entitlement to 5% equity in the Ipex Group. 3. The First to Sixthnamed Defendant are liable to the Plaintiff for breach of the agreement, with damages to be assessed by a Master under order 51 of the Supreme Court Rules. THE COURT ORDERS THAT: 4. The proceeding against the Seventhnamed Defendant is dismissed. 5. The costs of the proceeding, including the costs of today are reserved."

The first to sixth defendants appealed that decision. On 15 December 2000, the Court of Appeal by a majority (Batt JA and Eames AJA (as his Honour then was), Callaway JA dissenting) dismissed the appeal,[2] although it did by consent allow the appeal for the purpose of varying the first three paragraphs of the judgment of Hansen J. The order made by the Court of Appeal read as follows:

"THE COURT OF APPEAL ORDERS THAT: 1. The Appeal is allowed by consent for the purpose of varying the first three paragraphs of the judgment given by the Honourable Justice Hansen on 25 March 1999 to read: '1. On 30 August 1994 the Plaintiff and each of the First to Sixthnamed Defendants entered into a binding agreement ('the agreement') which was effective from 1 July 1994 and pursuant to which: (a) the Plaintiff acquired the right to 5% of the equity in 'the Ipex Group' (as defined in the agreement); and (b) the First to Sixthnamed Defendants agreed to give effect to that entitlement in respect of profits from 1 July 1994 and otherwise on or before 1 July 1996 as pleaded in paragraph 10 of the Fourth Further Amended Statement of Claim dated 19 December 1997. 2. The First to Sixthnamed Defendants breached the agreement in that they each refused and failed, and continue to refuse and fail, to give effect to the Plaintiff's entitlement to 5% of the equity in the Ipex Group. 3. The First to Sixthnamed Defendant are liable to the Plaintiff for breach of the agreement, with damages to be assessed by a Judge but otherwise in accordance with Order 51.' 2. The Appeal is otherwise dismissed with costs."

The defendants unsuccessfully sought leave to appeal to the High Court of Australia.

Paragraph 10 of the Fourth Further Amended Statement of Claim which was referred to in the order of the Court of Appeal, read as follows:

"There were terms of the Agreement, inter alia: (a) that the Plaintiff was entitled to 5% of the equity in and profits of the Ipex Group from 1 July 1994; (b) that all future net profits of the Ipex Group generated in trust structures would be distributed to companies within the Ipex Group so that the value of the Ipex Group would be increased each year by the increase n the Group's net profit after tax; (c) that if dividends were paid by companies within the Ipex Group then a 5% distribution of profits would be made from trust structures to entities associated with the Plaintiff; (d) that the Plaintiff's entitlement to 5% equity in the Ipex Group was to be given effect by the formal restructuring of the Ipex Group, the sale of part of the Ipex Group or in any event by the 1st July 1996."

The question of the assessment of the plaintiff's damages came before me rather than a Master because the Court of Appeal accepted the parties' view that, if the appeal were unsuccessful, damages should be assessed by a judge.[3] Callaway JA, who dissented on the substantive point, said:

"It is likely that questions will have to be decided of at least the same difficulty as those which had to be decided at the trial. In my view, it is not impossible that the assessment of damages will prove more difficult than the determination of liability."[4]

Eames AJA, who delivered the main majority judgment, which was substantially agreed with by Batt JA[5], stated that "the likely complexity of the issues" that would arise made it "appropriate" that the assessment be conducted by a judge.[6]

At the hearing, the plaintiff called evidence from three valuers, Mr Michael Shulman, Mr Michael Churchill and Mr Marcus Rose, and one other witness, Mr Jonathan Sheiman, who had also been a party to the agreement made in August 1994 with the Ipex Group. Mr Hosking did not give evidence on this occasion. The defendants called evidence from two valuers, Mr Craig Edwards and Ms June Wilson, and from Mr Joel Schwalb, the founder and managing director of the Ipex Group, and a solicitor, Mr Jack Stuk, a partner in the firm Jerrard & Stuk. At the conclusion of the hearing, a solicitor employed by the Ipex Group, Mr James Cook, was also called to give evidence about the results of searches for certain documents, which are referred to below.

The Meaning of the Plaintiff's Entitlement to Five Per Cent of the Equity in the Ipex Group

The defendants submitted that the assessment of the plaintiff's damages involved an assessment of common law damages for breach of an "indefinitely expressed contractual obligation", that is, an obligation which gave the promisor some latitude in the way the obligation was to be performed. This meant, so the defendants submitted, that the assessment involved a two step process. The Court must first define the mode of performance upon which damages were to be assessed and then assess the damages flowing from the failure to perform that obligation.

The plaintiff did not agree that the assessment involved a two step process. Furthermore, there was considerable disagreement between the parties concerning the mode of performance upon which damages were to be assessed. The disagreement extended to the issues of what was meant by the plaintiff's entitlement to 5% of the equity in the Ipex Group, how that entitlement could have been satisfied by the defendants and what evidence was required to make out the plaintiff's claim. All of these issues need to be resolved before I can embark on the task of actually assessing the damages.

I turn, first, to events following the judgment of the Court of Appeal. Pursuant to an order made by Mandie J on 2 February 2001, "pleadings" defining the issues were exchanged by the parties. On 6 March 2001, the defendants delivered a document entitled "Defendants' Statement of the Range of Modes of Performance upon which Damages are to be assessed." However, the relevant version of the "pleadings" is to be found in a document entitled "Defendants' Amended Statement of the Range of Modes of Performance upon which Damages are to be assessed" dated 11 April 2001 ("the defendants' statement") and a document entitled "Plaintiff's Response to Defendants' Amended Statement of the Range of Modes of Performance upon which Damages are to be assessed" dated 2 May 2001 ("the plaintiff's response").

In paragraph 6 of the defendants' statement it was asserted that it was open under the agreement for the defendants to tender to the plaintiff his entitlement to 5% equity in the Ipex Group as defined in the agreement by:

(a) restructuring the Ipex Group by:

(i) establishing a new entity or entities (the "restructure vehicle"), which could be either a corporation or a unit trust, in whatever form the defendants decided;

(ii) effecting the transfer of the assets of the defendants as they stood at 1 July 1996 to the restructure vehicle;

(iii) effecting the assumption of the liabilities of the defendants as they stood at 1 July 1996 by the restructure vehicle; and

(iv) granting securities to the financiers of the defendants in substitution for the securities granted by the defendants to their financiers as at 1 July 1996; and

(b) tendering to the plaintiff 5% of:

(i) the issued shares in a corporation or corporations regulated by a constitution containing provisions determined by the defendants (if the restructure vehicle were to be a corporation or corporations); or

(ii) the issued units in a unit trust to be held pursuant to a Trust Deed, the terms of which would be determined by the defendants (if the restructure vehicle were to be a unit trust or trusts).

It was then stated that because the modes of performance available to the defendants were so diverse the plaintiff was only entitled to nominal damages.

Alternatively, it was said in paragraph 10 of the defendants' statement that if the defendants had tendered to the plaintiff equity in the form of shares in a corporation, or units in a unit trust, those shares or units could have been issued with various restrictions, which were then set out.

Further, the defendants claimed in their statement that, as no dividends were paid by companies within the Ipex Group between the date of the agreement, 30 August 1994, and 1 July 1996, no entitlement to profits arose.

In paragraph 6 of his response, the plaintiff admitted that it was open under the agreement for the defendants to tender to the plaintiff his entitlement to 5% equity in the Ipex Group as defined in the agreement by:

(a) restructuring the Ipex Group by establishing a "restructure vehicle" (which could be either a corporation or a unit trust);

(b) effecting the transfer of all of the assets of the defendants as at 1 July 1996 to the restructure vehicle;

(c) effecting the assumption by the restructure vehicle of all of the liabilities of the defendants as at 1 July 1996;

(d) effecting the transfer to the restructure vehicle of the whole of the business or businesses which were being carried on by the defendants as at 1 July 1996;

(e) tendering to the plaintiff shares in the restructure vehicle if that vehicle was a corporation, or units if the restructure vehicle was a unit trust, equal in value to 5% of the value of the Ipex Group.

However, in paragraph 10 of his response, the plaintiff said that in any such restructure, each of the shares or units tendered to the plaintiff was required to have the same rights and liabilities as any other share or unit in the restructure vehicle and that the defendants were not entitled in the mode of performance to discriminate against the plaintiff by transferring to him a share or unit which had lesser rights or greater liabilities than any other share or unit in the restructure vehicle.

Further, the plaintiff contended that the entitlement to profits was not conditional upon the payment of dividends.

In his response, the plaintiff claimed an amount consisting of the sums of:

"(i) 5% of the profits of the Ipex Group from 1 July 1994 to the date of payment; and (ii) 5% of the value of the Ipex Group as at the date of assessment by this Honourable Court."

As set out in his final version of Particulars of Loss, this translated into a claim for $7,623,000 calculated as at 30 June 2002 as follows:

Share of after tax profits from 1 July 1994 $2,190,000

Share of franking credits from 1 July 1994 $1,151,000

Mrs Crennan QC, who appeared with Mr Riordan and Mr Horan of counsel on behalf of the plaintiff, submitted that the plaintiff's entitlement to 5% of the equity in the Ipex Group meant 5% of the value of the Group and that this value could have been transferred in a number of ways - by shares or units or a combination of both, so long as it was equivalent to 5% of the value of the Group. Counsel for the plaintiff pointed out in their final submissions that the fact that, at the time of the agreement, the Ipex Group was constituted by both companies and trusts meant that neither 5% of the shares in the companies nor 5% of the units in the trusts could amount to 5% of the equity of the Group. Whether the defendants' obligation was to be satisfied by a grant of shares or a grant of units, it was submitted that an assessment was necessary as to whether what was granted matched 5% of the value of the Group.

On behalf of the defendants, Mr Burnside QC, who appeared with Mr Carney of counsel on behalf of the defendants, submitted that the plaintiff's entitlement under the agreement was to:

(a) 5% of "the equity in the group" (clause 3 of the agreement) on "a proposed sale of the group or part thereof prior to or in the course of a formal restructure or listing of the group" or "in any event" by no later than 1 July 1996 (clause 9 of the agreement), and

(b) 5% of the profits of the group between 1 July 1994 and the granting of the 5% interest on 1 July 1996, (clause 2 of the agreement), if dividends were declared by the companies in the group (clause 8 of the agreement).

Mr Burnside submitted that the appropriate mode of performance was for this entitlement to be translated into 5% of the share capital of the restructure vehicle ("Newco") which Mr Schwalb said that he would have set up, probably after seeking the advice of Mr Stuk. Mr Burnside further submitted that because the defendants were entitled to perform the contract in the way most favourable to them, this share capital would have been subject to a number of restrictive aspects, which would considerably reduce the value of the plaintiff's interest.

Mr Burnside submitted that the plaintiff's approach was not only incorrect as a matter of construction of the agreement, it was also contrary to the position previously taken by the plaintiff. Therefore, Mr Burnside submitted, the plaintiff was in effect estopped. He referred to two statements by the plaintiff's then senior counsel in directions hearings before Mandie J in February and April 2001 to the effect that the mode of performance against which loss was to be measured was that there would have been a new company which would have issued 5% of its shares to the plaintiff and that was what he should have had. Mr Burnside also referred me to paragraphs 6 and 10 of the plaintiff's response, which he submitted, proceeded on the same basis.

Mrs Crennan disputed that the plaintiff's response should be read in this way. She emphasised that paragraph 6 of the response admitted that it was "open" to the defendants to tender to the plaintiff his entitlement to "5% equity" by tendering to the plaintiff:

"shares in the restructure vehicle if that vehicle was a corporation ... equal in value to 5% of the value of the Ipex Group."

Further, Mrs Crennan referred to the paragraph of the plaintiff's response which set out in general terms the plaintiff's claim (quoted in paragraph 16 above) including a claim to "5% of the value of the Ipex Group as at the date of assessment by this Honourable Court."

I accept the plaintiff's submissions on this point. There was, in my opinion, no change of position by the plaintiff nor any estoppel. The plaintiff has consistently claimed that he was entitled to 5% of the value of the Ipex Group. As the plaintiff's counsel stated in their final submissions, the plaintiff did not say (and had never said) that the defendants could not perform the agreement by issuing or transferring to the plaintiff shares in a restructure company vehicle for the Ipex Group. It was open to the defendants to have tendered the plaintiff's entitlement in the form of shares in a restructure vehicle, provided that the value of such shares was equal to 5% of the value of the Ipex Group.

In his judgment at first instance, Hansen J dealt with the argument by the defendants that no binding agreement had been made. In the course of rejecting the submission, his Honour said:

"Then it was argued that the word 'equity' was uncertain. Counsel for the plaintiff submitted that it was plain, in the context, that 'equity in the group' meant shares or units in an entity mentioned in cl.1 of the agreement. In my view that is correct. It accords with references to holding shares in cl.17. It also accords with a common and well understood meaning of the word equity as referring to the holding of shares in a company. See Ford's Principles of Corporations Law, paras.17.020 and 17.070."[7]

It seems to me that Eames AJA also considered "equity" as referring to shares or units. There are references to that view in paragraphs 66, 67 and 69 of his Honour's reasons. In paragraph 72, Eames AJA said:

"Hansen J, with whose reasons as to the issue of uncertainty I am in substantial agreement, held that the phrase 'equity in the group' meant shares or units in the entities which at present or in future would comprise the Group."

Further, his Honour also said that given that it was a 5% equity in the Group as a whole which was to be provided:

"it did not follow that a 5% equity must necessarily have been provided in each company or trust, so long as overall such an interest was achieved."

By "such an interest", I consider his Honour was referring to shares or units representing 5% of the value of the Group, as the plaintiff contended.

The next question is whether the damages are to be assessed by deciding what 5% of the equity in the Ipex Group was worth or by valuing 5% of the shares in Newco, which shareholding would be subject to the differential rights and the numerous restrictions which Mr Schwalb said he would have required if that entity were to have been set up.

Counsel for the defendants submitted that the defendants' ability to choose a mode of performance which was least disadvantageous to them was in accordance with well established principles. They referred to Paula Lee Ltd v Robert Zehil & Co Ltd[8] ("Paula Lee") where Mustill J held that where damages were required to be calculated for breach of contract in a situation where the defendant could fulfil its part of the contract by performing its obligation by alternative methods and had a freedom of choice which method to use, damages were to be assessed by reference to that method of performance which was least unfavourable to the defendant. Mustill J also referred to the distinction:

"which exists between (a) an obligation expressed in terms of a range of alternatives from which the promisor may choose and (b) a single obligation expressed in an indefinite way"

and expressed the view that damages would be assessed on the basis of what would have been a reasonable method of performance with the interests of both parties in mind.[9]

Defendants' counsel also referred to the restatement of this principle by McHugh JA (as his Honour then was) in Biotechnology Australia Pty Ltd v Pace[10] in the following terms:

"Where the contingency is dependent upon the way in which the party in breach of the contract would perform the contract, the settled rule is that damages are assessed on the basis that the wrongdoer would have performed the contract in the way most favourable to himself."

The following passages from the judgments of the Court of Appeal were also relied on by the defendants. In his judgment, Eames AJA said that:

"Hansen J was entitled to find, as he did, that 'the agreement itself contained no suggestion of differential rights among the holders of the equity in the Group'. Hansen J held, appropriately in my view, that one interpretation which was open was that the meaning to be given to the phrase, insofar as shares were involved, was that ordinary shares would be involved, not preference shares. He was not called upon to resolve that issue, because specific performance was not required. There were alternative interpretations which were open, but that did not mean that the term was uncertain. ... The plaintiff agreed to terms which place him at something of a disadvantage in determining how his loss may be assessed. The damages will be assessed on the basis, so far as applicable, that the appellants would have performed the contract in the way most favourable to themselves."[11]

The above quotation from the judgment of McHugh JA was cited by Eames AJA in a footnote to this passage.

"Mr Scerri [senior counsel for Mr Hosking] was driven to concede that the bargain entailed that the respondent would accept his 5% of the equity in the group in whatever form the appellants decided."[12]

His Honour went on to record that Mr Scerri pointed out that there would be some limits on the appellants' freedom of choice, such as acting honestly, acting reasonably or at least not purporting to perform the contract in a way that no reasonable person would adopt, and not discriminating between the minority shareholders.

Mr Burnside therefore submitted that, following the Court of Appeal's decision, it was open to the defendants to choose the way in which the agreement could have been implemented. That meant that the defendants could choose the mode of performance which was least disadvantageous to it, including the creation of Newco along the lines advised by Mr Stuk, which Mr Schwalb said he would have accepted.

Mrs Crennan disputed this approach. She submitted that Mr Scerri's concession was only about the fact that 5% of the equity could be given in various ways (such as by shares or units or cash) and not that the defendants could, if they chose, perform the contract in a way that did not correlate with giving 5% of the value of the company.

Mrs Crennan emphasised that under the agreement Mr Hosking was to receive 5% of the equity in the Group (clause 3 of the agreement) by no later than 1 July 1996 whether or not there had been a sale or a formal restructure or listing of the Group (clause 9 of the agreement). Therefore, she submitted, it was 5% of the value of the Group, whether or not shares had been issued or the Group restructured or sold or profits distributed. Clauses 7 and 8, particularly with the reference in clause 7 to increasing "the value of the group" fitted in with this approach.

Mrs Crennan picked up the distinction drawn by Mustill J in Paula Lee[13] between the situation where there was a single promise, but it was somewhat vague, and the situation where the promise itself expressly provided for various ways of performing the promise. Mrs Crennan submitted that it was in that second situation that the principle of the defendant being entitled to choose the mode of performance which best suited it became applicable. In the present case, which fell within the first category, it was submitted that there was only a single promise, namely, to give Mr Hosking 5% of the equity in the Ipex Group. Further, Mrs Crennan submitted that the defendants would not have given Mr Hosking 5% equity in the Group if the form in which it would have been given did not truly represent 5% of the equity or value in the Group.

In support of that submission, Mrs Crennan referred to the decision of the English Court of Appeal in Abrahams v Herbert Reiach Limited[14]. This case involved the assessment of damages for breach of an agreement to publish in book form a collection of articles by the plaintiff on training for athletics. The form and price of the book, the number of copies to be printed, and the date of publication were left to the discretion of the publishers, although the fee to be paid to the authors for every copy of the book sold was agreed. Bankes LJ rejected the contention by the publishers that this was one of those contracts which might be performed in one of several ways, with the plaintiff having to be content with having the damages assessed by the standard which was the least onerous to the defendant. His Lordship continued:

"In the cases to which we have been referred the contracts provide on the face of them for alternative methods of performance. This contract only imposes one obligation upon the appellants - namely, to publish. The question is what will satisfy that obligation?"[15]

Atkin LJ concurred in the result. He held that:

"... in the present case there are no alternatives, and to adjust the rights of the parties the only method is to form a reasonable estimate of the amount the respondents would be in pocket if the appellant had kept his promise."[16]

I agree that the defendants' promise was a single promise. The breach of contract in this case was, as the plaintiff contended, that the defendants did not give him his 5% equity in the Ipex Group. The general rule concerning the awarding of damages is that:

"Where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed."[17]

Thus, the damages to be awarded to the plaintiff have to be such that he is placed in the same situation as if the contract had not been breached.

If there had been no breach, then on 1 July 1996, at the latest, Mr Hosking would have been given his 5% equity in the Group, which interest could have been represented by shares or units or a combination of both. In my opinion, whatever the form of the performance by the defendants of their contractual obligation, whether or not there had been satisfactory compliance would be tested by deciding whether or not the alleged performance in fact represented the promised 5% of the equity in the Ipex Group. This in turn would involve assessing whether what had been given to the plaintiff had a value equivalent to 5% of the equity in the Ipex Group. In the case of shares in a new company or units in a new trust, it would be a relatively simple exercise to check whether all of the assets of the relevant business of the defendants as at 1 July 1996 had been transferred to the new entity and whether all of the liabilities had been assumed by the new entity and whether the number of shares or units represented a 5% holding. In my opinion, if all of the rights and liabilities attaching to the shares or units were the same, then such an exercise would represent 5% of the equity in the Ipex Group. Hansen J held that "the agreement itself contained no suggestion of differential rights among the holders of the equity in the Group."[18] That statement was quoted with approval by Eames AJA in his judgment in the Court of Appeal.[19] On the other hand, if the rights and liabilities attaching to the shares or units were not the same then, in my opinion, the plaintiff would not have received his 5% of the equity in the Ipex Group.

Furthermore, if the defendants had decided that they no longer wanted Mr Hosking to have an interest in the Group but nevertheless had been prepared to honour their promise to him, presumably they could have met Mr Hosking's entitlement by paying him cash. In order to check whether Mr Hosking had received his contractual entitlement, it would be necessary to calculate the value of 5% of the equity in the Ipex Group.

In the circumstances, whichever way one looks at it, the plaintiff was entitled to be awarded damages which placed him, so far as money could do it, in the same situation as if the contract had not been breached. This means that he is entitled to receive damages equivalent to 5% of the equity in the Ipex Group, which can only mean, in my opinion, 5% of the value of the Ipex Group.

The conclusion that the agreement required that any shares in a new company or units in a new trust granted to the plaintiff have the same rights and liabilities attaching to them as applied to the other 95% shareholdings or unitholdings does not mean that in assessing the value of a 5% interest in the Ipex Group, account can not be taken of the fact that this was a minority interest, with a proportionately lesser value than that of any greater interest, for example 51%, which carried with it a premium for control. All that I have decided so far is that the agreement did not provide for differential rights, with the shares or units to be given to Mr Hosking to be burdened by a raft of onerous restrictions applicable only to his holding. Whether there should be any and what discounting for the nature of a minority interest will be examined later in this judgment.

This finding means that much of Mr Stuk's evidence was, as the plaintiff maintained, irrelevant to the issue before me. Mr Stuk said that in October 2002 he was asked by the defendants' solicitors to prepare a blueprint of how the transaction would have proceeded if it had been implemented. Mr Stuk said that his proposal was sensible, tax neutral and commercially efficient. He agreed that his instructions were to draw it in the least advantageous way to Mr Hosking. Nevertheless, he said that it still had to be commercial to the minority shareholder and that it could not be onerous or oppressive. Mr Stuk said that his proposal satisfied these requirements. I find that statement rather hard to accept given that Mr Stuk gave evidence that if he had been acting for Mr Hosking in negotiating the terms on which the shares in Newco were to be granted to Mr Hosking, he would have opposed virtually all of the restrictions he had advised Mr Schwalb to impose. However, as I have said, much of this evidence was irrelevant in the light of my finding that all of the shares in Newco would have had to have the same rights and liabilities attaching to them.

Did The Plaintiff Make Out His Claim For Damages?

My acceptance of the plaintiff's approach to the question of the method of assessment of his damages, as discussed above, also means that an important preliminary submission by the defendants must be rejected.

This issue arose out of the fact that, as I have stated, Mr Hosking did not give evidence in this hearing. The defendants submitted that, in the circumstances, the plaintiff had failed to make out his claim for damages for expectation loss. It was pointed out that the plaintiff had stated in his response that the amount claimed by him as the value of the Ipex Group constituted:

"the price which a willing, but not anxious, buyer, acting at arms-length and having all necessary information would be prepared to pay a willing, but not anxious seller, of the Ipex Group as a going concern."

Mr Burnside submitted that this approach anticipated evidence from the plaintiff proving that on the balance of probabilities had the agreement been performed:

(a) the plaintiff would have sought to have sold his shares as a willing but not anxious seller; and

(b) a market would have existed for those shares consisting of a willing but not anxious purchaser.

He submitted that, because the plaintiff did not give evidence at this hearing, there was no material concerning his intention with respect to, or how he would have dealt with, the shares or units he was supposed to have received. It was submitted that very different scenarios could arise, depending on Mr Hosking's evidence, each with quite different consequences for the assessment of damages. These different scenarios could include holding the shares in the long term, hoping that the company would be wound up or the assets distributed, or that the company would be listed on the stock exchange so that the shares would become readily tradeable, or alternatively looking for a buyer in the short term in order to sell at whatever price could be obtained. Mr Burnside therefore argued that the value of what Mr Hosking lost depended on what plans he had and there was no evidence at all on this point. Moreover, Mr Burnside submitted that there was a gap in the evidence regarding the existence of a buyer and that it was not reasonable to assume that anyone would be willing to pay money to buy the 5% shareholding. Therefore, it had not been shown that Mr Hosking had lost anything of value. All that Mr Hosking had lost, Mr Burnside submitted, was the possibility of getting an indeterminate amount of money at an indeterminate time in the future, which was not capable of quantification. Therefore, all that he could be awarded was nominal damages for expectation loss.

Although the defendants submitted that the plaintiff should fail in his claim for damages for expectation loss, they did concede that he would be entitled to recover damages suffered by way of reliance loss. They accepted that on the evidence this could amount to the sum of $160,000 but no more. The plaintiff rejected the concession that he had established reliance damages in the sum of $160,000.

I do not consider that the defendants' submission that the plaintiff failed to make out his claim for damages for expectation loss is correct. As I have previously held, Mr Hosking's loss is to be measured by the value of his 5% equity in the Group. It was simply not relevant to investigate what Mr Hosking would have done with his 5% shareholding or unitholding if in fact the defendants had given it to him.

If, contrary to my view, the Court is required to engage in the extraordinarily hypothetical exercise of deciding in what way the defendants would have chosen to perform the agreement if they had not decided to breach it, then I consider that there is no evidence before the Court allowing me to reach any definite conclusion. The evidence from Mr Schwalb only was that if he had had to perform the agreement, he probably would have engaged Mr Stuk and would have instructed him to consider a whole range of restrictions on Mr Hosking's shareholding and would have accepted his advice on these matters. As I have previously said, I do not consider that giving the plaintiff such a downgraded and unequal shareholding would have constituted performance of the requirement to give him 5% of the equity of the Group. That evidence from Mr Schwalb is therefore irrelevant and once it is excluded, I am not able to say what mode of performance the defendants would have chosen. Mr Schwalb may nevertheless have gone ahead with a more equitably structured Newco or he may have decided that in these circumstances he did not want Mr Hosking to have any part to play in Newco and simply paid him out. These possibilities were not canvassed because the defendants' position throughout was that all of the restrictions were reasonable and in accordance with their contractual obligation. As I have said, I do not agree.

It therefore seems to me that the plaintiff is correct in submitting that his claim for damages was made out upon proof of the value of his 5% equity in the Ipex Group.

A further aspect of the plaintiff's entitlement under the agreement, about which the parties remained in dispute, was whether the plaintiff had any entitlement to profits. Mr Burnside submitted that the entitlement was only pending the receipt of the 5% equity, that is, until the sale, restructure or listing or in any event by no later than 1 July 1996, if dividends were declared in this period. He submitted that as none were declared before 1 July 1996, the entitlement to profits added nothing to the plaintiff's claim. Alternatively, he submitted that the plaintiff had no entitlement to profits either before or after 1 July 1996, because any such entitlement only arose if dividends were declared, and none had ever been declared.

On the other hand, Mrs Crennan submitted that Mr Hosking was entitled to a share of the profits of the Group until such time as he was given his 5% equity interest and that this was clearly recognised by both Hansen J and the Court of Appeal. She further submitted that the plaintiff was entitled to his share of the profits, whether or not they had been distributed, Accordingly, his entitlement did not depend on dividends having been declared by the Group. However, counsel for the plaintiff accepted that he did not have an "independent" right to 5% of the profits in addition to his right to 5% of the equity in the Group and agreed that the 5% equity interest carried with it an entitlement to a share of the retained profits of the Group. Therefore, in order to prevent double counting, it was submitted that it was appropriate to adjust the value of the 5% equity interest by removing the plaintiff's share of retained profits and that that amount form a separate head of the claim for damages. It was submitted that, although the total amount awarded would be equivalent to 5% of the value of the Group, it was useful for the Court to calculate Mr Hosking's share of profits because such an approach was consistent with the judgments of Hansen J and the Court of Appeal, the separate amount would represent the minimum figure to which the plaintiff should be entitled and it made clear that the plaintiff was also entitled to an amount for the loss of the franking credits which he would otherwise have received upon the distribution of the after-tax profits by way of dividends.

Hansen J held that Mr Hosking was entitled to "5% of the profit from 1 July 1994 and to receive his interest in the Group no later than 1 July 1996."

"It is apparent that Hansen J considered that an immediate entitlement to 5% equity, which was to be effective as from 1 July 1994 (as provided by clauses 2, 3, 4), translated, at least, to an entitlement to profits, in the period between 1 July 1994 and 1 July 1996 (the date stipulated in clause 9(b) as the last date by which the entitlement to be provided by equity in the restructured company had to be delivered). Thus 5% of the equity carried an entitlement to 5% of the profits. Given that the breach occurred at 1 July 1996 that is the date at which the 5% equity in the Group must then be determined for the purpose of calculating damages. The entitlement of the respondent to 5% of the profits from 1 July 1994 was not challenged before us. Subject to hearing counsel, I consider that it would be appropriate that the order of the court should reflect the fact that Hansen J held that there was such an entitlement."[20]

This suggests to me that Eames AJA was saying that the plaintiff was entitled to 5% of the profits, at least for the period between 1 July 1994 and 30 June 1996, regardless of the fact that no dividends were declared in this period. I note that in the next paragraph of his reasons Eames AJA also said that:

"once the agreement is deemed not incomplete or uncertain ... the entitlement to profits must also be taken into account when calculating damages."

It must be remembered that Eames AJA was clearly assuming that damages would be assessed as at the date of breach, being 1 July 1996. However, as will be seen, in the end the damages were assessed as at 30 June 2002.

Despite what was said in the above passages from the earlier judgments, Mr Burnside referred me, without objection,to the draft minutes of orders proposed by the plaintiff for the Court of Appeal's order. Paragraphs 1 and 2 of that draft read as follows:

"1. On 30 August 1994 the Plaintiff and each of the First to Sixthnamed Defendants entered into a binding agreement ('the agreement') which was effective from 1 July 1994 and pursuant to which: (a) the Plaintiff acquired the right to 5% of the equity in 'the Ipex Group' (as defined in the agreement); (b) the First to Sixthnamed Defendants agreed to give effect to that entitlement on or before 1 July 1996; and (c) the Plaintiff was entitled to 5% of the profits of the Ipex Group from 1 July 1994. 2. The First to Sixthnamed Defendants breached the agreement in that they each refused and failed, and continue to refuse and fail, to give effect to the Plaintiff's entitlement to 5% of the equity in the Ipex Group, or to his entitlement to 5% of the profits of the Ipex Group from 1 July 1994."

A comparison of this draft with the final form of the order shows that sub-paragraph 1(c) was deleted and instead words were added in sub-paragraph (b), and the last part of paragraph 2 was deleted. The second omission is particularly significant because this would suggest that, after hearing counsel, the Court of Appeal was not prepared to declare that the defendants had breached the agreement by failing to give effect to the plaintiff's entitlement to 5% of the profits of the Group from 1 July 1994. This could only be, in my opinion, because no dividends had been declared.

The plaintiff's entitlement to profits was, in my opinion, only until he received his 5% equity in the group, in whatever form that took, and until 1 July 1996 at the latest. Thereafter he became entitled to damages for breach of the agreement. Further, in my opinion, the plaintiff's entitlement to profits in what turned out to be a two year period only arose if dividends were declared. The plaintiff was not to be in any better position than the other parties owning equity in the Group. Moreover, if profits were retained in this period then the plaintiff's 5% equity in the group as at 1 July 1996 would be correspondingly greater. Equally, it seems to me from what the valuers said, and counsel for the plaintiff accepted, that the retention of profits would have been reflected in a greater valuation figure of the group as at 30 June 2002. In those circumstances, it would be, as the plaintiff's counsel conceded, double counting to award damages calculated by reference to 5% of the profits from 1 July 1994 to 30 June 2002 as claimed by the plaintiff, as well as damages calculated by reference to the plaintiff's 5% equity in the Group.

In my opinion, there is no entitlement to an award of damages representing 5% of the profits between 1 July 1994 and 30 June 2002. But even if there were, I do not consider that it would be appropriate to treat this claim as a separate item rather than assessing the value of 5% of the equity in the Ipex Group, including in such calculation all of the retained profits. I therefore reject the claim by the plaintiff of $2.19 million for 5% of the profits and the consequential claims of $1.151 million for a 5% share of franking credits and $56,000 for his share of profit normalisation adjustments.

Five Per Cent of the Capital Reserve Distribution

The plaintiff also claimed an entitlement to 5% of the capital reserve distribution carried out on 13 August 1998 when the trustees of the Schwalb Family Trust No. 1 resolved to distribute $25.85 million equally to Mr Schwalb and his three sons. The plaintiff submitted that this was a very large amount which had been removed from the Group, in respect of which the plaintiff had not received his 5% entitlement. It was irrelevant that it was only a paper transaction in that the sums had been immediately lent back to the Group. Nevertheless, the plaintiff argued, insofar as these beneficiary loans were treated as liabilities of the Group in calculating Mr Hosking's 5% equity in the Group, the plaintiff was denied his entitlement to 5% of that sum. Therefore, the plaintiff submitted that the amount of the capital reserve distribution either should be seen as an extra item of entitlement for the plaintiff or the beneficiary loans should be treated as forming part of the equity in the Group and not as liabilities.

The defendants initially argued that as this step was taken by them after the date of breach on 1 July 1996, and thus after the plaintiff's cause of action for damages had arisen, the plaintiff could not recover anything in respect of the transaction. This submission rather overlooked, in my view, the fact that the defendants had agreed to the assessment of the damages as at 30 June 2002, which was after the distribution. In those circumstances, one could not ignore the effect the transaction had had on the Group's financial position as at 30 June 2002. Perhaps in recognition of this point, evidence was led from the defendants' own valuer, Mr Edwards, concerning a further valuation he had prepared, on the instructions of the defendants' solicitors, based on the assumption that this transaction had not occurred. I refer to this valuation in more detail below.

In my opinion, the capital reserve distribution has to be taken into account in some way in calculating the plaintiff's damages and the most appropriate way is once again not to treat the relevant beneficiary loans as a separate item but to take them into account when calculating the value of the equity in the Group.

Calculation of the Plaintiff's Claim for Damages

My rejection of these additional items in the plaintiff's calculation of his damages means that the dispute comes down to only one issue, namely, the amount of damages which is equivalent to the plaintiff's entitlement to 5% of the equity in the Ipex Group.

The final paragraph of the defendants' statement read:

"Further, damages are to be assessed as at 1 July 1996."

This accorded with normal contractual principles that damages should be assessed as at the date of breach. However, a court may depart from the general rule where necessary to do so in the interests of justice, or to provide a remedy which will most fairly compensate the plaintiff for the wrong that he has suffered. In such circumstances, the court may assess the damages at a later date than the date of breach.[21]

Paragraph 13 of the plaintiff's response stated:

"The Plaintiff contends that the damages are to be assessed as at the date of the assessment by this Honourable Court."

During the trial, Mrs Crennan contended that this meant assessment by reference to the last complete financial year because assessment as at the date of the hearing or judgment was not feasible. Mrs Crennan also explained that the principal consideration which made it inappropriate to assess damages as at the date of breach was that, if the defendants had performed their obligations under the agreement by giving effect to the plaintiff's 5% interest in the Group, the plaintiff would not have been required immediately to sell or dispose of that interest. Thus, she submitted that the plaintiff was entitled to hold on to his 5% interest and to take the benefit of any subsequent increase in the value of that interest.

The matter of the assessment of damages first came before me on 5 April 2002, when the defendants sought further directions. The trial date was fixed for 21 October 2002.

On 20 August 2002, the defendants' solicitors, Arnold Bloch Leibler, wrote to the plaintiff's solicitor, Mr Eric Vadarlis, raising the question of possible agreement between the parties on the date at which damages were to be assessed. The defendants' solicitors suggested that the parties agree on 30 June 2002. Subsequently, on 4 October 2002, as no agreement had been reached, Arnold Bloch Leibler wrote to Mr Vadarlis stating that:

"Our clients will accept that the damages are to be assessed as at the date of the assessment by the Court."

That is, the defendants accepted the position put forward in the plaintiff's response that the damages should be assessed as at the date of the hearing and not the date of breach.

The matter then came before me in mid October when the plaintiff sought an order that the trial date be vacated because of the allegedly late delivery by the defendants of a substantial amount of recent financial information. Regrettably, I felt compelled to vacate the trial date until early in the new year. In the course of the hearing of that application, the question was raised whether the parties could agree that the experts should address the last balance date prior to the date of hearing, namely 30 June 2002. Otherwise, it was said, the problem of assessing recent financial information would constantly re-occur. However, senior counsel then appearing for the defendants raised the problem of post balance date events. He said that he expected that the valuers would want to consider whether any post balance date events affected their valuation.

This proved prophetic because in their expert witness statements, the defendants' valuers took into account, in differing degrees, the pessimistic outlook and potential losses in the financial year ending 30 June 2003 referred to in Mr Joel Schwalb's witness statements. The importance of this point was apparently not appreciated by the plaintiff's advisers until shortly before the hearing date which had been refixed for 25 February 2003. They became concerned at their inability to get to grips with this new financial information and sought to limit the defendants to events occurring in the period ending 30 June 2002.

By letter dated 19 February 2003 Arnold Bloch Leibler wrote to Mr Vadarlis pointing out that:

"There has been no agreement between us (or order of the Court) that 30 June 2002 is to be the date of the assessment of damages."

The plaintiff then applied just before the hearing for an order that I fix the date of assessment at 30 June 2002 and refuse to allow the defendants to file any supplementary material. I declined to make any such order at that stage.

Subsequently, during the course of the hearing, I ruled that the parties' agreement that damages were to be assessed as at the date of assessment by the Court, by which they meant an assessment of the plaintiff's loss based on the position of the Ipex Group as at the last completed balance date, namely 30 June 2002, and insofar as that position was affected by any post balance date events, be implemented. This came about in the following circumstances. The defendants foreshadowed evidence to the effect that the Ipex Group had suffered a loss in the six months ending 31 December 2002 and that it was anticipated that greater losses would be incurred in the full financial year. The plaintiff indicated that it would object to this evidence because of the late and non-existent discovery about those post 30 June 2002 events. It was even tentatively suggested that perhaps I should reject the parties' agreement and do my own calculations based on the date of breach. Mr Burnside objected to this course because assessment of damages as at 1 July 1996 was not how the case had been prepared. Mr Burnside also argued that evidence of the situation of the Ipex Group post 30 June 2002 was admissible. A ruling was therefore required so that the parties knew how the matter was to proceed.

As it transpired, it would certainly have been a lot simpler if I had insisted that the damages be assessed as at the date of breach, namely 1 July 1996, and not given effect to the parties' agreement that they be assessed as at the date of the assessment by the Court, which both parties understood to mean an assessment based on the figures for the year ended 30 June 2002. However, the parties had prepared their evidence accordingly and insistence on assessment as at the date of breach would have probably caused another adjournment of the hearing to allow the parties to recast their evidence. In the circumstances, I did not consider that it would be unfair to either party to continue on more or less the same basis as they had been expecting.

Counsel for the plaintiff submitted that the Ipex Group was a large, successful and profitable enterprise. It had reported a profit in every year since its inception in 1983. Over the last decade, it had diversified its business from a manufacturer and supplier of personal computers to cover a broad range of IT products and services, including systems integration, project management, outsourcing and software development. The Ipex Group had a "blue-chip" government and corporate customer base, and had been ranked as one of the top 20 Australian IT businesses. Accordingly, it was submitted that the Group was a "major player" in the Australian IT industry.

It was further submitted that Ipex presented itself as a well-established and successful company, and was recognised as such in the industry. For example its website (as at 28 June 2001) stated:

"Ipex ITG is recognized internationally, as a desktop integration company of excellence, with the capacity to handle the most technical and logistically complex multi-million dollar projects. Since 1982, Ipex ITG has built its success on providing total, fully integrated IT solutions enabling business to make quick, informed decisions, automate, monitor and control business and organizational processes and streamline internal and external communications."

The marketing brochures of the Ipex Group described it as "the largest and most successful Australian-owned IT Company", noting that it is ranked as a "Top 20 IT Systems Integrator" and a "Top 5 Desktop/Server Manufacturer". In describing its financial capacity, these brochures stated that:

"Ipex's long term success is evident in the consistently high ratings given by independent financial analysts. Ipex ITG is regarded as one of the most financially stable and secure IT companies in the industry, and stands ahead of almost all of its multi-national competitors."

It was also pointed out that the Ipex Group had a letter of credit facility of approximately $50 million with HSBC Bank Australia Ltd, secured by (among other things) fixed and floating charges over the assets and undertakings of companies within the Ipex Group. Under the terms of this facility:

(a) Ipex was required to provide to the Bank audited consolidated annual accounts, budget forecasts and cash flow projections, and quarterly management accounts;

(b) Ipex gave continuing warranties that its most recent accounts provided to the Bank were a true, fair and accurate statement of its financial position, that there had been no material adverse change in the financial position since those accounts were prepared, and that Ipex had disclosed in writing all facts which were material to the assessment of the nature and amount of the risk undertaken by the Bank; and

(c) the Bank must be notified of any change to Ipex's core business.

Counsel for the plaintiff submitted that in its dealings with the Bank, Ipex had consistently represented itself as a highly profitable company. Moreover, it had distributed retained profits which represented goodwill of $25.85 million in 1998.

On behalf of the plaintiff, it was submitted that the Ipex Group had demonstrated over a lengthy period its ability to remain profitable, anticipating and adapting to changes in the IT industry. It was argued that some statements by the valuers supported this conclusion. For example, according to Mr Rose, the management of Ipex had shown themselves to be adroit in dealing with such changing circumstances. One of the defendants' valuers, Ms Wilson, had stated in her report that the financial information "demonstrates that Ipex has a long track record of positive earnings", and "there is no evidence to suggest that the business will not continue to trade at least for the medium term." Finally, Mr Churchill said in re-examination that his reading of the financial information about the Ipex Group was that "on balance there is a very positive trend in most of the numbers, suggesting a profitable company that will in all likelihood continue to be profitable." There were no signs of a company that was about "to encounter any significant difficulties."

Mr Joel Schwalb was the founder and managing director of the Ipex Group. He said in his witness statement that he was an electrical engineer by training. He had a B.Sc. (Electronics) from the Israel Institute of Technology and a M.Sc. (Computers) from the University of Wisconsin. Mr Schwalb said that he had "responsibility for accounts, finance and the procurement of products for sale or assembly."

In his witness statement prepared in October 2002, Mr Schwalb gave an overview of the current activities of the Ipex Group. He said that the Ipex Group sold computer hardware and information technology ("IT") services. About 65% of its sales were to government and 35% to corporate entities. About 78% of its sales revenue was made up of sales of computer hardware and the balance of 22% was made up of services. The Ipex Group had approximately 600 employees in twelve offices around Australia. Mr Schwalb said that the Ipex Group began in 1983 as a computer hardware manufacturer and supplier. It branched out into systems integration and networking in 1989. This led to it becoming a provider of IT related services. From 1989 it had also provided software services. In 1998 it commenced an outsourcing business. In 1999 it started a software development business.

Mr Schwalb said that as a computer hardware supplier the Ipex Group designed computer equipment, imported the necessary computer components and manufactured the equipment from these components, including desktop workstations, notebooks, servers and monitors. As a service company, the Ipex Group provided technical support and warranty services for the equipment it sold and a range of services which included every aspect of an organisation's IT needs. Amongst other things, these included providing consultancy services on all IT issues, installing and designing computer networks and training.

Mr Schwalb said that outsourcing was, in effect, a combination of both the computer sales and service businesses. Outsourcing involved the Ipex Group contracting to perform some or all of the task of the IT department of a business or government entity, including the provision of hardware. Ipex was paid a monthly fee over the life of the contract.

The Ipex Group was also a software developer, which involved the customisation or development of business related software. Between 1989 and 1999, the Group's software activities were primarily related to the customisation of the software or other software manufacturers (some unsuccessful attempts at software development were made prior to 1996). Since 1999 the focus had shifted to writing the Group's own software for business applications.

According to Mr Schwalb the Group's major competitors included Acer Computer Australia Pty Ltd, Compaq Computer Australia Pty Ltd, Dell Computer Pty Ltd, Hewlett-Packard Australia Ltd, IBM Limited and Optima ICM Limited. He said that of these companies, the one most like the Ipex Group was Optima ICM Limited ("Optima ICM"), a publicly listed Australian company based in Sydney. Optima ICM was a computer manufacturer, IT services provider and outsourcer like the Ipex Group. The two companies often competed for the same work. In 2003, for example, Optima ICM beat the Ipex Group in obtaining a Department of Defence contract to supply 25,000 computers.

Mr Schwalb said that since its commencement he had run the Ipex Group with the aim of maximising its potential for growth. His policy was to seek to achieve and then maintain cash holdings of 30% of sales revenue. This meant that profits were "ploughed" back into the business and not distributed to equity holders.

Mr Schwalb explained that the Ipex Group had credit facilities provided by the Hong Kong Bank of Australia Limited. They were secured by a debenture charge and personal guarantees. The various forms of the credit facilities totalled nearly $50 million.

The prospects of the Ipex Group were painted as very gloomy by Mr Schwalb. He said that "the market for service contracts has now collapsed." In his view the decline was permanent. Previously, this had been a very lucrative part of the Group's business.

In Mr Schwalb's opinion, the IT industry was "in recession." It was suffering from the aftermath of the temporary surge in sales running up to the year 2000, due to Y2K and the GST, and "a pessimistic business outlook post 11 September 2001." Competition had increased. There had been a fierce price war since about April/May 2001. Mr Schwalb said that he did not see a future for the Ipex Group as a hardware supplier because it would not be able to compete with the large manufacturers, all of whom were likely to be based in China.

In addition, Mr Schwalb said that the market for outsourcing had "substantially disappeared." For different reasons both the government market and the business market had collapsed. Just before government departments lost interest in outsourcing, the Ipex Group had won the Group 8 contract and commenced providing services to eight Commonwealth Government agencies or entities in June 2000 for a contract price of $143 million over five years. Mr Schwalb said that the Group made a big investment in outsourcing only to find "that the market that we anticipated no longer exists."

Mr Schwalb said that he did not consider it likely in the foreseeable future that any part of the assets of the Group would be distributed to equity holders "whether through the payment of dividends or otherwise."

Mr Schwalb also gave evidence about how he would have performed the agreement with Mr Hosking if he had had to do so. He probably would have instructed Mr Jack Stuk of the firm Jerrard and Stuk. He would have given instructions that he wanted maximum possible control, with no shareholders' agreement unless necessary, no payment of dividends until the 30% of the company's turnover could be maintained, no board representation for Mr Hosking and a casting vote for himself in the case of deadlock, restrictions on selling shares and a requirement that shareholders proportionally bear the burden of providing collateral security to support any external creditors' facilities.

Further examples of the Ipex Group's struggle to survive given by Mr Schwalb were the 8% reduction in staff, the reduction from $100,000 to $20,000 in the minimum target size of prospective engineering projects and the reduction in cash reserves from $60 million as at 30 June 2000 to approximately $24 million in October 2002. This last example appeared in Mr Schwalb's witness statement after the sentence: "Our financial strength has been depleted badly." Counsel for the plaintiff submitted that this was an example of Mr Schwalb attempting to twist the facts in order to support misleading assertions. As was pointed out, the diminution of $36 million in the Group's cash reserves was brought about by the purchase of approximately $38 million of computer equipment for the Group 8 contract, which commenced in mid-2000. It was therefore submitted that the diminution of cash reserves did not indicate any depletion of financial strength. Rather, the plaintiff argued, the Ipex Group had applied its significant cash reserves so as to derive higher returns by acting as a financier under the Group 8 contract.

In a supplementary witness statement prepared in March 2003, Mr Schwalb produced responses given to further questions from the defendants' valuers about a variety of matters. One response referred to two deals or "wins" since the end of the 2002 financial year. One was a contract with Telstra which he said was likely to be a loss given that the cost price of the 27,000 computers was $1,399 and they were being sold to Telstra at about $1,201 (ex GST). This was done in order to retain Ipex's position on Telstra's panel, with the "hope that we will be able to increase our price over the duration of the agreement." The second deal or win was a contract to supply the Australian Tax Office with about 20,000 computers at an expected gross margin of $110 per computer. The response setting out management's expectations for the financial year ending 30 June 2003 was as follows:

"Management's original expectation was that Ipex would incur a loss of between $5-7 million in FYE 2003. This was based on results for the first four months of the year, being an operating loss of $1.24 million (extrapolated to a full year operating loss of $3.72 million) combined with the net effect of the two new deals. This methodology, in Management's opinion, remains valid. However, the net effect of the two new deals needs to be revised to recognise that only half the Telstra PCs will be purchased in FYE 2003. On this basis, we have forecast a loss of $2.67 million arising from the sale of PCs to Telstra in the remainder of this financial year. Offset against this is the $2.2 million gross profit we will make through the sale of 20,000 PCs to EDS for the Australian Tax Office, leaving us with a net loss of $0.47 million on these two deals. As a result, Management has forecast an operating loss of $4.19 million for FYE 2003."

Subsequently, Mr Schwalb produced in evidence a sheet of handwritten calculations said to show the cost of the computers at the time of the Telstra tender. At an exchange rate of $0.56 to the US dollar, the cost was said to be $1,357 compared with a sale price of $1,141. However, he later said in cross-examination that he initially offered the computer at $1,278. The $1,141 figure happened only in December and supply to Telstra did not begin until January. Moreover, Mr Schwalb agreed that prices were fixed only for the first 90 days of the contract, and that in any event Ipex was doing better than it had quoted because the exchange rate was above $0.56. Mr Schwalb agreed that the costings for a computer changed daily in that the exchange rate changed and the cost of components changed. In trying to work out the cost price of a computer to Ipex, Mr Schwalb made the point that it was not necessarily the most current price of a part. Ipex might use a part from its stock on hand which had been purchased at another price. On top of the cost of the parts making up the computer sold to Telstra, there had to be added, according to Mr Schwalb, another 18-20% in overheads. Nevertheless, the alleged loss of nearly $200 per computer sold to Telstra had been considerably reduced by the end of Mr Schwalb's evidence on this topic.

In respect of the Australian Tax Office contract, Mr Schwalb first said that he "committed" to purchasing the parts for all 20,000 computers at the same time, when he got the letter of intent. He said that at least 7,000 computers were pre-built in December 2002, with a further 2,000 to 3,000 in early January, and that the components for those computers were already in stock. This evidence was given apparently in rejection of the suggestion that the Group had benefited from the recent improvements in the exchange rate in supplying computers under the Australian Tax Office contract. However, later when seeking to justify the low figure in the profit and loss statement for closing stock as at 31 December 2002, Mr Schwalb appeared to agree that his earlier evidence was inaccurate and that many of the components had not been delivered before 7 January 2003. The favourable changes in the exchange rate had increased the Group's margin on each computer sold to the Australia Tax Office.

Mr Schwalb also gave evidence about the Group 8 contract. He said that he had to drop his initial price by some $20 million to beat the competition. This reduced the margin from 8% profit to a slight loss. On the other hand, on extra work for that contract the Group had made a $2.5 million profit over the life of the contract. Overall, he considered that the Group was at breakeven or below for the Group 8 contract. Mr Schwalb explained why entry into a loss making contract had occurred. First, more government outsourcing was expected, but this had not occurred. Secondly, it was seen as an opportunity to enter a new market, exporting the concept of marketing.

Mr Schwalb also produced in evidence a document headed:

This statement was said to show that the Group had suffered a net loss of $4.953 million for the six months ending 31 December 2002.

However, Mr Schwalb's evidence concerning the profit and loss of the Ipex Group for this period was shown to be inconsistent with the consolidated general ledger, trial balances and the monthly BAS statements. Mr Schwalb then referred to a number of adjustments he had made to the figures, which had not previously been disclosed. He also agreed that he had included a number of expenses incurred in June 2002 or earlier but not paid until July 2002 as part of the calculation of the profit and loss in the six month period, although those expenses could well have been carried forward into the calculation of the profit and loss for the year ended 30 June 2002. Mr Schwalb also conceded in cross-examination that any evidence he gave about profits or losses in relation to various contracts were "estimates." Despite the way in which it had been presented to the Court, it became obvious to me that the so-called profit and loss account for the period ended 31 December 2002 was nothing of the sort, and even apart from other contrary evidence, I would place no reliance on it.

Mr Shulman was recalled to give evidence about what he had been able to ascertain from the recently discovered post 30 June 2002 financial information. He disputed the claim by Mr Schwalb that the Ipex Group had made a loss of $4.953 million in the six months to 31 December 2002 or that it would make a loss in the financial year ending 30 June 2003. On the contrary, Mr Shulman said that from his examination of the documents he had concluded that the Group had made a profit before tax of at least $3.224 million in the six month period. Further, he concluded that it had made a profit of $2.092 million in January and a profit of $11.289 million in February, with the result that it had made a profit of $16.606 million for the eight months ending 28 February 2003, which if maintained would lead to a profit for the financial year ending 30 June 2003 of approximately $24.8 million. Mr Shulman agreed in cross-examination that multiplying the eight months' figure by 1.5 to obtain an annual figure was "not the most reliable way" but it was the only way he could do it at that stage.

Because of the way events turned out, which will be referred to below, I do not consider it necessary to spend further time examining the most confusing and unsatisfactory evidence concerning the pricing of the computers sold under those two important contracts with Telstra and the Australian Tax Office and concerning Mr Schwalb's claim that the Group had suffered a substantial loss in the six months ending 31 December 2002. It is sufficient, for present purposes, if I state my view of Mr Schwalb as a witness.

In the circumstances, I was left with the clear impression that in giving his evidence Mr Schwalb was attempting to portray the situation of his Group in the worst possible light, in order that the amount which the defendants are ordered to pay to the plaintiff by way of damages be as low as possible. He was an unsatisfactory witness in many respects. However, in the result, the outcome of this proceeding does not turn on the various disputed parts of his evidence.

Like Mr Hosking, Mr Sheiman was entitled to a 5% equity in the Ipex Group. In his witness statement, Mr Sheiman said that when he left the Group in October 2000 he told Mr Joel Schwalb that he wanted his 5% equity paid out. He said that he had previously been paid his "5% profit entitlement/distribution for the years ending June 1995 and June 1996." Most of it had been paid into his loan account. Eventually Mr Sheiman reached an agreement with Mr Schwalb that he would be paid 5% of the after tax profits for the period from 1 July 1996 to 30 June 2000 less the bonuses or commissions paid to him. On the figures supplied by Mr Schwalb, the after tax profits totalled $14.38 million, of which after adjustments for bonuses or commissions Mr Sheiman's share was $474,220. The total payment he received, including his current loan account indebtedness, was $603,408.

It was submitted on behalf of the plaintiff that Mr Sheiman was given inaccurate profit figures by Mr Schwalb with the result that he received less than he was entitled to. The defendants disputed this assertion. They correctly submitted that Mr Sheiman's evidence that he did not have any information regarding the Ipex Group's profits earned in the years 1997 to 2000 was demonstrated to be false and that in any event Mr Sheiman was content to use and trust Mr Kahn, who was both his accountant and the accountant for the Group, to calculate his exit entitlement.

The plaintiff submitted that Mr Schwalb had referred in his witness statement to the payment to Mr Sheiman in order to suggest that a 5% equity in the Group was worth only about the $474,220 which he had agreed to take in satisfaction of his interest. Further, whether or not Mr Sheiman was misled about the financial position of the Group, the plaintiff submitted that it was instructive to see how Mr Schwalb responded to Mr Sheiman's request to be paid out. Mr Schwalb did not say that the shares which could be issued would be worth nothing because of all the restrictions he would impose. Rather, he worked out what he said the Group was worth and agreed to pay Mr Sheiman 5% of that figure. It was this approach that the plaintiff had sought to follow in this proceeding.

However, as far as I am concerned, Mr Sheiman's evidence was not really relevant to the issue of the assessment of Mr Hosking's damages.

I turn at last to the conflicting valuation evidence relied on by the parties in respect of the issue of damages. It is appropriate, first of all, to briefly set out the differing approaches followed by each of the valuers and to refer to some of the criticisms made of those valuers.

It was common ground with all of the valuers that the most appropriate methodology was to adopt a capitalisation of future maintainable earnings approach. Under this methodology, the value of the equity in the Group was determined by capitalising future maintainable earnings at an appropriate price earnings multiple and adding or deducting the value of any surplus net assets or liabilities. Various types of earnings were used by the valuers in calculating their figures for future maintainable earnings. Mr Shulman and Ms Wilson used EBIT figures whereas Mr Churchill and Mr Rose used EBITDA figures and Mr Edwards after tax figures.

The plaintiff's main valuation evidence was provided by Mr Michael Shulman. His witness statement dated 18 December 2002 contained a report dated 17 December 2002. Mr Shulman was a chartered accountant. He stated that he had been a partner in the Audit and Corporate Finance Division of Stannards Accountants & Advisors Pty Ltd since 1998. Prior to that he had been a partner in the Audit and Corporate Finance Division of Clarke & Company, Chartered Accountants and Management Consultants, since 1992. Mr Shulman had had 17 years' experience working with the public and private sectors, through a combination of statutory audit assignments, valuation and forensic accounting engagements, mergers and acquisitions advice, financial advisory assignments and the provision of accounting advice.

In his report, Mr Shulman stated that he had, as instructed, "undertaken an assessment of the fair value of the Ipex Group ... as at 1 July 2002." This had been completed to facilitate an assessment of the fair value of the plaintiff's "entitlement to 5% of the equity of the Group and his entitlement to 5% of the profits earned by the Group since 1 July, 1994." After setting out his sources of information, Mr Shulman summarised his understanding of the history of the Ipex Group and its activities, which was in part based on Mr Schwalb's witness statement and in part on material on the Group's website. Minor errors were made in his listing of the major customers of, and the major suppliers to, the Group. More controversially, Mr Shulman gave an overview of the industry in which the Group operated. He said that:

"The industry has a tendency to 'peak' every 3-5 years, when new technological developments occur. This timeframe is also typically in line with the life span of most IT equipment. The most recent example of 'peaking' is the 'Y2K' bug which amongst other things, has synchronised PC purchasing patterns across the world (i.e. the next peak being expected in 2003 and 2004)."

Mr Shulman concluded that the Ipex Group was a significant participant in the IT market. It had generated normalised earnings before interest and tax of $70.8 million since 1 July 1993, or $7.86 million per annum.

Mr Shulman adopted a capitalisation of future maintainable earnings approach. He prepared the following table of the operating results of the group between 1994 and 2002, including adjustments for normalisation of the earnings:

(i) Normalisation adjustments were not calculated for these periods.

Mr Shulman derived his future maintainable earnings figure of $11.64 million by calculating the average of the group's normalised earnings before tax for the four years 1999 to 2002. For the 2002 year, this involved deducting from reported earnings of $8.841 million, $1.026 million for interest earned on the surplus cash and adding $0.695 million for a variety of other adjustments, resulting in a normalised earnings figure of $8.51 million.

Referring to his use of the last four years' results, Mr Shulman said in his report that he believed a prospective purchaser of the Group "would rely upon such historical information to determine maintainable earnings." Utilising a four year period eliminated "fluctuations which would occur if reliance were only placed on one or two years of results which could be a 'peak' or 'trough' years." He added that in his view it also approximated "the normal business cycle of the IT industry." In evidence he said that he chose four years because it was the mid point of the three to five year cycle of the IT industry. On the other hand, Mr Shulman said, selecting just one year "runs the risk of in fact being a biased selection, bearing in mind that it doesn't cut across the entire business cycle."

Mr Shulman said in his report that to determine an appropriate earnings multiple for the Ipex Group as at 1 July 2002 required consideration of the following factors:

(a) the future prospects of the Group's business, which were promising based on the nature of its business, its sustained profitability in recent times when the IT industry had been in a slump, its quality customer base and the expected buoyancy in the IT industry in the coming years (arising from new product demand and rationalisation of smaller competitors);

(b) the pre-existing profitability and financial condition of the business;

(c) the human resources of the business, with its experienced and well-skilled management team;

(d) the business profile, which in the case of the Group was high; and

(e) general economic and industry expectations.

Mr Shulman decided to use an EBIT multiple of 9.0 to 9.5. This figure was derived from the figure of 19.11, which was the average of the implied EBIT multiple of three companies based in the United States of America (International Business Machines Corporation ("IBM"), Dell Computer Corporation ("Dell") and Compaq Computer Corporation ("Compaq")), which he identified as providing a similar type of product and service to the IT industry as Ipex. Mr Shulman did acknowledge, however, that the three companies were larger than Ipex and serviced more geographic segments than Ipex did. The multiple chosen by Mr Shulman for Ipex represented a discount of some 53% (low) to 51% (high) on the average of 19.11. Mr Shulman said in his report that in arriving at these discounted multiples:

"adjustments have been made to the implied multiples of the companies examined for: - the private company status of the Group; - the potential illiquidity of a 5% ownership interest in the Group; and - the other factors noted pertaining to the Group's operations ..."

Mr Shulman noted that his multiple equated to a PE ratio of 12.8 to 13.5 and that the average PE ratio for all listed stocks in Australia at 30 June 2002 was 27.12.

Application of the multiple of 9.0 to 9.5 to his future maintainable earnings figure of $11.64 million meant that Mr Shulman obtained an amount of between $104.76 million and $110.58 million for the total value of the net operating assets of the Group. He then made a further adjustment "to reflect the value of the Group's equity after taking account of surplus assets and surplus liabilities." Surplus assets totalled $20.04 million - $20 million in cash and $0.04 million in investments. Part of this calculation was to treat $20 million of the cash and deposits of $25.92 million as surplus cash, based on the fact that approximately $1 million of interest had been earned in the 2002 year. Against that were set surplus liabilities totalling $31.34 million - $28.05 million of related party loans and $3.29 million for income tax provision and GST. After deducting this adjustment figure of $11.30 million, Mr Shulman obtained a figure of between $93.46 million and $99.28 million for the value of 100% of the group's equity. Mr Hosking's 5% share of that was, therefore, between $4.673 million and $4.964 million, before any adjustment for treating profits as a separate item, which I have held is not the appropriate method.

Mr Shulman then set out his calculations of the other amounts to which he considered Mr Hosking was entitled following the Court of Appeal's decision. They are listed in paragraph 17 above. Again, I have held that these other items cannot be considered separately.

Counsel for the defendants objected to the reception of Mr Shulman's report on the ground that it was inadmissible. It was said that the report failed to adequately identify what instructions, facts or assumptions it was based on and to identify any evidential or reasoned basis for many of the matters contained in it. It was therefore submitted that accepting Mr Shulman's report would contravene the principles governing the reception of expert evidence as discussed by the Full Court of the Supreme Court of Western Australia in Pownall v Conlon Management Pty Ltd as trustee for the Kalbarri Trust[22] and Heydon JA (as his Honour then was) in Makita (Australia) Pty Ltd v Sproules[23]. Counsel further submitted that even if Mr Shulman's report were received by way of submission very little weight should be accorded to it.

Some telling criticisms were made by the defendants of the failure by Mr Shulman to precisely identify the instructions he had received or the basis on which he reached many of his conclusions. However, Mr Shulman did perform valuable work in analysing the financial results of the Ipex Group, particularly in relation to the post 30 June 2002 results, which I regard as clearly admissible. Moreover, the main part of the defendants' attack centred on Mr Shulman's assumptions regarding profits and dividend policy, which is not relevant given my conclusion in respect of the plaintiff's claim to 5% of the profits of the Group between 1 July 1994 and 30 June 2002.

It therefore seems to me that the appropriate way to proceed is to treat Mr Shulman's evidence as admissible, but to take into account the defendants' criticisms of his approach when relevant to my consideration of the various specific issues and to give appropriate weight to Mr Shulman's views in the light of those criticisms.

The defendants also submitted that the genesis of Mr Shulman's final report left no scope for confidence in his evidence because it was said that he had, over time, given wildly inconsistent valuations for the Ipex business, based on a variety of inconsistent methods. A number of criticisms of Mr Shulman were advanced by the defendants in respect of the three previous reports prepared by Mr Shulman dated 2 March 2000, 20 September 2002 and 27 November 2002. First, it was pointed out by the defendants that Mr Shulman's various valuations showed that the value of the Group had fallen in real terms between June 1996 and June 2002. For example, his 20 September 2002 report valued the Group at between $93.69 million and $98.65 million as at 30 June 1996, and at between $121.68 million and $127.66 million as at 30 June 2000. Yet his final report valued the Group only at between $93.46 million and $99.78 million as at 30 June 2002, and his final valuation was predicated on the Group improving its earnings rate over the most recent year - future maintainable earnings of $11.64 million as against earnings in 2001 and 2002 of $3.2 million ($6.1 million normalised) and $8.2 million ($8.5 million normalised). It was submitted that the idea that the business had, given inflation, shrunk over the last six years, and even more dramatically over the last two years, was inconsistent with Mr Shulman's own view about Ipex's growth.

Secondly, the defendants submitted that because Mr Shulman used three different approaches in calculating future maintainable earnings in his reports, without being able to explain the rationale for these different approaches, the inference should be drawn that his choice of methodology was result-driven. In the 2 March 2000 report, which was an assessment of value "as at current date", Mr Shulman used the three years between 1996 and 1998 to derive his average for the purposes of determining future maintainable earnings, despite the fact that he also set out the 1995 earnings in his report. This year happened to be the lowest of the four years in question. Mr Shulman said that he did not consider this report to be a valuation, it was more a summary of the current position based on the little information available. In the 20 September 2002 report, which contained valuations as at 1 July 1996 and 30 June 2000, Mr Shulman used the five years from 1996 to 2000 to derive an average for the valuation as at 1 July 1996. He said that using the actual operating results for those five years in essence crystallised what the forecast results would have been.[24] Only the current year's results were used for the valuation as at 30 June 2000. However, the year 2000 figure was discounted by 30% "to take account of the 'peak' experienced by the IT market at that point in time." Mr Shulman said that when he prepared the 20 September 2002 report, he had not had access to Ipex's books and accounts for the years ended 2001 and 2002. When he prepared the 27 November 2002 report, he did have that information. He knew by then that 1999 and 2000 were high years and that 2001 and 2002 were low years. This was the first time Mr Shulman used a four year average.

Thirdly, the defendants drew attention to the fact that although Mr Shulman in his 20 September 2002 report discounted the year 2000 figure by 30%, he failed to make any equivalent adjustment to that figure in his final report.

Fourthly, the defendants submitted that there was inconsistency between Mr Shulman's discounting by 37% to 40% of the average EBIT multiple of the three United States companies, to allow the private company status of the Group, the potential illiquidity of the 5% interest and other more general factors, in his 20 September 2002 report and his discounting by 50% to 53% of the average EBIT multiple of the same three companies to allow for the same factors in his final report.

Again, these criticisms raise important issues which need to be taken into account when relevant to my consideration of the various specific issues.

The defendants also criticised the assertion by Mr Shulman that the computer industry was cyclical and therefore that 2003 was going to be a bonanza year. It was said that Mr Shulman had no factual basis for this statement. The first question was what was meant by a "cycle". The defendants argued that all that Mr Schwalb meant when he agreed that there was a cycle was that the business went up and down. Mr Burnside submitted that even if hardware orders and to a lesser extent other services were concentrated by the implementation of the GST and Y2K, there was no evidence to suggest that this would lead to a cycle of sales. Decisions still had to be made to re-order new hardware and software. Further, he submitted that the evidence showed that hardware margins were becoming very thin so that even large volumes did not necessarily translate into large profits. Finally, he queried why, if Mr Shulman's evidence was correct, 2002 was not a good year, when it followed three years after the undoubted boom year of 1999.

Mr Shulman was also the subject of a further attack on his credit. It arose in the following unusual circumstances. After judgment in this matter had unfortunately been reserved for far too long a period, the plaintiff made application by summons dated 15 December 2003 to re-open his case in order to call further evidence. On 19 December 2003 I granted the plaintiff's application pursuant to r.49.01(1) of the Supreme Court Rules. The initial further evidence in question was the sixth defendant's financial statements and report for the year ended 30 June 2003, which it was said had only just become publicly available. I will refer in detail to this issue of the 2003 results later in this judgment. For present purposes, it is sufficient to note that Mr Shulman gave evidence at the re-opened hearing on 9 February 2004 ("the first re-opened hearing") and was cross-examined on his further report dated 4 February 2004.

After yet further delay in the delivery of judgment, the defendants made application by summons dated 5 May 2004 to re-open their case in order to call further evidence. On 6 May 2004 I granted that application. The evidence in question was that Mr Shulman had failed to reveal to the Court on the occasion of the first re-opened hearing that at that time there was on foot an application to the Companies Auditors and Liquidators Disciplinary Board ("the Board") by the Australian Securities and Investment Commission ("ASIC") to have Mr Shulman dealt with under s.1292 of the Corporations Act 2001 in relation to the audits by him of three companies in respect of the financial year ended 30 June 2001. On 29 March 2004 he was suspended from practice as an auditor for a period of one year commencing 1 April 2004.

There was a second re-opened hearing on 28 May 2004. Pursuant to my directions, Mr Shulman had filed an affidavit sworn 21 May 2004 in which he set out the history of his dispute with ASIC. He stated that in November 2003 he had received a "peer review" report from a Mr Ross Fraser of WHK Day Neilson in which Mr Fraser had concluded that "the documentation in relation to at least some of these matters should have been more extensive" but that he had not "seen evidence from ASIC, or on the audit files, that would indicate that the opinions formed and expressed were not appropriate." Shortly thereafter, Mr Shulman said he signed and returned written consent orders which had been forwarded to him by ASIC. He stated that he did not hear anything further until early March 2004 when he received a telephone call from the Registrar of the Board who advised him that there would be a hearing before the Board in relation to the proposed orders.

Mr Shulman said in his affidavit that when he prepared his further report and gave his further evidence on 9 February 2004, "it did not occur to me to mention the pending application by ASIC to the Board or the consent orders that I had signed." He stated that he "did not deliberately conceal such matters from either the plaintiff, the defendants or this Honourable Court." He further stated that he did not consider that the matters raised by ASIC in its application to the Board, which related to the performance of the duties of an auditor, and specifically concerned the sufficiency of evidence in audit files and working papers of work performed and opinions and conclusions reached, had any relevance to the matters on which he gave evidence in this proceeding.

Mr Shulman agreed in cross-examination that after he met with ASIC in June 2003 he appreciated that ASIC's concerns were a serious matter which could result in him having to cease acting as an auditor for a period of 12 months. He also agreed that the consent orders provided for him to be suspended from practice as an auditor for a period of 12 months. Mr Shulman further agreed that the biography he included in his expert witness statement for the first re-opened hearing had not changed from the one he used approximately a year earlier. Accordingly, it contained no reference to his temporary inability to handle audit matters. He agreed after some debate that if the suspension had happened before giving evidence he would have disclosed it.

Mr Burnside submitted that this episode revealed two things about Mr Shulman The first was his obvious tendency to justify his own position regardless of almost everything else. The second and more important aspect was that his handling of the ASIC complaint disclosed a lack of judgment. Both of these criticisms were said to be extremely relevant to an assessment of his evidence at the hearing itself. This led Mr Burnside to submit that I should not place any reliance on Mr Shulman's subjective judgment in his valuation evidence.

Counsel for the plaintiff submitted that the most significant part of Mr Shulman's evidence, which was not challenged, was that it did not occur to him to mention his difficulty to the plaintiff's lawyers. Further, it was submitted that the matters surrounding the suspension did not affect his valuation evidence.

I consider that this attack on Mr Shulman's reliability as an expert witness does not really assist me in deciding the issues in this case. I can readily understand how it came about that Mr Shulman omitted to mention the impending suspension at the time he gave his further evidence at the first re-opened hearing. Probably no thought at all was given to the re-inclusion of his previously used biography in his further report. However, I was rather surprised at Mr Shulman's initial attitude to what should be revealed about his suspension once this issue was highlighted. Nevertheless, as I have said, in the final analysis, this episode was of little assistance in deciding the important issues in this case. In my opinion, there are weightier or more persuasive reasons for accepting or rejecting various parts of Mr Shulman's evidence.

The plaintiff's next valuer was Mr Michael Churchill. His witness statement dated 19 December 2002 contained a report of the same date. Mr Churchill was a chartered accountant and a partner of Pricewaterhouse Coopers Corporate Finance and Recovery practice. His resumé indicated that he had had extensive experience in the valuation of businesses, shares and of other forms of equity (including share options). He was the co-author of "Business Valuations Digest" and the author of numerous published articles relating to valuations, expert reports, public sector commercialisation and value management.

Mr Churchill said that he had not been asked to undertake the investigations which he would normally conduct in the preparation of a valuation. For instance, he had been instructed to assume that Mr Shulman's normalisation adjustment to the Ipex Group's earnings were correct. Rather he had been asked to consider and comment on the valuation report of Mr Shulman. Mr Churchill said in evidence that he considered that "the approach and methodology adopted by Mr Shulman was consistent with accepted valuation practice" and that "broadly speaking" he was in agreement with the approach taken by Mr Shulman. I will deal with Mr Churchill's more detailed comments on Mr Shulman's methodology later when considering particular issues involved in the valuations. For the moment I will confine myself to summarising what he said would have been his preferred approach.

To calculate what he called the business enterprise value, Mr Churchill chose to use an EBITDA figure rather than an EBIT figure, based only on 2002 reported results, and with an EBITDA multiple range obtained from looking at two domestic companies (Volante Group Limited ("Volante") and Data # 3 Limited ("Data # 3")) which he considered to be comparable. He made adjustments to the observed EBITDA multiples "for negotiability and removal of the minority discount effect in the observed comparable data." Mr Churchill said in evidence that he chose capitalisation of EBITDA "to remove the potential distortions created by the significant depreciation and amortisation charges in the last two financial years." Nevertheless, he considered Mr Shulman's use of EBIT figures was "an acceptable approach."

Mr Churchill used a figure of $22.3 million for the reported EBITDA for the 2002 year and an EBITDA multiple of between 4.0 and 6.0. This meant that the range of the business enterprise value was between $89.2 million and $133.8 million. (When giving evidence, Mr Churchill pointed out that he had made a small error in his calculations by not deducting Mr Shulman's normalisation figure of $0.3 million for the year ended 30 June 2002 from his reported EBITDA figure of $22.3 million. This would have altered the range to between $88 million and $132 million.) This broad range compares with Mr Shulman's value of net operating assets of between $104.76 million and $110.58 million. Mr Churchill considered that all of Mr Shulman's remaining calculations could stay the same. That is, $11.30 million should be deducted to take account of surplus assets and liabilities, before calculating Mr Hosking's 5% entitlement. By my calculations, this meant Mr Churchill's final range for the 5% share of the equity was between $3.835 million and $6.035 million.

Mr Churchill noted in his report that his broad range encompassed Mr Shulman's range. He said that his range was broader than he would typically expect if he had carried out a valuation exercise. This was because a valuation exercise would have involved, amongst other things, "a more detailed examination of the differences between the comparable companies and Ipex, which would ordinarily result in a greater level of comfort as to the likely range of multiples which would be applied (typically resulting in a narrower range)."

As will be seen, in their final submissions counsel for the defendants criticised Mr Churchill's use of the EBITDA method. They also argued that Mr Churchill's report was not a valuation because it relied so heavily on Mr Shulman's figures. Nevertheless, this did not prevent the defendants from relying on two criticisms by Mr Churchill of Mr Shulman's approach. This is hardly surprising as I found Mr Churchill to be a credible witness in respect of the limited evidence he was able to give.

The plaintiff's third valuer was Mr Marcus Rose. His witness statement dated 18 December 2002 contained a report dated 17 December 2002. Mr Rose said that since 1994 he had been managing director of Concept Financial Services Group which was a boutique financial services group which provided a range of services including financial advice, mergers and acquisitions, capital raisings, valuations, investment management and investor relations.

Mr Rose had also been instructed to accept that Mr Shulman's normalisation adjustments were correct. Like Mr Churchill, Mr Rose used EBITDA figures. However, his EBITDA figure was the average of the normalised EBITDA figures for the group over the three years 2000 to 2002 or $16.4 million. His earnings multiple was in the range of 5.54 to 6.18 times. In his report, Mr Rose said that he had:

"arrived at this range by taking the average EBITDA multiple (9.23 times) for the Australian IT companies quoted above, and discounted that multiple by between 33-40% to account for the private company status of the Group, as well as its size, geographic location and in particular the uncertainties of the industry it operates in."

Of these companies, Mr Rose regarded Aspect Computing Limited ("Aspect"), Kaz Group Limited ("Kaz") and SMS Management Limited ("SMS") as the most relevant to Ipex. Mr Rose's earnings multiple meant that he estimated the fair market value of the group at between $90.85 million and $101.35 million.

However, in accordance with his instructions, Mr Rose said that he had not taken into account any surplus assets or liabilities. For the purpose of comparing Mr Rose's implied value of Mr Hosking's 5% entitlement, with Mr Shulman's and Mr Churchill's figures, $11.30 million should be deducted to take account of surplus assets and liabilities. By my calculations, this would reduce Mr Rose's range for the fair market value of the Group to between $79.55 million and $90.05 million and results in a figure for Mr Hosking's 5% share of between $3.98 million and $4.50 million.

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Cases Cited (7)