Judgment
1HER HONOUR: In March this year I handed down my reasons for judgment on an application brought by Ms Fitzpatrick (on her own behalf and on behalf of a company in which she and her former de facto husband, Mr Cheal, each own 50% of the shares). The company in question (the second plaintiff in these proceedings, ACN 089 142 870 Pty Ltd) formerly traded as Chilli Surfboards Pty Ltd. It conducted a business of the manufacture and sale of surfboards bearing a Chilli logo (ownership of the trade mark for which, following a succession of transactions involving Mr Cheal and companies including the trustee of his family trust, now reposes in the second defendant (Cheal Industries) and use of which has been licensed to the company now trading as Chilli Surfboards Pty Ltd (the third defendant, to which I have referred as Chilli #2)).
2Ms Fitzpatrick's complaint in the proceedings was, in effect, that Mr Cheal had diverted the "business" of Chilli #1 (namely, the business of making and selling surfboards with the Chilli logo) to Chilli #2 with a view to excluding Ms Fitzpatrick from the business or a share in the business of Chilli #1, with the result that the business and goodwill in Chilli #1 was destroyed. Insofar as that allegation was broadly founded on the assumption that ownership the Chilli trade mark (or the right to use that trade mark) had been diverted from Chilli #1 to Chilli #2, Ms Fitzpatrick did not establish that the trade mark had ever been in the ownership of Chilli #1 (though it had had the right to use it for some time, first under an implied licence and then under an express licence that Mr Cheal did not seek to renew). I accepted that the goodwill in the trade mark itself had reposed, at the relevant times, in Mr Cheal and then Cheal Industries. (Allegations of breach of fiduciary and other duties owed by Mr Cheal as a director of Chilli #1 were based on similar conduct were also made.)
3Mr Cheal defended the proceedings, in substance, on the basis that Chilli #1 did not at any time own the relevant Chilli trade mark and that Mr Cheal remained at all times free to dispose of his own intellectual property (and to use his surfboard making skills) as he saw fit (without regard to the effect this would have on Chilli #1, of which he remained a director, and its ability to continue to conduct its surfboard-making business). It was the defendants' position that, even if a breach of directors' duties or oppression were to be made out, the goodwill of the business conducted by Chilli #1 resided solely in the trade mark and in Mr Cheal's personal labour and, therefore, at the time Mr Cheal changed corporate entities (and commenced carrying on what was in effect the same surfboard-making business through Chilli #2), Chilli #1 had no real value.
4I found that Mr Cheal was in breach of his statutory and fiduciary duties as a director of Chilli #1, by reason of his conduct (while still a director of Chilli #1) in facilitating the incorporation of Chilli #2 and effectively setting up a competing business to the business that was then conducted by Chilli #1. I considered that, in the course of so doing, Mr Cheal had, in effect, appropriated for the benefit of Chilli #2 both the name of Chilli #1 and any goodwill separately associated with that name and the period of trade that the company had by then carried on under that name.
5I held that Mr Cheal had conducted the affairs of Chilli #1 in a manner oppressive to the interests of Ms Fitzpatrick (in breach of s 232 of the Corporations Act 2001) by, inter alia, bringing about the acquisition or incorporation of Chilli #2 and appropriating to that company any goodwill separately associated with the Chilli #1 company name.
6The relief for which Ms Fitzpatrick's Counsel, Mr Evans, had principally contended at the hearing was, as I understood it, an order under s 233 of the Corporations Act 2001 (Cth) for the purchase of Ms Fitzpatrick's shares in Chilli #1 for the amount representing a half share in the value of Chilli #1's business as a going concern at the relevant time.
7The plaintiffs relied upon the valuation of an expert forensic accountant (Mr McMahon) as to the appropriate valuation of the business of Chilli #1 as at various dates. That valuation was on the basis of a sale of the business as a going concern. It was based on the assumption (in accordance with the instructions given to Mr McMahon) that the company had ownership (or, perhaps, the exclusive right to use) the Chilli trade mark. That assumption was not sustainable on the findings I made.
8I outlined in my principal reasons for judgment the relief that I considered would be appropriate (depending on the election by the plaintiffs as to which, of the alternative claims for relief made by the plaintiffs, was to be pursued. I set out in my reasons (and in the orders I then proposed to make) the amount which I took to be the relevant sum for Ms Fitzpatrick's half share in the company (based on a footnote in Mr McMahon's to the effect that, if Chilli #1 were to be valued after the acquisition of the business, then the only value would be the fair market value of the Net Operating Assets with no component for goodwill and his explanation in the witness box that the valuation of a share to be acquired on this basis would not take into account company debt). Mr Slater QC, who appeared for the defendants, leading Ms Francois, when the matter was listed for submissions as to the final orders to be made, submitted that this approach was incorrect.
9I accepted the force of Mr Slater's submissions as to the value attributed to the respective shareholders' equity in the books of the company (Ms Fitzpatrick's half share of which being $12,265.52) though that did not take into account any value to be attributed to the goodwill represented by the Chilli Surfboards company name and associated with the previous use of the Chilli logo as at 30 June 2006.
10There was no evidence before me as to that value (assuming it could be separately determined) since Mr McMahon's report had assumed that Chilli #1 had the goodwill in the trade mark and Mr McMahon had not considered it feasible or practical to attempt separately to value any other items of goodwill.
11Accordingly, the question remained as to whether there was a separate value to the use of or goodwill in the Chilli #1 company name in circumstances where the Chilli trade mark (and goodwill referable specifically to the use of that trade mark) reposed not in Chilli #1 but in Mr Cheal (and later in Cheal Industries). I invited the parties to consider whether agreement could be reached on that issue and as to whether, failing such agreement, whether the parties sought to have that matter referred to expert determination (a course I thought unlikely to warrant the expense involved) or to leave this for the Court to determine (in which case I indicated that I would be unlikely to be in a position to do more than attribute a nominal value thereto). On that occasion I made an order for the payment to Ms Fitzpatrick the amount of $12,265.52, representing a half share of the shareholders' equity as disclosed in the company's accounts at the relevant time.
12The matter came back before me for directions on 14 May 2012 and I was informed that the parties had agreed that the matter should be left for the Court to determine a nominal value to be placed on any goodwill attributable to or associated with the company name.
13I made directions for the service by both parties of written submissions as to how that nominal value should be assessed and it was agreed by the parties that I should proceed to make that assessment on the papers, without the need for further oral argument.
14The issue now before me, therefore, is as to the nominal value to be attributed to the Chilli #1 company name (divorced, in effect, from the Chilli trade mark itself). I had indicated in my principal reasons that it seemed open to infer that the company name must have had some value to Mr Cheal (and, through him, Chilli # 2) since Mr Cheal had taken the steps to transfer that name for the benefit of Chilli #2. (The submission by Ms Francois that the second company could as easily have traded as, say, James Cheal Surfboards, seems to me not to be the point since it clearly did not do so. The decision was made by Mr Cheal or someone on his behalf to take the steps necessary to change the name of Chilli #1 and use that name for the new company.)
15Mr Evans submitted that the value ultimately to be given to the "loss" of the Chilli #1 company name should be assessed by reference to the costs that must have been incurred (or, perhaps more accurately, since there is no evidence that some or all of these costs were in fact incurred, that should be assumed to have been incurred) incurred by the defendants in procuring the transfer of the name of Chill #1 to Chilli #2.
16It is submitted that those costs must have included: the registration fee payable for the change of name of Chilli #1 (currently a fee of $351 payable to ASIC); the amount payable for the registration of Chilli #2 (currently a fee of $426 again payable to ASIC); costs of obtaining advice as to and the implementation of the change of name of Chilli #1 (estimated as being in the order of $200 to $400); and the costs of obtaining and registering the new company that became Chilli #2 (estimated to be in excess of $1,500)).
17Mr Evans submits that other costs would also have been incurred in Mr Cheal obtaining advice as to the steps to be taken to transfer the business of Chilli #1 to Chilli #2, in the circumstances that existed at the time Ms Fitzpatrick had indicated her refusal to transfer her share in Chilli #1 for no consideration, estimated at not less than $2,500).
18Thus it is submitted that the value that should be placed on Ms Fitzpatrick's share in Chilli #1 (over and above half of the net asset value on the books of the company) is not less than $5,000.
19For the defendants, Ms Francois of Counsel has emphasised that there is no evidence before the Court that the company name of Chilli #1 and associated goodwill (assessed on the basis that Chilli #1 did not own the Chilli trade mark as at 30 June 2006) had any value beyond that associated with the trade mark (or that there was a value to any other intangible items owned by Chilli #1). Reference is made to the observation by Mr McMahon (at [2.2] of his report) that (although noting the possibility that a separate estimate could be made as to the value of each identifiable intangible asset which has a separate identity of its own, independent of the business, "as distinct from Goodwill which is regarded as an unidentifiable intangible asset which cannot be separated from the entity") he could see no good reason to seek separately to estimate the value of the brand name from the value of the goodwill for Chilli #1 and that he regarded them as essentially one and the same thing in the present case. Ms Francois noted that, in cross-examination, Mr McMahon, when taken to [2.2] of his report and asked whether the value of the trade mark was essentially the goodwill of Chilli #1 said (at T 41):
A. No, it's a much bigger picture and I feel that it was impossible to separate the value of the trade mark from the value of the commercial goodwill of the business. I couldn't separate them, I had no precise information to do that.
20With respect, what I understood Mr McMahon to be saying was not that it was not possible to attribute a value to goodwill separate from the trade mark, in this or any other case, but simply that in the present case it had not been feasible (or, presumably, necessary, having regard to the assumptions on which his report was based) to so and that he did not have the information to enable him to carry out such an exercise. (I had thought that an intellectual property expert might be in the position to opine as to whether there was generally perceived to be value in a company name in such circumstances. However, Mr Slater was adamant that the appropriate expert would be a valuation expert.)
21I accept that there is equally no information before the Court that would enable the goodwill associated with the company name independently of the Chilli trade mark to be separately valued, in the sense in which an expert forensic accountant valuing such goodwill would carry out such an exercise. That, however, is why I am now called upon to attribute a nominal value thereto (in circumstances where I would infer that the company name must have had some value to the person most likely to wish to acquire it - namely, Mr Cheal). Ms Francois' submissions acknowledge that the only likely buyer of the company name would be Mr Cheal.
22Ms Francois submits that, in circumstances where there was no evidence from Mr Cheal as to what he would have been willing to pay for the company name (had he received advice that it was necessary to do so) and where Mr Cheal's evidence was there was no discussion between him and his accountant as to the acquisition of the company name (a matter that the accountant considered not to be 'essential'), there is no proper basis to give a value beyond the company formation costs of $890 in the 2006 accounts (which it is submitted have in any event already been taken into account in determining the total shareholder equity amount of $24,531.04).
23Ms Francois submits that the adoption of what she has termed a "replacement cost methodology" to determine the value of the company name and associated goodwill is problematic in that it is contrary to the evidence of Mr McMahon as to the value of the "goodwill"; is not based on any evidence that a replacement cost approach is an appropriate valuation methodology to determine the fair market value that would be paid for the company name and associated goodwill in the open market; is not accompanied by evidence before the Court of the alleged replacement costs; and involves a double counting of the historical incorporation costs of Chilli #1, which it is said are encompassed in the amount attributable to shareholders' equity.
24Pausing there, as explained above, I did not understand Mr McMahon to be saying that there was no ability separately to value the goodwill reposing in use of a company name; rather, that he had not done so and had not had the information in order to do so. Similarly, while I accept that what I am now asked to do is without the benefit of expert evidence as to the appropriate valuation methodology, that is a function of the decision by the parties (sensible as I consider it to be and consistent with the objectives in s 56 of the Civil Procedure Act 2005 (NSW)) to leave the question to be determined by the application of a nominal value to such goodwill.
25Finally, it is submitted by Ms Francois that if the value attributable to Ms Fitzpatrick's share in this regard were to be in the order of $5,000 then this means that the total value (including Mr Cheal's share of that item) would be $10,000, a result suggested to be incongruous in a company where the shareholders' equity was $24,531.04 (as it would add over 40% value to shareholders' equity).
26The defendants submit that there is no value to be attributable to this item and that the only proper nominal value that could be attributed to the company name and associated goodwill is an amount of no more than $1,000 (of which a half share is $500).
Reasons
27At the outset, I note that when the court comes to value an oppressed shareholder's interest (when determining the relief to be awarded for oppression) it has been recognised that the aim is to put that shareholder in the position as if there had been no oppression.
28In Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60, von Doussa J (at 102) said:
The court must fix a price that represents a fair value in all the circumstances of the case: Re Bird Precision Bellows Ltd [1984] 2 WLR 869 at 876 Re London School of Electronics Ltd [1985] 3 WLR 474 at 484 Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549 at 562; Re Bagot Well Pastoral Co Pty Ltd; Shannon v Reid (1992) 9 ACSR 129 at 146.
...
To arrive at a fair value to be paid now by valuing the shareholding at some date in the past and by adding to that value an allowance for the fact that the shareholder has been kept out of the enjoyment of that value in the meantime, to borrow the words of Lord Denning, is to give to the oppressed shareholder "what is in effect money compensation for the injury done to [the shareholder]" but I see no objection to this. The section gives a large discretion to the court and it is well exercised in making an oppressor make compensation to those who have suffered at his hands: in Scottish Co-operative Wholesale Society v Meyer at 369.
29In ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1995) 15 ACSR 536, Young J (as his Honour then was) said (at 540):
However in cases dealing with the price at which an oppressor is to purchase the oppressed's shares in a company the word ``fair'' has been given significance. For instance in Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 at 369, Lord Denning said that one of the most useful orders that could be made is to "order the oppressor to buy their shares at a fair price: and a fair price would be, I think, the value which the shares would have had at the date of the petition, if there had been no oppression". The concept of "fair price"' in this sense has been followed subsequently; see for instance Re Associated Tool Industries Ltd (1963) 5 FLR 55 at 70; Re Golden Bread Pty Ltd [1977] Qd R 44 at 55; Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60 at 102 and cases cited by von Doussa J in that case at para 25.5. The flavour of the judgments in the company oppression cases is that in looking to the fair value one must look at all the circumstances of the case and seek to put the oppressed in the same position as nearly as can be as if there had been no oppression, erring, if there is to be any erring, on the side of the oppressed. (my emphasis)
30While the general principle, when determining relief for oppression, was said in Scottish Co-operative Wholesale Society v Meyer [1959] AC 324; [1958] 3 All ER 66, at 86, per Lord Keith to be to determine "what would have been the value of the shares at the commencement of the proceedings had it not been for the effect of the oppressive conduct of which complaint was made", Lord Keith went on to note that:
This is clearly not a matter on which a calculation can be made with mathematical accuracy or by the application of strict accounting principles...
31In that case, Lord Denning, at 89, recognised that a fair price would be the value which the shares would have had at the date of the suit had there had been no oppression.
32The objective of fashioning relief which removes the adverse effects of the oppression has been recognised in Shelton v NRMA [2004] FCA 1393; (2004) 51 ACSR 278, at [26], cited by Bergin J (as her Honour then was) in Backoffice Investments v Campbell [2007] NSWSC 161; (2007) 61 ACSR 144 (2007) 25 ACLC 302, at [93], and reaffirmed in Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95, at [195], [332] (a proposition not questioned in the High Court's decision in this matter, Campbell v Backoffice Investments Pty Ltd [2009] HCA 36, at [178]; (2009) 259 ALR 402; (2009) 83 ALJR 110).
33While Ms Francois emphasised that the exercise was not to award damages for loss, the compensatory nature of the remedy has been noted in Rankine v Rankine (1995) 124 FLR 340 at 345-346 that "by ordering the compulsory purchase of the applicant's shares at a stated price, the court is in effect awarding compensation for the respondents' breach of duty" and the authorities I have referred to above (see Meyer at 369, In Re a Company No 002612 of 1984 (1986) 2 BCC 99 at 495; Coombs v Dynasty at 918).
34In Short v Crawley (No 30) [2007] NSWSC 1322, White J noted at 1237 that when valuing shares for this purpose "The overriding requirement is that the valuation, and the time at which the valuation is to be carried out, be fair" and that fairness depends on the facts of the particular case (citing Re London School of Electronics Ltd [1986] Ch 211 at 224; Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 at 144; Profinance Trust SA v Gladstone [2002] 1 WLR 1024 at 1034).
35I noted in Vadori v AAV Plumbing [2010] NSWSC 274; (2010) 77 ACSR 616 (the facts of which were not dissimilar to those in the present case) that there was some support in the authorities for the approach of valuing an applicant's shares in a company which had lost business opportunities due to breaches by the directors (where this conduct also constituted the oppression) by treating the new company, which took the business opportunity, as if it were a wholly-owned subsidiary of the subject company (Re Bright Pine Mills [1969] VR 1002 at 1013-1014; Dwyer v Lippiatt; Dwyer v Backpackers R Us (2004) 50 ACSR 333, at 355; Drinkwater v Caddyrack Pty Ltd [1997] NSWSC 431). Thus, in Re Bright Pine Mills, at 1013-1014, the Victorian Court of Appeal indicated the possibility that a purchase order might in some way take into account the assets or profits of the company to which the business opportunity had been transferred. In Dwyer v Lippiatt; Dwyer v Backpackers R Us, White J, suggesting how Counsel should agree to the valuation of the oppressed shareholder's share, gave consideration to the adoption of such an approach.
36There is, therefore, room for a different approach to be taken in relation to the valuation of shares (where that would produce a fairer outcome on the facts of the particular case) than the textbook approach to valuation. The question is what is a fair value to be attributed in all the circumstances.
37In the present case, I accept that where there was most value in the goodwill of Chilli #1's business was its ability to use the trade mark that belonged to Mr Cheal (and that, independently of the right to use the trade mark, the company name might have little value). Nevertheless, the fact that Mr Cheal might have chosen to leave Chilli #1 and carry on a competing business without engaging in oppressive conduct or breach of duty owed to Chilli #1 merely highlights the fact that he presumably considered it in his interests not to do so. The impression I gained from the evidence at the hearing was that Mr Cheal had chosen to follow the course that he did (in circumstances where Ms Fitzpatrick had already refused a request to transfer her share to him) was that he had sought to avoid the process by which a resolution of the value attached to Ms Fitzpatrick's shareholding (if any) might be determined by simply setting up another company and changing corporate entities.
38There was presumably some perceived value in the use of the Chilli #1 name (even if Mr Cheal's accountant dismissed it as non-essential) since otherwise there is no reason for Mr Cheal to have undertaken the steps he did to change the name.
39In those circumstances it seems to me that a fair price for Ms Fitzpatrick's share requires some recognition to be given to the fact that, by appropriating the company name in that fashion, Mr Cheal avoided the premium that Ms Fitzpatrick might well have demanded had her consent to its use been requested.
40While I accept that the replacement cost methodology (as so described by Ms Francois) may not be the conventional approach, it at least recognises that there would presumably have been costs savings to Mr Cheal had he not acted as he did (by moving to establish a new corporate entity and to appropriate the company name). (Ms Francois points to the fact that there is no amount attributed in Chilli #2's accounts to its formation or establishment costs and no evidence from Mr Cheal or his accountant as to the costs of any implementation or other advice in relation to the establishment of Chilli #2. If, by this, it is submitted that there would have been no costs savings had Mr Cheal not moved to carry on business through a new company, I do not know that I can make such an assumption without knowing the basis on which the decision was made to account for incorporation costs in Chilli #2.) However, the relevant oppressive conduct for the purposes of the present exercise was the appropriation of the company name, not the incorporation per se of Chilli #2.
41Perhaps more to the point is that it cannot be assumed that, had Mr Cheal sought Ms Fitzpatrick's consent to the use of the Chilli #1 company name, she would not have been in a position to place a price on that consent. It surely would have been open to Chilli #1 to seek to restrain a competitor company from using its name. Chilli #1's right to do so is what, in effect, it (or Ms Fitzpatrick) would have been asked to relinquish. It does not seem to me to the point that there is no evidence that she would have done so (or that, had she done so, Mr Cheal might then have chosen not to use the Chilli #1 name), in circumstances where Mr Cheal's conduct deprived her of an opportunity to do so.
42In other words, the reason that a nominal value is now to be ascribed to Ms Fitzpatrick's share in this regard is because Mr Cheal acted wrongfully to deprive Chilli #1 of the ability to derive some value from the use of its company name.
43While it is submitted that attributing a figure of $5,000 to Ms Fitzpatrick's half share in the company (in addition to her half share of the net operating assets) effectively results in a 40% loading to the overall shareholders' value, it must be remembered that the figures in question are relatively low and, in determining a fair price for her share in all the circumstances, I consider that Ms Fitzpatrick should be given the benefit of the assumption that at least a small payment or premium could reasonably have been charged for the loss of the benefit of the Chilli #1 company name, particularly when it was submitted in the course of the hearing that the business of Chilli #1 had not been destroyed and had been able to continue in relation to the use of machinery at the premises (hence there may have been some residual value to Chilli #1 in the retention of its hitherto recognised company name).
44I note that the court, in determining a fair price in these circumstances is permitted to err on the side of the oppressed party (ES Gordon) and that the exercise of determining a nominal sum (albeit in a different context) was described by Rothman J in Ahmadi v Fairfax Media Publications Pty Ltd [2010] NSWSC 702 as being largely intuitive. (Similarly, though again I emphasise that this was in a different context, it has been recognised that there are circumstances where the assessment of damages may, of necessity, involve what is "guess work rather than estimation" per Toohey J in Commonwealth of Australia v Amann Aviation Pty Limited (1991) 174 CLR 64 at 138; quoting Menzies J in Jones v Schiffmann (1971) 124 CLR 303 at 308.)
45It seems to me that the amount sought by Mr Evans by way of a nominal value for the goodwill attributable to use of the company name is not unreasonable in quantum. However, insofar as the value were to be assessed on a replacement cost approach, I am not persuaded that the costs savings to Mr Cheal (or Chilli #2) had Mr Cheal not taken this course would have necessarily amounted to the estimated $5,000 (since even if there had been consent to the change of name, the costs of establishment of the new company, whatever they were, would have been borne); what would not have been borne by Chilli #1, presumably, would have been the costs to it of registration of the change of name (on the assumption that these would have been assumed by Chilli #2 as part of any agreement for the change of name).
46On the basis that Chilli #1 would have been in a position to restrain the use of its name by another company, and hence would have had a basis on which to place a price on its consent to a change of name, I consider that a reasonable (admittedly nominal) value to be placed on that in the circumstances would be $3,500, plus the costs involved in the registration of the change from Chilli #1's perspective ($351), and that, since it was Mr Cheal who wrongfully deprived Chilli #1 of the opportunity to obtain payment for the use of its name, this sum should be attributed to Ms Fitzpatrick's share in the company. Hence, I consider the nominal value to be attributed to this aspect of the company's goodwill should be $4,000 (being $3,851 rounded up).
47Accordingly, I will award Ms Fitzpatrick an additional sum of $4,000 in effect as the premium payable for use of the Chilli #1 name. I will list the matter for argument on costs in light of this finding, which should then dispose of the proceedings before me.
Orders
48For the reasons above, I make the following orders:
(1)The first defendant pay to the first plaintiff, in addition to the amount payable pursuant to order 1 of the orders made on 5 April 2012, the sum of $4,000 within 28 days (subject to any set-off that the defendants may seek in respect of any costs orders that may be made in their favour in due course).
(2)Stand the matter over for submissions on costs to 14 June 2012 at 9am before me.