In the matter of ICB Medical Distributors Pty Ltd and The International College of Biomechanics Pty Ltd; ICB Gait and Posture Clinic Pty Ltd; Foot Steps Orthotics Pty Limited [2018] NSWSC 1415
On 29 August 2018, I delivered judgment ([2018] NSWSC 1315) ("Judgment") in respect of an application brought by Dr Najjarine for an order for winding up ICB Medical Distributors Pty Ltd ("ICB Medical") and several other companies within the ICB group of companies (together, "ICB Companies"). I also determined Mr Kielt's Cross-Claim, by which he sought an order that he buy out Dr Najjarine's shares in ICB Medical.
I held that a winding up order should not be made. I noted that, although Dr Najjarine's Second Amended Statement of Claim had sought an order that he purchase all of the shares of the other shareholder in those companies, Mr Kielt, he had placed primary emphasis in seeking a winding up order at the hearing and had made no submissions of substance in support of an order that he buy out Mr Kielt's shares. I also observed (at Judgment [222]-[223]) that, where a winding up order was not made, several factors supported an order that Mr Kielt should buy Dr Najjarine's shares, rather than the reverse, where I had found oppressive conduct by both Mr Kielt and Dr Najjarine.
I held that orders should be made, as Mr Kielt proposed, that he purchase Dr Najjarine's shares in the ICB Companies at the date of judgment, with the price to be calculated on a basis that made adjustments for several transactions that I had addressed in the Judgment. I observed (at Judgment [221]) that:
"It seems to me that an order for Mr Kielt to buy out Dr Najjarine's shares in ICB Medical and the other companies in the ICB Group on that basis will sufficiently address the oppressive conduct that has been established without the adverse impacts on third parties, including employees, arising from a winding up, and without allowing Dr Najjarine to use a winding up order to advance his and his associated entities' adverse interests as trade competitors of ICB Medical. In principle, a valuation could be undertaken of Dr Najjarine's equity in the companies in the ICB Group, by reference to future cashflow, excluding the liabilities to which I have referred above, and having regard to income tax that would properly be payable on those future earnings. The financial adjustments that would be required to bring about a purchase of Dr Najjarine's shares at fair value, by excluding debt that I have held was not properly recorded as owed to Mr Kielt, his associated companies and members of his family, are relatively straightforward and Mr Kielt has proposed orders that would largely bring them about. There is no reason to think that those adjustments would not address all relevant matters, given the detail of the exploration of ICB Medical's financial affairs in these proceedings. Where an order of that kind can appropriately address the oppression, a winding up order should not be made."
I also noted (at Judgment [224]) that:
"While I will make an order that Mr Kielt buy out, and Dr Najjarine sell, Dr Najjarine's shares in the companies in the ICB Group, I will not order the appointment of a single expert to value those shares as Dr Najjarine proposed. It seems to me that there is little or no prospect that the parties would agree common assumptions for such an expert, and the appointment of such an expert would be the precursor to a range of further disputes as to his or her instructions. I will instead make orders for each party to serve their respective expert evidence, based on assumptions they agree or otherwise adopt at their own risk, in respect of the valuation of those shares. There will then need to be a further hearing to determine the value of Dr Najjarine's shares, if the parties cannot agree that matter so as to avoid the costs of that further hearing. I should add, for completeness, that I do not consider it necessary to make orders in respect of amounts that would be credited to directors' loans accounts, as proposed by Mr Kielt, if Dr Najjarine does not consent to them, even to the extent that they would be in his favour."
I directed the parties to bring in agreed Short Minutes of Order to give effect to the Judgment within 14 days or, if there was no agreement, their respective draft Short Minutes of Order and submissions as to any differences between them.
[3]
Corrections to the Judgment under the slip rule
Dr Najjarine identifies three corrections which he submits should be made to the Judgment under the "slip rule". The first of those corrections may be straightforward. The second and third relate to corrections of monetary amounts set out in paragraph 220 of the Judgment, one of which may involve an incorrect figure and the other a double counting of part of an amount. I will direct Mr Kielt to advise, within seven days, whether he accepts that those corrections should be made.
[4]
Orders as to valuation process
The first order proposed by Mr Kielt provides that he buy Dr Najjarine's shares in the ICB Companies at the value determined by the Court in accordance with a specified process, or at a value otherwise mutually agreed by the parties. The order proposed by Mr Kielt is broadly consistent with the result that I reached in the Judgment. However, that order should not be made until the valuation process has been completed, when it can specify the amount for which the buy-out should proceed. On the other hand, Dr Najjarine proposes that the Court should make an order that Mr Kielt buy Dr Najjarine's shares at "Fair Value" and a further order defining that concept. Mr Kielt responds that an order should not be made in this form and the assumptions relied upon in the parties' experts reports can be either agreed between them or adopted at their respective risk. I am not persuaded that an order defining that concept should be made as proposed by Dr Najjarine, for the reasons set out below.
Dr Najjarine's proposed orders define "Fair Value" as 50% of the market value of all the issued shares in the ICB Companies, as determined on the basis of several adjustments. Dr Najjarine submits that the orders should provide for the value of the shares to be determined at "fair value" rather than "market value". That seems to me to be a matter for evidence or submissions at a hearing on the merits rather than a matter that should be determined in advance of it. Dr Najjarine also proposes that all of the issued shares in the ICB Companies are to be valued as a single parcel of shares capable of being bought and sold together but not separately, and submits that "fairness requires" that the ICB Companies be valued as a group rather than individually. It seems to me that that is also likely to be a matter of expert evidence, rather than of any broad concept of fairness, and should be determined at a hearing on the merits and not predetermined in advance.
The second adjustment proposed by Dr Najjarine is to provide for a valuation on the basis that certain entries to which I referred in the Judgment had not been made and that certain amounts had not been credited to Mr Kielt's loan accounts and had instead been credited to the retained profits account in ICB Medical's accounting records for the year ended 30 June 2011. It seems to me that the adjustments that are to be made in determining the value of the shares in the ICB Companies are clear from the Judgment and the parties can be left to reflect them in the assumptions provided to their respective valuation experts, no doubt recognising that any expert report that does not make the specified adjustments would likely not advance the relevant party's valuation case. The consequences of those adjustments for the value of the shares in the ICB Companies are in turn a matter for expert evidence.
The third adjustment proposed by Dr Najjarine is to exclude any value attributable to recoverable claims by the ICB Companies against Dr Najjarine or associated entities arising out of matters pleaded by Mr Kielt in his Cross-Claim. Dr Najjarine submitted that Mr Kielt had agreed not to seek compensation for any diversion of business or other breach of duty by Dr Najjarine, and Dr Najjarine refers to paragraph 223 of the Judgment in that respect. That submission may misstate that paragraph, which observed only that:
"Mr Kielt does not seek compensation, in any buy-out order, for any diversion of business to AOL or Crown Orthotics or other breach of duty by Dr Najjarine." [emphasis added]
I did not understand Mr Kielt to have made any concession at the hearing as to what steps the ICB Companies may later take in respect of any claims against Dr Najjarine, if they come under Mr Kielt's control. It is not apparent why Mr Kielt would have any particular interest in seeking to have an allowance made for claims that the ICB Companies may have against Dr Najjarine, where that would potentially increase the amount that he would be required to pay to buy-out Dr Najjarine's shares in the ICB Companies. Any such adjustment may or may not raise difficulties of proof of the amount of such recoveries and may otherwise be a matter for expert evidence. It seems to me that the Court should not now predetermine the question whether such an adjustment should or should not be made, rather than determining that question when any such evidence is led and it has heard submissions on the merits.
The fourth adjustment proposed by Dr Najjarine is to exclude amounts that the ICB Companies may be required to pay to the Australian Taxation Office as a result of any incorrect income tax returns, research and development tax incentive applications or incorrect export market development grant applications lodged by them. Dr Najjarine supports the exclusion of any adjustment in respect of tax returns, research and development tax incentive applications and export market development grant applications on the basis that:
"It is possible - indeed likely - that there will be adverse consequences for ICB Medical from actions likely to be taken by the authorities as a result of the inclusion in the company's accounts - which formed the basis for its tax returns, R[esearch] & D[evelopment] tax incentive applications and export market development grant applications - of expenses that the Court has found ought not to have been included."
Dr Najjarine submits that the exclusion is necessary to ensure that any such adverse consequences are borne by Mr Kielt whose misconduct, Dr Najjarine submits, will have caused them. The merit of such an exclusion is not self-evident where Dr Najjarine was a director of ICB Medical throughout the relevant period. Again, it seems to me that the Court should not now pre-determine whether or not such an adjustment should be made, but address that question when any relevant evidence is led and it has heard submissions as to that matter on the merits.
Mr Kielt proposes that the parties should serve any expert reports on which they intend to rely within four weeks, by 12 October 2018, such reports to include any assumptions relied upon, and reply reports by 19 October 2018. Mr Kielt submits that four weeks is sufficient for the initial exchange of valuation reports and refers to the relatively modest nature of the ICB Companies and the extent of the forensic examination of their financial records already conducted in the proceedings. Mr Kielt notes that he has engaged an accountant to conduct a valuation and that accountant has indicated that a four week timetable would be adequate. On the other hand, Dr Najjarine's proposed orders provide that he should lead expert valuation evidence first within six weeks, by 30 November 2018, and that Mr Kielt should then serve any expert valuation evidence within a further four weeks, by 31 December 2018, with Dr Najjarine to serve any valuation evidence and other evidence in reply by 31 January 2019. Mr Kielt takes issue with the extended timetable proposed by Dr Najjarine for leading such evidence.
In support of his proposed timetable, Dr Najjarine points to the fact that financial statements and tax returns for the ICB Companies for several years have not been finalised or lodged and points to possible difficulties with other financial records and submits that:
"Dr Najjarine's expert will have to prepare financial accounts (not on behalf of the Companies but for his own use) and calculate tax liabilities for the years ended 30 June 2015, 2016, 2017 and 2018. That will obviously take some time to do and will necessitate a detailed inspection and consideration of the company's records for the last four years."
Whether the preparation of such accounts is required may depend upon the valuation approach adopted by an expert retained by Dr Najjarine, since it is not apparent that that would be required to undertake a cashflow valuation of the shares in the ICB Companies. If that is required, I am not persuaded that it would take a substantial time, where Dr Najjarine had retained a forensic accounting expert and obtained her report prior to the commencement of the proceedings, evidence from that expert had been served although it was not read or tendered at the hearing, and the issues as to the ICB Companies' accounts were explored at considerable length at the hearing.
Dr Najjarine also submits that it is likely that that his valuation expert will be required to travel to the United Kingdom and China in order to inspect the premises, plant, equipment and stock located in ICB Companies in those jurisdictions. There may be a question whether evidence of an expert with Australian valuation experience (as distinct from an expert with Chinese or English experience) would be admissible in respect of the value of premises, plant, equipment and stock situated in China and in the United Kingdom, quite apart from the question whether the costs of such travel would be proportionate to the amounts in issue in these proceedings. I give little weight to that matter in determining the time required to lead expert evidence. I am not persuaded that Dr Najjarine should be allowed to 30 November 2018 to provide valuation related evidence, or that it is preferable that Dr Najjarine lead his evidence first, when Mr Kielt is the proponent of a buy-out of Dr Najjarine's shares in the ICB Companies.
Mr Kielt submits that a "staggered" approach to the parties' valuation reports is not necessary and would unduly delay the resolution of the proceedings. In his submissions, which were not consistent with his proposed orders, Dr Najjarine accepted a process for exchange of such reports, although adding the observation that he did so because Mr Kielt "does not seem to want to examine [Dr Najjarine's] evidence before he serves his own evidence." He then submitted, without further explanation, that the time allowed for expert evidence, if both parties serve their respective evidence by the same date, should be 31 December 2018, which is six weeks longer than Mr Kielt sought to lead his evidence in chief and four weeks longer than Dr Najjarine sought to lead his evidence in chief.
I am not persuaded that a process for exchange of expert reports, rather than a staged process, is appropriate. The former course has a real risk that the expert reports would be at cross-purposes, if each expert values the companies on different assumptions and adopts different methodologies, without knowing the assumptions and methodology adopted by the other expert. That risk will be reduced if Mr Kielt serves his lay and expert valuation evidence before Dr Najjarine does so, and that course will also largely accommodate Dr Najjarine's wish for extra time to serve his evidence. The orders for filing of expert evidence should also require that any lay evidence that is to be led to prove assumptions made by the experts be filed at the same time as the expert reports. In accordance with a common practice in this list, the parties should not be permitted to rely on expert or lay evidence as to valuation filed after that date without leave.
I will therefore make an order that Mr Kielt file and serve all expert and lay evidence on which he relies as to the valuation of shares in the ICB Companies and as to the orders to be made in these proceedings within four weeks, by 4pm on 11 October 2018, no further evidence to be relied on if served after that date without leave. I will make a further order that Dr Najjarine file and serve all expert and lay evidence on which he relies as to the valuation of shares in the ICB Companies and as to the orders to be made in these proceedings within a further five weeks, by 4pm on 15 November 2018, no further evidence to be relied on if served after that date without leave. That will allow Dr Najjarine some thirteen weeks from the date of Judgment, and nine weeks from the date of these orders, to prepare that evidence. That period seems to me to be sufficient, given the detail with which the ICB Companies' financial position was reviewed in the earlier hearing and the fact that Dr Najjarine had served expert forensic accounting evidence for the purposes of the primary hearing, although he did not rely on it at that hearing. I will make an order for Mr Kielt to serve any expert evidence and lay evidence in reply by 4pm on 28 November 2018, which is longer than the period which he proposed for service of such evidence.
Dr Najjarine proposed that the Court direct Mr Kielt to provide Dr Najjarine and his accounting and legal advisers "at such times and to such extent as they may reasonably require" copies of the records of the ICB Companies and access to the records, staff and premises of those companies, upon an undertaking that the records and information so obtained would not be used other than for the purpose of the preparation of Dr Najjarine's evidence and the purpose of the conduct of the proceedings. Mr Kielt does not oppose this order but submits that it is unnecessary, where Dr Najjarine remains a director of the ICB Companies and has, Mr Kielt contends, been provided access to all company records relating to those companies and its subsidiaries.
It does not seem to me that this order should be made. In principle, there is no reason that one of the two directors of ICB Medical should be required to take responsibility for providing to the other and his advisers the documents that are relevant to the proceedings, where both directors together, acting as a board, have control of those documents. Both directors can, of course, readily pass a resolution authorising the companies to provide such documents to them and their respective advisers. Second, in practice, it is not apparent why Mr Kielt, rather than Mr Kielt and Dr Najjarine jointly, should be required to bear the costs of provision of such documents. Third, the form of the proposed order excludes the Court's role in ensuring that disclosure does not extend beyond what is appropriately required for the determination of proceedings, recognised in Supreme Court Equity Practice Note 11, and raises a significant risk of further collateral disputes as to whether documents sought by Dr Najjarine and his accounting or legal advisers are or are not "reasonably required".
I will list the matter for directions on 16 November 2018, after Dr Najjarine's evidence is due to be served, and before Mr Kielt's evidence in reply is due to be served, to confirm compliance with these directions, and I will tentatively list the hearing to determine the valuation of those shares to commence on 6 December 2018 and continue, if necessary, into the last week of term. The parties may advise my Associate, within 7 days, if these dates cause any substantial difficulty for Counsel.
[5]
Costs
I had expressed a preliminary view as to costs in paragraphs 225-226 of the Judgment, where I observed that:
"In the result, Dr Najjarine has not been successful in obtaining the relief that he sought, namely a winding up order of the relevant companies. Dr Najjarine has failed in several of the matters alleged against Mr Kielt, and in significant aspects of his defence of the Cross-Claim, which together took up a substantial portion of the hearing time. Mr Kielt has succeeded in defending Dr Najjarine's winding up application, but only by reason of a position first advanced on the last day of a lengthy hearing. Had he not advanced that position, the companies in the ICB Group would have been wound up by reason of his and Dr Najjarine's conduct, because a buy-out order that did not exclude the debts improperly created in favour of Mr Kielt, his family members and his companies would not have done justice to Dr Najjarine.
I had, in the course of the hearing, drawn the parties' attention on several occasions to the fact that the conduct of the hearing, by both of them, might raise the possibility that no order as to costs would be made in favour of a successful party. In the result, Dr Najjarine has not achieved the result he sought, and Mr Kielt has only succeeded in achieving a much less favourable buy-out order than he originally sought by reason of a last minute change of position. It seems to me that the proper course will be to make no order as to the costs of the proceedings and leave each party to bear his own costs. I will, however, allow the parties a brief opportunity to be heard in that respect.
Both Dr Najjarine and Mr Kielt made submissions as to costs. Dr Najjarine submits that an order should be made that Mr Kielt pay 40% of his costs of the proceedings to date, on the basis that a significant amount of hearing time was taken up on accounting issues as to which findings were made in Dr Najjarine's favour, although (I interpolate) he had not obtained the relief he had sought and Mr Kielt had succeeded in his Cross-Claim against him. Mr Kielt supported the preliminary view expressed in the Judgment. It seems to me that an order as to costs should be deferred until the Court has determined the valuation stage of the proceedings, since the parties' conduct of that aspect of the proceedings and the outcome of that aspect of the proceedings may well be relevant to the question of the costs to be awarded in respect of the earlier part of the proceedings. In those circumstances, it is neither necessary or appropriate that I should address the parties' further submissions as to costs at this point. I do note, in fairness, that the parties may be well advised to have regard to the prospect that there will be no order as to costs of the earlier part of the proceedings, or the whole of the proceedings, in reaching decisions as to the extent to which they incur further costs in respect of the remaining aspects of the proceedings.
[6]
Orders
Accordingly, I make the following orders:
By 4pm on 19 September 2018, the Plaintiff and the Defendant each provide, or they together provide, a copy of the Court's judgment dated 29 August 2018 to the Australian Taxation Office.
By 4pm on 19 September 2018, the Defendant advise the Plaintiff and the Associate to Black J whether he accepts the proposed "slip rule corrections" to the Judgment set out in paragraph 1 of the Plaintiffs' submissions dated 12 September 2018.
By 4pm on 11 October 2018, the Defendant file and serve all expert and lay evidence on which he relies as to the valuation of shares in the ICB Companies, no further evidence to be relied on if served after that date without leave.
By 4pm on 15 November 2018, the Plaintiff file and serve all expert and lay evidence on which he relies as to the valuation of shares in the ICB Companies, no further evidence to be relied on if served after that date without leave.
By 4pm on 28 November 2018, the Defendant file and serve any expert evidence and lay evidence in reply, no further evidence to be relied on if served after that date without leave.
List the matter for directions at 9.15am on 16 November 2018 before Black J.
Tentatively list the hearing to determine the valuation of the shares in the ICB Companies to commence at 10am on 6 December 2018 and continue, if necessary, into the last week of term.
By 4pm on 20 September 2018, the parties to advise the Associate to Black J whether the hearing dates specified in order 7 cause any substantial difficulty for Counsel.
There be liberty to apply on 3 business days' notice specifying the relief sought.
[7]
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Decision last updated: 21 September 2018