Julie Dawn Rhodes v Christine Elizabeth Fletcher & Quasar Professionals ACT Pty Ltd

The Nature of the Reference 6 Although the Orders do not expressly refer to any of the Supreme Court Rules (the Rules), the first defendant submitted that from a reasonable reading of the Orders it is apparent that a reference under Part 72 of the Rules was contemplated. It is submitted that this is particularly obvious from the use of the words "reference" and "referred" in Order 3 and the description of Mr Hollands as "referee" in paragraph 10 of the Orders. It is submitted that the Orders follow the essential provisions of Part 72, including defining the nature of the question referred and the basis of Mr Holland's remuneration. 7 The first defendant submitted that if the Court was not of the view that Mr Hollands was a referee within the meaning of Part 72, the only meaningful alternative is that Mr Hollands is a Court Expert appointed pursuant to Part 39 of the Rules. It was submitted that the Court has powers under Part 39 Rule 2 to refer matters back to Mr Hollands on the same basis that a matter may be referred back to a referee. However the first defendant submitted that if Mr Hollands is to be treated as a Court Appointed Expert, the defendant could apply under Part 39 Rule 4 to cross examine him, and under Part 39 Rule 6 the parties could seek to call further evidence. It was submitted that either course seems contrary to the intention of the Orders and that Part 72 is the Part into which this "reference" fits. 8 The plaintiff submitted that the Orders did not include a reference under Part 72 or an appointment pursuant to Part 39. It was submitted that the parties had reached agreement as to how the valuation of the shares would be concluded and in particular the parties agreed pursuant to Order 8 that the valuation would be "conclusive and binding". Mr Cotman SC highlighted the difference in the process contemplated by the Orders and the process contemplated pursuant Part 72 Rule 13. 9 Rule 13 provides for a process whereby the Court may adopt, vary or reject the report in whole or in part; require an explanation by way of report from the referee; on any ground remit for further consideration by the referee the whole or any part of the matter referred for further report; decide any matter on the evidence taken before the referee with or without additional evidence; and then give judgment or make such order as it thinks fit. 10 Mr Cotman SC submitted it was never contemplated by the parties that anything further was to happen in respect of the valuation other than the first or second defendant purchasing the plaintiff's share on the basis of Mr Hollands' "conclusive and binding" valuation. 11 Mr Harper submitted that whether Mr Hollands' role fell within Part 72 or Part 39 of the Rules, or neither of those Parts, it was governed by the rules of natural justice. On this premise Mr Harper submitted that such a duty required Mr Hollands to be impartial and to be seen to be impartial: Xuereb & Anor v Viola & Ors (1989) 18 NSWLR 453. In that case Cole J said at 649: Another aspect of natural justice is that the referee must be actually impartial, and must be perceived by a disinterested bystander to be so. Accordingly he must not hear evidence or receive representations from one side behind the back of or in the absence of the other. 12 In Ceccattini v ICM 2000 Pty Ltd [1999] NSWSC 1196 (8 December 1999) Santow J said at paragraph 12: A fair minded person has been described in different ways for example, the reasonable person ( Vakauta v Kelly (1989) 167 CLR 568); the reasonably minded observer ( Goktas v GIO (1993) 31 NSWLR 684); an objective and reasonable person ( Raybos Australia Pty Ltd v Tectran Corporation Pty Ltd (1986) 6 NSWLR 272 at 275). Thus Deane J in Webb Webb v The Queen (1994) 181 CLR 41. at 67 quoting Livesy v NSW Bar Association (1983) 151 CLR 288 at 293 said that the test is: Whether, in all the circumstances, a fair minded lay observer with knowledge of the material objective facts might entertain a reasonable apprehension that [the Judge] might not bring an impartial and unprejudiced mind to the resolution of the question in issue. 13 In Telecomputing PCS Pty Ltd & Ors v Bridge Wholesale Acceptance Corporation (Aust) Ltd (1991) 24 NSWLR 513 Rogers CJ Comm D described the notion of natural justice as it applies to referees in the following terms at 523: It is established, by judgments by each of the judges of the Commercial Division, that referees are required to afford parties natural justice. What natural justice may require in a given case may vary substantially. There is no better guide to what natural justice may require in a given case than the test of fairness. Fairness demands that each party be afforded a proper opportunity of putting before the referee particulars of the contentions relied upon and an opportunity to comment not just on the information adduced by the other side, but also any information on contentious matters which may have been gathered by the referee. Further it means that a referee should not form a concluded opinion or close his or her mind to the contentions of the parties before all the evidence is in.

He then referred to relevant considerations in choosing the rate as follows: · the current rates of return for investment in the investment area generally; · the current rates of return for investments generally applicable for similar businesses; · the adjustment of the current rates for risk factors such as the capacity of the business to continue the stream of income; · the adjustment of current rates for risk factors in the business context generally compared to bank interest in a relatively risk free environment; and · market information about what independent parties might be offering for similar businesses. 34 In respect of this last mentioned matter Mr Hollands said: In this context we are advised that discussions have taken place with listed companies operating in this area with the objective of selling businesses at a price/earnings ratio (or capitalisation rate) of 6 times after tax earnings. There were some conditions attached to this arrangement including continuation of certain key personnel. Without those conditions a multiple of 4 times after tax earnings was achievable. A price/earnings multiple of 4 translates into a capitalisation rate of 25%. In comparison to a relatively risk free bank investment of say, 5% and bonds at the rate of 8%-9%. In contemplating this issue it was suggested that in view of the fact that staff do not have restraint of trade conditions imposed on them, that Quasar is a smaller operator in this market and that the work (and thus profits) are contract driven, that there is little or no goodwill which would lead to a low price earnings multiple. 35 Mr Hollands noted that the ultimate measure of the value of the business will be the profits that are generated from the funds employed and expressed the view that in the second defendant's case there were significant profits that had been generated and were continuing to be generated. He reached this conclusion "regardless of the impediments that have been argued mitigate against any goodwill value". 36 Having referred to his view that market conditions would prevail in concluding the issue Mr Hollands expressed the opinion that a capitalisation rate of 25% (or price/earnings multiple of 4) was an appropriate factor to apply to the FME of the second defendant. This resulted in applying the capitalisation rate to the FME ($115,501) which resulted in a total valuation of the company of $462,004. That figure was applied to the net tangible assets of the company as at 1 October 1998 and an imputed goodwill figure was calculated at $225,494. 37 Mr Hollands valued the plaintiff's share at 50% of $462,004 resulting in the value of $231,002 as at 1 October 1998. He concluded the capitalisation rate section of his Report by saying "in addition to her interest as a shareholder, the company owes Ms Rhodes a loan account of $75,589 which should be repaid in full". 38 The final portion of the Report, is headed "Reservations" one of which was expressed as follows: The conclusions contained in the valuation and the report are subject to review upon presentation of data which is either undisclosed or not available as at the date of this report. 39 It is apparent from the Report that Mr Hollands was provided with the following: · information that Hilton Fletcher was the spouse of the first defendant; · information about the engagement of a manager which he described as "arm's length"; · information from an unidentified source about discussions by some unidentified person or persons with unidentified listed companies operating either in the same geographical area as the second defendant or in the same industry as the second defendant; · information about conditions in a particular unidentified arrangement disclosed by the unidentified person who provided the information about discussions with the unidentified listed companies; 40 The first defendant submitted that the receipt and use of this information by Mr Hollands without giving the first defendant the opportunity to comment upon it and/or make submissions about it was unfair and amounted to a breach of the rules of natural justice. 41 The first defendant submitted that had the opportunity been afforded submissions and/or information would have been provided to Mr Hollands to correct a number of erroneous conclusions which he appeared to have reached on this information. 42 The alleged erroneous conclusions included: · that Hilton Fletcher was living with the first defendant as her spouse when the true position was that Hilton Fletcher and the first defendant were estranged; · that the second defendant's payment to Hilton Fletcher was paid in accordance with what was described as "a common occurrence of privately owned businesses". The first defendant claimed the position was quite different; · that the discussions with the listed company was market information about "a similar business" when the true position was that if, as the first defendant apprehended, the listed company referred to was Unisys People, the business was not at all similar to that of the second defendant. 43 The first defendant's evidence was that the salary scheme for Hilton Fletcher was instituted by the plaintiff and all wages paid to Hilton Fletcher were paid under that scheme. The first defendant said that Mr Fletcher's high salary in the 1998 financial year resulted from commission earned on sales. The first defendant stated that Mr Fletcher was very good at selling and was compensated at 50% of his gross margin. That scheme was the subject of a Management Committee meeting held in February 1998 and a new commission policy was recommended. 44 The first defendant submitted that had the opportunity been provided such information could have been given to Mr Hollands together with the correct information that the first defendant and Mr Fletcher were estranged. 45 Mr Hollands proceeded to normalise Mr Fletcher's salary in the valuation process on the basis that it may have been considered by some in the market place to be excessive. A reasonable reading of the report is that this approach was integrally connected to Mr Hollands' statements about Mr Fletcher's status as the spouse of the first defendant, the reference to the "common occurrence in private companies" giving rise to that level of payment and the reference to the "arm's length" arrangement with the manager employed during part of the period. 46 It may be that if the first defendant had been able to place before Mr Hollands the above information about Mr Fletcher's salary, Mr Hollands would still have proceeded to normalise Mr Fletcher's salary. However that is not the test in this case. 47 Although the first defendant does not know, and the Court does not know, what Mr Hollands was referring to when he reported that he had been advised of the discussions with the listed companies, the first defendant, has for the purposes of this application, assumed that the reference is to the sale by Unisys People to Candle Australia. 48 The first defendant distinguished the second defendant's business from that of Unisys People. The latter was a national IT recruitment company with a large number of staff and contractors. Additionally it had a secured major customer, Unisys Australia. As part of the sale, Unisys Australia apparently entered into an exclusive arrangement whereby Candle Australia would be their guaranteed supplier. 49 In contrast, the first defendant claimed that the second defendant is not a national business, has no guaranteed customers and no guarantee of goodwill or future earnings, no restraint of trade covenants and no obligation to provide continued assistance after the sale. 50 In cross examination of both the first defendant and Mr Irving, the accountant for the second defendant, Mr Cotman SC demonstrated very effectively that if certain of the information that the first defendant wished to have placed before Mr Hollands, was placed before him, there may be no difference in the valuation. 51 The first defendant submitted that the statement by Mr Hollands that the loan account to Ms Rhodes "should be repaid in full" demonstrated a lack of impartiality. Mr Harper submitted that such a statement would give any reasonable, objective observer the impression that Mr Hollands may well be taking the partisan position favourable to the plaintiff. 52 The first defendant's evidence in relation to this debt (Tr. 30 - 35) demonstrated that the first defendant was offended by the statement that the debt should be repaid in full. There is no doubt that disputation had arisen between the first defendant and the plaintiff over the debt in the past. There is equally no doubt that the liability was contained in the second defendant's accounts provided to Mr Hollands, without disclosing to Mr Hollands that the first defendant was of the view that, although the debt was contained in the accounts, there was an issue between the first defendant and the plaintiff as to whether the debt was payable. 53 It seems to me that a reasonable, objective observer would not take the view that such a reference is evidence of partisan attachment to the plaintiff or a lack of impartiality. 54 As Rogers CJ Comm D said in Telecomputing "what natural justice may require in a given case may vary substantially". Mr Cotman SC submitted that the first defendant must have known that Mr Hollands was meeting with parties without the other being present because the first defendant met with Mr Hollands in the absence of the plaintiff. However that does not mean that natural justice would dictate that Mr Hollands could keep from the other party, not present at the meeting, relevant information that he received in the absence of that party that he was going to use in his valuation process. 55 Mr Hollands highlighted the fact that the choice of the capitalisation rate "often gives rise for concern". Indeed that is exactly what has happened in this case. This is not a case where there is concern simply about the choice of the rate. It is the process of obtaining information and being given advice about matters, including discussions with third parties, and utilising that information in the Report without providing the first defendant with an opportunity to comment upon it that gives rise to the concern. 56 Natural justice issues aside, the evidence establishes that Mr Hollands' valuation process was competent. However in this application it is not an answer to submit that the analysis was competent and careful. 57 In relation to the advice about the listed companies received by Mr Hollands, the first defendant simply does not know with certainty what the arrangement was, with whom the arrangement was made, which listed company was the subject of the discussions and who provided the detail to Mr Hollands. It was obviously important enough for Mr Hollands to include it in his Report and to subject it to analysis. It was therefore important for the first defendant to know about it and to be given the opportunity to comment upon it. 58 I am also of the view that Mr Hollands should have given the first defendant an opportunity to comment upon the salary issue relating to Mr Fletcher. 59 These matters and others were raised with Mr Hollands in a letter of 7 June 2000 from the defendants' solicitors. That letter noted the reservation expressed in the Report and suggested that Mr Hollands did not appear to have had access to further information which was raised by the first defendant. The letter requested Mr Hollands to withdraw his current valuation and reconsider the matter having regard to the matters raised in the letter of 7 June 2000. 60 Apparently Mr Hollands was away from his office between 7 June 2000 and 13 July 2000. On that day he responded to the defendants' solicitors refuting the observations made in the communication and suggesting that on calm reflection the defendants would reach a "different conclusion". 61 Mr Hollands did not specifically address the request to receive the further information and consider it which may be understandable by reason of the claim at the end of the solicitor's letter threatening proceedings in negligence. 62 I am satisfied that the material dealing with Mr Fletcher's salary issue and the listed company discussions issue was material relating to a contentious matter. These matters seem to me to be related directly and indirectly to the steps taken ultimately to reach the choice of the capitalisation rate. 63 I am satisfied that, consistent with the application of the notion of natural justice as it applies to referees outlined by Rogers CJ Comm D in Telecomputing at 523, opportunity should have been afforded to the first defendant to comment upon and/or provide information and make submissions upon those matters. I am also satisfied that the failure to provide such opportunity was in breach of natural justice. 64 I am satisfied that, pursuant to Part 72 Rule 13 of the Rules, the matter should be remitted to Mr Hollands in order for the following to occur: 1 That Mr Hollands provide to the first defendant details of the information provided to him in relation to the discussions with the listed companies and the arrangement to which reference was made in the Report. An opportunity should then be afforded to the first defendant to make submissions about that information; and 2 That Mr Hollands provide the opportunity to the first defendant to provide information and make submissions about the matters relating to Hilton Fletcher's status and his salary structure.

At a glance

Court

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Before

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Judgment (26 paragraphs)

Parties

Cases Cited (9)

Cited By (2)