M T Associates Pty Ltd v Aqua-Max Pty Ltd

5. The two general issues now before the court for consideration and determination are first, what is the value of the shares in the company Aqua-Max Pty Ltd ("Aqua-Max") as at 17 July 1998 and secondly, what amount should the majority shareholder in Aqua-Max, Sietel pay to M.T. Associates for its shareholding in the company?

10. It is necessary to briefly summarise the progress of the proceeding.

13. The dispute in the proceeding arose out of a joint venture agreement which was entered into on 21 November 1988 between, inter alia, M.T. Associates and Sietel. The joint venture vehicle was the company Aqua-Max. Sietel held 80% of the issued shares, namely, 1,600 shares, and M.T. Associates held the balance of 400 shares.

16. Thereafter the various parties to the joint venture agreement designed, developed and manufactured a gas storage hot water heater. It became known as the Aqua-Max G200 heater.

19. It had two features which made it one of the best storage hot water units on the market. First, it had a five star energy efficiency rating and secondly, its water container, namely, the cylinder, was made of stainless steel. These two features were at the time unique in the gas storage hot water heater market in Australia. Recently another gas storage hot water service has come onto the market which has a five star energy efficiency rating. However, its storage cylinder is not stainless steel.

22. Aqua-Max commenced selling the product in 1992. The inventor of the unit was Mr John Massey Trihey who was a party to the joint venture agreement as were companies associated with him. The other party to the joint venture agreement, Sietel, is a public company controlled by interests associated with Mr Richard Rees and his family. The Rees interests own approximately 80% of the issued shares in Sietel.

25. The parties fell out in about April 1993 and a proceeding was instituted in the Federal Court by M.T. Associates in November 1993. The proceeding was transferred to this court. The plaintiff is M.T. Associates and the two defendants are Aqua-Max and Sietel. A third defendant, Cook's Body Works Pty Ltd, was added at the end of the trial of the proceeding.

28. The primary claim was relief from oppression by Sietel as majority shareholder.

31. Eventually the proceeding came on before me on 2 February 1998 and after a 53 day trial I reserved my judgment which I delivered on 18 June 1998.

34. The court held that Sietel through its directors was guilty of conduct proscribed by s.260 of the Law, i.e. oppressive and unfairly prejudicial conduct contrary to the interests of the minority shareholder.

37. By reason of the provisions of the joint venture agreement and the occurrence of certain events the shareholding in Aqua-Max was altered.

40. As at the date of the court order, 18 July 1998, the shareholding in Aqua-Max was Sietel, 1819 shares and M.T. Associates 400 shares, ie 81.974% and 18.026% respectively.

43. The court ordered that the majority shareholder, Sietel, purchase the minority shareholding of M.T. Associates in Aqua-Max and the parties were invited to make submissions on the question of valuing the shares.

46. Various proposals were put forward and discussed. In the end the parties agreed that the most appropriate method to value the shares was by reference to a special referee pursuant to Order 53 of the Rules of Court.

49. On 17 July 1998 I ordered that the valuation be referred to a special referee and the court appointed Mr C.T. Daley of PriceWaterhouseCoopers as special referee.

52. On 9 October 1998 the referee delivered his report to the Prothonotary. A question arose over his fees which were eventually paid in February 1999 and thereafter the parties obtained a copy of the report.

55. On 19 March 1999 M.T. Associates and the defendants to the proceeding, namely, Aqua-Max, Sietel and Cook's Body Works Pty Ltd filed summonses in the proceeding, the defendants seeking an order the report be adopted and the plaintiff seeking an order that the court decline to adopt the report.

58. The two summons came on before me on 2 August 1999 and after a four day hearing I delivered a reserved judgment on 20 August 1999 ("the August 1999 hearing").

61. In my reasons for judgment I determined that there were certain features about the referee's report which I was not prepared to adopt but in the interests of justice which is the final determinant as required by Rule 50.04 of the Rules of Court, I adopted parts of the report and excluded other parts.

64. I informed the parties that the court would value the shares with those parts of the referee's report which were adopted forming the basis of the calculation, permitting the parties to place further evidence before the court with respect to other issues which were identified and make submissions in respect thereof.

67. The referee after considering a number of valuation methods selected the capitalisation of future maintainable earnings as the appropriate method to value the shares.

70. The parties agree that this is the appropriate method of valuation in the circumstances.

73. After hearing further submissions on 27 August 1999 I ordered that the court adopt part of the report of the special referee.

76. The excluded parts of the report were the amount of expense for research and development in the future maintainable earnings (FME), the expense calculated for leasing and hiring of plant and equipment and also personnel charges, the amount of the debt owed by Aqua-Max to Sietel as at 17 July 1998, the referee's reasoning in respect to the value of tax losses, his reasoning and determination of the range of capitalisation rates and the use made by the referee of the notional debt in valuing the shares.

79. In my reasons for judgment I stated that the only item in the future maintainable earnings calculation which I was not prepared to adopt was the research and development item but Mr Kennon QC submitted to the court that once I had excluded the capitalisation rates fixed by the special referee this had an effect upon the items of leasing of plant and equipment and personnel costs and accordingly I excluded those items also. Mr Kennon QC also submitted that the valuation of the tax losses was wrong. He submitted that it was in the interests of justice that these items be the subject of further evidence and submission. I acceded to the submission.

82. Taking into account the stance taken by Sietel on the application to adopt the report, on reflection Sietel was fortunate to be given the opportunity to later argue, contrary to its earlier submission, that the referee was wrong. On its application to adopt the special referee's report Sietel had submitted that his approach reasoning and decision were correct and ought to be adopted. Three expert witnesses were called to support the approach of the special referee and his determination by the defendants. The same three experts were called on the present proceeding and have to some extent adopted different views concerning the referee's report to what was put in evidence at the August 1999 hearing. The changes are matters relevant to the credit of the witnesses called by Sietel.

85. I ordered the following issues to be considered and determined on the adjourned hearing -

(i) In calculating future maintainable earnings:

(a) What necessary and appropriate adjustments for leasing and hiring of plant and equipment should be made?

(b) What necessary and appropriate adjustments should be made for personnel charges?

(c) What necessary and appropriate adjustments should be made for research and development?

(ii) What was the actual debt owed by Aqua-Max Pty Ltd to Sietel Ltd on 17 July 1998?

(iii) What is the appropriate capitalisation rate to apply in determining the valuation of the company using the capitalisation of future maintainable earnings based on:

(a) earnings before interest and tax? ("E.B.I.T.")

(b) earnings before interest, tax, depreciation and amortisation? ("E.B.I.T.D.A.")

(iv) What is the amount of the surplus asset being the tax effective value of the tax losses, if any, to include in the calculation of the value of the shares in Aqua-Max as at 17 July 1998 referred to by the referee in paragraphs 202-209 of the referee's report?

(v) What is the valuation of the shares in the company Aqua-Max Pty Ltd as at 17 July 1998?

(vi) Having determined the value of the shares in the company what price should Sietel Ltd pay to the plaintiff for its shareholding under an order made pursuant to s.246AA of the Corporations Law?

91. It is observed there are two general issues to be determined, namely, the value of the shares as at 17 July 1998 and what should Sietel pay for Aqua-Max's shareholding?

94. Counsel for M.T. Associates contended that there were certain factors not taken into account in the valuation process which must be taken into account on the second part of the determination to fully compensate Aqua-Max for its loss as a shareholder, caused by the oppressive conduct of the majority shareholder. The authorities support the claim for compensation. The court directed M.T. Associates to supply particulars of the matters relied upon, which it did. It will be necessary to refer to the particulars later.

98. This is the continuation of the proceeding and accordingly the evidence at trial, the referee's report and the evidence adduced at this hearing constitute the factual material before the court. The evidence adduced at the August 1999 hearing of the cross-summons concerning the referee's report is not part of the evidence in this hearing. However, I informed the parties that if any of the evidence called on that occasion is relied upon it would be open to a party to prove it in this part of the proceeding.

101. At this hearing Mr Trihey gave further evidence and was cross-examined.

104. Since the conclusion of the hearing in 1998 Aqua-Max introduced into the market a new storage hot water system called the Kwikot G40 ("G40"). It sells at a lesser price than the Aqua-Max G200 ("G200"). It came onto the market in June 1998.

107. The G40 heater has a four star energy efficiency rating and Mr Trihey is of the opinion that although the two water heaters are very similar the G40 heater is not as efficient as the G200 water heater. However, the G40 has a superior recovery rate to the G200. It has the stainless steel storage tank like the G200.

110. At the August 1999 hearing Mr Rees gave evidence that the G200 was to be phased out by the end of that year. Before the referee the contention was that it would be phased out in early 1999. It is noted that when this statement was made the G40 had just been launched on the market. Now the evidence is that it will not phased out until some time in this year. It is asserted that the G40 has not been a success. It is now uncertain how long Aqua-Max will continue to sell the G200. But on one version of the evidence of Mr Rees it may be years because of the G40's inability to capture the Aqua-Max market. This continual change of position by Aqua-Max through Mr R. Rees raises considerable doubts concerning the assertion that the G200 is to be phased out and replaced by a "completely new model".

113. The sales summary shows that in the year 1 October 1998 to 30 September 1999 Aqua-Max sold 18,605 G200 units and 5,466 G40 units (total 24,071 units) compared with a total of 25,797 units for the previous year. In that year Aqua-Max sold 23,578 G200 for the year and 2,219 G40 units for the four month period after its launch. The G40 unit has a number of features different to the G200. It has a superior recovery rate, the water delivery valve is better and it is a more attractive unit. It is to be noted that in the market place it directly competes with the G200. It will be necessary to consider these facts when determining what the future holds for the company. It is not good business practice to have two similar products on the market. Not only is it necessary to have two production lines but in the market Aqua-Max is competing with itself. The difference in price is in the order of $40.

116. Mr Rees gave evidence at the August 1999 hearing that the G200 would be phased out in a matter of months. In November 1999 he swore an affidavit in which he gave evidence which leads to the inference that that the G200 will be marketed for the foreseeable future and that was the thrust of his evidence at this hearing. However, his evidence is confusing. He gave evidence that the G200 would be phased out in 2000 but in a vague way suggested that the G40 was a flop and may have to be replaced. He then said a completely new model would have to be designed over four years at a cost in excess of M$7 to replace the G200. This would mean the G200 would have to continue.

119. The change in the G200's fate from July 1998 (referee's exercise), to August 1999 to November 1999 to this year cannot be put down to error or changing circumstances. The sales figures to August 1999 demonstrate that Mr Rees could not honestly have told the court at the August hearing that the G200 was to be phased out within six months. It was selling at a rate which would defy commercial common sense to take off the market. Nothing was said about the G40 in August that it was a flop. Yet by December 1999 the defendants' counsel asserted it was a flop. Mr R. Rees did not quite embrace that view. But his position is confusing and has all the hallmarks of recent invention to support the argument that Aqua-Max is now experiencing problems in the market place. This reflects on his credibility.

122. Mr Trihey also gave evidence with respect to matters raised by Mr Rees in his affidavit and in particular relating to the ownership of the plant and equipment used by Aqua-Max.

125. The plaintiff also called John Selak who is an expert valuer employed by Ferrier Hodgson Corporate Advisory (Vic) Pty Ltd.

128. He prepared a report which was tendered, gave evidence in respect to it, and was cross-examined.

131. Mr Selak's assistant, William Davidson, gave evidence of the difficulties he experienced getting information from Mr Rees concerning the accounts and records. He was cross-examined at length to demonstrate that the difficulties were either due to his own carelessness or an unfortunate misunderstanding.

134. I am satisfied on the evidence that Mr Rees, continuing his approach as evident in the first hearing, was being less than helpful and was being obstructive.

137. Every investigating accountant employed by M.T. Associates and the referee's staff have had trouble understanding the accounts and records of Aqua-Max and experienced difficulties in getting reliable information and records from Mr Rees.

140. Mr Richard Rees who is chief executive officer and a director of Aqua-Max and the managing director of Sietel swore an affidavit on 18 November 1999 in which he covered a number of topics concerning the ownership of plant and equipment and the future of the business of Aqua-Max. He was cross-examined at some length.

143. In addition, the defendants called Mr Michael Sloan of Taylor Lockwood Pty Ltd who is a valuer with respect to the valuation of plant and equipment owned by Aqua-Max and Sietel as at 15 September 1998 and as at November 1999. The defendants also called Mr Brian Edward Cazaly, a consultant, who gave evidence with respect to the issue of research and development, and Mr Roland Wettenhall, a chartered accountant, who gave valuation evidence. Professor Robert Officer gave evidence as did Michael Humphris, a chartered accountant in support of the methodology and approach of Mr Wettenhall. Both gave further viva voce evidence on the critical issue of the capitalisation rate. It is noted that their additional evidence was not the subject of a written report and was given without notice to the M.T. Associates lawyers. The evidence could and should have been the subject of exchanged reports. All witnesses were cross-examined.

146. In final address an issue arose concerning the findings made by the Court concerning Mr Rees' credibility at the trial and the use to be made of the findings at this hearing.

149. The evidence amply supports the conclusion that Mr Richard Rees is Sietel Ltd and Mr Richard Rees is Aqua-Max Pty Ltd. He solely controls both companies, he makes all decisions of any importance on their behalf and is the one who is responsible for the accounting records, the only one who fully understands them and controls their production to the plaintiff and the Court.

152. In his address in reply, Mr Kendall QC amplifying a submission he had put in final address that Mr Rees lacked credibility referred the court to statements made in the reasons for judgment I delivered on 18 June 1988 in the oppression proceeding and submitted that the court should not accept any evidence of Mr Rees unless it was corroborated in some satisfactory way.

155. He referred the court to pp.15 - 17 and p.139 of the reasons in which I did make strong criticisms of the honesty and credibility of Mr Richard Rees.

158. Mr Kennon QC objected to the court taking into account the findings I had made on that occasion and submitted that if the court was to take into account those matters the court should disqualify itself from deciding the issues in the present hearing.

161. I did make strong criticisms of the honesty of Mr Rees and opined the view that "I should view R. Rees' evidence with suspicion and scrutinise it very carefully."

164. The findings made were necessary in order to resolve the factual issues in the oppression trial.

167. At no stage prior to the matter being raised in final address (the 22nd day of the further hearing) did counsel on behalf of the defendants object to me determining the issues in the further hearing. Further, at the August 1999 hearing Mr Rees gave evidence on that occasion and was cross-examined and no objection was made to me hearing the applications. Indeed on that occasion I rejected some of the evidence of Mr Rees.

170. Any question of perceived bias, has been waived by no objection being taken at this further hearing but in any event if objection had been taken in my opinion the court would have been duty bound to continue with the hearing.

173. This part of the hearing is concerned with the question of the appropriate order to make under s.246AA after the court had made findings as to the oppression issues in the first part of the hearing, and is a mere continuation of the same proceeding. The issues now before the Court are different to the earlier issues and I am bound to approach the issues, which I do, with an open mind.

176. The question that now confronts the court is what use if any, can the court make of the earlier findings stated in the reasons for judgment concerning the credibility of Mr Rees.

179. In my view they cannot be ignored. They were made after 53 days' trial and were necessary in order to determine the issues before the court. Indeed the credibility of Mr Rees was an issue of importance in that part of the proceeding.

182. The findings were made after a long trial during which time the court had ample time and opportunities to appraise the credibility of Mr Rees.

185. This part of the hearing involves different issues. The fact is that the court has formed a certain view of the credibility of Mr Rees which cannot be ignored and in my opinion leads to the conclusion that I must carefully examine and weigh the evidence of Mr Rees at this hearing and scrutinise it very carefully.

188. The earlier findings are to be taken into account as background but the main focus is on the evidence given by him and the way he gave evidence, at this hearing.

191. The facts are that he is in control of both companies and their accounting records, some of the accounting records are extremely confusing and he is the one who makes the decision to produce records and facts to the court. His obstructive attitude in the past cannot be overlooked and there is some evidence in the present hearing, of obstruction by him to produce documents and explain the records of both companies to the plaintiff's accountant.

194. The primary evidence relied upon by the defendants concerning research and development into the future is the evidence of Mr Rees. It is evidence which is difficult to contest. It behoves the court to closely and carefully consider it.

197. In regard to the question of perceived bias in the present circumstances I refer to the recent Court of Appeal decision of Locabail Ltd v Bayfield Properties [1999] EWCA Civ 3004; (2000) 1 All ER 65, especially at p.78 where the particularly strong Court of Appeal said -

"The mere fact that a judge, earlier in the same case or in a previous case, had commented adversely on a party or witness, or found the evidence of a party or witness to be unreliable, would not without more found a sustainable objection. In most cases, we think, the answer, one way or the other, will be obvious. But if in any case there is real ground for doubt, that doubt should be resolved in favour of recusal. We repeat: every application must be decided on the facts and circumstances of the individual case. The greater the passage of time between the event relied on as showing a danger of bias and the case in which the objection is raised, the weaker (other things being equal) the objection will be."

The point was raised very late in the present hearing.

203. The method selected to value the shares is the capitalisation of future maintainable earnings method. All parties agreed this was the appropriate method.

206. This method requires a step by step procedure as follows -

(i) an historical survey of the accounts of the company over a number of years, the more the better;

(ii) making an adjustment to those accounts to make allowances for unusual items and any items that could be attributable solely to the proprietor, to determine the true profit in previous years;

(iii) after making all proper adjustments considering and determining the likely future maintainable earnings of the company; this involves determining the present maintainable earnings and making a judgment as to the future of the business;

(iv) considering and determining an appropriate capitalisation rate for the shares;

(v) multiplying the future maintainable earnings by the capitalisation rate;

(vi) considering and determining whether there are any additional assets that should be taken into account and if appropriate added to the value;

(vii) Considering and determining whether any deductions should be made - e.g. debt owing by the business.

212. As has been said often in the past, and no doubt will be repeated often in the future, the exercise involves a judgment being formed based on the circumstances, the experience of the valuer and as to the future. One must take into account the risks involved in the conduct of the business. The past history does provide a basis for the future but it must be analysed with care before it is used as a factual basis to estimate the maintainable earnings for the future and the risks relevant to the capitalisation rate.

215. Each step in the exercise is fraught with potential controversy and requires a valuer to carefully seek, analyse and weigh all relevant evidence and carefully and logically arrive at his decision. Honesty and independence of the valuer are vital to the exercise.

218. Valuation of shares in a private company which conducts a small manufacturing and distribution business is a difficult exercise and invariably provokes much argument as to each step of the valuation procedure.

221. Whilst there is much room for honest difference of opinion in respect to the valuation, one would expect that valuers honestly approaching their task and provided they are given all relevant and accurate information, should arrive at valuations which are similar.

224. However, experience in the courts shows that this is a forlorn hope in most cases and this case is no exception.

227. Mr Selak on behalf of the plaintiff concluded that the value of 100% of Aqua-Max's share capital would be in the range of $12.7M to $13.1M on an EBIT basis depending on whether the Sietel loan interest was to be calculated on a simple or compound basis.

230. In contrast the defendants' expert, Mr Roland Wettenhall, has valued the shares at $1,305,000 at the EBIT level.

233. When the court is confronted with such an enormous disparity in the results of a valuation, it is difficult to accept the view that the difference between the valuers' results can be put down to an honest difference of opinion.

236. It is an unfortunate fact that expert witnesses are too often motivated by satisfying their client's wishes rather than acting independently and honestly and carefully giving opinion evidence.

239. I may say that my observations are not new. See for example Phipson on Evidence 10th Edition (1963) para 1286 where the learned author stated -

"The testimony of experts is often considered to be of slight value, since they are proverbially, though perhaps unwittingly, biased in favour of the side which calls them, as well as over-ready to regard harmless facts as confirmation of preconceived theories; moreover, support or opposition to given hypotheses can generally be multiplied at will."

Difficulties in Valuation - Defendants' conduct

244. I have found the task of valuing the shares extremely difficult.

247. Not only is there the enormous disparity between the valuations but there are a number of other factors which have exacerbated the difficulties in resolving the issues.

250. First, the referee's determination of the value. The referee fell into error in valuing the shares. The defendants in the application before the court in August 1999 supported the valuation whereas MTA attacked it on a variety of grounds. I considered the grounds of attack and ruled that some of them were made out. Having published my reasons I informed the parties that I proposed to adopt parts of the referee's report and decline to adopt other parts.

253. Having informed the parties of that fact, defendants' counsel, contrary to the earlier approach, then informed the court that there were other aspects about the referee's report which they did not agree with and in the course of the discussions I was persuaded that certain other aspects of the referee's report should be excluded.

256. It was put to me by the defendants' counsel that this about change of approach by the defendants could be justified on the basis that the referee in valuing the shares had taken into account what he calculated as a notional debt. It was the accepted view of the valuers called at the August 1999 hearing that the actual debt was to be deducted and not some notional debt. I so ruled.

259. The defendants submitted that once the court reached that conclusion other findings were open to doubt.

262. I have some difficulty in accepting that once that error had been exposed and corrected that it necessarily followed that the matters raised by the defendants needed further consideration. However, I have given the opportunity to the defendants to call evidence and make submissions in relation to the additional issues.

265. This inconsistent approach by the defendants raises doubts about their case.

268. Secondly, the difficulties encountered by the M.T. Associates expert in getting information has meant that their expert's report in some respects is not complete and in other respects proceeds on inadequate and uncertain information. It is put by M.T. Associates that the defendants were obstructing the valuer and making it difficult for him to obtain relevant information.

271. Mr William Davidson, the assistant to Mr Selak, was called as a witness by MTA to show the obstruction and he was cross-examined at some considerable length in relation to the assertion. Mr Davidson was seeking records and information from Mr Rees.

274. I listened with interest to the cross-examination and the proffered explanations put by cross-examining counsel as to difficulties that had been encountered and the suggestion that they were due to either error, misunderstanding or a failure by Mr Selak's assistant to follow up matters.

277. Mr Richard Rees is the Managing Director of Sietel Limited, the majority shareholder in Aqua-Max and is the Managing Director of the latter. On any view the companies operate very closely.

280. Mr Rees gave evidence at the trial in 1998 and I found him an unsatisfactory witness who was prepared to mislead and obstruct the gathering of information.

283. Mr Rees is responsible for the accounting systems of both Sietel and Aqua-Max. His background is accountancy and he has worked as an auditor. The accounting records of both Sietel and Aqua-Max are difficult to comprehend and according to Mr Rees, in some instances, do not mean what they convey to the reasonable reader.

286. Louis Carroll wrote the following through the mouth of Humpty Dumpty in "Through the Looking Glass" -

Humpty Dumpty - "There's glory for you!" Alice - "I don't know what you mean by glory". Humpty Dumpty - "I meant, 'There's a nice knock-down argument for you'." Alice - "But 'glory' doesn't mean 'a nice knock-down argument'." Humpty Dumpty retorted, in a rather scornful tone - "When I use a word it means just what I choose it to mean - neither more nor less". (Emphasis added.)

290. Mr Rees somewhat like Humpty Dumpty's attitude to language has his own modus operandi in respect to the accounting records of his companies. He is the only person who understands them. Documents and records are kept in a way which attracted much criticism at the original trial and the criticism continues. One can only be suspicious as to the accounts and records of both companies and whether those records truly reflect the facts.

293. It is so easy in this day and age with computers to re-arrange accounts, records and the like without trace and if records are kept in that way one loses confidence in their accuracy.

296. Mr Rees was slow to produce some documents and in some circumstances did not produce any documents until the trial commenced.

299. There is no excuse for what Mr Rees does. In this day and age with computers, well managed manufacturing companies of the size of Aqua-Max should have in its records all the information which could be retrieved very quickly to satisfy a request.

302. One of the big issues at the present hearing was the contention by Mr Rees that Aqua-Max did not own a large proportion of the plant and equipment even though it had been leasing or hiring it and using it over many, many years. The value of the plant and equipment is put at in excess of M$3.3.

305. The issue is who owns the plant and equipment? It is the contention of the defendants that it is wholly owned by Sietel, that the plant and equipment is presently being used by Aqua-Max on a monthly hire basis and Aqua-Max has no proprietary interest in any of the plant and equipment. M.T. Associates contends that the bulk of the plant and equipment is in fact owned by it.

308. The evidence of Mr Rees is that there is no documentation evidencing the arrangement between Sietel and Aqua-Max and he asserts there never has been. This has caused the plaintiff and its advisers to view the assertion with considerable suspicion which taking into account a number of other factors which I will refer to hereafter is well grounded. Not surprisingly Mr Selak and his assistant, Mr William Davidson, spent time trying to determine from the records the basis for the defendants' contention. Mr Selak requested the records to show who owned the plant and equipment and in the end documents called lease registers and asset registers were produced. One of them is headed "Aqua-Max - Lease Register". It is a print-out from a computer. One's immediate reaction is that it evidences Aqua-Max's entitlement to certain property which has been leased to it. However, when it was forwarded to Mr Davidson, Mr Rees in a covering fax referred to it as the Sietel lease register. This is despite the fact that there is such a print-out which is headed Sietel Lease Register.

311. This is but one of a number of examples where documents are produced which convey a certain conclusion but which Mr Rees asserts is not a correct conclusion.

314. I accept the evidence of Mr Davidson of the history of his attempts to obtain information and documents from Mr Rees concerning the very important issue of who owned the plant and equipment used by Aqua-Max. The responses by Mr Rees were unsatisfactory and obstructive. The information should have been readily available. It took an inordinate time to be provided.

317. The directors' reports and annual returns of both Sietel and Aqua-Max are in certain respects ambiguous and vague. When cross-examined on the entries Mr Rees invariably asserted that the auditors required that part of the document to be expressed in that way.

320. The records of Aqua-Max revealed a debt of $755,000 owing by it to Sietel as at 30 June 1998. However, it is the case of Sietel that because it has subsidised Aqua-Max over the years the loan account should be adjusted to reflect that fact. Indeed, the referee was induced by representations made on behalf of Mr Rees that the loan should be adjusted to reflect the alleged subsidy.

323. Mr Rees in evidence in the present hearing reiterated the contention. The court asked him was there any legal basis for the contention. He gave evidence that there was no documentation which supported his contention but he knew that Sietel had provided subsidies over the years, it had not been properly reimbursed and now the loan account should be adjusted to reflect the subsidy which he asserted was in the order of in excess of M$2.

326. When it was pointed out by the court that there was no documented legal basis for the adjustment and that Mr Rees was seeking to re-write the history of the relationship the court asked the following question which Mr Rees answered -

"Mr Rees, we've got to come back to whether there's a legal basis for this. It's all very well to talk generally but if Sietel was wanting to look after its interest it could have entered into an agreement, there could have been a resolution at the level of both boards that in the event of certain things happening Aqua-Max would reimburse Sietel to the extent of. But you can't point to anything that occurred in that way and what you're really saying to me is, 'Look, in the wash up it would be now fairer if Sietel was to get more back'?---No, no, no. Sietel didn't - didn't - we didn't have an arrangement like that and there was reasons why that wasn't put in writing, significant reasons because that could cause some tax implications by going around registering those sort agreements. Understandings are one thing, registered agreements, the tax department might look that up registered agreement and say 'Well, hey, hey fellows, I want to get in on this little show', so that's why there's an understanding. But the legal, the legal standing is that the legal ownership and the assets was never passed to Aqua-Max." (Emphasis added.)

330. Later the court asked the following questions and Mr Rees answered -

"Mr Rees, this is the vice of running a business in the way that you do, where you don't believe in having too many formal documents?

---I have - I'm the most documented person in this case. Just listen to me, Mr Rees. One might think that in relation to operating a business, from the interests of Sietel and Aqua-Max, there'd be some document which would be evidence of the relationship between the parties concerning the hiring of the plant and equipment, there's absolutely nothing and after a while one starts to think why not, a well conducted business would have such a document, with some evidence of the hiring arrangement?

---It is, it's the - I'm a very well documented person and I wouldn't like to dispute, but if you look at the other party, he had nothing, I am very well documented, I've thousands of files, I've got a reputation for documenting things, I'm very meticulous in the way I document things. Let me just continue the point. I put that point to you, you then say well look, there's nothing in writing about this understanding of

what - - - ?---No, I didn't - I explained why we didn't put it in writing. What Sietel would be expected to get back on its loan account, well, again - - - ?---No, because it retained - see, you don't - if we could put that in writing, we could say Sietel agrees to pass all this asset ownership over, agrees to a long term lease and agrees to the personnel, Sietel would have to agree to that on the basis that it gets the subsidies back, we could have put that in writing, or I put it as an understanding for some good reason, it wasn't just because I forgot about it, it it's thought through, people have in the past documented things, understandings, and got into trouble with tax, and I'm thinking well, I've got to be careful by - by thing, so.we'll keep it as an understanding, the directors are all there, we're quite entitled to have an understanding and we haven't got a tax liability. To put it down in black and white registered document, there is a risk of a significant tax liability, would send both companies broke maybe, so we have an understanding, but it's supported, Sietel's support is they retain the employment of the personnel, they retain the ownership of the assets, and that's well documented, I've put all vouchers out to support that and they retain the ownership of the building with no future lease commitment on it, no long term lease, they could do it, that is - that's how I get Sietel to agree to it, so the Sietel directors say, I say to the Sietel directors, this is the security I'm giving you in this understanding, I'm giving you very good support, you control the personnel that control this business, you control the building and control the assets. On Aqua-Max side I say, well, Aqua-Max, yes, you've missed out on those things, they were all controlled by Sietel but I'm giving you survival, I'm giving you subsidies and if you've got a better alternative, we've got a better alternative, we'll go elsewhere." (Emphasis added.)

334. The statement by Mr Rees of the concern that if matters are documented there may be problems with the Taxation Department amply supports the criticism of Mr Rees that he keeps records in such a way as to enable him to make assertions of fact to meet the particular circumstances in question. There are absolutely no documents that document the relationship between Sietel and Aqua-Max with respect to the use of the plant and equipment by Aqua-Max. However, there is ample evidence to which I will refer hereafter which supports the contention of M.T. Associates that at the end of a lease period the property was to vest in Aqua-Max.

337. Equally there is absolutely no evidence of any agreement between Sietel and Aqua-Max which would justify Sietel in increasing the loan account between them. Despite this lack of records Mr Rees is firmly convinced that Sietel should receive from Aqua-Max a sum in excess of M$2 for the loan account because of what he called "subsidies".

340. It emerged in the course of this hearing that neither Sietel or Aqua-Max had lodged income tax returns for the years 1992-1998 until July 1999 when they were filed as a bundle. No satisfactory explanation was given for this. Yet the auditors in those years did prepare drafts but they were never completed and then Mr Wettenhall had to finalise them in 1999. This conduct exacerbates the suspicion about the records of both companies, records in the sole control of Mr Rees.

343. In the circumstances the court must view the accounting records of both Aqua-Max and Sietel with suspicion.

346. There is no lease or any other document evidencing the use of plant and equipment by Aqua-Max which allegedly is owned by Sietel.

349. The difficulties in tracking down records in relation to this issue supports the submission that Mr Rees was being not only obstructive but also raises doubts as to the accuracy of documents produced.

352. It is very easy to adopt the Humpty Dumpty approach and say that when I produce an account it means what I say it means but without any supporting evidence, the assertion must be viewed as practically meaningless and on any view with scepticism. All these matters support the conclusion that Mr Rees is a witness whose evidence should not be accepted unless supported by credible independent evidence.

355. Thirdly, the expert for the defendants, Mr Wettenhall who was retained to assist the Rees interests in the valuation exercise before the referee and also to give evidence on the applications in August 1999 was engaged by Sietel and Aqua-Max to prepare their income tax returns and lodge them as a tax agent which he did on the 17th day of August 1999. He does not fit into the category of an independent expert. He spent considerable time with Mr Rees at the premises of Aqua-Max in 1998 preparing submissions to be made to the special referee. During this period he had opportunities to talk at some length with the special referee's assistants. He also escorted the special referee around the factory premises in the absence of any representative from M.T. Associates and his reason for doing so was specious nonsense. He stated in cross-examination in the proceeding in August last year that the reason why he went around the factory with a special referee was because he had an interest in factories. He maintained that the reason given last year was true at the present hearing. The fact was that he had already had a tour of inspection of the premises on a previous occasion for which he charged Aqua-Max as his alleged client a fee and he also charged for his time when he escorted Mr Daley the special referee around the premises. I do not accept his reason.

358. I am satisfied that Mr Wettenhall falls into that category of the expert witness who is extremely aware at all times of his brief and who is paying the bill. He plays the advocate and his evidence was coloured by his retainer. He was cross-examined as to the importance of independence and honesty of expert witnesses which he readily accepted were essential but in my opinion he has compromised his independence in this proceeding by his close involvement with Mr Rees, and his work lodging the tax returns for both companies for which he charged a substantial fee.

361. Further, he changed his evidence between the hearing in August 1999 and the present one in some respects. He also changed a draft report prepared by him which was provided to the defendants' legal team and their other two experts, after consultation and before giving evidence in the present hearing. The changes were significant and not satisfactorily explained. He also was prepared to use the referee's approach in respect to some of the issues when logic dictated otherwise, and then in viva voce evidence used a different approach. He was very aware of his client's interests when giving evidence. These matters reflect upon his credibility.

364. Another matter which made the court's task difficult and which reflected on the credibility of the defendants' case was the change in approach apparent in the present hearing.

367. Mr Kendall QC who appeared with Mr A. Phillips for M.T. Associates attacked the credibility and honesty of the defendants' case. He pointed out that at the hearing of the applications concerning the referee's report, the defendants did not criticise any part of the referee's approach, calculations or determination. In particular evidence was given by three experts to the effect that what the referee had done was correct and that he had arrived at the correct result. It was only during cross-examination of two of the experts that concessions were made that the referee had made an error in relation to the notional debt and its deduction. The three experts called on that occasion were Mr Wettenhall, Professor Robert Officer and Mr Michael Humphris. The approach on that occasion was for Mr Wettenhall to prepare a report and for the other two to comment on his methodology. The same three experts were called at the present hearing. They adopted the same approach.

370. In particular at the August 1999 hearing no attack was made on the referee's assessment of the research and development in the FME calculation or the referee's treatment of the plant, machinery and equipment used by Aqua-Max as being the subject of financial leases.

373. After the court held that the research and development item was incorrectly calculated and that the referee had wrongly determined a notional debt owing to Sietel which he had deducted, the defendants' case did a remarkable about turn.

376. After the court had published its reasons which effectively set aside the referee's notional debt deduction, the research and development item and the capitalisation rate, counsel on behalf of the defendants submitted that justice required the defendants be given an opportunity to question the leasing and hiring of plant and equipment, the amount for personnel charges made in respect of the Sietel employees and the value of the tax losses. The court was persuaded to exclude the referee's determination in respect to the items and give the parties the opportunity to adduce evidence and make submissions in relation to them.

379. Now the defendants say the research and development item determination by the referee was wrong and having embraced the figure at about $353,00 per annum now put a case that Aqua-Max is under siege from a competitor and will have to design, develop and manufacture a new product at an annual research and development amount of $750,000 for eight years.

382. If this argument is accepted it would have a substantial effect upon the FME.

385. As Mr Kendall QC correctly points out, at the August hearing last year not one mention of the need to develop a new product was put forward. Last year the evidence was the phasing out of the successful G200 unit and its replacement by the G40.

388. Now the evidence at this hearing is that the G40 has failed to live up to expectations, the G200 has run its course and has recently experienced problems and hence there is a need for a new product. Mr Kendall submits that this is a new case which is inconsistent with the stand taken last year and when analysed has very little substance. He also points out that having failed in supporting the notional debt deduction which was substantial (M$7.6) from the value, the defendants looked around for an item to support a large deduction and alighted on the ownership of the plant, machinery and equipment used by Aqua-Max. As I have stated, the referee treated the equipment as subject to financial leases giving Aqua-Max an interest in the plant and treated the balance owing under the leases as a commitment to Sietel.

391. I may say the deduction of the notional debt by the referee had an enormous impact on the valuation.

394. At the August 1999 hearing Sietel supported this approach but when the court set aside the deduction for the notional debt the defendants put a case that the plant, machinery and equipment in question were wholly owned by Sietel or would be wholly owned by Sietel, that Aqua-Max hired the equipment from month to month and there was no question of Aqua-Max ever having an interest in any of the plant and equipment it used which was supplied by Sietel. It is noted that Aqua-Max does own some equipment but this is treated separately.

397. The defendants' argument was that this equipment was valued at M$3.8 and this would have to be purchased by Aqua-Max in order to sell the business. Hence this would have to come off the value because Aqua-Max would have to purchase the plant from Sietel.

400. Mr Kendall QC submitted this was wholly inconsistent with the stance taken last year and it also reflects on the honesty and credibility of the defendants' case.

403. In a nutshell, having failed to have the notional debt deducted, Sietel through Mr Rees looked for another substantial deduction and ran the case that Sietel owned all the plant and equipment (save for a quantity of not great value owned by Aqua-Max), that Aqua-Max would have to purchase it in order for hypothetical sale to occur and the amount should be deducted from the purchase price.

406. In my opinion there is much substance in the submission and when the evidence is analysed in respect to the issues it will reveal much support for Mr Kendall's submission. I will return to this question hereafter.

409. Mr Kendall QC then submitted that when one considered the evidence as to how the new case was developed in relation to research and development, ownership of equipment and determination of the capitalisation rate it is clear that a plan was devised which not only involved Mr Rees and Mr Wettenhall but also the other two experts to establish bases for the new case. The evidence revealed that Mr Wettenhall prepared a draft report some time in October/early November 1999 which addressed the issues that were to be decided at the further hearing. Professor Officer and Mr Humphris were retained but with a limited brief which was to consider the report of Mr Wettenhall and to confine their evidence to whether or not the methodology used by Mr Wettenhall, the principles upon which he relied and his conclusions were based on proper valuation principles.

412. The evidence revealed that having prepared the draft report it was then considered in conference by the legal team, Mr Rees, Mr Wettenhall, Professor Officer, initially Mr Humphris and later his assistant.

415. Professor Officer prepared his report based upon the draft of Mr Wettenhall as did Mr Humphris. It is an inference from the evidence that as a result of the discussions involving the legal team, Mr Rees and the experts that Mr Wettenhall was prompted to re-think parts of his report and as a result he made a number of substantial changes, changes of significance to his original draft.

418. Professor Officer and Mr Humphris believe that before they signed their reports which were filed with the court they had seen the version signed by Mr Wettenhall.

421. An expert who spends considerable time with the legal team and other experts in the case considering and discussing the report which is to be the main report relied upon by a party and it is then changed in a significant way compromise his independence and his credibility as an expert.

424. Mr Humphris and his assistants apparently attended some three or four meetings and Professor Officer attended at least two meetings and had telephone conversations with members of the legal team.

427. Whilst both Professor Officer and Mr Humphris from time to time in their respective reports and in giving evidence emphasised that they were not really looking at the base figures used or any results but only were concerned with the methodology and logic of Mr Wettenhall's approach, nevertheless, in viva voce evidence, expressed views which were not in their written reports and further contradicted what they had said in their reports.

430. In my opinion the three experts called by the defendants compromised their independence and their credibility and it will be apparent from my consideration of their evidence in relation to particular issues that I was unimpressed with parts of their evidence.

433. All these matters combine to make reliance on the financial records, the evidence of Mr Rees and the defendants' experts precarious and fraught with risk and uncertainty.

436. The task of valuation has been difficult because of the uneasiness due to records which raise so many questions and because of the considerable doubts the court has about the evidence of Mr Rees.

439. I was impressed with the evidence of Mr Selak who was called by the plaintiff M.T. Associates and who in my opinion did seek to preserve his independence and to assist the court honestly and carefully. He was somewhat handicapped by the fact that he did not have all the information he wished to get from Mr Rees. However, I was impressed with his evidence and I was impressed with the evidence of his assistant, Mr William Davidson.

442. The obstruction by Mr Rees and the difficulty in understanding the financial records did not make the task of Messrs Selak or Davidson an easy one.

446. The starting point is the tables of the special referee which are comprised in Appendix H to his report.

449. There are three documents and first is the referee's exercise considering the accounts of Aqua-Max for the years ending 30 September 1993 through to 1998. In respect of the year 1998, the last three months are estimated.

452. His second document sets out the adjustments that should be made to the accounts, and the third document is the adjusted summary.

455. This adjusted summary is the starting point in the proceeding before me.

458. None of the documents in or attached to the referee's report include the profit and loss statement for the year ending 30 September 1998. In the present proceeding the profit and loss statement and balance sheet to the 30 June 1998 were tendered and it contains the items which the referee must have taken into account in assessing the accounts for the year ending 30 September 1998 which when adjusted are the basis for the future maintainable earnings assessment. The accounts are not easy to understand.

461. The parties accept that the special referee had the accounts which became Exhibit MTA 9.

464. The calculation by the referee showed future maintainable earnings at various levels including earnings before interest and taxation (EBIT). It is common ground between the parties that that is the appropriate level at which to value the shares. This was the view expressed by all of the experts.

467. The level above the EBIT level is the earnings before interest, taxation, depreciation and amortisation (EBITDA). It is at that level that one can determine what might be called the cash flow of the business. This level determines the gross profit less expenses resulting in the net profit.

470. The step between the EBITDA and the EBIT level involves consideration of research and development, depreciation of plant and equipment and amortisation in relation to depreciation in the past.

473. At the outset it must be emphasised that the object of the exercise is to determine what a reasonable but not over-willing purchaser would be prepared to pay and what the reasonable willing vendor but not over-anxious to sell, would be prepared to accept.

476. The second point that must be made is that the court is seeking to value the shares in Aqua-Max. The evidence clearly demonstrates that the assets of Aqua-Max are its ability to manufacture and sell hot water units i.e. its business. Its main area is the manufacture and sale of storage hot water systems but it also imports and sells an instantaneous hot water service.

479. The ability of Aqua-Max to derive income comes about because of its intellectual property, its know-how, the fact that it has designed a very good storage hot water unit and has established a healthy niche in the market, especially in this State.

482. Although counsel on behalf of Sietel was anxious to draw a distinction between the business of Aqua-Max and the value of the shares the reality is that the shares are to be valued on the basis of the value of the business.

485. The assets of the business which would be sold comprise the plant and equipment used to manufacture and sell the storage hot water services, the stock in hand, the intellectual property and know-how and the good will of the business. In addition there would be motor vehicles and office equipment. It also has the asset in the form of accumulated tax losses.

488. The sale will be effected by the transfer of the shares.

491. The third observation I wish to make concerns the question of Sietel and its attitude to a sale. The court is concerned to determine, inter alia, what a reasonable, willing but not over anxious vendor is prepared to accept for the business. In my opinion the court must proceed in this exercise on the basis that Sietel will put its "best foot forward" to achieve the best price. Sietel owns nearly 82% of the shares in Aqua-Max. Clearly it is in its commercial interests to obtain the best price. Accordingly it will take all reasonable steps consistent with its commercial interests to facilitate the sale and not obstruct in any way the successful completion of it. I proceed on that assumption.

494. I make this observation because from time to time, implicit in the defendants' evidence and submissions made, that because Sietel owned the real estate where the units are manufactured, that Sietel employs a number of key employees who work for Aqua-Max and that Sietel allegedly owns the plant and equipment which is used to manufacture the units that Sietel may be difficult in facilitating the sale and make demands that would jeopardise the sale. By way of example, that if it does own the plant and equipment it would expect to be paid the valuation of Taylor Lockwood which amounts to a considerable amount of money. But the reality is that there would have to be a degree of compromise because if Sietel could not sell the plant to Aqua-Max its value would drop substantially.

497. I find the defendants' approach unrealistic and I expressed it so a number of times during the course of the trial. The fact is that this sale would be with the full co-operation of Sietel.

500. Another matter that was highlighted by the defendants was that there was no certainty that those Sietel employees who were so important to Aqua-Max's success would necessarily go with the sale of the business. The argument was put that this decreased the capitalisation rate for the risk that these personnel may not pass with the business. Again I find this an unrealistic argument. Sietel would encourage these employees to go with the business for the obvious reason that it will increase the sale price. Realistically Sietel would not wish to place any obstruction in the way of these employees being employed by the new owner. Their expertise is best used in the business of Aqua-Max. It would be expected they would transfer their employment with the business.

503. That is not to say that Sietel is not entitled to a commercial return for any items of plant and equipment owned by it or that its commercial interests are not to be taken into account. But the reality is that it is the majority shareholder in the reasonable willing but not over anxious vendor and it would do all that was necessary to ensure the best price is obtained on a sale.

506. Sietel, as the majority shareholder, contends that the majority and the most valuable part of the plant and equipment used to manufacture the unit is owned by it and accordingly any value of the business must take into account that the purchaser of the business would need to purchase the plant and equipment from Sietel. It is suggested that the most practical course to adopt would be for Aqua-Max to purchase the plant and equipment. Hence it is contended that having arrived at the value of the business one must take off the value of the plant and equipment which would be paid for by Aqua-Max.

509. M.T. Associates has strenuously contended that Aqua-Max owns most of the plant and equipment which is used in the manufacturing business.

512. In determining the value I am of the opinion that the sale of the business would be effected by the sale of the shares in Aqua-Max and that it would be in the commercial interests of both vendor and purchaser that the sale would include all the necessary plant and equipment so that the purchaser obtains complete control of the manufacturing process. This means that Aqua-Max has to purchase all equipment owned by Sietel and it was common ground between the parties that the amount comes off the purchase price i.e. the debt owing to Sietel is increased.

517. The first step is to determine the items that made up the future maintainable earnings calculation arrived at by the referee.

520. The next step is to exclude the items of leasing and hiring of plant and equipment, the personnel charges levied by Sietel for its employees used by Aqua-Max and research and development.

523. It will be then necessary to consider what adjustments should be made in calculating the future maintainable earnings for each of the said items.

526. Having carried out that exercise it will be necessary to calculate the future maintainable earnings, determine the capitalisation rate and thereby value the company's business.

529. Once having arrived at that sum it is necessary to value the present value of the tax losses and add them to the calculation.

532. The court must then determine what actual debt is owed by Aqua-Max to Sietel Limited and deduct that from the amount. This comprises the debt owing at the relevant date and any amount that Aqua-Max has to pay for plant and equipment it has to purchase.

535. The date is 17 July 1998. That is the relevant date to determine the value of the business.

538. It is necessary to identify in the referee's calculation of the FME the amounts he allowed for leasing and hiring of plant and equipment, for personnel charges, that is, the provision of labour by Sietel to Aqua-Max and research and development.

541. I reproduce the special referee's summary set out in appendix H to his report. I have made a number of changes of no consequence.

AQUA-MAX - adjusted FME (Referee's Determination)

Earnings before interest taxation depreciation and amortisation (EBITDA)

552. The referee selected a capitalisation rate for the EBIT calculation at between 4.5-5.0 times. This results in a value - M$8.946 to M$9.940 according to the special referee.

555. The referee added the value of tax losses - M$1.075 to M$1,167 and subtracted debt to Sietel - M$7.613 - M$7.773 (this included the notional debt).

558. The items marked * in the FME are open to adjustment or exclusion and substitution in the present proceeding. The totals and value will as a result have to be amended.

561. The capitalisation rate, the value of the tax losses and the amount owing to Sietel were also very live issues at the present hearing.

564. The special referee took the actual figures of the company to the 30 June 1998 and estimated the last three months to 30 September 1998. The actual sales revenue to 30 September 1999 was substantially greater than the amount he estimated to the same date.

567. The first step is to determine what amount or amounts were included in the referee's FME calculation for the personnel charges, leased plant and equipment and research and development.

570. These items must be valued and then removed from the referee's calculation which will result in an increase in the FME.

573. The next step in the exercise is to determine what amount should be included as an expense in the FME for each of the said items.

576. The first step in the exercise has proven difficult. The referee's report comprises his report and appendices A - L (inclusive). Appendix H comprising three pages is the summary of the accounts for Aqua-Max for the company's financial years from 30 September 1993 to 1997 and the nine month period to 30 June 1998. The referee chose the nine month period because it was close to the relevant date which was 17 July 1998 but having done that he then annualised the accounts for the last three months. In other words he did not take into account actual income and expenses for that period. Counsel for M.T. Associates criticised that approach at the August 1999 hearing and I dealt with the criticism in my reasons.

579. The second page is a summary of adjustments of the accounts and the third page is the adjusted summary but as I have stated he annualised the figures for the final year ending on 30 September 1998.

582. The special referee took the final year as the FME.

585. In order to understand what he did, it is necessary to consider Appendix H, and some of the other appendices in his report. Unfortunately it is not entirely clear what items he included for what he described as costs i.e. expenses. He has lumped a number of costs together under the heading "other operating costs".

588. The evidence reveals that he had a print-out supplied by Mr R. Rees of the Aqua-Max accounts for the nine months to 30 June 1998 being Exhibit MTA 9. The parties accept that the referee had this document and worked from it.

591. It comprises a balance sheet, a profit and loss statement for the manufacturing division, a profit and loss comparison report for the same division, and a balance sheet profit and loss statement and profit and loss comparison sheet for the research and development division.

594. I told the parties on a number of occasions during the trial that it was a necessary first step in the valuation exercise to identify the amount or amounts assessed by the referee and included in his FME in respect of the three items.

597. I asked the plaintiffs' expert Mr Selak, Mr Rees and the defendants' expert Mr Wettenhall to state what each thought the referee had done. The task has proven difficult. This was apparent from the discussions during final address.

600. It has not been helped by two facts, namely, the failure of the referee to identify all the amounts he took into account and the confusing accounting records being Exhibit MTA9.

603. Fortunately the amounts for personnel can be easily identified. The issue in respect of personnel concerns the provision of persons employed by Sietel for performing services for Aqua-Max. The referee has included the item twice and the parties agree that he allowed the expense at a total of $488,000. This amount for present purposes is to be taken out as an expense and the actual expense is to be determined by the court. Fortunately the matters in issue are of small compass.

606. The amount for research and development has provoked much argument.

609. In the referee's summary there is but one item noted. It is an amortisation item of $353,000. This amount was calculated by the referee based purely on the past performance of Aqua-Max and he rearranged the figures. It has no real relevance to what the future holds. This was common ground between the parties. Accordingly it should be excluded from the FME calculation. What has to be determined for R and D in the FME is a reasonable sum to cover R and D in the future. i.e. what amount would the reasonable purchaser determine based upon all relevant facts?

612. The issue involves two matters, namely, an amount for continuing R and D for problems associated with the two present units being the G200 and the G40 and an amount for research and development for new products.

615. The contentious question at this point is, in addition to the $353,000, did the referee also include in the costs (i.e. expenses) an item for ongoing R and D i.e. the expense for R and D for the year 30 September 1998?

618. His amortisation calculation does not include any amount for actual expense.

621. It is common ground between the parties that there is an amount included in the expenses above the EBITDA total but there is some dispute about the amount.

624. M.T. Associates submits that the amount which has been included is $358,915 and refers to the evidence of Mr Selak to that effect. The court did ask Mr Selak what figure he thought the referee had allowed and he demonstrated by reference to the figures in MTA9 that the amount allowed was that sum.

627. The defendants have done their own calculation and Mr Rees produced a summary during final addresses which based on the figures before the court showed that the referee must have allowed the sum of $272,856.

630. I prefer the sworn evidence of Mr Selak and I am satisfied that the referee has included as an ongoing expense the annual sum of $358,915 in his expenses in the FME which is to be added to the $353,000.

633. It follows that an expense of $711,915 is to be excluded from the FME.

636. The third item is the amount included in the FME for leased equipment.

639. The special referee for the purposes of the FME calculation assumed that the Sietel equipment which was allegedly owned by Sietel and used by Aqua-Max was the subject of financial leases and therefore treated the commitment under the leases as part of the debt owed by Aqua-Max to Sietel.

642. The amount for the leasing included in the FME is $507,000 and appears to be made up of two items in the profit and loss, namely, Items 6150 and 6204 although the amounts do not quite match on an annual basis.

645. Neither party suggested any other amount was included for this item.

648. Both parties agree that the sum of $507,000 should be taken out of the calculation.

651. Once the three expense items are included it follows that the EBIT amount of $1,988,000 is to be increased by -

657. Having performed that exercise it is now necessary to consider each item and determine what is a reasonable sum to include in the FME bearing in mind that the FME means what it says: future maintainable earnings as at the relevant date being 17 July 1998.

661. I will in accordance with the special referee's approach use the figures to 30 September 1998.

664. Some sixteen and a half months have elapsed since the relevant date and it is appropriate to refer to the authorities to determine what use can be made of the events which have occurred subsequent to the relevant date.

667. The relevant date is 17 July 1998. The valuation of the shares in Aqua-Max is a question of fact. The shares must be valued at the relevant date and the valuation exercise requires the court to consider the evidence at that date, that is, the relevant facts and probabilities.

670. In carrying out the exercise one must proceed on the assumption that both the vendor and the purchaser are well acquainted with Aqua-Max and its business and are aware of all relevant circumstances which might effect the value of the shares whether they be beneficial or prejudicial circumstances. See Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418 at 440. The court whilst considering all relevant facts and probabilities at the relevant date does not shut its eyes to subsequent events if the subsequent events are relevant to the value at the relevant date.

673. In Trustees Executors and Agency Company Limited v The Commissioner of Taxes (Victoria) [1941] HCA 18; (1941) 65 CLR 33, the High Court was concerned with the valuation of a life estate given to a widow in circumstances where the widow died 30 minutes after the testator. The question was whether the court should apply the actuarial value of the life estate based upon the life expectancy of the widow independently of her impending death or assess the value in the light of the circumstances which existed at the date of death of the testator. Not surprisingly the court held that the exercise must take into account the events which actually occurred.

"It may be conceded that the calculation of duty upon the deceased's estate is not controlled by events subsequent to the death of the deceased. But subsequent events may be taken into account as evidence of what were the facts at the date of the testator's death. In the present case it must have been clear that the widow's life interest was worthless even during the half hour for which she survived her husband."

680. His Honour went on to emphasise the relevance of the subsequent events. He referred to what the High Court said in Weldon v Union Trustee Co of Australia Ltd (1925) 36 CLR at pp.168-69 where the court said -

"You are entitled to look at any evidence relevant to that issue, even if that evidence was not available at the date of the death of the testator; but that evidence must be relevant to the question of the value as at the date of the death."

684. In McCathie v The Federal Commissioner of Taxation [1944] HCA 9; (1944) 69 CLR 1 Williams J was concerned with determining the value of shares which a deceased person held in a company at the date of his death.

687. He repeated what he said in the Daandine case (unreported) delivered 26 August 1943 where he said -

"Values must be calculated in the light of circumstances which existed on the material date, in this case 30 June 1939, but subsequent events can be taken into account in order to determine the proper weight to attach to such circumstances. ... The whole tendency of the courts is to admit evidence of any events prior to the date of trial which will throw any real light on the issues."

"These were matters existing and to be taken into account at the date of death, and the court should not be forced to speculate as to their future when the facts are known and can speak for themselves."

695. The principles stated by Williams J have been applied in many cases. I refer by way of example to Re Haunstrup [1960] VicRp 48; (1960) VR 302 at 304 and AMP Society v Overseas Telecommunications Commission (1972) 2 NSWLR 806 at 822-23.

698. Two examples in the present case of subsequent events bearing on the probabilities at the relevant date are the confirmation of rumours that Rheem, a division of the substantial public company Southcorp Limited was developing a new hot water storage unit which would rival the Aqua-Max G200 and the level of sales in Aqua-Max subsequent to the relevant date having a bearing upon the probabilities of the future maintainable level of sales.

701. Before considering the three contested items to be included in the FME it is convenient and necessary to consider and determine who owned the plant and equipment used by Aqua-Max in its business.

705. In determining what would be a fair value, that is, what Aqua-Max would be prepared to accept and what the reasonable purchaser would be prepared to pay for the shareholding in Aqua-Max, it is my opinion that the value should be determined on a sale which would involve the purchaser acquiring all the plant and equipment necessary to carry out the business of Aqua-Max. Insofar as Aqua-Max does not own any plant and equipment it would be necessary for Aqua-Max to purchase that equipment so that it can offer the business as a complete package and the purchaser would have control of all plant and equipment. It would be commercially unsound to expect that a purchaser would pay multi millions for the acquisition of a business and not have control of all the plant and equipment necessary to carry on the business. This was the view expressed by a number of witnesses and I am satisfied accords with commercial common sense and reality.

708. It means that if Sietel owns any of the equipment which has to be purchased by Aqua-Max then the value will have to be deducted from the purchase price. This was common ground between the parties.

711. According to Mr R. Rees, the plant and equipment used by Aqua-Max in its business is to be divided into four categories.

"A review of the asset registers of Sietel and Aqua-Max together with a physical inventory being taken of the equipment being used by Aqua-Max has identified the relevant ownership of those assets."

718. He then referred to two valuations carried out by a Mr Sloan of Taylor Lockwood Pty Ltd Auctioneers and Valuers in September 1998 which valued the plant and equipment owned by Sietel Limited and valued that owned by Aqua-Max Pty Ltd.

721. Mr Rees then produced an exhibit to his affidavit, RR4, dated 18 November 1999 which is divided into two parts and purports to record the Sietel owned assets used by Aqua-Max and the Sietel owned tooling used by Aqua-Max, the first being dated 9 September 1998 and the second dated 17 November 1999.

724. After the trial commenced Mr Rees prepared another version of the summaries but included additional columns. This version dated 6 December 1999 became Exhibit D10.

727. The plaintiff produced a marked up version of D10 which became Exhibit MTA31. It is appropriate to refer to that exhibit because it is marked in a way which highlights what is alleged to be errors by Mr Rees in relation to some items of plant.

730. The first category of plant and equipment is that owned by Aqua-Max and which according to the Taylor Lockwood valuation had a value as at 15 September 1998 of $443,200 based on a market value for existing use. There is no dispute in relation to this equipment and it is accepted by both parties that in the sale of the shares those assets would pass to the purchaser. There is no question of any adjustment between Sietel and Aqua-Max in respect to this plant and equipment.

733. The dispute between the parties concerns the equipment allegedly owned by Sietel. This plant and equipment can be divided into three categories -

(i) Those assets acquired by Sietel pursuant to a finance lease, either a straight lease or hire purchase agreement, which have been on-leased to Aqua-Max pursuant to a notional lease and the lease or hire purchase agreement not having expired by the relevant date;

(ii) The assets acquired by Sietel pursuant to a finance lease which had expired and Sietel had obtained ownership of the assets; these assets were the subject of past notional leases to Aqua-Max which had expired; according to Mr Rees the plant and equipment was then hired to Aqua-Max on a month to month basis without any entitlement to a proprietary interest;

(iii) Plant and equipment acquired by Sietel which were never the subject of any finance lease by it or a notional lease to Aqua-Max and which have always been subject to a general hire on a month to month basis.

739. It is the contention of Mr Rees that at no stage in the past had Aqua-Max acquired any interest in the plant and equipment purchased by Sietel and used by it and that at all times the property in the plant and equipment in the three categories were owned by Sietel.

742. It is the contention of Mr Rees that those items of plant and equipment which are being used by Aqua-Max and which are not now the subject of any financial lease are hired to Aqua-Max on a month to month basis and it follows that Aqua-Max could at any point in time cancel the hire agreement with no obligation to Sietel. This was accepted by the defendants as being the consequence of a general hire.

745. There is no documentation which supports the claim by Sietel and I refer to the questions and answers given by Mr Rees set out above concerning his views in recording matters.

748. The first category of plant and equipment at the relevant date were subject to finance leases between Sietel and a financier and an alleged notional lease between Sietel and Aqua-Max. They still had time to run.

751. The categories two and three plant and equipment were at the relevant date according to Mr Rees subject to a general hire on a month to month basis with no obligations to continue with the hire on the part of either party for which an annual charge of some $45,000 was made by Sietel. Mr Rees stated that the $45,000 was a figure fixed many years ago and even though more and more equipment was being used by Aqua-Max the annual charge remained much in the same order.

754. There was no contest concerning category 1 plant and equipment nor category three. Category one property was still subject to finance leases between Sietel and the financier and hence Aqua-Max had not acquired any proprietary interest and the third category were always owned by Sietel. The contest concerns category 2, namely, the plant and equipment which in the past had been the subject of financial leases between Sietel and a financier and a notional lease between Sietel and Aqua-Max and the agreements had expired.

757. M.T. Associates contends that it was agreed between Mr Trihey acting on its behalf and as a director of Aqua-Max and Mr R. Rees that the plant and equipment would be on-leased by Sietel to Aqua-Max for the same period as the finance agreement between Sietel and the financier, and that at the end of the finance agreement Sietel would acquire the property by paying out the residual. That Aqua-Max would later own the plant and equipment.

760. There is no documentary evidence concerning the basis upon which Aqua-Max used the plant and equipment acquired by Sietel. It cannot be overlooked that under the joint venture agreement Sietel was to make a substantial contribution towards the costs of the venture. From the very outset Sietel supplied the funds to enable plant and equipment to be purchased, and was well reimbursed by Aqua-Max through the loan account.

763. Further, there is no document which supports the contention of Mr Rees that Sietel was to always own the plant and equipment. Mr Rees gave evidence that he knew as managing director of both companies what the relationship was and that the plant and equipment once the financial agreement had expired between Sietel and the financier was hired to Aqua-Max on a month to month basis.

766. Mr Trihey gave evidence that he had discussed with Mr Rees during the early days of the joint venture that Sietel would lease the plant and equipment from a financier, that it would be leased to Aqua-Max and that at the end of the lease period Aqua-Max would acquire the ownership in the property. It was his understanding that the Sietel loan account would be debited with the charges and Aqua-Max would repay the loan when funds became available.

769. Mr R. Rees gave evidence that no such discussions took place and no agreement was reached.

772. The defendants' counsel submitted that Mr Trihey's evidence was so vague, uncertain and ambiguous that it should not be accepted as any evidence of an agreement.

775. Mr Trihey gave evidence that in 1988 or 1989 he had a conversation with Mr Rees about the purchasing of the equipment and what was to happen. He stated that he and Mr Rees agreed that Aqua-Max having no assets could not raise credit, therefore the equipment should be bought or leased by Sietel and that when the plant and equipment had been paid out then it was to "revert to Aqua-Max". He stated that he and Mr Rees agreed to that.

778. Mr Kendall QC raised the question with Mr Trihey whether there was any discussion about what was to happen at the expiration of the lease period and the payment of the residual by Sietel to acquire the plant and equipment and whether Aqua-Max was to lease it for a further period to cover the payment for the residual. Mr Trihey was not in a position to answer that because when the parties parted in 1993 all of the leases were continuing and he did not know what was to happen thereafter.

781. One thing is clear from Mr Trihey's evidence that he and Mr Rees agreed that after the lease or hire purchase agreement had ended the property in the plant and equipment was to vest in Aqua-Max.

784. In cross-examination Mr Trihey stated that when the lease had expired Sietel would pay out the residual and the amount would be debited to the Aqua-Max loan account and the property would be transferred to Aqua-Max. Mr Trihey also stated in cross-examination that Mr Rees and he had agreed as to the property being transferred to Aqua-Max and this had been discussed on a number of occasions. He stated each time it was necessary to purchase plant and equipment the discussion came up. He stated -

"It would be bought, and Aqua-Max would own it; both. It would be bought for Aqua-Max to use and ultimately finish up owned by Aqua-Max."

788. He repeated that the question was raised more than once.

791. Mr Trihey in cross-examination used the word "impression". Mr Kennon QC asked him the following question -

"That is all it was, was it, it was an impression you had?---Yes, it was a discussion, and I was left with that impression, yes."

795. It was put to him that there was no agreement and he stated, "I believe there was an agreement, a verbal agreement."

798. Mr Rees gave evidence that no such discussions took place.

801. I am satisfied by the evidence of Mr Trihey that discussions did take place concerning ownership of the plant and equipment. I do not accept the evidence of Mr Rees that there was no such discussion on the topic.

804. The conversations took place some 11 or 12 years ago and it is not surprising that Mr Trihey was unable to give evidence as to dates and place. But I am satisfied that the conversations did take place. Plant was acquired from time to time at different places.

807. I find that what was agreed between the parties prior to them falling out in 1993 was that the plant and equipment would be acquired by Sietel through finance leases or hire purchase agreements that the plant and equipment would be on-leased to Aqua-Max for the same period as the finance lease between Sietel and a financier, that Sietel would charge Aqua-Max an added expense over and above what it was paying and that at some point in time Aqua-Max was to have the ownership of the plant and equipment.

810. The parties fell out in 1993 and at that stage no lease had run its course so that the question of the residual and further leasing for a period to cover it had not arisen. I am satisfied that Mr Trihey and Mr Rees agreed that any additional expense would be paid by Aqua-Max and that this would be achieved by debiting the loan account. This included covering the additional cost to cover the payment for the residual by Sietel which had not been discussed by the men prior to them falling out. However, thereafter the conduct of Sietel and Aqua-Max evidenced by what Mr Rees did leads to the inference that the residual was to be paid for by a further period of leasing between Sietel and Aqua-Max, followed by ownership being acquired by Aqua-Max.

813. I am fortified in that conclusion by a number of matters.

816. First, the agreement as to Aqua-Max owning the plant and equipment accorded with the commercial common sense of the business. The joint venture agreement provided for Sietel to invest money in the venture. Mr Trihey had the knowledge and the creativity to design a water storage unit. It was the expectation of the parties that Sietel would protect its investment by holding the property until Aqua-Max was in a position to re-pay the cost. By 1991-1992 when a substantial proportion of the plant and equipment was acquired the parties to the joint venture agreement were optimistic of the success of the venture. Sietel had to be protected in its investment and accordingly would wish to own the proprietary interest during the lease period but once Aqua-Max had successfully launched the hot water unit and generated income commercial common sense demanded that it should acquire the plant and equipment. There was no prejudice to Sietel in this step because Sietel was reimbursed handsomely for its acquisition of the plant and equipment, by Aqua-Max paying for it and Sietel had an 80% interest in Aqua-Max's business. There would be no reason not to transfer the property at the relevant time.

819. The second matter concerns evidence which provides support in the form of a resolution that was passed at a meeting of directors of Aqua-Max.

822. A meeting took place on 31 July 1990. In attendance was Mr R. Rees, Chairman and Mr J. Trihey, Director and the subject was - "Leasing of assets from Sietel Ltd".

825. The context in which this resolution was passed must be noted. By 31 July 1990 there was an expectation that the newly designed hot water unit would be a success and that it was anticipated that plant and equipment would be purchased for the manufacturing process. By October 1990 Aqua-Max was paying lease charges in respect of plant and equipment newly acquired.

828. On 31 July 1990 the directors resolved as follows -

"The Chairman declared to the meeting his shareholder interest and position as Managing Director of Sietel Ltd. Resolved that the directors could negotiate the leasing of assets as required from Sietel Ltd for use in the design and development of company products and/or future manufacture of those products. The terms and conditions to apply is appropriate for financial leases and between three and four years with residuals of 15 to 20%."

832. One other matter should be noted. Finance leases in 1990 were of two kinds, the straight leasing of equipment with a residual and a hire purchase agreement. Even though a finance lease did not contain any term which obliged the lessor to offer to sell the leased plant to the lessee at the end of the period of the lease, in practice invariably lessors offered to sell the equipment at the specified residual value and in the great majority of cases the lessee purchased the equipment. It was a satisfactory and tax effective way to acquire property.

835. In my opinion the resolution shows that it was contemplated by Messrs Rees and Trihey that Aqua-Max would lease from Sietel the plant and equipment on terms and conditions which were appropriate for financial leases for three to four years with residuals of 15 to 20%. Taken in the context of the times, in my opinion the parties clearly contemplated that Aqua-Max would acquire the interest in the property on the expiration of the lease.

838. Bearing in mind that very few detailed records were ever kept of meetings of the directors of Aqua-Max and that this was the only typewritten minutes of any such meeting while Mr Trihey was a director, it is significant that it was prepared and signed in that form at that time. One would infer that Mr Rees never put anything in writing and signed it unless he intended it to have effect.

841. The next piece of evidence which confirms my conclusions is the evidence that Mr Rees gave at trial concerning the issue.

844. The trial took place in 1998. The relationship between the parties commenced with the joint venture agreement in November 1988 and they parted in about April 1993. At the date when Mr Trihey and Mr Rees fell out all the leased equipment was still subject to financial leases with a financier. In other words, none had run their course and the question of what was to take place at the end of the lease with respect to the residual had not arisen. One of the bones of contention between the parties in 1993 was the allegation by the Trihey interests that Sietel was bleeding Aqua-Max by charging excessive amounts for lease charges, rental, management and computer charges, insurance charges and by charging an exorbitant rate on the loan owing to Sietel.

847. Much time at trial was spent on these issues. The focus was not at any stage on ownership of the plant and equipment. Nevertheless, Mr Rees was asked a question by his counsel in re-examination on this very issue.

850. Mr Rees was in the witness box for many, many days at trial. In re-examination he was asked the following question by his counsel and gave the following answers -

"MR WATKINS: Perhaps just to follow His Honour's question, and this was raised obliquely, I think, by Mr Wight - I may be wrong about that - the equipment that was leased by Sietel and was applied for the purpose of Aqua-Max's undertaking, what term of lease - what period of lease was generally entered into? How many years?---Generally four year leases was the standard lease period. At the end of that lease period, what happened?--- At the end of the lease period Sietel were usually offered the right to purchase the equipment. They would purchase the equipment and then the equipment was leased to Aqua-Max for another two years but the residual value was written off over two years, and then at the end of the six years Aqua-Max ended up with the equipment with no charges or payments being made, so the early leases have been - been with Aqua-Max now for one or two years or three - we had 91, went to 95, 96, 97, and now they were with Aqua-Max in their operation and use if they haven't scrapped them, for no cost, so they sit in Aqua-Max books at no cost, and there's no charges from Sietel to Aqua-Max on that equipment." (Emphasis added.)

854. In giving that evidence Mr Rees made it quite clear what happened after the parties fell out in 1993.

857. Later on the same day in re-examination Mr Watkins asked Mr Rees about certain documents which had been produced. He referred to a document concerning the leasing of equipment to Aqua-Max and was then asked the following question -

"What was the residual for the purpose of the transcript?---Seventeen thousand, one hundred and eighty one dollars which was a twenty per cent residual in the year - the number of years of the lease was four years. That will be a now owned - an asset that Aqua-Max no longer pays any lease charges on because it's had it six years."

861. Mr Rees was asked a number of questions at the present hearing before he was shown the transcript of the evidence he gave on the earlier occasion. He stated on at least two occasions that Aqua-Max never paid out any residual.

"Q: Can I just sum up from the example I've given to you. What would happen is you'd have a four year lease and a residual, you'd have a further two years of on-leasing by Sietel to Aqua-Max to pay out the residual, and after that, at the end of six years, the goods would be used by Aqua-Max but you say they are still owned by Sietel even though Aqua-Max would have in effect paid for the whole of the lease and the whole of the residual?---No, there was never a pay out of the residual."

871. Mr Rees on being confronted with the earlier evidence stated that it was not inconsistent with the evidence given at the present hearing, namely, that Sietel owned the equipment and Aqua-Max never acquired any interest in it.

874. In my opinion the whole thrust of his evidence given on 12 March 1998 points to the fact that at the end of the period of the lease there was to be a further period to cover the residual and that thereafter it was Aqua-Max's equipment. In my opinion the evidence given earlier supports the conclusion that Aqua-Max was to acquire the plant and equipment after the period of the lease had expired plus a further period to cover the residual payment made by Sietel.

877. The fourth matter which supports my conclusion is to be found in the accounts to 30 June 1998 being Exhibit MTA9. If the plant and equipment which allegedly was owned by Sietel was hired from month to month then there is no question of Aqua-Max ever obtaining a proprietary interest in any of the plant or equipment. The monthly charge would be an expense in the profit and loss account but there would be no question of depreciating the so-called lease chattels. Despite this the balance sheet of Aqua-Max shows that there is a provision for depreciation of plant and machinery leased in the sum of some $617,000. This is hardly consistent with treating the so-called Sietel owned assets on a general hire from month to month. Mr Wettenhall gave evidence that a chattel hired from month to month and which could be returned at the end of any month gave no interest in the chattel to the hirer and the hire charge was an expense in the profit and loss account.

880. The fifth matter is the credibility and honesty of Mr Rees. I have expressed fairly strong views of his honesty in my reasons for judgment but in the present proceeding I am satisfied that he is prepared to swear to a fact even though it be wrong if he thinks it will support the Sietel case. The fact of no documentation, his revelation of his concern about the Tax Department and documentation, the fact that on the application to support the referee's report last year there was no question of putting a case that Sietel owned all the plant and equipment the value of which had to be taken off the debt and the fact that now a case was being advanced that Sietel did own all the plant and equipment which would mean a substantial deduction from the purchase price supports the inference that Mr Rees' understanding as he put it of the relationship between Sietel and Aqua-Max concerning the lease property was false and wrong.

883. Further, as the marked up version of MTA31 establishes there are some 16 instances where Mr Rees has put in the general hire column plant and equipment which should have been inserted in the past notional lease column. Mr Rees was cross-examined in relation to each of these items and in most instances was prepared to accept that he had made an error. In respect of other items he neither accepted nor rejected the assertion that he had made an error. He only denied one item and the conclusion one draws from this is that his record keeping is inadequate. By referring to a document generated in 1993 counsel for M.T. Associates was able to establish that 15 errors were noted in the list compiled by Mr Rees as to items of equipment. The failure to keep proper records makes it difficult to determine what the true position is.

886. The next matter concerns the annual returns of Aqua-Max for 1991and 1992. It is noted in the notes to the accounts ending 30 September 1991 signed by Messrs Rees and Trihey as directors on 20 January 1992 the following under the heading "leases".

"Finance leases are capitalised recording an asset and a liability equal to the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Lease payments for operating leases are charges and expenses in the periods in which they are incurred."

890. The same note appears in the accounts for the year ending 30 September 1992 although the note does refer to the risks and benefits incidental to ownership of the asset. However, the point made in the 1991 note is also made in the 1992 note.

893. This in my opinion supports the view of who was controlling Aqua-Max and that was Mr R. Rees that Aqua-Max was leasing the plant and equipment pursuant to finance leases as that phrase was understood at that time. That is, a lease for a period with the expectation that the lessor would offer to sell the plant and equipment to the lessee at a specified residual value.

896. Finally, Mr Rees is in complete control of all the information concerning Sietel and Aqua-Max and in particular their accounting records. There is nothing in writing which supports what Mr Rees said. What documentation that has been placed before the court tends to support the version of Mr Trihey.

899. In my opinion the true position between Sietel and Aqua-Max was that at the end of the period of the lease between Sietel and the financier, the plant was further leased for a period of time to Aqua-Max to cover the cost of the residual which had been paid by Sietel and that at the end of that period it was agreed between the two companies that the ownership was to revert to Aqua-Max. That was the understanding of Mr Trihey up to mid 1993 and the evidence of Mr Rees confirms that after the leases were paid out by Sietel there was a further period to cover the residual payment by Sietel before Aqua-Max was to acquire the ownership.

902. It follows that in my opinion Aqua-Max owned the category of equipment referred to in Exhibit MTA31 in the column "past notional lease now hired".

905. It is convenient to deal with an argument put by the defendants' counsel. In support of their contention that Sietel owned the plant and equipment which had been leased by Sietel, counsel submitted that that seemed to be an accepted fact at the trial. Reference was made to part of the argument put by junior counsel for M.T. Associates at that hearing.

908. The question of ownership of that plant and equipment was not in issue at the hearing. The contention between the parties focussed on the allegation by M.T. Associates that Aqua-Max was paying an exorbitant amount of money for leasing the plant and equipment it used in the manufacture. As the events with which the court was primarily concerned occurred between 1989 and 1993 most of the plant and equipment was still subject to leases and there was no real issue as to ownership. Indeed the questions and answers asked of and given by Mr Richard Rees set out above confirms that the issue was raised in a way which was not central to the issues in the case. The fact that it was not an issue in the case does not support the argument put forward by the defendants in the present hearing that it was taken as accepted at that hearing that Sietel owned and would always own the property.

911. In order to value the plant and equipment in the third column which the parties accept was always owned by Sietel it will be necessary to make the adjustments which are highlighted by the light blue colour in the margin. All told there are 16 items.

914. In order to make the hypothetical sale for the purposes of valuation Aqua-Max will have to purchase that plant and equipment used by it in the course of its business from Sietel and this involves valuing the plant and equipment in category 1 and in category 3. As I have already stated it will be necessary to adjust some of the items in category 3 because of errors made by Mr Rees when preparing the document Exhibit D10 which is also Exhibit MTA31. I will work from MTA31.

917. Category 1 plant and equipment comprises plant and equipment which has been purchased from late 1994 to the relevant date and at which the relevant date were subject to some form of financial lease between Sietel and a financier.

920. Reference to Exhibit MTA31 identifies the items, the fact that they are notionally leased to Aqua-Max and the cost of same together with Taylor Lockwood's valuation.

923. The Court invited the parties to calculate what each submitted was the fair value of that category of the plant and equipment on the basis that Sietel would treat with the financier, would obtain the equipment upon payment of the sum and then sell it to Aqua-Max. In this regard in my opinion it is necessary to proceed on the basis that it was agreed between the parties that at the end of the lease, Aqua-Max would continue to lease it for a period whereby it paid out the residual and then acquire the interest in the property.

926. It is noted some of the plant and equipment was the subject of a hire-purchase agreement between Sietel and the financier.

929. In my opinion it follows that it is not just a mere question of determining the balance of the outstanding payments to ascertain the value. It is necessary to take into account payments made to the relevant date by Aqua-Max the total cost payable by Sietel to acquire the property prior to the expiration of the relevant agreement and then determine what is a fair price to be paid by Aqua-Max for the plant and equipment.

932. Counsel for M.T. Associates forwarded to the court supplementary submissions and included an analysis of the current notional lease pay out values which was prepared by Mr William Davidson of Mr Selak's office.

935. It is apparent that the summary by Mr Davidson is based upon evidence already before the court.

938. The defendants' solicitors have asserted that Mr Davidson has put in new evidence. In my opinion he has not. He has conveniently summarised material already before the court.

941. The court as the tribunal of fact could have performed the same exercise and Mr Davidson's summary avoids the court having to go through the time consuming exercise. This is a perfectly proper procedure. See the observations of the Full Court in R v Mitchell [1971] VicRp 5; (1971) VR 46 at pp.59-60 and on appeal the observations of Menzies J in the High Court, (1970) 44 ALJR at p.469.

944. According to Mr Davidson the materials before the court show that the total outstanding for what was described as the current notional leases was $1,617,994 and in that figure he included 11 motor vehicles which had a total outstanding of $159,092.

947. It is observed that the total pay out figures include an interest component in the remaining lease payments.

950. There is no evidence before the court as to any problems that may be encountered by Sietel seeking to pay out either a finance lease or a hire-purchase agreement ahead of time and whether there would be any penalties.

953. This makes the present exercise a difficult one and the court has to do its best on the available evidence.

956. According to Exhibit MTA31 the total cost of the items of plant and equipment the subject of current notional leases at the relevant date including the motor vehicles was $1,900,180. One compares that alleged total cost with the total Taylor Lockwood valuation which totals $1,878,900.

959. Another source to give some idea of the likely pay out figure is the outstanding lease liabilities shown in the books of Aqua-Max as at 30 June 1998 and that amount was said to be $1,532,000. That amount also included the motor vehicles.

962. Counsel on behalf of M.T. Associates submit that the purchase by Aqua-Max of the motor vehicles from Sietel was unnecessary because they were not essential to the manufacturing process and a purchaser would not be interested in buying them. I agree with this submission. Bearing in mind that it is necessary to make some assessment of the probabilities as at the relevant date I am of the view that the purchaser would not be interested in acquiring the motor vehicles which are listed on the last page of MTA31.

965. It is noted that there are five motor vehicles which at the relevant date were still subject to some form of financial lease and it is those five vehicles with which the court is concerned in relation to the first category of property.

968. According to my calculations the amount involved for the vehicles if taken on the total cost basis is $181,094 and if taken on the Taylor Lockwood and valuation is $130,200.

971. It is the submission of counsel for M.T. Associates that the court should not allow a greater sum than $1,532,000 being the total lease commitments in the books of Aqua-Max at the relevant date and that from that sum the amount should be deducted for the motor vehicles.

974. The difficulty I have in making an assessment does come about because there is no evidence as to whether a financier would allow either a straight lease or hire-purchase agreement to be paid out ahead of time and if so whether there would be any penalty or additional cost. One would be most surprised if there was not.

977. Further, the exercise is complicated by the fact that under a pure finance lease the lessee has no right to purchase the equipment. That is made quite clear by the terms of the finance lease. In practice, however, invariably lessors offer to sell the leased equipment at the residual value.

980. As against this I am not in a position to say what amount of the lease commitment is attributable to interest into the future and if there was an early pay out whether that interest would be reduced.

983. The defendants forwarded further submissions in regard to this and they submitted that the court should allow the sum of $1,608,600 in relation to what is described as the category 1 plant and equipment. This amount is calculated by taking the lease commitment of $1,532,000 in the Aqua-Max books and adding 5% being a reasonable figure for early pay out.

986. The court is bound to do its best on the available evidence before the court and taking in to account the total lease commitment of $1,532,000 and deducting the total cost for the five motor vehicles of $181,094, the result is $1,350,906.

989. In the end it is a question of determining a fair value between Sietel and Aqua-Max and doing the best I can I think a fair value weighing up all relevant factors is $1,300,000 for category 1 plant and equipment.

992. This amount will have to be deducted from the valuation of the shares.

995. It is now necessary to value the items that were always owned by Sietel, were never the subject of any lease between it and a financier or it and Aqua-Max but nevertheless had been used by Aqua-Max in its business. Exhibit MTA31 reveals the total cost of the plant and equipment and the Taylor Lockwood valuation. It is necessary to adjust the column to give effect to the errors made by Mr Rees.

998. Of errors identified by the blue marking on Exhibit MTA31 I am satisfied that Mr Rees did make an error in respect of the 16 instances save for asset No. 7320, voucher No. 33. In addition the item in voucher No. 19 is also an error in that it should be in the third column.

1001. In valuing this third category of plant and equipment I exclude the motor vehicles for the same reasons as I excluded them from the category 1 plant and equipment. No purchaser would be interested in purchasing a 1989 BMW by way of example.

1004. Making allowances for the adjustments for errors and motor vehicles it would appear that the grand total for the cost of same is $437,742 and the Taylor Lockwood valuation comes to $518,150.

1007. Mr Kendall QC submitted on behalf of M.T. Associates that the Court should reject the evidence of Mr Sloan from Taylor Lockwood and allow the total cost price less an amount for depreciation. As he points out much of the equipment is very old and the total cost of the equipment to Sietel would hardly be the price that a reasonable purchaser would pay for equipment so old. A great deal of it is eight to nine years old and some is even older.

1010. Mr Sloan who is employed by Taylor Lockwood and is a valuer, has valued the items on a market value or existing use basis. He gave evidence which was supported by Mr Rees that some of the substantial equipment was firmly affixed to the premises of Aqua-Max and would require considerable expense to move. He valued the plant equipment on the basis that it constituted an existing assembly line and was valued on the basis of what it would cost to establish such an assembly line. Hence he was of the opinion that the bulk of the plant and equipment was worth more than it cost. This was despite the fact that much of it was now in excess of eight years old and had been used over a long period of time.

1013. M.T. Associates did not call any valuation evidence. However, as Mr Kendall QC submitted some of the equipment had been purchased in the past from Taylor Lockwood and hence Mr Sloan was hardly in the position of an independent valuer. Further, Sietel had charged Aqua-Max a hire charge over many years totalling some $212,000 for plant and equipment some of which was in this category.

1016. In the end it is a question of what would be a fair price as between Aqua-Max and Sietel for Aqua-Max to acquire the equipment and in carrying out the calculation I proceed on the assumption that Sietel would co-operate in the sale. If it did not then there would be the risk that Aqua-Max could not wish to purchase the plant and equipment which would mean that Sitel would be left with equipment which on a broken-up basis would be of little value. Its value to Sietel comes about because it forms part of an assembly line.

1019. In my opinion as between Sietel and Aqua-Max, Aqua-Max would not pay the amount put forward by Taylor Lockwood on that basis. There has to be a degree of compromise as between Sietel and Aqua-Max. Taking into account the competing arguments and the circumstance I think a fair value for category 3 plant and equipment is $400,000.

1022. It follows that in my opinion a fair price for plant and equipment that Aqua-Max has to purchase from Sietel would be $1,700,000. This total amount has to be deducted from the valuation of the shares.

1025. It is now necessary to consider each of the contentious items.

1029. The evidence established, at the trial of the proceeding and before the special referee that Sietel employed a number of senior employees who devoted much of their time in the service of Aqua-Max. Sietel charged Aqua-Max for the provision of these services. The referee had to consider what was a reasonable charge for the senior personnel who were providing services to Aqua-Max in order to establish the FME. In other words the reasonable purchaser taking over the business would have to employ senior personnel at a certain rate and accordingly it was necessary to adjust the expenses to reflect the cost of the personnel. The referee had accepted that the charges made by Sietel were inadequate and the new purchaser would have to pay more.

1032. M.T. Associates in the August 1999 hearing contended that the referee's approach was wrong. It was said that he failed to take into account actual payments for personnel and that he proceeded on a false basis. I considered the attack made upon the referee's determination and although I thought his method was inappropriate I nevertheless thought that his finding as to the expenses for the future in respect to the senior employees at Aqua-Max was within range and should not be interfered with.

1035. Accordingly when I published my reasons for judgment I indicated that I was prepared to accept the special referee's calculation and this is apparent from my reasons for judgment. However Mr Kennon QC, appearing for the defendants submitted that since I had refused to adopt certain parts of the report the interests of justice dictated that I should also exclude the reasoning and determination in respect to the cost of personnel in the FME. I agreed to that course.

1038. Now, before me at this hearing, the defendants' contention is that what the special referee did was correct and accordingly I should calculate the same quantum of expense for the employment of the senior personnel in the FME. That was the evidence of the defendants expert, Mr Wettenhall, whose approach was concurred in by Mr Humphris.

1041. Since the matter was re-opened at the request of the defendants, Mr Selak repeated the criticisms he had given at the August 1999 hearing. He criticized the referee's approach because of the failure to look at actual figures but at this hearing, because of time constraints, proceeded on the assumption that the referee's approach was appropriate but stated that the referee's calculation of salary on costs of 25% was too high and that the calculations for on costs for the year 1998 were 15.5%.

1044. Mr Wettenhall gave evidence to the effect that the 25% on costs calculated by the special referee was conservative.

1047. I am of the opinion that Mr Selak's evidence is to be preferred as he does set out in detail what percentage should be allowed in respect to superannuation, payroll tax, WorkCover, long service leave and ends up with total statutory on cost of 15.5%.

1050. It is interesting to observe that Mr Wettenhall supported by Mr Humphris was prepared to say that 25% which the special referee had calculated was reasonable but in evidence said this would be a minimum. Taking into account the eagerness with which the defendants sought to increase the expenses, it is significant that he did not in fact to do so. Mr Rees not in any way confined by being independent said that he thought that the total cost was more in the vicinity of 35%.

1053. As I say I prefer Mr Selak's determination and it follows that of the total expense allowed by the special referee for personnel a sum of $37,050 should be deducted from the total expense.

1056. Accordingly the amount of the expense allowed in the FME for the cost of employing senior personnel should be reduced from $488,000 to $450,950.

1060. As the sale is on the basis that the purchase price covers the acquisition of all necessary plant and equipment there will be no ongoing expense for leasing and/or hiring of plant and equipment.

1063. However the new purchaser is entitled to depreciate the plant and equipment and accordingly there should be an allowance in the FME for the depreciation expense.

1066. It was conceded by counsel for M.T. Associates that there must be some allowance in the FME for depreciation of the plant and equipment acquired by the new purchaser but the question was how much?

1069. The defendants contended that the sum should be determined by ascertaining the value of the plant equipment, and depreciating it over a period of six years which would result in the total amount being divided by six. The evidence of Mr Wettenhall is that the amount that should be allowed is $654,476 in the FME.

1072. Professor Officer does not dispute Mr Wettenhall's approach but he is careful to note - "I am not attesting to the numbers used by Wettenhall, but the process and principle that he has adopted is (sic) sound."

1075. Mr Humphris for his part agrees that the period of six years is an appropriate right off period.

1078. Mr Wettenhall has valued the Sietel assets at $3,926,853 and has relied upon the Taylor Lockwood valuation of all assets owned by Sietel used by Aqua-Max.

1081. In carrying out this part of the exercise it is necessary to determine a fair value for the plant and equipment to be transferred on the sale. I have calculated the categories 1 and 3 plant and equipment but have not referred to the value of the second category plant and equipment which is to be transferred and which I have found is owned by Aqua-Max. According to Exhibit MTA31 taking into account the adjustment for errors the value of the plant and equipment is at cost of $1,070,266 and at the Taylor Lockwood valuation is $1,452,350.

1084. I have arrived at the total cost figures by taking the amount noted on p.3 of Exhibit MTA31 in relation to the grand total of Sietel assets used by Aqua-Max of $1,071,624 and added to that sum $31,358 which was in the general hire category and which should have been in the past notional lease column and added $30,000, being the item voucher No. 19 which should have been in the general hire column.

1087. With respect to the Taylor Lockwood valuation I have commenced with the grand total figure of $1,375,400 and taken from it the $4,000 which is item voucher No. 19 and added to it the sum of $80,950 being the total of the items which were in the wrong column.

1090. Taking in to account the criticisms made as to the lack of independence of Taylor Lockwood, the actual costs of the equipment much of which is old and the fact that there would have to be a degree of compromise between Sietel and Aqua-Max it is my opinion that a fair sum would be $1,200,000.

1093. It follows that the total value of the plant and equipment which would go with the business is $2,900,000 made up as follows -

1100. The evidence from the defendants' experts was that the depreciation should be written off over a period of six years. Mr Selak was hampered in his consideration of this issue and did not address the question of the period during which the plant and equipment should be depreciated.

1103. In my opinion I should accept the evidence of the defendants' experts as to the period over which one would expect the new purchaser to depreciate the equipment and accordingly the amount of $2,900,000 is to be divided by six to give an annual figure for depreciation of $483,333.34.

1106. The FME should be adjusted to allow for this expense.

1110. This item was a hotly contested issue in this proceeding. Mr Kendall QC submitted that the Court should approach the evidence given by the defendants in respect to research and development for the future with scepticism bearing in mind the way the defendants had conducted the case in the past.

1113. The defendants at this hearing adduced substantial evidence to support a conclusion that Aqua-Max was at the crossroads, that its main competitor had produced a new storage hot water unit which was good as if not better than the Aqua-Max G200 and that hereafter Aqua-Max would have to spend a substantial sum of money on research and development to design and manufacture "a completely new product".

"Aqua-Max will need to develop a completely new product if it is going to maintain margins and market share in the face of competition from products such as the new Rheem 'Stellar'." (Emphasis added.)

1120. Mr R. Rees opined the view that the "total R & D cost as explained above is estimated to cost M$9 and it would take approximately 3.5 to 4 years." This would involve a total expense of between M$2.259 to M$2.571 per annum.

1123. One can see from his evidence that he is of the view that the future purchaser would have to spend somewhere in the vicinity of M$2 plus per year to design a new unit over 3.5 to 4 years.

1126. Mr Wettenhall in his evidence stated that he read the affidavit of Mr Rees in which he outlined the development of the competitor's new hot water service recently released and having considered an analysis of the expenditure required which was Exhibit RR16 to Mr Rees' affidavit noted that the total expenditure was M$7.677. He states that for the purposes of his valuation he adopted a product life of eight years over which the R & D expenditure would be amortised and noted that this created an annual expense of $959,625 which he rounded out as a reasonable annual sum of $750,000.

1129. Professor Officer notes that the approach adopted by Mr Wettenhall is correct in principle but again he is guarded in his acceptance of the amounts. He says -

"The approach adopted for R & D and the adjustments are in principle correct although I have no knowledge as to the validity of the amounts used in the estimate."

1133. Mr Rees together with an employee of Sietel who is used by Aqua-Max, Mr Zuccon, were responsible for the projected cost analysis. This comprised listing the features of a completely new unit, and costing the labour and materials. The actual labour rate was fixed by Mr R. Rees and in my opinion is grossly inflated.

1136. I interpolate to note that there would have been an R & D cost for the development of the new Kwikot G40 by Aqua-Max. This would have provided an historical fact which properly analysed and if necessary adjusted could have been used as a basis for determining the R and D expense in the FME.

1139. Despite these observations and the fact that the Court did raise the question of the R & D cost for both the G200 and the G40 during the course of the defendants' case, no effort was made to place any evidence before the Court as to the actual cost of research and development for the G40. The information was within the camp of the defendants. What records there were represented a shaky basis for determining the correct amount.

1142. In final address Mr Kennon QC by referring to a number of records asserted that one could confidently say that $1,922,306 were spent on research and development for the G200.

1145. I would have thought that the R & D cost of designing and manufacturing the new unit Kwikot G40 which was designed to take over from the G200 would give a fairly sound basis for determining the cost of research and development in the future. The evidence was in the camp of the defendants, they failed to produce it and one can infer that the evidence would not have assisted their case as they wished to present it which was to establish a very high amount for R and D in the FME.

1148. Mr Humphris addressed the question of future R and D and in his evidence made a number of comments especially in paragraphs 7.8 and 7.9 of his witness statement which shows an incomplete consideration of matters and the proffering of an opinion without full and proper investigation. His evidence on this aspect has all the hallmarks of supporting his clients' case without proper consideration.

1151. Mr Selak noted that in his opinion the special referee had allowed the sum of $358,915 in his calculation of FME on an annual ongoing basis. Mr Selak opined the view -

"We concur with the special referee's treatment of this matter. In our view, this level of ongoing research and development expenditure is more than sufficient to sustain the business such as the one operated by Aqua-Max."

In considering the future he opined the view that the question of amortising research and development must be over a period of 20 years because in his opinion that is the estimated useful life of the product. This is to be compared with Mr Wettenhall's view of eight years. The latter seems too short bearing in mind that the G200 has been on the market for at least eight years and is likely to be on the market for at least another four or five years according to one version of the evidence given by Mr Rees. Mr Selak is of the view that a further sum of $73,850 should be allowed for research and development in addition to the amount of $358,915.00 making a total of $432,765 per annum.

1156. In my opinion the proper approach is to determine what were the probabilities as at the relevant date namely 17 July 1998 with respect to the future of the Aqua-Max business and its products.

1159. On 17 July 1998 Aqua-Max had been manufacturing and selling a very successful hot water storage unit the G200. It had a number of features which made it a market leader during the six years it had been in production. It had the five star energy efficiency rating, a ten year guarantee, a stainless steel storage tank and was the only hot water storage unit in Australia with a stainless steel tank.

1162. It was launched in 1992 and was extremely successful. By the relevant date it had won awards, had no real competition in the upper end of the market, had increased its sales every year so that at 30 June 1998 it had on an annualised basis sales in excess of M$17, (referee's assessment) and an operating profit (after making adjustments) of $972,027 according to the annual report. It was an extremely successful unit.

1165. The fact was its actual sales to 30 September 1998 were M$19.2 compared with the estimate of the referee of M$17.8.

1168. Aqua-Max had decided in its wisdom to design another unit, the Kwikot 40 which is very similar to the G200 but has the advantage that it has a quicker recovery rate than the G200. It was launched on the market in June 1998 and in its first month sold 457 units and in July sold 524.

1171. As at the relevant date Aqua-Max was selling on the average 2,000 units per month of the G200 and selling about 500 of the G40. For the three months leading to the relevant dates, April, May and June, it sold 2,022, 2,258 and 2,243 units respectively. The sales in May and June 1998 were the best months of that year and, a fair inference the best months' sales ever.

1174. Aqua-Max imported an instantaneous gas hot water service. This was one of the best on the market and the sales were steadily increasing.

1177. The reasonable vendor Aqua-Max, would be able to tell the reasonable purchaser that its business was buoyant, was ever increasing and that it had on the market the best storage hot water service in Australia and a very good continuous flow heater.

1180. A consideration of its sales figures over the previous six years showed an ever-increasing sales revenue. The figures show -

On any view a very successful developing business with no competition of any note at the upper end of the market.

1190. As at the relevant date there were rumours that Rheem, a division of a substantial public company Southcorp Ltd. was in the process of developing a new unit to provide competition to the Aqua-Max units. However it was not known at that point in time the characteristics of the new unit.

1193. As I have said, at the relevant date Aqua-Max imported from Japan an instantaneous hot water service which it sold for very little profit. The reason for its distribution by Aqua-Max was that there was a realisation that instantaneous hot water services were becoming popular and even though they cost substantially more than a storage unit there was a concern that the unit would be a real competitor some time in the future. The imported model is considered to be one of the best on the market.

1196. The fact was that on the relevant date Aqua-Max enjoyed a very well-established niche in the storage hot water market especially in the State of Victoria and that all the signs were that the business would continue to grow and be very successful.

1199. At the relevant date Aqua-Max had slightly in excess of 25% of the Victorian market. Gas hot water units are more popular in this State compared with other States. As at the relevant date the G200 was the most efficient storage hot water heater on the market and won the prestigious Galaxy Energy Efficiency Awards for the most efficient product in its class in 1995, 1996 and 1997. The instantaneous unit, the Continuum, won the Galaxy Award in its class in 1997.

1202. Bearing in mind that Aqua-Max had just put onto the market a new unit the reasonable vendor and the reasonable purchaser would not have been thinking in large terms for research and development into the future as at the relevant date.

1205. Aqua-Max in its submission to the referee in 1998 informed him that the G200 model was scheduled to be phased out by March 1999 and the Kwikot G40 model would be the only one sold thereafter. That was the expectation at the time. It was premature. It is noted it was launched in June 1998 and in support of that contention the special referee had the unit sales of the Kwikot 40 for June, July and August which showed 457, 524 and 652 units respectively being sold in that period.

1208. The referee considered the two main competitors to Aqua-Max being Southcorp Ltd, making Rheem and Vulcan, and GWA International Ltd. which makes the Dux brand of storage heaters. He set out a comparison of the products, their costs and features and made the following observation -

"Those comparisons suggest that Aqua-Max products are currently competitively priced at the premium end of the product scale, offering arguably a higher standard of features than similarly priced competitor products."

1212. In dealing with the research and development amount in the FME the special referee determined the R & D expenditure for the past, and assuming the G200 would be phased out by March 1999 he amortised the R and D costs over the period up to 30 September 1998.

1215. He did not address the question of the likely amount for R & D for the future based upon the facts and probabilities which existed at the relevant date namely 17 July 1998. I decided that the R & D expenditure amount fixed, and the methodology used, by the special referee were wrong and I held should be excluded from the FME.

1218. The question is, as at the relevant date, based upon the facts and probabilities known to the reasonable vendor and the reasonable purchaser, what amount should be allowed for future R and D and therefore an annual expense in the FME?

1221. At the August 1999 hearing the defendants supported the amount of $353,000 per year for research and development in the FME. No attempt was made before the special referee or indeed the Court in August 1999 to establish the cost of R & D for the G40 unit. The special referee had proceeded on the assumption that Aqua-Max had spent at least M$1.6 on the development of the Aqua-Max G200. The evidence tends to suggest the sum may have been greater.

1224. Mr Rees gave evidence in the present hearing that there were certain events which had occurred which showed that the rosy picture for the future of the business as at the relevant date was erroneous. It was contended that Aqua-Max was now facing difficulties in maintaining its profit because of some problems with the G200, the failure of the G40 to take over from the G200 and increased competition.

1227. The first event which occurred was the launching of the Rheem Stellar water storage unit. In fact it was released into the market in August 1999 and is a unit with features which no doubt will provide competition to the G200. The first thing to note is that it is a more attractive looking unit though, question whether that will increase sales, secondly it has a ten-year warranty, thirdly and more importantly has a five-star energy efficiency rating and finally, has a better recovery rate than both the G200 and the G40. Indeed it has slightly in excess of five stars energy rating. Recently queries have been raised about the energy rating of the G200 and the suggestion is that it is just reaching the five stars. As I have stated the other excellent feature of the Rheem Stellar is that it has a recovery rate of 200 litres per hour which compares with the G200 of 123 litres per hour and the G40 172 litres per hour. The Stellar sells for the same price as the G200, namely, $899.

1230. Southcorp Ltd which sells the Stellar unit is a very large public company and has huge resources to advertise its new product.

1233. Mr Rees also points out that since the relevant date the sales of the G200 have dropped off dramatically some 20% in the year to 30 September 1999. However in considering these figures it is important to note that Aqua-Max was competing with the G200 with its G40 product. Nevertheless the figures do show to 30 September 1999 that the total sales of units were 24,071 whereas to 30 September 1998 the total sales were 25,797. Mr Rees has given evidence that the G40 has not been a successful product and that the G200 would be continued for the foreseeable future with a distinct possibility that the G40 will cease production and be modified, re-named and then released onto the market as a new model. He gave evidence that it was necessary in order to overcome the new competition and to increase the sales that an entirely new model would have to be designed. It was anticipated it would take some four years.

1236. In addition Mr Rees emphasised that instantaneous hot water services were becoming more popular and although the price of these units was considerably more than the water storage units some years ago, the position today is that they are only about $400 or $500 more expensive for the better models. He said that the instantaneous hot water services were providing more and more competition and reducing the market for storage heaters.

1239. The question is what were the facts and probabilities as at the relevant date with respect to the sale of the G200 and G40 and future R & D and what effect if any does the later evidence have upon those facts and probabilities?

1242. One thing should not be overlooked. The G200 was designed and launched on the market in mid-1992. It was a completely new storage hot water unit with a five star energy rating, a stainless steel storage cylinder and a ten-year warranty. The design commenced from scratch. Aqua-Max was a new company entering into the field of manufacture and sale of hot water storage units.

1245. Aqua-Max has been a success story. There is no doubt about that. The figures amply support that conclusion to the relevant date. At the relevant date it had just introduced a new unit which was very similar to the G200 and said to be an improvement. Although its energy rating was four stars this was the same as competitors and it has a very good recovery rate. It has the stainless steel cylinder and the ten years' warranty.

1248. Commercial common sense dictated that any new unit should be based on the one that was successful, namely, the G200. The G40 was the result.

1251. A successful advertising jingle of the past is apposite - "When you're on a good thing stick to it!" It is not surprising that Aqua-Max made the decision to introduce a new unit which was very similar to the very successful G200. I have no doubt it was launched on the basis that eventually it would take over from the G200 and there was that expectation as at the relevant date.

1254. Mr Rees says there have been teething problems with the G40 and it has not been a successful unit. The probabilities today are that it will not be manufactured for much longer.

1257. He also said that the G200 had a few problems recently.

1260. Commercial common sense dictates that in meeting the competition from the new Stellar unit that the starting point is improving the present product i.e. the G200 and launching a new unit which improves it and more importantly uses the G200 model description e.g. the G200 Mark II. With the benefit of hindsight the sale of a similar unit by Aqua-Max has not helped the G40. The market liked the G200 and still purchased it in large numbers despite the availability of the G40. The sales since June 1998 are that the G200 outsold the G40 from that date to the end of September 1999 by a factor of three to one.

1263. What needs to be done is to design a unit to meet the features of the new Stellar. Aqua-Max has the advantage because it is still the only storage unit which has the stainless steel tank and can justifiably extend a warranty for ten years. The Stellar has a warranty for ten years but query whether the tank will last that long. Very little would need to be spent in improving the look of the G200 and the real question is the recovery rate.

1266. Mr Rees has given evidence that it will be necessary for Aqua-Max to develop a completely new product "if it is going to maintain margins and market share in the face of competition from products such as the new Rheem Stellar. Otherwise, Aqua-Max will suffer lower profits, as is currently occurring with the G200, because the product benefits are now significantly less than they were initially when compared with the opposition's products. An increase in its marketing effort and therefore costs are necessary to reduce the decline in sales."

1269. He asserts that the G200 is past its use by date.

1272. He then sets out what he considers are the parameters of a new product. It is clear from his evidence that the unit will be an entirely new unit achieving as much if not more than the Stellar.

1275. Mr Kendall QC submits that one should approach the evidence of Mr Rees with considerable caution.

1278. He emphasised that before the special referee there was no suggestion at all of large research and development for any new product. Indeed, there was no suggestion of a new product. In the August 1999 hearing the defendants took the view that the amount allowed for research and development of $353,000 by the referee was adequate. There was no suggestion of a new product.

1281. By August 1999 the G40 had been on the market for some 16 months. Mr Rees gave evidence on that occasion that it was anticipated that the G200 would be phased out early in 2000. He told the special referee it was to be phased out early in 1999. His change of position gives little confidence to accepting his evidence as to what the future holds for the G200.

1284. Mr Kendall QC then poses the question "What has changed?"

1287. He submits that the answer to that question is obvious, namely, the publication of the reasons for judgment after the August 1999 hearing and in particular the ruling that the notional debt should be ignored meant that a substantial item used to reduce the value was now no longer to be deducted.

1290. He submits that what the defendants then set out to do was to find another basis for raising a substantial expense and they alighted on the R and D element in the FME. Mr Kendall QC points out the position now is according to Mr Rees that the G200 has problems, the G40 is a flop and will be phased out very soon and re-launched and that it is now necessary to design a completely new product over four years.

1293. Mr Kendall QC emphasises that there is no design, report or any document concerning this new product. Mr Rees answered the criticism by saying that what was the point of he writing a report to himself; he knew what was required?

1296. Further, that Mr Zuccon was asked approximately two weeks before the present hearing to prepare what he estimated would be the work involved in designing the new unit.

1299. Mr Kendall QC submits that one has to be extremely wary of anything Mr Rees says not only because of the findings made by the court at the hearing of the trial on oppression, but also by reason of his change of position between the August hearing and this hearing, the lack of any documentation to support the concept and his obstruction in producing information.

1302. In my opinion there is much substance in Mr Kendall's submissions. This is in effect a new case. Although the result of my rulings last year was to focus the minds of the parties on R and D as a future expense based on the facts and probabilities at the relevant date, the fact is, this change of direction by Aqua-Max has been very sudden.

1305. It behoves the court to scrutinise the evidence very closely.

1308. It cannot be denied that Aqua-Max now has fairly substantial competition in the market place. The Rheem Stellar unit on paper appears to be a very good unit. Only time will tell whether it does successfully outsell the G200 in this State.

1311. The fact is that the G200 has been in the market place for eight years and has been successful. In the normal course of events householders when their storage heater fails move quickly to replace it and if they are satisfied with their present model will replace it with the latest of that model. It is expected that the G200 will last for at least ten years and one would expect that there will be repeat purchases in the years to follow. Commercial common sense dictates that any new unit should be an improvement of a market winner.

1314. I reject the evidence of Mr Rees that it would be necessary for Aqua-Max to design a completely new product to meet the new competition. In my opinion an improved version of the G200 would be the way to go. Clearly the G200 is a unit which plumbers recommend and it has established a very good niche in this State, namely, some 27% of all sales of storage hot water units in this State. It enjoys an excellent name. This is supported by its continued good sales over the new product, the G40. I interpolate to note the G40 is on the market $40 cheaper than the G200.

1317. The defendants called a Mr Cazaley to give evidence in respect to competition, research and development and in particular the likely competition from the instantaneous hot water units.

1320. Mr Cazaley like a lot of witnesses who come before the court made statements in his affidavit no doubt prepared by others, which he was not prepared to support fully in viva voce evidence. I may say I found him to be a frank honest witness in his viva voce evidence. Some of the statements made in his affidavit were not correct.

1323. Mr Cazaley has been involved from a very early age in the appliance industry, mainly concerned with white goods, gas cookers and gas heaters, and in 1969 joined a company which sold Rinnai products in Australia. Rinnai is a Japanese manufacturer of gas heating and cooking appliances. In the early years it was mainly concerned with residential heating appliances and was very successful.

1326. Rinnai was never involved in storage hot water services but it sold in Japan and later in Australia instantaneous continuous flow water heaters. Rinnai has been very successful in selling them. Mr Cazaley ceased to be with Rinnai in 1993 and since then he has been consulting with an Australian company which manufactures gas barbeques.

1329. In his affidavit Mr Cazaley makes two points, namely, that in his opinion the continuous flow instantaneous hot water heaters would "lead to the gradual but relative demise of the storage hot water service in Australia". He also asserted that by reason of the Rheem Stellar range of units, "unless Aqua-Max invests and develops its products to leapfrog competition like this, it will wither". He also asserted that the Stellar had features superior to the Aqua-Max product.

1332. In cross-examination Mr Cazaley frankly admitted that he was prepared to give evidence to assist Mr Rees. It became apparent in his cross-examination that he was not saying the instantaneous hot water service would eventually take over and accepted that there was and would always be a market for storage hot water services in this State. He frankly admitted that he was unaware of the alleged superior Stellar features compared with the G200 but more importantly accepted that G200 was a very good unit which was well received and was recommended by plumbers. He accepted that its feature of the stainless steel storage tank made it a very good unit. I reject his evidence insofar as he says that Aqua-Max would wither unless it invests. Frankly, he was not in a position to make that statement as he had not investigated either the features of the Stellar or the necessity of Aqua-Max to develop another product.

1335. He was asked the following questions and gave the following answers -

"And you know that a stainless steel tank is highly preferred in the market place, don't you?---That's right. You know as well that plumbers and suppliers generally who are recommending people to purchase gas storage water heaters in this State have for a number of years been strongly recommending that people who are doing so get an Aqua-Max 200, haven't they?---I believe so, yes. It is well known in the market place, isn't it?---I think so. And it's been widely respected and widely sought after in the market place, hasn't it?---Yes. Do you think, given your experience in the industry, that people who manufacture the Rheem Stellar would be especially pleased to get hold of a stainless steel tank so that they incorporate a stainless steel storage tank into the Rheem Stellar?---I would think so. It would be highly sought after, wouldn't it?---It would."

1339. He accepted that there was still a significant demand in the market place for storage water heaters. He agreed that that was one of the reasons why Rheem brought out the new Stellar.

1342. In my opinion the fact that Southcorp has designed and sells a new storage hot water unit speaks volumes for the continuation of the gas storage hot water unit market.

1345. One other piece of evidence which accords with common experience is that those who purchase hot water storage systems are very much influenced by their plumber.

1348. Mr Cazaley's evidence supports the conclusion that the G200 is still a very viable and popular model in the market place.

1351. As I have said, I reject the evidence of Mr Rees that it is necessary to develop an entirely new product. In my opinion it is unnecessary for Aqua-Max to develop "a completely new product" in order to maintain its market share and meet the competition from the Rheem Stellar.

1354. I reach that conclusion for a number of reasons.

1357. The Stellar was launched in August 1999. The rumours had been around for at least 12 months prior to its arrival, yet it was not until November 1999 that Mr Rees gave consideration to "a completely new product". In cross-examination he stated that it was the intention of Aqua-Max to phase out the G200 over the next three or four months that it was proposed to overcome the problems with the G40 and market it under a new name. The continual change of decision by its company director as to what Aqua-Max proposes to do, seen in the ever changing decisions concerning the G200 raises considerable doubt about what the future does hold.

1360. I accept the submission of Mr Kendall QC that the new product concept was devised to try and justify a very large R and D component in the FME. In my opinion the response of Mr Rees to the finding of the court that the notional debt was irrelevant was to seek a means of increasing the R and D element which I had ruled was to be reconsidered.

1363. Mr Kennon QC asserted in his opening that Aqua-Max took the view that the G40 had been a flop. Mr Rees was questioned about this and in my opinion the assertion by Mr Kennon was incorrect. The position is, according to Mr Rees, that Aqua-Max will phase out the G200 over the next three or four months, will correct the problems with the G40 and then launch another model of the G40 under another name to avoid the stigma as he puts it of some of the problems they have encountered particularly with pilot outage. The impression he left with the court was that Aqua-Max was getting on top of the problems.

1366. I do not accept that the G200 will be phased out in the next few months.

1369. Commercial common sense points to the course proposed by Mr Rees with respect to the G40 and not the expenditure of a huge amount on a completely new unit which would also involve a completely new assembly line at substantial cost.

1372. Secondly, there are no plans, reports, diagrams or any document of any alleged new unit. Indeed, Mr Zuccon was first asked in November, some weeks before the trial commenced, to prepare a document setting out the likely R and D expenditure on the new unit. One might have thought that if Aqua-Max was serious about this then thought would have been given a lot earlier than November when a trial date was pending to address the question of a new unit.

1375. Thirdly, the G40 was launched in June 1998, the referee was told the G200 was to be phased out in early 1999, the court was told in August 1999 that it would be phased out in early 2000 and not one word was spoken that the G40 was not successful or that an entirely new unit was to be designed. There was no evidence that G40 was experiencing problems of a nature that was likely to cause its demise. Yet an impression was created at this hearing that it would. This impression does not fit very well with the evidence of Mr Rees that the G200 was to be phased out in 2000.

1378. The rumours that Rheem was to bring out a new product go back prior to July 1998 although according to Mr Rees they became much stronger in about November 1998. One can assume that by the relevant date the probabilities were that Rheem was developing a unit and by August 1999 it was a reality. Despite those facts it was not until November 1999, shortly prior to trial, that the defendants turned their mind to a completely new unit.

1381. Thirdly, commercial common sense dictates that Aqua-Max should reap the benefit of its substantial success with the G200. The G40 did have some teething problems, which is not uncommon with a new product but the problems have been to some extent overcome and it is proposed that it should be used to develop a new model which is similar but under another name. The G200 has been a very successful unit. Since its launching onto the market in 1992 there have been increased sales every year up to the relevant date. I accept the sales to September 1999 show a drop. However, there were two very important events to explain the drop. The first was the distribution of the G40 unit which meant that Aqua-Max was competing with itself with a similar unit. Secondly, Mr Rees stated that the G200's sales and revenue were affected by the Longford Gas incident of September 1998.

1384. Properly analysed Aqua-Max's sales for 1999 provide a good base for the future.

1387. Mr Trihey gave evidence that the G40 is very similar to the G200. It has the benefit and advantage of the stainless steel tank, it has a better recovery than the G200 and it has a four star energy rating. No doubt thought must be giving to increasing it to five stars and indeed Mr Rees stated that a prototype had been built which achieved five stars. One would sense a degree of optimism that Aqua-Max can achieve that.

1390. In my opinion the obvious way to go is to build on the great success of the G200 and spend money to improve its features to directly take on the Stellar unit.

1393. Finally, the G200 unit has been a market leader. I reject the assertion made that it has reached the end of its life. The strong sales figures to the relevant date and the later sales (adjusted to reflect the G40 competition and the effects of the gas incident) show that it is still a very good selling item. Its best features are the stainless steel storage tank and its five star energy rating, two factors which Mr Cazaley accepted made it a very good unit. These features are emphasised in advertisements by Aqua-Max.

1396. It is noted that Rheem also emphasises that its flue is constructed out of stainless steel.

1399. The fact is that Rheem recognises the great benefits of the G200, namely, the five star feature and the stainless steel tank. Its new product has five stars and a stainless steel flue. In my opinion the starting point for Aqua-Max to respond to the new competition is to improve the present product, namely, the G200. Much money has been spent in the past to produce one of the best gas storage hot water units and common sense dictates building on the wonderful reputation it enjoys in the market place.

1402. With respect to the competition I do not accept that at the relevant date the instantaneous continuous flow hot water services represented a threat to the storage units. At that date they were considerably more expensive than the G200 and I accept the evidence of Mr Cazaley in cross-examination that there will always be a market for storage hot water units. Indeed there are features about the continuous instantaneous hot water service which would not appeal to some people, namely, the fact that there is no storage of hot water available, that water pressure can be affected and the nuisance aspect of fixing the temperature and finding it not to your satisfaction when under a shower necessitating a journey to the temperature control. No doubt if they become cheaper home owners may turn to them but in considering the facts and probabilities at the relevant date I do not think that the reasonable purchaser would be too concerned about competition from the instantaneous unit in the foreseeable future.

1405. This is amply supported by the fact that Mr Rees is wishing to design another storage unit.

1408. Another matter which shows that the G200 was a market leader and still is, is the event of the new Stellar unit. Rheem has in designing and manufacturing the new unit relied upon similar features to the G200. Features are the five star energy rating, the ten years warranty and the emphasis on the use of stainless steel. Rheem has recognised the excellence of the G200. But Rheem has not produced a unit which has the stainless steel container and that is a feature which the G200 still has over it.

1411. The reasonable purchaser would be looking for ten years maintenance of earnings and improving on them. In my opinion his focus would not be on the instantaneous gas market which has its own niche but the water storage gas heater market.

1414. Clearly there has to be an item for R and D in the FME. The relevant date is 17 July 1998. The reasonable purchaser of Aqua-Max would in my opinion be facing the future with confidence.

1417. Any question of improvement would be to existing models although it is clear that there should not be two models competing. Questions of improving the look and the recovery rate would be matters of importance. The reasonable purchaser even with the benefit of knowing the features of the Stellar would not embark upon designing a completely new unit at huge expense. Not only would there be the expense of the design as deposed to by Mr Rees but there would also be the substantial cost of establishing a new assembly line.

1420. What should be allowed for the R and D component in the FME is a difficult question? I proceed on the basis of what the new reasonable purchaser would do, namely, that he would stay with the present unit, improve one of them and re-launch it, say, as a G200 Mark II. The new purchaser will have to spend money on R and D in the meantime to meet problems with the present units and he will also have to make an allowance for future R and D.

1423. The difficulty the court has is fixing what is a reasonable amount.

1426. In his evidence-in-chief Mr Rees did touch upon the expense of R and D in the nine months to 30 June 1998 and made a general observation about the likely cost in those figures for R and D for the G40. I note that the G40 was launched in June 1998. Accordingly, at that point in time the actual cost involved in R and D in that unit would have been available to Aqua-Max and should have been easily calculated.

1429. I raised the question of the cost of the R and D for the G40 during the course of the defendants' case and pointed out that that would give some basis for determining what was a reasonable sum for R and D for the future. Despite this indication no attempt has been made by the defendants to place the figures before the court. No explanation was given for this failure. There is no doubt the calculation could be made. Indeed, to write off the R and D in the accounts requires a calculation and satisfaction of the figure by the auditors.

1432. The Annual Report of Aqua-Max for the year 1999 makes that clear.

1435. The figures for the G40 would have given the court some idea of the likely level of expenditure which Aqua-Max has incurred in the past for an improved product building on the success of the G200.

1438. The special referee was of the view that M$1.6 was spent by Aqua-Max on the G200. He said at paragraph 115 of his report -

"Also included within the assets owned by Aqua-Max are capitalised research and development expenditure totalling M$1.6 associated predominantly with the development of the Aqua-Max G200 product and the production processes required to manufacture it. Of this amount, M$1.4 was incurred prior to the commencement of production in 1992 with the balance being spread over five years to September 1997."

1442. Mr Wettenhall, by referring to the Aqua-Max tax returns noted that the company claimed a deduction for research and development expenditure between 1989 to 1998 of $3,889,089 which equals $388,908 per annum. One can safely infer from the figures that in the latter years there was an amount claimed for the design and production of the G40. Indeed for the last three years, namely, 1996-1998 the total expenditure was $726,814 which averages at $242,271 per annum. How the sums are calculated is not explained.

1445. As I have said one would assume that during the latter three year period there was expenditure on the development of the G40 but Mr Kennon QC submitted that by looking at the annual report for Aqua-Max for 30 September 1998 that that assumption may be on shaky ground.

"Research and development expenditure on new major projects is deferred where it is expected beyond reasonable doubt that sufficient future benefits will be derived so as to recover those deferred costs. Deferred research and development expenditure is amortised on a straight line basis over the period during which the related benefits are expected to be realised."

1452. Mr Rees did touch upon the topic in his evidence-in-chief as to the amount attributable to the G40 R and D in the total expenses of the R and D division to 30 June 1998. This is found on the last page of Exhibit MTA9.

1455. The total sum is $269,186 for the nine month period. Mr Rees gave evidence that the only portion which could be referrable to the new product was salaries which totalled $124,828.48. He was then asked from his own knowledge as how that might be broken up and he answered -

"I'd say about 50-60 per cent because of the period that it covers, would be related to the G40 and the problems we have there and the rest would be related to the G200 because we did an upgrade in that period to get it back to five stars; it wasn't a five star appliance after Rheem scrutinised it, so it related to the G40 and getting the thing back to the specifications as per the AGA requirement to maintain our five star rating."

1459. One thing is apparent and that is, according to Mr Trihey, that the G40 is very similar to the G200 and one might infer that the amount spent was not great. This is especially so when the defendants failed to place the evidence before the court. What evidence there was, to say the least, was indeed vague.

1462. On the figures put forward by Mr Rees and annualised the result is $83,218 was spent on the G40 to 30 September 1998 for the 12 months' period. Indeed query whether that is not an over statement because the product was launched before 30 June 1998 and hence there may not have been any expenditure for the balance of that financial year.

1465. It can be seen because of the state of the evidence that the court's task to fix a sum is extremely difficult. However, if there are any errors which work against the defendants then they only have themselves to blame.

1468. Some form of analysis of the G200 R and D costs and the G40 costs would at least give the court some evidence to make a determination as to the future.

1471. I have carefully considered the evidence in respect to factors which are relevant to the R and D for the future and proceeding on the assumption that the reasonable purchaser would build on the successful production of the G200 and improve it I think an annual sum of $350,000 for R and D to cover R and D with respect to the present units and the future model would be an appropriate amount. In arriving at that figure I have noted the annual expense claimed since 1989, I have made allowances for inflation and the fact that the G200 was a completely new unit and would be the basis for future models. Further, that the G200 enjoys a very successful position in the market. When viewed in this way the annual sum represents a total of M$1.4 over four years which in my opinion would be more than adequate to cover the R and D item in the FME for the foreseeable future. My Selak opined much the same view.

1474. Indeed, in considering this expense the court should not overlook the fact that R and D in the years following the four year period should be considerably less and this should be considered when considering the capitalisation rate.

1482. The special referee determined a number of capitalisation rates. He determined them at the EBITDA, the EBIT and the net profit after tax, levels.

1485. He carefully considered the various earnings multiples of certain listed public companies in the industry both in Australia and overseas and having carried out that analysis then considered a number of risk factors applicable to Aqua-Max and ultimately arrived at his decision.

1488. As I have stated for the purposes of valuing the shares it was the view of the experts that the most appropriate level to value the shares is at the EBIT level.

1491. At that level the special referee considered the range was from 4.5 to 5 times the FME.

1494. At the August 1999 hearing I ruled that because the amount of research and development which had been included was to be excluded and reconsidered, the effect of changing the FME as found by the special referee would impact on his capitalisation rate. Further, it was the evidence of both Professor Officer and Mr Humphris on that occasion that the exclusion of the notional debt would also have an effect upon the capitalisation rate. In other words the level of gearing was relevant.

1497. Accordingly, I ruled that the capitalisation rate was to be reconsidered.

1500. On the present application it has been accepted by all experts that the question of debt and level of gearing are irrelevant to the determination of the capitalisation rate at the EBIT level. It is only relevant at the net profit after tax level.

1503. That being so it seems to me that the careful analysis made by the special referee should be the starting point for the determination of the appropriate capitalisation rate. All experts agree that his methodology was appropriate.

1506. It will be appreciated that there is a degree of subjective assessment in determining a capitalisation rate because the valuer is obliged to assess the risks involved in the business which involves not only him considering the positive features of the business but also the risk factors which could effect its ability to maintain its profits in the future.

1509. The experts called by the parties proceeded on the that basis.

1512. Mr Selak who was called by M.T. Associates gave evidence as to what he thought the appropriate capitalisation rate should be.

1515. I was generally impressed with Mr Selak's approach to the valuation task. In my opinion he did honestly seek to determine a fair figure. In my view he was independent of his client and was more impressive than the three experts called by the defendant whose independence in my view was compromised. That is not to say that I accept all of Mr Selak's evidence because in some respects I think he was mistaken. I will refer to these aspects later.

1518. In relation to the capitalisation rate Mr Selak gave the following evidence -

"The capitalisation rate is the multiple applied to the FME to arrive at the value of the business. The variability and risk of the FME is built into the capitalisation rate. The determination of a capitalisation rate is subjective and is influenced by the experience of the valuer. The Price Earnings ratios of similar listed companies reflect the expected future growth of the listed company. These Price Earnings ratios are generally used as bench marks for the capitalisation rate."

1522. He then noted what the special referee had done and stated that in his view on an objective analysis of the facts the special referee's choice of the multiple of 4.5 to 5 was unsustainable. He then set out some seven reasons as to why the capitalisation rate should be increased and he then opined the view that the range at the EBIT level was 6.25 to 6.75.

1525. When one looks at what the special referee did it is clear that having ascertained a weighted average of the various companies he then listed some five reasons why the multiples should be decreased. Mr Kendall QC submits that it is clear that the special referee overlooked what might be described as the positive factors which would justify a higher rate and only concentrated on the risk factors.

1528. It is unclear from the referee's report what positive factors he took into account although I have no doubt that he did consider positive factors but he has focussed on the risk factors which, if I may say so, are factors of greatest concern to the reasonable purchaser. Each factor must be weighed and if there is going to be error then one would expect the reasonable purchaser to err on the side of conservatism especially if the purchase price is substantial as indeed it would be here.

1531. It will be necessary to further consider the evidence of Mr Selak on the points raised.

1534. Mr Wettenhall also commenced with the finding of the special referee. Mr Wettenhall gave evidence that the question of Sietel employees transferring with the business to the new owner was a risk factor which would have a significant impact on the capitalisation rate. He stated that the special referee did not take that factor into account as he alleged the special referee assumed all people working in the Aqua-Max business were in fact employees of that business. That is not correct. It is clear from the special referee's report that he did appreciate that Sietel was supplying employees to Aqua-Max.

1537. The point that is being made is that there would be no guarantee that on the sale of the business those persons who were essential to Aqua-Max's business and who were employed by Sietel would go with the business.

1540. I have some difficulty in accepting that as a fact. First, Sietel has an interest in providing the best package for sale and it would do everything in its power to encourage its important employees to go with the business. I do accept that Mr Richard Rees would not go with the business but in my view the loss of Mr Richard Rees to the business would not be something that the new purchaser would feel in a financial way. The only observation one would make is that Mr Rees may have to be employed for a period of time to explain the financial records and the lack of documentation.

1543. Secondly, those Sietel employees who were named had been employed by Sietel for many, many years in the storage hot water business and one would expect that Sietel upon selling the business would be restrained from opening up a similar business and accordingly could not provide appropriate employment for these employees. Mr Rees did advert to the possibility that Sietel may go back to making gas heaters. That may be so. But nevertheless the reality in my view is that the employees would pass to the new business.

1546. But having said that there is no evidence to prove that Aqua-Max could not satisfactorily employ substitute labour. I have no doubt that some of the men concerned have a very good understanding of the manufacture of the models but I doubt they would be indispensable to the business.

1549. However, Mr Wettenhall opined the view that there was this risk and it should be taken into account.

1552. Mr Wettenhall after referring to the fact that he thought the personnel in question were important to the success of Aqua-Max's business said -

"The risk associated with the employees is significant in respect of the attitude of Sietel. This risk will be reflected in a reduced capitalisation rate. In my opinion the capitalisation rate used by the special referee for EBIT should be reduced by 0.5 times."

1556. This meant that the appropriate capitalisation rate was 4.0 to 4.5 times.

1559. It is pertinent to observe what the other two experts called by the defendants did in respect to Mr Wettenhall's report and what they said in viva voce evidence.

1562. The evidence revealed that Mr Wettenhall prepared a draft report in late October/early November 1999, that the draft report was forwarded to the two experts, Professor Officer and Mr Humphris (or his assistants) and that after consideration and some discussion Mr Wettenhall's final report was prepared.

1565. It is significant that in his draft report Mr Wettenhall did not make the point about the employees at all.

1568. In his original report he said very little about the capitalisation rate. At paragraph 8.1 he wrote -

"The capitalisation rate to be applied on an EBIT basis will not vary because of changes outlined in this report. The special referee used a rate in the range of 4.5 to 5.0 times."

1572. He the made the observation that any gearing and changes in gearing were irrelevant to the exercise. He then said this in conclusion -

"This conclusion not to vary the capitalisation rate assumes that the services of the Sietel management team will be adopted and a cost incorporated in the value of equity calculations. If the purchaser chooses not to use the Sietel management team in the transition period then the capitalisation rates would decrease by 0.2 times up to 4.3 times to 4.8 times." (Emphasis added.)

1576. It is observed that it is put on the basis that if the new purchaser does not use the Sietel management team "in the transition period" then there would be a decrease.

1579. Between the draft report and the final report the change occurred.

1582. The fact was that Mr Wettenhall increased the reduction from 0.2 to 0.5 and justified it on a completely different basis.

1585. We now turn to the reports of Professor Officer and Mr Humphris. Both men were very concerned to emphasise that their reports were concerned with the methodology and approach of Mr Wettenhall and did not amount to an acceptance of figures used by him.

1588. Hence one finds in Professor Officer's report which was tendered in evidence that he states the principles involved in the valuation of shares and then his evidence according to his brief was as follows -

"I've been asked to report on the report of Roland Seton Wettenhall in the context of the above principles for establishing a value for the equity of Aqua-Max Pty Ltd."

1592. Professor Officer then goes on to state that in his opinion the special referee's report correctly applies the principles to determine a capitalisation rate for an EBIT for the FME. He states that he does not agree with the approach of Mr Wettenhall with respect to personnel but prefers the alternative approach, namely, determining the cost of employing the equivalent of the Sietel management team and including it as an expense.

1595. One might infer from his report that he was agreeing with the rate of the special referee, namely, 4.5 to 5. However, in giving his viva voce evidence he opined the view that as a rule of thumb when dealing with companies like Aqua-Max that the appropriate capitalisation rate would be one-third of the capitalisation rates of the sample of public companies used to establish a base rate.

1598. This was not included in his report and not surprisingly criticism was made by plaintiff's counsel that this had not been adverted to in the report.

1601. Professor Officer went on to say that in his opinion this would involve a capitalisation rate as he put it, "of three times, 3.5 times to four times".

1604. Mr Kendall QC pointed out that if one went to the weighted average of the range of companies in Australia, New Zealand, USA and United Kingdom used by the special referee the so-called one third rule would give a capitalisation rate of slightly in excess of five times and then pointed out that if the weighted average of the Australian companies were taken that this would give a capitalisation rate of about seven times. Professor Officer would not embrace these figures and kept mentioning three, 3.5 to four times.

1607. I must say I was not impressed with Professor Officer's approach. His approach was to state a rule of thumb approach and apply it generally to Aqua-Max. He did not, and he said many times that he had not made an investigation of Aqua-Max, its accounts or records, or indeed its business. On any view he had a superficial view of it and insofar as the defendants seek to rely upon his general approach of three, 3.5 to four times I reject it.

1610. Indeed, as Mr Kendall QC pointed out, if the Professor's rule of thumb was to be used then that supported a higher figure than the special referee's.

1613. On any view a rule of thumb approach is no more than a starting point and cannot produce any worthwhile result unless a full and proper investigation is made of the company in question.

1619. Mr Michael Humphris, chartered accountant, signed an expert's report on 19 November 1999.

1622. He stated his brief in these terms after being provided with a report of Mr Roland Wettenhall dated 19 November 1999 and the affidavit of Mr Richard Rees sworn on 18 November 1999 -

"I have been instructed to assess whether the valuation prepared by Mr Wettenhall has been completed in accordance with the generally applied valuation principles and practices and to comment generally having regard to the issues to be considered and determined by the court as outlined in the order."

1626. The reference to "the order" is the order made by the court on 27 August 1999.

1629. In relation to the capitalisation rate he referred with what the special referee did and the comments of Mr Wettenhall. He agreed with Mr Wettenhall's approach that the special referee's rates should be reduced by 0.5 times to reflect the assessment of the risk "associated with the availability of Sietel employees to a purchaser".

1632. He then concludes - "I agree with the assessment made by Mr Wettenhall to reduce the capitalisation rate by 0.5 times. I note that for a private company the size of Aqua-Max it would be unusual for a prospective purchaser to apply a capitalisation rate that is greater than 4.5 times FME on a EBIT basis."

1635. In cross-examination he stated that the observation made was based upon his experience.

1638. It is to be noted that Mr Humphris' main business activities over many years has been as a liquidator and receiver. Whilst I accept that he has had some experience in the area of advising on buying and selling solvent companies it is clear that much of his experience is based upon insolvent companies.

1641. It is clear from what Mr Humphris said in his report that he agrees with Mr Wettenhall's approach which reduced the EBIT capitalisation rate to 4.0 to 4.5 times but then opined the view that it would be unusual to have a greater rate than 4.5 times FME on an EBIT basis.

1644. As I have said, this report was dated 19 November 1999 and filed with the court and given to the plaintiff's representatives prior to the trial commencing on 22 November.

1647. Mr Humphris gave evidence on 8 and 9 February 2000 having stated that his report was true and correct.

1650. Counsel for the defendants took Mr Humphris through his report and after referring to that part of his report concerning the capitalisation rate he was asked the question -

"And you have been out to the premises of Aqua-Max?---Yes, I have. What would be your assessment of the appropriate capitalisation rate on an EBIT basis for Aqua-Max?---No more than three would be my view."

1654. It is clear from the totality of his evidence that the reason why he reduced what Mr Wettenhall had done was because he inspected the business premises in early December 1999.

1657. He then gave evidence as to what he observed on the inspection at Warrigal Road premises which evidently was over about two hours. He was somewhat critical of what he observed as to the state of the building, the age of it and the office area, the age of the equipment used and generally a view that in his opinion the business premises were not very attractive.

1660. The change in his opinion was brought about by the inspection he had. He opined the view that the premises and the manufacturing plant and equipment "looked to me like I guess any other factory in Moorabbin that I've been involved in over the three years that I finished up liquidating."

1663. He was then asked did he take into account the impact of competition on Aqua-Max and he said that he took into account the material provided by Mr Rees and Mr Wettenhall. He also stated that the other assumptions were "based on my experience in attempting to sell businesses of this vintage and nature in the manufacturing scene and my experience in that area, Your Honour, is that I've not been able to achieve any more than a three multiple in the last two or three years in dealing in this type of business."

1666. He was also asked did he take into account the growth prospects for the business in determining his capitalisation rate, and he replied, "Yes". Once again relying upon information given to him.

1669. Not surprisingly counsel for the plaintiff objected to the way this evidence was introduced in that it should have been in an expert's report. I agree.

1672. In two leading questions, defendants' counsel asked Mr Humphris whether he had taken into account certain other factors to reach his conclusion that the appropriate capitalisation rate was three. On both occasions he said he had to rely upon what Mr Wettenhall and Mr Rees had said in relation to these matters. Mr Wettenhall's evidence on these aspects was what Mr Rees had told him. Mr Rees' evidence has to be approached with caution.

1675. If he had taken into account these factors in considering his capitalisation rate then he made no mention of it in his report of 19 November and the whole thrust of the evidence to reduce what he had said in his report to a capitalisation rate of three times was based upon a two hour inspection in December.

1678. On occasions in his cross-examination Mr Humphris when confronted with a difficult question fell back on what many experts seek to do, namely, "my personal experience".

1681. The determination of a capitalisation rate in a valuation exercise involves investigating and considering many factors which bear upon the risk that the FME may not be achieved. It is those risk factors which are built into the capitalisation rate.

1684. Experience plays its part but it is the weighing of the factors relevant to the particular business which is of the utmost importance.

1687. There are a number of features about Mr Humphris' evidence which leads to the conclusion that it should be rejected. First, he demonstrated that he had not made a full investigation. He had not looked into all the factors that are relevant to the exercise and was prepared to opine the view based upon the two hour inspection and experience that the capitalisation rate was three times. Secondly, he played the advocate. Thirdly, when confronted with difficult questions fell back on "my experience". Often that was an inappropriate answer to the question asked and was effectively a piece of "stonewalling".

1690. Fourthly, on no view could any expert opine a view as to a capitalisation rate applicable to Aqua-Max without doing a proper and thorough investigation of all relevant factors. Mr Humphris did not do that.

1693. His written report was based upon the special referee's approach with a deduction based upon what Mr Wettenhall put forward as the transfer of personnel factor.

1696. Mr Humphris cast aside the earlier opinion and gave evidence based upon an inspection. When asked a number of questions by counsel as to what other factors he took into account which were identified by counsel he stated that he relied upon what others had told him. The ultimate source was Mr R. Rees.

1699. Further, it was apparent from the way he gave evidence that Mr Humphris' memory was found wanting. He was uncertain as to how many attendances he had, and how many draft reports he had. It became clear that he had two assistants who attended meetings with the defendants' legal team and Messrs Wettenhall and Rees and it is a fair inference prepared a draft report for him. He was overseas for a substantial period whilst his assistants were preparing his report.

1702. Finally, it is clear that the inspection was at the request of counsel and it was to be done in the context of evaluating an appropriate capitalisation rate for the business. The inspection was approximately two hours and it was conducted by Mr Rees. Mr Humphris admitted in cross-examination that one does not judge a book by the cover and further, he had to admit that if the business was in the state that he had observed then there was much room for improvement.

1705. All round I was not impressed with Mr Humphris. I do not know how any reputable expert could honestly state his opinion that the capitalisation rate of Aqua-Max was no greater than three times the FME where he had not carried out a full investigation and where the main basis for his assessment was a two hour inspection of the premises. One might think that an expert who went down that path would derive a greater insight into the business by looking at the end product of the manufacturing process and its marketability rather than the state of the business premises.

1708. I reject Mr Humphris' evidence concerning the capitalisation rate.

1711. That leaves the court with a consideration of the referee's capitalisation rates as a starting point.

1714. I do not accept the evidence of Mr Wettenhall that it is appropriate to reduce the capitalisation rate for the risk of Sietel employees not going with the business. I prefer the approach of Professor Officer. Further, in my view, the risk is so minimal that it can be ignored.

1717. That brings me to the matters relied upon by Mr Selak.

1720. One of the factors that Mr Selak relied upon was his view that the special referee had discounted the EBIT multiples because he considered Aqua-Max to have a high level of debt. It is agreed between all experts that that is an irrelevant matter when considering an EBIT multiple. The question is whether the special referee did take the high level of debt into account in determining his capitalisation rate at the EBIT level.

1723. I have closely read the special referee's report a number of times and it is unclear to me whether he did in fact take it into account. He did specifically refer to it but in relation to a cross-check method of valuation. I am not prepared to say that he did and accordingly I would not adjust his multiple on that basis.

1726. Mr Selak listed a number of other factors which he believed the referee did not take into account or alternatively did not give sufficient weight to, namely, that Aqua-Max was a substantial company in its own right, that it compared favourably with many industrial companies listed on the Australian Stock Exchange, that it consistently achieved the same net profit sales ratio as the listed companies used in the special referee's analysis, that in today's low interest low inflation environment, companies are constantly on the look out for opportunities to increase market share, that Aqua-Max would attract a lot of interest from its competitors, and that the special referee in estimating the sales revenue to the year ending 30 September 1998 reached a conclusion which was M$1.4 less than the actual sales revenue. Further, he noted in regard to the latter point that the sales revenue to 30 September 1999 was M$18.3 notwithstanding the gas crisis and other adverse effects which Mr Rees referred to in the annual report which again was in excess of the sales revenue estimated by the referee of M$17.8.

1729. With respect to the factors mentioned, save for the sales revenue, it is my opinion that the special referee would have taken those factors into account in making his assessment.

1732. However, there are five factors which in my opinion would justify an adjustment of the special referee's capitalisation rate.

1735. The first is that the special referee's estimate of sales revenue was considerably less than the actual figure. This leads to the conclusion that a prospective purchaser as at the relevant date could have considerable confidence in the ability of the company to generate sales revenue of at least M$17.8 which was the sum estimated by the special referee.

1738. It is appropriate in this regard to refer to an exercise done by Mr Rees in which he points out that the earnings before interest and taxation to 30 September 1999 have dropped substantially compared with the actual figures to 30 September 1998.

1741. Mr Rees put forward this evidence to show that there was a risk that the company in new hands would not achieve the same level of earnings before interest and tax in the future as it had in the past.

1744. In Exhibit RR6 to his affidavit Mr Rees, using the methodology in Appendix H to the special referee's report for results to 30 September 1998, has prepared the accounts to 30 September 1999. The point he makes is that the earnings before interest and tax to 30 September 1999 was $635,000 compared to $1,163,000 the previous year.

1747. I must confess I have some difficulty understanding his summary because of the difference in the figures compared with the special referee's. However, the point Mr Rees makes is that according to the accounts to 30 September 1998 there was a sum of $1,163,000 earnings before interest and taxation, whereas for the same period to 30 September 1999 the amount had dropped to $635,000.

1750. It is interesting to observe that although there was a drop of some $800,000 in sales revenue the gross profit to 30 September 1999 was M$8,267,000 which compares very favourably with the gross profit of $8,261,000 for the previous year.

1753. However, to determine whether or not the accounts truly reflect the earnings before interest and taxation abnormal items have to be adjusted. It is noted that the service calls had increased by $110,000 and there had been an increase in the provision for warranties of some $225,000. In addition, there was a substantial sum for legal costs which no doubt is attributable to the present proceedings and when these adjustments are made to the figures it is clear that the EBIT figure is very close to the previous year.

1756. In my opinion the facts and probabilities at the relevant date established a sales revenue of at least M$17.8 and the subsequent events have borne that out. In my opinion the risk factors to the business maintaining the FME should reflect this degree of confidence in assessing the capitalisation rate.

1759. The second item which in my opinion was not properly taken into account by the special referee and which has a positive effect upon the capitalisation rate is the research and development provision. In making his assessment it is clear that the special referee allowed in excess of $500,000 as a continuing annual expense for R and D.

1762. In my opinion that amount is excessive. I have ruled that the appropriate figure is $350,000 but in the light of all the facts known at the relevant date and the probabilities the sum of $350,000 is more than ample to cover future expense. The purchaser could feel considerable confidence that the amount is more than sufficient and that the amount will not be spent much beyond three or four years into the future. The amount thereafter for a substantial period would be less.

1765. Thirdly, a factor which the special referee relied upon which reduced the amount of the capitalisation rate was that "the company effectively operates a single product business".

1768. He went on then to opine the view that this significantly increased the risk to the business "given that any adverse events in relation to that product are not able to be offset from alternative earning streams". One immediately poses the question what adverse events?

1771. The special referee did identify one, namely, the recent gas crisis experienced in Victoria in September 1998.

1774. The facts and probabilities at the relevant date which pre-dated the Longford incident are that any such incidents are not likely to have a long lasting effect upon gas users in this State. This State depends very much at all levels on a supply of gas and the chances and the risks of gas being interrupted for any length of time are extremely remote. It is hard to think of any other adverse event. The product that has been produced by the company is a well accepted product. This company has an excellent track record and with one very good product. The fact it is a single product business is not a great risk in the circumstances. Further, it is not a single product business because Aqua-Max imports one of the best continuous flow instantaneous hot water services from Japan.

1777. Fourthly, another factor which the special referee used to reduce the rate was that the brand name of Aqua-Max does not enjoy the same level of market recognition as its competitors. Again query this in the State of Victoria. The evidence shows that Aqua-Max sells approximately 27% of all water storage heaters in this State. That is a very healthy portion of the Victorian market.

1780. Finally, the special referee took into account the non-negotiability of shares in private companies resulting in a further discount to a capitalisation rate.

1783. In my opinion he should not have taken that into account. In the valuation process, having reached a valuation of shares based upon FME multiplied by the capitalisation rate, the fact that it is a private company may result in a discount of the total valuation. In my opinion it is not a factor relevant to the capitalisation rate.

1786. In my view the special referee has made a number of errors in weighing up the relevant factors in determining the capitalisation rate.

1789. This in my view justifies the court in calculating an increased capitalisation rate and I take into account the five matters which I have mentioned above. Mr Selak gave evidence which I accept that the estimate by the referee of the annual sales in his FME was "very conservative" when compared with the actual sales and that "the risk associated with this level of sales not being achieved in the future is minimal". He concluded -

"Because of this very low risk profile, in valuing the company, one should adopt a more robust capitalisation multiple. This is a fundamental principle of valuation." I agree.

1793. In my opinion starting with the special referee's capitalisation rate and weighing up all relevant matters the appropriate capitalisation rate is six times.

1797. The FME is $2,410,631.66. Multiply that sum by 6 and the valuation is $14,463,789.96.

1801. Aqua-Max had substantial tax losses in the past.

1804. In the financial year ending 30 September 1998 it was able to deduct from its profits past tax losses in the sum of $308,007.

1807. In the previous year it was able to deduct tax losses in the sum of $838,905.

1810. As at 1 October 1998 it had tax losses in the sum of $1,869,575.

1813. The special referee for his part assessed the value of the tax losses on a carry forward basis of between M$1.08 and M$1.17.

1816. Mr Selak in his evidence proceeded to value the tax losses on a different basis. It was generally agreed by all the experts that the step by step process used by Mr Selak was a better approach than that employed by the referee.

1819. Mr Wettenhall in his report followed the special referee's approach and I must say the method is somewhat artificial. It proceeds on certain assumptions and does not commence with the actual amount of tax losses at 1 October 1998.

1822. Mr Wettenhall assessed the tax benefit in the sum of $243,241. He did a later calculation based on Mr Selak's approach and arrived at a very similar figure.

1825. Mr Selak's method was to take the actual figure of $1,869,575 and then by multiplying that sum by a tax rate of 33% ends up with a figure of some $616,960 which is the value if all could be claimed in one year at the relevant date.

1828. The tax rate was an average of expected rates. Mr Wettenhall agreed with the average rate.

1831. He then discounted that figure by an amount of 15% which in his opinion represented the risk factors in a purchaser acquiring the business and not being able to take the benefit of the tax losses. He arrived at a net present value of $524,416.

1834. Mr Selak was attacked on two grounds, namely, that his discount rate of 15% hardly took into account the risks that were involved. It was suggested that the rate should be somewhere around 36%.

1837. The second ground of attack was that in determining what he described as the net present value he failed to take into account that the deduction was to take place over the following years and there should be a discount for present value in respect of the deduction claimed in future years.

1840. In determining the discount rate a number of risk factors must be taken into account. First, there is the risk that the business will not make sufficient profits to enable it to deduct a substantial sum on an annual basis. To the year ending 30 September 1998 the sum of some $300,000 was deducted. In my view, based upon the revenue figures in the past and the subsequent figures which were placed into evidence by Mr Rees, that risk factor is remote.

1843. The second concern is the question of the new purchaser satisfying the law. The law only permits a deduction of a tax loss from an earlier income year if the business satisfies a continuity of ownership test or a same business test.

1849. The third factor which has to be taken into account is the risk that the law may be changed in the future thereby denying companies the right to deduct a tax loss from an earlier year. The right to deduct tax losses from earlier income years has been a feature of the taxation system in this country for many, many years and in my opinion any risk that the law may be changed is indeed remote.

1852. The first step in determining the value of tax losses is set the period during which the tax losses are likely to be deducted.

1855. In my view the profits will continue for at least five years and it is appropriate to proceed on the basis that the deductions will be available over that five years' period. Mr Selak for his part was of the view that the tax losses could be claimed over a shorter period of time. I think he is probably correct in this assessment but based upon the past I think it reasonable to proceed on the assumption that the amounts will be claimed over five years.

1858. If one is going to err it should be in favour of the reasonable purchaser.

1861. I think to determine the present value the discount rate of 36% used by Mr Wettenhall in his second calculation is too high. The special referee discounted the carry forward tax benefit by 20% which was the figure used by Mr Wettenhall in his calculation in his written report. It was put to Mr Wettenhall that his new calculation produced in evidence and which followed the methodology of Mr Selak arrives at a very similar figure to what he had arrived at in his earlier report and that his choice of 36% discount rate was very much influenced by wishing to reach the same figure based on his earlier calculation. He denied this suggestion and justified his change to greater risks because of the shorter period which he put at six years for deductions. The coincidence of the final figures provides some support for the suggestion but it is unnecessary for me to make a finding.

1864. As a general rule the discount rate to be applied for discounting the deduction of tax losses to cover the risks involved should be the same as the capitalisation rates for the earnings. There are risk factors which I have already highlighted and I think in the circumstances the most appropriate discount should be 20%.

1867. Mr Selak determined that the discount rate should be 15% to take into account the risks that would be involved in the new purchaser not obtaining the full benefit of the tax losses but in my view 20% is more the appropriate figure. Applying that to Mr Selak's methodology the amount is $493,568. However, his calculation did not take into account the fact that the deduction would be over a period of time and that the vendor would be receiving a present payment for an allowance which the purchaser could not utilise for periods up to five years.

1870. I interpolate here to note that Mr Humphris was of the view that tax losses were of little value in this day and age and he stated that often the purchaser required an agreement to the effect that he would pay a specified sum only when he was allowed the deduction. Whilst I do not doubt that in some sales, especially involving insolvent companies the tax losses may have little value, for present purposes I accept the evidence of Mr Selak supported by the referee and Mr Wettenhall that the tax losses here do have some value.

1873. In the end I do have to value the tax losses on the basis of what the reasonable purchaser would be prepared to pay and what the reasonable vendor would be prepared to accept, but realistically the latter is not in a very strong position to set a purchase price close to the potential benefit to the purchaser because of the risks that would be involved.

1876. Taking into account the risks and also giving effect to the fact that the present payment means money in the hand to the vendor in respect of a deduction spread over a number of years I think a fair sum for tax losses would be $350,000. In arriving at that figure I have not done an actuarial calculation to determine the present value spread over, say, one to five years because there are so many imponderables and contingencies that it is more appropriate to approach it on a global basis and hence I have arrived at the sum of $350,000.

1879. Both Mr Selak and Mr Wettenhall accept that the value today would be $616,960 if the deduction could be made immediately. The fact is that there are a number of risk factors which together with present payment bring the amount down to $350,000. But having arrived at that figure in the valuation process it will be necessary to consider in the second stage of the exercise whether an amount should be allowed for compensation because the ownership and business of Aqua-Max will not change after the order is complied with, and accordingly one would expect that Aqua-Max will be able to gain the full benefit or very close to it of the tax losses.

1882. The value of the tax losses has to be added to the value of the business which results in a total of $14,813,789.96.

1886. The accounts of 30 June 1998 reveal a loan by Sietel to Aqua-Max in the sum of $719,626.24.

1889. It was common ground between the parties that Aqua-Max would have to pay that amount of the loan and this would come off the valuation.

1892. Mr Rees however maintains that the loan should be adjusted to reflect the subsidies provided by Sietel over the years from the inception of the joint venture in 1988 to at least the relevant date. He stated that the special referee had been prepared to determine a subsidy in respect of rental of premises, supply of personnel and leasing of equipment and that this court should also adopt the same approach.

1895. In my opinion the special referee was wrong in allowing the subsidy and I have little doubt was induced by representations made by Mr Rees in documents which are potentially misleading to reach that conclusion. The special referee was not in a position to make any assessment as to whether or not there had been subsidies and more importantly if there had, whether Sietel had been fully reimbursed or not.

1898. There was sufficient evidence at trial which leads to the conclusion that any subsidies that Sietel provided were reimbursed handsomely by Aqua-Max in later years. I am not in any way persuaded that Sietel was not reimbursed. It cannot be overlooked that under the terms of the joint venture agreement Sietel's role predominantly was to provide the finances and secondly it got 80% of the issued shares.

1901. Further, I asked Mr Rees in the present hearing the legal basis upon which he said that the loan account could be increased, in other words, to re-write the history of the relationship between Sietel and Aqua-Max. Mr Rees was unable to point to any legal basis and in particular there was no documentation of any form which would justify the re-assessment of the loan account. As he put it, he had an understanding. It was not the understanding of Mr Trihey up to when he left in April 1993.

1904. I reject any basis put forward by Mr Rees for adjusting the loan account.

1907. The amount of the judgment against Aqua-Max pronounced in July 1998 in proceeding 5966 of 1993 of $484,000 also has to be deducted from the purchase price. This sum has to be paid by Aqua-Max. The parties agreed the sum is to be deducted.

1910. Finally, the other component to take into account is the value of the plant and equipment that Aqua-Max needs to purchase from Sietel before effecting the sale. I have found that that amount is $1,700,000 and accordingly there is a total of $2,903,626.24 to be deducted from the purchase price.

1913. Accordingly, I value the shares in Aqua-Max at the relevant date at $11,910,163.72. In my opinion that is a fair price that should be paid as between the reasonable willing but not over anxious vendor and what the reasonable willing but not over anxious purchaser would be prepared to pay.

1916. M.T. Associates has 400 shares out of a total 2,219 shares in Aqua-Max, that is, 18.026 per cent of the issued shares.

1919. It follows that M.T. Associates is entitled to at least $2,146,926.11 for its shareholding. But that is not the end of the matter.

1923. Even though the court has valued the shares in accordance with a method of valuation that is not the end of the exercise under s.246AA of the Corporations Law.

1926. Once the court is satisfied that conduct proscribed by s.246AA(2)(a) or (b) has occurred, the court has a wide unfettered discretion to make appropriate orders.

"The court may ... make such order or orders as it thinks fit."

1933. The wide power is subject to the provisions of sub-s.(4) which qualifies the power where it is proposed to make a winding up order. This is not relevant here.

1936. The sub-section gives examples of the types of orders that can be made but the list is not exhaustive. Like every other discretion entrusted to a court it must be exercised judicially. The power given to the court must be exercised taking into account all relevant matters and result in an order which is fair and equitable to both sides.

1939. In deciding what order should be made in the present matter the court is involved in a two step process.

1942. The first is to value the shares on a going concern basis determining what the reasonable, willing but not over anxious vendor would take and what the reasonable, willing but not over anxious purchaser would pay.

1945. Valuation forms the basis of the order but that is not the end of the determination.

1948. The second stage involves the court in considering and determining whether the oppressed member should receive any compensation for damage caused by the proscribed conduct and/or as a result of the sale of the shares to the majority of shareholders.

1951. The compensatory part of the jurisdiction was discussed by the House of Lords in Scottish Co-operative Wholesale Society Ltd v Meyer (1959) AC 324.

"One of the most useful orders mentioned in the section - which will enable to court to do justice to the injured shareholders - 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. Once the oppressor has bought the shares, the company can survive. It can continue to operate. That is a matter for him. It is, no doubt, true that an order of this kind gives to the oppressed shareholders what is in effect money compensation for the injury done to them: 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." [Emphasis added]

1958. In the same case Lord Keith of Avonholm said -

"The section introduces a wide power to the court to deal with such a situation in an equitable manner which it did not have in the case of a company prior to the passing of the Act in 1948." [Emphasis added]

1962. In In Re Jermyn Street Baths Ltd (1970) 1 WLR 1194, Pennycuick J said at p.1208 -

"Section 210 gives the court an unlimited judicial discretion to make such order as it thinks fit with a view to bringing to an end the matters complained of, including an order for buying out one faction by the other. It is not disputed on behalf of the respondents that in prescribing the basis on which the price of such a sale is to be calculated the court can in effect provide compensation for whatever injury has been inflicted by the oppressors." (Emphasis added.)

1966. Pennycuick J referred to what Lord Denning had said in the Scottish Co-Operative case.

1969. Although the decision was reversed on appeal - see (1971) 1 WLR 1042 - what his Lordship said has not been doubted.

1972. In In re Bird Precision Ltd (1986) Ch 658, Oliver LJ at p.669 referred to the wide jurisdiction entrusted to the court when he said -

"It seems to me that the whole framework of the section, and of such of the authorities as we have seen, which seem to me to support this, is to confer on the court a very wide discretion to do what is considered fair and equitable in all the circumstances of the case, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company; ... " [Emphasis added.]

1976. His Lordship referred to what Pennykuick J and Lord Denning had said - see, supra, p.672.

1979. The authorities in Australia establish the same approach to the section, namely, that the court determines what is a fair and just value for the shares. That is fair and just to both parties, and to cure the effect of the oppression on the minority shareholder. The valuation of the shares is the starting point and compensation may be ordered where it is just and equitable to do so.

1982. In Re Bodaibo Pty Ltd (1992) 6 ASCR 509, Vincent J at p.513 after quoting what Lord Denning had said went on to say -

"Certainly in the ascertainment of a fair price, consideration must be given to the selection of the most appropriate method of valuation in the particular circumstances of the matter before the court, and to the possible necessity that some adjustment should be made to the figure arrived at in order to offset the effects of the oppressive behaviour. In other words, as far as reasonably practicable, the court must endeavour to achieve equity between the parties and to ensure that the oppressor does not profit from the wrongful behaviour in which that party engaged to the detriment of those against whom it has so acted."

1986. I respectfully agree with what his Honour has said and I would add further that the court in seeking to achieve equity between the parties may allow compensation where the wrongful behaviour of the oppressor has caused damage to the oppressed even though the oppressor did not profit from his actions.

1989. Although the authorities establish that the oppressive conduct and its effect is to be disregarded in the valuation exercise - see Dynasty Pty Ltd v Coombs [1995] FCA 1447; (1995) 59 FCR 122, nevertheless the compensatory part of the jurisdiction is to be exercised to do justice and equity between the parties to overcome the effects of the oppressive conduct. This in an appropriate case would include an amount of interest. This latter question has been discussed in a number of cases in England and the general rule in relation to a quasi partnership company is that interest should be paid by way of compensation from the date when the obligation arose to purchase the shares. See In Re Bird Precision Bellows Ltd (1984) Ch 419 at pp.436 et seq and on appeal (1986) Ch 658 at p.676. See Dynasty Pty Ltd v Coombs, supra.

1992. Young J in Mike Gaffikin Marine v Princes Street Marine (1995) 13 ACLC 991 emphasised that in valuing shares the evidence of the valuer is but part of the material before the court to arrive at its decision. See at p.1001.

1995. The same judge in an earlier decision of E.S. Gordon Pty Ltd v Idameneo (No. 123) Pty Ltd (1994) 14 ACSR 536 referred to the jurisdiction and said this at p.540 -

"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."

1999. The authorities also establish that the fact that there is to be a valuation of minority shares and a compulsory purchase by the oppressor does not mean that the court should make a discount for a minority holding.

2002. The basis for this approach was discussed by Nourse J in In re Bird Precision Bellows Ltd, supra at p.430 where his Lordship said -

"I would expect that in a majority of cases where purchase orders are made under s.75 in relation to quasi partnerships the vendor is unwilling in the sense that the sale has been forced upon him. Usually he will be a minority shareholder whose interests have been unfairly prejudiced by the manner in which the affairs of the company have been conducted by the majority. On the assumption that the unfair prejudice has made it no longer tolerable for him to retain his interest in the company, the sale of his shares will invariably be his only practical way out short of a winding up. In that kind of case it seems to me that it would not merely not be fair, but most unfair, that he should be bought out on the fictional basis applicable to a free election to sell shares in accordance with the company's articles of association, or indeed on any other basis which involved a discounted price. In my judgment the correct course would be to fix the price pro rata according to the value of the shares as a whole and without any discount, as being the only fair method of compensating an unwilling vendor for the equivalent of a partnership share."

2006. The issue is discussed by Byrne J in Re DG Brims & Sons (1995) 16 ACSR 559. His Honour held that the shares should be valued without any discount.

2009. In Rankine v Rankine (1995) 18 ACSR 725 the Court of Appeal of Queensland discussed the nature of the jurisdiction and Thomas J gave the leading judgment.

2012. His Honour summarised the jurisdiction at p.730 when he said -

"In granting a remedy in favour of an oppressed shareholder under ss.260(2)(e) or 260(2)(f) by ordering the compulsory purchase of the applicant's shares at a stated price, the court is in effect awarding compensation for the respondent's breach of duty. The nature of the duty is both subtle and complex, and not capable of exhaustive definition, but the most useful expressions of it are collected in McPherson, The Law of Company Liquidation 3rd ed., Donovan, pp.143-44. One such expression describes it as a duty of probity and fair dealing. The compensatory nature of the remedy is recognised by Lord Denning in Meyer at p.369, in Re a Company No. 002612 1984 (1986) 2 BCLC 99, 495 and in Coombs v Dynasty, at ACLC 918. The ultimate finding of the price that should be paid cannot be made until the nature and effect of the oppression has been identified and its effect quantified or allowed for. By contrast the valuation of shares on the basis of the value of the company as a going concern, or by reference to its underlying assets, as has been directed in this case, is a conventional valuation exercise without adjustments for the oppression factors."

2016. Mr Kennon QC did not make a submission disputing the nature of the jurisdiction of the court. In particular he did not submit that the court in determining the appropriate order should discount the value of the shares because the shares are a minority holding.

2019. Further, he did not submit that the court should not give consideration to the payment of interest if appropriate.

2022. In considering and determining what orders should be made, the first step is to value the shares disregarding the effect of the oppressive conduct and then determine a price which takes into account what I would describe as the compensatory factors. The object of the exercise is to do what is just and equitable between the parties.

2025. There are a number of matters that should be steadily borne in mind when dealing with a case such as the present involving a quasi partnership company in which the shareholders have been brought together by a joint venture agreement.

2028. First, the exercise of the jurisdiction requires the court to make orders which are just and equitable to both parties. This may involve adjustments to the value of the shares ascertained on pure valuation principles and the adjustment may in a rare case be in favour of the oppressor.

2031. Secondly, the party making the assertion carries the onus of not only proving its entitlement to an addition or deduction as the case may be to the valuation but also to identify the matter which justifies the addition or deduction and proving that it was caused by the conduct complained of or as a result of the order to purchase and the quantum of damage that has been suffered.

2034. In the present proceeding counsel for M.T. Associates referred to a number of general matters but was unable to establish a basis for determining the quantum of the compensation. The court is not at large and it is not a question of awarding something in the nature of general damages. A party seeking an adjustment should adduce some evidence which enables the court to make an assessment of the amount which should be involved in the adjustment.

2037. Thirdly, the court must be careful not to punish or penalise the oppressor for the conduct complained of; the jurisdiction is compensatory.

2040. Fourthly, a practical test to determine the nature and extent of a loss justifying compensation is to compare what would have happened if the parties had continued to jointly operate their quasi partnership company with what in fact occurred as a result of the breakdown and the oppressive conduct. Another test would be to consider whether the oppressor benefits from the sale in a way which would make it unjust for the wrongdoer to keep the fruits of the unlawful conduct.

2043. In the present case Mr Kendall QC on behalf of M.T. Associates at the outset made it clear that the company was seeking compensation over and above the value of the shares and the court directed that the plaintiff give particulars of the claim for compensation.

2046. A document was prepared and exchanged which identified a number of matters that it was submitted should be taken into account. In final address during his reply Mr Kendall QC identified eight matters which he submitted should be taken into account in the second stage of the exercise.

2049. In considering the matters raised it is important that the court does not compensate at the second stage in respect of matters that have been taken into account in the valuation process.

2052. I have had some difficulty understanding some of the matters that were stated in the document identifying the oppression matters which was delivered early in the trial.

2055. But Mr Kendall QC identified eight matters in his reply which M.T. Associates claim justifies compensation.

2058. First, that Aqua-Max has in the past paid for leasing or hire charges to Sietel for plant and equipment which was owned by Aqua-Max and further, and that in respect of some lease charges Aqua-Max paid Sietel sums over and above the commercial rates. These charges had the effect of increasing the expenses thereby reducing the profits and also providing a windfall to Sietel. This would have an effect on the FME. It was submitted that the charges were caused by the oppressive conduct of Mr Rees in conducting the affairs of both companies to the advantage of Sietel and to the prejudice of Aqua-Max.

2061. Mr Rees for his part disagrees and maintains that Sietel did not take advantage of Aqua-Max in respect to leasing the plant and equipment. He asserts that in fact in respect to plant and equipment Sietel subsidised Aqua-Max over many many years. Mr Rees and his representatives managed to persuade the special referee that Sietel had subsidised Aqua-Max in the past and this was one of the factors taken into account by the special referee in calculating the notional debt.

2064. For the purposes of the valuation I have found that the bulk of the plant and equipment used by Aqua-Max was owned by it.

2067. In my opinion the evidence supports the contention that Sietel has been well reimbursed for all the moneys it provided to the joint venture and in particular in respect of leasing plant and equipment to Aqua-Max.

2070. The issue has been a bone of contention between the parties throughout the trial but the court has made no findings in respect to the issue other than to note that there was an inference open that Sietel was well reimbursed for its support. Further, I am not persuaded that in latter years that Aqua-Max has paid too much for leased equipment. The evidence revealed that there was a general annual charge of about $48,000 but this would have been a reasonable sum to cover the items which Sietel owned and which were used by Aqua-Max.

2073. I am not persuaded that the facts establish that Aqua-Max has paid excessive amounts for leasing of equipment. There is a suspicion it has but the evidence does not persuade me it did. In determining a fair amount for lease or hire payments it cannot be overlooked that Sietel undertook the financial burdens at times when Aqua-Max was not in a position to take them and was justified in charging a premium for risk and administration.

2076. The second matter raised was that Aqua-Max has in latter years been in the position to pay dividends to its shareholders but that Mr Rees looking after the interests of Sietel took no steps as a director to raise it with his fellow directors to resolve that a dividend be paid. It was argued that because Sietel was handsomely paid for leasing and compound interest on its loan account at a substantial rate, Sietel was not looking for any dividends. It followed Mr R. Rees was looking after the interests of Sietel and was not prepared to consider a dividend. If a dividend was paid M.T. Associates would receive a benefit.

2079. Mr Kennon QC submitted that if dividends had been paid in the past this would have reduced the FME and therefore would have affected the valuation exercise. I reject that argument. Dividends are paid after the net profit is determined.

2082. Mr Kendall QC referred to the accounts to 30 September 1996 and following and submitted that on the face of the accounts Aqua-Max was making sufficient profits to enable it to declare dividends.

2085. Whether or not Aqua-Max should have paid dividends in the past was a matter for the directors of the day. Mr J. Trihey ceased to be a director in 1993 and the directors in latter years were Mr R. Rees, his father Mr D. Rees and a Mr Lillee. At no stage have the directors resolved to pay dividends. I have no doubt Mr R. Rees is in complete control of Aqua-Max. I have no doubt he would be the one to raise the subject with the other directors.

2088. Mr Kendall QC relies heavily on the fact that that the level of profits over the last three years has been sufficient to enable the company to pay dividends and that the failure to do so was brought about by the oppressive conduct.

2091. Before one could draw that conclusion it will be necessary to look into the whole financial picture of Aqua-Max, the demands that were on the company at the relevant time and its ability to continue the business into the future. No attempt has been made to take me to any evidence other than the fact that the level of profits were suffered in those years to justify a conclusion that it would have been reasonable to resolve to pay a dividend.

2094. I am not persuaded on the evidence that Aqua-Max was in a position to pay dividends from 1996 to present. The company was formed in 1988, it did not commence to sell units until 1992, it has steadily established a business and a reputation and paid most of its debts. But one could not say that it was in its interests to declare dividends in the last three years. The evidence points to the company still needing to plough its profits back into the business to ensure its success. I am not persuaded by M.T. Associates that the failure to pay dividends was unreasonable, not in the interests of Aqua-Max or its shareholders and was the result of oppressive behaviour.

2097. Thirdly, that M.T. Associates has not received any royalties under the joint venture agreement, again in circumstances where Sietel Ltd has been well reimbursed for its investment. It submitted that Mr Rees ensured that no royalties were paid to ensure no money was paid to M.T. Associates and this is another consequence of the oppressive and prejudicial conduct.

2100. It is necessary to go back to the joint venture agreement dated 21 November 1988. Clause 9(1) provides -

"(1) Subject to sub-clause (3) of this clause, the parties will procure: -

(a) That Aqua will pay to MTA royalties on sales of products by Aqua at the rate of three per cent (3%) of sales.

(b) That Aqua will pay to Sietel a management fee calculated on sales of products at the rate of twelve per cent (12%) of sales of products.

(2) ...

(3) Neither MTA nor Sietel shall be entitled to receive any payment of royalty or of management fees under sub-clause (9)(1) until the directors of Aqua determine that it is reasonably practicable for Aqua to fund the payment."

2107. The parties to the joint venture agreement were Sietel, M.T. Associates, Mr Trihey and his company Malz Pty Ltd.

2110. Mr Kendall QC submits that the evidence shows that at least for the last three years there were sufficient funds in Aqua-Max so that it was in a position to pay MTA royalties and accordingly the failure by the directors of Aqua-Max to so determine was an act of oppression causing damage to M.T. Associates. The reference to directors is in fact Mr R. Rees and hence this is another consequence of the oppressive conduct.

2113. Again the only evidence relied upon by Mr Kendall QC was the level of profits for the last three years in Aqua-Max and he submitted that the profits were sufficient to justify the payment of royalties. Again there has been no examination of the financial position and the demands upon Aqua-Max over the last three years and I am not persuaded that it was reasonably practicable for the directors of Aqua-Max to determine to fund the payment of royalties. It is noted that if the royalties of 3% were paid to MTA then no doubt a management fee of 12% would be paid to Sietel and this would have the effect of increasing the expenses thereby reducing the profit and the FME which would affect the result in the valuation exercise.

2116. Further, there is no evidence before the court which would enable the court to form some basis for the likely level of payment of royalties.

2119. M.T. Associates failed to establish that that directors of Aqua-Max should have resolved to pay royalties and the management fee. Further the payment would affect the valuation exercise and accordingly any benefit in stage two would have to be balanced by a like amount in the first stage of the exercise.

2122. Fourthly, M.T. Associates contends that Sietel has by the oppressive conduct benefited in the past by payment of compound interest on its loans. This was a contentious issue at trial. I referred to the authorities which establish that simple interest is payable in the absence of agreement. I found that M.T. Associates was only entitled to simple interest on its loan.

2125. But I am now faced with a different issue. That is that the charging by Sietel of compound interest and the acquiesence in that decision by Aqua-Max through Mr R. Rees was the result of the oppressive conduct. Mr R. Rees maintained at trial that Sietel was providing a banking service to Aqua-Max and hence like all bank overdrafts, the loan should carry compound interest. In the end it is a question of doing what is fair and equitable between the parties and I am not persuaded by M.T. Associates that Sietel was acting unfairly in charging compound interest.

2128. Fifthly, that if the court reduces the capitalisation rate for the risk of the Sietel personnel not transferring their employment to the new owners the reality is that since the shares are to be purchased by Sietel the risk is removed. Therefore the reduction in the capitalisation rate should be balanced by payment of compensation for a risk that will not occur. It is put that Sietel would gain a windfall where the reality was that the risk had been removed.

2131. I have found that the capitalisation rate should not be reduced for the alleged risk and accordingly the issue does not arise.

2134. Sixthly, that if the tax losses are reduced in the valuation exercise because of the possibility that the purchaser may not be able to use them because it fails the continuity of ownership test and the same business test then the fact that Sietel becomes the total owner of all the shares, means the risk is negligible. Hence Aqua-Max will certainly be able to claim the deduction hereafter and the risk of not being able to obtain the full value of the tax losses is reduced. This means that Sietel will ultimately benefit from the forced sale at the expense of M.T. Associates.

2137. In my opinion this is a factor which must be taken into account in the second stage.

2140. I think that fairness and justice demand a compensatory allowance of $150,000. which brings the tax losses up to a value of $500,000. The reality is that the deductions will be allowed with the real prospect that they will be claimed over a lesser period than five years.

2143. Seventhly, that in the judgment of $484,000 which the court pronounced in 1998 in proceeding No. 5966 of 1993 in favour of various parties against Aqua-Max, a portion of the total judgment sums was for damages in the nature of interest. It is submitted by M.T. Associates that the interest was payable because of the failure by Aqua-Max to pay the amounts earlier and this failure was because of the oppression brought about by Sietel through Mr R. Rees.

2146. There is no doubt Aqua-Max has to pay the debt to the judgment creditors and accordingly it reduces the value. The judgment debt includes interest.

2149. The interest component is substantial, namely, $168,703.99.

2152. All told there were six claims for what in effect were debts due by Aqua-Max to M.T. Associates, Malz Nominees Pty Ltd and Mr John Trihey.

2155. There were no real defences to the claims and Mr Rees justified not paying the amounts by what was a baseless set of counterclaims. The moneys should have been paid in 1993 and the substantial amount of interest has been incurred because of the conduct of Mr Rees.

2158. Mr Kendall QC submitted that because Sietel will in fact own all the shares once the order of the court is satisfied it gains a benefit from the fact that the amount comes off the valuation. It is said it will benefit from the oppression because the valuation will be reduced and it has to pay less for the shares.

2161. In my opinion Sietel will benefit by the reduction of the purchase price in circumstances where the refusal to pay was at the instigation of Mr R. Rees for a purpose aimed at bringing the Trihey interests to its financial needs. The refusal was based on grounds which had no substance. This was all part of the oppression. This will be to the prejudice of M.T. Associates.

2164. An amount of $168,703.99 is allowed as compensation.

2167. Finally, it was submitted that since Sietel will receive an amount for the plant and equipment by reason of the hypothetical sale to Aqua-Max with a consequent reduction in the valuation price, it will gain a benefit because in reality the plant and equipment will remain with Sietel by reason of the transfer of shares. It will get a reduction in the sale price and keep the plant and equipment.

2170. Upon an analysis of the positions before and after the transfer of the shares in Aqua-Max, Sietel does gain a financial windfall.

2173. In valuing the shares the court determines the price for the business based upon an hypothetical sale. In order to effect the sale of a business as a package, Aqua-Max would have to purchase the plant and equipment owned by Sietel for M$1.7 to enable the sale to be effected at the best price. As a consequence this sum is deducted from the valuation figure which has the effect of reducing the purchase price payable by Sietel to M.T. Associates for the shares.

2176. However, as a result of the transfer by M.T. Associates to Sietel of the balance of the shares in the company, Sietel not only wholly owns all the shares in Aqua-Max and therefore the company, but it also still owns the plant and equipment which was the subject of a notional transfer to Aqua-Max to effect the hypothetical sale.

2179. By reason of the valuation exercise and the transfer of shares to Sietel, it gains a benefit at the expense of M.T. Associates which it should not in fairness and in equity be permitted to retain. The value of the benefit is 18.026% of M$1.7 which amounts to $306,442 and this sum is to be paid by Sietel to M.T. Associates by way of compensation for the effects of the oppressive conduct.

2183. It follows in my opinion that the matters which can be taken into account on the second stage are the tax losses, the interest on judgment and the ownership of plant and equipment. The sum of $625,145.99 is assessed in the second stage of the exercise to compensate the plaintiff M.T. Associates for the effects of the conduct proscribed by s.246AA of the Corporations Law.

2186. Sietel Ltd is to pay M.T. Associates Pty Ltd the sum of $2,772,072.10 being made up of the amount determined on the valuation exercise together with the sum of $625,145.99 for compensation for the effects of the conduct proscribed by s.246AA.

2189. That brings me to the question of interest on the amount.

2192. The order made on 17 July 1998 was that - "Sietel Ltd purchase the 400 shares of M.T. Associates Pty Ltd in the company Aqua-Max Pty Ltd at a price to be agreed between the parties on or before 21 July 1998 and in the event the parties cannot agree, at a price to be determined by the court after it has received the report of the special referee pursuant to Order 50 of the Supreme Court Rules."

2195. I am satisfied that the court has jurisdiction under s.246AA to award interest on the unpaid purchase price as compensation for the oppressive conduct. However, I agree with Nourse J, as he then was, in the decision of In Re Bird Precision Bellows Ltd, supra that the liability to pay interest would only arise when the liability to pay was established.

2198. Whilst the court ordered in July 1998 that Sietel Ltd was to purchase the shares, the obligation on Sietel to do so does not arise until the court determines what is a fair sum to be paid pursuant to s.246AA of the Law.

2201. It follows that M.T. Associates is not entitled to interest on any sum until it is fixed by the court and it will not be fixed by the court until I make an order to that effect.

2204. Subject to submissions by counsel I propose to make the following order -

That Sietel Ltd pay to M.T. Associates Pty Ltd the sum of $2,772,072.10 for its 400 shares in the company Aqua-Max Pty Ltd such price to be paid on or before 31 March 2000 upon M.T. Associates Pty Ltd tendering an executed share transfer in proper form and the share scrip.

2208. It will be necessary to hear the parties on the question of costs.