Plaintiff v Defendants

2 In very broad terms, the proceedings can be described as a partnership breakdown between Jason Sourasis ('Sourasis') and Liam Michael Pickering ('Pickering') over the manner in which the Strategic Management Australia AFL Pty Ltd ('Strategic') business was conducted.

3 The Main Proceeding was instituted by Strategic on 31 October 2014 against Precision Sports & Entertainment Group Pty Ltd ('Precision'), Pickering and James Pitcher ('Pitcher').

4 In the Main Proceeding I found that each of Pickering and Pitcher were in breach of various duties owed to Strategic and that they should make appropriate compensation.

5 The Oppression Proceeding was instituted by Chillimia Pty Ltd ('Chillimia') and Pickering on 20 October 2014 against Strategic, Jaszac Two Pty Ltd ('Jaszac') and Sourasis.

6 In the Oppression Proceeding I found that oppression had been made out essentially because of a Capital Raising undertaken by Sourasis on behalf of Strategic that had the effect of diluting the interest of Chillimia (Pickering's company) and increasing the interest of Jaszac (Sourasis' company) in Strategic.

7 On 12 September 2016 I heard argument on the appropriate form of relief in light of the June Reasons. Detailed submissions and draft orders were filed in advance of the hearing.

8 On 7 October 2016 I published reasons relating to the appropriate form of relief in each proceeding.[2]

9 In the Main Proceeding I held that the correct figure for equitable compensation, payable by each of Pickering and Pitcher to Strategic is $498,979 plus interest from 1 January 2016 at the daily rate of $116.30. I indicated that in due course Judgment would be entered accordingly.[3]

10 In the Oppression Proceeding I held that I would determine the value of the shares held by Chillimia in Strategic (40%) ('the Shares') as at 1 May 2014 ('the Valuation Date'), and the appropriate methodology to be used.[4]

11 Each party has filed experts reports. The valuation issue was heard on 31 January and 1 February 2017. Each expert was cross examined.

12 Chillimia called Dawna Wright ('Wright') as its expert witness. Her first report is dated 16 December 2016 ('Wright 1'). A second report, dated 27 January 2016 ('Wright 2') takes issue with certain matters raised by Paul Lom ('Lom') the expert retained by SMAFL, Jaszac and Sourasis. Lom's report is dated 16 January 2017.

13 Wright's approach is simple and straightforward. Based on instructions and assumptions, she has simply calculated 'the Net Present Value (NPV) of the assets of SMAFL as at 1 May 2014'. The final figure is $1,284,708 made up as follows -

• Receivable from Sourasis - $162,000[5]

14 In order to arrive at a value for the shares held by Chillimia, Wright has reduced the amount of $498,979 (receivable from Pickering/Pitcher) by $117,000 as representing the net cost of collecting the asset comprising the receivable. This sum, it was submitted, represented the costs of the proceeding that would not be recovered.[6]

15 Accordingly the NPV of the assets of SMAFL as at 1 May 2014 was $1,167,708 ($1,284,708 - $117,000) and 40% was $467,083 (ignoring cents). This is the value of the Shares suggested by Wright.

16 Lom disagrees and values Chillimia's equity or 40% stake 'to be in a range of $108,569 to $151,217 say $110,000 to $150,000'.[7]

17 Lom takes issue with a number of matters. They are set out below in summary form.

18 In relation to the assets of SMAFL, Lom essentially agrees with the first two items ($63,875 cash at bank and $35,000 representing shares in Strategic Accounting). He does not agree to the other three amounts recorded by Wright.

19 In relation to the sum of $162,000 receivable from Sourasis, Lom has excluded the entire amount on the basis that I made no specific finding to such effect and that the evidence did not in any event support such a finding.

20 In relation to the sum of $498,979 receivable from Pickering and Pitcher, Lom has reduced this so as to exclude the penalty interest component after 1 May 2014. According to Lom the correct amount is $343,486.

21 In relation to the sum of $524,854 representing future commissions, Lom has reduced this to $220,396.

22 The sum of $524,854 represents two components. First, the value of existing contracts ($314,851) and second the value of future contracts ($215,918). In relation to existing contracts Lom has reduced this amount by $94,455 to account for income tax. He places no value on the future contracts essentially because such payment was too uncertain and a prudent purchaser would not place any value on this asset. Accordingly his figure is $220,396.

23 In relation to assets and based on the 30 June 2014 financial statements, Lom has included trade receivables ($3,292) and a tax asset ($6,641).

24 Table 9 of Lom's report (subject to the adjustments referred to) sets out the differences of opinion referred to above. Table 9 is reproduced below -

25 Looking at Table 9 it is immediately apparent that Wright has not included any amount for liabilities whereas Lom has included an amount of $150,726. Wright's position is based on instructions to the effect that the financial statements of Strategic are unreliable and, unless verified, no amount should be included for liabilities. Lom has relied on the financial statements as at 30 June 2014 and included the amount to arrive at a figure for 1 May 2014.

26 Accordingly by reference to Table 9, Lom records the net assets or equity value at $521,964 and he records Wright's equity value at $1,325,623. However, Wright has reduced this figure to $1,167,709 for two reasons as noted. First she has reduced the sum of $197,000 by $35,000 to $162,000 and second she has reduced the sum of $498,979 by $117,000 to $381,979. The reason for the reduction was explained as comprising legal costs not recoverable in getting in the asset, being the difference between standard costs and solicitor and client costs. Wright also revised the figure of $1,325,623 to $1,319,709 for the reasons set out in Wright 2.

27 After the above adjustments and revisions the net asset value opined by each expert is -

28 In the final analysis, Wright's evidence is that $410,573 is the correct value for the Chillimia 40% interest in Strategic. However, as appears from Lom's report, he has reduced the sum of $208,786 in two further respects. First, a discount of 20% for Chillimia's minority interest, and second, a 35% discount for lack of marketability of the Shares. With this 55% reduction Lom's evidence is that $108,569 is the value of Chillimia's equity. Table 7 of Lom's report gives a higher figure of $151,217 as the value of Chillimia's equity and a lower figure of $108,569.

29 The main question in this part of the proceeding is whether the value of Chillimia's interest is somewhere between $108,569 and $151,217 as opined by Lom or $410,573 as opined by Wright.

30 Before dealing with and resolving the differences it is necessary and desirable to understand the role of the court in determining value in matters concerning the oppression provisions of the Corporations Act 2001 (Cth) ('the Act'). In my view this is critical to resolving the various differences.

31 The legal principles to be applied were not in dispute. Rather, the dispute relates to the fair value of the shares. I have taken this summary largely from the submissions made on behalf of Chillimia.

32 Section 233 of the Act provides that the Court 'can make any order under this section that it considers appropriate in relation to the company'. Consistent with this provision, courts have been held to have a 'very wide discretion' as to the relief that may be granted where oppressive conduct is established.[8]

33 The remedy contemplated by [166] and [169] of the June Reasons is the purchase of Chillimia's interest in Strategic at a value 'taking into account these reasons'. Such relief is expressly contemplated by both ss 233(1)(d) and (e) of the Act. The Court's discretion under s 233 is as noted, very wide. The sub-section:

...says nothing about the price for which purchase of shares can be ordered, or the basis for calculation of such a price. The only legal restriction on the way in which the price may be calculated is that it be a proper exercise of a judicial discretion.[9]

34 The granting of appropriate relief requires the Court to fix a price which is fair in all the circumstances.[10] The value that is fair is a value which the shares would have had, had it not been for the oppressive conduct.[11]

35 The price to be paid is compensatory in nature and is aimed at redressing the wrong done (the oppressive conduct).[12] Consequently the price to be paid will not always reflect the actual or real worth of the shares that might be obtained on the open market.[13] Further, 'the method of determining the price is not confined to ordinary valuation principles'.[14] The relevant question is what is a 'fair value' to be attributed in all the circumstances and there is room for different approaches as to valuation.[15] As the Full Court of the Federal Court stated in Dynasty Pty Ltd v Coombs[16], it is not just a question of value; it is a matter of fixing a price that should be paid.

36 Determining the fair value of the Shares is not free from difficulty. A number of matters must be emphasised. First, the court is not undertaking a formal valuation as such. Less precision is required and it is not simply a matter of arithmetic or assets and liabilities. Other facts may be relevant as to what is the fair or appropriate amount. This brings me to the next important point. The books and records and financial statements of Strategic cannot be relied on, thereby making the task more difficult. The books were a mess and it is not apparent that they are now in any better state. The financial statements have not been audited. They have not been signed and they are not reliable. Third, the court must do the best it can in the circumstances and may of course use the benefit of hindsight. Finally, appreciating these difficulties I declined to send the valuation to an expert, with all the attendant costs and difficulties and decided to deal with the issue myself. Having heard the matter I am satisfied that this was the correct decision.

37 In my opinion, for the reasons set out hereunder, the fair value of the Shares is $350,000. The value is to a great extent based on the net asset value of Strategic as at the Valuation Date with some adjustments. In my opinion this is the correct methodology.

38 I will deal with each identified disputed item or concept in turn. There are a number of matters that require consideration.

39 First, is the receivable from Sourasis in the sum of $162,000 (para [19]). Although I did not make a specific finding to such effect, for the reasons set out in paragraphs [161]-[162] of the June Reasons, I am satisfied, and it is more probable than not that the amount is owing by Sourasis. I will take the amount into account for valuation purposes (which in my discretion and on the evidence is desirable) but will not make a specific order against Sourasis for payment of this amount to Strategic.

40 Next is the receivable from Pickering and Pitcher in the sum of $498,979 (paras [20] and [26]). I agree with Lom that penalty interest after 1 May 2014 should be excluded. The correct amount is $343,486. I do not accept that the sum should be reduced by $117,000 as suggested by Wright and based on instructions. Costs will be dealt with separately. The amount of $343,486 representing the net present (as at 1 May 2014) value of the income stream is the correct amount.

41 The amount representing future commissions (from existing contracts) should be $314,851. This represents the net present value as at the Valuation Date of the income stream from existing contracts. I do not agree that the amount should be reduced by $94,455 for income tax as suggested by Lom. There is no basis to suggest that income tax would be paid. In fact the opposite is without doubt the case. In relation to the value of the future contracts I agree that commission relating to the player Pendelbury should be included as he was always a client of SMAFL. He never left. The others did and there was no certainty that they would return. In this regard I agree with Lom. The commission in relation to Pendelbury is $120,600. The total figure for this item is $307,500. Pendelbury represents a percentage of about 39.2% of the total figure for future commission of $215,918 (see Table 9), 39.2% is $84,640. This in my opinion is the value of the future contracts.

42 Accordingly, and doing the best I can, the value of the assets of Strategic as at the Valuation Date is $1,003,852, made up as follows -

43 Without taking into account liabilities or other deductions, the equity value of 40% of the shares in Strategic is $401,540, say $400,000.

44 This leaves liabilities, the discount amount for the minority interest (20%) and the lack of marketability of the shares (35%) and any other adjustments considered desirable in the circumstances, in order to arrive at a fair value. This is by no means an easy task.

45 I propose to take a very practical and common sense approach to the task at hand. The matters referred to in paragraph 44 are not without some substance and cannot simply be ignored. Further I am uncomfortable with the figure of $400,000.

46 In my opinion, doing the best I can, and in all of the circumstance of this case, I fix the fair value of the shares at $350,000. There is no scientific or mathematical basis for the reduction from the net asset value of $400,000. However, it is not simply 'the vibe' either. The matters that I have taken into account that inform such reduction are set out hereunder. Although strictly each matter, as referred to hereunder, has a counter argument and a retort, it is not necessary, given the task at hand, to resolve these matters. Rather, the existence of a dispute as to these matters and my clear opinion that $400,000 (being simply the net asset value) does not represent a fair value is sufficient for me to reduce the amount to what I consider to be a fair value of the shares.

47 First, I do not accept that there are no liabilities. Although I do not accept the figure of $150,726 referred to by Lom in Table 9, based as it is on unsigned draft accounts that I have no confidence in, the figure of nil should not be accepted. I do not know what the figure is but it forms a part - a minor part - of the reduction.

48 Second, the minority shareholding cannot simply be ignored. It is most unlikely that any purchaser of a minority interest, if there was one, would simply pay 40% of the net asset value. Although this may not strictly be relevant given the nature of the valuation, it is artificial, unrealistic and unfair to require a co-shareholder to pay what (on one view) is suggested to be a fair amount or value for the shares ($400,000) in circumstances where that amount could never (otherwise) be obtained. If it be said, based on the authorities referred to, that this is the consequence of the oppressive conduct of Sourasis, it must be recalled that the breach of duty by Pickering and Pitcher was also relevantly oppressive. I do not think it is an adequate or satisfying response to suggest that their oppression is simply and adequately taken care of by the award of equitable compensation. Rather, their conduct had a severe effect on the business of SMAFL. Despite the order for equitable compensation there is no reason why this cannot and should not be taken into account in fixing a fair value for shares in a company whose effective deterioration they have to a great extent brought about and benefited from. This is not double counting but rather a more realistic assessment of the fair value of the Shares.

49 As pointed out in the June Reasons each party has effectively won and lost. This makes the decision in relation to costs a difficult one. It is indeed tempting in the circumstances to simply make no order as to costs.

50 Strategic submits that although both matters were heard together, most of the relevant issues and evidence were dealt with and were part of the Main Proceeding, which of course included the counterclaim. As it was sufficiently successful, it seeks the costs of the Main Proceeding on an indemnity basis and submits that no order as to costs should be made in the Oppression Proceeding.

51 Pickering, Pitcher, Precision and Chillimia submitted that Chillimia should get the costs of the Oppression Proceeding on an indemnity basis and, because of overlapping issues and the narrow basis upon which Strategic succeeded, Strategic should get 50% of the costs of the Main Proceeding on the standard basis.

52 It is not in doubt that the Court has a very wide discretion in relation to costs.

53 The starting point is that there were two separate matters heard together. It is best to assess each case separately. There was of course (particularly given the counterclaim in the Main Proceeding) a substantial factual overlap. Strategic was by and large or sufficiently successful in the Main Proceeding and Chillimia was successful in the Oppression Proceeding. The question is whether the costs in each case should simply follow the event.

54 In my opinion Strategic is entitled to its costs of the Main Proceeding. It succeeded, to a sufficient extent, on its claim and the counterclaim was dismissed. There is, however a basis to reduce its costs as submitted by Pickering and Pitcher, but only by 20% and not the 50% figure suggested by them. In my opinion, there is no basis to award indemnity costs, as submitted by Strategic.

55 Strategic succeeded in only part of its claim and for an amount significantly less than its original claim. Although it is not unusual for successful parties to plead multiple causes of action, succeed on only one or two, and make claims for amounts far higher than they can establish, costs can in suitable cases be reduced or disallowed. This is, in my opinion, such a case.

56 A perusal of the pleadings, the Court Book and the opening submissions discloses a far wider, contentious and extravagant case than the case that ultimately succeeded. Some issues were not pressed, some were faintly pressed and of course the case against Precision failed and I do not propose to make any costs order in favour of Precision. There was of course, as it transpired, unnecessary documents, evidence and court time. As the trial judge and doing the best I can, I consider that Strategic should only recover 80% of its costs.

57 Finally, there is no basis to award indemnity costs. A finding of breach of fiduciary duty is not enough. There is no conduct on the part of Pickering and Pitcher that would suggest that such an order would be appropriate.

58 Accordingly, I propose to order that Strategic recover 80% of its costs on the usual standard basis. As noted, I do not propose to make any order in favour of Precision.

59 In my opinion Chillimia is entitled to its costs of the Oppression Proceeding. It succeeded on its claim. I do not propose to reduce its costs or decline to make a costs order as submitted by Strategic and the other defendants. Further, I do not propose to award indemnity costs, as submitted by Chillimia.

60 I do not accept that no order for costs should be made, as submitted by Strategic and the other defendants, on the basis that most of the matters in the Oppression Proceeding were necessary matters, issues and evidence in the Main Proceeding. Although there was some overlap there were many sufficiently discrete matters. Ultimately it will be a matter for the Costs Court. However, as with the Main Proceeding, there may be some basis to reduce the costs by a percentage to account for matters that were not pressed or faintly pressed or matters that occupied court time and documents in respect of issues that should not have been raised. However, in the exercise of my discretion, I decline to make any reduction for the reasons set out hereunder.

61 Although the conduct of Sourasis as a director of Strategic left much to be desired on the basis set out in the June Reasons, in the end and taking all matters into account, the usual standard order for costs (without reduction) should be made against the defendants in the Oppression Proceeding.

62 The main basis on which it was submitted that indemnity costs should be ordered was the false evidence given by Sourasis and his mother Kerry Sourasis in relation to the Kerry Sourasis Secured Loan Agreement. It was submitted that this misconduct in litigation was 'premeditated, extended throughout the case: from the pleadings to the Sourasis parties' written statements to evidence on oath and in contemporaneous statements made to the media and was maintained by further collusion during the trial'.[18]

63 Sourasis submitted that the relevant findings related only to credit and not to any breach of duty. It was submitted that as there was no dispute that the money had been repaid with interest, the only issue was whether it was made with Pickering's knowledge and approval.

64 Although evidence in relation to the Kerry Sourasis Secured Loan Agreement did not take much court time and although the issues (or more particularly the finding of fabrication in relation to the evidence given) related mainly, but not entirely, to credit, these factors do not preclude the making of an indemnity costs order. On the contrary, they come close to compelling such an order. However, although the conduct identified may well be sufficient to enable an indemnity costs order to be made, I decline to do so. This was hard fought, heavily contested litigation where everyone has done the wrong thing. In the exercise of my discretion, and in no way excusing or minimising such conduct, I consider that a standard costs order, without any deduction, is the appropriate order.

65 I will discuss with the parties a proposed form of order in each case. In the Oppression Proceeding I do not propose to grant any declaratory relief. Such relief is not necessary or of any assistance given the June Reasons. I do however propose to order that pursuant to s 233(e) of the Act, Strategic purchase the Shares for $350,000.[19] Finally, I will leave it to the parties to arrange the necessary exchange of payment or round-robin of cheques or the like.

[1] Strategic Management Australia AFL Pty Ltd & Anor v Precision Sports & Entertainment Group Pty Ltd & Ors [2016] VSC 303 ('June Reasons'). I will assume familiarity with the June Reasons. Defined terms bear the same meaning.

[2] The Judgment is unreported ('the October Reasons'). I will assume familiarity with the October Reasons. Defined terms bear the same meaning.

[4] The October Reasons at [23]-[27].

[5] The parties agreed that the amount should be reduced from $197,000 because the sum of $35,000 has been accounted for elsewhere.

[6] Reliance was placed on the affidavit of Paul Grant Linsdell sworn 19 January 2017 ('Linsdell affidavit').

[8] Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 (per French CJ at [72]): '...ss 232 and 233 are to be read broadly. The imposition of judge-made limitations on their scope is to be approached with caution'.

[9] United Rural Enterprises Pty Ltd v Lopmand Pty Ltd [2003] NSWSC 910; (2003) 47 ACSR 514 (at [36]), cited with approval in Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd [2004] FCAFC 153; (2004) 207 ALR 136 (at [70]-[78]) and in Crawley v Short (No 2) [2010] NSWCA 97 (at [9]). See also Ubertini v Saeco International Group SpA (No 5) [2014] VSC 234, [4(4)].

[10] Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd [2004] FCAFC 153; (2004) 207 ALR 136.

[11] Smith Martis Cork (supra); Rankine v Rankine (1995) 18 ACSR 725.

[12] Shirim Pty Ltd v Fesena Pty Ltd [2002] NSWSC 10: 'The purpose of an order that the oppressor purchase the shares at a fair price is to compensate the oppressed shareholder for the oppression which has taken place.'

[13] Wain v Drapac (No 2) [2013] VSC 381.

[14] Ubertini v Saeco International Group SpA (No 5) [2014] VSC 234, [4].

[15] Re Cheal Industries Pty Ltd [2012] NSWSC 595.

[16] [1995] FCA 1447; (1995) 59 FCR 122.

[17] I have not included the other minor amounts referred to by Lom (see Table 9).

[18] Chillimia submissions dated 27 January 2017 at [34].

[19] There is no opposition to this course. There is no evidence to suggest that the interests of creditors will be prejudiced.