Plaintiff v Defendants [2020] VSC 867 | Case summary

Supreme Court of Victoria|2020-12-17|Before: DELANY, J

CORPORATIONS - Oppression -Whether director had paid himself and family members excessive remuneration - Salaries paid not commensurate with work undertaken - Value of Company when salaries adjusted - Fair value of minority shareholding - Corporations Act 2001 (Cth) ss 202A, 233 - Re SRW Nominees Pty Ltd (No. 2) [2020] VSC 323 applied.

2 The proceeding was commenced on 12 May 2019. On 3 September 2020, the defendants accepted that Ms Rose be ordered to purchase the shares of Peter Joint at a price to be determined by the Court.[3] The agreed date for valuation is 30 June 2020.

3 Although the parties now are agreed there should be a purchase of Mr Joint's shares, they are not agreed about relevant factual matters to be taken into account in determining the price at which the share purchase should take place.

4 Mr Joint contends that there has been oppressive conduct. The defendants do not agree. In written submissions provided prior to trial the defendants contended that in the absence of oppressive conduct, it is appropriate that a 30% minority discount be adopted when determining the price to be paid by Sandia Rose for Peter Joint's shares.[4] When the trial commenced counsel for the defendants qualified the requirement for a discount on account of the minority nature of the interest. If the defendant's case as to the reasonableness of past remuneration paid was accepted, it would be unnecessary that there be an adjustment on account of minority interest, even if oppressive conduct is not made out. The law is clear that if oppression is established, there should be no discount on account of the interest being a minority interest.[5]

5 At trial evidence was given by the plaintiff, Mr Joint, the second defendant, John Tan, his son, Alex Tan and the third defendant, Sandia Rose, the domestic partner of John Tan. Each of those persons was cross-examined. In addition, the plaintiff relied upon two affidavits made by Andrew John Dennis,[6] a longstanding employee of the Company and its principal IT consultant. Mr Dennis was not required to attend for cross-examination.

6 Two experienced expert accounting witnesses, Mr Tyshing and Mr Smith, gave evidence directed to their assessment of the value of the issued shares in the Company as at 30 June 2020. Both experts prepared comprehensive reports prior to trial.[7] Both participated in an expert conference process and provided a statement by experts ('Joint Statement of Experts').[8] At the trial, the experts gave evidence in a conclave. That evidence, and the Joint Statement of Experts considered each of the factual issues in dispute between the parties, and how those issues impacted upon an assessment of the value of the Company from an accounting perspective. That impact is helpfully demonstrated in Appendices 1 and 2 from the Statement by Experts, both of which are reproduced later in these reasons.

B. Shareholders, Directors and the business of the Company

7 Program IT, the Company, was incorporated pursuant to the Corporations Act 2001 (Cth) ('the Act') on 22 June 2000.[9]

8 The Company has 100 fully paid shares.[10] The history of shareholding is as follows:[11]

(a) Initially, all of the shares were held by Jason Stephens (Stephens).

(b) On 31 October 2002, Stephens transferred 49 shares to Peter Joint.

(d) On 28 September 2009, Stephens transferred his 51 shares to John Tan for $51.[12]

(e) On 23 December 2009, following Stephens becoming a bankrupt, the Report to Creditors by his trustee in bankruptcy stated that 25 of 51 shares held by Stephens were held on trust for John Tan and the other 26 were held by Stephens in his own right.[13] The same report identified the transfer of the 51 shares from Stephens to Tan as a possible voidable transaction.[14] However, there is no evidence that any such claim was pursued against John Tan and John Tan says that at the time, the Company and the shares were, in any case, worthless.

(f) Between 26 October 2009 and 11 May 2015, Peter Joint held 49 shares and John Tan held 51 shares.

(g) On 11 May 2015, John Tan transferred his 51 shares to Sandia Rose.[15]

(h) Since 11 May 2015, Peter Joint has held 49 shares and Sandia Rose has held 51 shares.

9 Peter Joint was involved in the early years of the business operations of the Company. In particular, he was:

(a) an employee of the Company from shortly after its incorporation until 22 October 2004;[16]

(b) the CEO of the Company from 2002 until his employment was terminated on 22 October 2004 by John Tan;[17] and

10 John Tan, initially appointed as a director of the Company on 18 March 2002, has been the sole director of the Company since 12 May 2009.[19] Mr Tan is currently aged 72 and his partner, Sandia Rose, is a couple of years younger than him.

11 John Tan has accounting background. He obtained a bachelor of business from Deakin University in the 1970s or 1980s.[20] He worked at the Australian Taxation Office ('ATO') and before that, with the National Crime Authority. In 1988 he went into private practice as an accountant. After about 12 years he retired from that practice and not too long after that, he began his involvement with the Company.

12 Mr Tan described Stephens as an entrepreneur.[21] Stephens ceased to be a director of the Company on 18 March 2002 and ceased to be company secretary on 17 May 2002. In 2002 Mr Tan was appointed Director and Secretary in his place. From that point on, leaving aside the period 2006 - 2009 when John Tan was absent due to illness, Mr Tan has been both the sole director in control of the affairs of the Company and, at times, has also acted as the CEO.

13 Mr Joint gave evidence that the Company had two principal software products that it distributed, iET solution ('iET') and the Dimensional Insight Diver platform ('DI Diver').[22] Mr Joint gave evidence that the iET software provides a customer relationship management program ('CRM') that provides service desk management services to call centre organisations; and that the DI Diver software was used to analyse and report on the data received in the CRM databases.[23] Until 2010 and again from 2014, the Company has had exclusive distribution rights to the iET software.[24]

14 The Company continues to use the same two platforms, iET and DI Diver, that it relied upon for its core business in 2004. I accept the evidence of Mr Joint that these two products are not legacy products only.[25]

15 Mr Joint gave evidence that the core business of the Company was to set up the two software platforms in a manner specific to the needs of customers, to provide IT support to those customers and to provide regular upgrades.[26] He gave evidence that software distribution is one aspect only of the business of the Company. When put to him that the business of the Company was that of a distributor of software programs, he disagreed. Mr Joint also disagreed with the description of the business as a 'call centre'. I accept his evidence concerning these matters.

16 In the period between Peter Joint commencing his employment with the Company and his termination as CEO in October 2004, the Company grew. It is the evidence of Mr Joint that by 2004 there were 25 staff.[27] When cross-examined John Tan gave evidence of his recollection of approximately 18 employees of the Company at that time.[28] By late 2004 the business of the Company was conducted both in Australia and in Asia, with an office in Hong Kong.

17 In 2020 the Company has a much smaller workforce. Mr Tan gave evidence that there are currently three employees involved in the provision of IT services: Mr Dennis, and two other IT consultants, Francis Azarcon and Cathryn Delany. In addition, a bookkeeper, Tiana Machim works part time as she has done since the business moved its premises to Brighton. John Tan said that from 2015 onwards, staff levels, apart from himself and Sandia Rose, had reduced to the current level, but that as at 2015 there were one or two additional IT people when the business was being conducted at the premises in Hawthorn.[29]

18 The Company moved from Hawthorn to Suites 11 and 14 Bay Street Brighton around March 2019. The March 2019 lease was for a term of one year only and the Company now occupies the Brighton premises, together with an associated storage room on a monthly tenancy.[30]

19 Mr Dennis has been employed by the Company since 2002.[31] He made two affidavits, filed and relied upon by Mr Joint.[32] His unchallenged evidence is that he is the principal consultant at the Company. He works both from home and at the Brighton office. He has a team of consultants that he mentors and leads. In addition, he is responsible for managing supplier relationships, customer relationships, customer projects and support with respect to the Company's core business.[33] He has the required security clearance to provide services under the Department of Defence ('DOD') contract.[34] When Mr Joint was the CEO he also had the required security clearance.[35] Mr Tan does not have such a clearance.[36]

20 At the time Mr Joint ceased to be the CEO on 22 October 2004, the Company had approximately 30 customers, including the DOD**,** leveraged off the two software platforms.[37] In the early years, Sage Software Australia Pty Ltd (also referred to as Sage Micropay) was also a customer.[38]

21 As at 30 June 2020 the Company has what Mr Dennis describes as two significant contracts: A contract with the DOD, and a contract between Unicom Systems Inc (the parent organisation for iET solutions) and Sage Software Australia, pursuant to which the Company acts as agent and reseller for Unicom Systems Inc.[39]

22 The expert accounting evidence is that as at 2020, the DOD contract accounts for approximately 90% of the annual income of the Company and that the Sage business accounts for around $100,000 in income, paid each year as a lump sum in advance.[40] In 2020 the Company is reliant upon those two customers for its income.

23 The DOD contract was extended by the Department in late 2019 via a mechanism described as a 'Change Order'. The Change Order was signed by John Tan on 21 November 2019 and by the Department on 3 December 2019.[41] The previous contract value was $3,122,028, the new contract value is $3.957 million over three years.[42] The Purchase Order, a separate document to the Change Order, provides for an annual charge for the period 1 December 2019 to 30 November 2020 of $896,102.80.[43] The annual charge includes the cost of an upgrade. When cross-examined Mr Tan was not aware of the upgrade and said this was a matter that Mr Dennis was dealing with.[44]

24 Mr Tan was keen to play down the security of the DOD contract. He said that every year, when he asked Mr Dennis how long the Company should plan for, Mr Dennis said, no more than 12 months.[45] When Mr Tan gave instructions to Mr Tyshing, at that time the independent court appointed expert, he told Mr Tyshing about the possibility of the Department of Defence going to tender. That was a matter that Mr Tyshing referred to in his initial report.[46] However, at trial, Mr Tan gave no evidence that the Department intended to go to tender and there is no evidence that there is or was any proper foundation for the giving of such an instruction.[47]

25 This is not the first case to come before this Court involving the Company.

26 On 18 November 2004, Peter Joint commenced oppression proceedings against Stephens seeking orders that Stephens purchase his shares in the Company ('the First Oppression Proceeding'). Neither John Tan, nor Sandia Rose were parties to the First Oppression Proceeding[48] and they did not give evidence in any of the three separate trials relating to that proceeding.[49]

27 As the cross-examination of John Tan revealed, he was involved in providing instructions to Rigby Cook in relation to the First Oppression Proceeding in 2015, as was Stephens.[50] The narrations on the detailed solicitor's bills dated 21 December 2004 and 30 March 2005 record a number of communications with John Tan, including, expressly, the receipt of instructions from him.[51] I do not accept John Tan's evidence that he did not give instructions to Rigby Cook concerning the First Oppression Proceeding.[52]

28 There were a number of judgments delivered in the First Oppression Proceeding. They include:

(a) On 14 May 2007, Dodds-Streeton J delivered judgment.[53] Her Honour rejected Peter Joint's oppression case but, on the basis of Stephens having consented to a buy-out order, ordered that Stephens purchase Peter Joint's 49 shares in the Company based on a valuation as at the date of the Court's order.[54]

(b) On 7 February 2008, Robson J delivered his judgment,[55] in which he determined that, based on the current value of the shares in the Company, the shares had no value. Robson J declined to wind up the Company on the just and equitable ground.[56]

(c) On 21 November 2008, the Court of Appeal delivered its judgment,[57] allowing Peter Joint's appeal from the decision of Dodds-Streeton J. It declared that Stephens had engaged in oppressive conduct and ordered that Stephens purchase Peter Joint's shares in the Company, valued as at the date of the commencement of Proceeding, 18 November 2004, at $732,307 plus interest.[58] It is material to the present case to note that the sum of $732,307 was arrived at after allowing a reduction in the amount otherwise required to be paid by Stephens for Peter Joint's shares for the loan of $110,053.85 recorded at that time as owed to the Company by Peter Joint ('the Joint Loan').[59]

(d) On 23 September 2009, Gardiner AsJ ordered that Stephens execute a share transfer in accordance with the Court of Appeal judgment and pay Peter Joint the sum of $920,075.97 plus interest.

29 Stephens did not comply with the orders of the court to purchase Peter Joint's shares and to execute a share transfer.[60] On 25 November 2009, Stephens filed a debtor's petition and declared himself bankrupt.[61]

30 John Tan began to suffer from serious health problems in 2006 when he was diagnosed with inoperable stage 3 prostate cancer.[62] Mr Tan was told by doctors that he had only eight months to live. He spoke to Stephens. He told Stephens that he needed to leave everything behind. I accept his evidence that he left it to Stephens to organise his resignation as a director and for Stephens to continue running the business of the Company.[63] No resignation was advised to ASIC.

31 In late 2009, John Tan returned to active involvement in the Company.[64]

32 Mr Tan found out in late 2009, just before Stephens became a bankrupt, that his intended resignation as a director had not been notified to ASIC.[65] Peter Joint had resigned as a director on 12 May 2009. Stephens may well have been acting as a de facto director, but as at November 2009 John Tan was the only remaining director of the Company according to ASIC records.

33 Mr Tan gave evidence that in late 2009 he found the Company to be in a poor financial state.[66] He was advised the Company was in substantial debt to the ATO. The evidence is that the ATO debt was $150,000. The MYOB records of the Company show that the Company also owed debts to critical suppliers. iET Solutions was owed approximately $70,000;[67] and Dimensional Insights was owed $46,000.[68] Debts owed to the Company had been the subject of factoring arrangements.[69]

34 It was Mr Tan's evidence that upon resuming active involvement with the Company in late 2009 he performed the role of CEO. I accept that evidence.

35 To reduce debt and costs, Mr Tan reduced staff numbers to five or six people.[70] He employed a bookkeeper and he arranged to move the Company's business to rented premises at Oxley Road Hawthorn. The lease of those premises, dated 5 January 2010, provided for a term of occupation commencing 21 December 2009.[71] John Tan personally guaranteed the lease.[72]

36 Mr Tan was cross-examined about his motivation at that time. He accepted that his primary concern was his exposure as a director to personal liability for debts of the Company. However, he said that as he had 'no assets', any attempt by the ATO to recover any debt from him would have been unsuccessful.[73] He referred to personal bankruptcy as a hazard of business.[74]

37 From late 2009 until the end of the 2012 financial year Mr Tan was focused on the financial turnaround of the Company.[75] If it were not for his drive and involvement at that time it is clear that the Company would have failed. Whatever drove Mr Tan to take up the role of CEO at that difficult time for the Company, as a result of his hard work he was able to restore the financial position of the Company within approximately two and a half years.[76]

38 Mr Tan turned around the Company without any assistance or involvement of the former CEO, Mr Joint. No meetings of directors or annual general meetings of the Company were held after 2009.[77]

39 Mr Joint accepts, albeit in cross-examination he had difficulty coming to terms with it being the fact,[78] that John Tan clearly did a lot of work between late 2009 and early 2010 to turn the Company around.[79] Whilst Mr Joint did not accept that Mr Tan worked as CEO in the period from late 2009 until the end of FY12, or thereafter, in the manner described in Mr Tan's evidence, Mr Joint accepted that he was not aware of what Mr Tan had actually done. He asserted that based on his knowledge of the Company, Mr Tan 'should be doing very little'.[80] What cannot be disputed is that from late 2009 the affairs of the Company were in the hands of John Tan where they remain today, Mr Tan continuing as the sole director.

40 There was a gap in communications between Mr Joint and Mr Tan from at least late 2009 until 7 October 2011. On that day Peter Joint's solicitors (Goldsmiths) wrote to John Tan seeking access to the books and records of the Company.[81] The letter stated that if no response was received, Peter Joint would make an application to the Court.[82] John Tan did not respond to the letter.[83] Mr Joint did not make application to the Court as he had threatened to do.

41 John Tan gave evidence that he did not receive the 7 October 2011 letter, sent to his long term home address in Toorak. He sought to explain non-receipt of the letter by referring to thefts from letter boxes in Toorak.[84] I do not accept that evidence.

42 Mr Joint gave evidence that he had no involvement and effectively no visibility about the activities of the Company between 2009 and 2018.[85] There is a factual contest between the parties as to the extent of Peter Joint's knowledge of the affairs of the Company from the time of his resignation as director in May 2009 until mid-2018 and also as to the reasons between Mr Joint's lack of interaction with the Company and its affairs at that time.

43 I am sceptical of Mr Joint's claim that he was unaware of the Company and its activities from mid-2009 until mid-2018. The Company maintained a website. It had the same major customer with whom Mr Joint had dealt when CEO and it had the same key IT employee, Mr Dennis who was there when Mr Joint was the CEO and who gave evidence on affidavit at the trial of this proceeding on behalf of Mr Joint. It could not have been too difficult for an IT savvy Mr Joint, previously the CEO of the Company, to find out what the Company was doing if he chose to investigate.

44 During the period 2010 - 2014 the Company was without the benefit of an exclusive agency for the iET software. Mr Tan blames Mr Joint for the 2010 loss of that exclusive agency.[86] The Company regained the exclusive agency for iET in 2014.[87]

45 Throughout the trial proper, the defendants contended that an adjustment of $235,274.39 should be made against Mr Joint when valuing the shares in the Company on account of lost revenue from the loss of iET exclusive agency during that four year period. In final submissions, the defendants abandoned the claim that an adjustment should be made against Mr Joint on account of those matters when determining the fair value of his shares.[88]

46 By 2012, even without the benefit of the iET exclusive agency, the financial position of the Company had improved markedly. According to its annual accounts, in FY12, it recorded a profit of $137,962 and in FY13 a profit of $149,923.[89] None of that profit was distributed to shareholders.

47 In FY14, according to its annual accounts, the Company recorded a loss of $4,198.[90]

48 Directors fees were paid to John Tan from 2009. In FY12 Mr Tan's director's fees were $87,218, in FY13, $93,600, and in FY14, $85,254.[91] Mr Tan was not paid a salary as CEO or as an employee at any time from 2009.

49 On 11 May 2015, Tan transferred his 51 shares in the Company to Sandia Rose. The evidence of John Tan is that he decided to transfer his shares to Sandia Rose following a spike in his cancer markers and doubts about the efficacy of his treatment regime.[92] I accept the truth of that evidence.

50 After the 2015 share transfer the Company continued to pay directors fees to John Tan, and, in addition, it commenced to pay a wage to Sandia Rose. None of these matters were known to Mr Joint at the time.

51 There is a significant issue in the proceeding both as to the amount of work Mr Tan performed after the end of FY12, but also whether the role that he performed after that time equated to that of a CEO of the Company. Further, if it did, what was the appropriate remuneration for that role?

52 In final submissions, the defendants contended that John Tan's role comprised three phases: from FY10 to FY12; from FY13 to FY18; and FY19 to FY20. They submitted that until the end of FY12, his role was full time. From FY13 to FY15, the Full Time Equivalent ('FTE') equalled 0.75; from FY16 to FY18, FTE equalled 0.45; and in FY19 and FY20, 0.3.[93]

53 When cross-examined, Mr Tan described the impact of medication he is required to take and of his illness on the amount of work that he has been able to perform. He said that his medication causes mild symptoms of chronic fatigue.[94] Since 2013 he has been able to work a total of 3 to 3.5 hours in the day productively, but not 'at a stretch'.[95]

54 Mr Tan gave evidence that in the period FY13 to FY15 he attended the office daily;[96] but that for the sake of his health he reduced his attendance to approximately three days a week in FY16 - FY18.[97] In FY19 and FY20 his attendance was reduced to one to two days per week.[98]

55 The upshot of this evidence, which I accept, in contrast to John Tan's evidence on witness statement of working 10.00 am - 4.00 pm days, is that when Mr Tan says he attended the office daily between FY13 and FY15, his attendance was for around 3.25 hours per day. From FY13 until FY15 that equates to 16.25 hours per week, a little over two FTE days per week. When Mr Tan says that he worked three days a week in FY16 to FY18, he worked 3 x 3.25 hour days - approximately 1.5 FTE days per week. In FY19 and FY20 the number of FTE days worked by Mr Tan reduced to 1.5 days at 3.25 hours per day, or around 4.85 hours per week, approximately one half day per week at the business premises.

56 Although Mr Tan's attendance at the business was reduced substantially from FY13 and reduced further over the years that followed, the fees paid to him as director of the Company were not reduced on account of his reduced participation.

57 From mid-2018, Mr Joint again began active engagement concerning the Company.

58 On 29 June 2018 Mr Joint's solicitors, Goldsmiths, sent a letter erroneously dated 29 July 2018 to Mr Tan.[99] The letter drew attention to Mr Joint's entitlement as a shareholder to copies of the annual financial statements of the Company and to the receipt of dividends. It made a demand of John Tan and the Company for copies of the annual accounts since 1 June 2004 and a statement of all monies paid to Directors by way of wages dividends or otherwise since 1 June 2004, to be produced within seven days.

59 Mr Tan did not deny receipt of this correspondence, but he did not provide the requested books and records. His reason, he did not regard it as a 'good faith enquiry'.[100]

60 On 25 July 2018 Mr Tan responded, rejecting the matters raised in the Goldsmith's letter.[101] He wrote:

should your client wish to invoke any specific rights pursuant to the Constitution or Corporations Act, we are open to consider however ... the lack of any detail or basis for demand beyond makes consideration of the merits of your ... "request" or determination of any legal basis for a grant of access to any corporate record sadly impossible.

Mr Tan otherwise asserted that the details in Goldsmiths' letter were 'prima facie vexatious' and that the Company and its officers had complied with the applicable statutory reporting standards.[102]

61 By letter dated 6 September 2018 from his solicitors, Peter Joint renewed his demand for access to the books and records of the Company.[103]

62 It is the case for the defendants that Mr Joint deliberately did not enquire as to the affairs of the Company between 2011 and 2018. There was much cross-examination of Mr Joint concerning this topic and his lack of activity in pursuing his interest as a minority shareholder in the Company from 2009 to 2018. In that context the defendants submitted that Mr Joint was a most unimpressive witness and, at times, deliberately untruthful.[104] In cross-examination it was put to Mr Joint that he deliberately took no action for seven years because of problems in his marriage. Mr Joint denied that problems in his marriage were the reason for lack of contact between 2011 and 2017.[105]

63 Mr Joint mentioned in his affidavit that in 2012 his marriage started to run into difficulties.[106] When cross-examined, he said he and his wife separated in 2017 and there were proceedings in the Family Court in 2018.[107] His explanation for the initial delay in around 2012 was that he suffered from psychological difficulties after the events concerning Stephens and did not want even more litigation.[108]

64 Mr Joint gave evidence that he had been told in 2015 by a business associate, Mr Fraley that the Company had ceased trading and that a further contact from Mr Fraley in 2018 alerted him to the fact the Company was continuing to trade.[109]

65 The 2015 email from Mr Fraley does not refer to the Company.[110] Mr Joint's explanation for the delay from 2012 and his reliance upon two communications from Mr Fraley, one in 2015, the other in 2018, is less than compelling.

66 It is clear that it was only following the resolution of Mr Joint's family law disputes in June 2018 that Mr Joint again began to agitate for information concerning the Company following a seven year hiatus. He followed up correspondence from Goldsmiths on his behalf in 2018 with the issue of this proceeding on 8 March 2019.[111] Goldsmiths are the same lawyers who acted for him in the First Oppression Proceeding and in relation to family law matters. It is Goldsmiths who were responsible for sending the letter in October 2011,[112] and the letter dated 29 July 2018 sent on 29 June 2018.[113]

67 The Family Court made final orders in relation to property matters as between Mr Joint and his former wife on 6 June 2018.[114] The Orders do not expressly deal with Mr Joint's shares in the Company. However, they provide that if not otherwise specified both he and his former wife are to retain property including choses in action in their respective possession.[115] Mr Joint gave evidence that at the time of the financial settlement, he 'had no idea that they [his Program IT shares] ever existed'. I do not accept that evidence as truthful.

68 Mr Joint took no steps to assert his interest as a minority shareholder in the Company between 2011 and 2018. He renewed his efforts only a few weeks after his family law proceedings were resolved. The defendants submitted that Mr Joint's evidence concerning the reason for delay in bringing the proceedings between 2011 and 2018 was deliberately untruthful.[116] I agree. The explanation for the seven year delay is that Mr Joint waited until after that settlement before instructing his family law solicitors to again begin to assert his rights in the Company.

69 Mr Joint relied upon the following matters in support of his claim to have been oppressed as a member of the Company:

(a) Mr Joint is 'locked into' his shareholding which, despite the judgments in the First Oppression Proceeding, but because of Stephens acting in concert with John Tan in 2009,[117] he is unable to exit.

(b) John Tan has treated the Company as if it is totally his own and ignored Mr Joint's minority interest.

(c) John Tan has paid excessive remuneration to himself (both as to directors fees and expenses) in breach of s 202A of the Act. Without a resolution of the members, directors have no right to be paid for their services.[118]

(d) John Tan and/or the Company have paid wages to Sandia Rose and to Alex Tan in excess of the value of any work they did.

(e) The payment of moneys to John Tan and his family to which they were not entitled had the effect of reducing the profit of the Company so that no dividend was paid or payable.[119]

(f) No annual general meetings have been held, no Profit and Loss Statements or Balance Sheets have been provided.

(g) The appointment of the administrators in 2020 was oppressive.

70 In opening the case, three issues relating to remuneration and wages paid to Mr Tan and Sandia Rose were said to support a finding of oppressive conduct:

(a) First, Mr Tan's evidence that currently he works one to two days per week.

(b) Second, that since 2002 day-to-day operations of the business are being run by Mr Dennis, an employee of the business who is paid approximately $160,000 per annum.[120]

(c) Third, relying upon s 202A of the Act, there have been no board meetings since 2009 and there cannot have been any resolution authorising payment of directors fees.[121]

71 A further instance of alleged oppressive conduct was said to be the change in the business address of the Company from Arthur Street Eltham, to Oxley Road Hawthorn and then to its present address at Suite 11, 75 Bay Street, Brighton.

72 The facts concerning some of the alleged oppressive conduct relied upon are not controversial:

(a) Mr Joint was not invited to any General Meetings in the period between 2006 and 12 May 2009.[122]

(b) No General Meetings have been held since 12 May 2009.[123] That is the date on which Mr Joint resigned as a director.[124]

(d) An application by Mr Tan on 28 July 2020 to appoint administrators to the Company was dismissed by Sifris J on 10 August 2020.[126]

73 The defendants seek to excuse the failure to provide annual financial statements by relying on a plea that the Company, as a 'small proprietary company' with reduced reporting requirements, does not prepare financial reports and relies on its management accounts, as it is entitled to under the Act.[127] While it is correct the Company is exempt from producing a 'financial report' and a 'director's report',[128] that plea does nothing to assist the defendants when the evidence shows that the Company produced annual Profit and Loss Statements and Balance Sheets, that copies were not provided to the minority shareholder and that in some years there were significant profits, none of which were distributed to shareholders.[129]

74 Just as the attempted rebuttal by the defendants of the failure to provide financial accounts can be shortly dealt with, so too can Mr Joint's complaint about the Company changing its business address. Mr Joint contended that the Company changed its business address because John Tan wanted to hide from him both, the fact the business was still operating, and where it was operating from.

75 The inference for which Mr Joint contends is not realistic. The Company's website continues to identify its business address. Despite the failure to register the most recent change of business address with ASIC and the failure to notify Peter Joint of that change,[130] the suggestion that the change of address was a device used by John Tan to hide matters concerning the Company from Peter Joint simply fails to stack up[131] There is nothing sinister about the Company moving to new business premises and its actions in doing so, including not taking steps to notify Mr Joint, were not oppressive.

76 Accepting that every oppression case depends on its own facts, it was submitted on behalf of Mr Joint that there are marked similarities between the facts of the present case and the facts considered by the NSW Court of Appeal in Tomanovic v Global Mortgage Equity Corporation Pty Ltd[132] so as to support a finding of oppression.[133]

77 In Tomanovic, Campbell JA, with whom Young JA agreed, said as follows:

If the judge did not implicitly do so, I infer that the shares of the Tomanovic interests in the various group entities would probably not be saleable to anyone other than the Sayer interests at a fair price. It is not only being a minority shareholder that would make the shares unattractive. As well, the complex intra-group dealings, dealings of group entities with entities associated with Mr Sayer but not Mr Tomanovic, and the informality with which the affairs of the group have been conducted for many years, would be significant deterrents to a potential purchaser.
Important elements of the commercial unfairness in the situation are that the Sayer interests seek to keep the value of the equity of the Tomanovic interests locked up in the companies, in circumstances where:

(a) the income that the Tomanovic interests used to receive on the basis that it was theirs to keep has stopped being paid;

(b) there is no present prospect of the Tomanovic interests receiving income from their shareholding other than at the discretion of the Sayer interests, regardless of how the companies fare;

(c) there is no real prospect of the Tomanovic interests selling to anyone else for a fair value; and

(d) resumption of the former basis on which the two men co-operated is no longer possible.

Further, ...Since December 2004 [around 7 years] Mr Tomanovic has not had the regular provision of information about the activities of the companies that he formerly had.[134]

G. Legal principles: Oppression and 'fair value'

78 There is no dispute between the parties as to the applicable principles. The issue is as to their application to the facts.

79 In their written submissions, the defendants provided a list of propositions concerning oppression proceedings, the Court's power and how the Court should approach such cases:

(a) 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.[135]

(b) 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.[136]

(c) The granting of appropriate relief requires the Court to fix a price which is fair in all the circumstances.[137]

(d) The value that is fair is a value which the shares would have had, had it not been for the oppressive conduct.[138]

(e) The price to be paid is compensatory in nature and is aimed at redressing the wrong done (the oppressive conduct).[139]

(f) 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.[140]

(g) Further, 'the method of determining the price is not confined to ordinary valuation principles'.[141]

(h) 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.[142]

(i) As the Full Court of the Federal Court stated in Dynasty Pty Ltd v Coombs,[143] it is not just a question of value; it is a matter of fixing a price that should be paid.

80 In addition the defendants submitted that while there is no overriding requirement that the applicant must have clean hands, improper conduct on the part of the applicant may make the opponent's conduct not unfair or may affect the exercise by the court of its discretion in granting relief.[144] There is no basis for an oppression claim in relation to conduct undertaken with the 'acquiescence, or consent' of the applicant.[145] Whether a person has acquiesced is a question of fact and degree.[146]

81 Both parties agree that in determining the price for which Sandia Rose is to purchase Peter Joint's shares, the exercise the Court is required to undertake involves a determination of the 'fair value in all of the circumstances'. What constitutes fair value turns on the particular facts of the case.[147]

82 On behalf of Mr Joint it was submitted that the overriding aim when determining fair value is to put the shareholder in the position he would have been in if there had been no oppression.[148] When determining the fair price for shares in these circumstances, the method is not confined to ordinary valuation principles.[149] The expert evidence is not determinative, it is informative as to what the Court may determine to be a fair price, the calculation cannot be made with mathematical accuracy or by the application of strict accounting principles.[150]

83 Recently in Re SRW Nominees Pty Ltd (No. 2),__[151] Robson J made the following observations regarding the determination of fair value:

Section 233 of the Corporations Act 2001 (Cth) empowers the Court, upon a finding of oppression, to "make any order ... that it considers appropriate in relation to the company, including an order ... for the purchase of any shares ...". In United Rural Enterprises Pty Ltd v Lopmand Pty Ltd, Campbell J of the Supreme Court of New South Wales said that the section "says nothing about the price for which purchase of the shares can be ordered, or the basis for calculation of such a price". His Honour said "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".
Campbell J cited with approval In Re Bird Precision Bellows Ltd, where the defendants held a majority interest in the company, the oppressed shareholders held a minority interest and the majority was ordered to buy out the minority. There, Oliver LJ rejected the submission that the shares of the minority to be purchased by the oppressing majority should be valued on ordinary valuation principles, by which the minority shares would be valued without any premium for control. Rather, his Lordship said:

For my part I find myself quite unable to accept this submission. 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; and I find myself quite unable to accept that that discretion in some way stops short when it comes to the terms of the order for purchase in the manner in which the price is to be assessed. It has been pointed out, and I mention it again, that section 75(4) is merely a collection of possible methods of giving effect to section 75(3), and it is expressed to be without prejudice to the generality of subsection (3), which gives the court a very wide discretion as to the granting of relief in general terms in respect of the matters of which complaint has been made.

In Dynasty Pty Ltd v Coombs, the Full Court of the Federal Court held that where an oppressed shareholder is ordered to be bought out by the oppressor, it was the duty of the Court "to fix a price for the shares that represented a fair value in all the circumstances of the case".
In Patterson v Humfrey, Le Miere J of the Supreme Court of Western Australia said:

The court's primary objective in providing for a valuation of the company's shares is to determine the fair value of the company's shares. Where the defendant's oppressive conduct has reduced the value of the shares then it must logically follow that the valuation must disregard the adverse effect of the oppressive conduct.

In dealing with ascertaining the fair value of shares to be acquired in a case of oppression, Young J said in ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd:

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 erring, on the side of the oppressed.

I also bear in mind that the aim of the remedial relief is to put an end to the oppression.

84 Delay in commencing an oppression claim is a factor to be considered as part of the discretion under the statutory oppression provisions.[153]

85 The defendants relied in particular upon the following passage from Re Cheal Industries:[154]

[t]here is, therefore, room for a different approach to be taken in relation to the valuation of shares (where that would produce a fairer outcome on the facts of the particular case) than the textbook approach to valuation. The question is what is a fair value to be attributed in all the circumstances.[155]

86 The defendants submit that in determining the appropriate amount to be paid, the following matters need to be taken into account:

(a) Firstly, the price ought not be adjusted for the effect of any conduct or payments occurring prior to Sandia Rose becoming a shareholder on 11 May 2015 or in which Sandia Rose was otherwise not involved.

(b) Secondly, any adjustments made should also take into account the income tax which would otherwise have been payable by the Company had it not deducted those expenses from its taxable income. The tax effect to the Company in the event that any payments made by the Company are to be reversed as not having occurred, or treated in a different manner.[156]

(c) Thirdly, if the balance sheet of the Company ought to include as an asset a related party loan to John Tan as suggested by Mr Smith in his report, then the value of that asset should to be reduced to nil because John Tan is unable to repay any such loan.[157]

(d) Fourthly, the amount which Sandia Rose is required to pay to Peter Joint for his shares should be reduced and/or adjusted to reflect the amount owed by Peter Joint in respect of the Joint Loan.

87 The defendants submit that while the policy underlying a refusal to apply a minority discount is obvious enough where a shareholder has been unilaterally excluded from management, there is no basis for extending the application of that policy to circumstances where a person seeks to leave the business rather than being unilaterally excluded from it.[158]

88 In final submissions the Defendants contended that materially changed economic conditions due to the COVID-19 pandemic may cast doubt on the value of the Company and that a cautious approach is warranted.[159]

I. Valuation methodology and the expert valuation evidence

89 Mr Tyshing provided his first report on 16 October 2019,[160] at that time as a single Court appointed expert. For the purposes of preparing his first report Mr Tyshing interviewed both John Tan and Peter Joint. He did not speak to Mr Dennis.[161]

90 In his first report, valuing as at 30 June 2019, Mr Tyshing considered that the valuation of the Company hinged on two key issues. First, the DOD contract and second, the 'Sandia Loan'. While issues concerning how the DOD contract continue to remain central to the value of the Company as at 30 June 2020, as the defendants now accept that the Sandia loan is not a liability of the Company that topic is no longer relevant to value. The previous assertions by the defendants concerning the Sandia Loan are only relevant to questions of oppressive conduct.[162]

91 Mr Tyshing was told by John Tan that the Department was likely to put the DOD contract out to tender and that it was not prepared to commit to further business with the Company for more than 12 months.[163] When cross-examined Mr Tyshing agreed that he had been influenced when selecting a valuation methodology in his first report by his belief that the Company would have a single option contract only with the DOD for 12 months.[164] At the time he finalised his first report he was aware of a further option period, but that option had not been taken up. He valued accordingly.[165]

92 Adopting those assumptions Mr Tyshing valued the Company on the basis of an orderly realisation of assets[166] and not on a going concern basis.

93 Mr Tyshing prepared a second expert report dated 20 October 2020, this time valuing the Company as at 30 June 2020. For the purposes of his second report Mr Tyshing was retained on behalf of the defendants. In the interim Mr Smith had prepared his first expert report dated 18 February 2020 on the instructions of Mr Joint, valuing the Company as at 30 June 2019.

94 In his second expert valuing as at 30 June 2020 Mr Tyshing again adopted the orderly realisation of assets valuation methodology. He carried that methodology through his participation in the 12 October 2020 Statement of Experts.

95 Mr Tyshing considered the orderly realisation of assets method of valuation appropriate, first, because he considered the Company's trading profile at the normalised EBITDA level to be unprofitable and second, because the Company has a significant reliance on the DOD contract. When valuing as at 30 June 2020 Mr Tyshing approached the valuation on the basis that the current option period for the DOD contract ends in November 2020.[167] Because he did not consider the Company to be a going concern as at 30 June 2020, an orderly asset realisation methodology was, is in his opinion, appropriate.[168]

96 Mr Smith relied on the capitalisation of future maintainable earnings method (FME) for the valuation of the shares in the Company in each of his reports. His first report was responsive to the first report of Mr Tyshing. He prepared a second report dated 6 October 2020, and participated with Mr Tyshing in the Statement of Experts.

97 Mr Smith was first retained on behalf of Mr Joint in late 2009. On 11 November 2019 he produced a preliminary indicative valuation of the Company, at that time having both limited information and limited time to prepare his report.[169] He was instructed by Mr Joint to assume that payments to John Tan and Sandia Rose and expenses incurred by them were not incurred in the normal operations of the business. I accept his evidence that in order to arrive at an appropriate figure for normalised EBITDA it is not appropriate to take into account items that do not relate to the business.[170] He valued the Company as at 30 June 2019 on that basis, adopting the capitalisation of future maintainable earnings valuation approach.

98 The second report from Mr Smith in October 2020 proceeded on the basis of the same instructed assumptions, with some limited additional instructions.[171] It was put to Mr Smith that when writing his October 2020 report he sought to 'bolster' the case for Mr Joint by referring to Mr Joint's evidence and by not referring to the evidence of Mr Tan.[172] I do not accept that criticism of Mr Smith's evidence. I accept his evidence that the valuation task that he undertook was an appropriate accounting exercise based upon instructed assumptions.[173]

99 When opening the case, Counsel for the plaintiff asked the rhetorical question, how did the Company survive when on the face of its accounts it was loss-making. The consolidated profit and loss statements from 2012 to 2020 form part of Mr Smith's second report.[174] It was submitted that the explanation for the survival of the Company in the face of continuing losses as reported in the accounts is that if non-cash items being depreciation, long service leave, annual leave and legal fees are backed out of the FY20 expenses ($132,509) then a loss of $124,234 translates to a cash profit of approximately $8,000.[175] Adopting a figure for normalised EBITDA takes non-cash items such as those identified out of the business goodwill valuation calculation.

100 In his second report Mr Smith adopted $93,000, based on a weighted average of EBITDA for each of FY18, FY19 and FY20, as the appropriate figure to represent future maintainable earnings for the purposes of determining the value of the Company as at 30 June 2020.[176] He arrived at that figure after giving effect to his instructed assumptions.

101 The defendants were critical of Mr Smith for proceeding to value the Company on the basis of his instructed assumptions. It was put to him that relying on those instructions made him a 'mouthpiece' for the plaintiff.[177] I do not accept that criticism. It is entirely appropriate for an independent expert to proceed on the basis of instructed assumptions. The reliance by an expert upon instructed assumptions does not render the valuation report by the expert inadmissible, as submitted on behalf of the defendants.[178] If it turns out those instructed assumptions are either not proved, or if the Court determines that on the basis of contested evidence it is not appropriate to proceed on the basis of such instructions, then the relevance of the opinion of the expert based upon such instructions falls away. However, that does not mean that it was not appropriate for Mr Smith to adopt and express expert opinion based upon such instructions. Mr Smith's statement that he had no ability to assess the truth of an instructed assumption concerning Mr Tan's asserted lack of involvement in the management of the Company and that such an assessment is a matter for the Court is correct.[179]

102 The defendants submitted that Mr Smith was an unimpressive witness. I do not agree. Mr Smith presented as both a professional and an independent witness. The same is the case so far as Mr Tyshing is concerned.

103 In the Statement of Experts Mr Smith and Mr Tyshing addressed the various competing positions of the parties. In seeking to arrive at the goodwill of the Company, the experts agreed on certain adjustments to EBITDA,[180] following which the agreed adjusted EBITDA of the Company (prior to related party adjustments) was $156,329 for FY18, ($109,293) for FY19 and ($86,736) for FY20.[181]

104 After each of the adjustments for which Mr Smith contended based upon his instructed assumptions, his adjusted EBITDA figures were $299,853 for FY18, $34,281 for FY19 and $47,937 for FY20. The corresponding EBITDA figures for which Mr Tyshing contended were $163,083 for FY18, ($57,705) for FY19 and ( $41,247) for FY20. The competing figures and also the itemised reasons for the differences in the EBITDA figures are shown in Appendix 1 from the Statement of Experts reproduced at paragraph 107 below.

105 When valuing as at 30 June 2020 Mr Smith applied a weighting of 40% to FY20, 40% to FY19 and 20% to FY18. After applying that weighing to the adjusted EBITDA in the Statement of Experts and after making a reduction for assets employed in the business[182] and applying a multiple of earnings of three he arrived at a value for the goodwill of the business of $272,228. That figure is included by him in Appendix 2 to the Statement of Experts - Balance Sheet Assessment as representing the intangible assets of the Company, its goodwill.

106 Assuming a FME valuation approach, which Mr Tyshing did not consider an appropriate approach,[183] Mr Tyshing adopted a different approach to weighting the EBITDA for each of the FY20-FY18 years than that of Mr Smith. In the Statement of Experts Mr Tyshing applied a weighting of 10% of for FY18, 30% for FY19 and 60% for FY20 to his calculated EBITDA figures. Adopting that weighting and applying a multiple of 1.5 to his weighted EBITDA figures, as Mr Tyshing contended to be appropriate did not result in a positive value for goodwill. In the result, in the opinion of Mr Tyshing, when conducting a Balance Sheet Assessment, it was appropriate to include a nil allowance for goodwill.

107 It is convenient to reproduce Appendix 1 from the Joint Statement of Experts that helpfully identified areas of difference in their approaches to the calculation of normalised EBITDA:

Profit and Loss normalisations FY15 FY16 FY17 FY18 FY19 FY20 Reference

Agreed adjusted EBITDA -prior to related party adjustments

108 The competing Balance Sheet Assessments of Mr Tyshing and of Mr Smith as at 30 June 2020, $23,137 and $1,804,029 and the reasons for those very different figures are also helpfully summarised by a further table from the Statement of Experts, Appendix 2:

J: Differences between the Experts concerning Future Maintainable Earnings

109 The table that appears at CB 1217 of the Joint Statement of Experts summarises, the agreed adjustments to EBITDA prior to related party adjustments. It separately identifies each of the related party adjustments that Mr Smith contends, based upon his instructed assumptions should be made in order to arrive at normalised EBITDA. It also separately identifies the related party adjustments that Mr Tyshing considers appropriate to be made in order to arrive at normalised EBITDA. It is convenient to reproduce that table:

110 As will be apparent, there are a number of specific items that are in contest in the proceeding that impact upon the calculation of the appropriate EBIDTA.

111 When applying the FME methodology, Mr Smith adopted a weighting to EBITDA of 20% for the 2018 year, 40% for the 2019 year and 40% for the 2020 year.[184] In the Statement of Experts, expressing his view should the Court consider a FME approach appropriate, Mr Tyshing preferred to adopt a weighting of normalised EBITDA of 10% for FY18, 30% for FY19 and 60% for FY20.

112 When cross-examined, Mr Smith said that in his initial report he gave a greater weighting to the FY18 year, but lowered that weighting to 20%.[185] In the Joint Statement of Experts he gave a double weighting to the two most recent years. It was his evidence that to put a weighting of only 10% on FY18, as was Mr Tyshing's approach, was close to making the earnings in that year immaterial, or close to immaterial/negligible.[186]

113 Mr Tyshing agreed that it was appropriate to give more weight to the more recent years. He considered that a heavier weighting should be attributed to the most recent year of the trading results, that year being more reflective of the current and therefore the ongoing trading profile of the business.[187] He considered that the last two years were more indicative of the current performance of the business. He said his weighting was to be preferred because he considered 2018 to be an abnormally high year and that more recent years were more reflective of the current value of the business.[188]

114 The adoption of the Tyshing approach to weighting compared to the Smith approach has a significant impact upon the figure for future maintainable earnings. In the defendants' final submissions, they calculated that adopting Mr Smith's normalised EBITDA at $73,000 after reversing the rental adjustment, and factoring in Mr Smith's approach to appropriate imputed remuneration for John Tan and Sandia Rose, future maintainable earnings on a 20%/40%/40% basis, as per Mr Smith, are $27,143. If, on the other hand, Mr Tyshing's 10%/30%/60% weighting is adopted, future maintainable earnings are only $4,512. Assuming a multiple of 3 in each case, the comparative values are $81,429 (Smith) and $13,536 (Tyshing).

115 I prefer Mr Smith's approach to the weighting of the three years in question. However, I do not accept as valid the criticism of Mr Tyshing that when he determined to adopt 10% for FY18, with a 10-30-60 weighting that he was attempting to 'skew the outcome'.[189]

116 I accept Mr Smith's evidence that a weighting of 10% on the FY18 year, which both experts agree to be relevant and be taken into account, is not sufficiently significant. I accept Mr Smith's evidence that a weighting which puts twice as much weight on the most recent two financial years than on the FY18 year is appropriate. I also accept his evidence that, in light of the long history of the Company and its overall financial performance, the fact that FY19 and FY20 have negative financial results does not mean that it is appropriate to disregard future maintainable earnings as the basis for valuation.[190] Whilst FY18 was certainly a very profitable year, taking the Smith adjusted EBITDA in Table 1 to the Joint Statement of Experts (referred to above), FY15 with an adjusted EBITDA of $236,313, only five years prior to the valuation date, was also a strong year. It is also relevant to consider the new Change Order.[191] The Change Order expressly extended the DOD Contract from 1 December 2019 to 30 November 2022. The structure of the Change Order is to provide for three option periods, each of year within that extension. The total value of the previous contract was $3,122,028.53 inclusive of GST, the total value of the new Change Order is $3,957,763.69 GST inclusive.

117 The argument on behalf of the defendants that COVID-19 demands a cautious approach in some respects highlights the positive impact, in the present context, of the fact that the Company depends so heavily on the DOD contract. The DOD is not facing the significant uncertainties that are impacting the private sector in the COVID-19 economic environment.

118 There is a dispute between the experts as to the appropriate earnings multiple to be adopted if capitalisation of FME is the appropriate valuation method. In final submissions, the defendants submitted that a more conservative earnings multiple is appropriate for a business with an uncertain trading future.[192]

119 Mr Smith applied an EBITDA multiple of between 2.5 and 3.5 with a midpoint of 3.[193] Mr Smith provided reasons for adopting that multiplier based upon both general economic considerations and considerations that are specific to the business of the Company being valued.[194]

120 In the Statement of Experts, Mr Tyshing expressed his opinion that the appropriate range for the earnings multiple should be reduced to 1 - 2, given the uncertainty of the ongoing trading profile of the business and the significant risks that it faces. In particular, significant reliance upon the DOD contract and an inability to generate new business.[195]

121 During the conclave Mr Tyshing adhered to his view that 1 - 2 is an appropriate multiplier for the business. Mr Smith said that his adopted range of 2.5 - 3.5 is a very low multiple for computer software business, that it reflected the customer concentration and also took into account the employee risk concerning Mr Dennis.[196] It was the evidence of Mr Smith in the expert conclave that the earnings he had estimated were conservative and that the multiple of three also seemed conservative given the DOD contract had been extended.[197]

122 The evidence of Mr Smith as to the appropriate multiplier is to be preferred. It was his evidence that he could see no reason why the DOD contract would not continue. He said if he had known of the three-year window with a 25% increase in the value of the DOD contract, his valuation would have been higher.[198] Mr Tyshing had a different view of the risks to the business of its dominant DOD Contract. When valuing as at 30 June 2020 Mr Tyshing valued on the basis that the current option period for the DOD contract ends in November 2020.[199] He was understandably influenced in proceeding on that basis by information given to him earlier by Mr Tan about the Department considering putting the work out to tender, a proposition not proved at trial. I do not accept Mr Tyshing's evidence that a multiple of 2.5 - 3.5 does not make an adequate allowance for the risks of the business when that information, provided to him but not proved, is disregarded.[200]

123 The previous DOD contract was for a one year period, from 1 December 2015 to 30 November 2016, with up to three further 12 month options.[201] Each option was exercised by the Department. The current Change Order was issued in draft on 12 September 2019. On 17 October 2019, the DOD issued a Purchase Order for the 12 month period ending 30 November 2020.[202] Clause 3.2(a) of the Change Order provides that the Department has 30 days prior to the expiration of the 12 month period, 31 October 2020, to inform the Company whether it wishes to extend for another 12 months.[203]

124 It is significant that the next option under the Change Order is due to be exercised within the next few days of the experts giving evidence. John Tan gave no evidence that any communication had been received from the DOD that indicated it did not intend to exercise the option. Mr Tyshing said that if the next option was exercised that he would have to 'revisit' his valuation.[204] That evidence, appropriately and independently given, is another reason for preferring the multiple of three adopted by Mr Smith.

M: The balance Sheet of the Company and Disputed items of adjustment

125 To the value of the Company as at 30 June 2020 Mr Smith took his adopted value for Goodwill, initially $293,000, and in the Statement of Experts, $272,228 to which he added surplus assets to arrive at an equity value.

126 The 'surplus assets' included by Mr Smith were treated by him as a 'related party loan', the details of which were set out at table 6.13.6 of Mr Smith's second report:

127 In the course of preparation of the Statement of Experts there was some refinement by Mr Smith of these figures such that the total 'Related Party Loan Account' was $1,454,847 in lieu of $1,410,571. The areas of difference when it comes to determining the value of the Company by reference to its balance sheet as at 30 June 2020 were identified by the experts as follows:

128 It is convenient to deal with each of the disputed items of adjustment in turn and to do so beginning with those which have the greatest financial impact.

N. The allegation of excessive directors fees paid to John Tan

129 The plaintiff contends that in the calculation of EBIDTA and when valuing the Company, all monies paid to John Tan should be disregarded and that amounts that have in the past been paid to Mr Tan should be repaid by him.

130 The Statement of experts reports that from FY10 to FY20, as calculated by Mr Tyshing, John Tan received payments of $687,859.[205]

131 Excessive remuneration is liable to challenge as oppression.[206] What is required is that remuneration paid bears a reasonable relationship to what a CEO actually does. That historically Mr Tan did much work to turn the Company around, that work having been performed prior to 2012 when he acted as a full-time CEO, does not justify continued payments in 2020, eight years after the turn around work was completed. From FY13 Mr Tan, on his own evidence, reduced his attendance at the business, it now being down to 'one or two days a week', and those days being 3 - 3.5 hour days.[207]

132 As submitted on behalf the defendants the determination of whether or not John Tan was underpaid, in particular from FY13, is significant both in relation to surplus assets of the business and, from FY18-FY20 as to normalised earnings to be adopted.

133 Both experts agreed that if Mr Tan performed the work of a CEO then he is entitled to be paid for that work and this should be reflected in the earnings of the Company. As was accepted by counsel for Mr Joint in opening, if Mr Tan worked as a CEO and worked as a director, even if there is no resolution as required by s 202A, when determining the fair value, it is appropriate to take into account reasonable remuneration for a CEO.[208]

134 Although paid as directors fees, I accept that in the period FY10-FY12 Mr Tan effectively performed the role of a full-time CEO. Final submissions on behalf of Mr Joint conceded that Mr Tan should be paid the actual amounts paid in 2010-2012 as directors fees, but that he was 'considerably overpaid' in the period 2013-2020.[209]

135 I reject the submission on behalf of Mr Joint that by basing his opinion as to John Tan's role as a CEO upon a list of activities created by John Tan in hindsight that Mr Tyshing was led into error.[210] What is more important is that as a matter of substance, between 2010 and 2012 it is clear that Mr Tan, and not Mr Dennis, and no other person or persons, performed the role of CEO of the Company.

136 As reported by Mr Tyshing, Mr Tan was paid $45,273 in FY10, $86,727 in FY11 and $87,218 in FY12.[211] No adjustment should be made and no loan should be created to reflect payments made to Mr Tan in those financial years. The position is different when it comes to payments made to Mr Tan by the Company after 30 June 2012.

137 Clearly if there is an owner operator who performs a valuable role in generating income for the business, a purchaser of that business needs to find an equivalent person to carry out those functions, and then, at a cost. That cost must be reflected in the calculation of EBITDA. I accept Mr Smith's evidence, with which Mr Tyshing agreed, that when seeking to value the business, money paid to a director has no relevance. It is a function of the corporate structure of the business rather than a function of its value.[212]

138 In accordance with his instructed assumptions, Mr Smith made no allowance in his expert reports for the payment of directors fees or, if it be appropriate to treat John Tan's role as that of CEO, for remuneration for carrying out that role. Adopting that approach, between FY12 and FY20 he calculated that directors fees of $558,859 should not have been charged by John Tan to the Company.[213] He treated those amounts as part of the Related Party Loan Account.

139 Mr Tyshing considered that in the small to medium enterprise sector business owners need to 'multitask'.[214] Mr Tyshing saw Mr Tan's role as 'pretty much' him multitasking a range of functions of the CEO. That role included ensuring there is proper funding of the business, making sure it maintained solvency and ensuring there is clear direction and a way forward for the business.[215]

140 Mr Tyshing gave evidence that having regard to the turnover of the business he considered a salary of $176,000 p.a. is appropriate as at 2020 on a full-time basis.[216] In support of his adopted full-time equivalent salary of $176,000, Mr Tyshing noted that Mr Dennis was paid $160,000 plus superannuation.[217]

141 In the Statement of Experts Mr Smith reported that if it was appropriate to allow payment to Mr Tan for the performance of the CEO role then, the salary properly payable for that role as at 2020, having regard to the turnover of the business at less than $1 million is $120,000, inclusive of superannuation.[218]

142 Assuming the number of days per week worked by Mr Tan as CEO accords with his evidence given in his witness statement, in the Statement of Experts, adopting the FTE salary of $120,000 p.a in 2020, after taking into account payments made to Mr Tan as directors fees, Mr Smith calculates that Mr Tan was underpaid as CEO in the amount of $53,175 over the period FY10 to FY20.[219] Using the same assumptions as to the number of days worked, but adopting a salary of $176,000 p.a, as at 2020 Mr Tyshing expresses his opinion that Mr John Tan has been underpaid $498,566 over the corresponding period.[220]

143 When cross-examined, Mr Tyshing agreed that the Hays salary guide to which he made reference relates to companies with a turnover of up to $50 million per annum and that as at 2020 the Company 'is a very small company'.

144 I reject the proposition that having regard to the business activities of the Company and the roles of the persons who are employed by it that there is any proper basis to allow the salary of a CEO to Mr Tan or that there has been any proper basis to allow such a salary since at least 2015.

145 Having regard to the turnover of the business, the number of employees, and the number of customers, I prefer the views expressed by Mr Smith. I consider an annual salary of $120,000 to be an appropriate FTE salary for a CEO of this Company as at 2020, if indeed such a role were to be performed.

146 It is the unchallenged evidence of Mr Dennis that he is the principal customer contact, and he is unaware of Mr Tan having any customer contact.[221] On Mr Tan's own evidence, renewal of the DOD contract (as the Company's principal source of income) was something Mr Dennis managed.[222]

147 It is clear that the business of the Company is very much dependent upon the skills and continued employment and involvement of Mr Dennis. When it came to the renewal of the DOD contract in 2019, it was Mr Dennis with whom the department communicated.[223] Mr Dennis informed John Tan that there would be more options offered in terms of renewal of the contract. Asked about his familiarity with the contract, Mr Tan said 'I can't be sure on the date, but in the general sense I'm aware that Defence was looking to extend the contract'.[224]

Plaintiff v Defendants

At a glance

Court

Decision date

Before

Source

Judgment (584 paragraphs)

Parties

Cases Cited (6)