Plaintiffs v Defendants

Supreme Court of Victoria|2007-12-21|Before: DODDS-STREETON J

CORPORATIONS - Whether board's transfer of plaintiffs' income shares to member prior to establishment of agency under pre-emption article a breach of statutory contract - Whether loss and damage - Whether oppression - Whether transfer ratified - Company's auditor appointed to determine fair selling value of shares - Whether auditor's valuation in accordance with terms of the contract - Whether auditor independent and impartial - Failure of price fixing mechanism - Referral to independent valuer.

CORPORATIONS - (Cth), -(d) - Oppression - Whether reversal of decision to distribute dividends constitutes oppression - Whether related to circumstances in which plaintiffs ceased to be members.

1 In this proceeding, the plaintiffs, Mrs Dianne Beevers and her daughter, Ms Chloe Beevers, complain that in 2005, their income shares in the first defendant, Port Phillip Sea Pilots Pty Ltd, ('Pilot Co'), which for some years had consistently produced dividends of approximately $250,000 annually, were transferred to another shareholder in Pilot Co, the second defendant, Nominee Co, for only $44,508. The plaintiffs' principal complaint is that their income shares, which they estimate to be worth well over $1 million, were transferred to Nominee Co without their consent at a gross undervalue, in a breach of contract which also amounted to oppression. As a subsidiary complaint, the plaintiffs also allege that the board's reversal in December 2004 of its earlier decision to pay a $15,000 dividend to income shareholders, and its decision to pay $30,000 in extra salary to pilots instead, amounted to oppression pursuant to s 232 of the Corporations Act 2001. Nominee Co, by counterclaim, alleges that, due to mistake, the amount paid for the plaintiffs' income shares exceeded their true value. It seeks to recover the overpayment.

2 The members of Pilot Co are either licensed sea pilots employed by Pilot Co or members of their families. The structure and terms of shareholding in Pilot Co are unusual and reflect its emergence from a pre-existing, de facto partnership. Pilot Co has on issue 32 voting shares and 32 associated parcels of 10,520 income shares. The articles of Pilot Co provide that only a "Port Phillip Sea Pilot" (defined to mean a currently licensed pilot under the regulations of the Marine Act 1988, who is currently employed by Pilot Co in the capacity of a pilot) can hold a voting share in Pilot Co. The articles further provide that only a Port Phillip Sea Pilot or a family member of a Port Phillip Sea Pilot (defined to include a company controlled by a Port Phillip Sea Pilot) can hold an income share in Pilot Co.

3 The articles of Pilot Co also contain pre-emption provisions which prescribe, inter alia, a process for the transfer of the income shares of a retiring pilot or, (where applicable), his family, to another member of the company, or a person selected by the board of Pilot Co, when eligibility to hold the income shares ceases upon the termination of the pilot's employment. Article 13(c) provides that the income shareholder shall give written notice of intention to transfer the income shares in accordance with article 3 within a 14 day period (or such longer period as the board allows). Pursuant to article 3(b), the notice constitutes the board the shareholder's agent for sale to members of Pilot Co at a price agreed on by the shareholder and the board, or, failing such agreement, at a price certified by the company's auditor to be, in his opinion, the fair selling value as between a willing vendor and a willing purchaser. If at the expiration of the 14 day (or extended) period, the income shareholder has not given notice, it is deemed to be given.

4 Captain Beevers (who is the husband of Dianne Beevers and the father of Chloe Beevers) was a licensed sea pilot employed by Pilot Co from its incorporation in 1989 until his retirement due to ill-health on 7 February 2005. On his retirement, Captain Beevers held a voting share in Pilot Co, but had long since transferred his 10,520 income shares to his wife and daughter, who had each acquired them for valuable consideration in a number of tranches over a period of time. As at 7 February 2005, Dianne Beevers held 4,978 income shares and Chloe Beevers held 5,542 income shares.

5 Following Captain Beevers' resignation due to ill health on 7 February 2005, both his voting share and the plaintiffs' income shares were transferred to Nominee Co on about 9 February 2005. The 14 day period in which the plaintiffs were required to give notice under article 13(c) (which would constitute the board of Pilot Co their agent for sale under article 3(b)) had not yet expired. The plaintiffs had not agreed with the board on a price for their income shares and the company's auditor had not provided a certificate giving his opinion of the fair selling value. On about 9 February 2005, Pilot Co's accountant, Mr Calleja[1], paid the sums of $21,107 and $23,411 (totalling $44,518) into the joint bank account of Dianne Beevers and Chloe Beevers as consideration for their income shares. The plaintiffs, by a letter to Pilot Co dated 14 February 2005, protested at the failure to consult them, accepted the amounts as a part payment only and gave notice requesting that their income shares be valued in accordance with the articles.

6 It is not disputed that the plaintiffs did not agree on a price for the income shares with the board of Pilot Co on 9 February 2005, or at any time thereafter. Correspondence ensued between members of the Beevers family and Captain Buck, the managing director of Pilot Co, (in which the plaintiffs continued to protest at Pilot Co's actions and to insist on a valuation of their income shares in accordance with the articles). On about 20 March 2005, Captain Buck contacted Mr Ryan, Pilot Co's auditor, and requested him to produce a valuation of the plaintiffs' income shares.

7 On 29 March 2005, Mr Ryan produced a 'valuation letter', which did not constitute a valuation under article 3(b). Captain Buck therefore requested Mr Ryan to produce a complying certificate. In the course of preparing the certificate, Mr Ryan had numerous exchanges and communications with officers of Pilot Co, including Captain Buck, Captain Griffiths and the company's accountant, Mr Calleja. He obtained a large number of financial documents from Mr Calleja, and, on a number of occasions, documents passed between Mr Ryan and Mr Calleja, after each had added alterations, input or amendments. Mr Ryan also communicated with Gadens, the solicitors for Pilot Co, Plant Co and Nominee Co. The plaintiffs, through their solicitors, Williams Winter, sought to provide submissions to Mr Ryan in relation to the valuation of their income shares, which Mr Ryan declined to receive.

8 Mr Ryan, by a valuation report dated 2 June 2005, certified that, in his opinion, the fair selling value of the plaintiffs' income shares as between a willing vendor and a willing purchaser was $6,809. The valuation report attached a schedule of assets and liabilities. Although the valuation report did not state what methodology had been employed, it is now established that Mr Ryan's valuation was based on a net tangible assets methodology, whereby he calculated the value of Pilot Co's net tangible assets, assigned a nil value to its intangible assets and divided the amount by 32, being the number of parcels of income shares on issue.

9 On 8 June 2005, the board of Pilot Co purported to retransfer the plaintiffs' income shares to Nominee Co, apparently in recognition that the earlier transfer on 9 February 2005 did not comply with the requirements of the articles, and was therefore ineffective.

10 The plaintiffs allege that the transfer of the income shares to Nominee Co was in breach of a contract constituted by the articles of Pilot Co, including article 3(b). They contend that the contract was breached on 7 February 2005 by the unauthorised transfer or appropriation of their income shares for less than the stipulated fair selling value. They allege that the associated conduct amounted to oppression and breach of fiduciary duty owed as an agent by the board.

11 They allege that their loss arose on 7 February 2005 by a breach of contract, and claim damages, being the fair selling value of the shares as at that date. The plaintiffs' submit that Mr Ryan's certificate dated 2 June 2005 was not relevant because the breach of contract and the loss occurred on 7 February 2005. Alternatively, they argue that the valuation did not comply with article 3(b). They contend that the auditor's opinion was not in good faith or independent, and that he simply adopted the board's views. They allege that the certificate was prepared in collusion with Mr Calleja, and that Mr Ryan denied them procedural fairness by refusing to accept their submissions. Further, they argue that the valuation did not answer the questions article 3(b) required to be answered.

12 The plaintiffs contend that the income shares should be valued by the future maintainable earnings method, which would produce a value in the range of $1 - 1.4 million.

13 The defendants concede that the plaintiffs' income shares were transferred on 9 February 2005 prior to the agency of the board arising under article 3(b), but contend that, (in accordance with the plaintiffs' pleading), the plaintiffs subsequently ratified the transfer by their letter to the board dated 14 February 2005. The transfer of the plaintiffs' income shares to Nominee Co was thus effected by a contract which incorporated the price fixing mechanism set out in article 3(b). The defendants contend that the auditor's valuation report dated 2 June 2005 conformed to the terms of the price fixing mechanism in article 3(b) and produced a fair selling value of the income shares, which is binding on the plaintiffs.

14 Although the defendants concede that the plaintiffs did not receive the notices of meetings to which they were entitled or any direct communications from Pilot Co in relation to the transfer of their income shares on 9 February 2005, they contend that, following the plaintiffs' ratification of the transfer, their entitlement under article 3(b) was satisfied by the valuation report dated 2 June 2005. They contend that while the methodology of net tangible asset value adopted by the auditor was a discretionary matter not subject to curial review, it was, in any event, reasonable. The defendants deny that the transfer of the plaintiffs' income shares or the reversal of the board's decision to pay a dividend in December 2004 amounted to oppression.

15 The constitution of Pilot Co relevantly provides:

(a) Except as hereinafter provided no shares in the Company shall be transferred unless and until the rights of pre-emption hereinafter conferred shall have been exhausted.

(b) Every member or other person who intends to transfer shares (hereinafter called "the vendor") shall give notice in writing to the Board of his intention. That notice shall constitute the board his agent for the sale of the said shares in one or more lots, at the discretion of the Board, to members of the Company at a price to be agreed upon by the vendor and the board, or, in case of difference, at the price which the Auditor of the Company for the time being shall certify, by writing under his hand, to be in his opinion the fair selling value thereof as between a willing vendor and a willing purchaser.

(c) The Board may allocate some or all of the said shares to a person in its absolute discretion without assigning any reason therefore or may follow the procedure outlined in the following paragraphs of this Article.

(d) Upon the price being fixed as aforesaid, the Board may forthwith give notice to all the members of the Company holding voting shares of the numbers and price of the shares to be sold and invite each of them to state in writing within 21 days from the date of the said notice whether he is willing to purchase any, and, if so, what maximum number of the said shares.

(e) At the expiration of the said 21 days the Board may allocate the said shares to or amongst the members or member who shall have expressed their or his willingness to purchase as aforesaid, and (if more than one) so far as may be pro rata, according to the number of shares already held by them respectively, provided that no member shall be obliged to take more than the said maximum number of shares so notified by him as aforesaid. Upon such allocation being made the vendor shall be bound on payment of the said price to transfer the shares to the purchase or purchasers. If he makes default in so doing, the President for the time being of the Company, or failing him a Vice President shall forthwith be deemed to be the duly appointed attorney of the vendor with full power to execute, complete, and deliver in the name and on behalf of the vendor a transfer of shares to the purchasing member, and the Board may receive and give a good discharge for the purchase money on behalf of the vendor and enter the name of the purchaser in the register as holder by transfer of the said shares purchased by him.

(f) In the event of the whole of the said shares not being sold under article 3(e), the vendor may at any time after the expiration of the said 21 days, transfer the shares not so sold to any person and at any price.

(g) Articles 3(a) (b) (c) (d) (e) and (f) hereof shall not apply to a person who is already, or who is pursuant to Articles 12 or 13 hereof eligible to be, a member of the Company, nor to a transfer merely for the purpose of effectuating the appointment of new trustees, nor to a transfer by personal representatives to a legatee under the will of, or to the persons beneficially entitled thereto upon the distributors of the estate of a deceased member, nor to a transfer by a trustee to a beneficiary, provided that it is proved to the satisfaction of the Board that the transfer bona fide falls within one of these exceptions.

(h) The number of members for the time being of the Company (exclusive of persons who are in the employ of the Company and or persons who having been formerly in the employ of the Company were whilst in that employment and have continued after the determination of that employment to be members of the Company) shall not exceed fifty but where two or more persons hold one or more shares in the Company jointly they shall for the purpose of this paragraph be treated as a single member.

(i) Any invitation to the public to subscribe for, and any offer to the public to accept subscriptions for any shares in or debentures of the Company; and any invitation to the public to deposit money with, and any offer to the public to accept deposits of money with the Company for fixed periods or payable at call, whether bearing or not bearing interest is prohibited.

It shall be no objection to any agreement which the Company may make for the purchase of land buildings stock plant or any real or personal property whatsoever that the vendor or any party to such agreement may be President Vice President governing director managing director director promoter shareholder in or otherwise stand in a fiduciary position to the Company or that there is no independent board to represent and act on behalf of the company in respect of any such agreement and ever4y member of the Company both present future shall be deemed to have become such a member and to have joined the Company on this basis and subject to a compliance with the provisions of Section 228 of the Companies Code the said vendor or any party to such agreement anything herein contained to the contrary notwithstanding may as Director vote in respect of such an agreement and may in all respects acct as such Director in respect of any such agreement and on behalf of the Company enter into give effect to and carry out any such agreement and any such agreement may be signed or executed on behalf of the Company as well by the said vendor or any party to such agreement as by any other Director or Directors and/or Secretary.
The Board shall out of any moneys for the time being in its hands pay all costs charges and expenses incurred in connection with the promotion formation and registration of the Company.
The Board shall meet and the business of the Company shall be carried on at the office of the Company and if necessary at such other place or places as the Board shall from time to time deem advisable.
The registered office of the Company shall be at such a place within Victoria as the Board shall from time to time appoint.
The Company may exercise the powers conferred by Section 262 of the Companies Code and such powers shall accordingly be vested in the Board and the Company may cause to be kept in any country State or Territory including the Australian Capital Territory in which the Company transacts business in accordance with its objects a Branch Registered of members in accordance with the provisions of the Companies Code. The Board may subject to Section 262 of the Companies Code make such provision as it thinks fit respecting the keeping of such Branch Register and may comply with the requirements of any local law and the Board may issue shares on the Branch Register in manner provided by these Articles for the issue of shares on the Principal Register. The provisions contained in these Articles relating to shares in the company shall apply mutatis mutandis to all shares issued on the Branch Register. The Board may transfer shares from the Principal Register to the Branch Register or vice versa.

(a) The capital of the Company is Ten Million Dollars, divided into One Thousand (1,000) redeemable preference shares (hereinafter called "voting shares") of One Dollar ($1.00) each (hereinafter called "income shares") with power to divide the shares in the capital for the time being into further classes and to attach thereto respectively any preferential, deferred, qualified, or special rights privileges conditions or stipulations and with power to increase or reduce such capital and to issue any part of its capital original or increased with or without any preference priority or special privileges or subject to any postponement of rights or to any conditions or restrictions; or without any right of voting and generally on such terms and subjects to such conditions and provisions as may from time to time be determined in accordance with the Articles of Association for the time being in force.
Subject to the provisions hereinafter contained, the voting shares shall entitle the holders:-

(a) To receive notice of, attend and vote at all meetings of the Company and on a poll to have one vote per share held.

(b) On winding up, to rank pari passu with each other and priority to all other shares in the Company for payment of the capital paid up thereon and the amount of any arrears of dividend.

(c) On a winding up, to rank pari passu with each other and in priority to all other shares in the Company in participating in surplus assets of the Company.

Subject to the provisions hereinafter contained, the income shares shall entitle the holders:

(a) To receive in common with other holders of ordinary shares all dividends bonuses and other profits declared by the Company.

(b) To receive notice of and attend all meetings of the Company but not to vote thereat.

(a) Subject to the Companies Code, a voting share shall at the

option of the Company be liable to be redeemed at par by payment of the aggregate of the capital and any premium paid up thereon and the amount of any arrears of dividend payable at any time by notice in writing to the holder.

(c) No person may transfer his voting share except with the consent in writing of the Board which consent may be withheld in the absolute discretion of the Board and without the Board assigning any reason therefore.

(d) No person may hold a voting share unless he is the holder of a current Port Phillip Sea Pilots' licence and is currently employed by the Company as a Port Phillip Sea Pilot (such a person is hereinafter referred to as a "Pilot").

(a) No person may transfer an income share except with the

(b) No person may hold an income share other than a Pilot or members of his family (which expression shall include the wife, husband, father, mother, brother, sister, children and other lineal ancestors and descendants of a Pilot, adopted children, nieces and nephews and also a company in which a Pilot holds 50% or more of the voting shares).

(c) When the holder of an income share ceases to meet the requirements of Article 13(b) hereof he shall within 14 days or such further time as may be allowed by the Board give notice in writing to the Board of his intention to transfer the shares in accordance with Article 3 hereof or, if he shall fail to give such notice within the stipulated time, such notice shall be deemed to have been given and the provisions of Article 3 hereof shall have effect as if such notice had been given within the stipulated time.

16 Captain Beevers, Ms Dianne Beevers, Ms Chloe Beevers and Mr Ferrier swore affidavits on behalf of the plaintiffs.

17 Captain Griffiths, Captain Buck, Mr Calleja, Mr Ryan and Mr Reid swore affidavits on behalf of the defendants.

18 The plaintiffs' lay witnesses were not cross-examined. The plaintiffs' expert witness, Mr Ferrier, and the defendants' expert witness, Mr Reid, gave their evidence professionally and credibly. Counsel for the plaintiffs contended that Captain Griffiths was a belligerent witness who lacked candour and was not concerned 'to tell the truth'. While Captain Griffiths was frequently defensive and tended to minimise the nature of his exchange with Mr Ryan, I did not consider him to be an untruthful witness. Captain Buck and Mr Calleja were, in my view, credible witnesses.

19 Mr Ryan was an unsatisfactory witness in some respects. He was defensive and, at points, unconvincing. He had a tendency to be argumentative and appeared reluctant to make concessions or to acknowledge adverse points. While Mr Ryan did not present as an entirely candid witness, I did not consider that he was dishonest or intended to mislead the court.

20 Pilot Co is currently a registered pilotage service provider under the Marine Act. It conducts a sea piloting service for shipping in Port Phillip Bay and Westernport Bay. Pilotage is compulsory for all vessels in those waters. A pilot's essential function is to guide vessels in and out of the port with advice on navigation and related matters. Pilot Co employs licensed sea pilots to perform that task.

21 Pilot Co had its origins in a longstanding, large government-controlled, de facto partnership which, for about 150 years, had a monopoly for pilotage services in Port Phillip and Westernport Bays pursuant to the applicable legislation. In 1987, Price Waterhouse prepared a report which recommended incorporating the pilotage enterprise, using a bifurcated, twin company structure, whereby one company (Pilot Co) would employ the sea pilots and bill the client shipping lines, while the other company (Plant Co) would employ the non-pilot staff and would own most of the plant and real estate.

22 Captain Griffiths, the current chairman of the board of Pilot Co, deposed that:

[I]n December 1988 the Marine Act 1988 came into operation (repealing the Marine Act 1958). Under the Marine Act 1988 provision was made to allow the provision of pilotage services to be provided through a company. The Marine Act 1988 provided for the Marine Board to enter into an agreement (by competitive tender) for the provision of pilotage services for the ports of Port Phillip, Melbourne, Geelong and Westernport.

On about 30 June 1989 the Marine Board entered into an agreement with Pilot Co for the exclusive provision of pilotage services in Port Phillip and Westernport for a period of 10 years. This was after a tender process in which two tenders were submitted and considered by the Marine Board. Pilot Co was set up by and owned by the then existing members of the Service, including myself and Capt Beevers. Each pilot then also became an employee pilot of Pilot Co and an equal shareholder in Pilot Co (each pilot holding one voting share and 10,520 income shares.

Plant Co was also set up at that time for the purpose of owning the assets (such as the vessels, gear, equipment and other property) that the existing Port Phillip Sea Pilots then owned. These assets, collectively and equally owned by the individual member pilots of the Service, were transferred to Plant Co which issued to each pilot one voting share, 1000 income shares and convertible notes to the value of $51,000.

Therefore, on 1 July 1989 the Service as constituted by the individual Port Phillip Sea Pilots, as it had existed for the previous 150 years or thereabouts, ceased to exist.

23 Captain Griffiths was a prime mover in the decision to move the pilotage enterprise from a de facto partnership into a corporate form, which was opposed by some pilots. The decision-making process extended over about 5 years. The enterprise's longstanding solicitors, Smith & Emmerton (now Gadens), who were familiar with its operations and requirements, drew identical articles of association for the two companies, Pilot Co and Plant Co.

24 Immediately prior to incorporation of Pilot Co in 1989, there were 35 pilots in the de facto partnership. As Captain Griffiths deposed, when the unincorporated association was dissolved on 1 July 1989, some of its assets were transferred to Pilot Co and some were transferred to Plant Co. The former 'partners' each acquired shares in both Pilot Co and Plant Co. This represented an equal division of all issued voting and income shares between the members of the pre-existing partnership. Pilot Co was granted an exclusive licence to conduct pilotage in the relevant bays for 10 years.

25 In 1999, the pilot service was deregulated and, from that date, any qualified person has been entitled to perform pilotage services. In practice, however, only Pilot Co currently offers those services. The plaintiffs contend that it retains a monopoly in practice, because the barriers to entry are high.

26 Captain Griffiths testified that the pilots deliberately decided at the outset to divide the shares of both Pilot Co and Plant Co into voting and income shares and adopted a strategy of paying dividends. In Captain Griffiths' terms, the dividends constituted 'a different method of paying ourselves' (although, in some cases, the dividends were received by a family member). The structure permitted income splitting and consequent taxation advantages. Irrespective of their legal character, dividends on income shares were treated as being, in some respects, remuneration of the associated pilot.

27 From their inception, Plant Co and Pilot Co have always had a common board of directors and the same voting shareholders, being the member pilots. The income shareholders of Pilot Co and Plant Co can and do differ, although the criteria for eligibility is the same. Plant Co, as was initially envisaged, has employed the non-voting pilots and all other staff, and has owned most plant and real estate. Pilot Co has employed the voting pilots and billed the client shipping lines.

28 Plant Co currently owns several launches and a fleet of cars to transport the pilots to and from Melbourne, Geelong and Westernport. The control centre for Pilot Co is located at the Queenscliff Pilot Station and is equipped with radars, radios and crew accommodation. The Queenscliff Pilot Station, which is leased from the Victorian State Government, is manned by pilots under a roster system.

29 Plant Co makes its property, plant and equipment available to Pilot Co in return for a fee sufficient to enable Plant Co to meet its expenses. Plant Co is run to break even. It does not make profit and, consequently, cannot and does not pay dividends. The arrangement whereby Plant Co makes its services and assets available to Pilot Co for cost is not, and never been, the subject of a formal agreement. According to Captain Griffiths there was nothing to prevent Plant Co from demanding higher fees or commercial rates from Pilot Co, withholding its services from Pilot Co, or making them available to Pilot Co's competitors. He conceded, however, that it was not 'realistic' to suggest that Plant Co would charge Pilot Co commercial rates.

30 Therefore, as was originally envisaged, Pilot Co has only minimal assets, but makes almost all the income and the profit of the pilotage enterprise. Plant Co, in contrast, has 'all the assets in round terms', but makes no profit.

31 As at 7 February 2005, Pilot Co had on issue 32 voting shares and 32 parcels of income shares each comprising 10,520 income shares. Of the 32 parcels of income shares on issue, as at 7 February 2005, 26 parcels were owned by pilots or their family members and six parcels of income shares were held by Nominee Co. The identity of the holder of the six voting shares corresponding to the parcels of income shares held by Nominee Co is not clear.

32 Article 12(b) prescribes that no person may hold more than one voting share. Although the articles do not prescribe that the income shares associated with pilots must be equal, Captain Griffiths deposed that in practice, all pilot shareholdings in Pilot Co or Plant Co had always been equal and no pilot had been permitted to hold more than one voting share and one parcel of income shares in either company, other than for the exceptional case of a certain Captain Coy, who, in 2006, was permitted to reduce his work contribution to a half-load on the basis that he sold half of his income shares in Pilot Co and Plant Co.

33 Captain Griffiths deposed that Pilot Co's affairs were conducted on the basis that all pilots would contribute equal work and receive an equal financial reward. If a pilot failed to make an equal work contribution for any reason, it was the practice to make it up by the 'Time Off book'. According to Captain Griffiths, the use of the Time Off book was an entrenched procedure for working pilots who took leave of absence, but wished to continue to be paid as a full working pilot. Captain Griffiths deposed that unless a pilot agreed to use the Time Off book, no dividends would be paid during his absence, in order to avoid giving that pilot's family a financial benefit over those of the other working pilots. Captain Griffiths also deposed to Pilot Co's sick leave policy, under which dividends were taken into account in adjusting a pilot's sick leave entitlements in the event of an over payment.

34 Captain Griffiths deposed that, prior to November 2005, Pilot Co had no arrangements restraining its employee pilots from competitive activities after they left Pilot Co's employment. At the time of Captain Beevers' retirement, all pilots were entitled to resign from Pilot Co and establish a competing pilotage service. He testified that Pilot Co had, however, since entered into written employment agreements with the pilots who commenced employment after about November 2005. The workforce of Pilot Co was stable. The pilots' average age was the mid-50s. Most departures were due to retirement.

35 The usual (but not invariable) practice when a pilot ceased his employment with Pilot Co, whether due to retirement, resignation or death, was that the associated income shares were purchased by Nominee Co, a company established to hold or 'warehouse' the income shares of outgoing pilots until they could be acquired by an incoming pilot. Nominee Co has two issued shares, both of which are held by a director of Pilot Co, who is a sea pilot. As at 7 February 2005, its directors were Captain Griffiths and Captain Carroll. Because all its shares are held by sea pilots, Nominee Co is eligible pursuant to article 13 to hold income shares in Pilot Co. It has two directors, who are both directors of Pilot Co. Nominee Co typically purchases the shares of 'outgoing' pilots by means of a loan from Pilot Co. Similarly, new pilots who acquire income shares from Nominee Co typically receive a loan from Pilot Co. Nominee Co frequently holds several parcels of income shares at any given time. In a few instances, a pilot who was already an employee of Pilot Co, but who had not yet become a shareholder, has purchased an outgoing pilot's income shares, rather than Nominee Co.

36 The evidence did not establish how an outgoing pilot's voting share was treated and, in particular, it was unclear whether it was held by Nominee Co, or whether it was cancelled and subsequently reissued when required for a new shareholder pilot.

37 Captain Griffiths deposed to the practice when a pilot resigned or retired as follows:

Purchase of shares from outgoing Port Phillip Sea Pilots

When I became Managing Director, I had knowledge of the practice adopted by Pilot Co and Plant Co in dealing with the purchase of shares from an outgoing Port Phillip Sea Pilot. In particular:

(a) When a Port Phillip Sea Pilot ceases employment with Pilot Co, the Port Phillip Sea Pilot (or his family member or private company) is required to relinquish the shares in Pilot Co and Plant Co. These shares are normally transferred to and held in Nominee Co until an incoming Port Phillip Sea Pilot is invited to and purchases them.

(b) In relation to the price paid for the shares of the outgoing Port Phillip Sea Pilot, the Board of Pilot Co would at regular intervals determine and announce to the Port Phillip Sea Pilot shareholders the price at which the parcel of shares in Pilot Co and Plant Co were to be sold. This is based primarily on the net asset value of Pilot Co and Plant Co. The Board determined price is then published and announced to the pilots in the Notices to Pilot.

(c) Under the Articles of Association of Pilot Co and Plant Co, a Port Phillip Sea Pilot was able to refuse to agree with the price fixed by the Board and seek a price certified by the auditor.

As at 7 February 2005 (the date of Geoffrey Beevers' retirement):

(a) Nominee Co held 6 Parcels of Income Shares (63,120 income shares) in Pilot Co.

(b) The Plaintiffs together owned 10,520 income shares (one Parcel) in Pilot Co, with Dianne Beevers being the registered holder of 4,978 income shares and Chloe Beevers 5,542 income shares. As noted above, they had purchased these shares from Geoffrey Beevers for value.

The second defendant, Nominee Co, has a share capital of two ordinary one fully paid share. It was established shortly after Pilot Co and Plant Co. The shareholders of Nominee Co as at 20 December 2004 and 6 December 2005 were and remain Captain Griffiths and Captain Carroll. The directors of Nominee Co as at 6 December 2005 were Captain Griffiths and Captain Buck. (Captain Buck replaced Captain Caroll as a director of Nominee Co on 1 July 2005. Captain Caroll was a director of Nominee Co at 20 December 2004. For at least the last five years, the persons holding the hic[?] issued shares in Nominee Co have been the directors of Pilot Co. No deed or agreement governing the terms on which the directors of Pilot Co held the shares in Nominee Co could be located.

38 Although there was no formal deed or agreement establishing the terms on which the two Pilot Co directors held their shares in Nominee Co, Captain Griffiths testified that he understood that he held his share in Nominee Co as a trustee for the working pilots. Nominee Co does not receive dividends on the income shares which it holds from time to time, so the dividends paid in respect of the income shares held by the voting pilots or their families are correspondingly greater.

39 The plaintiffs contended that because the holders of other income shares benefited from Nominee Co's holding of parcels of income shares, it should be inferred that Nominee Co held them on trust for those income shareholders, rather than for the working pilots. It is unnecessary to determine that issue. It appears clear, however, that the two shareholders of Nominee Co did not hold their shares beneficially and that the other income shareholders were the practical, if not legal, beneficiaries of Nominee Co's shareholding.

40 The board of Pilot Co maintained a practice of striking, at regular, approximately annual intervals, a value for the shares in Plant Co and Pilot Co, by reference to their net tangible assets. The board routinely circulated the resultant values in a Notice to Pilots in order to notify pilots who intended to resign or terminate their employment in the near future of the price which would be offered for their (or where applicable, their family's) shares. It would appear that the board did not directly notify income shareholders who were not pilots of the relevant values. The current managing director of Pilot Co, Captain Buck, also conceded that the company did not notify the plaintiffs (and presumably other income shareholders) of company meetings which they were entitled to attend pursuant to the articles.

41 The values published by the board for shares over the years included the following:

42 Outgoing pilots sold their shares to Nominee Co for the published values on a number of occasions. Incoming pilots also purchased the shares for the published values. Nominee Co acquired Captain Nance's shares for $65,000 following his death in around July 1991. In August 2005, Captain Cuneo purchased a parcel of shares from Nominee Co for $280,000. Captain Martin also purchased a parcel of shares from Nominee Co for $280,000 in January 2006. A total of $265,000 was paid to Captain Woodward's family for his parcel of shares in March 2005. Captain Charlesworth was paid $280,000 for his parcel in January 2006, and Captain Keys was paid $290,000 in December 2006 following his retirement. On at least two occasions, however, it appears that an outgoing pilot or his family disputed the price offered for the shares and litigation ensued, which was subsequently settled.

43 As at the date of Captain Beevers' retirement, Nominee Co held six parcels of income shares.

44 The shareholder pilots employed by Pilot Co receive a lower salary than several licensed pilots employed by Plant Co, who do not hold shares. The non-member employee pilots (who generally did not initially hold fully endorsed licences, and were subject to certain graded limitations in the pilotage tasks they could undertake) received an annual salary of approximately $228,583 for the 2004-2005 year, although it varied according to whether they were first, second or third year employees. In contrast, the shareholder pilots received an annual salary of approximately $133,400 for the 2004-2005 year.

45 The operations of Pilot Co have been successful and profitable. The directors of Pilot Co customarily declare an annual set dividend, which is usually supplemented with further dividends throughout the course of the year. In 2004-2005, the dividends paid in relation to each parcel of income shares were as follows: franked dividend of $106,183 plus a $110,000 extra dividend (2005) for a total of $216,183. It is not disputed that the total annual dividends were approximately $250,000 over the last decade.

46 Captain Beevers was, since about 1982, a member of the original de facto partnership. He remained as a shareholder and employee pilot after the incorporation of the enterprise. As stated above, he transferred his income shares in Pilot Co and Plant Co to his wife and daughter, who obtained their ultimate holdings in various tranches.

47 It is not disputed that, although the plaintiffs became shareholders, and were thus entitled to receive notices of general meetings under the articles, Pilot Co did not communicate with them directly in relation to their shares or send them any notices of meeting.

48 In November 2004, Captain Beevers commenced a period of sick leave, due to a serious illness. In early November 2004, he requested a final pay forecast based on a notional retirement date of 4 July 2005. He was advised on 13 November 2004, by Mr Calleja (an accountant and administrator formally employed by Plant Co, but who, in fact, acted for the Pilot Co 'group') that 'your shares at this point in time have a value of $265,000'. The forecast was revised on 18 November 2004.

49 On or about 14 November 2004, the board of Pilot Co resolved, inter alia, to pay a standard dividend on 10 December 2004 and an extra dividend on 22 December 2005. Captain Carroll, the then managing director, advised the pilots of the proposed payments by an email dated 1 December 2004.

50 On 15 December 2004, Captain Carroll wrote to Captain Beevers seeking confirmation that his time off due to illness would be accumulated in the Time Off book. Captain Carroll's letter stated that as at 21 December 2004 Captain Beevers 'owed' a total of 45 days, which, in accordance with past practice and 'shareholders' agreement', could continue for six months:

[p]rovided that at the time of reconciliation, the total value of these days (grossed up to include all over payments) owed will be deducted from any remaining entitlements and if necessary from the sale of your shares (remember share dividends are actually wages).

51 Captain Beevers, however, by a letter to Captain Carroll, objected to the above proposal and to Pilot Co advancing him any moneys which would subsequently be deducted from his long service leave or share entitlements.

52 Due to Captain Beevers' refusal to agree that his being paid as a full working pilot would entail reconciliation through the Time Off book, or when his employment ended, the board of Pilot Co determined to pay no further dividends until the matter was resolved. It reversed its earlier decision to pay the extra $15,000 dividend. Instead, it determined to pay $30,000 to all working pilots. That excluded Captain Beevers, although his final payment was calculated on the basis that he was entitled to receive the payment.

53 The board notified pilots of the reversal of the decision to pay dividends by a memorandum to the pilots dated 23 December 2004, which referred to the Time Off book and stated that the policy enabled a pilot to remain on full pay (plus dividends and allowances) even during periods of illness, but required the days booked off to be reconciled (paid back) prior to completion of service with the company.

54 Captain Griffiths deposed that the board reversed the decision to pay the extra dividend because Captain Beevers' family would otherwise have received an unequal benefit over and above that of other working pilots or their families. The dispute with Captain Beevers over the Time Off book was not resolved. On 7 February 2005, Captain Beevers resigned. Captain Griffiths, at that date, was acting as interim managing director.

55 Captain Beevers' letter to Pilot Co dated 7 February 2005 gave notice of his resignation due to ill health. It complained of the attitude of management. The letter requested payment of Captain Beevers' arrears of pay, sick pay, long service leave, salary, continuance pension and of all other amounts owing to him.

56 On 8 February, 2005, Captain Buck assumed office as managing director of Pilot Co.

57 Prior to the expiration of 14 days from Captain Beevers' resignation, Pilot Co took unilateral action to transfer the plaintiffs' shares to Nominee Co. The email of the accountant, Mr Calleja, to Captain Beevers dated 9 February 2005, advised that all his shares had been paid out and cancelled. The email stated:

Please be advised that we have today forwarded to your respective bank account(s) all your retirement entitlements.

We also wish to advise you that as you are no longer a Port Phillip Sea Pilot all your PPSP shares have been paid out and cancelled.

You should expect a hard copy of your entitlement calculations in the mail.

Should you have any questions or queries regarding these calculations, please call or email us immediately.

It is clear that the plaintiffs' income shares were not cancelled, as Mr Calleja's letter indicated, either on or about 9 February 2005 or at any time thereafter. Rather, they were transferred to Nominee Co on or about 9 February 2005, for the total sum of $44,518. There had been no prior contact or consultation in relation to the transfer with the plaintiffs, who had not agreed to the amounts. Nor were the amounts certified by the auditor. The relevant sums were simply paid into the plaintiffs' joint bank accounts. The amounts were calculated on or about 7 February 2005, by Mr Calleja and Captain Griffiths, who conferred and set the 'notional' date of the transfer as 19 December 2004, being the last working day for which Captain Beevers was entitled to be paid. No transfer forms for the income shares were executed and the share register of Pilot Co did not record the transfer. On 11 February 2005, Mr Calleja reported the transfer of shares to ASIC.

58 As at 9 February 2005, the board of Pilot Co had no authority, on any view, either to cancel the plaintiffs' income shares or to arrange their sale or transfer as the agent of the plaintiffs. The plaintiffs had not given notice pursuant to article 13(c) invoking article 3(b) to constitute the board of Pilot Co their agent, and the 14 days after which such notice would be deemed to have been given had not expired.

59 The plaintiffs were dissatisfied with the conduct of Pilot Co in relation to their income shares. On 14 February 2005, they wrote to Captain Buck as follows:

Geoffrey has informed us that he received an email dated 09/02/05 from Ray Calleja advising that his retirement entitlements had been forwarded to his respective bank accounts.

We have checked our accounts and note the following payments were made into the ANZ Bank on 9 February 2005:

We hereby put you on notice that the payments made to Dianne for 4,978 shares in Port Phillip Sea Pilots Pty Ltd, and to Chloe for 5,542 shares in Port Phillip Sea Pilots Pty Ltd are accepted by us only in part payment of the monies owing and not in full and final payment.

We have obtained a copy of The Articles of Association of the Port Phillip Sea Pilots Pty Ltd and note that the proper process for the valuation of our shares in that company has not been followed and we write to:

(a) Give notice under Article 13 (c) of the Articles of Association of our intention to transfer the Port Phillip Sea Pilots Pty Ltd shares in accord with Article 3 and,

(b) Request that our 10,520 Port Phillip Sea Pilot Pty Ltd shares be valued in accordance with the provisions of the Articles of Association.

We advise that Dianne Beevers accepts the payment of $216,952 as full and final settlement for her shares in Port Phillip Sea Pilots Plant Company Pty Ltd.

Lastly, we consider it inappropriate that you have not communicated directly with us in respect of our share ownership which was purchased for value and in which Geoffrey has no beneficial ownership.

60 In response to the plaintiffs' letter of 14 February 2005, Captain Buck, by a letter to the plaintiffs and Captain Beevers dated 1 March 2005, stated:

Dear Captain Beevers, Ms D Beevers and Ms C Beevers,

With reference to your recent letter of 14th February 2005, I wish to make the following points.

I advise you that Ms D and C Beevers only held shares in the respective Pilot Companies because Captain G Beevers was a licensed pilot.

The respective shares have been paid out in full.

I am unsure of your use of the word 'obtain' in reference to the Articles of Association. It is my understanding that ALL Pilots were supplied with a copy at the time.
At your request you were supplied by this office a projected retirement package figure. Had you given notice that the share value was in dispute a valuation would have been supplied prior to your retirement. A valuation will be forwarded to you in the near future.
Captain Beevers is well aware of how the shares are valued and no advantage to him will be provided over other shareholders.

61 Captain Buck's letter, while it indicated that a 'valuation' would be supplied, did not clarify whether it would be in accordance with the articles or whether the consideration for the plaintiffs' income shares would be reassessed. The letter reflected the assumption that, although the company had not advised the plaintiffs directly of the value most recently attributed to income shares in the Notice to Pilots, Captain Beevers would have informed them of it, and that, in the absence of any notification of a dispute, Pilot Co had assumed that the plaintiffs agreed to the value recently published by the company.

62 Captain Buck, by letter to Captain Beevers dated 1 March 2005, stated:

I refer to your recent letter of 16th February 2005 and respond to your six points:

The monies were paid into bank accounts as designated by you. Cheques were not drawn up so as to expedite payments to you.

As you are aware pilots control all shares issued by this Company even if they choose to put them in family members' names to enable income splitting and subsequent tax minimisation.

Dividends paid to your family indeed form part of your salary package, as you know. A salary sheet is sent out each year by Ray Calleja which makes this quite clear.

The payments made to you are in full and final settlement of all monies owing unless there are actual errors in the calculations which we are more than willing to address.

I draw your attention to NTP No. 272 where you were advised that salary continuance insurance had been discontinued and you were advised to seek such insurance privately (a copy enclosed). To our knowledge Captain Griffiths has never given one pilot any special advantage over another. Please forward any documentation that you have to support this claim. Without such documentation we refute this claim totally.

63 Captain Beevers, by letter to Captain Buck dated 16 March 2005, stated:

Thank you for your letter dated 1 March 2005. I make the following responses to the six points raised by you:

The Authority given to Port Phillip Sea Pilots Pty Ltd was an authority to pay my salary into my bank account and their authority to pay the dividends into the bank accounts of my wife Dianne and my daughter Chloe. No other authority was given.

My wife Dianne and daughter Chloe held the shares in their own name being shares that they purchased for proper consideration. I had no control over these shares or the dividends earned by them.

The dividends did not form part of my salary package.

As previously advised the payments made to me were not accepted in full and final settlement of the monies owing.

My pay claim is for $142,294.87 calculated as under, together with my salary continuance pension as agreed in 1994.

64 The plaintiffs by a letter to Captain Buck dated 20 March 2005, reiterated their requirement for a valuation in accordance with the article. The letter stated:

We have your letter of 1 March 2005 and respond as follows:

The Shares held by us were shares which we purchased from Geoffrey and others for valuable consideration.

We believe that the Shares have not been paid out in full.

As Shareholders, the Company has never supplied us with Articles of Association or indeed notices of any Annual General Meeting or Annual Reports.

We look forward to receiving a valuation which complies with the Articles of Association. This is already overdue.

We are not aware of the criteria upon which your valuations are based and look forward to receiving details of the basis of which the valuation was made.

65 On about 21 March 2005, Captain Buck telephoned the company's auditor, Mr Ryan, and advised him of the dispute with the Beevers family over, inter alia, the value of their shares. He asked Mr Ryan for 'a valuation of the shares as you have done in the past.' He also instructed Mr Calleja to assist Mr Ryan with whatever he needed.

66 Mr Ryan, a chartered accountant of about 30 years' experience and a registered liquidator, had been the auditor of both Pilot Co and Plant Co since their incorporation in 1989.

67 Prior to 2005, however, Mr Ryan had never been asked to value the income shares. Rather, on three previous occasions (in March 1997, September 1999 and May 2002), he had been requested to review a schedule of assets in order to assist the board to ascertain the net tangible assets of Pilot Co and Plant Co, as the basis for striking a value of both the voting shares and the income shares of both companies on a consolidated basis. The purpose of the valuation on those occasions was to enable the board of Pilot Co to publish the value in a Notice to Pilots, as it did at regular, approximately annual intervals.

68 On those occasions, Mr Ryan did not value the shares or the income stream of either company. He simply reviewed a schedule of assets and the net asset value of the companies on a consolidated basis, and the board made the decision as to value.

69 In September and October 2002, Mr Ryan saw two successive drafts of a report prepared by Deloitte on the value of the shares. As Mr Ryan knew, the Deloitte draft reports had been prepared for Pilot Co in relation to litigation with an outgoing pilot, Captain Tod and his family. The report provided an opinion on the fair market value of the Tods' interest in Pilot Co and Plant Co. That was the first time that any formal valuation of the shares had been prepared.

70 Deloitte valued the Tods' shares on a net realisable assets as a going concern basis. In Deloitte's opinion, the fair market value of the Tods' interest in both companies was in the region of $255,000.

71 The analysis in the Deloitte draft report was reflected in the evidence Mr Ryan gave of his reasoning at trial and in the evidence of the defendants' expert witness, Mr Reid. It is therefore appropriate to set it out substantially in full. The draft report stated:

Based on our analysis of the business and discussions with management, intangible assets of PPSP and Plant Co are likely to comprise:

►Access to Port Phillip Sea Pilots' licences held by pilots

Intangible assets are likely to comprise a relatively minor component of the value of the businesses of PPSP and Plant Co for the following reasons:

the major intangible assets are the Port Phillip Sea Pilots' licences that are owned by individual pilots
it might be argued that the monopoly position currently enjoyed by PPSP is valuable. Mitigating this however are the following factors:

- barriers to entry to the Port Phillip Pilot industry are low

- there are examples of competition in unregulated environments (eg competition emerged for pilots operating in the Great Barrier Reef region in Australia within two and a half years of deregulation)

- it is not clear that monopoly rents are earned. Whilst the remuneration of PPSP pilots appear greater than that of their peers in Sydney, Brisbane and Newcastle, the hours worked by PPSP pilots also appear considerably higher

whilst other intangible assets may be of some value, in that they provide infrastructure, the value attributable to such assets is not likely to be significant

The specific characteristics of PPSP and Plant Co were taken into consideration in determining the suitability and appropriateness of each valuation methodology. Key considerations include:

Port Phillip Sea Pilots' licences are not owned by PPSP or Plant Co but by individual pilots
Intangible assets, owned by PPSP or Plant Co, are considered to comprise a relatively minor component of the value of the businesses of PPSP and Plant Co
Plant Co is an asset holding company and a significant proportion of its value would be in assets owned by Plant Co.

In addition, the following factors were also taken into consideration:

the "willing buyer" of a voting share in both PPSP and Plant Co would be restricted to master mariners holding a Port Phillip Sea Pilots' licence in the employ of or potentially in the employ of PPSP ("Pilot"). The pool of willing buyers is relatively small.
whilst income shares of PPSP and Plant Co can be owned by PPSP Pilots and family members, ownership of income shares is contingent on the licensed pilot being in the employ of PPSP. Accordingly, the willing buyer/owner of an income share in PPSP and Plant Co must be a Pilot or a family member of a Pilot.

To determine the fair market value of the shares in PPSP and Plant Co, we have considered the following commonly used approaches.

Asset based methods estimate the fair market value of a company's shares based on the realisable value of its identifiable net assets. Asset based methods include:

orderly realisation of assets method
liquidation of assets method
net assets on a going concern basis
cost to replicate

The orderly realisation of assets method estimates fair market value by determining the amount that would be distributed to shareholders, after payment of all liabilities, including realisation costs and taxation charges that arise, assuming the company is wound up in an orderly manner. The liquidation method is similar to the orderly realisation of assets method except the liquidation method assumes the assets are sold in a shorter time frame. Since wind up or liquidation of the company may not be contemplated, these methods in their strictest form may not necessarily be appropriate. The net assets on a going concern basis estimates the market values of the net assets of the entity but does not take account of realisation costs.

The replacement cost methodology is based on the concept of replacing or duplicating the assets of a business from scratch.

These approaches ignore the possibility that the company's value could exceed the realisable value of its assets. Asset based methods are appropriate when companies are not profitable or a significant proportion of a company's assets are liquid.

We are of the opinion that the net assets on a going concern basis is the most appropriate methodology to value PPSP and Plant Co. The following comments support the suitability of applying asset based methods to value PPSP and Plant Co:

intangible assets owned by PPSP and Plant Co comprise a relatively minor component of the value of the businesses of PPSP and Plant Co
methodologies other than asset based approaches may incorporate the value of the Port Phillip Sea Pilots' licences owned by each pilot in the derivation of total business value
a significant proportion of arms' length transactions between the company and new pilots have been transacted at values close to PPSP and Plant Co's net asset value
Plant Co is an asset holding company that provides plant and equipment and support services to PPSP. Accordingly, a significant proportion of its assets are in the form of tangible assets that could be liquidated
as a cross check of the reasonableness of the value of PPSP and Plant Co derived on an asset basis, we considered the potential cost of replicating the business.

Market based methods estimate a company's fair market value by considering the market price of transactions in its shares or the market value of comparable companies. Market based methods include:

capitalisation of maintainable earnings
analysis of a company's recent share trading history
industry specific methods

The capitalisation of maintainable earnings method estimates fair market value based upon the company's future maintainable earnings and an appropriate earnings multiple. An appropriate earnings multiple is derived from share market trading in, or market transactions involving, comparable companies. The capitalisation of maintainable earnings method is appropriate where the company's earnings are relatively stable or a reliable trend in earnings is evident.

The recent share trading history provides evidence on the fair market value of the shares in a company where they are publicly traded in an informed and liquid market.

Industry specific methods estimate fair market value using rules of thumb for a particular industry. Generally rules of thumb provide less persuasive evidence on market value of a company as they may not account for company specific factors.

As mentioned previously, methodologies other than asset based approaches and the cost to replicate may incorporate the value of the Port Phillip Sea Pilots' licences owned by each pilot. If applied, future maintainable earnings should be adjusted to take account of a commercial remuneration for pilots as well as a return on the licences held by the pilots. After such an adjustment, given the significance of the licences to the business, we would not expect a significant level of future maintainable earnings.

In addition, proponents of this method might argue that value resides in the monopoly position currently enjoyed by PPSP and Plant Co and that monopoly rents could be capitalised. There are, however, a number of factors that mitigate the potential of this monopoly position as mentioned above.

The discounted cash flow method estimates fair market value by discounting a company's future cash flows to their present value. This method is appropriate where a projection of future cash flows can be made with a reasonable degree of confidence. The discounted cash flow method is commonly used to value early stage companies or projects with a finite life.

We have been advised that management only prepare forecasts for the following financial year. Accordingly, we have not been provided with sufficient information to enable the discounted cash flow methodology to be applied.

In light of the above, we are of the opinion that the most appropriate methodology to value PPSP and Plant Co is net assets on a going concern basis. In addition, we have considered the cost to replicate the business to provide additional valuation evidence.

Methodologies other than asset based methodologies and the cost to replicate are likely to incorporate the value of the Port Phillip Sea Pilots' licences owned by each pilot in the derivation of total business value.

72 The subsequent Deloitte draft report dated 9 October 2006, in relation to the Tod family's interests, was to similar effect. It stated that, in Deloitte's opinion, the value of the Tod family's interests was in the region of $216,000.

73 The letter of Captain Buck, addressed to 'The Beevers Family' dated 4 April 2005, in response to their letters dated 16 March 2005 and 20 March 2005, stated that Pilot Co disagreed with their calculation of Captain Beevers' entitlements and rejected his claim for salary continuance. It reiterated that the plaintiffs had not queried the valuation published in the recent Notice to Pilots, but stated that a valuation would now nevertheless be obtained, as they had requested.

In relation to the value of the shares, Captain Beevers is well aware of the method adopted by the company in valuing the shares and that the shares are considered part of his remuneration. The share value was set at $265,000 by the Board in April 2004 as advised in Notice to Pilots 310 which all pilots received. This was also confirmed in the calculation of Captain Beevers' entitlements as provided to you by Ray Calleja on two separate occasions in November 2004 when you asked for a final pay forecast. Even when you informed us that you would be resigning on 7 February 2005 you did not query the share value or ask for a separate valuation to be undertaken. The payment for the shares upon your resignation was on the basis of the previous advices to you and the well known and understood procedure that has applied to all pilots for many years and you were silent right up to that time as to any objection in your case.

...As you have requested a valuation we are in the process of obtaining one. However, it can only be a valuation of the shares in both companies, not just one.

In view of your positions, if you do not accept the total payments for the shares on the basis that they have been made to you all, the payments should be returned immediately.

75 Mr Ryan, who had previously reviewed the net asset value of both Pilot Co and Plant Co for the purpose of striking the published share values, prepared and sent to Captain Buck a memorandum dated 29 March 2005 ('March memorandum'), in which he proposed to value the total income shares as at 28 February 2005 on a consolidated basis, based, as before, on an orderly realisation of the assets of both Pilot Co and Plant Co in the normal course of business.

In accordance with your request I have reviewed the consolidated Balance Sheets for the Port Phillip Sea Pilots Group as at 28 February 2005 with a view to evaluating the net realisable value of the total income shares issued as at 28 February 2005 for the purpose of assisting in determining the entry and exit price for incoming and outgoing pilots. For the purpose of this exercise, the total 2,000,640 income shares and 64 voting shares issued are equally distributed between the current 25 equity pilot shareholdings.

On the basis of my review I estimate that the total value of the income shares range between $200,000 to $215,000 per pilot based on the net realizable value of the shares at 28 February 2005. The net realizable value basis assumes an orderly realization of the assets of the two companies in the normal course of business. Each of the major assets was reviewed at cost or market value including the properties, vehicles, launches, office equipment, plant and equipment and values for these were adjusted as discussed with you in relation to the boat repair depot, jetty and pilot station. Cash, debtors and deposits were valued at their holding value as were liabilities including employee entitlements, trade creditors and current taxation liabilities but any future income tax liabilities or other contingencies are excluded. The above figures have taken into account the formal valuation of property, plant and equipment conducted by the Rushton Group in 2002.

It must be appreciated that the above limited review cannot be construed as a formal valuation and can only be used by you for internal purposes in assisting you in establishing an entry/exit price for incoming/outgoing pilots on a basis which has been consistent with practice in the past. Furthermore there are several other bases of determining the valuation of the shares that have not been considered including the capitalization of profits basis, which may invariably lead to a different result, but is not considered appropriate for the purposes of this review.

77 The March memorandum stated that the 'limited review' could not be construed as a formal valuation and could 'only be used by you for internal purposes' in assisting to establish an entry and exit price for incoming and outgoing pilots. It was neither a formal valuation nor an opinion as to the value of the income shares of Pilot Co, because it did not distinguish between the income shares of Pilot Co and Plant Co. It assumed, however, that the net tangible assets method of valuation was the correct one.

78 The March memorandum gave a figure of $200,000-$215,000 for the income share parcels in both Pilot Co and Plant Co on an orderly realisation basis. At trial, Mr Ryan stated that 80% of that figure would have been attributable to Plant Co, thus giving a value of $40,000 for Pilot Co.

79 Mr Ryan conceded that in preparing the memorandum, he carried out the same exercise as he had carried out in the past, when he was requested to review the schedule of assets prior to publishing the consolidated value of the companies in a Notice to Pilots.

80 On about 3 April 2005, while Mr Ryan was on holiday overseas, Captain Buck contacted him by telephone and explained that there was a problem with his 'valuation' in the March memorandum.

81 The plaintiffs at that stage retained solicitors, Williams Winter. The letter of Mr Howie of Williams Winter to Captain Buck dated 4 April 2005, stated, inter alia:

As requested in their letter of 20 March 2005 our clients seek valuation of their shares in the Port Phillip Sea Pilots Pty Ltd pursuant to the Articles of Association.

Could you please provide the valuation within the next seven (7) days.

82 The letter of Mr Howie to Captain Buck dated 6 April 2005 stated, inter alia, that Mrs Dianne Beevers had accepted payment of $216,952 in full and final settlement for her shares in Plant Co, but reiterated 'We therefore look forward to receiving your valuation of shares in [Pilot Co] valued in accordance with the Articles of Association of that company.'

83 On 11 April 2005, Mr Ryan returned to Melbourne and had a conversation with Captain Buck.

Capt R Buck advised that auditor's opinion required in respect of value of Shares transferred by Capt Beevers to PPSP Nominees, the amount of which is in dispute. At this stage, Deloitte would not be engaged as the matter was not yet in litigation. He suggested that I speak to Steven Troethe from Gadens.

85 On 11 April 2005, Mr Ryan also spoke to Mr Troeth, a solicitor at Gadens, the solicitors for Pilot Co, Plant Co and Nominee Co. Mr Ryan's file note stated:

Spoke to S Troethe who advised that a more detailed analysis is required and that reliance should not necessarily be placed upon the Rushton Valuation and if necessary an expert should be appointed to assist in the valuation of the buildings, or update the valuation if required.

86 A file note of Mr Troeth dated 12 April 2005 stated:

At a glance

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Legislation Cited (16)

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