Plumley v Adguage Pty Ltd & McCloud [1998] VSCA 70

18. In 1992 Adgauge instituted proceedings pursuant to the provisions of s.260 of the Corporations Law alleging that the affairs of Markbys were being conducted by the Plumleys in a manner that was oppressive to Adgauge. By deed made 1 December 1994 the proceedings were settled upon terms which, inter alia, required Typographique and the Plumleys to purchase the shares and units in Markbys and the unit trust held by Adgauge. The Deed provided that the parties would seek an order by consent in the proceeding that the Court appoint a person pursuant to Order 50 of the Supreme Court Rules as an expert to determine the amount to be paid as the price for the shares and units. Clause 4(c) of the Deed provided that the expert was to proceed on the basis:

"(i) that the relevant date of valuation of the Adgauge shares and units is 30 November 1994;

(A) the assets (including the goodwill) and the liabilities of the Markbys Renaissance Unit Trust and Markbys;

(B) the assets (including the goodwill) and the liabilities of ISIS;

(C) the assets (including the goodwill) and the liabilities of Communications;

as if they all form part of the assets undertaken in liabilities of Markbys; ..."

27. On 8 December 1994 an order was made by consent under R.50.01(1)(a) referring the questions in clause 4 of the Deed to a special referee acting as an expert for decision. The order was made in new proceedings instituted to enforce the terms of the deed. Rule 50.01 empowers the Court to refer any question to a special referee for him to decide the question or give his opinion with respect to it. The learned judge who decided to adopt the special referee's report concluded that the distinction between deciding a question and giving an opinion with respect to it is of no significance. As the rule carefully draws the distinction, I doubt that is so. However, it is not necessary to decide the question in order to determine the present appeal.

30. Geraldine Lee Adam, a senior manager with Price Waterhouse, was appointed as the special referee. His Honour directed that the referee might conduct the reference in such manner as was appropriate for the efficient and economical implementation of the order and that she was to have regard to the financial statements of Markbys, the Unit Trust, ISIS and Communications, but she might, where she considered it necessary for the purpose of determining the fair amount payable, look behind the statements and adjust them if necessary so that they reflected the fair and reasonable position as between the parties.

33. The special referee heard submissions from accountants engaged respectively by the Plumleys and the first and second-named respondents. By a report dated 1 March 1995 the special referee stated her decision on each of the matters referred to her. In her report the special referee described the method by which she assessed the value of the shares and units as follows:

"87. It is generally accepted that the value of the share capital of a business rests principally on its earning capacity. That is, the value of the business's underlying assets, and hence of its share capital, is measured by their capacity to produce profits and/or cashflow.

88. Therefore, when a business or shareholding in a viable company which is a going concern is to be valued, the most widely accepted and generally used valuation techniques are the capitalized maintainable earnings ("CME") and discounted cashflow ("BCF") methods. I do not consider an assets approach (the net realizable value of the assets of a business or company, assuming an orderly realization, or the value of the net assets to the business or company as a going concern) is appropriate to value a business or the shares in a company unless that business or company is not profitable, is not generating an adequate return, is in an establishment phase, has insolvency problems, is intended to be wound up, or is of the type which is typically sold on an assets basis (such as investment or property companies)."

The special referee chose the capitalized maintainable earnings method to value the shares and units. She reviewed the annual accounts, that is, the balance sheets and profit and loss accounts, of the group for the years to 30 June 1992, 1993 and 1994, for the five months to 30 November 1994 and projections for the unit trust and Communications to 30 June 1995. The special referee chose a price earnings multiple of three. She estimated annual future earnings before tax of $140,000. The value of 13 per cent of the capitalized value of all the shares and units was stated to be $55,000.

39. On 16 June 1995 the trial judge decided to adopt the report over the objections of the parties. He did so pursuant to R.50.04, which provides:

"50.04 The Court may as the interests of justice require adopt the report of a special referee or decline to adopt the report in whole or in part, and make such order or give such judgment as it thinks fit."

43. In both the oppression proceedings and the proceedings to enforce the terms of the deed the appellant has appealed against the order to adopt the special referee's report. When the appeals were called on for hearing Mrs. Plumley was the sole appellant. With the consent of the Plumleys and the respondents it was ordered that Mr. Plumley be added as a respondent to the appeals.

46. The appellant contends that the decision of the special referee is in error in that she failed to take into account the fact that at 30 November 1994 the liabilities of the group substantially exceeded its assets. According to the balance sheet of the group as at 30 November 1994 the excess of liabilities over assets amounted to $429,161. It was submitted on behalf of the appellant that the special referee valued only the business, and that valuation of the shares and units the subject matter of the sale was to be assessed by discounting the value of the business to take account of the deficit in the balance sheet of the group. It was submitted that the failure of the special referee to reduce the value of the shares to reflect the balance sheet deficit was an error of law. Counsel for the appellant relied upon the decision of the High Court in Commissioner of Succession Duties v. Executor Trustee and Agency Company of South Australia Limited (Clifford's Case) [1947] HCA 10; (1947) 74 C.L.R. 358, where at p.362, the Court said:

"The main items to be taken into account in estimating the value of shares are the earning power of the company and the value of the capital assets in which the shareholder's money is invested."

Counsel also relied upon Abraham v. Federal Commissioner of Taxation [1944] HCA 32; (1944) 70 C.L.R. 23, where Williams, J. had regard to the value of the assets of the company as well as its income yield in valuing the shares of the company.

51. It may be accepted that a judge ought not to adopt and act upon a special referee's decision on a question of law unless it appears to be correct. On the other hand, a decision as to a matter of fact is not to be reconsidered afresh, and in general should only be rejected if it is patently unreasonable or contrary to or against the weight of the evidence. Otherwise the reference will be no more than a rehearsal for the trial of the same issue before the Court. In Super Pty. Ltd. v. SJP Formwork (Aust) Pty. Ltd. (1992) 29 N.S.W.L.R. 549, the Court of Appeal was concerned with the adoption of a report of a special referee to whom proceedings had been referred for inquiry and report under a rule of court. Gleeson, C.J. said, at pp.563-4:

"Insofar as the subject matter of dissatisfaction with a referee's report is a question of law, or the application of legal standards to established facts, then a proper exercise of discretion would require a judge to consider and determine that matter afresh. ... On the other hand, if the referee's report reveals some error of principle, some absence or excess of jurisdiction, or some patent misapprehension of the evidence, that would ordinarily be a reason for rejecting it. ..."

See also Homebush Abattoir Corporation v. Bermria Pty. Ltd. (1991) 22 N.S.W.L.R. 605.

56. Order 50 and the like rule of court in New South Wales are the progeny of provisions once found in Arbitration Acts. Under the New South Wales Act issues of fact and law arising in court proceedings could be referred to an arbitrator for decision. In determining whether to act on such a decision a distinction was drawn between issues of fact and law. Buckley v. Bennell Design and Construction Pty. Ltd. [1978] HCA 20; (1978) 140 C.L.R. 1, at pp.36, 38, Jacobs, J. said of a referee or arbitrator:

"If he decides contrary to law or acts perversely or unreasonably, as he would do if he decided against the evidence and weight of evidence, he exceeds his authority then the report or award may be set aside, or remitted. ... In respect of errors of law there can be no implied authority given to an arbitrator under s.16(1) to make errors of law."

60. I do not intend to catalogue the grounds upon which a court may refuse to adopt a special referee's report. The courts' discretion is confined only by the interests of justice, which will depend upon the circumstances attending particular cases. See Integer Computing Pty. Ltd. v. Facom Australia Ltd. (unreported, Marks, J., 10 April 1987); Nicholls v. Stamer [1980] VicRp 46; [1980] V.R. 479, at p.495 per Brooking, J.; Leighton Contractors Pty. Ltd. v. C.E. Heath Underwriting & Agency Services Ltd (1995) 8 A.N.Z. Insurance cases 61-231. In many, if not most, cases it will be appropriate to exercise the discretion by reconsidering any questions of law and applying legal standards to established facts. I consider no more is required in this case.

63. In the present case no error of law was made by the special referee. In my view the special referee was not dealing with a question of law. Assessing the value of company shares involves ascertaining their market price. The courts in Abrahams v. Federal Commissioner of Taxation and Clifford's Case were themselves deciding a question of fact, namely, the value of company shares. It is not a principle of law that the value of shares in a company cannot be valued according to a capitalization of future maintainable earning without adjustment to reflect the relative values of the assets and liabilities of the company. Whether the capital position of a company conducting a business that is its principal asset does affect the value of its shares depends on how the market determines the price of companies in a like position, and that is a question of fact.

66. In the present case the special referee did consider the assets and liabilities of the company, but concluded that it was not appropriate to value its shares on an assets basis. The special referee entertained submissions from accountants representing the Plumleys and the first and second-named respondents. According to an affidavit sworn by the latter's accountant, which was before the trial judge:

"I refer to paragraph 87 of the special referee's report. The method valuation referred to in that paragraph was the basis of a detailed discussion between myself, Mr. Goodrich [the Plumleys' accountant] and the special referee. The method adopted by her formed the basis of considerable discussion at the meeting which Mr. Goodrich and I attended. Paragraph 87 fairly represents the views which the special referee expressed at those meetings. Further, I consider that the paragraph should be read in conjunction with paragraphs 88, 89, 90 and 91. The views expressed by the special referee in those paragraphs were views which the special referee foreshadowed to both myself and Mr. Goodrich and to which neither of us took particularly strong objection."

In the proceedings before the learned judge the Plumleys relied upon a report by a new accountant criticizing the special referee's report. By attacking the special referee's report according to the views of a new expert, the Plumleys would have the trial judge decide the very question referred to the special referee. In my opinion such an approach to the question of the adoption of the reports of special referees would largely negate the utility of Order 50.

71. The appellant contended that the special referee viewed the capitalized maintainable earnings method of valuation and the assets method of valuation as mutually exclusive. I do not consider that that she did. Rather, the special referee determined that in this case the appropriate method of valuation was to capitalize future maintainable earnings. That was a decision on a question of fact which does not reveal any patent misapprehension of the evidence and does not appear perverse or unreasonable.

74. It was also submitted on behalf of the appellant that the terms of clause 4 of the Deed made on 1 December 1994 required the special referee to value the shares according to the amount of the assets and liabilities of the group. While it is true that the clause refers to assets and liabilities, in my view it did so only to ensure that the special referee assessed the value of the group rather than the value of Markbys alone. It was not a direction to choose a particular method of valuation.

77. His Honour said that "the abiding consideration" in determining whether to adopt a special referee's report was that the Court, having considered the report and having heard any criticisms of it, must "feel comfortable to adopt it", and said that he was "comfortable in adopting (the special referee's) report generally." While I do not agree with the use of the word "comfort" to describe the test to be applied in exercising the power conferred by Rule 56.04, I do not think that on a fair reading his Honour's reasons disclose that he applied an incorrect test. In my opinion the learned trial judge did not err in the exercise of his discretion.

80. On 19 June 1995 the trial judge ordered that the report of the special referee be adopted, dealt with the costs of the special referee, the costs of the proceeding and leave to appeal and ordered that the proceeding be otherwise struck out. His Honour made no order for payment of any sum of money. In order to save the parties the expense of a new set of proceedings to enforce the terms of settlement, it is agreed that, if the appellant's objections to the report of the special referee are rejected, the appeal should be allowed for the purpose of giving judgment for the amount of the value of the shares in Markbys determined by the special referee. I would allow the appeals only for that limited purpose.