170 This yields EBITDA of $1,685,155. Ultimately both valuers adopted a capitalisation rate of 8.75 percent. In the case of the Marlborough Hotel, there is no reason to adjust that rate as was the case with Jackson's on George. Applying that capitalisation rate to EBITDA of $1,685,155 yields a value of $19,258,914. I will round this down to $19,250,000. This is higher than the final figures of both valuers. That is principally attributable to the fact that their last calculations made no allowance for the interruption of trading in the first two months of the financial year.
Provision for Capital Gains Tax
171 Mr Crawley, Athann Pty Ltd and Nabatu acquired the shares in J & J O'Brien prior to the introduction of capital gains tax. The company was already the owner of the Marlborough Hotel. Capital gains tax would not be payable by J & J O'Brien on the sale of the Marlborough Hotel, except insofar as the sale involved the sale of assets which, for capital gains tax purposes, are to be treated as separate assets acquired after 20 September 1985. Mr Carter identified two classes of assets of that kind. The first was 15 poker machine permits acquired by J & J O'Brien in about October 1998 at a cost of $750,000. Those permits are necessary for the operation of the hotel and would be transferred if the hotel were sold. However, there was no dispute that they would be treated as separate assets for capital gains tax purposes. They were valued by Mr Robertson at between $240,000 to $270,000 and by Mr Owen at $300,000 each. I adopt the value of $240,000 per permit, as did Mr Carter. That is the same value as Mr Robertson attributed to the poker machine permits when valuing the permits, entitlements and hotelier's licence associated with Jackson's on George which I have adopted in the earlier part of these reasons. Mr Carter calculated the capital gain on the poker machine permits, after indexation of the cost base, to be $2,768,775 giving rise to capital gains tax of $830,633. There was no dispute about these figures.
172 If the hotel were sold, the poker machine entitlements would also be transferred. Mr Carter said :
" On balance, I do not consider that PMEs are post-1985 assets, and accordingly, while necessarily using Mr Robertson's value for PMEs in my calculations of CGT on other assets, I do not consider that any CGT should be allowed with respect to PME. "
173 He did not give his reasons for this conclusion, but the defendants did not contend that capital gains tax would be payable on the transfer of poker machine entitlements. Nor did Ms Cartwright suggest that capital gains tax would be payable. Nor was there any calculation of what the tax would be. As the parties adopted a common position on this question, I will proceed accordingly.
174 Between 1988 and 1991, J & J O'Brien acquired land and buildings adjacent to the hotel which have subsequently been incorporated into the hotel. Mr Carter said that this land comprises about 20 percent of the total hotel site and is a separate asset for capital gains tax purposes. He was not challenged on this opinion and I accept it. Mr Carter assessed the capital gains tax which would be payable on the disposal of this asset which is inseparable from the wider hotel operation using the following methodology. First, he took the assumed value of the Marlborough Hotel less selling costs. From this, he deducted the value of poker machine permits and poker machine entitlements (less selling costs) to derive a value of the hotel net of the value of poker machine entitlements and poker machine permits. On the basis that the additional land acquired was 20 percent of the total property, he valued that additional land at 20 percent of the net figure. From that value he deducted the cost of the additional land after indexation and the cost of improvements to the additional land. He assessed the total cost base of the additional land after indexation at $1,421,513. The difference between this sum and 20 percent of the net value of the hotel after deducting the value of the poker machine permits and entitlements was the capital gain for the additional land and buildings.
175 There was no challenge to this assessment, nor as to his methodology. I adopt his approach, but it is necessary to adjust his calculation to bring to account the value of the Marlborough Hotel which I have found, rather than the value he assumed. I also adopt his assessment of the value of poker machine permits and poker machine entitlements which are based upon Mr Robertson's report. The value of the poker machine permits and poker machine entitlements after assumed two percent selling costs, totals $6,321,000. Using my determination of the value of the hotel of $19,250,000, and deducting selling costs of two percent, and deducting $6,321,000 as the value of poker machine permits and entitlements, gives a value of the hotel net of PME and PMP of $12,544,000. The value of the "additional property", being 20 percent of that sum, is $2,508,800. Deducting from that sum the figure of $1,421,513 gives a capital gain for the "additional property" of $1,087,287, on which tax of $326,186 would be payable.
176 Mr Carter also noted that whilst extensive improvements had been made to the hotel between 2000 and 2004 and in 2007, it is reasonable to assume that no capital gains tax would have accrued on improvements in 2007 even if those improvements were to be treated as a separate capital gains tax asset. In relation to the improvements between 2000 and 2004, Mr Carter assumed that $500,000 should be included as relating to the additional land. There was no challenge to his methodology or assumptions and I adopt his approach.
177 Accordingly, using Mr Carter's figures and methodology, but making adjustments for the different value of the hotel which I have found, I conclude that if the hotel were sold, J & J O'Brien would face a liability for capital gains tax of $1,156,819, being the sum of $830,633 and $326,186.
178 The plaintiffs submitted that it was not appropriate to include as a notional liability of the company in adjusting the balance sheet, the fees and taxes that would be payable if the underlying real estate were sold. In this respect they relied upon the judgment of Campbell J (as his Honour then was) in United Rural Enterprises Pty Ltd v Lopmand Pty Ltd [2003] NSWSC 910; (2004) 47 ACSR 514, especially at 524 [57] and 524-525 [60]. Campbell J said:
" [57] The question, however, is whether the Lopmand Painten share ought be valued on the basis that Painten is being, at least notionally, liquidated. I see no reason why it should be valued on that basis. The effect of URE purchasing the Lopmand Painten share will be that URE holds all of the issued shares in Painten. There is no basis in the evidence for believing that Mr Lindsay-Owen has plans to cause Painten to sell the real estate in the foreseeable future. The investment is cash flow positive, and has been cash flow positive for many years. Even if the time were to come when Mr Lindsay-Owen decided to realise the investment, it would be commercially attractive for him to try to realise it by selling all the shares in Painten, rather than by having Painten sell the land. Upon any such sale of shares, expenses analogous to the selling expenses which Mr Potter recognised may well be payable, but they would not be payable by Painten. Further, Painten would not pay income tax by reason of that sale occurring.
...
[60] ... However the general principle applied in [Fedorovitch v St Aubins Pty Ltd (No. 2) (1999) 17 ACLC 1558 ] , that it is only matters which affect the value of a share which should be taken into account in fixing a price for a compulsory buy-out order, can and should be applied here. In the present case, the prospect that, even if Mr Lindsay-Owen were to decide to quit the investment, the way in which he might choose to do so is by sale of the Painten shares has the effect that no allowance should be made for income tax on any net profit made by Painten, nor for marketing expenses which might become payable, at some stage in the future, in connection with a sale of shares in Painten which gave effective control of the Marayong unit. If the Marayong unit were owned as to two-thirds by Mr Lindsay-Owen personally, and as to one-third by Mr Lake personally, and Mr Lindsay-Owen were to purchase of Mr Lake's one-third interest, at a fair valuation, one can readily see that if Mr Lindsay-Owen were to sell the Marayong unit at some stage in the future, presumably he would have to pay marketing expenses in connection with that sale, and income tax on any profit he made on the sale. But the need to incur those marketing expenses in the future, or to pay that income tax in the future, is not something which would be taken into account in assessing the value of Mr Lake's one-third interest in the real estate. When the Marayong unit is held by a single-purpose corporate vehicle, and there is no proved intention to realise the investment in the foreseeable future, I likewise do not see any need to take into account the prospect that marketing expenses and income tax might be payable on any future sale. I therefore decline to make any adjustment to the value of the Painten assets, for the purpose of valuing the Lopmand Painten share, to take account of that possibility. "
179 The plaintiffs adduced evidence from Ms Cartwright that if the shareholders of J & J O'Brien wished to realise the capital value of the Marlborough Hotel, it was more likely that that would be achieved by a sale of the shares in J & J O'Brien than by a sale of the hotel. She said that the individual shareholder, Mr Crawley, and the individual beneficiaries of the family trust of which Springsley is trustee, would take advantage of the 50 percent CGT tax discount for individuals. Any reservation a purchaser might have about inheriting unforeseen liabilities would be assuaged by its being able to transfer the hotel into a special purpose vehicle without tax or stamp duty implications, so that J & J O'Brien could then be deregistered or liquidated to mitigate risks of potential liability. She said that she thought it improbable that J & J O'Brien would actually bear tax on a future sale of the Marlborough Hotel property and that it was more likely that any tax impost would be borne by the shareholders of J & J O'Brien in the form of capital gains tax on the sale of shares in the company. The plaintiffs submitted that the shares were not to be valued on the basis that the company was to be liquidated.
180 I do not accept the plaintiffs' submissions. In my view, the valuation of the shares in J & J O'Brien and Marsico is in the nature of a notional liquidation of the companies. It is by a notional realisation of the companies' assets that the capital value of those assets can be unlocked for the benefit of the minority shareholder. The fact that the majority shareholder does not intend to sell the asset at any definite time in the future is, in my view, irrelevant. It would be different if the minority share were to be valued by capitalising future dividends projected on the basis that the dividends were not depressed by any oppressive conduct. But that would lock the plaintiff into the consequences of being a minority shareholder. I have found that it would not be fair to discount the value of Nabatu's share on the basis that it is a minority shareholder.
181 Nabatu is entitled to one-third of the value of the net assets of the company. Those assets are not valued by capitalising the income to be derived from them under the current management. If the valuation were to be made on that basis, then I would accept that it would not be appropriate to make provision for a capital gains tax liability because such a valuation would involve no hypothetical sale of the asset. But for the reasons given in paras [21]-[29], that valuation approach is inappropriate as it would saddle Nabatu with the high level of expenses under the existing management, which would reflect its vulnerability as a minority shareholder.
182 On an actual liquidation, Nabatu would be entitled to one-third of the value of the surplus of assets over liabilities. The value of its interest would not be depressed by its being a minority holding. I have found that it is fair that its shares be valued without discount for its being a minority holding. Short of a liquidation, that is achieved only by a notional realisation of assets. Hence, I ordered that Nabatu's share be purchased at a valuation of one-third of the net assets of the company without discount for its being a minority parcel, with the companies' assets to be valued on the basis of current market values assuming willing but not anxious vendors and purchasers. Nabatu cannot take the benefit of that approach to valuation without accepting the consequences. The question is what would Nabatu receive on a realisation of the companies' assets? For that question to be properly answered, account must be taken of selling costs and liability for capital gains tax.
183 It is not to the point that the shareholders of J & J O'Brien might sell their shares rather than causing the company to sell the hotel. As a matter of principle, one would expect a prospective purchaser of shares to discount the price to be paid for the capital gains tax that would be payable when the property is sold. That was Mr Carter's opinion. He said that a purchaser would require the price of shares in the comapny to be significantly discounted to compensate for additional risks involved in a share purchase. He said that:
" In my opinion the best measure of the discount that would be required is to make allowance for the CGT that could be payable when the property is sold, and the valuation of the shares ... would be reduced accordingly. "
184 Mr Robertson also gave evidence that if a prospective purchaser of the hotel were to acquire shares in the company rather than the hotel itself, the purchaser would require a discount of the price. He said:
" In my opinion, the discount that a prospective purchaser of a hotel who is acquiring the shares in a company that owns the hotel, as opposed to simply acquiring the business of the hotel, represents the concern for risk attributed to issues such as capital gains tax liabilities and any unforeseen legal implications that may arise. [sic]"
185 All but two of the sales with which he has been concerned or has investigated, have been sales of the real estate, goodwill, and licences, as opposed to the purchase of the shares in the company that owns the hotel assets. I accept the evidence of Mr Carter and Mr Robertson in these respects. That evidence was not challenged.
186 I agree with the defendants' submission that if the shares were to be valued without taking account of the company's liability for capital gains tax on a sale, but otherwise its asset was valued at its market price, the plaintiffs would receive a windfall and Mr Crawley would be penalised in a way unconnected with redressing the effects of oppressive conduct.
187 The current accounting standards are instructive on this question. AASB116, which relates to accounting for property, plant and equipment, requires the reporting entities to which the standard applies to choose either the cost model in paragraph 30 of AASB116 or the revaluation model in paragraph 31 as its accounting policy. Paragraph 31 provides:
" After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. ... "
188 "Fair value" means "the amount for which an asset could be exchanged between knowledgable, willing parties in an arm's length transaction." Paragraph 5 of Interpretation 121 of the Urgent Issues Group provides relevantly:
" The deferred tax liability or asset that arises from the revaluation of a non-depreciable asset in accordance with AASB116.31 shall be measured on the basis of the tax consequences that would follow from recovery of the carrying amount of that asset through sale, regardless of the basis of measuring the carrying amount of that asset. Accordingly, if the tax law specifies a tax rate applicable to the taxable amount derived from the sale of an asset that differs from the tax rate applicable to the taxable amount derived from using an asset, the former rate is applied in measuring the deferred tax liability or asset related to a non-depreciable asset. "
189 In other words, if the standard applies, and assets in the books of a reporting entity are revalued to their fair value, then the entity should include the likely capital gains tax as a deferred liability.
190 It was common ground that Marsico and J & J O'Brien were not reporting entities required to comply with AASB116 and URG121. However, the significance of those standards is the recognition by those responsible for establishing accounting standards, that consistency requires that if assets are revalued to fair value, based on their market value if the asset were sold, the company should recognise the taxation liability which would accrue were the asset to be realised. That is so irrespective of whether it is intended that the asset be sold. In my view, the same principle applies in the present case.
191 For these reasons, the balance sheet of J & J O'Brien should be further adjusted by recognition of a liability for capital gains tax of $1,156,819. For the same reason, the value of the Marlborough Hotel should be brought to account after allowing for two percent selling costs, namely, at a figure of $18,865,000.
Net Profit from 1 July 2007 to 31 July 2008
192 It is appropriate to use the most up-to-date figures to assess the net operating profit of J & J O'Brien to 31 July 2008. In her first report, Ms Cartwright stated that net operating profit before tax for the six months to 31 December 2007, according to the general ledger, was $181,033. Mr Carter says that this omitted a loss from Prego's restaurant for that period of $25,929. No detailed analysis of the net profit to 31 December 2007 was provided by either Ms Cartwright or Mr Carter. Mr Carter was not cross-examined and Ms Cartwright did not take issue with this part of Mr Carter's report in her report in reply. I will therefore accept his contention to be correct. That would reduce Ms Cartwright's statement of profits to 31 December 2007 to $155,104.
193 Mr Carter said that he had been provided with up-to-date management information showing that J & J O'Brien had made a profit of $318,743 before tax and other adjustments to 30 April 2008. On this basis, he said that net profit for the 13-month period was $414,366. He also said that he had been provided with other profit and loss information that the profit for nine months was $255,252. This is a substantial discrepancy. He did not produce the information. From the further information provided by Ms Cartwright, the profit for the four months from January to April 2008 for the Marlborough Hotel was $99,597. I will use that figure. That results in a ten-month profit of $254,701, not $318,743. When $254,701 is extrapolated to a 13-month period, the net operating profit before tax and other adjustments is $331,111. This is substantially below the figure given by Mr Carter in his report, but he was not cross-examined on his figure with a view to the plaintiffs substantiating it, and I am unable to determine how he arrived at his figure. I will adopt the figure of $318,743 for which there is some supporting detail.
194 Ms Cartwright observed that professional fees had continued to be paid by J & J O'Brien to Gladewood after 31 October 2007. The orders of 19 December 2007 included orders for compensation in respect of excessive fees charged up to 31 October 2007. Ms Cartwright has made further adjustments in respect of excessive fees paid by J & J O'Brien to Gladewood and for interest on those amounts for the period from 1 November 2007 to 31 July 2008. There is no dispute about those adjustments which total $37,473. Hence, the net operating profit before tax to 31 July 2008 is $368,584. The tax expense on that profit is $110,575. Net operating profit after tax for the 13-month period is $258,009.
195 There was no dispute as to the other adjustments to be made to the audited balance sheet of J & J O'Brien as at 30 June 2007, save in respect of the calculation of interest on the judgment debts. However, for the same reasons as in para [139] above, I accept Ms Cartwright's calculation of interest.
196 The balance sheet may be restated as follows:
J & J O'Brien
Adjusted Balance Sheet at 1 August 2008
CURRENT ASSETS
Cash and cash equivalents 179,306
Trade debtors 874
Other debtors 75,180
Net Operating Profit after tax from 1/7/07 258,009
Judgment receivables 7,482,041
Inventory 87,697
Prepayments 37,728
TOTAL CURRENT ASSETS 8,120,835