Taylor v Saloniklis

REASONS FOR JUDGMENT 1 This is an application by the applicants against the respondents in a proceeding in this Court for the appointment by the Court of an expert under r 23.01 of the Federal Court Rules 2011 (Cth). Paragraphs 237 to 253 of the applicants' Third Amended Statement of Claim ("Statement of Claim") raise a number of valuation issues and it is proposed by the applicants that the expert address those issues. The expert put forward by the applicants is Mr Peter Holmes, who is a chartered accountant with expertise in accounting and valuation issues. The respondents oppose the application. 2 The applicants in the proceeding are Dr Lynette Taylor, LSY Taylor RSA Pty Ltd ("TaylorCo"), and Mr Alberto Alfocea. Mr Alfocea is Dr Taylor's husband. Dr Taylor is the sole director and shareholder of TaylorCo and the controlling mind of the company. TaylorCo was a member of a partnership known as Radiology SA ("RSA"). It had the right to certain payments upon its departure from the partnership. In addition, Dr Taylor held 100 units in the Radiology SA Services Trust No 2 ("RSA Services Trust No 2"), and she claims that she was and is entitled to certain payments upon the redemption of her units in the Trust. The valuation issues which are the subject of the applicants' application for the appointment of an expert by the Court relate to the valuation of TaylorCo's interest in the partnership and Dr Taylor's units in the RSA Services Trust No 2. The respondents' case is that those interests have been correctly valued, and that valuations and other financial information has been given to the applicants. The applicants dispute this. There are a number of other issues raised in the proceeding. By reference to related events, claims are made by the applicants under the partnership agreement, the Trade Practices Act 1974 (Cth), the Fair Trading Act 1987 (SA), the Sex Discrimination Act 1984 (Cth), the Disability Discrimination Act 1992 (Cth), and at common law. The applicants' claim for loss and damage and other relief extends well beyond the claims made in relation to TaylorCo's interest in the partnership and Dr Taylor's units in the RSA Services Trust No 2. 3 The applicants plead various clauses of the partnership agreement. They plead that, by virtue of clause 12.4, the partners must pay to TaylorCo amounts prescribed by clause 12.5 of the agreement for the redemption or assignment of TaylorCo's Group Interests. Clause 12.5 is in the following terms: In the case of Compulsory Disposal Events, the amount to be paid to the Departing Partner is calculated in accordance with the following formula: DPE = CAB + CUB Where: DPE is the Departing Partner's entitlement under this Agreement; CAB is the balance of the Departing Partner's Capital Account at the termination date (after taking into account the revaluation of the Group Assets in the manner set out in the Approved Valuation Principles); and CUB is the balance of the Departing Partner's Current Account (which, in the case of an overdrawn current account, will be a negative amount). 4 Clause 12.7 deals with a Departing Partner's entitlement in the case of Voluntary Disposal Events and provides that the amount will be calculated "in the same manner and paid in the same time frame as for a Compulsory Disposal Event". The respondents' case is that clause 12.7, not clause 12.5, is the relevant clause, but for present purposes it does not matter. 5 The Approved Valuation Principles referred to in clause 12.5 are set out in Schedule 5 to the agreement which is in the following terms: (1) Upon the entry of a Partner or the departure of a Partner the assets of the Group will be re-valued based on a multiple of the Group's consolidated EBITA for the last completed financial year prior to the relevant date. (2) There will be no re-valuation at any time during the period up to 30 June 2006. (3) The multiple to be applied for the valuation purposes will be a fixed multiple of 6 during the period from 1 July 2006 to 30 June 2010 and thereafter there will be a multiple that takes into account the prevailing market and practice condition and situation and, in the case of any dispute about the relevant multiple, will be determined by the Independent Accountant. 6 Clause (3) of Schedule 5 refers to the multiple to be applied in respect of the valuation of the Group's assets. There is a dispute between the applicants and the respondents as to the multiple to be applied. There was a lack of agreement between them as to the appointment of an expert under clause (3) of Schedule 5, but that dispute has now been resolved and that task will be performed by Mr Holmes. 7 The respondents contend that the clauses in the partnership agreement dealing with the valuation principles were modified by the parties. It is not necessary for me to set out in detail the respondents' case as to how these modifications came about. It is sufficient to say that the respondents contend that the variations came about as a result of a Modified Partner Payout Protocol, and that the effect of them is that the valuation of the assets of the Group would be calculated with reference to Group revenue averaged over three financial years, being the previous two years and the budget for the following year, and that sessional income earned by the doctors in the practice through the provision of radiology services to clinic sites owned or operated by third parties, or both, would be excluded. The applicants deny that the partnership agreement was so modified. 8 As I have said, the applicants claim that the respondents have not carried out the valuations in accordance with the partnership agreement. They claim a declaration that the valuation of TaylorCo's interest should be carried out as follows: (1) The valuation should be carried out by reference to the number of partners at the date of TaylorCo's retirement from the partnership. This was not done by the respondents according to the applicants. The respondents admit that this is what should be done; (2) The valuation should include in the determination of value the income that the partnership derives from radiology services it provides to non-RSA entities. The applicants contend that this non-RSA income was excluded from the determination of value. The respondents accept that this income was excluded and contend that it was correctly excluded in accordance with the Modified Partner Payout Protocol; (3) The Group's assets should have been re-valued using a multiple of the RSA Group's consolidated EBITA for the year of TaylorCo's retirement from the partnership. The applicants contend that, instead of doing this, the respondents applied a three year average EBITA. The respondents contend that a three year averaging method was properly applied to the calculation of Group EBITA in accordance with the Modified Partner Payout Protocol; (4) The valuation should be performed by using a multiple that takes into account the prevailing market practice, being a multiple of at least 7. The applicants contend that the respondents did not apply a multiple of at least 7. This issue will now be addressed by Mr Holmes acting as an expert under the partnership agreement; (5) The valuation should be based on the adjusted goodwill and consequent adjustment to the capital account determined by the matters referred to in paragraphs (1)-(3) above. The applicants allege that this did not occur; and (6) The valuation should include a correct determination of TaylorCo's current account. The partnership agreement provides that a partner's current account reflects the partner's entitlements to sessional profit entitlements and Group profits less any drawings received. The applicants allege that the valuation did not include a correct determination of TaylorCo's current account. 9 The first and sixth matters are, in a sense, either correct or incorrect and would not appear to call for any expertise to a substantial degree. The fourth matter is to be dealt with by an expert appointed under the partnership agreement, and the fifth matter is consequential. The matters of substance are the issues identified in paragraphs two and three. 10 The questions proposed by the applicants for the expert are as follows: 1. Having regard to the terms of Version 1, applied by a reasonably skilful and careful valuer, please provide your opinion as to whether, to what extent and/or how the determination in accordance with clause 12.5 and Schedule 5 of Version 1 of the amount to be paid to a departing partner with a termination date of 31 March 2012 should take into account each of the following matters: a) income that the Partnership derives from radiology services it provides to non­ RSA entities; b) incorporation into the Partnership's accounts of any adjustment to goodwill that results from revaluing the Group's assets using a multiple of the Group's consolidated EBITA for the last completed financial year prior to the relevant date, and making any necessary adjustment to the departing partner's Capital Account for that goodwill adjustment; c) inclusion in the determination of value the balance of the departing partner's Current Account as at the date of its retirement from the Partnership; and d) profit derived by the Partnership from the balance sheet of the "last completed financial year" to the termination date. 2. To the extent that your answer to Question 1 is that one or more of the matters set out at (a) to (d) should have been taken into account under Version 1 in determining the amount to be paid to a departing partner with a termination date of 31 March 2012, please identify whether each such matter was in fact taken into account in determining the amounts of $168,453 and $791,468 paid to the applicants on account of the departure of LSY Taylor RSA Pty Ltd from the Partnership. 3. Having regard to the appropriate multiple determined by you for the purpose of applying Version 1, please provide your opinion as to: a) the valuation of the assets of the Group based on a multiple of the Group's consolidated EBITA for the last completed financial year prior to 31 March 2012; and b) the balance of the Capital Account and Current Account of LSY Taylor RSA Pty Ltd as at 31 March 2012 for the purposes of clause 12.5 of Version 1, after taking into account the valuation you have determined in answer to question 3(a). 4. Having regard to the appropriate multiple determined by you for the purpose of applying Version 2, please provide your opinion as to: a) the valuation of the assets of the Group based on a multiple of the Group's revenue averaged over three financial years being the previous 2 years prior to 31 March 2012 and the budget for the following year; b) the adjustment (if any) to that valuation to be made for "the exclusion of sessional income earned by the Doctors in the Practice through the provision of radiology services to clinic sites owned and I or operated by third parties"; and c) the balance of the Capital Account and Current Account of LSY Taylor RSA Pty Ltd as at 31 March 2012 for the purposes of clause 12.5 of Version 2, after taking into account the valuation you have determined in answer to question 4(a) and (b). 5. Do the amounts that you have included in the Group's consolidated EBITA (Question 3) or the Group's revenue (Question 4) for the purposes of your answers to Questions 3 and 4 include all net income earned by the Radiology SA Services Trust No 2? 6. If your answer to question 5 is no, having regard to the terms of the Unit Trust Deed dated 28 September 2005 (a copy of which is annexed to these Questions) applied by a reasonably skilful and careful valuer, what is your opinion as to the fair and reasonable market value of Dr Taylor's units in the Radiology SA Services Trust No 2 as at 21 August 2013 (or, if calculation of the fair and reasonable market value as at that date is not practicable, as at 30 June 2013), for the purposes of the redemption of those units in accordance with clause 10 of that Unit Trust Deed. 11 It seems to me that the three principal issues in relation to the valuation of TaylorCo's interest in the partnership are as follows: (1) Should the determination of value include or exclude the income that the partnership derives from radiology services it provides to non-RSA entities? The respondents admit that, in valuing TaylorCo's interest, non-RSA income was excluded from the determination of value. The primary issue is whether that was correctly done. The respondents allege that that was correctly done because the Modified Partner Payout Protocol operated as an effective, valid and operative variation to the express terms of the partnership agreement. In the alternative, they allege that the applicants are estopped from denying that that was the case by reason of the matters identified in paragraph 240AA of the Defence. This issue raises issues of fact, construction and law to be determined by the Court. It is not clear to me that it raises an issue of accounting or valuation expertise. The fact that it was not taken into account is not in issue. There is an accounting or valuation issue where expert evidence is likely to be of assistance if income from non-RSA entities should have been taken into account. The parties must prepare their respective cases on the basis that they may need to adduce evidence on this issue. Although an expert appointed by the Court may provide assistance on this issue, I am not satisfied that there is a need for a Court appointed expert or that such an expert will contribute to the just, efficient and cost-effective management of this proceeding (Tyler v Thomas (2006) 150 FCR 357 at 365, [29], per Branson J). He or she may do so, but, in the circumstances of this proceeding, I think that the most efficient course is to make orders for the exchange of experts' reports and then to list the matter for trial. I refer to the matters I identify in paragraph 14 below. (2) Should the Group's consolidated EBITA for the year of TaylorCo's retirement from the partnership be the base to which the multiple is applied, or should the base be a three year average of EBITA as alleged by the respondents? Again, the respondents rely on the Modified Partner Payout Protocol pleaded in the Defence. In my opinion, the same reasoning applies to this matter as applies in the case of (1) above. (3) What is the appropriate multiple to be applied? The parties are agreed that Mr Holmes, an expert appointed and acting under the partnership agreement, will consider this issue. 12 The applicants submitted that expert evidence is admissible on the meaning to be given to the phrase "the Group's consolidated EBITA" in clause (1) of Schedule 5 of the partnership agreement. I am not ruling on that issue now. It is enough to say that I am not satisfied that it is sufficient to justify the appointment of an expert by the Court. Further, the applicants submitted that the determination of the appropriate multiple by Mr Holmes may involve a consideration of other issues raised in the questions proposed for the expert. At this stage, I am not satisfied that if this arises it is not a matter that cannot be dealt with by Mr Holmes acting under the partnership agreement. If there are difficulties, they will have to be dealt with if and when they arise. 13 I do not see the issue involving the value of Dr Taylor's units in the Radiology SA Services Trust No 2 as sufficient to warrant the appointment of an expert by the Court. As I understand it, the respondents' case is that the relevant income was included in the EBITA calculation. 14 This is a substantial piece of ligation. As I have said, the applicants make a number of substantial claims and I am told that there are already a number of experts' reports relating to other claims made by the applicants. It seems to me that if Mr Holmes is appointed as an expert by the Court he may require clarification of some of the issues that it is proposed to raise with him, and then there may well be arguments about the nature of any further instructions to be given to him. There may also be arguments about the admissibility of, or weight to be placed on, some of the opinions he expresses. Furthermore, the history of this litigation provides me with little confidence that the expert's report will narrow the issues, or that the report will not be followed by a substantial report from at least one of the parties. Of course, the Court has various methods of dealing with these matters, but an assessment has to be made and my assessment is that the Court should not appoint an expert. The parties should be left to gather such expert evidence as they may be advised. All efforts can then be made to exclude issues without merit from the trial. 15 I decline to appoint an expert under r 23.01 of the Federal Court Rules. 16 The applicants' application dated 16 December 2013 should be dismissed. I will hear the parties as to any other orders to be made on that application. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.