Temwood Holdings Pty Ltd v Oliver & Ors [1999] WASC 251

Temwood Holdings Pty Ltd v Oliver & Ors [1999] WASC 251 - WASC 1999 case summary — Zoe

[64]

6 As the plaintiff is controlled by a foreign company it is required to lodge annual financial reports and directors' reports with the ASIC pursuant to s 292(2) of the Corporations Law. It appears that, for a number of years, the plaintiff has been in breach of its obligations under the Corporations Law. However, under pressure from the defendants, it has lodged financial statements for the year ended 31 December 1998. This document appears as Annexure "NO11" to the first defendant's affidavit of 25 August 1999. It is to be noted that the accounting year for the plaintiff follows the calendar year rather than the usual Australian financial year. That being the case, the accounts dated 31 December 1998 are for the full preceding year. Both counsel had some difficulty interpreting the accounts so as to ascertain with precision the plaintiff's financial position. The accounts show that the plaintiff's current assets are valued at $5,941,671. Of this amount, "Inventories" accounts for $5,588,367. A note to the accounts shows that the amount for "Inventories" is broken up between "Land at directors' Valuation 1994" in the sum of $585,419 and two other amounts being capitalised development expenses and capitalised rates, taxes and financing costs. Under non-current assets there is again an entry for inventories which is put at $12,393,569. Of that amount, $5,984,820 is said to be "Land directors' valuation; 1994". The rest is made up, once again, of capitalised development expenses and capitalised, rates, taxes and financing costs. In relation to the directors' valuation, reference is made to a report by David Moore, an independent licensed valuer, the report being dated 20 May 1994. It is said that this report was adopted by the directors in the financial year ended 30 June 1997. Moving to liabilities, the current liabilities show borrowings at $4,170,161. The notes show that the bulk of this liability is a secured bank loan. The non-current liabilities show borrowings of $8,400,792. The notes show that of this amount $6,494,903 are loans from a controlling entity. That must be Goldcore. Total assets are said to be $18,400,147 and total liabilities are said to be $13,940,192. Relying on the balance sheet then, the plaintiff's net assets are said to be $4,459,955.

[68]

9 It is apparent from the accounts that the financial position of the plaintiff is largely dependent upon the valuation of its land holdings described as "Bayshore Development". The accounts rely on a valuation prepared in May 1994. Appearing as Annexure "BHCC1" to the affidavit of Chin is a valuation of the Bayshore Garden Estate prepared by the firm Christie Whyte Moore and dated 11 October 1999. It was on this valuation that the plaintiff sought to rely for the purposes of this hearing. The valuation was undertaken by David Moore ("Moore") a certified practising valuer. The development consists of three constituent parts. The land available for residential development can be subdivided into 401 lots. Presently, 33 of these lots are available for sale. Moore has valued this land on two separate basis. First, he has assumed that the land will be divided into 401 lots and progressively sold. As an alternative, Moore assumes that 33 lots are presently available and 368 lots will be realised and subsequently sold. The difference between the two values appears to be the costs associated with developing the 33 lots. There is also land to be used for group housing sites, a retirement village and a hotel site. He has put the value of this land at $3,200,000. Finally, there is a retail site which he has valued at $650,000. He has valued the land, assuming a subdivision into 401 lots at $5,750,000 and assuming the 368 lots at $5,300,000. On that basis he has two alternative valuations. The first, assuming the 401 lots and all of the other property puts the value of the development at $10,600,000 or, alternatively, $10,150,000. Chin says in his affidavit that to date eight of the 33 lots available for sale have been sold. He also says (at par 8.1) that "a large portion of the proceeds of these sales have been used to reduce Temwood's loan from the National Australia Bank". In fact, this is not correct. Of the eight lots apparently sold, none have settled and no amount has been repaid to the National Australia Bank. This fact came to light as a result of research undertaken by the first defendant with DOLA. Counsel for the plaintiff, during the course of his submissions, admitted Mr Chin had been in error and in fact none of the blocks had settled. This was a serious error and it should have been rectified by further affidavit evidence explaining how the mistake arose. It is not enough for counsel to acknowledge the mistake in the course of his submissions. Affidavits are sworn evidence of the deponent and all care must be taken to ensure that the information provided in the affidavits is correct.

[69]

10 The valuation did not take into account a shopping centre constructed in 1997 and a medical centre constructed around the same time. However, Moore's valuation of 20 February 1998 which appears as Annexure "NO14" to the first defendant's affidavit of 25 August 1999 values the shopping centre and medical centre together at $1,550,000. Subsequent to the hearing, solicitors for the plaintiff forwarded a copy of an affidavit of Douglas Howard Solomon sworn 2 December 1999. Appearing as Annexure "DHS2" to that affidavit is a written offer by a third party for the retirement village land. The plaintiff sought to rely on that offer as establishing that the valuation of the development generally was accurate. The offer itself was for $889,000. Moore's valuation of the retirement village of land was $751,934.40. What the plaintiff sought to draw from this further affidavit was simply to confirm that Moore's valuation was conservative and should be accepted. In my view the subsequent affidavit of Solomon, although I have taken it into account, is of little value. What is in evidence is expert opinion of Moore which puts the value of the development in total at $12,150,000 (assuming the 33 blocks are included). That is the total value of the plaintiff's land holding at present and it compares with the value of $12,393,569 to be found in the accounts. Apart from this market valuation of the plaintiff's land holding, Moore, in his report, has produced two cash flow projections. Annexure "4" to his report is based on 401 lots and Annexure "5" is based on 368. What these projections are intended to show is the return to the plaintiff if all possible lots in the subdivision are progressively developed and sold. Both projections show that it will not be until the middle of the year 2006 that the development will be completely sold. Perhaps most relevantly, however, the projections show that it will be late 2003 or 2004 before the plaintiff achieves a positive cash flow. These cash flow projections are of limited value in my view because they take in the land at valuation - that is to say, $5,750,000 or $5,300,000. Development and maintenance costs are then taken into account and sales are projected forward on the basis that 60 lots per year will be sold at $60,000. No account is taken of the present balance sheet position of Temwood. That is to say, the projections do not take into account interest charges, nor is any account taken of the debt owing to the controlling entity. What is more, in his affidavit of 8 November 1999 the first defendant challenges the assumption that it will be possible to sell 60 lots per year at $60,000. He challenges this assumption on the basis of the past performance and sales of the development. There is undeniable logic in his attack upon Moore's assumptions. But in any event, it seems to me the cash flow analysis is singularly unhelpful and goes no way to provide any realistic assessment of the actual financial position of the plaintiff.

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Judgment (83 paragraphs)

Temwood Holdings Pty Ltd v Oliver & Ors [1999] WASC 251 (10 December 1999)

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Cases Cited (12)