WLD Practice Holdings Pty Limited v Sara Stockham

The Unitholders' Agreement RECITALS: D. The parties wish to regulate their conduct in respect of the Trust and Trustee Company, in accordance with this Agreement. 1. DEFINITIONS AND INTERPRETATION 1.1 Definitions Unless otherwise defined in this Agreement, the following capitalised words are defined as follows in this Agreement: … (ee) Major Policy Issues means the matters set out in Schedule 3; … (ss) Unanimous Resolution means a resolution passed by one hundred per cent (100%) of the votes cast by the Unitholders entitled to vote on the resolution; 3. OBJECTIVES AND GENERAL OBLIGATIONS 3.1 Objectives of this Agreement This Agreement regulates the relationship of the Unitholders (in both their capacity as Unitholders and as Shareholders) and sets out the arrangements between them for the ownership, governance and operation of the Trustee Company and the Trust and the conduct of the Business. 3.2 Business Objectives The parties agree that the objectives of the Trustee Company and Trust are: (a) to carry on the Business; (b) to maximise profits; (c) to achieve outstanding long term returns to the Unitholders; (d) the active pursuit of opportunities for the Business in Australia and throughout the world; and (e) to do all such things as are incidental or conducive to the attainment of the above objectives. 7. DECISION MAKING BY UNITHOLDERS AND SHAREHOLDERS … 7.8 Major Policy Issues (a) Notwithstanding any other provision in this Agreement, the Trustee Company must not effect any decision in respect of any Major Policy Issues unless first approved by Unanimous Resolution by the Unitholders. (b) Any decision in relation to a Major Policy Issue which is not approved by Unitholders by Unanimous Resolution is void and of no effect. 13. DETERMINATION OF FAIR MARKET VALUE 13.1 Meaning of Fair Market Value In this Agreement "Fair Market Value" for a Unit (Relevant Unit) means the fair market value for that Relevant Unit on a going concern basis as at the date of offer or deemed offer to sell or subscribe for that Relevant Unit, on the premise that: (a) all of the Units are subject to sale between willing, but not anxious, vendors and a willing, but not anxious, purchaser dealing at arm's length; and (b) by reference to past accounts and current management figures and forecasts for the Trustee Company and Trust; (c) taking into account past and prospective earnings and underlying net asset values of the Trust; (d) from the value attributed to all of those Units, the value of that Relevant Unit will be pro-rated accordingly. 13.2 Determination of Fair Market Value (a) The Fair Market Value must be determined by the Trustee Company Accountant, adopting the method of valuation that the Trustee Company Accountant considers reasonably appropriate, with consideration of the following matters; (i) the matters set out in clause 13.1; (ii) without regard to whether a majority or minority interest is being sold (if applicable); (iii) applying generally accepted valuation principles. (b) Unless otherwise specified in this Agreement, the Trustee Company must use reasonable endeavours to procure that a determination of the Fair Market Value of Units by the Trustee Company Accountant occur within (1) month of: (i) in respect of clause 10.4, the giving of the Notice of Sale; or (ii) in respect of clause 11, the date the Event of Default occurs. (c) In making a determination, the Trustee Company Accountant acts as an expert and not as an arbitrator, and the Trustee Company Account's decision will be final and binding on the Unitholders except in the case of manifest error. (d) Each Unitholder: (i) must provide the Trustee Company Accountant with full access to relevant books and records and any information required by the Trustee Company Accountant to complete its determination of the Fair Market Value; and (ii) may make written submissions to the Trustee Company Accountant in respect of the matter being determined. (e) The costs of the Trustee Company Accountant will be borne by the Trust. (f) Upon the Trustee Company Accountant making, a determination, the Trustee Company must procure that the Company Accountant give the determination in writing to the Trustee Company, and the Trustee Company must serve the same on all Unitholders. SCHEDULE 3- MAJOR POLICY ISSUES The following issues are to be determined by the Unitholders, by Unanimous Resolution: … 3. agreement by the Trustee to the sale, transfer, lease, assignment, disposal or acquisition of Trust assets or entry into any contract to do so where the market value of such assets or the consideration in respect of the sale or acquisition of such assets is in excess of $50,000 … 6. the Trustee entering into borrowings or other financial accommodation resulting in total financial accommodation to, or borrowings of, the Trustee exceeding $50,000. …

The Unit Trust Deed 7.2. Reporting and Accounts (a) The Trustee will keep a complete and accurate record of all receipts and expenditures on account of the Trust Fund. (b) Promptly after the close of each Accounting Period, the Trustee will prepare a written accounting report (prepared in accordance with normally accepted accounting procedures) for such period consisting of a balance sheet and statement of income and expenditure and a list of assets held at the close of such a year and a copy thereof will be furnished upon request to the Unit Holders. (c) With the consent of the Unit Holders the accounting report will include the names and addresses of all persons or firms having custody of all or any portion of the assets of the Trust Fund. (d) The Trustee will at the direction of the Unit Holders appoint an auditor to examine and ascertain the correctness of the accounts of the Trust Fund and the Trustee may, in its discretion without such direction, appoint an auditor if it sees fit.

The Construction of the Unitholders' Agreement and Unit Trust Deed

1. The principles of contractual construction are well known. In Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, Gibbs J explained (at 109): [T]he primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another.
2. This passage was adopted as authoritative by a majority of the High Court in Westfield Management v AMP Capital Property Nominees (2012) 247 CLR 129, 139-40 (French CJ, Crennan, Kiefel and Bell JJ).
3. Further, as stated by the High Court in Electricity Generation Corporation v Woodside Energy Pty Ltd (2014) 251 CLR 640 at 656-657 (French CJ, Hayne, Crennan and Kiefel JJ): The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties ... intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".
4. In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (S99/2015; S102/2015) (2015) 256 CLR 104, French CJ, Nettle and Gordon JJ said (at [48]): Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
5. However, at [51] their Honours further noted that: Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties ... intended to produce a commercial result". Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".
6. In Cherry v Steele-Park [2017] NSWCA 295 Leeming JA stated (at [72]): The first is that the "plain meaning" reflects the primacy of the text of a written contract. The starting point and the ending point of the construction of a written commercial contract is the language chosen by the parties to record their bargain. In a familiar passage, Gibbs J referred in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; [1973] HCA 36 to the "primary duty" of a court construing a written contract to ascertain the legal meaning of a document "from the words of the instrument in which the contract is embodied". As I have said, "very often, nothing in the context will come close to displacing the ordinary grammatical meaning of the legal text": Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; [2014] NSWCA 184 at [74].
7. At [78] his Honour went on to say: There is now a deal of authority for the proposition that whether there is in truth a constructional choice available to a written contract cannot be determined without first at least considering evidence of surrounding circumstances.
8. The principles applicable to the construction of written contracts are generally applicable to the construction of deeds as well (J D Heydon, Heydon on Contract at [8.1470], citing Seddon v Senate (1810) 13 East 63; 104 ER 290 at 74 (East), 295 (ER)).
9. In relation to whether a contractual expert determination is binding as between the parties to the contract, McHugh JA said in Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 (at 335-336): The terms of the contract usually provide, as the lease in the present case does, that the decision of the valuer is "final and binding on the parties". By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision. It is now settled that an action for damages for negligence will lie against a valuer to whom the parties have referred the question of valuation if one of them suffers loss as the result of his negligent valuation… But as between the parties to the main agreement the valuation can stand even though it was made negligently. While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.
10. The cross-defendant points out that expert determinations have been invalidated in cases where for example an appointed person valued property himself instead of employing another person as "expert valuer" as expressly required (Jones v Jones [1971] 1 WLR 840 at 846, 853) or used one method of sampling and analysis instead of the specified "Method" expressly required (Verba Oil Supply & Trading GmbH v Petrograde Inc [2002] 1 All ER 703 at 706 [10], 713 [29], 716 [49]), while expert determinations have been upheld where appointed persons "have done precisely what they were asked to do" (Jones v Sherwood Services plc [1992] 1 WLR 277, 287) notwithstanding some mistake in the application of principles of valuation, failure to consider relevant matters or consideration of irrelevant matters (Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 331, 335-336), a deficiency of reasons relative to what is required of an arbitrator (Shoalhaven City Council v Firedam Civil Engineering Pty Ltd (2011) 244 CLR 305 at 316, 319) or a decision to make a speculative prediction of future inflation (Woolworths Ltd v Mefrost Pty Ltd (1988) 14 NSWLR 300, 307).
11. On the other hand, the cross-claimants point out that in Holt v Cox (1997) 23 ACSR 590 an outgoing shareholder was required to sell his shares in a company "at a fair price determined by the auditor of the company" (591). Santow J at trial and Mason P and Priestley JA in the Court of Appeal (Cole JA dissenting) held that the valuation was not made in accordance with the contract because the "fair price" required consideration be given to the possibility of a winding up and distribution of net assets and the valuer had disregarded that possibility.

The Parties' Submissions

1. The cross-claimants submit that clause 7.8 means that any transaction falling within the "Major Policy Issues" in schedule 3 must be authorised by a Unanimous Resolution or, as between the parties to the Unitholders' Agreement, it will be void and of no effect, meaning "devoid of any legal significance". They submit that the effect of clause 7.8 is that every Unitholder must positively assent to every significant transaction or event.
2. The cross-claimants submit that the subject of the valuation under clause 13 is a Unit in the Trust, which confers on the Unitholder certain rights and obligations created by the Unit Trust Deed as modified by the Unitholders' Agreement and the general law. They submit that the Valuer cannot adopt any "method of valuation" (cl 13.2) which disregards any part of the Unitholders' Agreement, including clause 7.8. They submit that to do so would lead to the "obviously" incorrect result that the financial statements of the Trust would be required to be prepared on the basis that clause 7.8 has full effect (whereby transactions conducted in breach of clause 7.8 would be "removed" from the accounts: T14.37) but the valuation of the outgoing Unitholder's Units would be undertaken on a completely different footing.
3. The cross-claimants submit that the financial information the Valuer, Mr Gwynne, was given discloses non-current liabilities well exceeding $50,000 which should have prompted an enquiry as to whether the requirements of clause 7.8 had been satisfied. They submit the failure of the Valuer to give effect to clause 7.8 in making his valuation means the valuation is invalid and must be set aside. However, during oral submissions counsel agreed that I was not required to determine factual questions for the purposes of answering the separate questions but if I determine the questions in favour of the cross-claimants a separate factual inquiry will be required (T4.9-33).
4. The cross-defendant submits that clause 7.8 is a contractual prohibition upon the Trustee giving effect to decisions in respect of Major Policy Issues in the absence of a Unanimous Resolution. However, clause 7.8 does not have the effect that the Trustee Company Accountant, in determining the Fair Market Value of a Unit under clause 13 of the Unitholders' Agreement, must be satisfied that there is evidence before him or her that clause 7.8 has been complied with in respect of every Major Policy Issue. It submits that clause 7.8 much less sets up any such requirement as a condition to the validity of any determination produced under clause 13.
5. The cross-defendant describes clause 13 as a "code" on the topic of what a Valuer must do to produce a valid valuation. It submits that where the parties intended to impose express obligations on the manner in which the Valuer carried out his task, they did so expressly all in one place (cl 13.2), which points against a construction that there is a further, non-express condition to the validity of a determination arising from a provision found elsewhere in the agreement. It submits that clause 13.2(a) signals a contractual intention to entrust to the Valuer all questions of methodology and that by clause 13.2(c) the parties indicated their intention to rely on the skill and judgment of the Valuer and be bound by his decision except in the case of manifest error. The cross-defendant further submits that clause 13.1(b) contemplates the valuation being conducted by reference to the actual past accounts that exist in fact, and that clause 13 contemplates the Valuer taking the accounts as he finds them (having regard to cll 9.2(a) and 9.2(b), s 129(1) of the Corporations Act 2001 (Cth) and cl 7.2 of the Unit Trust Deed). It submits the fact that clause 13.2(b) provides that the determination is to occur "within (1) month)" renders it highly unlikely the parties intended the determination to involve the extensive fact-finding inquiry contemplated by the cross-claimants.
6. The cross-defendant submits that clause 7.8 relates to the entirely tangential issue of decision making by the Unitholders. It draws attention to the words "the Trustee Company must not effect any decision…" and submits the clause imposes an obligation binding on the Trustee, the consequence of a breach being that the Trustee will be in breach of contract and the Unitholders may sue the Trustee for damages. The cross-defendant submits that the words "void and of no effect" cannot have the construction the cross-claimants attribute to them (having regard to the Company Law Review Act 1998 (Cth) and s 125 of the Corporations Act 2001 (Cth). It submits that clause 7.8 does not speak in terms of "transactions" but removes the legal consequences of any "decision" to enter into the transaction.
7. The cross-defendant further submits that the consequences of the cross-claimants' construction are nonsensical and provides examples as to why that is so. It also submits that there is an express provision in the Unit Trust Deed (cl 7.2) which enables the taking of an audit into the correctness of the Trust funds and that is the manner in which the parties chose to deal with any inaccuracies in the accounts.
8. In reply, the cross-claimants further submit that there is no express term that the Valuer can disregard clause 7.8 and such a term cannot be implied. They submit that the cross-defendant's assertion that the contract "signals a contractual intention to entrust to the Valuer all questions of methodology" implies the parties are precluded from challenging the methodology the Valuer selects, which is incorrect (Holt v Cox (1997) 23 ACSR 590). They submit that "past earnings" and "net asset values" must mean the true past earnings and true net asset values. They submit that clause 7.8 by its opening words prevails over every other provision in the Unitholders' Agreement and makes every decision "to effect", "effectuating" or "carrying into effect" a Major Policy Issue (which means a "transaction": T21.46) not approved by Unanimous Resolution "void and of no effect". They emphasise that the Valuer is entitled to make enquiries (cl 13(2)(d)(i)) and the parties are entitled to make submissions (cl 13.2(d)(ii)). They submit that this case is concerned with an invalid valuation which by definition is a nullity, whether it "contains" a "manifest error" or not. They submit that s 128 of the Corporations Act is not relevant to the valuation of units in a trust and the doctrine of corporate ultra vires is not relevant to the administration of trusts. They deny that the consequences of their construction are nonsensical. They submit that if nobody raises a clause 7.8 issue the Valuer would be entitled to assume it had been complied with but if an issue is raised the Valuer must recognise it as potentially relevant and make an honest professional judgment about whether it is, or could refer that question to the Court.
9. The cross-claimants also submit that the cross-defendant's contention that a Unitholder's only redress for false trust accounts is to seek an audit is inconsistent with the right of any beneficiary to invoke the jurisdiction of the Court at any time (Spellson v George (1987) 11 NSWLR 300); is inconsistent with clause 1.4 of the Unitholders' Agreement which gives contractual rights under that agreement priority over inconsistent provisions in the Unit Trust Deed; ignores that an auditor has no power to correct erroneous accounts; and has no plausibility when accounts are provided 12 months after the end of the year to which they relate, where demands for information have been ignored, and where it is unclear whether one Unitholder alone can require an audit.

Consideration

1. Clause 13 sets out a protocol which the Valuer is obliged to follow in determining the Fair Market Value of a Unit. The clause is set out above.
2. A number of features of the clause deal with the nature of the activity undertaken, the activity itself and the role to be played by the Valuer in the process.
3. But before the detail of the Valuer's role is considered the circumstances in which that expertise is required needs to be considered.
4. Here the process was triggered by the service by the first defendant (cross-claimant) upon the plaintiff (cross-defendant) of a sale notice pursuant to clause 10.4. Pursuant to clause 10.4(e) the Trustee must obtain a valuation of the Fair Market Value of the Sale Units in accordance with clause 13. Certain events follow that determination not presently relevant.
5. First the Valuer is to determine the value for a Unit at the relevant date "on a going concern basis" (cl 13.1). As is clear from the provisions of clause 13 a certain methodology and certain material are to be considered.
6. But in the end it is entirely a matter for the Valuer to determine the method of valuation he or she considers "reasonably appropriate" (cl 13.2(a)) with the qualification that generally accepted valuation principles are to be applied (cl 13.2(a)(iii)).
7. The Trustee must act within a tight timeframe (cl 13.2(b)) and the Valuer is to act as an expert not as an arbitrator (cl 13.2(c)).
8. Apart from a reference to the need for the valuer to consider "past accounts and current management figures and forecasts" (cl 31.1(b)) and "past and prospective earnings and underlying net asset values" (cl 13.1(c)), the Unitholders are obliged to provide the valuer with any relevant "books and records" of any Unitholder required (cl 13.2(d)).
9. Whilst it is agreed guidance as to some matters is provided a good deal of latitude is given to the Valuer in performing the task.
10. What is clear is that the accountant is to rely on historical financial records, which is unsurprising, rather than to, for example, conduct an audit or an independent investigation of the underlying financial records. This again is unsurprising given the timeframe allocated to the Valuer.
11. In addition there is an obligation on the Board of the Trustee to maintain financial records of the Trustee Company "in accordance with the Accounting Standards and all applicable laws" (cl 9.2(a)), which fortifies the reason why the Valuer is directed to have recourse to the items referred to in clause 13.1(b).
12. Clause 7 on the other hand regulates in some detail decision making by the Unitholders and shareholders.
13. Clause 7.8 deals with decision making on what is defined as "Major Policy Issues". All 21 "Major Policy Issues" are set out in schedule 3 of the Unitholders' Agreement. They deal comprehensively with all manner of the rights and obligations of Unitholders that may affect in broad terms their respective financial interests, requiring nothing less than a "Unanimous Resolution" to do so otherwise the "decision" is void and of no effect. This is the guarantee that important decisions will only be the subject of unanimity.
14. But clause 7.8 speaks of effecting "any decision". The word "effect" means in its natural and ordinary meaning some change which is a result or consequence of an action. Therefore this provision in my view is clearly and unambiguously directed to rendering void or of no effect a decision making process or the bringing into effect some decision which has not been the subject of unanimous decision of the Unitholders. It has nothing to do in my view with any valuation process conducted by a third party valuer at the direction of the Trustee pursuant to clause 13.
15. Clause 7.8 does not refer to any transaction which follows an unconstitutional decision. That falls to be the subject either of an action for breach of agreement or breach of trust. The clause only renders void the decision not the transaction that follows it. One very obvious reason why this is so is that the agreement cannot affect the rights of third parties who treat with the Trustee for example at arm's length.
16. My view is that clause 13, if invoked, is intended expressly to place the Valuer in a position where they have by design very little room to move. They are given a dedicated path and material to use on the way. They are in effect directed to make certain assumptions about the financial status of the Trustee.
17. It is clear from the above that clause 7.8 and clause 13 are independent and discrete provisions textually divorced from each other and dealing with entirely different aspects of trust administration. One, clause 7.8, is directed to ensuring unanimous decision making on agreed matters that require it, whereas the other, clause 13.1, deals with a mechanism where for whatever purpose a Fair Market Value is required to be determined.
18. It would be strange if the Unitholders were intending by clause 13 to be handing over to third party valuer an obligation to interfere in the business of the trust by, for example, making rulings on values of transactions, especially those where the financial interests of one of the Unitholders could be negatively affected. There is nothing in the language of either clause 7.8 or clause 13 to suggest that outcome, nor could it be in my view reasonably implicit. While each Unitholder may make written submissions to the Valuer (cl 13.2(d)(ii), those submissions are to be made "in respect of the matter being determined" which is the Fair Market Value for a Relevant Unit not the accuracy of the underlying accounting records.
19. The Unitholders' Agreement cannot in my view be objectively construed to provide a mechanism by which decisions on Major Policy Issues are not finally determined by the unanimous decisions of the Unitholders but by a stranger after he or she has made corrections to the books and records of the Trust, whose decision, aside from in the case of manifest error, will be final and binding on the Unitholders (cl 13.2(c)).
20. For those reasons I would answer the questions as follows: 1. In my view clause 7.8 is a contractual embargo upon the Trustee giving effect to decisions in respect of Major Policy Issues in the absence of a Unanimous Resolution. The clause in my view has no role to play in the Trustee Company Accountant (Valuer) determining the Fair Market Value of a Unit under clause 13. In other words the Valuer does not need to be satisfied or take into account whether there is evidence that clause 7.8 has been complied with, with respect to any Major Policy Issue. Nor is the Valuer's satisfaction as to such matters a condition to the validity of any determination under clause 13. 2. No.
21. I would invite the parties to bring in short minutes of order to reflect these reasons. If need be and if it cannot be agreed I will determine the question of costs.

Amendments 28 October 2020 - coversheet - removed publication restriction notation DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 October 2020