Supreme Court New South Wales Medium Neutral Citation: Shazbot Pty Ltd v Warner Capital Pty Ltd (No 3) [2023] NSWSC 527 Hearing dates: 27, 28 February; 1, 2, 22 March 2023 Date of orders: 18 May 2023 Decision date: 18 May 2023 Jurisdiction: Equity Before: Parker J Decision: See [161] Catchwords: EQUITY – remedies – partnership accounts – insolvency practice – value of uncompleted administrations – value of website Legislation Cited: Corporations Act 2001 (Cth), s 595 Cases Cited: Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588 Harmer v Commissioner of Taxation (1991) 173 CLR 264 Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 Milevski v Paltos [2022] NSWSC 261 Shazbot Pty Ltd v Warner Capital Pty Ltd [2018] NSWSC 1645 Shazbot Pty Ltd v Warner Capital Pty Ltd (No 2) [2019] NSWSC 1114 Warner Capital Pty Ltd v Shazbot Pty Ltd [2022] NSWCA 121 Texts Cited: Nil Category: Principal judgment Parties: Shazbot Pty Limited (First Plaintiff) Steven Barry Kugel (Second Plaintiff) Warner Capital Pty Limited (First Defendant) Anthony John Warner (Second Defendant) Clarence Street Partners Pty Limited (Third Defendant) Debtfree Pty Limited (Fourth Defendant) Representation: Counsel: E Finnane (Plaintiffs) C Wood SC & NE Furlan (Defendants) Solicitor: Uther Webster & Evans (First and Second Plaintiff) Emerson Lewis (First, Second, Third and Fourth Defendant) File Number(s): 2015/119465 Publication restriction: Nil JUDGMENT 1. These are complex partnership proceedings in which I delivered my principal judgment in October 2018: Shazbot Pty Ltd v Warner Capital Pty Ltd [2018] NSWSC 1645. In August 2019, following further debate between the parties, I made orders giving effect to my decision, including orders for the taking of partnership accounts: Shazbot Pty Ltd v Warner Capital Pty Ltd (No 2) [2019] NSWSC 1114. An appeal against those orders was unsuccessful, although there was a minor variation to their wording: Warner Capital Pty Ltd v Shazbot Pty Ltd [2022] NSWCA 121. This judgment resolves outstanding issues in the account so that the amount due under the orders can be determined. 2. The present judgment assumes familiarity with the earlier judgments in these proceedings. References to paragraphs in my 2018 and 2019 judgments are denoted "J1" and "J2" respectively. References to paragraphs in the Court of Appeal judgment are denoted "CA". 3. The proceedings concerned an insolvency practice which traded under the name "CRS Warner Kugel" or "CWK". The practice was established in 2007 by the second defendant, Mr Warner, and the second plaintiff, Mr Kugel. Both Mr Warner and Mr Kugel were (and are) insolvency practitioners. 4. Mr Warner and Mr Kugel established a unit trust structure for the conduct of the practice. The trustee company was a company named CRS Warner Kugel Pty Limited ("CWK Pty Ltd"). The company employed the staff who worked in the practice. It also held the lease of the practice office and other contracts for goods and services supplied to the practice. Fees for the administrations undertaken by Mr Warner and Mr Kugel were also invoiced by the company. 5. At a later point, Mr Warner and Mr Kugel established another company, Debtfree Pty Limited ("Debtfree"). This company was established as a vehicle for undertaking Part IX and Part X administrations under the Bankruptcy Act 1966 (Cth). The corporate insolvency work (voluntary administrations and liquidations) and the personal bankruptcies remained with CWK. 6. In September 2014, Mr Warner decided to bring his business relationship with Mr Kugel to an end and continue an insolvency practice on his own. Mr Warner presented this to Mr Kugel as a fait accompli and Mr Kugel did not contest it. There was a division of the work and of the assets of the practice. A handful of liquidations were retained by Mr Kugel, but all of the other administrations, corporate and personal, were retained by Mr Warner. Mr Warner was left with ownership of CWK (which he renamed "Clarence Street Partners Pty Limited") and Debtfree. The employees of the firm continued to work for Mr Warner is his new practice. 7. In my 2018 judgment, I found that, despite the practice having purportedly been conducted by CWK Pty Ltd, it had in law been a partnership between Mr Warner and Mr Kugel personally. The company had been the mere nominee of the partners for the purpose of holding practice assets and liabilities. The same was so for Debtfree, to the extent of its Part X administration work (the Part IX agreements were – permissibly – administered by Debtfree in its corporate capacity, and thus fell outside the partnership: see J1 [209]). 8. In my 2018 judgment, I also found that the parties had never reached a final agreement on the valuation of the assets and liabilities of the business which they had taken over. Accordingly, there remained an obligation on Mr Kugel and Mr Warner and their associated corporate entities to account to the partnership for the partnership assets and liabilities which they received from the informal division. There now remain two issues which require determination so that the account can be finalised. Value of administrations taken over by Mr Warner 1. A major focus of the hearing which resulted in the 2018 judgment was the value to Mr Warner of the administrations which he took over. Work-in-progress ("WIP") had accrued up until September 2014, some of which was collectable from monies then held in the relevant administrations, or might have been collectable from future recoveries. There was also the potential for earning additional fees for further work done on those administrations (although there would also be costs in completing those administrations which were without funds). 2. I found that the WIP as at the date of dissolution was an asset of the partnership and had not been taken into account in the informal division of assets between the parties. Accordingly, it had to be included in the partnership account. Any value (or cost) attributable to completing the administrations also needed to be taken into account. 3. The relevant accounting orders, as modified by the Court of Appeal, were: 6. Order that: (a) [Mr Warner and CWK] account for the income collected by either of them from 22 September 2014 onwards (and the income not collected but collectable as at the date of the account) which formed part of the company liquidation, company administration or bankruptcy trustee work in progress of the Partnership Firm as at 22 September 2014; (b) [Mr Warner and Debtfree] account for the income collected by either of them from 22 September 2014 onwards (and the income not collected but collectable as at date of the account) which formed part of the Part X agreement work in progress of the Partnership Firm as at 22 September 2014; …. 7. Order that: … (b) [Mr Warner and CWK] account for the capital value of the assets of the Partnership Firm received by them after 22 September 2014, less the amount of the debts or liabilities of the Partnership Firm assumed by either of them; (c) The account in (b) is to include the capital value (if any) of the goodwill as at 22 September 2014 associated with the future conduct of the insolvency administrations being conducted by the partners as at that date (but excluding the collection of work in progress of the Partnership Firm as at 22 September 2014). 1. The form of these orders reflected the distinction between the value of work in progress as at September 2014, on the one hand, and the value (positive or negative) of completing the administrations, on the other. Orders 6(a) and 6(b) dealt with income collected from partnership WIP. Orders 7(b) and 7(c) were concerned with the potential additional value (or cost) of continuing the administrations thereafter. I made separate orders because of my perception that the tax treatment of these two items might be different (see J2 [36]-[37]). Whether or not that ultimately proves to be the case, the form of those orders was not challenged in the Court of Appeal. 2. For the purposes of the accounting proceedings, the administrations taken over by Mr Warner were collectively referred to as the "book". There were 461 of them. In round terms, the WIP on the book as at the dissolution of the partnership in September 2014 was $4.2 million. Of that, Mr Warner has collected $1.56 million (see below). Mr Warner has also accrued a further $5.8 million on the book for work done after September 2014, of which he has collected $3.4 million. 3. The amount due under orders 6(a) and 6(b) was agreed at about $1.56 million (subject to a small further amount to cover later recoveries, and not including interest). The focus of the parties' debate was on order 7(c). 4. Order 7(c) described the value of the book as "goodwill". It was however common ground that I am not concerned with the goodwill of the practice in the technical sense. Rather, I am determining the value of the book (after accounting for WIP) as an asset or liability. The question is what premium a hypothetical purchaser would have paid to the partnership, or what discount that purchaser would have required to be paid by the partnership, to proceed with the purchase, assuming that the purchaser would be obliged to account back for any partnership WIP later collected: see CA [164]-[167]. 5. Throughout the accounting proceedings (and indeed going back to the 2018 hearing), it was contended on behalf of Mr Kugel that the book would have attracted a substantial premium. On one method of calculation, that premium was put at between $260,000 and $360,000; on another it was put at $400,000. On Mr Warner's behalf the opposite position was taken. Disposing of the book would, it was said, have required a "discount" payment to the purchaser of between $1.87 million and $1.94 million. Extensive expert evidence was filed on behalf of both parties in support of their respective positions. 6. But on the first and second days of the hearing, a question mark emerged over whether a purchaser could properly have paid a sum of money in consideration of the acquisition of the book, or required payment of such a sum, at all. I will describe the problem in more detail in a moment. For present purposes it is enough to say that there are professional obligations on insolvency practitioners which prevent them from paying or accepting inducements to accept appointments. 7. The discovery of this issue led to a debate in court and a reconsideration by the parties of their positions. Eventually, Mr Kugel abandoned his claim to a premium. Mr Warner, however, maintained his claim to a discount payment. 8. One thing that counsel for both parties recognised was that Mr Warner and Mr Kugel, as partners of CWK, derived their rights to conduct the book of administrations, and to charge fees for doing so, from holding statutory offices such as liquidator and trustee in bankruptcy. These statutory offices could not just be assigned to an incoming purchaser by agreement like other partnership assets and liabilities. The replacement of Mr Warner and Mr Kugel as existing statutory officeholders was a matter for the courts having jurisdiction over the insolvencies (corporate or personal). The most that Mr Warner and Mr Kugel as vendors could have done as part of the sale of the book would have been to undertake to make an application to the relevant court to have the purchaser appointed in their place, or to support such an application if made by the purchaser. Later references in this judgment to sale and purchase of the book should be understood in this sense. 9. Counsel for Mr Warner accepted that it would not have been permissible for the purchaser to insist on a direct payment of a discount sum expressly as consideration for taking over the book. But counsel submitted that an economically equivalent outcome could be achieved by an alternative structuring of the transaction. The partnership as vendor would make an advance payment to the purchaser (or a third party) on account of the purchaser's estimated future remuneration for the administrations. To the extent that the purchaser's actual remuneration (to the extent approved by the creditors or the court) exceeded available administration funds (after accounting for partnership WIP collected), the advance payment would make up the difference. 10. Counsel accepted that the effect of such an arrangement would have been for the monies paid on account to have been held on trust. The beneficiaries under the trust would have been the purchaser, to the extent of the approved and otherwise unrecoverable fees, and the partnership as vendor, to the extent of any surplus monies. Trusts where monies are held by a stakeholder until their ownership is determined are well known: see for example Harmer v Commissioner of Taxation (1991) 173 CLR 264. 11. The arrangement postulated by counsel was complex and would undoubtedly have required careful and detailed drafting of a written agreement between the partnership and the purchaser. Counsel did not however propound the terms of the postulated agreement beyond the general description I have given. 12. In the course of argument, counsel did clarify the nature of the trust arrangement on some points. The beneficial interest was not held by the creditors of the insolvent estate nor by the statutory officeholder. It was personal to the purchaser. Thus, if the purchaser was in turn replaced by a new statutory officeholder, the advance payment would not be available to that new administrator. Furthermore, counsel accepted that each administration in the book was separate and available funds in one administration could not be used to meet a remuneration shortfall in another. But counsel postulated that under the terms of the purchase, the advance payment would be available to meet any shortfall in any administration. Thus, for practical purposes, there would be nothing left over for the partnership as vendor. 13. It was common ground that the onus lies on the defendants, who are contending that the book was effectively a liability for the purposes of order 7(c), to prove that it had a negative value. Two questions arise. The first is whether the arrangement postulated by counsel for the defendants would have fallen foul of the anti-inducement provisions which applied to insolvency practitioners at the time. If not, the second question is whether the evidence upon which the defendants relied establishes that it would have been necessary to enter into such an arrangement to dispose of the book, and for that purpose to make an advance payment of $1.94 million or some lesser sum. Effect of anti-inducement provisions 1. The parties referred me to two publications which, it was common ground, contained anti-inducement provisions applicable to insolvency practitioners at the relevant time. There was also an anti-inducement provision in s 595 of the Corporations Act 2001 (Cth), which applied to company liquidators and administrators, but it is unnecessary to consider the terms of that enactment for present purposes. 2. The first publication was the Standard published by the Accounting Professional and Ethical Standards Board ("APES") and known as "APES 330 Insolvency Services". There are two relevant versions of this publication. The first was issued in 2011. The second was issued in September 2014 and went into effect in January 2015. As the hypothetical purchase might have taken several months to arrange, either provision might have proved applicable. But in any event, there is no difference between the wording of them. 3. For convenience, I will refer to the later version, in force from 1 January 2015. The relevant prohibition is set out at [3.20]-[3.21]. These paragraphs state: 3.20 A Member in Public Practice shall not provide any Inducement to any Entity to secure an Appointment for the Member or to secure or prevent the Appointment or nomination of another person. 3.21 A Member in Public Practice shall not accept an Appointment or perform an Administration that involves: (a) referral or other commissions, or monetary or non-monetary benefits; (b) spotter's fees; (c) understandings or requirements that work in the Administration will be given to a referrer; or (d) any other such arrangement that restrict the proper exercise of the Member's judgement and duties. 1. For the purposes of the Standard, the term "Inducement" is relevantly defined at [2]: Inducement means any benefit, whether monetary or not, given by a Member in Public Practice, the Member's Firm, Partners or an employee, or agent, consultant, or contractor of the Member, to an Entity which may in the view of a reasonable person influence that Entity's decision to refer, or to make, an Appointment. 1. The Standard also provides at [1.9]: In applying the requirements outlined in APES 330, Members in Public Practice should be guided not merely by the words but also by spirit of the Standard and the Code. 1. The second publication was the Australian Restructuring Insolvency & Turnaround Association ("ARITA") Code of Professional Practice for Insolvency Practitioners, third edition, dated 1 January 2014 ("the Code"). This is a distinct document from "the Code" referred to in the extract from the Standard above. 2. Reference was made to [6.6], entitled "referrals from other professionals and creditors": … A Practitioner must not accept any referral that contains, or is conditional upon: the giving or receiving of referral commissions, inducements or benefits; the giving or receiving of spotter's fees; the giving or receiving of recurring commissions; understandings or requirements that work in the Administration will be given to the referrer; or any other such arrangements that restrict the proper exercise of the Practitioner's judgment and duties. … 1. Reference was also made to [11.5], entitled "relationship marketing – inducements": Members must not provide any inducements to any person or entity: with a view to securing the person's own appointment or nomination; or to securing or preventing the appointment or nomination of some other person. This prohibition extends to all forms of formal insolvency appointment, both corporate and personal. In this context, an inducement is any benefit, whether monetary or not, given by a Member, or an employee, agent, consultant or contractor of the Member, to a third party which may, in the view of a reasonable person, influence that person's decision to refer, make, or prevent a formal insolvency appointment. … 1. It is convenient to begin with clause 3.20 of the Standard. I do not think that the clause would have applied to the arrangement postulated by counsel for the defendants between the partnership as vendor and the hypothetical purchaser of the book. It deals with the provision of an "Inducement". But under the postulated arrangement, the purchaser was to receive the benefit of a payment, rather than make one. Furthermore, an "Inducement" is defined in terms of a payment to an "Entity" and is linked to that Entity's decision to refer, or make, an insolvency appointment. In the present case, the relevant appointments would have been made by the relevant insolvency courts, which would not have been receiving any payment, nor would they have been influenced by the making of such a payment to the purchaser. For similar reasons, I do not think that the relevant provisions of the Code ([6.5] and [11.5]) would have applied either. 2. This leaves, however, clause 3.21 of the Standard. That clause would have prohibited the purchaser from accepting any appointment, or performing any administration, to which it applied. The prohibition did not require receipt of an Inducement, but only of "referral or other commissions, or monetary or non-monetary benefits". While the postulated advance payment probably would not have answered the description of a "referral or other commission", it would apparently have been a "monetary or non-monetary benefit" linked to accepting an appointment. 3. It might be asked whether an advance payment of remuneration approved by the court or by the creditors for services rendered should be seen as a "benefit". But in the end, I do not think that this matters. In the light of the evidence (see [67] below) that insolvency practitioners generally cannot expect to recover all of the fees which they charge, and therefore charge fees at higher rates to compensate, an arrangement which effectively involved underwriting the purchaser's fees would prima facie seem to be a "benefit". I do not think it is necessary to rely upon the provision about the "spirit" of the Standard to reach this conclusion. 4. Counsel for the plaintiffs pointed out that it is common for voluntary administrators, before accepting an appointment as such, to require a lump sum payment from the directors to cover their initial fees. Counsel submitted that, in principle, the postulated arrangement was no different. 5. There was, however, no evidence about how such payments to voluntary administrators are structured in practice. Whether such a payment is necessarily, or typically, an advance to the administrator from the directors personally or from the company was not debated. On any view, however, the ultimate liability for the fees charged by the administrator falls on the company, so that even if the payment is made by the directors personally, they must be subrogated to the administrator's rights against the company. It is far from clear to me that this is the same as the arrangement postulated by counsel in the present case. 6. In the end, having regard to the other conclusions I have reached, it is not necessary to come to a final decision on this question. Insolvency practitioners' evidence 1. Mr Hird: The centrepiece of the defendants' case on the value of the book was the expert report of Mr Michael Hird, prepared in December 2020. Mr Hird is a chartered accountant and registered liquidator. He has over twenty-five years' experience as an insolvency practitioner. 2. Mr Hird was asked what a purchaser would have paid (or required to have been paid) to acquire the book, on the basis that the purchaser would be obliged to account back for partnership WIP subsequently collected. Mr Hird's conclusion was that a payment of $1.94 million would be required. His reasoning, in summary, was as follows. 3. Mr Hird's first point was that the market for disposing of the book was a "limited" one. Mr Hird mentioned various factors to support this. In particular, there was a large number of administrations and a limited range of purchasers. Mr Hird also indicated that the sale of such a book was "not commonplace". In fact, Mr Hird did not refer to any case in which a premium/discount had been paid for the transfer of a book of administrations. 4. In these circumstances, Mr Hird undertook a calculation of the valuation which a hypothetical purchaser might be expected to have attributed to the book. Mr Hird stated that, in his opinion, his method of calculation addressed the "commercial realities" of purchasing such a book. 5. Mr Hird's calculation involved several steps. It started with identifying the cash at bank as at September 2014 and deducting the amount of the vendor's WIP covered by that cash. The surplus figure represented the minimum amount available to an incoming purchaser. 6. The next step involved making an estimate of the further recoveries which might be made in the administrations on behalf of creditors after September 2014. Mr Hird did not himself undertake any analysis of the book for this purpose. He relied on recovery estimates provided by Mr Warner. No attack was made on those estimates, nor were any alternative estimates offered. But they were, of course, only estimates. 7. To reflect the uncertainty associated with Mr Warner's recovery estimates, Mr Hird considered two different scenarios. One was the best case, in which the entire amount identified by Mr Warner was collected; Mr Hird adopted Mr Warner's figure and then applied a ten percent reduction as a "realisation charge". The worst case involved no recoveries being made. 8. The next step was to estimate the WIP which would be accrued by the purchaser in completing the administrations after September 2014. Mr Hird did so by classifying the administrations according to the level of progress they had reached as at September 2014, and applying a standardised cost to complete derived from experience in his own practice. His calculations were not contested. 9. Mr Hird's final step was to calculate how much of the purchaser's post-September 2014 WIP would be collectable. WIP could be collected from two potential sources: (1) any surplus cash as at September 2014; and (2) any future recoveries, but after any partnership WIP which had not already been paid had been accounted for. 10. From a collectability point of view, the administrations fell into three categories. The first category consisted of administrations where there was sufficient cash at bank, after accounting for partnership WIP, to meet the purchaser's future WIP. Such administrations were effectively risk-free from the purchaser's point of view. In administrations in the second and third categories, collection depended upon future recoveries. In the second category, on the best case for future recoveries, the purchaser's WIP would be collected. In the third category, it would not. 11. Mr Hird then proceeded to his valuation (which involved considering both scenarios). He applied a 15% premium to the administrations in the first category. Thus, if the estimate for purchaser's WIP was $10,000, a premium of $1,500 would be allowed by the purchaser. As collection did not depend upon future recoveries, this component of the valuation was the same in both scenarios. 12. In the other categories of administration, collection did depend on future recoveries. On the best case, where some collection would be possible in the second category of administrations, Mr Hird applied a premium of 10% of the collectable amount. He applied an 85% discount to non-collectable amounts in the third category. On the worst case, Mr Hird applied a 60% discount across both of those categories. 13. Mr Hird's report contained a table setting out the considerations which had led him to select these premium/discount percentages for the different categories of administration under the different scenarios. The considerations for the first category were identified as: Purchaser needs to maintain a reasonable profit margin from future fees collected. Any payment to the vendor causes the profit margin to decline. Other transaction costs comprise of 4.2% of purchaser's estimated WIP. Minimal risk of non-payment of future fees. A 15% premium is considered reasonable. For administrations in the third category, on the best case, they were: Future fees in this category are most likely to be written off in full given there is no cash at bank and no identified Recoveries. Unidentified sources of recovery may eventuate occasionally, but this is considered unlikely given he average age of the file. Any such recoveries are likely to be immaterial. In considering the book of administrations as a single book a purchaser may be prepared to forego part of their profit margin (ie discount their hourly rates) to secure the book. An 85% discount is considered reasonable. For administrations in the same category under the worst case, the identified considerations were (emphasis reflects changes from the best case): Future fees in this category include fees incurred in pursuing the identified Recoveries forecast to be 100% unsuccessful. Future fees in this category may be collected if the identified recoveries are in fact successful or any unidentified sources of recoveries eventuate. A purchaser may be able to recover a greater portion of these fees in this category and a lower discount is warranted. In considering the book of administrations as a single book a purchaser may be prepared to forego part of their profit margin (i.e. discount their hourly rates) to secure the book. A 60% discount is considered reasonable. 1. Adding up all of the premiums and discounts, both on the worst case and best case scenarios, produced an overall figure. Mr Hird also applied an adjustment for "unrecoverable disbursements". The total figure on the best case was a discount payment of $1.82 million. On the worst case, the discount payment was $2.35 million. Mr Hird's figure of $1.94 million represented a calculated mid-point between the best and worst case. 2. A year later, in December 2021, Mr Hird prepared a second report which responded to reports which had been served by the plaintiffs' experts in the meantime. 3. One of the points raised by the plaintiffs' experts concerned the role of actual costs in the calculation. Mr Hird's figure was calculated by reference to the purchasers' projected billings. The plaintiffs' experts made the point that billings involve a substantial mark-up on actual labour costs. 4. Mr Hird noted that costs had not been material to the analysis in his original report but went on to make some comments. He stated that in insolvency practice, the calculation of hourly rates charged by a practice is often based on a "rule of thumb". Specifically, the charge-out rate is made up of a certain share representing direct labour, another representing overheads, and a third representing the targeted profit margin. The two rules of thumb to which he referred were 33%/33%/33% ("the one-third rule") and 40%/40%/20% ("the forty-forty-twenty rule"). It seems that Mr Hird regarded the one-third rule as more prevalent in the insolvency sector. 5. Mr Hird then suggested that the classification of the book as an asset or a liability would have depended upon whether the purchaser's expected WIP would be more or less than the purchaser's expected costs. He noted that on his best case scenario, 43% of the purchaser's WIP would still be uncollectable. This was more than the two-thirds of the WIP which represented the purchaser's expected costs under the one-third rule of thumb. Thus, Mr Hird suggested, even on his best case, the book would have been unprofitable. 6. Mr Hird then devoted some time to addressing the estimates by the plaintiffs' experts of the costs of completing the work (which differed from each other). Because of the way the argument has been presented, it is not necessary to go into this aspect of the report. Mr Hird reaffirmed the approach which he had taken, noting that he had "considered the commercial realities". By way of explanation, he added: I confirm that the sale of an insolvency fee parcel to a third party is rare, and an element of judgment has been applied in selecting the premium and discount (payments to and from the vendor). I believe that my reasons for selecting the rates I did as set out in my Initial Report in Section 9 specifically and in my extensive analysis of the book of administrations generally would be broadly understood and accepted within the insolvency industry. There is to my knowledge no comparable publicly available data in respect of transactions of this nature. Notwithstanding, I have set out the range of possibilities, should an alternate position be considered more tenable 1. Mr Hird ended by reaffirming the figure of $1.940 million, which he had reached in his first report, as the sum which a purchaser would require to pay to take on the book. 2. Ms McCallum: The defendants also served reports from Ms Suelen McCallum, who is another chartered accountant and experienced insolvency practitioner. Her first report was prepared in December 2020. 3. Ms McCallum adopted a somewhat different method from that adopted by Mr Hird. Her approach was based on fee recoveries and deducting the costs to complete. It worked as follows. 4. Ms McCallum first noted that the average rate of profit of the partnership practice in the four years before dissolution had been 24.58% of fee revenue. This was the profit after allowing for the notional payment of salaries to each of the partners. Ms McCallum stated that in the industry, a profit of 20% on fees collected was "acceptable and normal". But she considered that from the point of view of a purchaser, a 35% profit margin would be required. 5. Ms McCallum then adopted a figure for estimated fee recovery of $1.829 million (calculated, I assume, in the same way as Mr Hird had calculated his fee recoveries, or in a similar way). Using the 24.58% profit margin, this yielded costs of 75.42% of the fees rendered, totalling $3.078 million. The result was a deficit of $1.249 million. 6. On Ms McCallum's analysis, the purchaser would first have required a 35% gross margin on fees recovered, which would have been $618,480. Adding this amount to the cost deficit produced a figure of $1.868 million, which was the amount which Ms McCallum considered a purchaser would have required to have been paid to take on the book. 7. Mr Crouch: A few days before the hearing was due to begin, the defendants filed an affidavit from a new witness, Nicholas James David Crouch. Mr Crouch is an insolvency practitioner who has almost twenty years of experience. He gave evidence of being asked in 2015 to take over a book of personal bankruptcy administrations from a practitioner who no longer wished to continue to undertake such administrations. 8. Mr Crouch described how he went through a process of "cherry picking". There were 300 administrations in total. Mr Crouch's enquiries indicated that 270 of them had no funds; he rejected those immediately. He then reviewed the remaining thirty in more detail for the purposes of determining how likely it was that those administrations could be completed profitably. Ultimately, he took on nineteen of those thirty administrations. 9. Mr Crouch did not pay to take on the nineteen administrations he selected. He also seems to have reached an arrangement with the retiring practitioner that the retiring practitioner's WIP would be subordinated, so that Mr Crouch would be under no obligation to account for that WIP until he had collected his own. Plaintiffs' submissions 1. Counsel for the plaintiffs emphasised evidence given by Mr Hird in cross-examination about certain basic features of the conduct of an insolvency practice, which was consistent with evidence given by other witnesses in the proceedings. Mr Hird accepted that practitioners can never expect to convert all of the WIP which they raise on their book of administrations into fees which can be collected. A shortfall is normal and inevitable. In fact, it is reflected in the generally higher fees which practitioners in insolvency charge: in effect, the fee rates charged contain an inbuilt subsidy for the administrations which are unfunded, and which have to be completed even though there will be no return. 2. Mr Hird also accepted that, unlike other accounting practices, the work of insolvency practices does not involve repeat business from the "client" who suffers insolvency. But the flow of some of the work may be influenced by lawyers and other provisional advisors. This means that taking on administrations, even if they may not directly produce a great deal of profit themselves, can give rise to contacts and exposure which may be useful in obtaining later work. 3. Counsel for the plaintiffs extensively criticised Mr Hird's reasoning. Four main points emerged. 4. First, counsel attacked Mr Hird's "worst case" scenario of no recoveries. Counsel suggested that not only was it contrary to Mr Hird's instructions, it was also completely unrealistic to suppose that none of the administrations would generate any recoveries whatever. Adopting this scenario as one end of the range would, the suggestion appeared to be, artificially reduce the "central estimate" reported by Mr Hird. 5. Counsel also suggested that this was unrealistic by reference to what had in fact occurred. In fact, Mr Warner had collected $3.4 million in fees and recoverable disbursements. Counsel submitted that, in accordance with the principles stated in Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281, it was legitimate for the Court to use hindsight in determining the value of the book as at September 2014. 6. Next, counsel attacked the figures selected by Mr Hird for the premiums and discounts to be applied by the purchaser for the purpose of placing a value on the projected WIP recoveries by the purchaser. Counsel observed that Mr Hird, as he accepted, does not have valuation qualifications and is not a valuer. Counsel submitted that the selection of these percentages was quite arbitrary, and no justification had been offered to explain how they involved any expertise being brought to bear (Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588 at [39], [42]). 7. Counsel's third point concerned Mr Hird's comments in his second report about costs. Counsel made two points. First, the one-third rule (and indeed the forty-forty-twenty rule) could not be used to deduce costs. The purpose of these rules of thumb was to set fees. They were management tools. It was not legitimate to use them as a basis for determining what level of costs would in fact be incurred. 8. Counsel's second point was that if a rule of thumb was to be used as a guide to actual costs, it should be applied to expected revenue. Mr Hird had applied the rule to expected WIP, which was unrealistic because WIP would not necessarily be collected. Counsel produced some recalculations of Mr Hird's costs figure, substituting the projected WIP collections ($2.98 million) for the projected WIP accruals ($5.23 million) used by Mr Hird. The result was to reduce the projected costs to the point that completion of the book would have resulted in a profit rather than a loss, which, on Mr Hird's logic (see [56] above) would result in it being an asset rather than a liability. 9. Finally, counsel attacked the additional costs included by Mr Hird in his calculation. Counsel submitted, by reference to evidence Mr Hird gave in cross-examination, that costs such as transaction costs, unrecoverable disbursements, storage and destruction were usual overheads and it involved double counting to charge them twice. Adjusting for these amounts, counsel's calculations suggested that the projected purchaser's revenue resulted in an even larger profit. 10. Counsel was also critical of Ms McCallum's analysis. There were two main points. 11. First, counsel criticised Ms McCallum's understanding of the relevant concepts. He suggested that she had confused profitability measured as a percentage of sales with the rate of return on the funds expended on making the purchase of a business. 12. Secondly, counsel criticised Ms McCallum's calculations of the costs associated with the projected purchaser's revenue. In working out labour costs, Ms McCallum had based her calculations on charge out rates rather than the actual salaries and on-costs. Again, counsel submitted that when this was corrected to reflect projected revenue, rather than projected WIP, the loss calculated by Ms McCallum turned into a profit. Ms McCallum had done the calculation by taking a percentage of the WIP. It was therefore linked to charge out rates, rather than actual labour cost. Defendants' submissions 1. Counsel for the defendants urged me to accept the conclusions of Mr Hird and Ms McCallum but relied principally on Mr Hird. Counsel noted the criticism of Mr Hird's discount factors as unsupported by any expertise but suggested that they could be explained by the one-third rule. Thus, as I understood it, counsel suggested that the fifteen percent premium allowed for monies to be collected, represented about half of the one third of those monies attributable to the profit share. This, however, was not an explanation which had been given by Mr Hird, at least not expressly in his report. 2. Counsel also emphasised the effect on the incoming practitioner of having to account for the whole of the September 2014 WIP before the incoming practitioner could recover his own WIP. The result was that the incoming practitioner would be working, in the first instance, to pay off the September 2014 WIP, before recovering WIP for the work that he had himself done. As I understand counsel's point, this justified a generally lower level of payment for the privilege of taking over the book. Conclusion 1. An overarching feature of the defendants' case is the lack of evidence of actual market transactions. Neither Mr Hird nor Ms McCallum based their calculations on any evidence of any prior sales. Both of them undertook a theoretical analysis based on a perception of what a typical purchaser would require to take on the book. 2. In Milevski v Paltos [2022] NSWSC 261, I described an approach of the type undertaken by Mr Hird and Ms McCallum as a "desktop analysis" and pointed out its limitations. I remain of the view that I expressed in that case (in particular at [150]-[155]). Such an analysis can only be determinative where the court can be satisfied that the approach attributed to purchasers is sufficiently clear, predictable, and dominant that it will drive prices actually paid in the market. It is very much a second-best form of evidence, and, even if it is plausible, the court is not at all obliged to accept that it reflects reality, no matter how distinguished the practitioners who have provided reports based on the approach may be. 3. In the present case, I think it is telling that the inducement issue which would have been created by a sale of the book did not come to the parties' attention until well after Mr Hird's and Ms McCallum's evidence had been filed (and responded to by the plaintiffs' witnesses). Reading between the lines, it seems that the issue only emerged because of the last-minute evidence from Mr Crouch. His was, in fact, the only evidence before the Court about an actual transfer of a group of administrations from one insolvency practitioner to another. It is even more telling that the transaction described by Mr Crouch did not involve him requiring a payment as a condition of taking on the book in question. Instead, he "cherry-picked" a small proportion of the administrations and negotiated a subordination of the outgoing practitioner's WIP on those administrations. 4. In these circumstances, I propose to start by considering the question from first principles. I will then return to the valuations provided by Mr Hird and Ms McCallum. 5. The evidence in this case shows, and it is common ground, that a typical insolvency practice involves undertaking a variety of administrations. Some of those will be unprofitable because they lack sufficient funds and sufficient prospects of recovery, and some will sustain fees. The idea is that the unavoidable costs of completing the unfunded administrations will be counterbalanced by the high profit margin which can be obtained on the fee-paying ones. 6. Prima facie, it seems to me inherently unlikely that an incoming practitioner would require a substantial discount payment for the privilege of taking on more work of a similar character. For an incoming practitioner with spare capacity, expanding the size of the practitioner's book would almost always be likely to create economies of scale. A practitioner who did not have spare capacity would presumably not be interested at all. 7. In these circumstances, it seems unlikely that a practitioner taking over a book of existing administrations would expect to recover all of the fees to be accrued on the administrations taken over. Common sense would suggest that a purchaser's concern would be to ensure that, among the book of administrations to be acquired, there will be enough fee-paying administrations to generate the revenue required to cover the additional costs of undertaking the administration of the book as a whole. 8. All of this is only reasoning from first principles. But it shows that there is a need to justify Mr Hird's approach of calculating an overall discount by applying percentage premiums or discounts to different categories of projected future WIP. 9. I am not sure that the submission by counsel for the plaintiffs about valuing the book by using hindsight, based on the monies in fact collected by Mr Warner, is sound. The Kizbeau case concerned the quantification of damages. It is true that, as counsel pointed out, the High Court did not limit the use of hindsight to such cases. But to my mind there is a major theoretical difficulty in applying that approach in the present case. 10. I am concerned with the value of the book as at the termination of the CWK partnership in September 2014. If the question was the value of a car owned by the partnership, the question would be purely one based on the then state of the car, and the then state of the market, as at that date. It could not depend upon whether the car in fact lasted longer or shorter than might have been expected by the purchaser. I cannot see in principle why the valuation of the book should be any different. 11. Counsel for the plaintiffs pointed to concessions made by Mr Hird in cross-examination that he was not a valuer and did not have valuation qualifications. Of itself that need not be fatal to accepting his approach. If Mr Hird had sufficient practical experience of transactions of the relevant type, he could legitimately have expressed an opinion. But he did not. 12. I agree with counsel's criticism of Mr Hird's percentage premiums and discounts. The considerations mentioned by Mr Hird (some of which are quoted at [51] above) do not provide any real objective basis for, or disclose any chain of expert reasoning to justify, the selection of those percentages. Even if I adopt the explanation offered by counsel (see [79] above) that the percentages are somehow tied up with the one-third rule of thumb (an explanation not adopted by Mr Hird, at least in his reports), that still does not really explain the selection of the particular figures. Generalised statements by Mr Hird about "commercial realities" ([42], [57] above) and his expectation of what other practitioners would accept ([51], [57] above) do not solve the problem. 13. All of this just makes the absence of evidence of the terms on which administrations were, at the time, transferred between practitioners in real life, even more striking. There is simply no evidence that incoming practitioners actually required payments to be made to them by outgoing practitioners to cover them against estimated future WIP they expected to accrue. Still less does the evidence establish that they calculated those payments by applying probability weightings to their estimated future WIP accruals according to the method used by Mr Hird. 14. I was left unclear about whether counsel for the defendants were actually inviting me to rely upon the "rule of thumb" costs calculations in Mr Hird's second report as an alternative valuation method which could be applied if the method used in his principal report were rejected. If so, I do not find it persuasive. I think the criticisms made of it are persuasive. More fundamentally, there was an equivalent lack of evidence that purchasers would have done their sums in this way. 15. Similar comments apply to Ms McCallum's evidence. I think it is a legitimate criticism that her labour costs were calculated by reference to WIP accrued rather than actual labour costs. Her profit margin of 35% is quite arbitrary and is not based on any market observations. 16. I have not forgotten counsel's point about the purchaser being obliged to account for partnership WIP in priority to collection of the purchaser's own WIP. Prima facie, it seems unattractive from the purchaser's point of view. There is also the case where Mr Crouch negotiated priority for his WIP in agreeing to take over some existing administrations. But the evidence does not show that such a priority arrangement was standard in the "market". 17. It seems to me that the point made by counsel really addresses a different issue. It might have been argued that, in formulating the order for the defendants to account for partnership WIP, it was to be accounted for on the basis that the purchaser's WIP would rank ahead of the partnership's, or perhaps that they should rank pari passu. But such an argument is not open at this point, having regard to the way in which the case has been conducted. 18. In the end, all of this only further calls attention to the evidentiary void in the defendants' case. Obviously, the transfer of administrations between practitioners must have happened many times. Yet there is no evidence that the trust arrangement propounded by counsel has ever been used, let alone that it was typical. In fact, there was no evidence from the defendants of the commercial terms on which such transfers of administrations between insolvency practitioners actually took place at the relevant time. The one piece of evidence on that subject came at the last moment, was not relied upon by the defendants' experts, and did not support the case counsel propounded. 19. The defendants ask me to accept that, faced with the need to give up the administrations, outgoing practitioners would pay $1.9 million for the privilege of having someone else take over those administrations. Of itself, that seems an extraordinarily large amount of money. But there is an even more fundamental difficulty. 20. As I have said, the replacement of insolvency officeholders by new insolvency practitioners is a matter for the insolvency courts. A practitioner who is unable or unwilling to continue cannot be forced to do so, and it becomes the court's responsibility to appoint a replacement. 21. In liquidations, there was a long-standing practice in insolvency courts whereby the names of official liquidators were recorded on a list maintained by the court, and where the court came to appoint a liquidator, and no liquidator had been nominated or the nominee was unsuitable, the next person on the list would be appointed by rotation. As at September 2014, the relevant practice in this Court was recorded in schedule 2 to the then current version of Practice Note SC Eq 4, introduced in 2011. That provided: The Registrar maintains a list of registered official liquidators who have consented in writing to accept all appointments as liquidator made by the Court. This list is sorted alphabetically by firm for liquidators located in metropolitan Sydney, and by individuals located in regional centres. The plaintiff in winding-up proceedings may nominate for appointment a registered official liquidator whose name appears in the Court's list. A nomination is effected by filing with the originating process a consent in Form 8 of the Rules, signed by the nominee, certifying that he or she is not aware of any conflict of interest or duty and making proper disclosure of fee rates, and serving it in accordance with Rule 5.5(3)(b). The Court appoints the plaintiff's nominee in the normal case, but is not obliged to do so. An obvious ground for the Court declining to appoint the plaintiff's nominee is that the Court considers there is an actual or potential conflict between the duties of a liquidator and the nominee's personal interest or some other duty (for example, a person who has acted as receiver and manager of the company for a secured creditor will almost never be appointed liquidator); Unless the consent in proper form of a registered official liquidator whose name appears in the Court's list is filed with the originating process for winding up, the Registry will select a liquidator by rotation from the Court's list. The plaintiff must obtain the consent in proper form of the liquidator selected by the Court, and file and serve that consent in accordance with Rule 5.5(3); If the liquidator declines to consent to the appointment (which the liquidator may do, after having given his or her consent to accept all court appointments, only on grounds such as conflict of interest), the plaintiff must: Nominate a registered official liquidator, whose name appears on the Court's list, by filing and serving the liquidator's consent in accordance with Rule 5.5(3); or approach the Registry for selection of another liquidator by rotation, and then file and serve that liquidator's consent in accordance with Rule 5.5(3). 1. The Practice Note in terms only referred to applications to appoint liquidators in winding-up proceedings, but the appointment of replacement liquidators, if necessary, by rotation from the list, would presumably have been approached in the same way. Although the current version of the Practice Note does not refer to a list of practitioners maintained by the Court, if the need arose the Court would presumably have to follow the same sort of procedure. Ultimately, there are two fundamental principles. One is that the Court in the exercise of its power (and duty) to replace a liquidator in appropriate circumstances cannot be constrained to appoint a particular replacement; still less can the power be defeated entirely if no replacement has been nominated. The second is that liquidators must be obliged to accept unfunded liquidations. If it were otherwise, the higher fees charged by liquidators compared with other accountancy professionals would not be justified. The same applies to other insolvency officeholders. 2. In these circumstances, it is difficult to see that practitioners disposing of their practice could ever face a practical compulsion to pay a sum on the scale claimed by the defendants in these proceedings. Why would such practitioners not, as a last resort, simply apply to the relevant insolvency court to be replaced as insolvency officeholders? If no-one was prepared to volunteer, a replacement, or replacements, would just have to be appointed by rotation, or in some other way, from among the remaining pool of officeholders receiving appointments from the court. 3. Seen in this light, it may be that the true measure of the value of the book was the cost of bringing applications to the relevant insolvency courts to appoint someone else to each of the administrations. But there is no evidence as to what those costs would have been, and they are likely to have been no more than a few tens of thousands of dollars, if that. The defendants' case was not put in that way. The case put by the defendants fails. Value of websites 1. The remaining relevant issue for the purposes of this judgment is the value of various websites operated by the firm prior to its dissolution, which were taken over by Mr Warner or Mr Kugel. Most of the debate concerned a website called "InsolvencyExperts.com.au". This website was taken over by Mr Kugel after the end of the partnership. There were four other websites taken over by Mr Warner. I will return to those after I have dealt with the Insolvency Experts website. Insolvency Experts website 1. The Insolvency Experts website appears to have been the main website used by CWK. It was established after CWK had registered the business name "The Insolvency Experts". The website contained details of a 1300 number for contacting the firm. For the purposes of the debate, the business name, the website, and the 1300 number, all of which were taken over by Mr Kugel, were treated as a single asset. For simplicity, I will not refer separately to the business name or the 1300 number unless it is necessary to do so. The question is, what value, if any, should be attributed to the website for the purpose of the partnership accounting. 2. Mr Kugel and Mr Warner gave some evidence at the original trial about the website. There was supplementary affidavit evidence from Mr Kugel and Mr Warner. At the hearing this year, Mr Kugel and Mr Warner were both briefly cross-examined by counsel. 3. For the purposes of the March hearing, both parties relied on expert evidence. The defendants retained Ms Lauren Cusack to give evidence on the value of the website. Ms Cusack is a chartered accountant who specialises in forensic accountancy. Her initial report was prepared in February 2021, with a reply report in November of that year. 4. The plaintiffs retained Dr Brent Coker as an expert. Dr Coker is a lecturer in Marketing at the University of Melbourne. He specialises in digital marketing. Dr Coker's report canvased the technical aspects of the report and commented on the valuation adopted by Ms Cusack in the light of those technical features. Both Mr Halligan and Mr Hayes, relying on Dr Coker's analysis, presented valuations of the website. They also both offered critiques of the reasoning in Ms Cusack's report. 5. As will be seen, the key witness for the plaintiffs on this issue was Dr Coker. A signed report from him, dated July 2021, was included by the plaintiffs' solicitors among the affidavits and expert reports in the court book and was formally tendered. But some confusion about the report arose in cross-examination. Counsel for the defendants pointed out that the report described itself as a "draft" report. Counsel also produced an earlier signed report, dated the month before (June 2021). This report was also described as a "draft" report but was signed and dated. When asked about the two reports by counsel in cross-examination, Dr Coker was unable to say from his recollection which of them was the actual report and which was the draft. There was some difference between the two reports identified by counsel. This included one specific paragraph ([4.16.5]) in the earlier (June) report which was adopted by Dr Coker in evidence, even though the corresponding paragraph in the later report was different. 6. In final submissions, counsel for the defendants contended that the existence of two signed reports which were not on exactly the same terms, was damaging to Dr Coker's credit. Counsel's submissions, however, did not identify any significant variations apart from the one to which I have referred, and I do not consider the existence of two versions of the report as being of any significance for the issues which I have to resolve in this judgment. 7. Undisputed and documentary evidence: Dr Coker gave some general evidence about marketing through websites which was not in dispute. He identified two types of traffic, or "hits", which a website can receive. Those two types of traffic derive from two types of search result displayed by the search engine operator (in this case Google) in answer to viewers' searches. 8. One type of search result is generated by a Google search engine algorithm in the usual way. Such search engine results display websites in order of apparent relevance to the search, based on the calculations made by the algorithm. Traffic to a website resulting from such a search result is known as "organic" traffic. 9. The second type of search result is generated by the Google facility formerly known as "Google AdWords" and now known as "Google Ads". For a fee, a website owner may "buy" terms which may be used by viewers in their searches. If a search contains the nominated terms, the relevant website will appear prominently (at the top of the first page of search results) in response. In this way, search results can be obtained quite independently of the search engine algorithm and the name, and content, of the website in question. Effectively, as its name suggests, it is a form of paid advertising for the website. 10. Studies have demonstrated that in eighty percent of internet searches, the searcher does not go beyond the first page of results which are displayed. This makes it all-important for organic search results to appear in the first ten or so of the results displayed by the algorithm. 11. The search engine results are generated by a computer program operated by Google, known as a "spider", which trawls through all of the references found on the internet for a particular subject, identifying all of the sites referring to that subject. These sites are then ranked by the Google search engine algorithm in order of apparent relevance. The full search engine algorithm used by Google is not publicly available, but some of its features are known or can be reverse-engineered or guessed. The ranking appears to be linked to the relevant size and sophistication of the different sites. It is also affected by the number of links to the site in question from other sites. Apparently, the algorithm assumes that the existence of cross-references to a site from other sites on the internet, is a sign of authority of the site to which the cross-reference is made. 12. The process of search engine optimisation, known as "SEO", seeks to use this knowledge to improve the ranking given to the site by the Google search engine algorithm. It has two features. One is to reconfigure the content of the site itself, so as to improve its apparent relevance to terms likely to be used in viewers' searches. The other is known as "inbound link optimisation" and involves trying to generate links from other sites to the subject site. 13. The SEO process requires a degree of expertise, or at least experience. It also takes time. According to Dr Coker, it may take 8-12 months for a positive effect to be seen. The process is also a continuous one; the website's content must continually be improved and new links to it must continually be generated to maintain its apparent relevance under the search engine algorithm. 14. The website originally used by Mr Warner and Mr Kugel for CWK, when they established the firm in 2007, was called "Liquidation Direct". There was also a business name, "Liquidation Direct". 15. In March 2011, the business name "The Insolvency Experts" was registered on behalf of CWK. Design and construction of the Insolvency Experts website began in October 2011. The firm transitioned from the old Liquidation Direct website to the new Insolvency Experts website between March and May 2012. For this purpose, they retained professional assistance from a firm known as "TMA". The contact at TMA was Mr Riley Chant. 16. CWK both used Google AdWords to generate traffic and paid TWA for ongoing SEO services from Mr Chant. The evidence included figures extracted from CWK's accounts which showed that in the financial year ended 30 June 2013, CWK spent $4000 on website development and $189,000 on advertising and promotion. In the year ended 30 June 2014, the last complete year of CWK's operation, the corresponding figures were $25,000 and $327,000. 17. Dr Coker was able to obtain some snapshots of the website, in its past form, for the purpose of his report. The evidence shows that the website was of a type known as a "brochure" website. This is a website which typically contains: information about the business behind the website; "persuasive content" in the form of testimonials, articles or blog posts written by members of the firm and designed to show off their knowledge and experience within the area of the firm's business; and contact information for customers to get in touch with the business. Such websites can be set up and maintained with the purchase of a domain name and the purchase of a small commercial software package. Typically, this can be done for as little as a few thousand dollars. Dr Coker contrasted such "brochure" websites with more sophisticated "e-commerce" websites which allow for purchases of goods or services. Such websites can cost tens of thousands or hundreds of thousands of dollars to establish. 18. The Insolvency Experts website retrieved by Dr Coker had over 100 pages. Apart from a homepage identifying the firm and its contact numbers, the site contained descriptions of insolvency procedures with generalised advice to potential customers about various insolvency processes and the services operated by CWK. The "persuasive content" consisted, as appears to be typical for websites of professional services firms, of articles posted to the website in the form of articles and case studies demonstrating particular features or pitfalls of insolvency processes. There were also videos of a similar type posted to the website. 19. It seems that as between Mr Warner and Mr Kugel, it was Mr Kugel who was mainly responsible for the website and who was most enthusiastic about using and developing it for business purposes. All of the articles and blog posts to which I was referred, and all of the videos, appeared to have been posted by Mr Kugel. I was not referred to any content posted by Mr Warner or any of the employed staff of CWK. 20. It appears that in about February 2014, Mr Chant conducted an overhaul of the website, which involved significant changes to its appearance and content. The overhaul was referred to in the evidence as a "re-skinning" of the website. Mr Kugel was dissatisfied with the result. In correspondence, in December 2014, with another website consultant, Mr Kugel described the overhaul as a "failed re-skinning", and said that after the overhaul was undertaken, the appearance of the website was "terrible". In cross-examination, Mr Kugel stated that Mr Chant "broke" the website in February 2014. 21. As already noted, on the dissolution of the partnership on 22 September 2014, it was agreed between Mr Warner and Mr Kugel, that Mr Kugel would take over the Insolvency Experts website. The AdWords service was paid up until the end of September, but Mr Kugel did not renew it, nor did he retain the replacement website consultant whose correspondence I have referred to. It appears that at the time, Mr Kugel was uncertain about whether he would even continue to operate as a liquidator and administrator; he was contemplating a practice purely involving pre-liquidation or pre-administration advice. It was not until August 2015 that a further "re-skinning" of the website occurred, and Mr Kugel started to actively use it again. The website apparently still exists, but apparently is nothing like it was from 2011 to 2014. 22. In evidence is some summary information about traffic to the website, as derived from data provided by Google. There is information about the number of monthly visits to the website between February 2013 and September 2014. At the beginning of this period, there were 7,000 or so visits to the site per month, of which organic traffic accounted for between 40-50%. By the end of the period, visits had declined to 4,000 per month and the organic traffic percentage was between 15-20%. 23. There is also Google data showing weekly website traffic from the last week of December 2013 until the end of September 2014, with some figures for October and November. In the week ending 21 September, the day before the partnership was terminated, there were over 1,100 visits, with an organic traffic percentage of approximately 16%, and a bounce rate of approximately 86%. The bounce rate gave the percentage of visits which did not go beyond the first page of the website. It is apparently a measure of the website's effectiveness, the idea being that visits to one page only are more likely to be associated with customers who visit the website once but do not find anything attractive on it and are unlikely to return. For October, data is given only for a single date (19 October), indicating 76 visits and a bounce rate of 97% (but an organic traffic percentage of approximately 16%). Only a single visit is referred to in the November data (on 12 November), with a bounce rate of 100%. 24. This statistical evidence is consistent with a decline in the quality and attractiveness of the website after 2014. That evidence also demonstrates a rapid fall of in the use of the website once Google AdWords was no longer being used. 25. Lay witness evidence: In an affidavit made in December 2015, prior to the original trial, Mr Warner referred to the Declaration of Independence, Relevant Relationship and Indemnities ("DIRRI") which was completed and signed by Mr Kugel or himself for each insolvency undertaken by them. He stated that the declaration identified the source of the firm's retainer. According to Mr Warner, a review of the DIRRIs for the administration which were incomplete as at September 2014, identified that 61% of them had derived from the Insolvency Experts website or its predecessor, Liquidation Direct. The underlying documents were not in evidence, but Mr Warner's testimony was not disputed. 26. Mr Kugel was asked about the subject in cross-examination during the original trial. On 12 February 2018, he gave evidence under cross-examination which included the following passages: Q. And you agree that [the Insolvency Direct website] was an asset of the CRS Warner Kugel Unit Trust? A. If you can call it an asset. I don't think it's an asset. Q. What do you think it is? A. Well, I think it's a lead generating site that's supported by, mainly, two things - or three things really. The things that it's supported by is a huge amount of Google spending, a long effort on spending money with a search engine optimisation, which was a - you get less and less return over time with that because Google changes and also because we maintained a - a list of 14,000 names that I would try to communicate with every four to six weeks so I could drive traffic to the website. Q. When you say it was a lead generator, you mean it was the source of potential jobs for CRS Warner Kugel Unit Trust? A. Well, we were - we were selling liquidations and bankruptcies and feeding other work into the Debt Free business through that. And it would generate opportunities for us to talk to people directly rather than try to deal with the accountants or lawyers that would be advising people. Q. It was an important part of the business in so far as getting in work was concerned. Would you agree with that proposition? A. Yes. Q. It was something that not only led to work being generated for the CRS Warner Kugel Unit Trust, it was something that substantial monies had been spent by the Trust in respect of. Do you agree with that? A. We spent a lot of money on it. Q. Yet you deny the proposition that it was asset of the Trust do you? A. Well, I say it wasn't an asset because as soon as you stopped spending on any of the components there and you stopped communicating, the website just fails. Q. But if one keeps spending that's not the position is it? A. If you've got 14,000 bucks a month to spend it will possibly work but it was diminishing returns also. … Q. Would you agree with the proposition that it was responsible for approximately 80 per cent of the work being generated by the Unit Trust? A. I don't think it was that high. Q. What would you think it is? A. I would have thought - well, I - I'd read it in Anthony's affidavit, he said about 60 per cent, that's what I would probably agree with. … Q. You think though 60 per cent is reasonable figure do you? A. It's probably fair. Q. In other words it was responsible for a substantial amount of the work coming in to the Unit Trust. Do you agree? A. Yes. 1. Counsel for the defendants returned to the subject during cross-examination in this year's hearing. Counsel referred to Mr Kugel's evidence about 60% being reasonable and the following evidence ensued: Q. and then, in the following question, it's suggested to you, "You thought 60% is a reasonable figure, do you?" and you said, "It's probably fair"; do you see that? A. Yes. Q. And you adhere to that evidence? A. What am I saying is 60%? Q. Well, if you go back up to line 24, it sets the context. "You would agree with the proposition that it was" - and the context there is the website - "responsible for 80% of the work being generated by the unit trust?" and your answer, "I don't think it was that high". At line 30, question, "What would you think it is? I would have thought, well - I'd read it in Anthony's affidavit. He said about 60% and that's what I'd probably agree with"; do you see that? A. Yes. Q. And you adhere to that evidence? A. Well, not in isolation, no. Q. It's the case, isn't it, that as at 2014, the website, Insolvency Experts, was responsible for about 60% of the work being generated for the firm; that was the position, wasn't it? A. No. HIS HONOUR: Now, when you put that, do you mean 60% of the jobs, or do you mean 60% of the value of the work being billed? WOOD: I'd better split it up, your Honour. Q. When Mr Wells [counsel for the defendants in 2018] was asking you these questions in February 2018 and you gave your answer that you thought - this is at line 31 - "he, Anthony, said it's about 60%, that's what I would probably agree with", were you referring to the number of appointments or the volume of fees that were being generated? A. Well, I really don't know. But I - I just - I'd just say you need to get an understanding of what the website was, in relation to business. … Q. … the amount of billings or the number of jobs? A. Well, I don't know. Q. Well, it's your evidence, isn't it, Mr Kugel? A. Yes, it is. Q. And you were engaging with Mr Wells in an assessment of the proportion of the work that came to CRS Warner Kugel that was derived from the website, were you not? A. That was derived from the website? Q. Yes? A. Well, plenty of work came through the website. Q. What proportion of work came through the website? A. Well, through the - through advertising the website, maybe 60%. Okay, I'm going to agree with Anthony. Q. And 60% by number of appointments, roughly? A. How can you say? I don't know; I - I got to say no to that. Q. Would it be roughly 60%, by reference to the volume of fees generated? A. But I can't even say that, so I'm going to say - have to say no. Q. So, when you agreed with me a moment ago that it was about 60%, what metric did you have in mind when you gave that answer? A. Well, I'm - agreeing with Anthony … but, you know, you - you might have a hundred great jobs and you might have a hundred bad ones. How do I know what came out of this group, in terms of revenue, in this sort of - in number, to - to give you an honest answer as to, it's either this or that? But I don't think it's either this or that. You know, some jobs can just knock it out of the park and other ones are only ever going to be 7 or $8000. But - but the number would be misleading also. 1. Expert witness evidence: Ms Cusack was instructed to assume that 60% of the fee revenue of the CWK practice was derived from the website. She recorded this instruction in her report, adding that this therefore meant that 60% of the value of the goodwill of CWK's business was derived from the website. On that assumption, she calculated the value of the website, by reference to the value of CWK's business as a whole, in the following manner. 2. Ms Cusack first calculated the maintainable earnings of the business as at September 2014 as $2.758 million per annum. To this she applied a percentage representing a profit rate (based on the firm's average profit rate over the previous five years) of 18.7%, yielding a figure of $510,000 per annum. She then applied a multiple of 2.5, which she selected, yielding a gross capital value of $1.275 million. Applying the 60% figure, she derived a value of $765,000. 3. Ms Cusack also undertook what she described as a check. This involved assessing the value of a royalty income stream from the website. Ms Cusack applied a royalty rate of 8.5% to her calculated figure of gross income of $2.758 million. Applying a factor of 2.5 resulted in a figure of $575,000. 4. Apart from the uncontentious evidence summarised above at [112], Dr Coker commented on the website traffic figures. He observed that the Insolvency Experts website depended more on advertising than on organic traffic. He also drew attention to the high "bounce" rate. 5. In the controversial passage from his draft report to which I have referred, Dr Coker stated that: My assumption is that it is not the website itself that generates the revenue, but rather the marketing and brand knowledge that drives traffic to the website that generates revenue. Of course, it is entirely plausible that any of those websites would have generated zero revenue if no-one were aware of their existence (no marketing or advertising). 1. At [3.1.2] he stated: I make the point that the website does not generate revenue, it is merely a tool that facilitates communications between the brand and prospective customers. It is marketing and advertising that generates revenue for a business. 1. However, in cross-examination, Dr Coker conceded that there was a distinction between visits to the sites and purchases. He also accepted that, at least to some extent, content may generate purchases: 2. Dr Coker's opinion was that the site had no value beyond the cost of building another site of the same type. He set out figures for various costs of reproducing and maintaining the site. Dr Coker expressed the view that Ms Cusack's approach was incorrect because it was instead based on the value of the income supposedly brought by the website to the business. 3. Mr Halligan expressed the conclusion that the value of the site, on a replacement basis, was between $11,200 and $22,750. This was taken from the figures provided by Dr Coker. Mr Halligan also criticised some of the calculations undertaken by Ms Cusack in deriving the net profit and her selection of the 8.5% figure for the royalty rate. In view of the conclusions I have reached, it is not necessary to go into this area of dispute. Nor is it necessary to say anything about the views of Mr Hayes. 4. Submission and conclusion: Counsel for the defendants urged me to uphold Ms Cusack's primary valuation figure of $765,000. Counsel submitted that the assumption about 60% of the firm's revenue having derived from the website, which underlay that valuation, was squarely based on the concession made by Mr Kugel in cross-examination, which I should accept as having been correct. Counsel submitted that it was too narrow a view to say that the website was merely a tool and did not itself generate any fee income. On the contrary, counsel submitted, the website contained content which did and, I should infer, would generate income. 5. Counsel also criticised the plaintiffs' experts' approach of valuing the website according to the costs of establishing it. Counsel pointed out that the law of copyright would have prevented a person who wished to reproduce the website merely from appropriating its content. Counsel also pointed out that, on the evidence, it would take some time (8-12 months or perhaps longer) to develop a new website. 6. In evaluating the parties' submissions on this issue, I begin by observing that the valuation figure propounded by Ms Cusack is a calculated figure. It might not be accurate to describe the valuation as purely a desktop exercise. The earnings multiple of 2.5 which she used may have some generalised market validity and does not appear to have been disputed by Mr Halligan, at least. But the fact remains that there was no specific market-based evidence, in the sense of evidence of figures actually paid for the purchase of a website for an insolvency practice, or indeed any other professional services firm. 7. I am not sure that the 60%-of-fees instruction which Ms Cusack followed is sufficiently established as a matter of fact. There is no reason to doubt Mr Warner's analysis of the DIRRIs, but, on his own description, the 60% figure was derived not from the Insolvency Experts website alone, but from the combination of that website with its predecessor. Furthermore, the 60% figure is a percentage of the total number of administrations, not necessarily the fees derived by the firm. But it is not necessary to go into this question any further. I think there is a more fundamental objection to Ms Cusack's approach. 8. The asset to be valued is the website, considered on its own and independently of promotional expenditure. On the evidence, non-organic traffic to the website was derived from Google advertising and had nothing to do with the website's content. The organic traffic would have been heavily influenced by the search engine optimisation, which, on the evidence, required continued ongoing expenditure to be effective. 9. It may be going too far to say that the Insolvency Experts website was merely a tool. The website did contain content which might have assisted in persuading potential customers of the expertise of the firm. But there was no evidence to identify whether that was in fact so, and, if so, how many of CWK's administrations derived from website content as distinct from the initial advertising or search engine optimisation which brought potential customers to the website. Ms Cusack's valuation method simply passed over this question. 10. I also think that it is too simple to say that it was not open to a purchaser to copy the website. The point being made by Dr Coker was not that the Insolvency Experts website could be copied holus-bolus. Rather, Dr Coker was making the point that a website with different content could be created and then made the subject of Google AdWords and SEO expenditure, so as to achieve a result functionally equivalent to the subject website. 11. The site did, of course, contain "persuasive content" in the form of blog posts and video posts from Mr Kugel. But there are two difficulties with this. 12. The first is that a purchaser acquiring the site but who would be facing competition from Mr Kugel, would be unwilling to preserve the site in its existing form and thereby promote Mr Kugel's expertise in the area. Counsel for the plaintiffs, as I understood them, accepted that this was so for the videos, but suggested that the blog posts could have their attribution removed. But not even this is clear. Counsel for the plaintiffs countered by pointing out that as the author of those posts, Mr Kugel had moral rights which included a right of correct attribution. 13. The second difficulty follows from a point I have already made. There was no evidence that the particular "persuasive content" on the site had any particular power in drawing customers. There was, for instance, no evidence that the percentage of administrations derived by CWK from the Insolvency Experts website was greater than the percentage of administrations derived by comparable insolvency firms from their websites. 14. The rhetorical question asked by counsel for the plaintiffs remains: why would a purchaser spend $765,000 for a website when something more or less equivalent could be produced for a fraction of that amount? The point made by counsel for the defendants about the development of a website taking time might, I suppose, give an existing website some marginal additional value above replacement value. But any such additional value (which would have to take into account the effect of the removal of much, if not all, of the website's "persuasive content") would need to be assessed in a completely different manner. Ms Cusack did not approach her valuation in that way. 15. Furthermore, the asset to be valued is the website as at 22 September 2014. On the evidence before me, the value of the website from a marketing point of view had been substantially reduced as a result of the failed "re-skinning" undertaken earlier in 2014. Counsel for the defendants themselves observed, in the course of their argument, that the steep decline in traffic after September 2014 was not solely attributable to the failure to pay for advertising, but also the damage to the website from the "failed re-skinning". Ms Cusack does not appear to have taken this into account at all in her analysis. 16. Properly understood, all Mr Warner's 60% figure showed was that, of CWK's current administrations as at September 2014, 60% had in the past come from one or other of the two websites. The evidence falls far short of establishing that as at September 2014, the website was attracting anything like the same level of business. 17. In summary, I think that Ms Cusack's approach reflected an incorrect view as to the nature of the website as a business asset. She appears to have treated the asset as one which, on its own, would bring in 60% of the firm's business. In fact, the website required constant expenditure in the form of Google advertising and search engine optimisation. The valuation of such an asset, seems to me to require an entirely different process from that which Ms Cusack undertook. 18. The same comments apply to the royalty method Ms Cusack used to check her valuation. Again, it was a calculated figure based on the income of the CWK business as a whole. It therefore rested, ultimately, on the assumption that in some way the website equated to a percentage of the goodwill of the business as whole. 19. It is possible that the Insolvency Experts website would have had some value to a potential enquirer who, for whatever reason, wished to acquire an existing website (but not necessarily its content). But there is simply no evidence that there was any market for such websites, let alone any evidence which would allow the Court to assess the value of this particular website in that market. I am not satisfied that the defendants have demonstrated that the website had any value. Other websites 1. The same reasoning applies to the other websites. Dr Coker provided figures in his report for the replacement value of those websites, but I am not satisfied that in fact they had any value. Conclusions and orders 1. I have concluded that: 1. the defendants have failed to establish that, as they claim, the book of administrations had a substantial negative value, much less what that value was; 2. so too have the defendants failed to establish a value for the Insolvency Experts website, and it follows that no value has been established for the websites retained by Mr Warner either. 1. Having resolved what I understand to be the remaining issues of principle, I will leave it to the parties to undertake the necessary calculations of the amount owing between the parties on the final balance of the partnership account. If the parties are able to agree the costs consequences of my decision in this judgment and in the previous judgments, then orders can also be made for costs. Otherwise, I will hear argument. 2. The orders of the Court are: 1. Adjourn the proceedings to 2:00pm on 19 May 2023 or such other date or time as may be arranged with my Associate. 2. Direct that the parties confer on the form of orders to be made to give effect to this judgment, and, no later than 12 hours before the adjourned hearing, submit proposed orders for this purpose. ********** 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: 18 May 2023