BABETS LTD (in liq) v VENN SUPREME COURT OF NEW SOUTH WALES — COURT OF APPEAL — COMMERCIAL DIVISION POWELL, COLE and STEIN JJA 16, 24 September 1997 [1997] NSWCA 36 SALE AND VALUATION OF BUSINESS — calculation of contractual purchase — PRICE — damages sought for breach of warranty — calculation of amount payable on claim and cross-claim-set-off. Cole JA. Ex tempore Babets Ltd (in liq), and Mr Silva as its liquidator, sued John Frederick Venn, Caroline Gaye Orriss, Lesley Robyn Walters and Wenn Holdings Pty Ltd arising out of the sale of an insurance broking business. The writ claimed monies due pursuant to the agreement for sale, and a claim based on unjust enrichment. The statement of claim prompted a defence and cross-claim which denied that any monies were due pursuant to the contract. It was claimed that the contract should be set aside as being voidable, and pursuant to the provisions of the Trade Practices Act. Damages were sought for breaches of warranty if a contract was held established, and pursuant to the Trade Practices Act. In a judgment delivered 20 April 1995 Hunter J entered judgment for the defendants on the summons. His Honour declared that the three personal defendants were not parties to the agreement for sale which he found established between Babets Ltd and Wenn Holdings and entered judgment for the latter company on the cross-claim in the sum of $5,000. The plaintiffs were ordered to pay the costs of all proceedings. Babets Ltd (in liq) and Mr Silva have appealed. The issues on appeal were in short compass. They are best understood by consideration of the figures in the table below. CLAIM 1. Adjusted purchase price $282,990.00 2. Equipment 8,000.00 290,990.00 3. Less: instalment paid 162,565.00 Balance due to appellants 128,425.00 DAMAGES 4. Reduced value of business purchased Price 282,990.00 Less value at 1.1.91 216,754.00 66,236.00 5. Debts not paid by appellants 24,000.00 6. Relocation expenses 15,000.00 105,236.00 2 UNREPORTED JUDGMENTS The above tables sets out the findings which the appellants contend Hunter J should have made. In addition there was a claim for interest on the claim, and on the damages. The appellants claim there should have been a verdict for the appellants on the claim, for the respondent on the cross-claim and after set-off a final verdict and judgment for the appellants. Interest on the contract claim was found by Hunter J to be 14%. It was not disputed that damages on the cross-claim would attract interest under the Supreme Court scale which, since 1991, has varied bwetween 17% and 10.5%. Prior to the calculation of any interest on the claim and cross-claim, the appellants contended that it was entitled to a verdict in the sum of $23,095 being the difference between its claim and the established cross-claim. The items which I have numbered 1,2,3 and 5 were not in dispute on the appeal. Regarding item 4, Hunter J found that the value of the business to be deducted from the agreed purchase price was not $216,754, but $188,660. The appellants said that was wrong. Regarding item 6, the appellants contended that the respondent company was not entitled to that sum as a separate head of damage. If the respondent succeeded in sustaining the trial judge's finding that there was an entitlement in the respondent company to $15,000 for relocation expenses, and if the value of the business was $188,660 as Hunter J, found rather than the $216,754 for which the appellants contended, the amount of the cross-claim would become $133,330 and thus exceed the appellant's claim by $4,905. It was the respondents/purchasers' position at trial and on appeal that, as the appellant was in liq, they had no interest in pursuing a cross-claim otherwise than to defeat the appellant's claim, and except for its relevance to cost determinations. It is thus necessary to consider the two items in dispute. Hunter J found that there existed a contract between Babets and Wenn Holdings which contained the following clause: 3. PURCHASE PRICE 3.1 Subject to the provisions of clause 3.3 hereof, the Purchaser agrees to pay to the Vendor, as the Purchase Price, for the Business and Assets an amount equal to the aggregate of: (a) $325,131 ('the initial Purchase Price"); and (b) an amount calculated in accordance with the following formula: [($216,754 + A) X 1.50 - $325,131 =B where: A = the actual dollar amount by which the general trading brokerage and fee income (excluding interest income) receivable by the Vendor for the period | July 1990 to 31 December 90 exceeds or is less than the said general or trading brokerage and fee income received by the Vendor for the same period during the previous year (as certified by the Purchaser's auditors); and B = the amount in dollar terms payable by the Purchaser or refund due by the Vendor to the Purchaser as the case may be. ("the Adjustment to the Purchase Price"); and (c) $ ("the Additional Purchase Price") 3.2 The Purchaser Price shall be paid as follows: (a) as to the Initial Purchase Price by bank cheque in favour of the Vendor or its nominee in the following manner: (i) $162,565 on the Completion Date; (ii) $162,565 on or before Ist February 1993. URJ BABETS LTD (in lig) v VENN (Cole JA) 3 (b) as to the Adjustment to the Purchase Price by bank cheque in favour of the Vendor or the Purchaser or their nominees as the case may be within 30 days of receipt by the Vendor of the Purchaser's auditor's certificate, or Ist February '93 whichever is earlier. 3.3 Notwithstanding the payment of the Initial Purchase Price or the Adjustment to the Purchase Price pursuant to clause 3.2 if the maintenance of the Brokerage Income receivable by the Purchaser in respect of business written by it for the clients of the Business for the period commencing Ist January 91 and terminating on 31st December 1991. ("the Adjustment Period") exceeds or is less than the Brokerage Income for the business for the same period during the previous year then the Initial Purchase Price is to be adjusted on the following formula: $325,131 Y=Z where: Y = an amount equal to the amount by which Brokerage Income receivable by the Purchaser in respect of the Business written for clients of the Business during the adjustment Period exceeds or is less than the Brokerage Income received by the Vendor for the same period during the previous year multiplied by a factor of 1.5 (as certified by the Purchaser's auditors), and Z = the amount in dollar terms payable.! It was accepted that the Initial Purchase Price referred to in cl 3.1(a) of $325,131 was arrived at by determining the appropriate income figure for Babets in the year preceding the purchase, that figure being $216,754, and multiplying that by a factor of 1.5. To determine the ultimate purchase price agreed at $282,990, it was necessary for Hunter J to adjust the initial purchase price by making the adjustment required by cl 3.1(b) and cl 3.3. Whilst cl 3.1(b), (which makes plain the manner in which the initial purchase price was determined), involves a consideration of an income stream prior to sale, the adjustment required by cl 3.3 involves a consideration of the income stream derived in "the Adjustment Period", being a period predominantly after the sale of the business which was settled on 14 March 1991. The appellant called a valuer, a Mr Walker. It will be necessary to return to his evidence but, in general terms, he gave evidence that a business of the nature being sold had a value in the market place related to the income stream which it generated. Accordingly a purchaser, depending upon his assessment of the likelihood of the client base remaining with the purchaser, would offer a factor of between | and 2 times the pre-purchase income stream. When he came to the valuation exercise for the purpose of calculation of damages, Hunter J took as the proper factor to be applied to this business the factor of 1. The appellant contends that the valuation of the business ought to have been $216,754. That is to apply the factor of 1 to the initial purchase price, not to apply it to the purchase price as adjusted in accordance with cl 3.1(b) and 3.3. That adjusted purchase price was agreed at $282,990. If one assumes that that purchase price contains as an ingredient the multiplier of 1.5, and recalculates the adjusted purchase price by inserting in lieu a factor of 1, the price calculated in accordance with the totality of cl 3 would become $188,660, being $282,990 1. Appeal Book, pp.646Q-648B. 4 UNREPORTED JUDGMENTS divided by 1.5 and multiplied by 1. The respondent contends that that is the exercise which Hunter J undertook, that it was a correct approach to the valuation exercise for the purpose of calculation of damage, and that it resulted in the value of the business at the time of sale as being $188,660. 5 It is plain that the adjustment required to the purchase price pursuant to cl 3.1(b) contains the multiplier of 1.5. The formula makes that clear. It is equally plain that cl 3.3 contains the multiplier of 1.5 because the factor Y adjusts the variation in income stream during the Adjustment Period by the factor of 1.5. It follows that if the contractual method of determining the price for the 10 business agreed to by the parties is followed, but that because of the circumstances found by his Honour to have diminished the true value of the business such that a factor of 1 rather than 1.5 was appropriate in valuing the business, then the value of the business sold, with the deficiencies found, was $188,660. 15 It is plain that is the approach adopted by his Honour. He wrote: Having regard to the evidence of Walker, I think it would be a generous approach to Babets Limited to take a factor of 1 as a measure of the value of the WA Business. Such a factor would place a value of $188,660, upon it.2 I can see no error in determining the true value of the business sold by this method. It was the method which the parties agreed was appropriate for calculation of the contractual purchase price, and there is no reason why the same method should not be used to calculate the value of the business at the time of sale after having regard to the effects of the various misrepresentations established. It accords with principle.3 It was not disputed on appeal that Hunter J was entitled to adopt a factor of 1 in such a valuation exercise as the evidence of Mr Walker made selection of that factor available. Mr Walker gave evidence concerning the matters to be taken into account in determining the appropriate multiplier. He considered that a prospective purchaser would reduce the multiplier from that which he would pay for a business which was "relatively clean" with "no problems" if there were "additional costs which would be associated with possibly losing portions of the portfolio and of the various expenses with dealing with clients etc which they might be incurred during the course of maintaining that portfolio". To the same effect he said: He wants the business and he thinks that the market rating for that business is going to be a certain multiplier. He knows that this is not as good a business as he would expect to pay for that multiplier, so he has to make his own decision as to what expenses he thinks it is going to cost him and how much he should deduct, but there is no hard and fast rule and when he arrives at the end of that formula he may well reject it and 40 say well, either a little bit more or a little bit less but it is a little bit different, even if he has already made a decision, he says this is worth 1.X or 1.5 is it; then he really is saying, well I thought it was worth 1.5 but these are the expenses that I was involved in, in actually keeping it, that I did not anticipate I was going to have.* It is apparent from this evidence that the variation in multiplier depends upon 45 an assessment of the likelihood of portion of the business being purchased subsequently being lost, or costs which might be incurred in seeking to maintain the client base being purchased. I can see nothing in the evidence of Mr Walker 50 2. Appeal Book, p.657. 3. Kizbeau Pty Ltd & Ors v WG & B Pty Ltd & Anor (1995) 184 CLR 281 at 291. 4. Appeal Book, p.143. URJ BABETS LTD (in lig) v VENN (Cole JA) 5 to suggest that included in the multiplier are costs incurred in disassociating the business purchased from the vendor. The multiplier reflects the opposite concept. The trial judge found that, when it was discovered that Babets Ltd had a trust account deficiency, and had been operating without a licence, it became important for Wenn Holdings to disassociate itself from Babets Ltd, and this involved its moving premises at a cost of $15,000. This move was found to be a direct result of breach of warranties. Plainly, to my mind, the multiplier was not directed to prospective breaches of warranties: it was directed to factors associated with maintaining the business purchased. It follows, in my view, that no error has been shown in the trial judge's determination that the value of the business in fact transferred was $188,660, or in his Honour's finding that the respondent was entitled by way of damages for breach of warranty to relocation expenses of $15,000. The result is that the cross-claim in damages exceeds the amount of the claim. It becomes unnecessary to consider the effect of interest. Accordingly the appeal fails, and it should be dismissed with costs. Counsel for the appellant: N Cotman SC Counsel for the respondent: B R McClintock SC and N Abadee Solicitors for the appellant: Abbott Tout Solicitors for the respondent: Clayton Utz