New South Wales Supreme Court CITATION : HANRATTY v THE CARRINGTON REDEVELOPMENT PTY LIMITED [1999] NSWSC 327 CURRENT JURISDICTION : EQUITY FILE NUMBER(S) : 4127/98 HEARING DATE(S) : 6 April 1999 JUDGMENT DATE : 6 April 1999 PARTIES : Christopher Shane HANRATTY v THE CARRINGTON REDEVELOPMENT PTY LIMITED & ANOR JUDGMENT OF : Bryson J COUNSEL : M. Spartalis for the Plaintiff V. Gray for the Defendant SOLICITORS : Coode & Corry for the Plaintiff Sutton & Byrne for the Defendant CATCHWORDS : Valuers - Valuation of Shares - Agreement that valuation by independent expert be final and binding - grounds on which valuation can be set aside - manifest error on face of determination - available material - incorrect valuation not a ground for setting aside report - hypothetical reasoning not a ground for setting aside - valuation complied with the terms of the contract - no manifest error. CASES CITED : Legal & General Life of Australia v A Hudson Pty Limited (1985) 1 NSWLR 314. DECISION : Plaintiff's Amended Notice of Motion of 6 April 1999 is dismissed The Defendant's Notice of Motion of 11 March 1999 is dismissed; Plaintiff pay the defendant's costs of the Notice of Motion of 5 February 1999 and the Amended Notice of Motion of 6 April 1999. Each party pay his own costs of the second defendant's Notice of Motion of 11 March 1999. - 9 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRYSON J TUESDAY, 6 APRIL, 1999 4127/98 CHRISTOPHER SHANE HANRATTY v THE CARRINGTON REDEVELOPMENT PTY LIMITED & ANOR JUDGMENT HIS HONOUR : 1 In orders made by consent on 13 October 1998 the Court ordered the second defendant or his nominee to purchase the entire shareholding of the plaintiff in the first defendant free and unencumbered. There are only two shareholders, namely, the plaintiff and the second defendant, and they each have an equal number of shares. 2 The short minutes of 13 October also note an agreement between the parties relating to the determination of the purchase price for the plaintiff's shareholding. 3 The agreement, when looked at closely, is not very clearly expressed in what it prescribes as to the means of determining the purchase price. At a number of places the document speaks as if what is to be ascertained is the purchase price of the plaintiff's shareholding. This appears in the terms of Order 1 of the consent orders and in the opening line of clause 1 of the agreement and in the opening two lines of clause 3. However, clause 1, which purports to state how the purchase price is to be determined, says in its opening phrases that what is to be determined is "the value of the first defendant as at 13 October 1998". That is to be determined by an expert Mr Dean-Willcocks on a basis set out; clause 1 provides: "In making such determination Mr Dean-Willcocks shall be acting as an independent expert whose decision shall be final and binding on both parties (save with respect to manifest error appearing on the face of the determination or in the explanation therefor) provided that Mr Dean-Willcocks must give a detailed explanation of how he has reached the value he determines." 4 There are a number of detailed prescriptions about the things that Mr Dean-Willcocks was to take into account in reaching his conclusion and as to how he was to regard them. 5 By clause 4 of the agreement it was provided that the plaintiff and also the second defendant must deliver business documents to Mr Dean-Willcocks by 16 October; that is, they incurred contractual obligations to deliver papers to him by that date.. In my opinion compliance with the obligations in clause 4 was not made a condition of the validity of any conclusion reached by Mr Dean-Willcocks. In fact the expert gave his valuation in his letter of 25 November 1998 and the enclosures thereto, and he attributed a nominal value of one dollar to the plaintiff's share. 6 The plaintiff, by his Notice of Motion and now his Amended Notice of Motion filed today seeks (Claim 1) orders which are said to be necessary to give effect to the consent order of 13 October 1998 requiring information to be furnished to the valuer by the second defendant, and some other orders, including an order removing the valuer, an order requiring the valuer to state the value of assets of the company on either a market basis or a going concern basis and give full reasons; an order requiring him to determine the value of the plaintiff's shareholding as one-half of the value of the company and not of the value of one share being sold, and some other procedural directions 7 In an alternative claim the Court is asked to set aside the orders of 13 October 1998 and to take up the original proceedings in the dispute between the two shareholders, with claims for liquidation and for provisional liquidation in the interim. 8 I must say at once that no grounds have been shown on which the orders of 13 October 1998 which were made by consent ought to be set aside. The orders did not expressly deal with the principal claims in the liquidation, that is for winding up, but ordered by consent that the second defendant purchase the plaintiff's shareholding, made some directions about costs, adjourned the summons to a stated date and reserved liberty to apply. The form of the orders suggests that they may not have been intended to be a final disposition of the proceedings and it is easy to see, at least in relation to the purchase, that liberty to apply was appropriate and that the Court might be asked further to exercise its powers with respect to carrying out the consent order relating to the sale of the shareholding. In a broad way that order was a resolution of the conflict among members of the company. 9 Submissions on behalf of the plaintiff did not conform very well to the claims in the Amended Notice of Motion but rather took the form of an attack on the expert's report and a claim that the report ought to be set aside. As I have earlier said, in my view failures by the parties, in particular of the second defendant, to comply with the contractual promise to produce information do not constitute a breach of a condition upon which the validity of the expert's report depends. 10 The expert's position can be distinguished very sharply from that of a court or arbitrator acting on a defined body of evidence and it is open to him to proceed, as his report shows he did, in the absence of what, on the face of things, would have been a complete set of business records and, for example, to proceed by inference as to periods for which records are not available based on experience and periods for which records are available. 11 The grounds on which an expert's report may be attacked are very limited. In my view they were expounded in a way which I should follow in the judgment of McHugh J A in Legal and General Life of Australia Limited v A Hudson Pty Limited (1985) 1 NSWLR 314. I particularly refer to his Honour's statement of conclusions at pages 335 to 336 which, in my respectful view, are well supported by his Honour's reasons and his Honour's review of case law. 12 It is, I think, crystal clear that the expert's report cannot be set aside on the ground that it is incorrect as a valuation of the shares. Much of what counsel put to me was directed to the suggestion that that was so, or that other conclusions than those reached by the valuer can be based on the information to which he refers. 13 There was also a number of complaints about matters which it is said the valuer should have investigated further or in respect of which it is said he should not have acted on limited material before him. These contentions related largely to the records produced being incomplete, but it was also said that he should have pursued further the second defendant's assertions about what his loan account was and the value of the trucks. 14 Criticisms of those kinds cannot lead, in my view, to the valuation being set aside. The valuation is liable to be set aside only on some radical basis to the effect that it is vitiated by conflict or collusion, or that for some other reason it was not a genuine endeavour to carry out the valuing task. Its force is that expressly given to it by the parties, that is, the determination of an independent expert is final and binding on both parties except with respect to manifest error on the face of the determination. It is not, in my view, a manifest error to have acted on the materials available. The context includes the need to proceed with expedition having regard to the time-table indicated by the order of 13 October 1998. It was contemplated that the purchase would be resolved during the adjournment of the summons and before 17 December 1998. 15 Criticism was specifically directed to the reference in the report under the heading "(ii) Basis of Valuation", where the valuer proceeded by valuing one of two shares in a proprietary limited company and said, "a logical purchaser ... would likely do so in the knowledge that it would be a 50% shareholder going forward with Mr Witts as the other 50% shareholder." This appears to me to indicate that the valuer valued the plaintiff's shares in a hypothetical sale to a hypothetical purchaser who would have to take into account in considering what he would pay the fact that he would then become a fifty per cent holder with the second defendant. It was contended that this was wrong in principle and departed from the provisions of the agreement noted in the Order. 16 In my view, the agreement of the parties does not state in a clear and express way on what basis, whether a hypothetical sale or by taking the value of the company's assets and halving them, the amount of the purchase price is to be determined by the expert. However, their intention can be ascertained by inference from what the document does say. It repeatedly refers, as I have said, to the thing to be determined as the purchase price for the plaintiff's shareholding. At one place in clause 1 it refers to "the value of the first defendant as at 13 October 1998" as the thing to be determined, the first defendant being the company, but it does not say what is to be done with that value when determined. 17 The plaintiff's counsel put forward the reading that that value is to be halved and to be taken as the amount to be paid. There is much force in this contention, but it is, however, an inference along with another available inference on the meaning of the document, and the preponderance of the references appears to me to establish that what the expert was to do was to determine the price in a hypothetical sale of the plaintiff's shares. In doing so he was to have regard in some way not spelt out to the value of the whole of the company - I suppose meaning the whole of its assets - as at the material date. Of course he would have to have regard to them in any rational exercise of addressing what would be paid by a hypothetical purchaser. 18 In my view the expert made no error in principle and did not set about valuing the wrong subject matter when he included in the basis of his valuation consideration of what would be in the mind of a purchaser acting logically. 19 In any event, on the rest of his reasoning, bringing that matter into account appears to me to have had no influence, because when the expert brought into consideration costs and expenses of $15,000 ordered to be paid by the company under Order 2 of 13 October 1998, the balance of the value of the company's assets as determined by him was negative. This appears at paragraph (vi) of his valuation and is illustrated by his two annexures B and C. Annexure B produces possible net assets at 30 June, including goodwill, of $9615 and Annexure C carries that forward to 13 October by reaching a possible profit on pro rata reasoning to achieve a total of $11,715 and then deducting the costs of $15,000 to produce the deficiency in assets. 20 Like other parts of his report these pages show recognition of the indeterminacy of many of the conclusions on which it is based, and the word "possible" appears frequently. Obviously a high degree of accuracy was not regarded by the expert as attainable on the information on which he acted. However, the margin of deficiency is significant and there is room for the deficiency to vary widely, up to $3225, before it could have any final impact on the nominal value attributed to the plaintiff's share. 21 The answer is the same even if the different method had been adopted in which the net value of the company's assets is ascertained and then halved. 22 I propose to dismiss the Amended Notice of Motion. By so doing the need to address the plaintiff's Cross Motion by Notice dated 11 March 1999 is resolved. 23 The order is: the plaintiff's Amended Notice of Motion of 6 April 1999 is dismissed. The defendant's Notice of Motion of 11 March 1999 is dismissed. 24 I order that the plaintiff pay the defendant's costs of the Notice of Motion of 5 February 1999 and the Amended Notice of Motion of 6 April 1999. I order that each party pay his own costs of the second defendant's Notice of Motion of 11 March 1999. ********* I certify that paragraphs 1-24 are the reasons for judgment of the Honourable Justice John Bryson. Date: 6 April 1999 .(Jill Stevenson) Associate Last Modified: 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.